================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 20-F
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 33-45136
DSG INTERNATIONAL LIMITED
-------------------------------------
(Exact name of Registrant as specified in its
charter)
-------------------------------------
(Translation of Registrant's name into
English)
British Virgin Islands
-------------------------------------
(Jurisdiction of incorporation or
organization)
17/F Watson Centre
16-22 Kung Yip St., Kwai Chung, Hong Kong
Tel. No. 852-2427-6951
-------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Ordinary Shares, par value
$0.01 per share ("Ordinary Shares")
-------------------------------------
(Title of Class)
-------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
-------------------------------------
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Ordinary Shares 6,678,359
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark which financial statement item the registrant has elected
to follow.
[ ] Item 17 [X] Item 18
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
================================================================================
ITEM 1. DESCRIPTION OF BUSINESS.
A. THE COMPANY
The Company was founded in Hong Kong in 1973, and was the first manufacturer
of disposable diapers in Hong Kong and one of the first companies to offer
disposable diapers to Hong Kong consumers. The Company also exports its products
from Hong Kong to other countries in Asia, including Singapore, Thailand and
Malaysia.
In 1984, the Company established a manufacturing facility in California
through a joint venture with a large French disposable diaper manufacturer, and
later that year acquired full ownership of that facility.
In 1987, the Company acquired the U.S. assets of a major private label
disposable diaper manufacturer which was in bankruptcy, and was thus able to
establish a second manufacturing facility at Norcross, Georgia to serve the
central, southeastern and northeastern United States. As a result, the Company
was able to move its "FITTI(R)" brand into U.S. national distribution.
In 1988, the Company acquired all the assets of an unprofitable private label
disposable diaper manufacturer in Australia. Also in 1988, the Company acquired
the assets, including brand names, of the unprofitable disposable diaper
manufacturing division of a major U.K. consumer products company.
In September 1991, the Company opened a new manufacturing facility in
Singapore to relieve capacity constraints at its Hong Kong facility and to
better service South East Asian markets.
On March 6, 1992, the Company commenced the initial public offering in the
United States of its Ordinary Shares.
In July 1993, the Company acquired all the assets of a private label
disposable diaper and feminine napkin manufacturing division of a Swiss company.
In September 1993, the Company acquired an unprofitable private label disposable
diaper and feminine napkin manufacturing company in Canada. At the end of
December 1993, the Company further acquired an unprofitable branded product
disposable diaper manufacturer in the United Kingdom.
In May 1994, the Company formed a joint venture company with its former
distributor in Thailand to acquire the entire capital of the distributor's
company and to build a plant in Bangkok, Thailand to manufacture baby diapers
and adult incontinence products. The Company owned an 80% interest in the joint
venture company. In August 1994, the Company acquired the entire capital of a
manufacturer of adult incontinence products in Switzerland. In November 1994,
the Company opened its new plant in Zhongshan, Guangdong in the People's
Republic of China.
In April 1995, the Company's management group, led by the Chairman, Brandon
Wang, and two other equity investors proposed a going private transaction to
which the holders of all the outstanding shares of the Company held by the
public would receive $19 per share. On May 26, 1995, after a review by a Special
Committee of independent directors appointed to consider and advise on the
proposal, the Board of Directors approved the going private transaction at a
price of $19.25 per share and authorized the Company to enter into a merger
agreement with corporations that had been formed by the management group. On
July 7, 1995 the merger agreement that had been entered into as of May 26, 1995
to effect the going private transaction was terminated because there was no
reasonable possibility that certain conditions of the merger agreement could be
satisfied within the time period stipulated in the agreement as there was no
reasonable prospect that financing would be available on satisfactory terms
within such time period.
1
In September 1995, the Company opened its new plant in Bangkok, Thailand. In
October 1995, the Company established a wholly-owned subsidiary in Malaysia to
assist with the marketing and distribution of the Company's products in
Malaysia.
In November 1996, the Company invited its public shareholders to tender their
shares to the Company at prices not greater than $14.50 nor less than $12.75
per share. The tender offer closed on December 13, 1996 and the Company
purchased 1,003,641 shares from the public shareholders at a price of $14.50 per
share.
DSG International Limited is incorporated in the British Virgin Islands and
has its principal executive office at 17/F Watson Centre, 16-22 Kung Yip Street,
Kwai Chung, Hong Kong. Its telephone number is (852) 2427-6951.
B. BUSINESS
1. General
The Company manufactures and markets disposable diapers primarily under its
own brand names, which include "FITTI(R)", "PET PET(R)", "COSIES(R)",
"COSIFITS(R)", "BABY LOVE(R)", "TOGS(R)", "CARES(R)", "VLESI(R)", "DISPO
123(TM)" and "CERTAINTY(R)". The Company also manufactures and markets
disposable diapers and feminine napkins under private labels. The Company's
products are sold internationally, with its eleven manufacturing facilities
being in Hong Kong, the United States, Australia, the United Kingdom, Singapore.
Switzerland, Canada, the People's Republic of China ("PRC") and Thailand.
The Company's operation in the United States, the Company's largest operation,
in association with the Company's operation in Canada, manufactures and
distributes branded and private label disposable baby diapers, adult
incontinence products, feminine napkins and training pants products for the
North American market. With sales in 48 states, the Company's "FITTI(R)" brand
is one of the best selling brands of disposable baby diapers in the United
States (excluding retailers' private labels), with a market share in the food
and grocery store sector estimated by the Company to be approximately 3% on a
volume basis.
In Australia, where the Company is one of the leading disposable baby diaper
manufacturers, the Company estimates that it has an overall market share of
approximately 22% on a volume basis, placing it second in that market. The
Australian market is divided into the pharmacy sector and the grocery store
sector, and the Company is currently providing brands of both premium quality
and ultra quality to both of these market sectors. The Company also markets
disposable baby diapers under private labels. In 1996, the Company's private
labels accounted for approximately 16% of its Australian sales.
The Company estimates that its share of the disposable baby diaper markets in
Hong Kong, Singapore and Malaysia ranges from 20% to 25%, placing it one of the
market leaders in those countries. In the PRC and Thailand, the Company's
leading brands, "FITTI(R)" and "PET PET(R)", are well established. With its
manufacturing plants in the PRC and in Thailand, the Company believes that it
will continue to expand sales in the PRC, Thailand and other markets in the Asia
Pacific region. The Company entered the Asian adult incontinence market through
its operation in Thailand in 1995 with the launch of its "DISPO 123(TM)" brand.
The Company believes that the market for adult incontinence products will
provide good growth and profit opportunities for the Company.
In the United Kingdom, the Company continues to emphasize its branded products
as the Company has seen vigorous consolidation of private label manufacturers in
the United Kingdom. In Switzerland, the Company's operation near Zurich
manufactures primarily private label disposable baby diapers and feminine
napkins for a major retail group which has over a 50% share of the retail trade
in Switzerland. The Company also manufactures
2
and distributes its "FITTI(R)" brand products for Switzerland and other European
markets but the expected growth is limited by other nationally advertised
brands. The Company's operation in the Eastern region of Switzerland
manufactures and distributes its branded "VLESI(R)" and other private label
adult incontinence products for the domestic market in Switzerland and for other
European markets.
The Company's marketing strategy is to provide retailers and wholesalers with
a quality, value-oriented product which offers good profit margins, combined
with a high level of service, rather than attempting to mass market its products
in competition with the industry leaders. The Company believes that its
attention to raw material costs and manufacturing efficiency, combined with
careful control of advertising and promotional costs, enables it to produce and
market value-oriented products at competitive prices. The Company targets niche
markets, including selected geographical areas, customer categories, pricing
categories and distribution channels. Consistent with this overall strategy,
each of the Company's geographic operations has a high degree of autonomy to
determine its own brand and product specifications and sales and marketing
policies. In those countries where the Company manufactures for private label
customers, the Company utilizes its expertise gained in marketing its own brands
to work together with the private label customer to develop suitable products
and packaging for the targeted markets.
The Company's growth strategy is to target its branded products at selected
sectors of mature markets, such as the United States and Western Europe, and to
take a broader marketing approach in less developed markets where there is a
high rate of growth in disposable diaper usage. The Company believes that its
manufacturing facilities in Asia and Australia will enable it to participate in
the expected growth of those markets. In the past, the Company has expanded its
business into new markets by acquiring the assets of unprofitable disposable
diapers and feminine napkins manufacturers in the United States, Australia, the
United Kingdom, Canada and Switzerland. The Company intends to seek further
opportunities to expand through acquisitions and will establish its own
manufacturing facilities in emerging markets which offer significant potential,
such as the Company's facilities in the PRC and Thailand which were opened in
1994 and 1995 respectively.
Raw materials account for about three-quarters of the cost of goods sold. The
principal raw material is fluff wood pulp, the cost of which increased
significantly in 1995 but declined in 1996. The improved profitability which
resulted from the softening of fluff wood pulp prices was partially offset by
the continued intense price and promotional competition, especially in North
America.
Disposable diapers are designed and marketed with two basic objectives in
mind: to afford parents of infants up to two and one-half years of age the
convenience of diapers which are disposed of after one use; and to reduce the
risk of chapping ("diaper rash") which often occurs when moisture from a soiled
diaper remains in contact with the baby's skin. The basic concept of most
disposable diapers on the market is the same: to allow moisture to pass through
a soft inner layer which is in contact with the baby's skin into a highly
absorbent inner core, from which the moisture is prevented from escaping by an
outer moisture-proof backsheet. There are significant differences in quality
among the various disposable diapers currently on the market. The most important
quality features of disposable diapers are their ability to absorb and retain
fluids, to prevent leakage through leg and waist openings by the use of
elasticized bands, and to be easily fitted and held in place by adhesive tapes
which secure the diaper firmly without causing discomfort to the baby. Broadly,
disposable diapers are divided into two types: thicker "regular" diapers which
use primarily fluff wood pulp as the absorption medium; and thinner "ultra"
diapers which use less fluff wood pulp and employ a super absorbent polymer in
the absorbent core. Other features, such as innovative fastenings, attractive
designs, extra-dry sublayer, gender specific absorbent cores, stand-up leg
gathers, elastic waistband and packaging help to differentiate products from one
another.
The most important quality features of feminine napkins are their ability to
fit and their ultra ability of absorbing and retaining fluid. The Company's
feminine napkin manufacturing equipment is able to provide quality features and
to tailor customers' product specifications.
3
Adult incontinence products are designed for the convenience of males and
females having various degrees of incontinence. The basic concept of most adult
incontinence products is to prevent leakage of urine and faeces by absorbing the
moisture into a highly absorbent inner core and retaining the soiled contents
within an outer moisture proof backsheet. Similar to disposable diapers, the
most important quality features of adult incontinence products are their ability
to absorb and retain fluids, to prevent leakage through leg and waist openings
by the use of elasticized bands, and to be easily fitted and held in place by
adhesive tapes which secure firmly without causing discomfort to the user. The
absorption media for adult incontinence products are fluff wood pulp and super
absorbent polymer. Other features, such as wetness indicator, stand-up leg
gathers, elastic waistband, frontal tape closure system and packaging help to
differentiate products from one another.
The Company believes that there is significant potential for adult
incontinence products due to the aging populations of the industrialized and
developed countries. The Company has entered the adult incontinence market, and
has established and acquired manufacturing facilities in Thailand and
Switzerland. The Company believes that with its three strategically located
manufacturing facilities, the Company is able to expand its sales of adult
incontinence products in the markets in North America, Europe and Asia. The
Company introduces adult incontinence products into its markets in a manner
consistent with its niche market strategy, and believes that the key to
successful marketing of this type of product is the high and prompt level of
service from the manufacturer and distributor, regular contact with institutions
to ensure proper usage of the products, and providing a range of products of
high quality and performance.
FORWARD-LOOKING STATEMENTS
The Company believes the fluff wood pulp prices will remain stable and that
the intense price and promotional competition, especially in North America, will
continue in 1997.
RISK FACTORS
The Company's forward-looking statements are based on the Company's
assumptions regarding the economies and market conditions in the countries in
which it operates, and certain assumptions regarding the price of raw materials,
including fluff wood pulp.
If the Company's actual performance differs materially from its projections
which are based on assumptions regarding the economies and market conditions in
the countries in which it operates, the Company's actual results could vary
significantly from the performance projected in the forward-looking statements.
2. Geographic Segment Information
The following table sets forth the percentage of the Company's net sales and
operating income (loss) by geographic market.
1996 1995 1994
---- ---- ----
Net sales
North America ............. 39.2% 45.3% 50.7%
Australia ................. 20.2 18.0 17.6
Asia ...................... 25.6 19.5 16.9
Europe .................... 15.0 17.2 14.8
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
4
1996 1995 1994
---- ---- ----
Operating income (loss)
North America................. 65.9% 106.8% 88.8%
Australia..................... 32.6 25.3% 26.8
Asia.......................... 42.7 34.4 16.6
Europe........................ 0.2 (24.5) (5.8)
Corporate expenses............ (41.4) (42.0) (26.4)
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
a. North America
i. Products
The Company manufactures and distributes disposable baby diapers, disposable
training and youth pants, adult incontinence products and feminine protection
products throughout North America under the brand names of "FITTI(R)" and
"CERTAINTY(R)", as well as a growing number of different private label brands.
"FITTI(R)" baby diapers are available in both Ultra-Thin and Supreme (cloth
back) varieties. The "FITTI(R)" baby diaper brand is a full-featured product,
recognized for its unique wetness indicator... a cute print that fades away when
the diaper becomes wet. The "FITTI(R)" brand name is also used with the
Company's disposable training pants and the new DRI-NITE JUNIOR youth pants.
These pant products feature cloth-like covers, tear-away side panels, and
comfortable waist and hip elastic. Another product in the "FITTI(R)" line-up is
Insert Shields, a product designed to be used as a diaper insert or a disposable
pad for light incontinence.
"FITTI(R)" remains the only "value-brand" in the market to offer a supreme
style diaper, other than private labels. This product incorporates the
cloth-like DrySoft cover, along with a SoftGrip mechanical tape closure system.
The Company has also launched economical "jumbo" packs to the marketplace under
the "FITTI(R)" brand. These have been very well accepted by retailers and
consumers alike, and initial gains in expanding distribution of these products
have been strong.
The Company continues to expand its private label diaper business throughout
North America with customers like Walgreens Drug, Woolworths, A&P, Topco,
Shurfine International, Hannaford Bros, McLane (division of Wal-Mart) and Costco
Wholesale. On the feminine hygiene side, the Company's focus remains on private
label with major North American retailers like Safeway, Walgreens, A&P, Sobeys,
Kmart and Uniprix Drug. In the external feminine protection segment, the Company
provides a full range of quality products including contour, winged, ultra-thin
and panty liner products.
The Company successfully launched its adult incontinence products in late
1996. The products are available under both the "CERTAINTY(R)" brand name as
well as selected private labels. Offered under the "CERTAINTY(R)" brand are
briefs, feminine bladder control pads, and feminine bladder control guards. All
of these products provide the incontinent sufferer with product features and
performance that the Company believes are far superior to any other brand now
available in North America. In all cases, the Company is offering products with
genuine points of difference and exclusive benefits. This has helped enhance
acceptance of this new program. Other new products are on the horizon, which
will assure the Company's position as the sole provider of "premium" products.
The "CERTAINTY(R)" brand is gaining good distribution with retailers like
ShopRite, Pathmark, A&P, Meijer Stores, Longs Drug, Albertsons and Fred Meyer.
Private label partnerships are being developed with major retailers like
Walgreens, Rite-Aid and Eckerd Drug.
5
ii. Sales and Marketing
Disposable diapers are believed to account for more than 90% of the baby
diaper changes in North America. The market can be divided into several
segments: brands that are advertised and sold nationally; brands that are not
widely advertised but are sold nationally; brands sold only in specific regional
areas; and baby diapers sold under the private labels of retailers. The
nationally advertised brands now account for roughly 75% of all sales. The
Company continues to expand its distribution base on its "FITTI(R)" brand with
new retail customers coming on board in Canada, the United States and Puerto
Rico. Puerto Rico and the Virgin Islands represent an excellent opportunity for
additional sales and expanded retail distribution. Sales of the "FITTI(R)" brand
disposable training pants have been excellent with steady volume growth. The
product was repositioned in 1996 with better features for the consumer at no
additional cost.
The Company has divided the North American market primarily into four regions:
the Western region serviced out of the Los Angeles facility, the Canadian region
which encompasses Canada and parts of the Northeastern United States serviced by
the Brantford, Ontario facility in Canada; and the Southeastern, Midwestern and
Caribbean regions are serviced by the Company's facility in Atlanta, Georgia.
Sales and marketing efforts are managed by a direct sales management team, which
utilizes a national network of independent, commissioned brokers to sell
directly to retailers and distributors/wholesalers. These brokers serve as the
Company's sales agents within defined territories to monitor sales, implement
company sanctioned trade promotions and handle all retail merchandising
responsibilities for complete line of the Company's products. The Company
remains committed to its marketing philosophy of direct account call
responsibility for all of its sales management personnel. This allows the
Company to provide a high degree of category expertise/education and to remain
flexible and responsive to trade and market needs. In addition, the strategic
location of its North American manufacturing facilities has enabled the Company
to achieve average shipping transit time of one to two days for most North
American destinations.
Branded Products. While sales volume declined slightly from 1995 levels due to
the continuing intense price and promotional pressure and a declining birth rate
in the North American market, "FITTI(R)" continued to enjoy a significant share
of the United States disposable baby diaper market. For the quarter ended
December 31, 1996, "FITTI(R)" brand's share was 3% of the total units of
disposable baby diapers and training pants sold in grocery outlets in the United
States. The grocery store sector represents approximately 56% of the $4 billion
in the United States retail market. The Company's products are sold nationwide
and "FITTI(R)" Medium and Large Ultra-Thin sizes both rank in the top 35
quartile in actual unit sales for the total U.S. grocery market, out of more
than 150 items in national distribution. In certain markets, such as New York,
the nation's largest retail market, the Company believes that the "FITTI(R)"
brand share is much greater than conventional market share data would indicate
because of the high percentage of "FITTI(R)" brand diapers being sold through
wholesale and inner city outlets that are not reporting to typical market
research organizations. With only 35% of the actual volume reflected by market
share data, "FITTI(R)" achieved a share of 7.2% of that market for the quarter
ended December 31, 1996. This compares to a market share of 4.7% for the quarter
ended March 31, 1996. In other markets such as Arizona, Kansas, Oklahoma and
Colorado, the Company believes that the "FITTI(R)" brand's market share remains
in excess of 10% of all units sold in grocery outlets. The Company concentrates
its efforts and marketing activities on providing wholesalers and retailers with
above average profit margins, packaging with great shelf impact, creative and
effective promotions combined with very efficient distribution, electronic data
interchange capability and a high level of customer service. The Company was the
first diaper manufacturer to offer a unique "free pre-paid long distance phone
card offer" to the consumer. The promotion was very successful at generating
"FITTI(R)" trial by targeting a high telephone user group: new, young parents
and grandparents. The Company provides consumers with affordable retail price
points, unique product features and the value-added combination of quality
products at lower prices. The Company has grown its business with a concentrated
effort against the primary diaper selling class of trade... grocery. The Company
enjoys good retail distribution of its "FITTI(R)" brand and very good working
relationships with major national and regional grocery retailers such as Kroger,
Pathmark, Shop Rite, A&P, Winn Dixie, Albertsons, Super Value, Fleming, Giant
Eagle, King Soopers, Ralphs Grocery and Stop & Shop. The Company continues to
target the non-food
6
class of trade as a major area of opportunity for growth in the future. Current
non-food retail partners include Ames, Shopko, Woolworth, Kmart/Canada, PharMor
and Meijer.
The Company began its launch of adult incontinence products in 1996. On the
branded side, "CERTAINTY(R)" is off to an excellent start. Initial retail
distribution gains have been made at major retailers such as Pathmark, ShopRite,
A&P, Waldbaums, Albertsons, Safeway, Longs Drug, Meijer and H.E. Butt. The
Company feels confident that this branded distribution will continue to expand
at a healthy rate. Already, the Company has new product entries in the
development stage. The Company's strategy is to provide products to the
marketplace that the Company believes are superior to other available products
and that are also more affordable than the advertised brands. This product
segment has also provided the Company with an excellent avenue of distribution
into the major drug retailers. The drug store trade now represents more than 50%
of the total $500 million in adult incontinent retail sales in the United
States. In addition, growth potential for this category remains high as the
population ages. The Company's strategy with the major non-food retailers is to
create a premium tier private label for them. This strategy is already paying
dividends, with distribution secured and new partnerships established at
Walgreens Drug, Rite-Aid Drug and Eckerd Drug. Additional retailers are targeted
as well. Lastly, we have entered into an initial partnership with a major
institutional distributor, which launched the Company into a new area of
opportunity. They will begin with the purchase and distribution of the Company's
premium adult brief product and expand into its full range. This distributor has
access to the national institutional market, which represents more than $750
million in adult incontinent product sales. The adult category represents an
area of significant sales and distribution growth for the Company, and
significant gains are expected in 1997.
Private Label. This segment of the Company's business is also a major area of
potential growth. On the disposable diaper side, new partnerships are underway
with major retailers like Price/Costco Clubs, A&P stores, Topco and Rich Foods.
Existing private label partnerships with major retailers like Walgreens Drug,
Shurfine International, Woolworth, Uniprix, Loblaws, Topco and A&P continue to
grow. The Company will look to the private label arena as a major area of growth
for all of its products categories, including disposable baby diapers, training
pants and adult incontinence products. The Company recognizes that the private
label segment of these businesses remains somewhat more insulated than typical
"value brands" from the aggressive pricing/promotional strategies of the
advertised brands, due to the "protective" posture that major retailers tend to
take when it comes to supporting their own brands. The Company's timing is good
in the baby diaper segment. The number of manufacturers capable of supplying a
full range of quality products (Ultra-thin diapers, Supreme-style diapers,
training pants, youth pants etc.) is less than it was several years ago. The
Company is also well positioned with its existing channels of distribution for
the Company's other branded and private label products. The Company has a proven
track record for product quality, category expertise and customer service of
which most major North American retailers are already aware.
b. AUSTRALIA
i. Products
In Australia, the Company manufactures and markets disposable diapers both
under its own brand names and under private labels. The Company's own brands
accounted for over 81% of its Australian sales for 1996. The Company currently
has four major brands of disposable diapers in Australia, two of which are
targeted at the pharmacy sector, and two of which are targeted at the grocery
store sector. "COSIES(R)", a premium quality, value priced "ultra" diaper with
multi-strand leg elastics, printed frontal tape closure system, soft elastic
waistband and stand-up leg gathers, and "COSIFITS(R)", an "ultra" diaper with
multi-strand leg elastics and frontal tape closure system, are distributed
through the pharmacy sector; while "BABYLOVE(R)", an "ultra" diaper similar to
"COSIES(R)", and "LULLABY(R)", an "ultra" diaper similar to "COSIFITS(R)", are
targeted at the food and grocery store sector. During 1996, the Company
introduced the "VLESI(R)" range of adult incontinence products into the
Australian institutional market.
7
ii. Sales and Marketing
The Australian retail market for disposable diapers has grown from
approximately $94 million in 1988, when the Company first entered the market, to
approximately $336 million in the twelve months ended December 1996/1/. The
growth of the total market in units was 5.7%, from 760 million diapers in 1995
to 804 million diapers in 1996. The Company believes that market utilization for
disposable diapers is approximately 55%, and is expected to increase to the
level of other industrialized Western countries. Branded products comprise
approximately 88% of the Australian market, with the remaining 12% made up of
private label products. The Company estimates that it currently is number two in
the market, with approximately 22% of the Australian disposable diaper market. A
major U.S. national manufacturer has approximately 64% of the market.
The Company markets and distributes the Company's branded products in
Australia in conjunction with independent brokers, who market and facilitate
distribution of the Company's products to the pharmacy and food and grocery
store sectors in each Australian state.
Branded Products. The Company's branded products, "COSIFITS(R)", "COSIES(R)"
and "COSIES(R) NIGHT-TIME", which was introduced specially designed for night
time extended use, are targeted at the pharmacy sector. This sector, which
accounts for approximately 21% of all disposable diaper sales in Australia,
consists of a large number of small and independent pharmacies which generally
do not have their own private label programs. The Company has successfully
pursued a strategy of encouraging these independent pharmacies to carry the
Company's brands, which are supported by national advertising and promotion, and
provide profit margins which are comparable to those typically offered by
private label programs.
The pharmacy sector is highly fragmented, and the Company sells to large
wholesalers of pharmaceutical products in Australia, such as Sigma Company, F.
H. Faulding Wholesale, and Australian Pharmaceutical Industries, who distribute
the products to individual pharmacies.
The Company's branded products, "BABYLOVE(R)" and "LULLABY(R)" are targeted at
the food and grocery store sector, which accounts for approximately 79% of all
disposable diaper sales in Australia. The food and grocery retail sector in
Australia is highly concentrated, and the Company's marketing strategy in this
sector is similar to that which it pursues with its "FITTI(R)" brand products in
other markets. The Company's retail customers in the food and grocery sector in
Australia include Woolworths, Safeway, Coles Myer and Franklins.
Private Label. Private label products accounted for approximately 12% of the
Australian market for disposable diapers in 1996, and the Company believes that
it currently has approximately 35% share of the private label market in
Australia. The Company has private label programs with major retail chains, such
as Franklins, Target and other retailers.
As in other markets, price and reliable service are the primary factors in
determining a retailer's choice of private label manufacturer. The Company
maintains its market position in this sector by working together with its
private label customers to design and regularly incorporate new product
improvements while maintaining competitive prices.
Institutional Products. The Company has engaged a sales team to cover the
institutional market for adult incontinence products. The adult incontinence
market is concentrated in institutions with a slowly developing retail
distribution. The Company intends to be a supplier with a full range of such
products in both the institutional and retail markets.
/1/ Source: AC Nielsen Sami, January 1997.
8
c. ASIA
i. Products
The Company manufactures disposable baby diapers primarily under its own
brands in Asia. These include its major brands "FITTI(R)" and "PET PET(R)",
which in 1996 accounted for approximately 41% and 50%, respectively, of the
Company's net sales in Asia. The Company also manufactures other secondary
brands as well as private labels on a selective basis. The "FITTI(R)" product is
an "ultra" diaper featuring multi-strand leg elastics, an extra-dry sublayer,
elastic waistband, printed frontal tape closure system and stand-up leg gathers.
"PET PET(R)" is a basic "ultra" diaper featuring multi-strand leg elastics,
elastic waistband and frontal tape. Both "FITTI(R)" and "PET PET(R)" enjoy
substantial market share, are well supported by advertising and promotion
activities, and are priced strategically lower than the major U.S. national
brands and Japanese brands sold in Asia.
The Company also manufactures and distributes adult incontinence products
under its own brand "DISPO 123(TM)" and in private labels. The "DISPO 123(TM)"
product is an ultra anatomic diaper, featuring multi-strand leg elastics,
frontal tape closure system and stand-up leg gathers, designed for the
convenience of males and females having various degrees of incontinence.
ii. Sales and Marketing
The Company continued to command strong market positions in both the mature
markets of Hong Kong and Singapore in 1996. In addition, the Company's recently
established manufacturing facilities in the PRC and Thailand have quickly
expanded their sales in the PRC, Thailand and Indonesian markets, capitalising
on the increasing usage of disposable baby diapers in those countries. The
Company also focuses on other potential and emerging markets and sells its
products in the Philippines, India and, to a lesser extent, Brunei, Taiwan and
Japan.
The volume of disposable baby diaper usage varies significantly in different
markets, depending to a large extent on the level of per capita disposable
incomes. The disposable baby diaper usage is relatively high in Hong Kong and
Singapore. Although these two mature markets have stagnant growth in recent
years, the Company has been able to pursue strategies to stabilize its market
share in these markets at about 25%. The disposable baby diaper usage is
relatively low in Malaysia, the PRC, Thailand and Indonesia, but the Company
believes that the usage will increase as income levels in these countries
continue to increase.
In Asia, the Company has identified Malaysia, the PRC, Thailand and Indonesia
as the markets which are most likely to expand in late l990s. The Company's
strategy is to offer a premium product for its own brands, to price below major
U.S. and Japanese brands, and to ensure flexibility in product features,
packaging and marketing functions to satisfy the ever-changing needs and trends
of the different markets in Asia.
In Hong Kong, the Company has its own sales force and its products are sold in
all major pharmacy outlets which account for over 75% of all disposable baby
diaper sales, and in major retail supermarket chains such as Wellcome, Park'N
Shop and China Resources Company. The Company's products have also penetrated
into cash-and-carry outlets like Carrefour.
In Singapore, the Company's products are distributed by its own sales force in
the two largest self service outlets, namely NTUC and Econ Minimart, besides the
other high-end retail outlets. The Company also appointed distributors to
distribute to the lower retail sector comprising of medical halls and
provision/sundry shops. The Company estimates that the size of the market in
1996 was $36 million and the Company's market share was approximately 20%.
9
In Malaysia, which the Company has identified as one of the fastest growing
markets in the region, the Company estimated that the total market size was
approximately $60 million in 1996. The Company believes that its sales in this
market will grow further as the usage of disposable baby diapers continues to
increase. The Company's products are distributed by appointed distributors in
the major chain stores such as Parkson Grand, The Store and Ocean, as well as to
the other secondary chain stores, independent supermarkets and to lower-end
retail outlets.
In the PRC, another fast growing market which the Company has identified, the
Company's leading brands are distributed in the friendship stores, department
stores and independent retail stores in Guangdong Province, Shanghai and
Beijing. The Company will expand distribution of its products to other major
cities along the coastline and other affluent provinces in the PRC, such as
Fujian and Zhejiang. The Company estimates that the current usage of disposable
baby diapers in the PRC is below 5% and will grow in accordance with the
anticipated rapid economic growth of the country.
In Thailand, although the usage of disposable baby diapers is relatively low,
the disposable baby diaper market has been growing rapidly in the past few years
and is expected to increase to the level of industrialized Western countries.
The Company's sales have been increasing with the growth of the market and as a
result of expanding the Company's distribution networks throughout the country.
The Company's products are distributed to supermarkets and department stores by
its own nationwide sales force. The Company estimates that its market share was
about 12.5% in 1996. The Company also manufactures adult incontinence products
and distributes to hospitals, supermarkets and department stores. The Company
estimates that its share of the Thailand adult incontinence market is
approximately 34%. The Company is also expanding its sales of adult incontinence
products in other Asian markets.
Although the disposable diaper market in Taiwan is highly competitive, the
Company continues to explore opportunities to increase its sales in this market.
The Company presently has lower expectations in exporting its products to
Japan and Korea because current non-tariff barriers and complex distribution
arrangements make entry into these markets difficult for foreign products.
The Company services most of its existing and potential markets in Asia out of
its established manufacturing facilities in Hong Kong and Singapore. The PRC
operation was established in the fourth quarter of 1994, and the manufacturing
facility in Thailand commenced operations in September 1995. The Company
believes that these two new manufacturing facilities will enable it to better
service and expand its business in both markets as well as other markets in
Asia. The Company's facility in Thailand also manufactures adult incontinence
diapers for all its Asian markets.
d. EUROPE
i. Products
The Company manufactures and markets disposable diapers under its own brands
in the United Kingdom, and manufactures private label disposable diapers,
feminine napkins, and branded and private label adult incontinence products in
Switzerland. The Company's brands currently in production are "FITTI(R)",
"COSIFITS(R)", "TOGS(R)", "CARES(R)" and "VLESI(R)". "FITTI(R)" and "TOGS(R)"
are "ultra" diapers that feature multi-strand leg elastics, stand-up leg
gathers, frontal tape, printed design backsheet and an extra-dry sublayer.
"COSIFITS(R)" and "CARES(R)" are regular "ultra" products featuring frontal
tape, an extra-dry sublayer and multi-strand leg elastics. "VLESI(R)" is an
"ultra" adult incontinence product range consisting of adult incontinence slips,
anatomic pads and underpads for the institutional market in Switzerland and
Europe.
10
ii. Sales and Marketing
The U.K. retail disposable diaper market in 1996 was approximately $708
million. Approximately 92% of the market was accounted for by branded products
and 8% was accounted for by private labels.
The Company's strategy is to emphasize its branded products which are sold to
regional retailers by offering a value-oriented product with good profit margins
and a high level of service. The Company's branded products are distributed to
wholesalers and regional chains.
In Switzerland, the disposable diaper market is dominated by a U.S. national
brand and the private brand of a major retail chain which has over 50% of retail
sales in the country. The Company is one of the two disposable diaper
manufacturers and the major feminine napkin supplier for this chain. The Company
believes that its Swiss operation will enable it to compete in the disposable
diaper and feminine napkin markets in Europe.
The Company's second operation in the Eastern region of Switzerland
manufactures branded and private label adult incontinence products and
distributes the products primarily through the institutional trade. The Company
estimates that its market share in the Swiss adult incontinence market is
approximately 30%. The Company is expanding its market for adult incontinence
products in Europe.
3. Competition
The disposable diaper industry is dominated world-wide by the brands of two
major U.S. manufacturers, The Procter & Gamble Company ("P&G") and
Kimberly-Clark Corporation ("K-C"). The market position of these manufacturers
relative to the Company varies from one geographic area to another, but due to
their substantial financial, technical and marketing resources, both of these
major manufacturers have the ability to exert significant influence and gain
substantial market share in any of their marketing areas. Despite the disparity
in relative strength, however, the Company has been able to achieve good results
with its branded and private label products and maintain a viable market
position in the face of very strong competition from the industry leaders.
a. NORTH AMERICA
The North American disposable baby diaper market remains dominated by the
brands of the two major U.S. manufacturers, P&G and K-C. Their combined market
share of the disposable baby diaper market is 70%, including the disposable
training pant and youth pant segments. Total category unit sales are now
declining at the rate of about 2%, with volume continuing to move slowly from
the food and drug sectors to the mass (discount) merchandisers. In 1996, these
two manufacturers continued their departure from their traditional strategy of
competing solely on the basis of consumer driven marketing programs and product
innovations. After P&G made their move in 1995 to a reduced count, unisex
program on both the Pampers and Luvs brands, they have spent heavily promoting
these at very low retail price points. An increasing number of retailers are
becoming concerned with the negative impact that this strategy has had on their
own private label sales and margins and some have taken corrective action to
protect their own brands that goes as far as declining to carry the Luvs brand.
All of the advertised brand's moves have resulted in retail price reductions and
a narrowing of retail price spreads. The net result is a two-tier category that
is offering premium products and value-added products. The segment that was
called "conventional" has now become "premium". The value segment, which now
includes the Luvs brand, private labels and the Company's "FITTI(R)" brands, now
accounts for more than 50% of all sales in the grocery class of trade.
11
The moves by the major manufacturers to lower prices and make deep promotional
offers have put serious sales and margin pressure on smaller branded
manufacturers and private label manufacturers. In response to the competitive
activity, the Company has reallocated its promotional spending to target key
markets with free standing coupon insert drops, targeted trade promotions,
greatly enhanced product features and performance, and tightened cost controls.
This strategy has allowed the Company to protect its share in critical markets,
expand its private label base of business and weather the competitive storm that
is persisting. While there was some negative impact on top line sales, the
Company's strategy produced a far greater margin contribution than in the
previous year.
In the adult incontinence arena, the Company is in an excellent competitive
position having the capability to provide key retailers and consumers with
product technology that is far superior to what any other manufacturer can
provide currently. The added advantage comes from the fact that this category,
more than most, has the greatest need for better products to meet the
performance requirements of consumers. The Company has a product strategy, which
will ensure that it is able to maintain this competitive edge well into 1997 and
beyond. This competitive edge will also allow the Company to make quick inroads
into the private label incontinent sector being able to offer premium products
at competitive prices. This segment also presents a better margin opportunity
because pricing and promotional strategies from the major manufacturers have
remained much more stable than in baby diapers.
b. AUSTRALIA
The major competition faced by the Company in Australia is from K-C, which
currently dominates the disposable baby diaper market with an estimated market
share of 64% in 1996. The Company believes it is able to compete successfully in
Australia because its strategy of targeting different brands at different
customer categories allows it greater flexibility in providing attractive margin
and promotional incentives to its customers.
c. ASIA
The Company's main competition in Asia comes from the two major U.S.
manufacturers, and from several manufacturers from Japan and Taiwan. The Company
believes that it has been able to maintain a significant share of the Asian
market due to its longer presence and well established brands in that region and
the logistical advantage which results from the strategic location of its
manufacturing operations.
d. EUROPE
In the United Kingdom, the market is dominated by P&G, which has a market
share in excess of 60%. K-C has been heavily promoting and discounting its
products in the U.K. market which has affected the volume of most private labels
and other brands. The Company believes that, by pursuing a flexible brand
strategy, it will be able to maintain its share of the market, despite the
strong competition from the industry leaders. In continental Europe, the Company
pursues expansion of its branded products and private label program in
disposable diapers and feminine napkins with other major retail chains outside
of Switzerland. The Company has commenced marketing of its adult incontinence
products in the retail trade in European markets.
4. Trademarks and Patents
Brand identification is an important element in marketing the Company's
products, and the Company recognizes the importance of its trademarks to the
success of its business. The Company has registered its major trademarks or has
applications pending in each of the major markets in which its products are
sold, and it has applications pending in several other countries for many of its
other trademarks. As the Company determines to pursue opportunities in new
markets, it seeks registration of the trademarks under which it will market its
products in those countries.
12
The Company has licenses to use certain patented technology relating to
certain features of the disposable diapers it manufactures, including
multi-strand leg elastics and the "Wetness Indicator" feature of the Company's
products in the United States.
5. Product Design and Development
The Company actively monitors trends in the United States and Europe in
relation to changes in product features, consumer preferences, and the impact of
environmental laws and regulations on the disposable diaper industry. Although
the Company does not devote substantial expenditure to research and development,
it constantly seeks to improve its products by substitution of materials and
components, and of product features, to systematically improve the performance
of its diapers for better absorbency and improved leakage protection. In
particular, the Company monitors world-wide developments in various raw material
components to enable the Company to take advantage of the latest developments,
and in certain cases the Company has worked closely with suppliers to pioneer
the use of such materials in the manufacture of disposable diapers.
With respect to packaging, the Company retains consultants in its various
markets to design packaging for the products which are sold under the Company's
own brands. Packaging for products sold under private labels is either designed
and developed by the retailer's own design department, or by design consultants
engaged by the Company working together with the retailer's design department.
6. Manufacturing Process
The manufacturing process begins with the purchase of raw materials, the most
important of which is fluff wood pulp. The fluff wood pulp is first fed through
a hammer mill to make a soft, absorbent core that is placed on a polyethylene
backsheet. In the case of "ultra" diapers, super absorbent polymer is then
added. The liner layers, leg elastics, tape and other applicable features are
then fed into the manufacturing equipment which shapes and produces the finished
product. Because of the high level of automation in the production process,
significant components of manufacturing efficiency result from prevention of
production line stoppages and reducing the defect rate. Manual labor is involved
primarily in packing and shipping, and labor costs represent only a small
fraction of the Company's total net sales.
The Company maintains constant quality control throughout the production
process, commencing with the incoming raw materials and continuing through
dispatch of the finished product. Each of the Company's diaper lines has a
full-time inspector assigned to assure quality control at all stages of the
production process, and line inspections and batch testing are made on a
continuous basis.
Because of the relatively high cost of shipping the finished product, the
Company has established manufacturing facilities near its major markets, and raw
materials (which can generally be transported at lower cost) are shipped to the
manufacturing facilities. The Company believes that this improves its efficiency
and enhances its competitiveness by reducing shipping costs, shortening the
distribution chain and improving customer service.
7. Raw Materials
The raw material components used in the manufacturing process are fluff wood
pulp, super absorbent polymer, polyethylene backsheet, polypropylene non-woven
liner, adhesive closure tape, hotmelt adhesive, elastic and tissue.
The main raw material is fluff wood pulp, which is purchased from several
suppliers in the United States, Scandinavia and New Zealand. The source from
which the fluff wood pulp is shipped to the Company's manufacturing facilities
is dependent on price, quality and availability. The cost of fluff wood pulp
increased significantly in 1995, softened in 1996, and the Company believes it
may stabilize in 1997. Other raw materials
13
are purchased from various sources, also depending on price, quality and
availability. The Company maintains good and long term relationships with its
raw materials suppliers. The Company's Chief Purchasing Officer oversees the
purchasing and sourcing policies of each of the Company's manufacturing
facilities and is responsible for new material developments and keeping track of
all world-wide producers of raw materials. He also negotiates and determines the
purchase of the Company's major raw materials with the Company's key raw
material suppliers.
The Company has negotiated supply contracts with several of its key suppliers.
Such arrangements are generally designed to achieve volume discounts on price
and to assure supply stability. In the event of unacceptable price increases,
the Company usually has the right to terminate the arrangement upon specified
notice periods, which generally range from two to three months.
Some of the suppliers of raw materials to the Company also manufacture
disposable diapers which compete with the Company's products. The Company has
not experienced any difficulty with its raw material suppliers who are in
competition with it on sales of finished product, but nevertheless it takes
steps to ensure that it has alternative sources of supply available.
The main source of energy for the Company's plants is electricity. The
automated process for manufacturing disposable diapers consumes larger amounts
of electricity than many other light industries, but none of the Company's
operating subsidiaries has experienced any problems with electricity supply.
8. Inventory Practice and Order Backlog
The disposable diaper industry is generally characterized by prompt delivery
by manufacturers and rapid movement of the product through retail outlets. The
lead time between placing an order and shipment to the local customer averages
five to ten days. The Company maintains varying levels of raw material and
finished product inventory depending on lead time and shipping schedules. The
Company's inventory levels generally vary between three to six weeks. Due to the
short lead time between order and delivery of product, the Company does not
maintain a significant backlog.
9. Customs and Import Duties
Some of the raw materials used in manufacturing the Company's products are
subject to import duties at varying rates in the countries in which the
Company's manufacturing facilities are located. However, import duties on raw
materials do not represent a significant part of the cost of the finished
product and, in most cases, the import duties are refundable if the finished
goods are exported from the countries of manufacture.
Imports of finished products to some of the markets are subject to import
duties at various rates. However, such duties are usually incorporated in the
selling price of the finished product.
10. Employees
The Company has a total of approximately 1,317 full time employees at its
manufacturing facilities. The Company considers its relationships with its
employees to be good in all of its plants, and none of the Company's plants has
ever experienced any material work stoppage.
The Company believes that all of its manufacturing facilities are in
compliance with applicable occupational health and safety legislation.
11. Environment
The Company believes that operations at all of its manufacturing facilities
are conducted in compliance with applicable environmental laws, and that none of
the material substances used or disposed of by the Company in its manufacturing
operations are considered to be toxic or hazardous substances under such laws.
14
The Company closely monitors environmental laws and regulations pertaining to
disposal of solid waste, which includes household refuse, packaging and paper
materials, and yardwaste, in addition to disposable diapers, in each of the
markets in which its products are sold. The Company is not aware of any such
laws or regulations which would have a material adverse effect on the Company's
business as presently conducted and proposed to be conducted. A number of states
in the United States have passed legislation that is intended to discourage the
use of disposable products such as beverage containers, certain packaging
materials and disposable diapers, or to encourage the use of non-disposable or
recyclable products. The Company believes that it will not have to make any
changes to its products to comply with presently existing environmental laws and
regulations in the markets in which its products are sold.
The Company endeavors to develop products which are environmentally
responsible by closely monitoring world-wide developments in various raw
material components and actively works with suppliers to develop and market
products utilizing such components.
12. Insurance
All of the Company's plant, machinery and inventories are covered by fire and
extended coverage insurance. The Company maintains product liability insurance
in amounts it believes to be adequate in all its operations, except for its
operations in Asia where local manufacturers customarily do not carry product
liability insurance because the risk of product liability lawsuits is considered
to be slight.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company operates eleven manufacturing facilities, with plants located in
the United States at Bell, California (near Los Angeles), and at Duluth, Georgia
(near Atlanta); in Hong Kong; in Melbourne, Australia; at Chesterfield, U.K.; in
Singapore; at Mettmenstetten, Switzerland; at Brantford (near Toronto), Canada;
at Goldach, Switzerland; at Zhongshan, Guangdong, PRC; and at Bangkok, Thailand.
The Company utilizes an aggregate of approximately 1,061,013 square feet of
space in its manufacturing operations. The Company believes that its plant and
facilities are adequate for its present operations, but it will require expanded
facilities if past growth trends in the Company's business continue. The
following table summarizes the physical properties that are used by the Company
in its manufacturing and distribution operations:
APPROXIMATE LEASE
SIZE OWNED/ EXPIRATION DATE
LOCATION USE (SQ. FEET) LEASED DATE OPENED
-------- --- ---------- ------ ---------- ------
Duluth, GA Manufacturing 155,625 Owned N/A Dec. 1993
Bell, CA Manufacturing 62,024 Leased Aug. 1997 Mar. 1984
Brantford, Canada Manufacturing 89,000 Owned N/A Sep. 1993
Hong Kong Manufacturing 111,701 Leased Jun. 1997 Jul. 1978
Singapore Manufacturing 43,540 Leased Apr. 2021/(1)/ May 1991
Melbourne, Australia Manufacturing 161,000 Owned N/A Feb. 1988
Chesterfield, U.K. Manufacturing 75,000 Leased May 2008 May 1988
Mettmenstetten, Switz. Manufacturing 78,000 Leased Jun. 1998 Jul. 1993
Goldach, Switz. Manufacturing 150,275 Owned N/A Aug. 1994
Zhongshan, PRC Manufacturing 66,043 Leased Oct. 2044 Dec. 1994
Bangkok, Thailand Manufacturing 68,805 Owned N/A Apr. 1995
London, U.K. Office 3,500 Owned N/A Mar. 1992
Foster City, CA Office 2,500 Owned N/A Aug. 1993
Bangkok, Thailand Office 15,216 Leased Dec. 1997 May 1994
Kuala Lumpur, Malaysia Office 1,580 Leased N/A Dec. 1995
/(1)/ The Company has an option to renew this lease for a further 30-year term.
15
ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are from time to time involved in routine
legal matters incidental to their business.
In February 1995, the Company and its U.S. subsidiary were named as defendants
in Action No. 95-19-2-ALB-AMER (WLS) brought by plaintiffs John M. Tharpe,
Robert E. Herrin and R & L Engineering, Inc., a Georgia corporation, in the
United States District Court, Middle District of Georgia. The complaint alleges
that the Company, its U.S. subsidiary and certain European suppliers of
disposable diaper manufacturing equipment (the "Defendants") have infringed U.S.
Patent No. 5,308,345 which relates to a certain process for elasticizing the
waistband of disposable diapers; that the Company and its U.S. subsidiary
breached a confidentiality agreement with the plaintiffs by using certain
information relating to the waistband applicator disclosed to them in confidence
by the plaintiffs; and theft by the Defendants of the plaintiffs' trade secrets
concerning the waistband applicator. The plaintiffs seek an injunction,
compensatory, punitive and exemplary monetary damages in an unspecified amount,
and attorneys' fees. The Company has denied liability and intends to vigorously
defend this action.
ITEM 4. CONTROL OF REGISTRANT.
The Company is not owned or controlled by another corporation or by any
foreign government. The following table sets forth information regarding
beneficial ownership of the Ordinary Shares of the Company by each person who on
December 31, 1996 is known by the Company to own 10% or more of the Company's
outstanding Ordinary Shares and by all directors and officers as a group.
ORDINARY SHARES
BENEFICIALLY OWNED
---------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------ --------- -------
10% or more shareholders (Brandon Wang) ...................................3,321,680/1/ 9.74%
Directors and Officers as a Group (11 persons) ............................4,427,846/1//2/ 66.30%
/1/ Includes 140,580 Ordinary Shares owned by Brandon Wang's wife, Eileen Wang,
as to which he disclaims beneficial ownership.
/2/ includes 123,000 Ordinary Shares owned by Benedict Wang's wife, Suk Yee
Heyley Sham, as to which he disclaims beneficial ownership; and 117,000
Ordinary Shares owned by S.L. Wang's wife, Pei Fang Wang, as to which he
disclaims beneficial ownership.
Brandon Wang and seven other members of Management own more than 50% of the
Company's outstanding Ordinary Shares and, acting together, are able to control
the election of the Board of Directors, and thus the direction and future
operations of the Company, including decisions regarding acquisitions and other
business opportunities, the declaration of dividends and the issuance of
additional Ordinary Shares and other securities, in each case without the
supporting vote of any other shareholder of the Company. In addition, Brandon
Wang is controlling shareholder of the Company and thus may be deemed to be a
parent of the Company under the rules and regulations of the Securities Exchange
Act of 1934.
The Company knows of no arrangements the operation of which may at a
subsequent date result in a change in control of the Company.
16
ITEM 5. NATURE OF TRADING MARKET.
The Company's Ordinary Shares are listed on the NASDAQ National Market System
under the trading symbol DSGIF, and are not listed for trading in any foreign
trading market.
As of December 31, 1996, the total number of record holders was 41, of which
30, representing 49.18% of Ordinary Shares, were in the United States.
Ordinary Share Price:
1996 1995
---------------------------- ----------------------------
QUARTER HIGH LOW HIGH LOW
------- ---- --- ---- ---
First $15 1/2 $12 1/2 $17 3/4 $11
Second 15 1/8 10 7/8 19 1/2 13 1/4
Third 11 5/8 10 1/4 18 5/8 8 1/2
Fourth 14 7/8 11 1/4 13 10
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
There are now no exchange control restrictions on remittances of dividends on
the Company's Ordinary Shares or on the conduct of the Company's operations
either in Hong Kong, where its principal executive offices are located, or the
British Virgin Islands, where it is incorporated. Certain other jurisdictions in
which the Company conducts operations do have various exchange controls. To
date, such controls have not had a material impact on the Company's financial
results.
There are no limitations on the rights of non-residents or foreign holders
imposed by foreign law or by the charter of DSG other than those limitations
described herein in Item 14, Description of Securities.
ITEM 7. TAXATION.
The following discussion is a summary of certain anticipated U.S. federal
income tax and BVI tax consequences of ownership of Ordinary Shares. The
discussion does not deal with all possible tax consequences relating to
ownership of Ordinary Shares and does not purport to deal with the tax
consequences applicable to all categories of owners, some of which (such as
dealers in securities, insurance companies and tax-exempt entities) may be
subject to special rules. In particular, the discussion does not address the tax
consequences under state, local and other national (e.g., non-U.S. and non-BVI)
tax laws. Accordingly, each shareholder should consult its own tax advisor
regarding the particular tax consequences to it of its ownership of the Ordinary
Shares. The following discussion is based upon laws and relevant interpretations
thereof in effect as of the date of this Annual Report, all of which are subject
to change.
A. UNITED STATES FEDERAL INCOME TAXATION
The following discussion only addresses the U.S. federal income taxation of a
U.S. person (e.g., a U.S. citizen or resident, a U.S. corporation, and an estate
or trust subject to U.S. tax on all of its income regardless of source) (a "U.S.
Investor") owning Ordinary Shares. In addition, the following discussion does
not address the tax consequences to a person who owns (or will own), directly,
indirectly or constructively, 10% or more of the Ordinary Shares (a "10%
Shareholder"). Non-U.S. persons and 10% Shareholders are advised to consult
their own tax advisors regarding the tax considerations incident to ownership of
the Ordinary Shares.
17
A U.S. Investor receiving a distribution with respect to the Ordinary Shares
will be required to include such distribution in gross income as a taxable
dividend to the extent such distribution is paid from earnings and profits of
the Company as determined under U.S. federal income tax principles. Any
distributions in excess of the earnings and profits of the Company will first be
treated, for U.S. federal income tax purposes, as a nontaxable return of capital
to the extent of the U.S. Investor's basis in the Ordinary Shares, and then as a
gain from the sale or exchange of a capital asset, provided that the Ordinary
Shares constitute capital assets in the hands of the U.S. Investor. U.S.
corporate shareholders will not be entitled to any deduction for distributions
received as dividends on the Ordinary Shares.
Gain or loss on the sale or exchange of the Ordinary Shares will be treated as
capital gain or loss if the Ordinary Shares are held as a capital asset by the
U.S. Investor. Such capital gain or loss will be a long-term capital gain or
loss if the U.S. Investor has a holding period of more than one year with
respect to the Ordinary Shares at the time of the sale or exchange.
Various provisions contained in the U.S. Internal Revenue Code (the "Code")
impose special taxes in certain circumstances on non-U.S. corporations and their
shareholders. The following is a summary of certain provisions which could have
an adverse impact on the Company and the U.S. Investors:
1. Personal Holding Companies
Sections 541 through 547 of the Code relate to the classification of certain
corporations (including foreign corporations) as personal holding companies
("PHCs") and the consequent taxation of such corporations on certain of their
U.S.-sourced income (including certain types of foreign sourced income which are
effectively connected with the conduct of a U.S. trade or business) to the
extent amounts at least equal to such income are not distributed to their
shareholders. A PHC is a corporation (i) more than 50% of the value of the stock
of which is owned, directly or indirectly, by five or fewer individuals (without
regard to their citizenship or residence), and (ii) which, if a foreign
corporation, receives 60% or more of such U.S.-related gross income, as
specially adjusted, from certain passive sources (such as dividends, interest,
royalties or rents). If the Company is classified as a PHC, a tax will be levied
at the rate of 39.6% on the Company's undistributed U.S. taxable income.
While more than 50% of the Ordinary Shares may be treated as owned (either
directly or indirectly) by five or fewer individuals, the Company intends to
cause its indirect U.K. subsidiary, the owner of the U.S. branch, together with
such corporation's immediate U.K.-resident parent corporation, to distribute any
amounts which would otherwise be characterized as "undistributed personal
holding company income" in the hands of either corporation with the intent that
such distributions would cause such distributed amounts to lose their character
as "United States source" taxable income subject to the PHC tax.
2. Foreign Personal Holding Companies
Sections 551 through 558 of the Code relate to foreign personal holding
companies ("FPHCs") and impute undistributed income of certain foreign
corporations to U.S. persons who are shareholders of such corporations. A
foreign corporation will be classified as a FPHC if (i) five or fewer
individuals, who are U.S. citizens or residents, directly or indirectly own more
than 50% of the corporation's stock (measured either by voting power or value)
(the "shareholder test") and (ii) the Company receives 60% or more of its gross
income (regardless of source), as specially adjusted, from certain passive
sources (the "income test").
The Company believes that it is not currently and has not been a FPHC for any
taxable year since its formation because for each such year either or both of
the income test and the shareholder test were not met. It is possible that
subsequent events would cause the Company to meet either or both of the income
test and the shareholder test. In the opinion of the Company, however, it is
unlikely that the shareholder test would be met, especially in view of the
inclusion of certain transfer restrictions in the Company's governing documents.
See "Description of Securities".
18
If the Company is classified as a FPHC after application of the shareholder
test and the income test, a pro rata portion of its undistributed income would
be imputed to its shareholders who are U.S. persons (including U.S.
corporations) and would be taxable to such persons as a dividend, even if no
cash dividend is actually paid, In that event (promptly after receiving an
opinion of counsel or final determination) the Company intends to distribute to
its shareholders sufficient amounts so that U.S. shareholders would receive cash
at least equal to the product of 150% of the highest federal income tax rate
which could apply to any U.S. shareholder and the amount of the dividend that
would otherwise be imputed to them. If the Company is classified as a FPHC in
the year preceding the death of a shareholder, the Ordinary Shares held by such
shareholder would obtain a tax basis equal to the lesser of their fair market
value or their tax basis in the hands of the decedent.
3. Controlled Foreign Corporations
Sections 951 through 964 and section 1248 of the Code relate to controlled
foreign corporations ("CFC") and impute undistributed income to certain
shareholders and convert into dividend income gains on dispositions of shares
which would otherwise qualify for capital gains treatment. The CFC provisions
only apply if 10% Shareholders (as defined above), who are also U.S. persons,
own, in the aggregate, more than 50% (measured by voting power or value) of the
shares of a foreign corporation. Even if the Company were to become classified
as a CFC, however, the income imputation rules referred to above would only
apply with respect to such 10% Shareholders.
4. United States Backup Withholding
A holder of an Ordinary Share may be subject to "backup withholding" at the
rate of 31% with respect to dividends paid on such Ordinary Share if such
dividends are paid by a paying agent, broker or other intermediary in the United
States or by a U.S. broker or certain United States-related brokers to such
holder outside the United States. In addition, the proceeds of the sale,
exchange or redemption of an Ordinary Share may be subject to backup withholding
if such proceeds are paid by a paying agent, broker or other intermediary in the
United States.
Actual backup withholding may be avoided by the holder of an Ordinary Share if
such holder (i) is a corporation or comes within certain other exempt categories
such as being a non-U.S. person, and when required, demonstrates this fact or
(ii) provides a correct taxpayer identification number, certifies that such
holder is not subject to backup withholding and otherwise complies with the
backup withholding rules. In addition, holders of Ordinary Shares who are not
U.S. persons ("non-U.S. holders") are generally exempt from backup withholding,
although such holders may be required to comply with certification and
identification procedures in order to prove their exemption.
Any amounts withheld under the backup withholding rules from a payment to a
holder will be refunded (or credited against the holder's U.S. federal income
tax liability, if any) provided that the amount withheld is claimed as federal
taxes withheld on the holder's U.S. federal income tax return relating to the
year in which the backup withholding occurred. A holder who is not otherwise
required to file a U.S. income tax return must generally file a claim for refund
(or, in the case of non-U.S. holders, an income tax return) in order to claim
refunds of withheld amounts.
B. BRITISH VIRGIN ISLANDS TAXATION
Under the laws of the British Virgin Islands as currently in effect, a holder
of Ordinary Shares who is not a resident of the British Virgin Islands is exempt
from BVI income tax on gains realized during that year on sale or disposal of
such shares; the British Virgin Islands does not impose a withholding tax on
dividends paid by the Company.
19
There are no capital gains, gift or inheritance taxes levied by the British
Virgin Islands. In addition, the Ordinary Shares are not subject to any transfer
taxes, stamp duties or similar charges in the British Virgin Islands.
There is no income tax treaty or convention currently in effect between the
United States and the British Virgin Islands, nor is any such treaty or
convention currently being negotiated.
ITEM 8. SELECTED CONSOLIDATED FINANCIAL DATA.
The information required by Item 8 is contained in page 34 of the Annual
Report to Shareholders, and is incorporated herein by reference.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by Item 9 is contained in pages 8 to 14 of the Annual
Report to Shareholders, and is incorporated herein by reference.
A. EXCHANGE RATE INFORMATION
The Consolidated Financial Statements of the Company are prepared in U.S.
dollars because this is the currency of the primary economic environment in
which the Company operates and the majority of the revenues are received and
expenses are disbursed in U.S. dollars. The financial statements of foreign
subsidiaries are translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards No. 52.
Singapore dollars, Australian dollars, Swiss francs, Pounds Sterling, Renminbi
and Thai Baht are convertible into U.S. dollars at freely floating rates. Hong
Kong dollars are tied to and allowed to fluctuate within a narrow range against
the value of the U.S. dollar. There are currently no restrictions on the flow of
such currencies, except Renminbi and Thai Baht, between such countries and the
United States.
Fluctuations in the value of foreign currencies cause U.S. dollar translated
amounts to change in comparison with previous periods and, accordingly, the
Company cannot quantify in any meaningful way, the effect of such fluctuations
upon future income. This is due to the number of currencies involved, the
constantly changing exposure in these currencies, and the fact that all foreign
currencies do not react in the same manner against the U.S. dollar.
B. POSSIBLE ADVERSE EFFECT ON THE COMPANY OF A CHANGE IN THE FUTURE STATUS OF
HONG KONG
The Company has its principal executive office and one of its manufacturing
facilities in Hong Kong.
Hong Kong is located on the south coast of China and is presently a British
Crown Colony administered by its Governor, who is the representative of, and
appointed by, Her Majesty the Queen. Effective July 1, 1997, the exercise of
sovereignty over Hong Kong will be transferred from the Government of the United
Kingdom of Great Britain and Northern Ireland to the Government of the People's
Republic of China (the "PRC"). The agreement between the Governments of the
United Kingdom and the PRC regarding this change is embodied in the Sino-British
Joint Declaration on the Question of Hong Kong (the "Joint Declaration"). The
Joint Declaration was signed on December 19, 1984 and ratified by both
Governments. On June 12, 1985, the Joint Declaration was formally registered at
the United Nations Secretariat in New York by both the British and the PRC
Governments. In the Joint Declaration the Government of the United Kingdom
declares that it will restore Hong Kong to the PRC effective July 1, 1997. On
that date, Hong Kong will become a Special Administrative Region ("SAR") of the
PRC. The Joint Declaration provides that the Hong Kong SAR shall be directly
under the authority of the Central People's Government of the PRC and shall
enjoy a high degree of autonomy except in
20
foreign and defense affairs, and that it shall be vested with executive,
legislative and independent judicial power. It also provides that the current
social and economic systems in Hong Kong shall remain unchanged for 50 years
after June 30, 1997 and that Hong Kong shall retain the status of an
international financial center.
Although the Company cannot determine in advance the actual impact that the
transfer of sovereignty from the United Kingdom government to the PRC may have
on its operations in Hong Kong, the Company does not envision or anticipate any
material adverse change in the business environment in Hong Kong in the
foreseeable future, and has not formulated any plans to prepare for such a
contingency. While the Company believes that its established presence in Hong
Kong and its recently established manufacturing operation in China will
facilitate its ability to increase its marketing activities in the PRC, if the
business climate in Hong Kong were to experience an adverse change, such change
could have an adverse effect on the Company's sales in Hong Kong. However, the
Company is incorporated outside Hong Kong, and the Hong Kong operation now
accounts for less than 17% of the Company's net sales and operating income.
C. RIGHTS OF SHAREHOLDERS UNDER BRITISH VIRGIN ISLANDS LAW MAY BE LESS THAN IN
U.S. JURISDICTIONS
The Company's corporate affairs are governed by its Memorandum and Articles of
Association and by the International Business Companies Act of the British
Virgin Islands. Principles of law relating to such matters as the validity of
corporate procedures, the fiduciary duties of Management and the rights of the
Company's shareholders may differ from those that would apply if the Company
were incorporated in a jurisdiction within the United States. The rights of
shareholders under British Virgin Islands law are not as clearly established as
the rights of shareholders under legislation or judicial precedent in existence
in most U.S. jurisdictions. Thus, the public shareholders of the Company may
have more difficulty in protecting their interests in the face of actions by the
Board of Directors or the principal shareholders than they might have as
shareholders of a corporation incorporated in a U.S. jurisdiction. In addition,
it is unlikely that the courts of the British Virgin Islands would enforce,
either in an original action or in an action for enforcement of judgments of
U.S. courts, liabilities which are predicated upon the securities laws of the
United States. See "Description of Securities".
Item 10. Directors and Officers of Registrant.
The directors and executive officers of the Company are:
NAME YEAR OF BIRTH PRESENT POSITION
---- ------------- ----------------
Brandon Wang 1946 Director, Chairman of the Board and President
Philip Leung 1948 Director and Vice President
Johnny Tsui 1941 Director, Vice President and Secretary
Patrick Tsang 1946 Director and Vice President
Terence Leung 1951 Director, Vice President and Treasurer
Peter Chang 1946 Director and Vice President
Owen Price 1926 Director
Anil Thadani 1946 Director
Terrence Daniels 1943 Director
Brandon Wang is married to Eileen Wang-Tsang, who is Patrick Tsang's sister.
Peter Chang is married to Brandon Wang's sister. Benedict Wang and S.L. Wang,
both of whom occupy Management positions (see below), are brothers of Brandon
Wang.
All directors are elected for a one-year term at the Annual Meeting of the
shareholders. The appointment of all officers is subject to the discretion of
the Board of Directors.
21
The Executive Committee of the Board of Directors consists of Brandon Wang,
Philip Leung, Johnny Tsui, Patrick Tsang, Terence Leung and Peter Chang. The
Executive Committee has authority to take any action, other than appointment of
auditors, election and removal of directors and appointment of officers, which
can be taken only by the Board of Directors.
The Company's Audit Committee consists of Anil Thadani, Terrence Daniels and
Owen Price. The principal functions of the Audit Committee are (i) to recommend
the independent auditors to be employed by the Company; (ii) to consult with the
independent auditors with regard to the plan of audit; (iii) to review, in
consultation with the independent auditors, their audit report or proposed audit
report; and (iv) to consult with the independent auditors with regard to the
adequacy of the Company's internal accounting controls.
Brandon Wang founded the Company in Hong Kong in 1973 and has been a director
and the Company's Chairman and Chief Executive Officer since that time. Mr. Wang
is a graduate of St. Francis Xavier's College in Rowloon, Hong Kong.
Philip Leung helped Brandon Wang establish the Company in 1973 and has served
as a director and Vice President of the Company since that time. He is currently
also the Company's Chief Purchasing Officer and oversees and implements the
global purchasing and product development of the Company. Mr. Leung holds a
diploma of Management Studies from Hong Kong Polytechnic and an M.B.A. degree
from the University of East Asia, Macau.
Johnny Tsui helped Brandon Wang establish the Company in 1973 and has served
as a director and Vice President of the Company since that time. In September
1995, he was appointed as Secretary of the Company. He has also served as Chief
Operating Officer of the Company's Asian Operation since 1991.
Patrick Tsang has been a director of the Company since 1980, and was appointed
a Vice President in January 1992. He was Secretary of the Company from March
1992 to September 1995. In 1988, he started up the Company's Australian
operation. Since July 1993 he has also served as Chief Operating Officer of the
Company's European operations. Mr. Tsang has a Ph.D. in Engineering from the
University of London. He also attended a Management Science course at Imperial
College, London.
Terence Leung has been the Company's Chief Financial and Accounting Officer
since 1988. He was appointed a director in 1991 and a Vice President in January
1992. Before joining the Company in 1978, Mr. Leung worked as an accountant with
several major trading corporations in Hong Kong. Mr. Leung is a certified public
accountant in the United Kingdom and Hong Kong.
Peter Chang has been the Chief Operating Officer of the Company's U.S.
operations since the Company moved its U.S. headquarters to Atlanta, Georgia in
late 1988. Mr. Chang joined the Company in 1984 as Vice President in charge of
U.S. sales and marketing at the time the Company commenced operations in the
United States, and became a director in 1991 and a Vice President in January
1992. Prior to joining the Company, Mr. Chang held various engineering and
management positions with major U.S. airlines, based in New York. Mr. Chang has
a Master's Degree in Operations Research from Kansas State University.
Owen Price became a director in April 1994. In 1993 he retired as the Managing
Director of Dairy Farm International Holdings Limited which he joined in 1974.
Prior to that time, he had 27 years experience with a large Australian retailer,
Woolworths Ltd., where he started as an Executive Trainee and worked his way
through to become Chief Executive in 1971. He has served on a number of retail
councils in different countries and has been an adviser to the Australian
government on trade matters. He is a director of numerous companies in the
Asia-Pacific region including four other listed public companies: Dairy Farm
International Holdings Limited, Cycle And Carriage Limited (alternate director),
Cold Storage (Malaysia) Berhad and The Hour Glass Limited.
22
Anil Thadani advises the Company on financial matters, corporate strategy and
development, and was a director of the Company from 1989 until April 1995, when
he resigned as a result of his interest in the going private transaction. He was
re-elected to the Board in September 1995. Mr. Thadani is the Chairman of
Schroder Capital Partners (Asia) Limited, a direct investment company, which he
founded in July 1992 in joint venture with the Schroders Group of the United
Kingdom. Prior to this, he was the Managing Director and a founding partner of
Arral & Partners Limited, a private investment company based in Hong Kong. He is
also a director of Programmed Maintenance Services Pty. Ltd., ODS System-Pro
Holdings Ltd., Equatorial Reinsurance (Singapore) Ltd. and Scandia (Asia) Ltd.
Mr. Thadani has a Master's Degree in Chemical Engineering from the University of
Wisconsin, Madison, and an M.B.A. from the University of California at Berkeley.
Terrence Daniels served as a director of the Company from January 1992 until
April 1995, when he resigned as a result of his interest in the going private
transaction. He was re-elected to the Board in September 1995. He is a former
Vice Chairman and director of W.R. Grace & Co. and a director of Stimsonite
Corporation, W.B. Bottling Corporation, Eskimo Pie Corporation and numerous
other private companies. Mr. Daniels is the founder, principal shareholder and
sole director of Quad-C, Inc., an investment firm located in Charlottesville,
Virginia. Mr. Daniels has a B.A. and an M.B.A. from the University of Virginia.
OTHER KEY MANAGEMENT PERSONNEL
In addition to the above-named officers and directors, the following persons
hold key management positions with the Company:
Benedict Wang became the Corporate Investor Relations Officer of the Company
in September 1993. Prior to this, he had been the Director of Sales and
Marketing of the Company's Hong Kong subsidiary in charge of marketing and sales
for the Asian region. Mr. Wang has a Master of Arts degree from the University
of North Dakota; a Bachelor of Fine Arts degree from the University of Manitoba;
and a Bachelor of Arts from the University of Waterloo (Ontario).
S.L. Wang's primary responsibility in the Company is to oversee research and
development of new manufacturing process and technologies. He joined the Company
in 1984 to help start its U.S. operations in Los Angeles, California. Prior to
joining the Company, Mr. Wang was employed in the United States as an architect
and project supervisor for construction projects. Mr. Wang holds a Bachelor's
Degree in Architectural Engineering from Chung Yuan University, Chung-Li,
Taiwan.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
In 1996 the aggregate remuneration paid by the Company and its subsidiaries to
all directors and officers of the Company as a group (11 persons) for services
in all capacities was approximately $5,774,003.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
Not applicable.
23
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
The following table sets forth the aggregate amount of loans made by the
Company to Brandon Wang, the founder, principal shareholder and Chief Executive
Officer of the Company and to a trust of which he is a beneficiary since January
1, 1994:
LOAN BALANCE BALANCE
AT BEGINNING LOANS LOANS AT END
OF YEAR EXTENDED REPAID OF YEAR
------------- -------- ------ -------
(DOLLARS IN THOUSANDS)
Year ended December 31, 1996 $12,536 $7,638 $4,530 $15,644
Year ended December 31, 1995 674 13,167 1,305 12,536
Year ended December 31, 1994 5,550 6,737 11,613 674
In 1996 and 1995 the Company advanced $7.6 million and $13.2 million,
respectively, to Brandon Wang, the founder, substantial shareholder and Chief
Executive Officer of the Company and to a trust of which he is a beneficiary.
These advances are made under a loan and security agreement in which the Company
agreed to make loans to Brandon Wang from time to time, subject to any limit on
such loans which may be imposed by the Board of Directors. The advances are
evidenced by promissory notes bearing interest at a rate equal to 1.5% over the
London Inter-Bank Offered Rate or such other rate that the Board of Directors
and the borrower shall agree in writing. The rate of interest is reviewed
quarterly and adjusted, if necessary. The promissory notes are collateralized by
the pledge of shares of the Company held by Brandon Wang. The fair market value
of the shares pledged must be at least 200% of the amount due under the notes.
The loans are repayable on demand. However, the Company and Brandon Wang have
agreed to a quarterly repayment schedule, with the final payment of principal
due in 1998. During 1996, Brandon Wang and a trust controlled by him repaid $4.5
million to the Company. The amount repayable in 1998 is shown as a non-current
asset. At December 31, 1996, the rate of interest on the notes was 7.2% (8% in
1995). Interest of $958,000 was charged on these advances in 1996 ($652,000 in
1995). The balance at December 31, 1996 was $15.6 million.
In 1994 the Company advanced amounts totalling $6.7 million to Brandon Wang
and to a company controlled by him on an unsecured basis. Interest at the rate
of 8% per annum was charged on these advances and amounted to $305,000 in 1994.
ITEM 14. DESCRIPTION OF SECURITIES.
The following is a brief description of the rights of holders of fully paid
Ordinary Shares. This description does not purport to be complete and is
qualified in its entirety by reference to the Memorandum and Articles of
Association of the Company, which have been previously filed as an exhibit, and
to the relevant provisions of the British Virgin Islands International Business
Companies Act.
A. GENERAL
All of the issued Ordinary Shares are credited as fully paid and
non-assessable, except that a share issued for a promissory note or other
written obligation for payment of a debt may be subject to forfeiture, and
accordingly no further contribution of capital may be required by the Company
from holders of Ordinary Shares. Under British Virgin Islands ("BVI") law,
non-residents of the BVI may freely hold, vote and transfer their Ordinary
Shares in the same manner as BVI residents.
24
B. DIVIDENDS
Holders of Ordinary Shares are entitled to participate in the payment of
dividends in proportion to their holdings. The Board of Directors may declare
and pay dividends in respect of any accounting period out of the profits legally
available for distribution. Dividends, if any, will be paid in U.S. dollars.
The Company's dividend policy will depend on the Company's earnings, capital
requirements, financial condition and other factors considered relevant by the
Board of Directors. For a discussion of taxation of dividends, see "Taxation".
The Company did not pay any dividend in 1996.
C. VOTING RIGHTS
In order to avoid certain adverse U.S. income tax consequences to the Company,
the voting rights of any shareholder who holds more than 10% of the Company's
outstanding shares will be suspended as to shares held by such shareholder in
excess of 10% of the Company's outstanding shares ("Excess Shares"). Excess
Shares are not counted as voting shares for purposes of establishing a quorum at
shareholders' meetings. However, the Board of Directors has discretion to exempt
any such Excess Shares from these restrictions if it is satisfied, on the basis
of evidence and assurances acceptable to it, that the holding of shares in
excess of 10% of the Company's outstanding shares by such shareholder will not
result in the Company being classified as a controlled foreign corporation
("CFC"), foreign personal holding company ("FPHC") or personal holding company
("PHC") within the meaning of the U.S. Internal Revenue Code ("Code"). See
"Taxation"; "Restrictions on Transfer and Voting; Redemption of Ordinary
Shares".
Every shareholder who is present in person or by proxy at a meeting of the
Company shall have one vote for each Ordinary Share of which he is the holder. A
poll may be demanded by the chairman of the meeting, or by any shareholder
present in person or by proxy.
The Articles of Association of the Company make no provision for cumulative
voting. Accordingly, the controlling shareholders have a sufficient number of
Ordinary Shares to elect all of the Company's directors.
D. RESTRICTIONS ON TRANSFER AND VOTING; REDEMPTION OF ORDINARY SHARES
The Company's Memorandum and Articles of Association contain certain
provisions which are intended to avoid situations in which the Company may be
classified as a CFC, FPHC or PHC. See "Taxation". These provisions are intended
only to avoid the adverse U.S. income tax consequences which would result from
such classification.
The following is a summary of the relevant provisions of the Memorandum and
Articles:
(i) Restricted Transfers of Ordinary Shares. The Board of Directors may,
but is not obliged to, refuse to register the transfer of any of the
Ordinary Shares of the Company if, in the opinion of the Board, such
transfer might cause the Company to be classified as a CFC, FPHC or PHC.
(ii) Restrictions on Voting Rights. In the event that any person holds more
than 10% of the Company's outstanding shares, any shares in excess of 10%
of the Company's outstanding shares shall be "Excess Shares", which shall
not be entitled to any voting rights and shall not be considered voting
shares for purposes of establishing a quorum. However, the Board of
Directors may exempt any such Excess Shares from these restrictions if it
is satisfied, on the basis of evidence and assurances acceptable to it,
that the holding of shares in excess of 10% of the Company's outstanding
shares by such shareholder will not result in the Company being classified
as a CFC, FPHC or PHC. In addition, these restrictions on voting
25
rights do not apply to shares acquired in a cash tender offer for all
outstanding shares of the Company where a majority of the outstanding
shares of the Company are duly tendered and accepted pursuant to such cash
tender offer.
(iii) Disclosure of Certain Information to the Company. Any person who
directly owns 5% or more of the Company's outstanding shares is required to
file with the Company, within 60 days of the end of the Company's taxable
year (which is currently the calendar year) and prior to any transfer of
shares by or to such person, an affidavit setting forth the number of
shares (1) owned directly by such person or by a nominee of such person,
and (2) owned indirectly or constructively by such person by reason of the
attribution rules of Sections 542, 544 and 958 of the Code or by reason of
application of the attribution rules of Rule 13(d) of the U.S. Securities
Exchange Act of 1934 ("Exchange Act"). The affidavit filed with the Company
must set forth all the information required to be reported (1) in returns
of shareholders required to be filed under U.S. Income Tax Regulations
Section 1.6035-1 (including shareholder related information for inclusion
in IRS Form 5471), and (2) in reports required to be filed under Section
13(d) of the Exchange Act. All shares held by any person who fails to
comply with this reporting requirement shall be deemed Excess Shares and
shall be subject to the voting restrictions and redemption provisions
described herein.
(iv) Redemption of Ordinary Shares. The Company may, in the discretion of
the Board of Directors, redeem any Excess Shares at a price equal to (l)
the average of the high and low sales price of the shares on the last
business day prior to the redemption date on the principal national
securities exchange on which such shares are listed or admitted to trading,
or (2) if the shares are not listed or admitted to trading, the average of
the highest bid and lowest asked prices on such last business day as
reported by the National Quotation Bureau Incorporated or similar
organization selected from time to time by the Company, or (3) if not
determinable as aforesaid, as determined in good faith by the Board of
Directors.
The directors of the Company, in a meeting held on January 6, 1992, resolved
that the principal shareholder, Brandon Wang, is exempt from the foregoing
restrictions. The directors have also approved exemption of certain
institutional shareholders from the foregoing restrictions as the Board was
satisfied that such exemption would not have any of the adverse tax consequences
described above.
E. DIRECTORS
Under the Company's Articles of Association, the first directors must be
appointed by the subscribers to the Memorandum of Association, and thereafter
the directors may be appointed by the shareholders, or by the directors to fill
a vacancy or as an addition to the existing directors. Directors may be removed,
with or without cause, by a resolution of the shareholders of the Company, or
with cause by a resolution of the other directors.
F. QUORUM
The quorum required to constitute a valid general meeting of shareholders
consists of shareholders present in person or by proxy holding at least a
majority of all issued Ordinary Shares entitled to vote. If a meeting is
adjourned for lack of quorum, it will stand adjourned to the next business day
at the same time and place or to such other day and at such other time and place
as the directors may determine, and if at the adjourned meeting there are
present within one hour from the time appointed for the meeting at least
one-third of the shares entitled to vote at the meeting, the shareholder or
shareholders present shall be a quorum. However, a meeting convened on the
requisition of the shareholders shall be dissolved if a quorum is not present at
the first meeting.
G. RESOLUTIONS
Resolutions may be adopted at shareholders' meetings by the affirmative vote
of a simple majority of the Ordinary Shares entitled to vote thereon.
26
Certain actions may be taken by a resolution of the directors. Such actions
include an amendment of the Company's Memorandum or Articles of Association, an
increase or reduction in the Company's authorized capital, and a change in the
Company's name.
H. RIGHTS IN A WINDING-UP
Holders of Ordinary Shares are entitled to participate in proportion to their
holdings in any distribution of assets after satisfaction of liabilities to
creditors in a winding-up.
I. AUTHORIZED BUT UNISSUED SHARES
Under the Company's Memorandum and Articles of Association, there are
11,685,000 authorized but unissued Ordinary Shares. Those additional authorized
but unissued Ordinary Shares may be utilized for a variety of corporate
purposes, including future public or private offerings to raise additional
capital or for facilitating corporate acquisitions. In addition, the Company
cancelled 603,000 shares in 1996 and presently holds as treasury shares
1,033,641 Ordinary Shares, which were repurchased under the share repurchase
plan adopted during 1994 and amended in 1995 and the tender offer transaction
which was completed in December 1996. Under section 34 of the BVI International
Business Companies Act, such shares are not entitled to vote or to have
dividends paid thereon. The Company does not currently have any plans to issue
additional Ordinary Shares, or to re-issue any of the Ordinary Shares presently
held as treasury shares.
J. TRANSFERS OF ORDINARY SHARES
The Company's Memorandum and Articles of Association do not restrict the
transferability of fully paid Ordinary Shares, except that the Board of
Directors may refuse to register the transfer of any of the Ordinary Shares if,
in the opinion of the Board, such transfer might result in the Company becoming
a CFC, FPHC or PHC. See "Restrictions on Transfer and Voting; Redemption of
Ordinary Shares".
K. NEW ISSUES OF ORDINARY SHARES
Under the Company's Articles of Association, the Board of Directors is
authorized to exercise the power of the Company to offer, allot, grant options
over or otherwise dispose of all of the remaining unissued Ordinary Shares of
the Company, which comprise 11,685,000 Ordinary Shares. The Board of Directors
may, without further shareholder action, increase the number of authorized
shares of the Company.
In addition the Board of Directors may, without further shareholder action,
designate any of the authorized but unissued Ordinary Shares as preferred shares
by amending the Company's Memorandum of Association. Upon filing such amendment
with the BVI Registrar of Companies, the Board of Directors would have authority
to fix the dividend rights and rates, voting rights, redemption provisions and
liquidation preference, all of which may take precedence over comparable rights
of the existing Ordinary Shares.
L. MERGER; DISSENTERS' RIGHTS
BVI law provides for mergers whereby there occurs either an absorption by one
company of another company and the simultaneous dissolution of the other
company, or the formation of a new company that absorbs two companies and the
automatic dissolution of both absorbed companies. BVI law provides for
compulsory acquisition or appraisal of the interests of a shareholder who
objects to the transfer of the ownership or assets of a company.
Under section 83 of the BVI International Business Companies Act, a
shareholder of a company incorporated under the Act has the right to object to a
proposed merger of the Company. If the shareholder complies fully with the
requirements of section 83 and the merger is approved by a majority of
shareholders, the dissenting shareholder may require the Company to pay fair
value (as agreed or appraised) for his shares.
27
Pursuant to section 83 (11) of the Act, a shareholder who chooses to enforce
dissenting shareholders' rights may not enforce other remedial rights to which
he might otherwise be entitled by virtue of his holding shares, except that the
shareholder shall retain the right to institute proceedings to obtain relief on
the ground that the merger is illegal.
M. JOINT SHAREHOLDERS
If two or more persons who hold shares jointly are present at a meeting in
person or by proxy they must vote as one. Dividends and notices may be paid or
sent, in the case of joint holders, to any one of the persons named as joint
shareholders in the register of members.
N. FIDUCIARY RESPONSIBILITIES
Under U.S. law majority and controlling shareholders generally have certain
"fiduciary" responsibilities to the minority shareholders. Shareholder action
must be taken in good faith and actions by controlling shareholders which are
obviously unreasonable may be declared null and void. BVI law protecting the
interests of minority shareholders may not be as protective in all circumstances
as the law protecting minority shareholders in U.S. jurisdictions.
While BVI law does permit a shareholder of a BVI company to sue its directors
derivatively (i.e., in the name of and for the benefit of the Company) and to
sue the Company and its directors for his benefit and for the benefit of others
similarly situated, the circumstances in which any such action may be brought,
and the procedures and defenses that may be available in respect of any such
action, may result in the rights of shareholders of a BVI company being more
limited than those of shareholders in a U.S. company.
O. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under its Memorandum and Articles of Association, the Company is authorized to
indemnify any person who is made or threatened to be made a party to a legal or
administrative proceeding by virtue of being a director, officer or agent of the
Company, provided such person acted in the best interests of the Company and, in
the case of a criminal proceeding, such person had no reasonable cause to
believe that his conduct was unlawful. The Company is obliged to indemnify any
director, officer or agent of the Company who was successful in any proceeding
against reasonable expenses incurred in connection with the proceeding,
regardless of whether such person met the standard of conduct described in the
preceding sentence.
P. TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services serves as the Transfer Agent and Registrar for
the Ordinary Shares.
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.
Not applicable.
ITEM 17. FINANCIAL STATEMENTS.
Financial statements are presented in Item 18.
ITEM 18. FINANCIAL STATEMENTS.
The information required by Item 18 is contained in pages 17 to 33 of the Annual
Report to Shareholders.
28
ITEM 19. FINANCIAL STATEMENTS AND SCHEDULES AND EXHIBITS.
A. FINANCIAL STATEMENTS
The following financial statements are contained in the Annual Report to
Shareholders at the pages referred to below, which pages are incorporated herein
by reference:
Page
----
Management Report 15
Independent Auditors' Report 16
Consolidated Statements of Operations for the three years ended December 31, 1996 17
Consolidated Balance Sheets as of December 31, 1996 and 1995 18-19
Consolidated Statements of Cash Flows for the three years ended December 31, 1996 20-21
Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1996 22
Notes to Consolidated Financial Statements 23-33
B. EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1 Loan and Security Agreement between Associated Hygienic Products LLC
as Borrower and Southtrust Bank of Georgia, N.A. as Lender, signed on
December 16, 1996.
11 Computation of Net Income Per Ordinary Share.
C. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are not included because the information is
contained in the Notes to Consolidated Financial Statements in pages 23 to 33 of
the Annual Report to Shareholders.
SIGNATURES
Pursuant to the requirement of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form 20-F and has duly caused the
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized, in Hong Kong, on May 23, 1997.
DSG INTERNATIONAL LIMITED
By /s/TERENCE Y.F. LEUNG
---------------------------
Terence Y.F. Leung
Vice President and Treasurer
29
- -----------------
MANAGEMENT REPORT
- -----------------
To the Shareholders of DSG International Limited
The financial statements of the Company published in this report were prepared
by the Company's management, which is responsible for their integrity and
objectivity. The statements have been prepared in accordance with United States
generally accepted accounting principles, applying certain estimates and
judgments as required. The financial information elsewhere in this report is
consistent with the statements.
The Company maintains a system of internal controls adequate to provide
reasonable assurance that its transactions are appropriately recorded and
reported, its assets are protected and its established policies are followed.
This system is maintained by the establishment and communication of policies and
a qualified financial staff.
Our independent auditors, Deloitte Touche Tohmatsu, provide an objective
independent review by audit of the Company's financial statements and issuance
of a report thereon. Their audit is conducted in accordance with United States
generally accepted auditing standards.
The Audit Committee of the Board of Directors, comprised solely of outside
directors, meets periodically and privately with the independent auditors and
representatives from the management to appraise the adequacy and effectiveness
of the audit functions, control systems and quality of our financial accounting
and reporting.
/s/ Terence Leung
TERENCE LEUNG
Chief Financial Officer
March 3, 1997
15
- ----------------------------
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Shareholders and the Board of Directors of DSG International Limited
We have audited the accompanying consolidated balance sheets of DSG
International Limited and its subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of DSG International Limited and its
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with accounting principles generally accepted
in the United States of America.
/s/ Deloitte Touche Tohmatsu
DELOITTE TOUCHE TOHMATSU
Hong Kong
March 3, 1997
16
- -------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------
(in thousands except per share amounts)
YEAR ENDED DECEMBER 31,
1996 1995 1994
---------------------------------
Net sales $236,050 $245,881 $218,771
Cost of sales 155,647 177,315 143,194
-------- -------- --------
Gross profit 80,403 68,566 75,577
Selling, general and administrative expenses 64,420 59,508 52,134
-------- -------- --------
Operating income 15,983 9,058 23,443
Interest expense (2,267) (1,759) (724)
Interest income 1,900 1,666 1,435
Exchange (loss) gain (176) 1,053 2,245
Non-recurring charge (Note 3) -- (1,968) --
Other (expense) income (89) (318) 284
-------- -------- --------
Income before income taxes 15,351 7,732 26,683
Provision for income taxes (Note 6) (6,185) (3,267) (10,033)
Minority interest in losses -- 222 --
-------- -------- --------
Net income $ 9,166 $ 4,687 $ 16,650
======== ======== ========
Earnings per share $ 1.18 $ 0.58 $ 2.00
======== ======== ========
Weighted average number of shares outstanding 7,747 8,109 8,315
======== ======== ========
See accompanying notes to consolidated financial statements.
- ---------------------------
CONSOLIDATED BALANCE SHEETS
- ---------------------------
(dollars in thousands except share amounts)
DECEMBER 31,
1996 1995
-------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 8,605 $ 15,573
Accounts receivable, less allowance for doubtful accounts
$643 in 1996 and $747 in 1995 27,577 26,115
Receivable from shareholder (Note 5) 10,031 1,680
Other receivables 1,249 794
Inventories (Note 7) 23,990 21,399
Prepaid expenses and other current assets 1,742 2,038
Recoverable tax 569 1,034
Deferred income taxes 75 94
-------- --------
Total current assets 73,838 68,727
-------- --------
Property and equipment -- at cost: (Note 8)
Land 4,747 4,798
Buildings 20,012 20,881
Machinery and equipment 69,099 66,409
Furniture and fixtures 2,622 2,408
Motor vehicles 1,999 1,632
Leasehold improvements 1,767 1,687
Construction in progress 134 6
-------- --------
Total 100,380 97,821
Less accumulated depreciation and amortization 38,297 28,630
-------- --------
Net property and equipment 62,083 69,191
-------- --------
Receivable from shareholder (Note 5) 5,613 10,856
Restricted cash -- 5,269
Deferred income taxes 162 58
Other assets 214 292
-------- --------
Total assets $141,910 $154,393
======== ========
See accompanying notes to consolidated financial statements.
18
- ---------------------------------------
CONSOLIDATED BALANCE SHEETS (CONTINUED)
- ---------------------------------------
(dollars in thousands except share amounts)
DECEMBER 31,
1996 1995
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities;
Short-term borrowings (Note 9) $ 10,227 $ 15,218
Current portion of long-term debt (Note 10) 3,204 8,141
Deferred purchase consideration (Note 11) 839 1,258
Accounts payable 10,197 11,359
Accrued advertising and promotion 5,156 4,325
Accrued payroll and employee benefits 2,730 2,472
Other accrued expenses 5,161 3,721
Income taxes payable 4,195 2,259
Deferred income taxes 415 397
-------- --------
Total current liabilities 42,124 49,150
-------- --------
Long-term debt (Note 10) 21,587 16,470
Deferred income taxes 3,207 3,303
Deferred purchase consideration (Note 11) 353 1,636
-------- --------
Total long-term liabilities 25,147 21,409
-------- --------
Minority interest -- 128
-------- --------
Commitments and contingencies (Note 13)
Shareholders' equity;
Ordinary shares, $0.01 par value - authorized 20,000,000 shares;
issued 7,712,000 shares in 1996 and 8,315,000 shares in 1995,
outstanding 6,678,359 shares in 1996 and 7,922,000 shares in 1995 77 83
Additional paid-in capital 33,653 41,270
Retained earnings 55,670 46,504
Foreign currency translation adjustments 551 720
Treasury shares, at cost - 1,033,641 shares in 1996
and 393,000 shares in 1995 (Note 12) (15,312) (4,871)
-------- --------
Total shareholders' equity 74,639 83,706
-------- --------
Total liabilities and shareholders' equity $141,910 $154,393
======== ========
See accompanying notes to consolidated financial statements.
19
- -------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
(dollars in thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,166 $ 4,687 $ 16,650
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 10,646 9,143 6,218
Accelerated depreciation on assets written off -- 534 --
Gain on disposals of property (15) (51) (48)
Loss on sale of investments -- 401 --
Deferred taxes 24 (77) 1,729
Minority interest -- (222) --
Other 1,490 (595) (434)
Net change in working capital components (1,365) (5,370) (4,352)
-------- -------- --------
Net cash provided by operating activities 19,946 8,450 19,763
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property (5,871) (16,445) (16,024)
Proceeds from disposals of property 45 142 184
Purchase of subsidiaries net of cash acquired -- -- (5,625)
Purchase of minority interest in subsidiary (150) -- --
Proceeds from sale of investments -- 4,565 --
Plant relocation (2,459)
Receipt of (investment in) restricted bank deposit 5,269 (623) (4,646)
Short-term investment -- -- (266)
Advances to shareholder (7,638) (13,167) (6,737)
Repayments by shareholder 4,530 1,306 11,613
Decrease in other assets -- -- 85
-------- -------- --------
Net cash used in investing activities (3,815) (24,222) (23,875)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in short-term borrowings (5,172) 7,986 1,808
Increase in long-term debt and other non-current debt 12,070 12,248 6,250
Repayment of long-term debt and other non-current debt (11,153) (449) (2,624)
Payment of deferred purchase consideration (823) (902) (1,162)
Investment by minority interest -- 150 200
Purchase of treasury shares (17,631) (4,871) --
Tender offer expenses (433) -- --
Dividend paid -- -- (2,079)
-------- -------- --------
Net cash (used in) provided by financing activities (23,142) 14,162 2,393
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents 43 37 38
-------- -------- --------
Decrease in cash and cash equivalents (6,968) (1,573) (1,681)
Cash and cash equivalents, beginning of period 15,573 17,146 18,827
-------- -------- --------
Cash and cash equivalents, end of period $ 8,605 $ 15,573 $ 17,146
======== ======== ========
See accompanying notes to consolidated financial statements.
20
- ------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED)
- ------------------------------------------------
(dollars in thousands)
YEAR ENDED DECEMBER 31,
1996 1995 1994
---------------------------------
SCHEDULE OF CHANGES IN WORKING CAPITAL COMPONENTS
NET OF EFFECTS FROM PURCHASE OF SUBSIDIARIES
Accounts receivable $(1,900) $ 1,360 $(7,777)
Other receivables (13) (627) (534)
Inventories (2,947) (4,231) (1,438)
Prepaid expenses and other current assets 277 100 223
Accounts payable (1,188) (4,012) 4,404
Accrued expenses 2,471 1,892 611
Income taxes payable 1,935 148 159
------- ------- -------
Net change in working capital components $(l,365) $(5,370) $(4,352)
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 2,258 $ 1,55l $ 676
Income taxes $ 4,412 $ 3,896 $ 8,735
See accompanying notes to consolidated financial statements.
21
- -----------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------
(in thousands)
UNREALIZED
FOREIGN LOSS ON
ORDINARY SHARES ADDITIONAL CURRENCY INVESTMENTS TREASURY TOTAL
----------------- PAID-IN RETAINED TRANSLATION AVAILABLE SHARES SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS FOR SALE AT COST EQUITY
------ ------ ------- -------- ----------- -------- ------- ------
Balance at January 1, 1994 8,315 $83 $41,270 $27,246 $ (625) $ -- $ -- $ 67,974
Net income -- -- -- 16,650 -- -- -- 16,650
Dividend paid -- -- (2,079) -- -- (2,079)
Unrealized loss on
investments -- -- -- -- -- (680) -- (680)
Translation adjustment for
the year -- -- -- -- 1,125 -- -- 1.125
------ --- ------- ------- ----- ----- -------- --------
Balance at December 31, 1994 8,315 83 41,270 41,817 500 (680) -- 82,990
Net income -- -- -- 4,687 -- -- 4,687
Realized on sale of
investments -- -- -- -- -- 680 -- 680
Purchase of treasury shares -- -- -- -- -- -- (4,871) (4,871)
Translation adjustment for
the year -- -- -- -- 220 -- -- 220
------ --- ------- ------- ----- ----- -------- --------
Balance at December 31, 1995 8,315 83 41,270 46,504 720 -- (4,871) 83,706
Net income -- -- -- 9,166 -- -- -- 9,166
Purchase of treasury shares
(Note 12) -- -- -- -- -- -- (18,064) (18,064)
Cancellation of treasury
shares (603) (6) (7,617) -- -- -- 7,623
Translation adjustment for
the year -- -- -- -- (169) -- -- (169)
------ --- ------- ------- ----- ----- -------- --------
Balance at December 31, 1996 7,712 $77 $33,653 $55,670 $ 551 $ -- $(15,312) $ 74,639
====== === ======= ======= ===== ===== ======== ========
See accompanying notes to consolidated financial statements.
22
- ------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(dollars in thousands)
1. ORGANIZATION AND BASIS OF PRESENTATION
DSG International Limited (the "Company") was incorporated in the British
Virgin Islands on December 31, 1991. It operates through subsidiary
companies located in North America, Australia, Asia and Europe which are
engaged in the manufacture and distribution of disposable baby diapers,
feminine napkins, adult incontinence products and training pants
products.
The financial statements of the Company and its subsidiaries have been
prepared in accordance with accounting principles generally accepted in
the United States of America ("U.S. GAAP") which differ from those used
in the statutory accounts of its subsidiaries. There are no material
differences between the U.S. GAAP amounts and the amounts used in the
statutory accounts of the subsidiaries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation -- The consolidated financial statements
include the assets, liabilities, revenues and expenses of all
subsidiaries. Intercompany balances and transactions are eliminated in
consolidation.
Cash and cash equivalents -- Cash and cash equivalents include cash on
hand, cash accounts, interest bearing savings accounts, commercial paper
and time certificates of deposit with an original maturity of three
months or less.
Inventories -- Inventories are stated at the lower of cost determined by
the first-in, first-out method, or value determined by the market.
Finished goods inventories consist of raw materials, direct labour, and
overhead associated with the manufacturing process.
Depreciation and amortization of property and equipment -- Depreciation
is provided on the straight line method at rates based upon the estimated
useful lives of the property, generally three to ten years except for
buildings which are 40 years. Costs of leasehold improvements are
amortized over the life of the related asset or the term of the lease,
whichever is shorter.
Revenue recognition -- The Company recognizes revenue at the time
shipments of product are made to customers.
Income taxes -- Deferred income taxes are provided at enacted statutory
rates for temporary differences resulting from differences between the
book and tax bases of assets and liabilities in accordance with Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes".
Long-lived assets -- The Company has considered in accordance with
Statement of Financial Accounting Standards No. 121 "Accounting for the
impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of" (SFAS No. 121), the guidelines regarding when impairment losses on
long-lived assets should be recognized and how impairment losses should
be measured. The Company believes that the adoption of SFAS No. 121 does
not have a material effect on its financial position or results of
operation.
23
- ------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------
(dollars in thousands)
Foreign currency translation -- The consolidated financial statements of
the Company are prepared in United States dollars because this is the
currency of the primary economic environment in which the Company
operates. Assets and liabilities of foreign subsidiaries are translated
at year end exchange rates, while revenues and expenses are translated at
average currency exchange rates during the year. Adjustments resulting
from translating foreign currency financial statements are reported as a
separate component of shareholders' equity. Gains or losses from foreign
currency transactions are included in net income of the current period.
Postretirement and postemployment benefits -- The Company does not
provide postretirement benefits, other than pensions, and postemployment
benefits, if any, are not significant.
Earnings per share -- Earnings per share are based on the weighted
average number of Ordinary Shares outstanding.
Concentration of credit risk -- The Company sells to distributors and
retailers located in each of the countries in which it operates. The
Company grants credit to all qualified customers on an unsecured basis
but does not believe it is exposed to any undue concentration of credit
risk to any significant degree.
Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires the use of
estimates. Actual results could differ from those estimates.
3. NON-RECURRING CHARGE
The non-recurring charge represents expenses of a going private
transaction proposed in April 1995 by a management group, led by the
Company's Chairman, Brandon Wang, and two other equity investors, which
was subsequently terminated in July 1995. The expenses include bank
syndication and refinancing fees and legal and professional expenses of
the Company, the special committee of independent directors and a
syndicate of banks.
4. ACQUISITIONS
In 1996 the Company acquired, for cash of $150, the minority interest in
a subsidiary, which approximated fair value.
During 1994 the Company acquired two companies: an 80% interest in its
former distributor in Thailand and the entire capital of a manufacturer
of adult incontinence products in Switzerland for a total cash
consideration of $6,410. Both acquisitions were accounted for as
purchases and their operating results are included in the Consolidated
Statements of Operations from their respective dates of acquisition. No
goodwill arose on these acquisitions.
5. RECEIVABLE FROM SHAREHOLDER
In 1996 and 1995 the Company advanced $7,638 and $13,167, respectively,
to Brandon Wang, the founder, substantial shareholder and Chief Executive
Officer of the Company and to a trust of which he is a beneficiary. These
advances are made under a loan and security agreement in which the
Company agreed to make loans to Brandon Wang from time to time, subject
to any limit on such loans which may be imposed by the Board of
Directors. The advances are evidenced by promissory notes bearing
interest at a
24
- ------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------
(dollars in thousands)
rate equal to 1.5% over the London Inter-Bank Offered Rate (LIBOR) or
such other rate that the Board of Directors and the borrower shall agree
in writing. The rate of interest is reviewed quarterly and adjusted, if
necessary. The promissory notes are collateralized by the pledge of
shares of the Company held by Brandon Wang. The fair market value of the
shares pledged must be at least 200% of the amount due under the Notes.
The loans are repayable on demand. However, the Company and Brandon Wang
have agreed to a quarterly repayment schedule, with the final payment of
principal due in 1998. During 1996, Brandon Wang and a trust controlled
by him repaid $4,530 to the Company. The amount repayable in 1998 is
shown as a non-current asset. At December 31, 1996, the rate of interest
on the notes was 7.2% (8% in 1995). Interest of $958 was charged on these
advances in 1996 ($652 in 1995). The balance at December 31, 1996 was
$15,644.
In 1994 the Company advanced amounts totalling $6,737 to Brandon Wang and
to a company controlled by him on an unsecured basis. Interest at the
rate of 8% per annum was charged on these advances and amounted to $305
in 1994.
6. INCOME TAXES
Income is subject to taxation in the various countries in which the
Company and its subsidiaries operate. The Company is not taxed in the
British Virgin Islands where it is incorporated.
The components of income before income taxes areas follows:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
--------------------------
U.S. $ 6,503 $5,467 $14,932
Foreign 8,848 2,265 11,751
------- ------ -------
$15,351 $7,732 $26,683
======= ====== =======
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
--------------------------
Current
U.S. Federal $2,320 $1,611 $ 5,595
U.S. State 54 - 482
Foreign 4,164 2,175 3,532
Benefit of loss carryforwards (415) (440) (1,305)
Deferred taxes 62 (79) 1,729
------ ------ -------
$6,185 $3,267 $10,033
====== ====== =======
25
- ------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------
(dollars in thousands)
6. INCOME TAXES (CONTINUED)
A reconciliation between the provision for income taxes computed by
applying the United States Federal statutory tax rate to income before
taxes and the actual provision for income taxes is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
------------------------------------
Provision for income taxes at statutory rate on
profit for the year 35.0% 35.0% 35.0%
Lower tax rate applicable to foreign earnings (1.1) (1.6) (1.0)
State income taxes net of Federal benefit 0.4 1.2 1.8
Losses for which tax benefit is not available 2.1 9.0 2.2
Utilization of loss carryforwards (2.7) (5.7) (4.9)
Withholding tax on interest and royalty income 1.9 5.0 0.7
Other 4.7 (0.6) 3.8
----- ----- -----
Effective rate 40.3% 42.3% 37.6%
===== ===== =====
Certain subsidiaries have operating loss carryforwards for income tax
purposes which maybe applied to reduce future taxable income. The loss
carryforwards are available on a country by country basis and are not
available for use except in the country in which the loss occurred. At
December 31, 1996 the tax loss carryforwards by country and their future
expiration dates are as follows:
TOTAL 2000 2001 2002 2003 INDEFINITE
----------------------------------------------------------
United Kingdom $80,378 $ -- $ -- $ -- $ -- $80,378
Thailand 811 -- 811 -- -- --
Switzerland 4,540 909 937 2,009 685 --
China 383 321 62 -- -- --
------- ------ ------ ------ ---- -------
$86,112 $1,230 $1,810 $2,009 $685 $80,378
======= ====== ====== ====== ==== =======
Included in United Kingdom operating loss carryforwards for income tax
purposes is approximately $74,242 relating to tax losses at the date of
acquisition of a company acquired in 1993. Utilization of these losses
will result in a reduction in future tax expense and is dependent on both
the earning of sufficient otherwise taxable income in the relevant
countries and the satisfaction of technical requirements of applicable
law. In the case of the United Kingdom, this includes the requirement
that there not be a "major change" in business activities.
Deferred income tax balances at December 31, 1996 are related to:
ASSETS LIABILITIES
--------------------------
Inventories $ 7 $ (196)
Accounts receivable and prepaid expenses 29 (200)
Property -- (3,000)
Other 201 226)
Tax loss carryforwards 26,525 --
valuation allowances (26,525) --
-------- -------
Total $ 237 $(3,622)
======== =======
26
- ------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------
(dollars in thousands)
7. INVENTORIES
Inventories by major categories are summarized as follows:
AT DECEMBER 31,
------------------
1996 1995
------------------
Raw materials $13,646 $12,949
Finished goods 10,344 8,450
------- -------
$23,990 $21,399
======= =======
8. PROPERTY AND EQUIPMENT
Included in property and equipment are assets acquired under capital
leases with the following net book values:
AT DECEMBER 31,
------------------
1996 1995
------------------
At cost:
Machinery and equipment $2,786 $248
Motor vehicles 458 257
------ ----
3,244 505
Less: Accumulated depreciation 501 130
------ ----
Net book value $2,743 $375
====== ====
27
- ------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------
(dollars in thousands)
9. SHORT-TERM BORROWINGS
These include borrowings in the form of trade acceptances, loans and
overdrafts with various banks:
AT DECEMBER 31,
---------------------
1996 1995
---------------------
Credit facilities granted $32,837 $26,016
======= =======
Utilized $10,227 $15,218
======= =======
Weighted average interest rate on
borrowings at end of year 6.46% 7,54%
======= =======
The Company maintains short-term bank credit lines in each of the
countries in which it operates. Interest rates are generally based on the
banks' prime lending rates and the credit lines are normally subject to
annual review. The Company had a $5,000 line of credit facility with a
U.S. domestic bank at December 31, 1996 ($2,000 in 1995). Borrowings
under this line of credit are repayable in 1998 and bear interest at
LIBOR plus 1.75% (7.45% at December 31, 1996). The line of credit is
collateralized by the accounts receivable, inventory and equipment of the
Company's U.S. subsidiary.
10. LONG-TERM DEBT
Long-term debt consists of:
AT DECEMBER 31,
---------------------
1996 1995
---------------------
Acquisition loan due in 1998 bearing interest at
6% at December 31, 1996. Repayable in 5 years'
quarterly installments commencing in 1993. The
acquisition loan is associated with the purchase
of a Canadian subsidiary, is denominated in
Canadian dollars and is collateralized by the
net assets of the subsidiary $ 1,504 $ 2,188
Swiss Franc denominated mortgage loans bearing interest
at 5% per annum repayable after 5 years 4,688 5,478
Bank loan fully repaid in 1996. The loan was secured over
a bank deposit of the same amount which was included in
restricted cash -- 5,269
Bank loan bearing interest at a rate of 7.7% per annum
at December 31, 1996, $1,375 repayable in 1997,
$1,500 in 1998 and $12,125 in 1999. The loan is
secured over the property, plant and equipment of
the Company's Duluth, Georgia facilities 15,000 10,000
Bank loan bearing interest at 6.7% at December 31, 1996.
Repayable in 3 years' semi-annual installments
commencing in 1995. The loan is secured over a
diaper machine 882 1,322
Bank loan repaid in 1996 -- 29
Capital leases 2,717 325
------- -------
Total 24,791 24,611
Current portion of long-term debt 3,204 8,141
------- -------
Long-term debt, less current portion $21,587 $16,470
======= =======
28
- ------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------
(dollars in thousands)
10. LONG-TERM DEBT (CONTINUED):
Maturities of long-term debt as at December 31, 1996 are as follows:
CAPITAL
LOANS LEASES TOTAL
-------------------------------------
Year ending December 31,
1997 $ 2,733 $ 471 $ 3,204
1998 2,528 439 2,967
1999 12,125 1,784 13,909
2000 -- 15 15
2001 and thereafter 4,688 6 4,694
------- ------ -------
Total $22,074 $2,715 $24,789
======= ====== =======
11. DEFERRED PURCHASE CONSIDERATION
In connection with the 1993 acquisition of the disposable hygiene
division of a Swiss corporation, the purchase price included a quarterly
payment representing 3.5% of the subsidiary's net sales for the five-year
period ended June 30, 1998. This amount will be reduced if certain
specified conditions occur and the subsidiary is liquidated. The purchase
liability is based on estimates made by the Company with reference to the
past and current trading history. No interest is payable on the amounts
outstanding. The remaining estimated annual payments are $839 in 1997 and
$353 in 1998.
12. SHARE REPURCHASES
During 1994 the Company adopted a plan authorizing the Company to
repurchase up to 500,000 shares of its ordinary shares and, in 1995, the
authority to purchase shares was increased to 1,000,000 shares. The
Company purchased 240,000 shares under this program for cash of $3,079 in
1996 and 393,000 shares for cash of $4,871 in 1995. 603,000 of these
repurchased shares were cancelled in 1996. Subsequent to the year end
date, a further 5,000 shares were repurchased for cash of $68.
On November 13, 1996, the Company made a tender offer to its public
shareholders to acquire its ordinary shares at prices, net to the seller
in cash, not greater than $14.50 nor less than $12.75 per share. The
offer closed on December 13, 1996 and the Company purchased 1,003,641
shares from the public shareholders at a price of $14.50 per share. In
conjunction with the tender offer, the Company incurred $433 for
investment banking fees, and legal and professional fees.
29
- ------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------
(dollars in thousands)
13. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease land, facilities and equipment
under operating leases, many of which contain renewal options and
escalation clauses. Rental expense under operating leases was $2,125 in
1996, $2,156 in l995 and $2,174 in 1994.
As at December 31, 1996, the Company and its subsidiaries were obligated
under operating leases requiring minimum rentals as follows:
Year ending December 31,
1997 $1,545
1998 484
1999 167
2000 152
2001 152
2002 and thereafter 978
------
Total $3,478
======
At December 31, 1996, the Company had capital commitments for the
purchase of machinery and equipment of $277 which will be expended in
1997.
The Company and its subsidiaries are, from time to time, involved in
routine legal matters incidental to their business. In the opinion of the
Company's management, the resolution of such matters will not have a
material effect on the Company's financial position or results of
operations.
14. EMPLOYEE BENEFIT PLANS
The Company's United States subsidiary has established a 401(k) plan
under which the Company matches employee contributions up to 5% of
employees' base compensation. The Company's other international
subsidiaries have defined contribution plans, covering substantially all
employees, which are determined by the boards of directors of the
subsidiaries. These plans provide for annual contributions by the Company
from 3.5% to 20% of eligible compensation of employees based on length of
service.
Total expense related to the above plans was $1,134 in 1996, $905 in 1995
and $753 in 1994.
30
- ------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------
(dollars in thousands)
15. SUPPLEMENTARY INFORMATION
Valuation and qualifying accounts:
BALANCE AT CHARGED TO
BEGINNING PURCHASE OF COST AND BALANCE AT END
OF YEAR SUBSIDIARIES EXPENSES DEDUCTIONS OF YEAR
------- ------------ -------- ---------- -------
Year ended December 31,1996
Allowances for doubtful accounts $ 747 $-- $ 381 $(485) $ 643
Provision for inventory obsolescence 450 -- 765 (211) 1,004
------ --- ------ ----- ------
$1,197 $-- $1,146 $(696) $1,647
====== === ====== ===== ======
Year ended December 31, 1995
Allowances for doubtful accounts $1,071 $-- $ 145 $(469) $ 747
Provision for inventory obsolescence 304 -- 499 (353) 450
------ --- ------ ----- ------
$1,375 $-- $ 644 $(822) $1,197
====== === ====== ===== ======
Year ended December 31, 1994
Allowances for doubtful accounts $ 312 $31 $ 989 $(261) $1,071
Provision for inventory obsolescence 193 -- 332 (221) 304
------ --- ------ ----- ------
$ 505 $31 $1,321 $(482) $1,375
====== === ====== ===== ======
Deductions relate to write-offs of accounts receivable as bad debts and
disposals of inventories.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of the Statement
of Financial Accounting Standards No. 107 "Disclosures About Fair Value
of Financial Instruments", The estimated fair value amounts have been
determined by the Company, using available market information and
appropriate valuation methodologies. The estimates presented herein are
not necessarily indicative of the amounts that the Company could realize
in a current market exchange. The carrying amounts of cash and cash
equivalents, accounts receivable, receivables from shareholder, accounts
payable, short-term borrowings, deferred purchase consideration and long-
term debt are reasonable estimates of their fair value. The interest rate
on the Company's long-term debt approximates that which would have been
available at December 31, 1996 for debt of the same remaining maturities.
The fair value of deferred purchase consideration has been estimated
using the expected future cash payments discounted at a market interest
rate.
31
- ------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------
(dollars in thousands)
17. SEGMENT INFORMATION
The Company is engaged in one industry segment, the manufacturing and
marketing of disposable hygienic products.
Certain financial information by geographic area is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
-----------------------------------
NET SALES
North America $ 92,622 $111,505 $111,025
Australia 47,643 44,329 38,441
Asia 60,359 47,837 36,870
Europe 35,426 42,210 32,435
-------- -------- --------
$236,050 $245,881 $218,771
======== ======== ========
OPERATING INCOME (LOSS)
North America $ 10,530 $ 9,674 $ 20,809
Australia 5,204 2,293 6,278
Asia 6,827 3,114 3,900
Europe 35 (2,217) (1,363)
Corporate expenses (6,613) (3,806) (6,181)
-------- -------- --------
$ 15,983 $ 9,058 $ 23,443
======== ======== ========
ASSETS, AT END OF PERIOD
North America $ 37,975 $ 41,466 $ 45,599
Australia 30,221 24,831 21,389
Asia 32,630 31,104 24,250
Europe 24,649 30,117 29,944
Corporate assets 16,435 26,875 14,255
-------- -------- --------
$141,910 $154,393 $135,437
======== ======== ========
No single customer accounted for 10% or more of the total revenues.
32
- ------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------
(dollars in thousands)
18. QUARTERLY DATA (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
-------------------------------------------------------
1996
Net sales $62,109 $59,995 $57,992 $55,954
Gross profit 18,658 20,810 20,106 20,829
Net income 1,118 2,278 2,347 3,423
Earnings per share 0.14 0.29 0.30 0.45
1995
Net sales $64,651 $63,395 $60,526 $57,309
Gross profit 19,076 18,385 16,715 14,390
Net income (loss) 2,174 1,933 (1,858)/(1)/ 2,438/(1)/
Earnings (losses) per share 0.26 0.24 (0.23) 0.31
1994
Net sales $47,806 $51,083 $60,027 $59,855
Gross profit 17,098 18,691 20,621 19,167
Net income 4,074 4,288 4,813 3,475
Earnings per share 0.49 0.52 0.58 0.41/(2)/
(1) The 3rd Quarter and 4th Quarter 1995 results include non-recurring
charges of $l,433 and $535, respectively.
(2) In the 4th Quarter 1994, the directors approved and paid to senior
management, in addition to the standard quarterly incentive bonus, a
discretionary bonus which had the effect of reducing earnings per
share for the 4th Quarter by $0.21.
ORDINARY SHARE PRICE:
1996 1995
----------------- -----------------
QUARTER HIGH LOW HIGH LOW
----------------- -----------------
Fourth $14 7/8 $11 1/4 $13 $10
Third 11 5/8 10 1/4 18 5/8 8 1/2
Second 15 1/8 10 7/8 19 1/2 13 1/4
First 15 1/2 12 1/2 17 3/4 11
33