-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cw6OtN207nFTXIhKFEJsMWJfNH2OjR1OyWzB1rrEmyemQFS6sXM4p1beCGBzchCq FxtHja2aPVMmyE9vCCyQRg== 0000929624-97-000692.txt : 19970610 0000929624-97-000692.hdr.sgml : 19970610 ACCESSION NUMBER: 0000929624-97-000692 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970606 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DSG INTERNATIONAL LTD CENTRAL INDEX KEY: 0000883230 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 000000000 STATE OF INCORPORATION: D8 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-19804 FILM NUMBER: 97620504 BUSINESS ADDRESS: STREET 1: 17/F WATSON CENTRE STREET 2: 16-22 KUNG YIP ST CITY: KWAI CHUNG HONG KONG STATE: K3 BUSINESS PHONE: 8524276951 MAIL ADDRESS: STREET 1: 17/F WATSON CENTRE STREET 2: 16-22 KUNG YIP ST CITY: KWAI CHUNG HONG KONG STATE: K3 20-F 1 FORM 20-F ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 Commission file number 33-45136 DSG INTERNATIONAL LIMITED ------------------------------------- (Exact name of Registrant as specified in its charter) ------------------------------------- (Translation of Registrant's name into English) British Virgin Islands ------------------------------------- (Jurisdiction of incorporation or organization) 17/F Watson Centre 16-22 Kung Yip St., Kwai Chung, Hong Kong Tel. No. 852-2427-6951 ------------------------------------- (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- None Securities registered or to be registered pursuant to Section 12(g) of the Act. Ordinary Shares, par value $0.01 per share ("Ordinary Shares") ------------------------------------- (Title of Class) ------------------------------------- (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None ------------------------------------- (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. Ordinary Shares 6,678,359 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark which financial statement item the registrant has elected to follow. [ ] Item 17 [X] Item 18 (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No ================================================================================ ITEM 1. DESCRIPTION OF BUSINESS. A. THE COMPANY The Company was founded in Hong Kong in 1973, and was the first manufacturer of disposable diapers in Hong Kong and one of the first companies to offer disposable diapers to Hong Kong consumers. The Company also exports its products from Hong Kong to other countries in Asia, including Singapore, Thailand and Malaysia. 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 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 disposable diaper manufacturer in Australia. Also in 1988, the Company acquired the assets, including brand names, of the unprofitable disposable 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 diaper and feminine napkin manufacturing division of a Swiss company. In September 1993, the Company acquired an unprofitable private label disposable diaper and feminine napkin manufacturing company in Canada. At the end of December 1993, the Company further acquired an unprofitable branded product disposable diaper manufacturer in the United Kingdom. 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 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 nor 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. DSG International Limited is incorporated in the British Virgin Islands and has its principal executive office at 17/F Watson Centre, 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 diapers 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)" and "CERTAINTY(R)". The Company also manufactures and markets disposable diapers and feminine napkins under private labels. The Company's products are sold internationally, with its eleven manufacturing facilities being in Hong Kong, the United States, Australia, the United Kingdom, Singapore. Switzerland, Canada, the People's Republic of China ("PRC") and Thailand. The Company's operation in the United States, the Company's largest operation, in association with the Company's operation in Canada, manufactures and distributes branded and private label disposable baby diapers, adult incontinence products, 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), with a market share in the food and grocery store sector estimated by the Company to be approximately 3% on a volume basis. In Australia, where the Company is one of the leading disposable baby diaper manufacturers, the Company estimates that it has an overall market share of approximately 22% on a volume basis, placing it second in that market. The Australian market is divided into the pharmacy sector and the grocery store sector, and the Company is currently providing brands of both premium quality and ultra quality to both of these market sectors. The Company also markets disposable baby diapers under private labels. In 1996, the Company's private labels accounted for approximately 16% of its Australian sales. The Company estimates that its share of the disposable baby diaper markets in Hong Kong, Singapore and Malaysia ranges from 20% to 25%, placing it one of the market leaders in those countries. In the PRC and Thailand, the Company's leading brands, "FITTI(R)" and "PET PET(R)", are well established. With its manufacturing plants in the PRC and in Thailand, the Company believes that it will continue to expand sales in the PRC, Thailand and other markets in the Asia Pacific region. The Company entered the Asian adult incontinence market through its operation in Thailand in 1995 with the launch of its "DISPO 123(TM)" brand. The Company believes that the market for adult incontinence products will provide good growth and profit opportunities for the Company. 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. 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 2 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'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 diapers and feminine napkins manufacturers in the United States, Australia, the United Kingdom, Canada and Switzerland. The Company intends to seek further opportunities to expand through acquisitions and will 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. Raw materials account for about three-quarters of the cost of goods sold. The principal raw material is fluff wood pulp, the cost of which increased significantly in 1995 but declined in 1996. The improved profitability which resulted from the softening of fluff wood pulp prices was partially offset by the continued intense price and promotional competition, especially in North America. 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 sublayer, 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. 3 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 and Switzerland. 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, and 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 believes the fluff wood pulp prices will remain stable and that the intense price and promotional competition, especially in North America, will continue in 1997. 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. 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.
1996 1995 1994 ---- ---- ---- Net sales North America ............. 39.2% 45.3% 50.7% Australia ................. 20.2 18.0 17.6 Asia ...................... 25.6 19.5 16.9 Europe .................... 15.0 17.2 14.8 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
4
1996 1995 1994 ---- ---- ---- Operating income (loss) North America................. 65.9% 106.8% 88.8% Australia..................... 32.6 25.3% 26.8 Asia.......................... 42.7 34.4 16.6 Europe........................ 0.2 (24.5) (5.8) Corporate expenses............ (41.4) (42.0) (26.4) ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
a. North America i. Products The Company manufactures and distributes disposable baby diapers, disposable training and youth pants, adult incontinence 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. "FITTI(R)" baby diapers are available in both Ultra-Thin and Supreme (cloth back) varieties. 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. "FITTI(R)" remains the only "value-brand" in the market to offer a supreme style diaper, other than private labels. This product incorporates the cloth-like DrySoft cover, along with a SoftGrip mechanical tape closure system. The Company has also launched economical "jumbo" packs to the marketplace under the "FITTI(R)" brand. These have been very 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 customers like Walgreens Drug, Woolworths, A&P, Topco, Shurfine International, Hannaford Bros, McLane (division of Wal-Mart) and Costco Wholesale. On the feminine hygiene side, the Company's focus remains on private label with major North American retailers like Safeway, Walgreens, A&P, Sobeys, Kmart and Uniprix Drug. In the external feminine protection segment, the Company provides a full range of quality products including contour, winged, ultra-thin and panty liner products. The Company successfully launched its adult incontinence products in late 1996. The products are available under both the "CERTAINTY(R)" brand name as well as selected private labels. Offered under the "CERTAINTY(R)" brand are briefs, feminine bladder control pads, and feminine bladder control guards. All of these products provide the incontinent sufferer with product features and performance that the Company believes are far superior to any other brand now available in North America. In all cases, the Company is offering products with genuine points of difference and exclusive benefits. This has helped enhance acceptance of this new program. Other new products are on the horizon, which will assure the Company's position as the sole provider of "premium" products. The "CERTAINTY(R)" brand is gaining good distribution with retailers like ShopRite, Pathmark, A&P, Meijer Stores, Longs Drug, Albertsons and Fred Meyer. Private label partnerships are being developed with major retailers like Walgreens, Rite-Aid and Eckerd Drug. 5 ii. Sales and Marketing Disposable 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 continues to expand its distribution base on its "FITTI(R)" brand with new retail customers coming on board in Canada, the United States and Puerto Rico. Puerto Rico and the Virgin Islands represent an excellent opportunity for additional sales and expanded retail distribution. Sales of the "FITTI(R)" brand disposable training pants have been excellent with steady volume growth. The product was repositioned in 1996 with better features for the consumer at no additional cost. The Company has divided the North American market primarily into four regions: the Western region serviced out of the Los Angeles facility, the Canadian region which encompasses Canada and parts of the Northeastern United States serviced by the Brantford, Ontario facility in Canada; and the Southeastern, Midwestern and Caribbean regions are serviced by the Company's facility in Atlanta, 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 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/education and to remain flexible and responsive to trade and 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. While sales volume declined slightly from 1995 levels due to the continuing intense price and promotional pressure and 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. For the quarter ended December 31, 1996, "FITTI(R)" brand's share was 3% of the total units of disposable baby diapers and training pants sold in grocery outlets in the United States. The grocery store sector represents approximately 56% of the $4 billion in the United States retail market. The Company's products are sold nationwide and "FITTI(R)" Medium and Large Ultra-Thin sizes both rank in the top 35 quartile in actual unit sales for the total U.S. grocery market, out of more than 150 items in national distribution. In certain markets, such as New York, the nation's largest retail market, the Company believes that the "FITTI(R)" brand share is much greater than conventional market share data would indicate because of the high percentage of "FITTI(R)" brand diapers being sold through wholesale and inner city outlets that are not reporting to typical market research organizations. With only 35% of the actual volume reflected by market share data, "FITTI(R)" achieved a share of 7.2% of that market for the quarter ended December 31, 1996. This compares to a market share of 4.7% for the quarter ended March 31, 1996. In other markets such as Arizona, Kansas, Oklahoma and Colorado, the Company believes that the "FITTI(R)" brand's 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, packaging with great shelf impact, creative and effective promotions combined with very efficient distribution, electronic data interchange capability and a high level of customer service. The Company was the first diaper manufacturer to offer a unique "free pre-paid long distance phone card offer" to the consumer. The promotion was very successful at generating "FITTI(R)" trial by targeting a high telephone user group: new, young parents and grandparents. 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 against the primary diaper selling class of 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, Winn Dixie, Albertsons, Super Value, Fleming, Giant Eagle, King Soopers, Ralphs Grocery and Stop & Shop. The Company continues to target the non-food 6 class of trade as a major area of opportunity for growth in the future. Current non-food retail partners include Ames, Shopko, Woolworth, Kmart/Canada, PharMor and Meijer. The Company began its launch of adult incontinence products in 1996. On the branded side, "CERTAINTY(R)" is off to an excellent start. Initial retail distribution gains have been made at major retailers such as Pathmark, ShopRite, A&P, Waldbaums, Albertsons, Safeway, Longs Drug, Meijer and H.E. Butt. The Company feels confident that this branded distribution will continue to expand at a healthy rate. Already, the Company has new product entries in the development stage. The Company's strategy is to provide products to the marketplace that the Company believes 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 drug store trade now represents more than 50% of the total $500 million in adult incontinent retail sales in the United States. In addition, growth potential for this category remains high as the population ages. The Company's strategy with the major non-food retailers is to create a premium tier private label for them. This strategy is already paying dividends, with distribution secured and new partnerships established at Walgreens Drug, Rite-Aid Drug and Eckerd Drug. Additional retailers are targeted as well. Lastly, we have entered into an initial partnership with a major institutional distributor, which launched the Company into a new area of opportunity. They will begin with the purchase and distribution of the Company's premium adult brief product and expand into its full range. This distributor has access to the national institutional market, which represents more than $750 million in adult incontinent product sales. The adult category represents an area of significant sales and distribution growth for the Company, and significant gains are expected in 1997. Private Label. This segment of the Company's business is also a major area of potential growth. On the disposable diaper side, new partnerships are underway with major retailers like Price/Costco Clubs, A&P stores, Topco and Rich Foods. Existing private label partnerships with major retailers like Walgreens Drug, Shurfine International, Woolworth, Uniprix, Loblaws, 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 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, Supreme-style 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 of which most major North American retailers are already aware. b. AUSTRALIA i. Products In Australia, the Company manufactures and markets disposable diapers both under its own brand names and under private labels. The Company's own brands accounted for over 81% of its Australian sales for 1996. The Company currently has four major brands of disposable diapers in Australia, two of which are targeted at the pharmacy sector, and two of which are targeted at the grocery store sector. "COSIES(R)", a premium quality, value priced "ultra" diaper with multi-strand leg elastics, printed frontal tape closure system, soft elastic waistband and stand-up leg gathers, and "COSIFITS(R)", an "ultra" diaper with multi-strand leg elastics and frontal tape closure system, are distributed through the pharmacy sector; while "BABYLOVE(R)", an "ultra" diaper similar to "COSIES(R)", and "LULLABY(R)", an "ultra" diaper similar to "COSIFITS(R)", are targeted at the food and grocery store sector. During 1996, the Company introduced the "VLESI(R)" range of adult incontinence products into the Australian institutional market. 7 ii. Sales and Marketing The Australian retail market for disposable diapers has grown from approximately $94 million in 1988, when the Company first entered the market, to approximately $336 million in the twelve months ended December 1996/1/. The growth of the total market in units was 5.7%, from 760 million diapers in 1995 to 804 million diapers in 1996. The Company believes that market utilization for disposable diapers is approximately 55%, and is expected to increase to the level of other industrialized Western countries. Branded products comprise approximately 88% of the Australian market, with the remaining 12% 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 diaper market. A major U.S. national manufacturer has approximately 64% of the market. The Company markets and distributes the Company's branded products in Australia in conjunction with independent brokers, who market and facilitate distribution of the Company's products to the pharmacy and food and grocery store sectors in each Australian state. Branded Products. The Company's branded products, "COSIFITS(R)", "COSIES(R)" and "COSIES(R) NIGHT-TIME", which was introduced specially designed for night time extended use, are targeted at the pharmacy sector. This sector, which accounts for approximately 21% of all disposable diaper sales in Australia, consists of a large number of small and independent pharmacies which generally do not have their own private label programs. The Company has successfully pursued a strategy of encouraging these independent pharmacies to carry the Company's brands, which are supported by national advertising and promotion, and provide profit margins which are comparable to those typically offered by private label programs. The pharmacy sector is highly fragmented, and the Company sells to large wholesalers of pharmaceutical products in Australia, such as Sigma Company, F. H. Faulding Wholesale, and Australian Pharmaceutical Industries, who distribute the products to individual pharmacies. The Company's branded products, "BABYLOVE(R)" and "LULLABY(R)" are targeted at the food and grocery store sector, which accounts for approximately 79% of all disposable diaper sales in Australia. The food and grocery retail sector in Australia is highly concentrated, and the Company's marketing strategy in this sector is similar to that which it pursues with its "FITTI(R)" brand products in other markets. The Company's retail customers in the food and grocery sector in Australia include Woolworths, Safeway, Coles Myer and Franklins. Private Label. Private label products accounted for approximately 12% of the Australian market for disposable diapers in 1996, and the Company believes that it currently has approximately 35% share of the private label market in Australia. The Company has private label programs with major retail chains, such as Franklins, Target and other retailers. As in other markets, price and reliable service are the primary factors in determining a retailer's choice of private label manufacturer. The Company maintains its market position in this sector by working together with its private label customers to design and regularly incorporate new product improvements while maintaining competitive prices. Institutional Products. The Company has engaged a sales team to cover the institutional market for adult incontinence products. The adult incontinence market is concentrated in institutions with a slowly developing retail distribution. The Company intends to be a supplier with a full range of such products in both the institutional and retail markets. /1/ Source: AC Nielsen Sami, January 1997. 8 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 in 1996 accounted for approximately 41% and 50%, respectively, 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 sublayer, 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. The "DISPO 123(TM)" product is an ultra anatomic diaper, featuring multi-strand leg elastics, frontal tape closure system and stand-up leg gathers, designed for the convenience of males and females having various degrees of incontinence. ii. Sales and Marketing The Company continued to command strong market positions in both the mature markets of Hong Kong and Singapore in 1996. In addition, the Company's recently established manufacturing facilities in the PRC and Thailand have quickly expanded their sales in the PRC, Thailand and Indonesian markets, capitalising on the increasing usage of disposable baby diapers in those countries. The Company also focuses on other potential and emerging markets and 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 at about 25%. 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 which are most likely to expand in late l990s. 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. In Singapore, the Company's products are distributed by its own sales force in the two largest self service outlets, namely NTUC and Econ Minimart, besides the other high-end retail outlets. The Company also appointed distributors to distribute to the lower retail sector comprising of medical halls and provision/sundry shops. The Company estimates that the size of the market in 1996 was $36 million and the Company's market share was approximately 20%. 9 In Malaysia, which the Company has identified as one of the fastest growing markets in the region, the Company estimated that the total market size was approximately $60 million in 1996. The Company believes that its sales in this market will grow further as the usage of disposable baby diapers continues to increase. 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 which 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 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 and is expected to increase to the level of industrialized Western countries. 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. The Company's products are distributed to supermarkets and department stores by its own nationwide sales force. The Company estimates that its market share was about 12.5% 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. 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 facilities in Hong Kong and Singapore. 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. d. EUROPE i. Products The Company manufactures and markets disposable diapers under its own brands in the United Kingdom, and manufactures private label disposable 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)", "TOGS(R)", "CARES(R)" and "VLESI(R)". "FITTI(R)" and "TOGS(R)" are "ultra" diapers that feature multi-strand leg elastics, stand-up leg gathers, frontal tape, printed design backsheet and an extra-dry sublayer. "COSIFITS(R)" and "CARES(R)" are regular "ultra" products featuring frontal tape, an extra-dry sublayer and multi-strand leg elastics. "VLESI(R)" is an "ultra" adult incontinence product range consisting of adult incontinence slips, anatomic pads and underpads for the institutional market in Switzerland and Europe. 10 ii. Sales and Marketing The U.K. retail disposable diaper market in 1996 was approximately $708 million. Approximately 92% of the market was accounted for by branded products and 8% was accounted for by private labels. The Company's strategy is to emphasize its branded products which are sold to regional retailers by offering a value-oriented product with good profit margins and a high level of service. The Company's branded products are distributed to wholesalers and regional chains. In Switzerland, the disposable diaper market is dominated by a U.S. national brand and the private brand of a major retail chain which has over 50% of retail sales in the country. The Company is one of the two disposable diaper manufacturers and the major feminine napkin supplier for this chain. The Company believes that its Swiss operation will enable it to compete in the disposable diaper and feminine napkin markets in Europe. The Company's second operation in the Eastern region of Switzerland manufactures branded and private label adult incontinence products and distributes the products primarily through the institutional trade. The Company estimates that its market share in the Swiss adult incontinence market is approximately 30%. The Company is expanding its market for adult incontinence products in Europe. 3. Competition The disposable 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 maintain a viable market position in the face of very strong competition from the industry leaders. a. NORTH AMERICA The North American disposable baby diaper market remains dominated by the brands of the two major U.S. manufacturers, P&G and K-C. Their combined market share of the disposable baby diaper market is 70%, including the disposable training pant and youth pant segments. Total category unit sales are now declining at the rate of about 2%, with volume continuing to move slowly from the food and drug sectors to the mass (discount) merchandisers. In 1996, 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 the Pampers and Luvs brands, they have spent heavily promoting these 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 that goes as far as declining 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 called "conventional" has now become "premium". The value segment, which now includes the Luvs brand, private labels and the Company's "FITTI(R)" brands, now accounts for more than 50% of all sales in the grocery class of trade. 11 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 to target key markets with free standing coupon insert drops, targeted trade promotions, greatly enhanced product features and performance, and 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 produced a far greater margin contribution than in the previous 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 far superior to what any other manufacturer can provide currently. The added advantage comes from the fact that this category, more than most, has the greatest need for better products to meet the performance requirements of consumers. The Company has a product strategy, which will ensure that it is able to maintain this competitive edge well into 1997 and beyond. This competitive edge will also allow the Company to make quick inroads into the private label incontinent sector being able to offer premium products at competitive prices. This segment also presents a better margin opportunity because pricing and promotional strategies from the major manufacturers have remained much more stable than in baby diapers. 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 64% in 1996. The Company believes it is able to compete successfully in Australia because its strategy of targeting different brands at different customer categories allows it greater flexibility in providing attractive margin and promotional incentives to its customers. 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. d. EUROPE In the United Kingdom, the 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 which has affected the volume of most private labels and other brands. The Company believes that, by pursuing a flexible brand strategy, it will be able to maintain its share of the market, despite the strong competition from the industry leaders. In continental Europe, the Company pursues expansion of its branded products and private label program in disposable diapers and feminine napkins with other major retail chains outside of Switzerland. The Company has commenced marketing of its adult incontinence products in the retail trade in European markets. 4. Trademarks and Patents Brand identification is an important element in marketing the Company's products, and the Company recognizes the importance of its trademarks to the success of its business. The Company has registered its major trademarks or has applications pending in each of the major markets in which its products are sold, and it has applications pending in several other countries for many of its other trademarks. As the Company determines to pursue opportunities in new markets, it seeks registration of the trademarks under which it will market its products in those countries. 12 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. 5. Product Design and Development The Company actively monitors trends in the United States and Europe in relation to changes in product features, consumer preferences, and the impact of environmental laws and regulations on the disposable diaper industry. Although the Company does not devote substantial expenditure to research and development, it constantly seeks to improve its products by substitution of materials and components, and of product features, to systematically improve the performance of its diapers for better absorbency and improved leakage protection. In particular, the Company monitors world-wide developments in various raw material components to enable the Company to take advantage of the latest developments, and in certain cases the Company has worked closely with suppliers to pioneer the use of such materials in the manufacture of disposable diapers. With respect to packaging, the Company retains consultants in its various markets to design packaging for the products which are sold under the Company's own brands. Packaging for products sold under private labels is either designed and developed by the retailer's own design department, or by design consultants engaged by the Company working together with the retailer's design department. 6. Manufacturing Process The manufacturing process begins with the purchase of raw materials, the most important of which is fluff wood pulp. The fluff wood pulp is first fed through a hammer mill to make a soft, absorbent core that is placed on a polyethylene backsheet. In the case of "ultra" diapers, super absorbent polymer is then added. The liner layers, leg elastics, tape and other applicable features are then fed into the manufacturing equipment which shapes and produces the finished product. Because of the high level of automation in the production process, significant components of manufacturing efficiency result from prevention of production line stoppages and reducing the defect rate. Manual labor is involved primarily in packing and shipping, and labor costs represent only a small fraction of the Company's total net sales. The Company maintains constant quality control throughout the production process, commencing with the incoming raw materials and continuing through dispatch of the finished product. Each of the Company's diaper lines has a full-time inspector assigned to assure quality control at all stages of the production process, and line inspections and batch testing are made on a continuous basis. Because of the relatively high cost of shipping the finished product, the Company has established manufacturing facilities near its major markets, and raw materials (which can generally be transported at lower cost) are shipped to the manufacturing facilities. The Company believes that this improves its efficiency and enhances its competitiveness by reducing shipping costs, shortening the distribution chain and improving customer service. 7. Raw Materials The raw material components used in the manufacturing process are fluff wood pulp, super absorbent polymer, polyethylene backsheet, polypropylene non-woven liner, adhesive closure tape, hotmelt adhesive, elastic 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, and the Company believes it may stabilize in 1997. Other raw materials 13 are purchased from various sources, also depending on price, quality and availability. The Company maintains good and long term relationships with its raw materials suppliers. The Company's Chief Purchasing Officer oversees the purchasing and sourcing policies of each of the Company's manufacturing facilities and is responsible for new material developments and keeping track of all world-wide producers of raw materials. He also negotiates and determines the purchase of the Company's major raw materials with the Company's key raw material suppliers. The Company has negotiated supply contracts with several of its key suppliers. Such arrangements are generally designed to achieve volume discounts on price and to assure supply stability. In the event of unacceptable price increases, the Company usually has the right to terminate the arrangement upon specified notice periods, which generally range from two to three months. Some of the suppliers of raw materials to the Company also manufacture disposable diapers which compete with the Company's products. The Company has not experienced any difficulty with its raw material suppliers who are in competition with it on sales of finished product, but nevertheless it takes steps to ensure that it has alternative sources of supply available. The main source of energy for the Company's plants is electricity. The automated process for manufacturing disposable diapers consumes larger amounts of electricity than many other light industries, but none of the Company's operating subsidiaries has experienced any problems with electricity supply. 8. Inventory Practice and Order Backlog The disposable diaper industry is generally characterized by prompt delivery by manufacturers and rapid movement of the product through retail outlets. The lead time between placing an order and shipment to the local customer averages five to ten days. The Company maintains varying levels of raw material and finished product inventory depending on lead time and shipping schedules. The Company's inventory levels generally vary between three to six weeks. Due to the short lead time between order and delivery of product, the Company does not maintain a significant backlog. 9. Customs and Import Duties Some of the raw materials used in manufacturing the Company's products are subject to import duties at varying rates in the countries in which the Company's manufacturing facilities are located. However, import duties on raw materials do not represent a significant part of the cost of the finished product and, in most cases, the import duties are refundable if the finished goods are exported from the countries of manufacture. Imports of finished products to some of the markets are subject to import duties at various rates. However, such duties are usually incorporated in the selling price of the finished product. 10. Employees The Company has a total of approximately 1,317 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. 14 The Company closely monitors environmental laws and regulations pertaining to disposal of solid waste, which includes household refuse, packaging and paper materials, and yardwaste, in addition to disposable diapers, in each of the markets in which its products are sold. The Company is not aware of any such laws or regulations which would have a material adverse effect on the Company's business as presently conducted and proposed to be conducted. A number of states in the United States have passed legislation that is intended to discourage the use of disposable products such as beverage containers, certain packaging materials and disposable diapers, or to encourage the use of non-disposable or recyclable products. The Company believes that it will not have to make any changes to its products to comply with presently existing environmental laws and regulations in the markets in which its products are sold. The Company endeavors to develop products which are environmentally responsible by closely monitoring world-wide developments in various raw material components and actively works with suppliers to develop and market products utilizing such components. 12. Insurance All of the Company's plant, machinery and inventories are covered by fire and extended coverage insurance. The Company maintains product liability insurance in amounts it believes to be adequate in all its operations, except for its operations in Asia where local manufacturers customarily do not carry product liability insurance because the risk of product liability lawsuits is considered to be slight. ITEM 2. DESCRIPTION OF PROPERTY. The Company operates eleven manufacturing facilities, with plants located in the United States at Bell, California (near Los Angeles), and at Duluth, Georgia (near Atlanta); in Hong Kong; in Melbourne, Australia; at Chesterfield, U.K.; in Singapore; at Mettmenstetten, Switzerland; at Brantford (near Toronto), Canada; at Goldach, Switzerland; at Zhongshan, Guangdong, PRC; and at Bangkok, Thailand. The Company utilizes an aggregate of approximately 1,061,013 square feet of space in its manufacturing operations. The Company believes that its plant and facilities are adequate for its present operations, but it will require expanded facilities if past growth trends in the Company's business continue. The following table summarizes the physical properties that are used by the Company in its manufacturing and distribution operations:
APPROXIMATE LEASE SIZE OWNED/ EXPIRATION DATE LOCATION USE (SQ. FEET) LEASED DATE OPENED -------- --- ---------- ------ ---------- ------ Duluth, GA Manufacturing 155,625 Owned N/A Dec. 1993 Bell, CA Manufacturing 62,024 Leased Aug. 1997 Mar. 1984 Brantford, Canada Manufacturing 89,000 Owned N/A Sep. 1993 Hong Kong Manufacturing 111,701 Leased Jun. 1997 Jul. 1978 Singapore Manufacturing 43,540 Leased Apr. 2021/(1)/ May 1991 Melbourne, Australia Manufacturing 161,000 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 Zhongshan, PRC Manufacturing 66,043 Leased Oct. 2044 Dec. 1994 Bangkok, Thailand Manufacturing 68,805 Owned N/A Apr. 1995 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
/(1)/ The Company has an option to renew this lease for a further 30-year term. 15 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. 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, 1996 is known by the Company to own 10% or more of the Company's outstanding Ordinary Shares and by all directors and officers as a group.
ORDINARY SHARES BENEFICIALLY OWNED --------------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT - ------------------------ --------- ------- 10% or more shareholders (Brandon Wang) ...................................3,321,680/1/ 9.74% Directors and Officers as a Group (11 persons) ............................4,427,846/1//2/ 66.30%
/1/ Includes 140,580 Ordinary Shares owned by Brandon Wang's wife, Eileen Wang, as to which he disclaims beneficial ownership. /2/ includes 123,000 Ordinary Shares owned by Benedict Wang's wife, Suk Yee Heyley Sham, as to which he disclaims beneficial ownership; and 117,000 Ordinary Shares owned by S.L. Wang's wife, Pei Fang Wang, as to which he disclaims beneficial ownership. Brandon Wang and seven other members of Management own more than 50% of the Company's outstanding Ordinary Shares and, acting together, are able to control the election of the Board of Directors, and thus the direction and future operations of the Company, including decisions regarding acquisitions and other business opportunities, the declaration of dividends and the issuance of additional Ordinary Shares and other securities, in each case without the supporting vote of any other shareholder of the Company. In addition, Brandon Wang is controlling shareholder of the Company and thus may be deemed to be a parent of the Company under the rules and regulations of the Securities Exchange Act of 1934. The Company knows of no arrangements the operation of which may at a subsequent date result in a change in control of the Company. 16 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, 1996, the total number of record holders was 41, of which 30, representing 49.18% of Ordinary Shares, were in the United States. Ordinary Share Price:
1996 1995 ---------------------------- ---------------------------- QUARTER HIGH LOW HIGH LOW ------- ---- --- ---- --- First $15 1/2 $12 1/2 $17 3/4 $11 Second 15 1/8 10 7/8 19 1/2 13 1/4 Third 11 5/8 10 1/4 18 5/8 8 1/2 Fourth 14 7/8 11 1/4 13 10
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., a U.S. citizen or resident, a U.S. corporation, and an estate or trust subject to U.S. tax on all of its income regardless of source) (a "U.S. Investor") owning Ordinary Shares. In addition, the following discussion does not address the tax consequences to a person who owns (or will own), directly, indirectly or constructively, 10% or more of the Ordinary Shares (a "10% Shareholder"). Non-U.S. persons and 10% Shareholders are advised to consult their own tax advisors regarding the tax considerations incident to ownership of the Ordinary Shares. 17 A U.S. Investor receiving a distribution with respect to the Ordinary Shares will be required to include such distribution in gross income as a taxable dividend to the extent such distribution is paid from earnings and profits of the Company as determined under U.S. federal income tax principles. Any distributions in excess of the earnings and profits of the Company will first be treated, for U.S. federal income tax purposes, as a nontaxable return of capital to the extent of the U.S. Investor's basis in the Ordinary Shares, and then as a gain from the sale or exchange of a capital asset, provided that the Ordinary Shares constitute capital assets in the hands of the U.S. Investor. U.S. corporate shareholders will not be entitled to any deduction for distributions received as dividends on the Ordinary Shares. Gain or loss on the sale or exchange of the Ordinary Shares will be treated as capital gain or loss if the Ordinary Shares are held as a capital asset by the U.S. Investor. Such capital gain or loss will be a long-term capital gain or loss if the U.S. Investor has a holding period of more than one year with respect to the Ordinary Shares at the time of the sale or exchange. Various provisions contained in the U.S. Internal Revenue Code (the "Code") impose special taxes in certain circumstances on non-U.S. corporations and their shareholders. The following is a summary of certain provisions which could have an adverse impact on the Company and the U.S. Investors: 1. Personal Holding Companies Sections 541 through 547 of the Code relate to the classification of certain corporations (including foreign corporations) as personal holding companies ("PHCs") and the consequent taxation of such corporations on certain of their U.S.-sourced income (including certain types of foreign sourced income which are effectively connected with the conduct of a U.S. trade or business) to the extent amounts at least equal to such income are not distributed to their shareholders. A PHC is a corporation (i) more than 50% of the value of the stock of which is owned, directly or indirectly, by five or fewer individuals (without regard to their citizenship or residence), and (ii) which, if a foreign corporation, receives 60% or more of such U.S.-related gross income, as specially adjusted, from certain passive sources (such as dividends, interest, royalties or rents). If the Company is classified as a PHC, a tax will be levied at the rate of 39.6% on the Company's undistributed U.S. taxable income. While more than 50% of the Ordinary Shares may be treated as owned (either directly or indirectly) by five or fewer individuals, the Company intends to cause its indirect U.K. subsidiary, the owner of the U.S. branch, together with such corporation's immediate U.K.-resident parent corporation, to distribute any amounts which would otherwise be characterized as "undistributed personal holding company income" in the hands of either corporation with the intent that such distributions would cause such distributed amounts to lose their character as "United States source" taxable income subject to the PHC tax. 2. Foreign Personal Holding Companies Sections 551 through 558 of the Code relate to foreign personal holding companies ("FPHCs") and impute undistributed income of certain foreign corporations to U.S. persons who are shareholders of such corporations. A foreign corporation will be classified as a FPHC if (i) five or fewer individuals, who are U.S. citizens or residents, directly or indirectly own more than 50% of the corporation's stock (measured either by voting power or value) (the "shareholder test") and (ii) the Company receives 60% or more of its gross income (regardless of source), as specially adjusted, from certain passive sources (the "income test"). The Company believes that it is not currently and has not been a FPHC for any taxable year since its formation because for each such year either or both of the income test and the shareholder test were not met. It is possible that subsequent events would cause the Company to meet either or both of the income test and the shareholder test. In the opinion of the Company, however, it is unlikely that the shareholder test would be met, especially in view of the inclusion of certain transfer restrictions in the Company's governing documents. See "Description of Securities". 18 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. 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. 4. 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 such as being a non-U.S. person, 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. 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. 19 There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands. In addition, the Ordinary Shares are not subject to any transfer taxes, stamp duties or similar charges in the British Virgin Islands. There is no income tax treaty or convention currently in effect between the United States and the British Virgin Islands, nor is any such treaty or convention currently being negotiated. ITEM 8. SELECTED CONSOLIDATED FINANCIAL DATA. The information required by Item 8 is contained in page 34 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 14 of the Annual Report to Shareholders, and is incorporated herein by reference. A. EXCHANGE RATE INFORMATION The Consolidated Financial Statements of the Company are prepared in U.S. dollars because this is the currency of the primary economic environment in which the Company operates and the majority of the revenues are received and expenses are disbursed 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, Renminbi 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. B. POSSIBLE ADVERSE EFFECT ON THE COMPANY OF A CHANGE IN THE FUTURE STATUS OF HONG KONG The Company has its principal executive office and one of its manufacturing facilities in Hong Kong. Hong Kong is located on the south coast of China and is presently a British Crown Colony administered by its Governor, who is the representative of, and appointed by, Her Majesty the Queen. Effective July 1, 1997, the exercise of sovereignty over Hong Kong will be transferred from the Government of the United Kingdom of Great Britain and Northern Ireland to the Government of the People's Republic of China (the "PRC"). The agreement between the Governments of the United Kingdom and the PRC regarding this change is embodied in the Sino-British Joint Declaration on the Question of Hong Kong (the "Joint Declaration"). The Joint Declaration was signed on December 19, 1984 and ratified by both Governments. On June 12, 1985, the Joint Declaration was formally registered at the United Nations Secretariat in New York by both the British and the PRC Governments. In the Joint Declaration the Government of the United Kingdom declares that it will restore Hong Kong to the PRC effective July 1, 1997. On that date, Hong Kong will become a Special Administrative Region ("SAR") of the PRC. The Joint Declaration provides that the Hong Kong SAR shall be directly under the authority of the Central People's Government of the PRC and shall enjoy a high degree of autonomy except in 20 foreign and defense affairs, and that it shall be vested with executive, legislative and independent judicial power. It also provides that the current social and economic systems in Hong Kong shall remain unchanged for 50 years after June 30, 1997 and that Hong Kong shall retain the status of an international financial center. Although the Company cannot determine in advance the actual impact that the transfer of sovereignty from the United Kingdom government to the PRC may have on its operations in Hong Kong, the Company does not envision or anticipate any material adverse change in the business environment in Hong Kong in the foreseeable future, and has not formulated any plans to prepare for such a contingency. While the Company believes that its established presence in Hong Kong and its recently established manufacturing operation in China will facilitate its ability to increase its marketing activities in the PRC, if the business climate in Hong Kong were to experience an adverse change, such change could have an adverse effect on the Company's sales in Hong Kong. However, the Company is incorporated outside Hong Kong, and the Hong Kong operation now accounts for less than 17% of the Company's net sales and operating income. C. 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". Item 10. Directors and Officers of Registrant. The directors and executive officers of the Company are:
NAME YEAR OF BIRTH PRESENT POSITION ---- ------------- ---------------- Brandon Wang 1946 Director, Chairman of the Board and President Philip Leung 1948 Director and Vice President Johnny Tsui 1941 Director, Vice President and Secretary Patrick Tsang 1946 Director and Vice President Terence Leung 1951 Director, Vice President and Treasurer Peter Chang 1946 Director and Vice President Owen Price 1926 Director Anil Thadani 1946 Director Terrence Daniels 1943 Director
Brandon Wang is married to Eileen Wang-Tsang, who is Patrick Tsang's sister. Peter Chang is married to Brandon Wang's sister. Benedict Wang and S.L. Wang, both of whom occupy Management positions (see below), are brothers of Brandon Wang. All directors are elected for a one-year term at the Annual Meeting of the shareholders. The appointment of all officers is subject to the discretion of the Board of Directors. 21 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. The Company's Audit Committee consists 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 proposed audit report; and (iv) to consult with the independent auditors with regard to the adequacy of the Company's internal accounting controls. Brandon Wang founded the Company in Hong Kong in 1973 and has been a director and the Company's Chairman and Chief Executive Officer since that time. Mr. Wang is a graduate of St. Francis Xavier's College in Rowloon, 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 Operation since 1991. Patrick Tsang has been a director of the Company since 1980, and was appointed a Vice President in January 1992. He was Secretary of the Company from March 1992 to September 1995. In 1988, he started up the Company's Australian operation. 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 four other listed public companies: Dairy Farm International Holdings Limited, Cycle And Carriage Limited (alternate director), Cold Storage (Malaysia) Berhad and The Hour Glass Limited. 22 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. 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). 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 1996 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 $5,774,003. ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES. Not applicable. 23 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, 1994:
LOAN BALANCE BALANCE AT BEGINNING LOANS LOANS AT END OF YEAR EXTENDED REPAID OF YEAR ------------- -------- ------ ------- (DOLLARS IN THOUSANDS) 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 Year ended December 31, 1994 5,550 6,737 11,613 674
In 1996 and 1995 the Company advanced $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 are 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 are 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 is reviewed quarterly and adjusted, if necessary. The promissory notes are collateralized by the pledge of shares of the Company held by Brandon Wang. The fair market value of the shares pledged must be at least 200% of the amount due under the notes. The loans are repayable on demand. However, the Company and Brandon Wang have agreed to a quarterly repayment schedule, with the final payment of principal due in 1998. During 1996, Brandon Wang and a trust controlled by him repaid $4.5 million to the Company. The amount repayable in 1998 is shown as a non-current asset. At December 31, 1996, the rate of interest on the notes was 7.2% (8% in 1995). Interest of $958,000 was charged on these advances in 1996 ($652,000 in 1995). The balance at December 31, 1996 was $15.6 million. In 1994 the Company advanced amounts totalling $6.7 million to Brandon Wang and to a company controlled by him on an unsecured basis. Interest at the rate of 8% per annum was charged on these advances and amounted to $305,000 in 1994. 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. 24 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 1996. C. VOTING RIGHTS In order to avoid certain adverse U.S. income tax consequences to the Company, the voting rights of any shareholder who holds more than 10% of the Company's outstanding shares will be suspended as to shares held by such shareholder in excess of 10% of the Company's outstanding shares ("Excess Shares"). Excess Shares are not counted as voting shares for purposes of establishing a quorum at shareholders' meetings. However, the Board of Directors has discretion to exempt any such Excess Shares from these restrictions if it is satisfied, on the basis of evidence and assurances acceptable to it, that the holding of shares in excess of 10% of the Company's outstanding shares by such shareholder will not result in the Company being classified as a controlled foreign corporation ("CFC"), foreign personal holding company ("FPHC") or personal holding company ("PHC") within the meaning of the U.S. Internal Revenue Code ("Code"). See "Taxation"; "Restrictions on Transfer and Voting; Redemption of Ordinary Shares". Every shareholder who is present in person or by proxy at a meeting of the Company shall have one vote for each Ordinary Share of which he is the holder. A poll may be demanded by the chairman of the meeting, or by any shareholder present in person or by proxy. The Articles of Association of the Company make no provision for cumulative voting. Accordingly, the controlling shareholders have a sufficient number of Ordinary Shares to elect all of the Company's directors. D. RESTRICTIONS ON TRANSFER AND VOTING; REDEMPTION OF ORDINARY SHARES The Company's Memorandum and Articles of Association contain certain provisions which are intended to avoid situations in which the Company may be classified as a CFC, FPHC or PHC. See "Taxation". These provisions are intended only to avoid the adverse U.S. income tax consequences which would result from such classification. The following is a summary of the relevant provisions of the Memorandum and Articles: (i) Restricted Transfers of Ordinary Shares. The Board of Directors may, but is not obliged to, refuse to register the transfer of any of the Ordinary Shares of the Company if, in the opinion of the Board, such transfer might cause the Company to be classified as a CFC, FPHC or PHC. (ii) Restrictions on Voting Rights. In the event that any person holds more than 10% of the Company's outstanding shares, any shares in excess of 10% of the Company's outstanding shares shall be "Excess Shares", which shall not be entitled to any voting rights and shall not be considered voting shares for purposes of establishing a quorum. However, the Board of Directors may exempt any such Excess Shares from these restrictions if it is satisfied, on the basis of evidence and assurances acceptable to it, that the holding of shares in excess of 10% of the Company's outstanding shares by such shareholder will not result in the Company being classified as a CFC, FPHC or PHC. In addition, these restrictions on voting 25 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 (l) the average of the high and low sales price of the shares on the last business day prior to the redemption date on the principal national securities exchange on which such shares are listed or admitted to trading, or (2) if the shares are not listed or admitted to trading, the average of the highest bid and lowest asked prices on such last business day as reported by the National Quotation Bureau Incorporated or similar organization selected from time to time by the Company, or (3) if not determinable as aforesaid, as determined in good faith by the Board of Directors. The directors of the Company, in a meeting held on January 6, 1992, resolved that the principal shareholder, Brandon Wang, is exempt from the foregoing restrictions. The directors have also approved exemption of certain institutional shareholders from the foregoing restrictions as the Board was satisfied that such exemption would not have any of the adverse tax consequences described above. E. 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. F. 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. G. RESOLUTIONS Resolutions may be adopted at shareholders' meetings by the affirmative vote of a simple majority of the Ordinary Shares entitled to vote thereon. 26 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. H. 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. I. AUTHORIZED BUT UNISSUED SHARES Under the Company's Memorandum and Articles of Association, there are 11,685,000 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 presently holds as treasury shares 1,033,641 Ordinary Shares, 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. Under section 34 of the BVI International Business Companies Act, such shares are not entitled to vote or to have dividends paid thereon. The Company does not currently have any plans to issue additional Ordinary Shares, or to re-issue any of the Ordinary Shares presently held as treasury shares. J. 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". K. 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 11,685,000 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. L. 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. 27 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. M. 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. N. 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. O. 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. P. 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. 28 ITEM 19. FINANCIAL STATEMENTS AND SCHEDULES AND EXHIBITS. A. FINANCIAL STATEMENTS The following financial statements are contained in the Annual Report to Shareholders at the pages referred to below, which pages are incorporated herein by reference:
Page ---- Management Report 15 Independent Auditors' Report 16 Consolidated Statements of Operations for the three years ended December 31, 1996 17 Consolidated Balance Sheets as of December 31, 1996 and 1995 18-19 Consolidated Statements of Cash Flows for the three years ended December 31, 1996 20-21 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1996 22 Notes to Consolidated Financial Statements 23-33
B. 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. 11 Computation of Net Income Per Ordinary Share. C. 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 23, 1997. DSG INTERNATIONAL LIMITED By /s/TERENCE Y.F. LEUNG --------------------------- Terence Y.F. Leung Vice President and Treasurer 29 - ----------------- 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 review by 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 the management to appraise the adequacy and effectiveness of the audit functions, control systems and quality of our financial accounting and reporting. /s/ Terence Leung TERENCE LEUNG Chief Financial Officer March 3, 1997 15 - ---------------------------- 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, 1996 and 1995 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte Touche Tohmatsu DELOITTE TOUCHE TOHMATSU Hong Kong March 3, 1997 16 - ------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS - ------------------------------------- (in thousands except per share amounts)
YEAR ENDED DECEMBER 31, 1996 1995 1994 --------------------------------- Net sales $236,050 $245,881 $218,771 Cost of sales 155,647 177,315 143,194 -------- -------- -------- Gross profit 80,403 68,566 75,577 Selling, general and administrative expenses 64,420 59,508 52,134 -------- -------- -------- Operating income 15,983 9,058 23,443 Interest expense (2,267) (1,759) (724) Interest income 1,900 1,666 1,435 Exchange (loss) gain (176) 1,053 2,245 Non-recurring charge (Note 3) -- (1,968) -- Other (expense) income (89) (318) 284 -------- -------- -------- Income before income taxes 15,351 7,732 26,683 Provision for income taxes (Note 6) (6,185) (3,267) (10,033) Minority interest in losses -- 222 -- -------- -------- -------- Net income $ 9,166 $ 4,687 $ 16,650 ======== ======== ======== Earnings per share $ 1.18 $ 0.58 $ 2.00 ======== ======== ======== Weighted average number of shares outstanding 7,747 8,109 8,315 ======== ======== ========
See accompanying notes to consolidated financial statements. - --------------------------- CONSOLIDATED BALANCE SHEETS - --------------------------- (dollars in thousands except share amounts)
DECEMBER 31, 1996 1995 ------------------------- ASSETS Current assets: Cash and cash equivalents $ 8,605 $ 15,573 Accounts receivable, less allowance for doubtful accounts $643 in 1996 and $747 in 1995 27,577 26,115 Receivable from shareholder (Note 5) 10,031 1,680 Other receivables 1,249 794 Inventories (Note 7) 23,990 21,399 Prepaid expenses and other current assets 1,742 2,038 Recoverable tax 569 1,034 Deferred income taxes 75 94 -------- -------- Total current assets 73,838 68,727 -------- -------- Property and equipment -- at cost: (Note 8) Land 4,747 4,798 Buildings 20,012 20,881 Machinery and equipment 69,099 66,409 Furniture and fixtures 2,622 2,408 Motor vehicles 1,999 1,632 Leasehold improvements 1,767 1,687 Construction in progress 134 6 -------- -------- Total 100,380 97,821 Less accumulated depreciation and amortization 38,297 28,630 -------- -------- Net property and equipment 62,083 69,191 -------- -------- Receivable from shareholder (Note 5) 5,613 10,856 Restricted cash -- 5,269 Deferred income taxes 162 58 Other assets 214 292 -------- -------- Total assets $141,910 $154,393 ======== ========
See accompanying notes to consolidated financial statements. 18 - --------------------------------------- CONSOLIDATED BALANCE SHEETS (CONTINUED) - --------------------------------------- (dollars in thousands except share amounts)
DECEMBER 31, 1996 1995 ------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities; Short-term borrowings (Note 9) $ 10,227 $ 15,218 Current portion of long-term debt (Note 10) 3,204 8,141 Deferred purchase consideration (Note 11) 839 1,258 Accounts payable 10,197 11,359 Accrued advertising and promotion 5,156 4,325 Accrued payroll and employee benefits 2,730 2,472 Other accrued expenses 5,161 3,721 Income taxes payable 4,195 2,259 Deferred income taxes 415 397 -------- -------- Total current liabilities 42,124 49,150 -------- -------- Long-term debt (Note 10) 21,587 16,470 Deferred income taxes 3,207 3,303 Deferred purchase consideration (Note 11) 353 1,636 -------- -------- Total long-term liabilities 25,147 21,409 -------- -------- Minority interest -- 128 -------- -------- Commitments and contingencies (Note 13) Shareholders' equity; Ordinary shares, $0.01 par value - authorized 20,000,000 shares; issued 7,712,000 shares in 1996 and 8,315,000 shares in 1995, outstanding 6,678,359 shares in 1996 and 7,922,000 shares in 1995 77 83 Additional paid-in capital 33,653 41,270 Retained earnings 55,670 46,504 Foreign currency translation adjustments 551 720 Treasury shares, at cost - 1,033,641 shares in 1996 and 393,000 shares in 1995 (Note 12) (15,312) (4,871) -------- -------- Total shareholders' equity 74,639 83,706 -------- -------- Total liabilities and shareholders' equity $141,910 $154,393 ======== ========
See accompanying notes to consolidated financial statements. 19 - ------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------- (dollars in thousands)
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 ----------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 9,166 $ 4,687 $ 16,650 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,646 9,143 6,218 Accelerated depreciation on assets written off -- 534 -- Gain on disposals of property (15) (51) (48) Loss on sale of investments -- 401 -- Deferred taxes 24 (77) 1,729 Minority interest -- (222) -- Other 1,490 (595) (434) Net change in working capital components (1,365) (5,370) (4,352) -------- -------- -------- Net cash provided by operating activities 19,946 8,450 19,763 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property (5,871) (16,445) (16,024) Proceeds from disposals of property 45 142 184 Purchase of subsidiaries net of cash acquired -- -- (5,625) Purchase of minority interest in subsidiary (150) -- -- Proceeds from sale of investments -- 4,565 -- Plant relocation (2,459) Receipt of (investment in) restricted bank deposit 5,269 (623) (4,646) Short-term investment -- -- (266) Advances to shareholder (7,638) (13,167) (6,737) Repayments by shareholder 4,530 1,306 11,613 Decrease in other assets -- -- 85 -------- -------- -------- Net cash used in investing activities (3,815) (24,222) (23,875) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES (Decrease) increase in short-term borrowings (5,172) 7,986 1,808 Increase in long-term debt and other non-current debt 12,070 12,248 6,250 Repayment of long-term debt and other non-current debt (11,153) (449) (2,624) Payment of deferred purchase consideration (823) (902) (1,162) Investment by minority interest -- 150 200 Purchase of treasury shares (17,631) (4,871) -- Tender offer expenses (433) -- -- Dividend paid -- -- (2,079) -------- -------- -------- Net cash (used in) provided by financing activities (23,142) 14,162 2,393 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents 43 37 38 -------- -------- -------- Decrease in cash and cash equivalents (6,968) (1,573) (1,681) Cash and cash equivalents, beginning of period 15,573 17,146 18,827 -------- -------- -------- Cash and cash equivalents, end of period $ 8,605 $ 15,573 $ 17,146 ======== ======== ========
See accompanying notes to consolidated financial statements. 20 - ------------------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOW (CONTINUED) - ------------------------------------------------ (dollars in thousands)
YEAR ENDED DECEMBER 31, 1996 1995 1994 --------------------------------- SCHEDULE OF CHANGES IN WORKING CAPITAL COMPONENTS NET OF EFFECTS FROM PURCHASE OF SUBSIDIARIES Accounts receivable $(1,900) $ 1,360 $(7,777) Other receivables (13) (627) (534) Inventories (2,947) (4,231) (1,438) Prepaid expenses and other current assets 277 100 223 Accounts payable (1,188) (4,012) 4,404 Accrued expenses 2,471 1,892 611 Income taxes payable 1,935 148 159 ------- ------- ------- Net change in working capital components $(l,365) $(5,370) $(4,352) ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 2,258 $ 1,55l $ 676 Income taxes $ 4,412 $ 3,896 $ 8,735
See accompanying notes to consolidated financial statements. 21 - ----------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - ----------------------------------------------- (in thousands)
UNREALIZED FOREIGN LOSS ON ORDINARY SHARES ADDITIONAL CURRENCY INVESTMENTS TREASURY TOTAL ----------------- PAID-IN RETAINED TRANSLATION AVAILABLE SHARES SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS FOR SALE AT COST EQUITY ------ ------ ------- -------- ----------- -------- ------- ------ Balance at January 1, 1994 8,315 $83 $41,270 $27,246 $ (625) $ -- $ -- $ 67,974 Net income -- -- -- 16,650 -- -- -- 16,650 Dividend paid -- -- (2,079) -- -- (2,079) Unrealized loss on investments -- -- -- -- -- (680) -- (680) Translation adjustment for the year -- -- -- -- 1,125 -- -- 1.125 ------ --- ------- ------- ----- ----- -------- -------- Balance at December 31, 1994 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 12) -- -- -- -- -- -- (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 ====== === ======= ======= ===== ===== ======== ========
See accompanying notes to consolidated financial statements. 22 - ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ (dollars in thousands) 1. ORGANIZATION AND BASIS OF PRESENTATION DSG International Limited (the "Company") was incorporated in the British Virgin Islands on December 31, 1991. 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, feminine napkins, adult incontinence products 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 labour, 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. 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 No. 109 "Accounting for Income Taxes". Long-lived assets -- The Company has considered in accordance with Statement of Financial Accounting Standards No. 121 "Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" (SFAS No. 121), the guidelines regarding when impairment losses on long-lived assets should be recognized and how impairment losses should be measured. The Company believes that the adoption of SFAS No. 121 does not have a material effect on its financial position or results of operation. 23 - ------------------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------ (dollars in thousands) Foreign currency translation -- The consolidated financial statements of the Company are prepared in United States dollars because this is the currency of the primary economic environment in which the Company operates. 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, other than pensions, and postemployment benefits, if any, are not significant. Earnings per share -- Earnings per share are based on the weighted average number of Ordinary Shares outstanding. Concentration of credit risk -- The Company sells to distributors and retailers located in each of the countries in which it operates. The Company grants credit to all qualified customers on an unsecured basis but does not believe it is exposed to any undue concentration of credit risk to any significant degree. Use of estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates. Actual results could differ from those estimates. 3. NON-RECURRING CHARGE The non-recurring charge 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. The expenses include bank syndication and refinancing fees and legal and professional expenses of the Company, the special committee of independent directors and a syndicate of banks. 4. ACQUISITIONS In 1996 the Company acquired, for cash of $150, the minority interest in a subsidiary, which approximated fair value. During 1994 the Company acquired two companies: an 80% interest in its former distributor in Thailand and the entire capital of a manufacturer of adult incontinence products in Switzerland for a total cash consideration of $6,410. Both acquisitions were accounted for as purchases and their operating results are included in the Consolidated Statements of Operations from their respective dates of acquisition. No goodwill arose on these acquisitions. 5. RECEIVABLE FROM SHAREHOLDER In 1996 and 1995 the Company advanced $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 are 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 are evidenced by promissory notes bearing interest at a 24 - ------------------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------ (dollars in thousands) 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 is reviewed quarterly and adjusted, if necessary. The promissory notes are collateralized by the pledge of shares of the Company held by Brandon Wang. The fair market value of the shares pledged must be at least 200% of the amount due under the Notes. The loans are repayable on demand. However, the Company and Brandon Wang have agreed to a quarterly repayment schedule, with the final payment of principal due in 1998. During 1996, Brandon Wang and a trust controlled by him repaid $4,530 to the Company. The amount repayable in 1998 is shown as a non-current asset. At December 31, 1996, the rate of interest on the notes was 7.2% (8% in 1995). Interest of $958 was charged on these advances in 1996 ($652 in 1995). The balance at December 31, 1996 was $15,644. In 1994 the Company advanced amounts totalling $6,737 to Brandon Wang and to a company controlled by him on an unsecured basis. Interest at the rate of 8% per annum was charged on these advances and amounted to $305 in 1994. 6. INCOME TAXES Income is subject to taxation in the various countries in which the Company and its subsidiaries operate. The Company is not taxed in the British Virgin Islands where it is incorporated. The components of income before income taxes areas follows:
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 1994 -------------------------- U.S. $ 6,503 $5,467 $14,932 Foreign 8,848 2,265 11,751 ------- ------ ------- $15,351 $7,732 $26,683 ======= ====== =======
The provision for income taxes consists of the following:
YEAR ENDED DECEMBER 31, ----------------------- 1996 1995 1994 -------------------------- Current U.S. Federal $2,320 $1,611 $ 5,595 U.S. State 54 - 482 Foreign 4,164 2,175 3,532 Benefit of loss carryforwards (415) (440) (1,305) Deferred taxes 62 (79) 1,729 ------ ------ ------- $6,185 $3,267 $10,033 ====== ====== =======
25 - ------------------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------ (dollars in thousands) 6. INCOME TAXES (CONTINUED) A reconciliation between the provision for income taxes computed by applying the United States Federal statutory tax rate to income before taxes and the actual provision for income taxes is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 ------------------------------------ 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 (1.1) (1.6) (1.0) State income taxes net of Federal benefit 0.4 1.2 1.8 Losses for which tax benefit is not available 2.1 9.0 2.2 Utilization of loss carryforwards (2.7) (5.7) (4.9) Withholding tax on interest and royalty income 1.9 5.0 0.7 Other 4.7 (0.6) 3.8 ----- ----- ----- Effective rate 40.3% 42.3% 37.6% ===== ===== =====
Certain subsidiaries have operating loss carryforwards for income tax purposes which maybe 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, 1996 the tax loss carryforwards by country and their future expiration dates are as follows:
TOTAL 2000 2001 2002 2003 INDEFINITE ---------------------------------------------------------- United Kingdom $80,378 $ -- $ -- $ -- $ -- $80,378 Thailand 811 -- 811 -- -- -- Switzerland 4,540 909 937 2,009 685 -- China 383 321 62 -- -- -- ------- ------ ------ ------ ---- ------- $86,112 $1,230 $1,810 $2,009 $685 $80,378 ======= ====== ====== ====== ==== =======
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, 1996 are related to:
ASSETS LIABILITIES -------------------------- Inventories $ 7 $ (196) Accounts receivable and prepaid expenses 29 (200) Property -- (3,000) Other 201 226) Tax loss carryforwards 26,525 -- valuation allowances (26,525) -- -------- ------- Total $ 237 $(3,622) ======== =======
26 - ------------------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------ (dollars in thousands) 7. INVENTORIES Inventories by major categories are summarized as follows:
AT DECEMBER 31, ------------------ 1996 1995 ------------------ Raw materials $13,646 $12,949 Finished goods 10,344 8,450 ------- ------- $23,990 $21,399 ======= =======
8. PROPERTY AND EQUIPMENT Included in property and equipment are assets acquired under capital leases with the following net book values:
AT DECEMBER 31, ------------------ 1996 1995 ------------------ At cost: Machinery and equipment $2,786 $248 Motor vehicles 458 257 ------ ---- 3,244 505 Less: Accumulated depreciation 501 130 ------ ---- Net book value $2,743 $375 ====== ====
27 - ------------------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------ (dollars in thousands) 9. SHORT-TERM BORROWINGS These include borrowings in the form of trade acceptances, loans and overdrafts with various banks:
AT DECEMBER 31, --------------------- 1996 1995 --------------------- Credit facilities granted $32,837 $26,016 ======= ======= Utilized $10,227 $15,218 ======= ======= Weighted average interest rate on borrowings at end of year 6.46% 7,54% ======= =======
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 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, 1996 ($2,000 in 1995). Borrowings under this line of credit are repayable in 1998 and bear interest at LIBOR plus 1.75% (7.45% at December 31, 1996). The line of credit is collateralized by the accounts receivable, inventory and equipment of the Company's U.S. subsidiary. 10. LONG-TERM DEBT Long-term debt consists of:
AT DECEMBER 31, --------------------- 1996 1995 --------------------- Acquisition loan due in 1998 bearing interest at 6% at December 31, 1996. Repayable in 5 years' quarterly installments 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 $ 1,504 $ 2,188 Swiss Franc denominated mortgage loans bearing interest at 5% per annum repayable after 5 years 4,688 5,478 Bank loan fully repaid in 1996. The loan was secured over a bank deposit of the same amount which was included in restricted cash -- 5,269 Bank loan bearing interest at a rate of 7.7% per annum at December 31, 1996, $1,375 repayable in 1997, $1,500 in 1998 and $12,125 in 1999. The loan is secured over the property, plant and equipment of the Company's Duluth, Georgia facilities 15,000 10,000 Bank loan bearing interest at 6.7% at December 31, 1996. Repayable in 3 years' semi-annual installments commencing in 1995. The loan is secured over a diaper machine 882 1,322 Bank loan repaid in 1996 -- 29 Capital leases 2,717 325 ------- ------- Total 24,791 24,611 Current portion of long-term debt 3,204 8,141 ------- ------- Long-term debt, less current portion $21,587 $16,470 ======= =======
28 - ------------------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------ (dollars in thousands) 10. LONG-TERM DEBT (CONTINUED): Maturities of long-term debt as at December 31, 1996 are as follows:
CAPITAL LOANS LEASES TOTAL ------------------------------------- Year ending December 31, 1997 $ 2,733 $ 471 $ 3,204 1998 2,528 439 2,967 1999 12,125 1,784 13,909 2000 -- 15 15 2001 and thereafter 4,688 6 4,694 ------- ------ ------- Total $22,074 $2,715 $24,789 ======= ====== =======
11. DEFERRED PURCHASE CONSIDERATION In connection with the 1993 acquisition of the disposable hygiene division of a Swiss corporation, the purchase price included a quarterly payment representing 3.5% of the subsidiary's net sales for the five-year period ended June 30, 1998. This amount will be reduced if certain specified conditions occur and the subsidiary is liquidated. The purchase liability is based on estimates made by the Company with reference to the past and current trading history. No interest is payable on the amounts outstanding. The remaining estimated annual payments are $839 in 1997 and $353 in 1998. 12. 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 240,000 shares under this program for cash of $3,079 in 1996 and 393,000 shares for cash of $4,871 in 1995. 603,000 of these repurchased shares were cancelled in 1996. Subsequent to the year end date, a further 5,000 shares were repurchased for cash of $68. 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 1,003,641 shares from the public shareholders at a price of $14.50 per share. In conjunction with the tender offer, the Company incurred $433 for investment banking fees, and legal and professional fees. 29 - ------------------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------ (dollars in thousands) 13. 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 $2,125 in 1996, $2,156 in l995 and $2,174 in 1994. As at December 31, 1996, the Company and its subsidiaries were obligated under operating leases requiring minimum rentals as follows:
Year ending December 31, 1997 $1,545 1998 484 1999 167 2000 152 2001 152 2002 and thereafter 978 ------ Total $3,478 ======
At December 31, 1996, the Company had capital commitments for the purchase of machinery and equipment of $277 which will be expended in 1997. The Company and its subsidiaries are, from time to time, involved in routine legal matters incidental to their business. 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. 14. 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 20% of eligible compensation of employees based on length of service. Total expense related to the above plans was $1,134 in 1996, $905 in 1995 and $753 in 1994. 30 - ------------------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------ (dollars in thousands) 15. SUPPLEMENTARY INFORMATION
Valuation and qualifying accounts: BALANCE AT CHARGED TO BEGINNING PURCHASE OF COST AND BALANCE AT END OF YEAR SUBSIDIARIES EXPENSES DEDUCTIONS OF YEAR ------- ------------ -------- ---------- ------- 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 ====== === ====== ===== ====== Year ended December 31, 1994 Allowances for doubtful accounts $ 312 $31 $ 989 $(261) $1,071 Provision for inventory obsolescence 193 -- 332 (221) 304 ------ --- ------ ----- ------ $ 505 $31 $1,321 $(482) $1,375 ====== === ====== ===== ======
Deductions relate to write-offs of accounts receivable as bad debts and disposals of inventories. 16. 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, 1996 for debt of the same remaining maturities. The fair value of deferred purchase consideration has been estimated using the expected future cash payments discounted at a market interest rate. 31 - ------------------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------ (dollars in thousands) 17. SEGMENT INFORMATION The Company is engaged in one industry segment, the manufacturing and marketing of disposable hygienic products. Certain financial information by geographic area is as follows:
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 ----------------------------------- NET SALES North America $ 92,622 $111,505 $111,025 Australia 47,643 44,329 38,441 Asia 60,359 47,837 36,870 Europe 35,426 42,210 32,435 -------- -------- -------- $236,050 $245,881 $218,771 ======== ======== ======== OPERATING INCOME (LOSS) North America $ 10,530 $ 9,674 $ 20,809 Australia 5,204 2,293 6,278 Asia 6,827 3,114 3,900 Europe 35 (2,217) (1,363) Corporate expenses (6,613) (3,806) (6,181) -------- -------- -------- $ 15,983 $ 9,058 $ 23,443 ======== ======== ======== ASSETS, AT END OF PERIOD North America $ 37,975 $ 41,466 $ 45,599 Australia 30,221 24,831 21,389 Asia 32,630 31,104 24,250 Europe 24,649 30,117 29,944 Corporate assets 16,435 26,875 14,255 -------- -------- -------- $141,910 $154,393 $135,437 ======== ======== ========
No single customer accounted for 10% or more of the total revenues. 32 - ------------------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------ (dollars in thousands) 18. QUARTERLY DATA (UNAUDITED)
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ------------------------------------------------------- 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)/(1)/ 2,438/(1)/ Earnings (losses) per share 0.26 0.24 (0.23) 0.31 1994 Net sales $47,806 $51,083 $60,027 $59,855 Gross profit 17,098 18,691 20,621 19,167 Net income 4,074 4,288 4,813 3,475 Earnings per share 0.49 0.52 0.58 0.41/(2)/
(1) The 3rd Quarter and 4th Quarter 1995 results include non-recurring charges of $l,433 and $535, respectively. (2) In the 4th Quarter 1994, the directors approved and paid to senior management, in addition to the standard quarterly incentive bonus, a discretionary bonus which had the effect of reducing earnings per share for the 4th Quarter by $0.21.
ORDINARY SHARE PRICE: 1996 1995 ----------------- ----------------- QUARTER HIGH LOW HIGH LOW ----------------- ----------------- Fourth $14 7/8 $11 1/4 $13 $10 Third 11 5/8 10 1/4 18 5/8 8 1/2 Second 15 1/8 10 7/8 19 1/2 13 1/4 First 15 1/2 12 1/2 17 3/4 11
33 EX-3.1 2 LOAN & SECURITY AGMT 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 TABLE OF CONTENTS 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
-i- 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
-ii- 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
-iii- 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
-iv- 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. "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- 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- "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- "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- 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- "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- 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- (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)(14) 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- "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- 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 31, 1997. -11- 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- 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 Lender's 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 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 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 -13- Borrowing for an Interest Period 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 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 -14- 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 -15- 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, -16- 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 2.9 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- 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 all 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- 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 -19- 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. -20- 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. -21- 7.3 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 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- 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- 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 Borrowers 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- 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. -25- 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- 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 maintains reasonable reserves on its books therefor in accordance with GAAP. -27- 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 -28- 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 -29- 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). -30- 8.20 FIXED CHARGE COVERAGE RATIO. --------------------------- The Fixed Charge Coverage Ratio of AMP 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- 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, -32- 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 -33- 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 then 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- 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 qualify 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 31, 1996. 9.11 FISCAL YEAR. ----------- Change its Fiscal Year end from December 31 (or consent to any such change by the Parent or AMP Holdings in its Fiscal Year). -35- 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. -36- 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 fall 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 -37- 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 frill 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. -38- 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 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. 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 my 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 -39- 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. -40- 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, -41- 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 -42- 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 -43- 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 -44- 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 -45- 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. -46- (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 AMP 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- (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- 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 By /s/ Peter Chang ------------------------------------ Peter Chang President Attest /s/ Philip Leung --------------------------------- Philip Leung Secretary SOUTHTRUST BANK OF GEORGIA, N.A. By /s/ Melinda M. Bergbom ------------------------------------ Melinda M. Bergbom Vice President -49- 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- EX-11 3 COMPUTATION OF NET INCOME EXHIBIT 11 COMPUTATION OF NET INCOME PER ORDINARY SHARE
YEAR ENDED DECEMBER 31. ------------------------------------ 1996 1995 1994 ---- ---- ---- (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) Number of ordinary shares Ordinary shares outstanding, beginning of year 7,922 8,315 8,315 Ordinary shares repurchased 240 393 - Ordinary shares tendered 1,004 - - Ordinary share cancelled 603 - - ====== ====== ======= Weighted average shares outstanding during the year 7,747 8,109 8,315 ====== ====== ======= Net income $9,166 $4,687 $16,650 ====== ====== ======= Earnings per share $ 1.18 $ 0.58 $ 2.00 ====== ====== =======
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