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