UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 (IRS EMPLOYER IDENTIFICATION NUMBER)
OF INCORPORATION OR ORGANIZATION)
5300 MEMORIAL, SUITE 900 77007
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING THE AREA CODE: (713) 869-8693
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
(CLASS) (OUTSTANDING AT AUGUST 5, 2000)
------- -------------------------------
Common Stock, $.001 Par Value 17,774,971
<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 June 30, 2000.
Consolidated Statements of Earnings for the Three Months and Six Months Ended
June 30, 1999 and 2000.
Consolidated Statement of Stockholders' Equity for the Six Months Ended June 30,
2000.
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and
2000.
Notes to Consolidated Financial Statements.
i
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
ASSETS 1999 2000
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ..................................................... $ 4,048 $ 2,521
Accounts receivable, net of allowance for doubtful accounts of $3,422 and
$4,280, respectively ........................................................ 65,771 63,143
Inventories ................................................................... 39,728 37,959
Prepaid expenses and other .................................................... 25,690 38,831
------------------ ------------------
Total current assets ................................................... 135,237 142,454
PROPERTY AND EQUIPMENT, net of depreciation and amortization of $28,680
and $33,532, respectively ......................................................... 101,952 98,636
INTANGIBLE AND OTHER ASSETS, net of amortization of $22,630 and
$25,343, respectively ............................................................. 100,491 95,775
------------------ ------------------
$ 337,680 $ 336,865
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings ......................................................... $ 31,385 $ 32,460
Current portion of long-term debt ............................................. 3,035 3,399
Accounts payable .............................................................. 53,436 56,829
Accrued liabilities ........................................................... 18,686 18,035
------------------ ------------------
Total current liabilities .............................................. 106,542 110,723
LONG-TERM DEBT ......................................................................... 34,984 36,603
SENIOR TERM NOTES ...................................................................... 145,888 145,834
OTHER LONG-TERM LIABILITIES ............................................................ 10,350 12,012
------------------ ------------------
297,764 305,172
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 30,000,000 shares authorized, 17,749,368 and
17,767,471 shares issued and outstanding, respectively ...................... 18 18
Additional paid-in capital .................................................... 75,337 75,371
Warrants ...................................................................... 1,879 1,879
Retained deficit .............................................................. (35,375) (36,384)
Foreign currency translation adjustments ...................................... (1,943) (9,191)
------------------ ------------------
Total stockholders' equity ............................................. 39,916 31,693
------------------ ------------------
$ 337,680 $ 336,865
================== ==================
</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 AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------- -----------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES ...................................................... $ 91,536 $ 89,708 $ 175,618 $ 189,248
COST OF GOODS SOLD ............................................. 59,195 54,209 113,068 114,713
------------ ------------ ------------ ------------
Gross profit ........................................ 32,341 35,499 62,550 74,535
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ................................................... 31,147 29,897 59,884 63,264
------------ ------------ ------------ ------------
Operating income .................................... 1,194 5,602 2,666 11,271
INTEREST EXPENSE, net .......................................... 5,318 5,733 9,627 11,661
OTHER EXPENSE (INCOME) ......................................... (1,452) 417 (1,681) 1,015
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX BENEFIT ................................. (2,672) (548) (5,280) (1,405)
INCOME TAX BENEFIT ............................................. 529 388 1,239 396
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS ................................ (2,143) (160) (4,041) (1,009)
DISCONTINUED OPERATIONS:
Change in estimate of loss on
disposal of detergent business .................. -- -- (467) --
------------ ------------ ------------ ------------
NET LOSS ....................................................... $ (2,143) (160) $ (3,574) $ (1,009)
============ ============ ============ ============
INCOME (LOSS) PER COMMON SHARE:
Basic earnings (loss) per share:
Continuing operations ............................... $ (0.12) $ (0.01) $ (0.23) $ (0.06)
Discontinued operations ............................. -- -- 0.03 --
------------ ------------ ------------ ------------
Net loss ............................................ $ (0.12) $ (0.01) $ (0.20) $ (0.06)
============ ============ ============ ============
Diluted earnings (loss) per share:
Continuing operations ............................... $ (0.12) $ (0.01) $ (0.23) $ (0.06)
Discontinued operations ............................. -- -- 0.03 --
------------ ------------ ------------ ------------
Net loss ............................................ $ (0.12) $ (0.01) $ (0.20) $ (0.06)
============ ============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING .............................. 17,727,962 17,761,229 17,721,100 17,757,623
============ ============ ============ ============
AVERAGE COMMON AND POTENTIAL COMMON SHARES OUTSTANDING ......... 17,727,962 17,761,229 17,721,100 17,757,623
============ ============ ============ ============
</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>
FOREIGN
COMMON SHARES ADDITIONAL CURRENCY
ISSUED AND COMMON PAID-IN RETAINED TRANSLATION
OUTSTANDING STOCK CAPITAL WARRANTS DEFICIT ADJUSTMENTS
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999 ............. 17,749,368 $ 18 $ 75,337 $ 1,879 $ (35,375) $ (1,943)
Effect of stock purchase
plans (unaudited) ................ 18,103 -- 34 -- -- --
Net loss (unaudited) ................. -- -- -- -- (1,009) --
Translation adjustments
(unaudited) ...................... -- -- -- -- -- (7,248)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, June 30, 2000
(unaudited) ...................... 17,767,471 $ 18 $ 75,371 $ 1,879 $ (36,384) $ (9,191)
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this
consolidated financial statement.
3
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
----------------------------------
1999 2000
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................................... $ (3,574) $ (1,009)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Discontinued operations .................................................................. (467) --
Depreciation and amortization ............................................................ 6,808 7,745
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable ................................................................. (7,158) (2,272)
Inventories ......................................................................... (298) 1,269
Prepaid expenses and other .......................................................... (8,954) (8,542)
Insurance receivable resulting from Argentina fire .................................. 3,691 2,900
Increase (decrease) in --
Accounts payable .................................................................... 8,930 2,393
Accrued and other liabilities ....................................................... (1,758) (894)
Change in other long-term liabilities .................................................... 157 (336)
--------------- ---------------
Net cash provided by (used in) operating activities ...................................... (2,623) 1,254
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .......................................................... (11,300) (9,375)
Deposit on sale of net assets of Mexican operations ......................................... -- 7,707
Final settlement to former shareholders of PrimoSoft ........................................ -- (2,464)
Proceeds from sale and leaseback of Mexico facility ......................................... 4,295 --
Investment in other noncurrent assets ....................................................... (5,999) (1,588)
--------------- ---------------
Net cash used in investing activities .................................................... (13,004) (5,720)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolver ................................................................... 16,563 99,073
Payments on revolvers ....................................................................... (5,450) (97,998)
Borrowings under (payments on) other debt ................................................... (275) 1,983
Financing related costs ..................................................................... (106) (153)
Proceeds from exercise of stock options and warrants ........................................ 59 34
--------------- ---------------
Net cash provided by financing activities ................................................ 10,791 2,939
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ...................................................... (4,836) (1,527)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................................... 12,309 4,048
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................................... $ 7,473 $ 2,521
=============== ===============
SUPPLEMENTAL DATA:
Cash paid during the period for:
Interest ................................................................................. $ 7,780 $ 11,210
Income taxes ............................................................................. $ 496 $ 593
Non-cash transactions:
Contribution of land and building by
Colombian joint venture partner ..................................................... $ 1,750 $ --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements included herein have been prepared by
Drypers Corporation (the "Company"), without audit, in accordance with Rule
10-01 of Regulation S-X for interim financial statements required to be filed
with the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles 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 six months ended June 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 six month periods ended June 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.
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 to 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, the Statement 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 is currently evaluating the
impact of such adoption on the Company's consolidated financial statements.
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 six months
ended June 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 both the three month and six month periods ended June 30,
2000.
5
<PAGE>
2. EARNINGS PER SHARE
Basic earnings per share ("EPS") is computed using the weighted average
number of common shares outstanding during the period. Diluted EPS gives effect
to the potential dilution of earnings which may have occurred if dilutive
potential common shares had been issued. The following reconciles the income and
shares used in the basic and diluted EPS computations (in thousands, except
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------------- --------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Loss from continuing operations .................... $ (2,143) $ (160) $ (4,041) $ (1,009)
Discontinued operations ............................ -- -- 467 --
------------ ------------ ------------ ------------
Net loss ........................................... $ (2,143) $ (160) $ (3,574) $ (1,009)
============ ============ ============ ============
Weighted average number of common shares
Outstanding .................................. 17,727,962 17,761,229 17,721,100 17,757,623
============ ============ ============ ============
Loss from continuing operations .................... $ (0.12) $ (0.01) $ (0.23) $ (0.06)
Discontinued operations ............................ -- -- 0.03 --
------------ ------------ ------------ ------------
Net loss ........................................... $ (0.12) $ (0.01) $ (0.20) $ (0.06)
============ ============ ============ ============
DILUTED EARNINGS PER SHARE:
Loss from continuing operations .................... $ (2,143) $ (160) $ (4,041) $ (1,009)
Discontinued operations ............................ -- -- 467 --
------------ ------------ ------------ ------------
Net loss ........................................... $ (2,143) $ (160) $ (3,574) $ (1,009)
============ ============ ============ ============
Weighted average number of common shares
Outstanding .................................. 17,727,962 17,761,229 17,721,100 17,757,623
Dilutive effect - options and warrants ............. -- -- -- --
------------ ------------ ------------ ------------
17,727,962 17,761,229 17,721,100 17,757,623
============ ============ ============ ============
Loss from continuing operations .................... $ (0.12) $ (0.01) $ (0.23) $ (0.06)
Discontinued operations ............................ -- -- 0.03 --
------------ ------------ ------------ ------------
Net loss ........................................... $ (0.12) $ (0.01) $ (0.20) $ (0.06)
============ ============ ============ ============
</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 3,562,626 and 4,373,674 for the
three months ended June 30, 1999 and 2000, respectively, and 3,562,626 and
4,359,878 for the six months ended June 30, 1999 and 2000, respectively.
6
<PAGE>
3. COMPREHENSIVE LOSS
Comprehensive loss, which encompasses net loss and currency translation
adjustments, is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------------- ----------------------------------
1999 2000 1999 2000
--------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss ............................................... $ (2,143) $ (160) $ (3,574) $ (1,009)
Currency translation adjustments ....................... (8) (1,628) (30) (7,248)
--------------- --------------- --------------- ---------------
Comprehensive loss ..................................... $ (2,151) $ (1,788) $ (3,604) $ (8,257)
=============== =============== =============== ===============
</TABLE>
4. INVENTORIES
Inventories consisted of the following (in thousands):
DECEMBER 31, JUNE 30,
1999 2000
---------- ----------
Raw Materials .................. $ 14,778 $ 14,568
Finished Goods ................. 24,950 23,390
---------- ----------
$ 39,728 $ 37,959
========== ==========
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.
5. DEBT
SHORT-TERM BORROWINGS
As of December 31, 1999 and June 30, 2000, the Company had borrowings
outstanding of $24,966,000 and $26,679,000, 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 was in compliance with the terms of the credit facility as of June
30, 2000. Borrowing availability under the revolving credit facility was
approximately $562,000 at June 30, 2000.
7
<PAGE>
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.
Short-term borrowings for the international operations as of December 31,
1999 and June 30, 2000 were $6,419,000 and $5,781,000, respectively, and
consisted of working capital and trade financing facilities.
LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
---------------- ----------
<S> <C> <C>
Note payable, due 2001, interest at 8.4%, partially secured by land and
buildings.................................................................. $ 1,511 $ 1,413
Term loans due 2002, interest at LIBOR plus 3.25%, secured by machinery and
equipment ................................................................. 7,122 9,803
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 2,036
------------ ----------
38,019 40,002
Less: current maturities................................................. (3,035) (3,399)
------------ ----------
$ 34,984 $ 36,603
============ ==========
</TABLE>
SENIOR TERM NOTES
Long-term debt under senior term notes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 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 $834, respectively....... $ 145,888 $ 145,834
============ ============
</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 Company was in compliance
with the terms of the indenture as of June 30, 2000.
8
<PAGE>
6. MALAYSIA ACQUISITION SETTLEMENT:
Effective September 11, 1998, the Company acquired certain assets and assumed
certain liabilities of PrimoSoft, a Malaysian manufacturer of disposable baby
diapers, for approximately $2,825,000 of the Company's common stock (403,571
shares issued on September 11, 1998) and approximately $10,290,000 in cash. The
acquisition was accounted for as a purchase, and the purchase price was
allocated to the acquired assets and liabilities assumed based on their
estimated fair values (current assets $2,618,000, property and equipment of
$3,093,000 and liabilities of $257,000). The consideration paid for PrimoSoft
exceeded the estimated fair market value of the net tangible assets acquired by
approximately $7,661,000 and this excess was recorded as goodwill.
In the agreement with the PrimoSoft sellers, the Company guaranteed the value
of the shares of its Common Stock issued to them at $7.00 per share. Because the
market price of the Company's Common Stock dropped in the year during which the
PrimoSoft sellers were required to hold the shares under federal securities
laws, the Company was required to make up the difference between the market
price and the guaranteed price. This final settlement payment was made in May
2000 with a cash payment of approximately $2.5 million. This transaction was
accounted for as a reduction in the Company's investment in its Malaysian
operations.
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.
9
<PAGE>
Information as to the operations and total assets of the Company's reportable
segments is as follows (in thousands):
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL TOTAL
--------------- --------------- ---------------
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 1999
Net sales ................................................................. $ 56,214 $ 35,322 $ 91,536
Intersegment sales ........................................................ $ 1,712 $ 1,871 $ 3,583
Operating income (loss) before management fees and corporate
overhead ............................................................ $ 3,257 $ (1,641) $ 1,616
Corporate overhead ........................................................ 69 (491) (422)
Interest expense, net ..................................................... -- -- (5,318)
Other income .............................................................. -- -- 1,452
---------------
Loss from continuing operations before tax benefit ........................ $ (2,672)
===============
SIX MONTHS ENDED JUNE 30, 1999
Net sales ................................................................. $ 107,951 $ 67,667 $ 175,618
Intersegment sales ........................................................ $ 2,120 $ 3,464 $ 5,584
Operating income (loss) before management fees and corporate
overhead ............................................................ $ 6,825 $ (2,991) $ 3,834
Corporate overhead ........................................................ (2,597) 1,429 (1,168)
Interest expense, net ..................................................... -- -- (9,627)
Other income .............................................................. -- -- 1,681
---------------
Loss from continuing operations before tax benefit ........................ $ (5,280)
===============
Total assets .............................................................. $ 159,353 $ 159,052 $ 318,405
=============== =============== ===============
<CAPTION>
DOMESTIC INTERNATIONAL TOTAL
--------------- --------------- ---------------
<S> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000
Net sales ................................................................. $ 61,535 $ 28,173 $ 89,708
Intersegment sales ........................................................ $ 290 $ -- $ 290
Operating income (loss) before management fees and corporate
overhead ............................................................ $ 8,642 $ (869) $ 7,773
Corporate overhead ........................................................ (1,874) (297) (2,171)
Interest expense, net ..................................................... -- -- (5,733)
Other expense ............................................................. -- -- (417)
---------------
Loss from continuing operations before tax benefit ........................ $ (548)
===============
SIX MONTHS ENDED JUNE 30, 2000
Net sales ................................................................. $ 126,473 $ 62,775 $ 189,248
Intersegment sales ........................................................ $ 290 $ -- $ 290
Operating income before management fees and
Corporate overhead .................................................. $ 14,305 $ 955 $ 15,260
Corporate overhead ........................................................ (3,562) (427) (3,989)
Interest expense, net ..................................................... -- -- (11,661)
Other expense ............................................................. -- -- (1,015)
---------------
Loss from continuing operations before tax benefit ........................ $ (1,405)
===============
Total assets .............................................................. $ 171,650 $ 165,215 $ 336,865
=============== =============== ===============
</TABLE>
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<PAGE>
8. SALE OF MEXICAN OPERATIONS:
On June 1, 2000, the Company signed definitive agreements entering into
certain transactions with an affiliate of Copamex, S.A. de C.V. ("Copamex")
which will provide for the sale of substantially all of its Mexican operations
to 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 Company will ultimately receive approximately $27.0 million as a
result of these transactions, which are scheduled to close on or before August
31, 2000, at which time legal title of all assets will transfer to Copamex. The
net assets of the Company's Mexican operations , as defined in the agreement,
were approximately $18.0 million as of June 30, 2000. The Mexican operations
have been included in the Company's consolidated financial statements as of and
for the periods ended June 30, 2000 because legal title to the assets resides
with the Company until August 31, 2000. The Company does not expect the gain
from these transactions to be significant.
To date, the Company has received approximately $13.1 million in proceeds
from these transactions as follows: $3.0 million for the sale of the license to
Copamex, $2.0 million as technical support reimbursements and the remainder as a
deposit towards the net assets of the Company's Mexican operations.
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<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.
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 Capacity allocation and utilization,
o timing of new distribution,
o successful turnaround of certain international operations,
o ability to expand growth in the United States,
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.
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.
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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
second quarter of 2000, we entered into agreements to sell all of our Mexican
operations to Copamex, S.A. de C.V. ("Copamex"), the second largest consumer
paper products company in Mexico. We will ultimately receive approximately $27.0
million as a result of this transaction, which is scheduled to close on or
before August 31, 2000. We will continue to pursue alliances and partnerships
that reduce our exposure to foreign risk and provide a faster return on our
international investments.
Although our Brazilian operations have seen increased unit volume, the market
was resistant to price increases to customers in 1999 due to the decline of the
Brazilian real. We were able to implement small price increases in 1999;
however, a substantial portion of our raw material costs are in U.S. dollars and
the price increases could not completely offset the increased costs.
Additionally, the country of Argentina lost a significant portion of its export
capacity when the Brazilian real devalued, exaggerating the recession in that
country. These factors combined to negatively impact our overall earnings for
1999 by approximately $9.0 million or $0.51 per diluted share. Our Brazilian
operations are showing signs of improvement in 2000 and we have reduced our
Argentine operations to a one diaper line facility as compared to a four diaper
line facility before the August 1998 fire in that facility.
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 six months ended
June 30, 1999 and 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------------------ ------------------------------------------
1999 2000 1999 2000
------------------- ------------------- ------------------- -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Domestic ............................... $ 56.2 61.4% $ 61.5 68.6% $ 108.0 61.5% $ 126.5 66.8%
International .......................... 35.3 38.6 28.2 31.4 67.6 38.5 62.7 33.2
-------- -------- -------- -------- -------- -------- -------- --------
Total net sales .................. $ 91.5 100.0% $ 89.7 100.0% $ 175.6 100.0% $ 189.2 100.0%
======== ======== ======== ======== ======== ======== ======== ========
</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.
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<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 six months ended
June 30, 1999 and 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 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 ............................................ 64.7 60.4 64.4 60.6
------------ ------------ ------------ ------------
Gross profit .................................................. 35.3 39.6 35.6 39.4
Selling, general and administrative expenses .................. 34.0 33.3 34.1 33.4
------------ ------------ ------------ ------------
Operating income .............................................. 1.3 6.3 1.5 6.0
Interest expense, net ......................................... 5.8 6.4 5.5 6.2
Other expense (income) ........................................ (1.6) 0.5 (1.0) 0.5
------------ ------------ ------------ ------------
Loss from continuing operations before income tax
benefit ................................................. (2.9) (0.6) (3.0) (0.7)
Income tax benefit ............................................ 0.6 0.4 0.7 0.2
------------ ------------ ------------ ------------
Loss from continuing operations ............................... (2.3) (0.2) (2.3) (0.5)
Discontinued operations ....................................... -- -- 0.3 --
------------ ------------ ------------ ------------
Net loss ...................................................... (2.3)% (0.2)% (2.0)% (0.5)%
============ ============ ============ ============
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999
NET SALES
Net sales decreased 2.0% to $89.7 million for the three months ended June 30,
2000 from $91.5 million for the three months ended June 30,1999 and included
$3.0 million from a license to Copamex in conjunction with the transactions
involving the sale of our Mexican operations. Domestic sales increased 9.5% to
$61.5 million for the three months ended June 30, 2000. Excluding the $3.0
million in license fees received from Copamex in the second quarter of 2000,
domestic sales increased 4.1% to $58.5 million for the three months ended June
30, 2000 from $56.2 million for the same period in 1999. This increase was
primarily driven by our private label sales doubling as compared to last year's
second quarter, 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, results for the second quarter 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 20.2%
to $28.2 million for the three months ended June 30, 2000 from $35.3 million in
the prior comparable period, driven primarily by a 32.1% decline in sales in
South America. Sales in Asia and Mexico were slightly 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 some improvement in net sales during the second quarter as
compared to the first quarter of 2000 in Brazil. The Brazilian Real has seen
some improvement against the U.S. dollar during the first half of 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. A new management team
has been put in place to assess the conditions in Argentina and implement a
turnaround plan.
COST OF GOODS SOLD
Cost of goods sold decreased as a percentage of net sales to 60.4% for the
three months ended June 30, 2000 compared to 64.7% for the three months ended
June 30, 1999. Excluding the effect of $3.0 million in license fees received
from Copamex in the second quarter of 2000, cost of goods sold as a percentage
of net sales was 62.5%. The remaining improvement of 2.2% in gross margin
percentage resulted from the effect of
14
<PAGE>
several factors. First, international gross profit increased primarily due to an
improved Brazilian Real exchange rate. Domestic margins improved in comparison
with prior year's gross margin due to manufacturing efficiencies over last year
which improved branded product gross margins despite higher raw material prices.
Partly offsetting this was 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased as a percentage of net
sales to 33.3% for the three months ended June 30, 2000 compared to 34.0% for
the three months ended June 30, 1999. Approximately $2.0 million was recorded as
a reduction to selling, general and administrative expenses in the second
quarter of 2000 for amounts received as reimbursements for manufacturing and
technical support we have provided under an agreement in place with Copamex.
Excluding the effect of the Copamex transactions, selling, general and
administrative expenses increased 2.8% as compared to the second quarter of
1999. This increase was primarily due to the change in expectations related to
the volume of business with a major customer which required us to adjust our
inventory levels and utilize other sales channels to correct the imbalance, thus
driving up promotional spending above normal levels.
OPERATING INCOME
As a result of the above factors, operating income increased $4.4 million
(including $3.0 million in licensing fees) to $5.6 million for the three months
ended June 30, 2000 from $1.2 million for the three months ended June 30, 1999.
Operating income as a percentage of net sales was 6.3% for the three months
ended June 30, 2000 versus 1.3% for the three months ended June 30, 1999.
INTEREST EXPENSE, NET
Interest expense, net increased to $5.7 million for the three months ended
June 30, 2000 as compared to $5.3 million for the three months ended June 30,
1999. The increase was primarily due to increased borrowing levels under our
revolving credit facility, additional term debt and increased interest rates.
OTHER EXPENSE (INCOME)
For the three months ended June 30, 2000, other expense of approximately
$417,000 primarily related to exchange losses from foreign operations as well as
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 three
months ended June 30, 1999, we had recorded approximately $1.1 million in other
income primarily related to lost profits recoverable under our business
interruption policy for the months of April 1999 through June 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 benefit of $388,000 for the three months ended June 30,
2000, compared to a benefit of $529,000 for the three months ended June 30,
1999. The benefits recorded relate to foreign operations.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
NET SALES
Net sales increased 7.8% to $189.2 million for the six months ended June 30,
2000 from $175.6 million for the six months ended June 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 17.2% to
$126.5 million for the six months ended June 30, 2000. Excluding the $3.0
million in license fees received from Copamex in the second quarter of 2000,
domestic sales increased 14.4% to $123.5 million for the six months ended June
30,
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<PAGE>
2000 from $108.0 million for the same period in 1999. This increase was
primarily due to the level of private label sales almost tripling as compared to
last year's first half, 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 7.2% to
$62.7 million for the six months ended June 30, 2000 from $67.6 million in the
prior comparable period, driven primarily by a 22.9% decline in sales in South
America, offset somewhat by strong growth in both Malaysia and Mexico of over
20% and 17%, respectively, compared with last year's first half. 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 first half of 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. We now have a new
management team in place to assess the conditions in Argentina and implement a
turnaround plan, similar to the steps we took in Mexico a year and a half ago.
COST OF GOODS SOLD
Cost of goods sold decreased as a percentage of net sales to 60.6% for the
six months ended June 30, 2000 compared to 64.4% for the six months ended June
30, 1999. Excluding the effect of $3.0 million in license fees received from
Copamex in the second quarter of 2000, cost of goods sold as a percentage of net
sales was 61.6%. The remaining improvement of 1.0% in gross margin percentage
resulted from the effect of several factors. First, international gross profit
increased primarily due to an improved Brazilian Real exchange rate and the
reallocation of production capacity out of Argentina to more profitable areas of
the company. Domestic margins improved in comparison with prior year's gross
margin due to manufacturing efficiencies over last year which improved branded
product gross margins despite higher raw material prices. Partly offsetting this
was 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.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased as a percentage of net
sales to 33.4% for the six months ended June 30, 2000 compared to 34.1% for the
six months ended June 30, 1999. Approximately $2.0 million was recorded as a
reduction to selling, general and administrative expenses in the second quarter
of 2000 for amounts received as reimbursements for manufacturing and technical
support we have provided under an agreement in place with Copamex. Excluding the
effect of the Copamex transactions, selling, general and administrative expenses
increased .9% as compared to the first half of 1999. This increase was primarily
due to the change in expectations related to the volume of business with a major
customer which required us to adjust our inventory levels and utilize other
sales channels to correct the imbalance, thus driving up promotional spending
above normal. This increase was partially offset by higher promotional expenses
in Malaysia during the first quarter of 2000 to profitably build business
following the additional capacity brought into that region from Argentina.
OPERATING INCOME
As a result of the above factors, operating income increased $8.6 million to
$11.3 million for the six months ended June 30, 2000 from $2.7 million for the
six months ended June 30, 1999. Operating income as a percentage of net sales
was 6.0% for the six months ended June 30, 2000 versus 1.5% for the six months
ended June 30, 1999.
INTEREST EXPENSE, NET
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<PAGE>
Interest expense, net increased to $11.7 million for the six months ended
June 30, 2000 as compared to $9.6 million for the six months ended June 30,
1999. The increase was primarily due to increased borrowing levels under our
revolving credit facility, additional term debt and increased interest rates.
OTHER EXPENSE (INCOME)
For the six months ended June 30, 2000, other expense of approximately $1.0
million primarily related to exchange losses on foreign operations as well as
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 six
months ended March 31, 1999, we had recorded approximately $1.3 million in other
income primarily related to lost profits recoverable under our business
interruption policy for the months of January 1999 through June 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 minimal tax benefit related to foreign taxes for the six months
ended June 30, 2000, compared to a benefit of $1.2 million for the six months
ended June 30, 1999. The decrease is primarily due to the tax implications of
improved operations in Brazil, offset by continued losses in Argentina.
DISCONTINUED OPERATIONS
During the first half of 1999, we recorded a $467,000 reduction in the
estimated loss on disposition of our laundry detergent business, which is
reflected as income from discontinued operations in the accompanying unaudited
consolidated statement of earnings. This reduction resulted from the actual
results realized upon the completion of the disposition of this business.
17
<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 $2.3 million of cash for the six months ended June
30, 2000, including the net collection of $2.9 million in insurance receivables
related to the Argentina fire in August 1998. The net $1.7 million of cash used
by operations during the six months ended June 30, 2000 was due to increases in
accounts receivable and increased promotional and other prepaid expenses
primarily related to the increased sales volume, offset by a corresponding
reduction in inventory levels. Our operations used $2.6 million of cash for the
six months ended June 30, 1999, net of the favorable effect of a $3.7 million
net collection of the insurance receivable related to the Argentina fire. The
use of cash during the six months ended June 30, 1999 primarily reflected
increased promotional and other prepaid expenses primarily related to the
startup of our new Colombian manufacturing operations, as well as our worldwide
operations.
Capital expenditures were $9.4 million for the six months ended June 30, 2000
and $11.3 million for the six months ended June 30, 1999. Planned capital
expenditures for the remainder of 2000 are approximately $1.0 million. 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
$4.4 million of the capital expenditures made in the first half of 1999 related
to restoration of our Argentina operations damaged by fire in August 1998. We
financed these capital expenditures in 1999 and 2000 through borrowings under
our revolving credit facility and equipment term loans.
Our estimated cash requirements during the remainder of 2000 are primarily
the funding of working capital needs, payment of debt service, and patent
license payments.
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<PAGE>
Working capital was $31.7 million as of June 30, 2000, compared to $28.7
million as of December 31, 1999. Current assets increased from $135.2 million as
of December 31, 1999 to $142.5 million as of June 30, 2000, and current
liabilities increased from $106.5 million as of December 31, 1999 to $110.7
million as of June 30, 2000. Total debt increased from $215.3 million at
December 31, 1999 to $218.3 million as of June 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.
Borrowing availability under the revolving credit facility was approximately
$562,000 at June 30, 2000. Our cash position has tightened during the second
quarter primarily due to a decrease in sales volume which resulted in a
reduction in our borrowing availability. As of August 11, 2000, we have no
additional borrowing availability under our revolving credit facility.
On June 1, 2000, we signed definitive agreements entering into certain
transactions with an affiliate of Copamex, S.A. de C.V. ("Copamex"), which will
provide for the sale of substantially all of our Mexican operations to Copamex,
the second largest consumer paper products company in Mexico. Under the terms of
the agreements, we will also sell a license to use certain patents in Mexico to
Copamex and will continue to provide technical support to Copamex. Total
proceeds of approximately $27.0 million will be received from these
transactions, which are scheduled to close on or before August 31, 2000, at
which time legal title of the assets will transfer to Copamex. To date, we have
received approximately $13.1 million for the sale of the license to Copamex,
technical support reimbursements and a deposit towards the net assets of our
Mexican operations.
Additionally, we have several other transactions currently in process which
should generate additional liquidity. Over the next several months our
Colombian subsidiary is expected to generate an additional $1.2 million of cash
from a sale/leaseback of the land and building comprising the Colombian facility
and our Malaysian subsidiary is expected to secure a $1.3 million trade
financing facility to provide working capital. More importantly, management will
continue to pursue alliances and partnerships that reduce our exposure to
foreign risk and provide a faster return on our international investments
similar to the Copamex transaction. Additionally, we have obtained the support
of our major vendors through extended terms on accounts payable. In late third
quarter 2000, we will implement an industry-wide price increase which should
help improve our margins beginning in the fourth quarter. Finally, we continue
to pursue reducing our inventory and accounts receivable levels required for the
business as well as pursuing operating lease financing for our major capital
projects.
We expect our tight cash position to continue as we bring our domestic
manufacturing capacity and inventory levels in line with current sales demand.
In the near term, however, our liquidity situation should improve with the
remaining proceeds from the Copamex transaction. Additionally, in the longer
term, our cash position should continue to improve as we continue to execute our
debt reduction strategy of pursuing joint venture or sale opportunities for our
existing international operations.
Management believes 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 for 2000, including working capital,
capital expenditures and debt service.
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<PAGE>
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.
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<PAGE>
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 June 30, 2000, we had
$37.4 million outstanding under these facilities. An increase in interest rates
of 1% would reduce annual net income by approximately $0.4 million. Our
remaining debt obligations as of June 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 August 1999, we entered into forward exchange contracts to hedge certain
U.S. dollar denominated inventory purchases for our Argentine subsidiary. The
contracts have varying maturities with none exceeding one year. The contracts
require monthly settlement and at June 30, 2000 the remaining notional contract
amount outstanding was $1.4 million with an average forward rate of $1.13. 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 $4.8
million with an average forward rate of $1.97. Deferred losses during the three
months ended June 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.
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 to 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, the Statement 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
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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 is
currently evaluating the impact of such adoption on the Company's consolidated
financial statements.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Meeting of Stockholders--May 26, 2000
(b) Terry A. Tognietti and Philip A. Tuttle were elected to serve as
directors for three-year terms expiring in 2002. The Company's other directors
are Walter V. Klemp, Nolan Lehmann, Raymond M. Chambers and Gary L. Forbes.
(c) On May 26, 2000, the Stockholders voted on the following proposals:
PROPOSAL NO. 1 -- To elect two persons to serve as directors of the
Company for a three-year term or until their respective successors are duly
elected and qualified.
PROPOSAL NO. 2 -- To ratify the appointment of Arthur Andersen LLP
as the Company's independent public accountants for the fiscal year ending
December 31, 2000.
As of April 14, 2000, the record date for determining stockholders
entitled to vote at the Annual Meeting of Stockholders, the Company had
outstanding and entitled to vote 17,762,533 shares of Common Stock.
The following table lists the votes cast for each proposal:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------------------------------------------------------------------------------------------------------------------------
PROPOSAL FOR AGAINST ABSTAIN BROKER NON-VOTES
-------- ---------- ------- -------- ----------------
<S> <C> <C> <C> <C>
No. 1
Terry A. Tognietti 14,557,896 196,736 -- --
Philip A. Tuttle 14,569,550 185,082 -- --
No. 2 14,654,020 80,450 20,162 --
</TABLE>
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:
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ALIGNMENT OF NEW DISTRIBUTION WITH CAPACITY ALLOCATION AND UTILIZATION. We
have been successful in consistent domestic sales growth. A key element of this
growth has been the increasing presence in mass merchandisers such as Wal-Mart
and Kmart versus the traditional grocery store chains. From this shift in market
mix we saw the opportunity not only for increased growth for its DRYPERS(R)
diapers but also additional growth by providing private label diapers as well.
Our strategy to increase sales to mass merchandisers has been very successful.
In 1999, we entered into new and expanded agreements and became a national
supplier to Kmart as well as a major supplier to Wal-Mart, Kroger and Food Lion.
In anticipation of future orders from this increased business, we increased
our production capabilities and invested in improved operations and logistics
systems in the fourth quarter of 1999 and the first quarter of 2000. The new
orders were delayed, however, until the first quarter of 2000, causing our
operations to be highly underutilized in 1999. Additionally, during the second
quarter of 2000, one of our major customers delayed indefinitely the completion
of a national private label distribution roll-out. We can make no assurances as
to when to expect the additional business. We have begun taking corrective
action in order to bring domestic capacity levels back in line with demand, and
are assessing our entire production operation to determine the most efficient
means for accomplishing this objective.
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.
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
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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.
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
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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.
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 - No reports on Form 8-K were filed with the Securities
and Exchange Commission during the three months ended June 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: AUGUST 14, 2000 By: /S/ BRIAN FONTANA
--------------- -----------------
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
27 Financial Data Schedule
28
