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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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .
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Commission file number 33-45136
DSG INTERNATIONAL LIMITED
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(Exact name of Registrant as specified in its charter)
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(Translation of Registrant's name into English)
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British Virgin Islands
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(Jurisdiction of incorporation or organization)
17/F Watson Centre, 16-22 Kung Yip Street, Kwai Chung
Hong Kong
Tel. No. 852-2484-4820
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(Address of principal executive office)
Securities registered or to be registered pur
suant to Section 12(b) of the Act.
Title of each Name of each exchange
Class on which registered
None
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
Ordinary Shares, par value
$0.01 per share ("Ordinary Shares")
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(Title of Class)
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's
classes of
capital or common stock as of the close of the period covered by the annual
report.
Ordinary Shares 6,674,606
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [_] No
Indicate by check mark which financial statement item the registrant has
elected to follow.
[_] Item 17 [X] Item 18
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1
934 subsequent to the distribution of securities under a plan
confirmed by a court.
[_] Yes [_] No
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Item 1. Description of Business.
A. The Company
DSG International Limited, established in Hong Kong in 1973, is one of the
world leading companies specialized in manufacturing disposable baby diapers,
adult incontinence, feminine hygiene and training pants products with over
twenty-five years of experience in this industry. The Company now operates ten
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
was able to move its "FITTI(R)" brand into U.S. national distribution.
In 1988, the Company acquired all the assets of an unprofitable private
label manufacturer of disposable baby diaper manufacturer in Australia. Also in
1988, the Company acquired the assets, including brand names, of the
unprofitable disposable baby diaper manufacturing division of a major U.K.
consumer products company.
In September 1991, the Company opened a new manufacturing facility in
Singapore to relieve capacity constraints at its Hong Kong facility and to
better service South East Asian markets.
On March 6, 1992, the Company commenced the initial public offering in the
United States of its Ordinary Shares.
In July 1993, the Company acquired all the assets of a private label
disposable baby diaper and feminine napkin manufacturing division of a Swiss
company. In September 1993, the Company acquired an unprofitable private label
disposable baby diaper and feminine napkin manufacturing company in Canada. At
the end of December 1993, the Company further acquired an unprofitable branded
product disposable baby diaper manufacturer in the United Kingdom. The Company
moved its manufacturing plant in Norcross, Georgia to Duluth, Georgia, where the
Company further expanded its production capacity in the U.S.
In May 1994, the Company formed a joint venture company with its former
distributor in Thailand. 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
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
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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 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.
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.
B. Business
1. General
The Company manufactures and markets disposable baby diapers, training
pants and adult incontinence products primarily under its own brand names, which
include "FITTI(R)", "PET PET(R)", "COSIES(R)", "COSIFITS(R)", "BABY LOVE(R)",
"TOGS(R)", "CARES(R)", "VLESI(R)", "DISPO 123(TM)",
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"CERTAINTY(R)", "HANDY(TM)" and "MERIT(R)". The Company also manufactures and
markets disposable baby diapers, adult incontinence, training pants and feminine
napkins products under private labels. The Company's products are sold
internationally, with its ten manufacturing facilities being in Hong Kong, the
United States, Australia, the United Kingdom, Switzerland, the People's Republic
of China ("PRC"), Thailand and Indonesia. The Company's manufacturing operations
in Singapore and California were closed in December 1997 and the operation in
Canada was closed in March 1998.
The Company's operation in Duluth, Georgia, the Company's largest
operation, in association with the Company's operation in Wisconsin,
manufactures and distributes branded and pr
ivate label disposable baby diapers,
adult incontinence, training pants and feminine napkins products for the North
American market. With sales in 48 states, the Company's "FITTI(R)" brand is one
of the best selling brands of disposable baby diapers in the United States
(excluding retailers' private labels). The Company estimated that its
"FITTI(R)" brand has approximately 2% market share on a volume basis in the food
and grocery store sector.
In Australia, the Company is the second largest manufacturer of disposable
baby diapers. It estimates that it has an overall unit volume market share of
approximately 22%. The Australian market is divided 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. The Company also markets disposable baby diapers under retail chain
private labels, which accounted for approximately 17% of its Australian sales in
1998. 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. Adult incontinence sales grew by 53.2% in 1998 compared
with 1997.
In most Asian countries, the Company's leading brands, "FITTI(R)" and "PET
PET(R)", are well established. In Hong Kong, although the disposable diaper
market had contracted due to lower birth rates, the Company maintains its second
place position in the market and estimates that its share is over 20%. Despite
the stagnant retail trade in the PRC, the Company maintains a strong position in
the market. The Company estimates that it is the market leader in the Guangdong
province, and its market share in the PRC is around 20%. In 1998, the Company
established a sales operation in Beijing to directly service the Beijing and
Tianjin markets and to expand sales and distribution to the northern markets,
such as Shandong and Liaoning provinces. The Company plans to set up sales
opera
tions in other potential markets in the PRC, particularly in the eastern
provinces where there is an accelerating demand for disposable baby diapers.
The Company's unit sales in Malaysia grew strongly in 1998 with the re-
introduction of an economy brand, and the Company believes that its sales will
continue to grow with the recovery of the economy. In Indonesia, the market was
badly hit by both the financial turmoil and political instability. Although the
Company's sales were adversely impacted, the Company estimates it maintains a
30% share of the market. In Thailand, the Company maintained its share of
disposable diaper market despite the economic downturn.
The Company manufactures and distributes adult incontinence products through
its operation in Thailand to all other markets in Asia under its "DISPO 123(TM)"
and "HANDY(TM)" brands. The Company believes that it is one of the market
leaders in the adult incontinence market in Thailand. In other Asian markets,
such as Hong Kong and Singapore
, the Company has recorded encouraging growth in
1998. The sales of adult incontinence products increased steadily over the
years and the Company's brands are well established both in the retail and
institutional sectors in the markets of the Asia Pacific region. Although
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in 1998 the Company was impacted by the unprecedented financial turmoil in the
region since the second half of 1997, the Company remains optimistic about the
market growth potential in the Asia Pacific region.
In the United Kingdom, the Company continues to market its branded products
to wholesalers and grocery retail accounts. On a selective basis, the Company
also manufactures private label disposable diapers which provide the Company
with reasonable profit margins. In Switzerland, the Company's operation near
Zurich manufactures primarily private label disposable baby diapers and feminine
napkins for a major retail group. The Company also manufactures and distributes
its "FITTI(R)" brand products for Switzerland and other European markets but t
he
expected growth is limited by other highly advertised international brands. The
Company's operation in the Eastern region of Switzerland manufactures and
distributes its branded "VLESI(R)" and other private label adult incontinence
products for the domestic market in Switzerland and for other European markets.
The Company increased its selling and distribution activities into the U.K. and
German markets. The Company believes that by focusing in adult incontinence
market, it will make further inroads in the continental Europe market.
The Company's marketing strategy is to provide retailers and wholesalers
with a quality, value-oriented product which offers good profit margins,
combined with a high level of service, rather than attempting to mass market its
products in competition with the industry leaders. The Company believes that
its attention to raw material costs and manufacturing efficiency, combined with
careful control of advertising and promotional costs, enables it to produce and
mark
et 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 unprofitable disposable
baby diapers, feminine napkins manufacturers and more recently by acquiring
adult incontinence manufacturers in the United States, Australia, the United
Kingdom, Canada and Switzerland. The Company will expand through acquisitions
when opportunities arise and establish its own manufacturing facilities in
emerging markets which offer significant growth potential, such as the Company's
facilities in the PRC, Th
ailand and Indonesia, which were opened in 1994, 1995
and 1998, respectively, together with the upcoming facility in Malaysia
commencing in 1999.
The Company's principal raw materials are fluff wood pulp and super
absorbent polymer. Other raw materials include polyethylene backsheets,
polypropylene non-woven liners, adhesive tapes, hot melt adhesive, elastic and
tissue. The cost of materials increased moderately in 1998 and also in 1999.
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 w
hich is in contact with the baby's skin into a highly
absorbent inner core, from which the moisture is prevented from escaping by an
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outer moisture-proof backsheet. There are significant differences in quality
among the various disposable diapers currently on the market. The most
important quality features of disposable diapers are their ability to absorb and
retain fluids, to prevent leakage through leg and waist openings by the use of
elasticized bands, and to be easily fitted and held in place by adhesive tapes
which secure the diaper firmly without causing discomfort to the baby. Broadly,
disposable diapers are divided into two types: thicker "regular" diapers which
use primarily fluff wood pulp as the absorption medium; and thinner "ultra"
diapers which use less fluff wood pulp and employ a super absorbent polymer in
the absorbent core. Other features, such as innovative fasten
ings, attractive
designs, extra-dry sub-layer, gender specific absorbent cores, stand-up leg
gathers, elastic waistband and packaging help to differentiate products from one
another.
The most important quality features of feminine napkins are their ability
to fit and their ultra ability of absorbing and retaining fluid. The Company's
feminine napkin manufacturing equipment is able to provide quality features and
to tailor customers' product specifications.
Adult incontinence products are designed for the convenience of males and
females having various degrees of incontinence. The basic concept of most adult
incontinence products is to prevent leakage of urine and faeces by absorbing the
moisture into a highly absorbent inner core and retaining the soiled contents
within an outer moisture proof backsheet. Similar to disposable diapers, the
most important quality features of adult incontinence products are their ability
to absorb and retain fluids, to prevent leakage through leg and waist op
enings
by the use of elasticized bands, and to be easily fitted and held in place by
adhesive tapes which secure firmly without causing discomfort to the user. The
absorption media for adult incontinence products are fluff wood pulp and super
absorbent polymer. Other features, such as wetness indicator, stand-up leg
gathers, elastic waistband, frontal tape closure system and packaging help to
differentiate products from one another.
The Company believes that there is significant potential for adult
incontinence products due to the aging populations of the industrialized and
developed countries. The Company has entered the adult incontinence market, and
has established and acquired manufacturing facilities in Thailand, Switzerland
and Wisconsin in the United States. The Company believes that with its three
strategically located manufacturing facilities, the Company is able to expand
its sales of adult incontinence products in the markets in North America, Europe
and Asia. The Company introduces
adult incontinence products into its markets
in a manner consistent with its niche market strategy. The Company believes
that the key to successful marketing of this type of product is the high and
prompt level of service from the manufacturer and distributor, regular contact
with institutions to ensure proper usage of the products, and providing a range
of products of high quality and performance.
Forward Looking Statements
The Company expects that the impact of currency turmoil in the Asian region
will diminish and stabilize in 1999. The intense price and promotional
competition in North America will continue in 1999. The market environment in
Europe will continue to be difficult. The Company will dispose of its private
label baby diaper and feminine napkin manufacturing facilities in Switzerland in
the first quarter of 1999. The manufacturing plant in Malaysia will commence
operation in the third quarter of 1999. The Company is planning to increase its
adult incontinence products sales i
n the North American, Australian, Asian and
European markets.
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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
Management's Discussion and Analysis of Financial Condition and Results of
Operations and as part of other sections of this Annual Report on Form 20-F and
the Company's other filings with the Securities and Exchange Commission under
the Securities Exchange Act of 1934.
Such forward looking stateme
nts are subject to certain risks, uncertainties
and assumptions, including without limitation to those identified below. Should
one or more of these risks or uncertainties materialize, or should any of the
underlying assumptions prove incorrect, actual results of current and future
operations may vary materially from those anticipated, estimated or projected.
Readers are cautioned not to place undue reliance on these forward looking
statements, which speak only as of their respective dates.
Risk Factors
The Company's forward looking statements are based on the Company's
assumptions regarding the economies and market conditions in the countries in
which it operates, and certain assumptions regarding the price of raw materials,
including fluff wood pulp and super absorbent polymer.
Among the factors that have a direct bearing on the Company's results of
operations and financial condition are leverage and debt service, competitive
industry, price changes by competitors, dependence on key produ
cts and
acceptance of product innovations, cost of certain raw materials, international
operations, currency fluctuations, currency devaluations, currency restrictions,
intellectual property risks, technological changes, covenant limitations and
other factors discussed herein.
If the Company's actual performance differs materially from its projections
which are based on assumptions regarding the economies and market conditions in
the countries in which it operates, the Company's actual results could vary
significantly from the performance projected in the forward looking statements.
2. Geographic Segment Information
The following table sets forth the percentage of the Company's net sales
and operating income (loss) by geographic market.
<TABLE>
<CAPTION>
1998 1997 1996
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<S>
<C> <C> <C>
Net sales
North America............................................................... 43.2% 39.4% 39.2%
Australia................................................................... 19.5 20.4 20.2
Asia........................................................................ 21.3 24.7 25.6
Europe...................................................................... 16.0 15.5 15.0
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100.0% 100.0% 100.0%
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Operating income (loss)
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<TABLE>
<S> <C> <C> <C>
North America.................................................................... 30.8% (15.3)% 65.9%
Australia........................................................................ 131.7 165.6 32.6
Asia............................................................................. 75.7 173.3 42.7
Europe........................................................................... (77.3) (72.2) 0.2
Corporate expenses............................................................... (60.9) (151.4) (41.4)
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100.0% 100.0% 100.0%
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</TABLE>
a. North America
i. Products
The Company manufactures and distributes disposable baby diapers,
disposable training and youth pants, adult incontinence and feminine protection
products throughout North America under the brand names of "FITTI(R)" and
"CERTAINTY(R)", as well as a growing number of different private label brands.
The "FITTI(R)" baby diaper brand is a full-featured product, recognized for its
unique wetness indicator, a cute print that fades away when the diaper becomes
wet. The "FITTI(R)" brand name is also used with the Company's disposable
training pants and the new DRI-NITE JUNIOR youth pants. These pant products
feature cloth-like covers, tear-away side panels, and comfortable waist a
nd hip
elastic. Another product in the "FITTI(R)" line-up is Insert Shields, a product
designed to be used as a diaper insert or a disposable pad for light
incontinence.
The Company is the first to offer a Super Toddler or XXL size baby
diaper that is marketed under various private labels. The Company has also
launched economical "jumbo" and "mega" pack diapers into the marketplace under
the "FITTI(R)" brand. These are well accepted by retailers and consumers.
The Company continues to expand its private label diaper business
throughout North America with such customers like Walgreens Drugs, Harris-
Teeter, A&P, Topco, Shurfine International, Hannaford Bros., Sav-A-Lot,
Pathmark, Rite-Aid and McLane (a division of Wal-Mart). The Company is one of
the two full line manufacturers capable of producing and marketing a full range
of disposable baby diapers as well as training pants, youth pants and diaper
inserts. This advantage will enhance the Company's sales and private label
partne
rship opportunities.
The Company launched its adult incontinence products since late 1996.
The Company's primary focus is once again the development of private labels
partnerships with retailers and institutions such as Walgreens, Medlines, Rite-
Aid, Pathmark, Target Stores and others. The Company's products are also
available under the "CERTAINTY(R)" brand name. The Company offers a full range
of products including briefs, feminine bladder control pads, and feminine
control bladder guards. All of these products provide the incontinent sufferer
with product features and performance that the Company believes are superior
than most of the other brands in North America. The Company's other new
products are on the horizon, assuring the Company's position as the primary
provider of full range of value priced "premium" products. The Company's adult
incontinence product line represents an ideal opportunity to expand sales and
distribution in this fast growing category, while providing better ma
rgin
relative to disposable baby diapers. In all cases, the Company is offering
products with genuine points of difference and exclusive benefits, features that
have helped enhance acceptance of these new programs.
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ii. Sales and Marketing
Disposable baby diapers are believed to account for more than 90% of
the baby diaper changes in North America. The market can be divided into
several segments: brands that are advertised and sold nationally; brands that
are not widely advertised but are sold nationally; brands sold only in specific
regional areas; and baby diapers sold under the private labels of retailers.
The nationally advertised brands account for roughly 75% of all sales. The
Company maintains a solid distribution base on its "FITTI(R)" brand, with new
retail customers coming on board from time to time. The Company's "FITTI(R)"
disposable training pants have enjoyed a steady volume growth since it was
repositioned in 1996 with better feature
s for the consumer at no additional
cost. The Company's new "FITTI(R)" DRI-NITE JUNIOR youth pant is gaining
distribution as it is the only value alternative for the consumer to Kimberly-
Clark's Goodnites.
The Company has consolidated its manufacturing and distribution
operations into two facilities to efficiently serve all North American markets.
Facilities are located in Oconto Falls, Wisconsin, and Duluth, Georgia. The
Company commissions a national network of independent brokers to sell directly
to retailers and distributors/wholesalers. These brokers, 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
merchandising activities. The Company's direct sales management team is
responsible for the Company's marketing and sales development functions. The
Company remains committed to its marketing philosophy of direct servicing of its
customers and accounts by the sales manag
ement personnel. This allows the
Company to provide a high degree of category expertise and education to the
trade, 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 average shipping transit time of one to two days
for most North American destinations.
Branded Products. Due to the intense price and promotional pressure
along with the declining birth rate in the U.S. market, the unit volume of
"FITTI(R)" slightly declined from the 1997 levels. At the end of 1998, market
share of "FITTI(R)" was 2% of the total units of disposable baby diapers and
training pants sold in grocery outlets within the United States. The grocery
store sector represents approximately 49% of the $3.6 billion United States
retail market. In certain markets, such as that of the New York metropolitan
area, the nation's largest market, the Company believes that "FITTI(R)" brand is
much greater
than conventional market share data would indicate. This is
because a higher percentage of "FITTI(R)" diapers are sold through wholesalers
and inner city outlets that typical market research reports do not cover. The
Company concentrates its efforts and marketing activities on providing
wholesalers and retailers with above average profit margins through the use of
packaging with greater shelf impact, creative and effective promotions combined
with very efficient distribution, electronic data interchange capability and a
high level of customer service. In 1998, the Company adopted the "EVERY DAY LOW
PRICE" pricing strategy on its "FITTI(R)" products offering the consumers with
"the best product for price" all the time. The Company provides consumers with
quality products at affordable price, unique product features and of good value
for money. The Company has grown its business with a concentrated effort within
the primary diaper selling class of the trade: grocery. The Company enjoys good
retail di
stribution of its "FITTI(R)" brand and has built up excellent working
relationships with major national and regional grocery retailers such as Kroger,
Pathmark, Shop Rite, A&P, Super Value and Fleming. The Company continues to
target the non-food class of trade as a major area of opportunity for growth in
the future. Current non-food retail partners include Ames, Shopko, Kmart/Canada
and Meijer. The Company
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continues to benefit from its marketing "firsts" to the market, bringing greater
consumer value to new category of the disposable baby products. Among these
"firsts" are disposable youth pants under the "FITTI(R)" DRI-NITE JUNIOR name
and a new Super Toddler (XXL) size baby diaper, marketed under assorted private
label banners.
The Company launched the adult incontinence products in 1996.
"CERTAINTY(R)" is the brand under which the Company markets its adult
incontinence products. However, the Company believes the private label share of
the category sales is more than 25% and it is the sector of adult incontinence
where the growth rate is more dramatic. 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. Besides, the Company
already has new products on hand in the development stage. The Company is
currently selling adult incontinence products to Walgreens, Rite-Aid, Thrifty-
Payless and Longs Drug Stores with many new programs, retail and institutional
partnership up and coming. The drug store trade now represents more than 50% of
the total $500 million in adult incontinence retail sales in the United States.
The Company's disposable baby diaper distribution network provides a good
foundation for the Company to grow in the category sales. In addition, growth
potential for this category remains high as the population ages.
Institution Volume and Activity. The institutional business provides
adult incontinence products to medical care facilities such as hospitals and
nursing homes. It is worth noting that the institutional market still
represents more than 60% of the total adult incontinence volume in North A
merica
or more than $700 million in sales. This adult category represents an area of
significant sales and distribution growth for the Company, and significant gains
had been captured in 1998.
Private Label. This segment of the Company's business is the major
area of potential growth. On the disposable baby diaper side, new partnerships
are underway with such major retailers as A&P stores, Rich Foods and Save-A-Lot
stores. Existing private label partnerships with major retailers like Walgreens
Drug, Shurfine International, Uniprix, Topco and A&P continue to grow. The
Company will look to the private label arena as a major area of growth for all
of its product categories, including disposable baby diapers, training pants and
adult incontinence products. The Company recognizes that the private label
segment of these businesses remains somewhat more insulated than that of typical
"value brands" from the aggressive pricing/promotional strategies of the
advertised brands, due to the "protecti
ve" posture that major retailers tend to
take when it comes to supporting their own brands. The Company is one of the
few manufacturers capable of supplying a full range of quality products (ultra-
thin diapers, training pants, youth pants etc.) and has a proven track record
for product quality, category expertise and customer service.
b. Australia
i. Products
In Australia, the Company manufactures and markets disposable baby
diapers under four core proprietary brand names and a number of retail chain
private label brands. The Company's proprietary diaper brands accounted for 80%
of its Australian diaper sales in 1998. Two of these proprietary brands are
targeted at the grocery and variety sectors, while the other two are exclusively
to the pharmacy sector. The two brands targeting the grocery and variety
sectors are "BABY LOVE(R)", which is a value priced,
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premium quality feature driven ultra diaper, while "LULLABY(R)", is an economy
price driven basic feature ultra diaper. The two "pharmacy only" brands are
"COSIES(R)", which has a similar marketing strategy to "BABY LOVE(R)" and
"COSIFITS(R)", which has a similar marketing strategy to "LULLABY(R)". In
addition to its four core proprietary brands, the Company continues to hold a
leading position in the private label sector producing corporate brands for a
number of major grocery and variety sector retailers. The Company 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 1998.
ii. Sales an
d Marketing
The Australian retail market for disposable baby diapers has grown
from approximately $65 million in 1988, when the Company first entered the
market, to approximately $199 million for the twelve months ended December
1998.(1) The total unit sales value in the combined grocery and pharmacy
sectors increased by 0.6%, from $198.0 million in 1997 to $199.2 million in
1998. Slow growth in the grocery sector and strong growth in the variety sector
of the category balanced a reduction in pharmacy sector sales. The Company
estimates that market utilization for disposable baby diapers, which is
currently below 65%, will slowly increase to be closer to the level of other
industrialized Western countries of over 85%. Branded products comprise
approximately 85% of the Australian market, with the remaining 15% made up of
private label products. The Company is currently the second largest
manufacturer in Australia, with approximately 22% unit volume share of the
disposable baby diaper marke
t. A major U.S.A. multi-national manufacturer is
the market leader with approximately 65% of the market.
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 1998. 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 retail profit margins
for the 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 1998, the pharmacy sector accounted for
estimated 15% of all disposable baby diaper sales in Australia, which is down
from 17% in 1997. This sector is highly fragmented and consists of a large
number of small and independent pharmacies that have restricted retail space,
offer a limited
(1) Source : AC Nielsen, January 1998.
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<PAGE>
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 promotes the Company's products. Th
e
major national marketing groups include Amcal, Guardian, ChemMart, ChemWorld,
Health Sense, among others.
Private Label. Private label products accounted for an estimated 15%
of the total Australian market for disposable baby diapers in 1998. The Company
estimates it has a 35% share of the total private label market in Australia.
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
secto
r 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 brands are "FITTI(R)" and "PET PET(R)", which
accounted for approximately 77% of the Company's net sales in Asia. The Company
has introduced several economic brands during the year and also manufactures
private labels on a selective basis only. The "FITTI(R) product is an "ultra"
diaper featuring multi-strand leg elastics, an extra-dry sub-layer, elastic
waistband, printed frontal tape closure system, stand-
up leg gathers and wetness
indicator. "PET PET(R)" is a basic "ultra" diaper featuring multi-strand leg
elastics, elastic waistband, frontal tape and wetness indicator. 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 manufactures and distributes adult incontinence products
under its own brands "DISPO 123(TM)" and "HANDY(TM)". The Company also
manufactures adult incontinence 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)" has similar
features as "DISPO 123(TM)" except for the stand-up leg gathers.
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<PAGE>
ii. Sales and Marketing
The Company continues to command strong market positions in both the
mature markets of Hong Kong and Singapore. The Company's early entries into
most of the markets in the Asian region have established invaluable brand image
and strong positions for the Company's products. The Company expands sales in
the PRC, Thailand and Malaysia by capitalizing on the increasing usage of
disposable baby diapers that are well supported by strategic pricing and wisely
designed advertising and promotional activities. Despite the currency turmoil
in some Asian countries in the latter part of 1997 and in 1998, the Company
still believes that Asian region has higher growth potential than in other
regions and will continue to focus o
n the other potential and opportunities of
emerging markets in the region. The Company also sells its products in India
and, to a lesser extent, Brunei, Vietnam and Japan.
The volume of disposable baby diaper usage varies significantly in
different markets, depending to a large extent on the level of per capita
disposable incomes. The disposable baby diaper usage is relatively high in Hong
Kong and Singapore. Although these two mature markets have stagnant growth in
recent years, the Company has been able to pursue strategies to stabilize its
market share in these markets. The disposable baby diaper usage is relatively
low in Malaysia, the PRC, Thailand and Indonesia, but the Company believes that
the usage will increase as income levels in these countries continue to
increase.
In Asia, the Company has identified Malaysia, the PRC, Thailand and
Indonesia as the markets that are most likely to expand in late 1990s. The
Company's strategy is to offer a premium product for its own
brands, to price
below major U.S. and Japanese brands, and to ensure flexibility in product
features, packaging and marketing functions to satisfy the ever-changing needs
and trends of the different markets in Asia.
In Hong Kong, the Company has its own sales force and its products are
sold in all major pharmacy outlets and department stores which account for over
70% of all disposable baby diaper sales, and in major retail supermarket chains
such as Wellcome, Park'N Shop and China Resources Company. The Company's
products have also penetrated into cash-and-carry outlets like Carrefour. Over
90% of the sales in Hong Kong are branded sales. The Company continues to build
up the "FITTI(R)" and "PET PET(R)" brands image by strong advertising programs,
which not only impact sales in the local market but also in the Pearl River
Delta area of Guangdong in the PRC.
In Singapore, the Company's appointed distributors are complemented by
the Company's own sales team to distribute its produ
cts. The disposable baby
diaper market in Singapore is relatively small and mature and has contracted due
to low birth rates and the weaker economy, with negative growth potential.
Almost all the Company's sales in Singapore are branded sales, which are
"FITTI(R)", "PET PET(R)" and "COSIFITS(R)".
In Malaysia, which the Company has identified as one of the fastest
growing markets in the region. The Company's major brands in the market are
"FITTI(R)" and "PET PET(R)" and an economy brand "COSIFITS(R)" was introduced in
1998 occupying a share in the growing lower end price segment. The Company
believes that its sales in this market will continue to grow further as the
usage of disposable baby diapers increases. The Company's products are
distributed by appointed distributors in the major chain stores such as Tops,
The Store and Ocean, as well as to the other secondary chain stores,
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<PAGE>
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 supermarkets,
department stores and independent retail stores in Guangdong Province, Shanghai
and Beijing. To cope with the rapid development of foreign invested
hypermarkets in the PRC, the Company cultivates good relationship with the major
players like Carrefour, Wal-mart, Price-Mart and etc. The Company will expand
distribution of its products to other major cities along the coastline and other
affluent provinces in the PRC, such as Fujian and Zhejiang. The Company
established a sales operation in Beijing to directly service the Beijing and
Tianjin markets and to
expand sales and distribution to the northern markets
such as Shandong and Liaoning provinces. The Company plans to set up other
sales operations in strategically selected cities that will enhance the sales
and distribution in the local markets and other markets at the nearby vicinity.
The Company has commenced advertising its brands in most of the major cities in
the southern and eastern part of the PRC. The Company estimates that the
current usage of disposable baby diapers in the PRC is below 5% and will grow in
accordance with the anticipated rapid economic growth of the country.
In Thailand, although the usage of disposable baby diapers is
relatively low, the disposable baby diaper market has been growing rapidly in
the past few years. The Company's sales have been increasing with the growth of
the market and as a result of expanding the Company's distribution networks
throughout the country. Around 70% of the Company's sales in Thailand were in
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 has increased its market share to about
15%, although total diaper market volume has contracted due to the economic
turmoil. The Company also manufactures adult incontinence products and
distributes to hospitals, supermarkets and department stores. The Company
estimates that its share of the Thailand adult incontinence market is
approximately 40%. 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; however the expansion of the Company's sales
were restrained because the products have always been imported which carried
very high import duties and suffered from adverse currency fluctuation. In 1998,
the Company established a
joint venture manufacturing facility near Jakarta that
helped reducing the product costs due to lower import duties on raw materials
and labor rate. However, the Company's sales have not expanded as anticipated
because of the market was adversely impacted by the financial turmoil and
political instability in the country.
The Company presently has lower expectations in exporting 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 the countries that have high rate of import duties on its products
and high risk of currency fluctuation, the Company believes that it is more
efficient and economical to service its markets by the domestic manufacturing
facility. The Company presently has manufacturing facilities in Hong Kong,
Thailand, the PRC and Indonesia. The Company is establishing a new
manufacturing facility in Malaysia for servicing its markets in Malaysia
and
Singapore.
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<PAGE>
d. Europe
i. Products
The Company manufactures and markets disposable baby diapers under its
own brands in the United Kingdom, and manufactures private label disposable baby
diapers, feminine napkins, and branded and private label adult incontinence
products in Switzerland. The Company's brands currently in production are
"FITTI(R)", "COSIFITS(R)", "CARES(R)" and "VLESI(R)". "FITTI(R)" is a value
brand baby diaper with full features such as leg gathers, wetness indicator,
printed backsheet and an extra-dry sub-layer. "COSIFITS(R)" and "CARES(R)" are
economy brands featuring frontal tape and extra-dry sub-layer. "VLESI(R)" adult
incontinence brand comprises a product range of adult incontinence briefs,
anatomic pads and underpa
ds for the institutional hospital and nursing home
markets.
ii. Sales and Marketing
The U.K. retail disposable baby diaper market in 1998 was
approximately $851 million. Approximately 90%(1) of the market were branded
products and the rest were made up of various private label brands of retailers
supplied by European diaper manufacturers.
The Company's strategy is to emphasize its branded products which are
sold to regional retails and wholesalers by offering a value-oriented product
with good profit margins and a high level of service. The Company also produces
own label for several U.K. grocery chains.
In Switzerland, the disposable baby diaper market of approximately $73
million(2) is dominated by a U.S. national brand and the private brand of a
major retail chain. It is estimated that about 65%(2) of the diaper volume in
Switzerland is supplied by the two major U.S. manufacturers. The Company's
Swiss operation situated near Zurich competes in the disposable
baby diaper and
feminine napkin markets in Switzerland and also in other European countries for
branded and private label business.
The Company's other operation in eastern part of Switzerland is in the
canton of St. Gallen. It manufactures and markets primarily branded adult
incontinence products and distributes them to institutions such as hospitals and
nursing homes. The Company estimates that its share in the Swiss adult
incontinence market is approximately 30% and is ranked second in the market.
The operation is actively expanding into other European markets through the
appointment of sales distributors.
The Company also has a presence in the Benelux with a sales and
distribution company near Brussels and serves institutional customers in this
region.
3. Competition
The disposable baby diaper industry is dominated world-wide by the
brands of two major U.S. manufacturers : The Procter & Gamble Company ("P&G")
and Kimberly-Clark Corporation ("K-C"). The ma
rket position of these
manufacturers, relative to the Company, varies from one geographic area to
(1) FSA Survey U.K.
(2) Nielsen Switzerland
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<PAGE>
another, but due to their substantial financial, technical and marketing
resources, both of these major manufacturers have the ability to exert
significant influence and gain substantial market share in any of their
marketing areas. Despite the disparity in relative strength, however, the
Company has been able to achieve good results with its branded and private label
products and is able to maintain a viable market position in the face of very
strong competition from the industry leaders.
a. North America
The North American disposable baby diaper market remains dominated by
the brands of the two major U.S. manufacturers: P&G and K-C. Their combined
market share of the disposable baby diaper market is 78%, including the
disposable trai
ning pant and youth pant segments. Total category unit sales are
now declining at the rate of about 4%, with volume continuing to move from the
food and drug sectors to the mass (discount) merchandisers. In 1998, these two
manufacturers continued their departure from their traditional strategy of
competing solely on the basis of consumer-driven marketing programs and product
innovations. After P&G made their move in 1995 to a reduced count, unisex
program on both their Pampers and Luvs brands, they spent heavily promoting
these brands at very low retail price points. An increasing number of retailers
are becoming concerned with the negative impact that this strategy has had on
their own private label sales and margins, and some have taken corrective action
to protect their own brands, at times going so far as to decline to carry the
Luvs brand. All of the advertised brand's moves have resulted in retail price
reductions and a narrowing of retail price spreads. The net result is a two-
tier category
that is offering premium products and value-added products. The
segment that was once called "conventional" has now become "premium".
The moves by the major manufacturers to lower prices and make deep
promotional offers have put serious sales and margin pressure on smaller branded
manufacturers and private label manufacturers. In response to the competitive
activity, the Company has reallocated its promotional spending and has
formulated a strategy in line with "every day low price", targeted trade
promotions, enhanced product features and performance, along with tightened cost
controls. This strategy has allowed the Company to protect its share in
critical markets, expand its private label base of business and weather the
competitive storm that is persisting. While there was some negative impact on
top line sales, the Company's strategy will help to protect margin contribution
in the coming year.
In the adult incontinence arena, the Company is in an excellent
competitive posit
ion, having the capability to provide key retailers,
institutions and consumers with product technology that is superior to what any
other manufacturer can currently provide. The added advantage comes from the
fact that this category, more than most, has the greatest need for better
products in order to meet the performance requirements of consumers. The
Company has a product strategy designed to maintain this competitive edge well
into 1999 and beyond. This competitive edge will also allow the Company to make
quick inroads into the private label incontinent sector, offering premium
products at competitive prices. This segment also presents a slightly better
margin of opportunity, since pricing and promotional strategies from the major
manufacturers have remained much more stable than in the baby diaper
marketplace.
b. Australia
The major competition faced by the Company in Australia is from
Kimberly-Clark Australia ("KCA"). KCA dominates the disposable baby diaper
market in Austr
alia, with a 1998 estimated market
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<PAGE>
unit volume share of 65%. 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, as well as quality domestic supplier for their private
label brands.
c. Asia
The Company's main competition in Asia comes from the two major U.S.
manufacturers, and from several manufacturers from Japan and Taiwan. The
Company believes that it has been able to ma
intain 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 is dominated
by P&G, which has a market share in excess of 60%. K-C has been heavily
promoting and discounting its products in the U.K. market. Since the entry of
K-C in the U.K. market, the private label brands have been reduced to a level of
about 10% market share. The Company believes that, by pursuing a flexible brand
strategy of supplying both branded and private label in disposable baby diapers
and feminine napkins, it will be able to maintain its share and volume, and also
achieve growth in certain markets.
The adult incontinence market in Europe is shared among several
European as well as U.S. manufacturers. The leading manufacturer in Europe is
SCA Molnlycke which holds the large
st market share in some Scandinavian
countries and also in the U.K. The largest market segment for adult
incontinence is still with institutions, such as hospitals and nursing homes.
The Company has expanded its market coverage into the Benelux through the
acquisition of a Dutch business in 1997 and also through appointment of
marketing and distribution partners in Germany and the U.K. The Company sees
its growth coming from developing of innovative features in its adult
incontinence product ranges as well as extending its geographic coverage.
4. Trademarks and Patents
Brand identification is an important element in marketing the
Company's products, and the Company recognizes the importance of its trademarks
to the success of its business. The Company has registered its major trademarks
or has applications pending in each of the major markets in which its products
are sold, and it has applications pending in several other countries for many of
its other trademarks. As the Company d
etermines 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
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<PAGE>
infringement and an agreement to pay future royalties. The Company and P&G had
reached settlement of this claim in 1998. The Company has an existing license
agreement from Kimberly-Clark concerning the sale of certain diaper products
covered by Kimberly-Clark patents.
5. Product Design and Development
The Company actively monitors trends in the United States and Europe
in relation to changes in product features, consumer preferences, and the impact
of environmental laws and regulations on the disposable diaper industry.
Although the Company does not devote substantial expenditure to research and
development, it constantly seeks to improve its products by substitution of
materials and components, and of product features, to systematically
improve the
performance of its diapers for better absorbency and improved leakage
protection. In particular, the Company monitors world-wide developments in
various raw material components to enable the Company to take advantage of the
latest developments, and in certain cases the Company has worked closely with
suppliers to pioneer the use of such materials in the manufacture of disposable
diapers.
With respect to packaging, the Company retains consultants in its
various markets to design packaging for the products which are sold under the
Company's own brands. Packaging for products sold under private labels is
either designed and developed by the retailer's own design department, or by
design consultants engaged by the Company working together with the retailer's
design department.
6. Manufacturing Process
The manufacturing process begins with the purchase of raw materials,
the most important of which is fluff wood pulp. The fluff wood pulp is first
fed through a hamm
er mill to make a soft, absorbent core that is placed on a
polyethylene backsheet. In the case of "ultra" diapers, super absorbent polymer
is then added. The liner layers, leg elastics, tape and other applicable
features are then fed into the manufacturing equipment which shapes and produces
the finished product. Because of the high level of automation in the production
process, significant components of manufacturing efficiency result from
prevention of production line stoppages and reducing the defect rate. Manual
labor is involved primarily in packing and shipping, and labor costs represent
only a small fraction of the Company's total net sales.
The Company maintains constant quality control throughout the
production process, commencing with the incoming raw materials and continuing
through dispatch of the finished product. Each of the Company's diaper lines
has a full-time inspector assigned to assure quality control at all stages of
the production process, and line inspections and ba
tch testing are made on a
continuous basis.
Because of the relatively high cost of shipping the finished product,
the Company has established manufacturing facilities near its major markets, and
raw materials (which can generally be transported at lower cost) are shipped to
the manufacturing facilities. The Company believes that this improves its
efficiency and enhances its competitiveness by reducing shipping costs,
shortening the distribution chain and improving customer service.
7. Raw Materials
The raw material components used in the manufacturing process are
fluff wood pulp, super
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<PAGE>
absorbent polymer, polyethylene backsheet, polypropylene non-woven liner,
adhesive closure tape, hotmelt adhesive, elastic and tissue.
The main raw material is fluff wood pulp, which is purchased from
several suppliers in the United States, Scandinavia and New Zealand. The source
from which the fluff wood pulp is shipped to the Company's manufacturing
facilities is dependent on price, quality and availability. The cost of fluff
wood pulp increased significantly in 1995, softened in 1996, stabilized
thereafter and the Company believes it may increase moderately in 1999. Other
raw materials are purchased from various sources, also depending on price,
quality and availability. The Company maintains good and long-term
relationships with its raw
materials suppliers. The Company's Chief Purchasing
Officer oversees the purchasing and sourcing policies of each of the Company's
manufacturing facilities and is responsible for new material developments and
keeping track of all world-wide producers of raw materials. He also negotiates
and determines the purchase of the Company's major raw materials with the
Company's key raw material suppliers.
The Company has negotiated supply contracts with several of its key
suppliers. Such arrangements are generally designed to achieve volume discounts
on price and to assure supply stability. In the event of unacceptable price
increases, the Company usually has the right to terminate the arrangement upon
specified notice periods, which generally range from two to three months.
Some of the suppliers of raw materials to the Company also manufacture
disposable diapers which compete with the Company's products. The Company has
not experienced any difficulty with its raw material suppliers who
are in
competition with it on sales of finished product, but nevertheless it takes
steps to ensure that it has alternative sources of supply available.
The main source of energy for the Company's plants is electricity.
The automated process for manufacturing disposable diapers consumes larger
amounts of electricity than many other light industries, but none of the
Company's operating subsidiaries has experienced any problems with electricity
supply.
8. Inventory Practice and Order Backlog
The disposable diaper industry is generally characterized by prompt
delivery by manufacturers and rapid movement of the product through retail
outlets. The lead time between placing an order and shipment to the local
customer averages five to ten days. The Company maintains varying levels of raw
material and finished product inventory depending on lead time and shipping
schedules. The Company's inventory levels generally vary between three to six
weeks. Due to the short lead time betwe
en order and delivery of product, the
Company does not maintain a significant backlog.
9. Customs and Import Duties
Some of the raw materials used in manufacturing the Company's products
are subject to import duties at varying rates in the countries in which the
Company's manufacturing facilities are located. However, import duties on raw
materials do not represent a significant part of the cost of the finished
product and, in most cases, the import duties are refundable if the finished
goods are exported from the countries of manufacture.
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<PAGE>
Imports of finished products to some of the markets are subject to
import duties at various rates. However, such duties are usually incorporated
in the selling price of the finished product.
10. Employees
The Company has a total of approximately 1,120 full time employees at
its manufacturing facilities. The Company considers its relationships with its
employees to be good in all of its plants, and none of the Company's plants has
ever experienced any material work stoppage.
The Company believes that all of its manufacturing facilities are in
compliance with applicable occupational, health and safety legislation.
11. Environment
The Company believes that operations at all of its manufacturing
facili
ties 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 no
t
have to make any changes to its products to comply with presently existing
environmental laws and regulations in the markets in which its products are
sold.
The Company endeavors to develop products which are environmentally
responsible by closely monitoring world-wide developments in various raw
material components and actively works with suppliers to develop and market
products utilizing such components.
12. Insurance
All of the Company's plant, machinery and inventories are covered by
fire and extended coverage insurance. The Company maintains product liability
insurance in amounts it believes to be adequate in all its operations, except
for its operations in Asia where local manufacturers customarily do not carry
product liability insurance because the risk of product liability lawsuits is
considered to be slight.
Item 2. Description of Property.
The Company operates ten manufacturing facilities, with plants located
in the United States at Duluth, Georgia
(near Atlanta) and at Oconto Falls,
Wisconsin; in Hong Kong; in Melbourne, Australia; at Chesterfield, U.K.; in
Switzerland at Mettmenstetten and Goldach; at Zhongshan, Guangdong, PRC; at
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<PAGE>
Bangkok, Thailand and at Jawa Barat, Indonesia.
The Company utilizes an aggregate of approximately 1,223,000 square feet
of space in its manufacturing operations. The Company believes that its plant
and facilities are adequate for its present operations, but it will require
expanded facilities if past growth trends in the Company's business continue.
The following table summarizes the physical properties that are used by the
Company in its manufacturing and distribution operations:
<TABLE>
<CAPTION>
Approximate Lease
Size Owned/ Expiration Date
Location Use
(Sq. Feet) Leased Date Opened
-------- ---- ---------- ------ ---- -------
<S> <C> <C> <C> <C> <C>
Duluth, GA Manufacturing 155,625 Owned N/A Dec. 1993
Wisconsin, WI Manufacturing 164,352 Owned N/A Apr. 1997
Hong Kong Manufacturing 111,700 Leased Jun. 1999 Jul. 1978
Singapore Office 43,540 Leased Apr. 2051 May 1991
Zhongshan, PRC Manufacturing 66,043 Leased Oct. 2044 Dec. 1994
Bangkok, Thailand Manufacturing 68,805 Owned N/A Apr. 1995
Melbourne, A
ustralia Manufacturing 179,200 Owned N/A Feb. 1988
Chesterfield, U.K. Manufacturing 75,000 Leased May 2008 May 1988
Mettmenstetten, Switz. Manufacturing 78,000 Leased Jun. 1999 Jul. 1993
Goldach, Switz. Manufacturing 150,275 Owned N/A Aug. 1994
London, U.K. Office 3,500 Owned N/A Mar. 1992
Mechelen, Belgium Office 3,400 Leased Dec. 1999 Apr. 1997
Bangkok, Thailand Office 15,216 Leased Dec. 1999 May 1994
Kuala Lumpur, Malaysia Office 1,580 Leased N/A Dec. 1995
Beijing, PRC Office 380 Leased Jul. 1999
Aug. 1998
Jawa Barat, Indonesia Manufacturing 174,000 Owned Sep. 2027 Nov. 1998
</TABLE>
Item 3. Legal Proceedings.
The Company and its subsidiaries are from time to time involved in
routine legal matters incidental to their business.
In February 1995, the Company and its U.S. subsidiary were named as
defendants in Action No. 95-19-2-ALB-AMER (WLS) brought by plaintiffs John M.
Tharpe, Robert E. Herrin and R & L Engineering, Inc., a Georgia corporation, in
the United States District Court, Middle District of Georgia. The complaint
alleges that the Company, its U.S. subsidiary and certain European suppliers of
disposable diaper manufacturing equipment (the "Defendants") have infringed U.S.
Patent No. 5,308,345 which relates to a certain process for elasticizing the
waistband of disposable diapers; that the Company and its U.S. subsidiary
breached a confidentiality agreement with the plaintiffs by using certain
information relat
ing to the waistband applicator disclosed to them in confidence
by the plaintiffs; and theft by the Defendants of the plaintiffs' trade secrets
concerning the waistband applicator. The plaintiffs seek an injunction,
compensatory, punitive and exemplary monetary damages in an unspecified amount,
and attorneys' fees. The Company has denied liability and intends to vigorously
defend this action.
In 1997, Procter & Gamble ("P&G") claimed that certain of the Company's
diaper products
-20-
<PAGE>
infringe P&G patents and demanded payment for past infringement and an agreement
to pay future royalties. The Company and P&G had reached settlement of this
claim in 1998. The Company has an existing license agreement from Kimberly-Clark
concerning the sale of certain diaper products covered by Kimberly-Clark
patents.
Item 4. Control of Registrant.
The Company is not owned or controlled by another corporation or by any
foreign government. The following table sets forth information regarding
beneficial ownership of the Ordinary Shares of the Company by each person who on
December 31, 1998 is known by the Company to own 10% or more of the Company's
outstanding Ordinary Shares and by all directors and officers as a group.
<TABLE>
<CAPTION>
Ordinary Shares
Beneficially Owned
------------------------
<S> <C> <C>
Name of Beneficial Owner Number Percent
- - ------------------------ ------- -------
10% or more shareholders (Brandon Wang).................................... 3,321,680(1) 49.77%
Directors and officers as a Group (10 persons)............................. 4,427,846(1)(2) 66.34%
</TABLE>
(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 O
rdinary Shares owned by Benedict Wang's wife, Suk Yee
Heyley Sham, as to which he disclaims beneficial ownership; and 117,000
Ordinary Shares owned by S.L. Wang's wife, Pei Fang Wang, as to which he
disclaims beneficial ownership.
Brandon Wang and seven other members of Management own more than 50% of the
Company's outstanding Ordinary Shares and, acting together, are able to control
the election of the Board of Directors, and thus the direction and future
operations of the Company, including decisions regarding acquisitions and other
business opportunities, the declaration of dividends and the issuance of
additional Ordinary Shares and other securities, in each case without the
supporting vote of any other shareholder of the Company. In addition, Brandon
Wang is controlling shareholder of the Company and thus may be deemed to be a
parent of the Company under the rules and regulations of the Securities Exchange
Act of 1934.
The Company knows of no arrangements the operation of
which may at a
subsequent date result in a change in control of the Company.
Item 5. Nature of Trading Market.
The Company's Ordinary Shares are listed on the NASDAQ National Market
System under the trading symbol DSGIF, and are not listed for trading in any
foreign trading market.
-21-
<PAGE>
As of December 31, 1998, the total number of record holders was 34, of
which 22, representing 39.53% of Ordinary Shares, were in the United States.
<TABLE>
<CAPTION>
Ordinary Share Price :
1998 1997
---- ----
Quarter High Low High Low
- - ------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First
$8.5000 $5.2500 $16.5000 $12.5000
Second 9.5000 6.6250 17.2500 12.7500
Third 7.0000 2.8750 16.6250 10.0000
Fourth 3.7500 2.8125 11.2500 7.3750
</TABLE>
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.
There are now no exchange control restrictions on remittances of
dividends on the Company's Ordinary Shares or on the conduct of the Company's
operations either in Hong Kong, where its principal executive offices are
located, or the British Virgin Islands, where it is incorporated. Certain other
jurisdictions in which the Company conducts operations do have various exchange
controls. To date, such controls have not had a material impact on the
Company's financial results.
There are no
limitations on the rights of non-residents or foreign
holders imposed by foreign law or by the charter of the Company other than those
limitations described herein in Item 14, Description of Securities.
Item 7. Taxation.
The following discussion is a summary of certain anticipated U.S.
federal income tax and BVI tax consequences of ownership of Ordinary Shares.
The discussion does not address with 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.
A. United States Federal Income Taxation
The following discussion only addresses the U.S. federal income taxation of
a U.S. person (e.g., an individual who is a citizen or resident of the U.S., a
U.S. corporation, an estate subject to U.S. tax on all of its income regardless
of source, and a trust if a court within the U.S. may exercise primary
supervision over the administration of such trust and one or more U.S. persons
have the authority to control substantial decisions of the trust.) (a "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%
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<PAGE>
Shareholders are advised to consult their own tax advisors regarding the tax
considerations incident to ownership of the Ordinary Shares.
A U.S. Investor receiving a distribution with respect to the Ordinary
Shares will be required to include such distribution in gross income as a
taxable dividend to the extent such distribution is paid from earnings and
profits of the Company as determined under U.S. federal income tax principles.
Any distributions in excess of the earnings and profits of the Company will
first be treated, for U.S. federal income tax purposes, as a nontaxable return
of capital to the extent of the U.S. Investor's basis in the Ordinary Shares,
and then as a gain from the sale or exchange of a capital asset, provided that
the Ordinary
Shares constitute capital assets in the hands of the U.S. Investor.
U.S. corporate shareholders will not be entitled to any deduction for
distributions received as dividends on the Ordinary Shares.
Gain or loss on the sale or exchange of the Ordinary Shares will be treated
as capital gain or loss if the Ordinary Shares are held as a capital asset by
the U.S. Investor. Such capital gain or loss will be a long-term capital gain
or loss if the U.S. Investor has a holding period of more than one year with
respect to the Ordinary Shares at the time of the sale or exchange.
Various provisions contained in the U.S. Internal Revenue Code (the "Code")
impose special taxes in certain circumstances on non-U.S. corporations and their
shareholders. The following is a summary of certain provisions which could have
an adverse impact on the Company and the U.S. Investors:
1. Personal Holding Companies
Sections 541 through 547 of the Code relate to the classification of
certain corporations (includ
ing 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 o
r fewer individuals, the Company intends to
cause its indirect U.K. subsidiary, the owner of the U.S. branch, together with
such corporation's immediate U.K.-resident parent corporation, to distribute any
amounts which would otherwise be characterized as "undistributed personal
holding company income" in the hands of either corporation with the intent that
such distributions would cause such distributed amounts to lose their character
as "United States source" taxable income subject to the PHC tax.
2. Foreign Personal Holding Companies
Sections 551 through 558 of the Code relate to foreign personal holding
companies ("FPHCs")
-23-
<PAGE>
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 pos
sible that
subsequent events would cause the Company to meet either or both of the income
test and the shareholder test. In the opinion of the Company, however, it is
unlikely that the shareholder test would be met, especially in view of the
inclusion of certain transfer restrictions in the Company's governing documents.
See "Description of Securities".
If the Company is classified as a FPHC after application of the shareholder
test and the income test, a pro rata portion of its undistributed income would
be imputed to its shareholders who are U.S. persons (including U.S.
corporations) and would be taxable to such persons as a dividend, even if no
cash dividend is actually paid. In that event (promptly after receiving an
opinion of counsel or final determination) the Company intends to distribute to
its shareholders sufficient amounts so that U.S. shareholders would receive cash
at least equal to the product of 150% of the highest federal income tax rate
which could apply to any U.S. shareholder
and the amount of the dividend that
would otherwise be imputed to them. If the Company is classified as a FPHC in
the year preceding the death of a shareholder, the Ordinary Shares held by such
shareholder would obtain a tax basis equal to the lesser of their fair market
value or their tax basis in the hands of the decedent.
3. Passive Foreign Investment Companies
Sections 1291 through 1297 of the Code relate to passive foreign investment
companies ("PFICs") and impose an interest charge on "excess distributions" made
from a PFIC. A foreign corporation is a PFIC if (i) 75% or more of its gross
income for the taxable year is passive income as defined under Section 954(c) of
the Code (the "passive income test"), or (ii) 50% or more of the average value
(or adjusted tax basis if the corporation is a CFC) of the assets held by the
corporation during the taxable year consist of assets that produce or are held
for the production of passive income (the "passive asset test"). Certain look-
through rul
es 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 ord
inary 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
-24-
<PAGE>
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.
4. Controlled Foreign Corporations
Sections 951 through 964 and section 1248 of the Code relate to controlled
foreign corporations ("CFC") and impute undistributed income to certain
shareholders and convert into dividend income gains on dispositions of shares
which would otherwise qualify for capital gains treatment. The CFC provisions
only apply if 10% Shareholders (as defined above), who are also U.S. persons,
own, in the aggregate, more than 50% (measured by voting power or value) of the
shares of a foreign corporation. Even if the Company were to become classified
as a CFC, however, the income imputation rules referred to above would only
apply with respect to such 10% Shareholders.
5. United States Backup Withholding
A holder of an Ordinary Share may be subject to "backup withholding" at the
rate of 31% with respect to dividends paid on such Ordinary Share if such
dividends are paid by a paying agent, broker or other i
ntermediary 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 cas
e 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.
-25-
<PAGE>
B. British Virgin Islands Taxation
Under the laws of the British Virgin Islands ("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 British Virgin Islands.
There is no income tax treaty or convention currently in effect between the
United States and the British Virgin Islands, nor is an
y such treaty or
convention currently being negotiated.
Item 8. Selected Consolidated Financial Data.
The information required by Item 8 is contained in page 16 of the Annual
Report to Shareholders, and is incorporated herein by reference.
Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The information required by Item 9 is contained in pages 8 to 13 of the
Annual Report to Shareholders, and is incorporated herein by reference.
Item 9A. Quantitative and Qualitative Disclosure about Market Risk.
A. Exchange Rate Information
The Consolidated Financial Statements of the Company are prepared in
U.S. dollar. The financial statements of foreign subsidiaries are translated
into U.S. dollar in accordance with Statement of Financial Accounting Standards
No. 52.
Singapore dollar, Australian dollar, Swiss Franc, Pounds Sterling and
Thai Baht are convertible into U.S. dollar at freely floating rates. Hong Kong
dollar is t
ied to and allowed to fluctuate within a narrow range against the
value of the U.S. dollar. There are currently no restrictions on the flow of
such currencies, except Renminbi and Thai Baht, between such countries and the
United States.
Fluctuations in the value of foreign currencies cause U.S. dollar
translated amounts to change in comparison with previous periods and,
accordingly, the Company cannot quantify in any meaningful way, the effect of
such fluctuations upon future income. This is due to the number of currencies
involved, the constantly changing exposure in these currencies, and the fact
that all foreign currencies do not react in the same manner against the U.S.
dollar.
-26-
<PAGE>
A confluence of currency fluctuation adversely impacted the Company's
financial performance in 1997. In the first half of the year 1997, Swiss Franc
was devalued by 8.6% due to strengthening of U.S. dollar against European
currency. In the second half of the year 1997, the Malaysian Ringgit, Singapore
dollar, Thai Baht and Indonesian Rupiah were devalued in the Asian financial
turmoil. As a result, the Company's reported sales were reduced by $9.7 million
in 1997 compared with the exchange rates used in 1996. The effect of the
exchange rate devaluation also impacted the Company's cost of materials as most
of the raw materials were payable in U.S. dollar. The Company does not hedge
against the risk of currency fluctuation.
The Company'
s financial performance was adversely affected by the Asian
currency turmoil in 1998. The devaluation of Thai Baht continued in 1998 and
dropped by 7.0% in the first quarter of 1998 against the fourth quarter of 1997.
Together with the political instability in Indonesia, Indonesian Rupiah dropped
substantially by 85.7% in the second quarter of 1998 compared with exchange rate
of corresponding period in 1997. Other Asian currencies like Singapore dollar
and Malaysian Ringgit also devaluated in 1998 and later on in the fourth quarter
of 1998, Malaysian Ringgit pegged with U.S. dollar. Due to the volatility of
the Asian currencies, the Company is unable to hedge against the risk of
currency fluctuation.
The Company anticipates the impact of the Asian financial turmoil will
diminish in 1999, and the economic growth in Asian countries will slow down. As
a consequence, the Company's sales volume and gross margin in Asian operations
will decline.
B. Exchange Rate Fluctuation
<TABLE>
<CAPTION>
1998 1997
---- ----
First quarter High Low Average High Low Average
- - ------------- ---- --- ------- ---- --- -------
<S> <C> <C> <C> <C> <C> <C>
Australian dollar 1.50 1.48 1.49 1.30 1.27 1.28
Malaysian Ringgit 4.54 3.64 3.96 2.47 2.47 2.47
Singapore dollar 1.75 1.60 1.66 1.45 1.40 1.42
Thai Baht 54.07 38.64 45.14 25.89 25.79 25.84
Indonesian Rupiah 12,913.33 8,605.00 10,042.22 2,214.20 2,212.54 2,213.53
Swiss Franc 1.52 1.45 1.48 1.47 1.42 1.45
Pounds Sterling 0.61 0.60 0.60 0.62 0.61 0.62
Second quarter
- - -------------
Australian dollar 1.64 1.53 1.59 1.33 1.27 1.30
Malaysian Ringgit 4.19 3.74 3.93 2.51 2.50 2.51
Singapore dollar 1.71 1.58 1.66 1.44 1.43 1.43
Thai Baht 42.39 38.63 40.36 26.01 23.14 24.62
Indonesian Rupiah 15,499.00 7,746.00 11,438.48 2,213.71 2,2
13.37 2,213.58
Swiss Franc 1.52 1.47 1.49 1.46 1.41 1.43
Pounds Sterling 0.61 0.60 0.60 0.61 0.60 0.61
Third quarter
- - ------------
Australian dollar 1.75 1.63 1.69 1.39 1.34 1.36
Malaysian Ringgit 4.18 3.78 4.03 3.17 2.62 2.91
Singapore dollar 1.77 1.69 1.72 1.52 1.46 1.50
Thai Baht 41.70 39.04 40.48 34.97 31.10 33.36
Indonesian Rupiah 12,913.33 11,067.86 11,683.73 3,684.76 2,212.51 2,703.76
</TABLE>
-27-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Swiss Franc 1.49 1.38 1.43 1.51 1.45 1.48
Pounds Sterling 0.61 0.59 0.60 0.62 0.61 0.62
Fourth quarter
- - -------------
Australian dollar 1.63 1.57 1.60 1.53 1.42 1.47
Malaysian Ringgit 3.79 3.78 3.79 3.88 3.40 3.59
Singapore dollar 1.65 1.62 1.64 1.67 1.58 1.61
Thai Baht
36.67 36.01 36.44 46.46 39.48 41.98
Indonesian Rupiah 7,748.00 7,743.00 7,746.33 5,166.33 3,680.71 4,176.00
Swiss Franc 1.41 1.34 1.38 1.45 1.39 1.42
Pounds Sterling 0.60 0.60 0.60 0.60 0.59 0.60
</TABLE>
Item 10. Directors and Officers of Registrant.
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
Name Year of Birth Present Position
---- ------------- ----------------
<S> <C> <C>
Brandon Wang 1946 Director, Chairman of the Board and President
Philip Leung 1948 Director and
Vice President
Johnny Tsui 1941 Director, Vice President and Secretary
Patrick Tsang 1946 Director and Vice President
Terence Leung 1951 Director, Vice President and Treasurer
Peter Chang 1946 Director and Vice President
Owen Price 1926 Director
Anil Thadani 1946 Director
</TABLE>
Brandon Wang is married to Eileen Wang-Tsang, who is Patrick Tsang's
sister. Peter Chang is married to Brandon Wang's sister. Benedict Wang and
S.L. Wang, both of whom occupy Management positions (see below), are brothers of
Brandon Wang.
All directors are elected for a one-year term at the Annual Meeting of the
shareholders. The appointment of all officers is subject to the discretion of
the Board of Directors.
The Executive Committee of the Boa
rd of Directors consists of Brandon Wang,
Philip Leung, Johnny Tsui, Patrick Tsang, Terence Leung and Peter Chang. The
Executive Committee has authority to take any action, other than appointment of
auditors, election and removal of directors and appointment of officers, which
can be taken only by the Board of Directors.
During 1998, the Company's Audit Committee consisted of Anil Thadani and
Owen Price. The principal functions of the Audit Committee are (i) to recommend
the independent auditors to be employed by the Company; (ii) to consult with the
independent auditors with regard to the plan of audit; (iii) to review, in
consultation with the independent auditors, their audit report or proposed audit
report; and (iv) to consult with the independent auditors with regard to the
adequacy of the Company's internal accounting controls.
Brandon Wang founded the Company in Hong Kong in 1973 and has been a
director and the
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<PAGE>
Company's Chairman and Chief Executive Officer since that time. Mr. Wang is a
graduate of St. Francis Xavier's College in Kowloon, Hong Kong.
Philip Leung helped Brandon Wang establish the Company in 1973 and has
served as a director and Vice President of the Company since that time. He is
currently also the Company's Chief Purchasing Officer and oversees and
implements the global purchasing and product development of the Company. Mr.
Leung holds a diploma of Management Studies from Hong Kong Polytechnic
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 a
ppointed 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 ha
s 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 diff
erent 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
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<PAGE>
July 1992 in joint venture with the Schroders Group of the United Kingdom. Prior
to this, he was the Managing Director and a founding partner of Arral & Partners
Limited, a private investment company based in Hong Kong. He is also a director
of Programmed Maintenance Services Pty. Ltd., ODS System-Pro Holdings Ltd.,
Equatorial Reinsurance (Singapore) Ltd. and Scandia (Asia) Ltd. Mr. Thadani has
a Master's Degree in Chemical Engineering from the University of Wisconsin,
Madison, and a M.B.A. from the University of California at Berkeley.
Other Key Management Personnel
In addition to the above-named officers and directors, the following
persons hold key management positions with the Company :
Benedict Wang became the Corporate Investor Relation
s Officer of the
Company in September 1993. Prior to this, he had been the Director of Sales and
Marketing of the Company's Hong Kong subsidiary in charge of marketing and sales
for the Asian region. Mr. Wang has a Master of Arts degree from the University
of North Dakota; a Bachelor of Fine Arts degree from the University of Manitoba;
and a Bachelor of Arts from the University of Waterloo (Ontario). Mr. Wang is
now Corporate Affairs Officer of the Company.
S.L. Wang's primary responsibility in the Company is to oversee research
and development of new manufacturing process and technologies. He joined the
Company in 1984 to help start its U.S. operations in Los Angeles, California.
Prior to joining the Company, Mr. Wang was employed in the United States as an
architect and project supervisor for construction projects. Mr. Wang holds a
Bachelor's Degree in Architectural Engineering from Chung Yuan University,
Chung-Li, Taiwan.
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.
Item 11. Compensation of Directors and Officers.
In 1998 the aggregate remuneration paid by the Company and its
subsidiaries to all directors and officers of the Company as a group (10
persons) for services in all capacities was approximately $5,065,030.
Item 12. Options to Purchase Securities from Registrant or Subsidiaries.
Not applicable.
Item 13. Interest of Management in Certain Transactions.
The following table sets forth the aggregate amount of loans made by the
Company to Brandon Wang, the founder, principal shareholder and Chief Exe
cutive
Officer of the Company and to a trust of which he is a beneficiary since January
1, 1996:
-30-
<PAGE>
<TABLE>
<CAPTION>
Loan Balance Balance
at Beginning Loans Loans at End
of Year Extended Repaid of Year
------ -------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1998 $607 $3,372 $507 $3,472
Year ended December 31, 1997 $15,644 $6,129 $21,166 $607
Year ended December 31, 1996
$12,536 $7,638 $4,530 $15,644
</TABLE>
In 1998, 1997 and 1996 the Company advanced $3.4 million, $6.1 million and
$7.6 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 in writing. The rate of interest was reviewed quarterly and adjusted, if
necessary. The promissory notes were collateralized by the pledge of shares of
the Company held by Brandon Wang. The fair market value of the shares pledged
was required to be at least
200% of the amount due under the notes. During
1998, 1997 and 1996, Brandon Wang and a trust controlled by him repaid $0.5
million, $21.2 million and $4.5 million, respectively, to the Company. Interest
of $0.1 million, $1.0 million and $1.0 million was charged on these advances in
1998, 1997 and 1996, respectively. The balance at December 31, 1998 was $3.5
million.
In 1997, a U.S. subsidiary of the Company extended a guarantee to a bank as
part of a $15 million term loan provided by the bank to Brandon Wang. The loan
agreement requires the U.S. subsidiary to maintain minimum cash balances of $6
million as collateral with the bank. Brandon Wang has pledged 2,217,100 shares
in the Company to the lender as security for the loan. Commencing January 1,
1998, this loan is repayable by quarterly instalments of $375,000 followed by a
balloon payment of $10,875,000 on August 1, 2000. In 1998 Brandon Wang repaid
$1.5 million and at December 31, 1998 the outstanding balance was $13.5 million.
In Janua
ry 1999 an additional $4 million was repaid.
Item 14. Description of Securities.
The following is a brief description of the rights of holders of fully
paid Ordinary Shares. This description does not purport to be complete and is
qualified in its entirety by reference to the Memorandum and Articles of
Association of the Company, which have been previously filed as an exhibit, and
to the relevant provisions of the British Virgin Islands International Business
Companies Act.
A. General
All of the issued Ordinary Shares are credited as fully paid and non-
assessable, except that a share issued for a promissory note or other written
obligation for payment of a debt may be subject to forfeiture, and accordingly
no further contribution of capital may be required by the Company from holders
of Ordinary Shares. Under British Virgin Islands ("BVI") law, non-residents of
the BVI may freely hold, vote and transfer their Ordinary Shares in the same
manner as BVI residents.
-31-
<PAGE>
B. Dividends
Holders of Ordinary Shares are entitled to participate in the payment of
dividends in proportion to their holdings. The Board of Directors may declare
and pay dividends in respect of any accounting period out of the profits legally
available for distribution. Dividends, if any, will be paid in U.S. dollars.
The Company's dividend policy will depend on the Company's earnings,
capital requirements, financial condition and other factors considered relevant
by the Board of Directors. For a discussion of taxation of dividends, see
"Taxation".
The Company did not pay any dividend in 1998.
C. Voting Rights
In order to avoid certain adverse U.S. income tax consequences to the
Company, the voting rights of any
shareholder who holds more than 10% of the
Company's outstanding shares will be suspended as to shares held by such
shareholder in excess of 10% of the Company's outstanding shares ("Excess
Shares"). Excess Shares are not counted as voting shares for purposes of
establishing a quorum at shareholders' meetings. However, the Board of
Directors has discretion to exempt any such Excess Shares from these
restrictions if it is satisfied, on the basis of evidence and assurances
acceptable to it, that the holding of shares in excess of 10% of the Company's
outstanding shares by such shareholder will not result in the Company being
classified as a controlled foreign corporation ("CFC"), foreign personal holding
company ("FPHC") or personal holding company ("PHC") within the meaning of the
U.S. Internal Revenue Code ("Code"). See "Taxation"; "Restrictions on Transfer
and Voting; Redemption of Ordinary Shares".
Every shareholder who is present in person or by proxy at a meeting of
the Company shall hav
e one vote for each Ordinary Share of which he is the
holder. A poll may be demanded by the chairman of the meeting, or by any
shareholder present in person or by proxy.
The Articles of Association of the Company make no provision for
cumulative voting. Accordingly, the controlling shareholders have a sufficient
number of Ordinary Shares to elect all of the Company's directors.
D. Restrictions on Transfer and Voting; Redemption of Ordinary Shares
The Company's Memorandum and Articles of Association contain certain
provisions which are intended to avoid situations in which the Company may be
classified as a CFC, FPHC or PHC. See "Taxation". These provisions are
intended only to avoid the adverse U.S. income tax consequences which would
result from such classification.
The following is a summary of the relevant provisions of the Memorandum
and Articles :
(i) Restricted Transfers of Ordinary Shares. The Board of Directors
may, but is not obliged to, refuse to regi
ster 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.
-32-
<PAGE>
(ii) Restrictions on Voting Rights. In the event that any person holds
more than 10% of the Company's outstanding shares, any shares in excess of 10%
of the Company's outstanding shares shall be "Excess Shares", which shall not be
entitled to any voting rights and shall not be considered voting shares for
purposes of establishing a quorum. However, the Board of Directors may exempt
any such Excess Shares from these restrictions if it is satisfied, on the basis
of evidence and assurances acceptable to it, that the holding of shares in
excess of 10% of the Company's outstanding shares by such shareholder will not
result in the Company being classified as a CFC, FPHC or PHC. In addition,
these restrictions on voting rights do not apply to shares ac
quired 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 Incorporate
d or similar organization selected from time to time by the
Company, or (3) if not determinable as aforesaid, as determined in good faith by
the Board of Directors.
The directors of the Company, in a meeting held on January 6, 1992,
resolved that the principal shareholder, Brandon Wang, is exempt from the
foregoing restrictions. The directors have also approved exemption of certain
institutional shareholders from the foregoing restrictions as the Board was
satisfied that such exemption would not have any of the adverse tax consequences
described above.
E. 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 di
ffer from those that would apply if
the Company were incorporated
-33-
<PAGE>
in a jurisdiction within the United States. The rights of shareholders under
British Virgin Islands law are not as clearly established as the rights of
shareholders under legislation or judicial precedent in existence in most U.S.
jurisdictions. Thus, the public shareholders of the Company may have more
difficulty in protecting their interests in the face of actions by the Board of
Directors or the principal shareholders than they might have as shareholders of
a corporation incorporated in a U.S. jurisdiction. In addition, it is unlikely
that the courts of the British Virgin Islands would enforce, either in an
original action or in an action for enforcement of judgments of U.S. courts,
liabilities which are predicated upon the securities laws of the Unite
d States.
See "Description of Securities".
F. Directors
Under the Company's Articles of Association, the first directors must be
appointed by the subscribers to the Memorandum of Association, and thereafter
the directors may be appointed by the shareholders, or by the directors to fill
a vacancy or as an addition to the existing directors. Directors may be
removed, with or without cause, by a resolution of the shareholders of the
Company, or with cause by a resolution of the other directors.
G. Quorum
The quorum required to constitute a valid general meeting of
shareholders consists of shareholders present in person or by proxy holding at
least a majority of all issued Ordinary Shares entitled to vote. If a meeting
is adjourned for lack of quorum, it will stand adjourned to the next business
day at the same time and place or to such other day and at such other time and
place as the directors may determine, and if at the adjourned meeting there are
present within one hour from the
time appointed for the meeting at least one-
third of the shares entitled to vote at the meeting, the shareholder or
shareholders present shall be a quorum. However, a meeting convened on the
requisition of the shareholders shall be dissolved if a quorum is not present at
the first meeting.
H. Resolutions
Resolutions may be adopted at shareholders' meetings by the affirmative
vote of a simple majority of the Ordinary Shares entitled to vote thereon.
Certain actions may be taken by a resolution of the directors. Such
actions include an amendment of the Company's Memorandum or Articles of
Association, an increase or reduction in the Company's authorized capital, and a
change in the Company's name.
I. Rights in a Winding-up
Holders of Ordinary Shares are entitled to participate in proportion to
their holdings in any distribution of assets after satisfaction of liabilities
to creditors in a winding-up.
J. Authorized but Unissued Shares
Under the Company's Memorandu
m and Articles of Association, there are
13,325,394 authorized but unissued Ordinary Shares. Those additional authorized
but unissued Ordinary Shares may be utilized
-34-
<PAGE>
for a variety of corporate purposes, including future public or private
offerings to raise additional capital or for facilitating corporate
acquisitions. In addition, the Company cancelled 603,000 shares in 1996 and
1,037,394 shares in 1997, which were repurchased under the share repurchase plan
adopted during 1994 and amended in 1995 and the tender offer transaction which
was completed in December 1996. The Company does not currently have any plans to
issue additional Ordinary Shares.
K. Transfers of Ordinary Shares
The Company's Memorandum and Articles of Association do not restrict the
transferability of fully paid Ordinary Shares, except that the Board of
Directors may refuse to register the transfer of any of the Ordinary Shares if,
in
the opinion of the Board, such transfer might result in the Company becoming
a CFC, FPHC or PHC. See "Restrictions on Transfer and Voting; Redemption of
Ordinary Shares".
L. New Issues of Ordinary Shares
Under the Company's Articles of Association, the Board of Directors is
authorized to exercise the power of the Company to offer, allot, grant options
over or otherwise dispose of all of the remaining unissued Ordinary Shares of
the Company, which comprise 13,325,394 Ordinary Shares. The Board of Directors
may, without further shareholder action, increase the number of authorized
shares of the Company.
In addition the Board of Directors may, without further shareholder
action, designate any of the authorized but unissued Ordinary Shares as
preferred shares by amending the Company's Memorandum of Association. Upon
filing such amendment with the BVI Registrar of Companies, the Board of
Directors would have authority to fix the dividend rights and rates, voting
rights, redemption p
rovisions and liquidation preference, all of which may take
precedence over comparable rights of the existing Ordinary Shares.
M. Merger; Dissenters' Rights
BVI law provides for mergers whereby there occurs either an absorption
by one company of another company and the simultaneous dissolution of the other
company, or the formation of a new company that absorbs two companies and the
automatic dissolution of both absorbed companies. BVI law provides for
compulsory acquisition or appraisal of the interests of a shareholder who
objects to the transfer of the ownership or assets of a company.
Under section 83 of the BVI International Business Companies Act, a
shareholder of a company incorporated under the Act has the right to object to a
proposed merger of the Company. If the shareholder complies fully with the
requirements of section 83 and the merger is approved by a majority of
shareholders, the dissenting shareholder may require the Company to pay fair
value (as agreed or appra
ised) 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.
-35-
<PAGE>
N. Joint Shareholders
If two or more persons who hold shares jointly are present at a meeting
in person or by proxy they must vote as one. Dividends and notices may be paid
or sent, in the case of joint holders, to any one of the persons named as joint
shareholders in the register of members.
O. Fiduciary Responsibilities
Under U.S. law majority and controlling shareholders generally have
certain "fiduciary" responsibilities to the minority shareholders. Shareholder
action must be taken in good faith and actions by controlling shareholders which
are obviously unreasonable may be declared null and void. BVI law protecting
the interests of minority shareholders may not be as protective in all
circumstances as the law protectin
g minority shareholders in U.S. jurisdictions.
While BVI law does permit a shareholder of a BVI company to sue its
directors derivatively (i.e., in the name of and for the benefit of the Company)
and to sue the Company and its directors for his benefit and for the benefit of
others similarly situated, the circumstances in which any such action may be
brought, and the procedures and defenses that may be available in respect of any
such action, may result in the rights of shareholders of a BVI company being
more limited than those of shareholders in a U.S. company.
P. Indemnification of Officers and Directors
Under its Memorandum and Articles of Association, the Company is
authorized to indemnify any person who is made or threatened to be made a party
to a legal or administrative proceeding by virtue of being a director, officer
or agent of the Company, provided such person acted in the best interests of the
Company and, in the case of a criminal proceeding, such person had no reaso
nable
cause to believe that his conduct was unlawful. The Company is obliged to
indemnify any director, officer or agent of the Company who was successful in
any proceeding against reasonable expenses incurred in connection with the
proceeding, regardless of whether such person met the standard of conduct
described in the preceding sentence.
Q. Transfer Agent and Registrar
ChaseMellon Shareholder Services serves as the Transfer Agent and
Registrar for the Ordinary Shares.
Item 15. Defaults upon Senior Securities.
On December 16, 1996, a U.S. subsidiary entered into a $15 million Term
Promissory Note ("Term Note"). In accordance with the terms and conditions of
the Term Note, the subsidiary is subject to mandatory prepayments on April 1,
1998 and 1999 by an amount equal to 50% of excess cash flow, as defined, for the
preceding fiscal year. The Term Note requires the maintenance of specific
covenants including financial ratios. For the year ended December 31, 1998, the
subsidi
ary failed to meet several covenants including their net income, tangible
net worth and fixed charge ratio covenants. A waiver has
-36-
<PAGE>
been obtained from the third-party financial institution.
Item 16. Changes in Securities and Changes in Security for Registered
Securities.
Not applicable.
Item 17. Financial Statements.
Financial statements are presented in Item 18.
Item 18. Financial Statements.
The information required by Item 18 is contained in pages 17 to 33 of
the Annual Report to Shareholders.
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 :
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management Report 15
Independent Auditors' Report 16
Consolidated Statements of Operations for the three years
ended December 31, 1998 17
Consolidated Balance Sheets as of December 31, 1998 and 1997 18-19
Consolidated Statements of Cash Flows for the three years
ended December 31, 1998 20-21
Consolidated Statements of Shareholders' Equity for the three years
ended December 31, 1998 22
Notes to Consolidated Financial Statements
23-33
</TABLE>
B. Condensed Financial Information
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report S-1
Unconsolidated Statements of Operations for the three years
ended December 31, 1998 S-2
Unconsolidated Balance Sheets as of December 31, 1998 and 1997 S-3
Unconsolidated Statements of Cash Flows for the three years
ended December 31, 1998 S-4
Note to Schedule 1 S-5
</TABLE>
C. Exhibit Index
Exhibit
-37-
<PAGE>
Number Description
------ -----------
3.1 Second Amendment to Loan and Security Agreement between Associated
Hygienic Products LLC and SouthTrust Bank of Georgia, N.A. dated
November 9, 1998.
3.2 Third Amendment to Loan and Security Agreement between Associated
Hygienic Products LLC and SouthTrust Bank of Georgia, N.A. dated
January 29, 1999.
3.3 Land Title Deed, dated October 24, 1997, of Indonesian joint
venture.
3.4 Sales and Purchase Agreement, dated December 14, 1998, between St.
Andrews Property Investment Inc. and Associated Hygienic Products
(Canada), Inc.
11 Computation of Net Income Per Ordinary
Share.
D. Financial Statement Schedules
All financial statement schedules are not included because the information
is contained in the Notes to Consolidated Financial Statements in pages 23 to 33
of the Annual Report to Shareholders.
-38-
<PAGE>
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 June 1, 1999.
DSG INTERNATIONAL LIMITED
By /s/TERENCE Y.F. LEUNG
----------------------
Terence Y.F. Leung
Vice President and Treasurer
-39-
<PAGE>
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, 1998 and 1997, and for each of the three years ended December 31,
1998, and have issued our report thereon dated March 19, 1999, such financial
statements and report are included in your 1998 Annual Report to the
Shareholders and are incorporated herein by reference. Our audits also included
the financial statement schedules of DSG International Limited, listed in Item
19. These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to exp
ress an opinion based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Deloitte Touche Tohmatsu
Hong Kong
March 19, 1999
-40-
<PAGE>
SCHEDULE 1
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Equity in earnings of subsidiaries $(1,201) $2,414 $17,909
Operating expenses:
Adminis
tration 563 3,394 4,082
Depreciation 20 12 10
------- ------ -------
Total operating expenses 583 3,406 4,092
Operating (loss) income (1,784) (992) 13,817
Interest expense (286) (217) (259)
Exchange (loss) gain (430) (390) (737)
Interest income 3,841 2,066 2,078
Other finance expenses (56) (6) (9)
Other income 590 955 461
------- ------ -------
Income before income taxes 1,875 1,416 15,351
Provision for income taxes 253 443 6,185
------- ------ -------
Net income $1,622 $ 973 $ 9,166
======= ====== =======
</TABLE>
See notes to Schedule 1
-41-
<PAGE>
SCHEDULE 1
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash
$1,734 $ 546
Due from related parties 3,472 607
Other receivables 187 203
Prepaid expenses and others 17 381
------- -------
Total current assets 5,410 1,737
Equipment:
Furniture 216 216
Motor vehicles 62 62
------- -------
Total 278 278
Less: accumulated depreciation 109 88
------- -------
Net property 169 190
------- -------
Investment in subsidiaries (on the equity method) 62,610 63,658
------- -------
Total assets $68,189 $65,585
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $98 $ 157
Accrued payroll and employee benefits - 600
Accrued expenses 59 49
Income taxes payable 19 1
------- -------
Total current liabilities 176 807
------- -------
Shareholders' equity:
Ordinary sha
res 67 67
Additional paid-in capital 18,301 18,301
Retained earnings 58,266 56,644
Translation reserve (8,621) (10,234)
------- ------
Total shareholders' equity 68,013 64,778
------- -------
Total liabilities and shareholders' equity $68,189 $65,585
======= =======
</TABLE>
See notes to Schedule 1
-42-
<PAGE>
SCHEDULE 1
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net cash provided by operating activities $1,392 $ 935 $8,790
Cash flows from investing activities
Expenditure
s for equipment - (62) -
Investments in and advances to subsidiaries (1,221) (43,940) (6,224)
Recoupment of investment in subsidiaries 3,882 28,245 18,783
Advances to shareholder (3,372) (6,129) (7,638)
Repayments by shareholder 507 21,166 4,530
Receipt of (investment in) restricted bank
deposit - - 5,269
------ ------ ------
Net cash provided by (used in) investing
activities (204) (720) 14,720
------ ------ ------
Cash flows from financing activities
Financing from long term loans - - -
Repayment of long term loans - - (5,269)
Purchase of treasury shares - (49) (17,632)
Tender offer expenses
- - (433)
------ ------ ------
Net cash used in financing activities - (49) (23,334)
Increase (decrease) in cash and cash
equivalents 1,188 166 176
Cash and cash equivalents, beginning of year 546 380 204
------ ------ ------
Cash and cash equivalents, end of year $1,734 $ 546 $ 380
====== ====== ======
Cash dividends from:
Consolidated subsidiaries $754 $14,334 $18,160
</TABLE>
See notes to Schedule 1
-43-
<PAGE>
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.
-44-
<PAGE>
EXHIBIT 3.1
-----------
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
-----------------------------------------------
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT, made, entered into
and effective as of the 9th day of November, 1998 (the "Amendment"), by and
---------
between ASSOCIATED HYGIENIC PRODUCTS LLC, a limited liability company duly
organized under the laws of the State of Wyoming ("Borrower"), and SOUTHTRUST
--------
BANK, N.A., successor by merger to SOUTHTRUST BANK OF GEORGIA, N.A., a national
banking association with offices in Atlanta, Georgia ("Lender").
------
WITNESSETH:
----------
WHEREAS, Borrower and Lender executed a certain Loan and Security
Agreement, dated as of December 16, 1996 (as amended to date, the "Loan
----
Agreement"; capitalized terms used herein and not defined herein have the
- - ---------
meanings assigned to them in the Loan Agreement); and
WHEREAS, certain Events of Default, as set forth on Schedule I hereto, have
----------
occurred and are continuing (collectively, the "Existing Events of Default");
--------------------------
and
WHEREAS, Lender (without waiving the Existing Events of Default) and
Borrower wish to amend the Loan Agreement in certain respects, as hereinafter
set forth;
NOW, THEREFORE, for and in consideration of the sum of $10.00, the
foregoing premises and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Additional Defined Terms. The following defined terms are
------------------------
hereby added to Section 1.1 of the Loan Agreement in alphabetical order:
"AHP Wisconsin" shall mean Associated Hygienic Products Inc.
-------------
"Wisconsin Location" shall mean the location of AHP Wisconsin at
------------------
205 East Highland Drive, Oconto Falls, Wisconsin.
2. Amendment to Definition of "Collateral Locations". The
------------------------------------------------
definition of "Collateral Locations" set forth in Section 1.1 of the Loan
Agreement is hereby deleted in its entirety and the following revised definition
of "Collateral Locations" is hereby substituted in lieu thereof:
"Collateral Locations" shall mean (i) the New Facility, (ii) 3312
--------------------
Berkley Lake Road, Suite 200, Duluth, Georgia, and (iii) and the
Wisconsin Location but only as to Equipment Collateral which is leased
by Borrower to AHP Wisconsin as described
<PAGE>
in Section 7 of that certain Second Amendment to Loan and Security
Agreement, dated as of November 9, 1998, between Borrower and Lender.
3. Amendment to Definition of Equipment Collateral. The
-----------------------------------------------
definition of "Equipment Collateral" set forth in Section 1.1 of the Loan
Agreement is hereby deleted in its entirety and the following revised definition
of "Equipment Collateral" is hereby substituted in lieu thereof:
"Equipment Collateral" shall mean all equipment of Borrower, or in
--------------------
which it has rights, whether now owned or hereafter acquired and
wherever located. As defined herein, "Equipment Collateral" shall
--------------------
include, without limitation, all machinery, fixtures, furniture,
furnishings, leasehold improvements, rolling stock, motor vehicles,
plant equipment, computers and other office equipment and office
furniture, together with any and all attachments and accessions,
substitutes and replacements, and tools, spare parts, and repair parts
used or useful in connection therewith.
4. Addition of New Definition of "Intangibles Collateral". The
-----------------------------------------------------
following definition of "Intangibles Collateral" is hereby added in Section 1.1
of the Loan Agreement:
"Intangibles Collateral" shall mean all general intangibles of a
----------------------
Borrower, whether now existing or hereafter acquired or arising,
including, without limitation, all copyrights, royalties, tax refunds,
rights to tax refunds, trademarks, trade names, service marks, patent
and proprietary rights, blueprints, drawings, designs, trade secrets,
plans, diagrams, schematics and assembly and display materials
relating thereto, all customer lists, all books and records, all
computer software and programs, and all rights of Borrower under any
contract.
4. Collateral.
----------
(a) In connection with the amendments to and addition of certain
collateral definitions set forth herein, Section 3 of the Loan Agreement is
hereby deleted in its entirety and the following revised Section 3 is hereby
substituted in lieu thereof:
3. SECURITY INTEREST--COLLATERAL.
---------------------------------
As security for the payment of the Notes and all Obligations
whatsoever of Borrower to Lender and the performance by Borrower of
all covenants and requirements hereunder and under the other Loan
Documents (including, without limitation, all Obligations of Borrower
under the Borrower Guaranty), Borrower hereby grants (or re-grants) to
Lender a continuing general lien upon and security interest in and to
the following described Property, wherever located, whether now
existing or hereafter acquired or arising (herein, the "Collateral"),
----------
namely: (a) the Accounts Receivable
-2-
<PAGE>
Collateral; (b) the Inventory Collateral; (c) the Equipment
Collateral; (d) the Balances Collateral; (e) the Intangibles
Collateral; and (f) all products and/or proceeds of any and all of the
foregoing, including, without limitation, insurance or condemnation
proceeds, all Property received wholly or partly in trade or exchange
for any of the foregoing, and all rents, revenues, issues, profits and
proceeds arising from the sale, lease, license, encumbrance,
collection or any other temporary or permanent disposition of any of
the foregoing or any interest therein (but the foregoing is not
intended, and shall not be construed to permit, any of the foregoing
transactions to the extent otherwise prohibited or restricted pursuant
hereto or to any other Loan Documents). The term "Collateral", as used
----------
herein, shall also include the right, title and interest of Borrower
in and to the New Facility in which Lender is being granted a security
title and Lien pursuant to the Mortgage.
(c) In connection with the foregoing modification to Section 3 of the
Loan Agreement, and in furtherance thereof, Borrower hereby acknowledges,
confirms and agrees that, notwithstanding any provision of the Loan Agreement or
any other Loan Document to the contrary, the Collateral (as redefined in Section
3 of the Loan Agreement, as amended hereby) secures, and shall continue to
secure, all Obligations of Borrower to Lender, including, without limitation,
all of Borrower's Obligations under the Term Note and all of Borrower's
Obligations under the Borrower Guaranty, unless and until all of such
Obligations are paid in full, and Lender has terminated this Agreement and the
Borrower Guaranty in writing.
5. Binding Effect. Except to the extent set forth expressly herein
--------------
above to the contrary, Borrower acknowledges and agrees that all terms and
provisions, covenants and conditions of the Loan Agreement and all documents
executed in connection therewith shall be and remain in full force and effect
and constitute the legal, valid, binding and enforceable obligations of Borrower
to Lender in accordance with their respective terms as of the date hereof. To
the extent of any conflict between any provision of this Amendment and any
provision of the Loan Agreement or any other Loan Document, any such conflicting
provision shall be deemed to be amended in a manner consistent with this
Amendment.
6. Representations. In order to induce Lender to enter into this
---------------
Amendment, Borrower hereby restates and renews each and every representation and
warranty heretofore made by it under or pursuant to the Loan Agreement, except
to the extent that such representations and warranties are untrue as a result of
the occurrence and continuance of the Existing Events of Default, and represents
and warrants further to Lender that it has taken all necessary and appropriate
company action to authorize the execution, delivery and performance hereof and
of any other document, instrument or agreement executed and/or delivered in
connection herewith and the same will not violate the Organizational Documents
or any document, instrument or agreement to which Borrower is a party or any
provision of law applicable to Borrower.
-3-
<PAGE>
7. Covenants. Borrower hereby restates and affirms each and every
---------
obligation, covenant and condition of the Loan Agreement, except to the extent
that Borrower is in violation thereof as a result of the occurrence and
continuance of the Existing Events of Default. In addition, Borrower hereby
covenants and agrees with Lender that within thirty (30) days after the date
hereof, it will (a) take, and cause HP Canada to take, all actions determined by
Lender to be necessary to perfect Lender's security interest in all equipment
owned by AHP Canada and located at the Wisconsin Location (the "Canada
------
Equipment"), (b) enter into a lease agreement with AHP Wisconsin documenting the
leasing arrangements between Borrower or AHP Canada, as applicable, as lessor,
and AHP Wisconsin, as lessee, relative to all such Canada Equipment being used
by AHP Wisconsin in its business at the Wisconsin Location, on terms and
conditions, including, without limitation, as to rentals, satisfactory to
Lender, and (c) execute and deliver, or cause to be executed and delivered, such
documents, instruments and agreements as Lender may deem to be necessary or
appropriate in connection with the foregoing.
8. Further Assurances. Borrower agrees to take such further
------------------
actions, as Lender shall reasonably request in connection herewith, to evidence
the amendments herein contained to the Loan Agreement.
9. No Default. Further to induce Lender to enter into this
----------
Amendment, Borrower hereby certifies to Lender that, upon execution of this
Amendment, there exists (i) except for the Existing Events of Default, no
Default Condition or Event of Default under the Loan Agreement and (ii) no right
of offset, defense, counterclaim, claim or objection in favor of Borrower as
against Lender arising out of or with respect to any of the Obligations.
10. No Waiver. Lender does not, by its execution and delivery of
---------
this Amendment, waive any of the Existing Events of Default or any other Events
of Default or Default Conditions which may presently or hereafter exist.
11. Governing Law. This Amendment shall be governed by and
-------------
construed in accordance with the laws of the State of Georgia.
-4-
<PAGE>
IN WITNESS WHEREOF, Borrower and Lender have executed this Amendment,
through their duly authorized officers, under their hands and seals, effective
as of the date and year first above written.
"BORROWER"
ASSOCIATED HYGIENIC (SEAL)
PRODUCTS LLC,
a Limited Liability Company
By: /s/ PETER CHANG
-----------------------------------------
Name: Peter Chang
Title: President
Attest: /s/ PETER LEUNG
---------------------------------
Name: Philip Leung
Title: Secretary
"LENDER"
SOUTHTRUST BANK, N.A. (SEAL)
By: /w/ WAYNE F. DURLACHER
-----------------------------------------
Wayne F. Durlacher, Senior Vice President
-5-
<PAGE>
REAFFIRMATION OF GUARANTY
-------------------------
The undersigned, each a guarantor of the "Obligations" of "Borrower"
to "Lender", as such terms are defined in the "Loan Agreement" referenced in the
within and foregoing Second Amendment to Loan and Security Agreement ("Second
------
Amendment"), pursuant to a certain Guaranty dated December 16, 1996
- - ---------
("Guaranty"), hereby acknowledges its receipt of a copy of the Second Amendment
and agrees that its Guaranty shall continue in full force and effect from and
after the execution and delivery thereof.
Dated: November 9, 1998
AHP HOLDINGS, L.P.
By: ELMBAY LIMITED,
an English corporation, as General
Partner
By: /s/ PETER CHANG
--------------------------------
Peter Chang
Principal Executive Officer
DSG INTERNATIONAL LIMITED
By: /s/ PETER CHANG
--------------------------------
Peter Chang
Vice President
-6-
<PAGE>
SCHEDULE I
----------
Existing Events of Default
--------------------------
Events of Default have occurred and are continuing under the Loan Agreement
as a result of (a) the failure of Holdings to maintain Tangible Net Worth of at
least $16,000,000 as required pursuant to Section 8.18 of the Loan Agreement,
(b) the failure of Holdings to achieve annual net income of at least $100,000
for its fiscal quarter ending June 30, 1998, as required pursuant to Section
8.19 of the Loan Agreement, (c) the failure of Holdings to achieve a Fixed
Charge Coverage Ratio of at least 1.25:1.00 for its fiscal quarter ending June
30, 1998, as required pursuant to Section 8.20 of the Loan Agreement, (d) the
transfer by Borrower of certain of its equipment constituting part of the
Collateral of Lender from its former plant location in Bell, California to a
location of Associated Hygienic Products, Inc. in Wisconsin, in violation of the
provisions of Sections 6.5 and 9.9 of the Loan Agreement (although Borrower
disputes that this Event of Default occurred), (e) the failure of AHP to hold
cash or cash equivalents at all times in the minimum amount of Eleven Million
Dollars ($11,000,000), as required pursuant to Section 8.23 of the Loan
Agreement, and (f) violations of Sections 9.6, 9.9 and 9.12 of the Loan
Agreement resulting from the making by Borrower of certain advances (as
reflected in Borrower's books and records) to Associated Hygienic Products Inc.
-7-
<PAGE>
EXHIBIT 3.2
-----------
THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
THIS THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT, made, entered
into and effective as of the 29th day of January, 1999 (the "Amendment"), by and
---------
between ASSOCIATED HYGIENIC PRODUCTS LLC, a limited liability company duly
organized under the laws of the State of Wyoming ("Borrower"), and SOUTHTRUST
--------
BANK, N.A., successor by merger to SOUTHTRUST BANK OF GEORGIA, N.A., a national
banking association with offices in Atlanta, Georgia ("Lender").
------
WITNESSETH:
----------
WHEREAS, Borrower and Lender are parties to a certain Loan and
Security Agreement, dated as of December 16, 1996 (as mended to date, the "Loan
----
Agreement"; capitalized terms used herein and not defined herein have the
- - ---------
meanings assigned to them in the Loan Agreement); and
WHEREAS, certain Events of Default, as set forth on Schedule I hereto,
----------
have occurred and are continuing under the Loan Agreement (collectively, the
"Existing Events of Default"); and
- - ---------------------------
WHEREAS, Borrower has requested that Lender waive the Existing Events
of Default and, subject to the terms and conditions set forth herein, Lender is
willing to do so; and
WHEREAS, Borrower has requested that Lender amend the financial
covenants set forth in Sections 8.18, 8.19 and 8.20 of the Loan Agreement and,
subject to the terms and conditions set forth herein, Lender is willing to do
so; and
WHEREAS, Borrower and Lender wish to amend the Loan Agreement in
certain other respects, as hereinafter set forth; and
WHEREAS, in order to give effect to the foregoing, Borrower and Lender
wish to enter into this Amendment;
NOW, THEREFORE, for and in consideration of the sum of $10.00, the
foregoing premises and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Waiver of Existing Events of Default. Effective upon satisfaction of
------------------------------------
each of the conditions precedent set forth in Section 3 hereof, Lender hereby
waives the Existing Events of Default; provided, however, that such waiver is
--------- -------
expressly limited to the Existing Events of Default and shall not be, or be
deemed to be, a waiver of any other Events of Default or Default Conditions
presently or hereafter existing, including, without limitation any Events of
Default or Default Conditions occurring as a result of any further violations by
Borrower of the provisions of the Loan Agreement specified on Schedule I hereto.
----------
<PAGE>
2. Amendments. Effective upon satisfaction of the conditions precedent
----------
set forth in Section 3 hereof, the Loan Agreement is hereby amended in the
following manner:
(a) Amendment to Definition of Fixed Charge Coverage Ratio. The definition
------------------------------------------------------
of "Fixed Charge Coverage Ratio" set forth in Section 1.1 of the Loan Agreement
is hereby deleted in its entirety and the following revised definition of "Fixed
Charge Coverage Ratio" is hereby substituted in lieu thereof:
"Fixed Charge Coverage Ratio" shall mean, for any fiscal period, the
---------------------------
ratio which (a) the sum of the net income plus management fees and
royalties paid plus depreciation and amortization expense plus Interest
Expense for AHP Holdings and its consolidated Subsidiaries for such period,
bears to (b) the sum of Interest Expense plus the current maturities of
long-term debt for AHP Holdings and its consolidated Subsidiaries for the
sine such period, all as determined under GAAP.
(b) Amendment to Section 2.2 of the Loan Agreement. Section 2.2 of the
----------------------------------------------
Loan Agreement is hereby amended by deleting the date "December 1, 1999" in
paragraph (c) thereof and substituting in lieu thereof the date "January 31,
2000".
(c) Amendment to Section 8.5 of the Loan Agreement. Section 8.5 of the
----------------------------------------------
Loan Agreement is hereby deleted in its entirety and the following revised
Section 8.5 is hereby substituted in lieu thereof:
8.5 Periodic Financial Statements of Borrower, AHP Holdings and
-----------------------------------------------------------
Parent. Borrower shall, as soon as practicable, and in any event within
------
thirty (30) days after the end of each calendar month, furnish to Lender
unaudited financial statements of Borrower, AHP Holdings and Parent (the
latter two on a consolidated basis), including a balance sheet, a cash flow
statement and an income statement, for the month then ended, the fiscal
quarter then ended (if applicable), and the Fiscal Year to date, certified
as to truth and accuracy by Borrower's chief executive officer or chief
financial officer.
(c) Amendment to Section 8.18 of the Loan Agreement. Section 8.18 of the
-----------------------------------------------
Loan Agreement is hereby deleted in its entirety and the following revised
Section 8.18 is hereby substituted in lieu thereof:
8.18 Tangible Net Worth.
-------------------
Tangible Net Worth shall be at least equal to Thirteen Million Five
Hundred Thousand Dollars ($13,500,000) at all times.
-2-
<PAGE>
(d) Amendment to Section 8.19 of the Loan Agreement. Section 8.19 of the
-----------------------------------------------
Loan Agreement is hereby deleted in its entirety and the following revised
Section 8.19 is hereby substituted in lieu thereof:
8.19 Net Income.
-----------
The net income for AHP Holdings and its consolidated Subsidiaries,
determined in accordance with GAAP, for each fiscal quarter set forth below
shall be at least the amount set forth opposite such fiscal quarter:
Fiscal Quarter Net Income
-------------- ----------
Fiscal Quarter ending
March 31, 1999 $0
Fiscal Quarter ending
June 30, 1999 $25,000
Fiscal Quarter ending
September 30, 1999 $25,000
Fiscal Quarter ending
December 31, 1999 $50,000
(e) Amendment to Section 8.20 of the Loan Agreement. Section 8.20 of the
-----------------------------------------------
Loan Agreement is hereby deleted in its entirety and the following revised
Section 8.20 is hereby substituted in lieu thereof:
8.20 Fixed Charge Coverage Ratio.
---------------------------
The Fixed Charge Coverage Ratio of AHP Holdings and its consolidated
Subsidiaries as of the end of each fiscal quarter in each fiscal year shall
be at least 1.00:1.00, as determined under GAAP.
(f) Amendment to Section 8.23 of the Loan Agreement. Section 8.23 of the
-----------------------------------------------
Loan Agreement (which was added thereto pursuant to the First Amendment to Loan
and Security Agreement dated as of August 19, 1997) is hereby deleted in its
entirety and the following revised Section 8.23 is hereby substituted in lieu
thereof:
8.23 Balances Collateral.
--------------------
(a) Heretofore Borrower has, and Borrower shall continue to, cause
all cash, checks, drafts, items and other instruments for the payment of
money which it now has or
-3-
<PAGE>
may at any time hereafter receive as proceeds of Collateral or otherwise to
be deposited with Lender in such controlled account maintained with Lender
as Lender shall designate (the "Controlled Account").
------------------
(b) All of such cash, checks, drafts, items and other instruments of
payment shall constitute Balances Collateral hereunder in which Borrower
hereby grants and re-grants to Lender a security interest as security for
the Obligations and as to which Lender shall have all rights of a secured
party arising under this Agreement, the other Loan Documents and applicable
law.
(c) Borrower shall cause the amount of the Balances Collateral
maintained in the Controlled Account to at all times equal or exceed the
sum of Six Million Dollars ($6,000,000) (the "Minimum Balances
----------------
Collateral"). So long as Borrower is in compliance with such requirement
----------
and so long as no Default Condition or Event of Default has otherwise
occurred and is continuing, in the ordinary course of business, Borrower
shall have the right to withdraw from the Controlled Account Balances
Collateral in excess of the Minimum Balances Collateral for use in its
business.
(d) At Borrower's request from time to time, Lender shall permit
Borrower to invest the Balances Collateral maintained in the Controlled
Account in certificates of deposit and other investment products offered by
Lender and its affiliate, SouthTrust Securities, Inc. which are acceptable
to Lender for such purpose, so long as Borrower takes all actions requested
by Lender such that Lender will continue to have a first priority perfected
security interest in such Balances Collateral following such investment.
(e) Addition of new Section 8.24 to the Loan Agreement. The Loan
--------------------------------------------------
Agreement is hereby further amended by adding, immediately after Section
8.23 thereof, a new Section 8.24 thereof, to read as follows:
8.24 Consultant.
----------
On or prior to January 30, 1999, at its expense Borrower shall hire a
business consultant selected by Borrower, but acceptable to Lender, to
provide to Lender and Borrower a detailed evaluation of the businesses of
Borrower and Associated Hygienic Products, Inc. and their respective
projections and business plans. Borrower shall cause such consultants to
deliver their report to Borrower and Lender on or prior to March 31, 1999.
3. Conditions Precedent. The waivers set forth in Section 1 hereof and
--------------------
the amendments set forth in Section 2 hereof shall not become effective unless
and until (a) Borrower shall have delivered to Lender a schedule of its and its
affiliates' patents and trademarks, (b) Brandon SL Wang shall have paid to
Lender the sum of $4,000,000 as a mandatory prepayment of the "Term Loan" (as
defined in the Wang Loan Agreement) pursuant to Section 2.4(b) of the Wang Loan
Agreement, for application to the unpaid principal installments of such Term
Loan in the inverse order of their
-4-
<PAGE>
respective maturities (which amount Lender has agreed to accept from Mr. Wang in
lieu of the sum of $6,807,993.75 previously demanded by Lender in accordance
with such Section 2.4(b)), and (c) Mr. Wang and Lender shall have entered into
an amendment to the Wang Loan Agreement relative to the "Events of Default" (as
defined therein) existing thereunder in form and substance satisfactory to
Lender.
4. Binding Effect. Except to the extent set forth expressly hereinabove to
--------------
the contrary, Borrower acknowledges and agrees that all terms and provisions,
covenants and conditions of the Loan Agreement and all documents executed in
connection therewith shall be and remain in full force and effect and constitute
the legal, valid, binding and enforceable obligations of Borrower to Lender in
accordance with their respective terms as of the date hereof. To the extent of
any conflict between any provision of this Amendment and any provision of the
Loan Agreement or any other Loan Document, any such conflicting provision shall
be deemed to be amended in a manner consistent with this Amendment.
5. Representations. In order to induce Lender to enter into this
---------------
Amendment, after giving effect thereto, Borrower hereby restates and renews each
and every representation and Warranty heretofore made by it under or pursuant to
the Loan Agreement, and represents and warrants further to Lender that it has
taken all necessary and appropriate company action to authorize the execution,
delivery and performance hereof and of any other document, instrument or
agreement executed and/or delivered in connection herewith and the same will not
violate the Organizational Documents or any document, instrument or agreement to
which Borrower is a party or any provision of law applicable to Borrower.
6. Further Assurances. Borrower agrees to take such further actions as
------------------
Lender shall reasonably request in connection herewith to evidence the
amendments herein contained to the Loan Agreement.
7. No Default. Further to induce Lender to enter into this Amendment,
----------
Borrower hereby certifies to Lender that, upon execution of this Amendment,
there exists (i) after giving effect to this Amendment, no Default Condition or
Event of Default under the Loan Agreement and (ii) no right of offset, defense,
counterclaim, claim or objection in favor of Borrower as against Lender arising
out of or with respect to any of the Obligations.
8. Release. Effective as of the date of execution of this Amendment,
-------
Borrower releases and forever waives and relinquishes all claims, demands,
obligations, liabilities and causes of action of whatsoever kind or nature,
whether known or unknown, which it has, may have, or might have or assert now or
in the future against Lender and its directors, officers, employees, attorneys,
agents, successors, predecessors and assigns and any Affiliates of Lender and
their directors, officers, employees, attorneys, agents, successors,
predecessors and assigns, directly or indirectly, arising out of, based upon, or
in any manner connected with any transaction, event, circumstance, action,
failure to act, or occurrence of any sort or type, relative to the Loan
Agreement, whether known or
-5-
<PAGE>
unknown, which occurred, existed, was taken, permitted, or begun before the
execution of this Amendment.
9. Governing Law. This Amendment shall be governed by and construed in
-------------
accordance with the laws of the State of Georgia.
IN WITNESS WHEREOF, Borrower and Lender have executed this Amendment,
through their duly authorized officers, under their hands and seals, effective
as of the date and year first above written.
"BORROWER"
ASSOCIATED HYGIENIC (SEAL)
PRODUCTS LLC,
a Limited Liability Company
By: /s/ PETER CHANG
--------------------------------------------
Name: Peter Chang
Title: President
Attest: /s/ PHILIP LEUNG
------------------------------------
Name: Philip Leung
Title: Secretary
"LENDER"
SOUTHTRUST BANK, N.A. (SEAL)
By: /s/ ROBERT E. MILAM SR.
--------------------------------------------
Name: Robert E. Milam Sr.
-------------------------------------
Title: Vice President
-------------------------------------
-6-
<PAGE>
REAFFIRMATION OF GUARANTY
-------------------------
The undersigned, each a guarantor of the "Obligations" of "Borrower"
to "Lender", as such terms are defined in the "Loan Agreement" referenced in the
within and foregoing Third Amendment to Loan and Security Agreement ("Third
-----
Amendment"), pursuant to a certain Guaranty dated December 16, 1996
- - ---------
("Guaranty"), hereby acknowledges its receipt of a copy of the Third Amendment
--------
and agrees that its Guaranty shall continue in full force and effect from and
after the execution and delivery thereof.
Dated: January 29, 1999
AHP HOLDINGS, L.P.
By: ELMBAY LIMITED,
an English corporation, as General
Partner
By: /s/ PETER CHANG
---------------------------------
Peter Chang
Principal Executive Officer
DSG INTERNATIONAL LIMITED
By: /s/ PETER CHANG
---------------------------------
Peter Chang
Vice President
-7-
<PAGE>
SCHEDULE I
----------
Existing Events of Default
--------------------------
Events of Default have occurred and are continuing under the Loan Agreement
as a result of (a) the failure of AHP Holdings to maintain Tangible Net Worth of
at least $16,000,000 as required pursuant to Section 8.18 of the Loan Agreement,
(b) the failure of AHP Holdings and its consolidated Subsidiaries to achieve
annual net income of at least $100,000 for their fiscal quarters ending June 30,
1998, September 30, 1998 and December 31, 1998 as required pursuant to Section
8.19 of the Loan Agreement, (c) the failure of AHP Holdings and its consolidated
Subsidiaries to achieve a Fixed Charge Coverage Ratio of at least 1.25:1.00 for
their fiscal quarters ending June 30, 1998, September 30, 1998 and December 31,
1998 as required pursuant to Section 8.20 of the Loan Agreement, (d) the
transfer by Borrower of certain of its equipment constituting part of the
Collateral of Lender from its former plant location in Bell, California to a
location of Associated Hygienic Products, Inc. in Wisconsin, in violation of the
provisions of Sections 6.5 and 9.9 of the Loan Agreement (although Borrower
disputes that this Event of Default occurred), (e) the failure of Borrower to
hold cash or cash equivalents at all times in the minimum mount of Eleven
Million Dollars ($11,000,000), as required pursuant to Section 8.23 of the Loan
Agreement, and (f) violations of Sections 9.6, 9.9 and 9.12 of the Loan
Agreement resulting from the making by Borrower of certain advances (as
reflected in Borrower's books and records) to Associated Hygienic Products, Inc.
An Event of Default has also occurred pursuant to Section 10.16 of the Loan
Agreement as a result of the occurrence and continuance of an "Event of Default"
under Section 5.1 of the Wang Loan Agreement resulting from the failure of Mr.
Wang to comply with the requirements of Section 4.2(b) of the Wang Loan
Agreement. Subject to the terms and conditions set forth therein, such Event of
Default is being separately waived by Lender pursuant to a First Amendment to
Loan Agreement dated of even date between Lender and Mr. Wang.
-8-
<PAGE>
EXHIBIT 3.3
-----------
DAFTAR ISIAN 205
BADAN PERTANAHAN NASIONAL
To: Suandi
[SEAL]
BUKU TANAH
HAK GUNA BANGUNAN No. 16
------------- ----
[SEAL]
PROPINSI JAWA BARAT
--------------------------------------------
KABUPATEN/KOTAMADYA SERANG
--------------------------------------------
KECAMATAN CIKANDE
--------------------------------------------
DESA/KELURAILAN LEUWI LIMUS
--------------------------------------------
KANTOR PERTANAHAN DAFTAR ISIAN 208
KABUPATEN/KOTAMADYA No. 4276 1997
------- --
SERANG DAFTAR ISIAN 307
- - ------------------- No. 6203 1997
------- --
AK. 791490 1 0 - 0 1 - 0 9 - 0 2 - 3 - 0 0 0 1 6
<PAGE>
PENDAFTARAN-PERTAMA
Halaman 2
- - --------------------------------------------------------------------------------
a) HAK : Guna Bangunan. f) NAMA PEMEGANG HAK
No. 16 PT. DSG. SURYA MAS INDONESIA
----------------------------
Desa : Leuwi Limus. BERKEDUDUKAN DI JAKARTA.
________________________
b) NAMA JALAN/PERSIL
- - --------------------------------------------------------------------------------
c) ASAL PERSIL g) PEMBUKUAN
1. Konversi Serang Tgl. 24-10-1997
-------------- ----------
2. Pemberian hak Kepala Kantor Pertanahan
Guna Bangunan. Kabupalen/Kotamadya
Serang
3. Pemisahan ------------------------
4. Penggabungan ttd.
Drs. H.M. HASJIM HUSEIN
-----------------------
NIP 010 053 449
- - --------------------------------------------------------------------------------
d) SURAT KEPUTUSAN h) PENERBITAN SERTIPIKAT
Serang Tgl. 24-10-1997
Kepala Kantor Pertanahan -------------- ----------
Kabupaten Serang Kepala Kantor Pertanahan
Nomor : 550.2-95-8K-1997 Kabupaten/Kotamadya
tanggai 13 Oktober 1997. Serang
-------------------
Liang pemasukan/biaya administrasi
Rp. 150.000,- [SEAL]
Lamanya hak berlaku
30 Tahun. Drs. H.H. HASJIM HUSEIN
Berakhirnya hak -----------------------
Tgl. 24 September 2027. NIP 010 053 449
- - --------------------------------------------------------------------------------
e) SURAT UKUR i) PENUNJUK
--------------
GAMBAR SITUASI Bekas Hak Milik No: 569, 526, 560,
572, 567, 558, 525, 151, 521, 564,
Tgl. 24-10-1997 565, 530, 528, 522, 519, 520, 527,
529, 523, 531, 524. dan 552.
No. 4744/1997 Desa Leuwi Limus.
Loas : 40.000 M/2/ (Empat
puluh ribu meter persegi).
- - --------------------------------------------------------------------------------
<PAGE>
DAFTAR ISIAN 207 3
1 0 - 0 1 - 0 9 - 0 2 - 3 - 0 0 0 1 6 Nomor hak : B16
---
SURAT UKUR
--------------
GAMBAR SITUASI
Nomor : 4744/1997
---- --
SEBIDANG TANAH TERLETAK DALAM
Propinsi : JAWA BARAT
---------------------------------------------------------------------
Kabupaten/Kotamadya : SERANG
----------------------------------------------------------
Kecamatan : CIKANDE
--------------------------------------------------------------------
Desa/Kelurchan : LEUWI LIMUS
---------------------------------------------------------------
Feta :
-------------------------------------------------------------------------
Lembar : Kotak : Nomor Pendaftaran :
------------- -------------- --------------
- - --------------------------------------------------------------------------------
Keadaan Tanab : Beberapa tanab darat kosong.
----------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Tanda-tanda batas : Patok beton I s/d IV yang berdiri diatas batas dan telab
------------------------------------------------------------
memenuhi ketentuan dalam PMA No. 8/1961.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Luas : 40.000 M/2/ (Empat puluh ribu meter persegi).
-------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Penunjukan dan penetapan batas : Batas-batas ditunjukkan oleb Iwan setiawan,
-----------------------------------------------
untuk dan atas pemohon.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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<PAGE>
PERBANDINGAN 1 : 1.000 4
-----
[MAP]
<PAGE>
5
Hai lain-lain : Gs. lain Bekas Hak Milik No. 569, 526, 560, 572, 567, 558, 151,
----------------------------------------------------------------
521, 564, 565, 530, 528, 522, 519, 520, 527, 529, 523,
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531, 524. dan 562. Desa Leuwi Limus
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Daftar Isian 302 tgl. 22-10-1997 No. 2086
------------------ ----------------------------------
Daftar Isian 307 tgl. 24-10-1997 No. 6204
------------------ ----------------------------------
UNTUK SERTIPIKAT Serang Tgl. 24-10-1997
----------------- ------ --
Serang Tgl. 24-10-1997 Kepala Sekai Pengukuran dan Pendaftaran Tanab
- - ------------ ------ ---
Kepala Kanton Pertanahan Kantor Pertanahan
Kabupaten/Kotamadya Kabupaten/Kotamadya
[SEAL] Serang Serang
- - ------------------------------ -------------------------------
ttd
Drs. H.M. HASJIM HUSEIN Dr. H. FIRMANSYAH
- - ------------------------------ -------------------------------
NIP 010 053 449 NIP 010 153 327
Permisahan
------------
Lihat surat ukur Penggabungan Nomor : /19 Nomor hak :
-------------- ------------ ------- -- ------
gambar situasi Pengganti
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Dikeluarkan surat ukur/gambar situasi
- - --------------------------------------- Luas Nomor Sisa Iuas
Tanggal Nomor hak
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
Sisanya diuraikan dalam surat ukur Nomor : /19 Nomor hak
-------------- ------- -- -------
gambar situasi
<PAGE>
FIRST REGISTRATION
a) Building Title Right
No. 16
Village: Leuwi Limus
b) Name of street/lot:
c) Original lot:
2. Building Title Right
d) Decree letter
Chief of Land Authority
Region: Serang
Number: 550 2-95-SK-1997
Date: 13 October 1997
Administration fee: Rp 150,000
Validity of Title Right: 30 years
Title Right ended: 24 September 2027
e) Location
Date: 24 October 1997
No.: 4744/1997
Area: 40,000 M2
f) Land Title Holder: PT DSG Surya Mas Indonesia
g) Registered: 24 October 1997
h) Issuance of Certificate: Serang, 24 October 1997
i) Reference: Ex Title Right No.
ATTN.: MR. TERENCE LEUNG
FROM : PAULA - PT SURYAMAS MENTARI
DATE : AUG. 3, 1999
RE : LAND TITLE DEED TRANSLATION.
<PAGE>
LOCATION
A LOT WHICH IS LOCATED:
Province: West Java
Region: Serang
Subdistrict: Cikande
Village: Leuwi Limus
Land condition: Some empty lots
Boundary: Concrete wall boundary and has fulfilled the requirement of Foreign
Investment Board Regulation No. 8/1961.
Area: 40,000 M2
Boundary arrangement and indicator: Boundaries appointed by Iwan Satiawan, on
behalf of the Applicant.
Page - 5
Others: Ex right title No.
List No. 302 dated 22 October 1997
List No. 307 dated 24 October 1997
<PAGE>
EXHIBIT 3.4
GOODS AND SERVICES TAX
DECLARATION AND INDEMNITY
TO: ASSOCIATED HYGIENIC PRODUCTS INC.
AND TO: MILLAR, ALEXANDER
Its Solicitors herein
RE: ST. ANDREWS PROPERTY INVESTMENT INC. PURCHASE
FROM ASSOCIATED HYGIENIC PRODUCTS INC.
1185 COLBORNE STREET EAST, BRANTFORD, ONTARIO
BEING PART LOT 27, RANGE 1, SOUTH OF HAMILTON ROAD,
TOWNSHIP OF BRANTFORD, COUNTY OF BRANT (THE "PROPERTY")
- - --------------------------------------------------------------------------------
THE PURCHASER HEREBY certifies and agrees that:
1. The Purchaser is registered under Subdivision d of Division V of Part IX
of the Excise Tax Act ("ETA") for the collection and remittance of the
Goods and Services Tax ("GST") and its registration number is:
880 496 229 RT.
2. The Purchaser will remit directly to the Receiver General of Canada the
GST payable and file the prescribed Form GST 60 pursuant to subsection
228 (4) of the ETA in connection with the sale and conveyance of the
property.
3. The property transferred pursuant to the agreement:
(a) is being purchased by the Purchaser as principal for its own
account and is not being purchased by the Purchaser as an agent,
trustee, or otherwise on behalf of or for another person; and
(b) does not constitute a supply of a residential complex made to an
individual for the purposes of paragraph 221 (2)(b) of the
ETA, and
4. The purchaser shall indemnify and save harmless the Vendor from any GST,
penalty, interest or other amounts which may be payable by or assessed
against the Vendor under the ETA as a result of, or in connection with,
the Vendor's failure to collect and remit any GST applicable on the sale
and conveyance of the property by the Vendor.
DATED at Hamilton, Ontario this 14th day of DECEMBER 1998.
ST. ANDREWS PROPERTY INVESTMENT INC.
Per:
/s/ Brian Pendergast
-----------------------------------
Name: BRIAN PENDERGAST
Office Held: PRESIDENT
I have authority to bind the Corporation
<PAGE>
EXHIBIT 11
COMPUTATION OF NET INCOME PER ORDINARY SHARE
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
---- ---- ----
(in thousands except per share
amounts)
<S> <C> <C> <C>
Number of ordinary shares
Ordinary shares outstanding, beginning of year 6,675 7,712 7,922
Ordinary shares repurchased -
5 240
Ordinary shares tendered - (1) 1,004
Ordinary shares cancelled - 1,034 603
===== ===== =====
Weighted average shares outstanding during the year 6,675 6,674 7,747
===== ===== ======
Net income $1,622 $ 974 $9,166
====== ===== ======
Earnings per share $0.24 $0.15 $ 1.18
====== ===== ======
</TABLE>
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