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, 2000
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
-------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
-------------------------------------------------------------------------
(Translation of Registrant's name into English)
British Virgin Islands
-------------------------------------------------------------------------
(Jurisdiction of incorporation or organization)
17/F Watson Centre, 16-22 Kung Yip Street, Kwai Chung
Hong Kong
Tel. No. 852-2484-4820
-------------------------------------------------------------------------
(Address of principal executive office)
Securities registered or to be registered pursuant to Section 12(b) of the
Act.
Title of each Class Name of each exchange on which registered
None
- ------------------- -----------------------------------------
Securities registered or to be registered pursuant to Section 12(g) of the
Act.
Ordinary Shares, par value
$0.01 per share ("Ordinary Shares")
-------------------------------------------------------------------------
(Title of Class)
-------------------------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
-------------------------------------------------------------------------
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
Ordinary Shares 6,674,606
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
PART I
Item 1. Identity of Directors, Senior Management and Advisors.
Not applicable.
Item 2. Offer Statistics and Expected Timetable.
Not applicable.
Item 3. Key Information.
A. Selected Financial Data
The information required is contained in the Selected Consolidated
Financial Data of the Annual Report to Shareholders, and is incorporated herein
by reference.
B. Capitalization and Indebtedness
The information required is contained in the Consolidated Balance Sheets
and Consolidated Statements of Shareholders' Equity of the Annual Report to
Shareholders, and is incorporated herein by reference.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Among the factors that have a direct effect on the results of operations
and financial condition of DSG International Limited (the "Company") are the
following:
1. Raw Material Cost.
The overall raw material costs have increased during year 2000 and the
Company's operating results may be adversely affected by any increases in raw
material costs in the future, specially the cost of the main raw material, fluff
wood pulp, which increased in 1999 and increased moderately in 2000.
2. Branded Product Innovation.
Patents and other intellectual property rights are an important competitive
factor in the disposable diaper market, mostly because of the industry emphasis
in product innovations. Patents held by the main competitors could severely
limit the Company's ability to keep up with branded product innovations, by
prohibiting the Company from marketing product with comparable features.
-2-
3. Pricing and Volumes.
The market position of the Company's main competitors, The Procter & Gamble
Company ("P&G") and Kimberly-Clark Corporation ("KC"), 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 in price and volumes, and gain
substantial market share in any of their marketing areas. They have heavily
promoted diapers in the multi-pack configuration. These packages offer a lower
unit price to the retailer and consumer. It is possible that as a consequence of
this strategy, in those geographic markets in which the main competitors have
adopted it, the Company may realize lower selling prices and/or lower sale
volumes.
4. Increased Cost.
On May 21, 2001, the Company entered into an agreement with P&G to settle
any potential liability of the Company which may have existed with respect to
any past infringement on P&G patents prior to January 1, 2001 and to agree on
royalty payments relating to sales on certain of the Company's products in the
Asian Pacific and Australian region after December 31, 2000. A similar agreement
with P&G was entered into in 1998 relating to the North American region that
provides for payments of royalty fees based on a percentage of certain products
sold after December 31, 1997 within North American region.
The Company believes that the royalty being charge by P&G under its respective
license agreements are approximately the same royalties that will be paid by its
major competitors for similar patent rights. However, the royalties will have an
adverse impact on the Company's future financial condition and results of
operations as compared to pre-settlement.
5. Increase Financial Leverage.
As a result of the acquisition of the North American asset of Drypers
Corporation, the Company has now short and long term debt of $47.5 million,
bearing various rates interest.
As a consequence of the incurrence of the Company's new debt, its principal
and interest obligations have increased substantially. The increase in the
Company's financial leverage as described above, could adversely affect the
Company's ability to obtain additional financing for working capital,
acquisitions or other purposes and could make the Company more vulnerable to
economic crisis in the different geographical markets and to competitive
pressures from its main competitors.
As a substantial portion of the Company's available cash from operations
will have to be applied to meet debt service requirements, the Company's
liquidity could be affected as well as its ability to fund capital expenditures.
Notwithstanding, the Company believes that its cash flow from operations and
other sources of liquidity will be adequate to meet its requirements for working
capital, capital expenditures, interest payment and scheduled principal payment
for the foreseeable future. However, if the Company is unable to generate
sufficient cash flow from operations in the future, it may be required to
refinance all or a portion of its existing debt or obtain additional financing.
There is not assurance that this additional financing could be obtained in
favorable terms for the Company.
-3-
6. Litigation Risk.
As the Company operates in an industry in which patents are numerous and
are enforced vigorously, the Company and its subsidiaries are from time to time
involved in legal matters.
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. On June 27, 2001, a jury returned a verdict and awarded
$4.0 million in damages and also provided for potential enhanced damages against
the Company of up to an additional $7.0 million. The Company will file post
trial motions to overturn the jury verdict and, if necessary, will appeal the
verdict to the U.S. Court of Appeals for the Federal Circuit. The Company
believes that it is reasonably possible that it will be successful in
overturning the jury verdict. Accordingly, the jury award has not been recorded
in the Company's consolidated financial statements. Unsuccessful resolution of
the above litigation resulting in a significant assessment against the Company
may result in the Company violating certain covenants of its debt agreements.
This would give the lenders the right to demand payment of outstanding amounts
unless the lenders waive their rights under the debt agreements. Demand for
payment by the lenders and the need to pay the award to the plaintiff would
require the Company to secure other financing sources to meet its obligations.
The Company has advised the lenders of the recent jury verdict and its intention
to pursue a post trial motion to overturn the decision and, if necessary, file
an appeal. While the Company believes that it is reasonably possible that it
will be successful in overturning the jury verdict, the outcome of this
litigation is uncertain.
-4-
Item 4. Information on the Company.
A. History and Development of the Company
DSG International Limited, established in Hong Kong in 1973, is one of the
world's leading companies specialized in manufacturing disposable baby diapers,
adult incontinence and training pants products, with over twenty-eight years of
experience in this industry. The Company now operates eleven manufacturing
facilities in North America, Australia, Asia and Europe with extensive
distribution activities around the world.
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
extended 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 diapers 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. The joint venture acquired the entire capital of the
distributor's company and built a plant in Bangkok, Thailand to manufacture baby
diapers and adult incontinence products. The Company currently holds an 80%
interest in the joint venture company. In August 1994, the Company acquired a
-5-
manufacturer of adult incontinence products in Switzerland. In November 1994,
the Company opened its 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.
In September 1995, the Company opened a 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 into 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.
In March 1998, the Company closed its operations in Canada and later on in
December, the factory facilities were sold. In November 1998, the Company
opened its joint venture manufacturing facilities in Indonesia.
In March 1999, the Company sold its private label baby diapers business in
Switzerland. In April and June 1999, the Company established two wholly owned
subsidiaries in the United Kingdom and Germany to assist the marketing and
distribution of the Company's adult incontinence products in Europe. In June
1999, the Company opened its new plant and commenced its baby disposable diapers
production in Selangor, Malaysia.
-6-
In October 2000, the Company sold its adult incontinence operation in
Switzerland and its sales office in Germany.
In March 2001, the Company acquired all the U.S. assets including the
"DRYPERS(R)" brand name and the manufacturing facilities in Marion, Ohio and
Vancouver, Washington of a major U.S. disposable baby diaper manufacturer which
was in bankruptcy, and was thus able to substantially expand its sales in the
U.S.
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) 2484-4820.
CAPITAL EXPENDITURES, INVESTMENT AND DISVESTITURES
Principal capital expenditures and divestitures over the last three years
include the following:
2000 1999 1998
---------- ---------- -----------
Property, plant and $5,947,000 $6,097,000 $ 6,444,000
equipment (net)
Investment in subsidiaries $5,883,000 $5,713,000 $ 1,221,000
and affiliated companies
Disposition of affiliated $7,068,000 $3,844,000 $ 3,882,000
companies and investments
B. Business Overview
-7-
1. General
The Company manufactures and markets disposable baby diapers, training
pants and adult incontinence products primarily under its own brand names, which
include "DRYPERS(R)", "FITTI(R)" "PET PET(R)", "COSIES(R)", "COSIFITS(R)", "BABY
LOVE(R)", "BABYJOY(R)", "LULLABY(R)", "CARES(R)", "CUDDLES(R)", "SUPER
FAN-NIES(R)", "DISPO 123(TM)", "HANDY(TM)", "CERTAINTY(R)" and "MERIT(R)". The
"DRYPERS(R)" brand was newly acquired in March 2001. The Company also
manufactures and markets disposable baby diapers, adult incontinence and
training pants products under private labels. The Company's products are sold
internationally, with its eleven manufacturing facilities being in Hong Kong,
the United States, Australia, the United Kingdom, the People's Republic of China
("PRC"), Thailand, Indonesia and Malaysia, including the two additional
manufacturing facilities which the Company operates in the United States as a
result of the recent acquisition in March 2001.
The Company manufactures and distributes branded and, rivate label
disposable baby diapers, adult incontinence products, training pants and youth
pants for the North American markets with its operations in Duluth, Georgia
Oconto Falls, Wisconsin and two newly acquired operations in Marion, Ohio and
Vancouver, Washington. With a strong regional presence, the Company's
"FITTI(R)" and "CUDDLES(R)" brands are some of the best selling brands of
disposable baby diapers (excluding private labels) in many key markets. The
Company's newly acquired "DRYPERS(R)" brand is the third best selling national
brand of disposable baby diapers and training pants in the North America
markets. The Company's sales in adult incontinence products, training pants and
youth pants have grown in their significance in the Company's North American
markets.
In Australia, the Company is the second largest manufacturer of disposable
baby diapers. The Australian market is divided primarily into three major
retail sectors, which are grocery, variety and pharmacy. The Company is
currently supplying brands of both premium and economy quality to all three
market sectors. It estimates that it has an overall unit volume market share of
approximately 24% as measured by AC Nielsen for the combined grocery and
pharmacy sectors. The Company also markets disposable baby diapers under retail
chain private labels, which accounted for approximately 16% of its Australian
diaper sales in 2000. The Company also distributes the "VLESI(R)" and
"MERIT(R)" range of adult incontinence products into the Australian market,
targeting the institutional sector of the market. The Company's overall sales
in the Australian market grew by over 16%, and the rate of growth in branded and
private label disposable baby diaper products as well as the rate of growth in
adult incontinence products were also in line with the total Company's growth.
In the PRC, the disposable diaper market is growing rapidly particularly in
the economy products segment. The Company's leading brands, "FITTI(R)" and "PET
PET(R)", are well established in most of the major cities including Shenzhen,
Guangzhou, Shanghai and Beijing; and the Company's economy brands, "BABY
LOVE(R)" and "BABYJOY(R)", expanded rapidly in the north-eastern part. In the
Guangdong province, the major southern province of the PRC, the Company has a
well-established sale and distribution network that extends throughout the
province and the Company believes that it is the market leader in the province,
with around 30% market share. In the northern part of the PRC, the Company's
sales operation in Beijing not only established direct sales and distribution in
the Beijing and Tianjin markets but also expanded its wholesale network into
other northern provinces such as Shandong and Liaoning. In the eastern part of
the PRC, the Company has established a strong sale and distribution network by
signing up a number of reputable territorial wholesalers and the Company is
optimistic about the growth opportunity in these
-8-
provinces. The Company plans to set up sales operations in other major cities
and provinces in the PRC and continues its effort in exploring the potential of
the PRC markets. In Hong Kong, the disposable diaper market remained stagnant
due to a low birth rate, however, the Company's sales increased by a high single
digit percentage over the Company's sales in 1999 and maintained its second
place position in the market with an estimated market share of over 20%. In
Singapore, the disposable diaper market has improved due to strong recovery of
the economy, and the Company's sales increased by almost 50% over the Company's
sales in 1999. In Malaysia, the Company recorded another year of strong volume
growth of 85% over the volume in 1999 and the Company expects its sales will
continue to grow with further gain of share of the market. In Indonesia, the
Company's sales volume was more than double the sales volume in 1999 as a result
of improvement of the nation's economy and political stability. The Company
believes that it continues to maintain its leader position and that its sales
will continue an upward trend as the nation's economy and political stability
improves further. In Thailand, the Company's brand, "BABY LOVE(R)" gained a
significant market share in the economy sector, and the Company's volume grew by
25% over the volume in 1999 despite the keen competition in the market.
The Company manufactures and distributes adult incontinence products
through its operation in Thailand to all other markets in Asia under its "DISPO
123(TM)", "HANDY(TM)" and "CERTAINTY(TM)" brands. The Company believes that it
is one of the market leaders in the adult incontinence market in Thailand. In
other Asian markets, 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. The Company remains optimistic about the market
growth potential of the adult incontinence market in the Asia Pacific region.
In Europe, the Company scaled down its operations. The Company's remaining
operation, the operation in the United Kingdom, continues to market its branded
products to wholesalers and grocery retail accounts. The Company also
manufactures private label disposable diapers on a selective basis.
The Company's marketing strategy is to provide retailers and wholesalers
with quality, value-oriented products which offer 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'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 disposable baby diaper and
adult incontinence manufacturers. The Company also expands through establishing
its own manufacturing facilities in emerging markets which offer significant
growth potential, such as the Company's facilities in the PRC, Thailand,
Indonesia and Malaysia, which were opened in 1994, 1995, 1998 and 1999,
respectively.
-9-
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, aloe
vera and tissue. The cost of materials increased in 1999 and also in 2000. 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: (1) 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 (2) 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. Other
features, such as innovative fastenings, attractive designs, extra-dry
sub-layer, gender specific absorbent cores, stand-up leg gathers, elastic
waistband, aloe vera and packaging help to differentiate products from one
another.
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 a high potential for adult incontinence
products due to the aging populations of the industrialized and developed
countries. The Company entered the adult incontinence markets in North America,
Europe and Australia, and established and acquired operations in Switzerland,
Thailand and Wisconsin in the United States in 1994, 1995 and 1997,
respectively. In October 2000, the Company sold its adult incontinence operation
in Switzerland and ceased manufacturing adult incontinence products in Europe.
The Company remains optimistic in its adult incontinence business in the markets
in North America, Asia and Australia. 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 a high and prompt level of service from the manufacturer and
distributor, regular contact with institutions to ensure proper knowledge of the
products, and providing a range of products of high quality and performance.
-10-
2. Geographic Segment and Product Category Information
The following table sets forth the percentage of the Company's net sales
by geographic market and product category activity.
2000 1999 1998
----- ----- -----
Net sales
North America................................................ 43.0% 45.4% 43.2%
Australia.................................................... 20.8 20.7 19.5
Asia......................................................... 28.3 22.2 21.3
Europe....................................................... 7.9 11.7 16.0
100.0% 100.0% 100.0%
Product sales by category
Baby diapers................................................. 74.7% 71.7% 74.3%
Adult incontinence........................................... 20.6 20.8 16.4
Others....................................................... 4.7 7.5 9.3
100.0% 100.0% 100.0%
3. Seasonality
There is no significant seasonality impact on the Company's business in
most countries.
4. 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, aloe vera and
tissue.
The main raw material is fluff wood pulp, which is purchased from several
suppliers in the United States, Scandinavia and Australia. 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 thereafter,
increased in 1999 and increased moderately until the third quarter in 2000. The
Company believes it will stabilize in 2001. 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
-11-
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.
5. Marketing Channels
a. North America
i. Products
The Company manufactures and distributes disposable baby diapers,
disposable training and youth pants and adult incontinence products throughout
North America under the brand names of "FITTI(R)", "CUDDLES(R)", "SUPER
FAN-NIES(R)" and "CERTAINTY(R)", as well as a growing number of different
private label store brands. The "FITTI(R)" brand is a full-featured value
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 DRI-NITE JUNIOR disposable youth
pants. The Company's pant products feature tear-away side panels, soft cloth-
like covers and comfortable waist and hip elastic. The "FITTI(R)" training pants
were the first North American product in this segment to offer the Company's
unique wetness indicators. In March 2001, the Company acquired the "DRYPERS(R)"
brand under which is the third largest selling brand of disposable baby diapers
and disposable training pants in the North America markets. The "DRYPERS(R)"
brand is a full featured premium product including multi-strand leg elastic for
a wide soft cuff, a reinforced tape landing zone for more secure fastening, a
soft elastic waistband, a thin overall profile, leakage barrier inner cuffs,
compression packaging and unique features such as "perfume free" and "baking
soda" for odor control.
The Company continues to expand its private label diaper business
throughout North America with such customers like Walgreens Drugs, Harris
Teeter, A&P, Topco, Pathmark, Rite-Aid, Richfood, McLane (a division of Wal-
Mart) and Medline Industries. The Company is the only full line manufacturer
capable of producing and marketing a full range of disposable baby diapers as
well as training pants and youth pants. This advantage should enhance the
Company's sales and private label partnership opportunities. With the
acquisition of the Drypers operations and the "DRYPERS(R)" brand, the Company
will gain entry to sell both branded and private label products to major
supermarket chains and mass merchandisers such as Wal-Mart and Kroger.
The Company's primary focus on adult incontinence products is the
development of profitable private label partnerships with retailers and
institutional distributors such as Walgreens Drugs and Medline Industries. The
Company's products are also available under the "CERTAINTY(R)" brand name. The
Company's focus is on the brief products, offering a wide range of product and
feature alternatives. The Company was the first to bring disposable adult pants
to the North American market and the Company
-12-
will continue to explore innovative product opportunities that will make a
positive difference in this category and bring better solutions to the
incontinence user.
ii. Sales and Marketing
Disposable baby diapers 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 that are sold under private label brands. The
nationally advertised brands account for around 80% of all sales. The Company
maintains a solid distribution base on its "FITTI(R)" and "CUDDLES(R)" brands,
with new retail customers being added on a regular basis. The Company's
"FITTI(R)" brand training pants have enjoyed steady sales growth and excellent
consumer acceptance. The Company's "FITTI(R)" DRI-NITE JUNIOR maintains a high
market share in the fast growing youth pant segment. This segment now accounts
for more than 3% of total category sales.
The Company efficiently services the North American market from two
manufacturing facilities. These facilities are located in Oconto Falls,
Wisconsin, and Duluth, Georgia. The Company commissions a national network of
independent brokers and non-food sales representatives to sell directly to
retailers and distributors/wholesalers. These brokers and sales
representatives, managed by the Company's direct sales management team, serve as
the Company's agents within defined territories to monitor sales, implement
trade promotions and handle the required merchandising activities and
responsibilities. The Company's direct sales management team is responsible for
the Company's marketing and headquarter sales functions. The Company remains
committed to its marketing philosophy of direct servicing of its customers and
accounts by sales management personnel. This allows the Company to provide
a high degree of category expertise and education to the trade and to be able to
promptly respond to trade and market needs. In addition, the strategic
locations of its North American manufacturing facilities has enabled the Company
to achieve an average shipping transit time of one to two days for most North
American destinations.
Branded Products. Due to the intense price and promotional pressure by the
advertised brands, combined with a declining birth rate in the U.S. market, the
"value brand" segment continues to shrink. By the end of 2000, the combined
share of the Company's "FITTI(R)" and "CUDDLES(R)" brands was roughly 2% of the
total units of disposable baby diapers and training pants sold in grocery
outlets throughout North America. The grocery sector represents around 50% of
the over $4.0 billion United States retail market. In certain markets, such as
New York/New Jersey, the nations largest retail market, the Company believes
that the "FITTI(R)" brand is much greater than conventional market share
tracking companies would indicate. This is because a much higher percentage of
"FITTI(R)" diapers and training pants are sold through urban wholesalers and
inner city retailers that typical market research does not track. The Company
concentrates its efforts and marketing activities providing wholesalers and
retailers with above average category profits through the use of packaging with
greater shelf impact, consumer preferred pre-priced packaging, creative
promotional support, efficient distribution, electronic data interchange and a
high level of customer service. The Company has maintained its strategy of
providing the best "everyday low price" on its "FITTI(R)" and "CUDDLES(R)"
brands, offering the consumer "the best product for the price" all the time.
The Company provides consumers with quality products at affordable prices,
unique product features and consistent value. The Company has grown its business
with a concentrated effort against the primary diaper selling class of trade:
grocery with key retail
-13-
partners such as Shoprite, A&P, Pathmark, Fleming, Harris Teeter and Super
Value. However, excellent distribution and sales gains have been made in other
non-grocery outlets such as Ames Department Stores and Meijer stores. The
Company continues to benefit from new product ideas and unique retailer profit
opportunities to the disposable baby products segment.
The Company's "CERTAINTY(R)" brand is the brand under which the Company
markets its adult incontinence products. However, the Company recognizes that
private brands represent more than 30% of the category sales with steady growth
at retail and it is this sector of adult incontinence where the greatest retail
sales opportunity exists. The Company will continue to target this private
brand segment with a range of superior products in terms of product features and
performance. 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. The drug store trade still represents the majority
of adult incontinence retail sales with approximately a 50% share of the over
$550 million category. Growth potential for the entire category remains high as
the population continues to age, people who are incontinent become more open to
treatment solutions and better products are developed.
Institutional Volume and Activity. The institutional providers supply
adult incontinence products to medical care facilities, nursing homes, extended
care facilities and home health care outlets. 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. The
adult category represents an area of significant sales and distribution growth
for the Company, and significant gains have been captured since its launch in
1996 and with the volume growing to more than 26% of the Company's total sales.
The Company enjoys an excellent working relationship with one of North America's
premier institutional suppliers of medical related products: Medline Industries,
Inc.
Private Label. This segment of the Company's business is the major area of
potential growth. The Company continues to strengthen its existing private
label partnerships with major retailers like Walgreens, Pathmark, A&P, Uniprix
Drug, McLane (a division of Wal-Mart), Topco etc. and by adding new products in
both areas of disposable baby diapers and adult incontinence products. The
Company will continue to target other major retailers to establish new
profitable private label partnerships in all of its product categories. The
Company recognizes that the private label segment remains somewhat more
insulated than that of the typical "value" brands from the aggressive
price/promotional strategies of the advertised brands, due to the
protective/defensive posture that major retailers tend to take when it comes to
protecting their corporate brand franchise. The Company is one of the few
manufacturers capable of supplying a full range of quality disposable baby
diapers and adult incontinence products and has a proven track record of quality
products, category expertise and customer service.
The Company's newly acquired "DRYPERS(R)" brand, under which disposable
baby diapers and training pants products are marketed, is a nationally
distributed premium brand which offers consumers the reliability of a brand name
and product quality and features comparable to the two major national brands in
the U.S. market. In addition, the acquisition of Dryper's North American
operations has added production facilities in Marion, Ohio and Vancouver,
Washington, enabling the Company to expand its private label programs with major
supermarket chains and mass merchandisers.
b. Australia
-14-
i. Products
In Australia, the Company manufactures and markets disposable baby diapers
under four core proprietary brand names and a number of retail chain private
label brands. The Company's proprietary diaper brands accounted for 81% of its
Australian diaper sales in 2000. Two of these proprietary brands are targeted at
the grocery and variety sectors, while the other two are exclusive to the
pharmacy sector. The two brands targeting the grocery and variety sectors are
"BABY LOVE(R)", which is a value priced, premium quality, feature driven ultra
diaper, while "LULLABY(R)" is an economy priced, basic feature driven ultra
diaper. The two "pharmacy only" brands are "COSIES(R)" and "COSIFITS(R)", which
have a similar marketing strategy to "BABY LOVE(R)" and "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 also
distributes the "VLESI(R)" and "MERIT(R)" range of adult incontinence products
into the Australian market, primarily targeting the nursing home sector. This
product range continued to show very strong growth in 2000.
ii. Sales and Marketing
The Australian combined grocery and pharmacy retail market for disposable
baby diapers has grown by 2.9%, from $224 million in 1999 to $231 million in
2000 with the grocery sector showing growth. The Company now estimates that
market utilization for disposable baby diapers is approximately 80%, which is
below the level of other industrialized Western countries at over 85%. Branded
products comprise approximately 90% of the Australian market, with the remaining
10% made up of private label products. The Company is currently the second
largest manufacturer in Australia, with approximately 24% unit volume share of
the disposable baby diaper market as measured by AC Nielsen for the combined
grocery and pharmacy sectors. A major U.S.A. multi-national manufacturer is the
market leader with approximately a 66% share of the same market sectors.
The Company markets and distributes its proprietary branded products in
Australia using exclusive independent brokers. Sales of private label brands
are managed either on a direct basis with a retail customer, or through their
selected "in-house broker" representative. For the "VLESI(R)" range of adult
incontinence products, the Company utilizes a direct sales force to sell to
customers and manage the distribution of the products through selected
independent distributors.
Branded Products. The Company's branded products, "BABY LOVE(R)" and
"LULLABY(R)" are targeted at the grocery and variety sectors. These two retail
sectors accounted for an estimated 85% of all disposable baby diaper sales in
Australia in 2000. These two sectors are highly concentrated, with over 80% of
the sales volumes controlled by major retailers and wholesalers, being
Woolworths, Coles Myer, Franklins and Australian Amalgamated Wholesalers. The
Company utilizes marketing strategies focused on strong profit margins for
retailers, combined with good product performance, unique product features and
"value" retail price points for the consumer. These strategies also 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. In 2000, the pharmacy sector accounted for
an estimated 15% of all disposable baby diaper sales in Australia. This sector
is highly fragmented and consists of a large number of small and
-15-
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 of the existing major wholesalers of
pharmaceutical products in Australia. These wholesalers include Sigma Company
Ltd., F.H. Faulding Wholesale, Australian Pharmaceutical Industries and Soul
Pattinson. Each of the wholesalers also operate and manage specific marketing
groups ("banner groups") which regularly promote the Company's products. The
major national marketing groups include Amcal, Guardian, ChemMart, ChemWorld
and Health Sense, among others.
Private Label. Private label product is sold primarily in the grocery and
variety sectors. In the grocery sector private label accounted for 11% of the
total sales for disposable baby diapers in 2000(1). The Company had a 45% share
of the total private label market in the grocery sector in 2000(2). Private
label market data is not available for the variety sector, however the Company
is recognized as a major supplier of private label products in this sector. The
Company has private label programs with a number of 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 within the private label sector 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 selected 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.
c. Asia
i. Products
The Company manufactures disposable baby diapers primarily under its own
brands in Asia. The Company's leading brands are "FITTI(R)" and "PET PET(R)",
and economy brands are "BABY LOVE(R)", "COSIFITS(R)", "FITTI Basic", and "BABY
JOY(R)". The Company also manufactures private labels on a selective basis. Both
"FITTI(R)" and "PET PET(R)" enjoy substantial market share, are well supported
by advertising and promotional activities, and are priced strategically lower
than the major U.S. national brands and the Japanese brands sold in Asia. The
Company's economy brands are basic products targeted to compete strictly on
price and value with local brands.
The Company manufactures and distributes adult incontinence products under
its own brands "DISPO 123(TM)","HANDY(TM)" and "CERTAINTY(TM)". The Company also
manufactures adult incontinence
(1) & (2) Source: AZTEC and AC Nielsen, April 2001
-16-
products in private labels. The "DISPO 123(TM)" product is an ultra anatomic
diaper, featuring multi-strand leg elastics, frontal tape closure system and
stand-up leg gathers. "HANDY(TM)" and "CERTAINTY(TM)" have similar features as
"DISPO 123(TM)" except for the stand-up leg gathers and slight specification
changes.
ii. Sales and Marketing
The Company continues to command strong market positions in the mature
markets of both Hong Kong and Singapore. The Company enjoys first-mover
advantages in most of the markets in the Asian region and has established
invaluable brand image and strong positions for the Company's products. The
Company continues to focus on expansion of sales in the PRC, Thailand, Malaysia
and Indonesia by capitalizing on the increasing usage of disposable baby diapers
that are well supported by strategic pricing and wisely designed advertising and
promotional activities. The Company also sells its products in India and, to a
lesser extent, Brunei, Vietnam and the Philippines.
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 contracted since the
aftermath of Asian financial turmoil, the Company has been able to pursue
strategies to maintain its market share in these markets. Disposable baby
diaper usage is relatively low in other Asian countries, 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 will expand rapidly in the next decade. The
Company's strategy is to offer a variety of premium branded products targeted to
compete with major U.S. and Japanese brands and to offer economy brands to
compete in the fastest growing segment of the markets. The Company also ensures
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. Its products are sold in
all major pharmacy outlets and department stores which account for 65% of all
disposable baby diaper sales, while the remaining 35% are sold in major retail
supermarket and hypermarket chains such as Park'N Shop, Wellcome and China
Resources Company. The disposable baby diaper market in Hong Kong has contracted
due to low birth rates and a weak economy. Over 90% of the sales in Hong Kong
are sales of "FITTI(R)" and "PET PET(R)" brands of products which collectively
have around a 30% share of the market. The "FITTI(R)" and "PET PET(R)" brands
are supported by strong advertising and promotion programs, which not only
impact sales in the local market but also in the Pearl River Delta area of
Guangdong province in the PRC.
In Singapore, the disposable baby diaper market is mature but relatively
small. The Company sells and distributes it products, which are almost all
branded products, by its own sales force in major retail chains, department
stores and hypermarkets.
The disposable baby diaper market in Malaysia continues to grow
particularly in the economy products segment. The Company's "FITTI(R)" and "PET
PET(R)" brands of products have been selling in the market for many years;
however, with the establishment of the manufacturing facility in Selangor,
-17-
Malaysia in 1999, the Company was able to compete with the local economy
products manufacturers. The Company's economy brands, "COSIFITS(R)" and FITTI
Basic, expanded rapidly and have gained a significant share in the economy
segment of the market. The Company's products are distributed nationwide by its
own sales forces directly to the major chain stores such as Tops, Store and
Ocean, Giant, and Carrefour, 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 hypermarkets, supermarkets,
department stores and independent retail stores in most of the provinces, such
as Guangdong, Fujian, Zhejiang and major cities, such as Guangzhou, Shenzhen,
Shanghai and Beijing. To cope with the rapid development of foreign invested
hypermarkets in the PRC, the Company cultivates good relationships with the
major players like Carrefour, Wal-mart and Price-Mart, and the Company's
products are listed and sold in these hypermarkets. The Company's sales
operation in Beijing directly services the Beijing and Tianjin markets and will
expand sales and distribution to northern markets such as Shandong and
Liaoning provinces. The Company also established an operation in Shanghai to
directly service the Shanghai market and serve as a logistic center for
servicing the markets in the eastern part of the PRC. The Company has expanded
its distribution network to the provinces in the mid-western part of the PRC,
such as Sichuan, Chongqing, Yunan, Hunan and Hubei, and continues to expand its
distribution network with the aim of covering all the provinces of the PRC. The
Company plans to set up other sales operations in strategically selected cities
that will enhance sales and distribution to local markets and other markets in
the nearby vicinity. The Company's sales expansion in the PRC is well supported
by strategic pricing and a tailor-made advertising and promotion program. The
Company estimates that the current usage of disposable baby diapers in the PRC
is around 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 major brands in the market are "FITTI(R)", "PET PET(R)"
and "BABY LOVE(R)". 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. Over 70% of the Company's sales in Thailand were in the
Bangkok metropolitan area, with the rest of the sales coming from the suburban
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 sustain a market share of about 16% in
2000. The Company also manufactures private label products for a supermarket
chain. The Company's adult incontinence products are distributed to hospitals,
supermarkets and department stores. The Company estimates that its share of the
Thailand adult incontinence market was approximately 50% in 2000, a more than
double increase in its share of the market in 1999. 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 Indonesian market. With the joint venture manufacturing facility near
Jakarta, the Company is able to reduce its product costs as a result of an
import duty exemption on raw materials and minimize the adverse effect of
currency fluctuation. The Company's products are sold in all major hypermarkets
and supermarket chains and its major competitors in the market are imported U.S.
major brands.
-18-
The Company presently is not keen to export its products to Japan, Taiwan
and Korea because current non-tariff barriers and complex distribution
arrangements make entry into these markets difficult for foreign products.
In countries that have high rates of import duties on products and high
risks of currency fluctuation, the Company believes that it is more efficient
and economical to service their markets through domestic manufacturing
facilities. The Company presently has manufacturing facilities in Hong Kong,
Thailand, the PRC, Indonesia and Malaysia.
d. Europe
i. Products
The Company manufactures and markets branded and private label disposable
baby diapers in the United Kingdom. The Company's brands currently in production
are "FITTI(R)", "COSIFITS(R)" and "CARES(R)". "FITTI(R)" is a value brand baby
diaper with full features such as leg gathers, wetness indicator, printed
backsheet, extra-dry sub-layer and mechanical fasteners. "COSIFITS(R)" and
"CARES(R)" are economy brands featuring frontal tape and extra-dry sub-layer.
ii. Sales and Marketing
The U.K. retail disposable baby diaper market in 1999 was approximately
$847 million. Approximately 87%(1) of the market was branded products and the
rest was made up of various private label brands of retailers supplied by
European diaper manufacturers.
The Company focused on selling its branded products 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 its own label for certain U.K.
grocery chains.
6. Dependent Patents, Licenses and Contracts
a. Patents, Trademarks and Licenses
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 decides 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 reached settlement of
(1) FSA Survey U.K.
-19-
this claim for the United States market in 1998. On May 21, 2001, the Company
entered into an agreement with P&G to settle any potential liability of the
Company which may have existed with respect to any past infringement on P&G
patents prior to January 1, 2001 and to agree on royalty payments relating to
sales on certain of the Company's products in the Asian Pacific and Australian
regions after December 31, 2000. The agreement encompasses fixed payments
totaling $300,000 relating to the period prior to January 1, 2001 and payment of
royalties based on a percentage of sales of certain products in the Asian
Pacific region beginning January 1, 2001. The amount of $300,000 relating to
periods prior to January 1, 2001 was recorded in the statement of operations for
the year ended December 31, 2000 as a component of selling, general and
administrative expenses. A similar agreement was entered into in 1998 relating
to the North American region and resulted in a payment of $900,000 to P&G,
recorded as a component of selling, general and administrative expenses in 1998,
for infringement of patents prior to January 1, 1998, as well as payments of
royalty fees based on a percentage of certain products sold after December 31,
1997 within the North American region.
b. Contracts
The Company is a contract manufacturer for certain customers to supply
private label products for baby disposable diapers and adult incontinence
products.
The Company entered into financial contracts with certain Banks and
Financial Institutions for various financing facilities of revolving working
capital line, equipment leasing and term loans. The information required is
contained in notes 10 and 11 of the Notes to Consolidated Financial Statements
in the Annual Report to Shareholders, and is incorporated herein by reference.
In March 2001, the Company entered into an amended financing agreement with
the existing financial institution under which the Company received a Term Loan
of $11,000,000 (the "Term Loan"), a capital expenditure line of up to
$5,000,000, and a revolving credit facility (based on the lesser of a percentage
of eligible accounts receivable and inventory or $15,000,000). Such financing
was entered into in connection with the Company's purchase of certain assets of
the North American operations of Drypers Corporation as discussed in Note 20.
The Company borrowed the full amount of the $11,000,000 Term Loan, with interest
payable at LIBOR plus 4.25% or prime plus 2.75% per year at the election of the
borrower, and repaid the existing Term Note. The Term Loan is repayable in 60
monthly installments of principal in the amount of $183,000 plus interest and is
collateralized by the Company's U.S. subsidiary's assets. In addition, the
Company borrowed approximately $9,100,000 of the $15,000,000 revolving credit
facility during March 2001. Among other things, the agreement contains certain
restrictive covenants, including the maintenance of earnings before interest,
taxes, depreciation, and amortization ("EBITDA") and tangible net worth, and
places limitations on acquisitions, dispositions, capital expenditures, and
additional indebtedness.
In addition in March 2001, the company borrowed $15,000,000 under a term
loan (the "$15 million Term Loan") from an overseas financial institution which
is controlled by one of the Company's non-executive directors. The loan bears
annual interest at a rate of 14.5% increasing to 17.5% if any amounts payable
under the loan are nor repaid when due. Interest is payable monthly while
principal is due in March 2002. The Company may prepay all or a portion of the
loan after the six-month anniversary of the initial borrowing. The loan is
secured by the Company's ownership interest in its Australian subsidiaries. In
addition, the loan agreement contains certain restrictive covenants, including
minimum tangible net worth and EBITDA of the Australian subsidiaries. The
borrowings were guaranteed by the Company's Chairman and Chief Executive
Officer.
In conjunction with the $15 million Term Loan, the Company committed to
issue share purchase warrants to the lender. The warrants will allow the lender
to purchase Ordinary Shares of the Company at a price of $0.01 per share. The
number of warrants issued will equal 0.75% of the Company's diluted Ordinary
Shares outstanding for each month any portion of the principal balance of the
loan is outstanding. However, in no event will the lender receive warrants which
grant the lender the right to purchase less than 4.5% of the Company's diluted
stock. The fair value of the warrants will be amortized over the term of the
loan as interest expense.
Under the Sale and Purchase agreement between Associated Hygienic Products
LLC as buyer and Drypers Corporation as seller, dated March 15, 2001, and
pursuant to the order of the U.S. Bankruptcy Court based in Houston, Texas, the
buyer agreed to buy and the seller agreed to sell its North America assets for
$38.5 million. This transaction closed March 14, 2001.
7. Competition
The disposable baby diaper industry is dominated worldwide by the brands of
two major U.S. manufacturers : P&G and KC. 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 secure its position in the face of very strong
competition from the industry leaders by remaining innovative, flexible and
financially responsible.
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 KC. Their combined market
share of the disposable baby diaper market is 79%; including the disposable
training pant, youth pant and swim pant segments. Total category unit sales are
declining at a rate of about 8%, with volume continuing to shift from the
grocery and drug classes of trade to the mass merchandisers. Consumers continue
to move to larger packs for a lower price and more savings. These two major
manufacturers continued their strategy of driving their business with aggressive
retail pricing, rather than competing solely on the basis of consumer-driven
marketing programs and product innovations. An increasing number of major
retailers remain concerned with the negative impact that the advertised brands'
strategy has had on their own private label sales and margins, and some continue
to take corrective actions to protect their own brands. All of the moves made
by the
-20-
advertised national brands have resulted in lower retail prices and the
narrowing of retail price spreads between the advertised brands and private
label offerings. Manufacturers and retailers alike are waiting anxiously to see
how long this price strategy can be maintained in the face of continuous
reductions in gross profit margins. The Company has positioned itself well to
compete even if conditions remain the same.
The continued moves by the major manufacturers to keep retail prices
depressed, promote aggressively and keep retailers satisfied with minimal
margins in favor of sales volume, have put serious sales and margin pressures on
smaller brand and private label manufacturers. In response to this competitive
activity, the Company has reallocated its promotional spending and has
maintained a strategy in line with "everyday low prices", targeted trade
promotions, enhanced product features and tightened cost controls. This strategy
on its core "FITTI(R)" and "CUDDLES(R)" brands has allowed the Company to
protect its share in critical markets and expand its private label base of
business.
In the adult incontinence arena, the Company is in an excellent competitive
position, having the capability to provide key retailers, institutions and
consumers with product technology that is superior to what other manufacturers
can currently provide. There is an added advantage that comes from the demand
for better products in order to meet the performance and comfort requirements of
incontinent consumers. In spite of the tough competitive climate, overall
margins in the adult segment remain better than in baby products.
b. Australia
The major competition faced by the Company in Australia is from Kimberly-
Clark Australia ("KCA"). KCA dominates the disposable baby diaper market in
Australia, with a 2000 estimated market unit volume share of 66% as measured by
AC Nielsen for the combined grocery and pharmacy sectors. The Company believes
it is able to compete successfully in Australia with its strategies of targeting
different brands to different retail sectors, its ability to provide attractive
retail profit margins for its customers and its ability to offer consumers
competitive quality products with unique features at value retail price points.
It also benefits from the desire of its retail customers for an alternative
supplier to KCA for national brand diapers, and for a quality domestic supplier
for their private label brands.
c. Asia
The Company's main competition in Asia comes from the brands of the two
major U.S. manufacturers, and several manufacturers from Japan and Taiwan. The
Company believes that it has been able to maintain a significant share of the
Asian market due to its longer presence and well established brands in that
region and the logistical advantage which results from the strategic location of
its manufacturing operations.
d. Europe
In the United Kingdom, the disposable baby diaper market continues to be
dominated by P&G, which has a market share of approximately 54%, and KC, which
has a market share of approximately 33%. Both companies continued heavily
promoting and discounting their brands in the U.K. market. Due to such
consistent promotion activities, 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
-21-
in disposable baby diapers, it will be able to maintain its share and volume in
the U.K. market. In this competitive environment, the cost increase of the
Company's product due to the increase of pulp prices could not be passed on.
8. Government Regulations
a. 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.
b. 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.
c. 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.
-22-
C. Organizational Structure
The Company's significant subsidiaries are:
Name Country of Incorporation Ownership Interest
Advance Medical Supply Company Limited Thailand 100%
Associated Hygienic Products Inc. Wisconsin, USA 100%
Associated Hygienic Products LLC Delaware, USA 100%
Disposable Soft Goods (Malaysia) Sdn. Bhd. Malaysia 100%
Disposable Soft Goods (S) Pte Limited Singapore 100%
Disposable Soft Goods (UK) Plc. U.K. 100%
Disposable Soft Goods (Zhongshan) Limited PRC 100%
Disposable Soft Goods Limited Hong Kong 100%
DSG (Malaysia) Sdn. Bhd. Malaysia 100%
DSG International (Thailand) Limited Thailand 80%
DSG Pty. Limited Australia 100%
PT DSG Surya Mas Indonesia 60%
D. Description of Property
The Company operates eleven manufacturing facilities, with plants located
in: the United States at Duluth, Georgia (near Atlanta) and at Oconto Falls,
Wisconsin; Hong Kong; Melbourne, Australia; Chesterfield, U.K.; Zhongshan,
Guangdong, PRC; Bangkok, Thailand; Jawa Barat, Indonesia; and Selangor,
Malaysia. The manufacturing facilities of the newly acquired operations are in
Marion, Ohio and Vancouver, Washington.
The Company utilizes an aggregate of approximately 1,639,216 square feet of
space in its manufacturing operations. The Company believes that its plant
facilities, with the acquisition of the North America operations of Drypers
Corporation, are adequate for its present operations.
The Company operates 39 productive disposable baby diaper machines and
adult incontinence machines, including 9 newly added machines from the
acquisition of the Drypers assets. The gross productivity of the machines range
from 350 pieces to 600 pieces per minute for disposable baby diaper and 200 to
300 pieces per minute for adult incontinence. The productivity of the machines
is dependent on the machine types, sizes and packing configurations of the
products.
The following table summarizes the physical properties that are used by the
Company in its manufacturing and distribution operations:
Approximate Lease
Size Owned/ Expiration Productive
Location Use (Sq. Feet) Leased Date Capacity(1)
- -------------------------------------------- ------------- ------------------- ------------ --------------- ------------
Duluth, GA Manufacturing 226,625 Owned N/A 8
Melbourne, Australia Manufacturing 179,200 Owned N/A 5
Jawa Barat, Indonesia Manufacturing 174,000 Leased Sep. 2027 1
Oconto Falls, WI Manufacturing 165,684 Owned N/A 5
Zhongshan, PRC Manufacturing 122,321 Leased Oct. 2044 3
Hong Kong Manufacturing 70,895 Leased Jun. 2001 2
Bangkok, Thailand Manufacturing 68,805 Owned N/A 2
Chesterfield, U.K. Manufacturing 65,000 Leased May 2008 2
Selangor, Malaysia Manufacturing 46,686 Leased Jan. 2002 2
Marion, Ohio Manufacturing 440,000 Leased Oct. 2002 7
Vancouver, Washington Manufacturing 80,000 Leased Jul. 2001 2
Bangkok, Thailand Office 22,822 Leased Dec. 2000 -
Singapore Office 14,500 Leased May 2001 -
London, U.K. Office 3,500 Owned N/A -
Shanghai, PRC Office 1,800 Leased Sep. 2002 -
Beijing, PRC Office 868 Leased Oct. 2002 -
Houston, TX Office 36,000 Leased Sep. 2001 -
(1) Refers to the number of diaper machines per location.
-23-
Item 5. Operating and Financial Review and Prospects.
A. Operating Results
The information required is contained in the Consolidated Statements of
Operations of the Annual Report to Shareholders, and is incorporated herein by
reference.
B. Liquidity and Capital Resources
The information required is contained in pages 15 and 16 of the Annual
Report to Shareholders, and is incorporated herein by reference.
C. Research and Development, Patents and Licenses
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.
D. Trend Information
1. Industry Trends
-24-
The Company believes that the most significant industry trends are:
. fluff wood pulp cost and other raw materials cost increased in 2000,
however, it is expected that increase in fluff wood pulp cost will slow
down in 2001;
. increasing demand for mechanical closure tape and cloth-like breathable
backsheet products, which the Company is meeting through modifications to
its machinery;
. the domination of industry leaders in most of the markets putting
pressure on retailers' margins, which the Company is finding difficult to
respond to by providing retailers with higher profit margins in the
current highly competitive market conditions.
The Company is unable to predict whether the other trends noted above would
have a material effect on its future financial condition or results of
operations and, if so, whether such an effect will be positive or negative.
2. 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.
Item 6. Directors, Senior Management and Employees.
A. Directors and Senior Management
The directors and executive officers of the Company are:
Name Age Present Position
- ------------------------- --- ------------------------------------------------------
Brandon Wang 55 Director, Chairman of the Board and President
Philip Leung 53 Director and Vice President
Johnny Tsui 60 Director, Vice President and Secretary
Patrick Tsang 55 Director and Vice President
Terence Leung 50 Director, Vice President and Chief Financial Officer
Peter Chang 55 Director and Vice President
Owen Price 75 Director
Anil Thadani 55 Director
Allister McLeish 61 Director
Brandon Wang is married to Eileen Wang-Tsang, who is Patrick Tsang's
sister. Peter Chang is married to Brandon Wang's sister.
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
-25-
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
University and a 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 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
-26-
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 a
M.B.A. from the University of California at Berkeley.
Allister McLeish became a director in October 2000. He previously served
as a non-executive director in the 1970's of one of the Company's subsidiaries
in Hong Kong. Mr. McLeish is a Scottish chartered accountant and a chartered
management accountant who recently retired from a publicly listed industrial
chemicals group, Yule Catto & Co. Plc., where he had held the position of
finance director for the past twenty years. Mr. McLeish has had over forty
years' experience with internationally based manufacturing companies and has
worked in the U.K. and in several Far Eastern countries.
OTHER KEY MANAGEMENT PERSONNEL
In addition to the above-named officers and directors, the following
persons hold key management positions with the Company:
George Jackson was appointed to the post of Chief Executive of the
Australian operations in mid 1997. Mr. Jackson joined the Company in 1987 and
prior to his transfer to Australia, he was the National Sales Manager with the
Company's U.S.A. operations. Prior to joining the Company, he held various
management positions in accounting and manufacturing with Weyerhaeuser Company.
He holds a B.A. degree in Business Administration - Accounting (1977) from the
University of Washington, Seattle, WA.
B. Compensation
In 2000 the aggregate remuneration paid by the Company and its subsidiaries
to all directors and officers of the Company as a group (9 persons) for
services in all capacities was approximately $4,811,663.
-27-
C. Board Practices
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.
Neither the Company nor any of its subsidiaries provide benefits for
directors upon termination of employment.
During 2000, the Company's Audit Committee consisted of Anil Thadani, Owen
Price and Allister McLeish. The principal functions of the Audit Committee are
(i) to recommend the independent auditors to be employed by the Company; (ii) to
consult with the independent auditors with regard to the plan of audit; (iii) to
review, in consultation with the independent auditors, their audit report or
proposed audit report; and (iv) to consult with the independent auditors with
regard to the adequacy of the Company's internal accounting controls. The
Company's Audit Committee met once in 2000.
During 2000, the Company did not appoint a remuneration committee.
D. Employees
The Company has a total of approximately 1,415 full time employees at its
manufacturing facilities as of December 31, 2000:-
2000 1999 1998
- ------------------------------------------------------------------------------
North America 383 399 482
- ------------------------------------------------------------------------------
Australia 218 181 186
- ------------------------------------------------------------------------------
Asia Pacific 760 508 256
- ------------------------------------------------------------------------------
Europe 54 126 196
- ------------------------------------------------------------------------------
Total 1,415 1,214 1,120
- ------------------------------------------------------------------------------
The Company does not have a significant number of temporary employees.
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.
In March 2001, the total full time employees of the Company increased by
approximately 500 as a result of the acquisition of the North America operations
of Drypers Corporation.
-28-
E. Share Ownership
For information concerning the beneficial ownership of the Company's
Ordinary Shares by Directors and Senior Management and major shareholders, see
Item 7 of this Report.
The Company has not granted the directors, senior management and employees
options to purchase shares of the Company.
In conjunction with the $15 million Term Loan in Note 11 to Consolidated
Financial Statements, the Company committed to issue share purchase warrants to
the lender for Ordinary Shares of the Company at a price of $0.01 per share. The
number of warrants issued will equal 0.75% of the Company's diluted Ordinary
Shares outstanding for each month any portion of the principal balance of the
loan is outstanding. However, in no event will the lender receive warrants which
grant the lender the right to purchase less than 4.5% of the Company's diluted
Ordinary Shares. The fair value of the warrants will be amortized over the term
of the loan as interest expense.
Item 7. Major Shareholders and Related Party Transactions.
A. Major Shareholders
As of December 31, 2000, the total number of record holders was 33, of
which 23, representing 41.29% of the Company's Ordinary Shares, were in the
United States.
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, 2000 is known by the Company to own 5% 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 (9 persons) ................. 4,171,846 (1) 62.50%
FMR Corp....................................................... 512,500 7.68%
Philip Leung................................................... 234,000 3.51%
Johnny Tsui.................................................... 234,000 3.51%
Peter Chang.................................................... 124,000 1.86%
Patrick Tsang.................................................. 122,000 1.83%
Terence Leung.................................................. 117,000 1.75%
Anil Thadani................................................... 19,166 0.29%
Owen Price..................................................... - -
Allister McLeish............................................... - -
Benedict Wang.................................................. 123,000 (2) 1.84%
S L Wang....................................................... 117,000 (2) 1.75%
(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
-29-
Ordinary Shares and other securities, in each case without the supporting vote
of any other shareholder of the Company. In addition, Brandon Wang is a
controlling shareholder of the Company and thus may be deemed to be a parent of
the Company under the rules and regulations of the Securities Exchange Act of
1934.
The Company knows of no arrangements the operation of which may at a
subsequent date result in a change in control of the Company.
B. Related Party Transactions
The information required is contained in note 12 of the Notes to
Consolidated Financial Statements in the Annual Report to Shareholders, and is
incorporated herein by reference.
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, 1996:
Loan balance Balance
at beginning Loans Loans at end
of year extended repaid of year
----------------------------------------------------------------
(dollars in thousands)
Year ended December 31, 2000 $2,811 $10,744 $1,943 $11,612
Year ended December 31, 1999 $3,472 $ 1,879 $2,540 $ 2,811
Year ended December 31, 1998 $ 607 $ 3,372 $ 507 $ 3,472
In 2000, 1999 and 1998 the Company advanced $10.7 million, $1.9 million,
and $3.4 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 loans were repayable on demand 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 upon in writing. The rate of interest was reviewed quarterly and adjusted,
if necessary. In January 2000, the Company's U.S. subsidiary borrowed amounts
under a term loan facility which was used to repay the balance of a loan payable
by Brandon Wang to a bank, amounting to $5.3 million. This amount has been
aggregated with the receivable from Brandon Wang which amounted to $2.8 million
at December 31, 1999. The resulting note payable by Brandon Wang is repayable on
demand and carries the same interest terms as those of the existing promissory
notes. Brandon Wang is required to provide collateral of shares of the Company
held by him, such amount to be not less than 125% of the amount due under the
notes. During 2000, 1999 and 1998, Brandon Wang and a trust controlled by him
repaid $1.9 million, $2.5 million, and $0.5 million, respectively, to the
Company. Interest of $0.5 million, $0.2 million, and $0.09 million was charged
on these advances in 2000, 1999 and 1998, respectively. The loans to Brandon
Wang are currently being treated as a reduction in shareholders' equity.
-30-
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
Our Consolidated Financial Statements are set forth under Item 18.
DIVIDENDS AND DIVIDEND POLICY
It is the Company's general policy to determine the actual annual amount of
future dividends based upon the Company's growth during the preceding year.
Future dividends will be in the form of cash or stock or a combination of both.
There can be no assurance that any dividend on the Ordinary Shares will be
declared, or if declared, what the amounts of dividends will be or whether such
dividends, once declared, will continue for any future period. The Company did
not pay any dividends in 2000, 1999 and 1998.
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. On June 27, 2001, a jury returned a verdict and awarded
$4.0 million in damages and also provided for potential enhanced damages against
the Company up to an additional $7.0 million. The Company will file post trial
motions to overturn the jury verdict and, if necessary, will appeal the verdict
to the U.S. Court of Appeals for the Federal Circuit. The Company believes that
it is reasonably possible that it will be successful in overturning the jury
verdict. Accordingly, the jury award has not been recorded in the Company's
consolidated financial statements. Unsuccessful resolution of the above
litigation resulting in a significant assessment against the Company may result
in the Company violating certain covenants of its debt agreements. This would
give the lenders the right to demand payment of outstanding amounts unless the
lenders waive their rights under the debt agreements. Demand for payment by the
lenders and the need to pay the award to the plaintiff would require the Company
to secure other financing sources to meet its obligations. The Company has
advised the lenders of the recent jury verdict and its intention to pursue a
post trial motion to overturn the decision and, if necessary, file an appeal.
While the Company believes that it is reasonably possible that it will be
successful in overturning the jury verdict, the outcome of this litigation is
uncertain.
A claim has been made by Ms. Rhonda Tracy, the owner of U.S. Patent No.
5,797,824 for disposable diapers with a padded waistband and leg holes,
asserting that the Company has been manufacturing and/or selling diapers which
infringe her patent. No lawsuit has been filed against the Company to date.
The Company, however, has filed a lawsuit against Ms. Tracy in the U.S. district
court for the Northern District of Georgia for a declaration that her patent is
invalid and/or not infringed. The Company's case is presently stayed pending an
action Ms. Tracy has filed against Jewel Food Stores, Inc., American Stores
Company, WalMart Stores, Inc., Dominick's Finer Foods, Inc., Drypers
Corporation, Kimberly-Clark Corporation and Tyco International, Ltd. in the U.S.
district court in the Northern District of Illinois claiming infringement of her
patent. The Company is unable to determine whether Ms. Tracy will file a lawsuit
against the Company, and if so, the impact of the ultimate outcome of this
matter. The Company denies any liability relating to this matter and intends to
pursue its case against Ms. Tracy and vigorously defend itself if a lawsuit is
filed.
B. Significant Changes
The information required is contained in Note 13 and Note 20 of the Notes
to Consolidated Financial Statements.
Item 9. Stock Price History.
A. Listing Details
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.
-31-
ORDINARY SHARE PRICE:
2000 1999 1998 1997 1996
------ ------- ------ ------- -------
High $7.000 $10.625 $9.500 $17.250 $15.500
Low 4.000 2.750 2.813 7.375 10.250
2001 2000 1999
------ ------ -------
Quarter High Low High Low High Low
- ------------------------- ------------ ------------ ------------ ------------ ------------- ------------
First $7.906 $4.063 $7.000 $5.500 $ 3.500 $2.750
Second - - 5.938 4.750 9.000 3.250
Third - - 5.500 4.000 10.625 7.000
Fourth - - 5.563 4.000 9.063 5.250
Apr 2001 Mar 2001 Feb 2001 Jan 2001 Dec 2000 Nov 2000
------------- ------------- ------------- ------------- ------------- -------------
High $7.125 $7.906 $5.500 $4.438 $4.875 $5.563
Low 5.500 4.750 4.063 4.063 4.000 4.625
B. Plan of Distribution
Not applicable.
Item 10. Other Information.
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
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.
1. 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.
-32-
2. 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 2000.
3. 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.
4. 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
-33-
"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.
5. 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
-34-
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".
6. Directors
Under the Company's Articles of Association, the subscribers to the
Memorandum of Association must appoint the first directors, 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.
7. Powers of Directors
The business and affairs of the Company is managed by the directors who may
pay all expenses incurred preliminary to and in connection with the formation
and registration of the Company and may exercise all such powers of the Company
as are not by the Act or by the Memorandum or the Articles required to be
exercised by the members of the Company, subject to any delegation of such
powers as may be prescribed by a resolution of members; but no requirement made
by a resolution of members shall prevail if it be inconsistent with the Articles
nor shall such requirement invalidate any prior act of the directors which would
have been valid if such requirement had not been made.
The directors may, by a resolution of directors, appoint any person,
including a person who is a director, to be an officer or agent of the Company.
The resolution of directors appointing an agent may authorize the agent to
appoint one or more substitutes or delegates to exercise some or all of the
powers conferred on the agent by the Company.
Every officer or agent of the Company has such powers and authority of the
directors, including the power and authority to affix the Seal, as are set forth
in the Articles or in the resolution of directors appointing the officer or
agent, except that no officer or agent has any power or authority with respect
to the matters requiring a resolution of directors under the Memorandum, the
Articles, or the Act.
The continuing directors may act notwithstanding any vacancy in their body,
save that if their number is reduced to their knowledge below the number fixed
by or pursuant to the Articles as the necessary quorum for a meeting of
directors, the continuing directors or director may act only for the purpose of
appointing directors to fill any vacancy that has arisen or for summoning a
meeting of members.
The directors may, by resolution of directors, exercise all the powers of
the Company to borrow money and to mortgage or charge its undertakings and
property or any part thereof, to issue debentures, debenture stock and other
securities whenever money is borrowed, or as security for any debt, liability or
obligation of the Company or of any third party.
All cheques, promissory notes, drafts, bills of exchange and other
negotiable instruments and all receipts for moneys paid to the Company, shall be
signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in
such manner as shall from time to time be determined by resolution of directors.
The Company may determine by resolution of directors to maintain at its
registered office a register of mortgages, charges and other encumbrances in
which there shall be entered the following particulars regarding each mortgage,
charge and other encumbrance: (a) the sum secured; (b) the assets secured; (c)
the name and address of the mortgagee/chargee or other encumbrancer; (d) the
date of creation of the mortgage, charge or other encumbrance; and (e) the date
on which the particulars specified above in respect of the mortgage, charge or
other encumbrance are entered in the register.
The Company may further determine by a resolution of directors to register
a copy of the register of mortgages, charges or other encumbrances with the
Registrar of Companies.
8. 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.
9. 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 and Articles of
Association, an increase or reduction in the Company's authorized capital, and a
change in the Company's name.
10. 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.
11. 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
-35-
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.
12. 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".
13. 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.
14. 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.
-36-
15. 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.
16. 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.
17. 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.
18. Transfer Agent and Registrar
Mellon Investor Services, LLC serves as the Transfer Agent and Registrar
for the Ordinary Shares.
C. Material Contracts
The following summarizes each material contract, other than contracts
entered into in the ordinary course of business, to which the Company or any
subsidiary of the Company is a party, for the two years immediately preceding
the filing of this report, and which are filed as Exhibits hereto:
Sale and Purchase Agreement between DSG TEK Limited, a wholly owned
subsidiary of the Company as seller and IVF Hartmann AG as buyer dated October
20, 2000 under which the seller sells to the buyer all shares of Vlesia AG , a
wholly own subsidiary of the seller, for the consideration of Swiss
-37-
Franc 8.5 million.
Loan and Security Agreement between Associated Hygienic Products LLC as
borrower and Foothill Capital Corporation as lender dated March 14, 2001 under
which the lender agrees to make a term loan, a capital expenditure line and
revolver advances to the borrower up to US$31.0 million. See Dependent Patents,
Licenses and Contracts in Item 4.B.6 and Note 11 of the Notes to Consolidated
Financial Statements.
Short Term Financing Agreement between DSG International Limited as
borrower and Breakers Investment Holding Limited as lender dated March 14, 2001
under which the lender agrees to make a term loan of $15.0 million to the
borrower. DSG International Limited will grant the lender warrants priced at
$0.01 per share for 0.75% of the Company's fully diluted Ordinary Shares for
each month up to a total of 9.0% of the Company's fully diluted Ordinary Shares
whilst any part of the loan is outstanding. Regardless of the repayment or any
prepayment of this loan, in no event will the lender receive warrants equivalent
to less than 4.5% of the Company's fully diluted Ordinary Shares.
Sale and Purchase agreement between Associated Hygienic Products LLC as
buyer and Drypers Corporation as seller dated February 20, 2001 under which and
pursuant to the order the U.S. Bankruptcy Court based in Houston, Texas the
buyer agrees to buy and the seller agrees to sell its North America Assets for
$38.5 million. This transaction closed March 14, 2001.
D. Exchange Controls
There are no exchange control restrictions on payment of dividends,
interest, or other payments to nonresident holders of the Company's securities
or on the conduct of the Company's operation in Hong Kong, where the Company's
principal executive offices are located or the British Virgin Islands, where the
Company is incorporated. Other jurisdictions in which the Company conducts
operations may have various exchange controls and the Company believes that such
controls will not have a material effect on the Company's liquidity or cash
flow.
E. Taxation
The following discussion is a summary of certain anticipated U.S. federal
income tax and BVI tax consequences of ownership of Ordinary Shares of the
Company. The discussion does not address all possible tax consequences relating
to ownership of Ordinary Shares and does not purport to describe 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.
1. 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 "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%
-38-
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:
a. 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.
b. Foreign Personal Holding Companies
Sections 551 through 558 of the Code relate to foreign personal holding
companies ("FPHCs")
-39-
and impute undistributed income of certain foreign corporations to U.S. persons
who are shareholders of such corporations. A foreign corporation will be
classified as a FPHC if (i) five or fewer individuals, who are U.S. citizens or
residents, directly or indirectly own more than 50% of the corporation's stock
(measured either by voting power or value) (the "shareholder test") and (ii) the
Company receives 60% or more of its gross income (regardless of source), as
specially adjusted, from certain passive sources (the "income test").
The Company believes that it is not currently and has not been a FPHC for
any taxable year since its formation because for each such year either or both
of the income test and the shareholder test were not met. It is possible that
subsequent events would cause the Company to meet either or both of the income
test and the shareholder test. In the opinion of the Company, however, it is
unlikely that the shareholder test would be met, especially in view of the
inclusion of certain transfer restrictions in the Company's governing documents.
See "Description of Securities".
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.
c. 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
-40-
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 or would be classified as passive income under the applicable
authorities.
d. 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.
e. 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 2000.
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.
-41-
2. British Virgin Islands Taxation
Under the laws of the BVI 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 BVI.
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.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
The Annual Report on Form 20-F of DSG International Limited as filed with
the Securities and Exchange Commission and Exhibits thereto and documents
referenced therein will be made available upon request to:
Office of the Secretary
DSG International Limited
17/F Watson Centre
16-22 Kung Yip Street
Kwai Chung, Hong Kong
Item 11. Quantitative and Qualitative Disclosures about Market Risk
A. Currency Fluctuation
1. 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.
The Australian dollar, Swiss Franc, Pound Sterling, Deutsche Mark, Belgian
Franc, Singapore dollar, Thai Baht and Indonesian Rupiah are convertible into
U.S. dollars at freely floating rates. The Hong Kong dollar and Malaysian
Ringgit 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, Thai Baht and Malaysian Ringgit, 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.
The exchange rate in the Asian countries stabilized in 2000 and the
exchange rate of Australian dollars and some European currencies such as Swiss
Franc and Belgian Franc devalued in 2000 compared with 1999. The Company
anticipates that the economies of the Asian countries are recovering which will
strengthen the Company's foundation for market expansion in the region. The
Company is unable to predict whether the trends noted above would have a
material effect on its future financial condition or results of operations and,
if so, whether such an effect will be positive or negative.
2. Exchange Rate Fluctuation
2000 1999
-------- --------
High Low Average High Low Average
------------ ------------ ------------ ------------ ------------ ------------
First quarter
- -------------
Australian dollar 1.63 1.56 1.60 1.60 1.58 1.59
Malaysian Ringgit 3.80 3.80 3.80 3.79 3.79 3.79
Singapore dollar 1.71 1.70 1.71 1.73 1.68 1.71
Thai Baht 37.82 37.44 37.64 37.47 36.76 37.16
Indonesian Rupiah 7,782.50 7,072.91 7,311.20 8,610.00 8,609.22 8,609.74
Swiss Franc 1.67 1.64 1.65 1.48 1.41 1.44
Pound Sterling 0.63 0.62 0.62 0.62 0.61 0.62
Belgian Franc 42.15 41.03 41.56 37.45 35.25 36.37
Deutsche Mark 2.04 1.99 2.01 - - -
Hong Kong dollar 7.78 7.78 7.78 7.76 7.75 7.76
Renminbi 8.30 8.30 8.30 8.30 8.30 8.30
Second quarter
- --------------
Australian dollar 1.75 1.65 1.70 1.53 1.51 1.52
2000 1999
-------- --------
High Low Average High Low Average
------------ ------------ ------------ ------------ ------------ ------------
Malaysian Ringgit 3.80 3.80 3.80 3.79 3.79 3.79
Singapore dollar 1.73 1.70 1.72 1.72 1.69 1.70
Thai Baht 39.26 37.94 38.74 37.09 36.63 36.89
Indonesian Rupiah 8,661.33 7,788.20 8,369.29 8,616.67 7,052.73 8,093.80
Swiss Franc 1.72 1.64 1.68 1.54 1.51 1.52
Pound Sterling 0.67 0.64 0.65 0.64 0.62 0.63
Belgian Franc 44.05 42.62 43.30 38.93 37.81 38.41
Deutsche Mark 2.14 2.07 2.10 1.89 1.87 1.88
Hong Kong dollar 7.79 7.79 7.79 7.76 7.75 7.75
Renminbi 8.30 8.30 8.30 8.30 8.30 8.30
Third quarter
- -------------
Australian dollar 1.83 1.69 1.76 1.58 1.51 1.54
Malaysian Ringgit 3.80 3.80 3.80 3.79 3.79 3.79
Singapore dollar 1.74 1.71 1.73 1.71 1.68 1.69
Thai Baht 42.26 40.78 41.43 41.48 36.91 38.85
Indonesian Rupiah 8,667.22 8,663.33 8,664.93 8,631.44 7,056.18 7,817.48
Swiss Franc 1.73 1.67 1.71 1.52 1.48 1.51
Pound Sterling 0.69 0.67 0.68 0.63 0.61 0.62
Belgian Franc 45.54 43.54 44.71 38.27 37.51 37.96
Deutsche Mark 2.21 2.11 2.17 1.86 1.82 1.84
Hong Kong dollar 7.80 7.79 7.80 7.77 7.76 7.76
Renminbi 8.30 8.30 8.30 8.30 8.30 8.30
Fourth quarter
- --------------
Australian dollar 1.94 1.80 1.88 1.57 1.54 1.55
Malaysian Ringgit 3.80 3.80 3.80 3.79 3.79 3.79
Singapore dollar 1.75 1.73 1.74 1.67 1.66 1.66
Thai Baht 43.63 43.14 43.42 38.66 37.37 38.23
Indonesian Rupiah 8,667.56 8,666.44 8,666.89 7,066.18 7,063.91 7,064.97
Swiss Franc 1.80 1.63 1.73 1.59 1.52 1.56
Pound Sterling 0.71 0.67 0.69 0.62 0.61 0.62
Belgian Franc 47.80 43.28 46.01 39.82 38.41 39.28
Deutsche Mark 2.32 2.10 2.23 1.93 1.85 1.90
Hong Kong dollar 7.80 7.80 7.80 7.77 7.77 7.77
Renminbi 8.30 8.30 8.30 8.30 8.30 8.30
3. Forward-Looking Statements
The Company continues to expand its markets in the Asian region and the
Company expects that its market share in the region will increase. The Company
expects that the exchange rate of the currency of certain countries in the Asia
Pacific region will fluctuate in greater magnitude in 2001. The cost of raw
materials, primarily fluff wood pulp cost will be stable.
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",
"believe" 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 the
Operating and Financial Review and Prospects 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 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.
B. Foreign Currency Risk
As of December 31, 2000, the Company had no open forward contracts or
option contracts. The Company's cash on hand as of December 31, 2000 was
$10,327,000 of which $2,691,000 equivalent was held in various foreign
currencies such as the Australian Dollar, Hong Kong Dollar, Renminbi, Thai
Baht, Malaysian Ringgit, Indonesian Rupiah, Singapore Dollar and Pound Sterling.
The US$ equivalents of the cash in foreign currencies may vary subject to
exchange rate fluctuation.
C. Interest Rate Fluctuations
The Company's interest expenses and income are sensitive to change in
interest rates. The Company had short term debts and long term debts of
$22,233,000 bearing various interest rates, and any fluctuation in the interest
rate will have direct impact on the Company's interest expenses.
As of December 31, 2000, no borrowings consisted of floating rate
borrowings.
The Company will be exposed to interest rate fluctuations on any borrowings
under the Loan Facility and any change in interest rate could affect its results
of operations and cash flows. The potential effect of a hypothetical 0.5%
increase in interest rate for year 2000 outstanding indebtedness would be a
reduction in cash flows of approximately $111,000 and a reduction in net income
of approximately $74,000.
Item 12. Description of Securities Other than Equity Securities.
Not applicable.
PART II
Item 13. Defaults, dividend Arrearages and Delinquencies.
Not applicable.
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds.
Not applicable.
Item 15. [Reserved]
Item 16. [Reserved]
PART III
Item 17. Financial Statements.
Financial statements are presented in Item 19.A.
-42-
Item 18. Financial Statements.
The information required by Item 18 is contained in Item 19.A.
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............................................................................ 19
Independent Auditors' Report................................................................. 20
Consolidated Statements of Operations and Comprehensive Income for the three years ended
December 31, 2000............................................................................ 21
Consolidated Balance Sheets as of December 31, 2000 and 1999................................. 22-23
Consolidated Statements of Cash Flows for the three years ended December 31, 2000............ 24-25
Consolidated Statements of Shareholders' Equity for the three years ended December 31, 2000.. 26
Notes to Consolidated Financial Statements................................................... 27-40
B. Financial Statement Schedule
Schedule 1 - Condensed Financial Information
Page
--------
Unconsolidated Statements of Operations for the three years ended December 31, 2000......... 1
Unconsolidated Balance Sheets as of December 31, 2000 and 1999.............................. 2
Unconsolidated Statements of Cash Flows for the three years ended December 31, 2000......... 3
Note to Schedule 1.......................................................................... 4
No other financial statement schedules are provided because the information
is not required or is contained in the Notes to Consolidated Financial
Statements of the Annual Report to Shareholders.
-43-
C. Exhibit Index
Exhibit
Number Description
- -------------------- --------------------------------------------------
10.C.1 Sale and Purchase Agreement dated October 20,
2000 between DSG TEK Limited and IVF Hartman AG
10.C.2 Loan and Security Agreement dated March 14, 2001
between Associated Hygienic Products LLC and
Foothill Capital Corporation
10.C.3 Short Term Financing Agreement dated March 14,
2001 between DSG International Limited and
Breakers Investment Holding Limited
10.C.4 Sale and Purchase Agreement dated February 20,
2001 between Associated Hygienic Products LLC and
Drypers Corporation
11 Computation of Net Income Per Ordinary Share
-44-
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 July 9, 2001.
DSG INTERNATIONAL LIMITED
By /s/ TERENCE Y.F. LEUNG
-----------------------
Terence Y.F. Leung
Chief Financial Officer
-45-
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, 2000 and 1999, and for each of the three years ended December 31,
2000, and have issued our report thereon dated May 15, 2001, (May 25, 2001 as to
the third paragraph of Note 13 and July 9, 2001 as to the fourth paragraph of
Note 13); such financial statements and report are included in your 2000 Annual
Report to the Shareholders and are incorporated herein by reference. Our audits
also included the financial statement schedule of DSG International Limited,
listed in Item 19. This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Deloitte Touche Tohmatsu
Hong Kong
May 15, 2001
-46-
ABOUT THE COMPANY
DSG International Limited is a global company specialized in manufacturing and
distribution of disposable baby diapers, adult incontinence and training pants
products. The Company now has eleven manufacturing plants established in Hong
Kong, the United States, Australia, England, China, Thailand, Indonesia and
Malaysia. The Company's products are marketed and distributed throughout Asia,
Australia, North America and Europe. Its principal brand names are "FITTI/R/",
"PET PET/R/", "COSIES/R/", "COSIFITS/R/", "BABY LOVE/R/", "BABYJOY/R/",
"LULLABY/R/", "CARES/R/", "CUDDLES/R/", "SUPER FAN-NIES/R/", "DISPO 123/TM/",
"HANDY/TM/", "CERTAINTY/R/", "MERIT/R/" and "DRYPERS/R/". These brands are
synonymous with high quality and superior value, characteristics that the
Company is dedicated to maintaining.
FINANCIAL HIGHLIGHTS
Year Ended December 31,
2000 1999 1998 1997 1996
------------------------------------------------------------
(In US$ million except per share amounts)
Net sales $214.7 $205.8 $207.9 $230.9 $236.1
Net income $ 3.0 $ 4.4 $ 1.6 $ 1.0 $ 9.2
Shareholders' equity $ 63.4 $ 70.3 $ 68.0 $ 64.8 $ 74.6
Earnings per share $ 0.44 $ 0.66 $ 0.24 $ 0.15 $ 1.18
-1-
CONTENTS
THE DSG MANAGEMENT TEAM 3
Executive and Non-Executive Directors of DSG
TO OUR SHAREHOLDERS 4
Report on the highlights of 2000 and the outlook for 2001
by Brandon Wang, Chairman
OPERATIONS 6
Report of DSG's operations world-wide in 2000
OPERATING AND FINANCIAL REVIEW AND PROSPECTS 9
SELECTED CONSOLIDATED FINANCIAL DATA 18
MANAGEMENT REPORT 19
by Terence Leung, Chief Financial Officer
INDEPENDENT AUDITORS' REPORT 20
by Deloitte Touche Tohmatsu, Hong Kong
CONSOLIDATED STATEMENTS OF OPERATIONS 21
CONSOLIDATED BALANCE SHEETS 22
CONSOLIDATED STATEMENTS OF CASH FLOWS 24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27
SHAREHOLDER INFORMATION 41
DSG COMPANIES 42
DSG Corporate addresses world-wide
-2-
THE DSG MANAGEMENT TEAM
DSG EXECUTIVE DIRECTORS DSG OFFICERS
Brandon S L Wang George Jackson
Chairman and Chief Executive Officer Chief Executive of Australia
Philip K C Leung
Chief Purchasing Officer
Johnny S L Tsui
Chief Operating Officer of Asia Pacific and
Company Secretary
Patrick K Y Tsang
Chief Operating Officer of Europe
Terence Y F Leung
Chief Financial Officer
Peter Chang
Chief Operating Officer of North America
DSG NON-EXECUTIVE DIRECTORS
Anil Thadani
Chairman of Schroder Capital Partners (Asia)
Limited, Hong Kong
Owen Price
Formerly Managing Director of Dairy Farm
International Holdings, Hong Kong
(retired in 1993)
Allister McLeish
Scottish Chartered Accountant and
Chartered Management Accountant
-3-
TO OUR SHAREHOLDERS
The year 2000 marked another year of progress towards the long-term goals of DSG
International Limited, as we implemented a number of strategic initiatives
related to local market conditions and future growth. Overall volume continued
to grow, with the Company enjoying its highest net sales since 1997. Although
net income in 2000 declined from 1999 due to gross margin pressures during the
fourth quarter, we believe we are well-positioned in our key markets for a
successful 2001.
Financial Review
Our net sales for the year ended December 31, 2000 increased 4.3% to $214.7
million. Net income was $3.0 million, or $0.44 per share, compared to $4.4
million, or $0.66 per share, in 1999. The primary reason for the decline was a
soft fourth quarter, with net sales about even with the same period in 1999, and
net loss of $0.2 million, down from $1.8 million for the fourth quarter last
year, due mainly to a lower gross margin caused by higher costs of wood pulp and
other raw materials. These increased costs resulted in a gross margin of
32.2% for the year, compared to 32.9% in 1999. We continued to stress operating
efficiency in 2000 and succeeded in lowering selling, general and administrative
expenses slightly to 29.3% of sales, compared to 29.8% in 1999, even though we
increased advertising and promotional activities in some key regions.
Our balance sheet is strong. We reduced long-term debt by $8.0 million during
2000 and, at December 31, our debt to equity ratio was 14.2% compared to 22.1%
at year-end 1999.
Operations
North America
The most important development for our North American operations was the
acquisition during the first quarter 2001 of Drypers North America, which was
merged into Associated Hygienic Products (AHP), our North American business
unit. This strategic acquisition will accomplish several key goals for AHP.
First of all, once the Drypers operations are fully integrated into AHP, our
North American revenue run rate should more than double from the $92.2 million
in net sales last year. This will translate to significant growth for DSG
International as well. Secondly, the two Drypers plants acquired in the
transaction will provide additional capacity and productivity for North American
operations. And finally, the Drypers acquisition will provide the synergies to
consolidate and grow our current position as the second largest supplier of
private label disposable diapers and training pants in our North American
markets.
Australia
We continued our strong presence in Australia during 2000 and remain the second
largest manufacturer of baby diapers in this market. Net sales increased 4.9%
to $44.8 million, as we increased our penetration of the pharmacy sector and our
participation in private label products for the grocery and variety sectors. We
also gained market share in the adult incontinence market.
Asia
Our greatest growth story occurred in the Asian region, where net sales
increased dramatically to $60.8 million in 2000, a gain of 33.1% over 1999. We
had a strong showing across the region, including Malaysia, the PRC, Thailand,
Indonesia, Hong Kong and Singapore. While we had the benefit of strong local
economies, the results were also due to aggressive, competitive and tailored
marketing strategies in the various locales of the region. For instance, we have
-4-
introduced economy brands in certain markets to capture new consumers and have
varied our brands and packaging in other markets to react to competition and
local market conditions. We believe our early entry in these emerging
disposable diaper markets will position us well for continued penetration and
growth.
Europe
In Europe, we continue to face strong competition in the United Kingdom. In the
fourth quarter, we sold our adult incontinence operation based in Switzerland
and will continue to concentrate on both branded and private label disposable
diapers for the U.K. market.
Outlook
We remain very optimistic about the future for DSG International Limited and
believe we are well-positioned to leverage the growth we experienced in 2000. We
are pleased with the internal growth that has been generated in our Asia and
Australia markets. Coupled with the acquisition of market share in the U.S.
through Drypers, we have the opportunity to make 2001 one of our most successful
years ever in terms of revenue growth. Our challenge is to ensure that our
growth is efficient and profitable, while remaining responsive to the needs and
demands of the market. While we remain subject to such factors as the conditions
of regional economies and the costs of raw materials, we constantly review and
adjust our regional business models to manage our operations accordingly.
We appreciate the support of our shareholders and look forward to providing
favorable reports to you in the future.
Brandon Wang
Chairman
-5-
OPERATIONS
DSG International Limited, established in Hong Kong in 1973, is one of the world
leading companies specialized in manufacturing disposable baby diapers, adult
incontinence and training pants products in this industry. The Company now
operates eleven manufacturing facilities in North America, Australia, Asia and
Europe with extensive distribution activities around the world.
The principal raw materials for the Company's disposable products are fluff wood
pulp and super absorbent polymer. Other raw materials include polyethylene
backsheets, polypropylene non-woven liners, adhesive tapes, hot melt adhesive,
elastic, aloe vera and tissue.
There are different marketing and distribution strategies for each geographic
segment of the Company, however, the Company's fundamental strategies are:
. Producing high quality and value-added products for consumers.
. Providing healthy profit margins to distributors and retailers.
. Manufacturing in a highly flexible and efficient way.
. Responding intelligently to change in the marketplace.
NORTH AMERICA
During the year, the Company continued its effort to further strengthen the
North American operation. All the programs, systems and other measures put in
place to improve the productivity and efficiency have shown significant positive
results. However, the improvement was partially negated by the impact of the
region-wide manpower resource shortage as well as the increase costs of certain
raw materials. With the slowing down trend of the economy, it is expected this
manpower shortage situation should ease off accordingly.
The net sales for the year 2000 were $92.2 million compared with $93.5 million
in 1999. The slight decrease in sales was mostly attributable to the company's
decision to tighten the credit policy resulting in some fall out of customers.
Operating income as a percentage improved to 5.7% in year 2000 versus 5.3% in
1999. This increase was achieved through efficiency gain despite of the higher
raw material and labor cost.
The Company continued to expand the diaper business both in branded and private
label. On the branded side, the Company had introduced Mega packs for FITTI
brand, Jumbo packs for FITTI brand training pants as well as the roll out on
FITTI brand size 6 Super Toddler. On the private label side, the company
continued to strengthen its existing private label partnerships with major
retailers like Walgreens, Pathmark, A & P, Uniprix Drug,Topco etc. Adding new
products in both areas of disposable baby products and disposable adult
incontinence. The Company will continue to target other major retailers to
establish new profitable private label partnerships in all of its product
categories. New partners brought on in year 2000 include Meijer Stores and
Brunos Supermarkets.
In March 2001, the Company acquired Drypers's North American operations and
the "Drypers/R/" brand name. The combination of the Company's North American
operations and Drypers will provide a new level of service to our branded and
private label customers in the U.S. markets and gain entry to the major
supermarket chains and mass merchandisers such as Walmart and Kroger. Once the
Drypers operations are fully integrated into the Company's North American
operations, the revenue growth should more than double of the net sales of $92.2
million in 2000.
In the adult incontinence area, the Company continued to pursue the strategy to
have the capability to provide key retailers, institutions and consumers with
product technology that is superior to what other manufacturers can currently
provide. The "value" tier fitted briefs introduced by the Company in 1999 for
the private label retailers has been well embraced by the consumers. As the
result of this success, the Company currently is putting on major efforts to
bring the programs to more retailers.
-6-
In line with the Company's global fundamental marketing strategies, the
Company's North American operations provide its customers high quality products
and superior service with a satisfactory profit margin.
The Company's principal brand names in North America are Drypers/R/, FITTI/R/,
CUDDLES/R/ for disposable baby diapers and CERTAINTY/R/ for adult incontinence.
AUSTRALIA
The Company's net sales in 2000 were $44.8 million, representing an increase of
4.9% compared with sales of $42.7 in 1999. Net sales increased due to new
growth in the pharmacy class of trade, expansion of private label distribution
and continued market share gains in adult incontinence sales. Operating income
was $3.9 million in 2000 and $4.8 million in 1999, declined due to market
pressure for increased advertising and promotional spending and the addition of
enhanced product features without an increase in selling price. The currency
exchange rates against the U.S. dollar in 2000 had dropped by 10% compared with
1999 and had impacted on the operating results.
The Company remains as the second largest manufacturer of disposable baby
diapers in Australia. The Company's major brands in Australia, BABY LOVE/R/ and
LULLABY/R/, continue to penetrate the grocery and variety sector, while
COSIFITS/R/ and COSIES/R/ are maintaining a strong presence in the independent
pharmacy sector. In addition, the Company is also a leading supplier of private
label diapers for major grocery and variety retailers. The Company's reliable
service, high quality products and competitive prices have resulted in
increasing its significant position in the private label sector.
The Company also distributes the VLESI/R/ range of adult incontinence products
into the Australian market.
ASIA
The Company's net sales in Asian regions increased by 33.1% to $60.8 million in
2000 compared with $45.7 million in 1999. Operating income increased by 20.1% to
$4.6 million in 2000 from $3.8 million in 1999. The promising results were
attributable to the recovering economy and implementation of "go local and go
direct" strategy in the region. The Company's sales in the markets in Malaysia
and PRC continued to grow strongly, sales in the Thailand and Indonesian markets
remained robust. The Company's sales in Hong Kong and Singapore markets had
improved despite the problems of market shrinkage and intense price competition.
The conversion to the use of disposable baby diaper in the region is growing,
the Company has been able to capture the growth by introducing a number of
economy brands to the newly converted consumers and stepping up of advertising
and promotion expenditure.
The Company's major brands for disposable baby diaper are FITTI/R/, PET PET/R/,
COSIFITS/R/, BABY LOVE/R/ and BABYJOY/R/. The Company produces and distributes
adult incontinence products in Asia under the brands named DISPO 123/TM/ and
HANDY/TM/.
The Company provides consumers with a different range of products with price
differentiation to maintain its competitiveness against other local brands. The
Company also has flexibility in tailoring packaging, brand and product
differentiation and advertising and promotional activities to cope with
different demands in various markets in the region. Although competition and
pricing pressure have become more intense in the region, the Company believes
that there is great potential for sales growth with projected population growth
and favorable conversion rate. As a pioneer in the region, the Company has an
advantage in entering and expanding these markets by encouraging disposable
diaper usage and establishing its brands at an early stage through strategic
advertising and promotional activities.
EUROPE
-7-
The Company's net sales in Europe were $16.8 million in 2000 compared with $24.0
million in 1999. The Company sold the Swiss adult incontinence operation during
the year and the Company's U.K. operation continued with branded and private
label disposable baby diapers. Operating loss for the year 2000 was $2.4
million compared with an operating loss of $1.7 million in 1999.
The Company's brands in Europe for baby diapers are FITTI/R/, COSIFITS/R/ and
CARES/R/. The Company believes that the presence of its branded and private
label disposable baby diapers in the United Kingdom can be maintained although
it will be difficult to penetrate the market share of Procter & Gamble and
Kimberly-Clark.
-8-
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis should be read in conjunction with the
Selected Consolidated Financial Data and the Consolidated Financial Statements
and related Notes which appear elsewhere in this Annual Report.
General
The Company's revenues are primarily derived from the manufacture and sale of
disposable baby diapers, adult incontinence and training pants products in North
America, Australia, Asia and Europe, both under its own brands and private label
brands of major retailers.
The Company is not taxed in the British Virgin Islands where it is incorporated.
The Company's subsidiaries are subject to taxation in the jurisdictions in which
they operate.
The Consolidated Financial Statements of the Company are prepared in U.S.
dollars, and the majority of its revenues are received and expenses are
disbursed in U.S. dollars. Because certain of the Company's subsidiaries
account for their transactions in currencies other than U.S. dollars, the
Consolidated Balance Sheets contain foreign currency translation adjustments and
the Consolidated Statements of Operations contain realized exchange gains and
losses due to exchange rate fluctuations.
Industry Trends
The Company believes that the most significant industry trends are:
. fluff wood pulp cost and other raw materials cost increased in 2000, however,
it is expected that increase in fluff wood pulp cost will slow down in 2001;
. increasing demand for mechanical closure tape and cloth-like breathable
backsheet products, which the Company is meeting through modifications to its
machinery;
. the domination of industry leaders in most of the markets putting pressure on
retailers' margins, which the Company is finding difficult to respond to by
providing retailers with higher profit margins in the current highly
competitive market conditions.
The Company is unable to predict whether the other trends noted above would have
a material effect on its future financial condition or results of operations
and, if so, whether such an effect will be positive or negative.
Forward-Looking Statements
The Company continues to expand its markets in the Asian region and the Company
expects that its market share in the region will increase. The Company expects
that the exchange rate of the currency of certain countries in the Asian Pacific
region will fluctuate in greater magnitude in 2001. The cost of raw materials,
primarily fluff wood pulp cost will be stable.
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", "expect",
"believe" 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
Operating and Financial Review and Prospects 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
-9-
under the Securities Exchange Act of 1934.
Risk Factors
Among the factors that have a direct effect on the results of operations
and financial condition of DSG International Limited (the "Company") are the
following:
1. - Raw Material Cost.
The overall raw material costs have increased during year 2000 and the
Company's operating results may be adversely affected by any increases in raw
material costs in the future, specially the cost of the main raw material, fluff
wood pulp, which increased in 1999 and increased moderately in 2000.
2. - Branded Product Innovation.
Patents and other intellectual property rights are an important competitive
factor in the disposable diaper market, mostly because of the industry emphasis
in product innovations. Patents held by the main competitors could severely
limit the Company's ability to keep up with branded product innovations, by
prohibiting the Company from marketing product with comparable features.
3. - Pricing and Volumes.
The market position of the Company's main competitors, The Procter & Gamble
Company ("P&G") and Kimberly-Clark Corporation ("KC"), 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 in price and volumes, and gain
substantial market share in any of their marketing areas. They have heavily
promoted diapers in the multi-pack configuration. These packages offer a lower
unit price to the retailer and consumer. It is possible that as a consequence of
this strategy, in those geographic markets in which the main competitors have
adopted it, the Company may realize lower selling prices and/or lower sale
volumes.
4. - Increased Cost.
On May 21, 2001, the Company entered into an agreement with P&G to settle
any potential liability of the Company which may have existed with respect to
any past infringement on P&G patents prior to January 1, 2001 and to agree on
royalty payments relating to sales on certain of the Company's products in the
Asian Pacific and Australian region after December 31, 2000. A similar agreement
with P&G was entered into in 1998 relating to the North American region that
provides for payments of royalty fees based on a percentage of certain products
sold after December 31, 1997 within North American region.
The Company believes that the royalty being charged by P&G under its
respective license agreements are approximately the same royalties that will be
paid by its major competitors for similar patent rights. However, the royalties
will have an adverse impact on the Company's future financial condition and
results of operations as compared to pre-settlement.
5. - Increase Financial Leverage.
As a result of the acquisition of the North American asset of Drypers
Corporation, the Company has now short and long term debt of $47.5 million,
bearing various rates interest.
As a consequence of the incurrence of the Company's new debt, its principal
and interest obligations have increased substantially. The increase in the
Company's financial leverage as described above, could adversely affect the
Company's ability to obtain additional financing for working capital,
acquisitions or other purposes and could make the Company more vulnerable to
economic crisis in the different geographical markets and to competitive
pressures from its main competitors.
As a substantial portion of the Company's available cash from operations
will have to be applied to meet debt service requirements, the Company's
liquidity could be affected as well as its ability to fund capital expenditures.
Notwithstanding, the Company believes that its cash flow from operations and
other sources of liquidity will be adequate to meet its requirements for working
capital, capital expenditures, interest payment and scheduled principal payment
for the foreseeable future. However, if the Company is unable to generate
sufficient cash flow from operations in the future, it may be required to
refinance all or a portion of its existing debt or obtain additional financing.
There is not assurance that this additional financing could be obtained in
favorable terms for the Company.
6. -Litigation Risk.
As the Company operates in an industry in which patents are numerous and
are enforced vigorously, the Company and its subsidiaries are from time to time
involved in legal matters.
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. On June 27, 2001, a jury returned a verdict and awarded
$4.0 million in damages and also provided for potential enhanced damages against
the Company of up to an additional $7.0 million. The Company will file post
trial motions to overturn the jury verdict and, if necessary, will appeal the
verdict to the U.S. Court of Appeals for the Federal Circuit. The Company
believes that it is reasonably possible that it will be successful in
overturning the jury verdict. Accordingly, the jury award has not been recorded
in the Company's consolidated financial statements. Unsuccessful resolution of
the above litigation resulting in a significant assessment against the Company
may result in the Company violating certain covenants of its debt agreements.
This would give the lenders the right to demand payment of outstanding amounts
unless the lenders waive their rights under the debt agreements. Demand for
payment by the lenders and the need to pay the award to the plaintiff would
require the Company to secure other financing sources to meet its obligations.
The Company has advised the lenders of the recent jury verdict and its intention
to pursue a post trial motion to overturn the decision and, if necessary, file
an appeal. While the Company believes that it is reasonably possible that it
will be successful in overturning the jury verdict, the outcome of this
litigation is uncertain.
-10-
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)
Results of Operations
1. Overall
The following table sets forth the percentage of net sales represented by
the specified components of income and expense for the years ended December 31,
2000, 1999 and 1998.
Year Ended December 31,
2000 1999 1998
----------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 67.8 67.1 71.3
Gross profit 32.2 32.9 28.7
Selling, general and administrative expenses (29.3) (29.8) (26.6)
Gain on disposals of property, plant and equipment 0.1 0.5 -
Restructuring costs - - (0.4)
Operating income 3.0 3.6 1.7
Interest expense (0.7) (1.1) (1.2)
Interest income 0.4 0.4 0.4
Exchange loss (0.6) (0.5) (0.1)
Gain on disposal of subsidiaries 0.1 - -
Other income - 0.3 0.1
Income before income taxes 2.2 2.7 0.9
Provision for income taxes (0.7) (0.5) (0.1)
Minority interest (0.1) (0.1) -
Net income 1.4% 2.1% 0.8%
-11-
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)
2. Comparison of 2000, 1999 and 1998
The Company's net sales in 2000 increased by 4.3% to $214.7 million compared
with $205.8 million in 1999. The Company's sales in Asia Pacific grew more than
30% and in Australia grew by 5% despite the 10% devaluation of Australian
dollars against U.S. dollars during the year. The Company's sales in North
America in 2000 were marginally lower than in 1999. The Company sold its Swiss
adult incontinence operation during the year which resulted in the reduction in
the Company's sales in Europe.
Gross profit margin for the year 2000 was 32.2% compared with 32.9% in
1999. The raw material costs in 2000 were higher than the costs in 1999 due to
higher fluff wood pulp cost. Also a high proportion of the volume growth in Asia
came from the value brands of relatively low margin. The Company was able to
alleviate the negative impact on raw material costs and lower margin by higher
sales volume and increased productivity of the Company's operations in Asia and
Australia. Selling, general and administrative expenses increased by $1.6
million to $62.9 million due to higher spending on advertising and promotion
activities in Asia and Australia. The Company also recorded a $0.3 million
charge relating to a patent agreement with Procter & Gamble Company (see Note
13).
The Company's net sales in 1999 were $205.8 million compared with $207.9
million in 1998. The Company's net sales actually grew in all regions except
Europe where the sales impacted by the sale of the Swiss diaper and napkin
business during the year. The Company's adult incontinence business had a
double-digit growth in 1999.
Gross profit as a percentage of net sales in 1999 was higher than 1998 by
4.1% due to the improvement of production efficiency in all regional segments
and the implementation of "go local and go direct" strategy in the Asian
operations. Selling, general and administrative expenses as a percentage of net
sales increased to 29.8% in 1999 compared with 26.6% in 1998, primarily due to
higher expenditure on advertising and promotion activities and additional
administrative expenses in the newly commenced operations in the Asian region
and a $2.0 million increase in executive compensation in 1999. In 1999, the
Company sold its property in Singapore and machinery and equipment in one of its
plants in Switzerland resulting in a gain of $0.9 million.
-12-
Geographic Segment Information
As the results of the Company's operations differ significantly from one
market to another, the following discussion considers the Company's results in
each of the geographic regions in which it operates. The tables below set forth
the Company's net sales and operating income in each geographic region in 2000,
1999 and 1998, and the percentage change over the preceding period:
1. North America
Year Ended December 31, Increase/(Decrease)
2000 1999 1998 2000 1999 1998
--------------------------------------------------------------------
(Dollars in thousands)
Net sales $92,229 $93,479 $89,911 (1.3)% 4.0% (1.3)%
Operating income 5,301 5,001 1,155 6.0 333.0 -
Comparison of 2000, 1999 and 1998.
The Company's net sales were $92.2 million in year 2000 compared with $93.5
million in 1999. The slight decrease in sales was mostly attributed to the
Company's decision to revise the credit policy resulting in some fall out of
customers. Gross profit margin was at 28.6% in year 2000 compared with 29.5% in
1999. Although the Company achieved greater productivity gains during the year
but the higher cost of raw material and labor contributed a lower gross margin
than the year before. Selling, general and administrative expenses in year 2000
reduced to 22.5% from 24.1% a year ago. This improvement was primarily
attributed by continued effort to trim promotional expenditures and other cost
control measures. Operating income for the year 2000 improved by 6.0% from
previous year to $5.3 million.
The Company's net sales in North America increased by 4.0% to $93.5 million
in 1999 from $89.9 million in 1998. The net sales growth was primarily from the
adult incontinence business. Gross profit margin improved by 3.1% from 26.4% in
1998 to 29.5% in 1999. This increase of gross margin was attributed to the
improvement of operation efficiency subsequent to the consolidation of the
operations in 1998. Selling, general and administrative expenses in 1999
declined by 1.0% from 1998 primarily due to lower promotional expenditures and
effective cost saving measures. Operating income for 1999 significantly
improved to $5.0 million from $1.2 million in 1998.
2. Australia
Year Ended December 31, Increase/(Decrease)
2000 1999 1998 2000 1999 1998
----------------------------------------------------------------------
(Dollars in thousands)
Net sales $44,753 $42,676 $40,487 4.9% 5.4% (14.2)%
Operating income 3,919 4,823 4,946 (18.7) (2.5) (16.5)
Comparison of 2000, 1999 and 1998.
The Company's net sales in Australia were $44.8 million and grew by 4.9%
over 1999. The actual growth was over 16% when the net sales were compared in
the domestic currency. The Australian dollar had devalued by over 10% against
U.S. dollars during 2000. Gross profit margin dropped by 2.5% from 39.2% in 1999
to 37.7% primarily due to higher fluff wood pulp cost in 2000. Selling, general
and
-13-
administrative expenses increased by 1% to 28.9% in 2000 due to higher
advertising and promotional expenditure. As a result, operating income, as a
percentage of net sales, in 2000 decreased by 2.5% to 8.8% on net sales.
The Company's net sales in Australia in 1999 were $42.7 million compared
with $40.5 million in 1998, a growth of $2.2 million. Gross profit margin
increased by 0.6% from 38.6% in 1998 to 39.2% in 1999. Operating income
decreased by 2.5% to $4.8 million compared with $4.9 million in 1998 due to
higher advertising and promotional expenditure resulting from increased
competition. The general and administrative expenses remained materially
unchanged compared to 1998.
-14-
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)
3. Asia
Year Ended December 31, Increase/(Decrease)
2000 1999 1998 2000 1999 1998
----------------------------------------------------------------------
(Dollars in thousands)
Net sales $60,835 $45,715 $44,208 33.1% 3.4% (22.4)%
Operating income 4,609 3,839 2,842 20.1 35.1 (54.2)
Comparison of 2000, 1999 and 1998.
The Company's net sales in Asia increased by 33.1% to $60.8 million in 2000
from $45.7 million in 1999. The Company recorded sales growth in all the markets
and high double-digit growth in the markets in Malaysia, the PRC and Indonesia.
The Company's gross profit increased by 20.9% to $22.6 million in 2000 from
$18.7 million in 1999, although the gross profit margin dropped by 3.6% to 37.2%
in 2000 from 1999 primarily due to higher fluff wood pulp cost and lower margin
on several economy brands. Selling, general and administrative expenses as a
percentage of net sales dropped by 2.6% to 29.6% in 2000 from 32.2% in 1999
primarily due to economies of higher volume of sales. Operating income was $4.6
million in 2000, increased by 20.1% over the operating income in 1999.
The Company's net sales in Asia increased by 3.4% to $45.7 million in 1999
from $44.2 million in 1998. The Company captured the growth of the markets in
the developing countries in the region and at the same time encountered intense
competition on price and promotional activities. Although the economy in the
region recovered rapidly, consumers became more price conscious than ever and
prices were reduced on certain branded products and several economy brands were
introduced to meet the increasing demand. Gross profit increased by $2.5
million to $18.7 million in 1999 compared with $16.2 million in 1998, mainly due
to higher profit margins from direct selling and distribution and reduced costs
by local manufacturing. Selling, general and administrative expenses increased
in 1999 due to the higher promotion expenditure and the additional
administrative expenses in the newly commenced operations in Indonesia and
Malaysia. As a result, operating income, including a gain of $0.7 million on
the sale of the Company's property in Singapore, increased to $3.8 million in
1999 from $2.8 million in 1998.
-15-
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued)
4. Europe
Year Ended December 31, Increase/(Decrease)
2000 1999 1998 2000 1999 1998
-------------------------------------------------------------------------
(Dollars in thousands)
Net sales $16,844 $23,972 $33,319 (29.7)% (28.1)% (6.7)%
Operating loss (2,371) (1,667) (2,903) 42.2 (42.6) 12.4
Comparison of 2000, 1999 and 1998.
The Company's net sales in Europe were $16.8 million in 2000 compared with
$24.0 million in 1999. The decrease in sales was the result of sale of the
Company's Swiss operation in baby diaper in 1999 and the sale of the Company's
Swiss operation in adult incontinence in 2000. The operating results in 2000
were impacted by higher fluff wood pulp cost and disappointing operating results
of the adult incontinence operation prior to sale. Operating loss in 2000
increased by $0.7 million compared with loss of $1.7 million in 1999 due to
lower gross profit margin, although the selling, general and administrative
expenses in 2000 were lower.
The Company's net sales in Europe were $24.0 million in 1999 against $33.3
million in 1998, representing a 28.1% decrease. The Company's diaper sales
volume in the United Kingdom was relatively stable, but operating profit was not
satisfactory. The Company's Swiss sales in adult incontinence products in 1999
showed moderate increase and operating profit improved over the previous year.
Combined with the effect of sale of the Company's Swiss operation in baby diaper
and feminine napkin products, these resulted in a reduced operating loss from
$2.9 million to $1.7 million.
Liquidity and Capital Resources
For the year ended December 31, 2000, the Company had cash and cash equivalents
of $10.3 million, a decrease of $4.0 million from $14.3 million for the year
ended December 31, 1999. The cash and cash equivalents were held separately by
the operations of the Company in their local currencies and were from time to
time invested in interest bearing deposit accounts. The Company did not use any
financial instruments for hedging.
Net cash provided by operating activities was $1.7 million, including
depreciation and amortization of $9.5 million and net increase in working
capital requirement of $10.2 million. The net increase in working capital
consisted of the increase of $7.3 million in accounts receivable and $5.0
million in inventories which was attributed to the increase in the Company's
sales. The Company believes that the working capital is sufficient for the
Company's present requirements and is able to provide additional working capital
for the Company's operations when needed by arranging additional banking
facilities with the banks and financial institutions for the operations.
Net cash used for investing activities was $8.7 million. The Company invested
$5.9 million in capital expenditure for additions and modifications to property,
machinery and equipment for the Company's various operations. The Company sold
the adult incontinence operation in Switzerland and a training pant machine for
gross proceeds of $6.1 million. The Company made advances of $10.7 million to a
shareholder and the shareholder made repayment of $1.9 million to the Company
during 2000. Additional
-16-
information on the advances to shareholder is provided in Note 12 of Notes to
Consolidated Financial Statements.
The Company utilized $13.2 million short-term bank credit lines out of total
credit facilities of $14.9 million as of December 31, 2000. The utilization of
short-term bank credit increased by $4.2 million in 2000 compared with the
utilization of $9.0 million in 1999. The increase in total borrowings, long term
and short term in 2000, was $11.4 million. The Company repaid $8.0 million of
its debts during 2000. The weighted average interest rate on borrowings at the
year ended 2000 was 8.91%. Additional information on bank credit facilities is
set out in Notes 10 and 11 of Notes to Consolidated Financial Statements.
In March 2001, the Company acquired the North American assets of Drypers
Corporation for a consideration of $38.5 million. The acquisition was financed
by cash and proceeds from term loans and revolving credit line from a U.S.
financial institution and an oversea financial institution. The interest rate on
the advances from the revolving credit line range from Libor plus 2.25% to Libor
plus 4.25% dependent upon the ratio of the Company's total debts to earnings
before interest, taxes, depreciation and amoritization ("EBITDA") measured on a
fiscal quarter-end basis. The interest rate on the U.S. term loan ranged from
Libor plus 2.75% to Libor plus 4.75% also dependent upon the ratio of the
Company's total debts to EBITDA measured on a fiscal quarter-end basis. The
interest rate on term loan from the oversea financial institution is 14.5%. The
Company will also grant to the oversea lender Warrants priced at $0.01 for 0.75%
for each month up to 9.0%, but no less than 4.5%, of the Company's fully diluted
Ordinary Shares whilst any part of the loan is outstanding (see Note 11).
The Company is in the process of a legal proceeding of a patent
infringement claim in 2001. On June 27, 2001, a jury returned a verdict and
awarded $4.0 million in damages and also provided for potential enhanced damages
against the Company of up to an additional $7.0 million. The Company will file
post trial motions to overturn the jury verdict and, if necessary, will appeal
the verdict to the U.S. Court of Appeals for the Federal Circuit. The Company
believes that it is reasonably possible that it will be successful in
overturning the jury verdict. Accordingly, the jury award has not been recorded
in the Company's consolidated financial statements. Unsuccessful resolution of
the above litigation resulting in a significant assessment against the Company
may result in the Company violating certain covenants of its debt agreements.
This would give the lenders the right to demand payment of outstanding amounts
unless the lenders waive their rights under the debt agreements. Demand for
payment by the lenders and the need to pay the award to the plaintiff would
require the Company to secure other financing resources to meet its obligations.
The Company has advised the lenders of the recent jury verdict and its intention
to pursue a post trial motion to overturn the decision and, if necessary, file
an appeal. While the Company believes that it is reasonably possible that it
will be successful in overturning the jury verdict, the outcome of this
litigation is uncertain (see Note 13).
The Company did not repurchase any shares or pay a dividend during 2000.
The adoption of SFAS No. 133 on January 1, 2001 did not have a material effect
in the Company's financial statements.
-17-
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
Statement of Operations Data 2000 1999 1998 1997 1996
----------------------------------------------------------------------
(in thousands except per share amounts)
Net sales $214,661 $205,842 $207,925 $230,930 $236,050
Cost of sales 145,532 138,120 147,997 153,929 155,647
Gross profit 69,129 67,722 59,928 77,001 80,403
Selling, general and administrative expenses (62,898) (61,322) (55,318) (71,912) (64,435)
Gain (loss) on disposals of property, plant and
equipment 244 1,034 42 (122) 15
Restructuring costs - - (897) (1,389) -
Operating income 6,475 7,434 3,755 3,578 15,983
Interest expense (1,594) (2,208) (2,511) (2,833) (2,267)
Interest income 868 792 790 1,451 1,900
Exchange loss (1,356) (997) (311) (610) (176)
Gain on disposal of subsidiaries 214 - - - -
Other income (expense) 54 522 155 (169) (89)
Income before income taxes 4,661 5,543 1,878 1,417 15,351
Provision for income taxes (1,557) (987) (253) (443) (6,185)
Minority interest (141) (121) (3) - -
Net income $ 2,963 $ 4,435 $ 1,622 $ 974 $ 9,166
Basic earnings per share:
Net income $0.44 $0.66 $0.24 $0.15 $1.18
Weighted average number of shares outstanding 6,675 6,675 6,675 6,675 7,747
The Company has not declared any dividend during the above periods.
December 31,
Balance Sheet Data 2000 1999 1998 1997 1996
---------------------------------------------------------------------------
Working capital $ 32,423 $ 36,000 $ 30,091 $ 30,823 $ 31,714
Total assets 111,409 120,945 133,909 130,273 141,910
Long-term debt 5,577 11,894 20,957 21,281 21,587
Shareholders' equity 63,447 70,302 68,013 64,778 74,639
-18-
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 financial 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 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.
/s/ Leung Yeuk Fong
Terence Leung
Chief Financial Officer
July 9, 2001
-19-
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, 2000 and 1999, and
the related consolidated statements of operations, comprehensive income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. 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 financial statements present fairly, in all material
respects, the financial position of DSG International Limited and its
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
/s/ Deloitte Touche Tohmatsu
Deloitte Touche Tohmatsu
Hong Kong
May 15, 2001
(May 25, 2001 as to the third paragraph of Note 13
and July 9, 2001 as to the fourth paragraph of Note 13)
-20-
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
Year Ended December 31,
2000 1999 1998
-------------------------------------------------
Net sales $214,661 $205,842 $207,925
Cost of sales 145,532 138,120 147,997
Gross profit 69,129 67,722 59,928
Selling, general and administrative expenses (62,898) (61,322) (55,318)
Gain on disposals of property,
plant and equipment (Note 3) 244 1,034 42
Restructuring costs (Note 4) - - (897)
Operating income 6,475 7,434 3,755
Interest expense (1,594) (2,208) (2,511)
Interest income 868 792 790
Exchange loss (1,356) (997) (311)
Gain on disposal of subsidiaries (Note 5) 214 - -
Other income, net 54 522 155
Income before income taxes 4,661 5,543 1,878
Provision for income taxes (Note 6) (1,557) (987) (253)
Minority interest (141) (121) (3)
Net income $ 2,963 $ 4,435 $ 1,622
Basic earnings per share $0.44 $0.66 $0.24
Weighted average number of shares outstanding 6,675 6,675 6,675
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Year Ended December 31,
2000 1999 1998
-------------------------------------------------
Net income $ 2,963 $4,435 $1,622
Other comprehensive (expense) income
Foreign currency translation adjustments (1,017) 665 1,613
Comprehensive income $ 1,946 $5,100 $3,235
See accompanying notes to consolidated financial statements.
-21-
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
2000 1999
--------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,327 $ 14,352
Accounts receivable, less allowance for doubtful accounts
of $897 in 2000 and $724 in 1999 33,468 29,318
Other receivables 2,472 2,799
Inventories (Note 7) 26,556 24,823
Prepaid expenses and other current assets 571 858
Income taxes receivable 219 153
Deferred income taxes - 14
Total current assets 73,613 72,317
Property and equipment - at cost : (Note 8)
Land 3,551 4,351
Buildings 13,049 19,092
Machinery and equipment 74,977 80,554
Furniture and fixtures 2,357 2,919
Motor vehicles 1,670 1,766
Leasehold improvements 2,017 1,909
Construction in progress 1,545 320
Total 99,166 110,911
Less: accumulated depreciation and amortization 62,685 62,930
Net property and equipment 36,481 47,981
Loan receivable (Note 9) 554 -
Deferred income taxes 299 -
Other assets 462 647
Total long-term assets 1,315 647
Total assets $111,409 $120,945
See accompanying notes to consolidated financial statements.
-22-
CONSOLIDATED BALANCE SHEETS - (Continued)
(in thousands except shares and per share amounts)
December 31,
2000 1999
---------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings (Note 10) $ 13,235 $ 9,040
Current portion of long-term debt (Note 11) 3,421 2,509
Accounts payable 14,992 12,864
Accrued advertising and promotion 2,404 2,992
Accrued payroll and employee benefits 1,863 2,330
Other accrued expenses 4,855 4,121
Income taxes payable (Note 6) 418 2,461
Deferred income taxes 2 -
Total current liabilities 41,190 36,317
Long-term debt (Note 11) 5,577 11,894
Deferred income taxes - 1,124
Total long-term liabilities 5,577 13,018
Minority interest 1,195 1,308
Commitments and contingencies (Note 13)
Shareholders' equity:
Ordinary shares, $0.01 par value - authorized 20,000,000 shares;
issued and outstanding 6,674,606 shares in 2000 and 1999 67 67
Additional paid-in capital 18,301 18,301
Retained earnings 65,664 62,701
Accumulated other comprehensive income (8,973) (7,956)
Less: Net receivable from shareholder (Note 12) (11,612) (2,811)
Total shareholders' equity 63,447 70,302
Total liabilities and shareholders' equity $111,409 $120,945
See accompanying notes to consolidated financial statements.
-23-
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2000 1999 1998
--------------------------------------------
Cash flows from operating activities
Net income $ 2,963 $ 4,435 $ 1,622
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,464 9,662 10,487
Accelerated depreciation on assets written off - - 897
Gain on disposals of property, plant and machinery (244) (1,034) (42)
Gain on disposal of subsidiaries (214) - -
Deferred income taxes (354) (798) (288)
Minority interest 141 121 3
Other 109 903 927
Net change in working capital components (10,190) (1,464) (6,425)
Net cash provided by operating activities 1,675 11,825 7,181
Cash flows from investing activities
Expenditures for property, plant and machinery (5,947) (6,097) (6,444)
Proceeds from disposals of property, plant and machinery 1,276 4,237 1,207
Proceeds from sale of subsidiary, net of cash forfeited 4,842 - (2)
Receipt of (investment in) restricted bank deposit - 6,000 (6,000)
Advances to a shareholder (10,744) (1,879) (3,372)
Repayments by a shareholder 1,943 2,540 507
Increase in other assets (39) (6) (19)
Net cash (used in) provided by investing activities (8,669) 4,795 (14,123)
Cash flows from financing activities
Increase (decrease) in short-term borrowings 4,858 (295) 1,180
Increase in long-term debt and other non-current debt 6,554 148 -
Repayment of long-term debt and other non-current debt (7,956) (10,582) (4,596)
Payment of deferred purchase consideration - - (184)
(Repayment to) investment by minority shareholder (255) (15) 465
Net cash provided by (used in) financing activities 3,201 (10,744) (3,135)
Effect of exchange rate changes on cash and cash
equivalents (232) (74) 39
(Decrease) increase in cash and cash equivalents (4,025) 5,802 (10,038)
Cash and cash equivalents, beginning of year 14,352 8,550 18,588
Cash and cash equivalents, end of year $ 10,327 $ 14,352 $ 8,550
See accompanying notes to consolidated financial statements.
-24-
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(in thousands)
Year Ended December 31,
2000 1999 1998
------------------------------------------
Schedule of changes in working capital components
net of effects from sale of subsidiaries
Accounts receivable $ (7,254) $ 2,353 $(6,991)
Other receivables 98 (470) (269)
Inventories (4,974) (966) 644
Prepaid expenses and other current assets 58 106 583
Accounts payable 3,207 (2,492) 701
Accrued expenses 571 (1,256) (274)
Income taxes payable (1,896) 1,261 (819)
Net change in working capital components $(10,190) $(1,464) $(6,425)
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 1,579 $ 2,208 $ 2,410
Income taxes 3,600 403 1,901
See accompanying notes to consolidated financial statements.
-25-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Net
Accumulated Receivable
Additional Other From Total
Ordinary Shares Paid-in Retained Comprehensive Shareholder Shareholders'
Shares Amount Capital Earnings Income (Note 12) Equity
--------------------------------------------------------------------------------------
Balance at January 1, 1998 6,674 $67 $18,301 $56,644 $(10,234) - $64,778
Net income - - - 1,622 - - 1,622
Foreign currency translation adjustment - - - - 1,613 - 1,613
Balance at December 31, 1998 6,674 67 18,301 58,266 (8,621) - 68,013
Net income - - - 4,435 - - 4,435
Foreign currency translation adjustment - - - - 665 - 665
Transfer of balance of net receivable
from shareholder at December 31, 1999 - - - - - (2,811) (2,811)
Balance at December 31, 1999 6,674 67 18,301 62,701 (7,956) (2,811) 70,302
Net income - - - 2,963 - - 2,963
Foreign currency translation adjustment - - - - (1,017) - (1,017)
Transfer of balance of net receivable
from shareholder at December 31, 2000 - - - - - (8,801) (8,801)
Balance at December 31, 2000 6,674 $67 $18,301 $65,664 $ (8,973) $(11,612) $63,447
See accompanying notes to consolidated financial statements.
-26-
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 manufacture and distribute disposable
baby diapers, adult incontinence 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 a maturity of three months or less when
purchased.
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, 2000 and
1999, goodwill amounted to $136 and $401 net of accumulated amortization of $406
and $507, 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 -- Income taxes are provided based on an asset and liability
approach for financial accounting and reporting of income taxes. Deferred
income tax liabilities or benefits are recorded to reflect the tax consequences
in future years of differences between tax basis of assets and liabilities and
the financial reporting amounts. A valuation allowance is recorded if it is
more likely than not that some portion of, or all of, a deferred tax asset will
not be realized.
-27-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
Valuation of long-lived assets -- The Company 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.
Foreign currency translation -- The Company uses the United States dollar
as its reporting currency. 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.
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.
Comprehensive income - Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners.
New accounting standard not yet adopted - The Financial Accounting
Standards Board has issued Statement of Financial Accounting Standards ("SFAS")
No. 133, "Derivative Instruments and Hedging Activities". This statement, as
amended, requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value and is effective for fiscal years
beginning after June 15, 2000. Gains or losses resulting from changes in the
values of those derivatives would be accounted within the statements of
operations and comprehensive income depending on the use of the derivative and
whether it qualifies for hedge accounting. The adoption of SFAS No. 133 on
January 1, 2001 did not have a material effect in the Company's financial
statements.
-28-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
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.
Reclassifications - Certain reclassifications have been made to prior-
period amounts to conform with the 2000 presentation. These reclassifications
had no effect on the results of operations or financial position for any year
presented.
3. DISPOSALS OF PROPERTY, PLANT AND EQUIPMENT
In 2000, the Company sold machinery in one of its plants in the U.S. for a
total consideration of $1,200 resulting in a gain of $153.
In 1999, the Company sold its property in Singapore and machinery and
equipment in one of its plants in Switzerland for a total consideration of
$3,318, resulting in a gain of $871.
4. RESTRUCTURING COSTS
In the fourth quarter of 1998, the Company wrote down the value of certain
surplus equipment in its Wisconsin operation by $897 to the value received on
its sale subsequent to the balance sheet date.
5. GAIN ON DISPOSAL OF SUBSIDIARIES
In October 2000, the Company sold its investment in the adult incontinence
manufacturing operation in Switzerland and a distribution office in Germany for
a cash consideration of $4,963, resulting in a gain of $214.
6. PROVISION FOR 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,
2000 1999 1998
---------------------------------------
U.S. $4,446 $2,235 $(1,297)
Foreign 215 3,308 3,175
$4,661 $5,543 $ 1,878
-29-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands)
6. PROVISION FOR INCOME TAXES - continued
The provision for income taxes consists of the following:
Year Ended December 31,
2000 1999 1998
----------------------------------------
Current
U.S. Federal $ 554 $ 440 $ (412)
U.S. State - - -
Foreign 1,452 2,404 1,378
Benefit of loss carrybackwards - (1,059) -
Benefit of loss carryforwards (95) - (425)
Deferred taxes (354) (798) (288)
$1,557 $ 987 $ 253
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,
2000 1999 1998
-----------------------------------------
Provision for income taxes at statutory rate on profit for
the year 35.0% 35.0% 35.0%
Effect of different tax rates applicable to foreign earnings (20.5) 14.8 (113.9)
Foreign losses which are not deductible 18.0 - -
Foreign profits which are not taxable (35.0) - -
Changes in valuation allowances 29.6 (32.5) 87.7
Withholding tax on interest and royalty income 5.7 3.9 10.0
Tax exemption under tax holiday (0.2) (2.3) (6.7)
Other 0.8 (1.1) 1.3
Effective rate 33.4% 17.8% 13.4%
The Company's subsidiary incorporated in the People's Republic of China is
entitled to a two-year exemption from state and local income taxes commencing
from the first profitable year of operations, which was 1998, followed by a 50%
reduction in tax rates for the next three years. The year ended December 31,
2000 was the first year for the subsidiary to be under a 50% reduction in the
prevailing tax rate. Had this tax holiday not been available, income tax expense
would have been higher by $11 and $138. Earnings per share would have been
the same in 2000 and was lower by $0.02 in 1999 and 1998.
-30-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands)
6. PROVISION FOR 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, 2000
the tax loss carryforwards by country and their future expiration dates are as
follows:
2010 -
Total 2001 2002 2003 2004 2005 2013 Indefinite
----------------------------------------------------------------------------------------------------
United Kingdom $100,136 $ - $ - $ - $ - $ - $ - $100,136
Switzerland 5,260 756 1,581 159 119 2,645 - -
U.S.A. 9,830 - - - - - 9,830 -
Belgium 813 - - - - - - 813
$116,039 $ 756 $1,581 $ 159 $ 119 $2,645 $9,830 $100,949
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 are related to:
At December 31,
2000 1999
Assets Liabilities Assets Liabilities
--------------------------------------------------------------
Inventories $ 1 $ - $ 22 $ (136)
Accounts receivable and prepaid expenses 19 (44) 10 (88)
Property - (493) - (1,702)
Other 939 (125) 884 (100)
Tax loss carryforwards 32,387 - 31,008 -
Valuation allowances (32,387) - (31,008) -
Total $ 959 $(662) $ 916 $(2,026)
-31-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands)
7. INVENTORIES
Inventories by major categories are summarized as follows:
At December 31,
2000 1999
----------------------
Raw materials $13,636 $14,657
Finished goods 12,920 10,166
$26,556 $24,823
8. PROPERTY AND EQUIPMENT
Included in property and equipment are assets acquired under capital leases
with the following net book values:
At December 31,
2000 1999
---------------------
At cost:
Machinery and equipment $5,982 $5,976
Motor vehicles 122 158
6,104 6,134
Less: Accumulated amortization 2,426 1,889
Net book value $3,678 $4,245
9. LOAN RECEIVABLE
The loan is non-interest bearing and will not be received within twelve
months from the balance sheet date and accordingly, the amount is reclassified
as a non-current asset in the financial statements.
10. SHORT-TERM BORROWINGS
These include borrowings in the form of trade acceptances, loans and
overdrafts with various banks:
At December 31,
2000 1999
------------------------
Credit facilities granted $14,850 $18,424
Utilized $13,235 $ 9,040
Weighted average interest rate on borrowings at
end of year 8.91% 8.53%
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. At December 31, 2000, borrowings of $1,842 are collateralized by
the pledge of accounts receivable and inventory of a subsidiary with a book
value of $12,100. In addition, borrowings of $362 are collateralized by the
pledge of land and buildings with a net book value of $1,099.
-32-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands)
11. LONG-TERM DEBT
Long-term debt consists of:
At December 31,
2000 1999
---------------------
Term loan bearing interest at LIBOR plus 2.25% (10.25% as of December
31, 2000) payable in monthly installments of $87.5 beginning June 2000
(the "Term Note") $3,628 $ -
Loan from finance companies at rates ranged from 7.00% to 10.50% per annum
at December 31, 2000. The loan is secured by the building and equipment
of the Company's Wisconsin facilities 2,455 1,785
Capital leases bearing interest rates ranged from 3.25% to 9.69% per annum
at December 31, 2000 2,915 3,905
Swiss Franc denominated mortgage loans repaid in full in 2000 - 3,940
Bank loan bearing interest at 8.40% per annum, with the final installment
repaid in March 2000 - 148
Term Loan bearing interest at LIBOR plus 1.50% (payable in monthly
installments of $125 beginning February 1997 with a balloon payment of
$10,625 due January 2000) - 4,625
Total 8,998 14,403
Current portion of long-term debt 3,421 2,509
Long-term debt, less current portion $5,577 $11,894
Maturities of long-term debt as at December 31, 2000 are as follows:
Capital
Loans Leases Total
-------------------------------------------
Year ending December 31,
2001 $1,589 $2,010 $3,599
2002 1,550 1,089 2,639
2003 1,550 40 1,590
2004 978 - 978
2005 416 - 416
6,083 3,139 9,222
Interest - (224) (224)
Total $6,083 $2,915 $8,998
In March 2001, the Company entered into an amended financing agreement with
the existing financial institution under which the Company received a Term Loan
of $11,000 (the "Term Loan"), a capital expenditure line of up to $5,000, and a
revolving credit facility (based on the lesser of a percentage of eligible
accounts receivable and inventory or $15,000). Such financing was entered into
in connection with the Company's purchase of certain assets of the North
American operations of Drypers Corporation as discussed in Note 20. The Company
borrowed the full amount of the $11,000 Term Loan, with interest payable at
LIBOR plus 4.25% or prime plus 2.75% per year at the election of the borrower,
and repaid the existing Term Note. The Term Loan is repayable in 60 monthly
installments of principal in the amount of $183 plus interest and is
collateralized by the Company's U.S. subsidiary's assets. In addition, the
Company borrowed approximately $9,100 of the $15,000 revolving credit facility
during March 2001. Among other things, the agreement contains certain
restrictive covenants, including the maintenance of earnings before interest,
taxes, depreciation, and amortization ("EBITDA") and tangible net worth, and
places limitations on acquisitions, dispositions, capital expenditures, and
additional indebtedness.
In addition, in March 2001, the Company borrowed $15,000 under a term loan
(the "$15 million Term Loan") from an overseas financial institution which is
controlled by one of the Company's non-executive directors. The loan bears
annual interest at a rate of 14.5% increasing to 17.5% if any amounts payable
under the loan are not repaid when due. Interest is payable monthly while
principal is due in March 2002. The Company may prepay all or a portion of the
loan after the six-month anniversary of the initial borrowing. The loan is
secured by the Company's ownership interest in its Australian subsidiaries. In
addition, the loan agreement contains certain restrictive covenants, including
minimum tangible net worth and EBITDA of the Australian subsidiaries. The
borrowings were guaranteed by the Company's Chairman and Chief Executive
Officer.
In conjunction with the $15 million Term Loan, the Company committed to
issue share purchase warrants to the lender. The warrants will allow the lender
to purchase Ordinary Shares of the Company at a price of $0.01 per share. The
number of warrants issued will equal 0.75% of the Company's diluted Ordinary
Shares outstanding for each month any portion of the principal balance of the
loan is outstanding. However, in no event will the lender receive warrants which
grant the lender the right to purchase less than 4.5% of the Company's diluted
stock. The fair value of the warrants will be amortized over the term of the
loan as interest expense.
-33-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands)
12. RECEIVABLE FROM SHAREHOLDER
In 2000, 1999 and 1998 the Company advanced $10,744, $1,879, and $3,372,
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 loans
were repayable on demand 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. In January
2000, the Company's U.S. subsidiary borrowed amounts under a term loan facility
which was used to repay the balance of a loan payable by Brandon Wang to a bank,
amounting to $5,250. This amount has been aggregated with the receivable from
Brandon Wang which amounted to $2,811 at December 31, 1999. The resulting note
payable by Brandon Wang is repayable on demand and carries the same interest
terms as those of the existing promissory notes. Brandon Wang is required to
provide collateral of shares of the Company held by him. The fair market value
of such shares must be not less than 125% of the amount due under the notes. At
December 31, 2000 and 1999, the Company has classified the balances owed by
Brandon Wang as a reduction from shareholders' equity. During 2000, 1999 and
1998, Brandon Wang and a trust controlled by him repaid $1,943, $2,540, and
$507, respectively, to the Company. Interest of $470, $243, and $92 was charged
on these advances in 2000, 1999 and 1998, respectively.
13. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease land, facilities and equipment
under operating leases, many
-34-
of which contain renewal options and escalation clauses. Rental expense under
operating leases was $1,650 in 2000, $1,787 in 1999 and $2,365 in 1998.
At December 31, 2000, the Company and its subsidiaries were obligated under
operating leases requiring minimum rentals as follows :
Year ending December 31,
2001 $1,097
2002 545
2003 374
2004 258
2005 241
2006 and thereafter 418
Total $2,933
The Company and its subsidiaries are, from time to time, involved in
routine legal matters incidental to their business. On May 21, 2001, the Company
entered into an agreement with The Proctor & Gamble Company ("P&G") to settle
any potential liability of the Company which may have existed with respect to
any past infringement on P&G patents prior to January 1, 2001 and to agree on
royalty payments relating to sales on certain of the Company's products in the
Asian Pacific and Australian region after December 31, 2000. The agreement
encompasses fixed payments totaling $300 relating to the period prior to January
1, 2001 and payment of royalties based on a percentage of sales of certain
products in the Asian pacific region beginning January 1, 2001. The amount of
$300 relating to periods prior to January 1, 2001 was recorded in the statement
of operations for the year ended December 31, 2000 as a component of selling,
general and administrative expenses. A similar agreement was entered into in
1998 relating to the North American region and resulted in a payment of $900 to
P&G, recorded as a component of selling, general and administrative expenses in
1998, for infringement of patents prior to January 1, 1998, as well as payments
of royalty fees based on a percentage of certain products sold after December
31,1997 within the North American region.
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 attorney's fees. On June 27, 2001, a jury returned a verdict and awarded
$4.0 million in damages and also provided for potential enhanced damages against
the Company of up to an additional $7.0 million. The Company will file post
trial motions to overturn the jury verdict and, if necessary, will appeal the
verdict to the U.S. Court of Appeals for the Federal Circuit. The Company
believes that it is reasonably possible that it will be successful in
overturning the jury verdict. Accordingly, the jury award has not been recorded
in the Company's consolidated financial statements. Unsuccessful resolution of
the above litigation resulting in a significant assessment against the Company
may result in the Company violating certain covenants of its debt agreements.
This would give the lenders the right to demand payment of outstanding amounts
unless the lenders waive their rights under the debt agreements. Demand for
payment by the lenders and the need to pay the award to the plaintiff would
require the Company to secure other financing sources to meet its obligations.
The Company has advised the lenders of the recent jury verdict and its intention
to pursue a post trial motion to overturn the decision and, if necessary, file
an appeal. While the Company believes that it is reasonably possible that it
will be successful in overturning the jury verdict, the outcome of this
litigation is uncertain.
-35-
A claim has been made by Ms. Rhonda Tracy, the owner of U.S. Patent No.
5,797,824 for disposable diapers with a padded waist and leg holes, asserting
that the Company has been manufacturing and/or selling diapers which infringe
her patent. No lawsuit has been filed against the Company to date. The Company,
however, has filed a lawsuit against Ms. Tracy in the U.S. district court for
the Northern District of Georgia for a declaration that her patent is invalid
and/or not infringed. The Company's case is presently stayed pending an action
Ms. Tracy has filed against Jewel Food Stores, Inc., American Stores Company,
WalMart Stores, Inc., Dominick's Finer Foods, Inc., Drypers Corporation,
Kimberly-Clark Corporation and Tyco International, Ltd. in the U.S. district
court in the Northern District of Illinois claiming infringement of her patent.
The Company is unable to determine whether Ms. Tracy will file a lawsuit against
the Company, and if so, the impact of the ultimate outcome of this matter. The
Company denies any liability relating to this matter and intends to pursue its
case against Ms. Tracy and vigorously defend itself if a lawsuit is filed.
-36-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands)
14. NON CASH TRANSACTIONS
Additions to fixtures and equipment during the year ended December 31, 2000
amounting to $303 were financed by new capital leases.
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 2% to 19% of eligible compensation of
employees based on length of service.
Total expense related to the above plans was $1,075 in 2000, $1,081 in 1999
and $1,135 in 1998.
16. SUPPLEMENTARY INFORMATION
Valuation and qualifying accounts:
Balance At Disposal Charged To Balance At
Beginning Of a Cost And End
Of Year Subsidiary Expenses Deductions Of Year
-----------------------------------------------------------------------------
Year ended December 31, 2000
Allowances for doubtful accounts $ 724 $ (41) $ 256 $ (42) $ 897
Provision for inventory obsolescence 376 (76) 457 (267) 490
$1,100 $(117) $ 713 $ (309) $1,387
Year ended December 31, 1999
Allowances for doubtful accounts $ 659 $ - $ 931 $ (866) $ 724
Provision for inventory obsolescence 840 - 569 (1,033) 376
$1,499 $ - $1,500 $(1,899) $1,100
Year ended December 31, 1998
Allowances for doubtful accounts $ 577 $ - $ 379 $ (297) $ 659
Provision for inventory obsolescence 1,228 - 623 (1,011) 840
$1,805 $ - $1,002 $(1,308) $1,499
Deductions relate to write-offs of accounts receivable as bad debts and
disposals of inventories.
-37-
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 and other receivables,
receivable from shareholder, accounts payable, short-term borrowings, 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, 2000 for debt of the same remaining maturities.
18. SEGMENT INFORMATION
The Company is engaged in one industry segment, the manufacturing and
marketing of disposable hygenic products. However, the Company has four
principal geographic segments for operating management purposes. The principal
measures of operating performance are operating income and income before income
taxes.
Certain financial information by geographic area and by products are as
follows:
Year Ended December 31,
2000 1999 1998
------------------------------------------------
Net sales
North America (principally the U.S.) $ 92,229 $ 93,479 $ 89,911
Australia 44,753 42,676 40,487
Asia 60,835 45,715 44,208
Europe 16,844 23,972 33,319
$214,661 $205,842 $207,925
Within this industry segment, the Company derived its revenues from the
following product lines for the years ended December 31, 2000, 1999 and 1998:
Year Ended December 31,
2000 1999 1998
------------------------------------------------
Products
Disposable baby diapers $160,417 $147,615 $154,485
Adult incontinence products 44,230 42,784 34,066
Training pants, youth pants and sanitary napkins 10,014 15,443 19,374
Total net sales $214,661 $205,842 $207,925
Intersegment sales were not significant.
Operating income (loss)
North America (principally the U.S.) $ 5,301 $ 5,001 $ 1,155
Australia 3,919 4,823 4,946
Asia 4,609 3,839 2,842
Europe (2,371) (1,667) (2,903)
Corporate expenses (4,983) (4,562) (2,285)
$ 6,475 $ 7,434 $ 3,755
Year Ended December 31,
2000 1999 1998
----------------------------------------------------
Income before income taxes
North America (principally the U.S.) $ 2,722 $ 1,695 $(1,651)
Australia 1,954 2,743 2,659
Asia 2,592 3,352 2,675
Europe (2,497) (2,747) (3,289)
Corporate (110) 500 1,484
$ 4,661 $ 5,543 $ 1,878
The gain on disposal of subsidiaries was recorded as a component of
corporate expenses in the tables above. The 1998 income before income taxes for
North America included the restructuring costs of the operation during the year.
Year Ended December 31,
2000 1999 1998
------------------------------------------------
Interest expenses
North America (principally the U.S.) $ 882 $1,510 $1,586
Australia 123 126 145
Asia 285 160 150
Europe 145 190 344
Corporate 159 222 286
$1,594 $2,208 $2,511
Year Ended December 31,
2000 1999 1998
------------------------------------------------
Interest income
North America (principally the U.S.) $ 204 $ 397 $ 523
Australia 53 41 42
Asia 34 41 54
Europe 63 44 92
Corporate 514 269 79
$ 868 $ 792 $ 790
Year Ended December 31,
2000 1999 1998
------------------------------------------------
Assets, at end of year
North America (principally the U.S.) $ 46,599 $ 44,479 $ 53,799
Australia 19,359 19,725 20,192
Asia 39,194 35,903 32,067
Europe 2,876 13,123 19,373
Corporate assets 3,381 7,715 8,478
$111,409 $120,945 $133,909
Year Ended December 31,
2000 1999 1998
------------------------------------------------
Expenditures for property, plant and equipment
North America (principally the U.S.) $2,645 $2,443 $2,841
Australia 1,497 728 741
Asia 1,528 2,407 1,926
Europe 197 517 936
Corporate assets 80 2 -
$5,947 $6,097 $6,444
Year Ended December 31,
2000 1999 1998
------------------------------------------------
Depreciation and amortization
North America (principally the U.S.) $3,875 $3,218 $ 3,876
Australia 1,642 1,899 1,912
Asia 2,901 2,418 2,049
Europe 978 2,061 3,470
Corporate assets 68 66 77
$9,464 $9,662 $11,384
Year Ended December 31,
2000 1999 1998
------------------------------------------------
Property, end of year
North America (principally the U.S.) $19,431 $21,671 $21,994
Australia 6,586 7,840 8,627
Asia 9,776 11,945 12,945
Europe 166 6,061 10,975
Corporate assets 522 464 475
$36,481 $47,981 $55,016
No single customer accounted for 10% or more of the total revenues.
-38-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands except per share amounts)
No single customer accounted for 10% or more of the total revenues.
19. QUARTERLY DATA (UNAUDITED)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-----------------------------------------------------------------------
2000
Net sales $55,868 $51,270 $54,191 $ 53,332
Gross profit 18,635 16,451 17,723 16,320
Net income (loss) 1,603 700 831 (171)(1)
Earnings (loss) per share 0.24 0.10 0.12 (0.02)
1999
Net sales $53,591 $48,732 $50,282 $ 53,237
Gross profit 17,273 15,784 16,904 17,761
Net income 1,556 316 747 1,816
Earnings per share 0.23 0.05 0.11 0.27
1998
Net sales $52,705 $49,601 $48,895 $ 56,724
Gross profit 14,279 14,064 13,550 18,035
Net (loss) income (1,081) (786) (347) 3,836 (2)
(Loss) earnings per share (0.16) (0.12) (0.05) 0.57
(1) Include $300 charge relating to an agreement with P&G (see Note 13).
(2) The 4th Quarter 1998 results include a reversal of $1,500 of estimated
executive compensation previously accrued rateably over the first three
quarters of 1998.
20. BUSINESS ACQUISITION
In March 2001, the Company acquired the North American assets of Drypers
Corporation pursuant to the order of the U.S. Bankruptcy Court based in Houston,
Texas for a consideration of $38.5 million. The assets are located in Marion,
Ohio; Vancouver, Washington and Houston, Texas and relate to the manufacture and
sale of disposable baby diapers. The acquisition was accounted for using the
purchase method. Historical annual gross sales relating to the assets purchased
was $208,000 for the year ended December 31, 2000. The acquisition was financed
by existing cash balances of the Company, proceeds from term loans
-39-
and revolving credit line (see Note 11).
-40-
SHAREHOLDER INFORMATION
Annual Meeting
The next annual meeting of shareholders will be held in Kuala Lumpur, Malaysia
on October 17, 2001 at 10:00 a.m. local time. Notice of the meeting and proxy
statement will be mailed to shareholders before the meeting.
Market Information
The Company's shares are traded on the NASDAQ National Market System under the
Symbol DSGIF.
Stock Transfer Agent
Mellon Investor Services, LLC
P.O. Box 3315
South Hackensack
New Jersey 07660
U.S.A.
Tel. : (1) 800-356 2017
website : www.chasemellon.com
Independent Auditors
Deloitte Touche Tohmatsu
26th Floor, Wing On Centre
111, Connaught Road, Central
Hong Kong
Principal Executive Office
DSG International Limited
17th Floor, Watson Centre
16-22 Kung Yip Street
Kwai Chung
Hong Kong
Tel: (852) 2484-4820
Form 20-F
The Company's 2000 report to the Securities and Exchange Commission on Form 20-F
provides additional details about the Company's business as well as other
financial information not included in this annual report. A copy of this report
is available to shareholders upon written request to the Company's Principal
Executive Office.
-41-
DSG COMPANIES
Asia Australia
Disposable Soft Goods Limited DSG Pty Limited
17/F Watson Centre (trading as Australian Pacific Paper Products)
16-22 Kung Yip Street 3 Lake Drive
Kwai Chung, N T Dingley
Hong Kong Victoria 3172
Telephone : (852) 2427 6951 Australia
Facsimile : (852) 2480 4491 Telephone : (61) 3-9552 1222
Facsimile : (61) 3-9558 1056
Disposable Soft Goods (S) Pte Limited
No. 1, Joo Koon Crescent North America
4th Floor, Yeow Heng Industrial Building
Singapore 629087 Associated Hygienic Products LLC
Telephone : (65) 861 9155 4455 River Green Parkway
Facsimile : (65) 861 9313 Duluth, GA 30096
U.S.A.
Disposable Soft Goods (Zhongshan) Limited Telephone : (1) 770-497 9800
Jin Chang Road Facsimile : (1) 770-623 8887
Jin Sha Industrial Zone
Shalang, Zhongshan, Guangdong Associated Hygienic Products Inc.
People's Republic of China 205 E. Highland Drive
Postal Code : 528411 Oconto Falls, WI 54154
Telephone : (86) 760-855 9866 U.S.A.
Facsimile : (86) 760-855 8794 Telephone : (1) 920-846 8444
Facsimile : (1) 920-846 3026
DSG International (Thailand) Limited
835 Moo 4 Prakasa Europe
Muang
Samutprakarn 10280 Disposable Soft Goods (UK) Plc
Thailand Boythorpe Works
Telephone : (66) 2-709 4153 Derbyshire
Facsimile : (66) 2-709 3884 Chesterfield, S40 2PH
U.K.
PT DSG Surya Mas Indonesia Telephone : (44) 1246-221 228
Jl. Pancatama Raya Kav. 18 Facsimile : (44) 1246-274 773
Desa Leuwilimus, Cikande
Serang, Jawa Barat
Indonesia
Telephone : (62) 254-400 934
Facsimile : (62) 254-400 939
Disposable Soft Goods (Malaysia) Sdn Bhd
No. 9, Jalan U1/19, Section U1
Hicom Glenmarie Industrial Park
40150 Shah Alam, Selangor
Malaysia
Telephone : (60) 3-519 4282
Facsimile : (60) 3-519 4286
-42-
DSG International Limited
Principal Executive Office
17/F Watson Centre
16-22 Kung Yip Street
Kwai Chung, N T
Hong Kong
Telephone : (852) 2484 4820
Facsimile : (852) 2480 4491
-43-
SCHEDULE 1
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31,
2000 1999 1998
------ ------ -------
(in thousands)
Equity in earnings of subsidiaries...................... $3,936 $5,049 $(1,201)
Operating expenses:
Administration......................................... 2,959 2,785 563
Selling................................................ 300 - -
Depreciation........................................... 25 23 20
Total operating expenses................................ 3,284 2,808 583
Operating income (loss)................................. 652 2,241 (1,784)
Interest expense........................................ (159) (223) (286)
Exchange loss........................................... (524) (861) (430)
Interest income......................................... 3,821 3,721 3,841
Other finance expenses ................................. - (2) (56)
Other income............................................ 730 546 590
Income before income taxes.............................. 4,520 5,422 1,875
Provision for income taxes.............................. 1,557 987 253
Net income.............................................. $2,963 $4,435 $ 1,622
See note to Schedule 1
-1-
SCHEDULE 1
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED BALANCE SHEETS
Year ended December 31,
2000 1999
------- -------
(in thousands)
ASSETS
Current assets:
Cash.............................................................. $ 4,667 $ 5,260
Other receivables................................................. 796 177
Prepaid expenses and others....................................... 7 27
Total current assets................................................ 5,470 5,464
Equipment:
Machinery and equipment........................................... 2 -
Furniture......................................................... 216 216
Motor vehicles.................................................... 139 62
Total............................................................ 357 278
Less: accumulated depreciation ................................. 156 132
Net property....................................................... 201 146
Investment in subsidiaries (on the equity method).................. 62,942 65,144
Total assets....................................................... $68,613 $70,754
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings........................................... $ - $ 148
Accounts payable................................................ 234 7
Accrued payroll and employee benefits .......................... 50 255
Accrued expenses................................................ 449 41
Income taxes payable............................................ 54 1
Total current liabilities......................................... 787 452
Shareholders' equity:
Ordinary shares................................................. 67 67
Additional paid-in capital...................................... 18,301 18,301
Retained earnings............................................... 65,664 62,701
Translation reserve............................................. (8,973) (7,956)
Less: net receivable from shareholder.......................... (7,233) (2,811)
Total shareholders' equity........................................ 67,826 70,302
Total liabilities and shareholders' equity........................ $68,613 $70,754
See note to Schedule 1
-2-
SCHEDULE 1
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
2000 1999 1998
-------- ------- -------
(in thousands)
Cash flows from operating activities
Net cash provided by operating activities............... $ 2,723 $ 4,734 $ 1,392
Cash flows from investing activities....................
Expenditures for equipment.............................. (79) - -
Investments in and advances to subsidiaries............. (5,883) (5,713) (1,221)
Recoupment of investment in subsidiaries................ 7,068 3,844 3,882
Advances to shareholder................................. (8,837) (1,879) (3,372)
Repayments by shareholder............................... 4,415 2,540 507
Net cash used in investing activities................... (3,316) (1,208) (204)
Cash flows from financing activities
(Decrease)/increase in cash and cash equivalents........ (593) 3,526 1,188
Cash and cash equivalents, beginning of year............ 5,260 1,734 546
Cash and cash equivalents, end of year.................. $ 4,667 $ 5,260 $ 1,734
Cash dividends from:
Consolidated subsidiaries............................ $ 4,818 $ 1,329 $ 754
See note to Schedule 1
-3-
DSG INTERNATIONAL LIMITED
NOTE 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.
-4-
Exhibits
Exhibit Description
- ------- -----------
Exhibit 10.C.1 Sale and Purchase Agreement dated October 20, 2000 between
DSG TEK Limited and IVF Hartman AG
Exhibit 10.C.2 Loan and Security Agreement dated March 14, 2001 between
Associated Hygienic Products LLC and Foothill Capital
Corporation
Exhibit 10.C.3 Short Term Financing Agreement dated March 14, 2001 between
DSG International Limited and Breakers Investment Holding
Limited
Exhibit 10.C.4 Sale and Purchase Agreement dated February 20, 2001 between
Associated Hygienic Products LLC and Drypers Corporation
Exhibit 11 Computation of Net Income Per Ordinary Share