<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 8, 1998
REGISTRATION NO. 333-52597
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DRYPERS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 2676 76-0344044
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
5300 MEMORIAL DRIVE, SUITE 900
HOUSTON, TEXAS 77007
(713) 869-8693
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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WALTER V. KLEMP
DRYPERS CORPORATION
5300 MEMORIAL DRIVE, SUITE 900
HOUSTON, TEXAS 77007
(713) 869-8693
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
ROBERT F. GRAY, JR., ESQ.
FULBRIGHT & JAWORSKI L.L.P.
1301 MCKINNEY, SUITE 5100
HOUSTON, TEXAS 77010-3095
(713) 651-5151
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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PROSPECTUS
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Offer to Exchange
all outstanding
10 1/4% Senior Notes due 2007
($30,000,000 principal amount outstanding)
for
10 1/4% Series B Senior Notes due 2007
($30,000,000 principal amount)
of
[Logo of Drypers Corporation appears here]
The Exchange Offer will expire at 5:00 p.m., New York City time, on July 13,
1998, unless extended.
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Drypers Corporation, a Delaware corporation ("Drypers"), hereby offers, upon
the terms and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal, to exchange $1,000 principal amount of its
10 1/4% Series B Senior Notes due 2007 (the "Exchange Notes"), in a
transaction registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement (as defined herein) of
which this Prospectus constitutes a part, for each $1,000 principal amount of
the outstanding 10 1/4% Senior Notes due 2007 (the "Outstanding Notes"), of
which $30,000,000 aggregate principal amount is outstanding (the "Exchange
Offer"). The Exchange Notes and the Outstanding Notes are sometimes referred
to herein collectively as the "Notes."
Drypers will accept for exchange any and all Outstanding Notes that are
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the date the Exchange Offer expires, which will be July 13, 1998 unless the
Exchange Offer is extended (the "Expiration Date"). Tenders of Outstanding
Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Outstanding Notes being tendered for exchange. However,
the Exchange Offer is subject to certain conditions that may be waived by
Drypers and to the terms and provisions of the Registration Rights Agreement
(as defined herein). See "The Exchange Offer." Outstanding Notes may be
tendered only in denominations of $1,000 and integral multiples thereof.
Drypers has agreed to pay the expenses of the Exchange Offer. There will be no
cash proceeds to Drypers from the Exchange Offer. See "Use of Proceeds."
The Exchange Notes will be obligations of Drypers entitled to the benefits
of the indenture relating to the Notes (the "Indenture"). The form and terms
of the Exchange Notes are identical in all material respects to the form and
terms of the Outstanding Notes, except that (i) the offering of the Exchange
Notes has been registered under the Securities Act, (ii) the Exchange Notes
will not be subject to transfer restrictions and (iii) certain provisions
relating to an increase in the stated interest rate on the Outstanding Notes
provided for under certain circumstances will be eliminated. Following the
Exchange Offer, any holders of Outstanding Notes will continue to be subject
to the existing restrictions on transfer thereof and, as a general matter,
Drypers will not have any further obligation to such holders to provide for
registration under the Securities Act of transfers of the Outstanding Notes
held by them. To the extent that Outstanding Notes are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered and tendered but
unaccepted Outstanding Notes could be adversely affected. See "The Exchange
Offer--Purpose and Effect of the Exchange Offer."
(continued on next page)
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SEE "RISK FACTORS" ON PAGES 17 TO 22 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
NOTES OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is June 8, 1998
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(continued from page 1)
The Outstanding Notes were sold by Drypers on March 17, 1998 to Prudential
Securities, Inc. (the "Initial Purchaser") in transactions not registered
under the Securities Act in reliance upon the exemption provided in Section
4(2) of the Securities Act (the "Offering"). The Initial Purchaser placed the
Outstanding Notes with qualified institutional buyers (as defined in Rule 144A
under the Securities Act) ("Qualified Institutional Buyers" or "QIBs").
Accordingly, the Outstanding Notes may not be reoffered, resold or otherwise
transferred in the United States unless such transaction is registered under
the Securities Act or an applicable exemption from the registration
requirements of the Securities Act is available. The Exchange Notes are being
offered hereby in order to satisfy the obligations of Drypers under the
Registration Rights Agreement.
The Exchange Notes will bear interest at a rate of 10 1/4% per annum,
payable semi-annually on June 15 and December 15 of each year, commencing
December 15, 1998. Holders of Exchange Notes of record on December 1, 1998,
will receive on December 15, 1998, an interest payment in an amount equal to
(x) the accrued interest on such Exchange Notes from the date of issuance
thereof to December 15, 1998, plus (y) the accrued interest on the previously
held Outstanding Notes from June 15, 1998 to the date of exchange thereof.
Interest will not be paid on Outstanding Notes that are accepted for exchange.
The Notes mature on June 15, 2007.
Outstanding Notes were initially represented by a single, global Outstanding
Note (the "Outstanding Global Note") in registered form, registered in the
name of Cede & Co., as nominee for The Depository Trust Company ("DTC" or the
"Depositary"), as depositary. The Exchange Notes exchanged for Outstanding
Notes represented by the Outstanding Global Note will be initially represented
by a single, global Exchange Note (the "Exchange Global Note") in registered
form, registered in the name of the Depositary. See "Description of the
Exchange Notes--Book-Entry, Delivery and Form." References herein to "Global
Note" shall be references to the Outstanding Global Note and the Exchange
Global Note.
Based on an interpretation of the Securities Act by the staff of the
Securities and Exchange Commission (the "SEC"), Exchange Notes issued pursuant
to the Exchange Offer in exchange for Outstanding Notes may be offered for
resale, resold and otherwise transferred by a holder thereof (other than (i) a
broker-dealer who purchased such Outstanding Notes directly from Drypers for
resale pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an "affiliate" (within the meaning of
Rule 405 of the Securities Act) of Drypers), without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that the holder is acquiring the Exchange Notes in its ordinary
course of business and is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of the
Exchange Notes. Holders of Outstanding Notes wishing to accept the Exchange
Offer must represent to Drypers that such conditions have been met.
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must agree that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Outstanding Notes
where such Outstanding Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. Drypers has agreed
that, for a period of 90 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
Prior to the Exchange Offer, there has been no public market for the
Outstanding Notes or the Exchange Notes. Drypers does not intend to apply for
listing of the Exchange Notes on any securities exchange or for quotation
through The Nasdaq Stock Market. There can be no assurance that an active
market for the Exchange Notes will develop. To the extent that a market for
the Exchange Notes does develop, future trading prices of
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<PAGE>
the Exchange Notes will depend on many factors, including, among other things,
prevailing interest rates, and the market for similar securities as well as
Drypers' results of operations and its financial condition. See "Risk
Factors."
Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that any Outstanding Notes are not tendered
and accepted in the Exchange Offer, a holder's ability to sell untendered
Outstanding Notes could be adversely affected. Following consummation of the
Exchange Offer, the holders of Outstanding Notes that are not tendered and
accepted will continue to be subject to the existing restrictions on transfer
thereof.
The Company expects that the Exchange Notes issued pursuant to this Exchange
Offer will be issued in the form of a Global Exchange Note (as defined under
the caption "Description of the Exchange Notes"), which will be deposited
with, or on behalf of the DTC and registered in its name or in the name of
Cede & Co., the DTC's nominee. Beneficial interests in the Global Exchange
Note representing the Exchange Notes will be shown on, and transfers thereof
to Qualified Institutional Buyers will be effected through, records maintained
by the DTC and its participants. After the initial issuance of the Global
Exchange Note, Exchange Notes in certificated form will be issued in exchange
for the Global Exchange Note on the terms set forth in the Indenture. See
"Description of the Exchange Notes-Book-Entry, Delivery and Form."
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY DRYPERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF DRYPERS SINCE THE DATE HEREOF.
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SPECIAL CAUTIONARY NOTICE REGARDING
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under "Summary", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business" and elsewhere in this Prospectus contain certain
forward-looking statements concerning the Company's operations, economic
performance and financial condition, including, among other things, the
Company's business strategy. These statements are based on the Company's
expectations and are subject to various risks and uncertainties. Actual
results could differ materially from those anticipated due to a number of
factors, including those identified under "Risk Factors" and elsewhere in this
Prospectus.
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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. 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 Prospectus are the property of their respective owners and are not
the property of the Company.
UNTIL SEPTEMBER 6, 1998 (90 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
DRYPERS CORPORATION, 5300 MEMORIAL DRIVE, SUITE 900, HOUSTON, TEXAS 77007,
ATTENTION: INVESTOR RELATIONS (TELEPHONE NUMBER: (713) 869-8693). IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY JULY
6, 1998.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto set forth in this
Prospectus. As used herein, the terms "Company" and "Drypers" mean Drypers
Corporation and its subsidiaries, except as the context may otherwise require.
Unless otherwise specified, all U.S. market share and market position data in
this Prospectus for the Company's brands and products and for its competitors
are based upon retail dollar sales that are derived from A.C. Nielsen data.
Such data represent A.C. Nielsen's estimates based upon data gathered by A.C.
Nielsen from market samples and, in the case of grocery store sales in the
United States, are based on samples taken from stores with sales in excess of
$2.0 million per year. Such data are therefore subject to some degree of
variance. Unless otherwise indicated, all sales and market share information in
this Prospectus referring to the United States excludes Puerto Rico.
THE COMPANY
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. 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. The Company's net sales and EBITDA (as defined herein) were
$287.0 million and $28.8 million, respectively, for the year ended December 31,
1997.
Drypers has historically marketed its products primarily in grocery stores in
the United States and Puerto Rico and in certain international markets,
including Latin America and the Pacific Rim. The U.S. disposable diaper and
training pant market (the "U.S. diaper market") for products sold in grocery
stores in 1997 totaled approximately $2.0 billion or 51.2% of the estimated
$3.8 billion total U.S. diaper market. As of December 20, 1997, the Company
sold its products throughout the United States to approximately 635 grocery
retailers with an estimated 20,000 retail outlets. These retailers had an
estimated 66% share of total U.S. grocery store sales of all products at that
date. Drypers believes that its brands represented 6.4% of the dollar volume
and 6.6% of the unit volume in the U.S. grocery store diaper market during
1997, and that its market share exceeded 10% in 15 of the 50 major markets as
defined by A.C. Nielsen, including such markets as Phoenix, Kansas City,
Minneapolis, Pittsburgh and Hartford. In addition, the Company believes that it
has an approximate 26% market share of the disposable diaper category in Puerto
Rico. In 1997, domestic operations, including Puerto Rico and export sales,
represented 66.7% of the Company's net sales and 71.1% of its EBITDA, with the
balance of its sales and EBITDA generated by its international operations.
The Company has been exporting diapers to Latin America and the Pacific Rim
since the early 1980s and since 1993 has significantly expanded its
international presence. In 1993, the Company began operations in Puerto Rico,
both to serve Puerto Rico and to better serve the Latin American export market.
In 1994, the Company acquired an interest in an existing disposable diaper
producer in Argentina, and in 1995 such producer became a wholly-owned
subsidiary of the Company. In 1996, the Company entered into a contract
manufacturing arrangement with a Mexican diaper producer and, in December 1996,
acquired substantially all of the assets of this producer. In early 1997, the
Company acquired the rights to the Puppet brand name (the third largest selling
diaper brand in Brazil), established a majority-owned subsidiary to market its
products in Brazil, entered into a supply arrangement with a local diaper
manufacturer, and entered into an agreement with Wal-Mart International to
carry the Puppet brand in its Brazilian stores. Wal-Mart International, a
division of Wal-Mart Stores, Inc., has also 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. Net sales for the Company's international
operations, excluding Puerto Rico and exports, grew from 13.4% of
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the Company's total net sales in 1996 to 33.3% in 1997. International EBITDA
grew from 1.2% of the Company's total EBITDA for 1996 to 28.9% for 1997.
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 seeks to position 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. At the same time, the Company intends to continue to
expand its international operations and pursues, on a selective basis, private
label programs to enhance its customer relationships.
After incurring an operating loss in 1995, the Company returned to
profitability in 1996 and substantially improved its results of operations in
1997. The Company's net sales increased 26.3% to $207.0 million during 1996 and
38.6% to $287.0 million during 1997. The Company's EBITDA increased from a loss
of $5.0 million during 1995 to $17.4 million during 1996 and increased 65.5% to
$28.8 million during 1997. 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.
The Company's executive offices are located at 5300 Memorial, Suite 900,
Houston, Texas 77007 and its telephone number is (713) 869-8693.
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:
. Continued 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 46% 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.
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. 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.
. 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 has developed and test marketed an innovative new
product under the brand name XClaim aimed at the $4 billion U.S. laundry
detergent category. See "Recent Developments."
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RECENT DEVELOPMENTS
New Revolving Credit Facility
On April 1, 1998, the Company entered into a three-year $50.0 million Senior
Secured Revolving Credit Facility (the "New Credit Facility") with BankBoston,
N.A., to replace the Company's existing $21.0 million revolving credit facility
(the "Revolving Credit Facility"), which would have expired in February 1999.
The New Credit Facility permits 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 bears 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
is secured by substantially all of the Company's assets.
National Advertising Campaign
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, thus increasing sales in the second half
of 1998.
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.
The Company incurred cost increases of approximately $8 million in the first
quarter of 1998, resulting in a net loss of $5.7 million, and expects to incur
approximately $2 million in the second quarter of 1998. The majority of these
increases 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 relate to the costs associated with
the new laundry detergent business and the expansion of capacity in several
Latin American markets.
Acquisition of Brazilian Manufacturer
On April 6, 1998, the Company exercised its fair value option to acquire the
remaining equity interest in the parent company of the Brazilian manufacturer
of its diapers. The transaction is subject to approval by the Brazilian
government. The transaction gives the Company a 100% ownership interest in the
Brazilian manufacturing facility for its diapers.
TRANSACTIONS RELATED TO THE OFFERING
On March 17, 1998, the Company issued the Outstanding Notes to the Initial
Purchaser (the "Note Offering") pursuant to a Purchase Agreement dated March
12, 1998.
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TERMS OF EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $30,000,000 aggregate
principal amount of Exchange Notes for up to an equal aggregate principal
amount of Outstanding Notes. The Exchange Notes will be obligations of Drypers
entitled to the benefits of the Indenture. The form and terms of the Exchange
Notes are identical in all material respects to the form and terms of the
Outstanding Notes, except that (i) the offering of the Exchange Notes has been
registered under the Securities Act, (ii) the Exchange Notes will not be
subject to transfer restrictions and (iii) certain provisions relating to an
increase in the stated interest rate on the Outstanding Notes provided for
under certain circumstances will be eliminated. See "Description of the
Exchange Notes."
Registration Rights
Agreement................... The Outstanding Notes were sold by Drypers on
March 17, 1998 to the Initial Purchaser pursuant
to a Purchase Agreement, dated March 12, 1998
(the "Purchase Agreement"). Pursuant to the
Purchase Agreement, Drypers and the Initial
Purchaser entered into the Registration Rights
Agreement which, among other things, grants the
holders of the Outstanding Notes certain exchange
and registration rights. The Exchange Offer is
intended to satisfy certain obligations of
Drypers under the Registration Rights Agreement.
The Exchange Offer.......... $1,000 principal amount of Exchange Notes will be
issued in exchange for each $1,000 principal
amount of Outstanding Notes validly tendered and
accepted pursuant to the Exchange Offer. As of
the date hereof, $30,000,000 in aggregate
principal amount of Outstanding Notes are
outstanding. Drypers will issue the Exchange
Notes to tendering holders of Outstanding Notes
promptly following the Expiration Date.
The terms of the Exchange Notes are identical in
all material respects to the Outstanding Notes
except for certain transfer restrictions and
registration rights relating to the Outstanding
Notes and except that the Outstanding Notes
provide that if (i) the Exchange Offer has not
been consummated within 60 days of the
effectiveness of the registration statement or
(ii) a shelf registration statement has not been
declared effective by August 14, 1998, the
interest rate on the Outstanding Notes will
increase by an amount ranging from 0.25% to 1.50%
per annum, from and including the applicable date
as described in the Registration Rights Agreement
until but excluding the date of the consummation
of the Exchange Offer.
In addition, to comply with the securities laws
of certain states of the United States, it may be
necessary to qualify for sale or register
thereunder the Exchange Notes prior to offering
or selling such Exchange Notes. Drypers has
agreed, pursuant to the Registration Rights
Agreement, subject to certain limitations
specified therein, to register or qualify the
Exchange Notes for offer or sale under the
securities laws of such states as any holder
reasonably requests in writing. Unless a holder
so requests, Drypers does not intend to register
or qualify the offer or sale of the Exchange
Notes in any such jurisdiction.
8
<PAGE>
Resale...................... Based on existing interpretations of the
Securities Act by the staff of the SEC set forth
in several no-action letters to third parties,
and subject to the immediately following
sentence, Drypers believes that Exchange Notes
issued pursuant to the Exchange Offer in exchange
for Outstanding Notes may be offered for resale,
resold and otherwise transferred by a holder
thereof (other than (i) a broker-dealer who
purchased such Outstanding Notes directly from
Drypers for resale pursuant to Rule 144A or any
other available exemption under the Securities
Act or (ii) a person that is an "affiliate"
(within the meaning of Rule 405 of the Securities
Act) of Drypers), without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that the holder
is acquiring the Exchange Notes in its ordinary
course of business and is not participating, and
has no arrangement or understanding with any
person to participate, in the distribution of the
Exchange Notes. However, any purchaser of Notes
who is an affiliate of Drypers or who intends to
participate in the Exchange Offer for the purpose
of distributing the Exchange Notes, or any
broker-dealer who purchased the Outstanding Notes
from Drypers to resell pursuant to Rule 144A or
any other available exemption under the
Securities Act, (i) will not be able to rely on
the interpretations by the staff of the SEC set
forth in the above-mentioned no-action letters,
(ii) will not be able to tender its Outstanding
Notes in the Exchange Offer and (iii) must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection
with any sale or transfer of the Notes unless
such sale or transfer is made pursuant to an
exemption from such requirements. Drypers does
not intend to seek its own no-action letter and
there is no assurance that the staff of the SEC
would make a similar determination with respect
to the Exchange Notes as it has in such no-action
letters to third parties. See "The Exchange
Offer--Purpose and Effect of the Exchange Offer"
and "Plan of Distribution." Each broker-dealer
that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with
resales of Exchange Notes received in exchange
for Outstanding Notes where such Outstanding
Notes were acquired by such broker-dealer as a
result of market-making activities or other
trading activities. Drypers has agreed that, for
a period of 90 days after the Expiration Date, it
will make this Prospectus available to any
broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
Expiration Date............. 5:00 p.m., New York City time, on July 13, 1998,
unless the Exchange Offer is extended, in which
case the term "Expiration Date" means the latest
date and time to which the Exchange Offer
9
<PAGE>
is extended. See "The Exchange Offer--Expiration
Date; Extensions; Amendments."
Accrued Interest on the
Exchange Notes and the
Outstanding Notes.......... The Exchange Notes will bear interest at a rate
of 10 1/4% per annum, payable semi-annually on
June 15 and December 15 of each year, commencing
December 15, 1998. Holders of Exchange Notes of
record on December 1, 1998, will receive on
December 15, 1998, an interest payment in an
amount equal to (x) the accrued interest on such
Exchange Notes from the date of issuance thereof
to December 15, 1998, plus (y) the accrued
interest on the previously held Outstanding Notes
from June 15, 1998 to the date of exchange
thereof. Interest will not be paid on Outstanding
Notes that are accepted for exchange. The Notes
mature on June 15, 2007.
Conditions to the Exchange
Offer....................... Drypers may terminate the Exchange Offer if it
determines that its ability to proceed with the
Exchange Offer could be materially impaired due
to the occurrence of certain conditions. Drypers
does not expect any of such conditions to occur,
although there can be no assurance that such
conditions will not occur. Holders of Outstanding
Notes will have certain rights under the
Registration Rights Agreement should Drypers fail
to consummate the Exchange Offer. See "The
Exchange Offer--Conditions to the Exchange
Offer."
Procedures for Tendering
Outstanding Notes.......... Each holder of Outstanding Notes wishing to
accept the Exchange Offer must complete, sign and
date the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or
such facsimile, together with the Outstanding
Notes to be exchanged and any other required
documentation, to Bankers Trust Company, as
Exchange Agent, at the address set forth herein
and therein or effect a tender of Outstanding
Notes pursuant to the procedures for book-entry
transfer as provided for herein and therein. By
executing the Letter of Transmittal, each holder
will represent to Drypers that, among other
things, the Exchange Notes acquired pursuant to
the Exchange Offer are being acquired in the
ordinary course of business of the person
receiving such Exchange Notes, whether or not
such person is the holder, that neither the
holder nor any such other person has any
arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes and that neither the holder nor any such
other person is an "affiliate," as defined in
Rule 405 under the Securities Act, of Drypers.
See "The Exchange Offer--Procedures for
Tendering."
Following the consummation of the Exchange Offer,
holders of Outstanding Notes not tendered as a
general matter will not have
10
<PAGE>
any further registration rights, and the
Outstanding Notes will continue to be subject to
certain restrictions on transfer. Accordingly,
the liquidity of the market for the Outstanding
Notes could be adversely affected. See "The
Exchange Offer--Consequences of Failure to
Exchange."
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Outstanding Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender in the Exchange Offer
should contact such registered holder promptly
and instruct such registered holder to tender on
his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner
must, prior to completing and executing the
Letter of Transmittal and delivering his
Outstanding Notes, either make appropriate
arrangements to register ownership of the
Outstanding Notes in such holder's name or obtain
a properly completed bond power from the
registered holder or endorsed certificates
representing the Outstanding Notes to be
tendered. The transfer of record ownership may
take considerable time, and completion of such
transfer prior to the Expiration Date may not be
possible. See "The Exchange Offer--Procedures for
Tendering."
Guaranteed Delivery
Procedures.................. Holders of Outstanding Notes who wish to tender
their Outstanding Notes and who cannot complete
the procedure for book-entry transfer and deliver
a properly completed Letter of Transmittal and
any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date may tender their Outstanding
Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--
Guaranteed Delivery Procedures."
Withdrawal Rights........... Tenders of Outstanding Notes may be withdrawn at
any time prior to the Expiration Date by
furnishing a written or facsimile transmission
notice of withdrawal to the Exchange Agent
containing the information set forth in "The
Exchange Offer--Withdrawal of Tenders."
Acceptance of Outstanding
Notes and Delivery of
Exchange Notes............. Subject to certain conditions (as summarized
above in "Conditions to the Exchange Offer" and
described more fully in "The Exchange Offer--
Conditions to the Exchange Offer"), Drypers will
accept for exchange any and all Outstanding Notes
that are properly tendered in the Exchange Offer
prior to the Expiration Date. See "The Exchange
Offer--Procedures for Tendering." The Exchange
Notes issued pursuant to the Exchange Offer will
be delivered promptly following the Expiration
Date.
Exchange Agent.............. Bankers Trust Company, the Trustee under the
Indenture, is serving as exchange agent (the
"Exchange Agent") in connection with the Exchange
Offer. The mailing address of the Exchange Agent
is BT
11
<PAGE>
Services Tennessee, Inc. Reorganization Unit,
P.O. Box 292737, Nashville, TN 37229-2737; the
address for deliveries by overnight courier is BT
Services Tennessee, Inc. Reorganization Unit,
Grassmere Park Drive, Nashville, TN 37211; and
the address for hand deliveries is Bankers Trust
Company, Corporate Trust and Agency Unit, 123
Washington Street, First Floor Window, New York,
NY 10008. For assistance and requests for
additional copies of this Prospectus, the Letter
of Transmittal or the Notice of Guaranteed
Delivery, the telephone number for the Exchange
Agent is (615) 835-3572 or (800) 735-7777, and
the facsimile number for the Exchange Agent is
(615) 835-3701.
Effect on Holders of
Outstanding Notes.......... Holders of Outstanding Notes who do not tender
their Outstanding Notes in the Exchange Offer
will continue to hold their Outstanding Notes and
will be entitled to all the rights and
limitations applicable thereto under the
Indenture. All untendered, and tendered but
unaccepted, Outstanding Notes will continue to be
subject to the restrictions on transfer provided
for in the Outstanding Notes and the Indenture.
To the extent that Outstanding Notes are tendered
and accepted in the Exchange Offer, the trading
market, if any, for the Outstanding Notes could
be adversely affected. See "Risk Factors--
Consequences of Exchange and Failure to
Exchange."
See "The Exchange Offer" for more detailed information concerning the terms
of the Exchange Offer.
12
<PAGE>
SUMMARY OF TERMS OF EXCHANGE NOTES
Securities Offered.......... $30,000,000 aggregate principal amount of 10 1/4%
Series B Senior Notes due 2007.
Maturity Date............... June 15, 2007.
Interest Payment Dates...... June 15 and December 15, commencing December 15,
1998.
Optional Redemption......... The Exchange Notes will be redeemable at the
option of Drypers, in whole or in part, at any
time on or after June 15, 2002, at the redemption
prices set forth herein, plus accrued and unpaid
interest, if any, to the applicable redemption
date. In addition, Drypers may, at its option,
redeem prior to June 15, 2000, up to 34.78% of
the original principal amount of the Exchange
Notes at 110.25% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the
applicable redemption date, with the net proceeds
of one or more Public Equity Offerings (as
defined). See "Description of the Exchange
Notes--Redemption."
Ranking..................... The Exchange Notes will be senior unsecured
obligations of the Company ranking pari passu
with all existing and future unsubordinated debt
of the Company. The Exchange Notes will be
effectively subordinated to all of the Company's
secured debt, including loans under the New
Credit Facility (as defined herein), to the
extent of the assets securing such debt and will
be structurally subordinated to all liabilities,
including trade payables, of the Company's
subsidiaries that did not guarantee the Notes. As
of March 31, 1998, the Company had $120.6 million
of debt outstanding other than the Notes ($5.6 of
which was debt of its subsidiaries) and its
subsidiaries had approximately $14.9 million of
accounts payable and third party debt. See
"Capitalization" and Note 3 of the Notes to
Consolidated Financial Statements.
Change of Control........... Upon a Change of Control, the Company will be
required, subject to certain conditions, to offer
to purchase all outstanding Exchange Notes at
101% of the principal amount thereof, plus
accrued interest to the date of purchase. See
"Description of the Exchange Notes."
Certain Covenants........... The Indenture contains certain covenants,
including, but not limited to, covenants with
limitations on the following: (i) the incurrence
of additional debt; (ii) restricted payments;
(iii) asset dispositions; (iv) transactions with
affiliates; (v) dividend and other payment
restrictions affecting subsidiaries; (vi) liens;
and (vii) the merger, consolidation or sale of
assets of the Company. In addition, subsidiaries
of the Company may, in the future, be required to
guarantee payment of the Notes. See "Description
of the Exchange Notes".
13
<PAGE>
Use of Proceeds............. Drypers will not receive any cash proceeds from
the issuance of the Exchange Notes offered
hereby. In consideration for issuing the Exchange
Notes as contemplated in this Prospectus, Drypers
will receive in exchange Outstanding Notes in
like principal amount.
Risk Factors................ Prospective purchasers of the Exchange Notes
should carefully consider all of the information
contained in this Prospectus, including the
information set forth under the caption "Risk
Factors", before making an investment in the
Exchange Notes.
14
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary historical financial information 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>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
------------------------------------------------------ ----------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS
DATA(1):
Net sales.............. $156,079 $173,552 $163,947 $207,014 $287,010 $60,161 $78,592
Cost of goods sold..... 95,295 106,130 114,075 126,128 175,545 36,756 47,249
-------- -------- -------- -------- -------- ------- -------
Gross profit......... 60,784 67,422 49,872 80,886 111,465 23,405 31,343
Selling, general and
administrative
expenses.............. 46,231 48,081 53,691 70,333 89,973 18,961 32,477
Unusual expenses....... 2,376(2) 1,141(3) 3,185(4) -- -- -- --
Restructuring charge... -- -- 4,255(5) -- -- -- --
-------- -------- -------- -------- -------- ------- -------
Operating income
(loss)................ 12,177 18,200 (11,259) 10,553 21,492 4,444 (1,134)
Interest expense, net.. 11,115 7,685 8,035 8,931 9,957 2,198 3,450
Other income
(expense)............. -- 434 -- -- 253 (123) 56
-------- -------- -------- -------- -------- ------- -------
Income (loss) before
income tax provision
(benefit) and
extraordinary items... 1,062 10,949 (19,294) 1,622 11,788 2,123 (4,528)
Income tax provision
(benefit)............. 1,370 4,151 (3,829) 309 2,344 150 1,141
-------- -------- -------- -------- -------- ------- -------
Income (loss) before
extraordinary items... (308) 6,798 (15,465) 1,313 9,444 1,973 (5,669)
Extraordinary items.... -- (3,688)(6) -- -- (7,769)(7) -- --
-------- -------- -------- -------- -------- ------- -------
Net income (loss)...... $ (308) $ 3,110 $(15,465) $ 1,313 $ 1,675 $ 1,973 $(5,669)
======== ======== ======== ======== ======== ======= =======
FINANCIAL RATIOS AND
OTHER DATA:
EBITDA(8).............. $ 16,594 $ 23,333 $ (4,959) $ 17,412 $ 28,807 $ 6,189 $ 836
Adjusted EBITDA(9)..... 18,970 24,474 2,481 17,412 28,807 6,189 836
Capital expenditures... 6,157 7,079 8,896 5,931 21,598 3,440 7,222
Depreciation and
amortization.......... 5,017 5,799 7,068 7,624 8,220 2,041 2,080
Ratio of EBITDA to pro
forma interest
expense, net(8)(10)... 2.1x .2x
Ratio of earnings to
fixed charges(11)..... 1.1x 2.3x -- 1.2x 2.1x 1.9x --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $ 48,728 $ 68,563
Property, and equipment, net......................... 53,270 58,890
Total assets......................................... 205,232 239,713
Short-term debt, including current
portion of long-term debt........................... 1,593 2,377
Long-term debt, less current portion................. 116,755 149,318
Stockholders' equity................................. 55,580 50,917
</TABLE>
15
<PAGE>
- --------
(1) The Company acquired two U.S. regional diaper manufacturing operations in
1992. In 1994, the Company acquired a preferred stock interest in an
Argentine diaper manufacturer, which became a wholly owned subsidiary of
the Company in July 1995. In December 1996, the Company acquired a diaper
manufacturing operation in Mexico. The Company established operations in
Brazil in February 1997. The results of these operations have been
included since their respective dates of acquisition or establishment.
(2) 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 and expenses in connection with a patent
infringement lawsuit in which the Company settled by entering into a
license agreement and agreed to pay a royalty if the Company should use
the other party's patented technology.
(3) Includes legal fees and expenses of $1,141,000 incurred in connection with
a patent infringement lawsuit, which was settled during the second quarter
of 1994 with no payment by the Company or the other party.
(4) 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 and unusual expenses of $827,000 related to costs
associated with the Company's refinancing described in Note 1 of the Notes
to Consolidated Financial Statements.
(5) Includes a noncash restructuring charge of $4,255,000 related to the
write-down of idled equipment to net realizable value and lease
termination costs related to the closure of the Houston facility.
(6) Includes a noncash extraordinary expense of $2,014,000, net of taxes, for
the write-off of capitalized debt issuance costs and original issue
discount, and a cash extraordinary expense of $1,674,000, net of taxes,
for prepayment fees in connection with the redemption of $30,000,000
principal amount of 12 1/2% Senior Notes from the proceeds of the
Company's initial public offering.
(7) 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 (the "Existing Notes").
(8) EBITDA represents income from operations plus depreciation and
amortization (excluding the portion of amortization included in interest
expense). The Company has included EBITDA data (which is not a measure of
financial performance under generally accepted accounting principles)
because such data are used by certain investors to measure a company's
ability to service debt and because a comparable measure will be a factor
in certain incurrence tests included in the Indenture. EBITDA should not
be considered as an alternative to income from operations or to cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles) and should not be construed as an
indication of a company's operating performance or as a measure of
liquidity.
(9) Adjusted EBITDA represents EBITDA plus unusual expenses and restructuring
charges.
(10) The calculation of pro forma interest expense gives effect to the Note
Offering, the offering of the Existing Notes and the application of the
estimated net proceeds therefrom as if they had occurred on January 1,
1997, and includes pro forma interest income for the period earned on cash
balances at an assumed annual rate of 3%. This pro forma information is
not necessarily indicative of the financial results that might have
occurred had the transactions actually taken place on January 1, 1997, or
of future results of operations.
(11) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consists of income (loss) before income tax provision (benefit)
and extraordinary items plus fixed charges. "Fixed charges" consist of
interest on all debt and amortization of deferred financing costs and
original issue discounts/premiums plus the interest component of rental
expense under operating leases (assumed to equal one-third of rental
expense). Earnings were not adequate to cover fixed charges by $10,669,000
for the year ended December 31, 1995 and by $733,000 for the three months
ended March 31, 1998. After giving pro forma effect to the Note Offering,
the offering of the Existing Notes and the application of the estimated
net proceeds therefrom as if they had occurred on January 1, 1997, and
including pro forma interest income for the period earned on cash balances
at an assumed annual rate of 3%, the Company's ratio of earnings to fixed
charges would have been 1.8x for the year ended December 31, 1997. Pro
forma earnings were not adequate to cover pro forma fixed charges by
$715,000 for the three months ended March 31, 1998.
16
<PAGE>
RISK FACTORS
An investment in the Notes offered hereby involves a high degree of risk.
Each prospective investor should carefully examine this entire Prospectus and
should give particular attention to the risk factors set forth below before
purchasing the Notes offered hereby.
CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE. Holders of Outstanding
Notes who do not exchange their Outstanding Notes for Exchange Notes pursuant
to the Exchange Offer will continue to be subject to the restrictions on
transfer to such Outstanding Notes as set forth in the legend thereon as a
consequence of the issuance of the Outstanding Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the
Outstanding Notes that are not tendered, or are tendered but not accepted, may
not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. Drypers does not
currently anticipate that it will register the Outstanding Notes under the
Securities Act. In addition, upon the consummation of the Exchange Offer
holders of Outstanding Notes which remain outstanding will not be entitled to
any rights to have such Outstanding Notes registered under the Securities Act
or to any similar rights under the Registration Rights Agreement. To the
extent that Outstanding Notes are tendered and accepted in the Exchange Offer,
a holder's ability to sell untendered, or tendered but unaccepted, Outstanding
Notes could be adversely affected. The Outstanding Notes provide that if (i)
the Exchange Offer has not been consummated within 30 days of the
effectiveness of the Registration Statement or (ii) a shelf registration
statement has not been declared effective by August 14, 1998, the interest
rate on the Outstanding Notes will increase by an amount ranging from 0.25% to
1.50% per annum from and including the applicable date as described in the
Registration Rights Agreement until but excluding the date on which the
Exchange Offer is consummated or a shelf registration statement is declared
effective.
LEVERAGE AND DEBT SERVICE. The Company is highly leveraged. As of March 31,
1998 the Company's total debt and stockholders' equity was $151.7 million and
$50.9 million, respectively, and its ratio of debt to stockholders' equity was
3.0 to 1. See "Capitalization". In addition, the Company is party to the
Revolving Credit Facility under which up to $21.0 million may be borrowed on a
secured basis, subject to certain conditions, including without limitation,
the maintenance by the Company of a sufficient level of accounts receivable
and inventories. On April 1, 1998, the Company entered into a three-year
credit facility for $50.0 million with BankBoston, N.A. to replace the
Revolving Credit Facility. See "Recent Developments--New Revolving Credit
Facility". At March 31, 1998, the Company's borrowing base of accounts
receivable and inventories would have permitted the Company to borrow up to
$42.4 million under the New Credit Facility. All outstanding borrowings under
the Revolving Credit Facility were repaid with the net proceeds of the Note
Offering.
The Company's level of debt will have several important effects on its
future operations, including (i) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) covenants
contained in the Company's debt obligations will require the Company to meet
certain financial tests, and other restrictions will limit its ability to
borrow additional funds or to dispose of assets and may affect the Company's
flexibility in planning for, and reacting to, changes in its business,
including possible acquisition opportunities, and (iii) the Company's ability
to obtain additional financing in the future for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired.
Management believes that, excluding acquisitions, future cash flow from
operations, together with available borrowings under the New Credit Facility,
will be adequate to meet the Company's anticipated cash requirements,
including for working capital, capital expenditures and debt service, for the
foreseeable future. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Liquidity and Capital Resources".
In 1995, the Company's liquidity was adversely affected by a confluence of
unusual events and, among other things, it (i) obtained various amendments and
waivers from the lender under the Revolving Credit Facility and term loan and
(ii) deferred 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,
17
<PAGE>
1996 as part of the refinancing described in Note 1 of the Notes to
Consolidated Financial Statements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Overview--Unusual Industry
Conditions in 1995" and "--Liquidity and Capital Resources".
The Company's ability to meet its debt service obligations and to reduce its
total debt will be dependent upon the Company's future performance, which will
be subject to general economic conditions and financial, business and other
factors affecting the operations of the Company, many of which are beyond its
control. There can be no assurance that the Company's business will continue
to generate cash flow at or above current levels. If the Company is unable to
generate sufficient cash flow from operations in the future to service its
debt, it may be required to refinance all or a portion of its existing debt,
including the Notes, or to obtain additional financing. There can be no
assurance that any such financing could be obtained on terms acceptable to the
Company, if at all.
COMPETITIVE INDUSTRY. In the United States, the Company experiences
substantial competition from a number of producers of disposable baby diapers
and training pants, including larger manufacturers of the leading national
brands and other private label manufacturers. For the 52 weeks ended December
20, 1997, The Procter & Gamble Company ("Procter & Gamble"), which
manufactures Pampers and Luvs, and Kimberly-Clark Corporation ("Kimberly-
Clark"), which manufactures Huggies, held 78.9% of the total U.S. diaper
market and 74.7% of the domestic grocery store market for disposable diapers.
One or both of Procter & Gamble and Kimberly-Clark also dominate most of the
international markets, including those in which the Company currently
competes. Both Procter & Gamble and Kimberly-Clark have substantially greater
manufacturing, marketing and financial resources than the Company and thus are
able to exert significant influence on the worldwide markets in which they
compete. Actions by the Company's competitors could have a material adverse
effect on the Company. See "Business--Industry Conditions".
PRICE CHANGES BY COMPETITORS. The disposable diaper industry is
characterized by substantial price competition, which is effected through
price changes, product count changes and promotions. Typically, because of
their large market share, one of the Company's larger competitors initiates
such pricing changes. The Company may respond to these pricing changes with
changes to its own prices, product counts or promotional programs. The process
of fully implementing such changes may require a number of months and the
Company's operating results may be adversely affected. For example, a price
per package and product count reduction by Procter & Gamble in the first
quarter of 1995 led to a subsequent repositioning of the Company's Drypers
brand, which adversely affected the Company's results of operations during
that period. There can be no assurance that these or future price or product
changes by the Company's larger competitors will not have a material adverse
effect on the Company or that the Company will be able to react with price or
product changes of its own to maintain its current market position. In
addition, there can be no assurance that the major producers of private label
diapers will not price or position their products in such a manner as to have
a material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Industry Conditions".
DEPENDENCE ON KEY PRODUCTS AND ACCEPTANCE OF PRODUCT INNOVATIONS. Sales of
the Company's Drypers brand premium diapers and training pants in the United
States accounted for 61.3%, 62.0% and 52.3% of the Company's net sales for the
years ended December 1995, 1996 and 1997, respectively. The Company has made
substantial investments in manufacturing equipment and processes for these
products. In addition, the Company from time to time has introduced product
innovations that are incorporated into all of the Company's premium products.
The Company is substantially dependent on the continued success of sales of
these products and customer acceptance of its product innovations. A number of
factors could materially reduce sales by the Company of its products, or the
profitability of such sales, including actions by its competitors, shifts in
consumer preferences or the lack of acceptance of the Company's product
innovations. There can be no assurance that in the future such factors will
not have a material adverse effect on the Company. See "Business--Products".
COSTS OF CERTAIN RAW MATERIALS. Raw materials, especially pulp,
superabsorbent polymers and polypropylene nonwoven fabric, are significant
components of the Company's products and packaging. An
18
<PAGE>
industry-wide shortage or a significant increase in the price of any of these
components could adversely affect the Company's ability to maintain its profit
margins in the event price competition does not permit the Company to increase
prices. Beginning in late 1994, pulp prices rose dramatically with quoted
market prices rising from $575 per ton in September 1994 to a high price of
$975 per ton in October 1995. These increases in pulp prices had a material
adverse effect on the Company in 1995. Since March 1996, the quoted market
price for pulp has ranged between $550 per ton and $650 per ton. The Company
has reduced the pulp content (as measured by weight) in its premium brand
diaper by 30% since 1995. However, there can be no assurance that a sustained
high level in the cost of pulp or any other raw material will not have a
material adverse effect on the Company in the future.
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS, DEVALUATIONS AND
RESTRICTIONS. The Company currently has operations in Argentina, Mexico and
Brazil and expects its international operations to become a larger contributor
to sales and profitability in the future. The Company also exports products
from the United States and Puerto Rico primarily to Latin America and the
Pacific Rim. The success of the Company's sales to, operations in and
expansion into international markets depends on numerous factors, many of
which are beyond the Company's control. Such factors include economic
conditions in the foreign countries in which the Company operates and to which
it sells its products. In addition, international operations and expansion may
increase the Company's exposure to certain common risks in the conduct of
business outside the United States, including currency exchange rate
fluctuations, restrictions on the repatriation of profits and assets,
compliance with foreign laws and standards, political risks and risks of
increases in duties, taxes and governmental royalties. Moreover, the level of
the Company's exports is impacted by the relative strength or weakness of the
U.S. dollar. Other than the United States, each country in which the Company
operates has experienced political and economic instability in recent years.
Moreover, as recent events in the Latin American region have demonstrated,
negative economic or political developments in one country in the region can
lead to or exacerbate economic or political crises elsewhere in the region.
The economies of Latin America are characterized by extensive government
intervention in the economy; inflation and, in some cases, hyperinflation;
currency devaluations, fluctuations, controls and shortages; troubled and
insolvent financial institutions; capital flight; political instability,
turmoil and violence; and economic contraction and unemployment. Any of the
foregoing could have a material adverse effect on the Company.
INTELLECTUAL PROPERTY RISKS. The Company's larger branded competitors
normally seek U.S. and foreign patent protection for the product enhancements
they develop. The Company believes it has been able to introduce product
features comparable to those introduced by its competitors by using
manufacturing methods or materials that are not protected by patents, although
there can be no assurance that the Company will be able to continue to do so
in the future. To the extent the Company is not able to introduce comparable
products on a timely basis, its financial position and results of operations
could be materially adversely affected.
In addition, the Company from time to time has received, and may receive in
the future, communications from third parties asserting that the Company's
products, trademarks, designs, labels or packaging infringe upon such third
parties' intellectual property rights. There can be no assurance that third
parties will not successfully assert claims against the Company with respect
to existing or future products or packaging. Should the Company be found to
infringe upon the intellectual property rights of others, the Company could be
required to cease use of certain products, trademarks, designs, labels or
packaging or pay damages to the affected parties, any of which could have a
material adverse effect on the Company. Substantial costs also may be incurred
by the Company in redesigning its labels or packaging, in selecting and
clearing new trademarks or in defending any legal action. In 1994, the Company
settled a patent infringement lawsuit with a competitor.
TECHNOLOGICAL CHANGES. The disposable baby diaper industry is subject to
frequent technological innovations, with the Company's larger branded
competitors having been the leaders in product design and development
historically. The large research and development departments of these
companies have developed most of the important product enhancements in the
disposable baby diaper industry in the past several years. The Company
believes that by working closely with its suppliers, distributors and other
industry participants it has
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been able to introduce product enhancements comparable to those introduced by
its competitors when needed to maintain the Company's competitive position,
although there can be no assurance that the Company will be able, or will have
adequate resources, to do so in the future. To the extent the Company is not
able or does not have adequate resources to introduce comparable products on a
timely basis, its financial position and results of operations could be
materially adversely affected.
COVENANT LIMITATIONS. The New Credit Facility and the Indenture contain
numerous financial and operating covenants that will limit the discretion of
the Company's management with respect to certain business matters. These
covenants will place significant restrictions on, among other things, the
ability of the Company to incur additional debt, to create liens or other
encumbrances, to pay dividends and make other investments and restricted
payments, and to sell or otherwise dispose of assets and to merge or
consolidate with other entities. See "Description of Certain Debt" and
"Description of the Notes--Certain Covenants". The New Credit Facility
requires the Company to meet certain financial ratios and tests. A failure to
comply with the obligations contained in these instruments could result in an
event of default thereunder, which could result in acceleration of the related
debt and the acceleration of debt under other instruments evidencing debt that
may contain cross-acceleration or cross-default provisions. If, as a result
thereof, a default occurs with respect to the New Credit Facility the lender
thereunder will have a prior claim with respect to assets pledged as security
by the Company, the effect of which could be to restrict payments to the
holders of the Notes.
ENCUMBRANCES ON ASSETS TO SECURE NEW CREDIT FACILITY; EFFECTIVE
SUBORDINATION. The Notes will be unsecured. The Company's obligations under
the New Credit Facility are secured by a first priority lien on the
receivables, inventory, financial assets and general intangibles of the
Company. The Indenture also permits the Company to incur certain additional
secured debt subject to the conditions specified therein. If the Company
becomes insolvent or is liquidated, or if payment under the New Credit
Facility is accelerated, the lender under the New Credit Facility will have a
prior claim with respect to such assets and will be entitled to exercise the
remedies available to a secured lender under applicable law. See "Description
of Certain Debt".
The Notes are also effectively subordinated to all existing and future debt
and other liabilities of the Company's subsidiaries that do not guarantee the
Notes. While the Company's subsidiaries do not presently carry a significant
amount of debt, the Indenture permits the existing subsidiaries to incur
additional debt under certain circumstances. In the event of an insolvency,
liquidation or other reorganization of any of the subsidiaries of the Company,
creditors of such subsidiaries, including trade creditors, would be entitled
to payment in full from the assets of such subsidiaries before the Company, as
a stockholder, would be entitled to receive any distribution therefrom.
CONTROL BY MAJOR STOCKHOLDERS. As of April 15, 1998, Equus II Incorporated
and its affiliates beneficially owned 23.3% of the outstanding common stock of
the Company. Because a majority of the capital stock of the Company is held by
a limited number of holders, such holders, if acting together, have the
ability to exercise control over the business and affairs of the Company
because of their ability to elect the Company's Board of Directors and their
voting power with respect to actions requiring stockholder approval. As a
result, circumstances could arise in which the interests of the major
stockholders could be in conflict with the interests of the holders of the
Notes. For example, if the Company were to encounter financial difficulties or
were unable to pay its debts as they mature, the interests of the major
stockholders might conflict with the interests of the holders of the Notes. In
addition, the major stockholders may have an interest in pursuing
acquisitions, divestitures, financings or other transactions that, in their
judgment, could enhance their equity investment, even though such transactions
might involve risks to the holders of the Notes.
DEPENDENCE ON KEY PERSONNEL. The Company believes that its continued success
will depend to a significant extent upon the abilities and continued efforts
of its senior management. The loss of the services of any one or more of such
key personnel could have an adverse effect on the Company and there can be no
assurance that the Company would be able to find suitable replacements for
such key personnel. The Company has employment agreements with certain of its
senior executives. The Company does not maintain key man life insurance on any
of its executives.
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INABILITY TO PURCHASE NOTES UPON A CHANGE OF CONTROL. Upon a Change of
Control, the Company will be required to offer to repurchase all outstanding
Notes at 101% of the principal amount thereof plus accrued interest to the
date of repurchase. However, there can be no assurance that sufficient funds
will be available at the time of any Change of Control to make any required
repurchases of the Notes tendered, or that restrictions in the New Credit
Facility will allow the Company to make such required repurchases.
Notwithstanding these provisions, the Company could enter into certain
transactions, including certain recapitalizations, that would not constitute a
Change of Control but would increase the amount of debt outstanding at such
time. See "Description of the Notes--Certain Covenants--Purchase of Notes upon
a Change of Control."
LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES. The Outstanding Notes
currently are owned by a relatively small number of beneficial owners. The
Outstanding Notes have not been registered under the Securities Act and are
subject to significant restrictions on resale. The Exchange Notes will
constitute a new issue of securities with no established trading market. The
Company does not intend to list the Outstanding Notes or the Exchange Notes on
any national securities exchange or to seek the admission thereof to trading
in the National Association of Securities Dealers Automated Quotation System.
Although the Initial Purchaser has advised the Company that, following
consummation of the Exchange Offer, they currently intend to make a market in
the Exchange Notes, they are not obligated to do so, and any market making
activity with respect to the Exchange Notes may be discontinued at any time
without notice. In addition, such market making activity will be subject to
the limits imposed in the Exchange Act, and may be limited during the Exchange
Offer. Accordingly, no assurance can be given that an active public or other
market will develop for the Exchange Notes or as to the liquidity of or the
trading market for the Exchange Notes.
EXCHANGE OFFER PROCEDURES. Issuance of the Exchange Notes in Exchange for
Outstanding Notes pursuant to the Exchange Offer will be made only after a
timely receipt by the Company of the Outstanding Notes, a properly completed
and duly executed Letter of Transmittal and all other required documents.
Therefore, holders of the Outstanding Notes desiring to tender their
Outstanding Notes in exchange for Exchange Notes should allow sufficient time
to ensure timely delivery. The Company is under no duty to give notification
of defects or irregularities with respect to the tenders of Outstanding Notes
for exchange. Outstanding Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to
be subject to the existing restrictions on transfer thereof. On consummation
of the Exchange Offer, the registration rights under the Registration
Agreement will terminate except that if (i) the Company determines that the
Exchange Offer may not be consummated as soon as practicable after the
Expiration Date because it would violate applicable law or the applicable
interpretations of the staff of the Commission, (ii) the Initial Purchaser so
requests with respect to the Outstanding Notes not eligible to be exchanged
for Exchange Notes in the Exchange Offer and held by it following consummation
of the Exchange Offer or (iii) any holder of an Outstanding Note (other than a
broker-dealer exchanging Outstanding Notes that were acquired as a result of
market making or other trading activities) is not eligible to participate in
the Exchange Offer or, in the case of any holder of Outstanding Notes (other
than a broker-dealer exchanging Outstanding Notes that were acquired as a
result of market making or other trading activities) that participates in the
Exchange Offer, such holder does not receive freely tradeable Exchange Notes
on the date of the exchange for validly tendered (and not withdrawn)
Outstanding Notes, the Company has agreed to file and maintain a shelf
registration statement that would allow resales or transfer of restricted
Outstanding Notes or Exchange Notes owned by such holders. In addition, any
holder of Outstanding Notes who tenders in the Exchange Offer for the purpose
of participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Outstanding Notes that were
acquired by the broker-dealer as a result of market-making activities or other
trading activities must acknowledge that it will deliver a prospectus in
connection with any resale of the Exchange Notes. See "Plan of Distribution."
To the extent that Outstanding Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered and tendered but unaccepted
Outstanding Notes could be adversely affected. See "The Exchange Offer."
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CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF OUTSTANDING
NOTES. The Company intends for the Exchange Offer to satisfy its registration
obligations under the Registration Agreement. If the Exchange Offer is
consummated, the Company does not, except in very limited circumstances set
forth in the Registration Agreement, intend to file additional registration
statements for the sale or other disposition of Outstanding Notes.
Consequently, following completion of the Exchange Offer, holders of
Outstanding Notes seeking liquidity in their investment would have to rely on
an exemption from the registration requirements of applicable securities laws,
including the Securities Act, with respect to any sale or other disposition of
Outstanding Notes.
----------------
SPECIAL CAUTIONARY NOTICE REGARDING
FORWARD-LOOKING STATEMENTS
Certain of the matters discussed under "Summary", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business" and elsewhere in this Prospectus contain certain
forward-looking statements concerning the Company's operations, economic
performance and financial condition, including, among other things, the
Company's business strategy. These statements are based on the Company's
expectations and are subject to various risks and uncertainties. Actual
results could differ materially from those anticipated due to a number of
factors, including those identified under "Risk Factors" and elsewhere in this
Prospectus.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Outstanding Notes were sold by Drypers on March 17, 1998, to the Initial
Purchaser pursuant to a Purchase Agreement, dated March 12, 1998, between
Drypers and the Initial Purchaser (the "Purchase Agreement"). The Initial
Purchaser subsequently resold all of the Outstanding Notes to Qualified
Institutional Buyers, each of whom agreed to comply with certain transfer
restrictions and other conditions. As a condition to the purchase of the
Outstanding Notes by the Initial Purchaser, Drypers entered into a
Registration Rights Agreement with the Initial Purchaser, which requires,
among other things, that promptly following the issuance and sale of the
Outstanding Notes, Drypers file with the SEC the Registration Statement with
respect to the Exchange Notes, use its best efforts to cause the Registration
Statement to become effective under the Securities Act and, upon the
effectiveness of the Registration Statement, offer to the holders of the
Outstanding Notes the opportunity to exchange their Outstanding Notes for a
like principal amount of Exchange Notes, which will be issued without a
restrictive legend and may be reoffered and resold by the holder without
restrictions or limitations under the Securities Act subject to certain
exceptions described below. A copy of the Registration Rights Agreement has
been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The term "holder" with respect to the Exchange Offer
means any person in whose name Outstanding Notes are registered on Drypers'
books or any other person who has obtained a properly completed bond power
from the registered holder or any person whose Outstanding Notes are held of
record by the Depositary who desires to deliver such Outstanding Notes by
book-entry transfer of the Depositary. The Outstanding Notes provide that if
(i) the Exchange Offer has not been consummated within 30 days of the
effectiveness of the Registration Statement or (ii) a shelf registration
statement has not been declared effective by August 14, 1998, the interest
rate on the Outstanding Notes will increase by an amount ranging from 0.25% to
1.50% per annum from and including the applicable date as described in the
Registration Rights Agreement until but excluding the date the Exchange Offer
is consummated or a shelf registration statement is declared effective.
Based on existing interpretations of the Securities Act by the staff of the
SEC set forth in several no-action letters to third parties, and subject to
the immediately following sentence, Drypers believes that Exchange Notes
issued pursuant to the Exchange Offer in exchange for Outstanding Notes may be
offered for resale, resold and otherwise transferred by a holder thereof
(other than (i) a broker-dealer who purchased such Outstanding Notes directly
from Drypers for resale pursuant to Rule 144A or any other available exemption
under the Securities Act or (ii) a person that is an "affiliate" (within the
meaning of Rule 405 of the Securities Act) of Drypers), without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that the holder is acquiring the Exchange Notes in its ordinary
course of business and is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of the
Exchange Notes. However, any purchaser of Outstanding Notes who is an
affiliate of Drypers or who intends to participate in the Exchange Offer for
the purpose of distributing the Exchange Notes, or any broker-dealer who
purchased the Outstanding Notes from Drypers to resell pursuant to Rule 144A
or any other available exemption under the Securities Act, (i) will not be
able to rely on the interpretations by the staff of the SEC set forth in the
above-mentioned no-action letters, (ii) will not be able to tender its
Outstanding Notes in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Outstanding Notes unless such sale
or transfer is made pursuant to an exemption from such requirements.
Accordingly, any holder who tenders in the Exchange Offer with the intention
to participate, or for the purpose of participating, in a distribution of the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. See "Plan of Distribution."
As a result of the filing and effectiveness of the Registration Statement of
which this Prospectus is a part, Drypers will not be required to pay an
increased interest rate on the Outstanding Notes. Following the consummation
of the Exchange Offer, holders of Outstanding Notes not tendered will not have
any further registration rights except in certain limited circumstances
requiring the filing of a Shelf Registration Statement (as defined herein),
and the Outstanding Notes will continue to be subject to certain restrictions
on transfer. See
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"Description of the Exchange Notes." Accordingly, the liquidity of the market
for the Outstanding Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, Drypers will accept all Outstanding Notes
properly tendered and not withdrawn prior to 5:00 p.m. New York City time, on
the Expiration Date. After authentication of the Exchange Notes by the Trustee
or an authenticating agent, Drypers will issue and deliver $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
Outstanding Notes accepted in the Exchange Offer. Holders may tender some or
all of their Outstanding Notes pursuant to the Exchange Offer in denominations
of $1,000 and integral multiples thereof.
Each holder of Outstanding Notes (other than certain specified holders) who
wishes to exchange Outstanding Notes for Exchange Notes in the Exchange Offer
will be required to represent that (i) it is not an affiliate of Drypers, (ii)
any Exchange Notes to be received by it were acquired in the ordinary course
of its business and (iii) it has no arrangement or understanding with any
person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the Outstanding Notes, except that (i) the
offering of the Exchange Notes has been registered under the Securities Act,
(ii) the Exchange Notes will not be subject to transfer restrictions and (iii)
certain provisions relating to an increase in the stated interest rate on the
Outstanding Notes provided for under certain circumstances will be eliminated.
The Exchange Notes will evidence the same debt as the Outstanding Notes. The
Exchange Notes will be issued under and entitled to the benefits of the
Indenture.
As of the date of this Prospectus, $30,000,000 aggregate principal amount of
the Outstanding Notes is outstanding. In connection with the issuance of the
Outstanding Notes, Drypers arranged for the Outstanding
Notes to be issued and transferable in book-entry form through the facilities
of the Depositary, acting as depositary. The Exchange Notes will also be
issuable and transferable in book-entry form through the Depositary.
This Prospectus, together with the accompanying Letter of Transmittal, is
initially being sent to all registered holders of the Outstanding Notes as of
the close of business on June 1, 1998. Drypers intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act, and
the rules and regulations of the SEC thereunder, including Rule 14e-1, to the
extent applicable. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Outstanding Notes being tendered, and holders of
the Outstanding Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of the State of Delaware or under the Indenture in
connection with the Exchange Offer. Drypers shall be deemed to have accepted
validly tendered Outstanding Notes when, as and if Drypers has given oral or
written notice thereof to the Exchange Agent. See "--Exchange Agent." The
Exchange Agent will act as agent for the tendering holders for the purpose of
receiving Exchange Notes from Drypers and delivering Exchange Notes to such
holders.
If any tendered Outstanding Notes are not accepted for exchange because of
an invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted Outstanding Notes will be returned, at
Drypers' cost, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the
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exchange of Outstanding Notes pursuant to the Exchange Offer. Drypers will pay
all charges and expenses, other than certain applicable taxes, in connection
with the Exchange Offer. See "--Solicitation of Tenders; Fees and Expenses."
NEITHER THE BOARD OF DIRECTORS OF DRYPERS NOR DRYPERS MAKES ANY
RECOMMENDATION TO HOLDERS OF OUTSTANDING NOTES AS TO WHETHER TO TENDER OR
REFRAIN FROM TENDERING ALL OR ANY PORTION OF THEIR OUTSTANDING NOTES PURSUANT
TO THE EXCHANGE OFFER. MOREOVER, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF OUTSTANDING NOTES MUST MAKE THEIR OWN DECISION
WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE
AMOUNT OF OUTSTANDING NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE
LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR ADVISORS, IF ANY, BASED ON
THEIR OWN FINANCIAL POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on July
13, 1998, unless Drypers, in its sole discretion, extends the Exchange Offer,
in which case the term "Expiration Date" shall mean the latest date to which
the Exchange Offer is extended. Drypers may extend the Exchange Offer at any
time and from time to time by giving oral or written notice to the Exchange
Agent and by timely public announcement.
Drypers expressly reserves the right, in its sole discretion (i) to delay
acceptance of any Outstanding Notes, to extend the Exchange Offer or to
terminate the Exchange Offer and to refuse to accept Outstanding Notes not
previously accepted, if any of the conditions set forth herein under "--
Conditions to the Exchange Offer" shall have occurred and shall not have been
waived by Drypers (if permitted to be waived by Drypers), by giving oral or
written notice of such delay, extension or termination to the Exchange Agent
and (ii) to amend the terms of the Exchange Offer in any manner. Any such
delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof by Drypers to the
registered holders of the Outstanding Notes. If the Exchange Offer is amended
in a manner determined by Drypers to constitute a material change, Drypers
will promptly disclose such amendment in a manner reasonably calculated to
inform the holders of such amendment and Drypers will extend the Exchange
Offer to the extent required by law.
Without limiting the manner in which Drypers may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of the Exchange Offer, Drypers shall have no obligation to publish, advise, or
otherwise communicate any such public announcement, other than by making a
timely release thereof to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate of 10 1/4% per annum,
payable semi-annually on June 15 and December 15 of each year, commencing
December 15, 1998. Holders of Exchange Notes of record on December 1, 1998,
will receive on December 15, 1998, an interest payment in an amount equal to
(x) the accrued interest on such Exchange notes from the date of issuance
thereof to December 15, 1998, plus (y) the accrued interest on the previously
held Outstanding Notes from June 15, 1998 to the date of exchange thereof.
Interest will not be paid on Outstanding Notes that are accepted for exchange.
The Notes mature on June 15, 2007.
PROCEDURES FOR TENDERING
Each holder of Outstanding Notes wishing to accept the Exchange Offer must
complete, sign and date the Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or such facsimile, together with
the Outstanding Notes to be exchanged and any other required documentation, to
Bankers Trust Company, as Exchange Agent, at the
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address set forth herein and therein or effect a tender of Outstanding Notes
pursuant to the procedures for book-entry transfer as provided for herein and
therein. By executing the Letter of Transmittal, each holder will represent to
Drypers that, among other things, the Exchange Notes acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is the
holder, that neither the holder nor any such other person has any arrangement
or understanding with any person to participate in the distribution of such
Exchange Notes and that neither the holder nor any such other person is an
"affiliate," as defined in Rule 405 under the Securities Act, of Drypers.
Any financial institution that is a participant in the Depositary's Book-
Entry Transfer Facility system may make book-entry delivery of the Outstanding
Notes by causing the Depositary to transfer such Outstanding Notes into the
Exchange Agent's account in accordance with the Depositary's procedure for
such transfer. Although delivery of Outstanding Notes may be effected through
book-entry transfer into the Exchange Agent's account at the Depositary, the
Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at its address set forth herein under
"--Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration
Date. DELIVERY OF DOCUMENTS TO THE DEPOSITARY IN ACCORDANCE WITH ITS
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
Only a holder may tender its Outstanding Notes in the Exchange Offer. To
tender in the Exchange Offer, a holder must complete, sign and date the Letter
of Transmittal or a facsimile thereof, have the signatures thereof guaranteed
if required by the Letter of Transmittal, and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with the Outstanding Notes
(unless such tender is being effected pursuant to the procedure for book-entry
transfer) and any other required documents, to the Exchange Agent, prior to
5:00 p.m., New York City time, on the Expiration Date.
The tender by a holder will constitute an agreement between such holder,
Drypers and the Exchange Agent in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal. If less than all
of the Outstanding Notes are tendered, a tendering holder should fill in the
amount of Outstanding Notes being tendered in the appropriate box on the
Letter of Transmittal. The entire amount of Outstanding Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise
indicated.
THE LETTER OF TRANSMITTAL WILL INCLUDE REPRESENTATIONS TO DRYPERS THAT,
AMONG OTHER THINGS, (1) THE EXCHANGE NOTES ACQUIRED PURSUANT TO THE EXCHANGE
OFFER ARE BEING ACQUIRED IN THE ORDINARY COURSE OF BUSINESS OF THE PERSON
RECEIVING SUCH EXCHANGE NOTES (WHETHER OR NOT SUCH PERSON IS THE HOLDER), (2)
NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON IS ENGAGED IN, INTENDS TO ENGAGE
IN OR HAS ANY ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN
THE DISTRIBUTION OF SUCH EXCHANGE NOTES, (3) NEITHER THE HOLDER NOR ANY SUCH
OTHER PERSON IS AN "AFFILIATE," AS DEFINED IN RULE 405 UNDER THE SECURITIES
ACT, OF DRYPERS AND (4) IF THE TENDERING HOLDER IS A BROKER OR DEALER (AS
DEFINED IN THE EXCHANGE ACT) (A) IT ACQUIRED THE OUTSTANDING NOTES FOR ITS OWN
ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES
AND (B) IT HAS NOT ENTERED INTO ANY ARRANGEMENT OR UNDERSTANDING WITH DRYPERS
OR ANY "AFFILIATE" THEREOF (WITHIN THE MEANING OF RULE 405 UNDER THE
SECURITIES ACT) TO DISTRIBUTE THE EXCHANGE NOTES TO BE RECEIVED IN THE
EXCHANGE OFFER. IN THE CASE OF A BROKER-DEALER THAT RECEIVES EXCHANGE NOTES
FOR ITS OWN ACCOUNT IN EXCHANGE FOR OUTSTANDING NOTES WHICH WERE ACQUIRED BY
IT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES, THE LETTER OF
TRANSMITTAL WILL ALSO INCLUDE AN ACKNOWLEDGMENT THAT THE BROKER-DEALER WILL
DELIVER A COPY OF THIS PROSPECTUS IN CONNECTION WITH THE RESALE BY IT OF
EXCHANGE NOTES RECEIVED PURSUANT TO THE EXCHANGE OFFER; HOWEVER, BY SO
ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, SUCH HOLDER WILL NOT BE DEEMED
TO ADMIT THAT IT IS AN
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"UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT. SEE "PLAN OF
DISTRIBUTION."
THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ENSURE DELIVERY TO THE EXCHANGE AGENT PRIOR TO THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT
TO DRYPERS. HOLDERS MAY ALSO REQUEST THAT THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES EFFECT SUCH TENDER FOR HOLDERS,
IN EACH CASE AS SET FORTH HEREIN AND IN THE LETTER OF TRANSMITTAL.
Any beneficial owner whose Outstanding Notes are registered in the name of
his broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on his behalf. If such beneficial owner
wishes to tender on his own behalf, such beneficial owner must, prior to
completing and executing the Letter of Transmittal and delivering his
Outstanding Notes, either make appropriate arrangements to register ownership
of the Outstanding Notes in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer of record ownership may
take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act (each an "Eligible Institution"), unless
the Outstanding Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" of the Letter of Transmittal
or (ii) for the account of an Eligible Institution. If the Letter of
Transmittal is signed by a person other than the registered holder listed
therein, such Outstanding Notes must be endorsed or accompanied by appropriate
bond powers which authorize such person to tender the Outstanding Notes on
behalf of the
registered holder, in either case signed as the name of the registered holder
or holders appears on the Outstanding Notes. If the Letter of Transmittal or
any Outstanding Notes or bond powers are signed or endorsed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by Drypers,
evidence satisfactory to Drypers of their authority to so act must be
submitted with such Letter of Transmittal.
The Company understands that the Exchange Agent has confirmed with DTC that
any financial institution that is a participant in DTC's system may utilize
DTC's Automated Tender Offer Program ("ATOP") to tender Outstanding Notes. The
Company further understands that the Exchange Agent will request, within two
business days after the date the Exchange Offer commences, that DTC establish
an account with respect to the Outstanding Notes for the purpose of
facilitating the Exchange Offer, and any participant may make book-entry
delivery of Outstanding Notes by causing DTC to transfer such Outstanding
Notes into the Exchange Agent's account in accordance with DTC's ATOP
procedures for transfer. However, the exchange of the Outstanding Notes so
tendered will only be made after timely confirmation (a "Book-Entry
Confirmation") of such book-entry transfer and timely receipt by the Exchange
Agent of an Agent's Message (as defined in the next sentence), and any other
documents required by the Letter of Transmittal. The term "Agent's Message"
means a message, transmitted by DTC and received by the Exchange Agent and
forming part of Book-Entry Confirmation, which states that DTC has received an
express acknowledgment from a participant tendering Outstanding Notes which
are the subject of such Book-Entry Confirmation and that such participant has
received and agrees to be bound by the terms of the Letter of Transmittal and
that the Company may enforce such agreement against such participant.
27
<PAGE>
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Outstanding Notes will be
determined by Drypers in its sole discretion, which determination will be
final and binding. Drypers reserves the absolute right to reject any and all
Outstanding Notes not properly tendered or any Outstanding Notes Drypers'
acceptance of which would, in the opinion of counsel for Drypers, be unlawful.
Drypers also reserves the absolute right to waive any irregularities or
conditions of tender as to particular Outstanding Notes. Drypers'
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in the Letter of Transmittal) will be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of Outstanding Notes must be cured within such time as Drypers shall
determine. Although Drypers intends to notify holders of defects or
irregularities with respect to tenders of Outstanding Notes, neither Drypers,
the Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of
Outstanding Notes, nor shall any of them incur any liability for failure to
give such notification. Tenders of Outstanding Notes will not be deemed to
have been made until such irregularities have been cured or waived. Any
Outstanding Notes received by the Exchange Agent that Drypers determines are
not properly tendered or the tender of which is otherwise rejected by Drypers
and as to which the defects or irregularities have not been cured or waived by
Drypers will be returned by the Exchange Agent to the tendering holder unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, Drypers reserves the right in its sole discretion (a) to
purchase or make offers for any Outstanding Notes that remain outstanding
subsequent to the Expiration Date, or, as set forth under "--Conditions to the
Exchange Offer," terminate the Exchange Offer and (b) to the extent permitted
by applicable law, to purchase Outstanding Notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such
purchases or offers may differ from the terms of the Exchange Offer.
BOOK-ENTRY TRANSFER
Drypers understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Outstanding Notes at the DTC (the "Book-Entry Transfer Facility") for the
purpose of facilitating the Exchange Offer, and subject to the establishment
thereof, any financial institution that is a participant in the Book-Entry
Transfer Facility's system may make book-entry delivery of Outstanding Notes
by causing such Book-Entry Transfer Facility to transfer such Outstanding
Notes into the Exchange Agent's account with respect to the Outstanding Notes
in accordance with the Book-Entry Transfer Facility's procedures for such
transfer.
ALTHOUGH DELIVERY OF OUTSTANDING NOTES MAY BE EFFECTED THROUGH BOOK-ENTRY
TRANSFER INTO THE EXCHANGE AGENT'S ACCOUNT AT THE BOOK-ENTRY TRANSFER
FACILITY, AN APPROPRIATE LETTER OF TRANSMITTAL PROPERLY COMPLETED AND DULY
EXECUTED WITH ANY REQUIRED SIGNATURE GUARANTEE AND ALL OTHER REQUIRED
DOCUMENTS MUST IN EACH CASE BE TRANSMITTED TO AND RECEIVED OR CONFIRMED BY THE
EXCHANGE AGENT AT ITS ADDRESS SET FORTH BELOW ON OR PRIOR TO THE EXPIRATION
DATE, OR, IF THE GUARANTEED DELIVERY PROCEDURES DESCRIBED BELOW ARE COMPLIED
WITH, WITHIN THE TIME PERIOD PROVIDED UNDER SUCH PROCEDURES. DELIVERY OF
DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO
THE EXCHANGE AGENT.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Outstanding Notes and (i) whose Outstanding
Notes are not immediately available, or (ii) who cannot deliver their
Outstanding Notes, the Letter of Transmittal or any other required documents
to the Exchange Agent prior to the Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely basis, may effect a tender if:
(a) the tender is made through an Eligible Institution;
28
<PAGE>
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmittal, mail or hand delivery)
setting forth the name and address of the holder, the certificate number or
numbers of such holder's Outstanding Notes and the principal amount of such
Outstanding Notes tendered, stating that the tender is being made thereby,
and guaranteeing that, within three New York Stock Exchange ("NYSE")
trading days after the Expiration Date, the Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing the
Outstanding Notes to be tendered in proper form for transfer (or
confirmation of a book-entry transfer into the Exchange Agent's account at
the Depositary of Outstanding Notes delivered electronically) and any other
documents required by the Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered Outstanding Notes in proper form for transfer (or confirmation of
a book-entry transfer into the Exchange Agent's account at the Depositary
of Outstanding Notes delivered electronically) and all other documents
required by the Letter of Transmittal are received by the Exchange Agent
within three NYSE trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
For a withdrawal to be effective, a written or facsimile transmission notice
of withdrawal must be received by the Exchange Agent at its address set forth
herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any
such notice of withdrawal must (i) specify the name of the person having
deposited the Outstanding Notes to be withdrawn (the "Depositor"), (ii)
identify the Outstanding Notes to be withdrawn (including the certificate
number or numbers and principal amount of such Outstanding Notes or, in the
case of Outstanding Notes transferred by book-entry transfer, the name and
number of the account at the Depositary to be credited), (iii) be signed by
the Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Outstanding Notes were tendered (including any
required signature guarantee) or be accompanied by documents of transfer
sufficient to permit the Trustee with respect to the Outstanding Notes to
register the transfer of such Outstanding Notes into the name of the Depositor
withdrawing the tender and (iv) specify the name in which any such Outstanding
Notes are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time of receipt)
of such withdrawal notices will be determined by Drypers, whose determination
shall be final and binding on all parties. Any Outstanding Notes so withdrawn
will be deemed not to have been validly tendered for purposes of the Exchange
Offer, and no Exchange Notes will be issued with respect thereto unless the
Outstanding Notes so withdrawn are validly retendered. Any Outstanding Notes
that have been tendered but are not accepted for exchange will be returned to
the holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Outstanding Notes may be retendered by following one of the
procedures described above under "--Procedures for Tendering" at any time
prior to the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, Drypers will not be
required to accept for exchange, or to issue Exchange Notes for, any
Outstanding Notes, and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Outstanding Notes if, in Drypers'
judgment, any of the following conditions has occurred or exists or has not
been satisfied: (i) that the Exchange Offer, or the making of any exchange by
a holder, violates applicable law or any applicable interpretation of the
staff of the SEC, (ii) that any action or proceeding shall have been
instituted or threatened in any court or by or before any governmental
29
<PAGE>
agency or body with respect to the Exchange Offer, (iii) that there has been
adopted or enacted any law, statute, rule or regulation that can reasonably be
expected to impair the ability of Drypers to proceed with the Exchange Offer,
(iv) that there has been declared by United States federal or Texas or New
York state authorities a banking moratorium; or (v) that trading on the New
York Stock Exchange or generally in the United States over-the-counter market
has been suspended by order of the SEC or any other governmental agency.
If Drypers determines that it may terminate the Exchange Offer for any of
the reasons set forth above, Drypers may (i) refuse to accept any Outstanding
Notes and return any Outstanding Notes that have been tendered to the holders
thereof, (ii) extend the Exchange Offer and retain all Outstanding Notes
tendered prior to the Expiration Date of the Exchange Offer, subject to the
rights of such holders of tendered Outstanding Notes to withdraw their
tendered Outstanding Notes or (iii) waive such termination event with respect
to the Exchange Offer and accept all properly tendered Outstanding Notes that
have not been withdrawn. If such waiver constitutes a material change in the
Exchange Offer, Drypers will disclose such change by means of a supplement to
this Prospectus that will be distributed to each registered holder, and
Drypers will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such period.
EXCHANGE AGENT
Bankers Trust Company, the Trustee under the Indenture, has been appointed
as Exchange Agent for the Exchange Offer. In such capacity, the Exchange Agent
has no fiduciary duties and will be acting solely on the basis of directions
of Drypers. Requests for assistance and requests for additional copies of this
Prospectus or of the Letter of Transmittal should be directed to the Exchange
Agent addressed as follows:
By Mail: BT Services Tennessee, Inc.
Reorganization Unit
P.O. Box 292737
Nashville, TN 37229-2737
By Overnight Courier: BT Services Tennessee, Inc.
Reorganization Unit
Grassmere Park Drive
Nashville, TN 37211
By Hand Delivery: Bankers Trust Company
Corporate Trust and Agency Unit
123 Washington Street
First Floor Window
New York, NY 10006
Facsimile Transmission: (615) 835-3701
Confirmation by Telephone: (615) 835-3572
Information: (800) 735-7777
Delivery to an address or facsimile number other than those listed above
will not constitute a valid delivery.
30
<PAGE>
SOLICITATION OF TENDERS; FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by Drypers. The principal solicitation pursuant to the Exchange Offer is
being made by mail. Additional solicitations may be made by officers and
regular employees of Drypers and its affiliates in person, by telegraph,
telephone or telecopier.
Drypers has not retained any dealer-manager in connection with the Exchange
Offer and will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. Drypers will, however, pay the
Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket costs and
expenses in connection therewith and will indemnify the Exchange Agent for all
losses and claims incurred by it as a result of the Exchange Offer. Drypers
may also pay brokerage houses and other custodians, nominees and fiduciaries
the reasonable out-of-pocket expenses incurred by them in forwarding copies of
this Prospectus, Letters of Transmittal and related documents to the
beneficial owners of the Outstanding Notes and in handling or forwarding
tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees and printing costs, will be paid by Drypers.
Drypers will pay all transfer taxes, if any, applicable to the exchange of
Outstanding Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Outstanding Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered
holder of the Outstanding Notes tendered, or if tendered Outstanding Notes are
registered in the name of any person other than the person signing the Letter
of Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Outstanding Notes pursuant to the Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the registered holder or any
other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed by
Drypers directly to such tendering holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Outstanding Notes, as reflected in Drypers' accounting records on the date of
the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by Drypers as a result of the consummation of the Exchange Offer.
The expenses of the Exchange Offer will be amortized by Drypers over the term
of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Outstanding
Notes are urged to consult their financial and tax advisors in making their
own decisions as to what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Outstanding Notes pursuant to the terms of, this Exchange
Offer, Drypers will have fulfilled a covenant contained in the Registration
Rights Agreement. Holders of the Outstanding Notes who do not tender their
Outstanding Notes in the Exchange Offer will continue to hold such Outstanding
Notes and will be entitled to all the rights, and subject to the limitations
applicable thereto, under the Indenture and the Registration Rights Agreement,
except for any such rights under the Registration Rights Agreement that by
their terms terminate or cease to have further effect as a result of the
making of this Exchange Offer. See "Description of the Exchange Notes." All
untendered Outstanding Notes will continue to be subject to the restrictions
on transfer set forth in the Indenture. The Outstanding Notes may not be
offered, resold, pledged or otherwise transferred, prior to the date that is
two years after the later of March 17, 1998 and the last date on which Drypers
or any "affiliate" (within the meaning of Rule 144 of the Securities Act) of
Drypers was the owner of such Outstanding Note except (i) to Drypers, (ii)
pursuant to a registration statement which has been declared effective under
the Securities Act, (iii) to Qualified
31
<PAGE>
Institutional Buyers in reliance upon the exemption from the registration
requirements of the Securities Act provided by Rule 144A, (iv) to
Institutional Accredited Investors in transactions exempt from the
registration requirements of the Securities Act, (v) in transactions complying
with the provisions of Regulation S under the Securities Act or (vi) pursuant
to any other available exemption from the registration requirements under the
Securities Act. To the extent that Outstanding Notes are tendered and accepted
in the Exchange Offer, the liquidity of the trading market for untendered
Outstanding Notes could be adversely affected.
Drypers may in the future seek to acquire untendered Outstanding Notes in
the open market or through privately negotiated transactions, through
subsequent exchange offers or otherwise. Drypers intends to make any such
acquisitions of Outstanding Notes in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the SEC
thereunder, including Rule 14e-1, to the extent applicable. Drypers has no
present plan to acquire any Outstanding Notes that are not tendered in the
Exchange Offer or to file a registration statement to permit resales of any
Outstanding Notes that are not tendered in the Exchange Offer.
32
<PAGE>
USE OF PROCEEDS
Drypers will not receive any cash proceeds from the issuance of the Exchange
Notes offered hereby. In consideration for issuing the Exchange Notes as
contemplated in this Prospectus, Drypers will receive in exchange Outstanding
Notes in like principal amount. The form and terms of the Exchange Notes are
identical in all material respects to the form and terms of the Outstanding
Notes, except that (i) the offering of the Exchange Notes has been registered
under the Securities Act, (ii) the Exchange Notes will not be subject to
transfer restrictions and (iii) certain provisions relating to an increase in
the stated interest rate on the Outstanding Notes provided for under certain
circumstances will be eliminated. The Outstanding Notes surrendered in
exchange for Exchange Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the Exchange Notes will not result in a
change in the indebtedness of Drypers.
The net proceeds from the sale of the Outstanding Notes were approximately
$30.1 million. These net proceeds were used in the manner described below.
A portion of the net proceeds was used to repay in full all amounts
outstanding under the Revolving Credit Facility, which totaled $5.0 million at
March 17, 1998. The remaining net proceeds are to be used for general
corporate purposes, including capital expenditures (estimated to be $20.0
million for 1998).
33
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998. See "Use of Proceeds" and the Consolidated Financial Statements,
including the notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C>
Short-term debt:
New Credit Facility (1)........................................ $ --
Current portion of other long-term debt........................ 2,377
--------
Total short-term debt........................................ $ 2,377
========
Long-term debt, less current portion:
10 1/4% Senior Notes due 2007.................................. $146,078
Other long-term debt........................................... 3,240
--------
Total long-term debt, less current portion................... 149,318
Stockholders' equity:
Common stock, $.001 par value, 20,000,000 shares authorized;
16,818,923 shares issued and outstanding (2).................. 17
Additional paid-in capital (2)................................. 71,091
Warrants....................................................... 1,084
Retained deficit............................................... (21,275)
--------
Total stockholders' equity................................... 50,917
--------
Total capitalization....................................... $200,235
========
</TABLE>
- --------
(1) On April 1, 1998, the Company entered into a three-year $50.0 million new
credit facility (the "New Credit Facility") with BankBoston, N.A. to
replace the revolving credit facility. The New Credit Facility permits 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, which would have permitted
the Company to borrow up to $42.4 million at March 31, 1998.
(2) Does not include (a) up to 2,100,130 shares of common stock that may be
issued upon exercise of stock options under various stock option plans at
a weighted average exercise price of $3.01 per share; and (b) up to
676,890 shares of common stock issuable upon exercise of common stock
warrants at a weighted average exercise price of $2.59 per share.
34
<PAGE>
SELECTED FINANCIAL DATA
The following summary historical financial information 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>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
------------------------------------------------------ ----------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS
DATA(1):
Net sales............... $156,079 $173,552 $163,947 $207,014 $287,010 $60,161 $78,592
Cost of goods sold...... 95,295 106,130 114,075 126,128 175,545 36,756 47,249
-------- -------- -------- -------- -------- ------- -------
Gross profit............ 60,784 67,422 49,872 80,886 111,465 23,405 31,343
Selling, general and
administrative
expenses............... 46,231 48,081 53,691 70,333 89,973 18,961 32,477
Unusual expenses........ 2,376(2) 1,141(3) 3,185(4) -- -- -- --
Restructuring charge.... -- -- 4,255(5) -- -- -- --
-------- -------- -------- -------- -------- ------- -------
Operating income (loss). 12,177 18,200 (11,259) 10,553 21,492 4,444 (1,134)
Interest expense, net... 11,115 7,685 8,035 8,931 9,957 2,198 3,450
Other income (expense).. -- 434 -- -- 253 (123) 56
-------- -------- -------- -------- -------- ------- -------
Income (loss) before
income tax provision
(benefit) and
extraordinary items.... 1,062 10,949 (19,294) 1,622 11,788 2,123 (4,528)
Income tax provision
(benefit).............. 1,370 4,151 (3,829) 309 2,344 150 1,141
-------- -------- -------- -------- -------- ------- -------
Income (loss) before
extraordinary items.... (308) 6,798 (15,465) 1,313 9,444 1,973 (5,669)
Extraordinary items..... -- (3,688)(6) -- -- (7,769)(7) -- --
-------- -------- -------- -------- -------- ------- -------
Net income (loss)....... $ (308) $ 3,110 $(15,465) $ 1,313 $ 1,675 $ 1,973 $(5,669)
======== ======== ======== ======== ======== ======= =======
Common shares
outstanding............ 2,989 5,777 6,588 6,694 8,879 7,838 12,540
======== ======== ======== ======== ======== ======= =======
Common and potential
common shares
outstanding............ 2,989 6,302 6,588 15,065 18,470 17,925 12,540
======== ======== ======== ======== ======== ======= =======
Income (loss) per common
share(/8/):
Income (loss) before
extraordinary items:
Basic................. $ (.10) $ 1.18 $ (2.35) $ .11 $ 1.00 $ .23 $ (.46)
======== ======== ======== ======== ======== ======= =======
Diluted............... $ (.10) $ 1.08 $ (2.35) $ .09 $ .51 $ .23 $ (.46)
======== ======== ======== ======== ======== ======= =======
Extraordinary items:
Basic................. -- $ (.64) -- -- $ (.88) -- --
======== ======== ======== ======== ======== ======= =======
Diluted............... -- $ (.59) -- -- $ (.42) -- --
======== ======== ======== ======== ======== ======= =======
Net income (loss):
Basic................. $ (.10) $ .54 $ (2.35) $ .11 $ .12 $ .23 $ (.46)
======== ======== ======== ======== ======== ======= =======
Diluted............... $ (.10) $ .49 $ (2.35) $ .09 $ .09 $ .23 $ (.46)
======== ======== ======== ======== ======== ======= =======
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31 MARCH 31
---------------------------------------- -------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL RATIOS AND
OTHER DATA:
EBITDA(9)............... $16,594 $23,333 $(4,959) $17,412 $28,807 $6,189 $ 836
Adjusted EBITDA(10)..... 18,970 24,474 2,481 17,412 28,807 6,189 836
Capital expenditures.... 6,157 7,079 8,896 5,931 21,598 3,440 7,222
Depreciation and
amortization........... 5,017 5,799 7,068 7,624 8,220 2,041 2,080
Ratio of EBITDA to pro
forma interest expense,
net(9)(11)............. 2.1x .2x
Ratio of earnings to
fixed charges(12)...... 1.1x 2.3x -- 1.2x 2.1x 1.9x --
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit).............. $ 8,587 $ 17,962 $ (3,597) $ 8,707 $ 48,728 $ 68,563
Property and equipment,
net.................... 31,271 34,853 34,208 35,154 53,270 58,890
Total assets............ 115,905 131,731 137,420 150,555 205,232 239,713
Short-term debt,
including current
portion of long-term
debt................... 6,807 6,813 12,064 16,567 1,593 2,377
Long-term debt, less
current portion........ 75,510 46,632 47,350 48,647 116,755 149,318
Stockholders'
equity(13)............. 13,997 56,767 41,822 53,608 55,580 50,917
</TABLE>
36
<PAGE>
- --------
(1) The Company acquired two U.S. regional diaper manufacturing operations in
1992. In 1994, the Company acquired a preferred stock interest in an
Argentine diaper manufacturer, which became a wholly-owned subsidiary of
the Company in July 1995. In December 1996, the Company acquired a diaper
manufacturing operation in Mexico. The Company established operations in
Brazil in February 1997. The results of these operations have been
included since their respective dates of acquisition or establishment.
(2) 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 and expenses in connection with a patent
infringement lawsuit in which the Company settled by entering into a
license agreement and agreed to pay a royalty if the Company should use
the other party's patented technology.
(3) Includes legal fees and expenses of $1,141,000 incurred in connection
with a patent infringement lawsuit which was settled during the second
quarter of 1994 with no payment by the Company or the other party.
(4) 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 and unusual expenses of $827,000 related to costs
associated with the Company's refinancing described in Note 1 of the
Notes to Consolidated Financial Statements.
(5) Includes a noncash restructuring charge of $4,255,000 related to the
write-down of idled equipment to net realizable value and lease
termination costs related to the closure of the Company's Houston
facility.
(6) Includes a noncash extraordinary expense of $2,014,000, net of taxes, for
the write-off of capitalized debt issuance costs and original issue
discount, and a cash extraordinary expense of $1,674,000, net of taxes,
for prepayment fees in connection with the redemption of $30,000,000
principal amount of 12 1/2% Senior Notes from the proceeds of the
Company's initial public offering.
(7) 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 Existing Notes.
(8) 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.
(9) EBITDA represents income from operations plus depreciation and
amortization (excluding the portion of amortization included in interest
expense). The Company has included EBITDA data (which is not a measure of
financial performance under generally accepted accounting principles)
because such data are used by certain investors to measure a company's
ability to service debt and because a comparable measure will be a factor
in certain incurrence tests included in the Indenture. EBITDA should not
be considered as an alternative to income from operations or to cash
flows from operating activities (as determined in accordance with
generally accepted accounting principles) and should not be construed as
an indication of a company's operating performance or as a measure of
liquidity.
(10) Adjusted EBITDA represents EBITDA plus unusual expenses and restructuring
charges.
(11) The calculation of pro forma interest expense gives effect to the Note
Offering, the offering of the Existing Notes and the application of the
estimated net proceeds therefrom as if they had occurred on January 1,
1997, and includes pro forma interest income for the period earned on
cash balances at an assumed annual rate of 3%. This pro forma information
is not necessarily indicative of the financial results that might have
occurred had the transactions actually taken place on January 1, 1997, or
of future results of operations.
(12) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consists of income (loss) before income tax provision
(benefit) and extraordinary items plus fixed charges. "Fixed charges"
consist of interest on all debt and amortization of deferred financing
costs and original issue discounts/premiums plus the interest component
of rental expense under operating leases (assumed to equal one-third of
rental expense). Earnings were not adequate to cover fixed charges by
$10,669,000 for the year ended December 31, 1995 and by $733,000 for the
three months ended March 31, 1998. After giving pro forma effect to the
Note Offering, the offering of the Existing Notes and the application of
the estimated net proceeds therefrom as if they had occurred on January
1, 1997, and including pro forma interest income for the period earned on
cash balances at an assumed annual rate of 3%, the Company's ratio of
earnings to fixed charges would have been 1.8x for the year ended
December 31, 1997. Pro forma earnings were not adequate to cover pro
forma fixed charges by $715,000 for the three months ended March 31,
1998.
(13) The Company has never declared a cash dividend on its common stock.
37
<PAGE>
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, is intended to aid in
understanding the Company's results of operations as well as its financial
position, cash flows, debt and other key financial information.
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, 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 and the three-month periods ended March 31, 1997 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
---------------------------------------- ------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic................ $154.5 94.3% $179.2 86.6% $191.3 66.7% $45.6 75.8% $51.0 64.9%
International........... 9.4 5.7 27.8 13.4 95.7 33.3 14.6 24.2 27.6 35.1
------ ----- ------ ----- ------ ----- ----- ----- ----- -----
Total Net Sales....... $163.9 100.0% $207.0 100.0% $287.0 100.0% $60.2 100.0% $78.6 100.0%
====== ===== ====== ===== ====== ===== ===== ===== ===== =====
</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, lack of acceptance by consumers
of product features and innovations, foreign governmental monetary and policy
changes and other factors discussed herein.
38
<PAGE>
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 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 of 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
39
<PAGE>
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.
The foregoing factors should be taken into account, along with the other
factors discussed below and elsewhere in this Prospectus, in comparing the
Company's results during the past three years and the three months ended March
31, 1997 and 1998, and in understanding the results that may be expected in
the future.
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, and the three months ended March 31,
1997 and 1998.
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31 MARCH 31
-------------------- ------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........................ 69.6 60.9 61.2 61.1 60.1
----- ----- ----- ----- -----
Gross profit.............................. 30.4 39.1 38.8 38.9 39.9
Selling, general and administrative ex-
penses................................... 32.8 34.0 31.3 31.5 41.3
Unusual expenses.......................... 1.9 -- -- -- --
Restructuring charge...................... 2.6 -- -- -- --
----- ----- ----- ----- -----
Operating income (loss)................... (6.9) 5.1 7.5 7.4 (1.4)
Interest expense, net..................... 4.9 4.3 3.5 3.7 4.4
Other income (expense).................... -- -- 0.1 (0.2) 0.1
----- ----- ----- ----- -----
Income (loss) before income tax provision
(benefit) and extraordinary item......... (11.8) 0.8 4.1 3.5 (5.7)
Income tax provision (benefit)............ (2.4) 0.2 0.8 0.2 1.5
Extraordinary item........................ -- -- (2.7) -- --
----- ----- ----- ----- -----
Net income (loss)......................... (9.4)% 0.6% 0.6% 3.3% (7.2)%
===== ===== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1998 Compared to the Three Months Ended March
31, 1997.
Net Sales. Net sales increased 30.6% to $78.6 million for the three months
ended March 31, 1998 from $60.2 million for the three months ended March 31,
1997. Domestic sales increased 11.8% to $51.0 million for
40
<PAGE>
the three months ended March 31, 1998 from $45.6 million for the three months
ended March 31, 1997. 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, in addition to the national
media campaign in the United States for the Company's premium brand diapers,
and increased distribution in the training pant and private label categories.
The Company believes that the national media campaign and the introduction of
the new product 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 in export sales
resulting from pricing pressures in Asia due to recent currency declines. Net
sales in the international sector grew to $27.6 million for the three months
ended March 31, 1998 from $14.6 million in the prior comparable period. This
substantial increase primarily reflected the continued growth in sales volume
for the Company's operations in Argentina and Mexico and the growth of
business from the Company's operations in Brazil, which began in March 1997.
Cost of Goods Sold. Cost of goods sold decreased slightly as a percentage of
net sales to 60.1% for the three months ended March 31, 1998 compared to 61.1%
for the three months ended March 31, 1997. This decrease reflected an increase
in price per pad for the North American business and the benefits of higher
volumes over the Company's fixed cost base offset by growth in international
sales which have generally lower gross profit margins (and correspondingly
lower selling and promotional costs).
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased as a percentage of net sales to 41.3% for
the three months ended March 31, 1998 compared to 31.5% for the three months
ended March 31, 1997. The increase reflected the costs associated with the
Company's national television advertising campaign in the United States, which
began in February 1998 and a slight increase in promotional costs in Mexico
due to price competition from Procter & Gamble occurring late in the quarter,
offset by increases in international sales which have lower selling and
promotional costs.
Operating Income. As a result of the above factors, the Company's operating
income decreased $5.5 million to an operating loss of $1.1 million for the
three months ended March 31, 1998 from operating income of $4.4 million for
the three months ended March 31, 1997.
Interest Expense, net. Interest expense, net increased to $3.5 million for
the three months ended March 31, 1998 as compared to $2.2 million for the
three months ended March 31, 1997. The increase was primarily due to the June
1997 issuance of $115.0 million of 10 1/4% Senior Notes due 2007 and
amortization of additional deferred loan costs related to this transaction.
Income Taxes. The Company recorded a provision of $1.1 million related to
foreign taxes for the three months ended March 31, 1998, compared to a
provision of $150,000 in 1997. The increase is related to the increase in
international earnings during 1998.
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
41
<PAGE>
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.
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 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 pants 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 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
42
<PAGE>
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. Interest expense 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 new 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 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; the funding of capital investments in machinery,
equipment and computer systems; and the funding of acquisitions. 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 provided $3.7 million of cash during the three
months ended March 31, 1997 and used $10.8 million of cash during the three
months ended March 31, 1998. The use of cash during the three months ended
March 31, 1998 primarily reflected costs related to the national television
campaign in the United States, the increase in inventory to support the
increased sales volume, expenditures related to the development of the Xclaim
product, and international capital expenditures. The Company's operations used
$6.9 million of cash during the year ended December 31, 1997, reflecting 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.
The Company's capital expenditures were $7.2 million for the three months
ended March 31, 1998 and $3.4 million for the three months ended March 31,
1997. The significant increase between periods in capital expenditures related
primarily to international production capacity increases. The Company's
capital expenditures were $21.6 million for the year ended December 31, 1997
reflecting machine enhancements incurred in connection with the launch of
Drypers with Aloe Vera and production capacity increases. The
43
<PAGE>
Company financed its capital expenditures in 1997 and the first quarter of
1998 through borrowings under its former revolving credit facility and from
the proceeds of the $115.0 million and $30.0 million offerings of 10 1/4%
Senior Notes in June 1997 and March 1998, respectively.
The Company incurred significant cost increases of approximately $8 million
in the first quarter of 1998 and expects to incur approximately $2 million in
the second quarter of 1998. The majority of these increases 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 relates to the costs associated with the new laundry 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 for the entire fiscal year. 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.
The Company operates in an industry in which patents relating to 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 and other products so as to avoid infringing any valid patents of its
competitors. There can be no assurance that the Company will not be held to be
infringing 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. In addition, as the Company continues to introduce
new products and product innovations the Company may incur expenses related to
additional license agreements and/or additional patent infringement insurance
coverage.
The Company's working capital was $68.6 million as of March 31, 1998
compared to $48.7 million as of December 31, 1997. The Company's current
assets increased from $77.0 million as of December 31, 1997 to $104.7 million
as of March 31, 1998 and current liabilities increased from $28.3 million as
of December 31, 1997 to $36.2 million as of March 31, 1998. Total debt
increased from $118.3 million at December 31, 1997 to $151.7 million as of
March 31, 1998.
On April 1, 1998, the Company entered into a new three-year $50.0 million
credit facility to replace the former revolving credit facility. The new
credit facility permits 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 bears 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
is secured by substantially all of the Company's assets. At March 31, 1998,
the Company's borrowing base would have permitted the Company to borrow up to
$42.4 million. No borrowings were outstanding under the former revolving
credit facility as of March 31, 1998.
On March 17, 1998, the Company closed its private issuance of an additional
$30.0 million of 10 1/4% Senior Notes (the "Outstanding Notes") at a price of
103.625% of the principal amount thereof. The Outstanding Notes were issued
under the same indenture as the June 1997 issuance of 10 1/4% Senior Notes.
Proceeds from the issuance of the Outstanding Notes were $30.4 million ($30.1
million, net), $5.0 million of which was used to repay all outstanding
indebtedness under the revolving credit facility and the remaining proceeds
will be used for general corporate purposes, including capital expenditures.
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.
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On June 24, 1997, the Company closed its private issuance of $115.0 million
aggregate principal amount of 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 Company's former revolving
credit facility, to repay a term loan with a bank, 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 $7.8 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.
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. On April 6, 1998, the Company exercised
its fair value option to acquire the remaining equity interest in the parent
company of the Brazilian manufacturer of its diapers. The acquisition will be
accounted for as a purchase, and the purchase price of approximately $5.2
million will be allocated to the acquired assets and liabilities assumed based
on their estimated fair values. The transaction is subject to approval by the
Brazilian government. The transaction gives the Company a 100% ownership
interest in the Brazilian manufacturing facility of its diapers. Following
this transaction, the Company's total investment in Brazil is approximately
$15.0 million.
Management believes that future cash flow from operations, together with
cash on hand, available borrowings under the new credit facility and the net
proceeds of the Outstanding Notes described above will be adequate to meet the
Company's anticipated cash requirements, including working capital, capital
expenditures, debt service and acquisitions, for the foreseeable future.
INFLATION
Inflationary conditions in the United States have been moderate and 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.
NEW ACCOUNTING STANDARDS
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 that 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.
In April 1998, Statement of Position (SOP) 98-5 "Reporting on the Costs of
Start-Up Activities", was issued by the American Institute of Certified Public
Accountants. SOP 98-5 requires that all nongovernmental entities expense
start-up activities as those costs are incurred. The Company is required to
adopt SOP 98-5 for the fiscal year ending December 31, 1999. The Company does
not expect the adoption of SOP 98-5 to have a material effect on its financial
position or results of operations.
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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.
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BUSINESS
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. 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, Brazil and
Mexico. 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.
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.
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
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private label products. 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 pants market sold
through grocery stores, measured by retail sales, was approximately $2.0
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%
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 Markets. Although disposable baby
diaper usage is significantly lower outside the United States, Western Europe,
Japan and other developed countries, the Company estimates that the
international disposable baby diaper market is approximately $12 billion in
manufacturers' sales. Procter & Gamble and Kimberly-Clark have contributed to
the development of the international market for disposable baby diapers by
advertising heavily and by introducing their products in numerous markets.
Although Procter & Gamble and Kimberly-Clark dominate 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.
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:
Continued 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
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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.
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. See "Recent Developments".
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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, Venture, 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 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 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 April 1998,
the Company exercised its fair market value option to acquire the Brazilian
manufacturer of its diapers. 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.
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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.
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 pants 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
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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 pants 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.
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 pants products to the
brand name Drypers. In the second
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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.
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.
53
<PAGE>
The Company maintains quality control procedures throughout the production
process, commencing with the receipt of raw materials and continuing through
shipment of the finished product. Each of the Company's production lines has
on-line electronic detection devices built into the overall production control
system that feed data to process control computers that automatically reject
certain nonconforming products. In addition, each of the Company's diaper
lines has a full-time inspector assigned to assure quality control at all
stages of the production process. Finally, line inspections and batch testing
are performed on a continuous basis. On-site testing labs are utilized to
conduct thorough tests of quality attributes on a daily basis and to assist in
the product development process.
RAW MATERIALS
The raw materials used in the Company's manufacturing process include wood
pulp, super absorbent polymer, polyethylene film, polypropylene nonwoven
fabric, adhesive closure tape, hot melt adhesive, elastic, tissue, bags,
boxes, 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 March 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
54
<PAGE>
a one-year contract entered into with the syndicate. The Company believes its
relationship with its employees is good.
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.
PROPERTIES
The Company leases manufacturing, distribution and administrative space in
seven 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
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. The Company believes
that its other leased facilities are adequate for its current needs.
55
<PAGE>
MANAGEMENT
Set forth below are the names, ages, and positions of the officers and
directors of the Company. All directors are elected for a term of one year and
serve until their successors are elected and qualified. All officers hold
office until their successors are elected and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------ --- ----------------------------------------------------
<S> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS:
Walter V. Klemp......... 38 Chairman of the Board, Co-Chief Executive Officer
Terry A. Tognietti...... 41 Co-Chief Executive Officer, President--Drypers North
America, Secretary and Director
Raymond M. Chambers..... 42 Co-Chief Executive Officer, President--Drypers
International and Director
Joe D. Tanner........... 51 Executive Vice President and Chief Operating
Officer--Drypers International
Jonathan P. Foster...... 34 Executive Vice President and Chief Financial Officer
Gary L. Forbes.......... 54 Director
Nolan Lehmann........... 53 Director
Philip A. Tuttle........ 56 Director
OTHER OFFICERS:
David M. Olsen.......... 40 Vice President of Marketing
Chris R. Richards....... 32 Vice President Sales--Drypers North America
</TABLE>
Mr. Klemp has served as the Chairman of the Board and Co-Chief Executive
Officer of Drypers since January 1995 and has served on its Board of Directors
since its formation in February 1987. From February 1996 to July 1996, in
addition to his duties as Chairman and Co-Chief Executive Officer, he served
as Acting Chief Financial Officer. He served as the Managing Director--Finance
of Drypers from its formation to December 1994. In 1984, Mr. Klemp
participated in the formation of VMG Enterprises, Inc. ("VMG") and, in 1987,
the formation of Drypers.
Mr. Tognietti participated in the formation of Drypers and has served as Co-
Chief Executive Officer, President of Drypers North America and Secretary
since January 1995. Mr. Tognietti also has served as a director of Drypers
since August 1991, and as Managing Director of Drypers from its formation to
December 1994. From January 1994 to December 1994, he served as the Company's
Managing Director--Domestic Operations. From June 1992 to December 1993, he
served as President of the Company's Veragon division. From June 1979 to
August 1987, Mr. Tognietti was involved in operations management within the
baby diaper division of Procter & Gamble, serving in various positions,
including Pampers operations department manager, Luvs operations department
manager and Luvs manufacturing development manager.
Mr. Chambers has served as Co-Chief Executive Officer, President of Drypers
International and a director of Drypers since January 1995 and served as a
Managing Director of Drypers from June 1992 to December 1994. In June 1992, he
also became President of the Company's VMG division and served in such
capacity until December 1993. From January 1994 to December 1994, he served as
the Company's Managing Director--International Operations. From July 1989
until joining the Company in June 1992, Mr. Chambers served as Chief Executive
Officer and President of VMG. Mr. Chambers also served as Vice President of
Manufacturing of VMG from March 1986 to July 1989 and as Operations Manager of
VMG from April 1985 to March 1986. From March 1979 to April 1985, Mr. Chambers
served in various manufacturing management positions with Procter & Gamble,
including process engineer with divisional responsibilities for specific
Pampers product improvements.
Mr. Tanner has served as Executive Vice President and Chief Operating
Officer--Drypers International since February 1996. From February 1995 until
February 1996, he served as the Company's Vice President, Chief Operating
Officer--Drypers International. Mr. Tanner served as President of Hygienic
Products
56
<PAGE>
International, Inc., a subsidiary of the Company that was merged into Drypers
in February 1996, from its inception in February 1992 to February 1995.
Mr. Foster has served as Chief Financial Officer since July 1996 and as
Executive Vice President of Drypers since November 1996. From September 1995
to July 1996, Mr. Foster was Chief Financial Officer of Dickson Weatherproof
Nail Company, Inc., based in Chicago, Illinois. From September 1991 to August
1995, Mr. Foster was with Schlumberger, Ltd. as Controller and Treasurer for
Global Tel*Link, Inc., a telecommunications subsidiary in Mobile, Alabama, and
as Assistant Controller and Controller for Schlumberger's Measurement
Division, a manufacturer and worldwide marketer of industrial flow measurement
products, based in Greenwood, South Carolina. Mr. Foster is a certified public
accountant.
Mr. Forbes has served as a director of the Company since May 1996. Mr.
Forbes has served as Vice President of Equus Capital Management Corporation
since 1991 and also has served as Vice President of Equus II Incorporated
("Equus"). Equus Capital Management Corporation and Equus Capital Corporation
also serve as the management company and managing general partner of Equus
Capital Partners, L.P. ("Equus Capital"), one of several funds formed by Equus
Capital Corporation. Equus Capital and its affiliate, Equus, are principal
stockholders of the Company. Mr. Forbes is a director of Advanced Technical
Products Inc., a manufacturer of perfomance composite products, Consolidated
Graphics, Inc., a company involved in commercial and financial printing, and
NCI Building Systems, Inc., a manufacturer of pre-engineered metal buildings.
Mr. Forbes is a certified public accountant.
Mr. Lehmann has served as a director of the Company since 1991. He has
served as President and a director of Equus Capital Management Corporation,
located in Houston, Texas, since 1983, and is also President and a director of
Equus Capital Corporation. Mr. Lehmann also currently serves as President and
a director of Equus. Mr. Lehmann also serves on the board of directors of
Allied Waste Industries, Inc., a company involved in solid waste disposal,
American Residential Services, Inc., a provider of residential services,
Brazos Sportswear, Inc., a marketer of casual sportswear, and Garden Ridge
Corporation, a specialty retail corporation. Mr. Lehmann is a certified public
accountant.
Mr. Tuttle has served as a director of the Company since 1991. Since May
1989, Mr. Tuttle has been a general partner of Davis Venture Group, the
general partner of Davis Venture Partners, L.P. (collectively, "Davis"). Davis
is a principal stockholder of the Company. Since May 1997, Mr. Tuttle has been
a general partner of Davis, Tuttle Venture Group, the general partner of
Davis, Tuttle Venture Partners, L.P., a private equity partnership. Mr. Tuttle
also serves on the board of directors of Zydeco Energy, Inc., a drilling,
exploration and energy services company. Mr. Tuttle is a certified public
accountant and is a fellow of the Institute of Directors, London, England.
Mr. Olsen has served as the Vice President of Marketing since March 1996 and
in various management positions in the Marketing Department of Drypers since
January 1992. Mr. Olsen worked at Johnson and Johnson from December 1988 to
December 1991 as a Product Manager in their feminine hygiene business. From
1985 to 1988, Mr. Olsen worked at Saatchi and Saatchi Advertising where he was
the account supervisor on the Procter & Gamble account.
Mr. Richards has served as Vice President of Sales for Drypers North America
since March 1996. Mr. Richards worked in the marketing and sales departments
of a regional U.S. diaper manufacturer from March 1990 until the Company's
acquisition of such manufacturer in 1992. Prior to March 1990, Mr. Richards
worked at Revlon, Inc. in various sales and sales management positions.
57
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table and the notes thereto set forth, as of April 15, 1998,
the beneficial ownership of the Company's Common Stock ("Common Stock") by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the Common Stock, (ii) each director and named executive officer of the
Company, and (iii) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP(1)
---------------------
COMMON
NAME STOCK PERCENT
---- --------- -------
<S> <C> <C>
Equus II Incorporated and affiliates(2) ................. 3,904,496 23.2
2929 Allen Parkway, 25th Floor
Houston, Texas 77019
Davis Venture Group and affiliates(3).................... 1,544,379 9.2
12 Greenway Plaza, Suite 1100
Houston, Texas 77046
Heartland Advisers, Inc.(4).............................. 1,449,776 8.6
790 North Milwaukee Street
Milwaukee, Wisconsin 53202
Meridian Fund, Ltd.(5)................................... 936,195 5.6
601 Jefferson, Suite 4000
Houston, Texas 77002
Walter V. Klemp.......................................... 791,088(6) 4.5
5300 Memorial, Suite 900
Houston, Texas 77007
Terry A. Tognietti....................................... 673,846(7) 3.9
5300 Memorial, Suite 900
Houston, Texas 77007
Raymond M. Chambers...................................... 596,765(8) 3.4
5300 Memorial, Suite 900
Houston, Texas 77007
Joe D. Tanner............................................ 300,594(9) 1.8
5300 Memorial, Suite 900
Houston, Texas 77007
Jonathan P. Foster....................................... 21,667(10) *
5300 Memorial, Suite 900
Houston, Texas 77007
Gary L. Forbes(11)....................................... 13,834(11) (11)
Nolan Lehmann(12)........................................ 12,348(12) (12)
Philip A. Tuttle(13)..................................... 9,334(13) (13)
6 directors and 2 other executive officers as a group
(8 persons)(14)......................................... 7,868,351 42.0
</TABLE>
- --------
*Less than 1%.
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under Rule 13d-3(d), shares not
outstanding that are subject to options, warrants, rights or conversion
privileges exercisable within 60 days are deemed outstanding for the
purpose of calculating the number and percentage owned by such person,
but not deemed outstanding for the purpose of calculating the percentage
owned by any other person. Beneficial ownership includes outstanding
shares of Common Stock and shares of Common Stock that such holder has a
right to acquire within 60 days upon exercise of outstanding options or
warrants. Except as otherwise noted, each stockholder has sole voting and
dispositive power with respect to the shares of Common Stock.
58
<PAGE>
(2) "Equus II Incorporated and affiliates" consists of Equus Capital
Management Corporation, Equus Capital Corporation, Equus and Equus
Capital. Equus Capital Management Corporation and Equus Capital
Corporation serve as the management company and sub-advisor of Equus.
Equus Capital Management Corporation and Equus Capital Corporation also
serve as the management company and managing general partner of Equus
Capital. Because of these relationships, each of the entities
constituting Equus II Incorporated and affiliates may be deemed to
beneficially own the 3,677,906 shares of Common Stock held directly by
Equus and the 226,590 shares of Common Stock held directly by Equus
Capital.
(3) "Davis Venture Group and affiliates" comprises Davis Venture Group and
Davis Venture Partners, L.P. Davis Venture Group is the general partner
of Davis Venture Partners, L.P. Because of such relationships Davis
Venture Group may be deemed to be beneficial owner of shares of Common
Stock held of record by Davis Venture Partners, L.P.
(4) The foregoing information is based solely on information contained in
Amendment No. 3 to Schedule 13G dated April 13, 1998 of Heartland
Advisors, Inc. filed with the Securities and Exchange Commission with
respect to its beneficial ownership of Common Stock.
(5) The foregoing information is based solely on information contained in
Schedule 13G dated March 30, 1998 of Meridian Fund, Ltd. filed with the
Securities and Exchange Commission with respect to its beneficial
ownership of Common Stock.
(6) Includes 129,081 and 498,916 shares of Common Stock issuable upon
exercise of warrants and options, respectively.
(7) Includes 17,211 and 498,916 shares of Common Stock issuable upon exercise
of warrants and options, respectively.
(8) Includes 103,265 and 473,500 shares of Common Stock issuable upon
exercise of warrants and options, respectively.
(9) Includes 7,284 and 139,167 shares of Common Stock issuable upon exercise
of warrants and options, respectively.
(10) Includes 21,667 shares of Common Stock issuable upon exercise of options.
(11) Mr. Forbes is Vice President of Equus Capital Management Corporation and
Equus Capital Corporation. Because of such relationships, he may be
deemed to be the beneficial owner of the shares of Common Stock
beneficially owned by Equus II Incorporated and affiliates. Mr. Forbes
disclaims such beneficial ownership. See Note (2) to this table. Includes
3,668 shares of Common Stock issuable upon exercise of options.
(12) Mr. Lehmann is President and a director of each of Equus Capital
Management Corporation, Equus Capital Corporation and Equus. Because of
such relationships, he may be deemed to be the beneficial owner of the
shares of Common Stock beneficially owned by Equus II Incorporated and
affiliates. Mr. Lehmann disclaims such beneficial ownership. See Note (2)
to this table. Includes 9,334 shares of Common Stock issuable upon
exercise of options.
(13) Mr. Tuttle is a general partner of Davis Venture Group. Because of such
relationship, Mr. Tuttle may be deemed to be the beneficial owner of the
shares of Common Stock beneficially owned by Davis Venture Group and
affiliates. Mr. Tuttle disclaims such beneficial ownership. See Note (3)
to this table. Includes 9,334 shares of Common Stock issuable upon
exercise of options.
(14) See notes (6) through (13) above.
59
<PAGE>
DESCRIPTION OF REVOLVING CREDIT FACILITY
On April 1, 1998, the Company entered into a three-year $50.0 million new
credit facility with BankBoston, N.A. to replace the Company's former
revolving credit facility. The new credit facility permits 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 will 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 is secured by substantially all of
the Company's assets. At March 31, 1998, the Company's borrowing base would
have permitted the Company to borrow up to $42.4 million.
60
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
The following is a summary of the material terms of the Indenture, as
amended by the Supplemental Indenture. The Company will issue the Exchange
Notes offered hereby pursuant to the Indenture, as modified by the
Supplemental Indenture, between the Company and Bankers Trust Company, as
trustee (the "Trustee").
A copy of the existing Indenture was filed as an Exhibit to the Registration
Statement relating to the registration of the Existing Notes. A copy of the
Supplemental Indenture will be made available by the Company upon request. The
Indenture is subject to and governed by the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The following summary of the material
provisions of the Indenture does not purport to be complete and is subject to,
and qualified in its entirety by, reference to the provisions of the
Indenture, including the definitions of certain terms contained therein and
those terms made part of the Indenture by reference to the Trust Indenture
Act. For definitions of certain capitalized terms used in the following
summary, see "Certain Definitions" below.
On June 24, 1997, the Company issued $115,000,000 aggregate principal amount
of the Existing Notes under the Indenture, all of which have been exchanged
for $115,000,000 aggregate principal amount of exchange notes with terms
similar to the Exchange Notes. The Company issued the $30,000,000 of
Outstanding Notes on March 17, 1998 and may, from time to time, issue
additional senior notes under the Indenture (collectively, the "New Notes"),
subject in each case to compliance with the covenants described below under
"Certain Covenants". As used in this Offering Memorandum, the term "Notes"
includes the Existing Notes, the New Notes and the Exchange Notes, unless the
context otherwise requires, and the terms "holder" and "holders" include
holders of the Existing Notes, the New Notes and the Exchange Notes.
GENERAL
The Exchange Notes, like the Outstanding Notes will mature on June 15, 2007
and are senior unsecured obligations of the Company. $145,000,000 aggregate
principal amount of notes have been issued under the Indenture. Each Exchange
Note issued in respect of an Existing Note will bear interest at the rate of
10 1/4% per annum from March 17, 1998 or from the most recent interest payment
date to which interest has been paid or duly provided for, payable
semiannually on June 15 and December 15 in each year, until the principal
thereof is paid or duly provided for, to the person in whose name the Existing
Note (or any predecessor Note) is registered at the close of business on June
1 or December 1 next preceding such interest payment date. The New Notes (and
any Exchange Notes issued in respect thereof) will bear interest at the rate
of 10 1/4% per annum from their 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 or duly provided for, to the
person in whose name the New Note (or any predecessor Note) is registered at
the close of business on June 1 or December 1 next preceding such interest
payment date. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
The principal of and premium, if any, and interest on the Notes will be
payable, and the Notes will be exchangeable and transferable, at the office or
agency of the Company in The City of New York maintained for such purposes
(which initially will be the office of the Trustee located at Four Albany
Street, New York, New York 10006); provided, however, that, at the option of
the Company, interest may be paid by check mailed to the address of the person
entitled thereto as such address appears in the security register. The Notes
will be issued only in registered form without coupons and only in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer or exchange or redemption of
Notes, but the Company may require payment in certain circumstances of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in connection therewith.
Since the Closing Date, all of the Company's Subsidiaries have been
Restricted Subsidiaries. However, under certain circumstances, the Company
will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to any of the
restrictive covenants set forth in the Indenture.
61
<PAGE>
Subject to the covenants described below under "Certain Covenants" and
applicable laws, the Company may issue additional Notes under the Indenture.
Any Notes offered hereby that remain outstanding after the consummation of the
Exchange Offer pertaining thereto, Exchange Notes issued in connection with
any Exchange Offer and any Notes heretofore or hereafter issued under the
Indenture, including New Notes (and any Exchange Notes issued in respect
thereof), will be treated as a single class of securities under the Indenture.
The Notes will not be entitled to the benefit of any sinking fund.
GUARANTEES
Payment of the principal of (and premium, if any, on) and interest on the
Notes, when and as the same become due and payable, will be guaranteed,
jointly and severally, on a senior unsecured basis by the Subsidiary
Guarantors referred to below. The obligations of each Subsidiary Guarantor
under its Subsidiary Guarantee will be limited so as not to constitute a
fraudulent conveyance under applicable law.
The Indenture requires that each domestic Restricted Subsidiary (those
active Restricted Subsidiaries that are organized or principally doing
business in the United States and its territories and possessions) be a
Subsidiary Guarantor, as well as each other Restricted Subsidiary that
guarantees any other Debt of the Company. Since the Closing Date, the Company
has had no active domestic Restricted Subsidiaries or any other Restricted
Subsidiaries that guarantee any other Debt of the Company and, accordingly,
there are currently no Subsidiary Guarantors.
The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into any other person (other than the Company or another
Subsidiary Guarantor) unless: (a) subject to the provisions of the following
paragraph, the person formed by or surviving such consolidation or merger (if
other than such Subsidiary Guarantor) assumes all of the obligations of such
Subsidiary Guarantor under the Indenture and its Subsidiary Guarantee,
pursuant to a supplemental indenture in form and substance satisfactory to the
Trustee and (b) immediately after giving effect to such transaction, no
Default or Event of Default has occurred and is continuing.
The Indenture provides that, in the event of (a) a sale, transfer or other
disposition of all of the Capital Stock of a Subsidiary Guarantor to a person
that is not an Affiliate of the Company, (b) a sale, transfer or other
disposition of all or substantially all of the assets of a Subsidiary
Guarantor to a person that is not an Affiliate of the Company or (c) the
designation of such Subsidiary Guarantor as an Unrestricted Subsidiary, in any
such case in compliance with the terms of the Indenture, then such Subsidiary
Guarantor will be deemed automatically and unconditionally released and
discharged from all of its obligations under its Subsidiary Guarantee without
any further action on the part of the Trustee or any holder of the Notes;
provided that the Net Proceeds of any such sale, transfer or other disposition
are applied in accordance with the "Limitation on Certain Asset Sales"
covenant.
RANKING
The Notes are senior unsecured obligations of the Company and rank pari
passu in right of payment with all existing and future unsubordinated debt of
the Company. The Notes are effectively subordinated to all of the Company's
secured debt, including loans outstanding under the New Credit Facility, to
the extent of the assets securing such loans, and are structurally
subordinated to all liabilities, including trade payables, of the Company's
subsidiaries that do not guarantee the Notes. As of March 31, 1998, the
Company had $120.6 million of debt outstanding other than the Outstanding
Notes and its subsidiaries had approximately $14.9 million of accounts payable
and third party debt. Subject to certain limitations, the Company and its
Restricted Subsidiaries may incur additional Debt in the future.
62
<PAGE>
REDEMPTION
The Notes will be redeemable at the election of the Company, as a whole or
from time to time in part, at any time on or after June 15, 2002, on not less
than 30 nor more than 60 days' prior notice at the redemption prices
(expressed as percentages of principal amount) set forth below, together with
accrued interest, if any, to the redemption date, if redeemed during the 12-
month period beginning on June 15 of the years indicated below (subject to the
right of holders of record on the relevant record dates to receive interest
due on an interest payment date):
<TABLE>
<CAPTION>
REDEMPTION REDEMPTION
YEAR PRICE
---------- ----------
<S> <C>
2002.......................................................... 105.125%
2003.......................................................... 103.417
2004.......................................................... 101.708
</TABLE>
and thereafter at 100% of the principal amount, together with accrued
interest, if any, to the redemption date.
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 date of
redemption (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 the New Notes theretofore issued under the
Indenture, remains outstanding. Any such redemption must be made within 90
days of the related Equity Offering.
If less than all the Notes are to be redeemed, the particular Notes to be
redeemed will be selected not more than 60 days prior to the redemption date
by the Trustee by lot or such other method as the Trustee deems fair and
appropriate.
CERTAIN DEFINITIONS
"Acquired Debt" means Debt of a person (a) existing at the time such person
is merged with or into the Company or becomes a Subsidiary or (b) assumed in
connection with the acquisition of assets from such person.
"Affiliate" means, with respect to any specified person, any other person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person. For the purposes of this
definition, "control", when used with respect to any specified person, means
the power to direct the management and policies of such person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer") by the Company or
a Restricted Subsidiary, directly or indirectly, in one or a series of related
transactions, to any person other than the Company or a Restricted Subsidiary
of (a) any Capital Stock of any Restricted Subsidiary, (b) all or
substantially all of the properties and assets of the Company and its
Restricted Subsidiaries representing a division or line of business or (c) any
other properties or assets of the Company or any Restricted Subsidiary, other
than in the ordinary course of business. For the purposes of this definition,
the term "Asset Sale" does not include any transfer of properties or assets
(i) that is governed by the provisions of the Indenture described under
"Consolidation, Merger and Sale of Assets", (ii) between or among the Company
and its Restricted Subsidiaries pursuant to transactions that do not violate
any other provision of the Indenture, (iii) to an Unrestricted Subsidiary or a
Joint Venture, if permitted under the "Limitation on Restricted Payments"
covenant, (iv) representing obsolete or permanently retired equipment and
facilities, (v) involving the leasing of a JOA diaper
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line from McDonnell Douglas Leasing Corporation, including the sale and
leaseback of related equipment, (vi) the sale and leaseback of all or a
portion of a diaper, training pant or wet wipe production line acquired by the
Company or a Restricted Subsidiary after the Closing Date, provided that the
aggregate amount of proceeds received by the Company from any such sale may
not exceed $1,500,000 or (vii) the gross proceeds of which (exclusive of
indemnities) do not exceed $1,000,000 for any particular item or $2,000,000 in
the aggregate for any fiscal year of the Company.
"Capital Stock" of any person means any and all shares, interests,
partnership interests, participations, rights in or other equivalents (however
designated) of such person's equity interest (however designated).
"Capitalized Lease Obligation" means, with respect to any person, an
obligation incurred or assumed under or in connection with any capital lease
of real or personal property that, in accordance with GAAP, has been recorded
as a capitalized lease.
"Change of Control" means the occurrence of any of the following events:
(a) Any person or "group" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person will
be deemed to have "beneficial ownership" of all securities that such person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of a majority of
the voting power of all classes of Voting Stock of the Company.
(b) During any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company
(together with any new directors whose election to such Board of Directors,
or whose nomination for election by the stockholders of the Company, was
approved by a vote of 66 2/3% of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in
office.
(c) The Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution.
"Closing Date" means June 24, 1997.
"Consolidated Adjusted Net Income" means, for any period, the net income (or
net loss) of the Company and its Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP, adjusted to the
extent included in calculating such net income or loss by excluding (a) any
net after-tax extraordinary gains or losses (less all fees and expenses
relating thereto), (b) any net after-tax gains or losses (less all fees and
expenses relating thereto) attributable to Asset Sales, (c) the portion of net
income (or loss) of any person (other than the Company or a Restricted
Subsidiary), including Unrestricted Subsidiaries, in which the Company or any
Restricted Subsidiary has an ownership interest, except to the extent of the
amount of dividends or other distributions actually paid to the Company or any
Restricted Subsidiary in cash during such period, (d) the net income (or loss)
of any person combined with the Company or any Restricted Subsidiary on a
"pooling of interests" basis attributable to any period prior to the date of
combination and (e) the net income (but not the net loss) of any Restricted
Subsidiary to the extent that the declaration or payment of dividends or
similar distributions by such Restricted Subsidiary is at the date of
determination restricted, directly or indirectly, including by way of foreign
governmental limitations on remittances, except to the extent that such net
income could be paid to the Company or a Restricted Subsidiary thereof by
loans, advances, intercompany transfers, principal repayments or otherwise;
provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted
Subsidiary, Consolidated Adjusted Net Income will be reduced (to the extent
not otherwise reduced in accordance with GAAP) by an amount equal to (A) the
amount of the Consolidated Adjusted Net Income otherwise attributable to such
Restricted Subsidiary multiplied by (B) the quotient of (1) the number of
shares of outstanding common stock of such Restricted Subsidiary not owned on
the last day of such period by the Company or any of its Restricted
Subsidiaries divided by (2) the total number of shares of outstanding common
stock of such Restricted Subsidiary on the last day of such period.
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"Consolidated EBITDA" means, for any period, the sum of, without duplication
Consolidated Adjusted Net Income for such period, plus (or, in the case of
clause (d) below, plus or minus) the following items to the extent included in
computing Consolidated Adjusted Net Income for such period (a) Consolidated
Fixed Charges for such period, plus (b) the provision for federal, state,
local and foreign income taxes of the Company and its Restricted Subsidiaries
for such period, plus (c) the aggregate depreciation and amortization expense
of the Company and its Restricted Subsidiaries for such period, plus (d) any
other non-cash charges for such period, and minus non-cash credits for such
period, other than non-cash charges or credits resulting from changes in
prepaid assets or accrued liabilities in the ordinary course of business;
provided that income tax expense, depreciation and amortization expense, fixed
charges and non-cash charges and credits of a Restricted Subsidiary will be
included in Consolidated EBITDA only to the extent (and in the same
proportion) that the net income of such Subsidiary was included in calculating
Consolidated Adjusted Net Income for such period.
"Consolidated Fixed Charge Coverage Ratio" means, for any period, the ratio
of (a) Consolidated EBITDA for such period to (b) Consolidated Fixed Charges
for such period.
"Consolidated Fixed Charges" means, for any period, without duplication, the
sum of (a) the amount that, in conformity with GAAP, would be set forth
opposite the caption "interest expense" (or any like caption) on a
consolidated statement of operations of the Company and its Restricted
Subsidiaries for such period, including, without limitation, (i) amortization
of debt discount, (ii) the net cost of interest rate contracts (including
amortization of discounts), (iii) the interest portion of any deferred payment
obligation, (iv) amortization of debt issuance costs and (v) the interest
component of Capitalized Lease Obligations, plus (b) cash dividends paid on
Preferred Stock and Disqualified Stock by the Company and any Restricted
Subsidiary (to any person other than the Company and its Restricted
Subsidiaries), plus (c) all interest on any Debt of any person guaranteed by
the Company or any of its Restricted Subsidiaries; provided, however, that
Consolidated Fixed Charges will not include (i) any gain or loss from
extinguishment of debt, including the write-off of debt issuance costs and
(ii) the fixed charges of a Restricted Subsidiary to the extent (and in the
same proportion) that the net income of such Subsidiary was excluded in
calculating Consolidated Adjusted Net Income pursuant to clause (e) of the
definition thereof for such period.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity of the Company and its Restricted Subsidiaries as set forth on the most
recently available quarterly or annual consolidated balance sheet of the
Company and its Restricted Subsidiaries, less any amounts attributable to
Disqualified Stock or any equity security convertible into or exchangeable for
Debt, the cost of treasury stock and the principal amount of any promissory
notes receivable from the sale of the Capital Stock of the Company or any of
its Restricted Subsidiaries and less, to the extent included in calculating
such stockholders' equity of the Company and its Restricted Subsidiaries, the
stockholders' equity attributable to Unrestricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign
currency adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
"Debt" means (without duplication), with respect to any person, whether
recourse is to all or a portion of the assets of such person and whether or
not contingent, (a) every obligation of such person for money borrowed, (b)
every obligation of such person evidenced by bonds, debentures, notes or other
similar instruments, (c) every reimbursement obligation of such person with
respect to letters of credit, bankers' acceptances or similar facilities
issued for the account of such person, (d) every obligation of such person
issued or assumed as the deferred purchase price of property or services, (e)
every Capitalized Lease Obligation of such person, (f) all Disqualified Stock
of such person valued at its maximum fixed repurchase price, plus accrued and
unpaid dividends, (g) all obligations of such person under or in respect of
Hedging Obligations, and (h) every obligation of the type referred to in
clauses (a) through (g) of another person and all dividends of another person
the payment of which, in either case, such person has guaranteed. For purposes
of this definition, the "maximum fixed repurchase price" of any Disqualified
Stock that does not have a fixed repurchase price will be calculated in
accordance with the terms of such Disqualified Stock as if such Disqualified
Stock were repurchased on any date on which Debt is required to be determined
pursuant to the Indenture, and if such price is based upon, or
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measured by, the fair market value of such Disqualified Stock, such fair
market value will be determined in good faith by the board of directors of the
issuer of such Disqualified Stock. Notwithstanding the foregoing, trade
accounts payable and accrued liabilities arising in the ordinary course of
business and any liability for federal, state or local taxes or other taxes
owed by such person will not be considered Debt for purposes of this
definition.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series of
transactions in respect of which the Board of Directors is required to deliver
a resolution of the Board of Directors under the Indenture, a member of the
Board of Directors who does not have any material direct or indirect financial
interest in or with respect to such transaction or series of transactions
(other than as the holder of Voting Stock of the Company).
"Disqualified Stock" means any class or series of Capital Stock that, either
by its terms, or by the terms of any security into which it is convertible or
exchangeable or by contract or otherwise (i) is, or upon the happening of an
event or passage of time would be, required to be redeemed prior to one year
after the final Stated Maturity of the Notes, (ii) is redeemable at the option
of the holder thereof at any time prior to one year after such final Stated
Maturity or (iii) at the option of the holder thereof, is convertible into or
exchangeable for debt securities at any time prior to one year after such
final Stated Maturity; provided that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders
thereof the right to cause the issuer thereof to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes will not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in the "Limitation on Certain
Asset Sales" and "Purchase of Notes upon a Change of Control" covenants
described below and such Capital Stock specifically provides that the issuer
will not repurchase or redeem any such stock pursuant to such provision prior
to the Company's repurchase of such Notes as are required to be repurchased
pursuant to the "Limitation on Certain Asset Sales" and "Purchase of Notes
upon a Change of Control" covenants described below.
"Equity Offering" means an offer and sale by the Company of its common stock
(which is Qualified Stock) to a person other than a Subsidiary.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
that are in effect on the Closing Date.
"guarantee" means, as applied to any obligation, (a) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (b) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limitation, the payment of
amounts drawn down under letters of credit.
"Hedging Obligations" means the obligations of any person under (i) interest
rate swap agreements, interest rate cap agreements and interest rate collar
agreements and (ii) other agreements or arrangements designed to protect such
person against fluctuations in interest rates or the value of foreign
currencies.
"Investment" in any person means, (i) directly or indirectly, any advance,
loan or other extension of credit (including, without limitation, by way of
guarantee or similar arrangement) or capital contribution to any person, the
purchase or other acquisition of any stock, bonds, notes, debentures or other
securities issued by such person, the acquisition (by purchase or otherwise)
of all or substantially all of the business or assets of such person, or the
making of any investment in such person, (ii) the designation of any
Restricted Subsidiary as an Unrestricted Subsidiary and (iii) the transfer of
any assets or properties from the Company or a Restricted Subsidiary to any
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Unrestricted Subsidiary, other than the transfer of assets or properties made
in the ordinary course of business. Investments exclude extensions of trade
credit on commercially reasonable terms in accordance with normal trade
practices.
"Issuance Date" means the closing date for the sale and original issuance of
the Notes under the Indenture.
"Joint Venture" means any person (other than an individual or government)
that is not a Subsidiary of the Company and a majority of whose revenues are
derived or will, as a consequence of the Company's or one of its Subsidiaries'
Investments therein, be derived from the business of the manufacture and sale
of disposable diapers and/or training pants in the United States or elsewhere
or a business reasonably related thereto.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim,
preference, priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. A person will be deemed to own subject to a Lien any property that
such person has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or cash equivalents, including payments in respect
of deferred payment obligations when received in the form of, or stock or
other assets when disposed for, cash or cash equivalents (except to the extent
that such obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary), net of (a) brokerage commissions and other fees and
expenses (including fees and expenses of legal counsel and investment banks)
related to such Asset Sale, (b) provisions for all taxes payable as a result
of such Asset Sale, (c) payments made to retire Debt where payment of such
Debt is secured by the assets that are the subject of such Asset Sale, (d)
amounts required to be paid to any person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in the assets that are
subject to the Asset Sale and (e) appropriate amounts to be provided by the
Company or any Restricted Subsidiary, as the case may be, as a reserve
required in accordance with GAAP against any liabilities associated with such
Asset Sale and retained by the seller after such Asset Sale, including pension
and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale.
"Permitted Investments" means any of the following:
(a) Investments in (i) securities with a maturity of 180 days or less
issued or directly and fully guaranteed or insured by the United States or
any agency or instrumentality thereof (provided that the full faith and
credit of the United States is pledged in support thereof); (ii)
certificates of deposit or acceptances with a maturity of 180 days or less
of any financial institution that is a member of the Federal Reserve System
having combined capital and surplus of not less than $500,000,000; and
(iii) commercial paper with a maturity of 180 days or less issued by a
corporation that is not an Affiliate of the Company and is organized under
the laws of any state of the United States or the District of Columbia and
having a rating of P-1 (or its equivalent) from Moody's Investors Service,
Inc. or A-1 (or its equivalent) from Standard & Poor's Ratings Services.
(b) Investments by the Company or any Restricted Subsidiary in another
person, if as a result of such Investment such other person (i) becomes a
Restricted Subsidiary or (ii) is merged or consolidated with or into, or
transfers or conveys all or substantially all of its assets to, the Company
or a Restricted Subsidiary.
(c) Investments by the Company or a Restricted Subsidiary in the Company
or a Subsidiary Guarantor.
(d) Investments in the form of senior loans to any Restricted Subsidiary
that is not a Subsidiary Guarantor, provided that no portion of its net
income would be excluded under the definition of Consolidated Adjusted Net
Income by reason of clause (e) of the definition thereof.
(e) Investments in assets owned or used in the ordinary course of
business.
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(f) Investments in existence on the Closing Date.
(g) Investments in any person in the form of the capital contribution of
the Company's common stock.
(h) Promissory notes received as a result of Asset Sales permitted under
the "Limitation on Certain Asset Sales" covenant.
(i) Direct or indirect loans to employees, or to a trustee for the
benefit of such employees, of the Company or any Restricted Subsidiary in
an aggregate amount outstanding at any time not exceeding $400,000 plus the
amount of direct or indirect loans to employees for relocation assistance.
(j) The purchase of all or any portion of the 49% of Hygienic Products
International Limited, the Company's Cayman Islands subsidiary that owns
its Brazilian operations, not owned by the Company prior to the Closing
Date.
(k) Other Investments that do not exceed $3,000,000 in the aggregate at
any time outstanding.
"Preferred Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
person's preferred or preference stock, whether now outstanding or issued
after the Closing Date, and including, without limitation, all classes and
series of preferred or preference stock of such person.
"Qualified Equity Interest" means any Qualified Stock and all warrants,
options or other rights to acquire Qualified Stock (but excluding any debt
security that is convertible into or exchangeable for Capital Stock).
"Qualified Stock" of any person means any and all Capital Stock of such
person, other than Disqualified Stock.
"Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
"Revolving Credit Facility" means the loan and security agreement dated
February 26, 1996, between the Company and Congress Financial Corporation
(Southwest), as such agreement may be amended, restated, supplemented,
refinanced or otherwise modified from time to time with the same lender or one
or more other lenders.
"Significant Subsidiary" means any Restricted Subsidiary of the Company that
together with its Subsidiaries, (a) for the most recent fiscal year of the
Company, accounted for more than 10% of the consolidated net sales of the
Company and its Restricted Subsidiaries or (b) as of the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of the Company
and its Restricted Subsidiaries, in the case of either (a) or (b), as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year or (c) was organized or acquired after the
beginning of such fiscal year and would have been a Significant Subsidiary if
it had been owned during the entire fiscal year.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is
due and payable and, when used with respect to any other Debt, means the date
specified in the instrument governing such Debt as the fixed date on which the
principal of such Debt or any installment of interest thereon is due and
payable.
"Subordinated Debt" means Debt of the Company or a Subsidiary Guarantor that
is subordinated in right of payment to the Notes or the Subsidiary Guarantee
issued by such Subsidiary Guarantor, as the case may be.
"Subsidiary" means any person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by the Company
and/or one or more other Subsidiaries of the Company.
"Subsidiary Guarantee" means a guarantee of the Notes by a Restricted
Subsidiary in accordance with the provisions of the Indenture.
"Subsidiary Guarantor" means any Restricted Subsidiary that issues a
Subsidiary Guarantee.
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"Unrestricted Subsidiary" means (a) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary in accordance with the
"Unrestricted Subsidiaries" covenant and (b) any Subsidiary of an Unrestricted
Subsidiary.
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees
of any person (irrespective of whether or not, at the time, stock of any other
class or classes has, or might have, voting power by reason of the happening
of any contingency).
"Weighted Average Life" means, as of the date of determination with respect
to any Debt or Disqualified Stock, the quotient obtained by dividing (a) the
sum of the products of (i) the number of years from the date of determination
to the date or dates of each successive scheduled principal or liquidation
value payment of such Debt or Disqualified Stock, respectively, multiplied by
(ii) the amount of each such principal or liquidation value payment by (b) the
sum of all such principal or liquidation value payments.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary, all of
the outstanding voting securities (other than directors' qualifying shares or
an immaterial number of shares required to be owned by other persons pursuant
to applicable law) of which are owned, directly or indirectly, by the Company.
CERTAIN COVENANTS
The Indenture will contain, among others, the following covenants:
Limitation on Debt. The Company will not, and will not permit any Restricted
Subsidiary to, create, issue, assume, guarantee or in any manner become
directly or indirectly liable for the payment of, or otherwise incur
(collectively, "incur"), any Debt (including Acquired Debt and the issuance of
Disqualified Stock), except that the Company or a Restricted Subsidiary may
incur Debt or issue Disqualified Stock if, at the time of such event, the
Consolidated Fixed Charge Coverage Ratio for the immediately preceding four
full fiscal quarters for which internal financial statements are available,
taken as one accounting period, would have been equal to at least 2.0 to 1.0
through June 30, 1998 and 2.5 to 1.0 thereafter.
In making the foregoing calculation, pro forma effect will be given to: (i)
the incurrence of such Debt and (if applicable) the application of the net
proceeds therefrom, including to refinance other Debt, as if such Debt was
incurred and the application of such proceeds occurred at the beginning of
such four-quarter period, (ii) the incurrence, repayment or retirement of any
other Debt by the Company or its Restricted Subsidiaries since the first day
of such four-quarter period as if such Debt was incurred, repaid or retired at
the beginning of such four-quarter period and (iii) the acquisition (whether
by purchase, merger or otherwise) or disposition (whether by sale, merger or
otherwise) of any company, entity or business acquired or disposed of by the
Company or its Restricted Subsidiaries, as the case may be, since the first
day of such four-quarter period, as if such acquisition or disposition
occurred at the beginning of such four-quarter period. In making a computation
under the foregoing clause (i) or (ii), (A) interest on Debt bearing a
floating interest rate will be computed as if the rate in effect on the date
of computation had been the applicable rate for the entire period, (B) if such
Debt bears, at the option of the Company, a fixed or floating rate of
interest, interest thereon will be computed by applying, at the option of the
Company, either the fixed or floating rate and (C) the amount of Debt under a
revolving credit facility will be computed based upon the average daily
balance of such Debt during such four-quarter period.
Notwithstanding the foregoing, the Company may, and may, to the extent
expressly permitted below, permit its Restricted Subsidiaries to, incur any of
the following Debt ("Permitted Debt"):
(i) Debt of the Company or any Restricted Subsidiary under the Revolving
Credit Facility or one or more other credit facilities in an aggregate
principal amount at any one time outstanding not to exceed the greater of
(a) $21,000,000 and (b) the sum of 75% of the aggregate book value of the
accounts receivable (net of bad debt reserves) and 50% of the aggregate net
book value of the inventory of the Company and its Restricted Subsidiaries
determined on a consolidated basis in accordance with GAAP as of the last
day of the immediately preceding four full fiscal quarters for which
internal financial statements are available, less any amounts applied to
the permanent reduction of such credit facilities pursuant to the
"Limitation on Certain Asset Sales" covenant, together with guarantees of
such Debt by a Restricted Subsidiary; provided,
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however, that the aggregate principal amount of Debt of the Company's
foreign Restricted Subsidiaries that are not Subsidiary Guarantors, as a
group, permitted to be outstanding in reliance on this clause (i) may not
exceed the greater of (x) $10,000,000 and (y) 50% of the aggregate book
value of the accounts receivable (net of bad debt reserves) of such foreign
Restricted Subsidiaries calculated in accordance with the foregoing
provisions of this clause (i).
(ii) Debt of the Company or any Restricted Subsidiary outstanding on the
Closing Date (excluding borrowings under the Revolving Credit Facility).
(iii) Debt owed by the Company to any Restricted Subsidiary or owed by
any Subsidiary Guarantor to the Company or any other Restricted Subsidiary
that is a Subsidiary Guarantor (provided that such Debt is held by the
Company or such Restricted Subsidiary) or owed by the Company or a
Subsidiary Guarantor to a Restricted Subsidiary that is not a Subsidiary
Guarantor, provided such debt would represent a "Permitted Investment"
under clause (d) of the definition thereof.
(iv) Debt represented by the Existing Notes, the Subsidiary Guarantees
and any Exchange Notes.
(v) Debt of the Company or any Restricted Subsidiary in respect of
Hedging Obligations incurred in the ordinary course of business.
(vi) Capitalized Lease Obligations of the Company or any Restricted
Subsidiary, provided that the aggregate amount of Debt under this clause
(vi) does not exceed $5,000,000 at any one time outstanding.
(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 or 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.
(viii) Debt of the Company or any Restricted Subsidiary consisting of
guarantees, indemnities or obligations in respect of purchase price
adjustments in connection with the acquisition or disposition of assets,
including, without limitation, shares of Capital Stock.
(ix) Guarantees by any Restricted Subsidiary made in accordance with the
provisions of the "Guarantees of Debt by Restricted Subsidiaries" covenant.
(x) Debt of the Company or any Restricted Subsidiary, not permitted by
any other clause of this definition, in an aggregate principal amount not
to exceed $3,000,000 at any one time outstanding.
(xi) Any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") of any
outstanding Debt, other than Debt incurred pursuant to clauses (i), (v),
(vi), (vii) or (x) of this definition, including any successive
refinancings thereof, so long as (A) any such new Debt is in a principal
amount that does not exceed the principal amount so refinanced, plus the
amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Debt refinanced or the amount of
any premium reasonably determined by the Company as necessary to accomplish
such refinancing, plus the amount of the expenses of the Company incurred
in connection with such refinancing, (B) in the case of any refinancing of
Subordinated Debt, such new Debt is made subordinate to the Notes at least
to the same extent as the Debt being refinanced and (C) such refinancing
Debt does not have a Weighted Average Life less than the Weighted Average
Life of the Debt being refinanced and does not have a final scheduled
maturity earlier than the final scheduled maturity, or permit redemption at
the option of the holder earlier than the earliest date of redemption at
the option of the holder, of the Debt being refinanced.
Limitation on Restricted Payments. The Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, take any of the
following actions:
(a) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Capital Stock of the Company or any Restricted
Subsidiary (other than (i) dividends or distributions payable solely
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in Qualified Equity Interests, (ii) dividends or distributions by a
Restricted Subsidiary payable to the Company or another Restricted
Subsidiary or (iii) pro rata dividends or distributions on common stock of
a Restricted Subsidiary held by minority stockholders, provided that such
dividends do not in the aggregate exceed the minority stockholders' pro
rata share of such Restricted Subsidiary's net income from the first day of
the Company's fiscal quarter during which the Closing Date occurs);
(b) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any shares of Capital Stock (or any options, warrants or
other rights to acquire shares of Capital Stock) of (i) the Company or any
Unrestricted Subsidiary or (ii) any Restricted Subsidiary held by any
Affiliate of the Company (other than, in either case, any such Capital
Stock owned by the Company or any of its Restricted Subsidiaries);
(c) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Debt; and
(d) make any Investment (other than a Permitted Investment) in any person
(such payments or other actions described in (but not excluded from) clauses
(a) through (d) being referred to as "Restricted Payments"), unless at the
time of, and immediately after giving effect to, the proposed Restricted
Payment:
(i) no Default or Event of Default has occurred and is continuing,
(ii) the Company could incur at least $1.00 of additional Debt (other
than Permitted Debt) pursuant to the first paragraph of the "Limitation on
Debt" covenant and
(iii) the aggregate amount of all Restricted Payments declared or made
after the Closing Date does not exceed the sum of:
(A) 50% of the aggregate Consolidated Adjusted Net Income of the
Company during the period (taken as one accounting period) from the
first day of the Company's fiscal quarter during which the Closing Date
occurs to the last day of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the
time of such proposed Restricted Payment (or, if such aggregate
cumulative Consolidated Adjusted Net Income is a loss, minus 100% of
such amount); plus
(B) the aggregate net cash proceeds received by the Company after the
Closing Date from the issuance or sale (other than to a Subsidiary) of
Qualified Equity Interests of the Company (excluding proceeds of an
Equity Offering that are used to redeem Notes, as discussed above);
plus
(C) the aggregate net cash proceeds received by the Company after the
Closing Date from the issuance or sale (other than to a Subsidiary) of
debt securities or Disqualified Stock that have been converted into or
exchanged for Qualified Stock of the Company, together with the
aggregate net cash proceeds received by the Company at the time of such
conversion or exchange; plus
(D) $5,000,000.
Notwithstanding the foregoing, the Company and its Restricted Subsidiaries may
take any of the following actions, so long as (with respect to clauses (e) and
(f) below) no Default or Event of Default has occurred and is continuing or
would occur:
(a) The payment of any dividend within 60 days after the date of
declaration thereof, if at the declaration date such payment would not have
been prohibited by the foregoing provision.
(b) The repurchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company in exchange for, or out
of the net cash proceeds of a substantially concurrent issuance and sale
(other than to a Subsidiary) of, Qualified Equity Interests of the Company.
(c) The purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Debt in exchange for, or out of
the net cash proceeds of a substantially concurrent issuance and sale
(other than to a Subsidiary) of Qualified Equity Interests of the Company.
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(d) The purchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Debt in exchange for, or out of the
net cash proceeds of a substantially concurrent issuance or sale (other
than to a Subsidiary) of, Subordinated Debt, so long as the Company or a
Restricted Subsidiary would be permitted to refinance such original
Subordinated Debt with such new Subordinated Debt pursuant to clause (xi)
of the definition of Permitted Debt.
(e) The repurchase of any Subordinated Debt at a purchase price not
greater than 101% of the principal amount of such Subordinated Debt in the
event of a "change of control" in accordance with provisions similar to the
"Purchase of Notes upon a Change of Control" covenant; provided that, prior
to or simultaneously with such repurchase, the Company has made the Change
of Control Offer as provided in such covenant with respect to the Notes and
has repurchased all Notes validly tendered for payment in connection with
such Change of Control Offer.
(f) The repayment, on or promptly after the Closing Date, of the
Company's outstanding 12% Junior Subordinated Debentures in the principal
amount of $2,400,000.
The payments described in clauses (b), (c) and (e) of this paragraph will be
Restricted Payments that will be permitted to be taken in accordance with this
paragraph but will reduce the amount that would otherwise be available for
Restricted Payments under the foregoing clause (iii) and the payments
described in clauses (a), (d) and (f) of this paragraph will be Restricted
Payments that will be permitted to be taken in accordance with this paragraph
and will not reduce the amount that would otherwise be available for
Restricted Payments under the foregoing clause (iii).
For the purpose of making any calculations under the Indenture (i) if a
Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company
will be deemed to have made an Investment in an amount equal to the fair
market value of the net assets of such Restricted Subsidiary at the time of
such designation as determined by the Board of Directors of the Company, whose
good faith determination will be conclusive, (ii) any property transferred to
or from an Unrestricted Subsidiary will be valued at fair market value at the
time of such transfer, as determined by the Board of Directors of the Company,
whose good faith determination will be conclusive and (iii) subject to the
foregoing, the amount of any Restricted Payment, if other than cash, will be
determined by the Board of Directors of the Company, whose good faith
determination will be conclusive.
If the aggregate amount of all Restricted Payments calculated under the
foregoing provision includes an Investment in an Unrestricted Subsidiary or
other person that thereafter becomes a Restricted Subsidiary, the aggregate
amount of all Restricted Payments calculated under the foregoing provision
will be reduced by the lesser of (x) the net asset value of such Subsidiary at
the time it becomes a Restricted Subsidiary and (y) the initial amount of such
Investment.
If an Investment resulted in the making of a Restricted Payment, the
aggregate amount of all Restricted Payments calculated under the foregoing
provision will be reduced by the amount of any net reduction in such
Investment (resulting from the payment of interest or dividends, loan
repayment, transfer of assets or otherwise), to the extent such net reduction
is not included in the Company's Consolidated Adjusted Net Income; provided
that the total amount by which the aggregate amount of all Restricted Payments
may be reduced may not exceed the lesser of (x) the cash proceeds received by
the Company and its Restricted Subsidiaries in connection with such net
reduction and (y) the initial amount of such Investment.
In computing Consolidated Adjusted Net Income of the Company for purposes of
the foregoing clause (iii)(A), (i) the Company may use audited financial
statements for the portions of the relevant period for which audited financial
statements are available on the date of determination and unaudited financial
statements and other current financial data based on the books and records of
the Company for the remaining portion of such period and (ii) the Company will
be permitted to rely in good faith on the financial statements and other
financial data derived from the books and records of the Company that are
available on the date of determination. If the Company makes a Restricted
Payment that, at the time of the making of such Restricted Payment, would in
the good faith determination of the Company be permitted under the
requirements of the Indenture, such Restricted
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Payment will be deemed to have been made in compliance with the Indenture
notwithstanding any subsequent adjustments made in good faith to the Company's
financial statements affecting Consolidated Adjusted Net Income of the Company
for any period.
Purchase of Notes upon a Change of Control. If a Change of Control occurs at
any time, then each holder of Notes will have the right to require that the
Company purchase such holder's Notes, in whole or in part in integral
multiples of $1,000, at a purchase price in cash equal to 101% of the
principal amount of such Notes, plus accrued and unpaid interest, if any, to
the date of purchase, pursuant to the offer described below (the "Change of
Control Offer") and the other procedures set forth in the Indenture.
Within 45 days following any Change of Control, the Company will notify the
Trustee thereof and give written notice of such Change of Control to each
holder of Notes by first-class mail, postage prepaid, at its address appearing
in the Note Register, stating, among other things, (i) the purchase price and
the purchase date, which will be a Business Day no earlier than 30 days nor
later than 60 days from the date such notice is mailed or such later date as
is necessary to comply with requirements under the Exchange Act; (ii) that any
Note not tendered will continue to accrue interest; (iii) that, unless the
Company defaults in the payment of the purchase price, any Notes accepted for
payment pursuant to the Change of Control Offer will cease to accrue interest
on and after the Change of Control purchase date; and (iv) certain other
procedures that a holder of Notes must follow to accept a Change of Control
Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes that might be tendered by holders of the Notes seeking to accept
the Change of Control Offer. The Revolving Credit Facility (or the New Credit
Facility) is expected to prohibit the purchase of Notes by the Company prior
to full repayment of debt thereunder. There can be no assurance that in the
event of a Change of Control the Company will be able to obtain the necessary
consents to consummate a Change of Control Offer. The failure of the Company
to make or consummate the Change of Control Offer or pay the applicable Change
of Control purchase price when due would result in an Event of Default and
would give the Trustee and the holders of the Notes the rights described under
"Events of Default".
One of the events that constitutes a Change of Control under the Indenture
is the disposition of "all or substantially all" of the Company's assets. This
term has not been interpreted under New York law (which is the governing law
of the Indenture) to represent a specific quantitative test. As a consequence,
in the event holders of the Notes elect to require the Company to purchase the
Notes and the Company elects to contest such election, there can be no
assurance as to how a court interpreting New York law would interpret the
phrase in many circumstances.
The existence of a holder's right to require the Company to purchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction that constitutes a Change of Control.
The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture may not afford holders of Notes the right to
require the Company to repurchase such Notes in the event of a highly
leveraged transaction or certain transactions with the Company's management or
its affiliates, including a reorganization, restructuring, merger or similar
transaction involving the Company (including, in certain circumstances, an
acquisition of the Company by management or its affiliates) that may adversely
affect holders of the Notes, if such transaction is not a transaction defined
as a Change of Control. See "Certain Definitions" above for the definition of
"Change of Control". A transaction involving the Company's management or its
affiliates, or a transaction involving a recapitalization of the Company,
would result in a Change of Control if it is the type of transaction specified
in such definition.
The Company will comply with the applicable tender offer rules including
Rule l4e-l under the Exchange Act, and any other applicable securities laws
and regulations in connection with a Change of Control Offer.
The Company will not, and will not permit any Restricted Subsidiary to,
create any restriction (other than restrictions existing under Debt as in
effect on the Closing Date or in refinancings of such Debt) that would
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materially impair the ability of the Company to make a Change of Control Offer
to purchase the Notes or, if such Change of Control Offer is made, to pay for
the Notes tendered for purchase.
Limitation on Certain Asset Sales. (a) The Company will not, and will not
permit any Restricted Subsidiary to, engage in any Asset Sale unless (i) the
consideration received by the Company or such Restricted Subsidiary for such
Asset Sale is not less than the fair market value of the assets sold (as
determined by the Board of Directors of the Company, whose good faith
determination will be conclusive) and (ii) the consideration received by the
Company or the relevant Restricted Subsidiary in respect of such Asset Sale
consists of at least 80% (A) cash or cash equivalents or (B) the assumption by
the transferee of Debt of the Company or a Restricted Subsidiary ranked pari
passu with the Notes and release of the Company or such Restricted Subsidiary
from all liability on such Debt.
(b) If the Company or any Restricted Subsidiary engages in an Asset Sale,
the Company may, at its option, within 12 months after such Asset Sale, (i)
apply all or a portion of the Net Cash Proceeds to the permanent reduction of
amounts outstanding under the Revolving Credit Facility or to the repayment of
other senior Debt of the Company or a Restricted Subsidiary or (ii) invest (or
enter into a legally binding agreement to invest) all or a portion of such Net
Cash Proceeds in properties and assets to replace the properties and assets
that were the subject of the Asset Sale or in properties and assets that will
be used in businesses of the Company or its Restricted Subsidiaries, as the
case may be, existing on the Closing Date. If any such legally binding
agreement to invest such Net Cash Proceeds is terminated, the Company may,
within 90 days of such termination or within 12 months of such Asset Sale,
whichever is later, invest such Net Cash Proceeds as provided in clause (i) or
(ii) (without regard to the parenthetical contained in such clause (ii))
above. The amount of such Net Cash Proceeds not so used as set forth above in
this paragraph (b) constitutes "Excess Proceeds".
(c) When the aggregate amount of Excess Proceeds exceeds $5,000,000, the
Company will, within 30 days thereafter, make an offer to purchase from all
holders of Notes, on a pro rata basis, in accordance with the procedures set
forth in the Indenture, the maximum principal amount (expressed as a multiple
of $1,000) of Notes that may be purchased with the Excess Proceeds, at a
purchase price in cash equal to 100% of the principal amount thereof, plus
accrued interest, if any, to the date such offer to purchase is consummated.
To the extent that the aggregate principal amount of Notes tendered pursuant
to such offer to purchase is less than the Excess Proceeds, the Company may
use such deficiency for general corporate purposes. If the aggregate principal
amount of Notes validly tendered and not withdrawn by holders thereof exceeds
the Excess Proceeds, the Notes to be purchased will be selected on a pro rata
basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds will be reset to zero.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
suffer to exist any transaction with, or for the benefit of, any Affiliate of
the Company or any beneficial owner of 5% or more of any class of the Capital
Stock of the Company at any time outstanding ("Interested Persons"), unless
(a) such transaction is on terms that are no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than those that could have
been obtained in an arm's length transaction with third parties who are not
Interested Persons and (b) either (i) with respect to any transaction or
series of related transactions involving aggregate payments in excess of
$1,000,000, but less than $5,000,000, the Company delivers an officers'
certificate to the Trustee certifying that such transaction or transactions
comply with clause (a) above or (ii) with respect to a transaction or series
of transactions involving aggregate payments equal or greater than $5,000,000,
such transaction or transactions have been approved by the Board of Directors
(including a majority of the Disinterested Directors) of the Company or the
Company has obtained a written opinion from a nationally recognized investment
banking firm to the effect that such transaction or transactions are fair to
the Company or such Restricted Subsidiary from a financial point of view.
The foregoing covenant will not restrict any of the following:
(A) Transactions among the Company and/or its Restricted Subsidiaries.
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(B) The Company from paying reasonable and customary regular compensation
and fees to directors of the Company or any Restricted Subsidiary who are
not employees of the Company or any Restricted Subsidiary.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any
kind on the ability of any Restricted Subsidiary to (a) pay dividends, in cash
or otherwise, or make any other distributions on or in respect of its Capital
Stock, (b) pay any Debt owed to the Company or any other Restricted
Subsidiary, (c) make loans or advances to the Company or any other Restricted
Subsidiary or (d) transfer any of its properties or assets to the Company or
any other Restricted Subsidiary, except for such encumbrances or restrictions
existing under or by reason of any of the following:
(i) Any agreement in effect on the Closing Date.
(ii) Customary non-assignment provisions of any lease governing a
leasehold interest of the Company or any Restricted Subsidiary.
(iii) The refinancing or successive refinancings of Debt incurred under
the agreements in effect on the Closing Date, so long as such encumbrances
or restrictions are no less favorable to the Company or any Restricted
Subsidiary than those contained in such original agreement.
(iv) Any agreement or other instrument of a person acquired by the
Company or any Restricted Subsidiary in existence at the time of such
acquisition (but not created in contemplation thereof), which encumbrance
or restriction is not applicable to any person, or the properties or assets
of any person, other than the person, or the property or assets of the
person, so acquired.
(v) Any agreement providing for the incurrence of Permitted Debt by a
Restricted Subsidiary in compliance with the "Limitation on Debt" covenant
provided that such Restricted Subsidiary is or becomes a Subsidiary
Guarantor.
Restriction on Transfer of Assets to Subsidiaries. The Company will not
sell, convey, transfer or otherwise dispose of its property or assets to any
of its Subsidiaries, except for sales, conveyances, transfers or other
dispositions (a) of property or assets having an aggregate fair market value
no greater than $5,000,000 made after the Closing Date and in the ordinary
course of business; (b) of property or assets having a fair market value not
in excess of the amount of Investments then permitted to be made pursuant to
the definition of Permitted Investments or the "Limitation on Restricted
Payments" covenant; or (c) made to any Restricted Subsidiary, if such
Restricted Subsidiary is either (i) a Subsidiary Guarantor or (ii) a
Restricted Subsidiary, provided that no portion of its net income would be
excluded under the definition of Consolidated Adjusted Net Income by reason of
clause (e) of the definition thereof. The amount of any sale, conveyance,
transfer or other disposition permitted to be made pursuant to the foregoing
clause (b), unless it constitutes a Permitted Investment, will be treated as
the payment of a Restricted Payment in calculating the amount of Restricted
Payments made by the Company.
Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Company will not sell, and will not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell, any shares of Capital
Stock of a Restricted Subsidiary (including options, warrants or other rights
to purchase shares of such Capital Stock) except (i) to the Company or a
Wholly Owned Restricted Subsidiary, (ii) issuances or sales to foreign
nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to
the extent required by applicable law, or issuances or sales to directors of
directors' qualifying shares, (iii) if, immediately after giving effect to
such issuance or sale, neither the Company nor any of its Subsidiaries owns
any shares of Capital Stock of such Restricted Subsidiary (including options,
warrants or other rights to purchase shares of such Capital Stock) (iv) if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer constitute a Restricted Subsidiary and any
Investment in such person remaining after giving effect to such issuance or
sale would have been permitted to be made under the "Limitation on Restricted
Payments" covenant if made on the date of such issuance or sale or (v)
issuances or sales to the other stockholders of such Restricted Subsidiary of
up to 1% of the Capital Stock of such Restricted Subsidiary.
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Guarantees of Debt by Restricted Subsidiaries. All of the Company's domestic
Restricted Subsidiaries (those active Restricted Subsidiaries organized or
principally doing business in the United States and its territories and
possessions) will be Subsidiary Guarantors.
In addition, the Company will not permit any Restricted Subsidiary that is
not a Subsidiary Guarantor, directly or indirectly, to guarantee, assume or in
any other manner become liable for the payment of any Debt of the Company or
any Debt of any other Restricted Subsidiary, unless (a) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture
providing for a guarantee of payment of the Notes by such Restricted
Subsidiary and (b) with respect to any guarantee of Subordinated Debt by a
Restricted Subsidiary, any such guarantee is subordinated to such Restricted
Subsidiary's guarantee with respect to the Notes at least to the same extent
as such Subordinated Debt is subordinated to the Notes, provided that the
foregoing provision will not be applicable to any guarantee by any Restricted
Subsidiary that existed at the time such person became a Restricted Subsidiary
and was not incurred in connection with, or in contemplation of, such person
becoming a Restricted Subsidiary.
Any guarantee by a Restricted Subsidiary of the Notes pursuant to the
preceding paragraph will provide by its terms that it will be automatically
and unconditionally released and discharged upon (i) any sale, exchange or
transfer to any person not an Affiliate of the Company of all of the Company's
and the Restricted Subsidiaries' Capital Stock in, or all or substantially all
the assets of, such Restricted Subsidiary (which sale, exchange or transfer is
not prohibited by the Indenture), (ii) the release or discharge of the
guarantee that resulted in the creation of such guarantee of the Notes, except
a discharge or release by or as a result of payment under such guarantee or
(iii) the designation of such Restricted Subsidiary as an Unrestricted
Subsidiary in accordance with the terms of the Indenture.
Unrestricted Subsidiaries. (a) The Board of Directors of the Company may
designate any Subsidiary (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary so long as (i) neither the
Company nor any Restricted Subsidiary is directly or indirectly liable for any
Debt of such Subsidiary, (ii) no default with respect to any Debt of such
Subsidiary would permit (upon notice, lapse of time or otherwise) any holder
of any other Debt of the Company or any Restricted Subsidiary to declare a
default on such other Debt or cause the payment thereof to be accelerated or
payable prior to its stated maturity, (iii) any Investment in such Subsidiary
made as a result of designating such Subsidiary an Unrestricted Subsidiary
will not violate the provisions of the "Limitation on Restricted Payments"
covenant, (iv) neither the Company nor any Restricted Subsidiary has a
contract, agreement, arrangement, understanding or obligation of any kind,
whether written or oral, with such Subsidiary other than those that might be
obtained at the time from persons who are not Affiliates of the Company and
(v) neither the Company nor any Restricted Subsidiary has any obligation to
subscribe for additional shares of Capital Stock or other equity interest in
such Subsidiary, or to maintain or preserve such Subsidiary's financial
condition or to cause such Subsidiary to achieve certain levels of operating
results.
(b) The Board of Directors of the Company may designate any Unrestricted
Subsidiary as a Restricted Subsidiary; provided that (i) no Default or Event
of Default has occurred and is continuing following such designation and (ii)
the Company is in compliance with the "Limitation on Debt" covenant (treating
any Debt of such Unrestricted Subsidiary as the incurrence of Debt by a
Restricted Subsidiary).
Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Lien of any kind on or with respect to any of its property
or assets, including any shares of stock or indebtedness of any Restricted
Subsidiary, whether owned at the Closing Date or thereafter acquired, or any
income, profits or proceeds therefrom, or assign or otherwise convey any right
to receive income thereon, unless (a) in the case of any Lien securing
Subordinated Debt, the Notes are secured by a Lien on such property, assets or
proceeds that is senior in priority to such Lien and (b) in the case of any
other Lien, the Notes are equally and ratably secured with the obligation or
liability secured by such Lien.
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Notwithstanding the foregoing, the Company may, and may permit any
Restricted Subsidiary to, incur any of the following Liens ("Permitted
Liens"):
(i) Liens (other than Liens securing Debt under the Revolving Credit
Facility) existing as of the Closing Date.
(ii) Liens on property or assets of the Company or any Restricted
Subsidiary securing Debt under the Revolving Credit Facility or other
credit facilities permitted by clause (i) of the definition of "Permitted
Debt" in a principal amount not to exceed the principal amount of the
outstanding Debt thereunder.
(iii) Liens on any property or assets of a Restricted Subsidiary granted
in favor of the Company or any Restricted Subsidiary.
(iv) Liens securing the Notes or any Subsidiary Guarantee.
(v) Liens upon real or personal property or any other asset acquired or
constructed after the date of the Supplemental Indenture; provided that (a)
any such Lien is created solely for the purpose of securing Capitalized
Lease Obligations or other Debt incurred in accordance with the "Limitation
on Debt" covenant described above (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.
(vi) Liens securing Acquired Debt created prior to (and not in connection
with or in contemplation of) the incurrence of such Debt by the Company or
any Restricted Subsidiary; provided that such Lien does not extend to any
property or assets of the Company or any Restricted Subsidiary other than
the property and assets acquired in connection with the incurrence of such
Acquired Debt.
(vii) Liens securing obligations under Hedging Obligations permitted to
be incurred pursuant to clause (v) of the definition of "Permitted Debt".
(viii) Statutory Liens or landlords', carriers', warehouseman's,
mechanics', suppliers', materialmen's, repairmen's or other like Liens
arising in the ordinary course of business and with respect to amounts not
yet delinquent or being contested in good faith by appropriate proceedings.
(ix) Liens for taxes, assessments, government charges or claims that are
being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted.
(x) Liens incurred or deposits made to secure the performance of tenders,
bids, leases, statutory obligations, surety and appeal bonds, government
contracts, performance bonds and other obligations of a like nature
incurred in the ordinary course of business (other than contracts for the
payment of money).
(xi) Easements, rights-of-way, restrictions and other similar charges or
encumbrances not interfering in any material respect with the business of
the Company or any Restricted Subsidiary incurred in the ordinary course of
business.
(xii) Liens arising by reason of any judgment, decree or order of any
court, so long as such Lien is adequately bonded and any appropriate legal
proceedings that may have been duly initiated for the review of such
judgment, decree or order have not been finally terminated or the period
within which such proceedings may be initiated has not expired.
(xiii) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof.
(xiv) Liens upon specific items of inventory or other goods and proceeds
of the Company or any Restricted Subsidiary securing its obligations in
respect of bankers' acceptances issued or created for the account of any
person to facilitate the purchase, shipment or storage of such inventory or
other goods.
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(xv) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods.
(xvi) Any extension, renewal or replacement, in whole or in part, of any
Lien described in the foregoing clauses (i) through (xv); provided that any
such extension, renewal or replacement is no more restrictive in any
material respect than the Lien so extended, renewed or replaced and does
not extend to any additional property or assets.
Reports. The Company will be required to file on a timely basis with the
Commission, to the extent such filings are accepted by the Commission and
whether or not the Company has a class of securities registered under the
Exchange Act, the annual reports, quarterly reports and other documents that
the Company would be required to file if it were subject to Section 13 or
15(d) of the Exchange Act. The Company will also be required (a) to file with
the Trustee, and provide to the Trustee for distribution to each holder of
Notes, without cost to such holder, copies of such reports and documents
within 15 days after the date on which the Company files such reports and
documents with the Commission or the date on which the Company would be
required to file such reports and documents if the Company were so required
and (b) if filing such reports and documents with the Commission is not
accepted by the Commission or is prohibited under the Exchange Act, to supply
at the Company's cost copies of such reports and documents to any prospective
holder of Notes promptly upon written request.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company may not consolidate with or merge with or into any other person
or, directly or indirectly, convey, sell, assign, transfer, lease or otherwise
dispose of its properties and assets substantially as an entirety to any other
person (in one transaction or a series of related transactions), unless each
of the following conditions is satisfied:
(a) Either (i) the Company is the surviving corporation or (ii) the
person (if other than the Company) formed by such consolidation or into
which the Company is merged or the person that acquires by sale,
assignment, transfer, lease or other disposition the properties and assets
of the Company substantially as an entirety (the "Surviving Entity") (A) is
a corporation, partnership or trust organized and validly existing under
the laws of the United States, any state thereof or the District of
Columbia and (B) expressly assumes, by a supplemental indenture in form
satisfactory to the Trustee, all of the Company's obligations under the
Indenture and the Notes.
(b) Immediately after giving effect to such transaction and treating any
obligation of the Company or a Restricted Subsidiary in connection with or
as a result of such transaction as having been incurred at the time of such
transaction, no Default or Event of Default has occurred and is continuing.
(c) Immediately after giving effect to such transaction on a pro forma
basis, the Consolidated Net Worth of the Company (or of the Surviving
Entity if the Company is not the continuing obligor under the Indenture) is
equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction.
(d) Immediately after giving effect to such transaction on a pro forma
basis (on the assumption that the transaction occurred at the beginning of
the most recently ended four full fiscal quarter period for which internal
financial statements are available, the Company (or the Surviving Entity if
the Company is not the continuing obligor under the Indenture) could incur
at least $1.00 of additional Debt (other than Permitted Debt) pursuant to
the first paragraph of the "Limitation on Debt" covenant.
(e) If the Company is not the continuing obligor under the Indenture,
each Subsidiary Guarantor, unless it is the other party to the transaction
described above, has by supplemental indenture confirmed that its
Subsidiary Guarantee applies to the Surviving Entity's obligations under
the Indenture and the Notes.
(f) If any of the property or assets of the Company or any of its
Restricted Subsidiaries would thereupon become subject to any Lien, the
provisions of the "Limitation on Liens" covenant are complied with.
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(g) The Company delivers, or causes to be delivered, to the Trustee, in
form and substance reasonably satisfactory to the Trustee, an officers'
certificate and an opinion of counsel, each stating that such transaction
complies with the requirements of the Indenture.
In the event of any transaction described in and complying with the
conditions listed in the first paragraph of this covenant in which the Company
is not the continuing obligor under the Indenture, the Surviving Entity will
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and thereafter the Company will, except in
the case of a lease, be discharged from all its obligations and covenants
under the Indenture and Notes.
EVENTS OF DEFAULT
Each of the following will be "Events of Default" under the Indenture:
(a) Default in the payment of any interest on any Note when it becomes
due and payable, and continuance of such default for a period of 30 days.
(b) Default in the payment of the principal of (or premium, if any, on)
any Note when due.
(c) Failure to perform or comply with the Indenture provisions described
under "Consolidation, Merger and Sale of Assets".
(d) Default in the performance, or breach, of any covenant or agreement
of the Company or any Subsidiary Guarantor contained in the Indenture or
any Subsidiary Guarantee (other than a default in the performance, or
breach, of a covenant or agreement that is specifically dealt with
elsewhere herein), and continuance of such default or breach for a period
of 60 days after written notice has been given to the Company by the
Trustee or to the Company and the Trustee by the holders of at least 25% in
aggregate principal amount of the Notes then outstanding.
(e) (i) An event of default has occurred under any mortgage, bond,
indenture, loan agreement or other document evidencing an issue of Debt of
the Company or any Significant Subsidiary, which issue has an aggregate
outstanding principal amount of not less than $5,000,000, and such default
has resulted in such Debt becoming, whether by declaration or otherwise,
due and payable prior to the date on which it would otherwise become due
and payable or (ii) a default in any payment when due at final maturity of
any such Debt.
(f) Failure by the Company or any of its Restricted Subsidiaries to pay
one or more final judgments the uninsured portion of which exceeds in the
aggregate $5,000,000, which judgment or judgments are not paid, discharged
or stayed for a period of 60 days.
(g) Any Subsidiary Guarantee issued by a Significant Subsidiary ceases to
be in full force and effect or is declared null and void or any Subsidiary
Guarantor denies that it has any further liability under any Subsidiary
Guarantee, or gives notice to such effect (other than by reason of the
termination of the Indenture or the release of any such Subsidiary
Guarantee in accordance with the Indenture), and such condition has
continued for a period of 60 days after written notice of such failure
requiring the Subsidiary Guarantor and the Company to remedy the same has
been given (x) to the Company by the Trustee or (y) to the Company and the
Trustee by the holders of 25% in aggregate principal amount of the Notes
then outstanding.
(h) The occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company or any Significant Subsidiary.
If an Event of Default (other than as specified in clause (h) above) occurs
and is continuing, the Trustee or the holders of not less than 25% in
aggregate principal amount of the Notes then outstanding may, and the Trustee
at the request of such holders will, declare the principal of all of the
outstanding Notes immediately due and payable and, upon any such declaration,
such principal will become due and payable immediately. If an Event of Default
specified in clause (h) above occurs and is continuing, then the principal of
all of the
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outstanding Notes will ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any holder
of Notes.
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may
rescind such declaration and its consequences if (i) the Company has paid or
deposited with the Trustee a sum sufficient to pay (A) all overdue interest on
all Notes, (B) all unpaid principal of (and premium, if any, on) any
outstanding Notes that has become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Notes, (C) to the
extent that payment of such interest is lawful, interest upon overdue interest
and overdue principal at the rate borne by the Notes and, (D) all sums paid or
advanced by the Trustee under the Indenture and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel;
and (ii) all Events of Default, other than the non-payment of amounts of
principal of (or premium, if any, on) or interest on the Notes that have
become due solely by such declaration of acceleration, have been cured or
waived. No such rescission will affect any subsequent default or impair any
right consequent thereon.
The holders of not less than a majority in aggregate principal amount of the
outstanding Notes may, on behalf of the holders of all of the Notes, waive any
past defaults under the Indenture, except a default in the payment of the
principal of (and premium, if any) or interest on any Note, or in respect of a
covenant or provision that under the Indenture cannot be modified or amended
without the consent of the holder of each Note outstanding.
If a Default or an Event of Default occurs and is continuing and is known to
the Trustee, the Trustee will mail to each holder of the Notes notice of the
Default or Event of Default within 90 days after the occurrence thereof.
Except in the case of a Default or an Event of Default in payment of principal
of (and premium, if any, on) or interest on any Notes, the Trustee may
withhold the notice to the holders of the Notes if a committee of its trust
officers in good faith determines that withholding such notice is in the
interests of the holders of the Notes.
The Company is required to furnish to the Trustee annual statements as to
the performance by the Company and the Subsidiary Guarantors of their
respective obligations under the Indenture and as to any default in such
performance. The Company is also required to notify the Trustee within ten
days of any officer of the Company having knowledge of any Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may by board resolution, at its option and at any time,
terminate the obligations of the Company and any Subsidiary Guarantors with
respect to the outstanding Notes ("defeasance"). Such defeasance means that
the Company and any Subsidiary Guarantors will be deemed to have paid and
discharged the entire Debt represented by the outstanding Notes, except for
(i) the rights of holders of outstanding Notes to receive payments in respect
of the principal of (and premium, if any, on) and interest on such Notes when
such payments are due, (ii) the Company's obligations to issue temporary
Notes, register the transfer or exchange of any Notes, replace mutilated,
destroyed, lost or stolen Notes, maintain an office or agency for payments in
respect of the Notes and segregate and hold such payments in trust, (iii) the
rights, powers, trusts, duties and immunities of the Trustee and (iv) the
defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to terminate the obligations of the Company and
any Subsidiary Guarantor with respect to certain covenants set forth in the
Indenture under "Certain Covenants" above, and any omission to comply with
such obligations would not constitute a Default or an Event of Default with
respect to the Notes ("covenant defeasance").
In order to exercise either defeasance or covenant defeasance, (a) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated
solely to, the benefit of the holders of the Notes, money in an amount, or
U.S. Government Obligations (as defined in the Indenture) that through the
scheduled payment of principal and interest thereon will provide money
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in an amount, or a combination thereof, sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay and
discharge the principal of (and premium, if any, on) and interest on the
outstanding Notes at maturity (or upon redemption, if applicable) of such
principal or installment of interest; (b) no Default or Event of Default has
occurred and is continuing on the date of such deposit or, insofar as an event
of bankruptcy under clause (h) of "Events of Default" above is concerned, at
any time during the period ending on the 91st day after the date of such
deposit; (c) such defeasance or covenant defeasance must not result in a
breach or violation of, or constitute a default under, the Indenture or any
material agreement or instrument to which the Company or any Subsidiary
Guarantor is a party or by which it is bound or cause the Trustee or the trust
so created to be subject to the Investment Company Act of 1940; (d) in the
case of defeasance, the Company must deliver to the Trustee an opinion of
counsel stating that the Company has received from, or there has been
published by, the Internal Revenue Service a ruling, or since the date hereof,
there has been a change in applicable federal income tax law, to the effect,
and based thereon such opinion must confirm that, the holders of the
outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance had not occurred; (e) in the case
of covenant defeasance, the Company must have delivered to the Trustee an
opinion of counsel to the effect that the Holders of the Notes outstanding
will not recognize income, gain or loss for federal income tax purposes as a
result of such covenant defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such covenant defeasance had not occurred; and (f) the
Company must have delivered to the Trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent provided for
relating to either the defeasance or the covenant defeasance, as the case may
be, have been complied with.
SATISFACTION AND DISCHARGE
Upon the request of the Company, the Indenture will cease to be of further
effect (except as to surviving rights of registration of transfer or exchange
of the Notes, as expressly provided for in the Indenture) and the Trustee, at
the expense of the Company, will execute proper instruments acknowledging
satisfaction and discharge of the Indenture when (a) either (i) all the Notes
theretofore authenticated and delivered (other than destroyed, lost or stolen
Notes that have been replaced or paid and Notes that have been subject to
defeasance as described under "Defeasance or Covenant Defeasance of
Indenture") have been delivered to the Trustee for cancellation or (ii) all
Notes not theretofore delivered to the Trustee for cancellation (A) have
become due and payable, (B) will become due and payable at Stated Maturity
within one year or (C) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Company, and
the Company has irrevocably deposited or caused to be deposited with the
Trustee funds in trust for the purpose in an amount sufficient to pay and
discharge the entire Debt on such Notes not theretofore delivered to the
Trustee for cancellation, for principal (and premium, if any, on) and interest
to the date of such deposit (in the case of Notes that have become due and
payable) or to the Stated Maturity or Redemption Date, as the case may be; (b)
the Company has paid or caused to be paid all sums payable under the Indenture
by the Company; and (c) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided in the Indenture relating to the satisfaction and discharge
of the Indenture have been complied with.
AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture and any Subsidiary Guarantee
may be made by the Company, any affected Subsidiary Guarantor and the Trustee
with the consent of the holders of a majority in aggregate outstanding
principal amount of the Notes; provided, however, that no such modification or
amendment may, without the consent of the holder of each outstanding Note
affected thereby:
(a) change the Stated Maturity of the principal of, or any installment of
interest on, any Note, or reduce the principal amount thereof or the rate
of interest thereon or any premium payable upon the redemption
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thereof, or change the place of payment where, or the coin or currency in
which, any Note or any premium or interest thereon is payable, or impair
the right to institute suit for the enforcement of any such payment after
the Stated Maturity thereof (or, in the case of redemption, on or after the
Redemption Date);
(b) reduce the principal amount of outstanding Notes, the consent of
whose holders is required for any amendment, supplement or waiver under the
Indenture; or
(c) waive a default in the payment of principal of, or premium, if any,
or interest on the Notes.
The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
Without the consent of any holders, the Company and the Trustee, at any time
and from time to time, may enter into one or more indentures supplemental to
the Indenture for any of the following purposes: (1) to evidence the
succession of another person to the Company and the assumption by any such
successor of the covenants of the Company in the Indenture and in the Notes;
or (2) to add to the covenants of the Company for the benefit of the holders,
or to surrender any right or power herein conferred upon the Company; or (3)
to add additional Events of Defaults; or (4) to provide for uncertificated
Notes in addition to or in place of the certificated Notes; or (5) to evidence
and provide for the acceptance of appointment under the Indenture by a
successor Trustee; or (6) to secure the Notes; or (7) to cure any ambiguity,
to correct or supplement any provision in the Indenture that may be defective
or inconsistent with any other provision in the Indenture, or to make any
other provisions with respect to matters or questions arising under the
Indenture, provided that such actions pursuant to this clause do not adversely
affect the interests of the holders in any material respect; or (8) to
evidence the succession of another Person to any Subsidiary Guarantor and the
assumption by any such successor of the covenants of such Subsidiary Guarantor
in the Indenture and in the Notes; or (9) to evidence an addition of a new
Subsidiary Guarantor and the assumption by any such new Subsidiary Guarantor
of the covenants in the Indenture and in the Notes; or (10) to comply with any
requirements of the Commission in order to effect and maintain the
qualification of the Indenture under the Trust Indenture Act.
THE TRUSTEE
Bankers Trust Company, the Trustee under the Indenture, will be the initial
paying agent and registrar for the Notes.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. Under the Indenture, the holders of a majority in
outstanding principal amount of the Notes will have the right to direct the
time, method and place of conducting any proceeding for exercising any remedy
available to the Trustee, subject to certain exceptions. If an Event of
Default has occurred and is continuing, the Trustee will exercise such rights
and powers vested in it under the Indenture and use the same degree of care
and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee thereunder,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage
in other transactions; provided, however, that, if it acquires any conflicting
interest (as defined) it must eliminate such conflict or else resign.
GOVERNING LAW
The Indenture, the Notes and the Subsidiary Guarantees will be governed by,
and construed in accordance with, the laws of the State of New York.
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BOOK-ENTRY, DELIVERY AND FORM
The Notes offered hereby to be resold as set forth herein will initially be
issued in the form of one Global Note (the "Global Note"). The Global Note
will be deposited on the Issue Date with the Trustee as custodian for The
Depository Trust Company (the "Depositary") and registered in the name of Cede
& Co., as nominee of the Depositary (such nominee being referred to herein as
the "Global Note Holder").
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchaser), banks and trust companies, clearing
corporations and certain other organizations. Access to the Depositary's
system is also available to other entities such as banks, brokers, dealers and
trust companies (collectively, the "Indirect Participants" or the
"Depositary's Indirect Participants") that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly.
Persons who are not Participants may beneficially own securities held by or on
behalf of the Depositary only through the Depositary's Participants or the
Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Initial Purchaser with portions of
the principal amount of the Global Note and (ii) ownership of the Notes
evidenced by the Global Note will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to own, transfer or pledge Notes evidenced
by the Global Note will be limited to such extent. For certain other
restrictions on the transferability of the Notes, see "Notices to Investors".
So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of
any Notes evidenced by the Global Note. Beneficial owners of Notes evidenced
by the Global Note will not be considered the owners or Holders thereof under
the Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any
aspect of the records of the Depositary or for maintaining, supervising or
reviewing any records of the Depositary relating to the Notes.
Payments in respect of the principal of and premium, if any, and interest on
any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by a paying agent to or at the direction of the
Global Note Holder in its capacity as the registered Holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names Notes, including the Global Note, are
registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial
owners of Notes. The Company believes, however, that it is currently the
policy of the Depositary to immediately credit the accounts of the relevant
Participants with such payments, in amounts proportionate to their respective
holdings of beneficial interests in the relevant security as shown on the
records of the Depositary. Payments by the Depositary's Participants and the
Depositary's Indirect Participants to the beneficial owners of Notes will be
governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
Certificated Notes
If (i) the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its
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option, notifies the Trustee in writing that it elects to change the issuance
of Notes in the form of Certificated Securities under the Indenture then, upon
surrender by the Global Note Holder of its Global Note, Notes in registered,
definitive, certificated form (the "Certificated Notes") will be issued to
each person that the Global Note Holder and the Depositary identify as being
the beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
Same-Day Settlement and Payment
The Indenture requires that payments in respect of the Notes represented by
the Global Note (including principal, premium, if any, and interest) be made
by wire transfer of immediately available funds to the accounts specified by
the Global Note Holder. With respect to Certificated Notes, the Company will
make all payments of principal, premium, if any, and interest by wire transfer
of immediately available funds to the accounts specified by the Holders
thereof or, if no such account is specified, by mailing a check to each such
Holder's registered address. Secondary trading in long-term notes and
debentures of corporate issuers is generally settled in clearinghouse or next-
day funds. In contrast, the Notes represented by the Global Note are eligible
to trade in the PORTAL market and to trade in the Depositary's Same-Day Funds
Settlement System, and any permitted secondary market trading activity in such
Notes will, therefore, be required by the Depositary to be settled in
immediately available funds.
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CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the principal U.S. federal income
tax consequences of the purchase, ownership and disposition of the Notes to
initial purchasers thereof who are U.S. Holders (as defined below) and the
principal U.S. federal income and estate tax consequences of the purchase,
ownership and disposition of the Notes to initial purchasers who are Foreign
Holders (as defined below). This discussion is based on currently existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing and temporary regulations of the U.S. Department of the Treasury
("Treasury") promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect on the date hereof and all of which
are subject to change, possibly with retroactive effect, or different
interpretations. This discussion does not address the tax consequences to
subsequent purchasers of Notes and is limited to purchasers who hold the Notes
as capital assets, within the meaning of section 1221 of the Code. This
discussion also does not address the tax consequences to Foreign Holders that
are subject to U.S. federal income tax on a net basis on income realized with
respect to a Note because such income is effectively connected with the
conduct of a U.S. trade or business. Such Foreign Holders are generally taxed
in a similar manner to U.S. Holders, but certain special rules do apply.
Moreover, this discussion is for general information only and does not address
all of the tax consequences that may be relevant to particular initial
purchasers in light of their personal circumstances or to certain types of
initial purchasers (such as certain financial institutions, insurance
companies, tax-exempt entities, dealers in securities or currencies or persons
holding Notes as a part of a hedging or conversion transaction or a straddle).
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP, EXCHANGE AND
DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY U.S. FEDERAL TAX
LAWS AND ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED
CHANGES) IN APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
U.S. FEDERAL INCOME TAXATION OF U.S. HOLDERS
As used herein, the term "U.S. Holder" means a holder of a Note that is, for
U.S. federal income tax purposes, (a) a citizen or resident of the United
States, (b) a corporation, partnership or other entity created or organized in
or under the laws of the United States or any political subdivision thereof,
(c) an estate the income of which is subject to U.S. federal income taxation
regardless of source or (d) a trust subject to the primary supervision of a
court within the United States and the control of one or more U.S. persons, as
described in Section 7701(a)(30) of the Code.
Payment of Interest on Notes. Interest paid or payable on a Note will be
taxable to a U.S. Holder as ordinary interest income, generally at the time it
is received or accrued, in accordance with such holder's regular method of
accounting for U.S. federal income tax purposes. Because the issue price of
the Notes equaled their stated principal amount, the Notes were not issued
with original issue discount ("OID") and consequently the Exchange Notes
should not have any OID.
Sale, Exchange, Redemption or Retirement of the Notes. Upon the sale,
exchange, redemption, retirement at maturity or other disposition of a Note, a
U.S. Holder generally will recognize taxable gain or loss equal to the
difference between the sum of cash plus the fair market value of all other
property received on such disposition (except to the extent such cash or
property is attributable to accrued but unpaid interest not previously
included in income, which will be taxable as ordinary income) and such U.S.
Holder's adjusted tax basis in the Note. A U.S. Holder's adjusted tax basis in
a Note generally will equal the cost of the Note to such U.S. Holder, less any
principal payments received by such U.S. Holder.
Gain or loss recognized on the sale, exchange, redemption, retirement or
other disposition of a Note generally will be capital gain or loss and will be
long-term capital gain or loss if, at the time of such disposition, the U.S.
Holder's holding period for the Note is more than one year. Under the Taxpayer
Relief Act of 1997, lower tax rates apply to the sale or exchange of capital
assets by individuals who have held such assets for more than 18 months.
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The exchange of a Note by a U.S. Holder for an Exchange Note should not
constitute a taxable exchange. Consequently, no gain or loss should be
recognized by U.S. Holders of the Notes upon receipt of the Exchange Notes.
For purposes of determining gain or loss upon the subsequent sale or exchange
of the Exchange Notes, a U.S. Holder's basis in the Exchanges Notes should be
the same as such holder's basis in the Notes exchanged therefor. U.S. Holders
should be considered to have held the Exchange Notes from the time of their
original acquisition of the Notes.
Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements may apply to certain payments of principal,
premium, if any, and interest on a Note, and to proceeds of the sale or
redemption of a Note before maturity. The Company, its agent, a broker, the
Trustee or any paying agent, as the case may be, will be required to withhold
from any payment that is subject to backup withholding a tax equal to 31% of
such payment if, among other things, a U.S. Holder fails to furnish his
taxpayer identification number (social security number or employer
identification number), certify that such number is correct, certify that such
holder is not subject to backup withholding or otherwise comply with the
applicable requirements of the backup withholding rules. Certain U.S. Holders,
including all corporations, are not subject to backup withholding and
information reporting requirements. Any amounts withheld under the backup
withholding rules from a payment to a U.S. Holder will be allowed as a credit
against such U.S. Holder's U.S. federal income tax liability and may entitle
the holder to a refund, provided that the required information is furnished to
the U.S. Internal Revenue Service ("IRS").
U.S. FEDERAL INCOME TAXATION OF FOREIGN HOLDERS
As used herein, the term "Foreign Holder" means a holder of a Note that is,
for U.S. federal income tax purposes, (a) a nonresident alien individual, (b)
a foreign corporation, (c) a nonresident alien fiduciary of a foreign estate
or trust or (d) a foreign partnership.
Payment of Interest on Notes. In general, payments of interest received by a
Foreign Holder will not be subject to U.S. federal withholding tax, provided
that (a)(i) the Foreign Holder does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the Company
entitled to vote, (ii) the Foreign Holder is not a controlled foreign
corporation that is related to the Company actually or constructively through
stock ownership, (iii) the Foreign Holder is not a bank receiving interest
described in Section 881(c)(3)(A) of the Code, and (iv) either (A) the
beneficial owner of the Note, under penalties of perjury, provides the Company
or its agent with such beneficial owner's name and address and certifies on
IRSForm W-8 (or a suitable substitute form) that it is not a U.S. Holder or
(B) a securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or
business (a "financial institution") holds the Note and provides a statement
to the Company or its agent under penalties of perjury in which it certifies
that such an IRS Form W-8 (or a suitable substitute) has been received by it
from the beneficial owner of the Notes or qualifying intermediary and
furnishes the Company or its agent a copy thereof or (b) the Foreign Holder is
entitled to the benefits of an income tax treaty under which interest on the
Notes is exempt from U.S. withholding tax and the Foreign Holder or such
Foreign Holder's agent provides a properly executed IRS Form 1001 claiming the
exemption. Payments of interest not exempt from U.S. federal withholding tax
as described above will be subject to such withholding tax at the rate of 30%
(subject to reduction under an applicable income tax treaty).
Sale, Exchange, Redemption or Retirement of the Notes. A Foreign Holder
generally will not be subject to U.S. federal income tax (and generally no tax
will be withheld) with respect to gain realized on the sale, exchange,
redemption, retirement at maturity or other disposition of a Note unless the
Foreign Holder is an individual who is present in the United States for a
period or periods aggregating 183 or more days in the taxable year of the
disposition and, generally, either has a "tax home" or an "office or other
fixed place of business" in the United States.
Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements do not apply to payments of interest made
by the Company or a paying agent to Foreign Holders if
86
<PAGE>
the certification described above under "--U.S. Federal Income Taxation of
Foreign Holders--Payment of Interest on Notes" is received, provided that the
payor does not have actual knowledge that the holder is a U.S. Holder. If any
payments of principal and interest are made to the beneficial owner of a Note
by or through the foreign office of a foreign custodian, foreign nominee or
other foreign agent of such beneficial owner, or if the foreign office of a
foreign "broker" (as defined in applicable Treasury regulations) pays the
proceeds of the sale of a Note to the seller thereof, backup withholding and
information reporting will not apply. Information reporting requirements (but
not backup withholding) will apply, however, to a payment by a foreign office
of a broker that is a U.S. person or is a foreign person that derives 50% or
more of its gross income for certain periods from the conduct of a trade or
business in the United States, or that is a "controlled foreign corporation"
(generally, a foreign corporation controlled by certain U.S. shareholders)
with respect to the United States unless the broker has documentary evidence
in its records that the holder is a Foreign Holder and certain other
conditions are met or the holder otherwise establishes an exemption. Payment
by a U.S. office of a broker is subject to both backup withholding at a rate
of 31% and information reporting unless the holder certifies under penalties
of perjury that it is a Foreign Holder or otherwise establishes an exemption.
The procedures described above for withholding tax on interest payments, and
some of the associated backup withholding and information reporting rules, are
currently the subject of new proposed regulations, which are proposed to be
effective for payments made after December 31, 1997, subject to certain
transition rules. The proposed regulations, if adopted in their current form,
would modify the procedures for establishing an exemption from withholding tax
described above. Informal statements by the IRS indicate that the proposed
regulations, when finally adopted, will be made effective for payments made
after December 31, 1998. No official announcement to this effect, however, has
been issued by the IRS.
Recently issued Treasury regulations modify certain of the certification
requirements described above. These modifications will become generally
effective for interest payments made beginning January 1, 2000. The Company or
its paying agent may request new withholding exemption forms from holders in
order to qualify for continued exemption from withholding under the Treasury
regulations when they become effective. For example, under recently issued
Treasury regulations, a Foreign Holder will be required to provide a Form W-8
(or substitute form) to the withholding agent on which such holder provides
its name, address and taxpayer identification number and states, under penalty
of perjury, that the interest paid on a Note and the gain on the sale,
exchange or other disposition of a Note is not effectively connected with such
holder's United States trade or business in order to obtain an exemption from
withholding tax on payments made beginning January 1, 2000.
Federal Estate Taxes. Subject to applicable estate tax treaty provisions,
Notes held at the time of death (or Notes transferred before death but subject
to certain retained rights or powers) by an individual who at the time of
death is a Foreign Holder will not be included in such Foreign Holder's gross
estate for U.S. federal estate tax purposes provided that the individual does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote or hold the
Notes in connection with a U.S. trade or business.
87
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer (a "Participating Broker-Dealer") must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. This Prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Outstanding Notes where such Outstanding Notes
were acquired by the broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed that, for a period of 90 days
after the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. In addition, until
September 6, 1998, all dealers effecting transactions in the Exchange Notes
may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their
own account pursuant to the Exchange Offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to the purchaser or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such Exchange
Notes. Any broker-dealer that resells the Exchange Notes that were received by
it for its own account pursuant to the Exchange Offer and any broker or dealer
that participates in a distribution of such Exchange Notes may be deemed to be
an "underwriter" within the meaning of the Securities Act, and any profit on
any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a Prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 90 days after the Expiration Date, the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the
Letter of Transmittal. The Company has agreed to pay all expenses incident to
the Exchange Offer (including the expenses of one counsel for the Holders of
the Notes) other than commissions or concessions of any brokers or dealers,
and will indemnify the holders of the Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Company of the happening of any event which
makes any statement in the Prospectus untrue in any material respect or which
requests the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of the
Prospectus until the Company has amended or supplemented the Prospectus to
correct such misstatement or omission and has furnished copies of the amended
or supplemental Prospectus to such broker-dealer. If the Company shall give
any such notice to suspend the use of the Prospectus, it shall extend the time
period referred to above by the number of days during the period from and
including the date of the giving of such notice to and including when broker-
dealers shall have received copies of the supplemented or amended Prospectus
necessary to permit resales of the Exchange Notes.
88
<PAGE>
LEGAL MATTERS
The validity of the Exchange Notes will be passed upon for the Company by
Fulbright & Jaworski L.L.P., Houston, Texas. Certain members of Fulbright &
Jaworski L.L.P. involved in the preparation of this Prospectus own in the
aggregate 7,467 shares of Common Stock and warrants to purchase 3,905 shares
of Common Stock at an exercise price of $2.41 per share.
EXPERTS
The consolidated financial statements and schedule of the Company as of
December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997, included in this Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their reports with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in accounting and auditing in
giving said reports.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to
the securities offered by this Prospectus. Certain of the information
contained in the Registration Statement is omitted from this Prospectus, and
reference is hereby made to the Registration Statement and exhibits and
schedules relating thereto for further information with respect to the Company
and the securities offered by this Prospectus. Subsequent to the Exchange
Offer, the Company will be subject to certain periodic reporting and other
informational requirements of the Exchange Act, and, in accordance therewith,
will file certain reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information will be
available for inspection, and copies of such materials may be obtained upon
payment of the fees prescribed therefor by the rules and regulations of the
Commission from the Commission, at its principal offices located at Judiciary
Plaza, 450 Fifth Street, Room 1024, Washington, D.C. 20549, and at the
Regional Offices of the Commission located at Northwestern Atrium Center, 500
West Madison Street, 1400, Chicago, Illinois 60661-2511, and at 7 World Trade
Center, Suite 1300, New York, New York 10048. The Commission maintains a World
Wide Web site on the Internet at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants,
including the Company, that file electronically with the Commission.
So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it is required to furnish the information required to be
filed with the Commission to the Trustee and the holders of the Outstanding
Notes and the Exchange Notes. The Company has agreed that, notwithstanding
that it may not be required to remain subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the Company will file with the
Commission and provide the Trustee and Noteholders with such annual reports
and such information, documents and other reports as are specified in Sections
13 and 15(d) of the Exchange Act (excluding however information with respect
to benefit plans and long-term compensation arrangements) and applicable to a
U.S. corporation subject to such Sections, such information, documents and
other reports to be so filed and provided at the times specified for the
filing of such information, documents and reports under such Sections.
The Company has agreed that for so long as any of the Outstanding Notes are
outstanding and are "restricted securities" within the meaning of Rule
144(a)(3) under the Securities Act, it will make available to any prospective
purchaser of the Outstanding Notes or beneficial owner of the Outstanding
Notes in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act until such time as the Company has either
exchanged the Outstanding Notes for the Exchange Notes or until such time as
the holders thereof have disposed of such Outstanding Notes pursuant to an
effective registration statement filed by the Company.
89
<PAGE>
INCORPORATION BY REFERENCE
All documents filed by the Company pursuant to the Exchange Act, after the
date of this Prospectus and prior to the termination of the Registration
Statement of which this Prospectus is a part with respect to registration of
the Exchange Notes, shall be deemed to be incorporated by reference in this
Prospectus and be a part hereof from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference in this Prospectus shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained in this
Prospectus, or in any other subsequently filed document that also is or is
deemed to be incorporated by reference, modifies or replaces such statement.
The Company undertakes to provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus has been delivered,
upon written or oral request of any such person, a copy of any or all of the
documents incorporated by reference herein, other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference
into the information that this Prospectus incorporates. Written or oral
requests for such copies should be directed to: Drypers Corporation, 5300
Memorial Drive, Suite 900, Houston, Texas 77007 (telephone 713/369-3693),
Attention: Investor Relations.
The information on executive compensation, including the summary
compensation table and information on options set forth in the Company's proxy
statement dated April 23, 1998 (the "Proxy Statement"), is incorporated by
reference in this Prospectus. The Company will provide a copy of the Proxy
Statement, without charge, to each person to whom this Prospectus is
delivered, upon written or oral request to Drypers Corporation, 5300 Memorial
Drive, Suite 900, Houston, Texas 77007 (telephone (713) 869-8693), Attention:
Investor Relations.
Any statement contained in the information in the Proxy Statement which is
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein modifies or supersedes such information in the Proxy Statement. Any
such statement that has been so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
90
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997, and March
31, 1998................................................................. F-3
Consolidated Statements of Earnings for the Years Ended December 31, 1995,
1996 and 1997, and the Three Months Ended March 31, 1997 and 1998........ F-4
Consolidated Statements of Stockholders' Equity for the Years Ended Decem-
ber 31, 1995, 1996 and 1997, and the Three Months Ended March 31, 1998... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997, and the Three Months Ended March 31, 1997 and 1998.. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
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
F-2
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31 1998
------------------ -----------
ASSETS 1996 1997 (UNAUDITED)
------ -------- -------- -----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................... $ 4,923 $ 9,269 $ 22,379
Accounts receivable, net of allowance for
doubtful accounts of $1,160, $2,064, and
$2,127, respectively........................ 30,631 33,941 41,269
Inventories.................................. 11,616 21,090 22,933
Prepaid expenses and other................... 4,410 12,730 18,153
-------- -------- --------
Total current assets....................... 51,580 77,030 104,734
PROPERTY AND EQUIPMENT, net of depreciation and
amortization.................................. 35,154 53,270 58,890
INTANGIBLE AND OTHER ASSETS, net of
amortization of $10,185, $13,438 and $14,251,
respectively.................................. 63,821 74,932 76,089
-------- -------- --------
$150,555 $205,232 $239,713
======== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Short-term borrowings........................ $ 15,622 $ -- $ --
Current portion of long-term debt............ 945 1,593 2,377
Accounts payable............................. 16,958 16,558 18,646
Accrued liabilities.......................... 9,348 10,151 15,148
-------- -------- --------
Total current liabilities.................. 42,873 28,302 36,171
LONG-TERM DEBT................................. 2,125 1,755 3,240
SENIOR TERM NOTES.............................. 44,122 115,000 146,078
SUBORDINATED DEBT TO RELATED PARTIES........... 2,400 -- --
DEFERRED RENT PAYABLE AND OTHER................ 5,427 4,595 3,307
-------- -------- --------
96,947 149,652 188,796
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000
shares authorized, 90,000, 61,110 and -0-
shares issued and outstanding, respectively. 1 1 --
Common stock, $.001 par value, 20,000,000
shares authorized, 7,179,230, 10,513,223 and
16,818,923 shares issued and outstanding,
respectively................................ 7 10 17
Additional paid-in capital................... 68,823 69,998 71,091
Warrants..................................... 1,395 1,097 1,084
Retained deficit............................. (16,618) (15,526) (21,275)
-------- -------- --------
Total stockholders' equity................. 53,608 55,580 50,917
-------- -------- --------
$150,555 $205,232 $239,713
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
----------------------------------- ------------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES............... $ 163,947 $ 207,014 $ 287,010 $ 60,161 $ 78,592
COST OF GOODS SOLD...... 114,075 126,128 175,545 36,756 47,249
---------- ----------- ----------- ----------- -----------
Gross profit........ 49,872 80,886 111,465 23,405 31,343
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 53,691 70,333 89,973 18,961 32,477
UNUSUAL EXPENSES........ 3,185 -- -- -- --
RESTRUCTURING CHARGE.... 4,255 -- -- -- --
---------- ----------- ----------- ----------- -----------
Operating income
(loss)............. (11,259) 10,553 21,492 4,444 (1,134)
RELATED-PARTY INTEREST
EXPENSE................ 406 354 199 88 --
OTHER INTEREST EXPENSE,
net.................... 7,629 8,577 9,758 2,110 3,450
OTHER INCOME (EXPENSE).. -- -- 253 (123) 56
---------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAX PROVISION
(BENEFIT) AND
EXTRAORDINARY ITEM..... (19,294) 1,622 11,788 2,123 (4,528)
INCOME TAX PROVISION
(BENEFIT).............. (3,829) 309 2,344 150 1,141
---------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM..... (15,465) 1,313 9,444 1,973 (5,669)
EXTRAORDINARY ITEM:
Costs of early
extinguishment of
debt................. -- -- (7,769) -- --
---------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)....... (15,465) 1,313 1,675 1,973 (5,669)
PREFERRED STOCK
DIVIDEND............... -- 561 583 168 80
---------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)
ATTRIBUTABLE TO COMMON
STOCKHOLDERS........... $ (15,465) $ 752 $ 1,092 $ 1,805 $ (5,749)
========== =========== =========== =========== ===========
INCOME (LOSS) PER COMMON
SHARE:
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM:
Basic............... $ (2.35) $ .11 $ 1.00 $ .23 $ (.46)
========== =========== =========== =========== ===========
Diluted............. $ (2.35) $ .09 $ .51 $ .11 $ (.46)
========== =========== =========== =========== ===========
EXTRAORDINARY ITEM:
Basic............... -- -- $ (.88) -- --
========== =========== =========== =========== ===========
Diluted............. -- -- $ (.42) -- --
========== =========== =========== =========== ===========
NET INCOME (LOSS):
Basic............... $ (2.35) $ .11 $ .12 $ .23 $ (.46)
========== =========== =========== =========== ===========
Diluted............. $ (2.35) $ .09 $ .09 $ .11 $ (.46)
========== =========== =========== =========== ===========
COMMON SHARES
OUTSTANDING............ 6,587,698 6,694,298 8,878,638 7,837,778 12,540,053
========== =========== =========== =========== ===========
COMMON AND POTENTIAL
COMMON SHARES
OUTSTANDING............ 6,587,698 15,064,913 18,469,676 17,924,752 12,540,053
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<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
debenture............ -- 41,666 -- -- 500 -- --
Exercise of senior
term note warrants... -- 14,780 -- -- 170 (170) --
Exercise of stock
options and other
warrants............. -- 9,817 -- -- 55 (35) --
Net loss.............. -- -- -- -- -- -- (15,465)
------- ---------- --- --- ------- ------ --------
BALANCE, December 31,
1995................... -- 6,619,804 -- 7 58,482 703 (17,370)
Issuance of preferred
stock, net of $178 in
offering costs....... 90,000 -- 1 -- 8,822 -- --
Issuance of common
stock and warrants in
connection with
refinancing.......... -- 194,780 -- -- (56) 692 --
Issuance of common
stock in connection
with an acquisition.. -- 360,000 -- -- 1,575 -- --
Preferred stock
dividends ($6.23 per
share)............... -- -- -- -- -- -- (561)
Exercise of stock
options.............. -- 4,646 -- -- -- -- --
Net income............ -- -- -- -- -- -- 1,313
------- ---------- --- --- ------- ------ --------
BALANCE, December 31,
1996................... 90,000 7,179,230 1 7 68,823 1,395 (16,618)
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)
Conversion of
preferred stock and
dividends into common
stock (unaudited).... (61,110) 6,292,364 (1) 7 1,058 -- --
Preferred stock
dividends ($1.24 per
share) (unaudited)... -- -- -- -- -- -- (80)
Effect of stock option
and stock purchase
plans (unaudited).... -- 5,000 -- -- 22 -- --
Exercise of warrants
(unaudited).......... -- 8,336 -- -- 13 (13) --
Net loss (unaudited).. -- -- -- -- -- -- (5,669)
------- ---------- --- --- ------- ------ --------
BALANCE, March 31, 1998
(unaudited)............ -- 16,818,923 $-- $17 $71,091 $1,084 $(21,275)
======= ========== === === ======= ====== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
--------------------------- ----------------
1995 1996 1997 1997 1998
-------- -------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss).............. $(15,465) $ 1,313 $ 1,675 $ 1,973 $(5,669)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities-
Depreciation and amortization.. 7,068 7,624 8,220 2,041 2,080
Restructuring charge........... 4,255 -- -- -- --
Non-cash portion of
extraordinary item............ -- -- 3,745 -- --
Deferred income taxes.......... (4,187) -- -- -- --
Other.......................... (379) 401 63 (43) (303)
Changes in operating assets
and liabilities, net of
acquisitions-
(Increase) decrease in-
Accounts receivable.......... 1,476 (5,724) (3,310) (4,544) (7,328)
Inventories.................. 5,398 (67) (9,474) (2,520) (2,473)
Prepaid expenses and other... 110 (973) (8,320) (1,051) (4,190)
Increase (decrease) in-
Accounts payable............. 5,038 (2,974) (400) 6,179 2,088
Accrued liabilities.......... 2,941 (3,891) 853 1,691 4,997
-------- -------- ------- ------- -------
Net cash provided by (used
in) operating activities.... 6,255 (4,291) (6,948) 3,726 (10,798)
-------- -------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment..................... (8,896) (5,931) (21,598) (3,440) (7,222)
Proceeds from sale of
equipment..................... -- 800 -- -- --
Investment in other noncurrent
assets........................ (773) (1,197) (2,754) (374) (590)
Payments under noncompete
agreements.................... (250) (400) (231) (63) --
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) (3,877) (7,812)
-------- -------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings under senior term
notes......................... -- -- 115,000 -- 31,087
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 40,756 35,100
Payments on revolvers.......... (44,922) (153,968) (94,918) (41,943) (35,100)
Borrowings under (payments on)
other debt.................... 1,750 (625) (5,022) (125) 2,269
Financing related costs........ -- (773) (4,708) -- (1,658)
Proceeds from issuance of
common stock.................. -- -- 200 -- --
Proceeds from issuance of
preferred stock............... -- 8,822 -- -- --
Proceeds from exercise of stock
options and warrants.......... 20 -- 315 222 22
-------- -------- ------- ------- -------
Net cash provided by (used
in) financing activities.... 4,401 11,133 45,163 (1,090) 31,720
-------- -------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........... 737 2,687 4,346 (1,241) 13,110
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD............ 1,499 2,236 4,923 4,923 9,269
-------- -------- ------- ------- -------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD...................... $ 2,236 $ 4,923 $ 9,269 $ 3,682 $22,379
======== ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
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 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 were
used to repay all outstanding amounts under the revolving credit facility and
will be used for general corporate purposes, including capital expenditures.
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 $30,000,000 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 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.
F-7
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
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.
Interim Financial Information
The unaudited consolidated financial information as of and for the three-
month periods ended March 31, 1997 and 1998 has not been audited by
independent public accountants, but in the opinion of management of the
Company, all adjustments (consisting only of normal, recurring adjustments)
necessary for a fair presentation of the consolidated balance sheet,
statements of earnings, statement of stockholders' equity and statements of
cash flows at the date and for the interim periods indicated have been made.
Accounting measurements at interim dates inherently involve greater reliance
on estimates than at year-end. The results of operations for the three months
ended March 31, 1998, are not necessarily indicative of the results that will
be realized for the fiscal year ending December 31, 1998.
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 consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials....................................... $ 4,659 $ 6,948 $ 6,692
Finished goods...................................... 6,957 14,142 16,241
------- ------- -------
$11,616 $21,090 $22,933
======= ======= =======
</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.
F-8
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
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 consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment........................... $44,349 $57,159 $59,315
Land and buildings................................ -- 7,181 11,281
Office equipment and furniture.................... 2,573 3,638 3,848
Automobiles....................................... 222 189 277
Leasehold improvements............................ 2,167 2,872 2,931
------- ------- -------
49,311 71,039 77,652
Accumulated depreciation and amortization......... (14,157) (17,769) (18,762)
------- ------- -------
$35,154 $53,270 $58,890
======= ======= =======
</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.
Intangible and Other Assets
Intangible and other assets, net of accumulated amortization, consisted of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill........................................... $55,261 $66,907 $65,852
Deferred financing costs........................... 3,153 4,502 6,070
License agreement.................................. 1,310 1,002 925
Noncompete agreements.............................. 147 -- --
Receivable from Chansommes do Brasil Ind. E Com.
Ltda. (See Note 2)................................ 2,167 -- --
Other.............................................. 1,783 2,521 3,242
------- ------- -------
$63,821 $74,932 $76,089
======= ======= =======
</TABLE>
F-9
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
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 consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------- MARCH 31,
1996 1997 1998
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Selling and promotional............................. $ 2,684 $ 3,546 $ 3,894
Interest payable.................................... 1,428 681 3,671
License agreement payable........................... 400 400 400
Property and sales tax payable...................... 1,254 1,958 2,303
Other............................................... 3,582 3,566 4,880
------- ------- -------
$ 9,348 $10,151 $15,148
======= ======= =======
</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.
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.
F-10
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited)
Earnings Per Share
As of December 31, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS No. 128
requires dual presentation of basic and diluted earnings per share ("EPS")
data and restatement of all prior periods presented. Basic 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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31 MARCH 31
----------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic Earnings Per
Share:
Income (loss) before
extraordinary item,
less preferred stock
dividend............. $ (15,465) $ 752 $ 8,861 $ 1,805 $ (5,749)
Extraordinary item.... -- -- (7,769) -- --
---------- ----------- ----------- ----------- -----------
Net income (loss)
attributable to
common stockholders.. $ (15,465) $ 752 $ 1,092 $ 1,805 $ (5,749)
========== =========== =========== =========== ===========
Weighted average
number common shares
outstanding.......... 6,587,698 6,694,298 8,878,638 7,837,778 12,540,053
========== =========== =========== =========== ===========
Income (loss) before
extraordinary item... $ (2.35) $ .11 $ 1.00 $ .23 $ (.46)
Extraordinary item.... -- -- (.88) -- --
---------- ----------- ----------- ----------- -----------
Basic EPS............. $ (2.35) $ .11 $ .12 $ .23 $ (.46)
========== =========== =========== =========== ===========
Diluted Earnings Per
Share:
Income (loss) before
extraordinary item... $ (15,465) $ 1,313 $ 9,444 $ 1,973 $ (5,749)
Extraordinary item.... -- -- (7,769) -- --
---------- ----------- ----------- ----------- -----------
Net income (loss)..... $ (15,465) $ 1,313 $ 1,675 $ 1,973 $ (5,749)
========== =========== =========== =========== ===========
Weighted average
number common shares
outstanding.......... 6,587,698 6,694,298 8,878,638 7,837,778 12,540,053
Dilutive effect--
options and warrants. -- 870,615 1,839,648 1,086,974 --
Dilutive effect--
preferred stock...... -- 7,500,000 7,751,390 9,000,000 --
---------- ----------- ----------- ----------- -----------
6,587,698 15,064,913 18,469,676 17,924,752 12,540,053
========== =========== =========== =========== ===========
Income (loss) before
extraordinary item... $ (2.35) $ .09 $ .51 $ .11 $ (.46)
Extraordinary item.... -- -- (.42) -- --
---------- ----------- ----------- ----------- -----------
Diluted EPS........... $ (2.35) $ .09 $ .09 $ .11 $ (.46)
========== =========== =========== =========== ===========
</TABLE>
For the years ended December 31, 1995, 1996 and 1997, and the three months
ended March 31, 1997 and 1998, options and warrants excluded from the diluted
earnings per share calculation because their effect was antidilutive to the
calculation totaled 24,995, 85,978, 168,185, 75,617 and 6,012,955,
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
F-11
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
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. Income taxes paid for the three
months ended March 31, 1997 and 1998, were $70,000 and $842,000, 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. Interest paid on
debt for the three months ended March 31, 1997 and 1998, was $464,000 and
$234,000, 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.
New Accounting Standards
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.
In April 1998, Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-up Activities", was issued by the American Institute of Certified Public
Accountants. SOP 98-5 requires that all nongovernmental entities expense
start-up activities as these costs are incurred. The Company is required to
adopt SOP 98-5 for the fiscal year ending December 31, 1999. The Company does
not expect the adoption of SOP 98-5 to have a material effect on its financial
position or results of operations.
F-12
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
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.
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.
F-13
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
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:
Recent Financing Transactions
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 were issued
under the same indenture as the $115,000,000 issuance of 10 1/4% Senior Notes
discussed below. Proceeds of the issuance of the New Senior Notes were used to
repay all outstanding indebtedness under the revolving credit facility and
will be used for general corporate purposes, including capital expenditures.
The Company plans to file an exchange offer registration statement by May
15, 1998 with the Securities and Exchange Commission for the purpose of
registering and issuing in exchange for all of the New Senior Notes 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.
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 and March 31, 1998, 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
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 and March 31, 1998.
Short-term borrowings for the international operations were not material as
of December 31, 1997 and March 31, 1998.
F-14
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
Long-Term Debt
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
--------------- MARCH 31,
1996 1997 1998
------ ------- -----------
(UNAUDITED)
<S> <C> <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%, par-
tially secured by land and buildings............. -- 1,950 1,853
Various other notes payable....................... 1,945 1,398 3,764
------ ------- -------
3,070 3,348 5,617
Less: current maturities........................ (945) (1,593) (2,377)
------ ------- -------
$2,125 $ 1,755 $ 3,240
====== ======= =======
</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 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.
Senior Term Notes
Long-term debt under senior term notes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------- MARCH 31,
1996 1997 1998
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
10 1/4% Senior Notes, interest due semiannually
on June 15 and December 15, principal due June
15, 2007, including unamortized debt premium of
$--, $-- and $1,078, respectively.............. $ -- $115,000 $146,078
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 $146,078
======= ======== ========
</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.
F-15
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
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 $43,400,000 of
the $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 a 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. On December 10, 1997, the Company
redeemed the remaining $1,600,000 of 12 1/2% Senior Notes pursuant to an
optional redemption provision.
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
----------- MARCH 31,
1996 1997 1998
------ ---- -----------
(UNAUDITED)
<S> <C> <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.
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.
F-16
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited)
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 equipment............ 1,194 1,194
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>
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>
F-17
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
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 shares 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
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.
F-18
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
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
range 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):
<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>
F-19
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
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 OF PRICE OF NUMBER OF PRICE OF
CONTRACTUAL OPTIONS OUTSTANDING EXERCISABLE EXERCISABLE
EXERCISE PRICE RANGES LIFE OUTSTANDING OPTIONS OPTIONS OPTIONS
--------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Nonqualified stock op-
tion plans--
$.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 648,625 $3.01 354,717 $3.00
$4.51--$6.00 9.2 years 362,000 $5.32 3,333 $5.00
$6.01--$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
$5.64--$6.25 8.4 years 42,000 $6.14 8,000 $5.88
</TABLE>
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 and exercise prices are presented below.
<TABLE>
<CAPTION>
NUMBER OF SHARES
ISSUABLE UNDER
WARRANTS
OUTSTANDING AT EXERCISE
DECEMBER 31, PRICE
1997 WARRANT HOLDERS PER SHARE
---------------- --------------------------------------- ---------
<C> <S> <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>
F-20
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited)
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.
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, 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.
F-21
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
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.
Litigation
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.
Employment Agreements
The Company has entered into employment agreements with three executive
officers that extend through February 25, 2000, with 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.
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>
<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. The Company is
currently negotiating a lease financing arrangement for an additional training
pant line.
Equipment Purchase Commitments
The Company has committed to purchase four additional diaper lines to be
delivered in 1998.
F-22
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
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>
9. QUARTERLY FINANCIAL DATA (UNAUDITED):
Unaudited summarized data by quarter for 1996, 1997 and 1998 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)
1998--
Net sales................... $78,592
Gross profit................ 31,343
Net loss.................... (5,669)
Basic earnings per share.... $ (.46)
Diluted earnings per share.. $ (.46)
</TABLE>
F-23
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(All discussions and disclosures with a reference date subsequent to March 18,
1998 are unaudited.)
- --------
(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:
New Revolving Credit Facility
On April 1, 1998, the Company entered into a three-year $50,000,000 new
credit facility with BankBoston, N.A. to replace the Company's former
revolving credit facility. The new credit facility permits 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 will 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 is secured by substantially all of
the Company's assets. At March 31, 1998, the Company's borrowing base would
have permitted the Company to borrow up to $42,400,000.
Acquisition of Brazilian Manufacturer
On April 6, 1998, the Company exercised its fair value option to acquire the
remaining equity interest in the parent company of Chansommes . The
acquisition will be accounted for as a purchase, and the purchase price of
approximately $5,200,000 will be allocated to the acquired assets and
liabilities assumed based on their estimated fair values. This transaction is
subject to approval by the Brazilian government. The transaction gives the
Company a 100% ownership interest in the Brazilian manufacturing facility of
its diapers. Following this transaction, the Company's total investment in
Brazil is approximately $15,000,000.
F-24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASER. THIS PROSPEC-
TUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY NOTES BY ANY-
ONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED,
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO
DO SO, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SO-
LICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN-
DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT
BEEN A CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.................................................................... 4
Risk Factors............................................................... 17
The Exchange Offer......................................................... 23
Use of Proceeds............................................................ 33
Capitalization............................................................. 34
Selected Financial Data.................................................... 35
Management's Discussion and Analysis
of Financial Condition and Results of Operations.......................... 38
Business................................................................... 47
Management................................................................. 56
Principal Stockholders..................................................... 58
Description of Revolving Credit Facility................................... 60
Description of the Exchange Notes.......................................... 61
Certain U.S. Federal Income Tax Considerations............................. 85
Plan of Distribution....................................................... 88
Legal Matters.............................................................. 89
Experts.................................................................... 89
Available Information...................................................... 89
Incorporation by Reference................................................. 90
Index to Financial Statements.............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$30,000,000
[LOGO OF DRYPERS APPEARS HERE]
DRYPERS CORPORATION
----------------------
PROSPECTUS
----------------------
10 1/4% Series B Senior
Notes due 2007
June 8, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has authority under Section 145 of the General Corporation Law
of the State of Delaware to indemnify its officers, directors, employees and
agents to the extent provided in such statute. Article Ninth of the Company's
Restated Certificate of Incorporation, referenced as Exhibit 3.1 hereto, and
Article VIII of the Company's Bylaws, referenced as Exhibit 3.2 hereto,
provide for indemnification of the Company's officers, directors, employees
and agents.
Section 102 of the General Corporation Law of the State of Delaware permits
the limitation of directors' personal liability to the corporation or its
stockholders for monetary damages for breach of fiduciary duties as a director
except for (i) any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) breaches under
Section 174 of the Delaware General Corporation Law, which relates to unlawful
payments of dividends or unlawful stock repurchases or redemptions and (iv)
any transaction from which the director derived an improper personal benefit.
Article Ninth of the Company's Restated Certificate of Incorporation limits a
director's personal liability to the extent permitted by Section 102.
Article VIII of the Company's Bylaws provides that the Company may maintain
insurance, at its expense, to protect itself and any of its directors,
officers, employees or agents or any person serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against and incurred by such person, or arising out of such person's
status as such, whether or not the Company would have the power to indemnify
such person against such liability under the Delaware General Corporation Law.
Pursuant to this provision, the Company currently maintains directors and
officers insurance.
The Company has entered into an indemnity agreement with each of its
officers and directors contractually obligating the Company to indemnify such
person to the fullest extent permitted by the General Corporation Law of the
State of Delaware. In connection with the Recapitalization and pursuant to the
Agreement and Plan of Merger dated March 22, 1991, the Company agreed that (i)
the indemnification obligations of the Company under its Certificate of
Incorporation and Bylaws constitute binding contractual obligations to each of
the Company's officers and directors immediately prior to the
Recapitalization, (ii) the amendment or repeal of those provisions will not
affect the rights of officers and directors of the Company immediately prior
to the Recapitalization relating to services occurring prior to such amendment
or repeal and (iii) for three years after the effective time of the
Recapitalization, it will use its best efforts to cause the Company to
maintain director and officer liability insurance for the officers and
directors of the Company immediately prior to the Recapitalization with
comparable terms as existing immediately prior to the Recapitalization, unless
the annual cost for premiums for such insurance (reduced by amounts
voluntarily contributed by covered parties) is more than $50,000.
In connection with the UltraCare acquisition and pursuant to the Agreement
and Plan of Reorganization dated September 18, 1992, pursuant to which
UltraCare was acquired, the Company agreed that the indemnification
obligations of UltraCare under its Certificate of Incorporation and Bylaws
would survive the closing and continue in full force and effect, as an
obligation of the Company. In addition, for a period of three years following
the closing of the UltraCare acquisition, the Company must use its best
efforts to (i) maintain or extend coverage of any directors' and officers'
liability insurance and fiduciary liability insurance carried by UltraCare or
its subsidiaries to the former officers and directors of UltraCare with
respect to actions or omissions occurring on or prior to the closing of the
UltraCare acquisition, unless the annual costs for premiums for such insurance
(reduced by amounts voluntarily contributed by covered parties) is in excess
of $50,000 and (ii) not amend the Certificate of Incorporation or Bylaws to
reduce the level of indemnification below that in effect on the day the
Agreement and Plan of Reorganization was executed.
II-1
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrants
pursuant to the foregoing provisions, the Registrants have been informed that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a) 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.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
*3.1 --Restated Certificate of Incorporation of Drypers Corporation, as
amended.
**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).
**+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).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
**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.
*5.1 --Opinion of Fulbright & Jaworski L.L.P. regarding the legality of
the Exchange Notes.
**+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).
**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).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
**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).
**+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).
**10.26 --Credit Agreement Dated as of April 1, 1998 by and among Drypers
Corporation and the Banks which are parties hereto and BankBoston,
N.A., as Agent. (Filed as Exhibit 10.1 to Form 10-Q filed May 13,
1998, Commission File No. 023422).
***12.1 --Statement Regarding Computation of Ratio of Earnings to Fixed
Charges.
***21.1 --Subsidiaries of Drypers Corporation.
*23.1 --Consent of Arthur Andersen LLP.
*23.2 --Consent of Fulbright & Jaworski, L.L.P. (contained in Exhibit 5.1).
*24.1 --Powers of Attorney (See page II-6).
*25.1 --Statement of Eligibility under Trust Indenture Act of 1939 of a
Corporation designated to act as Trustee on Form T-1.
*99.1 --Form of Letter of Transmittal and related documents.
</TABLE>
- --------
* Filed herewith.
** Incorporated by reference to the filing indicated.
*** Previously filed.
+ Management contract or compensatory plan or arrangement filed pursuant to
Item 14 of Form 10-K.
II-4
<PAGE>
(b) Financial Statement Schedules
The following financial statement schedule should be read in conjunction
with the financial statements included in this Registration Statement.
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................. S-1
Schedule II--Valuation and Qualifying Accounts........................ S-2
</TABLE>
ITEM 22. UNDERTAKINGS.
We the undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act aunt, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant has duly
caused this Amendment No. 1 to registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston,
State of Texas, on June 8, 1998.
DRYPERS CORPORATION
/s/ Walter V. Klemp
By __________________________________
Walter V. Klemp
Chairman of the Board
and to Co-Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Walter V. Klemp Chairman of the Board, Co-Chief June 8, 1998
____________________________________ Executive Officer and Director
Walter V. Klemp (Principal Executive Officer)
/s/ Terry A. Tognietti Co-Chief Executive Officer, June 8, 1998
____________________________________ President--Drypers North
Terry A. Tognietti America and Director
/s/ Raymond M. Chambers Co-Chief Executive Officer, June 8, 1998
____________________________________ President--Drypers
Raymond M. Chambers International
and Director
/s/ Philip A. Tuttle* Director June 8, 1998
____________________________________
Philip A. Tuttle
/s/ Nolan Lehmann* Director June 8, 1998
____________________________________
Nolan Lehmann
/s/ Gary L. Forbes* Director June 8, 1998
____________________________________
Gary L. Forbes
/s/ Jonathan P. Foster Executive Vice President and June 8, 1998
____________________________________ Chief Financial Officer
Jonathan P. Foster (Principal Financial Officer
and Principal Accounting
Officer)
</TABLE>
*By /s/ Walter V. Klemp
- ---------------------------------
Walter V. Klemp,
as attorney in fact
II-6
<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
S-1
<PAGE>
SCHEDULE II
DRYPERS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGED TO BALANCE
BEGINNING COST AT END
CLASSIFICATION OF PERIOD AND EXPENSE DEDUCTIONS(1) OTHER(2) OF PERIOD
-------------- --------- ----------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
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.
S-2
<PAGE>
EXHIBIT 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
DRYPERS CORPORATION
Drypers Corporation, a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "Corporation"), does
hereby certify:
FIRST: The Corporation was originally incorporated under the name VRG
Holding Corporation.
SECOND: The original Certificate of Incorporation of the Corporation
was filed in the offices of the Secretary of State of the State of Delaware on
March 20, 1991.
THIRD: The amendments to and restatement of the Corporation's
Certificate of Incorporation set forth in the following resolution were approved
and declared advisable by the Corporation's Board of Directors, and were duly
adopted in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware:
"RESOLVED, that the Certificate of Incorporation of the Corporation be
amended and restated in its entirety as follows:
First: The name of the Corporation is Drypers Corporation.
Second: The registered office of the Corporation in the State of Delaware
is located at 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name and address of its registered agent is The Corporation Trust
Company, 1209 Orange Street, Wilmington, Delaware 19801.
Third: The nature of the business, objects and purposes to be transacted,
promoted or carried on by the Corporation are:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
Fourth: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 62,500,000 of which (i) 50,000,000
shares shall be Common Stock, $.001 par value (hereinafter called the "Common
Stock"), (ii) 1,500,000 shares shall be Nonvoting Common Stock, $.001 par value
(hereinafter called the "Nonvoting Common Stock"), (iii) 10,000,000 shares shall
be Senior Preferred Stock, par value $.01 per share (hereinafter called "Senior
Preferred Stock"), and (iv) 1,000,000 shares shall be Junior Preferred Stock,
par value $.01 per share (hereinafter called "Junior Preferred Stock") (the
Senior Preferred Stock and the Junior Preferred Stock are hereinafter sometimes
collectively referred to as the "Preferred Stock").
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Effective as of the filing of this Restated Certificate of Incorporation,
each share of Common Stock issued and outstanding immediately prior to the
effective time shall be automatically changed and converted, without any action
on the part of the holder thereof, into .25 shares of Common Stock, and each
holder who upon the effectiveness of this Restated Certificate of Incorporation
would otherwise be entitled to receive a fractional share of Common Stock shall
be entitled to receive for such fractional interest, and at the effective time
of this Restated Certificate of Incorporation any such fractional interest in
shares of Common Stock of the Corporation shall be converted into the right to
receive, an amount in cash equal to the initial public offering price of shares
of Common Stock in the Corporation's initial public offering times such
fractional interest.
A statement of the powers, designations, preferences and relative rights
and the qualifications, limitations and restrictions of the Common Stock, the
Nonvoting Common Stock and the Preferred Stock is as follows:
A. Preferred Stock
(1) Shares of Preferred Stock may be issued from time to time in one
or more series, each such series to have distinctive serial designations, as
shall hereafter be determined in the resolution or resolutions providing for the
issue of such Preferred Stock from time to time adopted by the Board of
Directors pursuant to authority so to do which is hereby vested in the Board of
Directors.
(2) Each series of Preferred Stock
(a) may have such number of shares;
(b) may have such voting powers, full or limited, or may be
without voting powers;
(c) may be subject to redemption at such time or times and at
such prices;
(d) may be entitled to receive dividends (which may be
cumulative or noncumulative), at such rate or rates, on such conditions,
from such date or dates, and at such times, and payable in preference to,
or in such relation to, the dividends payable on any other class or classes
or series of stock;
(e) may have such rights upon the dissolution of, or upon any
distribution of the assets of, the Corporation;
(f) may be made convertible into, or exchangeable for, shares of
any other class or classes or of any other series of the same or any other
class or classes of stock of the Corporation at such price or prices or at
such rates of exchange, and with such adjustments;
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(g) may be entitled to the benefit of a sinking fund or purchase
fund to be applied to the purchase or redemption of shares of such series
in such amount or amounts;
(h) may be entitled to the benefit of conditions and
restrictions upon the creation of indebtedness of the Corporation or any
subsidiary, upon the issue of any additional stock (including additional
shares of such series or of any other shares) and upon the payment of
dividends or the making of other distributions on and the purchase
redemption or other acquisition by the Corporation or any subsidiary of any
outstanding stock of the Corporation; and
(i) may have such other relative, participating, optional or
other special rights and qualifications, limitations or restrictions
thereof; all as shall be stated in said resolution or resolutions providing
for the issue of such Preferred Stock. Except where otherwise set forth in
the resolution or resolutions adopted by the Board of Directors providing
for the issue of any series of Preferred Stock, the number of shares
comprising such series may be increased or decreased (but not below the
number of shares then outstanding) from time to time by like action of the
Board of Directors.
(3) Shares of any series of Preferred Stock which have been redeemed
(whether through the operation of a sinking fund or otherwise) or purchased by
the Corporation, or which, if convertible or exchangeable, have been converted
into or exchanged for shares of stock of any other class or classes shall have
the status of authorized and unissued shares of Preferred Stock and may be
reissued as a part of the series of which they were originally a part or may be
reclassified and reissued as part of a new series of Preferred Stock to be
created by resolution or resolutions of the Board of Directors or as part of any
other series of Preferred Stock, all subject to the conditions or restrictions
on issuance set forth in the resolution or resolutions adopted by the Board of
Directors providing for the issue of any series of Preferred Stock and to any
filing required by law.
B. Common Stock and Nonvoting Common Stock
Except as otherwise provided herein, all shares of Common Stock and
Nonvoting Common Stock will be identical and will entitle the holders thereof to
the same rights and privileges.
(1) Voting Rights. The holders of Common Stock will be entitled to
one vote per share on all matters to be voted on by the Corporation's
stockholders, and except as otherwise required by law, the holders of Nonvoting
Common Stock will have no right to vote their shares of Nonvoting Common Stock
on any matters to be voted on by the Corporation's stockholders.
(2) Dividends. When and as dividends are declared thereon, whether
payable in cash, property or securities of the Corporation, the holders of
Common Stock
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and the holders of Nonvoting Common Stock will be entitled to share, ratably
according to the number of shares of Common Stock or Nonvoting Common Stock held
by them, in such dividends; provided, that if dividends are declared which are
payable in shares of Common Stock or Nonvoting Common Stock, dividends will be
declared which are payable at the same rate on Common Stock and Nonvoting Common
Stock, and the dividends payable in shares of Common Stock will be payable to
holders of Common Stock, and the dividends payable in shares of Nonvoting Common
Stock will be payable to the holders of Nonvoting Common Stock.
(3) Liquidation Rights. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary, after
payment shall have made to the holders of any Preferred Stock pursuant to
Section A of this Article Fourth, the holders of Common Stock and Nonvoting
Common Stock shall be entitled, to the exclusion of the holders of Preferred
Stock, to share, ratably according to the number of shares of Common Stock or
Nonvoting Common Stock held by them, in the remaining assets of the Corporation
available for distribution to its stockholders.
(4) Conversion of Nonvoting Common Stock.
(a) At any time and from time to time, each record holder of
Nonvoting Common Stock will be entitled to convert any and all of the
shares of such holder's Nonvoting Common Stock into the same number of
shares of Common Stock at such holder's election; provided, that each
holder of Nonvoting Common Stock shall only be entitled to convert any
share or shares of Nonvoting Common Stock to the extent that after giving
effect to such conversion such holder or its affiliates shall not directly
or indirectly own, control or have power to vote a greater quantity of
securities of any kind issued by the Corporation than such holder and its
affiliates are permitted to own, control or have power to vote under any
law or under any regulation, rule or other requirement of any governmental
authority at any time applicable to such holder and its affiliates.
(b) Each conversion of shares of Nonvoting Common Stock into
shares of Common Stock will be effected by the surrender of the certificate
or certificates representing the shares to be converted at the principal
office of the Corporation (or such other office or agency of the
Corporation as the Corporation may designate by notice in writing to the
holder or holders of the Nonvoting Common Stock) at any time during normal
business hours, together with a written notice by the holder of such
Nonvoting Common Stock stating that such holder desires to convert the
shares, or a stated number of the shares, of Nonvoting Common Stock
represented by such certificate or certificates into Common Stock and that
upon such conversion such holder and its affiliates will not directly or
indirectly own, control or have the power to vote a greater quantity of
securities of any kind issued by the Corporation than such holders and its
affiliates are permitted to own, control or have the power to vote under
any applicable law, regulation, rule or other governmental requirement (and
such
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statement will obligate the Corporation to issue such Common Stock). Such
conversion will be deemed to have been effected as of the close of business
on the date on which such certificate or certificates have been surrendered
and such notice has been received, and at such time the rights of the
holder of the converted Nonvoting Common Stock as such holder will cease
and the person or person in whose name or names the certificate or
certificates for shares of Common Stock are to be issued upon such
conversion will be deemed to have become the holder or holders of record of
the shares of Common Stock represented thereby.
(c) Promptly after such surrender and the receipt of such written
notice, the Corporation will issue and deliver in accordance with the
surrendering holder's instructions (i) the certificate or certificates for
the Common Stock issuable upon such conversion and (ii) a certificate
representing any Nonvoting Common Stock which was represented by the
certificate or certificates delivered to the Corporation in connection with
such conversion but which was not converted.
(d) If the Corporation in any manner subdivides or combines the
outstanding shares of one class of either Common Stock or Nonvoting Common
Stock, the outstanding shares of the other class will be proportionately
subdivided or combined.
(e) In the case of, and as a condition to, any capital
reorganization of, or any reclassification of the capital stock of, the
Corporation (other than a subdivision or combination of shares of Common
Stock or Nonvoting Common Stock into a greater or lesser number of shares
(whether with or without par value) or a change in the par value of Common
Stock or Nonvoting Common Stock or from par value to no par value, or from
no par value to par value) or in the case of, and as condition to, the
consolidation or merger of the Corporation with or into another corporation
(other than a merger in which the Corporation is the continuing corporation
and which does not result in any reclassification of outstanding shares of
Common Stock or Nonvoting Common Stock), each share of Nonvoting Common
Stock shall be convertible into the number of shares of stock or other
securities or property receivable upon such reorganization,
reclassification, consolidation or merger by a holder of the number of
shares of Common Stock of the Corporation into which such share of
Nonvoting Common Stock was convertible immediately prior to such
reorganization, reclassification, consolidation or merger; and, in any such
case, appropriate adjustment shall be made in the application of the
provisions set forth in this paragraph 4 with respect to the rights and
interests thereafter of the holder of Nonvoting Common Stock to the end
that the provisions set forth in this paragraph 4 (including provisions
with respect to the conversion rate) shall thereafter be applicable, as
nearly as they reasonably may be, in relation to any shares of stock or
other securities or property thereafter deliverable upon the conversion of
the shares of Nonvoting Common Stock.
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(f) Shares of Nonvoting Common Stock which are converted into
shares of Common Stock as provided herein shall not be reissued.
(g) The Corporation will at all times reserve and keep available
out of its authorized but unissued shares of Common Stock or its treasury
shares, solely for the purpose of issue upon the conversion of the
Nonvoting Common Stock as provided in this paragraph 4, such number of
share of Common Stock as shall then be issuable upon the conversion of all
then outstanding shares of Nonvoting Common Stock (assuming that all such
shares of Nonvoting Common Stock are held by persons entitled to convert
such shares into Common Stock).
(h) The issuance of certificates for Common Stock upon the
conversion of Nonvoting Common Stock will be made without charge to the
holders of such shares for any issuance tax in respect thereof or other
cost incurred by the Corporation in connection with such conversion and the
related issuance of Common Stock. The Corporation will not close its books
against the transfer of Nonvoting Common Stock or of Common Stock issued or
issuable upon the conversion of Nonvoting Common Stock in any manner which
would interfere with the timely conversion of Nonvoting Common Stock.
C. General Provisions
(1) No stockholder shall be entitled as a matter of right to
subscribe for or receive additional shares of any class of stock of the
Corporation, whether now or hereafter authorized, or any bonds, debentures or
other securities convertible into stock, but such additional shares of stock or
other securities convertible into stock may be issued or disposed of by the
Board of Directors to such persons and on such terms as in its discretion it
shall deem advisable.
(2) No action required or permitted to be taken at any annual or
special meeting of stockholders of the Corporation may be taken without such
meeting; and the right of stockholders of the Corporation to take such action by
a consent in writing is denied.
(3) No stockholder of the Corporation shall have the right of
cumulative voting at any election of directors or upon any other matter.
Fifth: The Corporation is to have perpetual existence.
Sixth: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized:
(1) To make, alter or repeal the by-laws of the Corporation.
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(2) To authorize and cause to be executed mortgages and liens upon
the real and personal property of the Corporation.
(3) To set apart out of any of the funds of the Corporation available
for dividends a reserve or reserves for any proper purpose and to abolish
any such reserve in the manner in which it was created.
(4) By a majority of the whole Board of Directors, to designate one
or more committees, each committee to consist of two or more of the
directors of the Corporation. The Board of Directors may designate one or
more directors and as alternate members of any committee, who may replace
any absent or disqualified member or any meeting of the committee. Any
such committee, to the extent provided in the resolution or in the by-laws
of the Corporation, shall have and may exercise the powers of the Board of
Directors in the management of the business and affairs of the Corporation
and may authorize the seal of the Corporation to be affixed to all papers
which may require it; provided, however, the by-laws may provide that in
the absence or disqualification of any member of such committee or
committees the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at
the meeting in the place of any such absent or disqualified member.
(5) Except as otherwise specified in any contract between the
Corporation and one or more of its stockholders, when and as authorized by
the affirmative vote of the holders of a majority of the stock issued and
outstanding having voting power given at a stockholders' meeting duly
called upon such notice as is required by statute, to sell, lease or
exchange all or substantially all the property and assets of the
Corporation, including its goodwill and its corporate franchises, upon such
terms and conditions and for such consideration, which may consist in whole
or in part of money or property including securities of any other
corporation or corporations, as the Board of Directors shall deem expedient
and for the best interest of the Corporation.
Seventh: Meetings of stockholders may be held within or without the State
of Delaware, as the by-laws of the Corporation shall so provide.
Eighth: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, as the same exists or hereafter may be amended or (iv) for any transaction
from which the director derived an improper personal benefit. If the Delaware
General Corporation Law hereafter is amended to authorize the further
elimination or limitation of the liability of directors, then the liability of a
director of the Corporation, in addition to the limitation on personal
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liability provided herein, shall be limited to the fullest extent permitted by
the amended Delaware General Corporation Law. Any repeal or modification of
this paragraph by the stockholders of the Corporation shall be prospective only,
and shall not adversely affect any limitation on the personal liability of a
director of the Corporation existing at the time of such repeal or modification.
Ninth: The Corporation may indemnify any person who was, is, or is
threatened to be made a party to a proceeding (as hereinafter defined) by reason
of the fact that he (i) is or was a director or officer of the Corporation or
(ii) while a director or officer of the Corporation, is or was serving at the
request of the Corporation as a director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another foreign
or domestic corporation, partnership, joint venture, sole proprietorship, trust,
employee benefit plan, or other enterprise, to the fullest extent permitted
under the Delaware General Corporation Law, as the same exists or may hereafter
be amended.
The Corporation may additionally indemnify any employee or agent of the
Corporation to the fullest extent permitted by law.
As used herein, the term "proceeding" means any threatened, pending, or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such an action, suit or proceeding,
and any inquiry or investigation that could lead to such an action, suit or
proceeding.
Tenth: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, subject to
any express provisions or restriction contained in this Certificate of
Incorporation or in the by-laws of the Corporation, in any manner now or
hereafter provided by law, and all rights and powers at any time conferred upon
the directors or stockholders of the Corporation by this Certificate of
Incorporation or any amendment hereto are subject to such right of the
Corporation.
Eleventh: A. The number of directors of the Corporation shall be fixed
from time to time by resolution of the Board of Directors of the Corporation
adopted by the affirmative vote of not less than 80% of the number of directors
of the Corporation in office at that time; provided that;
(i) the number of directors of the Corporation shall be not less
than six,
(ii) the number of directors of the Corporation shall be six
unless and until such number shall be increased by resolution of the
Board of Directors of the Corporation adopted by the affirmative vote
of not less than 80% of the number of directors of the Corporation
then in office, and
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(iii) the number of directors of the Corporation shall not be
decreased in the effect of that decrease would be to shorten the term
of any director of the Corporation at the time in office.
B. Commencing with the first annual meeting of the stockholders
following the filing of this Restated Certificate of Incorporation, the
directors of the corporation shall be divided into three classes, each class to
be initially composed of two persons, and upon any change in the size of the
Board of Directors, each class to be as nearly equal in number as possible. All
three classes of directors of the Corporation shall be elected at the first
annual meeting of stockholders of the Corporation following the filing of this
Restated Certificate of Incorporation. The initial term of office of directors
of the first class who are elected at the first annual meeting of stockholders
of the Corporation following the filing of this Restated Certificate of
Incorporation shall expire at the next annual meeting of stockholders of the
Corporation; the initial term of office of directors of the second class who are
elected at the first annual meeting of the stockholders of the Corporation
following the filing of this Restated Certificate of Incorporation shall expire
at the third annual meeting of stockholders of the Corporation following the
filing of this Restated Certificate of Incorporation; and the initial term of
office of directors of the third class who are elected at the first annual
meeting of the stockholders of the Corporation following the filing of this
Restated Certificate of Incorporation shall expire at the fourth annual meeting
of stockholders of the Corporation following the filing of this Restated
Certificate of Incorporation.
At each annual meeting of stockholders of the Corporation, the number of
directors equal to the number of the class the term of which expires at the time
of such meeting shall be elected to hold office for a term expiring a the third
annual meeting of stockholders of the corporation after their election.
C. A director of the Corporation may not be removed from office
unless such removal is for cause and the holders of a majority of the shares of
stock of the Corporation entitled to vote for the election of such a director
shall have voted in favor of such removal at a meeting of stockholders of the
Corporation expressly called for that purpose.
For purposes of this Article Eleventh, "Cause" shall mean if the director
is willfully and persistently guilty of any significant misconduct or neglect in
the discharge of his duties hereunder, provided that notice thereof has been
given to the director, or if the director is convicted of or pleads guilty or
nolo contendere to any felony criminal offense or any civil offense involving
fraud or moral turpitude, other than an offense that in the opinion of the other
members of the Board of Directors does not affect the director's position as a
director.
Twelfth: A. This Certificate of Incorporation shall not be amended,
other than for the issuance of Preferred Stock pursuant to Article Fourth,
unless, in addition to any other requirement therefor imposed by law, the
holders of not less than two-
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thirds of the shares of stock of the Corporation entitled to vote thereon shall
have voted in favor of the proposed amendment.
B. The Corporation shall not be merged into or consolidated with any
other corporation, nor shall any other corporation be merged into the
Corporation, unless, in addition to any other requirement therefor imposed by
law, the holders of not less than two-thirds of the shares of stock of the
Corporation entitled to vote thereon shall have voted in favor of the proposed
merger or consolidation.
C. The Corporation shall not be dissolved unless, in addition to any
other requirement therefor imposed by law, the holders of not less than two-
thirds of the shares of stock of the Corporation entitled to vote thereon shall
have voted in favor of the proposed dissolution.
D. The vote referred to in the foregoing provisions of this Article
Twelfth shall be in addition to the vote of the holders of shares of any class
of stock of the Corporation otherwise required by this Certificate of
Incorporation, the resolution or resolutions of the Board of Directors of the
Corporation providing for the issuance of shares of Preferred Stock of the
Corporation of a particular series, or any agreement between the Corporation and
any national securities exchange.
E. The provisions of Paragraph B of this Article Twelfth shall not apply
to the merger of any other corporation into the Corporation if the General
Corporation Law of the State of Delaware does not require a vote of the holders
of shares of stock of the Corporation as a condition to that merger.
Thirteenth: A. Except as set forth in Paragraph D of this Article
Thirteenth, the affirmative vote of the holders of at least 80% of the
outstanding shares of all stock of the Corporation, considered for the purposes
of this Article Thirteenth as one class and hereinafter in this Article
Thirteenth embraced in the term "voting stock", shall be required for:
(i) a merger of the Corporation into, or a consolidation of the
Corporation with, any other corporation, or a merger of any other
corporation into the Corporation, or
(ii) any sale or lease of all or substantially all of the assets of
the Corporation to any other corporation, person or other entity, or
(iii) any sale or lease to the Corporation or any subsidiary thereof
of any assets (except assets having an aggregate fair market value of less
than $1,000,000) in exchange for voting stock (or securities convertible
into or exchangeable for voting stock or options, warrants or rights to
purchase voting stock or securities convertible into boting stock) of the
Corporation or any subsidiary of the Corporation by any other corporation,
person or entity,
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if, as of the record date for the determination of stockholders entitled to
notice thereof and to vote thereon, or as of the time the Board of Directors of
the Corporation shall have approved a memorandum of understanding, or the
Corporation shall have entered into any agreement, with respect to any such
transaction for which the vote of the holders of no class of stock of the
Corporation is otherwise required by law, this Certificate of Incorporation of
any other contract or agreement, such other corporation, person or entity which
is a party to such a transaction is the beneficial owner, directly or
indirectly, of 5% or more of the outstanding shares of the voting stock.
B. Solely for the purpose of determining whether such other
corporation, person or entity which is a party to such a transaction is the
beneficial owner of 5% or more of the outstanding shares of voting stock, that
corporation, person or other entity shall be deemed to be the beneficial owner
of any shares of voting stock:
(i) which it owns directly, whether or not of record, or
(ii) which it has the right to acquire pursuant to any agreement or
understanding or upon exercise of conversion rights, exchange rights,
warrants or options or otherwise, or
(iii) which are beneficially owned, directly or indirectly (including
shares deemed to be owned through application of clause (ii) above), by any
"affiliate" or associate: of such corporation, person or other entity, as
those terms are defined in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934 as in effect on December 10, 1976
or
(iv) which are beneficially owned, directly or indirectly (including
shares deemed to be owned through application of clause (ii) above), by any
other corporation, person or entity with which it or its "affiliate" or
"associate" has any agreement or understanding for the purpose of
acquiring, holding, voting or disposing of voting stock.
Solely for the purpose of determining whether such other corporation,
person or entity which is a party to such a transaction is the beneficial owner
of 5% or more of the outstanding shares of voting stock, the outstanding shares
of voting stock shall be deemed to include shares deemed to be beneficially
owned by such other corporation, person or entity through the application or the
provisions of the immediately preceding paragraph.
As used in this Article Thirteenth, the term "subsidiary" shall mean a
corporation a majority of the voting power of the capital stock (that is, voting
power entitled to be exercised in the election of directors, but excluding
voting power entitled so to be exercised only upon the happening of some
contingency unless such contingency shall have occurred and is continuing) of
which shall be owned by the
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Corporation or by one or more subsidiaries or by the corporation and one or more
subsidiaries.
C. The Board of Directors of the Corporation shall have the power
and duty to determine for the purposes of this Article Thirteenth, on the basis
of information known to this Corporation, whether:
(i) such other corporation, person or other entity beneficially owns
5% or more of the outstanding shares of voting stock,
(ii) a corporation, person or entity is an "affiliate" or "associate"
(as defined in Paragraph B above) of another,
(iii) the assets being acquired by the corporation, or any subsidiary
thereof, have an aggregate fair market value of less than $1,000,000, and
(iv) the memorandum of understanding referred to in Paragraph D below
is substantially consistent with the transaction covered thereby.
Any such determination shall be conclusive and binding for all purposes of this
Article Thirteenth.
D. The provisions of Paragraph A of this Article Thirteenth shall
not apply to:
(i) any merger of the Corporation into, or any consolidation of the
Corporation with, any other corporation, any merger of any other
corporation into the Corporation, any sale or lease to the Corporation or
any subsidiary of any assets of any other corporation, person or entity, or
any sale or lease by the Corporation or any subsidiary of any of its assets
to any other corporation, person or entity if, in any such case, the Board
of Directors of the Corporation has approved a memorandum of understanding
with such other corporation, person or entity with respect to such merger
consolidation, sale or lease prior to the time that such other corporation,
person or entity shall have become a beneficial owner of 5% or more of the
outstanding shares of voting stock; or
(ii) any merger of the Corporation into, any consolidation of the
Corporation with, any merger into the Corporation of, any sale or lease to
the Corporation or any subsidiary of any assets of, or any sale or lease by
the Corporation or any subsidiary of any of its assets to, any corporation
not less than 50% of the outstanding stock of which is beneficially owned,
directly or indirectly, by the Corporation.
E. Notwithstanding any other provision of this Certificate of
Incorporation or of the by-laws of the Corporation, this Article Thirteenth
shall not be amended, altered, changed or repealed, directly or indirectly,
unless, in addition to any
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other requirement therefor imposed by law, the holders of not less than 80% of
the outstanding shares of voting stock of the Corporation shall have voted in
favor of such amendment, alteration, change or repeal.
F. The vote referred to in the foregoing provisions of this Article
Thirteenth shall be in addition to the vote of the holders of shares of any
class of stock of the Corporation otherwise required by this Certificate of
Incorporation, the resolution or resolutions of the Board of Directors of the
Corporation providing for the issuance of shares of Preferred Stock of the
Corporation of a particular series, or any agreement between the Corporation and
any national securities exchange.
Fourteenth: A. All of the powers of the Corporation, insofar as the same
may be lawfully vested by this Certificate of Incorporation in the Board of
Directors of the Corporation, are hereby conferred upon the Board of Directors
of the Corporation.
B. In furtherance and not in limitation of the foregoing provisions of
this Article Fourteenth, and for the purpose of the orderly management of the
business and the conduct of the affairs of the Corporation, the Board of
Directors of the Corporation shall have the power to adopt, amend or repeal from
time to time by-laws of the Corporation, subject to the right of the
stockholders of the Corporation entitled to vote thereon to adopt, amend or
repeal by-laws of the Corporation; provided that by-laws of the Corporation
shall not be adopted, amended or repealed by the stockholders of the Corporation
unless the holders of not less than 80% of the shares of stock of the
Corporation entitled to vote thereon shall have voted in favor of such adoption,
amendment or repeal at a meeting of stockholders of the Corporation expressly
called for that purpose.
C. No action required or permitted to be taken at any annual or special
meeting of stockholders of the Corporation may be taken without such a meeting;
and the right of stockholders of the Corporation to take any such action by a
consent in writing is denied.
D. Notwithstanding any other provision of this Certificate of
Incorporation or of the by-laws of the Corporation, this Article Fourteenth
shall not be amended, altered, changed or repealed, directly or indirectly,
unless, in addition to any other requirement therefor imposed by law, the
holders of not less than 80% of the shares of stock of the Corporation entitled
to vote thereon shall have voted in favor of such amendment, alteration, change
or repeal.
E. The vote referred to in the foregoing provisions of this Article
Fourteenth shall be in addition to the vote of the holders of shares of any
class of stock of the Corporation otherwise required by this Certificate of
Incorporation, the resolution or resolutions of the Board of Directors of the
Corporation providing for the issuance of shares of Preferred Stock of the
Corporation of a particular series, or any agreement between the Corporation and
any national securities exchange.
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FOURTH: That after the Board of Directors' adoption of the foregoing
resolution, said amendments and restatement were proposed to the stockholders of
the Corporation for their approval, and said stockholders duly consented in
favor of said amendments and restatement.
FIFTH: That said amendments and restatement were duly adopted in
accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware.
SIXTH: That this Restated Certificate of Incorporation shall be effective
upon the filing hereof.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which
restates and integrates and further amends the provisions of the Restated
Certificate of Incorporation of this Corporation, having been duly adopted by
the Board of Directors and stockholders of this Corporation in accordance with
Sections 242 and 245 of the Delaware General Corporation Law, has been duly
executed by Walter V. Klemp, its Managing Director, and attested by Terry A.
Tognietti, its Secretary, this 24th day of January, 1994.
DRYPERS CORPORATION
By /s/ Walter V. Klemp
----------------------------
Walter V. Klemp
Managing Director
(duly authorized to act in the
capacity of President)
ATTEST:
By /s/ Terry A. Tognietti
-----------------------------------------
Terry A. Tognietti
Secretary
14
<PAGE>
CERTIFICATE OF CORRECTION
Drypers Corporation, a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify:
FIRST: The name of the Corporation is Drypers Corporation.
SECOND: A Restated Certificate of Incorporation of the Corporation
(the "Restated Certificate") was filed with the Secretary of State of the State
of Delaware on January 25, 1994. The Restated Certificate requires correction
as permitted by Section 103(f) of the General Corporation Law of the State of
Delaware because the Restated Certificate is an inaccurate record of the
corporate action referred to therein.
THIRD: The Restated Certificate is an inaccurate record of the
corporate action referred to therein in that the Restated Certificate
incorrectly sets forth the minimum number of directors and contains certain
typographical errors.
FOURTH: The second paragraph of Article Fourth of the amended and
restated Certificate of Incorporation of the Corporation, set forth in Article
Third of the Restated Certificate, is corrected to read in its entirety as
follows:
"Effective as of the filing of this Restated Certificate of
Incorporation, each share of Common Stock issued and outstanding
immediately prior to the effective time shall be automatically changed and
converted, without any action on the part of the holder thereof, into .25
shares of Common Stock, and each holder who upon the effectiveness of this
Restated Certificate of Incorporation would otherwise be entitled to
receive a fractional share of Common Stock shall be entitled to receive for
such fractional interest, and at the effective time of this Restated
Certificate of Incorporation any such fractional interest in shares of
Common Stock of the Corporation shall be converted into the right to
receive, an amount in cash equal to the initial public offering price of
shares of Common Stock in the Corporation's initial public offering times
such fractional interest or if the Corporation's initial public offering
does not occur, an amount to be determined by the Board of Directors times
such fractional interest."
FIFTH: Paragraph (g) of Section B.(4) of Article Fourth of the amended and
restated Certificate of Incorporation of the Corporation, set forth in Article
Third of the Restated Certificate, is corrected to read in its entirety as
follows:
"(g) The Corporation will at all times reserve and keep available out
of its authorized but unissued shares of Common Stock or its treasury
shares, solely for the purpose of issue upon the conversion of the
Nonvoting Common Stock as provided in this paragraph 4, such number of
shares of Common Stock as shall then be issuable upon the conversion of all
then outstanding shares of Nonvoting Common Stock (assuming
<PAGE>
that all such shares of Nonvoting Common Stock are held by persons entitled
to convert such shares into Common Stock)."
SIXTH: Paragraph (2) of Section C. of Article Fourth of the amended and
restated Certificate of Incorporation of the Corporation, set forth in Article
Third of the Restated Certificate, has been deleted and paragraph (3) of such
section has been renumbered as paragraph (2).
SEVENTH: Paragraph (1) of Article Sixth of the amended and restated
Certificate of Incorporation of the Corporation, set forth in Article Third of
the Restated Certificate, has been deleted and the remaining paragraphs of
Article Sixth have been renumbered. Paragraph (3) of Article Sixth of the
amended and restated Certificate of Incorporation of the Corporation, is
corrected to read in its entirety as follows:
"(3) By a majority of the whole Board of Directors, to designate one
or more committees, each committee to consist of two or more of the
directors of the Corporation. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. Any such
committee, to the extent provided in the resolution or in the by-laws of
the Corporation, shall have and may exercise the powers of the Board of
Directors in the management of the business and affairs of the Corporation
and may authorize the seal of the Corporation to be affixed to all papers
which may require it; provided, however, the by-laws may provide that in
the absence or disqualification of any member of such committee or
committees, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at
the meeting in the place of any such absent or disqualified member."
EIGHTH: Section A. of Article Eleventh of the amended and restated
Certificate of Incorporation of the Corporation, set forth in Article Third of
the Restated Certificate, is corrected to read in its entirety as follows:
"Eleventh: A. The number of directors of the Corporation shall be
fixed from time to time by resolution of the Board of Directors of the
Corporation adopted by the affirmative vote of not less than 80% of the
number of directors of the Corporation in office at that time; provided
that;
(i) the number of directors of the Corporation shall be not less
than five,
(ii) the number of directors of the Corporation shall be six
unless and until such number shall be increased by resolution of the
Board of Directors of the Corporation adopted by the affirmative vote
of not less than 80% of the number of directors of the Corporation
then in office, and
-2-
<PAGE>
(iii) the number of directors of the Corporation shall not be
decreased if the effect of that decrease would be to shorten the term
of any director of the Corporation at the time in office."
NINTH: The second paragraph of Section B. of Article Eleventh of the
amended and restated Certificate of Incorporation of the Corporation, set forth
in Article Third of the Restated Certificate, is corrected to read in its
entirety as follows:
"At each annual meeting of stockholders of the Corporation, the number
of directors equal to the number of the class the term of which expires at
the time of such meeting shall be elected to hold office for a term
expiring on the third annual meeting of stockholders of the corporation
after their election."
TENTH: Clause (iii) of Section A. of Article Thirteenth of the amended and
restated Certificate of Incorporation of the Corporation, set forth in Article
Third of the Restated Certificate, is corrected to read in its entirety as
follows:
"(iii) any sale or lease to the Corporation or any subsidiary
thereof of any assets (except assets having an aggregate fair market
value of less than $1,000,000) in exchange for voting stock (or
securities convertible into or exchangeable for voting stock or
options, warrants or rights to purchase voting stock or securities
convertible into voting stock) of the Corporation or any subsidiary of
the Corporation by any other corporation, person or entity,"
ELEVENTH: The first sentence of Section B. of Article Thirteenth of the
amended and restated Certificate of Incorporation of the Corporation, set forth
in Article Third of the Restated Certificate, is corrected to read in its
entirety as follows:
"B. Solely for the purpose of determining whether such other
corporation, person or entity that is a party to such a transaction is the
beneficial owner of 5% or more of the outstanding shares of voting stock,
that corporation, person or other entity shall be deemed to be the
beneficial owner of any shares of voting stock:
(i) which it owns directly, whether or not of record, or
(ii) which it has the right to acquire pursuant to any agreement
or understanding or upon exercise of conversion rights, exchange
rights, warrants or options or otherwise, or
(iii) which are beneficially owned, directly or indirectly
(including shares deemed to be owned through application of clause
(ii) above), by any "affiliate" or "associate" of such corporation,
person or other entity, as those terms are defined in Rule 12b-2 of
the General Rules and Regulations under the Securities Exchange Act of
1934, or
-3-
<PAGE>
(iv) which are beneficially owned, directly or indirectly
(including shares deemed to be owned through application of clause
(ii) above), by any other corporation, person or entity with which it
or its "affiliate" or "associate" has any agreement or understanding
for the purpose of acquiring, holding, voting or disposing of voting
stock."
TWELFTH: The last paragraph of Section B. of Article Thirteenth of the
amended and restated Certificate of Incorporation of the Corporation, set forth
in Article Third of the Restated Certificate, is corrected to read in its
entirety as follows:
"As used in this Article Thirteenth, the term "subsidiary" shall mean
a corporation a majority of the voting power of the capital stock (that is,
voting power entitled to be exercised in the election of directors, but
excluding voting power entitled so to be exercised only upon the happening
of some contingency unless such contingency shall have occurred and is
continuing) of which shall be owned by the Corporation or by one or more
subsidiaries or by the Corporation and one or more subsidiaries."
THIRTEENTH: Section C. of Article Thirteenth of the amended and restated
Certificate of Incorporation of the Corporation, set forth in Article Third of
the Restated Certificate, is corrected to read in its entirety as follows:
"C. The Board of Directors of the Corporation shall have the power
and duty to determine for the purposes of this Article Thirteenth, on the
basis of information known to the Corporation, whether:
(i) such other corporation, person or other entity beneficially
owns 5% or more of the outstanding shares of voting stock,
(ii) a corporation, person or entity is an "affiliate" or
"associate" (as defined in Paragraph B above) of another,
(iii) the assets being acquired by the Corporation, or any
subsidiary thereof, have an aggregate fair market value of less than
$1,000,000, and
(iv) the memorandum of understanding referred to in Paragraph D
below is substantially consistent with the transaction covered
thereby.
Any such determination shall be conclusive and binding for all purposes of
this Article Thirteenth."
FOURTEENTH: The last paragraph of the Restated Certificate, is corrected
to read in its entirety as follows:
-4-
<PAGE>
"IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which
restates and integrates and further amends the provisions of the Restated
Certificate of Incorporation of this Corporation, having been duly adopted
by the Board of Directors and stockholders of this Corporation in
accordance with Sections 242 and 245 of the Delaware General Corporation
Law, and written consent and notice having been given as provided in
Section 228 of the Delaware General Corporation Law, has been duly executed
by Walter V. Klemp, its Managing Director, and attested by Terry A.
Tognietti, its Secretary, this 24th day of January, 1994."
IN WITNESS WHEREOF, Drypers Corporation has caused this Certificate of
Correction to be signed by Walter V. Klemp, its Managing Director, and attested
by Terry A. Tognietti, its Secretary, this 15th day of March, 1994.
DRYPERS CORPORATION
By /s/ Walter V. Klemp
-------------------------
Walter V. Klemp
Managing Director
(duly authorized to act in the
capacity of President)
ATTEST:
By /s/ Terry A. Tognietti
-----------------------
Terry A. Tognietti
Secretary
-5-
<PAGE>
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION
OF DRYPERS CORPORATION
Drypers Corporation, a Delaware corporation (the "Corporation"), does
hereby certify:
That the amendment set forth below to the Corporation's Restated of
Certificate of Incorporation were duly adopted in accordance with the provisions
of Sections 242 and 245 of the General Corporation Law of the State of Delaware:
I. The first paragraph of Article Fourth of the Corporation's Restated
Certificate of Incorporation is hereby deleted and replaced in its entirety by
the following:
Fourth: The total number of shares of all classes of stock that the
corporation shall have authority to issue is 25,000,000, of which (i)
20,000,000 shares shall be Common Stock $.001 par value (the "Common
Stock"), and (ii) 5,000,000 shares shall be Senior Preferred Stock, $.01
par value per share (the "Preferred Stock").
II. Paragraph D of Article Thirteenth of the Corporation's Restated
Certificate of Incorporation is hereby deleted and replaced in its entirety by
the following:
D.
(1) The provisions of Paragraph A of this Article Thirteenth shall
not be applicable to any particular Business Combination, and such Business
Combination shall require only such affirmative vote as is required by law, or
any other provision of this Restated Certificate of Incorporation, or otherwise,
if in the case of a Business Combination that does not involve cash or other
consideration being received by the stockholders of the Corporation, solely in
their capacity as stockholders, the conditions specified in the following
paragraph (a) is met, or if in the case of any other Business Combination, the
conditions specified in either paragraph (a) or (b) below are met (the term
"Business Combination" as used in this Article Thirteenth means any transaction
that is referred to in any one or more of clauses (i) through (iii) of Paragraph
A of this Article Thirteenth):
<PAGE>
(a) Approval by Disinterested Directors. The Business
Combination shall have been approved by a majority of the Disinterested
Directors (as hereinafter defined).
(b) Price and Procedure Requirements. All of the following
conditions shall have been met:
(i) The aggregate amount of the cash and the Fair Market Value as
of the date of the consummation of the Business Combination (the
"Consummation Date") of consideration other than cash to be received per
share by holders of Common Stock in such Business Combination shall be at
least equal to the higher of the following (it being intended that the
requirements of this paragraph (b)(i) shall be required to be met with
respect to all shares of Common Stock outstanding, whether or not the
Interested Shareholder has previously acquired any shares of the Common
Stock):
(A) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Shareholder for any shares of Common Stock acquired by it
(1) within the five-year period immediately prior to the first public
announcement of the proposal of the Business Combination (the "Announcement
Date") or (2) in the transaction in which it became an Interested
Shareholder, whichever is higher; and
(B) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested Shareholder became
an Interested Shareholder (such latter date is referred to in this
Paragraph D as the "Determination Date"), whichever is higher.
(ii) The aggregate amount of the cash and the Fair Market Value
as of the Consummation Date of consideration other than cash to be received
per share by holders of shares of any class or series of outstanding Voting
Stock, other than the Common Stock, in such Business Combination shall be
an amount equal to at least the highest of the following (it being intended
that the requirements of this paragraph (b)(ii) shall be required to be met
with respect to every class of outstanding Voting Stock (other than the
Common Stock), whether or not the Interested Shareholder has previously
acquired any shares of a particular class of Voting Stock):
<PAGE>
(A) (if applicable) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers' fees) paid by
the Interested Shareholder for any shares of such class of Voting Stock
acquired by it (1) within the five-year period immediately prior to the
Announcement Date or (2) in the transaction in which it became an
Interested Shareholder, whichever is higher; and
(B) (if applicable) the highest preferential amount per share to
which the holders of shares of such class of Voting Stock are entitled in
the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation; and
(C) the Fair Market Value per share of such class of Voting Stock
on the Announcement Date or on the Determination Date, whichever is higher;
and
(iii) The consideration to be received by holders of a
particular class or series of outstanding Voting Stock (including Common
Stock) shall be in cash or in the same form as the Interested Shareholder
has previously paid for shares of such class of Voting Stock previously
acquired by it. If the Interested Shareholder has paid for shares of any
class or series of Voting Stock with varying forms of consideration, the
form of consideration for such class or series of Voting Stock shall be
either cash or the form used to acquire the largest number of shares of
such class or series of Voting Stock previously acquired by it, whether or
not part of the Business Combination. The price determined in accordance
with paragraphs (b)(i) and (b)(ii) of this Paragraph D shall be subject to
appropriate adjustment in the event of any stock dividend, stock split,
combination of shares or similar event; and
(iv) After such Interested Shareholder has become an Interested
Shareholder and prior to the consummation of such Business Combination:
(A) except as approved by a majority of the Disinterested Directors, there
shall have been no failure to declare and pay at the regular date therefor
any full quarterly dividends (whether or not cumulative) on any outstanding
stock having preference over the Common Stock as to dividends or upon
liquidation; (B) there shall have been (1) no reduction in the annual rate
of dividends paid on the Common Stock (except as necessary to reflect any
subdivision of the Common Stock), except as approved by a majority of the
Disinterested Directors, and (2) an increase in such annual rate of
<PAGE>
dividends as necessary to reflect any reclassification (including any
reverse stock split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of outstanding
shares of the Common Stock, unless the failure so to increase such annual
rate is approved by a majority of the Disinterested Directors; and (C) such
Interested Shareholder shall have not become the beneficial owner of any
additional shares of Voting Stock except as part of the transaction which
results in such Interested Shareholder becoming an Interested Shareholder
and except in a transaction which, after giving effect thereto, would not
result in any increase in the Interested Shareholder's percentage of
beneficial ownership of any class of Voting Stock; and
(v) After such Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have received the
benefit, directly or indirectly (except proportionately as a stockholder),
of any loans, advances, guarantees, pledges or other financial assistance
or any tax credits or other tax advantages provided by the Corporation,
whether in anticipation of or in connection with such Business Combination
or otherwise; and
(vi) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the Securities
Exchange Act of 1934 and the rules and regulations thereunder (or any
subsequent provisions replacing such Act, rules or regulations) shall be
mailed to public shareholders of the Corporation, if any, at least 30 days
prior to the consummation of such Business Combination (whether or not such
proxy or information statement is required to be mailed pursuant to such
Act or subsequent provisions); and
(vii) Such Interested Shareholder shall not have made any major
change in the Corporation's business or equity capital structure without
the approval of a majority of the Disinterested Directors.
(2) For the purpose of this Paragraph D:
(a) A "person" shall mean any individual, firm, corporation or
other entity.
(b) "Interested Shareholder" shall mean any person (other than
the Corporation or any Subsidiary) who or which:
<PAGE>
(i) is the beneficial owner, directly or indirectly, of 5% or
more of the voting power of the outstanding voting stock; or
(ii) is an affiliate of the Corporation and at any time within
the two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 5% or more of the voting power
of the then outstanding voting stock; or
(iii) is an assignee of or otherwise has succeeded to any shares
of voting stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any
Interested Shareholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act of
1933.
(c) For the purpose of determining whether a person is an
Interested Shareholder pursuant to subparagraph (1)(b) of this Paragraph D,
the number of shares of voting stock deemed to be outstanding shall include
shares deemed owned through the application of Paragraph B of this Article
Thirteenth but shall not include any other shares of voting stock which may
be issuable pursuant to any agreement, arrangement or understanding, or
upon exercise of conversion rights, warrants or options, or otherwise.
(d) "Disinterested Director" means any member of the board of
directors of the Corporation who is unaffiliated with the Interested
Shareholder and was a member of the board of directors of the Corporation
prior to the time that the Interested Shareholder became an Interested
Shareholder, and any successor of a Disinterested Director who is
unaffiliated with the Interested Shareholder and is recommended to succeed
a Disinterested Director by a majority of Disinterested Directors then on
the board of directors.
(e) "Fair Market Value" means: (i) in the case of cash, the
aggregate amount of such cash; (ii) in the case of stock, the highest
closing sale price during the 30-day period immediately preceding the date
in question of a share of such stock on the Composite Tape for New York
Stock Exchange Listed Stocks, or, if such stock is not quoted on the
Composite Tape for the New York Stock Exchange, or, if such stock is not
listed on New York Stock Exchange, on the principal United States
securities exchange
<PAGE>
registered under the Securities Exchange Act of 1934 on which such stock is
listed, or, if such stock is not listed on any such exchange, the highest
closing bid quotation with respect to a share of such stock during the 30-
day period preceding the date in question on the National Association of
Securities Dealers, Inc. Automated Quotations System, the National
Quotation Bureau Incorporated or otherwise in the over-the-counter market,
or if no such quotations are available, the fair market value on the date
in question of a share of such stock as determined by a majority of the
Disinterested Directors in good faith; and (iii) in the case of property
other than cash or stock, the fair market value of such property on the
date in question as determined by a majority of Disinterested Directors in
good faith.
(f) In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash to be
received" as used in subparagraphs (1)(b)(i) and (1)(b)(ii) of this
Paragraph D shall include the shares of Common Stock and the shares of any
other class of outstanding Voting Stock retained by the holders of such
shares.
(g) "Equity Security" shall have the meaning ascribed to such
term in Section 3(a)(11) of the Securities Exchange Act of 1934, as in
effect on January 1, 1995.
IN WITNESS WHEREOF, Drypers Corporation has caused this Certificate to be
signed by its duly authorized officer this 30th day of May, 1995.
DRYPERS CORPORATION
By: /s/ Walter V. Klemp
----------------------------------------------
Walter V. Klemp, Chairman of the
Board, Co-Chief Executive Officer
<PAGE>
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
HYGIENIC PRODUCTS INTERNATIONAL, INC.
A WASHINGTON CORPORATION
INTO
DRYPERS CORPORATION
A DELAWARE CORPORATION
Drypers Corporation, a corporation organized and existing pursuant to
the laws of Delaware (the "Company"), does hereby certify:
First: That the Company was incorporated on March 20, 1991, pursuant
to the General Corporation Law of the State of Delaware.
Second: That the Company owns all of the outstanding shares of the
stock of Hygienic Products International, Inc., a Washington corporation
incorporated on February 3, 1992, pursuant to the Washington Business
Corporation Act, the provisions of which permit the merger of a corporation of
another state and a corporation organized and existing under the laws of said
state, and the aggregate authorized capital stock of Hygienic Products
International, Inc. consists of 1,000,000 million shares of common stock, no par
value.
Third: That the Company, by the following resolutions of its Board of
Directors duly adopted at a meeting duly held on February 22, 1996, determined
to merge Hygienic Products International, Inc. into itself:
RESOLVED, that subject to the terms and conditions of the Plan of Merger
(as defined below), the Company merge (the "Merger") its wholly owned
subsidiary, Hygienic Products International, Inc., a Washington corporation
("HPI"), into itself; and that the Company assume all rights, privileges,
powers, property, liabilities, duties and obligations of HPI;
RESOLVED, that, to effect the Merger, the Company is hereby authorized to
enter into an Agreement and Plan of Merger (the "Plan of Merger") with HPI,
setting forth the agreements and conditions under which the Merger will occur;
RESOLVED, that the form, terms and provisions of the draft of the Plan of
Merger presented to the Board of Directors of the Company be, and they hereby
are, in all respects approved, adopted, ratified and confirmed, and that each of
any Co-Chief Executive Officer and any Vice President of the Company be, and
each of them hereby is, authorized, in the name and on behalf of the Company, to
execute and deliver the Plan of Merger in the form of the Plan of Merger
presented to the Board of Directors of the Company, with such changes, deletions
and additions thereto as the officer of the Company executing such instrument or
document shall in his discretion approve, the execution and delivery by such
officer of such instrument or document to be conclusive
<PAGE>
evidence of the approval of this Board of Directors thereof and all matters
relating thereto;
RESOLVED, that the Merger shall be effective February 23, 1996;
RESOLVED, that any Co-Chief Executive Officer, any Vice President or the
Secretary of the Company be, and each hereby is, authorized and directed to make
and execute a Certificate of Ownership and Merger setting forth a copy of these
resolutions to merge into itself its wholly owned subsidiary, HPI, and assume
liabilities and obligations, and the date of adoption thereof; and to cause the
same to be filed with the Secretary of State of Delaware; and to do all acts and
things whatsoever, whether within or without the State of Delaware, that may be
necessary or proper to effect the Merger.
RESOLVED, that any Co-Chief Executive Officer, any Vice President or the
Secretary of the Company be, and each hereby is, authorized and directed to make
and execute the Articles of Merger setting forth the Plan of Merger to merge
into itself its wholly owned subsidiary, HPI, and assume liabilities and
obligations, and a statement that shareholder approval was not required; and to
cause the same to be filed with the Secretary of State of Washington; and to do
all acts and things whatsoever, whether within or without the State of
Washington, that may be necessary or proper to effect the Merger.
RESOLVED, that, in connection with the Merger, the appropriate officers of
the Company be, and each of them hereby is, authorized to prepare, execute,
deliver and perform such additional agreements, documents or other instruments
and to take such other action, in the name and on behalf of the Company, as each
of such officers, in his discretion, shall deem necessary or advisable to effect
the Merger, the taking of such action and the preparation, execution, delivery
and performance of such agreements, documents and other instruments shall be
conclusive evidence of the approval of this Board of Directors thereof and all
matters relating thereto;
RESOLVED, that any Co-Chief Executive Officer, any Vice President and
Secretary of the Company be, and each of them hereby is, authorized to execute,
deliver and perform such agreements, documents and other instruments and take
such other action, in the name and on behalf of the Company, as such officer, in
his discretion, shall deem necessary or advisable to carry out the intent of the
foregoing resolutions, and the execution, delivery and performance of any such
agreements, documents or other instruments or the performance of any such act
shall be conclusive evidence of the approval of this Board of Directors thereof
and all matters relating thereto; and
RESOLVED, that any and all actions taken by or on behalf of the officers of
the Company prior to the adoption of these resolutions which are within the
authority conferred hereby are hereby in all respects ratified, confirmed and
approved.
and the Plan of Merger was approved, adopted, certified and executed and
acknowledged by Hygienic Products International, Inc. in accordance with the
Washington Business Corporation Act;
-2-
<PAGE>
and the Plan of Merger was approved, adopted, certified and executed and
acknowledged by the Company in accordance with Section 253 of the General
Corporation Law of the State of Delaware.
Fourth: That pursuant to the Washington Business Corporation Act, the sole
shareholder of Hygienic Products International, Inc. are not required to approve
the Plan of Merger.
Fifth: The surviving corporation of the merger shall be the Company.
Sixth: The Certificate of Incorporation of the Company shall be the
Certificate of Incorporation of the surviving corporation.
Seventh: The bylaws of the Company shall be the bylaws of the surviving
corporation.
Eight: A copy of the Plan of Merger is on file at the principal place of
business of the surviving corporation.
Ninth: A copy of the Plan of Merger will be furnished, upon request and
without cost, to any stockholder of the Company or Hygienic Products
International, Inc.
IN WITNESS WHEREOF, the Company has caused this Certificate to be signed in
counterparts by Walter V. Klemp, its Chairman of the Board and Co-Chief
Executive Officer, this 22nd day of February, 1996.
DRYPERS CORPORATION
By /s/ Walter V. Klemp
------------------------------------
Walter V. Klemp
Chairman of the Board and Co-Chief
Executive Officer
-3-
<PAGE>
CERTIFICATE OF DESIGNATIONS
OF
SENIOR CONVERTIBLE CUMULATIVE 7.5% PREFERRED STOCK
OF
DRYPERS CORPORATION
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
DRYPERS CORPORATION, a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), does hereby certify that, pursuant to
the authority conferred on the Board of Directors of the Corporation by the
Restated Certificate of Incorporation, as amended, of the Corporation and in
accordance with Section 151 of the General Corporation Law of the State of
Delaware, the Board of Directors of the Corporation adopted the following
resolution establishing a series of 90,000 shares of Senior Preferred Stock of
the Corporation designated as "Senior Convertible Cumulative 7.5% Preferred
Stock":
RESOLVED, that pursuant to the authority conferred on the Board of
Directors of this Corporation by the Restated Certificate of Incorporation,
as amended, of the Corporation, a series of Senior Preferred Stock, par
value $.01 per share, of the Corporation be and hereby is established and
created, and that the designation and number of shares thereof and the
voting and other powers, preferences and relative, participating, optional
or other rights of the shares of such series and the qualifications,
limitations and restrictions thereof shall be as follows:
1. Designation and Amount. There shall be a series of Senior
Preferred Stock designated as "Senior Convertible Cumulative 7.5% Preferred
Stock" and the number of shares constituting such series shall be 90,000. Such
series is referred to herein as the "7.5% Preferred Stock."
2. Stated Value. The stated value of the 7.5% Preferred Stock shall
be $100.00 per share.
3. Rank. All shares of 7.5% Preferred Stock shall rank prior as to
payment of dividends, redemption and distributions of assets upon liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
to all of the Corporation's now or hereafter issued Common Stock, par value
$.001 per share (the "Common Stock"), and to any other class of Preferred Stock
of the Corporation which hereafter may be issued.
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4. Dividends. The holders of the 7.5% Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of Directors out of
funds at the time legally available therefor, dividends at the rate of $7.50 per
annum per share, which shall be fully cumulative and shall be declared, to the
extent permitted by applicable law, on March 1, June 1, September 1 and December
1 of each year commencing upon the issuance of the shares of 7.5% Preferred
Stock. Dividends shall accrue simple interest from the date declared until paid
at the rate of 7.50% per annum, compounded quarterly. Dividends shall be
payable only upon the conversion or redemption of shares of 7.5% Preferred Stock
or on December 1, 2003 (the "Dividend Payment Date") (except that if the
Dividend Payment Date or the date of any such conversion or redemption is a
Saturday, Sunday or legal holiday, then such dividend shall be payable on the
next day that is not a Saturday, Sunday or legal holiday), and may be paid in
cash or in Common Stock, par value $.001 per share, of the Corporation ("Common
Stock"), at the option of the Corporation. Dividends paid in Common Stock shall
be valued at the current Market Value (as defined in Section 9 hereof) per share
of Common Stock, subject to adjustment as provided in Section 7(c) hereof.
Dividends shall be paid to the holder or holders of record of such shares as
such holder appears on the stock transfer books of the Corporation on the date
of conversion, on the record date with respect to any redemption, as may be
fixed by the Board of Directors (or, to the extent permitted by applicable law,
a duly authorized committee thereof), or on the Dividend Payment Date. For
purposes hereof, the term "legal holiday" shall mean any day on which banking
institutions are authorized to close in New York City, New York or in Houston,
Texas. Subject to the next paragraph of this Section 4, dividends on account of
arrears for any past dividend period may be declared at any time, without
reference to any regular dividend declaration date. The amount of dividends
payable per share of 7.5% Preferred Stock for each quarterly dividend period
shall be computed by dividing the annual dividend amount by four. The amount of
dividends payable for the initial dividend period and any period shorter than a
full quarterly dividend period shall be computed on the basis of a 360-day year
of twelve 30-day months.
No dividends or other distributions, shall be declared, paid or set
apart for payment on, and no purchase, redemption or other acquisition shall be
made by the Corporation of, any shares of Common Stock or other capital stock of
the Corporation ranking junior as to dividends to the 7.5% Preferred Stock (the
"Junior Dividend Stock") unless and until all accrued and unpaid dividends
payable on the 7.5% Preferred Stock shall have been paid or declared and set
apart for payment.
5. Liquidation Preference. In the event of a liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
the holders of 7.5% Preferred Stock shall be entitled to receive, out of the
assets of the Corporation available for distribution to stockholders, whether
such assets are stated capital or surplus of any nature, an amount equal to the
sum of $100.00 per share, all dividends accrued and unpaid thereon to the date
of final distribution to such holders, whether or not declared, and all interest
thereon, before any payment shall be made or any assets distributed to the
holders of Common Stock or any other class or series of the Corporation's
capital stock ranking junior as to liquidation rights to the 7.5% Preferred
Stock. Neither a consolidation or merger of the Corporation with another
corporation nor a sale or transfer of all or part of the Corporation's assets
for cash, securities or
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other property will be considered a liquidation, dissolution or winding up of
the Corporation.
6. Optional Redemption. The Corporation may, at its option and
subject to the terms of the Indenture, redeem any or all of the outstanding
shares of 7.5% Preferred Stock at any time on or after March 1, 1998 (any such
date being hereinafter referred to as a "Redemption Date"), provided that the
Market Value of the Common Stock on such Redemption Date is at least $3.00 per
share. Any redemption by the Corporation of less than all of the outstanding
shares shall be made on a pro rata basis among all holders of 7.5% Preferred
Stock. The per share cash redemption price for the 7.5% Preferred Stock on a
Redemption Date shall be $100.00 per share, plus an amount in cash or Common
Stock of the corporation equal to all dividends on the 7.5% Preferred Stock
accrued and unpaid thereon, whether or not declared, pro rata to such Redemption
Date, plus all interest accrued on such dividends through such Redemption Date,
such sum being hereinafter referred to as the "Redemption Price."
Not more than 60 nor less than 20 days prior to a Redemption Date,
notice by personal delivery, overnight delivery or first class mail, postage
prepaid, shall be given to the holders of record of the 7.5% Preferred Stock to
be redeemed, addressed to such stockholders at their last addresses as shown on
the stock transfer books of the Corporation. Such notice of redemption shall
specify the Redemption Date, the Redemption Price, the place or places of
payment, that payment will be made upon presentation and surrender of the shares
of 7.5% Preferred Stock, that on and after Redemption Date, dividends will cease
to accumulate on redeemed shares, the then-effective conversion rate pursuant to
Section 7 hereof and that the right of holders to convert shall terminate at the
close of business on the third business day prior to such Redemption Date.
On or after a Redemption Date, each holder of the shares of 7.5%
Preferred Stock shall surrender the certificate or certificates evidencing the
redeemed shares to the Corporation at the place designated in such notice and
shall thereupon be entitled to receive payment of the Redemption Price.
7. Conversion Privilege.
(a) Right of Conversion. Each share of 7.5% Preferred Stock shall be
convertible at the option of the holder thereof at any time prior to the close
of business on the third business day prior to a Redemption Date into fully paid
and nonassessable shares of Common Stock and such other securities and property
as hereinafter provided, at the rate of 100 shares of Common Stock for each full
share of 7.5% Preferred Stock, plus any accrued dividends or interest to be
paid, at the option of the Corporation and subject to the terms of the
Indenture, in cash or in the form of Common Stock, in each case subject to
adjustment as set forth in paragraph (c) of this Section 7.
(b) Conversion Procedures. Any holder of shares of 7.5% Preferred
Stock desiring to convert such shares into Common Stock shall surrender the
certificate or certificates evidencing such shares of 7.5% Preferred Stock at
the office of the
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transfer agent for the 7.5% Preferred Stock, which certificate or certificates,
if the Corporation shall so require, shall be duly endorsed to the Corporation
or in blank, or accompanied by proper instruments of transfer to the Corporation
or in blank, accompanied by irrevocable written notice to the Corporation that
the holder elects so to convert such shares of 7.5% Preferred Stock and
specifying the name or names (with address) in which a certificate or
certificates evidencing shares of Common Stock are to be issued.
The Corporation shall, as soon as practicable after such deposit of
certificates evidencing shares of 7.5% Preferred Stock accompanied by the
written notice and compliance with any other conditions herein contained,
deliver at such office of such transfer agent to the person or persons for whose
account such shares of 7.5% Preferred Stock were so surrendered, or to the
nominee or nominees of such person, certificates evidencing the number of full
shares of Common Stock to which such person shall be entitled as aforesaid,
together with a cash adjustment of any fraction of a share as hereinafter
provided. Subject to the following provisions of this paragraph, such
conversion shall be deemed to have been made as of the date of such surrender of
the shares of 7.5% Preferred Stock to be converted, and the person or person
entitled to receive the Common Stock deliverable upon conversion of such 7.5%
Preferred Stock shall be treated for all purposes as the record holder or
holders of such Common Stock on such date; provided, however, that the
Corporation shall not be required to convert any shares of 7.5% Preferred Stock
while the stock transfer books of the Corporation are closed for any purpose,
but the surrender of 7.5% Preferred Stock for conversion during any period while
such books are so closed shall become effective for conversion immediately upon
the reopening of such books as if the surrender had been made on the date of
such reopening, and the conversion shall be at the conversion rate in effect on
such date.
(c) Adjustment of Conversion Rate. The number of shares of Common
Stock and number or amount of any other securities and property as hereinafter
provided into which a share of 7.5% Preferred Stock is convertible (the
"conversion rate") shall be subject to adjustment from time to time as follows:
(i) In case the Corporation shall (1) pay a dividend or make a
distribution on its Common Stock that is paid or made (A) in other shares
of stock of the Corporation or (B) in rights to purchase stock or other
securities if such rights are not separable from the Common Stock except
upon the occurrence of a contingency, (2) subdivide its outstanding shares
of Common Stock into a greater number of shares or (3) combine its
outstanding shares of Common Stock into a smaller number of shares, then in
each such case the conversion rate in effect immediately prior thereto
shall be adjusted retroactively so that the holder of any shares of 7.5%
Preferred Stock thereafter surrendered for conversion shall be entitled to
receive the number of shares of Common Stock and other shares and rights to
purchase stock or other securities (or, in the event of the redemption of
any such shares or rights, any cash, property or securities paid in respect
of such redemption) which such holder would have owned or have been
entitled to receive after the happening of any event described above had
such shares of 7.5% Preferred Stock been converted
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immediately prior to the happening of such event. An adjustment made
pursuant to this subparagraph (i) shall become effective immediately after
the record date in the case of a dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision
or combination.
(ii) In case the Corporation shall issue rights or warrants to all
holders of its Common Stock entitling them (for a period expiring within 45
days after the date fixed for determination mentioned below) to subscribe
for or purchase shares of Common Stock at a price per share less than the
current Market Value (as defined in Section 9 hereof) per share of the
Common Stock on the date fixed for the determination of stockholders
entitled to receive such rights or warrants, then the conversion rate in
effect at the opening of business on the day following the date fixed for
such determination shall be increased by multiplying such conversion rate
by a fraction of which the numerator shall be the number of shares of
Common Stock outstanding at the close of business on the date fixed for
such determination plus the number of shares of Common Stock so offered for
subscription or purchase and the denominator shall be the number of shares
of Common Stock outstanding at the close of business on the date fixed for
such determination plus the number of shares of Common Stock which the
aggregate of the offering price of the total number of shares of Common
Stock so offered for subscription or purchase would purchase at such
current market price, such increase to become effective immediately after
the opening of business on the day following the date fixed for such
determination; provided, however, that in the event that all the shares of
Common Stock offered for subscription or purchase are not delivered upon
the exercise of such rights or warrants, upon the expiration of such rights
or warrants the conversion rate shall be readjusted to the conversion rate
which would have been in effect had the numerator and the denominator of
the foregoing fraction and the resulting adjustment been made based upon
the number of shares of Common Stock actually delivered upon the exercise
of such rights or warrants, rather than upon the number of shares of Common
Stock offered for subscription or purchase. For the purposes of this
subparagraph (ii), the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the
Corporation.
(iii) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Common Stock evidences of its
indebtedness, cash (excluding ordinary cash dividends paid out of retained
earnings of the Corporation), other assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in
subparagraphs (i) and (ii) above), then in each such case the conversion
rate shall be adjusted retroactively so that the same shall equal the rate
determined by multiplying the conversion rate in effect immediately prior
to the close of business on the date fixed for the determination of
stockholders entitled to receive such distribution by a fraction of which
the numerator shall be the current Market Value (as hereinafter defined)
per share of the Common Stock on the date fixed for such determination and
the denominator shall be such current market price per share of the Common
Stock less the amount of cash and the then fair market value (as determined
by the Board of Directors, whose determination shall be conclusive and
described in a resolution of the
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Board of Directors) of the portion of the assets, rights or evidences of
indebtedness so distributed applicable to one share of Common Stock, such
adjustment to become effective immediately prior to the opening of business
on the day following the date fixed for the determination of stockholders
entitled to receive such distribution.
(iv) No adjustment in the conversion rate shall be required unless
such adjustment would require an increase or decrease of at least 1% in
such rate; provided, however, that the Corporation may make any such
adjustment at its election; and provided, further, that any adjustments
which by reason of this subparagraph (iv) are not required to be made shall
be carried forward and taken into account in any subsequent adjustment.
All calculations under this Section 7 shall be made to the nearest cent or
to the nearest one-hundredth of a share, as the case may be.
(v) Whenever the conversion rate is adjusted as provided in any
provision of this Section 7:
(1) the Corporation shall compute the adjusted conversion rate
in accordance with this Section 7 and shall prepare a certificate
signed by the principal financial officer of the Corporation setting
forth the adjusted conversion rate and showing in reasonable detail
the facts upon which such adjustment is based, and such certificate
shall forthwith be filed with the transfer agent of the 7.5% Preferred
Stock; and
(2) a notice stating that the conversion rate has been adjusted
and setting forth the adjusted conversion rate shall forthwith be
required, and as soon as practicable after it is required, such notice
shall be mailed by the Corporation to all record holders of 7.5%
Preferred Stock at their last addresses as they shall appear in the
stock transfer books of the Corporation.
(vi) In the event that at any time, as a result of any adjustment
made pursuant to this Section 7, the holder of any shares of 7.5% Preferred
Stock thereafter surrendered for conversion shall become entitled to
receive any shares of the Corporation other than shares of Common Stock or
to receive any other securities, the number of such other shares or
securities so receivable upon conversion of any share of 7.5% Preferred
Stock shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions contained in
this Section 7 with respect to the Common Stock.
(d) No Fractional Shares. No fractional shares or scrip representing
fractional shares of Common Stock shall be issued upon conversion of 7.5%
Preferred Stock. If more than one certificate evidencing shares of 7.5%
Preferred Stock shall be surrendered for conversion at one time by the same
holder, the number of full shares issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of 7.5% Preferred Stock
so surrendered. Instead of any fractional share of Common Stock which would
otherwise be issuable upon conversion of any
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shares of 7.5% Preferred Stock, the Corporation shall, at its option and subject
to the terms of the Indenture, either (i) pay a cash adjustment in respect of
such fractional interest in an amount equal to the same fraction of the Market
Value per share of Common Stock at the close of business on the day of
conversion or (ii) round up to the nearest whole share and pay such additional
share in lieu of the adjustment.
(e) Reclassification, Consolidation, Merger or Sale of Assets. In
case of any reclassification of the Common Stock, any consolidation of the
Corporation with, or merger of the Corporation into, any other entity, any
merger of another entity into the Corporation (other than a merger which does
not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Corporation), any sale or transfer of
all or substantially all of the assets of the Corporation or any compulsory
share exchange, pursuant to which share exchange the Common Stock is converted
into other securities, cash or other property, then, as a condition to approval
and validity of any such merger, sale or transfer of assets or compulsory share
exchange, lawful provision shall be made as part of the terms of such
transaction whereby the holder of each share of 7.5% Preferred Stock then
outstanding shall, subject to the terms of the Indenture, have the right
thereafter, during the period such share shall be convertible, to convert such
share only into the kind and amount of securities, cash and other property
receivable upon such reclassification, consolidation, merger, sale, transfer or
share exchange by a holder of the number of shares of Common Stock of the
Corporation into which such share of 7.5% Preferred Stock might have been
converted immediately prior to such reclassification, consolidation, merger,
sale, transfer or share exchange. The Corporation, the entity formed by such
consolidation or the entity resulting from such merger or which acquires such
assets or which acquires the Corporation's shares, as the case may be, shall
make provisions in its certificate or articles of incorporation or other
constituent document to establish such right. Such certificate or articles of
incorporation or other constituent document shall provide for adjustments which,
for events subsequent to the effective date of such certificate or articles of
incorporation or other constituent document, shall be at least as favorable to
the holders of 7.5% Preferred Stock and as nearly equivalent as may be
practicable to the adjustments provided for in this Section 7. The above
provisions shall similarly apply to successive reclassifications,
consolidations, mergers, sales, transfers or share exchanges.
(f) Reservation of Shares; Transfer Taxes; Etc. The Corporation shall
at all times reserve and keep available, out of its authorized and unissued
stock, solely for the purpose of effecting the conversion of the 7.5% Preferred
Stock, such number of shares of its Common Stock, free of preemptive rights, as
shall from time to time be sufficient to effect the conversion of all shares of
7.5% Preferred Stock, including all dividends and interest accrued thereon, from
time to time outstanding. The Corporation shall from time to time, in
accordance with the laws of the State of Delaware, increase the authorized
number of shares of Common Stock if at any time the number of shares of Common
Stock not outstanding shall not be sufficient to permit the conversion of all
the then-outstanding shares of 7.5% Preferred Stock.
If any shares of Common Stock required to be reserved for purposes of
conversion of the 7.5% Preferred Stock hereunder require registration with or
approval
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of any governmental authority under any federal or state law before such shares
may be issued upon conversion, the Corporation will, in good faith and as
expeditiously as possible, endeavor to cause such shares to be duly registered
or approved, as the case may be. If the Common Stock is traded on the Nasdaq
SmallCap Market System or any national securities exchange, the Corporation
will, if permitted by the rules of the Nasdaq SmallCap Market System or of such
exchange, list and keep listed on the Nasdaq SmallCap Market System or on such
exchange, upon official notice of issuance, all shares of Common Stock issuable
upon conversion of the 7.5% Preferred Stock.
The Corporation shall pay any and all issue or other taxes that may be
payable in respect of any issue or delivery of shares of Common Stock upon
conversion of the 7.5% Preferred Stock. The Corporation shall not, however, be
required to pay any tax which may be payable in respect of any transfer involved
in the issue or delivery of Common Stock (or other securities or assets) in a
name other than that in which the shares of 7.5% Preferred Stock so converted
were registered, and no such issue or delivery shall be made unless and until
the person requesting such issue has paid to the Corporation the amount of such
tax or has established, to the satisfaction of the Corporation, that such tax
has been paid.
Before taking any action which would cause an adjustment reducing the
conversion rate such that the effective conversion price would be below the then
par value of the Common Stock, the Corporation shall take any corporate action
which may, in the opinion of its counsel, be necessary in order that the
Corporation may validly and legally issue fully paid and nonassessable shares of
Common Stock at the conversion rate as so adjusted.
(g) Prior Notice of Certain Events. In case:
(i) the Corporation shall (1) declare any dividend (or any other
distribution) on its Common Stock, other than (A) a dividend payable in
shares of Common Stock or (B) a dividend payable in cash out of its
retained earnings other than any special or nonrecurring or other
extraordinary dividend or (2) declare or authorize a redemption or
repurchase of in excess of 10% of the then-outstanding shares of Common
Stock; or
(ii) the Corporation shall authorize the granting to the holders of
Common Stock of rights or warrants to subscribe for or purchase any shares
of stock of any class or of any other rights or warrants (other than any
rights specified in paragraph (c)(i)(1)(B) of this Section 7); or
(iii) of any reclassification of Common Stock (other than a
subdivision or combination of the outstanding Common Stock, or a change in
par value, or from par value to no par value, or from no par value to par
value), or of any consolidation or merger to which the Corporation is a
party and for which approval of any stockholders of the Corporation shall
be required, or of the sale or transfer of all or substantially all of the
assets of the Corporation or of any compulsory share exchange whereby the
Common Stock is converted into other securities, cash or other property; or
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(iv) of the voluntary or involuntary dissolution, liquidation or winding up
of the Corporation;
then the Corporation shall cause to be filed with the transfer agent for the
7.5% Preferred Stock, and shall cause to be mailed to the holders of record of
the 7.5% Preferred Stock, at their last address as they shall appear upon the
stock transfer books of the Corporation, at least 15 days prior to the
applicable record date hereinafter specified, a notice stating (x) the date on
which a record (if any) is to be taken for the purpose of such dividend,
distribution, redemption, repurchase or granting of rights or warrants or, if a
record is not to be taken, the date as of which the holders of Common Stock of
record entitled to such dividend, distribution, redemption, rights or warrants
are to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer, share exchange, dissolution, liquidation
or winding up is expected to become effective, and the date as of which it is
expected that holders of Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other property deliverable upon
such reclassification, consolidation, merger, sale, transfer, share exchange,
dissolution, liquidation or winding up (but no failure to mail such notice or
any defect therein or in the mailing thereof shall affect the validity of the
corporate action required to be specified in such notice).
(h) Other Changes in Conversion Rate. The Corporation from time to
time may increase the conversion rate by any amount for any period of time if
the period is at least 20 days and if the increase is irrevocable during the
period. Whenever the conversion rate is so increased, the Corporation shall
mail to holders of record of the 7.5% Preferred Stock a notice of the increase
at least 15 days before the date the increased conversion rate takes effect, and
such notice shall state the increased conversion rate and the period it will be
in effect.
The Corporation may make such increases in the conversion rate, in
addition to those required or allowed by this Section 7, as shall be determined
by it, as evidenced by a resolution of the Board of Directors, to be advisable
in order to avoid or diminish any income tax to holders of Common Stock
resulting from any dividend or distribution of stock or issuance of rights or
warrants to purchase or subscribe for stock or from any event treated as such
for income tax purposes.
8. Special Conversion Rights.
(a) Change of Control. Upon the occurrence of a Change of Control (as
defined in paragraph (e) below) with respect to the Corporation, each holder of
7.5% Preferred Stock shall have the right, at the holder's option, for a period
of 30 days after the mailing of a notice by the Corporation that a Change of
Control has occurred, to convert all, but not less than all, of such holder's
7.5% Preferred Stock into 100 shares of Common Stock of the Corporation (as such
number may be adjusted pursuant to Section 7(c) hereof). The Corporation may,
at its option and subject to the terms of the Indenture, on a pro rata basis
among holders of 7.5% Preferred Stock, in lieu of providing 100 shares of Common
Stock (as such number may be adjusted pursuant to Section 7(c)) upon any such
special conversion, provide the holders with cash equal to the Market Value (as
hereinafter defined) of such number of shares of Common Stock.
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Shares of 7.5% Preferred Stock which become convertible pursuant to a special
conversion right shall, unless so converted, remain convertible into the number
of shares of Common Stock that the holders of the 7.5% Preferred Stock would
have owned immediately after the Change of Control if the holders had converted
the 7.5% Preferred Stock immediately before the effective date of the Change of
Control.
(b) Fundamental Change. Upon the occurrence of a Fundamental Change
(as defined in paragraph (e) below) with respect to the Corporation, each holder
of 7.5% Preferred Stock shall have a special conversion right, at the holder's
option and subject to the terms of the Indenture, for a period of 30 days after
the mailing of a notice by the Corporation that a Fundamental Change has
occurred, to convert all, but not less than all, of such holder's 7.5% Preferred
Stock into the kind and amount of cash, securities, property or other assets
receivable upon such Fundamental Change by a holder of the number of shares of
Common Stock into which such shares of 7.5% Preferred Stock would have been
convertible immediately prior to such Fundamental Change. The Corporation or a
successor corporation, as the case may be, may, at its option and in lieu of
providing the consideration as required above upon such conversion, provide the
holder with cash equal to the Market Value of the Common Stock multiplied by the
number of shares of Common Stock into which such shares of 7.5% Preferred Stock
would have been convertible immediately prior to such Fundamental Change. 7.5%
Preferred Stock which becomes convertible pursuant to a special conversion right
shall, unless so converted, remain convertible into the kind and amount of cash,
securities, property or other assets that the holders of the 7.5% Preferred
Stock would have owned immediately after the Fundamental Change if the holders
had converted the 7.5% Preferred Stock immediately before the effective date of
the Fundamental Change.
(c) Notice. Upon the occurrence of a Change of Control or a
Fundamental Change with respect to the Corporation, within 30 days after such
occurrence, the Corporation shall mail to each registered holder of 7.5%
Preferred Stock a notice of such occurrence (the "Special Conversion Notice")
setting forth the following:
(i) the event constituting the Change of Control or Fundamental
Change;
(ii) the conversion date upon exercise of the applicable special
conversion right;
(iii) the conversion rate (and related conversion price) then in
effect under Section 7 and the continuing conversion rights, if any, under
Section 7;
(iv) the name and address of the paying agent and conversion agent;
(v) that holders who want to convert shares of 7.5% Preferred Stock
must satisfy the requirements of Section 7(b) and must exercise such
conversion right within the 30-day period after the mailing of such notice
by the Corporation;
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(vi) that exercise of such conversion right shall be irrevocable and
no dividends on shares of 7.5% Preferred Stock (or portions thereof)
tendered for conversion shall accrue from and after the conversion date;
and
(vii) that the Corporation (or a successor corporation, if
applicable) may, at its option, elect to pay cash (specifying the amount
thereof per share) for all shares of 7.5% Preferred Stock tendered for
conversion.
(d) Exercise Procedures. A holder of 7.5% Preferred Stock must
exercise the special conversion right within the 30-day period after the mailing
of the Special Conversion Notice or such special conversion right shall expire.
Such right must be exercised in accordance with Section 7(b) to the extent the
procedures in Section 7(b) are consistent with the special provisions of this
Section 8. Exercise of such conversion right shall be irrevocable, to the
extent permitted by applicable law, and dividends on 7.5% Preferred Stock
tendered for conversion shall cease to accrue from and after the conversion
date. The conversion date with respect to the exercise of a special conversion
right arising upon a Change of Control or Fundamental Change shall be the tenth
day after the mailing of the Special Conversion Notice. In taking any action in
connection with any Change of Control or Fundamental Change or related special
conversion right, the Company will comply with all applicable federal securities
laws and regulations.
9. Definitions. The following definitions shall apply to terms used
in this Certificate.
(i) a "Change of Control" with respect to the Corporation shall be
deemed to have occurred at such time as any person (within the meaning of
Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), including a group (within the meaning of
Rule 13d-5 under the Exchange Act), together with any of its Affiliates or
Associates (as defined below), files or becomes obligated to file a report
(or any amendment or supplement thereto) on Schedule 13D or 14D-1 pursuant
to the Exchange Act disclosing that such person has become the beneficial
owner of either (i) 50% or more of the shares of Common Stock of the
Corporation then outstanding or (ii) securities representing 50% or more of
the combined voting power of the Voting Stock (as defined below) of the
Corporation then outstanding; provided, that a Change of Control shall not
be deemed to have occurred with respect to any transaction that constitutes
a Fundamental Change. An "Affiliate" of a specified person is a person
that directly or indirectly controls, or is controlled by, or is under
common control with, the person specified. An "Associate" of a person
means (1) any corporation or organization, other than the Corporation or
any subsidiary of the Corporation, of which the person is an officer or
partner or is, directly or indirectly, the beneficial owner of 10% or more
of any class of equity securities; (2) any trust or estate in which the
person has a substantial beneficial interest or as to which the person
serves as trustee or in a similar fiduciary capacity; and (3) any relative
or spouse of the person, or any relative of the spouse, who has the same
home as the person or who is a director or officer of the person or any of
its parents or subsidiaries.
-11-
<PAGE>
As used herein, a person shall be deemed to have "beneficial ownership"
with respect to, and shall be deemed to "beneficially own," any securities
of the Corporation in accordance with Section 13 of the Exchange Act and
the rules and regulations (including Rule 13d-3, Rule 13d-5 and any
successor rules) promulgated by the Securities and Exchange Commission
thereunder; provided that a person shall be deemed to have beneficial
ownership of all securities that any such person has a right to acquire
whether such right is exercisable immediately or only after the passage of
time and without regard to the 60-day limitation referred to in Rule 13d-3;
(ii) a "Fundamental Change" with respect to the Corporation means (i)
the occurrence of any transaction or event in connection with which 66 2/3%
or more of the outstanding Common Stock of the Corporation shall be
exchanged for, converted into, acquired for or constitute solely the right
to receive cash, securities, property or other assets (whether by means of
an exchange offer, liquidation, tender offer, consolidation, merger,
combination, reclassification, recapitalization or otherwise) or (ii) the
conveyance, sale, lease, assignment, transfer or other disposal of all or
substantially all of the Corporation's property, business or assets;
provided, however, that a Fundamental Change shall not be deemed to have
occurred with respect to either of the following transactions or events:
(a) any transaction or event in which more than 50% (by value as determined
in good faith by the Board of Directors of the Corporation) of the
consideration received by holders of Common Stock consists of Marketable
Stock (as defined below); or (b) any consolidation or merger of the
Corporation in which the holders of Common Stock of the Corporation
immediately prior to such transaction own, directly or indirectly, (1) 50%
or more of the common stock of the sole surviving corporation (or of the
ultimate parent of such sole surviving corporation) outstanding at the time
immediately after such consolidation or merger and (2) securities
representing 50% or more of the combined voting power of the surviving
corporation's Voting Stock (as defined below) (or of the Voting Stock of
the ultimate parent of such surviving corporation) outstanding at such
time.
(iii) "Indenture" means the Indenture dated as of November 10, 1992
among the Corporation, First Interstate Bank of Texas, N.A., as trustee,
and certain of the Corporation's subsidiaries, as guarantors, pursuant to
which the Corporation's 12.5% Series B Senior Notes due 2002 are issued, as
such Indenture may be amended and supplemented from time to time in
accordance with the terms thereof; provided, however, that the Indenture
may not be amended or supplemented in any manner which would adversely
affect the ability of the Corporation to pay the dividends or interest on
or support the conversion of the 7.5% Preferred Stock without the consent
of the holders of the 7.5% Preferred Stock.
(iv) the "Market Value" of the Common Stock or any other Marketable
Stock on any date shall be deemed to be the average of the daily closing
prices for the 20 consecutive trading days commencing with the 30th trading
day before the day in question. The closing price for each day shall be
the reported last
-12-
<PAGE>
sales price or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices, in either case on the
Nasdaq SmallCap Market System or, if the Common Stock is not listed or
admitted to trading on Nasdaq SmallCap Market System, on any national
securities exchange on which the Common Stock is listed or admitted to
trading or, if the Common Stock is not quoted on the Nasdaq SmallCap Market
System or listed or admitted to trading on any national securities
exchange, the average of the closing bid and asked prices in the over-the-
counter market as furnished by any New York Stock Exchange member firm
selected from time to time by the Corporation for that purpose, or, if such
prices are not available, the fair market value set by, or in a manner
established by, the Board of Directors of the Corporation in good faith.
"Trading day" shall mean a day on which the Nasdaq SmallCap Market System
or national securities exchange used to determine the closing price is open
for the transaction of business or the reporting of trades or, if the
closing price is not so determined, a day on which the Nasdaq SmallCap
Market System is open for the transaction of business.
(v) "Marketable Stock" shall mean Common Stock or common stock of any
corporation that is the successor to all or substantially all of the
business or assets of the Corporation as a result of a Fundamental Change
(or of the ultimate parent of such successor), which is (or will, upon
distribution thereof, be) quoted or listed on the Nasdaq SmallCap Market
System, any national securities exchange or any similar system of automated
dissemination of quotations of securities prices in the United States.
(vi) "Voting Stock" means, with respect to any person, capital stock
of such person having general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees
of such person (irrespective of whether or not at the time capital stock of
any other class or classes shall have or might have voting power by reason
of the happening of any contingency).
10. Voting Rights.
(a) General. The holders of 7.5% Preferred Stock will be entitled to
100 votes per share of 7.5% Preferred Stock, subject to adjustment in accordance
with Section 7 hereof, on all matters subject to a vote of stockholders of the
Corporation, such that holders of 7.5% Preferred Stock shall have the same
voting rights as they would have if the shares of 7.5% Preferred Stock held by
them had been converted into Common Stock.
(b) Class Voting Rights. So long as any shares of 7.5% Preferred
Stock remain outstanding, the Corporation shall not, without the affirmative
vote or consent of the holders of at least 66-2/3% of all outstanding 7.5%
Preferred Stock voting separately as a class, (i) amend, alter or repeal (by
merger or otherwise) any provision of the Certificate of Incorporation or the
Bylaws of the Corporation, as amended, so as to adversely affect the relative
rights, preferences, qualifications, limitations or
-13-
<PAGE>
restrictions of the 7.5% Preferred Stock or the Common Stock or (ii) effect any
reclassification of the 7.5% Preferred Stock.
11. Status of Acquired Shares. Shares of 7.5% Preferred Stock
redeemed by the Corporation, received by the Corporation upon conversion
pursuant to Section 7 or Section 8 or otherwise acquired by the Corporation will
be restored to the status of authorized but unissued shares of Senior Preferred
Stock, without designation as to series, and may thereafter be issued, but not
as shares of 7.5% Preferred Stock.
12. Preemptive Rights. The 7.5% Preferred Stock is not entitled to
any preemptive or subscription rights in respect of any securities of the
Corporation.
13. Usury. It is the intention of parties hereto to conform strictly
to applicable usury laws. Accordingly, if the transactions contemplated hereby
would be usurious under applicable law (including, without limitation, the laws
of the State of Texas, the laws of the State of Delaware and the laws of the
United States of America), then, in that event, notwithstanding anything to the
contrary herein, it is agreed that the aggregate of all consideration which
constitutes interest under applicable law that is taken, reserved, contracted
for, charged or received pursuant to this Certificate of Designations or
otherwise in connection herewith shall under no circumstances exceed the maximum
amount of interest allowed by applicable law, and any excess shall be canceled
automatically and, if theretofore paid, shall be promptly refunded to the
Company or, if applicable, credited against future interest owed to a holder of
7.5% Preferred Stock.
14. Severability of Provisions. Whenever possible, each provision
hereof shall be interpreted in a manner as to be effective and valid under
applicable law, but if any provision hereof is held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating or otherwise
adversely affecting the remaining provisions hereof. If a court of competent
jurisdiction should determine that a provision hereof would be valid or
enforceable if a period of time were extended or shortened or a particular
percentage were increased or decreased, then such court may make such change as
shall be necessary to render the provision in question effective and valid under
applicable law.
-14-
<PAGE>
IN WITNESS WHEREOF, Drypers Corporation has caused this Certificate to
be signed on its behalf by Walter V. Klemp, its Chairman of the Board and Co-
Chief Executive Officer, this 23rd day of February, 1996.
DRYPERS CORPORATION
By: /s/ Walter V. Klemp
--------------------------
Walter V. Klemp
Chairman of the Board and
Co-Chief Executive Officer
-15-
<PAGE>
DRYPERS CORPORATION
CERTIFICATE OF AMENDMENT
TO
RESTATED CERTIFICATE OF INCORPORATION
Drypers Corporation (the "Company"), a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware
("DGCL"), does hereby certify:
FIRST: That the Board of Directors of the Company, at a meeting held on
April 22, 1998, unanimously adopted resolutions proposing and declaring
advisable the following amendment to the Restated Certificate of Incorporation
of the Company and directed that such amendment be considered at the next annual
meeting of stockholders of the Company:
To amend the first paragraph of Article Fourth of the Restated Certificate
of Incorporation in its entirety to read as follows:
Fourth: The total number of shares of all classes of stock which
the Corporation shall have authority to issue is 35,000,000 of which (i)
30,000,000 shares shall be common stock, $.001 par value per share (the
"Common Stock"), and (ii) 5,000,000 shares shall be Senior Preferred Stock,
$.01 par value per share (the "Preferred Stock").
SECOND: That at the annual meeting of stockholders of the Company duly
called and held on May 21, 1998, in accordance with Section 222 of the DGCL, the
holders of at least two-thirds of the outstanding shares of Common Stock of the
Company entitled to vote on such amendment voted in favor of such amendment.
THIRD: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of Section 242 of the DGCL.
In Witness Whereof, the Company has caused this Certificate to be signed on
May 21, 1998, by Jonathan P. Foster, its Executive Vice President and Chief
Financial Officer.
DRYPERS CORPORATION
By: /s/ Jonathan P. Foster
----------------------------------------
Jonathan P. Foster
Executive Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT 5.1
June 8, 1998
Drypers Corporation
5300 Memorial Drive, Suite 900
Houston, Texas 77007
Gentlemen:
We have acted as counsel for Drypers Corporation, a Delaware corporation
(the "Company"), in connection with the Company's Registration Statement on
Form S-4 (the "Registration Statement") relating to the registration under the
Securities Act of 1933, as amended (the "Securities Act"), and the proposed
offer by the Company to exchange (the "Exchange Offer") its 10 1/4% Series B
Senior Notes due 2007 (up to $30,000,000 aggregate principal amount) (the
"Exchange Notes"), for its outstanding 10 1/4% Senior Notes due 2007
($30,000,000 principal amount outstanding) (the "Outstanding Notes"). The
Outstanding Notes have been, and the Exchange Notes will be, issued pursuant
to an Indenture dated as of June 15, 1997, as amended (the "Indenture"),
between the Company and Bankers Trust Company, as Trustee (the "Trustee").
We have examined (i) the Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws of the Company, each as amended to date, (ii)
the Indenture, (iii) the Registration Statement on Form S-4, filed by the
Company with the Securities and Exchange Commission, for the registration of
the Exchange Notes under the Securities Act, and (iv) such certificates,
statutes and other instruments and documents as we considered appropriate for
purposes of the opinions hereinafter expressed.
In connection with this opinion, we have assumed that (i) the Registration
Statement, and any amendments thereto (including post-effective amendments),
will have become effective, (ii) the Indenture will have been qualified under
the Trust Indenture Act of 1939, as amended, and (iii) the Exchange Notes will
be issued and exchanged in compliance with applicable federal and state
securities laws in the manner stated in the Registration Statement.
Based upon the foregoing, subject to the qualifications hereinafter set
forth, and having regard for such legal considerations as we have deemed
relevant, we are of the opinion that the Exchange Notes proposed to be issued
pursuant to the Exchange Offer have been duly authorized for issuance and,
subject to the Registration Statement becoming effective under the Securities
Act and in compliance with any applicable state securities laws, when
executed, authenticated, issued, delivered and exchanged in accordance with
the Exchange Offer and the Indenture, will be legally issued and will
constitute valid and legally binding obligations of the Company, enforceable
against the Company in accordance with their terms.
The opinions expressed herein are subject to the following:
a. The enforceability of the Exchange Notes may be limited or affected by
(i) bankruptcy, insolvency, reorganization, moratorium, liquidation,
rearrangement, fraudulent transfer, fraudulent conveyance and other similar
laws (including court decisions) now or hereafter in effect and affecting
the rights and remedies of creditors generally or providing for the relief
of debtors, (ii) the refusal of a particular court to grant equitable
remedies, including, without limitation, specific performance and
injunctive relief, and (iii) general principles of equity (regardless of
whether such remedies are sought in a proceeding in equity or at law).
b. We express no opinion as to the enforceability of any provisions of
the Exchange Notes that would require the performance thereof in the
presence of fraud or illegality on the part of the holders of the Exchange
Notes or the Trustee.
The opinions expressed herein are limited exclusively to the federal laws of
the United States of America, the laws of the State of New York and the
General Corporation Law of the State of Delaware, and we are expressing no
opinion as to the effect of the laws of any other jurisdiction.
This opinion is rendered solely for the benefit of the Company and is not to
be used, circulated, copied, quoted or referred to without our prior written
consent. We hereby consent to the filing of this opinion as an
<PAGE>
Drypers Corporation
June 8, 1998
Page 2
exhibit to the Registration Statement and to the statements made with respect
to us under the caption "Legal Matters" in the Prospectus included as part of
the Registration Statement.
Very truly yours,
/s/ Fulbright & Jaworski L.L.P.
Fulbright & Jaworski L.L.P.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated March 18, 1998 on the consolidated financial statements and
schedule of Drypers Corporation and subsidiaries, and to all references to our
firm included in this Registration Statement.
ARTHUR ANDERSEN LLP
Houston, Texas
June 8, 1998
<PAGE>
EXHIBIT 25.1
________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT
TO SECTION 305(b)(2) ___________
______________________________
BANKERS TRUST COMPANY
(Exact name of trustee as specified in its charter)
NEW YORK 13-4941247
(Jurisdiction of Incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification no.)
FOUR ALBANY STREET
NEW YORK, NEW YORK 10006
(Address of principal (Zip Code)
executive offices)
BANKERS TRUST COMPANY
LEGAL DEPARTMENT
130 LIBERTY STREET, 31ST FLOOR
NEW YORK, NEW YORK 10006
(212) 250-2201
(Name, address and telephone number of agent for service)
_________________________________
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 DRIVE, SUITE 900
HOUSTON, TX 77007
(Address, including zip code of
Principal executive offices)
10.25% SENIOR B NOTES DUE 2007
(Title of the indenture securities)
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee.
(a) Name and address of each examining or supervising authority to which it
is subject.
NAME ADDRESS
---- -------
Federal Reserve Bank (2nd District) New York, NY
Federal Deposit Insurance Corporation Washington, D.C.
New York State Banking Department Albany, NY
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
If the obligor is an affiliate of the Trustee, describe each such
affiliation.
None.
Item 3. -15. Not Applicable
ITEM 16. LIST OF EXHIBITS.
Exhibit 1 - Restated Organization Certificate of Bankers Trust
Company dated August 7, 1990, Certificate of Amendment
of the Organization Certificate of Bankers Trust Company
dated June 21, 1995 - Incorporated herein by reference
to Exhibit 1 filed with Form T-1 Statement, Registration
No. 33-65171, Certificate of Amendment of the
Organization Certificate of Bankers Trust Company dated
March 20, 1996, incorporate by referenced to Exhibit 1
filed with Form T-1 Statement, Registration No. 333-
25843 and Certificate of Amendment of the Organization
Certificate of Bankers Trust Company dated June 19,
1997, copy attached.
EXHIBIT 2 - Certificate of Authority to commence business -
Incorporated herein by reference to Exhibit 2 filed
with Form T-1 Statement, Registration No. 33-21047.
EXHIBIT 3 - Authorization of the Trustee to exercise corporate
trust powers - Incorporated herein by reference to
Exhibit 2 filed with Form T-1 Statement, Registration
No. 33-21047.
EXHIBIT 4 - Existing By-Laws of Bankers Trust Company, as amended on
November 18, 1997. Copy attached.
-2-
<PAGE>
EXHIBIT 5 - Not applicable.
EXHIBIT 6 - Consent of Bankers Trust Company required by Section
321(b) of the Act. - Incorporated herein by reference to
Exhibit 4 filed with Form T-1 Statement, Registration
No. 22-18864.
EXHIBIT 7 - The latest report of condition of Bankers Trust Company
dated as of December 31, 1997. Copy attached.
EXHIBIT 8 - Not Applicable.
EXHIBIT 9 - Not Applicable.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York, and State of New York, on the 14th day
of May, 1998.
BANKERS TRUST COMPANY
By: _______________________________
Sandra J. Shaffer
Assistant Vice President
-4-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York, and State of New York, on the 14th day
of May, 1998.
BANKERS TRUST COMPANY
By: Sandra J. Shaffer
-----------------
Sandra J. Shaffer
Assistant Vice President
-5-
<PAGE>
State of New York,
Banking Department
I, MANUEL KURSKY, Deputy Superintendent of Banks of the State of New York,
DO HEREBY APPROVE the annexed Certificate entitled "CERTIFICATE OF AMENDMENT OF
THE ORGANIZATION CERTIFICATE OF BANKERS TRUST COMPANY UNDER SECTION 8005 OF THE
BANKING LAW," dated June 19, 1997, providing for an increase in authorized
capital stock from $1,601,666,670 consisting of 100,166,667 shares with a par
value of $10 each designated as Common Stock and 600 shares with a par value of
$1,000,000 each designated as Series Preferred Stock to $2,001,666,670
consisting of 100,166,667 shares with a par value of $10 each designated as
Common Stock and 1,000 shares with a par value of $1,000,000 each designated as
Series Preferred Stock.
WITNESS, my hand and official seal of the Banking Department at the City of New
York,
this 27TH day of June in the Year of our Lord one thousand
nine hundred and ninety-seven.
Manuel Kursky
------------------------------
Deputy Superintendent of Banks
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
ORGANIZATION CERTIFICATE
OF BANKERS TRUST
Under Section 8005 of the Banking Law
_____________________________
We, James T. Byrne, Jr. and Lea Lahtinen, being respectively a Managing
Director and an Assistant Secretary of Bankers Trust Company, do hereby certify:
1. The name of the corporation is Bankers Trust Company.
2. The organization certificate of said corporation was filed by the
Superintendent of Banks on the 5th of march, 1903.
3. The organization certificate as heretofore amended is hereby amended
to increase the aggregate number of shares which the corporation shall have
authority to issue and to increase the amount of its authorized capital stock in
conformity therewith.
4. Article III of the organization certificate with reference to the
authorized capital stock, the number of shares into which the capital stock
shall be divided, the par value of the shares and the capital stock outstanding,
which reads as follows:
"III. The amount of capital stock which the corporation is hereafter to
have is One Billion, Six Hundred and One Million, Six Hundred Sixty-Six
Thousand, Six Hundred Seventy Dollars ($1,601,666,670), divided into One
Hundred Million, One Hundred Sixty-Six Thousand, Six Hundred Sixty-Seven
(100,166,667) shares with a par value of $10 each designated as Common
Stock and 600 shares with a par value of One Million Dollars ($1,000,000)
each designated as Series Preferred Stock."
is hereby amended to read as follows:
"III. The amount of capital stock which the corporation is hereafter to
have is Two Billion One Million, Six Hundred Sixty-Six Thousand, Six
Hundred Seventy Dollars ($2,001,666,670), divided into One Hundred Million,
One Hundred Sixty-Six Thousand, Six Hundred Sixty-Seven (100,166,667)
shares with a par value of $10 each designated as Common Stock and 1000
shares with a par value of One Million Dollars ($1,000,000) each designated
as Series Preferred Stock."
<PAGE>
5. The foregoing amendment of the organization certificate was authorized
by unanimous written consent signed by the holder of all outstanding shares
entitled to vote thereon.
IN WITNESS WHEREOF, we have made and subscribed this certificate this 19th
day of June, 1997.
James T. Byrne, Jr.
-------------------
James T. Byrne, Jr.
Managing Director
Lea Lahtinen
-------------------
Lea Lahtinen
Assistant Secretary
State of New York )
) ss:
County of New York )
Lea Lahtinen, being fully sworn, deposes and says that she is an Assistant
Secretary of Bankers Trust Company, the corporation described in the foregoing
certificate; that she has read the foregoing certificate and knows the contents
thereof, and that the statements herein contained are true.
Lea Lahtinen
------------
Lea Lahtinen
Sworn to before me this 19th day
of June, 1997.
Sandra L. West
- -------------------------------------
Notary Public
SANDRA L. WEST
Notary Public State of New York
No. 31-4942101
Qualified in New York County
Commission Expires September 19, 1998
<PAGE>
BY-LAWS
NOVEMBER 18, 1997
BANKERS TRUST COMPANY
NEW YORK
<PAGE>
BY-LAWS
OF
BANKERS TRUST COMPANY
ARTICLE I
MEETINGS OF STOCKHOLDERS
SECTION 1. The annual meeting of the stockholders of this Company shall be held
at the office of the Company in the Borough of Manhattan, City of New York, on
the third Tuesday in January of each year, for the election of directors and
such other business as may properly come before said meeting.
SECTION 2. Special meetings of stockholders other than those regulated by
statute may be called at any time by a majority of the directors. It shall be
the duty of the Chairman of the Board, the Chief Executive Officer or the
President to call such meetings whenever requested in writing to do so by
stockholders owning a majority of the capital stock.
SECTION 3. At all meetings of stockholders, there shall be present, either in
person or by proxy, stockholders owning a majority of the capital stock of the
Company, in order to constitute a quorum, except at special elections of
directors, as provided by law, but less than a quorum shall have power to
adjourn any meeting.
SECTION 4. The Chairman of the Board or, in his absence, the Chief Executive
Officer or, in his absence, the President or, in their absence, the senior
officer present, shall preside at meetings of the stockholders and shall direct
the proceedings and the order of business. The Secretary shall act as secretary
of such meetings and record the proceedings.
ARTICLE II
DIRECTORS
SECTION 1. The affairs of the Company shall be managed and its corporate powers
exercised by a Board of Directors consisting of such number of directors, but
not less than ten nor more than twenty-five, as may from time to time be fixed
by resolution adopted by a majority of the directors then in office, or by the
stockholders. In the event of any increase in the number of directors,
additional directors may be elected within the limitations so fixed, either by
the stockholders or within the limitations imposed by law, by a majority of
directors then in office. One-third of the number of directors, as fixed from
time to time, shall constitute a quorum. Any one or more members of the Board
of Directors or any Committee thereof may participate in a meeting of the Board
of Directors or Committee thereof by means of a conference telephone or similar
communications equipment which allows all persons participating in the meeting
to hear each other at the same time. Participation by such means shall
constitute presence in person at such a meeting.
<PAGE>
All directors hereafter elected shall hold office until the next annual meeting
of the stockholders and until their successors are elected and have qualified.
No person who shall have attained age 72 shall be eligible to be elected or re-
elected a director. Such director may, however, remain a director of the
Company until the next annual meeting of the stockholders of Bankers Trust New
York Corporation (the Company's parent) so that such director's retirement will
coincide with the retirement date from Bankers Trust New York Corporation.
No Officer-Director who shall have attained age 65, or earlier relinquishes his
responsibilities and title, shall be eligible to serve as a director.
SECTION 2. Vacancies not exceeding one-third of the whole number of the Board
of Directors may be filled by the affirmative vote of a majority of the
directors then in office, and the directors so elected shall hold office for the
balance of the unexpired term.
SECTION 3. The Chairman of the Board shall preside at meetings of the Board of
Directors. In his absence, the Chief Executive Officer or, in his absence, such
other director as the Board of Directors from time to time may designate shall
preside at such meetings.
SECTION 4. The Board of Directors may adopt such Rules and Regulations for the
conduct of its meetings and the management of the affairs of the Company as it
may deem proper, not inconsistent with the laws of the State of New York, or
these By-Laws, and all officers and employees shall strictly adhere to, and be
bound by, such Rules and Regulations.
SECTION 5. Regular meetings of the Board of Directors shall be held from time
to time on the third Tuesday of the month. If the day appointed for holding
such regular meetings shall be a legal holiday, the regular meeting to be held
on such day shall be held on the next business day thereafter. Special meetings
of the Board of Directors may be called upon at least two day's notice whenever
it may be deemed proper by the Chairman of the Board or, the Chief Executive
Officer or, in their absence, by such other director as the Board of Directors
may have designated pursuant to Section 3 of this Article, and shall be called
upon like notice whenever any three of the directors so request in writing.
SECTION 6. The compensation of directors as such or as members of committees
shall be fixed from time to time by resolution of the Board of Directors.
<PAGE>
ARTICLE III
COMMITTEES
SECTION 1. There shall be an Executive Committee of the Board consisting of not
less than five directors who shall be appointed annually by the Board of
Directors. The Chairman of the Board shall preside at meetings of the Executive
Committee. In his absence, the Chief Executive Officer or, in his absence, such
other member of the Committee as the Committee from time to time may designate
shall preside at such meetings.
The Executive Committee shall possess and exercise to the extent permitted by
law all of the powers of the Board of Directors, except when the latter is in
session, and shall keep minutes of its proceedings, which shall be presented to
the Board of Directors at its next subsequent meeting. All acts done and powers
and authority conferred by the Executive Committee from time to time shall be
and be deemed to be, and may be certified as being, the act and under the
authority of the Board of Directors.
A majority of the Committee shall constitute a quorum, but the Committee may act
only by the concurrent vote of not less than one-third of its members, at least
one of whom must be a director other than an officer. Any one or more directors,
even though not members of the Executive Committee, may attend any meeting of
the Committee, and the member or members of the Committee present, even though
less than a quorum, may designate any one or more of such directors as a
substitute or substitutes for any absent member or members of the Committee, and
each such substitute or substitutes shall be counted for quorum, voting, and all
other purposes as a member or members of the Committee.
SECTION 2. There shall be an Audit Committee appointed annually by resolution
adopted by a majority of the entire Board of Directors which shall consist of
such number of directors, who are not also officers of the Company, as may from
time to time be fixed by resolution adopted by the Board of Directors. The
Chairman shall be designated by the Board of Directors, who shall also from time
to time fix a quorum for meetings of the Committee. Such Committee shall
conduct the annual directors' examinations of the Company as required by the New
York State Banking Law; shall review the reports of all examinations made of the
Company by public authorities and report thereon to the Board of Directors; and
shall report to the Board of Directors such other matters as it deems advisable
with respect to the Company, its various departments and the conduct of its
operations.
In the performance of its duties, the Audit Committee may employ or retain, from
time to time, expert assistants, independent of the officers or personnel of the
Company, to make studies of the Company's assets and liabilities as the
Committee may request and to make an examination of the accounting and auditing
methods of the Company and its system of internal protective controls to the
extent considered necessary or advisable in order to determine that the
operations of the Company, including its fiduciary departments, are being
audited by the General Auditor in such a manner as to provide prudent and
adequate protection. The Committee also may direct the General Auditor to make
such investigation as it deems necessary or advisable with respect to the
Company, its various departments and the conduct of its operations. The
Committee shall hold regular quarterly meetings and during the intervals thereof
shall meet at other times on call of the Chairman.
<PAGE>
SECTION 3. The Board of Directors shall have the power to appoint any other
Committees as may seem necessary, and from time to time to suspend or continue
the powers and duties of such Committees. Each Committee appointed pursuant to
this Article shall serve at the pleasure of the Board of Directors.
ARTICLE IV
OFFICERS
SECTION 1. The Board of Directors shall elect from among their number a
Chairman of the Board and a Chief Executive Officer; and shall also elect a
President, and may also elect a Senior Vice Chairman, one or more Vice Chairmen,
one or more Executive Vice Presidents, one or more Senior Managing Directors,
one or more Managing Directors, one or more Senior Vice Presidents, one or more
Principals, one or more Vice Presidents, one or more General Managers, a
Secretary, a Controller, a Treasurer, a General Counsel, one or more Associate
General Counsels, a General Auditor, a General Credit Auditor, and one or more
Deputy Auditors, who need not be directors. The officers of the corporation may
also include such other officers or assistant officers as shall from time to
time be elected or appointed by the Board. The Chairman of the Board or the
Chief Executive Officer or, in their absence, the President, the Senior Vice
Chairman or any Vice Chairman, may from time to time appoint assistant officers.
All officers elected or appointed by the Board of Directors shall hold their
respective offices during the pleasure of the Board of Directors, and all
assistant officers shall hold office at the pleasure of the Board or the
Chairman of the Board or the Chief Executive Officer or, in their absence, the
President, the Senior Vice Chairman or any Vice Chairman. The Board of
Directors may require any and all officers and employees to give security for
the faithful performance of their duties.
SECTION 2. The Board of Directors shall designate the Chief Executive Officer
of the Company who may also hold the additional title of Chairman of the Board,
President, Senior Vice Chairman or Vice Chairman and such person shall have,
subject to the supervision and direction of the Board of Directors or the
Executive Committee, all of the powers vested in such Chief Executive Officer by
law or by these By-Laws, or which usually attach or pertain to such office. The
other officers shall have, subject to the supervision and direction of the Board
of Directors or the Executive Committee or the Chairman of the Board or, the
Chief Executive Officer, the powers vested by law or by these By-Laws in them as
holders of their respective offices and, in addition, shall perform such other
duties as shall be assigned to them by the Board of Directors or the Executive
Committee or the Chairman of the Board or the Chief Executive Officer.
The General Auditor shall be responsible, through the Audit Committee, to the
Board of Directors for the determination of the program of the internal audit
function and the evaluation of the adequacy of the system of internal controls.
Subject to the Board of Directors, the General Auditor shall have and may
exercise all the powers and shall perform all the duties usual to such office
and shall have such other powers as may be prescribed or assigned to him from
time to time by the Board of Directors or vested in him by law or by these By-
Laws. He shall perform such other duties and shall make such investigations,
examinations and reports as may be prescribed or required by the Audit
Committee. The General Auditor shall have unrestricted access to all records
and premises of the Company and shall delegate such authority to his
subordinates. He shall have the duty to report to the Audit Committee on all
matters concerning the internal audit
<PAGE>
program and the adequacy of the system of internal controls of the Company which
he deems advisable or which the Audit Committee may request. Additionally, the
General Auditor shall have the duty of reporting independently of all officers
of the Company to the Audit Committee at least quarterly on any matters
concerning the internal audit program and the adequacy of the system of internal
controls of the Company that should be brought to the attention of the directors
except those matters responsibility for which has been vested in the General
Credit Auditor. Should the General Auditor deem any matter to be of special
immediate importance, he shall report thereon forthwith to the Audit Committee.
The General Auditor shall report to the Chief Financial Officer only for
administrative purposes.
The General Credit Auditor shall be responsible to the Chief Executive Officer
and, through the Audit Committee, to the Board of Directors for the systems of
internal credit audit, shall perform such other duties as the Chief Executive
Officer may prescribe, and shall make such examinations and reports as may be
required by the Audit Committee. The General Credit Auditor shall have
unrestricted access to all records and may delegate such authority to
subordinates.
SECTION 3. The compensation of all officers shall be fixed under such plan or
plans of position evaluation and salary administration as shall be approved from
time to time by resolution of the Board of Directors.
SECTION 4. The Board of Directors, the Executive Committee, the Chairman of the
Board, the Chief Executive Officer or any person authorized for this purpose by
the Chief Executive Officer, shall appoint or engage all other employees and
agents and fix their compensation. The employment of all such employees and
agents shall continue during the pleasure of the Board of Directors or the
Executive Committee or the Chairman of the Board or the Chief Executive Officer
or any such authorized person; and the Board of Directors, the Executive
Committee, the Chairman of the Board, the Chief Executive Officer or any such
authorized person may discharge any such employees and agents at will.
<PAGE>
ARTICLE V
INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
SECTION 1. The Company shall, to the fullest extent permitted by Section 7018
of the New York Banking Law, indemnify any person who is or was made, or
threatened to be made, a party to an action or proceeding, whether civil or
criminal, whether involving any actual or alleged breach of duty, neglect or
error, any accountability, or any actual or alleged misstatement, misleading
statement or other act or omission and whether brought or threatened in any
court or administrative or legislative body or agency, including an action by or
in the right of the Company to procure a judgment in its favor and an action by
or in the right of any other corporation of any type or kind, domestic or
foreign, or any partnership, joint venture, trust, employee benefit plan or
other enterprise, which any director or officer of the Company is servicing or
served in any capacity at the request of the Company by reason of the fact that
he, his testator or intestate, is or was a director or officer of the Company,
or is serving or served such other corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise in any capacity, against
judgments, fines, amounts paid in settlement, and costs, charges and expenses,
including attorneys' fees, or any appeal therein; provided, however, that no
indemnification shall be provided to any such person if a judgment or other
final adjudication adverse to the director or officer establishes that (i) his
acts were committed in bad faith or were the result of active and deliberate
dishonesty and, in either case, were material to the cause of action so
adjudicated, or (ii) he personally gained in fact a financial profit or other
advantage to which he was not legally entitled.
SECTION 2. The Company may indemnify any other person to whom the Company is
permitted to provide indemnification or the advancement of expenses by
applicable law, whether pursuant to rights granted pursuant to, or provided by,
the New York Banking Law or other rights created by (i) a resolution of
stockholders, (ii) a resolution of directors, or (iii) an agreement providing
for such indemnification, it being expressly intended that these By-Laws
authorize the creation of other rights in any such manner.
SECTION 3. The Company shall, from time to time, reimburse or advance to any
person referred to in Section 1 the funds necessary for payment of expenses,
including attorneys' fees, incurred in connection with any action or proceeding
referred to in Section 1, upon receipt of a written undertaking by or on behalf
of such person to repay such amount(s) if a judgment or other final adjudication
adverse to the director or officer establishes that (i) his acts were committed
in bad faith or were the result of active and deliberate dishonesty and, in
either case, were material to the cause of action so adjudicated, or (ii) he
personally gained in fact a financial profit or other advantage to which he was
not legally entitled.
SECTION 4. Any director or officer of the Company serving (i) another
corporation, of which a majority of the shares entitled to vote in the election
of its directors is held by the Company, or (ii) any employee benefit plan of
the Company or any corporation referred to in clause (i) in any capacity shall
be deemed to be doing so at the request of the Company. In all other cases, the
provisions of this Article V will apply (i) only if the person serving another
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise so served at the specific request of the Company, evidenced by
a written communication signed by the Chairman of the Board, the Chief Executive
Officer or the
<PAGE>
President, and (ii) only if and to the extent that, after making such efforts as
the Chairman of the Board, the Chief Executive Officer or the President shall
deem adequate in the circumstances, such person shall be unable to obtain
indemnification from such other enterprise or its insurer.
SECTION 5. Any person entitled to be indemnified or to the reimbursement or
advancement of expenses as a matter of right pursuant to this Article V may
elect to have the right to indemnification (or advancement of expenses)
interpreted on the basis of the applicable law in effect at the time of
occurrence of the event or events giving rise to the action or proceeding, to
the extent permitted by law, or on the basis of the applicable law in effect at
the time indemnification is sought.
SECTION 6. The right to be indemnified or to the reimbursement or advancement
of expense pursuant to this Article V (i) is a contract right pursuant to which
the person entitled thereto may bring suit as if the provisions hereof were set
forth in a separate written contract between the Company and the director or
officer, (ii) is intended to be retroactive and shall be available with respect
to events occurring prior to the adoption hereof, and (iii) shall continue to
exist after the rescission or restrictive modification hereof with respect to
events occurring prior thereto.
SECTION 7. If a request to be indemnified or for the reimbursement or
advancement of expenses pursuant hereto is not paid in full by the Company
within thirty days after a written claim has been received by the Company, the
claimant may at any time thereafter bring suit against the Company to recover
the unpaid amount of the claim and, if successful in whole or in part, the
claimant shall be entitled also to be paid the expenses of prosecuting such
claim. Neither the failure of the Company (including its Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of or
reimbursement or advancement of expenses to the claimant is proper in the
circumstance, nor an actual determination by the Company (including its Board of
Directors, independent legal counsel, or its stockholders) that the claimant is
not entitled to indemnification or to the reimbursement or advancement of
expenses, shall be a defense to the action or create a presumption that the
claimant is not so entitled.
SECTION 8. A person who has been successful, on the merits or otherwise, in the
defense of a civil or criminal action or proceeding of the character described
in Section 1 shall be entitled to indemnification only as provided in Sections 1
and 3, notwithstanding any provision of the New York Banking Law to the
contrary.
<PAGE>
ARTICLE VI
SEAL
SECTION 1. The Board of Directors shall provide a seal for the Company, the
counterpart dies of which shall be in the charge of the Secretary of the Company
and such officers as the Chairman of the Board, the Chief Executive Officer or
the Secretary may from time to time direct in writing, to be affixed to
certificates of stock and other documents in accordance with the directions of
the Board of Directors or the Executive Committee.
SECTION 2. The Board of Directors may provide, in proper cases on a specified
occasion and for a specified transaction or transactions, for the use of a
printed or engraved facsimile seal of the Company.
ARTICLE VII
CAPITAL STOCK
SECTION 1. Registration of transfer of shares shall only be made upon the books
of the Company by the registered holder in person, or by power of attorney, duly
executed, witnessed and filed with the Secretary or other proper officer of the
Company, on the surrender of the certificate or certificates of such shares
properly assigned for transfer.
ARTICLE VIII
CONSTRUCTION
SECTION 1. The masculine gender, when appearing in these By-Laws, shall be
deemed to include the feminine gender.
ARTICLE IX
AMENDMENTS
SECTION 1. These By-Laws may be altered, amended or added to by the Board of
Directors at any meeting, or by the stockholders at any annual or special
meeting, provided notice thereof has been given.
I, Sandra J. Shaffer, Assistant Secretary of Bankers Trust Company, New York,
New York, hereby certify that the foregoing is a complete, true and
<PAGE>
correct copy of the By-Laws of Bankers Trust Company, and that the same are in
full force and effect at this date.
/s/ SANDRA J. SHAFFER
_____________________________________
ASSISTANT SECRETARY
DATED: May 14, 1998
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Legal Title of Bank: Bankers Trust Company Call Date: 12/31/97 ST-BK: 36-4840 FFIEC 031
Address: 130 Liberty Street Vendor ID: D CERT: 00623 Page RC-1
City, State ZIP: New York, NY 10006 11
FDIC Certificate No.: |0|0|6|2|3
</TABLE>
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR DECEMBER 31, 1997
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, reported the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC--BALANCE SHEET
<TABLE>
<CAPTION>
C400
-----------------------------------------------
Dollar Amounts in Thousands RCFD Bil Mil Thou
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS / / / / / / / /
1. Cash and balances due from depository institutions (from Schedule RC-A): / / / / / / / /
a. Noninterest-bearing balances and currency and coin (1).................. 0081 2,121,000 1.a.
b. Interest-bearing balances (2)........................................... 0071 4,770,000 1.b.
2. Securities: / / / / / / / /
a. Held-to-maturity securities (from Schedule RC-B, column A).............. 1754 0 2.a.
b. Available-for-sale securities (from Schedule RC-B, column D)............ 1773 4,015,000 2.b
3. Federal funds sold and securities purchased under agreements to resell.. 1350 28,927,000 3.
4. Loans and lease financing receivables: / / / / / / / /
a. Loans and leases, net of unearned income
(from Schedule RC-C).............................. RCFD 2122 17,692,000 / / / / / / / / 4.a.
b. LESS: Allowance for loan and lease losses......... RCFD 3123 659,000 / / / / / / / / 4.b.
c. LESS: Allocated transfer risk reserve............. RCFD 3128 0 / / / / / / / / 4.c.
d. Loans and leases, net of unearned income,
allowance, and reserve (item 4.a minus 4.b
and 4.c)................................................................ 2125 17,033,000 4.d.
5. Trading Assets (from schedule RC-D)...................................... 3545 45,488,000 5.
6. Premises and fixed assets (including capitalized leases)................. 2145 766,000 6.
7. Other real estate owned (from Schedule RC-M)............................. 2150 188,000 7.
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M)..................................................... 2130 58,000 8.
9. Customers' liability to this bank on acceptances outstanding............. 2155 633,000 9.
10. Intangible assets (from Schedule RC-M)................................... 2143 83,000 10.
11. Other assets (from Schedule RC-F)........................................ 2160 5,957,000 11.
12. Total assets (sum of items 1 through 11)................................. 2170 110,039,000 12.
-------------------------------
</TABLE>
__________________________
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Legal Title of Bank: Bankers Trust Company Call Date: 12/31/97 ST-BK: 36-4840 FFIEC 031
Address: 130 Liberty Street Vendor ID: D CERT: 00623 Page RC-2
City, State ZIP: New York, NY 10006 12
FDIC Certificate No.: |0|0|6|2|3
</TABLE>
SCHEDULE RC--CONTINUED
<TABLE>
<CAPTION>
-----------------------------------------------
Dollar Amounts in Thousands / / / / / / / / Bil Mil Thou
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES / / / / / / / / / / / / / / / /
13. Deposits: / / / / / / / / / / / / / / / /
a. In domestic offices (sum of totals of columns A and C from
Schedule RC-E, part 1).................................................. RCON 2200 24,608,000
(1) Noninterest-bearing(1)........................ RCON 6631 2,856,000 / / / / / / / / / / / / / / / /
(2) Interest-bearing.............................. RCON 6636 21,752,000 / / / / / / / / / / / / / / / /
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from
Schedule RC-E part II................................................... RCFN 2200 20,529,000
(1) Noninterest-bearing........................... RCFN 6631 2,122,000 / / / / / / / / / / / / / / / /
(2) Interest-bearing.............................. RCFN 6636 18,407,000 / / / / / / / / / / / / / / / /
14. Federal funds purchased and securities sold under agreements to repurchase RCFD 2800 13,777,000
15. a. Demand notes issued to the U.S. Treasury................................ RCON 2840 0
b. Trading liabilities (from Schedule RC-D)................................ RCFD 3548 24,968,000
16. Other borrowed money (includes mortgage indebtedness / / / / / / / / / / / / / / / /
and obligations under capitalized leases): / / / / / / / / / / / / / / / /
a. With a remaining maturity of one year or less........................... RCFD 2332 5,810,000
b. With a remaining maturity of more than one year through three years..... A547 4,702,000
c. With a remaining maturity of more than three years...................... A548 1,750,000
17. Not Applicable.......................................................... / / / / / / / / / / / / / / / /
18. Bank's liability on acceptances executed and outstanding................ RCFD 2920 633,000
19. Subordinated notes and debentures (2)................................... RCFD 3200 1,307,000
20. Other liabilities (from Schedule RC-G).................................. RCFD 2930 5,961,000
21. Total liabilities (sum of items 13 through 20).......................... RCFD 2948 104,045,000
22. Not Applicable.......................................................... / / / / / / / / / / / / / / / /
EQUITY CAPITAL / / / / / / / / / / / / / / / /
23. Perpetual preferred stock and related surplus........................... RCFD 3838 1,000,000
24. Common stock............................................................ RCFD 3230 1,352,000
25. Surplus (exclude all surplus related to preferred stock)................ RCFD 3839 540,000
26. a. Undivided profits and capital reserves.................................. RCFD 3632 3,526,000
b. Net unrealized holding gains (losses) on available-for-sale / / / / / / / / / / / / / / / /
securities.............................................................. RCFD 8434 (45,000)
27. Cumulative foreign currency translation adjustments...................... RCFD 3284 (379,000) 27.
28. Total equity capital (sum of items 23 through 27)........................ RCFD 3210 5,994,000 28.
29. Total liabilities and equity capital (sum of items 21 and 28)............ RCFD 3300 110,039,000
-------------------------------------------------
Memorandum
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that Number
best describes the most comprehensive level of auditing work performed ---------------------------
for the bank by independent external auditors as of any date during 1996...| RCFD 6724 N/A | M
------------------------------------
1 = Independent audit of the bank 4 = Directors' examination of
conducted in accordance the bank performed by other
with generally accepted external auditors (may be
auditing standards by a required by state chartering
certified public accounting authority)
firm which submits a report 5 = Review of the bank's
on the bank financial statements by
2 = Independent audit of the certified auditors
bank's parent holding company 6 = Compilation of the bank's
conducted in accordance with financial statements by
generally accepted auditing external auditors
standards by a certified 7 = Other audit procedures (excluding
public accounting firm tax preparation work)
which submits a report on 8 = No external audit work
the consolidated holding
company (but not on the bank
separately)
3 = Directors' examination of the
bank conducted in accordance
with generally accepted
auditing standards by a
certified public accounting
firm (may be required by
state chartering authority)
______________________
(1) Including total demand deposits and noninterest-bearing time and savings deposits.
(2) Includes limited-life preferred stock and related surplus.
</TABLE>
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
DRYPERS CORPORATION
OFFER TO EXCHANGE ITS
10 1/4% SERIES B SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
10 1/4% SENIOR NOTES DUE 2007
(PRINCIPAL AMOUNT $1,000 PER NOTE)
PURSUANT TO THE PROSPECTUS
DATED JUNE 8, 1998.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON JULY 13, 1998, UNLESS THE OFFER IS EXTENDED.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
BANKERS TRUST COMPANY
<TABLE>
<S> <C> <C>
BY MAIL: BY HAND: BY OVERNIGHT MAIL:
BT Services Tennessee, Inc. Bankers Trust Company BT Services Tennessee, Inc.
Reorganization Unit Corporate Trust and Agency Unit Reorganization Unit
P.O. Box 292737 123 Washington Street 648 Grassmere Park Road
Nashville, TN 37229-2737 First Floor Window Nashville, TN 37211
New York, NY 10006
</TABLE>
FOR INFORMATION CALL:
(800) 735-7777
Confirm: (615) 835-3572
Facsimile: (615) 835-3701
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER
OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. THE
INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
The undersigned acknowledges that he or she has received the Prospectus,
dated June 8, 1998 (the "Prospectus"), of Drypers Corporation (the "Company")
and this Letter of Transmittal (the "Letter of Transmittal"), which together
constitute the Company's offer (the "Exchange Offer") to exchange up to
$30,000,000 aggregate principal amount of the Company's 10 1/4% Series B
Senior Notes due 2007 (the "Exchange Notes") for a like principal amount of
its outstanding 10 1/4% Senior Notes due 2007 (the "Outstanding Notes" and,
together with the Exchange Notes, the "Notes"). The terms of the Exchange
Notes are identical in all respects to the Outstanding Notes, except the
Exchange Notes have been registered pursuant to the Securities Act of 1933, as
amended (the "Securities Act") and, therefore, will not bear legends
restricting their transfer and will not contain certain provisions providing
for an increase in the interest rate paid thereon. The term "Expiration Date"
shall mean 5:00 p.m. New York City time, on July 13, 1998, unless the Exchange
Offer is extended as provided in the Prospectus, in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended. Capitalized terms used but not defined herein shall have
the same meaning given them in the Prospectus.
The Letter of Transmittal is to be completed by holders of Outstanding Notes
either (i) if the Outstanding Notes are forwarded herewith or (ii) if tender
of Outstanding Notes is to be made by book-entry transfer to an account
maintained by Bankers Trust Company (the "Exchange Agent") at The Depository
Trust Company ("DTC") pursuant to the procedures set forth in "The Exchange
Offer--Procedures for Tendering" in the Prospectus.
Any Holder that is a participant in DTC's system may utilize DTC's Automated
Tender Offer Program ("ATOP") to tender Outstanding Notes. The exchange of the
Outstanding Notes so tendered will only be made after timely confirmation (the
"Book-Entry Confirmation") of such book-entry transfer and timely receipt by
the Exchange Agent of an Agent's Message (as defined in the next sentence),
and any other documents required by the Letter of Transmittal. The term
"Agent's Message" means a message, transmitted by DTC and received by the
Exchange Agent and forming part of Book-Entry Confirmation, which states that
DTC has received an express acknowledgment from a participant tendering
Outstanding Notes which are the subject of such Book-Entry Confirmation and
that such participant has received and agrees to be bound by the terms of the
Letter of Transmittal and that the Company may enforce such agreement against
such participant.
Holders of Outstanding Notes whose certificates (the "Certificates") for
such Outstanding Notes are not immediately available or who cannot deliver
their Certificates and all other required documents to the Exchange Agent
prior to 5:00 p.m., New York City time, on the Expiration Date or who cannot
complete the procedures for book-entry transfer on a timely basis must tender
their Outstanding Notes according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery Procedures" in the
Prospectus. See Instruction 1.
The term "Holder" with respect to the Exchange Offer means any person in
whose name Outstanding Notes are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered holder. The undersigned has completed, executed and delivered this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer. Except for Holders tendering the
Outstanding Notes by the use of ATOP as specified above, Holders who wish to
tender their Outstanding Notes must complete this Letter of Transmittal in its
entirety.
<PAGE>
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY
BEFORE COMPLETING THIS LETTER OF TRANSMITTAL
ALL TENDERING HOLDERS COMPLETE THIS BOX
DESCRIPTION OF OUTSTANDING NOTES TENDERED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF
NAME AND ADDRESS OF OUTSTANDING NOTES PRINCIPAL AMOUNT OF BENEFICIAL HOLDERS
REGISTERED HOLDER TENDERED (ATTACH OUTSTANDING NOTES FOR WHOM
(PLEASE FILL IN IF CERTIFICATE ADDITIONAL LIST IF (IF LESS THAN OUTSTANDING NOTES
BLANK) NUMBERS* NECESSARY) ALL)** ARE HELD
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$
- --------------------------------------------------------------------------------------------------------
$
- --------------------------------------------------------------------------------------------------------
$
- --------------------------------------------------------------------------------------------------------
Total Amount Tendered: $
</TABLE>
- -------------------------------------------------------------------------------
* Need not be completed by book-entry holders.
** Outstanding Notes may be tendered in integral multiples of $1,000. All
Outstanding Notes held shall be deemed tendered unless a lesser number is
specified in this column.
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
[_] CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC AND
COMPLETE THE FOLLOWING (ONLY PARTICIPANTS IN DTC MAY DELIVER NOTES BY BOOK-
ENTRY TRANSFER (SEE INSTRUCTION 1)):
Name of Tendering Institution:_____________________________________________
DTC Account Number:________________________________________________________
Transaction Code Number:___________________________________________________
[_] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING (SEE INSTRUCTION 5):
Name of Registered Holder(s):______________________________________________
Window Ticket Number (if any):_____________________________________________
Date of Execution of Notice of Guaranteed Delivery:________________________
Name of Institution which executed the notice of Guaranteed Delivery:______
If Guaranteed Delivery is to be made by Book-Entry Transfer:_______________
Name of Tendering Institution:_____________________________________________
DTC Account Number:________________________________________________________
Transaction Code Number:___________________________________________________
[_] CHECK HERE IF OUTSTANDING NOTES TENDERED BY BOOK-ENTRY TRANSFER BUT NOT
EXCHANGED ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH
ABOVE.
[_] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE OUTSTANDING NOTES FOR
ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF
THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:______________________________________________________________________
Address:___________________________________________________________________
Area Code and Telephone Number:____________________________________________
2
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to the Company the above described aggregate
principal amount of Outstanding Notes in exchange for a like aggregate
principal amount of Exchange Notes.
Subject to and effective upon the acceptance for exchange of all or any
portion of the Outstanding Notes tendered herewith in accordance with the
terms and conditions of the Exchange Offer (including, if the Exchange Offer
is extended or amended, the terms and conditions of any such extension or
amendment), the undersigned hereby sells, assigns and transfers to or, upon
the order of the Company, all right, title and interest in and to such
Outstanding Notes as are being tendered herewith. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent as its agent and
attorney-in-fact (with full knowledge that the Exchange Agent is also acting
as agent of the Company in connection with the Exchange Offer) with respect to
the tendered Outstanding Notes, with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest),
subject only to the right of withdrawal described in the Prospectus, to (i)
deliver Certificates for Outstanding Notes together with all accompanying
evidence of transfer and authenticity to, or upon the order of the Company,
upon receipt by the Exchange Agent, as the undersigned's agent, of the
Exchange Notes to be issued in exchange for such Outstanding Notes, (ii)
present Certificates for such Outstanding Notes for transfer, and to transfer
the Outstanding Notes on the books of the Company, and (iii) receive for the
account of the Company all benefits and otherwise exercise all rights of
beneficial ownership of such Outstanding Notes, all in accordance with the
terms and conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE
OUTSTANDING NOTES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR
EXCHANGE, THE COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE
THERETO, FREE AND CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES,
AND THAT THE OUTSTANDING NOTES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE
CLAIMS OR PROXIES. THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY
ADDITIONAL DOCUMENTS DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE
NECESSARY OR DESIRABLE TO COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF
THE OUTSTANDING NOTES TENDERED HEREBY. THE UNDERSIGNED HAS READ AND AGREES TO
ALL OF THE TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered Holder(s) of the Outstanding
Notes tendered hereby should be printed above, if they are not already set
forth above, as they appear on the Certificates representing such Outstanding
Notes. The Certificate number(s) and the Outstanding Notes that the
undersigned wishes to tender should be indicated in the appropriate boxes
above.
If any tendered Outstanding Notes are not exchanged pursuant to the Exchange
Offer for any reason, or if Certificates are submitted for more Outstanding
Notes than are tendered or accepted for exchange, Certificates for such
nonexchanged or nontendered Outstanding Notes will be returned (or, in the
case of Outstanding Notes tendered by book-entry transfer, such Outstanding
Notes will be credited to an account maintained at DTC), without expense to
the tendering Holder, promptly following the expiration or termination of the
Exchange Offer.
The undersigned understands that tender of Outstanding Notes pursuant to any
one of the procedures described in "The Exchange Offer--Procedures for
Tendering and --Guaranteed Delivery Procedures" in the Prospectus and in this
Letter of Transmittal, and the Company's acceptance for exchange of such
tendered Outstanding Notes, will constitute a binding agreement between the
undersigned and the Company upon the terms and subject to the conditions of
the Exchange Offer. The undersigned recognizes that, under certain
circumstances set forth in the Prospectus, the Company may not be required to
accept for exchange any of the Outstanding Notes tendered hereby.
Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, the undersigned hereby directs that the Exchange Notes be
issued in the name(s) of the undersigned or, in the case of book-entry
transfer of Outstanding Notes, that such Exchange Notes be credited to the
account indicated above maintained at DTC. If applicable, substitute
Certificates representing Outstanding Notes not exchanged or not accepted for
exchange will be issued to the undersigned or, in the case of a book-entry
transfer of Outstanding Notes, will be credited to the account indicated above
maintained at DTC. Similarly, unless otherwise indicated under "Special
Delivery Instructions," please deliver Exchange Notes to the undersigned at
the address shown below the undersigned's signature.
BY TENDERING OUTSTANDING NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (I) THE UNDERSIGNED IS NOT AN
3
<PAGE>
"AFFILIATE" OF THE COMPANY, (II) ANY EXCHANGE NOTES TO BE RECEIVED BY THE
UNDERSIGNED ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS, (III)
THE UNDERSIGNED HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO
PARTICIPATE IN A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF
EXCHANGE NOTES TO BE RECEIVED IN THE EXCHANGE OFFER, AND (IV) IF THE
UNDERSIGNED IS NOT A BROKER-DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND
DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION (WITHIN THE MEANING OF THE
SECURITIES ACT) OF SUCH EXCHANGE NOTES BY TENDERING OUTSTANDING NOTES PURSUANT
TO THE EXCHANGE OFFER AND EXECUTING THIS LETTER OF TRANSMITTAL. A HOLDER OF
OUTSTANDING NOTES WHICH IS A BROKER-DEALER REPRESENTS AND AGREES, CONSISTENT
WITH CERTAIN INTERPRETIVE LETTERS ISSUED BY THE STAFF OF THE DIVISION OF
CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE COMMISSION TO THIRD
PARTIES, THAT (A) SUCH OUTSTANDING NOTES HELD BY THE BROKER-DEALER ARE HELD
ONLY AS A NOMINEE OR (B) SUCH OUTSTANDING NOTES WERE ACQUIRED BY SUCH BROKER-
DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER
TRADING ACTIVITIES AND IT WILL DELIVER A PROSPECTUS (AS AMENDED OR
SUPPLEMENTED FROM TIME TO TIME) MEETING THE REQUIREMENTS OF THE SECURITIES ACT
IN CONNECTION WITH ANY RESALE OF SUCH EXCHANGE NOTES (PROVIDED THAT, BY SO
ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, SUCH BROKER-DEALER WILL NOT BE
DEEMED TO ADMIT THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF THE
SECURITIES ACT).
THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE REGISTRATION
RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM
TIME TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER (AS DEFINED BELOW)
IN CONNECTION WITH RESALES OF EXCHANGE NOTES RECEIVED IN EXCHANGE FOR
OUTSTANDING NOTES, WHERE SUCH OUTSTANDING NOTES WERE ACQUIRED BY SUCH
PARTICIPATING BROKER-DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING
ACTIVITIES OR OTHER TRADING ACTIVITIES, FOR A PERIOD ENDING 90 DAYS AFTER THE
EXPIRATION DATE (SUBJECT TO EXTENSION UNDER CERTAIN LIMITED CIRCUMSTANCES
DESCRIBED IN THE PROSPECTUS) OR, IF EARLIER, WHEN ALL SUCH EXCHANGE NOTES HAVE
BEEN DISPOSED OF BY SUCH PARTICIPATING BROKER-DEALER. IN THAT REGARD, EACH
BROKER-DEALER WHO ACQUIRED OUTSTANDING NOTES FOR ITS OWN ACCOUNT AS A RESULT
OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A "PARTICIPATING BROKER-
DEALER"), BY TENDERING SUCH OUTSTANDING NOTES AND EXECUTING THIS LETTER OF
TRANSMITTAL, AGREES THAT, UPON RECEIPT OF NOTICE FROM THE COMPANY OF THE
OCCURRENCE OF ANY EVENT OR THE DISCOVERY OF ANY FACT WHICH MAKES ANY STATEMENT
CONTAINED OR INCORPORATED BY REFERENCE IN THE PROSPECTUS UNTRUE IN ANY
MATERIAL RESPECT OR WHICH CAUSES THE PROSPECTUS TO OMIT TO STATE A MATERIAL
FACT NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED OR INCORPORATED BY
REFERENCE THEREIN, IN LIGHT OF THE CIRCUMSTANCES UNDER WHICH THEY WERE MADE,
NOT MISLEADING OR OF THE OCCURRENCE OF CERTAIN OTHER EVENTS SPECIFIED IN THE
REGISTRATION RIGHTS AGREEMENT, SUCH PARTICIPATING BROKER-DEALER WILL SUSPEND
THE SALE OF EXCHANGE NOTES PURSUANT TO THE PROSPECTUS UNTIL THE COMPANY HAS
AMENDED OR SUPPLEMENTED THE PROSPECTUS TO CORRECT SUCH MISSTATEMENT OR
OMISSION AND HAS FURNISHED COPIES OF THE AMENDED OR SUPPLEMENTED PROSPECTUS TO
THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS GIVEN NOTICE THAT THE SALE
OF THE EXCHANGE NOTES MAY BE RESUMED, AS THE CASE MAY BE. IF THE COMPANY GIVES
SUCH NOTICE TO SUSPEND THE SALE OF THE EXCHANGE NOTES, IT SHALL EXTEND THE 90
DAY PERIOD REFERRED TO ABOVE DURING WHICH PARTICIPATING BROKER-DEALERS ARE
ENTITLED TO USE THE PROSPECTUS IN CONNECTION WITH THE RESALE OF EXCHANGE NOTES
BY THE NUMBER OF DAYS DURING THE PERIOD FROM AND INCLUDING THE DATE OF THE
GIVING OF SUCH NOTICE TO AND INCLUDING THE DATE WHEN PARTICIPATING BROKER-
DEALERS SHALL HAVE RECEIVED COPIES OF THE SUPPLEMENTED OR AMENDED PROSPECTUS
NECESSARY TO PERMIT RESALES OF THE EXCHANGE NOTES OR TO AND INCLUDING THE DATE
ON WHICH THE COMPANY GIVES NOTICE THAT THE SALE OF EXCHANGE NOTES MAY BE
RESUMED, AS THE CASE MAY BE.
Holders of Outstanding Notes whose Outstanding Notes are accepted for
exchange will not receive accrued interest on such Outstanding Notes for any
period from and after the exchange of such Outstanding Notes for the Exchange
Notes.
Except as stated in the Prospectus, this tender is irrevocable.
4
<PAGE>
HOLDER(S) SIGN HERE
(SEE INSTRUCTIONS 2, 5 AND 6)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 ON PAGE 13)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered Holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Outstanding Notes hereby tendered or on a security
position listing, or by any person(s) authorized to become the registered
Holder(s) by endorsements and documents transmitted herewith (including such
opinions of counsel, certifications and other information as may be required
by the Company for the Outstanding Notes to comply with the restrictions on
transfer applicable to the Outstanding Notes). If signature is by an
attorney-in-fact, trustee, officer of a corporation or another acting in a
fiduciary capacity or representative capacity, please set forth the signer's
full title. See Instruction 5.
------------------------------------------------------------------------------
------------------------------------------------------------------------------
(SIGNATURE(S) OF HOLDER(S))
Dated ____________________________, 1998
Name(s):______________________________________________________________________
(PLEASE PRINT)
Capacity (full title):________________________________________________________
Address:______________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number:_______________________________________________
Tax Identification or Social Security Number:_________________________________
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 2 AND 5)
------------------------------------------------------------------------------
(AUTHORIZED SIGNATURE)
Date: ____________________________, 1998
Name of Firm:_________________________________________________________________
Capacity (full title):________________________________________________________
(PLEASE PRINT)
Address:______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number:_______________________________________________
5
<PAGE>
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if the Exchange Notes are to be issued in the name of
someone other than the registered Holder of the Outstanding Notes whose
name(s) appear(s) above.
Issue
[_] Exchange Notes and/or
[_] Outstanding Notes not tendered
to:
Name(s):______________________________________________________________________
Address:______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number:_______________________________________________
Tax Identification or Social Security Number(s):______________________________
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6)
To be completed ONLY if Exchange Notes are to be sent to someone other than
the registered Holder of the Outstanding Notes whose name(s) appear(s) above,
or to such registered Holder(s) at an address other than that shown above.
Mail
[_] Exchange Notes and/or
[_] Outstanding Notes not tendered
to:
Name(s):______________________________________________________________________
Address:______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number:_______________________________________________
Tax Identification or Social Security Number(s):______________________________
6
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF LETTER OF TRANSMITTAL OR AGENT'S MESSAGE AND CERTIFICATES,
GUARANTEED DELIVERY PROCEDURES. This Letter of Transmittal is to be completed
either if (a) Certificates are forwarded herewith or (b) tenders are to be
made pursuant to the procedures for tender by book-entry transfer set forth in
"The Exchange Offer--Procedures for Tendering" in the Prospectus. Certificates
for Outstanding Notes being tendered, or timely confirmation of a book-entry
transfer of such Outstanding Notes into the Exchange Agent's account at DTC,
as well as this Letter of Transmittal (or a facsimile thereof), properly
completed and duly executed, with any required signature guarantees, and any
other documents required by this Letter of Transmittal, must be received by
the Exchange Agent at its address set forth herein prior to 5:00 p.m., New
York City time, on the Expiration Date. Outstanding Notes may be tendered in
integral multiples of $1,000.
Holders who are participants in DTC's system may utilize DTC's Automated
Tender Offer Program ("ATOP") to tender Outstanding Notes. The exchange of the
Outstanding Notes so tendered will only be made after timely confirmation (the
"Book-Entry Confirmation") of such book-entry transfer and timely receipt by
the Exchange Agent of an Agent's Message (as defined in the next sentence),
and any other documents required by the Letter of Transmittal. The term
"Agent's Message" means a message, transmitted by DTC and received by the
Exchange Agent and forming part of Book-Entry Confirmation, which states that
DTC has received an express acknowledgment from a participant tendering
Outstanding Notes which are the subject of such Book-Entry Confirmation and
that such participant has received and agrees to be bound by the terms of the
Letter of Transmittal and that the Company may enforce such agreement against
such participant.
Holders who wish to tender their Outstanding Notes and (i) whose Outstanding
Notes are not immediately available or (ii) who cannot deliver their
Outstanding Notes, this Letter of Transmittal and all other required documents
to the Exchange Agent prior to 5:00 p.m., New York City time, on the
Expiration Date or (iii) who cannot complete the procedures for delivery by
book-entry transfer on a timely basis may tender their Outstanding Notes by
properly completing and duly executing a Notice of Guaranteed Delivery
pursuant to the guaranteed delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures" in the Prospectus. Pursuant to such
procedures: (i) such tender must be made by or through an Eligible Institution
(as defined below); (ii) a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form made available by the Company,
must be received by the Exchange Agent prior to 5:00 p.m., New York City time,
on the Expiration Date; and (iii) the Certificates (or a Book-Entry
Confirmation (as defined in the Prospectus)) representing all tendered
Outstanding Notes, in proper form for transfer, together with a Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent within three New
York Stock Exchange, Inc. trading days after the date of execution of such
Notice of Guaranteed Delivery, all as provided in "The Exchange Offer--
Guaranteed Delivery Procedures" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in such notice. As used herein and
in the Prospectus, "Eligible Institution" means a firm or other entity
identified as an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act, including (as such terms are defined therein)
(i) a bank; (ii) a broker, dealer, municipal securities broker or dealer or
government securities broker or dealer; (iii) a credit union; (iv) a national
securities exchange, registered securities association or clearing agency; or
(v) a savings association that is a participant in a securities transfer
association.
THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering Holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance
of such tender.
2. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of
Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered Holder (which
term, for purposes of this document, shall include any participant in DTC
whose name appears on a security position listing as the owner of the
Outstanding Notes) of Outstanding Notes tendered herewith, unless such
Holder has completed either the box entitled "Special Issuance
Instructions" or the box entitled "Special Delivery Instructions" above, or
(ii) such Outstanding Notes are tendered for the account of a firm that
is an Eligible Institution.
7
<PAGE>
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal. See Instruction 5.
3. INADEQUATE SPACE. If the space provided in the box captioned "Description
of Outstanding Notes" is inadequate, the Certificate number(s) and/or the
principal amount of Outstanding Notes and any other required information
should be listed on a separate signed schedule which is attached to this
Letter of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. Tenders of Outstanding Notes will
be accepted only in integral multiples of $1,000. If less than all the
Outstanding Notes evidenced by any Certificate submitted are to be tendered,
fill in the principal amount of Outstanding Notes which are to be tendered in
the box entitled "Principal Amount of Outstanding Notes Tendered (if less than
all)." In such case, the holder will receive new Certificate(s) for the
remainder of the Outstanding Notes, promptly after the Expiration Date. All
Outstanding Notes represented by Certificates delivered to the Exchange Agent
will be deemed to have been tendered unless otherwise indicated.
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. In order for a withdrawal to be effective on or prior to that
time, a written, telegraphic, telex or facsimile transmission of such notice
of withdrawal must be timely received by the Exchange Agent at one of its
addresses set forth above or in the Prospectus prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must specify
the name of the person who tendered the Outstanding Notes to be withdrawn, the
aggregate principal amount of Outstanding Notes to be withdrawn, and (if
Certificates for Outstanding Notes have been tendered) the name of the
registered Holder of the Outstanding Notes as set forth on the Certificate for
the Outstanding Notes, if different from that of the person who tendered such
Outstanding Notes. If Certificates for the Outstanding Notes have been
delivered or otherwise identified to the Exchange Agent, then prior to the
physical release of such Certificates for the Outstanding Notes, the tendering
Holder must submit the serial numbers shown on the particular Certificates for
the Outstanding Notes to be withdrawn and the signature on the notice of
withdrawal must be guaranteed by an Eligible Institution, except in the case
of the Outstanding Notes tendered for the account of an Eligible Institution.
If the Outstanding Notes have been tendered pursuant to the procedures for
book-entry transfer set forth in "The Exchange Offer--Procedures for
Tendering," the notice of withdrawal must specify the name and number of the
account of DTC to be credited with the withdrawal of Outstanding Notes, in
which case a notice of withdrawal will be effective if delivered to the
Exchange Agent by written, telegraphic, telex or facsimile transmission.
Withdrawals of tenders of Outstanding Notes may not be rescinded. Outstanding
Notes properly withdrawn will not be deemed validly tendered for purposes of
the Exchange Offer, but may be retendered at any subsequent time prior to 5:00
p.m., New York City time, on the Expiration Date by following any of the
procedures described in the Prospectus under "The Exchange Offer--Procedures
for Tendering."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all
parties. The Company, any affiliates or assigns of the Company, the Exchange
Agent or any other person shall not be under any duty to give any notification
of any irregularities in any notice of withdrawal or incur any liability for
failure to give any such notification. Any Outstanding Notes which have been
tendered but which are withdrawn will be returned to the Holder thereof
without cost to such Holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered Holder(s) of the
Outstanding Notes tendered hereby, the signature(s) must correspond exactly
with the name(s) as written on the face of the Certificate(s) without
alteration, enlargement or any change whatsoever.
If any of the Outstanding Notes tendered hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Outstanding Notes are registered in different name(s) on
several Certificates, it will be necessary to complete, sign and submit as
many separate Letters of Transmittal (or facsimiles thereof) as there are
different registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such person should so indicate when
signing and must submit proper evidence satisfactory to the Company, in its
sole discretion, of such persons' authority to so act.
When this Letter of Transmittal is signed by the registered owner(s) of the
Outstanding Notes listed and transmitted hereby, no endorsement(s) of
Certificate(s) or separate bond power(s) are required unless Exchange Notes
are to be issued in the name of a person other than the registered Holder(s).
Signature(s) on such Certificate(s) or bond power(s) must be guaranteed by an
Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Outstanding Notes listed, the Certificates must be
endorsed or accompanied by appropriate bond powers, signed exactly as the name
or
8
<PAGE>
names of the registered owner(s) appear(s) on the Certificates, and also must
be accompanied by such opinions of counsel, certifications and other
information as the Company or the Trustee for the Outstanding Notes may
require in accordance with the restrictions on transfer applicable to the
Outstanding Notes. Signatures on such Certificates or bond powers must be
guaranteed by an Eligible Institution.
If tendered Outstanding Notes are registered in the name of the signer of
the Letter of Transmittal and the Exchange Notes to be issued in exchange
therefor are to be issued (and any untendered Outstanding Notes are to be
reissued) in the name of the registered Holder (including any participant in
The Depository Trust Company (also referred to as a book-entry facility) whose
name appears on a security listing as the owner of Outstanding Notes), the
signature of such signer need not be guaranteed. In any other case, the
tendered Outstanding Notes must be endorsed or accompanied by written
instruments of transfer in form satisfactory to the Company and duly executed
by the registered Holder and the signature on the endorsement or instrument of
transfer must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or an "eligible guarantor institution" as defined by Rule
17Ad-15 under the Securities Exchange Act of 1934, as amended.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If Exchange Notes are to be
issued in the name of a person other than the signer of this Letter of
Transmittal, or if Exchange Notes are to be sent to someone other than the
signer of this Letter of Transmittal or to an address other than that shown
above, the appropriate boxes on this Letter of Transmittal should be
completed. Certificates for Outstanding Notes not exchanged will be returned
by mail or, if tendered by book-entry transfer, by crediting the account
indicated above maintained at DTC. See Instruction 4.
7. IRREGULARITIES. The Company will determine, in its sole discretion, all
questions as to the form of documents, validity, eligibility (including time
of receipt) and acceptance for exchange of any tender of Outstanding Notes,
which determination shall be final and binding on all parties. The Company
reserves the absolute right to reject any and all tenders determined by it not
to be in proper form or the acceptance of which, or exchange for, may, in the
view of counsel to the Company, be unlawful. The Company also reserves the
absolute right, subject to applicable law, to waive any of the conditions of
the Exchange Offer set forth in the Prospectus under "The Exchange Offer--
Conditions to the Exchange Offer" or any conditions or irregularities in any
tender of Outstanding Notes of any particular Holder whether or not similar
conditions or irregularities are waived in the case of other Holders. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including this Letter of Transmittal and the instructions hereto) will be
final and binding. No tender of Outstanding Notes will be deemed to have been
validly made until all irregularities with respect to such tender have been
cured or waived. Neither the Company, any affiliate or assign of the Company
or the Exchange Agent nor any person shall be under any duty to give
notification of any irregularities in tenders or incur any liability for
failure to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions and
requests for assistance may be directed to the Exchange Agent at its address
and telephone number set forth on the front of this Letter of Transmittal.
Additional copies of the Prospectus, the Notice of Guaranteed Delivery and the
Letter of Transmittal may be obtained from the Exchange Agent or from your
broker, dealer, commercial bank, trust company or other nominee.
9. 31% BACKUP WITHHOLDING, SUBSTITUTE FORM W-9. Under the U.S. Federal
income tax law, a Holder whose tendered Outstanding Notes are accepted for
exchange is required to provide the Exchange Agent with such Holder's correct
taxpayer identification number ("TIN") on the Substitute Form W-9 below. If
the Exchange Agent is not provided with the correct TIN, the Internal Revenue
Service (the "IRS") may subject the Holder or the payee to a $50 penalty. In
addition, payments to such Holders or other payees with respect to Exchange
Notes exchanged pursuant to the Exchange Offer may be subject to 31% backup
withholding.
The box in Part 3 of Substitute Form W-9 may be checked if the tendering
Holder has not been issued a TIN and has applied for a TIN or intends to apply
for a TIN in the near future. If the box in Part 3 is checked, the Holder or
other payee must also complete the certifications in Part 2 and the
Certificate of Awaiting Taxpayer Identification Number below in order to avoid
backup withholding. Notwithstanding that the box in Part 3 is checked and the
Certificate of Awaiting Taxpayer Identification Number is completed, the
Exchange Agent will withhold 31% of all payments made to the payee 7 days
following receipt by the Exchange Agent of the Certificate of Awaiting
Taxpayer Identification Number and prior to the time a properly certified TIN
is provided to the Exchange Agent.
The Holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered owner of
Outstanding Notes or of the last transferee appearing on the transfers
attached to, or endorsed on, the Outstanding Notes. If the Outstanding Notes
are registered in more than one name or are not in the name of the actual
owner, consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
number to report.
Certain Holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such Holders should nevertheless
complete the Substitute Form W-9 below, and write "exempt" on the face
thereof, to avoid possible erroneous backup withholding.
9
<PAGE>
A foreign person may qualify as an exempt recipient by submitting a properly
completed IRS Form W-8, signed under penalties of perjury, attesting to that
Holder's exempt status. Please consult the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which Holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather, the
U.S. Federal Income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be applied for.
10. LOST, DESTROYED OR STOLEN CERTIFICATES. If any Certificate(s)
representing Outstanding Notes have been lost, destroyed or stolen, the Holder
should promptly notify the Exchange Agent. The Holder will then be instructed
by the Exchange Agent as to the steps that must be taken in order to replace
the Certificate(s). This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing lost, destroyed or stolen
Certificate(s) have been followed.
11. SECURITY TRANSFER TAXES. Holders who tender their Outstanding Notes for
exchange will not be obligated to pay any transfer taxes in connection
therewith. If, however, Exchange Notes are to be delivered to, or are to be
issued in the name of, any person other than the registered Holder of the
Outstanding Notes tendered, or if a transfer tax is imposed for any reason
other than the exchange of Outstanding Notes in connection with the Exchange
Offer, then the amount of any such transfer tax (whether imposed on the
registered Holder or any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with this Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering Holder.
IMPORTANT: SUBJECT TO THE PROVISIONS OF THE PROSPECTUS, IN ORDER TO EFFECT
THE EXCHANGE OF THE OUTSTANDING NOTES FOR THE EXCHANGE NOTES, THIS LETTER OF
TRANSMITTAL (OR FACSIMILE THEREOF) OR THE AGENT'S MESSAGE (AS APPLICABLE) AND
ALL OTHER REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
10
<PAGE>
PAYER'S NAME: BANKERS TRUST COMPANY
- -------------------------------------------------------------------------------
PART 1--PLEASE PROVIDE YOUR Social Security
TIN IN THE BOX AT RIGHT AND Number or
CERTIFY BY SIGNING AND Employer
DATING BELOW. Identification Number
SUBSTITUTE ----------------------
--------------------------------------------------------
FORM W-9 PART 2--CERTIFICATIONS--Under penalties of perjury, I
certify that:
(1) The number shown on this form is my correct
DEPARTMENT OF THE Taxpayer Identification Number (or I am waiting
TREASURY for a number to be issued to me) and
INTERNAL REVENUE
SERVICE (2) I am not subject to backup withholding because:
(a) I am exempt from backup withholding, or (b)
I have not been notified by the Internal Revenue
PAYER'S REQUEST FOR Service (the "IRS") that I am subject to backup
TAXPAYER withholding as a result of failure to report all
IDENTIFICATION interest or dividends, or (c) the IRS has
NUMBER ("TIN") notified me that I am no longer subject to
backup withholding.
CERTIFICATION INSTRUCTIONS--You must cross out item
(2) above if you have been notified by the IRS that
you are currently subject to backup withholding
because of underreporting interest or dividends on
your tax return. However, if after being notified by
the IRS that you are subject to backup withholding,
you received another notification from the IRS that
you are no longer subject to backup withholding, do
not cross out such item (2).
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR
CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER THAN
THE CERTIFICATIONS REQUIRED TO AVOID BACKUP
WITHHOLDING.
--------------------------------------------------------
PART 3
Signature _______________________Date
Name (please print)__________________ Awaiting TIN
Address (please print)_______________ [_]
_____________________________________
- -------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU WITH RESPECT TO EXCHANGE
NOTES EXCHANGED PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE
ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATION IF YOU CHECKED THE BOX IN PART 3
OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number within
60 days, 31% of all reportable payments made to me thereafter will be
withheld until I provide a number. Moreover, I understand that during this
60-day period, 31% of all reportable payments made to me will be withheld
commencing 7 business days after the payor receives this Certificate of
Awaiting Taxpayer Identification Number and terminating on the date I provide
a certified TIN to the payor.
Signature ______________________________________________________________ Date
Name (please print)___________________________________________________________
Address (please print)________________________________________________________
11
<PAGE>
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
10 1/4% SENIOR NOTES DUE 2007
(PRINCIPAL AMOUNT $1,000 PER NOTE)
OF
DRYPERS CORPORATION
This Notice of Guaranteed Delivery, or one substantially equivalent to this
form, must be used for a holder of the Issuer's (as defined below) 10 1/4%
Senior Notes due 2007 (the "Outstanding Notes") to accept the Exchange Offer
(as defined below) if (i) certificates for such holder's Outstanding Notes are
not immediately available, (ii) such holder cannot deliver its certificates
for Outstanding Notes, the Letter of Transmittal and all other required
documents to Bankers Trust Company (the "Exchange Agent") prior to 5:00 p.m.,
New York City time, on the Expiration Date (as defined in the Prospectus
referred to below) or (iii) the procedures for delivery by book-entry transfer
cannot be completed on a timely basis. This Notice of Guaranteed Delivery may
be delivered by hand, overnight courier or mail, or transmitted by facsimile
transmission, to the Exchange Agent. See "The Exchange Offer--Guaranteed
Delivery Procedures" in the Prospectus.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
BANKERS TRUST COMPANY
<TABLE>
<S> <C> <C>
BY MAIL: BY HAND: BY OVERNIGHT MAIL:
BT Services Tennessee, Inc. Bankers Trust Company BT Services Tennessee, Inc.
Reorganization Unit Corporate Trust and Agency Unit Reorganization Unit
P.O. Box 292737 123 Washington Street 648 Grassmere Park Road
Nashville, TN 37229-2737 First Floor Window Nashville, TN 37211
New York, NY 10006
</TABLE>
FOR INFORMATION CALL:
(800) 735-7777
Confirm: (615) 835-3572
Facsimile: (615) 835-3701
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
Ladies and Gentlemen:
The undersigned hereby tenders to Drypers Corporation, a Delaware
corporation (the "Issuer"), upon the terms and subject to the conditions set
forth in the Prospectus dated June 8, 1998 (as the same may be amended or
supplemented from time to time, the "Prospectus"), and the related Letter of
Transmittal (which together constitute the "Exchange Offer"), receipt of which
is hereby acknowledged, the aggregate principal amount of Outstanding Notes
set forth below pursuant to the guaranteed delivery procedures set forth in
the Prospectus under the caption "The Exchange Offer--Guaranteed Delivery
Procedures." All capitalized terms used herein but not defined shall have the
meanings ascribed to them in the Prospectus.
1
<PAGE>
The undersigned understands and acknowledges that the Exchange Offer will
expire at 5:00 p.m., New York City time, on July 13, 1998, unless extended by
the Issuer. The term "Expiration Date" shall mean 5:00 p.m., New York City
time, on July 13, 1998, unless the Exchange Offer is extended as provided in
the Prospectus, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
SIGNATURE Aggregate Principal Amount of
Outstanding Notes Tendered
x_________________________ Date: (must be integral multiples of
$1,000): $_____________________________
x_________________________ Date:
Signature(s) of Registered Certificate Number(s) of Outstanding
Holder(s) Notes (if available):__________________
or Authorized Signatory
Aggregate Principal Amount
Area Code and Telephone Number:__ Represented by Certificate(s):$________
Name(s):_________________________ IF TENDERED OUTSTANDING NOTES WILL BE
(Please Print) DELIVERED BY BOOK-ENTRY TRANSFER,
PROVIDE THE DEPOSITORY TRUST COMPANY
("DTC") ACCOUNT NO. AND TRANSACTION
CODE (IF AVAILABLE):
Capacity (full title, if signing
in a fiduciary or representative
capacity):
---------------------------------
Address:_________________________ Account No.:___________________________
---------------------------------
Transaction No.:_______________________
Taxpayer Identification Number
or Social Security No.:__________
GUARANTEE OF DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified as an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 promulgated under the
Securities Exchange Act of 1934, as amended, guarantees deposit with the
Exchange Agent of a properly completed and executed Letter of Transmittal (or
facsimile thereof), or an Agent's Message, as well as the certificate(s)
representing all tendered Outstanding Notes in proper form for transfer, or
confirmation of the book-entry transfer of such Outstanding Notes into the
Exchange Agent's account at DTC as described in the Prospectus under the
caption "The Exchange Offer--Procedures for Tendering--Book-Entry Transfer"
and other documents required by the Letter of Transmittal, all by 5:00 p.m.,
New York City time, on the third New York Stock Exchange trading day following
the Expiration Date.
Name of Eligible Institution:__________________________________________________
AUTHORIZED SIGNATURE
Address:_____________________________ Name:________________________________
- ------------------------------------- Title:_______________________________
Area Code and Telephone No.:_________ Date:________________________________
NOTE: DO NOT SEND OUTSTANDING NOTES WITH THIS NOTICE OF GUARANTEED
DELIVERY. ACTUAL SURRENDER OF OUTSTANDING NOTES MUST BE MADE PURSUANT TO, AND
BE ACCOMPANIED BY, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF
TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
2
<PAGE>
DRYPERS CORPORATION
OFFER TO EXCHANGE ITS 10 1/4% SERIES B SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 FOR ANY AND ALL OF ITS OUTSTANDING
10 1/4% SENIOR NOTES DUE 2007
(PRINCIPAL AMOUNT $1,000 PER NOTE)
PURSUANT TO THE PROSPECTUS
DATED JUNE 8, 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON JULY 13, 1998 UNLESS THE OFFER IS EXTENDED.
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Drypers Corporation, a Delaware corporation (the "Issuer"), is offering,
upon the terms and subject to the conditions set forth in the Prospectus dated
June 8, 1998 (the "Prospectus") and the accompanying Letter of Transmittal
enclosed herewith (which together constitute the "Exchange Offer"), to
exchange its 10 1/4% Series B Senior Notes due 2007 (the "Exchange Notes") for
a like principal amount of its outstanding 10 1/4% Senior Notes due 2007 (the
"Outstanding Notes", and together with the Exchange Notes, the "Notes"). As
set forth in the Prospectus, the terms of the Exchange Notes are identical in
all material respects to the Outstanding Notes, except that the Exchange Notes
have been registered under the Securities Act of 1933, as amended, and
therefore will not be subject to certain restrictions on their transfer and
will not contain certain provisions providing for an increase in the interest
rate paid thereon. Outstanding Notes may be tendered in whole or in part in
integral multiples of $1,000.
THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE "THE EXCHANGE
OFFER--CONDITIONS TO THE EXCHANGE OFFER" IN THE PROSPECTUS.
Enclosed herewith for your information and forwarding to your clients are
copies of the following documents:
1. the Prospectus, dated June 8, 1998;
2. the Letter of Transmittal for your use and for the information of your
clients (facsimile copies of the Letter of Transmittal may be used to
tender Outstanding Notes);
3. a form of letter which may be sent to your clients for whose accounts
you hold Outstanding Notes registered in your name or in the name of
your nominee, with space provided for obtaining such clients'
instructions with regard to the Exchange Offer; and
4. a Notice of Guaranteed Delivery.
YOUR PROMPT ACTION IS REQUESTED. PLEASE NOTE THAT THE EXCHANGE OFFER WILL
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON JULY 13, 1998, UNLESS EXTENDED.
PLEASE FURNISH COPIES OF THE ENCLOSED MATERIALS TO THOSE OF YOUR CLIENTS FOR
WHOM YOU HOLD OUTSTANDING NOTES REGISTERED IN YOUR NAME OR IN THE NAME OF YOUR
NOMINEE AS QUICKLY AS POSSIBLE.
In all cases, exchanges of Outstanding Notes accepted for exchange pursuant
to the Exchange Offer will be made only after timely receipt by the Exchange
Agent of (a) certificates representing such Outstanding Notes, or a book-entry
confirmation (as defined in the Prospectus), as the case may be, (b) the
Letter of Transmittal (or facsimile thereof), properly completed and duly
executed, or an Agent's Message (as defined in the Prospectus) and (c) any
other required documents.
Holders who wish to tender their Outstanding Notes and (i) whose Outstanding
Notes are not immediately available or (ii) who cannot deliver their
Outstanding Notes, the Letter of Transmittal or an Agent's Message and any
other documents required by the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date must tender their Outstanding Notes according to
the guaranteed delivery procedures set forth under the caption "The Exchange
Offer--Guaranteed Delivery Procedures" in the Prospectus.
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of, holders of Outstanding Notes residing in any jurisdiction in
which the making of the Exchange Offer or acceptance thereof would not be in
compliance with the laws of such jurisdiction.
1
<PAGE>
The Issuer will not make any payments to brokers, dealers or other persons
for soliciting acceptances of the Exchange Offer. The Issuer will, however,
upon request, reimburse you for customary clerical and mailing expenses
incurred by you in forwarding any of the enclosed materials to your clients.
The Issuer will pay or cause to be paid any transfer taxes payable on the
transfer of Outstanding Notes to it, except as otherwise provided in the
Letter of Transmittal.
Questions and requests for assistance with respect to the Exchange Offer or
for copies of the Prospectus and Letter of Transmittal may be directed to the
Exchange Agent at its address set forth in the Prospectus or at 1-800-735-
7777.
Very truly yours,
DRYPERS CORPORATION
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE ISSUER OR ANY AFFILIATE THEREOF, OR
AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS OR USE ANY DOCUMENT
ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THE
ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
2
<PAGE>
DRYPERS CORPORATION
OFFER TO EXCHANGE ITS
10 1/4% SERIES B SENIOR NOTES DUE 2007
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
10 1/4% SENIOR NOTES DUE 2007
(PRINCIPAL AMOUNT $1,000 PER NOTE)
PURSUANT TO THE PROSPECTUS
DATED JUNE 8, 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON JULY 13, 1998, UNLESS THE OFFER IS EXTENDED
TO OUR CLIENTS:
Enclosed for your consideration is a Prospectus dated June 8, 1998 (the
"Prospectus") and a Letter of Transmittal (which together constitute the
"Exchange Offer") relating to the offer by Drypers Corporation (the "Issuer")
to exchange its 10 1/4% Series B Senior Notes due 2007 (the "Exchange Notes")
for a like principal amount of its outstanding 10 1/4% Senior Notes due 2007
(the "Outstanding Notes", and together with the Exchange Notes, the "Notes").
As set forth in the Prospectus, the terms of the Exchange Notes are identical
in all material respects to the Outstanding Notes, except that the Exchange
Notes have been registered under the Securities Act of 1933, as amended, and
therefore will not be subject to certain restrictions on their transfer and
will not contain certain provisions providing for an increase in interest rate
paid thereon. Outstanding Notes may be tendered in whole or in part in
integral multiples of $1,000.
The enclosed material is being forwarded to you as the beneficial owner of
Outstanding Notes held by us for your account or benefit but not registered in
your name. An exchange of any Outstanding Notes may only be made by us as the
registered Holder pursuant to your instructions. Therefore, the Issuer urges
beneficial owners of Outstanding Notes registered in the name of a broker,
dealer, commercial bank, trust company or other nominee to contact such Holder
promptly if they wish to exchange Outstanding Notes in the Exchange Offer.
Accordingly, we request instructions as to whether you wish us to exchange
any or all such Outstanding Notes held by us for your account or benefit,
pursuant to the terms and conditions set forth in the Prospectus and Letter of
Transmittal. We urge you to read carefully the Prospectus and Letter of
Transmittal before instructing us to exchange your Outstanding Notes.
Your instructions to us should be forwarded as promptly as possible in order
to permit us to exchange Outstanding Notes on your behalf in accordance with
the provisions of the Exchange Offer. The Exchange Offer expires at 5:00 p.m.,
New York City time, on July 13, 1998, unless extended. The term "Expiration
Date" shall mean 5:00 p.m., New York City time, on July 13, 1998, unless the
Exchange Offer is extended as provided in the Prospectus, in which case the
term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended. A tender of Outstanding Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
Your attention is directed to the following:
1. The Exchange Offer is for the exchange of $1,000 principal amount of
Exchange Notes for each $1,000 principal amount of Outstanding Notes.
$30,000,000 aggregate principal amount of Outstanding Notes was outstanding
as of June 8, 1998.
2. THE EXCHANGE OFFER IS SUBJECT TO CERTAIN CONDITIONS. SEE "THE EXCHANGE
OFFER--CONDITIONS TO THE EXCHANGE OFFER" IN THE PROSPECTUS.
3. The Exchange Offer and withdrawal rights will expire at 5:00 p.m., New
York City time, on July 13, 1998, unless extended.
4. The Issuer has agreed to pay certain expenses of the Exchange Offer.
Any transfer taxes incident to the transfer of Outstanding Notes from the
tendering Holder to the Issuer will be paid by the Issuer, except as
provided in the Prospectus and the Letter of Transmittal. See "The Exchange
Offer--Fees and Expenses" in the Prospectus.
The Exchange Offer is not being made to, nor will tenders be accepted from
or on behalf of Holders of Outstanding Notes, residing in any jurisdiction in
which the making of the Exchange Offer or acceptance thereof would not be in
compliance with the laws of such jurisdiction.
If you wish us to tender any or all of your Outstanding Notes held by us for
your account or benefit, please do instruct us by completing, executing and
returning to us the attached instruction form. THE ACCOMPANYING LETTER OF
TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATIONAL PURPOSES ONLY AND MAY NOT BE
USED BY YOU TO EXCHANGE OUTSTANDING NOTES HELD BY US AND REGISTERED IN OUR
NAME FOR YOUR ACCOUNT OR BENEFIT.
1
<PAGE>
INSTRUCTIONS
The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein relating to the Exchange Offer of Drypers
Corporation.
This will instruct you to tender for exchange the aggregate principal amount
of Outstanding Notes indicated below (or, if no aggregate principal amount is
indicated below, all Outstanding Notes) held by you for the account or benefit
of the undersigned, pursuant to the terms of and conditions set forth in the
Prospectus and the Letter of Transmittal.
Aggregate Principal Amount of Outstanding Notes to be tendered for exchange:
$________*
*I (we) understand that if I (we)
sign this instruction form without
indicating an aggregate principal
amount of Outstanding Notes in the
space above, all Outstanding Notes
held by you for my (our) account
will be tendered for exchange.
---------------------------------------
---------------------------------------
Signature(s)
---------------------------------------
Capacity (full title) if signing in a
fiduciary or representative capacity
---------------------------------------
---------------------------------------
---------------------------------------
---------------------------------------
Name(s) and address, including zip
code
Date:__________________________________
---------------------------------------
Area Code and Telephone Number
---------------------------------------
Taxpayer Identification or Social
Security No.
2
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER.
Social Security numbers have nine digits separated by two hyphens (i.e. 000-
00-0000). Employer identification numbers have nine digits separated by only
one hyphen (i.e. 00-0000000). The table below will help determine the number
to give the payer.
- ----------------------------------------------
<TABLE>
<CAPTION>
GIVE THE
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY
NUMBER OF--
- -----------------------------------------------
<S> <C>
1. An individual's account The individual
2. Two or more individuals The actual owner
(joint account) of the account
or, if combined
funds, any one of
the individuals(1)
3. Husband and wife (joint The actual owner
account) of the account
or, if
joint funds,
either person(1)
4. Custodian account of a The minor(2)
minor (Uniform Gift to
Minors Act)
5. Adult and minor (joint The adult or, if
account) the minor is the
only contributor,
the minor(1)
6. Account in the name of The ward, minor,
guardian or committee for a or incompetent
designated ward, minor or person(3)
incompetent person
7. a. The usual revocable The grantor-
savings trust account trustee(1)
(grantor is also
trustee)
b. So-called trust account The actual
that is not a legal or owner(1)
valid trust under state
law
8. Sole proprietorship The owner(4)
account
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF --
- ------------------------------------------------
<S> <C>
9. A valid trust, estate or The legal entity
pension trust (5) (Do not
furnish the
identifying
number of the
personal
representative or
trustee unless
the legal entity
itself is not
designated in the
account title.)
10. Corporate account The corporation
11. Religious, charitable or The organization
educational organization
account
12. Partnership account The partnership
13. Association, club or The organization
other tax-exempt
organization
14. A broker or registered The broker or
nominee nominee
15. Account with the The public entity
Department of Agriculture
in the name of a public
entity (such as a state or
local government, school
district or prison) that
receives agricultural
program payments
</TABLE>
- ------------------------------------------------
- -------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) Circle the ward's, minor's or incompetent person's name and furnish such
person's social security number.
(4) Show the name of the owner.
(5) List first and circle the name of the legal trust, estate or pension
trust.
NOTE: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
PAGE 2
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or
Form SS-4, Application for Employer Identification Number, at the local office
of the Social Security Administration or the Internal Revenue Service and
apply for a number.
PAYEES EXEMPT FROM BACKUP WITHHOLDING
Payees specifically exempted from backup withholding on ALL payments include
the following:
. A corporation.
. A financial institution.
. An organization exempt from tax under Section 501(a) of the Internal
Revenue Code or an individual retirement plan.
. The United States or any agency or instrumentality thereof.
. A State, the District of Columbia, a possession of the United States or
any subdivision or instrumentality thereof.
. A foreign government, a political subdivision of a foreign government or
any agency or instrumentality thereof.
. An international organization or any agency or instrumentality thereof.
. A dealer in securities or commodities required to register in the United
States or a possession of the United States.
. A real estate investment trust.
. A common trust fund operated by a bank under Section 584(a) of the
Internal Revenue Code.
. An exempt charitable remainder trust or a non-exempt trust described in
Section 4947(a)(1) of the Internal Revenue Code.
. An entity registered at all times under the Investment Company Act of
1940.
. A foreign central bank of issue.
Payments of interest not generally subject to backup withholding include the
following:
. Payments of interest on obligations issued by individuals. Note: You may
be subject to backup withholding if this interest is $600 or more and is
paid in the course of the payer's trade or business and you have not
provided your correct taxpayer identification number to the payer.
. Payments of tax-exempt interest (including exempt-interest dividends
under Section 852 of the Internal Revenue Code).
. Payments described in Section 6049(b)(5) of the Internal Revenue Code to
non-resident aliens.
. Payments on tax-free covenant bonds under Section 1451 of the Internal
Revenue Code.
. Payments made by certain foreign organizations.
Exempt payees described above must still complete the Substitute Form W-9
enclosed herewith to avoid possible erroneous backup withholding. FILE THIS
FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE
"EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS
ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM.
Certain payments, other than interest, dividends, and patronage dividends,
that are not subject to information reporting are also not subject to backup
withholding. For details, see the regulations under sections 6041, 6041A(a),
6042, 6044, 6045, 6049, 6050A and 6050N of the Internal Revenue Code.
PRIVACY ACT NOTICE.--Section 6109 of the Internal Revenue Code requires most
recipients of dividends, interest, or other payments to give taxpayer identi-
fication numbers to payers who must report the payments to the Internal Reve-
nue Service. The Internal Revenue Service uses the numbers for identification
purposes and to help verify the accuracy of the recipient's tax return. Payers
must be given the numbers whether or not recipients are required to file tax
returns. Payers must generally withhold 31% of the gross amount of interest,
dividends, and certain other payments to a payee who does not furnish a tax-
payer identification number to a payer. Certain penalties may also apply.
PENALTIES
(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you fail
to furnish your taxpayer identification number to a payer, you are subject to
a penalty of $50 for each such failure unless your failure is due to reason-
able cause and not to willful neglect.
(2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Falsifying certifications or
affirmations may subject you to criminal penalties including fines and/or im-
prisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
