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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, 1997
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.)
5300 MEMORIAL, SUITE 900
HOUSTON, TEXAS 77007
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 869-8693
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 7.5% preferred stock) held by non-affiliates of the
Registrant based upon the price at which the common stock was sold on February
28, 1998: $55,275,106
Number of shares of common stock outstanding as of February 28, 1998:
10,521,558
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
Drypers (the "Company") is a leading manufacturer and marketer of premium
quality, value-priced disposable baby diapers and training pants sold under the
Drypers brand name in the United States and under the Drypers and other brand
names internationally. The Company also manufactures and sells lower-priced
diapers under other brand names in the United States and internationally, as
well as private label diapers and training pants and pre-moistened baby wipes.
The Company's Drypers brand is the fourth largest selling diaper brand in the
United States, and the second largest selling training pant brand in U.S.
grocery stores.
Drypers targets the value segment of the U.S. diaper market by offering products
with features and quality comparable to the premium-priced national brands at
generally lower prices. The Company positions its products to provide enhanced
profitability for retailers and better value to consumers. The Company
continually seeks to expand its extensive grocery store sales and distribution
network, while increasing its limited penetration of the mass merchant and
drugstore chain markets, in order to capture a greater share of the U.S. diaper
market.
Since 1993, Drypers has significantly expanded its international presence,
competing in the lower-priced branded and private label categories. The Company
currently produces diapers in Puerto Rico, Argentina and Mexico and has entered
into a supply arrangement with a Brazilian manufacturer to produce diapers under
the Company's Puppet brand name. Wal-Mart International has selected the Company
to be its exclusive private label supplier of disposable diapers to Wal-Mart
stores throughout Latin America (which are currently located in Argentina,
Brazil and Mexico) and in Puerto Rico. The Company intends to continue to expand
its operations in Argentina, Brazil and Mexico and is actively seeking further
expansion opportunities through acquisition, joint venture or other arrangements
in Latin America and the Pacific Rim.
Drypers(R), Comfees(R), Baby's Choice(R) and Wee-Fits(R) are U.S. registered
trademarks and Puppet is a Brazilian federally registered trademark owned by the
Company. XClaim(R) is a U.S. registered trademark owned by NewLund Laboratories,
Inc. Sesame Street(R) is a trademark licensed to the Company by The Children's
Television Workshop. All other trademarks or service marks referred to in this
document are the property of their respective owners and are not the property of
the Company.
INDUSTRY CONDITIONS
U.S. Disposable Baby Diaper Market
The size of the U.S. diaper market measured by retail sales was approximately
$3.8 billion in 1997. The Company believes the U.S. market has experienced
little growth in recent years as a result of the already high level of market
penetration of disposable diapers (estimated to be above 90%) and to a decrease
in the number of diapers used per baby as a result of improvements in absorbency
and leakage control. The principal manufacturers of disposable diapers in the
United States can be grouped into three general categories: premium-priced
branded producers, value-priced branded producers and private label producers.
Procter & Gamble and Kimberly-Clark are the leading premium-priced branded
producers and have tended to compete on the basis of product quality, features
and price. As a result, they 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.
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Historically, value-priced branded diapers such as those produced 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-priced 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-priced 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-
priced brand name manufacturers do not generally engage in extensive research
and development or national advertising and are generally marketed to a more
defined audience than is reached by mass advertising, through the use of
coupons, in-store promotions and cooperative programs with retailers.
Private label diapers 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 and the Company. 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.
The size of the U.S. disposable baby diaper and training pant market sold
through grocery stores, measured by retail sales, was approximately $2 billion
during 1997. Since 1989, the Company's larger branded competitors have lost
grocery market share on a combined basis both to value-priced brands, which
represented the fastest growing segment, and to private label products. In
addition, grocery store distribution of diapers has been decreasing as a
percentage of total diaper sales in the United States from 60% in 1994 to 51.2%
in 1997, reflecting a shift in distribution to mass merchants.
Procter & Gamble and Kimberly-Clark are the dominant companies in the disposable
diaper market, with an estimated 37.7% and 41.2% share, respectively, of the
total U.S. diaper market and an estimated 34.1% and 40.6% share, respectively,
of the domestic grocery store market for disposable diapers for the 52 weeks
ended December 20, 1997. There are also private label manufacturers with higher
diaper sales than the Company. There has recently been consolidation among
private label manufacturers in the United States, leaving fewer competitors in
this market.
The size of the U.S. disposable diaper market sold through mass-merchants and
drugstore chain retailers, measured by retail sales, was approximately $1.9
billion during 1997, representing approximately 48.8% of the U.S. diaper 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. Mass merchants have increased their percentage of
total diaper sales in the United States from 30% in 1994 to 39.6% in 1997 while
drug store market share has decreased from 10% to 9.2% over the same period.
International Disposable Baby Diaper Market
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 worldwide sales
of disposable diapers, in certain foreign markets there are local manufacturers
which represent a significant portion of the market.
In Japan and Western Europe, the disposable baby diapers sold by local producers
are generally of a quality comparable to the premium products sold in the United
States. However, in most other countries, local 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, should cause aggregate
disposable diaper sales outside the United States to grow substantially faster
than domestic sales.
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BUSINESS STRATEGY
The Company's business strategy is to maintain high growth in sales while
maximizing its EBITDA and profitability by focusing on the following key
strategic elements:
Continue product innovation to differentiate the Drypers brand
Drypers has successfully differentiated its diaper and training pant products
from the other national brands through the selective development of cost-
effective innovative product features. For example, Drypers began to promote its
diapers as the only perfume-free national brand in 1994. In 1996, Drypers
introduced the first odor-control diaper, Drypers with Natural Baking Soda, and
in 1997, the Company launched Drypers with Aloe Vera as well as entered into a
licensing agreement to use the Sesame Street trademark and characters on the
Company's products, packaging and advertising materials. In addition to
positioning Drypers as a national brand with these premium quality product
features and innovations, the Company believes that the launch of these new
products was in large part responsible for its increased penetration of the U.S.
grocery store market from an estimated 54% in December 1995 to 66% as of
December 1997.
Increase brand awareness and retail penetration through a targeted advertising
and promotional campaign
The Company continually seeks to expand its sales and distribution network in
the United States, Puerto Rico and certain international markets. The Company
believes that marketing its premium quality products with features comparable to
the leading premium-priced national brands will increase consumer awareness of
its products in the U.S. market and ultimately its penetration of the grocery
and mass-merchant channels. In this regard, during February 1998, the Company
commenced its first national television advertising campaign through a cost-
effective, targeted series of commercials aimed at increasing brand awareness
and penetration of U.S. retail channels. As a result, the Company believes that
it is well positioned to increase its extensive penetration of the grocery store
market, as well as its limited penetration of the mass-merchant and drugstore
chain markets, which currently account for approximately 48.8% of the total U.S.
diaper market.
Offer "Every Day Value" branded products to consumers
The Company's premium quality, value-priced diapers and training pants are
designed to offer consumers the recognition and reliability of a national brand
name together with product quality and features comparable to the premium-priced
national brands at generally lower prices. Drypers believes that this
combination of brand name, premium product quality and "Every Day Value" prices
offers consumers an attractive alternative to the premium-priced brands.
Provide higher margin products for retailers
The manufacturers of the leading national brands typically sell their premium-
priced products to retailers at prices above those of other diaper
manufacturers. Retailers generally price the premium-priced diaper brands with
relatively little margin to attract customers into their stores. Drypers sells
its products to retailers at a generally lower price than the leading premium-
priced national brands, which allows retailers to offer a lower price to
customers while achieving substantially higher margins, increasing their
category profitability. The Company believes that it is able to maintain
attractive profit margins for retailers while offering consumers a better
price/value relationship as compared with the premium-priced national brands as
a result of the Company's emphasis on (i) selective development of innovative
product features which distinguish its products from the premium-priced brands,
(ii) manufacturing high quality products at substantially the same costs as the
leading national brand manufacturers, (iii) significantly lower advertising,
promotion and research and development expenses and (iv) maintaining a
substantially lower corporate overhead structure.
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Continue to pursue international expansion opportunities
Management believes there continue to be substantial growth opportunities for
producers of disposable baby diapers and training pants in the developing
markets in Latin America, the Pacific Rim and Eastern Europe. This opportunity
reflects the current low levels of consumer penetration for those products (from
less than 5% to 35% in those markets compared to approximately 95% in the United
States, Western Europe and Japan) and the rapid increase in the standard of
living in those regions in recent years. The Company intends to continue to
expand its operations in Argentina, Mexico and Brazil and is actively seeking
further expansion opportunities through acquisition, joint venture and other
arrangements in Latin America and elsewhere. The Company believes that increased
geographic diversity should help to reduce its sensitivity to competitive
pressures in any one specific market in the future.
Expand product lines to include additional consumer products
The Company seeks to produce and market additional high quality consumer
products, which would be sold primarily through grocery stores, drug stores and
mass merchants and which it believes offer opportunities for growth by occupying
specialty niches in large and fragmented consumer product categories. By
expanding into additional product lines, the Company believes it could improve
its ability to provide logistical support to retailers, which it believes will
become increasingly important to retailers, while improving its leverage on
overhead costs. In October 1997, the Company acquired an option to purchase
NewLund Laboratories, Inc. which had developed and test marketed an innovative
new product under the brand name XClaim aimed at the $4 billion U.S. laundry
detergent category.
MARKET POSITION
U.S. Grocery Store Market
The grocery store segment represented approximately 51.2% of the U.S. diaper
market, or $2.0 billion of retail sales, in 1997. The Company estimates that its
products are currently distributed through approximately 635 retailers with an
estimated 20,000 retail outlets in the United States whose sales represented 66%
of the total U.S. grocery store market for disposable diapers and training pants
in December 1997, as compared to 54% in December 1995, 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 6.4% of the total
dollar volume and 6.6% of the total unit volume for disposable diapers and
training pants in the total grocery store category during 1997. However, the
Company estimates that its brands have market shares as high as 20% in its more
established domestic grocery store markets.
U.S. Mass-Merchant and Drugstore Chains
The mass-merchant and drugstore chain segments, in aggregate, represented
approximately 48.8% of the U.S. diaper market, or $1.9 billion of retail sales
in 1997. 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 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, Meijer and Caldor. Drypers believes
that its national branded focus will generate increased distribution
opportunities with mass-merchants and drugstore chains.
U.S. 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-priced positioning of its premium branded products.
The Company believes private label opportunities are enhanced by the Company's
low cost structure and ability to provide
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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.
International Operations
Industry sources estimate the international disposable diaper market to
represent approximately $12 billion in annual manufacturers' sales, with current
low levels of consumer penetration of those products (from less than 5% to 35%
in Latin America, the Pacific Rim and Eastern Europe compared to approximately
95% in the United States, Western Europe and Japan). The Company's foreign
produced and exported products are sold in over 28 countries and accounted for
approximately 35.1% of the Company's net sales during 1997. The Company has
focused its international efforts primarily in Latin America because of the
relatively low but growing level of disposable diaper market penetration, the
rapid increase in the standard of living, the relatively higher birth rate and
the resulting high level of market potential. In these markets, the Company
predominantly competes in the lower-priced branded and private label categories.
The Company, with operations in Argentina and Mexico, has established
manufacturing capabilities outside of the United States. This capability was
strengthened with the February 1997 acquisition of the Brazilian Puppet brand
name and the resulting formation of a joint venture to market this brand in
Brazil. In addition, the Company is the exclusive private label diaper supplier
to all Wal-Mart stores in Latin America (which are currently located in
Argentina, Brazil and Mexico) and in Puerto Rico, and also supplies Drypers
branded products to Wal-Mart stores in these markets. In Argentina, despite a
lagging economy in 1996, the Company believes that it had an approximate 15%
market share of the disposable diaper category in 1997. Furthermore, the Company
believes that the acquired Puppet brand name has an approximate 12% market share
in Brazil, largely through distribution to major grocery store chains and mass-
merchants. The Company intends to continue to expand its operations in
Argentina, Mexico and Brazil and is actively seeking further expansion
opportunities through acquisition, joint venture or other arrangements in the
Pacific Rim and Latin America.
PRODUCTS
Disposable Baby Diapers
There are significant quality differences among the various disposable diapers
available to consumers. 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 three types of disposable baby diapers in
the United States: premium brand name diapers, lower-priced 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. The Company's premium quality brand
diapers incorporate many of the product features that are offered by the leading
national premium brands. The Company believes that the lower retail price and
the combination of product features distinguish its premium quality value-priced
brand name diapers in the market. These product features 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, beginning in 1997, a breathable, cloth-like outer cover. In
addition, Drypers are differentiated by features not offered by some or all of
the other national brands, such as "perfume free", baking soda for odor control
and, beginning in 1997, aloe vera to soothe skin.
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Lower-priced Brand Name Baby Diapers. The Company's lower-priced products, sold
under the brand name Comfees, incorporate some of the product features currently
offered by the Company's premium brand. 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 lower-priced 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 currently sells its lower-priced
diapers in only limited U.S. markets.
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 lower-priced
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 lower-priced branded products, the Company sells
diapers outside of the United States with product specifications designed for
particular foreign markets which address specific competitive and affordability
factors in those markets.
Disposable Training Pants
The Company has developed a line of premium disposable training pants, marketed
under the Drypers brand name for children of toilet-training age. The Company
also produces and sells private label training pants which are manufactured to
the specifications of and are sold under labels of various concerns. 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
pant market has grown to $529 million in 1997 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 training pants in 1995:
improved contouring in the core for better absorbency, Lycra Tummy Snugs 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 pant category
on a unit volume basis during 1996. More recently, the Company added baking soda
and aloe vera to its training pants, similar to its baby diapers. The Company's
Drypers training pants are now the second leading brand of disposable training
pants sold through grocery stores in the United States.
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Pre-moistened Baby Wipes
The Company manufactures and markets pre-moistened baby wipes in the United
States. The Company estimates the pre-moistened baby wipes retail market in the
United States was approximately $550 million in 1997.
New Detergent Product
In October 1997, the Company acquired an option, exercisable in 1998, to
purchase all of the outstanding stock of NewLund Laboratories, Inc., the
developer and marketer of a new concept in laundry detergents. If the Company
exercises this option, it will acquire NewLund for a total of $4.2 million. The
new product allows a single, small sheet of nonwoven fabric coated with
detergent, whitener, fabric softener and static guard to be used in both the
washer and the dryer. This product, which is currently in limited distribution
under the brand name XClaim in the southeastern United States, was cited in
Advertising Age in December 1997 as one of America's top 10 "hottest new
products". The Company believes that the specialty nature of this product gives
it an opportunity to develop a profitable niche within the $4 billion consumer
laundry detergent business. The Company has redesigned the packaging for the
product and has an agreement to purchase the product from a third party who is
responsible for manufacturing XClaim and for further research and development
and capital expenditures related thereto. The Company plans to expand the
distribution of XClaim in 1998 and believes that this product will further
leverage the existing Drypers' sales and marketing organization.
PRODUCT DESIGN AND DEVELOPMENT
Drypers seeks to enhance its products by adding cost effective product features
and substituting materials and components to improve 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 the
introduction of innovative features for its core branded products 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.
In the first quarter of 1995, the Company converted its diaper products to an
"ultra-thin" absorbent core, changed its diaper and training pants products'
packaging to be consistent throughout the United States and completed the
transition of its diaper and training pant products to the brand name Drypers.
In the second quarter of 1996, Drypers launched the industry's first odor
control diaper, Drypers with Natural Baking Soda. In June 1997, the Company
introduced diapers and training pants that include aloe vera and launched a
licensing arrangement to use the Sesame Street trademark and characters on the
Company's products and packaging and in advertising and promotional materials.
SALES AND DISTRIBUTION
In the United States, the Company uses in-house managers to coordinate brokerage
companies which facilitate the distribution of the Company's products through
grocery stores on a non-exclusive basis. The Company believes that this approach
has expedited the Company's entry into grocery chains and independent grocers
because of the strong long-term relationships that many of these brokers have
with these retailers. 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.
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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 Puerto Rico, it uses a direct sales
force and, in Argentina, Mexico and Brazil, it uses a combination of a direct
sales force and wholesalers that distribute to small independent retailers.
ADVERTISING AND PROMOTION
In the United States, diapers are highly promoted since many retailers rely on
their diaper products to attract customers to their stores. In addition, Procter
& Gamble and Kimberly-Clark spend a significant amount on mass media advertising
to create demand for their products. In contrast, Drypers has relied more
heavily on promotional spending and cooperative merchandising arrangements with
retailers. Promotional activity, such as couponing, is geared toward initiating
consumer trial and has been especially effective at targeting spending when less
than full distribution has yet to be achieved. As the Company's distribution
continues to expand, a greater emphasis may be placed on advertising to build
greater brand awareness for the Drypers name.
The high level of branded promotion and advertising in the diaper category is
reflected in generally higher wholesale prices and manufacturers' gross margins
when compared to private label manufacturers, offset by correspondingly higher
levels of selling, general and administrative expenses.
In February 1998, the Company launched a national television advertising
campaign for its Drypers brand diapers as part of the Company's strategy of
building the Drypers national brand. The Company believes that building brand
recognition through advertising should allow the Company to gradually reduce its
dependence on direct promotional spending and should increase the distribution
of Drypers brand diapers and, in turn, increase sales in the second half of
1998.
Advertising and promotional activity varies greatly in international markets,
but is generally lower than the level of activity in the United States. As a
consequence, the Company's international business, similar to its domestic
private label business, generally experiences lower gross margins and selling,
general and administrative expenses than its U.S. branded business.
MANUFACTURING PROCESS
Disposable diapers are manufactured on high speed lines beginning 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.
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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, baking
soda and aloe vera. 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.
TRADEMARKS AND PATENTS
The Company has registered or has applications pending to register numerous
trademarks in the United States, including Drypers. 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 U.S. and foreign patent protection for the
product enhancements that they develop, and there are numerous U.S. 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.
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 and 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. In addition, the
Company has obtained insurance for the collection of certain of its
international accounts receivable and patent infringement related issues. There
can be no assurance, however, that future claims will not exceed coverage.
EMPLOYEES
As of January 31, 1998, the Company employed approximately 1,100 people on a
full-time basis. None of the Company's employees are represented by a labor
union except in Mexico where such representation is required by local law. The
Company's Mexican employees are members of a syndicate and are employed under a
one-year contract entered into with the syndicate. The Company believes its
relationship with its employees is good.
-10-
<PAGE>
ITEM 2. PROPERTIES
The Company leases manufacturing, distribution and administrative space in nine
locations in the United States, Brazil, Puerto Rico, Argentina and Mexico, as
follows:
<TABLE>
<CAPTION>
SQUARE LEASE EXPIRATION
------ ----------------
LOCATION FEET DATE USE
-------- ---- ---- ---
<S> <C> <C> <C>
Vancouver, Washington 80,000 September 30, 2003 Manufacturing and Administrative
Vancouver, Washington 22,000 April 1, 2000 Warehouse
Vancouver, Washington 30,000 Month to Month Warehouse
Marion, Ohio 440,000 October 31, 2007 Manufacturing and Administrative
Houston, Texas 32,000 May 1, 2004 Administrative
Mogi das Cruzes, Brazil 23,000 May 1, 1998 Warehouse and Administrative
Toa Alta, Puerto Rico 51,000 November 30, 2003 Manufacturing and Administrative
Buenos Aires, Argentina 116,000 September 30, 2002 Manufacturing and Administrative
Guadalajara, Mexico 48,000 June 30, 1998 Manufacturing and Administrative
</TABLE>
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 1998, and the Company is
currently in the process of constructing a new facility. In pursuing
international expansion opportunities, the Company has started limited
distribution in Colombia, Singapore and Malaysia. The Company has leased
temporary administrative and warehouse space on a month-to-month basis in these
locations. 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 1997.
-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 381 stockholders of record of
the common stock as of February 28, 1998.
1996 1997
------------ ------------
High Low High Low
---- --- ---- ---
Quarter-
First $4.13 $2.75 $4.75 $3.63
Second 4.00 2.75 7.75 3.88
Third 4.25 2.63 7.94 6.13
Fourth 5.63 3.50 9.00 5.13
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 10 1/4% Senior Notes ("10 1/4% 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
-----------------------------------------------------------------------------
Statement of Earnings Data 1993 1994 1995 1996 1997
------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Net sales $ 156,079 $ 173,552 $ 163,947 $ 207,014 $ 287,010
Operating income (loss) 12,177(a) 18,200(b) (11,259)(d) 10,553 21,492
Income (loss) before income
tax provision (benefit) and 1,062 10,949 (19,294) 1,622 11,788
extraordinary item
Income (loss) before (308) 6,798 (15,465) 1,313 9,444
extraordinary item
Net income (loss)
attributable to common (308) 3,110(c) (15,465) 752 1,092(e)
stockholders
Income (loss) per common
share(f):
Income (loss) before
extraordinary item:
Basic $ ( .10) $ 1.18 $ ( 2.35) $ .11 $ 1.00
============ =========== =========== =========== ==========
Diluted $ ( .10) $ 1.08 $ ( 2.35) $ .09 $ .51
============ =========== =========== =========== ==========
Extraordinary item:
Basic -- $ (.64) -- -- $ (.88)
============ =========== =========== =========== ==========
Diluted -- $ (.59) -- -- $ (.42)
============ =========== =========== =========== ==========
Net income (loss):
Basic $ ( .10) $ .54 $ ( 2.35) $ .11 $ .12
============ =========== =========== =========== ==========
Diluted $ ( .10) $ .49 $ ( 2.35) $ .09 $ .09
============ =========== =========== =========== ==========
Common shares outstanding 2,989,380 5,776,554 6,587,698 6,694,298 8,878,638
============ =========== =========== =========== ==========
Common and potential common
shares outstanding 2,989,380 6,302,384 6,587,698 15,064,913(g) 18,469,676(g)
============ =========== =========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------
Balance Sheet Data 1993 1994 1995 1996 1997
------------------ --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $ 8,587 $ 17,962 $ (3,597) $ 8,707 $ 48,728
Total assets 115,905 131,731 137,420 150,555 205,232
Long-term debt, including 75,510 46,632 47,350 49,592 118,348
current portion
Stockholders' equity(h) 13,997 56,767 41,822 53,608 55,580
</TABLE>
____________________________________________
(a) 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.
(b) Includes legal expenses of $1,141,000 incurred in connection with a patent
infringement lawsuit which was settled during the second quarter of 1994.
(c) 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.
(d) 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.
(e) Includes a noncash extraordinary expense of $3,745,000 for the write-off of
capitalized debt issuance costs and a cash extraordinary expense of
$4,024,000 for prepayment and other fees in connection with the application
of the net proceeds of the offering of the $115,000,000 10 1/4% Senior Notes
in June 1997.
(f) The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share", in the fourth quarter of 1997. Accordingly,
income (loss) per share data for all prior periods presented has been
restated.
(g) Common and potential common shares outstanding for 1996 and 1997 include the
weighted average effect of shares of common stock issuable upon the
conversion of the outstanding shares of convertible preferred stock issued
in February 1996.
(h) 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
The following discussion and analysis, together with the accompanying
consolidated financial statements and related notes, are intended to aid in
understanding the Company's results of operations as well as its financial
position, cash flows, indebtedness and other key financial information. Unless
otherwise indicated, references herein to "Drypers" or "the Company" refer to
Drypers Corporation and its subsidiaries.
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 Operations 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 and financial condition are leverage and debt service, competitive
industry, price changes by competitors, dependence on key products and
acceptance of product innovations, cost of certain raw materials, international
operations, currency fluctuations, currency devaluations, currency restrictions,
intellectual property risks, technological changes, covenant limitations and
other factors discussed herein.
OVERVIEW
Drypers is a leading manufacturer and marketer of premium quality, value-priced
disposable baby diapers and training pants sold under the Drypers brand name in
the United States and under the Drypers and other brand names internationally.
The Company also manufactures and sells lower-priced diapers under other brand
names in the United States and internationally, as well as private label diapers
and training pants and pre-moistened baby wipes. During 1995, the Company
successfully integrated its four regional brands under the Drypers brand name
which it believes has increased the awareness of the Company's products with
retailers and consumers while generating operating efficiencies. The Company
currently sells its products principally to approximately 635 U.S. grocery
retailers with an estimated 20,000 retail outlets. The Company continually seeks
to expand its U.S. grocery store distribution network while increasing its
limited penetration of the mass-merchant and drugstore chain markets. In 1997,
sales of branded products represented 88.9% of the Company's net sales in the
United States and sales of private label and other products represented 11.1% of
net sales in the United States.
The Company's annual net sales increased to $287.0 million in the year ended
December 31, 1997 from $156.1 million in the year ended December 31, 1993. This
sales growth has been achieved by (i) the expansion of international sales
through exports, contract manufacturing and acquisitions of diaper manufacturing
operations, particularly in Latin America, (ii) the increased share in existing
retail accounts and expanded penetration into new accounts in part due to the
introduction of several new product features such as Drypers with Natural Baking
Soda, and (iii) the increase in sales of training pants. The Company seeks to
expand both its domestic and international sales and operations.
In June 1997, the Company introduced Drypers with Aloe Vera, the first diapers
and training pants to contain aloe vera, an herbal extract recognized for its
ability to help soothe skin. The improved diaper also featured a breathable,
cloth-like outer cover typically only found on premium-priced branded diapers.
In addition, the Company entered into an exclusive licensing arrangement with
The Children's Television Workshop under which the Company's products,
packaging,
-14-
<PAGE>
advertising and promotional materials feature Big Bird, Elmo and other familiar
characters from the children's television show Sesame Street.
The Company's domestic operations include sales in the United States, Puerto
Rico and exports from these manufacturing operations. The following table sets
forth the Company's domestic and international net sales for each of the last
three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1995 1996 1997
---------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
Domestic $154.5 94.3% $179.2 86.6% $191.3 66.7%
International 9.4 5.7 27.8 13.4 95.7 33.3
------ ----- ------ ----- ------ -----
Total Net $163.9 100.0% $207.0 100.0% $287.0 100.0%
====== ===== ====== ===== ====== =====
Sales
</TABLE>
Among the factors that have a direct bearing on the Company's results of
operations are price and product changes and promotional activity by
competitors, increases in costs of raw materials, timing of technological
advances by the Company and its competitors, acceptance by consumers of product
features and innovations, foreign governmental monetary and policy changes and
other factors discussed herein.
Gross profit margins vary significantly across the Company's product lines, as
do the levels of promotional and marketing support. Accordingly, gross profit
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 do not necessarily cause significant fluctuations in operating margins.
Unusual Industry Conditions in 1995
A confluence of unusual events adversely impacted the Company's financial
performance in 1995. In December 1994, the Mexican peso was devalued and,
because Drypers did not have a plant in Mexico at that time and was instead
exporting to Mexico from its Houston, Texas plant, an estimated $10 million in
annual sales were lost almost immediately. The effect of the economic crisis in
Mexico later adversely impacted the Argentine economy as well, reducing the
Company's ability to maintain sales volumes and margins in its then recently
acquired operations in Buenos Aires.
Beginning in the first quarter of 1995, Procter & Gamble and Kimberly-Clark
increased their rates of promotional spending on their premium-priced brands
more aggressively than the Company. In addition, Procter & Gamble repositioned
Luvs, its national value-priced brand, after having already reduced prices
substantially within the previous 18 months, with a reduction in the number of
diapers per package and a reduction in price per package. The Company responded
with a repositioning of its own, lowering the number of diapers per package and
the price per package and, as a result, recognized $2.4 million in unusual
expenses in the first quarter of 1995.
Throughout 1995, the industry experienced substantial price increases in pulp, a
major component of the total cost to produce diapers and training pants.
Beginning in late 1994, pulp prices rose dramatically with quoted market prices
rising from $575 per ton in June 1994 to $650 per ton in March 1995, $850 per
ton in June 1995 and $975 per ton in September 1995. Due to the competitive
environment, the 1995 increases in pulp prices were not passed on to consumers,
thus reducing gross profit margins. These increases in pulp prices had a
material adverse effect on the Company in 1995. A decline in the quoted market
price of pulp began in November 1995 with the quoted market price of pulp
ranging between $550 and $650 per ton since March 1996.
These external events happened at a particularly vulnerable point in the
Company's own development. As a final step to complete the Company's planned
transition to one national brand throughout the United States, the Company
converted, during the first quarter of 1995, its four regional brands (Drypers,
Comfees, Baby's Choice and Wee-Fits) into one common package design and brand
name, Drypers. This conversion meant that the Company's brand awareness was
unusually low in roughly three-quarters of the United States until consumers
became accustomed to the new brand and
-15-
<PAGE>
package. In response to rising pulp prices, the Company accelerated the
conversion of its premium diaper products to include a thinner absorbent core
that is less reliant on pulp. The initial version of this "ultra-thin" product
met with slow initial consumer acceptance.
The matters discussed above had a material adverse impact on the Company's
financial position and results of operations. In addition, the Company's
liquidity was adversely affected, which required it to, among other things,
obtain various amendments and waivers from the lenders under its existing
revolving credit facility and defer payment of the interest due on November 1,
1995 under its $45.0 million of outstanding 12 1/2% Senior Notes, which default
was cured by the payment of overdue interest on February 29, 1996 as part of the
refinancing described in Note 1 to the Notes to Consolidated Financial
Statements.
Improved Recent Performance
In response to these events, management implemented a plan to improve sales and
margins, increase operating efficiency and substantially reduce costs throughout
the Company's operations. The major components of the cost reduction program
included the closure of the Company's Houston manufacturing facility, reduction
of manufacturing and general overhead costs and a redesigned premium diaper,
which reduced overall product cost. Between January 1995 and January 1996, the
Company's redesign of its premium diaper to an "ultra-thin" configuration
reduced pulp content (as measured by weight) by 30%. In response to initial slow
consumer acceptance, this product was subsequently modified resulting in
increased consumer acceptance. The full benefit of the cost reduction plan was
not reflected in operating income until the third quarter of 1996, as the
Company invested heavily in promotional spending to rebuild market share during
the first half of 1996. In the second half of 1996, promotional spending
returned to normal levels. To offset its loss of export sales to Mexico, the
Company re-entered the Mexican diaper market in the second quarter of 1996
through contract manufacturing arrangements with a local producer. The Company
acquired the manufacturing operations of this producer in December 1996. In
addition, the Company introduced Drypers with Natural Baking Soda in May 1996.
As a result of the combined effect of these initiatives, the Company experienced
a significant recovery of sales volume and a return to profitability.
In 1996, the Company experienced improved financial performance, in part due to
the successful introduction of Drypers with Natural Baking Soda in May of that
year and a full year of consolidated operations in Argentina. Net sales
increased by 26.3% to $207.0 million in 1996 from $163.9 million in 1995. As a
result of the new product launch, the improved competitive pricing environment,
the effects of its cost reduction program and lower pulp prices, the Company
increased its national market share and returned to profitability, generating
EBITDA of $17.4 million in 1996 as compared with a loss of $5.0 million in 1995.
The Company continued its improved financial performance in 1997 as its net
sales and EBITDA increased to $287.0 million and $28.8 million, respectively,
for the year ended December 31, 1997 from $207.0 million and $17.4 million,
respectively, for the year ended December 31, 1996. In each of the eight
consecutive quarters ended December 31, 1997, the Company's EBITDA exceeded its
EBITDA for the same quarter of the prior year.
-16-
<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, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1996 1997
--------- -------- ---------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold...................... 69.6 60.9 61.2
--------- -------- ---------
Gross profit 30.4 39.1 38.8
Selling, general and administrative 32.8 34.0 31.3
expenses...............................
Unusual expenses 1.9 -- --
Restructuring charge.................... 2.6 -- --
--------- -------- ---------
Operating income (loss)................. (6.9) 5.1 7.5
Interest expense, net................... 4.9 4.3 3.5
Other income............................ -- -- 0.1
--------- -------- ---------
Income (loss) before income tax
provision (benefit) and (11.8) 0.8 4.1
extraordinary item...................
Income tax provision (benefit).......... (2.4) 0.2 0.8
Extraordinary item...................... -- -- (2.7)
--------- -------- ---------
Net income (loss)....................... (9.4)% 0.6% 0.6%
========= ======== =========
</TABLE>
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
Net Sales
Net sales increased 38.6% to $287.0 million for the year ended December 31, 1997
from $207.0 million for the year ended December 31, 1996. Domestic sales
increased 6.7% to $191.3 million for the year ended December 31, 1997 from
$179.2 million for 1996. This increase was primarily the result of the June 1997
introduction of Drypers with Aloe Vera and the launch of the licensing
arrangement for the Sesame Street characters, as well as the introduction of the
baking soda product in May 1996, and the continued growth in training pant and
private label sales. The Company believes that the introduction of the new
product innovations contributed to an increased share in existing retail
accounts and expanded penetration into new accounts in the United States. The
increase in U.S. sales between periods was mitigated by a decline during the
third quarter of 1997 in net sales in Puerto Rico due to price competition from
Procter & Gamble and a decline in export sales resulting from pricing pressures
in Asia due to recent currency declines. Net sales in the international sector
grew to $95.7 million for the year ended December 31, 1997 from $27.8 million in
the prior comparable period. This substantial increase reflected primarily the
improved sales volume for the Company's operations in Argentina, the growth of
business in Mexico and the Company's majority-owned consolidated venture in
Brazil, which began operations in March 1997.
Cost of Goods Sold
Cost of goods sold increased slightly as a percentage of net sales to 61.2% for
the year ended December 31, 1997 compared to 60.9% for the year ended December
31, 1996. This increase reflected growth in international sales which have
generally lower gross profit margins (and correspondingly lower selling and
promotional costs) partially offset by lower raw material costs and the benefits
of higher volumes over the Company's fixed cost base.
-17-
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased as a percentage of net
sales to 31.3% for the year ended December 31, 1997 compared to 34.0% for the
year ended December 31, 1996. The decrease reflected the Company's efforts and
focus on reducing domestic per pad selling costs, including but not limited to
reducing the face value and volume of coupons, in-store promotions and slotting
fees and improved management and monitoring of, and controls over, promotional
allowances. Increases in international sales which have lower selling and
promotional costs also contributed to this decrease.
Operating Income
As a result of the above factors, the Company's operating income increased $10.9
million, or 103.7%, to $21.5 million for the year ended December 31, 1997 from
$10.6 million for the year ended December 31, 1996. Operating income as a
percentage of net sales was 7.5% for the year ended December 31, 1997 versus
5.1% in the prior year.
Interest Expense, net
Interest expense, net increased to $10.0 million for the year ended December 31,
1997 as compared to $8.9 million for the year ended December 31, 1996. The
increase was due to the issuance of $115.0 million of 10 1/4% Senior Notes due
2007 in June 1997 and amortization of additional deferred loan costs related to
this transaction.
Income Taxes
The Company recorded a provision of $2.3 million related to state and foreign
taxes for the year ended December 31, 1997, compared to a provision of $309,000
in 1996. The increase is related to the increase in international earnings
during 1997.
Extraordinary Item
In connection with the Company's financing transactions completed during the
second quarter of 1997, the Company recognized an extraordinary item of $7.8
million for the write-off of capitalized debt issuance costs and prepayment and
other fees.
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. Domestic sales
increased 16.0% to $179.2 million in 1996 from $154.5 million in 1995, primarily
as a result of increased promotional spending at the beginning of the year, the
introduction of the new baking soda product in May 1996, and continued growth in
training pant sales. Net sales in the international sector grew significantly to
$27.8 million in 1996 from $9.4 million in 1995. Most of this increase came from
the inclusion of the results of the Company's operations in Argentina for a full
year in 1996 as compared to five months during 1995, with the balance generated
by the establishment of a contract manufacturing relationship in Mexico.
Cost of Goods Sold
Cost of goods sold decreased as a percentage of net sales to 60.9% for 1996
compared to 69.6% for the prior year. A major component of the cost of goods
sold is the cost of pulp, which accounted for approximately 10% and 7% of cost
of goods sold in 1995 and 1996, respectively. Of the 8.7 percentage point
improvement, approximately 3.0 percentage points resulted from a reduction in
the average cost of pulp content in the Company's products in 1996 with the
balance
-18-
<PAGE>
resulting from efficiency improvements. The quoted market price of pulp began
1996 at $925 per ton and fluctuated between $550 per ton and $650 per ton for
most of the year as compared to 1995 when the quoted market price began the year
at $650 per ton but fluctuated between $850 per ton and $975 per ton for most of
the year. The major components of improved efficiency included closure of the
Houston manufacturing facility and increased sales and production volumes. This
reduction in cost of goods sold as a percentage of net sales came despite an
increase in international sales which have generally lower gross profit margins.
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 1995. The total increase reflected 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 and by the increases in
international sales which have inherently lower selling and promotional costs.
Selling, general and administrative expenses as a percentage of net sales
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. The reduction in per pad selling costs was made possible
by the increased demand for the Company's new baking soda diaper.
Operating Income
As a result of the above factors, the Company's operating income in 1996
increased to $10.6 million from an operating loss of $11.3 million in 1995, a
period affected by $7.4 million in nonrecurring charges associated with the
Company's restructuring. Operating income as a percentage of net sales was 5.1%
in 1996.
Interest Expense, net
Interest expense, net was $8.9 million for the year ended December 31, 1996, as
compared to $8.0 million for the year ended December 31, 1995. The increase
reflects increased borrowings under the revolving credit facility and
amortization of additional deferred loan costs related to the refinancing.
Income Taxes
The Company recorded a provision related to state and foreign taxes of $309,000
for the year ended December 31, 1996. A portion of the Company's available U.S.
net operating loss carryforwards offset the need for any federal tax provision
related to domestic operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements include, but are not limited to, the
payment of principal and interest on its debt; the funding of working capital
needs, primarily inventory, accounts receivable and advertising and promotional
expenses; and the funding of capital investments in machinery, equipment and
computer systems. Historically, the Company has financed its debt service,
working capital and capital expenditure requirements through a combination of
internally generated cash flow, borrowings under the Company's revolving credit
facility and other sources and proceeds from private and public offerings of
debt and equity securities.
The Company's operations used $4.3 million of cash during the year ended
December 31, 1996 and $6.9 million of cash during the year ended December 31,
1997. In 1996, the Company returned its working capital to more normal levels
from previous years by reducing accounts payable and accrued liabilities. The
use of cash during the year ended December 31, 1997 reflected the cash portion
of the extraordinary item and increases in working capital primarily for the
growth in the Mexico and Brazil operations, the latter including advances to the
Company's contract manufacturer for future inventory purchases.
-19-
<PAGE>
The Company generated cash flows of $6.3 million from operations in 1995. In
1995, as the Company experienced the difficulties described above under
"Overview--Unusual Industry Conditions in 1995", which resulted in a net loss of
$15.5 million, it was able to maintain positive cash flow primarily by reducing
the levels of receivables and inventories it maintained by $6.9 million, and by
allowing its accounts payable and accrued liabilities to rise by an aggregate of
$8.0 million.
The Company's capital expenditures were $21.6 million for the year ended
December 31, 1997 and $5.9 million for the year ended December 31, 1996. The
significant increase between periods in capital expenditures reflected machine
enhancements incurred in connection with the launch of Drypers with Aloe Vera
and production capacity increases. The Company financed its capital expenditures
in 1997 through borrowings under the revolving credit facility and from the
proceeds of the $115.0 million offering of the 10 1/4% Senior Notes in June
1997. The Company financed its capital expenditures in 1996 from the proceeds of
an offering of preferred stock and through borrowings under the revolving credit
facility. The Company's capital expenditures were $8.9 million in 1995. The
Company financed the expenditures in 1995 through a combination of borrowings
under a revolving credit facility and from the proceeds of the Company's initial
public offering in 1994.
The Company will incur one-time cost increases estimated at $8 million in the
first quarter of 1998 and $2 million in the second quarter of 1998. The majority
of these costs will represent the cost of the Company's new advertising campaign
(in connection with which there will be no near-term corresponding reduction of
promotional expenses), while the remainder will relate to the costs associated
with the new detergent business and the expansion of capacity in several Latin
American markets.
The Company's estimated cash requirements during 1998, excluding the
aforementioned cost increases, are primarily the funding of working capital
needs, payment of debt service and planned capital expenditures of approximately
$20.0 million. The planned capital expenditures in 1998 are primarily related to
the expansion of international capacity and modifications to existing domestic
equipment to enable the Company to make future product enhancements. Of the
Company's $21.6 million of capital expenditures in 1997, approximately $6.8
million was incurred in late 1997 related to international facility and
equipment expansion, predominantly in Argentina and Mexico, which will increase
capacity in 1998.
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 takes careful steps to design, produce and sell its
baby diapers to avoid infringing any valid patents of its competitors. There
can be no assurance that the Company will not be held to be infringing on
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. This area will become of increasing importance as the Company
continues to introduce new products and product innovations; thus, the Company
may incur expenses related to additional license agreements and/or additional
patent infringement insurance coverage.
The Company's working capital was $48.7 million as of December 31, 1997 compared
to $8.7 million as of December 31, 1996. The Company's current assets increased
from $40.6 million as of December 31, 1995 to $51.6 million as of December 31,
1996 and to $77.0 million as of December 31, 1997, and current liabilities,
including short-term debt, decreased from $44.2 million in 1995 to $42.9 million
in 1996 and to $28.3 million as of December 31, 1997. Total debt increased from
$59.4 million as of December 31, 1995 to $65.2 million as of December 31, 1996
and to $118.3 million at December 31, 1997.
On June 24, 1997, the Company closed its private issuance of $115.0 million
aggregate principal amount of the 10 1/4% Senior Notes. Proceeds from the
offering of the 10 1/4% Senior Notes were used to repurchase $43.4 million of
the $45.0 million in principal amount of the Company's outstanding 12 1/2%
Senior Notes pursuant to a tender offer therefor, to repay a $10.0 million
working capital facility, to repay borrowings outstanding under the revolving
credit facility, to repay the Company's term loan with a bank, to repay the
Company's junior subordinated debt and other indebtedness and
-20-
<PAGE>
for general corporate purposes. In connection with these transactions, the
Company recognized an extraordinary expense of $7.8 million for the write-off of
capitalized debt issuance costs and prepayment and other fees, of which $3.7
million was non-cash. On December 10, 1997, the Company redeemed the remaining
$1.6 million of 12 1/2% Senior Notes pursuant to an optional redemption
provision.
The revolving credit facility provides for up to $21.0 million of borrowings,
with availability determined as a function of advance rates based on eligible
accounts receivable, finished goods inventory and raw material inventory.
Borrowings under the revolving credit facility bear interest at a rate of prime
plus 1 3/4% per annum and mature in February 1999. As of March 13, 1998, the
Company's borrowing base of accounts receivable and inventories would have
permitted it to borrow up to $6.0 million. No borrowings were outstanding under
the revolving credit facility as of December 31, 1997.
The Company has received a proposal from BankBoston, N.A. for a three-year $50.0
million new credit facility to replace the revolving credit facility. The new
credit facility is expected to permit the Company to borrow under a borrowing
base formula equal to the sum of 75% of the aggregate net book value of its
accounts receivable and 50% of the aggregate net book value of its inventory on
a consolidated basis, subject to additional limitations on incurring debt. The
new credit facility is expected to bear interest in the range of prime to prime
plus 3/4%, or LIBOR plus 1 1/2% to LIBOR plus 2 1/2%, in each case based on the
Company's debt to EBITDA ratio determined on a quarterly basis. The new credit
facility would be secured by substantially all of the Company's assets. At
December 31, 1997, the Company's borrowing base would have permitted the Company
to borrow up to $36.0 million if the new credit facility had been in place.
There can be no assurance that the Company will be able to successfully conclude
its negotiations for the new credit facility.
On March 17, 1998, the Company closed its private issuance of an additional
$30.0 million of 10 1/4% Senior Notes (the "New Senior Notes") at a price of
103.625% of the principal amount thereof. The New Senior Notes were issued
under the same indenture as the $115.0 million issuance of 10 1/4% Senior Notes.
Proceeds of the issuance of the New Senior Notes will be used to repay all
outstanding indebtedness under the revolving credit facility and for general
corporate purposes, including capital expenditures.
In February 1997, the Company began a series of transactions in which it
established a 51% owned subsidiary in Brazil to market its products, acquired
the rights to the Puppet brand name and entered into a supply arrangement with a
Brazilian manufacturer. The Company initially paid 1.0 million shares of common
stock and canceled an outstanding $2.2 million receivable from such manufacturer
as consideration for the transactions. The sellers of the Puppet brand name
exercised an option to receive $4.0 million in cash in lieu of the 1.0 million
shares, and such cash was paid to the sellers in May 1997. During the second
quarter of 1997, the Company also exercised a portion of its fair value option
to purchase 44% of the remaining 49% interest in its Brazilian subsidiary for
$5.3 million in cash. The Company has a fair market value option to acquire the
Brazilian manufacturer of the diapers.
In October 1997, the Company acquired an option for $1.5 million, exercisable in
1998, to purchase all of the outstanding stock of NewLund Laboratories, Inc.,
the developer and marketer of a new concept in laundry detergents. The exercise
price for the option to acquire NewLund is $2.7 million.
Management believes that future cash flow from operations, together with cash on
hand, available borrowings under the revolving credit facility (or the new
credit facility, if entered into) and the net proceeds of the New Senior Notes
described above will be adequate to meet the Company's anticipated cash
requirements, including working capital, capital expenditures, debt service and
limited acquisitions, for the foreseeable future.
INFLATION
Inflationary conditions in the United States have been moderate and, except for
pulp prices in 1995, have not had a material impact on the Company's results of
operations or financial position. 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.
-21-
<PAGE>
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". This statement establishes standards for
reporting of comprehensive income and its components in financial statements.
Comprehensive income is the total of net income and all other nonowner changes
in equity. The Company is required to adopt SFAS No. 130 in the first quarter of
fiscal 1998. Reclassification of comparative financial statements provided for
earlier periods will be required. The Company believes that the display of
comprehensive income will not differ materially from the currently reported net
income (loss) attributable to common stockholders.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information". This
statement requires disclosure related to each segment of an enterprise's
operations similar to those required under current standards with the addition
of quarterly disclosure requirements and a finer partitioning of geographic
disclosures. The Company is required to adopt SFAS No. 131 for the fiscal year
ending December 31, 1998.
YEAR 2000
The operation of the Company's business is dependent in part on its computer
software programs and operating systems (collectively, "Programs and Systems").
These Programs and Systems are used in several key areas of the Company's
business, including materials purchasing, inventory management, pricing, sales,
shipping and financial reporting, as well as in various administrative
functions. The Company has been evaluating its Programs and Systems to identify
potential Year 2000 compliance problems. The Year 2000 compliance issues exist
because many computer systems and applications currently use two digit date
fields to designate a year. Therefore, date sensitive systems may recognize the
Year 2000 as the Year 1900 or not at all. This inability to recognize or
properly treat the Year 2000 may cause the Programs and Systems to process
critical financial and operational information incorrectly. It is anticipated
that replacement of most of the Company's Programs and Systems will be
necessary to make such Programs and Systems Year 2000 compliant. The Company is
also communicating with suppliers, financial institutions and others to
coordinate Year 2000 conversions.
Based on present information, the Company believes that it will be able to
achieve such Year 2000 compliance through a replacement of existing Programs
and Systems with new Programs and Systems that are already Year 2000 compliant.
However, no assurance can be given that these efforts will be successful. The
Company expects that the expenses and capital expenditures associated with the
replacement of the Company's Programs and Systems will be approximately $3
million over the next two years.
-22-
<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, 1996
and 1997, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 18, 1998
-23-
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31
--------------------
1996 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,923 $ 9,269
Accounts receivable, net of allowance for doubtful accounts 30,631 33,941
of $1,160 and $2,064, respectively
Inventories 11,616 21,090
Prepaid expenses and other 4,410 12,730
--------- ---------
Total current assets 51,580 77,030
PROPERTY AND EQUIPMENT, net of depreciation and amortization 35,154 53,270
INTANGIBLE AND OTHER ASSETS, net of amortization of $10,185 and
$13,438, respectively 63,821 74,932
--------- ---------
$ 150,555 $ 205,232
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 15,622 $ --
Current portion of long-term debt 945 1,593
Accounts payable 16,958 16,558
Accrued liabilities 9,348 10,151
--------- ---------
Total current liabilities 42,873 28,302
LONG-TERM DEBT 2,125 1,755
SENIOR TERM NOTES 44,122 115,000
SUBORDINATED DEBT TO RELATED PARTIES 2,400 --
DEFERRED RENT PAYABLE AND OTHER 5,427 4,595
--------- ---------
96,947 149,652
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, 90,000 and 61,110 shares issued and 1 1
outstanding, respectively
Common stock, $.001 par value, 20,000,000 shares
authorized, 7,179,230 and 10,513,223 shares issued and 7 10
outstanding, respectively
Additional paid-in capital 68,823 69,998
Warrants 1,395 1,097
Retained deficit (16,618) (15,526)
--------- ---------
Total stockholders' equity 53,608 55,580
--------- ---------
$ 150,555 $ 205,232
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-24-
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
NET SALES $ 163,947 $ 207,014 $ 287,010
COST OF GOODS SOLD 114,075 126,128 175,545
---------- ----------- -----------
Gross profit 49,872 80,886 111,465
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 53,691 70,333 89,973
UNUSUAL EXPENSES 3,185 - -
RESTRUCTURING CHARGE 4,255 - -
---------- ----------- -----------
Operating income (loss) (11,259) 10,553 21,492
RELATED-PARTY INTEREST EXPENSE 406 354 199
OTHER INTEREST EXPENSE, net 7,629 8,577 9,758
OTHER INCOME - - 253
---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT)
AND EXTRAORDINARY ITEM (19,294) 1,622 11,788
INCOME TAX PROVISION (BENEFIT) (3,829) 309 2,344
---------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (15,465) 1,313 9,444
EXTRAORDINARY ITEM:
Costs of early extinguishment of debt - - (7,769)
---------- ----------- -----------
NET INCOME (LOSS) (15,465) 1,313 1,675
PREFERRED STOCK DIVIDEND - 561 583
---------- ----------- -----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (15,465) $ 752 $ 1,092
========== =========== ===========
INCOME (LOSS) PER COMMON SHARE:
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM:
Basic ($ 2.35) $ .11 $ 1.00
========== =========== ===========
Diluted ($ 2.35) $ .09 $ .51
========== =========== ===========
EXTRAORDINARY ITEM:
Basic -- -- $ (.88)
========== =========== ===========
Diluted -- -- $ (.42)
========== =========== ===========
NET INCOME (LOSS):
Basic ($ 2.35) $ .11 $ .12
========== =========== ===========
Diluted ($ 2.35) $ .09 $ .09
========== =========== ===========
COMMON SHARES OUTSTANDING 6,587,698 6,694,298 8,878,638
========== =========== ===========
COMMON AND POTENTIAL COMMON SHARES OUTSTANDING 6,587,698 15,064,913 18,469,676
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-25-
<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, 1994 - 6,553,541 $ - $ 7 $ 57,757 $ 908 $ (1,905)
Conversion of junior
subordinated debendure - 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 ($7.50
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)
Issuance of common stock - 71,657 - - 200 - -
Conversion of preferred stock
and dividends into common
stock (28,890) 2,937,417 - 3 312 - -
Preferred stock dividends ($7.50
per share) - - - - - - (583)
Effect of stock option and stock
purchase plans - 111,348 - - 283 - -
Issuance of warrants - - - - - 50 -
Exercise of warrants - 213,571 - - 380 (348) -
Net income - - - - - - 1,675
----------- ----------- --------- ------ ---------- -------- --------
BALANCE, December 31, 1997 61,110 10,513,223 $ 1 $ 10 $ 69,998 $ 1,097 $(15,526)
=========== =========== ========= ====== ========== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-26-
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
1995 1996 1997
-------- ---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $(15,465) $ 1,313 $ 1,675
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities-
Depreciation and amortization 7,068 7,624 8,220
Restructuring charge 4,255 - -
Non-cash portion of extraordinary item - - 3,745
Deferred income taxes (4,187) - -
Other (379) 401 63
Changes in operating assets and liabilities, net
of acquisitions-
(Increase) decrease in-
Accounts receivable 1,476 (5,724) (3,310)
Inventories 5,398 (67) (9,474)
Prepaid expenses and other 110 (973) (8,320)
Increase (decrease) in-
Accounts payable 5,038 (2,974) (400)
Accrued liabilities 2,941 (3,891) 853
-------- ---------- ---------
Net cash provided by (used in) operating activities 6,255 (4,291) (6,948)
-------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (8,896) (5,931) (21,598)
Proceeds from sale of equipment - 800 -
Investment in other noncurrent assets (773) (1,197) (2,754)
Payments under noncompete agreements (250) (400) (231)
Refund of deposits - 2,573 1,136
Investment in Mexico acquisition - - (595)
Investment in Brazilian venture - - (9,827)
-------- ---------- ---------
Net cash used in investing activities (9,919) (4,155) (33,869)
-------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under senior term notes - - 115,000
Payments on senior term notes - - (45,000)
Borrowings under working capital facility - - 10,000
Payments on working capital facility - - (10,000)
Borrowings under revolvers 47,553 157,677 79,296
Payments on revolvers (44,922) (153,968) (94,918)
Borrowings under (payments on) other debt 1,750 (625) (5,022)
Financing related costs - (773) (4,708)
Proceeds from issuance of common stock - - 200
Proceeds from issuance of preferred stock - 8,822 -
Proceeds from exercise of stock options and warrants 20 - 315
-------- ---------- ---------
Net cash provided by financing activities 4,401 11,133 45,163
-------- ---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 737 2,687 4,346
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,499 2,236 4,923
-------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,236 $ 4,923 $ 9,269
======== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-27-
<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,
Brazil 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 3) and the private issuance of convertible preferred stock (see Note 5).
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% Series B Senior Notes and
transaction costs.
On June 24, 1997, the Company closed a private issuance of $115,000,000
aggregate principal amount of 10 1/4% Senior Notes due 2007 (the "10 1/4% Senior
Notes"). Proceeds from the offering of the 10 1/4% Senior Notes were used to
repurchase $43,434,000 of the $45,000,000 in principal of the Company's
outstanding 12 1/2% Series B Senior Notes due November 1, 2002 pursuant to a
tender offer therefor, to repay the Company's working capital facility, to repay
borrowings outstanding under the Company's revolving credit facility, to repay
the Company's term loan with a bank and to repay the Company's junior
subordinated debt and other indebtedness and for general corporate purposes. In
connection with these transactions, the Company recognized an extraordinary
expense of $7,769,000 for the write-off of capitalized debt issuance costs and
prepayment and other fees, of which $3,745,000 was non-cash. Subsequent to
December 31, 1997, the Company issued an additional $30,000,000 of 10 1/4%
Senior Notes, the proceeds of which will be used to repay all outstanding
amounts under the revolving credit facility and for general corporate purposes,
including capital expenditures (See Note 10).
Management believes that future cash flow from operations, together with cash on
hand, available borrowings under the revolving credit facility and the net
proceeds of the additional $30.0 million of 10 1/4% Senior Notes described above
will be adequate to meet the Company's anticipated cash requirements, including
working capital, capital expenditures, debt service and limited acquisitions,
for the foreseeable future.
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
-28-
<PAGE>
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 materials, 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, 1996 and 1997, consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Raw materials $ 4,659 $ 6,948
Finished goods 6,957 14,142
------- -------
$11,616 $21,090
======= =======
</TABLE>
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.
-29-
<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.
<TABLE>
<CAPTION>
Useful Lives
---------------------
<S> <C>
Machinery and equipment 10 - 12 years
Buildings 20 years
Office equipment and furniture 5 years
Automobiles 5 years
Leasehold improvements Lesser of term of lease
or life of asset
</TABLE>
Property and equipment at December 31, 1996 and 1997, consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Machinery and equipment $ 44,349 $ 57,159
Land and buildings -- 7,181
Office equipment and furniture 2,573 3,638
Automobiles 222 189
Leasehold improvements 2,167 2,872
-------- ---------
49,311 71,039
Accumulated depreciation and amortization (14,157) (17,769)
-------- ---------
$ 35,154 $ 53,270
======== =========
</TABLE>
The Company has entered into a six year operating lease with a lease financing
company for a diaper production line, which was delivered in the fourth quarter
of 1997. Deposits of $1,136,000 related to this production line are included as
a component of machinery and equipment as of December 31, 1996. The Company was
reimbursed for these deposits during the later portion of 1997. In connection
with production line lease agreements, the Company issued letters of credit
totaling approximately $2,500,000. Subsequent to December 31, 1997, the lease
financing company for one of the diaper production lines released the related
letter of credit in the amount of $1,250,000. These operating lease commitments
are included in the future minimum rental commitments presented in Note 7.
-30-
<PAGE>
Intangible and Other Assets
As of December 31, 1996 and 1997, intangible and other assets, net of
accumulated amortization, consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Goodwill $55,261 $66,907
Deferred financing costs 3,153 4,502
License agreement 1,310 1,002
Noncompete agreements 147 --
Receivable from Chansommes do Brasil Ind. E 2,167 --
Com. Ltda. (See Note 2)
Other 1,783 2,521
------- -------
$63,821 $74,932
======= =======
</TABLE>
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 agreement is amortized over the five-year life of the
agreement using the straight-line method.
Accrued Liabilities
Accrued liabilities at December 31, 1996 and 1997, consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Selling and promotional $2,684 $ 3,546
Interest payable 1,428 681
License agreement payable 400 400
Property and sales tax payable 1,254 1,958
Other 3,582 3,566
------- -------
$ 9,348 $10,151
======= =======
</TABLE>
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 3.
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.
-31-
<PAGE>
Advertising
Advertising production costs are expensed the first time the advertisement is
run. Media (TV and print) placement costs are expensed in the month the
advertising appears.
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.
Earnings Per Share
As of December 31, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". SFAS 128 requires dual
presentation of basic and diluted EPS data and restatement of all prior periods
presented. Basic earnings per share ("EPS") is computed using the weighted
average number of common shares outstanding during the period. Diluted EPS
gives effect to the potential dilution of earnings which may have occurred if
dilutive potential common shares had been issued. The following reconciles the
income and shares used in the basic and diluted EPS computations (in thousands,
except share data):
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Basic Earnings Per Share:
- ------------------------
Income (loss) before extraordinary
item, less preferred stock dividend $ (15,465) $ 752 $ 8,861
Extraordinary item -- -- (7,769)
---------- ----------- -----------
Net income (loss) attributable to $ (15,465) $ 752 $ 1,092
common stockholders ========== =========== ===========
Weighted average number common shares
outstanding 6,587,698 6,694,298 8,878,638
========== =========== ===========
Income (loss) before extraordinary item $ (2.35) $ .11 $ 1.00
Extraordinary item -- -- (.88)
---------- ----------- -----------
Net income (loss) $ (2.35) $ .11 $ .12
========== =========== ===========
Diluted Earnings Per Share:
- --------------------------
Income (loss) before extraordinary item $ (15,465) $ 1,313 $ 9,444
Extraordinary item -- -- (7,769)
---------- ----------- -----------
Net income (loss) $ (15,465) $ 1,313 $ 1,675
========== =========== ===========
Weighted average number common shares 6,587,698 6,694,298 8,878,638
outstanding
Dilutive effect - options and warrants -- 870,615 1,839,648
Dilutive effect - preferred stock -- 7,500,000 7,751,390
---------- ----------- -----------
6,587,698 15,064,913 18,469,676
========== =========== ===========
Income (loss) before extraordinary item $ (2.35) $ .09 $ .51
Extraordinary item -- -- (.42)
---------- ----------- -----------
Net income (loss) $ (2.35) $ .09 $ .09
========== =========== ===========
</TABLE>
-32-
<PAGE>
For the years ended December 31, 1995, 1996 and 1997, options and warrants
excluded from the diluted earnings per share calculation because their effect
was antidilutive to the calculation totaled 24,995, 85,978 and 168,185,
respectively.
Income Taxes
The Company accounts for income taxes in accordance with 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, 1995, 1996 and 1997, were
$325,000, -- and $2,022,000, respectively.
Interest paid on debt for the years ended December 31, 1995, 1996 and 1997, was
$4,213,000, $10,646,000 and $11,221,000, 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. As of January 1, 1998, Brazil will no longer be treated as highly
inflationary.
Reclassifications
Certain reclassifications have been made in the accompanying consolidated
financial statements for the years ended December 31, 1995 and 1996, to conform
with the presentation used in the December 31, 1997, consolidated financial
statements.
-33-
<PAGE>
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". This statement establishes standards for
reporting of comprehensive income and its components in financial statements.
Comprehensive income is the total of net income and all other nonowner changes
in equity. The Company is required to adopt SFAS No. 130 in the first quarter of
fiscal 1998. Reclassification of comparative financial statements provided for
earlier periods will be required. The Company believes that the display of
comprehensive income will not differ materially from the currently reported net
income (loss) attributable to common stockholders.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information". This
statement requires disclosure related to each segment of an enterprise's
operations similar to those required under current standards with the addition
of quarterly disclosure requirements and a finer partitioning of geographic
disclosures. The Company is required to adopt SFAS No. 131 for the fiscal year
ending December 31, 1998.
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.
Unaudited pro forma net sales, net loss, and net loss per common share for the
year ended December 31, 1995, would have been approximately $172,736,000,
$(16,910,000) and $(2.57), respectively, assuming the acquisition of Seler
occurred on January 1, 1995, 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, 1995, 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), $595,000 in cash and
$1,175,000 in the form of a note payable due in 1998. 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 $1,725,000 and this
excess was recorded as goodwill.
-34-
<PAGE>
Brazil
In February 1997, 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 production of Chansommes.
Consideration paid in connection with the transactions included $4,000,000 of
common stock of the Company (1,000,000 shares), and cancellation of an
outstanding receivable from Chansommes of $2,167,000. Under the terms of the
agreement, the 1,000,000 shares of common stock were held in escrow by the
Company through May 5, 1997 at which time the owners of such shares elected to
receive $4,000,000 in cash in lieu of the shares. In connection with the
transactions, the Company also obtained a fair market value option to purchase
the remaining 49% interest in the venture in Brazil. During the second quarter
of 1997, the Company exercised a portion of such option and obtained 44% of the
remaining 49% interest for $5,300,000 in cash. Total cash consideration paid in
connection with the transactions, including transaction costs, was approximately
$9,827,000. Additionally, the Company has a fair market value option to acquire
Chansommes.
New Detergent Product
In October 1997, the Company acquired an option for $1,500,000, exercisable in
1998, to purchase all of the outstanding stock of NewLund Laboratories, Inc.,
the developer and marketer of a new concept in laundry detergents. If the
Company exercises this option, it will acquire NewLund for a total of $4.2
million. In connection with this transaction, the Company issued $200,000 of the
Company's common stock (71,657 shares). The new product, which is in limited
distribution under the brand name XClaim, allows a single, small sheet of
nonwoven fabric coated with detergent, whitener, fabric softener and static
guard to be used in both the washer and the dryer.
3. DEBT:
Short-Term Borrowings
As of December 31, 1996, the Company had borrowings outstanding of $15,622,000
under revolving credit facilities, at a weighted average interest rate of 10.0%.
As of December 31, 1997, there were no borrowings outstanding under revolving
credit facilities.
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 an offering of
convertible preferred stock in February 1996 (See Note 5) were used to repay the
previously existing credit facility, the previously deferred interest on the
12 1/2% Series B 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 $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 $50,500,000 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, 1997.
Short-term borrowings for the international operations were not material as of
December 31, 1996 and 1997.
-35-
<PAGE>
Long-Term Debt
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1997
---------- ---------
<S> <C> <C>
Term loan with a bank, interest at prime plus 2%,
secured by a diaper production line................ $1,125 $ --
Note payable, due 2001, interest at 8.4%, partially
secured by land and buildings...................... -- 1,950
Various other notes payable......................... 1,945 1,398
---------- ---------
3,070 3,348
Less: current maturities (945) (1,593)
---------- ---------
$2,125 $ 1,755
========== =========
</TABLE>
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. The term loan was paid in full with the
proceeds of the 10 1/4% Senior Notes discussed below.
On April 24, 1997, the Company entered into a note purchase agreement with a
financial institution, whereby the Company obtained $10,000,000 in working
capital financing. This financing was provided through the issuance of two
$5,000,000 promissory notes (the "Working Capital Facility"), bearing interest
at 12% per annum payable semiannually and each due on May 1, 1999. The Working
Capital Facility was unsecured and could be prepaid by the Company, subject to a
3% premium if prepaid on or before January 2, 1998. In connection with the
issuance of the Working Capital Facility, the Company issued a warrant to
purchase 100,000 shares of the Company's common stock to the financial
institution. The Working Capital Facility was paid in full with the proceeds of
the 10 1/4% Senior Notes discussed below. The prepayment premium was included
in the extraordinary item related to the early extinguishment of debt discussed
below.
-36-
<PAGE>
Senior Term Notes
Long-term debt under senior term notes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1997
--------- ---------
<S> <C> <C>
10 1/4% Senior Notes, interest due semiannually on
June 15 and December 15, principal due June 15, 2007.................. $ -- $ 115,000
12 1/2% Series B Senior Notes, interest due semiannually on May 1 and
November 1, principal due November 1, 2002, net of unamortized debt
discount of $878 and $--, respectively.............................. 44,122 --
--------- ---------
$ $44,122 $ 115,000
========= =========
</TABLE>
In October 1996, the indenture governing the Company's 12 1/2% Series B 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.
On June 24, 1997, the Company closed a private issuance of $115,000,000
aggregate principal amount of its 10 1/4% Senior Notes. Proceeds from the
offering of the 10 1/4% Senior Notes were used to repurchase $45,000,000 in
principal amount of the Company's outstanding 12 1/2% Series B Senior Notes due
November 1, 2002 pursuant to a tender offer therefor, to repay the Working
Capital Facility, to repay borrowings outstanding under the Company's revolving
credit facility, to repay the Company's term loan with a bank and to repay the
Company's junior subordinated debt and other indebtedness and for general
corporate purposes. In connection with these transactions, the Company
recognized an extraordinary expense of $7,769,000 for the write-off of
capitalized debt issuance costs and prepayment and other fees, of which
$3,745,000 was non-cash.
The Company completed an exchange offer on October 14, 1997, pursuant to which
all of the 10 1/4% Senior Notes were tendered for a like principal amount of new
notes with identical terms which may be offered and sold by the holders without
restrictions or limitations under the Securities Act of 1933, as amended.
The indenture governing the 10 1/4% Senior Notes contains 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. The indenture also contains provisions for acceleration of payment of
principal upon a change of control, as defined.
The fair value of the Company's 10 1/4% Series B 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
$113,445,000 as of December 31, 1997.
Long-Term Subordinated Debt
Long-term subordinated debt to stockholders or warrant holders consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1997
--------- ----------
<S> <C> <C>
Junior subordinated notes, bearing interest at 12% $ 2,400 $ --
========= ==========
</TABLE>
The junior subordinated notes were paid in full with the proceeds of the 10 1/4%
Senior Notes discussed above.
-37-
<PAGE>
The carrying amount of all debt outstanding as of December 31, 1997, other than
the 10 1/4% Series B Senior Notes, approximates fair value, based on the
Company's current incremental interest rate for similar types of financial
instruments.
4. INCOME TAXES:
Income (loss) before income tax provision (benefit) and extraordinary item and
income tax provision (benefit) for the years ended December 31, 1995, 1996 and
1997 are composed of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
-------- ------- -------
<S> <C> <C> <C>
Income (loss) before income tax provision
(benefit) and extraordinary item-
United States $(19,393) $ 1,287 $ 3,481
Non-United States 99 335 8,307
-------- ------- -------
$(19,294) $ 1,622 $11,788
======== ======= =======
Income tax provision (benefit)-
Current-
United States $ 358 $ 198 $ 55
Non-United States - 111 2,289
-------- ------- -------
$ 358 $ 309 $ 2,344
======== ======= =======
Deferred-
United States (4,187) $ - $ -
Non-United States - - -
-------- ------- -------
(4,187) - -
======== ======= =======
$ (3,829) $ 309 $ 2,344
======== ======= =======
</TABLE>
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, 1996 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1997
-------- -------
<S> <C> <C>
Deferred tax assets-
Accruals and reserves $ 1,469 $ 1,319
Net operating loss and credit carryforwards 5,550 7,272
Tax deferral of book write-down of machinery and 1,194 1,194
equipment
Other 994 253
-------- -------
9,207 10,038
Less- Valuation allowance (1,898) (3,089)
-------- -------
7,309 6,949
-------- -------
Deferred tax liabilities-
Excess of tax over book depreciation (6,101) (5,632)
Other (1,208) (1,317)
-------- -------
(7,309) (6,949)
-------- -------
Net deferred tax asset (liability) $ - $ -
======== =======
</TABLE>
-38-
<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:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
United States statutory rate (34)% 34% 34%
Non-United States income, taxed at less than
United States statutory rate - (9) (18)
Increase (decrease) in valuation allowance 12 (61) 25
Nondeductible expenses, primarily goodwill 3 39 17
State income taxes (1) 16 -
---- ---- ----
(20)% 19% 58%
==== ===== ====
</TABLE>
As of December 31, 1997, the Company had net operating loss carryforwards of
approximately $18,900,000 which are available to offset future taxable income.
The loss carryforwards will expire in the years 2008 through 2012 if not
utilized. The Company also has alternative minimum tax credits of approximately
$457,000 which are available indefinitely.
5. 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. 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.
During 1997, 28,890 shares of the Company's 7.5% Preferred Stock together with
accrued dividends were converted into 2,937,417 shares of common stock. On
March 2, 1998, the remaining holders of the Company's 7.5% Preferred Stock
elected to exchange their preferred stock and related accrued dividends for
6,279,768 of the Company's common stock.
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
-39-
<PAGE>
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 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, 1995, 1996 and
1997, were 370,006, 151,624 and 767,916, respectively.
Stock option transactions under the plans during 1995, 1996 and 1997 were as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- --------------------- -------------------
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 1 460,656 $ 8.13 486,656 $7.71 1,890,010 $2.97
Granted 41,000 3.79 1,864,876 3.01 15,000 6.00
Canceled (15,000) 9.88 (456,876) 8.21 - -
Exercised - - (4,646) .04 (85,265) 2.41
-------- ------ --------- ----- --------- ------
Options outstanding at December 31 486,656 $ 7.71 1,890,010 $2.97 1,819,745 $3.03
======== ====== ========= ===== ========= ======
Options exercisable at December 31 305,906 $ 4.52 1,758,259 $2.96 1,719,744 $2.99
======== ====== ========= ===== ========= ======
Options exercise price range at December 31 $.04-$8.38 $.04-$3.50 $0.04-$6.00
Incentive stock option plans-
Options outstanding at January 1 281,375 $10.14 399,000 $7.55 690,125 $3.01
Granted 165,600 3.88 736,000 3.01 396,500 5.42
Canceled (42,975) 10.80 (444,875) 7.12 (19,417) 3.91
Exercised (5,000) 4.00 - - (26,083) 3.00
-------- ------ --------- ----- --------- ------
Options outstanding at December 31 399,000 $ 7.55 690,125 $3.01 1,041,125 $3.91
======== ====== ========= ===== ========= ======
Options exercisable at December 31 37,060 $ 9.11 149,349 $3.00 358,050 $3.02
======== ====== ========= ===== ========= ======
Options exercise price range at December 31 $3.88-$12.50 $3.00-$3.50 $3.00-$6.50
Non-Employee Director stock option plan -
Options outstanding at January 1 - - - - 55,000 $4.21
Granted - - 55,000 $4.21 30,000 6.25
Canceled - - - - - -
Exercised - - - - - -
-------- ------ --------- ----- --------- ------
Options outstanding at December 31 - - 55,000 $4.21 85,000 $4.84
======== ====== ========= ===== ========= ======
Options exercisable at December 31 - - 4,000 $5.88 22,336 $4.51
======== ====== ========= ===== ========= ======
Options exercise price at December 31 $3.75-$5.88 $3.75-$6.25
</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 and the non-employee director stock options
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 the following pro forma
amounts (in thousands, except share data):
-40-
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
---------- --------- --------
<S> <C> <C> <C> <C>
Net income (loss) As reported $(15,465) $ 1,313 $1,675
Pro forma $(15,580) $(1,243) $ 670
Basic earnings (loss) per share As reported $ (2.35) $ .11 $ .12
Pro forma $ (2.36) $ (.27) $ .01
Diluted earnings (loss) per share As reported $ (2.35) $ (.09) $ .09
Pro forma $ (2.36) $ (.27) $ .04
</TABLE>
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 total
compensation cost recognized in reported income for the years ended December 31,
1995, 1996 and 1997, was $--, $679,000 and $42,000, respectively.
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 weighted average
fair value of options granted in 1997 was $4.00 per share. 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, 1996 and 1997, respectively: risk-free interest rates
of 6.34%, 6.03% and 6.61%; expected lives of five years; expected volatility of
36.05%, 36.05% and 88.49%; and no expected dividend yield in all years.
<TABLE>
<CAPTION>
Weighted Weighted
Weighted Average Average
Average Number Price of Number of Price of
Contractual of Options Outstanding Exercisable Exercisable
Exercise Price Ranges Life Outstanding Options Options Options
- ------------------------------ ----------- ----------- ----------- ----------- -----------
Nonqualified stock option
plans-
<S> <C> <C> <C> <C> <C>
$.04 3.6 years 7,994 $ .04 7,994 $ .04
$3.00 - $3.50 8.3 years 1,796,751 $3.01 1,711,750 $3.00
$6.00 9.4 years 15,000 $6.00 - -
Incentive stock option plans-
$3.00 - $4.50 8.4 years 649,625 $3.01 354,717 $3.00
$4.50 - $6.00 9.2 years 362,000 $5.32 3,333 $5.00
$6.00 - $6.50 9.9 years 30,500 $6.50 - -
Non-Employee Director stock
option plan-
$3.75 - $5.63 8.4 years 43,000 $3.75 14,336 $3.75
$5.63 - $6.25 8.4 years 42,000 $6.14 8,000 $5.88
</TABLE>
-41-
<PAGE>
Warrants
The Company has issued warrants under several separate agreements which expire
by 2002. As of December 31, 1997, a total of 676,890 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 and none are
callable by the Company. 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. 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
1997 Warrant Holders Per Share
---------------------- ------------------------------------------ ---------
<S> <C> <C>
256,842 Management $2.41
35,918 Senior noteholders .02
199,822 Nonmanagement common stockholders 2.41
84,308 Employees, vendors and other affiliates 2.41
100,000 Financial institution 4.50
-------
676,890
=======
</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.
The outside investment advisory firm exercised the 250,000 warrants in December,
1997. In 1997, the Company issued 100,000 warrants to a financial institution
for services rendered in connection with providing the Working Capital Facility.
6. EMPLOYEE BENEFIT PLANS:
401(k) Savings Plan
The Company has adopted a 401(k) savings plan which covers substantially all
employees. The Company contributed $171,000, $174,000 and $236,000 to the plan
during the years ended December 31, 1995, 1996 and 1997, 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. The Company recorded expense of $345,000 and $113,000 for the
years ended December 31, 1996 and 1997, respectively, in connection with the
profit sharing plan.
-42-
<PAGE>
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, 1997, 1,500,000 shares of the Company's common
stock, par value $.001 per share, have been registered for purchase under this
plan. During 1997, 19,592 shares were purchased on the open market for employees
at an average price of $5.79 per share.
7. COMMITMENTS AND CONTINGENCIES:
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.
There can be no assurance that the Company will not be held to be infringing on
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, one officer that extends through March
14, 1999, and another with a key employee which extends through December 31,
1999. As of December 31, 1997, the Company's remaining aggregate commitment
under the agreements is approximately $2,107,000.
-43-
<PAGE>
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 2007. Rental expense aggregated $1,771,000, $1,418,000 and
$3,216,000 for the years ended December 31, 1995, 1996 and 1997, 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):
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31-
1998 $ 4,137
1999 4,012
2000 3,772
2001 3,625
2002 3,603
Thereafter 5,145
-------
Total minimum lease payments required $24,294
=======
</TABLE>
The table above includes future minimum rental commitments for a diaper
production line under a lease entered into in December 1997.
8. SIGNIFICANT CUSTOMERS/GEOGRAPHIC DATA:
For each of the three years ended December 31, 1995, 1996 and 1997, the Company
had no individual customers whose purchases exceeded 10% of net sales. For each
of the three years ended December 31, 1995, 1996 and 1997, the percentage of the
Company's net sales which were to customers in foreign countries totaled 19.2%,
24.2% and 41.2%, respectively.
The following table presents geographic data for the years ended December 31,
1995, 1996 and 1997 (in thousands). The Company includes in domestic operations
all export sales originating from the United States and sales in Puerto Rico.
Substantially all of the Company's export sales originating from the United
States are secured by letters of credit.
<TABLE>
<CAPTION>
1995 1996 1997
--------- -------- --------
<S> <C> <C> <C>
United States
Net sales $154,546 $179,244 $191,331
Operating income (loss) (11,211) 9,854 14,605
Identifiable assets 118,970 117,821 133,512
Latin America
Net sales $ 9,401 $ 27,770 $ 95,679
Operating income (loss) (48) 699 6,887
Identifiable assets 18,450 32,734 71,720
</TABLE>
-44-
<PAGE>
9. QUARTERLY FINANCIAL DATA (UNAUDITED):
Unaudited summarized data by quarter for 1996 and 1997 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>
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
Basic earnings per share/(a)/ $ (.45) $ .03 $ .27 $ .26 $ .11
Diluted earnings per share/(a)/ $ (.45) $ .02 $ .12 $ .11 $ .09
1997-
Net sales $60,161 $72,551 $80,086 $74,212 $287,010
Gross profit 23,405 27,568 31,701 28,791 111,465
Income before extraordinary item 1,973 2,183 2,750 2,538 9,444
Net income (loss) 1,973 (5,586)/(b)/ 2,750 2,538 1,675
Basic earnings per share before
extraordinary item/(a)/ $ .23 $ .26/(c)/ $ .27 $ .24 $ 1.00/(c)/
Diluted earnings per share before
extraordinary item/(a)/ $ .11 $ .12/(c)/ $ .15 $ .14 $ .51/(c)/
- -----------------------
</TABLE>
/(a)/ The Company adopted SFAS No. 128, "Earnings Per Share", as of December 31,
1997. Accordingly, earnings per share data for all prior periods presented
has been restated.
/(b)/ Includes a noncash extraordinary expense of $3,745,000 for the write-off
of capitalized debt issuance costs and a cash extraordinary expense of
$4,024,000 for prepayment and other fees in connection with the early
extinguishment of debt.
/(c)/ Second quarter and year-to-date 1997 basic earnings per share were ($.73)
and $.12, respectively, after the extraordinary item related to the
extinguishment of debt. Diluted earnings per share for the same periods
were ($.30) and $.09, respectively.
10. SUBSEQUENT EVENTS:
Issuance of $30,000,000 of 10 1/4% Senior Notes due 2007
On March 17, 1998, the Company closed its private issuance of an additional
$30,000,000 of 10 1/4% Senior Notes (the "New Senior Notes") at a price of
103.625% of the principal amount thereof. The New Senior Notes will be issued
under the same indenture as the $115,000,000 issuance of 10 1/4% Senior Notes.
Proceeds of the issuance of the New Senior Notes will be used to repay all
outstanding indebtedness under the revolving credit facility and for general
corporate purposes, including capital expenditures.
Conversion of Preferred Shares
On March 2, 1998, the remaining holders of the Company's 7.5% Preferred Stock
elected to exchange their preferred stock and related accrued dividends for
6,279,768 of the Company's common stock.
-45-
<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, 1996 and 1997, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997, included in this Form 10-K
and have issued our report thereon dated March 18, 1998. 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 18, 1998
-46-
<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
-------------- ---------- ---------- ------------- -------- ---------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1995 $ 238 $ 490 $ (395) $607 $ 940
Year Ended December 31, 1996 $ 940 $1,240 $(1,020) -- $1,160
Year Ended December 31, 1997 $1,160 $1,532 $ (628) -- $2,064
</TABLE>
______________________
/(1)/ Write-offs of uncollectible accounts.
/(2)/ Consolidation of Seler, S.A.'s allowance for doubtful accounts as of July
31, 1995.
-47-
<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>
Form 10-K Item Number and Caption Caption in Definitive Proxy Statement
--------------------------------- -------------------------------------
<S> <C>
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>
-48-
<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 the 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 Form of Common Stock Certificate (Filed as Exhibit 4.2 to Form
S-1 filed January 26, 1994, Registration Statement No.
33-74436).
**4.2 - 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).
**4.3 - 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).
**4.4 - 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).
**4.5 - 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).
**4.6 - Forms of Warrants (Filed as Exhibit 4.37 to Form S-1 Filed
October 8, 1993, Registration Statement No. 33-70098).
**+4.7 - 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).
**+4.8 - 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).
-49-
<PAGE>
**+4.9 - 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).
**+4.10 - 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).
**+4.11 - 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).
**4.12 - 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).
**4.13 - Rights Agreement dated January 20, 1995 by and between Drypers
Corporation and ChaseMellon Shareholder Services, L.L.C. (Filed
as Exhibit 4.20 to Form 10-K filed March 31, 1997, Commission
File No. 0-23422).
**4.14 - Rights Agreement Amendment dated as of February 26, 1996, by
and between Drypers Corporation and ChaseMellon Shareholder
Services, L.L.C. (Filed as Exhibit 4.20 to Form 10-K filed
March 31, 1997, Commission File No. 0-23422).
**4.15 - Indenture dated as of June 15, 1997, between Drypers
Corporation and Bankers Trust Company, as Trustee (Filed as
Exhibit 4.1 to Form 10-Q filed August 12, 1997, Commission File
No. 0-23422).
*4.16 - First Supplemental Indenture dated as of March 6, 1998, between
Drypers Corporation and Bankers Trust Company, as Trustee.
**+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 - 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).
**10.4 - 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).
**10.5 - 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).
-50-
<PAGE>
**10.6 - 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, as amended by
the Fifth Lease Amendment dated September 1, 1992, as amended
by the Sixth Lease Amendment dated November 1, 1997 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).
**10.7 - 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).
**10.8 - 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).
**10.9 - Lease Contract dated July 1, 1994 between Houston-West Loop,
Limited and Drypers Corporation. (Filed as Exhibit 10.14 to
Form 10-K filed March 29, 1995, Commission File No. 0-23422)
**10.10 - 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).
**+10.11 - 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).
**10.12 - 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).
**10.13 - 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).
**10.14 - 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).
**10.15 - 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).
**10.16 - 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).
**10.17 - 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).
**+10.18 - Employment Agreement dated February 25, 1997, by and between
Drypers Corporation and Walter V. Klemp. (Filed as Exhibit
10-24 to Form 10-K filed March 31, 1997, Commission File No.
0-23422).
**+10.19 - Employment Agreement dated February 25, 1997, by and between
Drypers Corporation and Raymond M. Chambers. (Filed as Exhibit
10-25 to Form 10-K filed March 31, 1997, Commission File No.
0-23422).
**+10.20 - Employment Agreement dated February 25, 1997, by and between
Drypers Corporation and Terry A. Tognietti. (Filed as Exhibit
10-26 to Form 10-K filed March 31, 1997, Commission File No.
0-23422).
**+10.21 - Employment Agreement dated March 14, 1996, by and between
Drypers Corporation and Joe D. Tanner. (Filed as Exhibit 10-27
to Form 10-K filed March 31, 1997, Commission File No.
0-23422).
-51-
<PAGE>
**+10.22 - Employment Agreement dated July 19, 1996, by and between
Drypers Corporation and David M. Olsen. (Filed as Exhibit 10-28
to Form 10-K filed March 31, 1997, Commission File No.
0-23422).
**+10.23 - Drypers Corporation Amended and Restated 1995 Key Employee
Stock Option Plan. (Filed as Exhibit 10.28 to Amendment No. 1
to Form S-4 filed September 15, 1997, Registration Statement
No. 333-34071).
**+10.24 - Drypers Corporation 1996 Non-Employee Director Stock Option
Plan. (Filed as Exhibit 10.29 to Amendment No. 1 to Form S-4
filed September 15, 1997, Registration Statement No.
333-34071).
**+10.25 - First Amendment to Drypers Corporation Amended and Restated
1995 Key Employee Stock Option Plan. (Filed as Exhibit 10.30 to
Amendment No. 1 to Form S-4 filed September 15, 1997,
Registration Statement No. 333-34071).
*21.1 - Subsidiaries of Drypers Corporation.
*23.1 - Consent of Independent Public Accountants.
*27.1 - Financial Data Schedule
*27.2 - Restated Financial Data Schedule
*27.3 - Restated Financial Data Schedule
- ---------------
* 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
No reports on Form 8-K were filed during the three months ended December
31, 1997.
-52-
<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 18th day of March,
1998.
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 18th day of March, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Walter V. Klemp Co-Chief Executive Officer, Chairman of
------------------------------ the Board and Director
Walter V. Klemp (Principal Executive Officer)
/s/ Jonathan P. Foster Chief Financial Officer
------------------------------ (Principal Financial and Accounting Officer)
Jonathan P. Foster
/s/ Terry A. Tognietti Co-Chief Executive Officer, President - Drypers
------------------------------ North America and Director
Terry A. Tognietti
/s/ Raymond M. Chambers Co-Chief Executive Officer, President - Drypers
------------------------------ International and Director
Raymond M. Chambers
/s/ Nolan Lehmann Director
------------------------------
Nolan Lehmann
</TABLE>
-53-
<PAGE>
EXHIBIT 4.16
FIRST SUPPLEMENTAL INDENTURE
First Supplemental Indenture, dated as of March 6, 1998, by and between
Drypers Corporation, a corporation organized and existing under the laws of
the State of Delaware (the "Company"), having its principal offices at 5300
Memorial, Suite 900, Houston, Texas 77007, and Bankers Trust Company, as
trustee ("Trustee"), having its principal corporate trust office at Four
Albany Street, New York, New York 10006.
WITNESSETH:
Whereas, the Company has heretofore executed and delivered to the Trustee
that certain Indenture dated as of June 15, 1997, by and between the Company
and the Trustee pursuant to which the 10 1/4% Senior Notes due 2007 and the
10 1/4% Series B Senior Notes due 2007 (collectively, the "Notes"), in the
original aggregate principal amount of $115,000,000, were issued (the
"Indenture") (capitalized terms used herein shall have the respective meanings
ascribed thereto in the Indenture unless herein defined or the context shall
otherwise require);
Whereas, Section 902 of the Indenture provides that the Company and Trustee
may, from time to time, with the consent of the holders of a majority in
principal amount of the Outstanding Notes, enter into one or more supplemental
indentures to provide for, among other things, the amendments to the Indenture
set forth below;
Whereas, the Holders of at least a majority in principal amount of the
Outstanding Notes have consented to the amendments to the Indenture set forth
below;
Whereas, the Company has been duly authorized by its Board of Directors to
enter into, execute and deliver this First Supplemental Indenture;
Whereas, the Company has complied with all conditions contained in the
Indenture with respect to the amendments to the Indenture set forth below;
Now Therefore, in order to comply with the provisions of the Indenture and
for and in consideration of the premises and the covenants and agreements
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Trustee
agree as follows:
ARTICLE ONE
Amendments
The following sections of the Indenture are hereby amended as follows:
Section 1. Section 101 of the Indenture is amended by adding the following
definitions:
"Existing Notes" means the $115,000,000 aggregate principal amount of
10 1/4% Senior Notes of the Company issued on June 24, 1997, other than any
Exchange Notes.
"New Notes" means the 10 1/4% Senior Notes of the Company issued at any
time after the Issuance Date (other than any Exchange Notes and any Notes
issued in exchange for Existing Notes pursuant to Section 305 under this
Indenture).
<PAGE>
Section 2. Section 101 of the Indenture is amended by replacing in their
entirety the following definitions:
"Closing Date" means June 24, 1997.
"Initial Notes" means the Existing Notes and the New Notes.
"Initial Purchasers" means, as applicable, any initial purchasers of
Notes in any offering of Notes pursuant to one or more exemptions from
registration under the Securities Act.
"Registration Rights Agreement" means, as applicable, (i) the
Registration Rights Agreement, dated as of June 24, 1997, among the
Company, Prudential Securities Incorporated and Credit Suisse First Boston
Corporation, relating to the Existing Notes, and (ii) any similar agreement
that the Company may enter into in relation to a particular issuance of New
Notes.
Section 3. Section 2.01 of the Indenture is hereby amended to add a new
second paragraph thereof as follows:
Any New Notes shall be in substantially the form set forth in this
Article, except that (i) the date on which interest thereon begins to
accrue may be changed, (ii) the date of the Registration Rights Agreement
applicable to a particular issuance of New Notes may be inserted, (iii) the
provisions relating to an increase in the stated rate of interest thereon
may be changed and (iv) the first paragraph of the reverse side of such New
Notes may be changed to state that an unlimited principal amount of Notes
may be issued under the Indenture, all as determined by the officers
executing such New Notes, as evidenced by their execution of such New
Notes.
Section 4. The initial two paragraphs of Section 3.01 are hereby amended in
their entirety to read as follows:
The aggregate principal amount of Notes which may be authenticated and
delivered under this Indenture is unlimited. Subject to Article 10 of this
Indenture, the Company may, from time to time, issue New Notes. Except as
otherwise provided in Section 2.01, the New Notes will have terms and
conditions that are identical to the Existing Notes, and any New Notes will
be part of the same issue as, and will vote on all matters with, the
Existing Notes.
The Initial Notes shall be known and designated as the "10 1/4% Senior
Notes due 2007" and the Exchange Notes shall be known and designated as the
"10 1/4% Series B Senior Notes due 2007," in each case, of the Company. The
Stated Maturity of the Notes shall be June 15, 2007. The Existing Notes
(and any Exchange Notes issued in respect thereof) shall bear interest at
the rate of 10 1/4% per annum from June 24, 1997, or from the most recent
Interest Payment Date to which interest has been paid or duly provided for,
payable on December 15, 1997 and semiannually thereafter on June 15 and
December 15 in each year, until the principal thereof is paid in full and
to the Person in whose name the Existing Note (or any Predecessor Note) is
registered at the close of business on the relevant Regular Record Date
next preceding such Interest Payment Date. The New Notes (and any Exchange
Notes issued in respect thereof) shall bear interest at the rate of 10 1/4%
per annum from the respective dates of original issuance, or from the most
recent Interest Payment Date to which interest has been paid or duly
provided for, payable semiannually thereafter on June 15 and December 15 in
each year, until the principal thereof is paid in full and to the Person in
whose name the New Note (or any Predecessor Note) is registered at the
close of business on the relevant Regular Record Date next preceding such
Interest Payment Date. Interest shall be computed on the basis of a 360-day
year comprised of twelve 30-day months, until the principal thereof is paid
or duly provided for. Interest on any overdue principal, interest (to the
extent lawful) or premium, if any, shall be payable on demand.
Section 5. The second sentence of the third paragraph of Section 303 of the
Indenture is hereby amended in its entirety to read as follows:
On Company Order, the Trustee shall authenticate for original issue
Exchange Notes; provided that such Exchange Notes shall be issuable only
upon the valid surrender for cancellation of Initial Notes of a like
principal amount in accordance with an Exchange Offer pursuant to a
Registration Rights Agreement.
2
<PAGE>
Section 6. Section 1009(b)(iv) of the Indenture is hereby amended in its
entirety to read as follows:
(iv) Debt represented by the Existing Notes, the Subsidiary Guarantees
and any Exchange Notes.
Section 7. Section 1009(b)(vii) of the Indenture is amended in its entirety
to read as follows:
(vii) Debt of the Company or any Restricted Subsidiary under purchase
money mortgages or secured by purchase money security interests so long as
(x) such Debt is not secured by any property or assets of the Company or
any Restricted Subsidiary other than the property and assets so acquired
and (y) such Debt is created prior to, at the time of or within six months
after the later of the acquisition, the completion of construction or the
commencement of full operation of the related property; provided that the
aggregate amount of Debt under this clause (vii) does not exceed $2,000,000
at any one time outstanding.
Section 8. Clause (v) of the second paragraph of Section 1017 is amended in
its entirety to read as follows:
(v) Liens upon real or personal property or any other asset acquired or
constructed after the date of the supplemental indenture pursuant to which
this clause (v) was first amended; provided that (a) any such Lien is
created solely for the purpose of securing Capitalized Lease Obligations or
other Debt incurred in accordance with Section 1009, (1) to finance the
cost (including the cost of improvements) of property or assets so acquired
or constructed, and such Lien is created prior to, at the time of or within
six months after the later of the acquisition, the completion of
construction or the commencement of full operation of such property or
assets or (2) as Hedging Obligations relating solely to the Debt described
in clause (1) of this clause (v), (b) the principal amount of the Debt
secured by such Lien as of the time incurred does not exceed 100% of such
cost and (c) any such Lien does not extend to any property or assets of the
Company or any Restricted Subsidiary other than the property or assets so
acquired or constructed.
Section 9. The fourth paragraph of the reverse side of the Note and the
fourth paragraph of Section 205 of the Indenture are amended in their entirety
to read as follows:
In addition, at any time or from time to time prior to June 15, 2000, the
Company may at its option redeem Notes with the net proceeds of one or more
Equity Offerings at a redemption price equal to 110.25% of the principal
amount thereof, together with accrued interest, if any, to the Redemption
Date (subject to the rights of Holders of record on the relevant record
date to receive interest due on an interest payment date); provided that,
immediately after giving effect to any such redemption, an aggregate
principal amount of Notes at least equal to the sum of (i) $75,000,000 and
(ii) 65% of the aggregate principal amount of New Notes theretofore issued
hereunder remains Outstanding. Any such redemption must be made within 90
days of the related Equity Offering.
ARTICLE TWO
Miscellaneous
Section 1. Except as expressly supplemented by this First Supplemental
Indenture, the Indenture and the Notes issued thereunder are in all respects
ratified and confirmed and all of the rights, remedies, terms, conditions,
covenants and agreements of the Indenture and Notes issued thereunder shall
remain in full force and effect.
Section 2. This First Supplemental Indenture is executed as and shall
constitute an indenture supplemental to the Indenture and shall be construed
in connection with and as part of the Indenture. This First Supplemental
Indenture shall be governed by and construed in accordance with the laws of
the jurisdiction that governs the Indenture and its construction.
Section 3. This First Supplemental Indenture may be executed in any number
of counterparts, each of which shall be deemed to be an original for all
purposes; but such counterparts shall together be deemed to constitute but one
and the same instrument.
3
<PAGE>
Section 4. Any and all notices, requests, certificates and other instruments
executed and delivered after the execution and delivery of this First
Supplemental Indenture may refer to the Indenture without making specific
reference to this First Supplemental Indenture, but nevertheless all such
references shall include this First Supplemental Indenture unless the context
otherwise requires.
Section 5. This First Supplemental Indenture shall be deemed to have become
effective upon the date first above written.
Section 6. In the event of a conflict between the terms of this First
Supplemental Indenture and the Indenture, this First Supplemental Indenture
shall control.
In Witness Whereof, the parties have caused this First Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
ATTEST: Drypers Corporation
/s/ Walter V. Klemp
/s/ Jonathan P. Foster By: _________________________________
_______________________________
Walter V. Klemp
ATTEST: Chairman & Co-CEO
/s/ Sandra Shaffer Bankers Trust Company
_______________________________
/s/ Marc Parilla
By: _________________________________
Marc Parilla
Assistant Treasurer
4
<PAGE>
DRYPERS CORPORATION
STATE OF TEXAS(S)
(S)
COUNTY OF HARRIS(S)
This instrument was acknowledged before me on March 6, 1998, by Walter V.
Klemp, the Chairman & Co-CEO of Drypers Corporation, a Delaware corporation,
on behalf of said corporation.
/s/ Darice Angel
-------------------------------------
Notary Public in and for
the State of Texas
My Commission expires:
12-10-2001
- -------------------------------
[SEAL]
TRUSTEE
STATE OF NEW YORK (S)
(S)
COUNTY OF NEW YORK(S)
This instrument was acknowledged before me on March 6, 1998, by Marc J.
Parilla, an Assistant Treasurer of Bankers Trust Company, in its capacity as
trustee.
/s/ Margaret Bereza
-------------------------------------
Notary Public in and for
the State of New York
My Commission expires:
2-22-2000
- -------------------------------
[SEAL]
5
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF DRYPERS 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 Ind. e. Com. Ltda.
Drypers Caribbean Holdings Limited
LSFNE Company
Drypers Asia Pte. Ltd.
Drypers Asia Malaysia
JER Equipamentos e Comercio Ltda.
<PAGE>
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 18, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,269,000
<SECURITIES> 0
<RECEIVABLES> 36,005,000
<ALLOWANCES> 2,064,000
<INVENTORY> 21,090,000
<CURRENT-ASSETS> 77,030,000
<PP&E> 71,039,000
<DEPRECIATION> (17,769,000)
<TOTAL-ASSETS> 205,232,000
<CURRENT-LIABILITIES> 28,302,000
<BONDS> 115,000,000
0
10,000
<COMMON> 1,000
<OTHER-SE> 55,569,000
<TOTAL-LIABILITY-AND-EQUITY> 205,232,000
<SALES> 287,010,000
<TOTAL-REVENUES> 287,010,000
<CGS> 175,545,000
<TOTAL-COSTS> 265,518,000
<OTHER-EXPENSES> (253,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,957,000
<INCOME-PRETAX> 11,788,000
<INCOME-TAX> 2,344,000
<INCOME-CONTINUING> 9,444,000
<DISCONTINUED> 0
<EXTRAORDINARY> (7,769,000)
<CHANGES> 0
<NET-INCOME> 1,675,000
<EPS-PRIMARY> .12<F1>
<EPS-DILUTED> .09<F1>
<FN>
<F1> Basic EPS after extraordinary item was $.12 and Diluted EPS after
extraordinary item was $.09 for the year ended December 31, 1997.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 3-MOS 3-MOS 3-MOS YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 APR-01-1996 JUL-01-1996 JAN-01-1996 JAN-01-1997
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 MAR-31-1997
<CASH> 1,917,000 2,976,000 4,420,000 4,923,000 3,682,000
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 23,264,000 25,460,000 25,657,000 31,791,000 36,790,000
<ALLOWANCES> 602,000 513,000 1,013,000 1,160,000 1,615,000
<INVENTORY> 12,517,000 12,751,000 12,663,000 11,616,000 14,136,000
<CURRENT-ASSETS> 40,090,000 44,230,000 45,588,000 51,580,000 58,454,000
<PP&E> 46,885,000 48,532,000 49,987,000 49,311,000 52,718,000
<DEPRECIATION> 10,898,000 11,950,000 13,028,000 14,157,000 15,313,000
<TOTAL-ASSETS> 136,310,000 140,496,000 141,660,000 150,555,000 163,245,000
<CURRENT-LIABILITIES> 37,488,000 41,616,000 41,317,000 42,873,000 49,379,000
<BONDS> 43,993,000 44,036,000 44,079,000 44,122,000 44,165,000
0 0 0 0 0
7,000 7,000 7,000 7,000 7,000
<COMMON> 1,000 1,000 1,000 1,000 1,000
<OTHER-SE> 47,617,000 47,846,000 49,488,000 53,600,000 55,627,000
<TOTAL-LIABILITY-AND-EQUITY> 136,310,000 140,496,000 141,660,000 150,555,000 163,245,000
<SALES> 45,042,000 52,821,000 55,066,000 207,014,000 60,161,000
<TOTAL-REVENUES> 45,042,000 52,821,000 55,066,000 207,014,000 60,161,000
<CGS> 28,813,000 31,301,000 33,192,000 126,128,000 36,756,000
<TOTAL-COSTS> 45,977,000 49,906,000 50,727,000 196,461,000 55,717,000
<OTHER-EXPENSES> 0 0 0 0 123,000
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 1,980,000 2,421,000 2,210,000 8,931,000 2,198,000
<INCOME-PRETAX> (2,970,000) 494,000 2,129,000 1,622,000 2,123,000
<INCOME-TAX> 55,000 146,000 173,000 309,000 150,000
<INCOME-CONTINUING> (2,915,000) 348,000 1,956,000 1,313,000 1,973,000
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> (2,915,000) 348,000 1,956,000 1,313,000 1,973,000
<EPS-PRIMARY> (.45)<F1> .03<F1> .27<F1> .11<F1> .23<F1>
<EPS-DILUTED> (.45)<F1> .02<F1> .12<F1> .09<F1> .11<F1>
<FN>
<F1>EPS-Primary represents basic EPS & EPS-Diluted represents-Diluted EPS restated
for SFAS 128.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> APR-01-1997 JUL-01-1997
<PERIOD-END> JUN-30-1997 SEP-30-1997
<CASH> 30,567,000 24,746,000
<SECURITIES> 0 0
<RECEIVABLES> 37,794,000 41,205,000
<ALLOWANCES> 1,702,000 1,927,000
<INVENTORY> 12,632,000 13,815,000
<CURRENT-ASSETS> 86,031,000 84,431,000
<PP&E> 55,947,000 63,037,000
<DEPRECIATION> 14,714,000 15,925,000
<TOTAL-ASSETS> 199,120,000 203,412,000
<CURRENT-LIABILITIES> 26,979,000 29,035,000
<BONDS> 116,566,000 116,566,000
0 0
8,000 10,000
<COMMON> 1,000 1,000
<OTHER-SE> 49,963,000 52,880,000
<TOTAL-LIABILITY-AND-EQUITY> 199,120,000 203,412,000
<SALES> 72,551,000 80,086,000
<TOTAL-REVENUES> 72,551,000 2
<CGS> 44,983,000 48,385,000
<TOTAL-COSTS> 67,955,000 73,619,000
<OTHER-EXPENSES> (165,000) 68,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,012,000 2,683,000
<INCOME-PRETAX> 2,749,000 3,716,000
<INCOME-TAX> 566,000 966,000
<INCOME-CONTINUING> 2,183,000 2,750,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> (7,769,000) 0
<CHANGES> 0 0
<NET-INCOME> (5,586,000) 2,750,000
<EPS-PRIMARY> .12<F1> .27<F1>
<EPS-DILUTED> .09<F1> .15<F1>
<FN>
<F1>EPS-Primary represents basic EPS & EPS-Diluted represents-Diluted EPS restated
for SFAS 128.
</FN>
</TABLE>
