UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO __________
COMMISSION FILE NUMBER 0-23422
DRYPERS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0344044
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1415 WEST LOOP NORTH 77055
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING THE AREA CODE: (713) 682-6848
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $.001 PAR VALUE 6,851,154 SHARES
----------------------------- ----------------
(Class) (Outstanding at October 16, 1996)
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following information required by Rule 10-01 of Regulation
S-X is provided herein for Drypers Corporation:
Consolidated Balance Sheets -- December 31, 1995 and September
30, 1996.
Consolidated Statements of Earnings for the Three Months and Nine
Months Ended September 30, 1995 and 1996.
Consolidated Statement of Stockholders' Equity for the Nine
Months Ended September 30, 1996.
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1995 and 1996.
Notes to Consolidated Financial Statements.
2
DRYPERS CORPORATION
CONSOLIDATED BALANCE SHEETS
( IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31 SEPTEMBER 30
1995 1996
---------- --------
(AUDITED) (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash ......................................................... $ 2,236 $ 4,420
Accounts receivable, net of allowance for doubtful accounts of
$940 and $1,013, respectively .......................... 24,039 24,644
Inventories .................................................. 10,913 12,663
Prepaid expenses and other ................................... 3,437 3,861
--------- ---------
Total current assets ...................................... 40,625 45,588
PROPERTY AND EQUIPMENT, net of depreciation and amortization .... 36,375 36,959
INTANGIBLE AND OTHER ASSETS, net of amortization of $7,094
and $9,346, respectively ............................... 60,420 59,113
--------- ---------
$ 137,420 $ 141,660
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt, revolver and current portion of term loan ... $ 12,064 $ 15,904
Accounts payable ............................................. 19,319 14,382
Accrued liabilities .......................................... 12,839 11,031
--------- ---------
Total current liabilities ................................ 44,222 41,317
TERM LOAN ........................................................ 1,000 750
SENIOR TERM NOTES ................................................ 43,950 44,079
LONG-TERM SUBORDINATED DEBT TO RELATED PARTIES ................... 2,400 2,400
OTHER LONG-TERM LIABILITIES ...................................... 4,026 3,618
--------- ---------
95,598 92,164
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 5,000,000 shares authorized,
-0- and 90,000 shares issued and outstanding, respectively . -- 1
Common Stock, $.001 par value, 20,000,000 shares authorized,
6,619,804 and 6,649,450 shares issued and
outstanding, respectively .................................. 7 7
Additional paid-in capital ................................... 58,482 67,034
Warrants ..................................................... 703 973
Retained deficit ............................................. (17,370) (18,519)
--------- ---------
Total stockholders' equity ................................ 41,822 49,496
--------- ---------
$ 137,420 $ 141,660
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
DRYPERS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1995 1996 1995 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
NET SALES ................................... $ 43,295 $ 55,066 $ 117,393 $ 152,929
COST OF GOODS SOLD .......................... 30,478 33,192 82,914 93,306
----------- ------------ ----------- -----------
Gross profit ............................ 12,817 21,874 34,479 59,623
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 13,334 17,535 39,158 53,249
UNUSUAL EXPENSES ............................ -- -- 2,358 --
RESTRUCTURING CHARGE ........................ -- -- 2,972 --
----------- ------------ ----------- -----------
Operating income (loss) ................ (517) 4,339 (10,009) 6,374
RELATED PARTY INTEREST EXPENSE .............. 92 88 278 264
OTHER INTEREST EXPENSE, net ................. 1,983 2,122 5,587 6,347
----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ........... (2,592) 2,129 (15,874) (237)
INCOME TAX PROVISION (BENEFIT) .............. 64 173 (3,803) 374
----------- ------------ ----------- -----------
NET INCOME (LOSS) .......................... (2,656) 1,956 (12,071) (611)
PREFERRED STOCK DIVIDEND .................... -- (172) -- (392)
----------- ------------ ----------- -----------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS ......................... ($ 2,656) $ 1,784 ($ 12,071) ($ 1,003)
=========== ============ =========== ===========
COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ............. 6,600,866 16,118,794 6,574,218 6,640,084
=========== ============ =========== ===========
NET INCOME ( LOSS) PER COMMON SHARE ....... ($ 0.40) $ 0.12 ($ 1.84) ($ 0.15)
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
DRYPERS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREFERRED COMMON
SHARES SHARES ADDITIONAL
ISSUED AND ISSUED AND PREFERRED COMMON PAID-IN RETAINED
OUTSTANDING OUTSTANDING STOCK STOCK CAPITAL WARRANTS DEFICIT
---------- ---------- --------- ------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 ... -- 6,619,804 -- $7 $ 58,482 $703 ($17,370)
Net loss ................... -- -- -- -- -- -- (611)
Issuance of preferred
stock, net ................. 90,000 -- $1 -- 8,822 -- --
Issuance of common stock
and warrants ............... -- 25,000 -- -- (270) 270 --
Preferred stock dividends
($4.36 per share) .......... -- -- -- -- -- -- (392)
Exercise of stock options .. -- 4,646 -- -- -- -- --
------ --------- --- --- -------- ---- --------
Balance, September 30, 1996 90,000 6,649,450 $1 $7 $ 67,034 $973 ($18,373)
====== ========= === === ======== ==== ========
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE>
DRYPERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30
1995 1996
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................ ($12,071) ($ 611)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities --
Restructuring charge ............................ 2,972 --
Depreciation and amortization ................... 5,333 5,646
Provision for deferred income taxes ............. (4,594) --
Deferred rent expense and other ................. (52) (273)
Changes in operating assets and liabilities ..... 12,028 (10,061)
-------- ---------
Net cash provided by (used in)
operating activities ..................... 3,616 (5,299)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................. (6,445) (3,537)
Investments in other non-current assets ............ (677) (431)
Payments under non-compete agreement ............... (189) (189)
-------- ---------
Net cash used in investing activities ...... (7,311) (4,157)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolver .......................... 12,248 119,428
Payments on revolver ............................... (11,258) (115,338)
Borrowing (payments) on term loan .................. 1,875 (500)
Financing related costs ............................ -- (773)
Net proceeds from issuance of preferred stock ...... -- 8,823
Proceeds from exercise of stock options ............ 20 --
-------- ---------
Net cash provided by financing activities .. 2,885 11,640
-------- ---------
NET INCREASE (DECREASE IN CASH) ...................... (810) 2,184
CASH AT BEGINNING OF PERIOD .......................... 1,499 2,236
-------- ---------
CASH AT END OF PERIOD ................................ $ 689 $ 4,420
======== =========
SUPPLEMENTAL DISCLOSURE CASH FLOW INFORMATION:
Net cash paid during period for:
Interest payments .................................. $ 3,802 $ 7,275
Income tax payments ................................ $ 325 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
DRYPERS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements included herein have been prepared
by Drypers Corporation (the "Company"), without audit, in accordance with Rule
10-01 of Regulation S-X for interim financial statements required to be filed
with the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes the
disclosures are adequate to make the information presented not misleading. The
financial statements included herein should be reviewed in conjunction with the
December 31, 1995 financial statements and related notes thereto. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year end. The results of operations for the three months and nine months
ended September 30, 1996, are not necessarily indicative of the results that
will be realized for the fiscal year ending December 31, 1996.
The unaudited consolidated financial information as of and for the
periods ended September 30, 1995 and 1996, as appropriate, has not been audited
by independent accountants, but in the opinion of management of the Company, all
adjustments (consisting only of normal, recurring adjustments) necessary for a
fair presentation of the consolidated balance sheets, statements of earnings,
statement of stockholders' equity and statements of cash flows at the date and
for the periods indicated have been made.
The disposable diaper industry is characterized by substantial price
competition, which is affected through price changes, product count changes and
promotions. Typically, because of their large market share, one of the Company's
larger branded competitors initiates such pricing changes. The Company typically
responds to such pricing changes with changes to its own prices, product counts
or promotional programs. The process of implementing such changes may require a
number of months, and the Company's operating results may be adversely affected.
The Company competes with a number of companies, some of which are larger than
the Company, have greater financial resources and offer broader product lines.
The Company markets its products in various foreign countries and is,
therefore, subject to currency and other economic fluctuations in these
countries. Changes in the value of the U.S. dollar against these currencies and
the ability of consumers in some foreign countries to afford disposable diapers
will affect the Company's results of operations and financial position.
7
<PAGE>
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which was effective for the Company on January 1,
1996. The statement sets forth guidelines regarding when to recognize an
impairment of long-lived assets, including goodwill, and how to measure such
impairment. The adoption of SFAS No. 121 did not have a significant effect on
the Company's consolidated financial statements.
2. INVENTORIES
Inventories at September 30, 1996, consisted of the following (in
thousands):
Raw Materials .................... $ 5,233
Finished Goods ................... 7,430
-------
$12,663
=======
3. DEBT
SHORT-TERM DEBT, REVOLVER AND TERM LOAN
On February 29, 1996, the Company entered into a three-year revolving
credit facility with a borrowing base of up to $21,000,000. Borrowing
availability under this facility is a function of advance rates based on
eligible accounts receivable, finished goods inventory and raw materials
inventory. Borrowings are collateralized by accounts receivable, inventory,
trademarks and trade names, stock of certain subsidiaries and other intangibles.
The Company had borrowings outstanding of $14,610,000 under a revolving
credit facility and $1,250,000 under a term loan with a bank as of September 30,
1996. Borrowings outstanding under the revolving credit facility bore interest
at prime plus 3% from January 1, 1996 through February 29, 1996 and prime plus 1
3/4% thereafter. Borrowings under the term loan bear interest at prime plus 3%.
The revolving credit facility and term loan, as amended, require the
Company, among other things, to maintain consolidated working capital, as
defined, which excludes borrowings under the revolving credit facility, of at
least $10,500,000 through December 31, 1996, of at least $18,000,000 during
fiscal 1997, of at least $23,000,000 during fiscal 1998, and of at least
$25,000,000 during fiscal 1999 and thereafter, and adjusted net worth, as
defined, of at least $48,000,000 through September 30, 1996, of at least
$49,000,000 from October 1, 1996, through December 30, 1996, of at least
$50,500,000 from December 31, 1996, through December 30, 1997, of at least
$52,500,000 from December 31, 1997, through December 30, 1998, and of at least
$54,500,000 from December 31, 1998, and thereafter. The Company was in
compliance with the terms of the revolving credit facility as of September 30,
1996.
8
<PAGE>
SENIOR TERM NOTES
Long-term debt under senior term notes at September 30, 1996 consisted
of the following (in thousands):
12-1/2% Senior Notes, interest due semiannually on
May 1 and November 1, principal due November 1,
2002, net of unamortized debt discount of $921 ......... $44,079
=======
These notes contain certain covenants that, among other things, limit
the Company's ability to incur additional indebtedness; pay dividends; purchase
capital stock; make certain other distributions, loans and investments; sell
assets; enter into transactions with related persons; and merge, consolidate or
transfer substantially all of its assets.
In October 1996, the indenture governing the Company's 12-1/2% Senior
Notes was amended to allow, among other things, increased borrowing under the
revolving credit facility and additional flexibility for certain business
investments. The Company issued approximately 200,000 shares of $.001 par value
common stock to certain bondholders as consideration for their consent to these
indenture modifications.
4. PREFERRED STOCK
During the nine months ended September 30, 1996, the Company sold 90,000
shares of the Company's Series A Senior Convertible Cumulative 7.5% Preferred
Stock ("7.5% Preferred Stock") for $8.8 million, net of related issuance costs.
The 7.5% Preferred Stock is convertible at the discretion of the holders, at a
rate of 100 shares of common stock per share of 7.5% Preferred Stock, into 9.0
million shares of the Company's common stock. Dividends accrue at the rate of
$7.50 per share, per year, and are payable only upon the conversion or
redemption of the 7.5% Preferred Stock or on December 1, 2003. The preferred
shares have a liquidation preference of $100 per share. Holders of the 7.5%
Preferred Stock have 100 votes per share. Common and common equivalent shares
used in the computation of earnings per share for the three months ended
September 30, 1996 include the 9,000,000 common shares issuable upon conversion
of the 90,000 shares of convertible preferred stock discussed above. However,
such common stock equivalents were not included in the computation of earnings
per share for the nine months ended September 30, 1996, as the impact would be
antidilutive.
9
<PAGE>
5. COMMITMENTS AND CONTINGENCIES
During 1995, the Company made deposits aggregating $2.3 million to a
diaper line manufacturer in connection with a purchase contract for two
production lines. The Company has additionally made a progress payment of
approximately $800,000 in August 1996. The Company has remaining purchase
commitments aggregating $4.0 million related to these two diaper lines. On
November 7, 1996, the Company entered into a letter of intent with a lease
financing company to provide financing on the first production line. Delivery of
this line is scheduled for the fourth quarter of 1996 and will be operating in
the first quarter of 1997. Negotiations are in process for a lease commitment on
the second production line, which would allow the Company to realize the
deposits and fulfill its obligations under the contract. Should the Company not
be able to fulfill its obligations for the second production line under the
contract, approximately $1.1 million of these deposits could be forfeited and,
if forfeited, the Company would be required to expense this amount in such
period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion and analysis, together with the accompanying
consolidated financial statements and related notes, will aid in understanding
the Company's results of operations as well as its financial position, cash
flows, indebtedness and other key financial information.
This Quarterly Report on Form 10-Q contains, in addition to historical
information, forward-looking statements that involve assumptions and
uncertainties. The Company's actual results could differ materially. Factors
that could cause or contribute to such differences include, but are not limited
to, competitive and economic factors, price changes by competitors, increases in
costs of raw materials, timing of technological advances by the Company and its
competitors, lack of acceptance by consumers of new products, and other factors
discussed below and elsewhere herein. See Item 5. "Other Information on
Cautionary Statements" below.
RECENT DEVELOPMENTS
During the first quarter of 1995, the Company repositioned its diaper
products in response to similar activity by its competitors. In response to
continued market pressures, the Company announced a plan in the second quarter
of 1995, to realign and consolidate its domestic operations. Concurrent with the
operational reorganization discussed above, the Company undertook a plan to
reorganize its financial structure. The Company's financial restructuring was
completed on February 29, 1996, with the establishment of a
10
<PAGE>
new revolving credit facility with a borrowing base of up to $21,000,000 and the
private issuance of convertible preferred stock. Availability under the new
revolving credit facility and the proceeds from the preferred stock were used to
repay the existing revolving credit facility, the previously deferred interest
payment on the 12-1/2% Senior Notes and transaction-related costs. As of
November 11, 1996, unused borrowing availability under the new revolving credit
facility was approximately $2.8 million. The Company continues to investigate
various alternatives to further improve liquidity including, among other things,
lease financing of assets, establishing revolving credit lines at the subsidiary
level and deferral of planned capital expenditures.
In the third quarter of 1995, management began implementing a plan to
reduce costs which was offset in part by an increase in promotional spending
incurred in an effort to increase market share. The major components of the cost
reduction program include, among others, the closure of the Houston, Texas
plant, reduction of manufacturing and general overhead costs and improved
product design.
The Company has reached agreement, subject to certain conditions, to
acquire Pannolini de Mexico, S.A. de C.V., its contract manufacturer in Mexico.
This will allow the Company to expand its production in Mexico, as currently
only one-third of Pannolini's production is for the Company. The acquisition is
expected to be modestly accretive to earnings beginning in the first quarter of
1997 and should allow the Company to improve its profitability and expand its
market share in Mexico.
RESULTS OF OPERATIONS
The following table sets forth the specified components of income and
expense for the Company expressed as a percentage of net sales for the three
months and the nine months ended September 30, 1995 and 1996.
Three Months Ended Nine Months Ended
September 30 September 30
1995 1996 1995 1996
----- ----- ----- -----
Net sales ....................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .............. 70.4 60.3 70.6 61.0
----- ----- ----- -----
Gross profit .................... 29.6 39.7 29.4 39.0
Selling, general and
administrative expenses ......... 30.8 31.8 33.4 34.8
Unusual expenses ................ -- -- 2.0 --
Restructuring charge ............ -- -- 2.5 --
----- ----- ----- -----
Operating income (loss) ......... (1.2) 7.9 (8.5) 4.2
Interest expense, net ........... 4.8 4.0 5.0 4.3
----- ----- ----- -----
Income (loss) before taxes ...... (6.0) 3.9 (13.5) (.1)
Income taxes .................... .1 .3 (3.2) .2
----- ----- ----- -----
-----
Net income (loss) ............... (6.1)% 3.6% (10.3)% (.3)%
===== ===== ===== =====
11
<PAGE>
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1996 TO THREE MONTHS ENDED
SEPTEMBER 30, 1995
NET SALES. Net sales increased 27.2% to $55.1 million for the three
months ended September 30, 1996 from $43.3 million for the three months ended
September 30, 1995. The increase was primarily due to market share growth of the
Company's domestic premium brand diapers and training pants as well as growth in
international sales. The domestic premium diaper sales increase was driven by
strong acceptance of the Company's new baking soda product introduced in the
second quarter of 1996 and increased distribution within the grocery segment.
The Company's training pants volume increased due to product improvements, new
packaging and more favorable pricing. Growth in international sales was driven
by increased distribution.
COST OF GOODS SOLD. Cost of goods sold decreased as a percentage of net
sales to 60.3% for the three months ended September 30, 1996 compared to 70.4%
for the three months ended September 30, 1995. The 10.1% decrease is primarily
due to reduced pulp prices and raw material usage, lower conversion costs and
modest increases in unit sales prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased as a percentage of net sales to 31.8% for the
three months ended September 30, 1996 compared to 30.8% of net sales for the
three months ended September 30, 1995. The total increase reflects higher
couponing and promotional spending as well as an increase in the percentage of
premium domestic diaper and training pant sales relative to total sales, offset
by a decrease in general and administrative expenses as percentage of net sales.
INTEREST EXPENSE. Interest expense was $2.2 million for the three months
ended September 30, 1996 compared to $2.1 million for the three months ended
September 30, 1995. The increase reflects increased borrowings and interest
rates under the new revolving credit facility and amortization of deferred loan
costs related to the refinancing.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1996 TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
NET SALES. Net sales increased 30.3% to $152.9 million for the nine
months ended September 30, 1996 from $117.4 million for the nine months ended
September 30, 1995. The increase was primarily due to market share growth of the
Company's domestic premium brand diapers and training pants as well as growth in
international sales. The domestic premium diaper sales increase was driven by
continued strong acceptance of the Company's improved thin product, the new
baking soda product introduced in May 1996 and increased distribution. The
Company's training pants volume increased due to product improvements, new
packaging and more favorable pricing. Growth in international sales was driven
by increased distribution.
12
<PAGE>
COST OF GOODS SOLD. Cost of goods sold decreased as a percentage of net
sales to 61.0% for the nine months ended September 30, 1996 compared to 70.6%
for the nine months ended September 30, 1995. The 9.6% decrease from 1995 levels
reflects reduced pulp prices and raw material usage, lower per unit conversion
costs and slightly increased unit sales prices, offset by product purchases from
a third party to meet sales demand.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased as a percentage of net sales to 34.8% for the
nine months ended September 30, 1996 compared to 33.4% of net sales for the nine
months ended September 30, 1995. The total increase reflects higher couponing
and promotional spending as well as an increase in the percentage of premium
domestic diaper and training pant sales relative to total sales, offset by a
decrease in general and administrative expenses as percentage of net sales.
UNUSUAL EXPENSES. Procter & Gamble's Luvs brand was repositioned in the
first quarter of 1995 with a reduction in the number of diapers per package and
a reduction in price per diaper. Late in the first quarter of 1995, the Company
responded with another repositioning of its own, lowering package counts and
prices, to restore a favorable pricing spread between the Drypers brand and the
other national brands. As part of this repositioning, the Company recognized
$2.4 million of promotional expenses and inventory adjustments which were
recorded as an unusual expense in the first quarter of 1995.
RESTRUCTURING CHARGE. Operating results for the second quarter of 1995
include a restructuring charge of approximately $3.0 million. As part of the
restructuring, the Company implemented a plan to realign and consolidate its
domestic operations from three production facilities to two. The Company also
reduced its work force.
INTEREST EXPENSE. Interest expense was $6.6 million for the nine months
ended September 30, 1996 compared to $5.9 million for the nine months ended
September 30, 1995. The increase reflects increased borrowings and interest
rates under the new revolving credit facility and amortization of deferred loan
costs related to the refinancing.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
On February 29, 1996, the Company established a new three-year revolving
credit facility, with a borrowing base of up to $21 million, with a financial
institution. Borrowings under the facility accrue interest at a rate of prime
plus 1 3/4% per annum. Borrowing availability under this facility is a function
of advance rates based on eligible accounts receivable, finished goods inventory
and raw materials inventory. In October 1996, the indenture governing the
Company's 12-1/2% Senior Notes was amended to allow, among other things,
increased borrowing under the revolving credit facility and additional
flexibility for certain business investments. Borrowings under this facility are
secured by accounts receivable, inventory, trademarks and trade names, stock of
certain subsidiaries and other intangibles. In addition, the Company received
approximately $8.8 million from the private placement of convertible preferred
stock, net of related issuance costs. All balances outstanding under the
previous revolving credit facility with a bank were paid on March 1, 1996, with
borrowings under the new revolving credit facility and approximately $1.5
million of the proceeds from the sale of preferred stock.
In connection with the refinancing discussed above, the term loan with a
bank was continued and the loan covenants were amended and are similar to those
of the new revolving credit facility. Principal payments of $125,000 are due
quarterly, and borrowings are secured by a diaper production line.
For the nine months ended September 30, 1996, cash used in operating
activities totaled $5.3 million as a result of returning the Company's working
capital structure to normal operating levels. Cash used in investing activities
totaled $4.2 million. The majority of the cash outflows were funded by
additional borrowings under the revolving credit facility and the proceeds from
the issuance of preferred stock. At September 30, 1996, the Company had
borrowings outstanding of $14.6 million under a revolving credit facility and
$1.3 million under a term loan. Borrowings outstanding under the revolving
credit facility bore interest at prime plus 3% from January 1, 1996 through
February 29, 1996 and prime plus 1 3/4% thereafter. Borrowings under the term
loan bear interest at prime plus 3%. As of November 11, 1996, unused borrowing
availability under the new revolving credit facility was approximately $2.8
million.
The Company's estimated cash requirements over the next twelve months
are primarily the funding of working capital needs, including payment of
principal and interest on indebtedness and planned capital expenditures. In
addition, the Company will be required to pay $800,000 pursuant to a license
agreement in December 1996.
The Company made deposits in 1995 aggregating $2.3 million to a diaper
line manufacturer in connection with a purchase contract for two production
lines. The Company has additionally made a progress payment of approximately
$800,000 in August 1996. The Company has remaining purchase commitments
aggregating $4.0 million related to these two diaper lines. On November 7, 1996,
the Company entered into a letter of intent with a lease financing company to
provide financing on the first
14
<PAGE>
production line. Delivery of this line is scheduled for the fourth quarter of
1996 and will be operating in the first quarter of 1997. Negotiations are in
process for a lease commitment on the second production line, which would allow
the Company to realize the deposits and fulfill its obligations under the
contract. Should the Company not be able to fulfill its obligations for the
second production line under the contract, approximately $1.1 million of these
deposits could be forfeited and, if forfeited, the Company would be required to
expense this amount in such period. While not committed, approximately $1
million in additional capital expenditures are expected through December 31,
1996.
The Company believes that the combination of the borrowing availability
under the revolving credit facility, financing of its remaining commitments for
the diaper lines discussed above, cost reductions and the increased margins from
market share growth should allow the Company to meet its debt service and
capital expenditure requirements, remain in compliance with its amended
financial covenants and manage its business needs.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Cautionary Statements:
The Company's expectations with respect to future results of
operations embodied in oral and written forward looking
statements are subject to the following risks and uncertainties
that must be considered when evaluating the likelihood of the
Company's realization of such expectations:
The disposable diaper industry is characterized by substantial
price competition, which is affected through price changes,
product count changes and promotions. Typically, because of their
large market share, one of the Company's larger branded
competitors initiates such pricing changes. The Company typically
responds to such pricing changes with changes to its own prices,
product counts or promotional programs. The process of
implementing such changes may require a number of months, and the
Company's operating results may be adversely affected.
Raw material prices, notably wood pulp, are a major component of
the total cost to produce disposable baby diapers and training
pants. While the cost of pulp has declined significantly from the
record-high levels experienced in the fourth quarter of 1995,
there can be no assurance that if pulp prices rise again in the
future the Company will be able to pass those increases to its
customers or redesign its products to reduce pulp usage;
therefore, operating margins could be adversely affected.
The Company markets its products in various foreign countries and
is, therefore, subject to currency and other economic
fluctuations in these countries. Changes in the value of the U.S.
dollar against these currencies and the ability of consumers in
some foreign countries to afford disposable diapers will affect
the Company's results of operations and financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS-- Reference is made to the Exhibit Index on page
18 for a list of exhibits filed as part of this report
pursuant to Item 601 of Regulation S-K.
(b) REPORTS ON FORM 8-K--No reports on Form 8-K were filed for
the three months ended September 30, 1996.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRYPERS CORPORATION
Date: NOVEMBER 13, 1996 By: /S/ JONATHAN FOSTER
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
17
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
- ------------------------------
4.1 First Supplemental Indenture dated October 2, 1996,
between Drypers Corporation and Wells Fargo
Bank Texas National Association, as Trustee.
27. Financial Data Schedule.
FIRST SUPPLEMENTAL INDENTURE
DATED AS OF OCTOBER 2, 1996
BETWEEN
DRYPERS CORPORATION
AND
WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION,
AS TRUSTEE
TO
INDENTURE
DATED AS OF NOVEMBER 10, 1992
BETWEEN
DRYPERS CORPORATION
AND
FIRST INTERSTATE BANK OF TEXAS, N.A.,
AS TRUSTEE
12.5% Series B Senior Notes Due November 1, 2002
<PAGE>
FIRST SUPPLEMENTAL INDENTURE, dated as of October 2, 1996, by and between
DRYPERS CORPORATION, a corporation organized and existing under the laws of the
State of Delaware (the "Company"), having its principal offices at 1415 West
Loop North, Houston, Texas 77055, and WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION, a national association organized and existing under the laws of the
United States of America and formerly First Interstate Bank of Texas, N.A.
("Trustee"), having its principal corporate trust office at 1000 Louisiana, 7th
Floor, Houston, Texas 77002;
W I T N E S S E T H:
WHEREAS, the Company has heretofore executed and delivered to the Trustee
that certain Indenture dated as of November 10, 1992, by and between the Company
and the Trustee (the "Indenture") pursuant to which the 12.5% Series B Notes due
November 1, 2002 (the "Securities"), in the original aggregate principal amount
of $75,000,000.00, were issued (capitalized terms used herein shall have the
respective meanings ascribed thereto in the Indenture unless herein defined or
the context shall otherwise require);
WHEREAS, Section 9.02 of the Indenture provides that the Company and
Trustee may, from time to time, with the consent of the holders of a majority in
principal amount of the Notes, enter into one or more supplemental indentures to
provide for, among other things, the amendments to the Indenture set forth
below;
WHEREAS, the Holders of 77.3% in principal amount of the Securities have
consented to the amendments to the Indenture set forth below;
WHEREAS, the Company has been duly authorized by its Board of Directors to
enter into, execute and deliver this First Supplemental Indenture;
WHEREAS, the Company has complied with all conditions contained in this
Indenture with respect to the amendments to the Indenture set forth below;
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WHEREAS, all conditions and requirements necessary to make the Indenture
as hereby supplemented a valid and binding agreement of the Company, in
accordance with its terms, have been performed and fulfilled;
NOW THEREFORE, in order to comply with the provisions of the Indenture and
for and in consideration of the premises and the covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Trustee agree
as follows:
ARTICLE ONE
AMENDMENTS
SECTION 1. Section 1.01 of the Indenture shall be and is hereby
amended to add the following definitions:
"BRAZILIAN PERMITTED INDUSTRY INVESTMENTS" means Investments from
time to time made by the Company or any of its Subsidiaries in Chansommes
consisting of (i) a diaper production line and (ii) in addition, cash or other
asset outlays of up to an aggregate net amount of $10,000,000, of which up to
$5,000,000 of such cash or other asset outlays (other than those consisting of
Qualified Capital Stock of the Company or any Subsidiary or the proceeds
thereof) may be invested no earlier than April 1, 1997, and $5,000,000 of such
cash or other asset outlays (other than those consisting of Qualified Capital
Stock of the Company or any Subsidiary or the proceeds thereof) may be invested
no earlier than April 1, 1999. Any such cash or other asset outlays (other than
those consisting of Qualified Capital Stock of the Company or any Subsidiary or
the proceeds thereof) must not be prohibited under the Revolving Credit
Agreement. In addition, with respect to any such Investment referred to in
clause (ii) of the first sentence of this definition, the Company or any of its
Subsidiaries may not make any such Investment (other than in Qualified Capital
Stock of the Company or any Subsidiary or the proceeds thereof) unless, after
giving effect thereto, (i) the sum of (A) cash (on a consolidated basis) and (B)
the additional amount that the Company may borrow under the Revolving Credit
Agreement is at least $4,000,000 and (ii) the Consolidated EBITDA
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Coverage Ratio (determined for the preceding six months, rather than 12 months)
is two-to-one or higher.
"CHANSOMMES" means Chansommes do Brasil Ind. E Com. Ltda., a Person
organized under the laws of Sao Paulo, Brazil, or any successor entity thereto.
"DRYPERS MEXICO" means a Person organized under the laws of Mexico
or any state thereof, or any successor entity thereto.
"FINISHED GOODS INVENTORY" means, at any time, the aggregate
Inventory of the Company and its Subsidiaries, on a consolidated basis, which
based upon the Company's or its respective Subsidiary's (as applicable) books
and records and in accordance with GAAP, the Company has determined consists of
finished goods Inventory, but in any event exclusive of duplication of Inventory
which at such time is included in Raw Materials Inventory.
"INVENTORY" means, with respect to any Person, all of such Person's
property that is classified as inventory on a consolidated balance sheet of such
Person and its Subsidiaries prepared in accordance with GAAP.
"MEXICAN PERMITTED INDEBTEDNESS" means Indebtedness of Drypers
Mexico (other than Revolving Credit Indebtedness) up to $1,500,000 in aggregate
principal amount secured by a lien on a diaper production line of Drypers
Mexico, provided that at the time of incurrence of such Indebtedness an amount
equal to the fair market value of such production line is paid in cash by
Drypers Mexico to the Company or, in the case of a Subsidiary Guarantor, to such
Subsidiary Guarantor to the extent it has made payments or contributed Property
to Drypers Mexico. The fair market value of such production line shall be
determined by a majority of the directors of the Company who are not also
Company officers whose determination shall be conclusive.
"MEXICAN PERMITTED INDUSTRY INVESTMENTS" means Investments made by
the Company or any of its Subsidiaries in Drypers Mexico consisting of (i) a
diaper production line and (ii) up to an aggregate net amount of $1,000,000 in
cash for which Investments the Company will at all times directly or indirectly
own not less than 51% of Drypers Mexico's
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<PAGE>
equity. Any such Investments (other than those consisting of the proceeds of
Qualified Capital Stock of the Company or any Subsidiary) must not be prohibited
under the Revolving Credit Agreement. In addition, the Company or any of its
Subsidiaries may not make any such Investments referred to in clause (ii) of the
first sentence of this definition (other than in Qualified Capital Stock of the
Company or any Subsidiary or the proceeds thereof) unless the cumulative
Consolidated EBITDA of the Company from April 1, 1996, to the end of the fiscal
quarter immediately preceding the date of such Investment shall exceed (i)
$3,000,000 in the case of an Investment made on or prior to September 30, 1996,
(ii) $9,000,000 in the case of an investment made after September 30, 1996, and
on or prior to December 31, 1996, or (iii) $13,750,000 in the case of an
Investment made after December 31, 1996 and on or prior to March 31, 1997. In
addition, with respect to any such Investment referred to in clause (ii) of the
first sentence of this definition made after March 31, 1997, the Company or any
of its Subsidiaries may not make any such Investment (other than in Qualified
Capital Stock of the Company or any Subsidiary or the proceeds thereof) unless,
after giving effect thereto, the Consolidated EBITDA Coverage Ratio (determined
for the preceding six months, rather than 12 months) is two-to-one or higher.
"PERMITTED INDUSTRY INVESTMENTS" means Investments by the Company or
any Subsidiary the consideration for which consists of Qualified Capital Stock
of the Company or any Subsidiary or the proceeds thereof.
"RAW MATERIALS INVENTORY" means, at any time, the aggregate
Inventory of the Company and its Subsidiaries, on a consolidated basis, which
based upon the Company's or its respective Subsidiary's (as applicable) books
and records and in accordance with GAAP, the Company has determined consists of
raw materials Inventory, but in any event exclusive of duplication of Inventory
which at such time is included in Finished Goods Inventory.
SECTION 2. The following definitions set forth in Section 1.01 of the
Indenture shall be and are hereby amended in their respective entireties to be
and read as follows:
"INVESTMENT" means, in respect of any Person, any investment in
another Person
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<PAGE>
(other than a Person that is, or will become effective on the making of such
Investment, a Wholly Owned Subsidiary), whether by means of a share purchase,
issuance of Qualified Capital Stock, capital contribution, loan, advance (other
than advances to employees for moving and travel expenses, drawing accounts and
similar expenditures in the ordinary course of business) or similar credit
extension constituting Indebtedness of such other Person, any guaranty of
Indebtedness of any other Person, and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP.
"PERMITTED INVESTMENTS" means the following kinds of Investments,
including the following kind of instruments if, in the case of instruments
referred to in clauses (i)-(iv) below, on the date of purchase or other
acquisition of any such instrument by the Company or any Subsidiary, the
remaining term to maturity is not more than one year: (i) readily marketable
obligations issued or unconditionally guaranteed as to principal and interest by
the United States of America or by any agency or authority controlled or
supervised by and acting as an instrumentality of the United States of America;
(ii) repurchase obligations for instruments of the type described in clause (i)
for which delivery of the instrument is made against payment; (iii) obligations
(including, but not limited to, demand or time deposits, bankers' acceptances
and certificates of deposit) issued by a depository institution or trust company
incorporated or doing business under the laws of the United States of America,
any state thereof or the District of Columbia or a branch or subsidiary of any
such depository institution or trust company operating outside the United
States, PROVIDED that such depository institution or trust company has, at the
time of the Company's or such Subsidiary's investment therein or contractual
commitment providing for such investment, capital, surplus or undivided profits
(as of the date of such institution's most recently published financial
statements) in excess of $100,000,000, (iv) commercial paper issued by any
corporation, if such commercial paper has, at the time of the Company's or any
Subsidiary's investment therein or contractual commitment providing for such
investment, credit ratings of A-I by Standard & Poor's Corporation ("S&P") and
P-1 by Moody's Investors Service, Inc. ("Moody's"); (v) money market
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<PAGE>
mutual or similar funds having assets in excess of $100,000,000; (vi) Permitted
Industry Investments; (vii) Brazilian Permitted Industry Investments; and (viii)
Mexican Permitted
Industry Investments.
"PERMITTED LIENS" means (i) Liens for taxes, assessments and
governmental charges not yet delinquent or being contested in good faith and for
which adequate reserves have been established to the extent required by GAAP,
(ii) landlord's, carrier's, warehousemen's, storage, mechanics', workmen's,
materialmen's, operator's or similar Liens arising in the ordinary course of
business, (iii) easements, rights-of-way, restrictions and other similar
easements, licenses, restrictions on the use of Property or minor imperfections
of title that in the aggregate, are not material in amount, and that do not in
any case materially detract from the Properties subject thereto or interfere
with the ordinary conduct of the business of the Company, (iv) judgment and
attachment Liens not giving rise to an Event of Default or Liens created by or
existing from any litigation or legal proceeding that are currently being
contested in good faith by appropriate proceedings and for which adequate
reserves have been made to the extent required by GAAP, (v)(a) Liens upon any
Property of any Person existing at the time of acquisition of such Property by
the Company, (b) Liens upon any Property of a Person existing at the time such
Person is merged or consolidated with the Company or any Subsidiary or existing
at the time of the sale or transfer of any such Property of such Person to the
Company or any Subsidiary, or (c) Liens upon any Property of a Person existing
at the time such Person becomes a Subsidiary; PROVIDED that in each case such
Lien has not been created in contemplation of or in connection with such sale,
merger, consolidation, transfer or acquisition, (vi) Liens existing on the Issue
Date, (vii) Liens on deposits made in the ordinary course of business, (viii)
Liens in favor of collecting banks having a right of setoff, revocation, refund
or chargeback with respect to money or instruments of the Company or any
Subsidiary on deposit with or in possession of such bank, (ix) Liens (including
extensions and renewals thereof) upon real or tangible personal property
acquired after the date of this Indenture, provided (A) any such Lien is created
solely for the purpose of securing
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<PAGE>
Indebtedness representing, or incurred to finance, refinance or refund, the cost
(including the cost of construction) of the item of property subject thereto,
(B) the principal amount of the Indebtedness secured by such Lien does not
exceed 100% of such cost, (C) such Lien does not extend to or cover any other
property other than such item of property and any improvements on such item and
(D) the incurrence of such Indebtedness is permitted by Section 4.11 of this
Indenture and the Revolving Credit Agreement, (x) Liens securing Revolving
Credit Indebtedness of the Company and its Subsidiaries permitted under clause
(v) of Section 4.11 of this Indenture, and (xi) Liens securing the Mexican
Permitted Indebtedness.
"REVOLVING CREDIT AGREEMENT" means any agreement or agreements
pursuant to which Revolving Credit Indebtedness is incurred.
"REVOLVING CREDIT INDEBTEDNESS" means Indebtedness of the Company or
any Subsidiary (including, without limitation and without duplication, any
guarantee issued by the Company or any Subsidiary in respect of, and any Lien
granted by the Company or any Subsidiary to secure, Revolving Credit
Indebtedness of the Company or any Subsidiary) incurred pursuant to or in
connection with one or more revolving credit, letter of credit or other working
capital facilities in an aggregate principal amount not to exceed, at any one
time outstanding, the greater of (a) $20,000,000 or (b) the sum of (without
duplication) (i) 80.0% of Eligible Receivables plus (ii) 60% of the value of
Finished Goods Inventory plus (iii) 50% of the value of Raw Materials Inventory,
in each case with respect to receivables and inventory of the Company and the
Subsidiaries, as of the month-end prior to the date of such incurrence, less, in
either case, the aggregate amount by which the commitments of the lenders under
such facilities are permanently reduced from time to time in accordance with
Section 4.12(i) of this Indenture.
SECTION 3. Section 4.09 of the Indenture shall be and is hereby amended in
its entirety to be and read as follows:
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<PAGE>
SECTION 4.09. LIMITATION ON RESTRICTED PAYMENTS.
Subject to the other provisions of this Section 4.09, the Company
will not, and will not permit any of its Subsidiaries to, directly or
indirectly:
(i) declare or pay any dividend on, or make any distribution in
respect of, or purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company, in each case other than (A) through the issuance
solely of the Company's own Qualified Capital Stock, or rights thereto, or (B)
any dividend on or any distribution in respect of Capital Stock of a Subsidiary
payable to the Company or a Wholly Owned Subsidiary in proportion to the
ownership interest in such Subsidiary held by the Company or such Wholly Owned
Subsidiary,
(ii) make any principal payment on, or redeem, repurchase, defease
or otherwise acquire or retire for value, prior to scheduled principal payment
or maturity, Indebtedness of the Company (excluding Indebtedness of
Subsidiaries) which is expressly subordinate in right of payment to the
Securities (other than Subordinated Indebtedness of the Company or any
Subsidiary, except for Restricted Subordinated Indebtedness, that is paid,
redeemed, repurchased, defeased or otherwise acquired or retired with the net
proceeds of Permitted Refinancing Indebtedness or Permitted Subsidiary
Refinancing Indebtedness),
(iii) make any principal payment on, or redeem, repurchase, defease
or otherwise acquire or retire for value any Restricted Subordinated
Indebtedness,
(iv) make any Investments (other than Permitted Investments),
provided that any dividend or distribution referred to in clause (B) of Section
4.09(i) hereof paid by a Subsidiary that is not a Subsidiary Guarantor may be
used to make an Investment in any Subsidiary, or
(v) incur, create, assume or suffer to exist any guarantee of
Indebtedness of, or make any loan or advancement to, or other investment in, or
permit any of its Subsidiaries to incur, create, assume or suffer to exist any
guarantee of Indebtedness of, or make any loan or advancement to, or other
investment in, any Related Person of the Company (other than
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<PAGE>
a Wholly Owned Subsidiary) except for any transaction with an officer or
director of the Company entered into in the ordinary course of business or any
such transaction on or prior to the date hereof (including any compensation,
noncompetition payment or employee benefit arrangement with any officer or
director of the Company) (such payments and other actions described in (i),
(ii), (iii), (iv) and (v) herein, collectively, "RESTRICTED PAYMENTS") unless:
(a) at the time of and after giving effect to the proposed
Restricted Payment no Default or Event of Default shall have occurred and
be continuing;
(b) at the time of and after giving effect to the proposed
Restricted Payment (the value of any such payment, if other than cash, as
determined in good faith by the Board of Directors, whose determination shall be
conclusive and evidenced by a board resolution), the aggregate amount of all
Restricted Payments declared or made after the Issue Date shall not exceed the
sum of (1) 50.0% of the Company's aggregate Consolidated Net Income (or if such
Consolidated Net Income is a loss, minus 100% of such loss) earned on a
cumulative basis during the period (taken as a single accounting period)
commencing on the day after Issue Date and ending on the last date of the
Company's most recently-ended full fiscal quarter immediately preceding the date
of such proposed Restricted Payment and (2) 100% of the aggregate net proceeds,
including cash and the fair market value of Property other than cash (such value
to be determined in good faith by a majority of the directors of the Company who
are not also Company officers whose determination shall be conclusive and
evidenced by a resolution), received by the Company from any Person other than a
Subsidiary from the issuance and sale at least one day after the Issue Date of
Qualified Capital Stock (excluding (i) any Qualified Capital Stock paid as a
dividend on any Capital Stock or as interest on any Indebtedness, (ii) the
issuance of Qualified Capital Stock upon the conversion of, or in exchange for,
any Qualified Capital Stock and (iii) the amount of net proceeds from the
issuance of Common Stock pursuant to an initial public offering that are used by
the Company to optionally redeem Securities as pursuant to clause (ii) of the
final paragraph of Section 3.07); and
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(c) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four quarter period
immediately preceding the proposed Restricted Payment, be able to incur
$1.00 of additional Indebtedness pursuant to the Consolidated EBITDA
Coverage Ratio test set forth in the first paragraph of Section 4.11.
Notwithstanding the foregoing, the provisions of this Section 4.09 will
not prevent:
(1) the payment of any dividend within 60 days after the date
of declaration thereof if at said date of declaration such payment
would comply with the provisions hereof;
(2) the exchanging, refinancing or refunding of Subordinated
Indebtedness through the issuance of Qualified Capital Stock, or
(3) the exchanging, refinancing or refunding of any shares of
Capital Stock of the Company or any Subsidiary through the issuance
of Qualified Capital Stock or the retirement of Subordinated
Indebtedness through the issuance of new Subordinated Indebtedness
so long as the principal amount of the new Subordinated Indebtedness
to be issued (a) does not exceed the principal amount (plus any
premium and consent payments required) of the Subordinated
Indebtedness so exchanged, refinanced or refunded, and (b) does not
mature prior to the stated maturity and does not have an Average
Life shorter than the Average Life of the Subordinated Indebtedness
being so exchanged, refinanced or refunded.
No exchanging, refinancing or refunding described in the immediately
proceeding paragraphs (2) or (3) and no proceeds of any sale or exchange, shall
be included in any computation made under clause (b)(2) above.
Not later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee (i) an Officer's Certificate stating that
such Restricted Payment is
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permitted hereunder and setting forth the basis upon which the calculations
required by this Section 4.09 were computed, which calculations may be based
upon the Company's latest available internal financial statements, and (ii) any
valuation opinion required by this Section 4.09.
SECTION 4. Section 4.11 of the Indenture shall be and is hereby
amended in its entirety to be and read as follows:
SECTION 4.11. LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS AND
DISQUALIFIED CAPITAL STOCK.
The Company will not, and will not permit any of its Subsidiaries
to, issue, incur, assume, guarantee or otherwise become liable with respect to
(collectively, "incur") any Indebtedness or any Disqualified Capital Stock
unless, on a pro forma basis after giving effect to such incurrence and the
application of the proceeds therefrom, the Consolidated EBITDA Coverage Ratio
would have been greater than 2.0 to 1.0. For purposes of the pro forma
calculations required to be made above, the amount of Indebtedness or
Disqualified Capital Stock to be incurred will be presumed to have been
outstanding during the latest four fiscal quarters and, if such Indebtedness is
being used to finance an acquisition of another business or entity, such
Consolidated EBITDA Coverage Ratio will be adjusted to give effect to such
acquisition on a pro forma basis as if such acquisition had occurred on the
first day of the earliest of such four fiscal quarters.
Notwithstanding the foregoing, (i) the Company may incur
Indebtedness evidenced by the Securities, (ii) the Company and its Subsidiaries
may incur Indebtedness and Disqualified Capital Stock outstanding on the Issue
Date, (iii) the Company may incur Permitted Refinancing Indebtedness, (iv) any
Subsidiary may incur Permitted Subsidiary Refinancing Indebtedness, (v) the
Company and its Subsidiaries may incur Revolving Credit Indebtedness, (vi)
Drypers Mexico may incur Mexican Permitted Indebtedness and (vii) any Subsidiary
may incur Indebtedness owing to the Company or another Subsidiary to acquire
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Qualified Capital Stock of the Company or any Subsidiary from the Company or
such Subsidiary to be used in connection with an acquisition otherwise permitted
under this Indenture, and any permitted renewal, refunding, refinancing,
replacement or extension thereof.
For purposes of determining any particular amount of Indebtedness
under this covenant, guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
amount shall not also be included.
SECTION 5. Section 4.13 of the Indenture shall be and is hereby
amended in its entirety to be and read as follows:
SECTION 4.13. LIMITATION ON TRANSACTIONS WITH RELATED PERSONS.
Neither the Company nor any of the Subsidiaries will (i) sell,
lease, transfer or otherwise dispose of any of its Property to, (ii) purchase
any Property from, (iii) make any Investment in, or (iv) enter into any contract
or agreement with or for the benefit of, a Related Person of the Company or any
Subsidiary (other than the Company or any such Subsidiary in which no Related
Person (other than the Company or another Wholly Owned Subsidiary) owns,
directly or indirectly, an equity interest) (a "RELATED PERSON TRANSACTION"),
other than Related Person Transactions in the ordinary course of business which
are on terms (which terms are in writing) no less favorable to the Company as
could be obtained in a comparable arm's length transaction from an unrelated
party; provided that, if the Company or any Subsidiary enters into a Related
Person Transaction or series of Related Person Transactions involving or having
an aggregate value of more than $500,000, such Related Person Transaction will
have been approved by all of the directors of the Company who are not also
Company officers whose determination shall be conclusive and evidenced by a
resolution and, with respect to any Related Person Transaction (i) involving or
having an aggregate value of more than $500,000 that has not been approved by
all of the directors of the Company who are not also Company officers, or (ii)
involving or having an aggregate value of more than
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$2,000,000 in which an officer of the Company owns an ownership interest in any
Person that is a party to such transaction (other than the Company), the Company
shall have received an opinion as to the fairness of the transaction to the
Company or such Subsidiary from a financial point of view from a nationally
recognized investment banking firm.
SECTION 6. Section 4.16 of the Indenture shall be and is hereby amended in
its entirety to be and read as follows:
SECTION 4.16. ADDITIONAL SUBSIDIARY GUARANTEES.
If the Company or any of its Subsidiaries shall transfer or cause to
be transferred in one, or a series of related transactions, any assets,
businesses, divisions, real property or equipment having a book value in excess
of $1,000,000 to any Subsidiary that is not a Subsidiary Guarantor, or if the
Company or any of its Subsidiaries shall acquire another Subsidiary having
assets with a book value in excess of $1,000,000, the Company shall (1) cause
such transferee Subsidiary or acquired Subsidiary, as the case may be, to
execute a Subsidiary Guarantee having the same terms and conditions as those set
forth in Article 10 hereof and (2) deliver to the Trustee an Opinion of Counsel,
in form and substance satisfactory to the Trustee, that such Subsidiary
Guarantee is a legally valid, binding and enforceable obligation of such
Subsidiary Guarantor, subject to customary exceptions for bankruptcy and
equitable principles; provided that none of Chansommes, Drypers Mexico and any
Permitted Industry Investment that is a Subsidiary shall be required to become a
Subsidiary Guarantor until such time as it is a Wholly Owned Subsidiary.
ARTICLE TWO
MISCELLANEOUS
SECTION 1. Except as expressly supplemented by this First Supplemental
Indenture, the Indenture and the Securities issued thereunder are in all
respects ratified and confirmed and all of the rights, remedies, terms,
conditions, covenants and agreements of the Indenture and Securities issued
thereunder shall remain in full force and effect.
SECTION 2. This First Supplemental Indenture is executed as and
shall constitute an
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<PAGE>
indenture supplemental to the Indenture and shall be construed in connection
with and as part of the Indenture. This First Supplemental Indenture shall be
governed by and construed in accordance with the laws of the jurisdiction that
governs the Indenture and its construction.
SECTION 3. This First Supplemental Indenture may be executed in any number
of counterparts, each of which shall be deemed to be an original for all
purposes; but such counterparts shall together be deemed to constitute but one
and the same instrument.
SECTION 4. Any and all notices, requests, certificates and other
instruments executed and delivered after the execution and delivery of this
First Supplemental Indenture may refer to the Indenture without making specific
reference to this First Supplemental Indenture, but nevertheless all such
references shall include this First Supplemental Indenture unless the context
otherwise requires.
SECTION 5. This First Supplemental Indenture shall be deemed to have
become effective upon the date first above written.
IN WITNESS WHEREOF, the parties have caused this First Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
ATTEST: DRYPERS CORPORATION
/s/ JONATHAN P. FOSTER By:/s/ WALTER V. KLEMP
Jonathan P. Foster Walter V. Klemp
Chief Financial Officer Chairman and Co-Chief Executive Officer
ATTEST: WELLS FARGO BANK (TEXAS), NATIONAL ASSOCIATION
/s/ SUSAN BREM By:/s/ CHRISTINA FAITH
Susan Brem Christina Faith
Assistant Vice President
Corporate Trust Officer
-15-
<PAGE>
DRYPERS CORPORATION
STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
This instrument was acknowledged before me on October 3rd, 1996, by
Walter V. Klemp, the Chairman of DRYPERS CORPORATION, a Delaware corporation, on
behalf of said corporation.
/s/ LISA W. TOLAR
Notary Public in and for
the State of Texas
My Commission expires:
10/9/98
-16-
<PAGE>
TRUSTEE
STATE OF TEXAS ss.
ss.
COUNTY OF HARRIS ss.
This instrument was acknowledged before me on October 9th, 1996, by
Christina Faith, an Assistant Vice President of WELLS FARGO BANK (TEXAS),
NATIONAL ASSOCIATION, a national association, on behalf of said national
association, in its capacity as trustee.
/s/ JACQUELINE M. NORRIS
Notary Public in and for
the State of Texas
My Commission expires:
10-28-98
-17-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,420,000
<SECURITIES> 0
<RECEIVABLES> 25,657,000
<ALLOWANCES> 1,013,000
<INVENTORY> 12,663,000
<CURRENT-ASSETS> 3,861,000
<PP&E> 40,125,000
<DEPRECIATION> 3,166,000
<TOTAL-ASSETS> 141,660,000
<CURRENT-LIABILITIES> 41,317,000
<BONDS> 44,079,000
0
1,000
<COMMON> 7,000
<OTHER-SE> (17,546,000)
<TOTAL-LIABILITY-AND-EQUITY> 141,660,000
<SALES> 152,929,000
<TOTAL-REVENUES> 152,929,000
<CGS> 93,306,000
<TOTAL-COSTS> 93,306,000
<OTHER-EXPENSES> 53,249,000
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<INTEREST-EXPENSE> 6,611,000
<INCOME-PRETAX> (237,000)
<INCOME-TAX> 374,000
<INCOME-CONTINUING> (611,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (611,000)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
