UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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 6,649,450 SHARES
(Class) (Outstanding at July 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 June 30, 1996.
Consolidated Statements of Earnings for the Three Months and Six Months
Ended June 30, 1995 and 1996.
Consolidated Statement of Stockholders' Equity for the Six Months Ended
June 30, 1996.
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1995 and 1996.
Notes to Consolidated Financial Statements.
2
DRYPERS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
December 31 June 30
1995 1996
--------- ---------
(Audited) (Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ............................................................ $ 2,236 $ 2,976
Accounts receivable, net of allowance for doubtful accounts of
$940 and $513, respectively .............................. 24,039 24,947
Inventories ..................................................... 10,913 12,751
Prepaid expenses and other ...................................... 3,437 3,556
--------- ---------
Total current assets ......................................... 40,625 44,230
PROPERTY AND EQUIPMENT, net of depreciation and amortization ...... 36,375 36,582
INTANGIBLE AND OTHER ASSETS, net of amortization of $7,094
and $8,601, respectively ................................. 60,420 59,684
--------- ---------
$ 137,420 $ 140,496
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt, revolver and current portion of term loan ...... $ 12,064 $ 15,005
Accounts payable ................................................ 19,319 16,788
Accrued liabilities ............................................. 12,839 9,823
--------- ---------
Total current liabilities ................................... 44,222 41,616
TERM LOAN .......................................................... 1,000 875
SENIOR TERM NOTES .................................................. 43,950 44,036
LONG-TERM SUBORDINATED DEBT TO RELATED PARTIES ..................... 2,400 2,400
OTHER LONG-TERM LIABILITIES ........................................ 4,026 3,715
--------- ---------
95,598 92,642
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) (20,161)
--------- ---------
Total stockholders' equity ................................... 41,822 47,854
--------- ---------
$ 137,420 $ 140,496
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
DRYPERS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------- --------------------------
1995 1996 1995 1996
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
NET SALES ................................... $ 37,758 $ 52,821 $ 74,098 $ 97,864
COST OF GOODS SOLD .......................... 27,306 31,301 52,436 60,115
----------- ------------ ----------- -----------
Gross profit ............................ 10,452 21,520 21,662 37,749
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 13,627 18,605 25,822 35,716
UNUSUAL EXPENSES ............................ -- -- 2,358 --
RESTRUCTURING CHARGE ........................ 2,972 -- 2,972 --
----------- ------------ ----------- -----------
Operating income (loss) ................ (6,147) 2,915 (9,490) 2,033
RELATED PARTY INTEREST EXPENSE .............. 92 88 186 176
OTHER INTEREST EXPENSE, net ................. 1,986 2,333 3,606 4,227
----------- ------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ........... (8,225) 494 (13,282) (2,370)
INCOME TAX PROVISION (BENEFIT) .............. (2,019) 146 (3,867) 201
----------- ------------ ----------- -----------
NET INCOME (LOSS) .......................... (6,206) 348 (9,415) (2,571)
PREFERRED STOCK DIVIDEND .................... -- (165) -- (220)
----------- ------------ ----------- -----------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS ......................... ($ 6,206) $ 183 ($ 9,415) ($ 2,791)
=========== ============ =========== ===========
COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ............. 6,565,711 15,995,725 6,560,894 6,635,401
=========== ============ =========== ===========
NET INCOME ( LOSS) PER COMMON SHARE ....... ($ 0.95) $ 0.02 ($ 1.43) ($ 0.42)
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
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 ................ -- -- -- -- -- -- (2,571)
Issuance of preferred
stock, net .............. 90,000 -- 1 -- 8,822 -- --
Issuance of common stock
and warrants ............ -- 25,000 -- -- (270) 270 --
Preferred stock dividends
($2.50 per share) ....... -- -- -- -- -- -- (220)
Exercise of stock
options ............... -- 4,646 -- -- -- -- --
----------- ----------- --------- ------ -------- ------- --------
Balance, June 30, 1996 .. 90,000 6,649,450 $ 1 $ 7 $ 67,034 $ 973 ($20,161)
=========== =========== ========= ====== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
5
DRYPERS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
June 30
1995 1996
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. ($9,415) ($ 2,571)
Adjustments to reconcile net loss to net
cash used in operating activities --
Restructuring charge ............................. 2,972 --
Depreciation and amortization .................... 3,370 3,717
Provision for deferred income taxes .............. (4,594) --
Deferred rent expense and other .................. (52) (221)
Changes in operating assets and liabilities ...... 5,647 (9,431)
------- --------
Net cash used in operating activities ....... (2,072) (8,506)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .................. (4,830) (1,394)
Investments in other non-current assets ............. (322) --
Payments under non-compete agreement ................ (126) (126)
------- --------
Net cash used in investing activities ....... (5,278) (1,520)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolver ........................... 7,687 76,206
Payments on revolver ................................ (1,024) (73,015)
Borrowing (payments) on term loan ................... 2,000 (375)
Financing related costs ............................. -- (872)
Net proceeds from issuance of preferred stock ....... -- 8,822
Proceeds from exercise of stock options ............. 20 --
------- --------
Net cash provided by financing activities ... 8,683 10,766
------- --------
NET INCREASE IN CASH .................................. 1,333 740
CASH AT BEGINNING OF PERIOD ........................... 1,499 2,236
------- --------
CASH AT END OF PERIOD ................................. $ 2,832 $ 2,976
======= ========
SUPPLEMENTAL DISCLOSURE CASH FLOW INFORMATION:
Net cash paid during period for:
Interest payments ................................... $ 3,487 $ 6,771
Income tax payments ................................. $ 325 --
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
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 six months
ended June 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 June 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 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 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% Senior
7
Notes and transaction-related costs. As of August 8, 1996, unused borrowing
availability under the new revolving credit facility was approximately
$3,600,000. The Company continues to investigate various alternatives to further
improve liquidity including, among other things, the sale of underutilized
assets, lease financing of assets and deferral of planned capital expenditures.
The Company's cash requirements over the next twelve months are
primarily the funding of working capital needs, including payment of principal
and interest on indebtedness, 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 over the next twelve months.
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 and manage
its business needs.
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.
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.
8
2. INVENTORIES
Inventories at June 30, 1996, consisted of the following (in thousands):
Raw Materials .......................................... $ 5,896
Finished Goods ......................................... 6,855
-------
$12,751
=======
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. 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,
extended accounts payable balances and transaction costs.
The Company had borrowings outstanding of $13,886,000 under a revolving
credit facility and $1,375,000 under a term loan with a bank as of June 30,
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 bear interest at
prime plus 3%.
The new 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 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. The Company was in
compliance with the terms of the revolving credit facility as of June 30, 1996.
9
SENIOR TERM NOTES
Long-term debt under senior term notes at June 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 $964 .................. $44,036
=======
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.
4. PREFERRED STOCK
During the six months ended June 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 June
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 six months ended June 30, 1996, as the impact would be
antidilutive.
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 subsequently made a progress payment of
approximately $785,000 in August 1996. The Company has remaining purchase
commitments aggregating $4.0 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.
10
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 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 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 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 August 8, 1996, unused borrowing availability
under the new revolving credit facility was approximately $3,600,000. The
11
Company continues to investigate various alternatives to further improve
liquidity including, among other things, the sale of underutilized assets, lease
financing of assets and deferral of planned capital expenditures.
In the third quarter of 1995, management began implementing a plan to
reduce costs 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, Texas 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.
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 six months ended June 30, 1995 and 1996.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------- -------------------
1995 1996 1995 1996
------- ------- ------- -------
Net sales ....................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .............. 72.3 59.3 70.8 61.4
------- ------- ------- -------
Gross profit .................... 27.7 40.7 29.2 38.6
Selling, general and
administrative expenses ....... 36.1 35.2 34.8 36.5
Unusual expenses ................ -- -- 3.2 --
Restructuring charge ............ 7.9 -- 4.0 --
------- ------- ------- -------
Operating income (loss) ......... (16.3) 5.5 (12.8) 2.1
Interest expense, net ........... 5.5 4.6 5.1 4.5
------- ------- ------- -------
Income (loss) before taxes ...... (21.8) .9 (17.9) (2.4)
Income taxes .................... (5.3) .3 (5.2) .2
------- ------- ------- -------
Net income (loss) ............... (16.5)% .6% (12.7)% (2.6)%
======= ======= ======= =======
12
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1996 TO THREE MONTHS ENDED JUNE 30,
1995
NET SALES. Net sales increased 39.7% to $52.8 million for the three
months ended June 30, 1996 from $37.8 million for the three months ended June
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 the
Company's international operations. The domestic premium diaper sales increase
was driven by continued strong acceptance of the Company's improved thin product
and, in part, due to the new baking soda product introduced in May 1996 and
increased distribution from the heavy promotional spending and couponing during
the three months ended March 31, 1996. Drypers training pants volume increased
due to product improvements, new packaging and more favorable pricing.
COST OF GOODS SOLD. Cost of goods sold decreased as a percentage of net
sales to 59.3% for the three months ended June 30, 1996 compared to 72.3% for
the three months ended June 30, 1995. The 13.0% decrease is primarily due to
lower conversion costs (resulting from the closure of the Houston, Texas plant
and improved efficiencies) being allocated over increased pad production,
reduced pulp prices and raw material usage and slightly increased unit sales
prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased as a percentage of net sales to 35.2% for the
three months ended June 30, 1996 compared to 36.1% of net sales for the three
months ended June 30, 1995. The total decrease reflects a decrease in general
and administrative expenses as a percentage of net sales, offset by an increase
in couponing and promotional spending as well as an increase in the percentage
of premium domestic diaper and training pant sales relative to total sales.
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
operations, a move intended to allow the Company the flexibility to react to
other business opportunities and utilize its excess capacity while reducing
costs. The plan provided for consolidation of the Company's domestic operations
from three production facilities to two in an effort to curtail the costs
associated with idle capacity. The Company has also reduced its work force. The
restructuring charge includes a $2.0 million provision for the writedown of
idled equipment to net realizable value and a $1.0 million charge related to
lease termination costs for the Houston, Texas facility.
13
INTEREST EXPENSE. Interest expense was $2.4 million for the three months
ended June 30, 1996 compared to $2.1 million for the three months ended June 30,
1995. The increase was primarily a result of increased borrowing under the
revolving credit facility and the additional term note financing obtained in
late April 1995 to fund working capital and capital expenditure requirements. In
addition, the interest rate paid on the revolving credit facility during the
second quarter of 1996 was prime plus 1 3/4% as compared to prime plus 1/2%
during the second quarter of 1995. Additionally, amortization of deferred loan
costs related to the refinancing and interest on certain notes payable
contributed to the increase in interest expense over the prior year.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 TO SIX MONTHS ENDED JUNE 30, 1995
NET SALES. Net sales increased 32.1% to $97.9 million for the six months
ended June 30, 1996 from $74.1 million for the six months ended June 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 the Company's
international operations. The domestic premium diaper sales increase was driven
by continued strong acceptance of the Company's improved thin product and, in
part, due to the new baking soda product introduced in May 1996 and increased
distribution from the heavy promotional spending and couponing during the three
months ended March 31, 1996. Drypers training pants volume increased due to
product improvements, new packaging and more favorable pricing.
COST OF GOODS SOLD. Cost of goods sold decreased as a percentage of net
sales to 61.4% for the six months ended June 30, 1996 compared to 70.8% for the
six months ended June 30, 1995. The 9.4% decrease is primarily due to reduced
pulp prices and raw material usage, lower conversion costs (resulting from the
closure of the Houston, Texas plant and improved efficiencies) being allocated
over increased pad production, and slightly increased unit sales prices, offset
by costs incurred to secure training pant product from an external source.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased as a percentage of net sales to 36.5% for the
six months ended June 30, 1996 compared to 34.8% of net sales for the six months
ended June 30, 1995. The 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 a percentage of net sales.
14
UNUSUAL EXPENSES. Procter & Gamble's Luvs brand was repositioned again
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
operations, a move intended to allow the Company the flexibility to react to
other business opportunities and utilize its excess capacity while reducing
costs. The plan provided for consolidation of the Company's domestic operations
from three production facilities to two in an effort to curtail the costs
associated with idle capacity. The Company has also reduced its work force. The
restructuring charge includes a $2.0 million provision for the writedown of
idled equipment to net realizable value and a $1.0 million charge related to
lease termination costs for the Houston, Texas facility.
INTEREST EXPENSE. Interest expense was $4.4 million for the six months
ended June 30, 1996 compared to $3.8 million for the six months ended June 30,
1995. The increase was primarily a result of increased borrowing under the
revolving credit facility and the additional term note financing obtained in
late April 1995 to fund working capital and capital expenditure requirements. In
addition, the interest rate paid on the revolving credit facility during the
second quarter of 1996 was prime plus 1 3/4% as compared to prime plus 1/2%
during the first half of 1995. Additionally, amortization of deferred loan costs
related to the refinancing and interest on certain notes payable contributed to
the increase in interest expense over the prior year.
15
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, 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 six months ended June 30, 1996, cash flow used in operating
activities totaled $8.5 million and cash flow used in investing activities
totaled $1.5 million. Such use was the result of returning the working capital
structure to normal operating levels. 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 June 30, 1996, the Company had
borrowings outstanding of $13.9 million under a revolving credit facility and
$1.4 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 August 8, 1996, unused borrowing
availability under the new revolving credit facility was approximately $3.6
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 payment of extended accounts payable
balances to certain raw material vendors. In addition, the Company will be
required to pay approximately $1.0 million 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 subsequently made a progress payment of approximately
$785,000 in August 1996. The Company has remaining purchase commitments
aggregating $4.0 million related to these two diaper lines. Management is
currently evaluating various
16
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. While not committed, approximately $3.2
million in additional capital expenditures is 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.
17
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) Annual Meeting of Stockholders--May 28,1996.
(b) Inapplicable.
(c) On May 28, 1996, the Stockholders voted in regard to the following
proposals:
PROPOSAL NO. 1 -- To elect two persons to serve as directors of
the Company for a three-year term or until their respective
successors are duly elected and qualified.
PROPOSAL NO. 2 -- To consider and vote on a proposal to amend and
restate the Drypers Corporation 1995 Key Employee Stock Option
Plan to increase the aggregate number of shares of the Company's
common stock with respect to which options may be granted under
the plan.
PROPOSAL NO. 3 -- To consider and vote on a proposal to adopt a
new non-employee director stock option plan.
PROPOSAL NO. 4 -- To consider and vote on a proposal to ratify the
appointment of Arthur Andersen LLP as the Company's independent
public accountants for the fiscal year ending December 31, 1996.
As of April 22, 1996, the record date for determining stockholders
entitled to vote at the Annual Meeting of Stockholders, the
Company had outstanding and entitled to vote 6,707,699 shares of
Common Stock and 88,000 shares of Senior Convertible 7.5%
Preferred Stock. Holders of the 7.5% Preferred Stock have 100
votes per share.
(See next page for voting information on each proposal.)
18
The following table lists the votes cast for each proposal:
<TABLE>
<CAPTION>
Nubmer of Shares
| For | Against | Abstain | Broker
- ------------------------------------------------------------------------------------------------------------------------------
Proposal Total Commmon Preferred Total Commmon Preferred Total Commmon Preferred Non-Votes
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
No. 1
- ------------------------------------------------------------------------------------------------------------------------------
Raymond M. Chambers 14,021,217 5,221,217 88,000 507,796 507,796 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Gary L. Forbes .... 14,018,217 5,218,217 88,000 510,796 510,796 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
No. 2 ............. 11,260,323 2,460,323 88,000 1,052,567 1,052,567 -- 22,953 22,953 -- 2,193,170
- ------------------------------------------------------------------------------------------------------------------------------
No. 3 ............. 11,715,966 2,915,966 88,000 772,828 772,828 -- 35,650 35,650 -- 2,004,569
- ------------------------------------------------------------------------------------------------------------------------------
No. 4 ............. 14,472,195 5,672,195 88,000 43,402 43,402 -- 13,416 13,416 -- --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
ITEM 4. (Continued).
(d) Inapplicable.
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 22 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 June 30, 1996.
20
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: AUGUST 13, 1996 By: /s/ WALTER V. KLEMP
Chairman and Co-Chief
Executive Officer
(Duly Authorized Officer)
(Principal Financial Officer)
21
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION PAGE NUMBER
27. Financial Data Schedule. 23
22
<TABLE> <S> <C>
<ARTICLE> 5
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,976,000
<SECURITIES> 0
<RECEIVABLES> 25,460,000
<ALLOWANCES> 513,000
<INVENTORY> 12,751,000
<CURRENT-ASSETS> 3,556,000
<PP&E> 48,532,000
<DEPRECIATION> 11,950,000
<TOTAL-ASSETS> 140,496,000
<CURRENT-LIABILITIES> 41,616,000
<BONDS> 51,026,000
0
1,000
<COMMON> 7,000
<OTHER-SE> (19,188,000)
<TOTAL-LIABILITY-AND-EQUITY> 140,496,000
<SALES> 97,864,000
<TOTAL-REVENUES> 97,864,000
<CGS> 60,115,000
<TOTAL-COSTS> 60,115,000
<OTHER-EXPENSES> 35,716,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,403,000
<INCOME-PRETAX> (2,370,000)
<INCOME-TAX> 201,000
<INCOME-CONTINUING> (2,571,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,571,000)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
