UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-23422
-------------------------------
DRYPERS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0344044
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
5300 MEMORIAL, SUITE 900
HOUSTON, TEXAS 77007
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING THE AREA CODE: (713) 869-8693
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
(CLASS) (OUTSTANDING AT AUGUST 6, 1999)
Common Stock, $.001 Par Value 17,731,888
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following information required by Rule 10-01 of Regulation S-X is
provided herein for Drypers Corporation and subsidiaries:
Consolidated Balance Sheets -- December 31, 1998 and June 30, 1999.
Consolidated Statements of Earnings for the Three Months and Six Months
Ended June 30, 1998 and 1999.
Consolidated Statement of Stockholders' Equity for the Six Months Ended
June 30, 1999.
Consolidated Statements of Cash Flows for the Six Months Ended June 30,
1998 and 1999.
Notes to Consolidated Financial Statements.
(i)
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, JUNE 30,
1998 1999
------------ ---------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 12,309 $ 7,473
Accounts receivable, net of allowance for
doubtful accounts of $2,635 and $3,119,
respectively .................................... 49,253 55,811
Inventories ....................................... 29,822 30,120
Prepaid expenses and other ........................ 28,164 33,612
------------ ---------
Total current assets .............................. 119,548 127,016
PROPERTY AND EQUIPMENT, net of depreciation and
amortization of $24,594 and $25,652, respectively .. 81,903 86,086
INTANGIBLE AND OTHER ASSETS, net of amortization
of $17,373 and $19,811, respectively ............... 98,721 105,303
------------ ---------
$ 300,172 $ 318,405
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings ............................. $ 38,385 $ 49,498
Current portion of long-term debt ................. 322 322
Accounts payable .................................. 33,407 42,336
Accrued liabilities ............................... 21,202 19,010
------------ ---------
Total current liabilities ....................... 93,316 111,166
LONG-TERM DEBT ....................................... 2,967 2,692
SENIOR TERM NOTES .................................... 145,997 145,943
OTHER LONG-TERM LIABILITIES .......................... 7,364 11,622
------------ ---------
249,644 271,423
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 30,000,000 shares
authorized, 17,706,660 and 17,731,888 shares
issued and outstanding, respectively ........... 18 18
Additional paid-in capital ....................... 75,244 75,302
Warrants ......................................... 180 180
Retained deficit ................................. (23,731) (27,305)
Foreign currency translation adjustments ......... (1,183) (1,213)
------------ ---------
Total stockholders' equity ..................... 50,528 46,982
------------ ---------
$ 300,172 $ 318,405
============ =========
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- ---------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES ........................... $ 80,302 $ 91,536 $ 158,894 $ 175,618
COST OF GOODS SOLD .................. 47,299 59,195 94,548 113,068
------------ ------------ ------------ ------------
Gross profit ................. 33,003 32,341 64,346 62,550
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES .......................... 26,890 31,147 59,367 59,884
------------ ------------ ------------ ------------
Operating income ............. 6,113 1,194 4,979 2,666
INTEREST EXPENSE, net .............. 4,453 5,318 7,903 9,627
OTHER INCOME ........................ 219 1,452 275 1,681
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (BENEFIT) ............... 1,879 (2,672) (2,649) (5,280)
INCOME TAX PROVISION (BENEFIT) ...... 406 (529) 1,547 (1,239)
------------ ------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING ....... 1,473 (2,143) (4,196) (4,041)
DISCONTINUED OPERATIONS:
Loss from operations of laundry
detergent business ............. 374 -- 374 --
Change in estimate of loss on
disposal of detergent business . -- -- -- (467)
------------ ------------ ------------ ------------
NET INCOME (LOSS) ................... 1,099 (2,143) (4,570) (3,574)
PREFERRED STOCK DIVIDEND ............ -- -- 80 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS ............... $ 1,099 $ (2,143) $ (4,650) $ (3,574)
============ ============ ============ ============
INCOME (LOSS) PER COMMON SHARE:
Basic earnings (loss) per share:
Continuing operations .......... $ 0.09 $ (0.12) $ (0.29) $ (0.23)
Discontinued operations ........ (0.02) -- (0.03) 0.03
------------ ------------ ------------ ------------
Net Income (loss) .............. $ 0.07 $ (0.12) $ (0.32) $ (0.20)
============ ============ ============ ============
Diluted earnings (loss) per share:
Continuing operations .......... $ 0.08 $ (0.12) $ (0.29) $ (0.23)
Discontinued operations ........ (0.02) -- (0.03) 0.03
------------ ------------ ------------ ------------
Net income (loss) .............. $ 0.06 $ (0.12) $ (0.32) $ (0.20)
============ ============ ============ ============
COMMON SHARES OUTSTANDING ........... 16,868,179 17,727,962 14,704,116 17,721,100
============ ============ ============ ============
COMMON AND POTENTIAL COMMON SHARES ..
OUTSTANDING ....................... 18,793,958 17,727,962 14,704,116 17,721,100
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON FOREIGN
SHARES ADDITIONAL CURRENCY
ISSUED AND COMMON PAID-IN RETAINED TRANSLATION
OUSTANDING STOCK CAPITAL WARRANTS DEFICIT ADJUSTMENTS
---------- -------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998 ............. 17,706,660 $ 18 $ 75,244 $ 180 $ (23,731) $ (1,183)
Effect of stock option and stock
purchase plans (unaudited) .......... 25,228 -- 58 -- -- --
Net loss (unaudited) ................... -- -- -- -- (3,574) --
Translation adjustments (unaudited) .... -- -- -- -- -- (30)
---------- -------- ---------- ---------- ----------- -------------
BALANCE, June 30, 1999 (unaudited) ..... 17,731,888 $ 18 $ 75,302 $ 180 $ (27,305) $ (1,213)
========== ======== ========== ========== =========== =============
</TABLE>
The accompanying notes are an integral part of this consolidated financial
statement.
3
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
---------------------
1998 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................................... $ (4,570) $ (3,574)
Adjustments to reconcile net loss to net cash used in operating activities
Discontinued operations ........................................................ -- (467)
Depreciation and amortization .................................................. 4,500 6,808
(Increase) decrease in --
Accounts receivable ........................................................ (11,532) (7,158)
Inventories ................................................................ (2,591) (298)
Prepaid expenses and other ................................................. (4,763) (8,954)
Insurance receivable resulting from Argentina fire ......................... -- 3,691
Increase (decrease)in--
Accounts payable ........................................................... 2,757 8,930
Accrued and other liabilities .............................................. 2,883 (1,758)
Change in other long-term liabilities .......................................... (776) 157
-------- --------
Net cash used in operating activities ...................................... (14,092) (2,623)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................................ (15,399) (11,300)
Proceeds from sale and leaseback of Mexico facility ............................... -- 4,295
Investment in Brazilian venture, net of cash acquired ............................ (3,946) --
Investment in other noncurrent assets ............................................. (1,127) (5,999)
-------- --------
Net cash used in investing activities .......................................... (20,472) (13,004)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under senior term notes ................................................ 31,087 --
Borrowings under revolvers ........................................................ 43,193 16,563
Payments on revolvers ............................................................. (35,100) (5,450)
Borrowings under (payments on) other debt ......................................... 2,923 (275)
Financing related costs ........................................................... (2,676) (106)
Proceeds from exercise of stock options and warrants ............................ 97 59
-------- --------
Net cash provided by financing ................................................. 39,524 10,791
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVILANTS ................................ 4,960 (4,836)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................................... 9,269 12,309
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................................... $ 14,229 $ 7,473
======== ========
SUPPLEMENTAL DATA:
Cash paid during the period for:
Interest ........................................................................ $ 7,133 $ 7,780
Income taxes .................................................................... $ 1,760 $ 496
Non-cash transactions:
Contribution of land and building by Colombian joint venture partner ........... -- $ 1,750
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements included herein have been prepared by
Drypers Corporation (the "Company"), without audit, in accordance with Rule
10-01 of Regulation S-X for interim financial statements required to be filed
with the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes the
disclosures are adequate to make the information presented not misleading. The
financial statements included herein should be reviewed in conjunction with the
Company's December 31, 1998 financial statements and related notes thereto.
Accounting measurements at interim dates inherently involve greater reliance on
estimates than at year end. The results of operations for the three months and
six months ended June 30, 1999 are not necessarily indicative of the results
that will be realized for the fiscal year ending December 31, 1999.
The consolidated financial information as of and for the three-month and
six-month periods ended June 30, 1998 and 1999, has not been audited by
independent accountants, but in the opinion of management of the Company, all
adjustments (consisting only of normal, recurring adjustments) necessary for a
fair presentation of the consolidated balance sheets, statements of earnings,
statement of stockholders' equity and statements of cash flows at the date and
for the interim periods indicated have been made.
In June 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 June 15, 2000. The Company 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.
5
<PAGE>
2. EARNINGS PER SHARE
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>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------- -----------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations, less
preferred stock dividend ................... $ 1,473 $ (2,143) $ (4,276) $ (4,041)
Discontinued operations ...................... (374) -- (374) 467
------------ ------------ ------------ ------------
Net income (loss) attributable to common
stockholders ............................... $ 1,099 $ (2,143) $ (4,650) $ (3,574)
============ ============ ============ ============
Weighted average number of common
outstanding ................................ 16,868,179 17,727,962 14,704,116 17,721,100
============ ============ ============ ============
Income (loss) from continuing operations ..... $ 0.09 $ (0.12) $ (0.29) $ (0.23)
Discontinued operations ...................... (0.02) -- (0.03) 0.03
------------ ------------ ------------ ------------
Net income (loss) ............................ $ 0.07 $ (0.12) $ (0.32) $ (0.20)
============ ============ ============ ============
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations, less
preferred stock dividend ................... $ 1,473 $ (2,143) $ (4,276) $ (4,041)
Discontinued operations ...................... (374) -- (374) 467
------------ ------------ ------------ ------------
Net income (loss) attributable to common
stockholders ............................... $ 1,099 $ (2,143) $ (4,650) $ (3,574)
============ ============ ============ ============
Weighted average number of common shares
oustanding ................................. 16,868,179 17,727,962 14,704,116 17,721,100
Dilutive effect - options and warrants ....... 1,925,779 -- -- --
------------ ------------ ------------ ------------
18,793,958 17,727,962 14,704,116 17,721,100
============ ============ ============ ============
Income (loss) from continuing operations ..... $ 0.08 $ (0.12) $ (0.29) $ (0.23)
Discontinued operations ...................... (0.02) -- (0.03) 0.03
------------ ------------ ------------ ------------
Net income (loss) ............................ $ 0.06 $ (0.12) $ (0.32) $ (0.20)
============ ============ ============ ============
</TABLE>
Common shares from the exercise or conversion of options, warrants and
convertible preferred stock excluded from the diluted earnings per share
calculation because their effect was antidilutive to the calculation totaled
264,704 and 3,562,626 for the three months ended June 30, 1998 and 1999,
respectively, and 133,083 and 3,562,626 for the six months ended June 30, 1998
and 1999, respectively.
6
<PAGE>
3. COMPREHENSIVE INCOME
Comprehensive income (loss), which encompasses net income and currency
translation adjustments, is as follows ( in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ -------------------
1998 1999 1998 1999
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) attributable to common stockholders $ 1,099 $(2,143) $(4,650) $(3,574)
Currency translation adjustments .................... 67 (8) 67 (30)
------- ------- ------- -------
Comprehensive income (loss) ......................... $ 1,166 $(2,151) $(4,583) $(3,604)
======= ======= ======= =======
</TABLE>
4. 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 most of these costs
will be covered by insurance.
As of June 30, 1999, the Company had received interim payments of
approximately $16,914,000 on its claim. No interim payments have been received
subsequent to June 30, 1999. 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 1998, the Company 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 and other cost estimates and the final
settlement reached with the Company's insurance carriers.
As of June 30, 1999, the Company has recorded in prepaid expenses and other
assets a receivable due from the insurance carriers of approximately $6,000,000
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 1998 through June 1999
to be recovered under the business interruption portion of the insurance claim.
For the six months ended June 30, 1999, the Company has recorded approximately
$3,500,000 in other income primarily related to proceeds under the Company's
property damage claim as well as lost profits and fixed expenses recoverable
under the Company's business interruption/extra expense policy. Management
believes that its estimates are reasonable, and will periodically review such
amounts for possible adjustment, if necessary, in the future. The Company is
continuing its efforts to complete the negotiation process with its insurance
carriers and has incurred to date approximately $26,200,000 related to the total
claim.
5. DISCONTINUED OPERATIONS
The initial results of the Company's laundry detergent operation in the last
two quarters of 1998, which generated an operating loss of $1,193,000 for the
entire 1998 fiscal year, 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, was 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 included $3,278,000 for the write-off of the initial
investment and receivable from the laundry detergent operation and $2,000,000
related to existing contractual obligations required to be satisfied in
disposing of the business. The Company has expended
7
<PAGE>
$348,000 in the first half of 1999 to meet its contractual obligations related
to disposing of the business. During the first quarter of 1999, the Company
recorded a $467,000 reduction in its estimated loss on disposition of the
business which is reflected as income from discontinued operations in the
accompanying unaudited consolidated statement of earnings for the six months
ended June 30, 1999.
6. INVENTORIES
Inventories consisted of the following (in thousands):
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
Raw Materials ....................... $ 12,702 $ 12,269
Finished Goods ...................... 17,120 17,851
------------ ------------
$ 29,822 $ 30,120
============ ============
Inventories are stated at the lower of cost (first-in, first-out) or market
value. Finished goods inventories include the cost of materials, labor and
overhead.
7. DEBT
SHORT-TERM BORROWINGS
As of December 31, 1998 and June 30, 1999, the Company had borrowings
outstanding of $38,385,000 and $49,498,000, respectively, under revolving credit
facilities.
On April 1, 1998, the Company entered into a new three-year $50.0 million
credit facility to replace the former revolving credit facility. As of June 30,
1999, the Company had borrowings outstanding of $44,830,000 under this 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, and requires the Company, among other things, to maintain a
minimum consolidated net worth, as defined, a minimum consolidated fixed charge
coverage ratio, as defined, a maximum consolidated funded debt to adjusted
consolidated EBITDA ratio, as defined, and a maximum level of capital
expenditures.
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, under the original terms of the
revolving credit facility, 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 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 revolving credit facility. The revolving
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 has
entered into discussions with the lender to restructure its facility into a
combination of a revolver, term loan and an over-advance facility by August 30,
1999. The Company was in compliance with the terms of the credit facility, as
amended, as of June 30, 1999. Additionally, as of August 10, 1999, the Company
has approximately $600,000 in borrowing availability under its Malaysian trade
financing facilities.
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.
8
<PAGE>
Short-term borrowings for the Company's international operations were
approximately $2,100,000 and $4,700,000 as of December 31, 1998 and June 30,
1999, respectively.
LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------
(UNAUDITED)
Note payable, due 2001, interest at 8.4%, partially
secured by land and buildings ...................... $ 1,707 $ 1,608
Various other notes payable .......................... 1,582 1,406
------------ ----------
3,289 3,014
Less: current maturities ........................ (322) (322)
------------ ----------
$ 2,967 $ 2,692
============ ===========
SENIOR TERM NOTES
Long-term debt under senior term notes consisted of the following (in
thousands):
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------
(UNAUDITED)
10 1/4% Senior Notes, interest due semiannually on June
15 and December 15, principal due June 15, 2007,
including unamortized bond premium of $997 and
$943, respectively ..................................$ 145,997 $145,943
============ ===========
On June 24, 1997, the Company closed a private issuance of $115,000,000 of 10
1/4% Senior Notes due 2007 ("10 1/4 Senior Notes"). On October 14, 1997, the
Company completed an exchange offer of registered notes for the 10 1/4% Senior
Notes. 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. On July 13, 1998, the Company
completed an exchange offer of registered notes for the New Senior Notes. 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 Company's revolving credit
facility and for general corporate purposes, including capital expenditures.
The indenture governing the 10 1/4% Senior Notes and the New Senior Notes
contains certain covenants that, among other things, limit the Company's ability
to incur additional indebtedness; pay dividends; purchase capital stock; make
certain other distributions, loans and investments; sell assets; enter into
transactions with related persons; and merge, consolidate or transfer
substantially all of its assets. The indenture also contains provisions for
acceleration of payment of principal upon a change of control, as defined.
8. COMMITMENTS AND CONTINGENCIES
In May 1999, the Company entered into an agreement for the sale and leaseback
of its manufacturing facility in Mexico and the underlying land for
consideration of approximately $5,200,000. The Company has purchase and lease
renewal options at projected future fair market values under the agreement. The
lease is classified as an operating lease in accordance with SFAS No. 13,
"Accounting for Leases". The Mexico land and building had a book value totaling
approximately $4,300,000. The gain realized on the sale transaction totaling
approximately $900,000 has been deferred and will be credited to income as rent
expense adjustment over the lease term. The average annual lease payments over
the life of the lease are approximately $10,803,000.
9
<PAGE>
9. SEGMENT INFORMATION
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 exports from those
areas) 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.
Information as to the operations and total assets of the Company's reportable
segments is as follows (in thousands):
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL TOTAL
--------- -------------- ---------
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1998
Net sales .................................................. $ 49,841 $ 30,461 $ 80,302
Intersegment sales ......................................... $ 927 $ 1,455 $ 2,382
Operating income before management fees and corporate
overhead ................................................. $ 6,570 2,172 $ 8,742
Corporate overhead ......................................... (2,048) (581) (2,629)
Interest expense, net ...................................... -- -- (4,453)
Other income ............................................... -- -- 219
--------- -------------- ---------
Income from continuing operations before taxes ............. $ 4,522 $ 1,591 $ 1,879
========= ============== =========
SIX MONTHS ENDED JUNE 30, 1998
Net sales .................................................. $ 100,868 $ 58,026 $ 158,894
Intersegment sales ......................................... $ 1,307 $ 1,620 $ 2,927
Operating income before management fees and corporate
overhead ................................................. $ 5,262 $ 5,539 $ 10,801
Corporate overhead ......................................... (4,715) (1,107) (5,822)
Interest expense, net ...................................... -- -- (7,903)
Other income ............................................... -- -- 275
--------- -------------- ---------
Income (loss) from continuing operations before taxes ...... $ 547 $ 4,432 $ (2,649)
========= ============== =========
Total assets ............................................... $ 149,016 $ 108,087 $ 257,103
========= ============== =========
DOMESTIC INTERNATIONAL TOTAL
--------- -------------- ---------
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
Net sales .................................................. $ 56,214 $ 35,322 $ 91,536
Intersegment sales ......................................... $ 1,712 $ 1,871 $ 3,583
Operating income (loss) before management fees and corporate
overhead ................................................. $ 3,257 $ (1,641) $ 1,616
Corporate overhead ......................................... 69 (491) (422)
Interest expense, net ...................................... -- -- (5,318)
Other income ............................................... -- -- 1,452
--------- -------------- ---------
Income (loss) from continuing operations before taxes ...... $ 3,326 $ (2,132) $ (2,672)
========= ============== =========
SIX MONTHS ENDED JUNE 30, 1999
Net sales .................................................. $ 107,951 $ 67,667 $ 175,618
Intersegment sales ......................................... $ 2,120 $ 3,464 $ 5,584
Operating income (loss) before management fees and corporate
overhead ................................................. $ 6,825 $ (2,991) $ 3,834
Corporate overhead ......................................... (2,597) 1,429 (1,168)
Interest expense, net ...................................... -- -- (9,627)
Other income ............................................... -- -- 1,681
--------- -------------- ---------
Income (loss) from continuing operations before taxes ...... $ 4,228 $ (1,562) $ (5,280)
========= ============== =========
Total assets ............................................... $ 159,353 $ 159,052 $ 318,405
========= ============== =========
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis, together with the accompanying
unaudited consolidated financial statements and related notes, are intended to
aid in understanding the Company's results of operations as well as its
financial position, cash flows, indebtedness and other key financial
information. Unless otherwise indicated, references herein to "Drypers" or "the
Company" refer to Drypers Corporation and its subsidiaries.
FROM TIME TO TIME, THE COMPANY MAY MAKE CERTAIN STATEMENTS THAT CONTAIN
"FORWARD-LOOKING" INFORMATION (AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995). WORDS SUCH AS "ANTICIPATE", "ESTIMATE", "PROJECT" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS MAY BE MADE BY MANAGEMENT ORALLY OR IN WRITING,
INCLUDING, BUT NOT LIMITED TO, IN PRESS RELEASES, AS PART OF THIS MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND AS
PART OF OTHER SECTIONS OF THIS QUARTERLY REPORT ON FORM 10-Q AND THE COMPANY'S
OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES
ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934.
SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES
AND ASSUMPTIONS, INCLUDING WITHOUT LIMITATION THOSE IDENTIFIED IN "ITEM 5. OTHER
INFORMATION" OF THIS QUARTERLY REPORT ON FORM 10-Q AND ELSEWHERE HEREIN. 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 TIMING OF NEW PRODUCT DISTRIBUTION,
INTERNATIONAL OPERATIONS, COMPLETION OF SALE-LEASEBACK TRANSACTIONS, CURRENCY
FLUCTUATIONS, CURRENCY DEVALUATIONS, CURRENCY RESTRICTIONS, CAPACITY ALLOCATION
AMONG THE COMPANY'S PRODUCTION FACILITIES, SCOPE OF INSURANCE COVERAGE, LEVERAGE
AND DEBT SERVICE, COMPETITIVE INDUSTRY, SUFFICIENCY OF PATENT AND OTHER
INTELLECTUAL PROPERTY PROTECTION, EXCESS PRODUCTION CAPACITY OVER PROJECTED
CUSTOMER DEMAND, PRICE CHANGES BY COMPETITORS, DEPENDENCE ON KEY PRODUCT,
ACCEPTANCE OF PRODUCT INNOVATIONS, COST OF CERTAIN RAW MATERIALS, TECHNOLOGICAL
CHANGES AND COVENANT LIMITATIONS IN DEBT INSTRUMENTS.
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 and is now the sixth largest
disposable diaper producer in the world. 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 test distribution in two
national mass merchants (Wal-Mart and Kmart). In March 1999, the Company
obtained full distribution into all Kmart stores, with initial shipments
beginning in April 1999.
11
<PAGE>
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. In addition, DRYPERS branded
products are also supplied 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 the Andean Pact and is actively seeking further expansion
opportunities through acquisition, joint venture or other arrangements in Latin
America and the Pacific Rim.
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 features adjustable grip tabs and
increased absorbency. DRYPERS SUPREME incorporates 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.
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. As of June 30, 1999, the Company had received interim
payments of approximately $16,914,000 on its claim. No interim payments have
been received subsequent to June 30, 1999. 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. Other income
for the year ended December 31, 1998 included 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 and other cost
estimates and the final settlement reached with the Company's insurance
carriers. See -"Liquidity and Capital Resources".
The initial results of the Company's laundry detergent operation in the last
two quarters of 1998, including an operating loss of $1.2 million for the entire
1998 fiscal year, 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, was 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 to customers. In the first quarter of 1999,
price increases were not readily accepted in Brazil, creating a short-term
uncertainty that management cannot quantify. The Company was able to implement a
small price increase in Brazil during the second quarter of 1999, but it was
offset by a further currency devaluation. Management believes that the price
increase implemented in the second quarter of 1999 should be sustainable going
forward and as a result, is anticipating a slight improvement in its Brazilian
operations for the remainder of 1999. Due to the impact of Brazil's devaluation
on the economy in Argentina, the Company is considering hedging and cost
12
<PAGE>
reduction efforts in response to the recession in that country; however,
management believes that improvement in the Company's Argentine operations is
unlikely throughout the remainder of 1999.
The Company's domestic operations include sales in the United States, Puerto
Rico and exports from these manufacturing operations. The following table sets
forth the Company's domestic and international net sales for the three months
and six months ended June 30, 1998 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------------- -------------------------------------
1998 1999 1998 1999
---------------- ---------------- ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic ......... $ 49.8 62.1% $ 56.2 61.4% $ 100.9 63.5% $ 108.0 61.5%
International .... 30.5 37.9 35.3 38.6 58.0 36.5 67.6 38.5
------- ----- ------- ----- -------- ----- -------- -----
Total net sales $ 80.3 100.0% $ 91.5 100.0% $ 158.9 100.0% $ 175.6 100.0%
======= ===== ======= ===== ======== ===== ======== =====
</TABLE>
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.
13
<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 three months and
six months ended June 30, 1998 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ -----------------
1998 1999 1998 1999
----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ..................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ............................ 58.9 64.7 59.5 64.4
----- ----- ----- -----
Gross profit .................................. 41.1 35.3 40.5 35.6
Selling, general and administrative expenses .. 33.5 34.0 37.4 34.1
----- ----- ----- -----
Operating income .............................. 7.6 1.3 3.1 1.5
Interest expense, net ......................... 5.5 5.8 5.0 5.5
Other income .................................. .2 1.6 .2 1.0
----- ----- ----- -----
Income (loss) from continuing operations before
income tax provision (benefit) .............. 2.3 (2.9) (1.7) (3.0)
Income tax provision (benefit) ............... .5 (.6) .9 (.7)
----- ----- ----- -----
Income (loss) from continuing operations ...... 1.8 (2.3) (2.6) (2.3)
Discontinued operations ....................... .4 -- .2 (.3)
----- ----- ----- -----
Net income (loss) ............................. 1.4% (2.3)% (2.8)% (2.0)%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998
NET SALES
Net sales increased 14.0% to $91.5 million for the three months ended June
30, 1999 from $80.3 million for the three months ended June 30, 1998. Domestic
sales increased 12.8% to $56.2 million for the three months ended June 30, 1999
from $49.8 million for the three months ended June 30, 1998. While the
introduction of Drypers' products in Kmart's 1500 Big Kmart stores in mid-May
made a significant contribution to the domestic sales increase, grocery store
and private label sales were also higher. While international unit sales volume
increased 33.0%, economic conditions in South America continued to negatively
impact Drypers' operations in those markets, counterbalancing strong growth in
Malaysia and Mexico. The Company was able to implement a 5.0% price increase in
Brazil during the quarter; however, this increase was offset by a further
currency devaluation. Despite the economic problems in South America, the
Company's Brazilian volume increased 34.0% as the Company expanded its market
share there. The Company's Mexico business achieved record net sales in the
second quarter of 1999, and the Company's recently acquired Asian operations
were also a strong contributor to net sales in the second quarter of 1999.
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales increased to 64.7% for the
three months ended June 30, 1999 compared to 58.9% for the three months ended
June 30, 1998. This increase primarily reflects economic conditions in Brazil,
where the Company experienced a 38.0% reduction in sales price per pad from the
comparable period in 1998. This decrease in net sales price per pad was directly
related to the Brazilian currency devaluation and was a slight improvement over
the decrease in the first quarter of 1999, due to a 5.0% price increase that was
implemented during the second quarter. However, the impact of this price
increase was offset by a further devaluation in the Brazilian real during the
second quarter of 1999. Additionally, cost of goods sold in the United States
increased slightly as compared to the second quarter of 1998, due to a higher
level of private label sales, which have lower gross margins but lower selling
and promotional costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
14
<PAGE>
Selling, general and administrative expenses remained relatively flat as a
percentage of net sales at 34.0% for the three months ended June 30, 1999
compared to 33.5% for the three months ended June 30, 1998. This is primarily
due to the increase in international business as a percentage of total net
sales, which has a lower selling and promotional expense level as compared to
domestic sales, in addition to product mix changes in the United States.
OPERATING INCOME
As a result of the above factors, the Company's operating income decreased
$4.9 million to $1.2 million for the three months ended June 30, 1999 from $6.1
million for the three months ended June 30, 1998.
INTEREST EXPENSE, NET
Interest expense, net increased to $5.3 million for the three months ended
June 30, 1999 as compared to $4.5 million for the three months ended June 30,
1998. The increase primarily relates to increased borrowing levels under the
Company's revolving credit facility as compared to the comparable prior year
period.
INCOME TAXES
The Company recorded a benefit of $529,000 related to foreign taxes for the
three months ended June 30, 1999, compared to a provision of $406,000 for the
three months ended June 30, 1998. The decrease is primarily due to the tax
implications of net losses in Argentina and Brazil in addition to continued
management focus on international tax planning strategies during 1998 and 1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
NET SALES
Net sales increased 10.5% to $175.6 million for the six months ended June
30, 1999 from $158.9 million for the six months ended June 30, 1998. Domestic
sales increased 7.0% to $108.0 million for the six months ended June 30, 1999
from $100.9 million for the six months ended June 30, 1998. Net sales in the
international sector grew to $67.6 million for the six months ended June 30,
1999 from $58.0 million in the prior comparable period. While the Company's
domestic business reflected consolidation among several major grocery retailers
during the first quarter of 1999, which resulted in fewer regularly scheduled
promotions for Drypers, promotional activity with these retailers returned to
its normal levels in the second quarter of 1999. Additionally, the introduction
of Drypers' products in Kmart's 1500 Big Kmart stores in mid-May made a
significant contribution to the domestic sales increase, as did increases in
both grocery store and private label sales in the second quarter of 1999. While
international unit sales volume increased 40.0%, economic conditions in South
America continued to negatively impact Drypers' operations in those markets,
counterbalancing strong growth in Malaysia and Mexico. The Company was able to
implement a 5.0% price increase in Brazil during the second quarter; however,
this increase was offset by a further currency devaluation. Despite the economic
problems in South America, the Company's Brazilian volume increased 41.0% as the
Company expanded its market share there. Due to the situation in South America,
management is reallocating production resources globally. The Company's Mexico
business achieved record net sales in the first and second quarter of 1999, and
the Company's recently acquired Asian operations were also a strong contributor
to net sales in the first half of 1999.
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales increased to 64.4% for the
six months ended June 30, 1999 compared to 59.5% for the six months ended June
30, 1998. This increase primarily reflects the currency devaluation in Brazil,
where the dollar sales price per pad decreased by over 59.0% as compared to the
comparable period in the prior year, while costs per pad did not decrease at the
same rate because a large percentage of raw materials are U.S. dollar based.
Price increases initiated in Brazil during the first quarter of
15
<PAGE>
1999 were not sustainable during the last month of the quarter due to
competitive pressures. The Company was able to implement a 5.0% price increase
during the second quarter; however, the impact of this price increase was offset
by a further devaluation in the Brazilian real during the second quarter of
1999. Additionally, international sales increased as a percentage of the
Company's total net sales to 38.5% for the six months ended June 30, 1999 from
36.5% for the six months ended June 30, 1998. These sales have a lower gross
margin and lower selling costs as a percentage of sales compared to the
Company's domestic business. Lastly, domestic gross margins were down slightly
as compared to the comparable prior year period due to changes in product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased as a percentage of net
sales to 34.1% for the six months ended June 30, 1999 compared to 37.4% for the
six months ended June 30, 1998. The decrease primarily reflected the costs of
the national advertising campaign in the United States, which began in February
1998. Additionally, the increase in international business as a percentage of
total net sales contributed to the decline because these sales have lower
selling and promotional expenses.
OPERATING INCOME
As a result of the above factors, the Company's operating income decreased
$2.3 million to $2.7 million for the six months ended June 30, 1999 from $5.0
million for the six months ended June 30, 1998.
INTEREST EXPENSE, NET
Interest expense, net increased to $9.6 million for the six months ended June
30, 1999 as compared to $7.9 million for the six months ended June 30, 1998. The
increase was primarily due to the issuance of 10 1/4% Senior Notes in March 1998
for $30.0 million, amortization of additional deferred loan costs related to
this transaction and increased borrowing levels under the Company's revolving
credit facility.
INCOME TAXES
The Company recorded a benefit of $1.2 million related to foreign taxes for
the six months ended June 30, 1999, compared to a provision of $1.5 million for
the comparable period in 1998. The decrease is primarily due to the tax
implications of net losses in Argentina and Brazil in addition to continued
management focus on international tax planning strategies during 1998 and 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements include, but are not limited to, the
payment of principal and interest on its debt; the funding of working capital
needs, primarily inventory, accounts receivable and advertising and promotional
expenses; the funding of capital investments in machinery, equipment and
computer systems; and the funding of acquisitions. Historically, the Company has
financed its debt service, working capital, capital expenditure and acquisition
requirements through a combination of internally generated cash flow, borrowings
under the Company's revolving credit facility and other sources and proceeds
from private and public offerings of debt and equity securities.
The Company's operations used $2.6 million of cash during the six months
ended June 30, 1999 and used $14.1 million of cash during the six months ended
June 30, 1998. The use of cash during the six months ended June 30, 1999
primarily reflected increased promotional and other prepaid expenses primarily
related to the Company's startup of its new Colombian manufacturing operations,
as well as the Company's worldwide operations and the payment of interest on the
10 1/4% Senior Notes. The use of cash during the six months ended June 30, 1998
primarily reflected the national television campaign in the United States, the
buildup of inventory to support the increase in sales volume (and the
corresponding increase in accounts receivable), payment of
16
<PAGE>
interest on the 10 1/4% Senior Notes and expenditures related to the Company's
discontinued laundry detergent business.
The Company's capital expenditures were $11.3 million for the six months
ended June 30, 1999 and $15.4 million for the six months ended June 30, 1998.
Approximately $4.4 million of the capital expenditures made in the first half of
1999 related to restoration of the Company's Argentina operations damaged by
fire in August 1998. The capital expenditures in the first quarter of 1998
related primarily to international production capacity increases. The Company
financed its capital expenditures in 1998 and 1999 through borrowings under its
revolving credit facility and from the proceeds of the $30.0 million offering of
10 1/4% Senior Notes in March 1998.
The Company incurred cost increases of approximately $8.0 million in the
first quarter of 1998 and approximately $2.0 million in the second quarter of
1998. The majority of these increases represented the cost of the Company's new
advertising campaign (in connection with which there will be no near-term
corresponding reduction of promotional expenses), while the remainder related to
the costs associated with the 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 $9.0 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 June 30, 1999, the Company has recorded in prepaid expenses and other
assets a receivable due from the insurance carriers and related to the Argentina
fire of approximately $6.0 million. This receivable is comprised of a portion 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 1998 through June 1999 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. 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 $44.8 million as of June 30, 1999. Insurance
proceeds anticipated to be received during the second half of 1999 will be used
to further 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
industries. 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 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 or patent
infringement insurance coverage.
The Company's working capital was $15.9 million as of June 30, 1999, compared
to $26.2 million as of December 31, 1998. The Company's current assets increased
from $119.5 million as of December 31, 1998 to $127.0 million as of June 30,
1999, and current liabilities increased from $93.3 million as of December 31,
1998 to $111.2 million as of June 30, 1999. Total debt increased from $187.7
million at December 31, 1998 to $198.5 million as of June 30, 1999.
17
<PAGE>
In 1997, the Company entered into a series of transactions related to the
establishment of a venture in Brazil, the acquisition of certain intangible
assets and rights from Chansommes do Brasil Ind. e Com. Ltda. ("Chansommes") and
the purchase of diaper production of Chansommes. Total cash consideration paid
in 1997 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 directly. 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 $15.1 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 June 24, 1997, the Company closed a private issuance of $115.0 million of
10 1/4% Senior Notes. On October 14, 1997, the Company completed an exchange
offer of registered notes for the 10 1/4% Senior Notes. 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. On July 13, 1998, the Company
completed an exchange offer of registered notes for the New 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.
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.
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.
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, under the original terms of the
revolving credit facility, 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 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
revolving 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 has entered into discussions with the lender to restructure its facility
into a combination of a revolver, term loan and an over-advance facility by
August 30, 1999. The Company was in compliance with the terms of the credit
facility, as amended, as of June 30, 1999.
As of June 30, 1999, under the most recent amendment to the revolving credit
facility, the Company had no borrowing availability. However, the Company's cash
position has strengthened as a result of collecting $6.8 million in insurance
reimbursements since December 31, 1998, obtaining $4.1 million in availability
through Malaysian banking facilities and completing a sale-leaseback transaction
of its Mexican manufacturing facility which generated $5.2 million.
Additionally, the Company has several transactions currently in process which
should generate approximately $8.0 million to $12.0 million in cash during the
second half of
18
<PAGE>
1999 in excess of cash flow from operations, as described below. The Company is
continuing its efforts to bring the insurance claim process to closure and
collect the remaining insurance receivable of approximately $6.0 million. The
Company is also pursuing an additional sale-leaseback transaction in South
America. Finally, the Company continues to pursue reducing its inventory and
accounts receivable levels required for the business as well as operating lease
financing for its major capital projects.
Management 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 the balance of 1999, including working
capital, 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 relates primarily to variable rate borrowings outstanding under
the Company's revolving credit facility discussed above. At June 30, 1999, the
Company had $44.8 million outstanding under its revolving credit facility. An
increase in interest rates of 1% would reduce annual net income by approximately
$400,000. The Company's remaining debt obligations as of June 30, 1999 were
primarily $145.0 million of Senior Notes, which carry a fixed interest rate of
10 1/4%, and therefore have no earnings exposure for changes 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, historically
inflation has not had a material impact on the results of operations of the
Company's locations 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 or the effect of
currency devaluations have had a material impact on the results of operations in
these locations. The Company has employed a strategy of borrowing at the foreign
subsidiary level in the respective local currencies to create a self-hedge
against future exposure to currency devaluation.
NEW ACCOUNTING STANDARDS
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 June 15, 2000. The Company 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.
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
19
<PAGE>
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, was implemented in August 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.
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
$8.0 million during 1998 and 1999. Approximately $7.0 million had been expended
on the PeopleSoft software and implementation process at June 30, 1999.
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 has
received a significant number of responses. 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. Additionally, the Company has planned to increase inventory levels at the
end of 1999 to mitigate any significant business interruption in shipments to
customers.
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.
20
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Meeting of Stockholders--May 28, 1999
(b) Raymond M. Chambers and Gary L. Forbes were elected to serve as
directors for three-year terms expiring in 2002. The Company's other
directors are Walter V. Klenip, Nolan Lehmann, Terry A. Tognietti and
Philip A. Tuttle.
(c) On May 28, 1999, the Stockholders voted on the following proposals:
PROPOSAL NO. 1 -- To elect two persons to serve as directors of the
Company for a three-year term or until their respective successors are duly
elected and qualified.
PROPOSAL NO. 2 -- To ratify the appointment of Arthur Andersen LLP
as the Company's independent public accountants for the fiscal year ending
December 31, 1999.
As of April 15, 1999, the record date for determining stockholders
entitled to vote at the Annual Meeting of Stockholders, the Company had
outstanding and entitled to vote 17,724,804 shares of Common Stock.
The following table lists the votes cast for each proposal:
Number of Shares
- --------------------------------------------------------------------------------
PROPOSAL FOR AGAINST ABSTAIN BROKER NON-VOTES
------------------ ---------- ------- -------- ----------------
No. 1
Raymond M. 15,409,384 126,797 -- --
Gary L. Forbes 15,413,004 123,177 -- --
No. 2 15,447,463 75,525 13,193 --
ITEM 5. OTHER INFORMATION
CAUTIONARY STATEMENTS:
FROM TIME TO TIME, THE COMPANY MAY MAKE CERTAIN STATEMENTS THAT CONTAIN
"FORWARD-LOOKING" INFORMATION (AS DEFINED IN THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995). WORDS SUCH AS "ANTICIPATE", "ESTIMATE", "PROJECT" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS MAY BE MADE BY MANAGEMENT ORALLY OR IN WRITING,
INCLUDING, BUT NOT LIMITED TO, IN PRESS RELEASES, AS PART OF MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND AS
PART OF OTHER SECTIONS OF THIS QUARTERLY REPORT ON FORM 10-Q AND THE COMPANY'S
OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES
ACT OF 1933 AND THE SECURITIES EXCHANGE ACT OF 1934.
SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES
AND ASSUMPTIONS, INCLUDING WITHOUT LIMITATION THOSE IDENTIFIED BELOW. SHOULD ONE
OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD ANY OF THE
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS OF CURRENT AND FUTURE
OPERATIONS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR PROJECTED.
READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THEIR RESPECTIVE DATES.
Among the factors that have a direct bearing on the Company's results of
operations and financial condition are the following factors:
LEVERAGE AND DEBT SERVICE. The Company is highly leveraged. The Company's
ability to meet its debt service obligations and to reduce its total debt will
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
21
<PAGE>
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 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 and 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
22
<PAGE>
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 continue to do so in the future.
To the extent the Company is not able to introduce comparable products on a
timely basis, its financial position and results of operations could be
materially adversely affected.
In addition, the Company from time to time has received, and may receive in
the future, communications from third parties, asserting that the Company's
products, trademarks, designs, labels or packaging infringe upon such third
parties' intellectual property rights. There can be no assurance that third
parties will not successfully assert claims against the Company with respect to
existing or future products or packaging. Should the Company be found to
infringe 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.
23
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - Reference is made to the Exhibit Index on Page 26 for a list
of exhibits filed as part of this
report pursuant to Item 601 of Regulation S-K.
(b) REPORTS ON FORM 8-K - A report on Form 8-K was filed with the Commission
on June 9, 1999, in which the Company announced the completion of a
sale-leaseback transaction related to its Mexican manufacturing facility.
Additionally, the Company announced that it had obtained approximately $2.8
million in Malaysian trade financing.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRYPERS CORPORATION
Date: AUGUST 12, 1999 By: /S/ JONATHAN P. FOSTER
--------------- ----------------------
Chief Financial Officer
(Duly Authorized Officer)
(Principal FinancialOfficer)
25
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
27 Financial Data Schedule
26
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM DRYPERS CORPORATION FORM 10-Q FOR THE QUARTER ENDED 6/30/99 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 7,473,000 7,473,000
<SECURITIES> 0 0
<RECEIVABLES> 58,930,000 58,930,000
<ALLOWANCES> 3,119,000 3,119,000
<INVENTORY> 30,120,000 30,120,000
<CURRENT-ASSETS> 33,612,000 33,612,000
<PP&E> 111,738,000 111,738,000
<DEPRECIATION> 25,652,000 25,652,000
<TOTAL-ASSETS> 318,405,000 318,405,000
<CURRENT-LIABILITIES> 111,166,000 111,166,000
<BONDS> 145,943,000 145,943,000
0 0
0 0
<COMMON> 18,000 18,000
<OTHER-SE> 46,964,000 46,964,000
<TOTAL-LIABILITY-AND-EQUITY> 318,405,000 318,405,000
<SALES> 91,536,000 175,618,000
<TOTAL-REVENUES> 91,536,000 175,618,000
<CGS> 59,195,000 113,068,000
<TOTAL-COSTS> 90,342,000 172,952,000
<OTHER-EXPENSES> (1,452,000) (1,681,000)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,318,000 9,627,000
<INCOME-PRETAX> (2,672,000) (5,280,000)
<INCOME-TAX> (529,000) (1,239,000)
<INCOME-CONTINUING> (2,143,000) (4,041,000)
<DISCONTINUED> 0 (467,000)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,143,000) (3,574,000)
<EPS-BASIC> (.12) (.20)
<EPS-DILUTED> (.12) (.20)
</TABLE>
