UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23422
DRYPERS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0344044
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5300 MEMORIAL, SUITE 900
HOUSTON, TEXAS 77007
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 869-8693
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value
Rights to Purchase Common Stock, $.001 par value
(TITLE OF EACH CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the price at which the common stock was sold on February
28, 1999: $21,101,666
Number of shares of common stock outstanding as of February 28, 1999:
17,713,958
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III, Items 10, 11, 12 and 13 will be
included in a proxy statement to be filed pursuant to Regulation 14A and is
incorporated herein by reference.
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PART I
ITEM 1. BUSINESS
Drypers Corporation (the "Company") is a leading manufacturer and marketer of
premium quality, value-priced disposable baby diapers and training pants sold
under the DRYPERS brand name in the United States and under the DRYPERS and
other brand names internationally. Currently, the Company is the third largest
producer of branded disposable baby diapers in the United States. The Company
also manufactures and sells lower-priced diapers under other brand names in the
United States and internationally, as well as private label diapers and training
pants and pre-moistened baby wipes. The Company's DRYPERS brand is the fourth
largest selling diaper brand in the United States and the second largest selling
training pant brand in U.S. grocery stores.
Drypers targets the value segment of the U.S. diaper market by offering products
with features and quality comparable to the premium-priced national brands at
generally lower prices. The Company positions its products to provide enhanced
profitability for retailers and better value to consumers. The Company
continually seeks to expand its extensive grocery store sales and distribution
network, while increasing its limited penetration of the mass merchant and
drugstore chain markets, in order to capture a greater share of the U.S. diaper
market. In 1998, Drypers began its first-ever national television campaign. As a
result of this campaign, in 1998, Drypers began with test distribution in two
national mass merchants (Wal-Mart and Kmart).
Drypers is the sixth largest diaper producer in the world. Since 1993, Drypers
has significantly expanded its international presence, competing in the
lower-priced branded and private label categories. The Company, through a series
of start-ups and acquisitions, currently produces diapers in Puerto Rico,
Argentina, Mexico, Brazil and Malaysia. Wal-Mart International has selected the
Company to be its appointed 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,and also supplies Drypers
branded products to Wal-Mart stores in these markets. Recently, the Company
gained distribution in the Wal-Mart stores in China, Canada and Germany. The
Company intends to continue to expand its operations in Argentina, Brazil,
Mexico, Malaysia and Colombia and is actively seeking further expansion
opportunities through acquisition, joint venture or other arrangements in Latin
America and the Pacific Rim.
DRYPERS(R), COMFEES(R), BABY'S CHOICE(R) and WEE-FITS(R) are U.S. registered
trademarks and PUPPET is a Brazilian federally registered trademark owned by the
Company. SESAME STREET(R) is a trademark licensed to the Company by The
Children's Television Workshop. All other trademarks or service marks referred
to in this document are the property of their respective owners and are not the
property of the Company.
INDUSTRY CONDITIONS
U.S. DISPOSABLE BABY DIAPER MARKET
The size of the U.S. diaper market measured by retail sales was approximately
$4.0 billion in 1998. The Company believes the U.S. market has experienced
little growth in recent years as a result of the already high level of market
penetration of disposable diapers (estimated to be above 90%) and the decrease
in the number of diapers used per baby as a result of improvements in absorbency
and leakage control. The principal manufacturers of disposable diapers in the
United States can be grouped into three general categories: premium-priced
branded producers, value-priced branded producers and private label producers.
Procter & Gamble and Kimberly-Clark are the leading premium-priced branded
producers and tend to compete on the basis of product quality, features and
price. As a result, they invest heavily both in research and development to
design frequent product enhancements and in marketing and advertising to promote
product sales and to increase consumer awareness of the benefits of disposable
diapers and their new features. Although their products are generally priced
above value-oriented brands and private label products to both retailers and
consumers, retailers generally sell these brands at prices that provide them
with relatively little margin in order to attract consumers into their stores.
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Historically, value-priced branded diapers such as those produced by the Company
have been sold primarily through grocery stores because the manufacturers of
these brands lacked national brand name recognition and the national production
and distribution capabilities necessary to service mass-merchant and drugstore
chains. The competitive strategies of value-priced brands vary significantly,
ranging from a focus on quality and value to a simple low-price strategy, and
the products vary from premium quality diapers to low quality diapers with few
enhancements. Generally, value-priced brands compete by offering products that
are priced below the premium-priced brands to both retailers and consumers and
typically provide higher margins to retailers than the national brands.
Value-priced brand name manufacturers do not generally engage in extensive
research and development or national advertising and are generally marketed to a
more defined audience than is reached by mass advertising, through the use of
coupons, in-store promotions and cooperative programs with retailers.
Private label diapers are marketed through various retail outlets under
retailer-affiliated labels and are typically manufactured to the specifications
of each retailer, resulting in significant quality differences among private
label products. Private label manufacturers generally emphasize price over
quality and features and, therefore, typically do not invest as heavily in
research and development as, and are generally slower to incorporate new product
enhancements than, premium-priced branded competitors and the Company. In
addition, because their products are sold under retailer-affiliated labels,
private label manufacturers spend minimal amounts on advertising and marketing
of their diapers, although retailers may engage in promotional activities.
The size of the U.S. disposable baby diaper and training pant market sold
through grocery stores, measured by retail sales in 1998, was approximately $2.0
billion or 49.3% of the estimated $4.0 billion total U.S. diaper market. Since
1989, the Company's larger branded competitors have lost grocery market share on
a combined basis both to value-priced brands, which represented the fastest
growing segment, and to private label products. In addition, grocery store
distribution of diapers has been decreasing as a percentage of total diaper
sales in the United States from 60% in 1994 to 49.3% in 1998, reflecting a shift
in distribution to mass merchants.
Procter & Gamble and Kimberly-Clark are the dominant companies in the disposable
diaper market, with an estimated 40.6% and 33.7% share, respectively, of the
total U.S. diaper market and an estimated 35.3% and 33.3% share, respectively,
of the domestic grocery store market for disposable diapers for the 52 weeks
ended December 26, 1998. There are also private label manufacturers with higher
diaper sales than the Company. There has recently been consolidation among
private label manufacturers in the United States, leaving fewer competitors in
this market.
The size of the U.S. disposable diaper market sold through mass-merchants and
drugstore chain retailers, measured by retail sales, was approximately $2.0
billion during 1998, representing approximately 50.7% of the U.S. diaper market.
The majority of the mass-merchant and drugstore chain retailers are national or
super-regional in scope and are primarily interested in nationally distributed
brands and private labels. Mass merchants have increased their percentage of
total diaper sales in the United States from 30% in 1994 to 41.3% in 1998 while
drug store market share has decreased from 10% to 9.4% over the same period.
INTERNATIONAL DISPOSABLE BABY DIAPER MARKET
Although disposable baby diaper usage is significantly lower outside the United
States, Western Europe, Japan and other developed countries, industry sources
estimate that the international disposable baby diaper market is approximately
$12.0 billion in manufacturers' sales. Procter & Gamble and Kimberly-Clark have
contributed to the development of the international market for disposable baby
diapers by advertising heavily and by introducing their products in numerous
markets. Although Procter & Gamble and Kimberly-Clark dominate worldwide sales
of disposable diapers, in certain foreign markets there are local manufacturers
which represent a significant portion of the market.
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In Japan and Western Europe, the disposable baby diapers sold by local producers
are generally of a quality comparable to the premium products sold in the United
States. However, in most other countries, local manufacturers generally sell a
lower quality product with fewer product features. The Company believes that
increased awareness outside the United States of the benefits of disposable
diapers, combined with generally higher birth rates, should cause aggregate
disposable diaper sales outside the United States to grow substantially faster
than domestic sales.
BUSINESS STRATEGY
The Company's business strategy is to maintain high growth in sales while
maximizing its EBITDA and profitability by focusing on the following key
strategic elements:
CONTINUED PRODUCT INNOVATION TO DIFFERENTIATE THE DRYPERS BRAND
Drypers has successfully differentiated its diaper and training pant products
from the other national brands through the selective development of
cost-effective innovative product features. For example, Drypers began to
promote its diapers as the only perfume-free national brand in 1994. In 1996,
Drypers introduced the first odor-control diaper, DRYPERS WITH NATURAL BAKING
SODA, and in 1997, the Company launched DRYPERS WITH ALOE VERA as well as
entered into a licensing agreement to use the SESAME STREET trademark and
characters on the Company's products, packaging and advertising materials. The
DRYPERS WITH ALOE VERA product received the Gold Edison Award from the American
Marketing Association for the most innovative children's product of 1997. In
addition to positioning DRYPERS as a national brand, these premium quality
product features and innovations helped increase Drypers' penetration of the
U.S. grocery store market from an estimated 54% in December 1995 to 66% as of
December 1997. In August of 1998, the Company continued its commitment to
innovation by launching DRYPERS SUPREME WITH GERM GUARD (TM) Liner. This product
positions Drypers as the only diaper in the industry to include an antibacterial
treatment. Today, Drypers has an estimated penetration of the U.S. grocery store
market of 74%.
INCREASE BRAND AWARENESS AND RETAIL PENETRATION THROUGH A TARGETED ADVERTISING
AND PROMOTIONAL CAMPAIGN
The Company continually seeks to expand its sales and distribution network in
the United States. The Company believes that increasing consumer awareness of
the DRYPERS brand in the U.S. market will not only assist in its continued
penetration into grocery stores, but also will facilitate its entry into
national mass merchants and drug channels as well. Such channels account for
roughly half of all U.S. diaper sales, yet have been effectively out of reach
for Drypers due to a lack of brand recognition. In this regard, during February
1998, the Company commenced its first national television advertising campaign
through a cost-effective, targeted series of commercials aimed at increasing
brand awareness. As a result, the Company has continued to increase its
extensive penetration of the grocery store market. Perhaps more importantly
though, two national mass merchants (Wal-Mart and Kmart) agreed to initiate
distribution tests of Drypers as a result of the increased brand awareness in
1998.
OFFER "EVERY DAY VALUE" BRANDED PRODUCTS TO CONSUMERS
The Company's premium quality, value-priced diapers and training pants are
designed to offer consumers the recognition and reliability of a national brand
name together with product quality and features comparable to the premium-priced
national brands at generally lower prices. Drypers believes that this
combination of brand name, premium product quality and "Every Day Value" prices
offers consumers an attractive alternative to the premium-priced brands.
PROVIDE HIGHER MARGIN PRODUCTS FOR RETAILERS
The manufacturers of the leading national brands typically sell their
premium-priced products to retailers at prices above those of other diaper
manufacturers. Retailers generally price the premium-priced diaper brands with
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relatively little margin to attract customers into their stores. Drypers sells
its products to retailers at a generally lower price than the leading
premium-priced national brands, which allows retailers to offer a lower price to
customers while achieving substantially higher margins, increasing their
category profitability. The Company believes that it is able to maintain
attractive profit margins for retailers while offering consumers a better
price/value relationship as compared with the premium-priced national brands as
a result of the Company's emphasis on (i) selective development of innovative
product features which distinguish its products from the premium-priced brands,
(ii) manufacturing high quality products at substantially the same costs as the
leading national brand manufacturers, (iii) significantly lower advertising,
promotion and research and development expenses and (iv) maintaining a
substantially lower corporate overhead structure.
CONTINUE TO PURSUE INTERNATIONAL EXPANSION OPPORTUNITIES
Management believes that there continues to be substantial growth opportunities
for producers of disposable baby diapers and training pants in the developing
markets in Latin America, the Pacific Rim and Eastern Europe. This opportunity
reflects the current low levels of consumer penetration for those products (from
less than 5% to 35% in those countries compared to approximately 95% in the
United States, Western Europe and Japan) and the rapid increase in the standard
of living in those regions in recent years. The Company intends to continue to
expand its operations in Argentina, Mexico, Brazil, Malaysia and Colombia and is
actively seeking further expansion opportunities through acquisition, joint
venture and other arrangements in Latin America and the Pacific Rim. The Company
believes that increased geographic diversity should help to reduce its
sensitivity to competitive pressures in any one specific market in the future.
EXPAND PRODUCT LINES TO INCLUDE ADDITIONAL CONSUMER PRODUCTS
The Company seeks to produce and market additional high quality consumer
products, which would be sold primarily through grocery stores, drug stores and
mass merchants and which it believes offer opportunities for growth by occupying
specialty niches in large and fragmented consumer product categories. By
expanding into additional product lines, the Company believes it could improve
its ability to provide logistical support to retailers while improving its
leverage on overhead costs.
MARKET POSITION
U.S. GROCERY STORE MARKET
The grocery store segment represented approximately 49.3% of the U.S. diaper
market, or $2.0 billion of retail sales, in 1998. The Company estimates, as of
December 1998, that its products were distributed through U.S. grocery retailers
whose sales represented 71% of the total U.S. grocery store market for
disposable diapers and training pants, as compared to 54% in December 1995, and
has achieved distribution levels in excess of 90% of the grocery stores in its
most developed markets. The Company believes that its brands represented 7.4% of
the total dollar volume and 10.0% of the total unit volume for disposable
diapers and training pants in the total grocery store category during the fourth
quarter of 1998. However, the Company estimates that its brands have market
shares as high as 20% in its more established domestic grocery store markets.
U.S. MASS-MERCHANT AND DRUGSTORE CHAINS
The mass-merchant and drugstore chain segments, in aggregate, represented
approximately 50.7% of the U.S. diaper market, or $2.0 billion of retail sales
in 1998. The majority of the mass-merchant and drugstore chain retailers are
national or super-regional in scope and are primarily interested in nationally
distributed, recognized brands. In late 1992, Drypers completed acquisitions
that provided nationwide production and distribution capabilities and began a
program of unifying its products nationwide under the DRYPERS brand name, which
was completed in the first quarter of 1995. The Company then embarked on a
campaign to create a unique national brand identity for Drypers. This began with
a series of product innovations, most of which have been unmatched by the larger
national brands. This campaign culminated in a national television advertising
campaign to raise consumer awareness of the Drypers brand. As a result of these
efforts, two national mass merchants (Wal-Mart and Kmart) agreed to initiate
distribution tests with Drypers.
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U.S. PRIVATE LABEL
Private label products play an important role in maintaining profit within many
retailers' stores. The Company believes that its private label products
complement the value-priced positioning of its premium branded products. The
Company believes private label opportunities are enhanced by the Company's low
cost structure and ability to provide products with features and performance
characteristics substantially equivalent to the national brands. There has
recently been consolidation among private label manufacturers in the United
States, leaving fewer competitors in this market.
INTERNATIONAL OPERATIONS
Industry sources estimate the international disposable diaper market to
represent approximately $12.0 billion in annual manufacturers' sales.
Importantly, there are currently low levels of consumer penetration for
disposable baby diapers and training pants in Latin America, the Pacific Rim and
Eastern Europe (from less than 5% to 35% in those countries compared to
approximately 95% in the United States, Western Europe and Japan). Roughly
speaking, the global diaper market potential is in excess of $100 billion. The
Company's foreign produced and exported products are sold in over 28 countries
and accounted for approximately 35.7% of the Company's net sales during 1998.
The Company has focused its international efforts primarily in Latin America
because of the relatively low but growing level of disposable diaper market
penetration, the rapid increase in the standard of living, the relatively higher
birth rate and the resulting high level of market potential. In these markets,
the Company predominantly competes in both the branded and private label
categories. The Company, with operations in Argentina and Mexico, has
established manufacturing capabilities outside of the United States. This
capability was strengthened with the February 1997 acquisition of the Brazilian
PUPPET brand name and the resulting formation of a joint venture to market this
brand in Brazil. In April 1998, the Company exercised its fair market value
option to acquire the Brazilian manufacture of its diapers. In addition, the
Company is the appointed private label diaper supplier to all Wal-Mart stores in
Latin America (which are currently located in Argentina, Brazil and Mexico) and
in Puerto Rico, and also supplies DRYPERS branded products to Wal-Mart stores in
these markets. Recently, the Company gained distribution in the Wal-Mart stores
in China, Canada and Germany. In Argentina and Brazil, the Company believes that
it has approximately 12% to 15% market share of the disposable diaper category.
In September 1998, the Company acquired PrimoSoft, a Malaysian manufacturer of
disposable baby diapers building on the Company's earlier export sales to that
region. The Company intends to continue to expand its operations in Argentina,
Mexico, Brazil, Malaysia and Colombia and is actively seeking further expansion
opportunities through acquisition, joint venture or other arrangements in Latin
America and the Pacific Rim.
PRODUCTS
Drypers seeks to enhance its products by adding cost-effective product features
and substituting materials and components to improve performance. Drypers works
closely with its suppliers, distributors and other industry participants to
identify, anticipate, and in some cases develop technological innovations so
that the Company's products can incorporate the most advanced design features
and also be clearly differentiated from other national brands. The Company uses
advanced manufacturing equipment and techniques that have proven to be adaptable
to permit the introduction of new products using either new materials or
production techniques.
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DISPOSABLE BABY DIAPERS
There are significant quality differences among the various disposable diapers
available to consumers. The most important quality features of disposable
diapers are their ability to absorb and retain fluids, to prevent leakage
through leg and waist openings by the use of elasticized bands and to be easily
fitted and held in place by fastening systems which secure the diaper firmly
without causing discomfort to the baby. Other features, such as thinner
construction, odor control, perfume free, attractive designs, extra-dry
sub-layers, gender-specific coloring, and packaging, help to differentiate
products from one another.
The Company manufactures and markets four types of disposable baby diapers in
the United States: premium and super-premium brand name diapers, lower-priced
brand name diapers and private label diapers.
PREMIUM AND SUPER-PREMIUM BRAND NAME BABY DIAPERS. The Company sells its premium
and super-premium brand name products under the brand name DRYPERS. The
Company's premium quality brand diapers incorporate many of the product features
that are offered by the leading national premium brands. The Company believes
that the lower retail price and the combination of product features distinguish
its premium quality value-priced brand name diapers in the market. These product
features include multi-strand leg elastic for a wide soft cuff, a reinforced
tape landing zone for more secure fastening, a soft elastic waistband, a thin
overall profile, leakage barrier inner cuffs, breathable sides and a cloth-like
outer cover. In addition, DRYPERS are differentiated by features not offered by
some or all of the other premium national brands, such as "perfume free", baking
soda for odor control, aloe vera to soothe skin, and beginning in 1998, an
anti-microbial shield to inhibit germs in the diapers.
LOWER-PRICED BRAND NAME BABY DIAPERS. The Company's lower-priced products, sold
under the brand name COMFEES, incorporate some of the product features currently
offered by the Company's premium brand. These product features include
multi-strand leg elastic for a wide soft cuff, a reinforced tape landing zone
for more secure fastening, a thin overall profile and compression packaging. The
Company's lower-priced brand name baby diapers are sold in packages that contain
fewer diapers, and at a package and per diaper cost to the consumer that is less
than the Company's premium brands. The Company currently sells its lower-priced
diapers in only limited U.S. markets.
PRIVATE LABEL BABY DIAPERS. The Company's private label products are
manufactured to the specifications of, and are sold under the labels of, major
retailers. The private label products produced by the Company range in quality
from the Company's premium brand products to the Company's lower-priced
products. The Company believes private label opportunities are enhanced by the
Company's low cost structure and its ability to provide products with features
and performance characteristics substantially equivalent to the national brands.
In addition to its premium, super-premium and lower-priced branded products, the
Company sells diapers outside of the United States with product specifications
designed for particular foreign markets which address specific competitive and
affordability factors in those markets.
DISPOSABLE TRAINING PANTS
The Company has developed a line of premium disposable training pants, marketed
under the DRYPERS brand name for children of toilet-training age. The Company
also produces and sells private label training pants which are manufactured to
the specifications of and are sold under labels of various concerns. Training
pants are a complementary product which may extend the period of time during
which consumers purchase disposable infant wear. Since the introduction of the
first premium disposable training pants by Kimberly-Clark, the domestic training
pant market has grown to $529 million in 1998 retail sales.
Drypers initially introduced its training pants into selected markets in late
1992, using several unique manufacturing processes. These processes encompass
the same level of automation and quality control, and many of the same raw
materials, as the baby diaper manufacturing process. The Company believes that
its training pants were the first premium disposable training pants in the
United States to offer a one-piece design with full circle elastic leg and waist
bands, making it more like real underwear than other products available in the
market. The Company believes these attributes are important to the success of
disposable training pants since young children often display a desire to wear
"real underwear". Typically, the Company's disposable training pants are sold at
a substantially higher per unit price than the Company's premium disposable
diapers, resulting in substantially higher gross profit margins than on premium
disposable diapers.
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Significant product improvements were made to DRYPERS training pants in 1995:
improved contouring in the core for better absorbency, LYCRA TUMMY SNUGS for
better fit around the waist and a new crotch design to eliminate bunching and
prevent leakage. These product improvements contributed to a 26.4% increase in
unit volume in 1995 despite the introduction of competitive brands. The Company
believes its training pants represented 8.9% of the total training pant category
on a unit volume basis during 1998. More recently, the Company added baking soda
and aloe vera to its training pants, similar to its baby diapers. The Company's
DRYPERS training pants are now the second leading brand of disposable training
pants sold through grocery stores in the United States.
PRE-MOISTENED BABY WIPES
The Company manufactures and markets pre-moistened baby wipes in the United
States. The Company estimates the pre-moistened baby wipes retail market in the
United States was approximately $550 million in 1998.
SALES AND DISTRIBUTION
In the United States, the Company uses in-house managers to coordinate brokerage
companies which facilitate the distribution of the Company's products through
grocery stores on a non-exclusive basis. The Company believes that this approach
has expedited the Company's entry into grocery chains and independent grocers
because of the strong long-term relationships that many of these brokers have
with these retailers. This strategy minimizes corporate overhead. In addition,
the location of its plants has enabled the Company to achieve average shipping
times of one to two days for most destinations in the United States.
Outside the United States, the Company tailors its approach to each foreign
market, taking into consideration the political and cultural environment as well
as the distribution infrastructures. In general, the Company works with
independent local distributors; however, in Puerto Rico, it uses a direct sales
force and, in Argentina, Mexico, Brazil, and Malaysia it uses a combination of a
direct sales force and wholesalers that distribute to small independent
retailers.
ADVERTISING AND PROMOTION
In the United States, diapers are highly promoted since many retailers rely on
their diaper products to attract customers to their stores. In addition, Procter
& Gamble and Kimberly-Clark spend a significant amount on mass media advertising
to create demand for their products. In contrast, Drypers has relied more
heavily on promotional spending and cooperative merchandising arrangements with
retailers. Promotional activity, such as couponing, is geared toward initiating
consumer trial and has been especially effective at targeting spending when less
than full distribution has yet to be achieved. As the Company's distribution
continues to expand, a greater emphasis may be placed on advertising to build
greater brand awareness for the DRYPERS name.
The high level of branded promotion and advertising in the diaper category is
reflected in generally higher wholesale prices and manufacturers' gross margins
when compared to private label manufacturers, offset by correspondingly higher
levels of selling, general and administrative expenses.
In 1998, the Company launched a national television advertising campaign for its
DRYPERS brand diapers as part of the Company's strategy of building the DRYPERS
national brand. The Company believes that increasing consumer awareness of the
DRYPERS brand in the U.S. market will not only assist in its continued
penetration into grocery stores, but also will facilitate its entry into
national mass merchants and drug channels. The Company believes that such
increased awareness led two national mass merchants (Wal-Mart and Kmart) to
agree to initiate distribution test with Drypers in 1998.
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Advertising and promotional activity varies greatly in international markets,
but is generally lower than the level of activity in the United States. As a
consequence, the Company's international business, similar to its domestic
private label business, generally experiences lower gross margins and selling,
general and administrative expenses than its U.S. branded business.
MANUFACTURING PROCESS
Disposable diapers are manufactured on high speed lines beginning with the
manufacture of an absorbent core which is constructed with a combination of wood
pulp and superabsorbent polymers. Nonwoven and polyethylene liner layers, leg
elastics, tape and other applicable features are then combined around the core
in an automated continuous process, which shapes and produces the finished
product. The Company believes it is able to purchase raw materials on
substantially the same terms as its larger branded competitors, and that it is
able to operate with proportionately lower corporate overhead because of its
more focused value-oriented strategy.
The Company maintains quality control procedures throughout the production
process, commencing with the receipt of raw materials and continuing through
shipment of the finished product. Each of the Company's production lines has
on-line electronic detection devices built into the overall production control
system that feed data to process control computers that automatically reject
certain nonconforming products. In addition, each of the Company's diaper lines
has a full-time inspector assigned to assure quality control at all stages of
the production process. Finally, line inspections and batch testing are
performed on a continuous basis. On-site testing labs are utilized to conduct
thorough tests of quality attributes on a daily basis and to assist in the
product development process.
RAW MATERIALS
The raw materials used in the Company's manufacturing process include wood pulp,
super absorbent polymer, polyethylene film, polypropylene nonwoven fabric,
adhesive closure tape, hot melt adhesive, elastic, tissue, bags, boxes, baking
soda, aloe vera and antibacterial treatment. In general, the Company has at
least two suppliers for each of the raw materials used in its manufacturing
process. The Company believes that it maintains good relationships with all of
its raw material suppliers and that it is able to purchase raw materials on
substantially the same terms as its larger branded competitors.
TRADEMARKS AND PATENTS
The Company has registered or has applications pending to register numerous
trademarks in the United States, including DRYPERS. In addition, the Company has
registered or applied for registration of certain of its trademarks in a number
of foreign countries.
Diaper manufacturers normally seek U.S. and foreign patent protection for the
product enhancements that they develop, and there are numerous U.S. patents that
relate to disposable diapers. The design and the technical features of the
diapers produced by the Company are considered by patent counsel before the
manufacture and sale of such products to avoid the features covered by unexpired
patents. The Company believes it has been able to introduce product innovations
comparable to those introduced by its competitors by using manufacturing methods
or materials that are not protected by such patents.
INVENTORY PRACTICE AND ORDER BACKLOG
The disposable diaper industry is generally characterized by prompt delivery by
manufacturers and rapid movement of the product through retail outlets. The time
between receipt of a customer's order and shipment to the customer averages two
to seven days. The Company maintains varying levels of raw material and finished
product inventory depending on lead times and shipping schedules. The Company's
inventory levels generally vary between two and five weeks. As a result of the
short lead time between order and delivery of product, the Company does not
maintain a significant backlog.
-9-
<PAGE>
INSURANCE
All of the Company's plant, machinery and inventory are covered by fire and
extended coverage insurance. In addition, the Company maintains adequate
business interruption and extra expense insurance for all of its operations.
Although the Company has never been named as a defendant in a product liability
lawsuit, the Company maintains product liability insurance in amounts it
believes to be adequate. There can be no assurance, however, that future claims
will not exceed coverage.
EMPLOYEES
As of December 31, 1998, the Company employed approximately 1,491 people on a
full-time basis. None of the Company's employees are represented by a labor
union except in Mexico where such representation is required by local law. The
Company's Mexican employees are members of a syndicate and are employed under a
year-to-year contract entered into with the syndicate. The Company believes its
relationship with its employees is good.
ITEM 2. PROPERTIES
The Company owns the land and building related to its operations in Mexico and
Brazil, which are used for manufacturing, warehousing and administrative
purposes. The Company is in the process of expanding its operations in the
Andean Pact region and has purchased land and a building in Cali, Colombia in
March 1999.
In addition, the Company relocated its Argentina facility following a fire at
its old facility in August 1998. The Company leases manufacturing, distribution
and administrative space in eight locations in the United States, Puerto Rico,
Argentina and Malaysia, as follows:
<TABLE>
<CAPTION>
SQUARE LEASE EXPIRATION
LOCATION FEET DATE USE
----------- ------ ------------------ --------
<S> <C> <C> <C>
Vancouver, Washington 80,000 September 30, 2003 Manufacturing and Administrative
Vancouver, Washington 22,000 April 1, 2000 Warehouse
Vancouver, Washington 30,000 Month to Month Warehouse
Marion, Ohio 440,000 October 31, 2007 Manufacturing and Administrative
Houston, Texas 32,000 May 1, 2004 Administrative
Toa Alta, Puerto Rico 51,000 November 30, 2003 Manufacturing and Administrative
Buenos Aires, Argentina 127,000 September 30, 2002 Manufacturing and Administrative
Kuala Lumpur, Malaysia 128,000 August 31, 2008 Manufacturing and Administrative
</TABLE>
The Company's equipment is highly automated and capable of continuous 24-hour
production. The Company has maintenance and machine shops that are capable of
meeting the majority of the Company's equipment service requirements. The
Company believes that its owned and leased facilities are adequate for its
current needs.
-10-
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain lawsuits and claims arising in the normal
course of business. In the opinion of management, uninsured losses, if any,
resulting from the ultimate resolution of these matters will not have a material
adverse effect on the financial position or results of operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of 1998.
-11-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock, $.001 par value, was listed on the Nasdaq SmallCap
Market from January 29, 1996 through May 26, 1998 under the symbol DYPR.
Effective May 27, 1998, the Company's stock began trading on the Nasdaq National
Market under the same symbol. The following table sets forth, for the periods
indicated, the high and low sales prices of the common stock as reported by the
Nasdaq National Market and the Nasdaq SmallCap Market. There were 378
stockholders of record of the common stock as of February 28, 1999. As of
February 28, 1999, the closing sale price of the Company's common stock on the
Nasdaq National Market was $2.06.
1997 1998
------------------ -------------------
HIGH LOW HIGH LOW
First Quarter $ 4.75 $ 3.63 $ 6.64 $ 6.29
Second Quarter 7.75 3.88 7.13 6.82
Third Quarter 7.94 6.13 4.58 4.25
Fourth Quarter 9.00 5.13 3.03 2.83
To date, the Company has neither declared nor paid any cash dividends on its
common stock, and the Company does not anticipate that dividends will be paid in
the foreseeable future. The Company intends to apply any future earnings to the
expansion and development of its business. The declaration and payment in the
future of any dividends will be at the election of the Company's board of
directors and will depend upon the earnings, capital requirements and financial
condition of the Company, general economic conditions and other pertinent
factors. In addition, the Company's revolving credit facility prohibits the
declaration or payment of any cash dividends by the Company. The indenture
relating to the Company's 10 1/4% Senior Notes ("10 1/4% Senior Notes") also
restricts the payment of cash dividends unless specific conditions are
satisfied.
-12-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data (in thousands, except share
data) should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements, including the notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA 1994 1995 1996 1997 1998
-------------------------- --------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales .............................. $ 173,552 $ 163,947 $ 207,014 $ 287,010 $ 332,640
Operating income (loss) ................ 18,200(a) (11,259)(c) 10,553 21,492 11,921
Income (loss) from continuing
operations before income tax
provision (benefit) and
extraordinary item .................. 10,949 (19,294) 1,622 11,788 (89)
Income (loss) from continuing operations
before extraordinary item ........... 6,798 (15,465) 1,313 9,444 (1,654)
Net income (loss) attributable to
common stockholders
3,110(b) (15,465) 752 1,092(d) (8,205)(e)
Income (loss) per common share(f):
Basic earnings (loss) per share:
Continuing operations ............ $ 1.18 $ (2.35) $ .11 $ 1.00 $ (.11)
Extraordinary loss from early
extinguishment of debt ........ (.64) -- -- (.88) --
Discontinued operations .......... -- -- -- -- (.40)
------------ ------------ ------------ ------------ ------------
Net income (loss) ................ $ .54 $ (2.35) $ .11 $ .12 $ (.51)
============ ============ ============ ============ ============
Diluted earnings (loss) per share:
Continuing operations ............ $ 1.08 $ (2.35) $ .09 $ .51 $ (.11)
Extraordinary loss from early
extinguishment of debt ........ (.59) -- -- (.42) --
Discontinued operations .......... -- -- -- -- (.40)
------------ ------------ ------------ ------------ ------------
Net income (loss) ................ $ .49 $ (2.35) $ .09 $ .09 $ (.51)
============ ============ ============ ============ ============
Common shares outstanding .............. 5,776,554 6,587,698 6,694,298 8,878,638 16,110,429
============ ============ ============ ============ ============
Common and potential common shares
outstanding ......................... 6,302,384 6,587,698 15,064,913(g) 18,469,676(g) 16,110,429
============ ============ ============ ============ ============
DECEMBER 31
--------------------------------------------------------------------------------------
BALANCE SHEET DATA 1994 1995 1996 1997 1998
------------------ ------------- ------------- ------------- ------------ -------------
Working capital (deficit) .............. $ 17,962 $ (3,597) $ 8,707 $ 48,728 $ 26,232
Total assets ........................... 131,731 137,420 150,555 205,232 300,172
Long-term debt, including
current portion ..................... 46,632 47,350 49,592 118,348 149,286
Stockholders' equity(h) ................ 56,767 41,822 53,608 55,580 50,528
</TABLE>
- - ---------------------------
(a) Includes legal expenses of $1,141,000 incurred in connection with a patent
infringement lawsuit which was settled during the second quarter of 1994.
(b) Includes a noncash extraordinary expense of approximately $2,000,000, net
of taxes, for previously capitalized debt issuance costs and original issue
discount, and a cash extraordinary expense of approximately $1,700,000, net
of taxes, for prepayment fees in connection with the $30,000,000 redemption
of the Company's 12 1/2% Senior Notes, funded by the proceeds from the
Company's initial public offering.
(c) Includes unusual expenses of $2,358,000 to reflect the costs associated
with the Company's repositioning/brand transition of its premium brand
diaper products, a noncash restructuring charge of $4,255,000 related to
the write-down of idled equipment to net realizable value, lease
termination costs related to the closure of the Company's Houston
manufacturing facility and unusual expenses of $827,000 related to costs
associated with the Company's refinancing transaction.
(d) Includes a noncash extraordinary expense of $3,745,000 for the write-off of
capitalized debt issuance costs and a cash extraordinary expense of
$4,024,000 for prepayment and other fees in connection with the application
of the net proceeds of the offering of $115,000,000 of the 10 1/4% Senior
Notes in June 1997.
(e) Includes a one-time charge of $6,471,000 related to discontinuing the
Company's laundry detergent business.
(f) The company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share", in the fourth quarter of 1997. Accordingly,
income (loss) per common share data for all prior periods presented has
been restated.
(g) Common and potential common shares outstanding for 1996 and 1997 include
the weighted average effect of shares of common stock issuable upon the
conversion of the outstanding shares of convertible preferred stock issued
in February 1996. All outstanding shares of convertible preferred stock
were converted to common stock in March 1998.
(h) The Company has never declared a cash dividend on its common stock.
-13-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis, together with the accompanying
consolidated financial statements and related notes, are intended to aid in
understanding the Company's results of operations as well as its financial
position, cash flows, indebtedness and other key financial information. Unless
otherwise indicated, references herein to "Drypers" or "the Company" refer to
Drypers Corporation and its subsidiaries.
FROM TIME TO TIME, THE COMPANY MAY MAKE CERTAIN STATEMENTS THAT CONTAIN
"FORWARD-LOOKING" INFORMATION (AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995). WORDS SUCH AS "ANTICIPATE", "ESTIMATE", "PROJECT" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS MAY BE MADE BY MANAGEMENT ORALLY OR IN WRITING,
INCLUDING, BUT NOT LIMITED TO, IN PRESS RELEASES, AS PART OF THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND AS
PART OF OTHER SECTIONS OF THIS ANNUAL REPORT ON FORM 10-K AND THE COMPANY'S
OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES
ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934.
SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS, INCLUDING WITHOUT LIMITATION THOSE IDENTIFIED BELOW. SHOULD ONE OR
MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD ANY OF THE
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS OF CURRENT AND FUTURE
OPERATIONS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THEIR RESPECTIVE DATES.
AMONG THE FACTORS THAT HAVE A DIRECT BEARING ON THE COMPANY'S RESULTS OF
OPERATIONS AND FINANCIAL CONDITION ARE INTERNATIONAL OPERATIONS, CURRENCY
FLUCTUATIONS, CURRENCY DEVALUATIONS, CURRENCY RESTRICTIONS, LEVERAGE AND DEBT
SERVICE, COMPETITIVE INDUSTRY, EXCESS CAPACITY OVER DEMAND, PRICE CHANGES BY
COMPETITORS, DEPENDENCE ON KEY PRODUCTS AND ACCEPTANCE OF PRODUCT INNOVATIONS,
COST OF CERTAIN RAW MATERIALS, INTELLECTUAL PROPERTY RISKS, TECHNOLOGICAL
CHANGES, COVENANT LIMITATIONS AND OTHER FACTORS DISCUSSED HEREIN.
OVERVIEW
Drypers is a leading manufacturer and marketer of premium quality, value-priced
disposable baby diapers and training pants sold under the DRYPERS brand name in
the United States and under the DRYPERS and other brand names internationally.
Currently, the Company is the third largest producer of branded disposable baby
diapers in the United States. The Company also manufactures and sells
lower-priced diapers under other brand names in the United States and
internationally, as well as private label diapers and training pants and
pre-moistened baby wipes. The Company's DRYPERS brand is the fourth largest
selling diaper brand in the United States and the second largest selling
training pant brand in U.S. grocery stores.
Drypers targets the value segment of the U.S. diaper market by offering products
with features and quality comparable to the premium-priced national brands at
generally lower prices. The Company positions its products to provide enhanced
profitability for retailers and better value to consumers. The Company
continually seeks to expand its extensive grocery store sales and distribution
network, while increasing its limited penetration of the mass merchant and
drugstore chain markets, in order to capture a greater share of the U.S. diaper
market. In 1998, Drypers began its first-ever national television campaign. As a
result of this campaign, in 1998, Drypers began with test distribution in two
national mass merchants (Wal-Mart and Kmart).
Drypers is the sixth largest diaper producer in the world. Since 1993, Drypers
has significantly expanded its international presence, competing in the
lower-priced branded and private label categories. The Company, through a series
of start-ups and acquisitions, currently produces diapers in Puerto Rico,
Argentina, Mexico, Brazil and Malaysia. Wal-Mart International has selected the
Company to be its appointed 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, and also supplies Drypers
branded products to Wal-Mart stores in these markets. Recently, the Company
gained distribution in the Wal-Mart stores in China, Canada and Germany. The
Company intends to continue to expand its operations in Argentina, Brazil,
Mexico, Malaysia and Colombia and is actively seeking further expansion
opportunities through acquisition, joint venture or other arrangements in Latin
America and the Pacific Rim.
-14-
<PAGE>
On August 6, 1998, the Company announced the introduction of two new product
innovations, DRYPERS(R) SUPREME WITH GERM GUARD(TM) LINER and DRYPERS(R)
ANTIBACTERIAL BABY WIPES WITH GERM GUARD(TM). Both products appeared on
retailers' shelves in October 1998. DRYPERS SUPREME WITH GERM GUARD LINER,
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 also
launched DRYPERS ANTIBACTERIAL BABY WIPES WITH GERM GUARD as an extension of its
growing baby wipes business.
In June 1997, the Company introduced DRYPERS WITH ALOE VERA, the first diapers
and training pants to contain aloe vera, an herbal extract recognized for its
ability to help soothe skin. The improved diaper also featured a breathable,
cloth-like outer cover typically only found on premium-priced branded diapers.
In addition, the Company entered into an exclusive licensing arrangement with
The Children's Television Workshop under which the Company's products,
packaging, advertising and promotional materials feature Big Bird, Elmo and
other familiar characters from the children's television show SESAME STREET.
On August 8, 1998, the Company's manufacturing facility in Argentina was
extensively damaged as a result of a fire. There were no employee injuries
resulting from the fire. In addition to physical damage to the facility, the
fire resulted in the loss of a portion of the finished goods and raw material
inventory. Two of the four diaper manufacturing lines were completely destroyed
and the remaining two lines were partially damaged. The Company maintained
insurance to cover damage to the Company's property, business interruption and
extra expense claims. Other income for the year ended December 31, 1998 includes
a nonrecurring gain, representing the difference between the estimated property
insurance proceeds on the machinery and equipment and the carrying value of the
machinery and equipment at the time of the fire. The ultimate amount of the gain
to be recorded depends on final diaper line manufacturer quotes, installation
costs, start-up costs, and other cost estimates and the final settlement reached
with the Company's insurance carriers.
The initial results of the laundry detergent operation in the last two quarters
of 1998, including an operating loss of $1.2 million, caused the Company to
reconsider its plans for these operations. As a result, the Company decided in
December 1998 to discontinue these operations and to settle remaining related
contractual obligations. A charge of $5.3 million resulted from recording these
obligations and the write-off of the Company's investment in the laundry
detergent business and, along with the 1998 operating loss, is presented as a
discontinued operation in the consolidated statement of earnings for the year
ended December 31, 1998.
In February 1999, the Company announced that it had lowered its 1999
expectations for its Latin American business due to the recent decline of the
Brazilian real. The Company expects U.S. dollar sales from Brazil and Argentina
to be lower than planned and cost of goods sold to be higher because of the
currency situation, resulting in a reduction in expected 1999 annual earnings,
primarily during the first half of 1999, of approximately $0.15 to $0.20 per
diluted share on a consolidated basis. This adjustment reflects the time delay
expected to implement anticipated price increases in order to pass through
increases in raw material costs.
The Company's domestic operations include sales in the United States, Puerto
Rico and exports from these manufacturing operations. The following table sets
forth the Company's domestic and international net sales for each of the last
three years.
YEAR ENDED DECEMBER 31
----------------------------------------------------
1996 1997 1998
---------------- ---------------- ----------------
(DOLLARS IN MILLIONS)
Domestic ............ $179.2 86.6% $191.3 66.7% $213.7 64.3%
International ....... 27.8 13.4 95.7 33.3 118.9 35.7
------ ------ ------ ------ ------ ------
Total Net Sales $207.0 100.0% $287.0 100.0% $332.6 100.0%
====== ====== ====== ====== ====== ======
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.
-15-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the specified components of income and expense
for the Company expressed as a percentage of net sales for the years ended
December 31, 1996, 1997 and 1998.
YEAR ENDED DECEMBER 31
------------------------
1996 1997 1998
------ ------ -----
Net sales .................................. 100.0% 100.0% 100.0%
Cost of goods sold ......................... 60.9 61.2 59.2
----- ----- -----
Gross profit ............................... 39.1 38.8 40.8
Selling, general and administrative expenses 34.0 31.3 37.2
----- ----- -----
Operating income ........................... 5.1 7.5 3.6
Interest expense, net ...................... 4.3 3.5 5.0
Other income ............................... -- 0.1 1.3
----- ----- -----
Income (loss) from continuing operations
before income tax provision and
extraordinary item ...................... 0.8 4.1 (0.1)
Income tax provision ....................... 0.2 0.8 0.4
Extraordinary item ......................... -- (2.7) --
----- ----- -----
Income (loss) from continuing operations ... 0.6 0.6 (0.5)
Discontinued operations .................... -- -- (1.9)
----- ----- -----
Net income (loss) .......................... 0.6% 0.6% (2.4)%
===== ===== =====
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
NET SALES
Net sales increased 15.9% to $332.6 million for the year ended December 31, 1998
from $287.0 million for the year ended December 31, 1997. Domestic sales
increased 11.7% to $213.7 million for the year ended December 31, 1998 from
$191.3 million for 1997. This increase primarily reflects positive trade and
consumer reaction to the national television media campaign in the United States
for the Company's premium brand diapers. Additionally, the September launch of
DRYPERS SUPREME WITH GERM GUARD LINER was a contributing factor to the increase
in domestic sales. Net sales in the international sector grew 24.2% to $118.9
million for the year ended December 31, 1998 from $95.7 million in the prior
year, reflecting growth in Brazil and Malaysia. Net sales for the Brazilian
operations grew 25.9% during 1998 as compared to 1997, primarily due to a
product promotion with Brazilian entertainer Xuxa. Argentine operations were
disrupted in the third and fourth quarter of 1998 due to a fire in the Company's
Argentina facility, resulting in only a slight increase in 1998 net sales as
compared to 1997. (See"Other Income"). Additionally, the Company's Asian
operations contributed significantly to the increase in international net sales.
This was primarily due to the acquisition of PrimoSoft in Malaysia in September
1998. These increases were offset by a decrease in 1998 net sales for the
Company's Mexican operations where the effect of a price war initiated in the
first half of 1998 by a competitor continued throughout the third quarter.
Although price increases were announced, signaling an abatement of this price
war, increased purchases of competitors' products in anticipation of their
announced price increases delayed a significant number of the Company's
shipments until the fourth quarter of 1998. Despite the effects of this price
war, the Company gained sizable new distribution in Mexico.
-16-
<PAGE>
COST OF GOODS SOLD
Cost of goods sold decreased as a percentage of net sales to 59.2% for the year
ended December 31, 1998 compared to 61.2% for the year ended December 31, 1997.
This decrease primarily reflects gains in gross margins in Latin America,
primarily Brazil. This increase in international gross margin percentage was
slightly offset by decreased gross margins in the Company's North American
operations. This was primarily the result of under-utilized capacity in the
United States, put in place to accommodate the volume that may be expected from
mass-merchant accounts if such mass merchant distribution is obtained in 1999.
Improvements in domestic capacity utilization during the last half of 1998 were
offset by inefficiencies related to the disruption of domestic production in
order to produce replacement diapers for the Company's Argentine customers,
needed because of the fire in the Company's Argentina facility.
(See-"Other Income").
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased as a percentage of net
sales to 37.2% for the year ended December 31, 1998 compared to 31.3% for the
year ended December 31, 1997. The increase primarily reflected the $10.0 million
in costs associated with the Company's national television advertising campaign
in the United States, which began in February 1998. This increase reflected the
need for the Company to continue normal promotional spending in parallel with
the media campaign until such time as increased brand recognition would allow a
reduction in promotional spending to offset the cost of ongoing advertising.
Additionally, selling and promotional costs related to international sales
increased, primarily in Brazil.
OPERATING INCOME
As a result of the above factors, the Company's operating income decreased $9.6
million to $11.9 million for the year ended December 31, 1998 from $21.5 million
for the year ended December 31, 1997. Operating income as a percentage of net
sales was 3.6% for the year ended December 31, 1998 versus 7.5% in the prior
year.
INTEREST EXPENSE, NET
Interest expense, net increased to $16.5 million for the year ended December 31,
1998 as compared to $10.0 million for the year ended December 31, 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, amortization of additional deferred loan costs
related to these transactions, and increased borrowing under the revolving
Company's credit facility.
OTHER INCOME
On August 8, 1998, the Company's manufacturing facility in Argentina was
extensively damaged as a result of a fire. There were no employee injuries
resulting from the fire. In addition to physical damage to the facility, the
fire resulted in the loss of a portion of the finished goods and raw material
inventory. Two of the four diaper manufacturing lines were completely destroyed
and the remaining two lines were partially damaged. The Company maintained
insurance to cover damage to the Company's property, business interruption and
extra expense claims. Other income for the year ended December 31, 1998 includes
a nonrecurring gain representing the difference between the estimated property
insurance proceeds on the machinery and equipment and the carrying value of the
machinery and equipment at the time of the fire. The ultimate amount of the gain
to be recorded depends on final diaper line manufacturer quotes, installation
costs, start-up costs, and other cost estimates and the final settlement reached
with the Company's insurance carriers. For the year ended December 31, 1998, the
Company has recorded approximately $4.0 million in other income primarily
related to estimated proceeds under the Company's property damage claim as well
as lost profits recoverable under the Company's business interruption policy for
the months of August through December 1998.
-17-
<PAGE>
INCOME TAXES
The Company recorded a provision of $1.6 million related to state and foreign
taxes for the year ended December 31, 1998, compared to a provision of $2.3
million in 1997. The decrease is primarily due to net losses in Argentina
resulting from the August fire and continued management focus on international
tax planning strategies during 1998.
DISCONTINUED OPERATIONS
Results of the laundry detergent operation in the last two quarters 1998,
including an operating loss of $1.2 million, caused the Company to reconsider
its plans for these operations. As a result, the Company decided in December
1998 to discontinue these operations and to settle remaining related contractual
obligations. A charge of $5.3 million resulted from recording these obligations
and the write-off of the Company's investment in the laundry detergent business
and, along with the 1998 operating loss, is presented as a discontinued
operation in the consolidated statement of earnings for the year ended December
31, 1998. The $5.3 million loss on disposal includes $3.3 million for the
write-off of the initial investment and receivable from the detergent operations
and $2.0 million related to existing contractual obligations required to be
satisfied in disposing of the business.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
NET SALES
Net sales increased 38.6% to $287.0 million for the year ended December 31, 1997
from $207.0 million for the year ended December 31, 1996. Domestic sales
increased 6.7% to $191.3 million for the year ended December 31, 1997 from
$179.2 million for 1996. This increase was primarily the result of the June 1997
introduction of DRYPERS WITH ALOE VERA and the launch of the licensing
arrangement for the SESAME STREET characters, as well as the introduction of the
baking soda product in May 1996, and the continued growth in training pant and
private label sales. The Company believes that the introduction of the new
product innovations contributed to an increased share in existing retail
accounts and expanded penetration into new accounts in the United States. The
increase in U.S. sales between periods was mitigated by a decline during the
third quarter of 1997 in net sales in Puerto Rico due to price competition from
Procter & Gamble and a decline in export sales resulting from pricing pressures
in Asia due to recent currency declines. Net sales in the international sector
grew to $95.7 million for the year ended December 31, 1997 from $27.8 million in
the prior comparable period. This substantial increase reflected primarily the
improved sales volume for the Company's operations in Argentina, the growth of
business in Mexico and the Company's majority-owned consolidated venture in
Brazil, which began operations in March 1997.
-18-
<PAGE>
COST OF GOODS SOLD
Cost of goods sold increased slightly as a percentage of net sales to 61.2% for
the year ended December 31, 1997 compared to 60.9% for the year ended December
31, 1996. This increase reflected growth in international sales which have
generally lower gross profit margins (and correspondingly lower selling and
promotional costs) partially offset by lower raw material costs and the benefits
of higher volumes over the Company's fixed cost base.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased as a percentage of net
sales to 31.3% for the year ended December 31, 1997 compared to 34.0% for the
year ended December 31, 1996. The decrease reflected the Company's efforts and
focus on reducing domestic per pad selling costs, including but not limited to
reducing the face value and volume of coupons, in-store promotions and slotting
fees and improved management and monitoring of, and controls over, promotional
allowances. Increases in international sales, which have lower selling and
promotional costs, also contributed to this decrease.
OPERATING INCOME
As a result of the above factors, the Company's operating income increased $10.9
million, or 103.7%, to $21.5 million for the year ended December 31, 1997 from
$10.6 million for the year ended December 31, 1996. Operating income as a
percentage of net sales was 7.5% for the year ended December 31, 1997 versus
5.1% in the prior year.
INTEREST EXPENSE, NET
Interest expense, net increased to $10.0 million for the year ended December 31,
1997 as compared to $8.9 million for the year ended December 31, 1996. The
increase was due to the issuance of $115.0 million of 10 1/4% Senior Notes due
2007 in June 1997 and amortization of additional deferred loan costs related To
this transaction.
INCOME TAXES
The Company recorded a provision of $2.3 million related to state and foreign
taxes for the year ended December 31, 1997, compared to a provision of $309,000
in 1996. The increase is related to the increase in international earnings
during 1997.
EXTRAORDINARY ITEM
In connection with the Company's financing transactions completed during the
second quarter of 1997, the Company recognized an extraordinary item of $7.8
million for the write-off of capitalized debt issuance costs and prepayment and
other fees.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements include, but are not limited to, the
payment of principal and interest on its debt; the funding of working capital
needs, primarily inventory, accounts receivable and advertising and promotional
expenses; and the funding of capital investments in machinery, equipment and
computer systems. Historically, the Company has financed its debt service,
working capital and capital expenditure requirements through a combination of
internally generated cash flow, borrowings under the Company's revolving credit
facility and other sources and proceeds from private and public offerings of
debt and equity securities.
The Company's operations used $17.5 million of cash for the year ended December
31, 1998, $12.0 million of which related to expenditures resulting from the
Argentina fire in August 1998, for which the Company had not been reimbursed as
of December 31, 1998. The Company's operations used $6.9 million of cash during
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the year ended December 31, 1997. The use of cash during the year ended December
31, 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 financing the working capital needs and restoration of
the Company's Argentina operatioNs damaged by fire in August 1998. The use of
cash during the year ended December 31, 1997, reflected 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 previous contract manufacturer for future inventory purchases.
The Company's capital expenditures were $26.5 million for the year ended
December 31, 1998 and $21.6 million for the year ended December 31, 1997. The
increase between periods in capital expenditures related primarily to
international production capacity increases and capital expenditures of
approximately $6.4 million related to restoration of the Company's Argentina
operations damaged by fire in August 1998. The Company's capital expenditures in
1997 reflected machine enhancements incurred in connection with the launch of
DRYPERS WITH ALOE VERA and production capacity increases including the
construction of a new facility in Mexico. The Company financed its capital
expenditures in 1997 and 1998 through borrowings under its 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, while the remainder related to the costs associated with
the Company's discontinued laundry detergent business and the expansion of
capacity in several Latin American markets.
The Company's estimated cash requirements during 1999 are primarily the funding
of working capital needs, payment of debt service, planned capital expenditures
of approximately $18.0 million and payment of contractual obligations to
discontinue the laundry detergent business. Of the planned capital expenditures
in 1999, approximately $8.0 million relates to rebuilding the facilities in
Argentina. The remainder relates to the expansion of capacity and modifications
to existing equipment to enable the Company to make future product enhancements.
A substantial portion of the domestic capital expenditures will be financed
through operating leases. As of December 31, 1998, the Company has recorded in
prepaid expenses and other assets a receivable due from the insurance carriers
of approximately $12.0 million related to the Argentina fire. This receivable is
comprised of the replacement cost of damaged inventory and the estimated
replacement cost of the Company's diaper manufacturing lines to be recovered
under the property portion of the insurance claim, as well as estimated lost
profits and fixed and incremental expenses for the months of August through
December 1998 to be recovered under the business interruption portion of the
insurance claim. Management believes this is a reasonable estimate of insurance
proceeds to be received, and will periodically review such amount for possible
adjustment, if necessary, in the future. As of December 31, 1998, the Company
had received interim payments of $8.7 million on its claim and to date has
received approximately $11.0 million in interim payments. The Company is
engaging in the claim process and settlement discussions with its insurers
regarding additional insurance proceeds to which the Company believes it is
entitled. In order to return its Argentina facility to normal operating capacity
on a timely basis and minimize the interruption in meeting consumer demand for
Drypers products in Argentina, the Company has increased its borrowings
outstanding under the Company's revolving credit facility to approximately $36.3
million as of December 31, 1998. Insurance proceeds anticipated to be received
during the first and second quarters of 1999 will be used to reduce the amount
outstanding under the revolving credit facility.
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 has incurred in the past, and may incur in the
future, expenses related to license agreements and/or patent infringement
insurance coverage.
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The Company's working capital was $26.2 million as of December 31, 1998,
compared to $48.7 million as of December 31, 1997. The Company's current assets
increased from $77.0 million as of December 31, 1997 to $119.5 million as of
December 31, 1998, and current liabilities increased from $28.3 million as of
December 31, 1997 to $93.3 million as of December 31, 1998. Total debt increased
from $118.3 million at December 31, 1997 to $187.7 million as of December 31,
1998.
Effective September 11, 1998, the Company acquired certain assets and assumed
certain liabilities of PrimoSoft, a Malaysian manufacturer of baby diapers, for
approximately $2.8 million of the Company's common stock (403,571 shares issued
on September 11, 1998) and approximately $10.3 million in cash. The acquisition
was accounted for as a purchase, and the purchase price was allocated to the
acquired assets and liabilities assumed based on their estimated fair values.
The consideration paid for PrimoSoft exceeded the estimated fair market value of
the net tangible assets acquired by approximately $7.7 million and this excess
was recorded as goodwill.
In February 1997, the Company entered into a series of transactions related to
the establishment of a 51% owned venture in Brazil, acquisition of certain
intangible assets and rights from Chansommes do Brasil Ind. E Com. Ltda.
("Chansommes") and the purchase of diaper production of Chansommes.
Consideration paid in connection with the transactions included $4.0 million of
common stock of the Company (1,000,000 shares), and cancellation of an
outstanding receivable from Chansommes of $2.2 million. Under the terms of the
agreement, the 1,000,000 shares of common stock were held in escrow by the
Company through May 5, 1997 at which time the owners of such shares elected to
receive $4.0 million in cash in lieu of the shares. In connection with the
transactions, the Company also obtained a fair market value option to purchase
the remaining 49% interest in the venture in Brazil. During the second quarter
of 1997, the Company exercised a portion of such option and obtained 44% of the
remaining 49% interest for $5.3 million in cash. Total cash consideration paid
in connection with the transactions, including transaction costs, was
approximately $9.8 million. In connection with the transactions, the Company
also obtained a fair market value option to acquire Chansommes. On April 6,
1998, the Company exercised its option to acquire Chansommes effectively giving
the Company a 100% ownership interest in the Brazilian manufacturer of its
diapers. The acquisition was accounted for as a purchase, and the purchase price
was allocated to the acquired assets and liabilities assumed based on their
estimated fair values. Total consideration for the entire series of Brazilian
venture was $15.1 million, which exceeded the estimated fair market value of the
net tangible assets acquired by approximately $16.5 million, and this excess was
recorded as goodwill.
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, with the remaining proceeds 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.
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On June 24, 1997, the Company closed its private issuance of $115.0 million
aggregate principal amount of 10 1/4% Senior Notes. Proceeds from the offering
Of the 10 1/4% Senior Notes were used to repurchase $43.4 million of the $45.0
million in principal amount of the Company's 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.
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 is
secured by substantially all of the Company's assets.
As a result of the charge related to the Company's discontinued laundry
detergent operations and the additional cash demands placed on the Company due
to the delay in receipt of insurance proceeds related to the fire at its
Argentina facility, as of December 31, 1998, the Company was in defalut under
certain of the financial covenants contained in its revolving credit facility.
On March 31, 1999, the Company and the lender entered into an agreement curing
the defaults, resetting certain financial covenants and requiring the Company to
reserve certain minimum levels of borrowing availability, thereby reducing the
total available revolving credit to the Company. The amendment raises the
effective cost of bank borrowings under the Company's revolving credit facility.
The new credit facility, as amended, bears interest in the range of prime to
prime plus 1 1/2% to LIBOR plus 1 1/2% to LIBOR plus 3 1/4%, in each case based
on the Company's debt to EBITDA ratio determined on a quarterly basis. The
Company plans to enter into discussions with the lender to restructure its
facility into a combination of a revolver, term loan, and an over-advance
facility.
At December 31, 1998, the Company's borrowing base would have permitted the
Company to borrow up to an additional $12.4 million. As of March 31, 1999, under
the most recent amendment to the revolving credit facility, the Company has no
borrowing availability. However, the Company has numerous transactions currently
in process which should generate approximately $9.7 million to $18.2 million in
cash during April and May 1999 in excess of cash flow from operations, as
described below. The Company is currently in the process of completing a
sale-leaseback transaction related to its Mexican facility. This transaction is
schedule to be completed by May 31, 1999 and should generate %5.2 million.
Secondly, the Company has received commitments from two Malaysian financial
institutions for lines of credit aggregating approximately $2.5 million. These
facilities should be in place within the month of April 1999 and are denominated
in the local currency. These transactions also serve as a self-hedge for the
Company against potential foreign currency exposure in that country. The Company
is also in the process of securing additional Malaysian financing proposals,
which could generate another $2.5 million. Thirdly, the Company has received a
commitment from its insurance carrier that a $2.0 million interim payment will
be received during the first week in April 1999, and the Company is continuing
its efforts to make further progress on bringing the insurance claim process to
closure by collecting the remaining insurance receivable of approximately $8.0
million. Finally, the Company continues to pursue operating lease financing for
its major capital projects.
Manatgement believes that future cash flow from operations, together with cash
on hand, available borrowings under the Company's revolving credit facility,
borrowings under foreign credit facilities, sale-leaseback of foreign land and
buildings, insurance proceeds related to the Argentina fire and potential
operating lease financing arrangements will be adequate to meet the Company's
anticipated cash requirements for 1999, including working capital expenditures,
debt service and acquisitions.
MARKET RISK
The Company does not utilize financial instruments for trading purposes and
holds no derivative financial instruments which could expose the company to
significant market risk. The Company's exposure to market risk for changes in
interest rates relate primarily to variable rate borrowings outstanding under
the Company's revolving credit facility discussed above. At December 31, 1998,
the Company had $36.3 million outstanding under the revolving credit facility.
An increase in interest rates of 1% would reduce annual net income by
approximately $.4 million. The Company's remaining debt obligations as of
December 31, 1998 were primarily $145.0 million of Senior Notes, which carry a
fixed interest rate of 10 1/4%, and thus, have no earnings exposure for chargEs
in interest rates.
INFLATION AND CURRENCY DEVALUATION
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, historically,
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. However, due to the recent economic
events in Latin America and Asia, inflationary conditions and/or the effect of
currency devaluations could have a material impact on the results of operations
in these locations. The Company is currently evaluating the possibility of
borrowing at the foreign subsidiary level in the respective local currency to
create a self-hedge against future exposure to currency devaluation.
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NEW ACCOUNTING STANDARDS
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 as incurred. The Company is required to adopt SOP 98-1 as of
January 1, 1999. The Company does not expect the adoption of SOP 98-1 to have a
material effect on its financial position or results of operations.
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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company is required to
adopt SFAS No. 133 as of January 1, 2000 and does not expect the adoption of
this statement to have a material effect on its financial position or results of
operations.
YEAR 2000
The operation of the Company's business depends 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
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. The Company has been evaluating its Programs and Systems to
identify potential Year 2000 compliance problems and recognizes the need to
ensure its operations will not be adversely impacted by Year 2000 software
failures. Software failures due to processing errors potentially arising from
calculations using the year 2000 date are a known risk. The Company has
developed a plan to ensure its systems comply with the requirements to process
transactions in the year 2000. The following is a status report of the Company's
efforts to date for fulfilling those compliance requirements:
THE COMPANY'S STATE OF READINESS
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.
Replacement of domestic Programs and Systems with PeopleSoft, which is Year 2000
compliant, is currently underway, and is scheduled to be fully tested and
implemented during the second quarter of 1999. Testing of existing international
Programs and Systems is scheduled to be fully completed and necessary changes
implemented by the end of the third quarter of 1999. Evaluation and modification
of all desktop hardware throughout the Company is currently in process and
should be completed by the end of the third quarter of 1999. Additionally,
potentially date sensitive chips embedded within production equipment are
currently being tested to identify and address any problems. The Company
anticipates that this process will be complete by the end of the third quarter
of 1999.
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COSTS TO ADDRESS YEAR 2000 ISSUES
The 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 during 1998 and 1999. Approximately $2.3 million had been expended on
the PeopleSoft software and implementation process at December 31, 1998.
RISKS OF YEAR 2000 ISSUES
The Company is in the process of executing its formal Year 2000 compliance plan
and expects to achieve implementation on or before September 30, 1999. The
Company has requested from its principal customers, suppliers and service
providers (such as financial institutions) written statements regarding their
knowledge of and plans for meeting the Year 2000 compliance requirements, and
anticipates receiving responses by April 30, 1999. However, no assurance can be
given that these efforts will be successful. If any of the Company's significant
customers, suppliers, or service providers do not successfully and timely
achieve Year 2000 compliance, the Company's business or operations could be
adversely affected. However, the Company has multiple suppliers for its primary
raw materials and has no major customers which alone comprise greater than 10%
of total net sales. Thus, alternate approaches are available in these areas to
mitigate the risks to the Company of Year 2000 noncompliance by these third
parties.
CONTINGENCY PLANS
Even though management believes the Company will successfully implement its
formal Year 2000 compliance plan, the Company is currently developing a "Worst
Case Contingency Plan", which will include generally an environment of utilizing
"Work Force", "Spreadsheet" and "Work Around" programming and procedural
efforts. This contingency plan is scheduled to be in place by September 30,
1999.
YEAR 2000 READINESS DISCLOSURES
ALL STATEMENTS REGARDING YEAR 2000 MATTERS CONTAINED IN THIS ANNUAL REPORT ON
FORM 10-K ARE "YEAR 2000 READINESS DISCLOSURES" WITHIN THE MEANING OF THE YEAR
2000 INFORMATION AND READINESS DISCLOSURES ACT.
OTHER INFORMATION
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
depend on 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 the Company does not 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 cannot generate sufficient cash flow
from operations in the future to service its debt, it may need 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. 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
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fully implementing such changes may require a number of months and the Company's
operating results may be adversely affected. For example, during the third
quarter of 1997 and first three quarters 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 62.0%,
52.3% and 47.6% of the Company's net sales for 1996, 1997 and 1998,
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 substantially depends on the continued
success of sales of these products and customer acceptance of its product
innovations. A number of factors could materially reduce sales by the Company of
its products, or the profitability of such sales, including actions by its
competitors, shifts in consumer preferences or the lack of acceptance of the
Company's product innovations. There can be no assurance that in the future such
factors will not have a material adverse effect on the Company.
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 if 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 the Company does not control. Such
factors include economic conditions in the foreign countries in which the
Company operates in 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 can 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.
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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 on 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.
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 or delayed 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 be 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
Company's 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. The effects of any such default or acceleration could
have a material adverse effect on the Company's financial position or results of
operations.
DEPENDENCE ON KEY PERSONNEL. The Company believes that its continued success
will depend to a significant extent upon the abilities and continued efforts of
its senior management. The loss of the services of any one or more of such key
personnel could have an adverse effect on the Company and there can be no
assurance that the Company would be able to find suitable replacements for such
key personnel. The Company has employment agreements with certain of its senior
executives. The Company does not maintain key man life insurance on any of its
executives.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Drypers Corporation:
We have audited the accompanying consolidated balance sheets of Drypers
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1998, and the related consolidated statements of earnings, comprehensive
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Drypers Corporation and
subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 18, 1999
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DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1997 1998
--------- ---------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 9,269 $ 12,309
Accounts receivable, net of allowance for
doubtful accounts of $2,064 and $2,635, respectively 33,941 49,253
Inventories .......................................... 21,090 29,822
Prepaid expenses and other ........................... 12,730 28,164
--------- ---------
Total current assets ....................... 77,030 119,548
PROPERTY, PLANT AND EQUIPMENT, net of depreciation and
amortization of $17,769 and $24,594, respectively...... 53,270 81,903
INTANGIBLE AND OTHER ASSETS, net of amortization
of $13,438 and $17,373, respectively................... 74,932 98,721
--------- ---------
$ 205,232 $ 300,172
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings ................................ $ -- $ 38,385
Current portion of long-term debt .................... 1,593 322
Accounts payable ..................................... 16,558 33,407
Accrued liabilities .................................. 10,151 21,202
--------- ---------
Total current liabilities .................. 28,302 93,316
LONG-TERM DEBT .......................................... 1,755 2,967
SENIOR TERM NOTES ....................................... 115,000 145,997
OTHER LONG-TERM LIABILITIES ............................. 4,595 7,364
--------- ---------
149,652 249,644
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 17,706,660 shares
issued and outstanding, respectively .............. 10 18
Additional paid-in capital ........................... 69,998 75,244
Warrants ............................................. 1,097 180
Retained deficit ..................................... (15,526) (23,731)
Foreign currency translation adjustments ............. -- (1,183)
--------- ---------
Total stockholders' equity ................. 55,580 50,528
--------- ---------
$ 205,232 $ 300,172
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-28-
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES ................................................... $ 207,014 $ 287,010 $ 332,640
COST OF GOODS SOLD .......................................... 126,128 175,545 196,985
------------ ------------ ------------
Gross profit ........................................... 80,886 111,465 135,655
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ................ 70,333 89,973 123,734
------------ ------------ ------------
Operating income ....................................... 10,553 21,492 11,921
RELATED-PARTY INTEREST EXPENSE .............................. 354 199 --
OTHER INTEREST EXPENSE, net ................................. 8,577 9,758 16,476
OTHER INCOME ................................................ -- 253 4,466
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAX PROVISION AND EXTRAORDINARY ITEM
1,622 11,788 (89)
INCOME TAX PROVISION ........................................ 309 2,344 1,565
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM........................................ 1,313 9,444 (1,654)
EXTRAORDINARY ITEM:
Costs of early extinguishment of debt .................... -- (7,769) --
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS .................... 1,313 1,675 (1,654)
DISCONTINUED OPERATIONS:
Loss from operations of discontinued laundry detergent
business .............................................. -- -- (1,193)
Loss on disposal of detergent business ................... -- -- (5,278)
------------ ------------ ------------
NET INCOME (LOSS) ........................................... 1,313 1,675 (8,125)
PREFERRED STOCK DIVIDEND .................................... 561 583 80
------------ ------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS........ $ 752 $ 1,092 $ (8,205)
============ ============ ============
INCOME (LOSS) PER COMMON SHARE:
Basic earnings (loss) per share:
Continuing operations .............................. $ .11 $ 1.00 $ (.11)
Extraordinary loss from early extinguishment of debt -- (.88) --
Discontinued operations ............................ -- -- (.40)
------------ ------------ ------------
Net income (loss) .................................. $ .11 $ .12 $ (.51)
============ ============ ============
Diluted earnings (loss) per share:
Continuing operations .............................. $ .09 $ .51 $ (.11)
Extraordinary loss from early extinguishment of debt -- (.42) --
Discontinued operations ............................ -- -- (.40)
------------ ------------ ------------
Net income (loss) .................................. $ .09 $ .09 $ (.51)
============ ============ ============
COMMON SHARES OUTSTANDING ................................... 6,694,298 8,878,638 16,110,429
============ ============ ============
COMMON AND POTENTIAL COMMON SHARES OUTSTANDING .............. 15,064,913 18,469,676 16,110,429
============ ============ ============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
-29-
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1996 1997 1998
------- ------- --------
<S> <C> <C> <C>
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 752 $ 1,092 $(8,205)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ............ -- -- (1,183)
------- ------- -------
COMPREHENSIVE INCOME (LOSS) ......................... $ 752 $ 1,092 $(9,388)
======= ======= =======
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
-30-
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
PREFERRED COMMON
SHARES SHARES ADDITIONAL
ISSUED AND ISSUED AND PREFERRED COMMON PAID-IN
OUTSTANDING OUTSTANDING STOCK STOCK CAPITAL WARRANTS
------------ ------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 .............. -- 6,619,804 $ -- $ 7 $ 58,482 $ 703
Issuance of preferred stock, net of
$178 in offering costs ............ 90,000 -- 1 -- 8,157 692
Issuance of common stock in connection
with refinancing .................. -- 194,780 -- -- 609 --
Issuance of common stock in connection
with an acquisition ............... -- 360,000 -- -- 1,575 --
Preferred stock dividends ($6.23 per
share) ............................ -- -- -- -- -- --
Exercise of stock options ............ -- 4,646 -- -- -- --
Net income ........................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1996 .............. 90,000 7,179,230 1 7 68,823 1,395
Issuance of common stock in connection
with acquisitions ................. -- 71,657 -- -- 200 --
Conversion of preferred stock and
dividends into common stock ....... (28,890) 2,937,417 -- 3 312 --
Preferred stock dividends ($7.50 per
share) ............................ -- -- -- -- -- --
Effect of stock option and stock
purchase plans .................... -- 111,348 -- -- 283 --
Issuance of warrants ................. -- -- -- -- -- 50
Exercise of warrants ................. -- 213,571 -- -- 380 (348)
Net income ........................... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1997 .............. 61,110 10,513,223 1 10 69,998 1,097
Issuance of common stock in connection
with an acquisition ............... -- 403,571 -- -- 2,825 --
Conversion of preferred stock and
dividends into common stock ....... (61,110) 6,292,364 (1) 7 1,058 --
Preferred stock dividends ($1.25 per
share) ............................ -- -- -- -- -- --
Effect of stock option and stock
purchase plans .................... -- 79,080 -- -- 381 --
Forfeiture of expired warrants ....... -- -- -- -- 254 (254)
Exercise of warrants ................. -- 418,422 -- 1 728 (663)
Net loss ............................. -- -- -- -- -- --
Translation adjustments .............. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1998 .............. -- 17,706,660 $ -- $ 18 $ 75,244 $ 180
========== ========== ========== ========== ========== ==========
</TABLE>
FOREIGN
CURRENCY
RETAINED TRANSLATION
DEFICIT ADJUSTMENTS
----------- ------------
BALANCE, December 31, 1995 .............. $ (17,370) $ --
Issuance of preferred stock, net of
$178 in offering costs ............ -- --
Issuance of common stock in connection
with refinancing .................. -- --
Issuance of common stock in connection
with an acquisition ............... -- --
Preferred stock dividends ($6.23 per
share) ............................ (561) --
Exercise of stock options ............ -- --
Net income ........................... 1,313 --
---------- ----------
BALANCE, December 31, 1996 .............. (16,618) --
Issuance of common stock in connection
with acquisitions ................. -- --
Conversion of preferred stock and
dividends into common stock ....... -- --
Preferred stock dividends ($7.50 per
share) ............................ (583) --
Effect of stock option and stock
purchase plans .................... -- --
Issuance of warrants ................. -- --
Exercise of warrants ................. -- --
Net income ........................... 1,675 --
---------- ----------
BALANCE, December 31, 1997 .............. (15,526) --
Issuance of common stock in connection
with an acquisition ............... -- --
Conversion of preferred stock and
dividends into common stock ....... -- --
Preferred stock dividends ($1.25 per
share) ............................ (80) --
Effect of stock option and stock
purchase plans .................... -- --
Forfeiture of expired warrants .......
Exercise of warrants ................. -- --
Net loss ............................. (8,125) --
Translation adjustments .............. -- (1,183)
---------- ----------
BALANCE, December 31, 1998 .............. $ (23,731) $ (1,183)
========== ==========
The accompanying notes are an integral
part of these consolidated financial statements.
-31-
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................ $ 1,313 $ 1,675 $ (8,125)
Adjustments to reconcile net income (loss)
to net cash used in operating activities
from continuing operations:
Discontinued operations ................................ -- -- 6,471
Depreciation and amortization .......................... 7,624 8,220 10,353
Non-cash portion of extraordinary item ................. -- 3,745 --
Write-off of machinery and equipment
resulting from Argentina fire ....................... -- -- 2,894
Other .................................................. 401 63 (181)
Changes in operating assets and liabilities,
net of acquisitions-
Increase in-
Accounts receivable .............................. (5,724) (3,310) (14,586)
Inventories ...................................... (67) (9,474) (6,616)
Prepaid expenses and other ....................... (973) (8,320) (6,466)
Effect of insurance receivable related to
Argentina fire ................................... -- -- (11,961)
Increase (decrease) in-
Accounts payable ................................. (2,974) (400) 9,633
Accrued liabilities .............................. (3,891) 853 3,226
Charge in Other Long-term liabilities ............... -- -- (2,162)
--------- --------- ---------
Net cash used in operating activities
of continuing operations ................... (4,291) (6,948) (17,520)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........................... (5,931) (21,598) (26,481)
Proceeds from sale of equipment ............................. 800 -- --
Investment in other noncurrent assets ........................ (1,197) (2,754) (3,409)
Payments under noncompete agreements ......................... (400) (231) --
Refund of deposits ........................................... 2,573 1,136 --
Investment in Mexico acquisition, net of cash acquired ....... -- (595) (1,175)
Investment in Brazilian acquisition, net of cash acquired .... -- (9,827) (3,943)
Investment in Malaysian acquisition, net of cash acquired .... -- -- (10,207)
--------- --------- ---------
Net cash used in investing activities
of continuing operations ................... (4,155) (33,869) (45,215)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under senior term notes ........................... -- 115,000 31,087
Payments on senior term notes ................................ -- (45,000) --
Borrowings under working capital facility .................... -- 10,000 --
Payments on working capital facility ......................... -- (10,000) --
Borrowings under revolvers ................................... 157,677 79,296 71,417
Payments on revolvers ........................................ (153,968) (94,918) (35,100)
Borrowings under (payments on) other debt .................... (625) (5,022) 2,242
Financing related costs ...................................... (773) (4,708) (2,891)
Proceeds from issuance of common stock ....................... -- 200 --
Proceeds from issuance of preferred stock .................... 8,822 -- --
Proceeds from stock options, warrants, and stock purchase plan -- 315 213
--------- --------- ---------
Net cash provided by financing activities
of continuing operations ................... 11,133 45,163 66,968
CASH USED IN DISCONTINUED OPERATIONS ............................ -- -- (1,193)
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ....................... 2,687 4,346 3,040
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................. 2,236 4,923 9,269
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................ $ 4,923 $ 9,269 $ 12,309
========= ========= =========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
-32-
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Drypers Corporation and its subsidiaries (the "Company") is a leading
manufacturer and marketer of premium quality, value-priced disposable baby
diapers and training pants sold under the DRYPERS brand name in the United
States and under the DRYPERS and other brand names internationally. Currently,
the Company is the third largest producer of branded disposable baby diapers in
the United States. The Company also manufactures and sells lower-priced diapers
under other brand names in the United States and internationally, as well as
private label diapers and training pants and pre-moistened baby wipes. The
Company's DRYPERS brand is the fourth largest selling diaper brand in the United
States and the second largest selling training pant brand in U.S.
grocery stores.
Drypers targets the value segment of the U.S. diaper market by offering products
with features and quality comparable to the premium-priced national brands at
generally lower prices. The Company positions its products to provide enhanced
profitability for retailers and better value to consumers. The Company
continually seeks to expand its extensive grocery store sales and distribution
network, while increasing its limited penetration of the mass merchant and
drugstore chain markets, in order to capture a greater share of the U.S. diaper
market. In 1998, Drypers began its first-ever national television campaign. As a
result of this campaign, in 1998, Drypers began with test distribution in two
national mass merchants (Wal-Mart and Kmart).
Drypers is the sixth largest diaper producer in the world. Since 1993, Drypers
has significantly expanded its international presence, competing in the
lower-priced branded and private label categories. The Company, through a series
of start-ups and acquisitions, currently produces diapers in Puerto Rico,
Argentina, Mexico, Brazil and Malaysia. Wal-Mart International has selected the
Company to be its appointed 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, and also supplies Drypers
branded products to Wal-Mart stores in these markets. Recently, the Company
gained distribution in the Wal-Mart stores in China, Canada and Germany. The
Company intends to continue to expand its operations in Argentina, Brazil,
Mexico, Malaysia and Colombia and is actively seeking further expansion
opportunities through acquisition, joint venture or other arrangements in Latin
America and the Pacific Rim.
BUSINESS CONDITIONS
The disposable diaper industry is characterized by substantial price
competition, which is affected through price changes, product count changes and
promotions. Typically, because of their large market share, one of the Company's
larger branded competitors initiates such pricing changes. The Company typically
responds to such pricing changes with changes to its own prices, product counts
or promotional programs. The process of implementing such changes may require a
number of months, and the Company's operating results may be adversely affected.
The Company competes with a number of companies, some of which are larger than
the Company and have greater financial resources and offer broader product
lines.
Raw materials, notably wood pulp, are a major component of the total cost to
produce disposable baby diapers and training pants. While the cost of pulp has
declined significantly from the record-high levels experienced in October 1995,
there can be no assurance that if pulp or other raw material prices rise again
in the future the Company will be able to pass those increases to its customers
or redesign its products to reduce usage; therefore, operating margins could be
adversely affected.
-33-
<PAGE>
The Company markets its products in various foreign countries and is, therefore,
subject to currency fluctuations in these countries. Changes in the value of the
United States dollar against these currencies will affect the Company's results
of operations and financial position.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Drypers Corporation and its majority-owned subsidiaries. All material
intercompany transactions and balances have been eliminated in consolidation.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, including goodwill and insurance
receivables, and liabilities, including promotional accruals, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
-34-
<PAGE>
ACCOUNTS RECEIVABLE
The Company grants credit to its customers, which include regional distributors,
grocery stores and mass-merchants, in the ordinary course of business. The
Company performs ongoing credit evaluations of its customers and credit losses,
when realized, have been within the range of management's expectations.
INVENTORIES
Inventories at December 31, 1997 and 1998, consisted of the following (in
thousands):
1997 1998
------- -------
Raw materials ..................... $ 6,948 $12,702
Finished goods .................... 14,142 17,120
------- -------
$21,090 $29,822
======= =======
Inventories are stated at the lower of cost (first-in, first-out) or market
value. Finished goods inventories include the costs of materials, labor and
overhead.
PROPERTY, PLANT AND EQUIPMENT
Expenditures for new facilities, significant betterments of existing properties
and leasehold improvements are recorded at cost. The Company capitalizes, as
machinery and equipment, internal and external costs incurred to develop and
enhance diaper production lines. Upon disposal of assets subject to depreciation
or amortization, the accounts are relieved of related costs and accumulated
depreciation or amortization and the resulting gains or losses are reflected in
income. Depreciation is computed using the straight-line method at rates
considered sufficient to amortize costs over estimated useful lives. The
estimated useful lives for certain machinery and equipment betterments are
shorter than the estimated useful lives of the machinery and equipment.
USEFUL LIVES
------------
Machinery and equipment 10 - 15 years
Buildings 20 years
Office equipment and furniture 5 years
Automobiles 5 years
Leasehold improvements Lesser of term of lease or
life of asset
Property, plant and equipment at December 31, 1997 and 1998, consisted of the
following (in thousands):
1997 1998
---------- ---------
Machinery and equipment .......................... $ 57,159 $ 85,934
Land and buildings ............................... 7,181 10,944
Office equipment and furniture ................... 3,638 5,542
Automobiles ...................................... 189 659
Leasehold improvements ........................... 2,872 3,418
--------- ---------
71,039 106,497
Accumulated depreciation and amortization ........ (17,769) (24,594)
--------- ---------
$ 53,270 $ 81,903
========= =========
-35-
<PAGE>
INTANGIBLE AND OTHER ASSETS
As of December 31, 1997 and 1998, intangible and other assets, net of
accumulated amortization, consisted of the following (in thousands):
1997 1998
------- -------
Goodwill--
20 year amortization ................ $10,409 $ 9,857
30 year amortization ................ 11,668 25,749
40 year amortization ................ 44,830 41,595
Deferred financing costs .............. 4,502 6,579
License agreements .................... 1,002 8,582
Software costs ........................ -- 2,816
Other ................................. 2,521 3,543
------- -------
$74,932 $98,721
======= =======
Goodwill is amortized over 20 years to 40 years using the straight-line method.
Management continually evaluates whether events or circumstances have occurred
that indicate the remaining estimated useful life of goodwill may warrant
revision or the remaining balance of goodwill may be impaired.
Deferred financing costs are amortized over the lives of the related debt using
the effective interest method. The license agreements are amortized over the
estimated lives of the relevant patents, using the straight-line method.
Deffered software costs are amortized over three years, using the straight-line
method.
ACCRUED LIABILITIES
Accrued liabilities at December 31, 1997 and 1998, consisted of the following
(in thousands):
1997 1998
------- -------
Selling and promotional ................................ $ 3,546 $ 4,004
Interest payable ....................................... 681 704
License agreement payable .............................. 400 2,000
Property and sales tax payable ......................... 1,958 2,388
Contractual obligations - discontinued operations ...... -- 2,000
Employee-related liabilities ........................... 3,140 3,087
Other .................................................. 426 7,019
------- -------
$10,151 $21,202
======= =======
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables and debt instruments. The book values of these
instruments excluding debt are considered to be representative of their
respective fair values. The fair value of the Company's debt instruments is
discussed in Note 5.
REVENUE RECOGNITION
The Company follows the policy of recognizing revenue upon shipment of the
product. Accruals are recorded for discounts and commissions at the time of
shipment.
-36-
<PAGE>
COUPON PROMOTIONS
The Company follows the policy of recognizing promotion expense when products
are shipped, based on the estimated redemption rate.
ADVERTISING
Advertising production costs are expensed the first time the advertisement is
run. Media (TV and print) placement costs are expensed in the month the
advertising appears. Advertising expense for the years ended December 31, 1996,
1997 and 1998, was $1,854,000, $3,219,000 and $10,383,000, respectively.
Advertising expense for the year ended December 31, 1998 reflects the Company's
national television campaign in the United States in the United States.
-37-
<PAGE>
EARNINGS PER SHARE
As of December 31, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share". SFAS 128 requires dual
presentation of basic and diluted EPS data and restatement of all prior periods
presented. Basic earnings per share ("EPS") is computed using the weighted
average number of common shares outstanding during the period. Diluted EPS gives
effect to the potential dilution of earnings which may have occurred if dilutive
potential common shares had been issued. The following reconciles the income and
shares used in the basic and diluted EPS computations (in thousands, except
share data):
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations
before extraordinary item, less
preferred stock dividend ......................... $ 752 $ 8,861 $ (1,734)
Extraordinary item .................................. -- (7,769) --
------------ ------------ ------------
Income (loss) from continuing operations ............ 752 1,092 (1,734)
Discontinued operations ............................. -- -- (6,471)
------------ ------------ ------------
Net income (loss) attributable to common stockholders $ 752 $ 1,092 $ (8,205)
============ ============ ============
Weighted average number common shares outstanding ... 6,694,298 8,878,638 16,110,429
============ ============ ============
Income (loss) from continuing operations............. $ .11 $ 1.00 $ (.11)
Extraordinary item .................................. -- (.88) --
Discontinued operations ............................. -- -- (.40)
------------ ------------ ------------
Net income (loss) ................................... $ .11 $ .12 $ (.51)
============ ============ ============
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations
before extraordinary item, less
preferred stock dividend in 1998 ................. 1,313 $ 9,444 $ (1,734)
Extraordinary item .................................. -- (7,769) --
------------ ------------ ------------
Income (loss) from continuing operations ............ 1,313 1,675 (1,734)
Discontinued operations ............................. -- -- (6,471)
------------ ------------ ------------
Net income (loss) ................................... $ 1,313 $ 1,675 $ (8,205)
============ ============ ============
Weighted average number common shares outstanding ... 6,694,298 8,878,638 16,110,429
Dilutive effect - options and warrants .............. 870,615 1,839,648 --
Dilutive effect - preferred stock ................... 7,500,000 7,751,390 --
------------ ------------ ------------
15,064,913 18,469,676 16,110,429
============ ============ ============
Income (loss) from continuing operations ............ $ .09 $ .51 $ (.11)
Extraordinary item .................................. -- (.42) --
Discontinued operations ............................. -- -- (.40)
------------ ------------ ------------
Net income (loss) ................................... $ .09 $ .09 $ (.51)
============ ============ ============
</TABLE>
For the years ended December 31, 1996, 1997 and 1998, options and warrants
excluded from the diluted earnings per share calculation because their effect
was antidilutive to the calculation totaled 85,978, 168,185, and 844,100,
respectively. Additionally, for the year ended December 31, 1998, 1,035,475
weighted average shares of preferred stock were excluded from the diluted
earning per share calculation because their effect was antidilutive to the
calculation.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires recognition of deferred tax assets
and liabilities for expected future tax consequences of events that have been
recognized in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the differences
between the financial statement carrying amounts and the tax bases of assets and
liabilities using enacted tax rates and laws in effect in the years in which the
differences are expected to reverse.
STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Supplemental
disclosures of cash flow information for the years ended December 31, 1996, 1997
and 1998 are as follows (in thousands):
-38-
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
-------- ------- --------
<S> <C> <C> <C>
Income taxes paid .............................................. $ -- $ 2,022 $ 2,165
Interest paid .................................................. $10,646 $11,221 $14,861
Non cash transactions:
Common stock issued for Mexico acquisition ................... $ 1,575 $ -- $ --
Warrants issued in connection with refinancing ............... $ 609 $ -- $ --
Warrants issued to financial institution for services provided
in connection with providing a working capital facility .. $ -- $ 50 $ --
Cancellation of outstanding receivable due from Brazilian
affiliate in connection with an acquisition .............. $ -- $ 2,167 $ --
Common stock issued for Malaysia acquisition ................. $ -- $ -- $ 2,825
</TABLE>
FOREIGN CURRENCY TRANSLATION
Local currencies are generally considered the functional currencies outside the
United States, except in countries which are highly inflationary. Assets and
liabilities are translated at year-end exchange rates for operations in local
currency environments. Income and expense items are translated at average rates
of exchange prevailing during the year.
For operations in countries which are highly inflationary, certain financial
statement amounts are translated at historical exchange rates, with all other
assets and liabilities translated at year-end exchange rates. These translation
adjustments are reflected in the results of operations. As of January 1, 1998,
Brazil was no longer highly inflationary. As of January 1, 1999, Mexico will no
longer be highly inflationary.
RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying consolidated
financial statements for the years ended December 31, 1996 and 1997, to conform
with the presentation used in the December 31, 1998, consolidated financial
statements.
NEW ACCOUNTING STANDARDS
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 as incurred. The Company is required to adopt SOP 98-1 as of
January 1, 1999. The Company does not expect the adoption of SOP 98-1 to have a
material effect on its financial position or results of operations.
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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company is required to
adopt SFAS No. 133 as of January 1, 2000 and does not expect the adoption of
this statement to have a material effect on its financial position or results of
operations as it does not currently hold derivatives.
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<PAGE>
2. DISCONTINUED OPERATIONS:
The initial results of the laundry detergent operation in the last two quarters
of 1998, which generated an operating loss of $1,193,000 caused the Company to
reconsider its plans for these operations. As a result, the Company decided in
December 1998 to discontinue these operations and to settle remaining related
contractual obligations. A charge of $5,278,000 resulted from recording these
obligations and the write-off of the Company's investment in the laundry
detergent business and, along with the 1998 operating loss, is presented as a
discontinued operation in the consolidated statement of earnings for the year
ended December 31, 1998. The $5,278,000 loss on disposal includes $3,278,000 for
the write-off of the initial investment and receivable from the detergent
operation and $2,000,000 related to existing contractual obligations required to
be satisfied in disposing of the business.
3. FIRE AT ARGENTINA FACILITY:
On August 8, 1998, the Company's manufacturing facility in Argentina was
extensively damaged as a result of a fire. There were no employee injuries
resulting from the fire. In addition to physical damage to the facility, the
fire resulted in the loss of a portion of the finished goods and raw material
inventory. Two of the four diaper manufacturing lines were completely destroyed
and the remaining two lines were partially damaged. The Company maintained
insurance to cover damage to the Company's property, business interruption and
extra expense claims. The Company has invested additional funds for relocation
to a new leased facility in Argentina and anticipates that these costs will be
covered by insurance.
As of December 31, 1998, the Company had received interim payments of $8,700,000
on its claim and to date has received approximately $11,000,000 in interim
payments. As of December 31, 1998, the Company has recorded approximately
$4,000,000 in other income primarily related to proceeds under the Company's
property damage claim as well as lost profits recoverable under the Company's
business interruption policy for the months of August through December 1998. The
Company is engaging in the claim process and settlement discussions with its
insurers regarding additional insurance proceeds to which the Company believes
it is entitled. The Company has recorded a substantial nonrecurring gain as
other income, representing the difference between the estimated property
insurance proceeds on the machinery and equipment and the carrying value of the
machinery and equipment at the time of the fire. The ultimate amount of the gain
to be recorded depends on final diaper line manufacturer quotes, installation
costs, start-up costs, and other cost estimates and the final settlement reached
with the Company's insurance carriers.
As of December 31, 1998, the Company has recorded in prepaid expenses and other
assets a receivable due from the insurance carriers of approximately $12,000,000
related to the Argentina fire. This receivable is comprised of the estimated
remaining replacement cost of the Company's diaper manufacturing lines to be
recovered under the property portion of the insurance claim as well as estimated
lost profit and fixed expenses for the months of August through December 1998 to
be recovered under the business interruption portion of the insurance claim.
Management believes this is a reasonable estimate of insurance proceeds to be
received, and will periodically review such amount for possible adjustment, if
necessary, in the future. Of the total receivable amount, $2,300,000 has been
received in 1999.
4. AQUISITIONS:
MEXICO
Effective December 17, 1996, the Company acquired certain assets and assumed
certain liabilities of Pannolini de Mexico, S.A. de C.V ("Pannolini") for
$1,575,000 of the Company's common stock (360,000 shares issued on December 17,
1996 and 46,782 shares issued on February 3, 1997), $595,000 in cash and
$1,175,000 in the form of a note payable due in 1998. The acquisition was
accounted for as a purchase, and the purchase price was allocated to the
acquired assets and liabilities assumed based on their estimated fair values
(current assets $1,504,000, property and equipment of $2,679,000 and liabilities
of $2,563,000). The consideration paid for Pannolini exceeded the estimated fair
market value of the net tangible assets acquired by $1,725,000 and this excess
was recorded as goodwill.
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<PAGE>
BRAZIL
In February 1997, the Company entered into a series of transactions related to
the establishment of a 51% owned venture in Brazil, acquisition of certain
intangible assets and rights from Chansommes do Brasil Ind. E Com. Ltda.
("Chansommes") and the purchase of diaper production of Chansommes.
Consideration paid in connection with the transactions included $4,000,000 of
common stock of the Company (1,000,000 shares), and cancellation of an
outstanding receivable from Chansommes of $2,167,000. Under the terms of the
agreement, the 1,000,000 shares of common stock were held in escrow by the
Company through May 5, 1997 at which time the owners of such shares elected to
receive $4,000,000 in cash in lieu of the shares. In connection with the
transactions, the Company also obtained a fair market value option to purchase
the remaining 49% interest in the venture in Brazil. During the second quarter
of 1997, the Company exercised a portion of such option and obtained 44% of the
remaining 49% interest for $5,300,000 in cash. Total cash consideration paid in
connection with the transactions, including transaction costs, was approximately
$9,827,000. In connection with the transactions, the Company also obtained a
fair market value option to acquire Chansommes. On April 6, 1998, the Company
exercised its option to acquire Chansommes, effectively giving the Company a
100% ownership interest in the Brazilian manufacturer of its diapers. The
acquisition was accounted for as a purchase, and the purchase price was
allocated to the acquired assets and liabilities assumed based on their
estimated fair values. Total consideration for the entire series of Brazilian
transactions was $15,077,000 ( current assets of $1,708, property, plant and
equipment of $11,292,000 and liabilities of $14,373,000) and exceeded the
estimated fair market value of the net tangible assets acquired by approximately
$16,450,000 and this excess was recorded as goodwill.
MALAYSIA
Effective September 11, 1998, the Company acquired certain assets and assumed
certain liabilities of PrimoSoft, a Malaysian manufacturer of disposable baby
diapers, for approximately $2,825,000 of the Company's common stock (403,571
shares issued on September 11, 1998) and approximately $10,290,000 in cash. The
acquisition was accounted for as a purchase, and the purchase price was
allocated to the acquired assets and liabilities assumed based on their
estimated fair values (current assets $2,618,000, property and equipment of
$3,093,000 and liabilities of $257,000). The consideration paid for PrimoSoft
exceeded the estimated fair market value of the net tangible assets acquired by
approximately $7,661,000 and this excess was recorded as goodwill.
5. DEBT:
SHORT-TERM BORROWINGS
As of December 31, 1997, there were no borrowings outstanding under revolving
credit facilities. As of December 31, 1998, the Company had borrowings
outstanding of $36,317,000 under revolving credit facilities, at a weighted
average interest rate of 8.2%.
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 is
secured by substantially all of the Company's assets.
As a result of the charge related to the Company's discontinued laundry
detergent operations and the additional cash demands placed on the Company due
to the delay in receipt of insurance proceeds related to the fire at its
Argentina facility, as of December 31, 1998, the Company was in default under
certain of the financial covenants contained in its revolving credit facility.
On March 31, 1999, the Company and the lender entered into an aggrement curing
the defaults, resetting certain financial covenants and requiring the Company to
reserve certain minimum levels of borrowing availability, thereby reducing the
total available revolving credit to the Company. The amendment raises the
effective cost of bank borrowings under the Company's revolving credit facility.
The new credit facility, as amended, bears interest in the range of prime to
prime plus 1 1/2%, or LIBOR plus 1 1/2% to LIBOR PLUS 3 1/4%, in each case based
on the Company's debt to EBITDA ratio determined on a quarterly basis. The
Company plans to enter into discussions with the lender to restructure its
facility into a combination of a revolver, term loan, and an over-advance
facility.
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<PAGE>
The Company has issued a letter of credit for approximately $1,250,000 in
connection with an operating lease for a diaper production line. This amount
reduces the borrowing availability under the Company's revolving credit
facility.
Short-term borrowings for the international operations were not material as of
December 31, 1997 and 1998.
LONG-TERM DEBT
Long-term debt as of December 31, 1997 and 1998 consisted of the following (in
thousands):
1997 1998
------- -------
Note payable, due 2001, interest at 8.4%,
partially secured by land and buildings........... 1,950 1,707
Various other notes payable ........................ 1,398 1,582
------- -------
3,348 3,289
Less: current maturities .................... (1,593) (322)
------- -------
$ 1,755 $ 2,967
======= =======
On April 24, 1997, the Company entered into a note purchase agreement with a
financial institution, whereby the Company obtained $10,000,000 in working
capital financing. This financing was provided through the issuance of two
$5,000,000 promissory notes (the "Working Capital Facility"), bearing interest
at 12% per annum payable semiannually and each due on May 1, 1999. The Working
Capital Facility was unsecured and could be prepaid by the Company, subject to a
3% premium if prepaid on or before January 2, 1998. In connection with the
issuance of the Working Capital Facility, the Company issued a warrant to
purchase 100,000 shares of the Company's common stock to the financial
institution. The Working Capital Facility was paid in full with the proceeds of
the 10 1/4% Senior Notes discussed below. The prepayment premium was included in
the extraordinary item related to the early extinguishment of debt discussed
below.
SENIOR TERM NOTES
Long-term debt under senior term notes as of December 31, 1997 and 1998
consisted of the following (in thousands):
1997 1998
-------- --------
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 $997, respectively ........... $115,000 $145,997
======== ========
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<PAGE>
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 therefore, to repay
the $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, with the remaining proceeds
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.
The fair value of the Company's 10 1/4% Senior Notes and New Senior Notes was
estimated using discounted cash flow analysis based on the Company's current
incremental interest rate for similar financial instruments, and was estimated
at approximately $144,261,000 as of December 31, 1998.
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<PAGE>
6. INCOME TAXES:
Income (loss) from continuing operations before income tax provision and
extraordinary item and income tax provision for the years ended December 31,
1996, 1997 and 1998 are composed of the following (in thousands):
1996 1997 1998
------- ------- --------
Income (loss) from continuing operations
before income tax provision and
extraordinary item
United States ........................ $ 1,287 $ 3,481 $(2,436)
Non-United States .................... 335 8,307 2,347
------- ------- -------
$ 1,622 $11,788 $ (89)
======= ======= =======
Income tax provision
Current-
United States ........................ $ 198 $ 55 $ 52
Non-United States .................... 111 2,289 1,513
------- ------- -------
$ 309 $ 2,344 $ 1,565
======= ======= =======
Deferred-
United States ........................ $ -- $ -- $ --
Non-United States .................... -- -- --
------- ------- -------
-- -- --
------- ------- -------
$ 309 $ 2,344 $ 1,565
======= ======= =======
Deferred income taxes reflect the impact of temporary differences between the
amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. The components of the net
deferred tax asset (liability) at December 31, 1997 and 1998 are as follows (in
thousands):
1997 1998
-------- --------
Deferred tax assets-
Accruals and reserves .......................... $ 1,319 $ 2,830
Net operating loss and credit carryforwards .... 7,272 9,821
Tax deferral of book write-down of
machinery and equipment ..................... 1,194 1,194
Other .......................................... 253 318
-------- --------
10,038 14,163
Less- Valuation allowance ...................... (3,089) (5,269)
-------- --------
6,949 8,894
-------- --------
Deferred tax liabilities-
Excess of tax over book depreciation ........... (5,632) (5,455)
Other .......................................... (1,317) (3,439)
-------- --------
(6,949) (8,894)
-------- --------
Net deferred tax asset (liability) .. $ -- $ --
======== ========
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<PAGE>
The consolidated provision for income taxes differs from the provision computed
at the statutory United States federal income tax rate for the following
reasons:
1996 1997 1998
----- ----- ------
United States statutory rate ...................... 34% 34% (34)%
Non-United States income, taxed at less than
United States statutory rate ................. (9) (18) (6)
(Utilization) generation of loss carryforward...... (61) 25 21
U.S. taxes on Subpart F income .................... -- -- 20
Nondeductible expenses, primarily goodwill ........ 39 17 19
State income taxes ................................ 16 -- --
Other ............................................. -- -- 4
--- --- ---
19% 58% 24 %
=== === ===
As of December 31, 1998, the Company had net operating loss and credit
carryforwards of approximately $26,000,000 which are available to offset future
taxable income. The U.S. loss carryforward will expire in the years 2008 through
2013 if not utilized. The Company also has alternative minimum tax credits of
approximately $457,000 and foreign losses and credits will carry forward
indefinately which are available indefinitely.
7. CAPITAL STOCK, STOCK OPTION PLANS AND WARRANTS:
PREFERRED STOCK
In 1996, the Company issued 90,000 shares of the Company's Series A Senior
Convertible Cumulative 7.5% Preferred Stock ("7.5% Preferred Stock") for
$9,000,000. The 7.5% Preferred Stock was convertible at the discretion of the
holders, at a rate of 100 shares of common stock per share of 7.5% Preferred
Stock, into 9,000,000 shares of the Company's common stock. Dividends accrued at
the rate of $7.50 per share, per year, and were payable only upon the conversion
or redemption of the 7.5% Preferred Stock or on December 1, 2003. The preferred
shares had a liquidation preference of $100 per share. Holders of the 7.5%
Preferred Stock had 100 votes per share.
During 1997, 28,890 shares of the Company's 7.5% Preferred Stock together with
accrued dividends were converted into 2,937,417 shares of common stock. During
1998, the remaining holders of the Company's 7.5% Preferred Stock elected to
exchange their preferred stock and related accrued dividends for 6,292,364
shares of the Company's common stock.
COMMON STOCK
Holders of the common stock have one vote per share.
STOCKHOLDERS RIGHTS AGREEMENT
The Company has a stockholders rights agreement to protect against coercive or
unfair takeover tactics. Under the terms of the agreement, the Company
distributed to its stockholders one right for each share of common stock held.
Each right entitles the holder to purchase one share of common stock for $75 per
share, subject to adjustment, or, under certain circumstances, stock of the
Company or of the acquiring entity for half market value. The rights are
exercisable only if a person or group acquires 15% or more of the Company's
common stock or makes a tender offer for 15% or more of the common stock.
The rights will expire on December 15, 2004.
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<PAGE>
STOCK OPTION PLANS
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which is effective for all awards granted after
December 31, 1994. The Company has various plans which provide for the granting
of nonqualified stock options or incentive stock options to purchase shares of
the Company's common stock to officers, executives, and key employees
responsible for the direction and management of the Company. Generally, under
the plans, options may be granted at not less than the fair market value of the
Company's common stock on the date of grant. Options under the nonqualified
plans generally become exercisable immediately or in ratable installments over a
five-year period from date of grant and may be exercised up to a maximum of 10
years from date of grant. Options under the incentive stock option plan and the
non-employee director stock option plan generally become exercisable after three
years in 33 1/3% increments per year and expire 10 years from date of grant.
Shares available for future options pursuant to the various stock option plans
as of December 31, 1996, 1997 and 1998, were 151,624, 767,916 and 1,166,174,
respectively.
Stock option transactions under the plans during 1996, 1997 and 1998 were as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------------- -------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Nonqualified stock option plans-
Options outstanding at January 1 ..... 486,656 $ 7.71 1,890,010 $ 2.97 1,819,745 $ 3.03
Granted .............................. 1,864,876 3.01 15,000 6.00 113,570 6.28
Canceled ............................. (456,876) 8.21 -- -- -- --
Exercised ............................ (4,646) .04 (85,265) 2.41 (15,000) 6.00
---------- -------- ---------- -------- ---------- --------
Options outstanding at December 31 ... 1,890,010 $ 2.97 1,819,745 $ 3.03 1,918,315 $ 3.19
========== ======== ========== ======== ========== ========
Options exercisable at December 31 ... 1,758,259 $ 2.96 1,719,744 $ 2.99 1,803,513 $ 3.00
========== ======== ========== ======== ========== ========
Options exercise price range at
December 31........................ $ .04 - $3.50 $ 0.04 - $6.00 $ 0.04 - $7.50
Incentive stock option plans-
Options outstanding at January 1 ..... 399,000 $ 7.55 690,125 $ 3.01 1,041,125 $ 3.91
Granted .............................. 736,000 3.01 396,500 5.42 542,230 7.06
Canceled ............................. (444,875) 7.12 (19,417) 3.91 (69,058) 5.87
Exercised ............................ -- -- (26,083) 3.00 (26,667) 3.07
---------- -------- ---------- -------- ---------- --------
Options outstanding at December 31 ... 690,125 $ 3.01 1,041,125 $ 3.91 1,487,630 $ 4.97
========== ======== ========== ======== ========== ========
Options exercisable at December 31 ... 149,349 $ 3.00 358,050 $ 3.02 669,686 $ 3.43
========== ======== ========== ======== ========== ========
Options exercise price range
at December 31...................... $3.00 - $3.50 $3.00 - $6.50 $3.00 - $7.50
Non-Employee Director stock option plan -
Options outstanding at January 1 ..... -- -- 55,000 $ 4.21 85,000 $ 4.84
Granted .............................. 55,000 $ 4.21 30,000 6.25 30,000 7.44
Canceled ............................. -- -- -- -- -- --
Exercised ............................ -- -- -- -- -- --
---------- -------- ---------- -------- ---------- --------
Options outstanding at December 31 ... 55,000 $ 4.21 85,000 $ 4.84 115,000 $ 5.52
========== ======== ========== ======== ========== ========
Options exercisable at December 31 ... 4,000 $ 5.88 22,336 $ 4.51 50,670 $ 4.70
========== ======== ========== ======== ========== ========
Options exercise price range
at December 31..................... $3.75 - $5.88 $3.75 - $6.25 $3.75 - $7.44
</TABLE>
Effective February 1996, the board of directors approved a plan for all options
whereby the exercise price was revised to reflect the current market price of
$3.00. The options granted under the 1991 non-qualified stock option plan at an
exercise price of $.04 per share and the non-employee director stock options
were not included in the repricing. All repriced options were canceled and
reissued accordingly.
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<PAGE>
As allowed by SFAS No. 123 the Company accounts for these plans under Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock options issued with exercise prices greater than or equal
to the fair market value of the Company's common stock at the date of grant. Had
compensation cost for these plans been determined consistent with SFAS No. 123,
the Company's income (loss) from continuing operations and earnings (loss) per
share from continuing operations would have been the following pro forma amounts
(in thousands, except share data):
<TABLE>
<CAPTION>
1996 1997 1998
--------- ------- ---------
<S> <C> <C> <C>
Income (loss) from continuing operations As reported $ 1,313 $ 1,675 $ (1,654)
Pro forma $ (1,243) $ 670 $ (3,303)
Basic earnings (loss) per share As reported $ .11 $ .12 $ (.11)
Pro forma $ (.27) $ .01 $ (.21)
Diluted earnings (loss) per share As reported $ .09 $ .09 $ (.11)
Pro forma $ (.27) $ .01 $ (.21)
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. The total
compensation cost recognized in reported income for the years ended December 31,
1996, 1997 and 1998, was $679,000, $ -- , and $ --, respectively.
The weighted average fair value of options granted in 1996 for which the
exercise price equaled the market price of the common stock on the grant date
and for which the exercise price was less than the market price of the common
stock on the grant date was $1.26 and $1.69 per share, respectively. The
weighted average fair value of options granted in 1997 was $4.00 per share. The
weighted average fair value of options granted in 1998 was $4.85 per share. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for options issued in 1996, 1997 and 1998, respectively:
risk-free interest rates of 6.03%, 6.61% and 6.01%; expected lives of five
years; expected volatility of 36.05%, 88.49% and 86.15%; and no expected
dividend yield in all years.
As of December 31, 1998, the following stock options were outstanding:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
AVERAGE NUMBER PRICE OF NUMBER OF PRICE OF
CONTRACTUAL OF OPTIONS OUTSTANDING EXERCISABLE EXERCISABLE
EXERCISE PRICE RANGES LIFE OUTSTANDING OPTIONS OPTIONS OPTIONS
--------------------- ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Nonqualified stock option plans-
$.04 2.6 years 7,994 $.04 7,994 $.04
$3.00 - $4.50 7.2 years 1,827,518 $3.01 1,795,519 $3.01
$7.50 9.4 years 82,803 $7.50 - -
Incentive stock option plans-
$3.00 - $4.50 7.5 years 788,333 $3.19 588,338 $3.08
$4.51 - $6.75 8.4 years 234,000 $5.98 81,348 $5.94
$6.76 - $7.50 9.4 years 465,297 $7.50 - -
Non-Employee Director stock option plan-
$3.75 - $4.50 7.4 years 43,000 $3.75 28,668 $3.75
$4.51 - $6.75 7.8 years 42,000 $5.97 22,002 $5.93
$7.44 9.4 years 30,000 $7.44 - -
</TABLE>
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<PAGE>
WARRANTS
The Company has issued warrants under several separate agreements which expire
by 2002. As of December 31, 1998, a total of 110,808 shares of common stock has
been reserved for issuance upon the exercise of common stock warrants. Each
warrant allows the holder to purchase one share of common stock and none are
callable by the Company. The warrants are recorded at their estimated fair
values at the date of issuance. The warrants were issued in connection with
financing transactions. The number of warrants outstanding, warrant holders,
exercise prices and call prices are presented below.
NUMBER OF SHARES
ISSUABLE UNDER
WARRANTS
OUTSTANDING AT EXERCISE
DECEMBER 31, PRICE
1998 WARRANT HOLDERS PER SHARE
---------------- ----------------- -----------
10,808 Senior noteholders $ .02
100,000 Financial institution $ 4.50
-------
110,808
=======
Certain of the warrant agreements contain a provision which allows for an
adjustment to the number of shares of common stock that can be purchased and the
exercise price per share upon the occurrence of certain events, as defined, to
preserve without dilution the rights of the warrant holders. The Company issued
258,247 additional warrants during 1996 pursuant to the antidilution provisions
of these agreements. In addition, the Company issued 250,000 warrants and 25,000
shares of common stock to an outside investment advisory firm for services
rendered in connection with the Company's refinancing in February 1996. The
outside investment advisory firm exercised the 250,000 warrants in December 1997
under a cashless exercise provision. In 1997, the Company issued 100,000
warrants to a financial institution for services rendered in connection with
providing the Working Capital Facility.
8. EMPLOYEE BENEFIT PLANS:
401(K) SAVINGS PLAN
The Company has adopted a 401(k) savings plan which covers substantially all
employees. The Company contributed approximately $174,000, $236,000 and $385,000
to the plan during the years ended December 31, 1996, 1997 and 1998,
respectively.
PROFIT SHARING PLAN
In 1996, the Company established a profit sharing plan that supplements the
Company's existing 401(k) savings plan and covers all U.S. employees who are
eligible to participate in the 401(k) savings plan. The plan provides for
employer discretionary contributions into the employee's 401(k) account, earned
only if the Company meets specific performance targets. The employer
discretionary contribution may not exceed 50% of consolidated net income, and
may be subject to adjustment by the board of directors. The plan provides for
50% of the value of any contributions to be paid in the form of cash and the
remaining 50% in the form of common stock of the Company. The Company accrues
amounts based on performance reflecting the value of cash and common stock which
is anticipated to be contributed. The Company recorded expense of $ -- ,
$113,000 and $ -- for the years ended December 31, 1996, 1997 and 1998,
respectively, in connection with the profit sharing plan.
-48-
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
Effective January 1, 1997, the Company established an employee stock purchase
plan whereby eligible employees of the Company employed in the continental
United States may purchase shares of the Company's common stock at a 15%
discount. As of December 31, 1998, 1,478,129 shares of the Company's common
stock, par value $.001 per share, remain available for purchase under this plan.
During 1998, 12,369 shares were purchased on the open market for employees under
the plan at an average price of $6.89 per share. During 1998, 21,871 shares were
issued under the employee stock purchase plan at an average price of $2.98 per
share.
9. COMMITMENTS AND CONTINGENCIES:
PATENTS
The Company operates in a commercial field in which patents relating to the
products, processes, apparatus and materials are more numerous than in many
other fields. The Company's products include such features as multistrand
elastic leg bands, replaceable frontal landing strips for the tape tabs,
upstanding cuffs, training pants and super absorbent pad construction. In each
case, the design and the technical features of the diapers produced by the
Company were carefully considered by legal counsel before the manufacture and
sale of such products, and steps were taken to avoid the features disclosed in
unexpired patents. Although much of the patent activity relates to the technical
work of Procter & Gamble Company and Kimberly-Clark Corporation, it is not
exclusive to those organizations, and the Company takes careful steps to design,
produce and sell its baby diapers to avoid infringing any valid patents of its
competitors.
There can be no assurance that the Company will not be held to be infringing on
existing patents in the future. Any such holding could result in an injunction,
damages and/or an increase in future operating costs as a result of design
changes or payment of royalties with respect to such patents, which might have a
material adverse effect on the financial condition or results of operations of
the Company.
LITIGATION
The Company is involved in certain lawsuits and claims arising in the normal
course of business. In the opinion of management, uninsured losses, if any,
resulting from the ultimate resolution of these matters will not have a material
adverse effect on the financial position or results of operations of the
Company.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with two individuals that
extend through December 31, 2001, with one individual that extends through
August 25, 2001, and with two individuals that extend through December 31, 1999.
The Company also has a consulting agreement with an individual that extends
through February 25, 2000. As of December 31, 1998, the Company's remaining
aggregate commitment under the agreements is approximately $3,500,000.
-49-
<PAGE>
OPERATING LEASES
The Company is obligated under various long-term leases for its
building/production facilities, machinery and equipment, which expire at various
dates through 2007. Rental expense aggregated $1,418,000, $3,216,000 and
$5,153,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
The leases provide for minimum annual rentals plus, in certain instances,
payment for property and use taxes, insurance and maintenance.
Future minimum rental commitments under noncancelable operating leases, are as
follows (in thousands):
Year ending December 31-
1999 $ 6,667
2000 6,118
2001 5,856
2002 4,816
2003 3,398
Thereafter 5,696
--------
Total minimum lease payments required $ 32,551
========
The table above includes future minimum rental commitments for a training pant
production line and other ancillary manufacturing equipment under leases entered
into in February 1999.
10. SEGMENT INFORMATION:
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", as of December 31, 1998. SFAS No. 131 established
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders. It also established standards for
related disclosures about products and services, and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The Company's chief operating decision
making group is the Chairman and Chief Executive Officer, the Chief Operating
Officer, the Chief Financial Officer and the President of Drypers International.
All of the Company's revenues are derived from sales of disposable baby
products. The Company classifies its business into two reportable segments:
"Domestic" (includes the United States and Puerto Rico) and "International"
(which includes all other foreign operations--Argentina, Mexico, Brazil,
Colombia, Singapore and Malaysia). All international operations have been
aggregated into one reportable segment because they have similar economic
characteristics and their operations are similar in the nature of the product
and production process, type of customer, and distribution method.
The Company evaluates performance based on several factors, of which the primary
financial measure is business segment operating income before management fee
income (expense) and corporate overhead. The accounting policies of the
operating segments are the same as those described in the summary of significant
accounting policies. Intersegment sales are accounted for at fair value as if
the sales were to third parties.
-50-
<PAGE>
Information as to the operations of the Company's reportable segments is as
follows (in thousands):
DOMESTIC INTERNATIONAL TOTAL
--------- ------------- ---------
1996
Net sales ........................... $ 179,244 $ 27,770 $ 207,014
Intersegment sales .................. $ 15,992 $ 605 $ 16,597
Operating income before management
fees and corporate overhead ...... $ 15,427 $ 1,149 $ 16,576
Corporate overhead .................. (6,023)
Interest expense, net ............... (8,931)
Other income ........................ --
---------
Income from continuing operations
before taxes ..................... $ 1,622
=========
1997
Net sales ........................... $ 191,329 $ 95,681 $ 287,010
Intersegment sales .................. $ 21,129 $ 1,242 $ 22,371
Operating income before management
fees and corporate overhead....... $ 23,031 $ 7,815 $ 30,846
Corporate overhead .................. (9,354)
Interest expense, net ............... (9,957)
Other income ........................ 253
---------
Income from continuing operations
before taxes and extraordinary item $ 11,788
=========
1998
Net sales ........................... $ 213,785 $ 118,855 $ 332,640
Intersegment sales .................. $ 31,321 $ 13,183 $ 44,504
Operating income before management
fees and corporate overhead....... $ 16,175 $ 4,035 $ 20,210
Corporate overhead .................. (8,289)
Interest expense, net ............... (16,476)
Other income ........................ 4,466
---------
Loss from continuing operations
before taxes ...................... $ (89)
=========
Information as to the depreciation/amortization, capital expenditures and assets
of the Company's reportable segments is as follows (in thousands):
DOMESTIC INTERNATIONAL TOTAL
--------- ------------- ---------
1996
Depreciation and amortization expense $ 6,580 $ 1,044 $ 7,624
Capital expenditures ................ $ 5,692 $ 239 $ 5,931
Total assets ........................ $ 117,821 $ 32,734 $ 150,555
1997
Depreciation and amortization expense $ 6,338 $ 1,882 $ 8,220
Capital expenditures ................ $ 15,178 $ 6,420 $ 21,598
Total assets ........................ $ 133,207 $ 72,025 $ 205,232
1998
Depreciation and amortization expense $ 6,446 $ 3,907 $ 10,353
Capital expenditures ................ $ 5,488 $ 20,993 $ 26,481
Total assets ........................ $ 156,249 $ 143,923 $ 300,172
-51-
<PAGE>
Information as to the Company's operations in different geographical areas is as
follows (in thousands):
<TABLE>
<CAPTION>
ALL OTHER
UNITED STATES(1) BRAZIL ARGENTINA INTERNATIONAL TOTAL
---------------- --------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
1996
Net sales ............... $179,244 $ -- $ 24,210 $ 3,560 $207,014
Long-lived assets ....... $ 30,968 $ -- $ 1,508 $ 2,678 $ 35,154
1997
Net sales ............... $191,329 $ 44,579 $ 33,370 $ 17,732 $287,010
Long-lived assets ....... $ 39,120 $ 2,659 $ 3,961 $ 7,530 $ 53,270
1998
Net sales ............... $213,786 $ 56,105 $ 33,553 $ 29,196 $332,640
Long-lived assets ....... $ 40,392 $ 16,475 $ 6,785 $ 18,251 $ 81,903
</TABLE>
(1) Includes Puerto Rico.
(2) Includes Mexico, Malaysia, Singapore and Colombia.
-52-
<PAGE>
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
Unaudited summarized data by quarter for 1997 and 1998 is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1997
Net sales .............................. $ 60,161 $ 72,551 $ 80,086 $ 74,212 $ 287,010
Gross profit ........................... 23,405 27,568 31,701 28,791 111,465
Income before extraordinary item ....... 1,973 2,183 2,750 2,538 9,444
Net income (loss) ...................... 1,973 (5,586)(a) 2,750 2,538 1,675
Basic earnings (loss) per share:
Continuing operations ............ $ .23 $ .26 $ .27 $ .24 $ 1.00
Extraordinary item ............... -- (.99) -- -- (.88)
----------- ----------- ----------- ----------- -----------
Net income (loss) ................ $ .23 $ (.73) $ .27 $ .24 $ .12
=========== =========== =========== =========== ===========
Diluted earnings (loss) per share:
Continuing operations ............ $ .11 $ .12 $ .15 $ .14 $ .51
Extraordinary item ............... -- (.42) -- -- (.42)
----------- ----------- ----------- ----------- -----------
Net income (loss) ................ $ .11 $ (.30) $ .15 $ .14 $ .09
=========== =========== =========== =========== ===========
1998(b) 1998
Net sales .............................. $ 78,592 $ 80,302 $ 85,841 $ 87,905 $ 332,640
Gross profit ........................... 31,343 33,003 33,473 37,836 135,655
Income (loss) from continuing operations (5,455) 1,259 1,519 1,023 (1,654)
Net income (loss) ...................... (5,669) 1,099 701 (4,256)(b) (8,125)
Basic earnings (loss) per share:
Continuing operations ............ $ (.44) $ .08 $ .09 $ .06 $ (.11)
Discontinued operations .......... (.02) (.01) (.05) (.30) (.40)
----------- ----------- ----------- ----------- -----------
Net income (loss) ................ $ (.46) $ .07 $ .04 $ (.24) $ (.51)
=========== =========== =========== =========== ===========
Diluted earnings (loss) per share:
Continuing operations .... ..... $ (.44) $ .07 $ .08 $ .06 $ (.11)
Discontinued operations .......... (.02) (.01) (.04) (.30) (.40)
Net income (loss) ................ $ (.46) $ .06 $ .04 $ (.24) $ (.51)
=========== =========== =========== =========== ===========
</TABLE>
- - -----------------
(a) Includes a noncash extraordinary expense of $3,745,000 for the write-off of
capitalized debt issuance costs and a cash extraordinary expense of
$4,024,000 for prepayment and other fees in connection with the early
extinguishment of debt.
(b) Income (loss) and earnings (loss) per share from continuing operations for
the first, second and third quarters of 1998 have been restated to reflect the
discontinued operations of the Company's laundry detergent business. This
resulted in a one-time charge of $6,471,000 in 1998.
-53-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Drypers Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated balance sheets of Drypers Corporation (a Delaware corporation) and
subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of earnings, comprehensive income, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1998,
included in this Form 10-K and have issued our report thereon dated February 18,
1999. Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. Financial statement Schedule
II is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This financial statement schedule
has been subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 18, 1999
-54-
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND AT END OF
CLASSIFICATION OF PERIOD EXPENSE DEDUCTIONS(1) OTHER PERIOD
---------------- ------------ ----------- ------------- ------ -----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended December 31, 1996 $ 940 $ 1,240 $ (1,020) $ -- $ 1,160
Year Ended December 31, 1997 $ 1,160 $ 1,532 $ (628) $ -- $ 2,064
Year Ended December 31, 1998 $ 2,064 $ 1,395 $ (824) $ -- $ 2,635
RESERVE FOR DISPOSAL OF LAUNDRY
DETERGENT BUSINESS:
Year Ended December 31, 1996 $ -- $ -- $ -- $ -- $ --
Year Ended December 31, 1997 $ -- $ -- $ -- $ -- $ --
Year Ended December 31, 1998 $ -- $ 2,000(2) $ -- $ -- $ 2,000
</TABLE>
- - ----------------------
(1) Write-offs of uncollectible accounts.
(2) Accrued for contractual obligations related to discontinuing the laundry
detergent business.
-55-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
In accordance with General Instruction G(3) to Form 10-K, the information
required by Items 10 through 13 will be set forth in the Company's Proxy
Statement relating to the annual meeting of the Company's stockholders under the
captions indicated below, and such information is incorporated herein by
reference.
CROSS REFERENCE
<TABLE>
<CAPTION>
FORM 10-K ITEM NUMBER AND CAPTION CAPTION IN DEFINITIVE PROXY STATEMENT
--------------------------------- -------------------------------------
<S> <C> <C>
Item 10. Directors and Executive Proposal One: Election of Directors,
Officers of the Registrant Information Regarding Nominees and
Directors, Executive Officers and
Compensation--Executive Officers, Section
16(a) Beneficial Ownership Reporting
Compliance
Item 11. Executive Compensation Executive Officers and Compensation--
Executive Compensation
Item 12. Security Ownership of Security Ownership of Certain Beneficial
Certain Beneficial Owners Owners and Management
and Management
Item 13. Certain Relationships and Executive Officers and Compensation--
Related Transactions Certain Transactions
</TABLE>
-56-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits, Financial Statements and Financial Statement Schedules.
(1) and (2) Financial Statements and Financial Statement Schedules.
Consolidated Financial Statements and the related Schedule II of the Company are
included in Item 8 (Financial Statements and Supplementary Data). All other
schedules have been omitted since the required information is not present or not
present in an amount sufficient to require submission of the schedule, or
because the information required is included in the Consolidated Financial
Statements and notes thereto.
(3) Exhibits.
Drypers undertakes to furnish any stockholder so requesting a copy of any of the
following exhibits upon payment to the Company of the reasonable costs incurred
by the Company in furnishing such exhibit.
**3.1 - Restated Certificate of Incorporation of Drypers Corporation, as
amended (Filed as Exhibit 3.1 to Form S-4/A filed June 8, 1998,
Registration Statement No. 333-52597).
**3.2 - Bylaws of Drypers Corporation, as amended, dated January 21, 1994
(Filed as Exhibit 3.2 to Form S-1 filed January 26, 1994,
Registration Statement No. 33-74436).
**4.1 - Form of Common Stock Certificate (Filed as Exhibit 4.2 to Form S-1
filed January 26, 1994, Registration Statement No. 33-74436).
**4.2 - Forms of Warrants (Filed as Exhibit 4.37 to Form S-1 Filed October
8, 1993, Registration Statement No. 33-70098).
**+4.3 - Form of Nonqualified Stock Option Agreement, as amended, entitling
the persons listed on Schedule 4.9 to purchase an aggregate of
125,000 shares of Common Stock (Filed as Exhibit 4.9 to Amendment
No. 1 to Form S-1 filed February 17, 1994, Registration Statement
No. 33-74436).
**+4.4 - Form of Nonqualified Stock Option Agreement, as amended, entitling
the persons listed on Schedule 4.10 to purchase an aggregate of
93,750 shares of Common Stock (Filed as Exhibit 4.10 to Amendment
No. 1 to Form S-1 filed February 17, 1994, Registration Statement
No. 33-74436).
**+4.5 - Form of Nonqualified Stock Option Agreement dated April 9, 1993,
entitling the persons listed on Schedule 4.11 to purchase an
aggregate of 71,875 shares of Common Stock (Filed as Exhibit 4.11
to Form S-1 filed January 26, 1994, Registration Statement
No. 33-74436).
**+4.6 - Form of Nonqualified Stock Option Agreement dated October 1, 1992,
entitling the persons listed on Schedule 4.13 to purchase an
aggregate of 45,000 shares of Common Stock (Filed as Exhibit 4.13
to Form S-1 filed January 26, 1994, Registration Statement
No. 33-74436).
**+4.7 - Form of Nonqualified Stock Option Agreement dated December 31,
1993, entitling the persons listed on Schedule 4.16 to purchase an
aggregate of 31,250 shares of Common Stock (Filed as Exhibit 4.16
to Form S-1 filed January 26, 1994, Registration Statement
No. 33-74436).
**4.8 - Form of Investment and Stock Registration Agreement dated November
10, 1992, by and among the Company and the persons listed on
Schedule 4.34 attached thereto (Filed as Exhibit 4.34 to Form S-4
filed November 20, 1992, Registration Statement No. 33-54810).
**4.9 - Rights Agreement dated January 20, 1995 by and between Drypers
Corporation and ChaseMellon Shareholder Services, L.L.C. (Filed as
Exhibit 4.20 to Form 10-K filed March 31, 1997, Commission File No.
0-23422).
**4.10 - Rights Agreement Amendment dated as of February 26, 1996, by and
between Drypers Corporation and ChaseMellon Shareholder Services,
L.L.C. (Filed as Exhibit 4.20 to Form 10-K filed March 31, 1997,
Commission File No. 0-23422).
**4.11 - Indenture dated as of June 15, 1997, between Drypers Corporation
and Bankers Trust Company, as Trustee (Filed as Exhibit 4.1 to
Form 10-Q filed August 12, 1997, Commission File No. 0-23422).
-57-
<PAGE>
**4.12 - First Supplemental Indenture dated as of March 6, 1998, between
Drypers Corporation and Bankers Trust Company, as Trustee. (Filed
as Exhibit 4.16 to Form 10-K filed March 20, 1998, Commission File
No. 0-23422)
**+10.1 - Form of Indemnity Agreement dated August 2, 1991, by and between
the Company and the persons listed on Schedule 10.1 (Filed as
Exhibit 10.1 to Form S-1 filed January 26, 1994, Registration
Statement No. 33-74436).
**10.2 - Warehouse Lease dated September 25, 1985, as amended by Addendum
No. 1 dated September 25, 1985, as amended by Addendum No. 2 dated
April 3, 1986, as amended by Addendum No. 3 dated October 14, 1988,
as amended by Addendum No. 4 dated September 30, 1991, by and
between Hillman Properties Northwest and VMG Enterprises, Inc.
(Filed as Exhibit 10.13 to Form S-4 filed November 20, 1992,
Registration Statement No. 33-54810).
**10.3 - Lease Agreement dated October 24, 1988, as amended by the First
Lease Amendment dated November 13, 1989, as amended by the Second
Lease Amendment dated August 2, 1990, as amended by the Third Lease
Amendment dated February 4, 1991, as amended by the Fourth Lease
Amendment dated November 18, 1991, as amended by the Fifth Lease
Amendment dated September 1, 1992, as amended by the Sixth Lease
Amendment dated November 1, 1997 by and between Willis Day
Properties, Inc. and UltraCare Products, Inc. (Filed as Exhibit
10.24 to Form S-4 filed November 20, 1992, Registration Statement
No. 33-54810).
**10.4 - Lease Agreement dated September 1, 1992, by and between Willis
Day Properties, Inc. and UltraCare Products, Inc. (Filed as Exhibit
10.25 to Form S-4 filed November 20, 1992, Registration Statement
No. 33-54810).
**10.5 - Lease Contract dated July 6, 1992, between Puerto Rico Industrial
Development Company and Hygienic Products International, Inc.
(Filed as Exhibit 10.26 to Form S-4 filed November 20, 1992,
Registration Statement No. 33-54810).
**10.6 - VRG Holding Corporation 1992 Incentive Stock Option Plan, as
amended (Filed as Exhibit 10.14 to Amendment No. 1 to Form S-1
filed February 17, 1994, Registration Statement No. 33-74436).
**+10.7 - VRG Holding Corporation 1991 Nonqualified Stock Option Plan
(Filed as Exhibit 10.15 to Form S-4 filed November 20, 1992,
Registration Statement No. 33-54810).
**10.8 - Drypers 401(k) Plan (Filed as Exhibit 10.25 to Amendment No. 1 to
Form S-1 filed February 17, 1994, Registration Statement No.
33-74436).
**10.9 - Drypers Corporation 1994 Non-Employee Director Option Plan (Filed
as Exhibit 10.2 to Form 10-Q filed August 4, 1995, Commission File
No. 0-23422).
**10.10 - Form of Drypers Corporation 1995 Key Employee Stock Option Plan
Nonqualified Stock Option Agreement (Filed as Exhibit 10.3 to Form
10-Q filed August 4, 1995, Commission File No. 0-23422).
**10.11 - Form of Drypers Corporation 1995 Key Employee Stock Option Plan
Incentive Stock Option Agreement (Filed as Exhibit 10.4 to Form
10-Q filed August 4, 1995, Commission File No. 0-23422).
*+10.12 - Employment Agreement dated March 1, 1999, by and between Drypers
Corporation and Walter V. Klemp.
*+10.13 - Employment Agreement dated March 1, 1999, by and between Drypers
Corporation and Raymond M. Chambers.
*+10.14 - Consulting Agreement dated February 25, 1999, by and between
Drypers Corporation and Terry A. Tognietti.
**+10.15 - Drypers Corporation Amended and Restated 1995 Key Employee Stock
Option Plan. (Filed as Exhibit 10.28 to Amendment No. 1 to Form S-4
filed September 15, 1997, Registration Statement No. 333-34071).
**+10.16 - Drypers Corporation 1996 Non-Employee Director Stock Option Plan.
(Filed as Exhibit 10.29 to Amendment No. 1 to Form S-4 filed
September 15, 1997, Registration Statement No. 333-34071).
**+10.17 - First Amendment to Drypers Corporation Amended and Restated 1995
Key Employee Stock Option Plan. (Filed as Exhibit 10.30 to
Amendment No. 1 to Form S-4 filed September 15, 1997, Registration
Statement No. 333-34071).
**10.18 - First Amendment to Drypers Corporation 401(k) Plan (Filed as
Exhibit 4.24 to Form S-8, filed July 6, 1998, Registration No.
333-58553.)
**10.19 - Second Amendment to Drypers Corporation 401(k) Plan (Filed as
Exhibit 4.25 to Form S-8, filed July 6, 1998, Registration No.
333-58553.)
-58-
<PAGE>
**10.20 - Credit Agreement dated as of April 1, 1998 by and among Drypers
Corporation and the Banks which are parties thereto and BankBoston,
N.A. as Agent (Filed as Exhibit 10.1 to Form 10-Q, filed May 13,
1998, Commission File No. 0-23422).
*10.21 - First Amendment to Credit Agreement dated September 9, 1998,
among Drypers Corporation and BankBoston, N.A.
*10.22 - Second Amendment to Credit Agreement dated December 30, 1998,
among Drypers Corporation and BankBoston, N.A.
*10.23 - Third Amendment to Credit Agreement dated March 31, 1999, among
Drypers Corporation and BankBoston, N.A.
*21.1 - Subsidiaries of Drypers Corporation.
*23.1 - Consent of Independent Public Accountants.
* 27.1 - Financial Data Schedule.
- - ---------------
* Filed herewith.
** Incorporated by reference to the filing indicated.
+ Managementcontract or compensatory plan or arrangement filed pursuant to
Item 14 of Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended December
31, 1998.
-59-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 30th day of March,
1999.
DRYPERS CORPORATION
By /s/ WALTER V. KLEMP
Walter V. Klemp
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons in the capacities indicated on
the 30th day of March, 1999.
SIGNATURE TITLE
----------- -------
/s/ WALTER V. KLEMP Chief Executive Officer, Chairman of the Board
Walter V. Klemp and Director (Principal Executive Officer)
/s/ JONATHAN P. FOSTER Chief Financial Officer and Executive Vice President
Jonathan P. Foster (Principal Financial and Accounting Officer)
/s/ RAYMOND M. CHAMBERS Chief Operating Officer and Director
Raymond M. Chambers
/s/ NOLAN LEHMANN Director
Nolan Lehmann
/s/ GARY L. FORBES Director
Gary L. Forbes
-60-
AGREEMENT AMENDING AND RESTATING
EMPLOYMENT AGREEMENT
BETWEEN
DRYPERS CORPORATION
AND
WALTER V. KLEMP
MARCH 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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
</TABLE>
<PAGE>
AGREEMENT AMENDING AND RESTATING
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made as of the 1st
day of March, 1999, 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 January 1, 1998 (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 Chairman of the Board and Chief Executive Officer
of the Employer in accordance with the provisions of Article V, Section
5.1 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 $330,000 per year, payable in
accordance with the normal payroll practices of the Employer but
in no less than equal bi-weekly installments; and
(b) during the Term of Employment as additional
compensation for services hereunder during the term of this
Agreement, the Employee shall be entitled to an annual bonus in
amount as shall be determined by the Compensation Committee of
Board of Directors of the Employer for each of the Company's
fiscal years ending after the date hereof.
. 5. TERM
(a) The "Term of Employment", as used herein, shall mean a
period commencing on the date hereof and ending on a date that is
the earlier to occur of (A) the third anniversary of the receipt
by the Employee of a written notice of termination by the
Employer given to the Employee ("Termination Without Cause") 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) 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
(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
<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
<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
<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 (A) upon a Termination Without Cause before a Change
in Control or (B) for any reason specified in subsection (vi) of
Section 5(a) above, the Employer shall, until the third
anniversary of the date of such termination continue to be
obligated to (i) make the payments specified under Section 4,
(ii) provide the benefits specified under Section 8(b), and (iii)
maintain the Employee as a participant in, or provide benefits
comparable to those of, the health insurance benefit plan
specified under Section 8(a). In the event of the termination of
the Term of Employment for any reason specified in subsection
(vii) of Section 5(a) above, the Employer shall, until the second
anniversary of the date of such termination continue to be
obligated to (i) make the 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.
<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 has received and shall
continue to 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 (the "Noncompetition Area"). Employee
represents to Employer that the enforcement of the restriction
contained in this Section 9 would not be unduly burdensome to
Employee and that in order to induce the Employer to provide for
the Term of Employment as set forth in Section 5 hereof to
replace Section 4.1 of the Employment Agreement, Employee further
represents and acknowledges that Employee has entered into this
agreement not to compete and is willing and able to compete in
other geographical areas not prohibited by this Section 9.
Notwithstanding the foregoing, it is agreed by the Employer that
the Employee may acquire an ownership interest, directly or
indirectly, of not more than five percent (5%) of the outstanding
securities of any corporation that is engaged in a business
competitive with the Employer and that is listed on any
recognized securities exchange or traded in the over the counter
market in the United States, provided that such investment is of
a totally passive nature and does not involve Employee devoting
time to the management or operations of such corporation.
(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, except as may
otherwise be required by applicable law, or (ii), within the
Noncompetition Area, 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 during the Noncompetition Period in
accordance with its terms, notwithstanding the termination of
Employee's employment for any reason.
(e) If Employee violates any covenant contained in this
Section 9 and Employer brings legal action for injunctive or
other relief, the Employer shall not, as a result of the time
involved in obtaining the relief, be deprived of the benefit of
the full period of any such covenant. Accordingly, the covenants
of Employee contained in this Section 9 shall be deemed to have
durations as specified above, which periods shall commence upon
the later of (i) the Ending Date and (ii) the date of entry by a
court of competent jurisdiction of a final judgment enforcing the
covenants of Employee in this Section 9.
(f) The parties to this Agreement agree that the
limitations contained in this Section 9 with respect to
geographic area, duration, and scope of activity are reasonable.
However, if any court shall determine that the geographic area,
duration, or scope of activity of any restriction contained in
this Section 9 is unenforceable, it is the intention of the
parties that such restrictive covenant set forth herein shall not
thereby be terminated but shall be deemed amended to the extent
required to render it valid and enforceable.
10. DISCLOSURE OF CONFIDENTIAL INFORMATION During the Term of Employment, the
Employee will disclose to Employer all ideas and business plans developed by him
during such period which relate directly to the business of Employer. The
Employee recognizes and acknowledges that he may have access to certain
additional confidential information of Employer or of certain corporations
affiliated with Employer, and that all such information constitutes valuable,
special and unique property of Employer and its affiliates. The Employee agrees
that, during the Term of Employment and for a period of five years after the
termination of the Term of Employment, he will not, without the prior written
consent of Employer, disclose or authorize or permit anyone under his direction
to disclose to anyone not properly entitled thereto any of such confidential
information. For purposes of the immediately preceding sentence, persons
properly entitled to such information shall be (i) the Board of Directors of
Employer and such officers, employees and agents of Employer or any affiliate
thereof to whom such information is furnished in the normal course of business
under established policies approved by Employer and (ii) such outside parties as
are legally entitled to or are customarily furnished such information, including
banking, lending, collection, accounting, and data processing institutions or
agencies who or which are provided such information in the normal course of
business of Employer. The Employee further agrees that upon termination of the
Term of Employment he will not take with him or retain, without the prior
written authorization of Employer, any papers, procedural or technical manuals,
customer lists, customer account analyses (including, without limitation,
accounts receivable agings, customer payment histories and customer account
activity reports), price books, files or other documents or copies thereof
belonging to Employer or to any affiliate of Employer, or any materials,
supplies, equipment or furnishings belonging to Employer or to any affiliate of
Employer, or any other confidential information of any kind belonging to
Employer or any affiliate of Employer. In the event of a breach or threatened
breach by the Employee of the provisions of this Section 10, Employer and the
Employee agree that the remedy at law available to Employer and its affiliates
would be inadequate and that Employer and its affiliates shall be entitled to an
injunction, without the necessity of posting bond therefor, restraining the
Employee from disclosing, in whole or in part, such confidential information.
Nothing herein shall be construed as prohibiting Employer and its affiliates
from pursuing any other remedies, in addition to the injunctive relief available
under this Section 10, for such breach or threatened breach, including the
recovery of damages from the Employee.
11. TRADE SECRETS All patents, formulae, inventions, processes, copyrights,
proprietary information, trademarks or trade names, or future improvements to
patents, formulae, inventions, processes, copyrights, proprietary information,
trademarks or trade names, developed or completed by the Employee during the
Term of Employment (collectively, the "Items") shall be promptly disclosed to
Employer. To the extent that the Employer determines such Items to be within the
scope of the Employer's business, 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 the Employee contests the validity
or enforceability of any of the provisions of Sections 9, 10 or 11 hereof, then
the Employee hereby agrees to pay in a timely and prompt manner any and all
legal fees and expenses incurred by the Employee from time to time as a result
of Employee's contesting of the validity or enforceability of any provision of
Sections 9, 10 or 11 hereof this Agreement; PROVIDED, HOWEVER, notwithstanding
the foregoing, in the event that the Employee contests the validity or
enforceability of any provision of Section 9, 10 or 11 hereof and is wholly
successful in such contest, then and in that event only will the Employer
reimburse the Employee for (i) the Employer's legal expenses paid by the
Employee and (ii) Employee's reasonable legal fees and costs incurred in
connection with such contest.
13 ASSIGMENT. 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 Employee 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.
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/ RAYMOND M. CHAMBERS
Raymond M. Chambers
President and
Chief Operating Officer
EMPLOYEE
/S/ WALTER V. KLEMP
Walter V. Klemp
<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.
AGREEMENT AMENDING AND RESTATING
EMPLOYMENT AGREEMENT
BETWEEN
DRYPERS CORPORATION
AND
RAYMOND M. CHAMBERS
MARCH 1, 1999
<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>
ii
AGREEMENT AMENDING AND RESTATING
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made as of the 1st
day of March, 1999, 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 January 1, 1998 (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 President and Chief Operating Officer of the Employer in
accordance with the provisions of Article V, Section 5.1 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 $330,000 per year, payable in accordance with
the normal payroll practices of the Employer but in no less than
equal bi-weekly installments; and
(b) during the Term of Employment as additional compensation
for services hereunder during the term of this Agreement, the
Employee shall be entitled to an annual bonus in amount as shall be
determined by the Compensation Committee of Board of Directors of
the Employer for each of the Company's fiscal years ending after the
date hereof.
. 5. TERM
(a) The "Term of Employment", as used herein, shall mean a
period commencing on the date hereof and ending on a date that is
the earlier to occur of (A) the third anniversary of the receipt by
the Employee of a written notice of termination by the Employer
given to the Employee ("Termination Without Cause") 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) 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
(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 president and
chief operating officer of a corporation engaged in the
Employer's business;
or
<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
<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
<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
(A) upon a Termination Without Cause before a Change in Control or
(B) for any reason specified in subsection (vi) of Section 5(a)
above, the Employer shall, until the third anniversary of the date
of such termination continue to be obligated to (i) make the
payments specified under Section 4, (ii) provide the benefits
specified under Section 8(b), and (iii) maintain the Employee as a
participant in, or provide benefits comparable to those of, the
health insurance benefit plan specified under Section 8(a). In the
event of the termination of the Term of Employment for any reason
specified in subsection (vii) of Section 5(a) above, the Employer
shall, until the second anniversary of the date of such termination
continue to be obligated to (i) make the 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.
<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 has received and shall
continue to 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 (the
"Noncompetition Area"). Employee represents to Employer that the
enforcement of the restriction contained in this Section 9 would not
be unduly burdensome to Employee and that in order to induce the
Employer to provide for the Term of Employment as set forth in
Section 5 hereof to replace Section 4.1 of the Employment Agreement,
Employee further represents and acknowledges that Employee has
entered into this agreement not to compete and is willing and able
to compete in other geographical areas not prohibited by this
Section 9. Notwithstanding the foregoing, it is agreed by the
Employer that the Employee may acquire an ownership interest,
directly or indirectly, of not more than five percent (5%) of the
outstanding securities of any corporation that is engaged in a
business competitive with the Employer and that is listed on any
recognized securities exchange or traded in the over the counter
market in the United States, provided that such investment is of a
totally passive nature and does not involve Employee devoting time
to the management or operations of such corporation.
(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, except as may otherwise be required by
applicable law, or (ii), within the Noncompetition Area, 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 during the Noncompetition Period in accordance with its
terms, notwithstanding the termination of Employee's employment for
any reason.
(e) If Employee violates any covenant contained in this
Section 9 and Employer brings legal action for injunctive or other
relief, the Employer shall not, as a result of the time involved in
obtaining the relief, be deprived of the benefit of the full period
of any such covenant. Accordingly, the covenants of Employee
contained in this Section 9 shall be deemed to have durations as
specified above, which periods shall commence upon the later of (i)
the Ending Date and (ii) the date of entry by a court of competent
jurisdiction of a final judgment enforcing the covenants of Employee
in this Section 9.
(f) The parties to this Agreement agree that the limitations
contained in this Section 9 with respect to geographic area,
duration, and scope of activity are reasonable. However, if any
court shall determine that the geographic area, duration, or scope
of activity of any restriction contained in this Section 9 is
unenforceable, it is the intention of the parties that such
restrictive covenant set forth herein shall not thereby be
terminated but shall be deemed amended to the extent required to
render it valid and enforceable.
10. DISCLOSURE OF CONFIDENTIAL INFORMATION During the Term of Employment,
the Employee will disclose to Employer all ideas and business plans
developed by him during such period which relate directly to the
business of Employer. The Employee recognizes and acknowledges that he
may have access to certain additional confidential information of
Employer or of certain corporations affiliated with Employer, and that
all such information constitutes valuable, special and unique property
of Employer and its affiliates. The Employee agrees that, during the
Term of Employment and for a period of five years after the termination
of the Term of Employment, he will not, without the prior written
consent of Employer, disclose or authorize or permit anyone under his
direction to disclose to anyone not properly entitled thereto any of
such confidential information. For purposes of the immediately
preceding sentence, persons properly entitled to such information shall
be (i) the Board of Directors of Employer and such officers, employees
and agents of Employer or any affiliate thereof to whom such
information is furnished in the normal course of business under
established policies approved by Employer and (ii) such outside parties
as are legally entitled to or are customarily furnished such
information, including banking, lending, collection, accounting, and
data processing institutions or agencies who or which are provided such
information in the normal course of business of Employer. The Employee
further agrees that upon termination of the Term of Employment he will
not take with him or retain, without the prior written authorization of
Employer, any papers, procedural or technical manuals, customer lists,
customer account analyses (including, without limitation, accounts
receivable agings, customer payment histories and customer account
activity reports), price books, files or other documents or copies
thereof belonging to Employer or to any affiliate of Employer, or any
materials, supplies, equipment or furnishings belonging to Employer or
to any affiliate of Employer, or any other confidential information of
any kind belonging to Employer or any affiliate of Employer. In the
event of a breach or threatened breach by the Employee of the
provisions of this Section 10, Employer and the Employee agree that the
remedy at law available to Employer and its affiliates would be
inadequate and that Employer and its affiliates shall be entitled to an
injunction, without the necessity of posting bond therefor, restraining
the Employee from disclosing, in whole or in part, such confidential
information. Nothing herein shall be construed as prohibiting Employer
and its affiliates from pursuing any other remedies, in addition to the
injunctive relief available under this Section 10, for such breach or
threatened breach, including the recovery of damages from the Employee.
11. TRADE SECRETS All patents, formulae, inventions, processes,
copyrights, proprietary information, trademarks or trade names, or future
improvements to patents, formulae, inventions, processes, copyrights,
proprietary information, trademarks or trade names, developed or completed
by the Employee during the Term of Employment (collectively, the "Items")
shall be promptly disclosed to Employer. To the extent that the Employer
determines such Items to be within the scope of the Employer's business,
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 the Employee contests
the validity or enforceability of any of the provisions of Sections 9, 10
or 11 hereof, then the Employee hereby agrees to pay in a timely and
prompt manner any and all legal fees and expenses incurred by the Employee
from time to time as a result of Employee's contesting of the validity or
enforceability of any provision of Sections 9, 10 or 11 hereof this
Agreement; PROVIDED, HOWEVER, notwithstanding the foregoing, in the event
that the Employee contests the validity or enforceability of any provision
of Section 9, 10 or 11 hereof and is wholly successful in such contest,
then and in that event only will the Employer reimburse the Employee for
(i) the Employer's legal expenses paid by the Employee and (ii) Employee's
reasonable legal fees and costs incurred in connection with such contest.
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 Employee at 3902 SE 154th
Court, Vancouver, WA 98683, 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, 10 or 11 of this Agreement be submitted to arbitration
pursuant to this Section 18 or otherwise. Any such dispute, claim and/or
disagreement subject to arbitration pursuant to the terms of this Section
18 shall be resolved by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association (the "AAA").
Arbitration under this provision must be initiated within 30 days of the
action, inaction, or occurrence about which the party initiating the
arbitration is complaining. Within ten days of the initiation of an
arbitration hereunder, each party will designate an arbitrator pursuant to
Rule 14 of the AAA Rules. The appointed arbitrators will appoint a neutral
arbitrator from the panel in the manner prescribed in Rule 13 of the AAA
Rules. Employee and Employer agree that the decision of the arbitrators
selected hereunder will be final and binding on both parties. This
arbitration provision is expressly made pursuant to and shall be governed
by the Federal Arbitration Act, 9 U.S.C. Sections 1 - 14. The parties
hereto agree that pursuant to Section 9 of the Act that a judgment of the
United States District Court for the Southern District of Texas, shall be
entered upon the award made pursuant to the arbitration.
IN WITNESS WHEREOF, the Employer has caused this Agreement to be
executed by its duly authorized officer, and the Employee has executed
this Agreement as of the date first above written.
DRYPERS CORPORATION
By /S/ WALTER V.
KLEMP
Walter V. Klemp
Chairman of the Board and
Chief Executive Officer
EMPLOYEE
/S/ RAYMOND M.
CHAMBERS
Raymond M. Chambers
<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.
Contribution to a deferred compensation investment vehicle in the amount of
$10,000 per year.
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.
TOGNIETTI CONSULTING AGREEMENT 1999
CONSULTING AGREEMENT
This Consulting Agreement ("Agreement") is by and between Drypers
Corporation, a Delaware corporation ("Company"), and Terry A. Tognietti
("Consultant").
W I T N E S S E T H:
WHEREAS, Consultant is a party to that Employment Agreement between the
parties hereto, dated August 30, 1992, as amended by that certain Agreement
Amending and Restating Employment Agreement, between the parties hereto, dated
as of February 25, 1997 (as amended, referred to herein as the "Employment
Agreement");
WHEREAS, Consultant is currently an officer and a director of the
Company; and
WHEREAS, the parties hereto desire to redefine Consultant's role with the
Company pursuant to which the Consultant will act as a consulting independent
contractor.
NOW, THEREFORE, in consideration of the above premises and of the mutual
covenants herein contained, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound, the parties hereto agree as follows:
1. RESIGNATION AND RETENTION.
<PAGE>
TOGNIETTI CONSULTING AGREEMENT 1999
1.1 Consultant hereby resigns as of the date hereof as an officer of
the Company and all subsidiaries of the Company and, upon the request of a
majority of the members of the then existing board of directors of the
Company, agrees to resign for solely personal reasons as a director of the
Company. Subject to the Company's and Consultant's compliance with their
respective obligations under this Agreement, each of the Company and
Consultant hereby release the other party from any and all claims arising
out of Consultant's prior employment as an employee and officer of the
Company, including, without limitation, the forgiveness, release,
extinguishment and discharge by the Company of the Consultant's Promissory
Note dated August 1, 1997, in the principal amount of $130,000.00 in favor
of the Company. The Company agrees that should any inquiry be made of the
Company regarding the reasons for the Consultant's resignation as an
officer of the Company, the Company shall represent that the Consultant
resigned as an officer to assume transactional functions as a consultant
on the Company's behalf and to pursue other business interests. Each of
the Company and the Consultant agree to (i) make no other public
announcements regarding the reasons for the Consultant's resignation as an
officer of the Company, (ii) make no denigrating or disparaging remarks
regarding the other, regardless of the truth or falsity of any such
remark, and (iii) take no action that would reflect negatively upon the
other's business or reputation. Unless specifically addressed, this
Agreement is not intended to be a waiver of any rights the Consultant may
have to (i) any nonforfeitable benefits under any of the Company's
employee benefit plans and executive compensation arrangements which, by
their terms, specifically provide for nonforfeitable benefits, (ii)
convert group benefits under any of the Company's employee benefit plans
to individual coverage, to the extent that such plans allow such
conversion, (iii) continue coverage under any of the Company's medical
plans as provided under the Employee Retirement Income Security Act of
1974, as amended, or section 4980 B of the Internal Revenue Code of 1986,
as amended, or (iv) receive compensation and benefits pursuant to this
Agreement.
1.2 The Company hereby retains Consultant as a general advisor and
consultant to management of the Company on certain matters pertaining to
the Company's business throughout the United States and Consultant hereby
accepts such arrangement upon the terms and conditions specified in this
Agreement. The Employment Agreement is hereby cancelled as of the date
hereof, and is replaced by this Agreement.
1.3 During the Term of Agreement (as hereinafter defined) under this
Agreement, the Consultant is entitled to all protections of any
indemnification agreements or provisions, including Company By-laws,
agreements and any director and officer liability insurance policies,
established or maintained by the Company for other directors and executive
officers of the Company.
2. DUTIES AND RESPONSIBILITIES.
2.1 Consultant shall (a) use reasonable efforts during the Term of
Agreement to search for potential business opportunities for the Company
("Projects") in accordance with the written direction, as accepted in
writing by the Consultant, of the Company's Chief Executive Officer and
(b) comply with all rules and regulations with respect to the Company's
business as may be issued from time to time by the Company that apply to
its executive officers. All business opportunities relating to the
Company's current or anticipated development that shall come to the
attention of Consultant shall be immediately brought to the attention of
the Company's Chief Executive Officer; and during the Term of Agreement
(as hereinafter defined), Consultant shall not usurp or divert any such
business opportunities for his own benefit or that of others without the
prior written approval of the Company. It is not contemplated that the
services described in this subparagraph 2.1 shall require Consultant's
full-time service throughout the Term of Agreement.
2.2 It is expressly understood and agreed that Consultant is not
authorized to enter into any contract on behalf of the Company or
otherwise in any manner whatsoever bind the Company. Consultant agrees to
make no representation to any person, corporation or firm inconsistent in
any manner with the provisions of this subparagraph 2.2. Consultant and
the Company further agree that Consultant is an independent contractor
under the terms of this Agreement and is not an employee of the Company.
3. FEE FOR SERVICE.
3.1 As the fee for his services hereunder during the Term of
Agreement, Consultant shall be paid a fee of $300,000.00 per year for each
year during such term, payable in semi-monthly installments.
<PAGE>
3.2 During the Primary Term of Agreement (as hereinafter defined):
(a) Consultant shall be entitled to receive $1,000.00
per month as an automobile allowance (such amount being intended to
include, without limitation, the cost of the automobile and all
operating costs including insurance, fuel, maintenance and repairs);
(b) Commencing 1 July 1999, the Consultant shall be
entitled to receive $4,292.00 per month as payment for an office and
secretary located off-site from the Company's facilities;
(c) Consultant shall be entitled to receive
reimbursement of reasonable expenses related to the performance of
his duties hereunder consistent with the Company's normal
reimbursement policies for executive officers; and
(d) Consultant shall be entitled to receive such
performance bonuses in such amounts and conditioned upon such
performance and/or such financial standards as the Compensation
Committee of the Board of Directors shall determine to be
appropriate for each Project.
3.3 During the Term of Agreement, and to the extent Consultant is
not entitled to receive similar benefits as a result of his employment or
affiliation with another business entity, Consultant shall also be
entitled to receive the following to the extent permitted by the
applicable Company plan and each such item shall be reported as required
by law:
(a) the payment of premiums on Consultant's split dollar
life insurance plan (as established when the Consultant was employed
by the Company), with the beneficiaries of such a policy as may be
designated by the Consultant;
(b) the payment to Consultant of $1,790.00 per month to
compensate Consultant for loss of group comprehensive life, medical
and dental insurance;
(c) the payment to Consultant of $710.00 per month to
compensate Consultant for loss of the Company's portion of all
payroll taxes;
(d) the payment to Consultant of $417.00 per month to
compensate Consultant for loss of benefits under Company benefit
plans available only to employees, including the benefits received
by Consultant under the Company's 401(k) plan in which Consultant
previously participated; and
(e) membership in The Houstonian Club, as such
membership is in effect on the date hereof, at the expense of the
Company. At the end of the Term of Agreement, the Company shall use
commercially reasonable efforts without the necessity of payment of
any fees to transfer such membership to the Consultant.
<PAGE>
4. TERM AND TERMINATION.
4.1 The "Term of Agreement" under this Agreement shall commence upon
the date hereof and end upon either (a) November 1, 2002, in the event
that the Average Stock Price ( as hereinafter defined) of the Company's
common stock, $.001 par value per share (the "Company Common Stock"), has
not been equal to or greater than $12.00 per share at any time during the
period (the "Determination Period") commencing after March 1, 2001 and
ending on November 1, 2001, or (b) November 1, 2001, in the event that the
Average Stock Price of the Company Common Stock has been equal to or
greater than $12.00 per share at any time during the Determination Period;
in each case, however, subject to termination upon the occurrence of any
of the events specified in Section 4.2 hereof. The "Average Stock Price"
shall mean the average of the per share closing prices of the Company
Common Stock on the Nasdaq National Market System (or other principal
exchange upon which the Company Common Stock is then trading) during any
five consecutive trading days, adjusted to give effect to any stock
dividend, stock split or other reclassification pursuant to which the
shares of Company Common Stock to be issued to the Consultant upon
exercise of any of Consultant's currently outstanding options to purchase
shares of the Company Common Stock (the "Consultant's Options") as set
forth on EXHIBIT A hereto are adjusted in accordance with the terms of
such options.
4.2 The Term of Agreement may be terminated upon the occurrence of
any of the following events:
(a) if the Company gives written notice to Consultant of
its intent to terminate the term of this Agreement for Cause (as
defined below), with the date of termination to be specified
prospectively in such notice;
(b) if Consultant gives written notice to the Company of
his intent to terminate this Agreement, with the date of termination
to be specified in such notice; or
(c) the death of Consultant.
For purposes of this Agreement, "Cause" shall mean: (a) if
Consultant is convicted of or pleads guilty or nolo contendere to any
felony or serious intentional misdemeanor, other than an offense that in
the opinion of the Board of Directors does not affect the Company or
Consultant's position as a consultant; or (b) if Consultant violates any
provision of Sections 6, 7 or 8 of this Agreement.
4.3 The "Primary Term of Agreement" under this Agreement commences
upon the date hereof and ends upon written notice by the Company to
Consultant of its intent to terminate the term of this Agreement following
the Consultant becoming an employee, officer or devoting a substantial
portion of his time for the benefit of another business entity.
<PAGE>
4.4 Consultant may be terminated at any time by the Board of
Directors, without Cause; provided that any such termination is without
prejudice to the Consultant's rights to be paid his Compensation pursuant
to Section 3.1, although any and all other benefits would cease.
5. CONSULTANT'S OPTIONS.
5.1 The Company shall execute and deliver to Consultant as soon as
practicable such agreements and other instruments as are necessary and
appropriate in order to cause each of Consultant's options to acquire
Company Common Stock to vest in full effective upon the date hereof, and
all such options are hereby made fully vested and exercisable. Such
options shall not require Consultant to be an employee at the time of
exercise, or limit the period of exercise by reason of employment status.
Consultant understands that all of such options are or shall become
Nonqualified Options (as defined in the applicable stock option plan) and
subject to applicable tax withholding at the time of exercise.
5.2 In the event that during the Term of Agreement any of the option
agreements to purchase Company Common Stock held by Walter V. Klemp or
Raymond M. Chambers on the date hereof are (i) cancelled and exchanged for
option agreements that provide for the purchase of shares of Company
Common Stock at an exercise price (the "New Exercise Price") that is less
than the then current exercise price of such options, or (ii) amended to
such effect or are otherwise replaced or repriced to such effect, then
Consultant's options to purchase that number of shares of Company Common
Stock equal to the greater of Mr. Klemp's or Mr. Chambers' shares subject
to such repriced option or options shall be cancelled and exchanged for
options to purchase Company Common Stock at the New Exercise Price. Such
options shall be fully vested and exercisable. Any new options (not in
replacement or exchange for such currently outstanding options) issued to
Messrs. Klemp or Chambers shall not entail or require issuance of any
options to the Consultant.
6. NON-COMPETITION.
<PAGE>
6.1 Consultant acknowledges that he has received special training
and shall continue to receive special knowledge from the Company.
Consultant acknowledges that included in the special knowledge received is
the confidential information identified in Section 7 below. Consultant
acknowledges that this confidential information is valuable to the Company
and, therefore, its protection and maintenance constitutes a legitimate
interest to be protected by the Company by this covenant not to compete.
Therefore, Consultant agrees that for the period (the "Noncompetition
Period") during the Term of Agreement and commencing upon the termination
thereof and ending upon the first anniversary thereof, in each case unless
otherwise extended pursuant to the terms hereof, Consultant 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 Company engages or proposes at the time of the termination of
the Term of Agreement to engage in business (the "Noncompetition Area").
Consultant represents to the Company that the enforcement of the
restriction contained in this Section 6 would not be unduly burdensome to
Consultant and that in order to induce the Company to redefine
Consultant's role with the Company and to provide for the fees during the
Term of Agreement as set forth in Section 3 hereof, Consultant further
represents and acknowledges that Consultant has entered into this
agreement not to compete and is willing and able to compete in other
geographical areas not prohibited by this Section 6. Notwithstanding the
foregoing, it is agreed by the Company that the Consultant may acquire an
ownership interest, directly or indirectly, of not more than five percent
(5%) of the outstanding securities of any corporation that is engaged in a
business competitive with the Company and that is listed on any recognized
securities exchange or traded in the over the counter market in the United
States, provided that such investment is of a totally passive nature and
does not involve Consultant devoting time to the management or operations
of such corporation.
6.2 Consultant agrees that a breach or violation of this covenant
not to compete by such Consultant shall entitle the Company, 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 Company may show itself
justly entitled. Further, during any period in which Consultant is in
breach of this covenant not to compete, the time period of this covenant
shall be extended for an amount of time that Consultant is in breach
hereof.
6.3 In addition to the restrictions set forth in Section 6.1,
Consultant 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 Company or contacts of the Company or any
other information pertaining to such persons, except as may otherwise be
required by applicable law, or (ii) within the Noncompetition Area, call
on, solicit, or take away, or attempt to call on, solicit or take away any
of the customers of the Company on whom Consultant called or with whom
Consultant became acquainted during Consultant's association with the
Company, whether for Consultant or for any other person, firm or
corporation.
6.4 The representation and covenants contained in this Section 6 on
the part of Consultant 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 Consultant against the Company or any officer,
director, or shareholder of the Company, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the enforcement
by the Company of the covenants of the Consultant contained in this
Section 6. In addition, the provisions of this Section 6 shall continue to
be binding upon Consultant during the Noncompetition Period in accordance
with its terms, notwithstanding the termination of Consultant for any
reason.
<PAGE>
6.5 If Consultant violates any covenant contained in this Section 6
and the Company brings legal action for injunctive or other relief, the
Company 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 Consultant contained in this
Section 6 shall be deemed to have durations as specified above, which
periods shall commence upon the later of (i) the last day of the Term of
Agreement and (ii) the date of entry by a court of competent jurisdiction
of a final judgment enforcing the covenants of Consultant in this Section
6.
6.6 The parties to this Agreement agree that the limitations
contained in this Section 6 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 6 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.
<PAGE>
7. DISCLOSURE OF CONFIDENTIAL INFORMATION. During the Term of Agreement,
the Consultant will disclose to the Company all ideas and business plans
developed by him during such period which relate directly to the business of the
Company. The Consultant recognizes and acknowledges that he may have access to
certain additional confidential information of the Company or of certain
corporations affiliated with the Company, and that all such information
constitutes valuable, special and unique property of the Company and its
affiliates. The Consultant agrees that, during the Term of Agreement and for a
period of five years after the termination of the Term of Agreement, he will
not, without the prior written consent of the Company, 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 the Company and such officers, employees and agents of
the Company or any affiliate thereof to whom such information is furnished in
the normal course of business under established policies approved by the Company
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 the Company. The Consultant
further agrees that upon termination of the Term of Agreement he will not take
with him or retain, without the prior written authorization of the Company, 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 the Company or to any affiliate
of the Company, or any materials, supplies, equipment or furnishings belonging
to the Company or to any affiliate of the Company, or any other confidential
information of any kind belonging to the Company or any affiliate of the
Company. In the event of a breach or threatened breach by the Consultant of the
provisions of this Section 7, the Company and the Consultant agree that the
remedy at law available to the Company and its affiliates would be inadequate
and that the Company and its affiliates shall be entitled to an injunction,
without the necessity of posting bond therefor, restraining the Consultant from
disclosing, in whole or in part, such confidential information. Nothing herein
shall be construed as prohibiting the Company and its affiliates from pursuing
any other remedies, in addition to the injunctive relief available under this
Section 7, for such breach or threatened breach, including the recovery of
damages from the Consultant.
80 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 Consultant during the Term of Agreement (collectively, the "Items") shall be
promptly disclosed to the Company. To the extent that the Company determines
such Items to be within the scope of the Company's business, the Consultant
shall execute such instruments of assignment of the Items to the Company as the
Company shall request. The Consultant acknowledges that a remedy at law for any
breach by him of the provisions of this Section 8 would be inadequate, and the
Consultant hereby agrees that the Company shall be entitled to injunctive relief
in case of any such breach.
90 LEGAL FEES AND EXPENSES. The Company shall pay all reasonable legal
fees and costs incurred by the Consultant in connection with this Agreement that
are incurred on or prior to the date hereof. In the event that Consultant
contests the validity or enforceability of any of the provisions of Sections 6,
7 or 8 hereof, then Consultant hereby agrees to pay in a timely and prompt
manner any and all legal fees and expenses incurred by the Company from time to
time as a result of Consultant's contesting of the validity or enforceability of
any provision of Sections 6, 7 or 8 hereof; provided however, notwithstanding
the foregoing, in the event that Consultant contests the validity or
enforceability of any provision of Section 6, 7 or 8 hereof and is wholly
successful in such contest, then and in that event only will the Company
reimburse Consultant for (i) the Company's legal expenses paid by Consultant and
(ii) his reasonable legal fees and costs incurred in connection with such
contest.
100 MISCELLANEOUS.
10.1 NOTICES. Any notice required or permitted under this Agreement
shall be in writing and shall be deemed to be delivered three business
days after deposit in the United States mail, postage prepaid, certified
or registered mail, return receipt requested, addressed as follows:
Company: Drypers Corporation
5300 Memorial Drive
Houston, Texas 77007
Attn: Walter V. Klemp
Consultant: Terry A. Tognietti
630 Alders Gate Court
Katy, Texas 77450
Notice given in any other manner shall be effective when received by
the addressee. The address for notice may be changed by notice given in
accordance with this provision.
<PAGE>
10.2 AMENDMENTS. This Agreement constitutes the entire agreement
between the parties with respect to the relationship between the Company
and Consultant and may not be amended, supplemented, waived, or terminated
except by written instrument executed by the parties hereto.
10.3 PRESERVATION OF BUSINESS. Consultant shall use his best efforts
to preserve the business and organization of the Company and to keep
available to the Company the services of its employees, and to preserve
the business relations of the Company. Consultant shall not commit any act
that might reasonably be expected to injure the Company. This Section 10.3
shall not be deemed to have been violated if the Consultant contacts
employees or other independent contractors of the Company to secure other
employment for such persons if and only to the extent that the Consultant
first notifies the Chief Executive Officer of the Company in writing that
he intends to make such contact, the nature and content of such proposed
contact and the name, time and purpose of such proposed contact.
10.4 ASSIGNMENTS. The Company may not assign this Agreement without
the consent of the Consultant, except in connection with a sale of
substantially all of the assets or the capital stock of the Company. The
rights and obligations of Consultant hereunder are personal to him, and no
such rights, benefits, duties or obligations shall be subject to voluntary
or involuntary alienation, assignment or transfer.
10.5 EFFECT OF AGREEMENT. This Agreement shall be binding upon
Consultant and his heirs, executors, administrators and legal
representatives and upon the Company and its successors and any permitted
assigns.
10.6 WAIVER OF BREACH. The waiver by either party hereto of a breach
of any provision of this Agreement by the other party hereto shall not
operate or be construed as a waiver by such party of any subsequent breach
of such other party.
10.7 GOVERNING LAW. The validity, construction, and enforcement of
this Agreement shall be governed by the laws of the State of Texas. In the
event of a dispute concerning this Agreement, the parties agree that venue
lies in a court of competent jurisdiction in Harris County, Texas.
10.8 SEVERABILITY. If any provision of this Agreement is declared
unenforceable by a court of last resort, such declaration shall not affect
the validity of any other provision of this Agreement.
10.9 CONSTRUCTION. The headings contained in this Agreement are for
reference purposes only and shall not affect this Agreement in any manner
whatsoever. Wherever required by the context, any gender shall include any
other gender, the singular shall include the plural, and the plural shall
include the singular.
<PAGE>
10.10 TIME FOR PERFORMANCE. If the time for performance of any
obligation set forth in this Agreement falls on a Saturday, Sunday, or
legal holiday, compliance with such obligation on the next business day
following such Saturday, Sunday, or legal holiday shall be deemed
acceptable.
10.11 EXECUTION. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original but all of which
shall be deemed one instrument. Consultant acknowledges that he has read
this Agreement and has been represented by separate legal counsel and he
understands that executing this Agreement is a condition of his right to
the Compensation described in Section 3.
10.12 PRIOR AGREEMENT. This Agreement supersedes and replaces the
Employment Agreement, which agreement shall terminate and be of no further
force or effect upon the due execution and delivery of this Agreement by
the parties hereto.
10.13 ARBITRATION. The Company and Consultant 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 Consultant's
engagement by the Company and/or the termination of this Agreement and/or
Consultant's engagement by the Company; PROVIDED, HOWEVER, notwithstanding
the foregoing, in no event shall any dispute, claim or disagreement
arising under Section 6, 7 or 8 of this Agreement be submitted to
arbitration pursuant to this Section 10.13 or otherwise. Any such dispute,
claim and/or disagreement subject to arbitration pursuant to the terms of
this Section 10.13 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. Consultant and the Company 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.
<PAGE>
TOGNIETTI CONSULTING AGREEMENT 1999
INTENDING TO BE LEGALLY BOUND, the parties hereto have executed this
Agreement to be dated and effective as of the 5th day of January 1999.
COMPANY:
DRYPERS CORPORATION
By: /s/ WALTER V. KLEMP
Walter V. Klemp
Chairman and Chief Executive Officer
CONSULTANT:
/s/ TERRY A. TOGNIETTI
Terry A. Tognietti
EXHIBIT 10.21
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is entered
into as of September 9, 1998, among DRYPERS CORPORATION, a Delaware corporation
(the "BORROWER"), the bank or banks listed on the signature pages hereof
(collectively, the "BANKS"), BANKBOSTON, N.A., a national banking association,
individually and as agent for itself and the other Banks and as issuer of
Letters of Credit (in its capacity as agent, the "AGENT").
R E C I T A L S:
A. The Agent, the Borrower and the Banks have entered into that certain
Credit Agreement dated as of April 1, 1998 (as the same may be amended,
modified, or supplemented from time to time, the "CREDIT AGREEMENT") subject to
the terms and conditions hereof..
B. The Borrower has requested the Agent and the Banks to amend certain
financial covenants contained in the Credit Agreement and to consent to certain
transactions proposed by the Borrower, which the Agent and the Banks are willing
to do subject to the terms and conditions hereof.
C. The Borrower, the Agent and the Banks desire to amend the Credit
Agreement as set forth herein.
A G R E E M E N T S:
NOW, THEREFORE, in consideration of the premises and other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Borrower, the Banks and the Agent agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. Unless otherwise specified herein, terms
defined in the Credit Agreement have the same meaning when used herein.
<PAGE>
ARTICLE II
AMENDMENTS
Section 2.1 AMENDMENT TO DEFINITION OF BORROWING BASE. Effective as of
the date hereof, the definition of "Borrowing Base" appearing in SECTION 1.1 of
the Credit Agreement is hereby amended in its entirety to read as follows:
"BORROWING BASE" means an amount equal to the lesser of (a) the
maximum amount that may be funded hereunder without the Borrower
violating the Indenture or (b) the sum of (i) seventy-five percent (75%)
of the aggregate net book value of the accounts receivable of the
Borrower and its Restricted Subsidiaries, plus (ii) fifty percent (50%)
of the aggregate net book value of the inventory of the Borrower and its
Restricted Subsidiaries, less (iii) the maximum principal amount of the
Debt of Foreign Restricted Subsidiaries if and to the extent such Debt
has been Guaranteed by the Borrower as permitted by SECTION 10.1(O)
hereof, and less (iv) any amounts applied to the permanent reduction of
the Commitments pursuant to SECTION 2.10 hereof.
Section 2.2 AMENDMENT TO DEFINITION OF CONSOLIDATED EBITDA. Effective as
of the date hereof, the definition of "Consolidated EBITDA" appearing in SECTION
1.1 of the Credit Agreement is hereby amended in its entirety to read as
follows:
"CONSOLIDATED EBITDA" means, for any period the sum of, without
duplication Consolidated Net Income for such period, plus (or, in the
case of clause (e) below, plus or minus) the following items to the
extent included in computing Consolidated Net Income for such period:
(a) the amount that, in conformity with GAAP, would be set forth
opposite the caption "interest expense" (or any like caption) on a
consolidated statement of earnings of the Borrower and its Restricted
Subsidiaries for such period, including, without limitation, (i)
amortization of debt discount, (ii) the net cost of interest rate
contracts (including amortization of discounts), (iii) the interest
portion of any deferred payment obligation, (iv) amortization of debt
issuance costs and (v) the interest component of Capital Lease
Obligations, plus (b) the provision for federal, state, local and
foreign income or franchise taxes of the Borrower and its Restricted
Subsidiaries for such period, plus (c) the aggregate depreciation and
amortization expense of the Borrower and its Restricted Subsidiaries for
such period, plus (d) $6,000,000 for the fiscal quarter ending March 31,
1998 and $2,000,000 for the fiscal quarter ending June 30, 1998, plus
(e) any other non-cash charges for such period, and minus non-cash
credits for such period, other than non-cash charges or credits
resulting from changes in reserves for accounts receivable and
inventory, prepaid assets or accrued liabilities in the ordinary course
of business, plus (f) income from Unrestricted Subsidiaries accounted
for under the equity method of accounting, provided that such income is
actually paid in cash to the Borrower or a Restricted Subsidiary during
such period.
<PAGE>
Section 2.3 AMENDMENT TO DEFINITION OF EURODOLLAR RATE. Effective as of
the date hereof, the definition of "Eurodollar Rate" appearing in SECTION 1.1 of
the Credit Agreement is hereby amended in its entirety to read as follows:
"EURODOLLAR RATE" means, for any Eurodollar Advance for any
Interest Period therefor, an interest rate per annum (rounded upwards,
if necessary, to the nearest 1/16 of 1%) at which Dollar deposits are
offered to BankBoston in immediately available funds two Business Days
prior to the first day of such Interest Period by leading banks in the
interbank eurodollar market selected by the Agent for a period
comparable to such Interest Period and in an amount comparable to the
principal amount of the Eurodollar Advance to which such Interest Period
relates. If BankBoston is not participating in a Eurodollar Advance
during any Interest Period therefor (pursuant to SECTION 5.3 or for any
other reason), the Eurodollar Rate for such Advance for such Interest
Period shall be the rate per annum (rounded upwards, if necessary, to
the nearest 1/16 of one percent) equal to the average of the offered
quotations appearing on Dow Jones Market Services (formerly Telerate)
page 3750 (or, if such page shall not be available, any successor or
similar service as may be selected by the Agent) as of 11:00 a.m. London
time, or as soon thereafter as practicable, on the date two Business
Days prior to the first day of such Interest Period for Dollar deposits
having a term comparable to such Interest Period and in an amount
comparable to the principal amount of the Eurodollar Advance to which
such Interest Period relates.
Section 2.4 AMENDMENT TO SECTION 5.5. Effective as of the date hereof,
subsection (ii) of the last sentence of SECTION 5.5 of the Credit Agreement is
hereby amended to read as follows:
(ii) the interest component of the amount such Bank would have
bid in the interbank eurodollar market for Dollar deposits of leading
banks and amounts comparable to such principal amount and with
maturities comparable to such period.
Section 2.5 AMENDMENT TO SECTION 10.1. Effective as of the date hereof,
SECTION 10.1 of the Credit Agreement is hereby amended to add thereto the
following SUBSECTIONS (O) AND (P) which shall read as follows:
(o) Debt of Foreign Restricted Subsidiaries to the Agent or an
Affiliate thereof which has been Guaranteed by the Borrower; and
(p) Debt not to exceed $6,000,000 owing to Proctor & Gamble
Company arising from the licensing to the Borrower of certain patents
owned by Proctor & Gamble Company.
<PAGE>
Section 2.6 AMENDMENT TO SECTION 11.2. Effective as of the date hereof,
SECTION 11.2 of the Credit Agreement is hereby amended in its entirety to read
as follows:
11.2 CONSOLIDATED FIXED CHARGE COVERAGE RATIO. The Borrower will
maintain or cause to be maintained, as of the end of each fiscal quarter
of the Borrower (beginning with the quarter ended September 30, 1998), a
Consolidated Fixed Charge Coverage Ratio of not less than the ratios set
forth below for the most recent four (4) fiscal quarters then ended:
RATIO FISCAL QUARTER ENDING
- - ----- ---------------------
1.0 to 1.0 September 30, 1998
1.0 to 1.0 December 31, 1998
1.1 to 1.0 March 31, 1999
1.1 to 1.0 June 30, 1999
1.25 to 1.0 September 30, 1999
1.25 to 1.0 December 31, 1999
1.50 to 1.0 March 31, 2000
1.50 to 1.0 June 30, 2000
1.75 to 1.0 September 30, 2000 and thereafter
Section 2.7 AMENDMENT TO SECTION 11.3. Effective as of the date hereof,
SECTION 11.3 of the Credit Agreement is hereby amended in its entirety to read
as follows:
11.3 CONSOLIDATED FUNDED DEBT TO ADJUSTED CONSOLIDATED EBITDA
RATIO. The Borrower will maintain or cause to be maintained a ratio of
Consolidated Funded Debt, as of the end of each fiscal quarter
(beginning with the quarter ended September 30, 1998), to Adjusted
Consolidated EBITDA for the most recent four (4) fiscal quarters then
ended, of not greater than the ratios set forth below:
<PAGE>
RATIO FISCAL QUARTER ENDING
----- ---------------------
6.25 to 1.00 September 30, 1998
6.00 to 1.00 December 31, 1998
6.00 to 1.00 March 31, 1999
6.00 to 1.00 June 30, 1999
5.00 to 1.00 September 30, 1999
5.00 to 1.00 December 31, 1999
4.50 to 1.00 March 31, 2000
4.50 to 1.00 June 30, 2000
September 30, 2000 and
3.00 to 1.00 thereafter
ARTICLE III
CONDITIONS PRECEDENT
Section 3.1 CONDITIONS. The effectiveness of this Amendment is subject
to the satisfaction of the following conditions precedent:
(a) The Agent shall have received all of the following, in form
and substance satisfactory to the Agent:
(1) RESOLUTIONS. Resolutions of the Board of Directors of
the Borrower certified by its secretary or an assistant secretary
which authorize the execution, delivery and performance by the
Borrower of this Amendment and any other Loan Documents executed
and/or delivered in connection herewith;
(2) INCUMBENCY CERTIFICATE. A certificate of incumbency
certified by the secretary or an assistant secretary of the
Borrower certifying the names of the officers of the Borrower who
are authorized to sign this Amendment and any other Loan
Documents executed and/or delivered in connection herewith,
together with specimen signatures of such officers;
<PAGE>
(3) GOVERNMENTAL CERTIFICATES. Certificates of the
appropriate governmental officials of the jurisdiction of
incorporation of the Borrower as to the existence and good
standing of the Borrower, each dated a current date;
(4) OPINION OF COUNSEL. A favorable opinion of Fulbright &
Jaworski, L.L.P., legal counsel to the Borrower, as to such
matters as the Agent may reasonably request; and
(5) ADDITIONAL INFORMATION. Such additional documents,
instruments and information as the Agent or its legal counsel,
Winstead Sechrest & Minick P.C., may reasonably request.
(b) The representations and warranties contained herein and in
all other Loan Documents, as amended hereby, shall be true and correct
as of the date hereof as if made on the date hereof, except for such
representations and warranties as are limited by their express terms to
a specific date.
(c) No Default shall have occurred and be continuing.
(d) The Agent shall have received an amendment fee in the amount
of $50,000.00.
(e) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents,
instruments, and other legal matters incident thereto shall be
reasonably satisfactory to the Agent and its legal counsel, Winstead
Sechrest & Minick P.C.
ARTICLE IV
CONSENTS
Section 4.1 CONSENT TO PRIMOSOFT TRANSACTIONS. The Borrower, together
with its wholly-owned subsidiary Drypers Asia Pte Ltd, a Singapore company
("DAPL"), proposes to purchase all of the ordinary shares and all of the
preference shares of Primosoft Sdn Bhd, a Malaysian company ("Primosoft") from
the various stockholders thereof (such transaction being hereinafter referred to
as the "Primosoft Acquisition") for total cash and non-cash consideration not to
exceed $12,500,000, net of proceeds received by the Borrower or DAPL from the
Primosoft Sale Leaseback (defined below). Concurrently with the closing of the
Primosoft Acquisition, Primosoft proposes to sell to Pioneer Corporation (M) Sdn
Bhd ("Pioneer") certain land and improvements located at Mukim Damansara,
District of Petaling, State of Selangor, Malaysia (the "Plant"), and Pioneer
will then lease back the Plant to Primosoft under a lease guaranteed by the
Borrower (such transaction being hereinafter referred to as the "Primosoft Sale
Leaseback"). Pursuant to SECTIONS 10.1, 10.3, 10.5 and 10.7 of the Credit
Agreement, the Borrower has requested that the Agent consent to the Primosoft
Acquisition and the Primosoft Sale Leaseback. Subject to the conditions
described in SECTION 4.2 below, the Agent hereby consents to the Primosoft
Acquisition and the Primosoft Sale Leaseback and agrees that such
<PAGE>
transactions shall not constitute a breach or violation of the Credit Agreement.
The consent granted herein is limited to the Primosoft Acquisition and the
Primosoft Sale Leaseback, and nothing contained herein shall be construed as a
consent by the Agent or the Banks with respect to any other transaction.
Section 4.2 CONDITIONS TO CONSENT. The consent to the Primosoft
Acquisition and the Primosoft Sale Leaseback granted under SECTION 4.1 above is
subject to compliance with the following conditions:
(a) The cash and non-cash consideration paid by the Borrower and
DAPL in connection with the Primosoft Acquisition shall be included in
all calculations for purposes of SECTION 10.3(A)(IV) and (V) of the
Credit Agreement;
(b) The original share certificates (and accompanying stock
powers duly executed in blank), if any, issued to the Borrower in
connection with the Primosoft Acquisition, but in any event not
exceeding 65% of the issued and outstanding capital stock of Primosoft,
shall be promptly delivered to the Agent pursuant to the Borrower Pledge
Agreement; and
(c) Promptly after the consummation of the Primosoft Acquisition,
DAPL shall execute and deliver to the Agent a Negative Pledge Agreement
in the form of Exhibit "G" to the Credit Agreement.
Section 4.3 CONSENT TO ACMA NEGATIVE PLEDGE. The Borrower proposes to
enter into an operating lease to be dated as of December 3, 1997 with ACMA USA,
Inc., a Delaware corporation ("ACMA"), covering a diaper machine (the "ACMA
Lease"). As a condition to entering into the ACMA Lease, ACMA has required that
the Borrower agree not to pledge or encumber the diaper machine which is the
subject of the ACMA Lease. Pursuant to SECTION 10.13 of the Credit Agreement,
the Borrower has requested that the Agent consent to the negative pledge
relating to the ACMA Lease. The Agent hereby consents to the negative pledge
relating to the ACMA Lease and agrees that such negative pledge shall not
constitute a breach or violation of SECTION 10.13 of the Credit Agreement,
provided that (a) the ACMA Lease at all times qualifies as an operating lease
(rather than as a capital lease) and (b) the Agent retains all of its rights
under the Borrower Security Agreement in the event that the Borrower acquires an
ownership interest in the diaper machine which is the subject of the ACMA Lease.
The consent granted herein is limited to the negative pledge relating to the
ACMA Lease, and nothing contained herein shall be construed as a consent by the
Agent or the Banks with respect to any other transaction.
Section 4.4 CONSENT TO SEAGRAM LEASE GUARANTY. Seler S.A., a subsidiary
of the Borrower, has entered into a lease contract dated August 31, 1998 with
Seagram de Argentina S.A. relating to a plant located in Escobar, Province of
Buenos Aires, Argentina (the "Seagram Lease"). Pursuant to SECTION 10.1 of the
Credit
<PAGE>
Agreement, the Borrower has requested that the Agent consent to the Borrower's
guaranty of all obligations of Seler S.A. under the Seagram Lease. The Agent
hereby consents to the Borrower's guaranty of the Seagram Lease and agrees that
such guaranty shall not constitute a breach or violation of SECTION 10.1 of the
Credit Agreement. The consent granted herein is limited to the Borrower's
guaranty of the Seagram Lease, and nothing contained herein shall be construed
as a consent by the Agent or the Bank with respect to any other transaction.
ARTICLE V
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
Section 5.1 RATIFICATIONS. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Credit Agreement and, except as expressly modified and superseded
by this Amendment, the terms and provisions of the Credit Agreement and the
other Loan Documents are ratified and confirmed and shall continue in full force
and effect. The Borrower, the Agent, and the Banks agree that the Credit
Agreement as amended hereby and the other Loan Documents shall continue to be
legal, valid, binding and enforceable in accordance with their respective terms.
Section 5.2 REPRESENTATIONS AND WARRANTIES. The Borrower hereby
represents and warrants to the Agent and the Banks that (a) the execution,
delivery and performance of this Amendment and any and all other Loan Documents
executed and/or delivered in connection herewith have been authorized by all
requisite corporate action on the part of Borrower and will not violate the
articles of incorporation or bylaws of Borrower, (b) the representations and
warranties contained in the Credit Agreement, as amended hereby, and in each
other Loan Document are true and correct on and as of the date hereof as though
made on and as of the date hereof, except for such representations and
warranties as are limited by their express terms to a specific date; (c) no
Default has occurred and is continuing,(d) Borrower is in full compliance with
all covenants and agreements contained in the Credit Agreement as amended hereby
and the other Loan Documents to which it is a party; and (e) none of the
transactions contemplated by the Primosoft Acquisition and the Primosoft Sale
Leaseback shall constitute a breach or violation of, or a default under, the
Indenture.
ARTICLE VI
MISCELLANEOUS
Section 6.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made in this Amendment or any Loan Documents
furnished in connection with this Amendment shall survive the execution and
delivery of this Amendment and the other Loan Documents, and no investigation by
the Agent or any closing shall affect the representations and warranties or the
right of the Agent and the Banks to rely upon them.
Section 6.2 REFERENCES. Each of the Loan Documents, including the Credit
Agreement and any and all other agreements, documents, or instruments now or
hereafter executed and delivered pursuant to the terms hereof or pursuant to the
terms of the Credit Agreement as amended hereby, are hereby amended so that any
reference in such Loan Documents to the Credit Agreement shall mean a reference
to the Credit Agreement as amended hereby.
<PAGE>
Section 6.3 EXPENSES OF THE AGENT. As provided in the Credit Agreement,
the Borrower agrees to pay on demand all reasonable costs and expenses incurred
by the Agent in connection with the preparation, negotiation, and execution of
this Amendment and the other Loan Documents executed pursuant hereto and any and
all amendments, modifications, and supplements thereto, including without
limitation the costs and reasonable fees of the Agent's legal counsel, and all
costs and expenses incurred by the Agent and the Banks in connection with the
enforcement or preservation of any rights under the Credit Agreement, as amended
hereby, or any other Loan Document, including without limitation the costs and
reasonable fees of legal counsel for the Agent and, at any time following and
during the continuance of an Event of Default, of legal counsel to each Bank.
Section 6.4 SEVERABILITY. Any provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall not impair
or invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 6.5 APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS
EXECUTED PURSUANT HERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS.
Section 6.6 COUNTERPARTS. This Amendment may be executed in a number of
identical counterparts, each of which shall be deemed an original. In making
proof of this instrument, it shall not be necessary for any party to account for
all counterparts, and it shall be sufficient for any party to produce but one
such counterpart bearing the signatures of all parties hereto.
Section 6.7 HEADINGS. The headings, captions, and arrangements used in
this Amendment are for convenience only and shall not affect the interpretation
of this Amendment.
Section 6.8 PARTIES BOUND. This Amendment is binding upon and shall
inure to the benefit of the Agent, the Banks and the Borrower and their
respective successors and assigns, except the Borrower may not assign or
transfer any of its rights or obligations hereunder without the prior written
consent of the Agent and all of the Banks.
Section 6.9 ENTIRE AGREEMENT. THIS AMENDMENT, THE CREDIT AGREEMENT, THE
LOAN DOCUMENTS, AND ALL OTHER INSTRUMENTS, DOCUMENTS AND AGREEMENTS EXECUTED AND
DELIVERED IN CONNECTION WITH THIS AMENDMENT REPRESENT THE FINAL AGREEMENT AMONG
THE PARTIES HERETO, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES HERETO.
(Balance of page intentionally left blank.)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to Credit Agreement to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
BORROWER:
DRYPERS CORPORATION
By: /s/JONATHAN P. FOSTER
Name: Jonathan P. Foster
Title: CPO & Executive Vice President
AGENT AND
BANKS:
BANKBOSTON, N.A., as Agent and as a Bank
By: /s/ RANDALL A. PARRISH
Name: Randall A. Parrish
Title: Vice President
EXHIBIT 10.22
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is entered
into as of December 30, 1998, among DRYPERS CORPORATION, a Delaware corporation
(the "BORROWER"), the bank or banks listed on the signature pages hereof
(collectively, the "BANKS"), BANKBOSTON, N.A., a national banking association,
individually and as agent for itself and the other Banks and as issuer of
Letters of Credit (in its capacity as agent, the "AGENT").
R E C I T A L S:
A. The Agent, the Borrower and the Banks have entered into that certain
Credit Agreement dated as of April 1, 1998 (as amended by a certain First
Amendment to Credit Agreement dated September 9, 1998, and as the same may
hereafter be amended, modified, or supplemented from time to time, the "CREDIT
AGREEMENT"), pursuant to which the Banks established a revolving credit facility
for the Borrower in an amount not to exceed $50,000,000.
B. The Borrower has requested the Agent or its Affiliates to provide
additional financing to the Borrower or one or more Restricted Subsidiaries
separate and apart from the Commitments under the Credit Agreement, which the
Agent or such Affiliates are willing to do, provided that the Borrower's
obligations with respect to such additional financing are secured by the
Collateral.
C. The Borrower, the Agent and the Banks desire to amend the Credit
Agreement as set forth herein.
A G R E E M E N T S:
NOW, THEREFORE, in consideration of the premises and other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Borrower, the Banks and the Agent agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. Unless otherwise specified herein,
terms defined in the Credit Agreement have the same meaning when used herein.
ARTICLE II
AMENDMENTS
Section 2.1 AMENDMENT TO DEFINITION OF OBLIGATIONS. Effective as of the
date hereof, the definition of "Obligations" appearing in SECTION 1.1 of the
Credit Agreement is hereby amended in its entirety to read as follows:
<PAGE>
"OBLIGATIONS" means all obligations, indebtedness, and liabilities
of the Borrower to the Agent, the Affiliates of the Agent and the Banks,
or any of them, whether arising pursuant to any of the Loan Documents or
in connection with any other transaction or agreement, now existing or
hereafter arising, whether direct, indirect, related, unrelated, fixed,
contingent, liquidated, unliquidated, joint, several, or joint and several
(including, without limitation, all of the Borrower's contingent
reimbursement obligations in respect of Letters of Credit, Guarantees and
Hedging Obligations), and all interest accruing thereon and all attorneys'
fees and other expenses incurred in the enforcement or collection thereof.
Section 2.2 AMENDMENT TO SCHEDULE 8.14. Effective as of the date hereof,
Schedule 8.14 of the Credit Agreement is hereby amended in its entirety to read
as set forth in Exhibit 1 attached to this Amendment.
ARTICLE III
CONDITIONS PRECEDENT
Section 3.1 CONDITIONS. The effectiveness of this Amendment is
subject to the satisfaction of the following conditions precedent:
(a) The Agent shall have received all of the following, in form and
substance satisfactory to the Agent:
(1) RESOLUTIONS. Resolutions of the Board of Directors of the
Borrower certified by its secretary or an assistant secretary which
authorize the execution, delivery and performance by the Borrower of
this Amendment and any other Loan Documents executed and/or
delivered in connection herewith;
(2) INCUMBENCY CERTIFICATE. A certificate of incumbency
certified by the secretary or an assistant secretary of the Borrower
certifying the names of the officers of the Borrower who are
authorized to sign this Amendment and any other Loan Documents
executed and/or delivered in connection herewith, together with
specimen signatures of such officers;
(3) GOVERNMENTAL CERTIFICATES. Certificates of the appropriate
governmental officials of the jurisdiction of incorporation of the
Borrower as to the existence and good standing of the Borrower, each
dated a current date;
(4) OPINION OF COUNSEL. A favorable opinion of Fulbright &
Jaworski, L.L.P., legal counsel to the Borrower, as to such matters
as the Agent may reasonably request; and
(5) ADDITIONAL INFORMATION. Such additional documents,
instruments and information as the Agent or its legal counsel,
Winstead Sechrest & Minick P.C., may reasonably request.
(b) The representations and warranties contained herein and in all
other Loan Documents, as amended hereby, shall be true and correct as of
the date hereof as if made
<PAGE>
on the date hereof, except for such representations and warranties as are
limited by their express terms to a specific date.
(c) No Default shall have occurred and be continuing.
(d) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents,
instruments, and other legal matters incident thereto shall be reasonably
satisfactory to the Agent and its legal counsel, Winstead Sechrest &
Minick P.C.
ARTICLE IV
CONSENTS
Section 4.1 CONSENT TO MEXICAN RESTRUCTURING. The Borrower has
restructured its Mexican operations as follows: (i) the Borrower formed a new
Subsidiary, Drypers Holding de Mexico SRL de CV ("DRYPERS HOLDING"), which
acquired a 99% permanent capital interest and a 100% variable capital interest
in Drypers Mexico SA de CV ("DRYPERS MEXICO"), (ii) Drypers Limited retained a
99% permanent capital interest in Drypers Mexico, and a .91% variable capital
interest therein, (iii) Drypers Holding formed two new Subsidiaries,
Commercializadora y Distribuidora Drypers de Mexico SRL de CV
("COMMERCIALIZADORA") and Drypers Servicios de Mexico SRL de CV ("Servicios"),
and obtained a 99% permanent capital interest therein, as well as a 99.089%
variable capital interest in Drypers Mexico, and (iv) Drypers Limited acquired a
minority interest of 1% in Drypers Holding and (v) the Borrower acquired or
retained 1% minority interests in Commercializadora, Servicios and Drypers
Mexico (such transactions described in clauses (i) through (v) above being
hereinafter referred to as the "MEXICAN Restructuring"). Pursuant to Sections
10.3, 10.5, 10.6, 10.7 and 10.14 of the Credit Agreement, the Borrower has
requested that the Agent consent to the Mexican Restructuring. Subject to the
conditions described in SECTION 4.2 below, the Agent hereby consents to the
Mexican Restructuring and agrees that such transactions shall not constitute a
breach or violation of the Credit Agreement. The consent granted herein is
limited to the Mexican Restructuring, and nothing contained herein shall be
construed as a consent by the Agent or the Banks with respect to any other
transaction.
Section 4.2 CONDITIONS TO CONSENT. The consent to the Mexican
Restructuring granted under SECTION 4.1 above is subject to compliance with the
following conditions:
(a) The original share certificates (and accompanying stock powers
duly executed in blank) of Drypers Holding, Commercializadora and
Servicios, issued to the Borrower in connection with the Mexican
Restructuring, but in any event not exceeding 65% of the issued and
outstanding capital stock of Drypers Holding, shall be promptly delivered
to the Agent pursuant to the Borrower Pledge Agreement;
(b) Drypers Holding shall promptly execute and deliver to the Agent
a Negative Pledge Agreement in the form of Exhibit "G" to the Credit
Agreement; and
(c) Drypers Limited shall deliver a new Schedule I to the Negative
Pledge Agreement of Drypers Limited which reflects its ownership of
one-percent (1%) of Drypers Holding.
<PAGE>
ARTICLE V
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
Section 5.1 RATIFICATIONS. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Credit Agreement and, except as expressly modified and superseded
by this Amendment, the terms and provisions of the Credit Agreement and the
other Loan Documents are ratified and confirmed and shall continue in full force
and effect. The Borrower, the Agent, and the Banks agree that the Credit
Agreement as amended hereby and the other Loan Documents shall continue to be
legal, valid, binding and enforceable in accordance with their respective terms.
Section 5.2 REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants to the Agent and the Banks that (a) the execution, delivery and
performance of this Amendment and any and all other Loan Documents executed
and/or delivered in connection herewith have been authorized by all requisite
corporate action on the part of Borrower and will not violate the articles of
incorporation or bylaws of Borrower, (b) the representations and warranties
contained in the Credit Agreement, as amended hereby, and in each other Loan
Document are true and correct on and as of the date hereof as though made on and
as of the date hereof, except for such representations and warranties as are
limited by their express terms to a specific date; (c) no Default has occurred
and is continuing,(d) Borrower is in full compliance with all covenants and
agreements contained in the Credit Agreement as amended hereby and the other
Loan Documents to which it is a party; (e) as a result of the amendment to the
definition of "Obligations" set forth in Section 2.1 hereof, the Collateral
secures, among other things, all obligations, indebtedness and liabilities of
the Borrower to any Affiliate of the Agent; and (f) none of the transactions
effectuated by the Mexican Restructuring constitutes a breach or violation of,
or a default under, the Indenture.
ARTICLE VI
MISCELLANEOUS
Section 6.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made in this Amendment or any Loan Documents
furnished in connection with this Amendment shall survive the execution and
delivery of this Amendment and the other Loan Documents, and no investigation by
the Agent or any closing shall affect the representations and warranties or the
right of the Agent and the Banks to rely upon them.
Section 6.2 REFERENCES. Each of the Loan Documents, including the Credit
Agreement and any and all other agreements, documents, or instruments now or
hereafter executed and delivered pursuant to the terms hereof or pursuant to the
terms of the Credit Agreement as amended hereby, are hereby amended so that any
reference in such Loan Documents to the Credit Agreement shall mean a reference
to the Credit Agreement as amended hereby.
Section 6.3 EXPENSES OF THE AGENT. As provided in the Credit Agreement,
the Borrower agrees to pay on demand all reasonable costs and expenses incurred
by the Agent in connection with the preparation, negotiation, and execution of
this Amendment and the other Loan Documents executed pursuant hereto and any and
all amendments, modifications, and supplements thereto, including without
limitation the costs and reasonable fees of the Agent's
<PAGE>
legal counsel, and all costs and expenses incurred by the Agent and the Banks in
connection with the enforcement or preservation of any rights under the Credit
Agreement, as amended hereby, or any other Loan Document, including without
limitation the costs and reasonable fees of legal counsel for the Agent and, at
any time following and during the continuance of an Event of Default, of legal
counsel to each Bank.
Section 6.4 SEVERABILITY. Any provision of this Amendment held by a court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 6.5 APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS
EXECUTED PURSUANT HERETO SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF
LAWS.
Section 6.6 COUNTERPARTS. This Amendment may be executed in a number of
identical counterparts, each of which shall be deemed an original. In making
proof of this instrument, it shall not be necessary for any party to account for
all counterparts, and it shall be sufficient for any party to produce but one
such counterpart bearing the signatures of all parties hereto.
Section 6.7 HEADINGS. The headings, captions, and arrangements
used in this Amendment are for convenience only and shall not affect the
interpretation of this Amendment.
Section 6.8 PARTIES BOUND. This Amendment is binding upon and shall inure
to the benefit of the Agent, the Banks and the Borrower and their respective
successors and assigns, except the Borrower may not assign or transfer any of
its rights or obligations hereunder without the prior written consent of the
Agent and all of the Banks.
Section 6.9 ENTIRE AGREEMENT. THIS AMENDMENT, THE CREDIT AGREEMENT, THE
LOAN DOCUMENTS, AND ALL OTHER INSTRUMENTS, DOCUMENTS AND AGREEMENTS EXECUTED AND
DELIVERED IN CONNECTION WITH THIS AMENDMENT REPRESENT THE FINAL AGREEMENT AMONG
THE PARTIES HERETO, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES HERETO.
(Balance of page intentionally left blank.)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment
to Credit Agreement to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
BORROWER:
DRYPERS CORPORATION
By: /s/ JONATHAN P. FOSTER
Name: Jonathan P. Foster
Title:CPO & Executive Vice President
AGENT AND
BANKS:
BANKBOSTON, N.A., as Agent and as a Bank
By: /s/ RANDALL A. PARRISH
Name: Randall A. Parrish
Title: Vice President
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") is entered
into as of March 31, 1999, among DRYPERS CORPORATION, a Delaware corporation
(the "BORROWER"), the bank or banks listed on the signature pages hereof
(collectively, the "BANKS"), and BANKBOSTON, N.A., a national banking
association, individually and as agent for itself and the other Banks and as
issuer of Letters of Credit (in its capacity as agent, the "AGENT").
R E C I T A L S:
A. The Agent, the Borrower and the Banks have entered into that certain
Credit Agreement dated as of April 1, 1998 as amended by a certain First
Amendment to Credit Agreement dated September 9, 1998 and by a certain Second
Amendment to Credit Agreement dated December 30, 1998 (such Credit Agreement, as
the same has previously been amended and as the same may now or hereafter be
amended, modified, or supplemented from time to time, being the "CREDIT
AGREEMENT"), pursuant to which the Banks established a revolving credit facility
for the Borrower in an amount not to exceed $50,000,000.
B. The Borrower has requested the Agent and the Banks to amend certain
definitions and financial covenants contained in the Credit Agreement and to
consent to certain transactions proposed by the Borrower, which the Agent and
the Banks are willing to do subject to the terms and conditions hereof.
C. The Borrower, the Agent and the Banks desire to amend the Credit
Agreement as set forth herein.
A G R E E M E N T S:
NOW, THEREFORE, in consideration of the premises and other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Borrower, the Banks and the Agent agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 DEFINITIONS. Unless otherwise specified herein,
terms defined in the Credit Agreement have the same meaning when used herein.
ARTICLE II
AMENDMENTS
Section 2.1 AMENDMENT TO DEFINITION OF APPLICABLE MARGIN. Effective as of
the date hereof, the definition of "Applicable Margin" appearing in SECTION 1.1
of the Credit Agreement is hereby amended in its entirety to read as follows:
"APPLICABLE MARGIN" means, for any day, (a) with respect to
Eurodollar Advances, the margin of interest over the Eurodollar Rate that
is applicable when any Applicable Rate based on the Eurodollar Rate is
determined under this Agreement, and (b) with respect to Alternate Base
Rate Advances, the margin of interest over the Alternate Base Rate that is
applicable when any Applicable Rate based on the Alternate Base Rate is
determined under this Agreement. The Applicable Margin is subject to
adjustment (upwards or downwards, as appropriate) based on the ratio of
Consolidated Funded Debt to Adjusted Consolidated EBITDA. Effective as of
each Adjustment Date, the Applicable Margin shall be adjusted to reflect
the Applicable Margin prescribed below for the ratio of Consolidated
Funded Debt to Adjusted Consolidated EBITDA as demonstrated by the most
recently delivered Compliance Certificate:
RATIO OF
CONSOLIDATED FUNDED APPLICABLE
DEBT MARGIN
TO APPLICABLE MARGIN FOR ALTERNATE
ADJUSTED CONSOLIDATED FOR EURODOLLAR BASE
EBITDA ADVANCES RATE ADVANCES
------ -------- -------------
Less than or equal to
3.00 to 1.00 1.50% 0.00%
Greater than 3.00 to
1.00, but less than or
equal to 3.50 to 1.00 1.75% 0.00%
Greater than 3.50 to
1.00, but less than or
equal to 4.00 to 1.00 2.00% 0.25%
Greater than 4.00 to
1.00, but less than or
equal to 4.50 to 1.00 2.25% 0.50%
Greater than 4.50 to
1.00, but less than or
equal to 5.00 to 1.00 2.50% 0.75%
Greater than 5.00 to
1.00, but less than or
equal to 5.50 to 1.00 2.75% 1.00%
Greater than 5.50 to
1.00 3.25% 1.50%
The Applicable Margin shall be 3.25% for Eurodollar Advances and 1.50% for
Alternate Base Rate Advances from April 1, 1999 until the first Adjustment
Date after December 31, 1999 that the Compliance Certificate demonstrates
a change in the ratio of Consolidated Funded Debt to Adjusted Consolidated
EBITDA to a level for which another Applicable Margin shall apply, or
until another Applicable Margin is otherwise applicable. After each
adjustment of the Applicable Margin in accordance herewith due to a change
in the ratio of Consolidated Funded Debt to Adjusted Consolidated EBITDA
as demonstrated by the Compliance Certificate, the new Applicable Margin
shall apply to all Advances made or outstanding thereafter until the next
Adjustment Date as of which the Compliance Certificate demonstrates a
change in the ratio of Consolidated Funded Debt to Adjusted Consolidated
EBITDA to a level for which another Applicable Margin shall apply. Upon
the request of the Agent, the Borrower must demonstrate to the reasonable
satisfaction of the Required Banks the required applicable ratio in order
to obtain an adjustment to a lower Applicable Margin. If the Borrower
fails to furnish to the Agent any Compliance Certificate (with
accompanying financial statements) by the date required by this Agreement,
then the maximum Applicable Margin shall apply at all times after such
date for all Advances made or outstanding after such date until the
Borrower furnishes the required Compliance Certificate (with accompanying
financial statements) to the Agent.
Section 2.2 ADDITIONAL DEFINITION OF ARGENTINE INSURANCE CLAIMS. Effective
as of the date hereof, SECTION 1.1 of the Credit Agreement is hereby amended to
add thereto a definition of "Argentine Insurance Claims" to read as follows:
"ARGENTINE INSURANCE CLAIMS" means the claims of Borrower or any
Subsidiary under BRB Seguros S.A. Policy No. 61869 and Chubb Group of
Insurance Companies Policy No. 3533-10-03CCG relating to the August 8,
1998 fire at the manufacturing facility of Borrower's Subsidiary in
Argentina.
Section 2.3 AMENDMENT TO DEFINITION OF CONSOLIDATED ADJUSTED OPERATING
CASH FLOW. Effective as of the date hereof, the definition of "Consolidated
Adjusted Operating Cash Flow" appearing in SECTION 1.1 of the Credit Agreement
is hereby amended in its entirety to read as follows:
"CONSOLIDATED ADJUSTED OPERATING CASH FLOW" means, for any period
the sum of, without duplication, (a) Consolidated EBITDA, minus (b) cash
payments of state and federal income and franchise taxes, minus (c) (i)
all Capital Expenditures not in excess of $2,000,000 for each fiscal
quarter during the fiscal year ending December 31, 1998, and (ii) all
Capital Expenditures for each fiscal quarter during each fiscal year
ending subsequent to December 31, 1998, plus (d) cash proceeds received by
the Borrower or any of its Subsidiaries arising from the Mexican
Sale/Leaseback Transaction.
Section 2.4 AMENDMENT TO DEFINITION OF CONSOLIDATED EBITDA. Effective as
of the date hereof, the definition of "Consolidated EBITDA" appearing in SECTION
1.1 of the Credit Agreement is hereby amended in its entirety to read as
follows:
"CONSOLIDATED EBITDA" means, for any period the sum of, without
duplication, Consolidated Net Income for such period, plus (or, in the
case of clause (e) below, plus or minus) the following items to the extent
included in computing Consolidated Net Income for such period: (a) the
amount that, in conformity with GAAP, would be set forth opposite the
caption "interest expense" (or any like caption) on a consolidated
statement of earnings of the Borrower and its Restricted Subsidiaries for
such period, including, without limitation, (i) amortization of debt
discount, (ii) the net cost of interest rate contracts (including
amortization of discounts), (iii) the interest portion of any deferred
payment obligation, (iv) amortization of debt issuance costs and (v) the
interest component of Capital Lease Obligations, plus (b) the provision
for federal, state, local and foreign income or franchise taxes of the
Borrower and its Restricted Subsidiaries for such period, plus (c) the
aggregate depreciation and amortization expense of the Borrower and its
Restricted Subsidiaries for such period, plus (d) $6,000,000 for the
fiscal quarter ending March 31, 1998 and $2,000,000 for the fiscal quarter
ending June 30, 1998, plus (e) any other non-cash charges for such period,
and minus non-cash credits for such period (including, without limitation,
for the fiscal quarter ending March 31, 1999 and thereafter, any gains on
the settlement of the Argentine Insurance Claims recorded as "Other
Income" on the Borrower's consolidated income statement), other than
non-cash charges or credits resulting from changes in reserves for
accounts receivable and inventory, prepaid assets or accrued liabilities
in the ordinary course of business, plus (f) income from Unrestricted
Subsidiaries accounted for under the equity method of accounting, provided
that such income is actually paid in cash to the Borrower or a Restricted
Subsidiary during such period, plus (g) the amount of the charge actually
recorded for the fiscal quarter ending December 31, 1998 as a result of
the discontinuance of laundry detergent operations and the writeoff of
Borrower's Investment in LSFNE Company and NewLund Laboratories, Inc.,
such amount not to exceed $6,500,000, plus (h) for the fiscal quarter
ending March 31, 1999 and thereafter, cash proceeds received by the
Borrower or any of its Subsidiaries from the settlement of the Argentine
Insurance Claims.
Section 2.5 DELETION OF DEFINITION OF MAINTENANCE CAPITAL EXPENDITURES.
Effective as of the date hereof, the definition of "Maintenance Capital
Expenditures" appearing in SECTION 1.1 of the Credit Agreement is hereby deleted
in its entirety.
Section 2.6 ADDITIONAL DEFINITION OF MEXICAN SALE/LEASEBACK TRANSACTION.
Effective as of the date hereof, SECTION 1.1 of the Credit Agreement is hereby
amended by adding thereto a definition of "Mexican Sale/Leaseback Transaction"
to read as follows:
"MEXICAN SALE/LEASEBACK TRANSACTION" means the sale by Drypers
Mexico SA de CV of its industrial facility located in Zapopan, Mexico to
G. Accion SA de CV and the leaseback of such facility for the
consideration and upon the terms and conditions reflected in that certain
Letter of Intent dated February 9, 1999 between Drypers Mexico, SA de CV
and G. Accion SA de CV.
Section 2.7 AMENDMENT TO SECTION 2.1. Effective as of the date hereof,
SECTION 2.1 of the Credit Agreement is hereby amended by adding the following
sentence at the end thereof:
Notwithstanding the foregoing, for the period commencing on April 1, 1999
and continuing through and including December 31, 1999, Borrower's
borrowings hereunder consist solely of Alternate Base Rate Advances and,
to the extent that any Eurodollar Advances were outstanding as of March
31, 1999, such Eurodollar Advances shall be deemed to have been Converted
into Alternate Base Rate Advances as of April 1, 1999 without Borrower
being liable for the payment of any compensation pursuant to SECTION 5.5
hereof.
Section 2.8 AMENDMENT TO SECTION 9.1. Effective as of the date hereof,
SECTION 9.1 of the Credit Agreement is hereby amended by adding the following
subsection (m) thereto which shall read as follows:
(m) CASH FORECAST REPORT. On or before Monday of each week
commencing April 5, 1999, a cash forecast report, in form and substance
satisfactory to the Agent, setting forth the anticipated sources and uses
of cash of the Borrower and its Subsidiaries for a period of not less than
eight weeks following the date of such report.
Section 2.9 AMENDMENT TO SECTION 9.6. Effective as of the date hereof,
SECTION 9.6 of the Credit Agreement is hereby amended by adding the following
sentence at the end thereof:
Without limiting the generality of the foregoing, Borrower will fully
cooperate, and will cause its Restricted Subsidiaries to fully cooperate,
with both (i) the Agent's audit and asset management review staff in
conducting a field exam of the Collateral and Borrower's books and records
and (ii) Daley-Hodkin Corp. in conducting an appraisal of Borrower's
domestic assets, such inspections to be conducted in March and April of
1999, and, upon completion of such field exam and appraisal, Borrower will
negotiate in good faith with the Agent concerning a restructuring of the
revolving credit facility with a view to completing such restructuring on
or prior to June 10, 1999. In the event such restructuring shall not have
been completed by June 10, 1999, Borrower shall pay to the Agent on June
10, 1999 a supplemental commitment fee equal to $500,000 in consideration
of the Banks continuing to make Advances hereunder.
Section 2.10 ADDITION OF SECTIONS 9.11. Effective as of the date hereof,
ARTICLE IX of the Credit Agreement is hereby amended by adding SECTION 9.11
thereto which shall read as follows:
9.11. DEPOSIT ACCOUNTS. On or prior to April 30, 1999, the Borrower
or a Subsidiary will execute, and will cause each financial institution in
which it maintains domestic deposit accounts to execute, a deposit account
agreement (the "ACCOUNT AGREEMENT") in favor of the Agent with respect to
each of such domestic deposit accounts, such Account Agreement to be in
form and substance satisfactory to the Agent. Neither Borrower nor any
Subsidiary will open any new domestic deposit account unless such deposit
account is covered by a fully executed Account Agreement in favor of the
Agent.
Section 2.11 AMENDMENT TO SECTION 11.2. Effective as of the date hereof,
SECTION 11.2 of the Credit Agreement is hereby amended in its entirety to read
as follows:
11.2 CONSOLIDATED FIXED CHARGE COVERAGE RATIO. The Borrower will maintain
or cause to be maintained, as of the end of each fiscal quarter of the
Borrower (beginning with the quarter ended September 30, 1998), a
Consolidated Fixed Charge Coverage Ratio of not less than the ratios set
forth below for the most recent four (4) fiscal quarters then ended:
RATIO FISCAL QUARTER ENDING
- - ----- ---------------------
1.0 to 1.0 September 30, 1998
1.0 to 1.0 December 31, 1998
0.9 to 1.0 March 31, 1999
1.0 to 1.0 June 30, 1999
1.1 to 1.0 September 30, 1999
1.25 to 1.0 December 31, 1999
1.50 to 1.0 March 31, 2000
1.50 to 1.0 June 30, 2000
September 30, 2000 and
1.75 to 1.0 thereafter
<PAGE>
Section 2.12 AMENDMENT TO ARTICLE XI. Effective as of the date hereof,
Article XI of the Credit Agreement is hereby amended by adding thereto the
following SECTIONS 11.5 and 11.6 which shall read as follows:
11.5 MINIMUM AVAILABILITY. The Borrower will maintain Availability
(hereinafter defined) of not less than the following amounts at all times
during the respective periods set forth below:
AMOUNT PERIOD
------ ------
From March 26, 1999
through
$3,500,000 April 29, 1999
From April 30, 1999
through
$7,000,000 June 8, 1999
From June 9, 1999 through
$12,000,000 June 10, 1999
From June 11, 1999
$5,000,000 through August 30, 1999
From August 31, 1999
$7,000,000 through September 29, 1999
From September 30, 1999
$8,000,000 through November 29, 1999
From November 30, 1999
$10,000,000 through December 30, 1999
From December 31, 1999
$12,000,000 and thereafter
For purposes hereof, "Availability" means, as of any date, the amount
calculated as the net availability for Advances pursuant to the most
recent Advance Request Form (after giving effect to any Advance requested
thereunder), or Borrowing Base Report submitted by the Borrower to the
Agent.
Section 2.13 AMENDMENT TO SCHEDULE 8.14. Effective as of the date hereof,
Schedule 8.14 of the Credit Agreement is hereby amended in its entirety to read
as set forth in Exhibit 1 attached to this Amendment.
ARTICLE III
CONDITIONS PRECEDENT
Section 3.1 CONDITIONS. The effectiveness of this Amendment is
subject to the satisfaction of the following conditions precedent:
(a) The Agent shall have received all of the following, in form and
substance satisfactory to the Agent:
(1) RESOLUTIONS. Resolutions of the Board of Directors of the
Borrower certified by its secretary or an assistant secretary which
authorize the execution, delivery and performance by the Borrower of
this Amendment and any other Loan Documents executed and/or
delivered in connection herewith;
(2) INCUMBENCY CERTIFICATE. A certificate of incumbency
certified by the secretary or an assistant secretary of the Borrower
certifying the names of the officers of the Borrower who are
authorized to sign this Amendment and any other Loan Documents
executed and/or delivered in connection herewith, together with
specimen signatures of such officers;
(3) GOVERNMENTAL CERTIFICATES. Certificates of the appropriate
governmental officials of the jurisdiction of incorporation of the
Borrower as to the existence and good standing of the Borrower, each
dated a current date;
(4) OPINION OF COUNSEL. A favorable opinion of Fulbright &
Jaworski, L.L.P., legal counsel to the Borrower, as to such matters
as the Agent may reasonably request; and
(5) INTERCOMPANY LOAN DOCUMENTATION. To the extent not
previously received and approved, documentation (including without
limitation promissory notes, security agreements and financing
statements) satisfactory to Agent evidencing advances made or to be
made by the Borrower (excluding transfers of inventory and
allocations of corporate overhead and expenses made in the ordinary
course of business) to the Foreign Subsidiaries or the Foreign
Affiliates and obligations of the Foreign Subsidiaries and the
Foreign Affiliates to repay such advances;
(6) DEPOSIT ACCOUNTS. A detailed listing of all domestic
deposit accounts maintained by the Borrower or any of its
Subsidiaries;
(7) ADDITIONAL INFORMATION. Such additional documents,
instruments and information as the Agent or its legal counsel,
Winstead Sechrest & Minick P.C., may reasonably request.
(b) The representations and warranties contained herein and in all
other Loan Documents, as amended hereby, shall be true and correct as of
the date hereof as if made on the date hereof, except for such
representations and warranties as are limited by their express terms to a
specific date.
(c) No Default shall have occurred and be continuing.
(d) The Agent shall have received an amendment fee in the amount
of $25,000.
(e) All corporate proceedings taken in connection with the
transactions contemplated by this Amendment and all documents,
instruments, and other legal matters incident thereto shall be reasonably
satisfactory to the Agent and its legal counsel, Winstead Sechrest &
Minick P.C.
ARTICLE IV
CONSENTS
Section 4.1 CONSENT TO MEXICAN SALE/LEASEBACK TRANSACTION. Pursuant to
SECTIONS 10.1, 10.5 and 10.7 of the Credit Agreement, the Borrower has requested
that the Agent consent to the Mexican Sale/Leaseback Transaction. Subject to the
conditions described in SECTION 4.2 below, the Agent hereby consents to the
Mexican Sale/Leaseback Transaction and agrees that such transactions shall not
constitute a breach or violation of the Credit Agreement. The consent granted
herein is limited to the Mexican Sale/Leaseback Transaction, and nothing
contained herein shall be construed as a consent by the Agent or the Banks with
respect to any other transaction.
Section 4.2 CONDITIONS TO CONSENT. The consent to the Mexican
Sale/Leaseback Transaction granted under SECTION 4.1 above is subject to
compliance with the following conditions:
(a) The cash consideration paid by G. Accion SA de CV to Drypers
Mexico SA de CV in connection with the Mexican Sale/Leaseback Transaction
shall not be less than $5,000,000;
(b) The Promise to Purchase Agreement and the Lease, each between G.
Accion SA de CV and Drypers Mexico SA de CV, shall be in form and
substance satisfactory to the Agent; and
(c) The Mexican Sale/Leaseback Transaction shall be consummated no
later than May 31, 1999.
Section 4.3 CONSENT TO COLOMBIAN JOINT VENTURE. Drypers Limited proposes
to structure and organize a joint venture with Conticauca S.A. to manufacture
and distribute diapers in the Andean region by means of the incorporation of a
Colombian corporation to be known as Drypers Andina & CIA, S.C.A. ("Drypers
Andina") pursuant to the terms of a Letter of Intent dated February 9, 1999 (the
"Colombian Joint Venture"). Pursuant to Sections 10.3, 10.5 and 10.7 of the
Credit Agreement, the Borrower has requested that the Agent consent to the
Colombian Joint Venture. Subject to the conditions described in SECTION 4.4
below, the Agent hereby consents to the Colombian Joint Venture and agrees that
such transactions shall not constitute a breach or violation of the Credit
Agreement. The consent granted herein is limited to the Colombian Joint Venture
as reflected in such Letter of Intent dated February 9, 1999, and nothing
contained herein shall be construed as a consent by the Agent or the Banks with
respect to any other transaction.
<PAGE>
Section 4.4 CONDITIONS TO CONSENT TO COLOMBIAN JOINT VENTURE. The consent
to the Colombian Joint Venture granted under Section 4.3 above is subject to
compliance with the following conditions:
(a) Drypers Andina shall be a Restricted Subsidiary, and Drypers
Limited shall own not less than a 75% voting interest therein;
(b) The cash consideration equal to $1,750,000 and the non-cash
consideration equal to $6,200,000 which are paid or contributed by the
Borrower and Drypers Limited to Drypers Andina in connection with the
Colombian Joint Venture shall be included in all calculations for purposes
of SECTION 10.3(A)(IV) and (V) of the Credit Agreement; and
(c) The definitive agreements among Conticauca SA, Drypers Limited
and Drypers Andina with respect to the Colombian Joint Venture shall be in
form substance satisfactory to the Agent and, upon the Agent's approval of
such definitive agreements, the Agent will consent to the release of its
security interest in the PCMC diaper line located in Marion, Ohio;
provided that the value of such PCMC diaper line equal to $3,500,000 shall
be included in all calculations for purposes of SECTION 10.7(F)(III) of
the Credit Agreement. Section 4.5 CONSENTS RELATING TO MALAYSIAN LINES OF
CREDIT. Drypers
Malaysia Sdn Bhd ("Drypers Malaysia") proposes to obtain lines of credit in an
aggregate amount not to exceed $5,000,000 (the "Malaysian Lines of Credit"). As
a condition to obtaining the Malaysian Lines of Credit, the lenders have
required that Drypers Malaysia agree not to pledge or encumber its assets.
Pursuant to SECTION 10.13 of the Credit Agreement, the Borrower has requested
that the Agent consent to the negative pledge relating to the assets of Drypers
Malaysia. The Agent hereby consents to the negative pledge relating to the
assets of Drypers Malaysia and agrees that such negative pledge shall not
constitute a breach or violation of SECTION 10.13 of the Credit Agreement. The
Agent hereby further consents, in connection with the Malaysian Lines of Credit,
to the Borrower's conversion of up to $5,000,000 of Drypers Malaysia's debt to
the Borrower into equity. The consents granted herein are limited to the
negative pledge and conversion of debt to equity relating to the Malaysian Lines
of Credit, and nothing contained herein shall be construed as a consent by the
Agent or the Banks with respect to any other transaction.
ARTICLE V
RATIFICATIONS, REPRESENTATIONS AND WARRANTIES
Section 5.1 RATIFICATIONS. The terms and provisions set forth in this
Amendment shall modify and supersede all inconsistent terms and provisions set
forth in the Credit Agreement and, except as expressly modified and superseded
by this Amendment, the terms and provisions of the Credit Agreement and the
other Loan Documents are ratified and confirmed and shall continue in full force
and effect. The Borrower, the Agent, and the Banks agree that the Credit
Agreement as amended hereby and the other Loan Documents shall continue to be
legal, valid, binding and enforceable in accordance with their respective terms.
Section 5.2 REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants to the Agent and the Banks that (a) the execution, delivery and
performance of this Amendment and any and all other Loan Documents executed
and/or delivered in connection herewith have been authorized by all requisite
corporate action on the part of Borrower and will not violate the articles of
incorporation or bylaws of Borrower, (b) the representations and warranties
contained in the Credit Agreement, as amended hereby, and in each other Loan
Document are true and correct on and as of the date hereof as though made on and
as of the date hereof, except for such representations and warranties as are
limited by their express terms to a specific date; (c) no Default has occurred
and is continuing,(d) Borrower is in full compliance with all covenants and
agreements contained in the Credit Agreement as amended hereby and the other
Loan Documents to which it is a party; and (e) none of the transactions
contemplated by the Mexican Sale/Leaseback Transaction, the Colombian Joint
Venture and the Malaysian Lines of Credit shall constitute a breach or violation
of, or a default under, the Indenture.
ARTICLE VI
MISCELLANEOUS
Section 6.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made in this Amendment or any Loan Documents
furnished in connection with this Amendment shall survive the execution and
delivery of this Amendment and the other Loan Documents, and no investigation by
the Agent or any closing shall affect the representations and warranties or the
right of the Agent and the Banks to rely upon them.
Section 6.2 REFERENCES. Each of the Loan Documents, including the Credit
Agreement and any and all other agreements, documents, or instruments now or
hereafter executed and delivered pursuant to the terms hereof or pursuant to the
terms of the Credit Agreement as amended hereby, are hereby amended so that any
reference in such Loan Documents to the Credit Agreement shall mean a reference
to the Credit Agreement as amended hereby.
Section 6.3 EXPENSES OF THE AGENT. As provided in the Credit Agreement,
the Borrower agrees to pay on demand all reasonable costs and expenses incurred
by the Agent in connection with the preparation, negotiation, and execution of
this Amendment and the other Loan Documents executed pursuant hereto and any and
all amendments, modifications, and supplements thereto, including without
limitation the costs and reasonable fees of the Agent's legal counsel, and all
costs and expenses incurred by the Agent and the Banks in connection with the
enforcement or preservation of any rights under the Credit Agreement, as amended
hereby, or any other Loan Document, including without limitation the costs and
reasonable fees of legal counsel for the Agent and, at any time following and
during the continuance of an Event of Default, of legal counsel to each Bank.
Without limiting the generality of the foregoing, the Borrower agrees to pay all
costs incurred by the Agent in connection with the appraisal of Borrower's
domestic assets by Daley-Hodkin Corp. and the Agent's field exam, both of which
are currently in progress.
Section 6.4 GERMAN SUBSIDIARY. Within ten (10) days after the date hereof,
the Borrower shall deliver to the Agent a Negative Pledge Agreement executed by
Drypers (Germany) GmbH.
Section 6.5 SEVERABILITY. Any provision of this Amendment held by a court
of competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
Section 6.6 APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN
DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
Section 6.7 COUNTERPARTS. This Amendment may be executed in a number of
identical counterparts, each of which shall be deemed an original. In making
proof of this instrument, it shall not be necessary for any party to account for
all counterparts, and it shall be sufficient for any party to produce but one
such counterpart bearing the signatures of all parties hereto.
Section 6.8 HEADINGS. The headings, captions, and arrangements
used in this Amendment are for convenience only and shall not affect the
interpretation of this Amendment.
Section 6.9 PARTIES BOUND. This Amendment is binding upon and shall inure
to the benefit of the Agent, the Banks and the Borrower and their respective
successors and assigns, except the Borrower may not assign or transfer any of
its rights or obligations hereunder without the prior written consent of the
Agent and all of the Banks.
Section 6.10 ENTIRE AGREEMENT. THIS AMENDMENT, THE CREDIT AGREEMENT, THE
LOAN DOCUMENTS, AND ALL OTHER INSTRUMENTS, DOCUMENTS AND AGREEMENTS EXECUTED AND
DELIVERED IN CONNECTION WITH THIS AMENDMENT REPRESENT THE FINAL AGREEMENT AMONG
THE PARTIES HERETO, AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS AMONG THE PARTIES HERETO.
(Balance of page intentionally left blank.)
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to
Credit Agreement to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
BORROWER:
DRYPERS CORPORATION
By: /s/ JONATHAN P. FOSTER
Name:Jonathan P. Foster
Title: CFO & EXEC V.P.
AGENT AND BANKS:
BANKBOSTON, N.A., as Agent and as a Bank
By:/S/ RANDALL A. PARRISH
Name: Randall A. Parrish
Title: Vice President
SUBSIDIARIES OF DRYPERS CORPORATION
Ultracare Products International, Inc.
Drypers Limited
Seler S.A.
New Dry S.A.
Drypers Mexico S.A. de C.V.
Drypers Holding de Mexico SRL de CV
Comercializadora y Distribuidora Drypers de Mexico SRL de CV
Drypers Servicios de Mexico SRL de CV
Hygienic Products de Mexico International Limited
Drypers do Brasil Ind. e. Com. Ltda.
Igienica Difusion Inc. Ltd.
Drypers Caribbean Holdings Limited
LSFNE Company
Drypers Asia Pte. Ltd. (Singapore)
Drypers Asia (M) SDN BHD (Malaysia)
Drypers Malaysia SDN BHD (formerly PrimoSoft)
Drypers Marketing SDN BHD
Drypers (Germany) GmbH
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statements, File Nos. 33-84410, 333-16085 and 333-58553.
ARTHUR ANDERSEN LLP
Houston, Texas
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10K FOR YEAR ENDED 12/31/98 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,309
<SECURITIES> 0
<RECEIVABLES> 51,888
<ALLOWANCES> 2,633
<INVENTORY> 29,822
<CURRENT-ASSETS> 119,548
<PP&E> 106,497
<DEPRECIATION> 24,594
<TOTAL-ASSETS> 300,172
<CURRENT-LIABILITIES> 93,316
<BONDS> 145,997
0
0
<COMMON> 18
<OTHER-SE> 50,510
<TOTAL-LIABILITY-AND-EQUITY> 300,172
<SALES> 332,640
<TOTAL-REVENUES> 332,640
<CGS> 196,985
<TOTAL-COSTS> 320,719
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,476
<INCOME-PRETAX> (89)
<INCOME-TAX> 1,565
<INCOME-CONTINUING> (1,654)
<DISCONTINUED> (6,471)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,205)
<EPS-PRIMARY> (.51)
<EPS-DILUTED> (.51)
</TABLE>
