UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-23422
DRYPERS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0344044
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5300 MEMORIAL, SUITE 900
HOUSTON, TEXAS 77007
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 869-8693
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.001 par value
Rights to Purchase Common Stock, $.001 par value
(TITLE OF EACH CLASS)
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 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant based upon the price at which the common stock was sold on February
29, 2000: $27,715,572
Number of shares of common stock outstanding as of February 29, 2000:
17,754,312
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III, Items 10, 11, 12 and 13 will be
included in a proxy statement to be filed pursuant to Regulation 14A and is
incorporated herein by reference.
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PART I
ITEM 1. BUSINESS
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 U.S.
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
devaluation's negative impact 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 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.
DRYPERS(R) is a U.S. registered trademark and PUPPET is a Brazilian federally
registered trademark that we own. All other trademarks or service marks referred
to in this Form 10-K are the property of their owners and are not owned by us.
We were originally organized in 1987 and are a Delaware corporation.
INDUSTRY CONDITIONS
U.S. DISPOSABLE BABY DIAPER MARKET
The size of the U.S. diaper market measured by retail sales was approximately
$4.2 billion in 1999. We believe the U.S. market has experienced little growth
in recent years as a result of the already high level of market penetration of
disposable diapers (estimated to be above 90%) and the decrease in the number of
diapers used per baby as a result of improvements in absorbency and leakage
control. The principal manufacturers of disposable diapers in the United States
can be grouped into three general categories:
o premium-priced branded producers,
o value-priced branded producers, and
o private label producers.
Procter & Gamble and Kimberly-Clark are the leading premium-priced branded
producers and tend to compete on the basis of product quality and features. As a
result, they invest heavily both in research and development, to design frequent
product enhancements, and in marketing and advertising, to promote product sales
and to increase
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consumer awareness of the benefits of disposable diapers and their new features.
Although their products are generally priced above value-oriented brands and
private label products to both retailers and consumers, retailers generally sell
these brands at prices that provide them with relatively little margin in order
to attract consumers into their stores.
Historically, value-priced branded diapers such as those we produced have been
sold primarily through grocery stores because the manufacturers of these brands
lacked national brand name recognition and the national production and
distribution capabilities necessary to service mass-merchant and drugstore
chains. The competitive strategies of value-priced brands vary significantly,
ranging from a focus on quality and value to a simple low-price strategy, and
the products vary from premium quality diapers to lower quality diapers with few
enhancements. Generally, value-priced brands compete by offering products that
are priced below the premium-priced brands to both retailers and consumers and
typically provide higher margins to retailers than the national brands.
Value-priced brand name manufacturers do not generally engage in extensive
research and development or national advertising and are generally marketed to a
more defined audience than is reached by mass advertising, through the use of
coupons, in-store promotions and cooperative programs with retailers.
Private label diapers are marketed through various retail outlets under
retailer-affiliated labels and are typically manufactured to the specifications
of each retailer, resulting in significant quality differences among private
label products. In addition, because their products are sold under
retailer-affiliated labels, private label manufacturers spend minimal amounts on
advertising and marketing of their diapers, although retailers may engage in
promotional activities.
The size of the U.S. disposable baby diaper and training pant market sold
through grocery stores, measured by retail sales in 1999, was approximately $2.0
billion or 46.6% of the estimated $4.2 billion total U.S. diaper market. Since
1989, our larger branded competitors have lost grocery market share on a
combined basis both to value-priced brands, which represented the fastest
growing segment, and to private label products. In addition, grocery store sales
of diapers has been decreasing as a percentage of total diaper sales in the
United States from 60.2% in 1994 to 46.6% in 1999, reflecting a shift in
distribution to mass merchants.
Procter & Gamble and Kimberly-Clark are the dominant companies in the disposable
diaper market. Procter & Gamble has an estimated 37.2% share of the total U.S.
diaper market and an estimated 34.5% share of the domestic grocery store market
for disposable diapers for the 52 weeks ended December 18, 1999. Kimberly-Clark
has an estimated 42.4% share of the total U.S. diaper market and 41.4% share of
the domestic grocery store market. There are also private label manufacturers
with higher diaper sales than Drypers. There has recently been consolidation
among private label manufacturers in the United States, leaving fewer
competitors in this market.
The size of the U.S. disposable diaper market sold through mass merchant and
drugstore chain retailers, measured by retail sales, was approximately $2.2
billion during 1999, representing approximately 53.4% of the U.S. diaper market.
The majority of the mass-merchant and drugstore chain retailers are national or
super-regional in scope and are primarily interested in nationally distributed
brands and private labels. Mass merchants have increased their percentage of
total diaper sales in the United States from 29.7% in 1994 to 43.4% in 1999
while drug store market share has remained flat at approximately 10.0% over the
same period.
INTERNATIONAL DISPOSABLE BABY DIAPER MARKET
Although disposable baby diaper usage is significantly lower outside the United
States, Western Europe, Japan and other developed countries, industry sources
estimate that the international disposable baby diaper market is approximately
$12.0 billion in manufacturers' sales. Procter & Gamble and Kimberly-Clark have
contributed to the development of the international market for disposable baby
diapers by advertising heavily and by introducing their products in numerous
markets. Although Procter & Gamble and Kimberly-Clark dominate worldwide sales
of disposable diapers, in certain foreign markets there are local manufacturers
that represent a significant portion of the market.
In Japan and Western Europe, the disposable baby diapers sold by local producers
are generally of a quality comparable to the premium products sold in the United
States. However, in most other countries, local manufacturers generally sell a
lower quality product with fewer product features. We believe that increased
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awareness outside the United States of the benefits of disposable diapers,
combined with generally higher birth rates, should cause aggregate disposable
diaper sales outside the United States to grow substantially faster than
domestic sales.
BUSINESS STRATEGY
Our business strategy is to maintain high growth in sales while maximizing
EBITDA, which is a common measure of financial performance equal to operating
income plus depreciation and amortization, and profitability by focusing on the
following key strategic elements:
CONTINUED PRODUCT INNOVATION TO DIFFERENTIATE THE DRYPERS BRAND
We have successfully differentiated our diaper and training pant products from
the other national brands through the selective development of cost-effective
innovative product features. For example, we began to promote our diapers as the
only perfume-free national brand in 1994. In 1996, we introduced the first
odor-control diaper, DRYPERS WITH NATURAL BAKING SODA, and in 1997, we launched
DRYPERS WITH ALOE VERA and entered into a licensing agreement to use the SESAME
STREET trademark and characters on our products, packaging and advertising
materials. The DRYPERS WITH ALOE VERA product received the Gold Edison Award
from the American Marketing Association for the most innovative children's
product of 1997. In addition to positioning DRYPERS as a national brand, these
premium quality product features and innovations helped increase our penetration
of the U.S. grocery store market from an estimated 54% in December 1995 to 77%
today.
INCREASE U.S. BRAND AWARENESS AND RETAIL PENETRATION THROUGH A TARGETED
ADVERTISING AND PROMOTIONAL CAMPAIGN
We continually seek to expand our sales and distribution network in the United
States. We believe that increasing consumer awareness of the DRYPERS brand in
the U.S. market will not only assist in our continued penetration into grocery
stores, but also has facilitated our entry into national mass merchants and drug
store channels as well. These retail outlets account for roughly half of all
U.S. diaper sales, and until recently have been effectively out of reach for us
due to a lack of brand recognition. In February 1998, we began our first
national television advertising campaign through a cost-effective, targeted
series of commercials aimed at increasing brand awareness. As a result, we have
continued to increase our extensive penetration of the grocery store market.
More importantly, Wal-Mart and Kmart agreed to initiate distribution tests of
DRYPERS as a result of the increased brand awareness in 1998. In April 1999, we
gained national distribution of our branded disposable diapers into all 1,500
Big Kmart stores across the U.S. In September 1999, we expanded our worldwide
relationship with Wal-Mart to include production of private label diapers in the
U.S.
OFFER "EVERY DAY VALUE" BRANDED PRODUCTS TO CONSUMERS
Our premium quality, value-priced diapers and training pants are designed to
offer consumers the recognition and reliability of a national brand name
together with product quality and features comparable to the premium-priced
national brands at generally lower prices. We believe that this combination of
brand name, premium product quality and "Every Day Value" prices offers
consumers an attractive alternative to the premium-priced brands.
PROVIDE HIGHER MARGIN PRODUCTS FOR RETAILERS
The manufacturers of the leading national brands typically sell their
premium-priced products to retailers at prices above those of other diaper
manufacturers. Retailers generally price the premium-priced diaper brands with
relatively little margin to attract customers into their stores. We sell our
products to retailers at a generally lower price than the leading premium-priced
national brands, which allows retailers to offer a lower price to customers
while achieving substantially higher margins, increasing their category
profitability. We believe that we are able to maintain attractive profit margins
for retailers while offering consumers a better price/value relationship as
compared with the premium-priced national brands as a result of our emphasis on
the following factors:
o selective development of innovative product features which distinguish
our products from the premium-priced brands,
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o manufacturing high quality products at substantially the same costs as
the leading national brand manufacturers,
o significantly lower advertising, promotion and research and development
expenses, and
o maintaining a substantially lower corporate overhead structure.
CONTINUE TO PURSUE INTERNATIONAL EXPANSION OPPORTUNITIES
Management believes that there continues to be substantial growth opportunities
for producers of disposable baby diapers and training pants in the developing
markets in Latin America, the Pacific Rim and Eastern Europe. This opportunity
reflects the current low levels of consumer penetration for those products (from
less than 5% to 35% in those countries compared to over 90% in the United
States, Western Europe and Japan) and the rapid increase in the standard of
living in those regions in recent years. 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 devaluation's negative impact 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 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. We believe that
increased geographic diversity should help us to reduce our sensitivity to
competitive pressures in any one specific market in the future.
MARKET POSITION
U.S. GROCERY STORE MARKET
The grocery store segment represented approximately 46.6% of the U.S. diaper
market, or $2.0 billion of retail sales, in 1999. We estimate that our products
were distributed through U.S. grocery retailers whose sales represented 77% of
the total U.S. grocery store market for disposable diapers and training pants as
of December 1999, as compared to 54.0% in December 1995, and that we have
achieved distribution levels in excess of 90% of the grocery stores in our most
developed markets. We believe that our brands represented 7.0% of the total
dollar volume and 7.3% of the total unit volume for disposable diapers and
training pants in the total grocery store category during the fourth quarter of
1999. However, we estimate that our brands have market shares as high as 15.0%
in our more established domestic grocery store markets.
U.S. MASS-MERCHANT AND DRUGSTORE CHAINS
The mass-merchant and drugstore chain segments, in aggregate, represented
approximately 53.4% of the U.S. diaper market, or $2.2 billion of retail sales,
in 1999. The majority of the mass-merchant and drugstore chain retailers are
national or super-regional in scope and are primarily interested in nationally
distributed, recognized brands. In late 1992, we completed acquisitions that
provided nationwide production and distribution capabilities and began a program
of unifying our products nationwide under the DRYPERS brand name, which was
completed in the first quarter of 1995. We then embarked on a campaign to create
a unique national brand identity for DRYPERS. This began with a series of
product innovations, some of which have been followed by the larger national
brands. As a result of these efforts, Drypers gained national distribution in
Kmart in April 1999 and continued our test with Wal-Mart.
U.S. PRIVATE LABEL
Private label products play an important role in maintaining profit within many
retailers' stores. We believe that our private label products complement the
value-priced positioning of our premium branded products. We believe private
label opportunities are enhanced by our low cost structure and ability to
provide products with features and performance characteristics substantially
equivalent to the national brands. There has recently been consolidation among
private label manufacturers in the United States, leaving fewer competitors in
this market. As a result, Drypers has gained over $100.0 million in annualized
domestic sales through new distribution into the private label market in 1999,
specifically the Wal-Mart, Kroger Co. and Food Lion, Inc. accounts.
INTERNATIONAL OPERATIONS
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Industry sources estimate the international disposable diaper market to
represent approximately $12.0 billion in annual manufacturers' sales.
Importantly, there are currently low levels of consumer penetration for
disposable baby diapers and training pants in Latin America, the Pacific Rim and
Eastern Europe (from less than 5% to 35% in those countries compared to over 90%
in the United States, Western Europe and Japan). Roughly speaking, we estimate
that the global diaper market potential is in excess of $100 billion. Our
foreign produced and exported products are sold in over 28 countries and
accounted for approximately 37.1% of our net sales during 1999. We have focused
our international efforts primarily in Latin America because of the following
factors:
o relatively low but growing level of disposable diaper market
penetration,
o the rapid increase in the standard of living,
o the relatively high birth rate, and
o the resulting high level of market potential.
In these markets, we compete in both the branded and private label categories.
With operations in Argentina and Mexico, we initially established manufacturing
capabilities outside of the United States. This capability was strengthened with
the February 1997 acquisition of the Brazilian PUPPET brand name and the
resulting formation of a joint venture to market this brand in Brazil. In April
1998, Drypers exercised its fair market value option to acquire the Brazilian
manufacturer of its diapers. In addition, we are the appointed private label
diaper supplier to all Wal-Mart stores in Latin America (which are currently
located in Argentina, Brazil and Mexico) and in 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. In Argentina
and Brazil, we believe that we have approximately 9% to 11% market share of the
disposable diaper category. This decline from 1998 levels is due to our focus on
eliminating unprofitable business in these markets. In September 1998, we
acquired PrimoSoft, a Malaysian manufacturer of disposable baby diapers,
building on our earlier export sales to that region. In August 1999, we began
manufacturing in Colombia through a 75% owned joint venture. 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 devaluation's negative impact 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 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.
PRODUCTS
We seek to enhance our products by adding cost-effective product features and
substituting materials and components to improve performance. We work closely
with our suppliers, distributors and other industry participants to identify,
anticipate, and in some cases develop technological innovations so that our
products can incorporate the most advanced design features and also be clearly
differentiated from other national brands. We use advanced manufacturing
equipment and techniques that have proven to be adaptable to permit the
introduction of new products using either new materials or production
techniques.
DISPOSABLE BABY DIAPERS
There are significant quality differences among the various disposable diapers
available to consumers such as their ability to:
o absorb and retain fluids,
o prevent leakage through leg and waist openings through the use of
elasticized bands, and
o be easily fitted and held in place by fastening systems which secure the
diaper firmly without causing discomfort to the baby.
Other features help to differentiate products from one another, such as:
o thinner construction,
o odor control,
o being perfume free,
o attractive designs,
o extra-dry sub-layers,
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o aloe vera, and
o packaging.
We manufacture and market two types of disposable baby diapers in the United
States, premium brand name and private label diapers.
PREMIUM BRAND NAME BABY DIAPERS. We sell our premium brand name products under
the brand name DRYPERS. Our premium quality brand diapers incorporate many of
the product features that are offered by the leading national premium brands. We
believe that the lower retail price and the combination of product features
distinguish our premium quality value-priced brand name diapers in the various
markets in which we compete. These product features include:
o multi-strand leg elastic for a wide soft cuff and leakage barrier,
o a reinforced tape landing zone for more secure fastening,
o a soft foam waistband,
o a thin overall profile,
o breathable sides, and
o a cloth-like outer cover.
In addition, DRYPERS are differentiated by features not offered by some or all
of the other premium national brands, such as being "perfume free", baking soda
for odor control and aloe vera to soothe skin.
PRIVATE LABEL BABY DIAPERS. Our private label products are manufactured to the
specifications of, and are sold under the labels of, major retailers. The
private label products we produce range in quality from our premium brand
products to our lower-priced products. We believe private label opportunities
are enhanced by our low cost structure and our ability to provide products with
features and performance characteristics substantially equivalent to the
national brands.
In addition to our premium branded products, we sell diapers outside of the
United States with product specifications designed for particular foreign
markets which address specific competitive and affordability factors in those
markets.
DISPOSABLE TRAINING PANTS
We have developed a line of premium disposable training pants, marketed under
the DRYPERS brand name for children of toilet-training age. We also produce and
sell private label training pants which are manufactured to the specifications
of and are sold under labels of various retailers. Training pants are a
complementary product which may extend the period of time during which consumers
purchase disposable infant wear. Since the introduction of the first premium
disposable training pants by Kimberly-Clark, the domestic training pant market
has grown to $492.0 million in 1999 retail sales.
Drypers initially introduced its training pants into selected markets in late
1992, using several unique manufacturing processes. These processes encompass
the same level of automation and quality control, and many of the same raw
materials, as the baby diaper manufacturing process. We believe that our
training pants were the first premium disposable training pants in the United
States to offer a one-piece design with full circle elastic leg and waist bands,
making it more like real underwear than other products available in the market.
We believe these attributes are important to the success of disposable training
pants since young children often display a desire to wear "real underwear".
Typically, our disposable training pants are sold at a substantially higher per
unit price than our premium disposable diapers, resulting in substantially
higher gross profit margins than on premium disposable diapers. We are planning
a mid-2000 launch of a next generation training pant that we believe will set a
new standard for the industry.
Significant product improvements were made to DRYPERS training pants in 1995,
including:
o improved contouring in the core for better absorbency,
o LYCRA TUMMY SNUGS for better fit around the waist, and
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o new crotch design to eliminate bunching and prevent leakage.
These product improvements contributed to a 26.4% increase in unit volume in
1995 despite the introduction of competitive brands. We believe our training
pants represented 10.0% of the total training pant category in grocery stores on
a unit volume basis during 1999. More recently, we added baking soda and aloe
vera to our training pants, similar to our baby diapers. DRYPERS training pants
are the second leading brand of disposable training pants sold through grocery
stores in the United States.
PRE-MOISTENED BABY WIPES
We manufacture and market pre-moistened baby wipes in the United States. We
estimate the pre-moistened baby wipes retail market in the United States was
approximately $679 million in 1999.
SALES AND DISTRIBUTION
In the United States, we use in-house managers to coordinate brokerage companies
which facilitate the distribution of our products through grocery stores on a
non-exclusive basis. We believe that this approach has expedited our entry into
grocery chains and independent grocers because of the strong long-term
relationships that many of these brokers have with these retailers. This
strategy minimizes corporate overhead. In addition, the location of our plants
has enabled us to achieve average shipping times of one to two days for most
destinations in the United States.
Outside the United States, we tailor our approach to each foreign market, taking
into consideration the political and cultural environment as well as the
distribution infrastructures. In general, we work with independent local
distributors; however, in Puerto Rico, we use a direct sales force and, in
Argentina, Mexico, Brazil, Malaysia and Colombia, we use a combination of a
direct sales force and wholesalers that distribute to small independent
retailers.
ADVERTISING AND PROMOTION
In the United States, diapers are highly promoted since many retailers rely on
their diaper products to attract customers to their stores. In addition, Procter
& Gamble and Kimberly-Clark spend a significant amount on mass media advertising
to create demand for their products. In contrast, we have relied more heavily on
promotional spending and cooperative merchandising arrangements with retailers.
Promotional activity, such as couponing, is geared toward initiating consumer
trial and has been especially effective at targeting spending when less than
full distribution has yet to be achieved. As our distribution continues to
expand, a greater emphasis may be placed on advertising to build greater brand
awareness for the DRYPERS name.
The high level of branded promotion and advertising in the diaper category is
reflected in generally higher wholesale prices and manufacturers' gross margins
when compared to private label manufacturers, offset by correspondingly higher
levels of selling, general and administrative expenses.
Advertising and promotional activity varies greatly in international markets,
but is generally lower than the level of activity in the United States. As a
consequence, our international business, similar to our domestic private label
business, generally experiences lower gross margins and selling, general and
administrative expenses than our U.S. branded business.
MANUFACTURING PROCESS
Disposable diapers are manufactured on high speed lines beginning with the
manufacture of an absorbent core which is constructed with a combination of wood
pulp and superabsorbent polymers. Nonwoven and polyethylene liner layers, leg
elastics, tape and other applicable features are then combined around the core
in an automated continuous process, which shapes and produces the finished
product. We believe we are able to purchase raw materials on substantially the
same terms as our larger branded competitors, and that we are able to operate
with proportionately lower corporate overhead because of our more focused
value-oriented strategy.
We maintain quality control procedures throughout the production process,
commencing with the receipt of raw materials and continuing through shipment of
the finished product. Each of our production lines has on-line
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electronic detection devices built into the overall production control system
that feed data to process control computers that automatically reject certain
nonconforming products. In addition, each of our diaper lines has a full-time
inspector assigned to assure quality control at all stages of the production
process. Finally, line inspections and batch testing are performed on a
continuous basis. On-site testing labs are utilized to conduct thorough tests of
quality attributes on a daily basis and to assist in the product development
process.
RAW MATERIALS
The following raw materials are used in our manufacturing process:
o wood pulp,
o super absorbent polymer,
o polyethylene film,
o polypropylene nonwoven fabric,
o adhesive closure tape,
o hot melt adhesive,
o elastic,
o tissue,
o bags,
o boxes,
o baking soda, and
o aloe vera.
In general, we have at least two suppliers for each of the raw materials used in
our manufacturing process. We believe that we maintain good relationships with
all of our raw material suppliers and that we are able to purchase raw materials
on substantially the same terms as our larger branded competitors.
TRADEMARKS AND PATENTS
We have registered or have applications pending to register numerous trademarks
in the United States, including DRYPERS. In addition, we have registered or
applied for registration of certain of our trademarks in a number of foreign
countries.
Diaper manufacturers normally seek U.S. and foreign patent protection for the
product enhancements that they develop, and there are numerous U.S. patents that
relate to disposable diapers. The design and the technical features of our
diapers are considered by patent counsel before the manufacture and sale of such
products to avoid the features covered by unexpired patents. We believe we have
been able to introduce product innovations comparable to those introduced by our
competitors by using manufacturing methods or materials that are not protected
by such patents.
INVENTORY PRACTICE AND ORDER BACKLOG
The disposable diaper industry is generally characterized by prompt delivery by
manufacturers and rapid movement of the product through retail outlets. The time
between receipt of a customer's order and shipment to the customer averages two
to seven days. We maintain varying levels of raw material and finished product
inventory depending on lead times and shipping schedules. Our inventory levels
generally vary between two and five weeks. As a result of the short lead time
between order and delivery of product, we do not maintain a significant backlog.
During the fourth quarter of 1999, we built domestic inventory to a 5 week lead
time level in anticipation of the roll-out of the newly gained Wal-Mart private
label business. The actual roll-out of this sales volume did not materially
impact inventory levels until the middle of the first quarter of 2000, thus
placing constraints on our working capital during this time period.
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INSURANCE
All of our plant, machinery and inventory are covered by fire and extended
coverage insurance. In addition, management believes that we maintain reasonable
levels of business interruption and extra expense insurance for all of our
operations. Although we have never been named as a defendant in a product
liability lawsuit, we maintain product liability insurance in amounts we believe
to be adequate. There can be no assurance, however, that future claims will not
exceed coverage and the ultimate resolution with our insurance carriers will
cover all losses.
EMPLOYEES
As of December 31, 1999, we employed approximately 1,540 people on a full-time
basis. None of our employees are represented by a labor union, except in Mexico
where such representation is required by local law. Our Mexican employees are
members of a syndicate and are employed under a year-to-year contract entered
into with the syndicate. We believe our relationship with our employees is good.
ITEM 2. PROPERTIES
We own the land and building related to our operations in Brazil, which are used
for manufacturing, warehousing and administrative purposes. The land and
building for our Colombian operations are held in a joint venture that is 75%
owned.
We lease manufacturing, distribution and administrative space in eight locations
in the United States, Puerto Rico, Argentina, Mexico and Malaysia, as follows:
<TABLE>
SQUARE LEASE EXPIRATION
LOCATION FEET DATE USE
- ----------------------- ------- ------------------ --------------------------------
<S> <C> <C> <C>
Vancouver, Washington . 80,000 September 30, 2003 Manufacturing and Administrative
Vancouver, Washington . 22,000 April 1, 2000 Warehouse
Marion, Ohio .......... 440,000 October 31, 2007 Manufacturing and Administrative
Houston, Texas ........ 32,000 May 1, 2004 Administrative
Toa Alta, Puerto Rico . 51,000 June 30, 2002 Manufacturing and Administrative
Buenos Aires, Argentina 646,000 September 30, 2003 Manufacturing and Administrative
Guadalajara, Mexico ... 359,000 June 3, 2014 Manufacturing and Administrative
Kuala Lumpur, Malaysia 128,000 August 31, 2008 Manufacturing and Administrative
</TABLE>
Our equipment is highly automated and capable of continuous 24-hour production.
We have maintenance and machine shops that are capable of meeting the majority
of our equipment service requirements. We believe that our owned and leased
facilities are adequate for our current needs.
ITEM 3. LEGAL PROCEEDINGS
We are involved in certain lawsuits and claims arising in the normal course of
business. In the opinion of management, uninsured losses, if any, resulting from
the ultimate resolution of these matters will not have a material adverse effect
on our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-10-
<PAGE>
Our common stock, $.001 par value, was listed on the Nasdaq SmallCap Market from
January 29, 1996 through May 26, 1998 under the symbol DYPR. On May 27, 1998,
our stock began trading on the Nasdaq National Market under the same symbol. On
June 30, 1999, our stock was moved to the Nasdaq SmallCap Market. The following
table sets forth, for the periods indicated, the high and low sales prices of
the common stock as reported by the Nasdaq National Market and the Nasdaq
SmallCap Market. There were 364 stockholders of record of our common stock as of
February 29, 2000. As of February 29, 2000, the closing sale price of the common
stock on the Nasdaq SmallCap Market was $2.63.
1998 1999
-------------------- --------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
First Quarter $ 6.64 $ 6.29 $ 2.68 $ 2.45
Second Quarter 7.13 6.82 2.92 2.73
Third Quarter 4.58 4.25 2.87 2.65
Fourth Quarter 3.03 2.83 2.82 2.60
We are prohibited from the declaration or payment of any cash dividends by our
credit facilities. The indenture relating to our 10 1/4% senior notes also
restricts the payment of cash dividends unless specific conditions are
satisfied. To date, we have not declared or paid any cash dividends on our
common stock, and we do not anticipate that dividends will be paid in the
foreseeable future. We intend to apply any future earnings to the expansion and
development of our business. The declaration and payment in the future of any
dividends will be at the election of our board of directors and will depend upon
the earnings, capital requirements and financial condition of the company,
general economic conditions and other pertinent factors.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data (in thousands, except share and
per share data) should be read in conjunction with the section of this Form 10-K
called "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements, including the notes
thereto, included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA 1995 1996 1997 1998 1999
-------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales ................................. $ 163,947 $ 207,014 $ 287,010 $ 332,640 $ 360,360
Operating income (loss) ................... (11,259)(a) 10,553 21,492 11,921 8,980
Income (loss) from continuing operations
before income tax provision (benefit)
and extraordinary item .................. (19,294) 1,622 11,788 (89) (13,809)
Income (loss) from continuing operations
before extraordinary item................ (15,465) 1,313 9,444 (1,654) (10,818)
Net income (loss) attributable to
common stockholders...................... (15,465) 752 1,092(b) (8,205)(c) (11,644)(d)
Income (loss) per common share:
Basic earnings (loss) per share:
Continuing operations ............... $ (2.35) $ .11 $ 1.00 $ (.11) $ (.61)
Extraordinary loss from early
extinguishment of debt ............ -- -- (.88) -- (.03)
Discontinued operations ............. -- -- -- (.40) (.01)
------------ ------------ ------------ ------------ ------------
Net income (loss) ................... $ (2.35) $ .11 $ .12 $ (.51) $ (.65)
============ ============ ============ ============ ============
Diluted earnings (loss) per share:
Continuing operations ............... $ (2.35) $ .09 $ .51 $ (.11) $ (.61)
Extraordinary loss from early
extinguishment of debt ............ -- -- (.42) -- (.03)
Discontinued operations ............. -- -- -- (.40) (.01)
------------ ------------ ------------ ------------ ------------
Net income (loss) ................... $ (2.35) $ .09 $ .09 $ (.51) $ (.65)
============ ============ ============ ============ ============
Average common shares outstanding ......... 6,587,698 6,694,298 8,878,638 16,110,429 17,731,386
============ ============ ============ ============ ============
Average common and potential common
shares outstanding ...................... 6,587,698 15,064,913(e) 18,469,676(e) 16,110,429 17,731,386
============ ============ ============ ============ ============
DECEMBER 31
--------------------------------------------------------------------------------
BALANCE SHEET DATA 1995 1996 1997 1998 1999
------------------ ------------ ------------ ------------ ------------ ------------
Working capital (deficit) ................. $ (3,597) $ 8,707 $ 48,728 $ 26,232 $ 28,695
Total assets .............................. 137,420 150,555 205,232 300,172 337,680
Long-term debt, including current portion . 47,350 49,592 118,348 149,286 183,907
Stockholders' equity(f) ................... 41,822 53,608 55,580 50,528 39,916
</TABLE>
- --------------------------------------------
(a) Includes unusual expenses of $2,358,000 to reflect the costs associated with
the repositioning/brand transition of our premium brand diaper products, a
noncash restructuring charge of $4,255,000 related to the write-down of
idled equipment to net realizable value, lease termination costs related to
the closure of our Houston manufacturing facility and unusual expenses of
$827,000 related to costs associated with our refinancing transaction.
(b) Includes a noncash extraordinary expense of $3,745,000 for the write-off of
capitalized debt issuance costs and a cash extraordinary expense of
$4,024,000 for prepayment and other fees in connection with the application
of the net proceeds of the offering of $115,000,000 of our senior notes in
June 1997.
(c) Includes a one-time charge of $6,471,000 related to discontinuing the
laundry detergent business.
(d) Includes a non-cash extraordinary expense of $567,000 for the write-off of
capitalized debt issuance costs in connection with the early extinguishment
of debt. Also includes a $259,000 change in estimate of the costs to dispose
of the laundry detergent operation.
(e) Average common and potential common shares outstanding for 1996 and 1997
include the weighted average effect of shares of common stock issuable upon
the conversion of the outstanding shares of convertible preferred stock
issued in February 1996. All outstanding shares of convertible preferred
stock were converted to common stock in March 1998.
(f) We have never declared a cash dividend on our common stock.
-12-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of our results of operations for the last three
years and our current financial position. This discussion should be read in
conjunction with our financial statements that are included with this report.
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 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 U.S.
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
devaluation's negative impact 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 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.
-13-
<PAGE>
In June 1997, we introduced DRYPERS WITH ALOE VERA, the first diapers and
training pants to contain aloe vera, an herbal extract recognized for its
ability to help soothe skin. The improved diaper also featured a breathable,
cloth-like outer cover typically only found on premium-priced branded diapers.
On August 8, 1998, our manufacturing facility in Argentina was extensively
damaged as a result of a fire. There were no employee injuries resulting from
the fire. In addition to physical damage to the facility, the fire resulted in
the loss of a portion of the finished goods and raw material inventory. Two of
the four diaper manufacturing lines were completely destroyed and the remaining
two lines were partially damaged. We maintained insurance to cover damage to our
property, business interruption and extra expense claims. As a result of
negotiations held in December 1999, we settled our claims of $24.9 million
against our policies for $20.7 million. Of this amount, we received
approximately $17.9 million as of December 31, 1999 and have subsequently
received approximately $2.9 million in 2000, which was recorded as a receivable
as of December 31, 1999. For the year ended December 31, 1999, we recorded a
write-off to Other Expense for the $4.2 million difference between the amounts
claimed and the total amounts eventually received. Due to the ambiguity of
insurance reimbursements, individual reimbursement cannot be matched to specific
categories of the claim.
The initial results of the laundry detergent operation in the last two quarters
of 1998, including an operating loss of $1.2 million, caused us to reconsider
our plans for these operations. As a result, we decided in December 1998 to
discontinue these operations and to settle remaining related contractual
obligations. A charge of $5.3 million resulted from recording these obligations
and the write-off of our investment in the laundry detergent business and, along
with the 1998 operating loss, was presented as a discontinued operation in the
consolidated statement of earnings for the year ended December 31, 1998. We
recorded $0.2 million during 1999 as additional costs necessary to dispose of
the laundry detergent business. These costs were recorded as a change in
estimate and primarily relate to a contractual obligation we have with one of
our directors in the event that individual is able to successfully market and
develop the detergent product. As of December 31, 1999, we have fulfilled our
contractual obligations to third parties related to the laundry detergent
operation.
In February 1999, we announced that we had lowered our 1999 expectations for our
Latin American business due to the decline of the Brazilian real. We expected
U.S. dollar sales from Brazil and Argentina to be lower than planned and cost of
goods sold to be higher because of the currency situation, resulting in a
reduction in expected 1999 annual earnings of approximately $0.15 to $0.20 per
diluted share on a consolidated basis. This adjustment reflected the time delay
expected to implement anticipated price increases in order to pass through
increases in raw material costs. Although our Brazilian operations have seen
increased unit volume, the market has been resistant to price increases to
customers. 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. We have deployed this manufacturing
capacity to our more profitable markets.
-14-
<PAGE>
RESULTS OF OPERATIONS
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 last three years.
YEAR ENDED DECEMBER 31
--------------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
(DOLLARS IN MILLIONS)
Domestic ............ $191.3 66.7% $213.7 64.3% $226.6 62.9%
International ....... 95.7 33.3 118.9 35.7 133.8 37.1
------ ------ ------ ------ ------ ------
Total Net Sales $287.0 100.0% $332.6 100.0% $360.4 100.0%
====== ====== ====== ====== ====== ======
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.
The following table sets forth the specified components of income and expense
expressed as a percentage of net sales for the years ended December 31, 1997,
1998 and 1999.
YEAR ENDED DECEMBER 31
---------------------------
1997 1998 1999
----- ----- -----
Net sales ..................................... 100.0% 100.0% 100.0%
Cost of goods sold ............................ 61.2 59.2 61.9
----- ----- -----
Gross profit .................................. 38.8 40.8 38.1
Selling, general and administrative ........... 31.3 37.2 35.6
----- ----- -----
Operating income .............................. 7.5 3.6 2.5
Interest expense, net ......................... 3.5 5.0 5.6
Other income (expense) ........................ 0.1 1.3 (0.7)
----- ----- -----
Income (loss) from continuing operations before
income tax provisions (benefit) and
extraordinary item .......................... 4.1 (0.1) (3.8)
Income tax provision (benefit) ................ 0.8 0.4 (0.8)
Extraordinary item ............................ (2.7) -- (0.2)
----- ----- -----
Income (loss) from continuing operations ...... 0.6 (0.5) (3.2)
Discontinued operations ....................... -- (1.9) --
----- ----- -----
Net income (loss) ............................. 0.6% (2.4)% (3.2)%
===== ===== =====
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
NET SALES
Net sales increased 8.3% to $360.4 million for the year ended December 31, 1999
from $332.6 million for the year ended December 31, 1998. Domestic sales
increased 6.0% to $226.6 million for the year ended December 31, 1999 from
$213.7 million for 1998. While our domestic business reflected consolidation
among several major grocery retailers during the first quarter of 1999, which
resulted in fewer regularly scheduled promotions, promotional activity with
these retailers returned to its normal levels in the second quarter of 1999.
Additionally, the introduction of our products in Kmart's 1500 Big Kmart stores
in mid-May made a significant contribution to the domestic sales increase, as
did increases in both grocery store and private label sales in the second and
third quarters of 1999. During the fourth quarter of 1999, we gained national
distribution in Wal-Mart for its private label diapers. This business will
gradually roll out throughout 2000, with the majority of the sales scheduled to
ship in the last half of the year. Net sales in the international sector grew
12.6% to $133.8 million for the year ended December 31, 1999 from $118.9 million
in the prior year, reflecting growth in Malaysia, Mexico and the Andean Pact.
While international unit sales volume increased 37.6%, economic conditions in
South America continued to negatively
-15-
<PAGE>
impact our operations in those markets, counterbalancing strong growth in
Malaysia, Mexico and the Andean Pact. We were able to implement small price
increases in Brazil during the second and third quarters; however, these
increases were offset by further currency devaluation. Despite the economic
problems in South America, our Brazilian volume increased 24.6% as we
successfully expanded our market share there. Due to the situation in South
America, management has reallocated capacity out of the Mercosur to more
profitable business areas while reducing ongoing operating costs within the
Mercosur. Our Mexico business achieved record net sales for three consecutive
quarters of 1999, and Asian operations we acquired in September 1998 were also a
strong contributor to net sales in 1999. Additionally, our operations in the
Andean Pact began manufacturing diapers in Colombia during the third quarter of
1999, boosting sales in that region significantly.
COST OF GOODS SOLD
Cost of goods sold increased as a percentage of net sales to 61.9% for the year
ended December 31, 1999 compared to 59.2% for the year ended December 31, 1998.
This increase primarily reflects the currency devaluation in Brazil, where the
dollar sales price per pad decreased by 37.2% as compared to the comparable
period in the prior year, while costs per pad did not decrease at the same rate
because a large percentage of raw materials are U.S. dollar based. Price
increases initiated in Brazil during the first quarter of 1999 were not
sustainable during the last month of the quarter due to competitive pressures.
We were able to implement small price increases during the second and third
quarters; however, the impact of these price increases were offset by further
devaluation in the Brazilian. Additionally, international sales increased as a
percentage of total net sales to 37.1% in 1999 compared to 35.7% in 1998. These
sales have a lower gross margin as a percentage of sales compared to our
domestic business. Lastly, domestic gross margins were down slightly as compared
to the comparable prior year period due to changes in product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased as a percentage of net
sales to 35.6% for the year ended December 31, 1999 compared to 37.2% for the
year ended December 31, 1998. The decrease primarily reflected the 1998 costs of
the national advertising campaign in the United States. Additionally, the
increase in international business as a percentage of total net sales
contributed to the decline because these sales have lower selling and
promotional expenses.
OPERATING INCOME
As a result of the above factors operating income decreased $2.9 million to $9.0
million for the year ended December 31, 1999 from $11.9 million for the year
ended December 31, 1998. Operating income as a percentage of net sales was 2.5%
for the year ended December 31, 1999 versus 3.6% in the prior year.
INTEREST EXPENSE, NET
Interest expense, net increased to $20.3 million for the year ended December 31,
1999 as compared to $16.5 million for the year ended December 31, 1998. The
increase was primarily due to the issuance of 10 1/4% Senior Notes due 2007 ("10
1/4 Senior Notes") in March 1998 for $30.0 million, amortization of additional
deferred loan costs related to this transaction, increased borrowing levels
under our revolving credit facility and increased interest rates.
OTHER INCOME (EXPENSE)
On August 8, 1998, our manufacturing facility in Argentina was extensively
damaged as a result of a fire. There were no employee injuries resulting from
the fire. In addition to physical damage to the facility, the fire resulted in
the loss of a portion of the finished goods and raw material inventory. Two of
the four diaper manufacturing lines were completely destroyed and the remaining
two lines were partially damaged. We maintained insurance to cover damage to our
property, business interruption and extra expense claims. As a result of
negotiations held in December 1999, we settled our claims of $24.9 million
against our policies for $20.7 million. Of this amount, we received
approximately $17.9 million as of December 31, 1999 and have subsequently
received approximately $2.8 million in 2000, which was recorded as a receivable
as of December 31, 1999. For the year ended December 31, 1999, we recorded a
write-off to Other Expense for the $4.2 million difference between the amounts
claimed and
-16-
<PAGE>
the total amounts eventually received. Due to the ambiguity of insurance
reimbursements, individual reimbursement cannot be matched to specific
categories of the claim.
INCOME TAXES
We recorded a benefit of $3.0 million related to foreign taxes for the year
ended December 31, 1999, compared to a provision of $1.6 million for the year
ended December 31, 1998. The decrease is primarily due to the tax implications
of net losses in Argentina and Brazil in addition to continued management focus
on international tax planning strategies during 1999.
DISCONTINUED OPERATIONS
We recorded $0.2 million during 1999 as additional costs necessary to dispose of
the laundry detergent business. These costs were recorded as a change in
estimate, and primarily relate to a contractual obligation we have with one of
our directors in the event that individual is able to successfully market and
develop the detergent product. As of December 31, 1999, we have fulfilled our
contractual obligations to third parties related to the laundry detergent
operation.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
NET SALES
Net sales increased 15.9% to $332.6 million for the year ended December 31, 1998
from $287.0 million for the year ended December 31, 1997. Domestic sales
increased 11.7% to $213.7 million for the year ended December 31, 1998 from
$191.3 million for 1997. This increase primarily reflects positive trade and
consumer reaction to the national television media campaign in the United States
for our premium brand diapers. Net sales in the international sector grew 24.2%
to $118.9 million for the year ended December 31, 1998 from $95.7 million in the
prior year, reflecting growth in Brazil and Malaysia. Net sales for the
Brazilian operations grew 25.9% during 1998 as compared to 1997, primarily due
to a product promotion with Brazilian entertainer Xuxa. Argentine operations
were disrupted in the third and fourth quarter of 1998 due to a fire in our
Argentina facility, resulting in only a slight increase in 1998 net sales as
compared to 1997. See the section called "Other Income", below, for a discussion
of the Argentina fire. Additionally, our Asian operations contributed
significantly to the increase in international net sales. This was primarily due
to the acquisition of PrimoSoft in Malaysia in September 1998. These increases
were offset by a decrease in 1998 net sales for our Mexican operations where the
effect of a price war initiated in the first half of 1998 by a competitor
continued throughout the third quarter. Although price increases were announced,
signaling an abatement of this price war, increased purchases of competitors'
products in anticipation of their announced price increases delayed a
significant number of our shipments until the fourth quarter of 1998. Despite
the effects of this price war, we gained sizable new distribution in Mexico.
COST OF GOODS SOLD
Cost of goods sold decreased as a percentage of net sales to 59.2% for the year
ended December 31, 1998 compared to 61.2% for the year ended December 31, 1997.
This decrease primarily reflects gains in gross margins in Latin America,
primarily Brazil. This increase in international gross margin percentage was
slightly offset by decreased gross margins in our North American operations.
This was primarily the result of under-utilized capacity in the United States,
put in place to accommodate the volume that may be expected from mass-merchant
accounts if such mass merchant distribution is obtained in 1999. Improvements in
domestic capacity utilization during the last half of 1998 were offset by
inefficiencies related to the disruption of domestic production in order to
produce replacement diapers for our Argentine customers, needed because of the
fire in our Argentina facility. See "Other Income", below, for a discussion of
the Argentina fire.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
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<PAGE>
Selling, general and administrative expenses increased as a percentage of net
sales to 37.2% for the year ended December 31, 1998 compared to 31.3% for the
year ended December 31, 1997. The increase primarily reflected the $10.0 million
in costs associated with our national television advertising campaign in the
United States, which began in February 1998. This increase reflected the need to
continue normal promotional spending in parallel with the media campaign until
such time as increased brand recognition would allow a reduction in promotional
spending to offset the cost of ongoing advertising. Additionally, selling and
promotional costs related to international sales increased, primarily in Brazil.
OPERATING INCOME
As a result of the above factors, operating income decreased $9.6 million to
$11.9 million for the year ended December 31, 1998 from $21.5 million for the
year ended December 31, 1997. Operating income as a percentage of net sales was
3.6% for the year ended December 31, 1998 versus 7.5% in the prior year.
INTEREST EXPENSE, NET
Interest expense, net increased to $16.5 million for the year ended December 31,
1998 as compared to $10.0 million for the year ended December 31, 1997. The
increase was primarily due to the issuance of our 10 1/4% senior notes in June
1997 and March 1998 for $115.0 million and $30.0 million, respectively,
amortization of additional deferred loan costs related to these transactions,
and increased borrowing under our revolving credit facility.
OTHER INCOME (EXPENSE)
On August 8, 1998, our manufacturing facility in Argentina was extensively
damaged as a result of a fire. There were no employee injuries resulting from
the fire. In addition to physical damage to the facility, the fire resulted in
the loss of a portion of the finished goods and raw material inventory. Two of
the four diaper manufacturing lines were completely destroyed and the remaining
two lines were partially damaged. We maintained insurance to cover damage to our
property, business interruption and extra expense claims. Other income for the
year ended December 31, 1998 includes a nonrecurring gain representing the
difference between the estimated property insurance proceeds on the machinery
and equipment and the carrying value of the machinery and equipment at the time
of the fire. The ultimate amount of the gain to be recorded depends on final
diaper line manufacturer quotes, installation costs, start-up costs, and other
cost estimates and the final settlement reached with our insurance carriers. For
the year ended December 31, 1998, we have recorded approximately $4.0 million in
other income primarily related to estimated proceeds under the property damage
claim as well as lost profits recoverable under the business interruption policy
for the months of August through December 1998.
INCOME TAXES
We recorded a provision of $1.6 million related to state and foreign taxes for
the year ended December 31, 1998, compared to a provision of $2.3 million in
1997. The decrease is primarily due to net losses in Argentina resulting from
the August fire and continued management focus on international tax planning
strategies during 1998.
DISCONTINUED OPERATIONS
The initial results of the laundry detergent operation in the last two quarters
of 1998, which generated an operating loss of $1.2 million, caused us to
reconsider our plans for these operations. As a result, we decided in December
1998 to discontinue these operations and to settle remaining related contractual
obligations. A charge of $5.3 million resulted from recording these obligations
and the write-off of our investment in the laundry detergent business and, along
with the 1998 operating loss, is presented as a discontinued operation in the
consolidated statement of earnings for the year ended December 31, 1998. The
$5.3 million loss on disposal includes $3.3 million for the write-off of the
initial investment and receivable from the detergent operations and $2.0 million
related to existing contractual obligations required to be satisfied in
disposing of the business.
LIQUIDITY AND CAPITAL RESOURCES
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<PAGE>
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
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 used $6.2 million of cash for the year ended December 31, 1999.
Our operations used $17.5 million of cash for the year ended December 31, 1998,
$12.0 million of which related to expenditures resulting from the Argentina fire
in August 1998, for which we had not been reimbursed as of December 31, 1998.
The use of cash during the year ended December 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, the buildup of inventory to support the increase in sales volume
(and the corresponding increase in accounts receivable) and the payment of
interest on the senior notes. The use of cash during the year ended December 31,
1998 primarily reflected the national television campaign in the United States,
the buildup of inventory to support the increase in sales volume (and the
corresponding increase in accounts receivable), payment of interest on the 10
1/4% senior notes and financing the working capital needs and restoration of our
Argentina operations which were damaged by fire in August 1998.
Capital expenditures were $23.8 million for the year ended December 31, 1999 and
$26.5 million for the year ended December 31, 1998. Approximately $6.3 million
of the capital expenditures made in 1999 related to restoration of our Argentina
operations damaged by fire in August 1998 and approximately $2.2 million related
to the movement of production capacity out of the Mercosur. Approximately $6.4
million of the capital expenditures made in 1998 related to restoration of our
Argentina operations and the remainder related to international production
capacity increases. We financed these capital expenditures in 1998 and 1999
through borrowings under our revolving credit facility and equipment term loans
and from the proceeds of the $30.0 million offering of senior notes in March
1998.
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 are bringing two new
high speed manufacturing lines into the U.S. 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 U.S. from our South American operations 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 $28.7 million as of December 31, 1999, compared to $26.2
million as of December 31, 1998. Current assets increased from $119.5 million as
of December 31, 1998 to $135.2 million as of December 31, 1999, and current
liabilities increased from $93.3 million as of December 31, 1998 to $106.5
million as of December 31, 1999. Total debt increased from $187.7 million at
December 31, 1998 to $215.3 million as of December 31, 1999.
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<PAGE>
Effective September 11, 1998, we acquired certain assets and assumed certain
liabilities of PrimoSoft, a Malaysian manufacturer of baby diapers, for
approximately $2.8 million of our common stock (403,571 shares issued on
September 11, 1998) and approximately $10.3 million in cash. The acquisition was
accounted for as a purchase, and the purchase price was allocated to the
acquired assets and liabilities assumed based on their estimated fair values.
The consideration paid for PrimoSoft exceeded the estimated fair market value of
the net tangible assets acquired by approximately $7.7 million and this excess
was recorded as goodwill.
On March 17, 1998, we closed a private issuance of an additional $30.0 million
of 10 1/4% senior notes at a price of 103.625% of the principal amount thereof.
These new senior notes were issued under the same indenture as the June 1997
issuance of senior notes. Proceeds from the offering of the new senior notes
were $30.4 million, $5.0 million of which was used to repay all outstanding
indebtedness under our former revolving credit facility, with the remaining
proceeds used for general corporate purposes, including capital expenditures. We
completed an exchange offer on July 13, 1998, pursuant to which all of the new
senior notes were tendered for a like principal amount of new notes with
identical terms which may be offered and sold by the holders without
restrictions or limitations under the Securities Act of 1933, as amended.
On June 24, 1997, we closed a private issuance of $115.0 million aggregate
principal amount of our senior notes. Proceeds from the offering of the senior
notes were used to repurchase $43.4 million of the $45.0 million in principal
amount of 12 1/2% senior notes pursuant to a tender offer therefore, to repay a
$10.0 million working capital facility, to repay borrowings outstanding under
our former revolving credit facility, to repay a term loan with a bank, to repay
junior subordinated debt and other indebtedness and for general corporate
purposes. In connection with these transactions, we recognized an extraordinary
expense of $7.8 million for the write-off of capitalized debt issuance costs and
prepayment and other fees, of which $3.7 million was non-cash. On December 10,
1997, we redeemed the remaining $1.6 million of 12 1/2% Senior Notes pursuant to
an optional redemption provision. We completed an exchange offer on October 14,
1997, pursuant to which all of the senior notes issued at that time were
tendered for a like principal amount of new notes with identical terms which may
be offered and sold by the holders without restrictions or limitations under the
Securities Act of 1933.
On April 1, 1998, we entered into a new three-year $50.0 million credit facility
to replace the former revolving credit facility. The new credit facility
permitted us to borrow under a borrowing base formula equal to the sum of 75% of
the aggregate net book value of our accounts receivable and 50% of the aggregate
net book value of our inventory on a consolidated basis, subject to additional
limitations on incurring debt. The new credit facility was secured by
substantially all of our assets.
As a result of the charge related to the discontinued laundry detergent
operations and the additional cash demands placed on us due to the delay in
receipt of insurance proceeds related to the fire at our Argentina facility, as
of December 31, 1998, under the original terms of the revolving credit facility,
we were in default under certain of the financial covenants contained in that
revolving credit facility. On March 31, 1999, we entered into an agreement with
the lender curing the defaults, resetting certain financial covenants and
requiring Drypers to reserve certain minimum levels of borrowing availability,
thereby reducing the total revolving credit available to us. The amendment also
raised the effective cost of bank borrowings under the revolving credit
facility. The revolving credit facility, as amended, bore interest in the range
of prime to prime plus 1 1/2%, or LIBOR plus 1 1/2% to LIBOR plus 3 1/4%, in
each case based on our debt to EBITDA ratio determined on a quarterly basis.
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%.
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<PAGE>
As of March 28, 2000, our borrowing base under the new financing facility allows
us to borrow up to an additional $1.6 million. Additionally, we have several
transactions currently in process which should generate additional liquidity.
Our Malaysian subsidiary is expected to generate an additional $3.0 million of
availability from various equipment term loans and trade financing facilities.
Our Colombian operations are expected to generate an additional $1.0 million of
availability from a line of credit supported by factored receivables, and our
Brazilian operations are securing a $1.2 million export financing line. All 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 restructured 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 account treatment and, accordingly,
gains and losses are deferred and included in the basis of the inventory hedged.
Drypers does not hold or issue derivative financial instruments for trading
purposes.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily to
variable rate borrowings outstanding under the restructured revolving credit
facility and equipment term loans discussed above. At December 31, 1999, we had
$32.1 million outstanding under these facilities. An increase in interest rates
of 1% would reduce annual net income by approximately $0.3 million. Our
remaining debt obligations as of December 31, 1999 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 December 31, 1999 the remaining notional
contract amount was $5.6 million at an average contract rate of $1.09, and
deferred losses were not material. Subsequent to yearend, 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 notional
amount of $8.8 million at an average rate of $1.92.
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 tem
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
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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.
YEAR 2000
Replacement of domestic computer software programs and operating systems with
PeopleSoft, which is Year 2000 compliant, was implemented in August 1999.
Testing of existing international programs and systems and evaluation and
modification of all desktop hardware throughout the company was completed.
Additionally, potentially date sensitive chips embedded within production
equipment were tested to identify and address any problems. Expenses and capital
expenditures associated with the replacement of our programs and systems was
approximately $8.0 million during 1998 and 1999.
We had executed our formal Year 2000 compliance plan by September 30, 1999. We
requested from our principal customers, suppliers and service providers (such as
financial institutions) written statements regarding their knowledge of and
plans for meeting the Year 2000 compliance requirements and received a
significant number of responses. However, no assurance can be given that these
efforts will be successful. If any of our significant customers, suppliers or
service providers do not successfully and timely achieve Year 2000 compliance,
our business or operations could be adversely affected. However, we have
multiple suppliers for our primary raw materials and have no major customers
which alone comprise greater than 10% of total net sales. Thus, alternate
approaches are available in these areas to mitigate the risks to us of Year 2000
noncompliance by these third parties.
OTHER INFORMATION
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.
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<PAGE>
PRICE CHANGES BY COMPETITORS. The disposable diaper industry is characterized by
substantial price competition, which is effected through price changes, product
count changes and promotions. Typically, because of their large market share,
one of our larger competitors initiates such pricing changes. We may respond to
these pricing changes with changes to our own prices, product counts or
promotional programs. The process of fully implementing such changes may require
a number of months and our operating results may be adversely affected. For
example, during the third quarter of 1997 and first three quarters of 1998,
price competition by Procter & Gamble adversely impacted our operations in
Puerto Rico and Mexico, respectively. There can be no assurance that future
price or product changes by our larger competitors will not have a material
adverse effect on our operations or that we will be able to react with price or
product changes of our own to maintain our current market position. In addition,
there can be no assurance that the major producers of private label diapers will
not price or position their products in such a manner as to have a material
adverse effect on our operations.
DEPENDENCE ON KEY PRODUCTS AND ACCEPTANCE OF PRODUCT INNOVATIONS. Our DRYPERS
premium brand diapers and training pants accounted for 52.3%, 47.6% and 44.5% of
our net sales for 1997, 1998 and 1999, respectively. We have made substantial
investments in manufacturing equipment and processes for these products. In
addition, from time to time we have introduced product innovations that are
incorporated into all of our premium products. We substantially depend on the
continued success of sales of these products and customer acceptance of our
product innovations. A number of factors could materially reduce sales of our
products, or the profitability of such sales, including actions by our
competitors, shifts in consumer preferences or the lack of acceptance of our
product innovations. There can be no assurance that in the future such factors
will not have a material adverse effect on our operations.
COSTS OF CERTAIN RAW MATERIALS. Raw materials, especially pulp, superabsorbent
polymers and polypropylene nonwoven fabric, are significant components of our
products and packaging. An industry-wide shortage or a significant increase in
the price of any of these components could adversely affect our ability to
maintain our profit margins if price competition does not permit us to increase
our prices.
INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS, DEVALUATIONS AND RESTRICTIONS.
We currently have operations in Argentina, Mexico, Brazil, Singapore, Malaysia,
Colombia and Germany. The success of our sales to, operations in and expansion
into international markets depends on numerous factors, many of which we do not
control. Such factors include economic conditions in the foreign countries in
which we sell our products. In addition, international operations and expansion
may increase our exposure to certain common risks in the conduct of business
outside the United States, including currency exchange rate fluctuations,
restrictions on the repatriation of profits and assets, compliance with foreign
laws and standards, political risks and risks of increases in duties, taxes and
governmental royalties. Moreover, the level of our exports are impacted by the
relative strength or weakness of the U.S. dollar. Other than the United States,
each country in which we operate has experienced political and economic
instability in recent years. Moreover, as recent events in the Latin American
region have demonstrated, negative economic or political developments in one
country in the region can lead to or exacerbate economic crises elsewhere in the
region. The economies of Latin America are characterized by extensive government
intervention in the economy; inflation and, in some cases, hyperinflation;
difficulty in raising prices for our products; currency devaluations,
fluctuations, controls and shortages; and troubled and insolvent financial
institutions. Any of the foregoing could have a material adverse effect on our
operations.
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
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<PAGE>
pay damages to the affected parties, any of which could have a material adverse
effect on our operations. Substantial costs also may be incurred by us in
redesigning its labels or packaging, in selecting and clearing new trademarks or
in defending any legal action.
TECHNOLOGICAL CHANGES. The disposable diaper industry is subject to frequent
technological innovations, our larger branded competitors having been the
leaders in product design and development historically. The large research and
development departments of these companies have developed most of the important
product enhancements in the disposable baby diaper industry in the past several
years. We believe that by working closely with our suppliers, distributors and
other industry participants we have been able to introduce product enhancements
comparable to those introduced by our competitors when needed to maintain our
competitive position, although there can be no assurance that we will be able,
or will have adequate resources, to do so in the future. To the extent we are
not able or do not have adequate resources to introduce comparable products on a
timely basis, our financial position and results of operations could be
materially adversely affected.
COVENANT LIMITATIONS. Our debt and operating lease agreements contain numerous
financial and operating covenants that limit the discretion of our management
with respect to certain business matters. These covenants place significant
restrictions on, among other things, our ability to incur additional debt, to
create liens or other encumbrances, to pay dividends and make other investments
and restricted payments, to sell or otherwise dispose of assets and to merge or
consolidate with other entities. Our credit facility also requires us to meet
certain financial ratios and tests. A failure to comply with the obligations
contained in such debt agreements could result in an event of default
thereunder, which could result in acceleration of the related debt and the
acceleration of debt under other instruments that may contain cross-acceleration
or cross-default provisions. The effects of any such default or acceleration
could have a material adverse effect on our financial position or results of
operations.
DEPENDENCE ON KEY PERSONNEL. We believe that our continued success will depend
to a significant extent upon the abilities and continued efforts of our senior
management. The loss of the services of any one or more of such key personnel
could have an adverse effect on us and there can be no assurance that we would
be able to find suitable replacements for such key personnel. We have employment
agreements with certain of our senior executives. We do not maintain key man
life insurance on any of our executives.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Drypers Corporation:
We have audited the accompanying consolidated balance sheets of Drypers
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1999, and the related consolidated statements of earnings, comprehensive
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Drypers Corporation and
subsidiaries as of December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles
in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
February 23, 2000
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<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
DECEMBER 31
-----------------------
1998 1999
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 12,309 $ 4,048
Accounts receivable, net of allowance for doubtful
accounts of $2,635 and $3,422 respectively ....... 61,214 65,771
Inventories ........................................ 29,822 39,728
Prepaid expenses and other ......................... 16,203 25,690
--------- ---------
Total current assets ........... 119,548 135,237
PROPERTY, PLANT AND EQUIPMENT, net of depreciation and
amortization of $24,594 and $28,680, respectively .. 84,719 101,952
INTANGIBLE AND OTHER ASSETS, net of amortization of
$17,373 and $22,360, rspectively ................... 95,905 100,491
--------- ---------
$ 300,172 $ 337,680
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings .............................. $ 38,385 $ 31,385
Current portion of long-term debt .................. 322 3,035
Accounts payable ................................... 33,407 53,436
Accrued liabilities ................................ 21,202 18,686
--------- ---------
Total current liabilities ...... 93,316 106,542
LONG-TERM DEBT ....................................... 2,967 34,984
SENIOR TERM NOTES .................................... 145,997 145,888
OTHER LONG-TERM LIABILITIES .......................... 7,364 10,350
--------- ---------
249,644 297,764
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, 30,000,000 shares
authorized, 17,706,660 and 17,749,368 shares
issued and outstanding, respectively ............. 18 18
Additional paid-in capital ......................... 75,244 75,337
Warrants ........................................... 180 1,879
Retained deficit ................................... (23,731) (35,375)
Foreign currency translation adjustments ........... (1,183) (1,943)
--------- ---------
Total stockholders' equity ..... 50,528 39,916
--------- ---------
$ 300,172 $ 337,680
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------ ------------ ------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES ............................................................... $ 287,010 $ 332,640 $ 360,360
COST OF GOODS SOLD ...................................................... 175,545 196,985 223,135
------------ ------------ ------------
Gross profit ......................... 111,465 135,655 137,225
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ............................ 89,973 123,734 128,245
------------ ------------ ------------
Operating income ..................... 21,492 11,921 8,980
RELATED-PARTY INTEREST EXPENSE .......................................... 199 -- --
OTHER INTEREST EXPENSE, net ............................................. 9,758 16,476 20,329
OTHER INCOME (EXPENSE) .................................................. 253 4,466 (2,460)
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAX PROVISION (BENEFIT) AND EXTRAORDINARY ITEM.................. 11,788 (89) (13,809)
INCOME TAX PROVISION (BENEFIT) .......................................... 2,344 1,565 (2,991)
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
EXTRAORDINARY ITEM..................................................... 9,444 (1,654) (10,818)
EXTRAORDINARY ITEM:
Costs of early extinguishment of debt ................................ (7,769) -- (567)
------------ ------------ ------------
INCOME (LOSS) FROM CONTINUING OPERATIONS ................................ 1,675 (1,654) (11,385)
DISCONTINUED OPERATIONS:
Loss from operations of discontinued laundry detergent business...... -- (1,193) --
Loss on disposal of laundry detergent business....................... -- (5,278) (259)
------------ ------------ ------------
NET INCOME (LOSS) ....................................................... 1,675 (8,125) (11,644)
PREFERRED STOCK DIVIDEND ................................................ 583 80 --
------------ ------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS.................... $ 1,092 $ (8,205) $ (11,644)
============ ============ ============
INCOME (LOSS) PER COMMON SHARE:
Basic earnings (loss) per share:
Continuing operations .......................................... $ 1.00 $ (.11) $ (.61)
Extraordinary loss from early extinguishment of debt ........... (.88) -- (.03)
Discontinued operations ........................................ -- (.40) (.01)
------------ ------------ ------------
Net income (loss) .............................................. $ .12 $ (.51) $ (.65)
============ ============ ============
Diluted earnings (loss) per share:
Continuing operations .......................................... $ .51 $ (.11) $ (.61)
Extraordinary loss from early extinguishment of debt ........... (.42) -- (.03)
Discontinued operations ........................................ -- (.40) (.01)
------------ ------------ ------------
Net income (loss) .............................................. $ .09 $ (.51) $ (.65)
============ ============ ============
AVERAGE COMMON SHARES OUTSTANDING ...................................... 8,878,638 16,110,429 17,731,386
============ ============ ============
AVERAGE COMMON AND POTENTIAL COMMON SHARES OUTSTANDING .................. 18,469,676 16,110,429 17,731,386
============ ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
YEAR ENDED DECEMBER 31
---------------------------------
1997 1998 1999
-------- -------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS ........................... $ 1,092 $ (8,205) $(11,644)
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS . -- (1,183) (760)
-------- -------- --------
COMPREHENSIVE INCOME (LOSS) .............. $ 1,092 $ (9,388) $(12,404)
======== ======== ========
The accompanying notes are an integral part of
these consolidated financial statements.
-28-
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
PREFERRED COMMON
SHARES SHARES
ISSUED AND ISSUED AND PREFERRED COMMON
OUTSTANDING OUTSTANDING STOCK STOCK
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 ................. 90,000 7,179,230 $ 1 $ 7
Issuance of common stock in connection
with acquisitions .................... -- 71,657 -- --
Conversion of preferred stock and
dividends into common stock .......... (28,890) 2,937,417 -- 3
Preferred stock dividends ($7.50 per
share)................................ -- -- -- --
Effect of stock option and stock purchase
plans ................................. -- 111,348 -- --
Issuance of warrants .................... -- -- -- --
Exercise of warrants .................... -- 213,571 -- --
Net income .............................. -- -- -- --
---------- ---------- ---------- ----------
BALANCE, December 31, 1997 ................. 61,110 10,513,223 1 10
Issuance of common stock in connection
with an acquisition.................... -- 403,571 -- --
Conversion of preferred stock and
dividends into common stock............ (61,110) 6,292,364 (1) 7
Preferred stock dividends ($1.25 per
share)................................ -- -- -- --
Effect of stock option and stock purchase
plans ................................. -- 79,080 -- --
Forfeiture of expired warrants .......... -- -- -- --
Exercise of warrants .................... -- 418,422 -- 1
Net loss ................................ -- -- -- --
Translation adjustments ................. -- -- -- --
---------- ---------- ---------- ----------
BALANCE, December 31, 1998 ................. -- 17,706,660 -- 18
Effect of stock option and stock purchase
plans ................................. -- 42,708 -- --
Issuance of warrants .................... -- -- -- --
Net loss ................................ -- -- -- --
Translation adjustments ................. -- -- -- --
---------- ---------- ---------- ----------
BALANCE, December 31, 1999 ................. -- 17,749,368 $ -- $ 18
========== ========== ========== ==========
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
PAID-IN RETAINED TRANSLATION
CAPITAL WARRANTS DEFICIT ADJUSTMENTS
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 ................. $ 68,823 $ 1,395 $ (16,618) $ --
Issuance of common stock in connection
with acquisitions .................... 200 -- -- --
Conversion of preferred stock and
dividends into common stock .......... 312 -- -- --
Preferred stock dividends ($7.50 per
share)................................ -- -- (583) --
Effect of stock option and stock purchase
plans ................................. 283 -- -- --
Issuance of warrants .................... -- 50 -- --
Exercise of warrants .................... 380 (348) -- --
Net income .............................. -- -- 1,675 --
---------- ---------- ---------- ----------
BALANCE, December 31, 1997 ................. 69,998 1,097 (15,526) --
Issuance of common stock in connection
with an acquisition.................... 2,825 -- -- --
Conversion of preferred stock and
dividends into common stock............ 1,058 -- -- --
Preferred stock dividends ($1.25 per
share)................................ -- -- (80) --
Effect of stock option and stock purchase
plans ................................. 381 -- -- --
Forfeiture of expired warrants .......... 254 (254) -- --
Exercise of warrants .................... 728 (663) -- --
Net loss ................................ -- -- (8,125) --
Translation adjustments ................. -- -- -- (1,183)
---------- ---------- ---------- ----------
BALANCE, December 31, 1998 ................. 75,244 180 (23,731) (1,183)
Effect of stock option and stock purchase
plans ................................. 93 -- -- --
Issuance of warrants .................... -- 1,699 -- --
Net loss ................................ -- -- (11,644) --
Translation adjustments ................. -- -- -- (760)
---------- ---------- ---------- ----------
BALANCE, December 31, 1999 ................. $ 75,337 $ 1,879 $ (35,375) $ (1,943)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
-29-
<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................................... $ 1,675 $ (8,125) $ (11,644)
Adjustments to reconcile net income (loss) to net cash used
in operating activities from continuing operations:
Discontinued operations ................................................... -- 6,471 259
Depreciation and amortization ............................................. 8,220 10,353 14,014
Non-cash portion of extraordinary item .................................... 3,745 -- 567
Write-off of machinery and equipment resulting from Argentina fire ........ -- 2,894 --
Changes in operating assets and liabilities, net of acquisitions-
Increase in-
Accounts receivable ................................................. (3,310) (14,586) (17,118)
Inventories ......................................................... (9,474) (6,616) (9,906)
Prepaid expenses and other .......................................... (8,320) (6,466) (5,987)
Effect of insurance receivable related to Argentina fire ............... -- (11,961) 9,061
Increase (decrease) in-
Accounts payable .................................................... (400) 9,633 20,029
Accrued liabilities ................................................. 853 3,226 (2,830)
Change in other long-term liabilities .................................. 63 (2,343) (2,641)
--------- --------- ---------
Net cash used in operating activities of continuing operations ... (6,948) (17,520) (6,196)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment .............................................. (21,598) (26,481) (23,761)
Proceeds from sale and leaseback of Mexico facility ............................. -- -- 5,820
Investment in other noncurrent assets and enterprise resource planning system ... (2,754) (3,409) (9,390)
Payments under noncompete agreements ............................................ (231) -- --
Refund of deposits .............................................................. 1,136 -- --
Investment in Mexico acquisition, net of cash acquired .......................... (595) (1,175) --
Investment in Brazilian acquisition, net of cash acquired ....................... (9,827) (3,943) --
Investment in Malaysian acquisition, net of cash acquired ....................... -- (10,207) --
--------- --------- ---------
Net cash used in investing activities of continuing operations ... (33,869) (45,215) (27,331)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under senior term notes .............................................. 115,000 31,087 --
Payments on senior term notes ................................................... (45,000) -- --
Borrowings under working capital facility ....................................... 10,000 -- --
Payments on working capital facility ............................................ (10,000) -- --
Borrowings under revolvers ...................................................... 79,296 71,417 45,393
Payments on revolvers ........................................................... (94,918) (35,100) (52,393)
Borrowings under (payments on) other debt ....................................... (5,022) 2,242 34,730
Financing related costs ......................................................... (4,708) (2,891) (1,780)
Proceeds from issuance of common stock .......................................... 200 -- --
Proceeds from stock options, warrants, and stock purchase plan .................. 315 213 93
--------- --------- ---------
Net cash provided by financing activities of continuing operations 45,163 66,968 26,043
CASH USED IN DISCONTINUED OPERATIONS ............................................... -- (1,193) (777)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................... 4,346 3,040 (8,261)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ..................................... 4,923 9,269 12,309
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................................... $ 9,269 $ 12,309 $ 4,048
========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
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<PAGE>
DRYPERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES:
BUSINESS
Drypers Corporation and its subsidiaries (the "Company" or "Drypers") is a
leading manufacturer and marketer of premium quality, value-priced disposable
baby diapers, training pants and pre-moistened baby wipes. The Company's
products are sold under the DRYPERS brand name in the United States and under
the DRYPERS and other brand names internationally. Currently, the Company is the
third largest producer of branded disposable baby diapers in the United States
and Latin America. The Company also manufactures and sells lower-priced diapers
under other brand names internationally, as well as private label diapers,
training pants and pre-moistened baby wipes. The Company's DRYPERS brand is the
fourth largest selling diaper brand in the United States and the second largest
selling training pant brand in U.S. grocery stores.
On the branded side of the business, Drypers targets the value segment of the
U.S. diaper market by offering products with features and quality comparable to
the premium-priced national brands at generally lower prices. The Company's
products are positioned to provide enhanced profitability for retailers and
better value to consumers. The Company continually seeks to expand its extensive
grocery store sales and distribution network, while increasing its penetration
of the mass merchant and drugstore chain markets, in order to capture a greater
share of the U.S. diaper market. In 1998, Drypers began its first-ever national
television campaign. As a result of this campaign, in 1998, Drypers began with
test distribution in two national mass merchants (Wal-Mart and Kmart). In April
1999, Drypers gained national distribution of its branded disposable diapers
into all 1,500 Big Kmart stores across the country. In September 1999, Drypers
expanded its worldwide relationship with Wal-Mart to include production of
private label diapers in the United States.
Drypers is the sixth largest diaper producer in the world. Since 1993, Drypers
has significantly expanded its international presence, competing in the
lower-priced branded and private label categories. The Company, through a series
of start-ups and acquisitions, currently produces diapers in Puerto Rico,
Argentina, Mexico, Brazil, Malaysia and Colombia. Wal-Mart International has
selected the Company to be its appointed private label supplier of disposable
diapers to Wal-Mart stores throughout Latin America (which are currently located
in Argentina, Brazil and Mexico) and Puerto Rico, and also supplies DRYPERS
branded products to Wal-Mart stores in these markets. In 1998, the Company
gained distribution in the Wal-Mart stores in China, Canada and Germany. With
the financial crisis in Brazil in early 1999, the Company's South American
operations significantly decreased in profitability. In Brazil, the Company
focused on increasing margins on its products to offset the devaluation's
negative impact on dollar based raw materials. In response to the related impact
on Argentina's economy, the Company has restructured its operations there,
moving capacity to more profitable operations throughout the world, and is
focused on returning its operations back to profitability. Drypers intends to
continue to expand its operations in Mexico, Malaysia, Europe and Colombia and
is actively seeking further expansion opportunities through acquisitions, joint
ventures or other arrangements worldwide.
BUSINESS CONDITIONS
The disposable diaper industry is characterized by substantial price
competition, which is affected through price changes, product count changes and
promotions. Typically, because of their large market share, one of the Company's
larger branded competitors initiates such pricing changes. The Company typically
responds to such pricing changes with changes to its own prices, product counts
or promotional programs. The process of implementing such changes may require a
number of months, and the Company's operating results may be adversely affected.
The Company competes with a number of companies, some of which are larger and
have greater financial resources and offer broader product lines than the
Company.
Raw materials, notably wood pulp, are a major component of the total cost to
produce disposable baby diapers and training pants. While the cost of pulp has
declined significantly from the record-high levels experienced in October 1995,
there can be no assurance that if pulp or other raw material prices rise again
in the future the Company will be
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<PAGE>
able to pass those increases to its customers or redesign its products to reduce
usage; therefore, operating margins could be adversely affected.
The Company markets its products in various foreign countries and is, therefore,
subject to currency fluctuations in these countries. Changes in the value of the
U.S. dollar against these currencies will affect the Company's results of
operations and financial position.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Drypers Corporation and its majority-owned subsidiaries. All material
intercompany transactions and balances have been eliminated in consolidation.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, including goodwill and insurance
receivables, and liabilities, including promotional accruals, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
ACCOUNTS RECEIVABLE
The Company grants credit to its customers, which include regional distributors,
grocery stores and mass-merchants, in the ordinary course of business. The
Company performs ongoing credit evaluations of its customers and credit losses
are provided for in the allowance for doubtful accounts.
INVENTORIES
Inventories at December 31, 1998 and 1999, consisted of the following (in
thousands):
1998 1999
------- -------
Raw materials $12,702 $14,778
Finished goods 17,120 24,950
------- -------
$29,822 $39,728
======= =======
Inventories are stated at the lower of cost (first-in, first-out) or market
value. Finished goods inventories include the costs of materials, labor and
overhead.
PROPERTY, PLANT AND EQUIPMENT
Expenditures for new facilities, significant betterments of existing properties
and leasehold improvements are recorded at cost. The Company capitalizes, as
machinery and equipment, internal and external costs incurred to develop and
enhance diaper production lines. Upon disposal of assets subject to depreciation
or amortization, the accounts are relieved of related costs and accumulated
depreciation or amortization and the resulting gains or losses are reflected in
income. Depreciation is computed using the straight-line method at rates
considered sufficient to amortize costs over estimated useful lives. The
estimated useful lives for certain machinery and equipment betterments are
shorter than the estimated useful lives of the machinery and equipment.
USEFUL LIVES
--------------
Machinery and equipment 10 - 15 years
Buildings 20 years
Office equipment and furniture 5 years
Automobiles 5 years
Leasehold improvements Lesser of term
of lease or life
of asset
Enterprise resource planning system 7 years
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<PAGE>
Property, plant and equipment at December 31, 1998 and 1999, consisted of the
following (in thousands):
1998 1999
------- --------
Machinery and equipment $85,934 $104,260
Enterprise resource planning system 2,816 7,086
Land and buildings 10,944 8,775
Office equipment and furniture 5,542 5,840
Automobiles 659 758
Leasehold improvements 3,418 3,913
------- --------
109,313 130,632
Accumulated depreciation and amortization (24,594) (28,680)
------- --------
$84,719 $101,952
======= ========
INTANGIBLE AND OTHER ASSETS
As of December 31, 1998 and 1999, intangible and other assets, net of
accumulated amortization, consisted of the following (in thousands):
1998 1999
------- --------
Goodwill--
20 year amortization $ 9,857 $ 9,353
30 year amortization 25,749 27,500
40 year amortization 41,595 40,548
Deferred financing costs 6,579 8,395
License agreements 8,582 7,801
Other 3,543 6,894
------- --------
$95,905 $100,491
======= ========
Goodwill is amortized over 20 years to 40 years using the straight-line method.
Management continually evaluates whether events or circumstances have occurred
that indicate the remaining estimated useful life of goodwill may warrant
revision or the remaining balance of goodwill may be impaired.
Deferred financing costs are amortized over the lives of the related debt using
the effective interest method. The license agreements are amortized over the
estimated lives of the relevant patents, using the straight-line method.
ACCRUED LIABILITIES
Accrued liabilities at December 31, 1998 and 1999, consisted of the following
(in thousands):
1998 1999
------- -------
Selling and promotional $ 4,004 $ 3,249
Interest payable 704 1,070
License agreement and royalties payable 2,000 4,863
Property and sales tax payable 2,388 582
Contractual obligations - discontinued
operations 2,000 506
Employee-related liabilities 3,087 3,733
Other 7,019 4,683
------- -------
$21,202 $18,686
======= =======
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<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables, debt instruments, forward exchange contracts and a
commodity swap for pulp purchases. The book values of these instruments
excluding debt are considered to be representative of their respective fair
values. The fair value of the Company's debt instruments is discussed in Note 5.
REVENUE RECOGNITION
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.
COUPON PROMOTIONS
The Company follows the policy of recognizing promotion expense when products
are shipped, based on the estimated redemption rate.
ADVERTISING
Advertising production costs are expensed the first time the advertisement is
run. Media (TV and print) placement costs are expensed in the month the
advertising appears. Advertising expense for the years ended December 31, 1997,
1998 and 1999, was $3,219,000, $10,383,000 and $3,381,000, respectively.
Advertising expense for the year ended December 31, 1998 reflects the Company's
national television campaign in the United States.
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<PAGE>
EARNINGS PER SHARE
The following reconciles the income and shares used in the basic and diluted
earnings per share computations (in thousands, except share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Income (loss) from continuing operations before
extraordinary item, less preferred stock dividend.... $ 8,861 $ (1,734) $ (10,818)
Extraordinary item .................................... (7,769) -- (567)
------------ ------------ ------------
Income (loss) from continuing operations .............. 1,092 (1,734) (11,385)
Discontinued operations ............................... -- (6,471) (259)
------------ ------------ ------------
Net income (loss) attributable to common stockholders . $ 1,092 $ (8,205) $ (11,644)
============ ============ ============
Weighted average number common shares outstanding...... 8,878,638 16,110,429 17,731,386
============ ============ ============
Income (loss) from continuing operations .............. $ 1.00 $ (.11) $ (.61)
Extraordinary item .................................... (.88) -- (.03)
Discontinued operations ............................... -- (.40) (.01)
------------ ------------ ------------
Net income (loss) ..................................... $ .12 $ (.51) $ (.65)
============ ============ ============
DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations before
extraordinary item, less preferred stock dividends
in 1998 ............................................ $ 9,444 $ (1,734) $ (10,818)
Extraordinary item .................................... (7,769) -- (567)
------------ ------------ ------------
Income (loss) from continuing operations .............. 1,675 (1,734) (11,385)
Discontinued operations ............................... -- (6,471) (259)
------------ ------------ ------------
Net income (loss) ..................................... $ 1,675 $ (8,205) $ (11,644)
============ ============ ============
Weighted average number common shares outstanding ..... 8,878,638 16,110,429 17,731,386
Dilutive effect - options and warrants ................ 1,839,648 -- --
Dilutive effect - preferred stock ..................... 7,751,390 -- --
------------ ------------ ------------
18,469,676 16,110,429 17,731,386
============ ============ ============
Income (loss) from continuing operations .............. $ .51 $ (.11) $ (.61)
Extraordinary item .................................... (.42) -- (.03)
Discontinued operations ............................... -- (.40) (.01)
------------ ------------ ------------
Net income (loss) ..................................... $ .09 $ (.51) $ (.65)
============ ============ ============
</TABLE>
For the years ended December 31, 1997, 1998 and 1999, options and warrants
excluded from the diluted earnings per share calculation because their effect
was antidilutive to the calculation totaled 168,185, 844,100, and 3,560,426,
respectively. Additionally, for the year ended December 31, 1998, 1,035,475
weighted average shares of preferred stock were excluded from the diluted
earning per share calculation because their effect was antidilutive to the
calculation.
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<PAGE>
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax assets and liabilities for expected future
tax consequences of events that have been recognized in the financial statements
or tax returns. Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities using enacted tax rates and
laws in effect in the years in which the differences are expected to reverse.
STATEMENTS OF CASH FLOWS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Supplemental
disclosures of cash flow information for the years ended December 31, 1997, 1998
and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Income taxes paid ................................................... $ 2,022 $ 2,165 $ 1,253
Interest paid ....................................................... $11,221 $14,861 $17,137
Non-cash investing and financing transactions:
Warrants issued to financial institution in connection with
refinancing ..................................................... $ -- $ -- $ 1,699
Warrants issued to financial institution for services provided in
connection with providing a working capital facility ............ $ 50 $ -- $ --
Cancellation of outstanding receivable due from Brazilian Affiliate
in connection with an acquisition ............................... $ 2,167 $ -- $ --
Common stock issued for Malaysia acquisition ...................... $ -- $ 2,825 $ --
</TABLE>
FOREIGN CURRENCY TRANSLATION
Local currencies are generally considered the functional currencies outside the
United States, except in countries which are highly inflationary. Assets and
liabilities are translated at year-end exchange rates for operations in local
currency environments. Income and expense items are translated at average rates
of exchange prevailing during the year.
For operations in countries which are highly inflationary, certain financial
statement amounts are translated at historical exchange rates, with all other
assets and liabilities translated at year-end exchange rates. These translation
adjustments are reflected in the results of operations. As of January 1, 1998,
Brazil was no longer highly inflationary. As of January 1, 1999, Mexico was no
longer highly inflationary.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses forward exchange contracts to hedge certain raw material
purchase commitments denominated in currencies other than the functional
currency of the applicable subsidiaries (the U.S. dollar for the Company's
Argentine and Brazilian subsidiaries). These instruments qualify for hedge
accounting and, accordingly gains and losses are deferred and included in the
basis of the inventory hedged. Premiums paid are recorded over the term of the
contracts. In August 1999, the Company entered into forward exchange contracts
to hedge certain U.S. dollar denominated inventory purchases for its Argentine
subsidiary. The contracts have varying maturities with none exceeding one year.
The contracts require monthly settlement and at December 31, 1999 the remaining
notional contract amount was $5.6 million at an average contract rate of $1.09,
and deferred losses were not material. Subsequent to yearend, the Company
entered into forward contracts to hedge certain U.S. dollar denominated
inventory purchases for its Brazilian subsidiary. The contracts have varying
maturities with none exceeding one year. The contracts require monthly
settlement and have a notional amount of $8.8 million at an average rate of
$1.92. In February 2000, the Company entered into a commodity swap contract to
hedge approximately 50% of its global pulp purchases. The contract has a
five-year term and requires monthly cash settlement. This contract
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<PAGE>
qualifies for hedge accounting and, accordingly gains and losses will be
deferred and included in the basis of the inventory hedged.
As a matter of policy, The Company does not engage in speculative derivative
activity and, other than for inventory purchases, does not hedge to protect the
results of foreign operations or other economic exposures. The Company's intent
is to not enter into transactions for which speculative accounting treatment of
the hedging instrument would be required.
RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying consolidated
financial statements for the years ended December 31, 1997 and 1998, to conform
with the presentation used in the December 31, 1999, consolidated financial
statements.
NEW ACCOUNTING STANDARDS
In March 1998, Statement of Position ("SOP") 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use", was issued by the
American Institute of Certified Public Accountants ("AICPA"). SOP 98-1 requires
that certain costs related to computer software developed or obtained for
internal use be expensed as incurred. The Company adopted SOP 98-1 as of January
1, 1999, and the adoption of SOP 98-1 did not have a material effect on its
financial position or results of operations.
In April 1998, SOP 98-5, "Reporting on the Costs of Start-Up Activities", was
issued by the AICPA. SOP 98-5 requires that all nongovernmental entities expense
costs of start-up activities as those costs are incurred. The Company adopted
SOP 98-5 as of January 1, 1999, and the adoption of SOP 98-5 did not have a
material effect on its financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company is required to
adopt SFAS No. 133, as 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.
2. DISCONTINUED OPERATIONS:
The initial results of the laundry detergent operation in the last two quarters
of 1998, which generated an operating loss of $1,193,000 for the entire 1998
fiscal year, caused the Company to reconsider its plans for these operations. As
a result, the Company decided in December 1998 to discontinue these operations
and to settle remaining related contractual obligations. A charge of $5,278,000
resulted from recording these obligations and the write-off of the Company's
investment in the laundry detergent business and, along with the 1998 operating
loss, is presented as a discontinued operation in the consolidated statement of
earnings for the year ended December 31, 1998. The $5,278,000 loss on disposal
includes $3,278,000 for the write-off of the initial investment and receivable
from the laundry detergent operation and $2,000,000 related to existing
contractual obligations required to be satisfied in disposing of the business.
The Company recorded $259,000 during 1999 as additional costs necessary to
dispose of the laundry detergent business. These costs were recorded as a change
in estimate and primarily relate to a contractual obligation the Company has
with one of its directors in the event that individual is able to successfully
market and develop the product. As of December 31, 1999, the Company has
fulfilled its contractual obligations to third parties related to the laundry
detergent operation.
3. FIRE AT ARGENTINA FACILITY:
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<PAGE>
On August 8, 1998, the Company's manufacturing facility in Argentina was
extensively damaged as a result of a fire. There were no employee injuries
resulting from the fire. In addition to physical damage to the facility, the
fire resulted in the loss of a portion of the finished goods and raw material
inventory. Two of the four diaper manufacturing lines were completely destroyed
and the remaining two lines were partially damaged. The Company maintained
insurance to cover damage to the Company's property, business interruption and
extra expense claims.
As a result of negotiations held in December 1999, the Company settled its
claims of approximately $24,900,000 against its policies for approximately
$20,700,000. Of this amount, the Company received approximately $17,900,000 as
of December 31, 1999 and has subsequently received approximately $2,900,000 in
2000, which was recorded as a receivable as of December 31, 1999. For the year
ended December 31, 1999, the Company recorded a write-off to Other Expense for
the difference of approximately $4,200,000 between the amounts claimed and the
total amounts eventually received. Due to the ambiguity of insurance
reimbursements, individual reimbursement cannot be matched to specific
categories of the claim.
For the year ended December 31, 1999, the Company recorded approximately
$645,000 in other income primarily related to proceeds under the Company's
property damage claim as well as lost profits and fixed expenses recoverable
under the Company's business interruption/extra expense policy.
As of December 31, 1998, the Company had received interim payments of
$8,700,000. For the year ended December 31, 1998, the Company had recorded
approximately $4,000,000 in other income primarily related to proceeds under the
Company's property damage claim as well as lost profits recoverable under the
Company's business interruption policy for the months of August through December
1998.
As of December 31, 1998, the Company had recorded a receivable due from the
insurance carriers of approximately $12,000,000 related to the Argentina fire.
This receivable was comprised of the estimated remaining replacement cost of the
Company's diaper manufacturing lines to be recovered under the property portion
of the insurance claim as well as estimated lost profit and fixed expenses for
the months of August through December 1998 to be recovered under the business
interruption portion of the insurance claim.
4. AQUISITIONS:
BRAZIL
In February 1997, the Company entered into a series of transactions related to
the establishment of a 51% owned venture in Brazil, acquisition of certain
intangible assets and rights from Chansommes do Brasil Ind. E Com. Ltda.
("Chansommes") and the purchase of diaper production of Chansommes.
Consideration paid in connection with the transactions included $4,000,000 of
common stock of the Company (1,000,000 shares), and cancellation of an
outstanding receivable from Chansommes of $2,167,000. Under the terms of the
agreement, the 1,000,000 shares of common stock were held in escrow by the
Company through May 5, 1997 at which time the owners of such shares elected to
receive $4,000,000 in cash in lieu of the shares. In connection with the
transactions, the Company also obtained a fair market value option to purchase
the remaining 49% interest in the venture in Brazil. During the second quarter
of 1997, the Company exercised a portion of such option and obtained 44% of the
remaining 49% interest for $5,300,000 in cash. Total cash consideration paid in
connection with the transactions, including transaction costs, was approximately
$9,827,000. In connection with the transactions, the Company also obtained a
fair market value option to acquire Chansommes. On April 6, 1998, the Company
exercised its option to acquire Chansommes, effectively giving the Company a
100% ownership interest in the Brazilian manufacturer of its diapers. The
acquisition was accounted for as a purchase and the purchase price was allocated
to the acquired assets and liabilities assumed based on their estimated fair
values. Total consideration for the entire series of Brazilian transactions was
$15,077,000 and exceeded the estimated fair market value of the net tangible
assets acquired (current assets of $1,708,000, property, plant and equipment of
$11,292,000 and liabilities of $14,373,000) by approximately $16,450,000 and
this excess was recorded as goodwill.
MALAYSIA
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<PAGE>
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.
The Company has been presented with a claim from the former owners of PrimoSoft
for approximately $2,000,000 representing the difference between the realized
value of the Company's stock and the price in the purchase agreement. Upon
resolution of the claim, this amount would be payable in either cash or the
Company's stock, at management's option.
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<PAGE>
5. DEBT:
SHORT-TERM BORROWINGS
As of December 31, 1998 and 1999, respectively, the Company had borrowings
outstanding of $36,317,000 and $24,666,000, respectively, under revolving credit
facilities, at weighted average interest rates of 8.2% and 9.7%, respectively.
On April 1, 1998, the Company entered into a three-year $50,000,000 credit
facility to replace the former revolving credit facility. This credit facility
permitted the Company to borrow under a borrowing base formula equal to the sum
of 75% of the aggregate net book value of its accounts receivable and 50% of the
aggregate net book value of its inventory on a consolidated basis, subject to
additional limitations on incurring debt. This credit facility was secured by
substantially all of the Company's assets, and required the Company, among other
things, to maintain a minimum consolidated net worth, as defined, a minimum
consolidated fixed charge coverage ratio, as defined, a maximum consolidated
funded debt to adjusted consolidated EBITDA ratio, as defined, and a maximum
level of capital expenditures.
As a result of the charge related to the Company's discontinued laundry
detergent operations and the additional cash demands placed on the Company due
to the delay in receipt of insurance proceeds related to the fire at its
Argentina facility, as of December 31, 1998, the Company was in default under
certain of the financial covenants contained in its revolving credit facility.
On March 31, 1999, the Company and the lender entered into an agreement curing
the defaults, resetting certain financial covenants and requiring the Company to
reserve certain minimum levels of borrowing availability, thereby reducing the
total available revolving credit to the Company. The amendment raised the
effective cost of bank borrowings under the revolving credit facility. The
credit facility, as amended, bore interest in the range of prime to prime plus 1
1/2%, or LIBOR plus 1 1/2% to LIBOR plus 3 1/4%, in each case based on the
Company's debt to EBITDA ratio determined on a quarterly basis.
On December 13, 1999, the Company entered into a new three-year $69,800,000
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 of up to $12,800,000 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% due on December 13, 2000, 2001 and 2002.
Borrowing availability under the revolving credit facility was approximately
$2,500,000 at December 31, 1999.
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, 1998
and 1999 were $2,068,000 and $6,419,000, respectively, and consisted of working
capital and trade financing facilities.
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<PAGE>
LONG-TERM DEBT
Long-term debt as of December 31, 1998 and 1999 consisted of the following (in
thousands):
1998 1999
-------- --------
Note payable, due 2001, interest at 8.4%, partially
secured by land and buildings ...................... 1,707 1,511
Term loans due 2002, interest at LIBOR plus 3.25%,
secured by machinery and equipment ................. -- 7,122
Term loan due 2002, interest at 12.5%, second
lien to Fleet Capital Corporation .................. -- 27,000
Various other notes payable .......................... 1,582 2,386
-------- --------
3,289 38,019
Less: current maturities ...................... (322) (3,035)
-------- --------
$ 2,967 $ 34,984
======== ========
SENIOR TERM NOTES
Long-term debt under senior term notes as of December 31, 1998 and 1999
consisted of the following (in thousands):
1998 1999
-------- --------
10 1/4% Senior Notes, interest due semiannually
on June 15 and December 15, principal due
June 15, 2007, including unamortized
bond premium of $997 and $888, respectively.........$145,997 $145,888
======== ========
On June 24, 1997, the Company closed a private issuance of $115,000,000
aggregate principal amount of its 10 1/4% Senior Notes due 2007 ("10 1/4% Senior
Notes"). Proceeds from the offering of the 10 1/4% Senior Notes were used to
repurchase $43,400,000 of the $45,000,000 in principal amount of the Company's
outstanding 12 1/2% Senior Notes pursuant to a tender offer therefore, to repay
a $10,000,000 working capital facility, to repay borrowings outstanding under
the Company's revolving credit facility, to repay a term loan with a bank and to
repay the Company's junior subordinated debt and other indebtedness and for
general corporate purposes. In connection with these transactions, the Company
recognized an extraordinary expense of $7,769,000 for the write-off of
capitalized debt issuance costs and prepayment and other fees, of which
$3,745,000 was non-cash. On December 10, 1997, the Company redeemed the
remaining $1,600,000 of 12 1/2% Senior Notes pursuant to an optional redemption
provision. The Company completed an exchange offer on October 14, 1997, pursuant
to which all of the 10 1/4% Senior Notes issued at that time were tendered for a
like principal amount of new notes with identical terms which may be offered and
sold by the holders without restrictions or limitations under the Securities Act
of 1933, as amended.
On March 17, 1998, the Company closed a private issuance of an additional
$30,000,000 of 10 1/4% Senior Notes (the "New Senior Notes") at a price of
103.625% of the principal amount thereof. The New Senior Notes were issued under
the same indenture as the June 1997 issuance of 10 1/4% Senior Notes. Proceeds
of the issuance of the New Senior Notes were used to repay all outstanding
indebtedness under the revolving credit facility, with the remaining proceeds
used for general corporate purposes, including capital expenditures. The Company
completed an exchange offer on July 13, 1998, pursuant to which all of the New
Senior Notes were tendered for a like principal amount of new notes with
identical terms which may be offered and sold by the holders without
restrictions or limitations under the Securities Act of 1933, as amended.
The indenture governing the 10 1/4% Senior Notes and the New Senior Notes
contains certain covenants that, among other things, limit the Company's ability
to incur additional indebtedness; pay dividends; purchase capital stock; make
certain other distributions, loans and investments; sell assets; enter into
transactions with related persons; and merge, consolidate or transfer
substantially all of its assets. The indenture also contains provisions for
acceleration of payment of principal upon a change of control, as defined.
The fair value of the Company's 10 1/4% Senior Notes and New Senior Notes was
estimated using discounted cash flow analysis based on the Company's current
incremental borrowing rate for similar financial instruments, and was estimated
at approximately $143,716,000 as of December 31, 1999.
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<PAGE>
6. INCOME TAXES:
Income (loss) from continuing operations before income tax provision and
extraordinary item and income tax provision for the years ended December 31,
1997, 1998 and 1999 are composed of the following (in thousands):
1997 1998 1999
-------- -------- --------
Income (loss) from continuing
operations before income tax
provision and extraordinary item
United States ................ $ 3,481 $ (2,436) $(10,486)
Non-United States ............ 8,307 2,347 (3,323)
-------- -------- --------
$ 11,788 $ (89) $(13,809)
======== ======== ========
Income tax provision
Current-
United States ................ $ 55 $ 52 $ 36
Non-United States ............ 2,289 1,513 (1,382)
-------- -------- --------
$ 2,344 $ 1,565 $ (1,346)
======== ======== ========
Deferred-
United States ................ $ -- $ -- $ --
Non-United States ............ -- -- (1,645)
-------- -------- --------
-- -- (1,645)
-------- -------- --------
$ 2,344 $ 1,565 $ (2,991)
======== ======== ========
Deferred income taxes reflect the impact of temporary differences between the
amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations. The components of the net
deferred tax asset at December 31, 1998 and 1999 are as follows (in thousands):
1998 1999
-------- --------
Deferred tax assets-
Accruals and reserves .............................. $ 2,830 $ 99
Net operating loss and credit carryforwards ........ 9,821 17,416
Tax deferral of book write-down of machinery
and equipment .................................... 1,194 1,194
Other .............................................. 318 399
-------- --------
14,163 19,108
Less- Valuation allowance .......................... (5,269) (9,561)
-------- --------
8,894 9,547
-------- --------
Deferred tax liabilities-
Excess of tax over book depreciation ............... (5,455) (6,058)
Other .............................................. (3,439) (1,844)
-------- --------
(8,894) (7,902)
-------- --------
Net deferred tax asset .................. $ -- $ 1,645
======== ========
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<PAGE>
The consolidated provision for income taxes differs from the provision computed
at the statutory United States federal income tax rate for the following
reasons:
1997 1998 1999
------ ------ ------
United States statutory rate ................. 34% (34)% (34)%
Non-United States taxes ...................... (18) (6) (9)
Generation of loss carryforwards, net of
utilization ................................ 25 21 16
United States taxes on Subpart F income ...... -- 20 --
Nondeductible expenses, primarily goodwill ... 17 19 7
Other ........................................ -- 4 --
------ ------ ------
58% 24% (20)%
====== ====== ======
As of December 31, 1999, the Company had net operating loss and credit
carryforwards of approximately $46,765,000 which are available to offset future
taxable income. The U.S. loss carryforwards will expire in the years 2008
through 2014 if not utilized and foreign losses and credits will carry forward
indefinitely. The Company also has alternative minimum tax credits of
approximately $457,000 which are available indefinitely.
7. CAPITAL STOCK, STOCK OPTION PLANS AND WARRANTS:
PREFERRED STOCK
In 1996, the Company issued 90,000 shares of the Company's Series A Senior
Convertible Cumulative 7.5% Preferred Stock ("7.5% Preferred Stock") for
$9,000,000. The 7.5% Preferred Stock was convertible at the discretion of the
holders, at a rate of 100 shares of common stock per share of 7.5% Preferred
Stock, into 9,000,000 shares of the Company's common stock. Dividends accrued at
the rate of $7.50 per share, per year, and were payable only upon the conversion
or redemption of the 7.5% Preferred Stock or on December 1, 2003. The preferred
shares had a liquidation preference of $100 per share. Holders of the 7.5%
Preferred Stock had 100 votes per share.
During 1997, 28,890 shares of the Company's 7.5% Preferred Stock together with
accrued dividends were converted into 2,937,417 shares of common stock. During
1998, the remaining holders of the Company's 7.5% Preferred Stock elected to
exchange their preferred stock and related accrued dividends for 6,292,364
shares of the Company's common stock.
COMMON STOCK
Holders of the common stock have one vote per share.
STOCKHOLDERS RIGHTS AGREEMENT
The Company has a stockholders rights agreement to protect against coercive or
unfair takeover tactics. Under the terms of the agreement, the Company
distributed to its stockholders one right for each share of common stock held.
Each right entitles the holder to purchase one share of common stock for $75 per
share, subject to adjustment, or, under certain circumstances, stock of the
Company or of the acquiring entity for half market value. The rights are
exercisable only if a person or group acquires 15% or more of the Company's
common stock or makes a tender offer for 15% or more of the common stock. The
rights will expire on December 15, 2004.
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<PAGE>
STOCK OPTION PLANS
Effective January 1, 1996, the Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," which is effective for all awards granted after
December 31, 1994. The Company has various plans which provide for the granting
of nonqualified stock options or incentive stock options to purchase shares of
the Company's common stock to officers, executives, and key employees
responsible for the direction and management of the Company. Generally, under
the plans, options may be granted at not less than the fair market value of the
Company's common stock on the date of grant. Options under the nonqualified
plans generally become exercisable immediately or in ratable installments over a
five-year period from date of grant and may be exercised up to a maximum of 10
years from date of grant. Options under the incentive stock option plan and the
non-employee director stock option plan generally become exercisable after three
years in 33 1/3% increments per year and expire 10 years from date of grant.
Shares available for future options pursuant to the various stock option plans
as of December 31, 1997, 1998 and 1999, were 767,916, 1,166,174, and 513,799,
respectively.
Stock option transactions under the plans during 1997, 1998 and 1999 were as
follows:
<TABLE>
<CAPTION>
1997 1998
-------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- ---------
Nonqualified stock option plans-
<S> <C> <C> <C> <C>
Options outstanding at January 1 1,890,010 $ 2.97 1,819,745 $ 3.03
Granted 15,000 6.00 113,570 6.28
Canceled - - - -
Exercised (85,265) 2.41 (15,000) 6.00
--------- --------- --------- ---------
Options outstanding at December 31 1,819,745 $ 3.03 1,918,315 $ 3.19
========= ========= ========= =========
Options exercisable at December 31 1,719,744 $ 2.99 1,803,513 $ 3.00
========= ========= ========= =========
Options exercise price range at December 31 $0.04 - $6.00 $0.04 - $7.50
Incentive stock option plans-
Options outstanding at January 1 690,125 $ 3.01 1,041,125 $ 3.91
Granted 396,500 5.42 542,230 7.06
Canceled (19,417) 3.91 (69,058) 5.87
Exercised (26,083) 3.00 (26,667) 3.07
--------- --------- --------- ---------
Options outstanding at December 31 1,041,125 $ 3.91 1,487,630 $ 4.97
========= ========= ========= =========
Options exercisable at December 31 358,050 $ 3.02 669,686 $ 3.43
========= ========= ========= =========
Options exercise price range at December 31 $3.00 - $6.50 $3.00 - $7.50
Non-Employee Director stock option plan -
Options outstanding at January 1 55,000 $ 4.21 85,000 $ 4.84
Granted 30,000 6.25 30,000 7.44
Canceled - - - -
Exercised - - - -
--------- --------- --------- ---------
Options outstanding at December 31 85,000 $ 4.84 115,000 $ 5.52
========= ========= ========= =========
Options exercisable at December 31 22,336 $ 4.51 50,670 $ 4.70
========= ========= ========= =========
Options exercise price range at December 31 $3.75 - $6.25 $3.75 - $7.44
<CAPTION>
1999
--------------------------
WEIGHTED
AVERAGE
EXERCISE
OPTIONS PRICE
--------- --------
Nonqualified stock option plans-
<S> <C> <C>
Options outstanding at January 1 1,918,315 $ 3.19
Granted 106,845 2.19
Canceled (50,000) 3.00
Exercised - -
--------- --------
Options outstanding at December 31 1,975,160 $ 3.15
========= ========
Options exercisable at December 31 1,809,114 $ 3.07
========= ========
Options exercise price range at December 31 $0.04 - $7.50
Incentive stock option plans-
Options outstanding at January 1 1,487,630 $ 4.97
Granted 610,055 2.19
Canceled (44,525) 4.72
Exercised - -
--------- --------
Options outstanding at December 31 2,053,160 $ 4.15
========= ========
Options exercisable at December 31 935,306 $ 3.81
========= ========
Options exercise price range at December 31 $2.19 - $7.50
Non-Employee Director stock option plan -
Options outstanding at January 1 115,000 $ 5.52
Granted 30,000 3.19
Canceled - -
Exercised - -
--------- --------
Options outstanding at December 31 145,000 $ 5.04
========= ========
Options exercisable at December 31 85,000 $ 5.01
========= ========
Options exercise price range at December 31 $3.19 - $7.44
</TABLE>
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<PAGE>
As allowed by SFAS No. 123 the Company accounts for these plans under Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock options issued with exercise prices greater than or equal
to the fair market value of the Company's common stock at the date of grant. Had
compensation cost for these plans been determined consistent with SFAS No. 123,
the Company's income (loss) from continuing operations and earnings (loss) per
share from continuing operations would have been the following pro forma amounts
(in thousands, except share data):
1997 1998 1999
-------- -------- --------
Income (loss) from
continuing operations
after extraordinary item As reported $1,675 $ (1,654) $(11,385)
Pro forma $ 670 $ (3,303) $(12,976)
Basic earnings (loss) per
share As reported $ .12 $ (.11) $ (.64)
Pro forma $ .01 $ (.21) $ (.73)
Diluted earnings (loss) per
share As reported $ .09 $ (.11) $ (.64)
Pro forma $ .01 $ (.21) $ (.73)
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. The Company did
not recognize any compensation cost in reported income for the years ended
December 31, 1997, 1998 and 1999.
The weighted average fair value of options granted in 1997, 1998 and 1999 was
$4.00, $4.85 and $1.54 per share, respectively. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for options issued in
1997, 1998 and 1999, respectively: risk-free interest rates of 6.61%, 6.01%, and
4.78%; expected lives of five years; expected volatility of 88.49%, 86.15%, and
83.36%; and no expected dividend yield in all years.
As of December 31, 1999, the following stock options were outstanding:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE
AVERAGE NUMBER PRICE OF NUMBER OF PRICE OF
CONTRACTUAL OF OPTIONS OUTSTANDING EXERCISABLE EXERCISABLE
EXERCISE PRICE RANGES LIFE OUTSTANDING OPTIONS OPTIONS OPTIONS
- --------------------------------------------- --------------- ----------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Nonqualified stock option plans-
$.04 1.6 years 7,994 $ 0.04 7,994 $ 0.04
$2.19 9.2 years 106,845 $ 2.19 -- --
$3.00 - $4.50 6.2 years 1,777,518 $ 3.01 1,773,519 $ 3.01
$7.50 8.4 years 82,803 $ 7.50 27,601 $ 7.50
Incentive stock option plans-
$2.19 9.2 years 598,055 $ 2.19 -- --
$3.00 - $4.50 6.2 years 772,208 $ 3.17 728,541 $ 3.12
$4.51 - $6.75 7.2 years 234,000 $ 5.98 169,166 $ 5.97
$7.50 8.3 years 448,897 $ 7.50 37,599 $ 7.50
Non-Employee Director stock option plan-
$3.19 - $4.50 7.6 years 73,000 $ 3.52 43,000 $ 3.75
$4.51 - $6.75 6.8 years 42,000 $ 5.97 32,000 $ 5.96
$7.44 8.4 years 30,000 $ 7.44 10,000 $ 7.44
</TABLE>
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<PAGE>
WARRANTS
The Company has issued warrants under several separate agreements which expire
by 2002. As of December 31, 1999, a total of 260,808 shares of common stock has
been reserved for issuance upon the exercise of common stock warrants. Each
warrant allows the holder to purchase one share of common stock and none are
callable by the Company. The warrants are recorded at their estimated fair
values at the date of issuance. The warrants were issued in connection with
financing transactions. The number of warrants outstanding, warrant holders and
exercise prices are presented below.
NUMBER OF SHARES
ISSUABLE UNDER
WARRANTS
OUTSTANDING AT EXERCISE
DECEMBER 31, PRICE
1999 WARRANT HOLDERS PER SHARE
---------------- --------------------- ---------
10,808 Senior noteholders $ .02
100,000 Financial institution $ 4.50
150,000 Financial institution $ 2.41
----------------
260,808
================
Certain of the warrant agreements contain a provision which allows for an
adjustment to the number of shares of common stock that can be purchased and the
exercise price per share upon the occurrence of certain events, as defined, to
preserve without dilution the rights of the warrant holders.
8. EMPLOYEE BENEFIT PLANS:
401(K) SAVINGS PLAN
The Company has adopted a 401(k) savings plan which covers substantially all
U.S. employees. The Company contributed approximately $236,000, $385,000, and
$410,000 to the plan during the years ended December 31, 1997, 1998 and 1999,
respectively.
PROFIT SHARING PLAN
In 1996, the Company established a profit sharing plan that supplements the
Company's existing 401(k) savings plan and covers all U.S. employees who are
eligible to participate in the 401(k) savings plan. The plan provides for
employer discretionary contributions into the employee's 401(k) account, earned
only if the Company meets specific performance targets. The employer
discretionary contribution may not exceed 50% of consolidated net income, and
may be subject to adjustment by the board of directors. The plan provides for
50% of the value of any contributions to be paid in the form of cash and the
remaining 50% in the form of common stock of the Company. The Company accrues
amounts based on performance reflecting the value of cash and common stock which
is anticipated to be contributed. The Company recorded expense of $113,000, $
- --, and $ -- for the years ended December 31, 1997, 1998 and 1999, respectively,
in connection with the profit sharing plan.
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<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
Effective January 1, 1997, the Company established an employee stock purchase
plan whereby eligible employees of the Company employed in the continental
United States may purchase shares of the Company's common stock at a 15%
discount. As of December 31, 1999, 1,435,421 shares of the Company's common
stock, par value $.001 per share, remain available for purchase under this plan.
During 1999, 42,708 shares were issued under the employee stock purchase plan at
an average price of $2.60 per share.
9. COMMITMENTS AND CONTINGENCIES:
PATENTS
The Company operates in a commercial field in which patents relating to the
products, processes, apparatus and materials are more numerous than in many
other fields. The Company's products include such features as multistrand
elastic leg bands, replaceable frontal landing strips for the tape tabs,
upstanding cuffs, training pants and super absorbent pad construction. In each
case, the design and the technical features of the diapers produced by the
Company were carefully considered by legal counsel before the manufacture and
sale of such products, and steps were taken to avoid the features disclosed in
unexpired patents. Although much of the patent activity relates to the technical
work of Procter & Gamble Company and Kimberly-Clark Corporation, it is not
exclusive to those organizations, and the Company takes careful steps to design,
produce and sell its baby diapers to avoid infringing any valid patents of its
competitors.
There can be no assurance that the Company will not be held to be infringing on
existing patents in the future. Any such holding could result in an injunction,
damages and/or an increase in future operating costs as a result of design
changes or payment of royalties with respect to such patents, which might have a
material adverse effect on the financial condition or results of operations of
the Company.
LITIGATION
The Company is involved in certain lawsuits and claims arising in the normal
course of business. In the opinion of management, uninsured losses, if any,
resulting from the ultimate resolution of these matters will not have a material
adverse effect on the financial position or results of operations of the
Company.
EMPLOYMENT/CONSULTING AGREEMENTS
The Company has entered into employment agreements with two individuals that
extend through March 1, 2002, with one individual that extends through September
1, 2000, and with another individual that extends through December 31, 2000. The
Company also has a consulting agreement with an individual that extends through
November 1, 2002. As of December 31, 1999, the Company's remaining aggregate
commitment under these agreements is approximately $4,000,000.
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<PAGE>
OPERATING LEASES
The Company is obligated under various long-term leases for its
building/production facilities, machinery and equipment, which expire at various
dates through 2007. Rental expense aggregated $3,216,000, $5,153,000, and
$6,778,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
The leases provide for minimum annual rentals plus, in certain instances,
payment for property and use taxes, insurance and maintenance. The Company does
not have material capital leases.
Future minimum rental commitments under noncancelable operating leases, are as
follows (in thousands):
Year ending December 31-
2000 $ 7,708
2001 6,948
2002 5,876
2003 5,571
2004 3,228
Thereafter 5,189
-------
Total minimum lease payments required $34,520
=======
10. SEGMENT INFORMATION:
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", as of December 31, 1998. SFAS No. 131 established
standards for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders. It also established standards for
related disclosures about products and services, and geographic areas. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The Company's chief operating decision
making group is the Chairman and Chief Executive Officer, the Chief Operating
Officer, the Chief Financial Officer and the President of Drypers International.
All of the Company's revenues are derived from sales of disposable baby
products. The Company classifies its business into two reportable segments:
"Domestic" (includes the United States and Puerto Rico) and "International"
(which includes all other foreign operations--Argentina, Mexico, Brazil,
Colombia, Singapore and Malaysia). All international operations have been
aggregated into one reportable segment because they have similar economic
characteristics and their operations are similar in the nature of the product
and production process, type of customer, and distribution method.
The Company evaluates performance based on several factors, of which the primary
financial measure is business segment operating income before management fee
income (expense) and corporate overhead. The accounting policies of the
operating segments are the same as those described in the summary of significant
accounting policies. Intersegment sales are accounted for at fair value as if
the sales were to third parties.
-48-
<PAGE>
Information as to the operations of the Company's reportable segments is as
follows (in thousands):
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL TOTAL
--------- --------- ---------
<S> <C> <C> <C>
1997
Net sales .................................................................... $ 191,329 $ 95,681 $ 287,010
Intersegment sales ........................................................... $ 21,129 $ 1,242 $ 22,371
Operating income before management fees and corporate overhead ............... $ 23,031 $ 7,815 $ 30,846
Corporate overhead ........................................................... (9,354)
Interest expense, net ........................................................ (9,957)
Other income ................................................................. 253
---------
Income from continuing operations
before taxes and extraordinary item ........................................ $ 11,788
=========
1998
Net sales .................................................................... $ 213,785 $ 118,855 $ 332,640
Intersegment sales ........................................................... $ 31,321 $ 13,183 $ 44,504
Operating income before management fees and corporate overhead ............... $ 16,175 $ 4,035 $ 20,210
Corporate overhead ........................................................... (8,289)
Interest expense, net ........................................................ (16,476)
Other income ................................................................. 4,466
---------
Loss from continuing operations before taxes.................................. $ (89)
=========
1999
Net sales .................................................................... $ 226,576 $ 133,784 $ 360,360
Intersegment sales ........................................................... $ 1,432 $ 9,348 $ 10,780
Operating income (loss) before management fees and corporate overhead ........ $ 14,667 $ (3,600) $ 11,067
Corporate overhead ........................................................... (2,087)
Interest expense, net ........................................................ (20,329)
Other expense ................................................................ (2,460)
---------
Loss from continuing operations before taxes ................................. $ (13,809)
=========
<CAPTION>
Information as to the depreciation and amortization expense, capital expenditures and assets of the Company's reportable segments is
as follows (in thousands):
<CAPTION>
DOMESTIC INTERNATIONAL TOTAL
--------- --------- ---------
<S> <C> <C> <C>
1997
Depreciation and amortization expense ........................................ $ 6,338 $ 1,882 $ 8,220
Capital expenditures ......................................................... $ 15,178 $ 6,420 $ 21,598
Total assets ................................................................. $ 133,207 $ 72,025 $ 205,232
1998
Depreciation and amortization expense ........................................ $ 6,446 $ 3,907 $ 10,353
Capital expenditures ......................................................... $ 5,488 $ 20,993 $ 26,481
Total assets ................................................................. $ 156,249 $ 143,923 $ 300,172
1999
Depreciation and amortization expense ........................................ $ 8,396 $ 5,618 $ 14,014
Capital expenditures ......................................................... $ 8,828 $ 14,933 $ 23,761
Total assets ................................................................. $ 169,103 $ 168,577 $ 337,680
</TABLE>
-49-
<PAGE>
Information as to the Company's operations in different geographical areas is as
follows (in thousands):
UNITED ALL OTHER
STATES(1) BRAZIL ARGENTINA INTERNATIONAL TOTAL
-------- -------- -------- -------- --------
1997
Net sales .......... $191,329 $ 44,579 $ 33,370 $ 17,732 $287,010
Long-lived assets .. $ 39,120 $ 2,659 $ 3,961 $ 7,530 $ 53,270
1998
Net sales .......... $213,785 $ 56,106 $ 33,553 $ 29,196 $332,640
Long-lived assets .. $ 40,392 $ 16,475 $ 6,785 $ 18,251 $ 81,903
1999
Net sales .......... $226,576 $ 43,507 $ 26,852 $ 63,425 $360,360
Long-lived assets .. $ 48,426 $ 17,077 $ 10,053 $ 26,396 $101,952
(1)Includes Puerto Rico.
(2)Includes Mexico, Malaysia, Singapore and Colombia.
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
Unaudited summarized data by quarter for 1998 and 1999 is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1998(a)
Net sales ........................................ $ 78,592 $ 80,302 $ 85,841 $ 87,905 $ 332,640
Gross profit ..................................... 31,343 33,003 33,473 37,836 135,655
Income (loss) from continuing operations ......... (5,455) 1,259 1,519 1,023 (1,654)
Net income (loss) ................................ (5,669) 1,099 701 (4,256) (8,125)
Basic earnings (loss) per share:
Continuing operations ...................... $ (.44) $ .08 $ .09 $ .06 $ (.11)
Discontinued operations .................... (.02) (.01) (.05) (.30) (.40)
----------- ----------- ----------- ----------- -----------
Net income (loss) .......................... $ (.46) $ .07 $ .04 $ (.24) $ (.51)
=========== =========== =========== =========== ===========
Diluted earnings (loss) per share:
Continuing operations ...................... $ (.44) $ .07 $ .08 $ .06 $ (.11)
Discontinued operations .................... (.02) (.01) (.04) (.30) (.40)
----------- ----------- ----------- ----------- -----------
Net income (loss) .......................... $ (.46) $ .06 $ .04 $ (.24) $ (.51)
=========== =========== =========== =========== ===========
1999
Net sales ........................................ $ 84,082 $ 91,536 $ 93,946 $ 90,796 $ 360,360
Gross profit ..................................... 30,209 32,341 36,592 38,083 137,225
Income (loss) from continuing operations before
extraordinary item ............................. (1,898) (2,143) (784) (5,993)(b) (10,818)
Net income (loss) ................................ (1,431)(c) (2,143)(c) (1,013) (7,057)(c)(d) (11,644)
Basic earnings (loss) per share:
Continuing operations ...................... $ (.11) $ (.12) $ (.04) $ (.34) $ (.61)
Extraordinary item ......................... -- -- -- (.03) (.03)
Discontinued operations .................... .03 -- (.01) (.03) (.01)
----------- ----------- ----------- ----------- -----------
Net income (loss) .......................... $ (.08) $ (.12) $ (.05) $ (.40) $ (.65)
=========== =========== =========== =========== ===========
Diluted earnings (loss) per share:
Continuing operations ...................... $ (.11) $ (.12) $ (.04) $ (.34) $ (.61)
Extraordinary item ......................... -- -- -- (.03) (.03)
Discontinued operations .................... .03 -- (.01) (.03) (.01)
----------- ----------- ----------- ----------- -----------
Net income (loss) .......................... $ (.08) $ (.12) $ (.05) $ (.40) $ (.65)
=========== =========== =========== =========== ===========
</TABLE>
- -----------------
(a) Net sales, gross profit, income (loss) and earnings (loss) per share from
continuing operations for the first, second and third quarters of 1998 have
been restated to reflect the discontinued operations of the Company's
laundry detergent business. This resulted in a one-time charge of
$6,471,000 in 1998.
(b) Includes a non-cash write-off to Other Expense related to the company's
final settlement of the insurance claim for the August 1998 fire at its
Argentina facility.
(c) Includes a change in estimate of the costs to dispose of the laundry
detergent operations of $467,000 in the first quarter of 1999, ($229,000)
in the third quarter of 1999 and ($497,000) in the fourth quarter of 1999.
(d) Includes a non-cash extraordinary expense of $567,000 for the write-off of
capitalized debt issuance costs in connection with the early extinguishment
of debt.
-50-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Drypers Corporation:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated balance sheets of Drypers Corporation (a
Delaware corporation) and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of earnings, comprehensive income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999, included in this Form 10-K and have issued our report thereon dated
February 23, 2000. Our audits were made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. Financial
statement Schedule II is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
financial statement schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Houston, Texas
February 23, 2000
<PAGE>
SCHEDULE II
DRYPERS CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COST AND AT END OF
CLASSIFICATION OF PERIOD EXPENSE DEDUCTIONS(1) OTHER PERIOD
-------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended December 31, 1997 $ 1,160 $ 1,532 $ (628) $ -- $ 2,064
Year Ended December 31, 1998 $ 2,064 $ 1,395 $ (824) $ -- $ 2,635
Year Ended December 31, 1999 $ 2,635 $ 822 $ (35) $ -- $ 3,422
RESERVE OF DISPOSAL OF
LAUNDRY DETERGENT BUSINESS:
Year Ended December 31, 1997 $ -- $ -- $ -- $ -- $ --
Year Ended December 31, 1998 $ -- $ 2,000(2) $ -- $ -- $ 2,000
Year Ended December 31, 1999 $ 2,000(2) $ 259(2) $ (1,753) $ -- $ 506
</TABLE>
- ----------------------
(1) Write-offs of uncollectible accounts or payments of contractual obligations
related to discontinuing the laundry detergent business.
(2) Accrued for contractual obligations related to discontinuing the laundry
detergent business.
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
In accordance with General Instruction G(3) to Form 10-K, the information
required by Items 10 through 13 will be set forth in our proxy statement
relating to the annual meeting of our stockholders under the captions indicated
below. This information is incorporated in this Form 10-K by reference.
CROSS REFERENCE
<TABLE>
<CAPTION>
FORM 10-K ITEM NUMBER AND CAPTION CAPTION IN DEFINITIVE PROXY STATEMENT
--------------------------------- --------------------------------------------------------
<S> <C>
Item 10. Directors and Executive Proposal One: Election of Directors, Information Regarding
Officers of the Registrant Nominees and Directors, Executive Officers and Compensation
-- Executive Officers, Section 16(a) Beneficial Ownership
Reporting Compliance
Item 11. Executive Compensation Executive Officers and Compensation--
Executive Compensation
Item 12. Security Ownership of Security Ownership of Certain Beneficial
Certain Beneficial Owners Owners and Management
and Management
Item 13. Certain Relationships and Executive Officers and Compensation--
Related Transactions Certain Transactions
</TABLE>
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits, Financial Statements and Financial Statement Schedules.
(1) and (2) Financial Statements and Financial Statement Schedules.
Consolidated Financial Statements and the related Schedule II of the Company are
included in Item 8 (Financial Statements and Supplementary Data). All other
schedules have been omitted since the required information is not present or not
present in an amount sufficient to require submission of the schedule, or
because the information required is included in the Consolidated Financial
Statements and notes thereto.
(3) Exhibits.
Drypers undertakes to furnish any stockholder so requesting a copy of any of the
following exhibits upon payment to the Company of the reasonable costs incurred
by the Company in furnishing such exhibit.
Exhibit
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
**3.1 - Restated Certificate of Incorporation of Drypers Corporation, as
amended (Filed as Exhibit 3.1 to Form S-4/A filed June 8, 1998,
Registration Statement No. 333-52597).
**3.2 - Bylaws of Drypers Corporation, as amended, dated January 21, 1994
(Filed as Exhibit 3.2 to Form S-1 filed January 26, 1994,
Registration Statement No. 33-74436).
**4.1 - Form of Common Stock Certificate (Filed as Exhibit 4.2 to Form S-1
filed January 26, 1994, Registration Statement No. 33-74436).
**4.2 - Forms of Warrants (Filed as Exhibit 4.37 to Form S-1 Filed October
8, 1993, Registration Statement No. 33-70098).
**+4.3 - Form of Nonqualified Stock Option Agreement, as amended, entitling
the persons listed on Schedule 4.9 to purchase an aggregate of
125,000 shares of Common Stock (Filed as Exhibit 4.9 to Amendment No.
1 to Form S-1 filed February 17, 1994, Registration Statement No.
33-74436).
**+4.4 - Form of Nonqualified Stock Option Agreement, as amended, entitling
the persons listed on Schedule 4.10 to purchase an aggregate of
93,750 shares of Common Stock (Filed as Exhibit 4.10 to Amendment No.
1 to Form S-1 filed February 17, 1994, Registration Statement No.
33-74436).
**+4.5 - Form of Nonqualified Stock Option Agreement dated April 9, 1993,
entitling the persons listed on Schedule 4.11 to purchase an
aggregate of 71,875 shares of Common Stock (Filed as Exhibit 4.11 to
Form S-1 filed January 26, 1994, Registration Statement No.
33-74436).
**+4.6 - Form of Nonqualified Stock Option Agreement dated October 1, 1992,
entitling the persons listed on Schedule 4.13 to purchase an
aggregate of 45,000 shares of Common Stock (Filed as Exhibit 4.13 to
Form S-1 filed January 26, 1994, Registration Statement No.
33-74436).
**+4.7 - Form of Nonqualified Stock Option Agreement dated December 31,
1993, entitling the persons listed on Schedule 4.16 to purchase an
aggregate of 31,250 shares of Common Stock (Filed as Exhibit 4.16 to
Form S-1 filed January 26, 1994, Registration Statement No.
33-74436).
**4.8 - Form of Investment and Stock Registration Agreement dated November
10, 1992, by and among the Company and the persons listed on Schedule
4.34 attached thereto (Filed as Exhibit 4.34 to Form S-4 filed
November 20, 1992, Registration Statement No. 33-54810).
**4.9 - Rights Agreement dated January 20, 1995 by and between Drypers
Corporation and ChaseMellon Shareholder Services, L.L.C. (Filed as
Exhibit 4.20 to Form 10-K filed March 31, 1997, Commission File No.
0-23422).
**4.10 - Rights Agreement Amendment dated as of February 26, 1996, by and
between Drypers Corporation and ChaseMellon Shareholder Services,
L.L.C. (Filed as Exhibit 4.20 to Form 10-K filed March 31, 1997,
Commission File No. 0-23422).
**4.11 - Indenture dated as of June 15, 1997, between Drypers Corporation
and Bankers Trust Company, as Trustee (Filed as Exhibit 4.1 to Form
10-Q filed August 12, 1997, Commission File No. 0-23422).
**4.12 - First Supplemental Indenture dated as of March 6, 1998, between
Drypers Corporation and Bankers Trust Company, as Trustee. (Filed as
Exhibit 4.16 to Form 10-K filed March 20, 1998, Commission File No.
0-23422)
<PAGE>
**+10.1 - Form of Indemnity Agreement dated August 2, 1991, by and between
the Company and the persons listed on Schedule 10.1 (Filed as Exhibit
10.1 to Form S-1 filed January 26, 1994, Registration Statement No.
33-74436).
**10.2 - Warehouse Lease dated September 25, 1985, as amended by Addendum
No. 1 dated September 25, 1985, as amended by Addendum No. 2 dated
April 3, 1986, as amended by Addendum No. 3 dated October 14, 1988,
as amended by Addendum No. 4 dated September 30, 1991, by and between
Hillman Properties Northwest and VMG Enterprises, Inc. (Filed as
Exhibit 10.13 to Form S-4 filed November 20, 1992, Registration
Statement No. 33-54810).
**10.3 - Lease Agreement dated October 24, 1988, as amended by the First
Lease Amendment dated November 13, 1989, as amended by the Second
Lease Amendment dated August 2, 1990, as amended by the Third Lease
Amendment dated February 4, 1991, as amended by the Fourth Lease
Amendment dated November 18, 1991, as amended by the Fifth Lease
Amendment dated September 1, 1992, as amended by the Sixth Lease
Amendment dated November 1, 1997 by and between Willis Day
Properties, Inc. and UltraCare Products, Inc. (Filed as Exhibit 10.24
to Form S-4 filed November 20, 1992, Registration Statement No.
33-54810).
**10.4 - Lease Agreement dated September 1, 1992, by and between Willis Day
Properties, Inc. and UltraCare Products, Inc. (Filed as Exhibit 10.25
to Form S-4 filed November 20, 1992, Registration Statement No.
33-54810).
**10.5 - Lease Contract dated July 6, 1992, between Puerto Rico Industrial
Development Company and Hygienic Products International, Inc. (Filed
as Exhibit 10.26 to Form S-4 filed November 20, 1992, Registration
Statement No. 33-54810).
** 10.6 - VRG Holding Corporation 1992 Incentive Stock Option Plan, as amended
(Filed as Exhibit 10.14 to Amendment No. 1 to Form S-1 filed February
17, 1994, Registration Statement No. 33-74436).
**+10.7 - VRG Holding Corporation 1991 Nonqualified Stock Option Plan (Filed as
Exhibit 10.15 to Form S-4 filed November 20, 1992, Registration
Statement No. 33-54810).
**10.8 - Drypers 401(k) Plan (Filed as Exhibit 10.25 to Amendment No. 1 to
Form S-1 filed February 17, 1994, Registration Statement No.
33-74436).
**10.9 - Drypers Corporation 1994 Non-Employee Director Option Plan (Filed
as Exhibit 10.2 to Form 10-Q filed August 4, 1995, Commission File
No. 0-23422).
**10.10 - Form of Drypers Corporation 1995 Key Employee Stock Option Plan
Nonqualified Stock Option Agreement (Filed as Exhibit 10.3 to Form
10-Q filed August 4, 1995, Commission File No. 0-23422).
**10.11 - Form of Drypers Corporation 1995 Key Employee Stock Option Plan
Incentive Stock Option Agreement (Filed as Exhibit 10.4 to Form 10-Q
filed August 4, 1995, Commission File No. 0-23422).
*+10.12 - Employment Agreement dated March 1, 1999, by and between Drypers
Corporation and Walter V. Klemp.
*+10.13 - Employment Agreement dated March 1, 1999, by and between Drypers
Corporation and Raymond M. Chambers.
*+10.14 - Consulting Agreement dated February 25, 1999, by and between Drypers
Corporation and Terry A. Tognietti.
**+10.15 - Drypers Corporation Amended and Restated 1995 Key Employee Stock
Option Plan. (Filed as Exhibit 10.28 to Amendment No. 1 to Form S-4
filed September 15, 1997, Registration Statement No. 333-34071).
**+10.16 - Drypers Corporation 1996 Non-Employee Director Stock Option Plan.
(Filed as Exhibit 10.29 to Amendment No. 1 to Form S-4 filed
September 15, 1997, Registration Statement No. 333-34071).
**+10.17 - First Amendment to Drypers Corporation Amended and Restated 1995 Key
Employee Stock Option Plan. (Filed as Exhibit 10.30 to Amendment No.
1 to Form S-4 filed September 15, 1997, Registration Statement No.
333-34071).
**10.18 - First Amendment to Drypers Corporation 401(k) Plan (Filed as
Exhibit 4.24 to Form S-8, filed July 6, 1998, Registration No.
333-58553.)
**10.19 - Second Amendment to Drypers Corporation 401(k) Plan (Filed as
Exhibit 4.25 to Form S-8, filed July 6, 1998, Registration No.
333-58553.)
**10.20 - Amended and Restated Credit Agreement dated December 13, 1999, by
and among Drypers Corporation, Fleet Capital Corporation, as Agent,
and the lenders party thereto (Filed as Exhibit 10.1 to Form 8-K,
filed January 13, 2000, Commission File No. 0-23422).
**10.21 - Term Loan Agreement dated December 13, 1999, by and among Drypers
Corporation, Davidson Kempner Service Company, LLC, as Agent, and the
lenders party thereto (Filed as Exhibit 10.2 to Form 8-K, filed
January 13, 2000, Commission File No. 0-23422).
*21.1 - Subsidiaries of Drypers Corporation.
*23.1 - Consent of Independent Public Accountants.
<PAGE>
*27.1 - Financial Data Schedule.
- ---------------
* Filed herewith.
** Incorporated by reference to the filing indicated.
+ Managementcontract or compensatory plan or arrangement filed pursuant to
Item 14 of Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended December
31, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 28th day of March,
2000.
DRYPERS CORPORATION
By /S/ WALTER V. KLEMP
--------------------------
Walter V. Klemp
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons in the capacities indicated on
the 28th day of March, 2000.
SIGNATURE TITLE
--------- -----
/S/WALTER V. KLEMP Chief Executive Officer, Chairman of
----------------------------- the Board and Director
Walter V. Klemp (Principal Executive Officer)
/S/JONATHAN P. FOSTER Chief Financial Officer and Executive
----------------------------- Vice President
Jonathan P. Foster (Principal Financial and Accounting
Officer)
/S/RAYMOND M. CHAMBERS Chief Operating Officer and Director
-----------------------------
Raymond M. Chambers
/S/ NOLAN LEHMANN Director
-----------------------------
Nolan Lehmann
/S/GARY L. FORBES Director
-----------------------------
Gary L. Forbes
EXHIBIT 21.1
SUBSIDIARIES OF DRYPERS CORPORATION
Ultracare Products International, Inc.
Drypers Limited
Seler S.A.
New Dry S.A.
Drypers Mexico S.A. de C.V.
Drypers Holding de Mexico SRL de CV
Drypers Servicios de Mexico SRL de CV
Hygienic Products International Limited
Drypers do Brasil Ind. e. Com. Ltda.
Igienica Difusion Inc. Ltd.
Drypers Caribbean Holdings Limited
Drypers Asia Pte. Ltd. (Singapore)
Drypers Asia (M) SDN BHD (Malaysia)
Drypers Malaysia SDN BHD (formerly PrimoSoft)
Drypers Marketing SDN BHD
Drypers (Germany) GmbH
Drypers Andina & Cia. S.C.A.
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports included in this Form 10-K, into the Company's previously filed
Registration Statements, File Nos. 333-16085 and 333-58553.
ARTHUR ANDERSEN LLP
Houston, Texas
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10K FOR YEAR ENDED 12/31/99 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,048,000
<SECURITIES> 0
<RECEIVABLES> 69,193,000
<ALLOWANCES> (3,422,000)
<INVENTORY> 39,728,000
<CURRENT-ASSETS> 25,690,000
<PP&E> 130,632,000
<DEPRECIATION> (28,680,000)
<TOTAL-ASSETS> 337,680,000
<CURRENT-LIABILITIES> 106,542,000
<BONDS> 145,888,000
0
0
<COMMON> 18,000
<OTHER-SE> 39,898,000
<TOTAL-LIABILITY-AND-EQUITY> 337,680,000
<SALES> 360,360,000
<TOTAL-REVENUES> 360,360,000
<CGS> 223,135,000
<TOTAL-COSTS> 35,380,000
<OTHER-EXPENSES> 2,428,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,329,000
<INCOME-PRETAX> (13,809,000)
<INCOME-TAX> (2,991,000)
<INCOME-CONTINUING> (10,818,000)
<DISCONTINUED> (259,000)
<EXTRAORDINARY> (567,000)
<CHANGES> 0
<NET-INCOME> (11,644,000)
<EPS-BASIC> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>