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 MARCH 31, 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.
[X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
(CLASS) (OUTSTANDING AT APRIL 15, 1999)
Common Stock, $.001 Par Value 17,724,804
<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 March 31, 1999.
Consolidated Statements of Earnings for the Three Months Ended March 31, 1998
and 1999.
Consolidated Statement of Stockholders' Equity for the Three Months Ended March
31, 1999.
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998
and 1999.
Notes to Consolidated Financial Statements.
i
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ----------
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 12,309 $ 8,515
Accounts receivable, net of allowance for doubtful
accounts of $2,635 and $2,922, respectively ..... 49,253 52,203
Inventories .......................................... 29,822 29,056
Prepaid expenses and other ........................... 28,164 30,251
--------- ---------
Total current assets .......................... 119,548 120,025
PROPERTY AND EQUIPMENT, net of depreciation and amortization
of $24,594 and $24,968 respectively ...................... 81,903 86,251
INTANGIBLE AND OTHER ASSETS, net of amortization of
$17,373 and $18,551, respectively ........................ 98,721 102,354
--------- ---------
$ 300,172 $ 308,630
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings ................................ $ 38,385 $ 45,988
Current portion of long-term debt .................... 322 322
Accounts payable ..................................... 33,407 30,775
Accrued liabilities .................................. 21,202 24,544
--------- ---------
Total current liabilities ..................... 93,316 101,629
LONG-TERM DEBT ................................................ 2,967 2,741
SENIOR TERM NOTES ............................................. 145,997 145,970
OTHER LONG-TERM LIABILITIES ................................... 7,364 9,185
--------- ---------
249,644 259,525
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 30,000,000 shares
authorized, 17,706,660 and 17,719,741 shares
issued and outstanding, respectively ............... 18 18
Additional paid-in capital ........................... 75,244 75,274
Warrants ............................................. 180 180
Retained deficit ..................................... (23,731) (25,162)
Foreign currency translation adjustments ............. (1,183) (1,205)
--------- ---------
Total stockholders' equity .................... 50,528 49,105
--------- ---------
$ 300,172 $ 308,630
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
1
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED
MARCH 31
----------------------------
1998 1999
------------ ------------
(unaudited)
NET SALES ...................................... $ 78,592 $ 84,082
COST OF GOODS SOLD ............................. 47,249 53,873
------------ ------------
Gross profit .............................. 31,343 30,209
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ................................... 32,477 28,737
------------ ------------
Operating income (loss) ................... (1,134) 1,472
INTEREST EXPENSE, net .......................... 3,450 4,309
OTHER INCOME ................................... 56 229
------------ ------------
LOSS BEFORE INCOME TAX PROVISION
(BENEFIT) ................................... (4,528) (2,608)
INCOME TAX PROVISION (BENEFIT) ................. 1,141 (710)
------------ ------------
LOSS FROM CONTINUING OPERATIONS ................ (5,669) (1,898)
DISCONTINUED OPERATIONS:
Change in estimate of loss on
disposal of detergent business ............ -- 467
------------ ------------
NET LOSS ....................................... (5,669) (1,431)
PREFERRED STOCK DIVIDEND ....................... 80 --
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS ... $ (5,749) $ (1,431)
============ ============
LOSS PER COMMON SHARE:
Basic earnings (loss) per share:
Continuing operations ................... $ (.46) $ (.11)
Discontinued operations ................. -- .03
------------ ------------
Net loss ................................ $ (.46) $ (.08)
============ ============
Diluted earnings (loss) per share:
Continuing operations ................... $ (.46) $ (.11)
Discontinued operations ................. -- .03
------------ ------------
Net loss ................................ $ (.46) $ (.08)
============ ============
COMMON SHARES OUTSTANDING ...................... 12,540,053 17,714,238
============ ============
COMMON AND POTENTIAL COMMON SHARES OUTSTANDING . 12,540,053 17,714,238
============ ============
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>
FOREIGN
COMMON SHARES ADDITIONAL CURRENCY
ISSUED AND COMMON PAID-IN RETAINED TRANSLATION
OUTSTANDING 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) ........ 13,081 -- 30 -- -- --
Net loss (unaudited) ................ -- -- -- -- (1,431) --
Translation adjustments (unaudited) -- -- -- -- -- (22)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, March 31, 1999 (unaudited) ... 17,719,741 $ 18 $ 75,274 $ 180 $ (25,162) $ (1,205)
========== ========== ========== ========== ========== ==========
</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>
THREE MONTHS ENDED
MARCH 31
----------------------
1998 1999
--------- ---------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................ $ (5,669) $ (1,431)
Adjustments to reconcile net loss to net cash used in
operating activities
Discontinued operations .............................. -- (467)
Depreciation and amortization ........................ 2,080 3,354
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable .............................. (7,328) (2,950)
Inventories ...................................... (2,473) 766
Prepaid expenses and other ....................... (4,190) (4,190)
Insurance receivable resulting from Argentina fire -- 2,103
Increase (decrease) in --
Accounts payable ................................. 2,088 (2,632)
Accrued and other liabilities .................... 4,997 3,809
Change in other long-term liabilities ................ (303) (701)
-------- --------
Net cash used in operating activities ................ (10,798) (2,339)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .................... (7,222) (6,551)
Investment in other noncurrent assets ................. (590) (2,301)
-------- --------
Net cash used in investing activities ......... (7,812) (8,852)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under senior term notes .................... 31,087 --
Borrowings under revolver ............................. 35,100 7,595
Payments on revolvers ................................. (35,100) --
Borrowings under (payments on) other debt ............. 2,269 (218)
Financing related costs ............................... (1,658) (10)
Proceeds from exercise of stock options and warrants .. 22 30
-------- --------
Net cash provided by financing activities ..... 31,720 7,397
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........ 13,110 (3,794)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............ 9,269 12,309
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 22,379 $ 8,515
======== ========
SUPPLEMENTAL DATA:
Cash paid during the period for:
Interest ............................................ $ 234 $ 96
Income taxes ........................................ $ 842 $ 170
</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 ended
March 31, 1999 are not necessarily indicative of the results that will be
realized for the fiscal year ending December 31, 1999.
The unaudited consolidated financial information as of and for the
three-month periods ended March 31, 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 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 ("AICPA"). SOP 98-1 requires
that certain costs related to computer software developed or obtained for
internal use be expensed as incurred. The Company adopted SOP 98-1 as of January
1, 1999, and the adoption of SOP 98-1 did not 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 AICPA. SOP 98-5 requires that all nongovernmental entities expense
costs of start-up activities as those costs are incurred. The Company adopted
SOP 98-5 as of January 1, 1999, and the adoption of SOP 98-5 did not 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.
5
<PAGE>
2. EARNINGS PER SHARE
Basic earnings per shares ("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
MARCH 31
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE:
Loss from continuing operations, less preferred
stock dividend ................................. $ (5,749) $ (1,898)
Discontinued operations ............................. -- 467
------------ ------------
Net loss attributable to common stockholders ........ $ (5,749) $ (1,431)
============ ============
Weighted average number of common shares outstanding 12,540,053 17,714,238
============ ============
Loss from continuing operations ..................... $ (.46) $ (.11)
Discontinued operations ............................. -- .03
------------ ------------
Net loss ............................................ $ (.46) $ (.08)
============ ============
DILUTED EARNINGS (LOSS) PER SHARE:
Loss from continuing operations, less preferred
stock dividend ................................. $ (5,749) $ (1,898)
Discontinued operations ............................. -- 467
------------ ------------
Net loss attributable to common stockholders ........ $ (5,749) $ (1,431)
============ ============
Weighted average number of common shares outstanding 12,540,053 17,714,238
============ ============
Loss from continuing operations ..................... $ (.46) $ (.11)
Discontinued operations ............................. -- .03
------------ ------------
Net loss ............................................ $ (.46) $ (.08)
============ ============
</TABLE>
For the three months ended March 31, 1998 and 1999, shares issuable upon the
exercise of options and warrants that were excluded from the diluted earnings
per share calculation because their effect was antidilutive to the calculation
totaled 1,871,065 and 3,612,951, respectively. Additionally, for the three
months ended March 31, 1998, 4,141,900 weighted average potential common shares
related to preferred stock were excluded from the diluted earnings per share
calculation because their effect was antidilutive to the calculation.
6
<PAGE>
3. COMPREHENSIVE INCOME
Comprehensive income (loss), which encompasses net loss and currency
translation adjustments, is as follows (in thousands):
THREE MONTHS ENDED
MARCH 31
-------------------
1998 1999
-------- -------
Loss attributable to common stockholders .......... $(5,749) $(1,431)
Currency translation adjustments .................. -- (22)
------- -------
Comprehensive loss ................................ $(5,749) $(1,453)
======= =======
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 March 31, 1999, the Company had received interim payments of
$13,500,000 on its claim and to date has received approximately $16,000,000 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 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 March 31, 1999, the Company has recorded in prepaid expenses and other
assets a receivable due from the insurance carriers of approximately $8,300,000
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 March 1999
to be recovered under the business interruption portion of the insurance claim.
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 $21,800,000 related to
the total claim. To date, the Company has received total insurance proceeds of
approximately $16,000,000, $2,500,000 of which was received in April 1999.
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, 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,
7
<PAGE>
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 $348,000 in the first
quarter of 1999 to meet its contractual obligations related to disposing of the
business. For the three months ended March 31, 1999, the Company has 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
consolidated statement of earnings for the three months ended March 31, 1999.
6. INVENTORIES
Inventories consisted of the following (in thousands):
DECEMBER 31, MARCH 31,
1998 1999
----------- ----------
Raw Materials.......... $12,702 $10,795
Finished Goods......... 17,120 18,261
------- -------
$29,822 $29,056
======= =======
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 March 31, 1999, the Company had borrowings
outstanding of $38,385,000 and $45,988,000, 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 March 31,
1999, the Company had borrowings outstanding of $44,710,000 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, 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 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. The Company was in compliance with the terms of the credit facility,
as amended, as of March 31, 1999.
8
<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 Company's international operations were not
material as of December 31, 1998 and March 31, 1999.
LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
DECEMBER 31, MARCH 31,
1998 1999
------------ ----------
Note payable, due 2001, interest at
8.4%, partially secured by land
and buildings...................... $1,707 $1,657
Various other notes payable........... 1,582 2,684
------ ------
3,289 4,341
Less: current maturities.......... (322) (1,600)
------ ------
$2,967 $2,741
====== ======
SENIOR TERM NOTES
Long-term debt under senior term notes consisted of the following (in
thousands):
DECEMBER 31, MARCH 31,
1998 1999
------------ ---------
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 $970, respectively.... $145,997 $145,970
======== ========
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. The New Senior Notes were issued under
the same indenture as the June 1997 issuance of 10 1/4% Senior Notes. Proceeds
of the issuance of the New Senior Notes were used to repay all outstanding
indebtedness under the revolving credit facility and 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.
9
<PAGE>
8. 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 "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 MARCH 31, 1998
Net sales ........................................... $ 51,027 $ 27,565 $ 78,592
Intersegment sales .................................. $ 380 $ 165 $ 545
Operating income (loss) before management fees and
corporate overhead ............................. $ (1,308) $ 3,367 $ 2,059
Corporate overhead .................................. (3,193)
Interest expense, net ............................... (3,450)
Other income ........................................ 56
---------
Income (loss) from continuing operations before taxes $ (4,528)
=========
Total assets ........................................ $ 155,594 $ 84,119 $ 239,713
========= ========= =========
THREE MONTHS ENDED MARCH 31, 1999
Net sales ........................................... $ 51,737 $ 32,345 $ 84,082
Intersegment sales .................................. $ 408 $ 1,593 $ 2,001
Operating income (loss) before management fees and
corporate overhead ............................. $ 3,567 $ (1,350) $ 2,217
Corporate overhead .................................. (745)
Interest expense, net ............................... (4,309)
Other income ........................................ 229
---------
Income (loss) from continuing operations before taxes $ (2,608)
=========
Total assets ........................................ $ 153,630 $ 155,000 $ 308,630
========= ========= =========
</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
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 DISTRIBUTION, INTERNATIONAL
OPERATIONS, COMPLETION OF SALE-LEASEBACK TRANSACTIONS, CURRENCY FLUCTUATIONS,
CURRENCY DEVALUATIONS, CURRENCY RESTRICTIONS, SCOPE OF INSURANCE COVERAGE,
LEVERAGE AND DEBT SERVICE, COMPETITIVE INDUSTRY, SUFFICIENCY OF PATENT AND OTHER
INTELLECTUAL PROPERTY PROTECTION, EXCESS CAPACITY OVER DEMAND, PRICE CHANGES BY
COMPETITORS, DEPENDENCE ON KEY PRODUCTS AND ACCEPTANCE OF PRODUCT INNOVATIONS,
COST OF CERTAIN RAW MATERIALS, TECHNOLOGICAL CHANGES, AND COVENANT LIMITATIONS.
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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 with 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.
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.
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. 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.
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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 1998,
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 reflected 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 recent economic stability is
promising, but until price increases go through, improvement in the Company's
Brazilian operations is unlikely.
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
ended March 31, 1998 and 1999.
THREE MONTHS ENDED
MARCH 31
----------------------------------
1998 1999
-------------- --------------
(dollars in millions)
Domestic.............. $51.0 64.9% $51.8 61.5%
International......... 27.6 35.1 32.3 38.5
----- ----- ----- -----
Total net sales.... $78.6 100.0% $84.1 100.0%
===== ===== ===== =====
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.
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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
ended March 31, 1998 and 1999.
THREE MONTHS ENDED
MARCH 31
------------------
1998 1999
------- -------
Net sales ........................ 100.0% 100.0%
Cost of goods sold................ 60.1 64.1
----- -----
Gross profit...................... 39.9 35.9
Selling, general and
administrative expenses......... 41.3 34.2
----- -----
Operating income (loss)........... (1.4) 1.7
Interest expense, net............. 4.4 5.1
Other income...................... 0.1 0.3
----- -----
Loss from continuing operations
before income tax provision
(benefit)...................... (5.7) (3.1)
Income tax provision (benefit).... 1.5 (0.8)
----- -----
Loss from continuing operations... (7.2) (2.3)
Discontinued operations........... -- 0.6
----- -----
Net loss.......................... (7.2)% (1.7)%
===== =====
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE MONTHS ENDED MARCH
31, 1998.
NET SALES
Net sales increased 7.0% to $84.1 million for the three months ended March
31, 1999 from $78.6 million for the three months ended March 31, 1998. Domestic
sales increased 1.4% to $51.8 million for the three months ended March 31, 1999
from $51.0 million for the three months ended March 31, 1998. This modest
increase primarily reflects 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 is expected to
return to its normal levels in the second quarter of 1999. Internationally, net
sales grew 17.3% to $32.3 million for the three months ended March 31, 1999 from
$27.6 million in the prior comparable period. While international unit sales
volume increased 22.0%, the devaluation of the Brazilian Real and the related
recession in Argentina contributed to the lower percentage increase in net sales
dollars. Despite the economic problems in South America and the August 1998 fire
in the Company's Argentina facility, the Company's Brazilian volume increased
53.0% with expanded market shares and the Company's Argentine operation has
recovered to 80.0% of the prior year's production. The Company's Mexico business
experienced a significant turnaround from 1998 and the Company's recently
acquired Asian operations were also a strong contributor to net sales in the
first quarter of 1999.
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales increased to 64.1% for the
three months ended March 31, 1999 compared to 60.1% for the three months ended
March 31, 1998. This increase primarily reflects the currency devaluation in
Brazil, where the dollar sales price per diaper decreased by over 40.0% as
compared to the comparable period in the prior year, while costs per diaper did
not decrease at the same rate as a large percentage of raw materials are U.S.
dollar based. Price increases initiated in Brazil during the first quarter of
1999 were not sustainable during the last month of the quarter due to
competitive reasons. Additionally, international sales increased as a percentage
of the Company's total net sales, to 38.5% for the three months ended March 31,
1999 from 35.1% for the three months ended March 31, 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.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased as a percentage of net
sales to 34.2% for the three months ended March 31, 1999 compared to 41.3% for
the three months ended March 31, 1998. The decrease primarily reflected the
costs of the 1998 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 as these sales have
lower selling and promotional expenses.
OPERATING INCOME (LOSS)
As a result of the above factors, the Company's operating income increased
$2.6 million to $1.5 million for the three months ended March 31, 1999 from an
operating loss of $1.1 million for the three months ended March 31, 1998.
INTEREST EXPENSE, NET
Interest expense, net increased to $4.3 million for the three months ended
March 31, 1999 as compared to $3.5 million for the three months ended March 31,
1998. The increase reflects amortization of additional deferred loan costs and
additional interest related to the issuance of the Company's $30.0 million 10
1/4% Senior Notes due 2007 ("10 1/4% Senior NoTES") in March 1998 and additional
interest, as well as increased borrowing under the revolving credit facility.
OTHER INCOME
As a result of the August 1998 fire at the Company's manufacturing facility
in Argentina, for the three months ended March 31, 1999, the Company has
recorded approximately $229,000 in other income primarily related to lost
profits recoverable under the Company's business interruption policy for the
months of January 1999 through March 1999.
INCOME TAXES
The Company recognized a benefit of $710,000 related to foreign taxes for the
three months ended March 31, 1999, compared to a provision of $1.1 million for
the comparable period in 1998. The decrease is primarily due to the tax
implications of net losses in Argentina resulting from the August 1998 fire in
addition to continued management focus on international tax planning strategies
during 1998 and 1999.
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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 $2.3 million of cash for the three months ended
March 31, 1999, including the favorable effect of the $2.1 million net change in
the insurance receivable related to the Argentina fire in August 1998. The
Company's operations used $10.8 million of cash during the three months ended
March 31, 1998. The use of cash during the three months ended March 31, 1999
primarily reflected increased promotional and other prepaid expenses primarily
related to the Company's ramp up of its new Colombian manufacturing operations,
as well as the Company's worldwide operations. The use of cash during the three
months ended March 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.
The Company's capital expenditures were $6.6 million for the three months
ended March 31, 1999 and $7.2 million for the three months ended March 31, 1998.
Approximately $2.4 million of the capital expenditures made in the first quarter
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'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 March 31, 1999, the Company has
recorded in prepaid expenses and other assets a receivable due from the
insurance carriers of approximately $8.3 million related to the Argentina fire.
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 March 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. Of the
total receivable amount, $2.5 million was received in April 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 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 $44.7
million as of March 31, 1999. Insurance proceeds anticipated to be received
during the second quarter 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
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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 $18.4 million as of March 31, 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 $120.0 million as of
March 31, 1999 and current liabilities increased from $93.3 million as of
December 31, 1998 to $101.6 million as of March 31, 1999. Total debt increased
from $187.7 million at December 31, 1998 to $195.0 million as of March 31, 1999.
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 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. 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. 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.
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
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<PAGE>
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, 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 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 has entered into discussions with the lender to restructure its facility
into a combination of a revolver, term loan, and an over-advance facility.
As of March 31, 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 and obtaining $2.8 million in
availability through Malaysian banking facilities. Additionally, the Company has
numerous transactions currently in process which should generate approximately
$7.2 million to $15.0 million in cash during 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 scheduled to be completed by May 31, 1999 and should generate
$5.2 million. Also, the Company has secured a commitment from a third Malaysian
financial institution for a line of credit of approximately $2.0 million. This
facility should be in place within the month of May 1999 and is denominated in
the local currency, as are the two lines of credit already secured in April
1999. These transactions also serve as a self-hedge for the Company against
potential foreign currency exposure in that country. Further, the Company is
continuing its efforts to bring the insurance claim process to closure and
collect the remaining insurance receivable of approximately $5.8 million. The
Company is also pursuing two sale-leaseback transactions 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 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 relate primarily to variable rate borrowings outstanding under
the Company's revolving credit facility discussed above. At March 31, 1999, the
Company had $44.7 million outstanding under the 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 March 31, 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.
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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 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
currencies to create a self-hedge against future exposure to currency
devaluation.
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 ("AICPA"). SOP 98-1 requires
that certain costs related to computer software developed or obtained for
internal use be expensed as incurred. The Company adopted SOP 98-1 as of January
1, 1999, and the adoption of SOP 98-1 did not 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 AICPA. SOP 98-5 requires that all nongovernmental entities expense
costs of start-up activities as those costs are incurred. The Company adopted
SOP 98-5 as of January 1, 1999, and the adoption of SOP 98-5 did not 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.
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:
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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 at the end of 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.
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
$5.0 million during 1998 and 1999. Approximately $3.3 million had been expended
on the PeopleSoft software and implementation process at March 31, 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.
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.
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PART II. OTHER INFORMATION
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 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.
21
<PAGE>
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 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.
22
<PAGE>
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - Reference is made to the Exhibit Index on Page 24 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
March 30, 1999 in which the Company announced its intention to discontinue
the operations of its laundry detergent business.
23
<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: MAY 13, 1999 By: /s/ JONATHAN P. FOSTER
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
24
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
27 Financial Data Schedule
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,515,000
<SECURITIES> 0
<RECEIVABLES> 55,125,000
<ALLOWANCES> 2,922,000
<INVENTORY> 29,056,000
<CURRENT-ASSETS> 120,025,000
<PP&E> 111,219,000
<DEPRECIATION> 24,968,000
<TOTAL-ASSETS> 308,630,000
<CURRENT-LIABILITIES> 101,629,000
<BONDS> 145,970,000
0
0
<COMMON> 18,000
<OTHER-SE> 49,087,000
<TOTAL-LIABILITY-AND-EQUITY> 308,630,000
<SALES> 84,082,000
<TOTAL-REVENUES> 84,082,000
<CGS> 53,873,000
<TOTAL-COSTS> 82,610,000
<OTHER-EXPENSES> (229,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,309,000
<INCOME-PRETAX> (2,608,000)
<INCOME-TAX> (710,000)
<INCOME-CONTINUING> (1,898,000)
<DISCONTINUED> 467,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,431,000)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
