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 SEPTEMBER 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
(STATE OR OTHER JURISDICTION OF 76-0344044
INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
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 NOVEMBER 8, 1999)
Common Stock, $.001 Par Value 17,741,500
<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 September 30, 1999.
Consolidated Statements of Earnings for the Three Months and Nine Months
Ended September 30, 1998 and 1999.
Consolidated Statement of Stockholders' Equity for the Nine Months Ended
September 30, 1999.
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 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, SEPTEMBER 30,
1998 1999
---------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 12,309 $ 6,098
Accounts receivable, net of allowance for doubtful accounts of $2,635 and
$3,251, respectively ........................................................ 49,253 66,812
Inventories..................................................................... 29,822 32,951
Prepaid expenses and other...................................................... 28,164 24,400
---------- -----------
Total current assets..................................................... 119,548 130,261
PROPERTY AND EQUIPMENT, net of depreciation and amortization of $24,594 and
$26,311, respectively................................................................. 81,903 88,606
INTANGIBLE AND OTHER ASSETS, net of amortization of $17,373 and
$18,588, respectively................................................................. 98,721 105,628
---------- -----------
$ 300,172 $ 324,495
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings........................................................... $ 38,385 $ 52,191
Current portion of long-term debt............................................... 322 322
Accounts payable................................................................ 33,407 51,495
Accrued liabilities............................................................. 21,202 16,475
---------- -----------
Total current liabilities................................................ 93,316 120,483
LONG-TERM DEBT........................................................................... 2,967 2,420
SENIOR TERM NOTES........................................................................ 145,997 145,915
OTHER LONG-TERM LIABILITIES.............................................................. 7,364 11,288
---------- -----------
249,644 280,106
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 30,000,000 shares authorized, 17,706,660 and
17,741,500 shares issued and outstanding, respectively....................... 18 18
Additional paid-in capital...................................................... 75,244 75,321
Warrants........................................................................ 180 180
Retained deficit................................................................ (23,731) (28,319)
Foreign currency translation adjustments........................................ (1,183) (2,811)
---------- ------------
Total stockholders' equity............................................... 50,528 44,389
---------- -----------
$ 300,172 $ 324,495
========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------ ---------------------------------
1998 1999 1998 1999
------------ ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
NET SALES............................................. $ 85,841 $ 93,946 $ 244,735 $ 269,564
COST OF GOODS SOLD ................................... 52,368 57,354 146,916 170,422
------------ ------------ ------------ -----------
Gross profit .............................. 33,473 36,592 97,819 99,142
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES........................................... 29,688 33,378 89,055 93,262
------------ ------------ ------------ -----------
Operating income........................... 3,785 3,214 8,764 5,880
INTEREST EXPENSE, net ................................ 4,530 4,711 12,433 14,338
OTHER INCOME.......................................... 1,987 134 2,262 1,814
------------ ------------ ------------ -----------
INCOME (LOSS) BEFORE INCOME TAX
PROVISION (BENEFIT)................................ 1,242 (1,363) (1,407) (6,644)
INCOME TAX PROVISION (BENEFIT)........................ (277) (579) 1,270 (1,818)
------------ ------------ ------------ -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS.............. 1,519 (784) (2,677) (4,826)
DISCONTINUED OPERATIONS:
Loss from operations of laundry detergent
business..................................... 818 -- 1,192 --
Change in estimate of loss on disposal
of detergent business........................ -- 229 -- (238)
------------ ------------ ------------ -----------
NET INCOME (LOSS) .................................... 701 (1,013) (3,869) (4,588)
PREFERRED STOCK DIVIDEND ............................. -- -- 80 --
------------ ------------ ------------ -----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS. $ 701 $ (1,013) $ (3,949) $ (4,588)
============ ============ ============ ===========
INCOME (LOSS) PER COMMON SHARE:
Basic earnings (loss) per share:
Continuing operations........................ $ 0.09 $ (0.04) $ (0.18) $ (0.27)
Discontinued operations...................... (0.05) (0.01) (0.07) .01
------------ ------------ ------------ -----------
Net income (loss)............................ $ 0.04 $ (0.05) $ (0.25) $ (0.26)
============ ============ ============ ==========
Diluted earnings (loss) per share:
Continuing operations........................ $ 0.08 $ (0.04) $ (0.18) $ (0.27)
Discontinued operations...................... (0.04) (0.01) (0.07) .01
------------ ------------ ------------ -----------
Net income (loss)............................ $ 0.04 $ (0.05) $ (0.25) $ (0.26)
============ ============ ============ ===========
COMMON SHARES OUTSTANDING............................. 17,360,880 17,736,991 15,589,704 17,726,397
============ ============ ============ ===========
COMMON AND POTENTIAL COMMON SHARES
OUSTANDING 18,271,276 17,736,991 15,589,704 17,726,397
============ ============ ============ ===========
</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
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) ... 34,840 -- 77 -- -- --
Net loss (unaudited) ........... -- -- -- -- (4,588) --
Translation adjustments
(unaudited) .................. -- -- -- -- -- (1,628)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, September 30, 1999
(unaudited) .................. 17,741,500 $ 18 $ 75,321 $ 180 $ (28,319) $ (2,811)
========== ========== ========== ========== ========== ==========
</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>
NINE MONTHS ENDED
SEPTEMBER 30
--------- ---------
1998 1999
--------- ---------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,869) $ (4,588)
Adjustments to reconcile net loss to net cash used in operating activities
Change in estimate of loss on disposal of detergent business................ -- (238)
Depreciation and amortization............................................... 7,313 10,062
Write-off of machinery and equipment resulting from Argentina fire.......... 2,894 --
Changes in operating assets and liabilities
(Increase) decrease in --
Accounts receivable.................................................... (9,913) (18,159)
Inventories............................................................ (3,908) (3,129)
Prepaid expenses and other............................................. (8,479) (852)
Effect of insurance receivable resulting from Argentina fire........... (10,008) 3,691
Increase (decrease)in--
Accounts payable....................................................... 4,308 18,088
Accrued and other liabilities.......................................... 8,919 (6,118)
Change in other long-term liabilities....................................... (1,833) (177)
--------- ---------
Net cash used in operating activities........................... (14,576) (1,420)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................................ (18,336) (15,888)
Proceeds from sale and leaseback of Mexico facility........................... -- 5,820
Investment in Brazilian venture, net of cash acquired......................... (3,943) --
Investment in Malaysia diaper manufacturer, net of cash acquired.............. (10,207) --
Investment in other noncurrent assets......................................... (1,568) (7,899)
--------- ---------
Net cash used in investing activities................................. (34,054) (17,967)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under senior term notes............................................ 31,087 --
Borrowings under revolvers.................................................... 57,738 19,256
Payments on revolvers......................................................... (35,100) (5,450)
Borrowings under (payments on) other debt..................................... 4,320 (547)
Financing related costs....................................................... (2,836) (161)
Proceeds from exercise of stock options and warrants.......................... 181 78
--------- ---------
Net cash provided by financing activities ............................ 55,390 13,176
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ 6,760 (6,211)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.................................... 9,269 12,309
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................................... $ 16,029 $ 6,098
========= =========
SUPPLEMENTAL DATA:
Cash paid during the period for:
Interest................................................................... $ 7,346 $ 8,148
Income taxes............................................................... $ 1,957 $ 902
Non-cash transactions:
Common stock issued for Malaysia acquisition............................... $ 2,825 $ --
Contribution of land and building by
Columbian 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
nine months ended September 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
nine-month periods ended September 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 currently holds only minimal amounts of 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1999 1998 1999
----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations, less
preferred stock dividend............................. $ 1,519 $ (784) $ (2,757) $ (4,826)
Discontinued operations................................. (818) (229) (1,192) 238
----------- ----------- --------- ---------
Net income (loss) attributable to common stockholders... $ 701 $ (1,013) $ (3,949) $ (4,588)
=========== =========== =========== ===========
Weighted average number of common shares outstanding.... 17,360,880 17,736,991 15,589,704 17,726,397
=========== =========== =========== ===========
Income (loss) from continuing operations................ $ 0.09 $ (0.04) $ (0.18) $ (0.27)
Discontinued operations................................. (0.05) (0.01) (0.07) .01
----------- ----------- ---------- -----------
Net income (loss)....................................... $ 0.04 $ (0.05) $ (0.25) $ (0.26)
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations, less preferred
stock dividend....................................... $ 1,519 $ (784) $ (2,757) $ (4,826)
Discontinued operations................................. (818) (229) (1,192) 238
----------- ----------- ---------- -----------
Net income (loss) attributable to common stockholders... $ 701 $ (1,013) $ (3,949) $ (4,588)
=========== =========== ========== ===========
Weighted average number of common shares outstanding.... 17,360,880 17,736,991 15,589,704 17,726,397
Dilutive effect - options and warrants.................. 910,396 -- -- --
----------- ----------- ---------- -----------
18,271,276 17,736,991 15,589,704 17,726,397
=========== =========== ========== ===========
Income (loss) from continuing operations............... $ 0.08 $ (0.04) $ (0.18) $ (0.27)
Discontinued operations................................ (0.04) (0.01) (0.07) .01
----------- ----------- ---------- -----------
Net income (loss)...................................... $ 0.04 $ (0.05) $ (0.25) $ (0.26)
=========== =========== ========== ===========
</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
958,434 and 3,560,426 for the three months ended September 30, 1998 and 1999,
respectively, and 848,434 and 3,560,426 for the nine months ended September 30,
1998 and 1999, respectively.
6
<PAGE>
3. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss), which encompasses net income and currency
translation adjustments, is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1999 1998 1999
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss) attributable to common stockholders $ 701 $ (1,013) $ (3,949) $ (4,588)
Currency translation adjustments .................... (1,078) (1,598) (1,078) (1,628)
---------- ---------- ---------- ----------
Comprehensive loss .................................. $ (377) $ (2,611) $ (5,027) $ (6,216)
========== ========== ========== ==========
</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 September 30, 1999, the Company had received interim payments of
approximately $16,914,000 on its claim. No interim payments have been received
subsequent to September 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 September 30, 1999, the Company has recorded 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 September 1999 to be recovered under the
business interruption portion of the insurance claim. For the nine months ended
September 30, 1999, the Company has recorded approximately $1,285,000 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 $26,700,000 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
7
<PAGE>
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 $674,000 during the nine
months ended September 30, 1999 to meet its contractual obligations related to
disposing of the business. During the nine months ended September 30, 1999, the
Company recorded a $238,000 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 nine months
ended September 30, 1999.
6. INVENTORIES
Inventories consisted of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1998 1999
------- -------
(UNAUDITED)
Raw Materials.............. $12,702 $12,314
Finished Goods............. 17,120 20,637
------- -------
$29,822 $32,951
======= =======
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 September 30, 1999, the Company had borrowings
outstanding of $38,385,000 and $52,191,000, 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 September
30, 1999, the Company had borrowings outstanding of $45,935,000 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 and document negotiations with the lender and another
financial institution to restructure its facility into a combination of a
revolver and term loans in November 1999. The Company was in compliance with the
terms of the credit facility, as amended, as of September 30, 1999.
Additionally, as of November 5, 1999, the Company has approximately $500,000
in borrowing availability under its Malaysian trade financing facilities, and is
scheduled to close on an equipment term loan for approximately $1,000,000 during
the second half of November 1999. The Company's
8
<PAGE>
Colombian operations are also scheduled to close on a $3,000,000 line of credit
during the second half of November 1999.
The Company has issued a letter of credit for $1,000,000 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
approximately $2,100,000 and $6,256,000 as of December 31, 1998 and September
30, 1999, respectively.
LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
December 31, September 30,
1998 1999
------ ------
(unaudited)
Note payable, due 2001, interest at
8.4%, partially secured by land
buildings......................... $1,707 $1,511
Various other notes payable........... 1,582 1,231
------ ------
3,289 2,742
Less: current maturities.......... (322) (322)
------ ------
$2,967 $2,420
====== ======
SENIOR TERM NOTES
Long-term debt under senior term notes consisted of the following (in
thousands):
December 31, September 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 $915, respectively...... $145,997 $ 145,915
======== =========
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.
9
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
The Company enters into various commitments from time to time for the
purchase of manufacturing equipment in the normal course of business. Management
believes that such commitments could be cancelled without material financial
obligation to the Company.
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
fees 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 SEPTEMBER 30, 1998
- -------------------------------------
Net sales............................................................ $ 55,919 $ 29,922 $ 85,841
Intersegment sales................................................... 973 493 1,466
Operating income before management fees and corporate overhead....... 8,751 1,487 10,238
Corporate overhead................................................... (5,905) (548) (6,453)
Interest expense, net................................................ (4,530)
Other income......................................................... 1,987
----------- ------------- ------------
Income from continuing operations before taxes....................... $ 2,846 $ 939 $ 1,242
=========== ============= ============
NINE MONTHS ENDED SEPTEMBER 30, 1998
- ------------------------------------
Net sales............................................................ $ 156,787 $ 87,948 $ 244,735
Intersegment sales................................................... 2,280 2,113 4,393
Operating income before management fees and corporate overhead....... 14,013 7,026 21,039
Corporate overhead................................................... (10,620) (1,655) (12,275)
Interest expense, net................................................ (12,433)
Other income......................................................... 2,262
----------- ------------- ------------
Income (loss) from continuing operations before taxes................ $ 3,393 $ 5,371 $ (1,407)
=========== ============= ============
Total assets......................................................... $ 154,792 $ 138,082 $ 292,874
=========== ============= ============
DOMESTIC INTERNATIONAL TOTAL
----------- ------------- ------------
THREE MONTHS ENDED SEPTEMBER 30, 1999
- -------------------------------------
Net sales............................................................ $ 57,578 $ 36,368 $ 93,946
Intersegment sales................................................... 831 -- 831
Operating income before management fees and corporate
overhead.......................................................... 5,809 109 5,918
Corporate overhead................................................... (1,835) (869) (2,704)
Interest expense, net................................................ (4,711)
Other income......................................................... 134
----------- ------------- ------------
Income (loss) from continuing operations before taxes................ $ 3,974 $ (760) $ (1,363)
=========== ============= ============
NINE MONTHS ENDED SEPTEMBER 30, 1999
- ------------------------------------
Net sales............................................................ $ 165,529 $ 104,035 $ 269,564
Intersegment sales................................................... 2,951 3,464 6,415
Operating income (loss) before management fees and corporate
overhead.......................................................... 12,634 (1,871) 10,763
Corporate overhead................................................... (4,432) (451) (4,883)
Interest expense, net................................................ (14,338)
10
<PAGE>
Other income......................................................... -- -- 1,814
----------- ------------- ------------
Income (loss) from continuing operations before taxes................ $ 8,202 $ (2,322) $ (6,644)
=========== ============= ============
Total assets......................................................... $ 163,499 $ 160,996 $ 324,495
=========== ============= ============
</TABLE>
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 COMPLETION OF A NEW BANK FACILITY, TIMING
OF NEW PRODUCT DISTRIBUTION, COMPETITIVE INDUSTRY, PRICE CHANGES BY COMPETITORS,
INTERNATIONAL OPERATIONS, CURRENCY FLUCTUATIONS, CURRENCY DEVALUATIONS, CURRENCY
RESTRICTIONS, CAPACITY ALLOCATION AMONG THE COMPANY'S PRODUCTION FACILITIES,
SCOPE OF INSURANCE COVERAGE, LEVERAGE AND DEBT SERVICE, SUFFICIENCY OF PATENT
AND OTHER INTELLECTUAL PROPERTY PROTECTION, DEPENDENCE ON KEY PRODUCTS,
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. In
11
<PAGE>
September 1999, the Company obtained private label distribution into all U.S.
Wal-Mart Stores, with initial shipments beginning in October 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. 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 September 30, 1999, the Company had received interim
payments of approximately $16,914,000 on its claim. No interim payments have
been received subsequent to September 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, 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 $674,000 during
the nine months ended September 30, 1999 to meet its contractual obligations
related to disposing of the business. During the nine months ended September 30,
1999, the Company recorded a $238,000 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 nine months ended September 30, 1999.
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. 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 implemented small price increases in
Brazil during the second and third quarters of 1999, but they were offset by
further currency devaluation. Management expects additional price increases in
the fourth quarter of 1999; however, due to the unanticipated weakening of
12
<PAGE>
the Brazilian real during the third quarter, clarity on the fourth quarter is
difficult. Due to the impact of Brazil's devaluation on the economy in
Argentina, the Company has entered into a series of forward contracts to hedge
its exposure related to U.S. dollar based raw materials and has implemented cost
reduction efforts in response to the recession in that country. Management
believes that improvement in the Company's Argentine operations is unlikely
throughout the remainder of 1999. The Company is considering a forward contract
to edge its exposure to the Brazilian real for the year 200 as well.
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 nine months ended September 30, 1998 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------------------ -----------------------------------------
1998 1999 1998 1999
-------------------- -------------------- --------------------- -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic....................... $ 55.9 65.2% $ 57.6 61.3% $ 156.8 64.1% $ 165.6 61.4%
International.................. 29.9 34.8 36.3 38.7 87.9 35.9 104.0 38.6
------- ------- ------- ------ -------- ------ -------- ------
Total net sales.......... $ 85.8 100.0% $ 93.9 100.0% $ 244.7 100.0% $ 269.6 100.0%
======= ======= ======= ====== ======== ====== ======== =====
</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 nine months ended September 30, 1998 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 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................................... 61.0 61.0 60.0 63.2
------ ------ ----- ------
Gross profit......................................... 39.0 39.0 40.0 36.8
Selling, general and administrative expenses......... 34.6 35.5 36.4 34.6
------ ------ ----- ------
Operating income .................................... 4.4 3.5 3.6 2.2
Interest expense, net................................ 5.3 5.0 5.1 5.3
Other income......................................... 2.3 .1 .9 .7
------ ------ ----- ------
Income (loss) from continuing operations before income
tax provision (benefit)........................... 1.4 (1.4) (.6) (2.4)
Income tax provision (benefit)....................... (.3) (.6) .5 (.7)
------ ------ ----- ------
Income (loss) from continuing operations............. 1.7 (.8) (1.1) 1.7
Discontinued operations.............................. (.9) (.2) (.5) --
------ ------ ----- ------
Net income (loss).................................... .8% (1.0)% (1.6)% (1.7)%
====== ====== ===== ======
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES
Net sales increased 9.4% to $93.9 million for the three months ended
September 30, 1999 from $85.8 million for the three months ended September 30,
1998. Domestic sales increased 3.0% to $57.6 million for the three months ended
September 30, 1999 from $55.9 million for the three months ended September 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. During the
quarter, the Company announced new private label agreements with Wal-Mart and
Kroger, as well as additional distribution of its branded products in Food Lion
Stores. This new business began shipment in the fourth quarter of 1999. While
international unit sales volume increased 21.5%, 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 small price increase in Brazil during the quarter; however, this
increase was offset by further currency devaluation, which negatively impacted
the quarter by approximately $1.0 million. Despite the economic problems in
South America, the Company's Brazilian unit volume increased 16.0% as the
Company was able to expand its market share there. The Company's Mexico business
achieved record net sales in the third quarter of 1999, and the Company's
recently acquired Asian operations were also a strong contributor to net sales
in the third quarter of 1999. Additionally, the Company's Andean Pact operations
began manufacturing diapers in Colombia during the quarter, boosting sales in
that region significantly.
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales remained flat at 61.0% for
the three months ended September 30, 1999 compared to the three months ended
September 30, 1998. This percentage is comprised of several offsetting factors.
Domestic gross profit slightly increased over the prior year, reflecting
improvements in efficiencies on branded product being offset by inefficiencies
on the new private label product. International gross profit improved slightly
over the last year due to gains outside of the Mercosur region of South America
(which includes the countries of Argentina, Brazil, Paraguay and Uraguay). In
Malaysia, the Company replaced private label manufacturing with branded products
and now has a base business in the Andean region.
14
<PAGE>
In Mexico, the Company is operating in a positive competitive environment
compared to the intense price competition that occurred last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased as a percentage of net
sales to 35.5% for the three months ended September 30, 1999 compared to 34.6%
for the three months ended September 30, 1998. This is primarily due to the
increase in international selling costs outside of the Mercosur, offset by
product mix changes in the United States.
OPERATING INCOME
As a result of the above factors, the Company's operating income decreased
$0.6 million to a loss of $3.2 million for the three months ended September 30,
1999 from income of $3.8 million for the three months ended September 30, 1998.
INTEREST EXPENSE, NET
Interest expense, net increased to $4.7 million for the three months ended
September 30, 1999 as compared to $4.5 million for the three months ended
September 30, 1998. The increase primarily relates to increased borrowing levels
and interest rates under the Company's revolving credit facility as compared to
the comparable prior year period.
INCOME TAXES
The Company recorded a benefit of $579,000 related to foreign taxes for the
three months ended September 30, 1999, compared to a benefit of $277,000 for the
three months ended September 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 and 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES
Net sales increased 10.1% to $269.6 million for the nine months ended
September 30, 1999 from $244.7 million for the nine months ended September 30,
1998. Domestic sales increased 5.6% to $165.6 million for the nine months ended
September 30, 1999 from $156.8 million for the nine months ended September 30,
1998. Net sales in the international sector grew to $104.0 million for the nine
months ended September 30, 1999 from $87.9 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 and third quarters of 1999. While international unit sales volume
increased 37.6%, 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 small price increases in
Brazil during the second and third quarters; however, these increases were
offset by further currency devaluation. Despite the economic problems in South
America, the Company's Brazilian unit volume increased 31.6% as the Company was
able to expand its market share there. Due to the situation in South America,
management has reallocated capacity out of the Mercosur to more profitable
business areas while reducing ongoing operating costs within the Mercosur. The
Company's Mexico business achieved record net sales for the first three quarters
of 1999, and the Company's recently acquired Asian operations were also a strong
contributor to net sales in 1999. Additionally, the Company's Andean Pact
operations began manufacturing diapers in Colombia during the third quarter of
1999, boosting sales in that region significantly.
15
<PAGE>
COST OF GOODS SOLD
Cost of goods sold as a percentage of net sales increased to 63.2% for the
nine months ended September 30, 1999 compared to 60.0% for the nine months ended
September 30, 1998. This increase primarily reflects the currency devaluation in
Brazil, where the dollar sales price per pad decreased by 39.2% 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 1999 were not
sustainable due to competitive pressures. The Company was able to implement
small price increases during the second and third quarters; however, the impact
of these price increases were offset by further devaluation in the Brazilian
real. Additionally, international sales increased as a percentage of the
Company's total net sales to 38.6% for the nine months ended September 30, 1999
from 35.9% for the nine months ended September 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 34.6% for the nine months ended September 30, 1999 compared to 36.4%
for the nine months ended September 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
$2.9 million to $5.9 million for the nine months ended September 30, 1999 from
$8.8 million for the nine months ended September 30, 1998.
INTEREST EXPENSE, NET
Interest expense, net increased to $14.3 million for the nine months ended
September 30, 1999 as compared to $12.4 million for the nine months ended
September 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, increased borrowing levels
under the Company's revolving credit facility and increased interest rates.
INCOME TAXES
The Company recorded a benefit of $1.8 million related to foreign taxes for
the nine months ended September 30, 1999, compared to a provision of $1.3
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 $1.4 million of cash during the nine months
ended September 30, 1999 and used $14.6 million of cash during the nine months
ended September 30, 1998. The use of cash during the nine
16
<PAGE>
months ended September 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, the buildup of inventory to support the increase in sales volume
(and the corresponding increase in accounts receivable) and the payment of
interest on the 10 1/4% Senior Notes. The use of cash during the nine monthS
ended September 30, 1998 primarily reflected the national television campaign in
the United States, the buildup of inventory to support the increase in sales
volume (and the corresponding increase in accounts receivable), payment of
interest on the 10 1/4% Senior Notes, financing the working capital needs and
restoration and expenditures related to the Xclaim product of the Company's
Argentina operations which were damaged by fire in August 1998.
The Company's capital expenditures were $15.9 million for the nine months
ended September 30, 1999 and $18.3 million for the nine months ended September
30, 1998. Approximately $7.0 million of the capital expenditures made in the
first three quarters of 1999 related to restoration of the Company's Argentina
operations damaged by fire in August 1998 while approximately $2.2 million
related to the movement of production capacity out of the Mercosur. The capital
expenditures in 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 $7.0 million relates to rebuilding
the facilities in Argentina that were destroyed by fire. The remainder relates
to the expansion of capacity and modifications to existing equipment to enable
the Company to make future product enhancements.
As of September 30, 1999, the Company has recorded 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 September 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 $45.9 million as of September 30, 1999. Insurance proceeds
anticipated to be received during the fourth 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 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.
17
<PAGE>
The Company's working capital was $9.8 million as of September 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 $130.3 million as of
September 30, 1999, and current liabilities increased from $93.3 million as of
December 31, 1998 to $120.5 million as of September 30, 1999. Total debt
increased from $187.7 million at December 31, 1998 to $200.8 million as of
September 30, 1999.
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 and another financial
institution to restructure its facility into a combination of a revolver and
term loans in November 1999. The Company was in compliance with the terms of the
credit facility, as amended, as of September 30, 1999.
18
<PAGE>
As of September 30, 1999, under the most recent amendment to the revolving
credit facility, the Company had no borrowing availability. However, the Company
has several transactions currently in process which should generate significant
additional liquidity. The Company is currently in the process of restructuring
its credit facilty with its lender and another financial institution into a
combination of a revolver and term loans which should provide approximately $8.0
million of additional liquidity. The Company is in the documentation process
related to the restructured credit facility and is anticipating a late November
1999 closing. Additionally, by November 15, 1999, the Company's Malaysian
subsidiary is expected to generate an additional $1.5 million of availability
from a combination of equipment term loans and trade financing and the Company's
Colombia operations are expected to generate an additional $3.0 million of
availability from a line of credit. Both facilities are in the documentation
process and will be denominated in the local currencies, thus serving as a
self-hedge. The Company is continuing its efforts to bring the insurance claim
process to closure by the end of 1999 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 restructured 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.
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, and has recently entered into a
series of forward exchange contracts related to raw material purchases for its
Argentine operations.
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
19
<PAGE>
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 currently holds minimal amounts of 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.
THE COMPANY'S STATE OF READINESS
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 and evaluation and modification of all desktop hardware
throughout the Company has been completed as of September 30, 1999.
Additionally, potentially date sensitive chips embedded within production
equipment have been successfully tested to identify and address any problems.
COSTS TO ADDRESS YEAR 2000 ISSUES
The Company estimated that the expenses and capital expenditures
associated with the replacement of the Company's Programs and Systems would be
approximately $8.0 million during 1998 and 1999. Approximately $7.8 million had
been expended on the PeopleSoft software and implementation process at September
30, 1999. Management does not expect remaining amounts to be expended on Year
2000 issues to be significant.
RISKS OF YEAR 2000 ISSUES
The Company has successfully implemented its formal Year 2000 compliance
plan as of 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 has successfully implemented
its formal Year 2000 compliance plan, the Company has developed a "Worst Case
Contingency Plan", which will include generally an environment of utilizing
"Work Force", "Spreadsheet" and "Work Around" programming and procedural
efforts. Additionally, the Company has planned to increase inventory levels at
the end of 1999 to mitigate any significant business interruption in shipments
to customers.
20
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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 September 30, 1999, the Company
had $52.2 million outstanding under its revolving credit facility. An increase
in interest rates of 1% would reduce annual net income by approximately
$520,000. The Company's remaining debt obligations as of September 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.
The Company historically has not utilized financial instruments for
trading purposes and has held no derivative financial instruments which could
expose the company to significant market risk. However, in August 1999 the
Company entered into a series of one-year forward exchange contracts with firm
commitments to hedge certain raw material purchases denominated in U.S. dollars
for its Argentine subsidiary.
21
<PAGE>
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.
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
22
<PAGE>
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.
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
23
<PAGE>
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 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 - There were no reports filed on Form 8-K during the
three months ended September 30, 1999.
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: NOVEMBER 15,1999 By: /S/ JONATHAN P. FOSTER
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
25
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
EXHIBIT
NUMBER DECRIPTION
- ------- ----------
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 9/30/99 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 6,098,000 6,098,000
<SECURITIES> 0 0
<RECEIVABLES> 70,063,000 70,063,000
<ALLOWANCES> 3,251,000 3,251,000
<INVENTORY> 32,951,000 32,951,000
<CURRENT-ASSETS> 130,261,000 130,261,000
<PP&E> 114,917,000 114,917,000
<DEPRECIATION> 26,311,000 26,311,000
<TOTAL-ASSETS> 324,495,000 324,495,000
<CURRENT-LIABILITIES> 120,483,000 120,483,000
<BONDS> 145,915,000 145,915,000
0 0
0 0
<COMMON> 18,000 18,000
<OTHER-SE> 44,371,000 44,371,000
<TOTAL-LIABILITY-AND-EQUITY> 324,495,000 324,495,000
<SALES> 93,946,000 269,564,000
<TOTAL-REVENUES> 93,946,000 269,564,000
<CGS> 57,354,000 170,422,000
<TOTAL-COSTS> 90,732,000 263,684,000
<OTHER-EXPENSES> (134,000) (1,814,000)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,711,000 14,338,000
<INCOME-PRETAX> (1,363,000) (6,644,000)
<INCOME-TAX> (579,000) (1,818,000)
<INCOME-CONTINUING> (784,000) (4,826,000)
<DISCONTINUED> (229,000) 238,000
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,013,000) (4,588,000)
<EPS-BASIC> (.05) (.26)
<EPS-DILUTED> (.05) (.26)
</TABLE>
