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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to ______
COMMISSION FILE NUMBER 33-45136
DSG INTERNATIONAL LIMITED
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(Exact name of Registrant as specified in its charter)
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(Translation of Registrant's name into English)
BRITISH VIRGIN ISLANDS
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(Jurisdiction of incorporation or organization)
17/F WATSON CENTRE, 16-22 KUNG YIP STREET, KWAI CHUNG
HONG KONG
TEL. NO. 852-2427-6951
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each Name of each exchange
Class on which registered
NONE
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Securities registered or to be registered pursuant to Section 12(g) of the Act.
ORDINARY SHARES, PAR VALUE
$0.01 PER SHARE ("ORDINARY SHARES")
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(Title of Class)
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NONE
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
ORDINARY SHARES 6,674,606
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [_] No
Indicate by check mark which financial statement item the registrant has
elected to follow.
[_] Item 17 [X] Item 18
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[_] Yes [_] No
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ITEM 1. DESCRIPTION OF BUSINESS.
A. THE COMPANY
The Company was founded in Hong Kong in 1973, and was the first
manufacturer of disposable baby diapers in Hong Kong and one of the first
companies to offer disposable baby diapers to Hong Kong consumers. The Company
also exports its products from Hong Kong to other countries in Asia, including
China, Singapore, Thailand, Malaysia and Indonesia.
In 1984, the Company established a manufacturing facility in California
through a joint venture with a large French disposable diaper manufacturer, and
later that year acquired full ownership of that facility.
In 1987, the Company acquired the U.S. assets of a major private label
disposable baby diaper manufacturer which was in bankruptcy, and was thus able
to establish a second manufacturing facility at Norcross, Georgia to serve the
central, southeastern and northeastern United States. As a result, the Company
was able to move its "FITTI(R)" brand into U.S. national distribution.
In 1988, the Company acquired all the assets of an unprofitable private
label manufacturer of disposable baby diaper manufacturer in Australia. Also in
1988, the Company acquired the assets, including brand names, of the
unprofitable disposable baby diaper manufacturing division of a major U.K.
consumer products company.
In September 1991, the Company opened a new manufacturing facility in
Singapore to relieve capacity constraints at its Hong Kong facility and to
better service South East Asian markets.
On March 6, 1992, the Company commenced the initial public offering in the
United States of its Ordinary Shares.
In July 1993, the Company acquired all the assets of a private label
disposable baby diaper and feminine napkin manufacturing division of a Swiss
company. In September 1993, the Company acquired an unprofitable private label
disposable baby diaper and feminine napkin manufacturing company in Canada. At
the end of December 1993, the Company further acquired an unprofitable branded
product disposable baby diaper manufacturer in the United Kingdom. The Company
moved its manufacturing plant in Norcross, Georgia to Duluth, Georgia, where the
Company further expanded its production capacity in the U.S.
In May 1994, the Company formed a joint venture company with its former
distributor in Thailand to acquire the entire capital of the distributor's
company and to build a plant in Bangkok, Thailand to manufacture baby diapers
and adult incontinence products. The Company owned an 80% interest in the joint
venture company. In August 1994, the Company acquired the entire capital of a
manufacturer of adult incontinence products in Switzerland. In November 1994,
the Company opened its new plant in Zhongshan, Guangdong in the People's
Republic of China.
In April 1995, the Company's management group, led by the Chairman, Brandon
Wang, and two other equity investors proposed a going private transaction to
which the holders of all the outstanding shares of the Company held by the
public would receive $19 per share. On May 26, 1995, after a review by a
Special Committee of independent directors appointed to consider and advise on
the proposal. The Board of Directors approved the going private transaction at
a price of $19.25 per share and authorized the Company to enter into a merger
agreement with corporations that had been formed by the management group. On
July 7, 1995 the merger agreement that had been entered into as of May 26, 1995
to effect the going private transaction was terminated because there was no
reasonable possibility that certain conditions of the merger agreement could be
satisfied within the time period stipulated in the agreement as there was no
reasonable prospect that financing would be available on satisfactory terms
within such time period.
1
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In September 1995, the Company opened its new plant in Bangkok, Thailand.
In October 1995, the Company established a wholly owned subsidiary in Malaysia
to assist with the marketing and distribution of the Company's products in
Malaysia.
In November 1996, the Company invited its public shareholders to tender
their shares to the Company at prices not greater than $14.50 or less than
$12.75 per share. The tender offer closed on December 13, 1996 and the Company
purchased 1,003,641 shares from the public shareholders at a price of $14.50 per
share.
In April 1997, the Company acquired the entire share capital of an adult
incontinence and disposable baby diaper manufacturer in Wisconsin, United
States, and the manufacturing assets of a company in the Netherlands and its
related distribution company in Belgium.
In June 1997, the Company entered a joint venture agreement with an
Indonesian distributor to establish a manufacturing facility in Jakarta,
Indonesia to manufacture disposable baby diapers. The Company owns a 60%
interest in the joint venture company.
During 1997, the Company closed its manufacturing operations in Canada,
California and Singapore.
DSG International Limited is incorporated in the British Virgin Islands and
has its principal executive office at 17/F Watson Center, 16-22 Kung Yip Street,
Kwai Chung, Hong Kong. Its telephone number is (852) 2427-6951.
B. BUSINESS
1. General
The Company manufactures and markets disposable baby diapers, training
pants and adult incontinence products primarily under its own brand names, which
include "FITTI(R)", "PET PET(R)", "COSIES(R)", "COSIFITS(R)", "BABY LOVE(R)",
"TOGS(R)", "CARES(R)", "VLESI(R)", "DISPO 123(TM)", "CERTAINTY(R)" and
"HANDY(TM)". The Company also manufactures and markets disposable baby diapers,
adult incontinence, training pants and feminine napkins products under private
labels. The Company's products are sold internationally, with its twelve
manufacturing facilities being in Hong Kong, the United States, Australia, the
United Kingdom, Singapore, Switzerland, Canada, the People's Republic of China
("PRC") and Thailand. The Company's manufacturing operations in Singapore and
California were closed in December 1997 and the operation in Canada was closed
in March 1998.
The Company's operation in the United States, the Company's largest
operation, in association with the Company's operation in Wisconsin,
manufactures and distributes branded and private label disposable baby diapers,
adult incontinence, feminine napkins and training pants products for the North
American market. With sales in 48 states, the Company's "FITTI(R)" brand is one
of the best selling brands of disposable baby diapers in the United States
(excluding retailers' private labels). The Company estimated that its
"FITTI(R)" brand has approximately 3% market share on a volume basis in the food
and grocery store sector.
In Australia, where the Company is one of the leading disposable baby
diaper manufacturers, it estimates that it has an overall unit volume market
share of approximately 22%, placing it second in that market. The Australian
market is divided into three major retail sectors, which are grocery, pharmacy
and variety. The Company is currently supplying brands of both premium and
economy quality to all three market sectors. The Company also markets
disposable baby diapers under retail chain private labels, which accounted for
approximately 16% of its Australian sales in 1997. The Company introduced the
"VLESI(R)" range of adult incontinence products into the Australian market in
mid 1996, targeting the institutional sector of the market. This new product
range showed substantial growth during 1997.
2
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The Company estimates that its share of the disposable baby diaper market
in Hong Kong was around 20%, placing it second in the market. In most of the
South East Asia countries, the Company's leading brands, "FITTI(R)" and "PET
PET(R)", are well established. The Company's unit sales in the PRC, Thailand,
Malaysia and Indonesia grew steadily in 1997 and the Company believes that it
will continue to expand sales in those countries with the accelerating rate of
conversion of use of disposable baby diapers. The Company commenced
manufacturing and distribution of adult incontinence products through its
operation in Thailand in 1995 and launched its "DISPO 123(TM)" brand in the same
year and its "HANDY(TM)" brand in 1997. The Company entered into a joint
venture in Indonesia to build a plant to manufacture disposable baby diapers, it
is estimated that the plant will commence operation in the fourth quarter of
1998. The sales of adult incontinence products increased steadily over the
years and the Company's brands are well established both in the retail and
institutional sectors in the markets of the Asia Pacific region. Although the
Company encountered the unprecedented financial turmoil in the region in the
second half of the year 1997, the Company remains optimistic about the market
growth potential in Asian Pacific region.
In the United Kingdom, the Company continues to emphasize its branded
products as the Company has seen vigorous consolidation of private label
manufacturers in the United Kingdom. On a selective basis, the Company also
manufactures private label disposable diapers which provide the Company with
reasonable profit margin. In Switzerland, the Company's operation near Zurich
manufactures primarily private label disposable baby diapers and feminine
napkins for a major retail group, which has over a 50% share of the retail trade
in Switzerland. The Company also manufactures and distributes its "FITTI(R)"
brand products for Switzerland and other European markets but the expected
growth is limited by other nationally advertised brands. The Company's
operation in the Eastern region of Switzerland manufactures and distributes its
branded "VLESI(R)" and other private label adult incontinence products for the
domestic market in Switzerland and for other European markets. The Company
stepped up its position in adult incontinence market in Europe by acquisition of
a Belgium adult incontinence distribution company in 1997 and the Company
believes that by focussing in adult incontinence market, it will create further
inroads in the continental Europe market.
The Company's marketing strategy is to provide retailers and wholesalers
with a quality, value-oriented product which offers good profit margins,
combined with a high level of service, rather than attempting to mass market its
products in competition with the industry leaders. The Company believes that
its attention to raw material costs and manufacturing efficiency, combined with
careful control of advertising and promotional costs, enables it to produce and
market value-oriented products at competitive prices. The Company targets niche
markets, including selected geographical areas, customer categories, pricing
categories and distribution channels. Consistent with this overall strategy,
each of the Company's geographic operations has a high degree of autonomy to
determine its own brand and product specifications and sales and marketing
policies. In those countries where the Company manufactures for private label
customers, the Company utilizes its expertise gained in marketing its own brands
to work together with the private label customer to develop suitable products
and packaging for the targeted markets.
The Company's growth strategy is to target its branded products at selected
sectors of mature markets, such as the United States and Western Europe, and to
take a broader marketing approach in less developed markets where there is a
high rate of growth in disposable diaper usage. The Company believes that its
manufacturing facilities in Asia and Australia will enable it to participate in
the expected growth of those markets. In the past, the Company has expanded its
business into new markets by acquiring the assets of unprofitable disposable
baby diapers, feminine napkins manufacturers and more recently by acquiring
adult incontinence manufacturers in the United States, Australia, the United
Kingdom, Canada and Switzerland. The Company will expand through acquisitions
when opportunities arise and establish its own manufacturing facilities in
emerging markets which offer significant potential, such as the Company's
facilities in the PRC and Thailand which were opened in 1994 and 1995,
respectively, together with the upcoming facility in Indonesia commencing in
1998.
3
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The Company's principal raw materials are fluff wood pulp and super
absorbent polymer. Other raw materials include polyethylene backsheets,
polypropylene non-woven liners, adhesive tapes, hot melt adhesive, elastic and
tissue. The cost of materials increased moderately in 1997 and also in 1998.
Raw materials account for about three-quarters of the cost of goods sold.
Disposable diapers are designed and marketed with two basic objectives in
mind: to afford parents of infants up to two and one-half years of age the
convenience of diapers which are disposed of after one use; and to reduce the
risk of chapping ("diaper rash") which often occurs when moisture from a soiled
diaper remains in contact with the baby's skin. The basic concept of most
disposable diapers on the market is the same: to allow moisture to pass through
a soft inner layer which is in contact with the baby's skin into a highly
absorbent inner core, from which the moisture is prevented from escaping by an
outer moisture-proof backsheet. There are significant differences in quality
among the various disposable diapers currently on the market. The most
important quality features of disposable diapers are their ability to absorb and
retain fluids, to prevent leakage through leg and waist openings by the use of
elasticized bands, and to be easily fitted and held in place by adhesive tapes
which secure the diaper firmly without causing discomfort to the baby. Broadly,
disposable diapers are divided into two types: thicker "regular" diapers which
use primarily fluff wood pulp as the absorption medium; and thinner "ultra"
diapers which use less fluff wood pulp and employ a super absorbent polymer in
the absorbent core. Other features, such as innovative fastenings, attractive
designs, extra-dry sub-layer, gender specific absorbent cores, stand-up leg
gathers, elastic waistband and packaging help to differentiate products from one
another.
The most important quality features of feminine napkins are their ability
to fit and their ultra ability of absorbing and retaining fluid. The Company's
feminine napkin manufacturing equipment is able to provide quality features and
to tailor customers' product specifications.
Adult incontinence products are designed for the convenience of males and
females having various degrees of incontinence. The basic concept of most adult
incontinence products is to prevent leakage of urine and faeces by absorbing the
moisture into a highly absorbent inner core and retaining the soiled contents
within an outer moisture proof backsheet. Similar to disposable diapers, the
most important quality features of adult incontinence products are their ability
to absorb and retain fluids, to prevent leakage through leg and waist openings
by the use of elasticized bands, and to be easily fitted and held in place by
adhesive tapes which secure firmly without causing discomfort to the user. The
absorption media for adult incontinence products are fluff wood pulp and super
absorbent polymer. Other features, such as wetness indicator, stand-up leg
gathers, elastic waistband, frontal tape closure system and packaging help to
differentiate products from one another.
The Company believes that there is significant potential for adult
incontinence products due to the aging populations of the industrialized and
developed countries. The Company has entered the adult incontinence market, and
has established and acquired manufacturing facilities in Thailand, Switzerland
and Wisconsin in the United States. The Company believes that with its three
strategically located manufacturing facilities, the Company is able to expand
its sales of adult incontinence products in the markets in North America, Europe
and Asia. The Company introduces adult incontinence products into its markets
in a manner consistent with its niche market strategy. The Company believes
that the key to successful marketing of this type of product is the high and
prompt level of service from the manufacturer and distributor, regular contact
with institutions to ensure proper usage of the products, and providing a range
of products of high quality and performance.
FORWARD-LOOKING STATEMENTS
The Company expects that the currency turmoil in the Asian region will
continue to affect the economic and financial environment of Asian countries in
1998. The intense price and promotional competition in North America will
continue in 1998. The market environment in Europe will continue to be
difficult. The manufacturing plant in Indonesia will commence operation in the
fourth quarter 1998. The Company is planning to increase its adult incontinence
products sales in the Australian, Asian and European markets.
4
<PAGE>
From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995). Words such as "anticipate", "estimate", "project" and
similar expressions are intended to identify such forward-looking statements.
Forward-looking statements may be made by management orally or in writing,
including, but not limited to, in press releases, as part of this Management's
Discussion and Analysis of Financial Condition and Results of Operations and as
part of other sections of this Annual Report on Form 20-F and the Company's
other filings with the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
Such forward-looking statements are subject to certain risks, uncertainties
and assumptions, including without limitation to those identified below. Should
one or more of these risks or uncertainties materialize, or should any of the
underlying assumptions prove incorrect, actual results of current and future
operations may vary materially from those anticipated, estimated or projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their respective dates.
RISK FACTORS
The Company's forward-looking statements are based on the Company's
assumptions regarding the economies and market conditions in the countries in
which it operates, and certain assumptions regarding the price of raw materials,
including fluff wood pulp and super absorbent polymer.
Among the factors that have a direct bearing on the Company's results of
operations and financial condition are leverage and debt service, competitive
industry, price changes by competitors, dependence on key products and
acceptance of product innovations, cost of certain raw materials, international
operations, currency fluctuations, currency devaluations, currency restrictions,
intellectual property risks, technological changes, covenant limitations and
other factors discussed herein.
If the Company's actual performance differs materially from its projections
which are based on assumptions regarding the economies and market conditions in
the countries in which it operates, the Company's actual results could vary
significantly from the performance projected in the forward-looking statements.
2. Geographic Segment Information
The following table sets forth the percentage of the Company's net sales
and operating income (loss) by geographic market.
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C> <C>
Net sales
North America............................................................. 39.4% 39.2% 45.3%
Australia................................................................. 20.4 20.2 18.0
Asia...................................................................... 24.7 25.6 19.5
Europe.................................................................... 15.5 15.0 17.2
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100.0% 100.0% 100.0%
====== ====== ======
Operating income (loss)
North America............................................................. (15.3)% 65.9% 106.8%
Australia................................................................. 165.6 32.6 25.3
Asia...................................................................... 173.3 42.7 34.4
Europe.................................................................... (72.2) 0.2 (24.5)
Corporate expenses........................................................ (151.4) (41.4) (42.0)
------ ----- ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
5
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a. NORTH AMERICA
i. Products
The Company manufactures and distributes disposable baby diapers,
disposable training and youth pants, adult incontinence products and feminine
protection products throughout North America under the brand names of "FITTI(R)"
and "CERTAINTY(R)", as well as a growing number of different private label
brands. The "FITTI(R)" baby diaper brand is a full-featured product, recognized
for its unique wetness indicator, a cute print that fades away when the diaper
becomes wet. The "FITTI(R)" brand name is also used with the Company's
disposable training pants and the new DRI-NITE JUNIOR youth pants. These pant
products feature cloth-like covers, tear-away side panels, and comfortable waist
and hip elastic. Another product in the "FITTI(R)" line-up is Insert Shields, a
product designed to be used as a diaper insert or a disposable pad for light
incontinence. The Company is the first to offer a Super Toddler or XXL size
baby diaper that is marketed under various private labels. The Procter & Gamble
Company has announced a Pampers product in the same size that it will begin
shipping in May 1998.
The Company has also launched economical "jumbo" pack diapers into the
marketplace under the "FITTI(R)" brand. These have been well accepted by
retailers and consumers alike, and initial gains in expanding distribution of
these products have been strong.
The Company continues to expand its private label diaper business
throughout North America with such customers like Walgreens Drug, Harris-Teeter,
A&P, Topco, Shurfine International, Hannaford Bros., Sav-A-Lot, Pathmark, Rite-
Aid and McLane (a division of Wal-Mart). The Company is one of two full line
manufacturers in the disposable private label baby products segment capable of
producing and marketing disposable baby diapers in all varieties as well as
training pants, youth pants and diaper inserts. This advantage will result in
expanded sales and increased distribution of the Company's products.
Consequently, the focus of the Company will be targeted primarily at private
label partnership opportunities in the months ahead.
The Company successfully launched its adult incontinence products in
late 1996. The Company's primary focus is once again the development of solid
private label supply partnerships with retailers such as Walgreens, Rite-Aid,
Pathmark, Target Stores and others. The Company's products are also available
under the "CERTAINTY(R)" brand name. Offered under this name are briefs,
feminine bladder control pads, and feminine control bladder guards. All of
these products provide the incontinent sufferer with product features and
performance the Company believes are superior to any other brands now available
in North America. In all cases, the Company is offering products with genuine
points of difference and exclusive benefits, features that have helped enhance
acceptance of these new programs. Other new products are on the horizon,
assuring the Company's position as the primary provider of value priced
"premium" products. The Company's adult incontinence product line represents an
ideal opportunity to expand sales and distribution in this fast growing
category, while enhancing margin opportunities relative to baby diapers.
ii. Sales and Marketing
Disposable baby diapers are believed to account for more than 90% of
the baby diaper changes in North America. The market can be divided into
several segments: brands that are advertised and sold nationally; brands that
are not widely advertised but are sold nationally; brands sold only in specific
regional areas; and baby diapers sold under the private labels of retailers.
The nationally advertised brands now account for roughly 75% of all sales. The
Company maintains a solid distribution base on its "FITTI(R)" brand, with new
retail customers coming on board in Canada, the United States and Puerto Rico.
Sales of "FITTI(R)" disposable training pants have seen an excellent steady
volume growth. The product was repositioned in 1996 with better features for
the consumer at no additional cost. The recent launch of new "FITTI(R)" DRI-
NITE JUNIOR youth pants has been a big success. Since the Company provides the
only value alternative for the consumer to Kimberly-Clark's Goodnites, steady
distribution and sales gains are continuing.
6
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The Company has consolidated its manufacturing and distribution
operations into two facilities to efficiently serve all North American markets.
Facilities are located in Oconto Falls, Wisconsin, and Duluth, Georgia. Sales
and marketing efforts are managed by a direct sales management team, which
utilizes a national network of independent, commissioned brokers to sell
directly to retailers and distributors/wholesalers. These brokers serve as the
Company's sales agents within defined territories to monitor sales, implement
company-sanctioned trade promotions and handle all retail merchandising
responsibilities for the complete line of the Company's products. The Company
remains committed to its marketing philosophy of direct account call
responsibility for all of its sales management personnel. This allows the
Company to provide a high degree of category expertise and education, while
remaining flexible and responsive to trade and also to market needs. In
addition, the strategic location of its North American manufacturing facilities
has enabled the Company to achieve average shipping transit time of one to two
days for most North American destinations.
Branded Products. Due to the continuing intense price and promotional
pressure, along with a declining birth rate in the North American market,
"FITTI(R)" continued to enjoy a significant share of the United States
disposable baby diaper market, despite the slight sales volume decline from 1996
levels. For the quarter ended December 31, 1997, "FITTI(R)"'s share was 2.3% of
the total units of disposable baby diapers and training pants sold in grocery
outlets within the United States. The grocery store sector represents
approximately 52% of the $4 billion United States retail market. In certain
markets, such as that of the New York metropolitan area, the nation's largest
market, the Company believes that "FITTI(R)" brand is much greater than
conventional market share data would indicate due to the high percentage of
"FITTI(R)" diapers sold through wholesale and inner city outlets that do not
report to typical market research organizations. In other markets, such as
those in Kansas and Oklahoma, the Company believes that the "FITTI(R)" market
share remains in excess of 10% of all units sold in grocery outlets. The
Company concentrates its efforts and marketing activities on providing
wholesalers and retailers with above average profit margins through the use of
packaging with greater shelf impact, creative and effective promotions combined
with very efficient distribution, electronic data interchange capability and a
high level of customer service. In the fall of 1997, the Company re-staged its
"FITTI(R)" diapers with a new lower price and greater consumer value. The
Company is confident the "FITTI(R)" brand has enhanced its philosophy of
offering the consumer "the best product for the price". The Company provides
consumers with affordable retail price points, unique product features and the
value-added combination of quality products at lower prices. The Company has
grown its business with a concentrated effort within the primary diaper selling
class of the trade : grocery. The Company enjoys good retail distribution of
its "FITTI(R)" brand and very good working relationships with major national and
regional grocery retailers such as Kroger, Pathmark, Shop Rite, A&P, Super Value
and Fleming. The Company continues to target the non-food class of trade as a
major area of opportunity for growth in the future. Current non-food retail
partners include Ames, Shopko, Kmart/Canada and Meijer. The Company continues
to benefit from its marketing "firsts", bringing greater consumer value to new
segments of the disposable baby product category. Among these firsts are
disposable youth pants under the "FITTI(R)" DRI-NITE JUNIOR name and a new Super
Toddler (XXL) size baby diaper, marketed under assorted private label banners.
The Company began its launch of adult incontinence products in 1996.
On the branded side, "CERTAINTY(R)" is the name under which the Company markets
its adult products. The focus of the Company is once again the private label
sector of adult incontinence, where sales are increasing at a dramatic rate, the
private label share of category sales is extremely high (25%+), and the Company
can offer retailers superior products to any of the national brands. Already,
the Company has new product entries in the development stage. The Company's
strategy is to provide products to the marketplace that are superior to other
available products and that are also more affordable than the advertised brands.
This product segment has also provided the Company with an excellent avenue of
distribution into the major drug retailers. The Company is currently selling
adult incontinence products to Walgreens, Rite-Aid, Thrifty-Payless and Longs
Drug Stores with many new programs and retail partners on the drawing board.
The drug store trade now represents more than 50% of the total $500 million in
adult incontinence retail sales in the United States. In addition, growth
potential for this category remains high as the population ages.
7
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Acquisition of Universal Converter, Inc. In the spring of 1997, the
Company acquired the assets and operations of Universal Converter, Inc. in
Oconto Falls, Wisconsin. This acquisition has greatly expanded production
capacity and product range in the adult incontinence segment. In addition, it
opened the door for expanded institutional sales which has happened over the
balance of 1997. Not only did this move secure the Company's position as the
primary supplier to one of the largest incontinent distributors to the
institutional market; it has opened doors with other important distributors.
Institution Volume and Activity. The institutional business provides
adult incontinence products to medical care facilities such as hospitals and
nursing homes. It is worth noting that the institutional market still
represents more than 60% of the total adult incontinence volume in North America
or more than $700 million in sales. This adult category represents an area of
significant sales and distribution growth for the Company, and significant gains
are expected in 1998 and beyond.
Private Label. As noted earlier, this segment of the Company's
business is the major area of potential growth. On the disposable baby diaper
side, new partnerships are underway with such major retailers as A&P stores,
Topco, Rich Foods and Save-A-Lot stores. Existing private label partnerships
with major retailers like Walgreens Drug, Shurfine International, Uniprix, Topco
and A&P continue to grow. The Company will look to the private label arena as a
major area of growth for all of its products categories, including disposable
baby diapers, training pants and adult incontinence products. The Company
recognizes that the private label segment of these businesses remains somewhat
more insulated than that of typical "value brands" from the aggressive
pricing/promotional strategies of the advertised brands, due to the "protective"
posture that major retailers tend to take when it comes to supporting their own
brands. The Company's timing is good in the baby diaper segment. The number of
manufacturers capable of supplying a full range of quality products (Ultra-thin
diapers, training pants, youth pants etc.) is less than it was several years
ago. The Company is also well positioned with its existing channels of
distribution for the Company's other branded and private label products. The
Company has a proven track record for product quality, category expertise and
customer service.
b. AUSTRALIA
i. Products
In Australia, the Company manufactures and markets disposable baby
diapers under four core proprietary brand names and a variety of retail chain
private labels. The Company's own brands accounted for over 77% of its
Australian sales for 1997. Two of these proprietary brands are targeted at the
grocery sector, while the other two are targeted at the pharmacy sector. The
two brands targeting the grocery sector are "BABY LOVE(R)", which is a value
priced, premium quality feature driven ultra diaper, while "LULLABY(R)", is an
economy price driven basic feature ultra diaper. The two brands in the pharmacy
sector are "COSIES(R)", which has a similar marketing strategy to "BABY LOVE(R)"
and "COSIFITS(R)", which has a similar marketing strategy to "LULLABY(R)". In
addition to its four core proprietary brands, the Company continues to hold a
leading position in the private label sector producing corporate brands for a
number of major grocery and variety sector retailers. The Company introduced
the "VLESI(R)" range of adult incontinence products into the Australian market
in mid 1996, primarily targeting the nursing home sector of the market. This
new product range showed substantial growth during 1997.
8
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ii. Sales and Marketing
The Australian retail market for disposable baby diapers has grown
from approximately $94 million in 1988, when the Company first entered the
market, to approximately $326 million in the twelve months ended December
1997.(1) The total unit sales volume in the combined grocery and pharmacy
sectors declined by 1.7%, from 804 million diapers in 1996 to 790 million
diapers in 1997. The primary reason of this reduction in unit volume was the
decline in pharmacy sector sales. Slow growth in the grocery sector and strong
growth in the variety sector of the category balanced this reduction in pharmacy
sector sales. The Company believes that market utilization for disposable baby
diapers, which is currently below 65%, will slowly increase to the level of
other industrialized Western countries of over 85%. Branded products comprise
approximately 85% of the Australian market, with the remaining 15% made up of
private label products. The Company estimates that it currently is number two
in the market, with approximately 22% of the Australian disposable baby diaper
market. A major U.S. national manufacturer has approximately 63% of the market.
The Company markets and distributes its branded products in Australia
using exclusive independent brokers, who market and facilitate distribution of
the Company's diaper products to the grocery and pharmacy sectors in each
Australian state. The majority of private label sales are managed on a direct
basis with each retail customer. For the "VLESI(R)" range of adult incontinence
products the Company utilizes a direct sales force in combination with exclusive
distributors in every state.
Branded Products. The Company's branded products, "BABY LOVE(R)" and
"LULLABY(R)" are targeted at the grocery and variety sectors, these two sectors
account for approximately 83% of all disposable baby diaper sales in Australia,
up from 79% in 1996. These two sectors are highly concentrated, with over 80%
of the sales volumes controlled by three major retailers, being Woolworths,
Coles Myer and Franklins. The Company utilizes marketing strategies focused on
strong retail profit margins for the retails and offering high value products
for the consumer. These strategies include state and national promotions
targeting consumer trial while focusing on "below the line" promotional support
for the retailers.
The Company's branded products, "COSIFITS(R)" and "COSIES(R)" are targeted
exclusively at the pharmacy sector. This pharmacy sector accounts for
approximately 17% of all disposable baby diaper sales in Australia, which is
down from 21% in 1996. This sector is highly fragmented and consists of a large
number of small and independent pharmacies that have restricted retail space,
offer a limited selection of diaper brands and do not have their own private
label diaper programs. The Company has successfully pursued a strategy of
encouraging these independent pharmacies to carry these two proprietary brands
as "pharmacy only brands", which are supported by national advertising and
promotion, and provide margins which are comparable to those typically offered
by private label programs.
The Company sells to all the major wholesalers of pharmaceutical products
in Australia. These wholesalers include Sigma Company Ltd., F.H. Faulding
Wholesale, Australian Pharmaceutical Industries and Soul Pattinson who
distribute the products to individual pharmacies.
Private Label. Private label products accounted for approximately 15%
of the total Australian market for disposable baby diapers in 1997. The Company
believes that it currently has approximately a 35% share of the private label
market in Australia. The Company has private label programs with major retail
chains, including Target, Fossey's, Coles Supermarkets, Bi-Lo, Franklins as well
as other retailers.
The Company has maintained and developed its leading market position
by building close working partnerships with its retail chain customers. Its
strategy is to proactively offer new product features with improved performance,
while maintaining competitive pricing and high levels of customer service.
Adult Incontinence Products. Approximately 80% of the total sales for
adult incontinence products in Australia are concentrated in the institutional
sector of the category, while the retail sector for these products has been slow
to develop. This institutional sector is comprised primarily of nursing homes,
adult care hostels and hospitals. The Company has employed a team of state
territory sales managers and exclusive state distributors who target the
institutional sector of this market. The Company intends to expand its range of
products and to achieve distribution in all sectors of this growing market.
(1) Source : AC Nielsen, January 1998.
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c. ASIA
i. Products
The Company manufactures disposable baby diapers primarily under its own
brands in Asia. These include its major brands "FITTI(R)" and "PET PET(R)",
which both in 1997 accounted for approximately 41% of the Company's net sales in
Asia. The Company also manufactures other secondary brands as well as private
labels on a selective basis. The "FITTI(R) product is an "ultra" diaper
featuring multi-strand leg elastics, an extra-dry sub-layer, elastic waistband,
printed frontal tape closure system and stand-up leg gathers. "PET PET(R)" is a
basic "ultra" diaper featuring multi-strand leg elastics, elastic waistband and
frontal tape. Both "FITTI(R)" and "PET PET(R)" enjoy substantial market share,
are well supported by advertising and promotion activities, and are priced
strategically lower than the major U.S. national brands and Japanese brands sold
in Asia.
The Company also manufactures and distributes adult incontinence products
under its own brand "DISPO 123(TM)" and in private labels. In 1997, the Company
introduced an economy brand named "HANDY(TM)". The "DISPO 123(TM)" product is an
ultra anatomic diaper, featuring multi-strand leg elastics, frontal tape closure
system and stand-up leg gathers, "HANDY(TM)" also has the similar features as
"DISPO 123(TM)" but with a slightly lower specifications.
ii. Sales and Marketing
The Company continued to command strong market positions in both the
mature markets of Hong Kong and Singapore. The manufacturing facilities in the
PRC and Thailand have helped expanding the Company's sales, capitalizing on the
increasing usage of disposable baby diapers in those countries. Despite the
currency turmoil in some Asian countries in the latter part of 1997, the Company
still believes that Asian region has higher growth potential than in other
regions and will continue focussing on other potential and emerging markets in
the region. The Company also sells its products in the Philippines, India and,
to a lesser extent, Brunei, Taiwan and Japan.
The volume of disposable baby diaper usage varies significantly in
different markets, depending to a large extent on the level of per capita
disposable incomes. The disposable baby diaper usage is relatively high in Hong
Kong and Singapore. Although these two mature markets have stagnant growth in
recent years, the Company has been able to pursue strategies to stabilize its
market share in these markets. The disposable baby diaper usage is relatively
low in Malaysia, the PRC, Thailand and Indonesia, but the Company believes that
the usage will increase as income levels in these countries continue to
increase.
In Asia, the Company has identified Malaysia, the PRC, Thailand and
Indonesia as the markets that are most likely to expand in late 1990s. The
Company's strategy is to offer a premium product for its own brands, to price
below major U.S. and Japanese brands, and to ensure flexibility in product
features, packaging and marketing functions to satisfy the ever-changing needs
and trends of the different markets in Asia.
In Hong Kong, the Company has its own sales force and its products are
sold in all major pharmacy outlets which account for over 75% of all disposable
baby diaper sales, and in major retail supermarket chains such as Wellcome,
Park'N Shop and China Resources Company. The Company's products have also
penetrated into cash-and-carry outlets like Carrefour. Over 90% of the sales in
Hong Kong are branded sales, the Company continues to build up the "FITTI(R)"
and "PET PET(R)" brands image by strong advertising program, which not only have
impact on sales in the local market but also in other Asian markets,
particularly the PRC market.
In Singapore, the Company's appointed distributors complemented by its
own sales team to distribute its products. The disposable baby diaper market in
Singapore is relatively small and matured, therefore, growth potential is very
limited. Almost all the Company's sales in Singapore are branded sales, which
are "FITTI(R)" and "PET PET(R)", and the Company estimates that the size of the
market was $29 million in 1997.
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In Malaysia, which the Company has identified as one of the fastest growing
markets in the region, the expansion of disposable baby diaper market has not
been as fast as the Company anticipated. The Company estimated that the total
market size was approximately $65 million in 1997, less than 10% growth from
1996 and the growth was mainly from the lower end economy products. The Company
major brand in the market is "FITTI(R)" and "PET PET(R)" and a economy brand
"COSIFITS(R)" was introduced during the year occupying a share in the growing
lower end segment. The Company believes that its sales in this market will
continue to grow further as the usage of disposable baby diapers increases. The
Company's products are distributed by appointed distributors in the major chain
stores such as Parkson Grand, The Store and Ocean, as well as to the other
secondary chain stores, independent supermarkets and to lower-end retail
outlets.
In the PRC, another fast growing market that the Company has identified,
the Company's leading brands are distributed in the friendship stores,
department stores and independent retail stores in Guangdong Province, Shanghai
and Beijing. The Company will expand distribution of its products to other major
cities along the coastline and other affluent provinces in the PRC, such as
Fujian and Zhejiang. The Company has commenced advertising its brands in
selective cities, such as Guangzhou and Shenzen. The Company estimates that the
current usage of disposable baby diapers in the PRC is below 5% and will grow in
accordance with the anticipated rapid economic growth of the country.
In Thailand, although the usage of disposable baby diapers is relatively
low, the disposable baby diaper market has been growing rapidly in the past few
years. The Company's sales have been increasing with the growth of the market
and as a result of expanding the Company's distribution networks throughout the
country. Around 70% of the Company's sales in Thailand were in Bangkok
metropolitan area, the rest of the sales came from the up-countries provinces.
The Company's products are distributed to supermarkets and department stores by
its own nationwide sales force. The Company has been able to capitalize on the
market growth and sustained its market share at about 12.5%, which was the same
in 1996. The Company also manufactures adult incontinence products and
distributes to hospitals, supermarkets and department stores. The Company
estimates that its share of the Thailand adult incontinence market is
approximately 34%. The Company is also expanding its sales of adult incontinence
products in other Asian markets.
The Company's brands "FITTI(R)" and "PET PET(R)" are the leading brands in
the Indonesia market, however the expansion of the Company's sales was
restrained because the products have always been imported and carried very high
import duties. The Company is establishing a manufacturing facility in Jakarta.
The Company believes that its sales in Indonesia would expand rapidly when the
products are manufactured locally because the products will be cheaper and more
affordable.
Although the disposable diaper market in Taiwan is highly competitive, the
Company continues to explore opportunities to increase its sales in this market.
The Company presently has lower expectations in exporting its products
to Japan and Korea because current non-tariff barriers and complex distribution
arrangements make entry into these markets difficult for foreign products.
The Company services most of its existing and potential markets in
Asia out of its established manufacturing facility in Hong Kong. The PRC
operation was established in the fourth quarter of 1994, and the manufacturing
facility in Thailand commenced operations in September 1995. The Company
believes that these two new manufacturing facilities will enable it to better
service and expand its business in both markets as well as other markets in
Asia. The Company's facility in Thailand also manufactures adult incontinence
diapers for all its Asian markets. During 1997, the Company closed the
Singapore manufacturing facility and started building a manufacturing facility
in Indonesia.
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d. EUROPE
i. Products
The Company manufactures and markets disposable baby diapers under its
own brands in the United Kingdom, and manufactures private label disposable baby
diapers, feminine napkins, and branded and private label adult incontinence
products in Switzerland. The Company's brands currently in production are
"FITTI(R)", "COSIFITS(R)", "CARES(R)" and "VLESI(R)". "FITTI(R)" is a value
brand baby diaper with full features such as leg gathers, wetness indicator,
printed backsheet and an extra-dry sub-layer. "COSIFITS(R)" and "CARES(R)" are
economy brands featuring frontal tape and extra-dry sub-layer. "VLESI(R)" adult
incontinence brand comprises a product range of adult incontinence briefs,
anatomic pads and underpads for the institutional hospital and nursing home
markets.
In the early 1997, the Company acquired the manufacturing assets of a Dutch
adult incontinence manufacturer. The equipment was relocated and consolidated
to the Company's Swiss adult incontinence operation. The acquisition gave the
Company increased coverage in the European markets, especially in the Benelux
region, as well as new product lines.
ii. Sales and Marketing
The U.K. retail disposable baby diaper market in 1997 was
approximately $780 million. Approximately 92%(1) of the market were branded
products and the rest were made up of various private label brands of retailers
supplied by European diaper manufacturers.
The Company's strategy is to emphasize its branded products which are
sold to regional retails and wholesalers by offering a value-oriented product
with good profit margins and a high level of service. The Company also produces
own label for several U.K. grocery chains.
In Switzerland, the disposable baby diaper market, approximately $73
million(2) is dominated by a U.S. national brand and the private brand of a
major retail chain. It is estimated that about 65%(3) of the diaper volume in
Switzerland is supplied by the two major U.S. manufacturers. The Company's Swiss
operation situated near Zurich competes in the disposable baby diaper and
feminine napkin markets in Switzerland and also in other European countries for
branded and private label business.
The Company's other operation in eastern part of Switzerland is in the
canton of St. Gallen. It manufactures and markets primarily branded adult
incontinence products and distributes them to institutions such as hospitals and
nursing homes. The Company estimates that its share in the Swiss adult
incontinence market is approximately 30% and is ranked second in the market.
The operation is actively expanding into other European markets through the
appointment of sales distributors.
The Company also has a presence in the Benelux with a sales and
distribution company near Brussels and serves institutional customers in this
region.
3. Competition
The disposable baby diaper industry is dominated world-wide by the brands
of two major U.S. manufacturers : The Procter & Gamble Company ("P&G") and
Kimberly-Clark Corporation ("K-C"). The market position of these manufacturers,
relative to the Company, varies from one geographic area to another, but due to
their substantial financial, technical and marketing resources, both of these
major manufacturers have the ability to exert significant influence and gain
substantial market share in any of their marketing areas. Despite the disparity
in relative strength, however, the Company has been able to achieve good results
with its branded and private label products and is able to maintain a viable
market position in the face of very strong competition from the industry
leaders.
(1) FSA Survey U.K.
(2) Nielsen Switzerland
(3) Nielson Switzerland
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a. NORTH AMERICA
The North American disposable baby diaper market remains dominated by
the brands of the two major U.S. manufacturers : P&G and K-C. Their combined
market share of the disposable baby diaper market is 70%, including the
disposable training pant and youth pant segments. Total category unit sales are
now declining at the rate of about 4%, with volume continuing to move slowly
from the food and drug sectors to the mass (discount) merchandisers. In 1997,
these two manufacturers continued their departure from their traditional
strategy of competing solely on the basis of consumer-driven marketing programs
and product innovations. After P&G made their move in 1995 to a reduced count,
unisex program on both their Pampers and Luvs brands, they spent heavily
promoting these brands at very low retail price points. An increasing number of
retailers are becoming concerned with the negative impact that this strategy has
had on their own private label sales and margins, and some have taken corrective
action to protect their own brands, at times going so far as to decline to carry
the Luvs brand. All of the advertised brand's moves have resulted in retail
price reductions and a narrowing of retail price spreads. The net result is a
two-tier category that is offering premium products and value-added products.
The segment that was once called "conventional" has now become "premium". The
Company's "FITTI(R)" brands, now accounts for more than 50% of all sales in the
grocery class of trade.
The moves by the major manufacturers to lower prices and make deep
promotional offers have put serious sales and margin pressure on smaller branded
manufacturers and private label manufacturers. In response to the competitive
activity, the Company has reallocated its promotional spending and has
formulated a strategy in line with "everyday low pricing", targeted trade
promotions, enhanced product features and performance, along with tightened cost
controls. This strategy has allowed the Company to protect its share in
critical markets, expand its private label base of business and weather the
competitive storm that is persisting. While there was some negative impact on
top line sales, the Company's strategy will help to protect margin contribution
in the coming year.
In the adult incontinence arena, the Company is in an excellent
competitive position, having the capability to provide key retailers and
consumers with product technology that is superior to what any other
manufacturer can currently provide. The added advantage comes from the fact
that this category, more than most, has the greatest need for better products in
order to meet the performance requirements of consumers. The Company has a
product strategy that will ensure it will maintain this competitive edge well
into 1998 and beyond. This competitive edge will also allow the Company to make
quick inroads into the private label incontinent sector, offering premium
products at competitive prices. This segment also presents a slightly better
margin of opportunity, since pricing and promotional strategies from the major
manufacturers have remained much more stable than in the baby diaper
marketplace.
b. AUSTRALIA
The major competition faced by the Company in Australia is from K-C,
which currently dominates the disposable baby diaper market with an estimated
market share of 63% in 1997. The Company believes it is able to compete
successfully in Australia because its strategy of targeting different brands at
the different retail sectors allows it greater flexibility in providing
attractive retail margins and alternatively product features to its retail
customers. It also benefits from the desire of its retail customers for an
alternative national brand diaper supplier to K-C, as well as quality supplier
for their private label brands.
c. ASIA
The Company's main competition in Asia comes from the two major U.S.
manufacturers, and from several manufacturers from Japan and Taiwan. The
Company believes that it has been able to maintain a significant share of the
Asian market due to its longer presence and well established brands in that
region and the logistical advantage which results from the strategic location of
its manufacturing operations.
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d. EUROPE
In the United Kingdom, the disposable baby diaper market is dominated
by P&G, which has a market share in excess of 60%. K-C has been heavily
promoting and discounting its products in the U.K. market. Since the entry of
K-C in the U.K. market, the private label brands have been reduced to a level of
about 8% market share. The Company believes that, by pursuing a flexible brand
strategy of supplying both branded and private label in disposable baby diapers
and feminine napkins, it will be able to maintain its share and volume, and
achieve also growth in certain markets.
The adult incontinence market in Europe is shared among several
European as well as U.S. manufacturers. The leading manufacturer in Europe is
SCA Molnlycke which holds the largest market share in some Scandinavian
countries and also in the U.K. The largest market segment for adult
incontinence is still with institutions, such as hospitals and nursing homes.
The Company has expanded its market coverage into the Benelux through the
acquisition of a Dutch business in 1997 and also through appointment of
marketing and distribution partners in Germany and the U.K. The Company sees
its growth coming from developing of innovative features in its adult
incontinence product ranges as well as extending its geographic coverage.
4. Trademarks and Patents
Brand identification is an important element in marketing the Company's
products, and the Company recognizes the importance of its trademarks to the
success of its business. The Company has registered its major trademarks or has
applications pending in each of the major markets in which its products are
sold, and it has applications pending in several other countries for many of its
other trademarks. As the Company determines to pursue opportunities in new
markets, it seeks registration of the trademarks under which it will market its
products in those countries.
The Company has licenses to use certain patented technology relating
to certain features of the disposable diapers it manufactures, including multi-
strand leg elastics and the "Wetness Indicator" feature of the Company's
products in the United States. In 1997, Procter & Gamble ("P&G") claimed that
certain of the Company's diaper products infringe P&G patents and demanded
payment for past infringement and an agreement to pay future royalties. The
Company and P&G are discussing terms of a possible settlement of this claim.
The Company has an existing license agreement from Kimberly-Clark concerning the
sale of certain diaper products covered by Kimberly-Clark patents.
5. Product Design and Development
The Company actively monitors trends in the United States and Europe
in relation to changes in product features, consumer preferences, and the impact
of environmental laws and regulations on the disposable diaper industry.
Although the Company does not devote substantial expenditure to research and
development, it constantly seeks to improve its products by substitution of
materials and components, and of product features, to systematically improve the
performance of its diapers for better absorbency and improved leakage
protection. In particular, the Company monitors world-wide developments in
various raw material components to enable the Company to take advantage of the
latest developments, and in certain cases the Company has worked closely with
suppliers to pioneer the use of such materials in the manufacture of disposable
diapers.
With respect to packaging, the Company retains consultants in its
various markets to design packaging for the products which are sold under the
Company's own brands. Packaging for products sold under private labels is
either designed and developed by the retailer's own design department, or by
design consultants engaged by the Company working together with the retailer's
design department.
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6. Manufacturing Process
The manufacturing process begins with the purchase of raw materials, the
most important of which is fluff wood pulp. The fluff wood pulp is first fed
through a hammer mill to make a soft, absorbent core that is placed on a
polyethylene backsheet. In the case of "ultra" diapers, super absorbent polymer
is then added. The liner layers, leg elastics, tape and other applicable
features are then fed into the manufacturing equipment which shapes and produces
the finished product. Because of the high level of automation in the production
process, significant components of manufacturing efficiency result from
prevention of production line stoppages and reducing the defect rate. Manual
labor is involved primarily in packing and shipping, and labor costs represent
only a small fraction of the Company's total net sales.
The Company maintains constant quality control throughout the production
process, commencing with the incoming raw materials and continuing through
dispatch of the finished product. Each of the Company's diaper lines has a full-
time inspector assigned to assure quality control at all stages of the
production process, and line inspections and batch testing are made on a
continuous basis.
Because of the relatively high cost of shipping the finished product,
the Company has established manufacturing facilities near its major markets, and
raw materials (which can generally be transported at lower cost) are shipped to
the manufacturing facilities. The Company believes that this improves its
efficiency and enhances its competitiveness by reducing shipping costs,
shortening the distribution chain and improving customer service.
7. Raw Materials
The raw material components used in the manufacturing process are fluff
wood pulp, super absorbent polymer, polyethylene backsheet, polypropylene non-
woven liner, adhesive closure tape, hotmelt adhesive, elastic and tissue.
The main raw material is fluff wood pulp, which is purchased from
several suppliers in the United States, Scandinavia and New Zealand. The source
from which the fluff wood pulp is shipped to the Company's manufacturing
facilities is dependent on price, quality and availability. The cost of fluff
wood pulp increased significantly in 1995, softened in 1996, stabilized in 1997
and the Company believes it may increase moderately in 1998. Other raw
materials are purchased from various sources, also depending on price, quality
and availability. The Company maintains good and long-term relationships with
its raw materials suppliers. The Company's Chief Purchasing Officer oversees
the purchasing and sourcing policies of each of the Company's manufacturing
facilities and is responsible for new material developments and keeping track of
all world-wide producers of raw materials. He also negotiates and determines
the purchase of the Company's major raw materials with the Company's key raw
material suppliers.
The Company has negotiated supply contracts with several of its key
suppliers. Such arrangements are generally designed to achieve volume discounts
on price and to assure supply stability. In the event of unacceptable price
increases, the Company usually has the right to terminate the arrangement upon
specified notice periods, which generally range from two to three months.
Some of the suppliers of raw materials to the Company also manufacture
disposable diapers which compete with the Company's products. The Company has
not experienced any difficulty with its raw material suppliers who are in
competition with it on sales of finished product, but nevertheless it takes
steps to ensure that it has alternative sources of supply available.
The main source of energy for the Company's plants is electricity. The
automated process for manufacturing disposable diapers consumes larger amounts
of electricity than many other light industries, but none of the Company's
operating subsidiaries has experienced any problems with electricity supply.
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8. Inventory Practice and Order Backlog
The disposable diaper industry is generally characterized by prompt
delivery by manufacturers and rapid movement of the product through retail
outlets. The lead time between placing an order and shipment to the local
customer averages five to ten days. The Company maintains varying levels of raw
material and finished product inventory depending on lead time and shipping
schedules. The Company's inventory levels generally vary between three to six
weeks. Due to the short lead time between order and delivery of product, the
Company does not maintain a significant backlog.
9. Customs and Import Duties
Some of the raw materials used in manufacturing the Company's products are
subject to import duties at varying rates in the countries in which the
Company's manufacturing facilities are located. However, import duties on raw
materials do not represent a significant part of the cost of the finished
product and, in most cases, the import duties are refundable if the finished
goods are exported from the countries of manufacture.
Imports of finished products to some of the markets are subject to
import duties at various rates. However, such duties are usually incorporated
in the selling price of the finished product.
10. Employees
The Company has a total of approximately 1,230 full time employees at
its manufacturing facilities. The Company considers its relationships with its
employees to be good in all of its plants, and none of the Company's plants has
ever experienced any material work stoppage.
The Company believes that all of its manufacturing facilities are in
compliance with applicable occupational health and safety legislation.
11. Environment
The Company believes that operations at all of its manufacturing
facilities are conducted in compliance with applicable environmental laws, and
that none of the material substances used or disposed of by the Company in its
manufacturing operations are considered to be toxic or hazardous substances
under such laws.
The Company closely monitors environmental laws and regulations
pertaining to disposal of solid waste, which includes household refuse,
packaging and paper materials, and yardwaste, in addition to disposable diapers,
in each of the markets in which its products are sold. The Company is not aware
of any such laws or regulations which would have a material adverse effect on
the Company's business as presently conducted and proposed to be conducted. A
number of states in the United States have passed legislation that is intended
to discourage the use of disposable products such as beverage containers,
certain packaging materials and disposable diapers, or to encourage the use of
non-disposable or recyclable products. The Company believes that it will not
have to make any changes to its products to comply with presently existing
environmental laws and regulations in the markets in which its products are
sold.
The Company endeavors to develop products which are environmentally
responsible by closely monitoring world-wide developments in various raw
material components and actively works with suppliers to develop and market
products utilizing such components.
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12. Insurance
All of the Company's plant, machinery and inventories are covered by
fire and extended coverage insurance. The Company maintains product liability
insurance in amounts it believes to be adequate in all its operations, except
for its operations in Asia where local manufacturers customarily do not carry
product liability insurance because the risk of product liability lawsuits is
considered to be slight.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company operates nine manufacturing facilities, with plants located
in the United States at Duluth, Georgia (near Atlanta) and at Oconto Falls,
Wisconsin; in Hong Kong; in Melbourne, Australia; at Chesterfield, U.K.; in
Switzerland at Mettmenstetten and Goldach; at Zhongshan, Guangdong, PRC; and at
Bangkok, Thailand.
The Company utilizes an aggregate of approximately 1,049,001 square feet
of space in its manufacturing operations. The Company believes that its plant
and facilities are adequate for its present operations, but it will require
expanded facilities if past growth trends in the Company's business continue.
The following table summarizes the physical properties that are used by the
Company in its manufacturing and distribution operations:
<TABLE>
<CAPTION>
APPROXIMATE LEASE
SIZE OWNED/ EXPIRATION DATE
LOCATION USE (SQ. FEET) LEASED DATE OPENED
- ----------------------------- ------------- --------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Duluth, GA Manufacturing 155,625 Owned N/A Dec. 1993
Brantford, Canada Warehouse 89,000 Owned N/A Sep. 1993
Wisconsin, WI Manufacturing 164,352 Owned N/A Apr. 1997
Hong Kong Manufacturing 111,701 Leased Jun. 1999 Jul. 1978
Singapore Office 43,540 Leased Apr. 2051 May 1991
Zhongshan, PRC Manufacturing 66,043 Leased Oct. 2044 Dec. 1994
Bangkok, Thailand Manufacturing 68,805 Owned N/A Apr. 1995
Melbourne, Australia Manufacturing 179,200 Owned N/A Feb. 1988
Chesterfield, U.K. Manufacturing 75,000 Leased May 2008 May 1988
Mettmenstetten, Switz. Manufacturing 78,000 Leased Jun. 1998 Jul. 1993
Goldach, Switz. Manufacturing 150,275 Owned N/A Aug. 1994
Mechelen, Belgium Office 3,400 Leased Dec. 1999 Apr. 1997
London, U.K. Office 3,500 Owned N/A Mar. 1992
Foster City, CA Office 2,500 Owned N/A Aug. 1993
Bangkok, Thailand Office 15,216 Leased Dec. 1997 May 1994
Kuala Lumpur, Malaysia Office 1,580 Leased N/A Dec. 1995
</TABLE>
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ITEM 3. LEGAL PROCEEDINGS.
The Company and its subsidiaries are from time to time involved in
routine legal matters incidental to their business.
In February 1995, the Company and its U.S. subsidiary were named as
defendants in Action No. 95-19-2-ALB-AMER (WLS) brought by plaintiffs John M.
Tharpe, Robert E. Herrin and R & L Engineering, Inc., a Georgia corporation, in
the United States District Court, Middle District of Georgia. The complaint
alleges that the Company, its U.S. subsidiary and certain European suppliers of
disposable diaper manufacturing equipment (the "Defendants") have infringed U.S.
Patent No. 5,308,345 which relates to a certain process for elasticizing the
waistband of disposable diapers; that the Company and its U.S. subsidiary
breached a confidentiality agreement with the plaintiffs by using certain
information relating to the waistband applicator disclosed to them in confidence
by the plaintiffs; and theft by the Defendants of the plaintiffs' trade secrets
concerning the waistband applicator. The plaintiffs seek an injunction,
compensatory, punitive and exemplary monetary damages in an unspecified amount,
and attorneys' fees. The Company has denied liability and intends to vigorously
defend this action.
In 1997, Procter & Gamble ("P&G") claimed that certain of the Company's
diaper products infringe P&G patents and demanded payment for past infringement
and an agreement to pay future royalties. The Company and P&G are discussing
terms of a possible settlement of this claim. The Company has an existing
license agreement from Kimberly-Clark concerning the sale of certain diaper
products covered by Kimberly-Clark patents.
ITEM 4. CONTROL OF REGISTRANT.
The Company is not owned or controlled by another corporation or by any
foreign government. The following table sets forth information regarding
beneficial ownership of the Ordinary Shares of the Company by each person who on
December 31, 1997 is known by the Company to own 10% or more of the Company's
outstanding Ordinary Shares and by all directors and officers as a group.
<TABLE>
<CAPTION>
ORDINARY SHARES
BENEFICIALLY OWNED
------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ ------ -------
<S> <C> <C> <C>
10% or more shareholders (Brandon Wang)....................................... 3,321,680(1) 49.77%
Directors and officers as a Group (11 persons)................................ 4,427,846(1)(2) 66.34%
</TABLE>
(1) Includes 140,580 Ordinary Shares owned by Brandon Wang's wife, Eileen
Wang, as to which he disclaims beneficial ownership.
(2) Includes 123,000 Ordinary Shares owned by Benedict Wang's wife, Suk
Yee Heyley Sham, as to which he disclaims beneficial ownership; and
117,000 Ordinary Shares owned by S.L. Wang's wife, Pei Fang Wang, as
to which he disclaims beneficial ownership.
Brandon Wang and seven other members of Management own more than 50% of the
Company's outstanding Ordinary Shares and, acting together, are able to control
the election of the Board of Directors, and thus the direction and future
operations of the Company, including decisions regarding acquisitions and other
business opportunities, the declaration of dividends and the issuance of
additional Ordinary Shares and other securities, in each case without the
supporting vote of any other shareholder of the Company. In addition, Brandon
Wang is controlling shareholder of the Company and thus may be deemed to be a
parent of the Company under the rules and regulations of the Securities Exchange
Act of 1934.
18
<PAGE>
The Company knows of no arrangements the operation of which may at a
subsequent date result in a change in control of the Company.
ITEM 5. NATURE OF TRADING MARKET.
The Company's Ordinary Shares are listed on the NASDAQ National Market
System under the trading symbol DSGIF, and are not listed for trading in any
foreign trading market.
As of December 31, 1997, the total number of record holders was 40, of
which 27, representing 39.53% of Ordinary Shares, were in the United States.
<TABLE>
<CAPTION>
ORDINARY SHARE PRICE :
<S> <C> <C> <C> <C>
1997 1996
---------------- ----------------
QUARTER HIGH LOW HIGH LOW
- ------------------------ ------- ------- ------- -------
First $16 1/2 $12 1/2 $15 1/2 $12 1/2
Second 17 1/4 12 3/4 15 1/8 10 7/8
Third 16 5/8 10 11 5/8 10 1/4
Fourth 11 1/4 7 3/8 14 7/8 11 1/4
</TABLE>
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
There are now no exchange control restrictions on remittances of
dividends on the Company's Ordinary Shares or on the conduct of the Company's
operations either in Hong Kong, where its principal executive offices are
located, or the British Virgin Islands, where it is incorporated. Certain other
jurisdictions in which the Company conducts operations do have various exchange
controls. To date, such controls have not had a material impact on the
Company's financial results.
There are no limitations on the rights of non-residents or foreign
holders imposed by foreign law or by the charter of DSG other than those
limitations described herein in Item 14, Description of Securities.
ITEM 7. TAXATION.
The following discussion is a summary of certain anticipated U.S.
federal income tax and BVI tax consequences of ownership of Ordinary Shares.
The discussion does not deal with all possible tax consequences relating to
ownership of Ordinary Shares and does not purport to deal with the tax
consequences applicable to all categories of owners, some of which (such as
dealers in securities, insurance companies and tax-exempt entities) may be
subject to special rules. In particular, the discussion does not address the
tax consequences under state, local and other national (e.g., non-U.S. and non-
BVI) tax laws. Accordingly, each shareholder should consult its own tax advisor
regarding the particular tax consequences to it of its ownership of the Ordinary
Shares. The following discussion is based upon laws and relevant
interpretations thereof in effect as of the date of this Annual Report, all of
which are subject to change.
A. UNITED STATES FEDERAL INCOME TAXATION
The following discussion only addresses the U.S. federal income taxation of
a U.S. person (e.g., an individual who is a citizen or resident of the U.S., a
U.S. corporation, an estate subject to U.S. tax on all of its income regardless
of source, and a trust if a court within the U.S. may exercise primary
supervision over the administration of such trust and one or more U.S. persons
have the authority to control substantial decisions of the trust.) (a
19
<PAGE>
"U.S. Investor") owning Ordinary Shares. In addition, the following discussion
does not address the tax consequences to a person who owns (or will own),
directly, indirectly or constructively, 10% or more of the Ordinary Shares (a
"10% Shareholder"). Non-U.S. persons and 10% Shareholders are advised to consult
their own tax advisors regarding the tax considerations incident to ownership of
the Ordinary Shares.
A U.S. Investor receiving a distribution with respect to the Ordinary
Shares will be required to include such distribution in gross income as a
taxable dividend to the extent such distribution is paid from earnings and
profits of the Company as determined under U.S. federal income tax principles.
Any distributions in excess of the earnings and profits of the Company will
first be treated, for U.S. federal income tax purposes, as a nontaxable return
of capital to the extent of the U.S. Investor's basis in the Ordinary Shares,
and then as a gain from the sale or exchange of a capital asset, provided that
the Ordinary Shares constitute capital assets in the hands of the U.S. Investor.
U.S. corporate shareholders will not be entitled to any deduction for
distributions received as dividends on the Ordinary Shares.
Gain or loss on the sale or exchange of the Ordinary Shares will be treated
as capital gain or loss if the Ordinary Shares are held as a capital asset by
the U.S. Investor. Such capital gain or loss will be a long-term capital gain
or loss if the U.S. Investor has a holding period of more than one year with
respect to the Ordinary Shares at the time of the sale or exchange.
Various provisions contained in the U.S. Internal Revenue Code (the "Code")
impose special taxes in certain circumstances on non-U.S. corporations and their
shareholders. The following is a summary of certain provisions which could have
an adverse impact on the Company and the U.S. Investors:
1. Personal Holding Companies
Sections 541 through 547 of the Code relate to the classification of
certain corporations (including foreign corporations) as personal holding
companies ("PHCs") and the consequent taxation of such corporations on certain
of their U.S.-sourced income (including certain types of foreign sourced income
which are effectively connected with the conduct of a U.S. trade or business) to
the extent amounts at least equal to such income are not distributed to their
shareholders. A PHC is a corporation (i) more than 50% of the value of the
stock of which is owned, directly or indirectly, by five or fewer individuals
(without regard to their citizenship or residence), and (ii) which, if a foreign
corporation, receives 60% or more of such U.S.-related gross income, as
specially adjusted, from certain passive sources (such as dividends, interest,
royalties or rents). If the Company is classified as a PHC, a tax will be
levied at the rate of 39.6% on the Company's undistributed U.S. taxable income.
While more than 50% of the Ordinary Shares may be treated as owned (either
directly or indirectly) by five or fewer individuals, the Company intends to
cause its indirect U.K. subsidiary, the owner of the U.S. branch, together with
such corporation's immediate U.K.-resident parent corporation, to distribute any
amounts which would otherwise be characterized as "undistributed personal
holding company income" in the hands of either corporation with the intent that
such distributions would cause such distributed amounts to lose their character
as "United States source" taxable income subject to the PHC tax.
2. Foreign Personal Holding Companies
Sections 551 through 558 of the Code relate to foreign personal holding
companies ("FPHCs") and impute undistributed income of certain foreign
corporations to U.S. persons who are shareholders of such corporations. A
foreign corporation will be classified as a FPHC if (i) five or fewer
individuals, who are U.S. citizens or residents, directly or indirectly own more
than 50% of the corporation's stock (measured either by voting power or value)
(the "shareholder test") and (ii) the Company receives 60% or more of its gross
income (regardless of source), as specially adjusted, from certain passive
sources (the "income test").
20
<PAGE>
The Company believes that it is not currently and has not been a FPHC for
any taxable year since its formation because for each such year either or both
of the income test and the shareholder test were not met. It is possible that
subsequent events would cause the Company to meet either or both of the income
test and the shareholder test. In the opinion of the Company, however, it is
unlikely that the shareholder test would be met, especially in view of the
inclusion of certain transfer restrictions in the Company's governing documents.
See "Description of Securities".
If the Company is classified as a FPHC after application of the shareholder
test and the income test, a pro rata portion of its undistributed income would
be imputed to its shareholders who are U.S. persons (including U.S.
corporations) and would be taxable to such persons as a dividend, even if no
cash dividend is actually paid. In that event (promptly after receiving an
opinion of counsel or final determination) the Company intends to distribute to
its shareholders sufficient amounts so that U.S. shareholders would receive cash
at least equal to the product of 150% of the highest federal income tax rate
which could apply to any U.S. shareholder and the amount of the dividend that
would otherwise be imputed to them. If the Company is classified as a FPHC in
the year preceding the death of a shareholder, the Ordinary Shares held by such
shareholder would obtain a tax basis equal to the lesser of their fair market
value or their tax basis in the hands of the decedent.
3. Passive Foreign Investment Companies
Sections 1291 through 1297 of the Code relate to passive foreign investment
companies ("PFICs") and impose an interest charge on "excess distributions" made
from a PFIC. A foreign corporation is a PFIC if (i) 75% or more of its gross
income for the taxable year is passive income as defined under Section 954(c) of
the Code (the "passive income test"), or (ii) 50% or more of the average value
(or adjusted tax basis if the corporation is a CFC) of the assets held by the
corporation during the taxable year consist of assets that produce or are held
for the production of passive income (the "passive asset test"). Certain look-
through rules take into account the assets and activities of related
corporations from which the foreign corporation either receives income or in
which it holds an interest. Although a determination whether a corporation is a
PFIC is made annually, in general, once a corporation has been classified as a
PFIC, it cannot thereafter lose its status as a PFIC.
Distribution from a PFIC will generally be characterized as an excess
distribution to the extent such distribution, when combined with all other
distributions received by the U.S. Holder in such taxable year, exceeds 125% of
the average distributions received by such shareholder in the three preceding
taxable years (or its holding period if shorter). Once the amount of the excess
distribution is determined, it is allocated ratably to all days in the
shareholder's holding period for the shares of the PFIC. Amounts allocated to
the current year or a year prior to the date upon which the corporation was a
PFIC are included in the shareholder's income as ordinary income. Amounts
allocated to prior years in which the corporation was a PFIC are subject to the
highest rate of tax for the year to which allocated, and each of the resulting
amounts of tax is subject to an interest charge as if it were an underpayment of
taxes for such tax year.
The Company does not believe that it should, in the current year or any
prior year, be classified as a PFIC. Under Section 1296(c) of the Code for
purposes of determining PFIC status, a foreign corporation is deemed to hold its
proportionate share of the assets and to receive directly its proportionate
share of the income of its subsidiaries in which it owns 25 percent or more of
the stock (determined by value). The Company, through its more than 25 percent
owned subsidiaries, is engaged in substantial manufacturing activities and holds
few assets (and receives little income) which would be classified as passive
assets under Notice 88-22 or would be classified as passive income under Section
954(c) of the Code (after application of the look-through rules under Section
1296(c) of the Code).
21
<PAGE>
4. Controlled Foreign Corporations
Sections 951 through 964 and section 1248 of the Code relate to controlled
foreign corporations ("CFC") and impute undistributed income to certain
shareholders and convert into dividend income gains on dispositions of shares
which would otherwise qualify for capital gains treatment. The CFC provisions
only apply if 10% Shareholders (as defined above), who are also U.S. persons,
own, in the aggregate, more than 50% (measured by voting power or value) of the
shares of a foreign corporation. Even if the Company were to become classified
as a CFC, however, the income imputation rules referred to above would only
apply with respect to such 10% Shareholders.
5. United States Backup Withholding
A holder of an Ordinary Share may be subject to "backup withholding" at the
rate of 31% with respect to dividends paid on such Ordinary Share if such
dividends are paid by a paying agent, broker or other intermediary in the United
States or by a U.S. broker or certain United States-related brokers to such
holder outside the United States. In addition, the proceeds of the sale,
exchange or redemption of an Ordinary Share may be subject to backup withholding
if such proceeds are paid by a paying agent, broker or other intermediary in the
United States.
Actual backup withholding may be avoided by the holder of an Ordinary Share
if such holder (i) is a corporation or comes within certain other exempt
categories, and when required, demonstrates this fact or (ii) provides a correct
taxpayer identification number, certifies that such holder is not subject to
backup withholding and otherwise complies with the backup withholding rules. In
addition, holders of Ordinary Shares who are not U.S. persons ("non-U.S.
holders") are generally exempt from backup withholding, although such holders
may be required to comply with certification and identification procedures in
order to prove their exemption. In the case of Ordinary Shares held by a
foreign partnership, this certification requirement would generally be applied
to the partners of such partnerships pursuant to certain regulations which will
generally become effective after 1999.
Any amounts withheld under the backup withholding rules from a payment to a
holder will be refunded (or credited against the holder's U.S. federal income
tax liability, if any) provided that the amount withheld is claimed as federal
taxes withheld on the holder's U.S. federal income tax return relating to the
year in which the backup withholding occurred. A holder who is not otherwise
required to file a U.S. income tax return must generally file a claim for refund
(or, in the case of non-U.S. holders, an income tax return) in order to claim
refunds of withheld amounts.
B. BRITISH VIRGIN ISLANDS TAXATION
Under the laws of the British Virgin Islands as currently in effect, a
holder of Ordinary Shares who is not a resident of the British Virgin Islands is
exempt from BVI income tax on gains realized during that year on sale or
disposal of such shares; the British Virgin Islands does not impose a
withholding tax on dividends paid by the Company.
There are no capital gains, gift or inheritance taxes levied by the British
Virgin Islands. In addition, the Ordinary Shares are not subject to any
transfer taxes, stamp duties or similar charges in the British Virgin Islands.
There is no income tax treaty or convention currently in effect between the
United States and the British Virgin Islands, nor is any such treaty or
convention currently being negotiated.
22
<PAGE>
ITEM 8. SELECTED CONSOLIDATED FINANCIAL DATA.
The information required by Item 8 is contained in page 16 of the Annual
Report to Shareholders, and is incorporated herein by reference.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information required by Item 9 is contained in pages 8 to 13 of the
Annual Report to Shareholders, and is incorporated herein by reference.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
A. EXCHANGE RATE INFORMATION
The Consolidated Financial Statements of the Company are prepared in
U.S. dollars. The financial statements of foreign subsidiaries are translated
into U.S. dollars in accordance with Statement of Financial Accounting Standards
No. 52.
Singapore dollars, Australian dollars, Swiss francs, Pounds Sterling and
Thai Baht are convertible into U.S. dollars at freely floating rates. Hong Kong
dollars are tied to and allowed to fluctuate within a narrow range against the
value of the U.S. dollar. There are currently no restrictions on the flow of
such currencies, except Renminbi and Thai Baht, between such countries and the
United States.
Fluctuations in the value of foreign currencies cause U.S. dollar
translated amounts to change in comparison with previous periods and,
accordingly, the Company cannot quantify in any meaningful way, the effect of
such fluctuations upon future income. This is due to the number of currencies
involved, the constantly changing exposure in these currencies, and the fact
that all foreign currencies do not react in the same manner against the U.S.
dollar.
A confluence of currency fluctuation adversely impacted the Company's
financial performance in 1997. In the first half of the year 1997, Swiss franc
was devalued by 8.6% due to strengthening of U.S. dollar against European
currency. In the second half of the year 1997, the Malaysian Ringgit, Singapore
dollar, Thai Baht and Indonesian Rupiah were devalued in the Asian financial
turmoil. As a result, the Company's reported sales were reduced by $9.7 million
in 1997 compared with the exchange rates used in 1996. The effect of the
exchange rate devaluation also impacted the Company's cost of materials as most
of the raw materials were payable in U.S. dollars. The Company does not hedge
against the risk of currency fluctuation.
The Company anticipates the Asian financial turmoil will continue in 1998,
and the economic growth in Asian countries will slow down. As a consequence,
the Company's sales volume and gross margin in Asian operations will decline.
23
<PAGE>
B. EXCHANGE RATE FLUCTUATION
<TABLE>
<CAPTION>
1997 1996
------------------------------------- -------------------------------------------
FIRST QUARTER High Low Average High Low Average
- ------------------- -------- --------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Australian Dollars 1.30 1.27 1.28 1.34 1.27 1.31
Malaysian Ringgit 2.47 2.47 2.47 2.55 2.53 2.54
Singapore Dollars 1.45 1.40 1.42 1.41 1.40 1.41
Thai Baht 25.89 25.79 25.84 25.25 25.12 25.16
Indonesian Rupiah 2214.20 2212.54 2213.53 2209.37 2178.31 2188.66
Swiss Francs 1.47 1.42 1.45 1.21 1.19 1.20
Pounds Sterling 0.62 0.61 0.62 0.66 0.64 0.65
SECOND QUARTER
- -------------------
Australian Dollars 1.33 1.27 1.30 1.26 1.25 1.26
Malaysian Ringgit 2.51 2.50 2.51 2.49 2.48 2.49
Singapore Dollars 1.44 1.43 1.43 1.40 1.40 1.40
Thai Baht 26.01 23.14 24.62 25.30 25.21 25.24
Indonesian Rupiah 2213.71 2213.37 2213.58 2403.04 2242.12 2349.78
Swiss Francs 1.46 1.41 1.43 1.26 1.23 1.25
Pounds Sterling 0.61 0.60 0.61 0.66 0.64 0.65
THIRD QUARTER
- -------------------
Australian Dollars 1.39 1.34 1.36 1.29 1.26 1.27
Malaysian Ringgit 3.17 2.62 2.91 2.49 2.48 2.49
Singapore Dollars 1.52 1.46 1.50 1.41 1.40 1.40
Thai Baht 34.97 31.10 33.36 25.30 25.22 25.25
Indonesian Rupiah 3684.76 2212.51 2703.76 2209.71 2209.43 2209.57
Swiss Francs 1.51 1.45 1.48 1.25 1.19 1.21
Pounds Sterling 0.62 0.61 0.62 0.64 0.64 0.64
FOURTH QUARTER
- -------------------
Australian Dollars 1.53 1.42 1.47 1.26 1.23 1.25
Malaysian Ringgit 3.88 3.40 3.59 2.52 2.51 2.52
Singapore Dollars 1.67 1.58 1.61 1.40 1.40 1.40
Thai Baht 46.46 39.48 41.98 25.52 25.41 25.45
Indonesian Rupiah 5166.33 3680.71 4176.00 2210.57 2209.40 2209.80
Swiss Francs 1.45 1.39 1.42 1.34 1.25 1.30
Pounds Sterling 0.60 0.59 0.60 0.61 0.59 0.60
</TABLE>
24
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME YEAR OF BIRTH PRESENT POSITION
- ----------------------- ------------- ---------------------------------------------
<S> <C> <C>
Brandon Wang 1946 Director, Chairman of the Board and President
Philip Leung 1948 Director and Vice President
Johnny Tsui 1941 Director, Vice President and Secretary
Patrick Tsang 1946 Director and Vice President
Terence Leung 1951 Director, Vice President and Treasurer
Peter Chang 1946 Director and Vice President
Owen Price 1926 Director
Anil Thadani 1946 Director
Terrence Daniels 1943 Director
</TABLE>
Brandon Wang is married to Eileen Wang-Tsang, who is Patrick Tsang's
sister. Peter Chang is married to Brandon Wang's sister. Benedict Wang and
S.L. Wang, both of whom occupy Management positions (see below), are brothers of
Brandon Wang.
All directors are elected for a one-year term at the Annual Meeting of the
shareholders. The appointment of all officers is subject to the discretion of
the Board of Directors.
The Executive Committee of the Board of Directors consists of Brandon Wang,
Philip Leung, Johnny Tsui, Patrick Tsang, Terence Leung and Peter Chang. The
Executive Committee has authority to take any action, other than appointment of
auditors, election and removal of directors and appointment of officers, which
can be taken only by the Board of Directors.
During 1997, the Company's Audit Committee consisted of Anil Thadani,
Terrence Daniels and Owen Price. The principal functions of the Audit Committee
are (i) to recommend the independent auditors to be employed by the Company;
(ii) to consult with the independent auditors with regard to the plan of audit;
(iii) to review, in consultation with the independent auditors, their audit
report or porposed audit report; and (iv) to consult with the independent
auditors with regard to the adequacy of the Company's internal accounting
controls.
Brandon Wang founded the Company in Hong Kong in 1973 and has been a
director and the Company's Chairman and Chief Executive Officer since that time.
Mr. Wang is a graduate of St. Francis Xavier's College in Kowloon, Hong Kong.
Philip Leung helped Brandon Wang establish the Company in 1973 and has
served as a director and Vice President of the Company since that time. He is
currently also the Company's Chief Purchasing Officer and oversees and
implements the global purchasing and product development of the Company. Mr.
Leung holds a diploma of Management Studies from Hong Kong Polytechnic and an
M.B.A. degree from the University of East Asia, Macau.
Johnny Tsui helped Brandon Wang establish the Company in 1973 and has
served as a director and Vice President of the Company since that time. In
September 1995, he was appointed as Secretary of the Company. He has also
served as Chief Operating Officer of the Company's Asian operations since 1991.
Patrick Tsang has been a director of the Company since 1980, and was
appointed a Vice President in January 1992. He was Secretary of the Company
from March 1992 to September 1995. In 1988, he started up
25
<PAGE>
the Company's Australian operations. Since July 1993 he has also served as Chief
Operating Officer of the Company's European operations. Mr. Tsang has a Ph.D. in
Engineering from the University of London. He also attended a Management Science
course at Imperial College, London.
Terence Leung has been the Company's Chief Financial and Accounting Officer
since 1988. He was appointed a director in 1991 and a Vice President in January
1992. Before joining the Company in 1978, Mr. Leung worked as an accountant
with several major trading corporations in Hong Kong. Mr. Leung is a certified
public accountant in the United Kingdom and Hong Kong.
Peter Chang has been the Chief Operating Officer of the Company's U.S.
operations since the Company moved its U.S. headquarters to Atlanta, Georgia in
late 1988. Mr. Chang joined the Company in 1984 as Vice President in charge of
U.S. sales and marketing at the time the Company commenced operations in the
United States, and became a director in 1991 and a Vice President in January
1992. Prior to joining the Company, Mr. Chang held various engineering and
management positions with major U.S. airlines, based in New York. Mr. Chang has
a Master's Degree in Operations Research from Kansas State University.
Owen Price became a director in April 1994. In 1993 he retired as the
Managing Director of Dairy Farm International Holdings Limited which he joined
in 1974. Prior to that time, he had 27 years experience with a large Australian
retailer, Woolworths Ltd., where he started as an Executive Trainee and worked
his way through to become Chief Executive in 1971. He has served on a number of
retail councils in different countries and has been an adviser to the Australian
government on trade matters. He is a director of numerous companies in the
Asia-Pacific region including three other listed public companies : Dairy Farm
International Holdings Limited, Cycle And Carriage Limited (alternate director),
and The Hour Glass Limited.
Anil Thadani advises the Company on financial matters, corporate strategy
and development, and was a director of the Company from 1989 until April 1995,
when he resigned as a result of his interest in the going private transaction.
He was re-elected to the Board in September 1995. Mr. Thadani is the Chairman
of Schroder Capital Partners (Asia) Limited, a direct investment company, which
he founded in July 1992 in joint venture with the Schroders Group of the United
Kingdom. Prior to this, he was the Managing Director and a founding partner of
Arral & Partners Limited, a private investment company based in Hong Kong. He
is also a director of Programmed Maintenance Services Pty. Ltd., ODS System-Pro
Holdings Ltd., Equatorial Reinsurance (Singapore) Ltd. and Scandia (Asia) Ltd.
Mr. Thadani has a Master's Degree in Chemical Engineering from the University of
Wisconsin, Madison, and an M.B.A. from the University of California at Berkeley.
Terrence Daniels served as a director of the Company from January 1992
until April 1995, when he resigned as a result of his interest in the going
private transaction. He was re-elected to the Board in September 1995. He is a
former Vice Chairman and director of W.R. Grace & Co. and a director of
Stimsonite Corporation, W.B. Bottling Corporation, Eskimo Pie Corporation and
numerous other private companies. Mr. Daniels is the founder, principal
shareholder and sole director of Quad-C, Inc., an investment firm located in
Charlottesville, Virginia. Mr. Daniels has a B.A. and an M.B.A. from the
University of Virginia. Mr. Daniels is not standing for election as a director
of the Company in 1998.
OTHER KEY MANAGEMENT PERSONNEL
In addition to the above-named officers and directors, the following
persons hold key management positions with the Company :
Benedict Wang became the Corporate Investor Relations Officer of the
Company in September 1993. Prior to this, he had been the Director of Sales and
Marketing of the Company's Hong Kong subsidiary in charge of marketing and sales
for the Asian region. Mr. Wang has a Master of Arts degree from the University
of North Dakota; a Bachelor of Fine Arts degree from the University of Manitoba;
and a Bachelor of Arts from the University of Waterloo (Ontario). Mr. Wang is
now Corporate Affairs Officer of the Company.
26
<PAGE>
S.L. Wang's primary responsibility in the Company is to oversee research
and development of new manufacturing process and technologies. He joined the
Company in 1984 to help start its U.S. operations in Los Angeles, California.
Prior to joining the Company, Mr. Wang was employed in the United States as an
architect and project supervisor for construction projects. Mr. Wang holds a
Bachelor's Degree in Architectural Engineering from Chung Yuan University,
Chung-Li, Taiwan.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
In 1997 the aggregate remuneration paid by the Company and its subsidiaries
to all directors and officers of the Company as a group (11 persons) for
services in all capacities was approximately $6,281,452.
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
Not applicable.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
The following table sets forth the aggregate amount of loans made by the
Company to Brandon Wang, the founder, principal shareholder and Chief Executive
Officer of the Company and to a trust of which he is a beneficiary since January
1, 1995 :
<TABLE>
<CAPTION>
LOAN BALANCE BALANCE
AT BEGINNING LOANS LOANS AT END
OF YEAR EXTENDED REPAID OF YEAR
------------ -------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Year ended December 31, 1997 $15,644 $ 6,129 $21,166 $ 607
Year ended December 31, 1996 12,536 7,638 4,530 15,644
Year ended December 31, 1995 674 13,167 1,305 12,536
</TABLE>
In 1997, 1996 and 1995 the Company advanced $6.1 million, $7.6 million and
$13.2 million, respectively, to Brandon Wang, the founder, substantial
shareholder and Chief Executive Officer of the Company and to a trust of which
he is a beneficiary. These advances were made under a loan and security
agreement in which the Company agreed to make loans to Brandon Wang from time to
time, subject to any limit on such loans which may be imposed by the Board of
Directors. The advances were evidenced by promissory notes bearing interest at
a rate equal to 1.5% over the London Inter-Bank Offered Rate or such other rate
that the Board of Directors and the borrower shall agree in writing. The rate
of interest was reviewed quarterly and adjusted, if necessary. The promissory
notes were collateralized by the pledge of shares of the Company held by Brandon
Wang. The fair market value of the shares pledged was required to be at least
200% of the amount due under the notes. The loans were repayable on demand,
however, the Company and Brandon Wang agreed to a quarterly repayment schedule,
with the final payment of principal due in 1998. During 1997 and 1996, Brandon
Wang and a trust controlled by him repaid $21.2 million and $4.5 million,
respectively, to the Company. As the loans were settled during 1997, the
pledged shares were released. Interest of $1.0 million, $1.0 million and $0.7
million was charged on these advances in 1997, 1996 and 1995, respectively. The
balance at December 31, 1997 was $0.6 million.
In 1997, a U.S. subsidiary of the Company extended a guarantee to a bank as
part of a $15 million term loan provided to Brandon Wang. Brandon Wang has
pledged 2,217,100 shares in the Company to the lender as security for the loan.
Commencing January 1, 1998, this loan is repayable by quarterly instalments of
$0.4 million followed by a balloon payment of $10.1 million on August 1, 2000.
27
<PAGE>
ITEM 14. DESCRIPTION OF SECURITIES.
The following is a brief description of the rights of holders of fully
paid Ordinary Shares. This description does not purport to be complete and is
qualified in its entirety by reference to the Memorandum and Articles of
Association of the Company, which have been previously filed as an exhibit, and
to the relevant provisions of the British Virgin Islands International Business
Companies Act.
A. GENERAL
All of the issued Ordinary Shares are credited as fully paid and non-
assessable, except that a share issued for a promissory note or other written
obligation for payment of a debt may be subject to forfeiture, and accordingly
no further contribution of capital may be required by the Company from holders
of Ordinary Shares. Under British Virgin Islands ("BVI") law, non-residents of
the BVI may freely hold, vote and transfer their Ordinary Shares in the same
manner as BVI residents.
B. DIVIDENDS
Holders of Ordinary Shares are entitled to participate in the payment of
dividends in proportion to their holdings. The Board of Directors may declare
and pay dividends in respect of any accounting period out of the profits legally
available for distribution. Dividends, if any, will be paid in U.S. dollars.
The Company's dividend policy will depend on the Company's earnings,
capital requirements, financial condition and other factors considered relevant
by the Board of Directors. For a discussion of taxation of dividends, see
"Taxation".
The Company did not pay any dividend in 1997.
C. VOTING RIGHTS
In order to avoid certain adverse U.S. income tax consequences to the
Company, the voting rights of any shareholder who holds more than 10% of the
Company's outstanding shares will be suspended as to shares held by such
shareholder in excess of 10% of the Company's outstanding shares ("Excess
Shares"). Excess Shares are not counted as voting shares for purposes of
establishing a quorum at shareholders' meetings. However, the Board of
Directors has discretion to exempt any such Excess Shares from these
restrictions if it is satisfied, on the basis of evidence and assurances
acceptable to it, that the holding of shares in excess of 10% of the Company's
outstanding shares by such shareholder will not result in the Company being
classified as a controlled foreign corporation ("CFC"), foreign personal holding
company ("FPHC") or personal holding company ("PHC") within the meaning of the
U.S. Internal Revenue Code ("Code"). See "Taxation"; "Restrictions on Transfer
and Voting; Redemption of Ordinary Shares".
Every shareholder who is present in person or by proxy at a meeting of
the Company shall have one vote for each Ordinary Share of which he is the
holder. A poll may be demanded by the chairman of the meeting, or by any
shareholder present in person or by proxy.
The Articles of Association of the Company make no provision for
cumulative voting. Accordingly, the controlling shareholders have a sufficient
number of Ordinary Shares to elect all of the Company's directors.
28
<PAGE>
D. RESTRICTIONS ON TRANSFER AND VOTING; REDEMPTION OF ORDINARY SHARES
The Company's Memorandum and Articles of Association contain certain
provisions which are intended to avoid situations in which the Company may be
classified as a CFC, FPHC or PHC. See "Taxation". These provisions are intended
only to avoid the adverse U.S. income tax consequences which would result from
such classification.
The following is a summary of the relevant provisions of the Memorandum
and Articles :
(i) Restricted Transfers of Ordinary Shares. The Board of Directors may,
but is not obliged to, refuse to register the transfer of any of the
Ordinary Shares of the Company if, in the opinion of the Board, such
transfer might cause the Company to be classified as a CFC, FPHC or
PHC.
(ii) Restrictions on Voting Rights. In the event that any person holds
more than 10% of the Company's outstanding shares, any shares in
excess of 10% of the Company's outstanding shares shall be "Excess
Shares", which shall not be entitled to any voting rights and shall
not be considered voting shares for purposes of establishing a
quorum. However, the Board of Directors may exempt any such Excess
Shares from these restrictions if it is satisfied, on the basis of
evidence and assurances acceptable to it, that the holding of shares
in excess of 10% of the Company's outstanding shares by such
shareholder will not result in the Company being classified as a CFC,
FPHC or PHC. In addition, these restrictions on voting rights do not
apply to shares acquired in a cash tender offer for all outstanding
shares of the Company where a majority of the outstanding shares of
the Company are duly tendered and accepted pursuant to such cash
tender offer.
(iii) Disclosure of Certain Information to the Company. Any person who
directly owns 5% or more of the Company's outstanding shares is
required to file with the Company, within 60 days of the end of the
Company's taxable year (which is currently the calendar year) and
prior to any transfer of shares by or to such person, an affidavit
setting forth the number of shares (1) owned directly by such person
or by a nominee of such person, and (2) owned indirectly or
constructively by such person by reason of the attribution rules of
Sections 542, 544 and 958 of the Code or by reason of application of
the attribution rules of Rule 13(d) of the U.S. Securities Exchange
Act of 1934 ("Exchange Act"). The affidavit filed with the Company
must set forth all the information required to be reported (1) in
returns of shareholders required to be filed under U.S. Income Tax
Regulations Section 1.6035-1 (including shareholder related
information for inclusion in IRS Form 5471), and (2) in reports
required to be filed under Section 13(d) of the Exchange Act. All
shares held by any person who fails to comply with this reporting
requirement shall be deemed Excess Shares and shall be subject to the
voting restrictions and redemption provisions described herein.
(iv) Redemption of Ordinary Shares. The Company may, in the discretion of
the Board of Directors, redeem any Excess Shares at a price equal to
(1) the average of the high and low sales price of the shares on the
last business day prior to the redemption date on the principal
national securities exchange on which such shares are listed or
admitted to trading, or (2) if the shares are not listed or admitted
to trading, the average of the highest bid and lowest asked prices on
such last business day as reported by the National Quotation Bureau
Incorporated or similar organization selected from time to time by
the Company, or (3) if not determinable as aforesaid, as determined
in good faith by the Board of Directors.
The directors of the Company, in a meeting held on January 6, 1992,
resolved that the principal shareholder, Brandon Wang, is exempt from the
foregoing restrictions. The directors have also approved exemption of certain
institutional shareholders from the foregoing restrictions as the Board was
satisfied that such exemption would not have any of the adverse tax consequences
described above.
29
<PAGE>
E. RIGHTS OF SHAREHOLDERS UNDER BRITISH VIRGIN ISLANDS LAW MAY BE LESS THAN IN
U.S. JURISDICTIONS
The Company's corporate affairs are governed by its Memorandum and
Articles of Association and by the International Business Companies Act of the
British Virgin Islands. Principles of law relating to such matters as the
validity of corporate procedures, the fiduciary duties of Management and the
rights of the Company's shareholders may differ from those that would apply if
the Company were incorporated in a jurisdiction within the United States. The
rights of shareholders under British Virgin Islands law are not as clearly
established as the rights of shareholders under legislation or judicial
precedent in existence in most U.S. jurisdictions. Thus, the public
shareholders of the Company may have more difficulty in protecting their
interests in the face of actions by the Board of Directors or the principal
shareholders than they might have as shareholders of a corporation incorporated
in a U.S. jurisdiction. In addition, it is unlikely that the courts of the
British Virgin Islands would enforce, either in an original action or in an
action for enforcement of judgments of U.S. courts, liabilities which are
predicated upon the securities laws of the United States. See "Description of
Securities".
F. DIRECTORS
Under the Company's Articles of Association, the first directors must be
appointed by the subscribers to the Memorandum of Association, and thereafter
the directors may be appointed by the shareholders, or by the directors to fill
a vacancy or as an addition to the existing directors. Directors may be
removed, with or without cause, by a resolution of the shareholders of the
Company, or with cause by a resolution of the other directors.
G. QUORUM
The quorum required to constitute a valid general meeting of
shareholders consists of shareholders present in person or by proxy holding at
least a majority of all issued Ordinary Shares entitled to vote. If a meeting
is adjourned for lack of quorum, it will stand adjourned to the next business
day at the same time and place or to such other day and at such other time and
place as the directors may determine, and if at the adjourned meeting there are
present within one hour from the time appointed for the meeting at least one-
third of the shares entitled to vote at the meeting, the shareholder or
shareholders present shall be a quorum. However, a meeting convened on the
requisition of the shareholders shall be dissolved if a quorum is not present at
the first meeting.
H. RESOLUTIONS
Resolutions may be adopted at shareholders' meetings by the affirmative
vote of a simple majority of the Ordinary Shares entitled to vote thereon.
Certain actions may be taken by a resolution of the directors. Such
actions include an amendment of the Company's Memorandum or Articles of
Association, an increase or reduction in the Company's authorized capital, and a
change in the Company's name.
I. RIGHTS IN A WINDING-UP
Holders of Ordinary Shares are entitled to participate in proportion to
their holdings in any distribution of assets after satisfaction of liabilities
to creditors in a winding-up.
30
<PAGE>
J. AUTHORIZED BUT UNISSUED SHARES
Under the Company's Memorandum and Articles of Association, there are
13,325,394 authorized but unissued Ordinary Shares. Those additional authorized
but unissued Ordinary Shares may be utilized for a variety of corporate
purposes, including future public or private offerings to raise additional
capital or for facilitating corporate acquisitions. In addition, the Company
cancelled 603,000 shares in 1996 and 1,037,394 shares in 1997, which were
repurchased under the share repurchase plan adopted during 1994 and amended in
1995 and the tender offer transaction which was completed in December 1996. The
Company does not currently have any plans to issue additional Ordinary Shares.
K. TRANSFERS OF ORDINARY SHARES
The Company's Memorandum and Articles of Association do not restrict the
transferability of fully paid Ordinary Shares, except that the Board of
Directors may refuse to register the transfer of any of the Ordinary Shares if,
in the opinion of the Board, such transfer might result in the Company becoming
a CFC, FPHC or PHC. See "Restrictions on Transfer and Voting; Redemption of
Ordinary Shares".
L. NEW ISSUES OF ORDINARY SHARES
Under the Company's Articles of Association, the Board of Directors is
authorized to exercise the power of the Company to offer, allot, grant options
over or otherwise dispose of all of the remaining unissued Ordinary Shares of
the Company, which comprise 13,325,394 Ordinary Shares. The Board of Directors
may, without further shareholder action, increase the number of authorized
shares of the Company.
In addition the Board of Directors may, without further shareholder
action, designate any of the authorized but unissued Ordinary Shares as
preferred shares by amending the Company's Memorandum of Association. Upon
filing such amendment with the BVI Registrar of Companies, the Board of
Directors would have authority to fix the dividend rights and rates, voting
rights, redemption provisions and liquidation preference, all of which may take
precedence over comparable rights of the existing Ordinary Shares.
M. MERGER; DISSENTERS' RIGHTS
BVI law provides for mergers whereby there occurs either an absorption
by one company of another company and the simultaneous dissolution of the other
company, or the formation of a new company that absorbs two companies and the
automatic dissolution of both absorbed companies. BVI law provides for
compulsory acquisition or appraisal of the interests of a shareholder who
objects to the transfer of the ownership or assets of a company.
Under section 83 of the BVI International Business Companies Act, a
shareholder of a company incorporated under the Act has the right to object to a
proposed merger of the Company. If the shareholder complies fully with the
requirements of section 83 and the merger is approved by a majority of
shareholders, the dissenting shareholder may require the Company to pay fair
value (as agreed or appraised) for his shares.
Pursuant to section 83 (11) of the Act, a shareholder who chooses to
enforce dissenting shareholders' rights may not enforce other remedial rights to
which he might otherwise be entitled by virtue of his holding shares, except
that the shareholder shall retain the right to institute proceedings to obtain
relief on the ground that the merger is illegal.
31
<PAGE>
N. JOINT SHAREHOLDERS
If two or more persons who hold shares jointly are present at a meeting in
person or by proxy they must vote as one. Dividends and notices may be paid or
sent, in the case of joint holders, to any one of the persons named as joint
shareholders in the register of members.
O. FIDUCIARY RESPONSIBILITIES
Under U.S. law majority and controlling shareholders generally have certain
"fiduciary" responsibilities to the minority shareholders. Shareholder action
must be taken in good faith and actions by controlling shareholders which are
obviously unreasonable may be declared null and void. BVI law protecting the
interests of minority shareholders may not be as protective in all circumstances
as the law protecting minority shareholders in U.S. jurisdictions.
While BVI law does permit a shareholder of a BVI company to sue its
directors derivatively (i.e., in the name of and for the benefit of the Company)
and to sue the Company and its directors for his benefit and for the benefit of
others similarly situated, the circumstances in which any such action may be
brought, and the procedures and defenses that may be available in respect of any
such action, may result in the rights of shareholders of a BVI company being
more limited than those of shareholders in a U.S. company.
P. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under its Memorandum and Articles of Association, the Company is authorized
to indemnify any person who is made or threatened to be made a party to a legal
or administrative proceeding by virtue of being a director, officer or agent of
the Company, provided such person acted in the best interests of the Company
and, in the case of a criminal proceeding, such person had no reasonable cause
to believe that his conduct was unlawful. The Company is obliged to indemnify
any director, officer or agent of the Company who was successful in any
proceeding against reasonable expenses incurred in connection with the
proceeding, regardless of whether such person met the standard of conduct
described in the preceding sentence.
Q. TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services serves as the Transfer Agent and
Registrar for the Ordinary Shares.
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.
Not applicable.
ITEM 17. FINANCIAL STATEMENTS.
Financial statements are presented in Item 18.
ITEM 18. FINANCIAL STATEMENTS.
The information required by Item 18 is contained in pages 17 to 33 of the
Annual Report to Shareholders.
32
<PAGE>
ITEM 19. FINANCIAL STATEMENTS AND SCHEDULES AND EXHIBITS.
A. FINANCIAL STATEMENTS
The following financial statements are contained in the Annual Report to
Shareholders at the pages referred to below, which pages are incorporated herein
by reference :
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management Report 14
Independent Auditors' Report 15
Consolidated Statements of Operations for the three years
ended December 31, 1997 17
Consolidated Balance Sheets as of December 31, 1997 and 1996 18-19
Consolidated Statements of Cash Flows for the three years
ended December 31, 1997 20-21
Consolidated Statements of Shareholders' Equity for the three years
ended December 31, 1997 22
Notes to Consolidated Financial Statements 23-33
B. CONDENSED FINANCIAL INFORMATION
Page
----
Independent Auditors' Report S-1
Unconsolidated Statements of Operations for the three years
ended December 31, 1997 S-2
Unconsolidated Balance Sheets as of December 31, 1997 and 1996 S-3
Unconsolidated Statements of Cash Flows for the three years
ended December 31, 1997 S-4
Notes to Schedule 1 S-5
</TABLE>
C. EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Loan and Security Agreement between Associated Hygienic Products
LLC as Borrower and SouthTrust Bank of Georgia, N.A. as Lender,
signed on December 16, 1996. (Incorporated by reference from
Exhibit 3.1 to Form 20-F filed June 6, 1997).
3.2 First Amendment to Loan and Security Agreement between Associated
Hygienic Products LLC and SouthTrust Bank of Georgia, N.A. dated
August 19, 1997.
3.3 Guaranty of Associated Hygienic Products LLC dated August 19, 1997.
3.4 Loan Agreement between Brandon S.L. Wang and SouthTrust Bank of
Georgia, N.A. dated August 19, 1997.
11 Computation of Net Income Per Ordinary Share.
33
<PAGE>
D. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are not included because the information
is contained in the Notes to Consolidated Financial Statements in pages 23 to 33
of the Annual Report to Shareholders.
SIGNATURES
Pursuant to the requirement of Section 12 of the Securities Exchange Act of
1934, the Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form 20-F and has duly caused the
Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized, in Hong Kong, on May 26, 1998.
DSG INTERNATIONAL LIMITED
By /s/TERENCE Y.F. LEUNG
---------------------
Terence Y.F. Leung
Vice President and Treasurer
34
<PAGE>
MANAGEMENT REPORT
To the Shareholders of DSG International Limited
The financial statements of the Company published in this report were prepared
by the Company's management, which is responsible for their integrity and
objectivity. The statements have been prepared in accordance with United States
generally accepted accounting principles, applying certain estimates and
judgments as required. The financial information elsewhere in this report is
consistent with the statements.
The Company maintains a system of internal controls adequate to provide
reasonable assurance that its transactions are appropriately recorded and
reported, its assets are protected and its established policies are followed.
This system is maintained by the establishment and communication of policies and
a qualified financial staff.
Our independent auditors, Deloitte Touche Tohmatsu, provide an objective
independent audit of the Company's financial statements and issuance of a report
thereon. Their audit is conducted in accordance with United States generally
accepted auditing standards.
The Audit Committee of the Board of Directors, comprised solely of outside
directors, meets periodically and privately with the independent auditors and
representatives from management to evaluate the adequacy and effectiveness of
the audit functions, control systems and quality of our financial accounting and
reporting.
TERENCE LEUNG
Chief Financial Officer
March 13, 1998
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Directors of
DSG International Limited
We have audited the accompanying consolidated balance sheets of DSG
International Limited and its subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of DSG International Limited and its
subsidiaries at December 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE TOUCHE TOHMATSU
Hong Kong
March 13, 1998
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
STATEMENT OF OPERATIONS DATA 1997 1996 1995 1994 1993
------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net sales $230,930 $236,050 $245,881 $218,771 $150,340
Cost of sales 153,929 155,647 177,315 143,194 95,724
Gross profit 77,001 80,403 68,566 75,577 54,616
Selling, general and administrative expenses 72,034 64,420 59,508 52,134 35,360
Restructuring costs 1,389 - - - -
-------- -------- -------- -------- --------
Operating income 3,578 15,983 9,058 23,443 19,256
Interest expense (2,833) (2,267) (1,759) (724) (162)
Interest income 1,451 1,900 1,666 1,435 1,053
Exchange (loss) gain (610) (176) 1,053 2,245 (90)
Non-recurring charge - - (1,968) - -
Other (expense) income (169) (89) (318) 284 211
-------- -------- -------- -------- --------
Income before income taxes 1,417 15,351 7,732 26,683 20,268
Provision for income taxes (443) (6,185) (3,267) (10,033) (6,970)
Minority interest in losses - - 222 - -
-------- -------- -------- -------- --------
Net income $974 $9,166 $4,687 $16,650 $13,298
======== ======== ======== ======== ========
Basic earnings per share:
Net income $0.15 $1.18 $0.58 $2.00 $1.60
Weighted average number of shares
outstanding 6,675 7,747 8,109 8,315 8,315
<CAPTION>
DECEMBER 31,
BALANCE SHEET DATA 1997 1996 1995 1994 1993
------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working capital $ 30,823 $ 31,714 $ 19,577 $ 34,307 $ 32,597
Total assets 130,273 141,910 154,393 135,437 102,088
Long-term debt 21,281 21,587 16,470 11,480 2,942
Shareholders' equity 64,778 74,639 83,706 82,990 67,974
</TABLE>
16
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------------
<S> <C> <C> <C>
Net sales $230,930 $236,050 $245,881
Cost of sales 153,929 155,647 177,315
-------- -------- --------
Gross profit 77,001 80,403 68,566
Selling, general and administrative expenses 72,034 64,420 59,508
Restructuring costs (Note 3) 1,389 - -
-------- -------- --------
Operating income 3,578 15,983 9,058
Interest expense (2,833) (2,267) (1,759)
Interest income 1,451 1,900 1,666
Exchange (loss) gain (610) (176) 1,053
Non-recurring charge (Note 5) - - (1,968)
Other expense, net (169) (89) (318)
-------- -------- --------
Income before income taxes 1,417 15,351 7,732
Provision for income taxes (Note 7) (443) (6,185) (3,267)
Minority interest in losses - - 222
-------- -------- --------
Net income $974 $9,166 $4,687
======== ======== ========
Basic earnings per share $0.15 $1.18 $0.58
======== ======== ========
Weighted average number of shares outstanding 6,675 7,747 8,109
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
CONSOLIDATED BALANCE SHEETS
(in thousands except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
-------------------
<S> <C> <C>
ASSETS
Current assets :
Cash and cash equivalents $18,588 $ 8,605
Accounts receivable, less allowance for doubtful
accounts of $577 in 1997 and $643 in 1996 24,209 27,577
Receivable from shareholder (Note 6) 607 10,031
Other receivables 1,323 1,249
Inventories (Note 8) 24,854 23,990
Prepaid expenses and other current assets 1,539 1,742
Income taxes receivable 591 569
Deferred income taxes 144 75
------- -------
Total current assets 71,855 73,838
------- -------
Property and equipment - at cost : (Note 9)
Land 4,699 4,747
Buildings 21,563 20,012
Machinery and equipment 76,233 69,099
Furniture and fixtures 2,661 2,622
Motor vehicles 1,782 1,999
Leasehold improvements 1,794 1,767
Construction in progress 538 134
------- -------
Total 109,270 100,380
Less: accumulated depreciation and amortization 52,586 38,297
------- -------
Net property and equipment 56,684 62,083
------- -------
Receivable from shareholder (Note 6) - 5,613
Deferred income taxes 291 162
Other assets 1,443 214
------- -------
Total assets $130,273 $141,910
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(in thousands except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
--------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities :
Short-term borrowings (Note 10) $ 8,177 $10,227
Current portion of long-term debt (Note 11) 4,228 3,204
Deferred purchase consideration (Note 12) 408 839
Accounts payable 14,844 10,197
Accrued advertising and promotion 3,578 5,156
Accrued payroll and employee benefits 2,322 2,730
Other accrued expenses 5,059 5,161
Income taxes payable (Note 7) 1,862 4,195
Deferred income taxes 554 415
-------- --------
Total current liabilities 41,032 42,124
-------- --------
Long-term debt (Note 11) 21,281 21,587
Deferred income taxes (Note 7) 2,448 3,207
Deferred purchase consideration (Note 12) - 353
-------- --------
Total long-term liabilities 23,729 25,147
-------- --------
Minority interest 734 -
-------- --------
Commitments and contingencies (Note 14)
Shareholders' equity :
Ordinary shares, $0.01 par value - authorized 20,000,000 shares;
issued 6,674,606 shares in 1997 and 7,712,000 shares in 1996,
outstanding 6,674,606 shares in 1997 and 6,678,359 shares in 1996 67 77
Additional paid-in capital 18,301 33,653
Retained earnings 56,644 55,670
Foreign currency translation adjustments (10,234) 551
Treasury shares, at cost - 1,033,641 shares in 1996 (Note 13) - (15,312)
-------- --------
Total shareholders' equity 64,778 74,639
-------- --------
Total liabilities and shareholders' equity $130,273 $141,910
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 974 $ 9,166 $ 4,687
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 12,206 10,646 9,143
Accelerated depreciation on assets written off 503 - 534
Loss (gain) on disposals of property 122 (15) (51)
Loss on sale of investments - - 401
Deferred taxes (544) 24 (77)
Minority interest - - (222)
Other 1,149 1,490 (595)
Net change in working capital components (1,567) (1,365) (5,370)
------- ------- -------
Net cash provided by operating activities 12,843 19,946 8,450
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property (6,389) (5,871) (16,445)
Proceeds from disposals of property 377 45 142
Purchase of subsidiaries net of cash acquired (4,366) - -
Purchase of minority interest in subsidiary - (150) -
Proceeds from sale of investments - - 4,565
Receipt of (investment in) restricted bank deposit - 5,269 (623)
Advances to shareholder (6,129) (7,638) (13,167)
Repayments by shareholder 21,166 4,530 1,306
Increase in other assets (483) - -
------- ------- -------
Net cash provided by (used in) investing activities 4,176 (3,815) (24,222)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in short-term borrowings (3,776) (5,172) 7,986
Increase in long-term debt and other non-current debt 6,056 12,070 12,248
Repayment of long-term debt and other non-current debt (8,314) (11,153) (449)
Payment of deferred purchase consideration (502) (823) (902)
Investment by minority shareholder 734 - 150
Purchase of treasury shares (49) (17,631) (4,871)
Tender offer expenses - (433) -
------- ------- -------
Net cash (used in) provided by financing activities (5,851) (23,142) 14,162
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents (1,185) 43 37
------- ------- -------
Increase (decrease) in cash and cash equivalents 9,983 (6,968) (1,573)
Cash and cash equivalents, beginning of year 8,605 15,573 17,146
------- ------- -------
Cash and cash equivalents, end of year $18,588 $8,605 $15,573
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
---------------------------
<S> <C> <C> <C>
SCHEDULE OF CHANGES IN WORKING CAPITAL COMPONENTS
NET OF EFFECTS FROM PURCHASE OF SUBSIDIARIES
Accounts receivable $ 2,094 $(1,900) $ 1,360
Other receivables (816) (13) (627)
Inventories (826) (2,947) (4,231)
Prepaid expenses and other current assets 418 277 100
Accounts payable 1,107 (1,188) (4,012)
Accrued expenses (1,617) 2,471 1,892
Income taxes payable (1,927) 1,935 148
------- ------- -------
Net change in working capital components $(1,567) $(1,365) $(5,370)
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $3,267 $2,258 $1,551
Income taxes $2,855 $4,412 $3,896
Acquisitions:
Fair value of assets acquired $15,052 $ - $ -
Goodwill 855 - -
Cash paid (4,923) - -
------- ------- -------
Liabilities assumed $10,984 $ - $ -
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Unrealized
Foreign Loss on
Additional Currency Investments Treasury Total
Ordinary Shares Paid-in Retained Translation Available Shares Shareholders'
Shares Amount Capital Earnings Adjustments for Sale at Cost Equity
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 8,315 $83 $41,270 $41,817 $ 500 $(680) $ - $ 82,990
Net income - - - 4,687 - - - 4,687
Realized on sale of investments - - - - - 680 - 680
Purchase of treasury shares - - - - - - (4,871) (4,871)
Translation adjustment for the
year - - - - 220 - - 220
------ ------- ---------- ----------- ----------- ----------- -------- -------------
Balance at December 31, 1995 8,315 83 41,270 46,504 720 - (4,871) 83,706
Net income - - - 9,166 - - - 9,166
Purchase of treasury shares
(Note 13) - - - - - - (18,064) (18,064)
Cancellation of treasury shares (603) (6) (7,617) - - - 7,623 -
Translation adjustment for the
year - - - - (169) - - (169)
------ ------- ---------- ----------- ----------- ----------- -------- -------------
Balance at December 31, 1996 7,712 77 33,653 55,670 551 - (15,312) 74,639
Net income - - - 974 - - 974
Purchase of treasury
shares (Note 13) (5) - - - - - (68) (68)
Adjustment of repurchased
shares 1 - - - - - 18 18
Cancellation of treasury
shares (1,034) (10) (15,352) - - - 15,362 -
Translation adjustment
for the year - - - - (10,785) - - (10,785)
------ ------- ---------- ----------- ----------- ----------- -------- -------------
Balance at December 31, 1997 6,674 $67 $18,301 $56,644 $(10,234) $- $- $64,778
====== ======= ========== =========== =========== =========== ======== =============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands)
1. ORGANIZATION AND BASIS OF PRESENTATION
DSG International Limited (the "Company") is incorporated in the British
Virgin Islands. It operates through subsidiary companies located in North
America, Australia, Asia and Europe which are engaged in the manufacture
and distribution of disposable baby diapers, adult incontinence, feminine
napkins and training pants products.
The financial statements of the Company and its subsidiaries have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP") which differ from those used in the
statutory accounts of its subsidiaries. There are no material differences
between the U.S. GAAP amounts and the amounts used in the statutory
accounts of the subsidiaries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation -- The consolidated financial statements
include the assets, liabilities, revenues and expenses of all subsidiaries.
Intercompany balances and transactions are eliminated in consolidation.
Cash and cash equivalents -- Cash and cash equivalents include cash on
hand, cash accounts, interest bearing savings accounts, commercial paper
and time certificates of deposit with an original maturity of three months
or less.
Inventories -- Inventories are stated at the lower of cost determined by
the first-in, first-out method, or value determined by the market. Finished
goods inventories consist of raw materials, direct labor, and overhead
associated with the manufacturing process.
Depreciation and amortization of property and equipment --Depreciation is
provided on the straight line method at rates based upon the estimated
useful lives of the property, generally three to ten years except for
buildings which are 40 years. Costs of leasehold improvements are amortized
over the life of the related asset or the term of the lease, whichever is
shorter.
Goodwill -- Goodwill is amortized on a straight-line basis over periods
estimated to be benefited, generally over 5 years. At December 31, 1997 and
1996, goodwill amounted to $862 and $214 net of accumulated amortization of
$346 and $140, respectively, and is included in other assets.
Revenue recognition -- The Company recognizes revenue at the time shipments
of product are made to customers.
Income taxes -- Deferred income taxes are provided at enacted statutory
rates for temporary differences resulting from differences between the book
and tax bases of assets and liabilities in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income
Taxes".
Valuation of long-lived assets -- The Company periodically evaluates the
carrying value of long-lived assets to be held and used, including goodwill
and other intangible assets, when events and circumstances warrant such a
review. The carrying value of a long-lived asset is considered impaired
when the anticipated undiscounted cash flow from such asset is separately
identifiable and is less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to be
disposed of are determined in a similar manner, except that fair market
values are reduced for the cost to dispose.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Foreign currency translation -- Assets and liabilities of foreign
subsidiaries are translated at year end exchange rates, while revenues and
expenses are translated at average currency exchange rates during the year.
Adjustments resulting from translating foreign currency financial
statements are reported as a separate component of shareholders' equity.
Gains or losses from foreign currency transactions are included in net
income of the current period.
Postretirement and postemployment benefits -- The Company does not provide
postretirement benefits, and postemployment benefits, if any, are not
significant.
Earnings per share -- Earnings per share are based on the weighted average
number of Ordinary Shares outstanding. On March 3, 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per
Share". This pronouncement provides for the calculation of basic and
diluted earnings per share which is different from the current calculation
of primary and fully diluted earnings per share. The adoption of this new
standard had no impact on the Company.
Concentration of credit risk -- The Company sells to distributors and
retailers located in each of the countries in which it operates. The
Company grants credit to all qualified customers on an unsecured basis but
does not believe it is exposed to any undue concentration of credit risk to
any significant degree.
New accounting standards not yet adopted -- The FASB has issued three new
disclosure standards. Results of operations and financial position will be
unaffected by implementation of these new standards.
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS No. 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", which supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise", establishes standards for the way that
public enterprises report information about operating segments in interim
financial statements issued to the public. It also establishes standards
for disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance.
SFAS No. 132, "Employers Disclosures about Pensions and Other
Postretirement Benefits", amends the disclosure requirements relating to
pensions and other postretirement benefits.
Each of these new standards is effective for financial statements for
periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact,
if any, they may have on future financial statement disclosures.
Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires the use of
estimates. Actual results could differ from those estimates.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands)
3. RESTRUCTURING COSTS
In the fourth quarter of 1997, the Company closed certain of its
manufacturing operations, principally through the closure of its Canadian
and Singapore manufacturing operations, resulting in aggregate losses of
$886, and the write-down of $503 of certain surplus equipment in Europe. Of
the total restructuring costs of $1,389, $503 represented non-cash write-
downs of property and equipment and $886 for the reduction in workforce and
other cash outflows.
4. ACQUISITIONS
In 1997, the Company acquired for cash the entire share capital of a
manufacturer of adult incontinence products and disposable baby diapers in
Wisconsin, United States, and the manufacturing assets of a company in the
Netherlands and its related distribution company in Belgium for a total
consideration of $4,923. Goodwill of $855 arose on the acquisition, which
is being amortized over 5 years. The acquisitions were accounted for as
purchases and their operating results are included in the Consolidated
Statements of Operations from their respective dates of acquisition. The
acquisitions had no material effect on operating results.
In 1996, the Company acquired for cash of $150, the minority interest in a
subsidiary, which approximated fair value.
5. NON-RECURRING CHARGE
The non-recurring charge in 1995 represents expenses of a going private
transaction proposed in April 1995 by a management group, led by the
Company's Chairman, Brandon Wang, and two other equity investors, which was
subsequently terminated in July 1995.
6. RECEIVABLE FROM SHAREHOLDER
In 1997, 1996 and 1995 the Company advanced $6,129, $7,638 and $13,167,
respectively, to Brandon Wang, the founder, substantial shareholder and
Chief Executive Officer of the Company and to a trust of which he is a
beneficiary. These advances were made under a loan and security agreement
in which the Company agreed to make loans to Brandon Wang from time to
time, subject to any limit on such loans which may be imposed by the Board
of Directors. The advances were evidenced by promissory notes bearing
interest at a rate equal to 1.5% over the London Inter-Bank Offered Rate
(LIBOR) or such other rate that the Board of Directors and the borrower
shall agree in writing. The rate of interest was reviewed quarterly and
adjusted, if necessary. The promissory notes were collateralized by the
pledge of shares of the Company held by Brandon Wang. The fair market value
of the shares pledged was required to be at least 200% of the amount due
under the notes. The loans were repayable on demand, however, the Company
and Brandon Wang agreed to a quarterly repayment schedule, with the final
payment of principal due in 1998. During 1997 and 1996, Brandon Wang and a
trust controlled by him repaid $21,166 and $4,530, respectively, to the
Company. As the loans were settled during 1997, the pledged shares were
released. Interest of $1,000, $958 and $652 was charged on these advances
in 1997, 1996 and 1995, respectively. The balance at December 31, 1997 was
$607.
In 1997, a U.S. subsidiary of the Company extended a guarantee to a bank as
part of a $15,000 term loan provided to Brandon Wang. Brandon Wang has
pledged 2,217,100 shares in the Company to the lender as security for the
loan. Commencing January 1, 1998, this loan is repayable by quarterly
instalments of $375 followed by a balloon payment of $10,875 on August 1,
2000.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands)
7. INCOME TAXES
Income is subject to taxation in the various countries in which the Company
and its subsidiaries operate. The Company is not taxed in the British
Virgin Islands where it is incorporated.
The components of income before income taxes are as follows :
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
U.S. $(3,928) $6,503 $5,467
Foreign 5,345 8,848 2,265
-------- -------- --------
$1,417 $15,351 $7,732
======== ======== ========
</TABLE>
The provision for income taxes consists of the following :
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Current
U.S. Federal $ - $ 2,320 $1,611
U.S. State - 54 -
Foreign 1,040 4,164 2,175
Benefit of loss carryforwards - (415) (440)
Deferred taxes (597) 62 (79)
-------- -------- --------
$ 443 $6,185 $3,267
======== ======== ========
</TABLE>
A reconciliation between the provision for income taxes computed by
applying the United States Federal statutory tax rate to income before
taxes and the actual provision for income taxes is as follows :
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Provision for income taxes at statutory rate
on profit for the year 35.0% 35.0% 35.0%
Lower tax rate applicable to foreign earnings (78.7) (1.1) (1.6)
State income taxes net of Federal benefit - 0.4 1.2
Changes in valuation allowances 64.3 2.1 9.0
Utilization of loss carryforwards - (2.7) (5.7)
Withholding tax on interest and royalty income 11.6 1.9 5.0
Other (0.9) 4.7 (0.6)
-------- -------- --------
Effective rate 31.3% 40.3% 42.3%
</TABLE>
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands)
7. INCOME TAXES - CONTINUED
Certain subsidiaries have operating loss carryforwards for income tax
purposes which may be applied to reduce future taxable income. The loss
carryforwards are available on a country by country basis and are not
available for use except in the country in which the loss occurred. At
December 31, 1997 the tax loss carryforwards by country and their future
expiration dates are as follows :
<TABLE>
<CAPTION>
TOTAL 2000 2001 2002 2003 2004 INDEFINITE
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
United Kingdom $84,962 $ - $ - $ - $ - $ - $84,962
Thailand 2,910 - - 2,910 - - -
Switzerland 3,957 894 918 1,824 184 137 -
China 554 334 65 155 - - -
U.S.A. 13,142 - 3,908 3,907 3,907 - 1,420
Belgium 246 - - - - - 246
------- ----- ------ ------ ------ ----- -------
$105,771 $1,228 $4,891 $8,796 $4,091 $137 $86,628
======= ===== ====== ====== ====== ===== =======
</TABLE>
Included in United Kingdom operating loss carryforwards for income tax
purposes is approximately $74,242 relating to tax losses at the date of
acquisition of a company acquired in 1993. Utilization of these losses will
result in a reduction in future tax expense and is dependent on both the
earning of sufficient otherwise taxable income in the relevant countries
and the satisfaction of technical requirements of applicable law. In the
case of the United Kingdom, this includes the requirement that there not be
a "major change" in business activities.
Deferred income tax balances at December 31, 1997 are related to :
<TABLE>
<CAPTION>
ASSETS LIABILITIES
-----------------------
<S> <C> <C>
Inventories $ 6 $ (182)
Accounts receivable and prepaid expenses 32 (78)
Property - (2,423)
Other 397 (319)
Tax loss carryforwards 27,256 -
Valuation allowances (27,256) -
--------- ------------
Total $435 $(3,002)
========= ============
</TABLE>
The valuation allowances were increased by $731 from $26,525 in 1996.
8. INVENTORIES
Inventories by major categories are summarized as follows :
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997 1996
-----------------
<S> <C> <C>
Raw materials $13,378 $13,646
Finished goods 11,476 10,344
------- --------
$24,854 $23,990
======= ========
</TABLE>
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands)
9. PROPERTY AND EQUIPMENT
Included in property and equipment are assets acquired under capital leases
with the following net book values :
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997 1996
---------------
<S> <C> <C>
At cost:
Machinery and equipment $2,062 $2,786
Motor vehicles 358 458
------ ------
2,420 3,244
Less: Accumulated amortization 819 501
------ ------
Net book value $1,601 $2,743
====== ======
</TABLE>
10. SHORT-TERM BORROWINGS
These include borrowings in the form of trade acceptances, loans and
overdrafts with various banks :
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997 1996
---------------
<S> <C> <C>
Credit facilities granted $36,134 $32,837
======= =======
Utilized $8,177 $10,227
======= =======
Weighted average interest rate on borrowings at
end of year 7.48% 6.46%
======= =======
</TABLE>
The Company maintains short-term bank credit lines in each of the countries
in which it operates. Interest rates are generally based on the banks'
prime lending rates and cost of funds and the credit lines are normally
subject to annual review.
The Company had a $5,000 line of credit facility with a U.S. domestic bank
at December 31, 1997 ($5,000 in 1996). Borrowings under this line of credit
are repayable in 1998 and bear interest at LIBOR plus 1.50% (7.28% at
December 31, 1997).
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands)
11. LONG-TERM DEBT
Long-term debt consists of :
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997 1996
---------------------
<S> <C> <C>
Acquisition loan due in 1998 bearing interest at 6% at
December 31, 1997. Repayable over 5 years in quarterly
instalments commencing in 1993. The acquisition loan
is associated with the purchase of a Canadian subsidiary,
is denominated in Canadian dollars and is collateralized
by the net assets of the subsidiary $ 552 $ 1,504
Swiss Franc denominated mortgage loans bearing interest at
3.75% - 5.0% per annum repayable after 5 years 4,345 4,688
Bank loan bearing interest at a rate of 7.0% per annum at
December 31, 1997. $1,500 repayable in 1998 and $12,125
in 1999. The loan is secured over accounts receivable,
inventory and the property, plant and equipment of the
Company's Duluth, Georgia facilities(1) 13,625 15,000
Bank loan bearing interest at 6.8% at December 31, 1997.
Repayable over 3 years in semi-annual instalments commencing
in 1995. The loan is secured over a diaper machine 440 882
Bank loan bearing interest at 8% per annum. Repayable over
3 years in semi-annual instalments 1,514 -
Loan from finance companies at rates ranged from 7.0% to
10.8% per annum at December 31, 1997. The loan is
secured over building and equipment of the Company's
Wisconsin facilities 3,190 -
Capital leases 1,843 2,717
--------- ----------
Total 25,509 24,791
Current portion of long-term debt 4,228 3,204
--------- ----------
Long-term debt, less current portion $21,281 $21,587
========= ==========
</TABLE>
Maturities of long-term debt as at December 31, 1997 are as follows :
<TABLE>
<CAPTION>
CAPITAL
LOANS LEASES TOTAL
-------------------------
<S> <C> <C> <C>
Year ending December 31,
1998 $ 3,867 $361 $ 4,228
1999 15,183 381 15,564
2000 227 372 599
2001 44 729 773
2002 and thereafter 4,345 - 4,345
------- ------- -------
Total $23,666 $1,843 $25,509
======= ======= =======
</TABLE>
/(1)/ On December 16, 1996, a U.S. subsidiary entered into a $15,000,000 Term
Promissory Note ("Term Note"). In accordance with the terms and
conditions of the Term Note, the subsidiary is subject to mandatory
prepayments on April 1, 1998 and 1999 by an amount equal to 50% of
excess cash flow, as defined, for the preceding fiscal year. For the
year ended December 31, 1997 no mandatory prepayments are due on April
1, 1998. The Term Note requires the maintenance of specific covenants
including financial ratios. For the year ended December 31, 1997, the
subsidiary failed to meet their net income and fixed charge ratio
covenants. A waiver has been obtained from the third-party financial
institution.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands except per share amounts)
12. DEFERRED PURCHASE CONSIDERATION
In connection with the 1993 acquisition of the disposable hygiene division
of a Swiss corporation, the purchase price included an interest-free
quarterly payment representing 3.5% of the subsidiary's net sales for the
five-year period ended June 30, 1998. The purchase liability is based on
estimates made by the Company with reference to the past and current
trading history. The remaining estimated annual payment is $408 in 1998.
13. SHARE REPURCHASES
During 1994, the Company adopted a plan authorizing the Company to
repurchase up to 500,000 shares of its ordinary shares and, in 1995, the
authority to purchase shares was increased to 1,000,000 shares. The Company
purchased 5,000 shares under this program for cash of $68 in 1997, 240,000
shares for cash of $3,079 in 1996 and 393,000 shares for cash of $4,871 in
1995. 603,000 of the repurchased shares were cancelled in 1996 and the
remainder was cancelled in 1997.
On November 13, 1996, the Company made a tender offer to its public
shareholders to acquire its ordinary shares at prices, net to the seller in
cash, not greater than $14.50 nor less than $12.75 per share. The offer
closed on December 13, 1996 and the Company purchased 1,002,394 shares from
the public shareholders at a price of $14.50 per share, which were
cancelled in 1997. In conjunction with the tender offer, the Company
incurred $433 for investment banking fees, and legal and professional fees.
During the first quarter of 1997, the Company repurchased 5,000 shares
from the public for a total cash consideration of $68.
14. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries lease land, facilities and equipment under
operating leases, many of which contain renewal options and escalation
clauses. Rental expense under operating leases was $2,236 in 1997, $2,125
in 1996 and $2,156 in 1995.
At December 31, 1997, the Company and its subsidiaries were obligated under
operating leases requiring minimum rentals as follows :
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1998 $1,783
1999 536
2000 424
2001 149
2002 149
2003 and thereafter 810
------
Total $3,851
======
</TABLE>
At December 31, 1997, the Company had capital commitments for the purchase
of machinery and equipment of $710 which will be expended in 1998.
The Company and its subsidiaries are, from time to time, involved in
routine legal matters incidental to their business. In 1997, Procter &
Gamble ("P&G") claimed that certain of the Company's diaper products
infringe P&G patents and demanded payment for past infringement and an
agreement to pay future royalties. The Company and P&G are discussing terms
of a possible settlement of this claim. The Company established a specific
accrual with regards to an ongoing patent infringement negotiation in 1997.
In the opinion of the Company's management, the resolution of such matters
will not have a material effect on the Company's financial position or
results of operations. The Company has an existing license agreement from
Kimberly-Clark concerning the sale of certain diaper products covered by
Kimberly-Clark patents.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands)
14. COMMITMENTS AND CONTINGENCIES - CONTINUED
As detailed in note 6, a U.S. subsidiary has guaranteed the repayment of
bank loans extended to Brandon Wang. At December 31, 1997 the outstanding
indebtedness covered by this guarantee amounted to $15,000. The line of
credit is collateralized by the accounts receivable, inventory and
equipment of the Company's U.S. subsidiary, which is required to maintain
certain financial ratios and other financial conditions. The agreement
requires the U.S. subsidiary to maintain cash balances with the lender
amounting to $11,000 and restricts the payment of dividends by the
subsidiary to a maximum of $3,000 in any financial year and restricts the
amount of outstanding debt owed to the subsidiary by the parent and its
other subsidiaries or affiliates. At December 31, 1997 the amount of equity
subject to such restrictions totaled $23,466. The U.S. subsidiary and its
consolidated subsidiaries are required to maintain tangible net worth of at
least $16,000 which amount is required to increase annually by 40% of the
subsidiary's consolidated net income. At December 31, 1997 the consolidated
tangible net worth of the subsidiary amounted to $23,179.
15. EMPLOYEE BENEFIT PLANS
The Company's United States subsidiary has established a 401(k) plan under
which the Company matches employee contributions up to 5% of employees'
base compensation. The Company's other international subsidiaries have
defined contribution plans, covering substantially all employees, which are
determined by the boards of directors of the subsidiaries. These plans
provide for annual contributions by the Company from 3.5% to 18% of
eligible compensation of employees based on length of service.
Total expense related to the above plans was $1,214 in 1997, $1,134 in 1996
and $905 in 1995.
16. SUPPLEMENTARY INFORMATION
Valuation and qualifying accounts :
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING PURCHASE OF COST AND AT END
OF YEAR SUBSIDIARIES EXPENSES DEDUCTIONS OF YEAR
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowances for doubtful accounts $ 643 $67 $470 $(603) $ 577
Provision for inventory obsolescence 1,004 7 850 (633) 1,228
------------- ------------ -------- ---------- -------
$1,647 $74 $1,320 $(1,236) $1,805
============= ============ ======== ========== =======
Year ended December 31, 1996
Allowances for doubtful accounts $747 $- $381 $(485) $643
Provision for inventory obsolescence 450 - 765 (211) 1,004
------------- ------------ -------- ---------- -------
$1,197 $- $1,146 $(696) $1,647
============= ============ ======== ========== =======
Year ended December 31, 1995
Allowances for doubtful accounts $1,071 $- $145 $(469) $747
Provision for inventory obsolescence 304 - 499 (353) 450
------------- ------------ -------- ---------- -------
$1,375 $- $644 $(822) $1,197
============= ============ ======== ========== =======
</TABLE>
Deductions relate to write-offs of accounts receivable as bad debts and
disposals of inventories.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(dollars in thousands)
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of the Statement of
Financial Accounting Standards No. 107 "Disclosures About Fair Value of
Financial Instruments". The estimated fair value amounts have been
determined by the Company using available market information and
appropriate valuation methodologies. The estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The carrying amounts of cash and cash equivalents,
accounts receivable, receivables from shareholder, accounts payable, short-
term borrowings, deferred purchase consideration, and long-term debt are
reasonable estimates of their fair value. The interest rate on the
Company's long-term debt approximates that which would have been available
at December 31, 1997 for debt of the same remaining maturities.
18. SEGMENT INFORMATION
The Company is engaged in one industry segment, the manufacturing and
marketing of disposable hygienic products.
Certain financial information by geographic area is as follows :
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1997 1996 1995
------------------------------
<S> <C> <C> <C>
NET SALES
North America $91,098 $92,622 $111,505
Australia 47,172 47,643 44,329
Asia 56,955 60,359 47,837
Europe 35,705 35,426 42,210
-------- -------- ---------
$230,930 $236,050 $245,881
======== ======== =========
OPERATING INCOME (LOSS)
North America $ (548) $10,530 $ 9,674
Australia 5,925 5,204 2,293
Asia 6,199 6,827 3,114
Europe (2,583) 35 (2,217)
Corporate expenses (5,415) (6,613) (3,806)
-------- -------- ---------
$3,578 $15,983 $9,058
======== ======== =========
ASSETS, AT END OF YEAR
North America $49,052 $37,975 $41,466
Australia 24,409 30,221 24,831
Asia 28,130 32,630 31,104
Europe 22,963 24,649 30,117
Corporate assets 5,719 16,435 26,875
-------- -------- ---------
$130,273 $141,910 $154,393
======== ======== =========
</TABLE>
No single customer accounted for 10% or more of the total revenues.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands except per share amounts)
19. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
1997
Net sales $56,768 $64,183 $58,257 $ 51,722
Gross profit 20,532 21,884 18,446 16,139
Net income (loss) 1,453 1,418 (1,120)(1) (777)
Earnings (loss) per share 0.22 0.21 (0.17)(1) (0.12)
1996
Net sales $62,109 $59,995 $57,992 $ 55,954
Gross profit 18,658 20,810 20,106 20,829
Net income 1,118 2,278 2,347 3,423
Earnings per share 0.14 0.29 0.30 0.45
1995
Net sales $64,651 $63,395 $60,526 $ 57,309
Gross profit 19,076 18,385 16,715 14,390
Net income (loss) 2,174 1,933 (1,858)(2) 2,438 (2)
Earnings (loss) per share 0.26 0.24 (0.23) 0.31
</TABLE>
(1) The 3rd Quarter 1997 results were restated by reducing the previously
reported loss by $903 representing exchange adjustments wrongly
recorded as expenses in that quarter.
(2) The 3rd Quarter and 4th Quarter 1995 results include non-recurring
charges of $1,433 and $535, respectively.
<TABLE>
<CAPTION>
ORDINARY SHARE PRICE :
1997 1996
QUARTER HIGH LOW HIGH LOW
-----------------------------------------------
<S> <C> <C> <C> <C>
Fourth $11 1/4 $ 7 3/8 $14 7/8 $11 1/4
Third 16 5/8 10 11 5/8 10 1/4
Second 17 1/4 12 3/4 15 1/8 10 7/8
First 16 1/2 12 1/2 15 1/2 12 1/2
</TABLE>
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Directors of
DSG International Limited
We have audited the financial statements of DSG International Limited as of
December 31, 1997 and 1996, and for each of the three years ended December 31,
1997, and have issued our report thereon dated March 13, 1998, such financial
statements and report are included in your 1997 Annual Report to the
Shareholders and are incorporated herein by reference. Our audits also included
the financial statement schedules of DSG International Limited, listed in Item
19. These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Deloitte Touche Tohmatsu
Hong Kong
March 13, 1998
S-1
<PAGE>
SCHEDULE 1
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Equity in earnings of subsidiaries $2,414 $17,909 $ 7,157
Operating expenses :
Administration 3,394 4,082 1,200
Depreciation 12 10 12
------ ------- -------
Total operating expenses 3,406 4,092 1,212
Operating income (loss) (992) 13,817 5,945
Interest expense (217) (259) (357)
Exchange (loss) gain (390) (737) 962
Non-recurring charge - - (1,440)
Interest income 2,066 2,078 1,975
Other finance expenses (6) (9) (3)
Other income 955 461 872
------ ------- -------
Income before income taxes 1,416 15,351 7,954
Provision for income taxes 443 6,185 3,267
------ ------- -------
Net income $973 $9,166 $4,687
====== ======= =======
</TABLE>
See notes to Schedule 1
S-2
<PAGE>
SCHEDULE 1
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1997 1996
----- -------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets :
Cash $ 546 $ 380
Due from related parties 607 15,645
Other receivables 203 286
Prepaid expenses and others 381 367
------- -------
Total current assets 1,737 16,678
------- -------
Equipment :
Furniture 216 216
Motor vehicles 62 -
------- -------
Total 278 216
Less : accumulated depreciation 88 77
------- -------
Net property 190 139
------- -------
Investment in subsidiaries (on the equity method) 63,658 58,748
------- -------
Total assets $65,585 $75,565
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities :
Accounts payable $ 157 $ 409
Accrued payroll and employee benefits 600 414
Accrued expenses 49 101
Income taxes payable 1 2
------- -------
Total current liabilities 807 926
------- -------
Shareholders' equity :
Ordinary shares 67 77
Additional paid-in capital 18,301 33,653
Retained earnings 56,644 55,670
Investment in treasury stock - (15,312)
Translation reserve (10,234) 551
------- -------
Total shareholders' equity 64,778 74,639
------- -------
Total liabilities and shareholders' equity $65,585 $75,565
======= =======
</TABLE>
See notes to Schedule 1
S-3
<PAGE>
SCHEDULE 1
CONDENSED FINANCIAL INFORMATION
UNCONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided by operating activities $935 $8,790 $4,768
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for equipment (62) - (124)
Investments in and advances to subsidiaries (43,940) (6,224) (17,377)
Recoupment of investment in subsidiaries 28,245 18,783 23,637
Advances to shareholder (6,129) (7,638) (13,167)
Repayments by shareholder 21,166 4,530 1,306
Receipt of (investment in) restricted bank deposit - 5,269 (623)
------- ------- -------
Net cash provided by (used in) investing activities (720) 14,720 (6,348)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Financing from long term loans - - 5,269
Repayment of long term loans - (5,269) (4,646)
Purchase of treasury shares (49) (17,632) (4,871)
Tender offer expenses - (433) -
------- ------- -------
Net cash used in financing activities (49) (23,334) (4,248)
------- ------- -------
Increase (decrease) in cash and cash equivalents 166 176 (5,828)
Cash and cash equivalents, beginning of year 380 204 6,032
------- ------- -------
Cash and cash equivalents, end of year $546 $380 $204
======= ======= =======
Cash dividends from :
Consolidated subsidiaries $14,334 $18,160 $149
</TABLE>
See notes to Schedule 1
S-4
<PAGE>
DSG INTERNATIONAL LIMITED
NOTES TO SCHEDULE 1
1. APPLICATION OF SIGNIFICANT ACCOUNTING PRINCIPLES
Accounting for subsidiaries DSG International Limited ("the Company") has
accounted for the earnings of its subsidiaries on the equity method in the
unconsolidated condensed financial information.
2. CONTINGENCIES
The Company and its subsidiaries are, from time to time, involved in
routine legal matters incidental to their business. In 1997, Procter &
Gamble ("P&G") claimed that certain of the Company's diaper products
infringe P&G patents and demanded payment for past infringement and an
agreement to pay future royalties. The Company and P&G are discussing
terms of a possible settlement of this claim. The Company established a
specific accrual with regards to an ongoing patent infringement negotiation
in 1997. In the opinion of the Company's management, the resolution of
such matters will not have a material effect on the Company's financial
position or results of operations.
S-5
<PAGE>
EXHIBIT 3.1
LOAN AND SECURITY AGREEMENT
BETWEEN
ASSOCIATED HYGIENIC PRODUCTS LLC,
AS BORROWER,
AND
SOUTHTRUST BANK OF GEORGIA, N.A.,
AS LENDER
CLOSING DATE:
DECEMBER 16, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. DEFINITIONS, TERMS AND REFERENCES................................... 1
---------------------------------
1.1 CERTAIN DEFINITIONS............................................ 1
-------------------
1.2 USE OF DEFINED TERMS........................................... 11
--------------------
1.3 ACCOUNTING TERMS............................................... 11
----------------
1.4 UCC TERMS...................................................... 11
---------
1.5 TERMINOLOGY.................................................... 11
-----------
1.6 EXHIBITS....................................................... 11
--------
2. THE FINANCING....................................................... 11
-------------
2.1 REVOLVING LINE OF CREDIT....................................... 11
------------------------
2.2 TERM LOAN...................................................... 12
---------
2.3 ONE GENERAL OBLIGATION............. .......................... 13
----------------------
2.4 INTEREST....................................................... 13
--------
2.5 METHOD OF MAKING PAYMENTS...................................... 15
-------------------------
2.6 PREPAYMENTS; EARLY TERMINATION................................. 15
------------------------------
2.7 USE OF PROCEEDS................................................ 16
---------------
2.8 INCREASED COSTS OR REDUCED RETURN.............................. 16
---------------------------------
2.9 INDEMNIFICATION OF LENDER ..................................... 16
-------------------------
3. SECURITY INTEREST -- COLLATERAL..................................... 17
-------------------------------
4. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE
----------------------------------------------------
TO ACCOUNTS RECEIVABLE COLLATERAL................................... 17
---------------------------------
4.1 BONA FIDE ACCOUNTS............................................. 18
------------------
4.2 GOOD TITLE; NO EXISTING ENCUMBRANCES........................... 18
------------------------------------
4.3 RIGHT TO ASSIGN; NO FURTHER ENCUMBRANCES....................... 18
----------------------------------------
4.4 COLLECTIONS.................................................... 18
-----------
4.5 POWER OF ATTORNEY.............................................. 18
-----------------
5. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE
----------------------------------------------------
TO INVENTORY COLLATERAL............................................. 19
-----------------------
5.1 SALE OF INVENTORY COLLATERAL................................... 19
----------------------------
5.2 INSURANCE...................................................... 19
---------
5.3 GOOD TITLE; NO EXISTING ENCUMBRANCES........................... 19
------------------------------------
5.4 RIGHT TO GRANT SECURITY INTEREST; NO FURTHER ENCUMBRANCES...... 19
--------------------------------------------------------
5.5 LOCATION OF INVENTORY COLLATERAL............................... 20
--------------------------------
6. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE
----------------------------------------------------
TO EQUIPMENT COLLATERAL............................................. 20
-----------------------
6.1 NO SALE OF EQUIPMENT COLLATERAL................................ 20
-------------------------------
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
6.2 INSURANCE...................................................... 20
---------
6.3 GOOD TITLE; NO EXISTING ENCUMBRANCES........................... 20
------------------------------------
6.4 RIGHT TO GRANT SECURITY INTEREST; NO FURTHER ENCUMBRANCES...... 21
---------------------------------------------------------
6.5 LOCATION....................................................... 21
--------
7. GENERAL REPRESENTATIONS AND WARRANTIES............................... 21
--------------------------------------
7.1 EXISTENCE AND QUALIFICATION.................................... 21
---------------------------
7.2 AUTHORITY; VALIDITY AND BINDING EFFECT......................... 21
--------------------------------------
7.3 NO MATERIAL LITIGATION......................................... 22
----------------------
7.4 TAXES.......................................................... 22
-----
7.5 CAPITAL........................................................ 22
-------
7.6 ORGANIZATION................................................... 22
------------
7.7 INSOLVENCY..................................................... 22
----------
7.8 TITLE.......................................................... 23
-----
7.9 MARGIN STOCK................................................... 23
------------
7.10 NO VIOLATIONS.................................................. 23
-------------
7.11 ERISA.......................................................... 23
-----
7.12 FINANCIAL STATEMENTS........................................... 24
--------------------
7.13 DELIVERY OF CERTAIN COLLATERAL................................. 24
------------------------------
7.14 PURCHASE OF COLLATERAL......................................... 24
----------------------
7.15 POLLUTION AND ENVIRONMENTAL CONTROL............................ 25
-----------------------------------
7.16 POSSESSION OF FRANCHISES, LICENSES, ETC........................ 25
---------------------------------------
7.17 DISCLOSURE..................................................... 25
----------
7.18 SUBSIDIARIES................................................... 25
------------
8. GENERAL AFFIRMATIVE COVENANTS........................................ 25
-----------------------------
8.1 RECORDS RESPECTING COLLATERAL.................................. 25
-----------------------------
8.2 FURTHER ASSURANCES............................................. 26
------------------
8.3 RIGHT TO INSPECT............................................... 26
----------------
8.4 REPORTS........................................................ 26
-------
8.5 PERIODIC FINANCIAL STATEMENTS OF BORROWER, AHP HOLDINGS
-------------------------------------------------------
AND PARENT
----------..................................................... 27
8.6 ANNUAL FINANCIAL STATEMENTS OF AHP HOLDINGS AND PARENT......... 27
------------------------------------------------------
8.7 PAYMENT OF TAXES............................................... 27
----------------
8.8 MAINTENANCE OF INSURANCE....................................... 28
------------------------
8.9 MAINTENANCE OF PROPERTY........................................ 28
-----------------------
8.10 CERTIFICATE OF NO EVENT OF DEFAULT; COMPLIANCE CERTIFICATE;
-----------------------------------------------------------
NOTICE OF DEFAULT.............................................. 28
-----------------
8.11 CHANGE OF PRINCIPAL PLACE OF BUSINESS, ETC..................... 28
------------------------------------------
8.12 WAIVERS........................................................ 29
-------
8.13 PRESERVATION OF EXISTENCE...................................... 29
-------------------------
8.14 COMPLIANCE WITH LAWS........................................... 29
--------------------
8.15 ERISA.......................................................... 29
-----
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
8.16 LITIGATION.................................................... 30
----------
8.17 LEVERAGE RATIO................................................ 30
--------------
8.18 TANGIBLE NET WORTH............................................ 30
------------------
8.19 NET INCOME.................................................... 30
----------
8.20 FIXED CHARGE COVERAGE RATIO................................... 31
---------------------------
8.21 OPERATING ACCOUNT............................................. 31
-----------------
8.22 ENVIRONMENTAL COMPLIANCE...................................... 31
------------------------
9. NEGATIVE COVENANTS.................................................. 33
------------------
9.1 NO LIENS...................................................... 33
--------
9.2 DEBT.......................................................... 33
----
9.3 CONTINGENT LIABILITIES........................................ 34
----------------------
9.4 DISTRIBUTIONS................................................. 34
-------------
9.5 REDEMPTIONS, ETC.............................................. 34
----------------
9.6 RESTRICTED INVESTMENT......................................... 35
---------------------
9.7 MERGER, TRANSFER, ETC......................................... 35
---------------------
9.8 ERISA......................................................... 35
-----
9.9 TRANSACTIONS WITH AFFILIATES.................................. 35
----------------------------
9.10 CAPITAL EXPENDITURES AND LEASES............................... 35
-------------------------------
9.11 FISCAL YEAR................................................... 35
-----------
9.12 LOANS AND ADVANCES............................................ 36
------------------
10. EVENTS OF DEFAULT................................................... 36
-----------------
10.1 NOTES........................................................ 36
-----
10.2 OBLIGATIONS.................................................. 36
-----------
10.3 MISREPRESENTATIONS........................................... 36
------------------
10.4 COVENANTS.................................................... 36
---------
10.5 DAMAGE, LOSS, THEFT OR DESTRUCTION OF COLLATERAL............. 37
------------------------------------------------
10.6 OTHER DEBTS.................................................. 37
-----------
10.7 VOLUNTARY BANKRUPTCY......................................... 37
--------------------
10.8 INVOLUNTARY BANKRUPTCY....................................... 37
----------------------
10.9 ORGANIZATIONAL DOCUMENTS; DISSOLUTION........................ 37
-------------------------------------
10.10 JUDGMENTS AND SETTLEMENTS.................................... 38
-------------------------
10.11 ERISA........................................................ 38
-----
10.12 CHANGE OF CONTROL............................................ 38
-----------------
10.13 CHANGE OF MANAGEMENT......................................... 38
--------------------
10.14 MATERIAL ADVERSE CHANGE...................................... 38
-----------------------
10.15 GUARANTIES................................................... 39
----------
11. REMEDIES............................................................ 39
--------
11.1 ACCELERATION OF THE OBLIGATIONS.............................. 39
-------------------------------
11.2 REMEDIES OF A SECURED PARTY.................................. 40
---------------------------
11.3 SET OFF...................................................... 40
-------
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
11.4 OTHER REMEDIES............................................... 40
--------------
12. MISCELLANEOUS....................................................... 41
-------------
12.1 WAIVER....................................................... 41
------
12.2 GOVERNING LAW................................................ 41
-------------
12.3 SURVIVAL..................................................... 41
--------
12.4 NO ASSIGNMENT BY BORROWER.................................... 41
-------------------------
12.5 COUNTERPARTS................................................. 41
------------
12.6 REIMBURSEMENT................................................ 41
-------------
12.7 SUCCESSORS AND ASSIGNS....................................... 42
----------------------
12.8 SEVERABILITY................................................. 42
------------
12.9 NOTICES...................................................... 42
-------
12.10 ENTIRE AGREEMENT; AMENDMENTS................................. 43
----------------------------
12.11 TIME OF THE ESSENCE.......................................... 44
-------------------
12.12 INTERPRETATION............................................... 44
--------------
12.13 LENDER NOT JOINT VENTURER.................................... 44
-------------------------
12.14 JURISDICTION; WAIVER OF TRIAL BY JURY........................ 44
-------------------------------------
12.15 ACCEPTANCE................................................... 44
----------
12.16 PAYMENT ON NON-BUSINESS DAYS................................. 45
----------------------------
12.17 UCC TERMINATIONS............................................. 45
----------------
12.18 CURE OF DEFAULT BY LENDER.................................... 45
-------------------------
12.19 RECITALS..................................................... 45
--------
12.20 ATTORNEY-IN-FACT............................................. 45
----------------
12.21 SOLE BENEFIT................................................. 46
------------
13. CONDITIONS PRECEDENT................................................ 46
--------------------
13.1 INITIAL REVOLVING ADVANCE AND THE TERM LOAN.................. 46
-------------------------------------------
13.2 TERM LOAN.................................................... 47
---------
13.3 CONDITIONS TO ALL LOANS...................................... 48
-----------------------
13.4 COMPLIANCE WITH CONDITIONS................................... 48
--------------------------
</TABLE>
-iv-
<PAGE>
LOAN AND SECURITY AGREEMENT
---------------------------
THIS LOAN AND SECURITY AGREEMENT (hereinafter, as it may be modified,
amended or supplemented from time to time, and together with all Exhibits
attached hereto, called this "Agreement"), made, entered into and effective as
---------
of the 16th day of December, 1996, by and between ASSOCIATED HYGIENIC PRODUCTS
LLC, a limited liability company duly organized under the laws of the State of
Wyoming, formerly known as "Associated Hygienic Products, a Limited Liability
Company" ("BORROWER"); and SOUTHTRUST BANK OF GEORGIA, N.A., a national banking
--------
association ("LENDER");
------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Borrower has applied to Lender for credit or other financial
accommodations, including, specifically, a revolving line of credit and a term
loan, each as more particularly described hereinbelow; and
WHEREAS, Lender is willing to extend such financial accommodations to
Borrower in accordance with the terms hereof upon the execution of this
Agreement by Borrower, compliance by Borrower with all of the terms and
provisions of this Agreement and fulfillment of all conditions precedent to
Lender's obligations herein contained;
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants herein contained, to induce Lender to extend the financial
accommodations provided for herein, and for other good and valuable
consideration, the sufficiency and receipt of all of which are acknowledged,
Borrower and Lender agree as follows:
1. DEFINITIONS, TERMS AND REFERENCES.
---------------------------------
1.1 CERTAIN DEFINITIONS.
-------------------
In addition to such other terms as elsewhere defined herein, as used
in this Agreement and in any Exhibits, the following terms shall have the
following meanings, unless the context requires otherwise:
"ACCOUNTS RECEIVABLE COLLATERAL" shall mean all rights of Borrower to
------------------------------
payment for goods sold or leased, or to be sold or to be leased, or for services
rendered or to be rendered, howsoever evidenced or incurred, including, without
limitation, all accounts, contract rights, instruments and chattel paper, all
returned or repossessed goods and all books, records, computer tapes, programs
and ledger books arising therefrom or relating thereto, all whether now owned or
hereafter acquired or arising.
"ACCOUNT DEBTOR" shall mean the Person who is obligated to Borrower on
--------------
any of the Accounts Receivable Collateral.
<PAGE>
"AFFILIATE" shall mean, with respect to any Person, any other Person
---------
Controlling, Controlled by or under common Control with such Person.
"AGREEMENT" shall have the meaning given to such term in the foregoing
---------
recitals to this Agreement.
"AHP HOLDINGS" shall mean AHP Holdings, L.P., a Georgia limited
------------
partnership.
"BALANCES COLLATERAL" shall mean all deposit accounts of Borrower now
-------------------
or hereafter opened with Lender, all certificates of deposit issued by Lender to
Borrower, and all drafts, checks and other items now or hereafter deposited in
or with Lender by Borrower for collection.
"BANKRUPTCY CODE" shall mean Title 11 of the United States Code, as
---------------
amended from time to time.
"BASE" shall mean that interest rate per annum so denominated and set
----
by Lender from time to time as an interest rate basis for borrowings from
Lender. Base is one of several interest rate bases which may be used by Lender.
Lender lends at interest rates above and below Base. Any change in any rate of
interest charged hereunder as a result of any change in Base shall become
effective as of the opening of business on each date on which such change in
Base occurs.
"BASE RATE" shall mean that per annum interest rate equal to Base.
---------
"BASE RATE BORROWING" shall mean and refer to that portion of
-------------------
outstanding borrowings evidenced by the Revolving Note or the Term Note, as the
case may be, as to which, pursuant to Section 2.4, Borrower has elected to be
charged interest at a rate computed by reference to the Base Rate.
"BORROWER" shall have the meaning given to such term in the foregoing
--------
recitals to this Agreement.
"BUSINESS DAY" shall mean any day on which Lender is open for the
------------
conduct of banking business at its main office in the State of Georgia.
"CAPITAL EXPENDITURES" shall have the meaning given to such term in
--------------------
accordance with GAAP, and shall specifically include, in any event, any current
expenditure made by a Person for the acquisition, construction, repair,
maintenance or replacement of fixed or capital assets which, under GAAP, would
be expected to be capitalized on the books of such Person.
"CHANGE OF CONTROL" shall mean: (a) the Controlling Shareholders,
-----------------
individually or in the aggregate, shall cease to Control Parent, (b) Parent
shall cease to directly or indirectly own and Control, with power to vote
(either itself or through one or more of its Subsidiaries), one hundred percent
(100%) of the issued and outstanding shares of each of the Members or (c) either
Member
-2-
<PAGE>
shall transfer any or all of its ownership units in Borrower to any other Person
or shall otherwise cease to own and Control such ownership units.
"CLOSING DATE" shall mean that date on which the initial Revolving
------------
Advance is made available to Borrower under the Revolving Line of Credit and
the initial disbursement of the Term Loan is made available to Borrower; which
date shall be, in each case, December 16, 1996.
"COLLATERAL" shall mean the property of Borrower described in Article
----------
3, or any part thereof, as the context shall require, in which Lender has, or is
to have, a security interest pursuant hereto, as security for payment of the
Obligations.
"COLLATERAL LOCATIONS" shall mean (i) the New Facility, (ii) the
--------------------
Warehouse Facility and (iii) Borrower's office and manufacturing facility
located at 5640 Lindbergh Lane, Bell, California 90201.
"CONTROL," "CONTROLLED", or "CONTROLLING" shall mean, with respect to
------- ---------- -----------
any Person, the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities or
otherwise; provided, however, that, in any event, any Person who owns directly
-------- -------
or indirectly twenty percent (20%) or more of the securities having ordinary
voting power for the election of directors or other governing body of a
corporation shall be deemed to "Control" such corporation for purposes of this
Agreement. Without limitation of the foregoing, the Members shall be deemed to
"Control" Borrower, and Parent shall be deemed to "Control" the Members and
Borrower.
"CONTROLLING SHAREHOLDERS" shall mean those shareholders of Parent
------------------------
Controlling Parent on the Closing Date.
"DEBT" means all liabilities, obligations and indebtedness of a Person
----
to any other Person, of any kind or nature, now or hereafter owing, arising, due
or payable, howsoever evidenced, created, incurred, acquired or owing, whether
primary, secondary, direct, contingent, fixed or otherwise, and including,
without in any way limiting the generality of the foregoing: (i) all liabilities
and obligations to trade creditors; (ii) in the case of Borrower, all of the
Obligations; (iii) all obligations and liabilities of any Other Person secured
by any Lien on a Person's Property, even though such Person shall not have
assumed or become liable for the payment thereof; (iv) all accrued pension fund
and other employee benefit plan obligations and liabilities; (v) all Guaranteed
Obligations; (vii) deferred taxes; and (viii) all obligations under capitalized
leases.
"DEFAULT CONDITION" shall mean the occurrence of any event which,
-----------------
after satisfaction of any requirement for the giving of notice or the lapse of
time, or both, would become an Event of Default.
"DEFAULT RATE" shall mean that interest rate per annum equal to two
------------
percent (2%) plus the stated interest rate effective under each Note from time
to time.
-3-
<PAGE>
"ELIGIBLE ACCOUNTS" shall mean that portion of the Accounts Receivable
-----------------
Collateral consisting of accounts actually owing to Borrower by its Account
Debtors subject to no counter-claim, defense, setoff or deduction, excluding,
---------
however, in any event, but without limitation, unless otherwise waived in
- -------
writing by Lender, any account: (i) with respect to which any portion thereof is
more than ninety (90) days past invoice date; (ii) which is owing by any Account
Debtor which is an Affiliate of Borrower; (iii) which is owing by any Account
Debtor having fifty percent (50%) or more in face value of its then existing
accounts with Borrower ineligible hereunder; (iv) the assignment of which is
subject to any requirements set forth in any Assignment of Claims Acts, unless
such requirements have been satisfied in all respects to Lender's satisfaction;
(v) which is owing by any Account Debtor whose accounts, in face amount, with
Borrower exceed ten percent (10%) of Borrower's total Eligible Accounts or such
greater percentage as may be established in writing from time to time by Lender
with respect to a particular Account Debtor, but only to the extent of such
excess; (vi) which is owing by an Account Debtor located outside the United
States, unless either (A) it is secured by an irrevocable letter of credit,
which letter of credit shall have been confirmed by a financial institution
acceptable to Lender and shall be in form and substance acceptable to Lender and
pledged to Lender, or (B) Lender has received other assurance of payment
acceptable to it, and which otherwise is payable in full in United States
Dollars; (vii) which is evidenced by a chattel paper or an instrument of any
kind or is not evidenced by an invoice or other documentation in form acceptable
to Lender; (viii) as to which Lender does not have a first priority security
interest; or (ix) which otherwise has been excluded by Lender, which it reserves
the right to do, in its sole discretion, exercised in a commercially reasonable
manner, for purposes hereof.
"ELIGIBLE INVENTORY" shall mean that portion of the Inventory
------------------
Collateral located at a Collateral Location (and not in transit) consisting of
raw materials, work-in-process and finished goods in the possession and control
of Borrower as to which Lender has a perfected first priority security interest
and which are not damaged or obsolete and which have not been excluded by
Lender, which it reserves the right to do, in its sole discretion, exercised in
a commercially reasonable manner, for purposes hereof.
"EMPLOYEE BENEFIT PLAN" shall mean any employee welfare benefit plan
---------------------
or any employee pension benefit plan, as those terms are defined in Section 3(1)
and 3(2) of ERISA, for the benefit of employees of Borrower or any Subsidiary or
any other entity which is a member of a "controlled group" or under "common
control" with Borrower, as such terms are defined in Section 4001 (a)(14) of
ERISA.
"EQUIPMENT COLLATERAL" shall mean all equipment of Borrower, or in
--------------------
which it has rights, whether now owned or hereafter acquired, located at, or
used in connection with Borrower's operations at, each of the Collateral
Locations at any time or from time to time on or subsequent to the Closing Date.
As defined herein, "Equipment Collateral" at each such location 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-
<PAGE>
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as may be amended from time to time.
"EVENT OF DEFAULT" shall mean any of the events or conditions
----------------
described in Article 10, provided that any requirement for the giving of notice
or the lapse of time, or both, has been satisfied.
"EXECUTIVE OFFICE" shall mean the business address of the New
----------------
Facility.
"FISCAL YEAR" shall mean the fiscal year of Parent, AHP Holdings and
-----------
Borrower concluding as of December 31 in each calendar year.
"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 same such period; all as
determined under GAAP.
"GAAP" shall mean generally accepted accounting principles,
----
consistently applied.
"GUARANTEED OBLIGATIONS" shall mean, with respect to any Person, all
----------------------
obligations of such Person which in any manner directly or indirectly guarantee
or assure, or in effect guarantee or assure, the payment or performance of any
indebtedness, dividend or other obligation of any other Person or assure or in
effect assure the holder of any such obligations against loss in respect
thereof, including, without limitation, any such obligations incurred through an
agreement, contingent or otherwise: (a) to purchase such obligations or any
property constituting security therefor; (b) to advance or supply funds for the
purchase or payment of such obligations or to maintain a working capital or
other balance sheet condition; or (c) to lease Property or to purchase any debt
or equity securities or other Property or services.
"INTEREST EXPENSE", for any fiscal period of AHP Holdings, shall mean
----------------
interest expense of AHP Holdings and its consolidated Subsidiaries during such
period on that portion of the Debt of AHP Holdings and its consolidated
Subsidiaries consisting of Debt for borrowed funds, including, without
limitation, in the case of Borrower, the Obligations.
"INTEREST PERIOD" shall mean with respect to any LIBOR Rate Borrowing,
---------------
a period of thirty (30), sixty (60), ninety (90) or one hundred eighty (180)
days, as Borrower may elect as provided in this Agreement; provided, that (a)
-------- ----
the first day of an Interest Period must be a Business Day, (b) any Interest
Period that would otherwise end on a day that is not a Business Day shall be
extended to the next succeeding Business Day, unless such Business Day falls in
the next calendar month, in which case the Interest Period shall end on the next
preceding Business Day, and (c) Borrower may not elect an Interest Period which
would extend beyond the Termination Date, in the
-5-
<PAGE>
case of any Revolving Loan, or beyond the final maturity date of the Term Loan,
in the case of the Term Loan.
"INVENTORY COLLATERAL" shall mean all inventory of Borrower, or in
--------------------
which it has rights, whether now owned or hereafter acquired, wherever located
including in transit, including, without limitation, all goods of Borrower held
for sale or lease or furnished or to be furnished under contracts of service,
all goods held for display or demonstration, goods on lease or consignment,
returned or repossessed goods, all raw materials, work-in-process, finished
goods and supplies used or consumed in Borrower's business, together with all
documents, documents of title, dock warrants, dock receipts, warehouse receipts,
bills of lading or orders for the delivery of all, or any portion, of the
foregoing.
"LENDER" shall have the meaning given to such term in the initial
------
recitals to this Agreement.
"LEVERAGE RATIO" shall mean, as of any date, the ratio which the total
--------------
liabilities of AHP Holdings and its consolidated Subsidiaries determined under
GAAP bears to the Tangible Net Worth of AHP Holdings and its consolidated
Subsidiaries.
"LIBOR" shall mean, with respect to any Interest Period for any LIBOR
-----
Rate Borrowing, the rate determined by Lender to be the rate at which deposits
in United States Dollars are offered to prime banks in the London interbank
market in an amount substantially equal to such LIBOR Rate Borrowing for a
period equal to such Interest Period.
"LIBOR RATE" shall mean that interest rate per annum equal to LIBOR
----------
plus, either: (i) 1.75% per annum, in respect of Revolving Advances; or (ii)
- ----
2.00% per annum, in respect of the Term Loan; provided, however, if and as long
--------
as the Leverage Ratio is 2.0:1 or less, the aforesaid per annum percentages
specified in clauses (i) and (ii) above shall each be reduced by .50% per annum;
that is, to 1.25% and 1.50% per annum, respectively.
"LIBOR RATE BORROWING" shall mean and refer to that portion of
--------------------
outstanding borrowings evidenced by the Revolving Note or the Term Note, as the
case may be, as to which, pursuant to Section 2.4, Borrower has elected to be
charged interest at a rate computed by reference to the LIBOR Rate.
"LIEN" shall mean any deed to secure debt, deed of trust, mortgage or
----
similar instrument, and any lien, security interest, preferential arrangement
which has the practical effect of constituting a security interest, security
title, pledge, charge, encumbrance or servitude of any kind, whether by
consensual agreement or by operation of statute or other law, and whether
voluntary or involuntary, including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof.
-6-
<PAGE>
"LOAN DOCUMENTS" shall mean this Agreement, the Notes, the Mortgage,
--------------
any financing statements covering portions of the Collateral, and any and all
other documents, instruments, certificates and agreements executed and/or
delivered by Borrower in connection herewith, or any one, more, or all of the
foregoing, as the context shall require.
"MARGIN" shall mean the sum of(a) an amount equal to eighty percent
------
(80%) of the face dollar amount, as at the date of determination, of Eligible
Accounts; plus (b) an amount equal to fifty percent (50%) of the dollar amount,
----
valued at the lower of FIFO cost or market value, as at the date of
determination, of Eligible Inventory less (c) reserves for costs, expenses and
----
liabilities as to which Lender is authorized to make Revolving Advances or to
charge Borrower's loan account hereunder and such other reserves as Lender shall
establish from time to time in its sole discretion, exercised in a commercially
reasonable manner.
"MARGIN REQUIREMENT" shall have the meaning ascribed to such term in
------------------
Section 2.1.
"MARGIN STOCK" shall have the meaning ascribed to such term in Section
------------
221.2(h) (or any successor provision) of Regulation U of the Board of Governors
of the Federal Reserve System.
"MEMBERS" shall mean, collectively, Elmbay Limited, an English
-------
company, and AHP Holdings.
"MORTGAGE" shall mean the Deed to Secure Debt, Security Agreement and
--------
Assignment of Leases and Rents, dated as of June 23, 1993, executed and
delivered by Borrower to Lender pursuant to the Original Loan Agreement, which
is recorded at Deed Book 8960, Page 243 et seq., Gwinnett County, Georgia
-- ----
records, as amended.
"MPPAA" shall mean the Multiemployer Pension Plan Amendments Act of
-----
1980, amending Title IV of ERISA.
"MULTIEMPLOYER PLAN" shall have the meaning set forth in Section
------------------
4001(a)(3) of ERISA.
"NEW FACILITY" shall mean the land owned by Borrower located at 4455
------------
River Green Parkway, River Green Business Park, Duluth, Gwinnett County, Georgia
30136, as described more particularly in the Mortgage, and all buildings,
structures or other improvements which have been, or hereafter may be,
constructed or situated thereon.
"NOTES" shall mean, collectively, the Revolving Note and the Term
-----
Note.
"OBLIGATIONS" shall mean any and all Debts, liabilities and
-----------
obligations of Borrower to Lender, including, without limiting the generality
of the foregoing, any indebtedness, liability or obligation of Borrower to
Lender under any loan made to Borrower by Lender prior to the date
-7-
<PAGE>
hereof and any and all extensions or renewals thereof in whole or in part; any
Debt, liability or obligation of Borrower to Lender arising hereunder or as a
result hereof, whether evidenced by the Notes, the other Loan Documents or
otherwise, and any and all extensions or renewals thereof in whole or in part;
any Debt, liability or obligation of Borrower to Lender under any later or
future advances or loans made by Lender to Borrower, and any and all extensions
or renewals thereof in whole or in part; any and all present and future Debt of
Borrower to other creditors which is purchased by Lender from such other
creditors; and any and all future or additional Debts, liabilities or
obligations of Borrower to Lender whatsoever and in any event, whether existing
as of the date hereof or hereafter arising, whether arising under a loan, lease,
credit card arrangements, line of credit, letter of credit or other type of
financing, and whether direct, indirect, absolute or contingent, as maker,
endorser, guarantor, surety or otherwise, and whether evidenced by, arising out
of, or relating to, a promissory note, bill of exchange, check, draft, bond,
letter of credit, guaranty agreement, bankers' acceptance, foreign exchange
contract, commitment fee, service charge or otherwise.
"OPERATING AGREEMENT" shall mean the Operating Agreement of Borrower,
-------------------
dated as of July 1, 1994, between the Members, as such agreement may be amended,
modified or restated hereafter with Lender's prior written consent (except as to
administrative or ministerial amendments or modifications).
"ORGANIZATIONAL DOCUMENTS" shall mean, collectively, the Operating
------------------------
Agreement and the Borrower's Articles of Organization, as amended to date, and
as further amended or modified hereafter, with Lender's prior written consent
(except as to administrative or ministerial amendments or modifications).
"ORIGINAL LOAN AGREEMENT" shall mean the Loan and Security Agreement,
-----------------------
dated as of June 23, 1993, between Borrower and Lender, as assignee of
SouthTrust Bank of Alabama, N.A., as amended and restated, in its entirety, by
the Prior Loan Agreement.
"PARENT" shall mean DSG International Limited, a British Virgin
------
Islands corporation.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
----
"PERMITTED ENCUMBRANCES" shall mean (i) Liens for taxes not yet due
----------------------
and payable or being contested as permitted by Section 8.7; (ii) carriers',
warehousemen's, mechanics', materialmen's, repairmen's or other like Liens
arising in the ordinary course of business, payment for which is not yet due or
which is being contested in good faith and by appropriate proceedings; (iii)
pledges or deposits in connection with worker's compensation, unemployment
insurance and other social security legislation; (iv) deposits to secure the
performance of utilities, leases, statutory obligations and surety and appeal
bonds and other obligations of a like nature incurred in the ordinary course of
business; (v) bankers' liens arising by statute or under customary terms
regarding depository relationships on deposits held by financial institutions
with whom Borrower has a banker-customer relationship; (vi) typical restrictions
imposed by licenses and leases of software
-8-
<PAGE>
(including location and transfer restrictions); (vii) those Liens described on
Exhibit "A" attached hereto and incorporated herein by reference; and (viii) any
- ------- -
other Liens described in, and permitted to exist under, Section 9.1 below.
"PERSON" shall mean any individual, sole proprietorship, partnership,
------
joint venture, trust, unincorporated organization, association, corporation,
institution, entity, party or government (whether territorial, national,
federal, state, county, city, municipal or otherwise, including, without
limitation, any instrumentality, division, agency, body or department thereof).
"PLAN" shall mean any employee benefit plan or other plan for any
----
employees of Borrower and any employees of any Subsidiary or any other entity
which is a member of a controlled group or under common control with Borrower,
as such terms are defined in Section 4001(a)(l4) of ERISA, and which is
subject to the provisions of Title IV of ERISA.
"PRIOR LOAN AGREEMENT" shall mean the Loan and Security Agreement,
--------------------
dated as of September 29, 1995, between Borrower and Lender, as amended through
the Closing Date.
"PROPERTY" shall mean any interest in any property or asset of any
--------
kind, whether real, personal or mixed, or tangible or intangible.
"REPORTABLE EVENT" shall mean any of the events described in Section
----------------
4043(b) of ERISA.
"RESTRICTED INVESTMENT" means any acquisition of Property by any
---------------------
Person in exchange for cash or other Property, whether in the form of an
acquisition of stock, debt security, or other Debt or obligation, or the
purchase or acquisition of any other Property, or by loan, advance, capital
contribution, or subscription, except acquisitions of the following: (a) fixed
------
assets to be used in the business of such Person so long as the costs thereof
constitute Capital Expenditures permitted hereunder; (b) goods held for sale or
to be used in the provision of services by such Person in the ordinary course of
business; (c) current assets arising from the sale of goods or the rendition of
services in the ordinary course of business of such Person; (d) direct
obligations of the United States of America, or any agency thereof, or
obligations guaranteed by the United States of America, provided, however, that
--------- -------
such obligations mature within one (1) year from the date of acquisition
thereof; (e) certificates of deposit maturing within one (1) year from the date
of acquisition, or overnight bank deposits, or other, similar investments in
each case issued by, created by, or with Lender.
"REVOLVING ADVANCE" shall mean an advance made to Borrower by Lender
-----------------
under the Revolving Line of Credit, which shall be evidenced by the Revolving
Note.
"REVOLVING LINE OF CREDIT" shall refer to the revolving line of credit
------------------------
opened by the Lender in favor of Borrower, pursuant to the provisions of Section
2.1.
-9-
<PAGE>
"REVOLVING NOTE" shall mean the Revolving Promissory note, dated as of
--------------
the Closing Date, as it may be amended or supplemented from time to time, in the
maximum amount of the Revolving Line of Credit, evidencing the Revolving
Advances, together with any renewals or extensions thereof, in whole or in part.
"SUBSIDIARY" shall mean any corporation, partnership, business
----------
association or other entity (including any Subsidiary of any of the foregoing)
of which Borrower owns at any time during the term of this Agreement, directly
or indirectly, fifty percent (50%) or more of the capital stock or equity
interest having ordinary power for the election of directors or others
performing similar functions. Any representation, warranty or covenant contained
in this Agreement which includes the term "Subsidiaries" shall mean and refer to
any Subsidiary which was such as of the date of determination for purposes of
such representation, warranty or covenant.
"TANGIBLE NET WORTH" shall mean the net worth of AHP Holdings and its
------------------
consolidated Subsidiaries, determined as of the end of any fiscal period of AHP
Holdings under GAAP, minus any and all assets of AHP Holdings and its
-----
consolidated Subsidiaries constituting (i) goodwill, patents, copyrights,
trademarks, trade names and other intangible assets, (ii) write-ups of assets,
(iii) unamortized debt discount and expense, (iv) long-term deferred charges,
(v) any Debt owing by any Affiliate to AHP Holdings or any of its consolidated
Subsidiaries, and (vi) any Restricted Investments.
"TAX DISTRIBUTIONS" shall mean distributions made by Borrower to its
-----------------
Members pursuant to Section 7.2(b) of the Operating Agreement, as in effect on
the Closing Date.
"TERMINATION DATE" shall mean April 30, 1998 (or such later date as
----------------
Lender may approve in writing from time to time).
"TERM LOAN" shall mean, subject to the terms and conditions set forth
---------
herein, the term loan to be made by Lender to Borrower on the Closing Date
pursuant to Section 2.2 hereof.
"TERM NOTE" shall mean the Term Promissory Note, dated as of the
---------
Closing Date, as it may be amended or supplemented from time to time, in the
principal amount of the Term Loan, together with any renewals or extensions
thereof, in whole or in part.
"UCC" shall mean the Uniform Commercial Code-Secured Transactions of
---
Georgia (OCGA Art. 11-9), as in effect on the date hereof.
"WAREHOUSE FACILITY" shall mean the leased facility used by Borrower
------------------
for warehouse purposes located at 6386 Corley Road, Norcross, Georgia 30071.
-10-
<PAGE>
1.2 USE OF DEFINED TERMS.
--------------------
All terms defined in this Agreement and the Exhibits shall have the
same defined meanings when used in any other Loan Documents, unless the context
shall require otherwise.
1.3 ACCOUNTING TERMS.
----------------
All accounting terms not specifically defined herein shall have the
meanings generally attributed to such terms under GAAP.
1.4 UCC TERMS.
---------
The terms "ACCOUNTS", "CHATTEL PAPER", "INSTRUMENTS", "GENERAL
INTANGIBLES", "INVENTORY", "EQUIPMENT", "FIXTURES", "DOCUMENTS", "PRODUCTS" and
"PROCEEDS", as and when used in the Loan Documents, shall have the same meanings
given to such terms under the UCC.
1.5 TERMINOLOGY.
-----------
All personal pronouns used in this Agreement, whether used in the
masculine, feminine or neuter gender, shall include all other genders; the
singular shall include the plural, and the plural shall include the singular.
Titles of Articles and Sections in this Agreement are for convenience only, and
neither limit nor amplify the provisions of this Agreement, and all references
in this Agreement to Articles, Sections, Subsections, paragraphs, clauses,
subclauses or Exhibits shall refer to the corresponding Article, Section,
Subsection, paragraph, clause, subclause of, or Exhibit attached to, this
Agreement, unless specific reference is made to the articles, sections or other
subdivisions divisions of, or Exhibit to, another document or instrument.
1.6 EXHIBITS.
--------
All Exhibits attached hereto are by reference made a part hereof.
2. THE FINANCING.
-------------
Upon execution of this Agreement and compliance with its terms,
including, without limitation, the conditions precedent set forth in Sections
13.1, 13.2 and 13.3 hereof, Lender agrees to make available to Borrower the
Revolving Line of Credit and to make the Term Loan, in each case, on the
following terms and conditions:
2.1 REVOLVING LINE OF CREDIT.
------------------------
(a) On the Closing Date, Lender agrees to open a Revolving Line of
Credit in favor of Borrower in the maximum aggregate principal amount of Ten
Million Dollars ($10,000,000), reducing to Five Million Dollars ($5,000,000),
effective on December 3l, 1997.
-11-
<PAGE>
Subject to the fulfillment of the conditions precedent set forth in Sections
13.1 and 13.3 hereof, during the period commencing on the Closing Date and
ending on the earliest to occur of (i) the Termination Date and (ii) the date of
--------
termination of the Revolving Line of Credit pursuant to Section 2.6 or Section
11 below, Borrower may borrow and repay and reborrow up to a maximum aggregate
principal amount of the Revolving Line of Credit; provided, however, that (A)
-------- -------
each Revolving Advance must be in the amount of One Hundred Thousand Dollars
($100,000) or an integral multiple thereof, (B) Revolving Advances will be made
by Lender to Borrower only on the first and the fifteenth of each calendar month
(or, in each instance, the next succeeding Business Day, as the case may be),
(C) any Revolving Advances constituting LIBOR Rate Borrowings must be obtained
and paid in accordance with Section 2.4 below, and (D) repayments of Revolving
Advances shall be made in accordance with Section 2.6(a) below; and, provided,
--------
further, that at no time shall the aggregate principal amount outstanding under
- -------
the Revolving Line of Credit exceed the Margin (such requirement being referred
to herein as the "MARGIN REQUIREMENT"). If at any time hereafter the Margin
------------------
Requirement is not satisfied, Borrower agrees to repay immediately the then
principal balance of the Revolving Note by that amount necessary to satisfy the
Margin Requirement.
(b) The Debt arising from the disbursement of any and all Revolving
Advances shall be evidenced by the Revolving Note, which shall be executed and
delivered by Borrower simultaneously herewith. Each request for a Revolving
Advance shall be made by Borrower to Lender in such manner as Lender may request
from time to time hereafter (including, without limitation, by telephone,
confirmed promptly in writing, or by facsimile transmission) and shall specify
the requested amount thereof together with the duration of the initial Interest
Period with respect thereto (if a LIBOR Rate Borrowing is requested) and such
other data as Lender, in its credit judgment, may request in connection
therewith. The principal amount of the Revolving Note shall be due and payable
in full on the earliest to occur of (i) the Termination Date and (ii) the date
--------
of any termination of the Revolving Line of Credit pursuant to Section 2.6 or
Section 11 below. Borrower hereby authorizes Lender to cause each Revolving
Advance to be disbursed by crediting the amount thereof to Borrower's demand
deposit account maintained with Lender pursuant to Section 8.21 below.
2.2 TERM LOAN.
---------
(a) Subject to the fulfillment of all of the conditions precedent set
forth in Sections 13.1, 13.2 and 13.3 hereof, Lender agrees to make the Term
Loan to Borrower on the Closing Date in an amount not in excess of Fifteen
Million Dollars ($15,000,000).
(b) Borrower shall obtain the Term Loan in one (1) disbursement on the
Closing Date.
(c) The Term Loan shall be evidenced by the Term Note. The principal
amount of the Term Note (or so much thereof as shall be disbursed to or on
behalf of Borrower) shall be payable in equal, consecutive, monthly installments
(based on an assumed ten-year principal amortization schedule) on the first day
of each calendar month, commencing on February 1, 1997,
-12-
<PAGE>
each to be in the amount of One Hundred Twenty-Five Thousand Dollars ($125,000),
followed by one final installment, constituting a balloon payment, in an amount
equal to the then unpaid principal balance of the Term Note, which shall be due
and payable on December 1, 1999.
(d) The Term Loan shall be further subject to mandatory prepayment on
April 1 of each year, beginning on April 1, 1998, by that amount equal to fifty
percent (50%) of "excess cash flow" (as defined) for the preceding Fiscal Year,
as determined by Lender from the annual audit report of AHP Holdings and its
consolidated subsidiaries delivered to Lender pursuant to Section 8.6, with the
proceeds of such mandatory prepayment to be applied to the Term Note in the
reverse order of installments thereof then remaining to be paid, starting with
the balloon payment. For purposes hereof, "excess cash flow" shall mean the sum
of the following, for AHP Holdings and its consolidated subsidiaries: (i) net
income, plus (ii) decreases in working capital, less (iii) increases in working
---- ----
capital, plus (iv) depreciation, amortization and other non-cash charges, less
---- ----
(v) Capital Expenditures (to the extent permitted hereby), less (vi) scheduled
----
payments of principal on the Term Loan, less (vii) dividends permitted hereby
----
(excluding the one-time $21,000,000 dividend) all determined with respect to
such period, and computed according to generally accepted accounting principles.
2.3 ONE GENERAL OBLIGATION.
----------------------
All extensions of credit by Lender to Borrower under this Agreement
shall constitute one general obligation of Borrower, secured by Lenders Lien on
the Collateral and by the Mortgage; provided that upon termination of the
--------
Revolving Line of Credit and payment in full of all Revolving Advances, Lender
shall release its Lien on the Accounts Receivable Collateral and the Inventory
Collateral.
2.4 INTEREST.
--------
Borrower agrees to pay to Lender interest on the Revolving Advances
and the Term Loan (in each case computed based on a 360-day year and the actual
number of days elapsed) in accordance with the following provisions:
(a) Revolving Advances. Interest on the principal amount of each
------------------
Revolving Advance shall be payable, at Borrowers option, either at (i) a
fluctuating rate per annum equal to the Base Rate, or (ii) a fluctuating rate
per annum equal to the LIBOR Rate, for Interest Periods of thirty (30), sixty
(60), ninety (90) or one hundred eighty (180) days, as selected by Borrower, as
hereinafter set forth. Borrower shall select the initial interest rate
applicable to each Revolving Advance in connection with its request for such
Revolving Advance pursuant to Section 2.1 above. Each such request shall
include, if a LIBOR Rate Borrowing is selected by Borrower, a reference to the
Interest Period selected by Borrower corresponding thereto. Thereafter, to the
extent that any Revolving Advance which constitutes a LIBOR Rate Borrowing is
not to be paid on the last day of an Interest Period, at least two (2) Business
Days prior to the last day of such Interest Period, Borrower shall notify Lender
in writing of its intent to continue such Revolving Advance as a LIBOR Rate
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<PAGE>
Borrowing for an Interest Period of either thirty (30), sixty (60), ninety (90)
or one hundred eighty (l80) days. If Borrower fails to do so on a timely basis,
then such LIBOR Rate Borrowing shall be converted to a Base Rate Borrowing at
the end of such Interest Period. In any event, however, shall more than five (5)
LIBOR Rate Borrowings with varying Interest Periods shall be in effect at any
one time in respect of Revolving Advances and each such LIBOR Rate Borrowing
shall be in integral multiples of One Hundred Thousand Dollars ($100,000).
(b) Term Loan.
---------
(i) Except as set forth in clause (ii) below concerning the
availability of a fixed interest rate option, interest on the outstanding
principal balance of the Term Loan shall be payable at Borrower's option, either
at (i) a fluctuating rate per annum equal to the Base Rate, or (ii) a
fluctuating rate per annum equal to the LIBOR Rate, for Interest Periods of
thirty (30), sixty (60), ninety (90) or one hundred eighty (180) days, as
selected by Borrower, as hereinafter set forth. Borrower shall have the right to
elect at any time to have up to four (4) Interest Periods in effect with respect
to the Term Loan provided that the minimum amount of the Term Loan to which each
Interest Period shall apply shall be One Million Dollars ($1,000,000) or an
integral multiple thereof. On the Closing Date, Borrower shall notify Lender in
writing as to the applicable interest rate or rates selected by Borrower with
respect to the Term Loan and, for any LIBOR Rate Borrowings, if more than one
Interest Period is selected, as to the amount of the Term Loan attributable to
each such Interest Period. Thereafter, at least two (2) Business Days prior to
the last day of each Interest Period, Borrower shall notify Lender in writing of
its intent to continue the portion of the Term Loan attributable to such
Interest Period at the LIBOR Rate for an Interest Period or Periods, as
applicable, of either thirty (30), sixty (60), ninety (90) or one hundred eighty
(180) days. If Borrower fails to do so on a timely basis, then each such LIBOR
Rate Borrowing shall be converted to a Base Rate Borrowing at the end of such
Interest Period.
(ii) At any time after the Closing Date, so long as no Default
Condition or Event of Default then exists, Borrower shall have the right to
request that Lender offer a fixed interest rate in respect of all or any portion
(in whole increments of One Million Dollars ($1,000,000) however) of the then
unpaid principal balance of the Term Loan if Lender is then offering fixed rates
for loans of the size, type and tenor of all or such portion of the Term Loan
outstanding at such time. Any such offer, by Lender, to be valid, must be
contained in a writing signed by an authorized officer of Lender making specific
reference to this provision. If Lender's offer of a fixed rate in respect of all
or any such portion of the Term Loan is accepted by Borrower (as evidenced by
its written acceptance thereof on the Business Day on which the offer is made),
then, such fixed interest rate shall become the applicable interest rate as of
the first day of the succeeding calendar quarter for all or such portion of the
Term Loan and remain effective thereafter until the Term Loan or such portion
thereof is paid in full.
(c) Payment. Interest on any Base Rate Loan shall be payable monthly
-------
in arrears on the first day of each calendar month hereafter (for the preceding
calendar month), commencing on February 1, 1997 (for the period from the Closing
Date through such date). Interest on any
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<PAGE>
LIBOR Rate Loan shall be payable at the end of the Interest Period corresponding
thereto, if such Interest Period is ninety (90) days or less, but otherwise at
intervals not to exceed ninety (90) days.
(d) Limitations on LIBOR Rate Borrowings. Notwithstanding any other
------------------------------------
term of this Agreement, Borrower shall not be able to obtain or continue LIBOR
Rate Borrowings or convert Base Rate Borrowings into LIBOR Rate Borrowings if:
(i) a Default Condition or Event of Default has occurred and during its
continuance; or (ii) Borrower has received notice from Lender that it has become
illegal or commercially impracticable for Lender to make or maintain any
borrowings hereunder as LIBOR Rate Borrowings, so long as such notice remains
effective; in either such case, then and thereafter all such borrowings shall be
made, or continued as, or converted into, Base Rate Borrowings.
2.5 METHOD OF MAKING PAYMENTS.
-------------------------
All payments owing under or pursuant to this Agreement, whether of
principal, interest, fees or otherwise, shall be made without defense, set-off
or counterclaim to Lender not later than 1:00 p.m. Atlanta, Georgia time on the
date when due and shall be made in lawful money of the United States of America
in immediately available funds at the office of Lender in Atlanta, Georgia. If
and to the extent that any such payment is not made by Borrower when due,
Borrower hereby authorizes and directs Lender to charge Borrower's demand
deposit account maintained with Lender pursuant to Section 8.21 hereof for the
amount of any such payment or, in lieu thereof or in addition thereto, so long
as the Revolving Line of Credit remains in effect, as necessary, to debit any
such payment as a Revolving Advance (whether or not an overadvance is created
thereby). Whenever any payment to be made hereunder or pursuant hereto shall be
stated to be due on a day which is not a Business Day, the due date thereof
shall be extended to the next succeeding Business Day and, with respect to
payments of principal, interest thereon shall be payable at the applicable rate
during such extension.
2.6 PREPAYMENTS; EARLY TERMINATION.
------------------------------
(a) Revolving Advances may be repaid (without penalty or premium) and
re-borrowed from time to time as provided in Section 2.1 hereof; provided that
--------
no Revolving Advance then constituting a LIBOR Rate Borrowing shall be repaid on
any day other than the last day of the Interest Period then applicable thereto
or on the Termination Date, as applicable. The principal amount of the Term Loan
(if made) may be prepaid in full or in part at any time or from time to time
after the first anniversary of the Closing Date, without penalty or premium;
provided, however, that (i) any such prepayment must be preceded by at least ten
- -------- -------
(10) days prior written notice thereof to the Lender, (ii) any such prepayment
must be accompanied by the payment of all then accrued interest on the principal
amount to be prepaid together with all accrued fees and expenses, (iii) any such
prepayment (other than a prepayment in full) must be in the amount of at least
One Hundred Thousand Dollars ($100,000) or an integral multiple thereof and (iv)
no portion of the Term Loan then constituting a LIBOR Rate Borrowing shall be
prepaid on any day other than the last day of the Interest Period then
applicable thereto or the maturity date of the Term Loan, as applicable. Each
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<PAGE>
partial prepayment of the Term Loan shall be applied to the unpaid principal
installments thereof in the inverse order of their respective maturities.
(b) In addition to the foregoing, Borrower may at any time hereafter
terminate the Revolving Line of Credit, provided, that (a) any such termination
must be preceded by at least ten (10) days written notice to the Lender and (b)
Borrower shall be required at such time to pay in full all outstanding Revolving
Advances, together with all accrued and unpaid interest thereon and all accrued
and unpaid fees and expenses which are payable by Borrower hereunder.
2.7 USE OF PROCEEDS.
---------------
The proceeds of the initial Revolving Advance, to be made on the
Closing Date, shall be used by Borrower to pay, by extension and renewal, to the
full extent thereof, all existing Revolving Advances outstanding under the Prior
Loan Agreement. The proceeds of all subsequent Revolving Advances shall be used
by Borrower to partially fund the payment of certain distributions permitted
pursuant to Section 9.4 for working capital purposes in the ordinary course of
its business. The proceeds of the Term Loan, to be made on the Closing Date,
shall be used by Borrower to pay in full by extension and renewal, any amount of
the existing Term Loan outstanding under the Prior Loan Agreement on the Closing
Date, and, to the extent of any balance, for Borrower's business purposes in
accordance with the terms of this Agreement (which may include, without
limitation, the payment of certain distributions permitted pursuant to Section
9.4).
2.8 INCREASED COSTS OR REDUCED RETURN.
---------------------------------
If, due to either (a) the introduction of or any change in or in the
interpretation of any U.S. or foreign law or regulation, or (b) the compliance
with any guideline or request from any governmental authority, there shall be
any increase in the cost to Lender of maintaining its commitments hereunder or
agreeing to make or making, funding or maintaining any Revolving Advances or the
Term Loan or any reduction in the rate of return on Lender's capital as a
consequence of its obligations hereunder to a level below that which Lender
would have achieved but for such events described in clauses (a)and (b) above
(taking into consideration Lender's policies to comply with statutorily required
levels with respect to capital adequacy), then Borrower agrees from time to
time, upon demand by Lender to pay to Lender additional amounts sufficient to
compensate Lender for such increased costs or reduced return. A certificate
identifying with reasonable specificity the basis for and the amount of such
increased costs or reduced return shall be submitted to Borrower by Lender and
shall be conclusive and binding for all purposes, absent manifest error. In
determining such amount, Lender may use reasonable averaging and attribution
methods.
2.9 INDEMNIFICATION OF LENDER.
-------------------------
At all times prior to and after the consummation of the transactions
contemplated by this Agreement, Borrower agrees to hold Lender, its respective
directors, officers, employees, agents,
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<PAGE>
Affiliates, successors and assigns harmless from and to indemnify Lender and its
respective directors, officers, employees, agents, Affiliates, successors and
assigns against, all loss, damages, costs and expenses (including, without
limitation, reasonable attorney's fees, costs and expenses) actually incurred by
any of the foregoing, whether direct, indirect or consequential, as a result of
or arising from or relating to any "Proceedings" (as defined below) by any
Person, whether threatened or initiated, asserting a claim for any legal or
equitable remedy against any Person under any statute, case or regulation,
including, without limitation, any federal or state securities laws or under any
common law or equitable case or otherwise, arising from or in connection with
this Agreement, and any other of the transactions contemplated by this Agreement
except to the extent such losses, damages, costs or expenses are due to the
wilful misconduct or gross negligence of Lender. As used herein, "PROCEEDINGS"
-----------
shall mean actions, suits or proceedings before any court, governmental or
regulatory authority. At the request of Lender, Borrower agrees to indemnify any
Person to whom Lender transfers or sells all or any portion of its interest in
the Obligations or participations therein on terms substantially similar to the
terms set forth above. Lender shall not be responsible or liable to any Person
for consequential damages which may be alleged as a result of this Agreement or
any of the transactions contemplated hereby. The obligations of Borrower under
this Section 2.9 shall survive the termination of this Agreement and payment of
the Obligations.
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,
Borrower hereby 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 Collateral; (b) the Inventory Collateral;
(c) the Equipment Collateral; (d) the Balances Collateral; and (e) 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.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO ACCOUNTS
----------------------------------------------------------------
RECEIVABLE COLLATERAL.
---------------------
With respect to the Accounts Receivable Collateral, Borrower hereby
represents, warrants and covenants to Lender as set forth below.
-17-
<PAGE>
4.1 BONA FIDE ACCOUNTS.
------------------
Each item of the Accounts Receivable Collateral arises or will arise
under a contract between Borrower and the Account Debtor, or from the bona fide
sale or delivery of goods to or performance of services for, the Account Debtor.
4.2 GOOD TITLE; NO EXISTING ENCUMBRANCES.
------------------------------------
Borrower has good title to its Accounts Receivable Collateral free and
clear of all Liens thereon other than any Permitted Encumbrances, and no
financing statement covering the Accounts Receivable Collateral is on file in
any public office other than any evidencing Permitted Encumbrances.
4.3 RIGHT TO ASSIGN; NO FURTHER ENCUMBRANCES.
----------------------------------------
Borrower has full right, power and authority to make this assignment
of the Accounts Receivable Collateral and hereafter will not pledge,
hypothecate, grant a security interest in, sell, assign, transfer, or otherwise
dispose of the Accounts Receivable Collateral, or any interest therein.
4.4 COLLECTIONS.
-----------
At any time when an Event of Default has occurred and is continuing,
at the request of Lender, Borrower shall transfer and deliver to Lender, or to
such account as Lender shall direct, all cash, checks, drafts, items and other
instruments for the payment of money which Borrower receives in full or partial
payment for Inventory Collateral or otherwise as proceeds of Accounts Receivable
Collateral and pending such transfer and delivery, Borrower shall be deemed to
hold the same in trust for the benefit of Lender. All such amounts shall be
applied by Lender in payment of the Obligations in such order as Lender shall
elect. Lender may additionally, at any time after the occurrence and during the
continuance of an Event of Default, in its sole discretion, direct Account
Debtors to make payments on the Accounts Receivable Collateral, or portions
thereof, directly to Lender, and the Account Debtors are hereby authorized and
directed to do so by Borrower upon Lender's direction, and the funds so received
shall be applied as aforesaid.
4.5 POWER OF ATTORNEY.
-----------------
Borrower irrevocably designates and appoints Lender its true and
lawful attorney either in the name of Lender or in the name of Borrower to ask
for, demand, sue for, collect, compromise, compound, receive, receipt for and
give acquittances for any and all sums owing or which may become due upon any
items of the Accounts Receivable Collateral and, in connection therewith, to
take any and all actions as Lender may deem necessary or desirable in order to
realize upon the Accounts Receivable Collateral, including, without limitation,
power to endorse in the name of Borrower, any checks, drafts, notes or other
instruments received in payment of or on account of the Accounts Receivable
Collateral, but Lender shall not be under any duty to exercise
-18-
<PAGE>
any such authority or power or in any way be responsible for the collection of
the Accounts Receivable Collateral. Lender hereby agrees that it will not
exercise the foregoing power of attorney except after the occurrence of, and
during the continuation of, an Event of Default.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO INVENTORY
-----------------------------------------------------------------
COLLATERAL.
----------
With respect to the Inventory Collateral, and in addition to the
covenants pertaining thereto in Sections 4.4 and 4.5, Borrower hereby
represents, warrants and covenants to Lender as set forth below.
5.1 SALE OF INVENTORY COLLATERAL.
----------------------------
Borrower will not sell, lease, exchange, or otherwise dispose of any
of the Inventory Collateral without the prior written consent of Lender, except
in the ordinary course of business for cash or on open account or on terms of
payment ordinarily extended to its customers. Upon the sale, exchange or other
disposition of the Inventory Collateral, the security interest and lien created
and provided for herein, without break in continuity and without further
formality or act, shall continue in and attach to any proceeds thereof,
including, without limitation, accounts, contract rights, shipping documents,
documents of title, bills of lading, warehouse receipts, dock warrants, dock
receipts and cash or non-cash proceeds, and in the event of any unauthorized
sale, shall continue in the Inventory Collateral itself.
5.2 INSURANCE.
---------
Borrower agrees that it will obtain and maintain insurance on the
Inventory Collateral with such companies, in an amount not less than one hundred
percent (100%) replacement cost of such Inventory and against such risks as
Lender may request, with loss payable to Lender and reflecting Lender as
additional insured, as its interests may appear. Such insurance shall not be
cancellable by Borrower, unless with the prior written consent of Lender, or by
Borrower's insurer, unless with at least thirty (30) days advance written notice
to Lender.
5.3 GOOD TITLE; NO EXISTING ENCUMBRANCES.
------------------------------------
Except with respect to any Permitted Encumbrances, Borrower owns the
Inventory Collateral free and clear of any prior Lien, and no financing
statements or other evidences of the grant of a security interest respecting the
Inventory Collateral exist on the public records as of the date hereof other
than any evidencing any Permitted Encumbrances.
5.4 RIGHT TO GRANT SECURITY INTEREST; NO FURTHER ENCUMBRANCES.
---------------------------------------------------------
Borrower has the right to grant a security interest in the Inventory
Collateral. Borrower will pay all taxes and other charges against the Inventory
Collateral, and Borrower will not
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<PAGE>
use the Inventory Collateral illegally or allow the Inventory Collateral to be
encumbered except for the security interest in favor of Lender granted herein
and except for any Permitted Encumbrances.
5.5 LOCATION OF INVENTORY COLLATERAL.
--------------------------------
Borrower hereby represents and warrants to Lender that, as of the date
hereof, the Inventory Collateral (except for certain portions thereof in
transit) of Borrower is situated only at one or more of the Collateral Locations
and Borrower covenants with Lender not to locate the Inventory Collateral at any
location other than a Collateral Location without at least thirty (30) days
prior written notice to Lender. In addition, to the extent Borrower should
warehouse any of the Inventory Collateral at any time hereafter, Borrower
acknowledges and agrees that such warehousing may be conducted only by
warehousemen who have been pre-approved by Lender and who, in any event, shall
issue non-negotiable warehouse receipts in Lender's name to evidence any such
warehousing of goods constituting Inventory Collateral. In any event, Borrower
will not consign any Inventory Collateral except upon first obtaining Lender's
prior written consent thereto.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO EQUIPMENT
-----------------------------------------------------------------
COLLATERAL.
----------
With respect to the Equipment Collateral, Borrower hereby represents,
warrants and covenants to Lender as set forth below.
6.1 NO SALE OF EQUIPMENT COLLATERAL.
-------------------------------
Borrower will not sell, lease, exchange, or otherwise dispose of any
of the Equipment Collateral without the prior written consent of Lender.
6.2 INSURANCE.
---------
Borrower agrees that it will obtain and maintain insurance on the
Equipment Collateral with such companies and in such amounts and against such
risks as Lender may reasonably request, with loss payable to Lender and
reflecting Lender as additional insured as its interest may appear. Such
insurance shall not be cancellable by Borrower, unless with the prior written
consent of Lender, or by Borrower's insurer, unless with at least thirty (30)
days advance written notice to Lender.
6.3 GOOD TITLE; NO EXISTING ENCUMBRANCES.
------------------------------------
Borrower owns the Equipment Collateral free and clear of any prior
Lien thereon other than with respect to any Permitted Encumbrances and no
financing statements or other evidences of the grant of a security interest
respecting the Equipment Collateral exist on the public records as of the date
hereof other than any evidencing any Permitted Encumbrances.
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<PAGE>
6.4 RIGHT TO GRANT SECURITY INTEREST; NO FURTHER ENCUMBRANCES.
---------------------------------------------------------
Borrower has the right to grant a security interest in the Equipment
Collateral. Borrower will pay all taxes and other charges against the Equipment
Collateral. Borrower will not use the Equipment Collateral illegally or allow
the Equipment Collateral to be encumbered except for the security interest in
favor of Lender granted herein and except for any Permitted Encumbrances.
6.5 LOCATION.
--------
As of the date hereof, the Equipment Collateral is located only at one
or more of the Collateral Locations and, hereafter, Borrower covenants with
Lender not to locate Equipment Collateral at any location other than a
Collateral Location.
7. GENERAL REPRESENTATIONS AND WARRANTIES.
--------------------------------------
In order to induce Lender to enter into this Agreement, Borrower
hereby represents and warrants to Lender (which representations and warranties,
together with the representations and warranties of Borrower contained in
Articles 4, 5 and 6, shall be deemed to be renewed as of the date of each
Revolving Advance) as set forth below.
7.1 EXISTENCE AND QUALIFICATION.
---------------------------
Borrower is a limited liability company duly organized and validly
existing under, and in good standing under, the laws of the State of Wyoming,
with its principal place of business, chief executive office and office where it
keeps all of its books and records being located at the Executive Office and is
duly qualified to transact business as such entity and is in good standing in
any other state wherein the conduct of its business or the ownership of its
Property requires such qualification. Borrower has as its name, as registered
with the secretary of state of the state of its organization, the words first
inscribed hereinabove as its name.
7.2 AUTHORITY; VALIDITY AND BINDING EFFECT.
--------------------------------------
Borrower has the power to make, deliver and perform under the Loan
Documents, and to borrow and grant Liens in the Collateral hereunder, and has
taken all necessary and appropriate action to authorize the execution, delivery
and performance of the Loan Documents. This Agreement constitutes, and the
remainder of the Loan Documents, when executed and delivered for value received,
will constitute, the valid obligations of Borrower, legally binding upon it and
enforceable against it in accordance with their respective terms. The
undersigned representatives of Borrower are duly authorized and empowered to
execute, attest and deliver this Agreement and the remainder of the Loan
Documents for and on behalf of Borrower, and to bind Borrower accordingly
thereby.
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<PAGE>
7.3 NO MATERIAL LITIGATION.
----------------------
There axe no proceedings pending or, so far as Borrower knows,
threatened, before any court or administrative agency which might materially
adversely affect the financial condition or operations of Borrower.
7.4 TAXES.
-----
Borrower has filed or caused to be filed any tax returns required to
be filed by it and has paid all taxes shown to be due and payable by it on said
returns or on any assessments made against it, the nonpayment of which could
reasonably be expected to have a material adverse effect on the Borrower's
financial condition or business operations, unless and to the extent only that
(x) such taxes are being contested in good faith and by appropriate proceedings
by Borrower, and (y) Borrower maintains reasonable reserves on its books
therefor in accordance with GAAP.
7.5 CAPITAL.
-------
All membership units, capital stock, debentures, bonds, notes and all
other securities of Borrower presently issued and outstanding are validly and
properly issued in accordance with all applicable laws, including, but not
limited to, the "blue sky" laws of all applicable states and the federal
securities laws.
7.6 ORGANIZATION.
------------
The Organizational Documents of Borrower are in full force and effect
under the laws of the State of Wyoming and all amendments to said Organizational
Documents have been duly and properly made under and in accordance with all
applicable laws.
7.7 INSOLVENCY.
----------
After giving effect to the funding of the Revolving Advances to be
made on the Closing Date, and the other transactions contemplated by this
Agreement and the uses by Borrower of the proceeds of the such advances as
provided hereunder, (a) the fair value and present fair saleable value of
Borrower's assets are in excess of the total amount of Borrower's liabilities,
including known contingent liabilities; (b) Borrower will not have incurred
debts, nor will it intend to incur debts, beyond its ability to pay such debts
as they mature; and (c) Borrower does not have unreasonably small capital to
carry on Borrower's business as theretofore operated and all businesses in which
the Borrower is about to engage. As used in this Section 7.7, "debt" means any
liability on a claim, and "claim" means (i) the right to payment, whether or not
such right is reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secured or
unsecured, or (ii) the right to an equitable remedy for breach of performance if
such breach gives rise to a right to payment, whether or not such right to an
equitable
-22-
<PAGE>
remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed,
undisputed, secured or unsecured.
7.8 TITLE.
-----
Borrower has good and marketable title to all of its properties
subject to no Lien of any kind except as otherwise disclosed in writing to
Lender and as to the Collateral, except for the Permitted Encumbrances.
------
7.9 MARGIN STOCK.
------------
Borrower is not engaged principally, or as one of its important
activities, in the business of purchasing or carrying any Margin Stock and no
part of the proceeds of any borrowing made pursuant hereto will be used to
purchase or carry any Margin Stock or to extend credit to others for the purpose
of purchasing or carrying any Margin Stock, or be used for any purpose which
violates, or which is inconsistent with, the provisions of Regulation X of the
Board of Governors of the Federal Reserve System. In connection herewith, if
requested by Lender, Borrower will furnish to Lender a statement in conformity
with the requirements of Federal Reserve Form F.R. U-1 referred to in Regulation
U of said Board to the foregoing effect.
7.10 NO VIOLATIONS.
-------------
The execution, delivery and performance by Borrower of this Agreement
and the Loan Documents have been duly authorized by all necessary action and do
not and will not require any consent or approval of the Members (except to the
extent obtained), violate any provision of any law, rule, regulation (including,
without limitation, Regulation X of the Board of Governors of the Federal
Reserve System), order, writ, judgment, injunction, decree, determination or
award presently in effect having applicability to Borrower or of the
Organizational Documents of Borrower, or result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which Borrower is a party or by which it or its
properties may be bound or affected; and Borrower is not in default under any
such law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award or any such indenture, agreement, lease or instrument.
7.11 ERISA.
-----
(i) Borrower is in compliance with the requirements of ERISA with
respect to each Employee Benefit Plan; (ii) no fact, including, but not limited
to, any Reportable Event exists in connection with any Plan which, more likely
than not, would constitute grounds for the termination of any such Plan by the
PBGC or for the appointment by the appropriate United States district court of a
trustee to administer any such Plan; (iii) Borrower does not maintain or
contribute to any Plan which has an "accumulated funding deficiency" (as defined
in Section 412 of the Internal Revenue Code); (iv) Borrower does not maintain or
contribute to any Plan which has incurred any material
-23-
<PAGE>
liability to the PBGC (other than for premium payments due in the ordinary
course of business, which premiums will be paid when due and payable); (v)
Borrower does not maintain or contribute to any Plan which has insufficient
assets to qualify for a standard termination pursuant to Section 4041 of ERISA;
(vi) Borrower is not required pursuant to the terms of any applicable collective
bargaining agreement to pay or accrue any contributions with respect to any Plan
which is a Multiemployer Plan and there has been no complete or partial
withdrawal by Borrower from any such Multiemployer Plan within the contemplation
of MPPAA; (vii) except as concurrently herewith disclosed to Lender in writing,
(A) Borrower does not maintain or contribute to any Employee Benefit Plan which
provides medical benefits, life insurance benefits or other welfare benefits as
defined in Section 3(1) of ERISA (excluding severance pay and benefits required
under Section 601 of ERISA) for former employees of such Borrower, and (B)
Borrower does not maintain or contribute to any non-qualified, unfunded deferred
compensation plan; and (viii) neither Borrower nor any fiduciary with respect to
any Employee Benefit Plan has engaged in a "prohibited transaction" within the
meaning of Section 4975 of the Internal Revenue Code or Section 406 of ERISA
with respect to any Employee Benefit Plan.
7.12 FINANCIAL STATEMENTS.
--------------------
The audited financial statements of Borrower for the most recently
completed fiscal year of Borrower, together with the unaudited financial
statements of Borrower for that portion ended, September 30, 1996, of its
current fiscal year, copies of which have heretofore been furnished to Lender,
are complete and accurately and fairly represent the financial condition of
Borrower, the results of Borrower's operations and the transactions in
Borrower's equity accounts as of the dates and for the periods referred to
therein, and have been prepared in accordance with GAAP throughout the period
involved. There is no material Debt of Borrower as of the date of such financial
statements which is not reflected therein or in the notes thereto. There has
been no material adverse change in the financial conditions or operations of
Borrower since the respective dates of the balance sheets contained in such
financial statements.
7.13 DELIVERY OF CERTAIN COLLATERAL.
------------------------------
Borrower has delivered to the Lender all agreements, letters of
credit, promissory notes, certificates of deposit, chattel paper or anything
else the physical possession of which is necessary in order for the Lender to
perfect or preserve the priority of its security interest therein.
7.14 PURCHASE OF COLLATERAL.
----------------------
Borrower has not purchased any of the Collateral in a bulk transfer or
in a transaction which was outside the ordinary course of the business of
Borrower's seller, except that Borrower acquired certain of the Equipment
Collateral from Parent, in compliance with all applicable laws.
-24-
<PAGE>
7.15 POLLUTION AND ENVIRONMENTAL CONTROL.
-----------------------------------
Borrower has obtained all permits, licenses and other authorizations
which are required under, and is in compliance with all Environmental Laws the
noncompliance with which would or might have a material adverse effect on its
business, financial condition or Property.
7.16 POSSESSION OF FRANCHISES, LICENSES, ETC.
---------------------------------------
Borrower possesses all franchises, certificates, licenses, permits and
other authorizations from governmental political subdivisions or regulatory
authorities, and all patents, trademarks, service marks, trade names,
copyrights, licenses and other rights, free from burdensome restrictions, that
are necessary for the ownership, maintenance and operation of any of its
Property and assets, and Borrower is not in violation of any thereof which would
or might have a material adverse effect on its business, financial condition or
Property.
7.17 DISCLOSURE.
----------
Neither this Agreement nor any other document, certificate or
statement furnished to Lender by or on behalf of Borrower in connection herewith
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein and therein not
misleading. To the best of Borrower's knowledge, there is no fact peculiar to
Borrower which materially adversely affects or in the future may (so far as
Borrower can now reasonably foresee) materially adversely affect the business,
Property or assets, or financial condition of Borrower which has not been set
forth in this Agreement or in the other documents, certificates and statements
furnished to Lender by or on behalf of Borrower prior to the date hereof in
connection with the transactions contemplated hereby, when taken as a whole.
7.18 SUBSIDIARIES.
------------
Borrower has no Subsidiaries.
8. GENERAL AFFIRMATIVE COVENANTS.
-----------------------------
Borrower covenants to Lender that from and after the date hereof, and
until such time as the Obligations have been paid in full and Lender shall have
terminated this Agreement in writing, Borrower will comply with the covenants
set forth below.
8.1 RECORDS RESPECTING COLLATERAL.
-----------------------------
All records of Borrower with respect to the Collateral will be kept at
the Executive Office (as it may be changed pursuant to Section 8.11) and will
not be removed from such address without the prior written consent of Lender.
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<PAGE>
8.2 FURTHER ASSURANCES.
------------------
Borrower shall duly execute and/or deliver (or cause to be duly
executed and/or delivered) to Lender any instrument, invoice, document, document
of title, dock warrant, dock receipt, warehouse receipt, bill of lading, order,
financing statement, assignment, waiver, consent or other writing which may be
reasonably necessary to Lender to carry out the terms of this Agreement and any
of the other Loan Documents and to perfect its security interest in and
facilitate the collection of the Collateral, the proceeds thereof, and any other
property at any time constituting security to Lender. Borrower shall perform or
cause to be performed such acts as Lender may reasonably request to establish
and maintain for Lender a valid and perfected Lien on the Collateral, free and
clear of any Liens other than in favor of Lender and other than the Permitted
Encumbrances.
8.3 RIGHT TO INSPECT.
----------------
Lender (or any person or persons designated by it) shall, in its sole
discretion, have the right to call at any place of business of Borrower at any
reasonable time during normal business hours, and, without hindrance or delay,
inspect the Collateral and inspect, audit, check and make extracts from
Borrower's books, records, journals, orders, receipts and any correspondence and
other data relating to the Collateral, to Borrower's business or to any other
transactions between the parties hereto. Without limiting the foregoing, Lender
shall be entitled to perform periodic field audits of Borrower's operations.
Lender shall hold in confidence Borrower's confidential or proprietary
information obtained pursuant to this Agreement and shall not disclose the same
to any third party, except: (i) as required by law or by judicial or
------
administrative process or to appropriate regulatory authorities or as such
information is or becomes public knowledge other than by virtue of Lender's
disclosure, (ii) to Lender's attorneys and accountants, and (iii) otherwise to
the extent that Lender needs to disclose such information in order to protect
its own interests or to collect all or any part of the Obligations.
8.4 REPORTS.
-------
Borrower shall, as soon as practicable, but in any event on or before
the respective dates specified below furnish or cause to be furnished to Lender:
(i) within ten (10) days after the end of each calendar month, a status report,
certified by a duly authorized officer on behalf of Borrower, showing the
aggregate dollar value of the items comprising the Accounts Receivable
Collateral and the age of each individual item thereof from invoice date as of
the last day of the preceding calendar month (segregating such items in such
manner and to such degree as Lender may reasonably request), and (ii) within
forty-five (45) days after the end of each calendar quarter, an inventory status
report, certified by a duly authorized officer of Borrower, in such detail as
Lender shall request, but to include in any event a description of the type,
dollar value and location of the Inventory Collateral as at the end of the
preceding month, valued at the lower of cost or market. Additionally, Lender
may, at any time, request that Borrower verify the individual account balances
of the individual Account Debtors by such means as Borrower and Lender then
mutually agree, provided that, after any Event of Default has occurred and while
it is continuing Lender shall have
-26-
<PAGE>
the further right to verify such balances directly. In any event, upon request
from Lender, made at any time hereafter but in any event no less often than
every three (3) months, Borrower shall furnish Lender with a then current
Account Debtor address list for Borrower.
8.5 PERIODIC FINANCIAL STATEMENTS OF BORROWER, AHP HOLDINGS AND
-----------------------------------------------------------
PARENT.
------
Borrower shall, as soon as practicable, and in any event within forty-
five (45) days after the end of each fiscal quarter of Borrower, AHP Holdings
and Parent, respectively, 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 fiscal quarter then ended and the fiscal year to date, certified as to truth
and accuracy by Borrower's chief executive officer or chief financial officer.
8.6 ANNUAL FINANCIAL STATEMENTS OF AHP HOLDINGS AND PARENT.
------------------------------------------------------
Borrower shall, as soon as practicable, and in any event within one
hundred twenty (120) days after the end of each Fiscal Year, furnish to Lender
the annual audit report of Parent and its consolidated Subsidiaries and,
separately, AHP Holdings and its consolidated Subsidiaries, including a balance
sheet, income statement and statement of cash flow, certified without material
qualification (and Lender reserves the right to determine whether qualifications
arising out of uncertainty or due to an accounting change are material for
purposes of this covenant), by independent certified public accountants of
recognized national (or international) standing, and prepared in accordance with
GAAP; provided, however, that (i) Parent or AHP Holdings may make a change in
-------- -------
its accounting methods in any Fiscal Year provided (A) such change or changes
are clearly reflected in its annual audit report, (B) any new method has been
concurred in by its independent certified public accountants and is in
accordance with GAAP and (C) this Agreement has been amended to the extent
necessary to reflect such changes in the financial covenants and other terms and
conditions of this Agreement; and (ii) Lender shall have the right, in response
to any change in GAAP occurring hereafter, to require that this Agreement be
amended to the extent necessary to reflect changes in the financial covenants
and other terms and conditions to this Agreement caused by such change in GAAP.
8.7 PAYMENT OF TAXES.
----------------
Borrower shall pay and discharge all taxes, assessments and
governmental charges upon it, its income and its Property, the non-payment of
which could reasonably be expected to have a material adverse effect on the
Borrower's financial condition or business operations, prior to the date on
which penalties attach thereto, unless and to the extent only that (x) such
taxes, assessments and governmental charges are being contested in good faith
and by appropriate proceedings by Borrower and (y) Borrower maintain reasonable
reserves on its books therefor in accordance with GAAP.
-27-
<PAGE>
8.8 MAINTENANCE OF INSURANCE.
------------------------
In addition to and cumulative with any other requirements imposed on
Borrower with respect to insurance herein or under the other Loan Documents,
Borrower shall maintain insurance with responsible insurance companies on such
of its Property, in such amounts and against such risks as is customarily
maintained by similar businesses operating in the same vicinity, but in any
event to include public liability, worker's compensation, loss, damage, flood,
windstorm, fire, theft, extended coverage and product liability insurance in
amounts satisfactory to Lender, which such insurance shall not be cancellable by
Borrower, unless with the prior written consent of Lender, or by Borrower's
insurer, unless with at least thirty (30) days advance written notice to Lender
thereof. Borrower shall file with Lender on or before the Closing Date and
annually upon Lender's request thereafter copies of insurance policies,
certified by an officer of Borrower's insurance company, to Lender's
satisfaction,, of such insurance then in effect stating the names of the
insurance companies, the amounts and rates of insurance, the date of expiration
thereof, the properties and risks covered thereby and the insured with respect
thereto, and, within thirty (30) days after notice in writing from Lender,
obtain such additional insurance as Lender may reasonably request.
8.9 MAINTENANCE OF PROPERTY.
-----------------------
Borrower shall maintain its Properties in good working condition.
8.10 CERTIFICATE OF NO EVENT OF DEFAULT; COMPLIANCE CERTIFICATE;
-----------------------------------------------------------
NOTICE OF DEFAULT.
-----------------
Borrower shall, on a quarterly basis not later than forty-five (45)
days after the close of each of its first three (3) fiscal quarters and not
later than one hundred twenty (120) days after the close, of its Fiscal Year,
certify to Lender, in a statement executed by Borrower's chief executive officer
or chief financial officer, that no Event of Default and no Default Condition
exists or has occurred and is existing, or, if an Event of Default or Default
Condition exists, specifying the nature and period of existence thereof and
setting forth the action which Borrower proposes to take with respect thereto.
Such certificate shall be accompanied by the certificate of the chief financial
officer on behalf of Borrower showing, in reasonable detail, compliance with
Sections 8.17 through 8.20, inclusive, and Section 9.10, by Borrower for the
immediately preceding fiscal quarter. In addition, promptly upon its becoming
aware of the occurrence of any Default Condition or Event of Default, Borrower
will notify Lender thereof in writing, specifying the nature and period of
existence thereof and the action which Borrower proposes to take with respect
thereto.
8.11. CHANGE OF PRINCIPAL PLACE OF BUSINESS, ETC.
------------------------------------------
Borrower hereby understands and agrees that if, at any time hereafter,
Borrower elects either (i) to move its Executive Office, except as described in
the definition thereof, (ii) to change its name, identity or its structure to
other than a limited liability company or (iii) to add any Collateral Location,
Borrower will notify Lender in writing at least thirty (30) days prior thereto
and
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<PAGE>
take such action in regard thereto as Lender may reasonably request to continue
the perfection of the Lender's security interest in the Collateral in respect of
such change.
8.12 WAIVERS.
-------
With respect to each of the Collateral Locations, Borrower will obtain
such waivers of lien, estoppel certificates or subordination agreements as
Lender may reasonably require to insure the priority of its security interest in
that portion of the Collateral situated at such locations.
8.13 PRESERVATION OF EXISTENCE.
-------------------------
Borrower shall preserve and maintain its existence as a limited
liability company and its rights, franchises and privileges in the jurisdictions
of its organization, and qualify and remain qualified as a foreign limited
liability company in each Collateral Location state and each jurisdiction in
which such qualification is necessary or desirable in view of its business and
operations or the ownership of its Property.
8.14 COMPLIANCE WITH LAWS.
--------------------
Borrower shall comply with the requirements of all applicable laws,
rules, regulations and orders of any governmental authority, noncompliance with
which would materially adversely affect its businesses or credit. Without
limiting the foregoing, Borrower shall obtain and maintain all permits, licenses
and other authorizations which are required under, and otherwise comply with,
all Environmental Laws.
8.15 ERISA.
-----
Borrower shall: (i) make prompt payments of contributions required by
the terms of each Employee Benefit Plan or to meet the minimum funding standards
set forth under ERISA with respect to each Employee Benefit Plan to which such
standards apply; (ii) notify Lender immediately of any fact, including, but not
limited to, any Reportable Event, arising in connection with any Plan which,
more likely than not, would constitute grounds for the termination thereof by
the PBGC or for the appointment by the appropriate United States district court
of a trustee to administer the Plan; (iii) notify Lender immediately of
Borrower's intent to terminate any Plan; (iv) notify Lender immediately of the
adoption of an amendment to any Plan (or of any other event) which causes any
Plan to fail to have sufficient assets to qualify for a standard termination
under Section 4041 of ERISA; (v) notify Lender immediately if the aggregate
unfunded liability with regard to all Plans increases to an amount in excess of
Fifty Thousand Dollars ($50,000); (vi) notify Lender immediately if Borrower
obtains information indicating that the aggregate withdrawal liability with
regard to all Plans increases to an amount in excess of Fifty Thousand Dollars
($50,000); (vii) notify Lender immediately of any filing of a request for a
waiver of the minimum funding standard with regard to any Employee Benefit Plan
to which such standard applies; (viii) promptly after receipt thereof, furnish
to Lender a copy of any notice received by Borrower from the PBGC relating to
the
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<PAGE>
intention of the PBGC to terminate any Plan or to appoint a trustee to
administer any Plan; (ix) promptly after receipt thereof furnish to Lender a
copy of any notice received by Borrower from the Internal Revenue Service
relating to the intention of the Internal Revenue Service to disqualify any
Employee Benefit Plan or to refuse to grant a favorable determination letter
with regard to any Employee Benefit Plan; (x) notify Lender immediately of any
lawsuit, claim for damages or administrative proceeding in which an Employee
Benefit Plan or a fiduciary with respect thereto is a defendant, wherein the
amount of damages claimed exceeds, either alone or in the aggregate with all
other such lawsuits, claims and administrative proceedings, Fifty Thousand
Dollars ($50,000); and (xi) furnish to Lender, promptly upon its request
therefor, such additional information concerning each and every Employee Benefit
Plan, including, but not limited to, the annual report required to be filed
under ERISA, as may be reasonably requested.
8.16 LITIGATION.
----------
Promptly, upon its receipt of notice or knowledge thereof, Borrower
will report to Lender any lawsuit or administrative proceeding in which Borrower
or any of its Subsidiaries is a defendant wherein the amount of damages claimed
against Borrower or any of its Subsidiaries exceeds Fifty Thousand Dollars
($50,000).
8.17 LEVERAGE RATIO.
--------------
The Leverage Ratio shall be not more than (i) 6.00:1, starting with
the Fiscal Quarter ending December 31, 1997, and continuing through the fiscal
quarter ending September 30, 1998; (ii) 3.00:1, starting with the Fiscal Quarter
ending December 31, 1997, the Fiscal Quarter ending September 30, 1999; and
(iii) 2.00:1, for each Fiscal Quarter ending thereafter.
8.18 TANGIBLE NET WORTH.
------------------
Tangible Net Worth shall be at least equal to One Million Dollars
($1,000,000), which minimum amount shall increase annually concurrently with
Borrower's delivery to Lender of the audited financial statements of AHP
Holdings and its consolidated Subsidiaries for each Fiscal Year, commencing with
the Fiscal Year ending December 31, 1997, as required by Section 8.6 hereof (but
in no event more than one hundred twenty (120) days after the end of any Fiscal
Year), by an amount equal to Two Million Dollars ($2,000,000).
8.19 NET INCOME.
----------
The minimum annual net income of AHP Holdings and its consolidated
Subsidiaries, determined in accordance with GAAP for each Fiscal Quarter,
starting with the Fiscal Quarter ended December 31, 1996, shall be One Hundred
Thousand Dollars ($100,000).
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<PAGE>
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 1.25:1, as determined under GAAP on a rolling four (4) quarters' basis,
starting with the fiscal quarter ending December 31, 1996.
8.21 OPERATING ACCOUNT.
-----------------
Borrower shall maintain an operating account with Lender to which
Lender may credit disbursements of Revolving Advances and charge payments due
hereunder as provided in Sections 2.1(b) and 2.5, respectively.
8.22 ENVIRONMENTAL COMPLIANCE.
------------------------
(a) DEFINITIONS. The following definitions shall apply for purposes of
-----------
this Section 8.22:
(i) "ENVIRONMENTAL LAW" shall mean any federal, state or
------------------
local statute, regulation or ordinance or any judicial or
administrative decree or decision now or hereafter promulgated with
respect to any "Hazardous Substance" (as hereinafter defined),
drinking water, ground water, landfills, open dumps, storage tanks,
underground storage tanks, solid waste, waste water, storm water
runoff, waste emissions, or wells. Without limiting the generality of
the foregoing, the term Environmental Law shall encompass each of the
following statutes, as may be amended from time to time, and all
regulations from time to time promulgated thereunder: the
Comprehensive Environmental Response, Compensation and Liability Act
of 1980 (codified in scattered sections of 26 U.S.C.; 33 U.S.C.; 42
U.S.C. and 42 U.S.C. (S) 9601 et seq.), the Clean Water Act of 1977
------
(33 U.S.C. (S) 1251 et seq.), the Clean Air Act (42 U.S.C. (S) 7401 et
------ --
seq.), the Resource Conservation and Recovery Act of 1976 (42 U.S.C.
---
(S) 6901 et seq.), the Safe Drinking Water Act (21 U.S.C. (S) 349; 42
------
U.S.C. (S)(S) 201 and 300f through 300j-9) and the Toxic Substances
Control Act (15 U.S.C. (S) 2601 et seq.).
------
(ii) "RELEASE" shall mean any spilling, leaking, pumping,
-------
emitting, emptying, discharging, injecting, storing, escaping,
leaching, dumping, or discharging, burying, abandoning, or disposing
into the environment by Borrower or any predecessor in interest of
Borrower.
(iii) "HAZARDOUS SUBSTANCE" shall mean each and every element,
-------------------
compound, chemical mixture, petroleum and gas product, substance,
contaminant, pollutant, including, without limitation, substances
which are toxic, carcinogenic, ignitable, corrosive or otherwise
dangerous to human, plant or animal health or well-
-31-
<PAGE>
being, and any other substance defined as a "hazardous substance,"
"hazardous waste," "hazardous material," "toxic material," "toxic
waste," or "special waste" under any Environmental Law and any other
substance which by law requires special handling in its collection,
storage, treatment or disposal.
(b) ENVIRONMENTAL REPRESENTATIONS AND WARRANTIES OF BORROWER.
--------------------------------------------------------
Borrower represents and warrants to Lender that (i) no condition, activity or
conduct exists on or in connection with any Collateral Location which
constitutes a violation of any Environmental Law; (ii) there has been no Release
of any Hazardous Substance on any Collateral Location; (iii) there are no
existing or closed underground storage tanks on any Collateral Location; (iv)
there are no existing or closed sanitary landfills, solid waste disposal sites,
or hazardous waste treatment, storage or disposal facilities on or affecting any
Collateral Location; (v) there exists no investigation, action, proceeding, or
claim by any agency, authority, or unit of government or by any third party
which could result in any liability, penalty, sanction, or judgment under any
Environmental Law with respect to any condition, use or operation of any
Collateral Location; and (vi) there has been no claim by any party that any
use, operation, or condition of any Collateral Location has caused any nuisance
or any other liability or adverse condition on any other property.
(c) INDEMNITY FOR BREACH OF ENVIRONMENTAL REPRESENTATIONS AND
---------------------------------------------------------
WARRANTIES AND FOR LIABILITIES. Borrower shall indemnify Lender and hold Lender
- ------------------------------
harmless from and against any and all claims, demands, losses, liabilities,
strict liabilities, damages, sanctions, penalties, fines, injuries, expenses,
costs (including attorney's fees), settlements, or judgments of any and every
kind whatsoever paid incurred or suffered by, or asserted against, Lender by any
person or entity or governmental agency arising out of, in connection with or
related in any way to (a) the Release or presence at, from, on, in or under any
Collateral Location of any Hazardous Substance, or (b) any act, omission,
condition, conduct, transaction or occurrence at, from, on or under any
Collateral Location in violation of any Environmental Law, regardless of whether
or not caused by or within the control of Borrower, or (c) the breach of any of
the representations or warranties contained in this Section 8.22.
(d) NOTICE TO LENDER. If Borrower receives any notice of (i) Release
----------------
of any Hazardous Substance, notification of which must be given to any
governmental agency under any Environmental Law, or notification of which has,
in fact, been given to any governmental agency, or (ii) any complaint, order,
citation or notice with regard to air emissions, water discharges, or any other
environmental health or safety matter affecting Borrower or any Collateral
Location from any person or entity (including, without limitation, the
Environmental Protection Agency), then Borrower shall immediately notify Lender
orally and in writing of said Release, complaint, order, citation or notice.
(e) ENVIRONMENTAL AUDIT. Lender shall have the right, after the
-------------------
occurrence of any event required to be reported to Lender pursuant to Section
8.22(d) hereof, in its sole discretion, to require Borrower to perform, at
Borrower's expense using an environmental consultant selected by Borrower and
acceptable to Lender, an environmental audit and, if deemed necessary by Lender,
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<PAGE>
an environmental risk assessment, each of which must be satisfactory to Lender.
Should Borrower fail to order any such environmental audit or risk assessment
within thirty (30) days after Lender's written request, Lender shall have the
right but not the obligation to retain an environmental consultant to perform
any such environmental audit or risk assessment. All costs and expenses incurred
by Lender in the exercise of such rights shall be payable by Borrower to Lender
on demand, shall bear interest at the Default Rate and, if occurring at a time
when the Revolving Line of Credit remains in effect, may be charged by Lender to
Borrower as Revolving Advances.
(f) SURVIVAL, ASSIGNABILITY, AND TRANSFERABILITY. The warranties,
--------------------------------------------
representations and indemnity set forth in subsections (b) and (c) of this
Section 8.22 shall survive any exercise by Lender or Lender of any remedies
under this Agreement or any Loan Document, including without limitation any
power of sale, and shall not merge with any deed or bill of sale given by
Borrower to Lender in lieu of foreclosure or any deed or bill of sale given
pursuant to a foreclosure. It is agreed and intended by Borrower and Lender that
the warranties, representations, and indemnity set forth above in subsections
(b) and (c) of this Section 8.22 may be assigned or otherwise transferred by
Lender to its successors and assigns and to any subsequent purchasers of all or
any portion of any Collateral by, through or under Lender, without notice to
Borrower and without any further consent of any other Person. To the extent
consent to any such assignment or transfer is required by applicable law,
advance consent to any such assignment or transfer is hereby given by Borrower
in order to maximize the extent and effect of the warranties, representations,
and indemnity given hereby.
9. NEGATIVE COVENANTS.
------------------
Borrower covenants to Lender that from and after the date hereof and
until such time as the Obligations have been paid in full and Lender shall have
terminated this Agreement in writing, Borrower will NOT, without the prior
written consent of Lender, do or permit to be done any of the things or acts set
forth below.
9.1 NO LIENS.
--------
Create, assume, or suffer to exist any Lien of any kind in or on any
of its Property except for: (i) Liens in favor of Lender; and (ii) Permitted
------ ---
Encumbrances.
9.2 DEBT.
----
Incur, assume, or suffer to exist any Debt, except for: (i) Debt for
------ ---
borrowed funds existing on the date of this Agreement; (ii) Debt for borrowed
funds incurred pursuant to financial contractual agreements made and entered
into, and disclosed in writing to Lender, prior to the date of this Agreement;
(ii) Debt for borrowed funds owing to Lender; (iii) trade payables and
contractual obligations to suppliers and customers incurred in the ordinary
course of business; (iv) accrued pension fund and other employee benefit plan
obligations and liabilities (provided, however, that such Debt does not result
in the existence of any Event of Default or Default Condition under any
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<PAGE>
other provision of this Agreement); (v) deferred taxes; (vi) Debt resulting from
endorsements of negotiable instruments received in the ordinary course of its
business; (vii) Debt described in, and permitted within the definition of
"Permitted Encumbrances"; and (viii) Debt owing by Borrower to Parent or to the
Members which does not exceed (net of Debt owing by Parent or the Members to
Borrower) Five Million Dollars ($5,000,000) in aggregate principal amount, as to
all such Debt outstanding at any one time.
9.3 CONTINGENT LIABILITIES.
----------------------
Guarantee, endorse, become surety with respect to or otherwise become
directly or contingently liable for or in connection with the obligations of any
other Person, except guarantees in favor of Lender and endorsements of
negotiable instruments for collection in the ordinary course of business.
9.4 DISTRIBUTIONS.
-------------
Pay any dividend, make any capital distribution, redeem or retire any
capital stock of, take any action which would have an effect equivalent to any
of the foregoing, except that (i) unless an Event of Default or Default
------
Condition then exists and is continuing or would result from the payment of such
distributions and so long as the payment of such distributions is otherwise made
in accordance with applicable law and Borrower's Organizational Documents, (i)
Borrower may make Tax Distributions to its Members at such times as are provided
in the Operating Agreement, (ii) Borrower may make annual distributions to its
Members in each Fiscal Year, payable at any time ten (10) days or more after
Lender's receipt of Borrower's audited financial statements for the preceding
Fiscal Year, in an amount not in excess of seventy-five percent (75%) of
Borrower's net income for the preceding Fiscal Year minus Tax Distributions paid
-----
with respect to the preceding Fiscal Year, determined in accordance with GAAP;
provided, however, that the Leverage Ratio as of the end of such Fiscal Year
- --------- -------
(after giving pro forma effect to the payment of any such dividend as if made in
such year) was not more than 2.01:1; and (iii) Borrower may make one or more
special distributions to the Parent between the Closing Date and December 31,
1997, in an aggregate amount not to exceed Twenty-One Million Dollars
($21,000,000), in addition to those specified in clauses (i) and (ii) above.
9.5 REDEMPTIONS, ETC.
----------------
Purchase, redeem, or otherwise acquire for value any of its membership
units.
-34-
<PAGE>
9.6 RESTRICTED INVESTMENT.
---------------------
Make any Restricted Investment, except that Ordinary Shares of Parent
may be purchased up to an amount in value not to exceed Five Hundred Thousand
Dollars ($500,000) in any one Fiscal Year.
9.7 MERGER, TRANSFER, ETC.
----------------------
Dissolve or otherwise terminate its status as a limited liability
company; or enter into any merger, reorganization or consolidation; or make any
material change in the type of business conducted by Borrower as of the date
hereof; or create any Subsidiary; or sell, assign, lease or otherwise dispose of
(whether in one transaction or a series of transactions) all, substantially all
or a substantial part of its property or assets, other than sales in the
ordinary course of business.
9.8 ERISA.
-----
Permit any Plan to become underfunded such that it would not have
sufficient assets in order to quality for a standard termination under Section
4041 of ERISA.
9.9 TRANSACTIONS WITH AFFILIATES.
----------------------------
Enter into, or be a party to, any transaction with any Affiliate of
Borrower, except (i) in the ordinary course of and pursuant to the reasonable
------
requirements of its business and upon fair and reasonable terms that are no less
favorable to Borrower or said Subsidiary than would be obtained in a comparable
arm's length transaction with a Person not an Affiliate, (ii) as permitted under
Sections 9.2 and 9.12 hereof or (iii) as otherwise may be approved in writing by
Lender from time to time hereafter, upon full disclosure to Lender.
9.10 CAPITAL EXPENDITURES AND LEASES.
-------------------------------
Expend, on a consolidated basis with AHP and its other consolidated
Subsidiaries, in Capital Expenditures or other leases of personal or real
property, other than as contracted for as of the date hereof, or contract for
any future Capital Expenditures or leases, which in the aggregate represent an
amount exceeding the sum of Three Million Five Hundred Thousand Dollars
($3,500,000) during each Fiscal Year of Borrower, starting with the Fiscal Year
ending December 3l, 1996.
9.11 FISCAL YEAR.
-----------
Change its Fiscal Year end from December 31 (or consent to any such
change by the Parent or AHP Holdings in its Fiscal Year).
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<PAGE>
9.12 LOANS AND ADVANCES.
------------------
Make any loans or other advances of money or any other property, to
any Person, including without limitation, any officer, director, stockholder,
employee or Affiliate of Borrower except for (i) loans to officers and employees
that do not exceed Twenty-Five Thousand Dollars ($25,000) in aggregate principal
amount, as to all such Persons, at any one time outstanding, and (ii) loans to
Parent and the Members, the aggregate amount of which (net of loans from Parent
and the Members to Borrower described in Section 9.2 above) does not exceed Five
Million Dollars ($5,000,000) at any time outstanding.
10. EVENTS OF DEFAULT.
-----------------
The occurrence of any events or conditions described below shall
constitute an Event of Default hereunder, provided that any requirement for the
giving of notice or the lapse of time, or both, has been satisfied.
10.1 NOTES.
-----
Borrower shall fail to make any payment of principal of or interest on
any Note within five (5) calendar days after the date when due.
10.2 OBLIGATIONS.
-----------
Borrower shall fail to make any payments of principal of or interest
on any of the Obligations (other than the Notes) or any other Obligations to
Lender, within five (5) calendar days after the date when due (or after
satisfaction of any shorter or longer requirement for the giving of notice or
the lapse of time, or both, contained in the applicable agreement pertaining to
such Obligations).
10.3 MISREPRESENTATIONS.
------------------
Borrower shall make any representations or warranties in any of the
Loan Documents or in any certificate or statement furnished at any time
hereunder or in connection with any of the Loan Documents which, when taken as a
whole, proves to have been untrue or misleading in any material respect when
made or furnished.
10.4 COVENANTS.
---------
Borrower shall default in the observance or performance of any
covenant or agreement contained herein or in any of the other Loan Documents
(other than a failure described in Sections 10.1 or 10.2), unless such default
is cured within ten (10) days after Borrower's receipt of notice from Lender of
such Default Condition.
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<PAGE>
10.5 DAMAGE, LOSS, THEFT OR DESTRUCTION OF COLLATERAL.
------------------------------------------------
There shall have occurred material uninsured damage to, or loss, theft
or destruction of, any part of the Collateral having a then current value in
excess of Fifty Thousand Dollars ($50,000).
10.6 OTHER DEBTS.
-----------
Borrower shall default in connection with any agreement evidencing,
securing or relating to any other Debt to, or under any operating lease with,
either Lender or with any creditor other than a Lender.
10.7 VOLUNTARY BANKRUPTCY.
--------------------
Borrower (or any guarantor) shall file a voluntary petition in
bankruptcy or a voluntary petition or answer seeking liquidation,
reorganization, arrangement, readjustment of its debts, or for any other relief
under the Bankruptcy Code, or under any other act or law pertaining to
insolvency or debtor relief, whether state, federal, or foreign, now or
hereafter existing; Borrower (or any guarantor) shall enter into any agreement
indicating its consent to, approval of, or acquiescence in, any such petition or
proceeding; Borrower (or any guarantor) shall apply for or permit the
appointment by consent or acquiescence of a receiver, custodian or trustee of
Borrower (or any guarantor) for all or a substantial part of its Property;
Borrower (or any guarantor) shall make an assignment for the benefit of
creditors; or Borrower (or any guarantor) shall be unable or shall fail to pay
its debts generally as such debts become due; or Borrower (or any guarantor)
shall admit, in writing, its inability or failure to pay its debts generally as
such debts become due.
10.8 INVOLUNTARY BANKRUPTCY.
----------------------
There shall have been filed against Borrower (or any guarantor) an
involuntary petition in bankruptcy or seeking liquidation, reorganization,
arrangement, readjustment of its debts or for any other relief under the
Bankruptcy Code, or under any other act or law pertaining to insolvency or
debtor relief, whether State, federal or foreign, now or hereafter existing,
which has not been dismissed within sixty (60) days of the date the petition is
filed; Borrower (or any guarantor) shall suffer or permit the involuntary
appointment of a receiver, custodian or trustee of Borrower (or any guarantor)
or for all or a substantial part of its Property; or Borrower (or any guarantor)
shall suffer or permit the issuance of a warrant of attachment, execution or
similar process against all or any substantial part of the Property of Borrower
(or any guarantor).
10.9 ORGANIZATIONAL DOCUMENTS; DISSOLUTION.
-------------------------------------
Either of the Organizational Documents shall be amended, amended and
restated or otherwise modified (other than administrative or ministerial
amendments and modifications) or shall be cancelled or terminated, in each case
without Lender's prior written consent; an event of
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<PAGE>
dissolution, as referenced in Section 9.1 of the Operating Agreement, shall
occur; or Borrower shall be dissolved.
10.10 JUDGMENTS AND SETTLEMENTS.
-------------------------
Final judgments or orders for the payment of money are rendered
against Borrower or Borrower settles any claim or lawsuit in the aggregate
amount of Fifty Thousand Dollars ($50,000) or more (exclusive of amounts covered
by insurance) which are not paid in full within ten (10) Business Days.
10.11 ERISA.
-----
The occurrence of any of the following events: (i) the termination of
any Plan in a distress termination under Section 4041(c) of ERISA or an
involuntary termination under Section 4042 of ERISA; (ii) the filing of a
request for a waiver of the minimum funding standard with regard to any Employee
Benefit Plan: (iii) the occurrence of any event which causes any Plan to cease
to have sufficient assets at all times so as to qualify for a standard
termination under Section 4041 of ERISA; (iv) the occurrence of any event which
causes the unfunded liability with regard to all such Plans in the aggregate to
become an amount in excess of Fifty Thousand Dollars ($50,000); (v) the
occurrence of any event which causes the withdrawal liability with regard to all
Plans to become an amount in excess of Fifty Thousand Dollars ($50,000); (vi)
the appointment of a trustee by an appropriate United States district court to
administer any Plan; or (vii) the institution of any proceedings by the PBGC to
terminate any such Plan or to appoint a trustee to administer any such Plan.
10.12 CHANGE OF CONTROL.
-----------------
A Change of Control shall occur.
10.13 CHANGE OF MANAGEMENT.
--------------------
There shall occur a change in the chief executive officer of Borrower
which, as of the Closing Date, is Peter Chang.
10.14 MATERIAL ADVERSE CHANGE.
-----------------------
The occurrence of any material change in the business, financial
condition, results of operations or business prospects of Borrower which Lender
reasonably determines, in good faith, materially and adversely affects the
ability of Borrower to pay and perform its Obligations to Lender.
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<PAGE>
10.15 GUARANTIES.
----------
Any default shall occur under, or in respect of, any guaranty issued
in favor of Lender in respect of the Obligations, or any guarantor thereunder
shall repudiate, or seek to repudiate, its liability thereon.
11. REMEDIES.
--------
Upon the occurrence and during the continuation of any Default
Condition or Event of Default, if prior to the Conversion Date, Lender's
obligation to extend financing under the Revolving Line of Credit and to make
the Term Loan shall immediately cease and the Revolving Line of Credit shall
terminate; provided, however, that if such obligations have ceased and
-------- -------
commitments terminated due to the occurrence of a Default Condition, and such
Default Condition does not become an Event of Default due to its having been
cured or waived before it has matured into an Event of Default, then such
obligation shall be reinstated as of the date such Default Condition is cured or
waived. Upon the occurrence or existence of any Event of Default, or at anytime
thereafter, without prejudice to the fights of Lender to enforce its claims
against Borrower for damages for failure by Borrower to fulfill any of its
obligations hereunder, subject only to prior receipt by Lender of payment in
full of all Obligations then outstanding in a form acceptable to Lender, Lender
shall have all of the fights and remedies described below, and Lender may
exercise any one, more, or all of such remedies, in its sole discretion, without
thereby waiving any of the others.
11.1 ACCELERATION OF THE OBLIGATIONS.
-------------------------------
Lender, at its option, may by written notice, effective upon receipt,
declare all of the Obligations (including but not limited to that portion
thereof evidenced by either of the Notes) to be immediately due and payable (and
in the event a voluntary or involuntary case is commenced under the Bankruptcy
Code by or against Borrower as a debtor, all Obligations automatically will be
due and payable without any notice or declaration by Lender), whereupon the same
shall become immediately due and payable without presentment, demand, protest,
notice of nonpayment or any other notice required by law relative thereto, all
of which are hereby expressly waived by Borrower, anything contained herein to
the contrary notwithstanding and, in connection therewith, Lender shall have the
right to increase the rate of interest charged on the Revolving Note or the Term
Note as applicable, without further notice, to a rate per annum equal to the
Default Rate. If any note of Borrower to Lender constituting Obligations,
including, without limitation, the Notes, shall be a demand instrument, as to
all or any parties thereof, however, the recitation of the right of Lender to
declare any and all Obligations to be immediately due and payable, whether such
recitation is contained in such note or in this Agreement, as well as the
recitation of the above events permitting Lender to declare all Obligations due
and payable, shall not constitute an election by Lender to waive its right to
demand payment under a demand at any time and in any event, as such Lender in
its discretion may deem appreciate. Thereafter, Lender, at its option, may, but
shall not be obligated to, accept less than the entire amount of Obligations
due, if tendered, provided, however, that unless
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<PAGE>
then agreed to in writing by Lender, no such acceptance shall or shall be deemed
to constitute a waiver of any Event of Default or a reinstatement of any
commitments of Lender hereunder.
11.2 REMEDIES OF A SECURED PARTY.
---------------------------
Lender shall thereupon have the rights and remedies of a secured party
under the UCC in effect on date thereof (regardless of whether the same has been
enacted in the jurisdiction where the rights or remedies are asserted),
including, without limitation, the right to take the Collateral or any portion
thereof into its possession, by such means (without breach of the peace) and
through agents or otherwise as it may elect (and, in connection therewith,
demand that Borrower assemble the Collateral at a place or places and in such
manner as the Lender shall prescribe), and sell, lease or otherwise dispose of
the Collateral or any portion thereof in its then condition or following any
commercially reasonable preparation or processing, which disposition may be by
public or private proceedings, by one or more contracts, as a unit or in
parcels, at any time and place and on any terms, so long as the same are
commercially reasonable. Lender may apply the proceeds of any such sale or
disposition to any of the Obligations in such order as Lender, in its sole
discretion, may elect. Lender shall give Borrower written notices of the time
and place of any public sale of the Collateral or the time after which any other
intended disposition thereof is to be made, except where the Collateral is
perishable or threatens to decline speedily in value or is of a type customarily
sold on a recognized market. The requirement of sending reasonable notice shall
be met if such notice is given to Borrower pursuant to Section 12.9 at least ten
(10) calendar days before such disposition. Expenses of retaking, holding,
insuring, preserving, protecting, preparing for sale or selling or the like with
respect to the Collateral shall include, in any event, reasonable attorneys'
fees and other legally recoverable collection expenses, all of which shall
constitute Obligations.
11.3 SET OFF.
-------
In addition to such other rights and remedies with respect to the
Balances Collateral as may exist from time to time hereafter in favor of Lender,
whether by way of setoff, banker's lien, consensual security interest or
otherwise, upon the occurrence of any Event of Default hereunder, Lender may
charge any part or all of the obligations of Lender to Borrower represented by
items constituting the Balances Collateral in the possession and control of
Lender against the Obligations, without prior notice to or demand upon Borrower.
11.4 OTHER REMEDIES.
--------------
Unless and except to the extent expressly provided for to the contrary
herein, the rights of the Lender specified herein shall be in addition to, and
not in limitation of, Lender's rights under the UCC, as amended from time to
time, or any other statute or rule of law or equity, or under any other
provision of any of the Loan Documents, or under the provisions of any other
document, instrument or other writing executed by Borrower or any third party in
favor of the Lender, all of which may be exercised successively or concurrently.
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<PAGE>
12. MISCELLANEOUS.
-------------
12.1 WAIVER.
------
Each and every right granted to Lender under this Agreement, or any of
the other Loan Documents, or any other document delivered hereunder or in
connection herewith or allowed it by law or in equity, shall be cumulative and
may be exercised from time to time. No failure on the part of Lender to
exercise, and no delay in exercising, any right shall operate as a waiver
thereof, nor shall any single or partial exercise by Lender of any right
preclude any other or future exercise thereof or the exercise of any other
right. No waiver by Lender of any Default Condition or Event of Default shall
constitute a waiver of any subsequent Default Condition or Event of Default.
12.2 GOVERNING LAW.
-------------
THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER, SHALL BE GOVERNED BY, AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF GEORGIA.
12.3 SURVIVAL.
--------
All representations, warranties and covenants made herein shall
survive the execution and delivery of all of the Loan Documents. The terms and
provisions of this Agreement shall continue in full force and effect,
notwithstanding the payment of one or more of the Notes or the termination of
the Revolving Line of Credit, until all of the Obligations have been paid in
full and Lender have terminated this Agreement in writing.
12.4 NO ASSIGNMENT BY BORROWER.
-------------------------
No assignment hereof shall be made by Borrower without the prior
written consent of Lender. Lender may assign, or sell participations and
undivided ownership interests in, its rights, title and interest herein and in
the Loan Documents at any time hereafter without notice to, or consent from,
Borrower.
12.5 COUNTERPARTS.
------------
This Agreement may be executed in two or more counterparts, each of
which when fully executed shall be an original, and all of said counterparts
taken together shall be deemed to constitute one and the same agreement.
12.6 REIMBURSEMENT.
-------------
Borrower agrees to pay to the Lender on demand all out-of-pocket costs
and expenses that Lender pays or incurs in connection with the negotiation,
preparation, consummation,
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<PAGE>
enforcement and termination of this Agreement and the other Loan Documents,
including, without limitation: (a) reasonable attorneys' fees and disbursements;
(b) costs and expenses (including reasonable attorneys' fees and disbursements)
for any amendment, supplement, waiver, consent or subsequent closing in
connection with the Loan Documents and the transactions contemplated thereby;
(c) costs and expenses of lien and title searches and title insurance; (d)
actual taxes, fees and other charges for recording any deeds to secure debt,
deeds of trust, mortgages, filing financing statements and continuations, and
other actions to perfect, protect and continue the Lien of Lender in the
Collateral; (e) sums paid or incurred to pay for any amount or to take any
action required of Borrower under the Loan Documents that Borrower fails to pay
or take; (f) costs of appraisals, inspections, and verifications of the
Collateral, including, without limitation, costs of travel, lodging, and meals
for inspections of the Collateral and Borrower's operations by Lender; (g) costs
and expenses of preserving and protecting the credit or the Collateral; and (h)
costs and expenses (including reasonable attorneys' and paralegals' fees and
disbursements) paid or incurred to obtain payment of the Obligations, enforce
the Lien in the Collateral, sell or otherwise realize upon the Collateral, and
otherwise enforce the provisions of the Loan Documents or to defend any claims
made or threatened against Lender arising out of the transactions contemplated
hereby (including, without limitation, preparations for and consultations
concerning any such matters). Borrower agrees to reimburse Lender for its actual
out-of-pocket costs and expenses incurred in conducting field examinations and
inspections of Borrower and its Property in addition to the foregoing. The
foregoing shall not be construed to limit any other provisions of the Loan
Documents regarding costs and expenses to be paid by Borrower. All of the
foregoing costs and expenses may, in the discretion of Lender, be charged to
Borrower's account as Revolving Advances. Borrower will pay all expenses
incurred by it in the transaction. In the event Borrower becomes a debtor under
the Bankruptcy Code, Lender's secured claim in such case shall include interest
on the Obligations and all fees, costs and charges provided for herein
(including, without limitation, reasonable attorneys' fees) all for the extent
allowed by the Bankruptcy Code.
12.7 SUCCESSORS AND ASSIGNS.
----------------------
This Agreement shall be binding upon and inure to the benefit of the
successors and permitted assigns of the parties hereto.
12.8 SEVERABILITY.
------------
If any provision of any of the Loan Documents or the application
thereof to any party thereto or circumstances shall be invalid or unenforceable
to any extent, the remainder of such Loan Documents and the application of such
provisions to any other party thereto or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
12.9 NOTICES.
-------
All notices, requests and demands to or upon the respective parties
hereto shall be deemed to have been properly given or made when personally
delivered or 5 calendar days after
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<PAGE>
being deposited in the mail, registered or certified mail, return receipt
requested, with sufficient postage prepaid, addressed as follows or to such
other address as may be designated hereafter in writing by the respective
parties hereto:
Borrower:
Associated Hygienic Products LLC
4455 River Green Parkway
Duluth, Georgia 30136
Attn: Mr. Peter Chang
President
Lender:
SouthTrust Bank of Georgia, N.A.
One Georgia Center, 22nd Floor
600 West Peachtree Street
Atlanta, Georgia 30308
Attn: Melinda M. Bergbom
Vice President
With a copy to:
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
Attn: Gerald T. Woods, Esq.
except in cases where it is expressly provided herein or by applicable law that
such notice, demand or request is not effective until received by the party to
whom it is addressed in which instance rejection or other refusal to accept or
the inability to deliver because of changed address of which no notice was given
shall be deemed to be receipt of the notice, demand or request sent. By giving
at least thirty (30)days written notice thereof, Borrower and Lender shall have
the right from time to time and at any time to change their respective addresses
and each shall have the right to specify any other address within the
continental United States of America.
12.10 ENTIRE AGREEMENT; AMENDMENTS.
-----------------------------
This Agreement, together with the Loan Documents executed in
connection therewith, collectively constitute the entire agreement between the
parties hereto with respect to the subject matter hereof. This Agreement also
constitutes an amendment and restatement of the prior Loan Agreement the terms
of which shall be superseded and replaced, in their entirety, hereby, it being
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<PAGE>
understood and agreed, however, that the foregoing is not intended by the
parties as a novation but, instead, a continuation of the financing originally
obtained by Borrower pursuant to the Prior Loan Agreement (albeit on different
terms) and the security therefor. Neither this Agreement or any Loan Document
nor any provision hereof or thereof may be changed, waived, discharged, modified
or terminated orally, but only by an instrument in writing signed by the party
against whom enforcement is sought.
12.11 TIME OF THE ESSENCE.
-------------------
Time is of the essence in this Agreement and the other Loan Documents.
12.12 INTERPRETATION.
--------------
No provision of this Agreement shall be construed against or
interpreted to the disadvantage of any party hereto by any court or other
governmental or judicial authority by reason of such party having or being
deemed to have structured or dictated such provision.
12.13 LENDER NOT JOINT VENTURER.
-------------------------
Neither this Agreement nor any agreements, instruments, documents or
transactions contemplated hereby (including the Loan Documents) shall in any
respect be interpreted, deemed or construed as making Lender a partner or joint
venturer with Borrower or as creating any similar relationship or entity, and
Borrower agrees that it will not make any contrary assertion, contention, claim
or counterclaim in any action, suit or other legal proceeding involving Lender
or Borrower.
12.14 JURISDICTION; WAIVER OF TRIAL BY JURY.
-------------------------------------
BORROWER AGREES THAT ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO
THIS AGREEMENT OR ANY LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF
GEORGIA OR THE UNITED STATES DISTRICT COURT, NORTHERN DISTRICT OF GEORGIA,
ATLANTA DIVISION, ALL AS LENDER MAY ELECT. BY EXECUTION OF THIS AGREEMENT,
BORROWER HEREBY SUBMITS TO EACH SUCH JURISDICTION, HEREBY EXPRESSLY WAIVING
WHATEVER RIGHTS MAY CORRESPOND TO IT BY REASON OF ITS PRESENT OR FUTURE
DOMICILE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF LENDER TO COMMENCE LEGAL
PROCEEDINGS OR OTHERWISE PROCEED AGAINST BORROWER IN ANY OTHER JURISDICTION OR
TO SERVE PROCESS IN ANY MANNER PERMITTED OR REQUIRED BY LAW. EACH OF BORROWER
AND LENDER HEREBY FURTHER WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDINGS WITH RESPECT TO THIS AGREEMENT OR ANY LOAN AGREEMENT.
12.15 ACCEPTANCE.
----------
This Agreement, together with the other Loan Documents, shall not
become effective unless and until delivered to Lender at its office in Atlanta,
Georgia and accepted in writing by
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<PAGE>
Lender thereafter at such office as evidenced by its execution hereof (notice of
which delivery and acceptance is hereby waived by Borrower).
12.16 PAYMENT ON NON-BUSINESS DAYS.
----------------------------
Whenever any payment to be made hereunder or under any Note shall be
stated to be due on a day which is not a Business Day; such payment may be made
on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of payment of interest hereunder or under
the Notes.
12.17 UCC TERMINATIONS.
----------------
EXCEPT AS PROVIDED IN SECTION 2.3 HEREOF, BORROWER AGREES THAT LENDER
SHALL NOT BE REQUIRED TO FILE ANY UCC TERMINATION STATEMENTS WITH RESPECT TO ANY
COLLATERAL UNLESS AND UNTIL ALL OBLIGATIONS HAVE BEEN PAID IN FULL AND LENDER
SHALL HAVE TERMINATED THIS AGREEMENT IN WRITING, WHICH LENDER SHALL DO WITHIN A
REASONABLE AMOUNT OF TIME AFTER THE OBLIGATIONS HAVE BEEN PAID IN FULL.
12.18 CURE OF DEFAULT BY LENDER.
-------------------------
If, hereafter, Borrower defaults in the performance of any duty or
obligation to Lender hereunder or under any Loan Document or to any other Person
(including, without limitation, any lessor, licensor, vendor, processor,
shipper, carrier or warehouseman), Lender may, at its option, but without
obligation, in order to protect or preserve Lender's credit or the Collateral,
cure such default and any costs, fees and expenses incurred by Lender in
connection therewith including, without limitation, for the purchase of
insurance, the payment of taxes and the removal or settlement of liens and
claims, shall bear interest at the Default Rate, shall be payable on demand and
if Lender elects prior to the Conversion Date shall be deemed to be Revolving
Advances, whether or not this creates an over-advance hereunder.
12.19 RECITALS.
--------
All recitals contained herein are hereby incorporated by reference
into this Agreement and made part thereof.
12.20 ATTORNEY-IN-FACT.
----------------
Borrower hereby designates, appoints and empowers Lender irrevocably
as its attorney-in-fact, at Borrower's cost and expense, to do in the name of
Borrower any and all actions which Lender may reasonably deem necessary or
advisable to protect, preserve or enforce its rights hereunder (including,
without limitation, its rights in and to the Collateral) upon the failure,
refusal or inability of Borrower to do so within ten (10) days after notice by
Lender to Borrower, and Borrower hereby agrees to indemnify and hold Lender
harmless from any costs, damages, expenses
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or liabilities arising against or actually incurred by Lender in connection
therewith, except those arising from the willful misconduct or gross negligence
of Lender. This power of attorney, being coupled with an interest, shall be
irrevocable, shall continue until all Obligations have been satisfied in full
and this Agreement has been terminated by Lender in writing and shall be in
addition to Lender's other rights, powers and remedies.
12.21 SOLE BENEFIT.
------------
The rights and benefits set forth in this Agreement and in all the
other Loan Documents are for the sole and exclusive benefit of the parties
thereto and may be relied upon only by them.
13. CONDITIONS PRECEDENT.
--------------------
13.1 INITIAL REVOLVING ADVANCE AND THE TERM LOAN.
-------------------------------------------
The conditions precedent set forth below shall constitute express
conditions precedent to any obligation of Lender to make the initial Revolving
Advance.
(a) MANAGEMENT COMMITTEE RESOLUTIONS AND INCUMBENCY CERTIFICATE OF
--------------------------------------------------------------
BORROWER. Receipt by Lender of a certificate from the Secretary (or Assistant
- --------
Secretary) of Borrower, certifying to Lender that appropriate resolutions have
been entered into by the Management Committee of Borrower incident hereto and
that the representatives of Borrower whose signatures appear hereinbelow, on the
other Loan Documents, and on any and all other documents, instruments and
agreements executed in connection herewith, are duly authorized by the
Management Committee of Borrower for and on behalf of Borrower to execute and
deliver this Agreement, the other Loan Documents and such other documents,
instruments and agreements, and to bind Borrower accordingly thereby.
(b) CERTIFICATES OF GOOD STANDING OF BORROWER. Receipt by Lender of
-----------------------------------------
a certificate of good standing or valid existence or other appropriate
equivalent with respect to Borrower from the Secretary of State of Wyoming and
of any other state in which a Collateral Location is situated and as to which
such certificates are available with respect to limited liability companies,
dated within ten (10) days of the date hereof.
(c) ORGANIZATIONAL DOCUMENTS OF BORROWER. Receipt by Lender of
------------------------------------
copies of the Organizational Documents of Borrower as in effect on date hereof,
certified as to truth and accuracy by the secretary or assistant secretary of
Borrower.
(d) LOAN DOCUMENTS. Receipt by Lender of the Revolving Note, the
--------------
Term Note and all other Loan Documents not elsewhere more particularly described
herein, duly executed in form and substance acceptable to Lender.
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<PAGE>
(e) TITLE INSURANCE ENDORSEMENTS. Receipt by Lender of a commitment
----------------------------
from a title insurer satisfactory to Lender to issue an endorsement to Lender's
mortgagee's title insurance policy obtained pursuant to the Prior Loan Agreement
insuring the first priority lien of the Mortgage in respect of both Notes,
subject only to those exceptions as shall be satisfactory to Lender and
otherwise in form and substance satisfactory to Lender in all respects.
(f) HAZARD INSURANCE CERTIFICATE. Receipt by Lender of a
----------------------------
certificate respecting all hazard insurance required hereunder, in form and
substance acceptable to Lender.
(g) FINANCING STATEMENTS. Receipt by Lender of any Uniform
--------------------
Commercial Code financing statements, or amendments thereto, respecting the
Collateral, in form and substance acceptable to Lender.
(h) GUARANTY OF PARENT AND AHP HOLDINGS. Receipt by Lender of the
-----------------------------------
unsecured guaranty of each of the Parent and AHP Holdings in respect of the
Obligations, together with appropriate certifications of organization,
authorization and incumbency; each to be in form and substance satisfactory to
Lender.
(i) ARRANGEMENT FEE. Receipt by Lender of a non-refundable
---------------
arrangement fee of $50,000.
(j) MISCELLANEOUS. Receipt by Lender of such other documents,
-------------
certificates, instruments and agreements as shall be required hereunder or
provided for herein or as Lender or Lender's counsel may require in connection
herewith.
13.2 TERM LOAN.
---------
The conditions precedent set forth below shall constitute additional
express conditions precedent to any obligation of Lender to make the Term Loan.
(a) APPRAISAL; OTHER INFORMATION. Lender shall have received an
----------------------------
appraisal of the improvements at the new facility performed by an appraiser, and
using a methodology satisfactory to Lender in all respects, and the results
thereof shall be satisfactory to Lender in all respects. In addition Lender
shall have received copies of such invoices, certificates of completion and
other documents as it may request in order to permit it to determine the New
Facility Loanable value.
(b) MORTGAGE AMENDMENT. The Mortgage shall have been amended to
------------------
reflect that it secures the Term Note, and the amendment shall have been
recorded with all intangible taxes payable thereon upon recording remitted by
Borrower.
-47-
<PAGE>
(c) MISCELLANEOUS. Lender shall have received such other documents,
-------------
certificates, instruments and agreements as shall be required hereunder or
provided for herein or as Lender or Lender's counsel may require in connection
herewith.
13.3 CONDITIONS TO ALL LOANS.
-----------------------
At the time of the making of each Revolving Advance and the Term Loan,
the following conditions shall exist (before as well as after giving effect to
such financial accommodation then being made and the proposed use of the
proceeds thereof):
(a) NO DEFAULT. There shall exist no Default Condition or Event of
----------
Default;
(b) REPRESENTATIONS TRUE. All representations and warranties
--------------------
contained herein shall be true and correct in all material respects with the
same effect as though such representations and warranties had been made on and
as of the date of such Revolving Advance or the Term Loan; and
(c) DOCUMENTS RECEIVED. Lender shall have received such other
------------------
documents in connection therewith as shall be required hereunder or provided for
herein, all in form and substance satisfactory to Lender.
13.4 COMPLIANCE WITH CONDITIONS.
--------------------------
Each request by Borrower for any Revolving Advance or for disbursement
of the Term Loan, and the acceptance by Borrower of the proceeds thereof, shall
constitute a representation and warranty by Borrower, as of the date of any
such Revolving Advance or disbursement of the Term Loan, that the applicable
conditions specified in Sections 13.1, 13.2 and 13.3 have been fully satisfied.
-48-
<PAGE>
IN WITNESS WHEREOF, Borrower and Lender each have set their hands and
Borrower has affixed its seal, all as of the day and year first above written.
ASSOCIATED HYGIENIC PRODUCTS LLC, (SEAL)
a Limited Liability Company
/s/ Peter Chang
By: ----------------------
Peter Chang
President
/s/ Philip Leung
Attest: -----------------------
Philip Leung
Secretary
SOUTHTRUST BANK OF GEORGIA, N.A.
/s/ Melinda M. Bergbom
By: -----------------------
Melinda M. Bergbom
Vice President
-49-
<PAGE>
EXHIBIT "A"
PERMITTED LIENS
---------------
1. Financing Statement number 91-498 filed by Clarklift of Atlanta, Inc. on
January 22, 1991 in the office of the Clerk of Superior Court of Gwinnett
County, Georgia against DSG International, Inc., d/b/a Associated Hygienic
Products covering one forklift.
2. Financing Statement number 89-8891 filed by Clarklift of Atlanta, Inc. on
December 4, 1989 in the office of the Clerk of Superior Court of Gwinnett
County, Georgia against DSG International, Inc., d/b/a Associated Hygienic
Products covering one forklift.
-1-
<PAGE>
EXHIBIT 3.2
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
----------------------------------------------
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT, made, entered into and
effective as of the 19th day of August, 1997 (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"); and
- ---------
WHEREAS, concurrently herewith, Borrower's affiliate, Brandon S L Wang, and
Lender have entered into a certain Loan Agreement, dated as of even date
herewith, pursuant to which, subject to the terms and conditions set forth
therein, Lender has agreed to make a term loan available to Mr. Wang, the entire
proceeds of which will simultaneously be paid over and delivered to Borrower in
payment of certain currently existing intercompany indebtedness in such amount;
and
WHEREAS, in connection with the foregoing, Borrower and Lender have agreed
to amend the Loan Agreement in certain respects; and
WHEREAS, Borrower and Lender wish to enter into this Amendment in order to
memorialize their mutual understandings in regard to the foregoing matters;
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. Definitions. As used in this Amendment, all defined terms shall
-----------
have the same meanings as and when used in the Loan Agreement.
2. Amendments to Definitions.
-------------------------
(a) Section 1.1 of the Loan Agreement is hereby amended by adding
therein the following definitions, in appropriate alphabetical order:
"AHP Canada" shall mean Associated Hygienic Products (Canada),
----------
Inc., an Ontario corporation.
"Borrower Guaranty" shall mean that certain Guaranty, dated as of
-----------------
August 19, 1997, executed and delivered by Borrower to Lender, pursuant to
which
<PAGE>
Borrower has guaranteed the payment and performance by Brandon S L Wang of
his obligations under the Wang Loan Agreement, as such guaranty may be
amended or modified from time to time hereafter.
"Wang Loan Agreement" shall mean that certain Loan Agreement,
-------------------
dated as of August 19, 1997 between Lender and Brandon S L Wang, as amended
or modified from time to time hereafter.
(b) The definition of "Change of Control" contained in Section 1.1 of
the Loan Agreement is hereby amended by deleting clause (c) thereof in its
entirety and substituting in lieu thereof the following revised clause (c):
(c) either Member shall transfer any or all of its ownership
units in Borrower or AHP Canada to any other Person or shall otherwise
cease to own and control such ownership units.
(c) The definition of "Control", "Controlled" or "Controlling"
contained in Section 1.1 of the Loan Agreement is hereby amended by deleting the
last sentence thereof and substituting in lieu thereof the following sentence:
Without limitation of the foregoing, the Members shall be deemed
to "Control" Borrower and AHP Canada, and Parent shall be deemed to
"Control" the Members, Borrower and AHP Canada.
(d) The definition of "Obligations" contained in Section 1.1 of the
Loan Agreement is hereby amended by adding the following sentence at the end of
such definition:
Without limitation of the foregoing, the "Obligations" shall
include all obligations of Borrower to Lender under the Borrower Guaranty.
3. Decrease in Revolving Line of Credit. Section 2.1 of the Loan
------------------------------------
Agreement is hereby amended by deleting in its entirety the first sentence in
paragraph (a) thereof and substituting in lieu thereof the following sentence:
On the Closing Date, Lender opened a Revolving Line of Credit in favor
of Borrower, the maximum aggregate principal amount of which has been
reduced to Five Million Dollars ($5,000,000) effective as of the date
of the funding of the "Term Loan" under the Wang Loan Agreement.
4. Collateral. Borrower hereby acknowledges and agrees with Lender
----------
that all of the Collateral shall secure all obligations of Borrower under the
Borrower Guaranty (in addition to all other Obligations of Borrower to Lender).
In furtherance of the foregoing, Section 3 of the
-2-
<PAGE>
Loan Agreement is hereby amended by inserting the following parenthetical after
the words "Loan Documents" in the third line thereof:
(including, without limitation, Borrower's Obligations under the
Borrower Guaranty)
5. Financial Statements. Section 8.5 of the Loan Agreement is
--------------------
hereby amended by deleting the parenthetical in the third and fourth lines
thereof and substituting in lieu thereof the following parenthetical:
(such statements for AHP Holding to be on a consolidated and
consolidating basis and such statements for Parent to be on a
consolidated basis)
6. Leverage Ratio. Section 8.17 of the Loan Agreement is hereby
--------------
deleted in its entirety and the following revised Section 8.17 is hereby
substituted in lieu thereof:
8.17 Leverage Ratio.
--------------
The Leverage Ratio shall be not more than 2.00:1 for each Fiscal
Quarter.
7. Tangible Net Worth. 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 Sixteen Million Dollars
($16,000,000), which minimum amount shall increase annually concurrently
with Borrower's delivery to Lender of the audited financial statements of
AHP Holdings and its consolidated subsidiaries for each Fiscal Year,
commencing with the Fiscal Year ending December 31, 1997, as required by
Section 8.6 hereof (but in no event more than one hundred twenty (120)
days after the end of any Fiscal Year) by an amount equal to forty percent
(40%) of net income of AHP and its consolidated subsidiaries for each
Fiscal Year.
8. Proceeds of Loan Repayment. The following new Section 8.23 is
--------------------------
hereby added immediately after Section 8.22 of the Loan Agreement.
8.23 Proceeds of Loan Repayment. Concurrently with Borrower's
--------------------------
receipt of the sum of Fifteen Million Dollars ($15,000,000) in payment of a
certain loan in like principal amount made by Borrower to Parent, which
payment shall be made concurrently with Lender's disbursement of the "Term
Loan" under the Wang Loan Agreement, Borrower shall apply Four Million
Dollars ($4,000,000) of such proceeds in payment of outstanding Revolving
Advances. The balance of such proceeds ($11,000,000) shall be held by
-3-
<PAGE>
Borrower in cash or cash equivalents satisfactory to Lender until this
Agreement has terminated and all Obligations have been paid in full. On a
quarterly basis, concurrently with its delivery of its financial statements
pursuant to Section 8.5 hereof. Borrower shall deliver to Lender such
evidence as Lender shall request that it continues to hold such amount in
cash or cash equivalents.
9. Intercompany Debt. Section 9.2 of the Loan Agreement is hereby
-----------------
amended by deleting clause (viii) thereof in its entirety, and substituting in
lieu thereof the following revised clause (viii):
(viii) Debt owing by Borrower to Parent or to the
Members or AHP Canada which does not exceed (net
of Debt owing by Parent or the Members or AHP
Canada to Borrower) Ten Million Dollars
($10,000,000) in aggregate principal amount, as to
all such Debt outstanding at any one time.
10. Distributions. Section 9.4 of the Loan Agreement is hereby
-------------
deleted in its entirety and the following revised Section 9.4 is hereby
substituted in lieu thereof.
9.4 Distributions.
-------------
Pay any dividend, make any capital distribution, redeem
or retire any capital stock or take any action which would
have an effect equivalent to any of the foregoing, except
------
that unless an Event of Default or Default Condition then
exists and is continuing or would result from the payment of
such distributions and so long as the payment of such
distributions is otherwise made in accordance with
applicable law and Borrower's Organizational Documents, (i)
Borrower may make Tax Distributions to its Members at such
times as are provided in the Operating Agreement and (ii)
Borrower may make annual distributions to its Members in
each Fiscal Year in an amount, which does not exceed Three
Million Dollars ($3,000,000) in the aggregate in any Fiscal
Year.
11. Loans and Advances. Section 9.12 of the Loan Agreement is hereby
------------------
deleted in its entirety and the following revised Section 9.12 is hereby
substituted in lieu thereof:
9.12. Loans and Advances.
------------------
Make any loans or other advances of money or any other property, to
any person, including, without limitation, any officer, director,
stockholder, employee or Affiliate of Borrower except for (i) loans to
officers and employees that do not exceed Twenty-Five Thousand Dollars
($25,000) in aggregate principal amount as to all such Persons, at any one
time outstanding, and (ii) loans to Parent and the Members and AHP Canada,
the aggregate amount of which (net of loans from Parent and the Members and
AHP Canada to Borrower
-4-
<PAGE>
described in Section 9.2 above) does not exceed Ten Million Dollars
($10,000,000) at any time outstanding.
12. Events of Default. The following subsection 10.16 is hereby
-----------------
added at the end of Article 10 of the Loan Agreement:
10.16 Wang Loan Agreement
-------------------
Any "Event of Default" (as defined therein) shall occur under
the Wang Loan Agreement.
13. 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 conjunction 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.
14. 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 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.
15. Covenants. Borrower hereby restates and affirms each and every
---------
obligation, covenant and condition of the Loan Agreement.
16. 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.
17. 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) no Default Condition or Event of Default under the
Loan Agreement and (ii) no fight 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.
18. Conditions Precedent. The following shall constitute express
--------------------
conditions precedent to the effectiveness of the amendments contemplated hereby
and to the obligations of Lender hereunder:
-5-
<PAGE>
a. Revolving Note. Borrower shall have executed and delivered in favor of
--------------
Lender a Revolving Promissory Note, dated as of the date hereof, in the
principal amount of Five Million Dollars ($5,000,000), which Revolving
Promissory Note (i) to the extent of the sum of Five Million Dollars
($5,000,000), shall constitute an extension and renewal of that certain
Revolving Promissory Note, dated as of December 16, 1996, in the principal
amount of Ten Million Dollars ($10,000,000), made by Borrower in favor of
Lender and (ii) shall be the "Revolving Note" for all purposes of the Loan
Agreement.
b. Resolutions. Lender shall have received from Borrower a certificate
-----------
from the Secretary or an Assistant Secretary of Borrower, in form and
substance satisfactory to Lender, certifying to Lender that appropriate
resolutions have been entered into by the managers of Borrower incident
hereto and that the officers of Borrower whose signatures appear
hereinbelow, and on any and all other documents, instruments and agreements
executed in connection herewith, are duly authorized by the managers of
Borrower for and on behalf of Borrower to execute and deliver this
Amendment and such other documents, instruments and agreements, and to bind
Borrower accordingly thereby, all in form and substance satisfactory to
Lender;
c. Wang Loan Agreement. All conditions precedent to the effectiveness of
-------------------
the Wang Loan Agreement shall have been satisfied and such agreement shall
have become effective.
d. Reaffirmation. AHP Holdings shall have delivered to Lender a
-------------
reaffirmation in respect of its Guaranty, specifically acknowledging the
inclusion of the Borrower Guaranty within the Obligations guaranteed under
such Guaranty.
19. Governing Law. This Amendment shall be governed by and construed
-------------
in accordance with the laws of the State of Georgia.
-6-
<PAGE>
IN WITNESS WHEREOF, Borrower and Lender have executed this Amendment,
through their duly authorized officers, under their hands and seals, effective
as of the date and year first above written.
"BORROWER"
ASSOCIATED HYGIENIC (SEAL)
PRODUCTS LLC,
a Limited Liability Company
By:/s/ Peter Chang
-------------------------------
Name: Peter Chang
Title: President
Attest:/s/ Philip Leung
-------------------------
Name: Philip Leung
Title: Secretary
-7-
<PAGE>
"LENDER"
SOUTHTRUST BANK, N.A. (SEAL)
By:/s/ Barbara A. Gewert VP.
---------------------------------
Barbara A. Gewert, Vice President
-8-
<PAGE>
REAFFIRMATION OF GUARANTY
-------------------------
The undersigned, AHP Holdings, L.P., a Georgia limited partnership
("Guarantor") the guarantor pursuant to a Guaranty, dated December 16, 1996
---------
("Guaranty"), of all "Obligations" of "Borrower" to "Lender" as such terms are
--------
defined in the "Loan Agreement" referenced in the within and foregoing First
Amendment to Loan Security Agreement ("First Amendment"; capitalized terms used
---------------
herein and not defined herein shall have the meanings assigned to them in the
First Amendment), hereby (a) acknowledges its receipt of a copy of the First
Amendment, (b) agrees to be bound thereby, (c) acknowledges and agrees that the
Guaranty shall continue in full force and effect, without modification,
diminution or impairment, from and after the execution and delivery of the First
Amendment (except that the obligations guaranteed by Guarantor under the
Guaranty shall not include Borrower's obligations under the Borrower Guaranty),
and (d) agrees that for so long as the Guaranty remains in effect it will not
pledge, hypothecate, assign, convey or transfer any of its assets (including,
without limitation, the membership units in Borrower and AHP Canada owned by it)
to any person other than Lender.
IN WITNESS WHEREOF the undersigned has executed this Reaffirmation of
Guaranty as of the 19th day of August, 1997.
AHP HOLDINGS L.P.
By: ELMBAY LIMITED, an English
Corporation, as General Partner
By: /s/ Peter Chang
-----------------------------------
Name: Peter Chang
Title: Principal Executive Officer
<PAGE>
EXHIBIT 3.3
GUARANTY
--------
1. OBLIGATIONS GUARANTEED. In consideration of the sum of Ten Dollars
----------------------
($10.00) and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, as well as for the purpose of inducing
SOUTHTRUST BANK, N.A., a national banking association ("LENDER"), to extend
------
credit or other financial accommodations to BRANDON S L WANG, an individual
resident of London, England (the "BORROWER"), or to renew or extend in whole or
--------
in part, any existing indebtedness of the Borrower to Lender, and in
consideration thereof, the undersigned, ASSOCIATED HYGIENIC PRODUCTS LLC, a
Wyoming limited liability company (called herein the "GUARANTOR"), promises and
---------
agrees to pay to Lender, its successors and assigns, endorsees or transferees,
when due, whether by acceleration or otherwise, and at all times thereafter, all
obligations, liabilities and indebtedness of the Borrower to Lender, whether now
existing or hereafter coming into existence, however and whenever incurred or
evidenced, whether express or implied, direct or indirect, absolute or
contingent, due or to become due, or as maker, endorser, guarantor, surety or
otherwise and all renewals and extensions thereof, in whole or in part
(collectively, the "OBLIGATIONS"), including, without limitation: (i) the debt
----------- ------------------------------
("TERM LOAN"), being evidenced by that certain Term Note, dated on, about or
---------
subsequent to the date hereof, payable to the order of Lender, in the original
principal amount of Fifteen Million Dollars ($15,000,000), as it may be amended,
modified, renewed or extended from time to time, issued by Borrower pursuant to
the Loan Agreement, dated as of August 19, 1997, between Borrower and Lender (as
amended or modified from time to time, the "LOAN AGREEMENT"); and (ii) any and
--------------
all other "Obligations" of Borrower to Lender arising under or pursuant to the
Loan Agreement (as that term is defined therein). For purposes of this Guaranty,
the term "Obligations" shall include, without limitation, all debts, liabilities
and obligations of the Borrower to Lender, notwithstanding any right or power of
the Borrower or anyone else to assert any claim or defense as to the invalidity
or unenforceability of any such obligation, and no such claim or defense shall
impair or affect the obligations and liabilities of the Guarantor hereunder.
Without limiting the generality of the foregoing, this instrument covers all
Obligations to Lender purporting to be made on behalf of Borrower by any officer
or agent of the same, without regard to the actual authority of such officer or
agent. The Guarantor acknowledges receipt of a copy, as signed (or in
substantially the form to be signed), of the Loan Agreement and each promissory
note executed pursuant thereto and described hereinabove; and agrees to abide by
those provisions thereof (if any) pertaining to the Guarantor so long as this
Guaranty remains effective. The Guarantor further agrees to pay to Lender all
expenses (including, but not limited to, attorney's fees) paid or incurred by
Lender in endeavoring to collect upon the Obligations, or any part thereof, and
in enforc-
<PAGE>
ing this Guaranty. Without limiting the generality, of any of the foregoing
provisions, upon the occurrence of any "Event of Default," as that term is
defined in the Loan Agreement (herein, an "Event of Default"), the Guarantor
----------------
shall pay to Lender upon demand the full amount of the Obligations for which
the Guarantor is liable hereunder.
2. ABSOLUTE AND UNCONDITIONAL LIABILITY. This Guaranty is
------------------------------------
continuing, absolute and unconditional and shall remain in full force and effect
as to the Guarantor, subject to discontinuance as to the Guarantor only as
follows: the Guarantor, and any person duly authorized and acting on behalf of
the Guarantor, may give written notice to Lender of discontinuance of this
Guaranty as to the Guarantor, but no such notice shall be effective in any
respect unless and until it is actually received by Lender and no such notice
shall affect or impair the liabilities hereunder of the Guarantor with respect
to any of the Obligations existing at the date of receipt of such notice by
Lender, any renewals or extensions of such of the Obligations (whether such
renewals or extensions are made before or after receipt of such notice by
Lender), any interest on such of the Obligations or any expenses paid or
incurred by Lender in endeavoring to collect such of the Obligations, or any
part thereof, and in enforcing this instrument against the Guarantor. Any such
notice of discontinuance by or on behalf of any one Guarantor (if there be more
than one) shall not affect or impair the liabilities and obligations hereunder
of any other Guarantor.
3. BENEFIT TO GUARANTOR. The Guarantor expressly represents and
--------------------
acknowledges that any extensions of credit or other financial accommodations
made by Lender to the Borrower, whether heretofore, now or hereafter made, are
and will be to the direct and material interest and benefit of the Guarantor as
an affiliate of Borrower. Without limitation of the foregoing, Guarantor
acknowledges that the entire proceeds of the Term Loan, when made to Borrower,
shall be paid over and delivered to Guarantor in repayment of certain debt(s)
owing by Borrower and/or his affiliates to Guarantor in such amount.
4. RIGHTS OF LENDER. The Guarantor hereby consents and agrees that
----------------
Lender may, at any time and from time to time, without notice to the Guarantor:
(a) retain or obtain from Borrower or any other party or parties, at any time, a
security interest, lien, title or other interest in any property, whether real,
personal, mixed, intangible, or chooses in action, of such party to secure any
of the Obligations or any liability hereunder (the "Collateral"); (b) retain or
----------
obtain the primary or secondary liability of any party or parties, in addition
to the Guarantor, with respect to any of the Obligations; (c) extend or renew
for any period (whether or not longer than the original period), alter, modify,
or exchange, any of the Obligations, or any writing evidencing the Obligations,
or any of them; (d) release, discharge, compromise, or enter into any accord and
satisfaction with respect to the Collateral, or any part thereof, any liability
of any other Guarantor hereunder, or any liability of any other party or parties
primarily or secondarily liable on any of the Obligations; (e) release
-2-
<PAGE>
or surrender the Collateral or any interest Lender may have in any of the
Collateral, with or without consideration, or exchange or substitute for the
Collateral, or any part thereof, any other security of like kind, or of any
kind; or (f) resort to or bring suit against any one Guarantor for payment of
any of the Obligations, whether or not Lender shall have resorted to or
brought suit against any other Guarantor of the Obligations, or any other
party primarily or secondarily liable on any of the Obligations, and whether
or not Lender shall have exhausted its rights or remedies against any of the
foregoing.
5. WAIVERS BY GUARANTOR. The Guarantor hereby expressly waives: (a)
--------------------
notice of acceptance of this Guaranty; (b) notice of the existence or creation
of all or any of the Obligations; (c) notice of any default, nonpayment, partial
payment, presentment, demand, and all other notices whatever; (d) any invalidity
or disability in whole or in part at the time of its acceptance or at any other
time with respect to the Collateral, or any part thereof, as well as with
respect to the liability of any party including any party who is or becomes
primarily or secondarily liable on the Obligations; (e) the fact that the
Collateral or any part thereof may at any time or from time to time be in
default or be incorrectly estimated or deteriorate in value for any cause
whatsoever; (f) all diligence by Lender in collection or protection of or
realization upon the Collateral, the Obligations, or any part thereof, any
liability hereunder, any liability of any party primarily or secondarily labile
on the Obligations, or any security for any of the foregoing; (g) any duty or
obligation on the part of Lender to ascertain the extent or nature of the
Collateral, or any part thereof, or any insurance or other rights respecting the
Collateral, or the liability of any party primarily or secondarily liable on the
Obligations, as well as any duty or obligation on the part of Lender to take any
steps or action to safeguard, protect, deal with, handle, obtain or convey
information respecting, or otherwise follow in any manner, the Collateral or any
part thereof, or such insurance, other rights, or security; (h) any duty or
obligation on Lender to proceed to collect the Obligations from, or to commence
an action against, the Borrower, despite any notice or request of the Guarantor
to do so; and (i) any and all rights of subrogation, indemnity, reimbursement or
other, similar rights to enforce any remedy which the Guarantor, as subrogee,
assignee or otherwise of the Lender, now has or may hereafter have, but for this
provision, against the Borrower, and any benefit of, and any right to
participate in, any security now or hereafter held by the Lender for the
Obligations, unless and until all Obligations have been fully paid and
satisfied.
6. NO RELEASE OR WAIVER. The liability and obligations of the
--------------------
Guarantor hereunder shall not be released, impaired or affected in any manner by
reason of: (a) the taking of any action consented to or permitted by the
Guarantor herein or otherwise, or (b) the failure of Lender to take any action,
or the existence of any condition, hereinabove waived. In addition to the
foregoing, no delay or failure on the part of Lender in the exercise
-3-
<PAGE>
of any right or remedy shall operate as a waiver thereof, and no single or
partial exercise by Lender of any right or remedy shall preclude other or
further exercise thereof or the exercise of any other right or remedy.
7. SUBORDINATION. The Guarantor subordinates to the Obligations of
-------------
the Borrower to the Lender any right, remedy, title, interest or claim of the
Guarantor against the Borrower, whether with respect to the payment of money or
otherwise, as co-maker, surety, guarantor, indemnitee, subrogee or otherwise,
and whether now or hereafter held by, owing to, assigned to or arising in favor
of the Guarantor as against the Borrower if and to the extent not herein waived
by the Guarantor (herein called a "Claim"), and agrees that any such Claim, to
-----
the extent hereafter collected, enforced or received by the Guarantor upon and
after the occurrence of an Event of Default, shall be collected, enforced and
received by the Guarantor as trustee for the Lender and be paid over to the
Lender on account of the Obligations of the Borrower to the Lender forthwith;
and the Guarantor further agrees, in connection therewith, that in the event of
any distribution, division or application, partial or complete, voluntary or
involuntary by operation of law or otherwise, of all or any part of the assets
of the Borrower or the proceeds thereof to the creditors of the Borrower, or
upon any indebtedness of the Borrower, by reason of dissolution, liquidation or
other winding up of the Borrower or its business, or compromise or settlement
with its creditors, or any sale, receivership, insolvency or bankruptcy
proceeding or assignment for the benefit of creditors, or any proceeding by or
against the Borrower for any relief under any provisions of the Bankruptcy Code,
then, and in any such event, any payment or distribution of any kind or
character, which shall be payable or deliverable with respect to any and all
Claims of the Guarantor against the Borrower, shall be paid or delivered
directly to the Lender for application to the Obligations, due or not due, of
the Borrower to the Lender until all such Obligations shall have been first and
fully and indefeasibly been paid and satisfied; the Guarantor hereby sells,
assigns, transfers and sets over to the Lender all of its rights to any and all
such distributions and irrevocably appoints the Lender as its attorney-in-fact
to make claim thereon (following an Event of Default) at its discretion.
8. ASSIGNMENT BY LENDER. Lender may, without notice of any kind,
--------------------
sell, assign or transfer all or any of the Obligations, and in such event each
and every immediate and successive assignee, transferee, or holder of all or any
of the Obligations, shall have the right to enforce this Guaranty, by suit or
otherwise, for the benefit of such assignee, transferee or holder, as fully as
if such assignee, transferee or holder were herein by name specifically given
such rights, power and benefits, but Lender shall have an unimpaired right,
prior and superior to that of any such assignee, transferee or holder, to
enforce this Guaranty for the benefit of Lender, as to so much of the
Obligations as it has not sold, assigned or transferred.
-4-
<PAGE>
9. APPLICATION OF FUNDS. Any amount received by Lender from whatever
--------------------
source (including the Guarantor) and applied by it toward the payment of the
Obligations shall be applied in such order of application as Lender may from
time to time elect.
10. ACCEPTANCE OF PLANS. Lender may accept any payment, plan for
-------------------
adjustment of debts, plan for reorganization or liquidation, or plan of
composition or extension proposed by, or on behalf of, the Borrower without in
any way affecting or discharging the liability of the Guarantor hereunder. If
the Obligations are partially paid, the Guarantor shall remain liable for any
balance of such Obligations. This instrument shall be revived and reinstated in
the event that any payment received by Lender, or any of Lender's successors and
assigns, endorsers or transferees, on any of the Obligations, is required to be
repaid or rescinded under present or future federal or state law or regulation
relating to bankruptcy, insolvency, or other relief of debtors, to the same
extent as if such payment had never been made, and the amount of such payment
and interest thereon shall be part of the Obligations guaranteed hereby.
11. SUCCESSORS AND ASSIGNS. This Guaranty shall bind and inure to
----------------------
the benefit of Lender, its successors and assigns, and likewise shall bind and
inure to the benefit of the Guarantor, and the heirs, executors, administrators,
successors and assigns of the Guarantor. If more than one person shall execute
this instrument, the term "Guarantor," shall mean, as used herein, all the
parties executing this instrument and all such parties shall be liable JOINTLY
AND SEVERALLY for each of the undertakings, agreements, obligations, covenants
and liabilities provided for herein with respect to the Guarantor. This
instrument contains the entire agreement and there is no understanding that any
person other than the Guarantor named above shall execute this instrument.
12. GEORGIA LAW. THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN
-----------
ACCORDANCE WITH THE LAWS OF THE STATE OF GEORGIA. WHERESOEVER POSSIBLE EACH
PROVISION OF THIS GUARANTY SHALL BE INTERPRETED IN SUCH MANNER AS TO BE
EFFECTIVE AND VALID UNDER APPLICABLE LAW, BUT IF ANY PROVISION OF THIS
INSTRUMENT SHALL BE PROHIBITED BY OR INVALID UNDER SUCH LAW, SUCH PROVISION
SHALL BE INEFFECTIVE TO THE EXTENT OF SUCH PROHIBITION OR INVALIDITY, WITHOUT
INVALIDATING THE REMAINDER OF SUCH PROVISION OR THE REMAINING PROVISIONS OF THIS
GUARANTY.
13. JURISDICTION. THE GUARANTOR AGREES THAT ANY LEGAL ACTION OR
------------
PROCEEDING WITH RESPECT TO THIS GUARANTY MAY BE BROUGHT IN THE COURTS OF THE
STATE OF GEORGIA OR THE UNITED STATES DISTRICT COURT, NORTHERN DISTRICT OF
GEORGIA, ATLANTA DIVISION, ALL AS LENDER MAY ELECT. BY EXECUTION OF THIS
GUARANTY, THE GUARANTOR HEREBY
-5-
<PAGE>
SUBMITS TO EACH SUCH JURISDICTION, HEREBY EXPRESSLY WAIVING WHATEVER RIGHTS MAY
CORRESPOND TO HIM BY REASON OF HIS PRESENT OR FUTURE DOMICILE, AND AGREES THAT
SERVICE OF PROCESS MAY BE MADE UPON HIM BY REGISTERED OR CERTIFIED MAIL DIRECTED
TO THE GUARANTOR CARE OF THE ADDRESS BELOW HIS SIGNATURE HERETO. NOTHING HEREIN
SHALL AFFECT THE RIGHT OF LENDER TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE
PROCEED AGAINST THE GUARANTOR IN ANY OTHER JURISDICTION OR TO SERVE PROCESS IN
ANY MANNER PERMITTED OR REQUIRED BY LAW. THE GUARANTOR FURTHER WAIVES ANY RIGHT
TO TRIAL BY JURY IN ANY SUCH PROCEEDINGS.
14. REPRESENTATIONS. The Guarantor represents and warrants that: (a)
---------------
the Guarantor has obtained all consents and approvals (if any) necessary to
permit the execution, delivery and performance of this Guaranty; (b) the
execution, delivery, and performance of this Guaranty by the Guarantor will not
contravene, or cause a default to occur under, any agreement by which the
Guarantor is bound; (c) the Guarantor is solvent; and (d) this Guaranty
constitutes the legal, valid and binding obligations of the Guarantor to the
Lender enforceable in accordance with its terms.
15. GUARANTOR'S LOAN AND SECURITY AGREEMENT. Guarantor hereby
---------------------------------------
acknowledges and agrees that the obligations of Guarantor hereunder constitute
"Obligations" under that certain Loan and Security Agreement, dated as of
December 16, 1996 (as amended or modified prior to the date hereof, concurrently
herewith and, from time to time hereafter, the "GUARANTOR'S LOAN AGREEMENT"),
--------------------------
between Guarantor and Lender, and that, for so long as this Guaranty remains in
effect or Guarantor has any obligations hereunder, the Guarantor's Loan
Agreement shall remain and full force and effect and Guarantor shall continue to
be bound by all representations, warranties, covenants and other provisions
thereof, notwithstanding that the "Revolving Line of Credit" may have been
terminated and the "Revolving Advances" and the "Term Loan" (as such terms are
defined therein) may have been paid in full.
-6-
<PAGE>
WITNESS the signature and seal of the Guarantor as of August 19, 1997.
ASSOCIATED HYGIENIC PRODUCTS LLC,
a Limited Liability Company (SEAL)
By: /s/ Peter Chang
---------------------------------------
Name: Peter Chang
Title: President
Attest: /s/ Philip Leung
-----------------------------------
Name: Philip Leung
Title: Secretary
Address for Notices:
c/o Associated Hygienic Products LLC
4455 River Green Parkway
Duluth, Georgia 30136
-7-
<PAGE>
ACCEPTED:
"LENDER"
SOUTHTRUST BANK, N.A.
By: /s/ Barbara A. Gewert
-----------------------------------
Barbara A. Gewert, Vice President
-8-
<PAGE>
EXHIBIT 3.4
LOAN AGREEMENT
BETWEEN
BRANDON S L WANG,
AS BORROWER,
AND
SOUTHTRUST BANK, N.A.,
AS LENDER
CLOSING DATE:
AUGUST 19, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<C> <S> <C>
1. DEFINITIONS, TERMS AND REFERENCES..................... 1
1.1 CERTAIN DEFINITIONS.............................. l
1.2 USE OF DEFINED TERMS............................. 6
1.3 ACCOUNTING TERMS................................. 6
1.4 TERMINOLOGY...................................... 6
1.5 EXHIBITS......................................... 6
2. TERM LOAN............................................. 6
2.1 GENERAL TERMS AND CONDITIONS..................... 6
2.2 INTEREST......................................... 7
2.3 METHOD OF MAKING PAYMENTS........................ 8
2.4 PREPAYMENTS...................................... 8
2.5 USE OF PROCEEDS.................................. 9
2.6 INCREASED COSTS OR REDUCED RETURN................ 9
2.7 INDEMNIFICATION OF LENDER........................ 10
3. REPRESENTATIONS AND WARRANTIES........................ 10
3.1 RESIDENCE........................................ 10
3.2 CAPACITY; VALIDITY AND BINDING EFFECT............ 10
3.3 NO MATERIAL LITIGATION........................... 11
3.4 TAXES............................................ 11
3.5 INSOLVENCY....................................... 11
3.6 MARGIN STOCK..................................... 11
3.7 NO VIOLATIONS.................................... 12
3.8 FINANCIAL STATEMENTS............................. 12
3.9 DISCLOSURE....................................... 12
4. COVENANTS............................................. 12
4.1 FURTHER ASSURANCES............................... 13
4.2 PERSONAL FINANCIAL STATEMENTS AND OTHER REPORTS.. 13
4.3 PAYMENT OF TAXES................................. 13
4.4 NOTICE OF DEFAULT................................ 13
4.5 COMPLIANCE WITH LAWS............................. 13
4.6 LITIGATION....................................... 13
5. EVENTS OF DEFAULT..................................... 14
5.1 TERM NOTE........................................ 14
5.2 OBLIGATIONS...................................... 14
5.3 MISREPRESENTATIONS............................... 14
5.4 COVENANTS........................................ 14
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
5.5 OTHER DEBTS.................................... 14
5.6 VOLUNTARY BANKRUPTCY........................... 15
5.7 INVOLUNTARY BANKRUPTCY......................... 15
5.8 ORGANIZATIONAL DOCUMENTS; DISSOLUTION.......... 15
5.9 JUDGMENTS AND SETTLEMENTS...................... 15
5.10 CHANGE OF CONTROL.............................. 16
5.11 MATERIAL ADVERSE CHANCE........................ 16
5.12 GUARANTIES..................................... 16
5.13 AHP US LOAN AGREEMENT.......................... 16
5.14 DEATH OR DISABILITY OF BORROWER................ 16
5.15 MATERIAL CHANGES IN CERTAIN ASSETS............. 16
6. REMEDIES............................................. 16
6.1 ACCELERATION OF THE OBLIGATIONS................ 17
6.2 SET OFF........................................ 17
6.3 OTHER REMEDIES................................. 17
7. MISCELLANEOUS........................................ 17
7.1 WAIVER......................................... 17
7.2 SURVIVAL....................................... 18
7.3 NO ASSIGNMENT BY BORROWER...................... 18
7.4 COUNTERPARTS................................... 18
7.5 REIMBURSEMENT.................................. 18
7.6 SUCCESSORS AND ASSIGNS......................... 19
7.7 SEVERABILITY................................... 19
7.8 NOTICES........................................ 19
7.9 ENTIRE AGREEMENT; AMENDMENTS................... 20
7.10 TIME OF THE ESSENCE............................ 20
7.11 INTERPRETATION................................. 20
7.12 LENDER NOT JOINT VENTURER...................... 20
7.13 GOVERNING LAW; JURISDICTION.................... 21
7.14 ACCEPTANCE..................................... 21
7.15 PAYMENT ON NON-BUSINESS DAYS................... 21
7.16 CURE OF DEFAULT BY LENDER...................... 21
7.17 RECITALS....................................... 22
7.18 ATTORNEY-IN-FACT............................... 22
7.19 SOLE BENEFIT................................... 22
8. CONDITIONS PRECEDENT................................. 22
8.1 LOAN DOCUMENTS................................. 22
8.2 GUARANTIES..................................... 22
8.3 AHP US LOAN AGREEMENT AND LOAN DOCUMENTS....... 23
8.4 OPINIONS OF COUNSEL............................ 23
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
8.5 MISCELLANEOUS.................................. 23
8.6 NO DEFAULT..................................... 23
8.7 REPRESENTATIONS TRUE........................... 23
8.8 LEVERAGE RATIO................................. 23
8.9 FINANCIAL STATEMENTS........................... 23
8.10 CERTAIN AGREEMENTS............................. 24
8.11 COMPLIANCE WITH CONDITIONS..................... 24
</TABLE>
-iii-
<PAGE>
LOAN AGREEMENT
--------------
THIS LOAN AGREEMENT (hereinafter, as it may be modified, amended or
supplemented from time to time, and together with all Exhibits attached hereto,
called this "AGREEMENT"), made, entered into and effective as of the 19th day of
---------
August, 1997, by and between BRANDON SL WANG, an individual resident of London,
England ("BORROWER"), and SOUTHTRUST BANK, N.A., a national banking association
--------
("LENDER");
------
WITNESSETH:
----------
WHEREAS, Borrower has applied to Lender for a term loan, as more
particularly described hereinbelow; and
WHEREAS, Lender is willing to extend such term loan to Borrower in
accordance with the terms hereof upon the execution of this Agreement by
Borrower, compliance by Borrower with all of the terms and provisions of this
Agreement and fulfillment of all conditions precedent to Lender's obligations
herein contained;
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants herein contained, to induce Lender to extend the financial
accommodations provided for herein, and for other good and valuable
consideration, the sufficiency and receipt of all of which are acknowledged,
Borrower and Lender agree as follows:
1. DEFINITIONS; TERMS AND REFERENCES.
---------------------------------
1.1 CERTAIN DEFINITIONS.
-------------------
In addition to such other terms as elsewhere defined herein, as used
in this Agreement and in any Exhibits, the following terms shall have the
following meanings, unless the context requires otherwise:
"AFFILIATE" shall mean, with respect to any Person, any other Person
---------
Controlling, Controlled by or under common Control with such Person.
"AGREEMENT" shall have the meaning given to such term in the foregoing
---------
recitals to this Agreement.
"AHP CANADA" shall mean Associated Hygienic Products (Canada), an
----------
Ontario corporation.
"AHP CANADA PLEDGE AGREEMENT" shall mean, that certain Stock Pledge
---------------------------
Agreement, to be dated as of even date herewith, to be executed and delivered by
AHP Holdings in favor of Lender, pursuant to which AHP Holdings will pledge to
Lender all of the issued and outstanding
<PAGE>
stock of AHP Canada as security for its obligations under its Guaranty and
the Obligations, as such Stock Pledge Agreement may be amended or modified from
time to time hereafter.
"AHP HOLDINGS" shall mean AHP Holdings, L.P., a Georgia limited
------------
partnership.
"AHP US" shall mean Associated Hygienic Products LLC, a Wyoming
------
limited liability company.
"AHP US LOAN AGREEMENT" shall mean that certain Loan and Security
---------------------
Agreement, dated as of December 16, 1996, between AHP US, as borrower, and
Lender, as successor by merger to SouthTrust Bank of Georgia, N.A., as lender,
as amended or modified concurrently herewith and from time to time hereafter.
"BANKRUPTCY CODE" shall mean Title 11 of the United States Code, as
---------------
amended from time to time.
"BASE RATE" shall mean that interest rate per annum so denominated and
---------
set by Lender from time to time as an interest rate basis for borrowings from
Lender. Base Rate is one of several interest rate bases which may be used by
Lender. Lender lends at interest rates above and below Base Rate. Any change in
any rate of interest charged hereunder as a result of any change in Base Rate
shall become effective as of the opening of business on each date on which such
change in Base Rate occurs.
"BASE RATE BORROWING" shall mean and refer to that portion of
-------------------
outstanding borrowings evidenced by the Term Note as to which, pursuant to
Section 2.2, Borrower has elected to be charged interest at a rate computed by
reference to the Base Rate.
"BORROWER" shall have the meaning given to such term in the foregoing
--------
recitals to this Agreement.
"BUSINESS DAY" shall mean any day on which Lender is open for the
------------
conduct of banking business at its offices in the States of Alabama and Georgia.
"CHANGE OF CONTROL" shall mean: (a) the Controlling Shareholders,
-----------------
individually or in the aggregate, shall cease to Control Parent, (b) Parent
shall cease to directly or indirectly own and Control, with power to vote
(either itself or through one or more of its Subsidiaries), one hundred percent
(100%) of the issued and outstanding shares of each of the Members or (c) either
Member shall transfer any or all of its ownership units in AHP US or AHP Canada
to any other Person or shall otherwise cease to own and Control such ownership
units.
"CLOSING DATE" shall mean that date on which all conditions precedent
------------
to the making of the Term Loan specified in Article 8 hereof are satisfied and
the Term Loan is made to Borrower.
-2-
<PAGE>
"CONTROL", "CONTROLLED", or "CONTROLLING" shall mean, with respect to
------- ---------- -----------
any Person the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities or
otherwise; provided, however, that in any event, any Person who owns directly or
-------- -------
indirectly twenty percent (20%) or more of the securities having ordinary
voting power for the election of directors or other governing body of a
corporation or other entity shall be deemed to "Control" such corporation or
other entity for purposes of this Agreement. Without limitation of the
foregoing, the Members shall be deemed to "Control" AHP US and AHP Canada, and
Parent shall be deemed to "Control" the Members, AHP US and AHP Canada.
"CONTROLLING SHAREHOLDERS" shall mean those shareholders of Parent
------------------------
Controlling Parent on the Closing Date.
"DEBT" means all liabilities, obligations and indebtedness of a
----
Person to any other Person of, any kind or nature, now or hereafter owing,
arising, due or payable, howsoever evidenced, created, incurred, acquired Or
owing, whether primary, secondary, direct, contingent, fixed or otherwise, and
including, without in any way limiting the generality of the foregoing: (i) all
liabilities and obligations to trade creditors; (ii) in the case of Borrower,
all of the Obligations; (iii) all obligations and liabilities of any other
Person secured by any lien on a Person's property, even though such Person shall
not have assumed or become liable for the payment thereof; (iv) all accrued
pension fund and other employee benefit plan obligations and liabilities; (v)
all Guaranteed Obligations; (vi) deferred taxes; and (vii) all obligations under
capitalized leases.
"DEFAULT CONDITION" shall mean the occurrence of any event which,
-----------------
after satisfaction of any requirement for the giving of notice or the lapse of
time, or both, would become an Event of Default.
"DEFAULT RATE" shall mean that interest rate per annum equal to two
------------
percent (2%) plus the stated interest rate effective under the Term Note from
time to time.
"EVENT OF DEFAULT" shall mean any of the events or conditions
----------------
described in Article 5, provided that any requirement for the giving of notice
or the lapse of time, or both, has been satisfied.
"GAAP" shall mean generally accepted accounting principles,
----
consistently applied.
"GUARANTEED OBLIGATIONS" shall mean, with respect to any Person, all
----------------------
obligations of such Person which in any manner directly or indirectly guarantee
or assure, or in effect guarantee or assure, the payment or performance of any
indebtedness, dividend or other obligation of any other Person or assure or in
effect assure the holder of any such obligations against loss in respect
thereof, including, without limitation, any such obligations incurred through an
agreement, contingent or otherwise: (a) to purchase such obligations or any
property constituting security therefor; (b) to advance or supply funds for the
purchase or payment of such obligations or to maintain a working
-3-
<PAGE>
capital or other balance sheet condition; or (c) to lease property or to
purchase any debt or equity securities or other property or services.
"GUARANTIES" shall mean, collectively; these certain Guaranties, each
----------
to be dated as of even date herewith, to be executed and delivered by Guarantors
in favor of Lender, pursuant to which Guarantors will guarantee the payment and
performance by Borrower of his Obligations to Lender, as such Guaranties may be
amended or modified from time to time hereafter. "GUARANTY," shall mean,
--------
individually, any of the Guaranties.
"GUARANTORS" shall mean, collectively, AHP Holdings, AHP US, and each
----------
of the Trusts. "GUARANTOR" shall mean, individually, any of the Guarantors.
---------
"INTEREST PERIOD" shall mean with respect to any LIBOR Rate Borrowing,
---------------
a period of thirty (30), sixty (60) or ninety (90) days, as Borrower may elect
as provided in this Agreement; provided, that (a) the first day of an Interest
-------- ----
Period must be a Business Day, (b) any Interest Period that would otherwise end
on a day that is not a Business Day shall be extended to the next succeeding
Business Day, unless such Business Day falls in the next calendar month, in
which case the Interest Period shall end on the next preceding Business Day, and
(c) Borrower may not elect an Interest Period which would extend beyond the
final maturity date of the Term Loan.
"LENDER" shall have the meaning given to such term in the initial
------
recitals to this Agreement.
"LIBOR RATE" shall mean, with respect to any Interest Period for any
----------
LIBOR Rate Borrowing, the rate determined by Lender to be the rate at which
deposits in United States Dollars are offered to prime banks in the London
interbank market in an amount substantially equal to such LIBOR Rate Borrowing
for a period equal to such Interest Period.
"LIBOR RATE BORROWING" shall mean and refer to that portion of
--------------------
outstanding borrowings evidenced by the Term Note, as to which, pursuant to
Section 2.2, Borrower has elected to be charged interest at a rate computed by
reference to the LIBOR Rate.
"LOAN DOCUMENTS" shall mean this Agreement, the Term Note, the Pledge
--------------
Agreement, the Guaranties, the AHP Canada Pledge Agreement and any and all other
documents, instruments, certificates and agreements executed and/or delivered by
Borrower or any Guarantor in connection herewith, or any one, more, or all of
the foregoing, as the context shall require.
"MARGIN STOCK" shall have the meaning ascribed to such term in Section
-------------
221.2(h) (or any successor provision) of Regulation U of the Board of Governors
of the Federal Reserve System.
"MEMBERS" shall mean, collectively, Elmbay Limited, an English
-------
company, and AHP Holdings.
-4-
<PAGE>
"OBLIGATIONS" shall mean any and all Debts, liabilities and
-----------
obligations of Borrower to Lender, including, without limiting the generality of
the foregoing, any indebtedness, liability or obligation of Borrower to Lender
under any loan made to Borrower by Lender prior to the date hereof and any and
all extensions or renewals thereof in whole or in part; and Debt, liability or
obligation of Borrower to Lender arising hereunder or as a result hereof,
whether evidenced by the Term Note, the other Loan Documents or otherwise, and
any and all extensions or renewals thereof in whole or in part; any Debt,
liability or obligation of Borrower to Lender under any later or future advances
or loans made by Lender to Borrower, and any and all extensions or renewals
thereof in whole or in part; any and all present and future Debt of Borrower to
other creditors which is purchased by Lender from such other creditors; and any
and all future or additional Debts, liabilities or obligations of Borrower to
Lender whatsoever and in any event, whether existing as of the date hereof or
hereafter arising, whether arising under a loan, lease, line of credit, letter
of credit or other type of financing, and whether direct, indirect, absolute or
contingent, as maker, endorser, guarantor, surety or otherwise, and whether
evidenced by, arising out of, or relating to, a promissory note, bill of
exchange, check, draft, bond, letter of credit, guaranty agreement, bankers'
acceptance, foreign exchange contract, commitment fee, service charge or
otherwise.
"PARENT" shall mean DSG International Limited, a British Virgin
------
Islands corporation.
"PERSON" shall mean any individual, sole proprietorship, partnership,
------
joint venture, trust, unincorporated organization, association, corporation,
institution, entity, party or government (whether territorial, national,
federal, state, county, city, municipal or otherwise, including, without
limitation, any instrumentality, division, agency, body or department thereof).
"PLEDGE AGREEMENT" shall mean that certain Stock Pledge Agreement, to
----------------
be dated as of even date herewith, to be executed and delivered by the Trust
which is denominated "Mr. Brandon Wang's Cayman Interest in Possession
Settlement" in favor of Lender, pursuant to which such Trust will pledge to
Lender at least 2,317,100 shares of the issued and outstanding stock of Paint
owned by it, as security for payment and performance of its obligations under
its Guaranty and the Obligations, as such Stock Pledge Agreement may be amended
or modified from time to time hereafter.
"SUBSIDIARY" shall mean any corporation, partnership, business
----------
association or other entity (including any Subsidiary of any of the foregoing)
of which and Person owns, directly or indirectly, fifty percent (50%) or more of
the capital stock or equity interest having ordinary power for the election of
directors or others performing similar functions. Any representation, warranty
or covenant contained in this Agreement which includes the term "Subsidiaries"
shall mean and refer to any Subsidiary which was such as of the date of
determination for purposes of such representation, warranty or covenant.
"TERM LOAN" shall mean, subject to the terms and conditions set forth
---------
herein, the term loan to be made by Lender to Borrower on the Closing Date
pursuant to Section 2.1 hereof.
-5-
<PAGE>
"TERM NOTE" shall mean the Term Promissory Note, dated as of the
---------
Closing Date, as it may be amended or supplemented from time to time, in the
principal amount of the Term Loan, together with any renewals or extensions
thereof, in whole or in part.
"TRUSTS" shall mean, collectively, "The Cavalino Trust" and "Mr.
------
Brandon Wang's Cayman Interest in Possession Settlement". "Trust" shall mean,
-----
individually, either of the Trusts.
1.2 USE OF DEFINED TERMS.
--------------------
All terms defined in this Agreement and the Exhibits shall have the
same defined meanings when used in any other Loan Documents, unless the context
shall require otherwise.
1.3 ACCOUNTING TERMS.
----------------
All accounting terms not specifically defined herein shall have the
meanings generally attributed to such terms under GAAP.
1.4 TERMINOLOGY.
-----------
All personal pronouns used in this Agreement, whether used in the
masculine, feminine or neuter gender, shall include all other genders; the
singular shall include the plural, and the plural shall include the singular.
Titles of Articles and Sections in this Agreement are for convenience only, and
neither limit nor amplify the provisions of this Agreement, and all references
in this Agreement to Articles, Sections, Subsections, paragraphs, clauses,
subclauses or Exhibits shall refer to the corresponding Article, Section,
Subsection, paragraph, clause, subclause of, or Exhibit attached to, this
Agreement, unless specific reference is made to the articles, sections or other
subdivisions divisions of, or Exhibit to, another document or instrument.
1.5 EXHIBITS.
--------
Any Exhibits attached hereto are by reference made a part hereof.
2. TERM LOAN.
---------
2.1. GENERAL TERMS AND CONDITIONS.
----------------------------
(a) Upon execution of this Agreement and compliance with its terms,
including, without limitation, the conditions precedent set forth in Article 8
hereof, Lender agrees to make the Term Loan to Borrower in an amount not in
excess of Fifteen Million Dollars ($15,000,000).
(b) The Term Loan shall be evidenced by the Term Note. The principal
amount of the Term Note (or so much thereof as shall be disbursed to or on
behalf of Borrower) shall be payable in equal, consecutive, quarterly
installments (based on an assumed ten-year principal
-6-
<PAGE>
amortization schedule) on the first day of each calendar quarter, commencing on
October 1, 1997, with each installment to be in the amount of Three Hundred
Seventy-Five Thousand Dollars ($375,000), followed by one (1) final
installment, constituting a balloon payment, in an amount equal to the then
unpaid principal balance of the Term Note, which shall be due and payable on
August 1, 2000.
2.2 INTEREST.
--------
Borrower agrees to pay to Lender interest on the Term Loan (computed
based on a 360-day year and the actual number of days elapsed) in accordance
with the following provisions:
(a) Interest Rate.
-------------
(i) Except as set forth in clause (ii) below concerning the
availability of a fixed interest rate option, interest on the outstanding
principal balance of the Term Loan shall be payable at Borrower's option, either
at (A) a fluctuating rate per annum equal to the Base Rate, or (B) a fluctuating
rate per annum equal to the LIBOR Rate plus 2.25% per annum, for Interest
Periods of thirty (30), sixty (60) or ninety (90) days, as selected by Borrower,
as hereinafter set forth; provided, however, that if, at his election, Borrower
-------- -------
pays to Lender a fee of Forty-Five Thousand Dollars ($45,000) prior to the date
of disbursement of the Term Loan, then the margin added to the LIBOR Rate
pursuant to the preceding clause (B) shall be reduced from 2.25% to 2.00%.
Borrower shall have the right to elect at any time to have up to four (4)
Interest Periods in effect with respect to the Term Loan provided that the
minimum amount of the Term Loan to which each Interest Period shall apply shall
be One Million Dollars ($1,000,000) or an integral multiple thereof. On the
Closing Date, Borrower shall notify Lender in writing as to the applicable
interest rate or rates selected by Borrower with respect to the Term Loan and,
for any LIBOR Rate Borrowings, if more than one Interest Period is selected, as
to the amount of the Term Loan attributable to each such Interest Period.
Thereafter, at least two (2) Business Days prior to the last day of each
Interest Period, Borrower shall notify Lender in writing of his intent to
continue the portion of the Term Loan attributable to such Interest Period at
the LIBOR Rate for an Interest Period or Periods, as applicable, of either
thirty (30), sixty (60) or ninety (90) days. If Borrower fails to do so on a
timely basis, then each such LIBOR Rate Borrowing shall be converted to a Base
Rate Borrowing at the end of such Interest Period.
(ii) At any time after the Closing Date, so long as no Default
Condition or Event of Default then exists, Borrower shall have the right to
request that Lender offer a fixed interest rate in respect of all (but not a
portion) of the then unpaid principal balance of the Term Loan if Lender is then
offering fixed rates for loans of the size, type and tenor of the principal
balance of the Term Loan outstanding at such time. Any such offer, by Lender, to
be valid, must be contained in a writing signed by an authorized officer of
Lender making specific reference to this provision. If Lender's offer of a fixed
rate in respect of the Term Loan is accepted by Borrower (as evidenced by its
written, acceptance thereof on the Business Day on which the offer is made),
then, such fixed interest rate shall become the applicable interest rate as of
the first day of the succeeding calendar
-7-
<PAGE>
quarter for all of the outstanding principal balance of the Term Loan and
remain effective thereafter until the Term Loan is paid in full.
(b) Payment. Interest on any Base Rate Loan shall be payable monthly
-------
in arrears on the first day of each calendar month hereafter (for the preceding
calendar month), commencing on the first day of the first month occurring after
the disbursement of the Term Loan. Interest on any LIBOR Rate Loan shall be
payable at the end of the Interest Period corresponding thereto.
(c) Limitations on LIBOR Rate Borrowings. Notwithstanding any other
------------------------------------
term of this Agreement, Borrower shall not be able to obtain or continue LIBOR
Rate Borrowings or convert Base Rate Borrowings into LIBOR Rate Borrowings if:
(i) a Default Condition or Event of Default has occurred and during its
continuance; or (ii) Borrower has received notice from Lender that it has become
illegal or commercially impracticable for Lender to make or maintain any
borrowings hereunder as LIBOR Rate Borrowings, so long as such notice remains
effective; in either such case, then and thereafter all such borrowings shall be
made, or continued as, or converted into, Base Rate Borrowings.
2.3 METHOD OF MAKING, PAYMENTS.
--------------------------
All payments owing under or pursuant to this Agreement, whether of
principal, interest, fees or otherwise, shall be made without defense, set-off
or counterclaim to Lender not later than 1:00 p.m. Atlanta, Georgia time on the
date when due and shall be made in lawful money of the United States of America
in immediately available funds at the office of Lender in Atlanta, Georgia.
Whenever any payment to be made hereunder or pursuant hereto shall be stated to
be due on a day which is not a Business Day, the due date thereof shall be
extended to the next succeeding Business Day and, with respect to payments of
principal, interest thereon shall be payable at the applicable rate during such
extension.
2.4 PREPAYMENTS.
-----------
(a) Voluntary Prepayments.
---------------------
The principal amount of the Term Loan may be prepaid in full or in
part at any time or from time to time after the first anniversary of the Closing
Date, without penalty or premium; provided, however, that (i) any such
-------- -------
prepayment must be preceded by at least ten (10) days prior written notice
thereof to the Lender, (ii) any such prepayment must be accompanied by the
payment of all then accrued interest on the principal amount to be prepaid
together with all accrued fees and expenses, (iii) any such prepayment (other
than a prepayment in full) must be in the amount of at least One Hundred
Thousand Dollars ($100,000) or an integral multiple thereof, (iv) no portion of
the Term Loan then constituting a LIBOR Rate Borrowing shall be prepaid on any
day other than the last day of the Interest Period then applicable thereto or
the maturity date of the Term Loan, as applicable and (v) in connection with any
prepayment of the Term Loan after a fixed rate election is made pursuant to
Section 2.2(a)(ii) hereof, Borrower shall pay to Lender a "mark to market"
-8-
<PAGE>
charge in such amount as Lender shall determine in connection with such
prepayment. Each partial prepayment of the Term Loan shall be applied to the
unpaid principal installments thereof in the inverse order of their respective
maturities.
(b) Mandatory Prepayments.
---------------------
In the event that at any time the outstanding principal balance of the
Term Loan shall exceed seventy-five percent (75%) of the fair market value of
the stock of Parent pledged to Lender pursuant to the Pledge Agreement, as
determined by Lender, in its sole discretion, then within three (3) Business
Days after Lender notifies Borrower of such excess, Borrower shall make such
prepayments of the Term Loan as are necessary in Lender's determination, in its
sole discretion, to restore the outstanding principal balance of the Term Loan
to not more than seventy-five percent (75%) of the fair market value of such
pledged stock. In connection with any prepayment made pursuant to this Section
2.4(b), Borrower shall (i) if any portion of the Term Loan so prepaid is a LIBOR
Rate Borrowing, reimburse Lender for any costs incurred by Lender resulting from
the repayment of such LIBOR Rate Borrowing prior to the end of an Interest
Period and (ii) if Borrower has elected to have the Term Loan bear interest at a
fixed rate pursuant to Section 2.2(a)(ii), pay to Lender a "mark to market"
charge in such amount as Lender shall determine in connection with such
prepayment. Each partial prepayment of the Term Loan shall be applied to the
unpaid principal installments thereof in the inverse order of their respective
maturities.
2.5 USE OF PROCEEDS.
---------------
The proceeds of the Term Loan shall be used by Borrower to pay in full
the loan in the outstanding principal amount of Fifteen Million Dollars
($15,000,000) previously made by Parent to Borrower; and, simultaneously
therewith, Parent shall use the proceeds of such loan repayment to pay in full
the loan in the outstanding principal amount of Fifteen Million Dollars
($15,000,000) previously made by AHP US to Parent.
2.6 INCREASED COSTS OR REDUCED RETURN.
---------------------------------
If, due to either (a) the introduction of or any change in or in the
interpretation of any U.S. or foreign law or regulation, or (b) the compliance
with any guideline or request from any governmental authority, there shall be
any increase in the cost to Lender of maintaining its commitments hereunder or
agreeing to make or making, funding or maintaining the Term Loan or any
reduction in the rate of return on Lender's capital as a consequence of its
obligations hereunder to a level below that which Lender would have achieved but
for such events described in clauses (a) and (b) above (taking into
consideration Lender's policies to comply with statutorily required levels with
respect to capital adequacy), then Borrower agrees from time to time, upon
demand by Lender to pay to Lender additional amounts sufficient to compensate
Lender for such increased costs or reduced return. A certificate identifying
with reasonable specificity the basis for and the amount of such increased costs
or reduced return shall be submitted to Borrower by Lender and shall be
-9-
<PAGE>
conclusive and binding for all purposes, absent manifest error. In determining
such amount, Lender may use reasonable averaging and attribution methods.
2.7 INDEMNIFICATION OF LENDER.
-------------------------
At all times prior to and after the consummation of the transactions
contemplated by this Agreement, Borrower agrees to hold Lender, its respective
directors, officers, employees, agents, Affiliates, successors and assigns
harmless from and to indemnify Lender and its respective directors, officers,
employees, agents, Affiliates, successors and assigns against, all loss,
damages, costs and expenses (including, without limitation, reasonable
attorney's fees, costs and expenses) actually incurred by any of the foregoing,
whether direct, indirect or consequential, as a result of or arising from or
relating to any "Proceedings" (as defined below) by any Person, whether
threatened or initiated, asserting a claim for any legal or equitable remedy
against any Person under any statute, case or regulation, including, without
limitation, any federal or state securities laws or under any common law or
equitable case or otherwise, arising from or in connection with this Agreement,
and any other of the transactions contemplated by this Agreement except to the
extent such losses, damages, costs or expenses are due to the willful misconduct
or gross negligence of Lender. As used herein, "PROCEEDINGS" shall mean actions,
-----------
suits or proceedings before any court, governmental or regulatory authority. At
the request of Lender, Borrower agrees to indemnify any Person to whom Lender
transfers or sells all or any portion of its interest in the Obligations or
participations therein on terms substantially similar to the terms set forth
above. Lender shall not be responsible or liable to any Person for consequential
damages which may be alleged as a result of this Agreement or any of the
transactions contemplated hereby. The obligations of Borrower under this Section
2.7 shall survive the termination of this Agreement and payment of the
Obligations.
3. REPRESENTATIONS AND WARRANTIES.
------------------------------
In order to induce Lender to enter into this Agreement, Borrower
hereby represents and warrants to Lender as set forth below.
3.1 RESIDENCE.
---------
Borrower is an individual resident of London, England.
3.2 CAPACITY; VALIDITY AND BINDING EFFECT.
-------------------------------------
Borrower has the capacity to make, deliver and perform under the Loan
Documents. This Agreement constitutes, and the remainder of the Loan Documents
to which Borrower is a party, when executed and delivered for value received,
will constitute, the valid obligations of Borrower, legally binding upon him and
enforceable against him in accordance with their respective terms.
-10-
<PAGE>
3.3 NO MATERIAL LITIGATION.
----------------------
There are no proceedings pending or, so far as Borrower knows,
threatened, before any court or administrative agency which might materially
adversely affect the financial condition of Borrower.
3.4 TAXES.
-----
Borrower has flied or caused to be flied any tax returns required to
be filed by him and has paid all taxes shown to be due and payable by him on
said returns or on any assessments made against him, the nonpayment of which
could reasonably be expected to have a material adverse effect on the Borrower's
financial condition, unless and to the extent only that (x) such taxes are being
contested in good faith and by appropriate proceedings by Borrower.
3.5 INSOLVENCY.
----------
After giving effect to the funding of the Term Loan and the uses by
Borrower of the proceeds of such loan as provided hereunder, (a) the fair value
and present fair saleable value of Borrower's assets are in excess of the total
amount of Borrower's liabilities, including known contingent liabilities; (b)
Borrower will not have incurred debts, nor will he intend to incur debts, beyond
his ability to pay such debts as they mature; and (c) Borrower will not have
unreasonably small capital to carry on Borrower's businesses as theretofore
operated and all businesses in which the Borrower is about to engage. As used in
this Section 3.5, "debt" means any liability on a claim, and "claim" means (i)
the right to payment, whether or not such right is reduced to judgment,
liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,
undisputed, legal, equitable, secured or unsecured, or (ii) the right to an
equitable remedy for breach of performance if such breach gives rise to a right
to payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured
or unsecured.
3.6 MARGIN STOCK.
------------
Borrower is not engaged principally, or as one of his important
activities, in the business of purchasing or carrying any Margin Stock and no
part of the proceeds of any borrowing made pursuant hereto will be used to
purchase or carry any Margin Stock or to extend credit to others for the purpose
of purchasing or carrying any Margin Stock, or be used for any purpose which
violates, or which is inconsistent with, the provisions of Regulation X of the
Board of Governors of the Federal Reserve System. In connection herewith, if
requested by Lender, Borrower will furnish to Lender a statement in conformity
with the requirements of Federal Reserve Form F.R. U-1 referred to in Regulation
U of said Board to the foregoing effect.
-11-
<PAGE>
3.7 NO VIOLATIONS.
-------------
The execution, delivery and performance by Borrower of this Agreement
and the Loan Documents to which he is party do not violate any provision of any
law, rule, regulation (including, without limitation, Regulation X of the Board
of Governors of the Federal Reserve System), order, writ, judgment, injunction,
decree, determination or award presently in effect having applicability to
Borrower, or result in a breach of or constitute a default under any indenture
or loan or credit agreement or any other agreement, lease or instrument to which
Borrower is a party or by which he or his properties may be bound or affected;
and Borrower is not in default under any such law, rule, regulation, order,
writ, judgment, injunction, decree, determination or award or any such
indenture, agreement, lease or instrument.
3.8 FINANCIAL STATEMENTS.
--------------------
The personal financial statements of Borrower for the most recently
completed calendar year, copies of which have heretofore been furnished to
Lender, are complete and accurately and fairly represent the financial condition
of Borrower, as of the date thereof and for the period referred to therein.
There is no material Debt of Borrower as of the date of such financial
statements which is not reflected therein or in the notes thereto. There has
been no material adverse change in the financial condition of Borrower since the
date of the balance sheets contained in such financial statements.
3.9 DISCLOSURE.
----------
Neither this Agreement nor any other document, certificate or
statement furnished to Lender by or on behalf of Borrower in connection herewith
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained herein and therein not
misleading. To the best of Borrower's knowledge, there is no fact peculiar to
Borrower which materially adversely affects or in the future may (so far as
Borrower can now reasonably foresee) materially adversely affect the business,
property or assets, or financial condition of Borrower which has not been set
forth in this Agreement or in the other documents, certificates and statements
furnished to Lender by or on behalf of Borrower prior to the date hereof in
connection with the transactions contemplated hereby, when taken as a whole.
4. COVENANTS.
---------
Borrower covenants to Lender that from and after the date hereof, and
until such time as the Obligations have been paid in full and Lender shall have
terminated this Agreement in writing, Borrower will comply with the covenants
set forth below.
-12-
<PAGE>
4.1 FURTHER ASSURANCES.
------------------
Borrower shall duly execute and/or deliver (or cause to be duly
executed and/or delivered) to Lender any instrument, waiver, consent or other
writing which may be reasonably necessary to Lender to carry out the terms of
this Agreement and any of the other Loan Documents.
4.2 PERSONAL FINANCIAL STATEMENTS AND OTHER REPORTS.
-----------------------------------------------
Borrower shall, as soon as practicable, and, in any event, within
one hundred twenty (120) days after the end of each calendar year, furnish to
Lender his personal financial statements for such calendar year, prepared in a
form satisfactory to Lender, and certified by Borrower to be true, correct and
complete and shall deliver to Lender such reports regarding the Trusts as it
may request from time to time.
4.3 PAYMENT OF TAXES.
----------------
Borrower shall pay and discharge all taxes, assessments and
governmental charges upon him, his income and his property, the non-payment of
which could reasonably be expected to have a material adverse effect on the
Borrower's financial condition, prior to the date on which penalties attach
thereto, unless and to the extent only that such taxes, assessments and
governmental charges are being contested in good faith and by appropriate
proceedings by Borrower and (y) Borrower maintains reasonable reserves therefor.
4.4 NOTICE OF DEFAULT.
-----------------
Promptly upon his becoming aware of the occurrence of any Default
Condition or Event of Default, Borrower will notify Lender thereof in writing,
specifying the nature and period of existence thereof and the action which
Borrower proposes to take with respect thereto.
4.5 COMPLIANCE WITH LAWS.
--------------------
Borrower Shall comply with the requirements of all applicable laws,
rules, regulations and orders of any governmental authority, noncompliance with
which would materially adversely affect his financial condition or credit.
4.6 LITIGATION.
----------
Promptly, upon his receipt of notice or knowledge thereof, Borrower
will report to Lender any lawsuit or administrative proceeding in which Borrower
is a defendant wherein the amount of damages claimed against Borrower exceeds
Fifty Thousand Dollars ($50,000).
-13-
<PAGE>
5. EVENTS OF DEFAULT.
-----------------
The occurrence of any events or conditions described below shall
constitute an Event of Default hereunder, provided that any requirement for the
giving of notice or the lapse of time, or both, has been satisfied.
5.1 TERM NOTE.
---------
Borrower (i) shall fail to make any payment of the Term Loan required
pursuant to Section 2.4(b) hereof or (ii) shall fail to make any other payment
of principal of or interest on the Term Note within five (5) calendar days after
the date when due.
5.2 OBLIGATIONS.
-----------
Borrower shall fail to make any payments of principal of or interest
on any of the Obligations (other than the Term Note) or any other Obligations to
Lender, within five (5) calendar days after the date when due (or after
satisfaction of any shorter or longer requirement for the giving of notice or
the lapse of time, or both, contained in the applicable agreement pertaining to
such Obligations).
5.3 MISREPRESENTATIONS.
------------------
Borrower or any Guarantor shall make any representations or warranties
in any of the Loan Documents or in any certificate or statement furnished at any
time hereunder or in connection with any of the Loan Documents which, when taken
as a whole, proves to have been untrue or misleading in any material respect
when made or furnished.
5.4 COVENANTS.
---------
Borrower or any Guarantor shall default in the observance or
performance of any covenant or agreement contained herein or in any of the other
Loan Documents (other than a failure described in Sections 5.1 or 5.2), unless
such default is cured within ten (10) days after Borrower's receipt of notice
from Lender of such Default Condition.
5.5 OTHER DEBTS.
-----------
Borrower shall default in connection with any agreement evidencing,
securing or relating to any other Debt to, or under any operating lease with
Lender or with any creditor other than Lender.
-14-
<PAGE>
5.6 VOLUNTARY BANKRUPTCY.
--------------------
Borrower (or any Guarantor or Parent) shall file a voluntary petition
in bankruptcy or a voluntary petition or answer seeking liquidation,
reorganization, arrangement, readjustment of its debts, or for any other relief
under the Bankruptcy Code, or under any other act or law pertaining to
insolvency or debtor relief, whether state, federal, or foreign, now or
hereafter existing; Borrower (or any Guarantor or Parent) shall enter into any
agreement indicating its consent to, approval of, or acquiescence in, any such
petition or proceeding; Borrower (or any Guarantor or Parent) shall apply for or
permit the appointment by consent or acquiescence of a receiver, custodian or
trustee of Borrower (or any Guarantor or Parent) for all or a substantial part
of its property; Borrower (or any Guarantor or Parent) shall make an assignment
for the benefit of creditors; or Borrower (or any Guarantor or Parent) shall be
unable or shall fail to pay its debts generally as such debts become due; or
Borrower (or any Guarantor or Parent) shall admit, in writing, its inability or
failure to pay its debts generally as such debts become due.
5.7 INVOLUNTARY BANKRUPTCY.
----------------------
There shall have been filed against Borrower (or any Guarantor or
Parent) an involuntary petition in bankruptcy or seeking liquidation,
reorganization, arrangement, readjustment of its debts or for any other relief
under the Bankruptcy Code, or under any other act or law pertaining to
insolvency or debtor relief, whether State, federal or foreign, now or hereafter
existing, which has not been dismissed within sixty (60) days of the date the
petition is flied; Borrower (or any Guarantor or Parent) shall suffer or permit
the involuntary appointment of a receiver, custodian or trustee of Borrower (or
any Guarantor or Parent) or for all or a substantial part of its property; or
Borrower (or any Guarantor or Parent) shall suffer or permit the issuance of a
warrant of attachment, execution or similar process against all or any
substantial part of the property of Borrower (or any Guarantor or Parent).
5.8 ORGANIZATIONAL DOCUMENTS DISSOLUTION.
------------------------------------
Any of the organizational documents of any Guarantor shall be amended,
amended and restated or otherwise modified (other than administrative or
ministerial amendments and modifications) or shall be canceled or terminated, in
each case without Lender's prior written consent; or any Guarantor shall be
dissolved.
5.9 JUDGMENTS AND SETTLEMENTS.
-------------------------
Final judgments or orders for the payment of money are rendered
against Borrower, Parent or any Guarantor or Borrower, Parent or any Guarantor
settles any claim or lawsuit in the aggregate amount of Fifty Thousand Dollars
($50,000) or more (exclusive of amounts covered by insurance) which are not paid
in full within ten (10) Business Days.
-15-
<PAGE>
5.10 CHANGE OF CONTROL.
-----------------
A Change of Control shall occur.
5.11 MATERIAL ADVERSE CHANGE.
-----------------------
The occurrence of any material change in the business, financial
condition, results of operations or business prospects of Borrower or any
Guarantor which Lender reasonably determines, in good faith, materially and
adversely affects the ability of Borrower or any Guarantor to pay and perform
his or its obligations to Lender.
5.12 GUARANTIES.
----------
Any default shall occur under, or in respect of, any of the Guaranties
or any of the other Loan Documents to which Guarantors are party, or any
Guarantor thereunder shall repudiate, or seek to repudiate, its liability
thereon.
5.13. AHP US LOAN AGREEMENT.
---------------------
An "Event of Default" (as defined therein) shall occur under the AHP
US Loan Agreement.
5.14. DEATH OR DISABILITY OF BORROWER.
-------------------------------
Borrower shall die or become disabled.
5.15. MATERIAL CHANGES IN CERTAIN ASSETS.
----------------------------------
There shall occur any material adverse change under or with respect to
either of the Trusts (or in the assets contained therein).
6. REMEDIES.
--------
Upon the occurrence or existence of any Event of Default, or at any
time thereafter, without prejudice to the rights of Lender to enforce its claims
against Borrower for damages for failure by Borrower to fulfill any of its
obligations hereunder, subject only to prior receipt by Lender of payment in
full of all Obligations then outstanding in a form acceptable to Lender, Lender
shall have all of the rights and remedies described below, and Lender may
exercise any one, more, or all of such remedies, in its sole discretion, without
thereby waiving any of the others.
-16-
<PAGE>
6.1 ACCELERATION OF THE OBLIGATIONS.
-------------------------------
Lender, at its option, may by written notice, effective upon receipt,
declare all of the Obligations (including but not limited to that portion
thereof evidenced by the Term Note) to be immediately due and payable (and in
the event a voluntary or involuntary case is commenced under the Bankruptcy
Code, or under any other act or law pertaining to insolvency or debtor relief,
whether state, federal or foreign, now or hereafter existing, by or against
Borrower as a debtor, all Obligations automatically will be due and payable
without any notice or declaration by Lender), whereupon the same shall become
immediately due and payable without presentment, demand, protest, notice of
nonpayment or any other notice required by law relative thereto, all of which
are hereby expressly waived by Borrower, anything contained herein to the
contrary notwithstanding and, in connection therewith, Lender shall have the
right to increase the rate of interest charged on the Term Note, without
further notice, to a rate per annum equal to the Default Rate. Thereafter,
Lender, at its option, may, but shall not be obligated to, accept less than the
entire amount of Obligations due, if tendered, provided, however, that unless
then agreed to in writing by Lender, no such acceptance shall or shall be deemed
to constitute a waiver of any Event of Default or a reinstatement of any
commitments of Lender hereunder.
6.2 SET OFF.
-------
In addition to such other rights and remedies with respect to deposit
accounts maintained by Borrower with Lender and cash and other property of
Borrower in the possession of Lender, as may exist from time to time hereafter
in favor of Lender, whether by way of setoff, banker's lien, consensual security
interest or otherwise, upon the occurrence of any Event of Default hereunder,
Lender may charge any part or all of the obligations of Lender to Borrower
represented by items constituting such property in the possession and control of
Lender against the Obligations, without prior notice to or demand upon Borrower.
6.3 OTHER REMEDIES.
--------------
Unless and except to the extent expressly provided for to the contrary
herein, the rights of the Lender specified herein shall be in addition to, and
not in limitation of, Lender's rights under any statute or rule of law or
equity, or under any other provision of any of the Loan Documents, or under the
provisions of any other document, instrument or other writing executed by
Borrower or any third party in favor of the Lender, all of which may be
exercised successively or concurrently.
7. MISCELLANEOUS.
-------------
7.1 WAIVER.
------
Each and every right granted to Lender under this Agreement, or any of
the other Loan Documents, or any other document delivered hereunder or in
connection herewith or allowed
-17-
<PAGE>
it by law or in equity, shall be cumulative and may be exercised from time to
time. No failure on the part of Lender to exercise, and no delay in exercising,
any right shall operate as a waiver thereof, nor shall any single or partial
exercise by Lender of any right preclude any other or future exercise thereof or
the exercise of any other right. No waiver by Lender of any Default Condition or
Event of Default shall constitute a waiver of any subsequent Default Condition
or Event of Default.
7.2 SURVIVAL.
--------
All representations, warranties and covenants made herein shall
survive the execution and delivery of all of the Loan Documents. The terms and
provisions of this Agreement shall continue in full force and effect,
notwithstanding the payment of the Term Note until all of the Obligations have
been paid in full and Lender have terminated this Agreement in writing.
7.3 NO ASSIGNMENT BY BORROWER.
-------------------------
No assignment hereof shall be made by Borrower without the prior
written consent of Lender. Lender may assign, or sell participations and
undivided ownership interests in, its rights, title and interest herein and in
the Loan Documents at any time hereafter without notice to, or consent from,
Borrower.
7.4 COUNTERPARTS.
------------
This Agreement may be executed in two or more counterparts, each of
which when fully executed shall be an original, and all of said counterparts
taken together shall be deemed to constitute one and the same agreement.
7.5 REIMBURSEMENT.
-------------
Borrower agrees to pay to the Lender on demand all out-of-pocket
costs and expenses that Lender pays or incurs in connection with the
negotiation, preparation, consummation, enforcement and termination of this
Agreement and the other Loan Documents, including, without limitation: (a)
reasonable attorneys' fees and disbursements; (b) costs and expenses
(including reasonable attorneys' fees and disbursements) for any amendment,
supplement, waiver, consent or subsequent closing in connection with the Loan
Documents and the transactions contemplated thereby; (c) sums paid or incurred
to pay for any amount or to take any action required of Borrower under the
Loan Documents that Borrower fails to pay or take; and (d) costs and expenses
(including reasonable attorneys' and paralegals' fees and disbursements) paid
or incurred to obtain payment of the Obligations and otherwise enforce the
provisions of the Loan Documents or to defend any claims made or threatened
against Lender arising out of the transactions contemplated hereby (including,
without limitation, preparations for and consultations concerning any such
matters). The foregoing shall not be construed to limit any other provisions
of the Loan Documents regarding costs and expenses to be paid by Borrower.
Borrower will pay all expenses incurred by it in the transaction. In the event
Borrower becomes a debtor under the Bankruptcy Code, or under any other act or
law
-18-
<PAGE>
pertaining to insolvency or debtor relief, whether state, federal or
foreign, now or hereafter existing, Lender's secured claim in such case shall
include interest on the Obligations and all fees, costs and charges provided
for herein (including, without limitation, reasonable attorneys' fees) all for
the extent allowed by the Bankruptcy Code or such other act or law.
7.6 SUCCESSORS AND ASSIGNS.
----------------------
This Agreement shall be binding upon and inure to the benefit of the
successors and permitted assigns of the parties hereto.
7.7 SEVERABILITY.
------------
If any provision of any of the Loan Documents or the application
thereof to any party thereto or circumstances shall be invalid or unenforceable
to any extent, the remainder of such Loan Documents and the application of such
provisions to any other party thereto or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
7.8 NOTICES.
-------
All notices, requests and demands to or upon the respective parties
hereto shall be deemed to have been properly given or made when personally
delivered or 5 calendar days after being deposited in the mail, registered or
certified mail, return receipt requested, with sufficient postage prepaid,
addressed as follows or to such other address as may be designated hereafter in
writing by the respective parties hereto:
Borrower:
See Signature Page
Lender:
South Trust Bank, N.A.
One Georgia Center, 22nd Floor
600 West Peachtree Street
Atlanta, Georgia 30308
Attn: Barbara A. Gewert
Vice President
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<PAGE>
With a copy to:
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
Attn: Gerald T. Woods, Esq.
except in cases where it is expressly provided herein or by applicable law that
such notice, demand or request is not effective until received by the party to
whom it is addressed in which instance rejection or other refusal to accept or
the inability to deliver because of changed address of which no notice was given
shall be deemed to be receipt of the notice, demand or request sent. By giving
at least thirty (30) days written notice thereof, Borrower and Lender shall have
the right from time to time and at any time to change their respective addresses
and each shall have the right to specify any other address within the
continental United States of America.
7.9 ENTIRE AGREEMENT AMENDMENTS.
---------------------------
This Agreement, together with the Loan Documents executed in
connection therewith, collectively constitute the entire agreement between the
parties hereto with respect to the subject matter hereof. Neither this Agreement
or any Loan Document nor any provision hereof or thereof may be changed, waived,
discharged, modified or terminated orally, but only by an instrument in writing
signed by the party against whom enforcement is sought.
7.10 TIME OF THE ESSENCE.
-------------------
Time is of the essence in this Agreement and the other Loan Documents.
7.11 INTERPRETATION.
--------------
No provision of this Agreement shall be construed against or
interpreted to the disadvantage of any party hereto by any court or other
governmental or judicial authority by reason of such party having or being
deemed to have structured or dictated such provision.
7.12 LENDER NOT JOINT VENTURER.
-------------------------
Neither this Agreement nor any agreements, instruments, documents or
transactions contemplated hereby (including the Loan Documents) shall in any
respect be interpreted, deemed or construed as making Lender a partner or joint
venturer with Borrower or as creating any similar relationship or entity, and
Borrower agrees that it will not make any contrary assertion, contention, claim
or counterclaim in any action, suit or other legal proceeding involving Lender
or Borrower.
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<PAGE>
7.13 GOVERNING LAW; JURISDICTION.
---------------------------
THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE AT, ATLANTA, GEORGIA
AND SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO
DETERMINED, IN ACCORDANCE WITH THE INTERNAL LAWS, AND NOT THE LAW OF CONFLICTS,
OF THE STATE OF GEORGIA. AS PART OF THE CONSIDERATION FOR NEW VALUE THIS DAY
RECEIVED, BORROWER HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL
COURT LOCATED WITHIN THE STATE OF GEORGIA IN ANY ACTION INSTITUTED HEREUNDER, TO
THE EXTENT PERMITTED BY APPLICABLE LAW, WAIVES PERSONAL SERVICE OF ANY AND ALL
PROCESS UPON BORROWER, AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE BY
REGISTERED MAIL DIRECTED TO BORROWER AT THE ADDRESS SPECIFIED IN SECTION 7.8
ABOVE AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON ACTUAL RECEIPT
THEREOF. TO THE EXTENT PERMITTED BY APPLICABLE LAW, BORROWER WAIVES TRIAL BY
JURY AND WAIVES ANY OBJECTION TO JURISDICTION AND VENUE OF ANY ACTION INSTITUTED
HEREUNDER OR UNDER ANY LOAN DOCUMENTS, AGREES NOT TO ASSERT ANY DEFENSE BASED ON
LACK OF JURISDICTION OR VENUE, AND CONSENTS TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY ANY COURT. NOTHING CONTAINED IN
THIS SECTION, HOWEVER, SHALL AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS
IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE RIGHT OF LENDER TO BRING ANY
ACTION OR PROCEEDING AGAINST BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER
JURISDICTION.
7.14 ACCEPTANCE.
----------
This Agreement, together with the other Loan Documents, shall not
become effective unless and until delivered to Lender at its office in Atlanta,
Georgia and accepted in writing by Lender thereafter at such office as evidenced
by its execution hereof (notice of which delivery and acceptance is hereby
waived by Borrower).
7.15 PAYMENT ON NON-BUSINESS DAYS.
----------------------------
Whenever any payment to be made hereunder or under the Term Note shall
be stated to be due on a day which is not a Business Day, such payment may be
made on the next succeeding Business Day, and such extension of time shall in
such case be included in the computation of payment of interest hereunder or
under the Notes.
7.16 CURE OF DEFAULT BY LENDER.
-------------------------
If, hereafter, Borrower defaults in the performance of any duty or
obligation to Lender hereunder or under any Loan Document or to any other Person
(including, without limitation, any lessor, licensor, vendor, processor,
shipper, carrier or warehouseman), Lender may, at its option, but without
obligation, in order to protect or preserve Lender's credit, cure such default
and any costs, fees and expenses incurred by Lender in connection therewith
payment of taxes, shall bear interest at the Default Rate and shall be payable
on demand.
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<PAGE>
7.17 RECITALS.
--------
All recitals contained herein are hereby incorporated by reference
into this Agreement and made part thereof.
7.18 ATTORNEY-IN-FACT.
----------------
Borrower hereby designates, appoints and empowers Lender irrevocably
as its attorney-in-fact, at Borrower's cost and expense, to do in the name of
Borrower any and all actions which Lender may reasonably deem necessary or
advisable to protect, preserve or enforce its rights hereunder upon the failure,
refusal or inability of Borrower to do so within ten (10) days after notice by
Lender to Borrower, and Borrower hereby agrees to indemnify and hold Lender
harmless from any costs, damages, expenses or liabilities arising against or
actually incurred by Lender in connection therewith, except those arising from
the willful misconduct or gross negligence of Lender. This power of attorney,
being coupled with an interest, shall be irrevocable, shall continue until all
Obligations have been satisfied in full and this Agreement has been terminated
by Lender in writing and shall be in addition to Lender's other rights, powers
and remedies.
7.19 SOLE BENEFIT.
------------
The rights and benefits set forth in this Agreement and in all the
other Loan Documents are for the sole and exclusive benefit of the parties
thereto and may be relied upon only by them.
8. CONDITIONS PRECEDENT.
--------------------
The conditions precedent set forth below shall constitute express
conditions precedent to any obligation of Lender to make the Term Loan.
8.1 LOAN DOCUMENTS.
--------------
Receipt by Lender of the Term Note, the Pledge Agreement (accompanied
by certificates evidencing the stock pledged thereunder and stock powers
executed in blank) and all other Loan Documents not elsewhere more particularly
described herein, duly executed in form and substance acceptable to Lender.
8.2 GUARANTIES.
----------
Receipt by Lender of the Guaranties, the AHP Canada Pledge Agreement,
all other documents necessary or desirable to perfect Lender's security interest
in the collateral described therein, and all other Loan Documents to be executed
and delivered by Guarantors, together with appropriate certifications of
organization, authorization, incumbency and good standing; each to be in form
and substance satisfactory to Lender.
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<PAGE>
8.3 AHP US LOAN AGREEMENT AND LOAN DOCUMENTS.
----------------------------------------
Receipt by Lender of (a) amendments to the AHP US Loan Agreement and
the other "Loan Documents" (as defined therein) {including, without limitation,
the "Mortgage", as defined therein) to provide (i) for a reduction in the
amount of the "Revolving Line of Credit" (as defined therein) thereunder from
Ten Million Dollars ($10,000,000) to Five Million Dollars ($5,000,000), (ii)
that the obligations of AHP US under its Guaranty are secured by the
"Collateral" (as defined therein) and (iii) as to such other matters as Lender
shall deem necessary or appropriate in connection with the transactions
contemplated hereby; (b) reaffirmations of all guaranties of the obligations of
AHP US under the AHP US Loan Agreement; and (c) such title policy endorsements,
certifications and other documents as Lender shall deem necessary or appropriate
in connection with the foregoing.
8.4 OPINIONS OF COUNSEL.
-------------------
Receipt by Lender of opinion of Borrower's, the Trusts' and the other
Guarantors' counsel in form and substance satisfactory to Lender.
8.5 MISCELLANEOUS.
-------------
Receipt by Lender of such other documents, certificates, instruments
and agreements as shall be required hereunder or provided for herein or as
Lender or Lender's counsel may require in connection herewith.
8.6 NO DEFAULT.
----------
There shall exist no Default Condition or Event of Default;
8.7 REPRESENTATIONS TRUE.
--------------------
All representations and warranties contained herein shall be true and
correct in all material respects with the same effect as though such
representations and warranties had been made on and as of the date of the Term
Loan is made.
8.8 LEVERAGE RATIO.
--------------
After giving effect to the transactions contemplated hereby, the
"Leverage Ratio" (as defined in the AHP US Loan Agreement) shall be not more
than 2.00 to 1.00.
8.9 FINANCIAL STATEMENTS.
--------------------
Lender shall have received financial statements for Borrower, prepared
as of a current date, in form and substance satisfactory to Lender.
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8.10. CERTAIN AGREEMENTS.
------------------
Lender shall have received copies of "The Cavalino Trust" and "Mr.
Brandon Wang's Cayman Interest in Possession Settlement", each of which shall be
satisfactory to Lender in all respects.
8.11 COMPLIANCE WITH CONDITIONS.
--------------------------
Borrower's request for disbursement of the Term Loan, and the
acceptance by Borrower of the proceeds thereof, shall constitute a
representation and warranty by Borrower, as of the date of such disbursement of
the Term Loan, that the applicable conditions specified in Sections 8.1 through
8.10 have been fully satisfied.
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<PAGE>
IN WITNESS WHEREOF, Borrower and Lender each have set their hands and
Borrower as affixed his seal, all as of the day and year first above written.
SOUTHTRUST BANK, N. A.
By: /s/ Barbara A. Gewert
----------------------------------
Barbara A. Gewert
Vice President
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<PAGE>
/s/ Brandon SL Wang
-------------------------------- (SEAL)
Brandon SL Wang
Signed, sealed and delivered by Address for Notices to Borrower:
Brandon SL Wang in the
presence of: c/o DSG International, Ltd.
-------------------------------------
The Old PumpHouse
-------------------------------------
35 Kensington Court Place
-------------------------------------
London, W8 5 BJ England
-------------------------------------
Fax 4471-938-4134
/s/ Diane S. White
- -------------------------------------
Witness
/s/ Judy Zisholtz
- -------------------------------------
Notary Public
My commission expires:
December 31, 1997
- -------------------------------------
[NOTARY SEAL]
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<PAGE>
EXHIBIT 11
COMPUTATION OF NET INCOME PER ORDINARY SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
---- ---- ----
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Number of ordinary shares
Ordinary shares outstanding, beginning of year 7,712 7,922 8,315
Ordinary shares repurchased 5 240 393
Ordinary shares tendered (1) 1,004 -
Ordinary shares cancelled 1,034 603 -
======= ====== ======
Weighted average shares outstanding during the year 6,674 7,747 8,109
======= ====== ======
Net income $ 974 $9,166 $4,687
======= ====== ======
Earnings per share $ 0.15 $ 1.18 $ 0.58
======= ====== ======
</TABLE>
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