UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
5300 MEMORIAL, SUITE 900
HOUSTON, TEXAS 77007
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING THE AREA CODE: (713) 869-8693
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
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 APRIL 14, 2000)
- ----------------------------- -------------------------------
Common Stock, $.001 Par Value 17,762,533
<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 March 31, 2000.
Consolidated Statements of Earnings for the Three Months Ended March 31, 1999
and 2000.
Consolidated Statement of Stockholders' Equity for the Three Months Ended March
31, 2000.
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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, MARCH 31,
ASSETS 1999 2000
------ --------------- ---------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ........................................................... $ 4,048 $ 3,926
Accounts receivable, net of allowance for doubtful accounts of $3,422 and
$3,788, respectively ............................................................ 65,771 70,389
Inventories ......................................................................... 39,728 36,286
Prepaid expenses and other .......................................................... 25,690 31,277
--------------- ---------------
Total current assets ......................................................... 135,237 141,878
PROPERTY AND EQUIPMENT, net of depreciation and amortization of $28,680 and $29,756,
respectively ............................................................................... 101,952 98,771
INTANGIBLE AND OTHER ASSETS, net of amortization of $22,630 and $23,702, respectively ........ 100,491 100,940
--------------- ---------------
$ 337,680 $ 341,589
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings ............................................................... $ 31,385 $ 33,349
Current portion of long-term debt ................................................... 3,035 5,944
Accounts payable .................................................................... 53,436 54,290
Accrued liabilities ................................................................. 18,686 22,953
--------------- ---------------
Total current liabilities .................................................... 106,542 116,536
LONG-TERM DEBT ............................................................................... 34,984 34,664
SENIOR TERM NOTES ............................................................................ 145,888 145,861
OTHER LONG-TERM LIABILITIES .................................................................. 10,350 11,061
--------------- ---------------
297,764 308,122
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 30,000,000 shares authorized,
17,749,368 and 17,756,525 shares issued and outstanding, respectively ............. 18 18
Additional paid-in capital .......................................................... 75,337 75,357
Warrants ............................................................................ 1,879 1,879
Retained deficit .................................................................... (35,375) (36,224)
Foreign currency translation adjustments ............................................ (1,943) (7,563)
--------------- ---------------
Total stockholders' equity ................................................... 39,916 33,467
--------------- ---------------
$ 337,680 $ 341,589
=============== ===============
</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
MARCH 31
----------------------------------
1999 2000
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
NET SALES .......................................................................... $ 84,082 $ 99,540
COST OF GOODS SOLD ................................................................. 53,873 60,504
--------------- ---------------
Gross profit ................................................................. 30,209 39,036
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ....................................... 28,737 33,367
--------------- ---------------
Operating income ............................................................. 1,472 5,669
INTEREST EXPENSE, net .............................................................. 4,309 5,928
OTHER EXPENSE (INCOME) ............................................................. (229) 598
--------------- ---------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT .......................... (2,608) (857)
INCOME TAX BENEFIT ................................................................. 710 8
--------------- ---------------
LOSS FROM CONTINUING OPERATIONS .................................................... (1,898) (849)
DISCONTINUED OPERATIONS:
Change in estimate of loss on
disposal of detergent business ................................................ 467 --
--------------- ---------------
NET LOSS ........................................................................... $ (1,431) $ (849)
--------------- ---------------
INCOME (LOSS) PER COMMON SHARE:
Basic earnings (loss) per share:
Continuing operations ...................................................... $ (.11) $ (.05)
Discontinued operations .................................................... .03 --
--------------- ---------------
Net loss ................................................................... $ (.08) $ (.05)
=============== ===============
Diluted earnings (loss) per share:
Continuing operations ...................................................... $ (.11) $ (.05)
Discontinued operations .................................................... .03 --
--------------- ---------------
Net loss ................................................................... $ (.08) $ (.05)
=============== ===============
AVERAGE COMMON SHARES OUTSTANDING .................................................. 17,714,238 17,754,018
=============== ===============
AVERAGE COMMON AND POTENTIAL COMMON SHARES OUTSTANDING ............................. 17,714,238 17,754,018
=============== ===============
</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>
BALANCE, December 31, 1999 . 17,749,368 $ 18 $ 75,337 $ 1,879 $ (35,375) $ (1,943)
Effect of stock option and
stock purchase plans
(unaudited) .............. 7,157 -- 20 -- -- --
Net loss (unaudited) ....... -- -- -- -- (849) --
Translation adjustments
(unaudited) .............. -- -- -- -- -- (5,620)
--------------- --------------- --------------- --------------- --------------- ---------------
BALANCE, March 31, 2000
(unaudited) .......... 17,756,525 $ 18 $ 75,357 $ 1,879 $ (36,224) $ (7,563)
=============== =============== =============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of this
consolidated financial statement.
3
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------------------
1999 2000
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................................... $ (1,431) $ (849)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Discontinued operations ............................................................ (467) --
Depreciation and amortization ...................................................... 3,354 3,940
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable ......................................................... (2,950) (7,518)
Inventories ................................................................. 766 3,442
Prepaid expenses and other .................................................. (4,190) (5,587)
Insurance receivable resulting from Argentina fire .......................... 2,103 2,900
Increase (decrease) in --
Accounts payable ............................................................ (2,632) 854
Accrued and other liabilities................................................ 3,809 4,549
Change in other long-term liabilities .............................................. (701) 709
--------------- ---------------
Net cash provided by (used in) operating activities ................................ (2,339) 2,440
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................................... (6,551) (5,346)
Investment in other noncurrent assets ................................................ (2,301) (1,789)
--------------- ---------------
Net cash used in investing activities ........................................ (8,852) (7,135)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolver ............................................................ 7,595 52,022
Payments on revolvers ................................................................ -- (50,058)
Borrowings under (payments on) other debt ............................................ (218) 2,589
Financing related costs .............................................................. (10) --
Proceeds from exercise of stock options and warrants ................................. 30 20
--------------- ---------------
Net cash provided by financing activities .................................... 7,397 4,573
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................................................. (3,794) (122)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................................... 12,309 4,048
--------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................. $ 8,515 $ 3,926
=============== ===============
SUPPLEMENTAL DATA:
Cash paid during the period for:
Interest .......................................................................... $ 96 $ 1,970
Income taxes ...................................................................... $ 170 $ 265
</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 ended March 31, 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 periods ended March 31, 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 issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company is required to
adopt SFAS No. 133, as amended by SFAS No. 137, as of January 1, 2001 and does
not expect the adoption of this statement to have a material effect on its
financial position or results of operations.
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, which meet the criteria of Staff Accounting Bulletin No. 101.
During the three months ended March 31, 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.
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):
THREE MONTHS ENDED
MARCH 31
------------------------
1999 2000
---------- ----------
BASIC EARNINGS (LOSS) PER SHARE:
Loss from continuing operations .................... $ (1,898) $ (849)
Discontinued operations ............................ 467 --
---------- ----------
Net loss ........................................... $ (1,431) $ (849)
========== ==========
Weighted average number of common shares outstanding 17,714,238 17,754,018
========== ==========
Loss from continuing operations .................... $ (.11) $ (.05)
Discontinued operations ............................ .03 --
---------- ----------
Net loss ........................................... $ (.08) $ (.05)
========== ==========
DILUTED EARNINGS (LOSS) PER SHARE:
Loss from continuing operations .................... $ (1,898) $ (849)
Discontinued operations ............................ 467 --
---------- ----------
Net loss ........................................... $ (1,431) $ (849)
========== ==========
Weighted average number of common shares outstanding 17,714,238 17,754,018
========== ==========
Loss from continuing operations .................... $ (.11) $ (.05)
Discontinued operations ............................ .03 --
---------- ----------
Net loss ........................................... $ (.08) $ (.05)
========== ==========
For the three months ended March 31, 1999 and 2000, 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 3,612,951 and 3,699,526, respectively.
3. COMPREHENSIVE INCOME (LOSS)
Comprehensive loss, which encompasses net loss and currency translation
adjustments, is as follows (in thousands):
THREE MONTHS ENDED
MARCH 31
------------------------
1999 2000
---------- ----------
Net loss ........................................... $ (1,431) $ (849)
Currency translation adjustments ................... (22) (5,620)
---------- ----------
Comprehensive loss ................................. $ (1,453) $ (6,469)
========== ==========
6
<PAGE>
4. INVENTORIES
Inventories consisted of the following (in thousands):
DECEMBER 31, MARCH 31,
1999 2000
---------- ----------
Raw Materials .................................... $ 14,778 $ 12,003
Finished Goods ................................... 24,950 24,283
---------- ----------
$ 39,728 $ 36,286
========== ==========
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 March 31, 2000, the Company had borrowings
outstanding of $24,666,000 and $27,554,000, respectively, under revolving credit
facilities.
On December 13, 1999, the Company entered into a new three-year $70,000,000
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 March
31, 2000. Borrowing availability under the revolving credit facility was
approximately $3,819,000 at March 31, 2000.
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 March 31, 2000 were $6,419,000 and $5,795,000, respectively, and
consisted of working capital and trade financing facilities.
7
<PAGE>
LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
DECEMBER 31, MARCH 31,
1999 2000
---------- ----------
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 10,122
Term loan due 2002, interest at 12.5%, secured by
second lien on substantially all of the Company's
assets ........................................... 27,000 27,000
Various other notes payable ........................ 2,386 2,073
---------- ----------
38,019 40,608
Less: current maturities ....................... (3,035) (5,944)
---------- ----------
$ 34,984 $ 34,664
========== ==========
SENIOR TERM NOTES
Long-term debt under senior term notes consisted of the following (in
thousands):
DECEMBER 31, MARCH 31,
1999 2000
--------- ---------
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 $861, respectively........... $ 145,888 $ 145,861
========= =========
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.
6. 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.
8
<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 MARCH 31, 1999
Net sales ................................. $ 51,737 $ 32,345 $ 84,082
Intersegment sales ........................ $ 408 $ 1,593 $ 2,001
Operating income (loss) before management
fees and corporate overhead ............. $ 3,567 $ (1,350) $ 2,217
Corporate overhead ........................ (745)
Interest expense, net ..................... (4,309)
Other income .............................. 229
-------------
Loss from continuing operations before
taxes.................................... $ (2,608)
=============
Total assets .............................. $ 153,630 $ 155,000 $ 308,630
============= ============= =============
THREE MONTHS ENDED MARCH 31, 2000
Net sales ................................. $ 64,938 $ 34,602 $ 99,540
Intersegment sales ........................ $ 20 $ 2,503 $ 2,523
Operating income before management fees
and corporate overhead .................. $ 5,663 $ 1,824 $ 7,487
Corporate overhead ........................ (1,818)
Interest expense, net ..................... (5,928)
Other expense ............................. (598)
-------------
Loss from continuing operations before
taxes.................................... $ (857)
=============
Total assets .............................. $ 179,399 $ 162,190 $ 341,589
============= ============= =============
</TABLE>
7. SUBSEQUENT EVENT:
On April 19, 2000, the Company entered into a letter of intent to form a
new subsidiary in Mexico with Copamex, S.A. de C.V. ("Copamex"), the second
largest consumer paper products company in Mexico. The new subsidiary will be
owned 50.1% by the Company and the remaining 49.9% by Copamex. The Company will
contribute its current Mexican operations to the new subsidiary. The Company is
also selling to Copamex a license to use certain patents in Mexico as part of
the proposed transaction. Under the proposed transaction, Drypers will manage
existing Mexican manufacturing operations while Copamex will manage sales and
distribution throughout Mexico. This transaction is expected to close in May
2000 and should generate in excess of $13.0 million in cash before taxes to the
Company. The transaction is subject to, among other things, completion of
financial and legal due diligence, the execution and delivery of a definitive
agreement and other documentation, and the receipt of necessary bank, board of
director and governmental approvals.
9
<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 timing of new distribution,
o international operations and the effect of recessionary economies,
o currency fluctuations,
o currency devaluation,
o currency restriction,
o leverage and debt service,
o competitive industry,
o excess capacity over demand,
o price changes by competitors,
o dependence on key products and acceptance of product innovation,
o cost of certain raw materials,
o intellectual property risks,
o technological change, and
o covenant limitations.
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 1998, we began our first-ever national television campaign. As a
result of this campaign, in 1998, we began with test distribution in two
national mass merchants, Wal-Mart and Kmart. In April 1999, we gained national
distribution of our branded disposable diapers into all 1,500 Big Kmart stores
across the country. In September 1999, we expanded our worldwide relationship
with Wal-Mart to include production of private label diapers 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
10
<PAGE>
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 back to profitability. We intend to continue to expand our operations
in Mexico, Malaysia, Europe and Colombia and are actively seeking further
expansion opportunities through acquisitions, joint ventures or other
arrangements worldwide.
Although our Brazilian operations have seen increased unit volume, the market
has been 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 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 taken steps to reduce 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. We have deployed
this manufacturing capacity to our more profitable markets.
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 ended March 31, 1999
and 2000.
THREE MONTHS ENDED
MARCH 31
-----------------------------
1999 2000
----------- ------------
(DOLLARS IN MILLIONS)
Domestic.............. $51.8 61.5% $64.9 65.2%
International......... 32.3 38.5 34.6 34.8
----- ---- ----- ----
Total net sales.... $84.1 100.0% $99.5 100.0%
===== ===== ===== =====
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
necessarily cause significant fluctuations in operating margins.
11
<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 ended March 31, 1999
and 2000.
THREE MONTHS ENDED
MARCH 31
-------------------------
1999 2000
---------- ----------
Net sales ........................................ 100.0% 100.0%
Cost of goods sold ............................... 64.1 60.8
---------- ----------
Gross profit ..................................... 35.9 39.2
Selling, general and administrative expenses ..... 34.2 33.5
---------- ----------
Operating income ................................. 1.7 5.7
Interest expense, net ............................ 5.1 6.0
Other expense (income) ........................... (0.3) 0.6
---------- ----------
Loss from continuing operations before income tax
benefit ........................................ (3.1) (0.9)
Income tax benefit ............................... (0.8) 0.0
---------- ----------
Loss from continuing operations .................. (2.3) (0.9)
Discontinued operations .......................... 0.6 0.0
---------- ----------
Net loss ......................................... (1.7)% (0.9)%
========== ==========
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999
NET SALES
Net sales increased 15.4% to $99.5 million for the three months ended March
31, 2000 from $84.1 million for the three months ended March 31, 1999. Domestic
sales increased 25.5% to $64.9 million for the three months ended March 31, 2000
from $51.8 million for 1999. Despite a highly competitive promotional
environment during the first quarter of 2000, we achieved record sales levels in
both our branded and private label business. We recognized further gains in our
U.S. grocery distribution with our DRYPERS brand, and by comparison to the same
period last year, this quarter reflected the full effect of our national
distribution with Kmart. Additionally, our private label sales tripled as
compared to last year's first quarter, due to the shipment of orders that we had
been anticipating from our larger, national customers, Kroger and Wal-Mart. Net
sales in the international sector grew 7.0% to $34.6 million for the three
months ended March 31, 2000 from $32.3 million in the prior comparable period,
reflecting strong growth in both Malaysia and Mexico of over 46% and 38%,
respectively, compared with last year's first quarter. 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
saw strong improvement in net sales during the first quarter as compared to the
fourth quarter of 1999. The Brazilian real has seen some improvement during the
first quarter of 2000; however, it is still well below 1998 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. Additionally, operations in Argentina have
been supported by one production line for almost the entire first quarter of
2000, bringing costs more in line with demand.
COST OF GOODS SOLD
Cost of goods sold decreased as a percentage of net sales to 60.8% for the
three months ended March 31, 2000 compared to 64.1% for the three months ended
March 31, 1999. Gross profits increased in all of our major international
markets, primarily due to positive changes in sales mix in Malaysia and Mexico,
an improved Brazilian real exchange rate and the reallocation of production
capacity out of Argentina to more profitable areas of the company.
Internationally, gross profits increased 7.4 percentage points over the first
quarter of 1999.
Domestic gross margins slightly declined in comparison to last year's gross
margin due to two offsetting factors. First, our manufacturing efficiencies
improved over last year, which increased branded product gross margins by almost
three percentage points despite higher raw material prices. Second, our sales
mix was more heavily weighted toward private label as compared to last year,
bringing overall domestic gross margins down. Private label products have a
lower gross margin, but also lower selling costs than branded products.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased as a percentage of net
sales to 33.5% for the three months ended March 31, 2000 compared to 34.2% for
the three months ended March 31, 1999. This decrease is a result of the
substantial decrease in promotional spending domestically being offset by an
increase internationally. The domestic decrease is the result of a change in our
branded/private label sales mix and decreased promotional spending on our
branded products. The increase internationally is due mainly to Malaysia's
efforts to profitably build business to utilize the additional capacity brought
into that region from Argentina.
OPERATING INCOME
As a result of the above factors, operating income increased $4.2 million to
$5.7 million for the three months ended March 31, 2000 from $1.5 million for the
three months ended March 31, 1999. Operating income as a percentage of net sales
was 5.7% for the three months ended March 31, 2000 versus 1.7% for the three
months ended March 31, 1999.
INTEREST EXPENSE, NET
Interest expense, net increased to $5.9 million for the three months ended
March 31, 2000 as compared to $4.3 million for the three months ended March 31,
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 March 31, 2000, other expense of approximately
$598,000 primarily related to 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 March 31, 1999, we had
recorded approximately $229,000 in other income primarily related to lost
profits recoverable under our business interruption policy for the months of
January 1999 through March 1999. This insurance claim was settled in December
1999.
INCOME TAXES
We recorded a minimal tax benefit related to foreign taxes for the three
months ended March 31, 2000, compared to a benefit of $0.7 million for the three
months ended March 31, 1999. The decrease is primarily due to the tax
implications of net losses in Argentina and Brazil in addition to continued
management focus on international tax planning strategies during 2000.
DISCONTINUED OPERATIONS
During the first quarter 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.
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;
o the funding of acquisitions and
13
<PAGE>
o patent license payments.
Historically, we have financed our debt service, 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 $2.4 million of cash for the three months ended
March 31, 2000, including the favorable impact of a $2.9 million net change in
the insurance receivable related to the Argentina fire in August 1998. The net
$0.5 million of cash used by operations during the three months ended March 31,
2000 was due to increases in accounts receivable and prepaid expenses primarily
related to the increased sales volume toward the end of the first quarter and
increased promotional and other prepaid expenses internationally, offset by a
reduction in inventory levels to more evenly match the sales generated by the
new Wal-Mart business. Our operations used $2.3 million of cash for the three
months ended March 31, 1999, including the favorable effect of a $2.1million net
change in the insurance receivable related to the Argentina fire. The use of
cash during the three months ended March 31, 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 $5.3 million for the three months ended March 31,
2000 and $6.6 million for the three months ended March 31, 1999. Planned capital
expenditures for 2000 are approximately $8.0 million. Our capital expenditures
in 2000 are front-loaded toward the beginning of the year due to the ramp-up of
new machines in Malaysia and in the U.S. in the first part of the year.
Approximately $2.4 million of the capital expenditures made in the first quarter
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 2000 are primarily the funding of
working capital needs, payment of debt service and planned capital expenditures
of approximately $8.0 million. The planned capital expenditures in 2000
primarily relate to expansion of capacity and modifications to existing
equipment to enable the company to make future product enhancements. We have
brought two new high speed manufacturing lines into the United States in the
first quarter of 2000. These are being financed through operating leases. We
have also moved an additional high speed diaper line to the United States from
our Argentina operation to assist in meeting the increased demand from our North
American operations.
We operate in an industry in which patents relating to products, processes,
apparatus and materials are more numerous than in many other industries. We take
careful steps to design, produce and sell our baby diapers and other products so
as to avoid infringing any valid patents of our competitors. There can be no
assurance that we will not be held to be infringing existing patents in the
future. Any such holding could result in an injunction, damages or an increase
in future operating costs as a result of design changes or payment of royalties
with respect to such patents, which might have a material adverse effect on our
financial condition or results of operations. In addition, as we continue to
introduce new products and product innovations, we have incurred in the past,
and may incur in the future, expenses related to license agreements or patent
infringement insurance coverage.
Working capital was $25.3 million as of March 31, 2000, compared to $28.7
million as of December 31, 1999. Current assets increased from $135.2 million as
of December 31, 1999 to $141.9 million as of March 31, 2000, and current
liabilities increased from $106.5 million as of December 31, 1999 to $116.5
million as of March 31, 2000. Total debt increased from $215.3 million at
December 31, 1999 to $219.8 million as of March 31, 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
14
<PAGE>
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 $3.8 million at March 31, 2000. As of May 11, 2000,
our borrowing base under the new financing facility allows us to borrow up to an
additional $7.2 million.
On April 19, 2000, we entered into a letter of intent to form a new
subsidiary in Mexico with Copamex, S.A. de C.V. ("Copamex"), the second largest
consumer paper products company in Mexico. The new subsidiary will be owned
50.1% by the Company and the remaining 49.9% by Copamex. We will contribute our
current Mexican operations to the new subsidiary. We are also selling to Copamex
a license to use certain patents in Mexico as part of the proposed transaction.
Under the proposed transaction, Drypers will manage existing Mexican
manufacturing operations while Copamex will manage sales and distribution
throughout Mexico. This transaction is expected to close in May 2000 and should
generate in excess of $13.0 million in cash before taxes to Drypers. The
transaction is subject to, among other things, completion of financial and legal
due diligence, the execution and delivery of a definitive agreement and other
documentation, and the receipt of necessary bank, board of director and
governmental approvals.
Additionally, we have several other transactions currently in process which
should generate additional liquidity. Our Malaysian subsidiary is expected to
generate an additional $1.3 million of availability from various equipment term
loans and trade financing facilities and our Brazilian operations are securing a
$0.7 million export financing line. Both of these international financing
facilities are in the documentation process and the Malaysian and Brazilian
facilities will be denominated in the local currencies, thus serving as a
self-hedge. Additionally, we have obtained the support of our major vendors
through extended terms on accounts payable. Finally, we continue to pursue
reducing our inventory and accounts receivable levels required for the business
as well as operating lease financing for our major capital projects.
Management believes that future cash flow from operations, together with cash
on hand, available borrowings under our credit facility, borrowings under
foreign credit facilities and potential operating lease financing arrangements
will be adequate to meet our anticipated cash requirements for 2000, including
working capital, capital expenditures, debt service and acquisitions.
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.
15
<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 March 31, 2000, we had
$37.7 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 March 31, 2000 were primarily $145.0 million of
senior notes, which carry a fixed interest rate of 10 1/4%, and a $27.0 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 March 31, 2000 the remaining notional contract
amount was $3.3 million with an average forward rate of $1.09. Deferred losses
during the three months ended March 31, 2000 were not material. 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 amount of $7.2 million with an average forward
rate of $1.92. Deferred losses during the three months ended March 31, 2000 were
not material.
COMMODITY RISK
In February 2000, we entered into a commodity swap contract to hedge
approximately 50% of our global pulp purchases. The contract has a five-year
term and requires monthly cash settlement.
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 of our locations 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 Latin 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 issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. We are required to adopt SFAS No. 133, as
amended by SFAS No. 137, as of January 1, 2001. We do not expect the adoption of
this statement to have a material effect on our financial position or results of
operations.
16
<PAGE>
PART II. OTHER INFORMATION
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. We do, however, believe that we will be able to meet our
anticipated cash requirements for 2000, including working capital, capital
expenditures, debt service, and acquisitions.
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
17
<PAGE>
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.
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.
18
<PAGE>
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS - Reference is made to the Exhibit Index on Page 21 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 March 31, 2000.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRYPERS CORPORATION
Date: MAY 15, 2000 By: /S/ JONATHAN P. FOSTER
------------ ----------------------
Chief Financial Officer
(Duly Authorized Officer)
(Principal Financial Officer)
20
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
27 Financial Data Schedule
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM DRYPERS CORPORATION FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,926,000
<SECURITIES> 0
<RECEIVABLES> 74,177,000
<ALLOWANCES> 3,788,000
<INVENTORY> 36,286,000
<CURRENT-ASSETS> 31,277,000
<PP&E> 128,527,000
<DEPRECIATION> 29,756,000
<TOTAL-ASSETS> 341,589,000
<CURRENT-LIABILITIES> 116,536,000
<BONDS> 145,861,000
0
0
<COMMON> 18,000
<OTHER-SE> 33,449,000
<TOTAL-LIABILITY-AND-EQUITY> 341,589,000
<SALES> 99,540,000
<TOTAL-REVENUES> 99,540,000
<CGS> 60,504,000
<TOTAL-COSTS> 93,871,000
<OTHER-EXPENSES> 598,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,928,000
<INCOME-PRETAX> (857,000)
<INCOME-TAX> (8,000)
<INCOME-CONTINUING> (849,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (849,000)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
