Pacrim International Capital Inc. Announces Retirement of Loans
- ACQUIRES INTEREST IN CORRUGATED PACKAGING COMPANY IN CHINA -
HONG KONG, Nov. 15 /CNW/ - PACRIM INTERNATIONAL CAPITAL INC. (PCN: TSX)
("Pacrim") today announced completion of its previously announced intended
retirement of various loans that had been made by Pacrim to a number of
companies in which Guy Lam, the Chairman and Chief Executive Officer of
Pacrim, has an interest. Pacrim funded the loans in order to allow the
borrowing companies to develop investment opportunities in the People's
Republic of China to be subsequently offered for sale to Pacrim. These
opportunities took longer to develop than originally anticipated.
The loans totalled approximately Cdn$26,619,000 of principal and accrued
interest as of November 14, 2008. The loans were secured, part of the security
consisting of the pledge of the outstanding common shares of Pacrim
International Capital Holdings Inc. ("PICH"), a holding company owned by Mr.
Lam with business interests in the People's Republic of China consisting of an
indirect 87.81% interest in Wah Sang Paper Products (Shenzhen) Co. Ltd. ("Wah
Sang"), a corrugated packaging company. The loans were retired by the transfer
of 46% of the shares of PICH to Pacrim pursuant to the realization on this
security.
A committee of all of the directors of Pacrim except Mr. Lam (the
"Independent Committee") retained American Appraisal China Limited (the
"Valuator") to render an independent opinion as to the equity value of PICH
based on a valuation of the business enterprise of Wah Sang (the "Valuation")
as of June 30, 2008. The Valuation is summarized in Schedule "A" to this press
release and is available electronically at www.sedar.com. In dealing with the
Valuation for the purposes of the retirement of the loans, the Independent
Committee adjusted the value range for PICH as determined by the Valuator to
reflect real estate unrelated to Wah Sang that was transferred out of PICH
after June 30, 2008 and to reflect the retirement of loans owed by PICH to
Pacrim. The resulting range for the equity value of PICH was US$40,667,000 to
US$55,566,000 or Cdn$50,081,000 to Cdn$68,430,000. The Independent Committee
determined the percentage of shares of PICH to be transferred to Pacrim
through retirement of the loans by dividing Cdn$26,619,000 (being the
principal and accrued interest of the loans to November 14, 2008) by
Cdn$57,867,000, being the value of PICH adopted by the Independent Committee
for such calculation on the basis of the adjusted value range for PICH derived
from the Valuation. 46% of the shares of PICH were thus transferred to Pacrim
with the balance of the shares of PICH being retained by Mr. Lam. Reference is
made to the "Valuation" section of Schedule "A" hereto for further details.
The corrugated packaging operations of Wah Sang are located in Shenzhen,
in the Pearl River Delta of southern China which houses one of the world's
largest concentrations of manufacturing of consumer electronics, office and
telecommunication equipment. Wah Sang sells its high-end packaging products
almost exclusively to multinational corporations which export from China. Wah
Sang has annual production capacity of 63,000 tonnes of containerboard, 50,000
tonnes of flexo containers and 18,000 tonnes of off-set colour containers. The
bulk of the containerboard produced is used internally for further processing
into flexo containers or off-set colour containers. A detailed description of
Wah Sang and a description of PICH are contained in Schedule "A" hereto.
Exhibit I to Schedule "A" contains the audited financial statements of PICH
for the year ended December 31, 2007 and the unaudited financial statements of
PICH for the six month interim period ended June 30, 2008.
There is litigation in Hong Kong with respect to PICH's indirect
ownership interest in Wah Sang. Based on the information available to it,
including a legal opinion, Pacrim believes that PICH is the rightful owner.
Reference is made to the "Litigation" section of Schedule "A" for further
details.
Pacrim intends to file a business acquisition report in accordance with
National Instrument 51-102 - Continuous Disclosure Obligations with respect to
the retirement of the loans.
Under Mr. Lam's direction, Pacrim intends to continue to explore other
investment opportunities in China.
Caution concerning forward-looking statements
Statements made in this news release, other than those concerning
historical financial information, should be considered forward-looking and
subject to various risks and uncertainties. Some forward-looking statements
may be identified by words like "may", "will", "anticipate", "estimate",
"expect", "intend" or "continue" or the negative thereof or similar
variations. Readers are cautioned not to place undue reliance on such
statements, as actual results may differ materially from those expressed or
implied in such statements. Factors that could cause results to vary include,
but are not limited to: risks associated with China including state ownership,
government sector intervention, foreign investment, repatriation of profit and
currency conversion, tax, the developing legal system, protection of
intellectual property rights, shareholder rights and enforcement of judgments,
permits and business licenses, appropriation, political stability
considerations, the central planned economy, fluctuations in foreign exchange
rates and Chinese accounting and auditing standards; litigation risk with
respect to the ownership of Wah Sang; risks in business and operations
including risks associated with expansion, future capital requirements,
dependence on key personnel, environmental regulation, competition, risk in
purchasing abroad, risk of change in the price of raw materials, product price
volatility, insurance and operating plant risk; customer risk including risk
of a single market and risk depending on major customers; technical risk
including risk in the advance of technology and risk of relying on technology
abroad; financial risk including foreign exchange risk, credit risk, liquidity
risk, cash flow and fair value interest rate risk; investment strategy risk;
and short term management transition risk.
We caution that the foregoing list of factors is not exhaustive and that
when reviewing our forward-looking statements, investors and others should
refer to the "Risk Factors" section of Pacrim's Annual Information Form, the
"Risks and Uncertainties" and other sections of our Management's Discussion
and Analysis, the "Risk Factors" section of Schedule "A" to this press release
and our other periodic filings with Canadian securities regulatory
authorities. All forward-looking statements presented herein should be
considered in conjunction with such filings. Except as required by Canadian
securities law, we do not undertake to update any forward-looking statements,
whether written or oral, that may be made from time-to-time by us or on our
behalf; such statements speak only as of the date made.
For further information, please contact:
Cindy Fung
Acting Chief Financial Officer
Pacrim International Capital Inc.
Tel. 852.2526.1554
SCHEDULE "A"
DESCRIPTION OF
WAH SANG PAPER PRODUCTS (SHENZHEN) CO. LTD.
AND
PACRIM INTERNATIONAL CAPITAL HOLDINGS INC.
TABLE OF CONTENTS
CURRENCY ............................................................. 1
WAH SANG PAPER PRODUCTS (SHENZHEN) CO. LTD ........................... 2
PACRIM INTERNATIONAL CAPITAL HOLDINGS INC. ...........................13
PRC REALTY INC. ......................................................13
FINANCIAL STATEMENTS OF PICH .........................................13
VALUATION ............................................................15
LITIGATION ...........................................................16
RISK FACTORS .........................................................17
EXHIBIT I - Financial Statements
CURRENCY
Unless otherwise indicated, all references herein to "dollar" or the use
of the symbol "$" or "Cdn.$" are to Canadian dollars, all references to "US
dollars" or "US$" are to United States dollars, and all references to "RMB"
are to Renminbi, the legal currency in the People's Republic of China ("China"
or the "PRC").
I. Canadian Dollar/RMB Exchange Rates
----------------------------------
The following table sets forth, for the periods indicated, certain
information concerning the exchange rate for translating RMB into Canadian
dollars using rates quoted by the Bank of Canada website. No representation is
made that RMB could be converted into Canadian dollars at that rate or any
other rate.
One Canadian dollar expressed in RMB
-------------------------------------------------------------------------
Year ended December 31 Average During Period
-------------------------------------------------------------------------
2004 6.3573
-------------------------------------------------------------------------
2005 6.7613
-------------------------------------------------------------------------
2006 7.0323
-------------------------------------------------------------------------
2007 7.0822
-------------------------------------------------------------------------
II. US Dollar/RMB Exchange Rates
The following table sets forth, for the periods indicated, certain
information concerning the exchange rate for translating RMB into US dollars
constructed using rates quoted by the Bank of Canada website. No
representation is made that RMB could be converted in US dollars at that rate
or any other rate.
One US dollar expressed in RMB
-------------------------------------------------------------------------
Year ended December 31 Average During Period
-------------------------------------------------------------------------
2004 8.2741
-------------------------------------------------------------------------
2005 8.1922
-------------------------------------------------------------------------
2006 7.9749
-------------------------------------------------------------------------
2007 7.6119
-------------------------------------------------------------------------
III. US Dollar/Canadian Dollar Exchange Rates
The following table sets forth, for the periods indicated, certain
information concerning the exchange rate for translating Canadian dollars into
US dollars using rates quoted by the Bank of Canada website. No representation
is made that Canadian dollars could be converted in US dollars at that rate or
any other rate.
One US dollar expressed in Canadian dollars
-------------------------------------------------------------------------
Year ended December 31 Average During Period
-------------------------------------------------------------------------
2004 1.3015
-------------------------------------------------------------------------
2005 1.2116
-------------------------------------------------------------------------
2006 1.1341
-------------------------------------------------------------------------
2007 1.0748
-------------------------------------------------------------------------
WAH SANG PAPER PRODUCTS (SHENZHEN) CO. LTD.
Wah Sang Paper Products (Shenzhen) Co. Ltd. ("Wah Sang") is strategically
located in Shenzhen, in the heart of China's Pearl River Delta, which houses
one of the world's largest concentrations of manufacturing of consumer
electronics and office and telecommunication equipment. All these products,
especially those produced by local operations of multinational corporations
for export purposes, require sophisticated high-end packaging such as that
produced by Wah Sang, which sells quality corrugated packaging products almost
exclusively to multinational corporations.
Please note in the following discussion all information for the year
ended December 31, 2006 and for the interim period ended June 30, 2008 is
unaudited.
Wah Sang's History
The business of Wah Sang was founded by the father of Guy Lam, the
President and Chief Executive Officer of Pacrim International Capital Inc.
("Pacrim"), in 1958 in Hong Kong. It started as a simple converter plant,
buying containerboard from local suppliers and converting it into
single-colour, single-wall containers. Wah Sang moved its manufacturing
operations to Shenzhen, China in 1989. This move was made for two strategic
reasons. Firstly, China's labour rates were (and continue to be) a fraction of
those in Hong Kong. More important was the belief that China would become the
manufacturing base for not just Hong Kong-based companies, but also
manufacturers from around the world. By relocating to Shenzhen, Wah Sang, with
its roots and track record in Hong Kong, would be better positioned than its
competitors in mainland China to supply these multinational enterprises.
In 1993, Wah Sang undertook to expand and to vertically integrate its
operations. A 20,000 square metre plant was custom built to house two
multi-layered production lines, capable of producing three-colour flexo print
containers. In 1995, a product testing centre was set up. In 1997, Wah Sang
started an offset printing operation by purchasing a new German made KBA
colour printing press. An enterprise wide Quality Control Circle initiative
was implemented in 1998. In 1999, Wah Sang introduced innovative Paper Pallet
and Slip Sheet to facilitate and streamline the delivery system. In 2000, Wah
Sang commenced formal recruiting efforts at local universities and technical
colleges in order to strengthen the newly created R&D centre. In 2003, Wah
Sang started expansion of its offset printing operation, with a view to the
establishment of a stand-alone offset printing centre.
Wah Sang is a joint stock limited company with foreign investment, as
approved by the Ministry of Foreign Trade and Economic Cooperation in China,
with a registered capital of US$20,700,000.
Intercorporate Relationships
Wah Sang owns 100% of the outstanding shares of Wah Sang Industrial (HK)
Co. Ltd., a subsidiary of Wah Sang incorporated in Hong Kong which trades in
paper materials for Wah Sang.
China's Corrugated Container Industry
The Pearl River Delta region hosts a concentration of export oriented
manufacturing industries which generally require corrugated boxes for
packaging. This region, which includes the cities of Guangzhou, Shenzhen,
Dongguan and Huizhou, is widely known as the production base for many global
manufacturers of consumer electronics and telecommunication products such as
Hi-Fi equipment, televisions and monitors, DVD players, computers, printers
and cellular phones. These products require high quality and sophisticated
corrugated packaging, both in terms of design and protection during
transportation. Wah Sang is strategically located in Shenzhen, in the heart of
this manufacturing heartland of China. Virtually all of Wah Sang's customers
are located within a radius of 200 kilometres of its facilities, allowing Wah
Sang to save on transportation costs while offering just-in-time delivery
service to customers.
Wah Sang's business strategy is to grow its business through internal
means as well as through acquisitions. Initially, Wah Sang plans to
concentrate on selective acquisitions within the Pearl River Delta region. In
the medium term, Wah Sang would seek acquisition opportunities in the Yangtze
River Delta region, including the cities of Shanghai, Suzhou, Nanjing and
Hangzhou, which region also hosts a concentration of export-oriented
manufacturing industries. The longer-term phase of Wah Sang's acquisition
strategy is to target the Beijing-Tianjin region, including the Province of
Shandong, which is the third major consumption area of corrugated products in
China.
Competitive Advantages of Wah Sang
Management of Wah Sang and management of Pacrim believe that Wah Sang
enjoys the following advantages over its competitors:
Blue Chip Customer Base
-----------------------
Wah Sang's customers are primarily Fortune 500 consumer products,
electronics and telecommunications companies, including Wal-Mart, Foxconn
Technology Group ("Foxconn"), Brother, Sony, IBM, Canon, Samsung, HP, Xerox,
DHL and UPS, and other multinational corporations. These companies all have
extremely high standards for the packaging of their products. Wah Sang's
ability to acquire these customers and subsequently maintain a strong
relationship with them results in a stable revenue base. Furthermore, Wah Sang
is in an excellent position to grow with these customers as they expand their
operations in China.
Quality of Products
-------------------
Through a comprehensive quality control system that covers every stage of
its production, including assessment of suppliers, sample testing of raw
materials, control over usage of raw materials, computerized and monitored
production process and quality testing of all finished products, Wah Sang
maintains a consistently high level of product quality. Consequently, Wah
Sang's products have consistently met its customer acceptance target of 99%
while the customer complaint rate has consistently been below the 0.25%
target. Wah Sang was ISO 9002 certified in 1996 and obtained its ISO
9000/14000 certification in 2002. Wah Sang has also been awarded Sony's "Green
Partner" designation.
Superior Equipment and Technologies
-----------------------------------
Over the years, Wah Sang has invested heavily in technologies and
equipment. For example, Wah Sang's equipment list includes three KBA printing
presses imported from Germany, capable of producing four, five and six-colour
offsets, respectively. The last one purchased, KBA 162, has a maximum printing
size of 47.5 inches x 63.75 inches, the largest available in the world today
and only three of such offset printing machines in southern China. Management
of Wah Sang believes that the quality of its equipment approaches world
standard, allowing it to service even the most demanding clients.
Customer Knowledge and Product Development Capabilities
-------------------------------------------------------
Management and staff of Wah Sang maintain close relationships with
customers and keep up-to-date with market trends and customers' needs. They do
so by regularly visiting customers to discuss market trends, pricing and
customer requirements, participating in industry conferences and exhibitions
and carrying out customer surveys. Consequently, Wah Sang has developed a
capability that enables it to conceptualize, design and produce new products
based on customers' needs in a timely manner. Examples of such capabilities
include shipments of point-of-sale display cases for Wal-Mart and corrugated
colouring doll houses for Target Stores.
Strong Profit Margins
---------------------
Most of Wah Sang's products are considered to be mid or high-end
packaging products, which command higher price points than commodity products
produced by many of Wah Sang's competitors. Cost control practices are
followed at all levels at Wah Sang. These factors combine to give Wah Sang
consistent and strong profit margins: Gross margins for 2005, 2006 and 2007
were 23.3%, 17.9% and 22.3% respectively, while net margin (after tax) was
12.5% for 2005, 5.3% for 2006 and 7% for 2007. The margin fluctuation is
related to the constant change in commodities prices worldwide, particularly
for kraft liner and medium liner paper.
Strategic Location
------------------
Wah Sang is strategically located in Shenzhen, in the heart of the Pearl
River Delta region of southern China. As above noted, this region is the
production base for many global manufacturers, all of which require high
quality and sophisticated corrugated packaging. Shenzhen is also adjacent to
Hong Kong and serves as the gateway for a significant portion of China's
import and export activities. Wah Sang is able to supply customers in Hong
Kong, Taiwan and other countries in Southeast Asia.
Products and the Production Process
Corrugated cardboard is made of paper and has an arched layer called
"fluting", between smooth sheets called "liner". Wah Sang has three major
product lines: containerboards, "flexo containers" and "offset colour
containers". Containerboard is the paper used for making corrugated
containers. Flexo containers refer to corrugated containers with colour logos,
text and graphics printed directly on the surface of the container. Offset
colour containers refer to corrugated containers with brilliant and detailed
colour graphics printed on laminated offset sheets which are pasted onto the
surface of the container. Because of the thickness and rigidity of the
containerboard, graphics on the flexo containers are generally inferior in
quality to those on offset colour containers.
Wah Sang's production capacity and actual production volume by product
line are provided below:
2008 (to
2003 2004 2005 2006 2007 June 30)
-------- -------- -------- -------- -------- --------
(tonnes)
Containerboard
Capacity 60,000 60,000 60,000 63,000 63,000 63,000
Actual volume
produced 56,647 60,229 58,962 57,455 56,392 24,820
Flexo Containers
Capacity 50,000 50,000 50,000 50,000 50,000 50,000
Actual volume
produced,
tonnes 41,430 44,499 46,988 39,673 39,099 19,260
Offset Colour
Containers
Capacity 12,000 12,000 18,000 18,000 18,000 18,000
Actual volume
produced 13,622 14,027 13,891 16,588 16,086 4,700
The bulk of the containerboard produced is used internally for further
processing into flexo containers or offset colour containers. In 2003, Wah
Sang embarked on a major expansion program to significantly increase the
capacity of the offset operation. The first phase of this program is now
complete and the capacity of the new Offset Centre is presently 18,000 tonnes.
Current plans call for further phased increase of the capacity, reaching
68,000 tonnes by the end of 2009 and reaping its full financial impact in
2010.
Production Process
------------------
Wah Sang has adopted a flexible and efficient production process which
vertically integrates the manufacture of corrugated containerboard and the
manufacture and printing of corrugated containers. This production process
enables Wah Sang to fulfill customer orders within a short lead time. Wah
Sang's lead time from the receipt of a customer's order to delivery of
finished goods, depending on the customer's specifications and order size,
typically ranges from one to seven days.
The principal raw materials used in the manufacture of containerboard and
corrugated containers are kraft liner paper and medium paper. The latter, also
known as fluting material or corrugated medium, is passed through a corrugator
machine at Wah Sang which presses the corrugation (known as flutes) into the
medium. These flutes resist pressure and bending from all directions, and
their dimensions can be altered to increase or decrease the strength of the
containerboard. Adhesives are then applied to the outer tips of the flutes to
attach a sheet of liner paper to each side of the corrugated medium to form a
rigid containerboard which is then used in the manufacture of corrugated
containers.
Production of Corrugated Containers
-----------------------------------
The containerboards are further processed by Wah Sang into corrugated
containers according to customer specifications. Logos of the customer,
depictions of the end-products and other graphic designs are printed directly
onto the containerboard (a process called flexo printing), which is then
moulded or cut into the required design and size, stapled or glued into
individual containers and packaged. After inspection, the flexo boxes are then
delivered to the customer. Alternatively, should a customer require a printing
quality that flexo printing cannot provide, the graphics are printed on
separate laminated offset sheets which are then glued onto the containerboards
before they are processed into boxes.
A flow chart illustrating the key steps of Wah Sang's production process
for containerboard and corrugated containers is provided below:
(a) Containerboard
------------
Kraft Liner
----------------------
------------ Corrugating into the
- desired number of
------------ layers
Medium ----------------------
Paper
------------
----------------------
Drying
----------------------
----------------------
Cutting
------------ ------------
----------------------
- Container- - Inspection
---------------------- board
------------ ------------
Measuring
------------
----------------------
Delivery
------------
(b) Corrugated Containers
----------------
Flexo printing
- directly on
----------- containerboard
Container- ----------------
board
------------ ---------------- ----------------
- Offset colour Adhere offset
------------ printing on - paper on
Printing separate paper containerboard
Material ---------------- ----------------
------------
----------------
------------ Cut into the
Sample required
product shape
production ----------------
------------
---------------- ---------------- ----------------
Stapling or - Offset - Inspection
glueing boxes
---------------- ---------------- ----------------
----------------
Delivery
----------------
Production Facilities and Quality Control
Wah Sang's facilities are located in two adjacent lots in the city of
Shenzhen. The original facilities were built in 1993, comprising six buildings
with an aggregate building area of 30,415 square metres on a site of 24,518
square metres under long-term land lease from the municipal government of
Shenzhen, expiring in 2041. The Offset Centre is a building of 32,747 square
metres on a site of 24,125 square metres adjacent to the original facilities.
This latter site is under a long-term land lease from the municipal government
of Shenzhen, expiring in 2053. A breakdown of the building areas of the two
facilities is provided below.
Original Offset
Building Centre
(sq. metres) (sq. metres)
------------ ------------
Production Area A 4,189 13,600
Production Area B 11,102 17,100
Production Area C and warehouse 12,227 2,047
Office 1,025 -
Dormitory 1,872 -
Total 30,415 32,747
Wah Sang maintains product quality targets that are set to international
standards, including a customer acceptance rate of 99% or higher and a
customer complaint rate of 0.25% or less.
The quality control team at Wah Sang had a staff of 55 as at December 31,
2007. The first component of the quality control system is a strict supplier
evaluation process whereby raw material suppliers are assessed at regular
intervals in accordance with a specific set of criteria including pricing,
quality of raw material supplied and quality of service. As raw materials
arrive at Wah Sang, they are examined on a random sampling basis to ensure the
materials meet established quality standards. Work-in-process inventories are
inspected to ensure that Wah Sang's products are manufactured in accordance
with customer specifications and standards. Finally, finished goods are
subject to physical tests and inspection before delivery.
Wah Sang has in place a company-wide Quality Central ("QC") Circle
initiative, in which representatives from each department participate in
weekly QC Circle meetings to explore different ways to ensure and improve on
product quality. As above noted, Wah Sang obtained ISO 9001/14000
certification in 2002.
Raw Material and Suppliers
The principal raw materials used by Wah Sang are kraft liner paper and
medium paper. Wah Sang sources these materials from various countries,
including China, the United States, Korea, Indonesia, Australia, New Zealand,
France, Brazil, South Africa and Canada. Wah Sang normally settles its
purchases, which are denominated either in U.S. dollars or Hong Kong dollars,
by letter of credit.
Domestically supplied paper material is generally 12% to 18% cheaper than
imported material. Furthermore, Wah Sang is exempt from paying VAT for its
domestic purchases due to its export company status. The quality of the
Chinese domestic paper supply has been steadily improving during the past few
years and consequently, Wah Sang has been buying more domestic paper to take
advantage of the lower cost. Wah Sang buys its raw material from over 30
suppliers. For the years 2005, 2006 and 2007, the total purchase attributable
to the five largest suppliers represented 66%, 46% and 71% of total purchases
respectively. The table below sets out the breakdown of Wah Sang's purchases
of paper raw material by domestic and foreign sources.
2008
(to
2003 2004 2005 2006 2007 June 30)
-------- -------- -------- -------- -------- --------
Paper purchases (US$000s)
Domestic 1,221 1,405 3,257 4,683 1,866 492
Foreign 19,468 23,239 20,292 18,072 18,866 10,091
-------- -------- -------- -------- -------- --------
Total 20,689 24,644 23,549 22,755 20,732 10,583
-------- -------- -------- -------- -------- --------
Inventory Control and Delivery System
Wah Sang monitors and controls the inventory levels of its raw material
and finished goods in order to ensure an efficient operation and to reduce the
risk of over-stocking and obsolescence. For raw material, it is Wah Sang's
policy to keep 30 to 45 days of supply in storage. With the gradual shift to
buying paper raw material internationally, management expects the paper
inventory will be maintained. Wah Sang's policy on finished goods is to keep a
minimum level of stock due to its short production lead time and the fact that
corrugated products cannot be stored for an extended period of time due to
moisture absorption and discolouration.
For local deliveries, Wah Sang has a team of 46 trucks each with delivery
routes covering a radius of 200 kilometres from its plant in Shenzhen. These
trucks are leased by Wah Sang, which generally signs an agreement with each
truck owner annually setting out the unit delivery prices for each
destination. The trucks are painted with the name and logo of Wah Sang and are
used exclusively by Wah Sang.
The occasional shipment of Wah Sang's products to overseas destinations
is made by container. Wah Sang has ongoing arrangements with forwarding
companies which transport Wah Sang's product from the plant by truck to the
shipping port in Shenzhen where the product is then transferred into
containers to be delivered by ship.
Product Development, Sales and Marketing
Wah Sang provides a comprehensive product offering to its customers,
including product development, product structure design, a complete graphics
design and production facility and product testing service. Most of Wah Sang's
customers consider corrugated containers as providing a selling function in
addition to protecting the end-product. To this end, Wah Sang offers its
customers full graphics capabilities that use state-of-the-art digital
photographic and computer technologies. This service is of particular
importance to Wah Sang's international customers in that it saves a
significant amount of time and expense usually incurred with traditional
advertising agencies and design houses, particularly in China where such
services at acceptable standards are difficult to find. The in-house design
capabilities also allow Wah Sang to achieve better quality control.
Wah Sang's customers may from time to time request Wah Sang to design
packaging cartons with specific levels of protection, visual appearance or
other particular needs. While some of Wah Sang's customers may have their own
in-house packaging design capabilities, Wah Sang often works closely with its
customers in designing the packaging. In addition, Wah Sang continuously
explores and develops new techniques for producing durable but lightweight
cartons to help its customers in reducing costs.
Wah Sang aims to strengthen its ongoing relationship with existing
customers, maintain a high level of customer satisfaction and attract new
customers by continuously promoting its products and market research. Specific
sales and marketing activities include:
- Monthly visits with customers to discuss market trends, pricing and
the customers' needs;
- Regularly provide product samples and specifications to customers and
potential customers;
- Participation in industry conferences, trade shows and exhibitions in
China;
- Carrying out customer surveys to gather feedback and suggestions from
customers; and
- Advertising in, and contributing articles to, industry periodicals.
Wah Sang's sales and marketing department employees visit with each
customer at least once a month. Customer feedback from these visits is
documented in detail and followed closely. The regular customer visits also
serve to monitor customer credit issues. Wah Sang has also implemented a
roving after-sales program whereby a dedicated team travels to visit customers
which have just received a product shipment to ascertain customer satisfaction
and deal with any discrepancies and concerns.
Customers
Approximately 95% of Wah Sang's sales are to domestic subsidiaries or
affiliates of foreign, international manufacturing companies. The bulk of Wah
Sang's customers are Fortune 500 companies or otherwise substantial
multinational enterprises, as above noted.
The top five customers of Wah Sang accounted for approximately 48% of Wah
Sang's gross revenue in 2005, 52% in 2006 and 57% in 2007. Management of Wah
Sang aims to increase sales to other customers and to secure new customers in
order to lessen its dependence on its top five customers and the consumer
electronics industry. The top five customers (by revenue) in 2007 were
Foxconn, Walmart, Brother, TCL King Electrical Appliance (Huizhou) Co., Ltd.,
and Dynapac Co., Ltd. In May 2007 Wah Sang entered into a strategic
partnership arrangement with Foxconn, the largest electronic and cell phone
manufacturer in the world. Foxconn has stationed operational staff at the Wah
Sang premises to strengthen daily operations. Another strategic partner
Dynapac Co. Ltd., a listed company on the Tokyo Stock Exchange, also stationed
permanent operational staff at the Wah Sang premises to ensure smooth
operations.
Organizational Structure, Senior Management and Employees
Wah Sang's organizational structure is set out below:
Senior Management
------------
Board of
Directors
------------
------------
Chairman
------------
------------ ------------
Finance General
Manager Manager
------------ ------------
---------- ---------- ---------- ---------- ---------- ----------
Internal Production HR Sales & Corporate
Audit Finance Manager Manager Marketing Development
Manager Department
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- -----------
Internal Production HR Purchasing Engineering
Audit Department Department ---------- -----------
Department ---------- ----------
---------- ---------- ---------- -----------
Operations Import & Information
Manager Export Technology
---------- ---------- -----------
---------- ---------- -----------
Operations Quality Warehouse
Department Assurance
---------- ---------- -----------
---------- ---------- -----------
Design Offset Transpor-
Manager Printing tation
---------- ---------- -----------
-------------
Technological
Development
-------------
Mr. Guy Lam, Chairman
---------------------
Mr. Lam has been Chairman since 2006. He obtained a degree in mechanical
engineering and a LL.B law degree in Canada, and a LL.M graduate degree in the
United States. He is an entrepreneur with experience in both North America and
Asia over the past 20 years.
Mr. William Lin, General Manager
--------------------------------
Mr. Lin joined Wah Sang in April, 2003, as Deputy General Manager, and
became General Manager in July, 2006. He has over 20 years of paper industry
experience, and held senior management positions with paper products company
in Taiwan, Shanghai and Vietnam before joining Wah Sang. Mr. Lin graduated
from university in Taiwan.
Mr. Huang Wei Rong, Finance Manager
-----------------------------------
Mr. Huang joined Wang Sang in September 2006 as Finance Manager, having
held management positions in manufacturing companies for the past ten years.
He is a university graduate and a qualified accountant in China.
Employees
---------
As at June 30, 2008, there were 885 employees at Wah Sang. A break down of
staff complement by function is provided below:
Staff Count
-------------
Production 342
Offset printing 206
Sales and marketing 80
Warehouse and inventory control 49
Quality control 52
Finance and administration 78
Transportation 38
Product development 18
Engineering and maintenance 9
Executive office 13
-------------
Total 885
-------------
Wah Sang provides room and board to all employees who elect to take this
benefit. Its expense in this regard for 2007 was approximately $52,135. Wah
Sang also pays all social insurance premiums on behalf of its employees,
including work related injury, health care, and retirement insurance, in
compliance with all labour laws and regulations.
Summary Compensation Table
The following table sets forth information concerning the compensation
paid by Wah Sang by way of salary and bonus for services rendered during the
year ended December 31, 2007, 2006 and 2005 to the equivalent of its Chief
Executive Officer and the Chief Financial Officer, and to the three other most
highly compensated executive officers during the year ended December 31, 2007
who met the applicable threshold of $150,000, based on total salary and
bonuses of which there were none. These individuals are collectively referred
to as the "Named Executive Officers".
-------------------------------------------------------------------------
Name and Long-Term
Principal Position Annual Compensation Compensation
-------------------------------------------------------------------------
Securities
Other under
Annual Options
Salary Bonus Compensation Granted
Year ($) ($) ($) (No.)
-------------------------------------------------------------------------
William Lin 2007 120,000 - - Nil
General Manager(2) 2006 108,874 - (1) Nil
2005 87,235 43,618 (1) Nil
-------------------------------------------------------------------------
Huang Wei Rong 2007 17,808 - 1,369 Nil
Finance Manager(3) 2006 5,688 Nil (1) Nil
-------------------------------------------------------------------------
Notes:
------
(1) The aggregate amount of perquisites and other personal benefits,
securities or property received in the fiscal year was no greater
than the lesser of $50,000 and 10% of the total of annual salary and
bonus of such Named Executive Officer for such fiscal year.
(2) Mr. Lin became General Manager in July, 2006, having been Deputy
General Manager from April, 2003.
(3) Mr. Huang commenced as Finance Manager in September, 2006.
Material Contracts
Wah Sang has not entered into any material contracts within the last two
years not in the ordinary course of business.
PACRIM INTERNATIONAL CAPITAL HOLDINGS INC.
Pacrim International Capital Holdings Inc. ("PICH") is a corporation
incorporated under The International Business Companies Ordinance of the
British Virgin Islands whose only asset is a 100% equity interest in PRC
Realty Inc. ("PRC Realty") which in turn holds an 87.81% equity interest in
Wah Sang. PICH has an authorized capitalization of 50,000 ordinary shares of
US$1.00 each of which 10,000 ordinary shares are issued and outstanding.
Pacrim owns 4,600 of the shares of PICH, being 46%, while Guy Lam owns the
balance.
PRC REALTY INC.
PRC Realty is a corporation incorporated under The International Business
Companies Ordinance of the British Virgin Islands whose only asset is an
87.81% equity interest in Wah Sang. PRC Realty has an authorized
capitalization of 100,000 ordinary shares of US$1.00 each and 1,000,000 10%
preference shares of $13.50 each of which one ordinary share only is issued
and outstanding, which share is owned by PICH.
Guy Lam had acquired the 87.81% equity interest in Wah Sang and a smaller
packaging company from members of his family between 2001 and 2004 for Hong
Kong $186,000,000 (being approximately Cdn. $27,800,000) in cash and common
shares of Pacrim.
See "Litigation" below for a description of certain litigation with
respect to PRC Realty.
FINANCIAL STATEMENTS OF PICH
Included in the following Exhibit I are the audited consolidated
financial statements of PICH for the year ended December 31, 2007 and the
unaudited consolidated financial statements of PICH for the six month interim
period ended June 30, 2008.
Selected Financial Results
--------------------------
The following table contains selected income statement and balance sheet
information with respect to PICH and has been derived from, and should be read
in conjunction with, the historical financial statements of PICH set out in
Exhibit I.
For the six
For the months ended
years ended December 31, June 30,
--------------------------- -------------
Consolidated Income Statement 2006 2007 2008
----------------------------- ------------- ------------- -------------
(US$000s) (unaudited) (unaudited)
Turnover 39,663 37,305 19,856
Cost of sales 32,556 28,967 16,020
------------- ------------- -------------
Gross profit 7,107 8,338 3,836
Gross margin % 17.92% 22.35% 19.32%
Other revenue 353 297 847
Other operating cost 1,754 1,645 995
Administrative expenses 2,211 1,879 3,480
------------- ------------- -------------
Profit from operations 3,495 5,111 208
Finance cost 2,507 5,679 1,451
------------- ------------- -------------
Profit before taxation 988 (568) (1,243)
Taxation (8) 303 205
------------- ------------- -------------
Profit before minority interests 996 (871) (1,448)
Minority interests 254 303 146
------------- ------------- -------------
Profit attributable to
shareholders 742 (1,174) (1,594)
Selected Consolidated Balance
-----------------------------
Sheet Data (at period-end)
--------------------------
(US$000s)
Cash and bank balances 574 4,342 1,266
Non-cash working capital 60,220 55,562 67,833
------------- ------------- -------------
Total assets 60,794 59,904 69,100
Total interest-bearing debt 38,053 36,869 45,952
------------- ------------- -------------
Total capital & reserves 22,741 23,035 23,148
VALUATION
A committee of all of the directors of Pacrim except Guy Lam (the
"Independent Committee") retained American Appraisal China Limited (the
"Valuator") on 1 September, 2008 to render an independent opinion as to the
equity value of PICH based on a valuation of the business enterprise of Wah
Sang (the "Valuation").
The Valuator is a subsidiary of American Appraisal Associates, the
world's largest independent valuation firm with over 50 offices around the
world. American Appraisal Associates has been providing appraisals and
business valuations for over 100 years. In China, the Valuator has performed
valuations since 1976 for a variety of purposes, including acquisitions,
formation of joint ventures, initial public offerings and financings.
The Valuator was selected to carry out the Valuation on the basis of its
expertise in such matters. The Valuator advised the Independent Committee that
it is independent of the Lam family. The Valuator further advised the
Independent Committee that the Valuator and the shareholders thereof have not
at any time provided any financial advisory services or participated in any
financing involving Pacrim or any of its affiliates and that there are no
understandings or agreements between the Valuator and the above parties with
respect to any future business dealings. Having reviewed all such
circumstances, the Independent Committee was satisfied that the Valuator is
independent of Pacrim and is qualified for the purposes of preparing the
Valuation.
The fee payable to the Valuator by Pacrim under the terms of its
engagement was not contingent in whole or in part on the conclusions of the
Valuator or the completion of any transaction and was determined by
negotiation between the Independent Committee and the Valuator. No limitations
were imposed by the Independent Committee on the Valuator in connection with
the provision of the Valuation.
Summary of the Valuation and Methodologies
The Valuator's mandate was to deliver to the Independent Committee the
Valuation.
For purposes of the Valuation, the Valuator was guided by the concept of
"fair market value", defined as the estimated amount at which a property might
be expected to exchange between a willing buyer and a willing seller, neither
being under compulsion, each having reasonable knowledge of all relevant
facts.
In preparing the Valuation, the Valuator conducted such analyses,
investigations, research and testing of assumptions as were considered to be
necessary in the circumstances. In the course of preparing the Valuation, the
Valuator was granted access to management of Wah Sang and PICH. A detailed
description of the scope of the review by the Valuator is set out in the
Valuation, a copy of which can be found at www.sedar.com.
In preparing the Valuation, the Valuator relied upon the completeness,
accuracy and fair presentation of all of the financial and other information,
data, advice, opinions and representations obtained by it from management of
PICH and Wah Sang (collectively, the "Information"). Except as expressly
described in the Valuation, the Valuator assumed the completeness, accuracy
and fair presentation of the Information and has not attempted to
independently verify the Information.
The Valuation has been rendered on the basis of the securities markets,
economic, financial, and general business conditions prevailing as at the date
of the Valuation and the conditions and prospects, financial and otherwise, of
PICH and its direct and indirect subsidiaries as they were reflected in the
Information and as they have been presented to the Valuator in discussions
with management. In the analyses and in preparing the Valuation, the Valuator
has also made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond the control of PICH and its subsidiaries.
The Valuator relied on two approaches to determine fair market value: the
income approach and the market approach. The income approach is the conversion
of expected periodic benefits of ownership into an indication of value. It is
based on the principal that an informed buyer would pay no more for the
property than an amount equal to the present worth of anticipated future
benefits (income) from the same or equivalent property with similar risk. The
market approach considers prices recently paid for similar assets, with
adjustments made to the indicated market prices to reflect condition and
utility of the appraised assets relative to the market comparable. Assets for
which there is an established used market may be appraised by this approach.
Based upon the investigation and analysis outlined in the Valuation and
the appraisal methods employed, it was the opinion of the Valuator that as at
June 30, 2008, the fair market value of the business enterprise of Wah Sang
was in the range of US$56,237,000 to US$73,204,000. It was the further opinion
of the Valuator that as at June 30, 2008 the equity value of PICH was in the
range of US$39,134,000 to US$54,033,000. Excluding common shares of Pacrim
held by PICH at June 30, 2008 (subsequently transferred out of PICH), it was
the opinion of the Valuator that as at June 30, 2008 the equity value of PICH
was in the range of US$34,942,000 to US$49,841,000.
The Valuator did not consider the litigation described below (see
"Litigation") in preparing the Valuation.
The foregoing discussion is a summary of the Valuation and is qualified
in its entirety by the Valuation available at www.sedar.com.
In dealing with the Valuation for the purposes of the retirement of loans
made by Pacrim to companies in which Guy Lam has an interest, the Independent
Committee adjusted the value range for PICH to reflect real estate unrelated
to Wah Sang transferred out of PICH after June 30, 2008 and to reflect the
retirement of loans owed by PICH to Pacrim. The resulting range for the equity
value of PICH was US$40,667,000 to US$55,566,000.
LITIGATION
Guy Lam, PICH, PRC Realty and others are named as defendants in a civil
action (the "Action") brought by Lam Pak Cheung (the "Plaintiff"), the father
of Guy Lam, in November 2007 in the High Court of the Hong Kong Special
Administrative Region. The dispute concerns the ownership of PRC Realty and
thus its 87.81% equity interest in Wah Sang. The Plaintiff claims that he is
the owner of PRC Realty and that the Register of Members of PRC Realty be
rectified by recording the Plaintiff (rather than PICH) as the owner of the
one outstanding share of PRC Realty. The Plaintiff also asked for monetary
damages. The Plaintiff alleges fraud and/or undue influence by Guy Lam with
respect to certain share transfers. Guy Lam and PICH have counterclaimed for
monetary damages.
Pacrim has been provided with an opinion from a Hong Kong barrister
involved in the Action that the Plaintiff is unlikely to be successful in
challenging Guy Lam's indirect ownership interest in Wah Sang.
Pacrim understands the parties to the Action have had settlement
discussions of various times, which have not been successful, and that
settlement discussions are continuing.
Based on the information available to it, including the above-noted legal
opinion, Pacrim believes that PICH is the rightful owner of PRC Realty.
However, an unfavourable outcome or settlement of the Action could involve
significant damage to PICH. See "Risk Factors - Litigation" below. In that
regard, Guy Lam has agreed to indemnify Pacrim from any claim, demand, action,
cause of action, direct or indirect loss (excluding loss of profits or
consequential loss), damage, liability, cost or expense (including reasonable
legal fees) which Pacrim and/or PICH (in the case of PICH, pro rata in
accordance with the parties' respective share ownership in PICH) may suffer as
a direct or indirect consequence of the Action or any other claim, demand or
action brought by the Plaintiff or Christine Lam with respect to the ownership
of PRC Realty or Wah Sang, provided that in no event will Mr. Lam be obligated
to indemnify Pacrim in an amount exceeding $26,619,000. As security for his
obligations under the indemnity, Mr. Lam has agreed to pledge or cause to be
pledged in favour of Pacrim a total of 26,566,763 common shares of Pacrim and
all of the 5,400 common shares of PICH held directly or indirectly by Mr. Lam.
RISK FACTORS
In addition to the risk factors described in Pacrim's Annual Information
Form and elsewhere in this Circular (see in particular Management's Discussion
and Analysis of Financial Condition and Results of Operation above), there are
a number of risk factors that could materially affect the business of Pacrim
upon its indirect acquisition of the controlling interest in Wah Sang, which
include, but are not limited to, the risk factors set out below:
Risk Associated with China
--------------------------
Wah Sang's results of operations, financial position and prospects are
subject to a significant degree to economic, political, social and legal
developments in China.
Wah Sang's operations are conducted in the PRC and it is anticipated that
this will continue to be the case. As such, Wah Sang's operations are exposed
to various levels of political, economic and other risks and uncertainties.
These risks and uncertainties include, but are not limited to: currency
exchange rates; high rates of inflation; labour unrest; renegotiation or
nullification of existing concessions, licenses, permits and contracts;
changes in taxation policies; restrictions on foreign exchange; government
corruption; changing political conditions; currency controls and governmental
regulations that favour or require the awarding of contracts to local
contractors or require foreign contractors to employ citizens of, or purchase
supplies from, a particular jurisdiction.
Changes, if any, in investment policies or shifts in political attitudes
in China may adversely affect Wah Sang's operations or profitability.
Operations may be affected in varying degrees by government regulations with
respect to, but not limited to, restrictions on production, price controls,
export controls, currency remittance, income taxes, foreign investment,
environmental legislation, land use, land claims of local people and water
use. Any events resulting in an adverse impact on the Chinese economy will
likely have an adverse effect on Wah Sang's profitability and prospects.
The occurrence of these various factors and uncertainties cannot be
accurately predicted and could have an adverse effect on Wah Sang's business,
financial condition and results of operations. The following risk factors are
risks unique to China that investors should be aware of.
State Ownership
---------------
Wah Sang carries on its business in China. As such, Wah Sang's results of
operations, financial position and prospects are subject to a significant
degree to economic, political, social and legal developments in China.
The Chinese economy differs from the economies of most developed
countries in a number of respects, including its structure, the level of
government involvement, the level of development, the control of foreign
exchange and the allocation of resources.
Before its adoption of reform and open door policies beginning in 1978,
China was primarily a planned economy. Since that time, China's economy has
been undergoing a transition from a planned economy to a more market-oriented
economy. Although in recent years the Chinese government has implemented
economic reforms, reduced state ownership and established sound corporate
governance in business enterprises, a substantial portion of productive assets
in China is still owned by the Chinese government. In addition, the Chinese
government continues to play a significant role in regulating industry by
imposing industrial policies. It also exercises significant control over
China's economic growth through the allocation of resources, control for
foreign currency-denominated obligations, setting monetary policy and
providing preferential treatment to particular industries or companies.
Furthermore, government policies relating to currency conversion, taxation,
import restrictions and the trading of imported goods, among others, continue
to have a significant impact on the overall economy, as does the presence of
the government as a market participant as well as the market regulator. Many
of the policy changes initiated since 1978 are unprecedented in China,
experimental in nature, and are frequently refined and readjusted. Political
and social factors may also lead to further refinements and readjustments. Any
changes in Chinese political, economic, or social conditions, or to the
current laws and regulations, or their interpretations may adversely affect
Wah Sang's profitability and prospects.
The economy of China has experienced significant growth in the past 20
years, but growth has been uneven both geographically and among various
sectors of the economy. The Chinese government has implemented various
macro-economic control measures from time to time in order to try and control
the rate of economic growth, including certain measures which were put in
place to restrict bank lending. Some of these measures may have a negative
effect on Wah Sang. For example, Wah Sang's operating results and financial
position may be adversely affected by: changes in the rate or method of
taxation; imposition of additional restrictions on currency conversion and
remittances abroad; reduction in tariff or quota protection and other import
restrictions; changes in the usage and costs of state-controlled
transportation services; and, state policies affecting the forestry industry.
In addition, such macro-economic control measures may have a general adverse
impact on the Chinese economy that would, in turn likely have an adverse
impact on Wah Sang's business and profitability.
Government Sector Intervention
------------------------------
If the Chinese government changes its currency policies or the
interpretation of those policies Wah Sang may face significant constraints on
its flexibility and ability to expand its business operations or to maximize
its profitability. Under current Chinese regulatory requirements, all major
capital expenditure projects require Chinese national and/or provincial
government approval.
Foreign Investment
------------------
In China, companies with a foreign ownership component could be required
to work within a framework which is different to that imposed on local
companies. However, the Chinese government is opening up opportunities for
foreign investment and this process is expected to continue, especially with
China's entry into the World Trade Organization. However, if the Chinese
government should reverse this trend and impose greater restrictions on
foreign companies, Wah Sang's ability to conduct business in China could be
negatively affected.
Repatriation of Profit and Currency Conversion
----------------------------------------------
The PRC government imposes control over the convertibility of the RMB
into foreign currencies. With effect from July 21, 2005, the PRC government
has reformed the RMB exchange rate regime into a managed floating exchange
rate regime based on market supply and demand with reference to a portfolio of
currencies, giving more flexibility as compared with the former system in
which the RMB was pegged to the US dollar. See "Foreign Exchange Risk" below.
Under such reformed system, the People's Bank of China ("PBOC") announces the
closing price of a foreign currency traded against the RMB in the inter-bank
foreign exchange market after the closing of the market on each working day,
and will make it the central parity for trading against the RMB on the
following working day. PRC banks licensed to engage in foreign exchange
transactions use the closing price announced by the PBOC as a basis and decide
a rate of their own to enter into foreign exchange sale and purchase
transactions with customers; such rate shall be within a specified floating
band around the central parity which may be adjusted by the PBOC from time to
time according to the economic and financial condition in the PRC. Although
such new regulations have provided for greater liquidity of the RMB, the RMB
is still not a freely convertible currency.
While Wah Sang is paid for its products in US dollars, it converts such
proceeds into RMB. Under current regulations, there is no restriction on
foreign exchange conversion on the current account (including dividend
payments to foreign investors) although any foreign exchange transaction on
the capital account is subject to significant foreign exchange controls and
requires the prior approval from the State Administration of Foreign Exchange
("SAFE"). However, even on the current account, the RMB is not a freely
convertible currency. Wah Sang is allowed to pay outstanding current account
obligations in foreign exchange but must present the proper documentation to a
designated foreign exchange bank to prove the authenticity of foreign exchange
under the current account. While the Chinese government is generally relaxing
restrictions on foreign trade and investment, there is no certainty that all
future local currency can be repatriated.
There can be no assurance that the availability of foreign currency will
be sufficient for Wah Sang to pay dividends to Pacrim or to satisfy other
foreign currency obligations. There is also no guarantee that foreign exchange
control policies will not be changed so as to require government approval to
convert RMB into foreign currency on the current account. In addition, failure
to obtain approval from SAFE for currency conversion on the capital account
may impact on Wah Sang's capital expenditure plans and its ability to expand
in accordance with its objectives.
Tax
---
Wah Sang receives special tax treatment in China. Wah Sang is a joint
stock limited company with foreign investment established in the Shenzhen
Special Economic Zone. Pursuant to the "Provisions of Shenzhen City People's
Government on Certain Questions Concerning Tax Policies on Enterprises in
Shenzhen Special Economic Zone", income tax is levied at the rate of 15% on
the issuer enterprise. As a result of national tax regulations and local
incentives, a reduced enterprise income tax rate is granted to foreign
invested companies registered in specific economic development zones.
Accordingly, Wah Sang pays enterprise income tax at a reduced rate.
In March 2007, the new Enterprise Income Tax Law (the "EITL") was enacted
in China. The EITL, which took effect in 2008, will bring foreign and domestic
companies in the PRC under the same tax code with most companies doing
business in China to have a corporate income tax rate of 25%. The EITL removes
the tax incentives offered to foreign invested enterprises since domestically
owned companies did not receive such incentives.
Wah Sang will enjoy certain "grandfathering" provisions under the EITL
with gradual increase in its tax rate to 25% in 2012 pursuant to a five year
transition period. The 15% tax rate for 2007 will increase to 18% for 2008,
20% for 2009, 22% for 2010, 24% for 2011 and 25% for 2012. Any increase in the
tax rate to which Wah Sang is subject pursuant to the EITL or otherwise will
reduce the after tax profit of Wah Sang and have a direct impact on the profit
available for distribution to its shareholders. Historical financial results
may thus not be indicative of results for future periods.
Wah Sang is preparing to apply to obtain more favourable tax treatment
under the new and high technology category but there can be no certainty such
application will be successful.
Under current Chinese laws, any dividends Wah Sang may receive from its
subsidiaries are not subject to Chinese tax. There can be no assurance that
these dividends would continue not to be subject to tax in the future.
Developing Legal System
-----------------------
The Chinese legal system is a system based on written statues that are
often incomplete or drafted ambiguously. They are interpreted by the Supreme
Peoples' Court and prior court decisions may be cited for reference but have
limited precedential value. Since 1979, the Chinese government has been
developing a comprehensive system of commercial laws, and considerable
progress has been made in introducing laws and regulations dealing with
economic matters such as foreign investment, corporate organization and
governance, commerce, taxation and trade.
However, because these laws and regulations are relatively new, and
because of the limited volume of published cases and their non-binding nature,
interpretation and enforcement of these laws and regulations involve
uncertainties. In addition, many judges in the PRC take a pragmatic view of
the law and seek to resolve problems without necessarily enforcing the legal
rights of the aggrieved parties. As the Chinese legal system develops, changes
in such laws and regulations, their interpretation, or their enforcement, may
have a material effect on Wah Sang.
Protection of Intellectual Property Rights
------------------------------------------
Intellectual property rights in China are still developing and there are
uncertainties involved in their protection and the enforcement of such
protection. Wah Sang will need to pay special attention to protecting its
intellectual property and trade secrets. Failure to do so could lead to the
loss of a competitive advantage that could not be compensated by a damages
award.
Shareholder rights and enforcement of judgments
-----------------------------------------------
As a Chinese legal entity, Wah Sang is subject to Chinese company law and
regulations. Company law in general and, in particular, provisions for the
protection of shareholders' rights and access to information are less
developed than those applicable to companies in other countries. Substantially
all of Wah Sang's assets are located in China. China does not have a treaty
with Canada providing for the reciprocal recognition and enforcement of
judgments of courts and as such, recognition and enforcement in China of
judgments of a Canadian court in relation to any matter not subject to a
binding arbitration provision may be difficult or impossible. Judgments
rendered against Pacrim, PICH and/or Wah Sang in Canada would likely not be
enforceable in China.
Permits and business licenses
-----------------------------
Wah Sang holds various permits, business licences and approvals
authorizing its operations and activities, which are subject to periodic
review and reassessment by the Chinese authorities. Standards of compliance
necessary to pass such reviews change from time to time and differ from
jurisdiction to jurisdiction, leading to a degree of uncertainty. If renewals,
or new permits, business licenses or approvals required in connection with
existing or new facilities or activities, are not granted or are delayed, or
if existing permits, business licenses or approvals are revoked or
substantially modified, Wah Sang will suffer a material adverse effect. If new
standards are applied to renewals or new applications, it could prove costly
to Wah Sang to meet any new level of compliance.
Appropriation
-------------
Wah Sang has purchased certain land use rights in China. Under Chinese
law, land use rights can be revoked in the public interest, although holders
of such appropriated land use rights typically receive compensation. Events in
China have shown that the public interest rationale is interpreted quite
broadly and the process of land appropriation may be less than transparent.
Litigation Risk
---------------
An unfavourable outcome or settlement of the Action described under
"Litigation" above with respect to the ownership of PRC Realty, or of any
other lawsuit or legal proceeding with respect to the ownership of PRC Realty
or Wah Sang, could involve significant damage to Pacrim. The interest in Wah
Sang is the primary operating asset of Pacrim and any such damage to Pacrim
could have a material adverse effect on Pacrim's business, financial condition
and results of operations.
Risks in Business and Operations
--------------------------------
Risks Associated with Expansion
-------------------------------
The success of Wah Sang's expansion strategy will depend on a number of
factors. There can be no assurance that Wah Sang's expansion strategy will be
successful, that modifications to its strategy will not be required or that
Wah Sang will be able to effectively market and/or manage and enhance
profitability. Wah Sang's ability to manage its growth effectively will
require it to develop its management information systems capabilities and
improve its operational and financial systems. Moreover, Wah Sang will need to
train, motivate and manage its employees and attract senior managers and
technical professionals. Any failure to expand these areas and implement and
improve such systems, procedures and controls in an efficient manner at a pace
consistent with Wah Sang's business could have a material adverse effect on
Wah Sang's business, financial condition and results of operations.
Future Capital Requirements/Chinese Monetary Policy
---------------------------------------------------
Wah Sang's future capital requirements will depend upon many factors,
including the expansion of its sales and marketing efforts and the status of
competition, if any. There can be no assurance that any additional financing
will be available to Wah Sang on acceptable terms, or at all. Lending may be
obtained from Canadian banks, Chinese banks or other debt markets.
Although Chinese banks are in the midst of reform, the basis on which
they can lend money is not transparent and they do not often lend money to
foreign invested enterprises. Obtaining financing from a Chinese bank will, to
a certain extent, involve leveraging personal relationships. There is no
guarantee that Wah Sang will have the right relationships if and when it
requires further financing. Recently the Chinese government has articulated
the need to try and control the rate of economic growth in China and has set
out stricter lending policies. This too could affect Wah Sang's ability to
obtain future bank financing.
If additional funds are raised by Pacrim issuing equity securities,
further dilution to the existing shareholders may result. If adequate funds
are not available, Wah Sang may be required to delay, scale back or eliminate
its programs. Accordingly, the inability to obtain such financing could have a
material adverse effect on Wah Sang's business, financial condition and
results of operations.
Dependence on Key Personnel
---------------------------
Due to the specialized and sophisticated nature of Wah Sang's business,
it is highly dependent on the continued service of, and on its ability to
attract and retain, qualified personnel. With the growth of China's economy
has come new-found mobility for employees such that many employees switch jobs
on a regular basis. Wah Sang may need to provide incentives to retain its key
personnel and such incentives could decrease profit.
Environmental Regulation
------------------------
Wah Sang's operations are subject to various environmental laws which
regulate matters such as health, safety, treatment of waste and land use.
Failure to comply with applicable laws, regulations and licensing requirements
may result in enforcement actions thereunder. Penalties could include
suspension or revocation of necessary licenses or permits, civil liability or
the imposition of fines. The cost of compliance, remediation or liability
could materially affect future operating results. Furthermore, the operational
or financial impact of new or amended laws or regulations cannot be predicted
and could have a material adverse impact on Wah Sang's financial condition and
operating results.
Competition
-----------
As the international packaging market expands, competition has become
fierce. Various packaging factories in China have expanded their production
scale, improved their product quality and have lowered their production costs.
The rapid introduction of foreign capital has resulted in the establishment of
joint ventures in packaging and foreign owned enterprises in southern and
western China in particular. These joint ventures and foreign enterprises
possess relatively large production scale, resulting in stronger competition
within the trade. Many of these entities are well established and have
extensive experience in connection with identifying and effecting business
acquisitions directly or through affiliates. Many of these competitors possess
greater financial, technical, personnel and other resources than Wah Sang and
there can be no assurance that Wah Sang will have the ability to compete
successfully. Competitors may introduce technological innovation in any of Wah
Sang's businesses, resulting in increased competitive pressures. Wah Sang's
financial resources will be relatively limited when contrasted with those of
many of their competitors. Although Wah Sang's projections assume that the
industry will generate competition, there can be no assurances on how any
level of competition may impact the future revenues of Wah Sang. China can be
a fiercely competitive market and small price differentials between otherwise
competitive goods and services can make an enormous difference to the
customer.
Risk in purchasing abroad
-------------------------
Major raw and processed materials used by Wah Sang are mostly purchased
abroad, mainly in the United States, Korea and Indonesia. As purchases abroad
involve links of international trade, there may be certain risks, including
quality control, transport security, transaction safety, and applicable law.
Any obstacles in the supply abroad, or any conflict between Wah Sang and its
suppliers abroad, will impact normal day to day operations.
Wah Sang closely monitors the development of the packaging printing
industry, obtaining information in a timely manner on changes in the supply of
raw materials in China. Where possible, Wah Sang intends to substitute Chinese
raw and processed materials for imported ones in order to reduce its
dependence on foreign suppliers of raw and processed materials.
Risk of change in the price of raw materials
--------------------------------------------
Paper (including kraft, corrugated paper and white card paper) accounts
for approximately 65% of Wah Sang's total cost of major raw and processed
materials. Changes in the price of such materials thus has a relatively large
impact on profit. At present, Wah Sang imports most of its raw paper
materials. Prices are thus greatly affected by price changes in the
international market, the international political situation and transportation
costs.
In order to reduce the risk resulting from changes in the price of raw
paper materials, Wah Sang participates in international trade of
advanced-orders for paper so as to reduce the impact of international market
fluctuations.
Share Price Volatility
----------------------
The market price of Pacrim's Common Shares is likely to be highly
volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in Wah Sang's operating results, announcements of
technological innovations, changes in estimates or analysis by securities
analysts, new contracts by Wah Sang, its competitors or their customers,
government regulatory action, general market conditions and other factors.
Product Price Volatility
------------------------
Wah Sang's financial performance is also linked to the selling prices of
its products. The price at which Wah Sang sells its products could fall or
fluctuate unpredictably in the event of changes in industry supply and demand
conditions. Wah Sang is not able to predict future market conditions and
selling prices of its products with any certainty. Any price volatility in raw
materials, other inputs, or in Wah Sang products may have a material adverse
effect on Wah Sang's business results of operations, cash flow and its ability
to satisfy its debt obligations and capital expenditure requirements.
Insurance
---------
Wah Sang maintains property and casualty insurance on certain of its
assets. However, not all risks are covered by insurance, and no assurance can
be given that insurance will be consistently available or will be consistently
available on an economically feasible basis. Wah Sang may also elect not to be
insured against certain liabilities due to high premium costs or for other
reasons. Furthermore, although Wah Sang maintains insurance against such
claims and in such amounts it considers adequate, there can be no assurance
that such insurance policies will be sufficient to cover each and every claim
or loss involving Wah Sang. In the event Wah Sang was to suffer an uninsured
loss, its business, financial condition and results of operations could be
materially adversely affected.
Operating Plant Risk
--------------------
There are many risks associated with operating facilities, including the
ability to secure raw materials and components, utility prices, the failure or
substandard performance of equipment, hiring and maintaining a productive and
reliable workforce, labour disputes, natural disasters, suspension of
operations and compliance with existing and new governmental statutes,
regulations and policies. The occurrence of material operational problems,
including but not limited to the events described above, could have a material
adverse effect on Wah Sang's business, financial condition and results of
operations.
Customer Risk
-------------
Risk of having only a single market
-----------------------------------
At present, Wah Sang's income from major operations comes solely from
packaging for products to be exported from China. Sales are mainly to
enterprises with foreign investment through which multinational companies have
invested in the Chinese mainland. There is thus the risk of having only a
single market: Factors such as a change in China's policies toward enterprises
with foreign investment, the situation in international market and market
competition may each give rise to fluctuations in the customer base that Wah
Sang serves at present.
Risk of depending on major customers
------------------------------------
Wah Sang's five biggest customers accounted for approximately 57% of
revenue in 2007. Any change in the total amount or mix of demand or the
purchasing power of these major customers will have a direct impact on
production, operations and results.
Technical Risks
---------------
Risk in the advance of technology
---------------------------------
At present, Wah Sang has leading edge technology in China. However, the
popularization of the application of new technology, processes and products in
the packaging industry will affect the advanced position of Wah Sang's
existing production technology and processes and thus may affect its
competitive advantage.
Risk of relying on technology abroad
------------------------------------
Wah Sang's technology has mainly been purchased from abroad along with
the importation of advanced equipment; Wah Sang thus relies heavily on imports
for development of products and advances in technology. As major technology
for the printing and packaging industry is concentrated in machines and
printing materials and as the technology changes quickly, it is necessary to
replace equipment as required in the market in order to maintain a leading
technological position. There can be no certainty that Wah Sang will continue
to be able to purchase advanced technology at suitable prices.
Financial Risk
--------------
Foreign exchange risk
---------------------
Wah Sang operates in China with most of its transactions in RMB although
it is paid for its products in US dollars.
The value of the RMB fluctuates and is subject to various factors such as
changes in the PRC political and economic conditions. Since 1994, the official
exchange rate for the conversion of RMB to US dollars has generally been
stable. On July 21, 2005, the RMB was revaluated upwards by approximately 2%
against the US dollar when the PBOC announced the change of the RMB exchange
regime from a US dollar peg system to a managed floating exchange rate regime
based on a basket of currencies. Thereafter, the RMB was allowed to fluctuate
daily by not more than 0.3% against the US dollar. On May 18, 2007, PBOC
announced the daily fluctuation rate of the RMB against the US dollar would be
increased to 0.5% as of May 21, 2007.
Exchange rate fluctuations may adversely affect PICH's financial position
and results. There is no assurance that the value of the RMB will remain at
the current level against the US dollar or against any other foreign currency.
PICH does not currently have in place a policy for managing or controlling
foreign currency risks.
As Pacrim reports financial results in Canadian dollars but Wah Sang
operates with RMB and US dollars, an increase in the Canadian dollar relative
to the RMB or the US dollar will adversely affect the value, translated or
converted into Canadian dollars, of Pacrim's revenue and net income.
Credit risk
-----------
PICH has no significant concentrations of credit risks. The carrying
amount of the trade receivables included in the consolidated balance sheet
represents PICH's maximum exposure to credit risk in relation to its financial
assets.
Liquidity risk
--------------
PICH attempts at all times to maintain sufficient cash and credit lines
to meet its liquidity requirements.
Cash flow and fair value interest rate risk
-------------------------------------------
As PICH has no significant interest-bearing assets, its income and
operating cash flows are substantially independent of changes in market
interest rates.
PICH's interest rate risk arises from borrowings. Borrowings issued at
variable rates expose PICH to cash flow interest rate risk. Borrowings issued
at fixed rates expose PICH to fair value interest rate risk. PICH has not
hedged its cash flow and fair value interest rate risk.
Short-term Management Transition Risk
-------------------------------------
As the management of Wah Sang is undergoing a restructuring at the
operating level, there has been a slow down in the filling of customer order,
and higher-than-planned production costs. While the portfolio of core
customers maintains intact, the new management faces the challenge of bringing
the operation back to its previous profitability benchmark and maintaining a
sustainable growth. Wah Sang is also arranging refinancing without recourse to
the personal assets of its shareholders.
Exhibit I
Consolidated Financial Statements of Pacrim International Capital
Holdings Inc. for the Year Ended December 31, 2007
Unaudited Consolidated Financial Statements of Pacrim International
Capital Holdings Inc. for the Six Month Interim Period Ended June 30,
2008
PACRIM INTERNATIONAL CAPITAL
HOLDINGS INC.
(Incorporated in the British Virgin Islands)
CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED 31 DECEMBER 2007
PACRIM INTERNATIONAL CAPITAL INC.
-------------------------------------------------------------------------
CONTENTS PAGES
INDEPENDENT AUDITOR'S REPORT 1-2
CONSOLIDATED INCOME STATEMENTS 3
CONSOLIDATED BALANCE SHEET 4
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY 5
CONSOLIDATED CASH FLOW STATEMENT 6
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7-28
INDEPENDENT AUDITOR'S REPORT
ZHSZ (2008) No. 644
TO THE SHAREHOLDERS OF PACRIM INTERNATIONAL CAPITAL HOLDINGS INC.
We have audited the accompanying financial statements of Pacrim
International Capital Holdings Inc., which comprise the consolidated balance
sheet as at December 31, 2007, and the consolidated income statement,
consolidated statement of changes in equity and consolidated cash flow
statement for the year then ended, and a summary of significant accounting
policies and other explanatory notes.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of
these financial statements in accordance with International Financial
Reporting Standards. This responsibility includes: designing, implementing and
maintaining internal control relevant to the preparation and fair presentation
of financial statements that are free from material misstatement, whether due
to fraud or error; selecting and applying appropriate accounting policies; and
making accounting estimates that are reasonable in the circumstances.
Auditor's Responsibility
Our responsibility is to express an opinion on these financial statements
based on our audit. We conducted our audit in accordance with International
Standards on Auditing. Those standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance
whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about
the amounts and disclosures in the financial statements. The procedures
selected depend on the auditor's judgment, including the assessment of the
risks of material misstatement of the financial statements, whether due to
fraud or error. In making those risk assessments, the auditor considers
internal control relevant to the entity's preparation and fair presentation of
the financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the entity's internal control.13 An audit also
includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe
that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our audit opinion.
Disagreement on accounting policies - Inappropriate accounting method
As discussed in Note 20 to the financial statements, subsidiary Pacrim
International Capital Inc. has not been included in the consolidated financial
statements. According to unaudited financial statement provided by Pacrim
International Capital Inc., the total assets and net assets of the subsidiary
as at December 31, 2007 were USD 51,490,948 and USD27,513,409 respectively;
the net loss for the year then ended was USD5,745,225. In our opinion, it is
not in accordance with International Financial Reporting Standards.
Limitation on scope
1. We did not obtain the evidence of fair value of PRC Realty Inc as of
December 31, 2004. Owing to the nature of the Company's records, we
were unable to satisfy ourselves as to goodwill amounted USD
8,145,666 by other audit procedures.
2. The Company has not maintained any supportive the evidence in
relation to rental incomes of investment properties in previous
years. We could not perform alternative procedures to express our
opinion on the completeness of amount due from shareholders and
retained earnings.
Opinion
In our opinion, except for the effect on the financial statements of the
matter referred to in the preceding paragraph, the financial statements give a
true and fair view of the financial position of Pacrim International Capital
Holdings Inc. as of December 31, 2007, and of its financial performance and
its cash flows for the year then ended in accordance with International
Financial Reporting Standards.
BDO Wuhan Zhonghuan Certified Public Accountants
July 4th, 2008
Wuhan, China
PACRIM INTERNATIONAL CAPITAL HOLDINGS INC.
CONSOLIDATED INCOME STATEMENT
AS AT DECEMBER 31, 2007
-------------------------------------------------------------------------
2007 2006
Unaudited
Note USD USD
------------- -------------
Revenue 5 37,305,014 39,662,846
Cost of sales 28,966,747 32,555,881
------------- -------------
Gross profit 8,338,267 7,106,965
Investment income 6 19,464 39,181
Other operating income 277,525 313,673
Distribution expenses 1,645,040 1,753,921
Administration expenses 1,858,455 2,091,219
Finance costs 7 5,679,507 2,507,380
Non-operating expense 20,418 119,293
------------- -------------
Profit before tax (568,164) 988,006
Income tax expense 8 302,533 (7,619)
------------- -------------
Profit for the year (870,697) 995,625
------------- -------------
------------- -------------
Attributable to:
Equity holders of the parent (1,173,513) 741,553
Minority interest 302,816 254,072
------------- -------------
------------- -------------
PACRIM INTERNATIONAL CAPITAL HOLDINGS INC.
CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2007
-------------------------------------------------------------------------
2007 2006
Unaudited
Note USD USD
------------- -------------
Assets
Non-current assets
Property, plant and equipment 10 14,590,597 15,011,391
Investment property 11 5,374,495 5,517,749
Goodwill 12 8,145,666 8,192,418
Other intangible assets 13 528,993 509,187
Deferred tax assets 14 103,064 61,241
Long term investment 15 2,824,876 519,020
------------- -------------
Total non-current assets 31,567,691 29,811,006
------------- -------------
Current assets
Inventories 16 3,243,841 3,984,920
Trade receivables 17 15,717,784 17,439,951
Other receivables 17 4,475,806 494,018
Prepayment and other deposit 557,371 2,138,437
Cash and cash equivalents 4,341,625 573,617
Amounts due from related parties 6,352,386
------------- -------------
Total current assets 28,336,427 30,983,329
------------- -------------
Total Assets 59,904,118 60,794,335
------------- -------------
------------- -------------
Equity and liabilities
Capital and reserves
Share capital 21 1 1
Retained earnings 14,843,956 16,261,702
Accumulated other comprehensive reserves 4,445,854 3,037,520
Minority interests 3,744,809 3,441,430
------------- -------------
Total equity 23,034,620 22,740,653
------------- -------------
Non-current liabilities
Current liabilities
Short-term loans 18 5,475,919 5,657,899
Trade payables 1,156,480 2,122,129
Other payable and accrued charges 19 5,569,588 461,901
Amounts due to related parties 22 24,193,367 29,626,157
Tax payable 474,144 185,596
------------- -------------
Total current liabilities 36,869,498 38,053,682
------------- -------------
Total liabilities 36,869,498 38,053,682
------------- -------------
Total liability and equity 59,904,118 60,794,335
------------- -------------
------------- -------------
PACRIM INTERNATIONAL CAPITAL HOLDINGS INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2007
-------------------------------------------------------------------------
Attributable equity holders of the parent
----------------------------------------------------
Share Exchange Statutory
Capital fluctuation reserve
reserve fund
------------- ------------- -------------
USD USD USD
Balance at 1 January
2007 (unaudited) 1 1,050,092 1,987,428
Exchange differences
arising on translation
of financial
statements of the
subsidiaries in
other jurisdictions 329,913 834,190
Dividends paid to
minority
shareholders
of the subsidiaries
Transfer of profits to
Statutory reserves 244,231
Profit for the year
------------- ------------- -------------
Balance at 31
December 2007 1 1,380,005 3,065,849
------------- ------------- -------------
------------- ------------- -------------
Attributable equity holders of the parent
----------------------------------------------------
Retained Minority
earning Interests
Total
------------- ------------- -------------
USD USD USD
Balance at 1 January
2007 (unaudited) 16,261,702 3,441,430 22,740,653
Exchange differences
arising on translation
of financial
statements of the
subsidiaries in
other jurisdictions (2) 563 1,164,664
Dividends paid to
minority
shareholders
of the subsidiaries
Transfer of profits to
Statutory reserves (244,231)
Profit for the year (1,173,513) 302,816 (870,697)
------------- ------------- -------------
Balance at 31
December 2007 14,843,956 3,744,809 23,034,620
------------- ------------- -------------
------------- ------------- -------------
PACRIM INTERNATIONAL CAPITAL HOLDINGS INC.
CONSOLIDATED CASH FLOW STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2007
-------------------------------------------------------------------------
Note 2007
-------------
USD
Cash flow from operating activities
Net income/loss after tax (870,697)
Reconciliation between profit and cash
inflow/outflow from operating activities:
Depreciation 10, 11 1,939,110
Amortisation 13 15,325
Provision for bad debts 265,822
Losses on disposal of property,
plant and equipment 5,367
Interest expense 7 2,558,161
Tax expense 302,533
Changes in:
Receivables, other receivables and prepaid expenses 2,030,591
Inventories 1,016,084
Accounts payable, other payables and accrued expenses 1,953,305
Tax paid (344,356)
-------------
Net cash provided by operating activities 8,871,245
-------------
Cashflows from investing activities:
Acquisitions of property, plant and equipment (102,484)
Proceed of property, plant and equipment 6,749
Acquisitions of long-term investment (2,305,856)
-------------
Net cash used in investing activities (2,401,591)
-------------
Cash flows from financing activities:
Repayment of borrowing (181,980)
Financial expense (2,558,161)
Net cash used in financing activities (2,740,141)
-------------
Net increase/(decrease) in cash 3,729,513
-------------
Exchange difference 38,495
Cash at beginning of year 573,617
-------------
Cash at end of year 4,341,625
-------------
-------------
PACRIM INTERNATIONAL CAPITAL INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2007
-------------------------------------------------------------------------
1. General information
Pacrim International Capital Holdings Inc. (thereafter "PICH") is a
private limited company incorporated in the British Virgin Islands.
The Company is principally engaged in investment holding. The activities
of its subsidiaries are set out in Note 20 of the financial statements.
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of financial
statements of the Company and its subsidiaries (hereinafter collectively
referred to as the "Group"), and the related consolidated financial
statements are set out below. These policies have been consistently
applied to all the years presented, unless otherwise stated.
2.1 Basis of accounting
The consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards ("IFRSs") including
International Accounting Standards and Interpretations issued by the
International Accounting Standards Board (IASB). The basis of accounting
is different from that used in the preparation of the statutory financial
statements in HKSSAPs. Appropriate adjustments have been made to the
statutory financial statements to conform to IFRSs. The transition from
HKSSAPs to IFRSs has had no material effect on the results for the prior
accounting period.
The consolidated financial statements are prepared under the historical
cost convention. The preparation of financial statements in conformity
with IFRSs requires the use of certain critical accounting estimates. It
also requires management to exercise its judgements in the process of
applying the Company's accounting policies. The areas involving a higher
degree of judgements or complexity, or areas where assumptions and
estimates are significant to the consolidated financial statements have
been disclosed in Note 4.
Although these estimates are based on management's best knowledge of
current events and actions, actual results ultimately may be different
from those estimates.
2.2 Consolidation
Subsidiaries
------------
Subsidiaries are all entities over which the Group has the power to
govern the financial and operating policies generally accompanying a
shareholding of more than half of the voting rights. The existence and
effect of potential voting rights that are currently exercisable or
convertible are considered when assessing whether the Group controls
another entity. Subsidiaries are fully consolidated from the date on
which control is transferred to the Group. They are de-consolidated from
the date that control ceases.
Inter-company transactions, balances and unrealised gains on transactions
between Group's entities are eliminated. Unrealised losses are also
eliminated unless the transaction provides evidence of an impairment of
the asset transferred. Accounting policies of subsidiaries have been
changed where necessary to ensure consistency with the policies adopted
by the Group.
Transaction and minority interests
----------------------------------
Minority interest is that part of the net results of operations and of
net assets of a subsidiary attributable to interests which are not owned
directly or indirectly by the Group.
Details of the Group's subsidiaries are set out in Note 20.
2.3 Goodwill
Goodwill arising on the acquisition of a subsidiary or a jointly
controlled entity represents the excess of the cost of acquisition over
the Group's interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities of the subsidiary or jointly
controlled entity reognised at the date of acquisition. Goodwill is
initially recognized as an asset at cost and is subsequently measured at
cost less any accumulated impairment losses.
For the purpose of impairment testing, goodwill is allocated to each of
the Group's cash-generating units expected to benefit from the synergies
of the combination. Cash-generating units to which goodwill has been
allocated are tested for impairment annually, or more frequently when
there is an indication that the unit may be impaired. If the recoverable
amount of the cash-generating unit is less than the carrying amount of
the unit, the impairment loss is allocated first to reduce the carrying
amount of any goodwill allocated to the unit and then to the other assets
of the unit pro-rata on the basis of the carrying amount of each asset in
the unit. An impairment loss recognized for goodwill is not reversed in a
subsequent period.
On disposal of a subsidiary or a jointly controlled entity, the
attributable amount of goodwill is included in the determination of the
profit or loss on disposal.
2.4 Foreign currencies
The individual financial statements of each group entity are presented in
the currency of the primary economic environment in which the entity
operates (its functional currency). For the purpose of the consolidated
financial statements, the results and financial position of each entity
are expressed in USD, which is the functional currency of the Company and
the presentation currency for the consolidated financial statements.
In preparing the financial statements of the individual entities,
transactions in currencies other than the entity's functional currency
(foreign currencies) are recorded at the rates of exchange prevailing at
the dates of the transactions. At each balance sheet date, monetary items
denominated in foreign currencies are retranslated at the rates
prevailing at the balance sheet date. Non-monetary items carried at fair
value that are denominated in foreign currencies are retranslated at the
rates prevailing at the date when the fair value was determined. Non-
monetary items that are measured in terms of historical cost in a foreign
currency are not retranslated.
Exchange differences are recognized in profit or loss in the period in
which they arise except for:
- Exchange differences which relate to assets under construction for
future productive use, which are included in the cost of those assets
where they are regarded as an adjustment to interest costs on foreign
currency borrowings;
- Exchange differences on transactions entered into in order to hedge
certain foreign currency risks; and
- Exchange differences on monetary items receivable from or payable to
a foreign operation for which settlement neither planned nor likely
to occur, which form part of the net investment in a foreign
operation/and which are recognized in the foreign currency
translation reserve and recognized in profit or loss on disposal of
the net investment.
For the purpose of presenting consolidated financial statements, the
assets and liabilities of the Group's foreign operations are expressed in
USD using exchange rates prevailing at the balance sheet date. Income and
expense items are translated at the average exchange rates at the dates
of the transactions are used. Exchange differences arising, if any, are
classified as equity and transferred to the Group's translation reserve.
Such exchange differences are recognized in profit or loss in the period
in which the foreign operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a
foreign operation are treated as assets and liabilities of the foreign
operation and translated at the closing rate.
2.5 Property, plant and equipment
(a) All property, plant and equipment are stated at historical cost less
accumulated depreciation and accumulated impairment losses.
Historical cost includes expenditures that are directly attributable
to the acquisition of the items.
Depreciation of the property, plant and equipment is calculated to
write off their cost of the assets on the straight-line basis over their
expected useful lives to the Group, taking into account their estimated
residual values. The principal annual depreciation rates used are:
Property and building Over the lease term or 4.5%
Plant and machinery 9%
Motor vehicle 18%
Furniture and equipment 18%
The assets' residual values and useful lives are reviewed, and adjusted
if appropriate at each balance sheet date.
(b) Construction in progress represents factory premises under
construction, production plants and machinery and other related fixed
assets under installation. Construction in progress is stated at
cost, which includes the cost of construction, purchase cost of plant
and machinery, as well as interest charges arising from borrowings
used to finance the construction during the period of time that is
required to complete and prepare the asset for its intended use.
Construction in progress for production plants and machinery is
transferred to fixed assets on the commissioning date. Plant and
machinery are considered to be commissioned when they are capable of
producing saleable quality output in commercial quantities on an ongoing
basis.
(c) An asset's carrying amount is written down immediately to its
recoverable amount if the asset's carrying amount is greater than its
estimated recoverable amount (Note 2.6).
(d) Gains and losses on disposal are determined by comparing proceeds
with carrying amounts of assets disposed. These are included in the
income statement.
(e) Subsequent costs are included in the asset's carrying amount or
recognised as a separate asset, as appropriate, only when it is
probable that future economic benefits associated with the item will
flow to the Group and the cost of the item can be measured reliably.
All other repairs and maintenances are charged to the income
statement during the financial period in which they are incurred.
2.6 Investment property
Investment property, which is property held to earn rentals and/or for
capital appreciation, is measured initially at its cost, including
transaction costs. Subsequent to initial recognition, investment property
is measured at cost method.
2.7 Impairment
Assets that have an indefinite useful life are not subject to
amortisation and are tested annually for impairment. Assets that are
subject to amortisation are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognised for the amount by which the
asset's carrying amount exceeds its recoverable amount. The recoverable
amount is the higher of an asset's fair value less costs for sell and
value in use. For the purpose of assessing impairment, assets are grouped
at the lowest levels for which there are separately identifiable cash
flows (cash-generating units). Non-financial assets other than goodwill
that suffered impairment are reviewed for possible reversal of the
impairment at each reporting date.
2.8 Financial assets
The Group's financial assets are mainly the loans and receivables.
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. They arise
when the Group provides money, goods or services directly to a debtor
with no intention of trading the receivable. They are included in current
assets, except for maturities greater than 12 months after the balance
sheet date. These are classified as non-current assets. Loans and
receivables are included in trade receivables, other receivables and
prepayments in the balance sheet. Loans and receivables are carried at
amortised cost using the effective interest method.
2.9 Inventories
Inventories are stated at the lower of cost or net realisable value. Cost
of raw materials represents invoiced price calculated using the weighted
average costing method. Cost of work in progress and finished goods
includes direct materials, direct labor and an appropriate proportion of
production overheads (based on normal operating capacity). It excludes
borrowing costs. Net realisable value is the estimate of the selling
price in the ordinary course of business, less the costs of completion
and selling expenses.
2.10 Trade receivables
Trade receivables are recognised initially at fair value and subsequently
measured at amortised cost using the effective interest method less
provision for impairment. A provision for impairment of trade receivables
is established when there is an objective evidence that the Group will
not be able to collect all amounts due according to the original terms of
receivables. The amount of the provision is the difference between the
asset's carrying amount and present value of estimated future cash flows,
discounted at the effective interest rate. The amount of the provision is
recognised in the income statement.
2.11 Cash and cash equivalents
Cash and cash equivalents include cash in hand and deposits held at call
with banks.
2.12 Borrowings
Borrowings are recognised initially at fair value, net of transaction
costs incurred. Borrowings are subsequently stated at amortised cost; any
difference between the proceeds net of transaction costs and the
redemption value is recognised in the income statement over the period of
the borrowings using the effective interest method.
Borrowing costs that are directly attributable to the acquisition,
construction or production of assets that necessarily take a substantial
period of time to be ready for their intended use or sale are capitalised
as part of the costs of the assets. All other borrowing costs are
expensed. Borrowings are classified as current liabilities unless the
Group has an unconditional right to defer settlement of the liability for
at least 12 months after the balance sheet date.
2.13 Taxation
Income tax for the financial year comprises current and deferred taxes.
Income tax is recognised in the consolidated profit and loss account
except to the extent that it relates to items recognised directly in
equity, in which case such income tax is recognised in equity.
Current tax is the expected tax payable on the taxable income for the
financial year, using tax rates enacted or substantially enacted at the
balance sheet date, and any adjustment to income tax payable in respect
of previous financial years.
Deferred tax is provided using the liability method, providing for
temporary differences at the balance sheet date between the carrying
amounts and tax bases of assets and liabilities in the financial
statements. The amount of deferred tax provided is based on the manner of
realisation or settlement of the carrying amount of assets and
liabilities, using tax rates enacted or substantially enacted at the
balance sheet date.
A deferred tax asset is recognised only to the extent that it is probable
that future taxable profits will be available against which the asset can
be utilised. Deferred tax assets are reduced to the extent that it is no
longer probable that the related tax benefit will be realised.
2.14 Retirement scheme
Pension obligations
-------------------
The Group participates in a defined contribution retirement scheme (the
"Scheme") operated by the local government. The Group's obligations
include contributions to the Scheme determined at a certain percentage of
the salaries of the employees. The regular contributions, which are
charged to the income statement on an accrual basis, constitute net
periodic costs for the year in which they are due and as such are
included in staff costs. Once the contributions have been paid, the Group
has no further payment obligations.
2.15 Provision
Provisions are recognised when: the Group has a present legal or
constructive obligation as a result of past events; it is more likely
than not that an outflow of resources will be required to settle the
obligation; and the amount has been reliably estimated. Provisions are
not recognised for future operating losses.
Where there are a number of similar obligations, the likelihood that an
outflow will be required in settlement is determined by considering the
class of obligations as a whole. A provision is recognised even if the
likelihood of an outflow with respect to any one item included in the
same class of obligations may be small.
2.16 Revenue recognition
Revenue comprises the fair value for the sale of goods and services, net,
of value-added tax, rebates and discounts and after eliminated sales
within the Group. Revenue is recognised as follows:
Sales of goods
--------------
Sales are recognised where the following terms are satisfied:
- The Company has transferred to the buyer the significant risks and
rewards of ownership of the goods;
- The Company retains neither continuing managerial involvement to the
degree usually associated with ownership nor effective control over
the goods sold;
- The economic benefits associated with the transaction will flow to
the Company; and
- The relevant amount of revenue and costs can be measured reliably.
Interest income
---------------
Interest income is recognised on a time-proportion basis using the
effective interest method. When a receivable is impaired, the Group
reduces the carrying amount to its recoverable amount, being the
estimated future cashflow discounted at original effective interest rate
of the instrument, and continues unwinding the discount as interest
income.
Dividend income
---------------
Dividend income is recognised when the right to receive payments is
established.
2.17 Leases
Leases of property, plant and equipment where the Group has substantially
all the risks and rewards of ownership are classified as finance leases.
Finance leases are capitalized at the inception of the lease at the lower
of the fair value of the leased property or the present value of the
minimum lease payments. Each lease payment is allocated between the
liability and finance charges so as to achieve a constant rate on the
finance balance outstanding. The corresponding rental obligations, net of
finance charges, are included in borrowings. The interest element of the
finance cost is charged to the consolidated income statement over the
lease period so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period. If there is
reasonable certainty that the lessee will obtain ownership by the end of
the lease term, the property, plant and equipment acquired under finance
leases is depreciated over the useful life of the asset; otherwise the
property, plant and equipment is depreciated over the shorter of the
lease term and its useful life.
Leases where a significant portion of the risks and rewards of ownership
are retained by the lessor are classified as operating leases. Payments
made under operating leases (net of any incentives received from the
lessor) are charged to the consolidated income statement on a straight-
line basis over the period of relevant leases.
2.18 Dividend distribution
Dividend distribution to the Company's shareholders is recognised as a
liability in the Group's consolidated financial statements in the period
in which the dividends are approved by the Company's shareholders.
3. Financial risk management
Financial risk factors
The Group's activities expose it to a variety of financial risks: foreign
exchange risk, credit risk, liquidity risk and cash flow interest-rate
risk.
Foreign exchange risk
---------------------
The Group's entities operate in the PRC with most of the transactions
denominated in Renminbi. The Group is exposed to foreign exchange risk
arising from the exposure of Renminbi against USD and HKD. The Group has
not hedged its foreign exchange rate risk.
In addition, the conversion of Renminbi into foreign currencies is
subject to the rules and regulations of the foreign exchange control
promulgated by the PRC government.
Market risk
-----------
The Group is in the normal course of business, exposed to foreign
exchange risk, credit risk, inventory risk and exchange control risk. The
Group risk management strategy aims to minimise the adverse effects of
financial risk on the Group financial performance.
Credit risk
-----------
The Group has no significant concentrations of credit risks. The carrying
amount of the trade receivables included in the consolidated balance
sheet represents the Group's maximum exposure to credit risk in relation
to its financial assets.
Liquidity risk
--------------
The Group ensures that it maintains sufficient cash and credit lines to
meet its liquidity requirements.
Cash flow and fair value interest rate risk
-------------------------------------------
As the Group has no significant interest-bearing assets, the Group's
income and operating cash flows substantially independent of changes in
market interest rates.
The Group's interest rate risk arises from borrowing, Borrowings issued
at variable rates expose the Group to cash flow interest rate risk.
Borrowings issued at fixed rates expose the Group to fair value
interest rate risk. The Group has not hedged its cash flow and fair value
interest rate risk.
Fair value estimation
The carrying amounts of the following financial instruments approximate
to their fair values.
Cash and cash equivalents, trade receivables, other receivables and
deposits, trade payables, other payable and accrued charges, and other
non-current liabilities and borrowings.
4. Critical accounting estimates and assumptions
Estimates and judgments are continually evaluated and are based on
historical experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances.
The Group makes estimates and assumptions concerning the future. The
resulting accounting estimates will, by definition, seldom equal the
related actual results. The estimates and assumptions that have a
significant risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next financial year are discussed
below.
Estimated impairment of property, plant and equipment and available-for-
sale investments
-------------------------------------------------------------------------
Property, plant and equipment and available-for-sales investments are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. The recoverable
amounts of property, plant and equipment and available-for-sale
investments have been determined based on value-in-use calculations.
These calculation and valuations require the use of judgement and
estimates.
Current taxation and deferred taxation
--------------------------------------
The Group is subject to taxation in the PRC. Significant judgement is
required in determining the amount of the provision for taxation and the
timing of payment of the related taxations. There are many transactions
and calculations for which the ultimate tax determination is uncertain
during the ordinary course of business. Where the final tax outcome of
these matters is different from the amounts that were initially recorded,
such difference will impact the income tax and deferred tax provisions in
the periods in which such determination are made.
5. Revenue
Revenue comprises the net amounts received and receivable for goods sold,
less returns and allowances during the year.
2007 2006 (Unaudited)
----------- -------------------
USD USD
Paper products 37,305,014 39,662,846
----------- -------------------
----------- -------------------
6. Investment income
2007 2006 (Unaudited)
----------- -------------------
USD USD
(*) Bank deposits 19,464 39,181
(*) Other loans and receivables
----------- -------------------
Total interest revenue 19,464 39,181
----------- -------------------
----------- -------------------
7. Finance costs
2007 2006 (Unaudited)
----------- -------------------
USD USD
Interests on:
(*) Bank loans 271,256 455,812
(*) Loan from a related company 2,286,905 1,601,924
(*) Foreign exchange difference 2,846,046 (306,296)
(*) Other finance costs 275,300 755,940
----------- -------------------
5,679,507 2,507,380
----------- -------------------
----------- -------------------
8. Income tax expense
Taxation 2007
-----------
USD
Tax expense comprises:
Current tax expense 454,189
Adjustments recognized in the
current year in relation to
the current tax of prior years (109,833)
Deferred tax expense relating to the origination and
reversal of temporary differences (41,823)
-----------
Total tax expense 302,533
-----------
-----------
No provision for Hong Kong income Tax has been made in the financial
statements, because the Group has not got any assessable profits derived
in Hong Kong during the year.
No provision for deferred tax has been made as the Group did not have any
significant un-provided deferred tax liabilities during the year.
The charge for the year can be reconciled to the profit per the income
statement as following:
2007
-----------
USD
Profit before taxation 2,783,457
Tax computed at applicable tax rate of
15% (2006:15%) 417,519
Tax effect of non-deductible expenses (5,678)
Tax effect of non-taxable income
(Over)/under provision in prior years (109,308)
-----------
302,533
-----------
-----------
Effective tax rate of 15% prevailing in the SZWS is adopted as the
Group's applicable tax rate in the above reconciliation as the
Group's major operation is located in the SZWS.
9. Profit for the year
Profit for the year has been arrived at after charging:
2007
-----------
USD
Depreciation and amortisation
(*) Depreciation of property, plant and equipment 1,815,790
(*) Depreciation of investment property 123,320
(*) Amortisation of intangible assets 15,325
-----------
Total depreciation and amortisation expense 1,954,435
-----------
Impairment losses on financial assets
(*) Impairment loss recognised on trade receivables 265,822
Staff cost 599,648
Financial cost 5,679,507
10. Property, plant and equipment
Property Furniture Plant
& & &
building equipment machinery
------------- ------------- -------------
USD USD USD
Cost
At 1 January 2007
(unaudited) 7,671,668 695,445 17,447,348
Additions 50,448 306,245
Disposal 3,236 2,042
Net foreign currency
exchange, difference 528,942 44,993 1,163,057
------------- ------------- -------------
At 31 December 2007 8,200,610 787,650 18,914,608
------------- ------------- -------------
------------- ------------- -------------
Depreciation and impairment
At 1 January 2007
(unaudited) 1,803,196 504,474 8,536,307
Depreciation expense 371,820 77,917 1,343,376
Depreciation written back
on disposal 2,527 33,160
Net foreign currency
exchange difference 387,791 34,816 325,542
------------- ------------- -------------
At 31 December 2007 2,562,807 614,680 10,172,065
------------- ------------- -------------
------------- ------------- -------------
NET BOOK VALUE
At 31 December 2006
(unaudited) 5,868,472 190,971 8,911,041
------------- ------------- -------------
------------- ------------- -------------
At 31 December 2007 5,637,803 172,970 8,742,543
------------- ------------- -------------
------------- ------------- -------------
Motor
Total
vehicle
------------- -------------
USD USD
Cost
At 1 January 2007
(unaudited) 96,590 25,911,051
Additions 19,051 375,744
Disposal 13,879 19,157
Net foreign currency
exchange, difference 6,668 1,743,660
------------- -------------
At 31 December 2007 108,430 28,011,298
------------- -------------
------------- -------------
Depreciation and impairment
At 1 January 2007
(unaudited) 55,683 10,899,660
Depreciation expense 22,677 1,815,790
Depreciation written back
on disposal 11,055 46,742
Net foreign currency
exchange difference 3,844 751,993
------------- -------------
At 31 December 2007 71,149 13,420,701
------------- -------------
------------- -------------
NET BOOK VALUE
At 31 December 2006
(unaudited) 40,907 15,011,391
------------- -------------
------------- -------------
At 31 December 2007 37,281 14,590,597
------------- -------------
------------- -------------
Subsidiary, Wah Sang Paper Products (Shenzhen) Co., Ltd, pledged its
fixed assets amounted USD 5,362,807.15 including equipments of
USD 4,316,291.94 and properties of USD 1,046,515.21 to Shenzhen
Development Bank for borrowing facility of USD 6,845,001.78 on
December 3, 2007. Wah Sang Paper Products (Shenzhen) Co., Ltd obtained
6 months loan of USD 5,475,919 on December 9, 2007 from Shenzhen
Development Bank according to the facility agreement
11. Investment property
Amount
-------------
USD
At cost
Balance at beginning of year (unaudited) 5,517,749
Accumulated depreciation 962,162
Net foreign currency exchange difference 818,908
-------------
Balance at end of year 5,374,495
-------------
-------------
Property which carried at USD 412,185 and located in South Qitouning
Dameisha, Yanmei Road, Yantian District, Shenzhen was pledged for Legend
Bright (Asia) Limited on September 7,2004 to Bank of East Asia Shenzhen
branch for mortgage loan of USD 288,535.
Property which carried at USD 4,634,199 and located in Units A & B, 27/F,
Century Tower I, Car Parking Spaces NOS 62&75, Level 3 Century Tower,
Hong Kong was mortgaged from DBS Bank by Eminent Gain Limited on
December 13, 2007 for loan of USD 3,461,228 with maturity date of
November 19, 2022.
Property which carried at USD 222,863 and located in Block 4 35D Flat 12
Central park, Chaoyang District, Beijing was pledged for Legend Shine
Limited on December 27, 2002 to Bank of East Asia for mortgage loan of
USD 155,828.
Property which carried at USD 229,505 and located in 10-2912 flat 7-10,88
Jianguo Road Chaoyang District, Beijing was pledged for Legend Shine
Limited on January 18, 2008 to Bank of East Asia for mortgage loan of
USD 211,519.
All the investment properties are held by the related parties upon Trust
for Pacrim International Capital Holdings Inc. as the beneficial owner.
According to those Declaration of Trust, Pacrim International Capital
Holdings Inc. can execute without limitation any and all corporate
documents, resolutions and transfers necessary to transfer the premises
from the registered owners of those investment properties to Pacrim
International Capital Holdings Inc.
Certain investment properties are used by the shareholder Mr. Guy Lam as
quarters without any rental fee.
12. Goodwill
2006
2007 (unaudited)
------------- -------------
USD USD
Cost 8,145,666 8,192,418
Accumulated impairment losses
------------- -------------
Carrying amount 8,145,666 8,192,418
------------- -------------
------------- -------------
During the financial year, the Group assessed the recoverable amount of
goodwill, and determined that there is no impairment incurred.
13. Other intangible assets
Land use right
---------------
Cost. USD
Balance at January 1, 2007 626,174
Additions
Net foreign currency exchange differences 43,213
---------------
Balance at December 31, 2007 669,387
---------------
---------------
Accumulated amortisation and impairment
Balance at January 1, 2007 116,987
Additions 15,325
Net foreign currency exchange differences 8,082
---------------
Balance at December 31, 2007 140,394
---------------
---------------
Carrying amount
Balance at January 1, 2007 509,187
---------------
---------------
Balance at December 31, 2007 528,993
---------------
---------------
14. Deferred tax assets
Deferred tax assets arise from the following:
Opening Charged Closing
balance to income balance
------------- ------------- -------------
USD USD USD
Provisions for doubtful debts 11,246 24,873 36,119
Provisions for impairment
of inventories 8,566 16,692 25,258
Provisions for long-term
investment 41,429 258 41,687
------------- ------------- -------------
61,241 41,823 103,064
------------- ------------- -------------
------------- ------------- -------------
15. Long term investment
The Company acquired 14.423% Class B preference share of Orient Pacific
Property investments limited amounted USD 2,307,692 on December 24,2007.
The Company did not consolidate its subsidiary, Pacrim International
Capital Inc., in the financial statement and included it in the long term
investment amounted USD 517,184 at cost.
16. Inventories
2006
2007 (unaudited)
------------- -------------
USD USD
Raw materials 2,277,587 1,883,025
Work-in-progress 410,841 1,156,622
Finished goods 620,194 1,002,383
------------- -------------
3,308,622 4,042,030
Less: Provision (64,781) (57,110)
------------- -------------
3,243,841 3,984,920
------------- -------------
------------- -------------
17. Trade and other receivables
2006
2007 (unaudited)
------------- -------------
USD USD
Trade receivables
Trade receivables from third parties 15,935,369 17,626,588
Less: Provision (217,585) (186,637)
------------- -------------
Trade receivables (net) 15,717,784 17,439,951
------------- -------------
------------- -------------
Other receivables
Other receivables from third parties 4,730,841 514,179
Less: Provision (255,035) (20,161)
------------- -------------
Other receivables (net) 4,475,806 494,018
------------- -------------
------------- -------------
18. Borrowings
2006
2007 (unaudited)
------------- -------------
USD USD
Current
Short-term loans (unsecured) 3,096,653
Short-term loans (secured) 5,475,919 2,561,246
------------- -------------
5,475,919 5,657,899
------------- -------------
Total borrowings 5,475,919 5,657,899
------------- -------------
------------- -------------
Detail information refers to Note 10.
19. Other payable and accrued charges
Other payable and accrued charges principally comprise amounts
outstanding for trade purchases and ongoing costs.
2007 2006
(unaudited)
------------- -------------
USD USD
Wage payables 163,371 157,492
Taxes payables 137,903 49,685
Accrued expense 197,381
Others payables 5,268,314 57,343
------------- -------------
5,569,588 461,901
------------- -------------
------------- -------------
20. Subsidiaries
Details of the subsidiaries of the Company at December 31, 2007 are as
follows:
Country of Percentage of
Name of incorporation registered capital Principal
Subsidiary /operation held by the company activities
---------- -------------- -------------------- -----------------
Directly Indirectly
Wah Sang Paper People's 87.81% Trading and
Products Republic Manufacturing
(Shenzhen) of China containerboard
Co., Ltd
PRC Realty Inc. British Virgin 100% Investment
Island
Pacrim British Virgin 53.97% Hotel and real
International Island estate development
Capital Inc. and management
company
Due to the resignation of the former general manager, the Group could
not control the business operation of Hong Kong Wah Sang Industrial Co.,
Ltd and thus has not consolidated in this year.
The consolidated financial statement does not include the subsidiary,
Pacrim International Capital Inc., which is a public company listed on
the Toronto Stock Exchange. Total assets and net assets of Pacrim
International Capital Inc. as at December 31, 2007 were USD 51,490,948
and USD 27,513,409 respectively; the net loss of Pacrim International
Capital Inc. for the year then ended was USD 5,745,225.
21. Share capital
2007 2006
(unaudited)
------------- -------------
USD USD
Authorised:
50,000 ordinary shares of USD1 each 50,000 50,000
------------- -------------
50,000.00 50,000.00
------------- -------------
------------- -------------
Issued and fully paid:
1 ordinary shares of USD1 each 1 1
------------- -------------
------------- -------------
22. Related party relationship
Relationship
Related parties Relationship
Wah Sang Paper Products (Shenzhen) Co., Ltd Subsidiary
PRC Realty Inc. Subsidiary
Pacrim International Capital Inc. Subsidiary
Lam Pak Cheung Family relative
Guy Lam Shareholder
Lam & Co., International Legal Consultants Ltd. Common control
Pacrim Capital Limited Common control
Pacrim Developments Inc. Common control
Eminent Gain Limited Common control
Hong Kong Wah Sang Limited Common control
In the opinion of the Directors of the Company, these transactions were
carried out on normal commercial terms and the prices as agreed between
the contracting parties.
Amount due from/to related parties
2007
-------------
USD
Amount due to related parties
(*) Amount due to other related parties 3,194,615
(*) Amount due to shareholder 20,998,752
-------------
24,193,367
-------------
-------------
PRC Realty Inc. had obtained a loan of CAD 2,400,000.00 with compound
annual interest rate of 15% from related party, Pacrim Developments Inc.
on January 27, 2003. The loan was due on January 27, 2005. On January 24,
2005, the loan agreement was revised and PRC Realty Inc. renewed the
outstanding loan amount of CAD 3,604,246.00 which consists of the sum of
CAD 2,400,000.00 as per the Loan agreement dated January 27,2003 and an
additional sum of CAD 783,085.00 on account and the unpaid interest of
CAD 421,161.00 inclusive. Interest on the Loan was accrued at the rate of
15% per annual and due on January 27,2007. Then the loan was extended to
November 1, 2007 with a pledge on 26,566,763 common shares of Pacrim
International Capital Inc. as security.
There are promissory notes due to Pacrim International Capital Inc.
amounted CAD 2,845,049.89 which bear interest at the compound rate of 2%
per annum and are due on November 1,2006.
Pacrim International Capital Holdings Inc. entered a loan agreement with
its subsidiary, Pacrim International Capital Inc. on June 30, 2006.
According to the agreement, Pacrim International Capital Holdings Inc.
obtained loan of CAD 6,042,430.91 due on June 30, 2008 with annual
compound interest rate of 5% and Pacrim International Capital Inc. had
option to convert the outstanding loan amount into common shares of
Pacrim International Capital Holdings Inc. at a 10% discount to its net
asset value.
23. Operating lease commitment
The future total minimum lease payments under non-cancellable operating
leases are as 2007 follows:
2007
-------------
USD
Not later than 1 year 70,394.00
Later than 1 year and not late than 5 years 90,696.27
-------------
161,090.27
-------------
-------------
24. Approval of consolidated financial statement
The consolidated financial statements were approved by the Board of
Directors on July 4th, 2008.
Pacrim International Capital Holdings Inc.
Financial Statements for the six months ended 30 June, 2008
(Unaudited - Prepared by Management)
Pacrim International Capital Holdings Inc.
Consolidated Income Statement
For the six months ended 30 June, 2008
(Unaudited - Prepared by Management)
-------------------------------------------------------------------------
Jan - Jun 2008 2007
-------------- ----
Unaudited
---------
US$ US$
TURNOVER 19,856,335 37,305,014
Cost of sales (16,019,714) (28,966,747)
------------ ------------
GROSS PROFIT 3,836,621 8,338,267
Investment income 496,603 19,464
Other operating income 350,094 277,525
------------ ------------
TOTAL INCOME 4,683,318 8,635,256
Distribution expenses (987,627) (1,645,040)
Administrative expenses (3,479,867) (1,858,455)
Finance costs (1,450,844) (5,679,507)
Non-operating expense (7,751) (20,418)
------------ ------------
PROFIT BEFORE TAXATION (1,242,771) (568,164)
Taxation 205,153 302,533
------------ ------------
PROFIT BEFORE MINORITY INTERESTS (1,447,924) (870,697)
MINORITY INTERESTS (145,538) (302,816)
------------ ------------
PROFIT ATTRIBUTABLE TO SHAREHOLDERS (1,593,462) (1,173,513)
------------ ------------
------------ ------------
Pacrim International Capital Holdings Inc.
Consolidated Balance Sheet
As at 30 June, 2008
(Unaudited - Prepared by Management)
-------------------------------------------------------------------------
Jan - Jun 2008 2007
-------------- ----
Unaudited
---------
US$ US$
NON-CURRENT ASSETS
Property, plant and equipment 15,176,416 14,590,597
Investment property 5,315,332 5,374,495
Goodwill 6,267,335 8,145,666
Other tangible Assets - 528,993
Deferred tax assets - 103,064
Long-term investment 2,976,093 2,824,876
------------ ------------
29,735,176 31,567,691
------------ ------------
CURRENT ASSETS
Inventories 6,530,509 3,243,841
Trade receivables 23,436,620 15,717,784
Other receivables 6,835,245 4,475,806
Prepayment and other deposit 1,000,825 557,371
Cash and cash equivalents 1,266,405 4,341,625
------------ ------------
39,069,604 28,336,427
------------ ------------
TOTAL ASSETS 68,804,780 59,904,118
------------ ------------
CURRENT LIABILITIES
Short-term loans 6,799,474 5,475,919
Trade payables 2,801,489 1,156,480
Other payable and accrued charges 8,617,739 5,569,588
Amount due to related companies 27,305,123 24,193,367
Tax payable 133,060 474,144
------------ ------------
45,656,885 36,869,498
------------ ------------
NET CURRENT ASSETS 23,147,895 23,034,620
------------ ------------
------------ ------------
CAPITAL AND RESERVES
Share capital 1 1
Retained earnings 13,251,186 14,843,956
Accumulated other comprehensive reserves 7,539,424 4,445,854
Minority interests 2,357,284 3,744,809
------------ ------------
TOTAL EQUITY 23,147,895 23,034,620
------------ ------------
------------ ------------
Pacrim International Capital Holdings Inc.
Consolidated Statement of Changes in Equity
For the six months ended 30 June, 2008
(Unaudited - Prepared by Management)
-------------------------------------------------------------------------
Balance as Exchange Statutory Net profit Balance as
at Dec 31, fluctuation reserve for the at Jun 30,
2007 reserve fund period 2008
---------- ----------- --------- ---------- ----------
US$ US$ US$
ATTRIBUTABLE
TO EQUITY
HOLDERS OF
THE COMPANY
Share capital 1 1
Exchange
fluctuation
reserve 1,380,005 2,548,725 3,928,730
Statutory
reserve
fund 3,065,849 544,845 3,610,694
Retained
profits 14,843,956 692 (1,593,462) 13,251,186
----------- ----------------------------------- ----------
19,289,811 2,549,417 544,845 (1,593,462) 20,790,611
MINORITY
INTEREST 3,744,809 (1,387,525) 2,357,284
----------- ----------------------------------- ----------
TOTAL 23,034,620 2,549,417 544,845 (2,980,987) 23,147,895
----------- ----------------------------------- ----------
----------- ----------------------------------- ----------
Pacrim International Capital Holdings Inc.
Notes to the Consolidated Financial Statements
As at 30 June 2008
(Unaudited - Prepared by Management)
1. General information
Pacrim International Capital Holdings Inc. (thereafter "PICH") is a
private limited company incorporated in the British Virgin Islands.
The Company is principally engaged in investment holding. The activities
of its subsidiaries are set out in Note 3 of the financial statements.
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of financial
statements of the Company and its subsidiaries (hereinafter collectively
referred to as the "Group"), and the related consolidated financial
statements are set out below. These policies have been consistently
applied to all the years presented, unless otherwise stated.
Basis of accounting
The consolidated financial statements have been prepared in accordance
with International Financial Reporting Standards ("IFRSs")
The consolidated financial statements are prepared under the historical
cost convention, except for the revaluation of certain financial
instruments The principal accounting policies adopted are set out below.
Basis of Consolidation
Subsidiaries
------------
Subsidiaries are all entities over which the Group has the power to
govern the financial and operating policies generally accompanying a
shareholding of more than half of the voting rights. The existence and
effect of potential voting rights that are currently exercisable or
convertible are considered when assessing whether the Group controls
another entity. Subsidiaries are fully consolidated from the date on
which control is transferred to the Group. They are de-consolidated from
the date that control ceases.
Inter-company transactions, balances and unrealized gains on transactions
between Group's entities are eliminated. Unrealized losses are also
eliminated unless the transaction provides evidence of an impairment
of the asset transferred. Accounting policies of subsidiaries have been
changed where necessary to ensure consistency with the policies adopted
by the Group.
Transaction and minority interests
----------------------------------
Minority interest is that part of the net results of operations and of
net assets of a subsidiary attributable to interests which are not owned
directly or indirectly by the Group.
Details of the Group's subsidiaries are set out in Note 3.
Goodwill
Goodwill arising on the acquisition of a subsidiary or a jointly
controlled entity represents the excess of the cost of acquisition over
the Group's interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities of the subsidiary or jointly
controlled, entity recognized at the date of acquisition. Goodwill is
initially recognized as an asset at cost and is subsequently measured at
cost less any accumulated impairment losses.
For the purpose of impairment testing, goodwill is allocated to each of
the Group's cash-generating units expected to benefit from the synergies
of the combination. Cash-generating units to which goodwill has been
allocated are tested for impairment annually, or more frequently when
there is an indication that the unit may be impaired. If the recoverable
amount of the cash-generating unit is less than the carrying amount of
the unit, the impairment loss is allocated first to reduce the carrying
amount of any goodwill allocated to the unit and then to the other assets
of the unit pro-rata on the basis of the carrying amount of each asset in
the unit. An impairment loss recognized for goodwill is not reversed in a
subsequent period.
On disposal of a subsidiary or a jointly controlled entity, the
attributable amount of goodwill is included in the determination of the
profit or loss on disposal.
Foreign currencies
The individual financial statements of each group entity are presented in
the currency of the primary economic environment in which the entity
operates (its functional currency). For the purpose of the consolidated
financial statements, the results and financial position of each entity
are expressed in USD, which are the functional currency of the Company
and the presentation currency for the consolidated financial statements.
In preparing the financial statements of the individual entities,
transactions in currencies other than the entity's functional currency
(foreign currencies) are recorded at the rates of exchange prevailing at
the dates of the transactions. At each balance sheet date, monetary items
denominated in foreign currencies are retranslated at the rates
prevailing at the balance sheet date. Non-monetary items carried at fair
value that are denominated in foreign currencies are retranslated at the
rates prevailing at the date when the fair value was determined.
Non-monetary items that are measured in terms of historical cost in a
foreign currency are not retranslated.
Exchange differences are recognized in profit or loss in the period in
which they arise except for:
- Exchange differences which relate to assets under construction for
future productive use, which are included in the cost of those assets
where they are regarded as an adjustment to interest costs on foreign
currency borrowings;
- Exchange differences on transactions entered into in order to hedge
certain foreign currency risks; and
- Exchange differences on monetary items receivable from or payable to
a foreign operation for which settlement neither planned nor likely
to occur, which form part of the net investment in a foreign
operation, and which are recognized in the foreign currency
translation reserve and recognized in profit or loss on disposal of
the net investment.
For the purpose of presenting consolidated financial statements, the
assets and liabilities of the Group's foreign operations are expressed in
USD using exchange rates prevailing at the balance sheet date. Income and
expense items are translated at the average exchange rates at the dates
of the transactions are used. Exchange differences arising, if any, are
classified as equity and transferred to the Group's translation reserve.
Such exchange differences are recognized in profit or loss in the period
in which the foreign operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a
foreign operation are treated as assets and liabilities of the foreign
operation and translated at the closing rate.
Property, plant and equipment
(a) All property, plant and equipment are stated at historical cost less
accumulated depreciation and accumulated impairment losses.
Historical cost includes expenditures that are directly attributable
to the acquisition of the items.
Depreciation of the property, plant and equipment is calculated to
write off their cost of the assets on the straight-line basis over
their expected useful lives to the Group, taking into account their
estimated residual values. The principal annual depreciation rates
used are:
Property and building Over the lease term or 4.5%
Plant and machinery 9%
Motor vehicle 18%
Furniture and equipment 18%
The assets' residual values and useful lives are reviewed, and
adjusted if appropriate at each balance sheet date.
(b) Construction in progress represents factory premises under
construction, production plants and machinery and other related fixed
assets under installation. Construction in progress is stated at
cost, which includes the cost of construction, purchase cost of plant
and machinery, as well as interest charges arising from borrowings
used to finance the construction during the period of time that is
required to complete and prepare the asset for its intended use.
Construction in progress for production plants and machinery is
transferred to fixed assets on the commissioning date. Plant and
machinery are considered to be commissioned when they are capable of
producing saleable quality output in commercial quantities on an
ongoing basis.
(c) An asset's carrying amount is written down immediately to its
recoverable amount if the asset's carrying amount is greater than its
estimated recoverable amount.
(d) Gains and losses on disposal are determined by comparing proceeds
with carrying amounts of assets disposed. These are included in the
income statement.
(e) Subsequent costs are included in the asset's carrying amount or
recognized as a separate asset, as appropriate, only when it is
probable that future economic benefits associated with the item will
flow to the Group and the cost of the item can be measured reliably.
All other repairs and maintenances are charged to the income
statement during the financial period in which they are incurred.
Investment property
Investment property, which is property held to earn rentals and/or for
capital appreciation, is measured initially at its cost, including
transaction costs. Subsequent to initial recognition, investment property
is measured at cost method.
Impairment
Assets that have an indefinite useful life are not subject to
amortization and are tested annually for impairment. Assets that are
subject to amortization are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss is recognized for the amount by which the
asset's carrying amount exceeds its recoverable amount. The recoverable
amount is the higher of an asset's fair value less costs for sell and
value in use. For the purpose of assessing impairment, assets are grouped
at the lowest levels for which there are separately identifiable cash
flows (cash-generating units). Non-financial assets other than goodwill
that suffered impairment are reviewed for possible reversal of the
impairment at each reporting date.
Financial assets
The Group's financial assets are mainly the loans and receivables.
Loans and receivables are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. They arise
when the Group provides money, goods or services directly to a debtor
with no intention of trading the receivable. They are included in current
assets, except for maturities greater than 12 months after the balance
sheet date. These are classified as non-current assets. Loans and
receivables are included in trade receivables, other receivables and
prepayments in the balance sheet. Loans and receivables are carried at
amortized cost using the effective interest method.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost
of raw materials represents invoiced price calculated using the weighted
average costing method. Cost of work in progress and finished goods
includes direct materials, direct labor and an appropriate proportion of
production overheads (based on normal operating capacity). It excludes
borrowing costs. Net realizable value is the estimate of the selling
price in the ordinary course of business, less the costs of completion
and selling expenses.
Trade receivables
Trade receivables are recognized initially at fair value and subsequently
measured at amortized cost using the effective interest method less
provision for impairment. A provision for impairment of trade receivables
is established when there is an objective evidence that the Group will
not be able to collect all amounts due according to the original terms of
receivables. The amount of the provision is the difference between the
asset's carrying amount and present value of estimated future cash flows,
discounted at the effective interest rate. The amount of the provision is
recognized in the income statement.
Cash and cash equivalents
Cash and cash equivalents include cash in hand and deposits held at call
with banks.
Borrowings
Borrowings are recognized initially at fair value, net of transaction
costs incurred. Borrowings are subsequently stated at amortized cost; any
difference between the proceeds net of transaction costs and the
redemption value is recognized in the income statement over the period of
the borrowings using the effective interest method.
Borrowing costs that are directly attributable to the acquisition,
construction or production of assets that necessarily take a substantial
period of time to be ready for their intended use or sale are capitalized
as part of the costs of the assets. All other borrowing costs are
expensed.
Borrowings are classified as current liabilities unless the Group has an
unconditional right to defer settlement of the liability for at least
12 months after the balance sheet date.
Taxation
Income tax for the financial year comprises current and deferred taxes.
Income tax is recognized in the consolidated profit and loss account
except to the extent that it relates to items recognized directly in
equity, in which case such income tax is recognized in equity.
Current tax is the expected tax payable on the taxable income for the
financial year, using tax rates enacted or substantially enacted at the
balance sheet date, and any adjustment to income tax payable in respect
of previous financial years.
Deferred tax is provided using the liability method, providing for
temporary differences at the balance sheet date between the carrying
amounts and tax bases of assets and liabilities in the financial
statements. The amount of deferred tax provided is based on the manner of
realization or settlement of the carrying amount of assets and
liabilities, using tax rates enacted or substantially enacted at the
balance sheet date.
A deferred tax asset is recognized only to the extent that it is probable
that future taxable profits will be available against which the asset can
be utilized. Deferred tax assets are reduced to the extent that it is no
longer probable that the related tax benefit will be realized.
Retirement scheme
Pension obligations
-------------------
The Group participates in a defined contribution retirement scheme (the
"Scheme") operated by the local government. The Group's obligations
include contributions to the Scheme determined at a certain percentage of
the salaries of the employees. The regular contributions, which are
charged to the income statement on an accrual basis, constitute net
periodic costs for the year in which they are due and as such are
included in staff costs. Once the contributions have been paid, the Group
has no further payment obligations.
Provision
Provisions are recognized when: the Group has a present legal or
constructive obligation as a result of past events; it is more likely
than not that an outflow of resources will be required to settle the
obligation; and the amount has been reliably estimated. Provisions are
not recognized for future operating losses. Where there are a number of
similar obligations, the likelihood that an outflow will be required in
settlement is determined by considering the class of obligations as a
whole. A provision is recognized even if the likelihood of an outflow
with respect to any one item included in the same class of obligations
may be small.
Revenue recognition
Revenue comprises the fair value for the sale of goods and services, net
of value-added tax, rebates and discounts and after eliminated sales
within the Group. Revenue is recognized as follows:
Sales of goods
--------------
Sales are recognized where the following terms are satisfied:
- The Company has transferred to the buyer the significant risks and
rewards of ownership of the goods;
- The Company retains neither continuing managerial involvement to the
degree usually associated with ownership nor effective control over
the goods sold;
- The economic benefits associated with the transaction will flow to
the Company; and
- The relevant amount of revenue and costs can be measured reliably.
Interest income
---------------
Interest income is recognized on a time-proportion basis using the
effective interest method. When a receivable is impaired, the Group
reduces the carrying amount to its recoverable amount, being the
estimated future cashflow discounted at original effective interest rate
of the instrument, and continues unwinding the discount as interest
income.
Dividend income
---------------
Dividend income is recognized when the right to receive payments is
established.
Leases
Leases of property, plant and equipment where the Group has substantially
all the risks and rewards of ownership are classified as finance leases.
Finance leases are capitalized at the inception of the lease at the lower
of the fair value of the leased property or the present value of the
minimum lease payments. Each lease payment is allocated between the
liability and finance charges so as to achieve a constant rate on the
finance balance outstanding. The corresponding rental obligations, net of
finance charges, are included in borrowings. The interest element of the
finance cost is charged to the consolidated income statement over the
lease period so as to produce a constant periodic rate of interest on the
remaining balance of the liability for each period. If there is
reasonable certainty that the lessee will obtain ownership by the end of
the lease term, the property, plant and equipment acquired under finance
leases is depreciated over the useful life of the asset; otherwise the
property, plant and equipment is depreciated over the shorter of the
lease term and its useful life.
Leases where a significant portion of the risks and rewards of ownership
are retained by the lessor are classified as operating leases. Payments
made under operating leases (net of any incentives received from the
lessor) are charged to the consolidated income statement on a straight-
line basis over the period of relevant leases.
Dividend distribution
Dividend distribution to the Company's shareholders is recognized as a
liability in the Group's consolidated financial statements in the period
in which the dividends are approved by the Company's shareholders.
3. Details of the subsidiaries of the Company at June 30, 2008 are as
follows:
Country of Percentage of
Name of incorporation registered capital Principal
Subsidiary /operation held by the company activities
---------- -------------- -------------------- -----------------
Directly Indirectly
Wah Sang Paper People's 87.81% Trading and
Products Republic Manufacturing
(Shenzhen) of China containerboard
Co., Ltd
PRC Realty Inc. British Virgin 100% Investment
Island
Pacrim British Virgin 53.97% Hotel and real
International Island estate development
Capital Inc. and management
company
4. Share capital
Jan-Jun2008 2007
(unaudited)
------------- -------------
USD USD
Authorized:
50.000 ordinary shares of USD1 each 50,000 50,000
------------- -------------
50,000.00 50,000.00
------------- -------------
------------- -------------
Issued and fully paid:
1 ordinary shares of USD1 each 1 1
------------- -------------
------------- -------------
5. Reconciliation of Pacrim International Capital Holding Inc. to
Canadian GAAP:
The financial statements of Pacrim International Capital Holdings Inc.
were prepared in accordance with International Financial Reporting
Standards ("IFRS"). We have reviewed and compared the relevant sections
of IFRS as they relate specifically to the operations of Pacrim
International Capital Inc.
Impact arising from
conversion from IFRS
Financial statement item to Canadian GAAP
------------------------ --------------------
(a) Goodwill None
(b) Property, plant and equipment - measurement None
(c) Property, plant and equipment - depreciation None
(d) Inventory - measurement None
(e) Inventory - conversion cost None
(f) Accounts receivable and provision for bad debts None
(g) Revenue recognition None
(h) Taxation - provision for income taxes None
(i) Taxation - tax refunds None
(j) Borrowing costs - accounting treatment None
(k) Borrowing costs - disclosure None
(1) Leases - accounting treatment None
(m) Leases - disclosure None
(n) Related party transaction - measurement None
(o) Related party transaction - disclosure None
(P) Foreign currency translation Immaterial
(q) Consolidated financial statements None
(r) Minority interest Immaterial
(s) Cash flow statements None
For further information: Cindy Fung, Acting Chief Financial Officer,
Pacrim International Capital Inc., Tel. 852.2526.1554
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