-----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, AvLH4mKjf28oyPRHIovNVekrYzuXbN6+Jrl7JrTd0Gw3MdUSJqXme+v0UE6Km1lD W0FZ4q3hOYmMrQdgr99waQ== 0000890566-97-000679.txt : 19970401 0000890566-97-000679.hdr.sgml : 19970401 ACCESSION NUMBER: 0000890566-97-000679 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRYPERS CORP CENTRAL INDEX KEY: 0000894232 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 760344044 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-23422 FILM NUMBER: 97571721 BUSINESS ADDRESS: STREET 1: 1415 W LOOP N CITY: HOUSTON STATE: TX ZIP: 77055 BUSINESS PHONE: 7136826848 MAIL ADDRESS: STREET 2: 1415 WEST LOOP NORTH CITY: HOUSTON STATE: TX ZIP: 77055 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-23422 DRYPERS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-0344044 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1415 WEST LOOP NORTH HOUSTON, TEXAS 77055 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 682-6848 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $.001 par value Rights to Purchase Common Stock, $.001 par value (TITLE OF EACH CLASS) 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 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. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting stock (common stock and senior convertible cumulative 7-1/2% preferred stock) held by non-affiliates of the Registrant based upon the price at which the common stock was sold on February 28, 1997: $41,899,461 Number of shares of common stock outstanding as of February 28, 1997: 8,252,272 DOCUMENTS INCORPORATED BY REFERENCE The information called for by Part III, Items 10, 11, 12 and 13 will be included in a proxy statement to be filed pursuant to Regulation 14A and is incorporated herein by reference. PART I ITEM 1. BUSINESS GENERAL Drypers Corporation (collectively, Drypers Corporation and all of its wholly owned subsidiaries, are referred to as the "Company" or "Drypers" throughout this report, unless otherwise indicated) manufactures and markets premium quality, value-oriented disposable baby diapers under the brand name DRYPERS(R) and other brand names internationally. The Company also manufactures and markets disposable training pants under the DRYPERS(R) brand name as well as lower priced, value-oriented branded disposable baby diapers, private label disposable baby diapers and training pants, and premoistened wipes. To date, Drypers has marketed its products primarily in grocery stores throughout the United States, and in certain international markets, including Latin America and the Pacific Rim. The United States grocery store market for disposable diapers and training pants in 1996 represented approximately 54% of the $3.7 billion total domestic disposable diaper and training pants market. The Company believes that its brands represented 5.8% of the dollar volume and 6.2% of the unit volume in the total grocery category during 1996. However, the Company estimates that its brands have market shares as high as 20% in its more established domestic grocery store markets. The Company believes that it is the third largest manufacturer of branded disposable diapers in the United States and one of the nation's largest manufacturers of branded disposable training pants. The Company's strategy for continued growth includes further penetration of existing distribution channels and expansion of international operations, both internally and through acquisitions. From its inception in 1987 through 1991, the Company distributed its products primarily in the southern and southwestern regions of the United States and grew to become one of the three largest regional branded diaper producers in the country. In order to gain nationwide production and distribution capabilities, in 1992, Drypers acquired the other two leading regional branded diaper producers, VMG Holdings Corp. ("VMG"), which distributed its own branded products primarily in the Northwest and Midwest, and UltraCare Products, Inc. ("UltraCare"), which distributed its own branded products primarily in the Northeast. In 1993, the Company started operations in Puerto Rico. In 1995, Drypers acquired operations in Argentina. The Company has extended its reach in Latin America by establishing operations in Mexico in December 1996 and Brazil in February 1997. See Note 9 to the consolidated financial statements for disclosure regarding geographic information. INDUSTRY OVERVIEW AND COMPETITION UNITED STATES DISPOSABLE BABY DIAPER MARKET -- GENERAL The size of the United States disposable baby diaper and training pants market, measured by retail sales, was approximately $3.7 billion during 1996. Since 1989, the aggregate domestic volume of disposable diaper sales has grown slowly. The Company attributes this slow growth to the already high level of market penetration of disposable diapers and to a decrease in the number of diapers used per baby as a result of improvements in absorbency and leakage control. The manufacturers of disposable diapers known to the Company in the United States can be grouped into three general categories: premium priced branded producers, value-oriented branded producers and private label producers. -2- The Company's larger branded competitors, Procter & Gamble Company ("Procter & Gamble") and Kimberly-Clark Corporation ("Kimberly-Clark"), have tended to compete on the basis of product quality, features and price. As a result, these premium priced branded producers invest heavily both in research and development to design frequent product enhancements and in marketing and advertising to promote product sales and to increase consumer awareness of the benefits of disposable diapers and their new features. Although their products are generally priced above value-oriented brands and private label products to both retailers and consumers, retailers generally sell these brands at prices that provide them with relatively little margin in order to attract consumers into their stores. Historically, value-oriented branded diapers such as those sold by the Company have been sold primarily through grocery stores because the manufacturers of these brands lacked national brand name recognition and the national production and distribution capabilities necessary to service mass-merchant and drugstore chains. The competitive strategies of value-oriented brands vary significantly, ranging from a focus on quality and value to a simple low-price strategy, and the products vary from premium quality diapers to low quality diapers with few enhancements. Generally, value-oriented brands compete by offering products that are priced below the premium priced brands to both retailers and consumers and typically provide higher margins to retailers than the national brands. Value-oriented brand name manufacturers do not generally engage in extensive research and development or national advertising. Value-oriented brands are generally marketed to a more defined audience than is reached by mass advertising by using coupons, in-store promotions and cooperative programs with retailers. Private label producers manufacture diapers that are marketed through various retail outlets under retailer-affiliated labels and are typically manufactured to the specifications of each retailer, resulting in significant quality differences among private label products. Private label manufacturers generally emphasize price over quality and features and, therefore, typically do not invest as heavily in research and development as, and are generally slower to incorporate new product enhancements than, premium priced branded competitors. In addition, because their products are sold under retailer-affiliated labels, private label manufacturers spend minimal amounts on advertising and marketing of their diapers, although retailers may engage in promotional activities. UNITED STATES DISPOSABLE BABY DIAPER MARKET - RECENT INDUSTRY CONDITIONS Luvs, a brand of Procter & Gamble, was repositioned in the first quarter of 1995, after having already reduced prices 27% in the previous 18 months, with a reduction in the number of diapers per package and a reduction in price per package. Late in the first quarter of 1995, the Company responded with a repositioning of its own, lowering package counts and prices, to restore a favorable pricing spread between the DRYPERS(R) brand and the other national brands. As part of this repositioning, the Company recognized $2.4 million of promotional and other related expenses which were recorded as an unusual expense in the first quarter of 1995. Simultaneously with the premium brand repositioning, the Company converted its diaper products to a thinner absorbent core ("ultra-thin"), changed its diaper and training pants products' packaging to be consistent throughout the United States and completed the transition of its diaper and training pants products to the brand name "DRYPERS(R)." These were the final steps necessary for the Company to complete a transition to one national brand name throughout the United States. Although the Company's current thin product is meeting with good consumer acceptance, the initial version met with some adverse consumer reaction. In addition, Procter & Gamble and Kimberly-Clark increased their rate of promotional spending more aggressively than the Company during the second quarter of 1995, which contributed to the Company's lower sales volumes. These conditions, coupled with a concurrent significant rise in pulp prices, occurred as the Company was making a transition from four regional brands to one brand, DRYPERS(R), across the country. The Company believes that the effect of the combination of these competitive pressures and the Company's transition to a national brand and slow acceptance of the Company's initial ultra-thin product was to reduce Drypers' national market share by roughly 20%, which resulted in a decline in production volume. This -3- reduction in volume caused fixed costs to be allocated over fewer units, compounding the decline in operating margin. Raw material prices, specifically pulp, rose dramatically during the fourth quarter of 1994 and the first 10 months of 1995. Pulp costs are a major component of the total cost to produce a diaper, representing approximately 7% of net sales in 1996. While the cost of pulp has declined significantly from the record high levels experienced in October 1995, there can be no assurance that if pulp or other raw material prices rise again in the future the Company will be able to pass these increases on to its customers or redesign its products to reduce usage; therefore, operating margins could be adversely affected. Given the adverse conditions present during the first half of 1995, management began implementing a plan to substantially reduce costs throughout the Company's operations. The major components of the cost reduction program included, among others, the closure of the Houston plant, reduction of manufacturing and general overhead costs and improved product design. The full benefit of the cost reduction plan was not realized until the third quarter of 1996, as the Company invested heavily in promotional spending to rebuild market share. As a result of these efforts, the Company has enjoyed a significant recovery of volume and a return to profitability in 1996. UNITED STATES DISPOSABLE BABY DIAPER MARKET -- DISTRIBUTION The size of the United States disposable baby diaper and training pants market through grocery stores, measured by retail sales, was approximately $2.0 billion during 1996. Since 1989, the Company's larger branded competitors have lost grocery market share on a combined basis both to value-oriented brands, which represented the fastest growing segment, and to private label products. Drypers believes its brands have gained market share predominantly at the expense of the Company's larger branded competitors and, to a lesser extent, from private label manufacturers. The Company estimates that its products are currently distributed through grocery stores whose sales represented 60% of the total United States grocery store market in December 1996, as compared to 54% in December 1995. Procter & Gamble and Kimberly-Clark are the dominant companies in the disposable diaper market, with an estimated 67% of the domestic grocery store market for disposable diapers for the 52 weeks ended December 28, 1996. The size of the United States disposable diaper market through mass-merchants and drugstore chain retailers, measured by retail sales, was approximately $1.7 billion during 1996 and represented approximately 46% of the United States disposable diaper and training pants market. The majority of the mass-merchant and drugstore chain retailers are national or super-regional in scope and are primarily interested in nationally distributed brands and private labels. In the first quarter of 1995, the Company completed its transition to one national brand name, DRYPERS(R), began distribution through certain mass-merchant and drugstore chains, including Venture, Meijer and Caldor, and initiated distribution through the Super K-Mart stores of K-Mart. Drypers believes that its national branded focus will generate increased distribution opportunities with mass-merchants and drugstore chains. INTERNATIONAL DISPOSABLE BABY DIAPER MARKETS Although disposable baby diaper usage is significantly lower outside the United States, Western Europe, Japan and other developed countries, the Company estimates that the international disposable baby diaper market is approximately $12 billion in manufacturers' sales. Procter & Gamble and Kimberly-Clark have contributed to the development of the international market for disposable baby diapers by advertising heavily and by introducing their products in numerous markets. Although Procter & Gamble and Kimberly-Clark dominate the international markets, in certain foreign markets there are local disposable diaper manufacturers which represent a significant portion of the market. -4- In Japan and certain countries in Western Europe, the disposable baby diapers sold by local producers are of a quality comparable to the premium products sold in the United States. However, in most other countries, the local disposable diaper manufacturers generally sell a lower quality product with fewer product features. The Company believes that increased awareness outside the United States of the benefits of disposable diapers, combined with generally higher birth rates, will cause aggregate disposable diaper sales outside the United States to grow substantially faster than domestic sales. The Company has focused its international efforts primarily in Latin America because of the relatively low, but growing level of diaper market penetration and because of the high level of market potential. In these markets, the Company predominantly competes in the price-value brand and private label categories. With plants in Argentina, Puerto Rico, and Mexico, the Company is establishing a manufacturing base outside of the mainland United States. This base has been strengthened with the February 1997 acquisition of the Brazilian "Puppet" brand and the resulting formation of a joint venture to market this brand in Brazil. In Argentina, despite a lagging economy in 1996, the Company believes that it has an approximate 12% market share of the disposable diaper category. There the Company markets branded and private label diapers to most major grocery store chains and mass-merchants. The Company believes that it has an approximate 24% market share of the disposable diaper category in Puerto Rico where it distributes via major grocery store and mass-merchants. Furthermore, the Company believes that the acquired "Puppet" brand has an approximate 14% market share in Brazil. There distribution is, again, via major grocery store chains and mass-merchants. As this growth opportunity is more fully enabled, Drypers intends to expand its reach to include the Pacific Rim countries. MARKETING EVERY DAY VALUE The Company's premium diapers offer consumers the reliability of a brand name and product quality and features comparable to the Company's larger branded competitors at prices generally lower per package. This combination of product quality and lower prices offers consumers an attractive alternative to the premium priced brands. Since 1993, Procter & Gamble's Luvs brand has attempted to emulate parts of Drypers' Every Day Value positioning by lowering its package counts and prices. In the first quarter of 1995, Procter & Gamble once again reduced Luvs' counts and prices. The Company responded late in that same quarter with a repositioning of DRYPERS(R), similar to one made in 1993. While this required a substantial investment, the Company believes that the continued domestic growth of its branded diaper sales was enhanced significantly by this move. HIGHER MARGINS TO RETAILERS The Company's larger branded competitors typically sell their products to retailers at prices above those of other diaper manufacturers. Retailers generally price the premium priced brands with relatively little margin to attract customers into their stores. Drypers is able to sell its products to retailers at a lower price than its larger branded competitors, which allows retailers to offer a lower price to consumers while obtaining substantially higher margins, increasing category profitability. As a result, retailers have an incentive to carry the Company's product line. In addition, Drypers attempts to build strong relationships with its retailers by providing a high level of service and promotional support. In addition to its brand name products, the Company selectively markets disposable diapers, training pants and premoistened wipes under private labels. For the year ended December 31, 1996, approximately 6.4% of the Company's net sales were from private label products. -5- NATIONAL BRAND IDENTIFICATION As a means to further capitalize on the strength of its national production and distribution capabilities, the Company completed the integration, during the first quarter of 1995, of its premium brand name diapers and training pants under a single brand name, DRYPERS(R). The Company believes that marketing its products under one national brand name has increased its market share within the United States by enhancing the familiarity of its brand both to retailers and to consumers. The Company also believes that this integration has resulted in certain production and advertising cost savings and will further enhance the Company's entry into the mass-merchant and drugstore chain markets. SELECTIVE INNOVATION Drypers emphasizes differentiation from the other national brands on the basis of more than just price. In 1994, the Company began to promote its diapers as the only "perfume free" national brand and in 1996, Drypers introduced the first odor control diaper, "Drypers with Baking Soda." The Company believes that it was able to maintain a high level of United States branded sales in the second half of 1996 while reducing its rate of promotional spending due in large part to the launch of baking soda diapers, as evidenced by the increase in grocery store distribution from 54% in December 1995 to 60% in December 1996. PRODUCTS DISPOSABLE BABY DIAPERS There are significant quality differences among the various disposable diapers currently being sold. 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 fastening systems which secure the diaper firmly without causing discomfort to the baby. Other features, such as thinner construction, odor control, perfume free, attractive designs, extra-dry sub-layers, gender-specific coloring, and packaging, help to differentiate products from one another. The Company manufactures and markets primarily three types of disposable baby diapers in the United States: premium brand name diapers, price-value brand name diapers and private label diapers. PREMIUM BRAND NAME BABY DIAPERS. The Company sells its premium brand name products under the brand name DRYPERS(R). Drypers' premium brand diapers incorporate many of the product features that are offered by the Company's larger branded competitors. These include 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, and compression packaging. In addition, Drypers are differentiated by features not offered by some or all of the other national brands, such as "perfume free" and "baking soda" for odor control. PRICE-VALUE BRAND NAME BABY DIAPERS. The Company's price-value products, sold under the brand name COMFEES(TM), incorporate some of the product features currently offered by the Company's premium brands. These product features include multi-strand leg elastic for a wide soft cuff, a reinforced tape landing zone for more secure fastening, a thin overall profile and compression packaging. The Company's price-value brand name baby diapers are sold in packages that contain fewer diapers, and at a package and per diaper cost to the consumer that is less than the Company's premium brands. The Company believes that the lower retail price and the combination of product features distinguish its price-value brand name diapers in the market. The Company currently sells its price-value diapers in only limited United States markets. -6- PRIVATE LABEL BABY DIAPERS. The Company's private label products are manufactured to the specifications of and are sold under the labels of major retailers. The private label products produced by the Company range in quality from the Company's premium brand products to the Company's price-value products. The Company believes private label opportunities are enhanced by the Company's low cost structure and its ability to provide products with features and performance characteristics substantially equivalent to the national brands. In addition to its premium and price-value products, the Company sells diapers outside of the United States with product specifications designed for particular foreign markets which address specific competitive and affordability sectors in those markets. DISPOSABLE TRAINING PANTS The Company has developed a line of premium disposable training pants, marketed under the Drypers(R) brand name, for children of toilet-training age. Training pants are a complementary product which may extend the period of time during which consumers purchase disposable infant wear. Since the introduction of the first premium disposable training pants by Kimberly-Clark, the domestic training pants market has grown to approximately $480 million in retail sales. Drypers initially introduced its training pants into selected markets in late 1992, using several unique manufacturing processes. These processes encompass the same level of automation and quality control, and many of the same raw materials, as the baby diaper manufacturing process. The Company believes that its training pants were the first premium disposable training pants in the United States to offer a one-piece design with full circle elastic leg and waist bands, making it more like real underwear than other products available in the market. The Company believes these attributes are important to the success of disposable training pants since young children often display a desire to wear "real underwear". Typically, the Company's disposable training pants are sold at a substantially higher per unit price than the Company's premium disposable diapers, resulting in substantially higher gross profit margins than on premium disposable diapers. Significant product improvements were made to DRYPERS(R) training pants in 1995; specifically, improved contouring in the core for better absorbency, Lycra(R) Tummy Snugs(TM) for better fit around the waist and a new crotch design to eliminate bunching and prevent leakage. These product improvements contributed to a 26.4% increase in unit volume in 1995 despite the introduction of competitive brands. The Company believes its training pants represented 7.8% of the total training and absorbency pants category on a unit volume basis during 1996 and are now the number two brand of disposable training pants sold through grocery stores in the United States. PRODUCT DESIGN AND DEVELOPMENT Drypers constantly seeks to enhance its products by adding product features and substituting materials and components to improve their performance. Drypers works closely with its suppliers, distributors and other industry participants to identify, anticipate, and in some cases develop technological innovations so that the Company's products can incorporate the most advanced design features and also be clearly differentiated from the other national brands. The Company uses advanced manufacturing equipment and techniques that have proven to be adaptable to permit the introduction of new products using either new materials or production techniques. The Company believes that its approach to product design and development minimizes its risk because it does not spend significant sums on research and development, limits the introduction of untried innovations and features, and does not have to spend heavily to advertise new product developments or to educate consumers. -7- In the first quarter of 1995, the Company converted its diaper products to a thinner absorbent core ("ultra-thin"), changed its diaper and training pants products' packaging to be consistent throughout the United States and completed the transition of its diaper and training pants products to the brand name "DRYPERS(R)." In the second quarter of 1996, Drypers launched the industry's first odor control diaper, "Drypers with Baking Soda." DISTRIBUTION Domestically, the Company uses grocery brokerage companies as agents to facilitate the distribution of its products through grocery stores. The Company believes that this approach has expedited the Company's entry into its current markets because of the strong long-term relationships that many of these brokers have with retailers. At the same time, this strategy minimizes corporate overhead. In addition, the location of its plants has enabled the Company to achieve average shipping times of one to two days for most destinations in the United States. Outside the United States, the Company tailors its approach to each foreign market, taking into consideration the political and cultural environment as well as the distribution infrastructures. In general, the Company works with independent local distributors; however, in certain markets such as Puerto Rico, it uses a direct sales force or, as in Argentina and Mexico, a combination of a direct sales force and wholesalers that distribute to small independent retailers. MARKET UNITED STATES GROCERY STORE MARKET The Company estimates that its products are currently distributed through grocery stores whose sales represented 60% of the total United States grocery store market for disposable diapers and training pants in December 1996, and has achieved distribution levels in excess of 90% of the grocery stores in its most developed markets. The Company believes that its brands represented 5.8% of the total dollar volume and 6.2% of the total unit volume for disposable diapers and training pants in the total grocery store category during 1996. However, the Company estimates that its brands have market shares as high as 20% in its more established domestic grocery store markets. UNITED STATES MASS-MERCHANT AND DRUGSTORE CHAINS The mass-merchant and drugstore chain segments, in aggregate, represent approximately 46% of the United States disposable diaper and training pants market, or $1.7 billion of retail sales in 1996. Until recently, the Company has not served these distribution channels. The majority of the mass-merchant and drugstore chain retailers are national or super-regional in scope and are primarily interested in nationally distributed, recognized brands. In late 1992, Drypers completed acquisitions that provided nationwide production and distribution capabilities and began a program of unifying its products nationwide under the DRYPERS(R) brand name, which was completed in the first quarter of 1995. As a result of this program, Drypers has obtained distribution through certain mass-merchant and drugstore chains, including Super K-Mart stores of K-Mart, Venture, Meijer and Caldor. Drypers believes that its national branded focus will generate increased distribution opportunities with mass-merchants and drugstore chains. -8- UNITED STATES PRIVATE LABEL CUSTOMER BASE Private label products play an important role in maintaining profit within many retailers' stores. The Company believes that its private label products are complementary to the value brand positioning of its products. Approximately 6.4% of the Company's 1996 total net sales were to private label customers. The Company believes private label opportunities are enhanced by the Company's low cost structure and ability to provide products with features and performance characteristics substantially equivalent to the national brands. There has recently been consolidation among private label manufacturers in the United States, leaving fewer competitors in this market. The Company believes that this increases its opportunity to obtain new private label business. INTERNATIONAL OPERATIONS Industry sources estimate the international disposable diaper market to represent approximately $12 billion in annual manufacturers' sales, while only being 10% penetrated. The Company's products are sold in over 28 foreign countries and territories, accounting for approximately 24.2% of the Company's total net sales during 1996. Since Drypers started Puerto Rico's first-ever diaper production facility in February 1993, the Company has become Puerto Rico's second leading diaper brand, with distribution in all of the island's largest retail chains, including Wal-Mart. In 1995, Seler S.A.("Seler"), an Argentine diaper manufacturer, became a wholly owned subsidiary of the Company. The Company has extended its reach in Latin America by establishing operations in Mexico in December 1996 and Brazil in February 1997. The Company is considering further expansion in the Pacific Rim and Latin American markets, especially within the other Mercosur trading pact countries of Uruguay and Paraguay. MANUFACTURING PROCESS The disposable diaper manufacturing process begins with the manufacture of an absorbent core which is constructed with a combination of wood pulp and superabsorbent polymers. Nonwoven and polyethylene liner layers, leg elastics, tape and other applicable features are then combined around the core in an automated continuous process, which shapes and produces the finished product. The Company believes it is able to purchase raw materials on substantially the same terms as its larger branded competitors, and that it is able to operate with proportionately lower corporate overhead because of its more focused value-oriented strategy. The Company maintains quality control procedures throughout the production process, commencing with the receipt of raw materials and continuing through shipment of the finished product. Each of the Company's production lines has on-line electronic detection devices built into the overall production control system that feed data to process control computers that automatically reject certain nonconforming products. In addition, each of the Company's diaper lines has a full-time inspector assigned to assure quality control at all stages of the production process. Finally, line inspections and batch testing are performed on a continuous basis. On-site testing labs are utilized to conduct thorough tests of quality attributes on a daily basis and to assist in the product development process. RAW MATERIALS The raw materials used in the Company's manufacturing process include wood pulp, super absorbent polymer, polyethylene film, polypropylene nonwoven fabric, adhesive closure tape, hot melt adhesive, elastic, tissue, bags, boxes and baking soda. In general, the Company has at least two suppliers for each of the raw materials used in its manufacturing process. The Company believes that it maintains good relationships with all of its raw material suppliers and that it is able to purchase raw materials on substantially the same terms as its larger branded competitors. -9- TRADEMARKS AND PATENTS The Company has registered or has applications pending to register numerous trademarks in the United States, including DRYPERS(R). In addition, the Company has registered or applied for registration of certain of its trademarks in a number of foreign countries. Diaper manufacturers normally seek United States and foreign patent protection for the product enhancements that they develop and there are numerous United States patents that relate to disposable diapers. The design and the technical features of the diapers produced by the Company are considered by patent counsel before the manufacture and sale of such products to avoid the features covered by unexpired patents. The Company believes it has been able to introduce product innovations comparable to those introduced by its competitors by using manufacturing methods or materials that are not protected by such patents. See Note 8 to the consolidated financial statements included elsewhere herein. 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 time between receipt of a customer's order and shipment to the customer averages two to seven days. The Company maintains varying levels of raw material and finished product inventory depending on lead times and shipping schedules. The Company's inventory levels generally vary between two to five weeks. As a result of the short lead time between order and delivery of product, the Company does not maintain a significant backlog. INSURANCE All of the Company's plant, machinery and inventory are covered by fire and extended coverage insurance. Although the Company has never been named as a defendant in a product liability lawsuit, the Company maintains product liability insurance in amounts it believes to be adequate with respect to its operations. In addition, the Company has obtained insurance with respect to the collection of certain of its accounts receivable. There can be no assurance however that future claims will not exceed coverage. EMPLOYEES As of February 28, 1997, the Company employed approximately 653 people on a full-time basis. None of the Company's employees are unionized except where required by local law. Such is the case in Mexico. The Company's employees there are members of a syndicate and are employed under a one year contract. The Company believes its relationship with its employees is good. -10- ITEM 2. PROPERTIES The Company leases a total of 693,000 square feet of manufacturing, distribution and administrative space in six locations in the United States, Puerto Rico, Argentina and Mexico, as follows:
Manufacturing Lines -------------------- Square Lease Expiration Baby Location Feet Date Use Diaper(1) Other(2) - ----------------------------------------------------------------------------------------------------------------------------------- Vancouver, Washington .............. 80,000 September 30, 2003 Manufacturing and Administrative 4 -- Vancouver, Washington .............. 22,000 April 1, 2000 Warehouse -- -- Marion, Ohio ....................... 215,000 February 28, 1998 Manufacturing and Administrative 4 3 Marion, Ohio ....................... 114,000 Month to Month Warehouse -- -- Houston, Texas ..................... 80,000 April 30, 1998 Warehouse and Administrative -- -- Houston, Texas ..................... 47,000 June 30, 1997 Warehouse -- -- Toa Alta, Puerto Rico .............. 51,000 November 30, 2003 Manufacturing and Administrative 1 -- Buenos Aires, Argentina ............ 54,000 January 31, 1998 Manufacturing and Administrative 2 -- Guadalajara, Mexico ................ 30,000 December 31, 1997 Manufacturing and Administrative 1 --
(1) Each baby diaper line is capable of producing approximately 700,000 to 1,000,000 cases of diapers per year. (2) Other manufacturing lines include a disposable training pants production line and two premoistened wipe lines at the Company's Marion, Ohio, location. The Company's equipment is highly automated and capable of continuous 24-hour, seven-day per week production. The Company has maintenance and machine shops which are capable of meeting the majority of the Company's equipment service requirements. The Company's Mexico operation will require additional manufacturing, warehouse and administrative space in 1997, and the Company is currently in negotiations to secure such space. The Company believes that its other leased facilities are adequate for its current needs. ITEM 3. LEGAL PROCEEDINGS The Company is involved in certain lawsuits and claims arising in the normal course of business. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not have a material adverse effect on the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of 1996. -11- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock, $.001 par value, was listed on the Nasdaq National Market under the symbol "DYPR" from March 11, 1994, through January 28, 1996. Effective January 29, 1996, the Company's stock began trading on the Nasdaq SmallCap Market. The following table sets forth, for the periods indicated, the high and low sales prices of the common stock as reported by the Nasdaq National Market and the Nasdaq SmallCap Market. There were 359 stockholders of record of the common stock as of February 28, 1997. 1995 1996 --------------- ---------------- HIGH LOW HIGH LOW Quarter- First .... $12.75 $ 8.00 $ 4.13 $ 2.75 Second ... 9.75 5.50 4.00 2.75 Third .... 8.13 3.00 4.25 2.63 Fourth ... 5.38 1.38 5.63 3.50 To date, the Company has neither declared nor paid any cash dividends on its common stock, and the Company does not anticipate that dividends will be paid in the foreseeable future. The Company intends to apply any future earnings to the expansion and development of its business. The declaration and payment in the future of any dividends will be at the election of the Company's board of directors and will depend upon the earnings, capital requirements and financial condition of the Company, general economic conditions and other pertinent factors. In addition, the Company's revolving credit facility prohibits the declaration or payment of any cash dividends by the Company. The indenture relating to the Company's Series B Senior Notes ("12-1/2% Senior Notes") also restricts the payment of cash dividends unless specific conditions are satisfied. -12- ITEM 6. SELECTED FINANCIAL DATA The following selected historical financial data (in thousands, except share data) should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements, including the notes thereto, included elsewhere herein.
YEAR ENDED DECEMBER 31 --------------------------------------------------------------------------- OPERATING DATA 1992(a) 1993 1994 1995 1996 - ------------------------ ----------- ----------- ----------- ----------- ----------- Net sales .............. $ 77,719 $ 156,079 $ 173,552 $ 163,947 $ 207,014 Operating income (loss) 5,658(b) 12,177(d) 18,200(e) (11,259)(g) 10,553 Income (loss) before income tax provision (benefit) and extraordinary item ... 1,526 1,062 10,949 (19,294) 1,622 Income (loss) before extraordinary item ... 660 (308) 6,798 (15,465) 1,313 Net income (loss) attributable to common stockholders .. (4,798)(c) (308) 3,110(f) (15,465) 752 Income (loss) attributable to common stockholders per common share: Before extraordinary item ............ $ (1.20) $ (.10) $ 1.09 $ (2.35) $ .09 Extraordinary item . (1.80) -- (.59) -- -- ----------- ----------- ----------- ----------- ----------- Net income (loss) .. $ (3.00) $ (.10) $ .50 $ (2.35) $ .09 =========== =========== =========== =========== =========== Common stock and common equivalent shares outstanding ........ 1,602,250 2,989,380 6,246,087 6,587,698 14,194,298(h) =========== =========== =========== =========== ===========
DECEMBER 31 ------------------------------------------------------------------ BALANCE SHEET DATA 1992(a) 1993 1994 1995 1996 - ------------------------ ----------- ----------- ----------- ----------- ----------- Working capital (deficit) ........ $ 10,994 $ 8,587 $ 17,962 $ (3,597) $ 8,707 Total assets .......... 112,918 115,905 131,731 137,420 150,555 Long-term debt, including current portion .......... 75,235 75,510 46,632 47,350 49,592 Stockholders' equity(i) 10,692 13,997 56,767 41,822 53,608
- ---------- (a) Year ended December 31, 1992, amounts include the results of operations of VMG and its subsidiary from May 31, 1992, as well as the operations of UltraCare and its subsidiary from November 10, 1992, the dates of acquisition, respectively. (b) Includes one-time acquisition-related expenses of $300,000 that were paid as bonuses to management in connection with the purchase of UltraCare by the Company. (c) Includes a noncash extraordinary expense of approximately $2,432,000, net of taxes, for previously capitalized debt issuance costs, a cash extraordinary expense of $466,000, net of taxes, for prepayment and other fees in connection with the UltraCare acquisition and completion of the 12-1/2% Senior Note offering, and $2,296,000 accretion in market value of a redeemable warrant. Income (loss) attributable to common stockholders for the year ended December 31, 1992, was reduced by $264,000 in dividends on redeemable preferred stock. (d) Includes unusual expenses of $1,536,000 to reflect the costs associated with the Company's repositioning of its premium brand diaper products and $840,000 of legal fees in connection with a patent infringement lawsuit. (e) Includes legal expenses of $1,141,000 incurred in connection with a patent infringement lawsuit which was settled during the second quarter of 1994. (f) Includes a noncash extraordinary expense of approximately $2,000,000, net of taxes, for previously capitalized debt issuance costs and original issue discount, and a cash extraordinary expense of approximately $1,700,000, net of taxes, for prepayment fees in connection with the $30,000,000 redemption of 12-1/2% Senior Notes funded by the proceeds from the Company's initial public offering. (g) Includes unusual expenses of $2,358,000 to reflect the costs associated with the Company's repositioning/brand transition of its premium brand diaper products, a noncash restructuring charge of $4,255,000 related to the write-down of idled equipment to net realizable value, lease termination costs related to the closure of the Houston facility and unusual expenses of $827,000 related to costs associated with the Company's refinancing transaction. (h) Common stock and common equivalent shares outstanding for 1996 includes the weighted average effect of 9,000,000 shares of common stock issuable upon the conversion of 90,000 shares of convertible preferred stock issued in February 1996. (i) The Company has never declared a cash dividend on its common stock. -13- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion and analysis, together with the accompanying consolidated financial statements and related notes, will aid in understanding the Company's results of operations as well as its financial position, cash flows, indebtedness and other key financial information. From time to time, the Company may make certain statements that contain "forward-looking" information (as defined in the Private Securities Litigation Reform Act of 1995). Words such as "anticipate", "estimate", "project" and similar expressions are intended to identify such forward-looking statements. Forward-looking statements may be made by management orally or in writing, including, but not limited to, in press releases, as part of this Management's Discussion and Analysis of Financial Condition and Results of Operation and as part of other sections of this Annual Report on Form 10-K and the Company's other filings with the Securities and Exchange Commission under the Securities Act of 1933 and 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. Among the factors that have a direct bearing on the Company's results of operations are price changes by competitors, increases in costs of raw materials, timing of technological advances by the Company and its competitors, lack of acceptance by consumers of new products, foreign governmental monetary and policy changes and other factors discussed herein. RECENT DEVELOPMENTS During the first quarter of 1995, the Company repositioned its diaper products in response to similar activity by its competitors. In response to continued market pressures, management began implementing a plan to substantially reduce costs throughout the Company's operations. The major components of the cost reduction program included, among others, the closure of the Houston plant, reduction of manufacturing and general overhead costs and improved product design. The full benefit of the cost reduction plan was not realized until the third quarter of 1996, as the Company invested heavily in promotional spending to rebuild market share. As a result of these efforts, the Company has enjoyed a significant recovery of volume and a return to profitability in 1996. Concurrent with the operational reorganization discussed above, the Company undertook a plan to reorganize its financial structure. The Company's financial restructuring was completed on February 29, 1996, with the establishment of a new revolving credit facility with a borrowing base of up to $21.0 million (see "Liquidity and Capital Resources") and the private issuance of convertible preferred stock. Availability under the new revolving credit facility and the proceeds from the preferred stock were used to repay the existing revolving credit facility, the previously deferred interest payment on the 12-1/2% Senior Notes and transaction costs. As of March 26, 1997, unused borrowing availability under the revolving credit facility was approximately $2.9 million. The Company continues to investigate various alternatives to further improve liquidity including, among other things, equity issuances, lease financing, additional borrowings, refinancing or amendment of existing debt, establishing revolving credit lines at the subsidiary level and deferral of planned capital expenditures (see "Liquidity and Capital Resources"). In December 1996, the Company entered into a six year operating lease with a lease financing company for a new state-of-the-art diaper production line. The line was delivered in December 1996, and was operational late in the first quarter of 1997. Previous deposits related to this diaper line of $1.1 million were included as a -14- component of machinery and equipment as of December 31, 1995. In March 1997, the Company entered into a six year operating lease with a lease financing company for a second diaper production line, which is scheduled for delivery in the fourth quarter of 1997. Deposits of $1.1 million related to this production line are included as a component of machinery and equipment as of December 31, 1996. These operating lease commitments are included in the future minimum rental commitments presented in Note 8 to the consolidated financial statements included elsewhere, herein. Subsequent to December 31, 1996, the Company entered into a series of transactions related to the establishment of a 51% owned venture in Brazil, acquisition of certain intangible assets and rights from Chansommes do Brasil Ind. E Com. Ltda. ("Chansommes") and the purchase of diaper and other production of Chansommes. Consideration paid in connection with the transactions totaled approximately $6.4 million, including $4.0 million of common stock of the Company (1.0 million shares), cancellation of an outstanding receivable from Chansommes of $2.2 million and $0.2 million of transaction related costs to date. Under the terms of the agreement, the 1.0 million shares of common stock are to be held in escrow by the Company through April 1997. The owners of such shares may elect until that time to receive cash in lieu of the shares for a portion or all of the $4.0 million. In this regard, to provide for additional liquidity needs, if necessary, the Company has received an irrevocable commitment from a major shareholder to provide up to $4.0 million in financing. Borrowings under this facility, if any, would accrue interest at 12% per annum. -15- RESULTS OF OPERATIONS The following table sets forth the specified components of income and expense for the Company expressed as a percentage of net sales for the years ended December 31, 1994, 1995 and 1996. Gross profit margins vary significantly across the Company's product lines, as do the levels of promotional and marketing support. Accordingly, gross profit and operating margins fluctuate with changes in the relative sales mix of the Company's various product lines. Since the differences in gross profit margins are generally offset by differences in promotional spending levels, changes in sales mix usually do not cause significant fluctuations in operating margins. The Company operates in various foreign countries and is therefore subject to currency fluctuations. Changes in the value of the United States dollar against these currencies will affect the Company's results of operations and financial position. When the United States dollar strengthens compared to other local currencies, the operating results of the Company's foreign operations translate into fewer United States dollars, thus decreasing the revenues and expenses of the Company on a consolidated basis. If the United States dollar weakens against the other relevant currencies, the opposite occurs. The Company's foreign operations attempt to minimize the effects of currency risk by borrowing externally in the local currency. As a matter of policy, the Company does not engage in currency speculation. Changes in exchange rates historically have not materially impacted the Company's net sales, costs or business practices and management expects this to continue. Inflationary conditions in the United States have been moderate and have not had a material impact on the results of operations or financial position for the three years ended December 31, 1996. Despite higher inflationary rates in Latin America, inflation has not had a material impact on the results of operations of the Company's operations located in that region because the Company has generally been able to pass on cost increases to its customers. Year Ended December 31 -------------------------------- 1994 1995 1996 ------ ------ ------ Net sales ................................ 100.0% 100.0% 100.0% Cost of goods sold ....................... 61.2 69.6 60.9 ------ ------ ------ Gross profit ............................. 38.8 30.4 39.1 Selling, general and administrative expenses ............................... 27.7 32.8 34.0 Unusual expenses ......................... .7 1.9 -- Restructuring charge ..................... -- 2.6 -- ------ ------ ------ Operating income (loss) .................. 10.4 (6.9) 5.1 Interest expense, net .................... 4.4 4.9 4.3 Other income ............................. .3 -- -- ------ ------ ------ Income (loss) before income tax provision (benefit) and extraordinary item ..................... 6.3 (11.8) .8 Income tax provision (benefit) ........... 2.4 (2.4) .2 Extraordinary item ....................... (2.1) -- -- ------ ------ ------ Net income (loss) ........................ 1.8% (9.4)% .6% ====== ====== ====== -16- YEAR ENDED DECEMBER, 31, 1996, COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 NET SALES Net sales increased 26.3% to $207.0 million for the year ended December 31, 1996 from $163.9 million for the year ended December 31, 1995. The increase was primarily due to the new baking soda product introduced in May 1996, continued growth in training pants sales, and the continued expansion of international sales. In addition, net sales for the year ended December 31, 1996, included the consolidation of Seler's results for twelve months as compared to five months during the year ended December 31, 1995. COST OF GOODS SOLD Cost of goods sold decreased as a percentage of net sales to 60.9% for the year ended December 31, 1996 compared to 69.6% for the year ended December 31, 1995. The decrease from 1995 levels reflects reduced pulp prices and raw material usage and lower per unit conversion costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased as a percentage of net sales to 34.0% for the year ended December 31, 1996 compared to 32.8% of net sales for the year ended December 31, 1995. The total increase reflects higher couponing and promotional spending as well as an increase in the percentage of premium domestic diaper and training pant sales relative to total net sales, offset by a decrease in general and administrative expenses as a percentage of net sales. Selling, general and administrative expenses as a percentage of sales have declined during 1996, however, from 38.0% of net sales in the first quarter to 31.6% of net sales in the fourth quarter, due to the Company's focus on reducing per-pad selling costs. INTEREST EXPENSE Interest expense was $8.9 million for the year ended December 31, 1996 compared to $8.0 million for the year ended December 31, 1995. The increase reflects increased borrowings under the new revolving credit facility and amortization of additional deferred loan costs related to the refinancing. INCOME TAXES The Company recorded a tax provision of $0.3 million for the year ended December 31, 1996. The Company's available net operating loss carryforwards previously reserved offset the need for any federal tax provision related to domestic operations. YEAR ENDED DECEMBER 31, 1995, COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 NET SALES Net sales decreased 5.5% to $163.9 million for the year ended December 31, 1995, from $173.6 million for the year ended December 31, 1994. The decrease was the result of a 9.1% price decrease which was partially offset by a 3.9% increase in unit sales volume. The Company's decline in net sales was due primarily to a reduction in the market share of its premium brand, the per unit price reductions and a shift in the product sales mix toward the lower margin products. The Company was subjected to significant increases in competitive activity from Procter & Gamble and Kimberly-Clark in the first half of 1995. The Company believes that the exceptionally high promotional spending by Procter & Gamble to enhance the domestic market share of its brands had the effect of decreasing the effectiveness of the Company's promotional strategies. As a result, the Company experienced a loss of retailer promotions and depressed sales volumes -17- during the transition to its new single ultra-thin national brand product. This heavy promotional activity by competitors throughout the first half of 1995 resulted in depressed premium brand diaper sales in the majority of the Company's domestic markets. The decline in premium brand diaper sales was somewhat mitigated by increases in the Company's other domestic business and the additional business which resulted from the Company's acquisition of Seler, effective July 31, 1995. COST OF GOODS SOLD Cost of goods sold increased as a percentage of net sales to 69.6% for the year ended December 31, 1995, compared to 61.2% for the year ended December 31, 1994. The increase was primarily due to the shift in the product sales mix toward lower margin products, reduced per unit sales prices, higher pulp prices and allocation of fixed costs over lower production volume. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased as a percentage of net sales to 32.8% for the year ended December 31, 1995, compared to 27.7% of net sales for the year ended December 31, 1994. The selling expense increase as a percentage of net sales was primarily due to higher fixed advertising and promotional spending on lower sales volume of the Company's premium brand products. The Company also had an increase in general and administrative expenses as a percentage of net sales. General and administrative expenses increased primarily from expansion of administrative support personnel and systems to support the Company's anticipated growth, in addition to increases in license fees and professional fees related to the refinancing transaction. UNUSUAL EXPENSES In connection with the repositioning of its premium diaper products and transition to one national brand in early 1995, the Company recognized $2.4 million of promotional and other related expenses which were recorded as an unusual expense. The Company also recognized $0.8 million of expenses related to the refinancing transaction completed on February 29, 1996, which were recorded as an unusual expense. During the second quarter of 1994, the Company recorded $1.1 million of legal fees associated with its defense and settlement of a patent infringement lawsuit as an unusual expense. RESTRUCTURING CHARGE Operating results for 1995 include a restructuring charge of approximately $4.3 million. As part of the restructuring, the Company implemented a plan to realign and consolidate its operations, a move intended to allow the Company the flexibility to react to other business opportunities and utilize its excess capacity while reducing costs. The plan provided for consolidation of the Company's domestic operations from three production facilities to two in an effort to curtail the costs associated with idle capacity. The restructuring charge included a $3.3 million provision for the write-down of idled equipment to net realizable value and a $1.0 million charge related to lease termination costs for the Houston facility. INTEREST EXPENSE Interest expense increased slightly to $8.0 million for the year ended December 31, 1995, as compared to $7.7 million for the year ended December 31, 1994. This increase was primarily the result of increased borrowing under the revolving credit facility and a term loan obtained to fund working capital and capital expenditure requirements, and higher interest rates, offset by the effect of the redemption of $30.0 million of 12-1/2% Senior Notes effective April 1, 1994, funded by the proceeds of the initial public offering. OTHER INCOME -18- The Company did not recognize any dividend income on the preferred stock of Seler during the year ended December 31, 1995, as compared to dividend income of $0.4 million for the year ended December 31, 1994. -19- INCOME TAXES The Company recorded a $3.8 million income tax benefit for the year ended December 31, 1995. Tax benefits recognized were limited due to the uncertainties related to future realization of net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES On February 29, 1996, the Company established a new three-year revolving credit facility with a financial institution, with a borrowing base of up to $21.0 million. Borrowings under the facility accrue interest at a rate of prime plus 1-3/4% per annum. Borrowing availability under this facility is a function of advance rates based on eligible accounts receivable, finished goods inventory and raw materials inventory. Borrowings under this facility are secured by accounts receivable, inventory, trademarks and trade names, stock of certain subsidiaries and other intangibles. In addition, the Company received approximately $8.8 million from the private placement of convertible preferred stock, net of related issuance costs. All balances outstanding under the previous revolving credit facility with a bank (which bore interest at prime plus 3% from January 1, 1996 through February 29, 1996) were paid on March 1, 1996, with borrowings under the new revolving credit facility and approximately $1.5 million of proceeds from the sale of preferred stock. In connection with the refinancing discussed above, the term loan with a bank was continued and the loan covenants were amended and are similar to those of the new revolving credit facility. Principal payments of $125,000 are due quarterly, and borrowings are secured by a diaper production line. Borrowings under the term loan bear interest at prime plus 2%. In October 1996, the indenture governing the Company's 12-1/2% Senior Notes was amended to allow, among other things, increased borrowing under the revolving credit facility and additional flexibility for certain business investments. For the year ended December 31, 1996, cash used in operating activities totaled $4.3 million as a result of returning the Company's working capital structure to normal operating levels. Cash used in investing activities totaled $4.2 million. The majority of the cash outflows were funded by additional borrowings under the revolving credit facility and the proceeds from the issuance of preferred stock. At December 31, 1996, the Company had borrowings outstanding of $14.7 million under a revolving credit facility and $1.1 million under a term loan. As of March 26, 1997, unused borrowing availability under the new revolving credit facility was approximately $2.9 million. The Company's estimated cash requirements over the next twelve months are primarily the funding of working capital needs, payment of principal and interest on indebtedness and planned capital expenditures of approximately $13.5 million primarily related to the Company's new product launch, scheduled for the second quarter of 1997, as well as expansion of domestic and international manufacturing capacity. Of the total capital expenditure budget, approximately $10.0 million is uncommitted. The Company will also be required to pay $0.4 million pursuant to a license agreement in December 1997. In addition, the Company could be required to pay up to $4.0 million to fulfill its obligation for the escrowed shares of common stock issued in connection with the Brazilian joint venture discussed in "Recent Developments." The Company continues to investigate various alternatives to further improve liquidity including, among other things, equity issuances, lease financing, additional borrowings, refinancing or amendment of existing debt, establishing revolving credit lines at the subsidiary level and deferral of planned capital expenditures. In this regard, to provide for additional liquidity needs, if necessary, the Company has received an irrevocable commitment from a major shareholder to provide up to $4.0 million in financing. Borrowings under this facility, if any, would accrue interest at 12% per annum -20- The Company believes that the combination of its cash on hand, future profitable operations, the borrowing availability under the existing revolving credit facility, and existing operating lease financing arrangements, in addition to the irrevocable commitment from a major shareholder and ongoing negotiations related to the refinancing or amendment of existing debt should allow the Company to meet its debt service and capital expenditure requirements, and the potential obligation related to the Brazil transaction, remain in compliance with its amended financial covenants and manage its business needs. -21- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Drypers Corporation: We have audited the accompanying consolidated balance sheets of Drypers Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 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, the financial statements referred to above present fairly, in all material respects, the financial position of Drypers Corporation and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas March 26, 1997 -22- DRYPERS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data) December 31 ---------------------- 1995 1996 --------- --------- ASSETS CURRENT ASSETS: Cash ............................................... $ 2,236 $ 4,923 Accounts receivable, net of allowance for doubtful accounts of $940 and $1,160, respectively 24,039 30,631 Inventories ........................................ 10,913 11,616 Prepaid expenses and other ......................... 3,437 4,410 --------- --------- Total current assets ...................... 40,625 51,580 PROPERTY AND EQUIPMENT, net of depreciation and amortization ................................... 34,208 35,154 INTANGIBLE AND OTHER ASSETS, net of amortization of $7,094 and $10,185, respectively ................ 62,587 63,821 --------- --------- $ 137,420 $ 150,555 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings .............................. $ 11,314 $ 15,622 Current portion of term loan and other long-term debt .................................. 750 945 Accounts payable ................................... 19,319 16,958 Accrued liabilities ................................ 12,839 9,348 --------- --------- Total current liabilities ................. 44,222 42,873 TERM LOAN AND OTHER LONG-TERM DEBT ................... 1,000 2,125 SENIOR TERM NOTES .................................... 43,950 44,122 SUBORDINATED DEBT TO RELATED PARTIES ................. 2,400 2,400 DEFERRED RENT PAYABLE AND OTHER ...................... 4,026 5,427 --------- --------- 95,598 96,947 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 5,000,000 shares authorized, - and 90,000 shares issued and outstanding, respectively ............. -- 1 Common stock, $.001 par value, 20,000,000 shares authorized, 6,619,804 and 7,179,230 shares issued and outstanding, respectively ...... 7 7 Additional paid-in capital ......................... 58,482 68,823 Warrants ........................................... 703 1,395 Retained deficit ................................... (17,370) (16,618) --------- --------- Total stockholders' equity ................ 41,822 53,608 --------- --------- $ 137,420 $ 150,555 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. -23- DRYPERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except Share Data) Year Ended December 31 ----------------------------------------- 1994 1995 1996 ----------- ----------- ----------- NET SALES .......................... $ 173,552 $ 163,947 $ 207,014 COST OF GOODS SOLD ................. 106,130 114,075 126,128 ----------- ----------- ----------- Gross profit ............... 67,422 49,872 80,886 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ...................... 48,081 53,691 70,333 UNUSUAL EXPENSES ................... 1,141 3,185 -- RESTRUCTURING CHARGE ............... -- 4,255 -- ----------- ----------- ----------- Operating income (loss) .... 18,200 (11,259) 10,553 RELATED-PARTY INTEREST EXPENSE ..... 375 406 354 OTHER INTEREST EXPENSE, net ........ 7,310 7,629 8,577 OTHER INCOME ....................... 434 -- -- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) AND EXTRAORDINARY ITEM ............... 10,949 (19,294) 1,622 INCOME TAX PROVISION (BENEFIT) ..... 4,151 (3,829) 309 ----------- ----------- ----------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ............... 6,798 (15,465) 1,313 EXTRAORDINARY ITEM: Costs of early extinguishment of debt, net of tax benefit of $ 2,260 ....................... (3,688) -- -- ----------- ----------- ----------- NET INCOME (LOSS) .................. 3,110 (15,465) 1,313 PREFERRED STOCK DIVIDEND ........... -- -- 561 ----------- ----------- ----------- NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS ........... $ 3,110 $ (15,465) $ 752 =========== =========== =========== COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING ............ 6,246,087 6,587,698 14,194,298 =========== =========== =========== NET INCOME (LOSS) PER COMMON SHARE: Before extraordinary item ........ $ 1.09 $ (2.35) $ .09 Extraordinary item ............... (.59) -- -- ----------- ----------- ----------- Net income (loss) ................ $ .50 $ (2.35) $ .09 =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. -24- DRYPERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In Thousands, Except Share Data)
Preferred Common Shares Shares Additional Issued and Issued and Preferred Common Paid-In Retained Outstanding Outstanding Stock Stock Capital Warrants Deficit ------------ ------------ --------- ------ ---------- -------- -------- BALANCE, December 31, 1993 -- 3,003,865 $ -- $ 3 $ 12,447 $ 6,562 $ (5,015) Issuance of common stock, net of $1,514 in offering costs ..... -- 3,048,005 -- 4 39,595 -- -- Exercise of redeemable warrant issued to a financial institution . -- 286,995 -- -- 3,444 (3,444) -- Exercise of senior term note warrants ......... -- 183,809 -- -- 2,217 (2,210) -- Exercise of stock options and other warrants .............. -- 30,867 -- -- 54 -- -- Net income .............. -- -- -- -- -- -- 3,110 ------------ ------------ --------- ------ ---------- -------- -------- BALANCE, December 31, 1994 -- 6,553,541 -- 7 57,757 908 (1,905) Conversion of junior subordinated debenture -- 41,666 -- -- 500 -- -- Exercise of senior term note warrants ......... -- 14,780 -- -- 170 (170) -- Exercise of stock options and other warrants .............. -- 9,817 -- -- 55 (35) -- Net loss ................ -- -- -- -- -- -- (15,465) ------------ ------------ --------- ------ ---------- -------- -------- BALANCE, December 31, 1995 -- 6,619,804 -- 7 58,482 703 (17,370) Issuance of preferred stock, net of $178 in offering costs ........ 90,000 -- 1 -- 8,822 -- -- Issuance of common stock and warrants in connection with refinancing ........... -- 194,780 -- -- (56) 692 -- Issuance of common stock in connection with an acquisition ........... -- 360,000 -- -- 1,575 -- -- Preferred stock dividends ($6.23 per share) ................ -- -- -- -- -- -- (561) Exercise of stock options -- 4,646 -- -- -- -- -- Net income .............. -- -- -- -- -- -- 1,313 ------------ ------------ --------- ------ ---------- -------- -------- BALANCE, December 31, 1996 90,000 7,179,230 $ 1 $ 7 $ 68,823 $ 1,395 $(16,618) ============ ============ ========= ====== ========== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. -25- DRYPERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
YEAR ENDED DECEMBER 31 ----------------------------------------- 1994 1995 1996 -------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ............................................................... $ 3,110 $(15,465) $ 1,313 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities- Depreciation and amortization ............................................... 5,799 7,068 7,624 Restructuring charge ........................................................ -- 4,255 -- Extraordinary item .......................................................... 3,248 -- -- Provision for (benefit from) deferred income taxes .......................... 1,030 (4,187) -- Deferred rent expense and other ............................................. (103) (379) 401 Changes in operating assets and liabilities, net of acquisition- (Increase) decrease in- Accounts receivable ...................................................... (7,487) 1,476 (5,724) Inventories .............................................................. (3,101) 5,398 (67) Prepaid expenses and other ............................................... (486) 110 (973) Increase (decrease) in- Accounts payable ......................................................... 3,097 5,038 (2,974) Accrued liabilities ...................................................... (1,287) 2,941 (3,891) -------- -------- --------- Net cash provided by (used in) operating activities ................ 3,820 6,255 (4,291) -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment .............................................. (7,079) (8,896) (5,931) Proceeds from sale of equipment ................................................. -- -- 800 Investment in other noncurrent assets ........................................... (154) (773) (1,197) Payments under noncompete agreements ............................................ (250) (250) (400) Refund of deposits .............................................................. 1,622 -- 2,573 Investment in affiliate ......................................................... (6,895) -- -- -------- -------- --------- Net cash used in investing activities .............................. (12,756) (9,919) (4,155) -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolver ....................................................... 11,113 47,553 157,677 Payments on revolver ............................................................ (11,107) (44,922) (153,968) Borrowings (payments) under term loan, net ...................................... -- 1,750 (625) Payments on senior term notes ................................................... (30,000) -- -- Financing related costs ......................................................... -- -- (773) Proceeds from issuance of common stock .......................................... 39,599 -- -- Proceeds from issuance of preferred stock ....................................... -- -- 8,822 Proceeds from exercise of warrants .............................................. 17 -- -- Proceeds from exercise of stock options ......................................... 54 20 -- -------- -------- --------- Net cash provided by financing activities .......................... 9,676 4,401 11,133 -------- -------- --------- NET INCREASE IN CASH .............................................................. 740 737 2,687 CASH AT BEGINNING OF YEAR ......................................................... 759 1,499 2,236 -------- -------- --------- CASH AT END OF YEAR ............................................................... $ 1,499 $ 2,236 $ 4,923 ======== ======== =========
The accompanying notes are an integral part of these consolidated financial statements. -26- DRYPERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: BUSINESS Drypers Corporation and its subsidiaries (the "Company") manufacture and market premium quality, value-oriented disposable baby diapers under the brand name DRYPERS(R) and other brand names internationally. The Company also manufactures and markets disposable training pants under the DRYPERS(R) brand name as well as lower priced, value-oriented branded disposable baby diapers, private label disposable baby diapers and training pants and premoistened wipes. The principal markets for its products are grocery stores, mass-merchants and private label customers throughout the United States, Puerto Rico, Argentina, and Mexico, and in certain other international markets, including Latin America and the Pacific Rim. BUSINESS CONDITIONS During the first quarter of 1995, the Company repositioned its diaper products in response to similar activity by its competitors. In response to continued market pressures, the Company announced a plan in the second quarter of 1995, to realign and consolidate its operations and recorded a restructuring charge of $4,255,000. This realignment and consolidation was completed in the second quarter of 1996. Concurrent with the operational reorganization discussed above, the Company undertook a plan to reorganize its financial structure. The Company's financial restructuring was completed on February 29, 1996, with the establishment of a new revolving credit facility with a borrowing base of up to $21,000,000 (see Note 4) and the private issuance of convertible preferred stock (see Note 6). Availability under the new revolving credit facility and the proceeds from the preferred stock were used to repay the existing revolving credit facility, the previously deferred interest payment on the 12-1/2% Senior Notes and transaction costs. As of March 26, 1997, unused borrowing availability under the new revolving credit facility was approximately $2,850,000. The Company's estimated cash requirements over the next twelve months are primarily the funding of working capital needs, payment of principal and interest on indebtedness and planned capital expenditures of approximately $13,500,000 primarily related to the Company's new product launch, scheduled for the second quarter of 1997, as well as expansion of domestic and international manufacturing capacity. Of the total capital expenditure budget, approximately $10,000,000 is uncommitted. The Company will also be required to pay $400,000 pursuant to a license agreement in December 1997. In addition, the Company could be required to pay up to $4,000,000 to fulfill its obligation for the escrowed shares of common stock issued in connection with the Brazilian joint venture discussed in Note 11. The Company continues to investigate various alternatives to further improve liquidity including, among other things, equity issuances, lease financing, additional borrowings, refinancing or amendment of existing debt, establishing revolving credit lines at the subsidiary level and deferral of planned capital expenditures. In this regard, to provide for additional liquidity needs, if necessary, the Company has received an irrevocable commitment from a major shareholder to provide up to $4,000,000 in financing. Borrowings under this facility, if any, would accrue interest at 12% per annum. The Company believes that the combination of its cash on hand, future profitable operations, the borrowing availability under the existing revolving credit facility, and existing operating lease financing arrangements, in addition to the irrevocable commitment from a major shareholder and ongoing negotiations related to the refinancing or amendment of existing debt should allow the Company to meet its debt service and capital -27- expenditure requirements, and the potential obligation related to the Brazil transaction (See Note 11), remain in compliance with its amended financial covenants and manage its business needs. The disposable diaper industry is characterized by substantial price competition, which is affected through price changes, product count changes and promotions. Typically, because of their large market share, one of the Company's larger branded competitors initiates such pricing changes. The Company typically responds to such pricing changes with changes to its own prices, product counts or promotional programs. The process of implementing such changes may require a number of months, and the Company's operating results may be adversely affected. The Company competes with a number of companies, some of which are larger than the Company and have greater financial resources and offer broader product lines. Raw material prices, notably wood pulp, are a major component of the total cost to produce disposable baby diapers and training pants. While the cost of pulp has declined significantly from the record-high levels experienced in October 1995, there can be no assurance that if pulp or other raw material prices rise again in the future the Company will be able to pass those increases to its customers or redesign its products to reduce usage; therefore, operating margins could be adversely affected. The Company markets its products in various foreign countries and is, therefore, subject to currency fluctuations in these countries. Changes in the value of the United States dollar against these currencies will affect the Company's results of operations and financial position. BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Drypers Corporation and its majority-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, including goodwill, and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. ACCOUNTS RECEIVABLE The Company grants credit to its customers, which include regional distributors, grocery stores and mass-merchants, in the ordinary course of business. The Company performs ongoing credit evaluations of its customers and credit losses, when realized, have been within the range of management's expectations. INVENTORIES Inventories at December 31, 1995 and 1996, consisted of the following (in thousands): 1995 1996 ------- ------- Raw materials .............. $ 5,722 $ 4,659 Finished goods ............. 5,191 6,957 ------- ------- $10,913 $11,616 ======= ======= Inventories are stated at the lower of cost (first-in, first-out) or market value. Finished goods inventories include the costs of materials, labor and overhead. -28- PROPERTY AND EQUIPMENT Expenditures for new facilities, significant betterments of existing properties and leasehold improvements are recorded at cost. The Company capitalizes, as machinery and equipment, internal and external costs incurred to develop and enhance diaper production lines. Upon disposal of assets subject to depreciation or amortization, the accounts are relieved of related costs and accumulated depreciation or amortization and the resulting gains or losses are reflected in income. Depreciation is computed using the straight-line method at rates considered sufficient to amortize costs over estimated useful lives. The estimated useful lives for certain machinery and equipment betterments are shorter than the estimated useful lives of the machinery and equipment. Useful Lives --------------- Machinery and equipment 10 - 12 years Office equipment and furniture 5 years Automobiles 5 years Leasehold improvements Lesser of term of lease or life of asset Property and equipment at December 31, 1995 and 1996, consisted of the following (in thousands): 1995 1996 -------- -------- Machinery and equipment ................. $ 41,176 $ 44,349 Office equipment and furniture .......... 1,957 2,573 Automobiles ............................. 222 222 Leasehold improvements .................. 1,925 2,167 -------- -------- 45,280 49,311 Accumulated depreciation and amortization (11,072) (14,157) -------- -------- $ 34,208 $ 35,154 ======== ======== In December 1996, the Company entered into a six year operating lease with a lease financing company for a new state-of-the-art diaper production line. The line was delivered in December 1996, and was operational late in the first quarter of 1997. Previous deposits related to this diaper line of $1,100,000 were included as a component of machinery and equipment as of December 31, 1995. In March 1997, the Company entered into a six year operating lease with a lease financing company for a second diaper production line, which is scheduled for delivery in the fourth quarter of 1997. Deposits of $1,100,000 related to this production line are included as a component of machinery and equipment as of December 31, 1996. In connection with these lease agreements, the Company issued letters of credit totaling approximately $2,500,000. These operating lease commitments are included in the future minimum rental commitments presented in Note 8. -29- INTANGIBLE AND OTHER ASSETS As of December 31, 1995 and 1996, intangible and other assets, net of accumulated amortization, consisted of the following (in thousands): 1995 1996 ------- ------- Goodwill ...................................... $55,096 $54,086 Deferred financing costs ...................... 2,109 3,153 License agreement ............................. 1,619 1,310 Noncompete agreement .......................... 334 1,322 Receivable from Chansommes do Brasil Ind. E Com Ltda. (See Note 11) ............... 2,167 2,167 Other ......................................... 1,262 1,783 ------- ------- $62,587 $63,821 ======= ======= Goodwill is amortized over 20 years to 40 years using the straight-line method. Management continually evaluates whether events or circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or the remaining balance of goodwill may not be recoverable. Deferred financing costs are amortized over the lives of the related debt using the effective interest method. The license agreement is amortized over six years, the estimated life of the relevant patent, using the straight-line method. The noncompete agreements are amortized over the five-year life of the agreements using the straight-line method. ACCRUED LIABILITIES Accrued liabilities at December 31, 1995 and 1996, consisted of the following (in thousands): 1995 1996 ------- ------ Selling and promotional ................ $ 2,964 $2,684 Interest payable ....................... 4,245 1,428 License agreement payable .............. 1,050 400 Property and sales tax payable ......... 543 1,254 Other .................................. 4,037 3,582 ------- ------ $12,839 $9,348 ======= ====== FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash, trade receivables, trade payables and debt instruments. The book values of these instruments excluding debt are considered to be representative of their respective fair values. The fair value of the Company's debt instruments is discussed in Note 4. REVENUE RECOGNITION The Company follows the policy of recognizing revenue upon shipment of the product. Accruals are recorded for discounts and commissions at the time of shipment. COUPON PROMOTIONS The Company follows the policy of recognizing promotion expense when products are shipped, based on the estimated redemption rate. -30- UNUSUAL EXPENSES During 1995, the Company repositioned its diaper products in response to similar activity by its competitors with a reduction in the number of diapers per package and a reduction in the price per package. As part of this repositioning, the Company recognized $2,358,000 of promotional and other related expenses which are reflected as an unusual expense in the accompanying consolidated statement of earnings. In addition, the Company recognized $827,000 for expenses related to the refinancing transaction in 1995 which is reflected as an unusual expense in the accompanying consolidated statement of earnings. During 1994, the Company recorded, as unusual expense, legal fees of $1,141,000 associated with the defense of a patent infringement lawsuit discussed further in Note 8. INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is computed using the weighted average number of shares of common stock outstanding plus, when their effect is dilutive, common stock equivalents. For the year ended December 31, 1996, common and common equivalent shares include the weighted average common shares issuable upon conversion of 90,000 shares of convertible preferred stock. See Note 6. INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which requires recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates and laws in effect in the years in which the differences are expected to reverse. STATEMENTS OF CASH FLOWS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Supplemental disclosures of cash flow information are as follows. Income taxes paid for the years ended December 31, 1994, 1995 and 1996, were $604,000, $325,000 and --, respectively. Interest paid on debt for the years ended December 31, 1994, 1995 and 1996, was $7,965,000, $4,213,000 and $10,646,000, respectively. FOREIGN CURRENCY TRANSLATION Local currencies are generally considered the functional currencies outside the United States, except in countries treated as highly inflationary. Assets and liabilities are translated at year-end exchange rates for operations in local currency environments. Income and expense items are translated at average rates of exchange prevailing during the year. To date, cumulative translation adjustments have been immaterial. For operations in countries treated as highly inflationary, certain financial statement amounts are translated at historical exchange rates, with all other assets and liabilities translated at year-end exchange rates. These translation adjustments are reflected in the results of operations and to date, have been immaterial. RECLASSIFICATIONS Certain reclassifications have been made in the accompanying consolidated financial statements for the years ended December 31, 1994 and 1995, to conform with the presentation used in the December 31, 1996, consolidated financial statements. -31- NEW ACCOUNTING STANDARDS In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The adoption of this standard did not have a significant impact on the Company's financial position or results of operations. In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The adoption of this standard did not have a significant impact on the Company's financial position or results of operations. See Note 6 for disclosures related to the adoption of SFAS No. 123. 2. ACQUISITIONS: ARGENTINA Effective July 31, 1994, the Company entered into a venture with Seler, S.A. ("Seler"), an Argentine manufacturer of disposable diapers. In connection with the venture, the Company purchased 26,470,000 shares of mandatorily redeemable preferred stock of Seler for $6,895,000. The terms of the preferred stock included a cumulative annual dividend at a rate consistent with Argentine market rates and a fair market value option to purchase all of the outstanding common stock of Seler in the future. In July 1995, Seler purchased all of its issued and outstanding capital stock not owned by the Company for two promissory notes in the aggregate of $1,100,000, resulting in Seler becoming a wholly owned subsidiary of the Company. The acquisition was accounted for as a purchase, and the purchase price of $10,202,000 was allocated to the acquired assets and liabilities assumed based on their estimated fair values (current assets of $6,262,000, property and equipment of $228,000 and liabilities of $7,258,000). The consideration paid for Seler exceeded the fair market value of the tangible assets acquired by $10,970,000 and this excess was recorded as goodwill. Prior to July 31, 1995, the Company accounted for its investment in Seler under the cost method. Effective July 31, 1995, the accounts of Seler and the results of its operations have been consolidated. Prior to the consolidation of Seler, the Company recognized rental and technical support/management and marketing service revenues under various agreements between the Company and Seler. Rental revenues and technical support revenues recognized for the year ended December 31, 1994, were $329,000 and $840,000, respectively, in addition to $430,000 recognized as dividend income on the preferred stock of Seler. Unaudited pro forma net sales, net income (loss), and net income (loss) per common share for the years ended December 31, 1994 and 1995, respectively, would have been approximately $180,747,000 and $172,736,000, respectively, $3,143,000 and $(16,910,000), respectively, and $.50 and $(2.57), respectively, assuming the acquisition of Seler occurred on January 1, 1994, and assuming there were no other changes in the operations of Seler. The pro forma results are not necessarily indicative of the financial results that might have occurred had the transaction actually taken place on January 1, 1994, or of future results of operations. MEXICO Effective December 17, 1996, the Company acquired certain assets and assumed certain liabilities of Pannolini de Mexico, S.A. de C.V ("Pannolini") for $1,575,000 of the Company's common stock (360,000 shares issued on December 17, 1996 and 46,782 shares issued on February 3, 1997) and consideration payable at a future date totaling $595,000. The remaining consideration, subsequent to adjustment, is to be paid by May 4, 1997, if in stock, or June 17, 1997, if in cash. The acquisition was accounted for as a purchase, and the purchase price was allocated to the acquired assets and liabilities assumed based on their estimated fair values (current assets $1,504,000, property and equipment of $2,679,000 and liabilities of $2,563,000). The consideration paid for Pannolini exceeded the estimated fair market value of the net tangible assets acquired by $550,000 and this excess was recorded as goodwill. The Company's allocation of purchase price is based on preliminary estimates of fair market value and may be revised at a later date. In connection with the acquisition, the Company entered into a $1,175,000 five year noncompete agreement with the former Pannolini shareholders. -32- 3. INITIAL PUBLIC OFFERING: On March 11, 1994, the Company issued 3,048,005 shares of common stock in an initial public offering (the "Offering"). Net proceeds to the Company after deduction of the underwriter's discount and other related offering costs were approximately $39,600,000. No members of management or the board of directors sold any shares in the Offering. The majority of the net proceeds from the Offering were used to redeem $30,000,000 in principal amount of the Company's 12-1/2% Senior Notes and to pay down the revolving line of credit. 4. DEBT: SHORT-TERM BORROWINGS As of December 31, 1995 and 1996, the Company had borrowings outstanding of $11,314,000 and $15,622,000, respectively, under revolving credit facilities, at weighted average interest rates of 11.5% and 10.0%, respectively. On February 29, 1996, the Company entered into a three-year revolving credit facility with a borrowing base of up to $21,000,000. Availability under the new revolving credit facility and a portion of the proceeds from the preferred stock sale were used to repay the previously existing credit facility, the previously deferred interest on the 12-1/2% Senior Notes and transaction costs. Borrowings outstanding under the previous revolving credit facility bore interest at prime plus 3% from January 1, 1996 through February 29, 1996. Borrowings under the current revolving credit facility accrue interest at a rate of prime plus 1-3/4% per annum. Borrowing availability under this facility is a function of advance rates based on eligible accounts receivable, finished goods inventory and raw materials inventory. Borrowings are collateralized by accounts receivable, inventory, trademarks and trade names, stock of certain subsidiaries and other intangibles. As of December 31, 1996, approximately $14,700,000 was outstanding under this facility. The revolving credit facility, as amended, requires the Company, among other things, to maintain consolidated working capital, as defined, which excludes borrowings under the revolving credit facility, of at least $10,500,000 through December 31, 1996, of at least $18,000,000 during fiscal 1997, of at least $23,000,000 during fiscal 1998, and of at least $25,000,000 during fiscal 1999 and thereafter, and adjusted net worth, as defined, of at least $48,000,000 through September 30, 1996, of at least $49,000,000 from October 1, 1996, through December 30, 1996, of at least $50,500,000 from December 31, 1996, through December 30, 1997, of at least $52,500,000 from December 31, 1997, through December 30, 1998, and of at least $54,500,000 from December 31, 1998, and thereafter. The Company was in compliance with the terms of the revolving credit facility as of December 31, 1996. Short-term borrowings for the international operations were not material as of December 31, 1996. TERM LOAN AND OTHER LONG-TERM DEBT In connection with the refinancing discussed above, the term loan with a bank was continued and the loan covenants were amended and are similar to those of the new revolving credit facility. Principal payments totaling $500,000, $500,000 and $125,000 are due in 1997, 1998 and 1999, respectively, and borrowings are secured by a diaper production line. The term loan bears interest at prime plus 2%. Other long-term debt as of December 31, 1996 consists of $445,000 due in 1997 to the former shareholders of Pannolini, $510,000 due to a Mexico bank (interest at LIBOR plus 10%) on April 26, 2006 and $989,000 due to a Mexico bank (interest at 12%) on October 25, 2003. The $989,000 due to a Mexico bank is partially secured by a diaper production machine. -33- SENIOR TERM NOTES Long-term debt under senior term notes at December 31, 1995 and 1996, consisted of the following (in thousands): 1995 1996 ------- ------- 12-1/2% Senior Notes, interest due semiannually on May 1 and November 1, principal due November 1, 2002, net of unamortized debt discount of $1,050 and $878, respectively ......................... $43,950 $44,122 ======= ======= The Company redeemed $30,000,000 in an aggregate principal amount of the 12-1/2% Senior Notes at 109% of the principal amount, plus accrued and unpaid interest, with the net proceeds of an initial public offering of common stock of the Company in March 1994. The remaining notes contain certain covenants that, among other things, limit the Company's ability to incur additional indebtedness; pay dividends; purchase capital stock; make certain other distributions, loans and investments; sell assets; enter into transactions with related persons; and merge, consolidate or transfer substantially all of its assets. In October 1996, the indenture governing the Company's 12-1/2% Senior Notes was amended to allow, among other things, increased borrowing under the revolving credit facility and additional flexibility for certain business investments. The Company issued 169,780 shares of $.001 par value common stock to certain bondholders as consideration for their consent to these indenture modifications. The fair value of the Company's 12-1/2% Senior Notes was estimated using discounted cash flow analysis based on the Company's current incremental interest rate for similar financial instruments, and was estimated at $46,912,000 as of December 31, 1996. LONG-TERM SUBORDINATED DEBT Long-term subordinated debt to stockholders and/or warrant holders at December 31, 1995 and 1996, consisted of the following (in thousands): 1995 1996 ------ ------ Junior subordinated notes, bearing interest at 12%, interest payable quarterly $2,400 $2,400 ====== ====== The 12-1/2% Senior Notes place certain restrictions on the payment of principal and interest on the junior subordinated debt. Under these provisions, the Company is currently restricted from making any principal or interest payments on this debt and has classified such balance as long-term as of December 31, 1996. The carrying amount of all debt outstanding as of December 31, 1996, other than the 12-1/2% Senior Notes, approximates fair value, based on the Company's current incremental interest rate for similar types of financial instruments. -34- 5. INCOME TAXES: Income (loss) before income tax provision (benefit) and extraordinary item and income tax provision (benefit) for the years ended December 31, 1994, 1995 and 1996 are composed of the following (in thousands): 1994 1995 1996 -------- -------- ------ Income (loss) before income tax provision (benefit) and extraordinary item- United States ............................. $ 10,949 $(19,393) $1,287 Non-United States ......................... -- 99 335 -------- -------- ------ $ 10,949 $(19,294) $1,622 ======== ======== ====== Income tax provision (benefit)- Current- United States ............................. $ 861 $ 358 $ 198 Non-United States ......................... -- -- 111 -------- -------- ------ $ 861 $ 358 $ 309 ======== ======== ====== Deferred- United States ............................. 3,290 (4,187) $ -- Non-United States ......................... -- -- -- -------- -------- ------ 3,290 (4,187) -- -------- -------- ------ $ 4,151 $ (3,829) $ 309 ======== ======== ====== Deferred income taxes reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The components of the net deferred tax asset (liability) at December 31, 1995 and 1996 are as follows (in thousands): 1995 1996 -------- -------- Deferred tax assets- Accruals and reserves ............................ $ 1,176 $ 1,469 Net operating loss and credit carryforwards ...... 7,468 5,550 Tax deferral of book write-down of machinery and equipment................................ 1,194 1,194 Other ............................................ 303 994 -------- -------- 10,141 9,207 Less- Valuation allowance ........................ (2,248) (1,898) -------- -------- 7,893 7,309 -------- -------- Deferred tax liabilities- Excess of tax over book depreciation ............. (6,691) (6,101) Other ............................................ (1,202) (1,208) -------- -------- (7,893) (7,309) -------- -------- Net deferred tax asset (liability) .......... $ -- $ -- ======== ======== The decrease in the valuation allowance was recorded due to utilization of previously reserved net operating loss carryforwards. -35- The consolidated provision (benefit) for income taxes differs from the provision (benefit) computed at the statutory United States federal income tax rate for the following reasons: 1994 1995 1996 --- --- --- United States statutory rate ..................... 34% (34)% 34% Non-United States income, taxed at less than United States statutory rate .............. (9) -- (9) Increase (decrease) in valuation allowance ....... -- 12 (61) Nondeductible expenses, primarily goodwill ....... 8 3 39 State income taxes ............................... 5 (1) 16 --- --- --- 38% (20)% 19% === === === As of December 31, 1996, the Company had net operating loss carryforwards of approximately $14,301,000 which are available to offset future taxable income. The loss carryforwards will expire in the years 2008 through 2011 if not utilized. The Company also has alternative minimum tax credits of approximately $387,000 which are available indefinitely. 6. CAPITAL STOCK, STOCK OPTION PLANS AND WARRANTS: PREFERRED STOCK In 1996, the Company issued 90,000 shares of the Company's Series A Senior Convertible Cumulative 7.5% Preferred Stock ("7.5% Preferred Stock") for $9,000,000 as further discussed in Note 1. The 7.5% Preferred Stock is convertible at the discretion of the holders, at a rate of 100 shares of common stock per share of 7.5% Preferred Stock, into 9,000,000 shares of the Company's common stock. Dividends accrue at the rate of $7.50 per share, per year, and are payable only upon the conversion or redemption of the 7.5% Preferred Stock or on December 1, 2003. The preferred shares have a liquidation preference of $100 per share. Holders of the 7.5% Preferred Stock have 100 votes per share. COMMON STOCK Holders of the common stock have one vote per share. STOCKHOLDERS RIGHTS AGREEMENT The Company has a stockholders rights agreement to protect against coercive or unfair takeover tactics. Under the terms of the agreement, the Company distributed to its stockholders one right for each share of common stock held. Each right entitles the holder to purchase one share of common stock for $75 per share, subject to adjustment, or, under certain circumstances, stock of the Company or of the acquiring entity for half market value. The rights are exercisable only if a person or group acquires 15% or more of the Company's common stock or makes a tender offer for 15% or more of the common stock. The rights will expire on December 15, 2004. STOCK OPTION PLANS Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which is effective for all awards granted after December 31, 1994. The Company has various plans which provide for the granting of nonqualified stock options or incentive stock options to purchase shares of the Company's common stock to officers and executives responsible for the direction and management of the Company. Generally, under the plans, options may be granted at not less than the fair market value on the date of grant. Options under the nonqualified plans generally become exercisable immediately or in ratable installments over a five-year period from date of grant and may be exercised up to a maximum of 10 years -36- from date of grant. Options under the incentive stock option plan and the non-employee director stock option plan generally become exercisable after three years in 33-1/3% increments per year and expire 10 years from date of grant. Shares available for future options pursuant to the various stock option plans as of December 31, 1994, 1995 and 1996, were 47,256, 370,006 and 151,624, respectively. The total compensation cost recognized in income for stock-based compensation awards was $679,000 for 1996. Stock option transactions under the plans during 1994, 1995 and 1996 were as follows:
1994 1995 1996 --------------------- --------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ---------- ------ ---------- ------ ---------- ------ Nonqualified stock option plans- Options outstanding at January 1 ..................... 397,244 $ 7.55 460,656 $ 8.13 486,656 $ 7.71 Granted .............................................. 65,000 11.49 41,000 3.79 1,864,876 3.01 Canceled ............................................. -- -- (15,000) 9.88 (456,876) 8.21 Exercised ............................................ (1,588) .04 -- -- (4,646) .04 ---------- ------ ---------- ------ ---------- ------ Options outstanding at December 31 ................... 460,656 $ 8.13 486,656 $ 7.71 1,890,010 $ 2.97 ========== ====== ========== ====== ========== ====== Options exercisable at December 31 ................... 247,532 $ 8.64 305,906 $ 4.52 1,758,259 $ 2.96 ========== ====== ========== ====== ========== ====== Options exercise price range at December 31 .......... $ .04 - $16.00 $ .04 - $ 8.38 $ .04 - $ 3.50 Incentive stock option plan- Options outstanding at January 1 ..................... 197,500 $ 9.57 281,375 $10.14 399,000 $ 7.55 Granted .............................................. 98,500 11.06 165,600 3.88 736,000 3.01 Canceled ............................................. (13,625) 8.92 (42,975) 10.80 (444,875) 7.12 Exercised ............................................ (1,000) 4.00 (5,000) 4.00 -- -- ---------- ------ ---------- ------ ---------- ------ Options outstanding at December 31 ................... 281,375 $10.14 399,000 $ 7.55 690,125 $ 3.01 ========== ====== ========== ====== ========== ====== Options exercisable at December 31 ................... -- -- 37,060 $ 9.11 149,349 $ 3.00 ========== ====== ========== ====== ========== ====== Options exercise price range at December 31 .......... $4.00 - $12.50 $3.88 - $12.50 $3.00 - $ 3.50 Non-Employee Director stock option plan- Options outstanding at January 1 ..................... -- -- -- -- -- -- Granted .............................................. -- -- -- -- 55,000 $ 4.21 Canceled ............................................. -- -- -- -- -- -- Exercised ............................................ -- -- -- -- -- -- ---------- ------ ---------- ------ ---------- ------ Options outstanding at December 31 ................... -- -- -- -- 55,000 $ 4.21 ========== ====== ========== ====== ========== ====== Options exercisable at December 31 ................... -- -- -- -- 4,000 $ 5.88 ========== ====== ========== ====== ========== ====== Options exercise price range at December 31 .......... $ 3.75 - $5.88
Effective February 1996, the board of directors approved a plan for all options whereby the exercise price was revised to reflect the current market price of $3.00. The options granted under the 1991 non-qualified stock option plan at an exercise price of $.04 per share were not included in the repricing. All repriced options were canceled and reissued accordingly. As allowed by SFAS No. 123 the Company accounts for these plans under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized for stock options issued with exercise prices greater than or equal to the fair market value at the date of grant. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income (loss) and earnings (loss) per share would have been reduced to the following pro forma amounts: 1995 1996 ------------- ------- Net Income (loss) As Reported $(15,465,000) $1,313,000 Pro Forma $(15,580,000) $(1,243,000) Earnings (loss) per share As Reported $(2.35) $.09 Pro Forma $(2.37) $(.09) -37- Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The weighted average fair value of options granted in 1995 was $1.70 per share. The weighted average fair value of options granted in 1996 for which the exercise price equaled the market price of the stock on the grant date and for which the exercise price was less than the market price of the stock on the grant date was $1.26 and $1.69 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for options issued in 1995 and 1996, respectively: risk-free interest rates of 6.34% and 6.03%; expected lives of five years; expected volatility of 36.05%; and no expected dividend yield in both years. Of the 1,890,010 nonqualified stock options outstanding at December 31, 1996, 25,134 have an exercise price of $.04, with a weighted average exercise price of $.04 and a weighted average remaining contractual life of eight months. All of these options are exercisable. The remaining 1,864,876 nonqualified stock options have exercise prices between $3.00 and $3.50, with a weighted average exercise price of $3.01 and a weighted average remaining contractual life of 10 years. Of these 1,864,876 nonqualified stock options, 1,733,125 are exercisable and their weighted average exercise price is $3.00. The incentive stock options and the non-employee director stock options outstanding at December 31, 1996 have a weighted average remaining contractual life of ten years. WARRANTS The Company has issued warrants under several separate agreements which expire between 1997 and 2006. As of December 31, 1996, a total of 942,664 shares of common stock has been reserved for issuance upon the exercise of common stock warrants. Each warrant allows the holder to purchase one share of common stock. The warrants are recorded at their estimated fair values at the date of issuance. The warrants were issued in connection with acquisition and financing transactions. Certain warrants are callable by the Company through their expiration dates. The number of warrants outstanding, warrant holders, exercise prices and call prices are presented below.
Number of Shares Issuable Under Warrants Outstanding at Exercise December 31, Price Company Call 1996 Warrant Holders Per Share Pruce Per Warrant - ----------------- ---------------------------------------------- --------- ----------------- 256,842 Management $ 2.41 Not callable 35,918 Senior noteholders .02 Not callable 258,835 Nonmanagement common stockholders 2.41 Not callable 98,820 Employees, vendors and other affiliates 2.41 Not callable 17,254 Predecessor company stockholders 5.00 $8.00 to $14.00 250,000 Investment advisors 2.08 Not callable 24,995 Others 36.00 Not callable -------- 942,664 ========
Certain of the warrant agreements contain a provision which allows for an adjustment to the number of shares of common stock that can be purchased and the exercise price per share upon the occurrence of certain events, as defined, to preserve without dilution the rights of the warrant holders. The Company issued 258,247 additional warrants during 1996 pursuant to the antidilution provisions of these agreements. In addition, the Company issued 250,000 warrants and 25,000 shares of common stock to an outside investment advisory firm for services rendered in connection with the Company's refinancing in February 1996. -38- 7. EMPLOYEE BENEFIT PLANS: 401(K) SAVINGS PLAN The Company has adopted a 401(k) savings plan which covers substantially all employees. The Company contributed $195,000, $171,000 and $174,000 to the plan during the years ended December 31, 1994, 1995 and 1996, respectively. PROFIT SHARING PLAN In 1996, the Company established a profit sharing plan that supplements the Company's existing 401(k) savings plan and covers all employees who are eligible to participate in the 401(k) savings plan. The plan provides for employer discretionary contributions into the employee's 401(k) account, earned only if the Company meets specific performance targets. The employer discretionary contribution may not exceed 50% of consolidated net income, and may be subject to adjustment by the board of directors. The plan provides for 50% of the value of any contributions to be paid in the form of cash and the remaining 50% in the form of common stock of the Company. The Company accrues amounts based on performance reflecting the value of cash and common stock which is anticipated to be earned. EMPLOYEE STOCK PURCHASE PLAN Effective January 1, 1997, the Company established an employee stock purchase plan whereby eligible employees of the Company employed in the continental United States may purchase shares of the Company's common stock at a 15% discount. As of December 31, 1996, 1,500,000 shares of the Company's common stock, par value $.001 per share, have been registered for purchase under this plan. 8. COMMITMENTS AND CONTINGENCIES: LITIGATION AND LEGAL MATTERS PATENTS The Company operates in a commercial field in which patents relating to the products, processes, apparatus and materials are more numerous than in many other fields. The Company's products include such features as multistrand elastic leg bands, replaceable frontal landing strips for the tape tabs, upstanding cuffs, training pants and super absorbent pad construction. In each case, the design and the technical features of the diapers produced by the Company were carefully considered by patent counsel before the manufacture and sale of such products, and steps were taken to avoid the features disclosed in unexpired patents. Although much of the patent activity relates to the technical work of Procter & Gamble Company and Kimberly-Clark Corporation ("Kimberly-Clark"), it is not exclusive to those organizations, and the Company takes careful steps to design, produce and sell its baby diapers to avoid infringing any valid patents of its competitors. However, during 1992 and 1993, Kimberly-Clark and Uni-Charm Corporation ("Uni-Charm"), respectively, commenced separate lawsuits against the Company alleging patent infringements. The Company subsequently filed counterclaims relating to both lawsuits. In September 1992, Kimberly-Clark commenced a lawsuit against the Company and a competitor alleging infringement of their inner leg gather patent. The lawsuit was settled in June 1994, and such settlement required no payment by the Company or Kimberly-Clark. Legal fees of $1,141,000 in 1994 associated with this litigation were recorded as an unusual expense. The Company does not expect the provisions of the settlement to have an adverse effect on future operations. -39- In November 1993, Uni-Charm commenced a lawsuit against the Company alleging infringement of their training pants patent. After preliminary discovery, the parties entered into a settlement agreement resolving the contentions between the parties. Uni-Charm has granted Drypers a license to manufacture disposable pant-diapers, training pants and absorbent underpants covered by its patented technology at an agreed royalty rate, if such technology is used. Drypers does not expect the provisions of the settlement to have an adverse effect on future operations. There can be no assurance that the Company will not be held to be infringing on other existing patents in the future; any such holding could result in an injunction, damages and/or an increase in future operating costs as a result of design changes or payment of royalties with respect to such patents, which might have a material adverse effect on the financial condition or results of operations of the Company. The Company is involved in certain other lawsuits and claims arising in the normal course of business. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not have a material adverse effect on the financial position or results of operations of the Company. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with three executive officers that extend through February 25, 2000, two officers that extend through July 19, 1997 and March 14, 1999, and another with a key employee which extends through December 31, 1999. Additionally, the Company has entered into an agreement for consulting services with a former officer of the Company which extends through November 10, 1997. As of December 31, 1996, the Company's remaining aggregate commitment under the agreements is approximately $3,354,000. OPERATING LEASES The Company is obligated under various long-term leases for its building/production facilities, machinery and equipment, which expire at various dates through 2004. Rental expense aggregated $1,567,000, $1,771,000 and $1,418,000 for the years ended December 31, 1994, 1995 and 1996, respectively. The leases provide for minimum annual rentals plus, in certain instances, payment for property and use taxes, insurance and maintenance. Future minimum rental commitments under noncancelable operating leases, excluding amounts accrued in the accompanying financial statements, are as follows (in thousands): Year ending December 31- 1997 $ 3,209 1998 3,603 1999 3,541 2000 3,419 2001 2,965 Thereafter 4,253 ------- Total minimum lease payments required $20,990 ======= The table above includes future minimum rental commitments for a diaper production line under a lease entered into subsequent to December 31, 1996. 9. SIGNIFICANT CUSTOMERS/GEOGRAPHIC DATA: For each of the three years ended December 31, 1994, 1995 and 1996, the Company had no individual customers whose purchases exceeded 10% of net sales. For each of the three years ended December 31, 1994, 1995 and 1996, the percentage of the Company's net sales which were to customers in foreign countries totaled 13.5%, 19.2% and 24.2%, respectively. -40- The following table presents geographic data for the years ended December 31, 1995 and 1996. Prior to the acquisition of Seler, in July 1995, the Company did not have any significant consolidated operations outside of the United States and its commonwealths. The Company includes in domestic operations all export sales originating from the United States and sales in Puerto Rico. 1995 1996 United States ------------ ------- Net sales $154,546,000 $179,244,000 Operating income (loss) (11,211,000) 9,854,000 Identifiable assets 118,970,000 117,821,000 Latin America Net sales $9,401,000 $27,770,000 Operating income (loss) (48,000) 699,000 Identifiable assets 18,450,000 32,734,000 10. QUARTERLY FINANCIAL DATA (UNAUDITED): Unaudited summarized data by quarter for 1995 and 1996 is as follows (in thousands, except per share data):
First Second Third Fourth Quarter Quarter Quarter Quarter Total --------- --------- --------- --------- --------- 1995- Net sales ................. $ 36,340 $ 37,758 $ 43,295 $ 46,554 $ 163,947 Gross profit .............. 11,210 10,452 12,817 15,393 49,872 Net loss .................. (3,208)(a) (6,206)(b) (2,656) (3,395)(c) (15,465) Net loss per share ........ $ (.49)(a) $ (.95)(b) $ (.40) $ (.51)(c) $ (2.35) 1996- Net sales ................. $ 45,042 $ 52,821 $ 55,066 $ 54,085 $ 207,014 Gross profit .............. 16,229 21,520 21,874 21,263 80,886 Net income (loss) ......... (2,915) 348 1,956 1,924 1,313 Net income (loss) per share $ (.45) $ .02 $ .12 $ .11 $ .09(d)
- ----------------- (a) Includes unusual expenses of $2,358,000 to reflect the costs associated with the Company's repositioning/brand transition of its premium brand diaper products. (b) Includes a noncash restructuring charge of $2,972,000 associated with the write-down of idled equipment to net realizable value and lease termination costs related to the closure of the Houston facility. (c) Includes a noncash charge of $1,283,000 to revise estimated restructuring charges recorded in the second quarter of 1995 for the write-down of idled equipment to net realized value and an unusual expense of $827,000 to reflect the costs associated with the Company's refinancing transaction. (d) Common and common equivalent shares for the three months ended June 30, 1996, September 30, 1996 and December 31, 1996, and for the year ended December 31, 1996, include the weighted average common shares issuable upon conversion of 90,000 shares of convertible preferred stock issued in February, 1996. Given the loss for the three months ended March 31, 1996, such common stock equivalents were not included since the impact would have been antidilutive. As a result, the sum of net income (loss) per share for the four quarters of 1996, which is based on average shares outstanding during the quarters, does not equal net income (loss) per share for the year, which is based on average shares outstanding during the year. 11. SUBSEQUENT EVENTS: -41- Subsequent to December 31, 1996, the Company entered into a series of transactions related to the establishment of a 51% owned venture in Brazil, acquisition of certain intangible assets and rights from Chansommes do Brasil Ind. E Com. Ltda. ("Chansommes") and the purchase of diaper and other production of Chansommes. Consideration paid in connection with the transactions totaled approximately $6,367,000, including $4,000,000 of common stock of the Company (1,000,000 shares), cancellation of an outstanding receivable from Chansommes of $2,167,000 and $200,000 of transaction related costs to date. Under the terms of the agreement, the 1,000,000 shares of common stock are to be held in escrow by the Company through April 1997. The owners of such shares may elect until that time to receive cash in lieu of the shares for a portion or all of the $4,000,000. See also Note 1. In this regard, to provide for additional liquidity needs, if necessary, the Company has received an irrevocable commitment from a major shareholder to provide up to $4,000,000 in financing. Borrowings under this facility, if any, would accrue interest at 12% per annum. -42- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Drypers Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of Drypers Corporation (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996, included in this Form 10-K and have issued our report thereon dated March 26, 1997. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. Financial statement Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Houston, Texas March 26, 1997 -43- SCHEDULE II DRYPERS CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
Additions Balance at Charged to Balance Beginning Cost and at End of Classification Of Period Expense Deductions(1) Other(2) Period -------------- --------- ------- -------------- -------- ------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year Ended December 31, 1994 ............... $ 304 $ 80 $ (146) $ -- $ 238 Year Ended December 31, 1995 ............... 238 490 (395) 607 940 Year Ended December 31, 1996 ............... 940 1,240 (1,020) -- 1,160
- ---------------------- (1) Write-offs of uncollectible accounts. (2) Consolidation of Seler, S.A.'s allowance for doubtful accounts as of July 31, 1995. -44- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III In accordance with General Instruction G(3) to Form 10-K, the information required by Items 10 through 13 will be set forth in the Company's Proxy Statement relating to the annual meeting of the Company's stockholders under the captions indicated below, and such information is incorporated herein by reference. CROSS REFERENCE
FORM 10-K ITEM NUMBER AND CAPTION CAPTION IN DEFINITIVE PROXY STATEMENT Item 10.Directors and Executive Proposal One: Election of Directors, Executive Officers of the Registrant Officers and Compensation--Executive Officers and--Compliance with Section 16(a) of the Securities and Exchange Act of 1934 Item 11.Executive Compensation Executive Officers and Compensation-- Executive Compensation Item 12.Security Ownership of Security Ownership of Certain Beneficial Certain Beneficial Owners Owners and Management and Management Item 13.Certain Relationships and Certain Relationships and Related Related Transactions Transactions
-45- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Exhibits, Financial Statements and Financial Statement Schedules. (1) and (2) Financial Statements and Financial Statement Schedules. Consolidated Financial Statements and related Schedule II of the Company are included in Item 8 (Financial Statements and Supplementary Data). All other schedules have been omitted since the required information is not present or not present in an amount sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements and notes thereto. (3) Exhibits. Drypers undertakes to furnish any stockholder so requesting a copy of any of the following exhibits upon payment to the Company of the reasonable costs incurred by the Company in furnishing such exhibit. Exhibit NUMBER DESCRIPTION OF EXHIBIT **3.1 - Restated Certificate of Incorporation of Drypers Corporation, as amended (Filed as Exhibit 3.1 to current report on Form 8-K dated March 1, 1996). **3.2 - Bylaws of Drypers Corporation, as amended, dated January 21, 1994 (Filed as Exhibit 3.2 to Form S-1 filed January 26, 1994, Registration Statement No. 33-74436). **4.1 - Specimen 12 1/2% Series B Senior Note Certificate (Filed as Exhibit 4.1 to Amendment No. 1 to Form S-4 filed March 17, 1993, Registration Statement No. 33-54810). **4.2 - Form of Common Stock Certificate (Filed as Exhibit 4.2 to Form S-1 filed January 26, 1994, Registration Statement No. 33-74436). **4.3 - Form of Common Stock Purchase Warrant entitling the persons listed on Schedule 4.3 to purchase an aggregate of 14,680 shares of Common Stock (Filed as Exhibit 4.3 to Form S-1 filed January 26, 1994, Registration Statement No. 33-74436). **4.4 - Form of Common Stock Purchase Warrant entitling the persons listed on Schedule 4.4 to purchase an aggregate of 24,088 shares of Common Stock (Filed as Exhibit 4.4 to Form S-1 filed January 26, 1994, Registration Statement No. 33-74436). **4.5 - Form of Common Stock Purchase Warrant entitling the persons listed on Schedule 4.5 to purchase an aggregate of 23,971 shares of Common Stock (Filed as Exhibit 4.5 to Form S-1 filed January 26, 1994, Registration Statement No. 33-74436). **4.6 - Form of Common Stock Purchase Warrant entitling the persons listed on Schedule 4.6 to purchase an aggregate of 346,183 shares of Common Stock (Filed as Exhibit 4.6 to Form S-1 filed January 26, 1994, Registration Statement No. 33-74436). **4.7 - Form of Common Stock Purchase Warrant entitling the persons listed on Schedule 4.7 to purchase an aggregate of 24,995 shares of Common Stock (Filed as Exhibit 4.7 to Form S-1 filed January 26, 1994, Registration Statement No. 33-74436). -46- **4.8 - Forms of Warrants (Filed as Exhibit 4.37 to Form S-1 Filed October 8, 1993, Registration Statement No. 33-70098). **+4.9 - Form of Nonqualified Stock Option Agreement, as amended, entitling the persons listed on Schedule 4.9 to purchase an aggregate of 125,000 shares of Common Stock (Filed as Exhibit 4.9 to Amendment No. 1 to Form S-1 filed February 17, 1994, Registration Statement No. 33-74436). **+4.10 - Form of Nonqualified Stock Option Agreement, as amended, entitling the persons listed on Schedule 4.10 to purchase an aggregate of 93,750 shares of Common Stock (Filed as Exhibit 4.10 to Amendment No. 1 to Form S-1 filed February 17, 1994, Registration Statement No. 33-74436). **+4.11 - Form of Nonqualified Stock Option Agreement dated April 9, 1993, entitling the persons listed on Schedule 4.11 to purchase an aggregate of 71,875 shares of Common Stock (Filed as Exhibit 4.11 to Form S-1 filed January 26, 1994, Registration Statement No. 33-74436). **+4.12 - Form of Nonqualified Stock Option Agreement dated October 1, 1992, entitling the persons listed on Schedule 4.13 to purchase an aggregate of 45,000 shares of Common Stock (Filed as Exhibit 4.13 to Form S-1 filed January 26, 1994, Registration Statement No. 33-74436). **+4.13 - Form of Nonqualified Stock Option Agreement dated December 31, 1993, entitling the persons listed on Schedule 4.16 to purchase an aggregate of 31,250 shares of Common Stock (Filed as Exhibit 4.16 to Form S-1 filed January 26, 1994, Registration Statement No. 33-74436). **4.14 - Indenture dated as of November 10, 1992, by and among the Company, Hygienic Products International, Inc., VRG Leasing Corporation, and First Interstate Bank of Texas, N.A., as trustee (Filed as Exhibit 4.29 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **4.15 - Warrant Agreement dated as of November 10, 1992, by and between the Company and First Interstate Bank of Texas, N.A., as warrant agent (Filed as Exhibit 4.31 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **4.16 - Warrant Agreement as dated as of July 31, 1991, by and between the Company and First Interstate Bank of Texas, N.A., as warrant agent (Filed as Exhibit 4.16 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **4.17 - 2% Convertible Junior Subordinated Debenture due June 30, 1998, issued to Randy C. Schaaf in the original principal amount of $500,000 (Filed as Exhibit 4.32 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **4.18 - Form of Investment and Stock Registration Agreement dated November 10, 1992, by and among the Company and the persons listed on Schedule 4.34 attached thereto (Filed as Exhibit 4.34 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **4.19 - Certificate of Designation of Senior Convertible Cumulative 7.5% Preferred Stock of Drypers Corporation (Filed as Exhibit 4.1 to Current Report on Form 8-K dated March 1, 1996). *4.20 - Rights Agreement dated January 20, 1995 by and between Drypers Corporation and ChaseMellon Shareholder Services, L.L.C. *4.21 - Rights Agreement Amendment dated as of February 26, 1996, by and between Drypers Corporation and ChaseMellon Shareholder Services, L.L.C. -47- **+10.1 - Form of Indemnity Agreement dated August 2, 1991, by and between the Company and the persons listed on Schedule 10.1 (Filed as Exhibit 10.1 to Form S-1 filed January 26, 1994, Registration Statement No. 33-74436). **+10.2 - Indemnity Agreement dated November 10, 1992, between the Company and Randy C. Schaaf (Filed as Exhibit 10.28 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **+10.3 - Consulting Agreement dated December 7, 1994, by and between the Company and Randy C. Schaaf (Filed as Exhibit 10.4 to Amendment No. 6 to Form S-1 filed January 23, 1995, Registration Statement No. 33-70098). **10.4 - Employment Agreement dated as of October 24, 1994, by and between the Company and David M. Pitassi (Filed as Exhibit 10.6 to Amendment No. 6 to Form S-1 filed January 23, 1995, Registration Statement No. 33-70098). **10.5 - Noncompetition Agreement dated June 11, 1991, by and between VMG Enterprises, Inc. and Dan A. Badders (Filed as Exhibit 10.23 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **+10.6 - Noncompetition Agreement dated as of November 10, 1992, by and among the Company and Randy C. Schaaf (Filed as Exhibit 10.31 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **10.7 - Lease Agreement dated April 1, 1988, by and between Gerald D. Hines and ACP Enterprises, Inc. (Filed as Exhibit 10.12 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **10.8 - Warehouse Lease dated September 25, 1985, as amended by Addendum No. 1 dated September 25, 1985, as amended by Addendum No. 2 dated April 3, 1986, as amended by Addendum No. 3 dated October 14, 1988, as amended by Addendum No. 4 dated September 30, 1991, by and between Hillman Properties Northwest and VMG Enterprises, Inc. (Filed as Exhibit 10.13 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **10.9 - Lease Agreement dated October 24, 1988, as amended by the First Lease Amendment dated November 13, 1989, as amended by the Second Lease Amendment dated August 2, 1990, as amended by the Third Lease Amendment dated February 4, 1991, as amended by the Fourth Lease Amendment dated November 18, 1991, by and between Willis Day Properties, Inc. and UltraCare Products, Inc. (Filed as Exhibit 10.24 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **10.10 - Lease Agreement dated September 1, 1992, by and between Willis Day Properties, Inc. and UltraCare Products, Inc. (Filed as Exhibit 10.25 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **10.11 - Lease Contract dated July 6, 1992, between Puerto Rico Industrial Development Company and Hygienic Products International, Inc. (Filed as Exhibit 10.26 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **10.12 - Lease Contract dated July 1, 1994 between Houston-West Loop, Limited and Drypers Corporation. -48- **10.13 - VRG Holding Corporation 1992 Incentive Stock Option Plan, as amended (Filed as Exhibit 10.14 to Amendment No. 1 to Form S-1 filed February 17, 1994, Registration Statement No. 33-74436). **+10.14 - VRG Holding Corporation 1991 Nonqualified Stock Option Plan (Filed as Exhibit 10.15 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **10.15 - Form of 12% Junior Subordinated Debenture due June 30, 1998, in the aggregate principal amount of $2,400,000 issued to the persons listed on Schedule 10.29 (Filed as Exhibit 10.29 to Form S-4 filed November 20, 1992, Registration Statement No. 33-54810). **10.16 - Drypers 401(k) Plan (Filed as Exhibit 10.25 to Amendment No. 1 to Form S-1 filed February 17, 1994, Registration Statement No. 33-74436). **10.17 - Memorandum of Preferred Stock Purchase Agreement dated July 31, 1994, by and among Drypers Corporation, Seler S.A., Ricardo Marcelo Albamonte and Alfred Garcia Bernal (Filed as Exhibit 10.1 to Form 10-Q filed August 15, 1994, Commission File No. 0-23422). **10.18 - Drypers Corporation 1995 Key Employee Stock Option Plan (Filed as Exhibit 10.1 to Form 10-Q filed August 4, 1995, Commission File No. 0-23422). **10.19 - Drypers Corporation 1994 Non-Employee Director Option Plan (Filed as Exhibit 10.2 to Form 10-Q filed August 4, 1995, Commission File No. 0-23422). **10.20 - Form of Drypers Corporation 1995 Key Employee Stock Option Plan Nonqualified Stock Option Agreement (Filed as Exhibit 10.3 to Form 10-Q filed August 4, 1995, Commission File No. 0-23422). **10.21 - Form of Drypers Corporation 1995 Key Employee Stock Option Plan Incentive Stock Option Agreement (Filed as Exhibit 10.4 to Form 10-Q filed August 4, 1995, Commission File No. 0-23422). **10.22 - Loan and Security Agreement dated February 26, 1996, between Congress Financial Corporation (Southwest) and Drypers Corporation (Filed as Exhibit 10.1 to Current Report on Form 8-K dated March 1, 1996). **10.23 - Second Amended and Restated Loan Agreement dated as of February 23, 1996, between Drypers Corporation and First Interstate Bank of Texas, N.A. (Filed as Exhibit 10.2 to Current Report on Form 8-K dated March 1, 1996). *+10.24 - Employment Agreement dated February 25, 1997, by and between Drypers Corporation and Walter V. Klemp. *+10.25 - Employment Agreement dated February 25, 1997, by and between Drypers Corporation and Raymond M. Chambers. *+10.26 - Employment Agreement dated February 25, 1997, by and between Drypers Corporation and Terry A. Tognietti. *+10.27 - Employment Agreement dated March 14, 1996, by and between Drypers Corporation and Joe D. Tanner. *+10.28 - Employment Agreement dated July 19, 1996, by and between Drypers Corporation and David M. Olsen. -49- *11.1 - Statement Regarding Computation of Per Share Earnings. *21.1 - Subsidiaries of Drypers Corporation. *23.1 - Consent of Arthur Andersen LLP. - ---------- * Filed herewith. ** Incorporated by reference to the filing indicated. + Management contract or compensatory plan or arrangement filed pursuant to Item 14 of Form 10-K. (b) Reports on Form 8-K A report on Form 8-K, dated December 31, 1996, was filed with the Commission December 31, 1996, in which the Company reported the acquisition of Pannolini de Mexico, S.A. de C.V. by Drypers Mexico, S.A. de C.V., a wholly owned subsidiary of the Company. -50- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 27th day of March, 1997. DRYPERS CORPORATION By /s/ WALTER V. KLEMP Walter V. Klemp Co-Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities indicated on the 27th day of March, 1997. Signature Title --------- ----- /s/ WALTER V. KLEMP Co-Chief Executive Officer, Chairman of the Board Walter V. Klemp and Director (Principal Executive Officer) /s/ JONATHAN P. FOSTER Chief Financial Officer Jonathan P. Foster (Principal Financial and Accounting Officer) /s/ TERRY A. TOGNIETTI Co-Chief Executive Officer, President - Drypers Terry A. Tognietti North America and Director /s/ RAYMOND M. CHAMBERS Co-Chief Executive Officer, President - Drypers Raymond N. Chambers International and Director /s/ NOLAN LEHMANN Director Nolan Lehmann -51- EX-4.20 2 EXHIBIT 4.20 ================================================================================ DRYPERS CORPORATION and CHASEMELLON SHAREHOLDER SERVICES, L.L.C. Rights Agent RIGHTS AGREEMENT Dated as of January 20, 1995 ================================================================================ TABLE OF CONTENTS Page ---- Section 1. Certain Definitions............................................ 1 Section 2. Appointment of Rights Agent.................................... 5 Section 3. Issue of Right Certificates.................................... 5 Section 4. Form of Right Certificates..................................... 8 Section 5. Countersignature and Registration.............................. 8 Section 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates................................................... 9 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights.. 10 Section 8. Cancellation and Destruction of Right Certificates............. 12 Section 9. Availability of Common Shares.................................. 13 Section 10. Common Shares Record Date...................................... 15 Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights......................................................... 15 Section 12. Certificate of Adjusted Purchase Price or Number of Shares..... 25 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.......................................................... 26 Section 14. Fractional Rights and Fractional Shares........................ 28 Section 15. Rights of Action............................................... 30 Section 16. Agreement of Right Holders..................................... 31 Section 17. Right Certificate Holder Not Deemed a Stockholder.............. 31 Section 18. Concerning the Rights Agent.................................... 32 Section 19. Merger or Consolidation or Change of Name of Rights Agent...... 32 Section 20. Duties of Rights Agent......................................... 33 Section 21. Change of Rights Agent......................................... 36 Section 22. Issuance of New Right Certificates............................. 37 Section 23. Redemption..................................................... 37 Section 24. Exchange....................................................... 40 Section 25. Notice of Certain Events....................................... 41 i Section 26. Notices........................................................ 42 Section 27. Supplements and Amendments..................................... 43 Section 28. Successors..................................................... 44 Section 29. Benefits of this Agreement..................................... 44 Section 30. Severability................................................... 44 Section 31. Determinations and Actions by the Board of Directors, etc...... 44 Section 32. Governing Law.................................................. 45 Section 33. Counterparts................................................... 45 Section 34. Descriptive Headings........................................... 45 Signatures ............................................................... 46 Exhibit A - Form of Right Certificate A-1 Exhibit B - Summary of Rights to Purchase Common Shares B-1 ii RIGHTS AGREEMENT Rights Agreement, dated as of January 20, 1995, between Drypers Corporation, a Delaware corporation (the "Company"), and ChaseMellon Shareholder Services, L.L.C. (the "Rights Agent"). The Board of Directors of the Company has authorized and declared a dividend of one Common Share (as hereinafter defined) purchase right (a "Right") for each Common Share of the Company outstanding on February 3, 1995 (the "Record Date"), each Right representing the right to purchase one Common Share, upon the terms and subject to the conditions herein set forth, and has further authorized and directed the issuance of one Right with respect to each Common Share of the Company that shall become outstanding between the Record Date and the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date (as such terms are hereinafter defined). Accordingly, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms (in addition to those defined above) have the meanings indicated: (a) "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the Common Shares then outstanding, but shall not include the Company, any wholly-owned Subsidiary (as such term is hereinafter defined) of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, any Person holding Common Shares for or pursuant to the terms of any such plan to the extent, and only to the extent, of the Common Shares so held, or any Grandfathered Stockholder (as such term is hereinafter defined). Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of Common Shares by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% or more of the Common Shares then outstanding; PROVIDED, HOWEVER, that if a Person becomes the Beneficial Owner of 15% or more of the Common Shares then outstanding by reason of share acquisitions by the Company and shall, after such share acquisitions by the Company, become the Beneficial Owner of any additional Common Shares, then such Person shall be deemed to be an "Acquiring Person". (b) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date of this Agreement. (c) A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly; (ii) which such Person or any of such Person's Affiliates or Associates has the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing), other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities, or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; PROVIDED, HOWEVER, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; (iii) which such Person or any of such Person's Affiliates or Associates -2- has the right to vote pursuant to any agreement, arrangement or understanding (whether or not in writing); PROVIDED, HOWEVER, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (A) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act and (B) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iv) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section 1(c) (iii)) or disposing of any securities of the Company. Notwithstanding the foregoing, any securities that are owned or held by the Company, by any Subsidiary of the Company, or by any employee benefit plan of the Company or of any Subsidiary of the Company, and any securities that are owned or held by any Person pursuant to the terms of any such plan, shall not be deemed to be beneficially owned by any other Person and no other Person shall be deemed to be the Beneficial Owner of such securities to the extent, and only to the extent, of the securities so held. (d) "Business Day" shall mean any day other than a Saturday, a Sunday, or a day on which banking institutions in the State of Texas or the State of New York are authorized or obligated by law or executive order to close. (e) "close of business" on any given date shall mean 5:00 p.m., Houston time, -3- on such date; PROVIDED, HOWEVER, that if such date is not a Business Day it shall mean 5:00 p.m., Houston time, on the next succeeding Business Day. (f) "Common Shares" when used with reference to the Company (specifically or in context) shall mean the shares of common stock, par value $0.001 per share, of the Company. "Common Shares" when used with reference to any Person other than the Company shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such other Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. (g) "Disinterested Director" shall have the meaning set forth in Section 23 hereof. (h) "Distribution Date" shall have the meaning set forth in Section 3 hereof. (i) "Final Expiration Date" shall have the meaning set forth in Section 7 hereof. (j) "Grandfathered Stockholder" shall mean at any time Equus II Incorporated and Equus Capital Partners, L.P. (collectively, together with their respective Affiliates and Associates, "Equus") which together are at the time in question the Beneficial Owners of the 1,329,227 Common Shares beneficially owned by Equus on the date of this Agreement; provided, however, that Equus shall not be Grandfathered Stockholders if either Equus II Incorporated or Equus Capital Partners, L.P. makes an acquisition of Common Shares that would increase the ownership of Equus to 25% or more of the Common Shares outstanding. (k) "Person" shall mean any individual, firm, corporation, incorporated or unincorporated association, limited liability company, partnership or other entity, and shall include any successor (by merger or otherwise) of such entity. (l) "Purchase Price" shall have the meaning set forth in Section 4 hereof, as the same may be adjusted from time to time in accordance with the terms of this Agreement. (m) "Redemption Date" shall have the meaning set forth in Section 7 hereof. -4- (n) "Shares Acquisition Date" shall mean the first date of public announcement (which, for purposes of this definition, shall include, without limitation, a report filed pursuant to Section 13(d) of the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such. (o) "Subsidiary" of any Person shall mean any corporation, incorporated or unincorporated association, limited liability company, partnership or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person. Certain additional terms used wholly within a subsequent Section of this Agreement shall have the meaning given them in the relevant Section of this Agreement for purposes of such Section. Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3 hereof, shall prior to the Distribution Date also be the holders of the Common Shares of the Company) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. Section 3. ISSUE OF RIGHT CERTIFICATES. -5- (a) Until the earlier (the earlier of such dates being herein referred to as the "Distribution Date") of (i) the close of business on the tenth Business Day after the Shares Acquisition Date and (ii) the close of business on the tenth Business Day after the date of the commencement by any Person (other than the Company, any wholly-owned Subsidiary of the Company, any employee benefit plan of the Company or of any wholly-owned Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan to the extent such entity is so acting with the approval or consent of the Company) of, or of the first public announcement of the intention of any Person (other than the Company, any wholly-owned Subsidiary of the Company, any employee benefit plan of the Company or of any wholly-owned Subsidiary of the Company, or any entity holding Common Shares for or pursuant to the terms of any such plan to the extent such entity is so acting with the approval or consent of the Company or as part of its ordinary activities with respect to any such plan) to commence, a tender or exchange offer the consummation of which would result in any Person becoming the Beneficial Owner of 15% or more of the Common Shares then outstanding, including any such date which is after the date of this Agreement and prior to the issuance of the Rights, (x) the Rights will be evidenced (subject to the provisions of Section 3(b) hereof) by the certificates for Common Shares registered in the names of the holders thereof (which certificates shall also be deemed to be Right Certificates) and not by separate Right Certificates, and (y) the right to receive Right Certificates will be transferable only in connection with the transfer of Common Shares of the Company. As soon as practicable after the Distribution Date, the Company will prepare and execute, the Rights Agent will countersign, and the Company will send or cause to be sent (and the Rights Agent will, if requested, send), by first-class, insured, postage prepaid mail, to each record holder of Common Shares as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, a Right Certificate, in substantially the form of EXHIBIT A hereto (a "Right Certificate"), evidencing one Right for each Common Share -6- of the Company so held. As of the Distribution Date, the Rights will be evidenced solely by such Right Certificates. (b) As promptly as practicable following the Record Date, the Company will send a copy of a Summary of Rights to Purchase Common Shares, in substantially the form of EXHIBIT B hereto (the "Summary of Rights"), by first-class, postage prepaid mail, to each record holder of Common Shares as of the close of business on the Record Date, at the address of such holder shown on the records of the Company. With respect to certificates for Common Shares of the Company outstanding as of the Record Date, until the Distribution Date, the Rights associated with the Common Shares represented by such certificates shall be evidenced by such certificates together with a copy of the Summary of Rights attached thereto. Until the Distribution Date (or the earlier of the Redemption Date and the Final Expiration Date), the surrender for transfer of any certificate for Common Shares outstanding on the Record Date, with or without a copy of the Summary of Rights attached thereto, shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. (c) Certificates for Common Shares which become outstanding (including, without limitation, reacquired Common Shares referred to in the last sentence of this paragraph (c)) after the Record Date but prior to the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date shall have impressed on, printed on, written on or otherwise affixed to them the following legend: This certificate also evidences and entitles the holder hereof to certain rights as set forth in a Rights Agreement between Drypers Corporation and ChaseMellon Shareholder Services, L.L.C., dated as of January 20, 1995 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Drypers Corporation. Under certain circumstances, as set forth in the Rights Agreement, the Rights described therein will be evidenced by separate certificates and will no longer be evidenced by this certificate. Drypers Corporation will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. As described in the Rights -7- Agreement, Rights issued to any Person who becomes an Acquiring Person (as those terms are defined in the Rights Agreement) shall become null and void. The Rights shall not be exercisable by a holder in any jurisdiction where the requisite qualification to the issuance to such holder of the Rights, or the exercise by such holder of the Rights in such jurisdiction, shall not have been obtained or obtainable. With respect to such certificates containing the foregoing legend, until the Distribution Date, the Rights associated with the Common Shares represented by such certificates shall be evidenced by such certificates alone, and the surrender for transfer of any such certificate shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. In the event that the Company purchases or acquires any Common Shares after the Record Date but prior to the Distribution Date, any Rights associated with such Common Shares shall be deemed canceled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Shares which are no longer outstanding. Section 4. FORM OF RIGHT CERTIFICATES. The Right Certificates (and the forms of election to purchase Common Shares and of assignment to be printed on the reverse thereof) shall be in substantially the form of EXHIBIT A hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. Subject to the provisions of Section 22 hereof, the Right Certificates shall entitle the holders thereof to purchase such number of Common Shares as shall be set forth therein at the price per Common Share set forth therein (the "Purchase Price"), but the number of such Common Shares and the Purchase Price shall be subject to adjustment as provided herein. Section 5. COUNTERSIGNATURE AND REGISTRATION. The Right Certificates shall be executed -8- on behalf of the Company by its Chairman of the Board of Directors, its President or any Vice President, either manually or by facsimile signature, shall have affixed thereto the Company's seal or a facsimile thereof, and shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Right Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless countersigned. In case any officer of the Company who shall have signed any of the Right Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates, nevertheless, may be countersigned by the Rights Agent and issued and delivered by the Company with the same force and effect as though the person who signed such Right Certificates had not ceased to be such officer of the Company; and any Right Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Agreement any such person was not such an officer. Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its principal office or offices, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates, the number of rights evidenced on its face by each of the Right Certificates and the date of each of the Right Certificates. Section 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHT CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES. Subject to the provisions of Section 14 hereof, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the earlier of the Redemption Date and the Final Expiration Date, any Right Certificate or Right Certificates (other than Right Certificates representing Rights that have become void pursuant to Section 11(a)(ii) hereof or that have been exchanged pursuant to Section 24 hereof) may be -9- transferred, split up, combined or exchanged for another Right Certificate or Right Certificates, entitling the registered holder to purchase a like number of Common Shares as the Right Certificate or Right Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate or Right Certificates shall make such request in writing delivered to the Rights Agent and shall endorse and surrender the Right Certificate or Right Certificates to be transferred, split up, combined or exchanged at the principal office of the Rights Agent. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Right Certificate until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Right Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Thereupon the Rights Agent shall countersign and deliver to the person entitled thereto a Right Certificate or Right Certificates, as the case may be, as so requested. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates. Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate if mutilated, the Company will make and deliver a new Right Certificate of like tenor to the Rights Agent for delivery to the registered holder in lieu of the Right Certificate so lost, stolen, destroyed or mutilated. Section 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS. -10- (a) The registered holder of any Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time, subject to the last sentence of Section 23(a) hereof, after the Distribution Date upon surrender of the Right Certificate, with the form of election to purchase on the reverse side thereof duly executed, to the Rights Agent at the principal office of the Rights Agent, together with payment of the Purchase Price for each Common Share as to which the Rights are exercised, at or prior to the earliest of (i) the close of business on January 20, 2005 (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date"), and (iii) the time at which such Rights are exchanged as provided in Section 24 hereof. (b) The Purchase Price for each Common Share pursuant to the exercise of a Right shall initially be $75.00, shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof, and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below. (c) Subject to the Company's rights under Section 11(a)(iii) hereof, upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase duly executed, accompanied by payment of the Purchase Price for the shares to be purchased (plus an amount equal to any applicable transfer tax required to be paid by the holder of such Right Certificate in accordance with Section 9 hereof) by certified check, cashier's check or money order payable to the order of the Company, the Rights Agent shall thereupon promptly (i) requisition from any transfer agent of the Common Shares certificates for the number of Common Shares to be purchased, and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, or the amount of cash, property or other securities to be paid or issued in lieu of the issuance of Common Shares in accordance with Section 11(a)(iii) hereof, (iii) after receipt of such -11- certificates, cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder, and (iv) when appropriate, after receipt, deliver such cash, property or other securities to or upon the order of the registered holder of such Right Certificate. (d) In case the registered holder of any Right Certificate shall exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent to the registered holder of such Right Certificate or to such holder's duly authorized assigns, subject to the provisions of Section 14 hereof. (e) Subject to the Company's rights under Section 11(a)(iii) hereof to otherwise fulfill its obligations, the Company covenants and agrees that it will cause to be kept available out of its authorized and unissued Common Shares, the number of Common Shares that will be sufficient to permit the exercise in full of all outstanding Rights in accordance with this Section 7. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder of Rights upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall have (i) completed and signed a certificate contained in the form of election to purchase set forth on the reverse side of the Right Certificate surrendered for such exercise and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Section 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES. All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in canceled form, or, if surrendered to the Rights Agent, shall be canceled by it, -12- and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any Right Certificate representing Rights purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all canceled Right Certificates to the Company, or shall, at the written request of the Company, destroy such canceled Right Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. Section 9. AVAILABILITY OF COMMON SHARES. The Company covenants and agrees that it will take all such action as may be necessary to ensure that all Common Shares delivered upon exercise of Rights shall, at the time of delivery of the certificates for such Common Shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully paid and nonassessable shares. The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which are payable in respect of the issuance or delivery of the Right Certificates or of any Common Shares (or other securities which may become or be issuable under the terms of this Agreement) upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Right Certificates to a Person other than, or the issuance or delivery of certificates for the Common Shares (or other securities which may become or be issuable under the terms of this Agreement) in a name other than that of, the registered holder of the Right Certificates evidencing Rights surrendered for transfer, delivery or exercise or to issue or to deliver any certificates for Common Shares (or other securities which may become or be issuable under the terms of this Agreement) upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by the holder of such Right Certificates at the time of surrender) or until it has been established to the Company's reasonable satisfaction that no such -13- tax is due. The Company covenants and agrees that, so long as Common Shares issuable and deliverable upon the exercise of Rights may be listed on any national securities exchange, the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable, all Shares reserved for issuance to be listed on such exchange upon official notice of issuance upon such exercise. The Company shall (i) prepare and file, as soon as possible following the Distribution Date, a registration statement under the Securities Act of 1933 (the "Act") with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause such registration statement to become effective as soon as possible after such filing, and (iii) cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Act) until no longer required to do so under the Act with respect to securities purchasable upon exercise of the Rights. The Company will also take all such action as may be required or as is appropriate under the securities or blue sky laws of such jurisdictions as may be necessary or appropriate with respect to the securities purchasable upon the exercise of the Rights. The Company may temporarily suspend for a period not to exceed 90 days following the Distribution Date, the exercisability of the Rights in order to prepare and file such registration statement and permit it to become effective. Upon any such suspension of exercisability of Rights referred to in this paragraph, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. Notwithstanding any provision in this Agreement to the contrary, the Rights shall not be exercisable by a holder in any jurisdiction where the requisite qualification to the issuance to such holder, or the exercise by such holder of the Rights in such jurisdiction, shall not have been obtained or be obtainable, or the exercise thereof shall not be permitted under applicable law or a -14- registration statement shall not have been declared effective. Section 10. COMMON SHARES RECORD DATE. Each Person in whose name any certificate for Common Shares is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Common Shares represented thereby on, and such certificate shall be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made; PROVIDED, HOWEVER, that if the date of such surrender and payment is a date upon which the Common Shares transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Common Shares transfer books of the Company are open. Section 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR NUMBER OF RIGHTS. The Purchase Price, the number of Common Shares that the holder of a Right Certificate is entitled to purchase on the exercise of the Rights evidenced thereby, and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Common Shares payable in Common Shares, (B) subdivide the outstanding Common Shares, (C) combine the outstanding Common Shares into a smaller number of Common Shares or (D) issue any shares of its capital stock in a reclassification of the Common Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a), the Purchase Price in effect at the time of the record date for such dividend or at the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of -15- any Right exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Right had been exercised immediately prior to such date and at a time when the Common Shares transfer books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. If an event occurs which would require an adjustment under both this Section 11(a)(i) and Section 11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii) hereof. (ii) Subject to Section 23 and 24 of this Agreement, in the event any Person shall become an Acquiring Person, proper provision shall be made so that each holder of a Right shall thereafter have a right to receive, upon exercise thereof in accordance with Section 7 hereof at a price equal to the then current Purchase Price multiplied by the number of Common Shares for which a Right is then exercisable, in accordance with the terms of this Agreement, such number of Common Shares as shall equal the result obtained by (A) multiplying the then current Purchase Price by the number of Common Shares for which a Right is then exercisable and dividing that product by (B) 50% of the then current per share market price of the Company's Common Shares (determined pursuant to Section 11(d) hereof) on the date such Person became an Acquiring Person (such resulting number of shares, the "Adjustment Shares"). Notwithstanding the foregoing or anything in this Agreement to the contrary, from and after the time any Person becomes an Acquiring Person, any Rights that are or were acquired or beneficially owned by such Acquiring Person (or any Associate or Affiliate of such Acquiring Person) shall be null and void without any further action and any holder of such Rights shall thereafter have no rights whatsoever with respect to such Rights, whether under this Agreement (including the right to exercise such Rights under any provision of -16- this Agreement) or otherwise. No Right Certificate shall be issued pursuant to Section 3 that represents Rights beneficially owned by an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof; no Right Certificate shall be issued at any time upon the transfer of any Rights to an Acquiring Person whose Rights would be void pursuant to the preceding sentence or any Associate or Affiliate thereof or to any nominee of such Acquiring Person, Associate or Affiliate; and any Right Certificate delivered to the Rights Agent for transfer to an Acquiring Person whose Rights would be void pursuant to the preceding sentence shall be canceled. (iii) In lieu of issuing Common Shares in accordance with Section 11(a)(ii) hereof, the Company may, if the Board of Directors of the Company determines that such action is necessary or appropriate: (A) determine the excess of (1) the value of the Adjustment Shares issuable upon the exercise of a Right (the "Current Value") over (2) the Purchase Price (such excess, the "Spread") and (B) with respect to each Right (subject to the provisions of Section 11(a)(ii) hereof), make adequate provision to substitute for the Adjustment Shares, upon exercise of a Right in payment of the applicable Purchase Price, cash, a reduction in the Purchase Price, other equity securities of the Company (including, without limitation, shares or units of shares or preferred stock which the Board of Directors has deemed to have the same value as the Common Shares (such shares of preferred stock herein called "common stock equivalents")), debt securities of the Company, other assets or any combination of the foregoing, having an aggregate value equal to the Current Value, where such aggregate value has been determined by the Board of Directors based upon the advice of an investment banking firm selected by the Board of Directors; provided, however, if the Company shall not have made adequate provision to deliver value pursuant to clause (B) within 30 days following the later of (x) the date any Person shall have become an Acquiring Person and (y) the -17- date on which the Company's right of redemption pursuant to Section 23(a) hereof expires, then the Company shall be obligated to deliver, upon surrender for exercise of a Right and without requiring payment of the Purchase Price, shares of Capital Stock (to the extent available) and then, if necessary, cash, which shares and cash would have an aggregate value equal to the Spread. For purposes of this Section 11(a)(iii), the value of the Common Shares shall be the current market price as determined pursuant to Section 11(d) hereof per Common Share on the date the Company's right of redemption pursuant to Section 23(a) hereof expires. With respect to any such action by the Company with respect to the Rights or this Agreement at any time after any Person becomes an Acquiring Person, such action shall be taken only if (A) there are Disinterested Directors then in office and (B) the Board of Directors of the Company, with the concurrence of a majority of the Disinterested Directors then in office, approves such action. (iv) Subject to subparagraph (iii) of this paragraph (a), in the event that there shall not be sufficient Common Shares issued but not outstanding or authorized but unissued to permit the exercise in full of the Rights in accordance with subparagraph (ii) of this paragraph (a), the Company shall take all such action as may be necessary to authorize additional Common Shares for issuance upon exercise of the Rights. (b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Common Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Common Shares or securities convertible into Common Shares at a price per Common Share (or having a conversion price per share, if a security convertible into Common Shares) less than the then current per share market price of the Common Shares (as defined in Section 11(d)) on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price -18- in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Common Shares outstanding on such record date plus the number of Common Shares which the aggregate offering price of the total number of Common Shares so to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and the denominator of which shall be the number of Common Shares outstanding on such record date plus the number of additional Common Shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible). In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent. Common Shares owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall fix a record date for the making of a distribution to all holders of the Common Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets (other than a regular quarterly cash dividend paid out of earnings or retained earnings or a dividend payable in Common Shares) or subscription rights or warrants (excluding those referred to in Section 11(b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the then current per share market price of the Common Shares on such record date, less the fair market value (as determined in good faith by the Board of Directors of the Company, whose determination shall be -19- described in a statement filed with the Rights Agent) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one Common Share and the denominator of which shall be such current per share market price of the Common Shares. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (d) For the purpose of any computation hereunder, the "current per share market price" of the Common Shares on any date shall be deemed to be the average of the daily closing prices per share of such Common Shares for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; PROVIDED, HOWEVER, that in the event that the current per share market price of the Common Shares is determined during a period following the announcement by the issuer of such Common Shares of (A) a dividend or distribution on such Common Shares payable in Common Shares or securities convertible into Common Shares, or (B) any subdivision, combination or reclassification of the Common Shares and prior to the expiration of 30 Trading Days after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the current per share market price shall be appropriately adjusted to reflect the current market price per share equivalent of Common Shares taking into account ex-dividend trading. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Common Shares are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal -20- national securities exchange on which the Common Shares are listed or admitted to trading or, if the Common Shares are not listed or admitted to trading on any national securities exchange, the last quoted sales price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use or, if on any such date the Common Shares are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Shares selected by the Board of Directors of the Company. If the Common Shares are not publicly held or so listed or traded, and no market maker is making, or has made during the relevant period, a market in the Common Shares, "current per share market price" shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Common Shares are listed or admitted to trading is open for the transaction of business or, if the Common Shares are not listed or admitted to trading on any national securities exchange, a Business Day. (e) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Purchase Price; PROVIDED, HOWEVER, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest one ten-thousandth interest in a Common Share. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which requires such adjustment or (ii) the date of the expiration of the right to exercise any Rights. (f) If as a result of an adjustment made pursuant to Section 11(a) or -21- Section 13(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Common Shares, thereafter the number of such other shares so receivable upon exercise of any Right shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions of this Section 11 with respect to the Common Shares and the provisions of Sections 7, 9, 10, 12, 13 and 14 with respect to the Common Shares shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of Common Shares purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of Common Shares (calculated to the nearest one one-thousandth of a Common Share) obtained by (i) multiplying (A) the number of Common Shares covered by a Right immediately prior to such adjustment by (B) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of Common Shares purchasable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of Common Shares for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights -22- (calculated to the nearest one one-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election, if any, to adjust the number of Rights, indicating the record date for the adjustment and, if known at the time, the amount of the adjustment to be made. Such record date may be the date on which the Purchase Price is adjusted or any date thereafter, but, if the Right Certificates have been issued, shall be at least 10 days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date Right Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of Common Shares issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Purchase Price and the number of Common Shares which were expressed in the initial Right Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below the then par value, if any, of the Common Shares issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, -23- be necessary in order that the Company may validly and legally issue fully paid and nonassessable Common Shares at such adjusted Purchase Price. (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised after such record date of the Common Shares and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Common Shares and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; PROVIDED, HOWEVER, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that the Company in its sole discretion shall determine to be advisable in order that any consolidation or subdivision of the Common Shares, issuance wholly for cash of any Common Shares at less than the current market price, issuance wholly for cash of Common Shares or securities which by their terms are convertible into or exchangeable for Common Shares, dividends on Common Shares payable in Common Shares or issuance of rights, options or warrants referred to in Section 11(b) hereafter made by the Company to holders of Common Shares shall not be taxable to such stockholders. (n) The Company covenants and agrees that it shall not, at any time after the Distribution Date, (i) consolidate with any other Person (other than a wholly-owned Subsidiary of the Company in a transaction which complies with Section 11(o) hereof), (ii) merge with or into any other Person (other than a wholly-owned Subsidiary of the Company in a transaction which complies with Section 11(o) hereof), (iii) effect a share exchange with any other Person or -24- conversion of the Company into another entity (other than with a wholly-owned Subsidiary of the Company in a transaction which complies with Section 11(o) hereof), or (iv) sell or transfer (or permit any Subsidiary to sell or transfer), in one transaction or series of related transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company and/or any of its wholly-owned Subsidiaries in one or more transactions, each of which complies with Section 11(o) hereof), if (x) at the time of or immediately after such consolidation, merger, exchange, conversion or sale, there are any rights, warrants or other instruments or securities outstanding or agreements in effect which would materially diminish or otherwise eliminate the benefits intended to be afforded by the Rights or (y) prior to, simultaneously with or immediately after such consolidation, merger, exchange, conversion or sale, the stockholders or interest holders of the Person who constitutes, or would constitute, the "Principal Party" for purposes of Section 13(a) hereof would have received a distribution of Rights previously owned by such Person or any of its Affiliates and Associates. (o) The Company covenants and agrees that, after the Distribution Date, it will not, except as permitted by Section 23, Section 24 or Section 27 hereof, take (or permit any Subsidiary to take) any action if, at the time such action is taken, it is reasonably foreseeable that such action will diminish in any material manner or otherwise eliminate the benefits intended to be afforded by the Rights. Section 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES. Whenever an adjustment is made as provided in Sections 11 or 13 hereof, the Company shall promptly (a) prepare a certificate setting forth such adjustment and a brief statement of the facts accounting for such adjustment, (b) file with the Rights Agent and with each transfer agent for the Common Shares a copy of such certificate and (c) mail a brief summary thereof to each holder of a Right Certificate in accordance with Section 25 hereof. -25- Section 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING POWER. (a) If, following the Shares Acquisition Date, directly or indirectly, (i) the Company shall consolidate with, merge with and into, or effect a share exchange or conversion with or into any Person, (ii) any Person shall merge with and into the Company or effect a share exchange or conversion with or into the Company, the Company shall be the continuing or surviving corporation in such transaction and, in connection with such transaction, all or part of the Common Shares shall be changed into or exchanged for stock or other securities of any Person (including the Company) or cash or any other property, or (iii) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any Person or Persons other than the Company or one or more of its wholly-owned Subsidiaries, then, and in each such case, proper provision shall be made so that (i) each holder of a Right (except as otherwise provided herein) shall thereafter have the right to receive, upon the exercise thereof at a price equal to the then current Purchase Price multiplied by the number of Common Shares for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Common Shares, such number of validly authorized and issued, fully paid and non-assessable Common Shares of the Principal Party (as defined in Section 13(b) hereof) as shall equal the result obtained by (A) multiplying the then current Purchase Price by the number of Common Shares for which a Right is then exercisable and dividing that product by (B) 50% of the then current per share market price of the Common Shares of the Principal Party (determined pursuant to Section 11(d) hereof) on the date of consummation of such transaction; (ii) the Principal Party shall thereafter be liable for, and shall assume, by virtue of such transaction, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company", as used in this Agreement, shall thereafter be deemed to mean the Principal Party; and (iv) such Principal Party shall take such -26- steps (including, but not limited to, the reservation of a sufficient number of its Common Shares in accordance with this Agreement) in connection with such consummation as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to the Common Shares of the Principal Party thereafter deliverable upon the exercise of the Rights. The Company shall not consummate any such transaction unless prior thereto the Company and the Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement so providing and further providing that, immediately after the date of any such transaction mentioned in this paragraph (a) of this Section 13, the Principal Party at its own expense will (i) prepare and file a registration statement under the Act with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, will cause such registration statement to become effective as soon as possible after such filing and will cause such registration statement to remain effective (with a prospectus at all times meeting the requirements of the Act) until no longer required under the Act with respect to securities purchasable upon exercise of the Rights; and (ii) qualify or register the Rights and the securities purchasable upon exercise of the Rights, and take all such other action as may be required or as is appropriate, under the securities or blue sky laws of such jurisdictions as may be necessary or appropriate. The Company shall not enter into any transaction of the kind referred to in this Section 13 if at the time of such transaction there are any rights, warrants, instruments or securities outstanding or any agreements or arrangements which, as a result of the consummation of such transaction, would eliminate or substantially diminish the benefits intended to be afforded by the Rights. The provisions of this Section 13 shall similarly apply to successive mergers, consolidations, exchanges, conversions, sales or other transfers. (b) "Principal Party" shall mean (i) in the case of any transaction described in clause (i) or (ii) of the first sentence of Section 13(a), the Person that is the issuer of any securities into which -27- Common Shares are converted in such transaction, and if no securities are so issued, the Person that is the other party to the transaction; and (ii) in the case of any transaction described in clause (iii) of the first sentence in Section 13(a), the Person that is the party receiving the greatest portion of the assets or earning power transferred pursuant to such transaction or transactions; PROVIDED, HOWEVER, that in any such case, (1) if the securities of such Person are not at such time or have not been continuously over the preceding 12-month period registered under Section 12 of the Exchange Act, and such Person is a direct or indirect Subsidiary of another Person the securities of which are and have been so registered, "Principal Party" shall mean such other Person; (2) in case such Person is a Subsidiary, directly or indirectly, of more than one other Person, the securities of two or more of which are and have been so registered, "Principal Party" shall mean whichever of such other Persons is the issuer of the securities so registered having the greatest aggregate market value; and (3) in case such Person is owned, directly or indirectly, by a joint venture formed by two or more other Persons that are not owned, directly or indirectly, by the same Person, the rules set forth in (1) and (2) above shall apply to each of the chains of ownership having an interest in such joint venture as if such Person were a "Subsidiary" of both or all of such other Persons and the Principal Parties in each such chain shall bear the obligations set forth in this Section 13 in the same ratio as their direct and indirect interests in such Person bear to the total of such interests. Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. -28- (a) The Company shall not be required to issue fractions of Rights or to distribute Right Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole Right. For purposes of this Section 14(a), the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would otherwise be issuable. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by NASDAQ or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used to determine the current market value of a Right for purposes of this Section 14(a). Notwithstanding anything in this Section 14(a) to the contrary, prior to the Distribution Date, the current market value of the Right for purposes of this Section 14(a) shall be deemed to be zero. (b) The Company shall not be required to issue fractional interests in Common -29- Shares upon exercise of the Rights or to distribute certificates which evidence fractional interests in Common Shares. In lieu of fractional interests in Common Shares, the Company shall pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Common Share. For purposes of this Section 14(b), the current market value of a Common Share shall be the closing price of a Common Share (as determined pursuant to the second sentence of Section 11(d) hereof) for the Trading Day immediately prior to the date of such exercise. (c) The holder of a Right by the acceptance of the Right expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right (except as provided above). Section 15. RIGHTS OF ACTION. All rights of action in respect of this Agreement, excepting the rights of action given to the Rights Agent under Section 18 and Section 20 hereof, are vested in the respective registered holders of the Right Certificates (and, prior to the Distribution Date, the registered holders of the Common Shares of the Company); and any registered holder of any Right Certificate (or, prior to the Distribution Date, of the Common Shares of the Company), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Distribution Date, of the Common Shares of the Company), may, in his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, such holder's right to exercise the Rights evidenced by such Right Certificate in the manner provided in such Right Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of the obligations of any Person -30- subject to, this Agreement. Section 16. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Shares of the Company; (b) after the Distribution Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office of the Rights Agent, duly endorsed or accompanied by a proper instrument of transfer; and (c) the Company and the Rights Agent may deem and treat the Person in whose name any Right Certificate (or, prior to the Distribution Date, the associated Common Shares certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or the associated Common Shares certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary. Section 17. RIGHT CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No holder, as such, of any Right Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Common Shares or interests therein or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Right Certificate be construed to confer upon the holder of any Right Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 25 hereof), or to receive dividends or -31- subscription rights, or otherwise, until the Right or Rights evidenced by such Right Certificate shall have been exercised in accordance with the provisions hereof. Section 18. CONCERNING THE RIGHTS AGENT. The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises. The Rights Agent shall be protected and shall incur no liability for, or in respect of any action taken, suffered or omitted by it in connection with, its administration of this Agreement in reliance upon any Right Certificate or certificate for the Common Shares or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons, or otherwise upon the advice of counsel as set forth in Section 20 hereof. Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT. Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the stock transfer or corporate trust business of the Rights Agent or any successor -32- Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case, at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Right Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned, and in case at that time any of the Right Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Right Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good -33- faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by any one of the Chairman of the Board of Directors, President, any Vice President, the Secretary or the Treasurer of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder to the Company and any other Person only for the Rights Agent's own negligence, bad faith or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Right Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Right Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including any Rights that become void pursuant to Section 11(a)(ii) hereof) or any adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Sections 3, 11, 13, 23 or 24 hereof, or the ascertaining of the existence of facts that would require any such change or adjustment (except -34- with respect to the exercise of Rights evidenced by Right Certificates after actual notice that such change or adjustment is required); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Common Shares to be issued pursuant to this Agreement or any Right Certificate or as to whether any Common Shares will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from any one of the Chairman of the Board of Directors, President, any Vice President, the Secretary or the Treasurer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered by it in good faith in accordance with instructions of any such officer or for any delay in acting while waiting for those instructions. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company (including, without limitation, acting as transfer agent for the Common Shares of the Company) or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect -35- or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Common Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Shares by registered or certified mail, and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit his Right Certificate for inspection by the Company), then the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of the States of New York or Texas (or of any other state of the United States so long as such corporation is authorized to do business as a banking institution in the State of New York or the State of Texas), in good standing, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million. After appointment, the successor Rights Agent shall be vested with the same -36- powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by the predecessor Rights Agent hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Shares, and mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. ISSUANCE OF NEW RIGHT CERTIFICATES. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Agreement. Section 23. REDEMPTION. (a) The Rights may be redeemed by action of the Board of Directors of the Company pursuant to paragraph (b) of this Section 23 and shall not be redeemed in any other manner. Notwithstanding anything contained or implied in this Agreement to the contrary, the Rights shall not be exercisable after the occurrence of an event described in Section 11(a)(ii) hereof until such time as the Company's rights of redemption hereunder have expired. (b) The Board of Directors of the Company may, at its option, at any time prior to the close of business on the tenth Business Day after the Shares Acquisition Date, redeem all, but not less than all, the then outstanding Rights at a redemption price of $.02 per Right, -37- appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price"); PROVIDED, HOWEVER, that with respect to any redemption of Rights under either of the circumstances set forth in clauses (i) and (ii) below, the Rights may be redeemed only if there are Disinterested Directors then in office and the Board of Directors of the Company, with the concurrence of a majority of the Disinterested Directors then in office, approves such redemption: (i) such approval occurs at any time after any Person becomes an Acquiring Person, or (ii) such approval occurs at any time after a change (resulting from a proxy solicitation or from a vote of stockholders or in any other manner) in a majority of the directors in office at the commencement of such solicitation, or prior to such vote, if any Person who is a participant in such solicitation or vote has stated (or, if the majority of the directors in office at the commencement of such solicitation or prior to such vote has determined in good faith) that such Person (or any of its Affiliates or Associates) intends to take or may consider taking, any action that would result in such Person becoming an Acquiring Person or that would result in the occurrence of an event described in Section 11(a)(ii) hereof. The Company may, at its option, pay the Redemption Price in cash, Common Shares (based on the current per share market price of the Common Shares at the time of redemption determined pursuant to Section 11(d) hereof) or any other form of consideration deemed appropriate by the Board of Directors of the Company; provided that if the Company elects to pay the Redemption Price in Common Shares, the Company shall not be required to issue fractional Common Shares and the number of Common Shares issuable to each holder of Rights shall be rounded down to the next whole share. (c) "Disinterested Director" shall mean (i) any member of the Board of Directors of the Company who is not an officer or employee of the Company or any of its Subsidiaries and who is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person or a nominee or representative of an Acquiring Person or of any such Affiliate or Associate -38- and who was a member of the Board of Directors of the Company prior to the time any Person became an Acquiring Person, or (ii) any successor to a director meeting the requirements of clause (i) of this sentence (a "Prior Director") if such successor is a member of the Board of Directors of the Company who is not an officer or employee of the Company or any of its Subsidiaries and who is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person or a nominee or representative of an Acquiring Person or of any such Affiliate or Associate and who was recommended for election or elected to succeed the Prior Director by a majority of the Disinterested Directors then on the Board of Directors of the Company. (d) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights pursuant to paragraph (b) of this Section 23, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. The Company shall promptly give public notice of any such redemption; PROVIDED, HOWEVER, that the failure to give, or any defect in, any such notice shall not affect the validity of such redemption. Within 10 days after such action of the Board of Directors ordering the redemption of the Rights pursuant to paragraph (b), the Company shall mail a notice of redemption to all the holders of the then outstanding Rights at their addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Shares of the Company. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or in Section 24 hereof, and other than in connection with the purchase of Common Shares prior to the Distribution Date. -39- Section 24. EXCHANGE. (a) The Board of Directors of the Company may, at its option, at any time after any Person becomes an Acquiring Person, exchange all or any part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 11(a)(ii) hereof) for Common Shares at an exchange ratio of one Common Share of the Company per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such exchange ratio being hereinafter referred to as the "Exchange Ratio"); PROVIDED, HOWEVER, that with respect to any such action by the Board of Directors as to such an exchange, the Rights may be so exchanged only if (i) there are Disinterested Directors then in office and (ii) the Board of Directors of the Company approves such exchange with the concurrence of a majority of the Disinterested Directors then in office. (b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to paragraph (a) of this Section 24, and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of Common Shares equal to the number of such Rights held by such holder multiplied by the Exchange Ratio. The Company shall promptly give public notice of any such exchange; PROVIDED, HOWEVER, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. The Company shall promptly mail a notice of any such exchange to all of the holders of such Rights at their addresses as they appear upon the registry books of the Rights Agent. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the Common Shares for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of -40- Section 11(a)(ii) hereof) held by each holder of Rights. (c) In the event that there shall not be sufficient Common Shares issued but not outstanding or authorized but unissued to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company shall take all such action as may be necessary to authorize additional Common Shares for issuance upon exchange of the Rights. (d) The Company shall not be required to issue fractions of Common Shares or to distribute certificates which evidence fractional Common Shares. In lieu of such fractional Common Shares, the Company shall pay to the registered holders of the Right Certificates with regard to which such fractional Common Shares would otherwise be issuable an amount in cash equal to the same fraction of the current market value of a whole Common Share. For the purposes of this paragraph (d), the current market value of a whole Common Share of the Company shall be the closing price of a Common Share of the Company (as determined pursuant to the second and third sentences of Section 11(d) hereof) for the Trading Day immediately prior to the date of exchange pursuant to this Section 24. Section 25. NOTICE OF CERTAIN EVENTS. (a) In case the Company shall propose (i) to pay any dividend payable in stock of any class to the holders of Common Shares or to make any other distribution to the holders of Common Shares (other than a regular quarterly cash dividend), (ii) to offer to the holders of Common Shares rights or warrants to subscribe for or to purchase any additional Common Shares or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of Common Shares (other than a reclassification involving only the subdivision of outstanding Common Shares), (iv) to effect any consolidation or merger into or with, or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person, or (v) to effect the -41- liquidation, dissolution or winding up of the Company, then, in each such case, the Company shall give to each holder of a Right Certificate, in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for purposes of such stock dividend, or distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the Common Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action described by clause (i) or (ii) above at least 10 days prior to the record date for determining holders of the Common Shares for purposes of such action, and in the case of any such other action, at least 10 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Common Shares, whichever shall be the earlier. (b) In case the event set forth in Section 11(a)(ii) hereof shall occur, then the Company shall as soon as practicable thereafter give to each holder of a Right Certificate, in accordance with Section 26 hereof, a notice of the occurrence of such event, which notice shall describe the event and the consequences of the event to holders of Rights under Section 11(a)(ii) hereof. Section 26. NOTICES. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Drypers Corporation 1415 West Loop North Houston, Texas 77055 Attention: Chairman of the Board Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right Certificate to or on -42- the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed (until another address is filed in writing with the Company) as follows: ChaseMellon Shareholder Services, L.L.C. 85 Challenger Road Ridgefield Park, New Jersey 07660 Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Right Certificate shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 27. SUPPLEMENTS AND AMENDMENTS. The Company may (and the Rights Agent shall at the direction of the Company) from time to time supplement or amend this Agreement without the approval of any holders of Right Certificates in order (i) at any time, to cure any ambiguity, (ii) at any time, to correct or supplement any provision contained herein that may be defective or inconsistent with any other provisions herein, (iii) prior to the Distribution Date, to change or supplement any of the provisions hereof in any manner which the Company may deem necessary or desirable (including, but without any limitation, changing the percentage of ownership of Common Shares at which a Person becomes an Acquiring Person, the Distribution Date, the time for redemption of Rights or the time for, or limits on, amendment of this Agreement) or (iv) after the Distribution Date, to change or supplement the provisions hereof in any manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of the Rights Certificates (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person), any such supplement or amendment to be evidenced by a writing signed by the Company and the Rights Agent; PROVIDED, HOWEVER, that with respect to any amendment or supplement at any time after any Person becomes an Acquiring Person, such amendment or supplement shall be made only if (a) there are Disinterested Directors then in office and (b) the Board of Directors of the Company, with the concurrence of a majority of the -43- Disinterested Directors then in office, approves such amendment or supplement. Section 28. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares of the Company) any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Shares of the Company). Section 30. SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; provided, however, that notwithstanding the foregoing, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and the Board of Directors of the Company, with the concurrence of the majority of the Disinterested Directors then in office, determines in its good faith judgment that severing the invalid language from this Agreement would materially and adversely affect the purpose and effect of this Agreement, the right of redemption set forth in Section 23 hereof shall be reinstated and shall not expire until the Close of Business on the 10th day following the date of such determination by the Board of Directors. Section 31. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS. For all purposes of this Agreement, any calculation of the number of Common Shares outstanding at a particular time, including for purposes of determining the particular percentage of such outstanding Common Shares of which any Person is the Beneficial Owner, shall be made in accordance with the last -44- sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Exchange Act. The Board of Directors of the Company (with, where specifically provided for herein, the concurrence of the Disinterested Directors) shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board of Directors (with, where specifically provided for herein, the concurrence of the Disinterested Directors) or to the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement, and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights or to amend the Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) that are done or made by the Board of Directors (with, where specifically provided for herein, the concurrence of the Disinterested Directors) in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights and all other Persons, and (y) not subject the Board of Directors or the Disinterested Directors to any liability to the holders of the Rights. Section 32. GOVERNING LAW. This Agreement and each Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Section 33. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 34. DESCRIPTIVE HEADINGS. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. -45- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and attested, all as of the day and year first above written. Attest: DRYPERS CORPORATION By /s/ TERRY A. TOGNIETTI By /s/ WALTER V. KLEMP Terry A. Tognietti Walter V. Klemp Secretary Chairman of the Board Attest: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. By /s/ JANIS DAUGHERTY By /s/ DAVID M. CARY Name: Janis Daugherty Name: David M. Cary Title: Relationship Manager Title: Relationship Manager -46- EXHIBIT A FORM OF RIGHT CERTIFICATE Certificate No. R ____________Rights NOT EXERCISABLE AFTER JANUARY 20, 2005, OR EARLIER IF REDEMPTION OR EXCHANGE OCCURS. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.02 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. Right Certificate Drypers Corporation This certifies that _____, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of January 20, 1995 (the "Rights Agreement"), between Drypers Corporation, a Delaware corporation (the "Company"), and ChaseMellon Shareholder Services, L.L.C. (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to the close of business (as defined in the Rights Agreement) on January 20, 2005, at the principal offices of the Rights Agent, or at the offices of its successor as Rights Agent, one share of Common Stock, $0.001 par value (the "Common Shares"), of the Company, at a purchase price of $75.00 per Common Share (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed. The number of Rights evidenced by this Right Certificate (and the number of Common Shares that may be purchased upon exercise hereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of February 3, 1995, based on the Common Shares as constituted at such date. As provided in the Rights Agreement, the Purchase Price and the number of Common Shares which may be purchased upon the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events. This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Right Certificates. Copies of the Rights Agreement are on file at the principal executive offices of the Company and the above-mentioned offices of the Rights Agent. This Right Certificate, with or without other Right Certificates, upon surrender at the principal office of the Rights Agent, may be exchanged for another Right Certificate or Right Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of interests in Common Shares as the Rights evidenced by the Right Certificate or Right Certificates surrendered shall have entitled such holder to purchase. If this A-1 Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Right Certificates for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate (i) may be redeemed by the Company at a redemption price of $.02 per Right payable in cash, Common Shares or other consideration or (ii) may be exchanged in whole or in part for Common Shares. No fractional interests in Common Shares will be issued upon the exercise of any Right or Rights evidenced hereby, but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Right Certificate shall be entitled to vote or receive dividends or be deemed for any purpose the holder of the Common Shares or of any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement. This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. Dated as of _____________, 199___. Attest: DRYPERS CORPORATION By _______________________________ Countersigned: CHASEMELLON SHAREHOLDER SERVICES, L.L.C. By _______________________________ Authorized Signature A-2 FORM OF REVERSE SIDE OF RIGHT CERTIFICATE FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Right Certificate.) FOR VALUE RECEIVED _________ hereby sells, assigns and transfers unto _________ (PLEASE PRINT NAME AND ADDRESS OF TRANSFEREE) _________ this Right Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _____________________ Attorney, to transfer the within Right Certificate on the books of the within-named Company, with full power of substitution. Dated: ________________, 199___. ___________________________ Signature Signature Guarantee: Signatures must be guaranteed by an "eligible guarantor institution" (such as a bank, stockbroker, credit union or savings association) pursuant to Rule 17Ad-15 of the Rules and Regulations of the Securities Exchange Act of 1934. ================================================================================ The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and that after due inquiry and to the best of the knowledge of the undersigned, it did not acquire the Rights evidenced by this Rights Certificate for any Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of such Person. ___________________________ Signature ================================================================================ A-3 FORM OF REVERSE SIDE OF RIGHT CERTIFICATE -- CONTINUED FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise the Right Certificate.) To: Drypers Corporation The undersigned hereby irrevocably elects to exercise __________ Rights represented by this Right Certificate to purchase the interests in Common Shares issuable upon the exercise of such Rights and requests that certificates for such Common Shares be issued in the name of: Please insert social security or other identifying number - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- If such number of Rights shall not be all the Rights evidenced by this Right Certificate, a new Right Certificate for the balance remaining of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- Dated: ________________, 199___. __________________________ Signature Signature Guarantee: Signatures must be guaranteed by an "eligible guarantor institution" (such as a bank, stockbroker, credit union or savings association) pursuant to Rule 17Ad-15 of the Rules and Regulations of the Securities Exchange Act of 1934. A-4 Form of Reverse Side of Right Certificate -- continued - -------------------------------------------------------------------------------- The undersigned hereby certifies that the Rights evidenced by this Right Certificate are not beneficially owned by an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and that after due inquiry and to the best of the knowledge of the undersigned, it did not acquire the Rights evidenced by this Rights Certificate for any Person who is, was or subsequently became an Acquiring Person or an Affiliate or Associate of such Person. __________________________ Signature - -------------------------------------------------------------------------------- NOTICE The signature in the foregoing Forms of Assignment and Election must conform to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. In the event the certification set forth above in the Form of Assignment or the Form of Election to Purchase, as the case may be, is not completed, the Company and the Rights Agent will deem the beneficial owner of the Rights evidenced by this Right Certificate to be an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and such Assignment or Election to Purchase will not be honored. A-5 EXHIBIT B SUMMARY OF RIGHTS TO PURCHASE COMMON SHARES On January 20, 1995, the Board of Directors of Drypers Corporation (the "Company") declared a dividend of one Common Share purchase right (a "Right") for each outstanding share of common stock, par value $0.001 per share (the "Common Shares"), of the Company and authorized the issuance of one Right for each Common Share which shall become outstanding between the Record Date and the earlier of the Distribution Date (as hereinafter defined) or the final expiration date of the Rights. The dividend is payable on February 3, 1995 (the "Record Date"), to the stockholders of record on that date. Each Right entitles the registered holder to purchase from the Company one Common Share of the Company at a price of $75.00 per share (the "Purchase Price"), subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (the "Rights Agent"). Until the earlier to occur of (i) ten business days following a public announcement that a person or group of affiliated or associated persons, other than the Company, any wholly-owned Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, any Person holding Common Shares for or pursuant to the terms of any such plan to the extent, and only to the extent, of the Common Shares so held, or the two affiliated stockholders of the Company (each defined in the Rights Agreement as a "Grandfathered Stockholder") who together on the Record Date own approximately 20% of the Common Shares (an "Acquiring Person"), has acquired beneficial ownership of 15% or more of the outstanding Common Shares or (ii) ten business days following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of such outstanding Common Shares (the earlier of such dates being called the "Distribution Date"), the Rights will be evidenced, with respect to any Common Share certificate outstanding as of the Record Date, by such Common Share certificate together with a copy of this Summary of Rights attached thereto. The Rights Agreement provides that, until the Distribution Date, the Rights will be transferred with and only with the Common Shares. Until the Distribution Date (or earlier redemption, exchange or expiration of the Rights), new Common Share certificates issued after the Record Date, upon transfer or new issuance of Common Shares will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption, exchange or expiration of the Rights), the surrender for transfer of any certificates for Common Shares outstanding as of the Record Date, even without such notation or copy of this Summary of Rights being attached thereto, will also constitute the transfer of the Rights associated with the Common Shares represented by such certificate. As soon as practicable following the Distribution Date, separate certificates evidencing the Rights ("Right Certificates") will be mailed to holders of record of the Common Shares as of the close of business on the Distribution Date and such separate Right Certificates alone will evidence the Rights. The Rights are not exercisable until the Distribution Date. The Rights will expire on January 20, 2005 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case, as described below. B-1 The Purchase Price payable, and the number of Common Shares or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Common Shares, (ii) upon the grant to holders of the Common Shares of certain rights, options or warrants to subscribe for or purchase Common Shares at a price, or securities convertible into Common Shares with a conversion price, less than the then current market price of the Common Shares or (iii) upon the distribution to holders of the Common Shares of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings or dividends payable in Common Shares) or of subscription rights or warrants (other than those referred to above). The number of outstanding Rights and the number of Common Shares issuable upon exercise of each Right are also subject to adjustment in the event of a stock split of the Common Shares or a stock dividend on the Common Shares payable in Common Shares or subdivisions, consolidations or combinations of the Common Shares occurring, in any such case, prior to the Distribution Date. In the event, following the first date of public announcement by the Company or an Acquiring Person that an Acquiring Person has become such (a "Shares Acquisition Date"), that the Company is, in effect, acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power is sold, proper provision will be made so that each holder of a Right, other than Rights that were or are beneficially owned by an Acquiring Person, will thereafter generally have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that any person becomes an Acquiring Person, proper provision shall be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be null and void for all purposes of the Rights Agreement and the holder thereof shall thereafter have no rights with respect to such Rights, whether under the Rights Agreement or otherwise), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the exercise price of the Right. Under some circumstances, in lieu of Common Shares, other equity and debt securities, property, cash or combinations thereof, including combinations with Common Shares, may be issued upon payment of the exercise price if of equal value to the number of Common Shares for which the Right is exercisable. Under certain circumstances, after a Person has become an Acquiring Person, the Board of Directors of the Company may exchange the Rights (other than Rights that were or are beneficially owned by an Acquiring Person), in whole or in part, at an exchange ratio of one Common Share per Right (subject to adjustment). With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments require an adjustment of at least 1% in such Purchase Price. No fractional Common Shares will be issued and in lieu thereof, an adjustment in cash will be made based on the market price of the Common Shares on the last trading day prior to the date of exercise. At any time prior to the close of business on the tenth business day after a Shares Acquisition Date, the Board of Directors of the Company may redeem the Rights in whole, but not B-2 in part, at a price of $.02 per right (the "Redemption Price"), which may be paid in cash or with Common Shares or other consideration deemed appropriate by the Board of Directors of the Company. Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. The terms of the Rights may be amended by the Board of Directors of the Company without the consent of the holders of the Rights at any time to cure any ambiguity or to correct or supplement any defective or inconsistent provisions and may, prior to the Distribution Date, be amended to change or supplement any other provision in any manner which the Company may deem necessary or desirable. After the Distribution Date the terms of the Rights may be amended (other than to cure ambiguities or correct or supplement defective or inconsistent provisions) only so long as such amendment shall not adversely affect the interests of the holders of the Rights (which may not be an Acquiring Person in whose hands Rights are void). Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. A copy of the Rights Agreement has been filed with the Securities and Exchange Commission as an Exhibit to a Registration Statement on Form 8-A dated January 23, 1995. A copy of the Rights Agreement is available free of charge from the Company. This summary description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which is hereby incorporated herein by reference. B-3 EX-4.21 3 EXHIBIT 4.21 RIGHTS AGREEMENT AMENDMENT THIS RIGHTS AGREEMENT AMENDMENT, dated as of February 26, 1996 (this "Amendment"), between Drypers Corporation, a Delaware corporation (the "Company"), and ChaseMellon Shareholder Services, L.L.C. (the "Rights Agent"), amends the Rights Agreement dated as of January 20, 1995 (the "Agreement"), between the Company and the Rights Agent. WHEREAS, the Company and the Rights Agent have heretofore entered into the Agreement; WHEREAS, on January 20, 1995, the Board of Directors of the Company authorized and declared a dividend distribution of one Right (as defined in the Agreement) for each share of Common Stock (as defined in the Agreement) of the Company outstanding on February 3, 1995; WHEREAS, pursuant to Section 27 of the Agreement, prior to the Distribution Date (as defined in the Agreement), the Company may and the Rights Agent shall, if the Company so directs, supplement or amend any provision of the Agreement without the approval of the holders of certificates representing shares of Common Stock; WHEREAS, the Distribution Date has not yet occurred as of the date hereof; and WHEREAS, the Board of Directors of the Company, at a meeting held February 26, 1996, has determined that certain terms of the Agreement should be amended and that it is in the best interests of the Company to amend such terms; NOW, THEREFORE, the Company and the Rights Agent hereby agree as follows: SECTION 1. Section 1 of the Agreement is hereby amended to add a new Section 1(e) to read as follows: "(e) `Capital Shares' when used with reference to the Company (specifically or in context) shall mean the Common Shares of the Company and the Preferred Shares." SECTION 2. Section 1 of the Agreement is hereby amended to add a new Section 1(n) to read as follows: "(f) `Preferred Shares' when used with reference to the Company (specifically or in context) shall mean the shares of Senior Convertible Cumulative 7.5% Preferred Stock, par value $0.01 per share, of the Company." SECTION 3. Section 1(j) of the Agreement is renumbered Section 1(k) and hereby amended in its entirety to read as follows: "(k) `Grandfathered Stockholder' shall mean at any time (i) Equus II Incorporated and Equus Capital Partners, L.P. (collectively, together with their respective Affiliates and Associates, "Equus") which together are at the time of this Agreement, as amended, the Beneficial Owners of 3,829,226 Common Shares and (ii) Heartland Advisors ("Heartland") which is at the time of this Agreement, as amended, the Beneficial Owner of 3,000,000 Common Shares; provided, however, that if either Equus II Incorporated or Equus Capital Partners, L.P. with respect to Equus or Heartland makes an acquisition of Capital Shares that would cause it to be the Beneficial Owner of 25% or more of the Common Shares outstanding then it shall not be a Grandfathered Stockholder." SECTION 4. Section 3(c) of the Agreement is hereby amended to change the legend contained therein to read in its entirety as follows: "This certificate also evidences and entitles the holder hereof to certain Rights as set forth in the Rights Agreement between Drypers Corporation and ChaseMellon Shareholder Services, L.L.C., dated as of January 20, 1995, as amended by the Rights Agreement Amendment dated as of February 26, 1996 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal offices of Drypers Corporation. Under certain circumstances, as set forth in the Rights Agreement, the Rights described therein will be evidenced by separate certificates and will no longer be evidenced by this certificate. Drypers Corporation will mail to the holder of this certificate a copy of the Rights Agreement, as in effect on the date of mailing, without charge promptly after receipt of a written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights issued to, or held by, any Person who is, was or becomes an Acquiring Person or any Affiliate or Associate thereof (as such terms are defined in the Rights Agreement), whether currently held by or on behalf of such Person or by any subsequent holder, may become null and void. The Rights shall not be exercisable by a holder in any jurisdiction where the requisite qualification to the issuance to such holder of the Rights, or the exercise by such holder of the Rights in such jurisdiction, shall not have been obtained or obtainable." SECTION 5. Except as expressly provided in Sections 1 through 3 hereof, all of the terms, conditions and obligations contained in the Agreement shall apply to this Rights Agreement Amendment. -2- IN WITNESS WHEREOF, the parties have executed this Rights Amendment Agreement as of the date first written above. DRYPERS CORPORATION By: /s/ WALTER V. KLEMP Name: Walter V. Klemp Title: Chairman and co-CEO CHASEMELLON SHAREHOLDER SERVICES, L.L.C. By: /s/ DAVID M. CARY Name: David M. Cary Title: Relationship Manager -3- EX-10.24 4 EXHIBIT 10.24 AGREEMENT AMENDING AND RESTATING EMPLOYMENT AGREEMENT BETWEEN DRYPERS CORPORATION AND WALTER V. KLEMP FEBRUARY 25, 1997 TABLE OF CONTENTS Page ---- 1. EMPLOYMENT......................................................... 1 2. SCOPE OF EMPLOYMENT................................................ 1 3. VACATION........................................................... 2 4. COMPENSATION....................................................... 2 5. TERM............................................................... 2 6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER........................... 6 7. EXPENSES........................................................... 7 8. EMPLOYEE BENEFITS.................................................. 7 9. NON-COMPETITION.................................................... 8 10. DISCLOSURE OF CONFIDENTIAL INFORMATION............................. 10 11. TRADE SECRETS...................................................... 11 12. LEGAL FEES AND EXPENSES............................................ 11 13. ASSIGNMENT......................................................... 11 14. SUCCESSORS......................................................... 11 15. ENTIRE AGREEMENT................................................... 11 16. GOVERNING LAW...................................................... 12 17. WAIVER............................................................. 12 18. ENFORCEABILITY..................................................... 12 19. NOTICES............................................................ 12 20. ARBITRATION........................................................ 12 AGREEMENT AMENDING AND RESTATING EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") made as of the 25th day of February, 1997, between Drypers Corporation, a Delaware corporation (the "Employer"), and Walter V. Klemp (the "Employee"), W I T N E S S E T H: WHEREAS, the Employer desires to obtain the services of the Employee, and the Employee desires to be employed by the Employer upon the terms and conditions hereinafter set forth; WHEREAS, the Employer and the Employee entered into an Employment Agreement made as of August 30, 1992 (the "Employment Agreement"), by which Employer employed the Employee, and the Employee agreed to serve the Employer, in the capacity, for the term, and subject to the conditions specified therein, and WHEREAS, Employer and the Employee wish to amend and restate the Employment Agreement and wish to enter into an agreement on a long-term basis for the full-time services of Employee; NOW, THEREFORE, in consideration of the premises, the agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree that the Employment Agreement is hereby amended and restated effective as of the date hereof as follows: 1. EMPLOYMENT. Subject to the terms and conditions hereinafter set forth, the Employer hereby agrees to employ the Employee, and the Employee hereby agrees to serve the Employer, in the capacity and for the Term of Employment specified herein. 2. SCOPE OF EMPLOYMENT. During the Term of Employment hereunder, the Employee will serve as Co-Chief Executive Officer of the Employer in accordance with the provisions of Article V, Section 5.7 of the By-Laws of the Employer. In that connection, the Employee will: (a) devote his full time, attention, and energies to the business of the Employer and will diligently and to the best of his ability perform all duties incident to his employment hereunder; (b) use his best efforts to promote the interests and goodwill of the Employer; and (c) perform such other duties commensurate with his office as the Board of Directors of the Employer may from time-to-time assign to him. The foregoing shall not be construed as preventing the Employee from making investments in other businesses or enterprises provided such investments do not require the provision of substantial services by the Employee to the operations or the affairs of such businesses or enterprises such that the provision thereof would interfere in any respect with the performance of the Employee's duties hereunder. 3. VACATION. During the Term of Employment the Employee shall be entitled to sick leave, holidays, and an annual four-week vacation, all in accordance with the regular policy of the Employer, during which time his compensation shall be paid in full. Each such vacation shall be taken by the Employee at such times as may be mutually agreed upon by the Employee and Employer. 4. COMPENSATION. As compensation for his services hereunder and in consideration of his agreement not to compete as set forth in Section 9, the Employer shall: (a) during the Term of Employment pay the Employee, subject to the terms and conditions of this Agreement, a base salary at the rate of not less than $235,000.00 per year, payable in accordance with the normal payroll practices of the Employer but in no less than equal bi-weekly installments; and (b) during the Term of Employment as additional compensation for services hereunder during the term of this Agreement, the Employee shall be entitled to an annual bonus in amount as shall be determined by the Compensation Committee of Board of Directors of the Employer for each of the Company's fiscal years ending after the date hereof. 5. TERM. (a) The "Term of Employment", as used herein, shall mean a period commencing on the date hereof and ending on the third anniversary (the "Ending Date") of the later to occur of (A) the receipt by the Employee of a written notice of termination by the Employer given to the Employee or (B) the occurrence of an event specified in this Section 5(a); PROVIDED HOWEVER that the occurrence of any of the following events set forth in this Section 5(a) prior to the Ending Date shall result in the immediate termination of the Term of Employment, but shall not result in the termination of this Agreement: (i) the commission by the Employee of an act constituting a dishonest or other act of material misconduct, or a fraudulent act or a felony under the laws of any state or of the United States to which the Employer or Employee is subject, and such act results (or is 2 intended to result directly or indirectly) in the Employee's substantial gain or personal enrichment to the detriment of the Employer; or (ii) the death of the Employee; or (iii) the inability of the Employee to perform his duties hereunder, whether by reason of injury (physical or mental), illness or otherwise, incapacitating him for a continuous period exceeding three months, excluding any leaves of absence approved by the Employer; or (iv) the Employee resigns at any time before a Change in Control (as defined in Section 6(d)); or (v) the Employee resigns at any time after a Change in Control (other than as provided in Section 5(a)(vii) below) prior to the occurrence of a Good Cause event ("Good Cause" being defined below); or (vi) the Employee resigns for any reason at any time subsequent to the occurrence of a Good Cause event after a Change in Control; or (vii) the Employee resigns for any reason (with or without the occurrence of a Good Cause event) at any time during the 30-day period commencing upon the first anniversary of a Change in Control. (b) The term "Good Cause" shall mean the occurrence of any of the following events: (i) the assignment by the Employer to the Employee of duties that are materially inconsistent with the Employee's office with 3 Employer at the time of such assignment, or the removal by the Employer from the Employee of a material portion of those duties usually appertaining to the Employee's office with the Employer at the time of such removal; or (ii) a material change by the Employer, without the Employee's prior written consent, in the Employee's responsibilities to the Employer, as such responsibilities are ordinarily and customarily required from time to time of a chief executive officer of a corporation engaged in the Employer's business; or (iii) any removal of the Employee from, or any failure to reelect or to reappoint the Employee to, the office stated in Section 2; or (iv) the Employer's direction that the Employee discontinue service (or not seek reelection or reappointment) as a director, officer or member of any corporation or association of which the Employee is a director, officer, or member at the date of this Agreement; or (v) a reduction by the Employer in the amount of the Employee's base salary as determined under this Agreement (or as subsequently increased), or the failure of the Employer to pay such base salary to the Employee at the time and in the manner specified in Section 4; or (vi) other than with respect to the annual performance bonus specified in Section 4(b) or, as made with the Employee's prior written consent, the discontinuance (without comparable replacement) or material reduction by the Employer of the Employee's participation in any bonus or other employee benefit 4 arrangement (including, without limitation, any profit-sharing, thrift, life insurance, medical, dental, hospitalization, stock option or retirement plan or arrangement) in which the Employee is a participant under the terms of this Agreement, as in effect on the date hereof or as may be improved from time to time hereafter; or (vii) the moving by the Employer of the Employee's principal office space, related facilities, or support personnel, from the Employer's principal operating offices, or the Employer's requiring the Employee to perform a majority of his duties outside the Employer's principal operating offices for a period of more than 30 consecutive days; or (viii) the relocation, without the Employee's prior written consent, of the Employer's principal operating offices to a location outside the county in which such offices are located at the time of the signing of this Agreement; or (ix) in the event the Employer requires the Employee to reside at a location more than 25 miles from the Employer's principal operating offices, except for occasional travel in connection with the Employer's business to an extent and in a manner which is substantially consistent with the Employee's current business travel obligations; or (x) in the event the Employee consents to a relocation of the Employer's principal operating offices, the failure of the Employer to (A) pay or reimburse the Employee on an after-tax basis for all reasonable moving expenses incurred by the Employee in connection with such relocation or (B) indemnify the Employee on an after-tax basis against any loss realized by the Employee on the sale of his principal residence in connection with such relocation; 5 or (xi) the failure of the Employer to provide the Employee with the benefits specified under Section 8; or (xii) the failure of the Employer to continue to provide the Employee with office space, related facilities and support personnel (including, without limitation, administrative and secretarial assistance) that are commensurate with the Employee's responsibilities to and position with the Employer; or (xiii) the failure by the Employer to promptly reimburse the Employee for the reasonable business expenses incurred by the Employee in the performance of his duties for the Employer, as set forth in Section 7. 6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER. (a) Subject to the provisions of paragraph (b) of this Section 6, in the event of termination of the Term of Employment for any reason specified in subsections (i), (ii), (iii), (iv) or (v) of Section 5(a) above, the Employer shall no longer be obligated to make the payments specified under Section 4 or to provide the benefits under Section 8; PROVIDED, HOWEVER, any payments payable under Section 4 which shall have been earned but not yet paid shall be paid by the Employer to the Employee, and the Employee shall pay any amount or amounts then owed by the Employee to the Employer. (b) In the event of the termination of the Term of Employment for any reason specified in subsection (vi) of Section 5(a) above, the Employer shall, until the third anniversary of the date of such termination continue to be obligated to (i) make the payments specified under Section 4, (ii) provide the benefits specified under Section 8(b), and (iii) maintain the Employee as a participant in, or provide benefits comparable to those of, the health insurance benefit plan specified under Section 8(a). In the event of the termination of the Term of Employment for any reason specified in subsection (vii) of Section 5(a) above, the Employer shall, until the second anniversary of the date of such termination continue to be obligated to (i) make the 6 payments specified under Section 4, (ii) provide the benefits specified under Section 8(b), and (iii) maintain the Employee as a participant in, or provide benefits comparable to those of, the health insurance benefit plan specified under Section 8(a). In the event of termination as specified in this paragraph (b), the Employee may elect, upon 30 days prior written notice of such election delivered to the Employer to have the remaining amounts payable to him pursuant to this Section 6(b) paid in a lump sum amount, which amount shall be computed by discounting to present value such remaining amounts payable to the Employee at a rate of 8% per annum for each payment otherwise owed to the Employee through the remaining months in such Term of Employment. (c) Under no circumstances shall the Employee be required to mitigate the amount of payment specified in Section 4 which is payable during the Term of Employment specified in paragraph (b) of this Section 6. (d) A "Change in Control" shall be deemed to have occurred at any time after the date of this Agreement that (i) any person (other than those persons who own more than 10% of the combined voting power of the Employer's outstanding voting securities on the date hereof) becomes the beneficial owner, directly or indirectly, of 30% or more of the combined voting power of the Employer's then outstanding voting securities, or (ii) the individuals who at the beginning of any period of two consecutive years constitute the Employer's Board of Directors cease for any reason to constitute a majority of such Board of Directors at any time during such two-year period. 7. EXPENSES. The Employer agrees that during the Term of Employment it will reimburse the Employee for out-of-pocket expenses reasonably incurred by him in connection with the performance of his service hereunder upon the presentation by the Employee of an itemized [monthly] accounting of such expenditures, including receipts where required for federal income tax regulations. 8. EMPLOYEE BENEFITS. During the Term of Employment: (a) Employee shall, upon satisfaction of any eligibility requirements with respect thereto, be entitled to participate in all employee benefit plans of Employer, including without limitation those health, dental, accidental death and dismemberment, and long term disability plans of Employer now or hereafter in effect that are made available to executive officers of the Employer; and (b) Employer shall maintain for Employee the benefits summarized on EXHIBIT A attached hereto. 7 9. NON-COMPETITION. (a) Employee acknowledges that he shall receive special training and knowledge from Employer. Employee acknowledges that included in the special knowledge received is the confidential information identified in Paragraph 10 below. Employee acknowledges that this confidential information is valuable to Employer and, therefore, its protection and maintenance constitutes a legitimate interest to be protected by Employer by this covenant not to compete. Therefore, Employee agrees that for the period (the "Noncompetition Period") (i) during the Term of Employment and (ii) in the event of a termination of the Term of Employment upon the occurrence of an event set forth in Section 5(a) hereof, commencing upon the occurrence of such event set forth in Section 5(a) and ending upon the first anniversary thereof, in each case unless otherwise extended pursuant to the terms hereof, Employee will not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any business that is engaged in the manufacture or marketing of disposable baby diapers, disposable training pants or pre-moistened wipes within the United States of America or within any other geographic area of the world where the Employer engages or proposes at the time of the termination of the Term of Employment to engage in business. Employee represents to Employer that the enforcement of the restriction contained in this Section 9 would not be unduly burdensome to Employee and that in order to induce the Employer to provide for the Term of Employment as set forth in Section 5 hereof to replace Section 4.1 of the Employment Agreement, Employee further represents and acknowledges that Employee has entered into this agreement not to compete and is willing and able to compete in other geographical areas not prohibited by this Section 9. (b) Employee agrees that a breach or violation of this covenant not to compete by such Employee shall entitle the Employer, as a matter of right, to an injunction issued by any court of competent jurisdiction, restraining any further or continued breach or violation of this covenant. Such right to an injunction shall be cumulative and in addition to, and not in lieu of, any other remedies to which the Employer may show itself justly entitled. Further, during any period in which Employee is in breach of this covenant not to compete, the time period of this covenant shall be extended for an amount of time that Employee is in breach hereof. 8 (c) In addition to the restrictions set forth in paragraph (a) of this Section 9, Employee shall not for the Noncompetition Period, either directly or indirectly, (i) make known to any person, firm or corporation that is engaged in the manufacture or marketing of disposable baby diapers, disposable training pants or pre-moistened wipes, the names and addresses of any of the customers of the Employer or contacts of the Employer or any other information pertaining to such persons or (ii) call on, solicit, or take away, or attempt to call on, solicit or take away any of the customers of the Employer on whom Employee called or with whom Employee became acquainted during Employee's association with the Employer, whether for Employee or for any other person, firm or corporation. (d) The representation and covenants contained in this Section 9 on the part of Employee will be construed as ancillary to and independent of any other provision of this Agreement, and the existence of any claim or cause of action of Employee against Employer or any officer, director, or shareholder of Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer of the covenants of the Employee contained in this Section 9. In addition, the provisions of this Section 9 shall continue to be binding upon Employee in accordance with its terms, notwithstanding the termination of Employee's employment for any reason. (e) If Employee violates any covenant contained in this Section 9 and Employer brings legal action for injunctive or other relief, the Employer shall not, as a result of the time involved in obtaining the relief, be deprived of the benefit of the full period of any such covenant. Accordingly, the covenants of Employee contained in this Section 9 shall be deemed to have durations as specified above, which periods shall commence upon the later of (i) the Ending Date and (ii) the date of entry by a court of competent jurisdiction of a final judgment enforcing the covenants of Employee in this Section 9. (f) The parties to this Agreement agree that the limitations contained in this Section 9 with respect to geographic area, duration, and scope of activity are reasonable. However, if any court shall determine that the geographic area, duration, or scope of activity of any restriction contained in this Section 9 is unenforceable, it is the intention of the parties that such restrictive covenant set forth herein shall not thereby be terminated but shall be deemed amended to the extent required to render it valid and enforceable. 9 10. DISCLOSURE OF CONFIDENTIAL INFORMATION. During the Term of Employment, the Employee will disclose to Employer all ideas and business plans developed by him during such period which relate directly to the business of Employer. The Employee recognizes and acknowledges that he may have access to certain additional confidential information of Employer or of certain corporations affiliated with Employer, and that all such information constitutes valuable, special and unique property of Employer and its affiliates. The Employee agrees that, during the Term of Employment and for a period of five years after the termination of the Term of Employment, he will not, without the prior written consent of Employer, disclose or authorize or permit anyone under his direction to disclose to anyone not properly entitled thereto any of such confidential information. For purposes of the immediately preceding sentence, persons properly entitled to such information shall be (i) the Board of Directors of Employer and such officers, employees and agents of Employer or any affiliate thereof to whom such information is furnished in the normal course of business under established policies approved by Employer and (ii) such outside parties as are legally entitled to or are customarily furnished such information, including banking, lending, collection, accounting, and data processing institutions or agencies who or which are provided such information in the normal course of business of Employer. The Employee further agrees that upon termination of the Term of Employment he will not take with him or retain, without the prior written authorization of Employer, any papers, procedural or technical manuals, customer lists, customer account analyses (including, without limitation, accounts receivable agings, customer payment histories and customer account activity reports), price books, files or other documents or copies thereof belonging to Employer or to any affiliate of Employer, or any materials, supplies, equipment or furnishings belonging to Employer or to any affiliate of Employer, or any other confidential information of any kind belonging to Employer or any affiliate of Employer. In the event of a breach or threatened breach by the Employee of the provisions of this Section 10, Employer and the Employee agree that the remedy at law available to Employer and its affiliates would be inadequate and that Employer and its affiliates shall be entitled to an injunction, without the necessity of posting bond therefor, restraining the Employee from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting Employer and its affiliates from pursuing any other remedies, in addition to the injunctive relief available under this Section 10, for such breach or threatened breach, including the recovery of damages from the Employee. 11. TRADE SECRETS. All patents, formulae, inventions, processes, copyrights, proprietary information, trademarks or trade names, or future improvements to patents, formulae, inventions, processes, copyrights, proprietary information, trademarks or trade names, developed or completed by the Employee during the Term of Employment (collectively, the "Items") shall be promptly disclosed to Employer, and the Employee shall execute such instruments of assignment of the Items to the Employer as Employer shall request. The Employee acknowledges that a remedy at law for any breach by him of the provisions of this Section 11 would be inadequate, and the Employee hereby agrees that Employer shall be 10 entitled to injunctive relief in case of any such breach. 12. LEGAL FEES AND EXPENSES. In the event that either of the parties to this Agreement contests the validity or enforceability of any of the provisions of Sections 9, 10 or 11 hereof, then such contesting party hereby agrees to pay in a timely and prompt manner any and all legal fees and expenses incurred by the other party from time to time as a result of such contesting party's contesting of the validity or enforceability of any provision of Sections 9, 10, or 11 hereof this Agreement; PROVIDED, HOWEVER, nothing contained in this Section 12 shall obligate the Employer to pay any legal fees or expenses incurred by the Employee in connection with any litigation by the Employer against the Employee to enforce the terms of this Agreement against the Employee. 13. ASSIGNMENT. This Agreement is a personal employment contract and the rights and interests of the Employee hereunder may not be sold, transferred, assigned, pledged, or hypothecated, directly or indirectly, or by operation of law or otherwise. 14. SUCCESSORS. This Agreement shall inure to the benefit of and be binding upon the Employer and its successors and assigns and upon the Employee and his legal representatives. 15. ENTIRE AGREEMENT. This Agreement, which contains the entire contractual understanding between the parties, may not be changed orally but only by a written instrument signed by the Employee and the Chairman of the Board of Directors of the Employer. 16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, and Employee agrees to subject himself to the jurisdiction of the Southern District of Texas. 17. WAIVER. The waiver of any breach of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition. 18. ENFORCEABILITY. In the event any provision of this Agreement is found to be unenforceable or invalid, such provision shall be severable from this Agreement and shall not affect the enforceability or validity of any other provision contained in this Agreement. 19. NOTICES. Any notices or other communications required or permitted hereunder shall be sufficiently given if sent by registered mail, postage prepaid, and (a) if to the Employee, addressed to him at 2105 S.E. 131st Avenue, Vancouver, Washington 98684, and (b) if to the Employer, addressed to it at 1415 West Loop North, Houston, Texas 77055 (Attention: Chairman of 11 the Board of Directors), or such other address as the party to whom or to which such notice or other communication is to be given shall have specified in writing to the other party, and any such notice or communication shall be deemed to have been given as of the date so mailed. 20. ARBITRATION. Employer and Employee agree to submit to final and binding arbitration any and all disputes, claims (whether in tort, contract, statutory, or otherwise) and/or disagreements concerning the interpretation or application of this Agreement and/or Employee's employment by Employer and/or the termination of this Agreement and/or Employee's employment by Employer; PROVIDED, HOWEVER, notwithstanding the foregoing, in no event shall any dispute, claim or disagreement arising under Section 9, 10 or 11 of this Agreement be submitted to arbitration pursuant to this Section 18 or otherwise. Any such dispute, claim and/or disagreement subject to arbitration pursuant to the terms of this Section 18 shall be resolved by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). Arbitration under this provision must be initiated within 30 days of the action, inaction, or occurrence about which the party initiating the arbitration is complaining. Within ten days of the initiation of an arbitration hereunder, each party will designate an arbitrator pursuant to Rule 14 of the AAA Rules. The appointed arbitrators will appoint a neutral arbitrator from the panel in the manner prescribed in Rule 13 of the AAA Rules. Employee and Employer agree that the decision of the arbitrators selected hereunder will be final and binding on both parties. This arbitration provision is expressly made pursuant to and shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1 - 14. The parties hereto agree that pursuant to Section 9 of the Act that a judgment of the United States District Court for the Southern District of Texas, shall be entered upon the award made pursuant to the arbitration. IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed by its duly authorized officer, and the Employee has executed this Agreement as of the date first above written. DRYPERS CORPORATION By /s/ TERRY A. TOGNIETTI Terry A. Tognietti Co-Chief Executive Officer EMPLOYEE /s/ WALTER V. KLEMP Walter V. Klemp 12 EXHIBIT A HEALTH AND WELFARE BENEFITS SUMMARY o Group comprehensive medical, dental, and term life insurance. Eighty percent of the premiums for Employee and his dependents are paid by Employer. o Long-term disability insurance. o Term life insurance in the amount of $250,000 o Contribution to a deferred compensation investment vehicle in the amount of $10,000 per year. OTHER EMPLOYEE PERQUISITES o Use of a car not more than (30 months old, with monthly lease payment not to exceed $750), such car to be equipped with a cellular phone, as well as all costs and expenses incurred in operating such car, including gas, service and maintenance charges, parts, fees for inspection and license plates, parking and tolls, and cellular phone equipment, installation and use charges. o Health and country club monthly family membership dues and reasonable expenses in accordance with the Employer's policies. o Income tax preparation costs. W. KLEMP EX-10.25 5 EXHIBIT 10.25 AGREEMENT AMENDING AND RESTATING EMPLOYMENT AGREEMENT BETWEEN DRYPERS CORPORATION AND RAYMOND M. CHAMBERS FEBRUARY 25, 1997 TABLE OF CONTENTS Page ---- 1. EMPLOYMENT.......................................................... 1 2. SCOPE OF EMPLOYMENT................................................. 1 3. VACATION............................................................ 2 4. COMPENSATION........................................................ 2 5. TERM................................................................ 2 6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER............................ 6 7. EXPENSES............................................................ 7 8. EMPLOYEE BENEFITS................................................... 7 9. NON-COMPETITION..................................................... 8 10. DISCLOSURE OF CONFIDENTIAL INFORMATION.............................. 10 11. TRADE SECRETS....................................................... 11 12. LEGAL FEES AND EXPENSES............................................. 11 13. ASSIGNMENT.......................................................... 11 14. SUCCESSORS.......................................................... 11 15. ENTIRE AGREEMENT.................................................... 11 16. GOVERNING LAW....................................................... 12 17. WAIVER.............................................................. 12 18. ENFORCEABILITY...................................................... 12 19. NOTICES............................................................. 12 20. ARBITRATION......................................................... 12 AGREEMENT AMENDING AND RESTATING EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") made as of the 25th day of February, 1997, between Drypers Corporation, a Delaware corporation (the "Employer"), and Raymond M. Chambers (the "Employee"), W I T N E S S E T H: WHEREAS, the Employer desires to obtain the services of the Employee, and the Employee desires to be employed by the Employer upon the terms and conditions hereinafter set forth; WHEREAS, the Employer and the Employee entered into an Employment Agreement made as of August 30, 1992 (the "Employment Agreement"), by which Employer employed the Employee, and the Employee agreed to serve the Employer, in the capacity, for the term, and subject to the conditions specified therein, and WHEREAS, Employer and the Employee wish to amend and restate the Employment Agreement and wish to enter into an agreement on a long-term basis for the full-time services of Employee; NOW, THEREFORE, in consideration of the premises, the agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree that the Employment Agreement is hereby amended and restated effective as of the date hereof as follows: 1. EMPLOYMENT. Subject to the terms and conditions hereinafter set forth, the Employer hereby agrees to employ the Employee, and the Employee hereby agrees to serve the Employer, in the capacity and for the Term of Employment specified herein. 2. SCOPE OF EMPLOYMENT. During the Term of Employment hereunder, the Employee will serve as Co-Chief Executive Officer of the Employer in accordance with the provisions of Article V, Section 5.7 of the By-Laws of the Employer. In that connection, the Employee will: (a) devote his full time, attention, and energies to the business of the Employer and will diligently and to the best of his ability perform all duties incident to his employment hereunder; (b) use his best efforts to promote the interests and goodwill of the Employer; and (c) perform such other duties commensurate with his office as the Board of Directors of the Employer may from time-to-time assign to him. The foregoing shall not be construed as preventing the Employee from making investments in other businesses or enterprises provided such investments do not require the provision of substantial services by the Employee to the operations or the affairs of such businesses or enterprises such that the provision thereof would interfere in any respect with the performance of the Employee's duties hereunder. 3. VACATION. During the Term of Employment the Employee shall be entitled to sick leave, holidays, and an annual four-week vacation, all in accordance with the regular policy of the Employer, during which time his compensation shall be paid in full. Each such vacation shall be taken by the Employee at such times as may be mutually agreed upon by the Employee and Employer. 4. COMPENSATION. As compensation for his services hereunder and in consideration of his agreement not to compete as set forth in Section 9, the Employer shall: (a) during the Term of Employment pay the Employee, subject to the terms and conditions of this Agreement, a base salary at the rate of not less than $235,000.00 per year, payable in accordance with the normal payroll practices of the Employer but in no less than equal bi-weekly installments; and (b) during the Term of Employment as additional compensation for services hereunder during the term of this Agreement, the Employee shall be entitled to an annual bonus in amount as shall be determined by the Compensation Committee of Board of Directors of the Employer for each of the Company's fiscal years ending after the date hereof. 5. TERM. (a) The "Term of Employment", as used herein, shall mean a period commencing on the date hereof and ending on the third anniversary (the "Ending Date") of the later to occur of (A) the receipt by the Employee of a written notice of termination by the Employer given to the Employee or (B) the occurrence of an event specified in this Section 5(a); PROVIDED HOWEVER that the occurrence of any of the following events set forth in this Section 5(a) prior to the Ending Date shall result in the immediate termination of the Term of Employment, but shall not result in the termination of this Agreement: (i) the commission by the Employee of an act constituting a dishonest or other act of material misconduct, or a fraudulent act or a felony under the laws of any state or of the United States to which the Employer or Employee is subject, and such act results (or is 2 intended to result directly or indirectly) in the Employee's substantial gain or personal enrichment to the detriment of the Employer; or (ii) the death of the Employee; or (iii) the inability of the Employee to perform his duties hereunder, whether by reason of injury (physical or mental), illness or otherwise, incapacitating him for a continuous period exceeding three months, excluding any leaves of absence approved by the Employer; or (iv) the Employee resigns at any time before a Change in Control (as defined in Section 6(d)); or (v) the Employee resigns at any time after a Change in Control (other than as provided in Section 5(a)(vii) below) prior to the occurrence of a Good Cause event ("Good Cause" being defined below); or (vi) the Employee resigns for any reason at any time subsequent to the occurrence of a Good Cause event after a Change in Control; or (vii) the Employee resigns for any reason (with or without the occurrence of a Good Cause event) at any time during the 30-day period commencing upon the first anniversary of a Change in Control. (b) The term "Good Cause" shall mean the occurrence of any of the following events: (i) the assignment by the Employer to the Employee of duties that are materially inconsistent with the Employee's office with 3 Employer at the time of such assignment, or the removal by the Employer from the Employee of a material portion of those duties usually appertaining to the Employee's office with the Employer at the time of such removal; or (ii) a material change by the Employer, without the Employee's prior written consent, in the Employee's responsibilities to the Employer, as such responsibilities are ordinarily and customarily required from time to time of a chief executive officer of a corporation engaged in the Employer's business; or (iii) any removal of the Employee from, or any failure to reelect or to reappoint the Employee to, the office stated in Section 2; or (iv) the Employer's direction that the Employee discontinue service (or not seek reelection or reappointment) as a director, officer or member of any corporation or association of which the Employee is a director, officer, or member at the date of this Agreement; or (v) a reduction by the Employer in the amount of the Employee's base salary as determined under this Agreement (or as subsequently increased), or the failure of the Employer to pay such base salary to the Employee at the time and in the manner specified in Section 4; or (vi) other than with respect to the annual performance bonus specified in Section 4(b) or, as made with the Employee's prior written consent, the discontinuance (without comparable replacement) or material reduction by the Employer of the Employee's participation in any bonus or other employee benefit 4 arrangement (including, without limitation, any profit-sharing, thrift, life insurance, medical, dental, hospitalization, stock option or retirement plan or arrangement) in which the Employee is a participant under the terms of this Agreement, as in effect on the date hereof or as may be improved from time to time hereafter; or (vii) the moving by the Employer of the Employee's principal office space, related facilities, or support personnel, from the Employer's principal operating offices, or the Employer's requiring the Employee to perform a majority of his duties outside the Employer's principal operating offices for a period of more than 30 consecutive days; or (viii) the relocation, without the Employee's prior written consent, of the Employer's principal operating offices to a location outside the county in which such offices are located at the time of the signing of this Agreement; or (ix) in the event the Employer requires the Employee to reside at a location more than 25 miles from the Employer's principal operating offices, except for occasional travel in connection with the Employer's business to an extent and in a manner which is substantially consistent with the Employee's current business travel obligations; or (x) in the event the Employee consents to a relocation of the Employer's principal operating offices, the failure of the Employer to (A) pay or reimburse the Employee on an after-tax basis for all reasonable moving expenses incurred by the Employee in connection with such relocation or (B) indemnify the Employee on an after-tax basis against any loss realized by the Employee on the sale of his principal residence in connection with such relocation; 5 or (xi) the failure of the Employer to provide the Employee with the benefits specified under Section 8; or (xii) the failure of the Employer to continue to provide the Employee with office space, related facilities and support personnel (including, without limitation, administrative and secretarial assistance) that are commensurate with the Employee's responsibilities to and position with the Employer; or (xiii) the failure by the Employer to promptly reimburse the Employee for the reasonable business expenses incurred by the Employee in the performance of his duties for the Employer, as set forth in Section 7. 6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER. (a) Subject to the provisions of paragraph (b) of this Section 6, in the event of termination of the Term of Employment for any reason specified in subsections (i), (ii), (iii), (iv) or (v) of Section 5(a) above, the Employer shall no longer be obligated to make the payments specified under Section 4 or to provide the benefits under Section 8; PROVIDED, HOWEVER, any payments payable under Section 4 which shall have been earned but not yet paid shall be paid by the Employer to the Employee, and the Employee shall pay any amount or amounts then owed by the Employee to the Employer. (b) In the event of the termination of the Term of Employment for any reason specified in subsection (vi) of Section 5(a) above, the Employer shall, until the third anniversary of the date of such termination continue to be obligated to (i) make the payments specified under Section 4, (ii) provide the benefits specified under Section 8(b), and (iii) maintain the Employee as a participant in, or provide benefits comparable to those of, the health insurance benefit plan specified under Section 8(a). In the event of the termination of the Term of Employment for any reason specified in subsection (vii) of Section 5(a) above, the Employer shall, until the second anniversary of the date of such termination continue to be obligated to (i) make the 6 payments specified under Section 4, (ii) provide the benefits specified under Section 8(b), and (iii) maintain the Employee as a participant in, or provide benefits comparable to those of, the health insurance benefit plan specified under Section 8(a). In the event of termination as specified in this paragraph (b), the Employee may elect, upon 30 days prior written notice of such election delivered to the Employer to have the remaining amounts payable to him pursuant to this Section 6(b) paid in a lump sum amount, which amount shall be computed by discounting to present value such remaining amounts payable to the Employee at a rate of 8% per annum for each payment otherwise owed to the Employee through the remaining months in such Term of Employment. (c) Under no circumstances shall the Employee be required to mitigate the amount of payment specified in Section 4 which is payable during the Term of Employment specified in paragraph (b) of this Section 6. (d) A "Change in Control" shall be deemed to have occurred at any time after the date of this Agreement that (i) any person (other than those persons who own more than 10% of the combined voting power of the Employer's outstanding voting securities on the date hereof) becomes the beneficial owner, directly or indirectly, of 30% or more of the combined voting power of the Employer's then outstanding voting securities, or (ii) the individuals who at the beginning of any period of two consecutive years constitute the Employer's Board of Directors cease for any reason to constitute a majority of such Board of Directors at any time during such two-year period. 7. EXPENSES. The Employer agrees that during the Term of Employment it will reimburse the Employee for out-of-pocket expenses reasonably incurred by him in connection with the performance of his service hereunder upon the presentation by the Employee of an itemized [monthly] accounting of such expenditures, including receipts where required for federal income tax regulations. 8. EMPLOYEE BENEFITS. During the Term of Employment: (a) Employee shall, upon satisfaction of any eligibility requirements with respect thereto, be entitled to participate in all employee benefit plans of Employer, including without limitation those health, dental, accidental death and dismemberment, and long term disability plans of Employer now or hereafter in effect that are made available to executive officers of the Employer; and (b) Employer shall maintain for Employee the benefits summarized on EXHIBIT A attached hereto. 7 9. NON-COMPETITION. (a) Employee acknowledges that he shall receive special training and knowledge from Employer. Employee acknowledges that included in the special knowledge received is the confidential information identified in Paragraph 10 below. Employee acknowledges that this confidential information is valuable to Employer and, therefore, its protection and maintenance constitutes a legitimate interest to be protected by Employer by this covenant not to compete. Therefore, Employee agrees that for the period (the "Noncompetition Period") (i) during the Term of Employment and (ii) in the event of a termination of the Term of Employment upon the occurrence of an event set forth in Section 5(a) hereof, commencing upon the occurrence of such event set forth in Section 5(a) and ending upon the first anniversary thereof, in each case unless otherwise extended pursuant to the terms hereof, Employee will not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any business that is engaged in the manufacture or marketing of disposable baby diapers, disposable training pants or pre-moistened wipes within the United States of America or within any other geographic area of the world where the Employer engages or proposes at the time of the termination of the Term of Employment to engage in business. Employee represents to Employer that the enforcement of the restriction contained in this Section 9 would not be unduly burdensome to Employee and that in order to induce the Employer to provide for the Term of Employment as set forth in Section 5 hereof to replace Section 4.1 of the Employment Agreement, Employee further represents and acknowledges that Employee has entered into this agreement not to compete and is willing and able to compete in other geographical areas not prohibited by this Section 9. (b) Employee agrees that a breach or violation of this covenant not to compete by such Employee shall entitle the Employer, as a matter of right, to an injunction issued by any court of competent jurisdiction, restraining any further or continued breach or violation of this covenant. Such right to an injunction shall be cumulative and in addition to, and not in lieu of, any other remedies to which the Employer may show itself justly entitled. Further, during any period in which Employee is in breach of this covenant not to compete, the time period of this covenant shall be extended for an amount of time that Employee is in breach hereof. 8 (c) In addition to the restrictions set forth in paragraph (a) of this Section 9, Employee shall not for the Noncompetition Period, either directly or indirectly, (i) make known to any person, firm or corporation that is engaged in the manufacture or marketing of disposable baby diapers, disposable training pants or pre-moistened wipes, the names and addresses of any of the customers of the Employer or contacts of the Employer or any other information pertaining to such persons or (ii) call on, solicit, or take away, or attempt to call on, solicit or take away any of the customers of the Employer on whom Employee called or with whom Employee became acquainted during Employee's association with the Employer, whether for Employee or for any other person, firm or corporation. (d) The representation and covenants contained in this Section 9 on the part of Employee will be construed as ancillary to and independent of any other provision of this Agreement, and the existence of any claim or cause of action of Employee against Employer or any officer, director, or shareholder of Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer of the covenants of the Employee contained in this Section 9. In addition, the provisions of this Section 9 shall continue to be binding upon Employee in accordance with its terms, notwithstanding the termination of Employee's employment for any reason. (e) If Employee violates any covenant contained in this Section 9 and Employer brings legal action for injunctive or other relief, the Employer shall not, as a result of the time involved in obtaining the relief, be deprived of the benefit of the full period of any such covenant. Accordingly, the covenants of Employee contained in this Section 9 shall be deemed to have durations as specified above, which periods shall commence upon the later of (i) the Ending Date and (ii) the date of entry by a court of competent jurisdiction of a final judgment enforcing the covenants of Employee in this Section 9. (f) The parties to this Agreement agree that the limitations contained in this Section 9 with respect to geographic area, duration, and scope of activity are reasonable. However, if any court shall determine that the geographic area, duration, or scope of activity of any restriction contained in this Section 9 is unenforceable, it is the intention of the parties that such restrictive covenant set forth herein shall not thereby be terminated but shall be deemed amended to the extent required to render it valid and enforceable. 9 10. DISCLOSURE OF CONFIDENTIAL INFORMATION. During the Term of Employment, the Employee will disclose to Employer all ideas and business plans developed by him during such period which relate directly to the business of Employer. The Employee recognizes and acknowledges that he may have access to certain additional confidential information of Employer or of certain corporations affiliated with Employer, and that all such information constitutes valuable, special and unique property of Employer and its affiliates. The Employee agrees that, during the Term of Employment and for a period of five years after the termination of the Term of Employment, he will not, without the prior written consent of Employer, disclose or authorize or permit anyone under his direction to disclose to anyone not properly entitled thereto any of such confidential information. For purposes of the immediately preceding sentence, persons properly entitled to such information shall be (i) the Board of Directors of Employer and such officers, employees and agents of Employer or any affiliate thereof to whom such information is furnished in the normal course of business under established policies approved by Employer and (ii) such outside parties as are legally entitled to or are customarily furnished such information, including banking, lending, collection, accounting, and data processing institutions or agencies who or which are provided such information in the normal course of business of Employer. The Employee further agrees that upon termination of the Term of Employment he will not take with him or retain, without the prior written authorization of Employer, any papers, procedural or technical manuals, customer lists, customer account analyses (including, without limitation, accounts receivable agings, customer payment histories and customer account activity reports), price books, files or other documents or copies thereof belonging to Employer or to any affiliate of Employer, or any materials, supplies, equipment or furnishings belonging to Employer or to any affiliate of Employer, or any other confidential information of any kind belonging to Employer or any affiliate of Employer. In the event of a breach or threatened breach by the Employee of the provisions of this Section 10, Employer and the Employee agree that the remedy at law available to Employer and its affiliates would be inadequate and that Employer and its affiliates shall be entitled to an injunction, without the necessity of posting bond therefor, restraining the Employee from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting Employer and its affiliates from pursuing any other remedies, in addition to the injunctive relief available under this Section 10, for such breach or threatened breach, including the recovery of damages from the Employee. 11. TRADE SECRETS. All patents, formulae, inventions, processes, copyrights, proprietary information, trademarks or trade names, or future improvements to patents, formulae, inventions, processes, copyrights, proprietary information, trademarks or trade names, developed or completed by the Employee during the Term of Employment (collectively, the "Items") shall be promptly disclosed to Employer, and the Employee shall execute such instruments of assignment of the Items to the Employer as Employer shall request. The Employee acknowledges that a remedy at law for any breach by him of the provisions of this Section 11 would be inadequate, and the Employee hereby agrees that Employer shall be 10 entitled to injunctive relief in case of any such breach. 12. LEGAL FEES AND EXPENSES. In the event that either of the parties to this Agreement contests the validity or enforceability of any of the provisions of Sections 9, 10 or 11 hereof, then such contesting party hereby agrees to pay in a timely and prompt manner any and all legal fees and expenses incurred by the other party from time to time as a result of such contesting party's contesting of the validity or enforceability of any provision of Sections 9, 10, or 11 hereof this Agreement; PROVIDED, HOWEVER, nothing contained in this Section 12 shall obligate the Employer to pay any legal fees or expenses incurred by the Employee in connection with any litigation by the Employer against the Employee to enforce the terms of this Agreement against the Employee. 13. ASSIGNMENT. This Agreement is a personal employment contract and the rights and interests of the Employee hereunder may not be sold, transferred, assigned, pledged, or hypothecated, directly or indirectly, or by operation of law or otherwise. 14. SUCCESSORS. This Agreement shall inure to the benefit of and be binding upon the Employer and its successors and assigns and upon the Employee and his legal representatives. 15. ENTIRE AGREEMENT. This Agreement, which contains the entire contractual understanding between the parties, may not be changed orally but only by a written instrument signed by the Employee and the Chairman of the Board of Directors of the Employer. 16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, and Employee agrees to subject himself to the jurisdiction of the Southern District of Texas. 17. WAIVER. The waiver of any breach of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition. 18. ENFORCEABILITY. In the event any provision of this Agreement is found to be unenforceable or invalid, such provision shall be severable from this Agreement and shall not affect the enforceability or validity of any other provision contained in this Agreement. 19. NOTICES. Any notices or other communications required or permitted hereunder shall be sufficiently given if sent by registered mail, postage prepaid, and (a) if to the Employee, addressed to him at 2105 S.E. 131st Avenue, Vancouver, Washington 98684, and (b) if to the Employer, addressed to it at 1415 West Loop North, Houston, Texas 77055 (Attention: Chairman of 11 the Board of Directors), or such other address as the party to whom or to which such notice or other communication is to be given shall have specified in writing to the other party, and any such notice or communication shall be deemed to have been given as of the date so mailed. 20. ARBITRATION. Employer and Employee agree to submit to final and binding arbitration any and all disputes, claims (whether in tort, contract, statutory, or otherwise) and/or disagreements concerning the interpretation or application of this Agreement and/or Employee's employment by Employer and/or the termination of this Agreement and/or Employee's employment by Employer; PROVIDED, HOWEVER, notwithstanding the foregoing, in no event shall any dispute, claim or disagreement arising under Section 9, 10 or 11 of this Agreement be submitted to arbitration pursuant to this Section 18 or otherwise. Any such dispute, claim and/or disagreement subject to arbitration pursuant to the terms of this Section 18 shall be resolved by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). Arbitration under this provision must be initiated within 30 days of the action, inaction, or occurrence about which the party initiating the arbitration is complaining. Within ten days of the initiation of an arbitration hereunder, each party will designate an arbitrator pursuant to Rule 14 of the AAA Rules. The appointed arbitrators will appoint a neutral arbitrator from the panel in the manner prescribed in Rule 13 of the AAA Rules. Employee and Employer agree that the decision of the arbitrators selected hereunder will be final and binding on both parties. This arbitration provision is expressly made pursuant to and shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1 - 14. The parties hereto agree that pursuant to Section 9 of the Act that a judgment of the United States District Court for the Southern District of Texas, shall be entered upon the award made pursuant to the arbitration. IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed by its duly authorized officer, and the Employee has executed this Agreement as of the date first above written. DRYPERS CORPORATION By /s/ WALTER V. KLEMP Walter V. Klemp Chairman of the Board EMPLOYEE /s/ RAYMOND M. CHAMBERS Raymond M. Chambers 12 EXHIBIT A HEALTH AND WELFARE BENEFITS SUMMARY o Group comprehensive medical, dental, and term life insurance. Eighty percent of the premiums for Employee and his dependents are paid by Employer. o Long-term disability insurance. o Term life insurance in the amount of $250,000 o Contribution to a deferred compensation investment vehicle in the amount of $10,000 per year. OTHER EMPLOYEE PERQUISITES o Use of a car not more than (30 months old, with monthly lease payment not to exceed $750), such car to be equipped with a cellular phone, as well as all costs and expenses incurred in operating such car, including gas, service and maintenance charges, parts, fees for inspection and license plates, parking and tolls, and cellular phone equipment, installation and use charges. o Health and country club monthly family membership dues and reasonable expenses in accordance with the Employer's policies. o Income tax preparation costs. R. CHAMBERS 13 EX-10.26 6 EXHIBIT 10.26 AGREEMENT AMENDING AND RESTATING EMPLOYMENT AGREEMENT BETWEEN DRYPERS CORPORATION AND TERRY A. TOGNIETTI FEBRUARY 25, 1997 TABLE OF CONTENTS Page ---- 1. EMPLOYMENT........................................................... 1 2. SCOPE OF EMPLOYMENT.................................................. 1 3. VACATION............................................................. 2 4. COMPENSATION......................................................... 2 5. TERM................................................................. 2 6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER............................. 6 7. EXPENSES............................................................. 7 8. EMPLOYEE BENEFITS.................................................... 7 9. NON-COMPETITION...................................................... 8 10. DISCLOSURE OF CONFIDENTIAL INFORMATION............................... 10 11. TRADE SECRETS........................................................ 11 12. LEGAL FEES AND EXPENSES.............................................. 11 13. ASSIGNMENT........................................................... 11 14. SUCCESSORS........................................................... 11 15. ENTIRE AGREEMENT..................................................... 11 16. GOVERNING LAW........................................................ 12 17. WAIVER............................................................... 12 18. ENFORCEABILITY....................................................... 12 19. NOTICES.............................................................. 12 20. ARBITRATION.......................................................... 12 AGREEMENT AMENDING AND RESTATING EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") made as of the 25th day of February, 1997, between Drypers Corporation, a Delaware corporation (the "Employer"), and Terry A. Tognietti (the "Employee"), W I T N E S S E T H: WHEREAS, the Employer desires to obtain the services of the Employee, and the Employee desires to be employed by the Employer upon the terms and conditions hereinafter set forth; WHEREAS, the Employer and the Employee entered into an Employment Agreement made as of August 30, 1992 (the "Employment Agreement"), by which Employer employed the Employee, and the Employee agreed to serve the Employer, in the capacity, for the term, and subject to the conditions specified therein, and WHEREAS, Employer and the Employee wish to amend and restate the Employment Agreement and wish to enter into an agreement on a long-term basis for the full-time services of Employee; NOW, THEREFORE, in consideration of the premises, the agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree that the Employment Agreement is hereby amended and restated effective as of the date hereof as follows: 1. EMPLOYMENT. Subject to the terms and conditions hereinafter set forth, the Employer hereby agrees to employ the Employee, and the Employee hereby agrees to serve the Employer, in the capacity and for the Term of Employment specified herein. 2. SCOPE OF EMPLOYMENT. During the Term of Employment hereunder, the Employee will serve as Co-Chief Executive Officer of the Employer in accordance with the provisions of Article V, Section 5.7 of the By-Laws of the Employer. In that connection, the Employee will: (a) devote his full time, attention, and energies to the business of the Employer and will diligently and to the best of his ability perform all duties incident to his employment hereunder; (b) use his best efforts to promote the interests and goodwill of the Employer; and (c) perform such other duties commensurate with his office as the Board of Directors of the Employer may from time-to-time assign to him. The foregoing shall not be construed as preventing the Employee from making investments in other businesses or enterprises provided such investments do not require the provision of substantial services by the Employee to the operations or the affairs of such businesses or enterprises such that the provision thereof would interfere in any respect with the performance of the Employee's duties hereunder. 3. VACATION. During the Term of Employment the Employee shall be entitled to sick leave, holidays, and an annual four-week vacation, all in accordance with the regular policy of the Employer, during which time his compensation shall be paid in full. Each such vacation shall be taken by the Employee at such times as may be mutually agreed upon by the Employee and Employer. 4. COMPENSATION. As compensation for his services hereunder and in consideration of his agreement not to compete as set forth in Section 9, the Employer shall: (a) during the Term of Employment pay the Employee, subject to the terms and conditions of this Agreement, a base salary at the rate of not less than $235,000.00 per year, payable in accordance with the normal payroll practices of the Employer but in no less than equal bi-weekly installments; and (b) during the Term of Employment as additional compensation for services hereunder during the term of this Agreement, the Employee shall be entitled to an annual bonus in amount as shall be determined by the Compensation Committee of Board of Directors of the Employer for each of the Company's fiscal years ending after the date hereof. 5. TERM. (a) The "Term of Employment", as used herein, shall mean a period commencing on the date hereof and ending on the third anniversary (the "Ending Date") of the later to occur of (A) the receipt by the Employee of a written notice of termination by the Employer given to the Employee or (B) the occurrence of an event specified in this Section 5(a); PROVIDED HOWEVER that the occurrence of any of the following events set forth in this Section 5(a) prior to the Ending Date shall result in the immediate termination of the Term of Employment, but shall not result in the termination of this Agreement: (i) the commission by the Employee of an act constituting a dishonest or other act of material misconduct, or a fraudulent act or a felony under the laws of any state or of the United States to which the Employer or Employee is subject, and such act results (or is 2 intended to result directly or indirectly) in the Employee's substantial gain or personal enrichment to the detriment of the Employer; or (ii) the death of the Employee; or (iii) the inability of the Employee to perform his duties hereunder, whether by reason of injury (physical or mental), illness or otherwise, incapacitating him for a continuous period exceeding three months, excluding any leaves of absence approved by the Employer; or (iv) the Employee resigns at any time before a Change in Control (as defined in Section 6(d)); or (v) the Employee resigns at any time after a Change in Control (other than as provided in Section 5(a)(vii) below) prior to the occurrence of a Good Cause event ("Good Cause" being defined below); or (vi) the Employee resigns for any reason at any time subsequent to the occurrence of a Good Cause event after a Change in Control; or (vii) the Employee resigns for any reason (with or without the occurrence of a Good Cause event) at any time during the 30-day period commencing upon the first anniversary of a Change in Control. (b) The term "Good Cause" shall mean the occurrence of any of the following events: (i) the assignment by the Employer to the Employee of duties that are materially inconsistent with the Employee's office with 3 Employer at the time of such assignment, or the removal by the Employer from the Employee of a material portion of those duties usually appertaining to the Employee's office with the Employer at the time of such removal; or (ii) a material change by the Employer, without the Employee's prior written consent, in the Employee's responsibilities to the Employer, as such responsibilities are ordinarily and customarily required from time to time of a chief executive officer of a corporation engaged in the Employer's business; or (iii) any removal of the Employee from, or any failure to reelect or to reappoint the Employee to, the office stated in Section 2; or (iv) the Employer's direction that the Employee discontinue service (or not seek reelection or reappointment) as a director, officer or member of any corporation or association of which the Employee is a director, officer, or member at the date of this Agreement; or (v) a reduction by the Employer in the amount of the Employee's base salary as determined under this Agreement (or as subsequently increased), or the failure of the Employer to pay such base salary to the Employee at the time and in the manner specified in Section 4; or (vi) other than with respect to the annual performance bonus specified in Section 4(b) or, as made with the Employee's prior written consent, the discontinuance (without comparable replacement) or material reduction by the Employer of the Employee's participation in any bonus or other employee benefit 4 arrangement (including, without limitation, any profit-sharing, thrift, life insurance, medical, dental, hospitalization, stock option or retirement plan or arrangement) in which the Employee is a participant under the terms of this Agreement, as in effect on the date hereof or as may be improved from time to time hereafter; or (vii) the moving by the Employer of the Employee's principal office space, related facilities, or support personnel, from the Employer's principal operating offices, or the Employer's requiring the Employee to perform a majority of his duties outside the Employer's principal operating offices for a period of more than 30 consecutive days; or (viii) the relocation, without the Employee's prior written consent, of the Employer's principal operating offices to a location outside the county in which such offices are located at the time of the signing of this Agreement; or (ix) in the event the Employer requires the Employee to reside at a location more than 25 miles from the Employer's principal operating offices, except for occasional travel in connection with the Employer's business to an extent and in a manner which is substantially consistent with the Employee's current business travel obligations; or (x) in the event the Employee consents to a relocation of the Employer's principal operating offices, the failure of the Employer to (A) pay or reimburse the Employee on an after-tax basis for all reasonable moving expenses incurred by the Employee in connection with such relocation or (B) indemnify the Employee on an after-tax basis against any loss realized by the Employee on the sale of his principal residence in connection with such relocation; 5 or (xi) the failure of the Employer to provide the Employee with the benefits specified under Section 8; or (xii) the failure of the Employer to continue to provide the Employee with office space, related facilities and support personnel (including, without limitation, administrative and secretarial assistance) that are commensurate with the Employee's responsibilities to and position with the Employer; or (xiii) the failure by the Employer to promptly reimburse the Employee for the reasonable business expenses incurred by the Employee in the performance of his duties for the Employer, as set forth in Section 7. 6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER. (a) Subject to the provisions of paragraph (b) of this Section 6, in the event of termination of the Term of Employment for any reason specified in subsections (i), (ii), (iii), (iv) or (v) of Section 5(a) above, the Employer shall no longer be obligated to make the payments specified under Section 4 or to provide the benefits under Section 8; PROVIDED, HOWEVER, any payments payable under Section 4 which shall have been earned but not yet paid shall be paid by the Employer to the Employee, and the Employee shall pay any amount or amounts then owed by the Employee to the Employer. (b) In the event of the termination of the Term of Employment for any reason specified in subsection (vi) of Section 5(a) above, the Employer shall, until the third anniversary of the date of such termination continue to be obligated to (i) make the payments specified under Section 4, (ii) provide the benefits specified under Section 8(b), and (iii) maintain the Employee as a participant in, or provide benefits comparable to those of, the health insurance benefit plan specified under Section 8(a). In the event of the termination of the Term of Employment for any reason specified in subsection (vii) of Section 5(a) above, the Employer shall, until the second anniversary of the date of such termination continue to be obligated to (i) make the 6 payments specified under Section 4, (ii) provide the benefits specified under Section 8(b), and (iii) maintain the Employee as a participant in, or provide benefits comparable to those of, the health insurance benefit plan specified under Section 8(a). In the event of termination as specified in this paragraph (b), the Employee may elect, upon 30 days prior written notice of such election delivered to the Employer to have the remaining amounts payable to him pursuant to this Section 6(b) paid in a lump sum amount, which amount shall be computed by discounting to present value such remaining amounts payable to the Employee at a rate of 8% per annum for each payment otherwise owed to the Employee through the remaining months in such Term of Employment. (c) Under no circumstances shall the Employee be required to mitigate the amount of payment specified in Section 4 which is payable during the Term of Employment specified in paragraph (b) of this Section 6. (d) A "Change in Control" shall be deemed to have occurred at any time after the date of this Agreement that (i) any person (other than those persons who own more than 10% of the combined voting power of the Employer's outstanding voting securities on the date hereof) becomes the beneficial owner, directly or indirectly, of 30% or more of the combined voting power of the Employer's then outstanding voting securities, or (ii) the individuals who at the beginning of any period of two consecutive years constitute the Employer's Board of Directors cease for any reason to constitute a majority of such Board of Directors at any time during such two-year period. 7. EXPENSES. The Employer agrees that during the Term of Employment it will reimburse the Employee for out-of-pocket expenses reasonably incurred by him in connection with the performance of his service hereunder upon the presentation by the Employee of an itemized [monthly] accounting of such expenditures, including receipts where required for federal income tax regulations. 8. EMPLOYEE BENEFITS. During the Term of Employment: (a) Employee shall, upon satisfaction of any eligibility requirements with respect thereto, be entitled to participate in all employee benefit plans of Employer, including without limitation those health, dental, accidental death and dismemberment, and long term disability plans of Employer now or hereafter in effect that are made available to executive officers of the Employer; and (b) Employer shall maintain for Employee the benefits summarized on EXHIBIT A attached hereto. 7 9. NON-COMPETITION. (a) Employee acknowledges that he shall receive special training and knowledge from Employer. Employee acknowledges that included in the special knowledge received is the confidential information identified in Paragraph 10 below. Employee acknowledges that this confidential information is valuable to Employer and, therefore, its protection and maintenance constitutes a legitimate interest to be protected by Employer by this covenant not to compete. Therefore, Employee agrees that for the period (the "Noncompetition Period") (i) during the Term of Employment and (ii) in the event of a termination of the Term of Employment upon the occurrence of an event set forth in Section 5(a) hereof, commencing upon the occurrence of such event set forth in Section 5(a) and ending upon the first anniversary thereof, in each case unless otherwise extended pursuant to the terms hereof, Employee will not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any business that is engaged in the manufacture or marketing of disposable baby diapers, disposable training pants or pre-moistened wipes within the United States of America or within any other geographic area of the world where the Employer engages or proposes at the time of the termination of the Term of Employment to engage in business. Employee represents to Employer that the enforcement of the restriction contained in this Section 9 would not be unduly burdensome to Employee and that in order to induce the Employer to provide for the Term of Employment as set forth in Section 5 hereof to replace Section 4.1 of the Employment Agreement, Employee further represents and acknowledges that Employee has entered into this agreement not to compete and is willing and able to compete in other geographical areas not prohibited by this Section 9. (b) Employee agrees that a breach or violation of this covenant not to compete by such Employee shall entitle the Employer, as a matter of right, to an injunction issued by any court of competent jurisdiction, restraining any further or continued breach or violation of this covenant. Such right to an injunction shall be cumulative and in addition to, and not in lieu of, any other remedies to which the Employer may show itself justly entitled. Further, during any period in which Employee is in breach of this covenant not to compete, the time period of this covenant shall be extended for an amount of time that Employee is in breach hereof. 8 (c) In addition to the restrictions set forth in paragraph (a) of this Section 9, Employee shall not for the Noncompetition Period, either directly or indirectly, (i) make known to any person, firm or corporation that is engaged in the manufacture or marketing of disposable baby diapers, disposable training pants or pre-moistened wipes, the names and addresses of any of the customers of the Employer or contacts of the Employer or any other information pertaining to such persons or (ii) call on, solicit, or take away, or attempt to call on, solicit or take away any of the customers of the Employer on whom Employee called or with whom Employee became acquainted during Employee's association with the Employer, whether for Employee or for any other person, firm or corporation. (d) The representation and covenants contained in this Section 9 on the part of Employee will be construed as ancillary to and independent of any other provision of this Agreement, and the existence of any claim or cause of action of Employee against Employer or any officer, director, or shareholder of Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer of the covenants of the Employee contained in this Section 9. In addition, the provisions of this Section 9 shall continue to be binding upon Employee in accordance with its terms, notwithstanding the termination of Employee's employment for any reason. (e) If Employee violates any covenant contained in this Section 9 and Employer brings legal action for injunctive or other relief, the Employer shall not, as a result of the time involved in obtaining the relief, be deprived of the benefit of the full period of any such covenant. Accordingly, the covenants of Employee contained in this Section 9 shall be deemed to have durations as specified above, which periods shall commence upon the later of (i) the Ending Date and (ii) the date of entry by a court of competent jurisdiction of a final judgment enforcing the covenants of Employee in this Section 9. (f) The parties to this Agreement agree that the limitations contained in this Section 9 with respect to geographic area, duration, and scope of activity are reasonable. However, if any court shall determine that the geographic area, duration, or scope of activity of any restriction contained in this Section 9 is unenforceable, it is the intention of the parties that such restrictive covenant set forth herein shall not thereby be terminated but shall be deemed amended to the extent required to render it valid and enforceable. 9 10. DISCLOSURE OF CONFIDENTIAL INFORMATION. During the Term of Employment, the Employee will disclose to Employer all ideas and business plans developed by him during such period which relate directly to the business of Employer. The Employee recognizes and acknowledges that he may have access to certain additional confidential information of Employer or of certain corporations affiliated with Employer, and that all such information constitutes valuable, special and unique property of Employer and its affiliates. The Employee agrees that, during the Term of Employment and for a period of five years after the termination of the Term of Employment, he will not, without the prior written consent of Employer, disclose or authorize or permit anyone under his direction to disclose to anyone not properly entitled thereto any of such confidential information. For purposes of the immediately preceding sentence, persons properly entitled to such information shall be (i) the Board of Directors of Employer and such officers, employees and agents of Employer or any affiliate thereof to whom such information is furnished in the normal course of business under established policies approved by Employer and (ii) such outside parties as are legally entitled to or are customarily furnished such information, including banking, lending, collection, accounting, and data processing institutions or agencies who or which are provided such information in the normal course of business of Employer. The Employee further agrees that upon termination of the Term of Employment he will not take with him or retain, without the prior written authorization of Employer, any papers, procedural or technical manuals, customer lists, customer account analyses (including, without limitation, accounts receivable agings, customer payment histories and customer account activity reports), price books, files or other documents or copies thereof belonging to Employer or to any affiliate of Employer, or any materials, supplies, equipment or furnishings belonging to Employer or to any affiliate of Employer, or any other confidential information of any kind belonging to Employer or any affiliate of Employer. In the event of a breach or threatened breach by the Employee of the provisions of this Section 10, Employer and the Employee agree that the remedy at law available to Employer and its affiliates would be inadequate and that Employer and its affiliates shall be entitled to an injunction, without the necessity of posting bond therefor, restraining the Employee from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting Employer and its affiliates from pursuing any other remedies, in addition to the injunctive relief available under this Section 10, for such breach or threatened breach, including the recovery of damages from the Employee. 11. TRADE SECRETS. All patents, formulae, inventions, processes, copyrights, proprietary information, trademarks or trade names, or future improvements to patents, formulae, inventions, processes, copyrights, proprietary information, trademarks or trade names, developed or completed by the Employee during the Term of Employment (collectively, the "Items") shall be promptly disclosed to Employer, and the Employee shall execute such instruments of assignment of the Items to the Employer as Employer shall request. The Employee acknowledges that a remedy at law for any breach by him of the provisions of this Section 11 would be inadequate, and the Employee hereby agrees that Employer shall be 10 entitled to injunctive relief in case of any such breach. 12. LEGAL FEES AND EXPENSES. In the event that either of the parties to this Agreement contests the validity or enforceability of any of the provisions of Sections 9, 10 or 11 hereof, then such contesting party hereby agrees to pay in a timely and prompt manner any and all legal fees and expenses incurred by the other party from time to time as a result of such contesting party's contesting of the validity or enforceability of any provision of Sections 9, 10, or 11 hereof this Agreement; PROVIDED, HOWEVER, nothing contained in this Section 12 shall obligate the Employer to pay any legal fees or expenses incurred by the Employee in connection with any litigation by the Employer against the Employee to enforce the terms of this Agreement against the Employee. 13. ASSIGNMENT. This Agreement is a personal employment contract and the rights and interests of the Employee hereunder may not be sold, transferred, assigned, pledged, or hypothecated, directly or indirectly, or by operation of law or otherwise. 14. SUCCESSORS. This Agreement shall inure to the benefit of and be binding upon the Employer and its successors and assigns and upon the Employee and his legal representatives. 15. ENTIRE AGREEMENT. This Agreement, which contains the entire contractual understanding between the parties, may not be changed orally but only by a written instrument signed by the Employee and the Chairman of the Board of Directors of the Employer. 16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, and Employee agrees to subject himself to the jurisdiction of the Southern District of Texas. 17. WAIVER. The waiver of any breach of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition. 18. ENFORCEABILITY. In the event any provision of this Agreement is found to be unenforceable or invalid, such provision shall be severable from this Agreement and shall not affect the enforceability or validity of any other provision contained in this Agreement. 19. NOTICES. Any notices or other communications required or permitted hereunder shall be sufficiently given if sent by registered mail, postage prepaid, and (a) if to the Employee, addressed to him at 2105 S.E. 131st Avenue, Vancouver, Washington 98684, and (b) if to the Employer, addressed to it at 1415 West Loop North, Houston, Texas 77055 (Attention: Chairman of 11 the Board of Directors), or such other address as the party to whom or to which such notice or other communication is to be given shall have specified in writing to the other party, and any such notice or communication shall be deemed to have been given as of the date so mailed. 20. ARBITRATION. Employer and Employee agree to submit to final and binding arbitration any and all disputes, claims (whether in tort, contract, statutory, or otherwise) and/or disagreements concerning the interpretation or application of this Agreement and/or Employee's employment by Employer and/or the termination of this Agreement and/or Employee's employment by Employer; PROVIDED, HOWEVER, notwithstanding the foregoing, in no event shall any dispute, claim or disagreement arising under Section 9, 10 or 11 of this Agreement be submitted to arbitration pursuant to this Section 18 or otherwise. Any such dispute, claim and/or disagreement subject to arbitration pursuant to the terms of this Section 18 shall be resolved by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). Arbitration under this provision must be initiated within 30 days of the action, inaction, or occurrence about which the party initiating the arbitration is complaining. Within ten days of the initiation of an arbitration hereunder, each party will designate an arbitrator pursuant to Rule 14 of the AAA Rules. The appointed arbitrators will appoint a neutral arbitrator from the panel in the manner prescribed in Rule 13 of the AAA Rules. Employee and Employer agree that the decision of the arbitrators selected hereunder will be final and binding on both parties. This arbitration provision is expressly made pursuant to and shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1 - 14. The parties hereto agree that pursuant to Section 9 of the Act that a judgment of the United States District Court for the Southern District of Texas, shall be entered upon the award made pursuant to the arbitration. IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed by its duly authorized officer, and the Employee has executed this Agreement as of the date first above written. DRYPERS CORPORATION By /s/ WALTER V. KLEMP Walter V. Klemp Chairman of the Board EMPLOYEE /s/ TERRY A. TOGNIETTI Terry A. Tognietti 12 EXHIBIT A HEALTH AND WELFARE BENEFITS SUMMARY o Group comprehensive medical, dental, and term life insurance. Eighty percent of the premiums for Employee and his dependents are paid by Employer. o Long-term disability insurance. o Term life insurance in the amount of $250,000 o Contribution to a deferred compensation investment vehicle in the amount of $10,000 per year. OTHER EMPLOYEE PERQUISITES o Use of a car not more than (30 months old, with monthly lease payment not to exceed $750), such car to be equipped with a cellular phone, as well as all costs and expenses incurred in operating such car, including gas, service and maintenance charges, parts, fees for inspection and license plates, parking and tolls, and cellular phone equipment, installation and use charges. o Health and country club monthly family membership dues and reasonable expenses in accordance with the Employer's policies. o Income tax preparation costs. T. TOGNIETTI 13 EX-10.27 7 EXHIBIT 10.27 EMPLOYMENT AGREEMENT BETWEEN DRYPERS CORPORATION AND JOE D. TANNER MARCH 14, 1996 TABLE OF CONTENTS PAGE 1. EMPLOYMENT........................................................... 1 2. SCOPE OF EMPLOYMENT.................................................. 1 3. VACATION............................................................. 2 4. COMPENSATION......................................................... 2 5. TERM................................................................. 2 6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER............................. 6 7. EXPENSES............................................................. 7 8. EMPLOYEE BENEFITS.................................................... 7 9. NON-COMPETITION...................................................... 7 10. DISCLOSURE OF CONFIDENTIAL INFORMATION............................... 10 11. TRADE SECRETS........................................................ 10 12. LEGAL FEES AND EXPENSES.............................................. 11 13. ASSIGNMENT........................................................... 11 14. SUCCESSORS........................................................... 11 15. ENTIRE AGREEMENT..................................................... 11 16. GOVERNING LAW........................................................ 11 17. WAIVER............................................................... 11 18. ENFORCEABILITY....................................................... 11 19. NOTICES.............................................................. 12 20. ARBITRATION.......................................................... 12 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") made as of the 14th day of March, 1996, between Drypers Corporation, a Delaware corporation (the "Employer"), and Joe D. Tanner (the "Employee"), W I T N E S S E T H: WHEREAS, the Employer desires to obtain the services of the Employee, and the Employee desires to be employed by the Employer upon the terms and conditions hereinafter set forth; and NOW, THEREFORE, in consideration of the premises, the agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree that the Employment Agreement is hereby amended and restated effective as of the date hereof as follows: 1. EMPLOYMENT. Subject to the terms and conditions hereinafter set forth, the Employer hereby agrees to employ the Employee, and the Employee hereby agrees to serve the Employer, in the capacity and for the Term of Employment specified herein. 2. SCOPE OF EMPLOYMENT. During the Term of Employment hereunder, the Employee will serve as Executive Vice President and Chief Operating Officer -- International of the Employer in accordance with the provisions of Article V, Section 5.8 of the By-Laws of the Employer. In that connection, the Employee will: (a) devote his full time, attention, and energies to the business of the Employer and will diligently and to the best of his ability perform all duties incident to his employment hereunder; (b) use his best efforts to promote the interests and goodwill of the Employer; and (c) perform such other duties commensurate with his office as the Board of Directors of the Employer may from time-to-time assign to him. The foregoing shall not be construed as preventing the Employee from making investments in other businesses or enterprises provided such investments do not require the provision of substantial services by the Employee to the operations or the affairs of such businesses or enterprises such that the provision thereof would interfere in any respect with the performance of the Employee's duties hereunder. 3. VACATION. During the Term of Employment the Employee shall be entitled to sick leave, holidays, and an annual four-week vacation, all in accordance with the regular policy of the Employer, during which time 1 his compensation shall be paid in full. Each such vacation shall be taken by the Employee at such times as may be mutually agreed upon by the Employee and Employer. 4. COMPENSATION. As compensation for his services hereunder and in consideration of his agreement not to compete as set forth in Section 9, the Employer shall: (a) during the Term of Employment pay the Employee, subject to the terms and conditions of this Agreement, a base salary at the rate of not less than $150,000.00 per year, payable in accordance with the normal payroll practices of the Employer but in no less than equal bi-weekly installments; and (b) during the Term of Employment as additional compensation for services hereunder during the term of this Agreement, the Employee shall be entitled to an annual bonus in amount as shall be determined by the Co-Chief Executive Officers of the Employer for each of the Company's fiscal years ending after the date hereof. 5. TERM. (a) The "Term of Employment", as used herein, shall mean a period commencing on the date hereof and ending on the third anniversary (the "Ending Date") of the receipt by the Employee of written notice of termination by the Employer given to the Employee; PROVIDED HOWEVER that the occurrence of any of the following events set forth in this Section 5(a) prior to the Ending Date shall result in the immediate termination of the Term of Employment, but shall not result in the termination of this Agreement: (i) the commission by the Employee of an act constituting a dishonest or other act of material misconduct, or a fraudulent act or a felony under the laws of any state or of the United States to which the Employer or Employee is subject, and such act results (or is intended to result directly or indirectly) in the Employee's substantial gain or personal enrichment to the detriment of the Employer; or (ii) the death of the Employee; or 2 (iii) the inability of the Employee to perform his duties hereunder, whether by reason of injury (physical or mental), illness or otherwise, incapacitating him for a continuous period exceeding three months, excluding any leaves of absence approved by the Employer; or (iv) the Employee resigns at any time other than after a Change in Control (as defined in Section 6(d)) without Good Cause ("Good Cause" being defined below). (b) The term "Good Cause" shall mean the occurrence of any of the following events: (i) the assignment by the Employer to the Employee of duties that are materially inconsistent with the Employee's office with Employer at the time of such assignment, or the removal by the Employer from the Employee of a material portion of those duties usually appertaining to the Employee's office with the Employer at the time of such removal; or (ii) a material change by the Employer, without the Employee's prior written consent, in the Employee's responsibilities to the Employer, as such responsibilities are ordinarily and customarily required from time to time of an executive vice president of a corporation engaged in the Employer's business; or (iii) any removal of the Employee from, or any failure to reelect or to reappoint the Employee to, the office stated in Section 2; or (iv) the Employer's direction that the Employee discontinue service (or not seek reelection or reappointment) as a director, officer or member of any corporation or association of which the Employee is a director, officer, or member at the date of this 3 Agreement; or (v) a reduction by the Employer in the amount of the Employee's base salary as determined under this Agreement (or as subsequently increased), or the failure of the Employer to pay such base salary to the Employee at the time and in the manner specified in Section 4; or (vi) other than with respect to the annual performance bonus specified in Section 4(b) or, as made with the Employee's prior written consent, the discontinuance (without comparable replacement) or material reduction by the Employer of the Employee's participation in any bonus or other employee benefit arrangement (including, without limitation, any profit-sharing, thrift, life insurance, medical, dental, hospitalization, stock option or retirement plan or arrangement) in which the Employee is a participant under the terms of this Agreement, as in effect on the date hereof or as may be improved from time to time hereafter; or (vii) the moving by the Employer of the Employee's principal office space, related facilities, or support personnel, from the Employer's principal operating offices in Vancouver, Washington, or the Employer's requiring the Employee to perform a majority of his duties outside the Employer's principal operating offices in Vancouver, Washington for a period of more than 30 consecutive days; or (viii) the relocation, without the Employee's prior written consent, of the Employer's principal operating offices to a location outside the county in which such offices are located at the time of the signing of this Agreement; or 4 (ix) in the event the Employer requires the Employee to reside at a location more than 25 miles from the Employer's principal operating offices, except for occasional travel in connection with the Employer's business to an extent and in a manner which is substantially consistent with the Employee's current business travel obligations; or (x) in the event the Employee consents to a relocation of the Employer's principal operating offices, the failure of the Employer to (A) pay or reimburse the Employee on an after-tax basis for all reasonable moving expenses incurred by the Employee in connection with such relocation or (B) indemnify the Employee on an after-tax basis against any loss realized by the Employee on the sale of his principal residence in connection with such relocation; or (xi) the failure of the Employer to provide the Employee with the benefits specified under Section 8; or (xii) the failure of the Employer to continue to provide the Employee with office space, related facilities and support personnel (including, without limitation, administrative and secretarial assistance) that are commensurate with the Employee's responsibilities to and position with the Employer; or (xiii) the failure by the Employer to promptly reimburse the Employee for the reasonable business expenses incurred by the Employee in the performance of his duties for the Employer, as set forth in Section 7. 6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER. (a) Subject to the provisions of paragraph (b) of this 5 Section 6, in the event of termination of the Term of Employment for any reason specified in Section 5(a) above, the Employer shall no longer be obligated to make the payments specified under Section 4 or to provide the benefits under Section 8; PROVIDED, HOWEVER, any payments payable under Section 4 which shall have been earned but not yet paid shall be paid by the Employer to the Employee, and the Employee shall pay any amount or amounts then owed by the Employee to the Employer. (b) In the event of the termination of the Term of Employment for any reason other than pursuant to an event specified in Section 5(a) above, the Employer shall, until the third anniversary of the date of such termination continue to be obligated to (i) make the payments specified under Section 4, (ii) provide the benefits specified under Section 8(b), and (iii) maintain the Employee as a participant in, or provide benefits comparable to those of, the health insurance benefit plan specified under Section 8(a). In the event of such termination, the Employee may elect, upon 30 days prior written notice of such election delivered to the Employer to have the remaining amounts payable to him pursuant to this Section 6(b) paid in a lump sum amount, which amount shall be computed by discounting to present value such remaining amounts payable to the Employee at a rate of 8% per annum for each payment otherwise owed to the Employee through the remaining months in such Term of Employment. (c) Under no circumstances shall the Employee be required to mitigate the amount of payment specified in Section 4 which is payable during the Term of Employment specified in paragraph (b) of this Section 6. (d) A "Change in Control" shall be deemed to have occurred at any time after the date of this Agreement that (i) any person (other than those persons who own more than 10% of the combined voting power of the Employer's outstanding voting securities on the date hereof) becomes the beneficial owner, directly or indirectly, of 30% or more of the combined voting power of the Employer's then outstanding voting securities, or (ii) the individuals who at the beginning of any period of two consecutive years constitute the Employer's Board of Directors cease for any reason to constitute a majority of such Board of Directors at any time during such two-year period. 7. EXPENSES. The Employer agrees that during the Term of Employment it will reimburse the Employee for out-of-pocket expenses reasonably incurred by him in connection with the performance of his service hereunder upon the presentation by the Employee of an itemized 6 monthly accounting of such expenditures, including receipts where required for federal income tax regulations. 8. EMPLOYEE BENEFITS. During the Term of Employment: (a) Employee shall, upon satisfaction of any eligibility requirements with respect thereto, be entitled to participate in all employee benefit plans of Employer, including without limitation those health, dental, accidental death and dismemberment, and long term disability plans of Employer now or hereafter in effect that are made available to executive officers of the Employer; and (b) Employer shall maintain for Employee the benefits summarized on EXHIBIT A attached hereto. 7 9. NON-COMPETITION. (a) Employee acknowledges that he shall receive special training and knowledge from Employer. Employee acknowledges that included in the special knowledge received is the confidential information identified in Paragraph 10 below. Employee acknowledges that this confidential information is valuable to Employer and, therefore, its protection and maintenance constitutes a legitimate interest to be protected by Employer by this covenant not to compete. Therefore, Employee agrees that for the period (the "Noncompetition Period") (i) during the Term of Employment and (ii) in the event of a termination of the Term of Employment upon the occurrence of an event set forth in Section 5(a) hereof, commencing upon the occurrence of such event set forth in Section 5(a) and ending upon the first anniversary thereof, in each case unless otherwise extended pursuant to the terms hereof, Employee will not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any business that is engaged in the manufacture or marketing of disposable baby diapers, disposable training pants or pre-moistened wipes within the United States of America or within any other geographic area of the world where the Employer engages or proposes at the time of the termination of the Term of Employment to engage in business. Employee represents to Employer that the enforcement of the restriction contained in this Section 9 would not be unduly burdensome to Employee and that in order to induce the Employer to provide for the Term of Employment as set forth in Section 5 hereof, Employee further represents and acknowledges that Employee has entered into this agreement not to compete and is willing and able to compete in other geographical areas not prohibited by this Section 9. (b) Employee agrees that a breach or violation of this covenant not to compete by such Employee shall entitle the Employer, as a matter of right, to an injunction issued by any court of competent jurisdiction, restraining any further or continued breach or violation of this covenant. Such right to an injunction shall be cumulative and in addition to, and not in lieu of, any other remedies to which the Employer may show itself justly entitled. Further, during any period in which Employee is in breach of this covenant not to compete, the time period of this covenant shall be extended for an amount of time that Employee is in breach hereof. (c) In addition to the restrictions set forth in 8 paragraph (a) of this Section 9, Employee shall not for the Noncompetition Period, either directly or indirectly, (i) make known to any person, firm or corporation that is engaged in the manufacture or marketing of disposable baby diapers, disposable training pants or pre-moistened wipes, the names and addresses of any of the customers of the Employer or contacts of the Employer or any other information pertaining to such persons or (ii) call on, solicit, or take away, or attempt to call on, solicit or take away any of the customers of the Employer on whom Employee called or with whom Employee became acquainted during Employee's association with the Employer, whether for Employee or for any other person, firm or corporation. (d) The representation and covenants contained in this Section 9 on the part of Employee will be construed as ancillary to and independent of any other provision of this Agreement, and the existence of any claim or cause of action of Employee against Employer or any officer, director, or shareholder of Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer of the covenants of the Employee contained in this Section 9. In addition, the provisions of this Section 9 shall continue to be binding upon Employee in accordance with its terms, notwithstanding the termination of Employee's employment for any reason. (e) If Employee violates any covenant contained in this Section 9 and Employer brings legal action for injunctive or other relief, the Employer shall not, as a result of the time involved in obtaining the relief, be deprived of the benefit of the full period of any such covenant. Accordingly, the covenants of Employee contained in this Section 9 shall be deemed to have durations as specified above, which periods shall commence upon the later of (i) the Ending Date and (ii) the date of entry by a court of competent jurisdiction of a final judgment enforcing the covenants of Employee in this Section 9. (f) The parties to this Agreement agree that the limitations contained in this Section 9 with respect to geographic area, duration, and scope of activity are reasonable. However, if any court shall determine that the geographic area, duration, or scope of activity of any restriction contained in this Section 9 is unenforceable, it is the intention of the parties that such restrictive covenant set forth herein shall not thereby be terminated but shall be deemed amended to the extent required to render it valid and enforceable. 9 10. DISCLOSURE OF CONFIDENTIAL INFORMATION. During the Term of Employment, the Employee will disclose to Employer all ideas and business plans developed by him during such period which relate directly to the business of Employer. The Employee recognizes and acknowledges that he may have access to certain additional confidential information of Employer or of certain corporations affiliated with Employer, and that all such information constitutes valuable, special and unique property of Employer and its affiliates. The Employee agrees that, during the Term of Employment and for a period of five years after the termination of the Term of Employment, he will not, without the prior written consent of Employer, disclose or authorize or permit anyone under his direction to disclose to anyone not properly entitled thereto any of such confidential information. For purposes of the immediately preceding sentence, persons properly entitled to such information shall be (i) the Board of Directors of Employer and such officers, employees and agents of Employer or any affiliate thereof to whom such information is furnished in the normal course of business under established policies approved by Employer and (ii) such outside parties as are legally entitled to or are customarily furnished such information, including banking, lending, collection, accounting, and data processing institutions or agencies who or which are provided such information in the normal course of business of Employer. The Employee further agrees that upon termination of the Term of Employment he will not take with him or retain, without the prior written authorization of Employer, any papers, procedural or technical manuals, customer lists, customer account analyses (including, without limitation, accounts receivable agings, customer payment histories and customer account activity reports), price books, files or other documents or copies thereof belonging to Employer or to any affiliate of Employer, or any materials, supplies, equipment or furnishings belonging to Employer or to any affiliate of Employer, or any other confidential information of any kind belonging to Employer or any affiliate of Employer. In the event of a breach or threatened breach by the Employee of the provisions of this Section 10, Employer and the Employee agree that the remedy at law available to Employer and its affiliates would be inadequate and that Employer and its affiliates shall be entitled to an injunction, without the necessity of posting bond therefor, restraining the Employee from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting Employer and its affiliates from pursuing any other remedies, in addition to the injunctive relief available under this Section 10, for such breach or threatened breach, including the recovery of damages from the Employee. 11. TRADE SECRETS. All patents, formulae, inventions, processes, copyrights, proprietary information, trademarks or trade names, or future improvements to patents, formulae, inventions, processes, copyrights, proprietary information, trademarks or trade names, developed or completed by the Employee during the Term of Employment (collectively, the "Items") shall be promptly disclosed to Employer, and the Employee shall execute such instruments of assignment of the Items to the Employer as Employer shall request. The Employee acknowledges that a remedy at law for any breach by him of the provisions of this Section 11 would be 10 inadequate, and the Employee hereby agrees that Employer shall be entitled to injunctive relief in case of any such breach. 12. LEGAL FEES AND EXPENSES. In the event that either of the parties to this Agreement contests the validity or enforceability of any of the provisions of Sections 9, 10 or 11 hereof, then such contesting party hereby agrees to pay in a timely and prompt manner any and all legal fees and expenses incurred by the other party from time to time as a result of such contesting party's contesting of the validity or enforceability of any provision of Sections 9, 10, or 11 hereof this Agreement; PROVIDED, HOWEVER, nothing contained in this Section 12 shall obligate the Employer to pay any legal fees or expenses incurred by the Employee in connection with any litigation by the Employer against the Employee to enforce the terms of this Agreement against the Employee. 13. ASSIGNMENT. This Agreement is a personal employment contract and the rights and interests of the Employee hereunder may not be sold, transferred, assigned, pledged, or hypothecated, directly or indirectly, or by operation of law or otherwise. 14. SUCCESSORS. This Agreement shall inure to the benefit of and be binding upon the Employer and its successors and assigns and upon the Employee and his legal representatives. 15. ENTIRE AGREEMENT. This Agreement, which contains the entire contractual understanding between the parties, may not be changed orally but only by a written instrument signed by the Employee and the Chairman of the Board of Directors of the Employer. 16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, and Employee agrees to subject himself to the jurisdiction of the Southern District of Texas. 17. WAIVER. The waiver of any breach of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition. 18. ENFORCEABILITY. In the event any provision of this Agreement is found to be unenforceable or invalid, such provision shall be severable from this Agreement and shall not affect the enforceability or validity of any other provision contained in this Agreement. 19. NOTICES. Any notices or other communications required or permitted hereunder shall be sufficiently given if sent by registered mail, postage prepaid, and (a) if to the Employee, addressed to him at 17507 N.E. 33rd Avenue, Ridgefield, Washington 98642, and 11 (b) if to the Employer, addressed to it at 1415 West Loop North, Houston, Texas 77055 (Attention: Chairman of the Board of Directors), or such other address as the party to whom or to which such notice or other communication is to be given shall have specified in writing to the other party, and any such notice or communication shall be deemed to have been given as of the date so mailed. 20. ARBITRATION. Employer and Employee agree to submit to final and binding arbitration any and all disputes, claims (whether in tort, contract, statutory, or otherwise) and/or disagreements concerning the interpretation or application of this Agreement and/or Employee's employment by Employer and/or the termination of this Agreement and/or Employee's employment by Employer; PROVIDED, HOWEVER, notwithstanding the foregoing, in no event shall any dispute, claim or disagreement arising under Section 9 of this Agreement be submitted to arbitration pursuant to this Section 18 or otherwise. Any such dispute, claim and/or disagreement subject to arbitration pursuant to the terms of this Section 18 shall be resolved by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). Arbitration under this provision must be initiated within 30 days of the action, inaction, or occurrence about which the party initiating the arbitration is complaining. Within ten days of the initiation of an arbitration hereunder, each party will designate an arbitrator pursuant to Rule 14 of the AAA Rules. The appointed arbitrators will appoint a neutral arbitrator from the panel in the manner prescribed in Rule 13 of the AAA Rules. Employee and Employer agree that the decision of the arbitrators selected hereunder will be final and binding on both parties. This arbitration provision is expressly made pursuant to and shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1 - 14. The parties hereto agree that pursuant to Section 9 of the Act that a judgment of the United States District Court for the Southern District of Texas, shall be entered upon the award made pursuant to the arbitration. IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed by its duly authorized officer, and the Employee has executed this Agreement as of the date first above written. DRYPERS CORPORATION By /s/ RAYMOND M. CHAMBERS Raymond M. Chambers Co-Chief Executive Officer 12 EMPLOYEE /s/ JOE D. TANNER Joe D. Tanner 13 EX-10.28 8 EXHIBIT 10.28 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") made as of the 19th day of July, 1996, between Drypers Corporation, a Delaware corporation (the "Employer"), and David M. Olsen (the "Employee"), W I T N E S S E T H: WHEREAS, the Employer desires to obtain the services of the Employee, and the Employee desires to be employed by the Employer upon the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises, the agreements herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. EMPLOYMENT. Subject to the terms and conditions hereinafter set forth, the Employer hereby agrees to employ the Employee, and the Employee hereby agrees to serve the Employer, in the capacity and for the Term of Employment specified herein. 2. SCOPE OF EMPLOYMENT. During the Term of Employment hereunder, the Employee will serve as Vice President, Marketing in accordance with the provisions of the By-Laws of the Employer. In that connection, the Employee will: (a) devote his full time, attention, and energies to the business of the Employer and will diligently and to the best of his ability perform all duties incident to his employment hereunder; (b) use his best efforts to promote the interests and goodwill of the Employer; and (c) perform such other duties commensurate with his office as the Board of Directors or any of the Co-Chief Executive Officers of the Employer may from time-to-time assign to him. The foregoing shall not be construed as preventing the Employee from making investments in other businesses or enterprises provided such investments do not require the provision of substantial services by the Employee to the operations or the affairs of such businesses or enterprises such that the provision thereof would interfere in any respect with the performance of the Employee's duties hereunder. 3. VACATION. During the Term of Employment the Employee shall be entitled to sick leave, holidays, and an annual vacation, all in accordance with the regular policy of the Employer for officers of the Employer, during which time his compensation shall be paid in full. Each such vacation shall be taken by the Employee at such times as may be mutually agreed upon by the Employee and Employer. 4. COMPENSATION. As compensation for his services hereunder and in consideration of his agreement not to compete as set forth in Section 9, the Employer shall: -2- (a) during the Term of Employment pay the Employee, subject to the terms and conditions of this Agreement, a base salary at the rate of not less than $115,000.00 per year, payable in accordance with the normal payroll practices of the Employer but in no less than equal bi-weekly installments; and (b) during the Term of Employment as additional compensation for services hereunder during the term of this Agreement, the Employee shall be entitled to an annual bonus in amounts as shall be determined by the Co-Chief Executive Officer and President of Drypers North America of the Employer for each of the Company's fiscal years ending after the date hereof. 5. TERM. (a) The "Term of Employment", as used herein, shall mean a period commencing on the date hereof and ending on the first anniversary of the date of this Agreement. The Term of Employment may be renewed for an additional term or terms as determined between the Employer and the Employee on or prior to the first anniversary of the date of this Agreement; PROVIDED HOWEVER that the occurrence of any of the following events set forth in this Section 5(a) prior to the end of the Term of Employment shall result in the immediate termination of the Term of Employment, but shall not result in the termination of this Agreement: (i) the commission by the Employee of an act constituting a dishonest or other act of material misconduct, or a fraudulent act or a felony under the laws of any state or of the United States to which the Employer or Employee is subject, and such act results (or is intended to result directly or indirectly) in the Employee's substantial gain or personal enrichment to the detriment of the Employer; or (ii) the death of the Employee; or (iii) the inability of the Employee to perform his duties hereunder, whether by reason of injury (physical or mental), illness or otherwise, incapacitating him for a continuous period exceeding three months, excluding any leaves of absence approved by the Employer; or (iv) the Employee resigns at any time other than after a Change in Control (as defined in Section 6(d)) without Good Cause ("Good Cause" being defined below). (b) The term "Good Cause" shall mean the occurrence of any of the following events: -3- (i) the assignment by the Employer to the Employee of duties that are materially inconsistent with the Employee's office with Employer at the time of such assignment, or the removal by the Employer from the Employee of a material portion of those duties usually appertaining to the Employee's office with the Employer at the time of such removal; or (ii) a material change by the Employer, without the Employee's prior written consent, in the Employee's responsibilities to the Employer, as such responsibilities are ordinarily and customarily required from time to time of a vice president of a corporation engaged in the Employer's business; or (iii) any removal of the Employee from, or any failure to reelect or to reappoint the Employee to, the office stated in Section 2; or (iv) the Employer's direction that the Employee discontinue service (or not seek reelection or reappointment) as a director, officer or member of any corporation or association of which the Employee is a director, officer, or member at the date of this Agreement; or (v) a reduction by the Employer in the amount of the Employee's base salary as determined under this Agreement (or as subsequently increased), or the failure of the Employer to pay such base salary to the Employee at the time and in the manner specified in Section 4; or (vi) other than with respect to the annual performance bonus specified in Section 4(b) or, as made with the Employee's prior written consent, the discontinuance (without comparable replacement) or material reduction by the Employer of the Employee's participation in any bonus or other employee benefit arrangement (including, without limitation, any profit-sharing, thrift, life insurance, medical, dental, hospitalization, stock option or retirement plan or arrangement) in which the Employee is a participant under the terms of this Agreement, as in effect on the date hereof or as may be improved from time to time hereafter; or (vii) the moving by the Employer of the Employee's principal office space, related facilities, or support personnel, from the Employer's principal operating offices or the Employer's requiring the Employee to perform a -4- majority of his duties outside the Employer's principal operating offices for a period of more than 30 consecutive days; -5- or (viii) the relocation, without the Employee's prior written consent, of the Employer's principal operating offices to a location outside the county in which such offices are located at the time of the signing of this Agreement; or (ix) in the event the Employer requires the Employee to reside at a location more than 25 miles from the Employer's principal operating offices, except for occasional travel in connection with the Employer's business to an extent and in a manner which is substantially consistent with the Employee's current business travel obligations; or (x) in the event the Employee consents to a relocation of the Employer's principal operating offices, the failure of the Employer to (A) pay or reimburse the Employee on an after-tax basis for all reasonable moving expenses incurred by the Employee in connection with such relocation or (B) indemnify the Employee on an after-tax basis against any loss realized by the Employee on the sale of his principal residence in connection with such relocation; or (xi) the failure of the Employer to provide the Employee with the benefits specified under Section 8; or (xii) the failure of the Employer to continue to provide the Employee with office space, related facilities and support personnel (including, without limitation, administrative and secretarial assistance) that are commensurate with the Employee's responsibilities to and position with the Employer; or (xiii) the failure by the Employer to promptly reimburse the Employee for the reasonable business expenses incurred by the Employee in the performance of his duties for the Employer, as set forth in Section 7. 6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER. (a) Subject to the provisions of paragraph (b) of this Section 6, in the event of termination of the Term of Employment for any reason specified in Section 5(a) above, the Employer shall no longer be obligated to make the -6- payments specified under Section 4 or to provide the benefits under Section 8; PROVIDED, HOWEVER, any payments payable under Section 4 which shall have been earned but not yet paid shall be paid by the Employer to the Employee, and the Employee shall pay any amount or amounts then owed by the Employee to the Employer. (b) In the event of the termination of the Term of Employment for any reason other than pursuant to an event specified in Section 5(a) above, the Employer shall, until the first anniversary of the date of such termination continue to be obligated to (i) make the payments specified under Section 4, (ii) provide the benefits specified under Section 8(b), and (iii) maintain the Employee as a participant in, or provide benefits comparable to those of, the health insurance benefit plan specified under Section 8(a). In the event of such termination, the Employee may elect, upon 30 days prior written notice of such election delivered to the Employer to have the remaining amounts payable to him pursuant to this Section 6(b) paid in a lump sum amount, which amount shall be computed by discounting to present value such remaining amounts payable to the Employee at a rate of 8% per annum for each payment otherwise owed to the Employee through the remaining months in such Term of Employment. (c) Under no circumstances shall the Employee be required to mitigate the amount of payment specified in Section 4 which is payable during the Term of Employment specified in paragraph (b) of this Section 6. (d) A "Change in Control" shall be deemed to have occurred at any time after the date of this Agreement that (i) any person (other than those persons who own more than 10% of the combined voting power of the Employer's outstanding voting securities on the date hereof) becomes the beneficial owner, directly or indirectly, of 30% or more of the combined voting power of the Employer's then outstanding voting securities, or (ii) the individuals who at the beginning of any period of two consecutive years constitute the Employer's Board of Directors cease for any reason to constitute a majority of such Board of Directors at any time during such two-year period. 7. EXPENSES. The Employer agrees that during the Term of Employment it will reimburse the Employee for out-of-pocket expenses reasonably incurred by him in connection with the performance of his service hereunder in accordance with the Employer's expense reimbursement policy for officers of the Employer upon the presentation by the Employee of an itemized accounting of such expenditures, including receipts where required for federal income tax regulations. 8. EMPLOYEE BENEFITS. During the Term of Employment, Employee shall, upon satisfaction of any eligibility requirements with respect thereto, be entitled to participate in all employee benefit plans of Employer, including without limitation those health, dental, accidental death and dismemberment, and long term disability plans of Employer now or hereafter in effect that are made available to officers of the Employer; and -7- 9. NON-COMPETITION. (a) Employee acknowledges that he shall receive special training and knowledge from Employer. Employee acknowledges that included in the special knowledge received is the confidential information identified in Paragraph 10 below. Employee acknowledges that this confidential information is valuable to Employer and, therefore, its protection and maintenance constitutes a legitimate interest to be protected by Employer by this covenant not to compete. Therefore, Employee agrees that for the period (the "Noncompetition Period") (i) during the Term of Employment and (ii) in the event of a termination of the Term of Employment upon the occurrence of an event set forth in Section 5(a) hereof, commencing upon the occurrence of such event set forth in Section 5(a) and ending upon the third anniversary thereof, in each case unless otherwise extended pursuant to the terms hereof, Employee will not, directly or indirectly, either as an employee, employer, consultant, agent, principal, partner, stockholder, corporate officer, director, or in any other individual or representative capacity, engage or participate in any business that is engaged in the manufacture or marketing of disposable baby diapers, disposable training pants or pre-moistened wipes within the United States of America or within any other geographic area of the world where the Employer engages or proposes at the time of the termination of the Term of Employment to engage in business. Employee represents to Employer that the enforcement of the restriction contained in this Section 9 would not be unduly burdensome to Employee and that in order to induce the Employer to provide for the Term of Employment as set forth in Section 5 hereof, Employee further represents and acknowledges that Employee has entered into this agreement not to compete and is willing and able to compete in other geographical areas not prohibited by this Section 9. (b) Employee agrees that a breach or violation of this covenant not to compete by such Employee shall entitle the Employer, as a matter of right, to an injunction issued by any court of competent jurisdiction, restraining any further or continued breach or violation of this covenant. Such right to an injunction shall be cumulative and in addition to, and not in lieu of, any other remedies to which the Employer may show itself justly entitled. Further, during any period in which Employee is in breach of this covenant not to compete, the time period of this covenant shall be extended for an amount of time that Employee is in breach hereof. (c) In addition to the restrictions set forth in paragraph (a) of this Section 9, Employee shall not for the Noncompetition Period, either directly or indirectly, (i) make known to any person, firm or corporation that is engaged in the manufacture or marketing of disposable baby diapers, disposable training pants or pre-moistened wipes, the names and addresses of any of the customers of the Employer or contacts of the Employer or any other information pertaining to such persons or (ii) call on, solicit, or take away, or attempt to call on, solicit or take away any of the customers of the Employer on whom Employee called or with whom Employee became acquainted during Employee's association with the Employer, whether for Employee or for any other person, firm or corporation. -8- (d) The representation and covenants contained in this Section 9 on the part of Employee will be construed as ancillary to and independent of any other provision of this Agreement, and the existence of any claim or cause of action of Employee against Employer or any officer, director, or shareholder of Employer, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by Employer of the covenants of the Employee contained in this Section 9. In addition, the provisions of this Section 9 shall continue to be binding upon Employee in accordance with its terms, notwithstanding the termination of Employee's employment for any reason. (e) If Employee violates any covenant contained in this Section 9 and Employer brings legal action for injunctive or other relief, the Employer shall not, as a result of the time involved in obtaining the relief, be deprived of the benefit of the full period of any such covenant. Accordingly, the covenants of Employee contained in this Section 9 shall be deemed to have durations as specified above, which periods shall commence upon the later of (i) the end of the Term of Employment and (ii) the date of entry by a court of competent jurisdiction of a final judgment enforcing the covenants of Employee in this Section 9. (f) The parties to this Agreement agree that the limitations contained in this Section 9 with respect to geographic area, duration, and scope of activity are reasonable. However, if any court shall determine that the geographic area, duration, or scope of activity of any restriction contained in this Section 9 is unenforceable, it is the intention of the parties that such restrictive covenant set forth herein shall not thereby be terminated but shall be deemed amended to the extent required to render it valid and enforceable. 10. DISCLOSURE OF CONFIDENTIAL INFORMATION. During the Term of Employment, the Employee will disclose to Employer all ideas and business plans developed by him during such period which relate directly to the business of Employer. The Employee recognizes and acknowledges that he may have access to certain additional confidential information of Employer or of certain corporations affiliated with Employer, and that all such information constitutes valuable, special and unique property of Employer and its affiliates. The Employee agrees that, during the Term of Employment and for a period of five years after the termination of the Term of Employment, he will not, without the prior written consent of Employer, disclose or authorize or permit anyone under his direction to disclose to anyone not properly entitled thereto any of such confidential information. For purposes of the immediately preceding sentence, persons properly entitled to such information shall be (i) the Board of Directors of Employer and such officers, employees and agents of Employer or any affiliate thereof to whom such information is furnished in the normal course of business under established policies approved by Employer and (ii) such outside parties as are legally entitled to or are customarily furnished such information, including banking, lending, collection, accounting, and data processing institutions or agencies who or which are provided such information in the normal course of business of Employer. The Employee further agrees that upon termination of the Term of Employment he will not take with him or retain, without the prior written authorization of Employer, any papers, procedural or technical manuals, customer lists, customer account analyses (including, without limitation, accounts receivable agings, customer payment histories and customer account activity reports), price books, files or other documents or -9- copies thereof belonging to Employer or to any affiliate of Employer, or any materials, supplies, equipment or furnishings belonging to Employer or to any affiliate of Employer, or any other confidential information of any kind belonging to Employer or any affiliate of Employer. The Employee further agrees that the existence and contents of this Agreement constitute confidential information of the Employer and that such confidential information should only be disclosed to or discussed with the Co-Chief Executive Officers or a member of the Board of Directors of the Employer. In the event of a breach or threatened breach by the Employee of the provisions of this Section 10, Employer and the Employee agree that the remedy at law available to Employer and its affiliates would be inadequate and that Employer and its affiliates shall be entitled to an injunction, without the necessity of posting bond therefor, restraining the Employee from disclosing, in whole or in part, such confidential information. Nothing herein shall be construed as prohibiting Employer and its affiliates from pursuing any other remedies, in addition to the injunctive relief available under this Section 10, for such breach or threatened breach, including the recovery of damages from the Employee. 11. TRADE SECRETS. All patents, formulae, inventions, processes, copyrights, proprietary information, trademarks or trade names, or future improvements to patents, formulae, inventions, processes, copyrights, proprietary information, trademarks or trade names, developed or completed by the Employee during the Term of Employment (collectively, the "Items") shall be promptly disclosed to Employer, and the Employee shall execute such instruments of assignment of the Items to the Employer as Employer shall request. The Employee acknowledges that a remedy at law for any breach by him of the provisions of this Section 11 would be inadequate, and the Employee hereby agrees that Employer shall be entitled to injunctive relief in case of any such breach. 12. LEGAL FEES AND EXPENSES. In the event that either of the parties to this Agreement contests the validity or enforceability of any of the provisions of Sections 9, 10 or 11 hereof, then such contesting party hereby agrees to pay in a timely and prompt manner any and all legal fees and expenses incurred by the other party from time to time as a result of such contesting party's contesting of the validity or enforceability of any provision of Sections 9, 10, or 11 hereof this Agreement; PROVIDED, HOWEVER, nothing contained in this Section 12 shall obligate the Employer to pay any legal fees or expenses incurred by the Employee in connection with any litigation by the Employer against the Employee to enforce the terms of this Agreement against the Employee. 13. ASSIGNMENT. This Agreement is a personal employment contract and the rights and interests of the Employee hereunder may not be sold, transferred, assigned, pledged, or hypothecated, directly or indirectly, or by operation of law or otherwise. 14. SUCCESSORS. This Agreement shall inure to the benefit of and be binding upon the Employer and its successors and assigns and upon the Employee and his legal representatives. 15. ENTIRE AGREEMENT. This Agreement, which contains the entire contractual understanding between the parties, may not be changed orally but only by a written instrument signed by the Employee and the Chairman of the Board of Directors of the Employer. -10- 16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas, and Employee agrees to subject himself to the jurisdiction of the Southern District of Texas. 17. WAIVER. The waiver of any breach of any term or condition of this Agreement shall not be deemed to constitute the waiver of any other breach of the same or any other term or condition. 18. ENFORCEABILITY. In the event any provision of this Agreement is found to be unenforceable or invalid, such provision shall be severable from this Agreement and shall not affect the enforceability or validity of any other provision contained in this Agreement. -11- 19. NOTICES. Any notices or other communications required or permitted hereunder shall be sufficiently given if sent by registered mail, postage prepaid, and (a) if to the Employee, addressed to him at 1516 S.E. 123rd, Vancouver, Washington 98684 and (b) if to the Employer, addressed to it at 1415 West Loop North, Houston, Texas 77055 (Attention: Chairman of the Board of Directors), or such other address as the party to whom or to which such notice or other communication is to be given shall have specified in writing to the other party, and any such notice or communication shall be deemed to have been given as of the date so mailed. 20. ARBITRATION. Employer and Employee agree to submit to final and binding arbitration any and all disputes, claims (whether in tort, contract, statutory, or otherwise) and disagreements concerning the interpretation or application of this Agreement and Employee's employment by Employer and the termination of this Agreement and Employee's employment by Employer; PROVIDED, HOWEVER, notwithstanding the foregoing, in no event shall any dispute, claim or disagreement arising under Section 9 of this Agreement be submitted to arbitration pursuant to this Section 18 or otherwise. Any such dispute, claim and disagreement subject to arbitration pursuant to the terms of this Section 18 shall be resolved by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA"). Arbitration under this provision must be initiated within 30 days of the action, inaction, or occurrence about which the party initiating the arbitration is complaining. Within ten days of the initiation of an arbitration hereunder, each party will designate an arbitrator pursuant to Rule 14 of the AAA Rules. The appointed arbitrators will appoint a neutral arbitrator from the panel in the manner prescribed in Rule 13 of the AAA Rules. Employee and Employer agree that the decision of the arbitrators selected hereunder will be final and binding on both parties. This arbitration provision is expressly made pursuant to and shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1 - 14. The parties hereto agree that pursuant to Section 9 of the Act that a judgment of the United States District Court for the Southern District of Texas, shall be entered upon the award made pursuant to the arbitration. IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed by its duly authorized officer, and the Employee has executed this Agreement as of the date first above written. DRYPERS CORPORATION By /s/ TERRY A. TOGNIETTI Terry A. Tognietti Co-Chief Executive Officer EMPLOYEE /s/ DAVID M. OLSEN David M. Olsen -12- EXHIBIT A HEALTH AND WELFARE BENEFITS SUMMARY o Group comprehensive medical, dental, and term life insurance. Eighty percent of the premiums for Employee and his dependents are paid by Employer. o Participation in the Company's 401k plan. OTHER EMPLOYEE PERQUISITES o Use of a car not more than (30 months old, with monthly lease payment not to exceed $650), such car to be equipped with a cellular phone, as well as all costs and expenses incurred in operating such car, including gas, service and maintenance charges, parts, fees for inspection and license plates, parking and tolls, and cellular phone equipment, installation and use charges. o Health and country club monthly family membership dues and reasonable expenses in accordance with the Employer's policies. -13- EX-11.1 9 EXHIBIT 11.1 DRYPERS CORPORATION AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
YEAR ENDED DECEMBER 31 -------------------------------------------- 1994 1995 1996 ------------ ------------ ------------ Income (loss) before extraordinary item ............. $ 6,798,000 $(15,465,000) $ 1,313,000 Extraordinary item .................................. (3,688,000) -- -- ------------ ------------ ------------ Net income (loss) ................................... $ 3,110,000 $(15,465,000) $ 1,313,000 ============ ============ ============ Weighted average number of shares of common stock ... 5,776,554 6,587,698 6,694,298 Common stock equivalents ............................ 469,533 -- 7,500,000 ------------ ------------ ------------ Weighted average number of shares of common stock and common stock equivalents .......................... 6,246,087 6,587,698 14,194,298 ============ ============ ============ Net income (loss) per share of common stock and common stock equivalents- Before extraordinary item ....................... $ 1.09 $ (2.35) $ .09 Extraordinary item .............................. (.59) -- -- ------------ ------------ ------------ Net income (loss) ................................... $ .50 $ (2.35) $ .09 ============ ============ ============
EX-21.1 10 EXHIBIT 21.1 SUBSIDIARIES OF DRYPERS CORPORATION VRG Leasing Corporation UltraCare Products International, Inc. Drypers Limited Seler, S.A. Drypers Mexico S.A. de C.V. New Dry, S.A. Hygienic Products International Limited, Inc. Drypers do Brasil, Ltda. EX-23.1 11 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statements, File Nos. 33-84410 and 333-16085. ARTHUR ANDERSEN LLP Houston, Texas March 26, 1997 EX-27.1 12
5 THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 DEC-31-1996 4,923,000 0 31,791,000 1,160,000 11,616,000 51,580,000 49,311,000 14,157,000 150,555,000 42,873,000 44,122,000 0 1,000 7,000 53,600,000 150,555,000 207,014,000 207,014,000 126,128,000 126,128,000 70,333,000 10,553,000 8,931,000 1,622,000 309,000 1,313,000 0 0 0 1,313,000 .09 .09
-----END PRIVACY-ENHANCED MESSAGE-----