<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period From to
Commission file number 0-23422
--------------------
DRYPERS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 76-0344044
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
5300 Memorial, Suite 900
Houston, Texas 77007
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including the area code: (713) 869-8693
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [_] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
(Class) (Outstanding at July 31, 1998)
----- ----------------------------
Common Stock, $.001 Par Value 17,200,342
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following information required by Rule 10-01 of Regulation S-X is
provided herein for Drypers Corporation and subsidiaries:
Consolidated Balance Sheets -- December 31, 1997 and June 30, 1998.
Consolidated Statements of Earnings for the Three Months and Six
Months Ended June 30, 1997 and 1998.
Consolidated Statement of Stockholders' Equity for the Six Months Ended
June 30, 1998.
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1997 and 1998.
Notes to Consolidated Financial Statements.
i
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DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
December 31, June 30,
ASSETS 1997 1998
------ ------------ --------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 9,269 $ 14,229
Accounts receivable, net of allowance for doubtful accounts of $2,064 and
$2,280, respectively................................................... 33,941 45,724
Inventories................................................................. 21,090 23,235
Prepaid expenses and other.................................................. 12,730 15,405
-------- --------
Total current assets................................................. 77,030 98,593
PROPERTY AND EQUIPMENT, net of depreciation and amortization of $17,769
and $20,917, respectively....................................................... 53,270 72,892
INTANGIBLE AND OTHER ASSETS, net of amortization of $13,438 and
$15,128, respectively........................................................... 74,932 85,618
-------- --------
$205,232 $257,103
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Short-term borrowings....................................................... $ -- $ 8,093
Current portion of long-term debt........................................... 1,593 2,883
Accounts payable............................................................ 16,558 23,280
Accrued liabilities......................................................... 10,151 12,552
-------- --------
Total current liabilities............................................ 28,302 46,808
LONG-TERM DEBT....................................................................... 1,755 3,240
SENIOR TERM NOTES.................................................................... 115,000 146,051
OTHER LONG-TERM LIABILITIES.......................................................... 4,595 8,614
-------- --------
149,652 204,713
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares authorized, 61,110 and
-0- shares issued and outstanding, respectively........................ 1 --
Common stock, $.001 par value, 30,000,000 shares authorized, 10,513,223 and
17,200,342 shares issued and outstanding, respectively..................... 10 17
Additional paid-in capital.................................................. 69,998 72,302
Warrants.................................................................... 1,097 180
Retained deficit............................................................ (15,526) (20,176)
Foreign currency translation adjustments.................................... -- 67
-------- --------
Total stockholders' equity........................................... 55,580 52,390
-------- --------
$205,232 $257,103
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- -------------------------------
1997 1998 1997 1998
------------ ----------- ------------- ------------
(unaudited)
<S> <C> <C> <C> <C>
NET SALES.................................................. $ 72,551 $ 80,805 $ 132,712 $ 159,397
COST OF GOODS SOLD......................................... 44,983 47,667 81,739 94,916
----------- ----------- ------------ -----------
Gross profit.............................. 27,568 33,138 50,973 64,481
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................................... 22,972 27,399 41,933 59,876
----------- ----------- ------------ -----------
Operating income........................... 4,596 5,739 9,040 4,605
RELATED-PARTY INTEREST EXPENSE............................. 82 -- 170 --
OTHER INTEREST EXPENSE, net................................ 1,930 4,453 4,040 7,903
OTHER INCOME............................................... 165 219 42 275
----------- ----------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAX PROVISION 2,749 1,505 4,872 (3,023)
INCOME TAX PROVISION....................................... 566 406 716 1,547
----------- ----------- ------------ -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM.................... 2,183 1,099 4,156 (4,570)
EXTRAORDINARY ITEM, costs of early extinguishment
of debt................................................ (7,769) -- (7,769) --
----------- ----------- ------------ -----------
NET INCOME (LOSS).......................................... (5,586) 1,099 (3,613) (4,570)
PREFERRED STOCK DIVIDEND................................... 168 -- 336 80
----------- ----------- ------------ -----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS........................................... $ (5,754) $ 1,099 $ (3,949) $ (4,650)
=========== =========== ============ ===========
INCOME (LOSS) PER COMMON SHARE:
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM:
Basic...................................... $ .26 $ .07 $ .49 $ (.32)
=========== =========== ============ ===========
Diluted.................................... $ .12 $ .06 $ .23 $ (.32)
=========== =========== ============ ===========
EXTRAORDINARY ITEM:
Basic...................................... $ (.99) $ -- $ (.99) $ --
=========== =========== ============ ===========
Diluted.................................... $ .42 $ -- $ (.43) $ --
=========== =========== ============ ===========
NET INCOME (LOSS):
Basic...................................... $ (.73) $ .07 $ (.50) $ (.32)
=========== =========== ============ ===========
Diluted.................................... $ (.30) $ .06 $ (.20) $ (.32)
=========== =========== ============ ===========
COMMON SHARES OUTSTANDING.................................. 7,875,910 16,868,179 7,856,844 14,704,116
=========== =========== ============ ===========
COMMON AND POTENTIAL COMMON SHARES
OUTSTANDING............................................. 18,482,412 18,793,958 18,242,149 14,704,116
=========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED FOREIGN
SHARES COMMON SHARES ADDITIONAL CURRENCY
ISSUED AND ISSUED AND PREFERRED COMMON PAID-IN RETAINED TRANSLATION
OUTSTANDING OUTSTANDING STOCK STOCK CAPITAL WARRANTS DEFICIT ADJUSTMENTS
----------- ------------ --------- ------- --------- -------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
($1.25 per share)
(unaudited).............. -- -- -- -- -- -- (80) --
Effect of stock option and
stock purchase plans
(unaudited)............. -- 12,254 -- -- 265 -- -- --
Exercise of warrants
(unaudited).............. -- 382,501 -- -- 980 (917) -- --
Net loss (unaudited)........ -- -- -- -- -- (4,570) --
Translation adjustments
(unaudited)................ -- -- -- -- -- -- -- 67
------- ---------- ---- --- ------- ------ -------- ------
BALANCE, June 30, 1998
(unaudited)................ -- 17,200,342 $-- $17 $72,302 $ 180 $(20,176) $ 67
======= ========== === === ======= ====== ======== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------
1997 1998
------- --------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................................... $ (3,613) $ (4,570)
Adjustments to reconcile net loss to net cash used in
operating activities--
Depreciation and amortization............................................. 4,037 4,500
Non-cash portion of extraordinary item.................................... 3,745 --
Deferred income taxes..................................................... -- (213)
Other..................................................................... (43) (563)
Changes in operating assets and liabilities, net of acquisitions--
Increase in--
Accounts receivable............................................... (5,461) (11,532)
Inventories....................................................... (1,016) (2,591)
Prepaid expenses and other........................................ (2,312) (4,763)
Increase (decrease) in--
Accounts payable.................................................. 892 2,757
Accrued and other liabilities..................................... (219) 2,883
-------- --------
Net cash used in operating activities....................... (3,990) (14,092)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................................ (8,518) (15,399)
Investment in Brazilian venture, net of cash acquired..................... (9,500) (3,946)
Investment in other noncurrent assets..................................... (643) (1,127)
Payments under noncompete agreement....................................... ( 126) --
-------- --------
Net cash used in investing activities............................. (18,787) (20,472)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under senior term notes........................................ 115,000 31,087
Payments on senior term notes............................................. (43,434) --
Borrowings under working capital facility................................. 10,000 --
Payments under working capital facility................................... (10,000) --
Borrowings under revolvers................................................ 79,296 43,193
Payments on revolvers..................................................... (94,918) (35,100)
Borrowings under (payments on) other debt................................. (3,972) 2,923
Financing related costs................................................... (3,773) (2,676)
Proceeds from exercise of stock options and warrants...................... 222 97
-------- --------
Net cash provided by financing activities......................... 48,421 39,524
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS....................................... 25,644 4,960
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................ 4,923 9,269
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 30,567 $ 14,229
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements included herein have been prepared by
Drypers Corporation (the "Company"), without audit, in accordance with Rule
10-01 of Regulation S-X for interim financial statements required to be filed
with the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes the
disclosures are adequate to make the information presented not misleading. The
financial statements included herein should be reviewed in conjunction with the
Company's December 31, 1997 financial statements and related notes thereto.
Accounting measurements at interim dates inherently involve greater reliance on
estimates than at year end. The results of operations for the three months and
six months ended June 30, 1998 are not necessarily indicative of the results
that will be realized for the fiscal year ending December 31, 1998.
The unaudited consolidated financial information as of and for the three-month
and six-month periods ended June 30, 1997 and 1998, has not been audited by
independent accountants, but in the opinion of management of the Company, all
adjustments (consisting only of normal, recurring adjustments) necessary for a
fair presentation of the consolidated balance sheets, statements of earnings,
statement of stockholders' equity and statements of cash flows at the date and
for the interim periods indicated have been made.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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 March 1998, Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained For Internal Use", was issued by the
American Institute of Certified Public Accountants. SOP 98-1 requires that
certain costs related to computer software developed or obtained for internal
use be expensed. The Company is required to adopt SOP 98-1 as of January 1,
1999.
In April 1998, 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 costs of start-up activities
as those costs are incurred. The Company is required to adopt SOP 98-5 as of
January 1, 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.
Cash interest paid for the six months ended June 30, 1997 and 1998 was
$5,041,000 and $7,133,000, respectively. Cash taxes paid for the six months
ended June 30, 1997 and 1998 were $70,000 and $1,760,000, respectively.
5
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
2. EARNINGS PER SHARE
As of December 31, 1997, the Company adopted 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 Six Months Ended
June 30 June 30
----------------------------- ------------------------------
1997 1998 1997 1998
------------ ----------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
Basic Earnings Per Share:
- -------------------------
Income (loss) before extraordinary item, less
preferred stock dividend................. $ 2,015 $ 1,099 $ 3,820 $ (4,650)
Extraordinary item................................ (7,769) -- (7,769) --
----------- ----------- ----------- -----------
Net income (loss) attributable to common
stockholders.............................. $ (5,754) $ 1,099 $ (3,949) $ (4,650)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding............................... 7,875,910 16,868,179 7,856,844 14,704,116
=========== =========== =========== ===========
Income (loss) before extraordinary item........... $ .26 $ .07 $ .49 $ (.32)
Extraordinary item................................ (.99) -- ( .99) --
----------- ----------- ----------- -----------
Net income (loss)................................. $ (.73) $ .07 $ ( .50) $ (.32)
=========== =========== =========== ===========
Diluted Earnings Per Share:
- ---------------------------
Income (loss) before extraordinary item........... $ 2,183 $ 1,099 $ 4,156 $ (4,650)
Extraordinary item................................ (7,769) -- (7,769) --
----------- ----------- ----------- -----------
Net income (loss)................................. $ (5,586) $ 1,099 $ (3,613) $ (4,650)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding............................... 7,875,910 16,868,179 7,856,844 14,704,116
Dilutive effect - options and warrants............ 1,741,667 1,925,779 1,452,887 --
Dilutive effect - preferred stock................. 8,864,835 -- 8,932,418 --
----------- ----------- ----------- -----------
18,482,412 18,793,958 18,242,149 14,704,116
=========== =========== =========== ===========
Income (loss) before extraordinary item........... $ .12 $ .06 $ .23 $ (.32)
Extraordinary item................................ (.42) -- (.43) --
----------- ----------- ----------- -----------
Net income (loss)................................. $ (.30) $ .06 $ (.20) $ (.32)
=========== =========== =========== ===========
</TABLE>
Common shares from the exercise or conversion of options, warrants and
convertible preferred stock excluded from the diluted earnings per share
calculation because their effect was antidilutive to the calculation totaled
110,940 and 264,704 for the three months ended June 30, 1997 and 1998,
respectively, and 120,940 and 133,083 for the six months ended June 30, 1997 and
1998, respectively.
3. COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income",
which requires companies to display comprehensive income and its components in
the financial satements. Comprehensive income (loss), which encompasses net
income and currency translation adjustments, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
----------------------------- ------------------------------
1997 1998 1997 1998
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) attributable to common
stockholders $(5,754) $1,099 $(3,949) $(4,650)
Currency translation adjustments -- 67 -- 67
------- ------ ------- -------
Comprehensive income (loss) $(5,754) $1,166 $(3,949) $(4,583)
======= ====== ======= =======
</TABLE>
4. ACQUISITION
On April 6, 1998, the Company exercised its fair value option to acquire
the remaining equity interest in the parent company of Chansommes do Brasil Ind.
e Com. Ltda. ("Chansommes"), the Brazilian manufacturer
6
<PAGE>
of its diapers. The acquisition was accounted for as a purchase, and the
purchase price of $9,250,000 was allocated to the acquired assets and
liabilities assumed based on their estimated fair values (property and equipment
of $11,069,000 and liabilities of $10,392,000). The consideration paid for
Chansommes exceeded the estimated fair market value of the net tangible assets
acquired by approximately $8,573,000 and this excess was recorded as goodwill.
This transaction effectively gives the Company a 100% ownership interest in the
Brazilian manufacturer of its diapers.
5. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
----------- --------
<S> <C> <C>
(unaudited)
Raw Materials................... $ 6,948 $ 8,285
Finished Goods.................. 14,142 14,950
------- -------
$21,090 $23,235
======= =======
</TABLE>
Inventories are stated at the lower of cost (first-in, first-out) or market
value. Finished goods inventories include the cost of materials, labor and
overhead.
6. DEBT
Short-Term Borrowings
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 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
June 30, 1998, the Company's borrowing base would have permitted the Company to
borrow up to an additional $36,600,000. As of June 30, 1998, borrowings
outstanding under this facility were approximately $8,093,000.
The new credit facility requires the Company, among other things, to maintain
a minimum consolidated net worth, as defined, a minimum consolidated fixed
charge coverage ratio, as defined, a maximum consolidated funded debt to
adjusted consolidated EBITDA ratio, as defined, and a maximum level of annual
capital expenditures. The Company was in compliance with the terms of the new
revolving credit facility as of June 30, 1998.
Long-Term Debt
Long-term debt consisted of the following (in thousands):
7
<PAGE>
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
---------------- -------------
<S> <C> <C>
(unaudited)
Note payable, due 2001, interest at 8.4%, partially secured by
land and buildings..................................................... $ 1,950 $ 1,804
Various other notes payable............................................. 1,398 4,319
------- -------
3,348 6,123
Less: current maturities............................................... (1,593) (2,883)
------- -------
$ 1,755 $ 3,240
======= =======
</TABLE>
Senior Term Notes
Long-term debt under senior term notes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
--------------- --------------
<S> <C> <C>
(unaudited)
10 1/4% Senior Notes, interest due semiannually on June 15 and
December 15, principal due June 15, 2007, including unamortized
bond premium of $-- and $1,051, respectively....................... $115,000 $146,051
======== ========
</TABLE>
On June 24, 1997, the Company closed a private issuance of $115,000,000
aggregate principal amount of its 10 1/4% Senior Notes due 2007 ("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% Senior Notes pursuant to a tender offer therefor, to repay a
$10,000,000 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 issued at that time 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.
On March 17, 1998, the Company closed a 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 June 1997 issuance of 10 1/4% Senior Notes. Proceeds
of the issuance of the New Senior Notes were used to repay all outstanding
indebtedness under the revolving credit facility and the remaining proceeds have
been and will be used for general corporate purposes, including capital
expenditures. The Company completed an exchange offer on July 13, 1998, pursuant
to which all of the New 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 and the New 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.
8
<PAGE>
7. EQUITY
On May 21, 1998, the shareholders voted to approve an increase in the
authorized number of shares of Common Stock, $.001 par value, from 20,000,000
shares to 30,000,000 shares.
8. COMMITMENTS AND CONTINGENCIES
The Company is currently negotiating a lease financing arrangement for an
additional training pant line. Furthermore, the Company has committed to
purchase four additional diaper lines to be delivered in 1998.
The Company is involved in certain lawsuits and claims arising in the normal
course of business. In the opinion of management, uninsured losses, if any,
resulting from the ultimate resolution of these matters will not have a material
adverse effect on the financial position or results of operations of the
Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis, together with the accompanying
consolidated financial statements and related notes, are intended to aid in
understanding the Company's results of operations as well as its financial
position, cash flows, indebtedness and other key financial information. Unless
otherwise indicated, references herein to "Drypers" or "the Company" refer to
Drypers Corporation and its subsidiaries.
From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995). Words such as "anticipate", "estimate", "project" and
similar expressions are intended to identify such forward-looking statements.
Forward-looking statements may be made by management orally or in writing,
including, but not limited to, in press releases, as part of this Management's
Discussion and Analysis of Financial Condition and Results of Operations and as
part of other sections of this Quarterly Report on Form 10-Q and the Company's
other filings with the Securities and Exchange Commission under the Securities
Act of 1933 and the Securities Exchange Act of 1934.
Such forward-looking statements are subject to certain risks, uncertainties
and assumptions, including without limitation those identified below. Should
one or more of these risks or uncertainties materialize, or should any of the
underlying assumptions prove incorrect, actual results of current and future
operations may vary materially from those anticipated, estimated or projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their respective dates.
Among the factors that have a direct bearing on the Company's results of
operations and financial condition are leverage and debt service, competitive
industry, price changes by competitors, dependence on key products and
acceptance of product innovations, costs of certain raw materials, international
operations, currency fluctuations, currency devaluations, currency restrictions,
intellectual property risks, technological changes, scope of insurance coverage,
covenant limitations and other factors discussed herein.
9
<PAGE>
OVERVIEW
Drypers is a leading manufacturer and marketer of premium quality, value-
priced disposable baby diapers and training pants sold under the Drypers(R)
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 currently sells its products principally to approximately 640 U.S.
grocery retailers with an estimated 21,000 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, and has made notable progress with mass-merchants in the first half of
1998. 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 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.
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 is currently in limited distribution under
the brand name Xclaim in the southeastern United States. The Company plans to
expand the distribution of Xclaim in the near future.
On August 6, 1998, the Company announced the introduction of two new
product innovations, Drypers(R) Supreme with Germ Guard(TM) and Drypers(R)
Antibacterial Baby Wipes with Germ Guard(TM). The Company expects both products
to be on retailers' shelves in October 1998. Drypers Supreme with Germ Guard,
containing an antibacterial treatment, is a super-premium line extension of the
Drypers with Aloe Vera premium diaper line, and will feature adjustable grip
tabs and increased absorbency. Drypers Supreme will incorporate popular features
of Drypers with Aloe Vera, including breathable sides and a soft, cloth-like
backing, in addition to featuring Sesame Street characters. The Company will
also be launching Drypers Antibacterial Baby Wipes with Germ Guard as an
extension of its growing baby wipes business.
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 the three
months and six months ended June 30, 1997 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
--------------------------------- ---------------------------------
1997 1998 1997 1998
--------------- --------------- --------------- ---------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic.......................... $47.1 64.9% $50.3 62.3% $ 92.6 69.8% $101.4 63.6%
International..................... 25.5 35.1 30.5 37.7 40.1 30.2 58.0 36.4
----- ----- ----- ----- ------ ----- ------ -----
Total net sales................. $72.6 100.0% $80.8 100.0% $132.7 100.0% $159.4 100.0%
===== ===== ===== ===== ====== ===== ====== =====
</TABLE>
10
<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.
RESULTS OF OPERATIONS
The following table sets forth the specified components of income and expense
for the Company expressed as a percentage of net sales for the three months and
six months ended June 30, 1997 and 1998.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------- ------------------
1997 1998 1997 1998
------- ------- ------ ------
(unaudited)
<S> <C> <C> <C> <C>
Net sales.................................................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......................................... 62.0 59.0 61.6 59.5
----- ----- ----- -----
Gross profit............................................... 38.0 41.0 38.4 40.5
Selling, general and administrative expenses............... 31.7 33.9 31.6 37.6
----- ----- ----- -----
Operating income........................................... 6.3 7.1 6.8 2.9
Interest expense, net...................................... 2.7 5.5 3.2 5.0
Other income............................................... .2 .3 -- .2
----- ----- ----- -----
Income (loss) before income tax provision.................. 3.8 1.9 3.6 (1.9)
Income tax provision....................................... .8 .5 .5 1.0
----- ----- ----- -----
Income (loss) before extraordinary item.................... 3.0% 1.4 3.1 % (2.9)%
===== ===== ===== =====
</TABLE>
Three Months Ended June 30, 1998 Compared to the Three Months Ended June 30,
1997
Net Sales
Net sales increased 11.4% to $80.8 million for the three months ended June 30,
1998 from $72.6 million for the three months ended June 30, 1997. Domestic sales
increased 6.8% to $50.3 million for the three months ended June 30, 1998 from
$47.1 million for the three months ended June 30, 1997. This increase primarily
reflects positive trade and consumer reaction to the national media campaign in
the United States which began in February 1998 for the Company's premium brand
diapers. The increase in U.S. sales between periods was offset by a decline in
export sales resulting from pricing pressures in Asia due to recent currency
devaluations. Net sales in the international sector grew to $30.5 million for
the three months ended June 30, 1998 from $25.5 million in the prior comparable
period. This increase of 19.6% primarily reflected the continued growth in sales
volume for the Company's operations in Argentina and in Brazil, where a new
product line "Xuxa by Drypers" has been very successful since its introduction
in June 1998. The increase in sales for Argentina and Brazil offset lower sales
in Mexico resulting from a now concluded price war by a competitor initiated in
the first quarter of 1998.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales decreased to 59.0% for the
three months ended June 30, 1998 compared to 62.0% for the three months ended
June 30, 1997. This decrease primarily reflects an increase in international
gross margins, mainly in Brazil. In the United States, gross margins were
unchanged as a result of prior years' price increases being offset by the effect
of excess capacity.
11
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased as a percentage of net
sales to 33.9% for the three months ended June 30, 1998 compared to 31.7% for
the three months ended June 30, 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 increased selling and
promotional costs related to international sales, primarily in Brazil.
Operating Income
As a result of the above factors, the Company's operating income increased
$1.1 million to $5.7 million for the three months ended June 30, 1998 from $4.6
million for the three months ended June 30, 1997.
Interest Expense, net
Interest expense, net increased to $4.5 million for the three months ended
June 30, 1998 as compared to $2.0 million for the three months ended June 30,
1997. The increase was primarily due to the issuance of the Company's 10 1/4%
Senior Notes due 2007 ("10 1/4% Senior Notes") in June 1997 and March 1998 for
$115.0 million and $30.0 million, respectively, and amortization of additional
deferred loan costs related to these transactions.
Income Taxes
The Company recorded a provision of $406,000 related to foreign taxes for the
three months ended June 30, 1998, compared to a provision of $566,000 in 1997.
The decrease is a result of management's focus on international tax planning
strategies during 1998.
Six Months Ended June 30, 1998 Compared to the Six Months Ended June 30, 1997
Net Sales
Net sales increased 20.1% to $159.4 million for the six months ended June 30,
1998 from $132.7 million for the six months ended June 30, 1997. Domestic sales
increased 9.4% to $101.4 million for the six months ended June 30, 1998 from
$92.6 million for the six months ended June 30, 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 offset by a
decline in export sales resulting from pricing pressures in Asia due to recent
currency devaluations. Net sales in the international sector grew to $58.0
million for the six months ended June 30, 1998 from $40.1 million in the prior
comparable period. This increase primarily reflected the continued growth in
sales volume for the Company's operations in Argentina and Brazil, which was
slightly offset by lower sales in Mexico due to a now concluded price war
initiated by a competitor in the first quarter of 1998.
Cost of Goods Sold
Cost of goods sold as a percentage of net sales decreased to 59.5% for the six
months ended June 30, 1998 compared to 61.6% for the six months ended June 30,
1997. This decrease primarily reflects an increase in international gross
margins, mainly in Brazil. In the United States, gross margins were unchanged as
a result of prior years' price increases being offset by the effect of excess
capacity.
12
<PAGE>
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased as a percentage of net
sales to 37.6% for the six months ended June 30, 1998 compared to 31.6% for the
six months ended June 30, 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 increased selling and promotional costs
related to international sales, primarily in Brazil.
Operating Income
As a result of the above factors, the Company's operating income decreased
$4.4 million to $4.6 million for the six months ended June 30, 1998 from $9.0
million for the six months ended June 30, 1997.
Interest Expense, net
Interest expense, net increased to $7.9 million for the six months ended
June 30, 1998 as compared to $4.2 million for the six months ended June 30,
1997. The increase was primarily due to the issuance of 10 1/4% Senior Notes in
June 1997 and March 1998 for $115.0 million and $30.0 million, respectively, and
amortization of additional deferred loan costs related to these transactions.
Income Taxes
The Company recorded a provision of $1.5 million related to foreign taxes for
the six months ended June 30, 1998, compared to a provision of $716,000 for the
comparable period in 1997. The increase is related to the increase in
international earnings during 1998.
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, capital expenditure and acquisition
requirements through a combination of internally generated cash flow, borrowings
under the Company's revolving credit facility and other sources and proceeds
from private and public offerings of debt and equity securities.
The Company's operations used $15.6 million of cash during the six months
ended June 30, 1998 and used $4.0 million of cash during the six months ended
June 30, 1997. The use of cash during the six months ended June 30, 1998
primarily reflected the national television campaign in the United States, the
buildup of inventory to support the increase in sales volume (and the
corresponding increase in accounts receivable), payment of interest on the 10
1/4% Senior Notes and expenditures related to the Xclaim product. 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 related to the Company's
June 1997 issuance of $115.0 million of 10 1/4% Senior Notes 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 $15.4 million for the six months ended
June 30, 1998 and $8.5 million for the six months ended June 30, 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 Company financed its capital
expenditures in 1997 and the first half 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 cost increases of approximately $8.0 million in the first
quarter of 1998 and approximately $2.0 million in the second quarter of 1998.
The majority of these increases represented the cost of the Company's new
advertising campaign (in connection with which there will be no near-term
corresponding
13
<PAGE>
reduction of promotional expenses), while the remainder related 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
$25.0 million for the fiscal year, $15.4 million of which have been incurred
through the second quarter. The planned capital expenditures in 1998 are
primarily related to the expansion of international capacity, which includes the
construction of a new facility in Mexico, 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 $51.8 million as of June 30, 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 $98.6 million as of
June 30, 1998, and current liabilities increased from $28.3 million as of
December 31, 1997 to $46.8 million as of June 30, 1998. Total debt increased
from $118.3 million at December 31, 1997 to $160.3 million as of June 30, 1998.
On April 6, 1998, the Company exercised its fair value option to acquire the
remaining equity interest in the parent company of Chansommes do Brasil Ind. e
Com. Ltda., the Brazilian manufacturer of its diapers. The acquisition was
accounted for as a purchase, and the purchase price of approximately $9.3
million was allocated to the acquired assets and liabilities assumed based on
their estimated fair values. This transaction has been approved by the Brazilian
government. The transaction effectively gives the Company a 100% ownership
interest in the Brazilian manufacturer of its diapers. Following this
transaction, the Company's total investment in Brazil is approximately $15.0
million.
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 June 30, 1998, the Company's
borrowing base would have permitted the Company to borrow up to an additional
$36.6 million.
On March 17, 1998, the Company closed a private issuance of an additional
$30.0 million of 10 1/4% Senior Notes (the "New Senior Notes") at a price of
103.625% of the principal amount thereof. The New Senior Notes were issued under
the same indenture as the June 1997 issuance of 10 1/4% Senior Notes. Proceeds
from the offering of the New Senior Notes were $30.4 million, $5.0 million of
which was used to repay all outstanding indebtedness under the Company's former
revolving credit facility and the remaining proceeds have been and will be used
for general corporate purposes, including capital expenditures. The Company
completed an exchange offer on July 13, 1998, pursuant to which all of the New
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.
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.
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
14
<PAGE>
$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 therefore, 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. The Company completed an exchange offer on October 14, 1997, pursuant
to which all of the 10 1/4% Senior Notes issued at that time 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.
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 New Senior 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 March 1998, Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained For Internal Use", was issued by the
American Institute of Certified Public Accountants. SOP 98-1 requires that
certain costs related to computer software developed or obtained for internal
use be expensed. The Company is required to adopt SOP 98-1 as of January 1,
1999.
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
costs of start-up activities as those costs are incurred. The Company is
required to adopt SOP 98-5 as of January 1,1999. The Company does not expect the
adoption of SOP 98-5 to have a material effect on its financial position or
results of operations.
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
15
<PAGE>
Company expects that the expenses and capital expenditures associated with the
replacement of the Company's Programs and Systems will be approximately $4.0
million over the next two years.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Meeting of Stockholders--May 21, 1998
(b) Inapplicable.
(c) On May 21, 1998, the Stockholders voted in regard to the following
proposals:
Proposal No. 1--To elect two persons to serve as directors of the
Company for a three-year term or until their respective successors are duly
elected and qualified.
Proposal No. 2--To consider and vote on a proposal to approve an
amendment to the Drypers Corporation Amended and Restated 1995 Key Employee
Stock Option Plan to increase the aggregate number of shares of the Company's
Common Stock with respect to which options may be granted under the plan by
1,000,000 to allow for the grant of additional options under the plan.
Proposal No. 3--To consider and vote on a proposal to amend the
Company's Restated Certificate of Incorporation to increase the number of
authorized shares of Common Stock from 20,000,000 to 30,000,000.
Proposal No. 4--To consider and vote on a proposal to ratify the
appointment of Arthur Andersen LLP as the Company's independent public
accountants for the fiscal year ending December 31, 1998.
As of April 13, 1998, the record date for determining stockholders
entitled to vote at the Annual Meeting of Stockholders, the Company had
outstanding and entitled to vote 16,818,923 shares of Common Stock.
The following table lists the votes cast for each proposal:
<TABLE>
<CAPTION>
Number of Shares
- -----------------------------------------------------------------------------------------
Proposal For Against Abstain Broker Non-Votes
- -------------------- --------- -------- ------- ----------------
<S> <C> <C> <C> <C>
No. 1
Walter V. Klemp 14,234,501 475,757 -- --
Nolan Lehman 14,240,051 470,207 -- --
No. 2 10,038,334 1,515,150 35,735 3,121,039
No. 3 14,529,620 150,678 29,959 --
No. 4 14,657,676 38,300 14,281 --
</TABLE>
ITEM 5. OTHER INFORMATION
Cautionary Statements:
From time to time, the Company may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995). Words such as "anticipate", "estimate", "project" and
similar expressions are intended to identify such forward-looking statements.
16
<PAGE>
Forward-looking statements may be made by management orally or in writing,
including, but not limited to, in press releases, as part of Management's
Discussion and Analysis of Financial Condition and Results of Operations and as
part of other sections of this Quarterly Report on Form 10-Q and the Company's
other filings with the Securities and Exchange Commission under the Securities
Act of 1933 and the Securities Exchange Act of 1934.
Such forward-looking statements are subject to certain risks, uncertainties
and assumptions, including without limitation those identified below. Should
one or more of these risks or uncertainties materialize, or should any of the
underlying assumptions prove incorrect, actual results of current and future
operations may vary materially from those anticipated, estimated or projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their respective dates.
Among the factors that have a direct bearing on the Company's results of
operations and financial condition are the following factors:
LEVERAGE AND DEBT SERVICE. The Company is highly leveraged. 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 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. A number of these producers 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.
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. Additionally,
during the third quarter of 1997 and first quarter of 1998, price competition by
Procter & Gamble adversely impacted the Company's operations in Puerto Rico and
Mexico, respectively. There can be no assurance that 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.
DEPENDENCE ON KEY PRODUCTS AND ACCEPTANCE OF PRODUCT INNOVATIONS. The
Company's Drypers brand premium brand diapers and training pants accounted for
61.3%, 62.0% and 52.3% of the Company's net sales for 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
17
<PAGE>
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.
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 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 its prices.
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS, DEVALUATIONS AND
RESTRICTIONS. The Company currently has operations in Argentina, Mexico, Brazil,
Singapore, Malaysia and Colombia and expects its international operations to
become a larger contributor to sales and profitability in the future. 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 are 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 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 and
troubled and insolvent financial institutions. 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.
TECHNOLOGICAL CHANGES. The disposable 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
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.
18
<PAGE>
SCOPE OF INSURANCE COVERAGE. The Company obtains insurance coverage that
management of the Company believes is adequate for its needs based in part on
coverage obtained by companies that are in the same industry as the Company and
the needs of the Company in its various locations around the world. To the
extent that such insurance coverage is insufficient to cover a claim in a
particular situation or to the extent that coverage is denied by the carrier for
some reason, the Company may be required to fund any such losses out of
available cash flow and its financial position and results of operations could
by materially adversely affected.
COVENANT LIMITATIONS. The Company's debt and operating lease agreements
contain numerous financial and operating covenants that limit the discretion of
the Company's management with respect to certain business matters. These
covenants 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, to sell or
otherwise dispose of assets and to merge or consolidate with other entities. The
new credit facility also requires the Company to meet certain financial ratios
and tests. A failure to comply with the obligations contained in such debt
agreements 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.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - Reference is made to the Exhibit Index on Page 20 for a list
of exhibits filed as part of this report pursuant to Item 601 of
Regulation S-K.
(b) Reports on Form 8-K - A report on Form 8-K was filed with the Commission
on May 6, 1998 in which the Company announced the exercise of its option
to acquire the remaining interest in the parent company of Chansommes do
Brasil Ind. e Com. Ltda., the Brazilian contract manufacturer of its
diapers.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRYPERS CORPORATION
Date: August 14, 1998 By: /s/ JONATHAN P. FOSTER
--------------- --------------------------
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
19
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
------------------------------
10.1 Employment Agreement dated January 1, 1998 by and between Drypers
Corporation and Walter V. Klemp.
10.2 Employment Agreement dated January 1, 1998 by and between Drypers
Corporation and Raymond M. Chambers.
10.3 Employment Agreement dated January 1, 1998 by and between Drypers
Corporation and Joe D. Tanner.
27 Financial Data Schedule
20
<PAGE>
EXHIBIT 10.1
AGREEMENT AMENDING AND RESTATING
EMPLOYMENT AGREEMENT
BETWEEN
DRYPERS CORPORATION
AND
WALTER V. KLEMP
JANUARY 1, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
1. EMPLOYMENT............................................................ 1
2. SCOPE OF EMPLOYMENT................................................... 1
3. VACATION.............................................................. 2
4. COMPENSATION.......................................................... 2
5. TERM.................................................................. 2
6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER.............................. 6
7. EXPENSES.............................................................. 7
8. EMPLOYEE BENEFITS..................................................... 7
9. NON-COMPETITION....................................................... 8
10. DISCLOSURE OF CONFIDENTIAL INFORMATION................................ 10
11. TRADE SECRETS......................................................... 11
12. LEGAL FEES AND EXPENSES............................................... 11
13. ASSIGNMENT............................................................ 11
14. SUCCESSORS............................................................ 11
15. ENTIRE AGREEMENT...................................................... 11
16. GOVERNING LAW......................................................... 12
17. WAIVER................................................................ 12
18. ENFORCEABILITY........................................................ 12
19. NOTICES............................................................... 12
20. ARBITRATION........................................................... 12
<PAGE>
AGREEMENT AMENDING AND RESTATING
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made as of the 1st day of
January, 1998, between Drypers Corporation, a Delaware corporation (the
"Employer"), and Walter V. Klemp (the "Employee"),
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Employer desires to obtain the services of the Employee, and the
Employee desires to be employed by the Employer upon the terms and conditions
hereinafter set forth;
WHEREAS, the Employer and the Employee entered into an Employment Agreement
made as of February 25, 1997 (the "Employment Agreement"), by which Employer
employed the Employee, and the Employee agreed to serve the Employer, in the
capacity, for the term, and subject to the conditions specified therein, and
WHEREAS, Employer and the Employee wish to amend and restate the Employment
Agreement and wish to enter into an agreement on a long-term basis for the full-
time services of Employee;
NOW, THEREFORE, in consideration of the premises, the agreements herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto agree that the Employment Agreement is hereby
amended and restated effective as of the date hereof as follows:
1. EMPLOYMENT. Subject to the terms and conditions hereinafter set forth, the
Employer hereby agrees to employ the Employee, and the Employee hereby agrees to
serve the Employer, in the capacity and for the Term of Employment specified
herein.
2. SCOPE OF EMPLOYMENT. During the Term of Employment hereunder, the Employee
will serve as Co-Chief Executive Officer of the Employer in accordance with the
provisions of Article V, Section 5.7 of the By-Laws of the Employer. In that
connection, the Employee will:
(a) devote his full time, attention, and energies to the business of the
Employer and will diligently and to the best of his ability perform all duties
incident to his employment hereunder;
<PAGE>
(b) use his best efforts to promote the interests and goodwill of the
Employer; and
(c) perform such other duties commensurate with his office as the Board of
Directors of the Employer may from time-to-time assign to him.
The foregoing shall not be construed as preventing the Employee from making
investments in other businesses or enterprises provided such investments do not
require the provision of substantial services by the Employee to the operations
or the affairs of such businesses or enterprises such that the provision thereof
would interfere in any respect with the performance of the Employee's duties
hereunder.
3. VACATION. During the Term of Employment the Employee shall be entitled to
sick leave, holidays, and an annual four-week vacation, all in accordance with
the regular policy of the Employer, during which time his compensation shall be
paid in full. Each such vacation shall be taken by the Employee at such times as
may be mutually agreed upon by the Employee and Employer.
4. COMPENSATION. As compensation for his services hereunder and in
consideration of his agreement not to compete as set forth in Section 9, the
Employer shall:
(a) during the Term of Employment pay the Employee, subject to the terms
and conditions of this Agreement, a base salary at the rate of not less than
$300,000.00 per year, payable in accordance with the normal payroll practices
of the Employer but in no less than equal bi-weekly installments; and
(b) during the Term of Employment as additional compensation for services
hereunder during the term of this Agreement, the Employee shall be entitled to
an annual bonus in amount as shall be determined by the Compensation Committee
of Board of Directors of the Employer for each of the Company's fiscal years
ending after the date hereof.
2
<PAGE>
5. TERM.
(a) The "Term of Employment", as used herein, shall mean a period
commencing on the date hereof and ending on the third anniversary (the "Ending
Date") of the later to occur of (A) the receipt by the Employee of a written
notice of termination by the Employer given to the Employee or (B) the
occurrence of an event specified in this Section 5(a); provided however that
the occurrence of any of the following events set forth in this Section 5(a)
prior to the Ending Date shall result in the immediate termination of the Term
of Employment, but shall not result in the termination of this Agreement:
(i) the commission by the Employee of an act constituting a dishonest
or other act of material misconduct, or a fraudulent act or a felony
under the laws of any state or of the United States to which the
Employer or Employee is subject, and such act results (or is intended
to result directly or indirectly) in the Employee's substantial gain
or personal enrichment to the detriment of the Employer;
or
(ii) the death of the Employee;
or
(iii) the inability of the Employee to perform his duties hereunder,
whether by reason of injury (physical or mental), illness or
otherwise, incapacitating him for a continuous period exceeding three
months, excluding any leaves of absence approved by the Employer;
or
(iv) the Employee resigns at any time before a Change in Control (as
defined in Section 6(d));
or
3
<PAGE>
(v) the Employee resigns at any time after a Change in Control (other
than as provided in Section 5(a)(vii) below) prior to the occurrence
of a Good Cause event ("Good Cause" being defined below);
or
(vi) the Employee resigns for any reason at any time subsequent to the
occurrence of a Good Cause event after a Change in Control;
or
(vii) the Employee resigns for any reason (with or without the
occurrence of a Good Cause event) at any time during the 30-day period
commencing upon the first anniversary of a Change in Control.
(b) The term "Good Cause" shall mean the occurrence of any of the
following events:
(i) the assignment by the Employer to the Employee of duties that are
materially inconsistent with the Employee's office with Employer at
the time of such assignment, or the removal by the Employer from the
Employee of a material portion of those duties usually appertaining to
the Employee's office with the Employer at the time of such removal;
or
(ii) a material change by the Employer, without the Employee's prior
written consent, in the Employee's responsibilities to the Employer,
as such responsibilities are ordinarily and customarily required from
time to time of a chief executive officer of a corporation engaged in
the Employer's business;
or
4
<PAGE>
(iii) any removal of the Employee from, or any failure to reelect or
to reappoint the Employee to, the office stated in Section 2;
or
(iv) the Employer's direction that the Employee discontinue service
(or not seek reelection or reappointment) as a director, officer or
member of any corporation or association of which the Employee is a
director, officer, or member at the date of this Agreement;
or
(v) a reduction by the Employer in the amount of the Employee's base
salary as determined under this Agreement (or as subsequently
increased), or the failure of the Employer to pay such base salary to
the Employee at the time and in the manner specified in Section 4;
or
(vi) other than with respect to the annual performance bonus specified
in Section 4(b) or, as made with the Employee's prior written consent,
the discontinuance (without comparable replacement) or material
reduction by the Employer of the Employee's participation in any bonus
or other employee benefit arrangement (including, without limitation,
any profit-sharing, thrift, life insurance, medical, dental,
hospitalization, stock option or retirement plan or arrangement) in
which the Employee is a participant under the terms of this Agreement,
as in effect on the date hereof or as may be improved from time to
time hereafter;
or
5
<PAGE>
(vii) the moving by the Employer of the Employee's principal office
space, related facilities, or support personnel, from the Employer's
principal operating offices, or the Employer's requiring the Employee
to perform a majority of his duties outside the Employer's principal
operating offices for a period of more than 30 consecutive days;
or
(viii) the relocation, without the Employee's prior written consent,
of the Employer's principal operating offices to a location outside
the county in which such offices are located at the time of the
signing of this Agreement;
or
(ix) in the event the Employer requires the Employee to reside at a
location more than 25 miles from the Employer's principal operating
offices, except for occasional travel in connection with the
Employer's business to an extent and in a manner which is
substantially consistent with the Employee's current business travel
obligations;
or
(x) in the event the Employee consents to a relocation of the
Employer's principal operating offices, the failure of the Employer to
(A) pay or reimburse the Employee on an after-tax basis for all
reasonable moving expenses incurred by the Employee in connection with
such relocation or (B) indemnify the Employee on an after-tax basis
against any loss realized by the Employee on the sale of his principal
residence in connection with such relocation;
or
6
<PAGE>
(xi) the failure of the Employer to provide the Employee with the
benefits specified under Section 8;
or
(xii) the failure of the Employer to continue to provide the Employee
with office space, related facilities and support personnel
(including, without limitation, administrative and secretarial
assistance) that are commensurate with the Employee's responsibilities
to and position with the Employer;
or
(xiii) the failure by the Employer to promptly reimburse the Employee
for the reasonable business expenses incurred by the Employee in the
performance of his duties for the Employer, as set forth in Section 7.
6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER.
(a) Subject to the provisions of paragraph (b) of this Section 6, in the
event of termination of the Term of Employment for any reason specified in
subsections (i), (ii), (iii), (iv) or (v) of Section 5(a) above, the Employer
shall no longer be obligated to make the payments specified under Section 4 or
to provide the benefits under Section 8; provided, however, any payments
payable under Section 4 which shall have been earned but not yet paid shall be
paid by the Employer to the Employee, and the Employee shall pay any amount or
amounts then owed by the Employee to the Employer.
(b) In the event of the termination of the Term of Employment for any
reason specified in subsection (vi) of Section 5(a) above, the Employer shall,
until the third anniversary of the date of such termination continue to be
obligated to (i) make the payments specified under Section 4, (ii) provide the
benefits specified under Section 8(b), and (iii) maintain the Employee as a
participant in, or provide benefits comparable to those of, the health
insurance benefit
7
<PAGE>
plan specified under Section 8(a). In the event of the termination of the Term
of Employment for any reason specified in subsection (vii) of Section 5(a)
above, the Employer shall, until the second anniversary of the date of such
termination continue to be obligated to (i) make the payments specified under
Section 4, (ii) provide the benefits specified under Section 8(b), and (iii)
maintain the Employee as a participant in, or provide benefits comparable to
those of, the health insurance benefit plan specified under Section 8(a). In
the event of termination as specified in this paragraph (b), the Employee may
elect, upon 30 days prior written notice of such election delivered to the
Employer to have the remaining amounts payable to him pursuant to this Section
6(b) paid in a lump sum amount, which amount shall be computed by discounting
to present value such remaining amounts payable to the Employee at a rate of
8% per annum for each payment otherwise owed to the Employee through the
remaining months in such Term of Employment.
(c) Under no circumstances shall the Employee be required to mitigate the
amount of payment specified in Section 4 which is payable during the Term of
Employment specified in paragraph (b) of this Section 6.
(d) A "Change in Control" shall be deemed to have occurred at any time
after the date of this Agreement that (i) any person (other than those persons
who own more than 10% of the combined voting power of the Employer's
outstanding voting securities on the date hereof) becomes the beneficial
owner, directly or indirectly, of 30% or more of the combined voting power of
the Employer's then outstanding voting securities, or (ii) the individuals who
at the beginning of any period of two consecutive years constitute the
Employer's Board of Directors cease for any reason to constitute a majority of
such Board of Directors at any time during such two-year period.
7. EXPENSES. The Employer agrees that during the Term of Employment it will
reimburse the Employee for out-of-pocket expenses reasonably incurred by him in
connection with the performance of his service hereunder upon the presentation
by the Employee of an itemized [monthly] accounting of such expenditures,
including receipts where required for federal income tax regulations.
8
<PAGE>
8. EMPLOYEE BENEFITS . During the Term of Employment:
(a) Employee shall, upon satisfaction of any eligibility requirements with
respect thereto, be entitled to participate in all employee benefit plans of
Employer, including without limitation those health, dental, accidental death
and dismemberment, and long term disability plans of Employer now or hereafter
in effect that are made available to executive officers of the Employer; and
(b) Employer shall maintain for Employee the benefits summarized on
Exhibit A attached hereto.
9. NON-COMPETITION.
(a) Employee acknowledges that he shall receive special training and
knowledge from Employer. Employee acknowledges that included in the special
knowledge received is the confidential information identified in Paragraph 10
below. Employee acknowledges that this confidential information is valuable to
Employer and, therefore, its protection and maintenance constitutes a
legitimate interest to be protected by Employer by this covenant not to
compete. Therefore, Employee agrees that for the period (the "Noncompetition
Period") (i) during the Term of Employment and (ii) in the event of a
termination of the Term of Employment upon the occurrence of an event set
forth in Section 5(a) hereof, commencing upon the occurrence of such event set
forth in Section 5(a) and ending upon the first anniversary thereof, in each
case unless otherwise extended pursuant to the terms hereof, Employee will
not, directly or indirectly, either as an employee, employer, consultant,
agent, principal, partner, stockholder, corporate officer, director, or in any
other individual or representative capacity, engage or participate in any
business that is engaged in the manufacture or marketing of disposable baby
diapers, disposable training pants or pre-moistened wipes within the United
States of America or within any other geographic area of the world where the
Employer engages or proposes at the time of the termination of the Term of
Employment to engage in business. Employee represents to Employer that the
enforcement of the restriction contained in this Section 9 would not be unduly
burdensome to Employee and that in order to induce the Employer to provide for
the Term of Employment as set forth in Section 5 hereof to
9
<PAGE>
replace Section 4.1 of the Employment Agreement, Employee further represents
and acknowledges that Employee has entered into this agreement not to compete
and is willing and able to compete in other geographical areas not prohibited
by this Section 9.
(b) Employee agrees that a breach or violation of this covenant not to
compete by such Employee shall entitle the Employer, as a matter of right, to
an injunction issued by any court of competent jurisdiction, restraining any
further or continued breach or violation of this covenant. Such right to an
injunction shall be cumulative and in addition to, and not in lieu of, any
other remedies to which the Employer may show itself justly entitled. Further,
during any period in which Employee is in breach of this covenant not to
compete, the time period of this covenant shall be extended for an amount of
time that Employee is in breach hereof.
(c) In addition to the restrictions set forth in paragraph (a) of this
Section 9, Employee shall not for the Noncompetition Period, either directly
or indirectly, (i) make known to any person, firm or corporation that is
engaged in the manufacture or marketing of disposable baby diapers, disposable
training pants or pre-moistened wipes, the names and addresses of any of the
customers of the Employer or contacts of the Employer or any other information
pertaining to such persons or (ii) call on, solicit, or take away, or attempt
to call on, solicit or take away any of the customers of the Employer on whom
Employee called or with whom Employee became acquainted during Employee's
association with the Employer, whether for Employee or for any other person,
firm or corporation.
(d) The representation and covenants contained in this Section 9 on the
part of Employee will be construed as ancillary to and independent of any
other provision of this Agreement, and the existence of any claim or cause of
action of Employee against Employer or any officer, director, or shareholder
of Employer, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by Employer of the covenants of the
Employee contained in this Section 9. In addition, the provisions of this
Section 9 shall continue to be binding upon Employee in accordance with its
terms, notwithstanding the termination of Employee's employment for any
reason.
10
<PAGE>
(e) If Employee violates any covenant contained in this Section 9 and
Employer brings legal action for injunctive or other relief, the Employer
shall not, as a result of the time involved in obtaining the relief, be
deprived of the benefit of the full period of any such covenant. Accordingly,
the covenants of Employee contained in this Section 9 shall be deemed to have
durations as specified above, which periods shall commence upon the later of
(i) the Ending Date and (ii) the date of entry by a court of competent
jurisdiction of a final judgment enforcing the covenants of Employee in this
Section 9.
(f) The parties to this Agreement agree that the limitations contained in
this Section 9 with respect to geographic area, duration, and scope of
activity are reasonable. However, if any court shall determine that the
geographic area, duration, or scope of activity of any restriction contained
in this Section 9 is unenforceable, it is the intention of the parties that
such restrictive covenant set forth herein shall not thereby be terminated but
shall be deemed amended to the extent required to render it valid and
enforceable.
10. DISCLOSURE OF CONFIDENTIAL INFORMATION. During the Term of Employment, the
Employee will disclose to Employer all ideas and business plans developed by him
during such period which relate directly to the business of Employer. The
Employee recognizes and acknowledges that he may have access to certain
additional confidential information of Employer or of certain corporations
affiliated with Employer, and that all such information constitutes valuable,
special and unique property of Employer and its affiliates. The Employee agrees
that, during the Term of Employment and for a period of five years after the
termination of the Term of Employment, he will not, without the prior written
consent of Employer, disclose or authorize or permit anyone under his direction
to disclose to anyone not properly entitled thereto any of such confidential
information. For purposes of the immediately preceding sentence, persons
properly entitled to such information shall be (i) the Board of Directors of
Employer and such officers, employees and agents of Employer or any affiliate
thereof to whom such information is furnished in the normal course of business
under established policies approved by Employer and (ii) such outside parties as
are legally entitled to or are customarily furnished such information, including
banking, lending, collection, accounting, and data processing institutions or
agencies who or which are provided such information in the normal course of
business of Employer. The Employee
11
<PAGE>
further agrees that upon termination of the Term of Employment he will not take
with him or retain, without the prior written authorization of Employer, any
papers, procedural or technical manuals, customer lists, customer account
analyses (including, without limitation, accounts receivable agings, customer
payment histories and customer account activity reports), price books, files or
other documents or copies thereof belonging to Employer or to any affiliate of
Employer, or any materials, supplies, equipment or furnishings belonging to
Employer or to any affiliate of Employer, or any other confidential information
of any kind belonging to Employer or any affiliate of Employer. In the event of
a breach or threatened breach by the Employee of the provisions of this Section
10, Employer and the Employee agree that the remedy at law available to Employer
and its affiliates would be inadequate and that Employer and its affiliates
shall be entitled to an injunction, without the necessity of posting bond
therefor, restraining the Employee from disclosing, in whole or in part, such
confidential information. Nothing herein shall be construed as prohibiting
Employer and its affiliates from pursuing any other remedies, in addition to the
injunctive relief available under this Section 10, for such breach or threatened
breach, including the recovery of damages from the Employee.
11. TRADE SECRETS. All patents, formulae, inventions, processes, copyrights,
proprietary information, trademarks or trade names, or future improvements to
patents, formulae, inventions, processes, copyrights, proprietary information,
trademarks or trade names, developed or completed by the Employee during the
Term of Employment (collectively, the "Items") shall be promptly disclosed to
Employer, and the Employee shall execute such instruments of assignment of the
Items to the Employer as Employer shall request. The Employee acknowledges that
a remedy at law for any breach by him of the provisions of this Section 11 would
be inadequate, and the Employee hereby agrees that Employer shall be entitled to
injunctive relief in case of any such breach.
12. LEGAL FEES AND EXPENSES. In the event that either of the parties to this
Agreement contests the validity or enforceability of any of the provisions of
Sections 9, 10 or 11 hereof, then such contesting party hereby agrees to pay in
a timely and prompt manner any and all legal fees and expenses incurred by the
other party from time to time as a result of such contesting party's contesting
of the validity or enforceability of any provision of Sections 9, 10, or 11
hereof this Agreement; provided, however, nothing contained in this Section 12
shall obligate the Employer to pay any legal fees or expenses incurred by the
Employee in connection with any litigation by the Employer against the Employee
to enforce the terms of this Agreement against the Employee.
12
<PAGE>
13. ASSIGNMENT. This Agreement is a personal employment contract and the
rights and interests of the Employee hereunder may not be sold, transferred,
assigned, pledged, or hypothecated, directly or indirectly, or by operation of
law or otherwise.
14. SUCCESSORS. This Agreement shall inure to the benefit of and be binding
upon the Employer and its successors and assigns and upon the Employee and his
legal representatives.
15. ENTIRE AGREEMENT. This Agreement, which contains the entire contractual
understanding between the parties, may not be changed orally but only by a
written instrument signed by the Employee and the Chairman of the Board of
Directors of the Employer.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, and Employee agrees to subject
himself to the jurisdiction of the Southern District of Texas.
17. WAIVER. The waiver of any breach of any term or condition of this
Agreement shall not be deemed to constitute the waiver of any other breach of
the same or any other term or condition.
18. ENFORCEABILITY. In the event any provision of this Agreement is found to
be unenforceable or invalid, such provision shall be severable from this
Agreement and shall not affect the enforceability or validity of any other
provision contained in this Agreement.
19. NOTICES. Any notices or other communications required or permitted
hereunder shall be sufficiently given if sent by registered mail, postage
prepaid, and
(a) if to the Employee, addressed to him at 1973 West Clay, Houston, Texas
77019, and
(b) if to the Employer, addressed to it at 5300 Memorial, Suite 900
Houston, Texas 77007 (Attention: Chairman of the Board of Directors), or such
other address as the party to whom or to which such notice or other
communication is to be given shall have specified in writing to the other
party, and any such notice or communication shall be deemed to have been given
as of the date so mailed.
13
<PAGE>
20. ARBITRATION. Employer and Employee agree to submit to final and binding
arbitration any and all disputes, claims (whether in tort, contract, statutory,
or otherwise) and/or disagreements concerning the interpretation or application
of this Agreement and/or Employee's employment by Employer and/or the
termination of this Agreement and/or Employee's employment by Employer;
PROVIDED, HOWEVER, notwithstanding the foregoing, in no event shall any dispute,
claim or disagreement arising under Section 9, 10 or 11 of this Agreement be
submitted to arbitration pursuant to this Section 18 or otherwise. Any such
dispute, claim and/or disagreement subject to arbitration pursuant to the terms
of this Section 18 shall be resolved by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association (the
"AAA"). Arbitration under this provision must be initiated within 30 days of the
action, inaction, or occurrence about which the party initiating the arbitration
is complaining. Within ten days of the initiation of an arbitration hereunder,
each party will designate an arbitrator pursuant to Rule 14 of the AAA Rules.
The appointed arbitrators will appoint a neutral arbitrator from the panel in
the manner prescribed in Rule 13 of the AAA Rules. Employee and Employer agree
that the decision of the arbitrators selected hereunder will be final and
binding on both parties. This arbitration provision is expressly made pursuant
to and shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1 -
14. The parties hereto agree that pursuant to Section 9 of the Act that a
judgment of the United States District Court for the Southern District of Texas,
shall be entered upon the award made pursuant to the arbitration.
IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed by
its duly authorized officer, and the Employee has executed this Agreement as of
the date first above written.
DRYPERS CORPORATION
/s/ TERRY A. TOGNIETTI
By____________________________________________________
Terry A. Tognietti
Co-Chief Executive Officer
EMPLOYEE
/s/ WALTER V. KLEMP
-------------------------------------------------------
Walter V. Klemp
14
<PAGE>
EXHIBIT A
HEALTH AND WELFARE BENEFITS SUMMARY
. Group comprehensive medical, dental, and term life insurance. Eighty
percent of the premiums for Employee and his dependents are paid by
Employer.
. Long-term disability insurance.
. Term life insurance in the amount of $250,000.
. Participation in the Company's 401k plan.
OTHER EMPLOYEE PERQUISITES
. Use of a car not more than (30 months old, with monthly lease payment not to
exceed $900), such car to be equipped with a cellular phone, as well as all
costs and expenses incurred in operating such car, including gas, service
and maintenance charges, parts, fees for inspection and license plates,
parking and tolls, and cellular phone equipment, installation and use
charges.
. Health and country club monthly family membership dues and reasonable
expenses in accordance with the Employer's policies.
. Income tax preparation costs.
15
<PAGE>
EXHIBIT 10.2
AGREEMENT AMENDING AND RESTATING
EMPLOYMENT AGREEMENT
BETWEEN
DRYPERS CORPORATION
AND
RAYMOND M. CHAMBERS
JANUARY 1, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
1. EMPLOYMENT..................................................... 1
2. SCOPE OF EMPLOYMENT............................................ 1
3. VACATION....................................................... 2
4. COMPENSATION................................................... 2
5. TERM........................................................... 2
6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER....................... 6
7. EXPENSES....................................................... 7
8. EMPLOYEE BENEFITS.............................................. 7
9. NON-COMPETITION................................................ 8
10. DISCLOSURE OF CONFIDENTIAL INFORMATION......................... 10
11. TRADE SECRETS.................................................. 11
12. LEGAL FEES AND EXPENSES........................................ 11
13. ASSIGNMENT..................................................... 11
14. SUCCESSORS..................................................... 11
15. ENTIRE AGREEMENT............................................... 11
16. GOVERNING LAW.................................................. 12
17. WAIVER......................................................... 12
18. ENFORCEABILITY................................................. 12
19. NOTICES........................................................ 12
20. ARBITRATION.................................................... 12
<PAGE>
AGREEMENT AMENDING AND RESTATING
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made as of the 1st day of
January, 1998, between Drypers Corporation, a Delaware corporation (the
"Employer"), and Raymond M. Chambers (the "Employee"),
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Employer desires to obtain the services of the Employee, and the
Employee desires to be employed by the Employer upon the terms and conditions
hereinafter set forth;
WHEREAS, the Employer and the Employee entered into an Employment Agreement
made as of February 25, 1997 (the "Employment Agreement"), by which Employer
employed the Employee, and the Employee agreed to serve the Employer, in the
capacity, for the term, and subject to the conditions specified therein, and
WHEREAS, Employer and the Employee wish to amend and restate the Employment
Agreement and wish to enter into an agreement on a long-term basis for the full-
time services of Employee;
NOW, THEREFORE, in consideration of the premises, the agreements herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto agree that the Employment Agreement is hereby
amended and restated effective as of the date hereof as follows:
1. EMPLOYMENT. Subject to the terms and conditions hereinafter set
forth, the Employer hereby agrees to employ the Employee, and the Employee
hereby agrees to serve the Employer, in the capacity and for the Term of
Employment specified herein.
2. SCOPE OF EMPLOYMENT. During the Term of Employment hereunder, the
Employee will serve as Co-Chief Executive Officer of the Employer in
accordance with the provisions of Article V, Section 5.7 of the By-Laws of
the Employer. In that connection, the Employee will:
(a) devote his full time, attention, and energies to the business
of the Employer and will diligently and to the best of his ability
perform all duties incident to his employment hereunder;
<PAGE>
(b) use his best efforts to promote the interests and goodwill of
the Employer; and
(c) perform such other duties commensurate with his office as the
Board of Directors of the Employer may from time-to-time assign to
him.
The foregoing shall not be construed as preventing the Employee from making
investments in other businesses or enterprises provided such investments do not
require the provision of substantial services by the Employee to the operations
or the affairs of such businesses or enterprises such that the provision thereof
would interfere in any respect with the performance of the Employee's duties
hereunder.
3. VACATION. During the Term of Employment the Employee shall be
entitled to sick leave, holidays, and an annual four-week vacation, all in
accordance with the regular policy of the Employer, during which time his
compensation shall be paid in full. Each such vacation shall be taken by
the Employee at such times as may be mutually agreed upon by the Employee
and Employer.
4. COMPENSATION. As compensation for his services hereunder and in
consideration of his agreement not to compete as set forth in Section 9,
the Employer shall:
(a) during the Term of Employment pay the Employee, subject to the
terms and conditions of this Agreement, a base salary at the rate of
not less than $300,000.00 per year, payable in accordance with the
normal payroll practices of the Employer but in no less than equal bi-
weekly installments; and
(b) during the Term of Employment as additional compensation for
services hereunder during the term of this Agreement, the Employee
shall be entitled to an annual bonus in amount as shall be determined
by the Compensation Committee of Board of Directors of the Employer
for each of the Company's fiscal years ending after the date hereof.
2
<PAGE>
5. TERM.
(a) The "Term of Employment", as used herein, shall mean a period
commencing on the date hereof and ending on the third anniversary (the
"Ending Date") of the later to occur of (A) the receipt by the Employee
of a written notice of termination by the Employer given to the Employee
or (B) the occurrence of an event specified in this Section 5(a);
provided however that the occurrence of any of the following events set
forth in this Section 5(a) prior to the Ending Date shall result in the
immediate termination of the Term of Employment, but shall not result in
the termination of this Agreement:
(i) the commission by the Employee of an act constituting a
dishonest or other act of material misconduct, or a fraudulent act or a
felony under the laws of any state or of the United States to which the
Employer or Employee is subject, and such act results (or is intended to
result directly or indirectly) in the Employee's substantial gain or
personal enrichment to the detriment of the Employer;
or
(ii) the death of the Employee;
or
(iii) the inability of the Employee to perform his duties
hereunder, whether by reason of injury (physical or mental), illness or
otherwise, incapacitating him for a continuous period exceeding three
months, excluding any leaves of absence approved by the Employer;
or
(iv) the Employee resigns at any time before a Change in
Control (as defined in Section 6(d));
or
3
<PAGE>
(v) the Employee resigns at any time after a Change in
Control (other than as provided in Section 5(a)(vii) below) prior to the
occurrence of a Good Cause event ("Good Cause" being defined below);
or
(vi) the Employee resigns for any reason at any time
subsequent to the occurrence of a Good Cause event after a Change in
Control;
or
(vii) the Employee resigns for any reason (with or without
the occurrence of a Good Cause event) at any time during the 30-
day period commencing upon the first anniversary of a Change in
Control.
(b) The term "Good Cause" shall mean the occurrence of any of the
following events:
(i) the assignment by the Employer to the Employee of duties
that are materially inconsistent with the Employee's office with
Employer at the time of such assignment, or the removal by the Employer
from the Employee of a material portion of those duties usually
appertaining to the Employee's office with the Employer at the time of
such removal;
or
(ii) a material change by the Employer, without the
Employee's prior written consent, in the Employee's responsibilities to
the Employer, as such responsibilities are ordinarily and customarily
required from time to time of a chief executive officer of a corporation
engaged in the Employer's business;
or
4
<PAGE>
(iii) any removal of the Employee from, or any failure to
reelect or to reappoint the Employee to, the office stated in Section 2;
or
(iv) the Employer's direction that the Employee discontinue
service (or not seek reelection or reappointment) as a director, officer
or member of any corporation or association of which the Employee is a
director, officer, or member at the date of this Agreement;
or
(v) a reduction by the Employer in the amount of the
Employee's base salary as determined under this Agreement (or as
subsequently increased), or the failure of the Employer to pay such base
salary to the Employee at the time and in the manner specified in
Section 4;
or
(vi) other than with respect to the annual performance bonus
specified in Section 4(b) or, as made with the Employee's prior written
consent, the discontinuance (without comparable replacement) or material
reduction by the Employer of the Employee's participation in any bonus
or other employee benefit arrangement (including, without limitation,
any profit-sharing, thrift, life insurance, medical, dental,
hospitalization, stock option or retirement plan or arrangement) in
which the Employee is a participant under the terms of this Agreement,
as in effect on the date hereof or as may be improved from time to time
hereafter;
or
5
<PAGE>
(vii) the moving by the Employer of the Employee's principal
office space, related facilities, or support personnel, from the
Employer's principal operating offices, or the Employer's requiring the
Employee to perform a majority of his duties outside the Employer's
principal operating offices for a period of more than 30 consecutive
days;
or
(viii) the relocation, without the Employee's prior written
consent, of the Employer's principal operating offices to a location
outside the county in which such offices are located at the time of the
signing of this Agreement;
or
(ix) in the event the Employer requires the Employee to
reside at a location more than 25 miles from the Employer's principal
operating offices, except for occasional travel in connection with the
Employer's business to an extent and in a manner which is substantially
consistent with the Employee's current business travel obligations;
or
(x) in the event the Employee consents to a relocation of the
Employer's principal operating offices, the failure of the Employer to
(A) pay or reimburse the Employee on an after-tax basis for all
reasonable moving expenses incurred by the Employee in connection with
such relocation or (B) indemnify the Employee on an after-tax basis
against any loss realized by the Employee on the sale of his principal
residence in connection with such relocation;
or
6
<PAGE>
(xi) the failure of the Employer to provide the Employee with
the benefits specified under Section 8;
or
(xii) the failure of the Employer to continue to provide the
Employee with office space, related facilities and support personnel
(including, without limitation, administrative and secretarial
assistance) that are commensurate with the Employee's responsibilities
to and position with the Employer;
or
(xiii) the failure by the Employer to promptly reimburse the
Employee for the reasonable business expenses incurred by the Employee
in the performance of his duties for the Employer, as set forth in
Section 7.
6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER.
(a) Subject to the provisions of paragraph (b) of this Section 6, in the
event of termination of the Term of Employment for any reason specified in
subsections (i), (ii), (iii), (iv) or (v) of Section 5(a) above, the Employer
shall no longer be obligated to make the payments specified under Section 4 or
to provide the benefits under Section 8; provided, however, any payments
payable under Section 4 which shall have been earned but not yet paid shall be
paid by the Employer to the Employee, and the Employee shall pay any amount or
amounts then owed by the Employee to the Employer.
(b) In the event of the termination of the Term of Employment for any
reason specified in subsection (vi) of Section 5(a) above, the Employer shall,
until the third anniversary of the date of such termination continue to be
obligated to (i) make the payments specified under Section 4, (ii) provide the
benefits specified under Section 8(b), and (iii) maintain the Employee as a
participant in, or provide benefits comparable to those of, the health
insurance benefit plan specified under Section 8(a). In the event of the
termination of the Term of Employment for any reason
7
<PAGE>
specified in subsection (vii) of Section 5(a) above, the Employer
shall, until the second anniversary of the date of such termination
continue to be obligated to (i) make the payments specified under
Section 4, (ii) provide the benefits specified under Section 8(b), and
(iii) maintain the Employee as a participant in, or provide benefits
comparable to those of, the health insurance benefit plan specified
under Section 8(a). In the event of termination as specified in this
paragraph (b), the Employee may elect, upon 30 days prior written
notice of such election delivered to the Employer to have the
remaining amounts payable to him pursuant to this Section 6(b) paid in
a lump sum amount, which amount shall be computed by discounting to
present value such remaining amounts payable to the Employee at a rate
of 8% per annum for each payment otherwise owed to the Employee
through the remaining months in such Term of Employment.
(c) Under no circumstances shall the Employee be required to
mitigate the amount of payment specified in Section 4 which is payable
during the Term of Employment specified in paragraph (b) of this
Section 6.
(d) A "Change in Control" shall be deemed to have occurred at any
time after the date of this Agreement that (i) any person (other than
those persons who own more than 10% of the combined voting power of
the Employer's outstanding voting securities on the date hereof)
becomes the beneficial owner, directly or indirectly, of 30% or more
of the combined voting power of the Employer's then outstanding voting
securities, or (ii) the individuals who at the beginning of any period
of two consecutive years constitute the Employer's Board of Directors
cease for any reason to constitute a majority of such Board of
Directors at any time during such two-year period.
7. EXPENSES. The Employer agrees that during the Term of Employment it
will reimburse the Employee for out-of-pocket expenses reasonably incurred by
him in connection with the performance of his service hereunder upon the
presentation by the Employee of an itemized [monthly] accounting of such
expenditures, including receipts where required for federal income tax
regulations.
8
<PAGE>
8. EMPLOYEE BENEFITS. During the Term of Employment:
(a) Employee shall, upon satisfaction of any eligibility
requirements with respect thereto, be entitled to participate in all
employee benefit plans of Employer, including without limitation those
health, dental, accidental death and dismemberment, and long term
disability plans of Employer now or hereafter in effect that are made
available to executive officers of the Employer; and
(b) Employer shall maintain for Employee the benefits summarized
on Exhibit A attached hereto.
9. NON-COMPETITION.
(a) Employee acknowledges that he shall receive special training
and knowledge from Employer. Employee acknowledges that included in the
special knowledge received is the confidential information identified in
Paragraph 10 below. Employee acknowledges that this confidential
information is valuable to Employer and, therefore, its protection and
maintenance constitutes a legitimate interest to be protected by
Employer by this covenant not to compete. Therefore, Employee agrees
that for the period (the "Noncompetition Period") (i) during the Term of
Employment and (ii) in the event of a termination of the Term of
Employment upon the occurrence of an event set forth in Section 5(a)
hereof, commencing upon the occurrence of such event set forth in
Section 5(a) and ending upon the first anniversary thereof, in each case
unless otherwise extended pursuant to the terms hereof, Employee will
not, directly or indirectly, either as an employee, employer,
consultant, agent, principal, partner, stockholder, corporate officer,
director, or in any other individual or representative capacity, engage
or participate in any business that is engaged in the manufacture or
marketing of disposable baby diapers, disposable training pants or pre-
moistened wipes within the United States of America or within any other
geographic area of the world where the Employer engages or proposes at
the time of the termination of the Term of Employment to engage in
business. Employee represents to Employer that the enforcement of the
restriction contained in this Section 9 would not be unduly burdensome
to Employee and that in order to induce the Employer to provide for the
Term of Employment as set forth in Section 5 hereof to
9
<PAGE>
replace Section 4.1 of the Employment Agreement, Employee further
represents and acknowledges that Employee has entered into this
agreement not to compete and is willing and able to compete in other
geographical areas not prohibited by this Section 9.
(b) Employee agrees that a breach or violation of this covenant
not to compete by such Employee shall entitle the Employer, as a matter
of right, to an injunction issued by any court of competent
jurisdiction, restraining any further or continued breach or violation
of this covenant. Such right to an injunction shall be cumulative and in
addition to, and not in lieu of, any other remedies to which the
Employer may show itself justly entitled. Further, during any period in
which Employee is in breach of this covenant not to compete, the time
period of this covenant shall be extended for an amount of time that
Employee is in breach hereof.
(c) In addition to the restrictions set forth in paragraph (a) of
this Section 9, Employee shall not for the Noncompetition Period, either
directly or indirectly, (i) make known to any person, firm or
corporation that is engaged in the manufacture or marketing of
disposable baby diapers, disposable training pants or pre-moistened
wipes, the names and addresses of any of the customers of the Employer
or contacts of the Employer or any other information pertaining to such
persons or (ii) call on, solicit, or take away, or attempt to call on,
solicit or take away any of the customers of the Employer on whom
Employee called or with whom Employee became acquainted during
Employee's association with the Employer, whether for Employee or for
any other person, firm or corporation.
(d) The representation and covenants contained in this Section 9
on the part of Employee will be construed as ancillary to and
independent of any other provision of this Agreement, and the existence
of any claim or cause of action of Employee against Employer or any
officer, director, or shareholder of Employer, whether predicated on
this Agreement or otherwise, shall not constitute a defense to the
enforcement by Employer of the covenants of the Employee contained in
this Section 9. In addition, the provisions of this Section 9 shall
continue to be binding upon Employee in accordance with its terms,
notwithstanding the termination of Employee's employment for any reason.
10
<PAGE>
(e) If Employee violates any covenant contained in this Section 9
and Employer brings legal action for injunctive or other relief, the
Employer shall not, as a result of the time involved in obtaining the
relief, be deprived of the benefit of the full period of any such
covenant. Accordingly, the covenants of Employee contained in this
Section 9 shall be deemed to have durations as specified above, which
periods shall commence upon the later of (i) the Ending Date and (ii)
the date of entry by a court of competent jurisdiction of a final
judgment enforcing the covenants of Employee in this Section 9.
(f) The parties to this Agreement agree that the limitations
contained in this Section 9 with respect to geographic area, duration,
and scope of activity are reasonable. However, if any court shall
determine that the geographic area, duration, or scope of activity of
any restriction contained in this Section 9 is unenforceable, it is the
intention of the parties that such restrictive covenant set forth herein
shall not thereby be terminated but shall be deemed amended to the
extent required to render it valid and enforceable.
10. DISCLOSURE OF CONFIDENTIAL INFORMATION. During the Term of
Employment, the Employee will disclose to Employer all ideas and business plans
developed by him during such period which relate directly to the business of
Employer. The Employee recognizes and acknowledges that he may have access to
certain additional confidential information of Employer or of certain
corporations affiliated with Employer, and that all such information constitutes
valuable, special and unique property of Employer and its affiliates. The
Employee agrees that, during the Term of Employment and for a period of five
years after the termination of the Term of Employment, he will not, without the
prior written consent of Employer, disclose or authorize or permit anyone under
his direction to disclose to anyone not properly entitled thereto any of such
confidential information. For purposes of the immediately preceding sentence,
persons properly entitled to such information shall be (i) the Board of
Directors of Employer and such officers, employees and agents of Employer or any
affiliate thereof to whom such information is furnished in the normal course of
business under established policies approved by Employer and (ii) such outside
parties as are legally entitled to or are customarily furnished such
information, including banking, lending, collection, accounting, and data
processing institutions or agencies who or which are provided such information
in the normal course of business of Employer. The Employee
11
<PAGE>
further agrees that upon termination of the Term of Employment he will not take
with him or retain, without the prior written authorization of Employer, any
papers, procedural or technical manuals, customer lists, customer account
analyses (including, without limitation, accounts receivable agings, customer
payment histories and customer account activity reports), price books, files or
other documents or copies thereof belonging to Employer or to any affiliate of
Employer, or any materials, supplies, equipment or furnishings belonging to
Employer or to any affiliate of Employer, or any other confidential information
of any kind belonging to Employer or any affiliate of Employer. In the event of
a breach or threatened breach by the Employee of the provisions of this Section
10, Employer and the Employee agree that the remedy at law available to Employer
and its affiliates would be inadequate and that Employer and its affiliates
shall be entitled to an injunction, without the necessity of posting bond
therefor, restraining the Employee from disclosing, in whole or in part, such
confidential information. Nothing herein shall be construed as prohibiting
Employer and its affiliates from pursuing any other remedies, in addition to the
injunctive relief available under this Section 10, for such breach or threatened
breach, including the recovery of damages from the Employee.
11. TRADE SECRETS. All patents, formulae, inventions, processes,
copyrights, proprietary information, trademarks or trade names, or future
improvements to patents, formulae, inventions, processes, copyrights,
proprietary information, trademarks or trade names, developed or completed by
the Employee during the Term of Employment (collectively, the "Items") shall be
promptly disclosed to Employer, and the Employee shall execute such instruments
of assignment of the Items to the Employer as Employer shall request. The
Employee acknowledges that a remedy at law for any breach by him of the
provisions of this Section 11 would be inadequate, and the Employee hereby
agrees that Employer shall be entitled to injunctive relief in case of any such
breach.
12. LEGAL FEES AND EXPENSES. In the event that either of the parties to
this Agreement contests the validity or enforceability of any of the provisions
of Sections 9, 10 or 11 hereof, then such contesting party hereby agrees to pay
in a timely and prompt manner any and all legal fees and expenses incurred by
the other party from time to time as a result of such contesting party's
contesting of the validity or enforceability of any provision of Sections 9, 10,
or 11 hereof this Agreement; provided, however, nothing contained in this
Section 12 shall obligate the Employer to pay any legal fees or expenses
incurred by the Employee in connection with any litigation by the Employer
against the Employee to enforce the terms of this Agreement against the
Employee.
12
<PAGE>
13. ASSIGNMENT. This Agreement is a personal employment contract and the
rights and interests of the Employee hereunder may not be sold, transferred,
assigned, pledged, or hypothecated, directly or indirectly, or by operation of
law or otherwise.
14. SUCCESSORS. This Agreement shall inure to the benefit of and be
binding upon the Employer and its successors and assigns and upon the Employee
and his legal representatives.
15. ENTIRE AGREEMENT. This Agreement, which contains the entire
contractual understanding between the parties, may not be changed orally but
only by a written instrument signed by the Employee and the Chairman of the
Board of Directors of the Employer.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, and Employee agrees to subject
himself to the jurisdiction of the Southern District of Texas.
17. WAIVER. The waiver of any breach of any term or condition of this
Agreement shall not be deemed to constitute the waiver of any other breach of
the same or any other term or condition.
18. ENFORCEABILITY. In the event any provision of this Agreement is
found to be unenforceable or invalid, such provision shall be severable from
this Agreement and shall not affect the enforceability or validity of any other
provision contained in this Agreement.
19. NOTICES. Any notices or other communications required or permitted
hereunder shall be sufficiently given if sent by registered mail, postage
prepaid, and
(a) if to the Employee, addressed to him at 17507 NE 33rd Avenue,
Vancouver, WA 98642, and
(b) if to the Employer, addressed to it at 5300 Memorial, Suite 900
Houston, Texas 77007 (Attention: Chairman of the Board of Directors), or
such other address as the party to whom or to which such notice or other
communication is to be given shall have specified in writing to the other
party, and any such notice or communication shall be deemed to have been
given as of the date so mailed.
13
<PAGE>
20. ARBITRATION. Employer and Employee agree to submit to final and
binding arbitration any and all disputes, claims (whether in tort, contract,
statutory, or otherwise) and/or disagreements concerning the interpretation or
application of this Agreement and/or Employee's employment by Employer and/or
the termination of this Agreement and/or Employee's employment by Employer;
PROVIDED, HOWEVER, notwithstanding the foregoing, in no event shall any dispute,
claim or disagreement arising under Section 9, 10 or 11 of this Agreement be
submitted to arbitration pursuant to this Section 18 or otherwise. Any such
dispute, claim and/or disagreement subject to arbitration pursuant to the terms
of this Section 18 shall be resolved by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association (the
"AAA"). Arbitration under this provision must be initiated within 30 days of the
action, inaction, or occurrence about which the party initiating the arbitration
is complaining. Within ten days of the initiation of an arbitration hereunder,
each party will designate an arbitrator pursuant to Rule 14 of the AAA Rules.
The appointed arbitrators will appoint a neutral arbitrator from the panel in
the manner prescribed in Rule 13 of the AAA Rules. Employee and Employer agree
that the decision of the arbitrators selected hereunder will be final and
binding on both parties. This arbitration provision is expressly made pursuant
to and shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections 1 -
14. The parties hereto agree that pursuant to Section 9 of the Act that a
judgment of the United States District Court for the Southern District of Texas,
shall be entered upon the award made pursuant to the arbitration.
IN WITNESS WHEREOF, the Employer has caused this Agreement to be
executed by its duly authorized officer, and the Employee has executed this
Agreement as of the date first above written.
DRYPERS CORPORATION
By /s/ WALTER V. KLEMP
------------------------------------
Walter V. Klemp
Chairman and
Co-Chief Executive Officer
EMPLOYEE
/s/ RAYMOND M. CHAMBERS
----------------------------------------
Raymond M. Chambers
14
<PAGE>
EXHIBIT A
---------
HEALTH AND WELFARE BENEFITS SUMMARY
. Group comprehensive medical, dental, and term life insurance. Eighty percent
of the premiums for Employee and his dependents are paid by Employer.
. Contribution to a deferred compensation investment vehicle in the amount of
$10,000 per year.
. Participation in the Company's 401k plan.
OTHER EMPLOYEE PERQUISITES
. Use of a car not more than (30 months old, with monthly lease payment not to
exceed $900), such car to be equipped with a cellular phone, as well as all
costs and expenses incurred in operating such car, including gas, service and
maintenance charges, parts, fees for inspection and license plates, parking
and tolls, and cellular phone equipment, installation and use charges.
. Health and country club monthly family membership dues and reasonable
expenses in accordance with the Employer's policies.
. Income tax preparation costs.
15
<PAGE>
EXHIBIT 10.3
AGREEMENT AMENDING AND RESTATING
EMPLOYMENT AGREEMENT
BETWEEN
DRYPERS CORPORATION
AND
JOE D. TANNER
APRIL 22, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
1. EMPLOYMENT............................................................ 1
2. SCOPE OF EMPLOYMENT................................................... 1
3. VACATION.............................................................. 2
4. COMPENSATION.......................................................... 2
5. TERM.................................................................. 2
6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER.............................. 6
7. EXPENSES.............................................................. 7
8. EMPLOYEE BENEFITS..................................................... 7
9. NON-COMPETITION....................................................... 7
10. DISCLOSURE OF CONFIDENTIAL INFORMATION................................ 10
11. TRADE SECRETS......................................................... 10
12. LEGAL FEES AND EXPENSES............................................... 11
13. ASSIGNMENT............................................................ 11
14. SUCCESSORS............................................................ 11
15. ENTIRE AGREEMENT...................................................... 11
16. GOVERNING LAW......................................................... 11
17. WAIVER................................................................ 11
18. ENFORCEABILITY........................................................ 11
19. NOTICES............................................................... 12
20. ARBITRATION........................................................... 12
i
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made as of the 22nd day of April,
1998, between Drypers Corporation, a Delaware corporation (the "Employer"), and
Joe D. Tanner (the "Employee"),
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Employer desires to obtain the services of the Employee, and the
Employee desires to be employed by the Employer upon the terms and conditions
hereinafter set forth; and
WHEREAS, the Employer and the Employee entered into an Employment Agreement
made as of March 17, 1997 (the "Employment Agreement"), by which Employer
employed the Employee, and the Employee agreed to serve the Employer, in the
capacity, for the term, and subject to the conditions specified therein, and
WHEREAS, Employer and the Employee wish to amend and restate the Employment
Agreement and wish to enter into an agreement on a long-term basis for the full-
time services of Employee;
NOW, THEREFORE, in consideration of the premises, the agreements herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto agree that the Employment Agreement is hereby
amended and restated effective as of the date hereof as follows:
1. EMPLOYMENT. Subject to the terms and conditions hereinafter set forth,
the Employer hereby agrees to employ the Employee, and the Employee hereby
agrees to serve the Employer, in the capacity and for the Term of Employment
specified herein.
2. SCOPE OF EMPLOYMENT. During the Term of Employment hereunder, the
Employee will serve as Executive Vice President and Chief Operating Officer --
International of the Employer in accordance with the provisions of Article V,
Section 5.8 of the By-Laws of the Employer. In that connection, the Employee
will:
(a) devote his full time, attention, and energies to the business of the
Employer and will diligently and to the best of his ability perform all
duties incident to his employment hereunder;
1
<PAGE>
(b) use his best efforts to promote the interests and goodwill of the
Employer; and
(c) perform such other duties commensurate with his office as the Board
of Directors of the Employer may from time-to-time assign to him.
The foregoing shall not be construed as preventing the Employee from making
investments in other businesses or enterprises provided such investments do not
require the provision of substantial services by the Employee to the operations
or the affairs of such businesses or enterprises such that the provision thereof
would interfere in any respect with the performance of the Employee's duties
hereunder.
3. VACATION. During the Term of Employment the Employee shall be entitled to
sick leave, holidays, and an annual four-week vacation, all in accordance with
the regular policy of the Employer, during which time his compensation shall be
paid in full. Each such vacation shall be taken by the Employee at such times as
may be mutually agreed upon by the Employee and Employer.
4. COMPENSATION. As compensation for his services hereunder and in
consideration of his agreement not to compete as set forth in Section 9, the
Employer shall:
(a) during the Term of Employment pay the Employee, subject to the terms
and conditions of this Agreement, a base salary at the rate of not less than
$175,000.00 per year, payable in accordance with the normal payroll practices
of the Employer but in no less than equal bi-weekly installments; and
(b) during the Term of Employment as additional compensation for services
hereunder during the term of this Agreement, the Employee shall be entitled to
an annual bonus in amount as shall be determined by the Co-Chief Executive
Officers of the Employer for each of the Company's fiscal years ending after
the date hereof.
2
<PAGE>
5. TERM.
(a) The "Term of Employment", as used herein, shall mean a period
commencing on the date hereof and ending on the third anniversary (the "Ending
Date") of the receipt by the Employee of written notice of termination by the
Employer given to the Employee; provided however that the occurrence of any of
the following events set forth in this Section 5(a) prior to the Ending Date
shall result in the immediate termination of the Term of Employment, but shall
not result in the termination of this Agreement:
(i) the commission by the Employee of an act constituting a dishonest
or other act of material misconduct, or a fraudulent act or a felony
under the laws of any state or of the United States to which the
Employer or Employee is subject, and such act results (or is intended
to result directly or indirectly) in the Employee's substantial gain
or personal enrichment to the detriment of the Employer;
or
(ii) the death of the Employee;
or
(iii) the inability of the Employee to perform his duties hereunder,
whether by reason of injury (physical or mental), illness or
otherwise, incapacitating him for a continuous period exceeding three
months, excluding any leaves of absence approved by the Employer;
or
(iv) the Employee resigns at any time other than after a Change in
Control (as defined in Section 6(d)) without Good Cause ("Good Cause"
being defined below).
(b) The term "Good Cause" shall mean the occurrence of any of the
following events:
3
<PAGE>
(i) the assignment by the Employer to the Employee of duties that are
materially inconsistent with the Employee's office with Employer at
the time of such assignment, or the removal by the Employer from the
Employee of a material portion of those duties usually appertaining to
the Employee's office with the Employer at the time of such removal;
or
(ii) a material change by the Employer, without the Employee's prior
written consent, in the Employee's responsibilities to the Employer,
as such responsibilities are ordinarily and customarily required from
time to time of an executive vice president of a corporation engaged
in the Employer's business;
or
(iii) any removal of the Employee from, or any failure to reelect or
to reappoint the Employee to, the office stated in Section 2;
or
(iv) the Employer's direction that the Employee discontinue service
(or not seek reelection or reappointment) as a director, officer or
member of any corporation or association of which the Employee is a
director, officer, or member at the date of this Agreement;
or
4
<PAGE>
(v) a reduction by the Employer in the amount of the Employee's base
salary as determined under this Agreement (or as subsequently
increased), or the failure of the Employer to pay such base salary to
the Employee at the time and in the manner specified in Section 4;
or
(vi) other than with respect to the annual performance bonus specified
in Section 4(b) or, as made with the Employee's prior written consent,
the discontinuance (without comparable replacement) or material
reduction by the Employer of the Employee's participation in any bonus
or other employee benefit arrangement (including, without limitation,
any profit-sharing, thrift, life insurance, medical, dental,
hospitalization, stock option or retirement plan or arrangement) in
which the Employee is a participant under the terms of this Agreement,
as in effect on the date hereof or as may be improved from time to
time hereafter;
or
(vii) the moving by the Employer of the Employee's principal office
space, related facilities, or support personnel, from the Employer's
principal operating offices in Vancouver, Washington, or the
Employer's requiring the Employee to perform a majority of his duties
outside the Employer's principal operating offices in Vancouver,
Washington for a period of more than 30 consecutive days;
or
5
<PAGE>
(viii) the relocation, without the Employee's prior written consent,
of the Employer's principal operating offices to a location outside
the county in which such offices are located at the time of the
signing of this Agreement;
or
(ix) in the event the Employer requires the Employee to reside at a
location more than 25 miles from the Employer's principal operating
offices, except for occasional travel in connection with the
Employer's business to an extent and in a manner which is
substantially consistent with the Employee's current business travel
obligations;
or
(x) in the event the Employee consents to a relocation of the
Employer's principal operating offices, the failure of the Employer to
(A) pay or reimburse the Employee on an after-tax basis for all
reasonable moving expenses incurred by the Employee in connection with
such relocation or (B) indemnify the Employee on an after-tax basis
against any loss realized by the Employee on the sale of his principal
residence in connection with such relocation;
or
(xi) the failure of the Employer to provide the Employee with the
benefits specified under Section 8;
or
(xii) the failure of the Employer to continue to provide the Employee
with office space, related facilities and support personnel
(including, without limitation, administrative and secretarial
assistance) that are commensurate with the Employee's responsibilities
to and position with the Employer;
6
<PAGE>
or
(xiii) the failure by the Employer to promptly reimburse the Employee
for the reasonable business expenses incurred by the Employee in the
performance of his duties for the Employer, as set forth in Section 7.
6. ADJUSTMENTS UPON TERMINATION BY EMPLOYER.
(a) Subject to the provisions of paragraph (b) of this Section 6, in the
event of termination of the Term of Employment for any reason specified in
Section 5(a) above, the Employer shall no longer be obligated to make the
payments specified under Section 4 or to provide the benefits under Section 8;
provided, however, any payments payable under Section 4 which shall have been
earned but not yet paid shall be paid by the Employer to the Employee, and the
Employee shall pay any amount or amounts then owed by the Employee to the
Employer.
(b) In the event of the termination of the Term of Employment for any
reason other than pursuant to an event specified in Section 5(a) above, the
Employer shall, until the third anniversary of the date of such termination
continue to be obligated to (i) make the payments specified under Section 4,
(ii) provide the benefits specified under Section 8(b), and (iii) maintain the
Employee as a participant in, or provide benefits comparable to those of, the
health insurance benefit plan specified under Section 8(a). In the event of
such termination, the Employee may elect, upon 30 days prior written notice of
such election delivered to the Employer to have the remaining amounts payable
to him pursuant to this Section 6(b) paid in a lump sum amount, which amount
shall be computed by discounting to present value such remaining amounts
payable to the Employee at a rate of 8% per annum for each payment otherwise
owed to the Employee through the remaining months in such Term of Employment.
7
<PAGE>
(c) Under no circumstances shall the Employee be required to mitigate the
amount of payment specified in Section 4 which is payable during the Term of
Employment specified in paragraph (b) of this Section 6.
(d) A "Change in Control" shall be deemed to have occurred at any time
after the date of this Agreement that (i) any person (other than those persons
who own more than 10% of the combined voting power of the Employer's
outstanding voting securities on the date hereof) becomes the beneficial
owner, directly or indirectly, of 30% or more of the combined voting power of
the Employer's then outstanding voting securities, or (ii) the individuals who
at the beginning of any period of two consecutive years constitute the
Employer's Board of Directors cease for any reason to constitute a majority of
such Board of Directors at any time during such two-year period.
7. EXPENSES. The Employer agrees that during the Term of Employment it will
reimburse the Employee for out-of-pocket expenses reasonably incurred by him in
connection with the performance of his service hereunder upon the presentation
by the Employee of an itemized monthly accounting of such expenditures,
including receipts where required for federal income tax regulations.
8. EMPLOYEE BENEFITS. During the Term of Employment:
(a) Employee shall, upon satisfaction of any eligibility requirements with
respect thereto, be entitled to participate in all employee benefit plans of
Employer, including without limitation those health, dental, accidental death
and dismemberment, and long term disability plans of Employer now or hereafter
in effect that are made available to executive officers of the Employer; and
(b) Employer shall maintain for Employee the benefits summarized on
Exhibit A attached hereto.
8
<PAGE>
9. NON-COMPETITION.
(a) Employee acknowledges that he shall receive special training and
knowledge from Employer. Employee acknowledges that included in the special
knowledge received is the confidential information identified in Paragraph 10
below. Employee acknowledges that this confidential information is valuable to
Employer and, therefore, its protection and maintenance constitutes a
legitimate interest to be protected by Employer by this covenant not to
compete. Therefore, Employee agrees that for the period (the "Noncompetition
Period") (i) during the Term of Employment and (ii) in the event of a
termination of the Term of Employment upon the occurrence of an event set
forth in Section 5(a) hereof, commencing upon the occurrence of such event set
forth in Section 5(a) and ending upon the first anniversary thereof, in each
case unless otherwise extended pursuant to the terms hereof, Employee will
not, directly or indirectly, either as an employee, employer, consultant,
agent, principal, partner, stockholder, corporate officer, director, or in any
other individual or representative capacity, engage or participate in any
business that is engaged in the manufacture or marketing of disposable baby
diapers, disposable training pants or pre-moistened wipes within the United
States of America or within any other geographic area of the world where the
Employer engages or proposes at the time of the termination of the Term of
Employment to engage in business. Employee represents to Employer that the
enforcement of the restriction contained in this Section 9 would not be unduly
burdensome to Employee and that in order to induce the Employer to provide for
the Term of Employment as set forth in Section 5 hereof, Employee further
represents and acknowledges that Employee has entered into this agreement not
to compete and is willing and able to compete in other geographical areas not
prohibited by this Section 9.
(b) Employee agrees that a breach or violation of this covenant not to
compete by such Employee shall entitle the Employer, as a matter of right, to
an injunction issued by any court of competent jurisdiction, restraining any
further or continued breach or violation of this covenant. Such right to an
injunction shall be cumulative and in addition to, and not in lieu of, any
other remedies to which the Employer may show
9
<PAGE>
itself justly entitled. Further, during any period in which Employee is in
breach of this covenant not to compete, the time period of this covenant shall
be extended for an amount of time that Employee is in breach hereof.
(c) In addition to the restrictions set forth in paragraph (a) of this
Section 9, Employee shall not for the Noncompetition Period, either directly
or indirectly, (i) make known to any person, firm or corporation that is
engaged in the manufacture or marketing of disposable baby diapers, disposable
training pants or pre-moistened wipes, the names and addresses of any of the
customers of the Employer or contacts of the Employer or any other information
pertaining to such persons or (ii) call on, solicit, or take away, or attempt
to call on, solicit or take away any of the customers of the Employer on whom
Employee called or with whom Employee became acquainted during Employee's
association with the Employer, whether for Employee or for any other person,
firm or corporation.
(d) The representation and covenants contained in this Section 9 on the
part of Employee will be construed as ancillary to and independent of any
other provision of this Agreement, and the existence of any claim or cause of
action of Employee against Employer or any officer, director, or shareholder
of Employer, whether predicated on this Agreement or otherwise, shall not
constitute a defense to the enforcement by Employer of the covenants of the
Employee contained in this Section 9. In addition, the provisions of this
Section 9 shall continue to be binding upon Employee in accordance with its
terms, notwithstanding the termination of Employee's employment for any
reason.
(e) If Employee violates any covenant contained in this Section 9 and
Employer brings legal action for injunctive or other relief, the Employer
shall not, as a result of the time involved in obtaining the relief, be
deprived of the benefit of the full period of any such covenant. Accordingly,
the covenants of Employee contained in this Section 9 shall be deemed to have
durations as specified above, which periods shall commence upon the later of
(i) the Ending Date and (ii) the date of entry by a court of competent
jurisdiction of a final judgment enforcing the covenants of Employee in this
Section 9.
10
<PAGE>
(f) The parties to this Agreement agree that the limitations contained in
this Section 9 with respect to geographic area, duration, and scope of
activity are reasonable. However, if any court shall determine that the
geographic area, duration, or scope of activity of any restriction contained
in this Section 9 is unenforceable, it is the intention of the parties that
such restrictive covenant set forth herein shall not thereby be terminated but
shall be deemed amended to the extent required to render it valid and
enforceable.
10. DISCLOSURE OF CONFIDENTIAL INFORMATION. During the Term of Employment, the
Employee will disclose to Employer all ideas and business plans developed by him
during such period which relate directly to the business of Employer. The
Employee recognizes and acknowledges that he may have access to certain
additional confidential information of Employer or of certain corporations
affiliated with Employer, and that all such information constitutes valuable,
special and unique property of Employer and its affiliates. The Employee agrees
that, during the Term of Employment and for a period of five years after the
termination of the Term of Employment, he will not, without the prior written
consent of Employer, disclose or authorize or permit anyone under his direction
to disclose to anyone not properly entitled thereto any of such confidential
information. For purposes of the immediately preceding sentence, persons
properly entitled to such information shall be (i) the Board of Directors of
Employer and such officers, employees and agents of Employer or any affiliate
thereof to whom such information is furnished in the normal course of business
under established policies approved by Employer and (ii) such outside parties as
are legally entitled to or are customarily furnished such information, including
banking, lending, collection, accounting, and data processing institutions or
agencies who or which are provided such information in the normal course of
business of Employer. The Employee further agrees that upon termination of the
Term of Employment he will not take with him or retain, without the prior
written authorization of Employer, any papers, procedural or technical manuals,
customer lists, customer account analyses (including, without limitation,
accounts receivable agings, customer payment histories and customer account
activity reports), price books, files or other documents or copies thereof
belonging to Employer or to any affiliate of Employer, or any materials,
supplies, equipment or furnishings belonging to Employer or to any affiliate of
Employer, or any other confidential information of any kind belonging to
Employer or any affiliate of Employer. In the event of a breach or threatened
breach by the Employee of the provisions of this Section 10, Employer and the
Employee
11
<PAGE>
agree that the remedy at law available to Employer and its affiliates would be
inadequate and that Employer and its affiliates shall be entitled to an
injunction, without the necessity of posting bond therefor, restraining the
Employee from disclosing, in whole or in part, such confidential information.
Nothing herein shall be construed as prohibiting Employer and its affiliates
from pursuing any other remedies, in addition to the injunctive relief available
under this Section 10, for such breach or threatened breach, including the
recovery of damages from the Employee.
11. TRADE SECRETS. All patents, formulae, inventions, processes, copyrights,
proprietary information, trademarks or trade names, or future improvements to
patents, formulae, inventions, processes, copyrights, proprietary information,
trademarks or trade names, developed or completed by the Employee during the
Term of Employment (collectively, the "Items") shall be promptly disclosed to
Employer, and the Employee shall execute such instruments of assignment of the
Items to the Employer as Employer shall request. The Employee acknowledges that
a remedy at law for any breach by him of the provisions of this Section 11 would
be inadequate, and the Employee hereby agrees that Employer shall be entitled to
injunctive relief in case of any such breach.
12. LEGAL FEES AND EXPENSES. In the event that either of the parties to this
Agreement contests the validity or enforceability of any of the provisions of
Sections 9, 10 or 11 hereof, then such contesting party hereby agrees to pay in
a timely and prompt manner any and all legal fees and expenses incurred by the
other party from time to time as a result of such contesting party's contesting
of the validity or enforceability of any provision of Sections 9, 10, or 11
hereof this Agreement; provided, however, nothing contained in this Section 12
shall obligate the Employer to pay any legal fees or expenses incurred by the
Employee in connection with any litigation by the Employer against the Employee
to enforce the terms of this Agreement against the Employee.
13. ASSIGNMENT. This Agreement is a personal employment contract and the
rights and interests of the Employee hereunder may not be sold, transferred,
assigned, pledged, or hypothecated, directly or indirectly, or by operation of
law or otherwise.
14. SUCCESSORS. This Agreement shall inure to the benefit of and be binding
upon the Employer and its successors and assigns and upon the Employee and his
legal representatives.
15. ENTIRE AGREEMENT. This Agreement, which contains the entire contractual
understanding between the parties, may not be changed
12
<PAGE>
orally but only by a written instrument signed by the Employee and the Chairman
of the Board of Directors of the Employer.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas, and Employee agrees to subject
himself to the jurisdiction of the Southern District of Texas.
17. WAIVER. The waiver of any breach of any term or condition of this
Agreement shall not be deemed to constitute the waiver of any other breach of
the same or any other term or condition.
18. ENFORCEABILITY. In the event any provision of this Agreement is found to
be unenforceable or invalid, such provision shall be severable from this
Agreement and shall not affect the enforceability or validity of any other
provision contained in this Agreement.
19. NOTICES. Any notices or other communications required or permitted
hereunder shall be sufficiently given if sent by registered mail, postage
prepaid, and
(a) if to the Employee, addressed to him at 17507 N.E. 33rd Avenue,
Ridgefield, Washington 98642, and
(b) if to the Employer, addressed to it at 5300 Memorial, Suite 900,
Houston, Texas 77007 (Attention: Chairman of the Board of Directors), or such
other address as the party to whom or to which such notice or other
communication is to be given shall have specified in writing to the other
party, and any such notice or communication shall be deemed to have been given
as of the date so mailed.
20. ARBITRATION. Employer and Employee agree to submit to final and binding
arbitration any and all disputes, claims (whether in tort, contract, statutory,
or otherwise) and/or disagreements concerning the interpretation or application
of this Agreement and/or Employee's employment by Employer and/or the
termination of this Agreement and/or Employee's employment by Employer;
PROVIDED, HOWEVER, notwithstanding the foregoing, in no event shall any dispute,
claim or disagreement arising under Section 9 of this Agreement be submitted to
arbitration pursuant to this Section 18 or otherwise. Any such dispute, claim
and/or disagreement subject to arbitration pursuant to the terms of this Section
18 shall be resolved by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association (the
13
<PAGE>
"AAA"). Arbitration under this provision must be initiated within 30 days of the
action, inaction, or occurrence about which the party initiating the arbitration
is complaining. Within ten days of the initiation of an arbitration hereunder,
each party will designate an arbitrator pursuant to Rule 14 of the AAA Rules.
The appointed arbitrators will appoint a neutral arbitrator from the panel in
the manner prescribed in Rule 13 of the AAA Rules. Employee and Employer agree
that the decision of the arbitrators selected hereunder will be final and
binding on both parties. This arbitration provision is expressly made pursuant
to and shall be governed by the Federal Arbitration Act, 9 U.S.C. Sections
1-14. The parties hereto agree that pursuant to Section 9 of the Act that a
judgment of the United States District Court for the Southern District of Texas,
shall be entered upon the award made pursuant to the arbitration.
IN WITNESS WHEREOF, the Employer has caused this Agreement to be executed by
its duly authorized officer, and the Employee has executed this Agreement as of
the date first above written.
DRYPERS CORPORATION
/s/ RAYMOND M. CHAMBERS
By_____________________________________________________
Raymond M. Chambers
Co-Chief Executive Officer
EMPLOYEE
/s/ JOE D. TANNER
-------------------------------------------------------
Joe D. Tanner
14
<PAGE>
EXHIBIT A
HEALTH AND WELFARE BENEFITS SUMMARY
. Group comprehensive medical, dental, and term life insurance. Eighty
percent of the premiums for Employee and his dependents are paid by Employer.
. Participation in the Company's 401k plan.
OTHER EMPLOYEE PERQUISITES
. Use of a car not more than (30 months old, with monthly lease payment not to
exceed $750), such car to be equipped with a cellular phone, as well as all
costs and expenses incurred in operating such car, including gas, service and
maintenance charges, parts, fees for inspection and license plates, parking
and tolls, and cellular phone equipment, installation and use charges.
. Income tax preparation costs.
. All reasonable costs for licensing and continuing education costs relating to
Oregon and Washington Bar Association.
TANNER
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> APR-01-1998 JAN-01-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 0 14,229,000
<SECURITIES> 0 0
<RECEIVABLES> 0 48,004,000
<ALLOWANCES> 0 (2,280,000)
<INVENTORY> 0 23,235,000
<CURRENT-ASSETS> 0 15,405,000
<PP&E> 0 93,809,000
<DEPRECIATION> 0 (20,917,000)
<TOTAL-ASSETS> 0 257,104,000
<CURRENT-LIABILITIES> 0 46,810,000
<BONDS> 0 146,051,000
0 0
0 0
<COMMON> 0 17,000
<OTHER-SE> 0 52,373,000
<TOTAL-LIABILITY-AND-EQUITY> 0 257,104,000
<SALES> 80,805,000 159,397,000
<TOTAL-REVENUES> 80,805,000 159,397,000
<CGS> 47,667,000 94,916,000
<TOTAL-COSTS> 75,066,000 154,792,000
<OTHER-EXPENSES> (219,000) (275,000)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,453,000 7,903,000
<INCOME-PRETAX> 1,505,000 (3,023,000)
<INCOME-TAX> 406,000 1,547,000
<INCOME-CONTINUING> 1,099,000 (4,570,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,099,000 (4,570,000)
<EPS-PRIMARY> .07 (.32)
<EPS-DILUTED> .06 (.32)
</TABLE>
