Document:

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                                                                  EXHIBIT 10.C.4

                           ASSET PURCHASE AGREEMENT

                                 by and among

                       DSG INTERNATIONAL LIMITED and/or
                       ASSOCIATED HYGIENIC PRODUCTS LLC

                               as the Purchaser

                                      and

                             DRYPERS CORPORATION,

                                   as Seller

                         Dated as of February 20, 2001
<PAGE>

                            ASSET PURCHASE AGREEMENT

     ASSET PURCHASE AGREEMENT, dated as of February 20, 2001 (the "Agreement"),
                                                                   ---------
by and among DSG International Limited, a British Virgin Island company and/or
Associated Hygienic Products LLC, a Delaware limited liability company,
(together with any subsidiary or affiliate to which such rights and obligations
may be assigned pursuant to Section 12.3 herein, the "Purchaser" and separately
                                                      ---------
"DSG" and "AHP"), DRYPERS CORPORATION, a Delaware corporation (the "Company" or
                                                                    -------
"Seller"). Capitalized terms used herein and not otherwise defined shall have
the meanings set forth in Article XII or in the Bidding Procedures Order.

     WHEREAS, the Company in its own name and through various subsidiaries is in
the business of manufacturing and marketing disposable baby diapers, training
pants, undergarments and pre-moistened baby wipes (the "Business") and owns or
                                                        --------
leases certain assets and properties related thereto; and

     WHEREAS, the Company is the debtor and debtor in possession in Chapter 11
case number O0-39360-H4-11 (the "Case") pending before the United States
                                 ----
Bankruptcy Court for the Southern District of Texas, Houston Division; and

     WHEREAS, subject to the terms and conditions set forth herein, (i) the
Purchaser desires to purchase and obtain the assignment from the Company of, and
the Company desires to sell, convey, assign and transfer to the Purchaser, (a)
all assets and properties of the Company relating to the Business located in the
United States, but such assets shall not include the Excluded Domestic Assets;
in each case free and clear of Liens, including, in the case of the Company,
pursuant to sections 363(b) and (f) and 365 of the Bankruptcy Code.

     NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants, and agreements set forth herein, the
parties hereto agree as follows:

                                       I

                     PURCHASE AND SALE OF ASSETS AND STOCK

     Section 1.1 Intentionally Omitted.
                 ---------------------

     Section 1.2 Purchase and Sale of Domestic Purchased Assets.
                 ----------------------------------------------

           Section 1.2.1 Sale of the Domestic Purchased Assets. On the terms and
                         -------------------------------------
subject to the conditions set forth in this Agreement, pursuant to sections
363(b) and (f) and 365 of the Bankruptcy Code, at the Closing, the Company shall
sell, assign, transfer, convey, and deliver to the Purchaser, and the Purchaser
shall purchase and accept from the Company, the Company's rights, title, and
interests in and to the Business located in the United States (other than the
Excluded Domestic Assets), including, without limitation, in and to all the
assets, properties, rights, contractual rights of the Company, and claims of the
Company related to the Business (except as otherwise set forth in Section
1.2.2), wherever located, whether tangible or intangible,

                                       1
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as the same shall exist at the Closing (such rights, title, and interests in and
to all such assets, properties, rights, contracts, and claims being collectively
referred to herein as the "Domestic Purchased Assets"), free and clear of all
                           -------------------------
Liens, other than Permitted Liens. The Domestic Purchased Assets shall include,
without limitation, all the Seller's rights, title, and interests in and to the
assets, properties, rights, contracts, and claims described in clauses (a)
through (m) below to the extent they are owned by the Company (but shall
specifically exclude those assets, properties, rights, contracts, and claims set
forth in Section 1.2.2):

          (a) all inventory, raw materials, work in process, finished goods,
samples, supplier spare parts, machinery, furnishings, furniture, fixtures,
office supplies, vehicles, equipment, computers, and other tangible personal
property (including all such items which are currently on order for use in the
Business in the United States);

          (b) all Trade Receivables;

          (c) the Intellectual Property, the rights to sue for, and remedies
against, present, and future infringements thereof, and the rights of priority
and protection of interests therein under applicable laws;

          (d) all books and records of the Business, including, without
limitation, data processing records, employment and personnel records, customer
lists, files, and records, advertising and marketing data and records, credit
records, records relating to suppliers and other data as well as all copies of
marketing brochures and materials and other printed or written materials in any
form or medium relating to the Company's ownership or operation of the Business
that the Company is not required by law to retain and duplicates of any such
materials that the Company is required by law to retain;

          (e) all rights under all warranties, representations and guarantees
made by suppliers, manufacturers, and contractors in connection with the
operation of the Business;

          (f) all of the Company's rights to the licenses, Permits, approvals,
clearances and authorizations desirable or required to conduct the Business,
including all of the Company's Environmental Permits;

          (g) all contracts listed on Schedule 1.2.1(g) (the foregoing being the
"Assumed Contracts"), and all rights of the Company thereunder,
 -----------------

          (h) all telephone numbers, other directory listings and Internet
domain names used by the Company in the conduct of the Business;

          (i) all credits, prepaid expenses deferred charges, advance payments,
security deposits and prepaid items (and, in each case, security interests from
third parties relating thereto);

          (j) all goodwill relating to the Domestic Purchased Assets and the
Business;

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          (k) all computer software programs and databases used by the Company,
whether owned, licensed (subject to applicable restrictions), leased, or
internally developed; and

          (1) all leases and subleases, including all amendments and
modifications pursuant to which the Company leases any real or personal property
that is listed as of the date hereof on Schedule 1.2.1(1) (the foregoing being
the "Assumed Leases").
     --------------

     Section 1.2.2 Excluded Domestic Assets. The following assets, properties,
                   ------------------------
and rights (the "Excluded Domestic Assets") are not included in the Domestic
                 ------------------------
Purchased Assets and shall be retained by the Company:

          (a) All contracts (other than contracts which have been included by
the Purchaser on Schedule 1.2.1(g)) (the "Excluded Contracts");
                                          ------------------

          (b) Any leases and subleases, including all amendments and
modifications, pursuant to which the Company leases any real or personal
property (unless such leases or subleases have been included by the Purchaser on
Schedule 1.2.1(1)) (the "Excluded Leases");
                         ---------------

          (c) all cash and cash equivalents of the Company;

          (d) all claims, counterclaims, demands and causes of action of the
Company, including without limitation, avoidance actions under sections 544,
547, 548, 549, 550 or 551 of the Bankruptcy Code;

          (e) any other asset, property, right, contract or claim set forth in
Section 1.2.2(e) of the Seller Disclosure Letter;

          (f) the Company's direct or indirect interest in the Subsidiaries;

          (g) the Company's direct interest in Drypers Germany;

          (h) the Puerto Rico Assets; and

          (i) any claims of the Company against any of its direct or indirect
Subsidiaries arising pursuant to intercompany advances, promissory notes, or
otherwise and incurred prior to February 14, 2001.

     Section 1.2.3 Assumed Liabilities. On the terms and subject to the
                   -------------------
conditions set forth in this Agreement, the transferee of the Domestic Purchased
Assets, upon the transfer of such assets to such transferee, shall assume from
the Company and thereafter pay, perform, or discharge in accordance with their
terms, only the following liabilities and obligations of the Company (the
"Assumed Liabilities"):
 -------------------

          (a) all liabilities and obligations with respect to, arising out of,
or related to, the ownership, possession or use of the Domestic Purchased
Assets, but in each case only to the extent arising out of or resulting from the
Conduct of the Business after the Closing

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<PAGE>

Date; provided, however, that liabilities in respect of property Taxes for the
current tax year shall be prorated as of the Closing Date; and

          (b) all obligations of the Company under the Assumed Contracts and
Assumed Leases which by the terms thereof are to be observed, paid, discharged
or performed, as the case may be, at any time after the Closing Date (including
obligations for goods in transit which have been ordered but not received by the
Company prior to the Closing), but excluding obligations and liabilities arising
out of any breach or default by the Company under any such Assumed Contract or
Assumed Lease prior to the Closing Date and excluding any cure amounts as set
forth in Section 1.2.4(d) below.

     Section 1.2.4 Excluded Liabilities. Notwithstanding anything to the
                   --------------------
contrary contained herein, the Purchaser shall not assume, or in any way be
liable or responsible for, any liabilities, commitments or obligations of the
Company of any kind or nature whatsoever, known or unknown, accrued, fixed,
contingent or otherwise, liquidated or unliquidated, choate or inchoate, due or
to become due, except for the Assumed Liabilities. Without limiting the
generality of the foregoing, the transferee of the Domestic Purchased Assets
shall not assume, and the Company shall remain responsible for, the following:
(a) any liabilities or obligations (whether absolute, contingent or otherwise)
with respect to, arising out of, or related to, the Domestic Purchased Assets on
or prior to the Closing Date, including, without limitation, any liability or
obligation of the Company or any of its employees, consultants, directors,
officers, affiliates or agents arising out of, relating to, or caused by
(whether directly or indirectly), the Company's ownership, possession, interest
in, use or control of the Domestic Purchased Assets; (b) any liability or
obligation of the Company for any Taxes of any kind accrued for, applicable to
or arising from any period ending on or prior to the Closing Date including,
without limitation, property Taxes for periods prior to the Closing Date (but
excluding property Taxes for the current tax year, which shall be prorated as of
the Closing Date); (c) any liability or obligation of the Company or any
Commonly Controlled Entity in respect of any employee benefit plans relating
solely to the Company or its employees (including, without limitation, any
pension, welfare, or other Benefit Plans), consulting, severance, change in
control or similar agreements (unless and to the extent that the Purchaser in
its discretion expressly agrees in writing to assume any such obligations after
modifying or amending any such plans or agreements as it may in its sole
judgment elect); (d) any cure amounts that become payable in respect of the
assumption and assignment to the Purchaser of Assumed Contracts, Assumed Leases
or other executory contracts and unexpired leases assigned to the Purchaser
under section 365 of the Bankruptcy Code; (e) any liability or obligation
arising pursuant to Safety and Environmental Laws or principles of common law
relating to pollution, protection of the Environment or health and safety based
on events, conditions or circumstances occurring or existing or prior to the
Closing Date; (f) any obligations or liabilities of any of the Company or any
Subsidiary to Wasserstein, Perella and Co., Inc.; (g) any liability or
obligation (whether absolute, contingent or otherwise) with respect to, arising
out of, or related to the Excluded Domestic Assets; (h) any product liability or
claim for injury to person or property, regardless when made or asserted,
relating to products manufactured, distributed or sold by the Business on or
prior to the Closing Date; (i) any recalls on or after the Closing Date mandated
by any Governmental Body of the products of the Business manufactured,
distributed or sold by the Seller on or prior to the Closing Date; (j) any
intercompany payables and other liabilities or obligations to the Company or any
of its affiliates; or (k) all costs and expenses incurred by Seller incident to
their negotiation and preparation of

                                       4
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this Agreement and their performance of and compliance with the terms,
conditions and arrangements contained herein.

     Section 1.3 Intentionally omitted.
                 ---------------------

     Section 1.4 Purchase Price.
                 --------------

          Section 1.4.1 Intentionally Omitted.
                        ---------------------

          Section 1.4.2 Intentionally Omitted.

          Section 1.4.3 Intentionally Omitted.

          Section 1.4.4 Purchase Price. (a) Subject to Section 1.4.4 (b), the
                        --------------
purchase price for the Domestic Purchased Assets shall be $38,460,000 (the
"Purchase Price") and $34,500,000 of the Purchase Price (net of any cash deposit
held by Purchaser) shall be paid on the Closing Date by wire transfer of
immediately available funds to an account which shall be designated in writing
by the Company at least one Business Day prior to the Closing Date. The balance
of $3,960,000 of the Purchase Price shall be paid and satisfied by the Purchaser
forgiving $3,960,000 in principal amount (including unpaid and accrued interest
on such principal amount) of the Paragon Subordinate DIP Loan as required by
Section 7.6 of this Agreement. Any cash deposit held by Purchaser shall be
applied on the Closing Date to the Purchase Price.

               (b) Section 1.4.4(b) Working Capital Adjustment. The Purchase
Price shall be decreased by the Working Capital Adjustment.

          "Working Capital Adjustment" shall be the amount by which the
aggregate inventory and receivables included in the Domestic Purchased Assets is
less as of Closing than the corresponding amounts on the Balance Sheet
previously furnished to Purchaser. The Working Capital Adjustment shall be made
within 45 days after the Closing, and the Parties shall escrow an agreed amount
of the Purchase Price paid at Closing to provide for such Working Capital
Adjustment.

                                       II

                                  THE CLOSING

     Section 2.1 Closing. The Closing of the transactions contemplated by this
                 -------
Agreement shall take place at the offices of Haynes and Boone, LLP, 1000
Louisiana, Suite 4300, Houston, Texas 77002 at 10:00 a.m. on the second Business
Day after all conditions set forth in Articles VI and VII shall have been
satisfied or waived or at such other time, date and place as shall be fixed by
agreement among the parties (the date of the Closing being herein referred to as
the "Closing Date").
     ------------

     Section 2.2 Acquisition Subsidiaries. On or before the Closing, the
                 ------------------------
Purchaser may designate one or more of the Purchaser Acquisition Subsidiaries in
writing to receive all or part of the Domestic Purchased Assets.

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     Section 2.3 Allocation of Asset Purchase Price. Not later than 30 days
                 ----------------------------------
following the Closing Date, the Purchaser shall deliver to the Company a
schedule allocating the Purchase Price among the Domestic Purchased Assets,
which schedule shall be binding upon the Purchaser and the Company for all
accounting and tax purposes.

                                      III

                 REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     The Company hereby represents and warrants to the Purchaser as follows, but
with respect to the Purchaser, only to the extent of the assets being purchased
by such Purchaser and, with respect to each representation and warranty, only to
the extent the same could reasonably be expected to have a Seller Materail
Adverse Effect.

     Section 3.1 Due Incorporation and Authority. The Company is a corporation
                 -------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware, and the Seller has all requisite corporate power and lawful
authority to own,lease and operate its properties and to carry on its business
as now being conducted, except where the failure to have such authority could
not reasonably be expected to (i) individually or in the aggregate, have a
material adverse effect on the properties, businesses, prospects, results of
operations or financial condition of the Company, or (ii) prevent or materially
interfere with the Seller's ability to consummate the transactions contemplated
hereby (the "Contemplated Transactions") (any event, effect or result described
             -------------------------
in clause (i) or (ii) above being a "Seller Material Adverse Effect").
                                     -------------------------------

     Section 3.2 Intentionally Omitted.
                 ---------------------

     Section 3.3 Qualification. The Company is duly qualified or otherwise
                 -------------
authorized as a foreign entity to transact business and, to the extent
applicapable, is in good standing in each jurisdiction in which such
qualification or authorization is required by Law, except where the failure so
to qualify or be authorized could not reasonably be expected to have a Seller
Material Adverse Effect. Section 3.3 of the Seller Disclosure Letter lists each
jurisdiction in which the Company is so qualified or otherwise authorized.

     Section 3.4 Intentionally Omitted.
                 ---------------------

     Section 3.5 Authority Relative to This Agreement. Except for any required
                 ------------------------------------
approvals of the Bankruptcy Court, Seller has all necessary corporate power and
authority to execute and deliver this Agreement and, assuming the satisfaction
of the conditions set forth in Articles VI and VII, to perform its obligations
hereunder. The execution and delivery of this Agreement by Seller, the
performance by Seller of its obligations hereunder and the consummation by
Seller of the transactions contemplated hereby have been duly authorized by all
requisite corporate action on the part of the Seller. This Agreement has been
duly and validly executed and delivered by Seller and (assuming due
authorization, execution and delivery hereof by the Purchaser and upon receipt
of any required approval of the Bankruptcy Court) constitutes the legal, valid
and binding obligation of the Seller enforceable against the Seller in
accordance with its terms.

                                       6

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     Section 3.6 SEC Documents. Since January 1, 1997, the Company has filed
                 -------------
with the Securities and Exchange Commission (the "SEC") all reports, schedules,
                                                  ---
forms, statements and other documents (including exhibits and all other
information therein) required to be filed with the SEC pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
                                                      ------------
rules and regulations of the SEC thereunder (the "SEC Documents"; the SEC
                                                  -------------
Documents filed since January 1, 1997 and prior to the date of this Agreement
are referred to as the "Identified SEC Documents"). As of their respective
                        ------------------------
dates, the SEC Documents compiled in all material respects with the requirements
of the Exchange Act and the rules and regulations of the SEC promulgated
thereunder applicable to such SEC Documents, and none of the SEC Documents when
filed contained, and, when considered as an entirety currently contain, any
untrue statement of a material fact or omitted or omit to state a material fact
or required to be stated therein or necessary in order to make statements
therein, in light of the circumstances under which they were made, not
misleading.

     Section 3.7 Financial Statements. The consolidated balance sheet of the
                 --------------------
Company as of December 31, 1999 and the related consolidated statements of
income, shareholder's equity and changes in financial position for the year then
ended, including the notes thereto, certified by Arthur Anderson LLP,
independent certified public accountants, which have been delivered to the
Purchaser, set forth the consolidated financial position of the Company as at
such a date and the consolidated results of operations of the Company for such
period, in each case in accordance with generally accepted accounting principles
consistently applied ("GAAP"). (The foregoing consolidated financial statements
of the Company as of December 31, 1999 and for the year then ended are sometimes
herein called the "Audited Financials.") The consolidated and consolidating
                   ------------------
balance sheets of the Company as of December 31, 2000, which have been delivered
to Purchaser, are sometimes herein called the "Balance Sheet" and December 31,
                                               -------------
2000 is sometimes herein called the "Balance Sheet Date." Except as set forth
                                     ------------------
therein or in the notes thereto, the Company reasonably believes such Audited
Financials and Balance Sheet present fairly the financial position and results
of operations of the company as of their respective dates and for the respective
periods covered thereby.

     Section 3.8 No Material Adverse Change. Except as set forth in Section 3.8
                 --------------------------
of the Seller Disclosure Letter, since the Balance Sheet Date there has been no
change, event or occurrence which has had a Seller Material Adverse Effect, and
to the knowledge of the Company no such change, event or occurrence is
threatened, nor has there been any damage, destruction or loss which could
reasonably be expected to have or has had a Seller Material Adverse Effect,
whether or not covered by insurance.

     Section 3.9 Taxes. Except as set forth in Section 3.9 of the Seller
                 -----
Disclosure Letter:

                   (a)  The Company has timely filed (after giving effect to any
extensions of the time to file which were obtained) prior to the date of this
Agreement, and will file prior to the Closing Date, all material Tax Returns
required to be filed prior to the date of this Agreement or the Closing Date, as
the case may be, with respect to Taxes for periods ending on or after January 1,
1993, and such returns are true, correct and complete in all material respects
and all Taxes are shown to be due on such Tax Returns have been paid; and on or
before the Closing Date, the Company has paid or will pay (or the Company has
paid or will pay on its

                                       7
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behalf), or has or will set up an adequate reserve for the payment of, all
material Taxes owed by the Company for all taxable periods through and including
the Closing Date.

                 (b)  The Company has not filed or entered into any election,
consent or extension agreement that extends any applicable statue of
limitations, which statue of limitations has not expired.

                 (c)  (i) The Company is not a party to any action or proceeding
pending or, to the Company's knowledge, threatened by an Governmental Authority
for assessment or collection of Taxes, (ii) no audit or investigation of the
Company, by any Governmental Authority is pending or threatened with respect to
Taxes, and (iii) no claim has been made by any Governmental Authority in a
jurisdiction where the Company does not file Tax Returns that it is or may be
subject to taxation in that jurisdiction.

                 (d)  The Company (i) is not a party to, is not bound by, is not
under any obligation under any Tax sharing or similar agreement that includes
any other person, nor (ii) has any liability for Taxes of any person (other than
members of the affiliated group, within the meaning of Section 1504(a) of the
Code, filing consolidated federal income tax returns of which the Company is the
common parent) under Treasury Regulation (S) 1.1502-6, Treasury Regulation
(S) 1.1502-78 or similar provision of state, local or foreign law, as a
transferee or successor, by contract, or otherwise.

                 (e)  The Company has not entered into nor is bound by any
closing agreement that could effect its Taxes for periods ending after the
Closing Date.

                 (f)  No gain or loss from deferred intercompany transactions or
excess loss accounts of the Company will be triggered by the Contemplated
Transactions.

                 (g)  The Company has not been in violation of any applicable
law relating to the payment or withholding of Taxes, and has duly and timely
withheld and paid over to the appropriate taxing authorities all material
amounts required to be so withheld and paid over.

                 (h)  For all periods ending or transactions consummated after
December 31, 1995, the Company has made available to the Purchaser true and
complete copies of all Tax Returns of the Company together with all related
examination reports and statements of deficiency, and true and complete copies
of the portion of all other Tax Returns relating to the activities of the
Company together with all related examination reports and statements of
deficiency.

                 (i)  There are no Liens for Taxes upon the assets or properties
of the Company except for statutory Liens for current Taxes not yet due, and the
Company has no knowledge of any claim relating to Taxes that, if adversely
determined, would result in any material Lien on any of the assets or property
of the Company.

                 (j)  The Company is not a party to any lease arrangement
involving a defeasance of rent, interest or principal.

                                       8
<PAGE>

                  (k)  Any adjustment of Taxes of the Company, made by the IRS
which adjustment is required to be reported to the appropriate state, local, or
foreign Taxing authorities, has been so reported.

                  (l)  The Company is not a direct or indirect beneficiary of a
guarantee of Tax benefits or any other arrangement that has the same economic
effect (including an indemnity from a seller or lessee of property, or other
insurance) with respect to any transaction or Tax opinion relating to the
Company.

                  (m)  The Company has not ever been (i) a "passive foreign
investment company," (ii) a "foreign personal holding company" (iii) a "foreign
sales corporation," (iv) a "foreign investment company," or (v) a person other
than a United States person, each within the meaning of the Code.

                  (n)  The Company has not been a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code during
the applicable period specified in Section 897(c)(1)(A)(ii) of the Code.

     Section 3.10 Permits.  To the Company's knowledge, the Company has all
                  -------
licenses, permits, exemptions, consents, waivers, authorizations, rights,
certificates of occupancy, franchises, orders or approvals of, and has made all
required registrations with, any Governmental Body that are required for the
conduct of the business of, or the intended use of any properties of, the
Company (collectively, "Permits"), and no suspension or cancellation of any of
                        -------
the Permits is pending or, to the knowledge of the Company, threatened, except
where the failure to have, or the suspension or cancellation of, any of the
Permits, individually or in the aggregate, could not reasonably be expected to
have a Seller Material Adverse Effect (Permits other than those excluded by the
foregoing exception being the "Material Permits").

     Section 3.11 No Breach.
                  ---------

                  (a) The execution and delivery of this Agreement by the
Company does not, and, assuming any necessary approval of this Agreement by the
Bankruptcy Court, the performance of this Agreement by Seller will not:

                      (i)   conflict with or violate any provision of any
Certificate of Incorporation or by-laws of the Company (to the extent that such
document is then governing such entity);

                      (ii)  conflict with or violate any Law applicable to the
Company by which any property or asset of the Company is or may be bound or
affected, except for any such conflicts or violations that, individually or in
the aggregate, could not reasonably be expected to have a Seller Material
Adverse Effect; or

                      (iii) assuming that all Required Consents (as defined in
Section 3.11(b)) have been obtained or deemed by operation of the Sale Order to
have been given, result in any breach of or constitute a default (or an event
which with or without notice or lapse of time or both would become a default)
under, or give to others any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a Lien, other than a

                                       9

<PAGE>

Permitted Lien, on any property or asset of the Company or, under any note,
bond, mortgage, indenture, contract, agreement, commitment, lease, license,
permit, franchise or other instrument or obligation (collectively, "Contracts")
                                                                    ---------
to which the Company is a party or by which it or its assets or properties is
bound or affected, except for such breaches, defaults or other occurrences
which, individually or in the aggregate, could not reasonably be expected to
have a Seller Material Adverse Effect.

           (b) Section 3.11 of the Seller Disclosure Letter identifies each
Contract to which the Company is a party or by it or its assets or properties is
or may be bound or affected in respect of which a Required Consent must be
obtained. For purposes hereof, a "Required Consent" means any consent under a
                                  ----------------
Material Contract required so that the execution, delivery and/or performance by
the Seller of this Agreement, the consummation of the Contemplated Transactions,
and the assumption and/or continued enforcement thereof by the Purchaser as
contemplated hereby will not result in any breach of or constitute a default (or
an event which with or without notice or lapse of time or both would become a
default) under, or give to others any right of termination, amendment,
acceleration or cancellation of, such Contract, or result in the creation of a
Lien, other than a Permitted Lien, on any property or asset of the Company. For
purposes hereof, the Company shall be deemed to have obtained a Required Consent
required to be obtained by the Company if, and to the extent that, pursuant to
the Sale Order the Company is authorized to assume and assign the Contract to
the Purchaser pursuant to section 365 of the Bankruptcy Code.

     Section 3.12 Actions and Proceedings. Except as set forth in Section 3.12
                  -----------------------
of the Seller Disclosure Letter, there are no outstanding Orders of any
Governmental Body against or involving the Company which could reasonably be
expected to have a Seller Material Adverse Effect or interfere with consummation
of the Contemplated Transactions. Except as to claims against the Company
arising prior to the Petition Date that are within the jurisdiction of the
Bankruptcy Court and are to be resolved in the Case, as of the date of this
Agreement, there are no actions, causes of action, suits, claims, complaints,
demands, litigations or legal, administrative or arbitral proceedings or
investigations (collectively, "Actions") (whether or not the defense thereof or
                              -------
liabilities in respect thereof are covered by insurance) pending, or, to the
Company's knowledge, threatened against or involving the Company or any of their
properties, owned or leased, which, individually or in the aggregate, could
reasonably be expected to have a Seller Material Adverse Effect.

     Section 3.13 Contracts.
                  ---------

                  (a) Section 3.13 of the Seller Disclosure Letter sets forth
all of the Material Contracts to which the Company is a party or by or to which
it or any of its properties may be bound or subject.

                  (b) To the knowledge of the Company, no parties to any
Material Contracts (other than the Company) are in default thereunder in any
respect nor does any condition exist that with notice can reasonably be expected
to or with lapse of time or both could constitute such a default thereunder
except where the existence of any such defaults (including the existence of any
conditions that with notice or lapse of time would constitute defaults) could

                                      10

<PAGE>

not, individually or in the aggregate, reasonably be expected to have a Seller
Material Adverse Effect.

     Section 3.14 Tangible Property. Except as set forth in Section 3.14 of the
                  -----------------
Seller Disclosure Letter, the facilities, machinery, equipment, furniture,
buildings and other improvements, fixtures, vehicles, structures, any related
capitalized items and other tangible property material to the business of the
Company (the "Tangible Property") are in commercially reasonable operating
              -----------------
condition and repair, subject to continued repair and replacement in accordance
with industry practice, and are suitable for their intended use.

     Section 3.15 Intellectual Property.
                  ---------------------

               (a) The Company owns or is licensed or otherwise has the right to
(i) with respect to such items that the Company claims to own outright, sell,
license and dispose of such items, without restriction, and (ii) with respect to
such items with respect to which the Company claims to have a license, use and
practice, all Copyrights, Patents, Trade Secrets, Trademarks, Internet Assets,
Software and other proprietary rights (collectively, the "Intellectual
                                                          ------------
Property") that are currently used in the businesses of the Company, the loss or
--------
cancellation of which could reasonably be expected to have a Seller Material
Adverse Effect. To the Company's knowledge, Section 3.15 lists all of the
material Intellectual Property of the Company.

               (b) Except as set forth in Section 3.15 of the Seller Disclosure
Letter, the Company is not in breach of or default under any IP License which
will not be cured under section 365 of the Bankruptcy Code upon the assumption
and assignment thereof to the Purchaser.

               (c) Neither the Company nor any of the Subsidiaries is in default
under any provisions of the Procter & Gamble Settlement Agreement.

               (d) The Company has the exclusive right to file, procure and
maintain all registrations with respect to the Intellectual Property owned by
the Company.

               (e) Neither the Company nor any Subsidiary has knowledge of any
challenge to the validity of any Patent or registered Trademark or Copyright
listed in Section 3.15(a) of the Seller Disclosure Letter.

     Section 3.16 Title to Properties.
                  -------------------

               (a) Intentionally Omitted.

               (b) Section 3.16 of the Seller Disclosure Letter contains a true
and complete list of all real property owned by the Company ("Owned Real
                                                              ----------
Property Assets"; Leased Real Property Assets and Owned Real Property Assets
---------------
collectively, "Real Property Assets").
               --------------------

               (c) All buildings, structures and other improvements in, on or
within the Real Property Assets are to the Company's knowledge in commercially
reasonable operating condition and repair, subject to continued repair and
replacement in accordance with past

                                       11
<PAGE>

practice, except for any failure to be in such condition and repair that could
not, individually or in the aggregate, have a Seller Material Adverse Effect.

     Section 3.17 Employee Benefit Plans.
                  ----------------------

               (a) Section 3.17 of the Seller Disclosure Letter contains a true
and complete list of each "employee benefit plan" (within the meaning of section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), including, without limitation, multiemployer plans within the meaning
  -----
of ERISA section 3(37)), stock purchase, stock option, severance, employment,
change-in control, fringe benefit, welfare benefit, collective bargaining,
bonus, incentive, deferred compensation and all other employee benefit plans,
agreements, programs, policies or other arrangements, whether or not subject to
ERISA, whether formal or informal, oral or written, legally bonding or not,
under which any Employee or former employee (or his or her beneficiary) of the
Company has any present or future right to benefits or under which the Company
has any present or future liability. All such plans, agreements, programs,
policies and arrangements shall be collectively referred to as the "Benefit
                                                                    -------
Plans."
-----

               (b) With respect to each Benefit Plan, the Company has made
available to the Purchaser a current, accurate and complete copy (or, to the
extent no such copy exists, an accurate description) thereof and, to the extent
applicable any summary plan description and other written communications (or a
description of any oral communications) by the Company to its employees
concerning the extent of the benefits provided under a Benefit Plan.

               (c) With respect to each Benefit Plan, no actions, suits or
claims (other than routine claims for benefits in the ordinary course) are
pending or, to the Company's knowledge, threatened, and no facts or
circumstances exist that could give rise to any such actions, suits or claims
which individually or in the aggregate could have a Seller Material Adverse
Effect.

     Section 3.18 Employee Relations. None of the Employees of the Company or,
                  ------------------
to the Company's knowledge, Foreign Employees is represented by a union, and no
union organizing efforts are now being conducted. The Company has not at any
time during the last three years had nor, to the knowledge of the Company, is
there now threatened, a strike, picket, work stoppage, work slowdown or other
labor dispute.

     Section 3.19 Insurance. The Company has heretofore made available for
                  ---------
inspection by the Purchaser true and correct copies of all policies or binders
of fire, liability, product liability, worker's compensation, directors and
officers liability, vehicular and other insurance held by or on behalf of the
Company which are presently in effect. Such policies and binders are valid and
binding in accordance with their terms, are in full force and effect, and insure
against risks and liabilities to an extent and in a manner customary in the
industries in which the Company operates. The Company has not received any
written notice of cancellation or non-renewal of any such policy or binder.

                                       12
<PAGE>

     Section 3.20 Company Products. To the Company's knowledge, except as set
                  ----------------
forth in Section 3.20 of the Seller Disclosure Letter, there are no statements,
citations or decisions by any Governmental Body specifically stating that any
Company Product is defective or unsafe or fails to meet any standards
promulgated by any such Governmental Body. Except as set forth in Section 3.20
of the Seller Disclosure Letter, there have been no recalls ordered by any such
Governmental Body with respect to any Company Product. Except as set forth in
Section 3.20 of the Seller Disclosure Letter, there is no (a) fact relating to
any Company Product that may impose upon the Company a duty to recall any
Company any Product or a duty to warn customers of a defect or of any Hazardous
Substance in any Company Product, (b) latent or overt design, manufacturing or
other defect in any Company Product, (c) Company Product, the reasonably
foreseeable use of which may expose any person to any Hazardous Substance or (d)
material liability for warranty claims or returns with respect to any Company
Product not fully reflected on the Audited Financials or Interim Financials.

     Section 3.21 Operations of the Company and Subsidiaries.
                  ------------------------------------------

               (a) Except as set forth in Section 3.21 of the Seller Disclosure
Letter or as contemplated by this Agreement, since the Balance Sheet Date the
Company has not:

                    (i)    waived in writing any material right under any
Material Contract or other agreement of the type required to be set forth in the
Seller Disclosure Letter;

                    (ii)   made any material change in its accounting methods or
practices or made any material change in depreciation or amortization policies
or rates adopted by it;

                    (iii)  except for inventory or equipment in the ordinary
course of business, sold, abandoned or made any other disposition of any of its
properties or assets or made any acquisition of all or any part of the
properties, capital stock or business of any other person;

                    (iv)   made any investment in any person, including, without
limitation, any Subsidiary;

                    (v)    transferred or disposed of its interest in any
Subsidiary.

                    (vi)   canceled any debts owed to or claims held by the
Business (including the settlement of any claims or litigation) with a value
greater than $25,000, except for claims held by the Company against any
Subsidiary and incurred prior to February 14, 2001;

                    (vii)  created, incurred or assumed, or agreed to create,
incur or assume, any indebtedness for borrowed money in respect of the Business
(other than money borrowed or advanced from the Company in the ordinary course
of the Business consistent with past practice); or

                    (viii) entered into or become committed to enter into any
other transaction material to the Business except in the ordinary course of the
Business or as contemplated by this Agreement.

                                       13
<PAGE>

               (b) Intentionally Omitted.

     Section 3.22 Consents and Approvals. No consent, approval, or authorization
                  ----------------------
of, or declaration, filing, or registration with any Governmental Body is
required to be made or obtained by the Company in connection with the execution,
delivery, and performance of this Agreement and the consummation of the
transactions contemplated hereby, except (a) for approvals or authorizations of
the Bankruptcy Court, (b) for consents, approvals, authorizations, declarations,
or rulings identified in Section 3.22 of the Seller Disclosure Letter, and (c)
for consents, approvals, authorizations, declarations, filings, or
registrations, which, if not obtained, could not, individually or in the
aggregate, have a Seller Material Adverse Effect. The items referred to in
clauses (a) through (c) of this Section 3.22 are hereinafter referred to as the
"Government Requirements."
 -----------------------

     Section 3.23 Non-Competition Agreements. Except as set forth in Section
                  --------------------------
3.23 of the Seller Disclosure Letter, neither the Company, nor any officer,
director, or key employee of the Company, is a party to any agreement that
purports to restrict or prohibit it, directly or indirectly, from engaging in
any business currently engaged in by the Company.

     Section 3.24 Board Approval and Recommendation. The Board of Directors of
                  ---------------------------------
the Company has determined that an immediate sale and assignment of the
Company's assets pursuant to this Agreement under sections 363 and 365 of the
Bankruptcy Code is in the best interests of the Company.

     Section 3.25 Brokers. Except for Wasserstein, Perella & Co., Inc., no
                  -------
person is entitled to any brokerage, financial advisory, finder's or similar fee
or commission payable by the Company in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company. The fees of Wasserstein, Perella & Co., Inc. relating to the
transactions contemplated hereby shall be and remain liabilities solely of the
Company, which liabilities are not being assumed by the Purchaser.

     Section 3.26 Purchased Property Held by Excluded Subsidiaries. None of the
                  ------------------------------------------------
Excluded Subsidiaries, as of the date hereof or will, as of the Closing Date,
possess, own, have any right to or interest in the Domestic Purchased Assets. In
the event that any Excluded Subsidiary possesses, owns, or has any right to or
interest in the Domestic Purchased Assets, then notwithstanding anything else
herein contained, Seller at Seller's sole cost and expense, shall cause such
Domestic Purchased Assets to be transferred to the Purchaser, without any
increase in the Purchase Price. Seller's obligations under this Section shall
terminate one year from the Closing Date.

                                       IV

                REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

     The Purchaser hereby represents and warrants to the Company as follows:

     Section 4.1 Organization. The Purchaser is a corporation or limited
                 ------------
liability company validly existing and in good standing under the laws of its
jurisdiction of incorporation.

                                       14
<PAGE>

     Section 4.2 Authority to Execute and Perform Agreement. The Purchaser has
                 ------------------------------------------
the full legal right and power and all authority and approvals to enter into,
execute and deliver this Agreement and each and every agreement and instrument
contemplated hereby to which the Purchaser is or will be a party and to perform
fully its obligations hereunder and thereunder. This Agreement has been duly
executed and delivered by the Purchaser, and on the Closing Date each and every
agreement and instrument contemplated hereby to which the Purchaser is a party
will be duly executed and delivered by the Purchaser and (assuming due execution
and delivery hereof and thereof by the other parties hereto and thereto) this
Agreement and each such other agreement and instrument will be valid and binding
obligations of the Purchaser enforceable against the Purchaser in accordance
with their respective terms. The execution and delivery by the Purchaser of this
Agreement and each and every other agreement and instrument contemplated hereby
to which the Purchaser is a party, the consummation of the transactions
contemplated hereby and thereby and the performance by the Purchaser of this
Agreement and each such other agreement and instrument in accordance with their
respective terms and conditions will not (a) violate any provision of the
Purchaser's governing or organizational documents; (b) except for filings or
approvals required in connection with Government Requirements, require such the
Purchaser to obtain any consent, approval, authorization or action of, or make
any filing with or give any notice to, any Governmental Body or any other
person; (c) conflict with or result in the breach of any of the terms and
conditions of, result in a material modification of the effect of, otherwise
cause the termination of or give any other contracting party the right to
terminate, or constitute (or with notice or lapse of time or both constitute) a
default under, any Contract to which the Purchaser is a party or by or to which
the Purchaser or any of its properties is or may be bound or subject; or (d)
violate any Law or Order of any Governmental Body applicable to the Purchaser.

     Section 4.3 Brokers. The Purchaser is responsible for any brokerage,
                 -------
financial advisory, finder's or similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Purchaser.

     Section 4.4 Sufficient Funds. The Purchaser represents and warrants that it
                 ----------------
has sufficient funds to satisfy its obligations under this Agreement and that,
no approval of, or waiver by, any lender is required as a condition to the
Purchaser's obtaining funds.

                                       V

                                   COVENANTS

     Section 5.1 Conduct of Business by the Seller Pending the Closing. From the
                 -----------------------------------------------------
date hereof through the Closing Date, the Seller agrees that it (a) shall
conduct its Business in the ordinary course; and (b) shall conduct its Business
in a manner such that the representations and warranties contained in Article
III shall continue to be true and correct on and as of the Closing Date as if
made on and as of the Closing Date. The Seller shall give the Purchaser prompt
notice of any event, condition or circumstance occurring from the date hereof
through the Closing Date that would constitute a material violation or material
breach of (i) any representation or warranty, whether made as of the date hereof
or as of the Closing Date, or (ii) any covenant of any Seller contained in this
Agreement. Without limiting the generality of the foregoing, except as provided
in the Seller Disclosure Letter or except as otherwise contemplated under this

                                       15
<PAGE>

Agreement, from the date hereof until the Closing Date, without the prior
written consent of the Purchaser: -

          (a) The Company shall not adopt or propose any change in their
certificates of incorporation or bylaws or comparable governing documents,
except a change that would not have any adverse affect on the Contemplated
Transactions;

          (b) The Company shall not declare, set aside, or pay any dividend or
other distribution with respect to any shares of their capital stock, or split,
combine, or reclassify any of their capital stock, or repurchase, redeem, or
otherwise acquire any shares of their capital stock;

          (c) The Company shall not merge or consolidate with any other person
or (except in the ordinary course of business) acquire a material amount of
assets of any other person;

          (d) The Company shall not and shall cause each Subsidiary (other than
the Excluded Subsidiaries) to not) lease, license, or otherwise surrender,
relinquish, encumber, or dispose of any Domestic Purchased Assets other than the
disposition of obsolete or damaged assets in the ordinary course of its business
or the sale of Inventory in the ordinary course of business; provided, however,
                                                             --------  -------
that the Seller may comply with the Bidding Procedures Order,

          (e) The Company shall not change any method of accounting or
accounting practice used by them, except for any charge required by GAAP;

          (f) The Company shall not establish or increase the benefits under, or
promise to establish, modify or increase the benefits under, any bonus,
insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including without limitation, the granting of stock
options, stock appreciation rights, performance awards, or restricted stock
awards), stock purchase or other employee benefit plan or employment, consulting
or severance agreement, or otherwise increase the compensation payable to any
directors, officers or employees of the Company or establish, adopt or enter
into any collective bargaining agreement;

          (g) The Company shall not make or agree to make any capital
expenditures or capital additions that exceed amounts provided for in the
budget(s) established under any Order of the Bankruptcy Court authorizing
post-petition financing;

          (h) The Company shall not in any material respect change its methods
of collecting Trade Receivables, and shall not make or agree to make any
settlement concerning a Trade Receivable in excess of $25,000 without consulting
with the Purchaser;

          (i) The Company shall not permit a default or event of default to
exist or occur under the Procter & Gamble Settlement Agreement; and

          (j) The Company shall not agree or commit to do any of the foregoing.

                                       16
<PAGE>

     Section 5.2 Access and Information. The Seller shall afford to the
                 ----------------------
Purchaser and to the Purchaser's financial advisors, legal counsel, accountants,
consultants, financing sources, and other authorized representatives reasonable
access during normal business hours throughout the period prior to the Closing
Date to all their books, records, properties, plants, and personnel which relate
to its respective business and, during such period, shall furnish as promptly as
practicable to the Purchaser (a) a copy of each material report, schedule, and
other document filed or received by them pursuant to the requirements of Laws
and (b) all other information as the Purchaser reasonably may request in
furtherance or the Contemplated Transactions, provided that the Purchaser shall
be bound by and shall comply with the terms of the Confidentiality Agreement
dated October 6, 2000 (the "Confidentiality Agreement") between the Company and
the Purchaser with respect to the Purchaser's ability to use or disclose any
such information and provided further, that no investigation pursuant to this
                     -------- -------
Section 5.2 shall affect any representations or warranties made herein or the
conditions to the obligations of the respective parties to consummate the
transactions contemplated by this Agreement. The covenants and agreements in
this Section 5.2 shall be cumulative with and in addition to the covenants and
agreements contained in that certain Confidentiality Agreement dated October 6,
2000.

     Section 5.3 Cure of Defaults. Subject to, among other provisions, Section
                 ----------------
1.2.4(d) hereof, the Company shall, on or prior to the Closing, provide evidence
satisfactory to the Purchaser that it has cured any and all defaults and
breaches under and satisfied (or, with respect to any Assumed Liability or
obligation that cannot be rendered non-contingent and liquidated prior to the
Closing Date, made effective provision reasonably satisfactory to the Purchaser
and the Bankruptcy Court for satisfaction from funds of the Company of) any
Assumed Liability or obligation arising from or relating to pre-Closing periods
under the Assumed Contracts and Assumed Leases so that such contracts and leases
may be assumed by the Company and assigned to the Purchaser in accordance with
the provisions of section 365 of the Bankruptcy Code, the Sale Order and this
Agreement (including, without limitation, Section 1.2.3 hereof). The Company
shall be solely responsible for payment of and curing all defaults and the Sale
Order shall so provide. In any event, Seller's cure obligations shall be limited
to such matters as may be cured solely by the payment of money.

     Section 5.4 Required Consents. The Company shall use commercially
                 -----------------
reasonable efforts, prior to the Closing, to obtain the Sale Order and all
Required Consents, and undertake all actions reasonably required pursuant to the
Sale Order and all Required Consents. The Purchaser shall not incur or be liable
for any expenses, costs or obligations in connection therewith. Seller shall not
be required to incur or be liable for any expenses, costs or obligations in
order to obtain any Required Consents. The Purchaser shall cooperate with the
Seller's efforts to obtain any Required Consents. Failure to obtain Required
Consent with respect to the Procter & Gamble U.S. and Canadian licenses shall
not entitle Purchaser to terminate this Agreement if such failure is due to
Purchaser's inability to satisfy any condition customarily imposed by The
Procter & Gamble Company with respect to transfer of licenses granted by it.

     Section 5.5 Filings; Other Action. Subject to the terms and conditions
                 ---------------------
hereof, as promptly as practicable the Seller and the Purchaser shall (a)
promptly make all filings and submissions required in order to satisfy all
necessary Government Requirements, (b) use commercially reasonable efforts to
cooperate with each other in (i) determining which filings are required to be
made prior to the Closing Date with, and which material consents, approvals,

                                       17
<PAGE>

permits, or authorizations are required to be obtained prior to the Closing Date
from, governmental or regulatory authorities of the United States and the
several states in connection with the execution and delivery of this Agreement
and the consummation of the Contemplated Transactions, and (ii) timely making
all such filings and timely seeking all such consents, approvals, permits, or
authorizations, and (c) use all commercially reasonable efforts to take, or
cause to be taken, all other action and do, or cause to be done, all other
things reasonably necessary or appropriate to consummate the Contemplated
Transactions, as soon as practicable. In connection with the foregoing, the
Company will promptly provide to the Purchaser, and the Purchaser will promptly
provide to the Company, copies of all correspondence, filings, or communications
(or memoranda setting forth the substance thereof) between such party or any of
its representatives, on the one hand, and any Governmental Bodies, on the other
hand, with respect to this Agreement and the Contemplated Transactions. The
parties acknowledge that certain actions may be necessary with respect to the
foregoing in making notifications and obtaining clearances consents, approvals,
waivers, or similar third party actions that are material to the consummation of
the Contemplated Transactions, and each party agrees to take all commercially
reasonable actions as are necessary, to complete such notifications and obtain
such clearances, approvals, waivers, or third party actions. Neither the Seller
nor the Purchaser shall be required to incur or be liable for any expenses,
costs or obligations in order to satisfy any Government Requirements, except
payment of routine application or filing fees.

     Section 5.6 Public Announcements. The parties will cooperate in the
                 --------------------
issuance of any press releases or otherwise in making any public statements
with respect to the Contemplated Transactions. The parties further agree
that no publicity release or public statement or public communication concerning
this Agreement or the Contemplated Transactions shall be made without written
advance approval thereof by the Company and the Purchaser, which approval shall
not be unreasonably withheld; provided, however, that a party may, without the
                              --------  -------
prior consent of the other party, but after providing notice thereof to the
other party, issue such press release or make such public statement as may, upon
the advice of counsel, be required by law or any listing agreement with any
national securities exchange.

     Section 5.7 Permit Transfers. The Purchaser shall use commercially
                 ----------------
reasonable efforts, at and as of the Closing, to cause the transfer or,
reissuance of any Material Permits or Material Environmental Permits to the
extent that such is required to cause the Material Permits and Material
Environmental Permits (on their present terms and conditions and without
modification or enhancement thereof) to remain in full force and effect in
the possession of the Purchaser after the Closing. Neither the Purchaser nor any
Seller shall be required to incur or be liable for any expenses, costs or
obligations in order to transfer, reissue or modify any Material Permits or
Material Environmental Permits, except payment of routine affiliation or filing
fees. The Company shall reasonably cooperate with the Purchaser in the
Purchaser's efforts to transfer or, reissue any Material Permits or Material
Environmental Permits.

     Section 5.8 Further Assurances. Each of the parties shall execute such
                 ------------------
Documents and take such further actions as may be reasonably required or
desirable to carry out the provisions hereof and the Contemplated Transactions,
but Seller shall not be obligated to incur or be liable for any expense, cost or
obligations in connection therewith. Each such party shall use commercially
reasonable efforts to fulfill or obtain the fulfillment of the conditions to the
Closing set forth in Articles VI and VII.

                                       18
<PAGE>

     Section 5.9 Bankruptcy Covenants.
                 --------------------

                    (a)  The Company shall promptly provide the Purchaser with
proposed final drafts of all documents, motions, orders, filings or pleadings
that the Company proposes to file with the Bankruptcy Court which relate to the
approval or consummation of the Contemplated Transactions, this Agreement or any
provision therein or herein, and will provide the Purchaser with reasonable
opportunity to review and comment on such filings.

                    (b)  Without limiting the generality of Section 5.9(a), the
Sale Order shall acceptable in form and substance to the Purchaser and its
counsel, including, without limitation, as to the adequacy of notice of the
hearing or hearings on the Company's motion for approval of the Contemplated
Transactions, the applicability of sections 363(f), 363(m) and 1146(c) of the
Bankruptcy Code to the Contemplated Transactions, the satisfaction of all cure
obligations, and the Purchaser's provision of adequate assurance of future
performance of the Assumed Contracts and Assumed Leases.

                    (c)  In the event an appeal is taken, or a stay pending
appeal is requested or reconsideration is sought, from the Sale Order, the
Company shall promptly after becoming aware thereof notify the Purchaser of such
notice of appeal, request for a stay pending appeal or motion for
reconsideration. The Company shall also provide the Purchaser with written
notice (and copies) of any other or further notice of appeal, motion or
application filed in connection with any appeal from or application for
reconsideration of, either of such orders and any related briefs. The Company
shall also defend any such appeals or requests for stay of the Sale Order, but
shall not be required to expend unlimited funds in doing so.

     Section 5.10 Tax Matters. During the period from the date of this Agreement
                  ----------
to and including the Closing Date, the Company shall: (i)properly prepare, in
the ordinary course of business and consistent with past practice, and timely
file all Tax Returns required to be filed by it on or before the Closing Date
("Post-signing Returns"); (ii) fully and timely pay all Taxes due and payable in
  --------------------
respect of such Post-signing Returns that are so filed; (iii) properly reserve
(and reflect such reserve in its books and records and financial statements), in
accordance with past practice and in the ordinary course of business, for all
Taxes payable by it (or them) for which no Post-signing Return is due prior to
or on the Closing Date; (iv) promptly notify the Purchaser of any material
federal, state or foreign income or franchise and any other suit, claim, action,
investigation, proceeding or audit (collectively, "Tax Actions") pending against
                                                   -----------
or with respect to the Company in respect of any Tax matter, including (without
limitation) Tax liabilities and refund claims, and not settle or compromise any
such Tax matter or Tax Action without the Purchaser's consent; (v) not make or
revoke any material Tax election or adopt or change a tax accounting method
without the Purchaser's consent; and (vi) terminate all Tax Sharing Agreements
to which the Company is a party such that there is no further Tax liability
thereunder.

     Section 5.11 Transfer Taxes. In the event that section 1146(c) of the
                  --------------
Bankruptcy Code does not apply to all aspects of the Contemplated Transactions,
all personal property transfer, documentary, sales, use, registration,
value-added and other similar Taxes (including interest, penalties and additions
to Tax) incurred in connection with the Contemplated Transactions ("Transfer
                                                                    --------
Taxes") shall be borne by the Purchaser.
-----

                                      19

<PAGE>

     Section 5.12   Intentionally Omitted.
                    ---------------------

     Section 5.13   Delivery of the Seller Disclosure Letter.  Concurrently with
                    ----------------------------------------
the execution of this Agreement, Company shall deliver to the Purchaser its
complete Seller Disclosure Letter, a true and correct copy of which is attached
to this Agreement as Exhibit "A."

                                      VI

                      CONDITIONS PRECEDENT TO OBLIGATION
                           OF THE PURCHASER TO CLOSE

     The obligation of the Purchaser to enter into and complete the Closing is
subject, at the option of the Purchaser acting in accordance with the provisions
of Article XI with respect to termination of this Agreement, to the fulfillment
on or prior to the Closing Date of the following conditions, any one or more of
which may be waived by the Purchaser:

     Section 6.1    Representations and Covenants.  All representations and
                    -----------------------------
warranties of the Seller contained in this Agreement shall be true in all
respects on and as of the Closing Date, with the same force and effect as though
made on and as of the Closing Date, except for such breaches that, individually
or in the aggregate, could not have a Seller Material Adverse Effect.  The
Seller shall have performed and complied in all respects with all covenants and
agreements required by this Agreement to be performed or complied with by the
Seller on or prior to the Closing Date, except for such breaches that,
individually or in the aggregate, could not have a Seller Material Adverse
Effect.

     Section 6.2    Consents and Approvals.  All Required Consents shall have
                    ----------------------
been obtained or deemed by operation of the Sale Order to have been given and
shall be in full force and effect, and the Purchaser shall have been furnished
with evidence reasonably satisfactory to it that each such Required Consent has
been either (i) expressly granted, or (ii) deemed, by operation of the Sale
Order, to have been given.

     Section 6.3    Closing Deliveries.  The Seller shall have made all
                    ------------------
deliveries contemplated by Section 8.1.

     Section 6.4    Government Requirements.  Any person required in connection
                    -----------------------
with the Contemplated Transactions to file a notification and report form in
compliance with, or obtain any consent or approval required under, any
Government Requirements shall have filed such form or requested such consent or
approval and the applicable waiting period with respect to each such form
(including any extension thereof by reason of a request for additional
information) shall have expired or been terminated or the requisite consent or
approval required thereby shall have been obtained without any material
condition or limitation on terms acceptable to the Purchaser.

     Section 6.5    No Claims.  No Actions shall be pending or, to the knowledge
                    ---------
of the Company or the Purchaser, threatened, before any Governmental Body
(including investigations instituted by the United States Department of Justice
or the Federal Trade Commission in connection with antitrust regulations) to
restrain or prohibit, or to obtain damages or a discovery order in respect of,
this Agreement or the consummation of the Contemplated Transactions or

                                      20

<PAGE>

which has had or may have, in the reasonable judgment of the Purchaser, a Seller
Material Adverse Effect or a material adverse effect upon any the Purchaser's
existing businesses, prospects, operations, assets, liabilities or financial
condition.

     Section 6.6 Sale Order.  The Sale Order in form and substance satisfactory
                 ----------
to the Purchaser and its counsel, shall have been entered by the Bankruptcy
Court by March 5, 2001 and shall not be stayed or reversed, ordered to be
reconsidered, or, in any manner not approved by the Purchaser, amended or
modified.

     Section 6.7 No Injunction.  On the Closing Date, there shall not be any
                 -------------
order outstanding against any party hereto or law promulgated that prevents the
consummation of, the Contemplated Transactions or any of the conditions to the
consummation of the Contemplated Transactions which, in the case of any such
order, law, action or proceeding could reasonably be expected to materially
adversely affect Purchaser or the Purchased Property.

     Section 6.8 No Material Adverse Change.  Except as set forth in Section 3.8
                 --------------------------
of the Seller Disclosure Letter, between the Balance Sheet Date and Closing Date
there has been no change, event or occurrence which has had a Seller Material
Adverse Effect, nor has there been any damage, destruction or loss which could
reasonably be expected to have or has had a Seller Material Adverse Effect,
whether or not covered by Insurance.

     Section 6.9 Bidding Procedures Order.  The Bidding Procedures Order shall
                 ------------------------
remain in full force and effect, and shall not have been stayed, vacated,
modified or supplemented without the Purchaser's prior consent, and the Company
shall have complied with the terms of the Bidding Procedures Order.

     Section 6.10 Intentionally Omitted.
                  ---------------------

     Section 6.11 Intentionally Omitted.
                  ---------------------

     Section 6.12 Intentionally Omitted.
                  ---------------------

     Section 6.13 Intentionally Omitted.
                  ---------------------

     Section 6.14 Intentionally Omitted.
                  ---------------------

                                      VII

                    CONDITIONS PRECEDENT TO THE OBLIGATION
                            OF THE SELLER TO CLOSE

     The obligation of the Seller to enter into and complete the Closing is
subject, at the option of the Seller acting in accordance with the provisions of
Article XI with respect to termination of this Agreement, to the fulfillment on
or prior to the Closing Date of the following conditions, any one or more of
which may be waived by the Company:

     Section 7.1 Representation and Covenants.  All representations and
                 ----------------------------
warranties of the Purchaser contained in this Agreement shall be true in all
material respects on and as of the

                                      21

<PAGE>

Closing Date, with the same force and effect as though made on and as of the
Closing Date. The Purchaser shall have performed and complied in all material
respects with all covenants and agreements required by this Agreement to be
performed or complied with by them on or prior to the Closing Date.

     Section 7.2  Certain Consents and Approvals.  All Required Consents shall
                  ------------------------------
have been obtained or deemed by operation of the Sale Order to have been given
and shall be in full force and effect.

     Section 7.3  Government Requirements.  Any person required in connection
                  -----------------------
with the Contemplated Transactions to file a notification and report form in
compliance with, or obtain any consent or approval required under, any
Government Requirements shall have filed such form or requested such consent or
approval and the applicable waiting period with respect to each such form
(including any extension thereof by reason of a request for additional
information) shall have expired or been terminated or the requisite consent or
approval required thereby shall have been obtained without any material
condition or limitation.

     Section 7.4  No Injunction.  On the Closing Date, there shall not be any
                  -------------
order outstanding against any party hereto or law promulgated that prevents the
consummation of, the Contemplated Transactions.

     Section 7.5  Payment.  The Purchaser shall have paid the Purchase Price at
                  -------
the Closing.

     Section 7.6  Replacement of Paragon Subordinate DIP Loan.  Purchaser shall
                  -------------------------------------------
furnish to Seller satisfactory evidence that Purchaser has purchased $3,960,000
in principal and any unpaid interest accrued on such principal amount of the
Paragon Subordinate DIP Loan and any other amounts for which the Company is
liable thereunder, which amounts shall have been paid at the time and in the
manner required by the Bidding Procedures Order. Purchaser shall also furnish to
Seller satisfactory evidence that Purchaser has forgiven and waived all amounts
due by and from the Company with respect to any amount of the Paragon
Subordinate DIP Loan purchased by the Purchaser.

     Section 7.7  Release of Subsidiaries; Subsidiary Indebtedness.  Each
                  ------------------------------------------------
Subsidiary of the Company shall have been released from, and shall have no
liability as a guarantor or otherwise in respect of, any liability of or to the
Company incurred prior to February 14, 2001, and any and all Liens on any
                                                         ---
properties or assets of any such Subsidiary securing any such obligation or
liability of or to the Company as a guarantor of any such obligation of or to
the Company, shall have been satisfied and unconditionally released. Where
requested by the applicable Subsidiary, the satisfaction of any Indebtedness of
a subsidiary to the Company shall have been by way of a conversion of such
Indebtedness into equity.

                                     VIII
                             DELIVERIES AT CLOSING

     Section 8.1  The Seller's Deliveries at Closing.  In addition to the other
                  ----------------------------------
things required to be done hereby, at the Closing, the Company shall deliver, or
cause to be delivered, to the Purchaser the following:

                                      22

<PAGE>

               (a)  a certificate dated the Closing Date validly executed on
behalf of the Seller to the effect that the conditions set forth in Section 6.1
have been satisfied;

               (b)  a legal opinion of outside counsel to the Company, dated the
Closing Date, addressed to the Purchaser, confirming that such counsel has
reviewed the docket of the Bankruptcy Court and that the Sale Order was entered
by the Bankruptcy Court and was described in such opinion, amended or modified;

               (c)  Intentionally Omitted;

               (d)  all documents, certificates and agreements necessary to
transfer to the Purchaser good and marketable title to the Domestic Purchased
Assets, free and clear of any and all Liens thereon (other than Permitted
Liens), including:

                    (i)    A duly executed Assignment and Assumption Agreement,
in customary form mutually agreeable to the parties;

                    (ii)   assignments of all Assumed Contracts, Intellectual
Property and any other agreements and instruments consisting Domestic Purchased
Assets, dated the Closing Date, assigning to the Purchaser all of the Company's
right, title and interest therein and thereto; and

                    (iii)  an assignment of lease, dated as of the Closing Date,
with respect to each Assumed Lease, in form reasonably acceptable to the
Purchaser;

               (e)  certified copies of all orders of the Bankruptcy Court
pertaining to the Contemplated Transactions, including the Sale Order, and
evidence of the entry of all such orders on the docket of the Chapter 11 case
and of the absence as of the Closing of any stay thereof; and

               (f)  Intentionally Omitted.

     Section 8.2 The Purchaser's Deliveries at Closing. In addition to the other
                 -------------------------------------
things required to be done hereby, at the Closing, the Purchaser shall have
delivered or caused to be delivered to the Company, the amounts provided in
Section 1.4.4, and, in addition, the Purchaser shall deliver, or cause to be
delivered, to the Company the following:

               (a)  a certificate of the Purchaser dated the Closing Date and
validly executed on behalf of the Purchaser to the effect that the conditions
set forth in Section 7.1 have been satisfied;

               (b)  a duly executed Assignment and Assumption Agreement, in
customary form mutually agreeable to the parties; and

               (c)  the items required by Section 7.6.

                                      23

<PAGE>

     Section 8.3  Required Documents.  All documents to be delivered by the
                  ------------------
Seller or to be entered into by the Seller and the Purchaser necessary to carry
out the transactions contemplated by this Agreement or contemplated by the terms
of this Agreement shall be reasonably satisfactory in form and substance to the
Purchaser and counsel to the Purchaser and all documents to be delivered by the
Purchaser necessary to carry out the transactions contemplated by this Agreement
or to be entered into by the Seller and the Purchaser necessary to carry out the
transactions contemplated by this Agreement shall be reasonably satisfactory in
form and substance to the Seller and counsel to the Seller.

                                      IX

                  CERTAIN ADDITIONAL PROVISIONS AND COVENANTS

     Section 9.1  Excluded Subsidiaries.  From and after the Closing Date, the
                  ---------------------
Company and each such Excluded Subsidiary shall cease using the Drypers name and
any stationery or material that includes such name for any and all purposes.

     Section 9.2  Further Assurances.  In addition to the provisions of this
                  ------------------
Agreement, from time to time after the Closing Date, the Company and the
Purchaser will use commercially reasonable efforts to execute and deliver such
other instruments of conveyance, transfer or assumption, as the case may be, and
take such other action as may be reasonably requested to implement more
effectively the conveyance and transfer of the Domestic Purchased Property.
Seller shall not be required to incur or be liable for any expenses, costs or
obligations in connection with the foregoing other than reasonable attorneys
fees and expenses.

     Section 9.3  Books and Records; Personnel.  For a period of seven (7) years
                  ----------------------------
after the Closing Date (or such longer period as may be required by any
governmental or regulatory body or authority or ongoing Legal Proceeding):

                    (a)  The Purchaser shall not dispose of or destroy any of
the business records and files of the Business other than in connection with a
sale or other disposition of the Business or any portion thereof. If the
Purchaser wishes to dispose of or destroy such records and files after that
time, it shall first give sixty (60) days' prior written notice to the Company,
and the Company shall have the right, at its option and expense, upon prior
written notice to the Purchaser within such sixty-day period, to take possession
of the records and files within ninety (90) days after the date of the notice
from the Company.

                    (b)  the Purchaser shall allow the Company and any of its
directors, officers, employees, counsel, representatives, accountants, and
auditors (collectively, the "Company Representatives") access to all business
                             -----------------------
records and files of the Company or the Business that are transferred to it in
connection herewith, which are reasonably required by such party in anticipation
of, or preparation for, any existing or future Legal Proceeding involving the
Company or Tax Return preparation, during regular business hours and upon
reasonable notice at the Purchaser's principal place of business or at any
location where such records are stored, and the Company Representatives shall
have the right at their cost to make copies of any such records and files;
provided, however, that any such access or copying shall be had or done in

                                      24

<PAGE>

such a manner so as not to interfere with the normal conduct of the Purchaser's
business or operations.

     Section 9.4  Third Party Rights. No provision of this Agreement shall
                  ------------------
create any third party beneficiary rights in any Employee, Foreign Employee or
any other persons or entities (including any beneficiary or dependent thereof),
in respect of continued employment (or resumed employment) for any specified
period of any nature or kind whatsoever, and no provision of this Agreement
shall create such third party beneficiary rights in any such persons or entities
in respect of any benefits that may be provided, directly or indirectly, under
any Benefit Plan or otherwise.

     Section 9.5  Hold Harmless. Intentionally Omitted.
                  -------------

     Section 9.6  Employment of the Company's Employees.
                  -------------------------------------

                    (a)  The Company shall use commercially reasonable efforts
to retain Employees and to maintain in good standing through the Closing all
relationships and agreements with Employees, independent contractors or
consultants, in each case from the date hereof through the Closing Date and, in
the case of the Company, to cooperate with the Purchaser in hiring its Employees
offered employment pursuant to Section 9.6(b); provided, that the foregoing
shall not require that the Company offer any compensation or other incentives in
addition to the compensation and benefits being provided or required to be
provided as of the date of this Agreement.

                    (b)  The Purchaser shall offer employment to certain Current
Employees effective as of the Closing Date, so as to avoid any statutory
liability of the Company to those employees.

                    (c)  From the date hereof through the Closing, the Company
shall permit the Purchaser to communicate with its employees, and consultants,
at reasonable times and upon reasonable notice, concerning the Purchaser's
plans, operations, business, customer relations and general personnel matters
and to interview such employees and consultants and review the personnel records
and such other information concerning such employees and consultants as the
Purchaser may reasonably request (subject to obtaining any legally required
written permission of any affected employee, or consultant and to other
applicable law), provided that such contacts shall be conducted in a manner that
is reasonably acceptable to the Company.

                    (d)  The Company shall be solely responsible for any and all
liabilities relating to or arising in connection with any actual, constructive
or deemed termination of employment (including without limitation, severance or
separation pay or benefits or other similar compensation or benefits under any
applicable law, regulation or Benefit Plan) to or with respect to any employee
of the Company other than a Purchaser Employee, and whether before the Closing
Date, or to any Purchaser Employee whether as a result of (A) any event
occurring before the Closing, or (B) any action or failure to act of the Company
(including without limitation, severance or separation pay or benefits under any
applicable law, regulation or Benefit Plan). Except as provided in this Section
9.6(d), the Purchaser shall be solely

                                      25
<PAGE>

responsible for any and all Liabilities relating to or arising in connection
with any actual, constructive or deemed termination of employment of any
Purchaser Employee.

     Section 9.7    Workers' Compensation
                    ---------------------

                         (a)  From and after the Closing Date: (i) the Company
shall remain solely responsible for any and all liabilities relating to or
arising in connection with any and all claims for workers' compensation benefits
(x) incurred by or in respect of any employee of the Company who is not a
Purchaser Employee on, prior to or after the Closing Date, and (y) incurred by
or in respect of a Purchaser Employee on or before the Closing Date, and (ii)
the Purchaser shall be solely responsible for any and all liabilities to or in
respect of a Purchaser Employee relating to or arising in connection with any
and all claims for worker's compensation benefits incurred after the date of
employment.

                         (b)  For purposes of this Section 9.8, a claim for
workers' compensation benefits shall be deemed to be incurred when the first
event giving rise to the claim occurs.

     Section 9.8    Employment Taxes
                    ----------------

                         (a)  The Company and the Purchaser shall (i) treat the
Purchaser as a "successor employer" and the Company as a "Predecessor," within
the meaning of sections 3121(a)(1) and 3306(b)(1) of the Code, with respect to
Purchaser Employees who are employed by the Purchaser for purposes of Taxes
imposed under the United States Federal Unemployment Tax Act ("FUTA") or the
                                                               ----
United States Federal Insurance Contributions Act ("FICA"), and (ii) cooperate
                                                    ----
with each other to avoid, to the extent possible, the filing of more than one
IRS Form W-2 with respect to each such Purchaser Employee for the calendar year
within which the Closing Date occurs.

                         (b)  At the reasonable request of the Purchaser with
respect to any particular applicable Tax Law relating to employment,
unemployment insurance, social security, disability, workers' compensation,
payroll, health care or other similar Tax other than Taxes imposed under FICA
and FUTA, the Company shall and the Purchaser shall (i) treat the Purchaser as a
successor employer and the Company as a predecessor employer, within the meaning
of the relevant provisions of such Tax Law, with respect to Purchaser Employees
who are employed by the Purchaser, and (ii) cooperate with each other to avoid,
to the extent possible, the filing of more than one individual information
reporting form pursuant to each such Tax Law with respect to each such Purchaser
Employee for the calendar year within which the Closing Date occurs.

     Section 9.9    Paid Up License.  The Purchaser acknowledges the Company
                    ---------------
will, effective immediately prior to the Closing, deliver the licenses described
on Schedule 9.9, each of which shall be a perpetual, fully paid-up transferable
license to use any Intellectual Property (including without limitation the right
to use the "Drypers" brand and all its associated trademarks, logos, styles and
related elements) provided, however, that such license shall be granted only to
the extent the Intellectual Property to be licensed by the Company is owned by
the Company or any

                                      26

<PAGE>

of its Subsidiaries immediately prior to Closing. Such license shall be
exclusive as to Trademarks and non-exclusive as to all other Intellectual
Property.

     Section 9.11 Transfer of Licenses and Trademarks.  To the extent any of the
                  -----------------------------------
licensees identified on Schedule 9.9 request the Company to do so, effective
immediately prior to the Closing, the Company will execute an assignment of the
trademarks covered by such licenses and registered in the geographic areas
identified in Schedule 9.9. The registration of such transfer will be at the
sole cost and expense of such licensee and upon the effectiveness of such
transfer the Purchaser shall have no further obligation pursuant to Section
9.10 to maintain the transferred trademarks.

     Section 9.10 Intellectual Property Fees.  The Purchaser shall pay all
                  --------------------------
renewal fees and other fees and do all acts necessary to maintain the
registrations and application  therefor and the continued existence of the
Intellectual Property licensed pursuant to Section 9.9. The Purchaser
undertakes not to do or permit to be done any act which would or might prejudice
or affect in any way the continued registration and/or existence of such
Intellectual Property or the licenses granted pursuant to Section 9.9. The
Purchaser shall cause any party who has or obtains any right or title to such
Intellectual Property to likewise comply with the obligations set out in this
Section 9.10. The Company shall use its best efforts to include a provision in
such license requiring the licensee thereof to reimburse the Purchaser for any
fees incurred by Purchaser to maintain the trademark registrations and
applications therefor.

                                    X

                        SURVIVAL OF REPRESENTATION AND
                             WARRANTIES OF SELLER

     Section 10.1 Survival of Representations and Warranties.  Notwithstanding
                  ------------------------------------------
any right of the Purchaser to investigate fully the affairs of the Company and
the Subsidiaries and notwithstanding any knowledge of facts determined or
determinable by the Purchaser pursuant to such investigation or right of
investigation, the Purchaser has the right to rely fully upon the
representations, warrants, covenants and agreements of the Seller contained in
this Agreement or in any documents delivered pursuant to this Agreement. The
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive until the Closing Date, at which time
they shall terminate.

                                      XI

                           TERMINATION OF AGREEMENT

     Section 11.1 Termination.  This Agreement may be terminated prior to the
                  -----------
Closing as follows:

                  (a)  at the election of the Seller, if any one or more of the
conditions to the obligation of the Seller to close set forth in Article VII has
not been fulfilled as of the scheduled Closing Date;

                                    27

<PAGE>

               (b)  at the election of the Purchaser, if any one or more of the
conditions to the obligation of the Purchaser to close set forth in Article VI
has not been fulfilled as of the scheduled Closing Date;

               (c)  at the election of the Seller or the Purchaser, if there is
any injunction, stay, order, or decree of any nature of any Governmental Body of
competent jurisdiction that is in effect that prohibits or materially restrains
the consummation of the Contemplated Transactions;

               (d)  at the election of the Seller, if the Purchaser has
materially breached any representation, warranty, covenant or agreement
contained in this Agreement, which breach cannot be or is not cured prior to the
scheduled Closing Date and which breach, individually or in the aggregate with
any other breaches, could have a Seller Material Adverse Effect;

               (e)  at the election of the Purchaser, if the Company has
materially breached any representation, warranty, covenant or agreement
contained in this Agreement, which breach cannot be or is not cured prior to the
scheduled Closing Date and which breach(es), individually or in the aggregate
with any other breaches, could have a Seller Material Adverse Effect;

               (f)  at any time on or prior to the Closing Date, by mutual
written consent of the Company and the Purchaser;

               (g)  at any time after March 23, 2001, at the election of the
Purchaser or the Seller, if by such date the Closing has not occurred; provided,
however, that neither the Seller, on the one hand, nor the Purchaser, on the
other hand, may terminate the Agreement pursuant to this Section 11.1(g) unless
at the time that such party seeks to exercise its right to terminate this
Agreement all conditions contained in Article VII, if termination is being
sought by the Purchaser, or Article VI, if termination is being sought by the
Seller, are, or are immediately capable of being, satisfied at the time that
such party gives notice of such termination;

               (h)  at any time after March 5, 2001, at the election of the
Purchaser or any of the Seller, if by such date the Sale Order has not been
entered; or

               (i)  at the election of the Purchaser on or prior to the Closing
Date pursuant to Section 6.14(a).

If this Agreement so terminates, it shall become null and void and have no
further force or effect, except as provided in Section 11.2.

     Section 11.2 Survival After Termination.
                  --------------------------

               (a)  If this Agreement terminates pursuant to Section 11.1 and
the Contemplated Transactions are not consummated, this Agreement shall become
null and void and have no further force or effect. Notwithstanding anything in
this Agreement to the contrary, the provisions of Section 5.2 relating to the
obligation of the Purchaser to keep confidential and

                                      28

<PAGE>

not to use certain information and data obtained from the Company or the
Subsidiaries, as the case may be, and to return documents to the Company or the
Subsidiaries, as the case may be, shall remain in full force and effect.

               (b)  The parties agree that if this Agreement is terminated under
any subsection of Section 11.1 other than Section 11.1(d), then the Purchaser's
sole and exclusive remedy shall be to receive any deposit in accordance with the
Bidding Procedures Order or the Sale Order.

                                      XII

                              GENERAL PROVISIONS

     Section 12.1 Notices. All notices, claims, demands, and other
                  -------
communications hereunder shall be in writing and shall be deemed given upon (x)
confirmation of receipt of a facsimile transmission, (y) confirmed delivery by a
standard overnight carrier or when delivered by hand, or (z) the expiration of
five (5) Business Days after the day when mailed by registered or certified mail
(postage prepaid, return receipt requested), addressed to the respective parties
at the following address (or such other address for a party as shall he
specified by like notice):

               (a)  If to the purchaser, to:

               Peter Chang
               Associated Hygienic Products LLC,
               a Delaware limited liability company
               4456 River Green Parkway
               Duluth, GA 30096
               Telecopy:     (770)497-9800

               with copies to:

               Robert E. Sullivan, Esq.
               Pillsbury Winthrop LLP
               50 Fremont Street
               San Francisco, CA 94103
               Telecopy:     (415)98-1200

               (b)  If to the Seller, to:

               Drypers Corporation
               5300 Memorial, Suite 900
               Houston, Texas 77007
               Telecopy:     (713)803-5554
               Attention:    Brian Fontana

                                  29
<PAGE>

                         with a copy to:

                         Haynes & Boone, L.L.P.
                         1000 Louisiana, Suite 4300
                         Houston, Texas 77002
                         Telecopy:  (713) 547-2600
                         Attention: Lenard M. Parkins, Esq.
                                    Kenric D. Kattner, Esq.

     Section 12.2   Descriptive Headings. The headings contained in this
                    --------------------
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.

     Section 12.3   Entire Agreement; Assignment. This Agreement (including the
                    ----------------------------
Exhibits, the Seller Disclosure Letter, and the other documents and instruments
referred to herein), together with the Confidentiality Agreement, (a)
constitutes the entire agreement and supersedes all other prior agreements and
understandings, both written and oral, between the parties, with respect to the
subject matter hereof, including, without limitation, any transaction between
the parties hereto and (b) shall not be assigned by operation of law or
otherwise; provided, however, that the Purchaser may assign all or any part of
           --------  -------
its rights and obligations hereunder to any subsidiary or affiliate of the
Purchaser without the consent of the Company, but the Purchaser shall not be
relieved of its obligations hereunder as a result of such assignment.

     Section 12.4   Governing Law. This Agreement shall be governed and
                    -------------
construed in accordance with the laws of the State of Texas without regard to
the rules of conflict of laws of the State of Texas and any other jurisdiction.

     Section 12.5   Expenses. Except as otherwise provided herein and in the
                    --------
Bidding Procedures Order, whether or not the actions contemplated by this
Agreement are consummated, all costs and expenses incurred in connection will
this Agreement and the transactions contemplated thereby shall be paid by the
party incurring such expenses.

     Section 12.6   Amendment. This Agreement may not be amended except by an
                    ---------
instrument in writing signed on behalf of the parties hereto.

     Section 12.7   Waiver. At any time prior to the Closing Date, the parties
                    -----
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto, and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party.

     Section 12.8   Counterparts; Effectiveness. This Agreement may be executed
                    ---------------------------
in two or more counterparts, each of which shall be deemed to be an original but
all of which shall constitute one and the same agreement. This Agreement shall
become effective when each party hereto shall have received counterparts thereof
signed by all the other parties hereto.

                                      30
<PAGE>

     Section 12.9   Severability; Validity; Parties in Interest. If any
                    -------------------------------------------
provision of this Agreement or the application thereof to any person or
circumstances is held invalid or unenforceable, the remainder of this Agreement,
and the application of such provisions to other persons or circumstances, shall
not be affected thereby, and to such end, the provisions of this Agreement are
agreed to be severable. Nothing in this Agreement, express or implied, is
intended to confer upon any person not a party to this Agreement.

     Section 12.10  Consent to Jurisdiction and Service of Process. All disputes
                    ----------------------------------------------
arising out or related to this Agreement, including, without limitation, any
dispute relating to the interpretation, meaning or effect of any provision
hereof, will be resolved in the Bankruptcy Court and the parties hereto each
submit to the exclusive jurisdiction of the Bankruptcy Court for the purpose of
adjudicating any such dispute; provided, however, that the parties agree that if
                               --------  -------
the Bankruptcy Court does not accept jurisdiction over any such dispute, such
dispute shall then be brought exclusively in the courts of the State of Texas
located in Houston or of the United States of America for the Southern District
of texas and each party hereby expressly submits to the personal jurisdiction
and the venue of such courts for the purposes thereof and expressly waives any
claim of improper venue and any claim that such courts are an inconvenient
forum.

                                     XIII

                                  DEFINITIONS

     Section 13.1  Certain Definitions. Capitalized terms used herein but not
                   -------------------
otherwise defined herein have the meaning assigned thereto in the Bankruptcy
Code. In addition to the terms defined above, as used in this Agreement, the
following terms have the following meanings:

"Accounts Payable" means all accounts payable of the Company and the
 ----------------
Subsidiaries taken as a whole, whether arising under a Contract or otherwise as
well as rights to rebates or credits from suppliers.

"Account Receivable" means any right to payment for goods sold or leased or for
 ------------------
services rendered, whether arising  under  a Contract or otherwise.

"affiliate" means, with respect to any person, any other person controlling,
 ---------
controlled by or under common control with, or the parents, spouse, lineal
descendants or beneficiaries of, such person.

"Asian Subsidiaries" means each of Drypers Malaysia SDN BHD, Drypers Marketing
 ------------------
SDN BHD, Drypers Asia Pte Ltd. and Drypers Asia (M) SDN BHD.

"Balance Sheet" shall have the meaning for such term set forth in Section 3.7.
 -------------

"Bankruptcy Code" means title 11 of the United States Code, as amended from time
 ---------------
to time, as applicable to the Case.

"Bankruptcy Court" means the United States Bankruptcy Court for the Southern
 ----------------
District of Texas, Houston Division, or such other court with jurisdiction over
the Case.

                                      31
<PAGE>

"Bankruptcy Rules" means the Federal Rules of Bankruptcy Procedure, as amended,
 ----------------
promulgated under section 2075 of title 28 of the United States Code, as
applicable to the Case.

"Bidding Procedures" means the Bidding Procedures contained in the Bidding
 ------------------
Procedures Order as amended or modified from time to time with the consent of
the Purchaser and the Company.

"Bidding Procedures Order" means that certain Order entered by the Bankruptcy
 ------------------------
Court on December 22, 2000 approving the Bidding Procedures (as defined therein,
as amended by that certain Amended Order entered by the Bankruptcy Court on
January 19, 2001, as further amended by that certain First Amended Order entered
on January 25, 2001 and as further amended by that certain Second Amended Order
entered on February 1, 2001).

"Business Day" means any day other than a Saturday, Sunday or "legal holiday" as
 ------------
defined in Bankruptcy Rule 9006(a).

"Claim" means (a) right to payment, whether or not such right is reduced to
 -----
judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured or unsecured, or (b) right to an
equitable remedy for breach of performance if such breach gives rise to a right
of payment, weather or not such right to an equitable remedy is reduced to
judgement, fixed, contingent, matured, unmatured, disputed, undisputed, secured
or unsecured.

"Code" means the Internal Revenue Code of 1986, as amended.
 ----

"Company Products" means all goods manufactured by the Company or any of its
 ----------------
Subsidiaries.

"Copyrights" means any foreign or United States copyright registration and
 ----------
applications for registration thereof, and any non-registered copyrights.

"Employee" means any individual employed by the Company as of the Closing Date.
 --------

"Environment" means navigable waters, waters of the contiguous zone, ocean
 -----------
waters, natural resources, surface waters, ground water, drinking water supply,
land surface, subsurface strata, ambient air, both inside and outside of
buildings and structures, man-made buildings and structures, and plant and
animal life on earth.

"Excluded Subsidiaries" means each of DL, HPI, Drypers Mexico S.A. de C.V.,
 ---------------------
Drypers Holdings de Mexico SRL de CV, Drypers Servicios de Mexico SRL de CV,
Drypers Caribbean Holdings Limited, Ultracare Products International, Inc. and
Igienica Difusion, Inc. Ltd.

"Foreign Employee" means any individual employed by any Subsidiary organized in
 ----------------
a jurisdiction other than the United States.

"Hazardous Substance" means any toxic waste, pollutant, contaminant, hazardous
 -------------------
substance, toxic substance, harzardous waste, special waste, industrial
substance or waste, petroleum or petroleum-derived substance or waste,
radioactive substance or waste, or any constituent of any such substance or
waste regulated under or defined by any Safety and Environmental Law.

                                      32
<PAGE>

"Inactive Employee" means an employee who is not actively at work due to
 -----------------
approved leave of absence, short-term disability leave or military leave.

"Indebtedness" means (i) any liability of any person (a) for borrowed money, (b)
 ------------
evidenced by a note or similar instrument (including a purchase money
obligation) given in connection with the acquisition of any property or assets
(other than inventory or similar property acquired in the ordinary course of
business), including securities, (c) for the payment of money relating to a
capitalized lease obligation, and (d) for any Claim; (ii) any liability of
others described in the preceding clause (i) which the person has guaranteed or
which is otherwise its legal liability; and (iii) any amendment, renewal,
extension or refunding of any liability of the types referred to in clauses (i)
and (ii) above.

"IRS" means the Internal Revenue Service.
 ---

"Internet Assets" means any internet domain names and other computer user
 ---------------
identifiers and any rights in and to sites on the world wide web including
rights in and to any text, graphics, audio and video files, and html or other
code incorporated in such sites.

"Inventories" means all of the inventory of the Company and its Subsidiaries,
 -----------
including without limitation: (i) all raw materials, work in process, parts,
components, assemblies, supplies and materials used or consumed in the business
of the Company and its Subsidiaries; (ii) all goods, wares and merchandise,
finished or unfinished, held for sale or lease or leased or furnished or to be
furnished under contracts of service; and (iii) all goods returned or
repossessed by the Company.

"Knowledge" means when used in reference to the Company (e.g. "to the Company's
 ---------
knowledge," "to the knowledge of the Company" and phrases of similar import)
means the knowledge of the Company's chief executive, operating and financial
officers, as well as the knowledge of the most senior executives, operating and
financial officers of each Subsidiary.

"Latin American Subsidiaries" means Seler S.A., New Dry S.A. Drypers do Brasil
 ---------------------------
Ind. e Com. Ltda., Drypers Andina + CIA, S.C.A.

"Legal Proceeding" means any judicial, administrative, regulatory or arbitral
 ----------------
proceeding, investigation or inquiry or administrative charge or complaint
pending at law or in equity before any governmental or regulatory body or
authority.

"Lien" shall have the meaning set forth in 11 U.S.C. (S) 101(37), and
 ----
specifically includes without limitation, any lien, claim, encumbrance, charge
and interest.

"Material Contract" means (i) any (x) Lease for real property or (y) Lease for
 -----------------
personal property, in each case requiring aggregate payments after Closing of
$150,000 or more; (ii) any contract for the purchase of materials, supplies,
goods, and services, equipment or other assets that has a term of at least one
year and that requires aggregate payments after Closing of $150,000 or more;
(iii) any contract that requires aggregate payments after Closing of $150,000 or
more, including debt documents; (iv) any sales, distribution or other similar
contracts not entered into in the ordinary course providing for the sale by the
Company or any of its Subsidiaries of materials, supplies, goods, services,
equipment or other assets that requires aggregate payments after Closing of

                                      33
<PAGE>

$150,000 or more; (v) any acquisition, dispositioning, partnership, joint
venture or other similar Contract; or (vi) any Contract or agreement under which
any Subsidiary indemnifies or has any other contingent liability to any person.

"Patents" means any foreign or United States patents and patent applications
 -------
including any divisions, continuations, continuations-in-part, substitutions or
reissues thereof, whether or not patents are issued on such applications and
whether or not such applications are modified, withdrawn or resubmitted.

"Permitted Liens" means (a) liens for taxes and other governmental charges and
 ---------------
assessments which are not yet due and payable, (b) liens of landlords and liens
of carriers, warehousemen, mechanics and materialmen and other like liens
arising in the ordinary course of business for sums not yet due and payable (c)
other liens or imperfections on property which are not material in amount or do
not materially detract from the value of or materially impair the existing use
of the property affected by such lien or imperfection and (d) any license of
Intellectual Property granted pursuant to Section 9.9..

"person" means any individual, corporation, partnership, limited liability
 ------
company, firm, joint venture, association, joint-stock company, trust,
unincorporated organization, Governmental Body or other entity.

"Petition Date" means October 10, 2000.
 -------------

"Procter & Gamble" means The Procter & Gamble Company, an Ohio corporation.
 ----------------

"Procter and Gamble Settlement Agreement" means order approving the
 ---------------------------------------
implementation of the prepetition term sheet agreement by and between the
Company and Procter & Gamble dated October 9, 2000, as amended through the date
of this Agreement, (including all exhibits thereto and any related agreements,
including, without limitation, the U.S. License Agreement, dated December 13,
2000, between the Company and Procter & Gamble and the Canadian License
Agreement, dated December 13, 2000, between the Company and Procter & Gamble).

"Procter and Gamble Settlement Order" means the Order of the Bankruptcy Court
 -----------------------------------
authorizing and approving the Procter and Gamble Settlement Agreement.

"property" or "properties" means real, personal or mixed property, tangible or
 --------      ----------
intangible.

"the Purchaser Disclosure Letter" means the disclosure letter delivered by the
 -------------------------------
Purchaser to the Company in connection with the execution and delivery of this
Agreement by the parties hereto.

"Purchaser Employee" means a Current Employee who is hired by the Purchaser.
 ------------------

"Safety and Environmental Laws" means all Laws and Orders relating to pollution,
 -----------------------------
protection of the Environment, public or worker health and safety, or the
emission, discharge, release or threatened release or Hazardous Substances into
the Environment or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling of
Hazardous Substances including the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. (S)9601 et seq., the Resource
                                                  ------
Conservation and Recovery Act, 42

                                      34
<PAGE>

U.S.C. (S) 6901 et seq., the Toxic Substances Control Act, 15 U.S.C. (S) 2601
                -------
et seq., the Federal Water Pollution Control Act, 33 U.S.C. (S) 1251 et seq.,
-------                                                              -------
the Clean Air Act, 42 U.S.C. (S) 7401 et seq., the Federal Insecticide,
                                      -------
Fungicide and Rodenticide Act, 7 U.S.C. (S) 121 et seq., the Occupational Safety
                                                -------
and Health Act, 29 U.S.C. (S) 661 et seq., the Asbestos Hazard Emergency
                                  -------
Response Act, 15 U.S.C. (S) 2601 et seq., the Safe Drinking Water Act, 42 U.S.C.
                                 -------
(S) 300f et seq., the Oil Pollution Act of 1990, 33 U.S.C. (S) 2701 et seq., and
         -------                                                    -------
analogous state and foreign Laws and Orders.

"Sale Order" means (i) an order of the Bankruptcy Court, in form and substance
 ----------
reasonably satisfactory to the Purchaser and the Company, approving the sale of
the Business, including all Domestic Purchased Assets and the assignment of all
Assumed Contracts, Assumed Leases by the Company to the Purchaser under this
Agreement pursuant to sections 105 and 363 of the Bankruptcy Code, in each case
free and clear of any Liens except as specifically set forth in this Agreement
as Permitted Lien or Assumed Liability, and finding that the Purchaser is acting
in good faith the Purchaser including for purposes of section 363(m) of the
Bankruptcy Code, and (ii) an order of orders of the Bankruptcy Court in form and
substance reasonably satisfactory to the Purchaser and the Company, approving
the assumption and assignment of all Assumed Contracts, and Assumed Leases by
the Company pursuant to section 365 of the Bankruptcy Code. The Sale Order shall
provide that all defaults of the Company under the Assumed Contracts and Assumed
Leases arising or accruing prior to the date of the Sale Order (without giving
effect to any acceleration clauses or any default provisions in such contracts
of a kind specified in section 365(b)(2) of the Bankruptcy Code) have been cured
or will be promptly cured by the Company such that the Purchaser shall have no
liability or obligation with respect to any default or obligation arising or
accruing prior to the date of the Closing, except as may otherwise be
specifically agreed as set forth in this Agreement; and that the Assumed
Contracts, and Assumed Leases will be transferred to, and remain in full force
and effect for the benefit of the Applicable the Purchaser, notwithstanding any
provision in such Assumed Contracts, Assumed Puerto Rico Contracts, Assumed
Leases and Assumed Puerto Rico Leases or in applicable law (including those
described in sections 365(b)(2) and (f) of the Bankruptcy Code) that prohibits,
restricts, or limits in any way such assignment or transfer.

"Seller Disclosure Letter" means the disclosure letter delivered by the Company
 ------------------------
to the Purchaser of the Agreement by the parties hereto pursuant to Section
5.13.

"Software" means any computer software programs, source code, object code, data
 --------
and documentation.

"Subsidiaries" means the Company's subsidiaries and affiliates, including
without limitation the subsidiaries and affiliates set forth in Section 3.2 of
the Seller Disclosure Letter.

"Taxes" means (i) any and all federal, state, provincial, local, foreign and
 -----
other taxes, levies, fees, imposts, duties, and similar governmental charges
(including any interest, fines, assessments, penalties or additions to tax
imposed in connection therewith or with respect thereto) including, without
limitation, taxes imposed on, or measured by, income, franchise, profits or
gross receipts, ad valorem, value added, capital gains, sales, goods and
services, use, real or personal property, capital stock, license, branch,
payroll, estimated withholding, employment, social security (or similar),
unemployment, compensation, utility, severance,

                                      35
<PAGE>

production, excise, stamp, occupation, premium, windfall profits, transfer and
gains taxes, and customs duties, and (ii) any transferee liability in respect of
any items described in clause (i) above.

"Tax Returns" means any and all reports, returns, declarations, claims for
 -----------
refund, elections, disclosures, estimates, information reports or returns or
statements required to a supplied to a taxing authority in connection with
Taxes, including any schedule or attachment thereto or amendment thereof.

"Trade Secrets" means any trade secrets, research records, processes,
 -------------
procedures, manufacturing formulae, technical know-how, technology, blue prints,
designs, plans, inventions (whether patentable and whether reduced to practice),
invention disclosures and improvements thereto.

"Trademarks" means any foreign or United States trademarks, service marks, trade
 ----------
dress, trade names, brand names, designs an logos, corporate names, product or
service identifiers, whether registered or unregistered, and all registrations
and applications for registration thereof.

"Treasury Regulation" means the regulations promulgated under the Code.
 -------------------

                                      36

<PAGE>

     IN WITNESS WHEREOF, the Sellers and the Purchaser have caused this
Agreement to be executed on their behalf by their officers thereunto duly
authorized, as of the date first above written.

                                             DSG International Limited

                                             By: /s/ Peter Chang
                                                 ---------------------------
                                                 Name: Peter Chang
                                                      ----------------------
                                                 Title: Vice President
                                                       ---------------------

                                             Associated Hygienic Products LLC

                                             By: /s/ Peter Chang
                                                ----------------------------
                                                 Name: Peter Chang
                                                      ----------------------
                                                 Title: President
                                                       ---------------------

                                             By:
                                                 ---------------------------
                                                 Name:
                                                      ----------------------
                                                 Title:
                                                       ---------------------

                                             DRYPERS CORPORATION

                                             By: /s/ Walter V. Klemp
                                                ----------------------------
                                                 Name: Walter V. Klemp
                                                      ----------------------
                                                 Title: CHRMN & CEO
                                                       ---------------------

                                      37<PAGE>

                                LOAN AGREEMENT

                                    between

                        PREFERRED EQUITIES CORPORATION

                                      and

                                 HSBC BANK USA

                                                  DATED: FEBRUARY 6, 2001
<PAGE>

                               TABLE OF CONTENTS
                               -----------------

                                                               Page
                                                               ----
ARTICLE I. The Credit.........................................   1
         1.1    The Credit....................................   1
         1.2    The Note......................................   1
         1.3    Interest......................................   1
         1.4    Definitions...................................   2

ARTICLE II. Loans and Payments................................   5
         2.1    Loans.........................................   5
         2.2    Loan Requests.................................   5
         2.3    Conditions to Each Loan.......................   6
         2.4    Disbursement of Loans.........................   6
         2.5    Proceeds--Mandatory Prepayments...............   6
         2.6    Voluntary Prepayments.........................   6
         2.7    Loans Without Additional Collateral...........   7

ARTICLE III. Conditions to this Agreement.....................   7
         3.1    Corporate Action..............................   7
         3.2    Guarantor Action..............................   8
         3.3    Corporate Documents...........................   8
         3.4    Opinion.......................................   8
         3.5    Guaranty......................................   8
         3.6    Security Agreement............................   8
         3.7    Certificate of Occupancy......................   8
         3.8    Interval Exchange Organization................   8
         3.9    Insurance.....................................   9
        3.10    Environmental Questionnaire...................   9
        3.11    Other Matters.................................   9

ARTICLE IV. Representations and Warranties ...................   9
         4.1    Company's Good Standing and Authority.........   9
         4.2    Guarantor's Good Standing and Authority.......   9
         4.3    Valid and Binding Obligations.................   9
         4.4    Good Title....................................  10
         4.5    No Pending Litigation.........................  10
         4.6    No Consent or Filing..........................  10
         4.7    Laws and Regulations..........................  10
         4.8    Permits, Licenses and Approvals...............  11

                                       i
<PAGE>

<TABLE>
<S>                                                            <C>
       4.9     No Violations.................................  11
      4.10     Interval Exchange Organization................  11
      4.11     Financial Statements..........................  11
      4.12     Tax Returns...................................  12
      4.13     Promissory Notes and Mortgages and Contracts..  12
      4.14     Environmental Matters.........................  12

ARTICLE V.     Affirmative Covenants.........................  12
       5.1     Payments......................................  12
       5.2     Financial Information.........................  13
       5.3     Notice........................................  13
       5.4     Taxes.........................................  14
       5.5     Insurance.....................................  14
       5.6     Litigation....................................  14
       5.7     Standing......................................  14
       5.8     Net Worth.....................................  14
       5.9     Books and Records - Right of Inspection.......  15
      5.10     Compliance with Law...........................  15
      5.11     Continue Business.............................  15
      5.12     Maintenance of the Project....................  15
      5.13     Lock Box Agreement............................  15
      5.14     Promissory Notes and Mortgages and Contracts..  15
      5.15     Environmental Matters.........................  15
      5.16     Other Acts....................................  16

ARTICLE VI.    Negative Covenants............................  16
      6.1      Encumbrances..................................  16
      6.2      Guaranties....................................  16
      6.3      Sale of Assets................................  16
      6.4      Investments and Loans.........................  16
      6.5      Communication with Obligors...................  17
      6.6      Promissory Notes and Mortgages or Contracts...  17
      6.7      Hazardous Substances..........................  17

ARTICLE VII.   Default.......................................  17
      7.1      Events of Default.............................  17
      7.2      Effects of an Event of Default................  19

ARTICLE VIII.  Expenses......................................  20
        8.1    Counsel Fees and Taxes........................  20
        8.2    Other Costs and Expenses......................  20

ARTICLE IX.    Miscellaneous.................................  20
        9.1    Amendments and Waivers........................  20
        9.2    Delays and Omissions..........................  20
</TABLE>

                                      ii
<PAGE>

<TABLE>
<S>                                                            <C>
        9.3    Successors and Assigns........................  21
        9.4    Notices.......................................  21
        9.5    Governing Law.................................  21
        9.6    Counterparts..................................  21
        9.7    Titles........................................  21
        9.8    Inconsistent Provisions.......................  22
        9.9    Course of Dealing.............................  22
       9.10    Indemnification...............................  22
       9.11    Environmental Indemnification.................  22
       9.12    No Liability..................................  22
       9.13    CONSENT TO JURISDICTION.......................  22
</TABLE>

                                      iii
<PAGE>

Exhibit A - Secured Term Note
Exhibit B - Borrower's Certificate and Loan Request
Exhibit C - Counsel's Opinion

                                      iv
<PAGE>

                                LOAN AGREEMENT

          AGREEMENT between PREFERRED EQUITIES CORPORATION, a Nevada corporation
(the "Company"), and HSBC BANK USA, a New York bank (the "Bank").

                                   Recitals

          A.   The Company and the Bank are parties to a Purchase and Sale
Agreement dated as of August 30, 1993, as amended by Amendment to Purchase and
Sale Agreement dated as of May 10, 1994, Second Amendment to Purchase and Sale
Agreement dated as of February 8, 1996, and Third Amendment to Purchase and Sale
Agreement dated as of February 20, 1998, and as supplemented by a letter-
agreement dated February 3, 1999 (together, the "Purchase Agreement").  Pursuant
to the Purchase Agreement, the Company sells to the Bank promissory notes and
deeds of trust, or installment sales contracts, evidencing the financing of the
purchase of Intervals (as defined in Section 1.4(j) of this Agreement) in the
Project (as defined in Section 1.4(o) of this Agreement).

          B.   The Company and the Bank wish to enter into this Agreement, under
which the Bank may make loans to the Company on the collateral security of
promissory notes and deeds of trust, and installment sales contracts, evidencing
the financing of purchases of Intervals in the Project.

                                   Agreement

                            ARTICLE I.  The Credit

          1.1  The Credit.  The Bank, relying on the representations and
warranties in this Agreement, may in its sole and absolute discretion lend to
the Company from time to time such sums ("Loan" or, collectively, "Loans") not
exceeding $5,000,000.00 (the "Credit") as the Company may request from time to
time on or before the first anniversary of the date of this Agreement and during
such additional periods as a supplement or amendment to this Agreement or a
separate agreement between the parties may provide.

          1.2  The Note.  The Credit shall be evidenced by a note of the Company
bearing a variable rate of interest and substantially in the form of Exhibit A
to this Agreement and any amendment, modification, replacement or extension
thereof (the "Note").
<PAGE>

                                      -2-

          1.3  Interest.  Each Loan shall accrue interest before maturity from
the date the Loan is made, on the balance of principal from time to time unpaid,
at an annual rate (the "Rate") equal to the Prime Rate plus one percent (1%).
After maturity, whether by acceleration or otherwise, the Note shall bear
interest at an annual rate equal to three percent (3%) in excess of the Rate.
The Rate shall change simultaneously with each change in the Prime Rate.  In no
event shall the Rate on the Note exceed the maximum rate allowed by law.
Interest shall be calculated on the basis of one three hundred sixtieth
(1/360th) of the Rate in effect for each calendar day the balance of principal
is unpaid.  Accrued interest shall be payable monthly on the tenth day of each
month beginning the month after the month in which this Agreement is executed
and when the principal of the Note is paid in full.

          1.4  Definitions.  The following terms have the following meanings:

               (a)  "Contract" - an installment sales agreement between the
Company as seller and a Timeshare Purchaser as buyer.

               (b)  "Disposal" - the intentional or unintentional abandonment,
discharge, deposit, injection, dumping, spilling, leaking, storing, burning,
thermal destruction or placing of any substance so that it or any of its
constituents may enter the Environment.

               (c)  "Environment" - any water, including but not limited to
surface water, ground water and water vapor; any land, including land surface or
subsurface; stream sediments; air; fish, wildlife and plants; and all other
natural resources or environmental media.

               (d)  "Environmental Laws" - all federal, state and local
environmental, land use, zoning, health, chemical use, safety and sanitation
laws, statutes, ordinances, regulations, codes and rules relating to the
protection of the Environment and/or governing the use, storage, treatment,
generation, transportation, processing, handling, production or disposal of
Hazardous Substances and the policies, guidelines, procedures, interpretations,
decisions, orders and directives of federal, state and local governmental
agencies and authorities with respect thereto.

               (e)  "Environmental Permits" - all licenses, permits, approvals,
authorizations, consents or registrations required by any applicable
Environmental Laws and all applicable judicial and administrative orders in
connection with the ownership, lease, purchase, transfer, closure, use and/or
operation of the Property and/or as may be required for the storage, treatment,
generation, transportation, processing, handling, production or disposal of
Hazardous Substances.

               (f)  "Environmental Questionnaire" - a questionnaire concerning
(i) activities and conditions affecting the Environment at any property of the
Company
<PAGE>

                                      -3-

comprising the Project or (ii) the enforcement or possible enforcement of any
Environmental Law against the Company.

               (g)  "Environmental Report" - a written report prepared for the
Bank by an environmental consulting or environmental engineering firm.

               (h)  "Guarantor" - Mego Financial Corp.

               (i)  "Hazardous Substances" - without limitation, any explosives,
radon, radioactive materials, asbestos, urea formaldehyde foam insulation,
polychlorinated biphenyls, petroleum and petroleum products, methane, hazardous
materials, hazardous wastes, hazardous or toxic substances and any other
material defined as a hazardous substance in Section 101(14) of the
Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42
U.S.C. (S) 9601(14)).

               (j)  "Interval" - the portion of a Unit purchased by a Timeshare
Purchaser.

               (k)  "Lock Box Agent" - Bank of America, N.A., who, pursuant to
the Lock Box Agreement, will process payments on the Promissory Notes and
Contracts pledged to the Bank and perform any other services specified in the
Lock Box Agreement.

               (l)  "Lock Box Agreement" - the separate agreement among the
Company, the Bank and the Lock Box Agent pursuant to which the Lock Box Agent
will process payments on the Promissory Notes and Contracts pledged to the Bank.

               (m)  "Mortgage" - a mortgage or deed of trust that secures a
Promissory Note and encumbers an Interval and that is given to the Company by a
Timeshare Purchaser.

               (n)  "Prime Rate" - the rate of interest publicly announced by
the Bank from time to time as its prime rate and is a base rate for calculating
interest on certain loans.

               (o)  "Project" - the timeshare developments commonly known as
Reno Spa Resort Club, Reno, Nevada; Grand Flamingo Resort Club, Las Vegas,
Nevada (which includes Grand Flamingo Towers, Grand Flamingo Villas, Grand
Flamingo Terraces, Grand Flamingo Suites, Grand Flamingo Winnick, Grand Flamingo
Fountains and The Grand Flamingo Plaza); and The Suites at Steamboat, Steamboat
Springs, Colorado.

               (p)  "Promissory Note" - a note given to the Company by a
Timeshare Purchaser to finance the purchase of an Interval (a "Purchase") and
secured by a Mortgage.
<PAGE>

                                      -4-

               (q)  "Qualified Promissory Note and Mortgage" or "Qualified
Contract"- a Promissory Note and the Mortgage securing it, or a Contract, that
meet all of the following criteria:

                    (i)    The credit of the Timeshare Purchaser who executed
the Promissory Note and Mortgage or Contract is acceptable to the Bank in its
sole discretion.

                    (ii)   All terms of the Purchase are acceptable to the Bank.
The down payment shall not be less than ten percent of the total sale price.

                    (iii)  The forms of Promissory Note and Mortgage or Contract
are acceptable to the Bank and comply with all applicable laws and regulations.

                    (iv)   All other documents relating to the Purchase,
including without limitation disclosure statements, purchase contracts and
deeds, are acceptable to the Bank and comply with all applicable laws and
regulations.

                    (v)    The Promissory Note and Mortgage or the Contract are
genuine and enforceable according to their terms and are the only such
instruments executed with respect to the financing of the Purchase.

                    (vi)   The Mortgage evidences a valid first lien on and
security interest in the Interval described in the Mortgage.

                    (vii)  The Timeshare Purchaser who executed the Promissory
Note and Mortgage or the Contract had full and unimpaired capacity to contract.

                    (viii) The Company has no knowledge of, or reason to believe
in the existence of, any fact or circumstance that might render the Promissory
Note or Mortgage or the Contract less valuable than it appears on its face to
be.

                    (ix)   Before the Promissory Note or the Contract was
pledged to the Bank, no more than two payments on the Promissory Note or the
Contract were 30 or more days delinquent in any 12-month period. When the
Promissory Note or the Contract is pledged to the Bank and at all times while
pledged to the Bank, no payment is 60 or more days delinquent. Nothing in this
subsection shall be construed to require that any Promissory Note or Contract be
in existence for any specified period of time in order to be considered a
Qualified Promissory Note or a Qualified Contract.

                    (x)    A policy of title insurance in form and content
satisfactory to the Bank that insures the holder of the Mortgage to the full
Unpaid Principal Balance of the Promissory Note secured by the Mortgage and
shows that the Mortgage is a first lien
<PAGE>

                                      -5-

on the Interval described in the Mortgage has been issued or, with the prior
approval of the Bank, a commitment to issue such a policy has been issued.

               (s)  "Release" - the same meaning as that given to the term in
Section 101(22) of the Comprehensive, Environmental Response, Compensation and
Liability Act of 1980 (42 U.S.C. (S) 9601(22)) and the regulations promulgated
thereunder.

               (t)  "Security Agreement" - the Pledge Security Agreement between
the Company and the Bank dated the date of this Agreement.

               (u)  "Timeshare Purchaser" - a person who purchases an Interval
in the Project.

               (v)  "Unit" - a residential unit in the Project.

               (w)  "Unpaid Principal Balance" - the amount of the principal of
a Promissory Note or a Contract that remains unpaid.

                        ARTICLE II.  Loans and Payments.

          2.1  Loans.

               (a)  Minimum Amount:  No Loan shall be in an amount less than
$100,000.00, except that no Loan under Section 2.7 of this Agreement shall be
less than $500,000.00.

               (b)  Collateral Ratio: No Loan shall at the time it is made
exceed ninety percent (90%) of the aggregate Unpaid Principal Balance of the
Qualified Promissory Notes or the Qualified Contracts, or both, to be pledged to
the Bank in conjunction with the Loan or cause the Unpaid Principal Balance of
all Loans or other extensions of credit made by the Bank to the Company under
this Agreement or under any other loan agreement or arrangement to exceed ninety
percent (90%) of the aggregate Unpaid Principal Balance of all Qualified
Promissory Notes and Qualified Contracts pledged by the Company to the Bank to
secure indebtedness.

          2.2  Loan Requests.  On or before the first anniversary of the date of
this Agreement and during such additional periods as a supplement or amendment
to this Agreement or a separate agreement between the parties may provide, the
Company may request a Loan under the Credit by delivering to the Bank a
Borrower's Certificate and Loan Request in the form of
<PAGE>

                                      -6-

Exhibit B to this Agreement ("Borrower's Certificate"), accompanied by (a)
copies of the Qualified Promissory Notes and Mortgages or the Qualified
Contracts proposed to be pledged and assigned to the Bank and (b) copies of such
other documents related to the transactions evidenced by the Qualified
Promissory Notes and Mortgages or the Qualified Contracts as the Bank may
require, including without limitation credit applications, credit reports,
purchase contracts, disclosure statements, a copy of the title insurance policy
or commitment referred to in Section 1.4(q)(x) of this Agreement and RESPA
statements.

          2.3  Conditions to Each Loan. The Bank will review the Company's
               -----------------------
Borrower's Certificate and the accompanying documents. The Bank will notify the
Company that the request is approved or that the request is not approved. If the
request is approved, the Company shall (a) endorse the Promissory Notes to the
order of the Bank, or assign the Contracts to the Bank, without restrictions or
limitations and deliver the Promissory Notes or the Contracts to the Bank; (b)
deliver to the Bank recorded assignments, or satisfactory evidence of the
recording of assignments, of all Mortgages; and (c) furnish the Bank with a
policy or commitment of title insurance insuring for the benefit of the Bank
each Mortgage submitted to the Bank to the full Unpaid Principal Balance of the
Promissory Note secured by the Mortgage and showing that each Mortgage is a
first lien upon the Interval described in the Mortgage. Qualified Promissory
Notes and Mortgages evidencing the financing of the purchase of Intervals in the
Suites at Steamboat will first be endorsed and assigned by Steamboat Suites,
Inc., to the Company and then by the Company to the Bank.

          2.4  Disbursement of Loans.  The Bank shall advance the requested Loan
               ---------------------
on (a) approval of the Loan by the Bank; (b) receipt of all of the items
described in Section 2.3, in form and content satisfactory to the Bank in its
sole discretion; (c) the facts stated in the Borrower's Certificate being true;
and (d) receipt of a fee in the amount of one percent (1%) of the amount of the
Loan.  Without limiting the requirement that the fee be paid at the time of the
Loan, unless the Company has advised the Bank that it will pay the fee directly
with other funds, the Bank may in its sole discretion deduct the fee from the
proceeds of the Loan.

          2.5  Proceeds--Mandatory Prepayments.  All payments of every kind on
               -------------------------------
the Promissory Notes and the Contracts securing the Credit shall be remitted
directly by the obligors of the Promissory Notes or the Contracts to the Lock
Box Agent for the account of the Bank pursuant to the Lock Box Agreement.  Any
remittances received by the Bank from the Lock Box Agent shall be applied first
to accrued interest on the Note, then to any costs or expenses owed to the Bank
and then to the principal of the Loans as the Bank may determine in its sole
discretion, as a mandatory prepayment.  If as of any monthly interest payment
date the remittances received by the Bank from the Lock Box Agent, after any
deductions pursuant to the Lock Box Agreement, are less than the amount of
accrued interest on the Note due on that date, the Company shall pay the
difference to the Bank within five calendar days of receiving notice of the
shortfall from the Bank.  On payment in full of the Note, the Company may
request from the Bank, and the Bank shall deliver to the Company, written notice
authorizing the Company to
<PAGE>

                                      -7-

notify Timeshare Purchasers to make payments on the Promissory Notes or the
Contracts directly to the Company, and the Company shall be permitted to receive
such payments subject to the terms of the Security Agreement.

          2.6  Voluntary Prepayments.  The Company shall not be permitted to
               ---------------------
prepay all or any portion of its principal indebtedness evidenced by the Note
from the date of this Agreement until the first anniversary of that date;
provided, however, the foregoing does not apply to mandatory prepayments
received and applied as described in Section 2.8 of this Agreement.  On and
after the first anniversary of the date of this Agreement, prepayment in full
shall be permitted on any interest payment date, provided that the Company also
pays to the Bank at the same time any unpaid accrued interest and a prepayment
premium determined as follows:

                Prepayment Period               Premium
                -------------------             -------

                First Anniversary through       3% of the then-outstanding
                day before Second               principal indebtedness on the
                Anniversary                     Note

                Second Anniversary through      2% of the then-outstanding
                day before Third Anniversary    principal indebtedness on the
                                                Note

                Third Anniversary through       1% of the then-outstanding
                day before  Fourth              principal indebtedness on the
                Anniversary                     Note

                Fourth Anniversary and          0
                thereafter

          2.7  Loans Without Additional Collateral.
               -----------------------------------

               (a)  If at any time the aggregate unpaid principal balance of the
Note falls below ninety percent (90%) of the aggregate Unpaid Principal Balance
of all Qualified Promissory Notes and all Qualified Contracts held by the Bank
to secure repayment of the Credit, the Company, no more than once each calendar
quarter, may request a Loan of no more than the amount of the excess (the
"Excess") without pledging and assigning additional Qualified Promissory Notes
and Mortgages or Contracts to the Bank.

               (b)  Except for the requirement that the Company provide
additional Qualified Promissory Notes and Mortgages or Contracts in the amount
of a requested Loan, the requirements of Sections 2.2, 2.3 and 2.4 of this
Agreement shall apply to requests for Loans under this Section 2.7, including
the requirement for payment of the fee described in Section 2.4.
<PAGE>

                                      -8-

                  ARTICLE III.  Conditions to this Agreement
                                ----------------------------

          This Agreement shall take effect only if the following conditions are
satisfied at or before the date of this Agreement.

          3.1  Corporate Action.  The Company shall have taken all necessary and
               ----------------
appropriate corporate action, and the Board of Directors of the Company shall
have adopted resolutions, authorizing the Credit, the execution and delivery of
this Agreement and the Note and the taking of all action required of the Company
by this Agreement; and the Company shall have furnished to the Bank certified
copies of those resolutions and such other corporate documents as the Bank may
reasonably request.

          3.2  Guarantor Action.  The Guarantor shall have taken all necessary
               ----------------
and appropriate corporate action, and its Board of Directors shall have adopted
resolutions, authorizing the execution and delivery of the Guaranty; and the
Guarantor shall have furnished to the Bank certified copies of those resolutions
and such other corporate documents as the Bank may reasonably request.

          3.3  Corporate Documents.  There shall have been furnished to the Bank
               -------------------
(a) copies of the Company's and the Guarantor's articles of incorporation and
by-laws certified by its Secretary as of the date of this Agreement; (b)
certificates of incumbency specifying the officers of the Company and the
Guarantor and containing and certifying to their specimen signatures; (c)
certificates of corporate status issued by the Secretary of State of the State
of Nevada; and (d) such other corporate documents as the Bank may reasonably
request.

          3.4  Opinion.  General counsel for the Company, Jon A. Joseph, shall
               -------
have furnished to the Bank his favorable opinion dated the date of this
Agreement and in the form of Exhibit C.
                             ---------

          3.5  Guaranty.  There shall have been furnished to the Bank the
               --------
written continuing guaranty of the Guarantor in form and content satisfactory to
the Bank, guaranteeing the payment of all indebtedness of the Company to the
Bank under this Agreement, whether now existing or hereafter incurred
("Guaranty").

          3.6  Security Agreement.  The Company shall have furnished to the
               ------------------
Bank, all in form and content satisfactory to the Bank, the Security Agreement
granting to the Bank a security interest in all of the Promissory Notes and the
Contracts it pledges to the Bank pursuant to Section 2.3 of this Agreement and
such UCC-1 financing statements as the Bank may reasonably require.
<PAGE>

                                      -9-

          3.7  Certificate of Occupancy.  There shall have been furnished to the
               ------------------------
Bank a copy of a certificate or certificates of occupancy with respect to those
portions of the Project that are completed, or similar documentation acceptable
to the Bank in its sole discretion.

          3.8  Interval Exchange Organization.  There shall have been furnished
               ------------------------------
to the Bank a copy of the contract or contracts affiliating the Project with
either Resort Condominiums International, Inc., or Interval International, Inc.

          3.9  Insurance.  There shall have furnished to the Bank currently-
               ---------
effective property and liability, workers compensation and flood insurance
policies or certificates, with endorsements and cancellation notice provisions
deemed necessary by the Bank, in form and content satisfactory to the Bank,
insuring the Project and, in the case of the property insurance, naming the Bank
as mortgagee on the Project as its interests may appear.

          3.10 Environmental Questionnaire.  The Company shall have furnished to
               ---------------------------
the Bank an Environmental Questionnaire in form acceptable to the Bank.

          3.11 Other Matters.  All matters incidental to the execution and
               -------------
delivery of this Agreement and the Note and all action required by this
Agreement shall be satisfactory to the Bank and its counsel, and this Agreement
shall then be in effect.

                  ARTICLE IV.  Representations and Warranties
                               ------------------------------

          The Company makes the following representations and warranties, which
shall be deemed to be continuing representations and warranties so long as any
indebtedness of the Company to the Bank, including indebtedness for fees and
expenses, remains unpaid:

          4.1  Company's Good Standing and Authority.  The Company is a
               -------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Nevada; has powers and authority to transact the business in
which it is engaged; is duly licensed or qualified and in good standing in each
jurisdiction in which the conduct of its business requires licensing or
qualification; and has all necessary power and authority to enter into, execute,
deliver and perform this Agreement, the Note, the Security Agreement and any
other document executed by it in connection with this Agreement, all of which
have been duly authorized by all proper and necessary corporate and shareholder
action.

<PAGE>

                                     -10-

          4.2  Guarantor's Good Standing and Authority.  The Guarantor is a
               ---------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of New York [?]; has powers and authority to transact the business
in which it is engaged; is duly licensed or qualified and in good standing in
each jurisdiction in which the conduct of its business requires licensing or
qualification; and has all necessary power and authority to enter into, execute,
deliver and perform its Guaranty and any other document executed by it in
connection with this Agreement, all of which have been duly authorized by all
proper and necessary corporate and shareholder action.

          4.3  Valid and Binding Obligations.  This Agreement  and the Note,
               -----------------------------
Security Agreement, Mortgage and Contract assignments and Promissory Note
endorsements and any other document executed by the Company in connection with
this Agreement, when executed, delivered or both, will constitute the legal,
valid and binding obligations of the Company, enforceable in accordance with
their terms, except as enforcement may be limited by state or federal
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting the rights of creditors generally.  The Guaranty, and any other
documents executed and delivered by the Guarantor in connection with this
Agreement, when executed, delivered on both, will constitute the legal, valid
and binding obligation of the Guarantor, enforceable in accordance with its
terms, except as enforcement may be limited by state or federal bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
rights of creditors generally.

          4.4  Good Title.  Each of the Company and the Guarantor has good and
               ----------
marketable title to all of its assets, none of which is subject to any mortgage,
indenture, pledge, lien, conditional sale contract, security interest,
encumbrance, claim, trust or charge except as referred to in the financial
statements described in this Agreement or as may be set forth in a schedule to
this Agreement, or in favor of the Bank.  At the time the Company pledges
Promissory Notes to the Bank and assigns Mortgages and Contracts to the Bank,
the Company has absolute title to those Promissory Notes and Mortgages and
Contracts, free and clear of all liens and encumbrances, and no other person or
entity has any interest in them.

          4.5  No Pending Litigation.  There are no actions, suits or
               ---------------------
proceedings (whether or not purportedly on behalf of the Company or the
Guarantor) or investigations pending or to the knowledge of the Company
threatened, against the Company or the Guarantor or any basis therefor, which if
adversely determined would in any case or in the aggregate materially adversely
affect the property, assets (including without limitation all Promissory Notes,
Mortgages and Contracts pledged and assigned to the Bank), financial condition
or business of the Company or the Guarantor or materially impair the right or
ability of the Company or the Guarantor to carry on its operations substantially
as now conducted or anticipated to be conducted in the future, or which question
the validity of this Agreement, the Note, the Promissory Notes, Mortgages and
Contracts pledged and assigned to the Bank, the Security Agreement, the Guaranty
or any other documents required by this Agreement or any action taken or to be
taken pursuant to any of the foregoing.
<PAGE>

                                     -11-

          4.6  No Consent or Filing.  No consent, license, approval or
               --------------------
authorization of, or registration, declaration or filing with, any court,
governmental body or authority or other person or entity is required in
connection with (a) the valid execution, delivery or performance of this
Agreement, the Note, the Security Agreement, the Guaranty or any other documents
required by this Agreement; (b) the endorsement of Promissory Notes to the Bank
and the assignment of Mortgages and Contracts to the Bank; or (c) any of the
transactions contemplated thereby, other than the recording of the Mortgages
assigned to the Bank, the recording of the assignments of those Mortgages and
any filings made pursuant to the Nevada Uniform Commercial Code.

          4.7  Laws and Regulations.  Each of the Company and the Guarantor has
               --------------------
been and will continue to be in full compliance with all applicable laws and
regulations, including, without limitation those providing for or requiring
disclosure of terms, charges or fees of any kind, respecting the offering,
advertising and promotion of the Intervals in the Project, the construction or
conversion of the Units in the Project and the development of the timeshare plan
in the Project or the negotiation, sale and financing of the Intervals.

          4.8  Permits, Licenses and Approvals.  The Company has obtained all
               -------------------------------
necessary governmental permits, licenses and approvals with respect to the
Project, the timeshare plan and the Intervals to be sold, all of which are
current and in force.

          4.9  No Violations.  Each of the Company and the Guarantor is not in
               -------------
violation of any term of its articles of incorporation or by-laws or of any
mortgage, borrowing agreement or other instrument or agreement pertaining to
indebtedness for borrowed money.  Each of the Company and the Guarantor is not
in violation of any term of any other indenture, instrument or agreement to
which it is a party or by which it may be bound, resulting or which might
reasonably be expected to result in a material and adverse effect on its
business or assets.  Each of the Company and the Guarantor is not in violation
of any order, writ, judgment, injunction or decree of any court of competent
jurisdiction or of any statute or rule or regulation of any competent
governmental authority.  The execution and delivery of this Agreement, the
Notes, the Security Agreement, the Guaranty and other documents required by this
Agreement and the performance of all of them is and will be in compliance with
the foregoing and will not result in any violation or result in the creation of
any mortgage, lien, security interest, charge or encumbrance on any properties
or assets except in favor of the Bank.  There exists no fact or circumstance not
disclosed in this Agreement or in the documents furnished in connection with
this Agreement that materially adversely affects or in the future (so far as the
Company can now reasonably foresee) may materially adversely affect the
condition, business or operations of the Company or the Guarantor.

          4.10 Interval Exchange Organization.  The Project is affiliated and in
               ------------------------------
good standing with Resort Condominiums International, Inc.
<PAGE>

                                     -12-

          4.11 Financial Statements.  The Company has furnished to the Bank an
               --------------------
audited financial statement showing the Company's condition as of August 21,
2000, prepared by Deloitt & Touche LLP, which statement represents correctly and
fairly the results of its operations and transactions as of the dates and for
the period referred to and which has been prepared in accordance with generally
accepted accounting principles consistently applied throughout the time periods
involved.  From the date of the financial statement to the date of this
Agreement, there have not been any materially adverse changes in the financial
condition disclosed in the financial statement.  None of the property or assets
shown in financial statements delivered to the Bank has been materially
adversely affected as the result of any fire, explosion, accident, flood,
drought, storm, earthquake, condemnation, requisition, statutory or regulatory
change, act of God or act of public enemy or other casualty, whether or not
insured.

          4.12 Tax Returns.  Each of the Company and the Guarantor has filed all
               -----------
federal and other tax returns required to be filed and has paid all taxes
required by those returns through its fiscal year ending August 31, 2000.   The
Company has not received any assessments by the Internal Revenue Service or
other taxing authority for additional unpaid taxes.

          4.13 Promissory Notes and Mortgages and Contracts.  All Promissory
               --------------------------------------------
Notes the Company pledges to the Bank and all Mortgages the Company assigns to
the Bank are Qualified Promissory Notes and Mortgages, and all Contracts the
Company assigns to the Bank are Qualified Contracts.

          4.14 Environmental Matters.
               ---------------------

               (a)  Any Environmental Questionnaire provided to the Bank was and
is accurate and complete and does not omit any material fact the omission of
which would make the information in the Environmental Questionnaire materially
misleading.

               (b)  No above-ground or underground storage tanks containing
Hazardous Substances are or have been located on any property comprising the
Project.

               (c)  No property owned, leased or operated by the Company is or
has been used for the Disposal of any Hazardous Substance or for the treatment,
storage or Disposal of Hazardous Substances.

               (d)  No Release of a Hazardous Substance has occurred or is
threatened on, at, from or near any property owned, leased or operated by the
Company.

               (e)  The Company is not subject to any existing, pending or
threatened suit, claim, notice of violation or request for information under any
Environmental Law.

               (f)  The Company is in compliance with all Environmental Laws.
<PAGE>

                                     -13-

                       ARTICLE V.  Affirmative Covenants
                                   ---------------------

          During the term of this Agreement, and so long thereafter as any
indebtedness of the Company to the Bank,  including any indebtedness for fees
and expenses, remains unpaid, the Company will:

          5.1  Payments.  Duly and punctually pay (a) the principal of and
               --------
interest on all indebtedness incurred by it under this Agreement in the manner
set forth in this Agreement and (b) all costs and expenses required by this
Agreement to be paid or reimbursed by the Company.  Without limiting Section 2.8
of this Agreement, any payments the Company receives on or with respect to the
Promissory Notes and Mortgages or the Contracts pledged and assigned to the Bank
(x) shall be held by the Company in trust for the Bank in the same medium in
which received; (y) shall not be commingled with any assets of the Company; and
(z) shall be delivered to the Bank in the form received, properly indorsed to
permit collection, not later than the next business day following the day of
their receipt.

          5.2  Financial Information.  Furnish to the Bank (a) within 60 days
               ---------------------
after the end of each quarter of each of its fiscal years an unaudited financial
statement of the Company as of the end of that quarter, which statement shall
consist of a balance sheet (which may be prepared using tax basis figures), an
operating statement and surplus reconciliation covering the period from the end
of the Company's immediately preceding fiscal year to the end of such quarter,
all in such detail as the Bank may request and certified to be correct by the
President or Chief Financial Officer of the Company, who shall also certify that
(i) the Company has complied with and is in compliance with all the terms,
covenants and conditions of this Agreement that are binding upon it, (ii) there
exists no Event of Default and no event which with the giving of notice or lapse
of time, or both would constitute an Event of Default or, if this is not the
case, that one or more specified Events of Default have occurred, and (iii) the
representations and warranties in Article IV of this Agreement are true with the
same effect as though made on the date of such certificate ("Compliance
Certificate"); (b) within 120 days after the end of each of its fiscal years and
as of the end of each such year, an audited financial statement of the Company,
which shall consist of a balance sheet and an operating statement and surplus
reconciliation covering the period of the Company's immediately preceding fiscal
year, prepared and certified by Deloitt & Touche LLP, or other independent
certified public accountants satisfactory to the Bank, together with a
Compliance Certificate; (c) within ten days after the end of each calendar
month, a statement in form and content satisfactory to the Bank that sets forth
for each obligor on a Promissory Note or a Contract pledged to the Bank the
original face amount of the Promissory Note or the Contract, the present
outstanding balance of the Promissory Note or the Contract as of the immediately
preceding month, a designation of those Promissory Notes or those Contracts on
which there is any default and such other information concerning the obligor's
account as the Bank may request in its sole discretion; and (d) such additional
information, reports or statements as the Bank may reasonably request regarding
the financial and business affairs of the Company.
<PAGE>

                                     -14-

          5.3  Notice.  Promptly notify the Bank in writing of (a) any pending
               ------
or future audits of the Company's or the Guarantor's federal income tax returns
by the Internal Revenue Service as soon as the Company has knowledge thereof and
the results of each such audit after its completion and (b) any default by the
Company or the Guarantor in the performance of, or any modifications to, any
agreement, mortgage, indenture or instrument to which the Company or the
Guarantor is a party or which is binding on the Company or the Guarantor and of
any default by the Company or the Guarantor in the payment of any of its
indebtedness.  The Company shall not, however, be required to notify the Bank of
modifications of those documents or agreements pertaining to its or the
Guarantor's transactions in the ordinary course of business (not concerning its
indebtedness for borrowed money) which do not materially and adversely affect
the business or assets of the Company or the Guarantor.

          5.4  Taxes.  Promptly pay and discharge all its taxes, assessments and
               -----
other governmental charges (including any charged or assessed on the issuance of
the Note) before the date on which penalties attach, establish adequate reserves
for the payment of taxes and assessments and make all required withholding and
other tax deposits; provided, however, that nothing in this Agreement shall be
interpreted to require the payment of any tax, assessment or charge so long as
its validity is being contested in good faith and by appropriate proceedings
diligently conducted.

          5.5  Insurance.  (a) Keep all its property so insurable insured at all
               ---------
times with responsible insurance carriers against fire, theft and other risks
(including flood, if required) in coverage, form and amount satisfactory to the
Bank and (b) keep adequately insured at all times in reasonable amounts with
responsible insurance carriers against liability on account of damage to persons
or property and under all applicable worker's compensation laws.

          5.6  Litigation.  Promptly notify the Bank in writing as soon as the
               ----------
Company has knowledge thereof of the institution or filing of any litigation,
action, suit, claim, counterclaim or administrative proceeding against or
investigation of the Company to which the Company or the Guarantor is a party by
or before any regulatory body or governmental agency (a) the outcome of which
may materially and adversely affect the finances or operations of the Company or
the Guarantor or the Company's ability to fulfill its obligations under this
Agreement or which involves more than $50,000.00 unless adequately covered by
insurance; (b) which questions the validity of this Agreement, the Note, the
Security Agreement, the Qualified Promissory Notes and Mortgages, the Contracts,
the Guaranty or any action taken or to be taken pursuant to the foregoing; or
(c) which is related to the Project in any way; and furnish or cause to be
furnished to the Bank such information regarding the same as the Bank may
request.
<PAGE>

                                     -15-

          5.7  Standing.  Maintain its corporate existence in good standing and
               --------
remain or become licensed or qualified and in good standing in each jurisdiction
in which the conduct of its business requires qualification or licensing.

          5.8  Net Worth.  Maintain at all times a consolidated tangible net
               ---------
worth of the Company and all of its subsidiaries of not less than
$20,000,000.00, such consolidated tangible net worth to be determined in
accordance with generally accepted accounting principles consistently applied in
conformity with the audited financial statements of the Company furnished to the
Bank, subject to the deductions described in Section 3(a)(xi) of the Purchase
Agreement.

          5.9  Books and Records - Right of Inspection.  Keep proper books and
               ---------------------------------------
records in accordance with generally accepted accounting principles consistently
applied and notify the Bank promptly in writing of any proposed change in the
location of those books and records and permit the Bank at all times to inspect
the Project and the books and records of the Company.

          5.10 Compliance with Law.  Comply with all applicable laws, including
               -------------------
without limitation all Environmental Laws, and all applicable governmental rules
and regulations.

          5.11 Continue Business.  Engage primarily in the business conducted by
               -----------------
it on the date of this Agreement.

          5.12 Maintenance of the Project.  So long as it is in control of the
               --------------------------
association responsible for the management, upkeep and repair of the Project,
cause the association to keep the Project properly maintained and repaired,
suffer no waste, impairment or deterioration of the land or improvements
constituting the Project, pay all taxes, assessments and other charges levied on
the Project and keep the Project fully insured in a sum not less than the full
insurable value and with an insurer or insurers acceptable to the Bank.

          5.13 Lock Box Agreement.  Comply at all times with the Lock Box
               ------------------
Agreement.

          5.14 Promissory Notes and Mortgages and Contracts.  Notify the Bank
               --------------------------------------------
within five days after learning that any Promissory Note and Mortgage pledged
and assigned to the Bank has ceased to be a Qualified Promissory Note and
Mortgage or that any Contract pledged and assigned to the Bank has ceased to be
a Qualified Contract.

          5.15 Environmental Matters.
               ---------------------
<PAGE>

                                     -16-

               (a) Promptly notify the Bank of the Disposal of any Hazardous
Substance at any property comprising the Project or of any Release or threatened
Release of a Hazardous Substance from any such property.

               (b) At the Bank's request, provide at the Company's expense
updated Environmental Questionnaires and/or Environmental Reports concerning the
Project.

               (c) Deliver promptly to the Bank (i) copies of any documents
received from the United States Environmental Protection Agency or any state,
county or municipal environmental or health agency concerning Company's
operations and (ii) copies of any documents submitted by Company to the United
States Environmental Protection Agency or any state, county or municipal
environmental or health agency concerning its operations.

       5.16    Other Acts.  Execute and deliver, or cause to be executed and
               ----------
delivered, to the Bank all further documents and perform all other acts and
things the Bank deems necessary or appropriate to protect or perfect any
mortgage or security interests in any property directly or indirectly securing
payment of any indebtedness of the Company to the Bank.

                        ARTICLE VI.  Negative Covenants
                                     ------------------

       During the term of this Agreement and so long thereafter as any of the
indebtedness of the Company to the Bank, including any indebtedness for fees and
expenses, remains unpaid, the Company will not, without the prior written
consent of the Bank:

       6.1     Encumbrances.  Create, incur, assume or suffer to exist any
               ------------
mortgage, lien, security interest, pledge or other encumbrance on any of the
Promissory Notes and Mortgages or Contracts pledged and assigned to the Bank,
whether now or hereafter pledged or assigned, except in favor of the Bank or as
listed on a schedule to this Agreement.

       6.2     Guaranties.  Become a guarantor, surety or otherwise liable for
               ----------
the debts or other obligations of any other person, whether by agreement to
purchase the indebtedness of any other person, or by agreement for the
furnishing of funds to any other person, through the purchase of goods, supplies
or services (or by way of stock purchase, capital contribution, advance or loan)
for the purpose of paying or discharging the indebtedness of any other person,
<PAGE>

                                     -17-

or otherwise, except as an endorser of instruments for the payment of money
deposited to its bank account for collection in the ordinary course of business
and except as set forth in Section 3(a)(xii) of the Purchase Agreement.  This
provision will not limit the Company's ability to guaranty obligations of its
subsidiary companies, provided that such obligations arise in connection with
the conduct of business reasonably associated or connected with the timeshare
and land development, sales and marketing businesses.

          6.3  Sale of Assets.  Convey, sell, transfer, lease or sell and lease
               --------------
back (a) all or any substantial portion of its property, assets or business to
any other person or (b) all or substantially all of its interest in any of the
resorts comprising the Project with respect to which the Bank has purchased
Promissory Notes and Mortgages or Contracts, except in the ordinary course of
business, which shall not include the sale of all or substantially all of any
such resort in a single transaction.

          6.4  Investments and Loans.  Make or suffer to exist any investments
               ---------------------
in, or loans or advances to, any other person (including, without limitation,
loans or advances to its shareholders, directors, officers or employees) except
as set forth in Section 3(a)(xiv) of the Purchase Agreement.

          6.5  Communication with Obligors.  Communicate with obligors on the
               ---------------------------
Promissory Notes and Mortgages pledged and assigned to the Bank if either (a)
the Bank instructs the Company not to so communicate or (b) there exists an
Event of Default or an event which with the giving of notice or lapse of time or
both would constitute an Event of Default; provided, however, that the Company
shall have no right at any time to collect payments from obligors.

          6.6  Promissory Notes and Mortgages or Contracts.  Except as set forth
               -------------------------------------------
below, agree to any extension, deferral, modification, waiver or any other
change in the terms of any Promissory Note and Mortgage or any Contract pledged
and assigned to the Bank unless authorized in writing by the Bank.
Notwithstanding the foregoing, the Company may, without first obtaining the
Bank's prior written consent, agree to extend, defer, modify, waive or otherwise
change the terms of any Promissory Note or Mortgage (except that the Company may
not release or discharge any collateral therefor), provided that (a) the Company
promptly notifies the Bank (and in no event later than five business days after
the action taken by the Company) and provides it with originals of any documents
executed by the Obligor or the Company or both that effect the extension,
deferral, modification, waiver or other change and (b) if the Bank so requests,
pay for or replace the affected Promissory Note and Mortgage or Contract in
accordance with Section 7.1(d) of this Agreement, which Promissory Note and
Mortgage or Contract shall no longer be deemed to be a Qualified Promissory Note
and Mortgage or a Qualified Contract.  The Company shall not take any of the
actions described above with respect to Qualified Promissory Notes and Mortgages
and Qualified Contracts that would cause the aggregate outstanding principal
amount of all affected Qualified Promissory Notes and Mortgages or
<PAGE>

                                     -18-

Qualified Contracts to exceed at any time ten percent of the aggregate
outstanding principal amount of all Qualified Promissory Notes and Mortgages and
Qualified Contracts held by the Bank.

          6.7  Hazardous Substances.  Suffer, cause or permit the Disposal of
               --------------------
Hazardous Substances at any property comprising the Project.

                             ARTICLE VII.  Default
                                           -------

          7.1  Events of Default.  The occurrence of any one or more of the
               -----------------
following events shall constitute an event of default ("Event of Default"):

               (a) Nonpayment.  Nonpayment after the same becomes due whether by
                   ----------
acceleration or otherwise of principal of or interest on the Note, any costs and
expenses or any other fee or premium provided for under this Agreement.

               (b) Negative Covenants.  Default in the observance of any of the
                   ------------------
covenants of the Company in Article VI of this Agreement.

               (c) Other Covenants.  Default in the observance of any of the
                   ---------------
covenants of the Company in this Agreement other than in Article VI, or in any
other agreement with the Bank, which is not remedied within 30 days after notice
by the Bank to the Company.

               (d) Promissory Notes and Mortgages or Contracts. Any Promissory
                   -------------------------------------------
Note and Mortgage or any Contract which the Company has pledged and assigned to
the Bank to secure the Credit ceases to be a Qualified Promissory Note and
Mortgage or a Qualified Contract and the Company fails within 30 days after the
Bank sends notice thereof, at the Company's option, either to (i) pay the Bank
an amount equal to the unpaid principal balance on the subject Promissory Note
or Contract or (ii) submit to the Bank one or more Qualified Promissory Notes or
Qualified Contracts not previously pledged to the Bank, the Unpaid Principal
Balance of which is not less than the Unpaid Principal Balance of the Promissory
Notes or Contracts it replaces, together with the Mortgages associated with
replacement Qualified Promissory Notes.

               (e) Voluntary Insolvency Proceedings. If the Company or the
                   --------------------------------
Guarantor (i) files a petition for liquidation, adjudication as a bankrupt or
relief as a debtor; (ii) files a petition or answer seeking reorganization or an
arrangement or similar relief under any bankruptcy, insolvency or similar laws
of the United States or any state thereof or of any foreign jurisdiction; (iii)
consents to the filing of a petition in any liquidation, bankruptcy or
reorganization proceeding; (iv) consents to the appointment of a receiver or
trustee or officer performing similar functions with respect to any substantial
part of its property; (v) makes a
<PAGE>

                                     -19-

general assignment for the benefit of its creditors; or (vi) executes a consent
to any other type of insolvency proceeding (under the Bankruptcy Code or
otherwise) or any formal or informal proceeding for the dissolution or
liquidation of, the settlement of claims against, or the winding up of the
affairs of, the Company or the Guarantor.

          (f) Involuntary Insolvency Proceedings.  The appointment of a
              ----------------------------------
receiver, trustee, custodian or officer performing similar functions for the
Company or the Guarantor or for any of its assets, the filing against the
Company or the Guarantor of a petition for liquidation or adjudication as a
bankrupt or insolvent or for reorganization under any bankruptcy or similar laws
of the United States or of any state thereof or of any foreign jurisdiction or
the institution against the Company or the Guarantor of any other type of
insolvency proceeding (under the Bankruptcy Code or otherwise) or of any formal
or informal proceeding for the dissolution or liquidation of, the settlement of
claims against, or the winding up of the affairs of, the Company or the
Guarantor, and the failure to have the appointment vacated or the petition or
proceeding dismissed within 30 days after the appointment, filing or
institution.

          (g) Representations.  If any certificate, statement, representation,
              ---------------
warranty or financial statement furnished by or on behalf of the Company or the
Guarantor pursuant to or in connection with this Agreement (including without
limitation representations and warranties contained in this Agreement) or as an
inducement to the Bank to enter into this Agreement or any other lending
agreement with the Company shall prove to have been false in any material
respect at the time as of which the facts set forth were certified or to have
omitted any substantial contingent or unliquidated liability or claim against
the Company or the Guarantor, or if on the date of this Agreement there shall
have been any materially adverse change in any of the facts disclosed by any
such statement or certificate, that was not disclosed by the Company to the Bank
at or before the time of execution.

          (h) Other Indebtedness and Agreements.  Nonpayment by the Company of
              ---------------------------------
any indebtedness for borrowed money (other than the indebtedness evidenced by
the Note) owing by the Company when due (or, if permitted by the applicable
document, within any applicable grace period), whether the indebtedness becomes
due by scheduled maturity, required prepayment, acceleration, demand or
otherwise, or failure to perform any term, covenant or agreement to be performed
by the Company under any agreement or instrument (other than this Agreement)
evidencing, securing or relating to any indebtedness owing by the Company when
required to be performed if the effect of the failure is to permit the holder to
accelerate the maturity of the indebtedness.

          (i) Judgments.  If any judgment or judgments (other than any judgment
              ---------
for which the Company is fully insured) against the Company remains unpaid,
unstayed on appeal, undischarged, unbonded or undismissed for a period of 30
days.
<PAGE>

                                     -20-

          7.2  Effects of an Event of Default.
               ------------------------------

               (a) On the happening of one or more Events of Default (except a
default under Section 7.1(e) or 7.1(f) of this Agreement), the Bank may declare
any obligations it may have under this Agreement, including without limitation
any obligation to make Loans, to be canceled and the principal of the Note to be
immediately due and payable, together with all interest thereon and fees and
expenses accruing under this Agreement.  Upon such declaration, the Bank's
obligations under this Agreement shall be immediately canceled, and the Note
shall become immediately due and payable without presentation, demand or further
notice of any kind to the Company.

               (b) On the happening of one or more Events of Default under
Section 7.1(e) or 7.1(f) of this Agreement, the Bank's obligations under this
Agreement, including without limitation any obligation to make Loans, shall be
canceled immediately, automatically and without notice, and the Note shall
become immediately due and payable without presentation, demand or notice of any
kind to the Company.

               (c) Before or after the happening of any Event of Default, the
Bank may notify the obligors on the Promissory Notes and Mortgages and the
Contracts securing the Credit that they have been assigned to the Bank and that
all payments are to be made directly to the Bank or the Designee. The Bank may
foreclose any Mortgages in default in its own name. If any applicable law
requires that the Company foreclose a Mortgage, the Company appoints the Bank
its attorney in fact to foreclose the Mortgage. If the Bank forecloses a
Mortgage, it may, but is not obligated to, obtain an appraisal of the subject
Interval and bid the appraised amount at any public sale of the Interval. If the
Bank obtains an appraisal and bids the amount of the appraisal, the Company
shall only be credited with the appraised amount.
<PAGE>

                                     -21-

                            ARTICLE VIII.  Expenses
                                           --------

          8.1  Counsel Fees and Taxes.  To reimburse the Bank for its counsel
               ----------------------
fees and other expenses for the preparation of this Agreement and related
documentation, the Company will pay the Bank $5,000.00.  The Company will also
reimburse the Bank for any taxes the Bank may be required to pay in connection
with the execution and delivery of this Agreement and any other documents
executed in connection with this Agreement.

          8.2  Other Costs and Expenses.  The Company will pay on demand to the
               ------------------------
Bank all of the costs and expenses, including without limitation actual counsel
fees and disbursements, incurred by the Bank (a) in connection with the
performance of this Agreement and all related agreements and other documents;
(b) in connection with all amendments, releases, consents and waivers related to
this Agreement and all related agreements and other documents; and (c) in
collecting any amount owing under this Agreement or other documents or in
realizing on or protecting any collateral securing the Company's performance
under this Agreement or any related agreement or other documents, including
without limitation, if the Bank retains counsel for any advice, suit, appeal,
insolvency or other proceeding under the Federal Bankruptcy Code or otherwise or
for any purpose relating to this Agreement, counsel fees and disbursements.

                           ARTICLE IX.  Miscellaneous
                                        -------------

          9.1  Amendments and Waivers.  This Agreement represents the entire
               ----------------------
understanding between the parties with respect to the subject matter of this
Agreement and supersedes all prior negotiations between the parties.  No
modification, rescission, waiver,
<PAGE>

                                     -22-

release or amendment of any provision of this Agreement shall be made except by
a written agreement signed by authorized officers of the Company and the Bank.

          9.2  Delays and Omissions.  No course of dealing and no delay or
               --------------------
omission by the Bank in exercising any right or remedy under this Agreement or
with respect to any indebtedness of the Company to the Bank shall operate as a
waiver thereof or of any other right or remedy, and no single or partial
exercise thereof shall preclude any other or further exercise thereof or the
exercise of any other right or remedy. The Bank may (but shall not be obligated
to) remedy any default by the Company under this Agreement or with respect to
any other person in any reasonable manner without waiving the default remedied
and without waiving any other prior or subsequent default by the Company and
shall be reimbursed for its expenses in remedying the default. All rights and
remedies of the Bank under this Agreement are cumulative.

          9.3  Successors and Assigns.  The Company and the Bank as used in this
               ----------------------
Agreement includes their legal representatives, successors and assigns.

          9.4  Notices.  Any notice or demand required or permitted to be given
               -------
under this Agreement must be in writing and shall be duly given if (i) if
personally delivered, upon delivery, (ii) if sent by registered or certified
mail, return receipt requested, upon receipt, (iii) if delivered by overnight
courier, upon receipt, and (iv) if sent by facsimile, upon receipt, provided the
notice is followed by a copy of the notice delivered or sent by one of the
methods specified in clauses (i), (ii) or (iii), in each case to the address set
forth below or to such other address as the receiving party may have designated
in a notice sent or delivered in accordance with this section. U.S. Postal
Service return receipts, courier service receipts or the sender's facsimile
transmission records, as the case may be, shall be conclusive proof of delivery.

          To the Company   -  Preferred Equities Corporation
                              4310 Paradise Road
                              Las Vegas, Nevada  89109-6597
                              Attention:  Jon A. Joseph, General Counsel
                              Facsimile Number:  (702) 369-4398

          To the Bank      -  HSBC Bank USA
                              Timeshare Department
                              One HSBC Center
                              10th Floor
                              Buffalo, New York  14203
                              Attention:  Paul J. Przybylski
                              Facsimile Number:  (716) 841-6088

          9.5  Governing Law.  This Agreement, the transactions described in
               -------------
this Agreement and the obligations of the Bank and the Company shall be
construed under and
<PAGE>

                                     -23-

governed by the internal laws of the State of New York without regard to
principles of conflicts of laws, except to the extent that the laws of another
state apply to the real estate law aspects of the assignment of Mortgages by the
Company to the Bank.

          9.6   Counterparts.  This Agreement may be executed in any number of
                ------------
counterparts and by the Bank and the Company on separate counterparts, each of
which when so executed and delivered shall be an original, but all such
counterparts shall together constitute one and the same Agreement.

          9.7   Titles.  Titles to the sections of this Agreement are solely for
                ------
the convenience of the Bank and the Company and are not an aid in the
interpretation of this Agreement or any part of this Agreement.

          9.8   Inconsistent Provisions.  The terms of this Agreement and any
                -----------------------
related agreements, instruments or other documents shall be cumulative except to
the extent they are specifically inconsistent with each other, in which case the
terms of this Agreement shall prevail.

          9.9   Course of Dealing. Without limitation of the foregoing, the Bank
                -----------------
shall have the right at all times to enforce the provisions of this Agreement
and all other documents executed in connection with this Agreement in strict
accordance with their terms, notwithstanding any course of dealing or
performance by the Bank in refraining from so doing at any time and
notwithstanding any custom in the banking trade. Any delay or failure by the
Bank at any time or times in enforcing its rights under such provisions in
strict accordance with their terms shall not be construed as having created a
course of dealing or performance modifying or waiving the specific provisions of
this Agreement.

          9.10  Indemnification.  The Company shall indemnify the Bank against,
                ---------------
and hold the Bank harmless from, any and all claims, losses, judgments, costs
and expenses (including, without limitation, attorney's fees and disbursements)
resulting from the Bank's entering into this Agreement or from any action or
inaction pertaining to the Project or the Promissory Notes and Mortgages pledged
and assigned to the Bank.

          9.11  Environmental Indemnification.  The Company shall indemnify,
                -----------------------------
defend and hold harmless the Bank from and against any and all liabilities,
claims, damages, penalties, expenditures, losses or charges, including but not
limited to all costs of investigation, monitoring, legal representation,
remedial response, removal, restoration or permit acquisition, which may now or
in the future be undertaken, suffered, paid, awarded, assessed or otherwise
incurred by the Bank or any other person or entity as a result of the presence,
Release or threatened Release of Hazardous Substances on, in, under or near any
property.  The liability of the Company under this section is not limited by any
exculpatory provisions in this Agreement or any other documents securing the
Loans and shall survive repayment of the Loans or any transfer or termination of
this Agreement regardless of the means of transfer or termination.
<PAGE>

                                     -24-

          9.12 No Liability.  The Bank shall not be liable in any way for the
               ------------
completeness or accuracy of any Environmental Report or the information
contained in it.  The Bank has no duty to warn the Company or any other person
about any actual or potential environmental contamination or other problem that
may have become apparent or will become apparent to the Bank.

          9.13 CONSENT TO JURISDICTION.  ANY ACTION OR PROCEEDING TO ENFORCE OR
               -----------------------
ARISING OUT OF THIS AGREEMENT, THE NOTE, THE SECURITY AGREEMENT OR ANY DOCUMENT
EXECUTED IN CONNECTION WITH THIS AGREEMENT MAY BE COMMENCED IN THE SUPREME COURT
OF NEW YORK IN THE COUNTY, OR IN THE DISTRICT COURT OF THE UNITED STATES IN THE
DISTRICT, IN WHICH THE BANK HAS AN OFFICE, AND A SUMMONS AND COMPLAINT
COMMENCING AN ACTION OR PROCEEDING IN ANY SUCH COURT SHALL BE PROPERLY SERVED
AND SHALL CONFER PERSONAL JURISDICTION IF SERVED PERSONALLY OR BY REGISTERED
MAIL TO THE COMPANY OR AS OTHERWISE PROVIDED BY THE LAWS OF THE STATE OF NEW
YORK OR THE UNITED STATES.

          IN WITNESS WHEREOF, the parties have caused this Agreement to be
signed by their authorized officers as of February 6, 2001.

                              PREFERRED EQUITIES CORPORATION

                              By /s/ Gregg A. McMurtrie
                                 --------------------------------------------
                                 Executive Vice President

                              HSBC BANK USA

                              By /s/ Paul J. Przybylski
                                 --------------------------------------------
                                 Paul J. Przybylski, Vice President
<PAGE>

                                   EXHIBIT A
                                   ---------

                               SECURED TERM NOTE

$5,000,000.00                                                   February 6, 2001

          FOR VALUE RECEIVED, the undersigned promises to pay to HSBC BANK USA
(the "Bank") or its order, on February 6, 2006, at its office at One HSBC
Center, Buffalo, New York, the principal sum of Five Million Dollars
($5,000,000.00) or the aggregate unpaid principal amount of all Loans made by
the Bank to the undersigned from time to time pursuant to a Loan Agreement
between the undersigned and the Bank dated the date of this Note ("Loan
Agreement"), whichever is less, together with interest on the balance of the
principal of this Note from time to time unpaid at an annual rate ("Rate") equal
to the Bank's Prime Rate plus one percent (1%). "Prime Rate" means the rate of
interest publicly announced by the Bank from time to time as its prime rate and
is a base for calculating interest on certain loans.

          All Loans may be inscribed by the Bank on the attached schedule or any
continuations of the schedule (the "Schedule"). Each entry on the Schedule shall
be prima facie evidence of the facts set forth. No failure by the Bank to make,
and no error by the Bank in making, any entry on the Schedule shall affect the
undersigned's obligation to repay the full principal amount advanced by the Bank
to or for the account of the undersigned or the undersigned's obligation to pay
interest.

          After maturity (whether by acceleration or otherwise), this Note shall
bear interest at an annual rate equal to three percent (3%) in excess of the
Rate. In no event shall the Rate exceed the maximum rate allowed by law. The
Rate shall change simultaneously with each change in the Prime Rate. Interest
shall be calculated on the basis of 1/360th of the Rate in effect for each
calendar day the balance of principal is unpaid. Accrued interest shall be
payable monthly on the tenth day of each month, beginning March 10, 2001, and
when the principal of this Note is paid in full.

          No failure by the holder of this Note to exercise, and no delay in
exercising, any right or remedy under this Note shall operate as a waiver
thereof, and no single or partial exercise by the holder of any right or remedy
under this Note shall preclude any other or further exercise thereof or the
exercise of any other right or remedy. The rights and remedies of the holder are
cumulative and not exclusive of any other rights or remedies the holder may
otherwise have.

          Reference is made to the Loan Agreement for provisions as to
prepayment, collateral and acceleration. The undersigned expressly waives any
requirements of presentment, protest or notice of dishonor.

<PAGE>

                                      -2-

           This Note shall be governed by the internal laws of the State of New
York without regard to principles of conflicts of laws. The undersigned shall
pay all costs and expenses incurred by the holder in enforcing this Note,
including, without limitation, actual attorneys' fees and legal expenses.

                              PREFERRED EQUITIES CORPORATION

                              By/s/ Gregg A. McMurtrie
                                ----------------------
                                Executive Vice President
<PAGE>

                                   SCHEDULE
                                      TO
                               SECURED TERM NOTE

<TABLE>
<CAPTION>
=================  ===================                          ===============  ==================
     DATE OF            AMOUNT OF                                  DATE OF            AMOUNT OF
       LOAN                LOAN                                      LOAN                LOAN
     <S>                <C>                                        <C>                <C>
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
-----------------  -------------------                          ---------------  ------------------
=================  ===================                          ===============  ==================
</TABLE>
<PAGE>

                                   EXHIBIT B
                                   ---------

                            BORROWER'S CERTIFICATE

                               AND LOAN REQUEST

TO HSBC BANK USA (the "Bank"):

           The undersigned certifies that he is the _____________ of Preferred
Equities Corporation (the "Company") and that he has read and knows the contents
of the Loan Agreement dated February 6, 2001, between the Company and the Bank
(the "Loan Agreement"); that the Company has complied with and is now in
compliance with all of the terms, covenants and conditions of the Loan Agreement
that are binding on the Company; that there has been no materially adverse
change in the Company's financial condition since the date of the Loan
Agreement; that there exists no Event of Default under the Loan Agreement and no
event that, with the giving of notice or lapse of time or both would constitute
an Event of Default; and that the representations and warranties of the Company
in the Loan Agreement are true on the date of this certificate.

          The Company acknowledges that the principal balance owed the Bank
under the Loan Agreement, as of the date of this certificate is $______________.

          The undersigned requests, pursuant to the Loan Agreement, that the
Bank make a Loan to the Company in the principal amount of $_____________, of
which $_______________ is the amount of the loan fee provided for in the Loan
Agreement and $__________________ is the amount to be advanced to the Company
pursuant to the Loan Agreement.

Date:  ___________________

                                    By ___________________________

[ACKNOWLEDGMENT]
<PAGE>

                                   EXHIBIT C
                                   ---------

                            [COUNSEL'S LETTERHEAD]

                                                      ____________________, 2001

HSBC Bank USA
Timeshare Department
One HSBC Center -- 10/th/ Floor
Buffalo, New York  14203

Re:  Loan to Preferred Equities Corporation

Ladies and Gentlemen:

We have acted as counsel to Preferred Equities Corporation (the "Company") in
connection with its execution and delivery of a loan agreement (the "Loan
Agreement") between HSBC Bank USA (the "Bank") and the Company dated the date of
this letter and of the Note.  Capitalized terms used in this letter have the
meanings indicated in the Agreement.

We are also counsel to Mego Financial Corp. ("Guarantor") in connection with its
execution and delivery of a Guaranty.

We are of the following opinions:

          1.   The Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Nevada; has powers and authority
to transact the business in which it is engaged; is duly licensed or qualified
and in good standing in each jurisdiction in which the conduct of such business
requires licensing or qualification; and has all necessary power and authority
to enter into, execute, deliver and perform the Agreement, the Note, the
Security Agreement and any other document executed by it in connection with the
Agreement, all of which have been duly authorized by all proper and necessary
corporate and shareholder action.

          2.   The Agreement, Note, Security Agreement, Mortgage and Contract
assignments and Promissory Note endorsements and any other documents executed by
the Company in connection with this Agreement, when executed, delivered or both,
will constitute the legal, valid and binding obligations of the Company,
enforceable in accordance with their
<PAGE>

HSBC Bank USA
Page 2

terms, except as such enforcement may be limited by state or federal bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
rights of creditors generally.

          3.   There are no actions, suits or proceedings (whether or not
purportedly on behalf of the Company or the Guarantor) or investigations pending
or to the knowledge of the Company threatened, against the Company or the
Guarantor or any basis therefor, which if adversely determined would in any case
or in the aggregate materially adversely affect the property, assets (including
without limitation all Promissory Notes and Mortgages and Contracts pledged and
assigned to the Bank), financial condition or business of the Company or the
Guarantor or materially impair the right or ability of the Company or the
Guarantor to carry on its operations substantially as now conducted or
anticipated to be conducted in the future, or which question the validity of the
Agreement, the Note, the Promissory Notes and Mortgages and Contracts pledged
and assigned to the Bank, the Security Agreement, the Guaranty or any other
documents required by the Agreement or any action taken or to be taken pursuant
to any of the foregoing.

          4.   No consent, license, approval or authorization of, or
registration, declaration or filing with, any court, governmental body or
authority or other person or entity is required in connection with (a) the valid
execution, delivery or performance of the Agreement, the Note, the Security
Agreement, the Guaranty or any other documents required by the Agreement; (b)
the endorsement of Promissory Notes to the Bank and the assignment of Mortgages
and Contracts to the Bank; or (c) any of the transactions contemplated thereby,
other than the recording of the Mortgages assigned to the Bank, the recording of
the assignments of those Mortgages and any filings made pursuant to the Nevada
Uniform Commercial Code.

          5.   Each of the documents used by the Company to sell and finance the
sale of Intervals, including without limitation any purchase contracts, deeds,
credit applications, promissory notes, disclosure statements and mortgages,
comply with all applicable local, state and federal laws and regulations.

          6.   The rate and amount of interest the Company has charged those
Timeshare Purchasers whose Promissory Notes the Company has offered to pledge to
the Bank do not violate the usury laws of the State of Nevada or any other state
whose usury laws apply.

          7.   The requirements of all Federal, state and local environmental
and land use statutes, ordinances and regulations have been fully complied with,
and all required permits and approvals have been issued except as otherwise
disclosed to the Bank in writing.  With respect to any permits and approvals not
obtained as of the date of this opinion, counsel does not know of any reason why
the permits and approvals will not be issued in a timely manner after that date.
<PAGE>

HSBC Bank USA
Page 3

          8.   The requirements of the Interstate Land Sales Full Disclosure Act
have been fully complied with, or such Act is not applicable to sales of
Intervals in the Project, and, if such Act applies, all future sales of any part
of the Project or improvements to the Project or Units will be in full
compliance with these requirements.

          9.   The requirements of the securities laws of Nevada and each other
state having jurisdiction over the sale of any part of the Project or
improvements have been fully complied with, and all future sales will be in full
compliance with those requirements.

          10.  The offering to sell and sale of any part of the Project or
improvements to the Project or Units are exempt from the registration
requirements of the Securities Act of 1933, and the Securities and Exchange Act
of 1934.

          11.  The Project is currently zoned to allow development and use
consistent with the description in plans, proposals and projections submitted by
the Company to the Bank, and all utility services necessary or appropriate to
that development and use are available to the Project.

          12.  All roads necessary for the full use of the improvements to the
Project and the Units for their intended purposes have been completed, the
necessary rights-of-way have been acquired or dedicated and accepted by the
appropriate governmental authority and the Company has taken all necessary steps
to assure completion of those roads.

          13.  The Company has obtained all other necessary governmental
permits, licenses and approvals with respect to the Project, the timeshare plan
and the Intervals to be sold, all of which are current and in force.

          14.  Each of the Company and the Guarantor is not in violation of any
material term of its certificate of incorporation or by-laws, or of any
mortgage, borrowing agreement or other instrument or agreement pertaining to
indebtedness for borrowed money.  Each of the Company and the Guarantor is not
in violation of any term of any other indenture, instrument or agreement to
which it is a party or by which it may be bound, resulting or which might
reasonably be expected to result in a material and adverse effect upon its
business or assets.  Each of the Company and the Guarantor is not in violation
of any order, writ, judgment, injunction or decree of any court of competent
jurisdiction or of any statute or rule or regulation of any competent
governmental authority.  The execution and delivery of the Agreement, the Note,
the Security Agreement, the Guaranty and other documents required by this
Agreement and the performance of all of them is and will be in compliance with
the foregoing and will not result in any violation or result in the creation of
any mortgage, lien, security interest, charge or encumbrance on any properties
or assets except in favor of the Bank.  To our knowledge, there exists no fact
or circumstance not disclosed in the Agreement or in the documents furnished in
<PAGE>

HSBC Bank USA
Page 4

connection with the Agreement that materially adversely affects or in the future
(so far as the Company can now foresee) may materially adversely affect the
condition, business or operations of the Company or the Guarantor.

          15.  The Guarantor is a corporation duly organized, validly existing
and in good standing under the laws of the State of New York [?]; has powers and
authority to transact the business in which it is engaged; is duly licensed or
qualified and in good standing in each jurisdiction in which the conduct of such
business requires licensing or qualification; and has all necessary power and
authority to execute, deliver and perform its Guaranty, which has been duly
authorized by all proper and necessary corporate and shareholder action.

          16.  The Guaranty will, when executed, delivered or both, constitute
the legal, valid and binding obligations of the Guarantor, enforceable in
accordance with their terms, except as such enforcement may be limited by state
or federal bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the rights of creditors generally.

                              Very truly yours,

<PAGE>

                           PLEDGE SECURITY AGREEMENT

          AGREEMENT made on February 6, 2001, by and between  PREFERRED EQUITIES
CORPORATION, 4310 Paradise Road, Las Vegas, Nevada 89109 ("Pledgor"), and HSBC
BANK USA, One HSBC Center, 10/th/ Floor, Buffalo, New York 14203 ("Secured
Party").

          The parties agree as follows:

          1.   Security Interest.

               In consideration of any extension of credit heretofore or
hereafter made by Secured Party to Pledgor, Pledgor hereby pledges, transfers
and assigns to Secured Party and grants to Secured Party a security interest
("Security Interest") in the promissory notes ("Promissory Notes") now or
hereafter delivered to Secured Party and all related mortgages or deeds of trust
now or hereafter assigned to Secured Party ("Mortgages") and in all installment
sales contracts ("Contracts") now or hereafter delivered to Secured Party, in
all increases or profits received therefrom, in all substitutions therefor, and
in all proceeds thereof in any form, including, without limitation, any and all
Promissory Notes and Mortgages and all Contracts described in any schedule
executed by Pledgor for the benefit of Secured Party ("Collateral").

          2.   Indebtedness Secured.

               The Security Interest secures payment of any and all indebtedness
("Indebtedness") of Pledgor to Secured Party, whether now existing or hereafter
incurred, of every kind and character, direct or indirect, and whether such
Indebtedness is from time to time reduced and thereafter increased, or entirely
extinguished and thereafter reincurred (unless Pledgor has indicated in writing
to Secured Party that it will not incur any further Indebtedness), including,
without limitation:  (a) all Indebtedness of Pledgor to Secured Party arising
under a loan agreement between Pledgor and Secured Party dated the date of this
Security Agreement ("Loan Agreement"); (b) Indebtedness not yet outstanding, but
contracted for, or with respect to which any other commitment by Secured Party
exists; (c) all interest provided in any instrument, document, or agreement
(including this Security Agreement) which accrues on any Indebtedness until
payment of such Indebtedness in full; (d) any moneys payable as hereinafter
provided; and (e) any debts owed or to be owed to others by Pledgor which
Secured Party has obtained, or may obtain, by assignment or otherwise.
<PAGE>

                                      -2-

          3.   Representations and Warranties of Pledgor.

               Pledgor represents and warrants and, so long as this Security
Agreement is in effect, shall be deemed continuously to represent and warrant
that:  (a) each Promissory Note and each Contract constituting Collateral is
genuine and in all respects what it purports to be; (b) Pledgor is the owner of
the Collateral free of all security interests or other encumbrances, except the
Security Interest; and (c) Pledgor's entering into this Security Agreement has
been authorized by all proper and necessary corporate and shareholder action.

          4.   Covenants of Pledgor.

               (a)  So long as this Security Agreement is in effect, Pledgor:
(i) will endorse the Promissory Notes, without restriction, to the order of
Secured Party and deliver the Promissory Notes to Secured Party; will assign any
Mortgages securing the Promissory Notes to Secured Party and deliver such
assignments to Secured Party; will assign the Contracts to Secured Party and
deliver such assignments to Secured Party; will deliver to Secured Party any
other documents or information in Pledgor's possession or control related to the
Promissory Notes or the Contracts; (ii) will defend the Collateral against the
claims and demands of all other parties; will keep the Collateral free from all
security interests or other encumbrances, except the Security Interest; and will
not sell, transfer, assign, deliver or otherwise dispose of any Collateral or
any interest therein without the prior written consent of Secured Party; (iii)
will notify Secured Party promptly in writing of any change in Pledgor's
address, specified above; (iv) in connection herewith, will execute and deliver
to Secured Party such financing statements, assignments and other documents and
do such other things relating to the Collateral and the Security Interest as
Secured Party may request, and pay all costs of title searches and filing
financing statements, assignments and other documents in all public offices
requested by Secured Party; and (v) will pay all taxes, assessments and other
charges of every nature which may be imposed, levied or assessed against the
Collateral.

               (b)  In addition to the foregoing covenants, so long as this
Security Agreement is in effect Pledgor: (i) will notify Secured Party promptly
in writing of any change in Pledgor's name, identity or corporate or other
structure; (ii) will furnish to Secured Party financial statements in such form
and at such intervals as Secured Party shall request; will keep, in accordance
with generally accepted accounting principles consistently applied, accurate and
complete books and records, including, without limitation, records concerning
the Collateral; at Secured Party's request, will mark any and all such books and
records to indicate the Security Interest; will permit Secured Party or its
agents to audit and make extracts from or copies of such books and records and
any of Pledgor's ledgers, reports, correspondence or other books and records
pertaining to the Collateral; and will duly account to Secured Party's
satisfaction, at such time or times as Secured Party may require, for any of the
Collateral; (iii) will not, without the prior written consent of Secured Party,
file or authorize or permit to be filed in any public office any financing
statement that relates to the Collateral and names Pledgor as debtor but does
not name Secured Party as secured party; (iv) will pay all taxes, assessments
and other charges of every nature which may be imposed, levied or assessed
against Pledgor or any of Pledgor's
<PAGE>

                                      -3-

assets, prior to the date of attachment of any penalties or liens with respect
thereto (other than liens attaching prior to payment becoming due, if payment is
made when due), provided, however, Pledgor shall not be required to pay any such
tax, assessment or other charge so long as its validity is being contested in
good faith by appropriate proceedings diligently conducted; (v) if at any time
any Promissory Note and Mortgage ceases to be a Qualified Promissory Note and
Mortgage or any Contract ceases to be a Qualified Contract (as defined in the
Loan Agreement), will comply with the requirements of Section 7.1(d) of the Loan
Agreement; and (vi) will notify Secured Party promptly in writing of any
material adverse change in connection with the Collateral.

          5.   Events of Default.

               (a)  Any of the following events or conditions shall constitute
an event of default hereunder: (i) default by Pledgor in the performance of any
obligation, term or condition of this Security Agreement or any other agreement
relating to the Indebtedness between Pledgor and Secured Party that is not cured
within 30 days after Pledgor receives written notice of the default from Secured
Party or (ii) an Event of Default as defined in the Loan Agreement.

               (b)  Secured Party, at its sole election, may declare all or any
part of any Indebtedness not payable on demand to be immediately due and payable
without demand or notice of any kind upon the happening of any event of default
(other than an Event of Default under Section 7.1(e) or 7.1(f) of the Loan
Agreement). All or any part of any Indebtedness not payable on demand shall be
immediately due and payable without demand or notice of any kind upon the
happening of one or more Events of Default under Section 7.1(e) or 7.1(f) of the
Loan Agreement. The provisions of this paragraph are not intended in any way to
affect any rights of Secured Party with respect to any Indebtedness which may
now or hereafter be payable on demand.

               (c)  Secured Party's rights and remedies with respect to the
Collateral shall be those of a Secured Party under the Uniform Commercial Code
and under any applicable law, as the same may from time to time be in effect, in
addition to those rights granted herein and in any other agreement now or
hereafter in effect between Pledgor and Secured Party.

               (d)  Without in any way requiring notice to be given in the
following time and manner, Pledgor agrees that any notice by Secured Party of
sale, disposition or other intended action hereunder or in connection herewith,
whether required by the Uniform Commercial Code or otherwise, shall constitute
reasonable notice to Pledgor if such notice is mailed by regular or certified
mail, postage prepaid, at least ten (10) days prior to such action, to Pledgor's
address specified above or to any other address which Pledgor has specified in
writing to Secured Party as the address to which notices hereunder shall be
given to Pledgor.
<PAGE>

                                      -4-

               (e)  Pledgor agrees to pay on demand all reasonable costs and
expenses incurred by Secured Party in enforcing this Security Agreement, in
realizing upon or protecting any Collateral and in enforcing and collecting any
Indebtedness or any guaranty thereof, including, without limitation, if Secured
Party retains counsel for advice, suit, appeal, insolvency or other proceedings
under the Federal Bankruptcy Code or otherwise, or for any of the above
purposes, the actual attorney's fees incurred by Secured Party.  Payment of all
moneys hereunder shall be secured by the Collateral.

          6.   Miscellaneous.

               (a)  Pledgor authorizes Secured Party, without notice or demand
and without affecting Pledgor's obligations hereunder, (i) to take from any
party and hold collateral (other than the Collateral) for the payment of the
Indebtedness or any part thereof, and to exchange, enforce or release such
collateral or any part hereof; (ii) to accept and hold any indorsement or
guaranty of payment of the Indebtedness or any part thereof and to release,
substitute or modify any obligation of any such indorser or guarantor, or any
party who has given any security, mortgage or other interest in any other
collateral as security for the payment of the Indebtedness or any part thereof,
or any other party in any way obligated to pay the Indebtedness or any part
thereof; and (iii) upon the occurrence of any event of default as hereinabove
provided, to direct the order or manner of the disposition of any and all other
collateral and the enforcement of any and all indorsements, guaranties and other
obligations relating to the Indebtedness or any part thereof as Secured Party,
in its sole discretion, may determine.

               (b)  Pledgor hereby appoints Secured Party as Pledgor's attorney-
in-fact (without requiring Secured Party) to perform all acts which Secured
Party deems appropriate to perfect and continue the Security Interest and to
protect, preserve and realize upon the Collateral. This power of attorney shall
not be affected by the subsequent disability or incompetence of Pledgor. A
carbon, photographic or other reproduction of this Security Agreement or of a
financing statement shall be sufficient as a financing statement.

               (c)  (i) As further security for payment of the Indebtedness,
Pledgor hereby grants to Secured Party a Security Interest in and lien on any
and all property of Pledgor which is or may hereafter be in the possession or
control of Secured Party in any capacity or, with respect only to proceeds of
the Collateral or other property related to the Collateral or to the
transactions contemplated by the Loan Agreement, of any third party acting on
its behalf, including, without limitation, all deposit and other accounts and
all moneys owed or to be owed by Secured Party to Pledgor or by the Lock Box
Agent (as defined in the Loan Agreement) to Pledgor; and with respect to all of
such property, Secured Party shall have the same rights hereunder as it has with
respect to the Collateral; (ii) without limiting any other right of Secured
Party, whenever Secured Party has the right to declare any Indebtedness to be
immediately due and payable (whether or not it has so declared), Secured Party
at its sole election, may set off against the Indebtedness any and all moneys
then or thereafter owed to Pledgor by Secured Party in any capacity, whether or
not the Indebtedness or the obligation to pay such moneys owed by
<PAGE>

                                      -5-

Secured Party is then due, and Secured Party shall be deemed to have exercised
such right of set off immediately at the time of such election though any charge
therefor is made or entered on Secured Party's records subsequent thereto.

               (d)  Upon Pledgor's failure to perform any of its duties
hereunder, Secured Party may, but shall not be obligated to, perform any or all
such duties, including, without limitation, payment of taxes, assessments,
insurance and other charges and expenses as herein provided, and Pledgor shall
pay an amount equal to the cost thereof to Secured Party on demand of Secured
Party. Payment of all moneys hereunder shall be secured by the Collateral.

               (e)  No course of dealing between Pledgor and Secured Party and
no delay or omission by Secured Party in exercising any right or remedy
hereunder or with respect to any Indebtedness shall operate as a waiver thereof
or of any other right or remedy, and no single or partial exercise thereof shall
preclude any other or further exercise thereof or the exercise of any other
right or remedy. Secured Party may remedy any default by Pledgor hereunder or
with respect to any Indebtedness in any reasonable manner without waiving the
default remedied and without waiving any other prior or subsequent default by
Pledgor. All rights and remedies of Secured Party hereunder are cumulative.

               (f)  Secured Party shall have no obligation to take, and Pledgor
shall have the sole responsibility for taking, any and all steps to preserve
rights against any and all prior parties to any Promissory Note or other
Instrument constituting Collateral, whether or not in Secured Party's
possession.  Secured Party shall not be responsible to Pledgor for loss or
damage resulting from Secured Party's failure to enforce or collect any such
Collateral or to collect any moneys due or to become due thereunder.  Pledgor
waives protest of any Instrument constituting Collateral at any time held by
Secured Party on which Pledgor is in any way liable and waives notice of any
other action taken by Secured Party.

               (g)  The rights and benefits of Secured Party hereunder shall, if
Secured Party so directs, inure to any party acquiring any interest in the
Indebtedness or any part thereof.

               (h)  Secured Party and Pledgor as used herein shall include the
successors or assigns of those parties.

               (i)  This Security Agreement represents the entire understanding
between the parties hereto with respect to the subject matter hereto and
supersedes all prior negotiations between the parties.  No modification,
rescission, waiver, release or amendment of any provision of this Security
Agreement shall be made except by a written agreement subscribed by Pledgor and
by a duly authorized officer of Secured Party.

               (j)  This Security Agreement and the transaction evidenced hereby
shall be construed under the internal laws of New York State, as the same may
from time to time be in effect, without regard to principles of conflicts of
laws, except to the extent that the laws of
<PAGE>

                                      -6-

another state apply to the real estate law aspects of the assignment of
Mortgages by Pledgor to Secured Party.

               (k)  All terms, unless otherwise defined in this Security
Agreement, shall have the definitions set forth in the Uniform Commercial Code
adopted in New York State, as the same may from time to time be in effect.

               (l)  PLEDGOR AGREES THAT ANY ACTION OR PROCEEDING TO ENFORCE, OR
ARISING OUT OF, THIS SECURITY AGREEMENT OR ANY DOCUMENT EXECUTED IN CONNECTION
WITH THIS SECURITY AGREEMENT MAY BE COMMENCED IN THE SUPREME COURT OF NEW YORK
IN ERIE COUNTY, OR IN THE UNITED STATES DISTRICT COURT OF THE WESTERN DISTRICT
OF NEW YORK, AND PLEDGOR AGREES THAT A SUMMONS AND COMPLAINT COMMENCING AN
ACTION OR PROCEEDING IN ANY SUCH COURT SHALL BE PROPERLY SERVED AND SHALL CONFER
PERSONAL JURISDICTION IF SERVED PERSONALLY OR BY REGISTERED MAIL TO IT, OR AS
OTHERWISE PROVIDED BY THE LAWS OF THE STATE OF NEW YORK OR THE UNITED STATES.

               (m)  This Security Agreement is and is intended to be a
continuing Security Agreement and shall remain in full force and effect until
all of the Indebtedness outstanding has been paid in full, including without
limitation all principal, interests, costs, expenses or other sums of any kind
owed Secured Party. If, after receipt of any payment of all or any part of the
Indebtedness, Secured Party is for any reason compelled to surrender such
payment to any person or entity, because such payment is determined to be void
or voidable as a preference, impermissible set off, or a diversion of trust
funds, or for any other reason, this Security Agreement shall continue in full
force notwithstanding any contrary action which may have been taken by Secured
Party in reliance upon such payment, and any such contrary action so taken shall
be without prejudice to Secured Party's rights under this Security Agreement and
shall be deemed to have been conditioned upon such payment having become final
and irrevocable.

                                   PREFERRED EQUITIES CORPORATION

                                   By  /s/ Gregg A. McMurtrie
                                      ----------------------------------
                                      Gregg A. McMurtrie
                                      Executive Vice President

<PAGE>

SCHEDULE TO
PLEDGE SECURITY AGREEMENT

                                         ______, 200__

1.      Security Agreement.  I, the Debtor/Pledgor, have signed a Pledge
        ------------------
        Security Agreement dated February 6, 2001, with you, HSBC Bank USA, the
        Secured Party.  The Pledge Security Agreement gives you a Security
        Interest in Collateral which is listed in any Schedule referring to that
        Security Agreement.  This is a Schedule to that Security Agreement and
        the following is Collateral subject to that Security Agreement.

================================================================================
                       LIST OR DESCRIPTION OF COLLATERAL
================================================================================

                  SEE ATTACHED SCHEDULE "A" LIST OF COLLATERAL

================================================================================
================================================================================

2.      Receipt.  Secured party agrees that it has received all of the above
        -------
        Collateral.

Debtor/Pledgor:                       Secured Party:

PREFERRED EQUITIES                    HSBC BANK USA
CORPORATION

By ______________________________     By ____________________________
<PAGE>

                               SECURED TERM NOTE

$5,000,000.00                                                   February 6, 2001

          FOR VALUE RECEIVED, the undersigned promises to pay to HSBC BANK USA
(the "Bank") or its order, on February 6, 2006, at its office at One HSBC
Center, Buffalo, New York, the principal sum of Five Million Dollars
($5,000,000.00) or the aggregate unpaid principal amount of all Loans made by
the Bank to the undersigned from time to time pursuant to a Loan Agreement
between the undersigned and the Bank dated the date of this Note ("Loan
Agreement"), whichever is less, together with interest on the balance of the
principal of this Note from time to time unpaid at an annual rate ("Rate") equal
to the Bank's Prime Rate plus one percent (1%).  "Prime Rate" means the rate of
interest publicly announced by the Bank from time to time as its prime rate and
is a base for calculating interest on certain loans.

          All Loans may be inscribed by the Bank on the attached schedule or any
continuations of the schedule (the "Schedule").  Each entry on the Schedule
shall be prima facie evidence of the facts set forth.  No failure by the Bank to
make, and no error by the Bank in making, any entry on the Schedule shall affect
the undersigned's obligation to repay the full principal amount advanced by the
Bank to or for the account of the undersigned or the undersigned's obligation to
pay interest.

          After maturity (whether by acceleration or otherwise), this Note shall
bear interest at  an annual rate  equal to three percent (3%) in excess of the
Rate.  In no event shall the Rate exceed the maximum rate allowed by law.  The
Rate shall change simultaneously with each change in the Prime Rate.  Interest
shall be calculated on the basis of 1/360th of the Rate in effect for each
calendar day the balance of principal is unpaid.  Accrued interest shall be
payable monthly on the tenth day of each month, beginning March 10, 2001, and
when the principal of this Note is paid in full.

          No failure by the holder of this Note to exercise, and no delay in
exercising, any right or remedy under this Note shall operate as a waiver
thereof, and no single or partial exercise by the holder of any right or remedy
under this Note shall preclude any other or further exercise thereof or the
exercise of any other right or remedy.  The rights and remedies of the holder
are cumulative and not exclusive of any other rights or remedies the holder may
otherwise have.

          Reference is made to the Loan Agreement for provisions as to
prepayment, collateral and acceleration.  The undersigned expressly waives any
requirements of presentment, protest or notice of dishonor.

          This Note shall be governed by the internal laws of the State of New
York without regard to principles of conflicts of laws.  The undersigned shall
pay all costs and expenses
<PAGE>

                                      -2-

incurred by the holder in enforcing this Note, including, without limitation,
actual attorneys' fees and legal expenses.

                                   PREFERRED EQUITIES CORPORATION

                                   By /s/ Gregg A. McMurtrie
                                     -----------------------------------
                                          Executive Vice President
<PAGE>

                               SCHEDULE
                                  TO
                           SECURED TERM NOTE

=============   =============            =============   =============
   DATE OF        AMOUNT OF                  DATE OF       AMOUNT OF
    LOAN            LOAN                      LOAN            LOAN
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=============   =============            =============   =============

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00027-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00027-of-00352.parquet"}]]