UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 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. Yes [X] 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 6,624,450 shares
(Class) (Outstanding at March 31, 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 March 31,
1996.
Consolidated Statements of Operations for the Three Months
Ended March 31, 1995 and 1996.
Consolidated Statement of Stockholders' Equity -- March 31,
1996.
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1995 and 1996.
Notes to Consolidated Financial Statements.
<PAGE>
DRYPERS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER MARCH
1995 1996
--------- ---------
(AUDITED) (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash ................................................................................... $ 2,236 $ 1,917
Accounts receivable, net of allowance for doubtful accounts of
$863 and $602, respectively ........................................................ 24,039 22,662
Inventories ............................................................................ 10,913 12,517
Prepaid expenses and other ............................................................. 3,437 2,994
--------- ---------
Total current assets ................................................................ 40,625 40,090
PROPERTY AND EQUIPMENT, net of depreciation and amortization ................................ 36,375 35,987
INTANGIBLE AND OTHER ASSETS, net of amortization of $7,094
and $7,801, respectively ........................................................... 60,420 60,233
--------- ---------
$ 137,420 $ 136,310
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt, revolver and current portion of term loan ............................. $ 12,064 $ 10,839
Accounts payable ....................................................................... 19,319 16,247
Accrued liabilities .................................................................... 12,839 10,402
--------- ---------
Total current liabilities .......................................................... 44,222 37,488
TERM LOAN .................................................................................... 1,000 1,000
SENIOR TERM NOTES ............................................................................ 43,950 43,993
LONG-TERM SUBORDINATED DEBT TO RELATED PARTIES ............................................... 2,400 2,400
OTHER LONG-TERM LIABILITIES .................................................................. 4,026 3,804
--------- ---------
95,598 88,685
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 5,000,000 shares authorized,
-0- and 88,000 shares issued and outstanding, respectively ........................... -- 1
Common Stock, $.001 par value, 20,000,000 shares authorized,
6,619,804 and 6,624,450 shares issued and outstanding, respectively .................. 7 7
Additional paid-in capital ............................................................. 58,482 67,254
Warrants ............................................................................... 703 703
Retained deficit ....................................................................... (17,370) (20,340)
--------- ---------
Total stockholders' equity .......................................................... 41,822 47,625
--------- ---------
$ 137,420 $ 136,310
========= =========
</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)
THREE MONTHS ENDED MARCH 31
--------------------------
1995 1996
----------- -----------
NET SALES ........................................ $ 36,340 $ 45,042
COST OF GOODS SOLD ............................... 25,130 28,813
----------- -----------
Gross profit ................................. 11,210 16,229
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .... 12,196 17,109
UNUSUAL EXPENSES ................................. 2,358 --
----------- -----------
Operating loss ............................. (3,344) (880)
RELATED PARTY INTEREST EXPENSE ................... 88 88
OTHER INTEREST EXPENSE, net ...................... 1,624 1,892
----------- -----------
LOSS BEFORE INCOME TAXES ......................... (5,056) (2,860)
INCOME TAX PROVISION (BENEFIT) ................... (1,848) 55
----------- -----------
NET LOSS ......................................... (3,208) (2,915)
PREFERRED STOCK DIVIDEND ......................... -- (55)
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ..... ($ 3,208) ($ 2,970)
=========== ===========
COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING .................. 6,556,077 6,621,353
=========== ===========
NET LOSS PER COMMON SHARE ...................... ($ 0.49) ($ 0.45)
=========== ===========
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 ($17,370)
Net loss -- -- -- -- -- -- (2,915)
Issuance of preferred
stock, net 88,000 -- 1 -- 8,772 -- --
Preferred stock dividends
($.625 per share) -- -- -- -- -- -- (55)
Exercise of stock options -- 4,646 -- -- -- -- --
-------------- -------------- ------------ ---------- ------------- ----------- ------------
Balance, March 31, 1996 88,000 6,624,450 $1 $7 $67,254 $703 ($20,340)
============== ============== ============ ========== ============= =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
DRYPERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31
-------------------
1995 1996
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................... ($3,208) ($ 2,915)
Adjustments to reconcile net loss to net
cash used in operating activities --
Depreciation and amortization ...................... 1,655 1,803
Provision for deferred income taxes ................ (1,848) --
Deferred rent expense and other .................... (58) (177)
Changes in operating assets and liabilities ........ 2,222 (5,348)
------- --------
Net cash used in operating activities ......... (1,237) (6,637)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .................... (4,016) (647)
Investments in other non-current assets ............... (237) (28)
Payments under non-compete agreement .................. (63) (63)
------- --------
Net cash used in investing activities ......... (4,316) (738)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolver ............................. 5,000 33,613
Payments on revolver .................................. -- (34,588)
Payments on term loan ................................. -- (250)
Financing related costs ............................... -- (492)
Net proceeds from issuance of preferred stock ......... -- 8,773
Proceeds from exercise of stock options ............... 20 --
------- --------
Net cash provided by financing activities ..... 5,020 7,056
------- --------
NET DECREASE IN CASH .................................... (533) (319)
CASH AT BEGINNING OF PERIOD ............................. 1,499 2,236
------- --------
CASH AT END OF PERIOD ................................... $ 966 $ 1,917
======= ========
SUPPLEMENTAL DISCLOSURE CASH FLOW INFORMATION:
Net cash paid during period for:
Interest payments ..................................... $ 300 $ 407
Income tax payments ................................... $ 325 $ 0
The accompanying notes are an integral part of these consolidated financial
statements.
6
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 per 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 ended March 31,
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 March 31, 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 and
statements of cash flows at the date and for the periods indicated have been
made.
During the first quarter of 1995, the Company repositioned its diaper
products in response to similar activity by its competitors with a reduction in
the number of diapers per package and a reduction in the price per package. In
response to continued market pressures, the Company announced a plan in the
second quarter of 1995, to realign and consolidate its operations, a move
intended to allow the Company the flexibility to react to other business
opportunities and utilize its excess capacity while reducing costs. The Company
has consolidated its domestic operations from three production facilities to two
in an effort to curtail the costs associated with excess capacity.
Concurrent with the operational reorganization discussed above, the
Company undertook a plan to reorganize its financial structure. The Company's
financial restructuring was completed on February 29, 1996, with the
establishment of a new revolving credit facility with a borrowing base of up to
$21,000,000 and the private issuance of $8,800,000 in convertible preferred
stock. Borrowings 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%
7
Senior Notes and transaction-related costs. As of May 13, 1996, unused
borrowing availability under the new revolving credit facility was approximately
$600,000. The Company continues to investigate various alternatives to further
improve liquidity including, among other things, the sale of underutilized
assets, lease financing of existing assets and deferral of planned capital
expenditures.
The Company's cash requirements in 1996 are primarily the funding of
working capital needs, including payment of principal and interest on
indebtedness, expenditures associated with the relocation of the Company's
training pants production operations, payment of extended accounts payable
balances to certain raw material vendors, payment due under a license agreement
and committed investments in machinery and equipment. While not committed,
additional capital expenditures are expected in 1996.
The Company believes that the combination of the borrowing availability
under the revolving credit facility, cost reductions and the increased margins
from recent market share growth should allow the Company to meet its cash
requirements, remain in compliance with its amended debt covenants, manage its
business needs and regain profitability.
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.
As of January 1, 1996, SFAS No. 123, "Accounting for Stock-Based
Compensation," was effective for the Company. SFAS No. 123 permits, but does not
require, a fair value-based method of accounting for employee stock option plans
which results in compensation expense recognition when stock options are
granted. The Company plans to continue the use of its current intrinsic
value-based method of accounting for such plans. As required by SFAS No. 123,
the Company will provide pro forma disclosure of net income and earnings per
share in the notes to future consolidated financial statements as if the fair
value-based method of accounting had been applied to awards covered by SFAS No.
123.
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
8
number of companies, some of which are larger than the Company and have
greater financial resources and offer broader product lines.
Raw material prices, notably wood pulp, are a major component of the
total cost to produce disposable baby diapers and training pants. While the cost
of pulp has declined significantly from the record-high levels experienced in
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.
2. INVENTORIES
Inventories at March 31, 1996, consisted of the following (in
thousands):
Raw Materials ........................................... $ 5,186
Finished Goods .......................................... 7,331
-------
$12,517
=======
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. 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. The indenture governing the Company's 12-1/2% Senior Notes restricts
borrowing under the facility to the greater of $15,000,000 or 75 percent of
accounts receivable. Borrowings are collateralized by accounts receivable,
inventory, trademarks and trade names, stock of certain subsidiaries and other
intangibles. Borrowings under the new revolving credit facility and a portion of
the proceeds from the preferred stock sale were used to repay the existing
credit facility, the previously deferred interest on the 12-1/2% Senior Notes,
previously extended accounts payable balances and transaction costs.
9
The Company had borrowings outstanding of $10,213,000 under a revolving
credit facility and $1,500,000 under a term loan with a bank as of March 31,
1996. Borrowings outstanding under the revolving credit facility bore interest
at prime plus 3% percent from January 1, 1996 through February 29, 1996 and
prime plus 1 3/4% thereafter. Borrowings under the term loan bore interest at
prime plus 3% during the first quarter of 1996.
The new revolving credit facility and term loan, as amended, require
the Company, among other things, to maintain consolidated working capital, as
defined, and 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 from February 29, 1996, 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.
SENIOR TERM NOTES
Long-term debt under senior term notes at March 31, 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 $1,007 ................. $43,993
=======
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.
10
4. PREFERRED STOCK
In February 1996, the Company sold 88,000 shares of the Company's
Series A Senior Convertible Cumulative 7.5% Preferred Stock ("7.5% Preferred
Stock") for $8.8 million as further discussed in Note 1. The 7.5% Preferred
Stock is convertible at the discretion of the holders, at a rate of 100 shares
of common stock per share of 7.5% Preferred Stock, into 8.8 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.
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 remaining purchase commitments aggregating
$4.8 million related to these two diaper lines. Management is currently
evaluating various methods of financing its remaining commitments for these
machines, including lease financing and the possible sale of the machines, 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
under the contract, these deposits could be forfeited and, if forfeited, the
Company would be required to expense this amount in such period. Penalty
payments, if any, that may be required if the company is unable to fulfill its
obligation to the manufacturer will be expensed when paid.
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 risks 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 the factors discussed below
and elsewhere herein.
11
RECENT DEVELOPMENTS
During the first quarter of 1995, the Company repositioned its diaper
products in response to similar activity by its competitors with a reduction in
the number of diapers per package and a reduction in the price per package. In
response to continued market pressures, the Company announced a plan in the
second quarter of 1995, to realign and consolidate its operations, a move
intended to allow the Company the flexibility to react to other business
opportunities and utilize its excess capacity while reducing costs. As a part of
this plan, the Company has consolidated its domestic operations from three
production facilities to two in an effort to curtail the costs associated with
excess capacity.
Concurrent with the operational reorganization discussed above, the
Company undertook a plan to reorganize its financial structure. The Company's
financial restructuring was completed on February 29, 1996, with the
establishment of a new revolving credit facility with a borrowing base of up to
$21,000,000 and the private issuance of $8,800,000 in 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 May 13, 1996, unused borrowing availability
under the new revolving credit facility was approximately $600,000. The Company
continues to investigate various alternatives to further improve liquidity
including, among other things, the sale of underutilized assets, lease financing
of existing assets and deferral of planned capital expenditures.
In the third quarter of 1995, management began implementing a plan to
reduce costs by approximately $3.0 million per quarter, offset in part by
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 plant, reduction of manufacturing and general overhead costs and
improved product design. In conjunction with the consolidation of the Company's
domestic operations, the Company has relocated its training pants production
operations to provide for further reductions in operating costs. Due to
increased demand for the Company's training pants products experienced
throughout 1995, the relocation of the training pants production operation did
not occur until late February, 1996. The full benefit of the cost reduction plan
is not expected to be realized until the third quarter of 1996.
12
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 ended March 31, 1995 and 1996.
THREE MONTHS ENDED
MARCH 31,
-----------------------
1995 1996
-------- --------
Net sales ................................... 100.0% 100.0%
Cost of goods sold .......................... 69.2 64.0
-------- --------
Gross profit ............................. 30.8 36.0
Selling, general and administrative
expenses ................................. 33.5 38.0
Unusual expenses ............................ 6.5 --
-------- --------
Operating loss .......................... (9.2) (2.0)
Interest expense, net ....................... 4.7 4.4
-------- --------
Loss before income taxes .................... (13.9) (6.4)
Income tax provision (benefit)
(5.1) 0.1
-------- --------
Net loss .................................... (8.8)% (6.5)%
========= ========
THREE MONTHS ENDED MARCH 31, 1996 TO COMPARED TO THREE MONTHS ENDED
MARCH 31, 1995
NET SALES. Net sales increased 23.9% to $45.0 million for the three
months ended March 31, 1996 from $36.3 million for the three months ended March
31, 1995. The increase reflects primarily market share growth of the Company's
domestic premium brand diapers and training pants as well as the consolidation
of Seler's results. These increases were partially offset by a decrease in
private label sales. The domestic premium diaper sales increase was driven by
continued strong acceptance of the Company's improved thin product and increased
promotional spending. Drypers training pants continued to outsell both Pampers
and Luvs in grocery stores while only having half the distribution of those
brands.
COST OF GOODS SOLD. Cost of goods sold decreased as a percentage of net
sales to 64.0% for the three months ended March 31, 1996 compared to 69.2% for
the three months ended March 31, 1995. The 5.2% decrease is primarily due to
lower conversion costs, and reduced pulp prices and raw material usage, offset
by slightly reduced unit sales prices and costs incurred while the training pant
line was being moved.
13
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased as a percentage of net sales to 38.0% for the
three months ended March 31, 1996 compared to 33.5% of net sales for the three
months ended March 31, 1995. The increase reflects increased advertising,
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.
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.
INTEREST EXPENSE. Interest expense was $1.9 million for the three
months ended March 31, 1996 compared to $1.7 million for the three months ended
March 31, 1995. The increase was primarily a result of increased borrowing under
the revolving credit facility and the additional term note financing obtained in
April 1995 to fund working capital and capital expenditure requirements. In
addition, the interest rate paid on the revolving credit facility during the
first quarter of 1996 was prime plus 3% as compared to prime plus 1/2% during
the first quarter of 1995.
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. The indenture governing the Company's
12-1/2% Senior Notes restricts borrowing under the facility to the greater of
$15.0 million or 75 percent of accounts receivable. 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. 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 of sale of preferred stock.
14
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 three months ended March 31, 1996, cash flow used in operating
activities totaled $6.6 million and cash flow used in investing activities
totaled $1.2 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 March 31, 1996, the Company had borrowings
outstanding of $10.2 million under a revolving credit facility and $1.5 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 bore interest
at prime plus 3% during the first quarter of 1996. As of May 13, 1996, unused
borrowing availability under the new revolving credit facility was approximately
$.6 million.
The Company's estimated cash requirements through December 31, 1996,
are primarily the funding of working capital needs, including payment of
principal and interest on indebtedness ($3.6 million, excluding the payment of
principal or interest on the new revolving credit facility), expenditures
associated with the relocation of the Company's training pants production
operations ($.8 million) and payment of extended accounts payable balances to
certain raw material vendors. While not committed, approximately $3.2 million in
additional capital expenditures is expected through December 31, 1996. In
addition, the Company will be required to pay $1.1 million pursuant to a license
agreement in December 1996.
The Company made deposits in 1995 aggregating $2,265,000 to a diaper
line manufacturer in connection with a purchase contract for two production
lines. The Company has remaining purchase commitments aggregating $4,826,000
related to these two diaper lines. Management is currently evaluating various
methods of financing its remaining commitments for these machines, including
lease financing and the possible sale of the machines, 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 under the contract,
these deposits could be forfeited and, if forfeited, the Company would be
required to expense this amount in such period. Penalty payments, if any, that
may be required if the Company is unable to fulfill its obligation to the
manufacturer will be expensed when paid.
The Company believes that the combination of the borrowing availability
under the revolving facility, 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, manage its business needs and regain profitability.
15
FUTURE OPERATIONS
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 and liquidity may be
adversely affected. The Company competes with a number of companies, some of
which are larger than the Company and have greater financial resources and offer
broader product lines.
Pulp costs are a major component of the total cost to produce a diaper,
representing approximately 10 percent of net sales in 1995. 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
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.
16
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.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS--There are no exhibits required to be filed
as part of this report pursuant to Item 601 of
Regulation S-K.
(b) REPORTS ON FORM 8-K--A report on Form 8-K was filed
on March 1, 1996 related to the Company's completion
of a financing package comprised of a revolving
credit facility, with a borrowing base of up to $21
million, from Congress Financial Corporation and
approximately $9 million of new equity in the form of
convertible preferred stock.
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: MAY 14, 1996 By: /S/ WALTER V. KLEMP
Chairman and Co-Chief
Executive Officer
(Duly Authorized Officer)
(Principal Financial Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM [IDENTIFY SPECIFIC FINANCIAL STATEMENTS] AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 1,917,000
<SECURITIES> 0
<RECEIVABLES> 23,264,000
<ALLOWANCES> 602,000
<INVENTORY> 12,517,000
<CURRENT-ASSETS> 2,994,000
<PP&E> 44,730,000
<DEPRECIATION> 10,898,000
<TOTAL-ASSETS> 136,310,000
<CURRENT-LIABILITIES> 37,488,000
<BONDS> 43,993,000
0
1,000
<COMMON> 7,000
<OTHER-SE> 67,957,000
<TOTAL-LIABILITY-AND-EQUITY> 136,310,000
<SALES> 45,042,000
<TOTAL-REVENUES> 45,042,000
<CGS> 28,813,000
<TOTAL-COSTS> 17,109,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,980,000
<INCOME-PRETAX> (2,860,000)
<INCOME-TAX> 55,000
<INCOME-CONTINUING> (2,915,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,915,000)
<EPS-PRIMARY> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
