F-1/A
Table of Contents

As filed with the Securities and Exchange Commission on April 27, 2012.

Registration No. 333-180358

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 1 to

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

TCP INTERNATIONAL HOLDINGS LTD.

(Exact name of registrant as specified in its charter)

 

Switzerland   3641   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

No. 139 Wangdong Rd (S), Songjiang

Shanghai, PRC 201601

011-86-221576191

(Address, including zip code, and telephone number, including

area code, of registrant’s principal executive offices)

 

 

Ellis Yan

325 Campus Drive

Aurora, Ohio 44202

330-995-6111

800-324-1496

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 

 

Copies to:

Ira C. Kaplan

Douglas E. Haas

 

Phyllis G. Korff

Joshua A. Kaufman

 

Christopher M. Kelly

Edward B. Winslow

Benesch Friedlander Coplan & Aronoff LLP   Skadden, Arps, Slate, Meagher & Flom LLP   Jones Day
200 Public Square, Suite 2300   Four Times Square  

North Point

Cleveland, OH 44114-2378   New York, NY 10036-6522  

901 Lakeside Avenue

Tel: (216) 363-4500   Tel: (212) 735-3000  

Cleveland, OH 44114

Fax: (216) 363-4588   Fax: (212) 735-2000   Tel: (216) 586-3939
    Fax: (216) 579-0212

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information contained in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale thereof is not permitted.

 

SUBJECT TO COMPLETION, DATED APRIL 27, 2012

 

PRELIMINARY PROSPECTUS

             Common Shares

 

LOGO

TCP International Holdings Ltd.

We are offering              of our common shares. This is our initial public offering and no public market currently exists for our common shares. We expect the initial public offering price to be between $         and $         per share. We intend to apply to list our common shares on                     under the symbol         .

We are an “emerging growth company” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements.

Investing in our common shares involves a high degree of risk. Please read “Risk Factors” beginning on page 14 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     PER SHARE      TOTAL  

Public Offering Price

   $                    $                

Underwriting Discounts and Commissions

     

Proceeds to TCP International Holdings Ltd., before expenses

     

 

 

Delivery of the common shares is expected to be made on or about                     , 2012. We have granted the underwriters an option for a period of 30 days to purchase an additional              common shares solely to cover over-allotments. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $            , and the total proceeds to us, before expenses, will be $            .

Joint Book-Running Managers

 

Jefferies   Citigroup   Piper Jaffray

Co-Manager

KeyBanc Capital Markets

Prospectus dated                     , 2012


Table of Contents

TABLE OF CONTENTS

 

 

 

     PAGE  

Prospectus Summary

     1   

Risk Factors

     14   

Forward-Looking Statements

     39   

Use of Proceeds

     40   

Dividend Policy

     41   

Capitalization

     42   

Dilution

     43   

Selected Historical Consolidated Financial Data

     44   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     47   

Industry

     68   

Business

     74   

Management

     102   

Principal Shareholders

     109   

Related Party Transactions

     112   

Description of Share Capital

     114   

Comparison of Swiss Law and Delaware Law

     122   

Shares Eligible for Future Sale

     127   

Taxation

     129   

Enforceability of Civil Liabilities

     136   

Underwriting

     137   

Expenses Related to the Offering

     144   

Legal Matters

     144   

Experts

     144   

Where You Can Find Additional Information

     145   

Index to Financial Statements

     F-1   

Appendix A—Glossary of Terms

     A-1   

 

 

We have not, and the underwriters and their affiliates have not, authorized anyone to provide you with any information or to make any representation not contained in this prospectus. We do not, and the underwriters and their affiliates do not, take any responsibility for, and can provide no assurances as to, the reliability of any information that others may provide you. We are not, and the underwriters and their affiliates are not, making an offer to sell, or seeking offers to buy, these securities in any jurisdiction where the offer or sale thereof is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common shares. Our business, financial condition, operating results and prospects may have changed since that date.

TRADEMARKS

We have proprietary rights in the trademarks TCP®, Spring Lamps™, TruDim™ and TruStart™ in the United States. We reserve all rights to our trademarks, regardless of the manner in which we refer to them in this prospectus. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

MARKET AND INDUSTRY DATA

This prospectus includes statistical data, market data and other industry data and forecasts, which we obtained from market research, publicly available information and independent industry publications and reports that we believe to be reliable sources. These industry publications generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy and completeness of the information. Although we believe that these sources are reliable, we have not independently verified the information contained in such publications.


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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that you should consider before deciding to invest in our common shares. You should read this entire prospectus carefully, including the risks of investing in our common shares described under “Risk Factors” and the more detailed information in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus. In this prospectus, unless the context otherwise requires, the term “TCP” refers to TCP International Holdings Ltd., and the terms the “Company,” “we,” “us,” and “our” refer to TCP International Holdings Ltd. together with its subsidiaries. The term “CHF” refers to Swiss francs, the terms “dollar” and “$” refer to U.S. dollars and the terms “renminbi” and “RMB” refer to Chinese renminbi.

Company

We are a leading producer and provider of energy efficient light bulbs to the global structures light bulb market. Our primary products include socket-based compact fluorescent lamps, or CFLs, light emitting diodes, or LEDs, and halogen bulbs. We were the number one provider of CFLs in the United States in 2011, with a 31% market share, according to the National Equipment Manufacturers Association, or NEMA. We have a strong distribution footprint and reputation among retailers and commercial lighting distributors and sell our products through more than 20,000 retail and commercial & industrial, or C&I, outlets. Since we manufacture only energy efficient light bulbs, and not conventional incandescent bulbs, we believe that we are well positioned to capitalize on the phase out of inefficient bulbs taking place in many major markets around the world.

With more than 3,500 CFL stock-keeping units, or SKUs, we believe that we have the largest and one of the most technologically advanced CFL product offerings in the world. We also sell a product line of more than 275 LED SKUs and 12 halogen SKUs that address a majority of socket-based lighting applications. Since our inception, we have focused on product innovation and research and development, or R&D. We have approximately 50 engineers and technicians focused on delivering new products to market and improving our existing products. We have developed several award winning products, including our private label CFLs, that achieved the highest overall rating from Consumer Reports for a CFL product from 2008 through 2011. We have also developed award winning LED bulbs, including our PAR38 and PAR30 series LED bulbs, which were both ranked #1 out of 67 and 49 entries, respectively, in a recent study performed by the Institute for Electric Efficiency, in which they were compared to products from Lighting Science Group, Philips, Samsung and Sylvania, among others. As the global lighting market reduces its reliance on conventional incandescent light bulbs, we believe that our broad portfolio of energy efficient lighting products creates a technology-neutral platform for growth, enabling us to address the majority of global socket-based lighting applications regardless of which technologies gain market acceptance.

We currently sell our products to a diverse global customer base through our two primary channels: the retail channel and the C&I channel. We also sell our products to retailers through utility and government incentive programs. Our key customers in the retail channel include The Home Depot, to which we are the largest energy efficient bulb supplier in the United States, as well as Homebase and Wal-Mart, which primarily sell our products under private label. Our key customers in the C&I segment include Consolidated Electrical Distributors, or CED, Grainger, HD Supply, Regency and Rexel. We have also established a presence in Asia, Europe and South America, and seek to leverage our strong North American customer and distribution base to facilitate expansion in these attractive global markets.

We utilize a vertically integrated, efficient and highly automated process to manufacture our CFL products. For our LED bulbs, we develop our own design specifications and source components from world class suppliers, and then we assemble and test the LED bulbs in-house. We have four manufacturing facilities located in China, where we have developed and currently utilize several advanced manufacturing techniques that we believe are proprietary. We currently outsource production of halogen bulbs, however, we plan to bring this production in-house as demand for these products grows. Unlike many of our competitors that outsource much

 

 

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or all of their product manufacturing, we believe our vertically integrated manufacturing processes enable us to control substantially all phases of our product manufacturing and distribution, allowing us to achieve best-in-class product quality, minimize our costs, react faster to our customers’ design requirements and provide shorter lead times for new products than our competitors.

For the years ended December 31, 2009, 2010 and 2011, our net sales were $257.7 million, $287.2 million and $280.9 million, respectively. Our net income during the same periods was $13.2 million, $16.4 million and $7.0 million, respectively, and our Adjusted EBITDA during such periods was $22.6 million, $29.9 million and $21.8 million, respectively.

Industry Background

The electric light bulb market is a large subset of the $100 billion global general lighting market. According to The Freedonia Group, Inc., the structures market for electric light bulbs, which comprises light bulb sales for use in residential buildings, non-residential buildings and non-building structures including street, highway and parking lot lighting, was valued at $21.9 billion in 2009 and is estimated to grow to $28.2 billion by 2014, representing a 5.2% compound annualized growth rate, or CAGR. The structures bulb market is the largest segment of the broader electric light bulb market and where we focus our business. CFLs and LEDs represented $5.7 billion, or 26.1%, of the global structures light bulb market in 2009 and are expected to grow to $13.0 billion, or 46.2%, by 2014.

There are six main types of light bulbs sold globally: conventional incandescent, linear fluorescent, CFL, LED, halogen and high intensity discharge, or HID, bulbs. Conventional incandescent bulbs currently represent one of the largest shares of the structures bulb market at 26% in 2009 and have been the bulb of choice for more than 100 years. However, because conventional incandescent light bulbs use high levels of energy relative to more energy efficient alternatives, many governments around the world have introduced measures to effectively phase out conventional incandescent light bulbs by imposing minimum efficiency standards for light bulbs above the levels that can be achieved by conventional incandescent technology. Governments and utilities are also promoting the use of efficient bulb technologies through various incentive programs designed to accelerate adoption of these technologies. We believe a significant growth opportunity exists for efficient lighting technologies, most notably CFL, LED and halogen technologies, as a result of government initiatives to phase out the use of inefficient light bulbs and the world-wide focus on energy efficiency and conservation.

Our Strengths

We believe that the following strengths differentiate us from our competitors:

Our high quality products span all major energy efficient light bulb technologies. We believe our product platform of more than 5,000 product SKUs, including industry leading CFLs, high quality LED and halogen bulbs, and complementary lighting products, represents some of the highest quality, most technologically advanced bulbs available in the market. Our CFL products feature a variety of advanced technologies, including a wide range of color temperatures, the ability to dim, rapid warm-up times and low mercury content, which we believe positions us to address the stringent demands of customers around the world. We have also developed a comprehensive line of high performance, high quality and cost competitive LED products that address a majority of the socket-based lighting market. In addition, we offer halogen bulbs that are compliant with the 2012 requirements of the U.S. Energy Independence and Security Act of 2007, or EISA. These halogen bulbs represent a near identical replacement to traditional incandescent bulbs while providing a longer lifetime and higher efficiency.

Our product offering is strategically aligned with market fundamentals. Significant changes are taking place in the global light bulb market, including the phase-out of inefficient bulbs in many major markets and a global focus on energy efficiency. Specifically, the United States, China, the European Union and Brazil, among other jurisdictions, have statutes requiring the phase-out of inefficient lighting technologies beginning in 2012. We believe that demand for our energy efficient products, including CFL, LED and halogen bulbs, will continue to

 

 

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grow as such legislation begins to impact consumer behavior. According to The Freedonia Group, Inc., global CFL demand in the structures market is expected to grow at a 13.9% CAGR through 2014 and global LED bulb demand in the structures market is expected to grow at a 45.9% CAGR over the same period. While uncertainty exists over which energy efficient technologies will be adopted in the near-, mid- and long-term, we believe that our product offering positions us to succeed regardless of which technologies gain market acceptance.

We operate a vertically integrated manufacturing model with state of the art facilities. Under our modern, vertically integrated manufacturing process, we control almost all aspects of the CFL product manufacturing process in-house. We also control the assembly and testing of our LED bulbs. Unlike most major light bulb manufacturers, who source some or all of their products from third parties or through joint ventures, we believe that controlling our manufacturing process enables us to implement advanced manufacturing operations and provide some of the highest quality, most technologically advanced lighting products while at the same time controlling costs and allows us to react faster to customer demands and changes in the market than our competitors.

We have developed a strong distribution footprint through customer service and an established reputation with key retail and C&I channel partners. We sell our products through more than 20,000 retail and C&I outlets. We have established strong relationships with key customers among do-it-yourself, or D-I-Y, mass retailers and big box retailers, including The Home Depot, Homebase and Wal-Mart. We have also established a reputation for high quality products with leading commercial distributors, including CED, Grainger, HD Supply, Regency and Rexel. We believe our heavy emphasis on customer service differentiates us in the market by simplifying the sales experience for our customers. Our distribution footprint spans North America, Asia, Europe and South America, with existing room for expansion at all of our in-house distribution facilities.

Our strong product development and R&D capabilities provide superior product innovation and speed to market. Our focus on product development and R&D enables us to provide a wide range of advanced products to our customers in a timely fashion. We operate two product development and R&D facilities, including seven laboratories, where we focus on product innovation, reliability testing, manufacturing improvement and compliance testing. Our R&D team consists of approximately 50 engineers and technicians who focus on providing our customers with a broad range of products that we believe represent some of the highest quality and most technologically advanced products on the market. We have developed several award winning products, including our private label CFLs that achieved the highest overall rating from Consumer Reports for a CFL product from 2008 through 2011. We have also developed high performance LED PAR38 and PAR30 bulbs, which were both ranked #1 out of 67 and 49 entries, respectively, in a recent study performed by the Institute for Electric Efficiency, in which they were compared to products from Lighting Science Group, Philips, Samsung and Sylvania, among others. We have also demonstrated rapid speed to market for our new LED products. For example, we were able to develop and bring to market our award winning PAR38 and PAR30 LED bulbs in less than nine months from initial product conceptualization to first sales. We believe our continued focus on product development and R&D is pivotal in defining us as a leader in energy efficient lighting technology, and we plan to leverage this expertise to continue our technology leadership.

We have an experienced management team. We have a strong and experienced management team, led by our Chief Executive Officer, Ellis Yan. Ellis Yan founded and developed our company and has been instrumental in growing the business into a leading provider of efficient lighting products in North America. Our core manufacturing, R&D, sales and marketing, distribution and finance management consists of 12 individuals who have worked in our industry for an average of approximately 17 years. We have also recently added key senior executives to continue our expansion into China, Europe and South America. Members of our senior management have joined us from major lighting companies, such as General Electric and Philips, and from leading lighting retailers, including The Home Depot, the largest lightbulb retailer in North America. We believe we have a strong team in place to continue to build our global lighting business.

 

 

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Our Strategy

We intend to leverage our competitive advantages to enhance our position as a leading global energy efficient light bulb provider by pursuing the following strategies:

Develop new products and technologies. We believe that our focus on new product development and technology leadership is essential to maintaining our long-term competitiveness in the lighting sector. We intend to continuously develop and commercialize next generation CFL, LED and halogen products, and also seek to improve our existing product portfolio. We believe that providing a more comprehensive line of energy efficient light bulbs will better position us to increase share in our established markets and expand into new markets. We intend to continue investing in product development and R&D in order to provide our customers with a more comprehensive line of high quality, market leading products.

Continue to grow our business in North America. We seek to expand our presence in North America and are working closely with key decision makers at our larger customers to ensure that we are offering these customers the product lines they require in an effort to gain share of their efficient light bulb sales. For example, we have been steadily increasing our LED product sales through our C&I channel by providing products that meet the specifications of the end customers and have had substantial recent success with several large lighting projects for retailers, including Macy’s, and with hospitality customers, including MGM Resorts. For our C&I channel, we are developing a more localized presence with our distributors, which we believe will enable us to develop a broader distribution reach and build closer relationships with end users. We are also focused on increasing the volume of our sales through North American utility and government incentive programs. As we continue to explore new sales channels, we intend to focus on providing differentiated products for specific channels and seek to leverage those relationships to gain new customers in North America.

Further expand in international markets. A key component of our long-term strategy is to balance our sales and marketing efforts between established and emerging markets. We seek to expand our business in key geographies, including Asia, Europe and South America, each of which contains large countries with similar legislation in place to ban the sale of inefficient bulbs in the near-term. We have been selling our products in China since 2004, where we operate six regional offices today, and plan to expand into all provinces in mainland China, with over 1,000 distribution branches, over the next several years. We plan to fund this expansion through, and to the extent permitted by, cash flow from our operations. We have established sales teams in China, the United Kingdom, the Netherlands, France and Brazil, which we believe will enable us to further establish our presence across these regions. We believe our strong market reputation has facilitated our initial success in these markets, and we intend to continue our focus on these key geographies going forward.

Shift our sales efforts to focus on higher margin business. We have historically sold our products to original equipment and original lighting manufacturers, or OEMs and OLMs, as a means of driving higher volume manufacturing to increase our operational efficiencies and create economies of scale. However, sales to OEMs and OLMs have historically represented a variable business, typically with lower margins for us. In addition, in many instances these OEMs and OLMs act as resellers for these products to our customers, particularly in the retail market. As a result, we are focusing significant resources on shifting our sales from OEMs and OLMs to our direct retail customers, including D-I-Ys, mass retailers and big box retailers. Over the last five years, we have been successful in shifting our sales meaningfully from OEM and OLM customers; sales to these customers represented 10.3% of our total sales in 2011, down from 22.4% of our total sales in 2009. We are also seeking to increase sales to new and existing C&I customers and have been able to achieve a 33% increase in our sales to this channel from 2010 to 2011, from $77.2 million to $102.9 million.

Continue to implement advanced manufacturing processes and other operational efficiencies. We intend to continue to invest in the automation of our manufacturing lines as well as R&D initiatives focused on improving our advanced manufacturing techniques in order to decrease our production costs and develop higher quality products. We also continually calibrate our warehouse SKUs, fine tune warehouse workflow and opportunistically renegotiate supplier agreements to improve operational efficiencies and reduce costs. To ensure speed and reliability of delivery to our customers, we plan to expand relationships with our existing logistics providers as well as bring certain logistics operations in-house in order to enhance our distribution performance.

 

 

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Risk Factors

There are a number of risks related to our business, our intellectual property, this offering and our common shares, doing business in China and taxation, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary. Some of the principal risks include the following:

 

  n  

Our industry is highly competitive. If we are not able to compete effectively, including against larger lighting manufacturers with greater resources, our business, financial condition and results of operations will be adversely affected.

 

  n  

The loss of our relationship with The Home Depot, or a significant decline in its purchases, could have a material adverse effect on our business, our ability to distribute our products, and our financial condition and results of operations.

 

  n  

Lighting products are subject to rapid technological changes. If we fail to accurately anticipate and adapt to these changes, the products we sell will become obsolete, and our business, financial condition and results of operations will be adversely affected.

 

  n  

If we are unable to increase production capacity for our products in a cost effective and timely manner, we may incur delays in shipment and our sales and reputation in the marketplace could be harmed.

 

  n  

The reduction or elimination of investments in, or incentives to adopt, CFL, LED and other energy efficient lighting or the elimination of, or changes in, policies, incentives or rebates in certain states or countries that encourage the use of CFLs, LEDs and other energy efficient lighting solutions over some traditional lighting technologies could cause the growing demand for our products to slow, which could materially and adversely affect our business, financial condition and results of operations.

 

  n  

The suspension of, repeal of or amendments to current requirements to phase-out energy inefficient bulb technologies by governments or the provision of government sponsored subsidies in our target geographies could impair our sales of energy efficient light bulbs in international markets.

 

  n  

If we are unable to obtain and adequately protect our intellectual property rights, our competitive position could be harmed.

 

  n  

There may be circumstances in which the interests of our major shareholders could be in conflict with your interests as a shareholder.

 

  n  

We intend to elect to be a “controlled company” under the rules of the stock exchange to which we apply and, therefore, will be exempt from certain stock exchange corporate governance requirements.

 

  n  

Changes in China’s economic, political and social conditions could have a material adverse effect on our business, financial condition and results of operations.

These and other risks are more fully described in the section entitled “Risk Factors” in this prospectus. If any of these risks actually occur, they could adversely affect our business, financial condition and results of operations.

Our Principal Shareholders

Following this offering, Ellis Yan, Solomon Yan and the Lillian Yan Irrevocable Stock Trust will own approximately     %,     % and     % of our common shares, respectively (in each case, assuming the underwriters do not exercise their option to purchase additional shares). Ellis Yan is our Chief Executive Officer and a member of our board of directors. Solomon Yan (whose Chinese name is Zhaoling Yan) is our President and a member of our board of directors. Ellis Yan and Solomon Yan are brothers. Lillian Yan is the beneficiary of the Lillian Yan Irrevocable Stock Trust and is the daughter of Ellis Yan.

 

 

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Corporate Information

Our registered office is c/o ABT Treuhandgesellschaft Andreas Baumann & Co, Alte Steinhauserstrasse 1, 6330 Cham, Switzerland. Our principal executive offices are located at No. 139 Wangdong Rd (S) Songjiang, Shanghai, PRC 201601, and our telephone number at this address is 011-86-221576191. Our website address is www.tcpi.com. The information on, or accessible through, our website does not constitute part of this prospectus.

Our History and Development

In 1986, Ellis Yan began a business marketing lighting products. Ellis Yan and his brother, Solomon Yan, began to develop, manufacture and assemble lighting products and the components used in those products in China in 1989. In 1993, Ellis Yan and Solomon Yan formed TCP US to market energy efficient lighting products, which were purchased from their Chinese manufacturing operations. Highlights in our development include:

 

  n  

in 1993, we began selling CFLs;

 

  n  

in the late 1990s, we introduced spiral CFLs;

 

  n  

in the early 2000s, we became The Home Depot’s primary supplier of CFLs;

 

  n  

in 2005, we achieved over $100 million in sales, reflecting an increase of 29% from the previous year’s sales, and expanded our sales into Canada;

 

  n  

by 2007, the year EISA was enacted in the United States, our annual sales exceeded $300 million;

 

  n  

in 2009, we were awarded ENERGY STAR® “Partner of the Year,” and our CFL products were named #1 in a study by Consumer Reports;

 

  n  

since 2009, we have begun development of our LED bulb and high efficiency halogen products and continue to innovate in the CFL product line, with the introduction of our dimmable (TruDimTM) and rapid start (TruStartTM) CFLs;

 

  n  

on October 6, 2010, TCP International Holdings Ltd. was formed under the laws of Switzerland, to act as a holding company for TCP US, TCP Canada and TCP Asia and to facilitate future financings, corporate planning and this initial public offering; and

 

  n  

in 2012, before the completion of this offering, we will legally acquire TCP Europe and TCP South America, whose operations are currently deemed beneficially owned by us since we control their funding and general oversight; these entities have been consolidated with our financial results since 2010 and 2011, respectively.

 

 

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Our Corporate and Ownership Structure

Upon the completion of this offering, the corporate and ownership structure of our company will be as shown in the following chart. All subsidiaries in the following chart are wholly owned. A complete organizational chart of the Company can be found in the section entitled “Business.”

 

LOGO

 

(1) 

TCP Bermuda Ltd. and its direct and indirect wholly-owned subsidiaries are referred to as “TCP Asia.” TCP Asia consists of our Asian operations (owned through TCP Hong Kong, or TCP HK), which manufacture all of our products in four factories in China. TCP Asia also markets our products throughout Asia.

(2) 

TCP North America consists of Technical Consumer Products, Inc., referred to as “TCP US,” TCP US’s wholly owned subsidiaries, and our Canadian operations, referred to as “TCP Canada.” TCP North America markets our products throughout North America.

(3) 

TCP B.V. and its direct and indirect wholly-owned subsidiaries are referred to as “TCP Europe.” TCP Europe consists of our European operations, which market our products throughout Europe. TCP Europe also includes our Brazilian operations, referred to as “TCP South America.” TCP South America was established in 2011 to market our products in South America, with an initial focus on Brazil.

 

 

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After the completion of this offering, we will have three companies that are considered variable interest entities, because we are deemed the primary beneficiary of these entities. These entities are required to be consolidated with our financial results under U.S. generally accepted accounting principles. Zhenjiang Fengxin Electronic Equipment Co., Ltd., or ZFX, and Shanghai Fengxin Energy-Saving Eco-Friendly Technology Limited, or SFX, are both wholly owned by Solomon Yan’s wife and their operations are controlled by Solomon Yan’s family. Because Solomon Yan’s wife is not a shareholder of TCP, she has maintained her separate ownership of these companies and has not contributed these companies to TCP. In addition, the current core business purpose of SFX is to own land rights. We do not consider owning land rights to be part of our core operations. ZFX was established for competitive purposes to sell to different customers than the customers of our Chinese subsidiaries. ZFX has ceased operations and we anticipate this entity will have minimal financial activity in the future as it winds down. TCP Campus Drive, LLC is wholly owned by Yan Properties, LLC, of which Ellis Yan is president and owner. This entity’s core business purpose is to own real estate. We do not consider owning real estate to be part of our core operations, and Yan Properties, LLC has therefore maintained separate ownership of this entity.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company need not comply with any new or revised financial accounting standard until such date that a non-reporting company is required to comply with such new or revised accounting standard. However, we have not elected to avail ourselves of this exemption.

We will remain an emerging growth company until the earliest of (a) the last day of our fiscal year during which we have total annual gross revenues of at least $1.0 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the previous 3-year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above. We have not taken advantage of any of these reduced reporting burdens in this prospectus, although we may choose to do so in future filings and, if we do, the information that we provide shareholders may be different than you might get from other public companies in which you hold common shares.

 

 

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THE OFFERING

 

Common shares offered:

             common shares

 

Over-allotment option:

We have granted the underwriters a 30-day option to purchase up to an additional              common shares from us at the initial public offering price less the underwriting discounts and commissions to cover over-allotments, if any, on the same terms as set forth in this prospectus.

 

Common shares to be outstanding immediately after the offering:

             common shares (or              common shares if the underwriters exercise in full their option to purchase additional shares).

 

Use of proceeds:

We intend to use the net proceeds from this offering to expand and improve our manufacturing processes, for research, development and commercialization activities in LED and other emerging technologies, for debt reduction, and for working capital and other general corporate purposes. We may also use a portion of the net proceeds to fund possible investments in, or acquisitions of, complementary businesses, products or technologies. See “Use of Proceeds.”

 

Dividend policy:

We currently do not intend to pay cash dividends in the foreseeable future, subject to the discretion of our board of directors. We currently intend to reinvest any future earnings in developing and expanding our business. See “Dividend Policy.”

 

Lock-up agreements:

We have agreed with the underwriters, subject to certain exceptions, not to sell or dispose of any common shares or any securities convertible into or exchangeable for any common shares during the period commencing on the date of this prospectus until 180 days after the date of this prospectus. Our shareholders, senior management and directors have agreed to similar lockup restrictions for a period of 180 days. See “Underwriting.”

 

Directed share program:

At our request, the underwriters have reserved for sale, at the initial public offering price, up to              shares offered by this prospectus for sale to some of our directors, officers, employees, and persons with whom we have a business relationship. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the public. Any reserved shares that are not so purchased will be offered by the underwriters to the public on the same terms as the other shares offered by this prospectus.

Anticipated trading symbol:

 

Risk factors:

Investing in our common shares involves a high degree of risk and purchasers of our common shares may lose part or all of their investment. See “Risk Factors” and the other information included elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common shares.

 

 

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Unless otherwise indicated, the information in this prospectus:

 

  n  

assumes no exercise of the underwriters’ option to purchase up to              common shares from us at the initial public offering price less the underwriting discounts and commissions to cover over-allotments, if any;

 

  n  

assumes an initial public offering price of $        per share, the midpoint of the estimated price range set forth on the cover page of this prospectus; and

 

  n  

does not give effect to the proposed incentive plan involving up to a maximum of     % of our common shares following the offering described in “Management–Employee Benefit Plans.”

 

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table sets forth our summary historical consolidated financial data as of the dates and for the periods indicated. The summary consolidated financial data as of December 31, 2011 and for each of the three years in the period ended December 31, 2011 were derived from our audited consolidated financial statements and related notes thereto included elsewhere in this prospectus.

Our historical results are not necessarily indicative of results to be expected in any future periods. You should read this information together with “Use of Proceeds,” “Capitalization,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this prospectus.

 

 

 

     YEAR ENDED DECEMBER 31,  
     2009     2010     2011  
    

(In thousands, except per share data)

 

Statement of Income Data:

      

Net sales

   $ 257,670      $ 287,243      $ 280,928   

Cost of goods sold

     205,253        216,929        215,580   
  

 

 

   

 

 

   

 

 

 

Gross profit

     52,417        70,314        65,348   

Selling, general and administrative expenses

     33,805        42,222        46,010   
  

 

 

   

 

 

   

 

 

 

Operating income

     18,612        28,092        19,338   

Interest expense

     (4,415     (3,660     (4,097

Interest income

     574        298        322   

Currency exchange losses

     (291     (3,371     (4,347
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     14,480        21,359        11,216   

Income tax expense from continuing operations 1

     (1,024     (4,671     (3,980
  

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     13,456        16,688        7,236   

Net loss from discontinued operations 2

     (289     (330     (249
  

 

 

   

 

 

   

 

 

 

Net income

     13,167        16,358        6,987   

Less net (income) loss attributable to noncontrolling interests 3

     (44     1,151        (3,281
  

 

 

   

 

 

   

 

 

 

Net income attributable to TCP shareholders

   $ 13,123      $ 17,509      $ 3,706   
  

 

 

   

 

 

   

 

 

 

Net income per share attributable to TCP shareholders, basic and diluted

   $ 0.06      $ 0.09      $ 0.02   
  

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding, basic and diluted

     204,534        204,784        205,534   

Other Financial Data:

      

Adjusted EBITDA 4

   $ 22,563      $ 29,897      $ 21,816   

 

 

 

 

 

     AS OF DECEMBER 31, 2011  
       ACTUAL          AS ADJUSTED 6     
     (In thousands)  

Balance Sheet Data:

     

Cash and cash equivalents

   $ 26,456       $            

Working capital 5

     766      

Total assets

     248,568      

Total short-term loans and long-term debt

     76,204      

Total liabilities

     187,431      

Total equity

     61,137      

 

 

 

 

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1

Through December 30, 2010, TCP US was treated as an S corporation under the Internal Revenue Code. Accordingly, in lieu of corporate federal and certain state income taxes, the shareholders of TCP US were taxed individually on their share of TCP US’s taxable income. Effective December 30, 2010, TCP US’s Subchapter S election was terminated as a result of TCP US being contributed to a foreign entity. From December 31, 2010 forward, TCP US is taxed under the Subchapter C provisions of the Internal Revenue Code.

2 

In August 2011, we sold the stock of one of our Chinese subsidiaries to an entity owned and controlled by our majority shareholders. We will have no continuing activity with this entity and accordingly it has been reflected as discontinued operations in the accompanying consolidated financial statements.

3

We consolidate certain variable interest entities, or VIEs, for which we are deemed to be the primary beneficiary. As we do not have an equity ownership in these VIEs, it presents 100% of the net income or loss of the VIEs as “Net income/loss attributable to noncontrolling interests” in the consolidated statements of income. All intercompany transactions between TCP and its subsidiaries and VIEs have been eliminated in consolidation.

4 

We present the non-GAAP financial measure “Adjusted EBITDA” as a supplemental measure of our performance. This non-GAAP financial measure is not a measure of financial performance or liquidity calculated in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and should be viewed as a supplement to, not a substitute for, our results of operations and balance sheet information presented on the basis of U.S. GAAP. Reconciliation of this non-GAAP financial measure to the most directly comparable U.S. GAAP measure is detailed below.

 

   We define Adjusted EBITDA as net income (loss) before interest expense, taxes, depreciation and amortization, discontinued operations, certain reorganization and offering related expenses, and rental activities of TCP Campus, one of our VIEs. Adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies. Adjusted EBITDA may exclude certain financial information that some may consider important in evaluating our financial performance. Adjusted EBITDA may not be indicative of historical operating results, and we do not intend for it to be predictive of future results of operations. We believe the use of Adjusted EBITDA as a metric assists our board, management and investors in comparing our operating performance on a consistent basis because it removes the impact of our capital structure (such as interest expense), asset base (such as depreciation and amortization) and tax structure, as well as certain items that affect inter-period comparability.

 

   The following table presents a reconciliation of Adjusted EBITDA to net income, which is the most directly comparable U.S. GAAP measure, for the periods presented.

 

 

 

     YEAR ENDED DECEMBER 31,  
     2009     2010     2011  
     (In thousands)  

Net income attributable to TCP shareholders

   $ 13,123      $ 17,509      $ 3,706   

Plus net income (loss) attributable to noncontrolling interests:

      

TCP Asia VIEs net income (loss)

     (72     1,061        2,614   

TCP Campus net income

     116        129        114   

TCP Europe net income (loss)

            (2,341     696   

TCP South America net loss

                   (143
  

 

 

   

 

 

   

 

 

 

Net income

     13,167        16,358        6,987   

Adjustments:

      

Interest expense, net

     3,841        3,362        3,775   

Income tax expense

     1,024        4,671        3,980   

Depreciation and amortization

     5,400        4,911        6,207   
  

 

 

   

 

 

   

 

 

 

EBITDA

     23,432        29,302        20,949   

Adjustments:

      

TCP Campus EBITDA a

     (824     (830     (820

Discontinued operations EBITDA 2

     (45     109        34   

Corporate reorganization charges b

            1,316          

Costs related to initial public offering c

                   1,653   
  

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 22,563      $ 29,897      $ 21,816   
  

 

 

   

 

 

   

 

 

 

 

 

  a 

TCP US leases its U.S. headquarters and warehouse facility from TCP Campus. TCP Campus is owned and controlled by the Chief Executive Officer and majority shareholder of TCP and is consolidated within our statements of income as a VIE. We do not consider TCP Campus’s business to be part of our core operations.

 

 

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  b 

Represents legal, accounting and professional fees related to the establishment of TCP on October 6, 2010 and subsequent corporate reorganization, as detailed in Note 1 to our audited consolidated financial statements included elsewhere in this prospectus.

  c 

Represents legal, accounting and professional fees incurred in connection with this offering.

5 

Total current assets minus total current liabilities.

6 

The “as adjusted” data gives effect to the issuance of              common shares in this offering at an assumed offering price of $         per common share, which is the midpoint of the range set forth on the cover of this prospectus.

 

 

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RISK FACTORS

Investing in our common shares involves a high degree of risk. You should carefully consider the following risk factors, as well as the financial and other information in this prospectus, before deciding to invest in our common shares. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially adversely affected. In such case, the trading price of our common shares could decline and you may lose all or part of your investment in our common shares.

Risks Related to Our Business

Our industry is highly competitive. If we are not able to compete effectively, including against larger lighting manufacturers with greater resources, our business, financial condition and results of operations will be adversely affected.

Our industry is highly competitive. We face competition from vendors of traditional lighting technologies and from vendors of newer innovative products. The lighting industry is characterized by rapid technological change, short product lifecycles, frequent new product introductions and a competitive pricing environment. These characteristics increase the need for continual innovation and, as new technologies evolve, provide entry points for new competitors as well as opportunities for rapid share shifts. Our products compete with a number of existing products and our success depends on our ability to effectively compete in this global market. Many of our competitors, such as General Electric, Philips and Sylvania, are large, well-capitalized companies with significantly more resources than ours and they are able to spend more aggressively on product development, marketing, sales and other product initiatives.

Our ability to compete effectively in our markets depends upon our ability to distinguish our company and our products from our competitors and their products based on various factors, including, among others:

 

  n  

breadth and quality of product offering;

 

  n  

product pricing and cost competitiveness;

 

  n  

access to distribution channels globally;

 

  n  

customer orientation and strong customer relationships; and

 

  n  

the success and timing of new product development.

To the extent we are unable to distinguish our products, our larger competitors and any other more innovative competitors may be able to capture our customers and reduce our opportunities for success, which will adversely affect our business, financial condition and results of operations.

The loss of our relationship with The Home Depot, or a significant decline in its purchases, could have a material adverse effect on our business, our ability to distribute our products, and our financial condition and results of operations.

Net sales to The Home Depot accounted for 42% of our total net sales in both the years ended December 31, 2009 and 2010 and 33% for the year ended December 31, 2011. We do not control The Home Depot nor do we have a long-term contract with, or any volume commitments from, The Home Depot. It may make decisions regarding its business undertakings with us that may be contrary to our interests, or may terminate its relationship with us altogether, which it may do at any time. In addition, if The Home Depot changes its business strategy, we may fail to maintain this relationship. Our sales are materially affected by fluctuations in the buying patterns of The Home Depot and such fluctuations may result from general economic conditions, higher than anticipated inventory positions or other factors. A loss of The Home Depot as a customer, or a significant decline in its purchases from us, could have a material adverse effect on our business, financial condition and results of operations and our ability to distribute our products.

 

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Lighting products are subject to rapid technological changes. If we fail to accurately anticipate and adapt to these changes, the products we sell will become obsolete, and our business, financial condition and results of operations will be adversely affected.

Lighting products are subject to rapid technological changes that often cause product obsolescence. Companies within the lighting industry are continuously developing new products with heightened performance and functionality, which puts pricing pressure on existing products and constantly threatens to make them, or causes them to be, obsolete. These trends are especially relevant for our LED bulb products, which have experienced, and are expected to continue to experience, very rapid technological improvement and cost declines compared to other current bulb technologies. Our typical product’s life cycle is relatively short, generating lower average selling prices as the cycle matures. If we fail to accurately anticipate the introduction of new technologies, we may possess significant amounts of obsolete inventory that can only be sold at substantially lower prices and profit margins than we anticipated. In addition, if we fail to accurately anticipate the introduction of new technologies or are unable to develop the planned new technologies, we may be unable to compete effectively due to our failure to offer products most demanded by the marketplace. If any of these failures occur, our business, financial condition and results of operations will be adversely affected.

If we are unable to increase production capacity for our products in a cost effective and timely manner, we may incur delays in shipment and our sales and reputation in the marketplace could be harmed.

An important part of our business plan is the expansion of production capacity for our products. In order to fulfill anticipated demand for our products, we invest in capacity in advance of actual customer orders, typically based on preliminary, non-binding indications of future demand. As customer demand for our products changes, we must be able to adjust our production capacity to meet demand while keeping costs down. Uncertainty is inherent within our facility and capacity expansion, and unforeseen circumstances could offset the anticipated benefits, disrupt our ability to provide products to our customers and impact product quality.

Our ability to successfully increase production capacity in a cost effective and timely manner will depend on a number of factors, including the following:

 

  n  

our ability to effectively increase the automation of the manufacturing processes for our CFL and LED product lines;

 

  n  

our ability to transition production between manufacturing facilities;

 

  n  

our ability to properly and quickly anticipate customer preferences among lighting products;

 

  n  

our ability to repurpose equipment from the production of one product to another;

 

  n  

the availability of critical components and raw materials used in the manufacture of our products;

 

  n  

our ability to effectively establish adequate management information systems, financial controls and supply chain management and quality control procedures; and

 

  n  

equipment failures, power outages, environmental risks or variations in the manufacturing process.

If we are unable to increase production capacity for our products in a cost effective and timely manner while maintaining adequate quality, we may incur delays in shipment or be unable to meet increased demand for our products, which could harm our sales and operating margins and damage our reputation and our relationships with current and prospective customers. Conversely, due to the proportionately high fixed cost nature of our business (such as facility expansion costs), if demand does not increase at the rate forecasted, we may not be able to reduce manufacturing expenses or overhead costs at the same rate as demand decreases, which could also result in lower margins and adversely affect our business, financial condition and results of operations.

The reduction or elimination of investments in, or incentives to adopt, CFL, LED and other energy efficient lighting or the elimination of, or changes in, policies, incentives or rebates in certain states or countries that encourage the use of CFLs, LEDs and other energy efficient lighting solutions over some traditional lighting technologies could cause the growing demand for our products to slow, which could materially and adversely affect our business, financial condition and results of operations.

Today, the upfront cost to consumers of CFLs, LEDs and other forms of lighting solutions exceeds the upfront cost for some traditional lighting technologies that provide similar lumen output in many applications. However, some governments around the world have used policy initiatives and other regulations, including financial incentives and

 

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rebates to consumers from which we benefit, to accelerate the development and adoption of CFLs, LEDs and other forms of lighting solutions and other non-traditional lighting technologies that are seen as more environmentally friendly compared to some traditional lighting technologies. Reductions in (including as a result of any budgetary constraints), or the elimination of, government investment and favorable energy policies could result in decreased demand for our products and decrease our sales, profits and margins. Further, if our products fail to qualify for any financial incentives or rebates or if restrictions by regulation of competitive products are removed, demand for our products may decrease, and our sales, profits and margins may decrease.

The suspension of, repeal of or amendments to current requirements to phase-out energy inefficient bulb technologies by governments or the provision of government sponsored subsidies in our target geographies could impair our sales of energy efficient light bulbs in international markets.

The suspension of, repeal of or amendments to current laws or regulations banning inefficient bulb technologies in countries or regions in North America, Asia, Europe, South America or other countries or regions in which we do business, could materially and adversely affect our business, financial condition and results of operations. Current legislation in many countries around the globe that mandate energy efficiency standards for light bulbs represents an important driver to the growth in adoption of the energy efficient light bulb technologies that we offer, such as CFLs and LEDs. In the United States, bills have been introduced in the House of Representatives to repeal or amend provisions of the Energy Independence and Security Act of 2007 that mandates energy efficiency standards for general service bulbs, such as the Better Use of Light Bulbs Act introduced in 2011. National Resources Canada has recently delayed by two years the implementation of its energy standard for general service bulbs. While we are not aware of any other current or proposed repeal of or proposal to change current legislation, any introduction of such measures could result in decreased purchases of our energy efficient bulb products by existing or potential customers in regions within the jurisdiction of such legislation. In the event of such government action, our business, financial condition and results of operations could be adversely affected.

Since 2008, the Chinese government has offered a subsidy program to provide energy efficient light bulbs to its citizens. Under this program, light bulbs are sold to consumers at state stores at a deep discount, 50% for individual purchasers and 30% for businesses. Manufacturers of the bulbs are then reimbursed by the government. The Chinese government established a national bid program that will subsidize 500 million units of CFL and LED products over the next three years. In the event that the Chinese government repeals, cancels or otherwise alters this program, our sales in China could be materially impaired which could have an adverse effect on our business, financial condition and results of operations.

Any increase in the cost or disruption in the availability of the raw materials or key components utilized in our lighting products may adversely affect our business, financial condition and results of operations.

The lighting industry is subject to significant fluctuations in the cost and availability of raw materials and components. We rely on a number of third-party suppliers to provide certain raw materials and to manufacture certain of the components of our products and expect to continue to rely on such suppliers.

Our results of operations are directly affected by the cost of our raw materials, which could be affected by, among other things, general shortages in the marketplace and high price volatility. Our principal raw materials (phosphor, glass, plastic and aluminum) together represented approximately 29% of the direct manufacturing costs of our bulbs in both 2009 and 2010 and 36% in 2011. As a result of the significant portion of our cost of goods sold represented by these raw materials, our gross profit and margins could be adversely affected by changes in the cost of these raw materials if we are unable to pass the increases on to our customers. For example, during the year ended December 31, 2011, the cost of the phosphorous elements used in the manufacturing of our lighting products fluctuated between ¥320 RMB/kg ($53/kg) at the beginning of the year to a high of approximately ¥2,400 RMB/kg ($413/kg) in July 2011 before returning to approximately ¥1,600 RMB/kg ($252/kg) as of December 31, 2011. The recent phosphor price increases have been primarily created by a reduced global supply of rare earth elements, the main raw material inputs for phosphor, particularly in China. More than 95% of the world’s current supply of rare earth elements comes from China, which has enacted a policy to reduce its exports because of its rising domestic demand and new environmental restrictions. Given the volatility in the cost of phosphorous elements, there can be no assurance that prices will not increase in the future, potentially at significant rates. Such increases may adversely affect our business, financial condition and results of operations.

 

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We depend on a limited number of suppliers for these and other raw materials. We do not have guaranteed supply arrangements with our suppliers and few alternative sources exist. Substitution of alternate raw materials could significantly change the performance of the lighting products that we manufacture. If the availability of any of these raw materials is limited, we may be unable to produce some of our products in the quantities demanded by our customers, which could have an adverse effect on plant utilization and our sales of products requiring such raw materials.

We depend on certain key suppliers for components that we require for our lighting products, and the loss of any of these suppliers could have an adverse effect on our business, financial condition and results of operations.

We depend on certain key suppliers for certain key components that we require for our lighting products, including the LEDs and printed circuit boards for our LED-based lighting products. Our third-party suppliers may encounter problems obtaining materials required during their manufacturing processes due to a variety of reasons, any of which could delay or impede their ability to meet our demand for components. Our reliance on third-party suppliers also subjects us to additional risks that could harm our business, including, among others:

 

  n  

we may not be able to obtain an adequate supply of our components in a timely manner or on commercially reasonable terms;

 

  n  

our suppliers may be accused of infringing the intellectual property of third parties which, if upheld, could alter or inhibit their ability to fulfill our orders and meet our requirements; and

 

  n  

our suppliers may encounter financial or other hardships unrelated to our demand, which could inhibit their ability to fulfill our orders and meet our requirements.

Finding a suitable alternate supply of required raw materials and components that meet our strict specifications and obtaining them in needed quantities may be a time-consuming process, and we may not be able to find an adequate alternative source of supply at an acceptable cost. Any significant interruption in the supply of these raw materials or components could have a material adverse effect on our business, financial condition and results of operations.

We have material weaknesses in our internal controls over financial reporting. If the material weaknesses persist or if we fail to establish and maintain effective internal controls over financial reporting in the future, our ability to both timely and accurately report our financial results could be adversely affected.

Prior to the completion of this offering, we were a private company with a corporate infrastructure, including finance, accounting and other supervisory resources, systems and processes, sufficient to meet our financial reporting needs as a private company. As a public company, we will be required to comply with the record keeping, financial reporting, corporate governance and other rules and regulations of the SEC, including the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. As a private company we were not required to comply with the internal control design, documentation and testing requirements imposed by the Sarbanes-Oxley Act of 2002.

In conjunction with our audit of the financial statements included in this registration statement and in preparation for this offering and future compliance with Section 404 of the Sarbanes-Oxley Act of 2002, we and our independent registered public accounting firm identified the following material weaknesses in our internal controls over financial reporting:

 

  n  

The Company does not have a consolidation process operating effectively (including related controls over the process) to allow it to prepare timely and accurate consolidated financial statements on both an interim and annual basis.

 

  n  

The Company’s process (including related controls over the process) of reviewing financial information of foreign operations is not effective in ensuring compliance with U.S. GAAP.

 

  n  

The Company does not have adequate staffing levels and required expertise sufficient to support the needs of a public international company, particularly in the areas of financial reporting for a public company and tax accounting expertise for an international company.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, or detected and corrected on a timely basis.

 

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We cannot predict the outcome of our efforts to remediate the material weaknesses at this time. During the course of the remediation, we may identify additional control deficiencies, which could give rise to deficiencies and other material weaknesses in addition to the material weaknesses previously identified. The material weaknesses described above could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our financial statements that would not be prevented or detected. We cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to remediate the material weaknesses described above or to avoid potential future material weaknesses.

We occasionally experience component quality problems with suppliers, and our current suppliers may not deliver satisfactory components in the future.

We occasionally experience component quality problems with suppliers. These quality issues generally result in warranty claims from our customers, and we recorded warranty expenses of $0.9 million, $1.2 million and $0.9 million in 2009, 2010 and 2011, respectively, or 0.4% of both our 2009 and 2010 net sales and 0.3% of our 2011 net sales. We may experience quality problems with suppliers in the future, which could decrease our gross margin and profitability, lengthen our sales cycles, adversely affect our customer relations and future sales prospects and subject our business to negative publicity. Our suppliers, especially new suppliers, may make manufacturing errors that may not be detected by our quality assurance testing, which could negatively affect the efficacy or safety of our products or cause shipment delays due to such errors. Additionally, we sometimes satisfy warranty claims even if they are not covered by our general warranty policy as a customer accommodation. If we were to experience quality problems with certain components purchased from our key suppliers, these adverse consequences could be magnified, and our business, financial condition and results of operations could be materially adversely affected.

Our success is largely dependent upon the skills, experience and efforts of our senior management and the loss of their services could have a material adverse effect on our business, financial condition and results of operations.

Our continued success depends upon the continued availability, contributions, skills, experience and efforts of our senior management. We are particularly dependent on the services of Ellis Yan, our Chief Executive Officer. Ellis Yan has major responsibilities with respect to sales, product development and overall corporate administration. We do not have a formal succession plan in place for Ellis Yan. Our proposed new employment agreement with Ellis Yan does not guarantee his services for a specified period of time. All of the current and proposed new employment agreements with our senior management team may be terminated by the employee at any time. While all such agreements include non-competition and confidentiality covenants, there can be no assurance that such provisions will be enforceable or adequately protect us. The loss of the services of any of these persons might impede our operations or the achievement of our strategic and financial objectives, and we may not be able to attract and retain individuals with the same or similar levels of experience or expertise. Additionally, while we have key man insurance on the life of Ellis Yan, such insurance may not adequately compensate us for the loss of Ellis Yan. The loss or interruption of the service of members of our senior management, particularly Ellis Yan, or our inability to attract or retain other qualified personnel could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to execute our business strategy to expand the marketing, distribution and sale of our products, and if we are unable to effectively manage the associated risks, our ability to expand our business abroad could be impaired.

We commenced sales in China in 2004, Europe in 2010, and South America in 2011 and expect to expand our sales in various geographical regions internationally as a part of our core business strategy. However, the marketing, distribution and sale of our products in export markets may expose us to a number of risks, including:

 

  n  

fluctuations in currency exchange rates;

 

  n  

increased costs associated with maintaining the ability to understand the local markets and follow their trends;

 

  n  

failure to develop products that work under the various voltage standards that can differ from region to region;

 

  n  

failure to maintain effective marketing and distributing presence in various countries;

 

  n  

failure to provide adequate customer service and support in these markets;

 

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  n  

failure to develop appropriate risk management and internal control structures tailored to overseas operations;

 

  n  

difficulty and cost relating to compliance with the different commercial and legal requirements of the markets in which we offer or plan to offer our products;

 

  n  

failure to obtain or maintain certifications for our products in these markets;

 

  n  

inability to obtain, maintain or enforce intellectual property rights;

 

  n  

unanticipated changes in prevailing economic conditions and regulatory requirements;

 

  n  

difficulty in employing and retaining sales personnel who are knowledgeable about, and can function effectively in, export markets; and

 

  n  

trade barriers such as export requirements, tariffs and taxes.

Our multi-national sales, manufacturing and operations subjects us to risks associated with operating in global markets.

We are a global business. For the years ended December 31, 2009, 2010 and 2011, respectively, we earned 90.8%, 86.0% and 85.2% of our net sales in North America and 9.2%, 13.3% and 10.0% in Asia. Our expansion into the European and South American markets represented 0.7% and 4.8% of our net sales in 2010 and 2011, respectively. Our principal executive offices and most of our manufacturing facilities are located in China, we are incorporated in Switzerland, and we maintain other offices in the United States, the Netherlands, the United Kingdom, Canada and Brazil. Global business operations are subject to inherent risks, including, among others:

 

  n  

unexpected changes in regulatory requirements, tariffs and other trade barriers or restrictions;

 

  n  

longer accounts receivable payment cycles and the difficulty of enforcing contracts and collecting receivables through certain non-U.S. legal systems;

 

  n  

difficulties in managing and staffing operations;

 

  n  

potentially adverse tax consequences;

 

  n  

the burdens of compliance with the laws and regulations of a number of jurisdictions;

 

  n  

import and export license requirements and restrictions of China, the United States and each other country in which we operate;

 

  n  

exposure to different legal standards and reduced protection for intellectual property rights in some countries;

 

  n  

currency fluctuations and restrictions;

 

  n  

political, social and economic instability, including war and the threat of war, acts of terrorism, pandemics, boycotts, curtailment of trade or other business restrictions;

 

  n  

periodic economic downturns in the markets in which we operate;

 

  n  

customs clearance and transportation delays; and

 

  n  

sales variability as a result of translating our non-U.S. sales into U.S. dollars.

Any of these factors may adversely affect our future sales outside the United States and, consequently, our business, financial condition and results of operations. Furthermore, as we increase our sales outside the United States, total sales may also be affected to a greater extent by seasonal fluctuations resulting from lower sales that typically occur during the summer months in Europe and other parts of the world.

Fluctuations in currency exchange rates may significantly impact our results of operations and may significantly affect the comparability of our results between financial periods.

Our operations are conducted by subsidiaries in many countries. The results of operations and the financial position of these subsidiaries are reported in the relevant foreign currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements. The main currencies to which we are exposed are the Euro, British pound, Chinese renminbi, Brazilian real and Swiss franc. The exchange rates between these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. A depreciation of these currencies against the U.S. dollar will decrease the U.S. dollar equivalent of the amounts derived from these operations reported in our consolidated financial statements and an appreciation of these currencies will result in a corresponding increase in such amounts. To the extent our raw material costs are

 

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determined with respect to the U.S. dollar rather than these currencies, depreciation of these currencies may have an adverse effect on our profit margins or our reported results of operations. Conversely, to the extent that we are required to pay for goods or services in foreign currencies, the appreciation of such currencies against the U.S. dollar will tend to negatively impact our results of operations. In addition, currency fluctuations may affect the comparability of our results of operations between financial periods.

We do not hedge our currency exposure and, therefore, we incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. Given the volatility of exchange rates, there can be no assurance that we will be able to effectively manage our currency transaction risks or that any volatility in currency exchange rates will not have a material adverse effect on our business, financial condition or results of operations.

We may be exposed to fines, penalties or other sanctions if we do not comply with laws and regulations designed to combat government corruption in countries in which we sell our products, and any determination that we violated such laws and regulations could have a material adverse effect on our business, financial condition and results of operations.

We operate in some countries that have experienced significant levels of governmental corruption. Our employees, agents and contractors may take actions in violation of our policies and applicable laws and regulations that generally prohibit the making of improper payments to foreign government officials for the purpose of obtaining or keeping business, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA. Such violations, if they occur, could have an adverse effect on our business, financial condition and results of operations and reputation. Any failure by us to ensure that our employees and agents comply with the FCPA and other applicable laws and regulations in non-U.S. jurisdictions could result in substantial civil and criminal penalties or restrictions on our ability to conduct business in certain non-U.S. jurisdictions, and our business, financial condition and results of operations could be materially and adversely affected.

We generally do not enter into long-term contracts with our customers, which could result in a disconnect between our production and sales.

We generally do not enter into long-term contracts with our customers. Rather, we generally sell our products to customers through purchase orders based on their current needs, which could result in a disconnect between our production and sales. As a result, we could experience periods during which our production exceeds the orders for our products, resulting in higher levels of inventory and of working capital employed in our business than would otherwise be required. We will also have to pay our fixed costs during such periods. We may not be able to timely find new customers, or increase orders from existing customers, in order to absorb our excess production and supplement our sales during these periods and we may not be able to recover our fixed costs as a result. Periods of no or limited purchase orders for our products could have a material adverse effect on our business, financial condition and results of operations.

Certification and compliance are important to adoption of our lighting products, and failure to obtain such certification or compliance will have an adverse effect on our business, financial condition and results of operations.

We are required to comply with certain legal requirements governing the materials used in our products. Certifications and compliance standards that we follow include UL, an independent organization that provides a UL mark on products that have passed testing and safety certification, and the efficiency requirements of ENERGY STAR®. Any efforts to amend existing legal requirements or implement new legal requirements in a manner with which we cannot comply might materially harm our sales. In addition, we cannot be certain that we will be able to obtain any such certifications for our new products or that, if certification standards are amended, we will be able to maintain certifications for our existing products. The failure to obtain such certifications or compliance will adversely affect our business, financial condition and results of operations.

A disruption at our assembly and manufacturing facilities could materially adversely affect our business, financial condition and results of operations.

Our assembly and manufacturing operations for our products are based in Zhenjiang, China, Shanghai, China, Huaian, China and Yangzhou, China. The operation of these facilities involves many risks, including equipment failures, natural disasters, industrial accidents, power outages and other business interruptions. Our existing

 

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business interruption insurance and third-party liability insurance to cover claims in respect of personal injury or property or environmental damage arising from accidents on our properties or relating to our operations may not be sufficient to cover all risks associated with our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations. Additionally, any interruption in our ability to assemble, manufacture or distribute our products could result in lost sales, limited sales growth and damage to our reputation in the market, all of which would adversely affect our business, financial condition and results of operations.

Our products may contain defects or otherwise not perform as expected, which could reduce sales, result in costs associated with warranty or product liability claims or recall of those items, all of which could materially adversely affect our business, financial condition and results of operations.

The manufacturing of our products involves complex processes and defects have been, and could be, found in our existing or future products. These defects may cause us to incur significant warranty, support and replacement costs, and costs associated with recall may divert the attention of our engineering personnel from our product development efforts and harm our relationships with customers and our reputation in the marketplace. We generally provide limited warranties ranging from one to nine years on our products, and such warranties may require us to replace or reimburse the purchaser for the purchase price of the product, at the customer’s discretion. Moreover, even if our products meet standard specifications, our customers may attempt to use our products in applications they were not designed for or in products that were not designed or manufactured properly, resulting in product failures and creating customer dissatisfaction. Since the majority of our products use electricity, it is possible that our products could result in injury, whether by product malfunctions, defects, improper installation or other causes. Particularly because our products often incorporate new technologies or designs, we cannot predict whether or not product liability claims will be brought against us. We may not have adequate resources in the event of a successful claim against us or a recall of a product. A successful product liability claim against us or a significant recall of a product that is not covered by insurance or is in excess of our available insurance limits could require us to make significant payments of damages and could materially adversely affect our results of operations and financial condition. These problems could result in, among other things, a delay in the recognition or loss of sales, loss of market share or failure to achieve market acceptance. A significant product recall or product liability litigation could also result in adverse publicity, damage to our reputation and a loss of customer confidence in our products and adversely affect our business, financial condition and results of operations.

If we are unable to manage our anticipated sales growth effectively, our business, financial condition and results of operations could be adversely affected.

We intend to undertake a number of strategies in an effort to grow our sales. If we are successful, our sales growth may place significant strain on our limited resources, including our research and development, sales and marketing, operational and administrative resources. To properly manage any future sales growth, we must continue to improve our management, operational, administrative, accounting and financial reporting systems and expand, train and manage our employee base, which may involve significant expenditures and increased operating costs. We may not be able to effectively manage the expansion of our operations or recruit and adequately train additional qualified personnel. If we are unable to manage our anticipated sales growth effectively, the quality of our customer care may suffer, we may experience customer dissatisfaction, reduced future sales or increased warranty claims, and our expenses could substantially and disproportionately increase. Any of these circumstances could adversely affect our business, financial condition and results of operations.

We may engage in future acquisitions that could disrupt our business, divert management attention, increase our expenses or otherwise adversely affect our business, financial condition and results of operations.

In the future, we may acquire complementary businesses, products, technologies or other assets. If we engage in future acquisitions, we may not strengthen our competitive position or achieve any of our intended goals or synergies with respect to any such acquisition. In addition, any such acquisition may be viewed negatively by our customers, financial markets or investors. Furthermore, any such acquisition could pose challenges with respect to the integration of personnel, technologies and operations from the acquired businesses and in the retention and motivation of key personnel from such businesses. Acquisitions may also disrupt our ongoing operations, divert management’s attention from day-to-day responsibilities, increase our expenses and otherwise adversely affect our business, financial condition and results of operations.

 

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The marketing and distribution efforts of our third-party distributors may not be effective, which could negatively affect our ability to expand our business, particularly in the C&I channel.

We market and sell some of our products to third-party distributors in all of our sales regions, especially in the United States. We rely on these distributors to service end users, and our failure to maintain strong working relationships with such distributors could have a material adverse impact on our operating results and damage our brand reputation, particularly in the C&I channel. For the years ended December 31, 2009, 2010 and 2011, our sales to our C&I channel were $74.2 million, $77.2 million and $102.9 million, respectively, or 28.8%, 26.9% and 36.6% of total net sales.

We do not control the activities of our distributors with respect to the marketing and sales of and customer service support for our products. Therefore, the reputation and performance of our distributors and the ability and willingness of our distributors to sell our products and uphold our reputation for high quality and advanced technology and their ability to expand their businesses are essential to the future growth of our sales in the C&I channel and has a direct and material impact on our sales and profitability. Also, as with our retail customers, we do not have long-term purchase commitments from our distributor customers, and they can therefore generally cancel, modify or reduce orders with little or no notice to us. As a result, any reductions or delays in, or cancellations of, orders from any of our distributors may have a negative impact on our sales and budgeting process.

Moreover, we may not be able to compete successfully against those of our competitors that have greater financial resources and are able to provide better incentives to distributors, which may result in reduced sales of our products or the loss of our distributors. The loss of any key distributor may force us to seek replacement distributors, and any resulting delay may be disruptive and costly.

If we are unable to obtain additional capital as needed in the future, our ability to grow our sales could be limited and we may be unable to pursue our current and future business strategies.

Our future capital requirements will depend on many factors, including the rate of our sales growth, our introduction of new products and services and enhancements to existing products and services, and our expansion of sales, marketing and product development activities. In addition, we may consider acquisitions of product lines, businesses or technologies in an attempt to grow our business, which could require significant capital and could increase our capital expenditures related to future operation of the acquired business or technology. We may not be able to obtain additional financing on terms favorable to us, if at all, and, as a result, we may be unable to expand our business or continue to pursue our current and future business strategies. Additionally, if we raise funds through debt financing, we may become subject to additional covenant restrictions and incur increased interest expense and principal payments.

As a manufacturer or importer of goods containing mercury, we are subject to requirements in certain jurisdictions that we take back, recycle or otherwise manage bulbs returned by our customers or that we pay for the costs of meeting such requirements.

In the United States, certain states assess all manufacturers of mercury-containing lights that sell those lights into that state to pay costs incurred by the state to fund its program to collect, transport, process and recycle those lights. In certain instances, we have been unable to effectively recover this additional cost from our customers. Environment Canada has announced its intention to develop regulations that would require us to establish recycling programs for mercury in bulbs that we import into Canada. It is possible that other states or jurisdictions into which we sell our CFLs will enact similar, or even more onerous, legislation. If such legislation becomes more widespread, our financial obligations under these programs could adversely affect our business, financial condition and results of operations.

Consumer resistance to the use of CFL bulbs due to their mercury content may reduce our sales of this product.

Our CFL bulbs contain a small amount of mercury, which could cause some prospective purchasers to choose non-CFL bulbs to avoid the risk of exposure to and cleanup of mercury. Widespread consumer resistance to CFL bulbs could adversely affect our business, financial condition and results of operations.

 

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The cost of compliance with environmental laws and regulations and any related environmental liabilities could adversely affect our business, financial condition and results of operations.

Our operations are subject to laws and regulations governing, among other things, the use of chemicals, emissions to air, discharge to water, the remediation of contaminated properties and the generation, handling, storage, transportation, treatment and disposal of and exposure to, waste and other materials, as well as laws and regulations relating to occupational health and safety. These laws and regulations frequently change, and the violation of these laws or regulations can lead to substantial fines, penalties and other liabilities, which could adversely affect our business, financial condition and results of operations.

We own and operate industrial property in China that we purchased from 2001 to 2010 and, if any environmental contamination is discovered, we could be responsible for remediation of the property.

We own our manufacturing and distribution facilities located in China. We purchased the land use rights for these properties from the Chinese government beginning in 2001. If environmental contamination is discovered at our facility and we are required to remediate the property, our recourse against the prior owners may be limited. Any such potential remediation could be costly and could adversely affect our business, financial condition and results of operations.

If our information technology systems fail, or if we experience an interruption in their operation or we are unable to protect them against cyber-based attacks or network security breaches, then our business, financial condition and results of operations could be materially adversely affected.

The efficient operation of our business is dependent on our information technology systems. We rely on those systems generally to manage the day-to-day operation of our business, manage relationships with our customers, maintain our research and development data and maintain our financial and accounting records. The failure of our information technology systems, our inability to successfully maintain and enhance our information technology systems or any compromise of the integrity or security of the data we generate from our information technology systems could adversely affect our results of operations, disrupt our business and product development and make us unable or severely limit our ability to respond to customer demands. In addition, our information technology systems are vulnerable to damage or interruption from:

 

  n  

earthquake, fire, flood and other natural disasters;

 

  n  

employee or other theft;

 

  n  

attacks by computer viruses or hackers;

 

  n  

power outages;

 

  n  

cyber-based attacks or network security breaches; and

 

  n  

computer systems, internet, telecommunications or data network failure.

Any interruption of our information technology systems, including security breaches, could result in decreased sales, increased expenses, increased capital expenditures, negative publicity, customer dissatisfaction and potential lawsuits or liability claims, any of which could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Intellectual Property

If we are unable to obtain and adequately protect our intellectual property rights, our competitive position could be harmed.

We consider certain aspects of our technology and processes proprietary. If we are not able to adequately protect or enforce the proprietary aspects of our technology, competitors may utilize our proprietary technology and our business, financial condition and results of operations could be harmed. We currently attempt to protect our technology through a combination of patent, copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and similar means. Despite our efforts, other parties may attempt to disclose, obtain or use our technologies. Our competitors may also be able to independently develop products that are substantially equivalent or superior to our products or design around our patents. In addition, the laws of some countries do not protect our proprietary rights as fully as do the laws of the United States. As a result, we may not be able to protect our proprietary rights adequately in the United States or abroad.

 

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We own United States and non-U.S. patents and patent applications that relate to some of our products, systems, business methods and technologies. We offer no assurance about the degree of protection which existing or future patents may afford us. Likewise, we offer no assurance that our patent applications will result in issued patents, that our patents will be upheld if challenged, that competitors will not develop similar or superior business methods or products outside the protection of our patents, that competitors will not infringe on our patents or that we will have adequate resources to enforce our patents.

We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise learn of our unpatented technology. To protect our trade secrets and other proprietary information, we generally require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our technologies, our business could be materially adversely affected.

Assertions by third parties of intellectual property infringement could result in significant costs and cause our operating results to suffer.

The markets in which we compete or plan to compete are characterized by rapidly changing products and technologies and there is intense competition to establish intellectual property protection and proprietary rights related to these products and technologies. The markets for CFL, LED and halogen light bulbs, in particular, are characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies.

We may be required to obtain licenses for such third-party intellectual property. If we need to license any third-party intellectual property or other technology, we could be required to pay royalties on certain of our products. In addition, there can be no assurance that we will be able to obtain such licenses on commercially reasonable terms or at all. Our inability to obtain third-party intellectual property licenses on commercially reasonable terms or at all could harm our business, results of operations, financial condition and/or prospects.

We have in the past received, and may receive, notices that claim we have infringed upon the intellectual property of others. See “Business—Legal Proceedings.” Even if these claims are not valid, they could subject us to significant costs. We have engaged in litigation and litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation may also be necessary to defend against claims of infringement or invalidity by others. An adverse outcome in litigation or any similar proceedings could subject us to significant liabilities to third-parties, require us to license disputed rights from others or require us to cease marketing, selling or using certain products or technologies. We may not be able to obtain licenses on acceptable terms, if at all. We also may have to indemnify certain customers if it is determined that we have infringed upon or misappropriated another party’s intellectual property. Any of these results could adversely affect our business, financial condition and results of operations. In addition, the cost of addressing any intellectual property litigation claim, both in legal fees and expenses, and the diversion of management resources, regardless of whether the claim is valid, could be significant and could materially harm our business, financial condition and results of operations.

Our efforts to protect our intellectual property may be less effective in some countries where intellectual property rights are not as well protected as in the United States.

The laws of some countries do not protect proprietary rights to the same degree as the laws of the United States and there is a risk that our ability to protect our proprietary rights may not be adequate in these countries. Many companies have encountered significant problems in protecting their proprietary rights against copying or infringement in such countries, some of which are countries in which we intend to sell our products. In particular, the application of laws governing intellectual property rights in China is uncertain and evolving and could involve substantial risks to us. If we are unable to adequately protect our intellectual property rights in China, our attempts to penetrate the Chinese market may be harmed. In addition, our competitors in China and these other countries may independently develop similar technology or duplicate our products, even if unauthorized, which could potentially reduce our sales in these countries and harm our business, financial condition and results of operations.

 

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The steps we have taken to protect our intellectual property may not be adequate, which could have a material adverse effect on our ability to compete in the market.

In addition to patents, we rely on confidentiality, non-compete, non-disclosure and assignment of inventions provisions, as appropriate, with our employees and consultants, to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures may not be adequate to protect our intellectual property from unauthorized disclosure, third-party infringement or misappropriation, for the following reasons:

 

  n  

the agreements may be breached, may not provide the scope of protection we believe they provide or may be determined to be unenforceable;

 

  n  

we may have inadequate remedies for any breach;

 

  n  

trade secrets and other proprietary information could be disclosed to our competitors; or

 

  n  

others may independently develop substantially equivalent or superior proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technologies.

Specifically with respect to non-compete agreements, under current U.S. law, we may be unable to enforce these agreements, in whole or in part, and it may be difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for us.

If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it could harm our ability to protect our rights and could have a material adverse effect on our business, financial condition and results of operations.

We may need to initiate lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive and, if we lose, could cause us to lose some of our intellectual property rights, which would harm our ability to compete in the market.

We rely on patents to protect a portion of our intellectual property and our competitive position. In order to protect or enforce our patent rights, we may initiate patent litigation against third-parties, such as infringement suits or interference proceedings. Any lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns, and the outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly unpredictable. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. In addition, we may provoke third-parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, including attorney fees, if any, may not be commercially valuable. The occurrence of any of these events could harm our business, financial condition and results of operations.

Risks Related to This Offering and Our Common Shares

There may be circumstances in which the interests of our major shareholders could be in conflict with your interests as a shareholder.

As of the date of this prospectus, Ellis Yan and Solomon Yan beneficially own approximately 51.2% and 44.2% of our common shares, respectively. Upon completion of this offering, Ellis Yan and Solomon Yan will beneficially own approximately     % and     % of our common shares, respectively, or     % and     % of our common shares, respectively, if the underwriters exercise their over-allotment option in full. As a result of this ownership, Ellis Yan and Solomon Yan will have a controlling influence on our affairs and their voting power will constitute a quorum of our shareholders voting on any matter requiring the approval of our shareholders. Such matters include the nomination and election of directors, the issuance of additional shares of our capital stock or payment of dividends, the adoption of amendments to our articles of association and organizational regulations and approval of mergers or sales of substantially all of our assets. In addition, Ellis Yan, Solomon Yan and The Lillian Yan Irrevocable Stock Trust, our principal shareholders, have entered into a shareholders agreement that provides for, among other things, these shareholders to vote their common shares in favor of certain board nominees designated by Ellis Yan and Solomon Yan.

 

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Accordingly, this concentration of ownership may harm the market price of our common shares by, among other things:

 

  n  

delaying, defending, or preventing a change of control, even at a per share price that is in excess of the then current price of our common shares;

 

  n  

impeding a merger, consolidation, takeover, or other business combination involving us, even at a per share price that is in excess of the then current price of our common shares; or

 

  n  

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, even at a per share price that is in excess of the then current price of our common shares.

Ellis Yan and Solomon Yan may cause corporate actions to be taken even if the interests of Ellis Yan and Solomon Yan conflict with the interests of our other shareholders.

As an “emerging growth company,” we will not be required to have auditor attestation of the effectiveness of our internal controls.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, and we intend to take advantage of certain exemptions from various requirements that are applicable to other public companies that are not emerging growth companies including, most significantly not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act for so long as we are an emerging growth company, which may be for as long as five years following our initial public offering. The JOBS Act also provides that an emerging growth company need not comply with any new or revised financial accounting standard until such date that a non-reporting company is required to comply with such new or revised accounting standard. However, we have not elected to avail ourselves of this exemption. We cannot predict if investors will find our common shares less attractive because our independent auditors will not have attested to the effectiveness of our internal controls. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common stock.

We intend to elect to be a “controlled company” under the rules of the stock exchange to which we apply and, therefore, will be exempt from certain stock exchange corporate governance requirements.

Because of the equity ownership of Ellis Yan and Solomon Yan and the shareholders agreement entered into among our principal shareholders (see “Principal Shareholders—Shareholders Agreement”), we intend to elect to be considered a “controlled company” for purposes of the rules of the stock exchange to which we apply. As such, we will be exempt from the stock exchange corporate governance requirement that a majority of our board of directors meet the specified standards of independence and exempt from the requirement that we have a compensation and governance committee made up entirely of directors who meet such independence standards. The stock exchange independence standards are intended to ensure that directors who meet the independence standard are free of any conflicting interest that could influence their actions as directors. It is possible that the interests of Ellis Yan and Solomon Yan may in some circumstances conflict with our interests and the interests of our other shareholders, including you.

Because there is no existing market for our common shares, our initial public offering price may not be indicative of the market price of our common shares after this offering, which may decrease significantly, and an actual public trading market for our common shares may not develop.

There is currently no public market for our common shares, and an active trading market may not develop or be sustained after this offering. Our initial public offering price has been determined through negotiation between us and the underwriters and may not be indicative of the market price for our common shares after this offering. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the stock exchange to which we apply or otherwise. The lack of an active market may reduce the value of your shares and impair your ability to sell your shares at the time or price at which you wish to sell them. An inactive market may also impair our ability to raise capital by selling our common shares and may impair our ability to acquire or invest in other companies, products or technologies by using our common shares as consideration.

 

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The market price of our common shares could fluctuate significantly as a result of a number of factors, including:

 

  n  

fluctuations in our financial performance;

 

  n  

economic and stock market conditions generally and specifically as they may impact us, participants in our industry or comparable companies;

 

  n  

changes in financial estimates and recommendations by securities analysts following our common shares or comparable companies;

 

  n  

earnings and other announcements by, and changes in market evaluations of, us, participants in our industry or comparable companies;

 

  n  

changes in business or regulatory conditions affecting us, participants in our industry or comparable companies;

 

  n  

changes in accounting standards, policies, guidance, interpretations or principles;

 

  n  

announcements or implementation by our competitors or us of acquisitions, technological innovations or new products, or other strategic actions by our competitors; or

 

  n  

trading volume of our common shares or the sale of stock by our management team, directors or principal shareholders.

The lack of a trading market in the United States may result in the loss of research coverage by any securities analysts that may cover our company in the future. Moreover, we cannot assure you that any securities analysts will initiate or maintain research coverage of our company and our common shares in the United States.

 

Compliance with Section 404 of the Sarbanes-Oxley Act of 2002 will require significant effort by management, and if our independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, the market price of our common shares could be adversely affected.

We are not currently required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and are, therefore, not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. Beginning with our second Annual Report on Form 20-F after completion of this offering, our management will be required to report on the effectiveness of our internal controls over financial reporting. In addition, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting beginning with our annual report on Form 20-F following the date on which we cease to qualify as an emerging growth company, which may be up to five full years following the date of this offering. The rules governing the standards that must be met for management to assess our internal controls over financial reporting are complex and require significant documentation, testing and remediation. We are currently in the process of reviewing, documenting and testing our internal controls over financial reporting, and have identified material weaknesses in our internal controls over financial reporting related to our consolidation process, review of financial information of foreign operations and staffing levels and expertise in the areas of financial reporting and tax accounting. As we complete this process, we may encounter problems or delays in completing the implementation of any changes necessary to make a favorable assessment of our internal controls over financial reporting. In addition, in connection with the attestation process by our independent registered public accounting firm, we may encounter problems or delays in completing the implementation of any requested improvements and receiving a favorable attestation. If we cannot favorably assess the effectiveness of our internal controls over financial reporting, or if, when applicable, our independent registered public accounting firm is unable to provide an unqualified attestation report on our internal controls, investors could lose confidence in our financial information and the market price of our common shares could decline.

We will incur increased costs as a result of becoming a public company.

As a public company, we will incur legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002 and the Dodd Frank Wall Street Reform and Consumer Protection Act and related rules implemented by the SEC. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer

 

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liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our senior management. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common shares, fines, sanctions and other regulatory action and potentially civil litigation.

Our management will have broad discretion over the use of the net proceeds from this offering and may not obtain a favorable return on the use of these proceeds.

Our management will have broad discretion in determining how to apply the net proceeds from this offering and may spend the proceeds in a manner that our shareholders may not deem desirable. We currently intend to use the net proceeds from this offering to expand and improve our manufacturing processes and for research, development and commercialization activities in LED and other emerging technologies, for debt reduction, and for working capital and other general corporate purposes. We also may use a portion of the net proceeds to fund possible investments in, or acquisitions of, complementary businesses, products or technologies, although we have no current agreements or commitments with respect to any investment or acquisition, and we are not currently engaged in negotiations with respect to any investment or acquisition. We cannot assure you that these uses or any other use of the net proceeds of this offering will yield favorable returns or results. See “Use of Proceeds” for additional information.

We do not anticipate paying cash dividends on our common shares in the foreseeable future, and any return on investment may be limited to the value of our common shares.

We do not anticipate paying cash dividends on our common shares in the foreseeable future. Under Swiss law, dividends may be paid out only if we have sufficient distributable profits from the previous fiscal year, or if we have freely distributable reserves, each as will be presented on our audited annual stand-alone statutory balance sheet. Dividend payments out of the share capital are not allowed. The affirmative vote at a shareholders’ meeting of a majority of the votes cast (excluding unmarked, invalid and non-exercisable votes, which includes broker non-votes) must approve distributions of dividends. Our board of directors may propose to the shareholders’ meeting that a dividend be paid, but cannot itself authorize the dividend. See “Dividend Policy” for additional information. Since we do not plan to pay dividends, our common shares may be less valuable than if we planned to do so, because a return on your investment will only be based upon the price at which you sell our common shares.

Purchasers in this offering will experience immediate and substantial dilution in net tangible book value, and any additional financing may result in additional dilution to our shareholders.

The assumed initial public offering price will be higher than the pro forma net tangible book value per common share of our outstanding common shares as of December 31, 2011. As a result, investors purchasing common shares in this offering will incur immediate dilution of $         per common share, based on an assumed initial public offering price of $         per common share, the midpoint of the range set forth on the cover of this prospectus. This dilution is due in large part to earlier investors having generally paid substantially less than the assumed initial public offering price when they purchased their common shares. Investors purchasing common shares in this offering will pay a price per common share that exceeds the book value of our assets after subtracting our liabilities. As a result of this dilution, investors purchasing common shares from us will have contributed     % of the total amount of our total net funding to date but will own only     % of our equity. In addition, the exercise of outstanding options and warrants will, and future equity issuances may, result in further dilution to investors. See “Dilution.” In addition, if we raise additional funds by issuing equity securities in the future, you may experience significant dilution of your ownership interest and the newly issued securities may have rights senior to those of the holders of our common shares.

The market price of our common shares could be adversely affected by future sales of our common shares.

Sales of a substantial number of our common shares following this offering or the perception that such sales might occur, could cause a decline in the market price of our common shares or could impair our ability to obtain capital through a subsequent offering of our equity securities or securities convertible into equity securities. Under our articles of association that will be in effect upon closing of our initial public offering, we are authorized to issue up to              common shares, of which          common shares will be outstanding upon the closing of this offering (             common shares if the underwriters’ over-allotment option is exercised in full). Of these shares, the common shares sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, or the Securities Act. In addition          common shares may be sold upon the expiration of the 180-day

 

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lock-up period under the lock-up agreements described below. Additionally, as of                     , 2012, we had granted a total of              restricted common shares or options to purchase common shares that may be resold as described under “Shares Eligible for Future Sale.”

We, our senior management, directors and shareholders of all of our outstanding common shares immediately prior to this offering (including restricted shares and shares issuable upon exercise of currently outstanding stock options) have entered into lock-up agreements described under the caption “Underwriting,” pursuant to which we and they have agreed, subject to certain exceptions and extensions, not to directly or indirectly (i) sell, offer, contract or grant any option to sell (including any short sale), pledge, transfer or establish an open “put equivalent position” within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, as amended, or the Exchange Act; (ii) otherwise dispose of any common shares, options or warrants to acquire common shares, or securities exchangeable or exercisable for or convertible into common shares currently or hereafter owned either of record or beneficially; or (iii) publicly announce an intention to do any of the foregoing, for a period of 180 days from the date of this prospectus. However, after the lock-up period expires, or if the lock-up restrictions are waived by the representatives of the underwriters, such persons may be able to sell their shares subject to relevant securities laws. We cannot predict the size of future issuances of our common shares or the effect, if any, that future sales and issuances of our common shares, or the perception of such sales or issuances, would have on the market price of our common shares. See “Shares Eligible for Future Sale.” Shortly after the completion of this offering, we intend to register all common shares relating to awards that we have granted or may grant under our outstanding equity incentive compensation plans as in effect on the date of this prospectus.

We are incorporated in Switzerland and Swiss law governs our corporate affairs.

We are a corporation incorporated under the laws of Switzerland. Our place of incorporation is Zug, Switzerland. The rights of holders of our common shares are governed by Swiss corporate law and by our articles of association. In particular, Swiss corporate law limits the ability of a shareholder to challenge resolutions or actions of our board of directors in court. Shareholders generally are not permitted to file a suit to reverse a decision or action by directors but are permitted to seek damages for breaches of fiduciary duty. Shareholder claims against a director for breach of fiduciary duty would, as a matter of Swiss law, have to be brought at our place of incorporation in Zug, Switzerland, or at the domicile of the involved director. In addition, under Swiss law, any claims by shareholders against us must be brought exclusively at our place of incorporation. See “Comparison of Swiss Law and Delaware Law–Directors’ fiduciary duties.”

As a foreign private issuer, we are permitted to file less information with the SEC than a company incorporated in the United States. Accordingly, there may be less publicly available information concerning us than there is for companies incorporated in the United States.

As a foreign private issuer, we are exempt from certain rules under the Exchange Act that impose disclosure requirements as well as procedural requirements for proxy solicitations under Section 14 of the Exchange Act. In addition, our officers, directors and principal shareholders are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act, nor are we generally required to comply with Regulation FD, which restricts the selective disclosure of material nonpublic information. Accordingly, there may be less information publicly available concerning us than there is for U.S. public companies that are not foreign private issuers.

We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.

Rule 3b-4(c) of the Exchange Act defines a foreign private issuer as any foreign issuer other than a foreign government, except for an issuer that has more than 50% of its outstanding voting securities held of record by U.S. residents, and any one of the following: (i) a majority of the issuer’s officers and directors are citizens or residents of the United States, (ii) more than 50% of its assets are located in the United States, or (iii) the issuer’s business is principally administered in the United States. We are a foreign issuer that is incorporated in Switzerland. We believe that we qualify as a foreign private issuer under U.S. federal securities law since, even though more than 50% of our outstanding common stock is currently held by one or more U.S. residents, fewer than a majority of our executive officers and of the members of our board of directors, each as set forth in the section entitled “Management—Senior Management and Directors,” are and, upon completion of this offering, will be citizens or residents of the United

 

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States, less than a majority of our assets were located in the United States as of February 29, 2012 and our business is principally administered outside the United States through our principal executive offices in Shanghai, China.

Because we are a foreign private issuer, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act and related rules and regulations, as well as the proxy rules promulgated under Section 14 of the Exchange Act and the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act. As specified by the Exchange Act, the determination of foreign private issuer status is made annually on the last business day of our second fiscal quarter. If we fail to qualify as a foreign private issuer in the future, including due to our failure to meet any one of the criteria set forth in the preceding paragraph, we must begin complying with the registration and reporting requirements and modifying our policies to comply with certain specified governance practices, as set forth under the Exchange Act, effective the first day of our next fiscal year. In addition, we would lose our ability to rely upon exemptions from certain corporate governance requirements of the stock exchange to which we apply that are available to foreign private issuers. In the future, we could lose our foreign private issuer status and, if we do, the regulatory and compliance costs to us under U.S. securities laws as a U.S. domestic issuer would be significantly higher than current costs.

Our articles of association and Swiss law contain provisions that could prevent or delay an acquisition of our company by means of a tender offer, a proxy contest or otherwise.

Our articles of association and Swiss law contain provisions that could prevent or delay an acquisition of us by means of a tender offer, a proxy contest or otherwise. These provisions may also adversely affect prevailing market prices for the shares. These provisions, among other things:

 

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provide that a merger or demerger transaction requires the affirmative vote of the holders of at least two-thirds of the shares represented at the meeting and the majority of the par value of the shares represented and, if the merger contract provides for the possibility of a so-called “cashout” or “squeeze-out” merger, the merger resolution requires the consent of at least 90% of the outstanding shares entitled to vote at the meeting;

 

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provide that any action required or permitted to be taken by the holders of shares must be taken at a duly called annual or extraordinary general meeting of shareholders; and

 

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limit the ability of our shareholders to amend or repeal some provisions of our articles of association.

Our status as a Swiss corporation means shareholders enjoy certain rights that may limit our flexibility to raise capital, issue dividends and otherwise manage ongoing capital needs.

Swiss law requires our shareholders to authorize increases in our share capital, and such authorizations are of limited duration. Additionally, subject to specified exceptions, Swiss law grants preemptive rights to existing shareholders to subscribe for new issuances of shares. Swiss law also does not provide as much flexibility in the various terms that can attach to different classes of shares as do the laws of some other jurisdictions. Swiss law requires shareholder approval for many corporate actions over which a board of directors would have authority in some other jurisdictions. For example, dividends must be approved by shareholders. These Swiss law requirements relating to our capital management may limit our flexibility, and situations may arise where greater flexibility would have provided benefits to our shareholders.

We are a Swiss company and it may be difficult for you to obtain or enforce judgments against us or our senior management and directors in the United States.

We are organized under the laws of Switzerland. Our place of incorporation is Zug, Switzerland. Most of our assets are located outside the United States. Furthermore, the majority of our directors and senior management named in this prospectus reside outside the United States and most of their assets are located outside the United States. Ellis Yan, our Chief Executive Officer, resides in the United States while Solomon Yan, our President, resides in China. As a result, investors may find it difficult to effect service of process within the United States upon us or these persons or to enforce outside the United States judgments obtained against us or these persons in U.S. courts, including judgments in actions predicated upon the civil liability provisions of the U.S. federal securities laws. Likewise, it may also be difficult for an investor to enforce in U.S. courts judgments obtained against us or these persons in courts located in jurisdictions outside the United States, including actions predicated upon the civil liability provisions of the U.S. federal securities laws. It may also be difficult for an investor to bring an original action in a Swiss court predicated upon the civil liability provisions of the U.S. federal securities laws against us or these persons.

 

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Our organizational regulations provide that directors and officers, past and present, are entitled to indemnification from us arising in connection with the performance of their duties and permit us to advance the expenses of defending any act, suit or proceeding to our directors and officers. Although there is doubt as to whether U.S. courts would enforce such a provision in an action brought in the United States under U.S. securities laws, such provision could make enforcing judgments obtained outside Switzerland more difficult to enforce against our assets in Switzerland or in jurisdictions that would apply Swiss law. See “Description of Share Capital” for additional information.

Risks Related to Doing Business in China

Changes in China’s economic, political and social conditions could have a material adverse effect on our business, financial condition and results of operations.

We conduct a substantial amount of our manufacturing operations in China. Accordingly, our business, financial condition, results of operations and prospects are significantly dependent on the economic, political and social conditions in China. The Chinese economy differs from the economies of developed countries in many respects, including the degree of government involvement, level of development, growth rate, control over foreign exchange, access to financing and allocation of resources. While China’s economy has experienced significant growth over the past 30 years, the growth has been uneven across different regions and periods and among various economic sectors in China. Moreover, sustained economic growth in China over the past few years has resulted in a general increase in labor costs, and the inflationary environment that has led to employee discontent, which could result in materially higher compensation costs being paid to employees. We cannot assure you that the ongoing evolution of economic, political and social conditions in China would not lead to events which may materially reduce our sales and profitability.

The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Nonetheless, a substantial portion of the productive assets in China continues to be owned by the Chinese government. The Chinese government’s control of these assets and other aspects of the national economy could materially and adversely affect our business. The Chinese government exercises significant control over China’s economic growth through the allocation of resources, control over payment of foreign currency-denominated obligations, implementation of monetary policy and provision of preferential treatment to particular industries or companies. In recent years, the Chinese government has implemented a number of measures, such as raising required bank reserves against deposit rates, which have placed additional limitations on the ability of commercial banks to make loans, and raising interest rates in order to decrease the growth rate of specific sectors of China’s economy that the government believed to be overheating. Such actions, as well as other Chinese policies, may materially and adversely affect our liquidity and access to capital as well as our ability to operate our business.

Our business, financial condition and results of operations could be materially and adversely affected by a severe and prolonged global economic downturn and a corresponding slowdown of the Chinese economy.

Recent global market and economic conditions have been challenging. Most major global economies faced a recession in 2008 and 2009 and significant market volatility in 2010 and 2011. Continued concerns about the systemic impact of a potentially long-term and widespread recession, energy costs, geopolitical issues and the availability and cost of credit have negatively affected business and consumer, contributed to increased market volatility and diminished expectations for economic growth around the world. The Chinese economy also faces challenges, including due to the possibility of diminished growth in demand for exported goods from the United States and Europe. The stimulus plans and other measures implemented by the Chinese government may not work effectively or quickly enough to maintain economic growth in China or avert a severe economic downturn. Since we intend to derive a significant amount of our net sales from sales in China, any prolonged slowdown in the Chinese economy could have a material adverse effect on our business, financial condition and results of operations.

Fluctuations in the value of the renminbi against the U.S. dollar may affect the value of your investment.

The value of the renminbi against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. The conversion of the renminbi into foreign currencies, including the U.S. dollar, has historically been based on exchange rates set by the People’s Bank of China. Since 2005, China started to allow its currency to fluctuate within a managed margin. On June 20, 2010, the People’s Bank of China announced that the Chinese government would further reform the renminbi exchange

 

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rate regime and increase the flexibility of the exchange rate. In March 2011, in a statement about the central bank’s plan for China’s five-year plan running from 2011 to 2015, the People’s Bank of China reiterated a long-standing description of exchange policy to keep the renminbi basically stable while strengthening its flexibility over the coming five years.

Currency exchange gains (losses) result from fluctuations in foreign currency exchange rates for financial assets and liabilities that are denominated in a currency other than the local currency in the region in which a transaction occurs. Currency exchange gains (losses) arise from the monthly revaluation of these assets (accounts receivable) and liabilities (accounts payable) from the date acquired or incurred through the final settlement date. Substantially all of our currency exchange losses are related to the settlement of TCP US’s inventory purchases from TCP Asia, which are denominated in U.S. dollars, while most of our costs and expenses (which are primarily incurred by our manufacturing operations in China) are denominated in renminbi. Fluctuations in foreign currency exchange rates between the U.S. dollar and Chinese renminbi will result in the recognition of currency exchange gains or losses, as the case may be, depending on the movement of foreign exchange rates from the date of inventory purchase to the settlement date.

The proceeds from this offering will be denominated in U.S. dollars. We do not hedge our exposure to fluctuations in exchange rates, including the exchange rate between the U.S. dollar and the renminbi. Appreciation or depreciation in the value of the renminbi relative to the U.S. dollar would affect our financial results, which are reported in U.S. dollars, without reflecting any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of earnings from and the value of any U.S. dollar-denominated investments that we may make in the future. Fluctuations in the exchange rate will also affect the relative purchasing power of the proceeds of this offering.

Our operations in China may face labor shortages, strikes and other disturbances.

In recent years, certain regions of China have been experiencing a labor shortage as migrant workers and middle level management seek better wages and working conditions elsewhere. This trend of labor shortages is expected to continue and will likely result in increasing wages as companies seek to keep their existing work forces. In addition, substantial competition in China for qualified and capable personnel, particularly experienced engineers and technical personnel, may make it difficult for us to recruit and retain qualified employees at our China facilities, which would adversely affect our profitability as well as our reported net income. No assurance can be given that we, or any of our customers in China, will not experience labor disturbances related to working conditions, wages or other reasons. Any labor shortages, strikes and other disturbances may adversely affect our future operating results and result in negative publicity and reputational harm.

The enforcement of Chinese labor contract law may increase our costs and decrease our net income.

China adopted the Labor Contract Law, effective January 1, 2008, and issued its implementation rules, effective September 18, 2008. The Labor Contract Law and related rules and regulations impose more stringent requirements on employers with regard to, among others, minimum wages, severance payment and non-fixed term employment contracts, time limits for probation periods, as well as the duration and the times that an employee can be placed on a fixed term employment contract. Compliance with the Labor Contract Law and its rules and regulations has resulted in an increase in our operating expenses, particularly our labor costs, and continued compliance with the Labor Contract Law and its implementation rules and regulations may further increase our operating expenses. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules and regulations may also limit our ability to effect those changes in a manner that we believe to be cost effective or desirable, could result in a decrease in our profitability and could adversely affect our business, financial condition and results of operations.

Uncertainties presented by the Chinese legal system could limit the legal protections available to us and subject us to legal risks, which could have a material adverse effect on our business, financial condition and results of operations.

Our operations in China are subject to applicable Chinese laws, rules and regulations. The Chinese legal system is a system based on written statutes. Prior court decisions may be cited for reference but have little value as precedents. Additionally, Chinese statutes are often principle-oriented and require detailed interpretations by the enforcement bodies to further apply and enforce such laws. Since 1979, the Chinese government has been developing a

 

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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, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because some of these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the Chinese legal system is based in part on government policies and internal rules, some of which may not be published on a timely basis or at all, and some of which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until some time after the violation. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. However, since Chinese administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection in China than in more developed legal systems. These uncertainties may also impede our ability to enforce the contracts we have entered into in China. As a result, these uncertainties could have a material adverse effect on our business, financial condition and results of operations.

We may elect to finance our operations in part from dividends and other distributions on equity paid by our subsidiaries, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our business, financial condition and results of operations.

We are a holding company and we may elect to finance our operations in part from dividends from our subsidiaries in China for our cash requirements, including any debt we may incur. Currently, substantially all of our net sales are generated by TCP North America. In future periods, however, we expect an increasing portion of our net sales to originate from TCP Asia. Current Chinese regulations permit our Chinese subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its respective after-tax profits each year, if any, to fund certain statutory reserves until the accumulated amount of such reserves reaches 50% of its registered capital. Through the date of this prospectus, our Chinese subsidiaries have funded the statutory reserves in compliance with Chinese regulations. These reserves are not distributable as cash dividends. Furthermore, if our Chinese subsidiaries incur debt, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Any limitation on the ability of our subsidiaries to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business and could have a material adverse effect on our business, financial condition and results of operations.

Under the New EIT Law and implementation regulation issued by State Council, a China income tax at the rate of 10% is applicable to dividends paid by Chinese enterprises to “non-resident enterprises” (enterprises that do not have an establishment or place of business in China, or has such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business) subject to the application of any relevant income tax treaty that China has entered into. Any dividend that we or any subsidiary considered a “non-resident enterprise” receives from our China subsidiaries will be subject to Chinese taxation at the 10% rate (or lower treaty rate).

Under the Chinese Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification could result in unfavorable tax consequences to us and our non-Chinese resident shareholders.

Pursuant to the Chinese Enterprise Income Tax Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “Tax Resident Enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. In April 2009, SAT released Guoshuifa [2009] No. 82, or Circular No. 82, clarifying the determination criteria of a Tax Resident Enterprise. Under the law and Circular No. 82, a Chinese enterprise is considered a resident enterprise if all of the following apply: (i) a Chinese funded enterprise’s major management department and personnel who are responsible for carrying out daily operations are located in China; (ii) the department or the personnel who have the right to decide or approve the Chinese funded enterprise’s financial and human resource matters are located in China; (iii) the major assets, account book, company seal and meeting minutes of the Chinese funded enterprise are located or stored in China;

 

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and (iv) the directors or management personnel holding no less than 50% voting rights of the Chinese funded enterprise habitually reside in China. The circular explicitly provides that the above standards apply to enterprises which are registered outside China and funded by Chinese enterprises or Chinese enterprise groups as controlling investors.

We are currently not treated as a Chinese resident enterprise by the relevant tax authorities. However, our principal executive office is currently based in China, and is expected to remain in China for the foreseeable future, and, therefore, we cannot assure you that we will not be considered a “resident enterprise” under the law and Circular No. 82. If the Chinese tax authorities determine that we are a “resident enterprise” for Chinese enterprise income tax purposes, we may be subject to enterprise income tax at a rate of 25% on our worldwide taxable income as well as subject to ongoing Chinese enterprise income tax reporting obligations.

Under the Chinese Enterprise Income Tax Law, if we are classified as a “resident enterprise” of China, such classification could result in unfavorable tax consequences to our non-Chinese resident investors.

The Chinese Enterprise Income Tax Law and its implementation regulations provide that if the enterprise that distributes dividends is domiciled in China, then such dividends are treated as China-sourced income, and Chinese income tax at the rate of up to 10% is applicable to such dividends payable to overseas investors that are “non-resident enterprises”. If we are considered a Chinese resident enterprise for tax purposes, any dividends distributed by us to our non-Chinese residents may be regarded as China-sourced income. As a result, such dividends will be subject to Chinese withholding tax at a rate of up to 10%, and the rate of withholding tax on dividends may be reduced depending on the provisions of the tax treaty between China and the jurisdiction in which the non-resident shareholder resides.

Dividends payable by our China Subsidiaries to TCP HK may become subject to a higher withholding tax under Chinese tax laws.

According to the Arrangement between China and Hong Kong on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with Respect to Taxes on Income, which was executed on August 21, 2006 and has been amended by protocols signed on January 30, 2008 and May 27, 2010, the Chinese withholding tax referred to in the preceding risk factor should not exceed 5% if a Hong Kong resident enterprise beneficially owns at least 25% equity interest in the Chinese entity. However, according to the Circular of State Administration of Taxation on Printing and Issuing the Administrative Measures for Non-resident Individuals and Enterprises to Enjoy the Treatment Under Taxation Treaties, which became effective on October 1, 2009, the 5% tax rate does not automatically apply. Approvals from competent local tax authorities are required before an enterprise can enjoy the relevant tax treatments relating to dividends under relevant taxation treaties. Further, the State Administration of Taxation promulgated the Notice on How to Understand and Determine the “Beneficial Owners” in Tax Treaties on October 27, 2009, or Circular No. 601, which provides guidance for determining whether a resident of a contracting state is the “beneficial owner” of an item of income under Chinese tax treaties and tax arrangements. According to Circular No. 601, a beneficial owner generally must be engaged in substantive business activities. An agent or conduit company will not be regarded as a beneficial owner and, therefore, will not qualify for treaty benefits. Conduit company normally refers to a company that is set up for the purpose of avoiding or reducing taxes or transferring or accumulating profits. While we believe that we are not a conduit company and are therefore eligible to enjoy the preferential tax rate, we cannot assure you that any dividends to be distributed by our Chinese subsidiaries to TCP HK will be entitled to the 5% reduced tax rate provided under the relevant tax arrangement between China and Hong Kong.

Chinese regulations relating to the establishment of offshore special purpose vehicle companies by China residents may subject our China resident beneficial owners or our Chinese subsidiaries to liability or penalties, limit our ability to inject capital into our Chinese subsidiaries, limit our Chinese subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

On October 21, 2005, State Administration of China, or SAFE, issued a “Notice on Certain Foreign Exchange Matters Concerning Fund Raising by Offshore Special Purpose Vehicle Companies of PRC Residents and Related Round-trip Investment,” or SAFE Circular No. 75. On May 27, 2011, SAFE issued the Operating Instruction on Foreign Exchange Administration for Domestic Residents Engaging in Financing and Round Trip Investment Via Overseas Special Purpose Vehicles, or Circular No. 19. Circular No. 19 came into effect on July 1, 2011. SAFE Circular No. 75 and Circular 19 are jointly referred to as SAFE Notice. According to SAFE Notice, a special purpose

 

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vehicle, or SPV, is an offshore special purpose company directly established or indirectly controlled by residents of China for the purpose of offshore investment with its assets or ownership rights consisting of Chinese enterprises. Under SAFE Notice, we are considered to be a SPV and residents of China are required to file with the competent local SAFE branch information about offshore companies in which they have invested, directly or indirectly, and to make follow-up filings in connection with certain material transactions involving such SPVs, such as increases or decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investment, or external guarantees, or other material events that do not involve return investment. Under SAFE Notice, failure to comply with the registration procedures set forth above could result in liability under Chinese law for foreign exchange evasion and may result in penalties and legal sanctions, including fines, the imposition of restrictions on a Chinese subsidiary’s foreign exchange activities and its ability to distribute dividends to the SPV, its ability to pay the SPV proceeds from any reduction in capital, share transfer or liquidation in respect of the Chinese subsidiary and the SPV’s ability to contribute additional capital into or provide loans to the Chinese subsidiary.

On May 27, 2011, SAFE issued the Operating Instruction on Foreign Exchange Administration for Domestic Residents Engaging in Financing and Round Trip Investment Via Overseas Special Purpose Vehicles, or Circular No. 19. Circular No. 19 came into effect on July 1, 2011. Circular No. 19 removes some major obstacles to round trip investments and provides a remedy to cure prior non-compliant round-trip investment. In contrast with Circular of the General Affairs Department of the State Administration of Foreign Exchange on Issuing the Operational Rules for the State Administration of Foreign Exchange Circular on Relevant Issues concerning Foreign Exchange Administration of Company Financings and Roundtripping Investments via Overseas Special Purpose Companies [Huizongfa (2007) No. 106], or Circular No. 106, Circular No. 19 removes the deadline for outbound investment registration and allows registration for special purpose vehicles, or SPVs, after the establishment of SPVs and before carrying out round-trip investments. One of our founders, Solomon Yan, is a Chinese citizen. In 2007 and 2008, he exchanged his ownership in subsidiaries in China for ownership in TCP HK, one of our indirect wholly owned subsidiaries. As such, Solomon Yan is required to register his ownership in us with SAFE according to SAFE Circular No. 75 and No. 19. Solomon Yan has contacted the local corresponding bureau of SAFE and is awaiting responses from the local corresponding bureau of SAFE for registration under SAFE Circular No. 75 to the relevant China foreign exchange authority.

If, for whatever reason, Solomon Yan fails to complete the SAFE registration under SAFE Circulars No. 75 and No. 19, such failure to complete the registrations may limit the ability of our China subsidiaries to pay the profits, dividends, liquidation expenses, share transfer expenses and capital decreasing fees to the offshore special purpose vehicles, and punishment could be imposed upon our Chinese subsidiaries for foreign exchange evasion or other non-compliance.

Any requirement to obtain a prior approval from the China Securities Regulatory Commission, or CSRC, could delay this offering, and a failure to obtain such approvals, if required, could have a material adverse effect on our business, results of operations and this offering.

In 2006, six Chinese regulatory agencies jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules. The M&A Rules require that, if an overseas company established or controlled by Chinese domestic companies or citizens intends to acquire equity interests or assets of any other Chinese domestic company affiliated with Chinese domestic companies or citizens, such acquisition must be submitted to the Ministry of Commerce, rather than local regulators, for approval. In addition, this regulation requires that an offshore special purpose vehicle formed for the purpose of overseas listing of the equity interests in Chinese companies via acquisition and controlled directly or indirectly by Chinese persons obtain the approval of the CSRC prior to the listing and trading of their securities on overseas stock exchanges. On September 21, 2006, the CSRC published a notice on its official website specifying the documents and materials required to be submitted by overseas special purpose companies seeking the CSRC’s approval of their overseas listings.

In late 2007 and 2008, Ellis Yan and Solomon Yan transferred their equity interests in our Chinese subsidiaries to TCP HK. Our China legal counsel, Jun He Law Firm, has advised us that the M&A Rules do not require an application to be submitted to the CSRC for its approval of this offering, given that the M&A Rules are applicable to foreign companies that acquire or merge with domestic Chinese companies. Since prior to our 2007/2008 corporate restructuring, our Chinese subsidiaries were already foreign invested enterprises, the M&A Rules are not applicable to our 2007/2008 corporate restructuring transactions.

 

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However, there can be no assurance that the CSRC will not in the future take a view that is contrary to that of our China legal counsel. If the CSRC requires that we obtain its approval prior to the completion of this offering, this offering will be delayed until we obtain the approval from the CSRC, which may take several months or longer, if such approval is obtained at all. If a prior approval from the CSRC is required but not obtained, we may face regulatory actions or other sanctions from the CSRC or other Chinese regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the transfer of the proceeds of this offering into China, or take other actions that could have a material adverse effect on our business, financial condition and results of operations. The CSRC or other Chinese regulatory agencies may also take actions requiring us to halt this offering.

Chinese regulation of loans and direct investment by offshore holding companies to Chinese entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our Chinese operating subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.

In utilizing the proceeds of this offering in the manner described in “Use of Proceeds,” as an offshore holding company of our Chinese operating subsidiaries, we may make loans to our Chinese operating subsidiaries, or we may make additional capital contributions to our Chinese operating subsidiaries. Loans by us to any of our operating subsidiaries in China, which are foreign-invested enterprises, to finance their activities cannot exceed statutory limits and must be registered with SAFE or its competent local counterparts. Capital contributions must be approved by, among others, the China Ministry of Commerce or its competent local counterparts. After obtaining approval, the capital contributions must be registered with the relevant local counterparts of SAFE. We made capital contributions to our Chinese operating subsidiaries as registered capital, which has been registered with the relevant local counterparts of SAFE. Historically, it has taken approximately one month to obtain the approval by the local counterpart of the China Ministry of Commerce, and approximately two weeks for the local counterpart of SAFE to complete the registration after we submitted the proper documentation. Each of our capital contributions has been approved and registered within such a timeframe. We may not be able to obtain these government approvals and registrations on a timely basis, if at all, with respect to future capital contributions by us to our Chinese operating subsidiaries. If we fail to receive such approvals or registrations, our ability to use the proceeds of this offering and to capitalize our Chinese operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

On August 29, 2008, SAFE promulgated the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign Invested Enterprises, or SAFE Circular No. 142, a notice regulating the conversion by a foreign-invested company of foreign currency into renminbi by restricting how the converted renminbi may be used. SAFE Circular No. 142 requires that renminbi converted from the foreign currency-denominated registered capital of a foreign-invested company may only be used for purposes within the company’s business scope approved by the applicable governmental authority and may not be used for equity investments within China unless specifically provided for otherwise in its business scope. In addition, SAFE strengthened its oversight of the flow and use of renminbi funds converted from the foreign currency-denominated registered capital of a foreign-invested company. The use of such renminbi may not be changed without approval from SAFE, and may not in any case be used to repay renminbi loans if the proceeds of such loans have not yet been used. Violations of SAFE Circular No. 142 may result in severe penalties, including substantial fines as set forth in the Foreign Exchange Administration Regulations. As a result, SAFE Circular No. 142 may significantly limit our ability to transfer the net proceeds from our initial public offering and subsequent offerings or financing to our Chinese subsidiaries, which may adversely affect our liquidity and our ability to fund and expand our business in China, and we may not be able to convert the net proceeds from our initial public offering and subsequent offerings or financing into renminbi to invest in or acquire any other Chinese companies.

We do not have valid title certificates to use certain properties occupied by us in China, which may adversely affect our operations.

Properties occupied by our China subsidiaries in China primarily consist of factory buildings, warehouses, ancillary buildings and offices. Any dispute or claim in relation to the title to the properties occupied by us, including any litigation involving allegations of illegal or unauthorized use of these properties, may result in us having to relocate our business operations and may materially and adversely affect our operations, financial condition, reputation and future growth. In addition, there can be no assurance that the Chinese government will not amend or revise existing

 

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property laws, rules or regulations to require additional approvals, licenses or permits, or to implement stricter requirements to obtain or maintain the title certificates required for the properties occupied by our China subsidiaries.

We own properties in China with an aggregate gross floor area of approximately 148,530 square meters. We have not obtained title ownership certificates to properties with an aggregate gross floor area of approximately 71,120 square meters, accounting for approximately 47.9% of the aggregate gross floor area of our properties. As to the properties without title certificates, among which: (i) we have obtained construction approvals and certificates for approximately 29,550 square meters, accounting for approximately 19.9% of the aggregate gross floor area of our properties, and there are no legal impediments to our obtaining the title ownership certificates to such properties; (ii) approximately 2,710 square meters, accounting for approximately 1.8% of the aggregate gross floor area of our properties, are ancillary buildings which do not have a material effect on our operations; and (iii) the properties for which we have not obtained any construction approvals and certificates are approximately 38,860 square meters, accounting for approximately 26.2% of the aggregate gross floor area of our properties. We use these properties for operations as manufacturing and warehouse facilities.

The operations we conduct on these title defective properties may be adversely affected as a result of the absence of valid legal title. For example, we may be required to seek alternative premises for our business operations, which may lead to disruptions in our business operations.

Risks Related to Taxation

We are subject to income taxes in Switzerland, as well as the United States and many other jurisdictions throughout the world, and are regularly audited in many of these jurisdictions.

Tax laws throughout the world are complex and the application of these rules to our company’s global business operations can be uncertain. While we believe we take reasonable positions on the tax returns filed throughout the world, some of these positions may be challenged during income tax audits in Switzerland, the United States and other jurisdictions. Consequently, significant judgment is required in evaluating our tax positions to determine our company’s ultimate tax liability. Management records current tax liabilities based on U.S. GAAP, including the more-likely-than-not recognition and measurement standard and the assumption that all material tax risks will be identified in the relevant examination. Our management believes that the estimates reflected in the consolidated financial statements accurately reflect our tax liabilities under these standards. However, our actual tax liabilities ultimately may differ from those estimates if we were to prevail in matters for which accruals have been established or if taxing authorities were to successfully challenge the tax treatment upon which our management has based its estimates. Income tax expense includes the impact of tax reserve positions and changes to tax reserves that are considered appropriate, as well as any related interest.

Our annual effective tax rate will differ from the Swiss statutory rate, primarily because of higher tax rates in the United States and most other non-Swiss jurisdictions. Our effective tax rate may be subject to fluctuations during the fiscal year as new information is obtained which may affect the assumptions we use to estimate our annual effective tax rate, including factors such as our mix of pretax earnings in the various tax jurisdictions in which we operate, valuation allowances against deferred tax assets, reserves for tax audit issues and settlements, utilization of research and experimentation tax credits and changes in tax laws in jurisdictions where we conduct operations.

We expect to be a controlled foreign corporation, or CFC, for U.S. federal income tax purposes.

We will be treated as a CFC for U.S. federal income tax purposes for the taxable year that includes this offering and we may be treated as a CFC in subsequent years. Treatment as a CFC will result in adverse U.S. federal income tax consequences for a U.S. Holder who directly or indirectly owns at least 10 percent of the total combined voting power of our voting stock. See “Taxation—Material United States Federal Income Tax Considerations—Controlled Foreign Corporation Status.”

We may be required to make certain cash payments to the former shareholders of TCP US pursuant to a Tax Indemnity Agreement between TCP US and such shareholders.

TCP US has entered into a Tax Indemnity Agreement with Ellis Yan and the Lillian Yan Irrevocable Stock Trust, the former shareholders of TCP US, pursuant to which it has agreed to make cash payments to them in the event that they incur additional federal, state or local income taxes as the result of a tax audit or other administrative or judicial

 

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proceeding affecting TCP US with respect to which TCP US was treated as an S corporation for U.S. federal and applicable state income tax purposes. Such payments would be made within 120 days after a determination relating to such tax audit or other administrative or judicial proceeding, and shall be in such amounts as are necessary for Ellis Yan and the Lillian Yan Irrevocable Stock Trust to receive, on an after tax basis, an amount equal to any additional federal, state and local income taxes payable by them as a result of such determination, including interest, penalties and additions to tax, less any related estimated reduction in federal, state and local income taxes payable by them for a subsequent taxable year which TCP US’s S election was in effect.

There is a risk that we could be treated as a U.S. domestic corporation for U.S. federal income tax purposes, which could result in a significantly greater U.S. federal income tax liability.

Section 7874(b) of the Internal Revenue Code of 1986, as amended, generally provides that a corporation organized outside the United States which acquires, directly or indirectly, pursuant to a plan or series of related transactions substantially all of the assets of a corporation organized in the United States will be treated as a domestic corporation for U.S. federal income tax purposes if shareholders of the acquired corporation, by reason of owning shares of the acquired corporation, own at least 80% (of either the voting power or the value) of the stock of the acquiring corporation after the acquisition. If Section 7874(b) were to apply to us as a result of the transfer of TCP US to us on December 30, 2010, then, among other things, we, as the acquiring corporation, would be subject to U.S. federal income tax on our worldwide taxable income as if we were a domestic corporation. Although Ellis Yan and the Lillian Yan Irrevocable Stock Trust owned less than 60% of our stock after the transfer of TCP US and the related transfers of TCP Asia and TCP Canada to us and a substantial portion of the stock was acquired for consideration other than their ownership interest in TCP US, we have been advised that Section 7874(b) could still be implicated under certain circumstances. We do not believe that those circumstances exist here and have received an opinion from one of our tax advisors, a nationally recognized accounting firm, that Section 7874(b) of the Code should not apply to treat us as a domestic corporation as a result of the transfer of TCP US to us. However, there is no assurance that the Internal Revenue Service would agree with this conclusion, and we have not sought a ruling from the Internal Revenue Service on this issue. The balance of this discussion (including the discussion under “Taxation–Material United States Federal Income Tax Considerations”) assumes that we will be treated as a foreign corporation for U.S. federal income tax purposes.

We may be or become a passive foreign investment company, or PFIC, for U.S. federal income tax purposes.

Although we do not anticipate being treated as a PFIC for U.S. federal income tax purposes for our current tax year, no assurances can be given in this regard. Also, we may or may not be treated as a PFIC in subsequent years due to changes in our assets or business operations. If we are a PFIC for any year, such characterization could result in adverse U.S. federal income tax consequences to investors who are U.S. Holders. See “Taxation—Material United States Federal Income Tax Considerations—Potential Application of Passive Foreign Investment Company Provisions.”

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains estimates and forward-looking statements that involve risks and uncertainties. Some of the matters discussed concerning our operations and financial performance include estimated forward-looking statements. These estimates and forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that could cause our actual results of operations, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results, as well as those of the markets we serve or intend to serve, to differ materially from those expressed in or suggested by these estimates or forward-looking statements. These estimates and forward-looking statements are based on assumptions regarding our present and future business strategies and the environment in which we expect to operate in the future. Important factors that could cause those differences include, but are not limited to:

 

  n  

changes in the competitive and technological environment in our industry;

 

  n  

changes in legislation that phases out inefficient bulb technologies;

 

  n  

our relationship with retail and third-party distributors;

 

  n  

the cost and availability of raw materials, including phosphor, and components for our lighting products;

 

  n  

regulatory requirements and approvals for our current and future lighting products;

 

  n  

global economic conditions, which affect end user demand for our lighting products;

 

  n  

changes in China’s economic, political and social conditions, Chinese labor supply and Chinese labor regulations;

 

  n  

the evolving Chinese legal system and uncertainties surrounding its application to us;

 

  n  

fluctuations in the value of the foreign currencies in countries in which we have operations, including China (renminbi), Canada (Canadian dollar), the Netherlands (Euro), United Kingdom (U.K. pound), Brazil (Real) and Switzerland (Swiss franc) versus the U.S. dollar;

 

  n  

our ability to protect our intellectual property and avoid infringing on others’ intellectual property;

 

  n  

costs of environmental compliance and/or the imposition of liabilities under environmental laws and regulations; and

 

  n  

our expected treatment under Swiss and U.S. federal tax legislation and the impact that Swiss tax and corporate legislation may have on our operations.

These factors are not exhaustive. Additional factors that could cause our actual results, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results to differ materially from these estimates or forward-looking statements include statements that contain information obtained from independent industry sources. Moreover, we operate in an evolving technological environment and new risk factors emerge from time to time. It is not possible for management to predict all risk factors that may affect our business, nor can we assess the impact of all identified risk factors on our business or the extent to which any such risk factor, or combination of risk factors, may cause our actual results to differ materially from those contained in any forward-looking statement.

In addition, statements that use the terms “believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate,” “may,” “might,” “will,” “should,” “potential,” “continue” and similar expressions are intended to identify forward-looking statements. All forward-looking statements in this prospectus reflect our current expectations and views of future events and are based on assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from future results expressed or implied by these forward-looking statements. Many of these factors are beyond our ability to control or predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable, actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed in “Risk Factors” and elsewhere in this prospectus. Accordingly, you should not place undue reliance on any forward-looking statements.

You should read this prospectus and the documents that we reference in this prospectus and the exhibits to the registration statement on Form F-1, of which this prospectus forms a part, that we have filed with the SEC completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. All forward-looking statements speak as of the date of this prospectus and, unless we are required to do so under U.S. federal securities laws or other applicable laws, we do not intend to update or revise any such forward-looking statements.

 

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USE OF PROCEEDS

We estimate that the net proceeds from this offering will be approximately $         (or $         if the underwriters exercise their option to purchase additional shares in full), at an assumed public offering price of $         per common share, the midpoint of the range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering to expand and improve our manufacturing processes, for research, development and commercialization activities in LED and other emerging technologies, for debt reduction, and for working capital and other general corporate purposes. The debt reduction would result from repayment of certain short-term indebtedness, which was incurred by our China subsidiaries to expand capacity and for general working capital purposes, in the amount of $                , as well as repayment of a portion of TCP US’s credit facility, which was incurred for general working capital purposes, in the amount of $                . The weighted average interest rate on China short-term indebtedness during 2011 was 6.2%. At December 31, 2011, TCP US’s credit facility had interest rates of 2.8% for LIBOR rate loans and 4.8% for prime rate loans. Effective January 1, 2012, the interest rates for TCP US’s credit facility increased to LIBOR plus 3.0% for LIBOR rate loans (previously LIBOR plus 2.5%) and the bank’s prime rate plus 2.0% for prime rate loans (previously the bank’s prime rate plus 1.5%). TCP US’s credit facility matures on December 11, 2013.

We also may use a portion of the net proceeds to fund possible investments in, or acquisitions of, complementary businesses, products or technologies. We have no current agreements or commitments with respect to any investment or acquisition, and we are not currently engaged in negotiations with respect to any investment or acquisition.

Each $1.00 increase or decrease in the assumed public offering price of $         per common share would increase or decrease, as applicable, the net proceeds to us by approximately $        , assuming the number of common shares offered by us as set forth on the cover of this prospectus remains the same and after deducting estimated underwriting discounts and commissions payable by us.

 

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DIVIDEND POLICY

We currently do not intend to pay cash dividends in the foreseeable future, subject to the discretion of our board of directors. We currently intend to reinvest any future earnings in developing and expanding our business.

Our ability to distribute dividends also may be limited by future contractual obligations and by Swiss law, which permits the distribution of dividends only out of net profit after establishment of reserves. Any payment of dividends must be approved at our annual shareholders’ meeting. See “Description of Share Capital—Dividends and Other Distributions.” In addition, the payment of dividends may be subject to Swiss withholding taxes. See “Taxation—Swiss Taxation—Swiss Withholding Tax on Dividends and Similar Distributions.”

Under TCP US’s credit facility, TCP US is prohibited from paying dividends to TCP without the consent of TCP US’s lender.

Under Bermuda law, there are restrictions on dividends that can be paid by TCP Bermuda Limited, a wholly-owned subsidiary of TCP, to TCP. Bermuda law prohibits a Bermuda company from declaring and paying a dividend or distribution out of contributed surplus if there are reasonable grounds for believing that (i) the company is, or would after the payment be, unable to pay its liabilities as they become due, or (ii) the realizable value of the company’s assets would thereby be less than its liabilities.

Under Chinese law, in order for any of our Chinese subsidiaries to pay dividends to TCP, the Chinese subsidiary must have fully funded its statutory reserve. Each of our Chinese subsidiaries is required to contribute at least 10% of its after tax profit to fund statutory reserves until the accumulated amount of such reserve is equal to 50% of its registered capital. Through the date of this prospectus, our Chinese subsidiaries have funded the statutory reserves in compliance with Chinese regulations.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of December 31, 2011 on:

 

  n  

an actual basis; and

 

  n  

an as adjusted basis to reflect the issuance of              common shares in this offering at an assumed initial public offering price of $         per share, the midpoint of the range set forth on the cover of this prospectus.

You should read this table in conjunction with our consolidated financial statements and related notes and “Selected Historical Consolidated Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

There has been no material change in our capitalization between December 31, 2011 and the date of this prospectus.

 

 

 

     AS OF DECEMBER 31, 2011  
     ACTUAL     AS ADJUSTED1  
    

(In thousands,

except per share data)

 

Cash and cash equivalents

   $ 26,456      $                
  

 

 

   

 

 

 

Debt:

    

Short-term borrowings 2

   $ 35,394      $     

Unsecured short-term borrowings 3

     34,073     

Long-term debt, including current portion

     6,737     
  

 

 

   

 

 

 

Total debt

     76,204     
  

 

 

   

 

 

 

Equity:

    

Common stock, CHF 0.10 par value: 205,534 shares authorized, issued and outstanding, actual;              shares authorized and              shares issued and outstanding, as adjusted

     21,988     

Additional paid-in capital

     1,233     

Shareholder loan receivable

     (8,354  

Accumulated other comprehensive income

     12,807     

Retained earnings

     34,375     
  

 

 

   

 

 

 

Total shareholders’ equity

     62,049     

Noncontrolling interests

     (912  
  

 

 

   

 

 

 

Total equity

     61,137     
  

 

 

   

 

 

 

Total capitalization

   $ 137,341      $     
  

 

 

   

 

 

 

 

 

 

1 

Each $1.00 increase or decrease in the assumed public offering price of $         per common share would increase or decrease, as applicable, the As Adjusted amount of each of additional paid-in capital, total shareholders’ equity and total capitalization by approximately $        , assuming the number of common shares offered by us as set forth on the cover of this prospectus remains the same and after deducting estimated underwriting discounts and commissions payable by us.

2 

Short-term borrowings include TCP US’s borrowings under its revolving line of credit agreement and TCP Asia’s short-term notes with various Chinese financial institutions. Borrowings under the revolving line of credit agreement are limited based on certain percentages of eligible accounts receivable and inventory and are collateralized by substantially all of TCP US’s assets. Borrowings under the short-term notes are collateralized by $9.4 million of accounts receivable as of December 31, 2011.

3 

Unsecured-short term borrowings include TCP Asia’s uncollateralized short-term notes with various Chinese financial institutions. Borrowings under the notes are cross-guaranteed by various TCP Asia operating entities.

 

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DILUTION

Purchasers of our common shares in this offering will suffer an immediate dilution in net tangible book value per share to the extent of the difference between the initial public offering price per share and the net tangible book value per share immediately after this offering. Net tangible book value per common share represents the amount of our total tangible assets less our total liabilities, divided by the number of common shares outstanding prior to the sale of common shares in this offering. Our net tangible book value as of December 31, 2011, before giving effect to the sale of common shares in this offering was $         per common share.

After giving effect to the sale of              common shares in this offering at an assumed initial public offering price of $         per common share, the midpoint of the range set forth on the cover of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our adjusted net tangible book value would have been $        , or $         per common share. This represents an immediate increase in net tangible book value of $         per common share to existing shareholders and an immediate dilution of $         per common share to new investors in this offering. The following table illustrates this per share dilution:

 

 

 

Public offering price per common share

      $            

Historical net tangible book value per common share as of December 31, 2011

   $               

Increase in net tangible book value per common share attributable to this offering

   $               
  

 

 

    

Adjusted net tangible book value per common share after giving effect to this offering

      $            
     

 

 

 

Dilution per common share to investors in this offering

      $            
     

 

 

 

 

 

If the underwriters were to exercise their over-allotment option in full in this offering, our adjusted net tangible book value per share attributable to this offering will be $        , representing an immediate increase in net tangible book value per share attributable to this offering of $         per share to our existing investors and an immediate dilution per share to new investors in this offering of $         per common share.

The following table summarizes the differences as of December 31, 2011 between our existing shareholders and the new investors with respect to the number of common shares purchased from us, the total consideration paid and the average price per common share paid. The total number of our common shares does not include common shares issuable pursuant to the exercise of the over-allotment option granted to the underwriters.

 

 

 

     COMMON SHARES PURCHASED    TOTAL CONSIDERATION    AVERAGE PRICE PER
COMMON SHARE
 
     NUMBER    PERCENT    AMOUNT    PERCENT   

Existing shareholders

               $            

New investors

               $            
  

 

  

 

  

 

  

 

  

Total

               $            
  

 

  

 

  

 

  

 

  

 

 

If the underwriters exercise their over-allotment option in full, our existing shareholders would own approximately % and our new investors would own approximately % of the total number of our common shares outstanding after this offering.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following table sets forth our selected historical consolidated data as of the dates and for the periods indicated. The selected consolidated financial data as of December 31, 2010 and 2011 and for each of the three years in the period ended December 31, 2011 were derived from our audited consolidated financial statements and related notes thereto included elsewhere in this prospectus. The selected consolidated financial data as of December 31, 2009 and for the year ended December 31, 2008 were derived from our audited consolidated financial statements and related notes thereto not included in this prospectus. The selected consolidated financial data as of December 31, 2007 and 2008 and for the year ended December 31, 2007 were derived from our unaudited consolidated financial statements and related notes thereto not included in this prospectus.

Our historical results are not necessarily indicative of results to be expected in any future periods. You should read this information together with “Use of Proceeds,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and related notes included elsewhere in this prospectus.

 

 

 

    YEAR ENDED DECEMBER 31,  
    2007     2008     2009     2010     2011  
    (In thousands, except per share data)  

Statement of Income Data:

         

Net sales

  $ 379,927      $ 319,126      $ 257,670      $ 287,243      $ 280,928  

Cost of goods sold

    317,202        275,701        205,253        216,929        215,580   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    62,725        43,425        52,417        70,314        65,348   

Selling, general and administrative expenses

    39,269        43,357        33,805        42,222        46,010   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    23,456        68        18,612        28,092        19,338   

Interest expense

    (5,157     (6,142     (4,415     (3,660     (4,097

Interest income

    392        384        574        298        322   

Currency exchange losses

    (2,765     (5,686     (291     (3,371     (4,347
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    15,926        (11,376     14,480        21,359        11,216   

Income tax expense from continuing operations 1

    (1,210     (2,008     (1,024     (4,671     (3,980
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    14,716        (13,384     13,456        16,688        7,236   

Net loss from discontinued operations 2

                  (289     (330     (249
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    14,716        (13,384     13,167        16,358        6,987   

Less net (income) loss attributable to noncontrolling interests 3

    1,669        1,395        (44     1,151        (3,281
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to TCP shareholders

  $ 16,385      $ (11,989   $ 13,123      $ 17,509      $ 3,706   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to TCP shareholders, basic and diluted

  $ 0.08      $ (0.06   $ 0.06      $ 0.09      $ 0.02   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of shares outstanding, basic and diluted

    204,534        204,534        204,534        204,784        205,534   

Dividends per share

  $ 0.00      $ 0.01      $ 0.01      $ 0.00      $ 0.01   

Other Financial Data:

         

Adjusted EBITDA 4

  $ 19,627     $ (544   $ 22,563      $ 29,897     $ 21,816  

 

 

 

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     AS OF DECEMBER 31,  
     2007      2008     2009     2010      2011  
     (In thousands)  

Balance Sheet Data:

            

Cash and cash equivalents

   $ 24,368       $ 23,910      $ 24,162      $ 39,590       $ 26,456   

Working capital 5

     10,418         (43,039     (36,428     2,084         766   

Total assets

     253,858         205,337        196,489        225,180         248,568   

Total short-term loans and long-term debt

     98,463         83,183        67,586        62,227         76,204   

Total liabilities

     220,527         188,706        171,308        158,796         187,431   

Total equity

     33,331         16,631        25,181        66,384         61,137   

 

 

1 

Through December 30, 2010, TCP US was treated as an S corporation under the Internal Revenue Code. Accordingly, in lieu of corporate federal and certain state income taxes, the shareholders of TCP US were taxed individually on their share of TCP US’s taxable income. Effective December 30, 2010, TCP US’s Subchapter S election was terminated as a result of TCP US being contributed to a foreign entity. From December 31, 2010 forward, TCP US is taxed under the Subchapter C provisions of the Internal Revenue Code.

2 

In August 2011, we sold the stock of one of our Chinese subsidiaries to an entity owned and controlled by our majority shareholders. We will have no continuing activity with this entity and accordingly it has been reflected as discontinued operations in the accompanying consolidated financial statements.

3 

We consolidate certain variable interest entities, or VIEs, for which we are deemed to be the primary beneficiary. As we do not have an equity ownership in these VIEs, it presents 100% of the net income or loss of the VIEs as “Net income/loss attributable to noncontrolling interests” in the consolidated statements of income. All intercompany transactions between TCP and its subsidiaries and VIEs have been eliminated in consolidation.

4 

We present the non-GAAP financial measure “Adjusted EBITDA” as a supplemental measure of our performance. This non-GAAP financial measure is not a measure of financial performance or liquidity calculated in accordance with accounting principles generally accepted in the United States, referred to herein as U.S. GAAP, and should be viewed as a supplement to, not a substitute for, our results of operations and balance sheet information presented on the basis of U.S. GAAP. Reconciliation of this non-GAAP financial measure to the most directly comparable U.S. GAAP measure is detailed below.

 

   We define Adjusted EBITDA as net income (loss) before interest expense, taxes, depreciation and amortization, discontinued operations, royalty, reorganization and offering related expenses and rental activities by TCP Campus, one of our VIEs. Adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies. Adjusted EBITDA may exclude certain financial information that some may consider important in evaluating our financial performance. Adjusted EBITDA may not be indicative of historical operating results, and we do not intend for it to be predictive of future results of operations. We believe the use of Adjusted EBITDA as a metric assists our board, management and investors in comparing our operating performance on a consistent basis because it removes the impact of our capital structure (such as interest expense), asset base (such as depreciation and amortization) and tax structure, as well as certain items that affect inter-period comparability.

 

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   The following table presents a reconciliation of Adjusted EBITDA to net income (loss), which is the most directly comparable U.S. GAAP measure, for the periods presented.

 

 

 

     YEAR ENDED DECEMBER 31,  
     2007     2008     2009     2010     2011  
     (In thousands)  

Net income (loss) attributable to TCP shareholders

   $ 16,385      $ (11,989   $ 13,123      $ 17,509      $ 3,706  

Plus net income (loss) attributable to noncontrolling interests:

          

TCP Asia VIEs net income (loss)

     (1,836     (1,489     (72     1,061        2,614   

TCP Campus net income

     167        94        116        129        114   

TCP Europe net income (loss)

                          (2,341     696   

TCP South America net loss

                                 (143
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     14,716        (13,384     13,167        16,358        6,987   

Adjustments:

          

Interest expense, net

     4,765        5,758        3,841        3,362        3,775   

Income tax expense

     1,210        2,008        1,024        4,671        3,980   

Depreciation and amortization

     2,924        5,461        5,400        4,911        6,207   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     23,615        (157     23,432        29,302        20,949   

Adjustments:

          

TCP Campus EBITDA a

     (610     (808     (824     (830     (820

Discontinued operations EBITDA 2

            421        (45     109        34   

Royalties b

     (3,378                            

Corporate reorganization charges c

                          1,316          

Costs related to initial public offering d

                                 1,653   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 19,627      $ (544   $ 22,563      $ 29,897      $ 21,816   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

  a

TCP leases its U.S. headquarters and warehouse facility from TCP Campus. TCP Campus is owned and controlled by the Chief Executive Officer and majority shareholder of TCP and is consolidated within our statements of income as a VIE. We do not consider TCP Campus’s business to be part of our core operations.

  b 

Represents the reversal of an accrual for royalties recognized as an expense in 2006 under a license agreement with the patent holder of certain CFL technology. We are disputing the validity of this agreement, as further described in “Business—Legal Proceedings.”

  c 

Represents legal, accounting and professional fees related to the establishment of TCP on October 6, 2010 and subsequent corporate reorganization, as detailed in Note 1 to our audited consolidated financial statements included elsewhere in this prospectus.

  d 

Represents legal, accounting and professional fees incurred in connection with this offering.

 

5 

Total current assets minus total current liabilities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with “Selected Historical Consolidated Financial Data” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and opinions, all of which involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences or cause our actual results or the timing of selected events to differ materially from those anticipated in these forward-looking statements include those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a leading producer and provider of energy efficient light bulbs, including CFLs, LEDs and halogen bulbs that address a majority of socket based lighting applications. We also offer a comprehensive line of complementary lighting products, including linear fluorescent bulbs and fixtures, exit and emergency lighting, CFL fixtures and ballasts. With more than 3,500 CFL SKUs, we believe that we have one of the largest and most technologically advanced CFL product lines in the world. We also sell a product line of more than 275 LED SKUs, including our PAR38 and PAR30 series LED bulbs which were top ranked by a recent study performed by the Institute for Electric Efficiency. Additionally, we offer 12 halogen SKUs that, along with our LEDs, address a majority of socket-based lighting applications.

We currently sell our products primarily in North America through retailers, including The Home Depot, and C&I distributors. Based on data from NEMA, we had a 31.0% market share of CFL bulb sales in 2011. According to Freedonia, we had a 4.0% market share of all light bulbs sold in North America in 2010. In addition, we have built a significant sales, marketing and distribution infrastructure in Asia since 2004 (particularly China, which accounted for 10.0% of our net sales in 2011), established sales, marketing and distribution operations in the Netherlands and the United Kingdom in 2010 to expand our sales in Europe, and commenced sales, marketing and distribution operations in South America in 2011 with an initial focus on Brazil.

We manufacture and test our products in four factories located in China. We utilize a vertically integrated, efficient and highly automated process to manufacture our CFL products. For our LED bulbs, we develop our own design specifications and source components from world class suppliers, which we assemble and test in-house. We currently rely on third parties for the production of our halogen bulbs; but we expect to bring the manufacture of these products in-house in the near-term.

Since our inception, we have focused on product innovation in order to continue developing our technology and increase our market share. We currently employ approximately 50 engineers and technicians and operate two research and development facilities, with a total of seven laboratories, located in China, and Aurora, Ohio.

For the years ended December 31, 2009, 2010 and 2011, our net sales were $257.7 million, $287.2 million and $280.9 million, respectively. Our net income during the same periods was $13.2 million, $16.4 million and $7.0 million, respectively, and our Adjusted EBITDA was $22.6 million, $29.9 million and $21.8 million, respectively.

Key Factors Affecting Our Results of Operations

Our results of operations have been, and we expect will continue to be, affected by the following key factors:

Rate and extent of adoption of energy efficient lighting products. The rate and extent of adoption of energy efficient lighting products, particularly CFL and LED bulbs, will depend upon, among other things, end users’ desire to install energy efficient products and their ability to pay higher up front costs for CFL and LED bulbs compared to conventional incandescent bulbs. Innovations and advancements in CFL and LED bulb manufacturing technology that reduce up front costs and improve performance will reduce the operating cost of the bulbs, further enhancing the value proposition of such lighting products compared to conventional incandescent bulbs. Subsidy and incentive programs instituted by governments, including the Chinese government, and U.S. utilities, including Pacific Gas & Electric Company in California, also encourage end users to adopt energy efficient lighting technology, further driving the sale of CFL and LED bulbs.

 

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Effectiveness of legislation prohibiting the sale of inefficient bulb technologies. As part of the global movement toward energy efficient technology, many governments, most importantly in the United States, Canada, the European Union, China and Brazil, have adopted legislation, regulations and programs to restrict or entirely ban the use of inefficient light bulbs. Such legislation typically has the effect of banning the manufacture and importation of certain wattages of conventional incandescent bulbs on a graduated schedule. For instance, effective January 2012, EISA began to phase out the sale of 100W+ conventional incandescent bulbs in the United States, which accounts for about 22.0% of the U.S. conventional incandescent bulb market. Beginning in January 2013, 75W+ conventional incandescent bulbs will be phased out, accounting for a cumulative total of 41.0% of the U.S. conventional incandescent bulb market. Then, after the phase out of the sale of 40W+ conventional incandescent bulbs in January 2014, EISA will effectively eliminate 99.0% of the U.S. conventional incandescent bulb market. Similarly, in October 2011 China officially announced its phase-out schedule for incandescent light bulbs, banning the sale of 100W+ bulbs by October 2012, 60W+ bulbs by October 2014 and 15W+ bulbs by October 2016. CFL, LED and halogen bulbs, all of which meet or exceed the efficiency standards required by these new legislations, stand to benefit as substitute products to incandescent bulbs. Adoption of additional legislative initiatives across the globe could foster further growth of the energy efficient lighting industry, while delays to the implementation of, or changes to, existing legislation could hinder such growth.

Effectiveness of our strategy to expand our sales into global markets. We seek to expand our business in key regions, including Asia, Europe, and South America, where we have established sales, marketing and distribution operations. The expansion of our business has required significant expenditures and we expect to require further investments in personnel, increasing our payroll and benefits costs, and in office and warehouse space, increasing our rental costs. To the extent that we are successful in expanding our sales volumes outside of North America, we would expect to see our net sales and operating profit increase at a growing rate, as our initial investment in marketing infrastructure is amortized across a more significant level of sales in each region. In addition, we would expect an increase in the number of currencies in which we receive payment, the effect of which would be to diversify our currency exposure away from the U.S. dollar. However, depending on the relative strengths of such currencies against the Chinese renminbi, we could also face incremental disparity between the currencies that we receive upon sales of our products and the currency in which we incur the majority of our costs of production.

Effectiveness of our strategy to expand our C&I sales channel. The retail sales channel is generally a stock and flow model, where retailers purchase large volumes of products for inventory and distribution throughout their stores. The stock and flow model is advantageous to us as the order volumes and regularity allow us to better plan our manufacturing capacities and maintain our production efficiencies. The C&I sales channel, on the other hand, has been more project focused for us, with customers purchasing smaller volumes of specialized and differentiated lighting products for specific installations and retrofits. In an effort to gain additional market share, we seek to expand our product offerings to our C&I customers to shift our C&I sales to more of a stock and flow model, which we anticipate will allow us to develop a more consistent and localized presence with our distributors, and build closer relationships with end users, enabling us to expand sales within our C&I channel. Because of the difference in buying volumes and product differentiation and specialization between the retail and C&I channels, we generally obtain higher average selling prices, or ASPs, for comparable products in our C&I sales channel, and we expect this to continue as we implement our strategy.

Ability to maintain and grow key customer relationships within our retail sales channel. The retail sales channel is dominated by a few key D-I-Ys, mass retailers and big box retailers. We have established business relationships with several of these key retailers and have a particularly strong relationship with The Home Depot. We are focused on expanding our relationship with other key players in the retail sales channel and deemphasizing OEM and OLM customer sales. We are actively engaged in maintaining and expanding our sales and key relationships with these key retailers through customized product offerings and superior customer service and flexibility.

Impact of internal buying practices and sales programs by our retail customers. Purchases by our retail customers are driven by the particular company’s internal buying practices and sales programs and do not necessarily follow seasonal buying patterns, which may result in fluctuations in our period to period net sales. Historically, we have experienced lower sales to our D-I-Ys, mass retailers and big box retailers in the first calendar quarter, and a further decline in the second calendar quarter of the year, with a subsequent pickup in sales in the third and fourth quarters. We do not believe these buying patterns are seasonal in nature, as different retail customers purchase

 

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lighting products on different schedules that do not necessarily overlap with buying patterns for their end customers. An additional factor impacting our quarterly and annual net sales trends are utility and government efficiency incentives and programs, for which we have no control over the timing or extent of the programs. However, seasonal factors and historical patterns should not be considered a reliable indicator of our future sales activity or performance. In the future, the effects of seasonality and economic cyclicality may also be impacted by our expansion into international markets, including Europe and South America.

Increased competition in the global lighting industry. We are experiencing increased competition in the global lighting industry resulting from greater global demand for energy efficient lighting technology. For instance, there are a number of new entrants into the LED bulb market, as well as a number of larger companies in related industries entering the markets. The increased competition has and may continue to result in competitive pricing pressures for all energy efficient lighting products.

Continued focus on manufacturing operating efficiencies and our ability to pass through raw material price increases. Competitive pricing pressures and increased raw material costs have had a negative impact on our product margins. To combat this margin contraction we continue to invest in automated manufacturing processes in order to increase our manufacturing capabilities while decreasing our manufacturing costs, principally through improved yield rates, lower material use and decreased labor costs. In June 2011, after several months of significant phosphor price increases, we were one of the first CFL providers in the industry to announce a phosphor price adjustment in an effort to recover a portion of our increased raw material costs. While we cannot quantify the impact this had on our business, we believe that our sales volumes were impacted during the second and third quarters of 2011 as we implemented the phosphor price adjustments in accordance with our customer pricing agreements. Accordingly, some of our customers chose to build inventory, accelerating purchases in advance of the price increases, while others chose to deplete inventory, delaying their purchases. We expect to continue to seek to recover the majority of the increased costs that we may incur in the future as a result of phosphors price spikes.

Impact of technological innovation. The energy efficient lighting industry contains a number of established and emerging technologies, which have displaced, and we expect to continue to displace, the market share of conventional incandescent bulbs. As the industry evolves, we expect innovations will continue to shape the competitive landscape of the global lighting industry. In order to maintain our position as a leading producer and provider of energy efficient light bulbs, we will need to continue to invest in our research and product development capabilities, pursue additional intellectual property rights and protect and enforce our existing proprietary technologies.

Impact of our changing product mix. For the last several years CFL bulb sales have represented the majority of our overall sales mix, comprising 90.6%, 88.2% and 82.6% of our 2009, 2010 and 2011 net sales, respectively. While we expect CFL bulbs to continue to represent the majority of our product sales in the foreseeable future, we are expanding our product offering, particularly with new LED and halogen bulb products, which we expect to constitute a growing portion of our net sales in the future. These products have different ASPs and margin profiles than our CFL products, and as our product mix shifts, such differences will impact our net sales and gross margins. LED products in general command higher ASPs and we believe will continue to result in higher gross margins than CFLs. Halogen bulbs generally have lower ASPs but we believe will result in higher gross margins than CFLs. As these new technologies continue to mature, we expect over the long-term that prices will continue to decline. However, we believe that by controlling our manufacturing processes, we will be able to drive cost-saving innovations throughout our manufacturing processes as well as technological improvements to our products, which we believe will allow us to control costs while at the same time providing high quality products with superior functionality, enabling us to secure premium pricing to our competitors.

General economic conditions in our end markets. Sales of energy efficient light bulbs are dependent on general economic conditions. A slower economy generally leads to reduced energy consumption, resulting in the sale of fewer light bulbs, as well as a slower rate of new construction, resulting in the installation of fewer new sockets (which generally tend to be outfitted for energy efficient lighting technology). In addition, during periods of economic downturns, price conscious consumers may choose to purchase lower priced, though inefficient, conventional incandescent bulbs instead of higher priced energy efficient CFL, LED or halogen light bulbs. The recession in North America and Europe that began in 2008 decreased the demand for energy efficient lighting products overall, as

 

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some customers delayed or elected to forego energy efficient lighting purchases or projects. Considering the size of the Chinese market and our relatively small market share in the region, we expect to have the opportunity to significantly increase our sales to China. However, a decline in the Chinese economy, including the Chinese construction market, could hinder our efforts to expand our sales in China.

Components of Results of Operations

Net sales. Our net sales are generated through the sale of high-quality, energy efficient light bulbs, including CFLs, LED and halogen bulbs, and other complementary lighting products. CFLs represent the largest portion of our business, accounting for 90.6%, 88.2% and 82.6% of our net sales in 2009, 2010 and 2011, respectively. The ASP for a 60W CFL bulb ranges between $1.00 and $6.25, compared to an ASP for a comparable halogen bulb between $1.00 and $1.75 and for a comparable LED bulb between $24.00 and $50.00. Accordingly, changes in product mix will have an impact on our overall net sales.

We sell principally through two channels: retail, including OEMs and OLMs, and C&I. Through these channels, we sell our products in a wide range of industries and geographies. While sales to certain industries, such as residential and commercial construction, may have a greater impact on our sales for a particular period, demand for our products is largely driven by the level of overall economic activity rather than by conditions particular to an industry or geographic region. Sales through the retail channel represent the largest portion of our business, accounting for 71.2%, 73.2% and 63.5% of our net sales in 2009, 2010 and 2011, respectively.

Through a strong focus on customer service, we believe we have differentiated ourselves in the market and, combined with our distribution capabilities, have established a strong reputation within the retail and C&I markets. Leveraging these relationships and our reputation has allowed us to shift our sales focus directly to the mass merchandise and C&I customers rather than OEMs and OLMs. We believe that this strategic shift in focus, working directly with the key decision makers in the retail and C&I channels, will allow us to expand our future sales.

The following table shows our net sales by the region in which our products are sold to the end user since 2009:

 

 

 

     YEAR ENDED DECEMBER 31,  
     2009      2010      2011  
     (In thousands)  
     Amount        As a %
of Total
     Amount        As a %
of Total
     Amount      As a %
of Total
 

North America

   $ 233,844           90.8    $ 246,958           86.0    $ 239,310         85.2

Asia

     23,826           9.2      38,358           13.3      28,145         10.0

Europe

                       1,927           0.7      13,256         4.7

South America

                                         217         0.1
  

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

 

 

 

Net Sales

   $ 257,670           100.0    $ 287,243           100.0    $ 280,928         100.0
  

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

 

 

 

 

 

Our policy is to recognize revenue when products are shipped or, for certain customers, when products are received by the customer’s shipping agent, at which time title transfers to the customer. For those customers shipped free on board, or FOB, destination, sales are recognized when products are accepted by the customer. All sales are final upon shipment of product to the customer, other than for normal warranty provisions. Sales are recorded net of estimated reductions for returns, which historically have represented an insignificant portion of our gross sales, customer programs and incentive offerings, including promotions and other volume based incentives. The majority of our customer programs and incentive programs are annual rebates to our large North American C&I customers. For the years ended December 31, 2009, 2010, and 2011, rebates totaled $1.9 million, $1.8 million and $3.4 million, respectively. The incentive programs are typically based on calendar year sales volumes and are paid in the first quarter of the subsequent calendar year.

Cost of goods sold and gross profit. Substantially all of our products are manufactured in our four production facilities in China. Cost of goods sold includes the actual costs incurred in the manufacturing of our products, including factory labor, raw materials and components, depreciation, freight and duty, warehouse labor and overhead

 

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charges, product testing, packaging material and outbound freight. The primary factors that drive our cost of goods sold are the cost of raw materials and components, our direct cost of labor and the capacity at which we operate our manufacturing facilities. Direct labor costs consist of salary, wages, bonus and employee benefit and other costs related to our employees engaged in the manufacture and distribution of our products.

We are not committed to, and do not favor, a single source for any of our raw materials and supply needs. We have more than 200 raw material suppliers, of which we consider 56 to be our primary suppliers, ensuring supply redundancy for substantially all of our key raw materials and components. Rare earth metals, principally phosphors, are a critical raw material input in the manufacture of fluorescent lighting. The cost of these rare earth metals has recently fluctuated significantly based on supply and demand. We currently purchase these metals on the spot market and do not have any long term purchase contracts or engage in any hedging activities. To offset the increase in rare earth metal costs, we have implemented phosphor price adjustments to our customers. Cost of goods sold, however will be impacted for the time lag between the increase in costs and the implementation of the price adjustments to our customers.

Our gross margins fluctuate based on channel and product mix. Our C&I customers generally require a much broader product offering and purchase in much smaller volumes than do our retail customers. Accordingly, we are able to obtain higher ASPs, resulting in higher gross margins, for comparable lighting products sold in our C&I channel compared to our retail channel. We are actively engaged in expanding our C&I channel, which accounted for 28.8%, 26.8% and 36.5% of our net sales in 2009, 2010 and 2011, respectively. From a product line perspective, our CFL sales accounted for 90.6%, 88.2% and 82.6% of our net sales in 2009, 2010 and 2011, respectively. The expansion of our product mix to include increased halogen and LED product sales will positively affect our gross margin, as those products generally have higher gross margins than CFLs.

Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of costs related to our sales and advertising activities, our research and development, administrative, legal and finance functions and other corporate expenses.

Sales and advertising expenses primarily include sales related payroll and personnel costs, sales commissions, travel, advertising programs and related overhead expenses. Sales and advertising expenses are affected by whether we use external sales representatives or our internal sales employees. During the latter half of 2010, we implemented our strategy to expand our C&I sales channel by replacing underperforming external sales representatives with our internal sales employees, resulting in increased payroll, benefits and travel and entertainment expenses. This change has allowed us to more closely control and focus the identification and development of our existing customer base and potential sales opportunities, resulting in period over period increases in our C&I sales.

Administrative expenses consist primarily of salary and benefit costs for executive, research and development and administrative employees, the use and maintenance of administrative offices (including depreciation expense), information systems and legal and accounting services. Our research and development costs are expensed as incurred and include the costs of personnel, materials, facilities and overhead costs related to the development of new efficient lighting technologies and the enhancement of our existing product lines. We expect our research and development costs to increase, principally through increased employee headcount and related expenses, as we continue to expand our product lines and research activities.

We expect our overall selling, general and administrative expenses to increase as we continue global expansion of our sales and marketing activities and manufacturing capabilities. In addition, we will incur a higher level of administrative costs as we increase our administrative, legal and accounting staff and incur additional outside professional costs in order to meet our public company reporting and corporate governance requirements subsequent to this offering.

Other income (expenses). Other income (expenses) is comprised of interest expense on our outstanding indebtedness, interest income and currency exchange gains (losses).

Interest expense consists primarily of interest on indebtedness under our credit facilities, notes payable and short-term bank loans. Interest income represents earnings on our short-term investments of cash and cash equivalents, including restricted cash.

 

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Currency exchange gains (losses) result from fluctuations in exchange rates for monetary assets and liabilities that are denominated in a currency other than the local currency in the region in which a transaction occurs. Currency exchange gains (losses) arise from the monthly revaluation of these assets (accounts receivable) and liabilities (accounts payable) from the date acquired or incurred through the final settlement date. Substantially all of our currency exchange losses are related to the settlement of TCP US’s inventory purchases from TCP Asia, which are denominated in U.S. dollars. As a result, fluctuations in exchange rates between the U.S. dollar and Chinese renminbi will result in the recognition of currency exchange gains or losses, depending on the movement of foreign exchange rates from the date of inventory purchase to the settlement date. Settlement dates are based on negotiated payment terms and range from 45 to 90 days.

Income tax expense. We are subject to income tax in a number of jurisdictions or countries in which we conduct business, including China, the United States, Canada, the Netherlands, Brazil, the United Kingdom, Hong Kong and Switzerland. Through December 30, 2010, TCP US was treated as an S corporation under the U.S. Internal Revenue Code of 1986, as amended, or the Code. Accordingly, in lieu of TCP paying U.S. federal and certain state income taxes, the shareholders of TCP US incurred pass through taxation on their share of TCP US’s taxable income. On December 30, 2010, all interests in TCP US were contributed to TCP in a non-cash transaction. Effective with this contribution, TCP US’s Subchapter S election was terminated as a result of its ownership by a foreign entity. Therefore, from this date forward TCP US became subject to taxes under Subchapter C of the Code. On December 30, 2010, we recognized a deferred tax asset of $1.6 million for the differences between the amounts reported for financial reporting and tax purposes related to termination of TCP US’s Subchapter S election.

Results of Operations

Comparison of the Years Ended December 31, 2010 and 2011

 

 

 

     YEAR ENDED DECEMBER 31,  
     2010     2011              
     (In thousands)              
     AMOUNT     AS A % OF
NET SALES
    AMOUNT     AS A % OF
NET SALES
    PERIOD-TO-PERIOD CHANGE  

Net sales

   $ 287,243        100.0   $ 280,928        100.0   $ (6,315     (2.2 )% 

Cost of goods sold

     216,929        75.5     215,580        76.7     (1,349     (0.6 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Gross profit

     70,314        24.5     65,348        23.3     (4,966     (7.1 )% 

Selling, general and administrative expenses

     42,222        14.7     46,010        16.4     3,788        9.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Operating income

     28,092        9.8     19,338        6.9     (8,754     (31.2 )% 

Other income (expenses)

            

Interest expense

     (3,660     (1.3 )%      (4,097     (1.5 )%      (437     (11.9 )% 

Interest income

     298        0.1     322        0.1     24        8.0

Currency exchange losses

     (3,371     (1.2 )%      (4,347     (1.5 )%      (976     (29.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Income from continuing operations before income taxes

     21,359        7.4     11,216        4.0     (10,143     (47.5 )% 

Income tax expense from continuing operations

     (4,671     (1.6 )%      (3,980     (1.4 )%      691        14.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net income from continuing operations

     16,688        5.8     7,236        2.6     (9,452     (56.6 )% 

Net loss from discontinued operations

     (330     (0.1 )%      (249     (0.1 )%      81        24.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net income

   $ 16,358        5.7   $ 6,987        2.5   $ (9,371     (57.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

Net sales. Net sales for the year ended December 31, 2011 were $280.9 million compared to $287.2 million for the same period in 2010, a decrease of $6.3 million, or 2.2%.

 

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In 2011, net sales in North America decreased by $7.6 million compared to 2010. During 2011, we experienced a year-over-year increase of $25.7 million, or 33.2%, within our C&I channel as a direct result of our increased sales efforts in this channel. As a result of our strategy to diversify our retail customer base, we experienced a reduction in revenues of $12.7 million in this channel primarily due to the reduction in sales to our largest retail customer, partially offset by the addition of new retail accounts. Further, the strategic decision to deemphasize our OLM customer base adversely impacted our revenue by $20.6 million during this period.

Net sales in 2011 in Asia decreased by $10.2 million compared to 2010. $5.1 million of the decrease in Asian sales resulted from our strategic decision to reduce our OEM sales. Lower overall CFL and glass tube sales of $4.4 million also contributed to the decrease.

In 2011, net sales in Europe increased $11.3 million compared to 2010 principally due to $8.6 million of incremental net sales resulting from energy incentive programs instituted by the British government and our continued penetration into the European retail channel during 2011.

During 2011, we experienced unit sales volume increases of 289.8% and 54.1% in our LED and linear fluorescent product lines, respectively, compared to 2010. The increases in LED and linear fluorescent sales volumes were tempered by lower ASPs within both product lines. Overall, LED ASPs declined as we introduced products into the more price competitive retail channel, while linear fluorescent ASPs declined as product mix shifted more heavily to lower priced linear fluorescent bulbs versus higher priced linear fluorescent fixtures. Sales volumes within our CFL product line, which accounted for 96.3% and 93.8% of our total unit sales volumes for 2010 and 2011, respectively, decreased 5.5% year-over-year. The decrease in overall volume is attributable to the sales decline in our retail channel in 2011, partially offset by CFL volume growth in the C&I channel. Changes in both sales channel mix and product mix within our CFL product line resulted in 3.8% lower ASP for 2011 compared to 2010.

Cost of goods sold and gross profit. Cost of goods sold in 2011 was $215.6 million compared to $216.9 million in 2010. Gross profit as a percentage of net sales was 23.3% in 2011 compared to 24.5% in 2010. The decrease in gross profit reflects the increased costs of raw materials, principally phosphors. During 2011, the cost of phosphors increased from approximately ¥320 RMB/kg ($53/kg) at the beginning of the year to a high of approximately ¥2,400 RMB/kg ($413/kg) in July 2011 before settling at approximately ¥1,600 RMB/kg ($252/kg) as of December 31, 2011. The 2011 gross margin impact related to the increased cost of phosphors was partially mitigated by a reduction in labor costs, improved production yield rates and more efficient use of raw material inputs through automation of production processes.

Selling, general and administrative expenses. Selling, general and administrative expenses were $46.0 million in 2011 compared to $42.2 million in 2010. The continued expansion of our sales and marketing operations in Europe and South America, which began operations during the first quarters of 2010 and 2011, respectively, contributed to $1.9 million of the period-over-period increase. Increased sales within our C&I channel resulted in $0.6 million in higher sales representative commissions in 2011 compared to 2010. Additionally, our professional expenses increased by $0.8 million in 2011 compared to 2010, principally in connection with the increased legal, accounting and consulting fees associated with this offering.

Other income (expenses). Our interest expense increased $0.4 million in 2011 compared to 2010. The increase in interest expense was the result of higher average debt balances, which increased by $4.3 million in 2011 compared to 2010. The increase in average debt balances was primarily the result of increased inventory purchases of $24.7 million, in connection with our strategy to expand our LED and C&I sales channel and lower cash flows from operating activities, principally due to a decrease in net income of $9.4 million.

As a result of a weakening of the U.S. dollar versus the Chinese renminbi, currency exchange losses increased $0.9 million, totaling $4.3 million in 2011 compared to $3.4 million in 2010.

Income tax expense from continuing operations. Income tax expense from continuing operations for 2011 was $4.0 million compared to $4.7 million in 2010. For 2011, our effective income tax rate of 35.5% approximated the U.S. federal income tax rate as the favorable impacts of lower statutory foreign income tax rates and the utilization of net operating loss carryforwards, for which we had previously recorded a full valuation allowance, was offset by current year net operating losses for which no benefit was recorded. For 2010, the difference between the U.S. federal

 

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income tax rate of 35% and our effective income tax rate of 21.9% was principally due to the pass-through nature of the income attributable to TCP US’s S corporation status through December 30, 2010 and the recognition of a deferred tax asset resulting from the termination of its S corporation status effective as of December 30, 2010.

Comparison of the Years Ended December 31, 2009 and 2010

 

 

 

     YEAR ENDED DECEMBER 31,        
     2009     2010        
     (In thousands)              
     AMOUNT     AS A % OF
NET SALES
    AMOUNT     AS A % OF
NET SALES
    PERIOD-TO-PERIOD CHANGE  

Net sales

   $ 257,670        100.0   $ 287,243        100.0   $ 29,573        11.5

Cost of goods sold

     205,253        79.7     216,929        75.5     11,676        5.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Gross profit

     52,417        20.3     70,314        24.5     17,897        34.1

Selling, general and administrative expenses

     33,805        13.1     42,222        14.7     8,417        24.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Operating income

     18,612        7.2     28,092        9.8     9,480        50.9

Other income (expenses)

            

Interest expense

     (4,415     (1.7 )%      (3,660     (1.3 )%      755        17.1

Interest income

     574        0.2     298        0.1     (276     (48.1 )% 

Currency exchange losses

     (291     (0.1 )%      (3,371     (1.2 )%      (3,080     NM
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Income from continuing operations before income taxes

     14,480        5.6     21,359        7.4     6,879        47.5

Income tax expense from continuing operations

     (1,024     (0.4 )%      (4,671     (1.6 )%      (3,647     NM
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net income from continuing operations

     13,456        5.2     16,688        5.8     3,232        24.0

Net loss from discontinued operations

     (289     (0.1 )%      (330     (0.1 )%      (41     (14.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Net income

   $ 13,167        5.1   $ 16,358        5.7   $ 3,191        24.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

* not meaningful

Net sales. Net sales for 2010 were $287.2 million compared to $257.7 million in 2009, an increase of $29.6 million or 11.5%.

In North America, net sales increased by $13.1 million, representing a year-over-year increase of 5.6%. North American retail net sales increased by $10.0 million, principally as a result of increased net sales to The Home Depot of $11.5 million, partially offset by a $1.5 million decrease in other retail sales. Our strategic decision to expand our C&I sales channel resulted in a year-over-year increase in C&I net sales of $3.1 million. The year-over-year increases were principally driven by higher adoption rates of energy efficient lighting products by consumers and by government and electric utility subsidies aimed to promote energy conservation and efficiency.

Net sales for 2010 in Asia increased $14.5 million, representing an increase of 60.9% when compared to 2009. Through Chinese energy efficiency subsidy programs, we receive a rebate from the Chinese government after proof is presented that our energy efficient bulbs have been purchased at government-owned stores and installed by the customer. In order to promote energy efficiency, China provides subsidies to companies that win government contracts through a bidding process to sell their energy efficient bulbs. The subsidy programs can be administered by the central government or local government. We have participated in subsidy programs through various government authorities. Under these programs, the government authorities announce on their websites and through relevant documentation that the products to be sold by us are energy efficient products and will publish the type and the price of the products. We will then sell the products at a preferential price, after deducting the subsidies we

 

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would receive from the government authorities, to certain geographic areas. We ensure that the products meet the energy efficiency test and are certified as China energy efficient products. If we fail to abide by the terms of the subsidy program, we may not be eligible to participate in future subsidy programs and our subsidy for the current year may be reduced. We still participate in Chinese energy efficiency subsidy programs to promote our sales within China. The Chinese government subsidies resulted in $7.4 million of incremental net sales in 2010 compared to the prior period. A further expansion of our Asian retail channel, including increased OEM net sales, resulted in an additional $7.7 million in net sales during 2010 compared to 2009.

Our newly established European operations contributed $1.9 million in net sales during 2010, the first year of operations.

Our 2010 CFL product line unit sales volumes, which represented 96.3% of unit sales volumes in 2010 compared to 96.1% in 2009, increased 7.6%, and as a result of changes in sales channel mix, the period-over-period ASP for our CFL product line increased 1.1%. While the unit sales volumes of our LED and linear fluorescent product lines were comparable between 2010 and 2009, changes in product mix resulted in increases in ASP of 55.3% and 20.3% during 2010 and 2009, respectively.

Cost of goods sold and gross profit. Cost of goods sold in 2010 was $216.9 million compared to $205.3 million in 2009. Gross profit as a percentage of net sales improved from 20.3% in 2009 to 24.5% in 2010. The overall improvement in gross profit as a percentage of net sales in 2010 compared to 2009 is a direct result of the increased sales within our C&I sales channel, as discussed previously. Further contributing to the increase in gross margin was an improvement in customer mix within our retail sales channel with the reduction in OEM and OLM net sales in 2010 as compared to 2009. During the 2009 economic downturn, we opportunistically increased our sales to OEM customers. While these sales were made at generally lower ASPs, resulting in lower gross profit, they allowed us to more fully utilize our production capacity and maintain our operating efficiencies. These opportunistic sales did not recur during 2010, with the OEM sales being replaced with direct retail sales.

Selling, general and administrative expenses. Selling, general and administrative expenses were $42.2 million in 2010 compared to $33.8 million in 2009. Our corporate reorganization and the establishment of our European operations resulted in an increase of $1.3 million and $2.9 million, respectively. In 2010, we incurred additional selling, general and administrative expense of $0.8 million, principally the result of increased retail reset agreement fees charged by certain of our retail customers, compared to 2009. Further contributing to the increase in selling, general and administrative expenses was our global investment in overhead infrastructure, principally salaries and wages related to the hiring of senior managers during 2010 compared to 2009.

Other income (expenses). Interest expense decreased to $3.7 million in 2010 from $4.4 million in 2009 as a result of lower average outstanding debt balances of TCP Asia and lower overall interest rates between periods.

Currency exchange losses increased to $3.4 million in 2010 compared to $291,000 in 2009 due to the combination of the weakening of the U.S. dollar against the Chinese renminbi and increased purchases by TCP US from TCP Asia, which are denominated in U.S. dollars.

Income tax expense from continuing operations. Income tax expense for 2010 was $4.7 million compared to $1.0 million in 2009. For 2010, the difference between the U.S. federal income tax rate of 35% and the effective income tax rate of 21.9% was principally due to the pass through nature of the income attributable to TCP US’s S corporation status through December 30, 2010 and the recognition of a deferred tax asset resulting from the termination of its S corporation status effective as of December 30, 2010. For 2009, the difference between the U.S. federal income tax rate of 35% and the effective income tax rate of 7.1% was principally due to income taxed at China’s statutory income tax rate of 25% and the utilization of net operating loss carryforwards for which we had previously recorded a full valuation allowance.

Quarterly Results of Operations

The following table presents our unaudited quarterly results of operations for the eight quarters in the two-year period ended December 31, 2011. This unaudited quarterly information has been prepared on the same basis as our audited financial statements and includes all adjustments, consisting only of normal recurring adjustments

 

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necessary for the fair presentation of the information for the quarters presented. You should read this information in conjunction with our audited consolidated financial statements and the related notes thereto included elsewhere in this prospectus. The results of operations for any quarter are not necessarily indicative of results of operations for any future period.

 

 

 

    QUARTER ENDED  
    MARCH 31,
2010
    JUNE 30,
2010
    SEPT. 30,
2010
    DEC. 31,
2010
    MARCH 31,
2011
    JUNE 30,
2011
    SEPT. 30,
2011
    DEC. 31,
2011
 
    (In thousands, except per share data)  
Statement of Income Data:                

Net sales

  $ 73,862      $ 59,473      $ 81,248      $ 72,660      $ 68,421      $ 59,691      $ 68,963      $ 83,853   

Cost of goods sold

    55,299        44,438        61,086        56,106        51,684        48,453        51,732        63,711   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    18,563        15,035        20,162        16,554        16,737        11,238        17,231        20,142   

Percent of net sales

    25.1     25.3     24.8     22.8     24.5     18.8     25.0     24.0

Selling, general and administrative expenses

    9,559        10,066        9,962        12,635        9,847        11,632        11,475        13,056   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    9,004        4,969        10,200        3,919        6,890        (394     5,756        7,086   

Percent of net sales

    12.2     8.4     12.5     5.4     10.1     (0.7 )%      8.4     8.5

Interest expense

    (960     (841     (893     (966     (786     (867     (1,109     (1,335

Interest income

    119        52        78        49        62        72        72        116   

Currency exchange losses

    (312     (674     (1,141     (1,244     (638     (1,198     (1,774     (737
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    7,851        3,506        8,244        1,758        5,528        (2,387     2,945        5,130   

Income tax (expense) benefit from continuing operations

    (1,635     (856     (1,717     (463     (1,361     92        (1,481     (1,230
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

    6,216        2,650        6,527        1,295        4,167        (2,295     1,464        3,900   

Percent of net sales

    8.4     4.5     8.0     1.8     6.2     (3.8 )%      2.1     4.7

Net loss from discontinued operations

    (137     (51     (73     (69     (122     (76     (51       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    6,079        2,599        6,454        1,226        4,045        (2,371     1,413        3,900   

Less net (income) loss attributable to non-controlling interests

    615        697        87        (248     (4,021     590        (106     256   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to TCP shareholders

  $ 6,694      $ 3,296      $ 6,541      $ 978      $ 24      $ (1,781   $ 1,307      $ 4,156   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to TCP shareholders, basic and diluted

  $ 0.03      $ 0.02      $ 0.03      $ 0.00      $ 0.00      $ (0.01   $ 0.01      $ 0.02   

Weighted average number of shares outstanding, basic and diluted

    204,534        204,534        204,534        205,534        205,534        205,534        205,534        205,534   

Other Financial Data:

               

Adjusted EBITDA 1

  $ 9,533      $ 5,237      $ 10,299      $ 4,828      $ 7,448      $ (58   $ 5,908      $ 8,518   

Percent of net sales

    12.9     8.8     12.7     6.6     10.9     (0.1 )%      8.6     10.2

 

 

1

We present the non-GAAP financial measure “Adjusted EBITDA” as a supplemental measure of our performance. This non-GAAP financial measure is not a measure of financial performance or liquidity calculated in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, and should be viewed as a supplement to, not a substitute for, our results of operations and balance sheet information presented on the basis of U.S. GAAP. Reconciliation of this non-GAAP financial measure to the most directly comparable U.S. GAAP measure is detailed below.

We define Adjusted EBITDA as net income (loss) before interest expense, taxes, depreciation and amortization, discontinued operations, reorganization and offering related expenses and rental activities by TCP Campus, one of our VIEs. Adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies. Adjusted EBITDA may exclude certain financial information that some may consider important in evaluating our financial performance. Adjusted EBITDA may not be indicative of historical operating results, and we do not intend for it to be predictive of future results of operations. We believe the use of Adjusted EBITDA as a metric assists our board, management and investors in comparing our operating performance on a consistent basis because it removes the impact of our capital structure (such as interest expense), asset base (such as depreciation and amortization) and tax structure, as well as certain items that affect inter-period comparability.

 

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The following table presents a reconciliation of adjusted EBITDA to net income (loss), which is the most directly comparable U.S. GAAP measure, for the periods presented.

 

    QUARTER ENDED  
    MARCH 31,
2010
    JUNE 30,
2010
    SEPT. 30,
2010
    DEC. 31,
2010
    MARCH 31,
2011
    JUNE 30,
2011
    SEPT. 30,
2011
    DEC. 31,
2011
 
    (In thousands)  

Net income (loss) attributable to TCP shareholders

  $ 6,694      $ 3,296      $ 6,541      $ 978      $ 24      $ (1,781   $ 1,307      $ 4,156   

Plus net income (loss) attributable to noncontrolling interests:

               

TCP Asia VIEs net income (loss)

    14        31        99        917        648        877        566        523   

TCP Campus net income

    31        31        36        31        31        30        27        26   

TCP Europe net income (loss)

    (660     (759     (222     (700     3,390        (1,485     (488     (721

TCP South America net loss

                                (48     (12     1        (84
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    6,079        2,599        6,454        1,226        4,045        (2,371     1,413        3,900   

Adjustments:

               

Interest expense, net

    841        789        815        917        724        795        1,037        1,219   

Income tax expense

    1,635        856        1,717        463        1,361        (92     1,481        1,230   

Depreciation and amortization

    1,085        1,208        1,307        1,311        1,436        1,475        1,608        1,688   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    9,640        5,452        10,293        3,917        7,566        (193     5,539        8,037   

Adjustments:

               

TCP Campus EBITDA a

    (206     (206     (210     (208     (205     (204     (205     (206

Discontinued operations EBITDA b

    99        (9     11        8        30               4          

Corporate reorganization charges c

                  205        1,111                               

Cost related to initial public offering d

                                57        339        570        687   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 9,533      $ 5,237      $ 10,299      $ 4,828      $ 7,448      $ (58   $ 5,908      $ 8,518   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  a

TCP leases its U.S. headquarters and warehouse facility from TCP Campus. TCP Campus is owned and controlled by the Chief Executive Officer and majority shareholder of TCP and is consolidated within our statements of income as a VIE. We do not consider TCP Campus’s business to be part of our core operations.

  b 

In August 2011, we sold the stock of one of our Chinese subsidiaries to an entity owned and controlled by our majority shareholders. We will have no continuing activity with this entity and accordingly it has been reflected as discontinued operations in the accompanying consolidated financial statements.

  c 

Represents legal, accounting and professional fees related to the establishment of TCP on October 6, 2010 and subsequent corporate reorganization, as detailed in Note 1 to our audited consolidated financial statements included elsewhere in this prospectus.

  d 

Represents legal, accounting and professional fees incurred in connection with this offering.

Quarterly Net Sales Trends

The buying patterns by our D-I-Ys, mass retailers and big box retailers are determined by the particular company’s internal practices and sales program and do not follow a typical trend, which may result in fluctuations in our period to period net sales. Historically, we have experienced lower sales by our D-I-Ys, mass retailers and big box retailers in the first calendar quarter, and a further decline in the second calendar quarter of the year, with a subsequent pickup in sales in the third and fourth quarters. An additional factor impacting our quarterly and annual net sales trends are utility and government efficiency incentives and programs, for which we have no control over the timing or extent of the programs. However, seasonal factors and historical patterns should not be considered a reliable indicator of our future sales activity or performance. In the future, the effects of seasonality and economic cyclicality may also be impacted by our expansion into international markets, including Europe and South America.

The quarterly net sales fluctuations experienced during 2010 and 2011 were driven principally by five factors: (i) the impacts of the buying pattern of our significant retail customers; (ii) expand our retail customer account base and reduce sales to OEM and OLM accounts; (iii) enhance our sales to the C&I channel; (iv) the implementation of government energy savings programs; and (v) the renegotiation of product pricing to account for increased phosphor prices, which impacted the timing of some of our sales in 2011. During the second quarter of 2010, a shift in buying patterns resulted in an $14.4 million reduction in retail net sales, offset by a $21.8 million increase during the third quarter of 2010. The third quarter of 2010 was also favorably impacted by $5.3 million in net sales related

 

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to energy savings programs implemented by the Chinese government. During the fourth quarter of 2010, the implementation of our strategic decision to deemphasize OEM and OLM sales resulted in an $8.9 million decrease in OEM and OLM net sales. Further impacting our fourth quarter 2010 net sales was a quarter-over-quarter decrease of $3.5 million related to Chinese government energy savings programs. The first quarter of 2011 was impacted by our strategic decision to expand our retail customer account base and reduce our retail customer account concentration, resulting in an increase in new retail customer sales of $9.0 million. Government energy savings programs in Asia and Europe also favorably impacted our first quarter net sales $3.9 million. The retail customer and government savings increases experienced during the first quarter 2011 were tempered by a $17.9 million reduction in retail sales from our existing customer base. Our second quarter 2011 net sales decreased $8.7 million, principally related to the timing of Asia and European government energy savings programs. Our third quarter 2011 net sales were favorably impacted by strong sales in the C&I channel, with a quarter-over-quarter increase of $6.8 million primarily related to the expansion of our existing customer base. We also benefited from increased demand from customers ahead of announced price increases due to rising phosphor costs as well as the initial effects of passing through rising phosphor costs to some of our customers. Our fourth quarter 2011 net sales were favorably impacted by the resolution of phosphor-related pricing issues with several large customers that had delayed shipments in the third quarter, resulting in an increase in retail customer net sales of $16.9 million.

Quarterly Gross Profit Trends

With the exception of the fourth quarter of 2010, our gross margin, was approximately 25% from the first quarter 2010 through the first quarter 2011. The fourth quarter 2010 gross margin was impacted by excess manufacturing capacity and overhead. Our manufacturing returned to more normal levels during the first quarter 2011. Gross profit for the second quarter of 2011 was negatively impacted by increasing raw material cost, principally phosphors, resulting in a gross profit as a percent of revenue of 18.8%. During this period the cost of phosphors increased from approximately ¥320 RMB/kg ($53/kg) at the beginning of the year to a high of approximately ¥2,400 RMB/kg ($413/kg), negatively impacting our margin percentages. The quarterly gross margin impact was partially mitigated by a reduction in labor costs, improved production yield rates and more efficient use of raw material inputs through automation of production processes. Our gross margin for the third and fourth quarters of 2011 improved to 25% and 24% respectively. The improvement in gross margin was the result of the combination of reduced phosphor prices, declining from approximately to ¥2,400 RMB/kg ($413/kg) to approximately ¥1,600 RMB/kg ($252/kg) at year end, and the continued reduction in labor costs, improved production yield rates and more efficient use of raw material inputs through additional manufacturing automation. Additionally, gross margin in the third quarter of 2011 benefited from a quarter-over-quarter increase in our higher margin C&I channel sales.

Quarterly Selling, General and Administrative Expense Trends

Our overall selling, general and administrative expense has increased as we continue global expansion of our sales and marketing activities, manufacturing capabilities and research and development. Increases in operating expenses have been largely attributable to enhancing technical personnel to expand research and development capabilities, sales and marketing efforts and expanding our administrative, legal and accounting staffs to support our continued growth. Professional costs increased related to our corporate reorganization activities during 2010 and in connection with the preparation of this offering during 2011. We expect to incur a higher level of selling, general and administrative costs as we increase our administrative, legal and accounting staff and incur additional outside professional costs in order to meet our public company reporting and corporate governance requirements subsequent to this offering, although over time we expect these expenses to decrease as a percentage of net sales.

Liquidity and Capital Resources

Historically, we have financed our operations primarily through cash generated from operations and borrowings under our bank credit facilities and notes payable. As of December 31, 2011, we had $26.5 million in cash and cash equivalents. We believe, based on our current and anticipated levels of operations, that the cash on hand, cash flow from operations and our borrowing capacity under existing bank financing arrangements will be sufficient to meet our current and anticipated cash operating requirements, including working capital needs, capital expenditures and scheduled principal and interest payments for the next 12 months.

 

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The operating subsidiaries have generated sufficient cash flow to support our business activities. The bank financing of TCP North America is collateralized by the accounts receivable and inventory and cash flows from its operations while TCP Asia’s bank financing is collateralized by fixed assets and cash flows from its operations. Cash and cash equivalents held outside of China as of December 31, 2011 was $4.3 million.

As of the date hereof, no loans are outstanding from us or our Chinese subsidiaries to our directors and executive officers or their relatives, or from our directors and executive officers or their relatives to us or our Chinese subsidiaries. No such loan to or from our directors and executive officers or their relatives is expected to be made in the future. From 2005 to 2011, certain of our Chinese subsidiaries made non-interest bearing loans to Ellis Yan and Solomon Yan, for both business and personal reasons. All business related loans were repaid prior to December 31, 2011. During that same period, Ellis Yan, Solomon Yan and Solomon Yan’s wife made non-interest bearing loans, principally from the proceeds of sales of their personal investments, to finance ongoing capital needs of certain of our Chinese subsidiaries. Since January 1, 2009, the largest amounts owed, in the aggregate, to our Chinese subsidiaries by Ellis Yan and Solomon Yan were $9.2 million at March 8, 2010 and $15.6 million at January 15, 2010, respectively. As of December 31, 2011, the principal amount owed to Ellis Yan was $4.3 million, and the principal amount due from Solomon Yan was $12.7 million. When aggregated, the net amount owed to the Chinese subsidiaries was $8.4 million at December 31, 2011. In addition, as of December 31, 2011, certain of our Chinese subsidiaries and VIEs owed Solomon Yan’s wife an aggregate amount of RMB 3.7 million (approximately $580,000 at current exchange rates). She was repaid in March 2012. In the same month, the boards of directors of these Chinese subsidiaries agreed to extinguish the net aggregate outstanding balance due from Solomon Yan. At the same time, Ellis and Solomon Yan agreed to extinguish the outstanding balances due to them from the Chinese subsidiaries. The net aggregate amounts owed to those Chinese subsidiaries would have been approximately $11.1 million on the date of extinguishment. Because these loans were non-interest bearing loans they were not deemed to be at arm’s length.

As of December 31, 2011, we had $76.2 million in short-term loans and long-term debt consisting of the following:

 

 

 

Revolving line of credit

   $ 26.0   

Short-term bank loans

     43.5   

Long-term debt

     6.7   
  

 

 

 

Total

   $ 76.2   
  

 

 

 

 

 

Short-term bank loans consisted of 26 separate loans with four Chinese banks. The following is a summary of the short-term loans outstanding as of December 31, 2011:

 

 

 

LENDER

   AMOUNT      NUMBER OF
LOANS
OUTSTANDING
     AVERAGE
INTEREST
RATE
    AMOUNT
COLLATERALIZED
BY ACCOUNTS
RECEIVABLE
     AMOUNT CROSS
COLLATERALIZED
BETWEEN
CHINESE
ENTITIES
 

Agricultural Bank of China

   $ 16.6         8         5.8   $       $ 16.6   

Communication Bank of China

     12.7         7         6.5             12.7   

Bank of China

     7.8         5         6.6     3.1         4.8   

Industrial and Commercial Bank of China

     6.4         6         6.6     6.3           
  

 

 

    

 

 

      

 

 

    

 

 

 

Total

   $ 43.5         26         $ 9.4       $ 34.1   
  

 

 

    

 

 

      

 

 

    

 

 

 

 

 

The interest rates to finance our borrowings as of December 31, 2011 ranged from 2.8% to 8.5%. In the United States, borrowings under a $30.0 million bank revolving line of credit agreement are limited based on certain percentages of eligible accounts receivable and inventory and are collateralized by substantially all of TCP US’s assets. There was no limitation at December 31, 2011 based on outstanding collateral. In addition, the revolving

 

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credit agreement requires that the aggregate intercompany payable between TCP US and TCP Asia be no less than $30.0 million. Certain of our notes payable, totaling $6.0 million at December 31, 2011, are collateralized by our U.S. Aurora facility and are personally guaranteed by our CEO and majority shareholder. In addition, as of December 31, 2011, $9.4 million of accounts receivable were pledged as collateral against certain short-term notes with various Asian vendors and financial institutions.

The revolving credit agreement also contains certain restrictive covenants that, among other things, limit additional indebtedness of TCP US, restrict non-tax related distributions, and require TCP US to maintain a minimum fixed charge coverage ratio of 1.25 to 1.0. The fixed charge ratio is defined within the revolving credit agreement as the ratio of our EBITDA, less unfunded capital expenditures, tax distributions to shareholders and cash taxes paid, to our fixed charges, including interest and fees paid under the credit facility, payments under capital lease obligations and other indebtedness. Borrowings under the revolving credit agreement are subject to an interest rate matrix based on TCP US’s fixed charge coverage ratio. As of December 31, 2011, the interest rates for borrowings under this agreement were, at our option, either LIBOR rate loans, with interest due at LIBOR plus 2.5%, or prime rate loans, with interest due at the bank’s prime rate plus 1.5%. While TCP US’s fixed charges as of December 31, 2011 were comparable to its fixed charges as of December 31, 2010, the fixed charge coverage ratio was impacted by lower EBITDA, as defined by the revolving credit agreement, of $2.0 million, increased tax distributions to shareholders of $1.1 million, increased taxes of $0.9 million and $0.5 million in increased unfunded capital expenditures. As a result, our interest rates for borrowings under this agreement were adjusted, as of January 1, 2012, to LIBOR plus 3.0% for LIBOR rate loans and the bank’s prime rate plus 2.0% for prime rate loans. TCP US was in compliance with the covenants under this agreement as of December 31, 2011. The revolving credit agreement matures on December 11, 2013.

We believe that cash flows from operating activities will be sufficient to fund anticipated business operations during the next 12 months while overall debt levels will remain the same.

Working Capital

The following table sets forth our working capital as of December 31, 2010 and 2011:

 

 

 

     DECEMBER 31,
2010
     DECEMBER 31,
2011
     PERIOD-TO-PERIOD
CHANGE
 
     (In thousands)  

Cash and cash equivalents

   $ 39,590       $ 26,456       $ (13,134     (33.2 )% 

Restricted cash

     2,007         6,261         4,254        212.0

Accounts receivable, net

     38,363         46,747         8,384        21.9

Inventories

     53,668         80,044         26,376        49.2

Prepaid expenses and other current assets

     14,299         15,530         1,231        8.6

Deferred income taxes

     3,103         2,546         (557     (18.0 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     151,030         177,584         26,554        17.6

Short term loans and current portion of long-term debt

     55,897         69,979         14,082        25.2

Accounts payable

     60,084         70,901         10,817        18.0

Related party loan payable

     996         763         (233     (23.4 )% 

Income taxes payable

     475         2,238         1,763        371.2

Accrued payroll and related expenses

     13,188         14,416         1,228        9.3

Accrued trade discounts and rebates

     3,190         5,817         2,627        82.4

Other current liabilities

     15,116         12,704         (2,412     (16.0 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     148,946         176,818         27,872        18.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Working capital

   $ 2,084       $ 766       $ (1,318     (63.2 )% 
  

 

 

    

 

 

    

 

 

   

 

 

 

 

 

Our working capital decreased by $1.3 million from December 31, 2010 to December 31, 2011. The change in working capital was principally driven by an increase in inventory balances, partially offset by increases in the current portion of debt and accounts payable. For the year ended December 31, 2011, we increased our inventory

 

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balances in connection with our strategy to expand our LED product line and C&I sales channel and also to satisfy the purchase requirements of major retail customers, including The Home Depot. The increases in current portion of debt and accounts payable were used to fund our investment in inventory.

Cash Flows

Following is a summary of our cash flows for the years ended December 31, 2009, 2010 and 2011:

 

 

 

     YEAR ENDED DECEMBER 31,  
     2009     2010     2011  
     (In thousands)  

Net cash provided by (used in) operating activities

   $ 20,284      $ 16,025      $ (1,567

Net cash used in investing activities

     (6,295     (11,276     (17,641

Net cash provided by (used in) financing activities.

     (13,797     9,596        4,949   

Effect of exchange rate changes on cash and cash equivalents

     60        1,083        1,125   
  

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash equivalents

   $ 252      $ 15,428      $ (13,134
  

 

 

   

 

 

   

 

 

 

 

 

Net Cash Provided by (Used in) Operating Activities

Net cash used in operating activities in 2011 was $1.6 million compared to $16.0 million in cash provided by operating activities in 2010. The principal reasons for the increase in cash used in operating activities for 2011 compared to 2010 were a decrease of $9.4 million in net income during the period and increases in inventory of $19.3 million and accounts receivable of $9.6 million, partially offset by an increase in accounts payable of $14.4 million. The increase in inventory was the result of the expansions of our LED product line and our C&I sales channel as well as the timing of purchases by our major retail customers. Higher raw material costs, principally phosphors, also contributed to the increase in inventory. The change in accounts receivable was the result of increased sales during the fourth quarter 2011 compared to the comparable period of 2010. The increase in accounts payable was principally the result of increased inventory purchases and the timing of vendor payments in December 2011 compared to December 2010.

Net cash provided by operating activities was $16.0 million in 2010 compared to $20.3 million in 2009, a decrease of $4.3 million. The decrease was primarily due to an increase in inventory of $23.5 million partially offset by increased net income of $3.2 million, increased cash provided by the collection of accounts receivable of $6.1 million and increased accounts payable balances of $8.3 million in 2010 compared to 2009. The increase in inventory is the result of our expansion of our C&I sales channel and the timing of purchases by our major retail customers. The changes in accounts receivable and payable are principally the result of the timing of major retail customer sales and related inventory purchases from period to period.

Net Cash Used in Investing Activities

Net cash used in investing activities was $17.6 million in 2011 compared to $11.3 million in 2010. The net increase in cash used in investing activities was primarily due to an increase in restricted cash balances as required by certain of our supplier agreements. This restricted cash increased as we built up inventory levels and may increase in the future if we further build up inventory levels.

Net cash used in investing activities was $11.3 million in 2010 compared to $6.3 million in 2009, an increase of $5.0 million. The net increase in cash used in investing activities was due to increased purchases of property, plant and equipment of $7.4 million within our Asian manufacturing operations in order to expand and automate our CFL manufacturing capabilities, partially offset by a reduction in restricted cash balances as required by certain of our financing and customer agreements.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $4.9 million during 2011 compared to $9.6 million during 2010. Net cash provided by financing activities in 2011 was principally comprised of net bank borrowings of $11.9 million partially offset by $5.6 million in non-interest bearing loans made to shareholders. Net cash provided by financing

 

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activities of $9.6 million in 2010 was the result of the receipt of $22.6 million in payment of non-interest bearing loans from shareholders, partially offset by net repayments of bank borrowings of $6.5 million and non-interest bearing related party loans of $6.7 million.

Net cash provided by financing activities was $9.6 million in 2010 compared to a use of cash of $13.8 million in 2009. The $9.6 million in net cash provided by financing activities in 2010 was the result of the receipt of $22.6 million in payment of non-interest bearing shareholder loans partially offset by repayments of $6.7 million of a related party non-interest bearing loan payable and $6.5 million of bank borrowings. The net cash used in financing activities of $13.8 million in 2009 was comprised of payments of $15.6 million, $2.6 million and $2.1 million for the repayment of bank borrowings, non-interest bearing loans made to shareholders and distributions to shareholders, respectively, partially offset by the receipt of $6.5 million in non-interest bearing loans from related parties.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that may be material to investors.

Capital Expenditures

We expect an increase in our capital spending as we continue to expand our production capabilities and improve our manufacturing efficiencies. Future capital requirements will depend on many factors, including our rate of sales growth, our global expansion activities, innovations within the energy efficient lighting industry, shifts in demand between energy efficient lighting products and the rate of acceptance and conversion to energy efficient lighting solutions. Our capital spending is generally used for the expansion of our Asian manufacturing operations and global warehouse and distribution facilities. Our capital investments have primarily been funded by operating cash flow and by bank borrowings under our existing credit facilities. We intend to invest a portion of the proceeds of this offering in additional capital projects to increase production capability and improve our manufacturing efficiency and expand our worldwide distribution capabilities. In the event that our sales growth and global expansion does not meet our expectations, we may eliminate or curtail capital projects in order to mitigate the impact on our use of cash. We had no material commitments for capital expenditures as of December 31, 2011.

Research and Development

Our research and development costs are expensed as incurred and totaled $1.6 million in 2009, $1.9 million in 2010 and $2.1 million in 2011. Such costs include the costs of personnel, materials, facilities and overhead costs related to the development of new efficient lighting technologies and the enhancement of our existing product lines. We currently employ approximately 50 engineers and technicians and operate two research and development facilities, with a total of seven laboratories, located in China, and Aurora, Ohio. We expect our research and development costs to increase, principally through increased employee headcount and related expenses, as we continue to expand our product lines and research and development activities.

 

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Contractual Obligations

Our contractual obligations and other commitments as of December 31, 2011 were as follows:

 

 

 

     PAYMENT DUE IN  
     LESS THAN
1 YEAR
     1-3
YEARS
     3-5
YEARS
     MORE THAN
5 YEARS
     TOTAL  
     (In thousands)  

Short term loans and long-term debt, including current portion *

   $ 69,979       $ 682       $ 422       $ 5,121       $ 76,204   

Operating lease agreements

     554         414         4                 972   

Interest on long-term debt *

     3,533         194         175         456         4,358   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 74,066       $ 1,290       $ 601       $ 5,577       $ 81,534   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

* including capital lease obligations

We have gross unrecognized tax benefits of $3.9 million at December 31, 2011. Due to uncertainty regarding the timing of such future cash outflows, if any, reasonable estimates cannot be made regarding the period of cash settlement with the applicable taxing authority. See Note 9, Income Taxes to our audited consolidated financial statements included elsewhere in this prospectus.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to several financial risks, including, among others, market risk (changes in exchange rates, changes in interest rates and market prices), credit risk, liquidity risk and commodity risk. Our principal liabilities consist of bank loans and trade payables. The main purpose of these liabilities is to provide the necessary funding for our operations. We have various financial assets such as trade receivables and cash and cash equivalents. Our cash and cash equivalent instruments are held at high-quality financial institutions and managed such that there is no significant concentration of credit risk in any one bank or other financial institution. Our management closely monitors the credit quality of the financial institutions with which we hold deposits.

Currency risk. Our reporting currency is the U.S. dollar. As of December 31, 2011, we had operations in North America, Asia, Europe and South America. As a result of our investments in entities that have functional currencies other than the U.S. dollar, we face exchange translation risk and our results can be affected by currency movements. Substantially all of our products are manufactured in China by TCP Asia. Since our current sales mix is weighted heavily toward our North American market, our operating results may become subject to significant fluctuations based upon changes in currency exchange rates of the U.S. dollar principally against the Chinese renminbi and to a lesser extent the U.S. dollar against the Canadian dollar and Euro. Accordingly, currency exchange rate fluctuations may adversely affect our financial results in the future. For example, a hypothetical 10% additional appreciation of the renminbi against the U.S. dollar during 2011 would have positively impacted our operating income by $1.6 million. We do not currently engage in any currency hedging activities.

Interest rate risk. As of December 31, 2011, we had cash and cash equivalents of $26.5 million. These amounts are held primarily in cash and money market funds. We do not enter into investments for trading or speculative purposes. Due to the short-term nature and floating interest rates of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Due to the low margin earned on these funds, we do not believe that a 10% change in interest rates would have a significant impact on our operating results, future earnings or liquidity.

We are exposed to interest rate risk related to our variable-rate debt. As of December 31, 2011, we had $26.0 million outstanding under a revolving line of credit agreement with a U.S. bank. The interest rates for borrowings under this agreement are subject to an interest rate matrix based on TCP US’s fixed charge coverage ratio, as defined by the agreement. As of December 31, 2011, the interest rates on the revolving line of credit were at our option of LIBOR rate loans, with interest due at LIBOR plus 2.5%, or prime rate loans, with interest due at the bank’s prime rate plus 1.5%. As of December 31, 2011, the interest on the LIBOR rate loans and prime rate loans

 

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was 2.77% and 4.75%, respectively. Effective January 1, 2012, changes in TCP US’s fixed charge coverage ratio have resulted in an adjustment to our interest rates for borrowings under this agreement to LIBOR plus 3.0% for LIBOR rate loans and the bank’s prime rate plus 2.0% for prime rate loans.

Potential movement of the LIBOR rate by +/- 1% would increase or decrease interest expense and cash paid for interest on an annualized basis by $260,000 based on the $26.0 million of variable rate debt outstanding as of December 31, 2011.

Credit risk. The majority of our credit risk as of December 31, 2011 was attributable to our total trade receivables balance of $46.7 million. Trade receivables are typically unsecured and are derived from sales earned from customers. A significant concentration of our business activity is with major United States home centers, such as The Home Depot, whose ability to meet their financial obligations is dependent on the economic conditions of the retail industry. Net sales to The Home Depot accounted for 42%, 42% and 33% of total net sales for the years ended 2009, 2010 and 2011, respectively. We manage our credit risk through credit approvals, establishing credit limits and continuously monitoring the creditworthiness of customers to which we grant credit terms in the normal course of business. It is our policy that all customers who wish to transact on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis, and historically our exposure to bad debts has been minimal.

Liquidity risk. We regularly evaluate market conditions, our liquidity profile, and various financing alternatives for opportunities to enhance our capital structure. If market conditions are favorable, we may refinance existing debt or consider issuing debt securities. Our ability to meet our current and anticipated operating requirements will depend upon our future performance, which in turn will be subject to general economic conditions and financial, business and other factors, including factors beyond our control.

Commodity risk. The manufacturing of our products relies heavily on the availability and price of certain commodity materials including petroleum based plastics, copper, and rare earth metals, principally phosphors. The markets for these raw materials are volatile and will continue to place pressure on our margins. While we have implemented pricing strategies in order to pass along these increased costs in the form of higher selling prices, there can be no assurance that future raw material shortages and increased prices will not negatively affect future results, including demand for our products and our profitability. Currently, the most significant pressure we face is the availability and cost of phosphors, a critical raw material input into the manufacturing of fluorescent lighting. China is currently the leader in rare earth mining, accounting for 97% for the world’s supply. Beginning in July 2007 through February of 2011, the Chinese government implemented a series of regulations to control mining practices and reduce the export levels of Chinese-produced rare earth metals, resulting in raw material shortages and increased prices. The cost of phosphors was particularly volatile during 2011. During 2011, the cost of phosphors increased from approximately ¥320 RMB/kg ($53/kg) at the beginning of the year to approximately ¥2,400 RMB/kg ($413/kg) in July 2011 before returning to approximately ¥1,600 RMB/kg ($252/kg) as of December 31, 2011. Accordingly, where phosphors had represented between 6% – 27% of the cost to manufacture fluorescent lighting prior to 2011, it represented between 24% – 70% of such cost during 2011.

We purchase some of our raw materials from several small suppliers who have demonstrated quality of materials and reliability of delivery as to the quantities required and delivery times. We purchase our materials at spot prices in the open market and we do not negotiate long-term supply contracts. We currently do not engage in hedging transactions for the purchase of raw materials.

Internal Controls

In conjunction with the audit of the financial statements included in this prospectus and in preparation for this offering and future compliance with Section 404 of the Sarbanes-Oxley Act of 2002, we and our independent registered public accounting firm identified the following material weaknesses in our internal controls over financial reporting:

 

  n  

The Company does not have a consolidation process operating effectively (including related controls over the process) to allow it to prepare timely and accurate consolidated financial statements on both an interim and annual basis.

 

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  n  

The Company’s process (including related controls over the process) of reviewing financial information of foreign operations is not effective in ensuring compliance with U.S. GAAP.

 

  n  

The Company does not have adequate staffing levels and required expertise sufficient to support the needs of a public international company, particularly in the areas of financial reporting for a public company and tax accounting expertise for an international company.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented, or detected and corrected on a timely basis.

We currently have separate financial reporting systems for different regions of our operations. Financial statements are submitted monthly to the finance team in the United States, which consolidates them into our global consolidation system.

In March 2012, we hired a Chief Financial Officer with significant public company experience. In connection with this offering, several positions will be added to the finance staff to improve our internal controls over financial reporting and to increase the technical accounting and finance experience within our organization. In addition, we continue to implement the remediation plan described below to improve the effectiveness of our internal controls over financial reporting as a public company.

To improve the financial reporting function, our remediation plan includes evaluation of skill sets and experience levels of existing financial reporting staff relative to those needed as a public company; development of a recruiting plan, including appropriate compensation levels; development and implementation of an outsourcing plan to meet certain financial reporting and compliance requirements until such time as we have fully recruited the necessary staff to meet those requirements; implementation of a streamlined consolidation process; and formalization of a period-end closing process and accounting and financial reporting processes to ensure consistency and reliability of reported results. We also intend to hire one or more resources to enhance our tax expertise.

To improve the controls documentation and testing process, our remediation plan includes reviewing and evaluating current documentation of internal controls, specifically over our consolidation process; evaluating and documenting overall entity control environment; developing documentation standards/methodology; determining and documenting key controls in each functional area; and developing and implementing a testing plan.

The measures or activities we have taken to date, or any future measures or activities we will take, may not remediate the material weakness we have identified.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, net sales, costs and expenses, and related disclosures. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe are reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates.

The following discussion addresses our critical accounting policies and reflects those areas that require more significant judgments and use of estimates and assumptions in the preparation of our consolidated financial statements.

Principles of consolidation. The consolidated financial statements include the accounts of TCP, our wholly-owned subsidiaries and companies that have been determined to be a variable interest entity, or VIE, for which we are the primary beneficiary. We are the primary beneficiary of a VIE if we have the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses. We continually evaluate whether we are the primary beneficiary of a VIE. Included within the consolidated financial

 

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statements are certain Asian sales, marketing and administrative entities, North American office and warehouse facilities and our European and South American sales, marketing and distribution operations, which have been determined to be VIEs for which we are the primary beneficiary. We do not currently have an equity interest in any of these entities and, therefore, 100% of the equity and net income or loss associated with these entities has been allocated to noncontrolling interests within the consolidated financial statements. On or prior to the completion of this offering, we expect to acquire 100% of the equity interests of TCP Europe and TCP South America. All intercompany transactions between us, our subsidiaries and VIEs have been eliminated in consolidation.

Inventories. Inventories are stated at the lower of cost or market. Cost is determined based on a currently-adjusted standard, which approximates actual cost on a first-in, first-out basis. Management regularly reviews inventory quantities on hand and inventory is written down, through cost of goods sold, for excess or obsolete inventory primarily based on estimated future demand and current market conditions. A significant change in lighting technology, customer demand or market conditions could render certain inventory obsolete and, thus, could have a material adverse impact on our operating results in the period the change occurs.

Income taxes. Deferred tax assets and liabilities are recognized under the liability method based upon the difference between the amounts reported for financial reporting and tax purposes. These deferred taxes are measured by applying enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. Valuation allowances are established when necessary to reflect the estimated amount of deferred tax assets that may not be realized based upon our analysis of estimated future taxable income and establishment of tax strategies. Reasonable judgment and estimates are required in determining the necessity and, if required, the amount of deferred tax valuation allowances. Factors included in our determination of the necessity of deferred tax valuation allowances include, but are not limited to, the nature and character of the deferred tax assets and liabilities, cumulative losses in recent years, projected future taxable income, future reversals of existing temporary differences, and the length of time that carryforwards can be utilized. Future taxable income, the results of tax strategies and changes in tax laws could impact these estimates.

In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the highest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Significant judgment is required in making these determinations, and adjustments to unrecognized tax benefits may be necessary to reflect actual taxes payable upon settlement.

Impairment of long-lived assets. We assess the impairment of long-lived assets, including definite-lived intangible assets and property, plant and equipment, when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Events that trigger a test for recoverability include material adverse changes in projected sales and expenses, significant underperformance relative to historical and projected future operating results, and significant negative industry or economic trends. When a triggering event occurs, a test for recoverability is performed, comparing projected undiscounted future cash flows to the carrying value of the asset group. If the carrying value exceeds the undiscounted cash flows, an impairment charge is recognized for the amount by which the carrying value of the asset group exceeds its estimated fair value. A test for recoverability is also performed when management has committed to a plan to sell or otherwise dispose of an asset group and the plan is expected to be completed within a year. When an impairment loss is recognized for assets to be held and used, the adjusted carrying values of those assets are depreciated over their remaining useful lives. We measure the fair value of a long-lived asset group by applying the income approach, using a discounted cash flows model. Changes in assumptions or estimates can materially affect the fair value measurement of an asset group, and therefore can affect the amount of the impairment. No triggering events have occurred, nor are there any commitments to sell or dispose of any asset groups, that would indicate the need to test for recoverability of our assets as of December 31, 2011.

 

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Recent Accounting Pronouncements

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (ASC Topic 220)—Presentation of Comprehensive Income.” This standard eliminated the option to report other comprehensive income and its components in the statement of changes in equity. Instead, companies would be required to present items of net income and other comprehensive income in one continuous statement—referred to as the statement of comprehensive income—or in two separate, but consecutive, statements. In December 2011, the FASB issued ASU No. 2011-12, which deferred the effective date of guidance pertaining to the reporting of reclassification adjustments out of accumulated other comprehensive income in ASU 2011-05. ASU 2011-12 reinstated the requirements for the presentation of reclassifications that were in place prior to the issuance of ASU 2011-05. Both ASU’s are effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The guidance requires changes in presentation only and will have no significant impact on our financial statements.

 

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INDUSTRY

Overview of the Global Light Bulb Market

The electric light bulb market is a large subset of the $100.0 billion global general lighting market. According to The Freedonia Group, Inc., the market for electric light bulbs was valued at $31.0 billion in 2009. This market, which includes both new and replacement bulbs, is expected to grow to approximately $43.6 billion by 2014, representing a 7.1% CAGR. Demand for electric light bulbs can be segmented into two major markets: (i) structures, including residential buildings, non-residential buildings and non-building structures such as street, highway and parking lot lighting; and (ii) motor vehicles and other manufactured goods, including flashlights, holiday lights and other durable goods. We sell light bulbs into the structures market, which is the largest segment of the broader electric light bulb market and where we focus our business, accounting for $21.9 billion in 2009 and estimated to grow to $28.2 billion by 2014, in 2008 dollar terms, representing a 5.2% CAGR.

 

LOGO

Source: The Freedonia Group, Inc.

 

(1) 

The structures market includes residential building, non-residential building and non-building structures end markets.

Numerous factors affect the electric light bulb market, from macroeconomic trends, including population growth and increasing urbanization, to regulatory changes, including the ban of inefficient bulb technologies in many countries, and a focus on energy efficiency in a number of established and emerging economies. While the global structures light bulb market is, to a degree, affected by the construction market, the majority of this market consists of replacement bulbs for existing sockets and fixtures, making the structures light bulb market less cyclical than other lighting markets.

Demand for light bulbs varies substantially across the globe, with more developed areas typically representing considerably larger markets in per capita terms than developing nations. Asia is the largest end market for light bulbs, accounting for 45% of the 2009 world total. North America is the second largest market, with a 20% share of global demand in 2009, followed by Western Europe, with a 16% share. Light bulb sales in select emerging economies, such as China, are expected to outpace light bulb sales in each of the United States, Western Europe and Japan by 2014, fueled by economic growth, growing urbanization, increased manufacturing output, new household formation activity and rising standards of living. China alone is expected to account for 45% of incremental product demand through 2014, strengthening its position as the largest bulb market in the world.

 

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LOGO

Source: The Freedonia Group, Inc.

There are six main types of light bulbs sold globally: conventional incandescent, linear fluorescent, CFL, LED, halogen and HID, and other light bulbs. The chart below summarizes the historical and projected global demand for light bulbs in the structures market by type through 2014. All market size and share data in the subsequent sections of the prospectus will refer to the global structures light bulb market, unless otherwise noted.

 

 

 

GLOBAL STRUCTURES MARKET DEMAND FOR LIGHT BULBS BY TYPE

 
    HISTORICAL     PROJECTED  
    1999     2004     2009     2014E     2009-2014E
CAGR
 
   

(In millions of 2008 U.S. Dollars)

       
    Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
    Amount     % of
Total
       

Incandescent(1)

  $ 5,580        42.6%      $ 6,220        38.0%      $ 5,680        26.0%      $ 4,590        16.3%        (4.2 )% 

Linear Fluorescent

    5,300        40.5%        6,150        37.5%        7,150        32.7%        6,550        23.2%        (1.7 )% 

CFL

    160        1.2%        1,400        8.5%        5,250        24.0%        10,050        35.6%        13.9

LED

    NM     NM*        20        0.1%        450        2.1%        2,980        10.6%        45.9

HID

    2,060        15.7%        2,590        15.8%        3,320        15.2%        4,030        14.3%        4.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 13,100        100.0%      $ 16,380        100.0%      $ 21,850        100.0%      $ 28,200        100.0%        5.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Source: The Freedonia Group, Inc.

(1) 

The incandescent bulb market consists of conventional incandescent and halogen bulbs.

* not meaningful

Technology Overview

Conventional Incandescent

Conventional incandescent bulbs operate by passing electric current through a filament encased in a glass bulb. The high electric resistance of the filament causes the filament to heat up and glow, producing light. Conventional incandescent bulbs represent the largest and most widely adopted technology used in the lighting market. However, because conventional incandescent bulbs are the least efficient lighting technology available, with as much as 90% of the energy lost in the form of heat, they have been the target of legislation in many countries that aim to ban this technology or restrict its use. Due to these bans and restrictions, demand in the overall incandescent bulb market is expected to decline from $5.7 billion in 2009, or 26.0% of the global market, to $4.6 billion, or 16.3% of the market by 2014, largely driven by the shift away from conventional incandescent bulbs that are unable to meet current and upcoming efficiency standards. Within the structures market, the majority of conventional incandescent bulbs are sold to the residential building market, with significant market share losses to more energy efficient bulbs

 

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having already occurred in non-residential building and non-building structures markets over the last several years. Residential customers continue to prefer conventional incandescents in many cases due to their low up front cost (typically between $0.25 and $1.50 for a 60 watt, or W, bulb in the U.S. market), high quality light output (warm white light), easy availability and familiarity. However, non-residential customers have been steadily switching away from conventional incandescent bulbs because the operating cost is significantly greater than the operating cost of the more energy efficient technologies that do not need to be replaced as frequently.

Linear Fluorescent

Linear fluorescent bulbs produce light by passing an electric arc between two tungsten cathodes in a phosphor coated tube that is filled with low-pressure mercury vapor and other gases. The electrons passing through the tube excite the mercury vapor, generating ultraviolet light that is converted to visible light upon contact with the phosphor. Linear fluorescent bulbs require an electronic ballast to provide the required voltage at start-up and control the flow of current to maintain optimum light output. Compared to incandescent bulbs, fluorescent bulbs are more energy efficient and have longer useful lives. These bulbs are most commonly used in commercial and industrial buildings, where large amounts of lighting is needed and electricity costs are a significant concern in bulb purchase decision. These bulbs are not as prevalent in residential settings because they are not suitable for socket-based applications. There has not been a significant amount of advancement in linear fluorescent technology in recent years, as producers are focusing on other, faster growing technologies that are suitable for a wider set of applications, such as CFLs and LED bulbs. As a result, the linear fluorescent bulb market totaled $7.2 billion in 2009, and is estimated to decline to $6.6 billion by 2014.

CFL

CFLs produce light with the same technology as linear fluorescent bulbs, but are designed with an A bulb shape and a screw-in base to fit socket-based applications. The majority of these bulbs are designed with integrated ballasts, or ballast components that are built into a screw-in base, making it easier to serve as a replacement to conventional incandescent bulbs. Compared to incandescent bulbs, CFLs use less energy to produce the same light output, last longer and generate less heat. CFLs are 75% more efficient than conventional incandescent bulbs, and CFLs typically last between 10,000 and 20,000 hours, compared to an average life span of approximately 1,000 hours for conventional incandescent bulbs. These factors allow CFLs to offer lower operating costs than incandescent bulbs, as CFLs use less electricity and need to be replaced much less frequently.

The CFL market totaled $5.3 billion in 2009, and is estimated to grow to $10.1 billion by 2014, representing a CAGR of 13.9%. By 2014, CFLs are expected to represent 35.6% of the total light bulb market for structures. CFLs are projected to be one of the greatest beneficiaries of legislation aimed at reducing the use of inefficient bulbs. CFLs have seen increasing acceptance in the commercial and residential markets as customers become more aware of this alternative.

CFL price reductions represent an important growth driver, with prices of CFLs decreasing 3.9% per year between 2004 and 2009. Further price declines are expected through 2014 as CFL production becomes increasingly automated, the underlying technology improves and there is expected to be an increase in sales volumes. Improvement of CFL quality and added features represent additional growth drivers. Historically, many poorly made CFLs produced light with an unattractive quality to the human eye, took a long time to “warm up” (or produce light after being turned on), had form factors that did not fit some applications and were not dimmable. As CFL manufacturers continue to improve light quality and add features such as dimming and rapid warm up, the market is expected to experience further growth. A challenge facing CFL adoption, particularly in the residential market, is that all CFLs contain some level of mercury, which increases storage and maintenance concerns. Companies that produce safer CFLs with reduced amounts of mercury should benefit substantially in the residential building market. CFLs, although having a higher up front cost than conventional incandescent bulbs, with average price points between $1.00 and $6.25 per 60W equivalent bulb in the U.S. market, represent one of the most cost competitive alternatives in the near-term, or over the next three years, as efficiency standards become increasingly strict.

LED

LEDs produce light by passing electrical current through a semiconductor that generates visible light. These devices are solid-state electronic components and can emit light in a variety of brightness levels and colors. LED bulbs offer the potential to achieve the highest energy efficiency and product life span of any light bulb technology currently

 

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available. LED bulbs typically last 25,000 to 50,000 hours, and are up to twice as efficient as fluorescent bulbs and up to six times as efficient as incandescent bulbs. As a result, LED bulbs offer very low operating costs since they use less electricity and have the longest lifetime of any available lighting technology. Unlike CFLs, LED bulbs do not contain mercury and do not suffer from warm up time lags. Most LED bulbs are also dimmable, unlike many CFLs, which can also reduce electricity consumption.

The LED bulb market totaled $0.5 billion in 2009, and is estimated to grow to $3.0 billion by 2014, representing a CAGR of 45.9%. LED bulbs are estimated to represent approximately 10.6% of the total structures bulb market in 2014. The major trends expected to drive growth in the adoption of LED bulbs are rapid cost reductions and improvement in performance and quality. Prices of LED bulbs are substantially higher than almost all other technologies. However, prices are estimated to fall 15.4% annually through 2014 and an additional 12.9% per year through 2019, driven largely by decreasing cost and increasing efficacies at the LED chip level. In the long-term, as costs continue to fall, LED bulbs are estimated to gain significant market share in almost all of the major lighting markets as they become competitive with other energy efficient technologies. Although the cost of LED bulbs has decreased significantly over the last several years, they remain the most expensive light bulb, with an average price between $24.00 and $50.00 per 60W equivalent bulb in the U.S. market, which is expected to hinder adoption in the near-term.

Halogen

Halogen bulbs are a type of incandescent bulb, with the main difference that the halogen filaments are enclosed in a halogen gas filled capsule. The halogen gas creates a number of performance advantages compared to conventional incandescent bulbs, while at the same time providing the familiar warm white light that many end users prefer from their bulbs. The halogen gas allows the filament to operate at a higher temperature than conventional incandescent bulbs, allowing halogen bulbs to produce light more efficiently. Halogen technology also increases the lifetime of the filament up to 3,000 hours, or about three times that of a conventional incandescent bulb, lowering the replacement costs of the bulbs. While halogen bulbs have a higher up front cost than conventional incandescent bulbs, costing between $1.00 and $1.75 per bulb, they are currently less expensive than CFL and LED bulbs.

The total halogen market, including non-structure applications, was $3.4 billion in 2009 and is expected to grow to $4.3 billion by 2014, representing a CAGR of 4.9%. Similar to CFLs, the major trend expected to drive the growth of halogens in the structures market is the onset of legislative bans on inefficient bulb technologies. Halogens are initially expected to represent a significant portion of bulbs replacing conventional incandescent technology because of their relatively low cost and high light quality. Halogen bulbs currently have a lower up front cost than competing CFL and LED bulbs and also produce light almost identical to the light produced by conventional incandescent bulbs. Halogens also operate just like conventional incandescent bulbs, with instantaneous start and the ability to dim, making them comfortable replacements, particularly in the residential market where the majority of conventional incandescent bulbs are sold. These characteristics provide halogen bulbs potential to absorb significant market share due to phase-outs of inefficient bulb technologies. However, halogens are expected to face challenges meeting increasingly strict efficiency standards in the medium-term, or over the next three to five years, as some models have efficiencies below future thresholds set by various legislative and regulatory bodies. Nevertheless, we believe new technological developments for halogens may lead to these bulbs to becoming the preferred replacement technology for the conventional incandescent bulb market in the near- and medium-term.

HID

HID bulbs produce light by creating an electric arc between tungsten electrodes housed inside a translucent or transparent fused quartz or fused alumina arc tube, which is filled with metal salts and gas. The gas acts as a catalyst to heat the metal salts, forming plasma, which increases the intensity of light produced by the arc and reduces power consumption. Compared to conventional incandescent, halogen and CFLs, HID bulbs generate more visible light per unit of electric power consumed since a greater proportion of their radiation is given off as visible light instead of heat. HID bulbs are primarily used in industrial, warehouse and outdoor lighting applications where high levels of light over large areas are typically required. HID bulbs represent a substantial majority of the HID and Other market, which totaled $3.3 billion in 2009 and is estimated to grow to $4.0 billion by 2014, representing a CAGR of 4.0%.

 

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The chart below shows average price, expected useful life and efficacy of the previously discussed bulb technologies:

 

 

 

     AVERAGE PRICE FOR 60W
($)
   EXPECTED LIFETIME
(HOURS)
   EFFICACY
(LUMENS/WATT)

Conventional Incandescent

   $0.25 – $1.50    ~1,000    15

Halogen

   $1.00 – $1.75    ~3,000    20

Compact Fluorescent

   $1.00 – $6.25    ~10,000 – 20,000    63

Linear Fluorescent

   NA    ~25,000    118

HID

   NA    ~12,000 – 20,000    104 – 120

Light-Emitting Diode

   $24.00 – $50.00    ~25,000 – 50,000    52 – 130

 

 

Source: The Freedonia Group, Inc.; Department of Energy.

Conventional incandescent bulbs are currently the major global light source and have been the bulb of choice for more than 100 years. Currently, in the residential market, while energy efficiency is sometimes a consideration when making lighting purchase decisions, consumers have been more likely to focus on up front cost, aesthetics, familiarity and availability. As a result, conventional incandescent bulbs continue to fill the majority of sockets in the residential market. In the non-residential building market, two technologies make up the bulk of the market: fluorescent and HID. Fluorescent bulbs, including CFLs, are most commonly found in commercial and industrial settings, where the lower energy costs and longer replacement cycles associated with this technology are of greater importance in bulb purchasing decisions. HIDs are used most commonly in high ceiling environments such as warehouses and other industrial buildings, and outdoor applications due to their ability to produce a large amount of light. Because HIDs do not satisfy as diverse an application base as do fluorescent technologies, linear fluorescent and CFLs represent a much larger portion of the total non-residential building market. Although LED light bulbs currently only account for a small share of the non-residential building market, demand for LED bulbs in the non-residential building sector is growing rapidly, as LED bulbs offer the lowest operating cost of all lighting technologies due to their long life and high efficiency.

Regulatory Changes—Phase-Out of Inefficient Bulb Technologies

Concerted energy conservation efforts and an increased drive towards energy efficient lighting have led many governments around the world to partially restrict or entirely ban certain inefficient light bulbs. Because conventional incandescent light bulbs use high levels of energy relative to more energy efficient alternatives, many governments around the world have introduced measures to effectively phase out conventional incandescent light bulbs by imposing minimum efficiency standards for light bulbs above the levels that can be achieved by conventional incandescent technology. The following are some of the regulatory changes enacted within the major lighting markets to limit or ban inefficient light bulbs:

 

  n  

North America: In December 2007, the U.S. federal government enacted EISA, which requires all general purpose light bulbs that produce 310 to 2,600 lumens (or 45 to 100+ watts) of light to be approximately 30% more energy efficient than conventional incandescent light bulbs by 2014. Because conventional incandescent light bulbs cannot meet the greater efficiency standards prescribed by the legislation, the EISA has effectively phased out the sale of 100W+ incandescent light bulbs, which account for about 22% of the U.S. incandescent bulb market, beginning in January 2012, and is expected to phase out 75W+ incandescent light bulbs, which account for 41% of the U.S. incandescent market, beginning in January 2013 and 40W+ incandescent light bulbs, representing a cumulative 99% of the U.S. incandescent market, beginning in 2014. While the EISA is effective January 1, 2012, in December 2011, the U.S. Congress passed a budget bill that prevents the Department of Energy from using its funding to enforce the energy efficient light bulb standards until October 1, 2012. Canada has enacted legislation similar to EISA that phases out the sale of 40 to 100W+ incandescent light bulbs during 2012, though recent rules extended the start date to 2014. Mexico has also enacted legislation that bans inefficient lighting in similar scope and timeline to the EISA standards. As a result, the share of conventional incandescent light bulbs in North America as a percentage of total North American bulb demand is expected to decline from 29.4% in 2009 to 16.8% by 2014, representing a 39.2% decline in absolute demand.

 

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  n  

European Union: In 2009, the European Union, or the E.U., adopted regulation that phases out certain inefficient light bulb technologies by requiring light bulbs to meet specified efficiency thresholds over time. The E.U. mandate effectively banned the sale throughout the E.U. of 100W+ incandescent light bulbs beginning in September 2009, 75W+ incandescent light bulbs beginning in September 2010 and 60W+ incandescent light bulbs beginning in September 2011. In addition, E.U. regulations will require all light bulbs to have at least a ‘B’ energy efficiency rating beginning in 2016. As a result, the share of conventional incandescent light bulbs in Western Europe, representing the significant majority of the total E.U. market, as a percentage of total Western European light bulb demand is expected to decline from 27.8% in 2009 to 16.4% by 2014, representing a 40.7% decline in absolute demand.

 

  n  

Rest of the world: Globally, many governments have begun to set minimum energy efficiency standards for light bulbs in an effort to manage energy consumption and drive the adoption of next generation light bulb technologies:

 

  n  

Argentina—Energy efficiency law banned the import of 25W+ incandescent light bulbs as of December 31, 2010 and their sale after May 31, 2011. Market share of conventional incandescent light bulbs is estimated to decline from 25.9% in 2009 to 16.6% in 2014.

 

  n  

Brazil—The phase-out of conventional incandescent light bulbs began in 2005 and current energy efficiency standards are expected to phase out 150W+ incandescent light bulbs beginning in 2012 and culminate in the phase out of all 25W+ incandescent light bulbs by 2016. Market share of conventional incandescent light bulbs is estimated to decline from 29.8% in 2009 to 17.6% in 2014.

 

  n  

China—In October 2011, China officially announced the ban on the import and sale of 100W+ incandescent light bulbs starting October 1, 2012, 60W+ incandescent light bulbs starting October 1, 2014, and 15W+ incandescent light bulbs starting October 1, 2016. Market share of conventional incandescent light bulbs is estimated to decline from 35.5% in 2009 to 27.9% in 2014.

 

  n  

India—India has not placed restrictions or bans on incandescent light bulbs. However, in 2007 it adopted the Bachat Bulb Yojana plan, a program intended to lower the use of incandescent light bulbs in India by offering CFLs to customers at a subsidized cost. Market share of conventional incandescent light bulbs is estimated to decline from 20.8% in 2009 to 13.2% in 2014.

 

  n  

Japan—Applicable law on energy consumption provides tax savings and local government subsidies for the adoption of LED lighting. Market share of conventional incandescent light bulbs is estimated to decline from 4.1% in 2009 to 3.3% in 2014.

 

  n  

Russia—Enacted a ban on the production and sale of all types of incandescent light bulbs by 2014, with 100W+ incandescent light bulbs and 75W+ incandescent light bulbs becoming prohibited in 2011 and 2013, respectively. Market share of conventional incandescent light bulbs is estimated to decline from 28.0% in 2009 to 17.3% in 2014.

 

  n  

Taiwan—A lighting development and supply program provides subsidies for energy efficient lighting and restricts production of inefficient lighting; incandescent light bulb restrictions began in 2010 and the government announced its intention to ban all incandescent light bulbs in 2012. Market share of conventional incandescent light bulbs is estimated to decline from 16.0% in 2009 to 9.8% in 2014.

As a result of government initiatives to phase out the use of inefficient light bulbs and the worldwide focus on energy efficiency and conservation, we believe a significant growth opportunity exists for efficient lighting technologies.

 

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BUSINESS

Overview

We are a leading producer and provider of energy efficient light bulbs to the global structures light bulb market, which, according to The Freedonia Group, Inc., was $21.9 billion in 2009. Our primary products include socket-based CFLs, LEDs, and halogen bulbs. We also offer a comprehensive line of complementary lighting products, including linear fluorescent bulbs and fixtures, exit and emergency lighting, CFL fixtures and ballasts. Since we manufacture only energy efficient light bulbs, and not conventional incandescent bulbs, we believe that we are well positioned to capitalize on the phase-out of inefficient bulbs taking place in many major markets around the world. We believe our vertically integrated business model, under which we design, manufacture and test substantially all of our products in-house, utilizing state-of-the-art manufacturing and testing equipment, provides us with a high degree of control over our product quality and costs and allows us to be more responsive to our customers than competitors, many of which outsource such functions. We have a strong distribution footprint and reputation among retailers and commercial lighting distributors in North America, and we are continuing to expand our footprint in other large global markets, including Asia, Europe and South America.

With more than 3,500 CFL SKUs, we believe we have the largest and most technologically advanced CFL product offerings of any of our competitors. We also sell a product line of more than 275 LED SKUs and 12 halogen SKUs that address a majority of socket-based lighting applications. Since our inception, we have been focused on product innovation and R&D in order to continue developing industry leading technology that we believe differentiates our products in the market. We employ approximately 50 dedicated engineers and technicians focused on delivering new products to market as well as continuing to improve our existing products. We currently operate two product development and R&D facilities in Shanghai, China and in Aurora, Ohio. As the global lighting market reduces its reliance on conventional incandescent light bulbs, we believe that our broad portfolio of energy efficient lighting products creates a technology-neutral platform for growth, enabling us to address the majority of global socket-based lighting applications regardless of which technologies gain market acceptance.

We currently sell our products to a diverse global customer base through our two primary customer channels: the retail channel and the C&I channel. We sell our products through more than 20,000 retail and C&I outlets. In addition, we also sell our products to retailers through utility and government incentive programs. Our key customers in the retail channel include The Home Depot, to which we are the largest energy efficient bulb supplier in the United States, Homebase and Wal-Mart, and our key customers in the C&I segment include CED, Grainger, HD Supply, Regency and Rexel. Our distribution footprint includes owned and leased facilities in North America, Europe, Asia and South America. We have developed a strong presence in North America, achieving 31% market share in CFL sales for 2011, according to NEMA. We have been selling our products in China since 2004, where we operate six regional offices today, and plan to expand into all 34 provinces, with over 1,000 distribution branches by the end of 2014. We have also established a presence in Europe and South America, and seek to leverage our strong North American customer and distribution base to facilitate expansion in these attractive global markets. These regions represent a key opportunity for us, as countries within all of these regions have some form of legislation in place banning the sale of inefficient bulbs in the near-term. We have established sales teams in China, the United Kingdom, the Netherlands, France and Brazil to penetrate these markets.

We operate a vertically integrated, efficient and highly automated manufacturing process with four manufacturing facilities located in China. Our CFL and linear fluorescent bulb production spans glass production and shaping, tube coating and processing, ballast, driver and base production and final assembly. For the manufacture of our LED bulbs, we rely on high quality supply partners for our packaged LED chips and optical components, which we incorporate with our proprietary driver technologies and bulb housings into final products. We operate an efficient, highly automated manufacturing process and utilize several proprietary advanced manufacturing techniques, such as automated tube bending and rotary bulb coating equipment, which we believe are unique in the lighting industry. We currently outsource production of halogen bulbs, however, we plan to bring this production in-house as demand for these products grows. We believe our vertically integrated manufacturing process enables us to control substantially all phases of our product manufacturing and distribution process, allowing us to achieve best-in-class product quality while minimizing our costs. By operating our own manufacturing facilities, we believe we are also able to react faster to our customers’ design requirements and provide shorter lead times for new products than our competitors.

 

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For the years ended December 31, 2009, 2010 and 2011, our net sales were $257.7 million, $287.2 million and $280.9 million, respectively. Our net income during the same periods was $13.2 million,