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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-23422
DRYPERS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0344044
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
5300 MEMORIAL, SUITE 900
HOUSTON, TEXAS 77007
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING THE AREA CODE: (713) 869-8693
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
(CLASS) (OUTSTANDING AT NOVEMBER 6, 2000)
Common Stock, $.001 Par Value 17,779,946 shares
<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, 1999 and September 30, 2000.
Consolidated Statements of Earnings for the Three Months and Nine Months Ended
September 30, 1999 and 2000.
Consolidated Statement of Stockholders' Equity for the Nine Months Ended
September 30, 2000.
Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
1999 and 2000.
Notes to Consolidated Financial Statements.
i
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
1999 2000
--------- ---------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents .................. $ 4,048 $ 2,804
Accounts receivable, net of allowance for
doubtful accounts of $3,422 and
$3,627, respectively ..................... 65,771 47,846
Inventories ................................ 39,728 33,828
Prepaid expenses and other ................. 25,690 33,432
--------- ---------
Total current assets .................... 135,237 117,910
PROPERTY AND EQUIPMENT, net of depreciation
and amortization of $28,680 and $33,465,
respectively ................................ 101,952 83,568
INTANGIBLE AND OTHER ASSETS, net of
amortization of $22,630 and $26,720,
respectively ................................ 100,491 91,885
--------- ---------
$ 337,680 $ 293,363
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings ...................... $ 31,385 $ 20,598
Current portion of long-term debt .......... 3,035 2,561
Accounts payable ........................... 53,436 64,231
Accrued liabilities ........................ 18,686 22,959
--------- ---------
Total current liabilities ............... 106,542 110,349
LONG-TERM DEBT ................................ 34,984 32,180
SENIOR TERM NOTES ............................. 145,888 145,807
OTHER LONG-TERM LIABILITIES ................... 10,350 10,012
--------- ---------
297,764 298,348
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value,
30,000,000 shares authorized,
17,749,368 and 17,779,946 shares
issued and outstanding, respectively ..... 18 18
Additional paid-in capital ................. 75,337 75,383
Warrants ................................... 1,879 1,879
Retained deficit ........................... (35,375) (72,208)
Foreign currency translation adjustments ... (1,943) (10,057)
--------- ---------
Total stockholders' equity .............. 39,916 (4,985)
--------- ---------
$ 337,680 $ 293,363
========= =========
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 AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------------- --------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
NET SALES .............................. $ 93,946 $ 75,210 $ 269,564 $ 264,458
COST OF GOODS SOLD ..................... 57,354 59,940 170,422 174,653
------------ ------------ ------------ ------------
Gross profit ....................... 36,592 15,270 99,142 89,805
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ............................. 33,378 29,539 93,262 92,803
IMPAIRMENT LOSS ........................ -- 12,128 -- 12,128
------------ ------------ ------------ ------------
Operating income (loss) ............ 3,214 (26,397) 5,880 (15,126)
INTEREST EXPENSE, net .................. 4,711 6,298 14,338 17,959
OTHER INCOME (EXPENSE) ................. 134 (2,256) 1,814 (3,271)
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX PROVISION
(BENEFIT) ............................ (1,363) (34,951) (6,644) (36,356)
INCOME TAX PROVISION (BENEFIT) ......... (579) 873 (1,818) 477
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS ........ (784) (35,824) (4,826) (36,833)
DISCONTINUED OPERATIONS:
Change in estimate of loss on
disposal of detergent business ... 229 -- (238) --
------------ ------------ ------------ ------------
NET LOSS ............................... $ (1,013) $ (35,824) $ (4,588) $ (36,833)
============ ============ ============ ============
INCOME (LOSS) PER COMMON SHARE:
Basic earnings (loss) per share:
Continuing operations .............. $ (0.04) $ (2.02) $ (0.27) $ (2.07)
Discontinued operations ............ (0.01) -- 0.01 --
------------ ------------ ------------ ------------
Net loss ........................... $ (0.05) $ (2.02) $ (0.26) $ (2.07)
============ ============ ============ ============
Diluted earnings (loss) per share:
Continuing operations .............. $ (0.04) $ (2.02 $ (0.27) $ (2.07)
Discontinued operations ............ (0.01) -- 0.01 --
------------ ------------ ------------ ------------
Net loss ........................... $ (0.05) $ (2.02) $ (0.26) $ (2.07)
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING ...... 17,736,991 17,771,113 17,726,397 17,762,120
============ ============ ============ ============
AVERAGE COMMON AND POTENTIAL COMMON
SHARES OUTSTANDING ..................... 17,736,991 17,771,113 17,726,397 17,762,120
============ ============ ============ ============
</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
SHARES FOREIGN
ISSUED ADDITIONAL CURRENCY
AND COMMON PAID-IN RETAINED TRANSLATION
OUTSTANDING STOCK CAPITAL WARRANTS DEFICIT ADJUSTMENTS
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 ............. 17,749,368 $ 18 $ 75,337 $ 1,879 $ (35,375) $ (1,943)
Effect of stock purchase
plans (unaudited) ................. 30,578 -- 46 -- -- --
Net loss (unaudited) ................ -- -- -- -- (36,833) --
Translation adjustments
(unaudited) ....................... -- -- -- -- -- (8,114)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE, September 30, 2000
(unaudited) ....................... 17,779,946 $ 18 $ 75,383 $ 1,879 $ (72,208) $ (10,057)
========== ========== ========== ========== ========== ==========
</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)
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
1999 2000
--------- ---------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................... $ (4,588) $ (36,833)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities
Discontinued operations .......................... (238) --
Depreciation and amortization .................... 10,062 11,679
Non-cash write-off of certain Colombian assets ... -- 2,050
Impairment loss .................................. -- 12,128
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable ............................ (18,159) 6,454
Inventories .................................... (3,129) 3,477
Prepaid expenses and other ..................... (852) (9,950)
Insurance receivable resulting from
Argentina fire ............................... 3,691 2,900
Increase (decrease) in --
Accounts payable ............................... 18,088 19,276
Accrued and other liabilities .................. (6,118) 4,173
Change in other long-term liabilities ............ (177) (1,734)
--------- ---------
Net cash provided by (used in) operating
activities ..................................... (1,420) 13,620
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................. (15,888) (11,868)
Final settlement to former shareholders
of PrimoSoft ..................................... -- (2,464)
Proceeds from sale and leaseback of
Mexico facility .................................. 5,820 --
Investment in other noncurrent assets .............. (7,899) (1,011)
--------- ---------
Net cash used in investing activities ............ (17,967) (15,343)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolver .......................... 19,256 148,085
Payments on revolvers .............................. (5,450) (158,872)
Payments on other debt ............................. (547) (1,910)
Financing related costs ............................ (161) (421)
Disposition of net assets of Mexican
operations ....................................... -- 13,551
Proceeds from exercise of stock options
and warrants ..................................... 78 46
--------- ---------
Net cash provided by financing
activities ..................................... 13,176 479
--------- ---------
NET DECREASE IN CASH AND CASH
EQUIVALENTS ........................................ (6,211) (1,244)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ............................................. 12,309 4,048
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........... $ 6,098 $ 2,804
========= =========
SUPPLEMENTAL DATA:
Cash paid during the period for:
Interest ........................................... $ 8,148 $ 12,371
Income taxes ....................................... $ 902 $ 786
Non-cash transactions:
Contribution of land and building by
Colombian joint venture partner ................ $ 1,750 $ --
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. CHAPTER 11 CASE
On October 10, 2000, Drypers Corporation (the "Company") filed a voluntary
petition for reorganization under Chapter 11 of the United States Bankruptcy
Code. The petition was filed with the United States Bankruptcy Court for the
Southern District of Texas, Houston Division. Under Chapter 11, the Company is
operating as a debtor-in-possession, or DIP, under the Bankruptcy Code and is
able to continue to conduct business in the ordinary course, while it devotes
efforts to develop a reorganization plan. None of the Company's foreign
subsidiaries were included in the Chapter 11 filing.
The Procter & Gamble Company had filed two lawsuits against the Company in
September 2000. The first lawsuit was filed in Federal District Court in Ohio
and alleged that Drypers owed $4.1 million to Procter & Gamble under its
licensing arrangements with Procter & Gamble. The second lawsuit, filed in
Federal District Court in Delaware, alleged infringement by the Company of
certain patents owned by Procter & Gamble related to its manufacturing of
disposable diapers. The Company had also received notice from Procter & Gamble
terminating license agreements between the two parties associated with these
patents. The Company's failure to make payments to Procter & Gamble resulted in
an event of default under its primary lending facilities at that time.
The Procter & Gamble lawsuits, together with a previously announced drop in
sales in the third quarter of 2000 due to an industry-wide transition to new
packaging in the United States and continued difficulties in international
markets, had two effects on the Company. First, the payments owed to Procter &
Gamble together with the anticipated financial covenant defaults under its
credit facilities at the time caused an immediate and critical liquidity issue
for the Company. Second, the infringement lawsuit by Procter & Gamble caused
uncertainty as to the Company's ability to continue producing diapers under the
patents licensed from Procter & Gamble. The combination of these two factors
caused the Company to make the Chapter 11 filing to allow it to resolve the
Procter & Gamble disputes in an orderly manner and to resolve all claims, as
defined in the Bankruptcy Code, against it that arose prior to the Chapter 11
filing.
On October 27, 2000, the bankruptcy court entered a final order approving the
Company's DIP financing. The DIP agreement calls for Fleet Capital Corporation
to provide a $25.0 million credit facility to fund the Company's ongoing
operating needs while in bankruptcy.
In addition, the bankruptcy court also gave final approval to the payment
plan between the Company and Procter & Gamble which resolves the outstanding
disputes and litigation between the two parties. With this approval, the Company
will make payments to Procter & Gamble under a new licensing arrangement that
will allow Drypers to continue producing diapers under the Procter & Gamble
patents.
An official committee of unsecured creditors was appointed in the Drypers
Chapter 11 case.
As a result of the Chapter 11 filing, the Company is prohibited from paying
any prepetition liabilities without Bankruptcy Court approval. The Chapter 11
filing resulted in a default under the Company's prepetition revolving credit
facility. Pursuant to the Bankruptcy Code, the Company can seek Bankruptcy Court
approval for the rejection of executory contracts or unexpired leases, including
real property leases. Any rejection of a contract or a lease may give rise to a
prepetition unsecured claim for damages arising from the rejection.
5
<PAGE>
The Company's ability to effect a successful reorganization will depend, in
significant part, on its ability to formulate a plan of reorganization that is
approved and confirmed by the Bankruptcy Court. Management believes, however,
that the Company may not be able to satisfy in full all of the claims against it
through the bankruptcy process. The Company is unable to predict at this time
when, if at all, it will emerge from its Chapter 11 case.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements included herein have been prepared by
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 in the United States 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, 1999 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
the nine months ended September 30, 2000 are not necessarily indicative of the
results that will be realized for the fiscal year ending December 31, 2000.
The unaudited consolidated financial information as of and for the three
month and nine month periods ended September 30, 1999 and 2000, 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.
As discussed in Note 1, on October 10, 2000, the Company filed for
reorganization under Chapter 11 of the Federal Bankruptcy Code. The accompanying
consolidated financial statements do not purport to reflect or provide for the
consequences of the bankruptcy proceedings. In particular, such consolidated
financial statements do not purport to show (a) as to assets, their realizable
value on a liquidation basis or their availability to satisfy liabilities; (b)
as to prepetition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any changes that may be made
in its business.
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In particular, SFAS No. 133 requires a company to record every derivative
instrument on the company's balance sheet as either an asset or liability
measured at fair value. In addition, SFAS No. 133 requires that changes in the
fair value of a derivative be recognized currently in earnings unless specific
hedge accounting criteria are satisfied. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. In June 2000, the FASB issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB No. 133." SFAS No. 138 addresses a limited number of issues causing
implementation difficulties for numerous entities that apply SFAS No. 133 and
amends the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments and certain hedging activities. Management has not
quantified the effect that SFAS No. 133 and SFAS No. 138 will have on the
Company's financial statements; however, SFAS No. 133 and SFAS No. 138 could
increase volatility in earnings and other comprehensive income. In June 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133" which
amended the effective date of SFAS No. 133. Both SFAS No. 133 and SFAS No. 138
are effective for fiscal years beginning after June 15, 2000. The Company will
adopt SFAS No. 133 and SFAS No. 138 as of January 1, 2001 and does not expect
the adoption of this statement to have a material impact on its financial
position or results of operations.
6
<PAGE>
The Company follows the policy of recognizing revenue upon shipment of the
product. Accruals are recorded for discounts and commissions at the time of
shipment. From time to time, the Company enters into bill and hold sale
transactions, for the convenience of the customer, for which title and risk has
already been passed to the customer. During the three months and nine months
ended September 30, 2000, the Company entered into barter transactions in order
to gain access to certain distribution channels. The Company recognized revenue
and expense related to these transactions of $3,645,000 and $1,802,000,
respectively, for the nine month period ended September 30, 2000. The Company
did not enter into any barter transactions during the three months ended
September 30, 2000.
3. 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
---------------------------- ----------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Loss from continuing operations ..... $ (784) $ (35,824) $ (4,826) $ (36,833)
Discontinued operations ............. 229 -- (238) --
----------- ----------- ----------- -----------
Net loss ............................ $ (1,013) $ (35,824) $ (4,588) $ (36,833)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding ................ 17,736,991 17,771,113 17,726,397 17,762,120
=========== =========== =========== ===========
Loss from continuing operations ..... $ (0.04) $ (2.02) $ (0.27) $ (2.07)
Discontinued operations ............. (0.01) -- 0.01 --
----------- ----------- ----------- -----------
Net loss ............................ $ (0.05) $ (2.02) $ (0.26) $ (2.07)
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE:
Loss from continuing operations ..... $ (784) $ (35,824) $ (4,826) $ (36,833)
Discontinued operations ............. 229 -- (238) --
----------- ----------- ----------- -----------
Net loss ............................ $ (1,013) $ (35,824) $ (4,588) $ (36,833)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding ................ 17,736,991 17,771,113 17,726,397 17,762,120
Dilutive effect - options and
warrants .......................... -- -- -- --
----------- ----------- ----------- -----------
17,736,991 17,771,113 17,726,397 17,762,120
=========== =========== =========== ===========
Loss from continuing operations ..... $ (0.04) $ (2.02) $ (0.27) $ (2.07)
Discontinued operations ............. (0.01) -- 0.01 --
----------- ----------- ----------- -----------
Net loss ............................ $ (0.05) $ (2.02) $ (0.26) $ (2.07)
=========== =========== =========== ===========
</TABLE>
Common shares issuable upon the exercise of options and warrants that were
excluded from the diluted earnings per share calculations because their effect
was antidilutive to the calculations totaled 3,560,426 and 4,427,081 for the
three months and the nine months ended September 30, 1999 and 2000,
respectively.
7
<PAGE>
4. COMPREHENSIVE LOSS
Comprehensive loss, which encompasses net loss and currency translation
adjustments, is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------
1999 2000 1999 2000
-------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Net loss ......................... $ (1,013) $(35,824) $ (4,588) $(36,833)
Currency translation adjustments . (1,598) (866) (1,628) (8,114)
-------- -------- -------- --------
Comprehensive loss ............... $ (2,611) $(36,690) $ (6,216) $(44,947)
======== ======== ======== ========
</TABLE>
5. INVENTORIES
Inventories consisted of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1999 2000
------- -------
Raw Materials .............. $14,778 $14,558
Finished Goods ............. 24,950 19,270
------- -------
$39,728 $33,828
======= =======
Inventories are stated at the lower of cost (first-in, first-out) or market
value. Finished goods inventories include the cost of materials, labor and
overhead.
6. DEBT
SHORT-TERM BORROWINGS
As of December 31, 1999 and September 30, 2000, the Company had borrowings
outstanding of $24,966,000 and $13,677,000, respectively, under revolving credit
facilities.
On December 13, 1999, the Company entered into a new three-year $77,000,000
financing facility to replace its $50,000,000 revolving credit facility. The new
facility consists of an asset-based revolver of up to $30,000,000, equipment
term loans and lease financing of up to $20,000,000 provided by a financial
institution and a $27,000,000 term loan provided by two additional lenders. The
revolving credit facility permits the Company to borrow under a borrowing base
formula equal to the sum of 75% of eligible accounts receivable, as defined, 60%
of eligible finished goods inventory, as defined, and 35% of eligible raw
material inventory, as defined, subject to additional limitations on incurring
debt. The new financing facility is secured by substantially all of the
Company's assets and requires the Company, among other things, to maintain a
minimum consolidated fixed charge coverage ratio, as defined, a minimum
consolidated interest coverage ratio, as defined, and a minimum consolidated
EBITDA level, as defined. The revolving credit facility bears interest at prime
plus 1/2% or LIBOR plus 3% and the equipment term loans bear interest at prime
plus 3/4% or LIBOR plus 3 1/4%, subject to adjustment based on the Company's
quarterly EBITDA levels, beginning June 30, 2000. The $27,000,000 term loan
bears interest at 12 1/2% and has an annual maintenance fee of 2% of the
outstanding principal amount due on each of December 13, 2000, 2001 and 2002.
The Company has issued letters of credit for approximately $1,516,000 in
connection with leases for a diaper production line and various computer
hardware and software. This amount reduces the borrowing availability under the
Company's revolving credit facility.
8
<PAGE>
The terms of the revolving credit facility described above provide that a
voluntary filing of a Chapter 11 petition results in an event of default on such
indebtedness. As a result of its Chapter 11 filing, the Company is prohibited
from paying any liabilities without Bankruptcy Court approval. Accordingly, no
such interest expense has been recorded in the accompanying financial statements
for the period subsequent to October 10, 2000.
On October 27, 2000, the Bankruptcy Court entered a final order (the "Final
Order") approving the Credit Agreement (the "DIP Credit Facility") as provided
under the Amended and Restated Credit Agreement dated as of December 13, 1999,
among the Company, as borrower, and Fleet Capital Corporation, as agent
("Fleet"). Pursuant to the terms of the DIP Credit Facility, Fleet has made
available to the Company a revolving credit and letter of credit facility in an
aggregate principal amount of $25,000,000. The borrowing base formulation is
comprised of certain specified percentages of eligible accounts receivable,
eligible inventory, equipment and personal and real property of the Company. The
DIP Credit Facility expires on April 30, 2001, or the date of entry of an order
by the Bankruptcy Court confirming a plan of reorganization.
Obligations under the DIP Credit Facility are secured by a lien on
substantially all of the Company's assets and properties and the proceeds
thereof, granted pursuant to the Final Order under Sections 364(c)(2) and
364(c)(3) of the Bankruptcy Code. Borrowings under the DIP Credit Facility may
be used to fund working capital and for other general corporate purposes. The
DIP Credit Facility contains restrictive covenants, including among other
things, limitations on the creation of additional liens and indebtedness,
limitations on capital expenditures, limitations on transactions with affiliates
including investments, loans and advances, the sale of assets, and the
maintenance of minimum earnings before interest, taxes, depreciation,
amortization and reorganization items, as well as a prohibition on the payment
of dividends.
The DIP Credit Facility provides that advances made will bear interest at a
rate of 1.0 percent per annum in excess of Fleet's Base Rate. The Company pays a
commitment fee of 0.25 percent per annum on the unused portion thereof, a letter
of credit fee equal to 2.0 percent per annum of average outstanding letters of
credit and certain other fees.
Short-term borrowings for the international operations as of December 31,
1999 and September 30, 2000 were $6,419,000 and $6,921,000, respectively, and
consisted of working capital and trade financing facilities.
9
<PAGE>
LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1999 2000
-------- --------
Note payable, due 2001, interest at 8.4%,
partially secured by land and buildings . $ 1,511 $ 1,315
Term loans due 2002, interest at LIBOR plus
3.25%, secured by machinery and equipment 7,122 5,716
Term loan due 2002, interest at 12.5%,
secured by second lien on substantially
all of the Company's assets ............. 27,000 26,750
Various other notes payable ................ 2,386 960
-------- --------
38,019 34,741
Less: current maturities ............... (3,035) (2,561)
-------- --------
$ 34,984 $ 32,180
======== ========
SENIOR TERM NOTES
Long-term debt under senior term notes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
-------- --------
<S> <C> <C>
10 1/4% Senior Notes, interest due semiannually on June 15
and December 15, principal due June 15, 2007, including
unamortized bond premium of $888 and $807, respectively $145,888 $145,807
======== ========
</TABLE>
The indenture governing the 10 1/4% Senior Notes contains certain covenants
that, among other things, limit the Company's ability to incur additional
indebtedness; pay dividends; purchase capital stock; make certain other
distributions, loans and investments; sell assets; enter into transactions with
related persons; and merge, consolidate or transfer substantially all of its
assets. The indenture also contains provisions for acceleration of payment of
principal upon a change of control, as defined. The filing of the Chapter 11
petition by the Company results in an event of default under the Indenture.
10
<PAGE>
7. SEGMENT INFORMATION:
All of the Company's revenues are derived from sales of disposable baby
products. The Company classifies its business into two reportable segments:
"Domestic" (includes the United States and Puerto Rico) and "International"
(which includes all other foreign operations--Argentina, Mexico, Brazil,
Colombia, Singapore and Malaysia). All international operations have been
aggregated into one reportable segment because they have similar economic
characteristics and their operations are similar in the nature of the product
and production process, type of customer and distribution method.
The Company evaluates performance based on several factors, of which the
primary financial measure is business segment operating income before management
fees and corporate overhead. The accounting policies of the operating segments
are the same as those described in Note 1 above. Intersegment sales are
accounted for at fair value as if the sales were to third parties.
11
<PAGE>
Information as to the operations and total assets of the Company's reportable
segments is as follows (in thousands):
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
---------
Loss from continuing operations before
tax benefit .......................... $ (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)
Other income ........................... 1,814
---------
Loss from continuing operations before
tax benefit ......................... $ (6,644)
=========
Total assets ........................... $ 163,499 $ 160,996 $ 324,495
========= ========= =========
DOMESTIC INTERNATIONAL TOTAL
--------- ------------- ---------
THREE MONTHS ENDED SEPTEMBER 30, 2000
Net sales .............................. $ 47,541 $ 27,669 $ 75,210
Intersegment sales ..................... $ 116 $ -- $ 116
Operating loss before management fees
and corporate overhead ............... $ (5,425) $ (12,817) $ (18,242)
Corporate overhead ..................... (7,782) (373) (8,155)
Interest expense, net .................. (6,298)
Other expense .......................... (2,256)
---------
Loss from continuing operations before
tax benefit .......................... $ (34,951)
=========
NINE MONTHS ENDED SEPTEMBER 30, 2000
Net sales .............................. $ 174,014 $ 90,444 $ 264,458
Intersegment sales ..................... $ 406 $ -- $ 406
Operating income (loss) before
management fees and corporate
overhead ............................. $ 8,880 $ (11,862) $ (2,982)
Corporate overhead ..................... (11,344) (800) (12,144)
Interest expense, net .................. (17,959)
Other expense .......................... (3,271)
---------
Loss from continuing operations before
tax benefit .......................... $ (36,356)
=========
Total assets ........................... $ 167,205 $ 126,158 $ 293,363
========= ========= =========
8. SALE OF MEXICAN OPERATIONS:
On August 31, 2000, the Company completed the sale of substantially all of
its Mexican operations to Copamex, S.A. de C.V. ("Copamex"), the second largest
consumer paper products company in Mexico. Under the terms of the agreements,
the Company is also licensing to Copamex the right to use certain patents in
Mexico and will continue to provide technical support to Copamex. The Mexican
operations have been included in the Company's consolidated results of
operations through August 31, 2000. The Company received approximately
$27,000,000 in cash proceeds from these transactions, approximately $9,170,000
of which related to the sale of the license and technical support
reimbursements. The net assets of the Company's Mexican operations, as defined
in the agreement, were approximately $13,551,000 as of August 31, 2000. The
Company recorded a loss of approximately $1,479,000 as a result of these
transactions.
12
<PAGE>
9. IMPAIRMENT LOSS:
In September 2000, the Company recorded a non-cash accounting charge of
approximately $12,128,000 related to an impairment of certain long-lived assets
of its Argentine and North American operations as required by SFAS 121. Under
the provision of this statement, the Company has evaluated its long-lived assets
for financial impairment, and will continue to evaluate them as events or
changes in circumstances indicate that the carrying amount of such assets may
not be fully recoverable. The $12.1 million non-cash charge was recorded to
reduce the carrying value of certain impaired long-lived assets to fair value.
Approximately $7,800,000 related to a write-down of Argentine goodwill,
approximately $2,800,000 related to a write-down of fixed assets in the
Company's Argentine operation and approximately $1,500,000 related to a
write-down of fixed assets in the Company's North American operation.
10. NON-CASH CHARGE:
In September 2000, the Company recorded a non-cash charge of approximately
$2,050,000 related to the write-down of certain promotional assets of its
Colombian operations that had previously been capitalized. Due to the recent
downturn in the Colombian economy and the Company's liquidity constraints, the
Company's Colombian operations have been adversely affected and the future
benefit to be provided by these promotional assets has been impaired.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of our results of operations and our current
financial position. This discussion should be read in conjunction with our
financial statements that are included with this report.
CHAPTER 11 PROCEEDINGS
On October 10, 2000, we filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code. The petition was filed with the
United States Bankruptcy Court for the Southern District of Texas, Houston
Division. Under Chapter 11, we are operating as a debtor-in-possession, or DIP,
under the Bankruptcy Code and are able to continue to conduct business in the
ordinary course, while we devote efforts to develop a reorganization plan. None
of our foreign subsidiaries were included in the Chapter 11 filing.
The Procter & Gamble Company had filed two lawsuits against us in September
2000. The first lawsuit was filed in Federal District Court in Ohio and alleged
that Drypers owed $4.1 million to Procter & Gamble under our licensing
arrangements with Procter & Gamble. The second lawsuit, filed in Federal
District Court in Delaware, alleged infringement by us of certain patents owned
by Procter & Gamble related to our manufacturing of disposable diapers. We had
also received notice from Procter & Gamble terminating license agreements
between us associated with these patents. Our failure to make payments to
Procter & Gamble resulted in an event of default under our primary lending
facilities at that time.
The Procter & Gamble lawsuits, together with a previously announced drop in
sales in the third quarter of 2000 due to an industry-wide transition to new
packaging in the United States and continued difficulties in international
markets, had two effects on us. First, the payments owed to Procter & Gamble
together with the anticipated financial covenant defaults under our credit
facilities at the time caused an immediate and critical liquidity issue for us.
Second, the infringement lawsuit by Procter & Gamble caused uncertainty as to
our ability to continue producing diapers under the patents licensed from
Procter & Gamble. The combination of these two factors caused us to make the
Chapter 11 filing to allow us to resolve the Procter & Gamble disputes in an
orderly manner and to resolve all claims, as defined in the Bankruptcy Code,
against us that arose prior to the Chapter 11 filing.
On October 27, 2000, the bankruptcy court entered a final order approving our
DIP financing. The DIP agreement calls for Fleet Capital Corporation to provide
a $25.0 million credit facility to fund our ongoing operating needs while in
bankruptcy. See "Liquidity and Capital Resources" for more information regarding
the DIP agreement.
In addition, the bankruptcy court also gave final approval to the payment
plan between us and Procter & Gamble which resolves the outstanding disputes and
litigation between us. With this approval, we will make payments to Procter &
Gamble under a new licensing arrangement that will allow us to continue
producing diapers under the Procter & Gamble patents.
An official committee of unsecured creditors was appointed in the Drypers
Chapter 11 case.
As a result of the Chapter 11 filing, we are prohibited from paying any
prepetition liabilities without Bankruptcy Court approval. The Chapter 11 filing
resulted in a default under its prepetition revolving credit facility. Pursuant
to the Bankruptcy Code, we can seek Bankruptcy Court approval for the rejection
of executory contracts or unexpired leases, including real property leases. Any
rejection of a contract or a lease may give rise to a prepetition unsecured
claim for damages arising from the rejection.
Our ability to effect a successful reorganization will depend, in significant
part, on our ability to formulate a plan of reorganization that is approved and
confirmed by the Bankruptcy Court. We believe, however, that we may not be able
to satisfy in full all of the claims in bankruptcy against us through the
bankruptcy process. We are unable to predict at this time when, if at all, we
will emerge from our Chapter 11 case.
14
<PAGE>
OVERVIEW
We are a leading manufacturer and marketer of premium quality, value-priced
disposable baby diapers, training pants and pre-moistened baby wipes. Our
products are sold under the DRYPERS brand name in the United States and under
the DRYPERS and other brand names internationally. Currently, we are the third
largest producer of branded disposable baby diapers in the United States and
Latin America. We also manufacture and sell lower-priced diapers under other
brand names internationally, as well as private label diapers, training pants
and pre-moistened baby wipes. Our 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.
On the branded side of the business, we target 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. Our products are
positioned to provide enhanced profitability for retailers and better value to
consumers. We continually seek to expand our extensive grocery store sales and
distribution network, while increasing our penetration of the mass merchant and
drugstore chain markets, in order to capture a greater share of the U.S. diaper
market. In September 1999, we expanded our worldwide relationship with Wal-Mart
to include production of private label diapers in the United States. During the
second quarter of 2000, we began limited distribution of our Drypers brand
diapers throughout the Wal-Mart Supercenters in the United States.
We are the sixth largest diaper producer in the world. Since 1993, we have
significantly expanded our international presence, competing in the lower-priced
branded and private label categories. Through a series of start-ups and
acquisitions, we currently produce diapers in Puerto Rico, Argentina, Mexico,
Brazil, Malaysia and Colombia. We were selected by Wal-Mart International 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 Puerto Rico, and we also supply DRYPERS branded products to Wal-Mart
stores in these markets. In 1998, we gained distribution in the Wal-Mart stores
in China, Canada and Germany. With the financial crisis in Brazil in early 1999,
our South American operations significantly decreased in profitability. In
Brazil, we focused on increasing margins on our products to offset the negative
impact caused by the financial crisis on dollar based raw materials. In response
to the related impact on Argentina's economy, we have restructured our
operations there, moving capacity to more profitable operations throughout the
world, and are focused on returning our operations to profitability. During the
third quarter of 2000, we sold all of our Mexican operations to an affiliate of
Copamex, S.A. de C.V. ("Copamex"), the second largest consumer paper products
company in Mexico for an aggregate purchase price of approximately $27.0
million.
Our domestic operations include sales in the United States, Puerto Rico and
exports from these manufacturing operations. The following table sets forth our
domestic and international net sales for the three months and nine months ended
September 30, 1999 and 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------------------------- ----------------------------------------
1999 2000 1999 2000
------------------ ------------------ ------------------ ------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic ............... $ 57.6 61.3% $ 47.5 63.2% $ 165.6 61.4% $ 174.0 65.8%
International .......... 36.3 38.7 27.7 36.8 104.0 38.6 90.5 34.2
-------- -------- -------- -------- -------- -------- -------- --------
Total net sales ...... $ 93.9 100.0% $ 75.2 100.0% $ 269.6 100.0% $ 264.5 100.0%
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
Gross profit margins vary significantly across our 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 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 normally
result in significant fluctuations in operating margins.
15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the specified components of income and expense
expressed as a percentage of net sales for the three months and nine months
ended September 30, 1999 and 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------- ---------------------
1999 2000 1999 2000
-------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Net sales .............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ..................... 61.0 79.7 63.2 66.0
-------- -------- -------- --------
Gross profit ........................... 39.0 20.3 36.8 34.0
Selling, general and
administrative expenses ............... 35.5 39.3 34.6 35.1
Impairment loss ........................ -- 16.1 -- 4.6
-------- -------- -------- --------
Operating income (loss) ................ 3.5 (35.1) 2.2 (5.7)
Interest expense, net .................. 5.0 8.4 5.3 6.8
Other income (expense) ................. 0.1 (3.0) 0.7 (1.2)
-------- -------- -------- --------
Loss from continuing operations
before income tax provision
(benefit) ........................... (1.4) (46.5) (2.4) (13.7)
Income tax provision (benefit) ......... (0.6) 1.2 (0.7) 0.2
-------- -------- -------- --------
Loss from continuing operations ........ (0.8) (47.7) (1.7) (13.9)
Discontinued operations ................ (0.2) -- -- --
-------- -------- -------- --------
Net loss ............................... (1.0)% (47.7)% (1.7)% (13.9)%
======== ======== ======== ========
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
NET SALES
Net sales decreased 19.9% to $75.2 million for the three months ended
September 30, 2000 from $93.9 million for the three months ended September 30,
1999. Domestic sales decreased 17.4% to $47.5 million for the three months ended
September 30, 2000 from $57.6 million for the same period in 1999. This decrease
was primarily driven by the downturn in sales related to the industry-wide
transition to new packaging in the U.S. Net sales in the international sector
decreased 23.9% to $27.7 million for the three months ended September 30, 2000
from $36.3 million in the prior comparable period, driven primarily by a 28.6%
decline in sales in South America. Sales in Asia and Mexico were off as well due
to a delayed new product launch in Asia and a decline in distribution coverage
in Mexico related to our announced sale of that operation. Our operations
continued to be impacted by the economic and market pressures in Brazil and
Argentina, but even though net sales in these countries decreased on a year over
year comparison, we saw three consecutive quarters of improved net sales in
Brazil beginning with the fourth quarter of 1999. The Brazilian Real has seen
some improvement against the U.S. dollar during the nine months ended September
30, 2000; however, it is still well below 1998 foreign exchange rate levels.
Strong market share competition in that country has kept price increases to a
minimum. However, through management of product and customer mix, we have been
successful in realizing higher prices overall. Offsetting this improvement in
Brazil, however, was the further deterioration of our Argentine operations.
Finally, we completed the sale of our Mexican operations on August 31, 2000,
resulting in only two full months of sales from this operation during the third
quarter of 2000 as compared to 1999.
COST OF GOODS SOLD
Cost of goods sold increased as a percentage of net sales to 79.7% for the
three months ended September 30, 2000 compared to 61.0% for the three months
ended September 30, 1999. The deterioration in gross margin percentage resulted
from the effect of several factors. First, domestic margins decreased in
comparison with prior year's gross margin due to the decrease in branded sales
as a result of the industry-wide transition to new packaging in the U.S. coupled
with the effect of product mix as the level of private label sales doubled from
the prior year, comprising a higher percentage of total domestic sales. Private
label products have a lower gross
16
<PAGE>
margin but also lower selling costs than branded products. Additionally, the
continued deterioration of the Argentina and Colombian economies negatively
impacted our operations in those regions, in addition to the loss of our Mexican
operations for one full month of the third quarter in 2000 as compared to the
prior year due to the sale of these operations to Copamex in August 2000. The
decrease in overall international gross margins was partially offset by the
implementation of a small price increase in Brazil.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased as a percentage of net
sales to 39.3% for the three months ended September 30, 2000 compared to 35.5%
for the three months ended September 30, 1999. Approximately $2.0 million was
recorded as a reduction to selling, general and administrative expenses in the
third quarter of 2000 for amounts received as reimbursements for manufacturing
and technical support we have provided under an agreement in place with Copamex
related to the sale of our Mexican operations. Excluding the effect of the
Copamex transactions, selling, general and administrative expenses increased
6.4% as compared to the third quarter of 1999 primarily due to the fixed
component of promotional expenses being absorbed over lower sales volume due to
the industry-wide transition to new packaging in the U.S.
IMPAIRMENT LOSS
In September 2000, we recorded a non-cash accounting charge of approximately
$12.1 million related to an impairment of certain long-lived assets of our
Argentine and North American operations as required by SFAS 121. Under the
provision of this statement, we have evaluated our long-lived assets for
financial impairment, and will continue to evaluate them as events or changes in
circumstances indicate that the carrying amount of such assets may not be fully
recoverable. The $12.1 million non-cash charge was recorded to reduce the
carrying value of certain impaired long-lived assets to fair value.
Approximately $7.8 million related to a write-down of Argentine goodwill,
approximately $2.8 million related to a write-down of fixed assets in our
Argentine operation and approximately $1.5 million related to a write-down of
fixed assets in our North American operation.
NON-CASH CHARGE
In September 2000, we recorded a non-cash charge of approximately $2.1
million related to the write-down of certain promotional assets of our Colombian
operations that had previously been capitalized. Due to the recent downturn in
the Colombian economy and the company's liquidity constraints, our Colombian
operations have been adversely affected and the future benefit to be provided by
these promotional assets has been impaired.
INTEREST EXPENSE, NET
Interest expense, net increased to $6.3 million for the three months ended
September 30, 2000 as compared to $4.7 million for the three months ended
September 30, 1999. The increase was primarily due to increased borrowing levels
under our revolving credit facility, additional term debt and increased interest
rates.
OTHER INCOME (EXPENSE)
For the three months ended September 30, 2000, other expense of approximately
$2.3 million primarily related to the loss on the sale of our Mexican operations
to Copamex in addition to exchange losses from foreign operations and premiums
and losses incurred on forward exchange contracts we have entered into to hedge
our foreign currency exposure in Argentina and Brazil.
17
<PAGE>
INCOME TAXES
We recorded a tax provision of $873,000 for the three months ended September
30, 2000, compared to a benefit of $579,000 for the three months ended September
30, 1999. The provision recorded primarily related to our Mexican operations and
the 1999 benefit recorded related to our other foreign operations.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
NET SALES
Net sales decreased 1.9% to $264.5 million for the nine months ended
September 30, 2000 from $269.6 million for the nine months ended September
30,1999 and included $3.0 million from the license to Copamex in conjunction
with the transactions involving the sale of our Mexican operations. Domestic
sales increased 5.1% to $174.0 million for the nine months ended September 30,
2000. Excluding the $3.0 million in license fees received from Copamex in the
second quarter of 2000, domestic sales increased 3.3% to $171.0 million for the
nine months ended September 30, 2000 from $165.6 million for the same period in
1999. This increase was primarily due to the level of private label sales more
than doubling as compared to last year's comparable period, due to the shipment
of orders that we had been anticipating from our larger, national customers,
Kroger and Wal-Mart. Additionally, by comparison to the same period last year,
this period reflected an overall decrease in branded grocery sales and an
overall increase in branded sales to mass merchants. Net sales in the
international sector decreased 13.1% to $90.5 million for the nine months ended
September 30, 2000 from $104.0 million in the prior comparable period, primarily
due to a 24.8% decline in sales in South America, offset somewhat by strong
growth in Malaysia of over 7.0%, compared with last year's comparable period.
Our operations continued to be impacted by the economic pressures in Brazil and
Argentina, but even though net sales in these countries decreased on a year over
year comparison, we have seen three consecutive quarters of improved net sales
in Brazil beginning with the fourth quarter of 1999. The Brazilian Real has seen
some improvement against the U.S. dollar during the nine months ended September
30, 2000; however, it is still well below 1998 foreign exchange rate levels.
Strong market share competition in that country has kept price increases to a
minimum. However, through management of product and customer mix, we have been
successful in realizing higher prices overall. Offsetting this improvement in
Brazil, however, was the further deterioration of our Argentine operations.
COST OF GOODS SOLD
Cost of goods sold increased as a percentage of net sales to 66.0% for the
nine months ended September 30, 2000 compared to 63.2% for the nine months ended
June 30, 1999. Excluding the effect of $3.0 million in license fees received
from Copamex related to the sale of our Mexican operations in the second quarter
of 2000, cost of goods sold as a percentage of net sales was 66.8%. The
deterioration in gross margin percentage resulted from the effect of several
factors. First, domestic margins decreased in comparison to the prior year
period due to the decrease in branded sales as a result of the industry-wide
transition to new packaging in the U.S. during the third quarter of 2000 coupled
with the effect of product mix as the level of private label sales doubled from
the prior year, comprising a higher percentage of total domestic sales. Private
label products have a lower gross margin but also lower selling costs than
branded products. Additionally, the downturn in the Colombian economy negatively
impacted our operations in that region, in addition to the loss of our Mexican
operations for one full month of the third quarter in 2000 as compared to the
prior year due to the sale of these operations to Copamex in August 2000. These
decreases in international gross margins were slightly offset by improvements in
Argentina and Brazil during the nine months ended September 30, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased as a percentage of net
sales to 35.1% for the nine months ended September 30, 2000 compared to 34.6%
for the nine months ended September 30, 1999. Approximately $4.0 million was
recorded as a reduction to selling, general and administrative expenses in the
second and third quarters of 2000 for amounts received as reimbursements for
manufacturing and technical support we have provided under an agreement in place
with Copamex related to the sale of our Mexican
18
<PAGE>
operations. Excluding the effect of the Copamex transactions, selling, general
and administrative expenses increased 2.0% as compared to the first nine months
of 1999 due to several factors. First, the second quarter change in expectations
related to the volume of business with a major customer required us to adjust
our inventory levels and utilize other sales channels to correct the imbalance,
thus increasing promotional spending above normal. Secondly, the fixed component
of promotional expenses during the third quarter of 2000 was absorbed over a
lower third quarter sales volume due to the industry-wide transition to new
packaging in the U.S. International selling and general administrative expenses
remained relatively flat for the nine months ended September 30, 2000 as
compared to the prior year period.
IMPAIRMENT LOSS
In September 2000, we recorded a non-cash accounting charge of approximately
$12.1 million related to an impairment of certain long-lived assets of our
Argentine and North American operations as required by SFAS 121. Under the
provision of this statement, we have evaluated our long-lived assets for
financial impairment, and will continue to evaluate them as events or changes in
circumstances indicate that the carrying amount of such assets may not be fully
recoverable. The $12.1 million non-cash charge was recorded to reduce the
carrying value of certain impaired long-lived assets to fair value.
Approximately $7.8 million related to a write-down of Argentine goodwill,
approximately $2.8 million related to a write-down of fixed assets in our
Argentine operation and approximately $1.5 million related to a write-down of
fixed assets in our North American operation.
NON-CASH CHARGE
In September 2000, we recorded a non-cash charge of approximately $2.1
million related to the write-down of certain promotional assets of our Colombian
operations that had previously been capitalized. Due to the recent downturn in
the Colombian economy and the company's liquidity constraints, our Colombian
operations have been adversely affected and the future benefit to be provided by
these promotional assets has been impaired.
INTEREST EXPENSE, NET
Interest expense, net increased to $18.0 million for the nine months ended
September 30, 2000 as compared to $14.3 million for the nine months ended
September 30, 1999. The increase was primarily due to increased borrowing levels
under our revolving credit facility, additional term debt and increased interest
rates.
OTHER INCOME (EXPENSE)
For the nine months ended September 30, 2000, other expense of approximately
$3.3 million primarily related to the loss on the sale of our Mexican operations
to Copamex in addition to exchange losses on foreign operations and premiums and
losses incurred on forward exchange contracts we have entered into to hedge our
foreign currency exposure in Argentina and Brazil. As a result of the August
1998 fire at our manufacturing facility in Argentina, for the nine months ended
September 30, 1999, we had recorded approximately $1.8 million in other income
primarily related to lost profits recoverable under our business interruption
policy for the months of January 1999 through September 1999, which was
ultimately reversed into other expense in the fourth quarter of 1999 upon final
settlement of the claim.
INCOME TAXES
We recorded a tax provision of $477,000 for the nine months ended September
30, 2000, primarily related to our Mexican operations. We recorded a tax benefit
of $1.8 million related to foreign taxes for the nine months ended September 30,
2000.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity requirements include, but are not limited to, the following
items:
o payment of principal and interest on debt;
o the funding of working capital needs, primarily inventory, accounts
receivable and advertising and promotional expenses;
o the funding of capital investments in machinery, equipment and computer
systems; and
o patent license payments.
Historically, we have financed our operations, working capital, capital
expenditure and acquisition requirements through a combination of internally
generated cash flow, borrowings under revolving credit facilities and other
sources and proceeds from private and public offerings of debt and equity
securities.
Our operations generated $13.6 million of cash for the nine months ended
September 30, 2000, including the net collection of $2.9 million in insurance
receivables related to the Argentina fire in August 1998 and approximately $9.1
million from the sale of a license to Copamex and technical support
reimbursements in connection with the sale of our Mexican operations on August
31, 2000. The net $1.6 million of cash generated by operations during the nine
months ended September 30, 2000 was primarily a result of the increased accounts
payable prior to our Chapter 11 filing offset by increased promotional and other
prepaid expenses incurred to drive sales volume. Our operations used $1.4
million of cash for the nine months ended September 30, 1999, net of the
favorable effect of a $3.7 million net collection of the insurance receivable
related to the Argentina fire.
Capital expenditures were $11.9 million for the nine months ended September
30, 2000 and $15.9 million for the nine months ended September 30, 1999. Planned
capital expenditures for the remainder of 2000 are not material. Our capital
expenditures in 2000 were front-loaded toward the beginning of the year due to
the ramp-up of new machines in Malaysia and in the U.S. 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. We financed these capital expenditures
in 1999 and 2000 through borrowings under our revolving credit facility and
equipment term loans.
Working capital was $7.6 million as of September 30, 2000, compared to $28.7
million as of December 31, 1999. Current assets decreased from $135.2 million as
of December 31, 1999 to $117.9 million as of September 30, 2000, and current
liabilities increased from $106.5 million as of December 31, 1999 to $110.3
million as of September 30, 2000. Total debt decreased from $215.3 million at
December 31, 1999 to $201.1 million as of September 30, 2000.
On December 13, 1999, we entered into a new three-year $77.0 million
financing facility to replace the $50.0 million revolving credit facility. The
new facility consists of an asset-based revolver of up to $30.0 million,
equipment term loans and lease financing of up to $20.0 million provided by a
financial institution, and a $27.0 million term loan provided by two additional
lenders. The revolving credit facility permits us to borrow under a borrowing
base formula equal to the sum of 75% of eligible accounts receivable, as
defined, 60% of eligible finished goods inventory, as defined, and 35% of
eligible raw material inventory, as defined, subject to additional limitations
on incurring debt. The new financing facility is secured by substantially all of
our assets and requires us, among other things, to maintain a minimum
consolidated fixed charge coverage ratio, as defined, a minimum consolidated
interest coverage ratio, as defined, and a minimum consolidated EBITDA level, as
defined. The revolving credit facility bears interest at prime plus 1/2% or
LIBOR plus 3% and the equipment term loans bear interest at prime plus 3/4% or
LIBOR plus 3 1/4%, subject to adjustment based on our quarterly EBITDA levels,
beginning June 30, 2000. The $27.0 million term loan bears interest at 12 1/2%
and has an annual maintenance fee of 2% on the outstanding principal amount.
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As a result of the Chapter 11 filing, the Company is prohibited from paying
any liabilities without Bankruptcy Court approval. The Chapter 11 filing
resulted in a default under its revolving credit facility.
In connection with the Chapter 11 filing, on October 27, 2000, the Bankruptcy
Court entered a final order approving the Credit Agreement (the "DIP Credit
Facility") as provided under the Amended and Restated Credit Agreement dated as
of December 13, 1999, among the Company, as Borrower, and Fleet Capital
Corporation ("Fleet"). Pursuant to the terms of the DIP Credit, Fleet has made
available to the Company a revolving credit and letter of credit facility in an
aggregate principal amount of $25.0 million. The borrowing base formulation is
comprised of certain specified percentages of eligible accounts receivable,
eligible inventory, equipment and personal and real property of the Company. The
DIP Credit Facility expires on April 30, 2001, or the date of entry of an order
by the Bankruptcy Court confirming a plan of reorganization.
Obligations under the DIP Credit Facility are secured by a lien on
substantially all of the Company's assets and properties and the proceeds
thereof, granted pursuant to the Final Order under Sections 364(c)(2) and
364(c)(3) of the Bankruptcy Code. Borrowings under the DIP Credit Facility may
be used to fund working capital and for other general corporate purposes. The
DIP Credit Facility contains restrictive covenants, including among other
things, limitations on the creation of additional liens and indebtedness,
limitations on capital expenditures, limitations on transactions with affiliates
including investments, loans and advances, the sale of assets, and the
maintenance of minimum earnings before interest, taxes, depreciation,
amortization and reorganization items, as well as a prohibition on the payment
of dividends.
The DIP Credit Facility provides that advances made will bear interest at a
rate of 1.0 percent per annum in excess of Fleet's Base Rate. The Company pays a
commitment fee of 0.25 percent per annum on the unused portion thereof, a letter
of credit fee equal to 2.0 percent per annum of average outstanding letters of
credit and certain other fees.
Our ability to effect a successful reorganization will depend, in significant
part, on our ability to formulate a plan of reorganization that is approved and
confirmed by the Bankruptcy Court. We believe, however, that we may not be able
to satisfy in full all of the claims in bankruptcy against us through the
bankruptcy process. We are unable to predict at this time when, if at all, we
will emerge from our Chapter 11 case.
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MARKET RISK
Drypers is exposed to market risk, including changes in interest rates,
currency exchange rates and raw materials prices. We utilize derivative
financial instruments as hedges to manage a portion of the exposure to
fluctuations in exchange rates for inventory purchases denominated in U.S.
dollars and pulp costs. These instruments qualify for hedge accounting treatment
and, accordingly, gains and losses are deferred and included in the basis of the
inventory hedged. Drypers does not hold or issue derivative financial
instruments for trading purposes.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to variable rate borrowings outstanding under the restructured revolving credit
facility and equipment term loans discussed above. At September 30, 2000, we had
$19.4 million outstanding under these facilities. An increase in interest rates
of 1% would reduce annual net income by approximately $0.2 million. Our
remaining debt obligations as of September 30, 2000 were primarily $145.0
million of senior notes, which carry a fixed interest rate of 10 1/4%, and a
$26.7 million term loan, with a fixed interest rate of 12 1/2%, and therefore
have no earnings exposure for changes in interest rates.
CURRENCY RISK
In January 2000, we entered into forward contracts to hedge certain U.S.
dollar denominated inventory purchases for our Brazilian subsidiary. The
contracts have varying maturities with none exceeding one year. The contracts
require monthly settlement and have a remaining notional contract amount
outstanding of $2.4 million with an average forward rate of $1.99. Deferred
losses during the three months ended September 30, 2000 were not material.
COMMODITY RISK
We currently have no commodity hedges outstanding at this time. The
counterparty for the pulp commodity swap we had entered into in February 2000
terminated our previously disclosed pulp hedge pursuant to provisions in the
contract allowing them to do so.
INFLATION AND CURRENCY DEVALUATION
Inflationary conditions in the United States have been moderate and have not
had a material impact on our 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 in that region because we
have generally been able to pass on cost increases to our customers. However,
due to the recent economic events in South America and Asia, inflationary
conditions and the effect of currency devaluations have had a material impact on
the results of operations in these locations. We have 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 have
recently entered into forward exchange contracts related to raw material
purchases for our Argentine and Brazilian operations.
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FORWARD-LOOKING STATEMENTS
The discussion of our results and financial condition includes various
forward-looking statements about our markets, the demand for our products and
services and our future results. These statements are based on certain
assumptions that we consider to be reasonable. The following are the primary
factors that have a direct bearing on our results of operations and financial
condition:
o successful resolution of claims and other matters related to our
bankruptcy filing,
o capacity allocation and utilization,
o timing of new distribution,
o leverage and debt service,
o covenant limitations,
o competitive industry,
o price changes by competitors,
o international operations and the effect of recessionary economies,
o currency fluctuations,
o currency devaluation,
o currency restrictions,
o leverage and debt service,
o intellectual property risks,
o dependence on key products and acceptance of product innovation,
o cost of certain raw materials, and
o technological changes.
See "Item 5. Other Information" for further discussion of these factors.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In particular, SFAS No. 133 requires a company to record every derivative
instrument on the company's balance sheet as either an asset or liability
measured at fair value. In addition, SFAS No. 133 requires that changes in the
fair value of a derivative be recognized currently in earnings unless specific
hedge accounting criteria are satisfied. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. In June 2000, the FASB issued SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB No. 133." SFAS No. 138 addresses a limited number of issues causing
implementation difficulties for numerous entities that apply SFAS No. 133 and
amends the accounting and reporting standards of SFAS No. 133 for certain
derivative instruments and certain hedging activities. Management has not
quantified the effect that SFAS No. 133 and SFAS No. 138 will have on the
Company's financial statements; however, SFAS No. 133 and SFAS No. 138 could
increase volatility in earnings and other comprehensive income. In June 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133" which
amended the effective date of SFAS No. 133. Both SFAS No. 133 and SFAS No. 138
are effective for fiscal years beginning after June 15, 2000. We will adopt SFAS
No. 133 and SFAS No. 138 as of January 1, 2001 and do not expect the adoption of
this statement to have a material impact on our financial position or results of
operations.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In September 2000, The Procter & Gamble Company ("P&G") commenced two
lawsuits against us. The first lawsuit was filed in Federal District Court in
Ohio and alleged that we owed $4.1 million to P&G under our licensing
arrangements with them. The second lawsuit, filed in Federal District Court in
Delaware, alleged infringement by the company of certain patents owned by P&G
related to Drypers' manufacturing of disposable diapers. We had also received
notice from P&G terminating license agreements between the parties associated
with these patents. As part of our bankruptcy, we reached an agreement with P&G
providing us with the necessary intellectual property licenses to continue
manufacturing our products and have entered into a payment plan which resolves
the outstanding disputes and litigation between Drypers and P&G. This payment
plan was approved by the bankruptcy court on November 1, 2000.
There can be no assurance that we will not be held to be infringing other
existing patents in the future. Any such holding could result in an injunction,
damages and/or an increase in future operating costs as a result of design
changes or payment of royalties with respect to such patents, which might have a
material adverse effect on the results of operations or financial condition of
the Company.
ITEM 5. OTHER INFORMATION
CAUTIONARY STATEMENTS:
FROM TIME TO TIME, WE 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, SUCH
AS 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 OUR 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 our results of operations and
financial condition are the following factors:
LEVERAGE AND DEBT SERVICE. We are highly leveraged. Our ability to meet our
debt service obligations and to reduce our total debt will depend on our future
performance, which will be subject to general economic conditions and financial,
business and other factors affecting our operations, many of which we do not
control. There can be no assurance that our business will continue to generate
cash flow at or above current levels. If we cannot generate sufficient cash flow
from operations in the future to service our debt, we may need to refinance all
or a portion of our existing debt or obtain additional financing. There can be
no assurance that any such financing could be obtained on terms acceptable to
us, if at all. Management will continue to pursue alliances and partnerships
similar to the Copamex transaction that reduce our exposure to foreign risk and
provide a faster return on our international investments, with the proceeds of
such transactions being applied toward debt reduction. We believe that future
cash flow from operations, together with cash on hand, available borrowings
under our credit facility, borrowings under foreign credit facilities, potential
operating lease financing arrangements, remaining proceeds from the Copamex
transaction and proceeds from potential joint ventures or sales of existing
international operations will be adequate to meet our anticipated cash
requirements, including working capital, capital expenditures and debt service.
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COMPETITIVE INDUSTRY. We experience 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 we do and thus are able to
exert significant influence on the worldwide markets in which they compete.
Actions by our competitors could have a material adverse effect on our results
of operations and financial condition.
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 our larger competitors initiates such pricing changes. We may
respond to these pricing changes with changes to our own prices, product counts
or promotional programs. The process of fully implementing such changes may
require a number of months and our 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 our operations in
Puerto Rico and Mexico, respectively. There can be no assurance that future
price or product changes by our larger competitors will not have a material
adverse effect on our operations or that we will be able to react with price or
product changes of our own to maintain our 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 our operations.
DEPENDENCE ON KEY PRODUCTS AND ACCEPTANCE OF PRODUCT INNOVATIONS. Our DRYPERS
premium brand diapers and training pants accounted for 52.3%, 47.6% and 44.5% of
our net sales for 1997, 1998 and 1999, respectively. We have made substantial
investments in manufacturing equipment and processes for these products. In
addition, from time to time we have introduced product innovations that are
incorporated into all of our premium products. We substantially depend on the
continued success of sales of these products and customer acceptance of our
product innovations. A number of factors could materially reduce sales of our
products, or the profitability of such sales, including actions by our
competitors, shifts in consumer preferences or the lack of acceptance of our
product innovations. There can be no assurance that in the future such factors
will not have a material adverse effect on our operations.
COSTS OF CERTAIN RAW MATERIALS. Raw materials, especially pulp,
superabsorbent polymers and polypropylene nonwoven fabric, are significant
components of our products and packaging. An industry-wide shortage or a
significant increase in the price of any of these components could adversely
affect our ability to maintain our profit margins if price competition does not
permit us to increase our prices.
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS, DEVALUATIONS AND
RESTRICTIONS. We currently have operations in Argentina, Mexico, Brazil,
Singapore, Malaysia, Colombia and Germany. The success of our sales to,
operations in and expansion into international markets depends on numerous
factors, many of which we do not control. Such factors include economic
conditions in the foreign countries in which we sell our products. In addition,
international operations and expansion may increase our 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 our exports are impacted by the relative strength or weakness of the
U.S. dollar. Other than the United States, each country in which we operate 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; difficulty in raising prices for our
products; currency devaluations, fluctuations, controls and shortages; and
troubled and insolvent financial institutions. Any of the foregoing could have a
material adverse effect on our operations.
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INTELLECTUAL PROPERTY RISKS. Our larger branded competitors normally seek
U.S. and foreign patent protection for the product enhancements they develop. We
believe we have been able to introduce product features comparable to those
introduced by our competitors by using manufacturing methods or materials that
are not protected by patents, although there can be no assurance that we can
continue to do so in the future. To the extent we are not able to introduce
comparable products on a timely basis, our financial position and results of
operations could be materially adversely affected.
In addition, from time to time we have received, and may receive in the
future, communications from third parties, asserting that our 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 us with respect to existing or future
products or packaging. Should we be found to infringe on the intellectual
property rights of others, we 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 our
operations. Substantial costs also may be incurred by us 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, our 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. We believe that by working closely with our suppliers, distributors and
other industry participants we have been able to introduce product enhancements
comparable to those introduced by our competitors when needed to maintain our
competitive position, although there can be no assurance that we will be able,
or will have adequate resources, to do so in the future. To the extent we are
not able or do not have adequate resources to introduce comparable products on a
timely basis, our financial position and results of operations could be
materially adversely affected.
COVENANT LIMITATIONS. Our debt and operating lease agreements contain
numerous financial and operating covenants that limit the discretion of our
management with respect to certain business matters. These covenants place
significant restrictions on, among other things, our ability 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. Our credit facility also requires
us 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 that may contain
cross-acceleration or cross-default provisions. The effects of any such default
or acceleration could have a material adverse effect on our financial position
or results of operations.
DEPENDENCE ON KEY PERSONNEL. We believe that our continued success will
depend to a significant extent upon the abilities and continued efforts of our
senior management. The loss of the services of any one or more of such key
personnel could have an adverse effect on us and there can be no assurance that
we would be able to find suitable replacements for such key personnel. We have
employment agreements with certain of our senior executives. We do not maintain
key man life insurance on any of our executives.
In September 2000, we announced that we have retained Wasserstein Perella &
Co. to assist us in the financial restructuring of the company, including the
potential sale of our international operations. Certain transactions, if
completed, involve scenarios that may lead to a significant write-down of
goodwill. No assurances can be given, however, that any transaction will
ultimately be concluded.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - Reference is made to the Exhibit Index on Page 28 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 - No reports on Form 8-K were filed with the
Securities and Exchange Commission during the three months ended
September 30, 2000.
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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 20, 2000 By: /s/ BRIAN FONTANA
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
10.1 Post-Petition Loan and Security Agreement, dated October 11, 2000, by and
among Drypers Corporation and Fleet Capital Corporation, as Agent.
27 Financial Data Schedule
28
