20-F 1 0001.txt FORM 20-F 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, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________. Commission file number 33-45136 DSG INTERNATIONAL LIMITED ------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) ------------------------------------------------------------------------- (Translation of Registrant's name into English) British Virgin Islands ------------------------------------------------------------------------- (Jurisdiction of incorporation or organization) 17/F Watson Centre, 16-22 Kung Yip Street, Kwai Chung Hong Kong Tel. No. 852-2484-4820 ------------------------------------------------------------------------- (Address of principal executive office) Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each Name of each exchange Class on which registered None -------------- -------------------- Securities registered or to be registered pursuant to Section 12(g) of the Act. Ordinary Shares, par value $0.01 per share ("Ordinary Shares") ------------------------------------------------------------------------- (Title of Class) ------------------------------------------------------------------------- (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None ------------------------------------------------------------------------- (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. Ordinary Shares 6,674,606 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No Indicate by check mark which financial statement item the registrant has elected to follow. [_] Item 17 [X] Item 18 (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [_] Yes [_] No 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 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 extended its "FITTI(R)" brand into U.S. national distribution. In 1988, the Company acquired all the assets of an unprofitable private label manufacturer of disposable baby 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 other equity investors proposed a going private transaction pursuant 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. In March 1999, the Company opened its new plant in Selangor, Malaysia and established two wholly-owned subsidiaries in the United Kingdom and Germany to assist the marketing and distribution of the Company's adult incontinence products in Europe. 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)", "BABYJOY(R)", "LULLABY(R)", "CARES(R)", "CUDDLES(R)", "SUPER FAN-NIES(R)", "DISPO 123(TM)", "HANDY(TM)", "VLESI(R)", "CERTAINTY(R)" and "MERIT(R)". The Company also manufactures and markets disposable baby diapers, adult incontinence and training pants products under private labels. The Company's products are sold internationally, with its ten manufacturing facilities being in Hong Kong, the United States, Australia, the United Kingdom, Switzerland, the People's Republic of China ("PRC"), Thailand, Indonesia and Malaysia. 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 private label disposable baby diapers, adult incontinence products, training pants and youth pants for the North American market. With a strong regional presence, the Company's "FITTI(R)" and "CUDDLES(R)" brands are some of the best selling brands of disposable baby diapers (excluding private labels) in many key markets like New York. The Company's new "SUPER FAN-NIES(R)" brand is gaining an enthusiastic consumer following and is expanding retail distribution. In Australia, the Company is the second largest manufacturer of disposable baby diapers. The Australian market is divided primarily into three major retail sectors, which are grocery, variety and pharmacy. The Company is currently supplying brands of both premium and economy quality to all three market sectors. It estimates that it has an overall unit volume market share of approximately 22% as measured by AC Nielsen for the combined grocery and pharmacy sectors. The market data for the variety sector is not commercially available. The Company also markets disposable baby diapers under retail chain private labels, which accounted for approximately 18% of its Australian diaper sales in 1999. 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 43.4% in 1999 compared with 1998. The Company's leading brands, "FITTI(R)" and "PET PET(R)", are well established in certain parts of the PRC and in most Asian countries. In Hong Kong, the disposable diaper market continued to contract due to low birth rate, however, the Company maintains its second place position in the market and estimates that its share is over 20%. In Singapore, the disposable diaper market contracted due to the reasons similar to the disposable diaper market in Hong Kong and the Company's sales were also impacted. In the PRC, the disposable diaper market grows rapidly particularly in the economy products segment. The Company in addition to its leading brands, "FITTI(R)" and "PET PET(R)", introduced two economy brands, "BABY LOVE(R)" and "BABYJOY(R)". The Company believes that it is the market leader in the Guangdong province, with around 20% market share. The Company's sales operation in Beijing not only established direct sales and distribution in the Beijing and Tianjin markets but also expanded its wholesale network into other northern provinces such as Shandong and Liaoning provinces. In the provinces of the eastern part of the PRC, the Company sets up a strong sales and distribution network by signing up a number of reputable territorial wholesalers and the Company sees promising growth in these provinces. The Company plans to set up sales operations in other major cities and provinces in the PRC and continues its effort in exploring the potential in the PRC markets. In Malaysia, the Company recorded a strong volume growth in 1999 and the Company expects its sales will continue to grow with further recovery of the economy. In Indonesia, although the Company's sales were impacted by the economy and political instability, the Company maintains its market leader position in the market, and the Company believes that its sales will be in the upward trend as the nation's economy and political stability recovers gradually. In Thailand, the Company maintained its market share despite the keen competition in the market. The Company manufactures and distributes adult incontinence products through its operation in Thailand to all other markets in Asia under its "DISPO 123(TM)" 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, the sales of adult incontinence products increased steadily over the years and the Company's brands are well established both in the retail and institutional sectors. The Company remains optimistic about the market growth potential of adult incontinence market 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. The Company's remaining operation in the Eastern region of Switzerland manufactures and distributes its branded "VLESI(R)" 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 and continues to develop new product and features of its range of incontinence products. 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 market value-oriented products at competitive prices. The Company's growth strategy is to target its branded products at selected sectors of mature markets, such as the United States and Western Europe, and to take a broader marketing approach in less developed markets where there is a high rate of growth in disposable diaper usage. The Company believes that its manufacturing facilities in Asia and Australia will enable it to participate in the expected growth of those markets. In the past, the Company has expanded its business into new markets by acquiring the assets of 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, Thailand, Indonesia and Malaysia, which were opened in 1994, 1995, 1998 and 1999, respectively. The Company's principal raw materials are fluff wood pulp and super absorbent polymer. Other raw materials include polyethylene backsheets, polypropylene non-woven liners, adhesive tapes, hot melt adhesive, elastic, aloe vera and tissue. The cost of materials increased in 1999 and also in 2000. Raw materials account for about three-quarters of the cost of goods sold. Disposable diapers are designed and marketed with two basic objectives in mind: (1) to afford parents of infants up to two and one-half years of age the convenience of diapers which are disposed of after one use and (2) to reduce the risk of chapping ("diaper rash") which often occurs when moisture from a soiled diaper remains in contact with the baby's skin. The basic concept of most disposable diapers on the market is the same: to allow moisture to pass through a soft inner layer which is in contact with the baby's skin into a highly absorbent inner core, from which the moisture is prevented from escaping by an outer moisture-proof backsheet. There are significant differences in quality among the various disposable diapers currently on the market. The most important quality features of disposable diapers are their ability to absorb and retain fluids, to prevent leakage through leg and waist openings by the use of elasticized bands, and to be easily fitted and held in place by adhesive tapes which secure the diaper firmly without causing discomfort to the baby. Broadly, disposable diapers are divided into two types: thicker "regular" diapers which use primarily fluff wood pulp as the absorption medium; and thinner "ultra" diapers which use less fluff wood pulp and employ a super absorbent polymer in the absorbent core. Other features, such as innovative fastenings, attractive designs, extra-dry sub-layer, gender specific absorbent cores, stand-up leg gathers, elastic waistband, aloe vera and packaging help to differentiate products from one another. Adult incontinence products are designed for the convenience of males and females having various degrees of incontinence. The basic concept of most adult incontinence products is to prevent leakage of urine and faeces by absorbing the moisture into a highly absorbent inner core and retaining the soiled contents within an outer moisture proof backsheet. Similar to disposable diapers, the most important quality features of adult incontinence products are their ability to absorb and retain fluids, to prevent leakage through leg and waist openings by the use of elasticized bands, and to be easily fitted and held in place by adhesive tapes which secure firmly without causing discomfort to the user. The absorption media for adult incontinence products are fluff wood pulp and super absorbent polymer. Other features, such as wetness indicator, stand-up leg gathers, elastic waistband, frontal tape closure system and packaging help to differentiate products from one another. The Company believes that there is 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 Switzerland, Thailand and Wisconsin in the United States in 1994, 1995 and 1997, respectively. 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, Asia and Australia. The Company introduces adult incontinence products into its markets in a manner consistent with its niche market strategy. The Company believes that the key to successful marketing of this type of product is 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 economy in the Asian region is recovering which will strengthen the Company's foundation for market expansion in the region. The cost of raw materials, primarily fluff wood pulp, will increase at a faster pace than in 1999. 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 statements are subject to certain risks, uncertainties and assumptions, including without limitation to those identified below. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated, estimated or projected. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of their respective dates. Risk Factors The Company's forward looking statements are based on the Company's assumptions regarding the economies and market conditions in the countries in which it operates, and certain assumptions regarding the price of raw materials, including fluff wood pulp and super absorbent polymer. Among the factors that have a direct bearing on the Company's results of operations and financial condition are leverage and debt service, competitive industry, price changes by competitors, dependence on key products and acceptance of product innovations, cost of certain raw materials, international operations, currency fluctuations, currency devaluations, currency restrictions, intellectual property risks, technological changes, covenant limitations and other factors discussed herein. If the Company's actual performance differs materially from its projections which are based on assumptions regarding the economies and market conditions in the countries in which it operates, the Company's actual results could vary significantly from the performance projected in the forward looking statements. 2. Geographic Segment Information The following table sets forth the percentage of the Company's net sales and operating income (loss) by geographic market.
1999 1998 1997 ---------- ---------- ---------- Net sales North America....................... 45.4% 43.2% 39.4% Australia........................... 20.7 19.5 20.4 Asia................................ 22.2 21.3 24.7 Europe.............................. 11.7 16.0 15.5 100.0% 100.0% 100.0%
Operating income (loss) North America....................... 67.3% 30.8% (15.3)% Australia........................... 64.9 131.7 165.6 Asia................................ 51.6 75.7 173.3 Europe.............................. (22.4) (77.3) (72.2) Corporate expenses..................... (61.4) (60.9) (151.4) 100.0% 100.0% 100.0%
a. North America i. Products The Company manufactures and distributes disposable baby diapers, disposable training and youth pants and adult incontinence products throughout North America under the brand names of "FITTI(R)", "CUDDLES(R)", "SUPER FAN- NIES(R)" and "CERTAINTY(R)", as well as a growing number of different private label store brands. The "FITTI(R)" brand is a full-featured value product, recognized for its unique wetness indicator, a cute print that fades away when the diaper becomes wet. The "FITTI(R)" brand name is also used with the Company's disposable training pants and the DRI-NITE JUNIOR disposable youth pants. The Company's pant products feature tear-away side panels, soft cloth- like covers and comfortable waist and hip elastic. The "FITTI(R)" training pants were the first North American product in this segment to offer the Company's unique wetness indicators. In 1999, the Company launched the first-ever disposable baby diapers with university team logos printed on the diaper cover. The Company's innovative brand is called "SUPER FAN-NIES(R)". The brand was launched regionally in the South in late 1999 where collegiate sports have a tremendous following. Acceptance was quick and the "SUPER FAN-NIES(R)" brand benefited from extraordinary media attention and consumer enthusiasm. The Company is the first and only to license these collegiate logos through CLC (Collegiate Licensing Corporation) for the baby diaper category. Plans are underway to expand the Company's list of university partners and the corresponding retail distribution and sales in the year 2000. The Company continues to expand its private label diaper business throughout North America with such customers like Walgreens Drugs, Harris Teeter, A&P, Topco, Pathmark, Rite-Aid, Richfood, McLane (a division of Wal- Mart) and Medline Industries. The Company is the only full line manufacturer capable of producing and marketing a full range of disposable baby diapers as well as training pants and youth pants. This advantage should enhance the Company's sales and private label partnership opportunities. The Company launched its adult incontinence products in late 1996. The Company's primary focus is the development of profitable private label partnerships with retailers and institutional distributors such as Walgreens Drug and Medline Industries. The Company's products are also available under the "CERTAINTY(R)" brand name. The Company's focus is on the brief segment, offering a wide range of product and feature alternatives. The Company believes that its products provide the incontinence sufferer with features and performance that are superior to most other brands in North America. The Company was the first to bring disposable adult pants to the North American market and the Company will continue to explore innovative product opportunities that will make a positive difference in this category and bring better solutions to the incontinence user. ii. Sales and Marketing Disposable baby diapers account for more than 90% of the baby diaper changes in North America. The market can be divided into several segments: brands that are advertised and sold nationally; brands that are not widely advertised but are sold nationally; brands sold only in specific regional areas; and baby diapers that are sold under private labels retailer brands. The nationally advertised brands account for roughly 79% of all sales. The Company maintains a solid distribution base on its "FITTI(R)" and "CUDDLES(R)" brands, with new retail customers being added on a regular basis. The Company's "FITTI(R)" brand training pants have enjoyed steady sales growth and excellent consumer acceptance. The Company's innovative "FITTI(R)" DRI-NITE JUNIOR remain the only "value" alternative in the fast growing youth pant segment. This segment now accounts for more than 3% of total category sales. The Company efficiently services the North American market from two manufacturing facilities. These facilities are located in Oconto Falls, Wisconsin, and Duluth, Georgia. The Company commissions a national network of independent brokers and non-food sales representatives to sell directly to retailers and distributors/wholesalers. These brokers and sales representatives, managed by the Company's direct sales management team, serve as the Company's agents within defined territories to monitor sales, implement trade promotions and handle the required merchandising activities and responsibilities. The Company's direct sales management team is responsible for the Company's marketing and headquarter sales functions. The Company remains committed to its marketing philosophy of direct servicing of its customers and accounts by the sales management personnel. This allows the Company to provide a high degree of category expertise and education to the trade and to be able to promptly respond to trade and market needs. In addition, the strategic locations of its North American manufacturing facilities has enabled the Company to achieve average shipping transit time of one to two days for most North American destinations. Branded Products. Due to the intense price and promotional pressure by the advertised brands, combined with a declining birth rate in the U.S. market, the "value brand" segment continues to shrink. By the end of 1999, the combined share of the Company's "FITTI(R)" and "CUDDLES(R)" brands was roughly 2% of the total units of disposable baby diapers and training pants sold in grocery outlets throughout North America. The grocery sector represents approximately 47% of the $4.2 billion United States retail market. In certain markets, such as New York/New Jersey, the nations largest retail market, the Company believes that the "FITTI(R)" brand is much greater than conventional market share tracking companies would indicate. This is because a much higher percentage of "FITTI(R)" diapers and training pants are sold through urban wholesalers and inner city retailers that typical market research does not track. The Company concentrates its efforts and marketing activities in providing wholesalers and retailers with above average category profits through the use of packaging with greater shelf impact, consumer preferred pre-priced packaging, creative promotional support, efficient distribution, electronic data interchange and a high level of customer service. The Company has maintained its 1998 strategy of providing the best "everyday low price" strategy on its "FITTI(R)" and "CUDDLES(R)" brands, offering the consumer "the best product for the price" all the time. The Company provides consumers with quality products at affordable price, unique product features and consistent value. The Company has grown its business with a concentrated effort against the primary diaper selling class of trade: grocery with key retail partners such as Shoprite, A&P, Pathmark, Fleming, Harris Teeter and Super Value. However, excellent distribution and sales gains have been made in other non-grocery outlets such as Ames Department Stores and Meijer stores. The Company continues to benefit from its "firsts" to market, bringing more consumer value, new product ideas and unique retailer profit opportunities to the disposable baby products segment. Among these "firsts" are disposable youth pants under the "FITTI(R)" DRI-NITE JUNIOR name, new Super Toddler (XXL) size diapers under private brands and the innovative "SUPER FAN-NIES(R)" logo diapers, that have targeted the loyalty of collegiate sports fans and alumni. More exciting disposable baby product innovations are under development for 2000 and beyond. The Company launched its disposable adult incontinence products in 1996. "CERTAINTY(R)" is the brand name under which the Company markets its adult incontinence products. However, the Company recognizes that private brands represent more than 30% of the category sales with steady growth at retail and it is this sector of adult incontinence where the greatest retail sales opportunity exists. The Company will continue to target this private brand segment with a range of superior products in terms of product features and performance. The Company's strategy is to provide products to the marketplace that are superior to other available products and that are also more affordable than the lesser quality advertised brands. In addition, the Company has new products under development to strengthen their future position in the marketplace. The Company's adult incontinence sales have nearly doubled in the past three years with retail partners including Walgreens, SAMS Club and Rite- Aid. The drug store trade still represents the majority of adult incontinence retail sales with a 46% share of the total $550 million category. Growth potential for the entire category remains extremely high as the population continues to age, people who are incontinent become more open to treatment solutions and better products are developed. Institutional Volume and Activity. The institutional providers supply adult incontinence products to medical care facilities, nursing homes, extended care facilities and home health care outlets. It is worth noting that the institutional market still represents more than 60% of the total adult incontinence volume in North America or more than $700 million in sales. The adult category represents an area of significant sales and distribution growth for the Company, and significant gains had been captured in 1999 with the volume growing to more than 26% of the Company's total sales. The Company enjoys an excellent working relationship with one of North America's premier institutional suppliers of medical related products: Medline Industries, Inc. Private Label. This segment of the Company's business is the major area of potential growth. The Company continues to strengthen its existing private label partnerships with major retailers like Walgreens, Pathmark, A&P, Uniprix Drug, McLane (a division of Wal-Mart), Topco etc. and by adding new products in both areas of disposable baby diapers and adult incontinence products. The Company will continue to target other major retailers to establish new profitable private label partnerships in all of its product categories. The Company recognizes that the private label segment remains somewhat more insulated than that of the typical "value" brands from the aggressive price/promotional strategies of the advertised brands, due to the protective/defensive posture that major retailers tend to take when it comes to protecting their corporate brand franchise. The Company is one of the few manufacturers capable of supplying a full range of quality disposable baby diapers and adult incontinence products and has a proven track record of quality products, category expertise and customer service. 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 82% of its Australian diaper sales in 1999. 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, 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)" and "COSIFITS(R)", which has a similar marketing strategy to "BABY LOVE(R)" and "LULLABY(R)". In addition to its four core proprietary brands, the Company continues to hold a leading position in the private label sector producing corporate brands for a number of major grocery and variety sector retailers. The Company also distributes the "VLESI(R)" and "MERIT(R)" range of adult incontinence products into the Australian market, primarily targeting the nursing home sector. This product range continued to show very strong growth in 1999. ii. Sales and Marketing The Australian combined grocery and pharmacy retail market for disposable baby diapers has grown from approximately $65 million in 1988, when the Company first entered the market, to approximately $211 million for the twelve months ended December 1999(1). The variety sector market data is not commercially available but is estimated to be an additional $45 million. The total unit sales value in the combined grocery and pharmacy sectors increased by 5.7%, from $199 million in 1998 to $211 million in 1999 with both sectors showing growth. The Company now estimates that market utilization for disposable baby diapers is approximately 75-80%, which is below the level of other industrialized Western countries at over 85%. Branded products comprise approximately 89% of the Australian market, with the remaining 11% 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 market as measured by AC Nielsen for the combined grocery and pharmacy sectors. A major U.S.A. multi-national manufacturer is the market leader with approximately 66% of the same market sectors. The Company markets and distributes its proprietary branded products in Australia using exclusive independent brokers. Sales of private label brands are managed either on a direct basis with a retail customer, or through their selected "in-house broker" representative. For the "VLESI(R)" range of adult incontinence products, the Company utilizes a direct sales force to sell to customers and manage the distribution of the products through selected independent distributors. Branded Products. The Company's branded products, "BABY LOVE(R)" and "LULLABY(R)" are targeted at the grocery and variety sectors. These two retail sectors accounted for an estimated 85% of all disposable baby diaper sales in Australia in 1999. 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 (1) Source : AZTEC and AC Nielsen, January 2000. 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 1999, the pharmacy sector accounted for estimated 15% of all disposable baby diaper sales in Australia. This sector is highly fragmented and consists of a large number of small and independent pharmacies that have restricted retail space, offer a limited selection of diaper brands and do not have their own private label diaper programs. The Company has successfully pursued a strategy of encouraging these independent pharmacies to carry these two proprietary brands as "pharmacy only brands", which are supported by national advertising and promotion, and provide margins which are comparable to those typically offered by private label programs. The Company sells to all 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. The major national marketing groups include Amcal, Guardian, ChemMart, ChemWorld, Health Sense, among others. Private Label. Private label product is sold primarily in the grocery and variety sectors. In the grocery sector private label accounted for 12% of the total sales for disposable baby diapers in 1999(2). The Company has a 35% share of the total private label market in the grocery sector(3). Private label market data is not available for the variety sector, however the Company is recognized as a major supplier of private label product in this sector. The Company has private label programs with a number of major retail chains, including Target, Fossey's, Coles Supermarkets, Bi-Lo, Franklins, as well as other retailers. The Company has maintained and developed its leading market position within the private label sector by building close working partnerships with its retail chain customers. Its strategy is to proactively offer new product features with improved performance, while maintaining competitive pricing and high levels of customer service. Adult Incontinence Products. Approximately 80% of the total sales for adult incontinence products in Australia are concentrated in the institutional sector of the category, while the retail sector for these products has been slow to develop. This institutional sector is comprised primarily of nursing homes, adult care hostels and hospitals. The Company has employed a team of state territory sales managers and selected distributors who target the institutional sector of this market. The Company intends to expand its range of products and to achieve distribution in all sectors of this growing market. c. Asia i. Products The Company manufactures disposable baby diapers primarily under its own brands in Asia. The Company's brands are "FITTI(R)" and "PET PET(R)", which accounted for approximately 76% of the Company's net sales in Asia. The Company also manufactures economy brands, such as "BABY (2) & (3) Source : AZTEC and AC Nielsen, January 2000 LOVE(R)" and "COSIFITS(R)", and private labels on a selective basis. Both "FITTI(R)" and "PET PET enjoy substantial market share, are well supported by advertising and promotional activities, and are priced strategically lower than the major U.S. national brands and the Japanese brands sold in Asia. The Company's economy brands are basic products targeted to compete straightly on price and value with local brands. 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. ii. Sales and Marketing The Company continues to command strong market positions in both the mature markets of Hong Kong and Singapore. The Company enjoys first-mover advantages in most of the markets in the Asian region and has established invaluable brand image and strong positions for the Company's products. The Company continues to focus on expansion of sales in the PRC, Thailand, Malaysia and Indonesia by capitalizing on the increasing usage of disposable baby diapers that are well supported by strategic pricing and wisely designed advertising and promotional activities. The Company also sells its products in India and, to a lesser extent, Brunei, Vietnam and 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 contracted since the aftermath of the Asian financial turmoil, the Company has been able to pursue strategies to maintain its market share in these markets. The disposable baby diaper usage is relatively low in other Asian countries, but the Company believes that the usage will increase as income levels in these countries continue to increase. In Asia, the Company has identified Malaysia, the PRC, Thailand and Indonesia as the markets that will expand rapidly in the next decade. The Company's strategy is to offer a variety of premium branded products targeted to compete with major U.S. and Japanese brands and economy brands to compete in the fastest growing segment of the markets. The Company also 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. Its products are sold in all major pharmacy outlets and department stores which account for 65% of all disposable baby diaper sales, while the remaining 35% are sold in major retail supermarket and hypermarket chains such as Wellcome, Park'N Shop, Carrefour and China Resources Company. 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 province in the PRC. In Singapore, the Company has employed its own sales team to market and distribute its products. The disposable baby diaper market in Singapore is relatively small and mature and has contracted due to low birth rates and weak economy. Almost all the Company's sales in Singapore are branded sales in major retail chains, department stores and hypermarkets. In 1999, the Company established a manufacturing facility in Selangor, Malaysia as part of the Company's localization strategy. The Company's products are distributed nationwide by its own sales forces directly to the major chain stores such as Tops, Store and Ocean, Giant, Carrefour as well as to the other secondary chain stores, independent supermarkets and to lower-end retail outlets. In the PRC, another fast growing market that the Company has identified, the Company's leading brands are distributed in hypermarkets, supermarkets, department stores and independent retail stores in most of the provinces, such as Guangdong, Fujian and major cities, such as Guangzhou, Shenzhen, Shanghai and Beijing. To cope with the rapid development of foreign invested hypermarkets in the PRC, the Company cultivates good relationships with the major players like Carrefour, Wal-mart, Price-Mart and etc. and the Company's products are listed and sold in these hypermarkets. The Company continues to 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 to the local markets and other markets at the nearby vicinity. The Company's sales expansion in the PRC is well supported by strategic pricing and tailor made advertising and promotion program. The Company estimates that the current usage of disposable baby diapers in the PRC is around 5% and will grow in accordance with the anticipated rapid economic growth of the country. In Thailand, although the usage of disposable baby diapers is relatively low, the disposable baby diaper market has been growing rapidly in the past few years. The Company's major brands in the market are "FITTI(R)", "PET PET(R)" and "BABY LOVE(R)". The Company's sales have been increasing with the growth of the market and as a result of expanding the Company's distribution networks throughout the country. Over 70% of the Company's sales in Thailand were in the Bangkok metropolitan area, with the rest of the sales coming from the suburban provinces. The Company's products are distributed to supermarkets and department stores by its own nationwide sales force. The Company has been able to capitalize on the market growth and sustains a market share of about 14% in 1999. The Company also manufactures private label products for a supermarket chain. The Company's adult incontinence products are distributed to hospitals, supermarkets and department stores. The Company estimates that its share of the Thailand adult incontinence market is approximately 22% in 1999. The Company is also expanding its sales of adult incontinence products in other Asian markets. The Company's brands "FITTI(R)" and "PET PET(R)" are the leading brands in the Indonesian market. With the established joint venture manufacturing facility near Jakarta, the Company is able to reduce its product costs as a result of import duty exemption on raw materials and minimizing the adverse effect of currency fluctuation. The Company's products are sold in all major hypermarkets and supermarket chains and its major competitors in the market are imported U.S. major brands. The Company presently is not keen to export its products to Japan, Taiwan and Korea because current non-tariff barriers and complex distribution arrangements make entry into these markets difficult for foreign products. In 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, Indonesia and Malaysia. d. Europe i. Products The Company manufactures and markets branded and private label disposable baby diapers in the United Kingdom, and manufactures 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, extra-dry sub-layer and mechanical fasteners. "COSIFITS(R)" and "CARES(R)" are economy brands featuring frontal tape and extra-dry sub-layer. "VLESI(R)" adult incontinence brand comprises a product range of adult incontinence briefs, anatomic pads and underpads for the institutional hospital and nursing home markets. ii. Sales and Marketing The U.K. retail disposable baby diaper market in 1999 was approximately $847 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 focused on selling its branded products to regional retails and wholesalers by offering a value-oriented product with good profit margins and a high level of service. The Company also produces own label for certain U.K. grocery chains. The Company's operation in eastern part of Switzerland is in the canton of St. Gallen. It manufactures and distributes the "VLESI(R)" brand of adult incontinence products 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, direct sales teams and nursing advisors. During the year, it introduced new and product improvements to its existing range. 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 ("KC"). (1) FSA Survey U.K. The market position of these manufacturers, relative to the Company, varies from one geographic area to another, but due to their substantial financial, technical and marketing resources, both of these major manufacturers have the ability to exert significant influence and gain substantial market share in any of their marketing areas. Despite the disparity in relative strength, however, the Company has been able to secure its position in the face of very strong competition from the industry leaders by remaining innovative, flexible and financially responsible. a. North America The North American disposable baby diaper market remains dominated by the brands of the two major U.S. manufacturers: P&G and KC. Their combined market share of the disposable baby diaper market is 79%; including the disposable training pant, youth pant and swim pant segments. Total category unit sales are declining at a rate of about 8%, with volume continuing to shift from the grocery and drug classes of trade to the mass merchandisers. Consumers continue to move to larger packs for a lower price and more savings. In 1999, these two major manufacturers continued their strategy of driving their business with aggressive retail pricing, rather than competing solely on the basis of consumer-driven marketing programs and product innovations. An increasing number of major retailers remain concerned with the negative impact that the advertised brand's strategy has had on their own private label sales and margins, and some continue to take corrective actions to protect their own brands. Again in 1999, all of the moves made by the advertised national brands have resulted in lower retail prices and the narrowing of retail price spreads between the advertised brands and private label offerings. Manufacturers and retailers alike are waiting anxiously to see how long this price strategy can be maintained in the face of rapidly rising raw material costs. The Company has positioned itself well to compete even its conditions remain the same. The continued moves by the major manufacturers to keep retail prices depressed, promote aggressively and keep the retailers satisfied with minimal margins in favor of sales volume, have put serious sales and margin pressure on smaller brand and private label manufacturers. In response to this competitive activity, the Company has reallocated its promotional spending and has maintained a strategy in line with "everyday low price", targeted trade promotions, enhanced product features and tightened cost controls. This strategy on its core "FITTI(R)" and "CUDDLES(R)" brands has allowed the Company to protect its share in critical markets, expand its private label base of business, successfully launch the innovative "SUPER FAN-NIES(R)" brand and weather the competitive storm that has persisted throughout 1999. With this competitive strategy, the Company was able to protect margin contributions while growing top line business in 1999. In the adult incontinence arena, the Company is in an excellent competitive position, having the capability to provide key retailers, institutions and consumers with product technology that is superior to what other manufacturers can currently provide. There is an added advantage that comes from the demand for better products in order to meet the performance and comfort requirements of incontinent consumers. Due to the strong growth of private label incontinence products in 1999, the major advertised brand, "DEPEND(R)" (KC) implemented an aggressive strategy of offering reduced costs for retailers who reduced their retails. As a result, "DEPEND(R)" retails dropped roughly 11% across North America. This has put added competitive pressure on smaller branded and private label manufacturers to maintain their margins and grow their business. The Company is again well positioned to weather this competitive situation because they have concentrated on building a business based upon superior products and tight cost controls. In spite of the tough competitive climate, overall margins in the adult segment remain better than in the baby segment. b. Australia The major competition faced by the Company in Australia is from Kimberly- Clark Australia ("KCA"). KCA dominates the disposable baby diaper market in Australia, with a 1999 estimated market unit volume share of 66% as measured by AC Nielsen for the combined grocery and pharmacy sectors. The Company believes it is able to compete successfully in Australia with its strategies of targeting different brands to different retail sectors, its ability to provide attractive retail profit margins for its customers and its ability to offer consumers competitive quality products with unique features at value retail price points. It also benefits from the desire of its retail customers for an alternative supplier to KCA for national brand diapers, as well as quality domestic supplier for their private label brands. c. Asia The Company's main competition in Asia comes from the brands of the two major U.S. manufacturers, and several manufacturers from Japan and Taiwan. The Company believes that it has been able to maintain a significant share of the Asian market due to its longer presence and well established brands in that region and the logistical advantage which results from the strategic location of its manufacturing operations. d. Europe In the United Kingdom, the disposable baby diaper market continues to be dominated by P&G, which has a market share approximately 60% and KC which has approximately 30%. Both companies continued to heavily promoting and discounting their brands in the U.K. market. Due to such consistent promotion activities, the private label brands have been reduced to a level of about 10% market share. The Company believes that, by pursuing a flexible brand strategy of supplying both branded and private label in disposable baby diapers, it will be able to maintain its share and volume in the U.K. market. In these competitive environment, the cost increase of the product due to increase of pulp prices could not be passed on. 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 and Paul Hartmann which hold the largest market share in many major markets. The largest market segment for adult incontinence is still with institutions, such as hospitals and nursing homes. Price competition in all markets are increasingly severe leading to overall unit price reduction in certain market/product segments, in spite of the increasing cost of raw materials during the year. The Company has extended its market coverage into Germany and the U.K. via its own sales and service personnel. The Company sees its growth coming from developing of innovative features in its adult incontinence product ranges as well as making inroads into its current markets. 4. Trademarks and Patents Brand identification is an important element in marketing the Company's products, and the Company recognizes the importance of its trademarks to the success of its business. The Company has registered its major trademarks or has applications pending in each of the major markets in which its products are sold, and it has applications pending in several other countries for many of its other trademarks. As the Company determines to pursue opportunities in new markets, it seeks registration of the trademarks under which it will market its products in those countries. The Company has licenses to use certain patented technology relating to certain features of the disposable diapers it manufactures, including multi- strand leg elastics and the "Wetness Indicator" feature of the Company's products in the United States. In 1997, Procter & Gamble ("P&G") claimed that certain of the Company's diaper products infringe P&G patents and demanded payment for past infringement and an agreement to pay future royalties. The Company and P&G reached settlement of 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 hammer mill to make a soft, absorbent core that is placed on a polyethylene backsheet. In the case of "ultra" diapers, super absorbent polymer is then added. The liner layers, leg elastics, tape and other applicable features are then fed into the manufacturing equipment which shapes and produces the finished product. Because of the high level of automation in the production process, significant components of manufacturing efficiency result from prevention of production line stoppages and reducing the defect rate. Manual labor is involved primarily in packing and shipping, and labor costs represent only a small fraction of the Company's total net sales. The Company maintains constant quality control throughout the production process, commencing with the incoming raw materials and continuing through dispatch of the finished product. Each of the Company's diaper lines has a full-time inspector assigned to assure quality control at all stages of the production process, and line inspections and batch testing are made on a continuous basis. Because of the relatively high cost of shipping the finished product, the Company has established manufacturing facilities near its major markets, and raw materials (which can generally be transported at lower cost) are shipped to the manufacturing facilities. The Company believes that this improves its efficiency and enhances its competitiveness by reducing shipping costs, shortening the distribution chain and improving customer service. 7. Raw Materials The raw material components used in the manufacturing process are fluff wood pulp, super absorbent polymer, polyethylene backsheet, polypropylene non- woven liner, adhesive closure tape, hotmelt adhesive, elastic, aloe vera 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, increased in 1999 and the Company believes it may increase further in 2000. 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 between order and delivery of product, the Company does not maintain a significant backlog. 9. Customs and Import Duties Some of the raw materials used in manufacturing the Company's products are subject to import duties at varying rates in the countries in which the Company's manufacturing facilities are located. However, import duties on raw materials do not represent a significant part of the cost of the finished product and, in most cases, the import duties are refundable if the finished goods are exported from the countries of manufacture. Imports of finished products to some of the markets are subject to import duties at various rates. However, such duties are usually incorporated in the selling price of the finished product. 10. Employees The Company has a total of approximately 1,214 full time employees at its manufacturing facilities. The Company considers its relationships with its employees to be good in all of its plants, and none of the Company's plants has ever experienced any material work stoppage. The Company believes that all of its manufacturing facilities are in compliance with applicable occupational, health and safety legislation. 11. Environment The Company believes that operations at all of its manufacturing facilities are conducted in compliance with applicable environmental laws, and that none of the material substances used or disposed of by the Company in its manufacturing operations are considered to be toxic or hazardous substances under such laws. The Company closely monitors environmental laws and regulations pertaining to disposal of solid waste, which includes household refuse, packaging and paper materials, and yardwaste, in addition to disposable diapers, in each of the markets in which its products are sold. The Company is not aware of any such laws or regulations which would have a material adverse effect on the Company's business as presently conducted and proposed to be conducted. A number of states in the United States have passed legislation that is intended to discourage the use of disposable products such as beverage containers, certain packaging materials and disposable diapers, or to encourage the use of non- disposable or recyclable products. The Company believes that it will not have to make any changes to its products to comply with presently existing environmental laws and regulations in the markets in which its products are sold. The Company endeavors to develop products which are environmentally responsible by closely monitoring world-wide developments in various raw material components and actively works with suppliers to develop and market products utilizing such components. 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.; at Goldach, Switzerland; at Zhongshan, Guangdong, PRC; at Bangkok, Thailand; at Jawa Barat, Indonesia and at Selangor, Malaysia. The Company utilizes an aggregate of approximately 1,177,784 square feet of space in its manufacturing operations. The Company believes that its plant and facilities are adequate for its present operations, but it will require expanded facilities if past growth trends in the Company's business continue. The following table summarizes the physical properties that are used by the Company in its manufacturing and distribution operations:
Approximate Lease Size Owned/ Expiration Location Use (Sq. Feet) Leased Date -------- --- ------------ ------- ---- Melbourne, Australia Manufacturing 179,200 Owned N/A Jawa Barat, Indonesia Manufacturing 174,000 Owned Sep. 2027 Wisconsin, WI Manufacturing 165,684 Owned N/A Duluth, GA Manufacturing 156,625 Owned N/A Goldach, Switzerland Manufacturing 150,275 Owned N/A Zhongshan, PRC Manufacturing 106,000 Leased Oct. 2044 Hong Kong Manufacturing 70,895 Leased Jun. 2001 Bangkok, Thailand Manufacturing 68,805 Owned N/A Chesterfield, U.K. Manufacturing 65,000 Leased May 2008 Selangor, Malaysia Manufacturing 41,300 Leased Jan. 2002 Bangkok, Thailand Office 15,216 Leased Dec. 2000 Singapore Office 10,000 Leased May 2001 London, U.K. Office 3,500 Owned N/A Mechelen, Belgium Office 3,400 Leased Dec. 1999 Beijing, PRC Office 868 Leased Oct. 2002 Ringsheim, Germany Office 344 Leased N/A
Item 3. Legal Proceedings. The Company and its subsidiaries are from time to time involved in routine legal matters incidental to their business. In February 1995, the Company and its U.S. subsidiary were named as defendants in Action No. 95-19-2-ALB-AMER (WLS) brought by plaintiffs John M. Tharpe, Robert E. Herrin and R & L Engineering, Inc., a Georgia corporation, in the United States District Court, Middle District of Georgia. The complaint alleges that the Company, its U.S. subsidiary and certain European suppliers of disposable diaper manufacturing equipment (the "Defendants") have infringed U.S. Patent No. 5,308,345 which relates to a certain process for elasticizing the waistband of disposable diapers; that the Company and its U.S. subsidiary breached a confidentiality agreement with the plaintiffs by using certain information relating to the waistband applicator disclosed to them in confidence by the plaintiffs; and theft by the Defendants of the plaintiffs' trade secrets concerning the waistband applicator. The plaintiffs seek an injunction, compensatory, punitive and exemplary monetary damages in an unspecified amount, and attorneys' fees. The Company has denied liability and intends to vigorously defend this action. In 1997, Procter & Gamble ("P&G") claimed that certain of the Company's diaper products infringe P&G patents and demanded payment for past infringement and an agreement to pay future royalties. The Company and P&G 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. A claim has been made by Ms Rhonda Tracy, the owner of U.S. Patent 5,797,824 for disposable diapers with a padded waistband and legholes, that the Company has been manufacturing and/or selling diapers which infringe her patent. No lawsuit has been filed against the Company to date. Ms Tracy has filed a lawsuit against Jewel Food Stores, Inc., American Stores Company, WalMart Stores, Inc., Dominick's Finer Foods, Inc., Drypers Corp., Kimberly-Clark Corp., and Tyco International, Ltd. in the federal court in the Northern District of Illinois claiming infringement of this patent. 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.
Ordinary Shares Beneficially Owned ------------------ Name of Beneficial Owner Number Percent ------------------------ ------ ------- 10% or more shareholders (Brandon Wang) .................. 3,321,680 (1) 49.77% Directors and officers as a Group (10 persons) ........... 4,411,846 (1)(2) 66.10%
(1) Includes 140,580 Ordinary Shares owned by Brandon Wang's wife, Eileen Wang, as to which he disclaims beneficial ownership. (2) Includes 123,000 Ordinary Shares owned by Benedict Wang's wife, Suk Yee Heyley Sham, as to which he disclaims beneficial ownership; and 117,000 Ordinary Shares owned by S.L. Wang's wife, Pei Fang Wang, as to which he disclaims beneficial ownership. Brandon Wang and seven other members of Management own more than 50% of the Company's outstanding Ordinary Shares and, acting together, are able to control the election of the Board of Directors, and thus the direction and future operations of the Company, including decisions regarding acquisitions and other business opportunities, the declaration of dividends and the issuance of additional Ordinary Shares and other securities, in each case without the supporting vote of any other shareholder of the Company. In addition, Brandon Wang is controlling shareholder of the Company and thus may be deemed to be a parent of the Company under the rules and regulations of the Securities Exchange Act of 1934. The Company knows of no arrangements the operation of which may at a subsequent date result in a change in control of the Company. Item 5. Nature of Trading Market. The Company's Ordinary Shares are listed on the NASDAQ National Market System under the trading symbol DSGIF, and are not listed for trading in any foreign trading market. As of December 31, 1999, the total number of record holders was 39, of which 28, representing 41.28% of Ordinary Shares, were in the United States. Ordinary Share Price:
1999 1998 ---- ---- Quarter High Low High Low ------- ---- --- ---- --- First $ 3.5000 $2.7500 $8.5000 $5.2500 Second 9.0000 3.2500 9.5000 6.6250 Third 10.6250 7.0000 7.0000 2.8750 Fourth 9.0630 5.2500 3.7500 2.8125
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% Shareholders are advised to consult their own tax advisors regarding the tax considerations incident to ownership of the Ordinary Shares. A U.S. Investor receiving a distribution with respect to the Ordinary Shares will be required to include such distribution in gross income as a taxable dividend to the extent such distribution is paid from earnings and profits of the Company as determined under U.S. federal income tax principles. Any distributions in excess of the earnings and profits of the Company will first be treated, for U.S. federal income tax purposes, as a nontaxable return of capital to the extent of the U.S. Investor's basis in the Ordinary Shares, and then as a gain from the sale or exchange of a capital asset, provided that the Ordinary Shares constitute capital assets in the hands of the U.S. Investor. U.S. corporate shareholders will not be entitled to any deduction for distributions received as dividends on the Ordinary Shares. Gain or loss on the sale or exchange of the Ordinary Shares will be treated as capital gain or loss if the Ordinary Shares are held as a capital asset by the U.S. Investor. Such capital gain or loss will be a long-term capital gain or loss if the U.S. Investor has a holding period of more than one year with respect to the Ordinary Shares at the time of the sale or exchange. Various provisions contained in the U.S. Internal Revenue Code (the "Code") impose special taxes in certain circumstances on non-U.S. corporations and their shareholders. The following is a summary of certain provisions which could have an adverse impact on the Company and the U.S. Investors: 1. Personal Holding Companies Sections 541 through 547 of the Code relate to the classification of certain corporations (including foreign corporations) as personal holding companies ("PHCs") and the consequent taxation of such corporations on certain of their U.S.-sourced income (including certain types of foreign sourced income which are effectively connected with the conduct of a U.S. trade or business) to the extent amounts at least equal to such income are not distributed to their shareholders. A PHC is a corporation (i) more than 50% of the value of the stock of which is owned, directly or indirectly, by five or fewer individuals (without regard to their citizenship or residence), and (ii) which, if a foreign corporation, receives 60% or more of such U.S.-related gross income, as specially adjusted, from certain passive sources (such as dividends, interest, royalties or rents). If the Company is classified as a PHC, a tax will be levied at the rate of 39.6% on the Company's undistributed U.S. taxable income. While more than 50% of the Ordinary Shares may be treated as owned (either directly or indirectly) by five or fewer individuals, the Company intends to cause its indirect U.K. subsidiary, the owner of the U.S. branch, together with such corporation's immediate U.K.-resident parent corporation, to distribute any amounts which would otherwise be characterized as "undistributed personal holding company income" in the hands of either corporation with the intent that such distributions would cause such distributed amounts to lose their character as "United States source" taxable income subject to the PHC tax. 2. Foreign Personal Holding Companies Sections 551 through 558 of the Code relate to foreign personal holding companies ("FPHCs") and impute undistributed income of certain foreign corporations to U.S. persons who are shareholders of such corporations. A foreign corporation will be classified as a FPHC if (i) five or fewer individuals, who are U.S. citizens or residents, directly or indirectly own more than 50% of the corporation's stock (measured either by voting power or value) (the "shareholder test") and (ii) the Company receives 60% or more of its gross income (regardless of source), as specially adjusted, from certain passive sources (the "income test"). The Company believes that it is not currently and has not been a FPHC for any taxable year since its formation because for each such year either or both of the income test and the shareholder test were not met. It is possible that subsequent events would cause the Company to meet either or both of the income test and the shareholder test. In the opinion of the Company, however, it is unlikely that the shareholder test would be met, especially in view of the inclusion of certain transfer restrictions in the Company's governing documents. See "Description of Securities". If the Company is classified as a FPHC after application of the shareholder test and the income test, a pro rata portion of its undistributed income would be imputed to its shareholders who are U.S. persons (including U.S. corporations) and would be taxable to such persons as a dividend, even if no cash dividend is actually paid. In that event (promptly after receiving an opinion of counsel or final determination) the Company intends to distribute to its shareholders sufficient amounts so that U.S. shareholders would receive cash at least equal to the product of 150% of the highest federal income tax rate which could apply to any U.S. shareholder and the amount of the dividend that would otherwise be imputed to them. If the Company is classified as a FPHC in the year preceding the death of a shareholder, the Ordinary Shares held by such shareholder would obtain a tax basis equal to the lesser of their fair market value or their tax basis in the hands of the decedent. 3. Passive Foreign Investment Companies Sections 1291 through 1297 of the Code relate to passive foreign investment companies ("PFICs") and impose an interest charge on "excess distributions" made from a PFIC. A foreign corporation is a PFIC if (i) 75% or more of its gross income for the taxable year is passive income as defined under Section 954(c) of the Code (the "passive income test"), or (ii) 50% or more of the average value (or adjusted tax basis if the corporation is a CFC) of the assets held by the corporation during the taxable year consist of assets that produce or are held for the production of passive income (the "passive asset test"). Certain look- through rules take into account the assets and activities of related corporations from which the foreign corporation either receives income or in which it holds an interest. Although a determination whether a corporation is a PFIC is made annually, in general, once a corporation has been classified as a PFIC, it cannot thereafter lose its status as a PFIC. Distribution from a PFIC will generally be characterized as an excess distribution to the extent such distribution, when combined with all other distributions received by the U.S. Holder in such taxable year, exceeds 125% of the average distributions received by such shareholder in the three preceding taxable years (or its holding period if shorter). Once the amount of the excess distribution is determined, it is allocated ratably to all days in the shareholder's holding period for the shares of the PFIC. Amounts allocated to the current year or a year prior to the date upon which the corporation was a PFIC are included in the shareholder's income as ordinary income. Amounts allocated to prior years in which the corporation was a PFIC are subject to the highest rate of tax for the year to which allocated, and each of the resulting amounts of tax is subject to an interest charge as if it were an underpayment of taxes for such tax year. The Company does not believe that it should, in the current year or any prior year, be classified as a PFIC. Under Section 1296(c) of the Code for purposes of determining PFIC status, a foreign corporation is deemed to hold its proportionate share of the assets and to receive directly its proportionate share of the income of its subsidiaries in which it owns 25 percent or more of the stock (determined by value). The Company, through its more than 25 percent owned subsidiaries, is engaged in substantial manufacturing activities and holds few assets (and receives little income) which would be classified as passive assets 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 intermediary in the United States or by a U.S. broker or certain United States-related brokers to such holder outside the United States. In addition, the proceeds of the sale, exchange or redemption of an Ordinary Share may be subject to backup withholding if such proceeds are paid by a paying agent, broker or other intermediary in the United States. Actual backup withholding may be avoided by the holder of an Ordinary Share if such holder (i) is a corporation or comes within certain other exempt categories, and when required, demonstrates this fact or (ii) provides a correct taxpayer identification number, certifies that such holder is not subject to backup withholding and otherwise complies with the backup withholding rules. In addition, holders of Ordinary Shares who are not U.S. persons ("non-U.S. holders") are generally exempt from backup withholding, although such holders may be required to comply with certification and identification procedures in order to prove their exemption. In the case of Ordinary Shares held by a foreign partnership, this certification requirement would generally be applied to the partners of such partnerships pursuant to certain regulations which will generally become effective after 2000. Any amounts withheld under the backup withholding rules from a payment to a holder will be refunded (or credited against the holder's U.S. federal income tax liability, if any) provided that the amount withheld is claimed as federal taxes withheld on the holder's U.S. federal income tax return relating to the year in which the backup withholding occurred. A holder who is not otherwise required to file a U.S. income tax return must generally file a claim for refund (or, in the case of non-U.S. holders, an income tax return) in order to claim refunds of withheld amounts. 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 any such treaty or convention currently being negotiated. Item 8. Selected Consolidated Financial Data. The information required by Item 8 is contained in page 14 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 7 to 13 of the Annual Report to Shareholders, and is incorporated herein by reference. Item 9A. Quantitative and Qualitative Disclosure about Market Risk. A. Exchange Rate Information The Consolidated Financial Statements of the Company are prepared in U.S. dollars. The financial statements of foreign subsidiaries are translated into U.S. dollar in accordance with Statement of Financial Accounting Standards No. 52. The Australian dollar, Swiss Franc, Pound Sterling, Deutsche Mark, Belgian Franc, Singapore dollar, Thai Baht and Indonesian Rupiah are convertible into U.S. dollars at freely floating rates. The Hong Kong dollar and Malaysian Ringgit are tied to and allowed to fluctuate within a narrow range against the value of the U.S. dollar. There are currently no restrictions on the flow of such currencies, except Renminbi, Thai Baht and Malaysian Ringgit, between such countries and the United States. Fluctuations in the value of foreign currencies cause U.S. dollar translated amounts to change in comparison with previous periods and, accordingly, the Company cannot quantify in any meaningful way, the effect of such fluctuations upon future income. This is due to the number of currencies involved, the constantly changing exposure in these currencies, and the fact that all foreign currencies do not react in the same manner against the U.S. dollar. The 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, the 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 the Singapore dollar and Malaysian Ringgit also devalued in 1998 and later on in the fourth quarter of 1998, the 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 exchange rates in the Asian countries stablized in 1999 and some Asian currencies such as Thai Baht and Indonesian Rupiah strengthened in 1999 compared with 1998. The Company anticipates that the economies of the Asian countries are recovering which will strengthen the Company's foundation for market expansion in the region. The Company is unable to predict whether the trends noted above would have a material effect in its future financial condition or results of operations and, if so, whether such an effect will be positive or negative. B. Exchange Rate Fluctuation
1999 1998 ---- ---- High Low Average High Low Average ---- --- ------- ---- --- ------- First quarter ------------- Australian dollar 1.60 1.58 1.59 1.50 1.48 1.49 Malaysian Ringgit 3.79 3.79 3.79 4.54 3.64 3.96 Singapore dollar 1.73 1.68 1.71 1.75 1.60 1.66 Thai Baht 37.47 36.76 37.16 54.07 38.64 45.14 Indonesian Rupiah 8,610.00 8,609.22 8,609.74 12,913.33 8,605.00 10,142.22 Swiss Franc 1.48 1.41 1.44 1.52 1.45 1.48 Pound Sterling 0.62 0.61 0.62 0.61 0.60 0.60 Belgian Franc 37.45 35.25 36.37 - - - Deutsche Mark - - - - - - Second quarter -------------- Australian dollar 1.53 1.51 1.52 1.64 1.53 1.59 Malaysian Ringgit 3.79 3.79 3.79 4.19 3.74 3.93 Singapore dollar 1.72 1.69 1.70 1.71 1.58 1.66 Thai Baht 37.09 36.63 36.89 42.39 38.63 40.36 Indonesian Rupiah 8,616.67 7,052.73 8,093.80 15,499.00 7,746.00 11,438.48 Swiss Franc 1.54 1.51 1.52 1.52 1.47 1.49 Pound Sterling 0.64 0.62 0.63 0.61 0.60 0.60 Belgian Franc 38.93 37.81 38.41 - - - Deutsche Mark 1.89 1.87 1.88 - - - Third quarter ------------- Australian dollar 1.58 1.51 1.54 1.75 1.63 1.69 Malaysian Ringgit 3.79 3.79 3.79 4.18 3.78 4.03 Singapore dollar 1.71 1.68 1.69 1.77 1.69 1.72 Thai Baht 41.48 36.91 38.85 41.70 39.04 40.48 Indonesian Rupiah 8,631.44 7,056.18 7,817.48 12,913.33 11,067.86 11,683.73 Swiss Franc 1.52 1.48 1.51 1.49 1.38 1.43
Pound Sterling 0.63 0.61 0.62 0.61 0.59 0.60 Belgian Franc 38.27 37.51 37.96 - - - Deutsche Mark 1.86 1.82 1.84 - - - Fourth quarter -------------- Australian dollar 1.57 1.54 1.55 1.63 1.57 1.60 Malaysian Ringgit 3.79 3.79 3.79 3.79 3.78 3.79 Singapore dollar 1.67 1.66 1.66 1.65 1.62 1.64 Thai Baht 38.66 37.37 38.23 36.67 36.01 36.44 Indonesian Rupiah 7,066.18 7,063.91 7,064.97 7,748.00 7,743.00 7,746.33 Swiss Franc 1.59 1.52 1.56 1.41 1.34 1.38 Pound Sterling 0.62 0.61 0.62 0.60 0.60 0.60 Belgian Franc 39.82 38.41 39.28 - - - Deutsche Mark 1.93 1.85 1.90 - - -
Item 10. Directors and Officers of Registrant. The directors and executive officers of the Company are:
Name Year of Birth Present Position ---- ------------- ---------------- Brandon Wang 1946 Director, Chairman of the Board and President Philip Leung 1948 Director and Vice President Johnny Tsui 1941 Director, Vice President and Secretary Patrick Tsang 1946 Director and Vice President Terence Leung 1951 Director, Vice President and Treasurer Peter Chang 1946 Director and Vice President Owen Price 1926 Director Anil Thadani 1946 Director
Brandon Wang is married to Eileen Wang-Tsang, who is Patrick Tsang's sister. Peter Chang is married to Brandon Wang's sister. Benedict Wang and S.L. Wang, both of whom occupy Management positions (see below), are brothers of Brandon Wang. All directors are elected for a one-year term at the Annual Meeting of the shareholders. The appointment of all officers is subject to the discretion of the Board of Directors. The Executive Committee of the Board of Directors consists of Brandon Wang, Philip Leung, Johnny Tsui, Patrick Tsang, Terence Leung and Peter Chang. The Executive Committee has authority to take any action, other than appointment of auditors, election and removal of directors and appointment of officers, which can be taken only by the Board of Directors. During 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 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 appointed as Secretary of the Company. He has also served as Chief Operating Officer of the Company's Asian operations since 1991. Patrick Tsang has been a director of the Company since 1980, and was appointed a Vice President in January 1992. He was Secretary of the Company from March 1992 to September 1995. In 1988, he started up the Company's Australian operations. Since July 1993 he has also served as Chief Operating Officer of the Company's European operations. Mr. Tsang has a Ph.D. in Engineering from the University of London. He also attended a Management Science course at Imperial College, London. Terence Leung has been the Company's Chief Financial and Accounting Officer since 1988. He was appointed a director in 1991 and a Vice President in January 1992. Before joining the Company in 1978, Mr. Leung worked as an accountant with several major trading corporations in Hong Kong. Mr. Leung is a certified public accountant in the United Kingdom and Hong Kong. Peter Chang has been the Chief Operating Officer of the Company's U.S. operations since the Company moved its U.S. headquarters to Atlanta, Georgia in late 1988. Mr. Chang joined the Company in 1984 as Vice President in charge of U.S. sales and marketing at the time the Company commenced operations in the United States, and became a director in 1991 and a Vice President in January 1992. Prior to joining the Company, Mr. Chang held various engineering and management positions with major U.S. airlines, based in New York. Mr. Chang has a Master's Degree in Operations Research from Kansas State University. Owen Price became a director in April 1994. In 1993 he retired as the Managing Director of Dairy Farm International Holdings Limited which he joined in 1974. Prior to that time, he had 27 years experience with a large Australian retailer, Woolworths Ltd., where he started as an Executive Trainee and worked his way through to become Chief Executive in 1971. He has served on a number of retail councils in different countries and has been an adviser to the Australian government on trade matters. He is a director of numerous companies in the Asia-Pacific region including three other listed public companies : Dairy Farm International Holdings Limited, Cycle And Carriage Limited (alternate director), and The Hour Glass Limited. Anil Thadani advises the Company on financial matters, corporate strategy and development, and was a director of the Company from 1989 until April 1995, when he resigned as a result of his interest in the going private transaction. He was re-elected to the Board in September 1995. Mr. Thadani is the Chairman of Schroder Capital Partners (Asia) Limited, a direct investment company, which he founded in July 1992 in joint venture with the Schroders Group of the United Kingdom. Prior to this, he was the 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 Relations Officer of the Company in September 1993. Prior to this, he had been the Director of Sales and Marketing of the Company's Hong Kong subsidiary in charge of marketing and sales for the Asian region. Mr. Wang has a Master of Arts degree from the University of North Dakota; a Bachelor of Fine Arts degree from the University of Manitoba; and a Bachelor of Arts from the University of Waterloo (Ontario). Mr. Wang is now Corporate Affairs Officer of the Company. 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 1999 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 $5,242,583. Item 12. Options to Purchase Securities from Registrant or Subsidiaries. Not applicable. Item 13. Interest of Management in Certain Transactions. The following table sets forth the aggregate amount of loans made by the Company to Brandon Wang, the founder, principal shareholder and Chief Executive Officer of the Company and to a trust of which he is a beneficiary since January 1, 1996 :
Loan balance Balance at beginning Loans Loans at end of year extended repaid of year ----------------------------------------------------------------- (dollars in thousands) Year ended December 31, 1999 $ 3,472 $1,879 $ 2,540 $2,811 Year ended December 31, 1998 $ 607 $3,372 $ 507 $3,472 Year ended December 31, 1997 $15,644 $6,129 $21,166 $ 607
In 1999, 1998 and 1997 the Company advanced $1.8 million, $3.4 million and $6.1 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 125% of the amount due under the notes. During 1999, 1998 and 1997, Brandon Wang and a trust controlled by him repaid $2.5 million, $0.5 million and $21.2 million, respectively, to the Company. Interest of $0.2 million, $0.1 million and $1.0 million was charged on these advances in 1999, 1998 and 1997, respectively. The balance at December 31, 1999 was $2.8 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 required 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 was repayable by quarterly instalments of $375,000 followed by a balloon payment of $10,875,000 on August 1, 2000. In 1999 and 1998, Brandon Wang repaid $4 million and $1.5 million, respectively. At December 31, 1999 and 1998, the outstanding balance was $8.4 million and $13.5 million, respectively. In January 2000, the Company's U.S. subsidiary borrowed amounts under a term loan facility which was used to repay the balance of the loan payable by Brandon Wang to the bank, amounting to $5.3 million. This amount has been aggregated with the receivable from Brandon Wang which amounted to $2.8 million at December 31, 1999. The resulting note payable by Brandon Wang is repayable on demand and carries the same interest terms as those of the existing promissory notes. Brandon Wang is required to provide collateral of shares of the Company held by him, such amount to be not less than 125% of the amount due under the notes. At December 31, 1999, the Company has classified the balance owed by Brandon Wang as a reduction from shareholders' equity as it is undeterminable when the increased note payable arising in January 2000 from the repayment of the bank loan to Brandon Wang will be 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. 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 1999. C. Voting Rights In order to avoid certain adverse U.S. income tax consequences to the Company, the voting rights of any shareholder who holds more than 10% of the Company's outstanding shares will be suspended as to shares held by such shareholder in excess of 10% of the Company's outstanding shares ("Excess Shares"). Excess Shares are not counted as voting shares for purposes of establishing a quorum at shareholders' meetings. However, the Board of Directors has discretion to exempt any such Excess Shares from these restrictions if it is satisfied, on the basis of evidence and assurances acceptable to it, that the holding of shares in excess of 10% of the Company's outstanding shares by such shareholder will not result in the Company being classified as a controlled foreign corporation ("CFC"), foreign personal holding company ("FPHC") or personal holding company ("PHC") within the meaning of the U.S. Internal Revenue Code ("Code"). See "Taxation"; "Restrictions on Transfer and Voting; Redemption of Ordinary Shares". Every shareholder who is present in person or by proxy at a meeting of the Company shall have one vote for each Ordinary Share of which he is the holder. A poll may be demanded by the chairman of the meeting, or by any shareholder present in person or by proxy. The Articles of Association of the Company make no provision for cumulative voting. Accordingly, the controlling shareholders have a sufficient number of Ordinary Shares to elect all of the Company's directors. D. Restrictions on Transfer and Voting; Redemption of Ordinary Shares The Company's Memorandum and Articles of Association contain certain provisions which are intended to avoid situations in which the Company may be classified as a CFC, FPHC or PHC. See "Taxation". These provisions are intended only to avoid the adverse U.S. income tax consequences which would result from such classification. The following is a summary of the relevant provisions of the Memorandum and Articles : (i) Restricted Transfers of Ordinary Shares. The Board of Directors may, but is not obliged to, refuse to register the transfer of any of the Ordinary Shares of the Company if, in the opinion of the Board, such transfer might cause the Company to be classified as a CFC, FPHC or PHC. (ii) Restrictions on Voting Rights. In the event that any person holds more than 10% of the Company's outstanding shares, any shares in excess of 10% of the Company's outstanding shares shall be "Excess Shares", which shall not be entitled to any voting rights and shall not be considered voting shares for purposes of establishing a quorum. However, the Board of Directors may exempt any such Excess Shares from these restrictions if it is satisfied, on the basis of evidence and assurances acceptable to it, that the holding of shares in excess of 10% of the Company's outstanding shares by such shareholder will not result in the Company being classified as a CFC, FPHC or PHC. In addition, these restrictions on voting rights do not apply to shares acquired in a cash tender offer for all outstanding shares of the Company where a majority of the outstanding shares of the Company are duly tendered and accepted pursuant to such cash tender offer. (iii) Disclosure of Certain Information to the Company. Any person who directly owns 5% or more of the Company's outstanding shares is required to file with the Company, within 60 days of the end of the Company's taxable year (which is currently the calendar year) and prior to any transfer of shares by or to such person, an affidavit setting forth the number of shares (1) owned directly by such person or by a nominee of such person, and (2) owned indirectly or constructively by such person by reason of the attribution rules of Sections 542, 544 and 958 of the Code or by reason of application of the attribution rules of Rule 13(d) of the U.S. Securities Exchange Act of 1934 ("Exchange Act"). The affidavit filed with the Company must set forth all the information required to be reported (1) in returns of shareholders required to be filed under U.S. Income Tax Regulations Section 1.6035-1 (including shareholder related information for inclusion in IRS Form 5471), and (2) in reports required to be filed under Section 13(d) of the Exchange Act. All shares held by any person who fails to comply with this reporting requirement shall be deemed Excess Shares and shall be subject to the voting restrictions and redemption provisions described herein. (iv) Redemption of Ordinary Shares. The Company may, in the discretion of the Board of Directors, redeem any Excess Shares at a price equal to (1) the average of the high and low sales price of the shares on the last business day prior to the redemption date on the principal national securities exchange on which such shares are listed or admitted to trading, or (2) if the shares are not listed or admitted to trading, the average of the highest bid and lowest asked prices on such last business day as reported by the National Quotation Bureau Incorporated or similar organization selected from time to time by the Company, or (3) if not determinable as aforesaid, as determined in good faith by the Board of Directors. The directors of the Company, in a meeting held on January 6, 1992, resolved that the principal shareholder, Brandon Wang, is exempt from the foregoing restrictions. The directors have also approved exemption of certain institutional shareholders from the foregoing restrictions as the Board was satisfied that such exemption would not have any of the adverse tax consequences described above. E. Rights of Shareholders under British Virgin Islands Law may be less than in U.S. Jurisdictions The Company's corporate affairs are governed by its Memorandum and Articles of Association and by the International Business Companies Act of the British Virgin Islands. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of Management and the rights of the Company's shareholders may differ from those that would apply if the Company were incorporated in a jurisdiction within the United States. The rights of shareholders under British Virgin Islands law are not as clearly established as the rights of shareholders under legislation or judicial precedent in existence in most U.S. jurisdictions. Thus, the public shareholders of the Company may have more difficulty in protecting their interests in the face of actions by the Board of Directors or the principal shareholders than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction. In addition, it is unlikely that the courts of the British Virgin Islands would enforce, either in an original action or in an action for enforcement of judgments of U.S. courts, liabilities which are predicated upon the securities laws of the United States. See "Description of Securities". F. Directors Under the Company's Articles of Association, the first directors must be appointed by the subscribers to the Memorandum of Association, and thereafter the directors may be appointed by the shareholders, or by the directors to fill a vacancy or as an addition to the existing directors. Directors may be removed, with or without cause, by a resolution of the shareholders of the Company, or with cause by a resolution of the other directors. G. Quorum The quorum required to constitute a valid general meeting of shareholders consists of shareholders present in person or by proxy holding at least a majority of all issued Ordinary Shares entitled to vote. If a meeting is adjourned for lack of quorum, it will stand adjourned to the next business day at the same time and place or to such other day and at such other time and place as the directors may determine, and if at the adjourned meeting there are present within one hour from the time appointed for the meeting at least one- third of the shares entitled to vote at the meeting, the shareholder or shareholders present shall be a quorum. However, a meeting convened on the requisition of the shareholders shall be dissolved if a quorum is not present at the first meeting. H. Resolutions Resolutions may be adopted at shareholders' meetings by the affirmative vote of a simple majority of the Ordinary Shares entitled to vote thereon. Certain actions may be taken by a resolution of the directors. Such actions include an amendment of the Company's Memorandum and 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 Memorandum and Articles of Association, there are 13,325,394 authorized but unissued Ordinary Shares. Those additional authorized but unissued Ordinary Shares may be utilized for a variety of corporate purposes, including future public or private offerings to raise additional capital or for facilitating corporate acquisitions. In addition, the Company cancelled 603,000 shares in 1996 and 1,037,394 shares in 1997, which were repurchased under the share repurchase plan adopted during 1994 and amended in 1995 and the tender offer transaction which was completed in December 1996. The Company does not currently have any plans to issue additional Ordinary Shares. K. Transfers of Ordinary Shares The Company's Memorandum and Articles of Association do not restrict the transferability of fully paid Ordinary Shares, except that the Board of Directors may refuse to register the transfer of any of the Ordinary Shares if, in the opinion of the Board, such transfer might result in the Company becoming a CFC, FPHC or PHC. See "Restrictions on Transfer and Voting; Redemption of Ordinary Shares". L. New Issues of Ordinary Shares Under the Company's Articles of Association, the Board of Directors is authorized to exercise the power of the Company to offer, allot, grant options over or otherwise dispose of all of the remaining unissued Ordinary Shares of the Company, which comprise 13,325,394 Ordinary Shares. The Board of Directors may, without further shareholder action, increase the number of authorized shares of the Company. In addition the Board of Directors may, without further shareholder action, designate any of the authorized but unissued Ordinary Shares as preferred shares by amending the Company's Memorandum of Association. Upon filing such amendment with the BVI Registrar of Companies, the Board of Directors would have authority to fix the dividend rights and rates, voting rights, redemption provisions and liquidation preference, all of which may take precedence over comparable rights of the existing Ordinary Shares. M. Merger; Dissenters' Rights BVI law provides for mergers whereby there occurs either an absorption by one company of another company and the simultaneous dissolution of the other company, or the formation of a new company that absorbs two companies and the automatic dissolution of both absorbed companies. BVI law provides for compulsory acquisition or appraisal of the interests of a shareholder who objects to the transfer of the ownership or assets of a company. Under section 83 of the BVI International Business Companies Act, a shareholder of a company incorporated under the Act has the right to object to a proposed merger of the Company. If the shareholder complies fully with the requirements of section 83 and the merger is approved by a majority of shareholders, the dissenting shareholder may require the Company to pay fair value (as agreed or appraised) for his shares. Pursuant to section 83 (11) of the Act, a shareholder who chooses to enforce dissenting shareholders' rights may not enforce other remedial rights to which he might otherwise be entitled by virtue of his holding shares, except that the shareholder shall retain the right to institute proceedings to obtain relief on the ground that the merger is illegal. N. Joint Shareholders If two or more persons who hold shares jointly are present at a meeting in person or by proxy they must vote as one. Dividends and notices may be paid or sent, in the case of joint holders, to any one of the persons named as joint shareholders in the register of members. O. Fiduciary Responsibilities Under U.S. law majority and controlling shareholders generally have certain "fiduciary" responsibilities to the minority shareholders. Shareholder action must be taken in good faith and actions by controlling shareholders which are obviously unreasonable may be declared null and void. BVI law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protecting minority shareholders in U.S. jurisdictions. While BVI law does permit a shareholder of a BVI company to sue its directors derivatively (i.e., in the name of and for the benefit of the Company) and to sue the Company and its directors for his benefit and for the benefit of others similarly situated, the circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect of any such action, may result in the rights of shareholders of a BVI company being more limited than those of shareholders in a U.S. company. P. Indemnification of Officers and Directors Under its Memorandum and Articles of Association, the Company is authorized to indemnify any person who is made or threatened to be made a party to a legal or administrative proceeding by virtue of being a director, officer or agent of the Company, provided such person acted in the best interests of the Company and, in the case of a criminal proceeding, such person had no reasonable cause to believe that his conduct was unlawful. The Company is obliged to indemnify any director, officer or agent of the Company who was successful in any proceeding against reasonable expenses incurred in connection with the proceeding, regardless of whether such person met the standard of conduct described in the preceding sentence. Q. Transfer Agent and Registrar Chase Mellon 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 subsidiary failed to meet several covenants including their net income, tangible net worth and fixed charge ratio covenants. A waiver has 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 :
Page ---- Management Report....................................................................... 15 Independent Auditors' Report............................................................ 16 Consolidated Statements of Operations for the three years ended December 31, 1999 ...... 17 Consolidated Balance Sheets as of December 31, 1999 and 1998 ........................... 18-19 Consolidated Statements of Cash Flows for the three years ended December 31, 1999 ...... 20-21 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1999 .............................................................. 22 Notes to Consolidated Financial Statements ............................................. 23-33
B. Exhibit Index Exhibit Number Description ------- ----------- 3.1 Sub-Tenancy Agreement of Unit C and Unit D on 15th Floor and 16th Floor and 17th Floor of Watson Centre, Hong Kong, made on June 30, 1999, between A.S. Watson & Co., Limited as Landlord and Disposable Soft Goods Limited as Tenant. 11 Computation of Net Income Per Ordinary Share. C. Financial Statement Schedules Schedule 1 - Condensed Financial Information
Page ---- Unconsolidated Statements of Operations for the three years ended December 31, 1999............................................................ S-1 Unconsolidated Balance Sheets as of December 31, 1999 and 1998 ......................... S-2 Unconsolidated Statements of Cash Flows for the three years ended December 31, 1999............................................................ S-3 Note to Schedule 1...................................................................... S-4
No other financial statement schedules are provided because the information is not required or is contained in the Notes to Consolidated Financial Statements in pages 23 to 33 of the Annual Report to Shareholders. SIGNATURES Pursuant to the requirement of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 20-F and has duly caused the Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Hong Kong, on June 19, 2000. DSG INTERNATIONAL LIMITED By /s/ TERENCE Y.F. LEUNG ------------------------------- Terence Y.F. Leung Vice President and Treasurer 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, 1999 and 1998, and for each of the three years ended December 31, 1999, and have issued our report thereon dated March 17, 2000, such financial statements and report are included in your 1999 Annual Report to the Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of DSG International Limited, listed in Item 19. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte Touche Tohmatsu Hong Kong March 17, 2000 ABOUT THE COMPANY DSG International Limited is a global company specialized in manufacturing and distribution of disposable baby diapers, adult incontinence and training pants products. The Company has ten manufacturing plants established in Hong Kong, the United States, Australia, England, Switzerland, China, Thailand, Indonesia and Malaysia. The Company's products are marketed and distributed throughout Asia, Australia, North America and Europe. Its principal brand names are "FITTI(R)", "PET PET(R)", "COSIES(R)", "COSIFITS(R)", "BABY LOVE(R)", "BABYJOY(R)", "LULLABY(R)", "CARES(R)", "CUDDLES(R)", "SUPER FAN-NIES(R)", "DISPO 123(TM)", "HANDY(TM)", "VLESI(R)", "CERTAINTY(R)" and "MERIT(R)". These brands are synonymous with high quality and superior value, characteristics that the Company is dedicated to maintaining. FINANCIAL HIGHLIGHTS
Year Ended December 31, 1995 1996 1997 1998 1999 ----------------------------------------------------------------- (In US$ million except per share amounts) Net sales $245.9 $236.1 $230.9 $207.9 $205.8 Net income $ 4.7 $ 9.2 $ 1.0 $ 1.6 $ 4.4 Shareholders' equity $ 83.7 $ 74.6 $ 64.8 $ 68.0 $ 70.3 Earnings per share $ 0.58 $ 1.18 $ 0.15 $ 0.24 $ 0.66
-1- CONTENTS
THE DSG MANAGEMENT TEAM 2 Executive and Non-Executive Directors of DSG TO OUR SHAREHOLDERS 3 Report on the highlights of 1999 and the outlook for 2000 by Brandon Wang, Chairman OPERATIONS 4 Report of DSG's operations world-wide in 1999 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7 SELECTED CONSOLIDATED FINANCIAL DATA 14 MANAGEMENT REPORT 15 by Terence Leung, Chief Financial Officer INDEPENDENT AUDITORS' REPORT 16 by Deloitte Touche Tohmatsu, Hong Kong CONSOLIDATED STATEMENTS OF OPERATIONS 17 CONSOLIDATED BALANCE SHEETS 18 CONSOLIDATED STATEMENTS OF CASH FLOWS 20 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23 SHAREHOLDER INFORMATION 34 DSG COMPANIES 35 DSG Corporate addresses world-wide
-2- THE DSG MANAGEMENT TEAM
DSG EXECUTIVE DIRECTORS DSG OFFICERS Brandon S L Wang Benedict Wang Chairman and Chief Executive Officer Corporate Affairs Officer Philip K C Leung S L Wang Chief Purchasing Officer Group Technical Officer Johnny S L Tsui George Jackson Chief Operating Officer of Asia Pacific and Chief Executive of Australia Company Secretary Patrick K Y Tsang Chief Operating Officer of Europe Terence Y F Leung Chief Financial Officer Peter Chang Chief Operating Officer of North America DSG NON-EXECUTIVE DIRECTORS Anil Thadani Chairman of Schroder Capital Partners (Asia) Limited, Hong Kong Owen Price Formerly Managing Director of Dairy Farm International Holdings, Hong Kong (retired in 1993)
-3- TO OUR SHAREHOLDERS The Year 1999 has been a year of excellent progress for the Company; the result fully reflects all the strategic steps taken in 1998 to accommodate the recovery of the Asian countries. With the stability of most currencies, we have enjoyed steady volume growth in the region. All of our manufacturing facilities have been fully engaged and we expect this situation to persist into Year 2000. We continue to expand the distribution of adult incontinence product in the region and we are very encouraged by the response of most markets. In Australia, we continue to improve our manufacturing efficiency and gain new customers in all areas. We are satisfied with the effort to improve our marketing position in the adult incontinence business. In Europe, the baby diaper market is still extremely difficult due to an unabated price war between major brands. After the reorganization of manufacturing facilities in Europe, adult incontinence production remains the core of our European operations. Our adult incontinence business in North America has enjoyed healthy growth in 1999; this is due to new product innovations and actions taken to strengthen our relationship with key customers. Our baby diaper sales in this region is steady and continuous measures are being made to improve our manufacturing efficiency. With the speedy recovery of the Asian economy, we are confidently entering the millennium with new targets for both of our marketing and manufacturing activities, even though the sign of price adjustment of raw materials is a concern. Brandon Wang Chairman -4- OPERATIONS DSG International Limited, established in Hong Kong in 1973, is one of the world leading companies specialized in manufacturing disposable baby diapers, adult incontinence and training pants products in this industry. The Company now operates ten manufacturing facilities in North America, Australia, Asia and Europe with extensive distribution activities around the world. The principal raw materials for the Company's disposable products are fluff wood pulp and super absorbent polymer. Other raw materials include polyethylene backsheets, polypropylene non-woven liners, adhesive tapes, hot melt adhesive, elastic, aloe vera and tissue. There are different marketing and distribution strategies for each geographic segment of the Company, however, the Company's fundamental strategies are: . Producing high quality and value-added products for consumers. . Providing healthy profit margins to distributors and retailers. . Manufacturing in a highly flexible and efficient way. . Responding intelligently to change in the marketplace. NORTH AMERICA During the year, the Company continued its effort to strengthen the consolidation of the North American operation. The programs, systems and other measures put in place to improve the productivity and efficiency have been on track with steady increase of performance results. Due to the particularly strong economy in this region, the Company faced with severe manpower shortages anywhere from general labor to management and professional staff. The Company has taken steps to minimize the impact; nevertheless, it does not appear that the labor force shortage problem will improve soon. The net sales for the year 1999 were $93.5 million compared with $89.9 million in 1998. The increase in sales was attributable to the expansion of both baby diapers and adult incontinence products. Operating income improved from $1.2 million in 1998 to $5.0 million in 1999. This significant increase of the operating income was primarily from improvement in the efficiency of operations. During the year, the Company expanded its disposable baby diaper product line with the addition of the CUDDLES(R) brand Jumbo Packs and the innovative SUPER FAN-NIES(R) brand. The CUDDLES(R) brand is designed to effectively address the value segment of the category driven by price. The SUPER FAN-NIES(R) brand represents the first-ever baby diaper product targeted at the collegiate sports fans. The product incorporates the actual university logos printed on the diaper cover. These expansion have added to the Company's sales and improved the Company's baby diaper profitability. The Company's adult incontinence sales continued to increase. The adult incontinence sales were 17% and 26% of the Company's sales in 1998 and 1999 respectively. The Company focused its adult incontinence business both in the institutional and retail sectors, with growth coming in both. The Company's strategy is to provide a superior range of products specifically designed to offer superior product features and performance better suited to meet the needs of the users. In line with the Company's global fundamental marketing strategies, the Company's North American operations provide its customers high quality products and superior service with satisfactory profit margin. The Company's principal brand names in North America are FITTI(R), CUDDLES(R) and SUPER FAN-NIES(R) for disposable baby diapers and CERTAINTY(R) for adult incontinence. -5- AUSTRALIA The Company's net sales and operating income in 1999 were $42.7 million and $4.8 million, representing an increase of 5.4% and a decrease of 2.5% respectively compared with 1998. Net sales increased due to new growth in the pharmacy class of trade, expansion of private label distribution and continued market share gains in adult incontinence sales. Operating profits declined slightly due to market pressure for increased advertising and promotional spending and the addition of enhanced product features without an increase in selling price. Currency exchange rates against the U.S. dollar had no material impact on results during 1999. The Company remains as the second largest manufacturer of disposable baby diapers in Australia. The Company's major brands in Australia, BABY LOVE(R) and LULLABY(R), continue to penetrate the grocery and variety sector, while COSIFITS(R) and COSIES(R) are maintaining a strong presence in the independent pharmacy sector. In addition, the Company is also a leading supplier of private label diapers for major grocery and variety retailers. The Company's reliable service, high quality products and competitive prices have resulted in increasing its significant position in the private label sector. The Company also distributes the VLESI(R) range of adult incontinence products into the Australian market. These items continued to show substantial growth during 1999 since their launch in mid-1996. ASIA The Company's net sales in Asian regions increased by 3.4% to $45.7 million in 1999 compared with $44.2 million in 1998. The promising results were attributable to the recovering economy and implementation of "go local and go direct" strategy in the region. During the year, the Company commenced its manufacturing operation in Malaysia and established its sales and distribution force in the Company's key markets. The Company recorded strong growth in the markets in Malaysia, Thailand and PRC, and strong sales recovery in the Indonesian markets. The Company's sales in Hong Kong and Singapore markets continued to face the problems of market shrinkage and intense price competition. The conversion to the use of disposable baby diaper in the region is growing, the Company has been able to capture the growth by introducing a number of economy brands to the newly converted consumers and stepping up of advertising and promotion expenditure. The Company's major brands for disposable baby diaper are FITTI(R), PET PET(R), COSIFITS(R), BABY LOVE(R) and BABYJOY(R). The Company produces and distributes adult incontinence products in Asia under the brands named DISPO 123(TM) and HANDY(TM). The Company provides consumers with a different range of products with price differentiation to maintain its competitiveness against other local brands. The Company also has flexibility in tailoring packaging, brand and product differentiation and advertising and promotional activities to cope with different demands in various markets in the region. Although competition and pricing pressure have become more intense in the region, the Company believes that there is great potential for sales growth with projected population growth and favorable conversion rate. As a pioneer in the region, the Company has an advantage in entering and expanding these markets by encouraging disposable diaper usage and establishing its brands at an early stage through strategic advertising and promotional activities. EUROPE The Company's net sales in Europe were $24.0 million in 1999 compared with $33.3 million in 1998. The top line reduction reflected the sale of the Swiss diaper and napkin business during 1999. The Company's remaining Swiss operation was focused on adult incontinence products, whereas, the Company's U.K. operation continued with branded and private label disposable baby diapers. Operating loss for the year 1999 was $1.7 million compared with an operating loss of $2.9 million in 1998. The Company's brands in Europe for baby diapers are FITTI(R), COSIFITS(R) and CARES(R), and its major brand for adult incontinence products is VLESI(R). The Company's adult incontinence continued to be active in the European markets in addition to maintaining the Swiss market share. Product improvements and introductions continued during the year. The Company believes that its baby branding strategy provides opportunities to maintain its presence in the United Kingdom although it will be difficult to penetrate the market share of Procter & Gamble and Kimberly- -6- Clark. The Company believes that its focus on expanding its market in the adult incontinence business by raising awareness of the VLESI(R) brand and to offer quality products and services will create further opportunities for growth in the European markets. -7- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Selected Consolidated Financial Data and the Consolidated Financial Statements and related Notes which appear elsewhere in this Annual Report. General The Company's revenues are primarily derived from the manufacture and sale of disposable baby diapers, adult incontinence and training pants products in North America, Australia, Asia and Europe, both under its own brands and private label brands of major retailers. The Company is not taxed in the British Virgin Islands where it is incorporated. The Company's subsidiaries are subject to taxation in the jurisdictions in which they operate. The Consolidated Financial Statements of the Company are prepared in U.S. dollars, and the majority of its revenues are received and expenses are disbursed in U.S. dollars. Because certain of the Company's subsidiaries account for their transactions in currencies other than U.S. dollars, the Consolidated Balance Sheets contain foreign currency translation adjustments and the Consolidated Statements of Operations contain realized exchange gains and losses due to exchange rate fluctuations. Industry Trends The Company believes that the most significant industry trends are . fluff wood pulp cost and other raw materials cost increased in 1999 and this is expected to continue in 2000; . increasing demand for ultra thin aloe vera and cloth-like breathable backsheet products, which the Company is meeting through modifications to its machinery; . the domination of industry leaders in most of the markets putting pressure on retailers' margins, which the Company is finding difficult to respond to by providing retailers with higher profit margins in the current highly competitive market conditions. The Company is unable to predict whether the other trends noted above would have a material effect on its future financial condition or results of operations and, if so, whether such an effect will be positive or negative. Forward Looking Statements The Company expects that the economy in the Asian region is recovering which will strengthen the Company's foundation for market expansion in the region. The cost of raw materials, primarily fluff wood pulp cost will increase in a faster pace than in 1999. -8- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) From time to time, the Company may make certain statements that contain "forward looking" information (as defined in the Private Securities Litigation Reform Act of 1995). Words such as "anticipate", "estimate", "project", "expect", "believe" and similar expressions are intended to identify such forward looking statements. Forward looking statements may be made by management orally or in writing, including, but not limited to, in press releases, as part of this Management's Discussion and Analysis of Financial Condition and Results of Operations and as part of other sections of this Annual Report on Form 20-F and the Company's other filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Such forward looking statements are subject to certain risks, uncertainties and assumptions, including without limitation to those identified below. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated, estimated or projected. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of their respective dates. Among the factors that have a direct bearing on the Company's results of operations and financial condition are leverage and debt service, competitive industry, price changes by competitors, dependence on key products and acceptance of product innovations, cost of certain raw materials, international operations, currency fluctuations, currency devaluations, currency restrictions, intellectual property risks, technological changes, covenant limitations and other factors discussed herein. Results of Operations 1. Overall The following table sets forth the percentage of net sales represented by the specified components of income and expense for the years ended December 31, 1999, 1998 and 1997. -9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued)
Year Ended December 31, 1999 1998 1997 -------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 67.1 71.3 66.7 Gross profit 32.9 28.7 33.3 Selling, general and administrative expenses (29.8) (26.6) (31.1) Gain (loss) on disposals of property, plant and equipment 0.5 - (0.1) Restructuring costs - (0.4) (0.6) Operating income 3.6 1.7 1.5 Interest expense (1.1) (1.2) (1.2) Interest income 0.4 0.4 0.6 Exchange loss (0.5) (0.1) (0.3) Other income 0.3 0.1 - Income before income taxes 2.7 0.9 0.6 Provision for income taxes (0.5) (0.1) (0.2) Minority interest (0.1) - - Net income 2.1% 0.8% 0.4%
2. Comparison of 1999, 1998 and 1997 The Company's net sales in 1999 were $205.8 million compared with $207.9 million in 1998. The Company's net sales actually grew in all regions except Europe where the sales impacted by the sale of the Swiss diaper and napkin business during the year. The Company's adult incontinence business had a double-digit growth in 1999. Gross profit as a percentage of net sales in 1999 was higher than 1998 by 4.2% due to the improvement of production efficiency in all regional segments and the implementation of "go local and go direct" strategy in the Asian operations. Selling, general and administrative expenses as a percentage of net sales increased to 29.8% in 1999 compared with 26.6% in 1998, primarily due to higher expenditure on advertising and promotion activities and additional administrative expenses in the newly commenced operations in the Asian region and a $2.0 million increase in executive compensation in 1999. In 1999, the Company sold its property in Singapore and machinery and equipment in one of its plants in Switzerland resulting in a gain of $0.9 million. Net sales for the year 1998 decreased by 10.0% from $230.9 million in 1997 to $207.9 million. The sales drop was primarily due to the Every Day Low Price ("EDLP") pricing strategy in the North American region and the currency devaluation of Australian dollar and certain Asian currencies against the U.S. dollar in the respective regions. The Company's overall sales volume decreased marginally in 1998 over 1997, however, there was promising growth in adult incontinence business. -10- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Gross profit as a percentage of net sales declined to 28.7% in 1998 from 33.3% in 1997 because of the new pricing strategy in the North American region as well as the increased cost of imported raw materials in certain operations in the Asian region due to currency devaluation against the U.S. dollar. Selling, general and administrative expenses as a percentage of net sales decreased to 26.6% in 1998 compared to 31.2% in 1997, primarily due to lower advertising and promotion expenses. The Company provided a write-down of $0.9 million for certain surplus equipment in 1998. The restructuring cost of $1.4 million in 1997 represented a one-time charge for the closure of several manufacturing operations in the North American and the Asian regions and a write-down of certain surplus equipment used in its European operations. The Company's interest expense in 1998 decreased to $2.5 million from $2.8 million in 1997 due to reduction in borrowings. The decrease in interest income to $0.8 million in 1998 from $1.5 million in 1997 was attributable to reduced average bank balances and the repayment of the loan receivable from a shareholder. Geographic Segment Information As the results of the Company's operations differ significantly from one market to another, the following discussion considers the Company's results in each of the geographic regions in which it operates. The tables below set forth the Company's net sales and operating income in each geographic region in 1999, 1998 and 1997, and the percentage change over the preceding period: 1. North America
Year Ended December 31, Increase/(Decrease) 1999 1998 1997 1999 1998 1997 ----------------------------------------------------------------------------- (Dollars in thousands) Net sales $93,479 $89,911 $91,098 4.0% (1.3)% (1.6)% Operating income (loss) 5,001 1,155 (548) 333.0 - -
Comparison of 1999, 1998 and 1997. The Company's net sales in North America increased by 4.0% to $93.5 million in 1999 from $89.9 million in 1998. The net sales growth was primarily from the adult incontinence business. Gross profit margin improved by 3.1% from 26.4% in 1998 to 29.5% in 1999. This increase of gross margin was attributed to the improvement of operation efficiency subsequent to the consolidation of the operations in 1998. Selling, general and administrative expenses in 1999 declined by 1.0% from 1998 primarily due to lower promotional expenditures and effective cost saving measures. Operating income for 1999 significantly improved to $5.0 million from $1.2 million in 1998. -11- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) The Company's net sales in North America decreased by 1.3% to $89.9 million in 1998 from $91.1 million in 1997. The sales actually grew by $3.6 million in 1998 but were adversely impacted by the price variance due to the change of pricing strategy to EDLP. The growth in sales was derived primarily from the adult incontinence business. Gross profit margin decreased by 5.8% from 32.2% in 1997 to 26.4% in 1998 as a result of EDLP strategy and lower productivity in the earlier part of 1998. In addition to the shift of coupon promotion to EDLP, other advertising and promotion expenditures were significantly decreased in 1998. Selling and administrative expenses in 1998 were lower than that of 1997, primarily due to a one-time charge for settlement of a patent infringement claim and the cost of closing operations in California and Canada in 1997. On the other hand, there was a write-down of $0.9 million for certain surplus equipment in 1998. Operating income recovered from a loss of $0.5 million in 1997 to a profit of $1.2 million in 1998. 2. Australia
Year Ended December 31, Increase/(Decrease) 1999 1998 1997 1999 1998 1997 ---------------------------------------------------------------------------- (Dollars in thousands) Net sales $42,676 $40,487 $47,172 5.4% (14.2)% (1.0)% Operating income 4,823 4,946 5,925 (2.5) (16.5) 13.9
Comparison of 1999, 1998 and 1997. The Company's net sales in Australia in 1999 were $42.7 million compared with $40.5 million in 1998, a growth of $2.2 million. Gross profit margin increased by 0.6% from 38.6% in 1998 to 39.2% in 1999. Operating income decreased by 2.5% to $4.8 million compared with $4.9 million in 1998 due to higher advertising and promotional expenditure resulting from increased competition. The general and administrative expenses remained materially unchanged compared to 1998. The Company's net sales in Australia in 1998 were $40.5 million compared with $47.2 million in 1997. The sales actually grew by $1.4 million, but were significantly impacted by adverse currency fluctuations against the U.S. dollar during 1998. Gross profit margin also decreased by 1.9% from 40.4% in 1997 to 38.5% in 1998 due to the costs associated with enhanced product features and the currency exchange rate. The Company was able to reduce its selling, general and administrative expenses by 1.9% in 1998 compared with 1997. This improvement was the result of lower freight and labor costs. Operating income decreased by 16.5% to $4.9 million compared with $5.9 million in 1997, due to the currency exchange rate. Operating income as expressed in Australian dollars showed a slight improvement of 0.2% in 1998 compared with 1997. -12- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) 3. Asia
Year Ended December 31, Increase/(Decrease) 1999 1998 1997 1999 1998 1997 ---------------------------------------------------------------------------- (Dollars in thousands) Net sales $45,715 $44,208 $56,955 3.4% (22.4)% (5.6)% Operating income 3,839 2,842 6,199 35.1 (54.2) (9.2)
Comparison of 1999, 1998 and 1997. The Company's net sales in Asia increased by 3.4% to $45.7 million in 1999 from $44.2 million in 1998. The Company captured the growth of the markets in the developing countries in the region and at the same time encountered intense competition on price and promotional activities. Although the economy in the region recovered rapidly, consumers became more price conscious than ever and prices were reduced on certain branded products and several economy brands were introduced to meet the increasing demand. Gross profit increased by $2.5 million to $18.7 million in 1999 compared with $16.2 million in 1998, mainly due to higher profit margins from direct selling and distribution and reduced costs by local manufacturing. Selling, general and administrative expenses increased in 1999 due to the higher promotion expenditure and the additional administrative expenses in the newly commenced operations in Indonesia and Malaysia. As a result, operating income, including a gain of $0.7 million on the sale of the Company's property in Singapore, increased to $3.8 million in 1999 from $2.8 million in 1998. The Company's net sales in Asia were down by 22.4% to $44.2 million in 1998 from $56.9 million in 1997. The decline in sales was due to adverse fluctuation of certain currencies in the region against the U.S. dollar and the decline in sales volume in the Indonesian and Hong Kong markets. The Hong Kong market contracted due to lower birth rates and the Indonesian market was hit badly by both the financial turmoil and political instability. Gross profit in 1998 dropped by $7.0 million from $23.2 million to $16.2 million primarily due to lower sales volume and increased cost of imported raw materials as a result of adverse currency fluctuations. Selling, general and administrative expenses fell by $3.7 million from $16.9 million in 1997 to $13.2 million in 1998 while operating income dropped by $3.4 million from $6.2 million in 1997 to $2.8 million in 1998. 4. Europe
Year Ended December 31, Increase/(Decrease) 1999 1998 1997 1999 1998 1997 ------------------------------------------------------------------------------- (Dollars in thousands) Net sales $23,972 $33,319 $35,705 (28.1)% (6.7)% 0.8% Operating loss (1,667) (2,903) (2,583) (42.6) 12.4 -
-13- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Comparison of 1999, 1998 and 1997. The Company's net sales in Europe were $24.0 million in 1999 against $33.3 million in 1998, representing a 28.1% decrease. The Company's diaper sales volume in the United Kingdom was relatively stable, but operating profit was not satisfactory. The Company's Swiss sales in adult incontinence products in 1999 showed moderate increase and operating profit improved over the previous year. Combined with the effect of sale of the Company's Swiss operation in baby diaper and feminine napkin products, these resulted in a reduced operating loss from $2.9 million to $1.8 million. The Company's net sales in Europe were $33.3 million in 1998 against $35.7 million in 1997, representing a 6.7% decrease. The Company's sales in the United Kingdom improved significantly as a result of gaining private label business in the disposable baby diaper market. However, the Company lost a major customer in the baby diaper category in the Swiss operation. Therefore, the operating loss for the year 1998 increased to $2.9 million compared to $2.6 million in 1997. Liquidity and Capital Resources For the year ended December 31, 1999, the Company had cash and cash equivalents of $14.4 million. Net cash provided by operating activities was $11.8 million, including depreciation and amortization of $9.7 million and the gain on disposals of property, plant and equipment of $1.0 million. The net working capital requirement in 1999 was $1.5 million. The Company has utilized $9.0 million short-term bank credit lines out of total credit facilities of $18.4 million as of December 31, 1999. The weighted average interest rate on borrowings at the year ended 1999 was 8.53%. Additional information on bank credit facilities is set out in Note 9 of Notes to Consolidated Financial Statements. Net cash provided by investing activities was $4.8 million. The Company invested $6.1 million in capital expenditure for additions and modifications to machinery and equipment for the Company's various operations. The $4.2 million proceeds from disposals of property derived primarily from the sale of the Company's property in Singapore and sale of the Company's baby diaper and feminine products operation in Switzerland. The Company repaid $10.7 million of its bank debt during the year 1999, and the Company's restricted bank deposit of $6.0 million was realized and applied in repayment of bank debt. During the year, the Company advanced $1.9 million to and received repayment of $2.5 million from its principal shareholder, Mr. Brandon Wang and a trust of which he is a beneficiary, under a loan and security agreement, details of which are provided in Note 5 of Notes to Consolidated Financial Statements. The Company did not repurchase any shares or pay a dividend during 1999. -14- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (Continued) Year 2000 The operation of the Company's business is dependent in part on its computer software programs and operating systems (collectively as "Programs and Systems"). These Programs and Systems are used in several key areas of the Company's business, including materials purchasing, inventory management, pricing, sales, shipping and financial reporting, as well as in various administrative functions. The Company has completed its Programs and Systems to identify potential Year 2000 compliance problems. The Year 2000 compliance issues exist because many computer systems and applications currently use two digit date fields to designate a year. Therefore, date sensitive systems may recognize the Year 2000 as the Year 1900 or not at all. This inability to recognize or properly treat the Year 2000 may cause the Programs and Systems to process critical financial and operational information incorrectly. It is anticipated that replacement of some of the Company's Programs and Systems will be necessary to make such Programs and Systems Year 2000 compliant. The Company has also communicated with suppliers, financial institutions and others to coordinate Year 2000 conversions. The lack of readiness on the part of suppliers, financial institutions and others could expose the Company to the potential for loss, impairment of business process and activities. Following the changeover to the Year 2000, the Company has no material Year 2000 incidents to report. For a number of years, the Company has been modifying systems to be Year 2000 compliant when making other enhancements. In 1999, costs incurred on Year 2000 modifications was approximately $0.2 million (1998: $1.0 million). All modification costs are charged as expenses except for capital equipment purchases. Cost relating to major systems changes that are not directly related to the Year 2000 but which address some Year 2000 issues are not included in these costs. -15- SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31, Statement of Operations Data 1999 1998 1997 1996 1995 ----------------------------------------------------------- (in thousands except per share amounts) Net sales $205,842 $207,925 $230,930 $236,050 $245,881 Cost of sales 138,120 147,997 153,929 155,647 177,315 Gross profit 67,722 59,928 77,001 80,403 68,566 Selling, general and administrative expenses (61,321) (55,318) (71,912) (64,435) (59,559) Gain (loss) on disposals of property, plant and 1,034 42 (122) 15 51 equipment Restructuring costs - (897) (1,389) - - Operating income 7,435 3,755 3,578 15,983 9,058 Interest expense (2,208) (2,511) (2,833) (2,267) (1,759) Interest income 792 790 1,451 1,900 1,666 Exchange (loss) gain (997) (311) (610) (176) 1,053 Non-recurring charge - - - - (1,968) Other income (expense) 522 155 (169) (89) (318) Income before income taxes 5,544 1,878 1,417 15,351 7,732 Provision for income taxes (987) (253) (443) (6,185) (3,267) Minority interest (122) (3) - - 222 Net income $ 4,435 $ 1,622 $ 974 $ 9,166 $ 4,687 Basic earnings per share: Net income $ 0.66 $ 0.24 $ 0.15 $ 1.18 $ 0.58 Weighted average number of shares outstanding 6,675 6,675 6,675 7,747 8,109
The Company has not declared any dividend during the above periods.
December 31, Balance Sheet Data 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Working capital $ 36,000 $ 30,091 $ 30,823 $ 31,714 $ 19,577 Total assets 121,847 133,909 130,273 141,910 154,393 Long-term debt 11,894 20,957 21,281 21,587 16,470 Shareholders' equity 70,302 68,013 64,778 74,639 83,706
-16- MANAGEMENT REPORT To the Shareholders of DSG International Limited The financial statements of the Company published in this report were prepared by the Company's management, which is responsible for their integrity and objectivity. The statements have been prepared in accordance with United States generally accepted accounting principles, applying certain estimates and judgments as required. The financial information elsewhere in this report is consistent with the financial statements. The Company maintains a system of internal controls adequate to provide reasonable assurance that its transactions are appropriately recorded and reported, its assets are protected and its established policies are followed. This system is maintained by the establishment and communication of policies and a qualified financial staff. Our independent auditors, Deloitte Touche Tohmatsu, provide an objective independent audit of the Company's financial statements and issuance of a report thereon. Their audit is conducted in accordance with United States generally accepted auditing standards. The Audit Committee of the Board of Directors, comprised solely of outside directors, meets with the independent auditors and representatives from management to evaluate the adequacy and effectiveness of the audit functions, control systems and quality of our financial accounting and reporting. Terence Leung Chief Financial Officer March 17, 2000 -17- INDEPENDENT AUDITORS' REPORT To the Shareholders and the Board of Directors of DSG International Limited We have audited the accompanying consolidated balance sheets of DSG International Limited and its subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of DSG International Limited and its subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte Touche Tohmatsu Deloitte Touche Tohmatsu Hong Kong March 17, 2000 -18- CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts)
Year Ended December 31, 1999 1998 1997 ----------------------------------------------------- Net sales $205,842 $207,925 $230,930 Cost of sales 138,120 147,997 153,929 Gross profit 67,722 59,928 77,001 Selling, general and administrative expenses (61,322) (55,318) (71,912) Gain (loss) on disposals of property, plant and equipment (Note 3) 1,034 42 (122) Restructuring costs (Note 4) - (897) (1,389) Operating income 7,434 3,755 3,578 Interest expense (2,208) (2,511) (2,833) Interest income 792 790 1,451 Exchange loss (997) (311) (610) Other income (expense), net 522 155 (169) Income before income taxes 5,543 1,878 1,417 Provision for income taxes (Note 6) (987) (253) (443) Minority interest (121) (3) - Net income $ 4,435 $ 1,622 $ 974 Basic earnings per share $ 0.66 $ 0.24 $ 0.15 Weighted average number of shares outstanding 6,675 6,675 6,675
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
Year Ended December 31, 1999 1998 1997 ---------------------------------------------------- Net income $4,435 $1,622 $ 974 Other comprehensive income (expense) Foreign currency translation adjustments 665 1,613 (10,785) Comprehensive income (expense) $5,100 $3,235 $ (9,811)
See accompanying notes to consolidated financial statements. -19- CONSOLIDATED BALANCE SHEETS (in thousands)
December 31, 1999 1998 ------------------------------ ASSETS Current assets: Cash and cash equivalents $ 14,352 $ 8,550 Accounts receivable, less allowance for doubtful accounts of $724 in 1999 and $659 in 1998 29,318 31,684 Receivable from shareholder (Note 5) - 3,472 Other receivables 2,799 2,403 Inventories (Note 7) 24,823 23,989 Prepaid expenses and other current assets 858 955 Income taxes receivable 153 490 Deferred income taxes 265 89 Total current assets 72,568 71,632 Property and equipment - at cost: (Note 8) Land 4,351 4,396 Buildings 19,092 21,558 Machinery and equipment 80,554 85,607 Furniture and fixtures 2,919 2,879 Motor vehicles 1,766 1,794 Leasehold improvements 1,909 1,687 Construction in progress 320 40 Total 110,911 117,961 Less: accumulated depreciation and amortization 62,930 62,945 Net property and equipment 47,981 55,016 Restricted cash (Note 5) - 6,000 Deferred income taxes 651 292 Other assets 647 969 Total assets $121,847 $133,909
See accompanying notes to consolidated financial statements. -20- CONSOLIDATED BALANCE SHEETS - (Continued) (in thousands except per share amounts)
December 31, 1999 1998 ------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings (Note 9) $ 9,040 $ 9,292 Current portion of long-term debt (Note 10) 2,509 4,086 Accounts payable 12,864 15,725 Accrued advertising and promotion 2,992 3,004 Accrued payroll and employee benefits 2,330 1,730 Other accrued expenses 4,121 5,978 Income taxes payable (Note 6) 2,461 1,467 Deferred income taxes 251 259 Total current liabilities 36,568 41,541 Long-term debt (Note 10) 11,894 20,957 Deferred income taxes (Note 6) 1,775 2,196 Total long-term liabilities 13,669 23,153 Minority interest 1,308 1,202 Commitments and contingencies (Note 12) Shareholders' equity: Ordinary shares, $0.01 par value - authorized 20,000,000 shares; issued and outstanding 6,674,606 shares in 1999 and 1998 67 67 Additional paid-in capital 18,301 18,301 Retained earnings 62,701 58,266 Foreign currency translation adjustments (7,956) (8,621) Less: Net receivable from shareholder (Note 5) (2,811) - Total Shareholders' equity 70,302 68,013 Total liabilities and shareholders' equity $121,847 $133,909
See accompanying notes to consolidated financial statements. -21- CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, 1999 1998 1997 ------------------------------------------------ Cash flows from operating activities Net income $ 4,435 $ 1,622 $ 974 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,662 10,487 12,206 Accelerated depreciation on assets written off - 897 503 (Gain) loss on disposals of property (1,034) (42) 122 Deferred income taxes (798) (288) (544) Minority interest 121 3 - Other 903 927 1,149 Net change in working capital components (1,464) (6,425) (1,567) Net cash provided by operating activities 11,825 7,181 12,843 Cash flows from investing activities Expenditures for property (6,097) (6,444) (6,389) Proceeds from disposals of property 4,237 1,207 377 Purchase of subsidiaries net of cash acquired - - (4,366) Proceeds from sale of investments, net of cash forfeited - (2) - Receipt of (investment in) restricted bank deposit 6,000 (6,000) - Advances to a shareholder (1,879) (3,372) (6,129) Repayments by a shareholder 2,540 507 21,166 Increase in other assets (6) (19) (483) Net cash provided by (used in) investing activities 4,795 (14,123) 4,176 Cash flows from financing activities (Decrease) increase in short-term borrowings (295) 1,180 (3,776) Increase in long-term debt and other non-current debt 148 - 6,056 Repayment of long-term debt and other non-current debt (10,582) (4,596) (8,314) Payment of deferred purchase consideration - (184) (502) (Repayment to) investment by minority shareholder (15) 465 734 Purchase of treasury shares - - (49) Net cash used in financing activities (10,744) (3,135) (5,851) Effect of exchange rate changes on cash and cash equivalents (74) 39 (1,185) Increase (decrease) in cash and cash equivalents 5,802 (10,038) 9,983 Cash and cash equivalents, beginning of year 8,550 18,588 8,605 Cash and cash equivalents, end of year $ 14,352 $ 8,550 $18,588
See accompanying notes to consolidated financial statements. -22- CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (in thousands)
Year Ended December 31, 1999 1998 1997 --------------------------------------------- Schedule of changes in working capital components net of effects from purchase of subsidiaries Accounts receivable $ 2,353 $(6,991) $ 2,094 Other receivables (470) (269) (816) Inventories (966) 644 (826) Prepaid expenses and other current assets 106 583 418 Accounts payable (2,493) 701 1,107 Accrued expenses (1,257) (274) (1,617) Income taxes payable 1,261 (819) (1,927) Net change in working capital components $(1,464) $(6,425) $(1,567) Supplemental disclosures of cash flow information Cash paid during the year for: Interest $ 2,208 $ 2,410 $ 3,267 Income taxes 403 1,901 2,855 Acquisition: Fair value of assets acquired $ - $ - $15,052 Goodwill - - 855 Cash paid - - (4,923) Liabilities assumed $ - $ - $10,984
See accompanying notes to consolidated financial statements. -23- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Foreign Net Additional Currency Treasury Receivable Ordinary Shares Paid-in Retained Translation Shares From Shares Amount Capital Earnings Adjustments At Cost Shareholder (Note 5) ---------------------------------------------------------------------------------------- Balance at January 1, 1997 7,712 $ 77 $ 33,653 $55,670 $ 551 $(15,312) $ - Net income - - - 974 - - - Purchase of treasury shares (Note 11) (5) - - - - (68) - Adjustment of repurchased shares 1 - - - - 18 - Cancellation of treasury shares (1,034) (10) (15,352) - - 15,362 - Translation adjustment for the year - - - - (10,785) - - Balance at December 31, 1997 6,674 67 18,301 56,644 (10,234) - - Net income - - - 1,622 - - - Translation adjustment for the year - - - - 1,613 - - Balance at December 31, 1998 6,674 67 18,301 58,266 (8,621) - - Net income - - - 4,435 - - - Translation adjustment for the year - - - - 665 - - Transfer of balance of net receivable from shareholder at December 31, 1999 - - - - - - (2,811) Balance at December 31, 1999 6,674 $ 67 $ 18,301 $62,701 $ (7,956) $ - $(2,811) Total Shareholders' Equity --------------- Balance at January 1, 1997 $ 74,639 Net income 974 Purchase of treasury shares (Note 11) (68) Adjustment of repurchased shares 18 Cancellation of treasury shares - Translation adjustment for the year (10,785) Balance at December 31, 1997 64,778 Net income 1,622 Translation adjustment for the year 1,613 Balance at December 31, 1998 68,013 Net income 4,435 Translation adjustment for the year 665 Transfer of balance of net receivable from shareholder at December 31, 1999 (2,811) Balance at December 31, 1999 $ 70,302
See accompanying notes to consolidated financial statements. -24- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 1. ORGANIZATION AND BASIS OF PRESENTATION DSG International Limited (the "Company") is incorporated in the British Virgin Islands. It operates through subsidiary companies located in North America, Australia, Asia and Europe which manufacture and distribute disposable baby diapers, adult incontinence and training pants products. The financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") which differ from those used in the statutory accounts of its subsidiaries. There are no material differences between the U.S. GAAP amounts and the amounts used in the statutory accounts of the subsidiaries. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation -- The consolidated financial statements include the assets, liabilities, revenues and expenses of all subsidiaries. Intercompany balances and transactions are eliminated in consolidation. Cash and cash equivalents -- Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts, commercial paper and time certificates of deposit with an original maturity of three months or less. Inventories -- Inventories are stated at the lower of cost determined by the first-in, first-out method, or value determined by the market. Finished goods inventories consist of raw materials, direct labor, and overhead associated with the manufacturing process. Depreciation and amortization of property and equipment -- Depreciation is provided on the straight line method at rates based upon the estimated useful lives of the property, generally three to ten years except for buildings which are 40 years. Costs of leasehold improvements are amortized over the life of the related asset or the term of the lease, whichever is shorter. Goodwill -- Goodwill is amortized on a straight-line basis over periods estimated to be benefited, generally over 5 years. At December 31, 1999 and 1998, goodwill amounted to $401 and $580 net of accumulated amortization of $507 and $328, respectively, and is included in other assets. Revenue recognition -- The Company recognizes revenue at the time shipments of product are made to customers. Income taxes -- Income taxes are provided based on an asset and liability approach for financial accounting and reporting of income taxes. Deferred income tax liabilities or benefits are recorded to reflect the tax consequences in future years of differences between tax basis of assets and liabilities and the financial reporting amounts at each year end. A valuation allowance is recognized if it is more likely than not that some portion of, or all of, a deferred tax asset will not be realized. -25- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Valuation of long-lived assets -- The Company periodically evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. Foreign currency translation -- The Company uses the United States Dollar as its reporting currency. Assets and liabilities of foreign subsidiaries are translated at year end exchange rates, while revenues and expenses are translated at average currency exchange rates during the year. Adjustments resulting from translating foreign currency financial statements are reported as a separate component of shareholders' equity. Gains or losses from foreign currency transactions are included in net income of the current period. Postretirement and postemployment benefits -- The Company does not provide postretirement benefits, and postemployment benefits, if any, are not significant. Earnings per share -- Earnings per share are based on the weighted average number of Ordinary Shares outstanding. Concentration of credit risk -- The Company sells to distributors and retailers located in each of the countries in which it operates. The Company grants credit to all qualified customers on an unsecured basis but does not believe it is exposed to any undue concentration of credit risk to any significant degree. New accounting standards adopted -- In 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" and comparative information for earlier years has been amended to conform to the presentation adopted. SFAS No. 130, "Reporting Comprehensive Income", establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, SFAS No. 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. -26- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise", establishes standards for the way that public enterprises report information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. SFAS No. 131 defines operating segments as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. New accounting standard not yet adopted - The Financial Accounting Standards Board has issued a new standard SFAS No. 133, "Derivative Instruments and Hedging Activities". This statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Management has not yet completed the analysis of the impact this would have on the financial statements of the Company. Use of estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates. Actual results could differ from those estimates. 3. DISPOSALS OF PROPERTY, PLANT AND EQUIPMENT In 1999, the Company sold its property in Singapore and machinery and equipment in one of its plants in Switzerland for a total consideration of $3,318, resulting in a gain of $871. 4. RESTRUCTURING COSTS In the fourth quarter of 1998, the Company wrote down the value of certain surplus equipment in its Wisconsin operation by $897 to the value received on its sale subsequent to the balance sheet date. In the fourth quarter of 1997, the Company closed certain of its manufacturing operations, principally through the closure of its Canadian and Singapore manufacturing operations, resulting in aggregate losses of $886, and the write-down of $503 of certain surplus equipment in Europe. Of the total restructuring costs of $1,389, $503 represented non-cash write-downs of property and equipment and $886 for the reduction in workforce and other cash outflows. -27- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 5. RECEIVABLE FROM SHAREHOLDER In 1999, 1998 and 1997 the Company advanced $1,879, $3,372 and $6,129, 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 125% of the amount due under the notes. During 1999, 1998 and 1997, Brandon Wang and a trust controlled by him repaid $2,540, $507 and $21,166, respectively, to the Company. Interest of $243, $92 and $1,000 was charged on these advances in 1999, 1998 and 1997, respectively. The balance at December 31, 1999 was $2,811. In 1997, a U.S. subsidiary of the Company extended a guarantee to a bank as part of a $15,000 term loan provided by the bank to Brandon Wang. The loan agreement required the U.S. subsidiary to maintain minimum cash balances of $6,000 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 was repayable by quarterly instalments of $375 followed by a balloon payment of $10,875 on August 1, 2000. In 1999 and 1998, Brandon Wang repaid $4,000 and $1,500, respectively. At December 31, 1999 and 1998, the outstanding balance was $8,376 and $13,500, respectively. In January 2000, the Company's U.S. subsidiary borrowed amounts under a term loan facility which was used to repay the balance of the loan payable by Brandon Wang to the bank, amounting to $5,250. This amount has been aggregated with the receivable from Brandon Wang which amounted to $2,811 at December 31, 1999. The resulting note payable by Brandon Wang is repayable on demand and carries the same interest terms as those of the existing promissory notes. Brandon Wang is required to provide collateral of shares of the Company held by him, such amount to be not less than 125% of the amount due under the notes. At December 31, 1999, the Company has classified the balance owed by Brandon Wang as a reduction from shareholders' equity as it is undeterminable when the increased note payable arising in January 2000 from the repayment of the bank loan to Brandon Wang will be repaid. 6. INCOME TAXES Income is subject to taxation in the various countries in which the Company and its subsidiaries operate. The Company is not taxed in the British Virgin Islands where it is incorporated. -28- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 6. INCOME TAXES - continued The components of income before income taxes are as follows:
Year Ended December 31, 1999 1998 1997 ---------------------------------------------------- U.S. $2,236 $(1,297) $(3,928) Foreign 3,308 3,175 5,345 $5,544 $ 1,878 $ 1,417
The provision for income taxes consists of the following:
Year Ended December 31, 1999 1998 1997 ------------------------------------------------------- Current U.S. Federal $ 440 $ (412) $ - U.S. State - - - Foreign 2,404 1,378 1,040 Benefit of loss carrybackwards (1,059) - - Benefit of loss carryforwards - (425) - Deferred taxes (798) (288) (597) $ 987 $ 253 $ 443
A reconciliation between the provision for income taxes computed by applying the United States Federal statutory tax rate to income before taxes and the actual provision for income taxes is as follows:
Year Ended December 31, 1999 1998 1997 ----------------------------------------------------- Provision for income taxes at statutory rate on profit for the year 35.0% 35.0% 35.0% Lower tax rate applicable to foreign earnings 14.8 (113.9) (78.7) Changes in valuation allowances (32.5) 87.7 64.3 Withholding tax on interest and royalty income 3.9 10.0 11.6 Tax exemption under tax holiday (2.3) (6.7) - Other (1.1) 1.3 (0.9) Effective rate 17.8% 13.4% 31.3%
-29- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 6. INCOME TAXES - continued The Company's subsidiary incorporated in the People's Republic of China is entitled to a two-year exemption from state and local income taxes commencing from the first profitable year of operations, which was 1998, followed by a 50% reduction in tax rates for the next three years. Had this tax holiday not been available, income tax expense would have been higher by $138 and $141 and earnings per share would have been lower by $0.02 in 1999 and 1998, respectively. Certain subsidiaries have operating loss carryforwards for income tax purposes which may be applied to reduce future taxable income. The loss carryforwards are available on a country by country basis and are not available for use except in the country in which the loss occurred. At December 31, 1999 the tax loss carryforwards by country and their future expiration dates are as follows:
2005 - Total 2001 2002 2003 2004 2005 2018 Indefinite ---------------------------------------------------------------------------- United Kingdom $ 95,780 $ - $ - $ - $ - $ - $ - $95,780 Germany 138 - 138 - - - - - Switzerland 5,480 781 1,650 166 124 2,759 - - U.S.A. 10,597 - - - - - 10,597 - Belgium 360 - - - - - - 360 $112,355 $ 781 $1,788 $ 166 $ 124 $2,759 $10,597 $96,140
Included in United Kingdom operating loss carryforwards for income tax purposes is approximately $74,242 relating to tax losses at the date of acquisition of a company acquired in 1993. Utilization of these losses will result in a reduction in future tax expense and is dependent on both the earning of sufficient otherwise taxable income in the relevant countries and the satisfaction of technical requirements of applicable law. In the case of the United Kingdom, this includes the requirement that there not be a "major change" in business activities. Deferred income tax balances at December 31 are related to:
At December 31, 1999 1998 Assets Liabilities Assets Liabilities --------------------------------------------------------------------- Inventories $ 22 $ (136) $ 48 $ (179) Accounts receivable and prepaid expenses 10 (88) 14 (53) Property - (1,702) - (2,179) Other 884 (100) 319 (44) Tax loss carryforwards 31,008 - 32,809 - Valuation allowances (31,008) - (32,809) - Total $ 916 $(2,026) $ 381 $(2,455)
-30- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 7. INVENTORIES Inventories by major categories are summarized as follows:
At December 31, 1999 1998 --------------------------------- Raw materials $14,657 $13,073 Finished goods 10,166 10,916 $24,823 $23,989
8. PROPERTY AND EQUIPMENT Included in property and equipment are assets acquired under capital leases with the following net book values:
At December 31, 1999 1998 --------------------------------- At cost: Machinery and equipment $5,976 $5,938 Motor vehicles 158 331 6,134 6,269 Less: Accumulated amortization 1,889 1,229 Net book value $4,245 $5,040
9. SHORT-TERM BORROWINGS These include borrowings in the form of trade acceptances, loans and overdrafts with various banks:
At December 31, 1999 1998 ---------------------------------- Credit facilities granted $18,424 $18,103 Utilized $ 9,040 $ 9,292 Weighted average interest rate on borrowings at end of year 8.53% 7.89%
The Company maintains short-term bank credit lines in each of the countries in which it operates. Interest rates are generally based on the banks' prime lending rates and cost of funds and the credit lines are normally subject to annual review. At December 31, 1999, borrowings of $2,386 are collateralized by the pledge of accounts receivable and inventory of a subsidiary with a book value of $5,815. -31- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 10. LONG-TERM DEBT Long-term debt consists of:
At December 31, 1999 1998 --------------------------------- Swiss Franc denominated mortgage loans bearing interest at 3.75% - 4.25% per annum repayable after 5 years. The loan is secured over the property of the Company's Swiss facilities $ 3,940 $ 4,567 Bank loan bearing interest at a rate of 7.28% per annum at December 31, 1999, repayable in full in January 2000. The loan is secured over accounts receivable, inventories and the property, plant and equipment of the Company's Duluth, Georgia facilities (1) 4,625 12,125 Bank loan bearing interest at 8.4% per annum, with the final instalment repayable in March 2000 148 841 Loan from finance companies at rates ranged from 7.0% to 10.5% per annum at December 31, 1999. The loan is secured over the building and equipment of the Company's Wisconsin facilities 1,785 2,488 Capital leases bearing interest rates ranged from 3.25% to 11.03% per annum at December 31, 1999 3,905 5,022 Total 14,403 25,043 Current portion of long-term debt 2,509 4,086 Long-term debt, less current portion $11,894 $20,957
Maturities of long-term debt as at December 31, 1999 are as follows:
Capital Loans Leases Total ---------------------------------------------- Year ending December 31, 2000 $ 1,192 $1,317 $ 2,509 2001 2,128 1,760 3,888 2002 1,050 828 1,878 2003 1,050 - 1,050 2004 1,050 - 1,050 Thereafter 4,028 - 4,028 Total $10,498 $3,905 $14,403
(1) On December 16, 1996, a U.S. subsidiary entered into a $15,000,000 Term Promissory Note ("Term Note"). In accordance with the terms and conditions of the Term Note, the subsidiary is subject to mandatory prepayments on April 1, 1998 and 1999 by an amount equal to 50% of excess cash flow, as defined, for the preceding fiscal year. The Term Note requires the maintenance of specific covenants including financial ratios. In January 2000, the Company refinanced the loan by a term loan provided by another financial institution and has classified the amount payable after 2000 as long-term. The term loan for an amount of $5,250 is repayable by monthly instalments of $88 over a 5-year period and is collateralized by the Company's U.S. subsidiary's assets. The term loan contains requirements to maintain tangible net worth, as defined in the loan and security agreement. -32- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands except per share amounts) 11. SHARE REPURCHASES During 1994, the Company adopted a plan authorizing the Company to repurchase up to 500,000 shares of its ordinary shares and, in 1995, the authority to purchase shares was increased to 1,000,000 shares. The Company purchased 5,000 shares under this program for cash of $68 in 1997, 240,000 shares for cash of $3,079 in 1996 and 393,000 shares for cash of $4,871 in 1995. 603,000 of the repurchased shares were cancelled in 1996 and the remainder was cancelled in 1997. On November 13, 1996, the Company made a tender offer to its public shareholders to acquire its ordinary shares at prices, net to the seller in cash, not greater than $14.50 nor less than $12.75 per share. The offer closed on December 13, 1996 and the Company purchased 1,002,394 shares from the public shareholders at a price of $14.50 per share, which were cancelled in 1997. In conjunction with the tender offer, the Company incurred $433 for investment banking fees, and legal and professional fees. During the first quarter of 1997, the Company repurchased 5,000 shares from the public for a total cash consideration of $68. 12. COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries lease land, facilities and equipment under operating leases, many of which contain renewal options and escalation clauses. Rental expense under operating leases was $1,787 in 1999, $2,365 in 1998 and $2,236 in 1997. At December 31, 1999, the Company and its subsidiaries were obligated under operating leases requiring minimum rentals as follows:
Year ending December 31, 2000 $1,447 2001 770 2002 262 2003 185 2004 and thereafter 761 Total $3,425
-33- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 12. COMMITMENTS AND CONTINGENCIES - continued The Company and its subsidiaries are, from time to time, involved in routine legal matters incidental to their business. In 1997, Procter & Gamble ("P&G") claimed that certain of the Company's diaper products infringe P&G patents and demanded payment for past infringement and an agreement to pay future royalties. The Company settled with P&G by a payment of $900 for infringement of patents prior to January 1998 and payment of 1% - 2% royalty fee on patents used by the Company thereafter. As detailed in Note 5, a U.S. subsidiary has guaranteed the repayment of bank loans extended to Brandon Wang. The line of credit is collateralized by the accounts receivable, inventories and equipment of the Company's U.S. subsidiary, which is required to maintain certain financial ratios and other financial conditions as well as restricting the payment of dividends by the subsidiary to a maximum of $3,000 in any financial year and restricting the amount of outstanding debt owed to the subsidiary by the parent and its other subsidiaries or affiliates. At December 31, 1999 and 1998, the amount of equity subject to such restrictions totaled $25,463 and $27,184, respectively. The U.S. subsidiary and its consolidated subsidiaries are required to maintain tangible net worth of at least $16,000 which amount is required to increase annually by 40% of the subsidiary's consolidated net income. At December 31, 1999 and 1998, the consolidated tangible net worth of the U.S. subsidiary amounted to $26,390 and $23,254, respectively. In January 2000, the Company repaid this loan. A Hong Kong subsidiary has also guaranteed the repayment of bank loans extended to Brandon Wang. At December 31, 1999 and 1998, the outstanding indebtedness covered by this guarantee amounted to $1,252 and $2,500, respectively. 13. EMPLOYEE BENEFIT PLANS The Company's United States subsidiary has established a 401(k) plan under which the Company matches employee contributions up to 5% of employees' base compensation. The Company's other international subsidiaries have defined contribution plans, covering substantially all employees, which are determined by the boards of directors of the subsidiaries. These plans provide for annual contributions by the Company from 2.3% to 20% of eligible compensation of employees based on length of service. Total expense related to the above plans was $1,081 in 1999, $1,135 in 1998 and $1,214 in 1997. -34- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 14. SUPPLEMENTARY INFORMATION Valuation and qualifying accounts:
Balance At Purchase Charged To Balance At Beginning Of Cost And End Of Year Subsidiaries Expenses Deductions Of Year -------------------------------------------------------------------- Year ended December 31, 1999 Allowances for doubtful accounts $ 659 $ - $ 931 $ (866) $ 724 Provision for inventory obsolescence 840 - 569 (1,033) 376 $1,499 $ - $1,500 $(1,899) $1,100 Year ended December 31, 1998 Allowances for doubtful accounts $ 577 $ - $ 379 $ (297) $ 659 Provision for inventory obsolescence 1,228 - 623 (1,011) 840 $1,805 $ - $1,002 $(1,308) $1,499 Year ended December 31, 1997 Allowances for doubtful accounts $ 643 $67 $ 470 $ (603) $ 577 Provision for inventory obsolescence 1,004 7 850 (633) 1,228 $1,647 $74 $1,320 $(1,236) $1,805
Deductions relate to write-offs of accounts receivable as bad debts and disposals of inventories. 15. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of the Statement of Financial Accounting Standards No. 107 "Disclosures About Fair Value of Financial Instruments". The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying amounts of cash and cash equivalents, accounts receivable, receivable from shareholder, accounts payable, short-term borrowings, deferred purchase consideration, and long-term debt are reasonable estimates of their fair value. The interest rate on the Company's long-term debt approximates that which would have been available at December 31, 1999 for debt of the same remaining maturities. -35- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 16. SEGMENT INFORMATION The Company is engaged in one industry segment, the manufacturing and marketing of disposable hygienic products. Certain financial information by geographic area is as follows:
Year Ended December 31, 1999 1998 1997 ----------------------------------------------------- Net sales North America $ 93,479 $ 89,911 $ 91,098 Australia 42,676 40,487 47,172 Asia 45,715 44,208 56,955 Europe 23,972 33,319 35,705 $205,842 $207,925 $230,930 Operating income (loss) North America $ 5,001 $ 1,155 $ (548) Australia 4,823 4,946 5,925 Asia 3,839 2,842 6,199 Europe (1,667) (2,903) (2,583) Corporate expenses (4,561) (2,285) (5,415) $ 7,435 $ 3,755 $ 3,578 Assets, at end of year North America $ 44,855 $ 53,799 $ 49,052 Australia 20,251 20,192 24,409 Asia 35,903 32,067 28,130 Europe 13,123 19,373 22,963 Corporate assets 7,715 8,478 5,719 $121,847 $133,909 $130,273 Property North America $ 21,671 $ 21,994 $ 19,977 Australia 7,840 8,627 10,502 Asia 11,945 12,945 12,644 Europe 5,360 10,274 12,359 Corporate 1,165 1,176 1,202 $ 47,981 $ 55,016 $ 56,684
No single customer accounted for 10% or more of the total revenues. -36- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands except per share amounts) 17. QUARTERLY DATA (UNAUDITED)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter --------------------------------------------------------------------------- 1999 Net sales $53,591 $48,732 $50,282 $ 53,237 Gross profit 17,273 15,784 16,904 17,761 Net income 1,556 316 747 1,816 Earnings per share 0.23 0.05 0.11 0.27 1998 Net sales $52,705 $49,601 $48,895 $ 56,724 Gross profit 14,279 14,064 13,550 18,035 Net (loss) income (1,081) (786) (347) 3,836 (1) (Loss) earnings per share (0.16) (0.12) (0.05) 0.57 1997 Net sales $56,768 $64,183 $58,257 $ 51,722 Gross profit 20,532 21,884 18,446 16,139 Net (loss) income 1,453 1,418 (1,120) (777) (Loss) earnings per share 0.22 0.21 (0.17) (0.12)
(1) The 4th Quarter 1998 results include a reversal of $1,500 of estimated executive compensation previously accrued rateably over the first three quarters of 1998. -37- SHAREHOLDER INFORMATION Annual Meeting The next annual meeting of shareholders will be held in Jakarta, Indonesia on October 17, 2000 at 10:00 a.m. Indonesian time. Notice of the meeting and proxy statement will be mailed to shareholders before the meeting. Market Information The Company's shares are traded on the NASDAQ National Market System under the Symbol DSGIF. Stock Transfer Agent ChaseMellon Shareholder Services 85 Challenger Road Overpeck Centre Ridgefield Park, NJ 07660 U.S.A. Tel. : (1) 800-356 2017 website : www.chasemellon.com Independent Auditors Deloitte Touche Tohmatsu 26th Floor, Wing On Centre 111, Connaught Road, Central Hong Kong Principal Executive Office DSG International Limited 17th Floor, Watson Centre 16-22 Kung Yip Street Kwai Chung Hong Kong Tel : (852) 2484-4820 Form 20-F The Company's 1999 report to the Securities and Exchange Commission on Form 20-F provides additional details about the Company's business as well as other financial information not included in this annual report. A copy of this report is available to shareholders upon written request to the Company's Principal Executive Office. -38- DSG COMPANIES
Asia Australia Disposable Soft Goods Limited DSG Pty Limited 17/F Watson Centre (trading as Australian Pacific Paper Products) 16-22 Kung Yip Street 3 Lake Drive Kwai Chung, N T Dingley Hong Kong Victoria 3172 Telephone : (852) 2427 6951 Australia Facsimile : (852) 2480 4491 Telephone : (61) 3-9552 1222 Facsimile : (61) 3-9558 1056 Disposable Soft Goods (S) Pte Limited No. 1, Joo Koon Crescent North America 4th Floor, Yeow Heng Industrial Building Singapore 629087 Associated Hygienic Products LLC Telephone : (65) 861 9155 4455 River Green Parkway Facsimile : (65) 861 9313 Duluth, GA 30096 U.S.A. Disposable Soft Goods (Zhongshan) Limited Telephone : (1) 770-497 9800 Jin Chang Road Facsimile : (1) 770-623 8887 Jin Sha Industrial Zone Shalang, Zhongshan, Guangdong Associated Hygienic Products Inc. People's Republic of China 205 E. Highland Drive Postal Code : 528411 Oconto Falls, WI 54154 Telephone : (86) 760-855 9866 U.S.A. Facsimile : (86) 760-855 8794 Telephone : (1) 920-846 8444 Facsimile : (1) 920-846 3026 DSG International (Thailand) Limited 835 Moo 4 Prakasa Europe Muang Samutprakarn 10280 Disposable Soft Goods (UK) Plc Thailand Boythorpe Works Telephone : (66) 2-709 4153 Derbyshire Facsimile : (66) 2-709 3884 Chesterfield, S40 2PH U.K. PT DSG Surya Mas Indonesia Telephone : (44) 1246-221 228 Jl. Pancatama Raya Kav. 18 Facsimile : (44) 1246-274 773 Desa Leuwilimus, Cikande Serang, Jawa Barat Vlesia AG Indonesia Blumenfeldstrasse 16 Telephone : (62) 254-400 934 CH-9403 Goldach Facsimile : (62) 254-400 939 Switzerland Telephone : (41) 71-8466 363 Disposable Soft Goods (Malaysia) Sdn Bhd Facsimile : (41) 71-8466 364 No. 9, Jalan U1/19, Section U1 Hicom Glenmarie Industrial Park DSG-Vlesia NV 40150 Shah Alam, Selangor (formerly known as Utermohlen Medical Care SA) Malaysia Brusselpoorstraat 8 Telephone : (60) 3-519 4282 Mechelen 2800 Facsimile : (60) 3-519 4286 Belgium Telephone : (32) 15-421 048 Facsimile : (32) 15-423 917
-39- DSG International Limited Principal Executive Office 17/F Watson Centre 16-22 Kung Yip Street Kwai Chung, N T Hong Kong Telephone : (852) 2484 4820 Facsimile : (852) 2480 4491 -40- SCHEDULE 1 CONDENSED FINANCIAL INFORMATION UNCONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 1999 1998 1997 ------ ------ ------ (in thousands) Equity in earnings of subsidiaries...................... $5,049 $(1,201) $2,414 Operating expenses: Administration..................................... 2,785 563 3,394 Depreciation....................................... 23 20 12 Total operating expenses................................ 2,808 583 3,406 Operating income (loss)................................. 2,241 (1,784) (992) Interest expense........................................ (223) (286) (217) Exchange loss........................................... (861) (430) (390) Interest income......................................... 3,721 3,841 2,066 Other finance expenses.................................. (2) (56) (6) Other income............................................ 546 590 954 Income before income taxes.............................. 5,422 1,875 1,417 Provision for income taxes.............................. 987 253 443 Net income.............................................. $4,435 $ 1,622 $ 974
See note to Schedule 1 SCHEDULE 1 CONDENSED FINANCIAL INFORMATION UNCONSOLIDATED BALANCE SHEETS
Year ended December 31, 1999 1998 ---- ---- (in thousands) ASSETS Current assets: Cash....................................................... $ 5,260 $ 1,734 Receivable from shareholder................................ - 3,472 Other receivables.......................................... 177 187 Prepaid expenses and others................................ 27 17 Total current assets.......................................... 5,464 5,410 Equipment: Furniture.................................................. 216 216 Motor vehicles............................................. 62 62 Total...................................................... 278 278 Less: accumulated depreciation............................ 132 109 Net property.................................................. 146 169 Investment in subsidiaries (on the equity method)............. 65,144 62,610 Total assets.................................................. $70,754 $68,189 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings..................................... $ 148 $ - Accounts payable.......................................... 7 98 Accrued payroll and employee benefits..................... 255 - Accrued expenses.......................................... 41 59 Income taxes payable...................................... 1 19 Total current liabilities..................................... 452 176 Shareholders' equity: Ordinary shares............................................ 67 67 Additional paid-in capital................................. 18,301 18,301 Retained earnings.......................................... 62,701 58,266 Translation reserve........................................ (7,956) (8,621) Less: net receivable from shareholder.................... (2,811) - Total shareholders' equity.................................... 70,302 68,013 Total liabilities and shareholders' equity.................... $70,754 $68,189
See note to Schedule 1 SCHEDULE 1 CONDENSED FINANCIAL INFORMATION UNCONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1999 1998 1997 ------ ------ ------ (in thousands) Cash flows from operating activities Net cash provided by operating activities................. $ 4,734 $ 1,392 $ 935 Cash flows from investing activities Expenditures for equipment................................ - - (62) Investments in and advances to subsidiaries............... (5,713) (1,221) (43,940) Recoupment of investment in subsidiaries.................. 3,844 3,882 28,245 Advances to shareholder................................... (1,879) (3,372) (6,129) Repayments by shareholder................................. 2,540 507 21,166 Net cash used in investing activities..................... (1,208) (204) (720) Cash flows from financing activities Purchase of treasury shares............................... - - (49) Increase in cash and cash equivalents..................... 3,526 1,188 166 Cash and cash equivalents, beginning of year.............. 1,734 546 380 Cash and cash equivalents, end of year.................... $ 5,260 $ 1,734 $ 546 Cash dividends from: Consolidated subsidiaries.............................. $ 1,329 $ 754 $ 14,334
See note to Schedule 1 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.