-----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, Qab6A8387PzgopsomNM2A2via4Zn6e0S2MhQ058Dd6sjMPi2poiYbGOH5Y2DBYgD j5ZqZa1NRNjaC7stAj3jew== 0001021408-01-503275.txt : 20010713 0001021408-01-503275.hdr.sgml : 20010713 ACCESSION NUMBER: 0001021408-01-503275 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010711 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: SEC FILE NUMBER: 000-19804 FILM NUMBER: 1679094 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 d20f.txt ANNUAL REPORT FOR YEAR ENDED DECEMBER 31, 2000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 20-F [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------ ------------ Commission file number 33-45136 DSG INTERNATIONAL LIMITED ------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) ------------------------------------------------------------------------- (Translation of Registrant's name into English) British Virgin Islands ------------------------------------------------------------------------- (Jurisdiction of incorporation or organization) 17/F Watson Centre, 16-22 Kung Yip Street, Kwai Chung Hong Kong Tel. No. 852-2484-4820 ------------------------------------------------------------------------- (Address of principal executive office) Securities registered or to be registered pursuant to Section 12(b) of the Act. Title of each 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 6,674,606 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark which financial statement item the registrant has elected to follow. [ ] Item 17 [X] Item 18 (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No PART I Item 1. Identity of Directors, Senior Management and Advisors. Not applicable. Item 2. Offer Statistics and Expected Timetable. Not applicable. Item 3. Key Information. A. Selected Financial Data The information required is contained in the Selected Consolidated Financial Data of the Annual Report to Shareholders, and is incorporated herein by reference. B. Capitalization and Indebtedness The information required is contained in the Consolidated Balance Sheets and Consolidated Statements of Shareholders' Equity of the Annual Report to Shareholders, and is incorporated herein by reference. C. Reasons for the Offer and Use of Proceeds Not applicable. D. Risk Factors Among the factors that have a direct effect on the results of operations and financial condition of DSG International Limited (the "Company") are the following: 1. Raw Material Cost. The overall raw material costs have increased during year 2000 and the Company's operating results may be adversely affected by any increases in raw material costs in the future, specially the cost of the main raw material, fluff wood pulp, which increased in 1999 and increased moderately in 2000. 2. Branded Product Innovation. Patents and other intellectual property rights are an important competitive factor in the disposable diaper market, mostly because of the industry emphasis in product innovations. Patents held by the main competitors could severely limit the Company's ability to keep up with branded product innovations, by prohibiting the Company from marketing product with comparable features. -2- 3. Pricing and Volumes. The market position of the Company's main competitors, The Procter & Gamble Company ("P&G") and Kimberly-Clark Corporation ("KC"), 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 in price and volumes, and gain substantial market share in any of their marketing areas. They have heavily promoted diapers in the multi-pack configuration. These packages offer a lower unit price to the retailer and consumer. It is possible that as a consequence of this strategy, in those geographic markets in which the main competitors have adopted it, the Company may realize lower selling prices and/or lower sale volumes. 4. Increased Cost. On May 21, 2001, the Company entered into an agreement with P&G to settle any potential liability of the Company which may have existed with respect to any past infringement on P&G patents prior to January 1, 2001 and to agree on royalty payments relating to sales on certain of the Company's products in the Asian Pacific and Australian region after December 31, 2000. A similar agreement with P&G was entered into in 1998 relating to the North American region that provides for payments of royalty fees based on a percentage of certain products sold after December 31, 1997 within North American region. The Company believes that the royalty being charge by P&G under its respective license agreements are approximately the same royalties that will be paid by its major competitors for similar patent rights. However, the royalties will have an adverse impact on the Company's future financial condition and results of operations as compared to pre-settlement. 5. Increase Financial Leverage. As a result of the acquisition of the North American asset of Drypers Corporation, the Company has now short and long term debt of $47.5 million, bearing various rates interest. As a consequence of the incurrence of the Company's new debt, its principal and interest obligations have increased substantially. The increase in the Company's financial leverage as described above, could adversely affect the Company's ability to obtain additional financing for working capital, acquisitions or other purposes and could make the Company more vulnerable to economic crisis in the different geographical markets and to competitive pressures from its main competitors. As a substantial portion of the Company's available cash from operations will have to be applied to meet debt service requirements, the Company's liquidity could be affected as well as its ability to fund capital expenditures. Notwithstanding, the Company believes that its cash flow from operations and other sources of liquidity will be adequate to meet its requirements for working capital, capital expenditures, interest payment and scheduled principal payment for the foreseeable future. However, if the Company is unable to generate sufficient cash flow from operations in the future, it may be required to refinance all or a portion of its existing debt or obtain additional financing. There is not assurance that this additional financing could be obtained in favorable terms for the Company. -3- 6. Litigation Risk. As the Company operates in an industry in which patents are numerous and are enforced vigorously, the Company and its subsidiaries are from time to time involved in legal matters. 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. On June 27, 2001, a jury returned a verdict and awarded $4.0 million in damages and also provided for potential enhanced damages against the Company of up to an additional $7.0 million. The Company will file post trial motions to overturn the jury verdict and, if necessary, will appeal the verdict to the U.S. Court of Appeals for the Federal Circuit. The Company believes that it is reasonably possible that it will be successful in overturning the jury verdict. Accordingly, the jury award has not been recorded in the Company's consolidated financial statements. Unsuccessful resolution of the above litigation resulting in a significant assessment against the Company may result in the Company violating certain covenants of its debt agreements. This would give the lenders the right to demand payment of outstanding amounts unless the lenders waive their rights under the debt agreements. Demand for payment by the lenders and the need to pay the award to the plaintiff would require the Company to secure other financing sources to meet its obligations. The Company has advised the lenders of the recent jury verdict and its intention to pursue a post trial motion to overturn the decision and, if necessary, file an appeal. While the Company believes that it is reasonably possible that it will be successful in overturning the jury verdict, the outcome of this litigation is uncertain. -4- Item 4. Information on the Company. A. History and Development of the Company DSG International Limited, established in Hong Kong in 1973, is one of the world's leading companies specialized in manufacturing disposable baby diapers, adult incontinence and training pants products, with over twenty-eight years of experience in this industry. The Company now operates eleven manufacturing facilities in North America, Australia, Asia and Europe with extensive distribution activities around the world. In 1984, the Company established a manufacturing facility in California through a joint venture with a large French disposable diaper manufacturer, and later that year acquired full ownership of that facility. In 1987, the Company acquired the U.S. assets of a major private label disposable baby diaper manufacturer which was in bankruptcy, and was thus able to establish a second manufacturing facility at Norcross, Georgia to serve the central, southeastern and northeastern United States. As a result, the Company extended its "FITTI(R)" brand into U.S. national distribution. In 1988, the Company acquired all the assets of an unprofitable private label manufacturer of disposable baby diapers in Australia. Also in 1988, the Company acquired the assets, including brand names, of the unprofitable disposable baby diaper manufacturing division of a major U.K. consumer products company. In September 1991, the Company opened a new manufacturing facility in Singapore to relieve capacity constraints at its Hong Kong facility and to better service South East Asian markets. On March 6, 1992, the Company commenced the initial public offering in the United States of its Ordinary Shares. In July 1993, the Company acquired all the assets of a private label disposable baby diaper and feminine napkin manufacturing division of a Swiss company. In September 1993, the Company acquired an unprofitable private label disposable baby diaper and feminine napkin manufacturing company in Canada. At the end of December 1993, the Company further acquired an unprofitable branded product disposable baby diaper manufacturer in the United Kingdom. The Company moved its manufacturing plant in Norcross, Georgia to Duluth, Georgia, where the Company further expanded its production capacity in the U.S. In May 1994, the Company formed a joint venture company with its former distributor in Thailand. The joint venture acquired the entire capital of the distributor's company and built a plant in Bangkok, Thailand to manufacture baby diapers and adult incontinence products. The Company currently holds an 80% interest in the joint venture company. In August 1994, the Company acquired a -5- manufacturer of adult incontinence products in Switzerland. In November 1994, the Company opened its plant in Zhongshan, Guangdong in the People's Republic of China. In April 1995, the Company's management group, led by the Chairman, Brandon Wang, and two other equity investors proposed a going private transaction to which the holders of all the outstanding shares of the Company held by the public would receive $19 per share. On May 26, 1995, after a review by a Special Committee of independent directors appointed to consider and advise on the proposal, the Board of Directors approved the going private transaction at a price of $19.25 per share and authorized the Company to enter into a merger agreement with corporations that had been formed by the management group. On July 7, 1995 the merger agreement that had been entered into as of May 26, 1995 to effect the going private transaction was terminated because there was no reasonable possibility that certain conditions of the merger agreement could be satisfied within the time period stipulated in the agreement as there was no reasonable prospect that financing would be available on satisfactory terms within such time period. In September 1995, the Company opened a new plant in Bangkok, Thailand. In October 1995, the Company established a wholly owned subsidiary in Malaysia to assist with the marketing and distribution of the Company's products in Malaysia. In November 1996, the Company invited its public shareholders to tender their shares to the Company at prices not greater than $14.50 or less than $12.75 per share. The tender offer closed on December 13, 1996 and the Company purchased 1,003,641 shares from the public shareholders at a price of $14.50 per share. In April 1997, the Company acquired the entire share capital of an adult incontinence and disposable baby diaper manufacturer in Wisconsin, United States, and the manufacturing assets of a company in the Netherlands and its related distribution company in Belgium. In June 1997, the Company entered into a joint venture agreement with an Indonesian distributor to establish a manufacturing facility in Jakarta, Indonesia to manufacture disposable baby diapers. The Company owns a 60% interest in the joint venture company. During 1997, the Company closed its manufacturing operations in Canada, California and Singapore. In March 1998, the Company closed its operations in Canada and later on in December, the factory facilities were sold. In November 1998, the Company opened its joint venture manufacturing facilities in Indonesia. In March 1999, the Company sold its private label baby diapers business in Switzerland. In April and June 1999, the Company established two wholly owned subsidiaries in the United Kingdom and Germany to assist the marketing and distribution of the Company's adult incontinence products in Europe. In June 1999, the Company opened its new plant and commenced its baby disposable diapers production in Selangor, Malaysia. -6- In October 2000, the Company sold its adult incontinence operation in Switzerland and its sales office in Germany. In March 2001, the Company acquired all the U.S. assets including the "DRYPERS(R)" brand name and the manufacturing facilities in Marion, Ohio and Vancouver, Washington of a major U.S. disposable baby diaper manufacturer which was in bankruptcy, and was thus able to substantially expand its sales in the U.S. DSG International Limited is incorporated in the British Virgin Islands and has its principal executive office at 17/F Watson Center, 16-22 Kung Yip Street, Kwai Chung, Hong Kong. Its telephone number is (852) 2484-4820. CAPITAL EXPENDITURES, INVESTMENT AND DISVESTITURES Principal capital expenditures and divestitures over the last three years include the following:
2000 1999 1998 ---------- ---------- ----------- Property, plant and $5,947,000 $6,097,000 $ 6,444,000 equipment (net) Investment in subsidiaries $5,883,000 $5,713,000 $ 1,221,000 and affiliated companies Disposition of affiliated $7,068,000 $3,844,000 $ 3,882,000 companies and investments
B. Business Overview -7- 1. General The Company manufactures and markets disposable baby diapers, training pants and adult incontinence products primarily under its own brand names, which include "DRYPERS(R)", "FITTI(R)" "PET PET(R)", "COSIES(R)", "COSIFITS(R)", "BABY LOVE(R)", "BABYJOY(R)", "LULLABY(R)", "CARES(R)", "CUDDLES(R)", "SUPER FAN-NIES(R)", "DISPO 123(TM)", "HANDY(TM)", "CERTAINTY(R)" and "MERIT(R)". The "DRYPERS(R)" brand was newly acquired in March 2001. The Company also manufactures and markets disposable baby diapers, adult incontinence and training pants products under private labels. The Company's products are sold internationally, with its eleven manufacturing facilities being in Hong Kong, the United States, Australia, the United Kingdom, the People's Republic of China ("PRC"), Thailand, Indonesia and Malaysia, including the two additional manufacturing facilities which the Company operates in the United States as a result of the recent acquisition in March 2001. The Company manufactures and distributes branded and, rivate label disposable baby diapers, adult incontinence products, training pants and youth pants for the North American markets with its operations in Duluth, Georgia Oconto Falls, Wisconsin and two newly acquired operations in Marion, Ohio and Vancouver, Washington. With a strong regional presence, the Company's "FITTI(R)" and "CUDDLES(R)" brands are some of the best selling brands of disposable baby diapers (excluding private labels) in many key markets. The Company's newly acquired "DRYPERS(R)" brand is the third best selling national brand of disposable baby diapers and training pants in the North America markets. The Company's sales in adult incontinence products, training pants and youth pants have grown in their significance in the Company's North American markets. In Australia, the Company is the second largest manufacturer of disposable baby diapers. The Australian market is divided primarily into three major retail sectors, which are grocery, variety and pharmacy. The Company is currently supplying brands of both premium and economy quality to all three market sectors. It estimates that it has an overall unit volume market share of approximately 24% as measured by AC Nielsen for the combined grocery and pharmacy sectors. The Company also markets disposable baby diapers under retail chain private labels, which accounted for approximately 16% of its Australian diaper sales in 2000. The Company also distributes the "VLESI(R)" and "MERIT(R)" range of adult incontinence products into the Australian market, targeting the institutional sector of the market. The Company's overall sales in the Australian market grew by over 16%, and the rate of growth in branded and private label disposable baby diaper products as well as the rate of growth in adult incontinence products were also in line with the total Company's growth. In the PRC, the disposable diaper market is growing rapidly particularly in the economy products segment. The Company's leading brands, "FITTI(R)" and "PET PET(R)", are well established in most of the major cities including Shenzhen, Guangzhou, Shanghai and Beijing; and the Company's economy brands, "BABY LOVE(R)" and "BABYJOY(R)", expanded rapidly in the north-eastern part. In the Guangdong province, the major southern province of the PRC, the Company has a well-established sale and distribution network that extends throughout the province and the Company believes that it is the market leader in the province, with around 30% market share. In the northern part of the PRC, the Company's sales operation in Beijing not only established direct sales and distribution in the Beijing and Tianjin markets but also expanded its wholesale network into other northern provinces such as Shandong and Liaoning. In the eastern part of the PRC, the Company has established a strong sale and distribution network by signing up a number of reputable territorial wholesalers and the Company is optimistic about the growth opportunity in these -8- provinces. The Company plans to set up sales operations in other major cities and provinces in the PRC and continues its effort in exploring the potential of the PRC markets. In Hong Kong, the disposable diaper market remained stagnant due to a low birth rate, however, the Company's sales increased by a high single digit percentage over the Company's sales in 1999 and maintained its second place position in the market with an estimated market share of over 20%. In Singapore, the disposable diaper market has improved due to strong recovery of the economy, and the Company's sales increased by almost 50% over the Company's sales in 1999. In Malaysia, the Company recorded another year of strong volume growth of 85% over the volume in 1999 and the Company expects its sales will continue to grow with further gain of share of the market. In Indonesia, the Company's sales volume was more than double the sales volume in 1999 as a result of improvement of the nation's economy and political stability. The Company believes that it continues to maintain its leader position and that its sales will continue an upward trend as the nation's economy and political stability improves further. In Thailand, the Company's brand, "BABY LOVE(R)" gained a significant market share in the economy sector, and the Company's volume grew by 25% over the volume in 1999 despite the keen competition in the market. The Company manufactures and distributes adult incontinence products through its operation in Thailand to all other markets in Asia under its "DISPO 123(TM)", "HANDY(TM)" and "CERTAINTY(TM)" brands. The Company believes that it is one of the market leaders in the adult incontinence market in Thailand. In other Asian markets, the sales of adult incontinence products increased steadily over the years and the Company's brands are well established both in the retail and institutional sectors. The Company remains optimistic about the market growth potential of the adult incontinence market in the Asia Pacific region. In Europe, the Company scaled down its operations. The Company's remaining operation, the operation in the United Kingdom, continues to market its branded products to wholesalers and grocery retail accounts. The Company also manufactures private label disposable diapers on a selective basis. The Company's marketing strategy is to provide retailers and wholesalers with quality, value-oriented products which offer good profit margins, combined with a high level of service, rather than attempting to mass market its products in competition with the industry leaders. The Company believes that its attention to raw material costs and manufacturing efficiency, combined with careful control of advertising and promotional costs, enables it to produce and market value-oriented products at competitive prices. The Company's growth strategy is to target its branded products at selected sectors of mature markets, such as the United States and Western Europe, and to take a broader marketing approach in less developed markets where there is a high rate of growth in disposable diaper usage. The Company believes that its manufacturing facilities in Asia and Australia will enable it to participate in the expected growth of those markets. In the past, the Company has expanded its business into new markets by acquiring the assets of disposable baby diaper and adult incontinence manufacturers. The Company also expands through establishing its own manufacturing facilities in emerging markets which offer significant growth potential, such as the Company's facilities in the PRC, Thailand, Indonesia and Malaysia, which were opened in 1994, 1995, 1998 and 1999, respectively. -9- The Company's principal raw materials are fluff wood pulp and super absorbent polymer. Other raw materials include polyethylene backsheets, polypropylene non-woven liners, adhesive tapes, hot melt adhesive, elastic, aloe vera and tissue. The cost of materials increased in 1999 and also in 2000. Raw materials account for about three-quarters of the cost of goods sold. Disposable diapers are designed and marketed with two basic objectives in mind: (1) to afford parents of infants up to two and one-half years of age the convenience of diapers which are disposed of after one use and (2) to reduce the risk of chapping ("diaper rash") which often occurs when moisture from a soiled diaper remains in contact with the baby's skin. The basic concept of most disposable diapers on the market is the same: to allow moisture to pass through a soft inner layer which is in contact with the baby's skin into a highly absorbent inner core, from which the moisture is prevented from escaping by an outer moisture-proof backsheet. There are significant differences in quality among the various disposable diapers currently on the market. The most important quality features of disposable diapers are their ability to absorb and retain fluids, to prevent leakage through leg and waist openings by the use of elasticized bands, and to be easily fitted and held in place by adhesive tapes which secure the diaper firmly without causing discomfort to the baby. Other features, such as innovative fastenings, attractive designs, extra-dry sub-layer, gender specific absorbent cores, stand-up leg gathers, elastic waistband, aloe vera and packaging help to differentiate products from one another. Adult incontinence products are designed for the convenience of males and females having various degrees of incontinence. The basic concept of most adult incontinence products is to prevent leakage of urine and faeces by absorbing the moisture into a highly absorbent inner core and retaining the soiled contents within an outer moisture proof backsheet. Similar to disposable diapers, the most important quality features of adult incontinence products are their ability to absorb and retain fluids, to prevent leakage through leg and waist openings by the use of elasticized bands, and to be easily fitted and held in place by adhesive tapes which secure firmly without causing discomfort to the user. The absorption media for adult incontinence products are fluff wood pulp and super absorbent polymer. Other features, such as wetness indicator, stand-up leg gathers, elastic waistband, frontal tape closure system and packaging help to differentiate products from one another. The Company believes that there is a high potential for adult incontinence products due to the aging populations of the industrialized and developed countries. The Company entered the adult incontinence markets in North America, Europe and Australia, and established and acquired operations in Switzerland, Thailand and Wisconsin in the United States in 1994, 1995 and 1997, respectively. In October 2000, the Company sold its adult incontinence operation in Switzerland and ceased manufacturing adult incontinence products in Europe. The Company remains optimistic in its adult incontinence business in the markets in North America, Asia and Australia. The Company introduces adult incontinence products into its markets in a manner consistent with its niche market strategy. The Company believes that the key to successful marketing of this type of product is a high and prompt level of service from the manufacturer and distributor, regular contact with institutions to ensure proper knowledge of the products, and providing a range of products of high quality and performance. -10- 2. Geographic Segment and Product Category Information The following table sets forth the percentage of the Company's net sales by geographic market and product category activity.
2000 1999 1998 ----- ----- ----- Net sales North America................................................ 43.0% 45.4% 43.2% Australia.................................................... 20.8 20.7 19.5 Asia......................................................... 28.3 22.2 21.3 Europe....................................................... 7.9 11.7 16.0 100.0% 100.0% 100.0% Product sales by category Baby diapers................................................. 74.7% 71.7% 74.3% Adult incontinence........................................... 20.6 20.8 16.4 Others....................................................... 4.7 7.5 9.3 100.0% 100.0% 100.0%
3. Seasonality There is no significant seasonality impact on the Company's business in most countries. 4. Raw Materials The raw material components used in the manufacturing process are fluff wood pulp, super absorbent polymer, polyethylene backsheet, polypropylene non- woven liner, adhesive closure tape, hotmelt adhesive, elastic, aloe vera and tissue. The main raw material is fluff wood pulp, which is purchased from several suppliers in the United States, Scandinavia and Australia. The source from which the fluff wood pulp is shipped to the Company's manufacturing facilities is dependent on price, quality and availability. The cost of fluff wood pulp increased significantly in 1995, softened in 1996, stabilized thereafter, increased in 1999 and increased moderately until the third quarter in 2000. The Company believes it will stabilize in 2001. Other raw materials are purchased from various sources, also depending on price, quality and availability. The Company maintains good and long-term relationships with its raw materials suppliers. The Company's Chief Purchasing Officer oversees the purchasing and sourcing policies of each of the Company's manufacturing facilities and is responsible for new material developments and keeping track of all world-wide producers of raw materials. He also negotiates and determines the purchase of the Company's major raw materials with the Company's key raw material suppliers. The Company has negotiated supply contracts with several of its key suppliers. Such arrangements are generally designed to achieve volume discounts on price and to assure supply stability. In the event of unacceptable price increases, the Company usually has the right to terminate the -11- 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. 5. Marketing Channels a. North America i. Products The Company manufactures and distributes disposable baby diapers, disposable training and youth pants and adult incontinence products throughout North America under the brand names of "FITTI(R)", "CUDDLES(R)", "SUPER FAN-NIES(R)" and "CERTAINTY(R)", as well as a growing number of different private label store brands. The "FITTI(R)" brand is a full-featured value product, recognized for its unique wetness indicator, a cute print that fades away when the diaper becomes wet. The "FITTI(R)" brand name is also used with the Company's disposable training pants and the DRI-NITE JUNIOR disposable youth pants. The Company's pant products feature tear-away side panels, soft cloth- like covers and comfortable waist and hip elastic. The "FITTI(R)" training pants were the first North American product in this segment to offer the Company's unique wetness indicators. In March 2001, the Company acquired the "DRYPERS(R)" brand under which is the third largest selling brand of disposable baby diapers and disposable training pants in the North America markets. The "DRYPERS(R)" brand is a full featured premium product including multi-strand leg elastic for a wide soft cuff, a reinforced tape landing zone for more secure fastening, a soft elastic waistband, a thin overall profile, leakage barrier inner cuffs, compression packaging and unique features such as "perfume free" and "baking soda" for odor control. The Company continues to expand its private label diaper business throughout North America with such customers like Walgreens Drugs, Harris Teeter, A&P, Topco, Pathmark, Rite-Aid, Richfood, McLane (a division of Wal- Mart) and Medline Industries. The Company is the only full line manufacturer capable of producing and marketing a full range of disposable baby diapers as well as training pants and youth pants. This advantage should enhance the Company's sales and private label partnership opportunities. With the acquisition of the Drypers operations and the "DRYPERS(R)" brand, the Company will gain entry to sell both branded and private label products to major supermarket chains and mass merchandisers such as Wal-Mart and Kroger. The Company's primary focus on adult incontinence products is the development of profitable private label partnerships with retailers and institutional distributors such as Walgreens Drugs and Medline Industries. The Company's products are also available under the "CERTAINTY(R)" brand name. The Company's focus is on the brief products, offering a wide range of product and feature alternatives. The Company was the first to bring disposable adult pants to the North American market and the Company -12- will continue to explore innovative product opportunities that will make a positive difference in this category and bring better solutions to the incontinence user. ii. Sales and Marketing Disposable baby diapers account for more than 90% of the baby diaper changes in North America. The market can be divided into several segments: brands that are advertised and sold nationally; brands that are not widely advertised but are sold nationally; brands sold only in specific regional areas; and baby diapers that are sold under private label brands. The nationally advertised brands account for around 80% of all sales. The Company maintains a solid distribution base on its "FITTI(R)" and "CUDDLES(R)" brands, with new retail customers being added on a regular basis. The Company's "FITTI(R)" brand training pants have enjoyed steady sales growth and excellent consumer acceptance. The Company's "FITTI(R)" DRI-NITE JUNIOR maintains a high market share in the fast growing youth pant segment. This segment now accounts for more than 3% of total category sales. The Company efficiently services the North American market from two manufacturing facilities. These facilities are located in Oconto Falls, Wisconsin, and Duluth, Georgia. The Company commissions a national network of independent brokers and non-food sales representatives to sell directly to retailers and distributors/wholesalers. These brokers and sales representatives, managed by the Company's direct sales management team, serve as the Company's agents within defined territories to monitor sales, implement trade promotions and handle the required merchandising activities and responsibilities. The Company's direct sales management team is responsible for the Company's marketing and headquarter sales functions. The Company remains committed to its marketing philosophy of direct servicing of its customers and accounts by sales management personnel. This allows the Company to provide a high degree of category expertise and education to the trade and to be able to promptly respond to trade and market needs. In addition, the strategic locations of its North American manufacturing facilities has enabled the Company to achieve an average shipping transit time of one to two days for most North American destinations. Branded Products. Due to the intense price and promotional pressure by the advertised brands, combined with a declining birth rate in the U.S. market, the "value brand" segment continues to shrink. By the end of 2000, the combined share of the Company's "FITTI(R)" and "CUDDLES(R)" brands was roughly 2% of the total units of disposable baby diapers and training pants sold in grocery outlets throughout North America. The grocery sector represents around 50% of the over $4.0 billion United States retail market. In certain markets, such as New York/New Jersey, the nations largest retail market, the Company believes that the "FITTI(R)" brand is much greater than conventional market share tracking companies would indicate. This is because a much higher percentage of "FITTI(R)" diapers and training pants are sold through urban wholesalers and inner city retailers that typical market research does not track. The Company concentrates its efforts and marketing activities providing wholesalers and retailers with above average category profits through the use of packaging with greater shelf impact, consumer preferred pre-priced packaging, creative promotional support, efficient distribution, electronic data interchange and a high level of customer service. The Company has maintained its strategy of providing the best "everyday low price" on its "FITTI(R)" and "CUDDLES(R)" brands, offering the consumer "the best product for the price" all the time. The Company provides consumers with quality products at affordable prices, unique product features and consistent value. The Company has grown its business with a concentrated effort against the primary diaper selling class of trade: grocery with key retail -13- partners such as Shoprite, A&P, Pathmark, Fleming, Harris Teeter and Super Value. However, excellent distribution and sales gains have been made in other non-grocery outlets such as Ames Department Stores and Meijer stores. The Company continues to benefit from new product ideas and unique retailer profit opportunities to the disposable baby products segment. The Company's "CERTAINTY(R)" brand is the brand under which the Company markets its adult incontinence products. However, the Company recognizes that private brands represent more than 30% of the category sales with steady growth at retail and it is this sector of adult incontinence where the greatest retail sales opportunity exists. The Company will continue to target this private brand segment with a range of superior products in terms of product features and performance. The Company's strategy is to provide products to the marketplace that are superior to other available products and that are also more affordable than the advertised brands. The drug store trade still represents the majority of adult incontinence retail sales with approximately a 50% share of the over $550 million category. Growth potential for the entire category remains high as the population continues to age, people who are incontinent become more open to treatment solutions and better products are developed. Institutional Volume and Activity. The institutional providers supply adult incontinence products to medical care facilities, nursing homes, extended care facilities and home health care outlets. It is worth noting that the institutional market still represents more than 60% of the total adult incontinence volume in North America or more than $700 million in sales. The adult category represents an area of significant sales and distribution growth for the Company, and significant gains have been captured since its launch in 1996 and with the volume growing to more than 26% of the Company's total sales. The Company enjoys an excellent working relationship with one of North America's premier institutional suppliers of medical related products: Medline Industries, Inc. Private Label. This segment of the Company's business is the major area of potential growth. The Company continues to strengthen its existing private label partnerships with major retailers like Walgreens, Pathmark, A&P, Uniprix Drug, McLane (a division of Wal-Mart), Topco etc. and by adding new products in both areas of disposable baby diapers and adult incontinence products. The Company will continue to target other major retailers to establish new profitable private label partnerships in all of its product categories. The Company recognizes that the private label segment remains somewhat more insulated than that of the typical "value" brands from the aggressive price/promotional strategies of the advertised brands, due to the protective/defensive posture that major retailers tend to take when it comes to protecting their corporate brand franchise. The Company is one of the few manufacturers capable of supplying a full range of quality disposable baby diapers and adult incontinence products and has a proven track record of quality products, category expertise and customer service. The Company's newly acquired "DRYPERS(R)" brand, under which disposable baby diapers and training pants products are marketed, is a nationally distributed premium brand which offers consumers the reliability of a brand name and product quality and features comparable to the two major national brands in the U.S. market. In addition, the acquisition of Dryper's North American operations has added production facilities in Marion, Ohio and Vancouver, Washington, enabling the Company to expand its private label programs with major supermarket chains and mass merchandisers. b. Australia -14- i. Products In Australia, the Company manufactures and markets disposable baby diapers under four core proprietary brand names and a number of retail chain private label brands. The Company's proprietary diaper brands accounted for 81% of its Australian diaper sales in 2000. Two of these proprietary brands are targeted at the grocery and variety sectors, while the other two are exclusive to the pharmacy sector. The two brands targeting the grocery and variety sectors are "BABY LOVE(R)", which is a value priced, premium quality, feature driven ultra diaper, while "LULLABY(R)" is an economy priced, basic feature driven ultra diaper. The two "pharmacy only" brands are "COSIES(R)" and "COSIFITS(R)", which have a similar marketing strategy to "BABY LOVE(R)" and "LULLABY(R)". In addition to its four core proprietary brands, the Company continues to hold a leading position in the private label sector producing corporate brands for a number of major grocery and variety sector retailers. The Company also distributes the "VLESI(R)" and "MERIT(R)" range of adult incontinence products into the Australian market, primarily targeting the nursing home sector. This product range continued to show very strong growth in 2000. ii. Sales and Marketing The Australian combined grocery and pharmacy retail market for disposable baby diapers has grown by 2.9%, from $224 million in 1999 to $231 million in 2000 with the grocery sector showing growth. The Company now estimates that market utilization for disposable baby diapers is approximately 80%, which is below the level of other industrialized Western countries at over 85%. Branded products comprise approximately 90% of the Australian market, with the remaining 10% made up of private label products. The Company is currently the second largest manufacturer in Australia, with approximately 24% unit volume share of the disposable baby diaper market as measured by AC Nielsen for the combined grocery and pharmacy sectors. A major U.S.A. multi-national manufacturer is the market leader with approximately a 66% share of the same market sectors. The Company markets and distributes its proprietary branded products in Australia using exclusive independent brokers. Sales of private label brands are managed either on a direct basis with a retail customer, or through their selected "in-house broker" representative. For the "VLESI(R)" range of adult incontinence products, the Company utilizes a direct sales force to sell to customers and manage the distribution of the products through selected independent distributors. Branded Products. The Company's branded products, "BABY LOVE(R)" and "LULLABY(R)" are targeted at the grocery and variety sectors. These two retail sectors accounted for an estimated 85% of all disposable baby diaper sales in Australia in 2000. These two sectors are highly concentrated, with over 80% of the sales volumes controlled by major retailers and wholesalers, being Woolworths, Coles Myer, Franklins and Australian Amalgamated Wholesalers. The Company utilizes marketing strategies focused on strong profit margins for retailers, combined with good product performance, unique product features and "value" retail price points for the consumer. These strategies also include state and national promotions targeting consumer trial while focusing on "below the line" promotional support for the retailers. The Company's branded products, "COSIFITS(R)" and "COSIES(R)" are targeted exclusively at the pharmacy sector. In 2000, the pharmacy sector accounted for an estimated 15% of all disposable baby diaper sales in Australia. This sector is highly fragmented and consists of a large number of small and -15- independent pharmacies that have restricted retail space, offer a limited selection of diaper brands and do not have their own private label diaper programs. The Company has successfully pursued a strategy of encouraging these independent pharmacies to carry these two proprietary brands as "pharmacy only brands", which are supported by national advertising and promotion, and provide margins which are comparable to those typically offered by private label programs. The Company sells to all of the existing major wholesalers of pharmaceutical products in Australia. These wholesalers include Sigma Company Ltd., F.H. Faulding Wholesale, Australian Pharmaceutical Industries and Soul Pattinson. Each of the wholesalers also operate and manage specific marketing groups ("banner groups") which regularly promote the Company's products. The major national marketing groups include Amcal, Guardian, ChemMart, ChemWorld and Health Sense, among others. Private Label. Private label product is sold primarily in the grocery and variety sectors. In the grocery sector private label accounted for 11% of the total sales for disposable baby diapers in 2000(1). The Company had a 45% share of the total private label market in the grocery sector in 2000(2). Private label market data is not available for the variety sector, however the Company is recognized as a major supplier of private label products in this sector. The Company has private label programs with a number of major retail chains, including Target, Fossey's, Coles Supermarkets, Bi-Lo, Franklins, as well as other retailers. The Company has maintained and developed its leading market position within the private label sector by building close working partnerships with its retail chain customers. Its strategy is to proactively offer new product features with improved performance, while maintaining competitive pricing and high levels of customer service. Adult Incontinence Products. Approximately 80% of the total sales for adult incontinence products in Australia are concentrated in the institutional sector of the category, while the retail sector for these products has been slow to develop. This institutional sector is comprised primarily of nursing homes, adult care hostels and hospitals. The Company has employed a team of state territory sales managers and selected distributors who target the institutional sector of this market. The Company intends to expand its range of products and to achieve distribution in all sectors of this growing market. c. Asia i. Products The Company manufactures disposable baby diapers primarily under its own brands in Asia. The Company's leading brands are "FITTI(R)" and "PET PET(R)", and economy brands are "BABY LOVE(R)", "COSIFITS(R)", "FITTI Basic", and "BABY JOY(R)". The Company also manufactures private labels on a selective basis. Both "FITTI(R)" and "PET PET(R)" enjoy substantial market share, are well supported by advertising and promotional activities, and are priced strategically lower than the major U.S. national brands and the Japanese brands sold in Asia. The Company's economy brands are basic products targeted to compete strictly on price and value with local brands. The Company manufactures and distributes adult incontinence products under its own brands "DISPO 123(TM)","HANDY(TM)" and "CERTAINTY(TM)". The Company also manufactures adult incontinence (1) & (2) Source: AZTEC and AC Nielsen, April 2001 -16- products in private labels. The "DISPO 123(TM)" product is an ultra anatomic diaper, featuring multi-strand leg elastics, frontal tape closure system and stand-up leg gathers. "HANDY(TM)" and "CERTAINTY(TM)" have similar features as "DISPO 123(TM)" except for the stand-up leg gathers and slight specification changes. ii. Sales and Marketing The Company continues to command strong market positions in the mature markets of both Hong Kong and Singapore. The Company enjoys first-mover advantages in most of the markets in the Asian region and has established invaluable brand image and strong positions for the Company's products. The Company continues to focus on expansion of sales in the PRC, Thailand, Malaysia and Indonesia by capitalizing on the increasing usage of disposable baby diapers that are well supported by strategic pricing and wisely designed advertising and promotional activities. The Company also sells its products in India and, to a lesser extent, Brunei, Vietnam and the Philippines. The volume of disposable baby diaper usage varies significantly in different markets, depending to a large extent on the level of per capita disposable incomes. The disposable baby diaper usage is relatively high in Hong Kong and Singapore. Although these two mature markets contracted since the aftermath of Asian financial turmoil, the Company has been able to pursue strategies to maintain its market share in these markets. Disposable baby diaper usage is relatively low in other Asian countries, but the Company believes that the usage will increase as income levels in these countries continue to increase. In Asia, the Company has identified Malaysia, the PRC, Thailand and Indonesia as the markets that will expand rapidly in the next decade. The Company's strategy is to offer a variety of premium branded products targeted to compete with major U.S. and Japanese brands and to offer economy brands to compete in the fastest growing segment of the markets. The Company also ensures flexibility in product features, packaging and marketing functions to satisfy the ever-changing needs and trends of the different markets in Asia. In Hong Kong, the Company has its own sales force. Its products are sold in all major pharmacy outlets and department stores which account for 65% of all disposable baby diaper sales, while the remaining 35% are sold in major retail supermarket and hypermarket chains such as Park'N Shop, Wellcome and China Resources Company. The disposable baby diaper market in Hong Kong has contracted due to low birth rates and a weak economy. Over 90% of the sales in Hong Kong are sales of "FITTI(R)" and "PET PET(R)" brands of products which collectively have around a 30% share of the market. The "FITTI(R)" and "PET PET(R)" brands are supported by strong advertising and promotion programs, which not only impact sales in the local market but also in the Pearl River Delta area of Guangdong province in the PRC. In Singapore, the disposable baby diaper market is mature but relatively small. The Company sells and distributes it products, which are almost all branded products, by its own sales force in major retail chains, department stores and hypermarkets. The disposable baby diaper market in Malaysia continues to grow particularly in the economy products segment. The Company's "FITTI(R)" and "PET PET(R)" brands of products have been selling in the market for many years; however, with the establishment of the manufacturing facility in Selangor, -17- Malaysia in 1999, the Company was able to compete with the local economy products manufacturers. The Company's economy brands, "COSIFITS(R)" and FITTI Basic, expanded rapidly and have gained a significant share in the economy segment of the market. The Company's products are distributed nationwide by its own sales forces directly to the major chain stores such as Tops, Store and Ocean, Giant, and Carrefour, as well as to the other secondary chain stores, independent supermarkets and to lower-end retail outlets. In the PRC, another fast growing market that the Company has identified, the Company's leading brands are distributed in hypermarkets, supermarkets, department stores and independent retail stores in most of the provinces, such as Guangdong, Fujian, Zhejiang and major cities, such as Guangzhou, Shenzhen, Shanghai and Beijing. To cope with the rapid development of foreign invested hypermarkets in the PRC, the Company cultivates good relationships with the major players like Carrefour, Wal-mart and Price-Mart, and the Company's products are listed and sold in these hypermarkets. The Company's sales operation in Beijing directly services the Beijing and Tianjin markets and will expand sales and distribution to northern markets such as Shandong and Liaoning provinces. The Company also established an operation in Shanghai to directly service the Shanghai market and serve as a logistic center for servicing the markets in the eastern part of the PRC. The Company has expanded its distribution network to the provinces in the mid-western part of the PRC, such as Sichuan, Chongqing, Yunan, Hunan and Hubei, and continues to expand its distribution network with the aim of covering all the provinces of the PRC. The Company plans to set up other sales operations in strategically selected cities that will enhance sales and distribution to local markets and other markets in the nearby vicinity. The Company's sales expansion in the PRC is well supported by strategic pricing and a tailor-made advertising and promotion program. The Company estimates that the current usage of disposable baby diapers in the PRC is around 5% and will grow in accordance with the anticipated rapid economic growth of the country. In Thailand, although the usage of disposable baby diapers is relatively low, the disposable baby diaper market has been growing rapidly in the past few years. The Company's major brands in the market are "FITTI(R)", "PET PET(R)" and "BABY LOVE(R)". The Company's sales have been increasing with the growth of the market and as a result of expanding the Company's distribution networks throughout the country. Over 70% of the Company's sales in Thailand were in the Bangkok metropolitan area, with the rest of the sales coming from the suburban provinces. The Company's products are distributed to supermarkets and department stores by its own nationwide sales force. The Company has been able to capitalize on the market growth and sustain a market share of about 16% in 2000. The Company also manufactures private label products for a supermarket chain. The Company's adult incontinence products are distributed to hospitals, supermarkets and department stores. The Company estimates that its share of the Thailand adult incontinence market was approximately 50% in 2000, a more than double increase in its share of the market in 1999. The Company is also expanding its sales of adult incontinence products in other Asian markets. The Company's brands "FITTI(R)" and "PET PET(R)" are the leading brands in the Indonesian market. With the joint venture manufacturing facility near Jakarta, the Company is able to reduce its product costs as a result of an import duty exemption on raw materials and minimize the adverse effect of currency fluctuation. The Company's products are sold in all major hypermarkets and supermarket chains and its major competitors in the market are imported U.S. major brands. -18- The Company presently is not keen to export its products to Japan, Taiwan and Korea because current non-tariff barriers and complex distribution arrangements make entry into these markets difficult for foreign products. In countries that have high rates of import duties on products and high risks of currency fluctuation, the Company believes that it is more efficient and economical to service their markets through domestic manufacturing facilities. The Company presently has manufacturing facilities in Hong Kong, Thailand, the PRC, Indonesia and Malaysia. d. Europe i. Products The Company manufactures and markets branded and private label disposable baby diapers in the United Kingdom. The Company's brands currently in production are "FITTI(R)", "COSIFITS(R)" and "CARES(R)". "FITTI(R)" is a value brand baby diaper with full features such as leg gathers, wetness indicator, printed backsheet, extra-dry sub-layer and mechanical fasteners. "COSIFITS(R)" and "CARES(R)" are economy brands featuring frontal tape and extra-dry sub-layer. ii. Sales and Marketing The U.K. retail disposable baby diaper market in 1999 was approximately $847 million. Approximately 87%(1) of the market was branded products and the rest was made up of various private label brands of retailers supplied by European diaper manufacturers. The Company focused on selling its branded products to regional retails and wholesalers by offering a value-oriented product with good profit margins and a high level of service. The Company also produces its own label for certain U.K. grocery chains. 6. Dependent Patents, Licenses and Contracts a. Patents, Trademarks and Licenses 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 decides to pursue opportunities in new markets, it seeks registration of the trademarks under which it will market its products in those countries. The Company has licenses to use certain patented technology relating to certain features of the disposable diapers it manufactures, including multi- strand leg elastics and the "Wetness Indicator" feature of the Company's products in the United States. In 1997, Procter & Gamble ("P&G") claimed that certain of the Company's diaper products infringe P&G patents and demanded payment for past infringement and an agreement to pay future royalties. The Company and P&G reached settlement of (1) FSA Survey U.K. -19- this claim for the United States market in 1998. On May 21, 2001, the Company entered into an agreement with P&G to settle any potential liability of the Company which may have existed with respect to any past infringement on P&G patents prior to January 1, 2001 and to agree on royalty payments relating to sales on certain of the Company's products in the Asian Pacific and Australian regions after December 31, 2000. The agreement encompasses fixed payments totaling $300,000 relating to the period prior to January 1, 2001 and payment of royalties based on a percentage of sales of certain products in the Asian Pacific region beginning January 1, 2001. The amount of $300,000 relating to periods prior to January 1, 2001 was recorded in the statement of operations for the year ended December 31, 2000 as a component of selling, general and administrative expenses. A similar agreement was entered into in 1998 relating to the North American region and resulted in a payment of $900,000 to P&G, recorded as a component of selling, general and administrative expenses in 1998, for infringement of patents prior to January 1, 1998, as well as payments of royalty fees based on a percentage of certain products sold after December 31, 1997 within the North American region. b. Contracts The Company is a contract manufacturer for certain customers to supply private label products for baby disposable diapers and adult incontinence products. The Company entered into financial contracts with certain Banks and Financial Institutions for various financing facilities of revolving working capital line, equipment leasing and term loans. The information required is contained in notes 10 and 11 of the Notes to Consolidated Financial Statements in the Annual Report to Shareholders, and is incorporated herein by reference. In March 2001, the Company entered into an amended financing agreement with the existing financial institution under which the Company received a Term Loan of $11,000,000 (the "Term Loan"), a capital expenditure line of up to $5,000,000, and a revolving credit facility (based on the lesser of a percentage of eligible accounts receivable and inventory or $15,000,000). Such financing was entered into in connection with the Company's purchase of certain assets of the North American operations of Drypers Corporation as discussed in Note 20. The Company borrowed the full amount of the $11,000,000 Term Loan, with interest payable at LIBOR plus 4.25% or prime plus 2.75% per year at the election of the borrower, and repaid the existing Term Note. The Term Loan is repayable in 60 monthly installments of principal in the amount of $183,000 plus interest and is collateralized by the Company's U.S. subsidiary's assets. In addition, the Company borrowed approximately $9,100,000 of the $15,000,000 revolving credit facility during March 2001. Among other things, the agreement contains certain restrictive covenants, including the maintenance of earnings before interest, taxes, depreciation, and amortization ("EBITDA") and tangible net worth, and places limitations on acquisitions, dispositions, capital expenditures, and additional indebtedness. In addition in March 2001, the company borrowed $15,000,000 under a term loan (the "$15 million Term Loan") from an overseas financial institution which is controlled by one of the Company's non-executive directors. The loan bears annual interest at a rate of 14.5% increasing to 17.5% if any amounts payable under the loan are nor repaid when due. Interest is payable monthly while principal is due in March 2002. The Company may prepay all or a portion of the loan after the six-month anniversary of the initial borrowing. The loan is secured by the Company's ownership interest in its Australian subsidiaries. In addition, the loan agreement contains certain restrictive covenants, including minimum tangible net worth and EBITDA of the Australian subsidiaries. The borrowings were guaranteed by the Company's Chairman and Chief Executive Officer. In conjunction with the $15 million Term Loan, the Company committed to issue share purchase warrants to the lender. The warrants will allow the lender to purchase Ordinary Shares of the Company at a price of $0.01 per share. The number of warrants issued will equal 0.75% of the Company's diluted Ordinary Shares outstanding for each month any portion of the principal balance of the loan is outstanding. However, in no event will the lender receive warrants which grant the lender the right to purchase less than 4.5% of the Company's diluted stock. The fair value of the warrants will be amortized over the term of the loan as interest expense. Under the Sale and Purchase agreement between Associated Hygienic Products LLC as buyer and Drypers Corporation as seller, dated March 15, 2001, and pursuant to the order of the U.S. Bankruptcy Court based in Houston, Texas, the buyer agreed to buy and the seller agreed to sell its North America assets for $38.5 million. This transaction closed March 14, 2001. 7. Competition The disposable baby diaper industry is dominated worldwide by the brands of two major U.S. manufacturers : P&G and KC. The market position of these manufacturers, relative to the Company, varies from one geographic area to another, but due to their substantial financial, technical and marketing resources, both of these major manufacturers have the ability to exert significant influence and gain substantial market share in any of their marketing areas. Despite the disparity in relative strength, however, the Company has been able to secure its position in the face of very strong competition from the industry leaders by remaining innovative, flexible and financially responsible. a. North America The North American disposable baby diaper market remains dominated by the brands of the two major U.S. manufacturers: P&G and KC. Their combined market share of the disposable baby diaper market is 79%; including the disposable training pant, youth pant and swim pant segments. Total category unit sales are declining at a rate of about 8%, with volume continuing to shift from the grocery and drug classes of trade to the mass merchandisers. Consumers continue to move to larger packs for a lower price and more savings. These two major manufacturers continued their strategy of driving their business with aggressive retail pricing, rather than competing solely on the basis of consumer-driven marketing programs and product innovations. An increasing number of major retailers remain concerned with the negative impact that the advertised brands' strategy has had on their own private label sales and margins, and some continue to take corrective actions to protect their own brands. All of the moves made by the -20- advertised national brands have resulted in lower retail prices and the narrowing of retail price spreads between the advertised brands and private label offerings. Manufacturers and retailers alike are waiting anxiously to see how long this price strategy can be maintained in the face of continuous reductions in gross profit margins. The Company has positioned itself well to compete even if conditions remain the same. The continued moves by the major manufacturers to keep retail prices depressed, promote aggressively and keep retailers satisfied with minimal margins in favor of sales volume, have put serious sales and margin pressures on smaller brand and private label manufacturers. In response to this competitive activity, the Company has reallocated its promotional spending and has maintained a strategy in line with "everyday low prices", targeted trade promotions, enhanced product features and tightened cost controls. This strategy on its core "FITTI(R)" and "CUDDLES(R)" brands has allowed the Company to protect its share in critical markets and expand its private label base of business. In the adult incontinence arena, the Company is in an excellent competitive position, having the capability to provide key retailers, institutions and consumers with product technology that is superior to what other manufacturers can currently provide. There is an added advantage that comes from the demand for better products in order to meet the performance and comfort requirements of incontinent consumers. In spite of the tough competitive climate, overall margins in the adult segment remain better than in baby products. b. Australia The major competition faced by the Company in Australia is from Kimberly- Clark Australia ("KCA"). KCA dominates the disposable baby diaper market in Australia, with a 2000 estimated market unit volume share of 66% as measured by AC Nielsen for the combined grocery and pharmacy sectors. The Company believes it is able to compete successfully in Australia with its strategies of targeting different brands to different retail sectors, its ability to provide attractive retail profit margins for its customers and its ability to offer consumers competitive quality products with unique features at value retail price points. It also benefits from the desire of its retail customers for an alternative supplier to KCA for national brand diapers, and for a quality domestic supplier for their private label brands. c. Asia The Company's main competition in Asia comes from the brands of the two major U.S. manufacturers, and several manufacturers from Japan and Taiwan. The Company believes that it has been able to maintain a significant share of the Asian market due to its longer presence and well established brands in that region and the logistical advantage which results from the strategic location of its manufacturing operations. d. Europe In the United Kingdom, the disposable baby diaper market continues to be dominated by P&G, which has a market share of approximately 54%, and KC, which has a market share of approximately 33%. Both companies continued heavily promoting and discounting their brands in the U.K. market. Due to such consistent promotion activities, the private label brands have been reduced to a level of about 8% market share. The Company believes that, by pursuing a flexible brand strategy of supplying both branded and private label -21- in disposable baby diapers, it will be able to maintain its share and volume in the U.K. market. In this competitive environment, the cost increase of the Company's product due to the increase of pulp prices could not be passed on. 8. Government Regulations a. 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. b. Environment The Company believes that operations at all of its manufacturing facilities are conducted in compliance with applicable environmental laws, and that none of the material substances used or disposed of by the Company in its manufacturing operations are considered to be toxic or hazardous substances under such laws. The Company closely monitors environmental laws and regulations pertaining to disposal of solid waste, which includes household refuse, packaging and paper materials, and yardwaste, in addition to disposable diapers, in each of the markets in which its products are sold. The Company is not aware of any such laws or regulations which would have a material adverse effect on the Company's business as presently conducted and proposed to be conducted. A number of states in the United States have passed legislation that is intended to discourage the use of disposable products such as beverage containers, certain packaging materials and disposable diapers, or to encourage the use of non- disposable or recyclable products. The Company believes that it will not have to make any changes to its products to comply with presently existing environmental laws and regulations in the markets in which its products are sold. The Company endeavors to develop products which are environmentally responsible by closely monitoring world-wide developments in various raw material components and actively works with suppliers to develop and market products utilizing such components. c. 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. -22- C. Organizational Structure The Company's significant subsidiaries are:
Name Country of Incorporation Ownership Interest Advance Medical Supply Company Limited Thailand 100% Associated Hygienic Products Inc. Wisconsin, USA 100% Associated Hygienic Products LLC Delaware, USA 100% Disposable Soft Goods (Malaysia) Sdn. Bhd. Malaysia 100% Disposable Soft Goods (S) Pte Limited Singapore 100% Disposable Soft Goods (UK) Plc. U.K. 100% Disposable Soft Goods (Zhongshan) Limited PRC 100% Disposable Soft Goods Limited Hong Kong 100% DSG (Malaysia) Sdn. Bhd. Malaysia 100% DSG International (Thailand) Limited Thailand 80% DSG Pty. Limited Australia 100% PT DSG Surya Mas Indonesia 60%
D. Description of Property The Company operates eleven manufacturing facilities, with plants located in: the United States at Duluth, Georgia (near Atlanta) and at Oconto Falls, Wisconsin; Hong Kong; Melbourne, Australia; Chesterfield, U.K.; Zhongshan, Guangdong, PRC; Bangkok, Thailand; Jawa Barat, Indonesia; and Selangor, Malaysia. The manufacturing facilities of the newly acquired operations are in Marion, Ohio and Vancouver, Washington. The Company utilizes an aggregate of approximately 1,639,216 square feet of space in its manufacturing operations. The Company believes that its plant facilities, with the acquisition of the North America operations of Drypers Corporation, are adequate for its present operations. The Company operates 39 productive disposable baby diaper machines and adult incontinence machines, including 9 newly added machines from the acquisition of the Drypers assets. The gross productivity of the machines range from 350 pieces to 600 pieces per minute for disposable baby diaper and 200 to 300 pieces per minute for adult incontinence. The productivity of the machines is dependent on the machine types, sizes and packing configurations of the products. The following table summarizes the physical properties that are used by the Company in its manufacturing and distribution operations:
Approximate Lease Size Owned/ Expiration Productive Location Use (Sq. Feet) Leased Date Capacity(1) - -------------------------------------------- ------------- ------------------- ------------ --------------- ------------ Duluth, GA Manufacturing 226,625 Owned N/A 8 Melbourne, Australia Manufacturing 179,200 Owned N/A 5 Jawa Barat, Indonesia Manufacturing 174,000 Leased Sep. 2027 1 Oconto Falls, WI Manufacturing 165,684 Owned N/A 5 Zhongshan, PRC Manufacturing 122,321 Leased Oct. 2044 3 Hong Kong Manufacturing 70,895 Leased Jun. 2001 2 Bangkok, Thailand Manufacturing 68,805 Owned N/A 2 Chesterfield, U.K. Manufacturing 65,000 Leased May 2008 2 Selangor, Malaysia Manufacturing 46,686 Leased Jan. 2002 2 Marion, Ohio Manufacturing 440,000 Leased Oct. 2002 7 Vancouver, Washington Manufacturing 80,000 Leased Jul. 2001 2 Bangkok, Thailand Office 22,822 Leased Dec. 2000 - Singapore Office 14,500 Leased May 2001 - London, U.K. Office 3,500 Owned N/A - Shanghai, PRC Office 1,800 Leased Sep. 2002 - Beijing, PRC Office 868 Leased Oct. 2002 - Houston, TX Office 36,000 Leased Sep. 2001 -
(1) Refers to the number of diaper machines per location. -23- Item 5. Operating and Financial Review and Prospects. A. Operating Results The information required is contained in the Consolidated Statements of Operations of the Annual Report to Shareholders, and is incorporated herein by reference. B. Liquidity and Capital Resources The information required is contained in pages 15 and 16 of the Annual Report to Shareholders, and is incorporated herein by reference. C. Research and Development, Patents and Licenses 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. D. Trend Information 1. Industry Trends -24- The Company believes that the most significant industry trends are: . fluff wood pulp cost and other raw materials cost increased in 2000, however, it is expected that increase in fluff wood pulp cost will slow down in 2001; . increasing demand for mechanical closure tape and cloth-like breathable backsheet products, which the Company is meeting through modifications to its machinery; . the domination of industry leaders in most of the markets putting pressure on retailers' margins, which the Company is finding difficult to respond to by providing retailers with higher profit margins in the current highly competitive market conditions. The Company is unable to predict whether the other trends noted above would have a material effect on its future financial condition or results of operations and, if so, whether such an effect will be positive or negative. 2. 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. Item 6. Directors, Senior Management and Employees. A. Directors and Senior Management The directors and executive officers of the Company are:
Name Age Present Position - ------------------------- --- ------------------------------------------------------ Brandon Wang 55 Director, Chairman of the Board and President Philip Leung 53 Director and Vice President Johnny Tsui 60 Director, Vice President and Secretary Patrick Tsang 55 Director and Vice President Terence Leung 50 Director, Vice President and Chief Financial Officer Peter Chang 55 Director and Vice President Owen Price 75 Director Anil Thadani 55 Director Allister McLeish 61 Director
Brandon Wang is married to Eileen Wang-Tsang, who is Patrick Tsang's sister. Peter Chang is married to Brandon Wang's sister. 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 -25- Xavier's College in Kowloon, Hong Kong. Philip Leung helped Brandon Wang establish the Company in 1973 and has served as a director and Vice President of the Company since that time. He is currently also the Company's Chief Purchasing Officer and oversees and implements the global purchasing and product development of the Company. Mr. Leung holds a diploma of Management Studies from Hong Kong Polytechnic University and a M.B.A. degree from the University of East Asia, Macau. Johnny Tsui helped Brandon Wang establish the Company in 1973 and has served as a director and Vice President of the Company since that time. In September 1995, he was appointed as Secretary of the Company. He has also served as Chief Operating Officer of the Company's Asian operations since 1991. Patrick Tsang has been a director of the Company since 1980, and was appointed a Vice President in January 1992. He was Secretary of the Company from March 1992 to September 1995. In 1988, he started up the Company's Australian operations. Since July 1993 he has also served as Chief Operating Officer of the Company's European operations. Mr. Tsang has a Ph.D. in Engineering from the University of London. He also attended a Management Science course at Imperial College, London. Terence Leung has been the Company's Chief Financial and Accounting Officer since 1988. He was appointed a director in 1991 and a Vice President in January 1992. Before joining the Company in 1978, Mr. Leung worked as an accountant with several major trading corporations in Hong Kong. Mr. Leung is a certified public accountant in the United Kingdom and Hong Kong. Peter Chang has been the Chief Operating Officer of the Company's U.S. operations since the Company moved its U.S. headquarters to Atlanta, Georgia in late 1988. Mr. Chang joined the Company in 1984 as Vice President in charge of U.S. sales and marketing at the time the Company commenced operations in the United States, and became a director in 1991 and a Vice President in January 1992. Prior to joining the Company, Mr. Chang held various engineering and management positions with major U.S. airlines, based in New York. Mr. Chang has a Master's Degree in Operations Research from Kansas State University. Owen Price became a director in April 1994. In 1993 he retired as the Managing Director of Dairy Farm International Holdings Limited which he joined in 1974. Prior to that time, he had 27 years experience with a large Australian retailer, Woolworths Ltd., where he started as an Executive Trainee and worked his way through to become Chief Executive in 1971. He has served on a number of retail councils in different countries and has been an adviser to the Australian government on trade matters. He is a director of numerous companies in the Asia-Pacific region including three other listed public companies : Dairy Farm International Holdings Limited, Cycle And Carriage Limited (alternate director), and The Hour Glass Limited. Anil Thadani advises the Company on financial matters, corporate strategy and development, and was a director of the Company from 1989 until April 1995, when he resigned as a result of his interest in the going private transaction. He was re-elected to the Board in September 1995. Mr. Thadani is the Chairman of Schroder Capital Partners (Asia) Limited, a direct investment company, which he founded in July 1992 in joint venture with the Schroders Group of the United Kingdom. Prior to this, he was the -26- Managing Director and a founding partner of Arral & Partners Limited, a private investment company based in Hong Kong. He is also a director of Programmed Maintenance Services Pty. Ltd., ODS System-Pro Holdings Ltd., Equatorial Reinsurance (Singapore) Ltd. and Scandia (Asia) Ltd. Mr. Thadani has a Master's Degree in Chemical Engineering from the University of Wisconsin, Madison, and a M.B.A. from the University of California at Berkeley. Allister McLeish became a director in October 2000. He previously served as a non-executive director in the 1970's of one of the Company's subsidiaries in Hong Kong. Mr. McLeish is a Scottish chartered accountant and a chartered management accountant who recently retired from a publicly listed industrial chemicals group, Yule Catto & Co. Plc., where he had held the position of finance director for the past twenty years. Mr. McLeish has had over forty years' experience with internationally based manufacturing companies and has worked in the U.K. and in several Far Eastern countries. OTHER KEY MANAGEMENT PERSONNEL In addition to the above-named officers and directors, the following persons hold key management positions with the Company: George Jackson was appointed to the post of Chief Executive of the Australian operations in mid 1997. Mr. Jackson joined the Company in 1987 and prior to his transfer to Australia, he was the National Sales Manager with the Company's U.S.A. operations. Prior to joining the Company, he held various management positions in accounting and manufacturing with Weyerhaeuser Company. He holds a B.A. degree in Business Administration - Accounting (1977) from the University of Washington, Seattle, WA. B. Compensation In 2000 the aggregate remuneration paid by the Company and its subsidiaries to all directors and officers of the Company as a group (9 persons) for services in all capacities was approximately $4,811,663. -27- C. Board Practices All directors are elected for a one-year term at the Annual Meeting of the shareholders. The appointment of all officers is subject to the discretion of the Board of Directors. The Executive Committee of the Board of Directors consists of Brandon Wang, Philip Leung, Johnny Tsui, Patrick Tsang, Terence Leung and Peter Chang. The Executive Committee has authority to take any action, other than appointment of auditors, election and removal of directors and appointment of officers, which can be taken only by the Board of Directors. Neither the Company nor any of its subsidiaries provide benefits for directors upon termination of employment. During 2000, the Company's Audit Committee consisted of Anil Thadani, Owen Price and Allister McLeish. 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. The Company's Audit Committee met once in 2000. During 2000, the Company did not appoint a remuneration committee. D. Employees The Company has a total of approximately 1,415 full time employees at its manufacturing facilities as of December 31, 2000:- 2000 1999 1998 - ------------------------------------------------------------------------------ North America 383 399 482 - ------------------------------------------------------------------------------ Australia 218 181 186 - ------------------------------------------------------------------------------ Asia Pacific 760 508 256 - ------------------------------------------------------------------------------ Europe 54 126 196 - ------------------------------------------------------------------------------ Total 1,415 1,214 1,120 - ------------------------------------------------------------------------------
The Company does not have a significant number of temporary employees. 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. In March 2001, the total full time employees of the Company increased by approximately 500 as a result of the acquisition of the North America operations of Drypers Corporation. -28- E. Share Ownership For information concerning the beneficial ownership of the Company's Ordinary Shares by Directors and Senior Management and major shareholders, see Item 7 of this Report. The Company has not granted the directors, senior management and employees options to purchase shares of the Company. In conjunction with the $15 million Term Loan in Note 11 to Consolidated Financial Statements, the Company committed to issue share purchase warrants to the lender for Ordinary Shares of the Company at a price of $0.01 per share. The number of warrants issued will equal 0.75% of the Company's diluted Ordinary Shares outstanding for each month any portion of the principal balance of the loan is outstanding. However, in no event will the lender receive warrants which grant the lender the right to purchase less than 4.5% of the Company's diluted Ordinary Shares. The fair value of the warrants will be amortized over the term of the loan as interest expense. Item 7. Major Shareholders and Related Party Transactions. A. Major Shareholders As of December 31, 2000, the total number of record holders was 33, of which 23, representing 41.29% of the Company's Ordinary Shares, were in the United States. 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, 2000 is known by the Company to own 5% or more of the Company's outstanding Ordinary Shares and by all directors and officers as a group.
Ordinary Shares Beneficially Owned --------------------------------- Name of Beneficial Owner Number Percent - ------------------------ --------- ---------- 10% or more shareholders (Brandon Wang) ....................... 3,321,680 (1) 49.77% Directors and officers as a Group (9 persons) ................. 4,171,846 (1) 62.50% FMR Corp....................................................... 512,500 7.68% Philip Leung................................................... 234,000 3.51% Johnny Tsui.................................................... 234,000 3.51% Peter Chang.................................................... 124,000 1.86% Patrick Tsang.................................................. 122,000 1.83% Terence Leung.................................................. 117,000 1.75% Anil Thadani................................................... 19,166 0.29% Owen Price..................................................... - - Allister McLeish............................................... - - Benedict Wang.................................................. 123,000 (2) 1.84% S L Wang....................................................... 117,000 (2) 1.75%
(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 -29- Ordinary Shares and other securities, in each case without the supporting vote of any other shareholder of the Company. In addition, Brandon Wang is a 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. B. Related Party Transactions The information required is contained in note 12 of the Notes to Consolidated Financial Statements in the Annual Report to Shareholders, and is incorporated herein by reference. The following table sets forth the aggregate amount of loans made by the Company to Brandon Wang, the founder, principal shareholder and Chief Executive Officer of the Company and to a trust of which he is a beneficiary since January 1, 1996:
Loan balance Balance at beginning Loans Loans at end of year extended repaid of year ---------------------------------------------------------------- (dollars in thousands) Year ended December 31, 2000 $2,811 $10,744 $1,943 $11,612 Year ended December 31, 1999 $3,472 $ 1,879 $2,540 $ 2,811 Year ended December 31, 1998 $ 607 $ 3,372 $ 507 $ 3,472
In 2000, 1999 and 1998 the Company advanced $10.7 million, $1.9 million, and $3.4 million, respectively, to Brandon Wang, the founder, substantial shareholder and Chief Executive Officer of the Company and to a trust of which he is a beneficiary. These advances were made under a loan and security agreement in which the Company agreed to make loans to Brandon Wang from time to time, subject to any limit on such loans which may be imposed by the Board of Directors. The loans were repayable on demand evidenced by promissory notes bearing interest at a rate equal to 1.5% over the London Inter-Bank Offered Rate (LIBOR) or such other rate that the Board of Directors and the borrower shall agree upon in writing. The rate of interest was reviewed quarterly and adjusted, if necessary. In January 2000, the Company's U.S. subsidiary borrowed amounts under a term loan facility which was used to repay the balance of a loan payable by Brandon Wang to a bank, amounting to $5.3 million. This amount has been aggregated with the receivable from Brandon Wang which amounted to $2.8 million at December 31, 1999. The resulting note payable by Brandon Wang is repayable on demand and carries the same interest terms as those of the existing promissory notes. Brandon Wang is required to provide collateral of shares of the Company held by him, such amount to be not less than 125% of the amount due under the notes. During 2000, 1999 and 1998, Brandon Wang and a trust controlled by him repaid $1.9 million, $2.5 million, and $0.5 million, respectively, to the Company. Interest of $0.5 million, $0.2 million, and $0.09 million was charged on these advances in 2000, 1999 and 1998, respectively. The loans to Brandon Wang are currently being treated as a reduction in shareholders' equity. -30- Item 8. Financial Information A. Consolidated Statements and Other Financial Information Our Consolidated Financial Statements are set forth under Item 18. DIVIDENDS AND DIVIDEND POLICY It is the Company's general policy to determine the actual annual amount of future dividends based upon the Company's growth during the preceding year. Future dividends will be in the form of cash or stock or a combination of both. There can be no assurance that any dividend on the Ordinary Shares will be declared, or if declared, what the amounts of dividends will be or whether such dividends, once declared, will continue for any future period. The Company did not pay any dividends in 2000, 1999 and 1998. 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. On June 27, 2001, a jury returned a verdict and awarded $4.0 million in damages and also provided for potential enhanced damages against the Company up to an additional $7.0 million. The Company will file post trial motions to overturn the jury verdict and, if necessary, will appeal the verdict to the U.S. Court of Appeals for the Federal Circuit. The Company believes that it is reasonably possible that it will be successful in overturning the jury verdict. Accordingly, the jury award has not been recorded in the Company's consolidated financial statements. Unsuccessful resolution of the above litigation resulting in a significant assessment against the Company may result in the Company violating certain covenants of its debt agreements. This would give the lenders the right to demand payment of outstanding amounts unless the lenders waive their rights under the debt agreements. Demand for payment by the lenders and the need to pay the award to the plaintiff would require the Company to secure other financing sources to meet its obligations. The Company has advised the lenders of the recent jury verdict and its intention to pursue a post trial motion to overturn the decision and, if necessary, file an appeal. While the Company believes that it is reasonably possible that it will be successful in overturning the jury verdict, the outcome of this litigation is uncertain. A claim has been made by Ms. Rhonda Tracy, the owner of U.S. Patent No. 5,797,824 for disposable diapers with a padded waistband and leg holes, asserting that the Company has been manufacturing and/or selling diapers which infringe her patent. No lawsuit has been filed against the Company to date. The Company, however, has filed a lawsuit against Ms. Tracy in the U.S. district court for the Northern District of Georgia for a declaration that her patent is invalid and/or not infringed. The Company's case is presently stayed pending an action Ms. Tracy has filed against Jewel Food Stores, Inc., American Stores Company, WalMart Stores, Inc., Dominick's Finer Foods, Inc., Drypers Corporation, Kimberly-Clark Corporation and Tyco International, Ltd. in the U.S. district court in the Northern District of Illinois claiming infringement of her patent. The Company is unable to determine whether Ms. Tracy will file a lawsuit against the Company, and if so, the impact of the ultimate outcome of this matter. The Company denies any liability relating to this matter and intends to pursue its case against Ms. Tracy and vigorously defend itself if a lawsuit is filed. B. Significant Changes The information required is contained in Note 13 and Note 20 of the Notes to Consolidated Financial Statements. Item 9. Stock Price History. A. Listing Details 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. -31- ORDINARY SHARE PRICE:
2000 1999 1998 1997 1996 ------ ------- ------ ------- ------- High $7.000 $10.625 $9.500 $17.250 $15.500 Low 4.000 2.750 2.813 7.375 10.250
2001 2000 1999 ------ ------ ------- Quarter High Low High Low High Low - ------------------------- ------------ ------------ ------------ ------------ ------------- ------------ First $7.906 $4.063 $7.000 $5.500 $ 3.500 $2.750 Second - - 5.938 4.750 9.000 3.250 Third - - 5.500 4.000 10.625 7.000 Fourth - - 5.563 4.000 9.063 5.250
Apr 2001 Mar 2001 Feb 2001 Jan 2001 Dec 2000 Nov 2000 ------------- ------------- ------------- ------------- ------------- ------------- High $7.125 $7.906 $5.500 $4.438 $4.875 $5.563 Low 5.500 4.750 4.063 4.063 4.000 4.625
B. Plan of Distribution Not applicable. Item 10. Other Information. A. Share Capital Not applicable. B. Memorandum and Articles of Association 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. 1. 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. -32- 2. 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 2000. 3. 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. 4. 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 -33- "Excess Shares", which shall not be entitled to any voting rights and shall not be considered voting shares for purposes of establishing a quorum. However, the Board of Directors may exempt any such Excess Shares from these restrictions if it is satisfied, on the basis of evidence and assurances acceptable to it, that the holding of shares in excess of 10% of the Company's outstanding shares by such shareholder will not result in the Company being classified as a CFC, FPHC or PHC. In addition, these restrictions on voting rights do not apply to shares acquired in a cash tender offer for all outstanding shares of the Company where a majority of the outstanding shares of the Company are duly tendered and accepted pursuant to such cash tender offer. (iii) Disclosure of Certain Information to the Company. Any person who directly owns 5% or more of the Company's outstanding shares is required to file with the Company, within 60 days of the end of the Company's taxable year (which is currently the calendar year) and prior to any transfer of shares by or to such person, an affidavit setting forth the number of shares (1) owned directly by such person or by a nominee of such person, and (2) owned indirectly or constructively by such person by reason of the attribution rules of Sections 542, 544 and 958 of the Code or by reason of application of the attribution rules of Rule 13(d) of the U.S. Securities Exchange Act of 1934 ("Exchange Act"). The affidavit filed with the Company must set forth all the information required to be reported (1) in returns of shareholders required to be filed under U.S. Income Tax Regulations Section 1.6035-1 (including shareholder related information for inclusion in IRS Form 5471), and (2) in reports required to be filed under Section 13(d) of the Exchange Act. All shares held by any person who fails to comply with this reporting requirement shall be deemed Excess Shares and shall be subject to the voting restrictions and redemption provisions described herein. (iv) Redemption of Ordinary Shares. The Company may, in the discretion of the Board of Directors, redeem any Excess Shares at a price equal to (1) the average of the high and low sales price of the shares on the last business day prior to the redemption date on the principal national securities exchange on which such shares are listed or admitted to trading, or (2) if the shares are not listed or admitted to trading, the average of the highest bid and lowest asked prices on such last business day as reported by the National Quotation Bureau Incorporated or similar organization selected from time to time by the Company, or (3) if not determinable as aforesaid, as determined in good faith by the Board of Directors. The directors of the Company, in a meeting held on January 6, 1992, resolved that the principal shareholder, Brandon Wang, is exempt from the foregoing restrictions. The directors have also approved exemption of certain institutional shareholders from the foregoing restrictions as the Board was satisfied that such exemption would not have any of the adverse tax consequences described above. 5. 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 -34- 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". 6. Directors Under the Company's Articles of Association, the subscribers to the Memorandum of Association must appoint the first directors, 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. 7. Powers of Directors The business and affairs of the Company is managed by the directors who may pay all expenses incurred preliminary to and in connection with the formation and registration of the Company and may exercise all such powers of the Company as are not by the Act or by the Memorandum or the Articles required to be exercised by the members of the Company, subject to any delegation of such powers as may be prescribed by a resolution of members; but no requirement made by a resolution of members shall prevail if it be inconsistent with the Articles nor shall such requirement invalidate any prior act of the directors which would have been valid if such requirement had not been made. The directors may, by a resolution of directors, appoint any person, including a person who is a director, to be an officer or agent of the Company. The resolution of directors appointing an agent may authorize the agent to appoint one or more substitutes or delegates to exercise some or all of the powers conferred on the agent by the Company. Every officer or agent of the Company has such powers and authority of the directors, including the power and authority to affix the Seal, as are set forth in the Articles or in the resolution of directors appointing the officer or agent, except that no officer or agent has any power or authority with respect to the matters requiring a resolution of directors under the Memorandum, the Articles, or the Act. The continuing directors may act notwithstanding any vacancy in their body, save that if their number is reduced to their knowledge below the number fixed by or pursuant to the Articles as the necessary quorum for a meeting of directors, the continuing directors or director may act only for the purpose of appointing directors to fill any vacancy that has arisen or for summoning a meeting of members. The directors may, by resolution of directors, exercise all the powers of the Company to borrow money and to mortgage or charge its undertakings and property or any part thereof, to issue debentures, debenture stock and other securities whenever money is borrowed, or as security for any debt, liability or obligation of the Company or of any third party. All cheques, promissory notes, drafts, bills of exchange and other negotiable instruments and all receipts for moneys paid to the Company, shall be signed, drawn, accepted, endorsed or otherwise executed, as the case may be, in such manner as shall from time to time be determined by resolution of directors. The Company may determine by resolution of directors to maintain at its registered office a register of mortgages, charges and other encumbrances in which there shall be entered the following particulars regarding each mortgage, charge and other encumbrance: (a) the sum secured; (b) the assets secured; (c) the name and address of the mortgagee/chargee or other encumbrancer; (d) the date of creation of the mortgage, charge or other encumbrance; and (e) the date on which the particulars specified above in respect of the mortgage, charge or other encumbrance are entered in the register. The Company may further determine by a resolution of directors to register a copy of the register of mortgages, charges or other encumbrances with the Registrar of Companies. 8. 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. 9. Resolutions Resolutions may be adopted at shareholders' meetings by the affirmative vote of a simple majority of the Ordinary Shares entitled to vote thereon. Certain actions may be taken by a resolution of the directors. Such actions include an amendment of the Company's Memorandum and Articles of Association, an increase or reduction in the Company's authorized capital, and a change in the Company's name. 10. 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. 11. Authorized but Unissued Shares Under the Company's Memorandum and Articles of Association, there are 13,325,394 authorized but unissued Ordinary Shares. Those additional authorized but unissued Ordinary Shares may be utilized for a variety of corporate purposes, including future public or private offerings to raise additional capital or for facilitating corporate acquisitions. In addition, the Company cancelled 603,000 shares in 1996 and -35- 1,037,394 shares in 1997, which were repurchased under the share repurchase plan adopted during 1994 and amended in 1995 and the tender offer transaction which was completed in December 1996. The Company does not currently have any plans to issue additional Ordinary Shares. 12. 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". 13. New Issues of Ordinary Shares Under the Company's Articles of Association, the Board of Directors is authorized to exercise the power of the Company to offer, allot, grant options over or otherwise dispose of all of the remaining unissued Ordinary Shares of the Company, which comprise 13,325,394 Ordinary Shares. The Board of Directors may, without further shareholder action, increase the number of authorized shares of the Company. In addition, the Board of Directors may, without further shareholder action, designate any of the authorized but unissued Ordinary Shares as preferred shares by amending the Company's Memorandum of Association. Upon filing such amendment with the BVI Registrar of Companies, the Board of Directors would have authority to fix the dividend rights and rates, voting rights, redemption provisions and liquidation preference, all of which may take precedence over comparable rights of the existing Ordinary Shares. 14. Merger; Dissenters' Rights BVI law provides for mergers whereby there occurs either an absorption by one company of another company and the simultaneous dissolution of the other company, or the formation of a new company that absorbs two companies and the automatic dissolution of both absorbed companies. BVI law provides for compulsory acquisition or appraisal of the interests of a shareholder who objects to the transfer of the ownership or assets of a company. Under section 83 of the BVI International Business Companies Act, a shareholder of a company incorporated under the Act has the right to object to a proposed merger of the Company. If the shareholder complies fully with the requirements of section 83 and the merger is approved by a majority of shareholders, the dissenting shareholder may require the Company to pay fair value (as agreed or appraised) for his shares. Pursuant to section 83 (11) of the Act, a shareholder who chooses to enforce dissenting shareholders' rights may not enforce other remedial rights to which he might otherwise be entitled by virtue of his holding shares, except that the shareholder shall retain the right to institute proceedings to obtain relief on the ground that the merger is illegal. -36- 15. 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. 16. 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. 17. 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. 18. Transfer Agent and Registrar Mellon Investor Services, LLC serves as the Transfer Agent and Registrar for the Ordinary Shares. C. Material Contracts The following summarizes each material contract, other than contracts entered into in the ordinary course of business, to which the Company or any subsidiary of the Company is a party, for the two years immediately preceding the filing of this report, and which are filed as Exhibits hereto: Sale and Purchase Agreement between DSG TEK Limited, a wholly owned subsidiary of the Company as seller and IVF Hartmann AG as buyer dated October 20, 2000 under which the seller sells to the buyer all shares of Vlesia AG , a wholly own subsidiary of the seller, for the consideration of Swiss -37- Franc 8.5 million. Loan and Security Agreement between Associated Hygienic Products LLC as borrower and Foothill Capital Corporation as lender dated March 14, 2001 under which the lender agrees to make a term loan, a capital expenditure line and revolver advances to the borrower up to US$31.0 million. See Dependent Patents, Licenses and Contracts in Item 4.B.6 and Note 11 of the Notes to Consolidated Financial Statements. Short Term Financing Agreement between DSG International Limited as borrower and Breakers Investment Holding Limited as lender dated March 14, 2001 under which the lender agrees to make a term loan of $15.0 million to the borrower. DSG International Limited will grant the lender warrants priced at $0.01 per share for 0.75% of the Company's fully diluted Ordinary Shares for each month up to a total of 9.0% of the Company's fully diluted Ordinary Shares whilst any part of the loan is outstanding. Regardless of the repayment or any prepayment of this loan, in no event will the lender receive warrants equivalent to less than 4.5% of the Company's fully diluted Ordinary Shares. Sale and Purchase agreement between Associated Hygienic Products LLC as buyer and Drypers Corporation as seller dated February 20, 2001 under which and pursuant to the order the U.S. Bankruptcy Court based in Houston, Texas the buyer agrees to buy and the seller agrees to sell its North America Assets for $38.5 million. This transaction closed March 14, 2001. D. Exchange Controls There are no exchange control restrictions on payment of dividends, interest, or other payments to nonresident holders of the Company's securities or on the conduct of the Company's operation in Hong Kong, where the Company's principal executive offices are located or the British Virgin Islands, where the Company is incorporated. Other jurisdictions in which the Company conducts operations may have various exchange controls and the Company believes that such controls will not have a material effect on the Company's liquidity or cash flow. E. Taxation The following discussion is a summary of certain anticipated U.S. federal income tax and BVI tax consequences of ownership of Ordinary Shares of the Company. The discussion does not address all possible tax consequences relating to ownership of Ordinary Shares and does not purport to describe the tax consequences applicable to all categories of owners, some of which (such as dealers in securities, insurance companies and tax-exempt entities) may be subject to special rules. In particular, the discussion does not address the tax consequences under state, local and other national (e.g., non-U.S. and non-BVI) tax laws. Accordingly, each shareholder should consult its own tax advisor regarding the particular tax consequences to it of its ownership of the Ordinary Shares. The following discussion is based upon laws and relevant interpretations thereof in effect as of the date of this Annual Report, all of which are subject to change. 1. United States Federal Income Taxation The following discussion only addresses the U.S. federal income taxation of a U.S. person (e.g., an individual who is a citizen or resident of the U.S., a U.S. corporation, an estate subject to U.S. tax on all of its income regardless of source, and a trust if a court within the U.S. may exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control substantial decisions of the trust) (a "U.S. Investor") owning Ordinary Shares. In addition, the following discussion does not address the tax consequences to a person who owns (or will own) directly, indirectly or constructively, 10% or more of the Ordinary Shares (a "10% Shareholder"). Non-U.S. persons and 10% -38- Shareholders are advised to consult their own tax advisors regarding the tax considerations incident to ownership of the Ordinary Shares. A U.S. Investor receiving a distribution with respect to the Ordinary Shares will be required to include such distribution in gross income as a taxable dividend to the extent such distribution is paid from earnings and profits of the Company as determined under U.S. federal income tax principles. Any distributions in excess of the earnings and profits of the Company will first be treated, for U.S. federal income tax purposes, as a nontaxable return of capital to the extent of the U.S. Investor's basis in the Ordinary Shares, and then as a gain from the sale or exchange of a capital asset, provided that the Ordinary Shares constitute capital assets in the hands of the U.S. Investor. U.S. corporate shareholders will not be entitled to any deduction for distributions received as dividends on the Ordinary Shares. Gain or loss on the sale or exchange of the Ordinary Shares will be treated as capital gain or loss if the Ordinary Shares are held as a capital asset by the U.S. Investor. Such capital gain or loss will be a long-term capital gain or loss if the U.S. Investor has a holding period of more than one year with respect to the Ordinary Shares at the time of the sale or exchange. Various provisions contained in the U.S. Internal Revenue Code (the "Code") impose special taxes in certain circumstances on non-U.S. corporations and their shareholders. The following is a summary of certain provisions which could have an adverse impact on the Company and the U.S. Investors: a. 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. b. Foreign Personal Holding Companies Sections 551 through 558 of the Code relate to foreign personal holding companies ("FPHCs") -39- and impute undistributed income of certain foreign corporations to U.S. persons who are shareholders of such corporations. A foreign corporation will be classified as a FPHC if (i) five or fewer individuals, who are U.S. citizens or residents, directly or indirectly own more than 50% of the corporation's stock (measured either by voting power or value) (the "shareholder test") and (ii) the Company receives 60% or more of its gross income (regardless of source), as specially adjusted, from certain passive sources (the "income test"). The Company believes that it is not currently and has not been a FPHC for any taxable year since its formation because for each such year either or both of the income test and the shareholder test were not met. It is possible that subsequent events would cause the Company to meet either or both of the income test and the shareholder test. In the opinion of the Company, however, it is unlikely that the shareholder test would be met, especially in view of the inclusion of certain transfer restrictions in the Company's governing documents. See "Description of Securities". If the Company is classified as a FPHC after application of the shareholder test and the income test, a pro rata portion of its undistributed income would be imputed to its shareholders who are U.S. persons (including U.S. corporations) and would be taxable to such persons as a dividend, even if no cash dividend is actually paid. In that event (promptly after receiving an opinion of counsel or final determination) the Company intends to distribute to its shareholders sufficient amounts so that U.S. shareholders would receive cash at least equal to the product of 150% of the highest federal income tax rate which could apply to any U.S. shareholder and the amount of the dividend that would otherwise be imputed to them. If the Company is classified as a FPHC in the year preceding the death of a shareholder, the Ordinary Shares held by such shareholder would obtain a tax basis equal to the lesser of their fair market value or their tax basis in the hands of the decedent. c. Passive Foreign Investment Companies Sections 1291 through 1297 of the Code relate to passive foreign investment companies ("PFICs") and impose an interest charge on "excess distributions" made from a PFIC. A foreign corporation is a PFIC if (i) 75% or more of its gross income for the taxable year is passive income as defined under Section 954(c) of the Code (the "passive income test"), or (ii) 50% or more of the average value (or adjusted tax basis if the corporation is a CFC) of the assets held by the corporation during the taxable year consist of assets that produce or are held for the production of passive income (the "passive asset test"). Certain look- through rules take into account the assets and activities of related corporations from which the foreign corporation either receives income or in which it holds an interest. Although a determination whether a corporation is a PFIC is made annually, in general, once a corporation has been classified as a PFIC, it cannot thereafter lose its status as a PFIC. Distribution from a PFIC will generally be characterized as an excess distribution to the extent such distribution, when combined with all other distributions received by the U.S. Holder in such taxable year, exceeds 125% of the average distributions received by such shareholder in the three preceding taxable years (or its holding period if shorter). Once the amount of the excess distribution is determined, it is allocated ratably to all days in the shareholder's holding period for the shares of the PFIC. Amounts allocated to the current year or a year prior to the date upon which the corporation was a PFIC are included in the shareholder's income as ordinary income. Amounts allocated to prior years in which the corporation was a PFIC are subject to the highest rate of tax for the year to which allocated, and each of -40- the resulting amounts of tax is subject to an interest charge as if it were an underpayment of taxes for such tax year. The Company does not believe that it should, in the current year or any prior year, be classified as a PFIC. Under Section 1296(c) of the Code for purposes of determining PFIC status, a foreign corporation is deemed to hold its proportionate share of the assets and to receive directly its proportionate share of the income of its subsidiaries in which it owns 25 percent or more of the stock (determined by value). The Company, through its more than 25 percent owned subsidiaries, is engaged in substantial manufacturing activities and holds few assets (and receives little income) which would be classified as passive assets or would be classified as passive income under the applicable authorities. d. 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. e. United States Backup Withholding A holder of an Ordinary Share may be subject to "backup withholding" at the rate of 31% with respect to dividends paid on such Ordinary Share if such dividends are paid by a paying agent, broker or other intermediary in the United States or by a U.S. broker or certain United States-related brokers to such holder outside the United States. In addition, the proceeds of the sale, exchange or redemption of an Ordinary Share may be subject to backup withholding if such proceeds are paid by a paying agent, broker or other intermediary in the United States. Actual backup withholding may be avoided by the holder of an Ordinary Share if such holder (i) is a corporation or comes within certain other exempt categories, and when required, demonstrates this fact or (ii) provides a correct taxpayer identification number, certifies that such holder is not subject to backup withholding and otherwise complies with the backup withholding rules. In addition, holders of Ordinary Shares who are not U.S. persons ("non-U.S. holders") are generally exempt from backup withholding, although such holders may be required to comply with certification and identification procedures in order to prove their exemption. In the case of Ordinary Shares held by a foreign partnership, this certification requirement would generally be applied to the partners of such partnerships pursuant to certain regulations which will generally become effective after 2000. Any amounts withheld under the backup withholding rules from a payment to a holder will be refunded (or credited against the holder's U.S. federal income tax liability, if any) provided that the amount withheld is claimed as federal taxes withheld on the holder's U.S. federal income tax return relating to the year in which the backup withholding occurred. A holder who is not otherwise required to file a U.S. income tax return must generally file a claim for refund (or, in the case of non-U.S. holders, an income tax return) in order to claim refunds of withheld amounts. -41- 2. British Virgin Islands Taxation Under the laws of the BVI as currently in effect, a holder of Ordinary Shares who is not a resident of the British Virgin Islands is exempt from BVI income tax on gains realized during that year on sale or disposal of such shares; the British Virgin Islands does not impose a withholding tax on dividends paid by the Company. There are no capital gains, gift or inheritance taxes levied by the British Virgin Islands. In addition, the Ordinary Shares are not subject to any transfer taxes, stamp duties or similar charges in the BVI. 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. F. Dividends and Paying Agents Not applicable. G. Statement by Experts Not applicable. H. Documents on Display The Annual Report on Form 20-F of DSG International Limited as filed with the Securities and Exchange Commission and Exhibits thereto and documents referenced therein will be made available upon request to: Office of the Secretary DSG International Limited 17/F Watson Centre 16-22 Kung Yip Street Kwai Chung, Hong Kong Item 11. Quantitative and Qualitative Disclosures about Market Risk A. Currency Fluctuation 1. Exchange Rate Information The Consolidated Financial Statements of the Company are prepared in U.S. dollars. The financial statements of foreign subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52. The Australian dollar, Swiss Franc, Pound Sterling, Deutsche Mark, Belgian Franc, Singapore dollar, Thai Baht and Indonesian Rupiah are convertible into U.S. dollars at freely floating rates. The Hong Kong dollar and Malaysian Ringgit are tied to and allowed to fluctuate within a narrow range against the value of the U.S. dollar. There are currently no restrictions on the flow of such currencies, except Renminbi, Thai Baht and Malaysian Ringgit, between such countries and the United States. Fluctuations in the value of foreign currencies cause U.S. dollar translated amounts to change in comparison with previous periods and, accordingly, the Company cannot quantify in any meaningful way, the effect of such fluctuations upon future income. This is due to the number of currencies involved, the constantly changing exposure in these currencies, and the fact that all foreign currencies do not react in the same manner against the U.S. dollar. The exchange rate in the Asian countries stabilized in 2000 and the exchange rate of Australian dollars and some European currencies such as Swiss Franc and Belgian Franc devalued in 2000 compared with 1999. The Company anticipates that the economies of the Asian countries are recovering which will strengthen the Company's foundation for market expansion in the region. The Company is unable to predict whether the trends noted above would have a material effect on its future financial condition or results of operations and, if so, whether such an effect will be positive or negative. 2. Exchange Rate Fluctuation
2000 1999 -------- -------- High Low Average High Low Average ------------ ------------ ------------ ------------ ------------ ------------ First quarter - ------------- Australian dollar 1.63 1.56 1.60 1.60 1.58 1.59 Malaysian Ringgit 3.80 3.80 3.80 3.79 3.79 3.79 Singapore dollar 1.71 1.70 1.71 1.73 1.68 1.71 Thai Baht 37.82 37.44 37.64 37.47 36.76 37.16 Indonesian Rupiah 7,782.50 7,072.91 7,311.20 8,610.00 8,609.22 8,609.74 Swiss Franc 1.67 1.64 1.65 1.48 1.41 1.44 Pound Sterling 0.63 0.62 0.62 0.62 0.61 0.62 Belgian Franc 42.15 41.03 41.56 37.45 35.25 36.37 Deutsche Mark 2.04 1.99 2.01 - - - Hong Kong dollar 7.78 7.78 7.78 7.76 7.75 7.76 Renminbi 8.30 8.30 8.30 8.30 8.30 8.30 Second quarter - -------------- Australian dollar 1.75 1.65 1.70 1.53 1.51 1.52
2000 1999 -------- -------- High Low Average High Low Average ------------ ------------ ------------ ------------ ------------ ------------ Malaysian Ringgit 3.80 3.80 3.80 3.79 3.79 3.79 Singapore dollar 1.73 1.70 1.72 1.72 1.69 1.70 Thai Baht 39.26 37.94 38.74 37.09 36.63 36.89 Indonesian Rupiah 8,661.33 7,788.20 8,369.29 8,616.67 7,052.73 8,093.80 Swiss Franc 1.72 1.64 1.68 1.54 1.51 1.52 Pound Sterling 0.67 0.64 0.65 0.64 0.62 0.63 Belgian Franc 44.05 42.62 43.30 38.93 37.81 38.41 Deutsche Mark 2.14 2.07 2.10 1.89 1.87 1.88 Hong Kong dollar 7.79 7.79 7.79 7.76 7.75 7.75 Renminbi 8.30 8.30 8.30 8.30 8.30 8.30 Third quarter - ------------- Australian dollar 1.83 1.69 1.76 1.58 1.51 1.54 Malaysian Ringgit 3.80 3.80 3.80 3.79 3.79 3.79 Singapore dollar 1.74 1.71 1.73 1.71 1.68 1.69 Thai Baht 42.26 40.78 41.43 41.48 36.91 38.85 Indonesian Rupiah 8,667.22 8,663.33 8,664.93 8,631.44 7,056.18 7,817.48 Swiss Franc 1.73 1.67 1.71 1.52 1.48 1.51 Pound Sterling 0.69 0.67 0.68 0.63 0.61 0.62 Belgian Franc 45.54 43.54 44.71 38.27 37.51 37.96 Deutsche Mark 2.21 2.11 2.17 1.86 1.82 1.84 Hong Kong dollar 7.80 7.79 7.80 7.77 7.76 7.76 Renminbi 8.30 8.30 8.30 8.30 8.30 8.30 Fourth quarter - -------------- Australian dollar 1.94 1.80 1.88 1.57 1.54 1.55 Malaysian Ringgit 3.80 3.80 3.80 3.79 3.79 3.79 Singapore dollar 1.75 1.73 1.74 1.67 1.66 1.66 Thai Baht 43.63 43.14 43.42 38.66 37.37 38.23 Indonesian Rupiah 8,667.56 8,666.44 8,666.89 7,066.18 7,063.91 7,064.97 Swiss Franc 1.80 1.63 1.73 1.59 1.52 1.56 Pound Sterling 0.71 0.67 0.69 0.62 0.61 0.62 Belgian Franc 47.80 43.28 46.01 39.82 38.41 39.28 Deutsche Mark 2.32 2.10 2.23 1.93 1.85 1.90 Hong Kong dollar 7.80 7.80 7.80 7.77 7.77 7.77 Renminbi 8.30 8.30 8.30 8.30 8.30 8.30
3. Forward-Looking Statements The Company continues to expand its markets in the Asian region and the Company expects that its market share in the region will increase. The Company expects that the exchange rate of the currency of certain countries in the Asia Pacific region will fluctuate in greater magnitude in 2001. The cost of raw materials, primarily fluff wood pulp cost will be stable. From time to time, the Company may make certain statements that contain "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995). Words such as "anticipate", "estimate", "project", "believe" and similar expressions are intended to identify such forward-looking statements. Forward-looking statements may be made by management orally or in writing, including, but not limited to, in press releases, as part of the Operating and Financial Review and Prospects and as part of other sections of this Annual Report on Form 20-F and the Company's other filings with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including without limitation those identified below. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated, estimated or projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates. B. Foreign Currency Risk As of December 31, 2000, the Company had no open forward contracts or option contracts. The Company's cash on hand as of December 31, 2000 was $10,327,000 of which $2,691,000 equivalent was held in various foreign currencies such as the Australian Dollar, Hong Kong Dollar, Renminbi, Thai Baht, Malaysian Ringgit, Indonesian Rupiah, Singapore Dollar and Pound Sterling. The US$ equivalents of the cash in foreign currencies may vary subject to exchange rate fluctuation. C. Interest Rate Fluctuations The Company's interest expenses and income are sensitive to change in interest rates. The Company had short term debts and long term debts of $22,233,000 bearing various interest rates, and any fluctuation in the interest rate will have direct impact on the Company's interest expenses. As of December 31, 2000, no borrowings consisted of floating rate borrowings. The Company will be exposed to interest rate fluctuations on any borrowings under the Loan Facility and any change in interest rate could affect its results of operations and cash flows. The potential effect of a hypothetical 0.5% increase in interest rate for year 2000 outstanding indebtedness would be a reduction in cash flows of approximately $111,000 and a reduction in net income of approximately $74,000. Item 12. Description of Securities Other than Equity Securities. Not applicable. PART II Item 13. Defaults, dividend Arrearages and Delinquencies. Not applicable. Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds. Not applicable. Item 15. [Reserved] Item 16. [Reserved] PART III Item 17. Financial Statements. Financial statements are presented in Item 19.A. -42- Item 18. Financial Statements. The information required by Item 18 is contained in Item 19.A. 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............................................................................ 19 Independent Auditors' Report................................................................. 20 Consolidated Statements of Operations and Comprehensive Income for the three years ended December 31, 2000............................................................................ 21 Consolidated Balance Sheets as of December 31, 2000 and 1999................................. 22-23 Consolidated Statements of Cash Flows for the three years ended December 31, 2000............ 24-25 Consolidated Statements of Shareholders' Equity for the three years ended December 31, 2000.. 26 Notes to Consolidated Financial Statements................................................... 27-40
B. Financial Statement Schedule Schedule 1 - Condensed Financial Information
Page -------- Unconsolidated Statements of Operations for the three years ended December 31, 2000......... 1 Unconsolidated Balance Sheets as of December 31, 2000 and 1999.............................. 2 Unconsolidated Statements of Cash Flows for the three years ended December 31, 2000......... 3 Note to Schedule 1.......................................................................... 4
No other financial statement schedules are provided because the information is not required or is contained in the Notes to Consolidated Financial Statements of the Annual Report to Shareholders. -43- C. Exhibit Index Exhibit Number Description - -------------------- -------------------------------------------------- 10.C.1 Sale and Purchase Agreement dated October 20, 2000 between DSG TEK Limited and IVF Hartman AG 10.C.2 Loan and Security Agreement dated March 14, 2001 between Associated Hygienic Products LLC and Foothill Capital Corporation 10.C.3 Short Term Financing Agreement dated March 14, 2001 between DSG International Limited and Breakers Investment Holding Limited 10.C.4 Sale and Purchase Agreement dated February 20, 2001 between Associated Hygienic Products LLC and Drypers Corporation 11 Computation of Net Income Per Ordinary Share -44- 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 July 9, 2001. DSG INTERNATIONAL LIMITED By /s/ TERENCE Y.F. LEUNG ----------------------- Terence Y.F. Leung Chief Financial Officer -45- INDEPENDENT AUDITORS' REPORT To the Shareholders and the Board of Directors of DSG International Limited We have audited the financial statements of DSG International Limited as of December 31, 2000 and 1999, and for each of the three years ended December 31, 2000, and have issued our report thereon dated May 15, 2001, (May 25, 2001 as to the third paragraph of Note 13 and July 9, 2001 as to the fourth paragraph of Note 13); such financial statements and report are included in your 2000 Annual Report to the Shareholders and are incorporated herein by reference. Our audits also included the financial statement schedule of DSG International Limited, listed in Item 19. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Deloitte Touche Tohmatsu Hong Kong May 15, 2001 -46- ABOUT THE COMPANY DSG International Limited is a global company specialized in manufacturing and distribution of disposable baby diapers, adult incontinence and training pants products. The Company now has eleven manufacturing plants established in Hong Kong, the United States, Australia, England, China, Thailand, Indonesia and Malaysia. The Company's products are marketed and distributed throughout Asia, Australia, North America and Europe. Its principal brand names are "FITTI/R/", "PET PET/R/", "COSIES/R/", "COSIFITS/R/", "BABY LOVE/R/", "BABYJOY/R/", "LULLABY/R/", "CARES/R/", "CUDDLES/R/", "SUPER FAN-NIES/R/", "DISPO 123/TM/", "HANDY/TM/", "CERTAINTY/R/", "MERIT/R/" and "DRYPERS/R/". These brands are synonymous with high quality and superior value, characteristics that the Company is dedicated to maintaining. FINANCIAL HIGHLIGHTS
Year Ended December 31, 2000 1999 1998 1997 1996 ------------------------------------------------------------ (In US$ million except per share amounts) Net sales $214.7 $205.8 $207.9 $230.9 $236.1 Net income $ 3.0 $ 4.4 $ 1.6 $ 1.0 $ 9.2 Shareholders' equity $ 63.4 $ 70.3 $ 68.0 $ 64.8 $ 74.6 Earnings per share $ 0.44 $ 0.66 $ 0.24 $ 0.15 $ 1.18
-1- CONTENTS THE DSG MANAGEMENT TEAM 3 Executive and Non-Executive Directors of DSG TO OUR SHAREHOLDERS 4 Report on the highlights of 2000 and the outlook for 2001 by Brandon Wang, Chairman OPERATIONS 6 Report of DSG's operations world-wide in 2000 OPERATING AND FINANCIAL REVIEW AND PROSPECTS 9 SELECTED CONSOLIDATED FINANCIAL DATA 18 MANAGEMENT REPORT 19 by Terence Leung, Chief Financial Officer INDEPENDENT AUDITORS' REPORT 20 by Deloitte Touche Tohmatsu, Hong Kong CONSOLIDATED STATEMENTS OF OPERATIONS 21 CONSOLIDATED BALANCE SHEETS 22 CONSOLIDATED STATEMENTS OF CASH FLOWS 24 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27 SHAREHOLDER INFORMATION 41 DSG COMPANIES 42 DSG Corporate addresses world-wide -2- THE DSG MANAGEMENT TEAM DSG EXECUTIVE DIRECTORS DSG OFFICERS Brandon S L Wang George Jackson Chairman and Chief Executive Officer Chief Executive of Australia Philip K C Leung Chief Purchasing Officer Johnny S L Tsui Chief Operating Officer of Asia Pacific and Company Secretary Patrick K Y Tsang Chief Operating Officer of Europe Terence Y F Leung Chief Financial Officer Peter Chang Chief Operating Officer of North America DSG NON-EXECUTIVE DIRECTORS Anil Thadani Chairman of Schroder Capital Partners (Asia) Limited, Hong Kong Owen Price Formerly Managing Director of Dairy Farm International Holdings, Hong Kong (retired in 1993) Allister McLeish Scottish Chartered Accountant and Chartered Management Accountant
-3- TO OUR SHAREHOLDERS The year 2000 marked another year of progress towards the long-term goals of DSG International Limited, as we implemented a number of strategic initiatives related to local market conditions and future growth. Overall volume continued to grow, with the Company enjoying its highest net sales since 1997. Although net income in 2000 declined from 1999 due to gross margin pressures during the fourth quarter, we believe we are well-positioned in our key markets for a successful 2001. Financial Review Our net sales for the year ended December 31, 2000 increased 4.3% to $214.7 million. Net income was $3.0 million, or $0.44 per share, compared to $4.4 million, or $0.66 per share, in 1999. The primary reason for the decline was a soft fourth quarter, with net sales about even with the same period in 1999, and net loss of $0.2 million, down from $1.8 million for the fourth quarter last year, due mainly to a lower gross margin caused by higher costs of wood pulp and other raw materials. These increased costs resulted in a gross margin of 32.2% for the year, compared to 32.9% in 1999. We continued to stress operating efficiency in 2000 and succeeded in lowering selling, general and administrative expenses slightly to 29.3% of sales, compared to 29.8% in 1999, even though we increased advertising and promotional activities in some key regions. Our balance sheet is strong. We reduced long-term debt by $8.0 million during 2000 and, at December 31, our debt to equity ratio was 14.2% compared to 22.1% at year-end 1999. Operations North America The most important development for our North American operations was the acquisition during the first quarter 2001 of Drypers North America, which was merged into Associated Hygienic Products (AHP), our North American business unit. This strategic acquisition will accomplish several key goals for AHP. First of all, once the Drypers operations are fully integrated into AHP, our North American revenue run rate should more than double from the $92.2 million in net sales last year. This will translate to significant growth for DSG International as well. Secondly, the two Drypers plants acquired in the transaction will provide additional capacity and productivity for North American operations. And finally, the Drypers acquisition will provide the synergies to consolidate and grow our current position as the second largest supplier of private label disposable diapers and training pants in our North American markets. Australia We continued our strong presence in Australia during 2000 and remain the second largest manufacturer of baby diapers in this market. Net sales increased 4.9% to $44.8 million, as we increased our penetration of the pharmacy sector and our participation in private label products for the grocery and variety sectors. We also gained market share in the adult incontinence market. Asia Our greatest growth story occurred in the Asian region, where net sales increased dramatically to $60.8 million in 2000, a gain of 33.1% over 1999. We had a strong showing across the region, including Malaysia, the PRC, Thailand, Indonesia, Hong Kong and Singapore. While we had the benefit of strong local economies, the results were also due to aggressive, competitive and tailored marketing strategies in the various locales of the region. For instance, we have -4- introduced economy brands in certain markets to capture new consumers and have varied our brands and packaging in other markets to react to competition and local market conditions. We believe our early entry in these emerging disposable diaper markets will position us well for continued penetration and growth. Europe In Europe, we continue to face strong competition in the United Kingdom. In the fourth quarter, we sold our adult incontinence operation based in Switzerland and will continue to concentrate on both branded and private label disposable diapers for the U.K. market. Outlook We remain very optimistic about the future for DSG International Limited and believe we are well-positioned to leverage the growth we experienced in 2000. We are pleased with the internal growth that has been generated in our Asia and Australia markets. Coupled with the acquisition of market share in the U.S. through Drypers, we have the opportunity to make 2001 one of our most successful years ever in terms of revenue growth. Our challenge is to ensure that our growth is efficient and profitable, while remaining responsive to the needs and demands of the market. While we remain subject to such factors as the conditions of regional economies and the costs of raw materials, we constantly review and adjust our regional business models to manage our operations accordingly. We appreciate the support of our shareholders and look forward to providing favorable reports to you in the future. Brandon Wang Chairman -5- OPERATIONS DSG International Limited, established in Hong Kong in 1973, is one of the world leading companies specialized in manufacturing disposable baby diapers, adult incontinence and training pants products in this industry. The Company now operates eleven manufacturing facilities in North America, Australia, Asia and Europe with extensive distribution activities around the world. The principal raw materials for the Company's disposable products are fluff wood pulp and super absorbent polymer. Other raw materials include polyethylene backsheets, polypropylene non-woven liners, adhesive tapes, hot melt adhesive, elastic, aloe vera and tissue. There are different marketing and distribution strategies for each geographic segment of the Company, however, the Company's fundamental strategies are: . Producing high quality and value-added products for consumers. . Providing healthy profit margins to distributors and retailers. . Manufacturing in a highly flexible and efficient way. . Responding intelligently to change in the marketplace. NORTH AMERICA During the year, the Company continued its effort to further strengthen the North American operation. All the programs, systems and other measures put in place to improve the productivity and efficiency have shown significant positive results. However, the improvement was partially negated by the impact of the region-wide manpower resource shortage as well as the increase costs of certain raw materials. With the slowing down trend of the economy, it is expected this manpower shortage situation should ease off accordingly. The net sales for the year 2000 were $92.2 million compared with $93.5 million in 1999. The slight decrease in sales was mostly attributable to the company's decision to tighten the credit policy resulting in some fall out of customers. Operating income as a percentage improved to 5.7% in year 2000 versus 5.3% in 1999. This increase was achieved through efficiency gain despite of the higher raw material and labor cost. The Company continued to expand the diaper business both in branded and private label. On the branded side, the Company had introduced Mega packs for FITTI brand, Jumbo packs for FITTI brand training pants as well as the roll out on FITTI brand size 6 Super Toddler. On the private label side, the company continued to strengthen its existing private label partnerships with major retailers like Walgreens, Pathmark, A & P, Uniprix Drug,Topco etc. Adding new products in both areas of disposable baby products and disposable adult incontinence. The Company will continue to target other major retailers to establish new profitable private label partnerships in all of its product categories. New partners brought on in year 2000 include Meijer Stores and Brunos Supermarkets. In March 2001, the Company acquired Drypers's North American operations and the "Drypers/R/" brand name. The combination of the Company's North American operations and Drypers will provide a new level of service to our branded and private label customers in the U.S. markets and gain entry to the major supermarket chains and mass merchandisers such as Walmart and Kroger. Once the Drypers operations are fully integrated into the Company's North American operations, the revenue growth should more than double of the net sales of $92.2 million in 2000. In the adult incontinence area, the Company continued to pursue the strategy to have the capability to provide key retailers, institutions and consumers with product technology that is superior to what other manufacturers can currently provide. The "value" tier fitted briefs introduced by the Company in 1999 for the private label retailers has been well embraced by the consumers. As the result of this success, the Company currently is putting on major efforts to bring the programs to more retailers. -6- In line with the Company's global fundamental marketing strategies, the Company's North American operations provide its customers high quality products and superior service with a satisfactory profit margin. The Company's principal brand names in North America are Drypers/R/, FITTI/R/, CUDDLES/R/ for disposable baby diapers and CERTAINTY/R/ for adult incontinence. AUSTRALIA The Company's net sales in 2000 were $44.8 million, representing an increase of 4.9% compared with sales of $42.7 in 1999. Net sales increased due to new growth in the pharmacy class of trade, expansion of private label distribution and continued market share gains in adult incontinence sales. Operating income was $3.9 million in 2000 and $4.8 million in 1999, declined due to market pressure for increased advertising and promotional spending and the addition of enhanced product features without an increase in selling price. The currency exchange rates against the U.S. dollar in 2000 had dropped by 10% compared with 1999 and had impacted on the operating results. The Company remains as the second largest manufacturer of disposable baby diapers in Australia. The Company's major brands in Australia, BABY LOVE/R/ and LULLABY/R/, continue to penetrate the grocery and variety sector, while COSIFITS/R/ and COSIES/R/ are maintaining a strong presence in the independent pharmacy sector. In addition, the Company is also a leading supplier of private label diapers for major grocery and variety retailers. The Company's reliable service, high quality products and competitive prices have resulted in increasing its significant position in the private label sector. The Company also distributes the VLESI/R/ range of adult incontinence products into the Australian market. ASIA The Company's net sales in Asian regions increased by 33.1% to $60.8 million in 2000 compared with $45.7 million in 1999. Operating income increased by 20.1% to $4.6 million in 2000 from $3.8 million in 1999. The promising results were attributable to the recovering economy and implementation of "go local and go direct" strategy in the region. The Company's sales in the markets in Malaysia and PRC continued to grow strongly, sales in the Thailand and Indonesian markets remained robust. The Company's sales in Hong Kong and Singapore markets had improved despite the problems of market shrinkage and intense price competition. The conversion to the use of disposable baby diaper in the region is growing, the Company has been able to capture the growth by introducing a number of economy brands to the newly converted consumers and stepping up of advertising and promotion expenditure. The Company's major brands for disposable baby diaper are FITTI/R/, PET PET/R/, COSIFITS/R/, BABY LOVE/R/ and BABYJOY/R/. The Company produces and distributes adult incontinence products in Asia under the brands named DISPO 123/TM/ and HANDY/TM/. The Company provides consumers with a different range of products with price differentiation to maintain its competitiveness against other local brands. The Company also has flexibility in tailoring packaging, brand and product differentiation and advertising and promotional activities to cope with different demands in various markets in the region. Although competition and pricing pressure have become more intense in the region, the Company believes that there is great potential for sales growth with projected population growth and favorable conversion rate. As a pioneer in the region, the Company has an advantage in entering and expanding these markets by encouraging disposable diaper usage and establishing its brands at an early stage through strategic advertising and promotional activities. EUROPE -7- The Company's net sales in Europe were $16.8 million in 2000 compared with $24.0 million in 1999. The Company sold the Swiss adult incontinence operation during the year and the Company's U.K. operation continued with branded and private label disposable baby diapers. Operating loss for the year 2000 was $2.4 million compared with an operating loss of $1.7 million in 1999. The Company's brands in Europe for baby diapers are FITTI/R/, COSIFITS/R/ and CARES/R/. The Company believes that the presence of its branded and private label disposable baby diapers in the United Kingdom can be maintained although it will be difficult to penetrate the market share of Procter & Gamble and Kimberly-Clark. -8- OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion and analysis should be read in conjunction with the Selected Consolidated Financial Data and the Consolidated Financial Statements and related Notes which appear elsewhere in this Annual Report. General The Company's revenues are primarily derived from the manufacture and sale of disposable baby diapers, adult incontinence and training pants products in North America, Australia, Asia and Europe, both under its own brands and private label brands of major retailers. The Company is not taxed in the British Virgin Islands where it is incorporated. The Company's subsidiaries are subject to taxation in the jurisdictions in which they operate. The Consolidated Financial Statements of the Company are prepared in U.S. dollars, and the majority of its revenues are received and expenses are disbursed in U.S. dollars. Because certain of the Company's subsidiaries account for their transactions in currencies other than U.S. dollars, the Consolidated Balance Sheets contain foreign currency translation adjustments and the Consolidated Statements of Operations contain realized exchange gains and losses due to exchange rate fluctuations. Industry Trends The Company believes that the most significant industry trends are: . fluff wood pulp cost and other raw materials cost increased in 2000, however, it is expected that increase in fluff wood pulp cost will slow down in 2001; . increasing demand for mechanical closure tape and cloth-like breathable backsheet products, which the Company is meeting through modifications to its machinery; . the domination of industry leaders in most of the markets putting pressure on retailers' margins, which the Company is finding difficult to respond to by providing retailers with higher profit margins in the current highly competitive market conditions. The Company is unable to predict whether the other trends noted above would have a material effect on its future financial condition or results of operations and, if so, whether such an effect will be positive or negative. Forward-Looking Statements The Company continues to expand its markets in the Asian region and the Company expects that its market share in the region will increase. The Company expects that the exchange rate of the currency of certain countries in the Asian Pacific region will fluctuate in greater magnitude in 2001. The cost of raw materials, primarily fluff wood pulp cost will be stable. From time to time, the Company may make certain statements that contain "forward looking" information (as defined in the Private Securities Litigation Reform Act of 1995). Words such as "anticipate", "estimate", "project", "expect", "believe" and similar expressions are intended to identify such forward-looking statements. Forward-looking statements may be made by management orally or in writing, including, but not limited to, in press releases, as part of this Operating and Financial Review and Prospects and as part of other sections of this Annual Report on Form 20-F and the Company's other filings with the Securities and Exchange Commission -9- under the Securities Exchange Act of 1934. Risk Factors Among the factors that have a direct effect on the results of operations and financial condition of DSG International Limited (the "Company") are the following: 1. - Raw Material Cost. The overall raw material costs have increased during year 2000 and the Company's operating results may be adversely affected by any increases in raw material costs in the future, specially the cost of the main raw material, fluff wood pulp, which increased in 1999 and increased moderately in 2000. 2. - Branded Product Innovation. Patents and other intellectual property rights are an important competitive factor in the disposable diaper market, mostly because of the industry emphasis in product innovations. Patents held by the main competitors could severely limit the Company's ability to keep up with branded product innovations, by prohibiting the Company from marketing product with comparable features. 3. - Pricing and Volumes. The market position of the Company's main competitors, The Procter & Gamble Company ("P&G") and Kimberly-Clark Corporation ("KC"), 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 in price and volumes, and gain substantial market share in any of their marketing areas. They have heavily promoted diapers in the multi-pack configuration. These packages offer a lower unit price to the retailer and consumer. It is possible that as a consequence of this strategy, in those geographic markets in which the main competitors have adopted it, the Company may realize lower selling prices and/or lower sale volumes. 4. - Increased Cost. On May 21, 2001, the Company entered into an agreement with P&G to settle any potential liability of the Company which may have existed with respect to any past infringement on P&G patents prior to January 1, 2001 and to agree on royalty payments relating to sales on certain of the Company's products in the Asian Pacific and Australian region after December 31, 2000. A similar agreement with P&G was entered into in 1998 relating to the North American region that provides for payments of royalty fees based on a percentage of certain products sold after December 31, 1997 within North American region. The Company believes that the royalty being charged by P&G under its respective license agreements are approximately the same royalties that will be paid by its major competitors for similar patent rights. However, the royalties will have an adverse impact on the Company's future financial condition and results of operations as compared to pre-settlement. 5. - Increase Financial Leverage. As a result of the acquisition of the North American asset of Drypers Corporation, the Company has now short and long term debt of $47.5 million, bearing various rates interest. As a consequence of the incurrence of the Company's new debt, its principal and interest obligations have increased substantially. The increase in the Company's financial leverage as described above, could adversely affect the Company's ability to obtain additional financing for working capital, acquisitions or other purposes and could make the Company more vulnerable to economic crisis in the different geographical markets and to competitive pressures from its main competitors. As a substantial portion of the Company's available cash from operations will have to be applied to meet debt service requirements, the Company's liquidity could be affected as well as its ability to fund capital expenditures. Notwithstanding, the Company believes that its cash flow from operations and other sources of liquidity will be adequate to meet its requirements for working capital, capital expenditures, interest payment and scheduled principal payment for the foreseeable future. However, if the Company is unable to generate sufficient cash flow from operations in the future, it may be required to refinance all or a portion of its existing debt or obtain additional financing. There is not assurance that this additional financing could be obtained in favorable terms for the Company. 6. -Litigation Risk. As the Company operates in an industry in which patents are numerous and are enforced vigorously, the Company and its subsidiaries are from time to time involved in legal matters. 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. On June 27, 2001, a jury returned a verdict and awarded $4.0 million in damages and also provided for potential enhanced damages against the Company of up to an additional $7.0 million. The Company will file post trial motions to overturn the jury verdict and, if necessary, will appeal the verdict to the U.S. Court of Appeals for the Federal Circuit. The Company believes that it is reasonably possible that it will be successful in overturning the jury verdict. Accordingly, the jury award has not been recorded in the Company's consolidated financial statements. Unsuccessful resolution of the above litigation resulting in a significant assessment against the Company may result in the Company violating certain covenants of its debt agreements. This would give the lenders the right to demand payment of outstanding amounts unless the lenders waive their rights under the debt agreements. Demand for payment by the lenders and the need to pay the award to the plaintiff would require the Company to secure other financing sources to meet its obligations. The Company has advised the lenders of the recent jury verdict and its intention to pursue a post trial motion to overturn the decision and, if necessary, file an appeal. While the Company believes that it is reasonably possible that it will be successful in overturning the jury verdict, the outcome of this litigation is uncertain. -10- OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued) Results of Operations 1. Overall The following table sets forth the percentage of net sales represented by the specified components of income and expense for the years ended December 31, 2000, 1999 and 1998.
Year Ended December 31, 2000 1999 1998 ---------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales 67.8 67.1 71.3 Gross profit 32.2 32.9 28.7 Selling, general and administrative expenses (29.3) (29.8) (26.6) Gain on disposals of property, plant and equipment 0.1 0.5 - Restructuring costs - - (0.4) Operating income 3.0 3.6 1.7 Interest expense (0.7) (1.1) (1.2) Interest income 0.4 0.4 0.4 Exchange loss (0.6) (0.5) (0.1) Gain on disposal of subsidiaries 0.1 - - Other income - 0.3 0.1 Income before income taxes 2.2 2.7 0.9 Provision for income taxes (0.7) (0.5) (0.1) Minority interest (0.1) (0.1) - Net income 1.4% 2.1% 0.8%
-11- OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued) 2. Comparison of 2000, 1999 and 1998 The Company's net sales in 2000 increased by 4.3% to $214.7 million compared with $205.8 million in 1999. The Company's sales in Asia Pacific grew more than 30% and in Australia grew by 5% despite the 10% devaluation of Australian dollars against U.S. dollars during the year. The Company's sales in North America in 2000 were marginally lower than in 1999. The Company sold its Swiss adult incontinence operation during the year which resulted in the reduction in the Company's sales in Europe. Gross profit margin for the year 2000 was 32.2% compared with 32.9% in 1999. The raw material costs in 2000 were higher than the costs in 1999 due to higher fluff wood pulp cost. Also a high proportion of the volume growth in Asia came from the value brands of relatively low margin. The Company was able to alleviate the negative impact on raw material costs and lower margin by higher sales volume and increased productivity of the Company's operations in Asia and Australia. Selling, general and administrative expenses increased by $1.6 million to $62.9 million due to higher spending on advertising and promotion activities in Asia and Australia. The Company also recorded a $0.3 million charge relating to a patent agreement with Procter & Gamble Company (see Note 13). The Company's net sales in 1999 were $205.8 million compared with $207.9 million in 1998. The Company's net sales actually grew in all regions except Europe where the sales impacted by the sale of the Swiss diaper and napkin business during the year. The Company's adult incontinence business had a double-digit growth in 1999. Gross profit as a percentage of net sales in 1999 was higher than 1998 by 4.1% due to the improvement of production efficiency in all regional segments and the implementation of "go local and go direct" strategy in the Asian operations. Selling, general and administrative expenses as a percentage of net sales increased to 29.8% in 1999 compared with 26.6% in 1998, primarily due to higher expenditure on advertising and promotion activities and additional administrative expenses in the newly commenced operations in the Asian region and a $2.0 million increase in executive compensation in 1999. In 1999, the Company sold its property in Singapore and machinery and equipment in one of its plants in Switzerland resulting in a gain of $0.9 million. -12- Geographic Segment Information As the results of the Company's operations differ significantly from one market to another, the following discussion considers the Company's results in each of the geographic regions in which it operates. The tables below set forth the Company's net sales and operating income in each geographic region in 2000, 1999 and 1998, and the percentage change over the preceding period: 1. North America
Year Ended December 31, Increase/(Decrease) 2000 1999 1998 2000 1999 1998 -------------------------------------------------------------------- (Dollars in thousands) Net sales $92,229 $93,479 $89,911 (1.3)% 4.0% (1.3)% Operating income 5,301 5,001 1,155 6.0 333.0 -
Comparison of 2000, 1999 and 1998. The Company's net sales were $92.2 million in year 2000 compared with $93.5 million in 1999. The slight decrease in sales was mostly attributed to the Company's decision to revise the credit policy resulting in some fall out of customers. Gross profit margin was at 28.6% in year 2000 compared with 29.5% in 1999. Although the Company achieved greater productivity gains during the year but the higher cost of raw material and labor contributed a lower gross margin than the year before. Selling, general and administrative expenses in year 2000 reduced to 22.5% from 24.1% a year ago. This improvement was primarily attributed by continued effort to trim promotional expenditures and other cost control measures. Operating income for the year 2000 improved by 6.0% from previous year to $5.3 million. The Company's net sales in North America increased by 4.0% to $93.5 million in 1999 from $89.9 million in 1998. The net sales growth was primarily from the adult incontinence business. Gross profit margin improved by 3.1% from 26.4% in 1998 to 29.5% in 1999. This increase of gross margin was attributed to the improvement of operation efficiency subsequent to the consolidation of the operations in 1998. Selling, general and administrative expenses in 1999 declined by 1.0% from 1998 primarily due to lower promotional expenditures and effective cost saving measures. Operating income for 1999 significantly improved to $5.0 million from $1.2 million in 1998. 2. Australia
Year Ended December 31, Increase/(Decrease) 2000 1999 1998 2000 1999 1998 ---------------------------------------------------------------------- (Dollars in thousands) Net sales $44,753 $42,676 $40,487 4.9% 5.4% (14.2)% Operating income 3,919 4,823 4,946 (18.7) (2.5) (16.5)
Comparison of 2000, 1999 and 1998. The Company's net sales in Australia were $44.8 million and grew by 4.9% over 1999. The actual growth was over 16% when the net sales were compared in the domestic currency. The Australian dollar had devalued by over 10% against U.S. dollars during 2000. Gross profit margin dropped by 2.5% from 39.2% in 1999 to 37.7% primarily due to higher fluff wood pulp cost in 2000. Selling, general and -13- administrative expenses increased by 1% to 28.9% in 2000 due to higher advertising and promotional expenditure. As a result, operating income, as a percentage of net sales, in 2000 decreased by 2.5% to 8.8% on net sales. The Company's net sales in Australia in 1999 were $42.7 million compared with $40.5 million in 1998, a growth of $2.2 million. Gross profit margin increased by 0.6% from 38.6% in 1998 to 39.2% in 1999. Operating income decreased by 2.5% to $4.8 million compared with $4.9 million in 1998 due to higher advertising and promotional expenditure resulting from increased competition. The general and administrative expenses remained materially unchanged compared to 1998. -14- OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued) 3. Asia
Year Ended December 31, Increase/(Decrease) 2000 1999 1998 2000 1999 1998 ---------------------------------------------------------------------- (Dollars in thousands) Net sales $60,835 $45,715 $44,208 33.1% 3.4% (22.4)% Operating income 4,609 3,839 2,842 20.1 35.1 (54.2)
Comparison of 2000, 1999 and 1998. The Company's net sales in Asia increased by 33.1% to $60.8 million in 2000 from $45.7 million in 1999. The Company recorded sales growth in all the markets and high double-digit growth in the markets in Malaysia, the PRC and Indonesia. The Company's gross profit increased by 20.9% to $22.6 million in 2000 from $18.7 million in 1999, although the gross profit margin dropped by 3.6% to 37.2% in 2000 from 1999 primarily due to higher fluff wood pulp cost and lower margin on several economy brands. Selling, general and administrative expenses as a percentage of net sales dropped by 2.6% to 29.6% in 2000 from 32.2% in 1999 primarily due to economies of higher volume of sales. Operating income was $4.6 million in 2000, increased by 20.1% over the operating income in 1999. The Company's net sales in Asia increased by 3.4% to $45.7 million in 1999 from $44.2 million in 1998. The Company captured the growth of the markets in the developing countries in the region and at the same time encountered intense competition on price and promotional activities. Although the economy in the region recovered rapidly, consumers became more price conscious than ever and prices were reduced on certain branded products and several economy brands were introduced to meet the increasing demand. Gross profit increased by $2.5 million to $18.7 million in 1999 compared with $16.2 million in 1998, mainly due to higher profit margins from direct selling and distribution and reduced costs by local manufacturing. Selling, general and administrative expenses increased in 1999 due to the higher promotion expenditure and the additional administrative expenses in the newly commenced operations in Indonesia and Malaysia. As a result, operating income, including a gain of $0.7 million on the sale of the Company's property in Singapore, increased to $3.8 million in 1999 from $2.8 million in 1998. -15- OPERATING AND FINANCIAL REVIEW AND PROSPECTS - (Continued) 4. Europe
Year Ended December 31, Increase/(Decrease) 2000 1999 1998 2000 1999 1998 ------------------------------------------------------------------------- (Dollars in thousands) Net sales $16,844 $23,972 $33,319 (29.7)% (28.1)% (6.7)% Operating loss (2,371) (1,667) (2,903) 42.2 (42.6) 12.4
Comparison of 2000, 1999 and 1998. The Company's net sales in Europe were $16.8 million in 2000 compared with $24.0 million in 1999. The decrease in sales was the result of sale of the Company's Swiss operation in baby diaper in 1999 and the sale of the Company's Swiss operation in adult incontinence in 2000. The operating results in 2000 were impacted by higher fluff wood pulp cost and disappointing operating results of the adult incontinence operation prior to sale. Operating loss in 2000 increased by $0.7 million compared with loss of $1.7 million in 1999 due to lower gross profit margin, although the selling, general and administrative expenses in 2000 were lower. The Company's net sales in Europe were $24.0 million in 1999 against $33.3 million in 1998, representing a 28.1% decrease. The Company's diaper sales volume in the United Kingdom was relatively stable, but operating profit was not satisfactory. The Company's Swiss sales in adult incontinence products in 1999 showed moderate increase and operating profit improved over the previous year. Combined with the effect of sale of the Company's Swiss operation in baby diaper and feminine napkin products, these resulted in a reduced operating loss from $2.9 million to $1.7 million. Liquidity and Capital Resources For the year ended December 31, 2000, the Company had cash and cash equivalents of $10.3 million, a decrease of $4.0 million from $14.3 million for the year ended December 31, 1999. The cash and cash equivalents were held separately by the operations of the Company in their local currencies and were from time to time invested in interest bearing deposit accounts. The Company did not use any financial instruments for hedging. Net cash provided by operating activities was $1.7 million, including depreciation and amortization of $9.5 million and net increase in working capital requirement of $10.2 million. The net increase in working capital consisted of the increase of $7.3 million in accounts receivable and $5.0 million in inventories which was attributed to the increase in the Company's sales. The Company believes that the working capital is sufficient for the Company's present requirements and is able to provide additional working capital for the Company's operations when needed by arranging additional banking facilities with the banks and financial institutions for the operations. Net cash used for investing activities was $8.7 million. The Company invested $5.9 million in capital expenditure for additions and modifications to property, machinery and equipment for the Company's various operations. The Company sold the adult incontinence operation in Switzerland and a training pant machine for gross proceeds of $6.1 million. The Company made advances of $10.7 million to a shareholder and the shareholder made repayment of $1.9 million to the Company during 2000. Additional -16- information on the advances to shareholder is provided in Note 12 of Notes to Consolidated Financial Statements. The Company utilized $13.2 million short-term bank credit lines out of total credit facilities of $14.9 million as of December 31, 2000. The utilization of short-term bank credit increased by $4.2 million in 2000 compared with the utilization of $9.0 million in 1999. The increase in total borrowings, long term and short term in 2000, was $11.4 million. The Company repaid $8.0 million of its debts during 2000. The weighted average interest rate on borrowings at the year ended 2000 was 8.91%. Additional information on bank credit facilities is set out in Notes 10 and 11 of Notes to Consolidated Financial Statements. In March 2001, the Company acquired the North American assets of Drypers Corporation for a consideration of $38.5 million. The acquisition was financed by cash and proceeds from term loans and revolving credit line from a U.S. financial institution and an oversea financial institution. The interest rate on the advances from the revolving credit line range from Libor plus 2.25% to Libor plus 4.25% dependent upon the ratio of the Company's total debts to earnings before interest, taxes, depreciation and amoritization ("EBITDA") measured on a fiscal quarter-end basis. The interest rate on the U.S. term loan ranged from Libor plus 2.75% to Libor plus 4.75% also dependent upon the ratio of the Company's total debts to EBITDA measured on a fiscal quarter-end basis. The interest rate on term loan from the oversea financial institution is 14.5%. The Company will also grant to the oversea lender Warrants priced at $0.01 for 0.75% for each month up to 9.0%, but no less than 4.5%, of the Company's fully diluted Ordinary Shares whilst any part of the loan is outstanding (see Note 11). The Company is in the process of a legal proceeding of a patent infringement claim in 2001. On June 27, 2001, a jury returned a verdict and awarded $4.0 million in damages and also provided for potential enhanced damages against the Company of up to an additional $7.0 million. The Company will file post trial motions to overturn the jury verdict and, if necessary, will appeal the verdict to the U.S. Court of Appeals for the Federal Circuit. The Company believes that it is reasonably possible that it will be successful in overturning the jury verdict. Accordingly, the jury award has not been recorded in the Company's consolidated financial statements. Unsuccessful resolution of the above litigation resulting in a significant assessment against the Company may result in the Company violating certain covenants of its debt agreements. This would give the lenders the right to demand payment of outstanding amounts unless the lenders waive their rights under the debt agreements. Demand for payment by the lenders and the need to pay the award to the plaintiff would require the Company to secure other financing resources to meet its obligations. The Company has advised the lenders of the recent jury verdict and its intention to pursue a post trial motion to overturn the decision and, if necessary, file an appeal. While the Company believes that it is reasonably possible that it will be successful in overturning the jury verdict, the outcome of this litigation is uncertain (see Note 13). The Company did not repurchase any shares or pay a dividend during 2000. The adoption of SFAS No. 133 on January 1, 2001 did not have a material effect in the Company's financial statements. -17- SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31, Statement of Operations Data 2000 1999 1998 1997 1996 ---------------------------------------------------------------------- (in thousands except per share amounts) Net sales $214,661 $205,842 $207,925 $230,930 $236,050 Cost of sales 145,532 138,120 147,997 153,929 155,647 Gross profit 69,129 67,722 59,928 77,001 80,403 Selling, general and administrative expenses (62,898) (61,322) (55,318) (71,912) (64,435) Gain (loss) on disposals of property, plant and equipment 244 1,034 42 (122) 15 Restructuring costs - - (897) (1,389) - Operating income 6,475 7,434 3,755 3,578 15,983 Interest expense (1,594) (2,208) (2,511) (2,833) (2,267) Interest income 868 792 790 1,451 1,900 Exchange loss (1,356) (997) (311) (610) (176) Gain on disposal of subsidiaries 214 - - - - Other income (expense) 54 522 155 (169) (89) Income before income taxes 4,661 5,543 1,878 1,417 15,351 Provision for income taxes (1,557) (987) (253) (443) (6,185) Minority interest (141) (121) (3) - - Net income $ 2,963 $ 4,435 $ 1,622 $ 974 $ 9,166 Basic earnings per share: Net income $0.44 $0.66 $0.24 $0.15 $1.18 Weighted average number of shares outstanding 6,675 6,675 6,675 6,675 7,747
The Company has not declared any dividend during the above periods.
December 31, Balance Sheet Data 2000 1999 1998 1997 1996 --------------------------------------------------------------------------- Working capital $ 32,423 $ 36,000 $ 30,091 $ 30,823 $ 31,714 Total assets 111,409 120,945 133,909 130,273 141,910 Long-term debt 5,577 11,894 20,957 21,281 21,587 Shareholders' equity 63,447 70,302 68,013 64,778 74,639
-18- MANAGEMENT REPORT To the Shareholders of DSG International Limited The financial statements of the Company published in this report were prepared by the Company's management, which is responsible for their integrity and objectivity. The statements have been prepared in accordance with United States generally accepted accounting principles, applying certain estimates and judgments as required. The financial information elsewhere in this report is consistent with the financial statements. The Company maintains a system of internal controls adequate to provide reasonable assurance that its transactions are appropriately recorded and reported, its assets are protected and its established policies are followed. This system is maintained by the establishment and communication of policies and a qualified financial staff. Our independent auditors, Deloitte Touche Tohmatsu, provide an objective independent audit of the Company's financial statements and issuance of a report thereon. Their audit is conducted in accordance with United States generally accepted auditing standards. The Audit Committee of the Board of Directors, comprised solely of outside directors, meets with the independent auditors and representatives from management to evaluate the adequacy and effectiveness of the audit functions, control systems and quality of our financial accounting and reporting. /s/ Leung Yeuk Fong Terence Leung Chief Financial Officer July 9, 2001 -19- 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, 2000 and 1999, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of DSG International Limited and its subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte Touche Tohmatsu Deloitte Touche Tohmatsu Hong Kong May 15, 2001 (May 25, 2001 as to the third paragraph of Note 13 and July 9, 2001 as to the fourth paragraph of Note 13) -20- CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share amounts)
Year Ended December 31, 2000 1999 1998 ------------------------------------------------- Net sales $214,661 $205,842 $207,925 Cost of sales 145,532 138,120 147,997 Gross profit 69,129 67,722 59,928 Selling, general and administrative expenses (62,898) (61,322) (55,318) Gain on disposals of property, plant and equipment (Note 3) 244 1,034 42 Restructuring costs (Note 4) - - (897) Operating income 6,475 7,434 3,755 Interest expense (1,594) (2,208) (2,511) Interest income 868 792 790 Exchange loss (1,356) (997) (311) Gain on disposal of subsidiaries (Note 5) 214 - - Other income, net 54 522 155 Income before income taxes 4,661 5,543 1,878 Provision for income taxes (Note 6) (1,557) (987) (253) Minority interest (141) (121) (3) Net income $ 2,963 $ 4,435 $ 1,622 Basic earnings per share $0.44 $0.66 $0.24 Weighted average number of shares outstanding 6,675 6,675 6,675
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands)
Year Ended December 31, 2000 1999 1998 ------------------------------------------------- Net income $ 2,963 $4,435 $1,622 Other comprehensive (expense) income Foreign currency translation adjustments (1,017) 665 1,613 Comprehensive income $ 1,946 $5,100 $3,235
See accompanying notes to consolidated financial statements. -21- CONSOLIDATED BALANCE SHEETS (in thousands)
December 31, 2000 1999 -------------------------- ASSETS Current assets: Cash and cash equivalents $ 10,327 $ 14,352 Accounts receivable, less allowance for doubtful accounts of $897 in 2000 and $724 in 1999 33,468 29,318 Other receivables 2,472 2,799 Inventories (Note 7) 26,556 24,823 Prepaid expenses and other current assets 571 858 Income taxes receivable 219 153 Deferred income taxes - 14 Total current assets 73,613 72,317 Property and equipment - at cost : (Note 8) Land 3,551 4,351 Buildings 13,049 19,092 Machinery and equipment 74,977 80,554 Furniture and fixtures 2,357 2,919 Motor vehicles 1,670 1,766 Leasehold improvements 2,017 1,909 Construction in progress 1,545 320 Total 99,166 110,911 Less: accumulated depreciation and amortization 62,685 62,930 Net property and equipment 36,481 47,981 Loan receivable (Note 9) 554 - Deferred income taxes 299 - Other assets 462 647 Total long-term assets 1,315 647 Total assets $111,409 $120,945
See accompanying notes to consolidated financial statements. -22- CONSOLIDATED BALANCE SHEETS - (Continued) (in thousands except shares and per share amounts)
December 31, 2000 1999 --------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings (Note 10) $ 13,235 $ 9,040 Current portion of long-term debt (Note 11) 3,421 2,509 Accounts payable 14,992 12,864 Accrued advertising and promotion 2,404 2,992 Accrued payroll and employee benefits 1,863 2,330 Other accrued expenses 4,855 4,121 Income taxes payable (Note 6) 418 2,461 Deferred income taxes 2 - Total current liabilities 41,190 36,317 Long-term debt (Note 11) 5,577 11,894 Deferred income taxes - 1,124 Total long-term liabilities 5,577 13,018 Minority interest 1,195 1,308 Commitments and contingencies (Note 13) Shareholders' equity: Ordinary shares, $0.01 par value - authorized 20,000,000 shares; issued and outstanding 6,674,606 shares in 2000 and 1999 67 67 Additional paid-in capital 18,301 18,301 Retained earnings 65,664 62,701 Accumulated other comprehensive income (8,973) (7,956) Less: Net receivable from shareholder (Note 12) (11,612) (2,811) Total shareholders' equity 63,447 70,302 Total liabilities and shareholders' equity $111,409 $120,945
See accompanying notes to consolidated financial statements. -23- CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year Ended December 31, 2000 1999 1998 -------------------------------------------- Cash flows from operating activities Net income $ 2,963 $ 4,435 $ 1,622 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,464 9,662 10,487 Accelerated depreciation on assets written off - - 897 Gain on disposals of property, plant and machinery (244) (1,034) (42) Gain on disposal of subsidiaries (214) - - Deferred income taxes (354) (798) (288) Minority interest 141 121 3 Other 109 903 927 Net change in working capital components (10,190) (1,464) (6,425) Net cash provided by operating activities 1,675 11,825 7,181 Cash flows from investing activities Expenditures for property, plant and machinery (5,947) (6,097) (6,444) Proceeds from disposals of property, plant and machinery 1,276 4,237 1,207 Proceeds from sale of subsidiary, net of cash forfeited 4,842 - (2) Receipt of (investment in) restricted bank deposit - 6,000 (6,000) Advances to a shareholder (10,744) (1,879) (3,372) Repayments by a shareholder 1,943 2,540 507 Increase in other assets (39) (6) (19) Net cash (used in) provided by investing activities (8,669) 4,795 (14,123) Cash flows from financing activities Increase (decrease) in short-term borrowings 4,858 (295) 1,180 Increase in long-term debt and other non-current debt 6,554 148 - Repayment of long-term debt and other non-current debt (7,956) (10,582) (4,596) Payment of deferred purchase consideration - - (184) (Repayment to) investment by minority shareholder (255) (15) 465 Net cash provided by (used in) financing activities 3,201 (10,744) (3,135) Effect of exchange rate changes on cash and cash equivalents (232) (74) 39 (Decrease) increase in cash and cash equivalents (4,025) 5,802 (10,038) Cash and cash equivalents, beginning of year 14,352 8,550 18,588 Cash and cash equivalents, end of year $ 10,327 $ 14,352 $ 8,550
See accompanying notes to consolidated financial statements. -24- CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued) (in thousands)
Year Ended December 31, 2000 1999 1998 ------------------------------------------ Schedule of changes in working capital components net of effects from sale of subsidiaries Accounts receivable $ (7,254) $ 2,353 $(6,991) Other receivables 98 (470) (269) Inventories (4,974) (966) 644 Prepaid expenses and other current assets 58 106 583 Accounts payable 3,207 (2,492) 701 Accrued expenses 571 (1,256) (274) Income taxes payable (1,896) 1,261 (819) Net change in working capital components $(10,190) $(1,464) $(6,425) Supplemental disclosures of cash flow information Cash paid during the year for: Interest $ 1,579 $ 2,208 $ 2,410 Income taxes 3,600 403 1,901
See accompanying notes to consolidated financial statements. -25- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Net Accumulated Receivable Additional Other From Total Ordinary Shares Paid-in Retained Comprehensive Shareholder Shareholders' Shares Amount Capital Earnings Income (Note 12) Equity -------------------------------------------------------------------------------------- Balance at January 1, 1998 6,674 $67 $18,301 $56,644 $(10,234) - $64,778 Net income - - - 1,622 - - 1,622 Foreign currency translation adjustment - - - - 1,613 - 1,613 Balance at December 31, 1998 6,674 67 18,301 58,266 (8,621) - 68,013 Net income - - - 4,435 - - 4,435 Foreign currency translation adjustment - - - - 665 - 665 Transfer of balance of net receivable from shareholder at December 31, 1999 - - - - - (2,811) (2,811) Balance at December 31, 1999 6,674 67 18,301 62,701 (7,956) (2,811) 70,302 Net income - - - 2,963 - - 2,963 Foreign currency translation adjustment - - - - (1,017) - (1,017) Transfer of balance of net receivable from shareholder at December 31, 2000 - - - - - (8,801) (8,801) Balance at December 31, 2000 6,674 $67 $18,301 $65,664 $ (8,973) $(11,612) $63,447
See accompanying notes to consolidated financial statements. -26- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands) 1. ORGANIZATION AND BASIS OF PRESENTATION DSG International Limited (the "Company") is incorporated in the British Virgin Islands. It operates through subsidiary companies located in North America, Australia, Asia and Europe which manufacture and distribute disposable baby diapers, adult incontinence and training pants products. The financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") which differ from those used in the statutory accounts of its subsidiaries. There are no material differences between the U.S. GAAP amounts and the amounts used in the statutory accounts of the subsidiaries. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation -- The consolidated financial statements include the assets, liabilities, revenues and expenses of all subsidiaries. Intercompany balances and transactions are eliminated in consolidation. Cash and cash equivalents -- Cash and cash equivalents include cash on hand, cash accounts, interest bearing savings accounts, commercial paper and time certificates of deposit with a maturity of three months or less when purchased. Inventories -- Inventories are stated at the lower of cost determined by the first-in, first-out method, or value determined by the market. Finished goods inventories consist of raw materials, direct labor, and overhead associated with the manufacturing process. Depreciation and amortization of property and equipment -- Depreciation is provided on the straight line method at rates based upon the estimated useful lives of the property, generally three to ten years except for buildings which are 40 years. Costs of leasehold improvements are amortized over the life of the related asset or the term of the lease, whichever is shorter. Goodwill -- Goodwill is amortized on a straight-line basis over periods estimated to be benefited, generally over 5 years. At December 31, 2000 and 1999, goodwill amounted to $136 and $401 net of accumulated amortization of $406 and $507, respectively, and is included in other assets. Revenue recognition -- The Company recognizes revenue at the time shipments of product are made to customers. Income taxes -- Income taxes are provided based on an asset and liability approach for financial accounting and reporting of income taxes. Deferred income tax liabilities or benefits are recorded to reflect the tax consequences in future years of differences between tax basis of assets and liabilities and the financial reporting amounts. A valuation allowance is recorded if it is more likely than not that some portion of, or all of, a deferred tax asset will not be realized. -27- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued Valuation of long-lived assets -- The Company evaluates the carrying value of long-lived assets to be held and used, including goodwill and other intangible assets, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long- lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. Foreign currency translation -- The Company uses the United States dollar as its reporting currency. Assets and liabilities of foreign subsidiaries are translated at year end exchange rates, while revenues and expenses are translated at average currency exchange rates during the year. Adjustments resulting from translating foreign currency financial statements are reported as a separate component of shareholders' equity. Gains or losses from foreign currency transactions are included in net income of the current period. Postretirement and postemployment benefits -- The Company does not provide postretirement benefits, and postemployment benefits, if any, are not significant. Earnings per share -- Earnings per share are based on the weighted average number of Ordinary Shares outstanding. Concentration of credit risk -- The Company sells to distributors and retailers located in each of the countries in which it operates. The Company grants credit to all qualified customers on an unsecured basis but does not believe it is exposed to any undue concentration of credit risk to any significant degree. Comprehensive income - Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. New accounting standard not yet adopted - The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Derivative Instruments and Hedging Activities". This statement, as amended, requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value and is effective for fiscal years beginning after June 15, 2000. Gains or losses resulting from changes in the values of those derivatives would be accounted within the statements of operations and comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. The adoption of SFAS No. 133 on January 1, 2001 did not have a material effect in the Company's financial statements. -28- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued 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. Reclassifications - Certain reclassifications have been made to prior- period amounts to conform with the 2000 presentation. These reclassifications had no effect on the results of operations or financial position for any year presented. 3. DISPOSALS OF PROPERTY, PLANT AND EQUIPMENT In 2000, the Company sold machinery in one of its plants in the U.S. for a total consideration of $1,200 resulting in a gain of $153. In 1999, the Company sold its property in Singapore and machinery and equipment in one of its plants in Switzerland for a total consideration of $3,318, resulting in a gain of $871. 4. RESTRUCTURING COSTS In the fourth quarter of 1998, the Company wrote down the value of certain surplus equipment in its Wisconsin operation by $897 to the value received on its sale subsequent to the balance sheet date. 5. GAIN ON DISPOSAL OF SUBSIDIARIES In October 2000, the Company sold its investment in the adult incontinence manufacturing operation in Switzerland and a distribution office in Germany for a cash consideration of $4,963, resulting in a gain of $214. 6. PROVISION FOR INCOME TAXES Income is subject to taxation in the various countries in which the Company and its subsidiaries operate. The Company is not taxed in the British Virgin Islands where it is incorporated. The components of income before income taxes are as follows:
Year Ended December 31, 2000 1999 1998 --------------------------------------- U.S. $4,446 $2,235 $(1,297) Foreign 215 3,308 3,175 $4,661 $5,543 $ 1,878
-29- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 6. PROVISION FOR INCOME TAXES - continued The provision for income taxes consists of the following:
Year Ended December 31, 2000 1999 1998 ---------------------------------------- Current U.S. Federal $ 554 $ 440 $ (412) U.S. State - - - Foreign 1,452 2,404 1,378 Benefit of loss carrybackwards - (1,059) - Benefit of loss carryforwards (95) - (425) Deferred taxes (354) (798) (288) $1,557 $ 987 $ 253
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, 2000 1999 1998 ----------------------------------------- Provision for income taxes at statutory rate on profit for the year 35.0% 35.0% 35.0% Effect of different tax rates applicable to foreign earnings (20.5) 14.8 (113.9) Foreign losses which are not deductible 18.0 - - Foreign profits which are not taxable (35.0) - - Changes in valuation allowances 29.6 (32.5) 87.7 Withholding tax on interest and royalty income 5.7 3.9 10.0 Tax exemption under tax holiday (0.2) (2.3) (6.7) Other 0.8 (1.1) 1.3 Effective rate 33.4% 17.8% 13.4%
The Company's subsidiary incorporated in the People's Republic of China is entitled to a two-year exemption from state and local income taxes commencing from the first profitable year of operations, which was 1998, followed by a 50% reduction in tax rates for the next three years. The year ended December 31, 2000 was the first year for the subsidiary to be under a 50% reduction in the prevailing tax rate. Had this tax holiday not been available, income tax expense would have been higher by $11 and $138. Earnings per share would have been the same in 2000 and was lower by $0.02 in 1999 and 1998. -30- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 6. PROVISION FOR INCOME TAXES - continued Certain subsidiaries have operating loss carryforwards for income tax purposes which may be applied to reduce future taxable income. The loss carryforwards are available on a country by country basis and are not available for use except in the country in which the loss occurred. At December 31, 2000 the tax loss carryforwards by country and their future expiration dates are as follows:
2010 - Total 2001 2002 2003 2004 2005 2013 Indefinite ---------------------------------------------------------------------------------------------------- United Kingdom $100,136 $ - $ - $ - $ - $ - $ - $100,136 Switzerland 5,260 756 1,581 159 119 2,645 - - U.S.A. 9,830 - - - - - 9,830 - Belgium 813 - - - - - - 813 $116,039 $ 756 $1,581 $ 159 $ 119 $2,645 $9,830 $100,949
Included in United Kingdom operating loss carryforwards for income tax purposes is approximately $74,242 relating to tax losses at the date of acquisition of a company acquired in 1993. Utilization of these losses will result in a reduction in future tax expense and is dependent on both the earning of sufficient otherwise taxable income in the relevant countries and the satisfaction of technical requirements of applicable law. In the case of the United Kingdom, this includes the requirement that there not be a "major change" in business activities. Deferred income tax balances at December 31 are related to:
At December 31, 2000 1999 Assets Liabilities Assets Liabilities -------------------------------------------------------------- Inventories $ 1 $ - $ 22 $ (136) Accounts receivable and prepaid expenses 19 (44) 10 (88) Property - (493) - (1,702) Other 939 (125) 884 (100) Tax loss carryforwards 32,387 - 31,008 - Valuation allowances (32,387) - (31,008) - Total $ 959 $(662) $ 916 $(2,026)
-31- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 7. INVENTORIES Inventories by major categories are summarized as follows: At December 31, 2000 1999 ---------------------- Raw materials $13,636 $14,657 Finished goods 12,920 10,166 $26,556 $24,823 8. PROPERTY AND EQUIPMENT Included in property and equipment are assets acquired under capital leases with the following net book values: At December 31, 2000 1999 --------------------- At cost: Machinery and equipment $5,982 $5,976 Motor vehicles 122 158 6,104 6,134 Less: Accumulated amortization 2,426 1,889 Net book value $3,678 $4,245 9. LOAN RECEIVABLE The loan is non-interest bearing and will not be received within twelve months from the balance sheet date and accordingly, the amount is reclassified as a non-current asset in the financial statements. 10. SHORT-TERM BORROWINGS These include borrowings in the form of trade acceptances, loans and overdrafts with various banks: At December 31, 2000 1999 ------------------------ Credit facilities granted $14,850 $18,424 Utilized $13,235 $ 9,040 Weighted average interest rate on borrowings at end of year 8.91% 8.53% The Company maintains short-term bank credit lines in each of the countries in which it operates. Interest rates are generally based on the banks' prime lending rates and cost of funds and the credit lines are normally subject to annual review. At December 31, 2000, borrowings of $1,842 are collateralized by the pledge of accounts receivable and inventory of a subsidiary with a book value of $12,100. In addition, borrowings of $362 are collateralized by the pledge of land and buildings with a net book value of $1,099. -32- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 11. LONG-TERM DEBT Long-term debt consists of:
At December 31, 2000 1999 --------------------- Term loan bearing interest at LIBOR plus 2.25% (10.25% as of December 31, 2000) payable in monthly installments of $87.5 beginning June 2000 (the "Term Note") $3,628 $ - Loan from finance companies at rates ranged from 7.00% to 10.50% per annum at December 31, 2000. The loan is secured by the building and equipment of the Company's Wisconsin facilities 2,455 1,785 Capital leases bearing interest rates ranged from 3.25% to 9.69% per annum at December 31, 2000 2,915 3,905 Swiss Franc denominated mortgage loans repaid in full in 2000 - 3,940 Bank loan bearing interest at 8.40% per annum, with the final installment repaid in March 2000 - 148 Term Loan bearing interest at LIBOR plus 1.50% (payable in monthly installments of $125 beginning February 1997 with a balloon payment of $10,625 due January 2000) - 4,625 Total 8,998 14,403 Current portion of long-term debt 3,421 2,509 Long-term debt, less current portion $5,577 $11,894
Maturities of long-term debt as at December 31, 2000 are as follows:
Capital Loans Leases Total ------------------------------------------- Year ending December 31, 2001 $1,589 $2,010 $3,599 2002 1,550 1,089 2,639 2003 1,550 40 1,590 2004 978 - 978 2005 416 - 416 6,083 3,139 9,222 Interest - (224) (224) Total $6,083 $2,915 $8,998
In March 2001, the Company entered into an amended financing agreement with the existing financial institution under which the Company received a Term Loan of $11,000 (the "Term Loan"), a capital expenditure line of up to $5,000, and a revolving credit facility (based on the lesser of a percentage of eligible accounts receivable and inventory or $15,000). Such financing was entered into in connection with the Company's purchase of certain assets of the North American operations of Drypers Corporation as discussed in Note 20. The Company borrowed the full amount of the $11,000 Term Loan, with interest payable at LIBOR plus 4.25% or prime plus 2.75% per year at the election of the borrower, and repaid the existing Term Note. The Term Loan is repayable in 60 monthly installments of principal in the amount of $183 plus interest and is collateralized by the Company's U.S. subsidiary's assets. In addition, the Company borrowed approximately $9,100 of the $15,000 revolving credit facility during March 2001. Among other things, the agreement contains certain restrictive covenants, including the maintenance of earnings before interest, taxes, depreciation, and amortization ("EBITDA") and tangible net worth, and places limitations on acquisitions, dispositions, capital expenditures, and additional indebtedness. In addition, in March 2001, the Company borrowed $15,000 under a term loan (the "$15 million Term Loan") from an overseas financial institution which is controlled by one of the Company's non-executive directors. The loan bears annual interest at a rate of 14.5% increasing to 17.5% if any amounts payable under the loan are not repaid when due. Interest is payable monthly while principal is due in March 2002. The Company may prepay all or a portion of the loan after the six-month anniversary of the initial borrowing. The loan is secured by the Company's ownership interest in its Australian subsidiaries. In addition, the loan agreement contains certain restrictive covenants, including minimum tangible net worth and EBITDA of the Australian subsidiaries. The borrowings were guaranteed by the Company's Chairman and Chief Executive Officer. In conjunction with the $15 million Term Loan, the Company committed to issue share purchase warrants to the lender. The warrants will allow the lender to purchase Ordinary Shares of the Company at a price of $0.01 per share. The number of warrants issued will equal 0.75% of the Company's diluted Ordinary Shares outstanding for each month any portion of the principal balance of the loan is outstanding. However, in no event will the lender receive warrants which grant the lender the right to purchase less than 4.5% of the Company's diluted stock. The fair value of the warrants will be amortized over the term of the loan as interest expense. -33- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 12. RECEIVABLE FROM SHAREHOLDER In 2000, 1999 and 1998 the Company advanced $10,744, $1,879, and $3,372, respectively, to Brandon Wang, the founder, substantial shareholder and Chief Executive Officer of the Company and to a trust of which he is a beneficiary. These advances were made under a loan and security agreement in which the Company agreed to make loans to Brandon Wang from time to time, subject to any limit on such loans which may be imposed by the Board of Directors. The loans were repayable on demand evidenced by promissory notes bearing interest at a rate equal to 1.5% over the London Inter-Bank Offered Rate (LIBOR) or such other rate that the Board of Directors and the borrower shall agree in writing. The rate of interest was reviewed quarterly and adjusted, if necessary. In January 2000, the Company's U.S. subsidiary borrowed amounts under a term loan facility which was used to repay the balance of a loan payable by Brandon Wang to a bank, amounting to $5,250. This amount has been aggregated with the receivable from Brandon Wang which amounted to $2,811 at December 31, 1999. The resulting note payable by Brandon Wang is repayable on demand and carries the same interest terms as those of the existing promissory notes. Brandon Wang is required to provide collateral of shares of the Company held by him. The fair market value of such shares must be not less than 125% of the amount due under the notes. At December 31, 2000 and 1999, the Company has classified the balances owed by Brandon Wang as a reduction from shareholders' equity. During 2000, 1999 and 1998, Brandon Wang and a trust controlled by him repaid $1,943, $2,540, and $507, respectively, to the Company. Interest of $470, $243, and $92 was charged on these advances in 2000, 1999 and 1998, respectively. 13. COMMITMENTS AND CONTINGENCIES The Company and its subsidiaries lease land, facilities and equipment under operating leases, many -34- of which contain renewal options and escalation clauses. Rental expense under operating leases was $1,650 in 2000, $1,787 in 1999 and $2,365 in 1998. At December 31, 2000, the Company and its subsidiaries were obligated under operating leases requiring minimum rentals as follows : Year ending December 31, 2001 $1,097 2002 545 2003 374 2004 258 2005 241 2006 and thereafter 418 Total $2,933 The Company and its subsidiaries are, from time to time, involved in routine legal matters incidental to their business. On May 21, 2001, the Company entered into an agreement with The Proctor & Gamble Company ("P&G") to settle any potential liability of the Company which may have existed with respect to any past infringement on P&G patents prior to January 1, 2001 and to agree on royalty payments relating to sales on certain of the Company's products in the Asian Pacific and Australian region after December 31, 2000. The agreement encompasses fixed payments totaling $300 relating to the period prior to January 1, 2001 and payment of royalties based on a percentage of sales of certain products in the Asian pacific region beginning January 1, 2001. The amount of $300 relating to periods prior to January 1, 2001 was recorded in the statement of operations for the year ended December 31, 2000 as a component of selling, general and administrative expenses. A similar agreement was entered into in 1998 relating to the North American region and resulted in a payment of $900 to P&G, recorded as a component of selling, general and administrative expenses in 1998, for infringement of patents prior to January 1, 1998, as well as payments of royalty fees based on a percentage of certain products sold after December 31,1997 within the North American region. 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 attorney's fees. On June 27, 2001, a jury returned a verdict and awarded $4.0 million in damages and also provided for potential enhanced damages against the Company of up to an additional $7.0 million. The Company will file post trial motions to overturn the jury verdict and, if necessary, will appeal the verdict to the U.S. Court of Appeals for the Federal Circuit. The Company believes that it is reasonably possible that it will be successful in overturning the jury verdict. Accordingly, the jury award has not been recorded in the Company's consolidated financial statements. Unsuccessful resolution of the above litigation resulting in a significant assessment against the Company may result in the Company violating certain covenants of its debt agreements. This would give the lenders the right to demand payment of outstanding amounts unless the lenders waive their rights under the debt agreements. Demand for payment by the lenders and the need to pay the award to the plaintiff would require the Company to secure other financing sources to meet its obligations. The Company has advised the lenders of the recent jury verdict and its intention to pursue a post trial motion to overturn the decision and, if necessary, file an appeal. While the Company believes that it is reasonably possible that it will be successful in overturning the jury verdict, the outcome of this litigation is uncertain. -35- A claim has been made by Ms. Rhonda Tracy, the owner of U.S. Patent No. 5,797,824 for disposable diapers with a padded waist and leg holes, asserting that the Company has been manufacturing and/or selling diapers which infringe her patent. No lawsuit has been filed against the Company to date. The Company, however, has filed a lawsuit against Ms. Tracy in the U.S. district court for the Northern District of Georgia for a declaration that her patent is invalid and/or not infringed. The Company's case is presently stayed pending an action Ms. Tracy has filed against Jewel Food Stores, Inc., American Stores Company, WalMart Stores, Inc., Dominick's Finer Foods, Inc., Drypers Corporation, Kimberly-Clark Corporation and Tyco International, Ltd. in the U.S. district court in the Northern District of Illinois claiming infringement of her patent. The Company is unable to determine whether Ms. Tracy will file a lawsuit against the Company, and if so, the impact of the ultimate outcome of this matter. The Company denies any liability relating to this matter and intends to pursue its case against Ms. Tracy and vigorously defend itself if a lawsuit is filed. -36- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 14. NON CASH TRANSACTIONS Additions to fixtures and equipment during the year ended December 31, 2000 amounting to $303 were financed by new capital leases. 15. EMPLOYEE BENEFIT PLANS The Company's United States subsidiary has established a 401(k) plan under which the Company matches employee contributions up to 5% of employees' base compensation. The Company's other international subsidiaries have defined contribution plans, covering substantially all employees, which are determined by the boards of directors of the subsidiaries. These plans provide for annual contributions by the Company from 2% to 19% of eligible compensation of employees based on length of service. Total expense related to the above plans was $1,075 in 2000, $1,081 in 1999 and $1,135 in 1998. 16. SUPPLEMENTARY INFORMATION Valuation and qualifying accounts:
Balance At Disposal Charged To Balance At Beginning Of a Cost And End Of Year Subsidiary Expenses Deductions Of Year ----------------------------------------------------------------------------- Year ended December 31, 2000 Allowances for doubtful accounts $ 724 $ (41) $ 256 $ (42) $ 897 Provision for inventory obsolescence 376 (76) 457 (267) 490 $1,100 $(117) $ 713 $ (309) $1,387 Year ended December 31, 1999 Allowances for doubtful accounts $ 659 $ - $ 931 $ (866) $ 724 Provision for inventory obsolescence 840 - 569 (1,033) 376 $1,499 $ - $1,500 $(1,899) $1,100 Year ended December 31, 1998 Allowances for doubtful accounts $ 577 $ - $ 379 $ (297) $ 659 Provision for inventory obsolescence 1,228 - 623 (1,011) 840 $1,805 $ - $1,002 $(1,308) $1,499
Deductions relate to write-offs of accounts receivable as bad debts and disposals of inventories. -37- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands) 17. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of the Statement of Financial Accounting Standards No. 107 "Disclosures About Fair Value of Financial Instruments". The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies. The estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. The carrying amounts of cash and cash equivalents, accounts and other receivables, receivable from shareholder, accounts payable, short-term borrowings, 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, 2000 for debt of the same remaining maturities. 18. SEGMENT INFORMATION The Company is engaged in one industry segment, the manufacturing and marketing of disposable hygenic products. However, the Company has four principal geographic segments for operating management purposes. The principal measures of operating performance are operating income and income before income taxes. Certain financial information by geographic area and by products are as follows:
Year Ended December 31, 2000 1999 1998 ------------------------------------------------ Net sales North America (principally the U.S.) $ 92,229 $ 93,479 $ 89,911 Australia 44,753 42,676 40,487 Asia 60,835 45,715 44,208 Europe 16,844 23,972 33,319 $214,661 $205,842 $207,925
Within this industry segment, the Company derived its revenues from the following product lines for the years ended December 31, 2000, 1999 and 1998:
Year Ended December 31, 2000 1999 1998 ------------------------------------------------ Products Disposable baby diapers $160,417 $147,615 $154,485 Adult incontinence products 44,230 42,784 34,066 Training pants, youth pants and sanitary napkins 10,014 15,443 19,374 Total net sales $214,661 $205,842 $207,925
Intersegment sales were not significant. Operating income (loss) North America (principally the U.S.) $ 5,301 $ 5,001 $ 1,155 Australia 3,919 4,823 4,946 Asia 4,609 3,839 2,842 Europe (2,371) (1,667) (2,903) Corporate expenses (4,983) (4,562) (2,285) $ 6,475 $ 7,434 $ 3,755
Year Ended December 31, 2000 1999 1998 ---------------------------------------------------- Income before income taxes North America (principally the U.S.) $ 2,722 $ 1,695 $(1,651) Australia 1,954 2,743 2,659 Asia 2,592 3,352 2,675 Europe (2,497) (2,747) (3,289) Corporate (110) 500 1,484 $ 4,661 $ 5,543 $ 1,878
The gain on disposal of subsidiaries was recorded as a component of corporate expenses in the tables above. The 1998 income before income taxes for North America included the restructuring costs of the operation during the year.
Year Ended December 31, 2000 1999 1998 ------------------------------------------------ Interest expenses North America (principally the U.S.) $ 882 $1,510 $1,586 Australia 123 126 145 Asia 285 160 150 Europe 145 190 344 Corporate 159 222 286 $1,594 $2,208 $2,511 Year Ended December 31, 2000 1999 1998 ------------------------------------------------ Interest income North America (principally the U.S.) $ 204 $ 397 $ 523 Australia 53 41 42 Asia 34 41 54 Europe 63 44 92 Corporate 514 269 79 $ 868 $ 792 $ 790 Year Ended December 31, 2000 1999 1998 ------------------------------------------------ Assets, at end of year North America (principally the U.S.) $ 46,599 $ 44,479 $ 53,799 Australia 19,359 19,725 20,192 Asia 39,194 35,903 32,067 Europe 2,876 13,123 19,373 Corporate assets 3,381 7,715 8,478 $111,409 $120,945 $133,909 Year Ended December 31, 2000 1999 1998 ------------------------------------------------ Expenditures for property, plant and equipment North America (principally the U.S.) $2,645 $2,443 $2,841 Australia 1,497 728 741 Asia 1,528 2,407 1,926 Europe 197 517 936 Corporate assets 80 2 - $5,947 $6,097 $6,444 Year Ended December 31, 2000 1999 1998 ------------------------------------------------ Depreciation and amortization North America (principally the U.S.) $3,875 $3,218 $ 3,876 Australia 1,642 1,899 1,912 Asia 2,901 2,418 2,049 Europe 978 2,061 3,470 Corporate assets 68 66 77 $9,464 $9,662 $11,384 Year Ended December 31, 2000 1999 1998 ------------------------------------------------ Property, end of year North America (principally the U.S.) $19,431 $21,671 $21,994 Australia 6,586 7,840 8,627 Asia 9,776 11,945 12,945 Europe 166 6,061 10,975 Corporate assets 522 464 475 $36,481 $47,981 $55,016
No single customer accounted for 10% or more of the total revenues. -38- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (dollars in thousands except per share amounts) No single customer accounted for 10% or more of the total revenues. 19. QUARTERLY DATA (UNAUDITED)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------------------------------------------------------------------- 2000 Net sales $55,868 $51,270 $54,191 $ 53,332 Gross profit 18,635 16,451 17,723 16,320 Net income (loss) 1,603 700 831 (171)(1) Earnings (loss) per share 0.24 0.10 0.12 (0.02) 1999 Net sales $53,591 $48,732 $50,282 $ 53,237 Gross profit 17,273 15,784 16,904 17,761 Net income 1,556 316 747 1,816 Earnings per share 0.23 0.05 0.11 0.27 1998 Net sales $52,705 $49,601 $48,895 $ 56,724 Gross profit 14,279 14,064 13,550 18,035 Net (loss) income (1,081) (786) (347) 3,836 (2) (Loss) earnings per share (0.16) (0.12) (0.05) 0.57
(1) Include $300 charge relating to an agreement with P&G (see Note 13). (2) The 4th Quarter 1998 results include a reversal of $1,500 of estimated executive compensation previously accrued rateably over the first three quarters of 1998. 20. BUSINESS ACQUISITION In March 2001, the Company acquired the North American assets of Drypers Corporation pursuant to the order of the U.S. Bankruptcy Court based in Houston, Texas for a consideration of $38.5 million. The assets are located in Marion, Ohio; Vancouver, Washington and Houston, Texas and relate to the manufacture and sale of disposable baby diapers. The acquisition was accounted for using the purchase method. Historical annual gross sales relating to the assets purchased was $208,000 for the year ended December 31, 2000. The acquisition was financed by existing cash balances of the Company, proceeds from term loans -39- and revolving credit line (see Note 11). -40- SHAREHOLDER INFORMATION Annual Meeting The next annual meeting of shareholders will be held in Kuala Lumpur, Malaysia on October 17, 2001 at 10:00 a.m. local time. Notice of the meeting and proxy statement will be mailed to shareholders before the meeting. Market Information The Company's shares are traded on the NASDAQ National Market System under the Symbol DSGIF. Stock Transfer Agent Mellon Investor Services, LLC P.O. Box 3315 South Hackensack New Jersey 07660 U.S.A. Tel. : (1) 800-356 2017 website : www.chasemellon.com Independent Auditors Deloitte Touche Tohmatsu 26th Floor, Wing On Centre 111, Connaught Road, Central Hong Kong Principal Executive Office DSG International Limited 17th Floor, Watson Centre 16-22 Kung Yip Street Kwai Chung Hong Kong Tel: (852) 2484-4820 Form 20-F The Company's 2000 report to the Securities and Exchange Commission on Form 20-F provides additional details about the Company's business as well as other financial information not included in this annual report. A copy of this report is available to shareholders upon written request to the Company's Principal Executive Office. -41- DSG COMPANIES Asia Australia Disposable Soft Goods Limited DSG Pty Limited 17/F Watson Centre (trading as Australian Pacific Paper Products) 16-22 Kung Yip Street 3 Lake Drive Kwai Chung, N T Dingley Hong Kong Victoria 3172 Telephone : (852) 2427 6951 Australia Facsimile : (852) 2480 4491 Telephone : (61) 3-9552 1222 Facsimile : (61) 3-9558 1056 Disposable Soft Goods (S) Pte Limited No. 1, Joo Koon Crescent North America 4th Floor, Yeow Heng Industrial Building Singapore 629087 Associated Hygienic Products LLC Telephone : (65) 861 9155 4455 River Green Parkway Facsimile : (65) 861 9313 Duluth, GA 30096 U.S.A. Disposable Soft Goods (Zhongshan) Limited Telephone : (1) 770-497 9800 Jin Chang Road Facsimile : (1) 770-623 8887 Jin Sha Industrial Zone Shalang, Zhongshan, Guangdong Associated Hygienic Products Inc. People's Republic of China 205 E. Highland Drive Postal Code : 528411 Oconto Falls, WI 54154 Telephone : (86) 760-855 9866 U.S.A. Facsimile : (86) 760-855 8794 Telephone : (1) 920-846 8444 Facsimile : (1) 920-846 3026 DSG International (Thailand) Limited 835 Moo 4 Prakasa Europe Muang Samutprakarn 10280 Disposable Soft Goods (UK) Plc Thailand Boythorpe Works Telephone : (66) 2-709 4153 Derbyshire Facsimile : (66) 2-709 3884 Chesterfield, S40 2PH U.K. PT DSG Surya Mas Indonesia Telephone : (44) 1246-221 228 Jl. Pancatama Raya Kav. 18 Facsimile : (44) 1246-274 773 Desa Leuwilimus, Cikande Serang, Jawa Barat Indonesia Telephone : (62) 254-400 934 Facsimile : (62) 254-400 939 Disposable Soft Goods (Malaysia) Sdn Bhd No. 9, Jalan U1/19, Section U1 Hicom Glenmarie Industrial Park 40150 Shah Alam, Selangor Malaysia Telephone : (60) 3-519 4282 Facsimile : (60) 3-519 4286
-42- DSG International Limited Principal Executive Office 17/F Watson Centre 16-22 Kung Yip Street Kwai Chung, N T Hong Kong Telephone : (852) 2484 4820 Facsimile : (852) 2480 4491
-43- SCHEDULE 1 CONDENSED FINANCIAL INFORMATION UNCONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 2000 1999 1998 ------ ------ ------- (in thousands) Equity in earnings of subsidiaries...................... $3,936 $5,049 $(1,201) Operating expenses: Administration......................................... 2,959 2,785 563 Selling................................................ 300 - - Depreciation........................................... 25 23 20 Total operating expenses................................ 3,284 2,808 583 Operating income (loss)................................. 652 2,241 (1,784) Interest expense........................................ (159) (223) (286) Exchange loss........................................... (524) (861) (430) Interest income......................................... 3,821 3,721 3,841 Other finance expenses ................................. - (2) (56) Other income............................................ 730 546 590 Income before income taxes.............................. 4,520 5,422 1,875 Provision for income taxes.............................. 1,557 987 253 Net income.............................................. $2,963 $4,435 $ 1,622
See note to Schedule 1 -1- SCHEDULE 1 CONDENSED FINANCIAL INFORMATION UNCONSOLIDATED BALANCE SHEETS
Year ended December 31, 2000 1999 ------- ------- (in thousands) ASSETS Current assets: Cash.............................................................. $ 4,667 $ 5,260 Other receivables................................................. 796 177 Prepaid expenses and others....................................... 7 27 Total current assets................................................ 5,470 5,464 Equipment: Machinery and equipment........................................... 2 - Furniture......................................................... 216 216 Motor vehicles.................................................... 139 62 Total............................................................ 357 278 Less: accumulated depreciation ................................. 156 132 Net property....................................................... 201 146 Investment in subsidiaries (on the equity method).................. 62,942 65,144 Total assets....................................................... $68,613 $70,754 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings........................................... $ - $ 148 Accounts payable................................................ 234 7 Accrued payroll and employee benefits .......................... 50 255 Accrued expenses................................................ 449 41 Income taxes payable............................................ 54 1 Total current liabilities......................................... 787 452 Shareholders' equity: Ordinary shares................................................. 67 67 Additional paid-in capital...................................... 18,301 18,301 Retained earnings............................................... 65,664 62,701 Translation reserve............................................. (8,973) (7,956) Less: net receivable from shareholder.......................... (7,233) (2,811) Total shareholders' equity........................................ 67,826 70,302 Total liabilities and shareholders' equity........................ $68,613 $70,754
See note to Schedule 1 -2- SCHEDULE 1 CONDENSED FINANCIAL INFORMATION UNCONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2000 1999 1998 -------- ------- ------- (in thousands) Cash flows from operating activities Net cash provided by operating activities............... $ 2,723 $ 4,734 $ 1,392 Cash flows from investing activities.................... Expenditures for equipment.............................. (79) - - Investments in and advances to subsidiaries............. (5,883) (5,713) (1,221) Recoupment of investment in subsidiaries................ 7,068 3,844 3,882 Advances to shareholder................................. (8,837) (1,879) (3,372) Repayments by shareholder............................... 4,415 2,540 507 Net cash used in investing activities................... (3,316) (1,208) (204) Cash flows from financing activities (Decrease)/increase in cash and cash equivalents........ (593) 3,526 1,188 Cash and cash equivalents, beginning of year............ 5,260 1,734 546 Cash and cash equivalents, end of year.................. $ 4,667 $ 5,260 $ 1,734 Cash dividends from: Consolidated subsidiaries............................ $ 4,818 $ 1,329 $ 754
See note to Schedule 1 -3- DSG INTERNATIONAL LIMITED NOTE TO SCHEDULE 1 1. APPLICATION OF SIGNIFICANT ACCOUNTING PRINCIPLES Accounting for subsidiaries - DSG International Limited ("the Company") has accounted for the earnings of its subsidiaries on the equity method in the unconsolidated condensed financial information. -4- Exhibits Exhibit Description - ------- ----------- Exhibit 10.C.1 Sale and Purchase Agreement dated October 20, 2000 between DSG TEK Limited and IVF Hartman AG Exhibit 10.C.2 Loan and Security Agreement dated March 14, 2001 between Associated Hygienic Products LLC and Foothill Capital Corporation Exhibit 10.C.3 Short Term Financing Agreement dated March 14, 2001 between DSG International Limited and Breakers Investment Holding Limited Exhibit 10.C.4 Sale and Purchase Agreement dated February 20, 2001 between Associated Hygienic Products LLC and Drypers Corporation Exhibit 11 Computation of Net Income Per Ordinary Share EX-10.C.1 2 dex10c1.txt SALE AND PURCHASE AGREEMENT DATED 10/20/00 Exhibit 10.C.1 Purchase Contract between DSG TEK Limited, Boythorpe Works, Chesterfield, Derbyshire S40 2PH, United Kingdom (hereafter "DSG TEK") and IVF HARTMANN AG, Victor-von Bruns-Strasse, CH-8212 Neuhausen am Rheinfall (hereafter "IVF") concerning all the shares of Vlesia AG, 9403 Goldach (hereafter "Vlesia") 2/17 Preamble Whereas, DSG International Ltd, with domicile in Hongkong, is a company with world-wide activities, which has specialised in the production and distribution of disposable nappies, incontinence products for adults, hygienic articles for ladies and training pants products. DSG International Ltd. controls DSG TEK, a limited company (Ltd.) under English law, with domicile in Cbesterfield. DSG TEK is sole shareholder of Vlesia AG, a joint-stock company under Swiss law, with domicile in Goldach. Vlesia had 63 employees (as at the date of May 31, 2000) and mainly produces and distributes incontinence products for adults. Approximately one-third of the turnover of Vlesia is from sales to overseas companies of the DSG group, by means of deliveries from Vlesia to Vlesia (UK) Ltd., DSG Pty. Ltd. (trading as Australian Pacific Paper Products), DSG Vlesia NV and Vlesia GmbH. Whereas, IVF is a joint-stock company under Swiss law, with domicile in Neuhausen am Rheinfall. IVF produces and distributes medical and hygienic products. Whereas, based on the "Letter of Intent" dated June, 16, 2000, DSG International Ltd. instructed its subsidiary company DSG TEK to sell all the shares of Vlesia to IVF Internationale Verbandstoff-Fabrik Schaffhausen, which subsequently changed its name to IVF Hartmann AG. Now, therefore, the parties agree as follows: Art. 1: Object for Sale DSG TEK herewith sells to IVF all shares of Vlesia, namely 2'500 registered shares with a par value of CHF 1'000.00 per share. Art. 2: Purchase Price The purchase price for the shares is CHF 8.5 mio. (eightmillionfivehundred thousand Swiss francs). Art. 3: Escrow Account The parties agree to arrange for an Escrow Account with the Zurcher Kantonalbank for the purpose of depositing the purchase price payment prior to the Closing Date, which depositing has to take place within five working days of signing of this contract. /s/ Initials IVF /s/ Initials DSG TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 3/17 The Escrow Account shall be opened in the joint names of the legal advisors of the parties, i.e. Froriep Renggli, Bellerivestrasse 201, 8034 Zurich and Dr. Marc Stahli, Rheinstrasse 10, 8500 Frauenfeld (jointly the "Lawyers") having joint signature right. The funds in the Escrow Account shall be released at Closing. The parties hereby undertake to instruct their Lawyers in accordance with the provisions of this contract. Fees and expenses related to the operation of the Escrow Account therein shall be charged to the Escrow Account. The Lawyers' fees and expenses related to the handling of the Escrow Account shall be borne by the parties with respect to the Lawyer representing them. Art. 4: Closing 4.1 Closing Date and Place Subject to the terms and conditions of this Contract, the completion shall take place at the Zurich office premises of Froriep Renggli, Attorneys at Law, or any other date and place as agreed by the parties, within one week of the receipt of final clearance by the Grundbuchinspektorat St. Gallen confirming that the sale of Vlesia shares to IVF does not need any governmental permission under the Federal Act on the Acquisition of Real Estate in Switzerland by non-resident Aliens. At the latest by November 10, 2000 DSG TEK and IVF will provide for proper documentation evidencing the individuals' representing these companies and DSG International Ltd. authorities to sign this Contract resp. the Appendices (unless already done so at signing) and to close the deal with binding effect for the companies. 4.2 Closing Obligation by IVF IVF will instruct its Lawyer to release the deposited purchase price and accrued interest held in the Escrow Account to an account named by DSG TEK. /s/ Initials IVF /s/ Initials DSG TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 4/17 4.3 Closing Deliveries by DSG TEK At Closing DSG TEK shall deliver to IVF the following documents: (i) duly executed share transfers in respect of the Vlesia shares, together with the relative share certificates duly endorsed or other documents of title to the shares and all such waivers, consents, approvals, authorisations and other documents necessary for transfer; (ii) the minutes of a board meeting approving the transfer of the shares to IVF; (iii) the duly signed shareholders' register of Vlesia showing IVF as the sole shareholder; and (iv) the resignation, with immediate effect, of the board members (directors) of Vlesia which IVF requests and (v) a statement of settled accounts of the board members. Art. 5: Operation of Vlesia IVF will take over the operational responsibility of Vlesia with all benefits and risks as of October 23, 2000. DSG TEK undertakes to instruct the directors of Vlesia to follow the instructions of IVF. Art. 6: Conditions Precedent to Closing The parties' obligation to close under this contract is subject to the final clearance by the Grundbuchinspektorat St. Gallen and any of its supervisory authorities confirming that DSG TEK is entitled to sell the shares according to Article 1, and that IVF is entitled to buy these shares without approval and without any restrictions or conditions under the Federal Act on the Acquisition of Real Estate in Switzerland by non-resident Aliens, as otherwise this Contract shall become null and void and each party shall return to the other party whatever it has received under this contract. Art. 7: Representations and Warranties of DSG TEK In addition to the other representations and warranties contained in this contract, DSG TEK gives IVF the following representations and warranties: /s/ Initials IVF /s/ Initials DSK TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 5/17 7.1 Concerning Share Capital and Shares: a) The entire share capital of Vlesia is CHF 2'500'000.00 divided into 2'500 registered shares with a par value of CHF 1'000.00 per share, and is fully paid-up. b) DSG TEK is the rightful and unhindered owner of all Vlesia shares. c) The Vlesia shares are free of any third-party claims. d) Save for the restrictions according to the decision of the Bezirksamt Rorschach dated 28th June 1994, DSG TEK can, without any restrictions, dispose freely over all rights in and from the Vlesia shares. e) There are no binding contracts between shareholders (e.g. Aktionars- bindungsvertrage), no rights of the shareholders or third parties to subscribe for shares in priority or other agreements in relation to Vlesia shares, neither options or other rights covering the issuing of additional Vlesia shares. 7.2 Concerning Organisational and Capital Structure of Vlesia: a) Vlesia exists legally and is not in liquidation. b) The excerpt from the Commercial Register concerning Vlesia dated 14.06.2000 (Appendix 1) and the Articles of Incorporation of 30.09.1994 (Appendix 2) are complete and correct and correspond to the facts and the Articles of Incorporation deposited with the Commercial Register; all facts relating to Vlesia which are obligatory for registration or which are able to be registered, are correctly incorporated in the Commercial Register. c) The copy of the shareholders' register (which has to be established according to Art. 686 OR; Appendix 3) is identical with the original which is binding for Vlesia. d) The decisions made by the board of directors and the shareholders concerning Vlesia have been fully disclosed to IVF. The copies of the minutes of the General Meetings of May 12, 2000 and June 15, 2000 (Appendices 4 and 5), as well as the minutes of the Board Meeting of May 12, 2000 (Appendix 6) correspond with the originals and are binding for Vlesia. /s/ Initials IVF /s/ Initials DSG TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 6/17 The Shareholders Meeting and the board of directors have not taken any more decisions since 15.06.2000 and 12.05.2000 respectively. 7.3 Concerning the Financial Resources of Vlesia: a) The audited annual balance sheet 1999 (Appendix 7) and the interim statement of September 30, 2000 (Appendix 8) were drawn up in accordance with US GAAP (generally agreed accounting principles). They fairly present and are true and fair and are consistent with that of preceding periods (balance sheet continuity). b) Especially concerning the annual balance sheet 1999 (Appendix 7) and the interim statement of September 30, 2000 (Appendix 8) on the respective fixed dates: aa) The assets shown are still the property of Vlesia and are not subject to third-party claims, unless the accounts in Appendices 7 and 8 show otherwise. bb) The accounts receivable are collectible or sufficient provisions have been made. cc) All inventories consist of items of a quality and quantity useable or saleable in the ordinary course of business as presently conducted, except for obsolete items and items of below-standard quality all of which have been written off or written down to net realisable value. dd) All recognisable risks, devaluation and losses, including possible losses from pending business have been catered for by sufficient amounts being written off, or adjustments, or allocation to reserves. ee) There are no contingent liabilities, other than those listed in the Appendices of the annual balance sheet 1999 (Appendix 7) resp. the interim statement of September 30, 2000 (Appendix 8). c) From October 1, 2000 until the signing of this contract, the business of Vlesia has been conducted in an orderly manner. Except from the normal course of business and the occurrences declared in the interim statement of September 30, 2000 (Appendix 8), no assets have been disposed of, and no new debts incurred, nor has there been any considerable deterioration in the business of Vlesia; further, since October 1, 2000 profits /s/ Initials IVF /s/ Initials DSK TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 7/17 have not been distributed in any way and no obligations concerning the distribution of profits entered into. d) All the management fees for the DSG Group, owed by Vlesia are allowed for in the annual balance sheet 1999 and/or in the interim statement of September 30, 2000 (see Appendix 8a). As from September 30, 2000 until signing of this contract such management fees will only be paid at maximum the same rate as up to this date (1% of turnover with third party customers). Payment by Vlesia of the management fees shall be made per end of October. e) All the equipment required for the continuation of the operation of Vlesia is in working order. f) The business records are in order at the time of the signing of the contract. 7.4 Concerning Taxes and Duties: According to the applicable law, Vlesia has submitted to the responsible authorities all the necessary tax returns, accounts, and social security statements correctly and in good time. Vlesia has paid all due taxes (including indirect taxes), duties and social security payments as well as any fixed interest on arrears, charges and penalties. Vlesia has made sufficient reserve provisions in the annual balance sheet 1999 (Appendix 7) and the interim statement (Appendix 8) for the taxes and charges not yet due as at the relevant dates. 7.5 Concerning Intangible Assets a) Vlesia has registered the trademarks "Vlesi", "Vlesi-Combi", "Vlesi-Form", "Vlesi-Plus" and "Vlesi-Soft" according to Appendix 9 and has not granted any licenses regarding these trademarks. b) DSG TEK is obliged, at their own expense, to transfer any further trademarks containing the names "Vlesia" or "Vlesi" or any adaptations of these names, which are registered in any country under DSG TEK or any affiliated company, to Vlesia. Applications of transfer and/or any other formalities shall be initiated within 30 days from the signing of this contract. DSG TEK shall send copies of these Applications and/or other formalities with- /s/ Initials IVF /s/ Initials DSK TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 8/17 out delay to IVF. Neither DSG TEK nor any affiliated companies have granted any licenses regarding trademarks containing the names "Vlesia" or "Vlesi" or any adaptations of these names. c) After the signing of this contract DSG TEK is obliged by December 1, 2000 the latest: (i.) to stop any usage of the trademarks mentioned in paragraph 7.5a) and of the trademarks which have to be transferred according to paragraph 7.5b); (ii.) to stop any usage of (independent of registration as trademarks) the names "Vlesia", "Vlesi" or adaptations of these names, both in countries where these names are registered as trademarks and in any other country; this prohibition of usage is also valid, if third parties are entitled to use "Vlesia", "Vlesi" or adaptions of these names; (iii.) to stop any usage of the names "Vlesia", "Vlesi" or adaptions of these names in their company name, their E-mail addresses, their domain-names, on their homepages or in any other way and to transfer E-mail addresses and domain-names to IVF if practicably possible. (iv.) The above mentioned prohibitions of usage (i.)-(iii.) comprise also the prohibition to register trademarks in any country in the world (independent of the registration of the trademarks mentioned in paragraph 7.5a or similar trademarks in such countries), if there is the possibility, that consumers could confuse these trademarks with the names "Vlesia", "Vlesi" or adaptions of these names or with the trademarks according to paragraph 7.5a and 7.5b. (v.) The above mentioned prohibitions of usage (i.)-(iii.) comprise also the prohibition to deliver any products to companies which use the names "Vlesia", "Vlesi" or adaptions of these names for the sale of products, in their company names or in any other regard. d) DSG TEK is obliged to order their present and future affiliated companies in a legally binding way to transfer trademarks according to paragraph 7.5b and to abide to all prohibitions of usage mentioned in paragraph 7.5c (i.)-(v.). /s/ Initials IVF /s/ Initials DSG TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 9/17 e) According to Appendix 12 DSG International Ltd. guarantees that all its affiliated companies, especially "DSG-Vlesia NV", "Vlesia (UK) Ltd." and "DSG Pty. Ltd.", abide to the rules of paragraphs 7.5b and 7.5c (i.)-(v.). 7.6 Concerning Hard- and Software The computer software and hardware used by Vlesia in the daily running of the business has been working normally and in accordance with the requirements of the business. Vlesia has all the required licences for the software used, and has paid the licence fees. 7.7 Concerning Contractual and other Legal Relationships: a) Neither the signing nor the enforcement of this contract offends against any law or decree, neither against a permit from the Swiss authorities save the consent of the Grundbuchinspektorat St. Gallen, nor against a contract which is essential for the continuation of Vlesia's business operations and gives no other party the right to end such a contract. b) The business activities of Vlesia do not infringe any regulations under public law, and there are no obligations arising from earlier infringements which are still outstanding. c) Vlesia is not in default with any contract material for the continued operation of the business. d) For all claims from guarantee, late-payment, defaults or similar dues, which up to the signing of this contract have been made or threatened by any third party or of which DSG TEK or Vlesia have knowledge or should have knowledge, sufficient reserve funds have been provided. e) The dispute with Papier Fabrik Sundern is definitely settled according to Appendix 13. There are no legal proceedings pending or threatened against Vlesia, nor are any to be expected. f) A schedule of outstanding purchase orders as at 30 September, 2000 is annexed as Appendix 14. Since that date no further purchase orders for raw materials have been entered into by Vlesia except in the ordinary course of business. Appendix 14a contains a list of all capital investments over CHF l0'000.-- not yet paid as per October 16, 2000. /s/ Initials IVF /s/ Initials DSG TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 10/17 g) Except Appendix 15, in relation to contracts, which are essential for the business of Vlesia, no opposite party has terminated or threatened to terminate such a contract and no opposite party is in arrears with such a contract. h) Vlesia possesses all the licences and concessions and other permits from the authorities which are necessary for the continuation of its business operations, and Vlesia has fulfilled all obligations in connection with such licences, concessions and other permits from the authorities. Nothing has happened, nor are any facts known, which today or after the expiry of a deadline to remedy infringements could cause damage to such licences, concessions and permits, or could cause the respective authorities to withdraw any such licences, concessions or permits. 7.8 Concerning Insurance: DSG TEK has provided IVF with details of all insurances held by Vlesia and warrants that the insurances are valid and that all premiums due to be paid prior to the date hereof have been paid in full and DSG TEK is not aware of any reason why the proposed sale would invalidate the existing insurances. 7.9 Concerning representatives of the hoard of directors, employees, freelances: a) The salary table contained in Appendix 16 shows a correct and complete list of all the agreements of Vlesia with all members of the board of directors, with all employees and with all freelances. b) The staff welfare (pension scheme), which is part of an insurance settle- ment with the Winterthur Life, fulfils all the legal requirements and stipulations; there are no third-party claims or obligations of Vlesia on the pension scheme which were not noted in the annual balance sheet of 1999 (Appendix 7) or the interim statement of September 30, 2000 (Appendix 8) or which would exceed the provisions made in the annual balance sheet of 1999 or the interim statement of September 30, 2000; no other pension concessions than under the pension scheme of the Winterthur Life have been made to representatives of the board of directors, employees or free- lances and Vlesia has no contractual liability to make any contributions to any personal pension scheme of any representatives of the board of direc- /s/ Initials IVF /s/ Initials DSG TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 11/17 tors, employees and freelances. All contributions payable to the pension scheme have been paid or provided for. c) With the exception of the above-mentioned salary- and social benefit claims, no financial claims or expectancies (Anwartschaften) of any kind against Vlesia exist, e.g. retirement pension-, death-, illness-, invalidity- or other support claims of existing or previous representatives of the board of directors, employees or freelances. 7.10 Concerning completeness and correctness of the information: This contract and its appendices contain no untrue information and there is no omission, which lets the given information in this contract and its appendices appear untrue. 7.11 Concerning environmental regulations and old contaminated waste dumps Since the date of the environmental report dated 30 May 1994 (Appendix 17) the business activities of Vlesia have fulfilled and continue to fulfil all relevant environmental regulations. DSG TEK guarantees that Vlesia has not committed any act since such date which, based on the environmental regulations (especially legislation for water and environmental protection) or private legislation, could lead to a public or private prosecution against Vlesia or to the imposition of costs by the authorities on Vlesia or on other persons with contractual claims or claims in rem to Vlesia's land. 7.12 Concerning limitations on DSG TEK's liability a) In paragraph 7.12 "Claim" means any claim for breach of or non-compliance with this contract (including any warranty claim or tax claim). b) Save for paragraph 7.10 IVF admits and acknowledges that it has not en- tered into the contract in reliance upon any warranties, guarantees, representations, covenants, undertakings, indemnities or other statements whatsoever other than those expressly set out in the contract and IVF acknowledges that DSG TEK have not given any such warranties, representations, covenants, undertakings, indemnities or other statements, in particular no guarantee is given to the achievement of any forecast. /s/ Initials IVF /s/ Initials DSG TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 12/17 c) No Claim shall be admissible and DSG TEK shall not be liable under any of the representations and warranties or any other provision of the contract: (i) to the extent that provision, reserve or allowance has been made in respect of the subject matter of the Claim in the revised annual balance sheet from 1999 (Appendix 7) and/or the interim statement of September 30, 2000 (Appendix 8) or to the extent that the subject matter of the Claim was specifically referred to in this contract; or (ii) to the extent that such liability arises or is increased as a result of any change or changes in legislation (primary or delegated) including without limitation any increases in rates of taxation or the introduction of any changes or new form of taxation or in the practice of the taxation authorities or any other relevant authority occurring after completion whether or not with retrospective effect; or (iii) to the extent that such liability occurs or arises as a result of or is otherwise attributable wholly or partly to any voluntary act, transaction or omission of Vlesia or IVF or their respective directors, employees or agents after completion. d) The aggregate liability of DSG TEK in respect of all Claims shall not exceed the purchase price according to Article 2. Art. 8: Vlesia (UK) Ltd. and DSG Vlesia NV The Appendices 18 and 19 contain a list of all the current customers of Vlesia (UK) Ltd. and DSG Vlesia NV. In the Appendices 20 and 21 there are also copies of all current, written contracts between Vlesia (UK) Ltd. resp. DSG Vlesia NV and their customers. Both companies had at their disposal in stock the goods listed in Appendices 22 and 23, as at September 30, 2000. Since that date no purchase orders for Vlesia products have been entered into by Vlesia (UK) Ltd. or DSG Vlesia NV except in the ordinary course of business. After the signing of this contract Vlesia is not obliged to deliver any more products to Vlesia (UK) Ltd. and DSG Vlesia NV. Appendices 24 and 25 contain legally binding declarations from Vlesia (UK) Ltd., resp. DSG Vlesia NV in favour of IVF signed by DSG International Ltd., which contain the following points: /s/ Initials IVF /s/ Initials DSG TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 13/17 (i.) Confirmation of the completeness and correctness of Appendices 18/19, 20/21 and 22/23; (ii.) Duty of both companies towards IVF, to inform their customers (Appendices 18 and 19) that as from 1.12.2000, orders should be placed directly with Vlesia, resp. duty of both companies, as from 1.12.2000 to pass on orders from existing customers (Appendices 18 and 19) and from new customers to Vlesia; (iii.) Duty of both companies, in a written declaration signed by each single company and IVF/Vlesia according to Appendix 26, informing their customers (Appendices 18/19) that IVF is the new owner of Vlesia and according to Appendix 26a that a company of the Hartmann-Group intends to enter into contracts with the customers of the two companies, and that these customers will be released from their contracts with Vlesia (UK) Ltd. and DSG Vlesia NV; (iv.) Duty of both companies to undertake nothing which could hinder their customers (Appendices 18 and 19) from entering into contracts with IVF/Vlesia; (v.) Duty of both companies, as from 1.12.2000, not to sell any more products which were manufactured by Vlesia. (vi.) Declaration of both companies, that they have no claims for remuneration for goods supplied after 1.12.2000 to customers according to Appendices 18 and 19 or any other customers, apart from those explicitly listed below. Especially exempt is any commission on turnover, or the like. IVF/Vlesia undertake during the period from date of signing this contract to November 30, 2000, to take no action to hinder customers of Vlesia (UK) Ltd. and DSG Vlesia NV to continue buying Vlesia Products from these two companies. Vlesia (UK) Ltd. and DSG Vlesia NV have the right until 30. November 2000, to sell their stocks, according to Appendices 22 and 23 to their customers in their own name and for their own profits. IVF/Vlesia are obliged to buy back the products listed in Appendices 22 and 23, which have not been sold by the end of November 2000 not later than December 31, 2000, at the prices listed in these appendices, provided they are products from Vlesia's current assortment. /s/ Initials IVF /s/ Initials DSG TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 14/17 The two companies will be reimbursed by IVF/Vlesia for the costs of handling and storage at a rate of 7% of the total value of the goods to be bought back. The Hartmann Companies in England, resp. Belgium shall, after the signing of this contract, enter into discussions with the employees of Vlesia (UK) Ltd., resp. DSG Vlesia NV who are directly connected with the incontinence-business of these companies, with regard to employment, provided these employees apply to the Hartmann Companies concerned by November 30, 2000. Art. 9: DSG Pty. Ltd. (trading as Australian Pacific Paper Products) IVF is obliged to supply DSG Pty. Ltd at the prices and under the conditions according to Appendix 27, as far as the orders are in the ordinary course of business regarding quantities until 31.12.2000. DSG TEK and, according to Appendix 28, also DSG International Ltd. confirm that no agreements exist which would oblige Vlesia to also supply DSG Pty. Ltd. after 31.12.2000. The parties will, however, after the signing of this contract, discuss whether and in what form the supply to DSG Pty. Ltd. after 31.12.2000 would be possible. DSG Pty. Ltd. will, however, have the right to order until March 31, 200l at prices and under conditions determined by IVF. DSG Pty. Ltd. will have the right to sell its stock of Vlesia Products. Art. 10: Warranty 10.1 Time limit: IVF can claim for untrue assurances given in this contract and infringement of representations and warranties given in this contract, up to 24 months after the time of the signing of the contract, infringements pertaining to assurances and guarantees concerning taxes and duties up to two months after the validity of the respective assessment (with later alterations of the already valid assessments, two months after the validity of the new assessment). This limit counts as observed if IVF notifies DSG TEK of the claim in writing before the expiry of the guarantee limit, and within 60 days after the expiry of the limit, has commenced legal proceedings or prosecution. The legal inquiry and claims periods according to Art. 201 OR and 210 OR are waived. /s/ Initials IVF /s/ Initials DSG TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 15/17 10.2 Legal consequences: If any of the assurances, representations or warranties stated in the contract are completely or partly incorrect, DSG TEK is obliged to put IVF or - if so claimed by IVF - Vlesia in the position it would be in, if the assurances, representations and guarantees made had been correct. The remaining rights of IVF by law or from this contract remain reserved (especially claims related to cancellation of the contract or compensation for damages or the possibility of action for nullification of the contract because of error (Art. 23 ff. OR) or deception (Art. 28 OR). Art. 11: Secrecy; Press release 11.1 The parties agree to treat the provisions of this contract as confidential, except if they are legally bound to inform third parties. DSG TEK has already informed Vlesia's employees of the intention to reach agreement with IVF. 11.2 After the signing of this contract, both parties together make a press release, the text of which must adhere exactly to the formulation in Appendix 29. Furthermore after the signing of this contract, both parties together inform Vlesia's clients with a letter, the text of which must adhere exactly to the formulation in Appendix 30. 11.3 The parties may make such other announcements in other countries as they agree between themselves or as they are required to make by law or any regulatory authority. Art. 12: Invalidity of the terms of contract If any of the terms of this contract should be invalid, become invalid or be declared invalid, this does not affect the validity of any of the other terms. The invalid, resp. ineffective terms should be replaced by others, which are valid in form and content, and which come closest to the purpose and intent of the invalid resp. ineffective terms. /s/ Initials IVF /s/ Initials DSG TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 16/17 Art. 13: Communications All communications with respect to this contract are to be made by registered letter to the address below, unless neither of the respective parties have informed of a change of address, and the other party has taken note of this change of address: To the buyer: IVF HARTMANN AG, Victor-van-Bruns-Strasse, 8212 Neuhausen am Rheinfall To the seller: DSG TEK Ltd., Boythorpe Works, Chesterfield, Derbyshire S40 2PH, United Kingdom Art. 14: Costs Each party pays its own costs, as well as those of their advisors in connection with this contract. Different regulations in this contract remain reserved. Art. 15: Copies of the Contract / Entirety of Contract This contract will be drawn up in 4 originals, two of which shall be initialled through on every side. Each party receives two copies. This contract contains the entire agreement between the parties. It replaces all previous oral or written agreements and arrangements in this connection. The Appendices form an integral part of this contract. Art. 16: Applicable Law This contract and all disputes arising out of this contract shall be governed by Swiss law. Art. 17: Jurisdiction Place of jurisdiction is the Commercial Court in St. Gallen. /s/ Initials IVF /s/ Initials DSG TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK 17/17 For DSG TEK Ltd.: Frauenfeld, October 20, 2000 /s/ Patrick Tsang ------------------------- Patrick Tsang For IVF Hartmann AG: Frauenfeld, October 20, 2000 /s/ Dr. Rinaldo Riguzzi ------------------------- Dr. Rinaldo Riguzzi /s/ Wolfgang Zollinger ------------------------- Wolfgang Zollinger /s/ Initials IVF /s/ Initials DSG TEK --------------------------- --------------------------- Initials IVF Initials DSG TEK EX-10.C.2 3 dex10c2.txt LOAN & SECURITY AGREEMENT EXHIBIT 10.C.2 ================================================================================ $35,000,000 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT by and among ASSOCIATED HYGIENIC PRODUCTS LLC as Borrower, THE LENDERS THAT ARE SIGNATORIES HERETO as the Lenders, and FOOTHILL CAPITAL CORPORATION as the Arranger and Administrative Agent Dated as of March 14, 2001 ================================================================================ TABLE OF CONTENTS
Page ---- 1. DEFINITIONS AND CONSTRUCTION...............................................2 1.1 Definitions..........................................................2 1.2 Accounting Terms....................................................29 1.3 Code................................................................29 1.4 Construction........................................................29 1.5 Schedules and Exhibits..............................................29 2. LOAN AND TERMS OF PAYMENT.................................................29 2.1 Revolver Advances...................................................30 2.3 Borrowing Procedures and Settlements................................33 2.4 Payments............................................................40 2.5 Overadvances........................................................43 2.6 Interest Rates and Letter of Credit Fee: Rates, Payments, and Calculations........................................................43 2.7 Cash Management.....................................................45 2.8 Crediting Payments; Float Charge....................................47 2.9 Designated Account..................................................47 2.10 Maintenance of Loan Account; Statements of Obligations..............47 2.11 Fees................................................................48 2.12 Letters of Credit...................................................48 2.13 LIBOR Option........................................................52 2.14 Capital Requirements................................................55 3. CONDITIONS; TERM OF AGREEMENT.............................................56 3.1 Conditions Precedent to the Initial Extension of Credit.............56 3.2 Conditions Subsequent to the Initial Extension of Credit............60 3.3 Conditions Precedent to all Extensions of Credit....................61 3.4 Term................................................................61 3.5 Effect of Termination...............................................61 3.6 Early Termination by Borrower.......................................62 4. CREATION OF SECURITY INTEREST.............................................62 4.1 Grant of Security Interest..........................................62 4.2 Negotiable Collateral...............................................63
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Page ---- 4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral........ 63 4.4 Delivery of Additional Documentation Required................................. 63 4.5 Power of Attorney............................................................. 64 4.6 Right to Inspect.............................................................. 64 4.7 Control Agreements............................................................ 65 4.8 Revised Article 9............................................................. 65 5. REPRESENTATIONS AND WARRANTIES...................................................... 66 5.1 No Encumbrances............................................................... 66 5.2 Eligible Accounts............................................................. 66 5.3 Eligible Inventory............................................................ 67 5.4 Equipment..................................................................... 68 5.5 Location of Inventory and Equipment........................................... 68 5.6 Inventory Records............................................................. 68 5.7 Location of Chief Executive Office, FEIN, Fiscal Year......................... 68 5.8 Due Organization and Qualification; Subsidiaries.............................. 68 5.9 Due Authorization; No Conflict................................................ 69 5.10 Litigation.................................................................... 70 5.11 No Material Adverse Change.................................................... 70 5.12 Fraudulent Transfer........................................................... 70 5.13 Employee Benefits............................................................. 70 5.14 Environmental Condition....................................................... 71 5.15 Brokerage Fees................................................................ 71 5.16 Intellectual Property......................................................... 71 5.17 Leases........................................................................ 71 5.18 DDAs.......................................................................... 71 5.19 Complete Disclosure........................................................... 71 5.20 Indebtedness.................................................................. 72 6. AFFIRMATIVE COVENANTS............................................................... 72 6.1 Accounting System............................................................. 72 6.2 Collateral Reporting.......................................................... 72
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Page ---- 6.3 Financial Statements, Reports, Certificates............................... 73 6.4 Guarantor Reports......................................................... 75 6.5 Return.................................................................... 75 6.6 Maintenance of Properties and Equipment................................... 76 6.7 Taxes..................................................................... 76 6.8 Insurance................................................................. 76 6.9 Location of Inventory and Equipment....................................... 77 6.10 Compliance with Laws...................................................... 77 6.11 Leases.................................................................... 77 6.12 Brokerage Commissions..................................................... 77 6.13 Existence................................................................. 78 6.14 Environmental............................................................. 78 6.15 Disclosure Updates........................................................ 78 6.16 License Default Notices................................................... 78 6.17 Engage Consultant......................................................... 79 7. NEGATIVE COVENANTS.............................................................. 79 7.1 Indebtedness.............................................................. 79 7.2 Liens..................................................................... 79 7.3 Restrictions of Fundamental Changes....................................... 80 7.4 Disposal of Assets........................................................ 80 7.5 Change Name............................................................... 80 7.6 Guarantee................................................................. 80 7.7 Nature of Business........................................................ 80 7.8 Payments, Prepayments and Amendments...................................... 80 7.9 Change of Control......................................................... 81 7.10 Consignments.............................................................. 81 7.11 Distributions............................................................. 81 7.12 Accounting Methods........................................................ 82 7.13 Investments............................................................... 82 7.14 Transactions with Affiliates.............................................. 82
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Page ---- 7.15 Suspension........................................................ 82 7.16 Compensation...................................................... 82 7.17 Use of Proceeds................................................... 82 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees............................................ 82 7.19 Securities Accounts............................................... 83 7.20 Financial Covenants............................................... 83 7.21 Officers.......................................................... 84 8. EVENTS OF DEFAULT....................................................... 84 9. THE LENDER GROUP'S RIGHTS AND REMEDIES.................................. 86 9.1 Rights and Remedies............................................... 86 9.2 Remedies Cumulative............................................... 89 10. TAXES AND EXPENSES...................................................... 89 11. WAIVERS; INDEMNIFICATION................................................ 89 11.1 Demand; Protest; etc.............................................. 89 11.2 The Lender Group's Liability for Collateral....................... 90 11.3 Indemnification................................................... 90 12. NOTICES................................................................. 90 13. CHOICE OF LAW AND VENUE; JURY TRAIL WAIVER.............................. 92 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS.............................. 93 14.1 Assignments and Participations.................................... 93 14.2 Successors........................................................ 96 15. AMENDMENTS; WAIVERS..................................................... 96 15.1 Amendments and Waivers............................................ 96 15.2 Replacement of Holdout Lender..................................... 97 15.3 No Waivers; Cumulative Remedies................................... 98 16. AGENT; THE LENDER GROUP................................................. 98 16.1 Appointment and Authorization of Agent............................ 98 16.2 Delegation of Duties.............................................. 99 16.3 Liability of Agent................................................ 99 16.4 Reliance by Agent................................................. 99
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Page ---- 16.5 Notice of Default or Event of Default..................................... 100 16.6 Credit Decision........................................................... 100 16.7 Costs and Expenses; Indemnification....................................... 101 16.8 Agent in Individual Capacity.............................................. 101 16.9 Successor Agent........................................................... 102 16.10 Lender in Individual Capacity............................................. 102 16.11 Withholding Taxes......................................................... 103 16.12 Collateral Matters........................................................ 105 16.13 Restrictions on Actions by Lender; Sharing of Payments.................... 106 16.14 Agency for Perfection..................................................... 106 16.15 Payments by Agent to the Lenders.......................................... 107 16.16 Concerning the Collateral and Related Loan Documents...................... 107 16.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by Lenders; Other Reports and Information.................................... 107 16.18 Several Obligations; No Liability......................................... 108 16.19 Legal Representations of Agent............................................ 109 17. GENERAL PROVISIONS.............................................................. 109 17.1 Effectiveness............................................................. 109 17.2 Section Headings.......................................................... 109 17.3 Interpretation............................................................ 109 17.4 Severability of Provisions................................................ 109 17.5 Amendments in Writing..................................................... 109 17.6 Counterparts; Telefacsimile Execution..................................... 110 17.7 Revival and Reinstatement of Obligations.................................. 110 17.8 Integration............................................................... 110 17.9 Conflicts................................................................. 110
-v- EXHIBITS AND SCHEDULES Exhibit A-1 Form of Assignment and Acceptance Exhibit B-1 Form of Borrowing Base Certificate Exhibit C-1 Form of Compliance Certificate Exhibit L-1 Form of LIBOR Notice Schedule C-1 Commitments Schedule E-1 Eligible Inventory Locations Schedule P-1 Permitted Liens Schedule R-1 Real Property Collateral Schedule 2.7(a) Cash Management Banks Schedule 5.4 Drypers Equipment Leases Assumed or Otherwise Transferred to Borrower Schedule 5.5 Locations of Inventory and Equipment Schedule 5.7 Chief Executive Office; FEIN Schedule 5.8(b) Capitalization of Borrower Schedule 5.8(c) Capitalization of Borrower's Subsidiaries Schedule 5.8(d) Subscriptions, Options, Warrants and Calls Schedule 5.10 Litigation Schedule 5.14 Environmental Matters Schedule 5.16 Intellectual Property Schedule 5.18 Demand Deposit Accounts Schedule 5.20 Permitted Indebtedness AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ------------------------------------------------ THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (this "Agreement"), is entered into as of March 14, 2001, between and among, on the --------- one hand, the lenders identified on the signature pages hereof (such lenders, together with their respective successors and assigns, are referred to hereinafter each individually as a "Lender" and collectively as the "Lenders"), ------ ------- FOOTHILL CAPITAL CORPORATION, a California corporation, as the arranger and administrative agent for the Lenders ("Agent"), and, on the other hand, ----- ASSOCIATED HYGIENIC PRODUCTS LLC, a Delaware limited liability company ("Borrower"). -------- WITNESSETH: ---------- WHEREAS, Borrower and Foothill (as defined herein) are parties to that certain Loan and Security Agreement dated as of January 21, 2000 (as amended prior to the date hereof, the "Prior Loan Agreement"); and -------------------- WHEREAS, Borrower has requested that Foothill amend and restate the Prior Loan Agreement in its entirety to, among other things, fund the acquisition of substantially all of the assets of Drypers (as defined herein) located in the United States of America; and WHEREAS, Foothill has agreed to such amendment and restatement of the Prior Loan Agreement in the manner set forth herein and in the amounts set forth herein; and WHEREAS, Borrower acknowledges and agrees that the security interests granted to Foothill pursuant to the Prior Loan Agreement and the other Loan Documents (as defined in the Prior Loan Agreement) shall remain outstanding and in full force and effect in accordance with the Prior Loan Agreement and such other Loan Documents and shall continue to secure the Obligations (as defined herein); and WHEREAS, each of Borrower, Foothill, and the Lenders (as defined herein) acknowledges and agrees that (i) the Obligations (as defined herein) represent, among other things, the amendment, restatement, renewal, extension, consolidation and modification of the Obligations (as defined in the Prior Loan Agreement) arising in connection with the Prior Loan Agreement and the other Loan Documents (as defined in the Prior Loan Agreement) executed in connection therewith; (ii) Borrower, Foothill and the Lenders intend that the Prior Loan Agreement and the other Loan Documents (as defined in the Prior Loan Agreement) executed in connection therewith and the collateral pledged thereunder shall secure, without interruption or impairment of any kind, all existing Obligations (as defined in the Prior Loan Agreement) under the Prior Loan Agreement and the other Loan Documents (as defined in the Prior Loan Agreement) executed in connection therewith as amended, restated, renewed, extended, consolidated and modified hereunder, together with all other Obligations (as defined herein) hereunder; (iii) all Liens (as defined in the Prior Loan Agreement) evidenced by the Prior Loan Agreement and the other Loan Documents (as 1 defined in the Prior Loan Agreement) executed in connection therewith are hereby ratified, confirmed and continued; (iv) this Agreement is intended to restate, renew, extend, consolidate, amend and modify the Prior Loan Agreement; and (v) the Loan Documents (as defined in the Prior Loan Agreement) (other than the Prior Loan Agreement which shall be restated, renewed, extended, consolidated, amended and modified as set forth herein) shall remain extant and in full force and effect (except to the extent amended and modified as of the date hereof); and WHEREAS, each of Borrower, Foothill and the Lenders intend that (i) the provisions of the Prior Loan Agreement be hereby superseded and replaced by the provisions hereof; and (ii) by entering into and performing their respective obligations hereunder, this transaction shall not constitute a novation. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants herein set forth and other good and valuable consideration, the receipt and adequacy of all of the foregoing as legally sufficient consideration being hereby acknowledged, Borrower, Foothill and the Lenders do hereby agree that the Prior Loan Agreement is amended and restated in its entirety as follows: The parties agree as follows: 1. DEFINITIONS AND CONSTRUCTION. 1.1 Definitions. As used in this Agreement, the following terms shall have ----------- the following definitions: "Account Debtor" means any Person who is or who may become obligated -------------- under, with respect to, or on account of, an Account, chattel paper, or a General Intangible. "Accounts" means all of Borrower's now owned or hereafter acquired -------- right, title, and interest with respect to "accounts" (as that term is defined in the Code), and any and all supporting obligations in respect thereof. "Acknowledgment of Licenses" means, collectively, that certain letter -------------------------- agreement by Procter & Gamble in favor of Agent dated as of March 14, 2001, acknowledging Agent's security interest in the Collateral, and that certain letter agreement by Disposable Soft Foods (UK) PLC in favor of Agent dated as of March 14, 2001, acknowledging Agent's security interest in the Collateral. "Acquired Assets" means the assets acquired by Borrower pursuant to the --------------- Asset Purchase Agreement. "Additional Documents" has the meaning set forth in Section 4.4. -------------------- ----------- 2 "Adjustment Date" means, with respect to any fiscal quarter end of --------------- Borrower, the later of (a) 90 days after such fiscal quarter end, or (b) the sixth (6th) day following the delivery to Agent of the financial statements for the last fiscal month period in such fiscal quarter. "Advances" has the meaning set forth in Section 2.1. -------- ----------- "Affiliate" means, as applied to any Person, any other Person who, --------- directly or indirectly, controls, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" means the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of Stock, by contract, or otherwise; provided, however, that, in any event: (a) any Person which owns -------- ------- directly or indirectly 5% or more of the securities having ordinary voting power for the election of directors or other members of the governing body of a Person or 5% or more of the partnership or other ownership interests of a Person (other than as a limited partner of such Person) shall be deemed to control such Person; (b) each director (or comparable manager) of a Person shall be deemed to be an Affiliate of such Person; and (c) each partnership or joint venture in which a Person is a partner or joint venturer shall be deemed to be an Affiliate of such Person. "Affiliate Subordination Agreement" means that certain amended and --------------------------------- restated subordination and non-setoff agreement relating to subordinated intercompany debt of the Borrower to its Affiliates, dated of even date herewith, among Borrower, certain of its Affiliates and Agent, in form and substance satisfactory to Agent. "Agent" means Foothill, solely in its capacity as agent for the Lenders ----- hereunder, and any successor thereto. "Agent's Account" means an account at a bank designated by Agent from --------------- time to time as the account into which Borrower shall make all payments to Agent for the benefit of the Lender Group and into which the Lender Group shall make all payments to Agent under this Agreement and the other Loan Documents; unless and until Agent notifies Borrower and the Lender Group to the contrary, Agent's Account shall be that certain deposit account bearing account number 323-266193 and maintained by Agent with The Chase Manhattan Bank, 4 New York Plaza, 15th Floor, New York, New York 10004, ABA #021000021. "Agent Advances" has the meaning set forth in Section 2.3(e)(i). -------------- ----------------- "Agent's Liens" means the Liens granted by Borrower to Agent for the ------------- benefit of the Lender Group under this Agreement or the other Loan Documents. "Agent-Related Persons" means Agent together with its Affiliates, --------------------- officers, directors, employees, and agents. 3 "Agreement" has the meaning set forth in the preamble hereto. --------- "Applicable Prepayment Premium" means, as of any date of determination, ----------------------------- an amount equal to (a) the Maximum Amount, multiplied by (b)(i) during the period of time from and after the date of the execution and delivery of this Agreement up to the date that is the first anniversary of the Closing Date, 5%, (ii) during the period of time from and including the date that is the first anniversary of the Closing Date up to the date that is the second anniversary of the Closing Date, 4%, (iii) during the period of time from and including the date that is the second anniversary of the Closing Date up to the date that is the third anniversary of the Closing Date, 3%, (iv) during the period of time from and including the date that is the third anniversary of the Closing Date up to the date that is the fourth anniversary of the Closing Date, 2%, and (v) during the period of time from and including the date that is the fourth anniversary of the Closing Date up to the Maturity Date, 1%, provided, however, -------- ------- if the Applicable Prepayment Premium, as calculated hereunder, when added to all interest and other charges for the use of money as contemplated by the Official Code of Georgia Annotated, Section 7-4-18 (the "Interest Charges") exceeds five percent (5%) per month (the "Legal Limit"), the amount of such Applicable Prepayment Premium shall be reduced to an amount which when added to the Interest Charges would equal the Legal Limit less $1.00. "Amended and Restated Wang Note" means that certain $4,085,000 amended ------------------------------ and restated term note given by Brandon SL Wang in favor of Borrower dated of even date herewith, in form and substance satisfactory to Agent, together with endorsement in blank. "Asset Purchase Agreement" means that certain asset purchase agreement, ------------------------ together with all related exhibits, schedules, annexes and all other documents related thereto, dated as of February 20, 2001 by and among Drypers, Borrower and DSG with respect to the Drypers Acquisition, in form and substance satisfactory to Agent, and on terms and conditions approved by the Court. "Assignee" has the meaning set forth in Section 14.1. -------- ------------ "Assignment and Acceptance" means an Assignment and Acceptance in the ------------------------- form of Exhibit A-1. ----------- "Assignment of Note" means that certain assignment of note dated as of ------------------ even date herewith executed and delivered by Borrower in favor of Agent with respect to the Amended and Restated Wang Note and related collateral documents, in form and substance satisfactory to Agent. "Authorized Person" means any officer or other employee of Borrower. ----------------- "Availability" means, as of any date of determination, if such date is ------------ a Business Day, and determined at the close of business on the immediately preceding Business Day, if such date of determination is not a Business Day, the amount that Borrower 4 is entitled to borrow as Advances under Section 2.1 (after giving effect to all ----------- then outstanding Obligations and all sublimits and reserves applicable hereunder). "Bankruptcy Code" means the United States Bankruptcy Code, as in effect --------------- from time to time. "Base LIBOR Rate" means the rate per annum, determined by Agent in --------------- accordance with its customary procedures, and utilizing such electronic or other quotation sources as it considers appropriate (rounded upwards, if necessary, to the next 1/16%), on the basis of the rates at which Dollar deposits are offered to major banks in the London interbank market on or about 2:00 p.m. (Georgia time) 2 Business Days prior to the commencement of the applicable Interest Period, for a term and in amounts comparable to the Interest Period and amount of the LIBOR Rate Loan requested by Borrower in accordance with this Agreement, which determination shall be conclusive in the absence of manifest error. "Base Rate" means, the rate of interest announced within Wells Fargo at ---------- its principal office in San Francisco as its "prime rate", with the understanding that the "prime rate" is one of Wells Fargo's base rates (not necessarily the lowest of such rates) and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto and is evidenced by the recording thereof after its announcement in such internal publication or publications as Wells Fargo may designate. "Base Rate Loan" means each Borrowing of an Advance or Capital -------------- Expenditure Loan or portion of the Term Loan that bears interest at a rate determined by reference to the Base Rate. "Base Rate Margin" has the meaning set forth in Section 2.6. ---------------- ----------- "Benefit Plan" means a "defined benefit plan" (as defined in ------------ Section 3(35) of ERISA) for which Borrower or any Subsidiary or ERISA - ------------- Affiliate of Borrower has been an "employer" (as defined in Section 3(5) of ----------- ERISA) within the past six years. "BNP Guarantees" means, collectively, that certain Limited Recourse -------------- Guaranty dated January 28, 2000 by BNP Private Bank & Trust Cayman Limited in favor of Borrower, and that certain Guaranty dated January 21, 2000 by BNP Jersey Trust Corporation Limited in favor of Borrower. "Board of Directors" means the board of directors (or comparable ------------------ managers) of Borrower or any committee thereof duly authorized to act on behalf of the board. "Books" means Borrower's now owned or hereafter acquired books and ----- records (including all of its Records indicating, summarizing, or evidencing its assets (including the Collateral) or liabilities, all of its Records relating to its business operations or financial condition, and all of its goods or General Intangibles related to such information). 5 "Borrower" has the meaning set forth in the preamble to this -------- Agreement. "Borrowing" means a borrowing hereunder consisting of Advances or --------- Capital Expenditure Loans or the Term Loan, made on the same day by the Lenders (or Agent on behalf thereof), or by Swing Lender in the case of a Swing Loan, or by Agent in the case of an Agent Advance. "Borrowing Base" has the meaning set forth in Section 2.1. -------------- ----------- "Borrowing Base Certificate" means a certificate in the form of Exhibit -------------------------- ------- B-1. - --- "Business Day" means any day that is not a Saturday, Sunday, or other ------------ day on which national banks are authorized or required to close, except that, if a determination of a Business Day shall relate to a LIBOR Rate Loan, the term "Business Day" also shall exclude any day on which banks are closed for dealings in Dollar deposits in the London interbank market. "Capital Expenditure Loan" has the meaning set forth in Section 2.2. ------------------------ ----------- "Capital Expenditure Loan Amount" means $5,000,000. ------------------------------- "Capital Lease" means a lease that is required to be capitalized for ------------- financial reporting purposes in accordance with GAAP. "Capitalized Lease Obligation" means any Indebtedness represented by ---------------------------- obligations under a Capital Lease. "Cash Equivalents" means (a) marketable direct obligations issued or ---------------- unconditionally guaranteed by the United States or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within 1 year from the date of acquisition thereof, (b) marketable direct obligations issued by any state of the United States or any political subdivision of any such state or any public instrumentality thereof maturing within 1 year from the date of acquisition thereof and, at the time of acquisition, having the highest rating obtainable from either S&P or Moody's, (c) commercial paper maturing no more than 1 year from the date of acquisition thereof and, at the time of acquisition, having a rating of A-1 or P-1, or better, from S&P or Moody's, (d) certificates of deposit or bankers' acceptances maturing within 1 year from the date of acquisition thereof either (i) issued by any bank organized under the laws of the United States or any state thereof which bank has a rating of A or A2, or better, from S&P or Moody's, or (ii) certificates of deposit less than or equal to $100,000 in the aggregate issued by any other bank insured by the Federal Deposit Insurance Corporation, and (e) investments in money market mutual funds having assets in excess of $2,500,000,000, substantially all of whose assets are comprised of the items described in clauses (a) through (d) above. 6 "Cash Management Bank" has the meaning set forth in Section 2.7(a). -------------------- -------------- "Cash Management Account" has the meaning set forth in Section 2.7(a). ----------------------- -------------- "Cash Management Agreements" means those certain cash management -------------------------- service agreements, in form and substance satisfactory to Agent, each of which is among Borrower, Agent, and one of the Cash Management Banks. "Change of Control" means (a) any "person" or "group" (within the ----------------- meaning of Sections 13(d) and 14(d) of the Exchange Act), other than Permitted Holders, that become the beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 20% or more, of the Stock of Borrower having the right to vote for the election of members of the Board of Directors, or (b) a majority of the members of the Board of Directors do not constitute Continuing Directors, (c) Borrower ceases to directly own and control 100% of the outstanding Stock of each of its Subsidiaries extant as of the Closing Date, or (d) DSG shall cease to own and control eighty percent (80%) of the total voting power of all classes of stock then outstanding of Holdco entitled to vote in the election of directors. "Chapter 11 Case" means Drypers' Chapter 11 Case No. 00-39360-H4-11 --------------- pending before the Court. "Closing Date" means the date of the making of the initial Advance (or ------------ other extension of credit) hereunder or the date on which Agent sends Borrower a written notice that each of the conditions precedent set forth in Section 3.1 either have been satisfied or have been waived. "Closing Date Business Plan" means the set of Projections of Borrower -------------------------- for the 1 year period following the Closing Date, on a month by month basis, in form and substance (including as to scope and underlying assumptions) satisfactory to Agent. "Code" means the Georgia Uniform Commercial Code, as in effect from ---- time to time. "Collateral" means all of Borrower's now owned or hereafter acquired ---------- right, title, and interest in and to each of the following: (a) Accounts, (b) Books, (c) Equipment, (d) General Intangibles, 7 (e) Inventory, (f) Investment Property, (g) Negotiable Collateral, (h) Real Property Collateral, (i) money or other assets of Borrower that now or hereafter come into the possession, custody, or control of any member of the Lender Group, and (j) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the foregoing, and any and all Accounts, Books, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real Property, money, deposit accounts, or other tangible or intangible property resulting from the sale, exchange, collection, or other disposition of any of the foregoing, or any portion thereof or interest therein, and the proceeds thereof. "Collateral Assignments" means, collectively, that certain Collateral ---------------------- Assignment of Rights Under Limited Recourse Guaranty and Stock Pledge Agreement dated as of January 21, 2000 executed and delivered by Borrower in favor of Foothill, and that certain Collateral Assignment of Rights Under Guaranty dated as of January 21, 2000 executed and delivered by Borrower to Foothill. "Collateral Access Agreement" means a landlord waiver, bailee letter, --------------------------- acknowledgement agreement, or attornment and subordination agreement of any lessor, warehouseman, processor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in the Equipment or Inventory, in each case, in form and substance reasonably satisfactory to Agent. "Collections" means all cash, checks, notes, instruments, and other ----------- items of payment (including insurance proceeds, proceeds of cash sales, rental proceeds, and tax refunds) of Borrower. "Commitment" means, with respect to each Lender, its Revolver ---------- Commitment, its Term Loan Commitment, or its Total Commitment, as the context requires, and, with respect to all Lenders, their Revolver Commitments, their Term Loan Commitments or their Total Commitments, as the context requires, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-I or on the signature page of the ------------ Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 141. ----------- "Compliance Certificate" means a certificate substantially in the form ---------------------- of Exhibit C-1 delivered by the chief financial officer of Borrower to Agent. ----------- 8 "Consultant" shall mean Starshak & Associates, Inc., or any subsequent ---------- replacement consultant satisfactory to Agent. "Continuing Director" means (a) any member of the Board of Directors ---------- -------- who was a director (or comparable manager) of Borrower on the Closing Date, and (b) any individual who becomes a member of the Board of Directors after the Closing Date if such individual was appointed or nominated for election to the Board of Directors by a majority of the Continuing Directors, but excluding any such individual originally proposed for election in opposition to the Board of Directors in office at the Closing Date in an actual or threatened election contest relating to the election of the directors (or comparable managers) of Borrower (as such terms are used in Rule 14a-11 under the Exchange Act) and whose initial assumption of office resulted from such contest or the settlement thereof. "Control Agreement" means a Control agreement, in form and substance ----------------- satisfactory to Agent, executed and delivered by Borrower, Agent, and the applicable securities intermediary with respect to a Securities Account or a bank with respect to a deposit account. "Court" means the United States Bankruptcy Court for the Southern ----- District of Texas, Houston Division. "Daily Balance" means, with respect to each day during the term of this ------------- Agreement, the amount of an Obligation owed at the end of such day. "DDA" means any checking or other demand deposit account maintained by --- Borrower. "Default" means an event, condition, or default that, with the giving ------- of notice, the passage of time, or both, would be an Event of Default. "Defaulting Lender" means any Lender that fails to make any Advance (or ----------------- other extension of credit) that it is required to make hereunder on the date that it is required to do so hereunder. "Defaulting Lender Rate" means (a) the Base Rate for the first 3 days --------------------- from and after the date the relevant payment is due, and (b) thereafter, at the interest rate then applicable to Advances that are Base Rate Loans (inclusive of the Base Rate Margin applicable thereto). "Designated Account" means account number 66-885-560 of Borrower ------------------ maintained with the Borrower's Designated Account Bank, or such other deposit account of Borrower (located within the United States) that has been designated as such, in writing, by Borrower to Agent. 9 "Designated Account Bank" means SouthTrust Bank of Georgia, N.A., whose ----------------------- office is located at 1 Georgia Center, 600 West Peachtree Street, Atlanta, Georgia 30302, and whose ABA number is 061000256. "Dilution" means, as of any date of determination, a percentage, based -------- upon the experience of the immediately prior 90 days, that is the result of dividing the Dollar amount of (a) bad debt write-downs, discounts, advertising allowances, credits, or other dilutive items with respect to the Accounts during such period, by (b) Borrower's Collections with respect to Accounts during such period (excluding extraordinary items) plus the Dollar amount of clause (a). "Dilution Reserve" means, as of any date of determination, an amount ---------------- sufficient to reduce the advance rate against Eligible Accounts by one percentage point for each percentage point by which Dilution is in excess of 5%. "Disbursement Letter" means an instructional letter executed and ------------------- delivered by Borrower to Agent regarding the extensions of credit to be made on the Closing Date, the form and substance of which is satisfactory to Agent. "Dollars" or "$" means United States dollars. ------- - "Drypers" means Drypers Corporation, a Delaware corporation, as debtor ------- or debtor-in-possession, as the case may be. "Drypers Acquisition" means the acquisition of Drypers' assets located ------------------- in the United States, including intellectual property and the "Drypers" trade name worldwide, and the assignment and assumption of certain executory contracts and leases of Drypers, all pursuant to the Asset Purchase Agreement, in each case, free and clear of all liens and encumbrances, as approved by the Court and on terms satisfactory to Agent in its sole discretion. "DSG" means DSG International Limited, a company formed under the laws --- of the British Virgin Islands. "DSG Holdings (UK)" means DSG Holdings (UK) Limited, a company formed ----------------- under the laws of England. "EBITDA" means, with respect to any fiscal period, Borrower's and its ------ Subsidiaries consolidated net earnings (or loss), minus extraordinary gains, plus interest expense (excluding interest received on the Amended and Restated Wang Note), income taxes, and depreciation and amortization for such period, as determined in accordance with GAAP. 10 "Eligible Accounts" means those Accounts created by the Borrower in the ----------------- ordinary course of its business, that arise out of Borrower's sale of goods or rendition of services, that comply with each of the representations and warranties respecting Eligible Accounts made by Borrower in the Loan Documents, and that are not excluded as ineligible by virtue of one or more of the criteria set forth below; provided, however, that such criteria may be fixed and revised --------- ------- from time to time by Agent in Agent's Permitted Discretion to address the results of any audit performed by Agent from time to time after the Closing Date. In determining the amount to be included, Eligible Accounts shall be calculated net of customer deposits and unapplied cash remitted to Borrower. Eligible Accounts shall not include the following: (a) Accounts that the Account Debtor has failed to pay within 120 days of original invoice date or that are more than 60 days past due, (b) Accounts owed by an Account Debtor (or its Affiliates) where 50% or more of all Accounts owed by that Account Debtor (or its Affiliates) are deemed ineligible under clause (a) above, (c) Accounts with respect to which the Account Debtor is an employee, Affiliate, or agent of Borrower, (d) Accounts arising in a transaction wherein goods are placed on consignment or are sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a bill and hold, or any other terms by reason of which the payment by the Account Debtor may be conditional, (e) Accounts that are not payable in Dollars, (f) Accounts with respect to which the Account Debtor either (i) does not maintain its chief executive office in the United States or Canada, or (ii) is not organized under the laws of the United States, Canada, or any state or province thereof, or (iii) is the government of any foreign country or sovereign state, or of any state, province, municipality, or other political subdivision thereof, or of any department, agency, public corporation, or other instrumentality thereof, unless (y) the Account is supported by an irrevocable letter of credit reasonably satisfactory to Agent (as to form, substance, and issuer or domestic confirming bank) that has been delivered to Agent and is directly drawable by Agent, or (z) the Account is covered by credit insurance in form, substance, and amount, and by an insurer, reasonably satisfactory to Agent; provided, in connection with any Canadian account debtor, such account ------- debtor shall have been directed to remit the proceeds of such Account to a Cash Management Bank, (g) Accounts with respect to which the Account Debtor is either (i) the United States or any department, agency, or instrumentality of the United States (exclusive, however, of Accounts with respect to which Borrower has complied, to the reasonable 11 satisfaction of Agent, with the Assignment of Claims Act, 31 USC (S) 3727), or (ii) any state of the United States (exclusive, however, of (y) Accounts owed by any state that does not have a statutory counterpart to the Assignment of Claims Act, or (z) Accounts owed by any state that does have a statutory counterpart to the Assignment of Claims Act as to which Borrower has complied to Agent's satisfaction), (h) Accounts with respect to which the Account Debtor is a creditor of Borrower, has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to its obligation to pay the Account, to the extent of such claim, right of setoff, or dispute, (i) Accounts, to the extent such Accounts, together with all other Accounts owing by such Account Debtor to Borrower or any Subsidiary of Borrower exceed in the aggregate (a) thirty percent (30%) of all Eligible Accounts in the case of Walgreen Company, (b) twenty percent (20%) of all Eligible Accounts in the case of Medline Industries, Inc., (c) twenty-five percent (25%) of all Eligible Accounts in the case of Walmart, and (d) ten percent (10%) of all Eligible Accounts in all other cases, (j) Accounts with respect to which the Account Debtor is subject to an Insolvency Proceeding, is not Solvent, has gone out of business, or as to which Borrower has received notice of an imminent Insolvency Proceeding or a material impairment of the financial condition of such Account Debtor, (k) Accounts with respect to which the Account Debtor is located in the states of New Jersey, Minnesota, or West Virginia (or any other state that requires a creditor to file a business activity report or similar document in order to bring suit or otherwise enforce its remedies against such Account Debtor in the courts or through any judicial process of such state), unless Borrower has qualified to do business in New Jersey, Minnesota, West Virginia, or such other states, or has filed a business activities report with the applicable division of taxation, the department of revenue, or with such other state offices, as appropriate, for the then-current year, or is exempt from such filing requirement, (l) Accounts, the collection of which, Agent, in its Permitted Discretion, believes to be doubtful by reason of the Account Debtor's financial condition, (m) Accounts that are not subject to a valid and perfected first priority Agent's Lien, (n) Accounts with respect to which (i) the goods giving rise to such Account have not been shipped and billed to the Account Debtor, or (ii) the services giving rise to such Account have not been performed and billed to the Account Debtor, or 12 (o) Accounts that represent the right to receive progress payments or other advance billings that are due prior to the completion of performance by Borrower of the subject contract for goods or services. "Eligible Inventory" means Inventory consisting of raw materials or ------------------ first quality finished goods held for sale in the ordinary course of Borrower's business located at one of Borrower's business locations set forth on Schedule -------- E-1 (or in-transit between any such locations), that complies with each of the - --- representations and warranties respecting Eligible Inventory made by Borrower in the Loan Documents, and that is not excluded as ineligible by virtue of the one or more of the criteria set forth below; provided, however, that such criteria --------- ------- may be fixed and revised from time to time by Agent in Agent's Permitted Discretion to address the results of any audit or appraisal performed by Agent from time to time after the Closing Date. In determining the amount to be so included, Inventory shall be valued at the lower of cost or market on a basis consistent with Borrower's historical accounting practices. An item of inventory shall not be included in Eligible Inventory if: (a) Borrower does not have good, valid, and marketable title thereto, (b) it is not located at one of the locations in the United States set forth on Schedule E-1 or in transit from one such location to another such ------------ location, (c) it is located on real property leased by Borrower or in a contract warehouse or in possession of a processor, in each case, unless it is subject to a Collateral Access Agreement executed by the lessor, warehouseman, processor or other third party, as the case may be, and unless it is segregated or otherwise separately identifiable from goods of others, if any, stored on the premises, (d) it is not subject to a valid and perfected first priority Agent's Lien, (e) it consists of goods returned or rejected by Borrower's customers, (f) it consists of goods that are obsolete or slow moving, restrictive or custom items, work-in-process, or goods that constitute spare parts, packaging (including "inners" and "outers") and shipping materials, supplies used or consumed in Borrower's business, bill and hold goods, defective goods, "seconds," or Inventory acquired on consignment, or (g) it is not subject to a license or other agreement or carries branded logos and trade names that limit or restrict Borrower's right to sell or display such Inventory, unless such Inventory is otherwise approved by Agent in its sole discretion. "Eligible Transferee" means (a) a commercial bank organized under the ------------------- laws of the United States, or any state thereof, and having total assets in excess of $250,000,000, (b) a commercial bank organized under the laws of any other country which is a member of 13 the Organization for Economic Cooperation and Development or a political subdivision of any such country and which has total assets in excess of $250,000,000, provided that such bank is acting through a branch or agency located in the United States, (c) a finance company, insurance company, or other financial institution or fund that is engaged in making, purchasing, or otherwise investing in commercial loans in the ordinary course of its business and having (together with its Affiliates) total assets in excess of $250,000,000, (d) any Affiliate (other than individuals) of a Lender that was party hereto as of the Closing Date, (e) so long as no Event of Default has occurred and is continuing, any other Person approved by Agent and Borrower, and (f) during the continuation of an Event of Default, any other Person approved by Agent. "Elmbay" means Elmbay Limited a corporation formed under the laws of ------ England, and the general partner of Holdco. "Elmbay Pledge Agreement" means that certain pledge agreement dated as ----------------------- of even date herewith, executed and delivered by Elmbay in favor of Agent, pledging all of its equity interest in Borrower to Agent, in form and substance satisfactory to Agent. "Environmental Actions" means any complaint, summons, citation, notice, --------------------- directive, order, claim, litigation, investigation, judicial or administrative proceeding, judgment, letter, or other communication from any Governmental Authority, or any third party involving violations of Environmental Laws or releases of Hazardous Materials from (a) any assets, properties, or businesses of Borrower or any predecessor in interest, (b) from adjoining properties or businesses, or (c) from or onto any facilities which received Hazardous Materials generated by Borrower or any predecessor in interest. "Environmental Law" means any applicable federal, state, provincial, ----------------- foreign or local statute, law, rule, regulation, ordinance, code, binding and enforceable guideline, binding and enforceable written policy or rule of common law now or hereafter in effect and in each case as amended, or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, to the extent binding on Borrower, relating to the environment, employee health and safety, or Hazardous Materials, including the Comprehensive Environmental Response, Cooperation and Liability Act, 42 U.S.C. 9601 et seq. ("CERCLA"); the Resource Conservation and Recovery ------ Act, 42 U.S.C. 6901 et seq. ("RCRA"); the Federal Water Pollution Control Act, ------ 33 USC (S) 1251 et seq; the Toxic Substances Control Act, 15 USC, (S) 2601 et ------ -- seq; the Clean Air Act, 42 USC (S) 7401 et seq.; the Safe Drinking Water Act, 42 - --- ------ USC. (S) 3803 et seq.; the Oil Pollution Act of 1990, 33 USC. (S) 2701 et seq.; ------ ------ the Emergency Planning and the Community Right-to-Know Act of 1986, 42 USC. (S) 11001 et seq.; the Hazardous Material Transportation Act, 49 USC (S) 1801 et ------ -- seq.; and the Occupational Safety and Health Act, 29 USC. (S)651 et seq. (to the - --- ------ extent it regulates occupational exposure to Hazardous Materials); any state and local or foreign counterparts or equivalents, in each case as amended from time to time. 14 "Environmental Liabilities and Costs" means all liabilities, monetary ----------------------------------- obligations, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including all reasonable fees, disbursements and expenses of counsel, experts, or consultants, and costs of investigation and feasibility studies), fines, penalties, sanctions, and interest incurred as a result of any claim or demand by any Governmental Authority or any third party which relates to any Environmental Action. "Environmental Lien" means any Lien in favor of any Governmental ------------------ Authority for Environmental Liabilities and Costs. "Equipment" means all of Borrower's now owned or hereafter acquired --------- right, title, and interest with respect to equipment, machinery, machine tools, motors, furniture, furnishings, fixtures, vehicles (including motor vehicles), tools, parts, goods (other than consumer goods, farm products, or inventory), wherever located, including all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, specifically including any assets acquired by Borrower with the proceeds of a Term Loan or Capital Expenditure Loan. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended, and any successor statute thereto. "ERISA Affiliate" means (a) any person subject to ERISA whose employees --------------- are treated as employed by the same employer is the employees of Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA whose employees are treated as employed by the same employer as the employees of Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any organization subject to ERISA that is a member of an affiliated service group of which Borrower is a member under IRC Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section 412 of the IRC, any Person subject to ERISA that is a party to an arrangement with Borrower and whose employees are aggregated with the employees of Borrower under IRC Section 414(o). "Event of Default" has the meaning set forth in Section 8. ---------------- --------- "Excess Availability" means the amount, as of the date any ------------------- determination thereof is to be made, equal to Availability minus the aggregate amount, if any, of all trade payables and royalty payments of Borrower aged in excess of historical levels with respect thereto and all book overdrafts in excess of historical practices with respect thereto, in each case as determined by Agent in its Permitted Discretion. "Exchange Act" means the Securities Exchange Act of 1934, as in effect ------------ from time to time. 15 "Fee Letter" means that certain fee letter, dated as of even date ---------- herewith, between Borrower and Agent, in form and substance satisfactory to Agent. "FEIN" means Federal Employer Identification Number. ---- "First Adjustment Date" has the meaning set forth in Section 2.6(a). --------------------- -------------- "Foothill" means Foothill Capital Corporation, a California -------- corporation. "Funding Date" means the date on which a Borrowing occurs. ------------ "Funding Losses" has the meaning set forth in Section 2.13(b)(ii). ------- ------ ------------------- "GAAP" means generally accepted accounting principles as in effect from ---- time to time in the United States, consistently applied. "General Intangibles" means all of Borrower's now owned or hereafter ------------------- acquired right, title, and interest with respect to general intangibles (including payment intangibles, contract rights, rights to payment, rights arising under common law, statutes, or regulations, choses or things in action, goodwill, patents, trade names, trademarks, servicemarks, copyrights, blueprints, drawings, purchase orders, customer lists, monies due or recoverable from pension funds, route lists, rights to payment and other rights under any royalty or licensing agreements, infringement claims, computer programs, information contained on computer disks or tapes, software, domain names, literature, reports, catalogs, money, deposit accounts, insurance premium rebates, tax refunds, and tax refund claims), and any and all supporting obligations in respect thereof, and any other personal property other than goods, Accounts, Investment Property, and Negotiable Collateral. "Governing Documents" means, with respect to any Person, the ------------------- certificate or articles of incorporation, by-laws, or other organizational documents of such Person. "Governmental Authority" means any federal, state, local, or other ---------------------- governmental or administrative body, instrumentality, department, or agency or any court, tribunal, administrative hearing body, arbitration panel, commission, or other similar dispute-resolving panel or body. "Hazardous Materials" means (a) substances that are defined or listed ------------------- in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous substances," "hazardous materials," "hazardous wastes," "toxic substances," or any other formulation intended to define, list, or classify substances by reason of properties harmful to human health or the environment such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, (b) oil, petroleum, or petroleum derived substances, natural gas, natural gas liquids, synthetic gas, drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas, or geothermal 16 resources, (c) any flammable substances or explosives or any radioactive materials, and (d) friable asbestos or electrical equipment that contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of 50 parts per million. "Holdco" means AHP Holdings L.P., a Georgia limited partnership. ------ "Indebtedness" means (a) all obligations of Borrower for borrowed ------------ money, (b) all obligations of Borrower evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of Borrower in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations of Borrower under Capital Leases, (d) all obligations or liabilities of others secured by a Lien on any asset of Borrower, irrespective of whether such obligation or liability is assumed, (e) all obligations of Borrower for the deferred purchase price of assets (other than trade debt incurred in the ordinary course of Borrower's business and repayable in accordance with customary trade practices), and (f) any obligation of Borrower guaranteeing or intended to guarantee (whether directly or indirectly guaranteed, endorsed, co-made, discounted, or sold with recourse to Borrower) any obligation of any other Person. "Indemnified Liabilities" has the meaning set forth in Section 11.3. ----------------------- ------------ "Indemnified Person" has the meaning set forth in Section 11.3. ------------------ ------------ "Insolvency Proceeding" means any proceeding commenced by or against --------------------- any Person under any provision of the Bankruptcy Code or under any other state or federal bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. "Intangible Assets" means, with respect to any Person, that portion of ----------------- the book value of all of such Person's assets that would be treated as intangibles under GAAP, excluding "goodwill" to the extent such goodwill is negative. "Intellectual Property Security Agreement" means that certain amended ---------------------------------------- and restated intellectual property security agreement dated of even date herewith, executed and delivered by Borrower in favor of Agent, in form and substance satisfactory to Agent. "Interest Period" means, with respect to each LIBOR Rate Loan, a period --------------- commencing on the date of the making of such LIBOR Rate Loan and ending 1, 2, or 3 months thereafter; provided, however, that (a) if any Interest Period would --------- ------- end on a day that is not a Business Day, such Interest Period shall be extended (subject to clauses (c)-(e) below) to the next succeeding Business Day, (b) interest shall accrue at the applicable rate based upon the LIBOR Rate from and including the first day of each Interest Period to, but excluding, the day on which any Interest Period expires, (c) any Interest Period that would end on a day that is not a Business Day shall be extended to the next succeeding Business 17 Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day, (d) with respect to an Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period), the Interest Period shall end on the last Business Day of the calendar month that is 1 , 2, or 3 months after the date on which the Interest Period began, as applicable, and (e) Borrower may not elect an Interest Period which will end after the Maturity Date. "Inventory" means all Borrower's now owned or hereafter acquired right, --------- title, and interest with respect to inventory, including goods held for sale or lease or to be furnished under a contract of service, goods that are leased by Borrower as lessor, goods that are furnished by Borrower under a contract of service, and raw materials, work in process, or materials used or consumed in Borrower's business. "Investment" means, with respect to any Person, any investment by such ---------- Person in any other Person (including Affiliates) in the form of loans, guarantees, advances, or capital contributions (excluding (a) commission, travel, and similar advances to officers and employees of such Person made in the ordinary course of business, and (b) bona fide Accounts arising from the sale of goods or rendition of services in the ordinary course of business consistent with past practice), purchases or other acquisitions for consideration of Indebtedness or Stock, and any other items that are or would be classified as investments on a balance sheet prepared in accordance with GAAP. "Investment Property" means all of Borrower's now owned or hereafter ------------------- acquired right, title, and interest with respect to "investment property" as that term is defined in the Code, and any and all supporting obligations in respect thereof. "IRC" means the Internal Revenue Code of 1986, as in effect from time --- to time. "Issuing Lender" means Foothill or any other Lender that, at the -------------- request of Borrower and with the consent of Agent agrees, in such Lender's sole discretion, to become an Issuing Lender for the purpose of issuing L/Cs or L/C Undertakings pursuant to Section 2.12. ------------ "L/C" has the meaning set forth in Section 2.12(a). --- --------------- "L/C Disbursement" means a payment made by the Issuing Lender pursuant ---------------- to a Letter of Credit. "L/C Undertaking" has the meaning set forth in Section 2.12(a). --------------- 18 "Lender" and "Lenders" have the respective meanings set forth in the ------ ------- preamble to this Agreement, and shall include any other Person made a party to this Agreement in accordance with the provisions of Section 14.1. ------------ "Lender Group" means, individually and collectively, each of the ------------ Lenders (including the Issuing Lender) and Agent. ""Lender Group Expenses" means all (a) costs or expenses (including --------------------- taxes, and insurance premiums) required to be paid by Borrower under any of the Loan Documents that are paid or incurred by the Lender Group, (b) fees or charges paid or incurred by Agent in connection with the Lender Group's transactions with Borrower, including, fees or charges for Photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Collateral appraisals or business valuations to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, real estate surveys, real estate title policies and endorsements, and environmental audits, (c) costs and expenses incurred by Agent in the disbursement of funds to Borrower (by wire transfer or otherwise), (d) charges paid or incurred by Agent resulting from the dishonor of checks, (e) reasonable costs and expenses paid or incurred by the Lender Group to correct any default or enforce any provision of the Loan Documents, or in gaining possession of, maintaining, handling, preserving, storing, shipping, selling, preparing for sale, or advertising to sell the Collateral, or any portion thereof, irrespective of whether a sale is consummated, (f) audit fees and expenses of Agent related to audit examinations of the Books to the extent of the fees and charges (and up to the amount of any limitation) contained in this Agreement, (g) reasonable costs and expenses of third party claims or any other suit paid or incurred by the Lender Group in enforcing or defending the Loan Documents or in connection with the transactions contemplated by the Loan Documents or the Lender Group's relationship with Borrower or any guarantor of the Obligations, (h) Agent's reasonable fees and expenses (including attorneys fees) incurred in advising, structuring, drafting, reviewing, administering, or amending the Loan Documents, and (i) Agent's and each Lender's reasonable fees and expenses (including attorneys fees) incurred in terminating, enforcing (including attorneys fees and expenses incurred in connection with a "workout," a restructuring," or an Insolvency Proceeding concerning Borrower or in exercising rights or remedies under the Loan Documents), or defending the Loan Documents, irrespective of whether suit is brought, or in taking any Remedial Action concerning the Collateral. "Lender-Related Person" means, with respect to any Lender, such --------------------- Lender, together with such Lender's Affiliates, and the officers, directors, employees, and agents of such Lender. 19 "Letter of Credit" means an L/C or an L/C undertaking, as the context ---------------- requires. "Letter of Credit Usage" means, as of any date of determination, the ----------------------- aggregate undrawn amount of all outstanding Letters of Credit plus 100% of the amount of outstanding time drafts accepted by an Underlying Issuer as a result of drawings under Underlying Letters of Credit. "LIBOR Deadline" has the meaning set forth in Section 2.13(b)(i). -------------- ------------------ "LIBOR Notice" means a written notice in the form of Exhibit L-1. ------------ ----------- "LIBOR Rate" means, for each Interest Period for each LIBOR Rate Loan, ---------- the rate per annum determined by Agent (rounded upwards, if necessary, to the next 1/16%) by dividing (a) the Base LIBOR Rate for such Interest Period, by (b) 100% minus the Reserve Percentage. The LIBOR Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage. "LIBOR Rate Loan" means each Borrowing of an Advance or portion of the --------------- Term Loan or the Capital Expenditure Loan, as the case may be, that bears interest at a rate determined by reference to the LIBOR Rate. "LIBOR Rate Margin" has the meaning set forth in Section 2.6. ----------------- ----------- "Lien" means any interest in an asset securing an obligation owed to, ---- or a claim by, any Person other than the owner of the asset, whether such interest shall be based on the common law, statute, or contract, whether such interest shall be recorded or perfected, and whether such interest shall be contingent upon the occurrence of some future event or events or the existence of some future circumstance or circumstances, including the lien or security interest arising from a mortgage, deed of trust, encumbrance, pledge, hypothecation, assignment, deposit arrangement, security agreement, conditional sale or trust receipt, or from a lease, consignment, or bailment for security purposes and also including reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases, and other title exceptions and encumbrances affecting Real Property. "Loan Account" has the meaning set forth in Section 2.10. ------------ ------------ "Loan Documents" means this Agreement, the Assignment of Note, the -------------- Cash Management Agreements, the BNP Guarantees, the Collateral Assignments, the Control Agreements, the Disbursement Letter, the Fee Letter, the Intellectual Property Security Agreement, the Letters of Credit, the Mortgages, the Officers' Certificate, the Parent Guaranty, the Parent Pledge Agreement, the Elmbay Pledge Agreement, the Parent Security Agreement, the Affiliate Subordination Agreement, the Wang Pledge Agreement, the Subordination Agreements, the Acknowledgement of Licenses, and any other note or notes 20 executed by Borrower in connection with this Agreement and payable to a member of the Lender Group, and any other agreement entered into, now or in the future, by Borrower and Agent or the Lender Group in connection with this Agreement, specifically including any reaffirmation agreement executed in connection with the foregoing. "Material Adverse Change" means (a) a material adverse change in the ----------------------- business, prospects, operations, results of operations, assets, liabilities or condition (financial or otherwise) of Borrower, (b) a material impairment of Borrower's ability to perform its obligations under the Loan Documents to which it is a party or of the Lender Group's ability to enforce the Obligations or realize upon the Collateral, or (c) a material impairment of the enforceability or priority of the Agent's Liens with respect to the Collateral as a result of an action or failure to act on the part of Borrower. "Maturity Date" has the meaning set forth in Section 3.4. ------------- ----------- "Maximum Amount" means $35,000,000. -------------- "Maximum Revolver Amount" means, at any date of determination, the ----------------------- Maximum Amount less the then outstanding principal balance of the Term Loan. "Mortgages" means, individually and collectively, one or more --------- mortgages, deeds of trust, or deeds to secure debt, executed and delivered by Borrower in favor of Agent, for the benefit of the Lender Group, in form and substance satisfactory to Agent, that encumber the Real Property Collateral and the related improvements thereto. "Negotiable Collateral" means all of Borrower's now owned and --------------------- hereafter acquired right, title, and interest with respect to letters of credit, letter of credit rights, instruments, promissory notes, drafts, documents, and chattel paper (including electronic chattel paper and tangible chattel paper), and any and all supporting obligations in respect thereof. "Net Liquidation Percentage" means the percentage of the book value of -------------------------- Borrower's Inventory that is estimated to be recoverable in an orderly liquidation of such Inventory, net of liquidation expenses, such percentage to be as determined from time to time by a qualified appraisal company selected by Agent. "Obligations" means all loans (including the Term Loan and the Capital ----------- Expenditure Loans), Advances, debts, principal, interest (including any interest that, but for the provisions of the Bankruptcy Code, would have accrued), contingent reimbursement obligations with respect to outstanding Letters of Credit, premiums, liabilities (including all amounts charged to Borrower's Loan Account pursuant hereto), obligations, fees (including the fees provided for in the Fee Letter), charges, costs, Lender Group Expenses (including any fees or expenses that, but for the provisions of the Bankruptcy Code, would have accrued), lease payments, guaranties, covenants, and duties of any kind and description 21 owing by Borrower to the Lender Group pursuant to or evidenced by the Loan Documents and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all interest not paid when due and all Lender Group Expenses that Borrower are required to pay or reimburse by the Loan Documents, by law, or otherwise. Any reference in this Agreement or in the Loan Documents to the Obligations shall include all amendments, changes, extensions, modifications, renewals replacements, substitutions, and supplements, thereto and thereof, as applicable, both prior and subsequent to any Insolvency Proceeding. "Officers' Certificate" means the representations and warranties of --------------------- officers form submitted by Agent to Borrower, together with Borrower's completed responses to the inquiries set forth therein, the form and substance of such responses to be satisfactory to Agent. "Order of the Court" means, with respect to the Chapter 11 Case, that ------------------ certain order of the Court authorizing (i) the Drypers Acquisition by Borrower and DSG pursuant to Sections 105 and 363 of the Bankruptcy Code and (ii) the assumption and assignment of certain executory contracts and unexpired leases pursuant to Section 365 of the Bankruptcy Code. "Originating Lender" has the meaning set forth in Section 14.1(e). ------------------ --------------- "Overadvance" has the meaning set forth in Section 2.5. ----------- ----------- "Parent Guaranty" means that certain amended and restated guaranty --------------- dated of even date herewith, executed and delivered by Holdco in favor of Agent, in form and substance satisfactory to Agent. "Parent Pledge Agreement" means that certain amended and restated ----------------------- pledge agreement dated of even date herewith, executed and delivered by Holdco in favor of Agent, pledging all of its equity interests in Borrower to Agent, in form and substance satisfactory to Agent. "Parent Security Agreement" means that certain amended and restated ------------------------- security agreement of even date herewith, executed and delivered by Holdco in favor of Agent, in form and substance satisfactory to agent. "Participant" has meaning set forth in Section 14.1(e). ----------- --------------- "Pass-Through Entity" means a Person which is an "S corporation" -------------------- within the meaning of Section 1361 of the IRC, a "qualified subchapter S subsidiary" within the meaning of Section 1361 (b)(3)(B) of the IRC, a partnership (including a limited liability company) within the meaning of Section 7701(a)(2) of the IRC (other than one electing to be 22 taxed as a corporation), or an entity with a single owner that is disregarded pursuant to Treasury Reg. (S)301.7701-3. "Permitted Discretion" means a determination made in good faith and in -------------------- the exercise of reasonable (from the perspective of a secured asset-based lender) business judgment. "Permitted Dispositions" means (a) sales or other dispositions by ---------------------- Borrower of Equipment that is substantially worn, damaged, or obsolete in the ordinary course of Borrower's business with an aggregate fair market value not to exceed $200,000 in any fiscal year, (b) sales by Borrower of Inventory to buyers in the ordinary course of business, (c) the use or transfer of money or Cash Equivalents by Borrower in a manner that is not prohibited by the terms of this Agreement or the other Loan Documents, (d) the licensing by Borrower, on a non-exclusive basis, of patents, trademarks, copyrights, and other intellectual property rights in the ordinary course of Borrower's business, (e) sales or dispositions of Equipment not included in the Daley-Hodkin appraisal dated November 16, 2000, or the Dean Machinery International, Inc. appraisal dated January 26, 2001, or any subsequent updated appraisal (the "Appraisal") in an --------- amount not to exceed $250,000 in the aggregate in any fiscal year, and (f) other sales of Equipment provided that the proceeds of each such sale equal or exceed 120% of the orderly liquidation value of such Equipment as set forth in the Appraisal. In the event of any sale of Equipment where the Equipment to be sold is not valued on an individual basis by the Appraisal, Agent shall determine in its reasonable judgment the orderly liquidation value of such Equipment. "Permitted Holders" means any direct or indirect wholly-owned ----------------- subsidiary of DSG. "Permitted Investments" means (a) investments in Cash Equivalents, (b) --------------------- investments in negotiable instruments for collection, and (c) advances made in connection with purchases of goods or services in the ordinary course of business. "Permitted Liens" means (a) Liens held by Agent for the benefit of --------------- Agent and the Lenders, (b) Liens for unpaid taxes that either (i) are not yet delinquent, or (ii) do not constitute an Event of Default hereunder and are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d) the ------------ interests of lessors under operating leases, (e) purchase money Liens or the interests secure Permitted Purchase Money Indebtedness and so long as such Lien attaches only to the asset purchased or acquired and the proceeds thereof, (f) Liens arising by operation of law in favor of warehousemen, landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred in the ordinary course business of Borrower and not in connection with the borrowing of money, and which Liens either (i) are for sums not yet delinquent, or (ii) are the subject of Permitted Protests, (g) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (h) Liens or deposits to secure performance of bids, tenders, or leases incurred in the ordinary 23 course of business of Borrower and not in connection with the borrowing of money, (i) Liens granted as security for surety or appeal bonds in connection with obtaining such bonds in the ordinary course of business of Borrower, (j) Liens resulting from any judgment or award that is not an Event of Default hereunder, (k) Liens with respect to the Real Property Collateral that are exceptions to the commitments for title insurance issued in connection with the Mortgages, as accepted by Agent, and (l) with respect to any Real Property that is not part of the Real Property Collateral, easements, rights of way, and zoning restrictions that do not materially interfere with or impair the use or operation thereof by Borrower. "Permitted Protest" means the right of Borrower to protest any Lien ----------------- (other than any such Lien that secures the Obligations), taxes (other than payroll taxes or taxes that are the subject of a United States federal tax lien), or rental payment, provided that (a) a reserve with respect to such obligation is established on the Books in such amount as is required under GAAP, (b) any such protest is instituted promptly and prosecuted diligently by Borrower in good faith, and (c) Agent is satisfied that, while any such protest is pending, there will be no impairment of the enforceability, validity, or priority of any of the Agent's Liens. "Permitted Purchase Money Indebtedness" means, as of any date of ------------------------------------- determination, Purchase Money Indebtedness incurred after the Closing Date in an aggregate principal amount outstanding at any one time not in excess of $250,000. "Person" means natural persons, corporations, limited liability ------ companies, limited partnerships, general partnerships, limited liability partnerships, joint ventures, trusts, land trusts, business trusts, or other organizations, irrespective of whether they are legal entities, and governments and agencies and political subdivisions thereof. "Personal Property Collateral" means Collateral other than Real ---------------------------- Property. "Projections" means Borrower's forecasted (a) balance sheets, (b) ----------- profit and loss statements, and (c) cash flow statements, all prepared on a basis consistent with Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. "Pro Rata Share" means: -------------- (a) with respect to a Lender's obligation to make Advances and receive payments of principal, interest, fees, costs, and expenses with respect thereto, the percentage obtained by dividing (i) such Lender's Commitment, by (ii) the aggregate Revolver Commitments of all Lenders, (b) with respect to a Lender's obligation to participate in Letters of Credit, to reimburse the Issuing Lender, and to receive payments of fees with respect thereto, the 24 percentage obtained by dividing (i) such Lender's Revolver Commitment, by (ii) the aggregate Revolver Commitments of all Lenders, (c) with respect to a Lender's obligation to make Capital Expenditure Loans and receive payments of interest, fees, and principal with respect thereto, the percentage obtained by dividing (i) such Lender's Revolver Commitment, by (ii) the aggregate amount of all Lenders' Revolver Commitments, (d) with respect to a Lender's obligation to make Advances and receive payments of principal, interest, fees, costs, and expenses with respect thereto, the percentage obtained by dividing (i) such Lender's Revolver Commitment, by (ii) the aggregate Revolver Commitments of all Lenders, (e) with respect to all other matters (including the indemnification obligations arising under Section 16.7), the percentage obtained by dividing (i) such Lender's Total Commitment, by (ii) the aggregate amount of Total Commitments of all Lenders; provided, however, that, in each case, in the -------- ------- event all Commitments have been terminated, Pro Rata Share shall be determined according to the Commitments in effect immediately prior to such termination. "Purchase Money Indebtedness" means Indebtedness (other than the --------------------------- Obligations, but including Capitalized Lease Obligations), incurred at the time of, or within 20 days after, the acquisition of any fixed assets for the purpose of financing all or any part of the acquisition cost thereof. "Real Property" means any estate or interests in real property ------------- now owned or hereafter acquired by Borrower and the improvements thereto. "Real Property Collateral" means the parcel or parcels of Real ------------------------ Property identified on Schedule R-1 (which shall include any parcel or parcels ------------ that are part of the Acquired Assets) and any Real Property hereafter acquired by Borrower. "Record" means information that is inscribed on a tangible medium ------ or which is stored in an electronic or other medium and is retrievable in perceivable form. "Remedial Action" means all actions taken to (a) clean up, --------------- remove, remediate, contain, treat, monitor, assess, evaluate, or in any way address Hazardous Materials in the indoor or outdoor environment, (b) prevent or minimize a release or threatened release of Hazardous Materials so they do not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, (c) perform any pre-remedial studies, investigations, or post-remedial operation and maintenance activities, or (d) conduct any other actions authorized by 42 USC (S) 9601. "Report" has the meaning set forth in Section 16.17. ------ ------------- 25 "Required Availability" means Excess Availability and unrestricted --------------------- cash and Cash Equivalents in an amount of not less than $5,000,000. "Required Lenders" means, at any time, (a) Agent, and (b) Lenders ---------------- whose Pro Rata Shares aggregate 66 2/3% or more of the Total Commitments, or if the Commitments have been terminated irrevocably, 66 2/3% or more of the Obligations then outstanding. "Reserve Percentage" means, on any day, for any Lender, the maximum ------------------ percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor Governmental Authority) for determining the reserve requirements (including any basic supplemental, marginal, or emergency reserve) that are in effect on such date with respect to eurocurrency fundings (currently referred to as "eurocurrency liabilities") of that Lender, but so long as such Lender is not required or directed under applicable regulations to maintain such reserves, the Reserve Percentage shall be zero. "Revolver Commitment" means, with respect to each Lender, its -------------------- Revolver commitment, and, with respect to all Lenders, their Revolver Commitments, in each as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or on the signature page of ------------ the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1 ------------ "Revolver Usage" means, as of any date of determination, the sum of -------------- (a) the then extant amount of outstanding Advances, plus (b) the then extant amount of the Letter of Credit Usage, plus (c) the then extant amount of outstanding Capital Expenditure Loans. "Risk Participation Liability" means, as to each Letter of Credit, all ---------------------------- reimbursement obligations of Borrower to the Issuing Lender with respect to an L/C Undertaking, consisting of (a) the amount available to be drawn or which may become available to be drawn, (b) all amounts that have been paid by the Issuing Lender to the Underlying Issuer to the extent not reimbursed by Borrower, whether by the making of an Advance or otherwise, and (c) all accrued and unpaid interest, fees, and expenses payable with respect thereto. "Royalty Reserves" means reserves determined from time to time by ---------------- Agent in its reasonable judgment, for the estimated costs relating to the royalties payable to any licensors, including without limitation, Kimberly Clark and Proctor & Gamble. "SEC" means the United States Securities and Exchange Commission and --- any successor thereto. "Securities Account" means a "securities account" as that term defined ------------------ in the Code. "Settlement" has the meaning set forth in Section 2.3(f)(i). ---------- ----------------- 26 "Settlement Date" has the meaning set forth in Section 2.3(f)(i). --------------- ----------------- "Solvent" means, with respect to any Person on a particular date, that ------- such Person is not insolvent (as such term is defined in the Uniform Fraudulent Transfer Act). "Stock" means all shares, options, warrants, interests, ----- participations, equity interests or other equivalents (regardless of how designated) of or in a Person, whether voting or nonvoting, including common stock, preferred stock, limited liability company interests, partnership interests, partnership interests, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "Subordinated Note A" means the indebtedness of Borrower to DSG ------------------- evidenced by that certain subordinated discount promissory note executed by Borrower and payable to the order of DSG dated as of March __, 2001, in the original principal amount of $15,906,250, as amended, restated or replaced from time to time with Agent's consent, all in form and substance satisfactory to Agent. "Subordinated Note B" means the indebtedness of Borrower to DSG ------------------- Holdings (UK), evidenced by that certain promissory note executed by Borrower and payable to the order of DSG Holdings (UK) dated as of March __, 2001, in the original principal amount of $5,000,000 in form and substance satisfactory to Agent. "Subordination Agreement" means, individually and collectively, (a) ----------------------- that certain Subordination Agreement dated of even date herewith, among DSG, Borrower and Agent relating to the Subordinated Note A, (b) that certain Subordination Agreement dated of even date herewith, among DSG Holdings (UK), Borrower and Agent relating to the Subordinated Note B, and (c) any other subordination agreement entered into in connection with Subordinated Note A or Subordinated Note B from time to time, all in form and substance satisfactory to Agent. "Subsidiary" of a Person means a corporation, partnership, limited ---------- liability company, or other entity in which that Person directly or indirectly ownes or controls the shares of Stock having ordinary voting power to elect a majority of the board of directors (or appoint other comparable managers) of such corporation, partnership, limited liability company, or other entity. "Swing Lender" means Foothill or any other Lender that, at the request ------------ of Borrower and with the consent of Agent agrees, in such Lender's sole discretion, to become the Swing Lender hereunder. "Swing Loan" has the meaning set forth in Section 2.3(d)(i). ---------- ----------------- 27 "Tangible Net Worth" means, as of any date of determination, the ------------------ result of (a) Borrower's total stockholder's equity, minus (b) the sum of (i) all Intangible Assets of Borrower, (ii) all of Borrower's prepaid expenses and (iii) all amounts due to Borrower from Affiliates. "Tax Distribution Amount" means, for any period when Borrower is a ----------------------- Pass-Through Entity, an amount sufficient to cover payment of the expected federal and state income taxes attributable to the ownership of Borrower's common equity, based on the highest federal and state income tax rates that could be applicable to any holder of Borrower's common equity (as the case may be), as determined through the end of the period in question; provided, however, that in no event shall the Tax Distribution Amount for any year exceed the actual amount of federal and state income taxes attributable to the ownership of Borrower's common equity. "Taxes" has the meaning set forth in Section 16.11. ----- ------------- "Term Loan" has the meaning set forth in Section 2.2. --------- ----------- "Term Loan Amount" means $11,000,000. ---------------- "Term Loan Commitment" means, with respect to each Lender, its Term -------------------- Loan Commitment, and, with respect to all Lenders, their Term Loan Commitments, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 or on the signature page of the ------------ Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1. ------------ "Total Commitment" means, with respect to each Lender, its Total ---------------- Commitment, and, with respect to all Lenders, their Total Commitments, in each case as such Dollar amounts are set forth beside such Lender's name under the applicable heading on Schedule C-1 attached hereto or on the signature page of ------------ the Assignment and Acceptance pursuant to which such Lender became a Lender hereunder in accordance with the provisions of Section 14.1. ------------ "Total Debt to EBITDA Ratio" means, at any date of determination, the -------------------------- ratio of (a) all Indebtedness of Borrower (excluding Indebtedness of Borrower pursuant to Subordinated Note B) as of such to (b) EBITDA for the four fiscal quarter period then ending. "Underlying Issuer" means a third Person which is the beneficiary of ----------------- an L/C Undertaking and which has issued a letter of credit at the request of the Issuing Lender for the benefit of Borrower. 28 "Underlying Letter of Credit" means a letter of credit that has been --------------------------- issued by an Underlying Issuer. "United States Person" has the meaning set forth in Section 16.11. -------------------- "Voidable Transfer" has the meaning set forth in Section 17.7. ----------------- ------------ "Wang Pledge Agreement" means that certain stock pledge agreement --------------------- dated as of January 21, 2000 between BNP Private Bank & Trust Cayman ("BNP Cayman"), as trustee, Piccadilly Cayman Limited and Borrower pledging certain shares of DSG to Agent. "Wells Fargo" means Wells Fargo Bank, National Association, a national ----------- banking association. 1.2 Accounting Terms. All accounting terms not specifically defined herein ---------------- shall be construed in accordance with GAAP. When used herein, the term "financial statements" shall include the notes and schedules thereto. When the term "Borrower" is used in respect of a financial covenant or a related definition, it shall be understood to mean Borrower and its Subsidiaries on a consolidated basis unless the context clearly requires otherwise. 1.3 Code. Any terms used in this Agreement that are defined in the Code ---- shall be construed an defined as set forth in the Code unless otherwise defined herein. 1.4 Construction. Unless the context of this Agreement of any other Loan ------------ Document clearly requires otherwise, references to the plural include the singular, references to the singular include the plural, the term "including" is not limiting, and the term "or" has, except where otherwise indicated, the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular provision of this Agreement or such other Loan Document, as the case may be. Section, subsection, clause, schedule, and exhibit references herein are to this Agreement unless otherwise specified. Any reference in this Agreement or in the other Loan Documents to any agreement, instrument, or document shall include all alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements, thereto and thereof, as applicable (subject to any restrictions on such alterations, amendments, changes, extensions, modifications, renewals, replacements, substitutions, joinders, and supplements set forth herein). Any reference herein to any Person shall be construed to include such Person's successors and assigns. Any requirement of a writing contained herein or in the other Loan Documents shall be satisfied by the transmission of a Record and any Record transmitted shall constitute a representation and warranty as to the accuracy and completeness of the information contained therein. 29 1.5 Schedule and Exhibits. All of the schedules and exhibits attached to --------------------- this Agreement shall be deemed incorporated herein by reference. 2. LOAN AND TERMS OF PAYMENT. 2.1 Revolver Advances. ----------------- (a) Subject to the terms and conditions of this Agreement, and during the term of this Agreement, each Lender with a Revolver Commitment agrees (severally, not jointly or jointly and severally) to make advances ("Advances") -------- to Borrower in an amount at any one time outstanding not to exceed such Lender's Pro Rata Share of an amount equal to the lesser of (i) the Maximum Revolver Amount less the Letter of Credit Usage less the outstanding principal amount of Capital Expenditure Loans, or (ii) the Borrowing Base less the Letter of Credit Usage. For purposes of this Agreement, "Borrowing Base" as of any date of -------------- determination, shall mean the result of: (X) the lesser of (i) 85% of the amount of Eligible Accounts, less the amount, if any, of the Dilution Reserve, and (ii) an amount equal to 45 days of Borrower's Collections with respect to Accounts for the immediately preceding 60 day period, plus (y) the lowest of (i) $15,000,000, (ii) the sum of (A) the lowest of (I) 80% times the then extant Net Liquidation Percentage times the next book value of Borrower's Eligible Inventory consisting of raw materials, (II) $5,000,000, or (III) 50% of the amount of credit availability created by clause (B) below of Borrower's Eligible Inventory, plus (B) 80% times the then extant Next Liquidation Percentage times the net book value of Borrower's Eligible Inventory consisting of first quality finished goods, and (iii) 75% of the amount of credit availability created by clause (x) above, minus ---------- (z) the Royalty Reserves and the aggregate amount of other reserves, if any, established by Agent under Section 2.1(b). -------------- 30 (b) Anything to the contrary in this Section 2.1 notwithstanding, ----------- Agent shall have the right to establish reserves in such amounts, and with respect to such matters, as Agent in its Permitted Discretion shall deem necessary or appropriate, against the Borrowing Base, including reserves with respect to (i) sums that Borrower is required to pay (such as taxes, assessments, insurance premiums, or, in the case of leased assets, rents or other amounts payable under such leases) and has failed to pay under any Section of this Agreement or any other Loan Document, and (ii) amounts owing by Borrower to any Person to the extent secured by a Lien on, or trust over, any of the Collateral (other than any existing Permitted Lien set forth on Schedule P-1 ------------ which is specifically identified thereon as entitled to have priority over the Agent's Liens), which Lien or trust, in the Permitted Discretion of Agent likely would have a priority superior to the Agent's Liens (such as Liens or trusts in favor of landlords, warehousemen, carriers, mechanics, materialmen, laborers, or suppliers, or Liens or trusts for ad valorem, excise, sales, or other taxes where given priority under applicable law) in and to such item of the Collateral. Agent shall also have the right to establish reserves for any amount by which, at any date of determination, in Agent's Permitted Discretion, the outstanding principal amount of the Term Loan exceeds 80% of the net orderly liquidation value of the Equipment and 70% of the quick sale value of the Real Property subject to Agent's first priority perfected lien. In addition to the foregoing, Agent shall have the right to have the Inventory reappraised by a qualified appraisal company selected by Agent from time to time after the Closing Date for the purpose of redetermining the Net Liquidation Percentage of the Eligible Inventory portion of the Collateral and, as a result, redetermining the Borrowing Base. (c) The Lenders with Revolver Commitments shall have no obligation to make additional Advances hereunder to the extent such additional Advances would cause the Revolver Usage to exceed the Maximum Revolver Amount. (d) Amounts borrowed pursuant to this Section may be repaid and, subject to the terms and conditions of this Agreement, reborrowed at any time during the term of this Agreement. 2.2 Term Loan; Capital Expenditure Loans. ------------------------------------ (a) Term Loan. Subject to the terms and conditions of this Agreement, on the Closing Date each Lender with a Term Loan Commitment agrees (severally, not jointly or jointly and severally) to make a term loan to Borrower in an amount equal to each such Lender's Pro Rata Share of the Term Loan Amount (the "Term Loan"). The Term Loan shall be repaid in sixty (60) equal monthly installments of principal (together with accrued interest), such installments to be payable on the first day of each month commencing with the first day of the first month following the date on which such Term Loan is made and continuing on the first day of each succeeding month. Additionally, the unpaid principal balance of the Term Loan shall be repaid with the proceeds of any Permitted Disposition to 31 the extent such repayment is required by Section 7.4 hereof, with such proceeds ----------- being applied to the installments due on the Term Loan in the inverse order of their maturity. The outstanding unpaid principal balance of the Term Loan, together with all accrued and unpaid interest and fees thereon, shall be due and payable on the earlier of the Maturity Date or the date of termination of this Agreement, whether by its terms, by prepayment, by acceleration, or otherwise. The unpaid principal balance of the Term Loan may be prepaid in whole or in part without penalty or premium (except as provided in Section 3.6) at any time ----------- during the term of this Agreement upon ninety (90) days' written notice by Borrower to Agent, all such prepaid amounts to be applied to the installments due on the Term Loan in the inverse order of their maturity. All amounts outstanding under the Term Loan shall constitute Obligations. (b) Capital Expenditure Loans. Subject to the terms and conditions of this Agreement, each Lender with a Revolver Commitment (severally, not jointly or jointly and severally) agrees to make a series of loans (each, a "Capital Expenditure Loan" and collectively the "Capital Expenditure Loans") to or for the benefit of Borrower, in an aggregate amount at any one time outstanding for such Lender not to exceed such Lender's Pro Rata Share of the Capital Expenditure Loan Amount. Each borrowing consisting of Capital Expenditure Loans shall be advanced directly to the applicable vendor or Borrower, as Borrower may request. Any new or used Equipment that is to be acquired or that has been purchased by Borrower using a Capital Expenditure Loan must be acceptable to Agent, in its sole discretion in all respects, must not be a fixture, and must not be intended to be affixed to real property or to become installed in or affixed to other goods. All amounts outstanding under the Capital Expenditure Loans shall constitute Obligations. Anything herein to the contrary notwithstanding, (a) each borrowing consisting of Capital Expenditure Loans shall be in a principal amount of not less than (i) $500,000, or (ii) such lesser amount as is the then unfunded balance of the Capital Expenditure Loan Amount; (b) each borrowing consisting of Capital Expenditure Loans shall be in an amount, as determined by Agent, not to exceed 80% of Borrower's invoice cost (net of shipping, freight, installation, and other so-called `soft costs') of (i) new or used Equipment that is to be purchased by Borrower with the proceeds of such Borrowing, or (ii) new or used Equipment that has been purchased by Borrower within 90 days prior to the date of such borrowing; (c) the Lender Group shall have no obligation to fund any Capital Expenditure Loan hereunder to the extent that the making thereof would cause the then outstanding amount of all Capital Expenditure Loans to exceed (i) the Capital Expenditure Loan Amount, or (ii) the Maximum Revolver Amount less the outstanding Advances less the Letter of Credit Usage; and (d) the aggregate amount of all Capital Expenditure Loans outstanding at any time (including giving effect to any requested Capital Expenditure Loans outstanding at any time (including giving effect to any requested Capital Expenditure Loan) shall not exceed the lesser of cost or fair market value of all of the Equipment acquired or financed with the proceeds of such Capital Expenditure Loans. Each Capital Expenditure Loan shall be repaid in sixty (60) equal monthly installments of principal (together with accrued interest), such installments to be payable on the first day of each month commencing with the first day of the first day of the first month following the date on which such Capital Expenditure Loan is made and continuing on the first day of each succeeding month. The outstanding principal balance of the Capital Expenditure Loans, together with 32 all accrued and unpaid interest and fees thereon, shall be due and payable on the earlier of the Maturity Date or the date of termination of this Agreement, whether by its terms, by prepayment, by acceleration, or otherwise. Capital Expenditure Loans may be prepaid in whole or in part without penalty or premium (except as provided in Section 3.6) at any time during the term of this ----------- Agreement upon ninety (90) days' written notice by Borrower to Agent, all such prepaid amounts to be applied to the installments due on all of the Capital Expenditure Loans of all Lenders in the inverse order of their maturity. 2.3 Borrowing Procedures and Settlements. ------------------------------------ (a) Procedure for Borrowing. Each Borrowing shall be made by an irrevocable written request by an Authorized Person delivered to Agent (which notice must be received by Agent no later than 1:00 p.m. (Georgia time) on the Business Day prior to the date that is the requested Funding Date in the case of a request for an Advance or the Term Loan specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day; provided, however, that in the case of a request for Swing Loan in an amount of - -------- ------- $1,000,000, or less, such notice will be timely received if it is received by Agent no later than 1:00 p.m. (Georgia time) on the Business Day that is the requested Funding Date) specifying (i) the amount of such Borrowing, and (ii) the requested Funding Date, which shall be a Business Day. At Agent's election, in lieu of delivering the above-described written request, any Authorized Person may give Agent telephonic notice of such request by the required time, with such telephonic notice to be confirmed in writing within 24 hours of the giving of such notice. (b) Agent's Election. Promptly after receipt of a request for a Borrowing pursuant to Section 2.3(a), Agent shall elect, in its discretion, (i) -------------- to have the terms of Section 2.3(c) apply to such requested Borrowing, or (ii) -------------- if the Borrowing is for an Advance, to request Swing Lender to make a Swing Loan pursuant to the terms of Section 2.3(d) in the amount of the requested -------------- Borrowing; provided, however, that if Swing Lender declines in its sole discretion to make a Swing Loan pursuant to Section 2.3(d), Agent shall elect to -------------- have the terms of Section 2.3(c) apply to such requested Borrowing. -------------- (c) Making of Advances. (i) In the event that Agent shall elect to have the terms of this Section 2.3(c) apply to a requested Borrowing as described in -------------- Section 2.3(b), then promptly after receipt of a request for a -------------- Borrowing pursuant to Section 2.3(a), Agent shall notify the Lenders, -------------- not later than 4:00 p.m. (Georgia time) on the Business Day immediately preceding the Funding Date applicable thereto, by telecopy, telephone, or other similar form of transmission, of the requested Borrowing. Each Lender shall make the amount of such Lender's Pro Rata Share of the requested Borrowing available to Agent in immediately available funds, to Agent's Account, not later than 1:00 p.m. (Georgia time) on the Funding Date applicable thereto. After Agent's receipt of the proceeds of 33 such Advances (or borrowing under the Term Loan or Capital Expenditure Loan, as applicable), upon satisfaction of the applicable conditions precedent set forth in Section 3 hereof, Agent shall make the proceeds thereof available to Borrower on the applicable Funding Date by transferring immediately available funds equal to such proceeds received by Agent to Borrower's Designated Account; provided, however, that, subject to the provisions of Section 2.3(i), -------- ------- -------------- Agent shall not request any Lender to make, and no Lender shall have the obligation to make, any Advance (or its portion of the Term Loan) if Agent shall have actual knowledge that (1) one or more of the applicable conditions precedent set forth in Section 3 will not be --------- satisfied on the requested Funding Date for the applicable Borrowing unless such condition has been waived, or (2) the requested Borrowing would exceed the Availability on such Funding Date. (ii) Unless Agent receives notice from a Lender on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least 1 Business Day prior to the date of such Borrowing, that such Lender will not make available as and when required hereunder to Agent for the account of Borrower the amount of that Lender's Pro Rata Share of the Borrowing, Agent may assume that each Lender has made or will make such amount available to Agent in immediately available funds on the Funding Date and Agent may (but shall not be so required), in reliance upon such assumption, make available to Borrower on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to Agent in immediately available funds and Agent in such circumstances has made available to Borrower such amount, that Lender shall on the Business Day following such Funding Date make such amount available to Agent, together with interest at the Defaulting Lender Rate for each day during such period. A notice submitted by Agent to any Lender with respect to amounts owing under this subsection shall be conclusive, absent manifest error. If such amount is so made available, such payment to Agent shall constitute such Lender's Advance on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to Agent on the Business Day following the Funding Date, Agent will notify Borrower of such failure to fund and, upon demand by Agent, Borrower shall pay such amount to Agent for Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Advances composing such Borrowing. The failure of any Lender to make any Advance on any Funding Date shall not relieve any other Lender of any obligation hereunder to make an Advance on such Funding Date, but no Lender shall be responsible for the failure of any other Lender to make the Advance to be made by such other Lender on any Funding Date. 34 (iii) Agent shall not be obligated to transfer to a Defaulting Lender any payments made by Borrower to Agent for the Defaulting Lender's benefit, and, in the absence of such transfer to the Defaulting Lender, Agent shall transfer any such payments to each other non-Defaulting Lender member of the Lender Group ratably in accordance with their Commitments (but only to the extent that such Defaulting Lender's Advance was funded by the other members of the Lender Group) or, if so directed by Borrower and if no Default or Event of Default had occurred and is continuing (and to the extent such Defaulting Lender's Advance was not funded by the Lender Group), retain same to be re-advanced to Borrower as if such Defaulting Lender has made Advances to Borrower. Subject to the foregoing, Agent may hold and, in its Permitted Discretion, re-lend to Borrower for the account of such Defaulting Lender the amount of all such payments received and retained by it for the account of such Defaulting Lender. Solely for the purposes of voting or consenting to matters with respect to the Loan Documents, such Defaulting Lender shall be deemed not to be a "Lender" and such Lender's Commitment shall be deemed to be zero. This Section shall remain effective with respect to such Lender until (x) the Obligations under this Agreement shall have been declared or shall have become immediately due and payable, (y) the non-Defaulting Lenders, Agent, and Borrower shall have waived such Defaulting Lender's default in writing, or (z) the Defaulting Lender makes its Pro Rata Share of the applicable Advance and pays to Agent all amounts owing by Defaulting Lender in respect thereof. The operation of this Section shall not be construed to increase or otherwise affect the Commitment of any Lender, to relieve or excuse the performance by such Defaulting Lender or any other Lender of its duties and obligations hereunder, or to relieve or excuse the performance by Borrower of its duties and obligations hereunder to Agent or to the Lenders other than such Defaulting Lender. Any such failure to fund by any Defaulting Lender shall constitute a material breach by such Defaulting Lender of this Agreement and shall entitle Borrower at its option, upon written notice to Agent, to arrange for a substitute Lender to assume the Commitment of such Defaulting Lender, such substitute Lender to be acceptable to Agent. In connection with the arrangement of such a substitute Lender, the Defaulting Lender shall have no right to refuse to be replaced hereunder, and agrees to execute and deliver a completed form of Assignment and Acceptance Agreement in favor of the substitute Lender (and agrees that it shall be deemed to have executed and delivered such document if it fails to do so) subject only to being repaid its share of the outstanding Obligations (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever; provided further, however, that any such assumption of the -------- ------- ------- Commitment of such Defaulting Lender shall not be deemed to constitute a waiver of any of the Lender Groups' or 35 Borrower's rights or remedies against any such Defaulting Lender arising out of or in relation to such failure to fund. (d) Making of Swing Loans. (i) In the event Agent shall elect, with the consent of Swing Lender, as a Lender, to have the terms of this Section 2.3(d) apply to a requested -------------- Borrowing as described in Section 2.3(b), Swing Lender as a Lender shall -------------- make such Advance in the amount of such Borrowing (any such Advance made solely by Swing Lender as a Lender pursuant to this Section 2.3(d) being -------------- referred to as a "Swing Loan" and such Advances being referred to ---------- collectively as "Swing Loans") available to Borrower on the Funding Date ----------- applicable thereto by transferring immediately available funds to Borrower's Designated Account. Each Swing Loan is an Advance hereunder and shall be subject to all the terms and conditions applicable to other Advances, except that no such Swing Loan shall be eligible for the LIBOR Option and all payments on any Swing Loan shall be payable to Swing Lender as a Lender solely for its own account (and for the account of the holder of any participation interest with respect to such Swing Loan). Subject to the provisions of Section 2.3(i), Agent shall not request Swing Lender as a -------------- Lender to make, and Swing Lender as a Lender shall not make, any Swing Loan if Agent has actual knowledge that (i) one or more of the applicable conditions precedent set forth in Section 3 will not be satisfied on the --------- requested Funding Date for the applicable Borrowing unless such condition has been waived, or (ii) the requested Borrowing would exceed the Availability on such Funding Date. Swing Lender as a Lender shall not otherwise be required to determine whether the applicable conditions precedent set forth in Section 3 have been satisfied on the Funding Date --------- applicable thereto prior to making, in its sole discretion, any Swing Loan. (ii) The Swing Loans shall be secured by the Agent's Liens, shall constitute Advances and Obligations hereunder, and shall bear interest at the rate applicable from time to time to Advances that are Base Rate Loans. (e) Agent Advances. (i) Agent hereby is authorized by Borrower and the Lenders, from time to time in Agent's sole discretion, (1) after the occurrence and during the continuance of a Default or an Event of Default, or (2) at any time that any of the other applicable conditions precedent set forth in Section 3 --------- have not been satisfied, to make Advances to Borrower on behalf of the Lenders that Agent, in its Permitted Discretion deems necessary or desirable (A) to preserve or protect the Collateral, or any portion thereof, (B) to enhance the likelihood of repayment of the Obligations, or (C) to pay any other amount chargeable to 36 Borrower pursuant to the terms of this Agreement, including Lender Group Expenses and the costs, fees, and expenses described in Section ------- 10 (any of the Advances described in this Section 2.3(e) shall be -- -------------- referred to as "Agent Advances"). Each Agent Advance is an Advance -------------- hereunder and shall be subject to all terms and conditions applicable to other Advances, except that no such Agent Advance shall be eligible for the LIBOR Option and all payments thereon shall be payable to Agent solely for its own account (and for the account of the holder of any participation interest with respect to such Agent Advance). (ii) The Agent Advances shall be repayable on demand and secured by the Agent's Liens granted to Agent under the Loan Documents, shall constitute Advances and Obligations hereunder, and shall bear interest at the rate applicable from time to time to Advances that are Base Rate Loans. (f) Settlement. It is agreed that each Lender's funded portion of the Advances is intended by the Lenders to equal, at all times, such Lender's Pro Rata Share of the outstanding Advances. Such agreement notwithstanding, Agent, Swing Lender and the other Lenders agree (which agreement shall not be for the benefit of or enforceable by Borrower) that in order to facilitate the administration of this Agreement and the other Loan Documents, settlement among them as to the Advances, the Swing Loans, and the Agent Advances shall take place on a periodic basis in accordance with the following provisions: (i) Agent shall request settlement ("Settlement") with the ---------- Lenders on a weekly basis, or on a more frequent basis if so determined by Agent, (1) on behalf of Swing Lender, with respect to each outstanding Swing Loan, (2) for itself, with respect to each Agent Advance, and (3) with respect to Collections received, as to each by notifying the Lenders by telecopy, telephone, or other similar form of transmission, of such requested Settlement, no later than 5:00 p.m. (Georgia time) on the Business Day immediately prior to the date of such requested Settlement (the date of such requested Settlement being the "Settlement Date"). Such notice of a Settlement Date shall --------------- include a summary statement of the amount of outstanding Advances, Swing Loans, and Agent Advances for the period since the prior Settlement Date. Subject to the terms and conditions contained herein (including Section 2.3(c)(iii): (y) if a Lender's balance of the ------------------- Advances, Swing Loans, and Agent Advances exceeds such Lender's Pro Rata Share of the Advances, Swing Loans, and Agent Advances as of a Settlement Date, then Agent shall, by no later than 3:00 p.m. (Georgia time) on the Settlement Date, transfer in immediately available funds to the account of such Lender as such Lender may designate, an amount such that each such Lender shall, upon receipt of such amount, have as of the Settlement Date, its Pro Rata Share of the Advances, Swing Loans, and Agent Advances, and (ii) if a Lender's balance of the Advances, 37 Swing Loans, and Agent Advances is less than such Lender's Pro Rata Share of the Advances, Swing Loans, and Agent Advances as of a Settlement Date, such Lender shall no later than 3:00 p.m. (Georgia time) on the Settlement Date transfer in immediately available funds to the Agent's Account, an amount such that each such Lender shall, upon transfer of such amount, have as of the Settlement Date, its Pro Rata Share of the Advances, Swing Loans, and Agent Advances. Such amounts made available to Agent under clause (z) of the immediately preceding sentence shall be applied against the amounts of the applicable Swing Loan or Agent Advance and, together with the portion of such Swing Loan or Agent Advance representing Swing Lender's Pro Rata Share thereof, shall constitute Advances of such Lenders. If any such amount is not made available to Agent by any Lender on the Settlement Date applicable thereto to the extent required by the terms hereof, Agent shall be entitled to recover for its account such amount on demand form such Lender together with interest thereon at the Defaulting Lender Rate. (ii) In determining whether a Lender's balance of the Advances, Swing Loans, and Agent Advances is less than, equal to, or greater than such Lender's Pro Rata Share of the Advances, Swing Loans, and Agent Advances as of a Settlement Date, Agent shall, as part of the relevant Settlement, apply to such balance the portion of payments actually received in good funds by Agent with respect to principal, interest, fees payable by Borrower and allocable to the Lenders hereunder, and proceeds of Collateral. To the extent that a net amount is owed to any such Lender after such application, such net amount shall be distributed by Agent to that Lender as part of such next Settlement. (iii) Between Settlement Dates, Agent, to the extent no Agent Advances or Swing Loans are outstanding, may pay over to Swing Lender any payments received by Agent, that in accordance with the terms of this Agreement would be applied to the reduction of the Advances, for application to Swing Lender's Pro Rata Share of the Advances. If, as of any Settlement Date, Collections received since the then immediately preceding Settlement Date have been applied to Swing Lender's Pro Rata Share of the Advances other than to Swing Loans, as provided for in the previous sentence, Swing Lender shall pay to Agent for the accounts of the Lenders, and Agent shall pay to the Lenders, to be applied to the outstanding Advances of such Lenders, an amount such that each Lender shall, upon receipt of such amount, have, as of such Settlement Date, its Pro Rata Share of the Advances. During the period between Settlement Dates, Swing Lender with respect to Swing Loans, Agent with respect to Agent Advances, and each Lender (subject to the effect of letter agreements between Agent and individual Lenders) with respect to the Advances other than Swing Loans and Agent Advances, shall be entitled to 38 interest at the applicable rate or rates payable under this Agreement on the daily amount of funds employed by Swing Lender, Agent, or the Lenders, as applicable. (g) Notation. Agent shall record on its books the principal amount of the Advances owing to each Lender, including the Swing Loans owing to Swing Lender, and Agent Advances owing to Agent, and the interest therein of each Lender, from time to time. In addition, each Lender is authorized, at such Lender's option, to note the date and amount of each payment or prepayment of principal of such Lender's Advances in its books and records, including computer records, such books and records constituting conclusive evidence, absent manifest error, of the accuracy of the information contained therein. (h) Lenders' Failure to Perform. All Advances (other than Swing Loans and Agent Advances) shall be made by the Lenders contemporaneously and in accordance with their Pro Rata Shares. It is understood that (i) no Lender shall be responsible for any failure by any other Lender to perform its obligation to make any Advance (or other extension of credit) hereunder, nor shall any Commitment of any Lender be increased or decreased as a result of any failure by any other Lender to perform its obligations hereunder, and (ii) no failure by any Lender to perform its obligations hereunder shall excuse any other Lender from its obligations hereunder. (i) Optional Overadvances. Any contrary provision of this Agreement notwithstanding, the Lenders hereby authorize Agent or Swing Lender, as applicable, and Agent or Swing Lender, as applicable, may, but is not obligated to, knowingly and intentionally, continue to make Advances (including Swing Loans) to Borrower notwithstanding that an Overadvances exists or thereby would be created, so long as (i) after giving effect to such Advances (including a Swing Loan) the outstanding Revolver Usage (except for and excluding amounts charged to the Loan Account for interest, fees, or Lender Group Expenses) does not exceed the Maximum Revolver Amount, and (ii) at the time of the making of any such Advance (including any Swing Loan), Agent does not believe, in good faith, that the Overadvance created by such Advance will be outstanding for more than 90 days. The foregoing provisions are for the exclusive benefit of Agent, Swing Lender, and the Lenders and are not intended to benefit Borrower in any way. The Advances and Swing Loans, as applicable, that are made pursuant to this Section 2.3(i) shall be subject to the same terms and conditions as any other - -------------- Advance or Swing Loan, as applicable, except that they shall not be eligible for the LIBOR Option and the rate of interest applicable thereto shall be the rate applicable to Advances that are Base Rate Loans under Section 2.6(c) hereof -------------- without regard to the presence or absence of a Default or Event of Default. (i) In the event Agent obtains actual knowledge that the Revolver Usage exceeds the amounts permitted by the preceding paragraph, regardless of the amount of, or reason for, such excess, Agent shall notify Lenders as soon as practicable (and prior to making any (or any additional) intentional 39 Overadvances (except for and excluding amounts charged to the Loan Account for interest, fees, or Lender Group Expenses) unless Agent determines that prior notice would result in imminent harm to the Collateral or its value), and the Lenders with Revolver Commitments thereupon shall, together with Agent, jointly determine the terms of arrangements that shall be implemented with Borrower intended to reduce, within a reasonable time, the outstanding principal amount of the Advances to Borrower to an amount permitted by the preceding paragraph. In the event Agent or any Lender disagrees over the terms of reduction or repayment of any Overadvance, the terms of reduction or repayment thereof shall be implemented according to the determination of the Required Lenders. (ii) Each Lender with a Revolver Commitment shall be obligated to settle with Agent as provided in Section 2.3(f) for the amount of such -------------- Lender's Pro Rata Share of any unintentional Overadvances by Agent reported to such Lender, any intentional Overadvances made as permitted under this Section 2.3(i), and any Overadvances resulting from the charging to the -------------- Loan Account of interest, fees, or Lender Group Expenses. 2.4 Payments. -------- (a) Payments by Borrower. (i) Except as otherwise expressly provided herein, all payments by Borrower shall be made to Agent's Account for the account of the Lender Group and shall be made in immediately available funds, no later than 2:00 p.m. (Georgia time) on the date specified herein. Any payment received by Agent later than 2:00 p.m. (Georgia time), shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue until such following Business Day. (ii) Unless Agent receives notice from Borrower prior to the date on which any payment is due to the Lenders that Borrower will not make such payment in full as and when required, Agent may assume that Borrower has made (or will make) such payment in full to Agent on such date in immediately available funds and Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent Borrower does not make such payment in full to Agent on the date when due, each Lender severally shall repay to Agent on demand such amount distributed to such Lender, together with interest thereon at the Defaulting Lender Rate for each day from the date such amount is distributed to such Lender until the date repaid. 40 (b) Apportionment and Application of Payments. (i) Except as otherwise provided with respect to Defaulting Lenders and except as otherwise provided in the Loan Documents (including letter agreements between Agent and individual Lenders), aggregate principal and interest payments shall be apportioned ratably among the Lenders (according to the unpaid principal balance of the Obligations to which such payments relate held by each Lender) and payments of fees and expenses (other than fees or expenses that are for Agent's separate account, after giving effect to any letter agreements between Agent and individual Lenders) shall be apportioned ratably among the Lenders having a Pro Rata Share of the type of Commitment or Obligation to which a particular fee relates. All payments shall be remitted to Agent and all such payments (other than payments received while no Default or Event of Default has occurred and is continuing and which relate to the payment of principal or interest of specific Obligations or which relate to the payment of specific fees) and all proceeds of Accounts or other Collateral received by Agent shall be applied as follows: A. first, to pay any Lender Group Expenses then due to Agent ----- under the Loan Documents, until paid in full, B. second, to pay any Lender Group Expenses then due to the ------ Lenders under the Loan Documents, on a ratable basis, until paid in full, C. third, to pay any fees then due to Agent (for its separate ----- account, after giving effect to any letter agreements between Agent and the individual Lenders) under the Loan Documents until paid in full, D. fourth, to pay any fees then due to any or all of the ------ Lenders (after giving effect to any letter agreements between Agent and individual Lenders) under the Loan Documents, on a ratable basis, until paid in full, E. fifth, to pay interest due in respect of all Agent Advances, ----- until paid in full, F. sixth, ratably to pay interest due in respect of the ----- Advances (other than Agent Advances), the Swing Loans, the Capital Expenditure Loan and the Term Loan until paid in full, G. seventh, to pay the principal of all Agent Advances until ------- paid in full, 41 H. eighth, ratably to pay all principal amounts then due and ------ payable (other than as a result of an acceleration thereof) with respect to the Term Loan and the Capital Expenditure Loans, until paid in full, I. ninth, to pay the principal of all Swing Loans until paid ----- in full, J. tenth, to pay the principal of all Advances until paid in ----- full, K. eleventh, if an Event of Default has occurred and is -------- continuing, to pay, on a pro-rata basis, the outstanding principal balance of the Term Loan and the Capital Expenditure Loan (in the inverse order of the maturity of the installments due thereunder) until the Term Loan and the Capital Expenditure Loan, are each, respectively, paid in full, L. twelfth, if an Event of Default has occurred and is ------- continuing, to Agent, to be held by Agent, for the ratable benefit of Issuing Lender and those Lenders having a Revolver Commitment, as cash collateral in an amount up to 105% of the then extant Letter of Credit Usage until paid in full, M. thirteenth, if an Event of Default has occurred and is ---------- continuing, to pay any other Obligations until paid in full, and N. fourteenth, to Borrower (to be wired to the Designated ---------- Account) or such other Person entitled thereto under applicable law. (ii) Agent promptly shall distribute to each Lender, pursuant to the applicable wire instructions received from each Lender in writing, such funds as it may be entitled to receive, subject to a Settlement delay as provided in Section 2.3(h). -------------- (iii) In each instance, so long as no Default or Event of Default has occurred and is continuing, Section 2.4(b) shall not be deemed to apply to -------------- any payment by Borrower specified by Borrower to be for the payment of specific Obligations then due and payable (or prepayable) under any provision of this Agreement. (iv) For purposes of the foregoing, "paid in full" means payment of all amounts owing under the Loan Documents according to the terms thereof, including loan fees, service fees, professional fees, interest (and specifically including interest accrued after the commencement of any Insolvency 42 Proceeding), default interest, interest on interest, and expense reimbursements, whether or not the same would be or is allowed or disallowed in whole or in part in any Insolvency Proceeding. (v) In the event of a direct conflict between the priority provisions of this Section 2.4 and other provisions contained in any ----------- other Loan Document, it is the intention of the parties hereto that such priority provisions in such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of this Section 2.4 ----------- shall control and govern. 2.5 Overadvances. If, at any time or for any reason, the amount of ------------ Obligations owed by Borrower to the Lender Group pursuant to Sections 2.1 and ---------------- 2.12 is greater than either the Dollar or percentage limitations set forth in - ---- Sections 2.1 or 2.12, (an "Overadvance"), Borrower immediately shall pay to - -------------------- ----------- Agent, in cash, the amount of such excess, which amount shall be used by Agent to reduce the Obligations in accordance with the priorities set forth in Section ------- 2.4(b). In addition, Borrower hereby promises to pay the Obligations (including - ------ principal, interest, fees, costs, and expenses) in Dollars in full to the Lender Group as and when due and payable under, the terms of this Agreement and the other Loan Documents. 2.6 Interest Rates and Letter of Credit Fee: Rates, Payments, and -------------------------------------------------------------- Calculations. - ------------ (a) Interest Rates. Except as provided in clause (c) below, all Obligations (except for undrawn Letters of Credit) that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof as follows: (i) if the relevant Obligation is an Advance made as a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the margin (as determined below) in effect from time to time in connection with LIBOR Rate Loans (the "LIBOR Rate Margin") with respect to Advances, (ii) if the relevant Obligation is a portion of a Capital Expenditure Loan or Term Loan made as a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the LIBOR Rate Margin with respect to Capital Expenditure Loans and the Term Loan, (iii) if the relevant Obligation is a portion of a Capital Expenditure Loan or Term Loan made as a Base Rate Loan, at a per annum rate equal to the Base Rate plus the margin (as determined below) in effect from time to time in connection with Base Rate Loans (the "Base Rate Margin") with respect to Capital Expenditure Loans and the Term Loan, and (iv) all other Obligations (except for undrawn Letters of Credit), at a per annum rate equal to the Base Rate plus the Base Rate Margin in effect for Advances made as Base Rate Loans. From the Closing Date to the First Adjustment Date, the Base Rate Margin in connection with Advances shall be 2.25%, the Base Rate Margin in connection with Capital Expenditure Loans and the Term Loan shall be 2.75%, the LIBOR Rate Margin in connection with Advances shall be 3.75%, 43 and the LIBOR Rate Margin in connection with Capital Expenditure Loans and the Term Loan shall be 4.25%. Commencing on the later of March 31, 2002 or the sixth (6th) day following the delivery of Borrower's financial statements to Agent for the fiscal year ending December 31, 2001 (the "First Adjustment Date') and on each Adjustment Date thereafter, the Base Rate Margin and the LIBOR Rate Margin shall each be adjusted to be the interest rate margin based upon the Total Debt to EBITDA Ratio for the 12 fiscal months then ended as set forth in such financial statements delivered to Agent pursuant to Section 6.3(a) -------------- as of the fiscal quarter end preceding such Adjustment Date, and expressed as a per annum rate of interest as set forth in the table below. - -------------------------------------------------------------------------------- Then the Then the If the Total Debt Type of Loan LIBOR Rate Base Rate to EBITDA Ratio Outstanding: Margin shall Margin shall is: be: be: - -------------------------------------------------------------------------------- Less than or Advances 3.25% 1.75% equal to 2.5 to 1.0 -------------------------------------------------------- Term Loan, 3.75% 2.25% Capital Expenditure Loan - -------------------------------------------------------------------------------- Greater than 2.5 Advances 3.50% 2.00% to 1.0 but less ------------------------------------------------------- than 3.0 to 1.0 Term Loan, 4.00% 2.50% Capital Expenditure Loan - -------------------------------------------------------------------------------- Greater than 3.0 Advances 3.75% 2.25% to 1.0 but less ------------------------------------------------------- than 3.5 to 1.0 Term Loan, 4.25% 2.75% Capital Expenditure Loan - -------------------------------------------------------------------------------- Greater than 3.5 Advances 4.00% 2.50% to 1.0 but less ------------------------------------------------------- than 4.0 to 1.0 Term Loan, 4.50% 3.00% Capital Expenditure Loan - -------------------------------------------------------------------------------- Equal to or Advances 4.25% 2.75% greater than 4.0 ------------------------------------------------------- to 1.0 Term Loan, 4.75% 3.25% Capital Expenditure Loan - -------------------------------------------------------------------------------- (b) Letter of Credit Fee. Burrower shall pay Agent (for the ratable benefit of the Lenders with a Revolver Commitment, subject to any letter agreement between Agent and individual Lenders), a Letter of Credit fee (in addition to the charges, commissions, fees, and costs set forth in Section ------- 2.12(e)) which shall accrue at a rate equal to 2.50% per annum times the Daily - -------- Balance of the undrawn amount of all outstanding Letters of Credit. (c) Default Rate. Upon the occurrence and during the continuation of an Event of Default (and at the election of Agent or the Required Lenders), (i) all Obligations (except for undrawn Letters of Credit ) that have been charged to the Loan Account pursuant to the terms hereof shall bear interest on the Daily Balance thereof at a per annum rate equal to 3 percentage points above the per annum rate otherwise applicable hereunder, and (ii) the Letter of Credit fee provided for above shall be increased to 3 percentage points above the per annum rate otherwise applicable hereunder. 44 (d) Payment. Interest, Letter of Credit fees, and all other fees payable hereunder shall be due and payable, in arrears, or the first day of each month at any time that Obligations or Commitments are outstanding. Borrower hereby authorizes Agent, from time to time, without prior notice to Borrower, to charge such interest and fees, all Lender Group Expenses (as and when incurred), the charges, commissions, fees, and costs provided for in Section ------- 2.12(e) (as and when accrued or incurred), the fees and costs provided for in - ------- Section 2.11 (as and when accrued or incurred), and all other payments as and - ------------ when due and payable under any Loan Document (including the installments due and payable with respect to the Term Loan and Capital Expenditure Loans) to Borrower's Loan Account, which amounts thereafter constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances hereunder. Any interest not paid when due shall be compounded by being charged to Borrower's Loan Account and shall thereafter constitute Advances hereunder and shall accrue interest at the rate then applicable to Advances that are Base Rate Loans hereunder. (e) Computation. All interest and fees chargeable under the Loan Documents shall be computed on the basis of a 360 day year for the actual number of days elapsed. In the event the Base Rate is changed from time to time hereafter, the rates of interest hereunder based upon the Base Rate automatically and immediately shall be increased or decreased by an amount equal to such change in the Base Rate. (f) Intent to Limit Charges to Maximum Lawful Rate. In no event shall the interest rate or rates payable under this Agreement, plus any other amounts paid in connection herewith, exceed the highest rate permissible under any law that a court of competent jurisdiction shall, in a final determination, deem applicable. Borrower and the Lender Group, in executing and delivering this Agreement, intend legally to agree upon the rate or rates of interest and manner of payment stated within it; provided, however, that, anything contained -------- ------- herein to the contrary notwithstanding, if said rate or rates of interest or manner of payment exceeds the maximum allowable under applicable law, then, ipso facto, as of the date of this Agreement, Borrower are and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrower in excess of such legal maximum, whenever received, shall be applied to reduce the principal balance of the Obligations to the extent of such excess. 2.7 Cash Management. --------------- (a) Borrower shall (i) establish and maintain cash management services of a type and on terms satisfactory to Agent at one or more of the banks set forth on Schedule 2.7(a) (each a "Cash Management Bank"), and shall --------------- -------------------- request in writing and otherwise take such reasonable steps to ensure that all of its Account Debtors (including, without limitation, "JSL Partners," the Department of Defense and the "Kid's Diapers Account") forward payment of the amounts owed by them directly to such Cash Management Bank; provided however, ---------------- that Borrower may continue to maintain the Hong Kong Bank of Canada bank 45 account (A) but unless and until a Cash Management Agreement for such account is delivered to Agent, Borrower (1) shall direct Wal-Mart Canada to re-direct its payments to a Cash Management Bank and (2) not less than once per week, Borrower shall initiate a wire transfer of such funds on deposit in such account to a Cash Management Bank, and (B) if such Cash Management Agreement is not received within 30 days of the Closing Date, Borrower shall close such account, (ii) deposit all Collections and other amounts received by Borrower directly from any Account Debtor or any other source, including, without limitation, all cash received from Affiliates, immediately upon receipt, into such Cash Management Bank, and (iii) deposit or cause to be deposited promptly, and in any event no later than the first Business Day after the date of receipt thereof, all Collections (including those sent directly by Account Debtors to a Cash Management Bank) into a bank account in Agent's name (a "Cash Management --------------- Account") at one of the Cash Management Banks. - ------- (b) Each Cash Management Bank shall establish and maintain Cash Management Agreements with Agent and Borrower, in form and substance acceptable to Agent. Each such Cash Management Agreement shall provide, among other things, that (i) all items of payment deposited in such Cash Management Account and proceeds thereof are held by such Cash Management Bank as agent or bailee-in- possession for Agent, (ii) the Cash Management Bank has no rights of setoff or recoupment or any other claim against the applicable Cash Management Account, other than for payment of its service fees and other charges directly related to the administration of such Cash Management Account and for returned checks or other items of payment, and (iii) it immediately will forward by daily sweep all amounts in the applicable Cash Management Account to the Agent's Account. (c) So long as no Default or Event of Default has occurred and is continuing, Borrower may amend Schedule 2.7(a) to add or replace a Cash --------------- Management Account Bank or Cash Management; provided, however, that (i) such -------- ------- prospective Cash Management Bank shall be satisfactory to Agent and Agent shall have consented in writing in advance to the opening of such Cash Management Account with the prospective Cash Management Bank, and (ii) prior to the time of the opening of such Cash Management Account, Borrower and such prospective Cash Management Bank shall have executed and delivered to Agent a Cash Management Agreement. Borrower shall close any of its Cash Management Accounts (and establish replacement cash management accounts in accordance with the foregoing sentence) promptly and in any event within 30 days of notice from Agent that the creditworthiness of any Cash Management Bank is no longer acceptable in Agent's reasonable judgment, or as promptly as practicable and in any event within 60 days of notice from Agent that the operating performance, funds transfer, or availability procedures or performance of the Cash Management Bank with respect to Cash Management Accounts or Agent's liability under any Cash Management Agreement with such Cash Management Bank is no longer acceptable in Agent's reasonable judgment, provided further, that with respect to the account with -------- ------- account number 1lF-07183 WCMA maintained at Merrill Lynch International, Borrower shall not keep in excess of $50,000 in such account at any time. 46 Additionally, at the request of Agent, Borrower shall deliver to Agent an agreement to obtain a first priority perfected interest in such account. (d) The Cash Management Accounts shall be cash collateral accounts, with all cash, checks and similar items of payment in such accounts securing payment of the Obligations, and in which Borrower is hereby deemed to have granted a Lien to Agent. 2.8 Crediting Payments; Float Charge. The receipt of any payment item by -------------------------------- Agent (whether from transfers to Agent by the Cash Management Banks pursuant to the Cash Management Agreements or otherwise) shall not be considered a payment on account unless such payment item is a wire transfer of immediately available federal funds made to the Agent's Account or unless and until such payment item is honored when presented for payment. Should any payment item not be honored when presented for payment, then Borrower shall be deemed not to have made such payment and interest shall be calculated accordingly. Anything to the contrary contained herein notwithstanding, any payment item shall be deemed received by Agent only if it is, received into the Agent's Account on a Business Day on or before 2:00 p.m. (Georgia time). If any payment item is received into the Agent's Account on a non-Business Day or after 2:00 p.m. (Georgia time) on a Business Day, it shall be deemed to have been received by Agent as of the opening of business on the immediately following Business Day. From and after the Closing Date, Agent shall be entitled to charge Borrower for 1 Business Day of `clearance' or `float' at the rate applicable to Base Rate Loans under Section 2.6 on all Collections that are received by Borrower (regardless of - ----------- whether forwarded by the Cash Management Banks to Agent). This across-the-board 1 Business Day clearance or float charge on all Collections is acknowledged by the parties to constitute an integral aspect of the pricing of the financing of Borrower and shall apply irrespective of whether or not there are any outstanding monetary Obligations; the effect of such clearance or float charge being the equivalent of charging 1 Business Day of interest on such Collections. The parties acknowledge and agree that the economic benefit of the foregoing provisions of this Section 2.8 shall be for the exclusive benefit of Agent. ----------- 2.9 Designated Account. Agent is authorized to make the Advances and ------------------ Capital Expenditure Loans and borrowings under the Term Loan, and Issuing Lender is authorized to issue the Letters of Credit, under this Agreement based upon telephonic or other instructions received from anyone purporting to be an Authorized Person, or without instructions if pursuant to Section 2.6(d). -------------- Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrower and made by Agent or the Lenders hereunder. Unless otherwise agreed by Agent and Borrower in writing, the proceeds of the Term Loan and any Advance, Capital Expenditure Loan, Agent Advance, or Swing Loan requested by Borrower and made by Agent or the Lenders hereunder shall be made to the Designated Account. 2.10 Maintenance of Loan Account; Statements of Obligations. Agent shall ------------------------------------------------------ maintain an account on its books in the name of Borrower (the "Loan Account") on ------------ which 47 Borrower will be charged with the Term Loan, all Advances (including Agent Advances and Swing Loans) made by Agent, Swing Lender, or the Lenders to Borrower or for Borrower's account, the Letters of Credit issued by Issuing Lender for Borrower's account, and with all other payment Obligations hereunder or under the other Loan Documents, including, accrued interest, fees and expenses, and Lender Group Expenses. In accordance with Section 2.8, the Loan ----------- Account will be credited with all payments received by Agent from Borrower or for Borrower's account, including all amounts received in the Agent's Account from any Cash Management Bank. Agent shall render statements regarding the Loan Account to Borrower, including principal, interest, fees, and including an itemization of all charges and expenses constituting Lender Group Expenses owing, and such statements shall be conclusively presumed to be correct and accurate and constitute an account stated between Borrower and the Lender Group unless, within 30 days after receipt thereof by Borrower, Borrower shall deliver to Agent written objection thereto describing the error or errors contained in any such statements. 2.11 Fees. Borrower shall pay to Agent the following fees and charges, ---- which fees and charges shall be non-refundable when paid (irrespective of whether this Agreement is terminated thereafter) and shall be apportioned among the Lenders in accordance with the terms of letter agreements between Agent and individual Lenders: (a) Unused Line Fee. On the first day of each month during the term of this Agreement, payable in arrears, an unused line fee in an amount equal to 0.375% per annum times the result of (a) the average Maximum Revolver Amount during the immediately preceding month, less (b) the sum of (i) the average Daily Balance of Advances that were outstanding during the immediately preceding month, plus (ii) the average Daily Balance of the Letter of Credit Usage during the immediately preceding month, plus (iii) the average Daily Balance of Capital Expenditure Loans that were outstanding during the immediately preceding month. (b) Fee Letter Fees. As and when due and payable under the terms of the Fee Letter, Borrower shall pay to Agent the fees set forth in the Fee Letter, and (c) Audit, Appraisal, and Valuation Charges. For the separate account of Agent, audit, appraisal, and valuation fees and charges as follows, (i) a fee of $750 per day, per auditor, plus out-of-pocket expenses for each financial audit of Borrower performed by personnel employed by Agent, (ii) if implemented, a one time charge of $3,000 plus out-of-pocket expenses for expenses for the establishment of electronic collateral reporting systems; provided, however, that if Borrower implements such electronic collateral - -------- ------- reporting system within 180 days of the date hereof, Agent shall discount such fee by an amount set by Agent in its determination, (iii) a fee of $1,500 per day per appraiser, plus out-of-pocket expenses, for each appraisal of the Collateral performed by personnel employed by Agent, and (iv) the actual charges paid or incurred by Agent if it elects to employ the services of one 48 or more third Persons to perform financial audits of Borrower, to appraise the Collateral, or any portion thereof, or to assess Borrower's business valuation. 2.12 Letters of Credit ----------------- (a) Subject to the terms and conditions of this Agreement, the Issuing Lender agrees to issue letters of credit for the account of Borrower (each, an "L/C") or to purchase participations or execute indemnities or --- reimbursement obligations (each such undertaking, an "L/C Undertaking") with --------------- respect to letters of credit issued by an Underlying Issuer (as of the Closing Date, the prospective Underlying Issuer is to be Wells Fargo) for the account of Borrower. To request the issuance of an L/C or an L/C Undertaking (or the amendment, renewal, or extension of an outstanding L/C or L/C Undertaking), Borrower shall hand deliver or telecopy (or transmit by electronic communication, if arrangements for doing so have been approved by the Issuing Lender) to the Issuing Lender and Agent (reasonably in advance of the requested date of issuance, amendment, renewal, or extension) a notice requesting the issuance of an L/C or L/C Undertaking, or identifying the L/C or L/C Undertaking to be amended, renewed, or extended, the date of issuance, amendment, renewal, or extension, the date on which such L/C or L/C Undertaking is to expire, the amount of such L/C or L/C Undertaking, the name and address of the beneficiary thereof (or the beneficiary of the Underlying Letter of Credit, as applicable), and such other information as shall be necessary to prepare, amend, renew, or extend such L/C or L/C Undertaking. If requested by the Issuing Lender, Borrower also shall be an applicant under the application with respect to any Underlying Letter of Credit that is to be the subject of an L/C Undertaking. The Issuing Lender shall have no obligation to issue a Letter of Credit if any of the following would result after giving effect to the requested Letter of Credit: (i) the Letter of Credit Usage would exceed $2,000,000, or (ii) the Letter of Credit Usage would exceed the Maximum Revolver Amount less than the extended outstanding amount of Advances, and Capital Expenditure Loan. Borrower and the Lender Group acknowledge and agree that certain Underlying Letters of Credit may be issued to support letters of credit that already are outstanding as of the Closing Date. Each Letter of Credit (and corresponding Underlying Letter of Credit) shall have an expiry date no 1ater than 30 days prior to the Maturity Date and all such Letters of Credit (and corresponding Underlying Letter of Credit) shall be in form and substance acceptable to the Issuing Lender (in the exercise of its Permitted Discretion), including the requirement that the amounts payable thereunder must be payable in Dollars. If Issuing Lender is obligated to advance funds under a Letter of Credit, Borrower immediately shall reimburse such L/C Disbursement to Issuing Lender by paying to Agent an amount equal to such L/C Disbursement not later than 2:00 p.m., Georgia time, on the date that such L/C Disbursement is made, if Borrower shall have received written or telephonic notice of such L/C Disbursement prior to 1:00 p.m., Georgia time, on such date, 49 or, if such notice has not been received by Borrower prior to such time on such date, then not later than 2:00 p.m., Georgia time, on (i) the Business Day that Borrower receives such notice, if such notice is received prior to 1:00 p.m., Georgia time, on the date of receipt, and, in the absence of such reimbursement, the L/C Disbursement immediately and automatically shall be deemed to be an Advance hereunder and, thereafter, shall bear interest at the rate then applicable to Advances that are Base Rate Loans under Section 2.6. To the extent ----------- an L/C Disbursement is deemed to be an Advance hereunder, Borrower's obligation to reimburse such L/C Disbursement shall be discharged and replaced by the resulting Advance. Promptly following receipt by Agent of any payment from Borrower pursuant to this paragraph, Agent shall distribute such payment to the Issuing Lender or, to the extent that Lenders have made payments pursuant to Section 2.12(c) to reimburse the Issuing Lender, then to such Lenders and the - -------------- Issuing Lender as their interest may appear. (b) Promptly following receipt of a notice of L/C Disbursement pursuant to Section 2.12(a), each Lender with a Revolver Commitment agrees to --------------- fund its Pro Rata Share of any Advance deemed made pursuant to the foregoing subsection on the same terms and conditions as if Borrower had requested such Advance and Agent shall promptly pay to Issuing Lender the amounts so received by it from the Lenders. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Lender or the Lenders with Revolver Commitment, the Issuing Lender shall be deemed to have granted to each Lender with a Revolver Commitment, and each Lender with a Revolver Commitment shall be deemed to have purchased, a participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit, and each such Lender agrees to pay to Agent, for the account of the Issuing Lender, such Lender's Pro Rata Share of any payments made by the Issuing Lender under such Letter of Credit. In consideration and in furtherance of the foregoing, each Lender with a Revolver Commitment hereby absolutely and unconditionally agrees to pay to Agent, for the account of the Issuing Lender, such Lender's Pro Rata Share of each L/C Disbursement made by the Issuing Lender and not reimbursed by Borrower on the date due as provided in clause (a) of this Section, or of any reimbursement payment required to be refunded to Borrower for any reason. Each Lender with a Revolver Commitment acknowledges and agrees that its obligation to deliver to Agent, for the account of the Issuing Lender, an amount equal to its respective Pro Rata Share pursuant to this Section 2.12(b) --------------- shall be absolute and unconditional and such remittance shall be made notwithstanding the occurrence or continuation of an Event of Default or Default or the failure to satisfy any condition set forth in Section 3 hereof. If any --------- such Lender fails to make available to Agent the amount of such Lender's Pro Rata Share of any payments made by the Issuing Lender in respect of such Letter of Credit as provided in this Section, Agent (for the account of the Issuing Lender) shall be entitled to recover such amount on demand from such Lender together with interest thereon at the Defaulting Lender Rate until paid in full. 50 (c) Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless from any loss, cost, expense, or liability, and reasonable attorneys fees incurred by the Lender Group arising out of or in connection with any Letter of Credit; provided, however, that Borrower shall not be obligated -------- ------- hereunder to indemnify for any loss, cost, expense, or liability that is caused by the gross negligence or willful misconduct of the Issuing Lender or any other member of the Lender Group. Borrower agrees to be bound by the Underlying Issuer's regulations and interpretations of any Underlying Letter of Credit or by Issuing Lender's interpretations of any L/C issued by Issuing Lender to or for Borrower's account, even though this interpretation may be different from Borrower's own, and Borrower understands and agrees that the Lender Group shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower's instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto. Borrower understands that the L/C Undertakings may require Issuing Lender to indemnify the Underlying Issuer for certain costs or liabilities arising out of claims by Borrower against such Underlying Issuer. Borrower hereby agrees to indemnify, save, defend, and hold the Lender Group harmless with respect to any loss, cost, expense (including reasonable attorneys fees), or liability incurred by the Lender Group under any L/C Undertaking as a result of the Lender Group's indemnification of any Underlying Issuer; provided, however, that Borrower shall -------- ------- not be obligated hereunder to indemnify for any loss, cost, expense, or liability that is caused by the gross negligence or willful misconduct of the Issuing Lender or any other member of the Lender Group. (d) Borrower hereby authorizes and directs any Underlying Issuer to deliver to the Issuing Lender all instruments, documents, and other writings and property received by such Underlying Issuer pursuant to such Underlying Letter of Credit and to accept and rely upon the Issuing Lender's instructions with respect to all matters arising in connection with such Underlying Letter of Credit and the related application. (e) Any and all charges, commissions, fees, and costs incurred by the Issuing Lender relating to Underlying Letters of (Credit shall be Lender Group Expenses for purposes of this Agreement and immediately shall be reimbursable by Borrower to Agent for the account of the Issuing Lender; it being acknowledged and agreed by Borrower that, as of the Closing Date, the issuance charge imposed by the prospective Underlying Issuer is .825% per annum times the face amount of each Underlying Letter of Credit, that such issuance charge may be changed from time to time, and that the Underlying Issuer also imposes a schedule of charges for amendments, extensions, drawings, and renewals. (f) If by reason of (i) any change in any applicable law, treaty, rule, or regulation or any change in the interpretation or application thereof by any Governmental Authority, or (ii) compliance by the Underlying Issuer or the Lender Group with any direction, request, or requirement (irrespective of whether having the force of law) of any Governmental Authority or monetary authority including, Regulation D of the Federal Reserve Board as from time to time in effect (and any successor thereto): 51 (i) any reserve, deposit, or similar requirement is or shall be imposed or modified in respect of any Letter of Credit issued hereunder, or (ii) there shall be imposed on the Underlying Issuer or the Lender Group any other condition regarding any Underlying Letter of Credit or any Letter of Credit issued pursuant hereto; and the result of the foregoing is to increase, directly or indirectly, the cost to the Lender Group of issuing, making, guaranteeing, or maintaining any Letter of Credit or to reduce the amount receivable in respect thereof by the Lender Group, then, and in any such case, Agent may, at any time within a reasonable period after the additional cost is incurred or the amount received is reduced, notify Borrower, and Borrower shall pay on demand such amounts as Agent may specify to be necessary to compensate the Lender Group for such additional cost or reduced receipt, together with interest on such amount from the date of such demand until payment in full thereof at the rate then applicable to Base Rate Loans hereunder. The determination by Agent of any amount due pursuant to this Section, as set forth in a certificate setting forth the calculation thereof in reasonable detail, shall, in the absence of manifest or demonstrable error, be final and conclusive and binding on all of the parties hereto. 2.13 LIBOR Option. ------------ (a) Interest and Interest Payment Dates. In lieu of having interest charged at the rate based upon the Base Rate, Borrower shall have the option (the "LIBOR Option") to have interest on all or a portion of the Advances, Term ------------ Loan or Capital Expenditure Loans be charged at the LIBOR Rate. Interest on LIBOR Rate Loans shall be payable on the earliest of (i) the last day of the Interest Period applicable thereto, (ii) the occurrence of an Event of Default in consequence of which the Required Lenders or Agent on behalf thereof elect to accelerate the maturity of the Obligations, (iii) termination of this Agreement pursuant to the terms hereof, or (iv) the first day of each month that such LIBOR Rate Loan is outstanding. On the last day of each applicable Interest Period, unless Borrower properly has exercised the LIBOR Option with respect thereto, the interest rate applicable to such LIBOR Rate Loan automatically shall convert to the rate of interest then applicable to Base Rate Loans of the same type hereunder. At any time that an Event of Default has occurred and is continuing, Borrower no longer shall have the option to request that Advances or Capital Expenditure Loans or portions of the Term Loan bear interest at the LIBOR Rate and Agent shall have the right to convert the interest rate on all outstanding LIBOR Rate Loans to the rate then applicable to Base Rate Loans hereunder. (b) LIBOR Election. (i) Borrower may, at any time and from time to time, so long as no Event of Default has occurred and is continuing, elect to exercise the LIBOR Option by notifying Agent prior to 2:00 p.m. (Georgia time) at least two (2) 52 Business Days prior to the commencement of the proposed Interest Period (the "LIBOR Deadline"). Notice of Borrower's election of the -------------- LIBOR Option for a permitted portion of the Advances or the Term Loan and an Interest Period pursuant to this Section shall be made by delivery to Agent of a LIBOR Notice received by Agent before the LIBOR Deadline, or by telephonic notice received by Agent before the LIBOR Deadline (to be confirmed by delivery to Agent of a LIBOR Notice received by Agent prior to 5:00 p.m. (Georgia time) on the same day. Promptly upon its receipt of each such LIBOR Notice, Agent shall provide a copy thereof to each of the Lenders having a Revolver Commitment. (ii) Each LIBOR Notice shall be irrevocable and binding on Borrower. In connection with each LIBOR Rate Loan, Borrower shall indemnify, defend, and hold Agent and the Lenders harmless against any loss, cost, or expense incurred by Agent or any Lender as a result of (a) the payment of any principal of any LIBOR Rate Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any LIBOR Rate Loan other than on the last day of the Interest Period applicable thereto, or (c) the failure to borrow, convert, continue or prepay any LIBOR Rate Loan on the date specified in any LIBOR Notice delivered pursuant hereto (such losses, costs, and expenses, collectively, "Funding Losses"). Funding Losses shall, with respect to Agent or any -------------- Lender, be deemed to equal the amount determined by Agent or such Lender to be the excess, if any, of (i) the amount of interest that would have accrued on the principal amount of such LIBOR Rate Loan had such event not occurred, at the LIBOR Rate that would have been applicable thereto, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period therefor), minus (ii) the amount of interest that would accrue on such principal amount for such period at the interest rate which Agent or such Lender would be offered were it to be offered, at the commencement of such period, Dollar deposits of a comparable amount and period in the London interbank market. A certificate of Agent or a Lender delivered to Borrower setting forth any amount or amounts that Agent or such Lender is entitled to receive pursuant to this Section shall be conclusive absent manifest error. (iii) Borrower shall have not more than 5 LIBOR Rate Loans in effect at any given time. Borrower only may exercise the LIBOR Option for LIBOR Rate Loans of at least $1,000,000 and integral multiples of $500,000 in excess thereof. 53 (c) Prepayments. Borrower may prepay LIBOR Rate Loans at any time; provided, however, that in the event that LIBOR Rate Loans are prepaid on -------- ------- any date that is not the last day of the Interest Period applicable thereto, including as a result of any automatic prepayment through the required application by Agent of proceeds of Collections in accordance with Section ------- 2.4(b) or for any other reason, including early termination of the term of this - ------ Agreement or acceleration of the Obligations pursuant to the terms hereof, Borrower shall indemnify, defend, and hold Agent and the Lenders and their Participants harmless against any and all Funding Losses in accordance with clause (b)(ii) above. (d) Special Provisions Applicable to LIBOR Rate. (i) The LIBOR Rate may be adjusted by Agent with respect to any Lender on a prospective basis to take into account any additional or increased costs to such Lender of maintaining or obtaining any eurodollar deposits or increased costs due to changes in applicable law occurring subsequent to the commencement of the then applicable Interest Period, including changes in tax laws (except changes of general applicability in corporate income tax laws) and changes in the reserve requirements imposed by the Board of Governors of the Federal Reserve System (or any successor), excluding the Reserve Percentage, which additional or increased costs would increase the cost of funding loans bearing interest at the LIBOR Rate. In any such event, the affected Lender shall give Borrower and Agent notice of such a determination and adjustment and Agent promptly shall transmit the notice to each other Lender and, upon its receipt of the notice from the affected Lender, Borrower may, by notice to such affected Lender (y) require such Lender to furnish to Borrower a statement setting forth the basis for adjusting such LIBOR Rate and the method for determining the amount of such adjustment, or (z) repay the LIBOR Rate Loans with respect to which such adjustment is made (together with any Funding Losses due under clause (b)(ii) above). (ii) In the event that any change in market conditions or any law, regulation, treaty, or directive, or any change therein or in the interpretation of application thereof, shall at any time after the date hereof, in the reasonable opinion of any Lender, make it unlawful or impractical for such Lender to fund or maintain LIBOR Advances or to continue such funding or maintaining, or to determine or charge interest rates at the LIBOR Rate, such Lender shall give notice of such changed circumstances to Agent and Borrower and Agent promptly shall transmit the notice to each other Lender and (y) in the case of any LIBOR Rate Loans of such Lender that are outstanding, the date specified in such Lender's notice shall be deemed to be the last day of the Interest Period of such LIBOR Rate Loans, and interest upon the LIBOR Rate Loans of such Lender thereafter shall accrue interest at the rate then applicable to Base Rate Loans, and (z) Borrower shall not be 54 entitled to elect the LIBOR Option until such Lender determines that it would no longer be unlawful or impractical to do so. (e) No Requirement of Matched Funding. Anything to the contrary contained herein notwithstanding, neither Agent, nor any Lender, nor any of their Participants, is required actually to acquire eurodollar deposits to fund or otherwise match fund any Obligation as to which interest accrues at the LIBOR Rate. The provisions of this Section shall apply as if each Lender or its Participants had match funded any Obligation as to which interest is accruing at the LIBOR Rate by acquiring eurodollar deposits for each Interest Period in the amount of the LIBOR Rate Loans. 2.14 Capital Requirements. If, after the date hereof, any Lender -------------------- determines that (i) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change in the interpretation or application thereof by any Governmental Authority charged with the administration thereof, or (ii) compliance by such Lender or its parent bank holding company with any guideline, request, or directive of any such entity regarding capital adequacy (whether or not having the force of law), the effect of reducing the return on such Lender's or such holding company's capital as a consequence of such Lender's Commitments hereunder to a level below that which such Lender or such holding company could have achieved but for such adoption, change, or compliance (taking into consideration such Lender's or such holding company's then existing policies with respect to capital adequacy and assuming the full utilization of such entity's capital) by any amount deemed by such Lender to be material, then such Lender may notify Borrower and Agent thereof. Following receipt of such notice, Borrower agrees to pay such Lender on demand the amount of such reduction of return of capital as and when such reduction is determined, payable within 90 days after presentation by such Lender of a statement in the amount and setting forth in reasonable detail such Lender's calculation thereof and the assumptions upon which such calculation was based (which statement shall be deemed true and correct absent manifest error). In determining such amount, such Lender may use any reasonable averaging and attributior methods. If Borrower becomes obligated to pay additional amounts to any Lender pursuant to this section as a result of any condition described in this section which is not generally applicable to all Lenders, then, unless the Lender to which such conditions apply has theretofore taken steps to remove or cure, and has removed or cured, within a reasonable time period the conditions creating the cause for such obligation to pay such additional amounts, Borrower may, within four months of being notified of such condition, designate an Eligible Transferee which is willing to purchase all rights and obligations of such Lender and which is acceptable to Agent (such Eligible Transferee being herein called a "Replacement Lender") to purchase for cash all of the rights and obligations of such Lender under this Agreement, without recourse to or warranty (other than title) by, or expense to, such Lender for a purchase price equal to the outstanding principal amount of the Advances, Capital Expenditure Loans and Term Loan payable to such Lender plus any accrued but unpaid interest and fees on such Advances, Capital Expenditure Loans and Term Loan, expense reimbursements and indemnities in respect of 55 that Lender's Commitment under the Loan Documents, whereupon the Commitment of such Lender shall be irrevocably terminated in whole (which shall include the termination in whole of the obligation of such Lender to make Advances and Capital Expenditure Loans to Borrower). Such Lender shall consummate such sale with such terms within a reasonable time not exceeding ten Business Days from the date Borrower shall have designated a Replacement Lender acceptable to Agent, and whereupon such Lender shall no longer be a party hereto or have any obligations or rights hereunder (except rights which, pursuant to the provisions of this Agreement, survive the termination of this Agreement and the repayment of the Obligations), and the Replacement Lender shall succeed to such obligations and rights. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 Conditions Precedent to the Initial Extension of Credit. The ------------------------------------------------------- obligation of the Lender Group (or any member thereof) to make the initial Advance (or otherwise to extend any credit provided for hereunder including, without limitation, the Term Loan and any Capital Expenditure Loan), is subject to the fulfillment, to the satisfaction of Agent, of each of the conditions precedent set forth below: (a) the Closing Date shall occur on or before March 31, 2001; (b) Agent shall have received all financing statements required by Agent, duly executed by Borrower, and Agent shall have received searches reflecting the filing of all such financing statements; (c) Agent shall have received each of the following documents, in form and substance satisfactory to Agent, duly executed, and each such document shall be in full force and effect: (i) the Control Agreements, (ii) the Disbursement Letter, (iii) the Fee Letter, (iv) the Cash Management Agreements, (v) the Mortgages, (vi) the Intellectual Property Security Agreement, (vii) the Parent Pledge Agreement, (viii) the Elmbay Pledge Agreement, (ix) the Parent Security Agreement, 56 (x) the Parent Guaranty, (xi) the Assignment of Note, together with the original Amended and Restated Wang Note, (xii) the Acknowledgement of Licenses, (xiii) the Affiliate Subordination Agreement, (xiv) the Subordination Agreements, and (xv) the Officers' Certificate; (d) Agent shall have received a certificate from the Secretary of Borrower attesting to the resolutions of Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which Borrower is a party and authorizing specific officers of such Borrower to execute the same; (e) Agent shall have received copies of Borrower's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of Borrower; (f) Agent shall have received a certificate of status with respect to Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of Borrower, which certificate shall indicate that Borrower is in good standing in such jurisdiction; (g) Agent shall have received certificates of status with respect to Borrower, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of Borrower) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that Borrower is in good standing in such jurisdictions; (h) Agent shall have received a certificate from the Secretary of Holdco attesting to the resolutions of Holdco's Board of Directors authorizing its execution, delivery, and performance of the Loan Documents to which Holdco is a party and authorizing specific officers of Holdco to execute the same; (i) Agent shall have received copies of Holdco's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of Holdco; (j) Agent shall have received a certificate of status with respect to Holdco, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate 57 officer of the jurisdiction of organization of Holdco, which certificate shall indicate that Holdco is in good standing in such jurisdiction; (k) Agent shall have received certificates of status with respect to Holdco, each dated within 30 days of the Closing Date, such certificates to be issued by the appropriate officer of the jurisdictions (other than the jurisdiction of organization of Holdco) in which its failure to be duly qualified or licensed would constitute a Material Adverse Change, which certificates shall indicate that Holdco is in good standing in such jurisdictions; (l) Agent shall have received a certificate of insurance, together with the endorsements thereto, as are required by Section 6.8, the form and substance of ----------- which shall be satisfactory to Agent; (m) Agent shall have received satisfactory evidence (including a certificate of the chief financial officer of Borrower) that all tax returns required to be filed by Borrower have been timely filed and all taxes upon Borrower or its properties, assets, income, and franchises (including Real Property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (n) Agent shall have completed its business, legal, and collateral due diligence, including (i) a collateral audit and review of Borrower's books and records (including the books and records relating to the Acquired Assets) and verification of Borrower's representations and warranties to the Lender Group, the results of which shall be satisfactory to Agent, (ii) an inspection of each of the locations where Inventory or Acquired Assets are located, the results of which shall be satisfactory to Agent, and (iii) confirmation that all Equipment is not subject to any encumbrance; (o) Agent shall have received an appraisal of the Net Liquidation Percentage applicable to Borrower's Inventory and an appraisal of Borrower's Equipment and the Acquired Assets, the results of which shall be satisfactory to Agent; (p) Agent shall have received Borrower's Closing Date Business Plan; (q) Borrower shall pay all Lender Group Expenses incurred in connection with the transactions evidenced by this Agreement; (r) Agent shall have received (i) appraisals of the Real Property Collateral satisfactory to Agent, and (ii) mortgagee title insurance policies (or marked commitments to issue the same) for the Real Property Collateral issued by a title insurance company satisfactory to Agent (each a "Mortgage Policy" and, collectively, the "Mortgage Policies") in amounts satisfactory to Agent assuring Agent that the Mortgages on such Real Property Collateral are valid and enforceable first priority mortgage Liens on such Real Property 58 Collateral free and clear of all defects and encumbrances except Permitted Liens, and the Mortgage Policies otherwise shall be in form and substance satisfactory to Agent; (s) Agent shall have received a phase-I environmental report, environmental indemnity, and a real estate survey with respect to each parcel composing the Real Property Collateral; the environmental consultants and surveyors retained for such reports or surveys, the scope of the reports or surveys, and the results thereof shall be acceptable to Agent; (t) Agent shall have received all Collateral Access Agreements with respect to the following locations: 1045 Holland Road, Marion, Ohio; 333 Joseph Street, Marion, Ohio; "Building 59", Vancouver, Washington; "Building 55", Vancouver, Washington; Memorial Highway, Houston, Texas; and Oconto Falls, Wisconsin. (u) Agent shall have received copies of lease assignment and assumption agreements with respect to the following locations: 333 Joseph Street, Marion, Ohio; "Building 59", Vancouver, Washington; "Building 55", Vancouver, Washington; and Memorial Highway, Houston, Texas. (v) Agent shall have received opinions of Counsel for Borrower (including Borrower's local counsel in the State of Georgia) and Holdco, each in form and substance satisfactory to Agent; (w) Borrower shall have received the proceeds of the Subordinated Note A and Subordinated Note B (in a minimum amount of $20,000,000) and in such greater amount as may be necessary to consummate the contemplated acquisition, on terms and conditions satisfactory to Agent; (x) Borrower shall have the Required Availability after giving effect to the initial extensions of credit hereunder; (Y) Borrower shall pay all Lender Group Expenses incurred in connection with the transactions evidenced by this Agreement; (z) Borrower shall have engaged the Consultant for a minimum of 180 days following the Closing Date, all on terms satisfactory to Agent; (aa) Agent shall have received duly executed, or entered, as the case may be, copies of the Asset Purchase Agreement accompanied by true and correct certified copies of all bid procedures orders and the Order of the Court approving the Drypers Acquisition contemplated therein, both in form and substance acceptable to Agent, but which Order shall provide for the sale of the Acquired Assets free and clear of all liens, security interests, claims and encumbrances (including, without limitation, ad valorem tax liens), other than those permitted by Agent, pursuant to Section 363(f) of the Bankruptcy Code, and contain 59 findings pursuant to Section 363(m) of the Bankruptcy Code and such Asset Purchase Agreement shall have been authorized by all necessary corporate action on the part of Borrower and Borrower shall have received all necessary governmental and other approvals (if any shall be required) relating to same, and such acquisition, assignment and assumption shall have been authorized by a final order of the Court, which shall not (i) have been stayed or reversed, or ordered to be reconsidered, or (ii) contravene or conflict with the organizational documents of Borrower or any provision of law, any presently existing requirement or restriction imposed by any judicial, arbitral, regulatory or governmental instrumentality or constitute a default under, or result in the creation or imposition of any lien other than liens permitted by Agent upon any property or assets of Borrower under any agreement, instrument or indenture by Borrower is bound; (bb) To the extent any "escrow agreement" or "escrow account" is entered into by Borrower and Drypers pursuant to the Asset Purchase Agreement to accommodate a "Working Capital Adjustment" (as defined in the Asset Purchase Agreement) Borrower shall deliver to Agent copies of such escrow documents and agreements, together with an acknowledgement of Agent's security interest in such "escrow account". (cc) Agent shall have received (i) copies of Borrower's royalty and private label manufacturer agreements and license agreements with Kimberly- Clark, Procter & Gamble, the Collegiate Licensing Products Company and Disposable Soft Goods (UK) plc, each in form and substance satisfactory to Agent, and (ii) consents, in form and substance reasonably satisfactory to Agent, from Proctor & Gamble and Disposable Soft Goods (UK) plc, acknowledging and consenting to Borrower's collateral assignment to Agent of Borrower's rights under the license agreements between Borrower and such licensors; (dd) Borrower shall have received all licenses, approvals or evidence of other actions required by any Governmental Authority in connection with the execution and delivery by Borrower of this Agreement or any other Loan Document or with the consummation of the transactions contemplated hereby and thereby; (ee) Agent shall have received a letter from Associated Hygienic Products, Inc. confirming it does not own any assets located in or about the State of Georgia other than books and records, and that such books and records are segregated from Borrower's books and records and clearly identified as such; and (ff) all other documents and legal matters in connection with the transactions contemplated by this Agreement shall have been delivered, executed, or recorded and shall be in form and substance satisfactory to Agent. 3.2 Conditions Subsequent to the Initial Extension of Credit. The -------------------------------------------------------- obligation of the Lender Group (or any member thereof) to continue to make Advances (or otherwise extend credit hereunder including, without limitation, any Capital Expenditure Loan) is subject to the fulfillment, on or before the date applicable thereto, of each of the conditions 60 subsequent set forth below (the failure by Borrower to so perform or cause to be performed constituting an Event of Default): (a) within 30 days of the Closing Date, Borrower shall deliver to Agent certified copies of the policies of insurance, together with the endorsements thereto, as are required by Section 6.8, the form and substance of ----------- which shall be satisfactory to Agent and its counsel; and (b) Within 90 days of the Closing Date, Borrower will provide a satisfactory opening consolidated balance sheet audited by an accounting firm satisfactory to Agent. 3.3 Conditions Precedent to all Extensions of Credit. The obligation of ------------------------------------------------ the Lender Group (or any member thereof) to make all Advances (or to extend any other credit hereunder, including all extensions of credit on the Closing Date) shall be subject to the following conditions precedent: (a) the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects on and as of the date of such extension of credit, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), (b) no Default or Event of Default shall have occurred and be continuing on the date of such extension of credit, nor shall either result from the making thereof, (c) no injunction, writ, restraining order, or other order of any nature prohibiting, directly or indirectly, the extending of such credit shall have been issued and remain in force by any Governmental Authority against Borrower, Agent, any Lender, or any of their Affiliates, and (d) no Material Adverse Change shall have occurred. 3.4 Term. This Agreement shall become effective upon the execution and ---- delivery hereof by Borrower, Agent, and the Lenders and shall continue in full force and effect for a term ending on March 14, 2006 (the "Maturity Date"). The ------------- foregoing notwithstanding, the Lender Group, upon the election of the Required Lenders, shall have the right to terminate its obligations under this Agreement immediately and without notice upon the occurrence and during the continuation of an Event of Default. 3.5 Effect of Termination. On the date of termination of this Agreement, --------------------- all Obligations (including contingent reimbursement obligations of Borrower with respect to any outstanding Letters of Credit) immediately shall become due and payable without notice or demand. No termination of this Agreement, however, shall relieve or discharge Borrower of its duties, Obligations, or covenants hereunder and the Agent's Liens in the Collateral shall 61 remain in effect until all Obligations (other than Obligations that by their terms survive termination hereof) have been fully and finally discharged and the Lender Group's obligations to provide additional credit hereunder have been terminated. When this Agreement has been terminated and all of the Obligations have been fully and finally discharged and the Lender Group's obligations to provide additional credit under the Loan Documents have been terminated irrevocably, Agent will, at Borrower's sole expense, execute and deliver any UCC termination statements, lien releases, mortgage releases, re-assignments of trademarks, discharges of security interests, and other similar discharge or release documents (and, if applicable, in recordable form) as are reasonably necessary to release, as of record, the Agent's Liens and all notices of security interests and liens previously filed by Agent with respect to the Obligations. 3.6 Early Termination by Borrower. Borrower have the option, at any time ----------------------------- upon 90 days prior written notice to Agent, to terminate this Agreement by paying to Agent, for the benefit of the Lender Group, in cash, the Obligations (including either (i) providing cash collateral to be held by Agent for the benefit of those Lenders with a Revolver Commitment in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to the Issuing Lender), in full, together with the Applicable Prepayment Premium (to be allocated based upon letter agreements between Agent and individual Lenders). If Borrower has sent a notice of termination pursuant to the provisions of this Section, then the Commitments shall terminate and Borrower shall be obligated to repay the Obligations (including either (i) providing cash collateral to be held by Agent for the benefit of those Lenders with a Revolver Commitment in an amount equal to 105% of the then extant Letter of Credit Usage, or (ii) causing the original Letters of Credit to be returned to the Issuing Lender), in full, together with the Applicable Prepayment Premium, on the date set forth as the date of termination of this Agreement in such notice. In the event of the termination of this Agreement and repayment of the Obligations at any time prior to the Maturity Date, for any other reason, including (a) termination upon the election of the Required Lenders to terminate after the occurrence of an Event of Default, (b) foreclosure and sale of Collateral, (c) sale of the Collateral in any Insolvency Proceeding, or (iv) restructure, reorganization or compromise of the Obligations by the confirmation of a plan of reorganization, or any other plan of compromise, restructure, or arrangement in any Insolvency Proceeding, then, in view of the impracticability and extreme difficulty of ascertaining the actual amount of damages to the Lender Group or profits lost by the Lender Group as a result of such early termination, and by mutual agreement of the parties as to a reasonable estimation and calculation of the lost profits or damages of the Lender Group, Borrower shall pay the Applicable Prepayment Premium to Agent (to be allocated based upon letter agreements between Agent and individual Lenders), measured as of the date of such termination. 4. CREATION OF SECURITY INTEREST. 62 4.1 Grant of Security Interest. Borrower hereby grants to Agent, for the -------------------------- benefit of the Lender Group, a continuing security interest in all of its right, title, and interest in all currently existing and hereafter acquired or arising Personal Property Collateral in order to secure prompt repayment of any and all of the Obligations in accordance with the terms and conditions of the Loan Documents and in order to secure prompt performance by Borrower of each of its covenants and duties under the Loan Documents. The Agent's Liens in and to the Personal Property Collateral shall attach to all Personal Property Collateral without further act on the part of Agent or Borrower. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for Permitted Dispositions, Borrower has no authority, express or implied, to dispose of any item or portion of the Collateral. 4.2 Negotiable Collateral. In the event that any Collateral, including --------------------- proceeds, is evidenced by or consists of Negotiable Collateral, and if and to the extent that perfection or priority of Agent's security interest is dependent on or enhanced by possession, Borrower, immediately upon the request of Agent, shall endorse and deliver physical possession of such Negotiable Collateral to Agent, provided, however that until an Event of Default has occurred and is -------- ------- continuing, Borrower shall be entitled to collect solely the interest paid with respect to the Amended and Restated Wang Note and deposit the same in the Cash Management Account. If an Event of Default shall have occurred and is continuing, any and all interest paid or payable in the form of cash, instruments or other property in respect of the Amended and Restated Wang Note shall be forthwith delivered to Agent to be applied in accordance with Section ------- 2.4(b)(i) and shall if received by Borrower, be received by Borrower in trust - --------- for the benefit of Agent, be segregated from the other property or funds of Borrower and be forthwith delivered to Agent by Borrower as Collateral under the terms of this Agreement in the same form as so received (with any necessary endorsements). 4.3 Collection of Accounts, General Intangibles, and Negotiable ----------------------------------------------------------- Collateral. At any time after the occurrence and during the continuation of an - ---------- Event of Default, Agent or Agent's designee may (a) notify Account Debtors of Borrower that the Accounts, chattel paper, or General Intangibles have been assigned to Agent or that Agent has a security interest therein, or (b) collect the Accounts, chattel paper, or General Intangibles directly and charge the collection costs and expenses to the Loan Account. Borrower agrees that it will hold in trust for the Lender Group, as the Lender Group's trustee, any Collections that it receives and immediately will deliver said Collections to Agent or a Cash Management Bank in their original form as received by Borrower. 4.4 Delivery of Additional Documentation Required. At any time upon the --------------------------------------------- request of Agent, Borrower, or Holdco, as the case may be, shall execute and deliver to Agent, any and all financing statements, original financing statements in lieu of continuation statements, fixture filings, security agreements, pledges, assignments (including, without limitation, assignments in connection with the Prior Loan Agreement and Prior Loan Documents), endorsements of certificates of title and all other documents (the "Additional 63 Documents") that Agent may request in its Permitted Discretion, in form and substance satisfactory to Agent, to perfect and continue perfected the Agent's Liens in the Collateral (whether now owned or hereafter arising or acquired), to create and perfect Liens in favor of Agent in any Real Property acquired after the Closing Date, and in order to fully consummate all of the transactions contemplated hereby and under the other Loan Documents. To the maximum extent permitted by applicable law, Borrower authorizes Agent to execute any such Additional Documents in Borrower's name and authorizes Agent to file such executed Additional Documents in any appropriate filing office. In addition, on such periodic basis as Agent shall reasonably require, Borrower shall (a) provide Agent with a report of all new patentable, copyrightable, or trademarkable materials acquired or generated by Borrower during the prior period, (b) cause all patents, copyrights, and trademarks acquired or generated by Borrower that are not already the subject of a registration with the appropriate filing office (or an application therefor diligently prosecuted) to be registered with such appropriate filing office in a manner sufficient to impart constructive notice of Borrower's ownership thereof, and (c) cause to be prepared, executed, and delivered to Agent supplemental schedules to the applicable Loan Documents to identify such patents, copyrights, and trademarks as being subject to the security interests created thereunder. 4.5 Power of Attorney. Borrower hereby irrevocably makes, constitutes, ----------------- and appoints Agent (and any of Agent's officers, employees, or agents designated by Agent) as Borrower's true and lawful attorney, with power to (a) if Borrower refuses to, or fails timely to execute and deliver any of the documents described in Section 4.4, sign the name of Borrower on any of the documents ----------- described in Section 4.4, (b) at any time that an Event of Default has occurred ----------- and is continuing, sign Borrower's name on any invoice or bill of lading relating to the Collateral, drafts against Account Debtors, or notices to Account Debtors, (c) send requests for verification of Accounts, (d) endorse Borrower's name on any Collection item that may come into the Lender Group's possession, (e) at any time that an Event of Default has occurred and is continuing, make, settle, and adjust all claims under Borrower's policies of insurance and make all determinations and decisions with respect to such policies of insurance, and (f) at any time that an Event of Default has occurred and is continuing, settle and adjust disputes and claims respecting the Accounts, chattel paper, or General Intangibles directly with Account Debtors, for amounts and upon terms that Agent determines to be reasonable, and Agent may cause to be executed and delivered any documents and releases that Agent determines to be necessary. The appointment of Agent as Borrower's attorney, and each and every one of its rights and powers, being coupled with an interest, is irrevocable until all of the Obligations have been fully and finally repaid and performed and the Lender Group's obligations to extend credit hereunder are terminated. 4.6 Right to Inspect. Agent and each Lender (through any of their --------------- respective officers, employees, or agents) shall have the right from time to time hereafter to inspect the Books and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, quality, value, condition of, or any other matter relating to, the 64 Collateral; provided, that if no Event of Default has occurred and is -------- continuing, Agent shall only conduct any such inspection or review of Borrower's Books and/or the Collateral during normal business hours, and provided further -------- ------- that Borrower shall cause to be performed by an appraiser satisfactory to Agent (a) on a semi-annual basis, updated appraisals of Borrower's Equipment, (b) on a quarterly basis, updated appraisals of Borrower's Inventory, and (c) on an annual basis, updated appraisals of Borrower's Real Property Collateral, in each case at Borrower's expense. 4.7 Control Agreements. Borrower agrees that it will not transfer assets ------------------ out of any Securities Accounts other than as permitted under Section 7.19 and, ------------ if to another securities intermediary, unless each of Borrower, Agent, and the substitute securities intermediary have entered into a Control Agreement. No arrangement contemplated hereby or by any Control Agreement in respect of any Securities Accounts or other Investment Property shall be modified by Borrower without the prior written consent of Agent. Upon the occurrence and during the continuance of a Default or Event of Default, Agent may notify any securities intermediary to liquidate the applicable Securities Account or any related Investment Property maintained or held thereby and remit the proceeds thereof to the Agent's Account. 4.8 Revised Article 9. Borrower acknowledges and agrees that, in ----------------- anticipation of the application to the transactions contemplated hereby, in one or more jurisdictions, of revised Article 9 of the Uniform Commercial Code ("Revised Article 9"): (a) Attachment. In applying the law of any jurisdiction in which Revised Article 9 is in effect, the Collateral includes all presently existing and hereafter acquired assets of Borrower, whether or not the type of Collateral is within the scope of Revised Article 9. The Collateral shall, without limitation, specifically include the following categories of assets as defined in Revised Article 9: goods (including inventory, equipment and any accessions thereto), instruments (including promissory notes), documents, accounts, chattel paper (whether tangible or electronic) deposit accounts, letter-of-credit rights (whether or not the letter of credit is evidenced by a writing), commercial tort claims, securities and all other investment property, general intangibles (including payment intangibles and software), supporting obligations and any and all proceeds of any thereof, wherever located, whether now owned and hereafter acquired. If Borrower shall, at any time, whether or not Revised Article 9 is in effect in any particular jurisdiction, acquire a commercial tort claim, as defined in Revised Article 9, seeking recovery in an amount in excess of $100,000, individually or in the aggregate, Borrower shall immediately notify Agent in a writing signed by Borrower and accompanied by a brief description of the commercial tort claim, granting to Agent in such writing a security interest therein and in the proceeds thereof, all upon the terms of this Agreement, with such writing to be in form and substance satisfactory to Agent. 65 (b) Perfection by Filing. Agent may at any time and from time to time, pursuant to the provisions of Section 4.1 and this Section 4.8, file financing ----------- ----------- statements, continuation statements and amendments thereto that describe the Collateral to include all presently existing and hereafter acquired assets of Borrower, or words of similar effect and which contain any other information required by Part 5 of Revised Article 9 for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment, including the type of Borrower's organization and any organization identification number issued to Borrower. Borrower agrees to furnish any such information to Agent immediately upon request. Any such financing statements, continuation statements or amendments may be signed by Agent on behalf of Borrower, and may be filed at any time in any jurisdiction whether or not Revised Article 9 is then in effect in that jurisdiction. (c) Other Perfection. Borrower shall at all times, and from time to time, whether or not Revised Article 9 is in effect in any particular jurisdiction, take such steps as Agent may reasonably request for Agent (a) to obtain an acknowledgment, in form and substance satisfactory to Agent, of any bailee having possession of any of the Collateral that the bailee holds such Collateral for Agent, (b) to obtain "control" of any investment property, deposit accounts, letter-of-credit rights or electronic chattel paper (as such terms are defined in Revised Article 9 with corresponding provisions in Rev. (S)(S) 9-104, 9-105, 9-106 and 9-107 relating to what constitutes "control" for such items of Collateral), with any agreements establishing control, to be in form and substance satisfactory to Agent, and (c) otherwise to insure the continued perfection and priority of Agent's security interest in any of the Collateral and of the preservation of its rights therein, whether in anticipation and following the effectiveness or Revised Article 9 in any jurisdiction. (d) Savings Clause. Nothing contained in this Section 4.8 shall be ----------- construed to narrow the scope of Agent's security interest in any of the Collateral or the perfection or priority thereof or to impair or otherwise limit any of the rights, powers, privileges or remedies of Agent or any Lender hereunder except (and then only to the extent) mandated by Revised Article 9 to the extent then applicable. 5. REPRESENTATIONS AND WARRANTIES. In order to induce the Lender Group to enter into this Agreement, Borrower makes the following representations and warranties to the Lender Group which shall be true, correct, and complete, in all material respects, as of the date hereof, and shall be true, correct, and complete, in all material respects, as of the Closing Date, and at and as of the date of the making of each Advance (or other extension of credit including, without limitation, any Capital Expenditure Loan) made thereafter, as though made on and as of the date of such Advance (or other extension of credit) (except to the extent that such representations and warranties relate solely to an earlier date) and such representations and warranties shall survive the execution and delivery of this Agreement: 66 5.1 No Encumbrances. Borrower has good and indefeasible title to the --------------- Collateral and the Real Property, free and clear of Liens except for Permitted Liens. 5.2 Eligible Accounts. The Eligible Accounts are bona fide existing ----------------- payment obligations of Account Debtors created by the sale and delivery of Inventory or the rendition of services to such Account Debtors in the ordinary course of Borrower's business, owed to Borrower without defenses, disputes, offsets counterclaims, or rights of return or cancellation. As to each Eligible Account, such Account is not: (a) owed by an employee, Affiliate, or agent of Borrower, (b) on account of a transaction wherein goods were placed on consignment or were sold pursuant to a guaranteed sale, a sale or return, a sale on approval, a bill and hold, or on any other terms by reason of which the payment by the Account Debtor may be conditional, (c) payable in a currency other than Dollars, (d) owed by an Account Debtor that has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to its obligation to pay the Account, (e) owed by an Account Debtor that is subject to any Insolvency Proceeding or is not Solvent or as to which Borrower has received notice of an imminent Insolvency Proceeding or a material impairment of the financial condition of such Account Debtor, (f) on account of a transaction as to which the goods giving rise to such Account have not been shipped and billed to the Account Debtor or the services giving rise to such Account have not been performed and accepted by the Account Debtor, (k) a right to receive progress payments or other advance billings that are due prior to the completion of performance by Borrower of the subject contract for goods or services, and (h) an Account that has not been billed to the customer. 5.3 Eligible Inventory. All Eligible Inventory is of good and ------------------ merchantable quality, free from defects. As to each item of Eligible Inventory, such Inventory is (a) owned by Borrower free and clear of all Liens other than Liens in favor of Lender, (b) either located at one of the locations set forth on Schedule E-l -------- --- or in transit from one such location to another such location, 67 (c) not located on real property leased by Borrower or in a contract warehouse, in each case, unless subject to a Collateral Access Agreement executed by the lessor, the warehouseman, or other third party, as the case may be, and unless segregated or otherwise separately identifiable from goods of others, if any, stored on the premises, (d) not goods that have been returned or rejected by Borrower's customers, and (e) not goods that are obsolete or slow moving, restrictive or custom items, work-in-process, or that constitute spare parts, packaging and shipping materials, supplies used or consumed in Borrower's business, bill and hold goods, defective goods, "seconds," or Inventory acquired on consignment. 5.4 Equipment. All of the Equipment is used or held for use in Borrower's --------- business and is fit for such purposes. Set forth on Schedule 5.4 is a ------------ description of all equipment and the applicable lessor for the leased equipment formerly leased to Drypers and now located at one of Borrower's locations set forth on Schedule 5.5, involving equipment with a fair market value in excess of ------------ $50,000 per lease, where such equipment has been or will be retained by Borrower, whether by way of assumption of the Drypers' lease agreement with the applicable lessor of such equipment, or by way of rejection, cancellation or renegotiation of any such lease agreement with respect to such equipment. 5.5 Location of Inventory and Equipment. The Inventory and Equipment are ----------------------------------- not stored with a bailee, warehouseman, or similar party (without Agent's prior written consent) and are located only at the locations identified on Schedule -------- 5.5; provided, however, that Borrower shall not maintain, locate or re-locate, - --- -------- ------- any of its Equipment (other than leased equipment) at or to, as the case may be, its locations at 1045 Holland Road, Marion, Ohio, Buildings 55 and 59 in Vancouver, Washington, or Memorial Highway in Houston, Texas, unless (a) Agent consents in writing at least 30 days prior to the location or re-location of such Equipment, and (b) Borrower obtains a Collateral Access Agreement with the landlord at such location, entitling Agent to a 120-day period following termination, surrender or abandonment by Borrower of such location to remove its Collateral. 5.6 Inventory Records. The Borrower keeps correct and accurate records ----------------- itemizing and describing the type, quality, and quantity of its Inventory and the book value thereof. 5.7 Location of Chief Executive Office; FEIN; Fiscal Year. The chief ----------------------------------------------------- executive office of the Borrower is located at the address indicated in Schedule 5.7 and each Borrower's FEIN is identified in Schedule 5.7. Borrower has a fiscal year ending December 31. 5.8 Due Organization and Oualification: Subsidiaries ------------------------------------------------ 68 (a) Borrower is duly organized and existing and in good standing under the laws of the jurisdiction of its organization and qualified to do business in any state where the failure to be so qualified reasonably could be expected to have a Material Adverse Change. (b) Set forth on Schedule 5.8(b), is a complete and accurate --------------- description of the authorized Stock of Borrower, by class, and, as of the Closing Date, a description of the number of shares of each such class that are issued and outstanding, and the name and amount of such Stock owned by each member. Other than as described on Schedule 5.8(b), there are no subscriptions, --------------- options, warrants, or calls relating to any shares of Borrower's Stock, including any right of conversion or exchange under any outstanding security or other instrument. Borrower is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its Stock or any security convertible into or exchangeable for any of its Stock. (c) Set forth on Schedule 5.8(c), is a complete and accurate list of --------------- Borrower's direct and indirect Subsidiaries, showing: (i) the jurisdiction of their organization, (ii) the number of shares of each class of common and preferred Stock authorized for each of such Subsidiaries, and (iii) the number and the percentage of the outstanding shares of each such class owned directly or indirectly by Borrower. All of the outstanding Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. (d) Except as set forth on Schedule 5.8(d), there are no --------------- subscriptions, options, warrants, or calls relating to any shares of Borrower's Subsidiaries' Stock, including any right of conversion or exchange under any outstanding security or other instrument. Neither Borrower nor any of its Subsidiaries is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of Borrower's Subsidiaries' Stock or any security convertible into or exchangeable for any such Stock. 5.9 Due Authorization: No Conflict. ------------------------------ (a) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party have been duly authorized by all necessary action on the part of Borrower. (b) The execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which it is a party do not and will not (i) violate any provision of federal, state, or local law or regulation applicable to Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on Borrower, (i) conflict with, result in a breach of, or constitute (with due notice or lapse of time or both) a default under any material contractual obligation of Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of Borrower, other than Permitted Liens, or 69 (iv) require any approval of Borrower's members or any approval or consent of any Person under any material contractual obligation of Borrower. (c) Other than the filing of financing statements, fixture filings, and Mortgages, the execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which Borrower is a party do not and will not require any registration with, consent, or approval of, or notice to, or other action with or by, any Governmental Authority or other Person. (d) This Agreement and the other Loan Documents to which Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by Borrower will be the legally valid and binding obligations of Borrower, enforceable against Borrower in accordance with their respective terms, except as enforcement may be limited by equitable principles or by bankruptcy, insolvency, reorganization, moratorium, or similar laws relating to or limiting creditors' rights generally. (e) The Agent's Liens are validly created, perfected, and first priority Liens, subject only to Permitted Liens. 5.10 Litigation. Other than those matters disclosed on Schedule 5.10, ---------- ------------- there are no actions, suits, or proceedings pending or, to the best knowledge of Borrower, threatened against Borrower, or any of its Subsidiaries, as applicable, except for (a) matters that are fully covered by insurance (subject to customary deductibles), (b) matters arising after the Closing Date that, if decided adversely to Borrower, or any of its Subsidiaries, as applicable, reasonably could not be expected to result in a Material Adverse Change, and (c) ongoing Collections matters in which the Borrower is a plaintiff. 5.11 No Material Adverse Change. All financial statements relating to -------------------------- Borrower or Holdco that have been delivered by Borrower or Holdco to the Lender Group have been prepared in accordance with GA4P (except, in the case of unaudited financial statements, for the lack of footnotes and being subject to year-end audit adjustments) and present fairly in all material respects, Borrower's (or Holdco's, as applicable) financial condition as of the date thereof and results of operations for the period then ended. There has not been a Material Adverse Change with respect to Borrower (or Holdco, as applicable) since the date of the latest financial statements submitted to the Lender Group on or before the Closing Date. 5.12 Fraudulent Transfer. ------------------- (a) Borrower is Solvent. (b) No transfer of property is being made by Borrower and no obligation is being incurred by Borrower in connection with the transactions contemplated by this Agreement or the other Loan Documents with the intent to hinder, delay, or defraud either present or future creditors of Borrower. 70 5.13 Employee Benefits. None of Borrower, any of its Subsidiaries, or any ----------------- of their ERISA Affiliates maintains or contributes to any Benefit Plan. 5.14 Environmental Condition. Except as set forth on Schedule 5.14, (a) ----------------------- ------------- none of Borrower's properties or assets has ever been used by Borrower or, to the best of Borrower's knowledge, by previous owners or operators in the disposal of, or to produce, store, handle, treat, release, or transport, any Hazardous Materials, except in material compliance with applicable Environmental Laws, (b) to Borrower's knowledge, none of Borrower's properties or assets has ever been designated or identified in any manner as a Hazardous Materials disposal site, or a candidate for closure, pursuant to any Environmental Law, (c) to Borrower's knowledge, no Environmental Lien arising under any Environmental Law has attached to any revenues or to any real or personal property owned or operated by Borrower, and (d) Borrower has not received a summons, citation, notice, or directive from the Environmental Protection Agency or any other federal or state governmental agency concerning any action or omission by Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 5.15 Brokerage Fees. Borrower has not utilized the services of any broker -------------- or finder in connection with Borrower's obtaining financing from the Lender Group under this Agreement and no brokerage commission or finders fee is payable by Borrower in connection herewith. 5.16 Intellectual Property. Borrower owns, or holds licenses in, all --------------------- trademarks, trade names, copyrights, patents, patent rights and licenses that are necessary to the conduct of its business as currently conducted. Attached hereto as Schedule 5.16 is a true, correct, and complete listing of all material ------------- patents, patent applications, trademarks, trademark applications, copyrights, and copyright registrations as to which Borrower is the owner or is an exclusive licensee in a geographic area. 5.17 Leases. Borrower enjoys peaceful and undisturbed possession under all ------ leases material to the business of Borrower and to which it is a party or under which it is operating. All of such leases are valid and subsisting and no material default by Borrower exists under any of them. 5.18 DDAs. Set forth on Schedule 5.18 are all of the Borrower's DDAs, ---- ------------- including, with respect to each depository (i) the name and address of such depository, and (ii) the account numbers of the accounts maintained with such depository. 5.19 Complete Disclosure. All factual information (taken as a whole) ------------------- furnished by or on behalf of Borrower in writing to Agent or any Lender (including all information contained in the Schedules hereto or in the other Loan Documents) for purposes of or in connection with this Agreement, the other Loan Documents or any transaction contemplated herein or therein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of Borrower in writing to Agent or any Lender will be, true and 71 accurate, in all material respects, on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading in any material respect at such time in light of the circumstances under which such information was provided. On the Closing Date, the Closing Date Projections represent, and as of the date on which any other Projections are delivered to Agent, such additional Projections represent Borrower's good faith best estimate of its future performance for the periods covered thereby. 5.20 Indebtedness. Set forth on Schedule 5.20 is a true and complete list ------------ ------------- of all Indebtedness of Borrower outstanding immediately prior to the Closing Date that is to remain outstanding after the Closing Date and such Schedule accurately reflects the aggregate principal amount of such Indebtedness and the principal terms thereof. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrower shall and shall cause each of its Subsidiaries to do all of the following: 6.1 Accounting System. Maintain a system of accounting that enables ----------------- Borrower to produce financial statements in accordance with GAAP and maintain records pertaining to the Collateral that contain information as from time to time reasonably may be requested by Agent. Borrower also shall keep an inventory reporting system that shows all additions, sales, claims, returns, and allowances with respect to the Inventory. 6.2 Collateral Reporting. Provide Agent with the following documents at -------------------- the following times in form satisfactory to Agent: - -------------------------------------------------------------------------------- Daily (a) a sales journal, collection journal, and credit register since the last such schedule and a calculation of the Borrowing Base as of such date, and (b) notice of all returns, disputes, or claims. - -------------------------------------------------------------------------------- Weekly (c) Inventory reports specifying each Borrower's cost and the wholesale market value of its Inventory, by category, with additional detail showing additions to and deletions from the Inventory. - -------------------------------------------------------------------------------- Monthly (d) a detailed calculation of the Borrowing Base (including (not later detail regarding those Accounts that are not Eligible than the Accounts), 10th day of each (e) a detailed and a summary aging, by total, of the Accounts, month) together with a reconciliation to the detailed calculation of the Borrowing Base previously provided to Agent - -------------------------------------------------------------------------------- 72 - -------------------------------------------------------------------------------- (f) a summary aging, by vendor, of Borrower's accounts payable and any book overdraft, and (g) a calculation of Dilution for the prior month. - -------------------------------------------------------------------------------- Quarterly (h) a detailed list of Borrower's customers, (i) a report regarding Borrower's accrued, but unpaid, ad valorem taxes, - -------------------------------------------------------------------------------- Upon (j) copies of invoices in connection with the Accounts, credit memos, request remittance advices, deposit slips, shipping and delivery documents in by Agent connection with the Accounts and, for Inventory and Equipment acquired by Borrower, purchase orders and invoices, and - -------------------------------------------------------------------------------- (k) such other reports as to the Collateral, or the financial condition of Borrower as Agent may reasonably request. - -------------------------------------------------------------------------------- In addition, Borrower agrees to cooperate fully with Agent to facilitate and implement a system of electronic collateral reporting in order to provide electronic reporting of each of the items set forth above. 6.3 Financial Statements, Reports, Certificates. Deliver to Agent, with ------------------------------------------- copies to each Lender: (a) as soon as available, but in any event within 30 days (45 days in the case of a month that is the end of the first 3 fiscal quarters in a fiscal year) after the end of each month during each of Borrower's fiscal years, (i) a company prepared consolidated balance sheet, income statement, and statement of cash flow covering Borrower's and its Subsidiaries' operations during such period, (ii) a certificate signed by the chief financial officer of Borrower to the effect that; A. the financial statements delivered hereunder have been prepared in accordance with GAAP (except for the lack of footnotes and being subject to year-end audit adjustments) and fairly present in all material respects the financial condition of Borrower and its Subsidiaries, B. the representations and warranties of Borrower contained in this Agreement and the other Loan Documents are true and correct in 73 all material respects on and as of the date of such certificate, as though made on and as of such date (except to the extent that such representations and warranties relate solely to an earlier date), and C. there does not exist any condition or event that constitutes a Default or Event of Default (or, to the extent of any non-compliance, describing such non-compliance as to which he or she may have knowledge and what action Borrower has taken, is taking, or proposes to take with respect thereto), and (iii) for each month that is the date on which a financial covenant in Section 7.20 is to be tested, a Compliance Certificate ------------ demonstrating, in reasonable detail, compliance at the end of such period with the applicable financial covenants contained in Section ------- 7.20, and ---- (b) as soon as available, but in any event within 90 days after the end of each of Borrower's fiscal years, (i) financial statements of Borrower and its Subsidiaries for each such fiscal year, audited by independent certified public accountants reasonably acceptable to Agent and certified, without any qualifications, by such accountants to have been prepared in accordance with GAAP (such audited financial statements to include a balance sheet, income statement, and statement of cash flow and, if prepared, such accountants' letter to management), (ii) a certificate of such accountants addressed to Agent and the Lenders stating that such accountants do not have knowledge of the existence of any Default or Event Default under Section 7.20. ------------ (c) as soon as available, but in any event within 30 days prior to the start of each Borrower's fiscal years, copies of Borrower's Projections and a business plan, in form and substance (including as to scope and underlying assumptions) satisfactory to Agent, in all respects, in its sole discretion, for the forthcoming 3 years, year by year, and for the forthcoming fiscal year, month by month, certified by the chief financial officer of Borrower as being such officer's good faith best estimate of the financial performance of Borrower during the period covered thereby, (d) if and when filed by Borrower, (i) 10-Q quarterly reports, Form 10-K annual reports, and Form 8-K current reports, (ii) any other filings made by Borrower with the SEC, 74 (iii) copies of Borrower's federal income tax returns, and any amendments thereto, filed with the internal Revenue Service, and (iv) any other information that is provided by Borrower to its shareholders generally, (e) if and when filed by Borrower and as requested by Agent, satisfactory evidence of payment of applicable excise taxes in jurisdictions in which (i) Borrower conducts business or is required to pay any such excise tax, (ii) where Borrower's failure to pay any such applicable excise tax would result in a Lien on the properties or assets of Borrower, or (iii) where Borrower's failure to pay any such applicable excise tax reasonably could be expected to result in a Material Adverse Change, (f) as soon as Borrower has knowledge of any event or condition that constitutes a Default or an Event of Default, notice thereof and a statement of the curative action that Borrower proposes to take with respect thereto, and (g) upon the request of Agent, any other report reasonably requested relating to the financial condition of Borrower. In addition to the financial statements referred to above, Borrower agrees to deliver financial statements prepared on both a consolidated and consolidating basis and agrees that no Subsidiary of Borrower will have a fiscal year different from that of Borrower. Borrower agrees that its independent certified public accountants are authorized to communicate with Agent and to release to Agent whatever financial information concerning Borrower Agent reasonably may request. Borrower waives the right to assert a confidential relationship, if any, it may have with any accounting firm or service bureau in connection with any information requested by Agent pursuant to or in accordance with this Agreement, and agrees that Agent may contact directly any such accounting firm or service bureau in order to obtain such information. 6.4 Guarantor Reports. Cause Holdco to deliver its annual financial ----------------- statements at the time when Borrower provides its audited financial statements to Agent and copies of all federal income tax returns as soon as the same are available and in any event no later than 30 days after the same are required to be filed by law. 6.5 Return. Cause returns and allowances as between Borrower and its ------ Account Debtors, to be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. If, at a time when no Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to Borrower, Borrower promptly shall determine the reason for such return and, if Borrower accepts such return, issue a credit memorandum (with a copy to be sent to Agent) in the appropriate amount to such Account Debtor. If, at a time when an Event of Default has occurred and is continuing, any Account Debtor returns any Inventory to 75 Borrower, the applicable Borrower promptly shall determine the reason for such return and, if Agent consents (which consent shall not be unreasonably withheld), issue a credit memorandum (with a copy to be sent to Agent) in the appropriate amount to such Account Debtor. 6.6 Maintenance of Properties and Equipment. Maintain and preserve all of --------------------------------------- its properties and Equipment which are necessary or useful in the proper conduct to its business in good working order and condition, ordinary wear and tear excepted, and comply at all times with the provisions of all leases to which it is a part as lessee, so as to prevent any loss of forfeiture thereof or thereunder. 6.7 Taxes. Cause all assessments and taxes, whether real, personal, or ----- otherwise, due or payable by, or imposed, levied, or assessed against Borrower or any of its assets to be paid in full, before delinquency or before the expiration of any extension period, except to the extent that the validity of such assessment or tax shall be the subject of a Permitted Protest. Borrower will make timely payment or deposit of all tax payments and withholding taxes required of it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state disability, and local, state, and federal income taxes, and will, upon request, furnish Agent with proof satisfactory to Agent indicating that Borrower has made such payments or deposits. Borrower shall deliver satisfactory evidence of payment of applicable excise taxes in each jurisdictions in which Borrower is required to pay any such excise tax. 6.8 Insurance. --------- (a) At Borrower's expense, maintain insurance, respecting its assets, including, without limitation, Real Property together with any and all improvements located thereon, wherever located, covering loss or damage by fire, theft, explosion, and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses. Borrower also shall maintain business interruption, public liability, and product liability insurance, as well as insurance against larceny, embezzlement, and criminal misappropriation. All such policies of insurance shall be in such amounts and with such insurance companies as are reasonable satisfactory to Agent. Borrower shall deliver copies of all such policies to Agent with a satisfactory lender's loss payable endorsement naming Agent as sole loss payee or additional insured as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Agent in the event of cancellation of the policy for any reason whatsoever. (b) Borrower shall give Agent prompt notice of any loss covered by such insurance. Agent shall have the exclusive right to adjust any losses payable under any such insurance policies in excess of $50,000, without any liability to Borrower whatsoever in respect of such adjustments. Any monies received as payment for any loss under any insurance policy mentioned above (other than liability insurance policies) or as payment of any award or compensation for condemnation or taking by eminent domain, shall be paid over to Agent to be applied at the option of the Required Lenders either to the prepayment of 76 the Obligations or shall be disbursed to Borrower under staged payment terms reasonably satisfactory to the Required Lenders for application to the cost of repairs, replacements, or restorations. Any such repairs, replacements, or restorations shall be effected with reasonable promptness and shall be of a value at least equal to the value of the items of property destroyed prior to such damage or destruction. (c) Borrower will not take out separate insurance concurrent in form or contributing in the event of loss with that required to maintained under this Section 6.8, unless Agent is included thereon as named insured with the loss payable to Agent under a lender's loss payable endorsement or its equivalent. Borrower immediately shall notify Agent whenever such separate insurance is taken out, specifying the insurer thereunder and full particulars as to the policies evidencing the same, and copies of such policies promptly shall be provided to Agent. 6.9 Location of Inventory and Equipment. Keep the Inventory and Equipment ----------------------------------- only at the locations identified on Schedule 5.5 and permitted by Section 5.5; ------------ ----------- provided, however, that Borrower may amend Schedule 5.5 so long as such - -------- ------- ------------ amendment occurs by written notice to Agent not less than 30 days prior to the date on which Inventory or Equipment is moved to such new location, so long as such new location is within the continental United States, and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected the Agent's Liens on such assets and also provides to Agent a Collateral Access Agreement. 6.10 Compliance with Laws. Comply with the requirements of all applicable -------------------- laws, rules, regulations and orders of any Governmental Authority, including the Fair Labor Standards Act and the Americans With Disabilities Act, other than laws, rules, regulations, and orders the non-compliance with which, individually or in the aggregate, would not result in and reasonably could not be expected to result in a Material Adverse Change. 6.11 Leases. Pay when due all rents and other amounts payable under any ------ leases to which Borrower is a party or by which Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. 6.12 Brokerage Commissions. Pay any and all brokerage commission or --------------------- finders fees incurred in connection with or as a result of Borrower's obtaining financing from the Lender Group under this Agreement. Borrower agrees and acknowledges that payment of all such brokerage commissions or finders fees shall be the sole responsibility of Borrower, and Borrower agrees to indemnify, defend, and hold Agent and the Lender Group harmless from and against any claim of any broker or finder arising out of Borrower's obtaining financing from the Lender Group under this Agreement. 77 6.13 Existence. At all times preserve and keep in full force and effect --------- Borrower's valid existence and good standing and any rights and franchises material to Borrower's business. 6.14 Environmental. ------------- (a) Keep any property either owned or operated by Borrower free of any Environmental Liens or post bonds or other financial assurances sufficient to satisfy the obligations or liability evidenced by such Environmental Liens (b) comply, in all material respects, with Environmental Laws and provide to Agent documentation of such compliance which Agent reasonably requests, (c) promptly notify Agent of any release of a Hazardous Material in any reportable quantity from or onto property owned or operated by Borrower and take any Remedial Actions required by any Governmental Authority with jurisdiction to abate said release or otherwise to come into compliance with applicable Environmental Law, and (d) promptly provide Agent with written notice within 10 days of the receipt of any of the following: (i) notice that an Environmental Lien has been filed against any of the real or personal property of Borrower, (ii) commencement of any Environmental Action against Borrower or notice that an Environmental Action will be filed against Borrower, and (iii) notice of a violation, citation, or other administrative order related to Environmental Laws which reasonably could be expected to result in a Material Adverse Change. 6.15 Disclosure Updates. Promptly and in no event later than 5 Business ------------------ Days after obtaining knowledge thereof, (a) notify Agent if any written information, exhibit, or report furnished to the Lender Group contained any untrue statement of a material fact or omitted to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made, and (b) correct any defect or error that may be discovered therein or any Loan Document or in the execution, acknowledgement, filing, or recordation thereof. 6.16 License Default Notices. Deliver to Agent copies of any and all ----------------------- default and/or termination notices received with respect to any of Borrower's existing or future license agreements including without limitation, the license agreements with Kimberly Clark, Proctor & Gamble, Collegiate Licensing Products Company and Disposable Soft Goods (UK) Plc. 6.17 Engage Consultant. Continue to engage Consultant for a period of 180 ----------------- days following the Closing Date on the terms set forth in any "engagement letter" or similar agreement describing the terms and conditions of Consultant's engagement between Borrower and Consultant, and acceptable to Agent, or during any other period of time required by Agent in its reasonable discretion thereafter, and authorize and instruct Consultant to engage discussions with Agent regarding Borrower's financial condition and the operation of Borrower's business at any time upon request of Agent, and to deliver to Agent such documents and reports in connection therewith as Agent may request. 78 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrower will not and will not permit any of its Subsidiaries to do many of the following: 7.1 Indebtedness. Create, incur, assure, permit, guarantee, or ------------ otherwise become or remain, directly or indirectly, liable with respect to any Indebtedness, except: (a) Indebtedness evidenced by this agreement and the other Loan Documents, together with Indebtedness owed to Underlying Issuers with respect to Underlying Letters of Credit, (b) Indebtedness set forth on Schedule 5.20, -------------- (c) Permitted Purchase Money Indebtedness, (d) Indebtedness evidenced by the Subordinated Note A and Subordinated Note B, and (e) refinancings, renewals, or extensions of Indebtedness permitted under clauses (b) and (c) of this Section 7.1 (and continuance or ----------- renewal of any Permitted Liens associated therewith) so long as: (i) the terms and conditions of such refinancings, renewals, or extensions do not, in Agent's judgement, materially impair the prospects of repayment of the Obligations by Borrower, (ii) such refinancings, renewals, or extensions do not result in an increase in the aggregate principal amount of, or interest rate with respect to, the Indebtedness so refinanced, renewed, or extended, (iii) such refinancings, renewals, or extensions do not result in shortening of the average weighted maturity of the Indebtedness so refinanced, renewed, or extended, nor are they on terms or conditions, that, taken as a whole, are materially more burdensome or restrictive to Borrower, and (iv) if the Indebtedness that is refinanced, renewed, or extended was subordinated in right of payment to the Obligations, then the terms and conditions of the refinancing, renewal, or extension Indebtedness must include subordination terms and conditions that are at least as favorable to the Lender group as those that were applicable to the refinanced, renewed, or extended Indebtedness, as determined by Agent. 7.2 Liens. Create, incur, assume, or permit to exist, directly or ------ indirectly, any Lien on or with respect to any of its assets, of any kind, whether now owned or hereafter acquired, or any income or profits therefrom, except for Permitted Liens (including Liens that are replacements of Permitted Liens to the extent that the original Indebtedness is refinanced, renewed, or extended under Section 7.1(e) and so long as the replacement Liens only encumber -------------- those assets that secured the refinancing, renewed, or extended Indebtedness). 79 7.3 Restrictions on Fundamental Changes. ----------------------------------- (a) Enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its Stock. (b) Liquidate, wind up, or dissolve itself (or suffer any liquidation or dissolution). (c) Convey, sell, lease, license, assign, transfer, or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its assets. 7.4 Disposal of Assets. Convey, sell, lease, license, assign, ------------------ transfer, or otherwise dispose of any of Borrower's assets; provided, however, -------- ------- that the Borrower may dispose of assets in a Permitted Disposition so long as (a) if the asset was required with the proceeds of a Capital Expenditure Loan, the proceeds are used to repay the applicable Capital Expenditure Loan on the date of receipt thereof by Borrower, (b) if the asset is Equipment that was included by Agent in the calculation of the Term Loan Amount and to the extent such proceeds from the sale of such Equipment are not used to purchase replacement Equipment of equal or greater value within five Business Days, the proceeds are used to repay the installments due on the Term Loan in the inverse order of maturity, and (c) in all other cases, the proceeds are directed to the Cash Management Account, or immediately deposited by Borrower in the Cash Management Account. 7.5 Change Name. Change Borrower's name, FEIN, corporate structure ----------- or identity, or add any new fictitious name; provided, however, that Borrower -------- ------- may change its name upon at least 30 days' prior written notice to Agent of such change and so long as, prior to such change of name, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected the Agent's Liens. 7.6 Guarantee. Guarantee or otherwise become in any way liable with --------- respect to the obligations of any third Person except by endorsement of instruments or items of payment for deposit to the account of Borrower or which are transmitted or turned over to Agent. 7.7 Nature of Business. Make any change in the principal nature of ------------------ its business. 7.8 Payments, Prepayments and Amendments. ------------------------------------ (a) Make any payments of principal of, or interest or fees on, Subordinated Note A or Subordinated Note B; provided, however, that Borrower may -------- ------- make regularly scheduled interest payments on Subordinated Note A after June 30, 2001 if (i) no Event of Default has occurred and is continuing, and (ii) Borrower has demonstrated to the satisfaction of Agent that, after giving effect to such payment, Excess Availability is $10,000,000 or more; and provided, further, that Borrower may refinance and pay in full the - -------- ------- 80 Subordinated Note A with the proceeds of new subordinated debt provided by an Affiliate of Borrower on terms and conditions, and subject to a Subordination Agreement and other documents, in form and substance satisfactory to Agent. (b) Except in connection with a refinancing permitted by Section ------- 7.1(e), prepay, redeem, defease, purchase, or otherwise acquire any Indebtedness - ------ of Borrower, other than the Obligations in accordance with this Agreement, and (c) Except in connection with a refinancing permitted by Section ------- 7.1(e), directly or indirectly, amend, modify, alter, increase, or change any of - ------ the terms or conditions of any agreement, instrument, document, indenture, or other writing evidencing or concerning Indebtedness permitted under Sections -------- 7.1(b), (c) or (d). - ------ --- --- 7.9 Change of Control. Cause, permit, or suffer, directly or indirectly, ----------------- any Change of Control. 7.10 Consignments. Consign any Inventory or sell any Inventory on bill and ------------ hold, sale or return, sale on approval, or other conditional terms of sale. 7.11 Distributions. Make any distribution or declare or pay any dividends ------------- (in cash or other property, other than Stock) on, or purchase, acquire, redeem, or retire any of Borrower's Stock, of any class, whether now or hereafter outstanding, or pay any management fees; except (a) so long as no Default or Event of Default exists on the date of such payment or immediately after giving effect thereto, from time to time during or following the end of any fiscal quarter during which Borrower was a Pass-Through Entity, Borrower may distribute to its respective equity holders in cash an amount not in excess of the tax distribution amount for the portion of the fiscal year during the end of such fiscal quarter, minus the aggregate amount of any such distributions therefor made in respect of such fiscal year; provided, however, that in no event shall the amount so distributed in respect of any fiscal year exceed the actual amount of federal and state income taxes for such year attributable to the ownership of Borrower's equity interest, and (b) the payment of management fees for payroll, director and related expenses, provided that no Event of Default has occurred and is continuing, to Holdco and Disposable Soft Goods International Limited, directly or indirectly, in an amount not to exceed $1,200,000 in the aggregate on a per annum basis; provided, however, that if no Event of Default has -------- ------- occurred hereunder and satisfactory projections have been delivered to Agent, Borrower may request on or after April 1, 2002 that Agent consider allowing an increase in such management fees, payroll fees, director and related expenses, but any such increase shall be in the sole discretion of Agent. The amount of any distribution of the Tax Distribution Amount under clause (a) of this Section shall be verified by the chief financial officer of Borrower in the certificate required under Section 6.3 and in the written statement required of Borrower's ----------- accountants under Section 6.3. ----------- 81 7.12 Accounting Methods. Modify or change its method of accounting (other ------------------ than as may be required to conform to GAAP) or enter into, modify, or terminate any agreement currently existing, or at any time hereafter entered into with any third party accounting firm or service bureau for the preparation or storage of Borrower's accounting records without said accounting firm or service bureau agreeing to provide Agent information regarding the Collateral or Borrower's financial condition. 7.13 Investments. Except for Permitted Investments, directly or ----------- indirectly, make or acquire any Investment, or incur any liabilities including contingent obligations) for or in connection with any Investment; provided, -------- however, that Borrower shall not have Permitted Investments (other than in the - ------- Cash Management Accounts) in excess of $500,000 outstanding at any one time unless, if such Permitted Investments are held with a bank or securities intermediary, Borrower and the applicable securities intermediary or bank have entered into Control Agreements governing such Permitted Investments, as Agent shall determine in its Permitted Discretion, to perfect (and further establish) the Agent's Liens in such Permitted Investments. 7.14 Transactions with Affiliates. Directly or indirectly enter into or ---------------------------- permit to exist any transaction with any Affiliate of Borrower except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms, that are fully disclosed to Agent, including, without limitation, any disclosure set forth on Annex A to the Affiliate Subordination ------- Agreement, and that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-Affiliate, and are subject to the Affiliate Subordination Agreement. 7.15 Suspension. Suspend or go out of a substantial portion of its ---------- business. 7.16 Compensation. Increase the annual fee or per-meeting fees paid to the ------------ members of its Board of Directors during any year by more than 15% over the prior year; pay or accrue total cash compensation, during any year, to its officers and senior management employees in an aggregate amount in excess of 115% of that paid or accrued in the prior year. 7.17 Use of Proceeds. Use the proceeds of (a) the Advances and the Term --------------- Loan for any purpose other than (i) on the Closing Date, (x) to facilitate the Drypers Acquisition, (y) to restate and restructure amounts owing under the Prior Loan Agreement, and (z) to pay transactional fees, costs, and expenses incurred in connection with this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby, and (ii) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted corporate purposes, and (b) the Capital Expenditure Loan for any purpose than to purchase Equipment. 7.18 Change in Location of Chief Executive Office: Inventory and Equipment --------------------------------------------------------------------- with Bailees. Relocate its chief executive office to a new location without - ------------ Borrower providing 30 days prior written notification thereof to Agent and so long as, at the time of 82 such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected the Agent's Liens and also provides to Agent a Collateral Access Agreement with respect to such new location. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Agent's prior written consent. 7.19 Securities Accounts. Establish or maintain any Securities Account ------------------- unless Agent shall have received a Control Agreement in respect of such Securities Account. Borrower shall not transfer assets out of any Securities Account; provided, however, that, so long as no Event of Default has occurred -------- ------- and is continuing or would result therefrom, Borrower may use such assets (and the proceeds thereof) to the extent not prohibited by this Agreement. 7.20 Financial Covenants. ------------------- (a) Fail to maintain: (i) Minimum EBITDA. EBITDA, measured on a fiscal quarter-end basis, of not less than the required amount set forth in the following table for the applicable period set forth opposite thereto; - -------------------------------------------------------------------------------- Applicable Amount Applicable Period - -------------------------------------------------------------------------------- $320,000 For the 3 month period ending June 30, 2001 - -------------------------------------------------------------------------------- $2,110,000 For the 6 month period ending September 30, 2001 - -------------------------------------------------------------------------------- $4,890,000 For the 9 month period ending December 31, 2001 - -------------------------------------------------------------------------------- $7,990,000 For the 12 month period ending March 31, 2002 - -------------------------------------------------------------------------------- $7,990,000 For the 12 month period ending fiscal quarter thereafter - -------------------------------------------------------------------------------- (ii) Tangible Net Worth. Tangible Net Worth of at least the required amount set forth in the following table as of the applicable date set forth opposite thereto: - -------------------------------------------------------------------------------- Applicable Amount Applicable Period - -------------------------------------------------------------------------------- $12,975,000 as of June 30, 2001 - -------------------------------------------------------------------------------- $13,325,000 as of September 30, 2001 - -------------------------------------------------------------------------------- 83 --------------------------------------------------------------------------- $14,140,000 as of December 31, 2001 --------------------------------------------------------------------------- $15,250,000 as of March 31, 2002 --------------------------------------------------------------------------- $14,140,000, plus as measured at the end of each fiscal quarter Borrower's cumulative thereafter net income since January 1, 2002 --------------------------------------------------------------------------- (b) Capital Expenditures. Make Capital Expenditures in any twelve month period in excess of $6,975,000. 7.21 Officers. Engage or hire any chief operating officer or chief -------- financial officer (or similar position) immediately prior to, on or after the Closing Date unless Agent shall have received and reviewed reference checks for any such individual, the results of which are satisfactory to Agent. 8. EVENTS OF DEFAULT. Any one or more of the following events shall constitute an event of default (each, an "Event of Default") under this Agreement: ---------------- 8.1 If Borrower fails to pay when due and payable or when declared due and payable, all or any portion of the Obligations (whether of principal, interest (including any interest which, but for the provisions of the Bankruptcy Code, would have accrued on such amounts), fees and charges due the Lender Group, reimbursement of Lender Group Expenses, or other amounts constituting Obligations); 8.2 (a) If Borrower fails to perform keep, or observe any term, provision, condition, covenant, or agreement contained in Sections 6.2 ------------ (Collateral Reporting), 6.3 (Financial Statements, Reports, Certificates), --- 6.7 (Taxes), 6.9 (Location of Inventory and Equipment), 6.10 (Compliance with - --- --- ---- Laws), or 6.11 (Leases) of this Agreement, and such failure continues for a ---- period of five (5) Business Days; (b) if Borrower falls to perform, keep, or observe any term, provision, condition, covenant, or agreement contained in Sections 6.1 (Accounting System), 6.4 (Guarantor Reports), 6.5 (Returns), or - ------------ --- --- 6.6 (Maintenance of Properties and Equipment) of this Agreement, and such - --- failure continues for a period of fifteen (15) Business Days; or (c) if Borrower or any guarantor of the Obligations fails to perform, keep, or observe any other term, provision, condition, covenant, or agreement contained in this Agreement, in any of the Loan Documents, or in any other present or future agreement between Borrower and Agent or any Lender; in each case, other than any such term, provision, condition, covenant, or agreement that is the subject of another provision of this Section 8, in which event such other provision of this Section 8 shall govern; provided, that during any period of time that any such failure or non- performance of Borrower or such guarantor of the Obligations referred to in this paragraph exists, even if such failure or non-performance is not yet an Event of Default by virtue of the existence of a grace or cure period or the pre-condition of the giving of a notice, at the option of the Required Lenders, Lenders shall not be required during such period to make Advances or Capital Expenditure Loans to Borrower; 8.3 If any material portion of Borrower's or any of its Subsidiaries' assets is attached, seized, subjected to a writ or distress warrant, levied upon, or comes into the possession of any third Person; 8.4 If an Insolvency Proceeding is commenced by Borrower or any of its Subsidiaries; 8.5 If an Insolvency Proceeding is commenced against Borrower, or any of its Subsidiaries, and any of the following events occur: (a) Borrower or the Subsidiary consents to the institution of such Insolvency Proceeding against it, (b) the petition commencing the Insolvency Proceeding is not timely controverted, (c) the petition commencing the Insolvency Proceeding is not dismissed within 45 calendar days of the date of the filing thereof; provided, however, that, during the pendency of such period, Agent (including any successor agent) and each other member of the Lender Group shall be relieved of their obligations to extend credit hereunder, (d) an interim trustee is appointed to take possession of all or any substantial portion of the properties or assets of, or to operate all or any substantial portion of the business of, Borrower of any of its Subsidiaries, or (e) an order for relief shall have been entered therein; 8.6 If Borrower or any of its Subsidiaries is enjoined, restrained, or in any way prevented by court order from continuing to conduct all or any material part of its business affairs; 8.7 If a notice of Lien, levy, or assessment is filed of record with respect to any of Borrower's or any of its Subsidiaries' assets by the United States, or any department, agency, or instrumentality thereof, or by any state, county, municipal, or governmental agency, or if any taxes or debts owing at any time hereafter to any one or more of such entities becomes a Lien, whether choate or otherwise, upon any of Borrower's or any of its Subsidiaries' assets and the same is not paid before such payment is delinquent; 8.8 If a judgment or other claim becomes a Lien or encumbrance upon any material portion of Borrower's or any of its Subsidiaries' assets; 8.9 If there is (a) a default in any material agreement to which Borrower or any of its Subsidiaries is a party and such default (i) occurs at the final maturity of the obligations thereunder, or (ii) results in a right by the other party thereto, irrespective of whether exercised, to accelerate the maturity of Borrower's or its Subsidiaries' obligations thereunder, to terminate such agreement, or to refuse to renew such agreement pursuant to an 85 automatic renewal right therein, or (b) a default under any of Borrower's existing or future license agreements, including, without limitation, the license agreements with Kimberly-Clark, Proctor & Gamble, collegiate Licensing Products Company and Disposable Soft Goods (UK) Plc; 8.10 If Borrower or any of its Subsidiaries makes any payment on account of Indebtedness that has been contractually subordinated in right of payment to the payment of the Obligations, except to the extent such payment is permitted by the terms of the subordination provisions applicable to such Indebtedness; 8.11 If any material misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement, or Record made to the Lender Group by Borrower, its Subsidiaries, or any officer, employee, agent, or director of Borrower or any of its Subsidiaries; 8.12 If the obligation of Holdco under the Parent Guaranty is limited or terminated by operation of law or by Holdco thereunder; or 8.13 If this Agreement or any other Loan Document that purports to create a Lien, shall, for any reason, fail or cease to create a valid and perfected and except to the extent permitted by the terms hereof or thereof, first priority Lien on or security interest in the Collateral covered hereby or thereby; or 8.14 Any provision of any Loan Document shall at any time for any reason be declared to be null and void, or the validity or enforceability thereof shall be contested by Borrower, or a proceeding shall be commenced by Borrower, or by any Governmental Authority having jurisdiction over Borrower, seeking to establish the invalidity or unenforceability thereof, or Borrower shall deny that Borrower has any liability or obligation purported to be created under any Loan Document. 9. THE LENDER GROUP'S RIGHTS AND REMEDIES. 9.1 Rights and Remedies. Upon the occurrence, and during the ------------------- continuation, of an Event of Default, the Required Lenders (at their election but without notice of their election and without demand) may authorize and instruct Agent to do any one or more of the following on behalf of the Lender Group (and Agent, acting upon the instructions of the Required Lenders, shall do the same on behalf of the Lender Group), all of which are authorized by Borrower: (a) Declare all Obligations, whether evidenced by this Agreement, by any of the other Loan Documents, or otherwise, immediately due and payable; 86 (b) Cease advancing money or extending credit to or for the benefit of Borrower under this Agreement, under any of the Loan Documents, or under any other agreement between Borrower and the Lender Group; (c) Terminate this Agreement and any of the other Loan Documents as to any future liability or obligation of the Lender Group, but without affecting any of the Agent's Liens in the Collateral and without affecting the Obligations; (d) Settle or adjust disputes and claims directly with Account Debtors for amounts and upon terms which Agent considers advisable, and in such cases, Agent will credit the Loan Account with only the net amounts received by Agent in payment of such disputed Accounts after deducting all Lender Group Expenses incurred or expended in connection therewith; (e) Cause Borrower to hold all returned Inventory in trust for the Lender Group, segregate all returned Inventory from all other assets of Borrower or in Borrower's possession and conspicuously label said returned Inventory as the property of the Lender Group; (f) Without notice to or demand upon Borrower or Holdco, make such payments and do such acts as Agent considers necessary or reasonable to protect its security interests in the Collateral. Borrower agrees to assemble the Personal Property Collateral if Agent so requires, and to make the Personal Property Collateral available to Agent at a place that Agent may designate which is reasonably convenient to both parties. Borrower authorizes Agent to enter the premises where the Personal Property Collateral is located, to take and maintain possession of the Personal Property Collateral, or any part of it, and to pay, purchase, contest, or compromise any Lien that in Agent's determination appears to conflict with the Agent's Liens and to pay all expenses incurred in connection therewith and to charge Borrower's Loan Account therefor. With respect to any of Borrower's owned or leased premises, Borrower hereby grants Agent license to enter into possession of such premises and to occupy the same, without charge, in order to exercise any of the Lender Group's rights or remedies provided herein, at law, in equity, or otherwise; (g) Without notice to Borrower (such notice being expressly waived), and without constituting a retention of any collateral in satisfaction of an obligation (within the meaning of the Code), set off and apply to the Obligations any and all (i) balances and deposits of Borrower held by the Lender Group (including any amounts received in the Cash Management Accounts), or (ii) Indebtedness at any time owing to or for the credit or the account of Borrower held by the Lender Group; (h) Hold, as cash collateral, any and all balances and deposits of Borrower held by the Lender Group, and any amounts received in the Cash Management Accounts, to secure the full and final repayment of all of the 0bligations; 87 (i) Ship, reclaim, recover, store, finish, maintain, repair, prepare for sale, advertise for sale, and sell (in the manner provided for herein) the Personal Property Collateral. Borrower hereby grants to Agent a license or other right to use, without charge, Borrower's labels, patents, copyrights, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Personal Property Collateral, in completing production of, advertising for sale, and selling any Personal Property Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to the Lender Group's benefit; (j) Sell the Personal Property Collateral at either a public or private sale, or both, by way of one or more contracts or transactions, for cash or on terms, in such manner and at such places (including Borrower's premises) as Agent determines is commercially reasonable. It is not necessary that the Personal Property Collateral be present at any such sale; (k) Agent shall give notice of the disposition of the Personal Property Collateral as follows: (i) Agent shall give Borrower a notice in writing of the time and place of public sale, or, if the sale is a private sale or some other disposition other than a public sale is to be made of the Personal Property Collateral, the time on or after which the private sale or other disposition is to be made; (ii) The notice shall be personally delivered or mailed, postage prepaid, to Borrower as provided in Section 12, at least 10 ---------- days before the earliest time of disposition set forth in the notice; no notice needs to be given prior to the disposition of any portion of the Personal Property Collateral that is perishable or threatens to decline speedily in value or that is of a type customarily sold on a recognized market; and (iii) If the sale is to be a public sale, Agent shall also give notice of the time and place by publishing a notice one time at least 10 days before the date of the sale in a newspaper of general circulation in the county in which such sale is to be held. (1) Agent, on behalf of the Lender Group may credit bid and purchase at any public sale; (m) Borrower acknowledges that the Obligations arose out of a commercial transaction, and agrees that if an Event of Default shall occur, Agent shall have the right to seek the appointment of a receiver or keeper to take possession of all or any portion of the Collateral or to operate same and, to the maximum extent permitted by law, Agent shall have the right to an immediate writ of possession without notice of a hearing. Borrower hereby consents to such right and such appointment and hereby waives any objection Borrower may 88 have thereto or the right to have a bond or other security posted by Agent in connection therewith; (n) The Lender Group shall have all other rights and remedies available to it at law or in equity or pursuant to any other Loan Document; and (o) Any deficiency that exists after disposition of the Personal Property Collateral as provided above will be paid immediately by Borrower. Any excess will be returned, without interest and subject to the rights of third Persons, by Agent to Borrower. 9.2 Remedies Cumulative. The rights and remedies of the Lender Group ------------------- under this Agreement, the other Loan Documents, and all other agreements shall be cumulative. The Lender Group shall have all other rights and remedies not inconsistent herewith as provided under the Code, by law, or in equity. No exercise by the Lender Group of one right or remedy shall be deemed an election, and no waiver by the Lender Group of any Event of Default shall be deemed a continuing waiver. No delay by the Lender Group shall constitute a waiver, election, or acquiescence by it. 10. TAXES AND EXPENSES. If Borrower fails to pay any monies (whether taxes, assessments, insurance premiums, or, in the case of leased properties or assets, rents or other amounts payable under such leases) due to third Persons, or fails to make any deposits or furnish any required proof of payment or deposit, all as required under the terms of this Agreement, then, to the extent Agent reasonably determines that such failure by Borrower could result in a Material Adverse Change, in its discretion and without prior notice to Borrower, may do any or all of the following: (a) make payment of the same or any part thereof, (b) set up such reserves in Borrower's Loan Account as Agent deems necessary to protect the Lender Group from the exposure created by such failure, or (c) in the case of the failure to comply with Section 6.8 hereof, obtain and maintain insurance ----------- policies of the type described in Section 6.8 and take any action with respect ----------- to such policies as Agent deems prudent. Any such amounts paid by Agent shall constitute Lender Group Expenses and any such payments shall not constitute an agreement by the Lender Group to make similar payments in the future or a waiver by the Lender Group of any Event of Default under this Agreement. Agent need not inquire as to, or contest the validity of, any such expense, tax, or Lien and the receipt of the usual official notice for the payment thereof shall be conclusive evidence that the same was validly due and owing. The provisions of this Section 10 shall not apply to any assessments or taxes that are the subject ---------- of a Permitted Protest. 11. WAIVERS; INDEMNIFICATION. 11.1 Demand; Protest; etc. Each Borrower waives demand, protest, notice of -------------------- protest, notice of default or dishonor, notice of payment and nonpayment, nonpayment at maturity, release, compromise, settlement. extension, or renewal of documents, instruments, 89 chattel paper, and guarantees at any time held by the Lender Group on which Borrower may in any way be liable. 11.2 The Lender Group's Liability for Collateral. Borrower hereby agrees ------------------------------------------- that: (a) so long as Agent complies with its obligations, if any, under the Code, the Lender Group shall not in any way or manner be liable or responsible for: (i) the safekeeping of the Collateral, (ii) any loss or damage thereto occurring or arising in any manner or fashion from any cause, (iii) any diminution in the value thereof or (iv) any act or default of any carrier, warehouseman, bailee, forwarding agency, or other Person, and (b) all risk of loss, damage, or destruction of the Collateral shall be borne by Borrower. 11.3 Indemnification. Borrower shall pay, indemnify, defend, and hold the --------------- Agent-Related Persons, the Lender-Related Persons with respect to each Lender, each Participant, and each of their respective officers, directors, employees, agents, and attorneys-in-fact (each, an "Indemnified Person") harmless (to the ------------------ fullest extent permitted by law) from and against any and all claims, demands, suits, actions, investigations, proceedings, and damages, and all reasonable attorneys fees and disbursements its and other costs and expenses actually incurred in connection therewith (as and when they are incurred and irrespective of whether Suit is brought), at any time asserted against, imposed upon, or incurred by any of them (a) in connection with or as a result of or related to the execution, delivery, enforcement, performance, or administration of this Agreement, any of the other Loan Documents, or the transactions contemplated hereby or thereby, and (b) with respect to any investigation, litigation, or proceeding related to this Agreement any other Loan Document, or the use of the proceeds of the credit provided hereunder (irrespective of whether any Indemnified Person is a party thereto), or any act, omission, event or circumstance in any manner related thereto (all the foregoing, collectively, the "Indemnified Liabilities"). The foregoing to the contrary notwithstanding, ----------------------- Borrower shall have no obligation to any Indemnified Person under this Section ------- 11.3 with respect to any Indemnified Liability that a court of competent - ---- jurisdiction finally determines to have resulted from the gross negligence or willful misconduct of such Indemnified Person. This provision shall survive the termination of this Agreement and the repayment of the Obligations. If any Indemnified Person makes any payment to any other Indemnified Person with respect to an Indemnified Liability as to which Borrower was required to indemnify the Indemnified Person receiving such payment, the Indemnified Person making such payment is entitled to be indemnified and reimbursed by Borrower with respect thereto. WITHOUT LIMiTATION, THE FOREGOING INDEMNITY SHALL APPLY TO EACH INDEMNIFIED PERSON WITH RESPECT TO INDEMNIFIED LL4BILITLE5 WHICH IN WHOLE OR IN PART CAUSED BY OR ARISE OUT OF ANY NEGLIGENT ACT OR OMISSION OF SUCH INDEMNIFIED PERSON OR OF ANY OTHER PERSON. 12. NOTICES. 90 Unless otherwise provided in this Agreement, all notices or demands by Borrower or Agent to the other relating to this Agreement or any other Loan Document shall be in writing and (except for financial statements and other informational documents which may be sent by first-class mail, postage prepaid) shall be personally delivered or sent by registered or certified mail (postage prepaid, return receipt requested), overnight courier, electronic mail (at such email addresses as Borrower or Agent, as applicable, may designate to each other in accordance herewith), or telefacsimile to Borrower or Agent, as the case may be, at its address set forth below: If to Borrower: ASSOCIATED HYGIENIC PRODUCTS LLC 4455 Green River Parkway Duluth, Georgia 30096 Attn: Peter Chang Fax No. 770.623.8887 with copies to: PILLSBURY WINTHROP LLP 50 Fremont Street, 5th Floor San Francisco, California 94105 Attn: Robert E. Sullivan, Esq. Fax No. 4l5.983.1200 If to Foothill: FOOTHILL CAPITAL CORPORATION 2450 Colorado Avenue Suite 3000W Santa Monica,California 90404 Attn: Business Finance Division Manager Fax No. 310.453.7413 with copies to: FOOTHILL CAPITAL CORPORATION 400 Northpark Town Center 1000 Abernathy Road, N.E. Suite 1450 Atlanta, Georgia 30328 Attn: Business Finance Division Manager Fax No. 770.508.1370 Paul, Hastings, Janofsky & Walker LLP 600 Peachtree Street, N.E. Suite 2400 Atlanta, Georgia 30308-2222 Attn: Jesse H. Austin, III, Esq. Fax No. 404.815.2424 91 Agent and Borrower may change the address at which they are to receive notices hereunder, by notice in writing in the foregoing manner given to the other party. All notices or demands sent in accordance with this Section 12, ---------- other than notices by Agent in connection with enforcement rights against the Collateral under the provisions of the Code, shall be deemed received on the earlier of the date of actual receipt or 3 Business Days after the deposit thereof in the mail. Borrower acknowledges and agrees that notices sent by the Lender Group in connection with the exercise of enforcement rights against Collateral under the provisions of the Code shall be deemed sent when deposited in the mail or personally delivered, or, where permitted by law, transmitted by telefacsimile or any other method set forth above. 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER. (a) THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT IN RESPECT OF SUCH OTHER LOAN DOCUMENT), THE CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF GEORGIA. (b) THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF FULTON, STATE OF GEORGIA, PROVIDED, HOWEVER, THAT ANY SUIT SEEKING ENFORCEMENT AGAINST -------- ------- ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE AGENT ELECTS TO BRING SUCH ACTION OR WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. BORROWER AND THE LENDER GROUP WAIVE, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ----- --- ---------- ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13(b). ------------- BORROWER AND THE LENDER GROUP HEREBY WAIVE, TO THE EXTENT PERMITTED BY APPLICABLE LAW, THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR C&USE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE 92 TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND THE LENDER GROUP REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 14. ASSIGNMENTS AND PARTICIPATIONS; SUCCESSORS. 14.1 Assignments and Participations. ------------------------------ (a) Any Lender may, with the written consent of Agent, assign and delegate to one or more assignees (each an "Assignee") all, or any ratable part -------- of all, of the Obligations, the Commitments and the other right; and obligations of such Lender hereunder and under the other Loan Documents, in a minimum amount of $5,000,000; provided, however, that Borrower and Agent may continue to deal -------- ------- solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses, and related information with respect to the Assignee, have been given to Borrower and Agent by such Lender and the Assignee, (ii) such Lender and its Assignee have delivered to Borrower and Agent an Assignment and Acceptance in form and substance satisfactory to Agent, and (iii) the assignor Lender or Assignee has paid to Agent for Agent's separate account a processing fee in the amount of $5,000. Anything contained herein to the contrary notwithstanding, the consent of Agent shall not be required (and payment of any fees shall not be required) if such assignment is in connection with any merge, consolidation, sale, transfer, or other disposition of all or any substantial portion of the business or loan portfolio of such Lender. (b) From and after the date that Agent notifies the assignor Lender (with a copy to Borrower) that it has received an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations herein under have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights except with respect to Section 11.3 hereof) and be released from its obligations under this ------------ Agreement (and in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement and the other Loan Documents, such Lender shall cease to be a party hereto and thereto), and such assignment shall affect a novation between Borrower and the Assignee. 93 (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the Assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (1) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document furnished pursuant hereto, (2) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrower or the performance or observance by Borrower of any of its obligations under this Agreement or any other Loan Document furnished pursuant hereto, (3) such Assignee confirms that it has received a copy of this Agreement, together with such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance, (4) such Assignee will, independently and without reliance upon Agent, such assigning Lender or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement, (5) such Assignee appoints and authorizes Agent to take such actions and to exercise such powers under this Agreement as are delegated to Agent, by the terms hereof, together with such powers as are reasonably incidental thereto, and (6) such Assignee agrees that it will perform all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance and receipt and acknowledgment by Agent of such fully executed Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto. (e) Any Lender may at any time, with the written consent of Agent, sell to one or more commercial banks, financial institutions, or other Persons not Affiliates of such Lender (a "Participant") participating interests in its ----------- Obligations, the Commitment, and the other rights and interests of that Lender (the "Originating Lender") hereunder and under the other Loan Documents ------------------ (provided that no written consent of Agent shall be required in connection with any sale of any such participating interests by a Lender to an Eligible Transferee); provided, however, that (i) the Originating Lender shall remain a -------- ------- "Lender" for all purposes of this Agreement and the other Loan Documents and the Participant receiving the participating interest in the Obligations, the Commitments, and the other rights and interests of the Originating Lender hereunder shall not constitute a "Lender" hereunder or under the other Loan Documents and the Or Originating Lender's obligations under this Agreement shall remain unchanged, (ii) the Originating Lender shall remain solely responsible for the performance of such obligations, (iii) Borrower, Agent, and the Lenders shall continue to deal solely and directly with the Originating Lender in connection with the 94 Originating Lender's rights and obligations under this Agreement and the other Loan Documents, (iv) no Lender shall transfer or grant any participating interest under which the Participant has the right to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment to, or consent or waiver with respect to this Agreement or of any other Loan Document would (A) extend the final maturity date of the Obligations hereunder in which such Participant is participating, (B) reduce the interest rate applicable to the Obligations hereunder in which such Participant is participating, (C) release all or a material portion of the Collateral or guaranties (except to the extent expressly provided herein or in any of the Loan Documents) supporting the Obligations hereunder in which such Participant is participating, (D) postpone the payment of, or reduce the amount of, the interest or fees payable to such Participant through such Lender, or (E) change the amount or due dates of scheduled principal repayments or prepayments or premiums, and (v) all amounts payable by Borrower hereunder shall be determined as if such Lender had not sold such participation; except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement. The rights of any Participant only shall be derivative through the Originating Lender with whom such Participant participates and no Participant shall have any rights under this Agreement or the other Loan Documents or any direct rights as to the other Lenders, Agent, Borrower, the Collections, the Collateral, or otherwise in respect of the Obligations. No Participant shall have the right to participate directly in the making of decisions by the Lenders among themselves. (f) In connection with any such assignment or participation or proposed assignment or participation, a Lender may disclose all documents and information which it now or hereafter may have relating to Borrower or Borrower's business, so long as such potential assignee or participant has previously agreed in writing to keep such documents and information confidential pursuant to Section 16.17 as if it were a Lender hereunder. ------------- (g) Any other provision in this Agreement notwithstanding, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement in favor of any Federal Reserve Bank in accordance with Regulation A of the Federal Reserve Bank or U.S. Treasury Regulation 31 CFR (S)203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. 14.2 Successors. This Agreement shall bind and inure to the benefit of the ---------- respective successors and assigns of each of the parties; provided, however, -------- ------- that Borrower may not assign this Agreement or any rights or duties hereunder without the Lenders' prior written consent and any prohibited assignment shall be absolutely void ab initio. No consent 95 to assignment by the Lenders shall release Borrower from its Obligations. A Lender may assign this Agreement and the other Loan Documents and its rights and duties hereunder and thereunder pursuant to Section 14.1 hereof and, except as ------------ expressly required pursuant to Section 14.1 hereof, no consent or approval by ------------ Borrower is required in connection with any such assignment. 15. AMENDMENTS; WAIVERS. 15.1 Amendments and Waivers. No amendment or waiver of any provision of ---------------------- this Agreement or any other Loan Document, and no consent with respect to any departure by Borrower therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by Agent at the written request of the Required Lenders) and Borrower and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent -------- ------- shall, unless in writing and signed by all of the Lenders affected thereby and Borrower and acknowledged by Agent, do any of the following: (a) increase or extend any Commitment of any Lender, (b) postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees, or other amounts due hereunder or under any other Loan Document, (c) reduce the principal of, or the rate of interest on, any loan or other extension of credit hereunder, or reduce any fees or other amounts payable hereunder or under any other Loan Document, (d) change the percentage of the Commitments that is required to take any action hereunder, (e) amend this Section or any provision of the Agreement providing for consent or other action by all Lenders, (f) release Collateral other than as permitted by Section 16.12, ------------- (g) change the definition of "Required Lenders", (h) contractually subordinate any of the Agent's Liens, (i) release Borrower or Holdco from any obligation for the payment of money, or (j) change the definition of Borrowing Base or the definitions of Eligible Accounts, Eligible Inventory, Maximum Revolves Amount, Term Loan Amount, or change Section 2.1(b), or -------------- 96 (k) amend any of the provisions of Section 16. ---------- and, provided further, however, that no amendment, waiver or consent shall, -------- ------- ------- unless in writing and signed by Agent, Issuing Lender, or Swing Lender, as applicable, affect the rights or duties of Agent, Issuing Lender, or Swing Lender, as applicable, under this Agreement or any other Loan Document. The foregoing notwithstanding, any amendment, modification, waiver, consent, termination, or release of, or with respect to, any provision of this Agreement or any other Loan Document that relates only to the relationship of the Lender Group among themselves, and that does not affect the rights or obligations of Borrower, shall not require consent by or the agreement of Borrower. 15.2 Replacement of Holdout Lender. ----------------------------- (a) If any action to be taken by the Lender Group or Agent hereunder requires the unanimous consent, authorization, or agreement of all Lenders, and a Lender ("Holdout Lender") fails to give its consent, authorization, or agreement, then Agent, upon at least 5 Business Days prior irrevocable notice to the Holdout Lender, may permanently replace the Holdout Lender with one or more substitute Lenders (each, a "Replacement Lender"), and the Holdout Lender shall have no right to refuse to be replaced hereunder. Such notice to replace the Holdout Lender shall specify an effective date for such replacement, which date shall not be later than 15 Business Days after the date such notice is given. (b) Prior to the effective date of such replacement, the Holdout Lender and each Replacement Lender shall execute and deliver an Assignment and Acceptance Agreement, subject only to the Holdout Lender being repaid its share of the outstanding Obligations (including an assumption of its Pro Rata Share of the Risk Participation Liability) without any premium or penalty of any kind whatsoever. If the Holdout Lender shall refuse or fail to execute and deliver any such Assignment and Acceptance Agreement prior to the effective date of such replacement, the Holdout Lender shall be deemed to have executed and delivered such Assignment and Acceptance Agreement. The replacement of any Holdout Lender shall be made in accordance with the terms of Section 14.1. Until such time as ------------ the Replacement Lenders shall have acquired all of the Obligations, the Commitments, and the other rights and obligations of the Holdout Lender hereunder and under the other Loan Documents, the Holdout Lender shall remain obligated to make the Holdout Lender's Pro Rata Share of Advances and to purchase a participation in each Letter of Credit, in an amount equal to its Pro Rata Share of the Risk Participation Liability of such Letter of Credit. 15.3 No Waivers; Cumulative Remedies. No failure by Agent or any Lender to ------------------------------- exercise any right, remedy, or option under this Agreement or, any other Loan Document, or delay by Agent or any Lender in exercising the same, will operate as a waiver thereof. No waiver by Agent or any Lender will be effective unless it is in writing, and then only to the 97 extent specifically stated. No waiver by Agent or any Lender on any occasion shall affect or diminish Agent's and each Lender's rights thereafter to require strict performance by Borrower of any provision of this Agreement. Agent's and each Lender's rights under this Agreement and the other Loan Documents will be cumulative and not exclusive of any other right or remedy that Agent or any Lender may have. 16. AGENT; THE LENDER GROUP. 16.1 Appointment and Authorization of Agent. Each Lender hereby designates -------------------------------------- and appoints Foothill as its representative under this Agreement and the other Loan Documents and each Lender hereby irrevocably authorizes Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to Agent by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Agent agrees to act as such on the express conditions contained in this Section 16. The ---------- provisions of this Section 16 (except Section 16.11 and Section 16.17(d)) are ---------- ------------- ---------------- solely for the benefit of Agent, and the Lenders, and Borrower shall have no rights as a third party beneficiary of any of the provisions contained herein. Any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document notwithstanding, Agent shall not have any duties or responsibilities, except those expressly set forth herein, nor shall Agent have or be deemed to have any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against Agent; it being expressly understood and agreed that the use of the word "Agent" is for convenience only, that Foothill is merely the representative of the Lenders, and only has the contractual duties set forth herein. Except as expressly otherwise provided in this Agreement, Agent shall have and may use its sole discretion with respect to exercising or refraining from exercising any discretionary rights or taking or refraining from taking any actions that Agent expressly is entitled to take or assert under or pursuant to this Agreement and the other Loan Documents. Without limiting the generality of the foregoing, or of any other provision of the Loan Documents that provides rights or powers to Agent, Lenders agree that Agent shall have the right to exercise the following powers as long as this Agreement remains in effect: (a) maintain, in accordance with its customary business practices, ledgers and records reflecting the status of the Obligations, the Collateral, the Collections, and related matters, (b) execute or file any and all financing or similar statements or notices, amendments, renewals, supplements, documents, instruments, proofs of claim, notices and other written agreements with respect to the Loan Documents, (C) make Advances, for itself or on behalf of Lenders as provided in the Loan Documents, (d) exclusively receive, apply, and distribute the Collections as provided in the Loan Documents, (e) open and maintain such bank accounts and cash management arrangements as Agent deems necessary and appropriate in accordance with the Loan Documents for the foregoing purposes with respect to the Collateral and the Collections, (f) perform, exercise, and enforce any and all other rights and remedies of the Lender Group with respect to Borrower, the 98 Obligations, the Collateral, the Collections, or otherwise related to any of same as provided in the Loan Documents, and (g) incur and pay such Lender Group Expenses as Agent may deem necessary or appropriate for the performance and fulfillment of its functions and powers pursuant to the Loan Documents. 16.2 Delegation of Duties. Agent may execute any of its duties under this -------------------- Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects as long as such selection was made without gross negligence or willful misconduct. 16.3 Liability of Agent. None of the Agent-Related Persons shall (i) be ------------------ liable for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Lenders for any recital, statement, representation or warranty made by Borrower or any Subsidiary or Affiliate of Borrower, or any officer or director thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of Borrower or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the Books or properties of Borrower or the books or records or properties of any of Borrower's Subsidiaries or Affiliates. 16.4 Reliance by Agent. Agent shall be entitled to rely, and shall be ----------------- fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent, or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to Borrower or counsel to any Lender), independent accountants and other experts selected by Agent. Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless Agent shall first receive such advice or concurrence of the Lenders as it deems appropriate and until such instructions are received, Agent shall act, or refrain from acting, as it deems advisable. If Agent so requests, it shall first be indemnified to its reasonable satisfaction by Lenders against any and all liability and expense that may be incurred by it by reason of taking or continuing to take any such action. Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the 99 Lenders and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Lenders. 16.5 Notice of Default or Event of Default. Agent shall not be deemed to ------------------------------------- have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest, fees, and expenses required to be paid to Agent for the account of the Lenders, except with respect to Events of Default of which Agent has actual knowledge, unless Agent shall have received written notice from a Lender or Borrower referring to this Agreement, describing such Default or Event of Default, and stating that such notice is a "notice of default." Agent promptly will notify the Lenders of its receipt of any such notice or of any Event of Default of which Agent has actual knowledge. If any Lender obtains actual knowledge of any Event of Default, such Lender promptly shall notify the other Lenders and Agent of such Event of Default. Each Lender shall be solely responsible for giving any notices to its Participants, if any. Subject to Section 16.4, Agent shall take such ------------ action with respect to such Default or Event of Default as may be requested by the Required Lenders in accordance with Section 9; provided, however, that --------- -------- ------- unless and until Agent has received any such request, Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable. 16.6 Credit Decision. Each Lender acknowledges that none of the Agent- --------------- Related Persons has made any representation or warranty to it, and that no act by Agent hereinafter taken, including any review of the affairs of Borrower and its Subsidiaries or Affiliates, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Lender. Each Lender represents to Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to Borrower. Each Lender also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information is it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower and any other Person (other than the Lender Group) party to a Loan Document. Except for notices, reports, and other documents expressly herein required to be furnished to the Lenders by Agent, Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial and other condition or creditworthiness of Borrower and any other Person party to a Loan Document that may come into the possession of any of the Agent-Related Persons. 100 16.7 Costs and Expenses; Indemnification. Agent may incur and pay Lender ----------------------------------- Group Expenses to the extent Agent reasonably deems necessary or appropriate for the performance and fulfillment of its functions, powers, and obligations pursuant to the Loan Documents, including court costs, reasonable attorneys fees and expenses, costs of collection by outside collection agencies and auctioneer fees and costs of security guards or insurance premiums paid to maintain the Collateral, whether or not Borrower is obligated to reimburse Agent or Lenders for such expenses pursuant to the Loan Agreement or otherwise. Agent is authorized and directed to deduct and retain sufficient amounts from Collections received by Agent to reimburse Agent for such out-of-pocket costs and expenses prior to the distribution of any amounts to Lenders. In the event Agent is not reimbursed for such costs and expenses from Collections received by Agent, each Lender hereby agrees that it is and shall be obligated to pay to or reimburse Agent for the amount of such Lender's Pro Rata Share thereof. Whether or not the transactions contemplated hereby are consummated, the Lenders shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), according to their Pro Rata Shares, from and against any and all Indemnified Liabilities; provided, however, that no Lender shall be liable for the payment -------- ------- to any Agent-Related Person of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct nor shall any Lender be liable for the obligations of any Defaulting Lender in failing to make an Advance or other extension of credit hereunder. Without limitation of the foregoing, each Lender shall reimburse Agent upon demand for such Lender's ratable share of any costs or out-of-pocket expenses (including attorneys fees and expenses) incurred by Agent in connection with the preparation, execution, delivery, administration, modification, amendment, or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document or any document contemplated by or referred to herein, to the extent that Agent is not reimbursed for such expenses by or on behalf of Borrower. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of Agent. 16.8 Agent in Individual Capacity. Foothill and its Affiliates may make ---------------------------- loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in, and generally engage in any kind of banking, trust, financial advisory, underwriting, or other business with Borrower and its Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Documents as though Foothill were not Agent hereunder, and, in each case, without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, Foothill or its Affiliates may receive information regarding Borrower or its Affiliates and any other Person (other than the Lender Group) party to any Loan Documents that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver Agent will use its reasonable best efforts to obtain), Agent shall 101 not be under any obligation to provide such information to them. The terms "Lender" and "Lenders" include Foothill in its individual capacity. 16.9 Successor Agent. Agent may resign as Agent upon 45 days notice to the --------------- Lenders. If Agent resigns under this Agreement, the Required Lenders shall appoint a successor Agent for the Lenders. If no successor Agent is appointed prior to the effective date of the resignation of Agent, Agent may appoint, after consulting with the Lenders, a successor Agent. If Agent has materially breached or failed to perform any material provision of this Agreement or of applicable law, the Required Lenders may agree in writing to remove and replace Agent with a successor Agent from among the Lenders. In any such event, upon the acceptance of its appointment as successor Agent hereunder, such successor Agent shall succeed to all the rights, powers, and duties of the retiring Agent and the term "Agent" shall mean such successor Agent and the retiring Agent's appointment, powers, and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Section 16 shall ---------- inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor Agent has accepted appointment as Agent by the date which is 45 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Lenders shall perform all of the duties of Agent hereunder until such time, if any, as the Lenders appoint a successor Agent as provided for above. The successor Agent shall be an Eligible Transferee. 16.10 Lender in Individual Capacity. Any Lender and its respective ----------------------------- Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Subsidiaries and Affiliates and any other Person (other than the Lender Group) party to any Loan Documents as though such Lender were not a Lender hereunder without notice to or consent of the other members of the Lender Group. The other members of the Lender Group acknowledge that, pursuant to such activities, such Lender and its respective Affiliates may receive information regarding Borrower or its Affiliates and any other Person (other than the Lender Group) party to any Loan Documents that is subject to confidentiality obligations in favor of Borrower or such other Person and that prohibit the disclosure of such information to the Lenders, and the Lenders acknowledge that, in such circumstances (and in the absence of a waiver of such confidentiality obligations, which waiver such Lender will use its reasonable best efforts to obtain), such Lender not shall be under any obligation to provide such information to them. With respect to the Swing Loans and Agent Advances, Swing Lender shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the sub-agent of Agent. 16.11 Withholding Taxes. ----------------- 102 (a) If any Lender is not a United States Person within the meaning of Section 7701(a)(30) of the IRC and such Lender claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the IRC, such Lender agrees with and in favor of Agent and Borrower, to deliver to Agent and Borrower: (i) if such Lender claims an exemption from withholding tax pursuant to the portfolio debt exception set forth in Section 871(h) and 881(c) of the IRC, (a) a statement of the Lender, signed under penalty of perjury, that it is not (I) a "bank" as described in Section 881(c)(3)(A) of the IRC, (II) a 10% shareholder of the Borrower (within the meaning of Section 881(c)(3)(B) of the IRC), or (III) a controlled foreign corporation described in Section 881(c)(3)(C) of the IRC, and (B) a properly completed IRS Form W-8BEN (or, if appropriate, an IRS Form W-8 IMY, together with all appropriate associated withholding certificates, documentary evidence and withholding statements), before the first payment of any interest under this Agreement and at any other time reasonably requested by Agent or Borrower; (ii) if such Lender claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, properly completed IRS Form W-8BEN (or if appropriate, an IRS Form W-8 IMY, together with all appropriate associated withholding certificates, documentary evidence and withholding statements), before the first payment of any interest under this Agreement and at any other time reasonably requested by Agent or Borrower; (iii) if such Lender claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Lender, a properly completed and executed copy of IRS Form W-8ECI before the first payment of any interest is due under this Agreement and at any other time reasonably requested by Agent or Borrower; (iv) such other form or forms as may be required under the IRC or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Lender agrees promptly to notify Agent and Borrower of any change in circumstances which would modify or render invalid any claimed exemption or reduction. (b) If any Lender claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form W-8BEN and such Lender sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of Borrower to such Lender, such Lender agrees to notify Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of Borrower to such Lender. To the 103 extent of such percentage amount, Agent will treat such Lender's IRS Form W-8BEN as no longer valid. (c) If any Lender is entitled to a reduction in the applicable withholding tax, Agent may withhold from any interest payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If the forms or other documentation required by subsection (a) of this Section are not delivered to Agent, then Agent may withhold from any interest payment to such Lender not providing such forms or other documentation an amount equivalent to the applicable withholding tax. (d) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify and hold Agent harmless for all amounts paid, directly or indirectly, by Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to Agent under this Section, together with all costs and expenses (including attorneys fees and expenses). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of Agent. (e) All payments made by Borrower hereunder or under any note will be made without setoff, counterclaim, or other defense except as required by applicable law other than for Taxes (as defined below). All such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction (other than the United States) or by any political subdivision or taxing authority thereof or therein (other than of the United States) with respect to such payments (but excluding, any tax imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein (i) measured by or based on the net income or net profits of a Lender, or (ii) to the extent that such tax results from a change in the circumstances of the Lender, including a change in the residence, place of organization, or principal place of business of the Lender, or a change in the branch or lending office of the Lender participating in the transactions set forth herein) and all interest, penalties or similar liabilities with respect thereto (all such non-excluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, Borrower agrees to pay the full amount of such Taxes (less, to the extent readily ascertainable by such Lender, the full amount of any benefit such Lender realizes as a result of the levy of such Taxes, including any tax credit with respect to such Taxes) and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any note, including ny amount paid pursuant to this Section ------- 16.11(e) after withholding or deduction for or on account of any Taxes, will - -------- not be less than 104 the amount provided for herein; provided, however, that Borrower shall not be -------- ------- required to increase any such amounts payable to Agent or any Lender (i) that is not organized under the laws of the United States, if such Person fails to comply with the other requirements of this Section 16.11, or (ii) if the ------------- increase in such amount payable results from Agent's or such Lender's own willful misconduct or gross negligence. Borrower will furnish to Agent as promptly as possible after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by Borrower. 16.12 Collateral Matters. ------------------ (a) The Lenders hereby irrevocably authorize Agent, at its option and in its sole discretion, to release any Lien on any Collateral (i) upon the termination of the Commitments and payment and satisfaction in full by Borrower of all Obligations, (ii) constituting property being sold or disposed of if a release is required or desirable in connection therewith and if Borrower certifies to Agent that the sale or disposition is permitted under Section 7.4 ----------- of this Agreement or the other Loan Documents (and Agent may rely conclusively on any such certificate, without further inquiry), (iii) constituting property in which Borrower owned no interest at the time the security interest was granted or at any time thereafter, or (iv) constituting property leased to Borrower under a lease that has expired or is terminated in a transaction permitted under this Agreement. Except as provided above, Agent will not execute and deliver a release of any Lien on any Collateral without the prior written authorization of (y) if the release is of all or substantially all of the Collateral, all of the Lenders, or (z) otherwise, the Required Lenders. Upon request by Agent or Borrower at any time, the Lenders will confirm in writing Agent's authority to release any such Liens on particular types or items of Collateral pursuant to this Section 16.12; provided, however, that (1) Agent ------------- -------- ------- shall not be required to execute any document necessary to evidence such release on terms that, in Agent's opinion, would expose Agent to liability or create any obligation or entail any consequence other than the release of such Lien without recourse, representation, or warranty, and (2) such release shall not in any manner discharge, affect, or impair the Obligations or any Liens (other than those expressly being released) upon (or obligations of Borrower in respect of) all interests retained by Borrower, including, the proceeds of any sale, all of which shall continue to constitute part of the Collateral. (b) Agent shall have no obligation whatsoever to any of the Lenders to assure that the Collateral exists or is owned by Borrower or is cared for, protected, or insured or has been encumbered, or that the Agent's Liens have been properly or sufficiently or lawfully created, perfected, protected, or enforced or are entitled to any particular priority, or to exercise at all or in any particular manner or under any duty of care, disclosure or fidelity, or to continue exercising, any of the rights, authorities and powers granted or available to Agent pursuant to any of the Loan Documents, it being understood and agreed that in respect of the Collateral, or any act, omission, or event related thereto, subject to the terms and conditions contained herein, Agent may act in any manner it may deem appropriate, in its sole discretion given Agent's own interest in the Collateral in its capacity as one of the 105 Lenders and that Agent shall have no other duty or liability whatsoever to any Lender as to any of the foregoing, except as otherwise provided herein. 16.13 Restrictions on Actions by Lenders; Sharing of Payments. ------------------------------------------------------- (a) Each of the Lenders agrees that it shall not, without the express consent of Agent, and that it shall, to the extent it is lawfully entitled to do so, upon the request of Agent, set off against the Obligations, any amounts owing by such Lender to Borrower or any deposit accounts of Borrower now or hereafter maintained with such Lender. Each of the Lenders further agrees that it shall not, unless specifically requested to do so by Agent, take or cause to be taken any action, including, the commencement of any legal or equitable proceedings, to foreclose any Lien on, or otherwise enforce any security interest in, any of the Collateral the purpose of which is, or could be, to give such Lender any preference or priority against the other Lenders with respect to the Collateral. (b) If, at any time or times any Lender shall receive (i) by payment, foreclosure, setoff, or otherwise, any proceeds of Collateral or any payments with respect to the Obligations arising under, or relating to, this Agreement or the other Loan Documents, except for any such proceeds or payments received by such Lender from Agent pursuant to the terms of this Agreement, or (ii) payments from Agent in excess of such Lender's ratable portion of all such distributions by Agent, such Lender promptly shall (1) turn the same over to Agent, in kind, and with such endorsements as may be required to negotiate the same to Agent, or in immediately available funds, as applicable, for the account of all of the Lenders and for application to the Obligations in accordance with the applicable provisions of this Agreement, or (2) purchase, without recourse or warranty, an undivided interest and participation in the Obligations owed to the other Lenders so that such excess payment received shall be applied ratably as among the Lenders in accordance with their Pro Rata Shares; provided, however, that if all or part of such excess payment received by the purchasing party is thereafter recovered from it, those purchases of participations shall be rescinded in whole or in part, as applicable, and the applicable portion of the purchase price paid therefor shall be returned to such purchasing party, but without interest except to the extent that such purchasing party is required to pay interest in connection with the recovery of the excess payment. 16.14 Agency for Perfection. Agent hereby appoints each other Lender as its --------------------- agent (and each Lender hereby accepts such appointment) for the purpose of perfecting the Agent's Liens in assets which, in accordance with Article 9 of the UCC can be perfected only by possession. Should any Lender obtain possession of any such Collateral, such Lender shall notify Agent thereof, and, promptly upon Agent's request therefor shall deliver such Collateral to Agent or in accordance with Agent's instructions. 16.15 Payments by Agent to the Lenders. All payments to be made by Agent to -------------------------------- the Lenders shall be made by bank wire transfer or internal transfer of immediately available funds pursuant to such wire transfer instructions as each party may designate for itself by 106 written notice to Agent. Concurrently with each such payment, Agent shall identify whether such payment (or any portion thereof) represents principal, premium, or interest of the Obligations. 16.16 Concerning the Collateral and Related Loan Documents. Each member ---------------------------------------------------- of the Lender Group authorizes and directs Agent to enter into this Agreement and the other Loan Documents relating to the Collateral, for the benefit of the Lender Group. Each member of the Lender Group agrees that any action taken by Agent in accordance with the terms of this Agreement or the other Loan Documents relating to the Collateral and the exercise by Agent of its powers set forth therein or herein, together with such other powers that are reasonably incidental thereto, shall be binding upon all of the Lenders. 16.17 Field Audits and Examination Reports; Confidentiality; Disclaimers by --------------------------------------------------------------------- Lenders; Other Reports and Information. By becoming a party to this Agreement, - -------------------------------------- each Lender: (a) is deemed to have requested that Agent furnish such Lender, promptly after it becomes available, a copy of each field audit or examination report (each a "Report" and collectively, "Reports") prepared by Agent, and ------ ------- Agent shall so furnish each Lender with such Reports, (b) expressly agrees and acknowledges that Agent does not (i) make any representation or warranty as to the accuracy of any Report, and (ii) shall not be liable for any information contained in any Report, (c) expressly agrees and acknowledges that the Reports are not comprehensive audits or examinations, that Agent or other party performing any audit or examination will inspect only specific information regarding Borrower and will rely significantly upon the Books, as well as on representations of Borrower's personnel, (d) agrees to keep all Reports and other material, non-public information regarding Borrower and its Subsidiaries and their operations, assets, and existing and contemplated business plans in a confidential manner; it being understood and agreed by Borrower that in any event such Lender may make disclosures (a) to counsel for and other advisors, accountants, and auditors to such Lender, (b) reasonably required by any bona fide potential or actual Assignee or Participant in connection with any contemplated or actual assignment or transfer by such Lender of an interest herein or any participation interest in such Lender's rights hereunder, (c) of information that has become public by disclosures made by Persons other than such Lender, its Affiliates, assignees, transferees, or Participants, or (d) as required or requested by any court, governmental or administrative agency, pursuant to any subpoena or other legal process, or by any law, statute, regulation, or court order; provided, -------- however, that, unless prohibited by applicable law, statute, regulation, or - ------- court order, such Lender shall notify Borrower of any request by any court, governmental or administrative agency, or pursuant to any subpoena or other legal process for disclosure of 107 any such non-public material information concurrent with, or where practicable, prior to the disclosure thereof, and (e) without limiting the generality of any other indemnification provision contained in this Agreement, agrees: (i) to hold Agent and any other Lender preparing a Report harmless from any action the indemnifying Lender may take or conclusion the indemnifying Lender may reach or draw from any Report in connection with any loans or other credit accommodations that the indemnifying Lender has made or may make to Borrower, or the indemnifying Lender's participation in, or the indemnifying Lender's purchase of, a loan or loans of Borrower; and (ii) to pay and protect, and indemnify, defend and hold Agent, and any such other Lender preparing a Report harmless from and against, the claims, actions, proceedings, damages, costs, expenses, and other amounts (including, attorneys fees and costs) incurred by Agent and any such other Lender preparing a Report as the direct or indirect result of any third parties who might obtain all or part of any Report through the indemnifying Lender. In addition to the foregoing: (x) any Lender may from time to time request of Agent in writing that Agent provide to such Lender a copy of any report or document provided by Borrower to Agent that has not been contemporaneously provided by Borrower to such Lender, and, upon receipt of such request, Agent promptly shall provide a copy of same to such Lender, (y) to the extent that Agent is entitled, under any provision of the Loan Documents, to request additional reports or information from Borrower, any Lender may, from time to time, reasonably request Agent to exercise such right as specified in such Lender's notice to Agent, whereupon Agent promptly shall request of Borrower the additional reports or information reasonably specified by such Lender, and, upon receipt thereof from Borrower, Agent promptly shall provide a copy of same to such Lender, and (z) any time that Agent renders to Borrower a statement regarding the Loan Account, Agent shall send a copy of such statement to each Lender. 16.18 Several Obligations: No Liability. Notwithstanding that certain of --------------------------------- the Loan Documents now or hereafter may have been or will be executed only by or in favor of Agent in its capacity as such, and not by or in favor of the Lenders, any and all obligations on the part of Agent (if any) to make any credit available hereunder shall constitute the several (and not joint) obligations of the respective Lenders on a ratable basis, according to their respective Commitments, to make an amount of such credit not to exceed, in principal amount, at any one time outstanding, the amount of their respective Commitments. Nothing contained herein shall confer upon any Lender any interest in, or subject any Lender to any liability for, or in respect of, the business, assets, profits, losses, or liabilities of any other Lender. Each Lender shall be solely responsible for notifying its Participants of any matters relating to the Loan Documents to the extent any such notice may be required, and no Lender shall have any obligation, duty, or liability to any Participant of any other Lender. Except as provided in Section 16.7, no member of the Lender Group shall ------------ have any liability for the acts or any other member of the Lender Group. No Lender shall be responsible to Borrower or 108 any other Person for any failure by any other Lender to fulfill its obligations to make credit available hereunder, nor to advance for it or on its behalf in connection with its Commitment, nor to take any other action on its behalf hereunder or in connection with the financing contemplated herein. 16.19 Legal Representation of Agent. In connection with the negotiation, ----------------------------- drafting, and execution of this Agreement and the other Loan Documents, or in connection with future legal representation relating to loan administration, amendments, modifications, waivers, or enforcement of remedies, Paul, Hastings, Janofsky & Walker LLP ("Paul Hastings") only has represented and only shall represent Foothill in its capacity as Agent and as a Lender. Each other Lender hereby acknowledges that Paul Hastings does not represent it in connection with any such matters. 17. GENERAL PROVISIONS. 17.1 Effectiveness. This Agreement shall be binding and deemed effective ------------- when executed by Borrower, Agent, and each Lender whose signature is provided for on the signature pages hereof. 17.2 Section Headings. Headings and numbers have been set forth herein for ---------------- convenience only. Unless the contrary is compelled by the context, everything contained in each Section applies equally to this entire Agreement. 17.3 Interpretation. Neither this Agreement nor any uncertainty or -------------- ambiguity herein shall be construed against the Lender Group or Borrower, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all parties and shall be construed and interpreted according to the ordinary meaning of the words used so as to accomplish fairly the purposes and intentions of all parties hereto. 17.4 Severability of Provisions. Each provision of this Agreement shall be -------------------------- severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. 17.5 Amendments in Writing. This Agreement only can be amended by a writing --------------------- signed by Agent (on behalf of the requisite Lenders) and Borrower. 17.6 Counterparts; Telefacsimile Execution. This Agreement may be executed ------------------------------------- in any number of counterparts and by different parties on separate counterparts, each of which, when executed and delivered, shall be deemed to be an original, and all of which, when taken together, shall constitute but one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering an executed counterpart of this Agreement by telefacsimile also shall deliver an original executed 109 counterpart shall not affect the validity, enforceability, and binding effect of this Agreement. The foregoing shall apply to each other Loan Document mutatis mutandis. 17.7 Revival and Reinstatement of Obligations. If the incurrence or payment ---------------------------------------- of the Obligations by Borrower or Holdco or the transfer to the Lender Group of any property should for any reason subsequently be declared to be void or voidable under any state or federal law relating to creditors' rights, including provisions of the Bankruptcy Code relating to fraudulent conveyances, preferences, or other Voidable or recoverable payments of money or transfers of property (collectively, a "Voidable Transfer"), and if the Lender Group is ----------------- required to repay or restore, in whole or in part, any such Voidable Transfer, or elects to do so upon the reasonable advice of its counsel, then, as to any such Voidable Transfer, or the amount thereof that the Lender Group is required or elects to repay or restore, and as to all reasonable costs, expenses, and attorneys fees of the Lender Group related thereto, the liability of Borrower automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 17.8 Integration. This Agreement, together with the other Loan Documents, ----------- reflects the entire understanding of the parties with respect to the transactions contemplated hereby and shall not be contradicted or qualified by any other agreement, oral or written, before the date hereof. 17.9 Conflicts. Except as otherwise provided in this Agreement or any of --------- the other Loan Documents by specific reference to the applicable provisions of this Agreement, if any provision contained in this Agreement conflicts with any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control [Signature page to follow.] 110 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first above written. ASSOCIATED HYGIENIC PRODUCTS LLC, a Delaware limited liability company By: /s/ Peter Chang ------------------------- Name: Peter Chang ------------------------- Title: President ------------------------- FOOTHILL CAPITAL CORPORATION, a California corporation, as Agent and as a Lender By: /s/ Phyliss Hasen ------------------------- Name: Phyliss Hasen ------------------------- Title: Vice President ------------------------- AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT SIGNATURE PAGE EX-10.C.3 4 dex10c3.txt SHORT TERM FINANCING AGREEMENT EXHIBIT 10.C.3 Term Sheet DSG International Limited 1. Borrower DSG International Limited ("DSG" or the "Company") 2. Lender Breakers Investment Holding Limited, a BVI Company ("BIHL") 3. Principal Amount US$15,000,000 (United States Dollars Fifteen Million) ("Loan") to be drawn in full at one time 4. Fees and Expenses DSG will pay an Advisory Fee equal to 1.0% of the Loan to Schroder Capital Partners Limited ("SCPL"), to be deducted by BIHL from the Loan upon draw down. In addition DSG shall pay all out of pocket expenses including any legal and other fees incurred by SCPL or BIHL in respect or in connection with the Loan. 5. Interest Rate 14.5% per annum. Failure to repay the Loan or any part thereof on the due dates will result in an increase in the interest payable to a note of 3% per annum above the Interest Rate on all outstanding amounts whilst they are outstanding. 6. Interest Period Interest will be paid and calculated monthly in advance on the principal amount of the Loan and Interest outstanding as of the beginning of the Interest Period in question. 7. Maturity The Loan shall be repaid in full twelve months from the date of advance. DSG will have the ability to prepay the Loan in whole or in part at any time after the six-month anniversary of the date of ----- advance. For the avoidance of doubt, DSG will not have the ability to prepay the Loan prior to six- month anniversary of the advance. 8. Collateral The Loan will be secured by a first priority perfected security interest in DSG's (i) Australian subsidiary companies - DSG Pty Limited and Napples DSG Pty Limited (the "Australian Subsidiaries") 9. Covenants DSG and the Australian Subsidiaries will be required to maintain a minimum level of tangible Net Worth and EBITDA identical to the covenants in that regard contained in the $35 Million Loan Agreement and for the Australian Subsidiaries, the covenants and the ratios will -1- be the same as those contained in the $35 Million Loan Agreement for AHP. DSG will covenant that all necessary consents have been obtained and that this Loan and the terms contained in this Term Sheet do not and will not breach or result in the breach of the $35 Million Loan Agreement or any other agreement to which DSG or any company within its group is party. DSG shall otherwise provide BIHL with such covenants as the Lender considers in its sole absolute discretion appropriate. 10. Warrants DSG will grant BIHL Warrants priced at $0.01 for 0.75% of the Company's fully diluted common stock for each month whilst any part of the Loan is outstanding - i.e., during the first 12 months after the date of the advance Warrants equivalent to a total of 9.0% of the Company's full diluted common stock. Regardless of the repayment or any prepayment of this Loan, in no event will BIHL receive Warrants equivalent to less than 4.5% of DSG's fully diluted Common Stock. 11. Conditions Precedent (1) DSG is a corporation in good standing in the state of its incorporation and qualified to do business in other states and countries where it has collateral. (2) Evidence satisfactory to BIHL that DSG has or will have adequate funds available to consummate the acquisition of Drypers Corporation's US Assets based on the terms of the Asset Purchase Agreement dated February 20, 2001. (3) All necessary consents will be obtained. (4) Such other conditions precedent as BIHL considers appropriate in the circumstances. BIHL may in its discretion waive any such conditions precedent. 12. Indemnification DSG will provide BIHL with same indemnification as provided to Foothill under the $35 Million Loan Agreement. 13. Representations and DSG will provide BIHL with Representations and Warranties Warranties as BIHL in its sole absolute discretion thinks appropriate but which shall include the same Representations and Warranties as have been provided to Foothill Capital Corporation under the $35 Million Loan Agreement with the additional proviso that such -2- Representations and Warranties shall be true with respect to DSG in addition to AHP. 14. Governing Law Hong Kong 15. Formal Documentation All Formal Documentation evidencing the Loan and the collateral therefor shall be in form and having contents satisfactory to BIHL and its legal counsel.
-3- The undersigned hereby certifies that: (i) DSG International Limited has or will have adequate funds available to consummate the acquisition of Drypers Corporation's U.S. Assets based upon the terms of the Asset Purchase Agreement dated February 20, 2001 and (ii) all necessary consents to complete the acquisition referred to in (i) above will be obtained. /s/ Brandon Wang ----------------------------------- Brandon Wang Chairman, DSG International Limited To: Breakers Investment Holding Limited Romasco Place, Wickhams Cay 1 Tortola BVI In consideration of your agreeing at my request to advance to DSG International Limited ("DSG"), a British Virgin Island company, the sum of US$15,000,000 pursuant to the terms of a letter of even date herewith addressed to DSG and the undersigned a copy of which is attached hereto I the undersigned hereby guarantee to you the repayment on the due dates therefor by DSG of all sums of money advanced by you to DSG as aforesaid with interest thereon subject as hereinafter mentioned that is to say: 1. Notice in writing of any default on the part of DSG is to be given by you to me and within 14 days from its receipt payment shall be made by me of all sums then due from me under this guarantee. 2. This guarantee shall not be considered as satisfied by any intermediate payment or satisfaction of the whole or any part of any of such sums of money owing as aforesaid but shall be a continuing security and shall extend to cover any of such sums of money which shall for the time being constitute the balance due to you by DSG on any account and shall be binding as a continuing security on me, my executors, administrators and legal representatives. 3. No illegality or invalidity of or in respect of the said letter or sums of money advanced by you to DSG as aforesaid shall affect or impair my liability hereunder. 4. I shall not be discharged or released from this guarantee by any arrangement made between you and DSG without my consent or by any alteration in the obligations undertaken by DSG or by any forbearance whether as to payment time performance or otherwise. 5. A certificate under your hand or that of your duly authorized agent as to the amount due at any time from DSG to you and/or any interest due thereon shall be conclusive and binding on me in the absence of manifest error. 6. The proper law of this guarantee is Hong Kong law and I submit to the non-exclusive jurisdiction of the Hong Kong Courts. As Witness whereof I have executed this guarantee the 12th day of March 2001. /s/ Brandon S.L. Wang - ---------------------------- Brandon S.L. Wang EX-10.C.4 5 dex10c4.txt SALE & PURCHASE AGREEMENT DATED 02/20/01 EXHIBIT 10.C.4 ASSET PURCHASE AGREEMENT by and among DSG INTERNATIONAL LIMITED and/or ASSOCIATED HYGIENIC PRODUCTS LLC as the Purchaser and DRYPERS CORPORATION, as Seller Dated as of February 20, 2001 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT, dated as of February 20, 2001 (the "Agreement"), --------- by and among DSG International Limited, a British Virgin Island company and/or Associated Hygienic Products LLC, a Delaware limited liability company, (together with any subsidiary or affiliate to which such rights and obligations may be assigned pursuant to Section 12.3 herein, the "Purchaser" and separately --------- "DSG" and "AHP"), DRYPERS CORPORATION, a Delaware corporation (the "Company" or ------- "Seller"). Capitalized terms used herein and not otherwise defined shall have the meanings set forth in Article XII or in the Bidding Procedures Order. WHEREAS, the Company in its own name and through various subsidiaries is in the business of manufacturing and marketing disposable baby diapers, training pants, undergarments and pre-moistened baby wipes (the "Business") and owns or -------- leases certain assets and properties related thereto; and WHEREAS, the Company is the debtor and debtor in possession in Chapter 11 case number O0-39360-H4-11 (the "Case") pending before the United States ---- Bankruptcy Court for the Southern District of Texas, Houston Division; and WHEREAS, subject to the terms and conditions set forth herein, (i) the Purchaser desires to purchase and obtain the assignment from the Company of, and the Company desires to sell, convey, assign and transfer to the Purchaser, (a) all assets and properties of the Company relating to the Business located in the United States, but such assets shall not include the Excluded Domestic Assets; in each case free and clear of Liens, including, in the case of the Company, pursuant to sections 363(b) and (f) and 365 of the Bankruptcy Code. NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants, and agreements set forth herein, the parties hereto agree as follows: I PURCHASE AND SALE OF ASSETS AND STOCK Section 1.1 Intentionally Omitted. --------------------- Section 1.2 Purchase and Sale of Domestic Purchased Assets. ---------------------------------------------- Section 1.2.1 Sale of the Domestic Purchased Assets. On the terms and ------------------------------------- subject to the conditions set forth in this Agreement, pursuant to sections 363(b) and (f) and 365 of the Bankruptcy Code, at the Closing, the Company shall sell, assign, transfer, convey, and deliver to the Purchaser, and the Purchaser shall purchase and accept from the Company, the Company's rights, title, and interests in and to the Business located in the United States (other than the Excluded Domestic Assets), including, without limitation, in and to all the assets, properties, rights, contractual rights of the Company, and claims of the Company related to the Business (except as otherwise set forth in Section 1.2.2), wherever located, whether tangible or intangible, 1 as the same shall exist at the Closing (such rights, title, and interests in and to all such assets, properties, rights, contracts, and claims being collectively referred to herein as the "Domestic Purchased Assets"), free and clear of all ------------------------- Liens, other than Permitted Liens. The Domestic Purchased Assets shall include, without limitation, all the Seller's rights, title, and interests in and to the assets, properties, rights, contracts, and claims described in clauses (a) through (m) below to the extent they are owned by the Company (but shall specifically exclude those assets, properties, rights, contracts, and claims set forth in Section 1.2.2): (a) all inventory, raw materials, work in process, finished goods, samples, supplier spare parts, machinery, furnishings, furniture, fixtures, office supplies, vehicles, equipment, computers, and other tangible personal property (including all such items which are currently on order for use in the Business in the United States); (b) all Trade Receivables; (c) the Intellectual Property, the rights to sue for, and remedies against, present, and future infringements thereof, and the rights of priority and protection of interests therein under applicable laws; (d) all books and records of the Business, including, without limitation, data processing records, employment and personnel records, customer lists, files, and records, advertising and marketing data and records, credit records, records relating to suppliers and other data as well as all copies of marketing brochures and materials and other printed or written materials in any form or medium relating to the Company's ownership or operation of the Business that the Company is not required by law to retain and duplicates of any such materials that the Company is required by law to retain; (e) all rights under all warranties, representations and guarantees made by suppliers, manufacturers, and contractors in connection with the operation of the Business; (f) all of the Company's rights to the licenses, Permits, approvals, clearances and authorizations desirable or required to conduct the Business, including all of the Company's Environmental Permits; (g) all contracts listed on Schedule 1.2.1(g) (the foregoing being the "Assumed Contracts"), and all rights of the Company thereunder, ----------------- (h) all telephone numbers, other directory listings and Internet domain names used by the Company in the conduct of the Business; (i) all credits, prepaid expenses deferred charges, advance payments, security deposits and prepaid items (and, in each case, security interests from third parties relating thereto); (j) all goodwill relating to the Domestic Purchased Assets and the Business; 2 (k) all computer software programs and databases used by the Company, whether owned, licensed (subject to applicable restrictions), leased, or internally developed; and (1) all leases and subleases, including all amendments and modifications pursuant to which the Company leases any real or personal property that is listed as of the date hereof on Schedule 1.2.1(1) (the foregoing being the "Assumed Leases"). -------------- Section 1.2.2 Excluded Domestic Assets. The following assets, properties, ------------------------ and rights (the "Excluded Domestic Assets") are not included in the Domestic ------------------------ Purchased Assets and shall be retained by the Company: (a) All contracts (other than contracts which have been included by the Purchaser on Schedule 1.2.1(g)) (the "Excluded Contracts"); ------------------ (b) Any leases and subleases, including all amendments and modifications, pursuant to which the Company leases any real or personal property (unless such leases or subleases have been included by the Purchaser on Schedule 1.2.1(1)) (the "Excluded Leases"); --------------- (c) all cash and cash equivalents of the Company; (d) all claims, counterclaims, demands and causes of action of the Company, including without limitation, avoidance actions under sections 544, 547, 548, 549, 550 or 551 of the Bankruptcy Code; (e) any other asset, property, right, contract or claim set forth in Section 1.2.2(e) of the Seller Disclosure Letter; (f) the Company's direct or indirect interest in the Subsidiaries; (g) the Company's direct interest in Drypers Germany; (h) the Puerto Rico Assets; and (i) any claims of the Company against any of its direct or indirect Subsidiaries arising pursuant to intercompany advances, promissory notes, or otherwise and incurred prior to February 14, 2001. Section 1.2.3 Assumed Liabilities. On the terms and subject to the ------------------- conditions set forth in this Agreement, the transferee of the Domestic Purchased Assets, upon the transfer of such assets to such transferee, shall assume from the Company and thereafter pay, perform, or discharge in accordance with their terms, only the following liabilities and obligations of the Company (the "Assumed Liabilities"): ------------------- (a) all liabilities and obligations with respect to, arising out of, or related to, the ownership, possession or use of the Domestic Purchased Assets, but in each case only to the extent arising out of or resulting from the Conduct of the Business after the Closing 3 Date; provided, however, that liabilities in respect of property Taxes for the current tax year shall be prorated as of the Closing Date; and (b) all obligations of the Company under the Assumed Contracts and Assumed Leases which by the terms thereof are to be observed, paid, discharged or performed, as the case may be, at any time after the Closing Date (including obligations for goods in transit which have been ordered but not received by the Company prior to the Closing), but excluding obligations and liabilities arising out of any breach or default by the Company under any such Assumed Contract or Assumed Lease prior to the Closing Date and excluding any cure amounts as set forth in Section 1.2.4(d) below. Section 1.2.4 Excluded Liabilities. Notwithstanding anything to the -------------------- contrary contained herein, the Purchaser shall not assume, or in any way be liable or responsible for, any liabilities, commitments or obligations of the Company of any kind or nature whatsoever, known or unknown, accrued, fixed, contingent or otherwise, liquidated or unliquidated, choate or inchoate, due or to become due, except for the Assumed Liabilities. Without limiting the generality of the foregoing, the transferee of the Domestic Purchased Assets shall not assume, and the Company shall remain responsible for, the following: (a) any liabilities or obligations (whether absolute, contingent or otherwise) with respect to, arising out of, or related to, the Domestic Purchased Assets on or prior to the Closing Date, including, without limitation, any liability or obligation of the Company or any of its employees, consultants, directors, officers, affiliates or agents arising out of, relating to, or caused by (whether directly or indirectly), the Company's ownership, possession, interest in, use or control of the Domestic Purchased Assets; (b) any liability or obligation of the Company for any Taxes of any kind accrued for, applicable to or arising from any period ending on or prior to the Closing Date including, without limitation, property Taxes for periods prior to the Closing Date (but excluding property Taxes for the current tax year, which shall be prorated as of the Closing Date); (c) any liability or obligation of the Company or any Commonly Controlled Entity in respect of any employee benefit plans relating solely to the Company or its employees (including, without limitation, any pension, welfare, or other Benefit Plans), consulting, severance, change in control or similar agreements (unless and to the extent that the Purchaser in its discretion expressly agrees in writing to assume any such obligations after modifying or amending any such plans or agreements as it may in its sole judgment elect); (d) any cure amounts that become payable in respect of the assumption and assignment to the Purchaser of Assumed Contracts, Assumed Leases or other executory contracts and unexpired leases assigned to the Purchaser under section 365 of the Bankruptcy Code; (e) any liability or obligation arising pursuant to Safety and Environmental Laws or principles of common law relating to pollution, protection of the Environment or health and safety based on events, conditions or circumstances occurring or existing or prior to the Closing Date; (f) any obligations or liabilities of any of the Company or any Subsidiary to Wasserstein, Perella and Co., Inc.; (g) any liability or obligation (whether absolute, contingent or otherwise) with respect to, arising out of, or related to the Excluded Domestic Assets; (h) any product liability or claim for injury to person or property, regardless when made or asserted, relating to products manufactured, distributed or sold by the Business on or prior to the Closing Date; (i) any recalls on or after the Closing Date mandated by any Governmental Body of the products of the Business manufactured, distributed or sold by the Seller on or prior to the Closing Date; (j) any intercompany payables and other liabilities or obligations to the Company or any of its affiliates; or (k) all costs and expenses incurred by Seller incident to their negotiation and preparation of 4 this Agreement and their performance of and compliance with the terms, conditions and arrangements contained herein. Section 1.3 Intentionally omitted. --------------------- Section 1.4 Purchase Price. -------------- Section 1.4.1 Intentionally Omitted. --------------------- Section 1.4.2 Intentionally Omitted. Section 1.4.3 Intentionally Omitted. Section 1.4.4 Purchase Price. (a) Subject to Section 1.4.4 (b), the -------------- purchase price for the Domestic Purchased Assets shall be $38,460,000 (the "Purchase Price") and $34,500,000 of the Purchase Price (net of any cash deposit held by Purchaser) shall be paid on the Closing Date by wire transfer of immediately available funds to an account which shall be designated in writing by the Company at least one Business Day prior to the Closing Date. The balance of $3,960,000 of the Purchase Price shall be paid and satisfied by the Purchaser forgiving $3,960,000 in principal amount (including unpaid and accrued interest on such principal amount) of the Paragon Subordinate DIP Loan as required by Section 7.6 of this Agreement. Any cash deposit held by Purchaser shall be applied on the Closing Date to the Purchase Price. (b) Section 1.4.4(b) Working Capital Adjustment. The Purchase Price shall be decreased by the Working Capital Adjustment. "Working Capital Adjustment" shall be the amount by which the aggregate inventory and receivables included in the Domestic Purchased Assets is less as of Closing than the corresponding amounts on the Balance Sheet previously furnished to Purchaser. The Working Capital Adjustment shall be made within 45 days after the Closing, and the Parties shall escrow an agreed amount of the Purchase Price paid at Closing to provide for such Working Capital Adjustment. II THE CLOSING Section 2.1 Closing. The Closing of the transactions contemplated by this ------- Agreement shall take place at the offices of Haynes and Boone, LLP, 1000 Louisiana, Suite 4300, Houston, Texas 77002 at 10:00 a.m. on the second Business Day after all conditions set forth in Articles VI and VII shall have been satisfied or waived or at such other time, date and place as shall be fixed by agreement among the parties (the date of the Closing being herein referred to as the "Closing Date"). ------------ Section 2.2 Acquisition Subsidiaries. On or before the Closing, the ------------------------ Purchaser may designate one or more of the Purchaser Acquisition Subsidiaries in writing to receive all or part of the Domestic Purchased Assets. 5 Section 2.3 Allocation of Asset Purchase Price. Not later than 30 days ---------------------------------- following the Closing Date, the Purchaser shall deliver to the Company a schedule allocating the Purchase Price among the Domestic Purchased Assets, which schedule shall be binding upon the Purchaser and the Company for all accounting and tax purposes. III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to the Purchaser as follows, but with respect to the Purchaser, only to the extent of the assets being purchased by such Purchaser and, with respect to each representation and warranty, only to the extent the same could reasonably be expected to have a Seller Materail Adverse Effect. Section 3.1 Due Incorporation and Authority. The Company is a corporation ------------------------------- duly organized, validly existing and in good standing under the laws of the State of Delaware, and the Seller has all requisite corporate power and lawful authority to own,lease and operate its properties and to carry on its business as now being conducted, except where the failure to have such authority could not reasonably be expected to (i) individually or in the aggregate, have a material adverse effect on the properties, businesses, prospects, results of operations or financial condition of the Company, or (ii) prevent or materially interfere with the Seller's ability to consummate the transactions contemplated hereby (the "Contemplated Transactions") (any event, effect or result described ------------------------- in clause (i) or (ii) above being a "Seller Material Adverse Effect"). ------------------------------- Section 3.2 Intentionally Omitted. --------------------- Section 3.3 Qualification. The Company is duly qualified or otherwise ------------- authorized as a foreign entity to transact business and, to the extent applicapable, is in good standing in each jurisdiction in which such qualification or authorization is required by Law, except where the failure so to qualify or be authorized could not reasonably be expected to have a Seller Material Adverse Effect. Section 3.3 of the Seller Disclosure Letter lists each jurisdiction in which the Company is so qualified or otherwise authorized. Section 3.4 Intentionally Omitted. --------------------- Section 3.5 Authority Relative to This Agreement. Except for any required ------------------------------------ approvals of the Bankruptcy Court, Seller has all necessary corporate power and authority to execute and deliver this Agreement and, assuming the satisfaction of the conditions set forth in Articles VI and VII, to perform its obligations hereunder. The execution and delivery of this Agreement by Seller, the performance by Seller of its obligations hereunder and the consummation by Seller of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of the Seller. This Agreement has been duly and validly executed and delivered by Seller and (assuming due authorization, execution and delivery hereof by the Purchaser and upon receipt of any required approval of the Bankruptcy Court) constitutes the legal, valid and binding obligation of the Seller enforceable against the Seller in accordance with its terms. 6 Section 3.6 SEC Documents. Since January 1, 1997, the Company has filed ------------- with the Securities and Exchange Commission (the "SEC") all reports, schedules, --- forms, statements and other documents (including exhibits and all other information therein) required to be filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the ------------ rules and regulations of the SEC thereunder (the "SEC Documents"; the SEC ------------- Documents filed since January 1, 1997 and prior to the date of this Agreement are referred to as the "Identified SEC Documents"). As of their respective ------------------------ dates, the SEC Documents compiled in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to such SEC Documents, and none of the SEC Documents when filed contained, and, when considered as an entirety currently contain, any untrue statement of a material fact or omitted or omit to state a material fact or required to be stated therein or necessary in order to make statements therein, in light of the circumstances under which they were made, not misleading. Section 3.7 Financial Statements. The consolidated balance sheet of the -------------------- Company as of December 31, 1999 and the related consolidated statements of income, shareholder's equity and changes in financial position for the year then ended, including the notes thereto, certified by Arthur Anderson LLP, independent certified public accountants, which have been delivered to the Purchaser, set forth the consolidated financial position of the Company as at such a date and the consolidated results of operations of the Company for such period, in each case in accordance with generally accepted accounting principles consistently applied ("GAAP"). (The foregoing consolidated financial statements of the Company as of December 31, 1999 and for the year then ended are sometimes herein called the "Audited Financials.") The consolidated and consolidating ------------------ balance sheets of the Company as of December 31, 2000, which have been delivered to Purchaser, are sometimes herein called the "Balance Sheet" and December 31, ------------- 2000 is sometimes herein called the "Balance Sheet Date." Except as set forth ------------------ therein or in the notes thereto, the Company reasonably believes such Audited Financials and Balance Sheet present fairly the financial position and results of operations of the company as of their respective dates and for the respective periods covered thereby. Section 3.8 No Material Adverse Change. Except as set forth in Section 3.8 -------------------------- of the Seller Disclosure Letter, since the Balance Sheet Date there has been no change, event or occurrence which has had a Seller Material Adverse Effect, and to the knowledge of the Company no such change, event or occurrence is threatened, nor has there been any damage, destruction or loss which could reasonably be expected to have or has had a Seller Material Adverse Effect, whether or not covered by insurance. Section 3.9 Taxes. Except as set forth in Section 3.9 of the Seller ----- Disclosure Letter: (a) The Company has timely filed (after giving effect to any extensions of the time to file which were obtained) prior to the date of this Agreement, and will file prior to the Closing Date, all material Tax Returns required to be filed prior to the date of this Agreement or the Closing Date, as the case may be, with respect to Taxes for periods ending on or after January 1, 1993, and such returns are true, correct and complete in all material respects and all Taxes are shown to be due on such Tax Returns have been paid; and on or before the Closing Date, the Company has paid or will pay (or the Company has paid or will pay on its 7 behalf), or has or will set up an adequate reserve for the payment of, all material Taxes owed by the Company for all taxable periods through and including the Closing Date. (b) The Company has not filed or entered into any election, consent or extension agreement that extends any applicable statue of limitations, which statue of limitations has not expired. (c) (i) The Company is not a party to any action or proceeding pending or, to the Company's knowledge, threatened by an Governmental Authority for assessment or collection of Taxes, (ii) no audit or investigation of the Company, by any Governmental Authority is pending or threatened with respect to Taxes, and (iii) no claim has been made by any Governmental Authority in a jurisdiction where the Company does not file Tax Returns that it is or may be subject to taxation in that jurisdiction. (d) The Company (i) is not a party to, is not bound by, is not under any obligation under any Tax sharing or similar agreement that includes any other person, nor (ii) has any liability for Taxes of any person (other than members of the affiliated group, within the meaning of Section 1504(a) of the Code, filing consolidated federal income tax returns of which the Company is the common parent) under Treasury Regulation (S) 1.1502-6, Treasury Regulation (S) 1.1502-78 or similar provision of state, local or foreign law, as a transferee or successor, by contract, or otherwise. (e) The Company has not entered into nor is bound by any closing agreement that could effect its Taxes for periods ending after the Closing Date. (f) No gain or loss from deferred intercompany transactions or excess loss accounts of the Company will be triggered by the Contemplated Transactions. (g) The Company has not been in violation of any applicable law relating to the payment or withholding of Taxes, and has duly and timely withheld and paid over to the appropriate taxing authorities all material amounts required to be so withheld and paid over. (h) For all periods ending or transactions consummated after December 31, 1995, the Company has made available to the Purchaser true and complete copies of all Tax Returns of the Company together with all related examination reports and statements of deficiency, and true and complete copies of the portion of all other Tax Returns relating to the activities of the Company together with all related examination reports and statements of deficiency. (i) There are no Liens for Taxes upon the assets or properties of the Company except for statutory Liens for current Taxes not yet due, and the Company has no knowledge of any claim relating to Taxes that, if adversely determined, would result in any material Lien on any of the assets or property of the Company. (j) The Company is not a party to any lease arrangement involving a defeasance of rent, interest or principal. 8 (k) Any adjustment of Taxes of the Company, made by the IRS which adjustment is required to be reported to the appropriate state, local, or foreign Taxing authorities, has been so reported. (l) The Company is not a direct or indirect beneficiary of a guarantee of Tax benefits or any other arrangement that has the same economic effect (including an indemnity from a seller or lessee of property, or other insurance) with respect to any transaction or Tax opinion relating to the Company. (m) The Company has not ever been (i) a "passive foreign investment company," (ii) a "foreign personal holding company" (iii) a "foreign sales corporation," (iv) a "foreign investment company," or (v) a person other than a United States person, each within the meaning of the Code. (n) The Company has not been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code. Section 3.10 Permits. To the Company's knowledge, the Company has all ------- licenses, permits, exemptions, consents, waivers, authorizations, rights, certificates of occupancy, franchises, orders or approvals of, and has made all required registrations with, any Governmental Body that are required for the conduct of the business of, or the intended use of any properties of, the Company (collectively, "Permits"), and no suspension or cancellation of any of ------- the Permits is pending or, to the knowledge of the Company, threatened, except where the failure to have, or the suspension or cancellation of, any of the Permits, individually or in the aggregate, could not reasonably be expected to have a Seller Material Adverse Effect (Permits other than those excluded by the foregoing exception being the "Material Permits"). Section 3.11 No Breach. --------- (a) The execution and delivery of this Agreement by the Company does not, and, assuming any necessary approval of this Agreement by the Bankruptcy Court, the performance of this Agreement by Seller will not: (i) conflict with or violate any provision of any Certificate of Incorporation or by-laws of the Company (to the extent that such document is then governing such entity); (ii) conflict with or violate any Law applicable to the Company by which any property or asset of the Company is or may be bound or affected, except for any such conflicts or violations that, individually or in the aggregate, could not reasonably be expected to have a Seller Material Adverse Effect; or (iii) assuming that all Required Consents (as defined in Section 3.11(b)) have been obtained or deemed by operation of the Sale Order to have been given, result in any breach of or constitute a default (or an event which with or without notice or lapse of time or both would become a default) under, or give to others any right of termination, amendment, acceleration or cancellation of, or result in the creation of a Lien, other than a 9 Permitted Lien, on any property or asset of the Company or, under any note, bond, mortgage, indenture, contract, agreement, commitment, lease, license, permit, franchise or other instrument or obligation (collectively, "Contracts") --------- to which the Company is a party or by which it or its assets or properties is bound or affected, except for such breaches, defaults or other occurrences which, individually or in the aggregate, could not reasonably be expected to have a Seller Material Adverse Effect. (b) Section 3.11 of the Seller Disclosure Letter identifies each Contract to which the Company is a party or by it or its assets or properties is or may be bound or affected in respect of which a Required Consent must be obtained. For purposes hereof, a "Required Consent" means any consent under a ---------------- Material Contract required so that the execution, delivery and/or performance by the Seller of this Agreement, the consummation of the Contemplated Transactions, and the assumption and/or continued enforcement thereof by the Purchaser as contemplated hereby will not result in any breach of or constitute a default (or an event which with or without notice or lapse of time or both would become a default) under, or give to others any right of termination, amendment, acceleration or cancellation of, such Contract, or result in the creation of a Lien, other than a Permitted Lien, on any property or asset of the Company. For purposes hereof, the Company shall be deemed to have obtained a Required Consent required to be obtained by the Company if, and to the extent that, pursuant to the Sale Order the Company is authorized to assume and assign the Contract to the Purchaser pursuant to section 365 of the Bankruptcy Code. Section 3.12 Actions and Proceedings. Except as set forth in Section 3.12 ----------------------- of the Seller Disclosure Letter, there are no outstanding Orders of any Governmental Body against or involving the Company which could reasonably be expected to have a Seller Material Adverse Effect or interfere with consummation of the Contemplated Transactions. Except as to claims against the Company arising prior to the Petition Date that are within the jurisdiction of the Bankruptcy Court and are to be resolved in the Case, as of the date of this Agreement, there are no actions, causes of action, suits, claims, complaints, demands, litigations or legal, administrative or arbitral proceedings or investigations (collectively, "Actions") (whether or not the defense thereof or ------- liabilities in respect thereof are covered by insurance) pending, or, to the Company's knowledge, threatened against or involving the Company or any of their properties, owned or leased, which, individually or in the aggregate, could reasonably be expected to have a Seller Material Adverse Effect. Section 3.13 Contracts. --------- (a) Section 3.13 of the Seller Disclosure Letter sets forth all of the Material Contracts to which the Company is a party or by or to which it or any of its properties may be bound or subject. (b) To the knowledge of the Company, no parties to any Material Contracts (other than the Company) are in default thereunder in any respect nor does any condition exist that with notice can reasonably be expected to or with lapse of time or both could constitute such a default thereunder except where the existence of any such defaults (including the existence of any conditions that with notice or lapse of time would constitute defaults) could 10 not, individually or in the aggregate, reasonably be expected to have a Seller Material Adverse Effect. Section 3.14 Tangible Property. Except as set forth in Section 3.14 of the ----------------- Seller Disclosure Letter, the facilities, machinery, equipment, furniture, buildings and other improvements, fixtures, vehicles, structures, any related capitalized items and other tangible property material to the business of the Company (the "Tangible Property") are in commercially reasonable operating ----------------- condition and repair, subject to continued repair and replacement in accordance with industry practice, and are suitable for their intended use. Section 3.15 Intellectual Property. --------------------- (a) The Company owns or is licensed or otherwise has the right to (i) with respect to such items that the Company claims to own outright, sell, license and dispose of such items, without restriction, and (ii) with respect to such items with respect to which the Company claims to have a license, use and practice, all Copyrights, Patents, Trade Secrets, Trademarks, Internet Assets, Software and other proprietary rights (collectively, the "Intellectual ------------ Property") that are currently used in the businesses of the Company, the loss or - -------- cancellation of which could reasonably be expected to have a Seller Material Adverse Effect. To the Company's knowledge, Section 3.15 lists all of the material Intellectual Property of the Company. (b) Except as set forth in Section 3.15 of the Seller Disclosure Letter, the Company is not in breach of or default under any IP License which will not be cured under section 365 of the Bankruptcy Code upon the assumption and assignment thereof to the Purchaser. (c) Neither the Company nor any of the Subsidiaries is in default under any provisions of the Procter & Gamble Settlement Agreement. (d) The Company has the exclusive right to file, procure and maintain all registrations with respect to the Intellectual Property owned by the Company. (e) Neither the Company nor any Subsidiary has knowledge of any challenge to the validity of any Patent or registered Trademark or Copyright listed in Section 3.15(a) of the Seller Disclosure Letter. Section 3.16 Title to Properties. ------------------- (a) Intentionally Omitted. (b) Section 3.16 of the Seller Disclosure Letter contains a true and complete list of all real property owned by the Company ("Owned Real ---------- Property Assets"; Leased Real Property Assets and Owned Real Property Assets - --------------- collectively, "Real Property Assets"). -------------------- (c) All buildings, structures and other improvements in, on or within the Real Property Assets are to the Company's knowledge in commercially reasonable operating condition and repair, subject to continued repair and replacement in accordance with past 11 practice, except for any failure to be in such condition and repair that could not, individually or in the aggregate, have a Seller Material Adverse Effect. Section 3.17 Employee Benefit Plans. ---------------------- (a) Section 3.17 of the Seller Disclosure Letter contains a true and complete list of each "employee benefit plan" (within the meaning of section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), including, without limitation, multiemployer plans within the meaning ----- of ERISA section 3(37)), stock purchase, stock option, severance, employment, change-in control, fringe benefit, welfare benefit, collective bargaining, bonus, incentive, deferred compensation and all other employee benefit plans, agreements, programs, policies or other arrangements, whether or not subject to ERISA, whether formal or informal, oral or written, legally bonding or not, under which any Employee or former employee (or his or her beneficiary) of the Company has any present or future right to benefits or under which the Company has any present or future liability. All such plans, agreements, programs, policies and arrangements shall be collectively referred to as the "Benefit ------- Plans." - ----- (b) With respect to each Benefit Plan, the Company has made available to the Purchaser a current, accurate and complete copy (or, to the extent no such copy exists, an accurate description) thereof and, to the extent applicable any summary plan description and other written communications (or a description of any oral communications) by the Company to its employees concerning the extent of the benefits provided under a Benefit Plan. (c) With respect to each Benefit Plan, no actions, suits or claims (other than routine claims for benefits in the ordinary course) are pending or, to the Company's knowledge, threatened, and no facts or circumstances exist that could give rise to any such actions, suits or claims which individually or in the aggregate could have a Seller Material Adverse Effect. Section 3.18 Employee Relations. None of the Employees of the Company or, ------------------ to the Company's knowledge, Foreign Employees is represented by a union, and no union organizing efforts are now being conducted. The Company has not at any time during the last three years had nor, to the knowledge of the Company, is there now threatened, a strike, picket, work stoppage, work slowdown or other labor dispute. Section 3.19 Insurance. The Company has heretofore made available for --------- inspection by the Purchaser true and correct copies of all policies or binders of fire, liability, product liability, worker's compensation, directors and officers liability, vehicular and other insurance held by or on behalf of the Company which are presently in effect. Such policies and binders are valid and binding in accordance with their terms, are in full force and effect, and insure against risks and liabilities to an extent and in a manner customary in the industries in which the Company operates. The Company has not received any written notice of cancellation or non-renewal of any such policy or binder. 12 Section 3.20 Company Products. To the Company's knowledge, except as set ---------------- forth in Section 3.20 of the Seller Disclosure Letter, there are no statements, citations or decisions by any Governmental Body specifically stating that any Company Product is defective or unsafe or fails to meet any standards promulgated by any such Governmental Body. Except as set forth in Section 3.20 of the Seller Disclosure Letter, there have been no recalls ordered by any such Governmental Body with respect to any Company Product. Except as set forth in Section 3.20 of the Seller Disclosure Letter, there is no (a) fact relating to any Company Product that may impose upon the Company a duty to recall any Company any Product or a duty to warn customers of a defect or of any Hazardous Substance in any Company Product, (b) latent or overt design, manufacturing or other defect in any Company Product, (c) Company Product, the reasonably foreseeable use of which may expose any person to any Hazardous Substance or (d) material liability for warranty claims or returns with respect to any Company Product not fully reflected on the Audited Financials or Interim Financials. Section 3.21 Operations of the Company and Subsidiaries. ------------------------------------------ (a) Except as set forth in Section 3.21 of the Seller Disclosure Letter or as contemplated by this Agreement, since the Balance Sheet Date the Company has not: (i) waived in writing any material right under any Material Contract or other agreement of the type required to be set forth in the Seller Disclosure Letter; (ii) made any material change in its accounting methods or practices or made any material change in depreciation or amortization policies or rates adopted by it; (iii) except for inventory or equipment in the ordinary course of business, sold, abandoned or made any other disposition of any of its properties or assets or made any acquisition of all or any part of the properties, capital stock or business of any other person; (iv) made any investment in any person, including, without limitation, any Subsidiary; (v) transferred or disposed of its interest in any Subsidiary. (vi) canceled any debts owed to or claims held by the Business (including the settlement of any claims or litigation) with a value greater than $25,000, except for claims held by the Company against any Subsidiary and incurred prior to February 14, 2001; (vii) created, incurred or assumed, or agreed to create, incur or assume, any indebtedness for borrowed money in respect of the Business (other than money borrowed or advanced from the Company in the ordinary course of the Business consistent with past practice); or (viii) entered into or become committed to enter into any other transaction material to the Business except in the ordinary course of the Business or as contemplated by this Agreement. 13 (b) Intentionally Omitted. Section 3.22 Consents and Approvals. No consent, approval, or authorization ---------------------- of, or declaration, filing, or registration with any Governmental Body is required to be made or obtained by the Company in connection with the execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated hereby, except (a) for approvals or authorizations of the Bankruptcy Court, (b) for consents, approvals, authorizations, declarations, or rulings identified in Section 3.22 of the Seller Disclosure Letter, and (c) for consents, approvals, authorizations, declarations, filings, or registrations, which, if not obtained, could not, individually or in the aggregate, have a Seller Material Adverse Effect. The items referred to in clauses (a) through (c) of this Section 3.22 are hereinafter referred to as the "Government Requirements." ----------------------- Section 3.23 Non-Competition Agreements. Except as set forth in Section -------------------------- 3.23 of the Seller Disclosure Letter, neither the Company, nor any officer, director, or key employee of the Company, is a party to any agreement that purports to restrict or prohibit it, directly or indirectly, from engaging in any business currently engaged in by the Company. Section 3.24 Board Approval and Recommendation. The Board of Directors of --------------------------------- the Company has determined that an immediate sale and assignment of the Company's assets pursuant to this Agreement under sections 363 and 365 of the Bankruptcy Code is in the best interests of the Company. Section 3.25 Brokers. Except for Wasserstein, Perella & Co., Inc., no ------- person is entitled to any brokerage, financial advisory, finder's or similar fee or commission payable by the Company in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. The fees of Wasserstein, Perella & Co., Inc. relating to the transactions contemplated hereby shall be and remain liabilities solely of the Company, which liabilities are not being assumed by the Purchaser. Section 3.26 Purchased Property Held by Excluded Subsidiaries. None of the ------------------------------------------------ Excluded Subsidiaries, as of the date hereof or will, as of the Closing Date, possess, own, have any right to or interest in the Domestic Purchased Assets. In the event that any Excluded Subsidiary possesses, owns, or has any right to or interest in the Domestic Purchased Assets, then notwithstanding anything else herein contained, Seller at Seller's sole cost and expense, shall cause such Domestic Purchased Assets to be transferred to the Purchaser, without any increase in the Purchase Price. Seller's obligations under this Section shall terminate one year from the Closing Date. IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser hereby represents and warrants to the Company as follows: Section 4.1 Organization. The Purchaser is a corporation or limited ------------ liability company validly existing and in good standing under the laws of its jurisdiction of incorporation. 14 Section 4.2 Authority to Execute and Perform Agreement. The Purchaser has ------------------------------------------ the full legal right and power and all authority and approvals to enter into, execute and deliver this Agreement and each and every agreement and instrument contemplated hereby to which the Purchaser is or will be a party and to perform fully its obligations hereunder and thereunder. This Agreement has been duly executed and delivered by the Purchaser, and on the Closing Date each and every agreement and instrument contemplated hereby to which the Purchaser is a party will be duly executed and delivered by the Purchaser and (assuming due execution and delivery hereof and thereof by the other parties hereto and thereto) this Agreement and each such other agreement and instrument will be valid and binding obligations of the Purchaser enforceable against the Purchaser in accordance with their respective terms. The execution and delivery by the Purchaser of this Agreement and each and every other agreement and instrument contemplated hereby to which the Purchaser is a party, the consummation of the transactions contemplated hereby and thereby and the performance by the Purchaser of this Agreement and each such other agreement and instrument in accordance with their respective terms and conditions will not (a) violate any provision of the Purchaser's governing or organizational documents; (b) except for filings or approvals required in connection with Government Requirements, require such the Purchaser to obtain any consent, approval, authorization or action of, or make any filing with or give any notice to, any Governmental Body or any other person; (c) conflict with or result in the breach of any of the terms and conditions of, result in a material modification of the effect of, otherwise cause the termination of or give any other contracting party the right to terminate, or constitute (or with notice or lapse of time or both constitute) a default under, any Contract to which the Purchaser is a party or by or to which the Purchaser or any of its properties is or may be bound or subject; or (d) violate any Law or Order of any Governmental Body applicable to the Purchaser. Section 4.3 Brokers. The Purchaser is responsible for any brokerage, ------- financial advisory, finder's or similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Purchaser. Section 4.4 Sufficient Funds. The Purchaser represents and warrants that it ---------------- has sufficient funds to satisfy its obligations under this Agreement and that, no approval of, or waiver by, any lender is required as a condition to the Purchaser's obtaining funds. V COVENANTS Section 5.1 Conduct of Business by the Seller Pending the Closing. From the ----------------------------------------------------- date hereof through the Closing Date, the Seller agrees that it (a) shall conduct its Business in the ordinary course; and (b) shall conduct its Business in a manner such that the representations and warranties contained in Article III shall continue to be true and correct on and as of the Closing Date as if made on and as of the Closing Date. The Seller shall give the Purchaser prompt notice of any event, condition or circumstance occurring from the date hereof through the Closing Date that would constitute a material violation or material breach of (i) any representation or warranty, whether made as of the date hereof or as of the Closing Date, or (ii) any covenant of any Seller contained in this Agreement. Without limiting the generality of the foregoing, except as provided in the Seller Disclosure Letter or except as otherwise contemplated under this 15 Agreement, from the date hereof until the Closing Date, without the prior written consent of the Purchaser: - (a) The Company shall not adopt or propose any change in their certificates of incorporation or bylaws or comparable governing documents, except a change that would not have any adverse affect on the Contemplated Transactions; (b) The Company shall not declare, set aside, or pay any dividend or other distribution with respect to any shares of their capital stock, or split, combine, or reclassify any of their capital stock, or repurchase, redeem, or otherwise acquire any shares of their capital stock; (c) The Company shall not merge or consolidate with any other person or (except in the ordinary course of business) acquire a material amount of assets of any other person; (d) The Company shall not and shall cause each Subsidiary (other than the Excluded Subsidiaries) to not) lease, license, or otherwise surrender, relinquish, encumber, or dispose of any Domestic Purchased Assets other than the disposition of obsolete or damaged assets in the ordinary course of its business or the sale of Inventory in the ordinary course of business; provided, however, -------- ------- that the Seller may comply with the Bidding Procedures Order, (e) The Company shall not change any method of accounting or accounting practice used by them, except for any charge required by GAAP; (f) The Company shall not establish or increase the benefits under, or promise to establish, modify or increase the benefits under, any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, stock option (including without limitation, the granting of stock options, stock appreciation rights, performance awards, or restricted stock awards), stock purchase or other employee benefit plan or employment, consulting or severance agreement, or otherwise increase the compensation payable to any directors, officers or employees of the Company or establish, adopt or enter into any collective bargaining agreement; (g) The Company shall not make or agree to make any capital expenditures or capital additions that exceed amounts provided for in the budget(s) established under any Order of the Bankruptcy Court authorizing post-petition financing; (h) The Company shall not in any material respect change its methods of collecting Trade Receivables, and shall not make or agree to make any settlement concerning a Trade Receivable in excess of $25,000 without consulting with the Purchaser; (i) The Company shall not permit a default or event of default to exist or occur under the Procter & Gamble Settlement Agreement; and (j) The Company shall not agree or commit to do any of the foregoing. 16 Section 5.2 Access and Information. The Seller shall afford to the ---------------------- Purchaser and to the Purchaser's financial advisors, legal counsel, accountants, consultants, financing sources, and other authorized representatives reasonable access during normal business hours throughout the period prior to the Closing Date to all their books, records, properties, plants, and personnel which relate to its respective business and, during such period, shall furnish as promptly as practicable to the Purchaser (a) a copy of each material report, schedule, and other document filed or received by them pursuant to the requirements of Laws and (b) all other information as the Purchaser reasonably may request in furtherance or the Contemplated Transactions, provided that the Purchaser shall be bound by and shall comply with the terms of the Confidentiality Agreement dated October 6, 2000 (the "Confidentiality Agreement") between the Company and the Purchaser with respect to the Purchaser's ability to use or disclose any such information and provided further, that no investigation pursuant to this -------- ------- Section 5.2 shall affect any representations or warranties made herein or the conditions to the obligations of the respective parties to consummate the transactions contemplated by this Agreement. The covenants and agreements in this Section 5.2 shall be cumulative with and in addition to the covenants and agreements contained in that certain Confidentiality Agreement dated October 6, 2000. Section 5.3 Cure of Defaults. Subject to, among other provisions, Section ---------------- 1.2.4(d) hereof, the Company shall, on or prior to the Closing, provide evidence satisfactory to the Purchaser that it has cured any and all defaults and breaches under and satisfied (or, with respect to any Assumed Liability or obligation that cannot be rendered non-contingent and liquidated prior to the Closing Date, made effective provision reasonably satisfactory to the Purchaser and the Bankruptcy Court for satisfaction from funds of the Company of) any Assumed Liability or obligation arising from or relating to pre-Closing periods under the Assumed Contracts and Assumed Leases so that such contracts and leases may be assumed by the Company and assigned to the Purchaser in accordance with the provisions of section 365 of the Bankruptcy Code, the Sale Order and this Agreement (including, without limitation, Section 1.2.3 hereof). The Company shall be solely responsible for payment of and curing all defaults and the Sale Order shall so provide. In any event, Seller's cure obligations shall be limited to such matters as may be cured solely by the payment of money. Section 5.4 Required Consents. The Company shall use commercially ----------------- reasonable efforts, prior to the Closing, to obtain the Sale Order and all Required Consents, and undertake all actions reasonably required pursuant to the Sale Order and all Required Consents. The Purchaser shall not incur or be liable for any expenses, costs or obligations in connection therewith. Seller shall not be required to incur or be liable for any expenses, costs or obligations in order to obtain any Required Consents. The Purchaser shall cooperate with the Seller's efforts to obtain any Required Consents. Failure to obtain Required Consent with respect to the Procter & Gamble U.S. and Canadian licenses shall not entitle Purchaser to terminate this Agreement if such failure is due to Purchaser's inability to satisfy any condition customarily imposed by The Procter & Gamble Company with respect to transfer of licenses granted by it. Section 5.5 Filings; Other Action. Subject to the terms and conditions --------------------- hereof, as promptly as practicable the Seller and the Purchaser shall (a) promptly make all filings and submissions required in order to satisfy all necessary Government Requirements, (b) use commercially reasonable efforts to cooperate with each other in (i) determining which filings are required to be made prior to the Closing Date with, and which material consents, approvals, 17 permits, or authorizations are required to be obtained prior to the Closing Date from, governmental or regulatory authorities of the United States and the several states in connection with the execution and delivery of this Agreement and the consummation of the Contemplated Transactions, and (ii) timely making all such filings and timely seeking all such consents, approvals, permits, or authorizations, and (c) use all commercially reasonable efforts to take, or cause to be taken, all other action and do, or cause to be done, all other things reasonably necessary or appropriate to consummate the Contemplated Transactions, as soon as practicable. In connection with the foregoing, the Company will promptly provide to the Purchaser, and the Purchaser will promptly provide to the Company, copies of all correspondence, filings, or communications (or memoranda setting forth the substance thereof) between such party or any of its representatives, on the one hand, and any Governmental Bodies, on the other hand, with respect to this Agreement and the Contemplated Transactions. The parties acknowledge that certain actions may be necessary with respect to the foregoing in making notifications and obtaining clearances consents, approvals, waivers, or similar third party actions that are material to the consummation of the Contemplated Transactions, and each party agrees to take all commercially reasonable actions as are necessary, to complete such notifications and obtain such clearances, approvals, waivers, or third party actions. Neither the Seller nor the Purchaser shall be required to incur or be liable for any expenses, costs or obligations in order to satisfy any Government Requirements, except payment of routine application or filing fees. Section 5.6 Public Announcements. The parties will cooperate in the -------------------- issuance of any press releases or otherwise in making any public statements with respect to the Contemplated Transactions. The parties further agree that no publicity release or public statement or public communication concerning this Agreement or the Contemplated Transactions shall be made without written advance approval thereof by the Company and the Purchaser, which approval shall not be unreasonably withheld; provided, however, that a party may, without the -------- ------- prior consent of the other party, but after providing notice thereof to the other party, issue such press release or make such public statement as may, upon the advice of counsel, be required by law or any listing agreement with any national securities exchange. Section 5.7 Permit Transfers. The Purchaser shall use commercially ---------------- reasonable efforts, at and as of the Closing, to cause the transfer or, reissuance of any Material Permits or Material Environmental Permits to the extent that such is required to cause the Material Permits and Material Environmental Permits (on their present terms and conditions and without modification or enhancement thereof) to remain in full force and effect in the possession of the Purchaser after the Closing. Neither the Purchaser nor any Seller shall be required to incur or be liable for any expenses, costs or obligations in order to transfer, reissue or modify any Material Permits or Material Environmental Permits, except payment of routine affiliation or filing fees. The Company shall reasonably cooperate with the Purchaser in the Purchaser's efforts to transfer or, reissue any Material Permits or Material Environmental Permits. Section 5.8 Further Assurances. Each of the parties shall execute such ------------------ Documents and take such further actions as may be reasonably required or desirable to carry out the provisions hereof and the Contemplated Transactions, but Seller shall not be obligated to incur or be liable for any expense, cost or obligations in connection therewith. Each such party shall use commercially reasonable efforts to fulfill or obtain the fulfillment of the conditions to the Closing set forth in Articles VI and VII. 18 Section 5.9 Bankruptcy Covenants. -------------------- (a) The Company shall promptly provide the Purchaser with proposed final drafts of all documents, motions, orders, filings or pleadings that the Company proposes to file with the Bankruptcy Court which relate to the approval or consummation of the Contemplated Transactions, this Agreement or any provision therein or herein, and will provide the Purchaser with reasonable opportunity to review and comment on such filings. (b) Without limiting the generality of Section 5.9(a), the Sale Order shall acceptable in form and substance to the Purchaser and its counsel, including, without limitation, as to the adequacy of notice of the hearing or hearings on the Company's motion for approval of the Contemplated Transactions, the applicability of sections 363(f), 363(m) and 1146(c) of the Bankruptcy Code to the Contemplated Transactions, the satisfaction of all cure obligations, and the Purchaser's provision of adequate assurance of future performance of the Assumed Contracts and Assumed Leases. (c) In the event an appeal is taken, or a stay pending appeal is requested or reconsideration is sought, from the Sale Order, the Company shall promptly after becoming aware thereof notify the Purchaser of such notice of appeal, request for a stay pending appeal or motion for reconsideration. The Company shall also provide the Purchaser with written notice (and copies) of any other or further notice of appeal, motion or application filed in connection with any appeal from or application for reconsideration of, either of such orders and any related briefs. The Company shall also defend any such appeals or requests for stay of the Sale Order, but shall not be required to expend unlimited funds in doing so. Section 5.10 Tax Matters. During the period from the date of this Agreement ---------- to and including the Closing Date, the Company shall: (i)properly prepare, in the ordinary course of business and consistent with past practice, and timely file all Tax Returns required to be filed by it on or before the Closing Date ("Post-signing Returns"); (ii) fully and timely pay all Taxes due and payable in -------------------- respect of such Post-signing Returns that are so filed; (iii) properly reserve (and reflect such reserve in its books and records and financial statements), in accordance with past practice and in the ordinary course of business, for all Taxes payable by it (or them) for which no Post-signing Return is due prior to or on the Closing Date; (iv) promptly notify the Purchaser of any material federal, state or foreign income or franchise and any other suit, claim, action, investigation, proceeding or audit (collectively, "Tax Actions") pending against ----------- or with respect to the Company in respect of any Tax matter, including (without limitation) Tax liabilities and refund claims, and not settle or compromise any such Tax matter or Tax Action without the Purchaser's consent; (v) not make or revoke any material Tax election or adopt or change a tax accounting method without the Purchaser's consent; and (vi) terminate all Tax Sharing Agreements to which the Company is a party such that there is no further Tax liability thereunder. Section 5.11 Transfer Taxes. In the event that section 1146(c) of the -------------- Bankruptcy Code does not apply to all aspects of the Contemplated Transactions, all personal property transfer, documentary, sales, use, registration, value-added and other similar Taxes (including interest, penalties and additions to Tax) incurred in connection with the Contemplated Transactions ("Transfer -------- Taxes") shall be borne by the Purchaser. - ----- 19 Section 5.12 Intentionally Omitted. --------------------- Section 5.13 Delivery of the Seller Disclosure Letter. Concurrently with ---------------------------------------- the execution of this Agreement, Company shall deliver to the Purchaser its complete Seller Disclosure Letter, a true and correct copy of which is attached to this Agreement as Exhibit "A." VI CONDITIONS PRECEDENT TO OBLIGATION OF THE PURCHASER TO CLOSE The obligation of the Purchaser to enter into and complete the Closing is subject, at the option of the Purchaser acting in accordance with the provisions of Article XI with respect to termination of this Agreement, to the fulfillment on or prior to the Closing Date of the following conditions, any one or more of which may be waived by the Purchaser: Section 6.1 Representations and Covenants. All representations and ----------------------------- warranties of the Seller contained in this Agreement shall be true in all respects on and as of the Closing Date, with the same force and effect as though made on and as of the Closing Date, except for such breaches that, individually or in the aggregate, could not have a Seller Material Adverse Effect. The Seller shall have performed and complied in all respects with all covenants and agreements required by this Agreement to be performed or complied with by the Seller on or prior to the Closing Date, except for such breaches that, individually or in the aggregate, could not have a Seller Material Adverse Effect. Section 6.2 Consents and Approvals. All Required Consents shall have ---------------------- been obtained or deemed by operation of the Sale Order to have been given and shall be in full force and effect, and the Purchaser shall have been furnished with evidence reasonably satisfactory to it that each such Required Consent has been either (i) expressly granted, or (ii) deemed, by operation of the Sale Order, to have been given. Section 6.3 Closing Deliveries. The Seller shall have made all ------------------ deliveries contemplated by Section 8.1. Section 6.4 Government Requirements. Any person required in connection ----------------------- with the Contemplated Transactions to file a notification and report form in compliance with, or obtain any consent or approval required under, any Government Requirements shall have filed such form or requested such consent or approval and the applicable waiting period with respect to each such form (including any extension thereof by reason of a request for additional information) shall have expired or been terminated or the requisite consent or approval required thereby shall have been obtained without any material condition or limitation on terms acceptable to the Purchaser. Section 6.5 No Claims. No Actions shall be pending or, to the knowledge --------- of the Company or the Purchaser, threatened, before any Governmental Body (including investigations instituted by the United States Department of Justice or the Federal Trade Commission in connection with antitrust regulations) to restrain or prohibit, or to obtain damages or a discovery order in respect of, this Agreement or the consummation of the Contemplated Transactions or 20 which has had or may have, in the reasonable judgment of the Purchaser, a Seller Material Adverse Effect or a material adverse effect upon any the Purchaser's existing businesses, prospects, operations, assets, liabilities or financial condition. Section 6.6 Sale Order. The Sale Order in form and substance satisfactory ---------- to the Purchaser and its counsel, shall have been entered by the Bankruptcy Court by March 5, 2001 and shall not be stayed or reversed, ordered to be reconsidered, or, in any manner not approved by the Purchaser, amended or modified. Section 6.7 No Injunction. On the Closing Date, there shall not be any ------------- order outstanding against any party hereto or law promulgated that prevents the consummation of, the Contemplated Transactions or any of the conditions to the consummation of the Contemplated Transactions which, in the case of any such order, law, action or proceeding could reasonably be expected to materially adversely affect Purchaser or the Purchased Property. Section 6.8 No Material Adverse Change. Except as set forth in Section 3.8 -------------------------- of the Seller Disclosure Letter, between the Balance Sheet Date and Closing Date there has been no change, event or occurrence which has had a Seller Material Adverse Effect, nor has there been any damage, destruction or loss which could reasonably be expected to have or has had a Seller Material Adverse Effect, whether or not covered by Insurance. Section 6.9 Bidding Procedures Order. The Bidding Procedures Order shall ------------------------ remain in full force and effect, and shall not have been stayed, vacated, modified or supplemented without the Purchaser's prior consent, and the Company shall have complied with the terms of the Bidding Procedures Order. Section 6.10 Intentionally Omitted. --------------------- Section 6.11 Intentionally Omitted. --------------------- Section 6.12 Intentionally Omitted. --------------------- Section 6.13 Intentionally Omitted. --------------------- Section 6.14 Intentionally Omitted. --------------------- VII CONDITIONS PRECEDENT TO THE OBLIGATION OF THE SELLER TO CLOSE The obligation of the Seller to enter into and complete the Closing is subject, at the option of the Seller acting in accordance with the provisions of Article XI with respect to termination of this Agreement, to the fulfillment on or prior to the Closing Date of the following conditions, any one or more of which may be waived by the Company: Section 7.1 Representation and Covenants. All representations and ---------------------------- warranties of the Purchaser contained in this Agreement shall be true in all material respects on and as of the 21 Closing Date, with the same force and effect as though made on and as of the Closing Date. The Purchaser shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by them on or prior to the Closing Date. Section 7.2 Certain Consents and Approvals. All Required Consents shall ------------------------------ have been obtained or deemed by operation of the Sale Order to have been given and shall be in full force and effect. Section 7.3 Government Requirements. Any person required in connection ----------------------- with the Contemplated Transactions to file a notification and report form in compliance with, or obtain any consent or approval required under, any Government Requirements shall have filed such form or requested such consent or approval and the applicable waiting period with respect to each such form (including any extension thereof by reason of a request for additional information) shall have expired or been terminated or the requisite consent or approval required thereby shall have been obtained without any material condition or limitation. Section 7.4 No Injunction. On the Closing Date, there shall not be any ------------- order outstanding against any party hereto or law promulgated that prevents the consummation of, the Contemplated Transactions. Section 7.5 Payment. The Purchaser shall have paid the Purchase Price at ------- the Closing. Section 7.6 Replacement of Paragon Subordinate DIP Loan. Purchaser shall ------------------------------------------- furnish to Seller satisfactory evidence that Purchaser has purchased $3,960,000 in principal and any unpaid interest accrued on such principal amount of the Paragon Subordinate DIP Loan and any other amounts for which the Company is liable thereunder, which amounts shall have been paid at the time and in the manner required by the Bidding Procedures Order. Purchaser shall also furnish to Seller satisfactory evidence that Purchaser has forgiven and waived all amounts due by and from the Company with respect to any amount of the Paragon Subordinate DIP Loan purchased by the Purchaser. Section 7.7 Release of Subsidiaries; Subsidiary Indebtedness. Each ------------------------------------------------ Subsidiary of the Company shall have been released from, and shall have no liability as a guarantor or otherwise in respect of, any liability of or to the Company incurred prior to February 14, 2001, and any and all Liens on any --- properties or assets of any such Subsidiary securing any such obligation or liability of or to the Company as a guarantor of any such obligation of or to the Company, shall have been satisfied and unconditionally released. Where requested by the applicable Subsidiary, the satisfaction of any Indebtedness of a subsidiary to the Company shall have been by way of a conversion of such Indebtedness into equity. VIII DELIVERIES AT CLOSING Section 8.1 The Seller's Deliveries at Closing. In addition to the other ---------------------------------- things required to be done hereby, at the Closing, the Company shall deliver, or cause to be delivered, to the Purchaser the following: 22 (a) a certificate dated the Closing Date validly executed on behalf of the Seller to the effect that the conditions set forth in Section 6.1 have been satisfied; (b) a legal opinion of outside counsel to the Company, dated the Closing Date, addressed to the Purchaser, confirming that such counsel has reviewed the docket of the Bankruptcy Court and that the Sale Order was entered by the Bankruptcy Court and was described in such opinion, amended or modified; (c) Intentionally Omitted; (d) all documents, certificates and agreements necessary to transfer to the Purchaser good and marketable title to the Domestic Purchased Assets, free and clear of any and all Liens thereon (other than Permitted Liens), including: (i) A duly executed Assignment and Assumption Agreement, in customary form mutually agreeable to the parties; (ii) assignments of all Assumed Contracts, Intellectual Property and any other agreements and instruments consisting Domestic Purchased Assets, dated the Closing Date, assigning to the Purchaser all of the Company's right, title and interest therein and thereto; and (iii) an assignment of lease, dated as of the Closing Date, with respect to each Assumed Lease, in form reasonably acceptable to the Purchaser; (e) certified copies of all orders of the Bankruptcy Court pertaining to the Contemplated Transactions, including the Sale Order, and evidence of the entry of all such orders on the docket of the Chapter 11 case and of the absence as of the Closing of any stay thereof; and (f) Intentionally Omitted. Section 8.2 The Purchaser's Deliveries at Closing. In addition to the other ------------------------------------- things required to be done hereby, at the Closing, the Purchaser shall have delivered or caused to be delivered to the Company, the amounts provided in Section 1.4.4, and, in addition, the Purchaser shall deliver, or cause to be delivered, to the Company the following: (a) a certificate of the Purchaser dated the Closing Date and validly executed on behalf of the Purchaser to the effect that the conditions set forth in Section 7.1 have been satisfied; (b) a duly executed Assignment and Assumption Agreement, in customary form mutually agreeable to the parties; and (c) the items required by Section 7.6. 23 Section 8.3 Required Documents. All documents to be delivered by the ------------------ Seller or to be entered into by the Seller and the Purchaser necessary to carry out the transactions contemplated by this Agreement or contemplated by the terms of this Agreement shall be reasonably satisfactory in form and substance to the Purchaser and counsel to the Purchaser and all documents to be delivered by the Purchaser necessary to carry out the transactions contemplated by this Agreement or to be entered into by the Seller and the Purchaser necessary to carry out the transactions contemplated by this Agreement shall be reasonably satisfactory in form and substance to the Seller and counsel to the Seller. IX CERTAIN ADDITIONAL PROVISIONS AND COVENANTS Section 9.1 Excluded Subsidiaries. From and after the Closing Date, the --------------------- Company and each such Excluded Subsidiary shall cease using the Drypers name and any stationery or material that includes such name for any and all purposes. Section 9.2 Further Assurances. In addition to the provisions of this ------------------ Agreement, from time to time after the Closing Date, the Company and the Purchaser will use commercially reasonable efforts to execute and deliver such other instruments of conveyance, transfer or assumption, as the case may be, and take such other action as may be reasonably requested to implement more effectively the conveyance and transfer of the Domestic Purchased Property. Seller shall not be required to incur or be liable for any expenses, costs or obligations in connection with the foregoing other than reasonable attorneys fees and expenses. Section 9.3 Books and Records; Personnel. For a period of seven (7) years ---------------------------- after the Closing Date (or such longer period as may be required by any governmental or regulatory body or authority or ongoing Legal Proceeding): (a) The Purchaser shall not dispose of or destroy any of the business records and files of the Business other than in connection with a sale or other disposition of the Business or any portion thereof. If the Purchaser wishes to dispose of or destroy such records and files after that time, it shall first give sixty (60) days' prior written notice to the Company, and the Company shall have the right, at its option and expense, upon prior written notice to the Purchaser within such sixty-day period, to take possession of the records and files within ninety (90) days after the date of the notice from the Company. (b) the Purchaser shall allow the Company and any of its directors, officers, employees, counsel, representatives, accountants, and auditors (collectively, the "Company Representatives") access to all business ----------------------- records and files of the Company or the Business that are transferred to it in connection herewith, which are reasonably required by such party in anticipation of, or preparation for, any existing or future Legal Proceeding involving the Company or Tax Return preparation, during regular business hours and upon reasonable notice at the Purchaser's principal place of business or at any location where such records are stored, and the Company Representatives shall have the right at their cost to make copies of any such records and files; provided, however, that any such access or copying shall be had or done in 24 such a manner so as not to interfere with the normal conduct of the Purchaser's business or operations. Section 9.4 Third Party Rights. No provision of this Agreement shall ------------------ create any third party beneficiary rights in any Employee, Foreign Employee or any other persons or entities (including any beneficiary or dependent thereof), in respect of continued employment (or resumed employment) for any specified period of any nature or kind whatsoever, and no provision of this Agreement shall create such third party beneficiary rights in any such persons or entities in respect of any benefits that may be provided, directly or indirectly, under any Benefit Plan or otherwise. Section 9.5 Hold Harmless. Intentionally Omitted. ------------- Section 9.6 Employment of the Company's Employees. ------------------------------------- (a) The Company shall use commercially reasonable efforts to retain Employees and to maintain in good standing through the Closing all relationships and agreements with Employees, independent contractors or consultants, in each case from the date hereof through the Closing Date and, in the case of the Company, to cooperate with the Purchaser in hiring its Employees offered employment pursuant to Section 9.6(b); provided, that the foregoing shall not require that the Company offer any compensation or other incentives in addition to the compensation and benefits being provided or required to be provided as of the date of this Agreement. (b) The Purchaser shall offer employment to certain Current Employees effective as of the Closing Date, so as to avoid any statutory liability of the Company to those employees. (c) From the date hereof through the Closing, the Company shall permit the Purchaser to communicate with its employees, and consultants, at reasonable times and upon reasonable notice, concerning the Purchaser's plans, operations, business, customer relations and general personnel matters and to interview such employees and consultants and review the personnel records and such other information concerning such employees and consultants as the Purchaser may reasonably request (subject to obtaining any legally required written permission of any affected employee, or consultant and to other applicable law), provided that such contacts shall be conducted in a manner that is reasonably acceptable to the Company. (d) The Company shall be solely responsible for any and all liabilities relating to or arising in connection with any actual, constructive or deemed termination of employment (including without limitation, severance or separation pay or benefits or other similar compensation or benefits under any applicable law, regulation or Benefit Plan) to or with respect to any employee of the Company other than a Purchaser Employee, and whether before the Closing Date, or to any Purchaser Employee whether as a result of (A) any event occurring before the Closing, or (B) any action or failure to act of the Company (including without limitation, severance or separation pay or benefits under any applicable law, regulation or Benefit Plan). Except as provided in this Section 9.6(d), the Purchaser shall be solely 25 responsible for any and all Liabilities relating to or arising in connection with any actual, constructive or deemed termination of employment of any Purchaser Employee. Section 9.7 Workers' Compensation --------------------- (a) From and after the Closing Date: (i) the Company shall remain solely responsible for any and all liabilities relating to or arising in connection with any and all claims for workers' compensation benefits (x) incurred by or in respect of any employee of the Company who is not a Purchaser Employee on, prior to or after the Closing Date, and (y) incurred by or in respect of a Purchaser Employee on or before the Closing Date, and (ii) the Purchaser shall be solely responsible for any and all liabilities to or in respect of a Purchaser Employee relating to or arising in connection with any and all claims for worker's compensation benefits incurred after the date of employment. (b) For purposes of this Section 9.8, a claim for workers' compensation benefits shall be deemed to be incurred when the first event giving rise to the claim occurs. Section 9.8 Employment Taxes ---------------- (a) The Company and the Purchaser shall (i) treat the Purchaser as a "successor employer" and the Company as a "Predecessor," within the meaning of sections 3121(a)(1) and 3306(b)(1) of the Code, with respect to Purchaser Employees who are employed by the Purchaser for purposes of Taxes imposed under the United States Federal Unemployment Tax Act ("FUTA") or the ---- United States Federal Insurance Contributions Act ("FICA"), and (ii) cooperate ---- with each other to avoid, to the extent possible, the filing of more than one IRS Form W-2 with respect to each such Purchaser Employee for the calendar year within which the Closing Date occurs. (b) At the reasonable request of the Purchaser with respect to any particular applicable Tax Law relating to employment, unemployment insurance, social security, disability, workers' compensation, payroll, health care or other similar Tax other than Taxes imposed under FICA and FUTA, the Company shall and the Purchaser shall (i) treat the Purchaser as a successor employer and the Company as a predecessor employer, within the meaning of the relevant provisions of such Tax Law, with respect to Purchaser Employees who are employed by the Purchaser, and (ii) cooperate with each other to avoid, to the extent possible, the filing of more than one individual information reporting form pursuant to each such Tax Law with respect to each such Purchaser Employee for the calendar year within which the Closing Date occurs. Section 9.9 Paid Up License. The Purchaser acknowledges the Company --------------- will, effective immediately prior to the Closing, deliver the licenses described on Schedule 9.9, each of which shall be a perpetual, fully paid-up transferable license to use any Intellectual Property (including without limitation the right to use the "Drypers" brand and all its associated trademarks, logos, styles and related elements) provided, however, that such license shall be granted only to the extent the Intellectual Property to be licensed by the Company is owned by the Company or any 26 of its Subsidiaries immediately prior to Closing. Such license shall be exclusive as to Trademarks and non-exclusive as to all other Intellectual Property. Section 9.11 Transfer of Licenses and Trademarks. To the extent any of the ----------------------------------- licensees identified on Schedule 9.9 request the Company to do so, effective immediately prior to the Closing, the Company will execute an assignment of the trademarks covered by such licenses and registered in the geographic areas identified in Schedule 9.9. The registration of such transfer will be at the sole cost and expense of such licensee and upon the effectiveness of such transfer the Purchaser shall have no further obligation pursuant to Section 9.10 to maintain the transferred trademarks. Section 9.10 Intellectual Property Fees. The Purchaser shall pay all -------------------------- renewal fees and other fees and do all acts necessary to maintain the registrations and application therefor and the continued existence of the Intellectual Property licensed pursuant to Section 9.9. The Purchaser undertakes not to do or permit to be done any act which would or might prejudice or affect in any way the continued registration and/or existence of such Intellectual Property or the licenses granted pursuant to Section 9.9. The Purchaser shall cause any party who has or obtains any right or title to such Intellectual Property to likewise comply with the obligations set out in this Section 9.10. The Company shall use its best efforts to include a provision in such license requiring the licensee thereof to reimburse the Purchaser for any fees incurred by Purchaser to maintain the trademark registrations and applications therefor. X SURVIVAL OF REPRESENTATION AND WARRANTIES OF SELLER Section 10.1 Survival of Representations and Warranties. Notwithstanding ------------------------------------------ any right of the Purchaser to investigate fully the affairs of the Company and the Subsidiaries and notwithstanding any knowledge of facts determined or determinable by the Purchaser pursuant to such investigation or right of investigation, the Purchaser has the right to rely fully upon the representations, warrants, covenants and agreements of the Seller contained in this Agreement or in any documents delivered pursuant to this Agreement. The representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive until the Closing Date, at which time they shall terminate. XI TERMINATION OF AGREEMENT Section 11.1 Termination. This Agreement may be terminated prior to the ----------- Closing as follows: (a) at the election of the Seller, if any one or more of the conditions to the obligation of the Seller to close set forth in Article VII has not been fulfilled as of the scheduled Closing Date; 27 (b) at the election of the Purchaser, if any one or more of the conditions to the obligation of the Purchaser to close set forth in Article VI has not been fulfilled as of the scheduled Closing Date; (c) at the election of the Seller or the Purchaser, if there is any injunction, stay, order, or decree of any nature of any Governmental Body of competent jurisdiction that is in effect that prohibits or materially restrains the consummation of the Contemplated Transactions; (d) at the election of the Seller, if the Purchaser has materially breached any representation, warranty, covenant or agreement contained in this Agreement, which breach cannot be or is not cured prior to the scheduled Closing Date and which breach, individually or in the aggregate with any other breaches, could have a Seller Material Adverse Effect; (e) at the election of the Purchaser, if the Company has materially breached any representation, warranty, covenant or agreement contained in this Agreement, which breach cannot be or is not cured prior to the scheduled Closing Date and which breach(es), individually or in the aggregate with any other breaches, could have a Seller Material Adverse Effect; (f) at any time on or prior to the Closing Date, by mutual written consent of the Company and the Purchaser; (g) at any time after March 23, 2001, at the election of the Purchaser or the Seller, if by such date the Closing has not occurred; provided, however, that neither the Seller, on the one hand, nor the Purchaser, on the other hand, may terminate the Agreement pursuant to this Section 11.1(g) unless at the time that such party seeks to exercise its right to terminate this Agreement all conditions contained in Article VII, if termination is being sought by the Purchaser, or Article VI, if termination is being sought by the Seller, are, or are immediately capable of being, satisfied at the time that such party gives notice of such termination; (h) at any time after March 5, 2001, at the election of the Purchaser or any of the Seller, if by such date the Sale Order has not been entered; or (i) at the election of the Purchaser on or prior to the Closing Date pursuant to Section 6.14(a). If this Agreement so terminates, it shall become null and void and have no further force or effect, except as provided in Section 11.2. Section 11.2 Survival After Termination. -------------------------- (a) If this Agreement terminates pursuant to Section 11.1 and the Contemplated Transactions are not consummated, this Agreement shall become null and void and have no further force or effect. Notwithstanding anything in this Agreement to the contrary, the provisions of Section 5.2 relating to the obligation of the Purchaser to keep confidential and 28 not to use certain information and data obtained from the Company or the Subsidiaries, as the case may be, and to return documents to the Company or the Subsidiaries, as the case may be, shall remain in full force and effect. (b) The parties agree that if this Agreement is terminated under any subsection of Section 11.1 other than Section 11.1(d), then the Purchaser's sole and exclusive remedy shall be to receive any deposit in accordance with the Bidding Procedures Order or the Sale Order. XII GENERAL PROVISIONS Section 12.1 Notices. All notices, claims, demands, and other ------- communications hereunder shall be in writing and shall be deemed given upon (x) confirmation of receipt of a facsimile transmission, (y) confirmed delivery by a standard overnight carrier or when delivered by hand, or (z) the expiration of five (5) Business Days after the day when mailed by registered or certified mail (postage prepaid, return receipt requested), addressed to the respective parties at the following address (or such other address for a party as shall he specified by like notice): (a) If to the purchaser, to: Peter Chang Associated Hygienic Products LLC, a Delaware limited liability company 4456 River Green Parkway Duluth, GA 30096 Telecopy: (770)497-9800 with copies to: Robert E. Sullivan, Esq. Pillsbury Winthrop LLP 50 Fremont Street San Francisco, CA 94103 Telecopy: (415)98-1200 (b) If to the Seller, to: Drypers Corporation 5300 Memorial, Suite 900 Houston, Texas 77007 Telecopy: (713)803-5554 Attention: Brian Fontana 29 with a copy to: Haynes & Boone, L.L.P. 1000 Louisiana, Suite 4300 Houston, Texas 77002 Telecopy: (713) 547-2600 Attention: Lenard M. Parkins, Esq. Kenric D. Kattner, Esq. Section 12.2 Descriptive Headings. The headings contained in this -------------------- Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 12.3 Entire Agreement; Assignment. This Agreement (including the ---------------------------- Exhibits, the Seller Disclosure Letter, and the other documents and instruments referred to herein), together with the Confidentiality Agreement, (a) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, between the parties, with respect to the subject matter hereof, including, without limitation, any transaction between the parties hereto and (b) shall not be assigned by operation of law or otherwise; provided, however, that the Purchaser may assign all or any part of -------- ------- its rights and obligations hereunder to any subsidiary or affiliate of the Purchaser without the consent of the Company, but the Purchaser shall not be relieved of its obligations hereunder as a result of such assignment. Section 12.4 Governing Law. This Agreement shall be governed and ------------- construed in accordance with the laws of the State of Texas without regard to the rules of conflict of laws of the State of Texas and any other jurisdiction. Section 12.5 Expenses. Except as otherwise provided herein and in the -------- Bidding Procedures Order, whether or not the actions contemplated by this Agreement are consummated, all costs and expenses incurred in connection will this Agreement and the transactions contemplated thereby shall be paid by the party incurring such expenses. Section 12.6 Amendment. This Agreement may not be amended except by an --------- instrument in writing signed on behalf of the parties hereto. Section 12.7 Waiver. At any time prior to the Closing Date, the parties ----- hereto may (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, and (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. Section 12.8 Counterparts; Effectiveness. This Agreement may be executed --------------------------- in two or more counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement. This Agreement shall become effective when each party hereto shall have received counterparts thereof signed by all the other parties hereto. 30 Section 12.9 Severability; Validity; Parties in Interest. If any ------------------------------------------- provision of this Agreement or the application thereof to any person or circumstances is held invalid or unenforceable, the remainder of this Agreement, and the application of such provisions to other persons or circumstances, shall not be affected thereby, and to such end, the provisions of this Agreement are agreed to be severable. Nothing in this Agreement, express or implied, is intended to confer upon any person not a party to this Agreement. Section 12.10 Consent to Jurisdiction and Service of Process. All disputes ---------------------------------------------- arising out or related to this Agreement, including, without limitation, any dispute relating to the interpretation, meaning or effect of any provision hereof, will be resolved in the Bankruptcy Court and the parties hereto each submit to the exclusive jurisdiction of the Bankruptcy Court for the purpose of adjudicating any such dispute; provided, however, that the parties agree that if -------- ------- the Bankruptcy Court does not accept jurisdiction over any such dispute, such dispute shall then be brought exclusively in the courts of the State of Texas located in Houston or of the United States of America for the Southern District of texas and each party hereby expressly submits to the personal jurisdiction and the venue of such courts for the purposes thereof and expressly waives any claim of improper venue and any claim that such courts are an inconvenient forum. XIII DEFINITIONS Section 13.1 Certain Definitions. Capitalized terms used herein but not ------------------- otherwise defined herein have the meaning assigned thereto in the Bankruptcy Code. In addition to the terms defined above, as used in this Agreement, the following terms have the following meanings: "Accounts Payable" means all accounts payable of the Company and the ---------------- Subsidiaries taken as a whole, whether arising under a Contract or otherwise as well as rights to rebates or credits from suppliers. "Account Receivable" means any right to payment for goods sold or leased or for ------------------ services rendered, whether arising under a Contract or otherwise. "affiliate" means, with respect to any person, any other person controlling, --------- controlled by or under common control with, or the parents, spouse, lineal descendants or beneficiaries of, such person. "Asian Subsidiaries" means each of Drypers Malaysia SDN BHD, Drypers Marketing ------------------ SDN BHD, Drypers Asia Pte Ltd. and Drypers Asia (M) SDN BHD. "Balance Sheet" shall have the meaning for such term set forth in Section 3.7. ------------- "Bankruptcy Code" means title 11 of the United States Code, as amended from time --------------- to time, as applicable to the Case. "Bankruptcy Court" means the United States Bankruptcy Court for the Southern ---------------- District of Texas, Houston Division, or such other court with jurisdiction over the Case. 31 "Bankruptcy Rules" means the Federal Rules of Bankruptcy Procedure, as amended, ---------------- promulgated under section 2075 of title 28 of the United States Code, as applicable to the Case. "Bidding Procedures" means the Bidding Procedures contained in the Bidding ------------------ Procedures Order as amended or modified from time to time with the consent of the Purchaser and the Company. "Bidding Procedures Order" means that certain Order entered by the Bankruptcy ------------------------ Court on December 22, 2000 approving the Bidding Procedures (as defined therein, as amended by that certain Amended Order entered by the Bankruptcy Court on January 19, 2001, as further amended by that certain First Amended Order entered on January 25, 2001 and as further amended by that certain Second Amended Order entered on February 1, 2001). "Business Day" means any day other than a Saturday, Sunday or "legal holiday" as ------------ defined in Bankruptcy Rule 9006(a). "Claim" means (a) 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 (b) right to an equitable remedy for breach of performance if such breach gives rise to a right of payment, weather or not such right to an equitable remedy is reduced to judgement, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. "Code" means the Internal Revenue Code of 1986, as amended. ---- "Company Products" means all goods manufactured by the Company or any of its ---------------- Subsidiaries. "Copyrights" means any foreign or United States copyright registration and ---------- applications for registration thereof, and any non-registered copyrights. "Employee" means any individual employed by the Company as of the Closing Date. -------- "Environment" means navigable waters, waters of the contiguous zone, ocean ----------- waters, natural resources, surface waters, ground water, drinking water supply, land surface, subsurface strata, ambient air, both inside and outside of buildings and structures, man-made buildings and structures, and plant and animal life on earth. "Excluded Subsidiaries" means each of DL, HPI, Drypers Mexico S.A. de C.V., --------------------- Drypers Holdings de Mexico SRL de CV, Drypers Servicios de Mexico SRL de CV, Drypers Caribbean Holdings Limited, Ultracare Products International, Inc. and Igienica Difusion, Inc. Ltd. "Foreign Employee" means any individual employed by any Subsidiary organized in ---------------- a jurisdiction other than the United States. "Hazardous Substance" means any toxic waste, pollutant, contaminant, hazardous ------------------- substance, toxic substance, harzardous waste, special waste, industrial substance or waste, petroleum or petroleum-derived substance or waste, radioactive substance or waste, or any constituent of any such substance or waste regulated under or defined by any Safety and Environmental Law. 32 "Inactive Employee" means an employee who is not actively at work due to ----------------- approved leave of absence, short-term disability leave or military leave. "Indebtedness" means (i) any liability of any person (a) for borrowed money, (b) ------------ evidenced by a note or similar instrument (including a purchase money obligation) given in connection with the acquisition of any property or assets (other than inventory or similar property acquired in the ordinary course of business), including securities, (c) for the payment of money relating to a capitalized lease obligation, and (d) for any Claim; (ii) any liability of others described in the preceding clause (i) which the person has guaranteed or which is otherwise its legal liability; and (iii) any amendment, renewal, extension or refunding of any liability of the types referred to in clauses (i) and (ii) above. "IRS" means the Internal Revenue Service. --- "Internet Assets" means any internet domain names and other computer user --------------- identifiers and any rights in and to sites on the world wide web including rights in and to any text, graphics, audio and video files, and html or other code incorporated in such sites. "Inventories" means all of the inventory of the Company and its Subsidiaries, ----------- including without limitation: (i) all raw materials, work in process, parts, components, assemblies, supplies and materials used or consumed in the business of the Company and its Subsidiaries; (ii) all goods, wares and merchandise, finished or unfinished, held for sale or lease or leased or furnished or to be furnished under contracts of service; and (iii) all goods returned or repossessed by the Company. "Knowledge" means when used in reference to the Company (e.g. "to the Company's --------- knowledge," "to the knowledge of the Company" and phrases of similar import) means the knowledge of the Company's chief executive, operating and financial officers, as well as the knowledge of the most senior executives, operating and financial officers of each Subsidiary. "Latin American Subsidiaries" means Seler S.A., New Dry S.A. Drypers do Brasil --------------------------- Ind. e Com. Ltda., Drypers Andina + CIA, S.C.A. "Legal Proceeding" means any judicial, administrative, regulatory or arbitral ---------------- proceeding, investigation or inquiry or administrative charge or complaint pending at law or in equity before any governmental or regulatory body or authority. "Lien" shall have the meaning set forth in 11 U.S.C. (S) 101(37), and ---- specifically includes without limitation, any lien, claim, encumbrance, charge and interest. "Material Contract" means (i) any (x) Lease for real property or (y) Lease for ----------------- personal property, in each case requiring aggregate payments after Closing of $150,000 or more; (ii) any contract for the purchase of materials, supplies, goods, and services, equipment or other assets that has a term of at least one year and that requires aggregate payments after Closing of $150,000 or more; (iii) any contract that requires aggregate payments after Closing of $150,000 or more, including debt documents; (iv) any sales, distribution or other similar contracts not entered into in the ordinary course providing for the sale by the Company or any of its Subsidiaries of materials, supplies, goods, services, equipment or other assets that requires aggregate payments after Closing of 33 $150,000 or more; (v) any acquisition, dispositioning, partnership, joint venture or other similar Contract; or (vi) any Contract or agreement under which any Subsidiary indemnifies or has any other contingent liability to any person. "Patents" means any foreign or United States patents and patent applications ------- including any divisions, continuations, continuations-in-part, substitutions or reissues thereof, whether or not patents are issued on such applications and whether or not such applications are modified, withdrawn or resubmitted. "Permitted Liens" means (a) liens for taxes and other governmental charges and --------------- assessments which are not yet due and payable, (b) liens of landlords and liens of carriers, warehousemen, mechanics and materialmen and other like liens arising in the ordinary course of business for sums not yet due and payable (c) other liens or imperfections on property which are not material in amount or do not materially detract from the value of or materially impair the existing use of the property affected by such lien or imperfection and (d) any license of Intellectual Property granted pursuant to Section 9.9.. "person" means any individual, corporation, partnership, limited liability ------ company, firm, joint venture, association, joint-stock company, trust, unincorporated organization, Governmental Body or other entity. "Petition Date" means October 10, 2000. ------------- "Procter & Gamble" means The Procter & Gamble Company, an Ohio corporation. ---------------- "Procter and Gamble Settlement Agreement" means order approving the --------------------------------------- implementation of the prepetition term sheet agreement by and between the Company and Procter & Gamble dated October 9, 2000, as amended through the date of this Agreement, (including all exhibits thereto and any related agreements, including, without limitation, the U.S. License Agreement, dated December 13, 2000, between the Company and Procter & Gamble and the Canadian License Agreement, dated December 13, 2000, between the Company and Procter & Gamble). "Procter and Gamble Settlement Order" means the Order of the Bankruptcy Court ----------------------------------- authorizing and approving the Procter and Gamble Settlement Agreement. "property" or "properties" means real, personal or mixed property, tangible or -------- ---------- intangible. "the Purchaser Disclosure Letter" means the disclosure letter delivered by the ------------------------------- Purchaser to the Company in connection with the execution and delivery of this Agreement by the parties hereto. "Purchaser Employee" means a Current Employee who is hired by the Purchaser. ------------------ "Safety and Environmental Laws" means all Laws and Orders relating to pollution, ----------------------------- protection of the Environment, public or worker health and safety, or the emission, discharge, release or threatened release or Hazardous Substances into the Environment or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances including the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. (S)9601 et seq., the Resource ------ Conservation and Recovery Act, 42 34 U.S.C. (S) 6901 et seq., the Toxic Substances Control Act, 15 U.S.C. (S) 2601 ------- et seq., the Federal Water Pollution Control Act, 33 U.S.C. (S) 1251 et seq., - ------- ------- the Clean Air Act, 42 U.S.C. (S) 7401 et seq., the Federal Insecticide, ------- Fungicide and Rodenticide Act, 7 U.S.C. (S) 121 et seq., the Occupational Safety ------- and Health Act, 29 U.S.C. (S) 661 et seq., the Asbestos Hazard Emergency ------- Response Act, 15 U.S.C. (S) 2601 et seq., the Safe Drinking Water Act, 42 U.S.C. ------- (S) 300f et seq., the Oil Pollution Act of 1990, 33 U.S.C. (S) 2701 et seq., and ------- ------- analogous state and foreign Laws and Orders. "Sale Order" means (i) an order of the Bankruptcy Court, in form and substance ---------- reasonably satisfactory to the Purchaser and the Company, approving the sale of the Business, including all Domestic Purchased Assets and the assignment of all Assumed Contracts, Assumed Leases by the Company to the Purchaser under this Agreement pursuant to sections 105 and 363 of the Bankruptcy Code, in each case free and clear of any Liens except as specifically set forth in this Agreement as Permitted Lien or Assumed Liability, and finding that the Purchaser is acting in good faith the Purchaser including for purposes of section 363(m) of the Bankruptcy Code, and (ii) an order of orders of the Bankruptcy Court in form and substance reasonably satisfactory to the Purchaser and the Company, approving the assumption and assignment of all Assumed Contracts, and Assumed Leases by the Company pursuant to section 365 of the Bankruptcy Code. The Sale Order shall provide that all defaults of the Company under the Assumed Contracts and Assumed Leases arising or accruing prior to the date of the Sale Order (without giving effect to any acceleration clauses or any default provisions in such contracts of a kind specified in section 365(b)(2) of the Bankruptcy Code) have been cured or will be promptly cured by the Company such that the Purchaser shall have no liability or obligation with respect to any default or obligation arising or accruing prior to the date of the Closing, except as may otherwise be specifically agreed as set forth in this Agreement; and that the Assumed Contracts, and Assumed Leases will be transferred to, and remain in full force and effect for the benefit of the Applicable the Purchaser, notwithstanding any provision in such Assumed Contracts, Assumed Puerto Rico Contracts, Assumed Leases and Assumed Puerto Rico Leases or in applicable law (including those described in sections 365(b)(2) and (f) of the Bankruptcy Code) that prohibits, restricts, or limits in any way such assignment or transfer. "Seller Disclosure Letter" means the disclosure letter delivered by the Company ------------------------ to the Purchaser of the Agreement by the parties hereto pursuant to Section 5.13. "Software" means any computer software programs, source code, object code, data -------- and documentation. "Subsidiaries" means the Company's subsidiaries and affiliates, including without limitation the subsidiaries and affiliates set forth in Section 3.2 of the Seller Disclosure Letter. "Taxes" means (i) any and all federal, state, provincial, local, foreign and ----- other taxes, levies, fees, imposts, duties, and similar governmental charges (including any interest, fines, assessments, penalties or additions to tax imposed in connection therewith or with respect thereto) including, without limitation, taxes imposed on, or measured by, income, franchise, profits or gross receipts, ad valorem, value added, capital gains, sales, goods and services, use, real or personal property, capital stock, license, branch, payroll, estimated withholding, employment, social security (or similar), unemployment, compensation, utility, severance, 35 production, excise, stamp, occupation, premium, windfall profits, transfer and gains taxes, and customs duties, and (ii) any transferee liability in respect of any items described in clause (i) above. "Tax Returns" means any and all reports, returns, declarations, claims for ----------- refund, elections, disclosures, estimates, information reports or returns or statements required to a supplied to a taxing authority in connection with Taxes, including any schedule or attachment thereto or amendment thereof. "Trade Secrets" means any trade secrets, research records, processes, ------------- procedures, manufacturing formulae, technical know-how, technology, blue prints, designs, plans, inventions (whether patentable and whether reduced to practice), invention disclosures and improvements thereto. "Trademarks" means any foreign or United States trademarks, service marks, trade ---------- dress, trade names, brand names, designs an logos, corporate names, product or service identifiers, whether registered or unregistered, and all registrations and applications for registration thereof. "Treasury Regulation" means the regulations promulgated under the Code. ------------------- 36 IN WITNESS WHEREOF, the Sellers and the Purchaser have caused this Agreement to be executed on their behalf by their officers thereunto duly authorized, as of the date first above written. DSG International Limited By: /s/ Peter Chang --------------------------- Name: Peter Chang ---------------------- Title: Vice President --------------------- Associated Hygienic Products LLC By: /s/ Peter Chang ---------------------------- Name: Peter Chang ---------------------- Title: President --------------------- By: --------------------------- Name: ---------------------- Title: --------------------- DRYPERS CORPORATION By: /s/ Walter V. Klemp ---------------------------- Name: Walter V. Klemp ---------------------- Title: CHRMN & CEO --------------------- 37 EX-11 6 dex11.txt COMPUTATION OF NET INCOME PER ORDINARY SHARE EXHIBIT 11 COMPUTATION OF NET INCOME PER ORDINARY SHARE
Year ended December 31, 2000 1999 1998 ------ ------ ------ (in thousands except per share amounts) Number of ordinary shares Ordinary shares outstanding, beginning of year ......... 6,675 6,675 6,675 Ordinary shares repurchased ............................ - - - Ordinary shares tendered ............................... - - - Ordinary shares cancelled .............................. - - - Weighted average shares outstanding during the year..... 6,675 6,675 6,675 Net income.............................................. $2,963 $4,435 $1,622 Earnings per share...................................... $ 0.44 $ 0.66 $ 0.24
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