UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
COMMISSION FILE NUMBER 33-45136
DSG INTERNATIONAL LIMITED
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(Exact name of Registrant as specified in its charter)
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(Translation of Registrant's name into English)
BRITISH VIRGIN ISLANDS
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(Jurisdiction of incorporation or organization)
17/F WATSON CENTRE, 16-22 KUNG YIP STREET, KWAI CHUNG
HONG KONG
TEL. NO. 852-2427-6951
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each Name of each exchange
Class on which registered
NONE
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
ORDINARY SHARES, PAR VALUE
$0.01 PER SHARE ("ORDINARY SHARES")
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(Title of Class)
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NONE
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(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 6,674,606
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 baby diapers in Hong Kong and one of the first
companies to offer disposable baby diapers to Hong Kong consumers. The Company
also exports its products from Hong Kong to other countries in Asia, including
China, Singapore, Thailand, Malaysia and Indonesia.
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 baby 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 manufacturer of disposable baby diaper manufacturer in Australia. Also in
1988, the Company acquired the assets, including brand names, of the
unprofitable disposable baby 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 baby diaper and feminine napkin manufacturing division of a Swiss
company. In September 1993, the Company acquired an unprofitable private label
disposable baby diaper and feminine napkin manufacturing company in Canada. At
the end of December 1993, the Company further acquired an unprofitable branded
product disposable baby diaper manufacturer in the United Kingdom. The Company
moved its manufacturing plant in Norcross, Georgia to Duluth, Georgia, where the
Company further expanded its production capacity in the U.S.
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 or 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.
In April 1997, the Company acquired the entire share capital of an adult
incontinence and disposable baby diaper manufacturer in Wisconsin, United
States, and the manufacturing assets of a company in the Netherlands and its
related distribution company in Belgium.
In June 1997, the Company entered a joint venture agreement with an
Indonesian distributor to establish a manufacturing facility in Jakarta,
Indonesia to manufacture disposable baby diapers. The Company owns a 60%
interest in the joint venture company.
During 1997, the Company closed its manufacturing operations in Canada,
California and Singapore.
DSG International Limited is incorporated in the British Virgin Islands and
has its principal executive office at 17/F Watson Center, 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 baby diapers, training
pants and adult incontinence products 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)", "CERTAINTY(R)" and
"HANDY(TM)". The Company also manufactures and markets disposable baby diapers,
adult incontinence, training pants and feminine napkins products under private
labels. The Company's products are sold internationally, with its twelve
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 manufacturing operations in Singapore and
California were closed in December 1997 and the operation in Canada was closed
in March 1998.
The Company's operation in the United States, the Company's largest
operation, in association with the Company's operation in Wisconsin,
manufactures and distributes branded and private label disposable baby diapers,
adult incontinence, 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). The Company estimated that its
"FITTI(R)" brand has approximately 3% market share on a volume basis in the food
and grocery store sector.
In Australia, where the Company is one of the leading disposable baby
diaper manufacturers, it estimates that it has an overall unit volume market
share of approximately 22%, placing it second in that market. The Australian
market is divided into three major retail sectors, which are grocery, pharmacy
and variety. The Company is currently supplying brands of both premium and
economy quality to all three market sectors. The Company also markets
disposable baby diapers under retail chain private labels, which accounted for
approximately 16% of its Australian sales in 1997. The Company introduced the
"VLESI(R)" range of adult incontinence products into the Australian market in
mid 1996, targeting the institutional sector of the market. This new product
range showed substantial growth during 1997.
2
The Company estimates that its share of the disposable baby diaper market
in Hong Kong was around 20%, placing it second in the market. In most of the
South East Asia countries, the Company's leading brands, "FITTI(R)" and "PET
PET(R)", are well established. The Company's unit sales in the PRC, Thailand,
Malaysia and Indonesia grew steadily in 1997 and the Company believes that it
will continue to expand sales in those countries with the accelerating rate of
conversion of use of disposable baby diapers. The Company commenced
manufacturing and distribution of adult incontinence products through its
operation in Thailand in 1995 and launched its "DISPO 123(TM)" brand in the same
year and its "HANDY(TM)" brand in 1997. The Company entered into a joint
venture in Indonesia to build a plant to manufacture disposable baby diapers, it
is estimated that the plant will commence operation in the fourth quarter of
1998. The sales of adult incontinence products increased steadily over the
years and the Company's brands are well established both in the retail and
institutional sectors in the markets of the Asia Pacific region. Although the
Company encountered the unprecedented financial turmoil in the region in the
second half of the year 1997, the Company remains optimistic about the market
growth potential in Asian Pacific region.
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. On a selective basis, the Company also
manufactures private label disposable diapers which provide the Company with
reasonable profit margin. 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 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
stepped up its position in adult incontinence market in Europe by acquisition of
a Belgium adult incontinence distribution company in 1997 and the Company
believes that by focussing in adult incontinence market, it will create further
inroads in the continental Europe market.
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
baby diapers, feminine napkins manufacturers and more recently by acquiring
adult incontinence manufacturers in the United States, Australia, the United
Kingdom, Canada and Switzerland. The Company will expand through acquisitions
when opportunities arise and 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, together with the upcoming facility in Indonesia commencing in
1998.
3
The Company's principal raw materials are fluff wood pulp and super
absorbent polymer. Other raw materials include polyethylene backsheets,
polypropylene non-woven liners, adhesive tapes, hot melt adhesive, elastic and
tissue. The cost of materials increased moderately in 1997 and also in 1998.
Raw materials account for about three-quarters of the cost of goods sold.
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 sub-layer, 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.
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, Switzerland
and Wisconsin in the United States. 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. The Company 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 expects that the currency turmoil in the Asian region will
continue to affect the economic and financial environment of Asian countries in
1998. The intense price and promotional competition in North America will
continue in 1998. The market environment in Europe will continue to be
difficult. The manufacturing plant in Indonesia will commence operation in the
fourth quarter 1998. The Company is planning to increase its adult incontinence
products sales in the Australian, Asian and European markets.
4
From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995). Words such as "anticipate", "estimate", "project" and
similar expressions are intended to identify such forward-looking statements.
Forward-looking statements may be made by management orally or in writing,
including, but not limited to, in press releases, as part of this Management's
Discussion and Analysis of Financial Condition and Results of Operations and as
part of other sections of this Annual Report on Form 20-F and the Company's
other filings with the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
Such forward-looking statements are subject to certain risks, uncertainties
and assumptions, including without limitation to those identified below. Should
one or more of these risks or uncertainties materialize, or should any of the
underlying assumptions prove incorrect, actual results of current and future
operations may vary materially from those anticipated, estimated or projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their respective dates.
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 and super absorbent polymer.
Among the factors that have a direct bearing on the Company's results of
operations and financial condition are leverage and debt service, competitive
industry, price changes by competitors, dependence on key products and
acceptance of product innovations, cost of certain raw materials, international
operations, currency fluctuations, currency devaluations, currency restrictions,
intellectual property risks, technological changes, covenant limitations and
other factors discussed herein.
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.
1997 1996 1995
----- ----- -----
Net sales
North America............................................................. 39.4% 39.2% 45.3%
Australia................................................................. 20.4 20.2 18.0
Asia...................................................................... 24.7 25.6 19.5
Europe.................................................................... 15.5 15.0 17.2
------ ----- ------
100.0% 100.0% 100.0%
====== ====== ======
Operating income (loss)
North America............................................................. (15.3)% 65.9% 106.8%
Australia................................................................. 165.6 32.6 25.3
Asia...................................................................... 173.3 42.7 34.4
Europe.................................................................... (72.2) 0.2 (24.5)
Corporate expenses........................................................ (151.4) (41.4) (42.0)
------ ----- ------
100.0% 100.0% 100.0%
====== ====== ======
5
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. 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. The Company is the first to offer a Super Toddler or XXL size
baby diaper that is marketed under various private labels. The Procter & Gamble
Company has announced a Pampers product in the same size that it will begin
shipping in May 1998.
The Company has also launched economical "jumbo" pack diapers into the
marketplace under the "FITTI(R)" brand. These have been 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 such customers like Walgreens Drug, Harris-Teeter,
A&P, Topco, Shurfine International, Hannaford Bros., Sav-A-Lot, Pathmark, Rite-
Aid and McLane (a division of Wal-Mart). The Company is one of two full line
manufacturers in the disposable private label baby products segment capable of
producing and marketing disposable baby diapers in all varieties as well as
training pants, youth pants and diaper inserts. This advantage will result in
expanded sales and increased distribution of the Company's products.
Consequently, the focus of the Company will be targeted primarily at private
label partnership opportunities in the months ahead.
The Company successfully launched its adult incontinence products in
late 1996. The Company's primary focus is once again the development of solid
private label supply partnerships with retailers such as Walgreens, Rite-Aid,
Pathmark, Target Stores and others. The Company's products are also available
under the "CERTAINTY(R)" brand name. Offered under this name are briefs,
feminine bladder control pads, and feminine control bladder guards. All of
these products provide the incontinent sufferer with product features and
performance the Company believes are superior to any other brands now available
in North America. In all cases, the Company is offering products with genuine
points of difference and exclusive benefits, features that have helped enhance
acceptance of these new programs. Other new products are on the horizon,
assuring the Company's position as the primary provider of value priced
"premium" products. The Company's adult incontinence product line represents an
ideal opportunity to expand sales and distribution in this fast growing
category, while enhancing margin opportunities relative to baby diapers.
ii. Sales and Marketing
Disposable baby 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 maintains a solid distribution base on its "FITTI(R)" brand, with new
retail customers coming on board in Canada, the United States and Puerto Rico.
Sales of "FITTI(R)" disposable training pants have seen an excellent steady
volume growth. The product was repositioned in 1996 with better features for
the consumer at no additional cost. The recent launch of new "FITTI(R)" DRI-
NITE JUNIOR youth pants has been a big success. Since the Company provides the
only value alternative for the consumer to Kimberly-Clark's Goodnites, steady
distribution and sales gains are continuing.
6
The Company has consolidated its manufacturing and distribution
operations into two facilities to efficiently serve all North American markets.
Facilities are located in Oconto Falls, Wisconsin, and Duluth, 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 the 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 and education, while
remaining flexible and responsive to trade and also to 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. Due to the continuing intense price and promotional
pressure, along with 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, despite the slight sales volume decline from 1996
levels. For the quarter ended December 31, 1997, "FITTI(R)"'s share was 2.3% of
the total units of disposable baby diapers and training pants sold in grocery
outlets within the United States. The grocery store sector represents
approximately 52% of the $4 billion United States retail market. In certain
markets, such as that of the New York metropolitan area, the nation's largest
market, the Company believes that "FITTI(R)" brand is much greater than
conventional market share data would indicate due to the high percentage of
"FITTI(R)" diapers sold through wholesale and inner city outlets that do not
report to typical market research organizations. In other markets, such as
those in Kansas and Oklahoma, the Company believes that the "FITTI(R)" 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 through the use of
packaging with greater shelf impact, creative and effective promotions combined
with very efficient distribution, electronic data interchange capability and a
high level of customer service. In the fall of 1997, the Company re-staged its
"FITTI(R)" diapers with a new lower price and greater consumer value. The
Company is confident the "FITTI(R)" brand has enhanced its philosophy of
offering the consumer "the best product for the price". 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 within the primary diaper selling
class of the 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, Super Value
and Fleming. The Company continues to target the non-food class of trade as a
major area of opportunity for growth in the future. Current non-food retail
partners include Ames, Shopko, Kmart/Canada and Meijer. The Company continues
to benefit from its marketing "firsts", bringing greater consumer value to new
segments of the disposable baby product category. Among these firsts are
disposable youth pants under the "FITTI(R)" DRI-NITE JUNIOR name and a new Super
Toddler (XXL) size baby diaper, marketed under assorted private label banners.
The Company began its launch of adult incontinence products in 1996.
On the branded side, "CERTAINTY(R)" is the name under which the Company markets
its adult products. The focus of the Company is once again the private label
sector of adult incontinence, where sales are increasing at a dramatic rate, the
private label share of category sales is extremely high (25%+), and the Company
can offer retailers superior products to any of the national brands. Already,
the Company has new product entries in the development stage. The Company's
strategy is to provide products to the marketplace that 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 Company is currently selling
adult incontinence products to Walgreens, Rite-Aid, Thrifty-Payless and Longs
Drug Stores with many new programs and retail partners on the drawing board.
The drug store trade now represents more than 50% of the total $500 million in
adult incontinence retail sales in the United States. In addition, growth
potential for this category remains high as the population ages.
7
Acquisition of Universal Converter, Inc. In the spring of 1997, the
Company acquired the assets and operations of Universal Converter, Inc. in
Oconto Falls, Wisconsin. This acquisition has greatly expanded production
capacity and product range in the adult incontinence segment. In addition, it
opened the door for expanded institutional sales which has happened over the
balance of 1997. Not only did this move secure the Company's position as the
primary supplier to one of the largest incontinent distributors to the
institutional market; it has opened doors with other important distributors.
Institution Volume and Activity. The institutional business provides
adult incontinence products to medical care facilities such as hospitals and
nursing homes. It is worth noting that the institutional market still
represents more than 60% of the total adult incontinence volume in North America
or more than $700 million in sales. This adult category represents an area of
significant sales and distribution growth for the Company, and significant gains
are expected in 1998 and beyond.
Private Label. As noted earlier, this segment of the Company's
business is the major area of potential growth. On the disposable baby diaper
side, new partnerships are underway with such major retailers as A&P stores,
Topco, Rich Foods and Save-A-Lot stores. Existing private label partnerships
with major retailers like Walgreens Drug, Shurfine International, Uniprix, 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 that of 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, 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.
b. AUSTRALIA
i. Products
In Australia, the Company manufactures and markets disposable baby
diapers under four core proprietary brand names and a variety of retail chain
private labels. The Company's own brands accounted for over 77% of its
Australian sales for 1997. Two of these proprietary brands are targeted at the
grocery sector, while the other two are targeted at the pharmacy sector. The
two brands targeting the grocery sector are "BABY LOVE(R)", which is a value
priced, premium quality feature driven ultra diaper, while "LULLABY(R)", is an
economy price driven basic feature ultra diaper. The two brands in the pharmacy
sector are "COSIES(R)", which has a similar marketing strategy to "BABY LOVE(R)"
and "COSIFITS(R)", which has a similar marketing strategy to "LULLABY(R)". In
addition to its four core proprietary brands, the Company continues to hold a
leading position in the private label sector producing corporate brands for a
number of major grocery and variety sector retailers. The Company introduced
the "VLESI(R)" range of adult incontinence products into the Australian market
in mid 1996, primarily targeting the nursing home sector of the market. This
new product range showed substantial growth during 1997.
8
ii. Sales and Marketing
The Australian retail market for disposable baby diapers has grown
from approximately $94 million in 1988, when the Company first entered the
market, to approximately $326 million in the twelve months ended December
1997.(1) The total unit sales volume in the combined grocery and pharmacy
sectors declined by 1.7%, from 804 million diapers in 1996 to 790 million
diapers in 1997. The primary reason of this reduction in unit volume was the
decline in pharmacy sector sales. Slow growth in the grocery sector and strong
growth in the variety sector of the category balanced this reduction in pharmacy
sector sales. The Company believes that market utilization for disposable baby
diapers, which is currently below 65%, will slowly increase to the level of
other industrialized Western countries of over 85%. Branded products comprise
approximately 85% of the Australian market, with the remaining 15% 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 baby diaper
market. A major U.S. national manufacturer has approximately 63% of the market.
The Company markets and distributes its branded products in Australia
using exclusive independent brokers, who market and facilitate distribution of
the Company's diaper products to the grocery and pharmacy sectors in each
Australian state. The majority of private label sales are managed on a direct
basis with each retail customer. For the "VLESI(R)" range of adult incontinence
products the Company utilizes a direct sales force in combination with exclusive
distributors in every state.
Branded Products. The Company's branded products, "BABY LOVE(R)" and
"LULLABY(R)" are targeted at the grocery and variety sectors, these two sectors
account for approximately 83% of all disposable baby diaper sales in Australia,
up from 79% in 1996. These two sectors are highly concentrated, with over 80%
of the sales volumes controlled by three major retailers, being Woolworths,
Coles Myer and Franklins. The Company utilizes marketing strategies focused on
strong retail profit margins for the retails and offering high value products
for the consumer. These strategies include state and national promotions
targeting consumer trial while focusing on "below the line" promotional support
for the retailers.
The Company's branded products, "COSIFITS(R)" and "COSIES(R)" are targeted
exclusively at the pharmacy sector. This pharmacy sector accounts for
approximately 17% of all disposable baby diaper sales in Australia, which is
down from 21% in 1996. This sector is highly fragmented and consists of a large
number of small and independent pharmacies that have restricted retail space,
offer a limited selection of diaper brands and do not have their own private
label diaper programs. The Company has successfully pursued a strategy of
encouraging these independent pharmacies to carry these two proprietary brands
as "pharmacy only brands", which are supported by national advertising and
promotion, and provide margins which are comparable to those typically offered
by private label programs.
The Company sells to all the major wholesalers of pharmaceutical products
in Australia. These wholesalers include Sigma Company Ltd., F.H. Faulding
Wholesale, Australian Pharmaceutical Industries and Soul Pattinson who
distribute the products to individual pharmacies.
Private Label. Private label products accounted for approximately 15%
of the total Australian market for disposable baby diapers in 1997. The Company
believes that it currently has approximately a 35% share of the private label
market in Australia. The Company has private label programs with major retail
chains, including Target, Fossey's, Coles Supermarkets, Bi-Lo, Franklins as well
as other retailers.
The Company has maintained and developed its leading market position
by building close working partnerships with its retail chain customers. Its
strategy is to proactively offer new product features with improved performance,
while maintaining competitive pricing and high levels of customer service.
Adult Incontinence Products. Approximately 80% of the total sales for
adult incontinence products in Australia are concentrated in the institutional
sector of the category, while the retail sector for these products has been slow
to develop. This institutional sector is comprised primarily of nursing homes,
adult care hostels and hospitals. The Company has employed a team of state
territory sales managers and exclusive state distributors who target the
institutional sector of this market. The Company intends to expand its range of
products and to achieve distribution in all sectors of this growing market.
(1) Source : AC Nielsen, January 1998.
9
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 both in 1997 accounted for approximately 41% 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 sub-layer, 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. In 1997, the Company
introduced an economy brand named "HANDY(TM)". The "DISPO 123(TM)" product is an
ultra anatomic diaper, featuring multi-strand leg elastics, frontal tape closure
system and stand-up leg gathers, "HANDY(TM)" also has the similar features as
"DISPO 123(TM)" but with a slightly lower specifications.
ii. Sales and Marketing
The Company continued to command strong market positions in both the
mature markets of Hong Kong and Singapore. The manufacturing facilities in the
PRC and Thailand have helped expanding the Company's sales, capitalizing on the
increasing usage of disposable baby diapers in those countries. Despite the
currency turmoil in some Asian countries in the latter part of 1997, the Company
still believes that Asian region has higher growth potential than in other
regions and will continue focussing on other potential and emerging markets in
the region. The Company also 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. 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 that are most likely to expand in late 1990s. 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. Over 90% of the sales in
Hong Kong are branded sales, the Company continues to build up the "FITTI(R)"
and "PET PET(R)" brands image by strong advertising program, which not only have
impact on sales in the local market but also in other Asian markets,
particularly the PRC market.
In Singapore, the Company's appointed distributors complemented by its
own sales team to distribute its products. The disposable baby diaper market in
Singapore is relatively small and matured, therefore, growth potential is very
limited. Almost all the Company's sales in Singapore are branded sales, which
are "FITTI(R)" and "PET PET(R)", and the Company estimates that the size of the
market was $29 million in 1997.
10
In Malaysia, which the Company has identified as one of the fastest growing
markets in the region, the expansion of disposable baby diaper market has not
been as fast as the Company anticipated. The Company estimated that the total
market size was approximately $65 million in 1997, less than 10% growth from
1996 and the growth was mainly from the lower end economy products. The Company
major brand in the market is "FITTI(R)" and "PET PET(R)" and a economy brand
"COSIFITS(R)" was introduced during the year occupying a share in the growing
lower end segment. The Company believes that its sales in this market will
continue to grow further as the usage of disposable baby diapers increases. 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 that 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 has commenced advertising its brands in
selective cities, such as Guangzhou and Shenzen. 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. 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. Around 70% of the Company's sales in Thailand were in Bangkok
metropolitan area, the rest of the sales came from the up-countries provinces.
The Company's products are distributed to supermarkets and department stores by
its own nationwide sales force. The Company has been able to capitalize on the
market growth and sustained its market share at about 12.5%, which was the same
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.
The Company's brands "FITTI(R)" and "PET PET(R)" are the leading brands in
the Indonesia market, however the expansion of the Company's sales was
restrained because the products have always been imported and carried very high
import duties. The Company is establishing a manufacturing facility in Jakarta.
The Company believes that its sales in Indonesia would expand rapidly when the
products are manufactured locally because the products will be cheaper and more
affordable.
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 facility in Hong Kong. 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. During 1997, the Company closed the
Singapore manufacturing facility and started building a manufacturing facility
in Indonesia.
11
d. EUROPE
i. Products
The Company manufactures and markets disposable baby diapers under its
own brands in the United Kingdom, and manufactures private label disposable baby
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)", "CARES(R)" and "VLESI(R)". "FITTI(R)" is a value
brand baby diaper with full features such as leg gathers, wetness indicator,
printed backsheet and an extra-dry sub-layer. "COSIFITS(R)" and "CARES(R)" are
economy brands featuring frontal tape and extra-dry sub-layer. "VLESI(R)" adult
incontinence brand comprises a product range of adult incontinence briefs,
anatomic pads and underpads for the institutional hospital and nursing home
markets.
In the early 1997, the Company acquired the manufacturing assets of a Dutch
adult incontinence manufacturer. The equipment was relocated and consolidated
to the Company's Swiss adult incontinence operation. The acquisition gave the
Company increased coverage in the European markets, especially in the Benelux
region, as well as new product lines.
ii. Sales and Marketing
The U.K. retail disposable baby diaper market in 1997 was
approximately $780 million. Approximately 92%(1) of the market were branded
products and the rest were made up of various private label brands of retailers
supplied by European diaper manufacturers.
The Company's strategy is to emphasize its branded products which are
sold to regional retails and wholesalers by offering a value-oriented product
with good profit margins and a high level of service. The Company also produces
own label for several U.K. grocery chains.
In Switzerland, the disposable baby diaper market, approximately $73
million(2) is dominated by a U.S. national brand and the private brand of a
major retail chain. It is estimated that about 65%(3) of the diaper volume in
Switzerland is supplied by the two major U.S. manufacturers. The Company's Swiss
operation situated near Zurich competes in the disposable baby diaper and
feminine napkin markets in Switzerland and also in other European countries for
branded and private label business.
The Company's other operation in eastern part of Switzerland is in the
canton of St. Gallen. It manufactures and markets primarily branded adult
incontinence products and distributes them to institutions such as hospitals and
nursing homes. The Company estimates that its share in the Swiss adult
incontinence market is approximately 30% and is ranked second in the market.
The operation is actively expanding into other European markets through the
appointment of sales distributors.
The Company also has a presence in the Benelux with a sales and
distribution company near Brussels and serves institutional customers in this
region.
3. Competition
The disposable baby 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 is able to maintain a viable
market position in the face of very strong competition from the industry
leaders.
(1) FSA Survey U.K.
(2) Nielsen Switzerland
(3) Nielson Switzerland
12
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 4%, with volume continuing to move slowly
from the food and drug sectors to the mass (discount) merchandisers. In 1997,
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 their Pampers and Luvs brands, they spent heavily
promoting these brands 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, at times going so far as to decline 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 once called "conventional" has now become "premium". The
Company's "FITTI(R)" brands, now accounts for more than 50% of all sales in the
grocery class of trade.
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 and has
formulated a strategy in line with "everyday low pricing", targeted trade
promotions, enhanced product features and performance, along with 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 will help to protect margin contribution
in the coming 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 superior to what any other
manufacturer can currently provide. The added advantage comes from the fact
that this category, more than most, has the greatest need for better products in
order to meet the performance requirements of consumers. The Company has a
product strategy that will ensure it will maintain this competitive edge well
into 1998 and beyond. This competitive edge will also allow the Company to make
quick inroads into the private label incontinent sector, offering premium
products at competitive prices. This segment also presents a slightly better
margin of opportunity, since pricing and promotional strategies from the major
manufacturers have remained much more stable than in the baby diaper
marketplace.
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 63% in 1997. The Company believes it is able to compete
successfully in Australia because its strategy of targeting different brands at
the different retail sectors allows it greater flexibility in providing
attractive retail margins and alternatively product features to its retail
customers. It also benefits from the desire of its retail customers for an
alternative national brand diaper supplier to K-C, as well as quality supplier
for their private label brands.
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.
13
d. EUROPE
In the United Kingdom, the disposable baby diaper 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. Since the entry of
K-C in the U.K. market, the private label brands have been reduced to a level of
about 8% market share. The Company believes that, by pursuing a flexible brand
strategy of supplying both branded and private label in disposable baby diapers
and feminine napkins, it will be able to maintain its share and volume, and
achieve also growth in certain markets.
The adult incontinence market in Europe is shared among several
European as well as U.S. manufacturers. The leading manufacturer in Europe is
SCA Molnlycke which holds the largest market share in some Scandinavian
countries and also in the U.K. The largest market segment for adult
incontinence is still with institutions, such as hospitals and nursing homes.
The Company has expanded its market coverage into the Benelux through the
acquisition of a Dutch business in 1997 and also through appointment of
marketing and distribution partners in Germany and the U.K. The Company sees
its growth coming from developing of innovative features in its adult
incontinence product ranges as well as extending its geographic coverage.
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.
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. In 1997, Procter & Gamble ("P&G") claimed that
certain of the Company's diaper products infringe P&G patents and demanded
payment for past infringement and an agreement to pay future royalties. The
Company and P&G are discussing terms of a possible settlement of this claim.
The Company has an existing license agreement from Kimberly-Clark concerning the
sale of certain diaper products covered by Kimberly-Clark patents.
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.
14
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, stabilized in 1997
and the Company believes it may increase moderately in 1998. Other raw
materials 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.
15
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 1,230 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.
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.
16
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 nine manufacturing facilities, with plants located
in the United States at Duluth, Georgia (near Atlanta) and at Oconto Falls,
Wisconsin; in Hong Kong; in Melbourne, Australia; at Chesterfield, U.K.; in
Switzerland at Mettmenstetten and Goldach; at Zhongshan, Guangdong, PRC; and at
Bangkok, Thailand.
The Company utilizes an aggregate of approximately 1,049,001 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
Brantford, Canada Warehouse 89,000 Owned N/A Sep. 1993
Wisconsin, WI Manufacturing 164,352 Owned N/A Apr. 1997
Hong Kong Manufacturing 111,701 Leased Jun. 1999 Jul. 1978
Singapore Office 43,540 Leased Apr. 2051 May 1991
Zhongshan, PRC Manufacturing 66,043 Leased Oct. 2044 Dec. 1994
Bangkok, Thailand Manufacturing 68,805 Owned N/A Apr. 1995
Melbourne, Australia Manufacturing 179,200 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
Mechelen, Belgium Office 3,400 Leased Dec. 1999 Apr. 1997
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
17
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.
In 1997, Procter & Gamble ("P&G") claimed that certain of the Company's
diaper products infringe P&G patents and demanded payment for past infringement
and an agreement to pay future royalties. The Company and P&G are discussing
terms of a possible settlement of this claim. The Company has an existing
license agreement from Kimberly-Clark concerning the sale of certain diaper
products covered by Kimberly-Clark patents.
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, 1997 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) 49.77%
Directors and officers as a Group (11 persons)................................ 4,427,846(1)(2) 66.34%
(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.
18
The Company knows of no arrangements the operation of which may at a
subsequent date result in a change in control of the Company.
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, 1997, the total number of record holders was 40, of
which 27, representing 39.53% of Ordinary Shares, were in the United States.
ORDINARY SHARE PRICE :
1997 1996
---------------- ----------------
QUARTER HIGH LOW HIGH LOW
- ------------------------ ------- ------- ------- -------
First $16 1/2 $12 1/2 $15 1/2 $12 1/2
Second 17 1/4 12 3/4 15 1/8 10 7/8
Third 16 5/8 10 11 5/8 10 1/4
Fourth 11 1/4 7 3/8 14 7/8 11 1/4
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., an individual who is a citizen or resident of the U.S., a
U.S. corporation, an estate subject to U.S. tax on all of its income regardless
of source, and a trust if a court within the U.S. may exercise primary
supervision over the administration of such trust and one or more U.S. persons
have the authority to control substantial decisions of the trust.) (a
19
"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.
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").
20
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".
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. Passive Foreign Investment Companies
Sections 1291 through 1297 of the Code relate to passive foreign investment
companies ("PFICs") and impose an interest charge on "excess distributions" made
from a PFIC. A foreign corporation is a PFIC if (i) 75% or more of its gross
income for the taxable year is passive income as defined under Section 954(c) of
the Code (the "passive income test"), or (ii) 50% or more of the average value
(or adjusted tax basis if the corporation is a CFC) of the assets held by the
corporation during the taxable year consist of assets that produce or are held
for the production of passive income (the "passive asset test"). Certain look-
through rules take into account the assets and activities of related
corporations from which the foreign corporation either receives income or in
which it holds an interest. Although a determination whether a corporation is a
PFIC is made annually, in general, once a corporation has been classified as a
PFIC, it cannot thereafter lose its status as a PFIC.
Distribution from a PFIC will generally be characterized as an excess
distribution to the extent such distribution, when combined with all other
distributions received by the U.S. Holder in such taxable year, exceeds 125% of
the average distributions received by such shareholder in the three preceding
taxable years (or its holding period if shorter). Once the amount of the excess
distribution is determined, it is allocated ratably to all days in the
shareholder's holding period for the shares of the PFIC. Amounts allocated to
the current year or a year prior to the date upon which the corporation was a
PFIC are included in the shareholder's income as ordinary income. Amounts
allocated to prior years in which the corporation was a PFIC are subject to the
highest rate of tax for the year to which allocated, and each of the resulting
amounts of tax is subject to an interest charge as if it were an underpayment of
taxes for such tax year.
The Company does not believe that it should, in the current year or any
prior year, be classified as a PFIC. Under Section 1296(c) of the Code for
purposes of determining PFIC status, a foreign corporation is deemed to hold its
proportionate share of the assets and to receive directly its proportionate
share of the income of its subsidiaries in which it owns 25 percent or more of
the stock (determined by value). The Company, through its more than 25 percent
owned subsidiaries, is engaged in substantial manufacturing activities and holds
few assets (and receives little income) which would be classified as passive
assets under Notice 88-22 or would be classified as passive income under Section
954(c) of the Code (after application of the look-through rules under Section
1296(c) of the Code).
21
4. 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.
5. 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, 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. In the case of Ordinary Shares held by a
foreign partnership, this certification requirement would generally be applied
to the partners of such partnerships pursuant to certain regulations which will
generally become effective after 1999.
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.
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.
22
ITEM 8. SELECTED CONSOLIDATED FINANCIAL DATA.
The information required by Item 8 is contained in page 16 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 13 of the
Annual Report to Shareholders, and is incorporated herein by reference.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
A. EXCHANGE RATE INFORMATION
The Consolidated Financial Statements of the Company are prepared 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 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.
A confluence of currency fluctuation adversely impacted the Company's
financial performance in 1997. In the first half of the year 1997, Swiss franc
was devalued by 8.6% due to strengthening of U.S. dollar against European
currency. In the second half of the year 1997, the Malaysian Ringgit, Singapore
dollar, Thai Baht and Indonesian Rupiah were devalued in the Asian financial
turmoil. As a result, the Company's reported sales were reduced by $9.7 million
in 1997 compared with the exchange rates used in 1996. The effect of the
exchange rate devaluation also impacted the Company's cost of materials as most
of the raw materials were payable in U.S. dollars. The Company does not hedge
against the risk of currency fluctuation.
The Company anticipates the Asian financial turmoil will continue in 1998,
and the economic growth in Asian countries will slow down. As a consequence,
the Company's sales volume and gross margin in Asian operations will decline.
23
B. EXCHANGE RATE FLUCTUATION
1997 1996
------------------------------------- -------------------------------------------
FIRST QUARTER High Low Average High Low Average
- ------------------- -------- --------- ------------- ------------- ------------- -------------
Australian Dollars 1.30 1.27 1.28 1.34 1.27 1.31
Malaysian Ringgit 2.47 2.47 2.47 2.55 2.53 2.54
Singapore Dollars 1.45 1.40 1.42 1.41 1.40 1.41
Thai Baht 25.89 25.79 25.84 25.25 25.12 25.16
Indonesian Rupiah 2214.20 2212.54 2213.53 2209.37 2178.31 2188.66
Swiss Francs 1.47 1.42 1.45 1.21 1.19 1.20
Pounds Sterling 0.62 0.61 0.62 0.66 0.64 0.65
SECOND QUARTER
- -------------------
Australian Dollars 1.33 1.27 1.30 1.26 1.25 1.26
Malaysian Ringgit 2.51 2.50 2.51 2.49 2.48 2.49
Singapore Dollars 1.44 1.43 1.43 1.40 1.40 1.40
Thai Baht 26.01 23.14 24.62 25.30 25.21 25.24
Indonesian Rupiah 2213.71 2213.37 2213.58 2403.04 2242.12 2349.78
Swiss Francs 1.46 1.41 1.43 1.26 1.23 1.25
Pounds Sterling 0.61 0.60 0.61 0.66 0.64 0.65
THIRD QUARTER
- -------------------
Australian Dollars 1.39 1.34 1.36 1.29 1.26 1.27
Malaysian Ringgit 3.17 2.62 2.91 2.49 2.48 2.49
Singapore Dollars 1.52 1.46 1.50 1.41 1.40 1.40
Thai Baht 34.97 31.10 33.36 25.30 25.22 25.25
Indonesian Rupiah 3684.76 2212.51 2703.76 2209.71 2209.43 2209.57
Swiss Francs 1.51 1.45 1.48 1.25 1.19 1.21
Pounds Sterling 0.62 0.61 0.62 0.64 0.64 0.64
FOURTH QUARTER
- -------------------
Australian Dollars 1.53 1.42 1.47 1.26 1.23 1.25
Malaysian Ringgit 3.88 3.40 3.59 2.52 2.51 2.52
Singapore Dollars 1.67 1.58 1.61 1.40 1.40 1.40
Thai Baht 46.46 39.48 41.98 25.52 25.41 25.45
Indonesian Rupiah 5166.33 3680.71 4176.00 2210.57 2209.40 2209.80
Swiss Francs 1.45 1.39 1.42 1.34 1.25 1.30
Pounds Sterling 0.60 0.59 0.60 0.61 0.59 0.60
24
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.
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.
During 1997, the Company's Audit Committee consisted 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 porposed 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 Kowloon, 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 operations 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
25
the Company's Australian operations. 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 three other listed public companies : Dairy Farm
International Holdings Limited, Cycle And Carriage Limited (alternate director),
and The Hour Glass Limited.
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. Mr. Daniels is not standing for election as a director
of the Company in 1998.
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). Mr. Wang is
now Corporate Affairs Officer of the Company.
26
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 1997 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 $6,281,452.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
Not applicable.
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, 1995 :
LOAN BALANCE BALANCE
AT BEGINNING LOANS LOANS AT END
OF YEAR EXTENDED REPAID OF YEAR
------------ -------- ------- -------
(dollars in thousands)
Year ended December 31, 1997 $15,644 $ 6,129 $21,166 $ 607
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
In 1997, 1996 and 1995 the Company advanced $6.1 million, $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 were 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 were 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 was reviewed quarterly and adjusted, if necessary. The promissory
notes were collateralized by the pledge of shares of the Company held by Brandon
Wang. The fair market value of the shares pledged was required to be at least
200% of the amount due under the notes. The loans were repayable on demand,
however, the Company and Brandon Wang agreed to a quarterly repayment schedule,
with the final payment of principal due in 1998. During 1997 and 1996, Brandon
Wang and a trust controlled by him repaid $21.2 million and $4.5 million,
respectively, to the Company. As the loans were settled during 1997, the
pledged shares were released. Interest of $1.0 million, $1.0 million and $0.7
million was charged on these advances in 1997, 1996 and 1995, respectively. The
balance at December 31, 1997 was $0.6 million.
In 1997, a U.S. subsidiary of the Company extended a guarantee to a bank as
part of a $15 million term loan provided to Brandon Wang. Brandon Wang has
pledged 2,217,100 shares in the Company to the lender as security for the loan.
Commencing January 1, 1998, this loan is repayable by quarterly instalments of
$0.4 million followed by a balloon payment of $10.1 million on August 1, 2000.
27
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.
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 1997.
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.
28
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 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
(1) 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.
29
E. 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".
F. 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.
G. 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.
H. RESOLUTIONS
Resolutions may be adopted at shareholders' meetings by the affirmative
vote of a simple majority of the Ordinary Shares entitled to vote thereon.
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.
I. 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.
30
J. AUTHORIZED BUT UNISSUED SHARES
Under the Company's Memorandum and Articles of Association, there are
13,325,394 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 1,037,394 shares in 1997, 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. The
Company does not currently have any plans to issue additional Ordinary Shares.
K. 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".
L. 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 13,325,394 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.
M. 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.
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.
31
N. 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.
O. 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.
P. 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.
Q. 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.
32
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 14
Independent Auditors' Report 15
Consolidated Statements of Operations for the three years
ended December 31, 1997 17
Consolidated Balance Sheets as of December 31, 1997 and 1996 18-19
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997 20-21
Consolidated Statements of Shareholders' Equity for the three years
ended December 31, 1997 22
Notes to Consolidated Financial Statements 23-33
B. CONDENSED FINANCIAL INFORMATION
Page
----
Independent Auditors' Report S-1
Unconsolidated Statements of Operations for the three years
ended December 31, 1997 S-2
Unconsolidated Balance Sheets as of December 31, 1997 and 1996 S-3
Unconsolidated Statements of Cash Flows for the three years
ended December 31, 1997 S-4
Notes to Schedule 1 S-5
C. 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. (Incorporated by reference from
Exhibit 3.1 to Form 20-F filed June 6, 1997).
3.2 First Amendment to Loan and Security Agreement between Associated
Hygienic Products LLC and SouthTrust Bank of Georgia, N.A. dated
August 19, 1997.
3.3 Guaranty of Associated Hygienic Products LLC dated August 19, 1997.
3.4 Loan Agreement between Brandon S.L. Wang and SouthTrust Bank of
Georgia, N.A. dated August 19, 1997.
11 Computation of Net Income Per Ordinary Share.
33
D. 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 26, 1998.
DSG INTERNATIONAL LIMITED
By /s/TERENCE Y.F. LEUNG
---------------------
Terence Y.F. Leung
Vice President and Treasurer
34
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 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 management to evaluate the adequacy and effectiveness of
the audit functions, control systems and quality of our financial accounting and
reporting.
TERENCE LEUNG
Chief Financial Officer
March 13, 1998
14
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, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE TOUCHE TOHMATSU
Hong Kong
March 13, 1998
15
SELECTED CONSOLIDATED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
STATEMENT OF OPERATIONS DATA 1997 1996 1995 1994 1993
------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net sales $230,930 $236,050 $245,881 $218,771 $150,340
Cost of sales 153,929 155,647 177,315 143,194 95,724
Gross profit 77,001 80,403 68,566 75,577 54,616
Selling, general and administrative expenses 72,034 64,420 59,508 52,134 35,360
Restructuring costs 1,389 - - - -
-------- -------- -------- -------- --------
Operating income 3,578 15,983 9,058 23,443 19,256
Interest expense (2,833) (2,267) (1,759) (724) (162)
Interest income 1,451 1,900 1,666 1,435 1,053
Exchange (loss) gain (610) (176) 1,053 2,245 (90)
Non-recurring charge - - (1,968) - -
Other (expense) income (169) (89) (318) 284 211
-------- -------- -------- -------- --------
Income before income taxes 1,417 15,351 7,732 26,683 20,268
Provision for income taxes (443) (6,185) (3,267) (10,033) (6,970)
Minority interest in losses - - 222 - -
-------- -------- -------- -------- --------
Net income $974 $9,166 $4,687 $16,650 $13,298
======== ======== ======== ======== ========
Basic earnings per share:
Net income $0.15 $1.18 $0.58 $2.00 $1.60
Weighted average number of shares
outstanding 6,675 7,747 8,109 8,315 8,315
DECEMBER 31,
BALANCE SHEET DATA 1997 1996 1995 1994 1993
------------------------------------------------
Working capital $ 30,823 $ 31,714 $ 19,577 $ 34,307 $ 32,597
Total assets 130,273 141,910 154,393 135,437 102,088
Long-term debt 21,281 21,587 16,470 11,480 2,942
Shareholders' equity 64,778 74,639 83,706 82,990 67,974
16
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------------
Net sales $230,930 $236,050 $245,881
Cost of sales 153,929 155,647 177,315
-------- -------- --------
Gross profit 77,001 80,403 68,566
Selling, general and administrative expenses 72,034 64,420 59,508
Restructuring costs (Note 3) 1,389 - -
-------- -------- --------
Operating income 3,578 15,983 9,058
Interest expense (2,833) (2,267) (1,759)
Interest income 1,451 1,900 1,666
Exchange (loss) gain (610) (176) 1,053
Non-recurring charge (Note 5) - - (1,968)
Other expense, net (169) (89) (318)
-------- -------- --------
Income before income taxes 1,417 15,351 7,732
Provision for income taxes (Note 7) (443) (6,185) (3,267)
Minority interest in losses - - 222
-------- -------- --------
Net income $974 $9,166 $4,687
======== ======== ========
Basic earnings per share $0.15 $1.18 $0.58
======== ======== ========
Weighted average number of shares outstanding 6,675 7,747 8,109
======== ======== ========
See accompanying notes to consolidated financial statements.
17
CONSOLIDATED BALANCE SHEETS
(in thousands except per share amounts)
DECEMBER 31,
1997 1996
-------------------
ASSETS
Current assets :
Cash and cash equivalents $18,588 $ 8,605
Accounts receivable, less allowance for doubtful
accounts of $577 in 1997 and $643 in 1996 24,209 27,577
Receivable from shareholder (Note 6) 607 10,031
Other receivables 1,323 1,249
Inventories (Note 8) 24,854 23,990
Prepaid expenses and other current assets 1,539 1,742
Income taxes receivable 591 569
Deferred income taxes 144 75
------- -------
Total current assets 71,855 73,838
------- -------
Property and equipment - at cost : (Note 9)
Land 4,699 4,747
Buildings 21,563 20,012
Machinery and equipment 76,233 69,099
Furniture and fixtures 2,661 2,622
Motor vehicles 1,782 1,999
Leasehold improvements 1,794 1,767
Construction in progress 538 134
------- -------
Total 109,270 100,380
Less: accumulated depreciation and amortization 52,586 38,297
------- -------
Net property and equipment 56,684 62,083
------- -------
Receivable from shareholder (Note 6) - 5,613
Deferred income taxes 291 162
Other assets 1,443 214
------- -------
Total assets $130,273 $141,910
======= =======
See accompanying notes to consolidated financial statements.
18
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(in thousands except per share amounts)
DECEMBER 31,
1997 1996
--------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities :
Short-term borrowings (Note 10) $ 8,177 $10,227
Current portion of long-term debt (Note 11) 4,228 3,204
Deferred purchase consideration (Note 12) 408 839
Accounts payable 14,844 10,197
Accrued advertising and promotion 3,578 5,156
Accrued payroll and employee benefits 2,322 2,730
Other accrued expenses 5,059 5,161
Income taxes payable (Note 7) 1,862 4,195
Deferred income taxes 554 415
-------- --------
Total current liabilities 41,032 42,124
-------- --------
Long-term debt (Note 11) 21,281 21,587
Deferred income taxes (Note 7) 2,448 3,207
Deferred purchase consideration (Note 12) - 353
-------- --------
Total long-term liabilities 23,729 25,147
-------- --------
Minority interest 734 -
-------- --------
Commitments and contingencies (Note 14)
Shareholders' equity :
Ordinary shares, $0.01 par value - authorized 20,000,000 shares;
issued 6,674,606 shares in 1997 and 7,712,000 shares in 1996,
outstanding 6,674,606 shares in 1997 and 6,678,359 shares in 1996 67 77
Additional paid-in capital 18,301 33,653
Retained earnings 56,644 55,670
Foreign currency translation adjustments (10,234) 551
Treasury shares, at cost - 1,033,641 shares in 1996 (Note 13) - (15,312)
-------- --------
Total shareholders' equity 64,778 74,639
-------- --------
Total liabilities and shareholders' equity $130,273 $141,910
======== ========
See accompanying notes to consolidated financial statements.
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
1997 1996 1995
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 974 $ 9,166 $ 4,687
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 12,206 10,646 9,143
Accelerated depreciation on assets written off 503 - 534
Loss (gain) on disposals of property 122 (15) (51)
Loss on sale of investments - - 401
Deferred taxes (544) 24 (77)
Minority interest - - (222)
Other 1,149 1,490 (595)
Net change in working capital components (1,567) (1,365) (5,370)
------- ------- -------
Net cash provided by operating activities 12,843 19,946 8,450
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property (6,389) (5,871) (16,445)
Proceeds from disposals of property 377 45 142
Purchase of subsidiaries net of cash acquired (4,366) - -
Purchase of minority interest in subsidiary - (150) -
Proceeds from sale of investments - - 4,565
Receipt of (investment in) restricted bank deposit - 5,269 (623)
Advances to shareholder (6,129) (7,638) (13,167)
Repayments by shareholder 21,166 4,530 1,306
Increase in other assets (483) - -
------- ------- -------
Net cash provided by (used in) investing activities 4,176 (3,815) (24,222)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in short-term borrowings (3,776) (5,172) 7,986
Increase in long-term debt and other non-current debt 6,056 12,070 12,248
Repayment of long-term debt and other non-current debt (8,314) (11,153) (449)
Payment of deferred purchase consideration (502) (823) (902)
Investment by minority shareholder 734 - 150
Purchase of treasury shares (49) (17,631) (4,871)
Tender offer expenses - (433) -
------- ------- -------
Net cash (used in) provided by financing activities (5,851) (23,142) 14,162
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents (1,185) 43 37
------- ------- -------
Increase (decrease) in cash and cash equivalents 9,983 (6,968) (1,573)
Cash and cash equivalents, beginning of year 8,605 15,573 17,146
------- ------- -------
Cash and cash equivalents, end of year $18,588 $8,605 $15,573
======= ======= =======
See accompanying notes to consolidated financial statements.
20
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(in thousands)
YEAR ENDED DECEMBER 31,
1997 1996 1995
---------------------------
SCHEDULE OF CHANGES IN WORKING CAPITAL COMPONENTS
NET OF EFFECTS FROM PURCHASE OF SUBSIDIARIES
Accounts receivable $ 2,094 $(1,900) $ 1,360
Other receivables (816) (13) (627)
Inventories (826) (2,947) (4,231)
Prepaid expenses and other current assets 418 277 100
Accounts payable 1,107 (1,188) (4,012)
Accrued expenses (1,617) 2,471 1,892
Income taxes payable (1,927) 1,935 148
------- ------- -------
Net change in working capital components $(1,567) $(1,365) $(5,370)
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $3,267 $2,258 $1,551
Income taxes $2,855 $4,412 $3,896
Acquisitions:
Fair value of assets acquired $15,052 $ - $ -
Goodwill 855 - -
Cash paid (4,923) - -
------- ------- -------
Liabilities assumed $10,984 $ - $ -
======= ======= =======
See accompanying notes to consolidated financial statements.
21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Unrealized
Foreign Loss on
Additional Currency Investments Treasury Total
Ordinary Shares Paid-in Retained Translation Available Shares Shareholders'
Shares Amount Capital Earnings Adjustments for Sale at Cost Equity
-------------------------------------------------------------------------------------------------
Balance at January 1, 1995 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 13) - - - - - - (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
Net income - - - 974 - - 974
Purchase of treasury
shares (Note 13) (5) - - - - - (68) (68)
Adjustment of repurchased
shares 1 - - - - - 18 18
Cancellation of treasury
shares (1,034) (10) (15,352) - - - 15,362 -
Translation adjustment
for the year - - - - (10,785) - - (10,785)
------ ------- ---------- ----------- ----------- ----------- -------- -------------
Balance at December 31, 1997 6,674 $67 $18,301 $56,644 $(10,234) $- $- $64,778
====== ======= ========== =========== =========== =========== ======== =============
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") is incorporated in the British
Virgin Islands. 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, adult incontinence, feminine
napkins 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 labor, 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.
Goodwill -- Goodwill is amortized on a straight-line basis over periods
estimated to be benefited, generally over 5 years. At December 31, 1997 and
1996, goodwill amounted to $862 and $214 net of accumulated amortization of
$346 and $140, respectively, and is included in other assets.
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 ("SFAS") No. 109 "Accounting for Income
Taxes".
Valuation of long-lived assets -- The Company periodically evaluates the
carrying value of long-lived assets to be held and used, including goodwill
and other intangible assets, when events and circumstances warrant such a
review. The carrying value of a long-lived asset is considered impaired
when the anticipated undiscounted cash flow from such asset is separately
identifiable and is less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to be
disposed of are determined in a similar manner, except that fair market
values are reduced for the cost to dispose.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Foreign currency translation -- 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, 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. On March 3, 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per
Share". This pronouncement provides for the calculation of basic and
diluted earnings per share which is different from the current calculation
of primary and fully diluted earnings per share. The adoption of this new
standard had no impact on the Company.
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.
New accounting standards not yet adopted -- The FASB has issued three new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS No. 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise", establishes standards for the way that
public enterprises report information about operating segments in interim
financial statements issued to the public. It also establishes standards
for disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance.
SFAS No. 132, "Employers Disclosures about Pensions and Other
Postretirement Benefits", amends the disclosure requirements relating to
pensions and other postretirement benefits.
Each of these new standards is effective for financial statements for
periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact,
if any, they may have on future financial statement disclosures.
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.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands)
3. RESTRUCTURING COSTS
In the fourth quarter of 1997, the Company closed certain of its
manufacturing operations, principally through the closure of its Canadian
and Singapore manufacturing operations, resulting in aggregate losses of
$886, and the write-down of $503 of certain surplus equipment in Europe. Of
the total restructuring costs of $1,389, $503 represented non-cash write-
downs of property and equipment and $886 for the reduction in workforce and
other cash outflows.
4. ACQUISITIONS
In 1997, the Company acquired for cash the entire share capital of a
manufacturer of adult incontinence products and disposable baby diapers in
Wisconsin, United States, and the manufacturing assets of a company in the
Netherlands and its related distribution company in Belgium for a total
consideration of $4,923. Goodwill of $855 arose on the acquisition, which
is being amortized over 5 years. The acquisitions were accounted for as
purchases and their operating results are included in the Consolidated
Statements of Operations from their respective dates of acquisition. The
acquisitions had no material effect on operating results.
In 1996, the Company acquired for cash of $150, the minority interest in a
subsidiary, which approximated fair value.
5. NON-RECURRING CHARGE
The non-recurring charge in 1995 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.
6. RECEIVABLE FROM SHAREHOLDER
In 1997, 1996 and 1995 the Company advanced $6,129, $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 were 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 were evidenced by promissory notes bearing
interest at a 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 was reviewed quarterly and
adjusted, if necessary. The promissory notes were collateralized by the
pledge of shares of the Company held by Brandon Wang. The fair market value
of the shares pledged was required to be at least 200% of the amount due
under the notes. The loans were repayable on demand, however, the Company
and Brandon Wang agreed to a quarterly repayment schedule, with the final
payment of principal due in 1998. During 1997 and 1996, Brandon Wang and a
trust controlled by him repaid $21,166 and $4,530, respectively, to the
Company. As the loans were settled during 1997, the pledged shares were
released. Interest of $1,000, $958 and $652 was charged on these advances
in 1997, 1996 and 1995, respectively. The balance at December 31, 1997 was
$607.
In 1997, a U.S. subsidiary of the Company extended a guarantee to a bank as
part of a $15,000 term loan provided to Brandon Wang. Brandon Wang has
pledged 2,217,100 shares in the Company to the lender as security for the
loan. Commencing January 1, 1998, this loan is repayable by quarterly
instalments of $375 followed by a balloon payment of $10,875 on August 1,
2000.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands)
7. 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 are as follows :
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------------------------
U.S. $(3,928) $6,503 $5,467
Foreign 5,345 8,848 2,265
-------- -------- --------
$1,417 $15,351 $7,732
======== ======== ========
The provision for income taxes consists of the following :
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------------------------
Current
U.S. Federal $ - $ 2,320 $1,611
U.S. State - 54 -
Foreign 1,040 4,164 2,175
Benefit of loss carryforwards - (415) (440)
Deferred taxes (597) 62 (79)
-------- -------- --------
$ 443 $6,185 $3,267
======== ======== ========
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,
1997 1996 1995
--------------------------------
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 (78.7) (1.1) (1.6)
State income taxes net of Federal benefit - 0.4 1.2
Changes in valuation allowances 64.3 2.1 9.0
Utilization of loss carryforwards - (2.7) (5.7)
Withholding tax on interest and royalty income 11.6 1.9 5.0
Other (0.9) 4.7 (0.6)
-------- -------- --------
Effective rate 31.3% 40.3% 42.3%
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands)
7. INCOME TAXES - CONTINUED
Certain subsidiaries have operating loss carryforwards for income tax
purposes which may be 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, 1997 the tax loss carryforwards by country and their future
expiration dates are as follows :
TOTAL 2000 2001 2002 2003 2004 INDEFINITE
---------------------------------------------------------
United Kingdom $84,962 $ - $ - $ - $ - $ - $84,962
Thailand 2,910 - - 2,910 - - -
Switzerland 3,957 894 918 1,824 184 137 -
China 554 334 65 155 - - -
U.S.A. 13,142 - 3,908 3,907 3,907 - 1,420
Belgium 246 - - - - - 246
------- ----- ------ ------ ------ ----- -------
$105,771 $1,228 $4,891 $8,796 $4,091 $137 $86,628
======= ===== ====== ====== ====== ===== =======
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, 1997 are related to :
ASSETS LIABILITIES
-----------------------
Inventories $ 6 $ (182)
Accounts receivable and prepaid expenses 32 (78)
Property - (2,423)
Other 397 (319)
Tax loss carryforwards 27,256 -
Valuation allowances (27,256) -
--------- ------------
Total $435 $(3,002)
========= ============
The valuation allowances were increased by $731 from $26,525 in 1996.
8. INVENTORIES
Inventories by major categories are summarized as follows :
AT DECEMBER 31,
1997 1996
-----------------
Raw materials $13,378 $13,646
Finished goods 11,476 10,344
------- --------
$24,854 $23,990
======= ========
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands)
9. PROPERTY AND EQUIPMENT
Included in property and equipment are assets acquired under capital leases
with the following net book values :
AT DECEMBER 31,
1997 1996
---------------
At cost:
Machinery and equipment $2,062 $2,786
Motor vehicles 358 458
------ ------
2,420 3,244
Less: Accumulated amortization 819 501
------ ------
Net book value $1,601 $2,743
====== ======
10. SHORT-TERM BORROWINGS
These include borrowings in the form of trade acceptances, loans and
overdrafts with various banks :
AT DECEMBER 31,
1997 1996
---------------
Credit facilities granted $36,134 $32,837
======= =======
Utilized $8,177 $10,227
======= =======
Weighted average interest rate on borrowings at
end of year 7.48% 6.46%
======= =======
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 cost of funds 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, 1997 ($5,000 in 1996). Borrowings under this line of credit
are repayable in 1998 and bear interest at LIBOR plus 1.50% (7.28% at
December 31, 1997).
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands)
11. LONG-TERM DEBT
Long-term debt consists of :
AT DECEMBER 31,
1997 1996
---------------------
Acquisition loan due in 1998 bearing interest at 6% at
December 31, 1997. Repayable over 5 years in quarterly
instalments 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 $ 552 $ 1,504
Swiss Franc denominated mortgage loans bearing interest at
3.75% - 5.0% per annum repayable after 5 years 4,345 4,688
Bank loan bearing interest at a rate of 7.0% per annum at
December 31, 1997. $1,500 repayable in 1998 and $12,125
in 1999. The loan is secured over accounts receivable,
inventory and the property, plant and equipment of the
Company's Duluth, Georgia facilities(1) 13,625 15,000
Bank loan bearing interest at 6.8% at December 31, 1997.
Repayable over 3 years in semi-annual instalments commencing
in 1995. The loan is secured over a diaper machine 440 882
Bank loan bearing interest at 8% per annum. Repayable over
3 years in semi-annual instalments 1,514 -
Loan from finance companies at rates ranged from 7.0% to
10.8% per annum at December 31, 1997. The loan is
secured over building and equipment of the Company's
Wisconsin facilities 3,190 -
Capital leases 1,843 2,717
--------- ----------
Total 25,509 24,791
Current portion of long-term debt 4,228 3,204
--------- ----------
Long-term debt, less current portion $21,281 $21,587
========= ==========
Maturities of long-term debt as at December 31, 1997 are as follows :
CAPITAL
LOANS LEASES TOTAL
-------------------------
Year ending December 31,
1998 $ 3,867 $361 $ 4,228
1999 15,183 381 15,564
2000 227 372 599
2001 44 729 773
2002 and thereafter 4,345 - 4,345
------- ------- -------
Total $23,666 $1,843 $25,509
======= ======= =======
/(1)/ On December 16, 1996, a U.S. subsidiary entered into a $15,000,000 Term
Promissory Note ("Term Note"). In accordance with the terms and
conditions of the Term Note, the subsidiary is subject to mandatory
prepayments on April 1, 1998 and 1999 by an amount equal to 50% of
excess cash flow, as defined, for the preceding fiscal year. For the
year ended December 31, 1997 no mandatory prepayments are due on April
1, 1998. The Term Note requires the maintenance of specific covenants
including financial ratios. For the year ended December 31, 1997, the
subsidiary failed to meet their net income and fixed charge ratio
covenants. A waiver has been obtained from the third-party financial
institution.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands except per share amounts)
12. DEFERRED PURCHASE CONSIDERATION
In connection with the 1993 acquisition of the disposable hygiene division
of a Swiss corporation, the purchase price included an interest-free
quarterly payment representing 3.5% of the subsidiary's net sales for the
five-year period ended June 30, 1998. The purchase liability is based on
estimates made by the Company with reference to the past and current
trading history. The remaining estimated annual payment is $408 in 1998.
13. 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 5,000 shares under this program for cash of $68 in 1997, 240,000
shares for cash of $3,079 in 1996 and 393,000 shares for cash of $4,871 in
1995. 603,000 of the repurchased shares were cancelled in 1996 and the
remainder was cancelled in 1997.
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 1,002,394 shares from
the public shareholders at a price of $14.50 per share, which were
cancelled in 1997. In conjunction with the tender offer, the Company
incurred $433 for investment banking fees, and legal and professional fees.
During the first quarter of 1997, the Company repurchased 5,000 shares
from the public for a total cash consideration of $68.
14. 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 $2,236 in 1997, $2,125
in 1996 and $2,156 in 1995.
At December 31, 1997, the Company and its subsidiaries were obligated under
operating leases requiring minimum rentals as follows :
Year ending December 31,
1998 $1,783
1999 536
2000 424
2001 149
2002 149
2003 and thereafter 810
------
Total $3,851
======
At December 31, 1997, the Company had capital commitments for the purchase
of machinery and equipment of $710 which will be expended in 1998.
The Company and its subsidiaries are, from time to time, involved in
routine legal matters incidental to their business. In 1997, Procter &
Gamble ("P&G") claimed that certain of the Company's diaper products
infringe P&G patents and demanded payment for past infringement and an
agreement to pay future royalties. The Company and P&G are discussing terms
of a possible settlement of this claim. The Company established a specific
accrual with regards to an ongoing patent infringement negotiation in 1997.
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. The Company has an existing license agreement from
Kimberly-Clark concerning the sale of certain diaper products covered by
Kimberly-Clark patents.
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands)
14. COMMITMENTS AND CONTINGENCIES - CONTINUED
As detailed in note 6, a U.S. subsidiary has guaranteed the repayment of
bank loans extended to Brandon Wang. At December 31, 1997 the outstanding
indebtedness covered by this guarantee amounted to $15,000. The line of
credit is collateralized by the accounts receivable, inventory and
equipment of the Company's U.S. subsidiary, which is required to maintain
certain financial ratios and other financial conditions. The agreement
requires the U.S. subsidiary to maintain cash balances with the lender
amounting to $11,000 and restricts the payment of dividends by the
subsidiary to a maximum of $3,000 in any financial year and restricts the
amount of outstanding debt owed to the subsidiary by the parent and its
other subsidiaries or affiliates. At December 31, 1997 the amount of equity
subject to such restrictions totaled $23,466. The U.S. subsidiary and its
consolidated subsidiaries are required to maintain tangible net worth of at
least $16,000 which amount is required to increase annually by 40% of the
subsidiary's consolidated net income. At December 31, 1997 the consolidated
tangible net worth of the subsidiary amounted to $23,179.
15. 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 18% of
eligible compensation of employees based on length of service.
Total expense related to the above plans was $1,214 in 1997, $1,134 in 1996
and $905 in 1995.
16. SUPPLEMENTARY INFORMATION
Valuation and qualifying accounts :
BALANCE AT CHARGED TO BALANCE
BEGINNING PURCHASE OF COST AND AT END
OF YEAR SUBSIDIARIES EXPENSES DEDUCTIONS OF YEAR
-----------------------------------------------------------
Year ended December 31, 1997
Allowances for doubtful accounts $ 643 $67 $470 $(603) $ 577
Provision for inventory obsolescence 1,004 7 850 (633) 1,228
------------- ------------ -------- ---------- -------
$1,647 $74 $1,320 $(1,236) $1,805
============= ============ ======== ========== =======
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
============= ============ ======== ========== =======
Deductions relate to write-offs of accounts receivable as bad debts and
disposals of inventories.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands)
17. 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, 1997 for debt of the same remaining maturities.
18. 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,
1997 1996 1995
------------------------------
NET SALES
North America $91,098 $92,622 $111,505
Australia 47,172 47,643 44,329
Asia 56,955 60,359 47,837
Europe 35,705 35,426 42,210
-------- -------- ---------
$230,930 $236,050 $245,881
======== ======== =========
OPERATING INCOME (LOSS)
North America $ (548) $10,530 $ 9,674
Australia 5,925 5,204 2,293
Asia 6,199 6,827 3,114
Europe (2,583) 35 (2,217)
Corporate expenses (5,415) (6,613) (3,806)
-------- -------- ---------
$3,578 $15,983 $9,058
======== ======== =========
ASSETS, AT END OF YEAR
North America $49,052 $37,975 $41,466
Australia 24,409 30,221 24,831
Asia 28,130 32,630 31,104
Europe 22,963 24,649 30,117
Corporate assets 5,719 16,435 26,875
-------- -------- ---------
$130,273 $141,910 $154,393
======== ======== =========
No single customer accounted for 10% or more of the total revenues.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands except per share amounts)
19. QUARTERLY DATA (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- --------------- ------------
1997
Net sales $56,768 $64,183 $58,257 $ 51,722
Gross profit 20,532 21,884 18,446 16,139
Net income (loss) 1,453 1,418 (1,120)(1) (777)
Earnings (loss) per share 0.22 0.21 (0.17)(1) (0.12)
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)(2) 2,438 (2)
Earnings (loss) per share 0.26 0.24 (0.23) 0.31
(1) The 3rd Quarter 1997 results were restated by reducing the previously
reported loss by $903 representing exchange adjustments wrongly
recorded as expenses in that quarter.
(2) The 3rd Quarter and 4th Quarter 1995 results include non-recurring
charges of $1,433 and $535, respectively.
ORDINARY SHARE PRICE :
1997 1996
QUARTER HIGH LOW HIGH LOW
-----------------------------------------------
Fourth $11 1/4 $ 7 3/8 $14 7/8 $11 1/4
Third 16 5/8 10 11 5/8 10 1/4
Second 17 1/4 12 3/4 15 1/8 10 7/8
First 16 1/2 12 1/2 15 1/2 12 1/2
33
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Directors of
DSG International Limited
We have audited the financial statements of DSG International Limited as of
December 31, 1997 and 1996, and for each of the three years ended December 31,
1997, and have issued our report thereon dated March 13, 1998, such financial
statements and report are included in your 1997 Annual Report to the
Shareholders and are incorporated herein by reference. Our audits also included
the financial statement schedules of DSG International Limited, listed in Item
19. These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Deloitte Touche Tohmatsu
Hong Kong
March 13, 1998
S-1
SCHEDULE 1
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
Equity in earnings of subsidiaries $2,414 $17,909 $ 7,157
Operating expenses :
Administration 3,394 4,082 1,200
Depreciation 12 10 12
------ ------- -------
Total operating expenses 3,406 4,092 1,212
Operating income (loss) (992) 13,817 5,945
Interest expense (217) (259) (357)
Exchange (loss) gain (390) (737) 962
Non-recurring charge - - (1,440)
Interest income 2,066 2,078 1,975
Other finance expenses (6) (9) (3)
Other income 955 461 872
------ ------- -------
Income before income taxes 1,416 15,351 7,954
Provision for income taxes 443 6,185 3,267
------ ------- -------
Net income $973 $9,166 $4,687
====== ======= =======
See notes to Schedule 1
S-2
SCHEDULE 1
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED BALANCE SHEETS
YEAR ENDED DECEMBER 31,
----------------------
1997 1996
----- -------
(IN THOUSANDS)
ASSETS
Current assets :
Cash $ 546 $ 380
Due from related parties 607 15,645
Other receivables 203 286
Prepaid expenses and others 381 367
------- -------
Total current assets 1,737 16,678
------- -------
Equipment :
Furniture 216 216
Motor vehicles 62 -
------- -------
Total 278 216
Less : accumulated depreciation 88 77
------- -------
Net property 190 139
------- -------
Investment in subsidiaries (on the equity method) 63,658 58,748
------- -------
Total assets $65,585 $75,565
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities :
Accounts payable $ 157 $ 409
Accrued payroll and employee benefits 600 414
Accrued expenses 49 101
Income taxes payable 1 2
------- -------
Total current liabilities 807 926
------- -------
Shareholders' equity :
Ordinary shares 67 77
Additional paid-in capital 18,301 33,653
Retained earnings 56,644 55,670
Investment in treasury stock - (15,312)
Translation reserve (10,234) 551
------- -------
Total shareholders' equity 64,778 74,639
------- -------
Total liabilities and shareholders' equity $65,585 $75,565
======= =======
See notes to Schedule 1
S-3
SCHEDULE 1
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
----- ---- -----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $935 $8,790 $4,768
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for equipment (62) - (124)
Investments in and advances to subsidiaries (43,940) (6,224) (17,377)
Recoupment of investment in subsidiaries 28,245 18,783 23,637
Advances to shareholder (6,129) (7,638) (13,167)
Repayments by shareholder 21,166 4,530 1,306
Receipt of (investment in) restricted bank deposit - 5,269 (623)
------- ------- -------
Net cash provided by (used in) investing activities (720) 14,720 (6,348)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Financing from long term loans - - 5,269
Repayment of long term loans - (5,269) (4,646)
Purchase of treasury shares (49) (17,632) (4,871)
Tender offer expenses - (433) -
------- ------- -------
Net cash used in financing activities (49) (23,334) (4,248)
------- ------- -------
Increase (decrease) in cash and cash equivalents 166 176 (5,828)
Cash and cash equivalents, beginning of year 380 204 6,032
------- ------- -------
Cash and cash equivalents, end of year $546 $380 $204
======= ======= =======
Cash dividends from :
Consolidated subsidiaries $14,334 $18,160 $149
See notes to Schedule 1
S-4
DSG INTERNATIONAL LIMITED
NOTES TO SCHEDULE 1
1. APPLICATION OF SIGNIFICANT ACCOUNTING PRINCIPLES
Accounting for subsidiaries DSG International Limited ("the Company") has
accounted for the earnings of its subsidiaries on the equity method in the
unconsolidated condensed financial information.
2. CONTINGENCIES
The Company and its subsidiaries are, from time to time, involved in
routine legal matters incidental to their business. In 1997, Procter &
Gamble ("P&G") claimed that certain of the Company's diaper products
infringe P&G patents and demanded payment for past infringement and an
agreement to pay future royalties. The Company and P&G are discussing
terms of a possible settlement of this claim. The Company established a
specific accrual with regards to an ongoing patent infringement negotiation
in 1997. 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.
S-5