-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TjVpSY7gIC9AQ9Q1ACLxyHhrkFXoyrUbTL816eCzNS3dTFnWIeq1TZcZZXZoGQSH pyy8RKSeS+7qB3iiput2fw== 0000929624-99-001419.txt : 19990819 0000929624-99-001419.hdr.sgml : 19990819 ACCESSION NUMBER: 0000929624-99-001419 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990803 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DSG INTERNATIONAL LTD CENTRAL INDEX KEY: 0000883230 STANDARD INDUSTRIAL CLASSIFICATION: 2670 IRS NUMBER: 000000000 STATE OF INCORPORATION: D8 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 000-19804 FILM NUMBER: 99677017 BUSINESS ADDRESS: STREET 1: 17/F WATSON CENTRE STREET 2: 16-22 KUNG YIP ST CITY: KWAI CHUNG HONG KONG STATE: K3 BUSINESS PHONE: 8524276951 MAIL ADDRESS: STREET 1: 17/F WATSON CENTRE STREET 2: 16-22 KUNG YIP ST CITY: KWAI CHUNG HONG KONG STATE: K3 20-F 1 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, 1998 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 pur suant 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 1 934 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, feminine hygiene and training pants products with over twenty-five years of experience in this industry. The Company now operates ten manufacturing facilities in North America, Australia, Asia and Europe with extensive distribution activities around the world. In 1984, the Company established a manufacturing facility in California through a joint venture with a large French disposable diaper manufacturer, and later that year acquired full ownership of that facility. In 1987, the Company acquired the U.S. assets of a major private label disposable baby diaper manufacturer which was in bankruptcy, and was thus able to establish a second manufacturing facility at Norcross, Georgia to serve the central, southeastern and northeastern United States. As a result, the Company was able to move its "FITTI(R)" brand into U.S. national distribution. In 1988, the Company acquired all the assets of an unprofitable private label manufacturer of disposable baby diaper manufacturer in Australia. Also in 1988, the Company acquired the assets, including brand names, of the unprofitable disposable baby diaper manufacturing division of a major U.K. consumer products company. In September 1991, the Company opened a new manufacturing facility in Singapore to relieve capacity constraints at its Hong Kong facility and to better service South East Asian markets. On March 6, 1992, the Company commenced the initial public offering in the United States of its Ordinary Shares. In July 1993, the Company acquired all the assets of a private label disposable baby diaper and feminine napkin manufacturing division of a Swiss company. In September 1993, the Company acquired an unprofitable private label disposable baby diaper and feminine napkin manufacturing company in Canada. At the end of December 1993, the Company further acquired an unprofitable branded product disposable baby diaper manufacturer in the United Kingdom. The Company moved its manufacturing plant in Norcross, Georgia to Duluth, Georgia, where the Company further expanded its production capacity in the U.S. In May 1994, the Company formed a joint venture company with its former distributor in Thailand. The joint venture acquired the entire capital of the distributor's company and built a plant in Bangkok, Thailand to manufacture baby diapers and adult incontinence products. The Company currently holds an 80% interest in the joint venture company. In August 1994, the Company acquired a manufacturer of adult incontinence products in Switzerland. In November 1994, the Company opened its plant in Zhongshan, Guangdong in the People's Republic of China. In April 1995, the Company's management group, led by the Chairman, Brandon Wang, and two -1- other equity investors proposed a going private transaction to which the holders of all the outstanding shares of the Company held by the public would receive $19 per share. On May 26, 1995, after a review by a Special Committee of independent directors appointed to consider and advise on the proposal, the Board of Directors approved the going private transaction at a price of $19.25 per share and authorized the Company to enter into a merger agreement with corporations that had been formed by the management group. On July 7, 1995 the merger agreement that had been entered into as of May 26, 1995 to effect the going private transaction was terminated because there was no reasonable possibility that certain conditions of the merger agreement could be satisfied within the time period stipulated in the agreement as there was no reasonable prospect that financing would be available on satisfactory terms within such time period. In September 1995, the Company opened a new plant in Bangkok, Thailand. In October 1995, the Company established a wholly-owned subsidiary in Malaysia to assist with the marketing and distribution of the Company's products in Malaysia. In November 1996, the Company invited its public shareholders to tender their shares to the Company at prices not greater than $14.50 or less than $12.75 per share. The tender offer closed on December 13, 1996 and the Company purchased 1,003,641 shares from the public shareholders at a price of $14.50 per share. In April 1997, the Company acquired the entire share capital of an adult incontinence and disposable baby diaper manufacturer in Wisconsin, United States, and the manufacturing assets of a company in the Netherlands and its related distribution company in Belgium. In June 1997, the Company entered a joint venture agreement with an Indonesian distributor to establish a manufacturing facility in Jakarta, Indonesia to manufacture disposable baby diapers. The Company owns a 60% interest in the joint venture company. During 1997, the Company closed its manufacturing operations in Canada, California and Singapore. In March 1998, the Company closed its operations in Canada and later on in December, the factory facilities were sold. In November 1998, the Company opened its joint venture manufacturing facilities in Indonesia. DSG International Limited is incorporated in the British Virgin Islands and has its principal executive office at 17/F Watson Center, 16-22 Kung Yip Street, Kwai Chung, Hong Kong. Its telephone number is (852) 2484-4820. B. Business 1. General The Company manufactures and markets disposable baby diapers, training pants and adult incontinence products primarily under its own brand names, which include "FITTI(R)", "PET PET(R)", "COSIES(R)", "COSIFITS(R)", "BABY LOVE(R)", "TOGS(R)", "CARES(R)", "VLESI(R)", "DISPO 123(TM)", -2- "CERTAINTY(R)", "HANDY(TM)" and "MERIT(R)". The Company also manufactures and markets disposable baby diapers, adult incontinence, training pants and feminine napkins products under private labels. The Company's products are sold internationally, with its ten manufacturing facilities being in Hong Kong, the United States, Australia, the United Kingdom, Switzerland, the People's Republic of China ("PRC"), Thailand and Indonesia. The Company's manufacturing operations in Singapore and California were closed in December 1997 and the operation in Canada was closed in March 1998. The Company's operation in Duluth, Georgia, the Company's largest operation, in association with the Company's operation in Wisconsin, manufactures and distributes branded and pr ivate label disposable baby diapers, adult incontinence, training pants and feminine napkins products for the North American market. With sales in 48 states, the Company's "FITTI(R)" brand is one of the best selling brands of disposable baby diapers in the United States (excluding retailers' private labels). The Company estimated that its "FITTI(R)" brand has approximately 2% market share on a volume basis in the food and grocery store sector. In Australia, the Company is the second largest manufacturer of disposable baby diapers. It estimates that it has an overall unit volume market share of approximately 22%. The Australian market is divided into three major retail sectors, which are grocery, variety and pharmacy. The Company is currently supplying brands of both premium and economy quality to all three market sectors. The Company also markets disposable baby diapers under retail chain private labels, which accounted for approximately 17% of its Australian sales in 1998. The Company also distributes the "VLESI(R)" and "MERIT(R)" range of adult incontinence products into the Australian market, targeting the institutional sector of the market. Adult incontinence sales grew by 53.2% in 1998 compared with 1997. In most Asian countries, the Company's leading brands, "FITTI(R)" and "PET PET(R)", are well established. In Hong Kong, although the disposable diaper market had contracted due to lower birth rates, the Company maintains its second place position in the market and estimates that its share is over 20%. Despite the stagnant retail trade in the PRC, the Company maintains a strong position in the market. The Company estimates that it is the market leader in the Guangdong province, and its market share in the PRC is around 20%. In 1998, the Company established a sales operation in Beijing to directly service the Beijing and Tianjin markets and to expand sales and distribution to the northern markets, such as Shandong and Liaoning provinces. The Company plans to set up sales opera tions in other potential markets in the PRC, particularly in the eastern provinces where there is an accelerating demand for disposable baby diapers. The Company's unit sales in Malaysia grew strongly in 1998 with the re- introduction of an economy brand, and the Company believes that its sales will continue to grow with the recovery of the economy. In Indonesia, the market was badly hit by both the financial turmoil and political instability. Although the Company's sales were adversely impacted, the Company estimates it maintains a 30% share of the market. In Thailand, the Company maintained its share of disposable diaper market despite the economic downturn. The Company manufactures and distributes adult incontinence products through its operation in Thailand to all other markets in Asia under its "DISPO 123(TM)" and "HANDY(TM)" brands. The Company believes that it is one of the market leaders in the adult incontinence market in Thailand. In other Asian markets, such as Hong Kong and Singapore , the Company has recorded encouraging growth in 1998. The sales of adult incontinence products increased steadily over the years and the Company's brands are well established both in the retail and institutional sectors in the markets of the Asia Pacific region. Although -3- in 1998 the Company was impacted by the unprecedented financial turmoil in the region since the second half of 1997, the Company remains optimistic about the market growth potential in the Asia Pacific region. In the United Kingdom, the Company continues to market its branded products to wholesalers and grocery retail accounts. On a selective basis, the Company also manufactures private label disposable diapers which provide the Company with reasonable profit margins. In Switzerland, the Company's operation near Zurich manufactures primarily private label disposable baby diapers and feminine napkins for a major retail group. The Company also manufactures and distributes its "FITTI(R)" brand products for Switzerland and other European markets but t he expected growth is limited by other highly advertised international brands. The Company's operation in the Eastern region of Switzerland manufactures and distributes its branded "VLESI(R)" and other private label adult incontinence products for the domestic market in Switzerland and for other European markets. The Company increased its selling and distribution activities into the U.K. and German markets. The Company believes that by focusing in adult incontinence market, it will make further inroads in the continental Europe market. The Company's marketing strategy is to provide retailers and wholesalers with a quality, value-oriented product which offers good profit margins, combined with a high level of service, rather than attempting to mass market its products in competition with the industry leaders. The Company believes that its attention to raw material costs and manufacturing efficiency, combined with careful control of advertising and promotional costs, enables it to produce and mark et value-oriented products at competitive prices. The Company's growth strategy is to target its branded products at selected sectors of mature markets, such as the United States and Western Europe, and to take a broader marketing approach in less developed markets where there is a high rate of growth in disposable diaper usage. The Company believes that its manufacturing facilities in Asia and Australia will enable it to participate in the expected growth of those markets. In the past, the Company has expanded its business into new markets by acquiring the assets of unprofitable disposable baby diapers, feminine napkins manufacturers and more recently by acquiring adult incontinence manufacturers in the United States, Australia, the United Kingdom, Canada and Switzerland. The Company will expand through acquisitions when opportunities arise and establish its own manufacturing facilities in emerging markets which offer significant growth potential, such as the Company's facilities in the PRC, Th ailand and Indonesia, which were opened in 1994, 1995 and 1998, respectively, together with the upcoming facility in Malaysia commencing in 1999. The Company's principal raw materials are fluff wood pulp and super absorbent polymer. Other raw materials include polyethylene backsheets, polypropylene non-woven liners, adhesive tapes, hot melt adhesive, elastic and tissue. The cost of materials increased moderately in 1998 and also in 1999. Raw materials account for about three-quarters of the cost of goods sold. Disposable diapers are designed and marketed with two basic objectives in mind: (1) to afford parents of infants up to two and one-half years of age the convenience of diapers which are disposed of after one use and (2) to reduce the risk of chapping ("diaper rash") which often occurs when moisture from a soiled diaper remains in contact with the baby's skin. The basic concept of most disposable diapers on the market is the same: to allow moisture to pass through a soft inner layer w hich is in contact with the baby's skin into a highly absorbent inner core, from which the moisture is prevented from escaping by an -4- outer moisture-proof backsheet. There are significant differences in quality among the various disposable diapers currently on the market. The most important quality features of disposable diapers are their ability to absorb and retain fluids, to prevent leakage through leg and waist openings by the use of elasticized bands, and to be easily fitted and held in place by adhesive tapes which secure the diaper firmly without causing discomfort to the baby. Broadly, disposable diapers are divided into two types: thicker "regular" diapers which use primarily fluff wood pulp as the absorption medium; and thinner "ultra" diapers which use less fluff wood pulp and employ a super absorbent polymer in the absorbent core. Other features, such as innovative fasten ings, attractive designs, extra-dry sub-layer, gender specific absorbent cores, stand-up leg gathers, elastic waistband and packaging help to differentiate products from one another. The most important quality features of feminine napkins are their ability to fit and their ultra ability of absorbing and retaining fluid. The Company's feminine napkin manufacturing equipment is able to provide quality features and to tailor customers' product specifications. Adult incontinence products are designed for the convenience of males and females having various degrees of incontinence. The basic concept of most adult incontinence products is to prevent leakage of urine and faeces by absorbing the moisture into a highly absorbent inner core and retaining the soiled contents within an outer moisture proof backsheet. Similar to disposable diapers, the most important quality features of adult incontinence products are their ability to absorb and retain fluids, to prevent leakage through leg and waist op enings by the use of elasticized bands, and to be easily fitted and held in place by adhesive tapes which secure firmly without causing discomfort to the user. The absorption media for adult incontinence products are fluff wood pulp and super absorbent polymer. Other features, such as wetness indicator, stand-up leg gathers, elastic waistband, frontal tape closure system and packaging help to differentiate products from one another. The Company believes that there is significant potential for adult incontinence products due to the aging populations of the industrialized and developed countries. The Company has entered the adult incontinence market, and has established and acquired manufacturing facilities in Thailand, Switzerland and Wisconsin in the United States. The Company believes that with its three strategically located manufacturing facilities, the Company is able to expand its sales of adult incontinence products in the markets in North America, Europe and Asia. The Company introduces adult incontinence products into its markets in a manner consistent with its niche market strategy. The Company believes that the key to successful marketing of this type of product is the high and prompt level of service from the manufacturer and distributor, regular contact with institutions to ensure proper usage of the products, and providing a range of products of high quality and performance. Forward Looking Statements The Company expects that the impact of currency turmoil in the Asian region will diminish and stabilize in 1999. The intense price and promotional competition in North America will continue in 1999. The market environment in Europe will continue to be difficult. The Company will dispose of its private label baby diaper and feminine napkin manufacturing facilities in Switzerland in the first quarter of 1999. The manufacturing plant in Malaysia will commence operation in the third quarter of 1999. The Company is planning to increase its adult incontinence products sales i n the North American, Australian, Asian and European markets. -5- From time to time, the Company may make certain statements that contain "forward looking" information (as defined in the Private Securities Litigation Reform Act of 1995). Words such as "anticipate", "estimate", "project", "believe" and similar expressions are intended to identify such forward looking statements. Forward looking statements may be made by management orally or in writing, including, but not limited to, in press releases, as part of the Management's Discussion and Analysis of Financial Condition and Results of Operations and as part of other sections of this Annual Report on Form 20-F and the Company's other filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Such forward looking stateme nts are subject to certain risks, uncertainties and assumptions, including without limitation to those identified below. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated, estimated or projected. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of their respective dates. Risk Factors The Company's forward looking statements are based on the Company's assumptions regarding the economies and market conditions in the countries in which it operates, and certain assumptions regarding the price of raw materials, including fluff wood pulp and super absorbent polymer. Among the factors that have a direct bearing on the Company's results of operations and financial condition are leverage and debt service, competitive industry, price changes by competitors, dependence on key produ cts and acceptance of product innovations, cost of certain raw materials, international operations, currency fluctuations, currency devaluations, currency restrictions, intellectual property risks, technological changes, covenant limitations and other factors discussed herein. If the Company's actual performance differs materially from its projections which are based on assumptions regarding the economies and market conditions in the countries in which it operates, the Company's actual results could vary significantly from the performance projected in the forward looking statements. 2. Geographic Segment Information The following table sets forth the percentage of the Company's net sales and operating income (loss) by geographic market.
1998 1997 1996 ----- ----- ----- Net sales North America............................................................... 43.2% 39.4% 39.2% Australia................................................................... 19.5 20.4 20.2 Asia........................................................................ 21.3 24.7 25.6 Europe...................................................................... 16.0 15.5 15.0 ---- ---- ---- 100.0% 100.0% 100.0% ===== ===== =====
Operating income (loss) -6- North America.................................................................... 30.8% (15.3)% 65.9% Australia........................................................................ 131.7 165.6 32.6 Asia............................................................................. 75.7 173.3 42.7 Europe........................................................................... (77.3) (72.2) 0.2 Corporate expenses............................................................... (60.9) (151.4) (41.4) ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
a. North America i. Products The Company manufactures and distributes disposable baby diapers, disposable training and youth pants, adult incontinence and feminine protection products throughout North America under the brand names of "FITTI(R)" and "CERTAINTY(R)", as well as a growing number of different private label brands. The "FITTI(R)" baby diaper brand is a full-featured product, recognized for its unique wetness indicator, a cute print that fades away when the diaper becomes wet. The "FITTI(R)" brand name is also used with the Company's disposable training pants and the new DRI-NITE JUNIOR youth pants. These pant products feature cloth-like covers, tear-away side panels, and comfortable waist a nd hip elastic. Another product in the "FITTI(R)" line-up is Insert Shields, a product designed to be used as a diaper insert or a disposable pad for light incontinence. The Company is the first to offer a Super Toddler or XXL size baby diaper that is marketed under various private labels. The Company has also launched economical "jumbo" and "mega" pack diapers into the marketplace under the "FITTI(R)" brand. These are well accepted by retailers and consumers. The Company continues to expand its private label diaper business throughout North America with such customers like Walgreens Drugs, Harris- Teeter, A&P, Topco, Shurfine International, Hannaford Bros., Sav-A-Lot, Pathmark, Rite-Aid and McLane (a division of Wal-Mart). The Company is one of the two full line manufacturers capable of producing and marketing a full range of disposable baby diapers as well as training pants, youth pants and diaper inserts. This advantage will enhance the Company's sales and private label partne rship opportunities. The Company launched its adult incontinence products since late 1996. The Company's primary focus is once again the development of private labels partnerships with retailers and institutions such as Walgreens, Medlines, Rite- Aid, Pathmark, Target Stores and others. The Company's products are also available under the "CERTAINTY(R)" brand name. The Company offers a full range of products including briefs, feminine bladder control pads, and feminine control bladder guards. All of these products provide the incontinent sufferer with product features and performance that the Company believes are superior than most of the other brands in North America. The Company's other new products are on the horizon, assuring the Company's position as the primary provider of full range of value priced "premium" products. The Company's adult incontinence product line represents an ideal opportunity to expand sales and distribution in this fast growing category, while providing better ma rgin relative to disposable baby diapers. In all cases, the Company is offering products with genuine points of difference and exclusive benefits, features that have helped enhance acceptance of these new programs. -7- ii. Sales and Marketing Disposable baby diapers are believed to account for more than 90% of the baby diaper changes in North America. The market can be divided into several segments: brands that are advertised and sold nationally; brands that are not widely advertised but are sold nationally; brands sold only in specific regional areas; and baby diapers sold under the private labels of retailers. The nationally advertised brands account for roughly 75% of all sales. The Company maintains a solid distribution base on its "FITTI(R)" brand, with new retail customers coming on board from time to time. The Company's "FITTI(R)" disposable training pants have enjoyed a steady volume growth since it was repositioned in 1996 with better feature s for the consumer at no additional cost. The Company's new "FITTI(R)" DRI-NITE JUNIOR youth pant is gaining distribution as it is the only value alternative for the consumer to Kimberly- Clark's Goodnites. The Company has consolidated its manufacturing and distribution operations into two facilities to efficiently serve all North American markets. Facilities are located in Oconto Falls, Wisconsin, and Duluth, Georgia. The Company commissions a national network of independent brokers to sell directly to retailers and distributors/wholesalers. These brokers, managed by the Company's direct sales management team, serve as the Company's agents within defined territories to monitor sales, implement trade promotions and handle merchandising activities. The Company's direct sales management team is responsible for the Company's marketing and sales development functions. The Company remains committed to its marketing philosophy of direct servicing of its customers and accounts by the sales manag ement personnel. This allows the Company to provide a high degree of category expertise and education to the trade, to be able to promptly respond to trade and market needs. In addition, the strategic locations of its North American manufacturing facilities has enabled the Company to achieve average shipping transit time of one to two days for most North American destinations. Branded Products. Due to the intense price and promotional pressure along with the declining birth rate in the U.S. market, the unit volume of "FITTI(R)" slightly declined from the 1997 levels. At the end of 1998, market share of "FITTI(R)" was 2% of the total units of disposable baby diapers and training pants sold in grocery outlets within the United States. The grocery store sector represents approximately 49% of the $3.6 billion United States retail market. In certain markets, such as that of the New York metropolitan area, the nation's largest market, the Company believes that "FITTI(R)" brand is much greater than conventional market share data would indicate. This is because a higher percentage of "FITTI(R)" diapers are sold through wholesalers and inner city outlets that typical market research reports do not cover. The Company concentrates its efforts and marketing activities on providing wholesalers and retailers with above average profit margins through the use of packaging with greater shelf impact, creative and effective promotions combined with very efficient distribution, electronic data interchange capability and a high level of customer service. In 1998, the Company adopted the "EVERY DAY LOW PRICE" pricing strategy on its "FITTI(R)" products offering the consumers with "the best product for price" all the time. The Company provides consumers with quality products at affordable price, unique product features and of good value for money. The Company has grown its business with a concentrated effort within the primary diaper selling class of the trade: grocery. The Company enjoys good retail di stribution of its "FITTI(R)" brand and has built up excellent working relationships with major national and regional grocery retailers such as Kroger, Pathmark, Shop Rite, A&P, Super Value and Fleming. The Company continues to target the non-food class of trade as a major area of opportunity for growth in the future. Current non-food retail partners include Ames, Shopko, Kmart/Canada and Meijer. The Company -8- continues to benefit from its marketing "firsts" to the market, bringing greater consumer value to new category of the disposable baby products. Among these "firsts" are disposable youth pants under the "FITTI(R)" DRI-NITE JUNIOR name and a new Super Toddler (XXL) size baby diaper, marketed under assorted private label banners. The Company launched the adult incontinence products in 1996. "CERTAINTY(R)" is the brand under which the Company markets its adult incontinence products. However, the Company believes the private label share of the category sales is more than 25% and it is the sector of adult incontinence where the growth rate is more dramatic. The Company's strategy is to provide products to the marketplace that are superior to other available products and that are also more affordable than the advertised brands. Besides, the Company already has new products on hand in the development stage. The Company is currently selling adult incontinence products to Walgreens, Rite-Aid, Thrifty- Payless and Longs Drug Stores with many new programs, retail and institutional partnership up and coming. The drug store trade now represents more than 50% of the total $500 million in adult incontinence retail sales in the United States. The Company's disposable baby diaper distribution network provides a good foundation for the Company to grow in the category sales. In addition, growth potential for this category remains high as the population ages. Institution Volume and Activity. The institutional business provides adult incontinence products to medical care facilities such as hospitals and nursing homes. It is worth noting that the institutional market still represents more than 60% of the total adult incontinence volume in North A merica or more than $700 million in sales. This adult category represents an area of significant sales and distribution growth for the Company, and significant gains had been captured in 1998. Private Label. This segment of the Company's business is the major area of potential growth. On the disposable baby diaper side, new partnerships are underway with such major retailers as A&P stores, Rich Foods and Save-A-Lot stores. Existing private label partnerships with major retailers like Walgreens Drug, Shurfine International, Uniprix, Topco and A&P continue to grow. The Company will look to the private label arena as a major area of growth for all of its product categories, including disposable baby diapers, training pants and adult incontinence products. The Company recognizes that the private label segment of these businesses remains somewhat more insulated than that of typical "value brands" from the aggressive pricing/promotional strategies of the advertised brands, due to the "protecti ve" posture that major retailers tend to take when it comes to supporting their own brands. The Company is one of the few manufacturers capable of supplying a full range of quality products (ultra- thin diapers, training pants, youth pants etc.) and has a proven track record for product quality, category expertise and customer service. b. Australia i. Products In Australia, the Company manufactures and markets disposable baby diapers under four core proprietary brand names and a number of retail chain private label brands. The Company's proprietary diaper brands accounted for 80% of its Australian diaper sales in 1998. Two of these proprietary brands are targeted at the grocery and variety sectors, while the other two are exclusively to the pharmacy sector. The two brands targeting the grocery and variety sectors are "BABY LOVE(R)", which is a value priced, -9- premium quality feature driven ultra diaper, while "LULLABY(R)", is an economy price driven basic feature ultra diaper. The two "pharmacy only" brands are "COSIES(R)", which has a similar marketing strategy to "BABY LOVE(R)" and "COSIFITS(R)", which has a similar marketing strategy to "LULLABY(R)". In addition to its four core proprietary brands, the Company continues to hold a leading position in the private label sector producing corporate brands for a number of major grocery and variety sector retailers. The Company also distributes the "VLESI(R)" and "MERIT(R)" range of adult incontinence products into the Australian market, primarily targeting the nursing home sector. This product range continued to show very strong growth in 1998. ii. Sales an d Marketing The Australian retail market for disposable baby diapers has grown from approximately $65 million in 1988, when the Company first entered the market, to approximately $199 million for the twelve months ended December 1998.(1) The total unit sales value in the combined grocery and pharmacy sectors increased by 0.6%, from $198.0 million in 1997 to $199.2 million in 1998. Slow growth in the grocery sector and strong growth in the variety sector of the category balanced a reduction in pharmacy sector sales. The Company estimates that market utilization for disposable baby diapers, which is currently below 65%, will slowly increase to be closer to the level of other industrialized Western countries of over 85%. Branded products comprise approximately 85% of the Australian market, with the remaining 15% made up of private label products. The Company is currently the second largest manufacturer in Australia, with approximately 22% unit volume share of the disposable baby diaper marke t. A major U.S.A. multi-national manufacturer is the market leader with approximately 65% of the market. The Company markets and distributes its proprietary branded products in Australia using exclusive independent brokers. Sales of private label brands are managed either on a direct basis with a retail customer, or through their selected "in-house broker" representative. For the "VLESI(R)" range of adult incontinence products the Company utilizes a direct sales force to sell to customers and manage the distribution of the products through selected independent distributors. Branded Products. The Company's branded products, "BABY LOVE(R)" and "LULLABY(R)" are targeted at the grocery and variety sectors. These two retail sectors accounted for an estimated 85% of all disposable baby diaper sales in Australia in 1998. These two sectors are highly concentrated, with over 80% of the sales volumes controlled by major retailers and wholesalers, being Woolworths, Coles Myer, Franklins and Australian Amalgamated Wholesalers. The Company utilizes marketing strategies focused on strong retail profit margins for the retailers, combined with good product performance, unique product features and "value" retail price points for the consumer. These strategies also include state and national promotions targeting consumer trial while focusing on "below the line" promotional support for the retailers. The Company's branded products, "COSIFITS(R)" and "COSIES(R)" are targeted exclusively at the pharmacy sector. In 1998, the pharmacy sector accounted for estimated 15% of all disposable baby diaper sales in Australia, which is down from 17% in 1997. This sector is highly fragmented and consists of a large number of small and independent pharmacies that have restricted retail space, offer a limited (1) Source : AC Nielsen, January 1998. -10- selection of diaper brands and do not have their own private label diaper programs. The Company has successfully pursued a strategy of encouraging these independent pharmacies to carry these two proprietary brands as "pharmacy only brands", which are supported by national advertising and promotion, and provide margins which are comparable to those typically offered by private label programs. The Company sells to all of the existing major wholesalers of pharmaceutical products in Australia. These wholesalers include Sigma Company Ltd., F.H. Faulding Wholesale, Australian Pharmaceutical Industries and Soul Pattinson. Each of the wholesalers also operate and manage specific marketing groups ("banner groups") which regularly promotes the Company's products. Th e major national marketing groups include Amcal, Guardian, ChemMart, ChemWorld, Health Sense, among others. Private Label. Private label products accounted for an estimated 15% of the total Australian market for disposable baby diapers in 1998. The Company estimates it has a 35% share of the total private label market in Australia. The Company has private label programs with a number of major retail chains, including Target, Fossey's, Coles Supermarkets, Bi-Lo, Franklins, as well as other retailers. The Company has maintained and developed its leading market position within the private label sector by building close working partnerships with its retail chain customers. Its strategy is to proactively offer new product features with improved performance, while maintaining competitive pricing and high levels of customer service. Adult Incontinence Products. Approximately 80% of the total sales for adult incontinence products in Australia are concentrated in the institutional secto r of the category, while the retail sector for these products has been slow to develop. This institutional sector is comprised primarily of nursing homes, adult care hostels and hospitals. The Company has employed a team of state territory sales managers and selected distributors who target the institutional sector of this market. The Company intends to expand its range of products and to achieve distribution in all sectors of this growing market. c. Asia i. Products The Company manufactures disposable baby diapers primarily under its own brands in Asia. The Company's brands are "FITTI(R)" and "PET PET(R)", which accounted for approximately 77% of the Company's net sales in Asia. The Company has introduced several economic brands during the year and also manufactures private labels on a selective basis only. The "FITTI(R) product is an "ultra" diaper featuring multi-strand leg elastics, an extra-dry sub-layer, elastic waistband, printed frontal tape closure system, stand- up leg gathers and wetness indicator. "PET PET(R)" is a basic "ultra" diaper featuring multi-strand leg elastics, elastic waistband, frontal tape and wetness indicator. Both "FITTI(R)" and "PET PET(R)" enjoy substantial market share, are well supported by advertising and promotional activities, and are priced strategically lower than the major U.S. national brands and the Japanese brands sold in Asia. The Company manufactures and distributes adult incontinence products under its own brands "DISPO 123(TM)" and "HANDY(TM)". The Company also manufactures adult incontinence products in private labels. The "DISPO 123(TM)" product is an ultra anatomic diaper, featuring multi-strand leg elastics, frontal tape closure system and stand-up leg gathers, "HANDY(TM)" has similar features as "DISPO 123(TM)" except for the stand-up leg gathers. -11- ii. Sales and Marketing The Company continues to command strong market positions in both the mature markets of Hong Kong and Singapore. The Company's early entries into most of the markets in the Asian region have established invaluable brand image and strong positions for the Company's products. The Company expands sales in the PRC, Thailand and Malaysia by capitalizing on the increasing usage of disposable baby diapers that are well supported by strategic pricing and wisely designed advertising and promotional activities. Despite the currency turmoil in some Asian countries in the latter part of 1997 and in 1998, the Company still believes that Asian region has higher growth potential than in other regions and will continue to focus o n the other potential and opportunities of emerging markets in the region. The Company also sells its products in India and, to a lesser extent, Brunei, Vietnam and Japan. The volume of disposable baby diaper usage varies significantly in different markets, depending to a large extent on the level of per capita disposable incomes. The disposable baby diaper usage is relatively high in Hong Kong and Singapore. Although these two mature markets have stagnant growth in recent years, the Company has been able to pursue strategies to stabilize its market share in these markets. The disposable baby diaper usage is relatively low in Malaysia, the PRC, Thailand and Indonesia, but the Company believes that the usage will increase as income levels in these countries continue to increase. In Asia, the Company has identified Malaysia, the PRC, Thailand and Indonesia as the markets that are most likely to expand in late 1990s. The Company's strategy is to offer a premium product for its own brands, to price below major U.S. and Japanese brands, and to ensure flexibility in product features, packaging and marketing functions to satisfy the ever-changing needs and trends of the different markets in Asia. In Hong Kong, the Company has its own sales force and its products are sold in all major pharmacy outlets and department stores which account for over 70% of all disposable baby diaper sales, and in major retail supermarket chains such as Wellcome, Park'N Shop and China Resources Company. The Company's products have also penetrated into cash-and-carry outlets like Carrefour. Over 90% of the sales in Hong Kong are branded sales. The Company continues to build up the "FITTI(R)" and "PET PET(R)" brands image by strong advertising programs, which not only impact sales in the local market but also in the Pearl River Delta area of Guangdong in the PRC. In Singapore, the Company's appointed distributors are complemented by the Company's own sales team to distribute its produ cts. The disposable baby diaper market in Singapore is relatively small and mature and has contracted due to low birth rates and the weaker economy, with negative growth potential. Almost all the Company's sales in Singapore are branded sales, which are "FITTI(R)", "PET PET(R)" and "COSIFITS(R)". In Malaysia, which the Company has identified as one of the fastest growing markets in the region. The Company's major brands in the market are "FITTI(R)" and "PET PET(R)" and an economy brand "COSIFITS(R)" was introduced in 1998 occupying a share in the growing lower end price segment. The Company believes that its sales in this market will continue to grow further as the usage of disposable baby diapers increases. The Company's products are distributed by appointed distributors in the major chain stores such as Tops, The Store and Ocean, as well as to the other secondary chain stores, -12- independent supermarkets and to lower-end retail outlets. In the PRC, another fast growing market that the Company has identified, the Company's leading brands are distributed in supermarkets, department stores and independent retail stores in Guangdong Province, Shanghai and Beijing. To cope with the rapid development of foreign invested hypermarkets in the PRC, the Company cultivates good relationship with the major players like Carrefour, Wal-mart, Price-Mart and etc. The Company will expand distribution of its products to other major cities along the coastline and other affluent provinces in the PRC, such as Fujian and Zhejiang. The Company established a sales operation in Beijing to directly service the Beijing and Tianjin markets and to expand sales and distribution to the northern markets such as Shandong and Liaoning provinces. The Company plans to set up other sales operations in strategically selected cities that will enhance the sales and distribution in the local markets and other markets at the nearby vicinity. The Company has commenced advertising its brands in most of the major cities in the southern and eastern part of the PRC. The Company estimates that the current usage of disposable baby diapers in the PRC is below 5% and will grow in accordance with the anticipated rapid economic growth of the country. In Thailand, although the usage of disposable baby diapers is relatively low, the disposable baby diaper market has been growing rapidly in the past few years. The Company's sales have been increasing with the growth of the market and as a result of expanding the Company's distribution networks throughout the country. Around 70% of the Company's sales in Thailand were in the Bangkok metropolitan area, with the rest of the sales coming from the suburban provinces. The Company's products are distributed to supermarkets and department stores by its own nationwide sales force. The Company has been able to capitalize on the market growth and has increased its market share to about 15%, although total diaper market volume has contracted due to the economic turmoil. The Company also manufactures adult incontinence products and distributes to hospitals, supermarkets and department stores. The Company estimates that its share of the Thailand adult incontinence market is approximately 40%. The Company is also expanding its sales of adult incontinence products in other Asian markets. The Company's brands "FITTI(R)" and "PET PET(R)" are the leading brands in the Indonesian market; however the expansion of the Company's sales were restrained because the products have always been imported which carried very high import duties and suffered from adverse currency fluctuation. In 1998, the Company established a joint venture manufacturing facility near Jakarta that helped reducing the product costs due to lower import duties on raw materials and labor rate. However, the Company's sales have not expanded as anticipated because of the market was adversely impacted by the financial turmoil and political instability in the country. The Company presently has lower expectations in exporting its products to Japan, Taiwan and Korea because current non-tariff barriers and complex distribution arrangements make entry into these markets difficult for foreign products. In the countries that have high rate of import duties on its products and high risk of currency fluctuation, the Company believes that it is more efficient and economical to service its markets by the domestic manufacturing facility. The Company presently has manufacturing facilities in Hong Kong, Thailand, the PRC and Indonesia. The Company is establishing a new manufacturing facility in Malaysia for servicing its markets in Malaysia and Singapore. -13- d. Europe i. Products The Company manufactures and markets disposable baby diapers under its own brands in the United Kingdom, and manufactures private label disposable baby diapers, feminine napkins, and branded and private label adult incontinence products in Switzerland. The Company's brands currently in production are "FITTI(R)", "COSIFITS(R)", "CARES(R)" and "VLESI(R)". "FITTI(R)" is a value brand baby diaper with full features such as leg gathers, wetness indicator, printed backsheet and an extra-dry sub-layer. "COSIFITS(R)" and "CARES(R)" are economy brands featuring frontal tape and extra-dry sub-layer. "VLESI(R)" adult incontinence brand comprises a product range of adult incontinence briefs, anatomic pads and underpa ds for the institutional hospital and nursing home markets. ii. Sales and Marketing The U.K. retail disposable baby diaper market in 1998 was approximately $851 million. Approximately 90%(1) of the market were branded products and the rest were made up of various private label brands of retailers supplied by European diaper manufacturers. The Company's strategy is to emphasize its branded products which are sold to regional retails and wholesalers by offering a value-oriented product with good profit margins and a high level of service. The Company also produces own label for several U.K. grocery chains. In Switzerland, the disposable baby diaper market of approximately $73 million(2) is dominated by a U.S. national brand and the private brand of a major retail chain. It is estimated that about 65%(2) of the diaper volume in Switzerland is supplied by the two major U.S. manufacturers. The Company's Swiss operation situated near Zurich competes in the disposable baby diaper and feminine napkin markets in Switzerland and also in other European countries for branded and private label business. The Company's other operation in eastern part of Switzerland is in the canton of St. Gallen. It manufactures and markets primarily branded adult incontinence products and distributes them to institutions such as hospitals and nursing homes. The Company estimates that its share in the Swiss adult incontinence market is approximately 30% and is ranked second in the market. The operation is actively expanding into other European markets through the appointment of sales distributors. The Company also has a presence in the Benelux with a sales and distribution company near Brussels and serves institutional customers in this region. 3. Competition The disposable baby diaper industry is dominated world-wide by the brands of two major U.S. manufacturers : The Procter & Gamble Company ("P&G") and Kimberly-Clark Corporation ("K-C"). The ma rket position of these manufacturers, relative to the Company, varies from one geographic area to (1) FSA Survey U.K. (2) Nielsen Switzerland -14- another, but due to their substantial financial, technical and marketing resources, both of these major manufacturers have the ability to exert significant influence and gain substantial market share in any of their marketing areas. Despite the disparity in relative strength, however, the Company has been able to achieve good results with its branded and private label products and is able to maintain a viable market position in the face of very strong competition from the industry leaders. a. North America The North American disposable baby diaper market remains dominated by the brands of the two major U.S. manufacturers: P&G and K-C. Their combined market share of the disposable baby diaper market is 78%, including the disposable trai ning pant and youth pant segments. Total category unit sales are now declining at the rate of about 4%, with volume continuing to move from the food and drug sectors to the mass (discount) merchandisers. In 1998, these two manufacturers continued their departure from their traditional strategy of competing solely on the basis of consumer-driven marketing programs and product innovations. After P&G made their move in 1995 to a reduced count, unisex program on both their Pampers and Luvs brands, they spent heavily promoting these brands at very low retail price points. An increasing number of retailers are becoming concerned with the negative impact that this strategy has had on their own private label sales and margins, and some have taken corrective action to protect their own brands, at times going so far as to decline to carry the Luvs brand. All of the advertised brand's moves have resulted in retail price reductions and a narrowing of retail price spreads. The net result is a two- tier category that is offering premium products and value-added products. The segment that was once called "conventional" has now become "premium". The moves by the major manufacturers to lower prices and make deep promotional offers have put serious sales and margin pressure on smaller branded manufacturers and private label manufacturers. In response to the competitive activity, the Company has reallocated its promotional spending and has formulated a strategy in line with "every day low price", targeted trade promotions, enhanced product features and performance, along with tightened cost controls. This strategy has allowed the Company to protect its share in critical markets, expand its private label base of business and weather the competitive storm that is persisting. While there was some negative impact on top line sales, the Company's strategy will help to protect margin contribution in the coming year. In the adult incontinence arena, the Company is in an excellent competitive posit ion, having the capability to provide key retailers, institutions and consumers with product technology that is superior to what any other manufacturer can currently provide. The added advantage comes from the fact that this category, more than most, has the greatest need for better products in order to meet the performance requirements of consumers. The Company has a product strategy designed to maintain this competitive edge well into 1999 and beyond. This competitive edge will also allow the Company to make quick inroads into the private label incontinent sector, offering premium products at competitive prices. This segment also presents a slightly better margin of opportunity, since pricing and promotional strategies from the major manufacturers have remained much more stable than in the baby diaper marketplace. b. Australia The major competition faced by the Company in Australia is from Kimberly-Clark Australia ("KCA"). KCA dominates the disposable baby diaper market in Austr alia, with a 1998 estimated market -15- unit volume share of 65%. The Company believes it is able to compete successfully in Australia with its strategies of targeting different brands to different retail sectors, its ability to provide attractive retail profit margins for its customers and its ability to offer consumers competitive quality products with unique features at value retail price points. It also benefits from the desire of its retail customers for an alternative supplier to KCA for national brand diapers, as well as quality domestic supplier for their private label brands. c. Asia The Company's main competition in Asia comes from the two major U.S. manufacturers, and from several manufacturers from Japan and Taiwan. The Company believes that it has been able to ma intain a significant share of the Asian market due to its longer presence and well established brands in that region and the logistical advantage which results from the strategic location of its manufacturing operations. d. Europe In the United Kingdom, the disposable baby diaper market is dominated by P&G, which has a market share in excess of 60%. K-C has been heavily promoting and discounting its products in the U.K. market. Since the entry of K-C in the U.K. market, the private label brands have been reduced to a level of about 10% market share. The Company believes that, by pursuing a flexible brand strategy of supplying both branded and private label in disposable baby diapers and feminine napkins, it will be able to maintain its share and volume, and also achieve growth in certain markets. The adult incontinence market in Europe is shared among several European as well as U.S. manufacturers. The leading manufacturer in Europe is SCA Molnlycke which holds the large st market share in some Scandinavian countries and also in the U.K. The largest market segment for adult incontinence is still with institutions, such as hospitals and nursing homes. The Company has expanded its market coverage into the Benelux through the acquisition of a Dutch business in 1997 and also through appointment of marketing and distribution partners in Germany and the U.K. The Company sees its growth coming from developing of innovative features in its adult incontinence product ranges as well as extending its geographic coverage. 4. Trademarks and Patents Brand identification is an important element in marketing the Company's products, and the Company recognizes the importance of its trademarks to the success of its business. The Company has registered its major trademarks or has applications pending in each of the major markets in which its products are sold, and it has applications pending in several other countries for many of its other trademarks. As the Company d etermines to pursue opportunities in new markets, it seeks registration of the trademarks under which it will market its products in those countries. The Company has licenses to use certain patented technology relating to certain features of the disposable diapers it manufactures, including multi- strand leg elastics and the "Wetness Indicator" feature of the Company's products in the United States. In 1997, Procter & Gamble ("P&G") claimed that certain of the Company's diaper products infringe P&G patents and demanded payment for past -16- infringement and an agreement to pay future royalties. The Company and P&G had reached settlement of this claim in 1998. The Company has an existing license agreement from Kimberly-Clark concerning the sale of certain diaper products covered by Kimberly-Clark patents. 5. Product Design and Development The Company actively monitors trends in the United States and Europe in relation to changes in product features, consumer preferences, and the impact of environmental laws and regulations on the disposable diaper industry. Although the Company does not devote substantial expenditure to research and development, it constantly seeks to improve its products by substitution of materials and components, and of product features, to systematically improve the performance of its diapers for better absorbency and improved leakage protection. In particular, the Company monitors world-wide developments in various raw material components to enable the Company to take advantage of the latest developments, and in certain cases the Company has worked closely with suppliers to pioneer the use of such materials in the manufacture of disposable diapers. With respect to packaging, the Company retains consultants in its various markets to design packaging for the products which are sold under the Company's own brands. Packaging for products sold under private labels is either designed and developed by the retailer's own design department, or by design consultants engaged by the Company working together with the retailer's design department. 6. Manufacturing Process The manufacturing process begins with the purchase of raw materials, the most important of which is fluff wood pulp. The fluff wood pulp is first fed through a hamm er mill to make a soft, absorbent core that is placed on a polyethylene backsheet. In the case of "ultra" diapers, super absorbent polymer is then added. The liner layers, leg elastics, tape and other applicable features are then fed into the manufacturing equipment which shapes and produces the finished product. Because of the high level of automation in the production process, significant components of manufacturing efficiency result from prevention of production line stoppages and reducing the defect rate. Manual labor is involved primarily in packing and shipping, and labor costs represent only a small fraction of the Company's total net sales. The Company maintains constant quality control throughout the production process, commencing with the incoming raw materials and continuing through dispatch of the finished product. Each of the Company's diaper lines has a full-time inspector assigned to assure quality control at all stages of the production process, and line inspections and ba tch testing are made on a continuous basis. Because of the relatively high cost of shipping the finished product, the Company has established manufacturing facilities near its major markets, and raw materials (which can generally be transported at lower cost) are shipped to the manufacturing facilities. The Company believes that this improves its efficiency and enhances its competitiveness by reducing shipping costs, shortening the distribution chain and improving customer service. 7. Raw Materials The raw material components used in the manufacturing process are fluff wood pulp, super -17- absorbent polymer, polyethylene backsheet, polypropylene non-woven liner, adhesive closure tape, hotmelt adhesive, elastic and tissue. The main raw material is fluff wood pulp, which is purchased from several suppliers in the United States, Scandinavia and New Zealand. The source from which the fluff wood pulp is shipped to the Company's manufacturing facilities is dependent on price, quality and availability. The cost of fluff wood pulp increased significantly in 1995, softened in 1996, stabilized thereafter and the Company believes it may increase moderately in 1999. Other raw materials are purchased from various sources, also depending on price, quality and availability. The Company maintains good and long-term relationships with its raw materials suppliers. The Company's Chief Purchasing Officer oversees the purchasing and sourcing policies of each of the Company's manufacturing facilities and is responsible for new material developments and keeping track of all world-wide producers of raw materials. He also negotiates and determines the purchase of the Company's major raw materials with the Company's key raw material suppliers. The Company has negotiated supply contracts with several of its key suppliers. Such arrangements are generally designed to achieve volume discounts on price and to assure supply stability. In the event of unacceptable price increases, the Company usually has the right to terminate the arrangement upon specified notice periods, which generally range from two to three months. Some of the suppliers of raw materials to the Company also manufacture disposable diapers which compete with the Company's products. The Company has not experienced any difficulty with its raw material suppliers who are in competition with it on sales of finished product, but nevertheless it takes steps to ensure that it has alternative sources of supply available. The main source of energy for the Company's plants is electricity. The automated process for manufacturing disposable diapers consumes larger amounts of electricity than many other light industries, but none of the Company's operating subsidiaries has experienced any problems with electricity supply. 8. Inventory Practice and Order Backlog The disposable diaper industry is generally characterized by prompt delivery by manufacturers and rapid movement of the product through retail outlets. The lead time between placing an order and shipment to the local customer averages five to ten days. The Company maintains varying levels of raw material and finished product inventory depending on lead time and shipping schedules. The Company's inventory levels generally vary between three to six weeks. Due to the short lead time betwe en order and delivery of product, the Company does not maintain a significant backlog. 9. Customs and Import Duties Some of the raw materials used in manufacturing the Company's products are subject to import duties at varying rates in the countries in which the Company's manufacturing facilities are located. However, import duties on raw materials do not represent a significant part of the cost of the finished product and, in most cases, the import duties are refundable if the finished goods are exported from the countries of manufacture. -18- Imports of finished products to some of the markets are subject to import duties at various rates. However, such duties are usually incorporated in the selling price of the finished product. 10. Employees The Company has a total of approximately 1,120 full time employees at its manufacturing facilities. The Company considers its relationships with its employees to be good in all of its plants, and none of the Company's plants has ever experienced any material work stoppage. The Company believes that all of its manufacturing facilities are in compliance with applicable occupational, health and safety legislation. 11. Environment The Company believes that operations at all of its manufacturing facili ties are conducted in compliance with applicable environmental laws, and that none of the material substances used or disposed of by the Company in its manufacturing operations are considered to be toxic or hazardous substances under such laws. The Company closely monitors environmental laws and regulations pertaining to disposal of solid waste, which includes household refuse, packaging and paper materials, and yardwaste, in addition to disposable diapers, in each of the markets in which its products are sold. The Company is not aware of any such laws or regulations which would have a material adverse effect on the Company's business as presently conducted and proposed to be conducted. A number of states in the United States have passed legislation that is intended to discourage the use of disposable products such as beverage containers, certain packaging materials and disposable diapers, or to encourage the use of non-disposable or recyclable products. The Company believes that it will no t have to make any changes to its products to comply with presently existing environmental laws and regulations in the markets in which its products are sold. The Company endeavors to develop products which are environmentally responsible by closely monitoring world-wide developments in various raw material components and actively works with suppliers to develop and market products utilizing such components. 12. Insurance All of the Company's plant, machinery and inventories are covered by fire and extended coverage insurance. The Company maintains product liability insurance in amounts it believes to be adequate in all its operations, except for its operations in Asia where local manufacturers customarily do not carry product liability insurance because the risk of product liability lawsuits is considered to be slight. Item 2. Description of Property. The Company operates ten manufacturing facilities, with plants located in the United States at Duluth, Georgia (near Atlanta) and at Oconto Falls, Wisconsin; in Hong Kong; in Melbourne, Australia; at Chesterfield, U.K.; in Switzerland at Mettmenstetten and Goldach; at Zhongshan, Guangdong, PRC; at -19- Bangkok, Thailand and at Jawa Barat, Indonesia. The Company utilizes an aggregate of approximately 1,223,000 square feet of space in its manufacturing operations. The Company believes that its plant and facilities are adequate for its present operations, but it will require expanded facilities if past growth trends in the Company's business continue. The following table summarizes the physical properties that are used by the Company in its manufacturing and distribution operations:
Approximate Lease Size Owned/ Expiration Date Location Use (Sq. Feet) Leased Date Opened -------- ---- ---------- ------ ---- ------- Duluth, GA Manufacturing 155,625 Owned N/A Dec. 1993 Wisconsin, WI Manufacturing 164,352 Owned N/A Apr. 1997 Hong Kong Manufacturing 111,700 Leased Jun. 1999 Jul. 1978 Singapore Office 43,540 Leased Apr. 2051 May 1991 Zhongshan, PRC Manufacturing 66,043 Leased Oct. 2044 Dec. 1994 Bangkok, Thailand Manufacturing 68,805 Owned N/A Apr. 1995 Melbourne, A ustralia Manufacturing 179,200 Owned N/A Feb. 1988 Chesterfield, U.K. Manufacturing 75,000 Leased May 2008 May 1988 Mettmenstetten, Switz. Manufacturing 78,000 Leased Jun. 1999 Jul. 1993 Goldach, Switz. Manufacturing 150,275 Owned N/A Aug. 1994 London, U.K. Office 3,500 Owned N/A Mar. 1992 Mechelen, Belgium Office 3,400 Leased Dec. 1999 Apr. 1997 Bangkok, Thailand Office 15,216 Leased Dec. 1999 May 1994 Kuala Lumpur, Malaysia Office 1,580 Leased N/A Dec. 1995 Beijing, PRC Office 380 Leased Jul. 1999 Aug. 1998 Jawa Barat, Indonesia Manufacturing 174,000 Owned Sep. 2027 Nov. 1998
Item 3. Legal Proceedings. The Company and its subsidiaries are from time to time involved in routine legal matters incidental to their business. In February 1995, the Company and its U.S. subsidiary were named as defendants in Action No. 95-19-2-ALB-AMER (WLS) brought by plaintiffs John M. Tharpe, Robert E. Herrin and R & L Engineering, Inc., a Georgia corporation, in the United States District Court, Middle District of Georgia. The complaint alleges that the Company, its U.S. subsidiary and certain European suppliers of disposable diaper manufacturing equipment (the "Defendants") have infringed U.S. Patent No. 5,308,345 which relates to a certain process for elasticizing the waistband of disposable diapers; that the Company and its U.S. subsidiary breached a confidentiality agreement with the plaintiffs by using certain information relat ing to the waistband applicator disclosed to them in confidence by the plaintiffs; and theft by the Defendants of the plaintiffs' trade secrets concerning the waistband applicator. The plaintiffs seek an injunction, compensatory, punitive and exemplary monetary damages in an unspecified amount, and attorneys' fees. The Company has denied liability and intends to vigorously defend this action. In 1997, Procter & Gamble ("P&G") claimed that certain of the Company's diaper products -20- infringe P&G patents and demanded payment for past infringement and an agreement to pay future royalties. The Company and P&G had reached settlement of this claim in 1998. The Company has an existing license agreement from Kimberly-Clark concerning the sale of certain diaper products covered by Kimberly-Clark patents. Item 4. Control of Registrant. The Company is not owned or controlled by another corporation or by any foreign government. The following table sets forth information regarding beneficial ownership of the Ordinary Shares of the Company by each person who on December 31, 1998 is known by the Company to own 10% or more of the Company's outstanding Ordinary Shares and by all directors and officers as a group.
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)............................. 4,427,846(1)(2) 66.34%
(1) Includes 140,580 Ordinary Shares owned by Brandon Wang's wife, Eileen Wang, as to which he disclaims beneficial ownership. (2) Includes 123,000 O rdinary Shares owned by Benedict Wang's wife, Suk Yee Heyley Sham, as to which he disclaims beneficial ownership; and 117,000 Ordinary Shares owned by S.L. Wang's wife, Pei Fang Wang, as to which he disclaims beneficial ownership. Brandon Wang and seven other members of Management own more than 50% of the Company's outstanding Ordinary Shares and, acting together, are able to control the election of the Board of Directors, and thus the direction and future operations of the Company, including decisions regarding acquisitions and other business opportunities, the declaration of dividends and the issuance of additional Ordinary Shares and other securities, in each case without the supporting vote of any other shareholder of the Company. In addition, Brandon Wang is controlling shareholder of the Company and thus may be deemed to be a parent of the Company under the rules and regulations of the Securities Exchange Act of 1934. The Company knows of no arrangements the operation of which may at a subsequent date result in a change in control of the Company. Item 5. Nature of Trading Market. The Company's Ordinary Shares are listed on the NASDAQ National Market System under the trading symbol DSGIF, and are not listed for trading in any foreign trading market. -21- As of December 31, 1998, the total number of record holders was 34, of which 22, representing 39.53% of Ordinary Shares, were in the United States.
Ordinary Share Price : 1998 1997 ---- ---- Quarter High Low High Low - - ------- ---- --- ---- --- First $8.5000 $5.2500 $16.5000 $12.5000 Second 9.5000 6.6250 17.2500 12.7500 Third 7.0000 2.8750 16.6250 10.0000 Fourth 3.7500 2.8125 11.2500 7.3750
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% -22- Shareholders are advised to consult their own tax advisors regarding the tax considerations incident to ownership of the Ordinary Shares. A U.S. Investor receiving a distribution with respect to the Ordinary Shares will be required to include such distribution in gross income as a taxable dividend to the extent such distribution is paid from earnings and profits of the Company as determined under U.S. federal income tax principles. Any distributions in excess of the earnings and profits of the Company will first be treated, for U.S. federal income tax purposes, as a nontaxable return of capital to the extent of the U.S. Investor's basis in the Ordinary Shares, and then as a gain from the sale or exchange of a capital asset, provided that the Ordinary Shares constitute capital assets in the hands of the U.S. Investor. U.S. corporate shareholders will not be entitled to any deduction for distributions received as dividends on the Ordinary Shares. Gain or loss on the sale or exchange of the Ordinary Shares will be treated as capital gain or loss if the Ordinary Shares are held as a capital asset by the U.S. Investor. Such capital gain or loss will be a long-term capital gain or loss if the U.S. Investor has a holding period of more than one year with respect to the Ordinary Shares at the time of the sale or exchange. Various provisions contained in the U.S. Internal Revenue Code (the "Code") impose special taxes in certain circumstances on non-U.S. corporations and their shareholders. The following is a summary of certain provisions which could have an adverse impact on the Company and the U.S. Investors: 1. Personal Holding Companies Sections 541 through 547 of the Code relate to the classification of certain corporations (includ ing foreign corporations) as personal holding companies ("PHCs") and the consequent taxation of such corporations on certain of their U.S.-sourced income (including certain types of foreign sourced income which are effectively connected with the conduct of a U.S. trade or business) to the extent amounts at least equal to such income are not distributed to their shareholders. A PHC is a corporation (i) more than 50% of the value of the stock of which is owned, directly or indirectly, by five or fewer individuals (without regard to their citizenship or residence), and (ii) which, if a foreign corporation, receives 60% or more of such U.S.-related gross income, as specially adjusted, from certain passive sources (such as dividends, interest, royalties or rents). If the Company is classified as a PHC, a tax will be levied at the rate of 39.6% on the Company's undistributed U.S. taxable income. While more than 50% of the Ordinary Shares may be treated as owned (either directly or indirectly) by five o r fewer individuals, the Company intends to cause its indirect U.K. subsidiary, the owner of the U.S. branch, together with such corporation's immediate U.K.-resident parent corporation, to distribute any amounts which would otherwise be characterized as "undistributed personal holding company income" in the hands of either corporation with the intent that such distributions would cause such distributed amounts to lose their character as "United States source" taxable income subject to the PHC tax. 2. Foreign Personal Holding Companies Sections 551 through 558 of the Code relate to foreign personal holding companies ("FPHCs") -23- and impute undistributed income of certain foreign corporations to U.S. persons who are shareholders of such corporations. A foreign corporation will be classified as a FPHC if (i) five or fewer individuals, who are U.S. citizens or residents, directly or indirectly own more than 50% of the corporation's stock (measured either by voting power or value) (the "shareholder test") and (ii) the Company receives 60% or more of its gross income (regardless of source), as specially adjusted, from certain passive sources (the "income test"). The Company believes that it is not currently and has not been a FPHC for any taxable year since its formation because for each such year either or both of the income test and the shareholder test were not met. It is pos sible that subsequent events would cause the Company to meet either or both of the income test and the shareholder test. In the opinion of the Company, however, it is unlikely that the shareholder test would be met, especially in view of the inclusion of certain transfer restrictions in the Company's governing documents. See "Description of Securities". If the Company is classified as a FPHC after application of the shareholder test and the income test, a pro rata portion of its undistributed income would be imputed to its shareholders who are U.S. persons (including U.S. corporations) and would be taxable to such persons as a dividend, even if no cash dividend is actually paid. In that event (promptly after receiving an opinion of counsel or final determination) the Company intends to distribute to its shareholders sufficient amounts so that U.S. shareholders would receive cash at least equal to the product of 150% of the highest federal income tax rate which could apply to any U.S. shareholder and the amount of the dividend that would otherwise be imputed to them. If the Company is classified as a FPHC in the year preceding the death of a shareholder, the Ordinary Shares held by such shareholder would obtain a tax basis equal to the lesser of their fair market value or their tax basis in the hands of the decedent. 3. Passive Foreign Investment Companies Sections 1291 through 1297 of the Code relate to passive foreign investment companies ("PFICs") and impose an interest charge on "excess distributions" made from a PFIC. A foreign corporation is a PFIC if (i) 75% or more of its gross income for the taxable year is passive income as defined under Section 954(c) of the Code (the "passive income test"), or (ii) 50% or more of the average value (or adjusted tax basis if the corporation is a CFC) of the assets held by the corporation during the taxable year consist of assets that produce or are held for the production of passive income (the "passive asset test"). Certain look- through rul es take into account the assets and activities of related corporations from which the foreign corporation either receives income or in which it holds an interest. Although a determination whether a corporation is a PFIC is made annually, in general, once a corporation has been classified as a PFIC, it cannot thereafter lose its status as a PFIC. Distribution from a PFIC will generally be characterized as an excess distribution to the extent such distribution, when combined with all other distributions received by the U.S. Holder in such taxable year, exceeds 125% of the average distributions received by such shareholder in the three preceding taxable years (or its holding period if shorter). Once the amount of the excess distribution is determined, it is allocated ratably to all days in the shareholder's holding period for the shares of the PFIC. Amounts allocated to the current year or a year prior to the date upon which the corporation was a PFIC are included in the shareholder's income as ord inary income. Amounts allocated to prior years in which the corporation was a PFIC are subject to the highest rate of tax for the year to which allocated, and each of -24- the resulting amounts of tax is subject to an interest charge as if it were an underpayment of taxes for such tax year. The Company does not believe that it should, in the current year or any prior year, be classified as a PFIC. Under Section 1296(c) of the Code for purposes of determining PFIC status, a foreign corporation is deemed to hold its proportionate share of the assets and to receive directly its proportionate share of the income of its subsidiaries in which it owns 25 percent or more of the stock (determined by value). The Company, through its more than 25 percent owned subsidiaries, is engaged in substantial manufacturing activities and holds few assets (and receives little income) which would be classified as passive assets or would be classified as passive income under the applicable authorities. 4. Controlled Foreign Corporations Sections 951 through 964 and section 1248 of the Code relate to controlled foreign corporations ("CFC") and impute undistributed income to certain shareholders and convert into dividend income gains on dispositions of shares which would otherwise qualify for capital gains treatment. The CFC provisions only apply if 10% Shareholders (as defined above), who are also U.S. persons, own, in the aggregate, more than 50% (measured by voting power or value) of the shares of a foreign corporation. Even if the Company were to become classified as a CFC, however, the income imputation rules referred to above would only apply with respect to such 10% Shareholders. 5. United States Backup Withholding A holder of an Ordinary Share may be subject to "backup withholding" at the rate of 31% with respect to dividends paid on such Ordinary Share if such dividends are paid by a paying agent, broker or other i ntermediary in the United States or by a U.S. broker or certain United States-related brokers to such holder outside the United States. In addition, the proceeds of the sale, exchange or redemption of an Ordinary Share may be subject to backup withholding if such proceeds are paid by a paying agent, broker or other intermediary in the United States. Actual backup withholding may be avoided by the holder of an Ordinary Share if such holder (i) is a corporation or comes within certain other exempt categories, and when required, demonstrates this fact or (ii) provides a correct taxpayer identification number, certifies that such holder is not subject to backup withholding and otherwise complies with the backup withholding rules. In addition, holders of Ordinary Shares who are not U.S. persons ("non-U.S. holders") are generally exempt from backup withholding, although such holders may be required to comply with certification and identification procedures in order to prove their exemption. In the cas e of Ordinary Shares held by a foreign partnership, this certification requirement would generally be applied to the partners of such partnerships pursuant to certain regulations which will generally become effective after 2000. Any amounts withheld under the backup withholding rules from a payment to a holder will be refunded (or credited against the holder's U.S. federal income tax liability, if any) provided that the amount withheld is claimed as federal taxes withheld on the holder's U.S. federal income tax return relating to the year in which the backup withholding occurred. A holder who is not otherwise required to file a U.S. income tax return must generally file a claim for refund (or, in the case of non-U.S. holders, an income tax return) in order to claim refunds of withheld amounts. -25- B. British Virgin Islands Taxation Under the laws of the British Virgin Islands ("BVI") as currently in effect, a holder of Ordinary Shares who is not a resident of the British Virgin Islands is exempt from BVI income tax on gains realized during that year on sale or disposal of such shares; the British Virgin Islands does not impose a withholding tax on dividends paid by the Company. There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands. In addition, the Ordinary Shares are not subject to any transfer taxes, stamp duties or similar charges in the British Virgin Islands. There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands, nor is an y such treaty or convention currently being negotiated. Item 8. Selected Consolidated Financial Data. The information required by Item 8 is contained in page 16 of the Annual Report to Shareholders, and is incorporated herein by reference. Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations. The information required by Item 9 is contained in pages 8 to 13 of the Annual Report to Shareholders, and is incorporated herein by reference. Item 9A. Quantitative and Qualitative Disclosure about Market Risk. A. Exchange Rate Information The Consolidated Financial Statements of the Company are prepared in U.S. dollar. The financial statements of foreign subsidiaries are translated into U.S. dollar in accordance with Statement of Financial Accounting Standards No. 52. Singapore dollar, Australian dollar, Swiss Franc, Pounds Sterling and Thai Baht are convertible into U.S. dollar at freely floating rates. Hong Kong dollar is t ied to and allowed to fluctuate within a narrow range against the value of the U.S. dollar. There are currently no restrictions on the flow of such currencies, except Renminbi and Thai Baht, between such countries and the United States. Fluctuations in the value of foreign currencies cause U.S. dollar translated amounts to change in comparison with previous periods and, accordingly, the Company cannot quantify in any meaningful way, the effect of such fluctuations upon future income. This is due to the number of currencies involved, the constantly changing exposure in these currencies, and the fact that all foreign currencies do not react in the same manner against the U.S. dollar. -26- A confluence of currency fluctuation adversely impacted the Company's financial performance in 1997. In the first half of the year 1997, Swiss Franc was devalued by 8.6% due to strengthening of U.S. dollar against European currency. In the second half of the year 1997, the Malaysian Ringgit, Singapore dollar, Thai Baht and Indonesian Rupiah were devalued in the Asian financial turmoil. As a result, the Company's reported sales were reduced by $9.7 million in 1997 compared with the exchange rates used in 1996. The effect of the exchange rate devaluation also impacted the Company's cost of materials as most of the raw materials were payable in U.S. dollar. The Company does not hedge against the risk of currency fluctuation. The Company' s financial performance was adversely affected by the Asian currency turmoil in 1998. The devaluation of Thai Baht continued in 1998 and dropped by 7.0% in the first quarter of 1998 against the fourth quarter of 1997. Together with the political instability in Indonesia, Indonesian Rupiah dropped substantially by 85.7% in the second quarter of 1998 compared with exchange rate of corresponding period in 1997. Other Asian currencies like Singapore dollar and Malaysian Ringgit also devaluated in 1998 and later on in the fourth quarter of 1998, Malaysian Ringgit pegged with U.S. dollar. Due to the volatility of the Asian currencies, the Company is unable to hedge against the risk of currency fluctuation. The Company anticipates the impact of the Asian financial turmoil will diminish in 1999, and the economic growth in Asian countries will slow down. As a consequence, the Company's sales volume and gross margin in Asian operations will decline. B. Exchange Rate Fluctuation
1998 1997 ---- ---- First quarter High Low Average High Low Average - - ------------- ---- --- ------- ---- --- ------- Australian dollar 1.50 1.48 1.49 1.30 1.27 1.28 Malaysian Ringgit 4.54 3.64 3.96 2.47 2.47 2.47 Singapore dollar 1.75 1.60 1.66 1.45 1.40 1.42 Thai Baht 54.07 38.64 45.14 25.89 25.79 25.84 Indonesian Rupiah 12,913.33 8,605.00 10,042.22 2,214.20 2,212.54 2,213.53 Swiss Franc 1.52 1.45 1.48 1.47 1.42 1.45 Pounds Sterling 0.61 0.60 0.60 0.62 0.61 0.62 Second quarter - - ------------- Australian dollar 1.64 1.53 1.59 1.33 1.27 1.30 Malaysian Ringgit 4.19 3.74 3.93 2.51 2.50 2.51 Singapore dollar 1.71 1.58 1.66 1.44 1.43 1.43 Thai Baht 42.39 38.63 40.36 26.01 23.14 24.62 Indonesian Rupiah 15,499.00 7,746.00 11,438.48 2,213.71 2,2 13.37 2,213.58 Swiss Franc 1.52 1.47 1.49 1.46 1.41 1.43 Pounds Sterling 0.61 0.60 0.60 0.61 0.60 0.61 Third quarter - - ------------ Australian dollar 1.75 1.63 1.69 1.39 1.34 1.36 Malaysian Ringgit 4.18 3.78 4.03 3.17 2.62 2.91 Singapore dollar 1.77 1.69 1.72 1.52 1.46 1.50 Thai Baht 41.70 39.04 40.48 34.97 31.10 33.36 Indonesian Rupiah 12,913.33 11,067.86 11,683.73 3,684.76 2,212.51 2,703.76
-27- Swiss Franc 1.49 1.38 1.43 1.51 1.45 1.48 Pounds Sterling 0.61 0.59 0.60 0.62 0.61 0.62 Fourth quarter - - ------------- Australian dollar 1.63 1.57 1.60 1.53 1.42 1.47 Malaysian Ringgit 3.79 3.78 3.79 3.88 3.40 3.59 Singapore dollar 1.65 1.62 1.64 1.67 1.58 1.61 Thai Baht 36.67 36.01 36.44 46.46 39.48 41.98 Indonesian Rupiah 7,748.00 7,743.00 7,746.33 5,166.33 3,680.71 4,176.00 Swiss Franc 1.41 1.34 1.38 1.45 1.39 1.42 Pounds Sterling 0.60 0.60 0.60 0.60 0.59 0.60
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 Boa rd of Directors consists of Brandon Wang, Philip Leung, Johnny Tsui, Patrick Tsang, Terence Leung and Peter Chang. The Executive Committee has authority to take any action, other than appointment of auditors, election and removal of directors and appointment of officers, which can be taken only by the Board of Directors. During 1998, the Company's Audit Committee consisted of Anil Thadani and Owen Price. The principal functions of the Audit Committee are (i) to recommend the independent auditors to be employed by the Company; (ii) to consult with the independent auditors with regard to the plan of audit; (iii) to review, in consultation with the independent auditors, their audit report or proposed audit report; and (iv) to consult with the independent auditors with regard to the adequacy of the Company's internal accounting controls. Brandon Wang founded the Company in Hong Kong in 1973 and has been a director and the -28- Company's Chairman and Chief Executive Officer since that time. Mr. Wang is a graduate of St. Francis Xavier's College in Kowloon, Hong Kong. Philip Leung helped Brandon Wang establish the Company in 1973 and has served as a director and Vice President of the Company since that time. He is currently also the Company's Chief Purchasing Officer and oversees and implements the global purchasing and product development of the Company. Mr. Leung holds a diploma of Management Studies from Hong Kong Polytechnic University and a M.B.A. degree from the University of East Asia, Macau. Johnny Tsui helped Brandon Wang establish the Company in 1973 and has served as a director and Vice President of the Company since that time. In September 1995, he was a ppointed as Secretary of the Company. He has also served as Chief Operating Officer of the Company's Asian operations since 1991. Patrick Tsang has been a director of the Company since 1980, and was appointed a Vice President in January 1992. He was Secretary of the Company from March 1992 to September 1995. In 1988, he started up the Company's Australian operations. Since July 1993 he has also served as Chief Operating Officer of the Company's European operations. Mr. Tsang has a Ph.D. in Engineering from the University of London. He also attended a Management Science course at Imperial College, London. Terence Leung has been the Company's Chief Financial and Accounting Officer since 1988. He was appointed a director in 1991 and a Vice President in January 1992. Before joining the Company in 1978, Mr. Leung worked as an accountant with several major trading corporations in Hong Kong. Mr. Leung is a certified public accountant in the United Kingdom and Hong Kong. Peter Chang ha s been the Chief Operating Officer of the Company's U.S. operations since the Company moved its U.S. headquarters to Atlanta, Georgia in late 1988. Mr. Chang joined the Company in 1984 as Vice President in charge of U.S. sales and marketing at the time the Company commenced operations in the United States, and became a director in 1991 and a Vice President in January 1992. Prior to joining the Company, Mr. Chang held various engineering and management positions with major U.S. airlines, based in New York. Mr. Chang has a Master's Degree in Operations Research from Kansas State University. Owen Price became a director in April 1994. In 1993 he retired as the Managing Director of Dairy Farm International Holdings Limited which he joined in 1974. Prior to that time, he had 27 years experience with a large Australian retailer, Woolworths Ltd., where he started as an Executive Trainee and worked his way through to become Chief Executive in 1971. He has served on a number of retail councils in diff erent countries and has been an adviser to the Australian government on trade matters. He is a director of numerous companies in the Asia-Pacific region including three other listed public companies : Dairy Farm International Holdings Limited, Cycle And Carriage Limited (alternate director), and The Hour Glass Limited. Anil Thadani advises the Company on financial matters, corporate strategy and development, and was a director of the Company from 1989 until April 1995, when he resigned as a result of his interest in the going private transaction. He was re-elected to the Board in September 1995. Mr. Thadani is the Chairman of Schroder Capital Partners (Asia) Limited, a direct investment company, which he founded in -29- July 1992 in joint venture with the Schroders Group of the United Kingdom. Prior to this, he was the Managing Director and a founding partner of Arral & Partners Limited, a private investment company based in Hong Kong. He is also a director of Programmed Maintenance Services Pty. Ltd., ODS System-Pro Holdings Ltd., Equatorial Reinsurance (Singapore) Ltd. and Scandia (Asia) Ltd. Mr. Thadani has a Master's Degree in Chemical Engineering from the University of Wisconsin, Madison, and a M.B.A. from the University of California at Berkeley. Other Key Management Personnel In addition to the above-named officers and directors, the following persons hold key management positions with the Company : Benedict Wang became the Corporate Investor Relation s Officer of the Company in September 1993. Prior to this, he had been the Director of Sales and Marketing of the Company's Hong Kong subsidiary in charge of marketing and sales for the Asian region. Mr. Wang has a Master of Arts degree from the University of North Dakota; a Bachelor of Fine Arts degree from the University of Manitoba; and a Bachelor of Arts from the University of Waterloo (Ontario). Mr. Wang is now Corporate Affairs Officer of the Company. S.L. Wang's primary responsibility in the Company is to oversee research and development of new manufacturing process and technologies. He joined the Company in 1984 to help start its U.S. operations in Los Angeles, California. Prior to joining the Company, Mr. Wang was employed in the United States as an architect and project supervisor for construction projects. Mr. Wang holds a Bachelor's Degree in Architectural Engineering from Chung Yuan University, Chung-Li, Taiwan. George Jackson was appointed to the post of Chief Executive of the Australian operations in mid 1997. Mr. Jackson joined the Company in 1987 and prior to his transfer to Australia, he was the National Sales Manager with the Company's U.S.A. operations. Prior to joining the Company, he held various management positions in accounting and manufacturing with Weyerhaeuser Company. He holds a B.A. degree in Business Administration - Accounting (1977) from the University of Washington, Seattle, WA. Item 11. Compensation of Directors and Officers. In 1998 the aggregate remuneration paid by the Company and its subsidiaries to all directors and officers of the Company as a group (10 persons) for services in all capacities was approximately $5,065,030. Item 12. Options to Purchase Securities from Registrant or Subsidiaries. Not applicable. Item 13. Interest of Management in Certain Transactions. The following table sets forth the aggregate amount of loans made by the Company to Brandon Wang, the founder, principal shareholder and Chief Exe cutive Officer of the Company and to a trust of which he is a beneficiary since January 1, 1996: -30-
Loan Balance Balance at Beginning Loans Loans at End of Year Extended Repaid of Year ------ -------- ------ ------- (dollars in thousands) Year ended December 31, 1998 $607 $3,372 $507 $3,472 Year ended December 31, 1997 $15,644 $6,129 $21,166 $607 Year ended December 31, 1996 $12,536 $7,638 $4,530 $15,644
In 1998, 1997 and 1996 the Company advanced $3.4 million, $6.1 million and $7.6 million, respectively, to Brandon Wang, the founder, substantial shareholder and Chief Executive Officer of the Company and to a trust of which he is a beneficiary. These advances were made under a loan and security agreement in which the Company agreed to make loans to Brandon Wang from time to time, subject to any limit on such loans which may be imposed by the Board of Directors. The loans were repayable on demand evidenced by promissory notes bearing interest at a rate equal to 1.5% over the London Inter-Bank Offered Rate (LIBOR) or such other rate that the Board of Directors and the borrower shall agree in writing. The rate of interest was reviewed quarterly and adjusted, if necessary. The promissory notes were collateralized by the pledge of shares of the Company held by Brandon Wang. The fair market value of the shares pledged was required to be at least 200% of the amount due under the notes. During 1998, 1997 and 1996, Brandon Wang and a trust controlled by him repaid $0.5 million, $21.2 million and $4.5 million, respectively, to the Company. Interest of $0.1 million, $1.0 million and $1.0 million was charged on these advances in 1998, 1997 and 1996, respectively. The balance at December 31, 1998 was $3.5 million. In 1997, a U.S. subsidiary of the Company extended a guarantee to a bank as part of a $15 million term loan provided by the bank to Brandon Wang. The loan agreement requires the U.S. subsidiary to maintain minimum cash balances of $6 million as collateral with the bank. Brandon Wang has pledged 2,217,100 shares in the Company to the lender as security for the loan. Commencing January 1, 1998, this loan is repayable by quarterly instalments of $375,000 followed by a balloon payment of $10,875,000 on August 1, 2000. In 1998 Brandon Wang repaid $1.5 million and at December 31, 1998 the outstanding balance was $13.5 million. In Janua ry 1999 an additional $4 million was repaid. Item 14. Description of Securities. The following is a brief description of the rights of holders of fully paid Ordinary Shares. This description does not purport to be complete and is qualified in its entirety by reference to the Memorandum and Articles of Association of the Company, which have been previously filed as an exhibit, and to the relevant provisions of the British Virgin Islands International Business Companies Act. A. General All of the issued Ordinary Shares are credited as fully paid and non- assessable, except that a share issued for a promissory note or other written obligation for payment of a debt may be subject to forfeiture, and accordingly no further contribution of capital may be required by the Company from holders of Ordinary Shares. Under British Virgin Islands ("BVI") law, non-residents of the BVI may freely hold, vote and transfer their Ordinary Shares in the same manner as BVI residents. -31- B. Dividends Holders of Ordinary Shares are entitled to participate in the payment of dividends in proportion to their holdings. The Board of Directors may declare and pay dividends in respect of any accounting period out of the profits legally available for distribution. Dividends, if any, will be paid in U.S. dollars. The Company's dividend policy will depend on the Company's earnings, capital requirements, financial condition and other factors considered relevant by the Board of Directors. For a discussion of taxation of dividends, see "Taxation". The Company did not pay any dividend in 1998. C. Voting Rights In order to avoid certain adverse U.S. income tax consequences to the Company, the voting rights of any shareholder who holds more than 10% of the Company's outstanding shares will be suspended as to shares held by such shareholder in excess of 10% of the Company's outstanding shares ("Excess Shares"). Excess Shares are not counted as voting shares for purposes of establishing a quorum at shareholders' meetings. However, the Board of Directors has discretion to exempt any such Excess Shares from these restrictions if it is satisfied, on the basis of evidence and assurances acceptable to it, that the holding of shares in excess of 10% of the Company's outstanding shares by such shareholder will not result in the Company being classified as a controlled foreign corporation ("CFC"), foreign personal holding company ("FPHC") or personal holding company ("PHC") within the meaning of the U.S. Internal Revenue Code ("Code"). See "Taxation"; "Restrictions on Transfer and Voting; Redemption of Ordinary Shares". Every shareholder who is present in person or by proxy at a meeting of the Company shall hav e one vote for each Ordinary Share of which he is the holder. A poll may be demanded by the chairman of the meeting, or by any shareholder present in person or by proxy. The Articles of Association of the Company make no provision for cumulative voting. Accordingly, the controlling shareholders have a sufficient number of Ordinary Shares to elect all of the Company's directors. D. Restrictions on Transfer and Voting; Redemption of Ordinary Shares The Company's Memorandum and Articles of Association contain certain provisions which are intended to avoid situations in which the Company may be classified as a CFC, FPHC or PHC. See "Taxation". These provisions are intended only to avoid the adverse U.S. income tax consequences which would result from such classification. The following is a summary of the relevant provisions of the Memorandum and Articles : (i) Restricted Transfers of Ordinary Shares. The Board of Directors may, but is not obliged to, refuse to regi ster the transfer of any of the Ordinary Shares of the Company if, in the opinion of the Board, such transfer might cause the Company to be classified as a CFC, FPHC or PHC. -32- (ii) Restrictions on Voting Rights. In the event that any person holds more than 10% of the Company's outstanding shares, any shares in excess of 10% of the Company's outstanding shares shall be "Excess Shares", which shall not be entitled to any voting rights and shall not be considered voting shares for purposes of establishing a quorum. However, the Board of Directors may exempt any such Excess Shares from these restrictions if it is satisfied, on the basis of evidence and assurances acceptable to it, that the holding of shares in excess of 10% of the Company's outstanding shares by such shareholder will not result in the Company being classified as a CFC, FPHC or PHC. In addition, these restrictions on voting rights do not apply to shares ac quired in a cash tender offer for all outstanding shares of the Company where a majority of the outstanding shares of the Company are duly tendered and accepted pursuant to such cash tender offer. (iii) Disclosure of Certain Information to the Company. Any person who directly owns 5% or more of the Company's outstanding shares is required to file with the Company, within 60 days of the end of the Company's taxable year (which is currently the calendar year) and prior to any transfer of shares by or to such person, an affidavit setting forth the number of shares (1) owned directly by such person or by a nominee of such person, and (2) owned indirectly or constructively by such person by reason of the attribution rules of Sections 542, 544 and 958 of the Code or by reason of application of the attribution rules of Rule 13(d) of the U.S. Securities Exchange Act of 1934 ("Exchange Act"). The affidavit filed with the Company must set forth all the information required to be reported (1) in returns of shareholders required to be filed under U.S. Income Tax Regulations Section 1.6035-1 (including shareholder related information for inclusion in IRS Form 5471), and (2) in reports required to be filed under Section 13(d) of the Exchange Act. All shares held by any person who fails to comply with this reporting requirement shall be deemed Excess Shares and shall be subject to the voting restrictions and redemption provisions described herein. (iv) Redemption of Ordinary Shares. The Company may, in the discretion of the Board of Directors, redeem any Excess Shares at a price equal to (1) the average of the high and low sales price of the shares on the last business day prior to the redemption date on the principal national securities exchange on which such shares are listed or admitted to trading, or (2) if the shares are not listed or admitted to trading, the average of the highest bid and lowest asked prices on such last business day as reported by the National Quotation Bureau Incorporate d or similar organization selected from time to time by the Company, or (3) if not determinable as aforesaid, as determined in good faith by the Board of Directors. The directors of the Company, in a meeting held on January 6, 1992, resolved that the principal shareholder, Brandon Wang, is exempt from the foregoing restrictions. The directors have also approved exemption of certain institutional shareholders from the foregoing restrictions as the Board was satisfied that such exemption would not have any of the adverse tax consequences described above. E. Rights of Shareholders under British Virgin Islands Law may be less than in U.S. Jurisdictions The Company's corporate affairs are governed by its Memorandum and Articles of Association and by the International Business Companies Act of the British Virgin Islands. Principles of law relating to such matters as the validity of corporate procedures, the fiduciary duties of Management and the rights of the Company's shareholders may di ffer from those that would apply if the Company were incorporated -33- in a jurisdiction within the United States. The rights of shareholders under British Virgin Islands law are not as clearly established as the rights of shareholders under legislation or judicial precedent in existence in most U.S. jurisdictions. Thus, the public shareholders of the Company may have more difficulty in protecting their interests in the face of actions by the Board of Directors or the principal shareholders than they might have as shareholders of a corporation incorporated in a U.S. jurisdiction. In addition, it is unlikely that the courts of the British Virgin Islands would enforce, either in an original action or in an action for enforcement of judgments of U.S. courts, liabilities which are predicated upon the securities laws of the Unite d States. See "Description of Securities". F. Directors Under the Company's Articles of Association, the first directors must be appointed by the subscribers to the Memorandum of Association, and thereafter the directors may be appointed by the shareholders, or by the directors to fill a vacancy or as an addition to the existing directors. Directors may be removed, with or without cause, by a resolution of the shareholders of the Company, or with cause by a resolution of the other directors. G. Quorum The quorum required to constitute a valid general meeting of shareholders consists of shareholders present in person or by proxy holding at least a majority of all issued Ordinary Shares entitled to vote. If a meeting is adjourned for lack of quorum, it will stand adjourned to the next business day at the same time and place or to such other day and at such other time and place as the directors may determine, and if at the adjourned meeting there are present within one hour from the time appointed for the meeting at least one- third of the shares entitled to vote at the meeting, the shareholder or shareholders present shall be a quorum. However, a meeting convened on the requisition of the shareholders shall be dissolved if a quorum is not present at the first meeting. H. Resolutions Resolutions may be adopted at shareholders' meetings by the affirmative vote of a simple majority of the Ordinary Shares entitled to vote thereon. Certain actions may be taken by a resolution of the directors. Such actions include an amendment of the Company's Memorandum or Articles of Association, an increase or reduction in the Company's authorized capital, and a change in the Company's name. I. Rights in a Winding-up Holders of Ordinary Shares are entitled to participate in proportion to their holdings in any distribution of assets after satisfaction of liabilities to creditors in a winding-up. J. Authorized but Unissued Shares Under the Company's Memorandu m and Articles of Association, there are 13,325,394 authorized but unissued Ordinary Shares. Those additional authorized but unissued Ordinary Shares may be utilized -34- for a variety of corporate purposes, including future public or private offerings to raise additional capital or for facilitating corporate acquisitions. In addition, the Company cancelled 603,000 shares in 1996 and 1,037,394 shares in 1997, which were repurchased under the share repurchase plan adopted during 1994 and amended in 1995 and the tender offer transaction which was completed in December 1996. The Company does not currently have any plans to issue additional Ordinary Shares. K. Transfers of Ordinary Shares The Company's Memorandum and Articles of Association do not restrict the transferability of fully paid Ordinary Shares, except that the Board of Directors may refuse to register the transfer of any of the Ordinary Shares if, in the opinion of the Board, such transfer might result in the Company becoming a CFC, FPHC or PHC. See "Restrictions on Transfer and Voting; Redemption of Ordinary Shares". L. New Issues of Ordinary Shares Under the Company's Articles of Association, the Board of Directors is authorized to exercise the power of the Company to offer, allot, grant options over or otherwise dispose of all of the remaining unissued Ordinary Shares of the Company, which comprise 13,325,394 Ordinary Shares. The Board of Directors may, without further shareholder action, increase the number of authorized shares of the Company. In addition the Board of Directors may, without further shareholder action, designate any of the authorized but unissued Ordinary Shares as preferred shares by amending the Company's Memorandum of Association. Upon filing such amendment with the BVI Registrar of Companies, the Board of Directors would have authority to fix the dividend rights and rates, voting rights, redemption p rovisions and liquidation preference, all of which may take precedence over comparable rights of the existing Ordinary Shares. M. Merger; Dissenters' Rights BVI law provides for mergers whereby there occurs either an absorption by one company of another company and the simultaneous dissolution of the other company, or the formation of a new company that absorbs two companies and the automatic dissolution of both absorbed companies. BVI law provides for compulsory acquisition or appraisal of the interests of a shareholder who objects to the transfer of the ownership or assets of a company. Under section 83 of the BVI International Business Companies Act, a shareholder of a company incorporated under the Act has the right to object to a proposed merger of the Company. If the shareholder complies fully with the requirements of section 83 and the merger is approved by a majority of shareholders, the dissenting shareholder may require the Company to pay fair value (as agreed or appra ised) for his shares. Pursuant to section 83 (11) of the Act, a shareholder who chooses to enforce dissenting shareholders' rights may not enforce other remedial rights to which he might otherwise be entitled by virtue of his holding shares, except that the shareholder shall retain the right to institute proceedings to obtain relief on the ground that the merger is illegal. -35- N. Joint Shareholders If two or more persons who hold shares jointly are present at a meeting in person or by proxy they must vote as one. Dividends and notices may be paid or sent, in the case of joint holders, to any one of the persons named as joint shareholders in the register of members. O. Fiduciary Responsibilities Under U.S. law majority and controlling shareholders generally have certain "fiduciary" responsibilities to the minority shareholders. Shareholder action must be taken in good faith and actions by controlling shareholders which are obviously unreasonable may be declared null and void. BVI law protecting the interests of minority shareholders may not be as protective in all circumstances as the law protectin g minority shareholders in U.S. jurisdictions. While BVI law does permit a shareholder of a BVI company to sue its directors derivatively (i.e., in the name of and for the benefit of the Company) and to sue the Company and its directors for his benefit and for the benefit of others similarly situated, the circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect of any such action, may result in the rights of shareholders of a BVI company being more limited than those of shareholders in a U.S. company. P. Indemnification of Officers and Directors Under its Memorandum and Articles of Association, the Company is authorized to indemnify any person who is made or threatened to be made a party to a legal or administrative proceeding by virtue of being a director, officer or agent of the Company, provided such person acted in the best interests of the Company and, in the case of a criminal proceeding, such person had no reaso nable cause to believe that his conduct was unlawful. The Company is obliged to indemnify any director, officer or agent of the Company who was successful in any proceeding against reasonable expenses incurred in connection with the proceeding, regardless of whether such person met the standard of conduct described in the preceding sentence. Q. Transfer Agent and Registrar ChaseMellon Shareholder Services serves as the Transfer Agent and Registrar for the Ordinary Shares. Item 15. Defaults upon Senior Securities. On December 16, 1996, a U.S. subsidiary entered into a $15 million Term Promissory Note ("Term Note"). In accordance with the terms and conditions of the Term Note, the subsidiary is subject to mandatory prepayments on April 1, 1998 and 1999 by an amount equal to 50% of excess cash flow, as defined, for the preceding fiscal year. The Term Note requires the maintenance of specific covenants including financial ratios. For the year ended December 31, 1998, the subsidi ary failed to meet several covenants including their net income, tangible net worth and fixed charge ratio covenants. A waiver has -36- 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, 1998 17 Consolidated Balance Sheets as of December 31, 1998 and 1997 18-19 Consolidated Statements of Cash Flows for the three years ended December 31, 1998 20-21 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1998 22 Notes to Consolidated Financial Statements 23-33
B. Condensed Financial Information
Page ---- Independent Auditors' Report S-1 Unconsolidated Statements of Operations for the three years ended December 31, 1998 S-2 Unconsolidated Balance Sheets as of December 31, 1998 and 1997 S-3 Unconsolidated Statements of Cash Flows for the three years ended December 31, 1998 S-4 Note to Schedule 1 S-5
C. Exhibit Index Exhibit -37- Number Description ------ ----------- 3.1 Second Amendment to Loan and Security Agreement between Associated Hygienic Products LLC and SouthTrust Bank of Georgia, N.A. dated November 9, 1998. 3.2 Third Amendment to Loan and Security Agreement between Associated Hygienic Products LLC and SouthTrust Bank of Georgia, N.A. dated January 29, 1999. 3.3 Land Title Deed, dated October 24, 1997, of Indonesian joint venture. 3.4 Sales and Purchase Agreement, dated December 14, 1998, between St. Andrews Property Investment Inc. and Associated Hygienic Products (Canada), Inc. 11 Computation of Net Income Per Ordinary Share. D. Financial Statement Schedules All financial statement schedules are not included because the information is contained in the Notes to Consolidated Financial Statements in pages 23 to 33 of the Annual Report to Shareholders. -38- SIGNATURES Pursuant to the requirement of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form 20-F and has duly caused the Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Hong Kong, on June 1, 1999. DSG INTERNATIONAL LIMITED By /s/TERENCE Y.F. LEUNG ---------------------- Terence Y.F. Leung Vice President and Treasurer -39- INDEPENDENT AUDITORS' REPORT To the Shareholders and the Board of Directors of DSG International Limited We have audited the financial statements of DSG International Limited as of December 31, 1998 and 1997, and for each of the three years ended December 31, 1998, and have issued our report thereon dated March 19, 1999, such financial statements and report are included in your 1998 Annual Report to the Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedules of DSG International Limited, listed in Item 19. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to exp ress an opinion based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Deloitte Touche Tohmatsu Hong Kong March 19, 1999 -40- SCHEDULE 1 CONDENSED FINANCIAL INFORMATION UNCONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 1998 1997 1996 ---- ---- ---- (in thousands) Equity in earnings of subsidiaries $(1,201) $2,414 $17,909 Operating expenses: Adminis tration 563 3,394 4,082 Depreciation 20 12 10 ------- ------ ------- Total operating expenses 583 3,406 4,092 Operating (loss) income (1,784) (992) 13,817 Interest expense (286) (217) (259) Exchange (loss) gain (430) (390) (737) Interest income 3,841 2,066 2,078 Other finance expenses (56) (6) (9) Other income 590 955 461 ------- ------ ------- Income before income taxes 1,875 1,416 15,351 Provision for income taxes 253 443 6,185 ------- ------ ------- Net income $1,622 $ 973 $ 9,166 ======= ====== =======
See notes to Schedule 1 -41- SCHEDULE 1 CONDENSED FINANCIAL INFORMATION UNCONSOLIDATED BALANCE SHEETS
Year ended December 31, 1998 1997 ---- ---- (in thousands) ASSETS Current assets: Cash $1,734 $ 546 Due from related parties 3,472 607 Other receivables 187 203 Prepaid expenses and others 17 381 ------- ------- Total current assets 5,410 1,737 Equipment: Furniture 216 216 Motor vehicles 62 62 ------- ------- Total 278 278 Less: accumulated depreciation 109 88 ------- ------- Net property 169 190 ------- ------- Investment in subsidiaries (on the equity method) 62,610 63,658 ------- ------- Total assets $68,189 $65,585 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $98 $ 157 Accrued payroll and employee benefits - 600 Accrued expenses 59 49 Income taxes payable 19 1 ------- ------- Total current liabilities 176 807 ------- ------- Shareholders' equity: Ordinary sha res 67 67 Additional paid-in capital 18,301 18,301 Retained earnings 58,266 56,644 Translation reserve (8,621) (10,234) ------- ------ Total shareholders' equity 68,013 64,778 ------- ------- Total liabilities and shareholders' equity $68,189 $65,585 ======= =======
See notes to Schedule 1 -42- SCHEDULE 1 CONDENSED FINANCIAL INFORMATION UNCONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 1998 1997 1996 ---- ---- ---- (in thousands) Cash flows from operating activities Net cash provided by operating activities $1,392 $ 935 $8,790 Cash flows from investing activities Expenditure s for equipment - (62) - Investments in and advances to subsidiaries (1,221) (43,940) (6,224) Recoupment of investment in subsidiaries 3,882 28,245 18,783 Advances to shareholder (3,372) (6,129) (7,638) Repayments by shareholder 507 21,166 4,530 Receipt of (investment in) restricted bank deposit - - 5,269 ------ ------ ------ Net cash provided by (used in) investing activities (204) (720) 14,720 ------ ------ ------ Cash flows from financing activities Financing from long term loans - - - Repayment of long term loans - - (5,269) Purchase of treasury shares - (49) (17,632) Tender offer expenses - - (433) ------ ------ ------ Net cash used in financing activities - (49) (23,334) Increase (decrease) in cash and cash equivalents 1,188 166 176 Cash and cash equivalents, beginning of year 546 380 204 ------ ------ ------ Cash and cash equivalents, end of year $1,734 $ 546 $ 380 ====== ====== ====== Cash dividends from: Consolidated subsidiaries $754 $14,334 $18,160
See notes to Schedule 1 -43- DSG INTERNATIONAL LIMITED NOTE TO SCHEDULE 1 1. APPLICATION OF SIGNIFICANT ACCOUNTING PRINCIPLES Accounting for subsidiaries - DSG International Limited ("the Company") has accounted for the earnings of its subsidiaries on the equity method in the unconsolidated condensed financial information. -44- EX-3.1 2 SECOND AMEND. TO LOAN AND SECURITY AGREEMENT EXHIBIT 3.1 ----------- SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT ----------------------------------------------- THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT, made, entered into and effective as of the 9th day of November, 1998 (the "Amendment"), by and --------- between ASSOCIATED HYGIENIC PRODUCTS LLC, a limited liability company duly organized under the laws of the State of Wyoming ("Borrower"), and SOUTHTRUST -------- BANK, N.A., successor by merger to SOUTHTRUST BANK OF GEORGIA, N.A., a national banking association with offices in Atlanta, Georgia ("Lender"). ------ WITNESSETH: ---------- WHEREAS, Borrower and Lender executed a certain Loan and Security Agreement, dated as of December 16, 1996 (as amended to date, the "Loan ---- Agreement"; capitalized terms used herein and not defined herein have the - - --------- meanings assigned to them in the Loan Agreement); and WHEREAS, certain Events of Default, as set forth on Schedule I hereto, have ---------- occurred and are continuing (collectively, the "Existing Events of Default"); -------------------------- and WHEREAS, Lender (without waiving the Existing Events of Default) and Borrower wish to amend the Loan Agreement in certain respects, as hereinafter set forth; NOW, THEREFORE, for and in consideration of the sum of $10.00, the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Additional Defined Terms. The following defined terms are ------------------------ hereby added to Section 1.1 of the Loan Agreement in alphabetical order: "AHP Wisconsin" shall mean Associated Hygienic Products Inc. ------------- "Wisconsin Location" shall mean the location of AHP Wisconsin at ------------------ 205 East Highland Drive, Oconto Falls, Wisconsin. 2. Amendment to Definition of "Collateral Locations". The ------------------------------------------------ definition of "Collateral Locations" set forth in Section 1.1 of the Loan Agreement is hereby deleted in its entirety and the following revised definition of "Collateral Locations" is hereby substituted in lieu thereof: "Collateral Locations" shall mean (i) the New Facility, (ii) 3312 -------------------- Berkley Lake Road, Suite 200, Duluth, Georgia, and (iii) and the Wisconsin Location but only as to Equipment Collateral which is leased by Borrower to AHP Wisconsin as described in Section 7 of that certain Second Amendment to Loan and Security Agreement, dated as of November 9, 1998, between Borrower and Lender. 3. Amendment to Definition of Equipment Collateral. The ----------------------------------------------- definition of "Equipment Collateral" set forth in Section 1.1 of the Loan Agreement is hereby deleted in its entirety and the following revised definition of "Equipment Collateral" is hereby substituted in lieu thereof: "Equipment Collateral" shall mean all equipment of Borrower, or in -------------------- which it has rights, whether now owned or hereafter acquired and wherever located. As defined herein, "Equipment Collateral" shall -------------------- include, without limitation, all machinery, fixtures, furniture, furnishings, leasehold improvements, rolling stock, motor vehicles, plant equipment, computers and other office equipment and office furniture, together with any and all attachments and accessions, substitutes and replacements, and tools, spare parts, and repair parts used or useful in connection therewith. 4. Addition of New Definition of "Intangibles Collateral". The ----------------------------------------------------- following definition of "Intangibles Collateral" is hereby added in Section 1.1 of the Loan Agreement: "Intangibles Collateral" shall mean all general intangibles of a ---------------------- Borrower, whether now existing or hereafter acquired or arising, including, without limitation, all copyrights, royalties, tax refunds, rights to tax refunds, trademarks, trade names, service marks, patent and proprietary rights, blueprints, drawings, designs, trade secrets, plans, diagrams, schematics and assembly and display materials relating thereto, all customer lists, all books and records, all computer software and programs, and all rights of Borrower under any contract. 4. Collateral. ---------- (a) In connection with the amendments to and addition of certain collateral definitions set forth herein, Section 3 of the Loan Agreement is hereby deleted in its entirety and the following revised Section 3 is hereby substituted in lieu thereof: 3. SECURITY INTEREST--COLLATERAL. --------------------------------- As security for the payment of the Notes and all Obligations whatsoever of Borrower to Lender and the performance by Borrower of all covenants and requirements hereunder and under the other Loan Documents (including, without limitation, all Obligations of Borrower under the Borrower Guaranty), Borrower hereby grants (or re-grants) to Lender a continuing general lien upon and security interest in and to the following described Property, wherever located, whether now existing or hereafter acquired or arising (herein, the "Collateral"), ---------- namely: (a) the Accounts Receivable -2- Collateral; (b) the Inventory Collateral; (c) the Equipment Collateral; (d) the Balances Collateral; (e) the Intangibles Collateral; and (f) all products and/or proceeds of any and all of the foregoing, including, without limitation, insurance or condemnation proceeds, all Property received wholly or partly in trade or exchange for any of the foregoing, and all rents, revenues, issues, profits and proceeds arising from the sale, lease, license, encumbrance, collection or any other temporary or permanent disposition of any of the foregoing or any interest therein (but the foregoing is not intended, and shall not be construed to permit, any of the foregoing transactions to the extent otherwise prohibited or restricted pursuant hereto or to any other Loan Documents). The term "Collateral", as used ---------- herein, shall also include the right, title and interest of Borrower in and to the New Facility in which Lender is being granted a security title and Lien pursuant to the Mortgage. (c) In connection with the foregoing modification to Section 3 of the Loan Agreement, and in furtherance thereof, Borrower hereby acknowledges, confirms and agrees that, notwithstanding any provision of the Loan Agreement or any other Loan Document to the contrary, the Collateral (as redefined in Section 3 of the Loan Agreement, as amended hereby) secures, and shall continue to secure, all Obligations of Borrower to Lender, including, without limitation, all of Borrower's Obligations under the Term Note and all of Borrower's Obligations under the Borrower Guaranty, unless and until all of such Obligations are paid in full, and Lender has terminated this Agreement and the Borrower Guaranty in writing. 5. Binding Effect. Except to the extent set forth expressly herein -------------- above to the contrary, Borrower acknowledges and agrees that all terms and provisions, covenants and conditions of the Loan Agreement and all documents executed in connection therewith shall be and remain in full force and effect and constitute the legal, valid, binding and enforceable obligations of Borrower to Lender in accordance with their respective terms as of the date hereof. To the extent of any conflict between any provision of this Amendment and any provision of the Loan Agreement or any other Loan Document, any such conflicting provision shall be deemed to be amended in a manner consistent with this Amendment. 6. Representations. In order to induce Lender to enter into this --------------- Amendment, Borrower hereby restates and renews each and every representation and warranty heretofore made by it under or pursuant to the Loan Agreement, except to the extent that such representations and warranties are untrue as a result of the occurrence and continuance of the Existing Events of Default, and represents and warrants further to Lender that it has taken all necessary and appropriate company action to authorize the execution, delivery and performance hereof and of any other document, instrument or agreement executed and/or delivered in connection herewith and the same will not violate the Organizational Documents or any document, instrument or agreement to which Borrower is a party or any provision of law applicable to Borrower. -3- 7. Covenants. Borrower hereby restates and affirms each and every --------- obligation, covenant and condition of the Loan Agreement, except to the extent that Borrower is in violation thereof as a result of the occurrence and continuance of the Existing Events of Default. In addition, Borrower hereby covenants and agrees with Lender that within thirty (30) days after the date hereof, it will (a) take, and cause HP Canada to take, all actions determined by Lender to be necessary to perfect Lender's security interest in all equipment owned by AHP Canada and located at the Wisconsin Location (the "Canada ------ Equipment"), (b) enter into a lease agreement with AHP Wisconsin documenting the leasing arrangements between Borrower or AHP Canada, as applicable, as lessor, and AHP Wisconsin, as lessee, relative to all such Canada Equipment being used by AHP Wisconsin in its business at the Wisconsin Location, on terms and conditions, including, without limitation, as to rentals, satisfactory to Lender, and (c) execute and deliver, or cause to be executed and delivered, such documents, instruments and agreements as Lender may deem to be necessary or appropriate in connection with the foregoing. 8. Further Assurances. Borrower agrees to take such further ------------------ actions, as Lender shall reasonably request in connection herewith, to evidence the amendments herein contained to the Loan Agreement. 9. No Default. Further to induce Lender to enter into this ---------- Amendment, Borrower hereby certifies to Lender that, upon execution of this Amendment, there exists (i) except for the Existing Events of Default, no Default Condition or Event of Default under the Loan Agreement and (ii) no right of offset, defense, counterclaim, claim or objection in favor of Borrower as against Lender arising out of or with respect to any of the Obligations. 10. No Waiver. Lender does not, by its execution and delivery of --------- this Amendment, waive any of the Existing Events of Default or any other Events of Default or Default Conditions which may presently or hereafter exist. 11. Governing Law. This Amendment shall be governed by and ------------- construed in accordance with the laws of the State of Georgia. -4- IN WITNESS WHEREOF, Borrower and Lender have executed this Amendment, through their duly authorized officers, under their hands and seals, effective as of the date and year first above written. "BORROWER" ASSOCIATED HYGIENIC (SEAL) PRODUCTS LLC, a Limited Liability Company By: /s/ PETER CHANG ----------------------------------------- Name: Peter Chang Title: President Attest: /s/ PETER LEUNG --------------------------------- Name: Philip Leung Title: Secretary "LENDER" SOUTHTRUST BANK, N.A. (SEAL) By: /w/ WAYNE F. DURLACHER ----------------------------------------- Wayne F. Durlacher, Senior Vice President -5- REAFFIRMATION OF GUARANTY ------------------------- The undersigned, each a guarantor of the "Obligations" of "Borrower" to "Lender", as such terms are defined in the "Loan Agreement" referenced in the within and foregoing Second Amendment to Loan and Security Agreement ("Second ------ Amendment"), pursuant to a certain Guaranty dated December 16, 1996 - - --------- ("Guaranty"), hereby acknowledges its receipt of a copy of the Second Amendment and agrees that its Guaranty shall continue in full force and effect from and after the execution and delivery thereof. Dated: November 9, 1998 AHP HOLDINGS, L.P. By: ELMBAY LIMITED, an English corporation, as General Partner By: /s/ PETER CHANG -------------------------------- Peter Chang Principal Executive Officer DSG INTERNATIONAL LIMITED By: /s/ PETER CHANG -------------------------------- Peter Chang Vice President -6- SCHEDULE I ---------- Existing Events of Default -------------------------- Events of Default have occurred and are continuing under the Loan Agreement as a result of (a) the failure of Holdings to maintain Tangible Net Worth of at least $16,000,000 as required pursuant to Section 8.18 of the Loan Agreement, (b) the failure of Holdings to achieve annual net income of at least $100,000 for its fiscal quarter ending June 30, 1998, as required pursuant to Section 8.19 of the Loan Agreement, (c) the failure of Holdings to achieve a Fixed Charge Coverage Ratio of at least 1.25:1.00 for its fiscal quarter ending June 30, 1998, as required pursuant to Section 8.20 of the Loan Agreement, (d) the transfer by Borrower of certain of its equipment constituting part of the Collateral of Lender from its former plant location in Bell, California to a location of Associated Hygienic Products, Inc. in Wisconsin, in violation of the provisions of Sections 6.5 and 9.9 of the Loan Agreement (although Borrower disputes that this Event of Default occurred), (e) the failure of AHP to hold cash or cash equivalents at all times in the minimum amount of Eleven Million Dollars ($11,000,000), as required pursuant to Section 8.23 of the Loan Agreement, and (f) violations of Sections 9.6, 9.9 and 9.12 of the Loan Agreement resulting from the making by Borrower of certain advances (as reflected in Borrower's books and records) to Associated Hygienic Products Inc. -7- EX-3.2 3 THIRD AMEND. TO LOAN AND SECURITY AGREEMENT EXHIBIT 3.2 ----------- THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT ---------------------------------------------- THIS THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT, made, entered into and effective as of the 29th day of January, 1999 (the "Amendment"), by and --------- between ASSOCIATED HYGIENIC PRODUCTS LLC, a limited liability company duly organized under the laws of the State of Wyoming ("Borrower"), and SOUTHTRUST -------- BANK, N.A., successor by merger to SOUTHTRUST BANK OF GEORGIA, N.A., a national banking association with offices in Atlanta, Georgia ("Lender"). ------ WITNESSETH: ---------- WHEREAS, Borrower and Lender are parties to a certain Loan and Security Agreement, dated as of December 16, 1996 (as mended to date, the "Loan ---- Agreement"; capitalized terms used herein and not defined herein have the - - --------- meanings assigned to them in the Loan Agreement); and WHEREAS, certain Events of Default, as set forth on Schedule I hereto, ---------- have occurred and are continuing under the Loan Agreement (collectively, the "Existing Events of Default"); and - - --------------------------- WHEREAS, Borrower has requested that Lender waive the Existing Events of Default and, subject to the terms and conditions set forth herein, Lender is willing to do so; and WHEREAS, Borrower has requested that Lender amend the financial covenants set forth in Sections 8.18, 8.19 and 8.20 of the Loan Agreement and, subject to the terms and conditions set forth herein, Lender is willing to do so; and WHEREAS, Borrower and Lender wish to amend the Loan Agreement in certain other respects, as hereinafter set forth; and WHEREAS, in order to give effect to the foregoing, Borrower and Lender wish to enter into this Amendment; NOW, THEREFORE, for and in consideration of the sum of $10.00, the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Waiver of Existing Events of Default. Effective upon satisfaction of ------------------------------------ each of the conditions precedent set forth in Section 3 hereof, Lender hereby waives the Existing Events of Default; provided, however, that such waiver is --------- ------- expressly limited to the Existing Events of Default and shall not be, or be deemed to be, a waiver of any other Events of Default or Default Conditions presently or hereafter existing, including, without limitation any Events of Default or Default Conditions occurring as a result of any further violations by Borrower of the provisions of the Loan Agreement specified on Schedule I hereto. ---------- 2. Amendments. Effective upon satisfaction of the conditions precedent ---------- set forth in Section 3 hereof, the Loan Agreement is hereby amended in the following manner: (a) Amendment to Definition of Fixed Charge Coverage Ratio. The definition ------------------------------------------------------ of "Fixed Charge Coverage Ratio" set forth in Section 1.1 of the Loan Agreement is hereby deleted in its entirety and the following revised definition of "Fixed Charge Coverage Ratio" is hereby substituted in lieu thereof: "Fixed Charge Coverage Ratio" shall mean, for any fiscal period, the --------------------------- ratio which (a) the sum of the net income plus management fees and royalties paid plus depreciation and amortization expense plus Interest Expense for AHP Holdings and its consolidated Subsidiaries for such period, bears to (b) the sum of Interest Expense plus the current maturities of long-term debt for AHP Holdings and its consolidated Subsidiaries for the sine such period, all as determined under GAAP. (b) Amendment to Section 2.2 of the Loan Agreement. Section 2.2 of the ---------------------------------------------- Loan Agreement is hereby amended by deleting the date "December 1, 1999" in paragraph (c) thereof and substituting in lieu thereof the date "January 31, 2000". (c) Amendment to Section 8.5 of the Loan Agreement. Section 8.5 of the ---------------------------------------------- Loan Agreement is hereby deleted in its entirety and the following revised Section 8.5 is hereby substituted in lieu thereof: 8.5 Periodic Financial Statements of Borrower, AHP Holdings and ----------------------------------------------------------- Parent. Borrower shall, as soon as practicable, and in any event within ------ thirty (30) days after the end of each calendar month, furnish to Lender unaudited financial statements of Borrower, AHP Holdings and Parent (the latter two on a consolidated basis), including a balance sheet, a cash flow statement and an income statement, for the month then ended, the fiscal quarter then ended (if applicable), and the Fiscal Year to date, certified as to truth and accuracy by Borrower's chief executive officer or chief financial officer. (c) Amendment to Section 8.18 of the Loan Agreement. Section 8.18 of the ----------------------------------------------- Loan Agreement is hereby deleted in its entirety and the following revised Section 8.18 is hereby substituted in lieu thereof: 8.18 Tangible Net Worth. ------------------- Tangible Net Worth shall be at least equal to Thirteen Million Five Hundred Thousand Dollars ($13,500,000) at all times. -2- (d) Amendment to Section 8.19 of the Loan Agreement. Section 8.19 of the ----------------------------------------------- Loan Agreement is hereby deleted in its entirety and the following revised Section 8.19 is hereby substituted in lieu thereof: 8.19 Net Income. ----------- The net income for AHP Holdings and its consolidated Subsidiaries, determined in accordance with GAAP, for each fiscal quarter set forth below shall be at least the amount set forth opposite such fiscal quarter: Fiscal Quarter Net Income -------------- ---------- Fiscal Quarter ending March 31, 1999 $0 Fiscal Quarter ending June 30, 1999 $25,000 Fiscal Quarter ending September 30, 1999 $25,000 Fiscal Quarter ending December 31, 1999 $50,000 (e) Amendment to Section 8.20 of the Loan Agreement. Section 8.20 of the ----------------------------------------------- Loan Agreement is hereby deleted in its entirety and the following revised Section 8.20 is hereby substituted in lieu thereof: 8.20 Fixed Charge Coverage Ratio. --------------------------- The Fixed Charge Coverage Ratio of AHP Holdings and its consolidated Subsidiaries as of the end of each fiscal quarter in each fiscal year shall be at least 1.00:1.00, as determined under GAAP. (f) Amendment to Section 8.23 of the Loan Agreement. Section 8.23 of the ----------------------------------------------- Loan Agreement (which was added thereto pursuant to the First Amendment to Loan and Security Agreement dated as of August 19, 1997) is hereby deleted in its entirety and the following revised Section 8.23 is hereby substituted in lieu thereof: 8.23 Balances Collateral. -------------------- (a) Heretofore Borrower has, and Borrower shall continue to, cause all cash, checks, drafts, items and other instruments for the payment of money which it now has or -3- may at any time hereafter receive as proceeds of Collateral or otherwise to be deposited with Lender in such controlled account maintained with Lender as Lender shall designate (the "Controlled Account"). ------------------ (b) All of such cash, checks, drafts, items and other instruments of payment shall constitute Balances Collateral hereunder in which Borrower hereby grants and re-grants to Lender a security interest as security for the Obligations and as to which Lender shall have all rights of a secured party arising under this Agreement, the other Loan Documents and applicable law. (c) Borrower shall cause the amount of the Balances Collateral maintained in the Controlled Account to at all times equal or exceed the sum of Six Million Dollars ($6,000,000) (the "Minimum Balances ---------------- Collateral"). So long as Borrower is in compliance with such requirement ---------- and so long as no Default Condition or Event of Default has otherwise occurred and is continuing, in the ordinary course of business, Borrower shall have the right to withdraw from the Controlled Account Balances Collateral in excess of the Minimum Balances Collateral for use in its business. (d) At Borrower's request from time to time, Lender shall permit Borrower to invest the Balances Collateral maintained in the Controlled Account in certificates of deposit and other investment products offered by Lender and its affiliate, SouthTrust Securities, Inc. which are acceptable to Lender for such purpose, so long as Borrower takes all actions requested by Lender such that Lender will continue to have a first priority perfected security interest in such Balances Collateral following such investment. (e) Addition of new Section 8.24 to the Loan Agreement. The Loan -------------------------------------------------- Agreement is hereby further amended by adding, immediately after Section 8.23 thereof, a new Section 8.24 thereof, to read as follows: 8.24 Consultant. ---------- On or prior to January 30, 1999, at its expense Borrower shall hire a business consultant selected by Borrower, but acceptable to Lender, to provide to Lender and Borrower a detailed evaluation of the businesses of Borrower and Associated Hygienic Products, Inc. and their respective projections and business plans. Borrower shall cause such consultants to deliver their report to Borrower and Lender on or prior to March 31, 1999. 3. Conditions Precedent. The waivers set forth in Section 1 hereof and -------------------- the amendments set forth in Section 2 hereof shall not become effective unless and until (a) Borrower shall have delivered to Lender a schedule of its and its affiliates' patents and trademarks, (b) Brandon SL Wang shall have paid to Lender the sum of $4,000,000 as a mandatory prepayment of the "Term Loan" (as defined in the Wang Loan Agreement) pursuant to Section 2.4(b) of the Wang Loan Agreement, for application to the unpaid principal installments of such Term Loan in the inverse order of their -4- respective maturities (which amount Lender has agreed to accept from Mr. Wang in lieu of the sum of $6,807,993.75 previously demanded by Lender in accordance with such Section 2.4(b)), and (c) Mr. Wang and Lender shall have entered into an amendment to the Wang Loan Agreement relative to the "Events of Default" (as defined therein) existing thereunder in form and substance satisfactory to Lender. 4. Binding Effect. Except to the extent set forth expressly hereinabove to -------------- the contrary, Borrower acknowledges and agrees that all terms and provisions, covenants and conditions of the Loan Agreement and all documents executed in connection therewith shall be and remain in full force and effect and constitute the legal, valid, binding and enforceable obligations of Borrower to Lender in accordance with their respective terms as of the date hereof. To the extent of any conflict between any provision of this Amendment and any provision of the Loan Agreement or any other Loan Document, any such conflicting provision shall be deemed to be amended in a manner consistent with this Amendment. 5. Representations. In order to induce Lender to enter into this --------------- Amendment, after giving effect thereto, Borrower hereby restates and renews each and every representation and Warranty heretofore made by it under or pursuant to the Loan Agreement, and represents and warrants further to Lender that it has taken all necessary and appropriate company action to authorize the execution, delivery and performance hereof and of any other document, instrument or agreement executed and/or delivered in connection herewith and the same will not violate the Organizational Documents or any document, instrument or agreement to which Borrower is a party or any provision of law applicable to Borrower. 6. Further Assurances. Borrower agrees to take such further actions as ------------------ Lender shall reasonably request in connection herewith to evidence the amendments herein contained to the Loan Agreement. 7. No Default. Further to induce Lender to enter into this Amendment, ---------- Borrower hereby certifies to Lender that, upon execution of this Amendment, there exists (i) after giving effect to this Amendment, no Default Condition or Event of Default under the Loan Agreement and (ii) no right of offset, defense, counterclaim, claim or objection in favor of Borrower as against Lender arising out of or with respect to any of the Obligations. 8. Release. Effective as of the date of execution of this Amendment, ------- Borrower releases and forever waives and relinquishes all claims, demands, obligations, liabilities and causes of action of whatsoever kind or nature, whether known or unknown, which it has, may have, or might have or assert now or in the future against Lender and its directors, officers, employees, attorneys, agents, successors, predecessors and assigns and any Affiliates of Lender and their directors, officers, employees, attorneys, agents, successors, predecessors and assigns, directly or indirectly, arising out of, based upon, or in any manner connected with any transaction, event, circumstance, action, failure to act, or occurrence of any sort or type, relative to the Loan Agreement, whether known or -5- unknown, which occurred, existed, was taken, permitted, or begun before the execution of this Amendment. 9. Governing Law. This Amendment shall be governed by and construed in ------------- accordance with the laws of the State of Georgia. IN WITNESS WHEREOF, Borrower and Lender have executed this Amendment, through their duly authorized officers, under their hands and seals, effective as of the date and year first above written. "BORROWER" ASSOCIATED HYGIENIC (SEAL) PRODUCTS LLC, a Limited Liability Company By: /s/ PETER CHANG -------------------------------------------- Name: Peter Chang Title: President Attest: /s/ PHILIP LEUNG ------------------------------------ Name: Philip Leung Title: Secretary "LENDER" SOUTHTRUST BANK, N.A. (SEAL) By: /s/ ROBERT E. MILAM SR. -------------------------------------------- Name: Robert E. Milam Sr. ------------------------------------- Title: Vice President ------------------------------------- -6- REAFFIRMATION OF GUARANTY ------------------------- The undersigned, each a guarantor of the "Obligations" of "Borrower" to "Lender", as such terms are defined in the "Loan Agreement" referenced in the within and foregoing Third Amendment to Loan and Security Agreement ("Third ----- Amendment"), pursuant to a certain Guaranty dated December 16, 1996 - - --------- ("Guaranty"), hereby acknowledges its receipt of a copy of the Third Amendment -------- and agrees that its Guaranty shall continue in full force and effect from and after the execution and delivery thereof. Dated: January 29, 1999 AHP HOLDINGS, L.P. By: ELMBAY LIMITED, an English corporation, as General Partner By: /s/ PETER CHANG --------------------------------- Peter Chang Principal Executive Officer DSG INTERNATIONAL LIMITED By: /s/ PETER CHANG --------------------------------- Peter Chang Vice President -7- SCHEDULE I ---------- Existing Events of Default -------------------------- Events of Default have occurred and are continuing under the Loan Agreement as a result of (a) the failure of AHP Holdings to maintain Tangible Net Worth of at least $16,000,000 as required pursuant to Section 8.18 of the Loan Agreement, (b) the failure of AHP Holdings and its consolidated Subsidiaries to achieve annual net income of at least $100,000 for their fiscal quarters ending June 30, 1998, September 30, 1998 and December 31, 1998 as required pursuant to Section 8.19 of the Loan Agreement, (c) the failure of AHP Holdings and its consolidated Subsidiaries to achieve a Fixed Charge Coverage Ratio of at least 1.25:1.00 for their fiscal quarters ending June 30, 1998, September 30, 1998 and December 31, 1998 as required pursuant to Section 8.20 of the Loan Agreement, (d) the transfer by Borrower of certain of its equipment constituting part of the Collateral of Lender from its former plant location in Bell, California to a location of Associated Hygienic Products, Inc. in Wisconsin, in violation of the provisions of Sections 6.5 and 9.9 of the Loan Agreement (although Borrower disputes that this Event of Default occurred), (e) the failure of Borrower to hold cash or cash equivalents at all times in the minimum mount of Eleven Million Dollars ($11,000,000), as required pursuant to Section 8.23 of the Loan Agreement, and (f) violations of Sections 9.6, 9.9 and 9.12 of the Loan Agreement resulting from the making by Borrower of certain advances (as reflected in Borrower's books and records) to Associated Hygienic Products, Inc. An Event of Default has also occurred pursuant to Section 10.16 of the Loan Agreement as a result of the occurrence and continuance of an "Event of Default" under Section 5.1 of the Wang Loan Agreement resulting from the failure of Mr. Wang to comply with the requirements of Section 4.2(b) of the Wang Loan Agreement. Subject to the terms and conditions set forth therein, such Event of Default is being separately waived by Lender pursuant to a First Amendment to Loan Agreement dated of even date between Lender and Mr. Wang. -8- EX-3.3 4 LAND TITLE DEED, DATED 10/24/97 EXHIBIT 3.3 ----------- DAFTAR ISIAN 205 BADAN PERTANAHAN NASIONAL To: Suandi [SEAL] BUKU TANAH HAK GUNA BANGUNAN No. 16 ------------- ---- [SEAL] PROPINSI JAWA BARAT -------------------------------------------- KABUPATEN/KOTAMADYA SERANG -------------------------------------------- KECAMATAN CIKANDE -------------------------------------------- DESA/KELURAILAN LEUWI LIMUS -------------------------------------------- KANTOR PERTANAHAN DAFTAR ISIAN 208 KABUPATEN/KOTAMADYA No. 4276 1997 ------- -- SERANG DAFTAR ISIAN 307 - - ------------------- No. 6203 1997 ------- -- AK. 791490 1 0 - 0 1 - 0 9 - 0 2 - 3 - 0 0 0 1 6 PENDAFTARAN-PERTAMA Halaman 2 - - -------------------------------------------------------------------------------- a) HAK : Guna Bangunan. f) NAMA PEMEGANG HAK No. 16 PT. DSG. SURYA MAS INDONESIA ---------------------------- Desa : Leuwi Limus. BERKEDUDUKAN DI JAKARTA. ________________________ b) NAMA JALAN/PERSIL - - -------------------------------------------------------------------------------- c) ASAL PERSIL g) PEMBUKUAN 1. Konversi Serang Tgl. 24-10-1997 -------------- ---------- 2. Pemberian hak Kepala Kantor Pertanahan Guna Bangunan. Kabupalen/Kotamadya Serang 3. Pemisahan ------------------------ 4. Penggabungan ttd. Drs. H.M. HASJIM HUSEIN ----------------------- NIP 010 053 449 - - -------------------------------------------------------------------------------- d) SURAT KEPUTUSAN h) PENERBITAN SERTIPIKAT Serang Tgl. 24-10-1997 Kepala Kantor Pertanahan -------------- ---------- Kabupaten Serang Kepala Kantor Pertanahan Nomor : 550.2-95-8K-1997 Kabupaten/Kotamadya tanggai 13 Oktober 1997. Serang ------------------- Liang pemasukan/biaya administrasi Rp. 150.000,- [SEAL] Lamanya hak berlaku 30 Tahun. Drs. H.H. HASJIM HUSEIN Berakhirnya hak ----------------------- Tgl. 24 September 2027. NIP 010 053 449 - - -------------------------------------------------------------------------------- e) SURAT UKUR i) PENUNJUK -------------- GAMBAR SITUASI Bekas Hak Milik No: 569, 526, 560, 572, 567, 558, 525, 151, 521, 564, Tgl. 24-10-1997 565, 530, 528, 522, 519, 520, 527, 529, 523, 531, 524. dan 552. No. 4744/1997 Desa Leuwi Limus. Loas : 40.000 M/2/ (Empat puluh ribu meter persegi). - - -------------------------------------------------------------------------------- DAFTAR ISIAN 207 3 1 0 - 0 1 - 0 9 - 0 2 - 3 - 0 0 0 1 6 Nomor hak : B16 --- SURAT UKUR -------------- GAMBAR SITUASI Nomor : 4744/1997 ---- -- SEBIDANG TANAH TERLETAK DALAM Propinsi : JAWA BARAT --------------------------------------------------------------------- Kabupaten/Kotamadya : SERANG ---------------------------------------------------------- Kecamatan : CIKANDE -------------------------------------------------------------------- Desa/Kelurchan : LEUWI LIMUS --------------------------------------------------------------- Feta : ------------------------------------------------------------------------- Lembar : Kotak : Nomor Pendaftaran : ------------- -------------- -------------- - - -------------------------------------------------------------------------------- Keadaan Tanab : Beberapa tanab darat kosong. ---------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- Tanda-tanda batas : Patok beton I s/d IV yang berdiri diatas batas dan telab ------------------------------------------------------------ memenuhi ketentuan dalam PMA No. 8/1961. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- Luas : 40.000 M/2/ (Empat puluh ribu meter persegi). ------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- Penunjukan dan penetapan batas : Batas-batas ditunjukkan oleb Iwan setiawan, ----------------------------------------------- untuk dan atas pemohon. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- PERBANDINGAN 1 : 1.000 4 ----- [MAP] 5 Hai lain-lain : Gs. lain Bekas Hak Milik No. 569, 526, 560, 572, 567, 558, 151, ---------------------------------------------------------------- 521, 564, 565, 530, 528, 522, 519, 520, 527, 529, 523, - - -------------------------------------------------------------------------------- 531, 524. dan 562. Desa Leuwi Limus - - -------------------------------------------------------------------------------- Daftar Isian 302 tgl. 22-10-1997 No. 2086 ------------------ ---------------------------------- Daftar Isian 307 tgl. 24-10-1997 No. 6204 ------------------ ---------------------------------- UNTUK SERTIPIKAT Serang Tgl. 24-10-1997 ----------------- ------ -- Serang Tgl. 24-10-1997 Kepala Sekai Pengukuran dan Pendaftaran Tanab - - ------------ ------ --- Kepala Kanton Pertanahan Kantor Pertanahan Kabupaten/Kotamadya Kabupaten/Kotamadya [SEAL] Serang Serang - - ------------------------------ ------------------------------- ttd Drs. H.M. HASJIM HUSEIN Dr. H. FIRMANSYAH - - ------------------------------ ------------------------------- NIP 010 053 449 NIP 010 153 327 Permisahan ------------ Lihat surat ukur Penggabungan Nomor : /19 Nomor hak : -------------- ------------ ------- -- ------ gambar situasi Pengganti - - -------------------------------------------------------------------------------- Dikeluarkan surat ukur/gambar situasi - - --------------------------------------- Luas Nomor Sisa Iuas Tanggal Nomor hak - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- Sisanya diuraikan dalam surat ukur Nomor : /19 Nomor hak -------------- ------- -- ------- gambar situasi FIRST REGISTRATION a) Building Title Right No. 16 Village: Leuwi Limus b) Name of street/lot: c) Original lot: 2. Building Title Right d) Decree letter Chief of Land Authority Region: Serang Number: 550 2-95-SK-1997 Date: 13 October 1997 Administration fee: Rp 150,000 Validity of Title Right: 30 years Title Right ended: 24 September 2027 e) Location Date: 24 October 1997 No.: 4744/1997 Area: 40,000 M2 f) Land Title Holder: PT DSG Surya Mas Indonesia g) Registered: 24 October 1997 h) Issuance of Certificate: Serang, 24 October 1997 i) Reference: Ex Title Right No. ATTN.: MR. TERENCE LEUNG FROM : PAULA - PT SURYAMAS MENTARI DATE : AUG. 3, 1999 RE : LAND TITLE DEED TRANSLATION. LOCATION A LOT WHICH IS LOCATED: Province: West Java Region: Serang Subdistrict: Cikande Village: Leuwi Limus Land condition: Some empty lots Boundary: Concrete wall boundary and has fulfilled the requirement of Foreign Investment Board Regulation No. 8/1961. Area: 40,000 M2 Boundary arrangement and indicator: Boundaries appointed by Iwan Satiawan, on behalf of the Applicant. Page - 5 Others: Ex right title No. List No. 302 dated 22 October 1997 List No. 307 dated 24 October 1997 EX-3.4 5 SALES AND PURCHASE AGREEMENT DATED 12/14/98 EXHIBIT 3.4 GOODS AND SERVICES TAX DECLARATION AND INDEMNITY TO: ASSOCIATED HYGIENIC PRODUCTS INC. AND TO: MILLAR, ALEXANDER Its Solicitors herein RE: ST. ANDREWS PROPERTY INVESTMENT INC. PURCHASE FROM ASSOCIATED HYGIENIC PRODUCTS INC. 1185 COLBORNE STREET EAST, BRANTFORD, ONTARIO BEING PART LOT 27, RANGE 1, SOUTH OF HAMILTON ROAD, TOWNSHIP OF BRANTFORD, COUNTY OF BRANT (THE "PROPERTY") - - -------------------------------------------------------------------------------- THE PURCHASER HEREBY certifies and agrees that: 1. The Purchaser is registered under Subdivision d of Division V of Part IX of the Excise Tax Act ("ETA") for the collection and remittance of the Goods and Services Tax ("GST") and its registration number is: 880 496 229 RT. 2. The Purchaser will remit directly to the Receiver General of Canada the GST payable and file the prescribed Form GST 60 pursuant to subsection 228 (4) of the ETA in connection with the sale and conveyance of the property. 3. The property transferred pursuant to the agreement: (a) is being purchased by the Purchaser as principal for its own account and is not being purchased by the Purchaser as an agent, trustee, or otherwise on behalf of or for another person; and (b) does not constitute a supply of a residential complex made to an individual for the purposes of paragraph 221 (2)(b) of the ETA, and 4. The purchaser shall indemnify and save harmless the Vendor from any GST, penalty, interest or other amounts which may be payable by or assessed against the Vendor under the ETA as a result of, or in connection with, the Vendor's failure to collect and remit any GST applicable on the sale and conveyance of the property by the Vendor. DATED at Hamilton, Ontario this 14th day of DECEMBER 1998. ST. ANDREWS PROPERTY INVESTMENT INC. Per: /s/ Brian Pendergast ----------------------------------- Name: BRIAN PENDERGAST Office Held: PRESIDENT I have authority to bind the Corporation EX-11 6 COMPUTATION OF NET INCOME PER ORDINARY SHARE EXHIBIT 11 COMPUTATION OF NET INCOME PER ORDINARY SHARE
Year ended December 31, 1998 1997 1996 ---- ---- ---- (in thousands except per share amounts) Number of ordinary shares Ordinary shares outstanding, beginning of year 6,675 7,712 7,922 Ordinary shares repurchased - 5 240 Ordinary shares tendered - (1) 1,004 Ordinary shares cancelled - 1,034 603 ===== ===== ===== Weighted average shares outstanding during the year 6,675 6,674 7,747 ===== ===== ====== Net income $1,622 $ 974 $9,166 ====== ===== ====== Earnings per share $0.24 $0.15 $ 1.18 ====== ===== ======
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