-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UrWSND9tvtqaSigCFaAE4hFVMoaljYeTU/ROeIdedL9vS4ZVSrwWHwy1uppEYYZ8 4Fw3B6U9+g1D8cWZ1oYoaw== 0000890566-99-000519.txt : 19990419 0000890566-99-000519.hdr.sgml : 19990419 ACCESSION NUMBER: 0000890566-99-000519 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRYPERS CORP CENTRAL INDEX KEY: 0000894232 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 760344044 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-23422 FILM NUMBER: 99596002 BUSINESS ADDRESS: STREET 1: 5300 MEMORIAL STE 900 CITY: HOUSTON STATE: TX ZIP: 77007 BUSINESS PHONE: 7138698693 MAIL ADDRESS: STREET 1: 1415 WEST LOOP NORTH STREET 2: 1415 WEST LOOP NORTH CITY: HOUSTON STATE: TX ZIP: 77055 10-K405/A 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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 28, 1999: $21,101,666 Number of shares of common stock outstanding as of February 28, 1999: 17,713,958 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. 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, 1997 and 1998, 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, 1998. 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 generally accepted auditing standards. 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, 1997 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas February 18, 1999 -27- DRYPERS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Data)
DECEMBER 31 ---------------------- 1997 1998 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents ............................ $ 9,269 $ 12,309 Accounts receivable, net of allowance for doubtful accounts of $2,064 and $2,635, respectively 33,941 49,253 Inventories .......................................... 21,090 29,822 Prepaid expenses and other ........................... 12,730 28,164 --------- --------- Total current assets ....................... 77,030 119,548 PROPERTY, PLANT AND EQUIPMENT, net of depreciation and amortization of $17,769 and $24,594, respectively...... 53,270 81,903 INTANGIBLE AND OTHER ASSETS, net of amortization of $13,438 and $17,373, respectively................... 74,932 98,721 --------- --------- $ 205,232 $ 300,172 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Short-term borrowings ................................ $ -- $ 38,385 Current portion of long-term debt .................... 1,593 322 Accounts payable ..................................... 16,558 33,407 Accrued liabilities .................................. 10,151 21,202 --------- --------- Total current liabilities .................. 28,302 93,316 LONG-TERM DEBT .......................................... 1,755 2,967 SENIOR TERM NOTES ....................................... 115,000 145,997 OTHER LONG-TERM LIABILITIES ............................. 4,595 7,364 --------- --------- 149,652 249,644 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 5,000,000 shares authorized, 61,110 and -0- shares issued and outstanding, respectively ......................... 1 -- Common stock, $.001 par value, 30,000,000 shares authorized, 10,513,223 and 17,706,660 shares issued and outstanding, respectively .............. 10 18 Additional paid-in capital ........................... 69,998 75,244 Warrants ............................................. 1,097 180 Retained deficit ..................................... (15,526) (23,731) Foreign currency translation adjustments ............. -- (1,183) --------- --------- Total stockholders' equity ................. 55,580 50,528 --------- --------- $ 205,232 $ 300,172 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. -28- DRYPERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except Share Data)
YEAR ENDED DECEMBER 31 ------------------------------------------- 1996 1997 1998 ------------ ------------ ------------ NET SALES ................................................... $ 207,014 $ 287,010 $ 332,640 COST OF GOODS SOLD .......................................... 126,128 175,545 196,985 ------------ ------------ ------------ Gross profit ........................................... 80,886 111,465 135,655 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ................ 70,333 89,973 123,734 ------------ ------------ ------------ Operating income ....................................... 10,553 21,492 11,921 RELATED-PARTY INTEREST EXPENSE .............................. 354 199 -- OTHER INTEREST EXPENSE, net ................................. 8,577 9,758 16,476 OTHER INCOME ................................................ -- 253 4,466 ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAX PROVISION AND EXTRAORDINARY ITEM 1,622 11,788 (89) INCOME TAX PROVISION ........................................ 309 2,344 1,565 ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE EXTRAORDINARY ITEM........................................ 1,313 9,444 (1,654) EXTRAORDINARY ITEM: Costs of early extinguishment of debt .................... -- (7,769) -- ------------ ------------ ------------ INCOME (LOSS) FROM CONTINUING OPERATIONS .................... 1,313 1,675 (1,654) DISCONTINUED OPERATIONS: Loss from operations of discontinued laundry detergent business .............................................. -- -- (1,193) Loss on disposal of detergent business ................... -- -- (5,278) ------------ ------------ ------------ NET INCOME (LOSS) ........................................... 1,313 1,675 (8,125) PREFERRED STOCK DIVIDEND .................................... 561 583 80 ------------ ------------ ------------ NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS........ $ 752 $ 1,092 $ (8,205) ============ ============ ============ INCOME (LOSS) PER COMMON SHARE: Basic earnings (loss) per share: Continuing operations .............................. $ .11 $ 1.00 $ (.11) Extraordinary loss from early extinguishment of debt -- (.88) -- Discontinued operations ............................ -- -- (.40) ------------ ------------ ------------ Net income (loss) .................................. $ .11 $ .12 $ (.51) ============ ============ ============ Diluted earnings (loss) per share: Continuing operations .............................. $ .09 $ .51 $ (.11) Extraordinary loss from early extinguishment of debt -- (.42) -- Discontinued operations ............................ -- -- (.40) ------------ ------------ ------------ Net income (loss) .................................. $ .09 $ .09 $ (.51) ============ ============ ============ COMMON SHARES OUTSTANDING ................................... 6,694,298 8,878,638 16,110,429 ============ ============ ============ COMMON AND POTENTIAL COMMON SHARES OUTSTANDING .............. 15,064,913 18,469,676 16,110,429 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. -29- DRYPERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands)
YEAR ENDED DECEMBER 31 ----------------------------- 1996 1997 1998 ------- ------- -------- NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 752 $ 1,092 $(8,205) FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ............ -- -- (1,183) ------- ------- ------- COMPREHENSIVE INCOME (LOSS) ......................... $ 752 $ 1,092 $(9,388) ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. -30- DRYPERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In Thousands, Except Share Data)
PREFERRED COMMON SHARES SHARES ADDITIONAL ISSUED AND ISSUED AND PREFERRED COMMON PAID-IN OUTSTANDING OUTSTANDING STOCK STOCK CAPITAL WARRANTS ------------ ------------ ---------- ---------- ----------- ---------- BALANCE, December 31, 1995 .............. -- 6,619,804 $ -- $ 7 $ 58,482 $ 703 Issuance of preferred stock, net of $178 in offering costs ............ 90,000 -- 1 -- 8,157 692 Issuance of common stock in connection with refinancing .................. -- 194,780 -- -- 609 -- Issuance of common stock in connection with an acquisition ............... -- 360,000 -- -- 1,575 -- Preferred stock dividends ($6.23 per share) ............................ -- -- -- -- -- -- Exercise of stock options ............ -- 4,646 -- -- -- -- Net income ........................... -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, December 31, 1996 .............. 90,000 7,179,230 1 7 68,823 1,395 Issuance of common stock in connection with acquisitions ................. -- 71,657 -- -- 200 -- Conversion of preferred stock and dividends into common stock ....... (28,890) 2,937,417 -- 3 312 -- Preferred stock dividends ($7.50 per share) ............................ -- -- -- -- -- -- Effect of stock option and stock purchase plans .................... -- 111,348 -- -- 283 -- Issuance of warrants ................. -- -- -- -- -- 50 Exercise of warrants ................. -- 213,571 -- -- 380 (348) Net income ........................... -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, December 31, 1997 .............. 61,110 10,513,223 1 10 69,998 1,097 Issuance of common stock in connection with an acquisition ............... -- 403,571 -- -- 2,825 -- Conversion of preferred stock and dividends into common stock ....... (61,110) 6,292,364 (1) 7 1,058 -- Preferred stock dividends ($1.25 per share) ............................ -- -- -- -- -- -- Effect of stock option and stock purchase plans .................... -- 79,080 -- -- 381 -- Forfeiture of expired warrants ....... -- -- -- -- 254 (254) Exercise of warrants ................. -- 418,422 -- 1 728 (663) Net loss ............................. -- -- -- -- -- -- Translation adjustments .............. -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- BALANCE, December 31, 1998 .............. -- 17,706,660 $ -- $ 18 $ 75,244 $ 180 ========== ========== ========== ========== ========== ==========
FOREIGN CURRENCY RETAINED TRANSLATION DEFICIT ADJUSTMENTS ----------- ------------ BALANCE, December 31, 1995 .............. $ (17,370) $ -- Issuance of preferred stock, net of $178 in offering costs ............ -- -- Issuance of common stock in connection with refinancing .................. -- -- Issuance of common stock in connection with an acquisition ............... -- -- Preferred stock dividends ($6.23 per share) ............................ (561) -- Exercise of stock options ............ -- -- Net income ........................... 1,313 -- ---------- ---------- BALANCE, December 31, 1996 .............. (16,618) -- Issuance of common stock in connection with acquisitions ................. -- -- Conversion of preferred stock and dividends into common stock ....... -- -- Preferred stock dividends ($7.50 per share) ............................ (583) -- Effect of stock option and stock purchase plans .................... -- -- Issuance of warrants ................. -- -- Exercise of warrants ................. -- -- Net income ........................... 1,675 -- ---------- ---------- BALANCE, December 31, 1997 .............. (15,526) -- Issuance of common stock in connection with an acquisition ............... -- -- Conversion of preferred stock and dividends into common stock ....... -- -- Preferred stock dividends ($1.25 per share) ............................ (80) -- Effect of stock option and stock purchase plans .................... -- -- Forfeiture of expired warrants ....... Exercise of warrants ................. -- -- Net loss ............................. (8,125) -- Translation adjustments .............. -- (1,183) ---------- ---------- BALANCE, December 31, 1998 .............. $ (23,731) $ (1,183) ========== ========== The accompanying notes are an integral part of these consolidated financial statements. -31- DRYPERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
YEAR ENDED DECEMBER 31 ------------------------------------ 1996 1997 1998 --------- --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ............................................ $ 1,313 $ 1,675 $ (8,125) Adjustments to reconcile net income (loss) to net cash used in operating activities from continuing operations: Discontinued operations ................................ -- -- 6,471 Depreciation and amortization .......................... 7,624 8,220 10,353 Non-cash portion of extraordinary item ................. -- 3,745 -- Write-off of machinery and equipment resulting from Argentina fire ....................... -- -- 2,894 Other .................................................. 401 63 (181) Changes in operating assets and liabilities, net of acquisitions- Increase in- Accounts receivable .............................. (5,724) (3,310) (14,586) Inventories ...................................... (67) (9,474) (6,616) Prepaid expenses and other ....................... (973) (8,320) (6,466) Effect of insurance receivable related to Argentina fire ................................... -- -- (11,961) Increase (decrease) in- Accounts payable ................................. (2,974) (400) 9,633 Accrued liabilities .............................. (3,891) 853 3,226 Change in other long-term liabilities ............... -- -- (2,162) --------- --------- --------- Net cash used in operating activities of continuing operations ................... (4,291) (6,948) (17,520) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ........................... (5,931) (21,598) (26,481) Proceeds from sale of equipment ............................. 800 -- -- Investment in other noncurrent assets ........................ (1,197) (2,754) (3,409) Payments under noncompete agreements ......................... (400) (231) -- Refund of deposits ........................................... 2,573 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 ................... (4,155) (33,869) (45,215) --------- --------- --------- 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 ................................... 157,677 79,296 71,417 Payments on revolvers ........................................ (153,968) (94,918) (35,100) Borrowings under (payments on) other debt .................... (625) (5,022) 2,242 Financing related costs ...................................... (773) (4,708) (2,891) Proceeds from issuance of common stock ....................... -- 200 -- Proceeds from issuance of preferred stock .................... 8,822 -- -- Proceeds from stock options, warrants, and stock purchase plan -- 315 213 --------- --------- --------- Net cash provided by financing activities of continuing operations ................... 11,133 45,163 66,968 CASH USED IN DISCONTINUED OPERATIONS ............................ -- -- (1,193) --------- --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS ....................... 2,687 4,346 3,040 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................. 2,236 4,923 9,269 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR ........................ $ 4,923 $ 9,269 $ 12,309 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. -32- DRYPERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: BUSINESS Drypers Corporation and its subsidiaries (the "Company") is a leading manufacturer and marketer of premium quality, value-priced disposable baby diapers and training pants sold under the DRYPERS brand name in the United States and under the DRYPERS and other brand names internationally. Currently, the Company is the third largest producer of branded disposable baby diapers in the United States. The Company also manufactures and sells lower-priced diapers under other brand names in the United States and internationally, as well as private label diapers and training pants and pre-moistened baby wipes. The Company's DRYPERS brand is the fourth largest selling diaper brand in the United States and the second largest selling training pant brand in U.S. grocery stores. Drypers targets the value segment of the U.S. diaper market by offering products with features and quality comparable to the premium-priced national brands at generally lower prices. The Company positions its products to provide enhanced profitability for retailers and better value to consumers. The Company continually seeks to expand its extensive grocery store sales and distribution network, while increasing its limited penetration of the mass merchant and drugstore chain markets, in order to capture a greater share of the U.S. diaper market. In 1998, Drypers began its first-ever national television campaign. As a result of this campaign, in 1998, Drypers began with test distribution in two national mass merchants (Wal-Mart and Kmart). Drypers is the sixth largest diaper producer in the world. Since 1993, Drypers has significantly expanded its international presence, competing in the lower-priced branded and private label categories. The Company, through a series of start-ups and acquisitions, currently produces diapers in Puerto Rico, Argentina, Mexico, Brazil and Malaysia. Wal-Mart International has selected the Company to be its appointed private label supplier of disposable diapers to Wal-Mart stores throughout Latin America (which are currently located in Argentina, Brazil and Mexico) and in Puerto Rico, and also supplies Drypers branded products to Wal-Mart stores in these markets. Recently, the Company gained distribution in the Wal-Mart stores in China, Canada and Germany. The Company intends to continue to expand its operations in Argentina, Brazil, Mexico, Malaysia and Colombia and is actively seeking further expansion opportunities through acquisition, joint venture or other arrangements in Latin America and the Pacific Rim. 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 than the Company and have greater financial resources and offer broader product lines. 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 able to pass those increases to its customers or redesign its products to reduce usage; therefore, operating margins could be adversely affected. -33- 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 United States 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. -34- 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, when realized, have been within the range of management's expectations. INVENTORIES Inventories at December 31, 1997 and 1998, consisted of the following (in thousands): 1997 1998 ------- ------- Raw materials ..................... $ 6,948 $12,702 Finished goods .................... 14,142 17,120 ------- ------- $21,090 $29,822 ======= ======= 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 Property, plant and equipment at December 31, 1997 and 1998, consisted of the following (in thousands): 1997 1998 ---------- --------- Machinery and equipment .......................... $ 57,159 $ 85,934 Land and buildings ............................... 7,181 10,944 Office equipment and furniture ................... 3,638 5,542 Automobiles ...................................... 189 659 Leasehold improvements ........................... 2,872 3,418 --------- --------- 71,039 106,497 Accumulated depreciation and amortization ........ (17,769) (24,594) --------- --------- $ 53,270 $ 81,903 ========= ========= -35- INTANGIBLE AND OTHER ASSETS As of December 31, 1997 and 1998, intangible and other assets, net of accumulated amortization, consisted of the following (in thousands): 1997 1998 ------- ------- Goodwill-- 20 year amortization ................ $10,409 $ 9,857 30 year amortization ................ 11,668 25,749 40 year amortization ................ 44,830 41,595 Deferred financing costs .............. 4,502 6,579 License agreements .................... 1,002 8,582 Software costs ........................ -- 2,816 Other ................................. 2,521 3,543 ------- ------- $74,932 $98,721 ======= ======= 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. Deffered software costs are amortized over three years, using the straight-line method. ACCRUED LIABILITIES Accrued liabilities at December 31, 1997 and 1998, consisted of the following (in thousands): 1997 1998 ------- ------- Selling and promotional ................................ $ 3,546 $ 4,004 Interest payable ....................................... 681 704 License agreement payable .............................. 400 2,000 Property and sales tax payable ......................... 1,958 2,388 Contractual obligations - discontinued operations ...... -- 2,000 Employee-related liabilities ........................... 3,140 3,087 Other .................................................. 426 7,019 ------- ------- $10,151 $21,202 ======= ======= FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash, trade receivables, trade payables and debt instruments. 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. -36- 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, 1996, 1997 and 1998, was $1,854,000, $3,219,000 and $10,383,000, respectively. Advertising expense for the year ended December 31, 1998 reflects the Company's national television campaign in the United States. -37- EARNINGS PER SHARE As of December 31, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". SFAS 128 requires dual presentation of basic and diluted EPS data and restatement of all prior periods presented. Basic earnings per share ("EPS") is computed using the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to the potential dilution of earnings which may have occurred if dilutive potential common shares had been issued. The following reconciles the income and shares used in the basic and diluted EPS computations (in thousands, except share data):
1996 1997 1998 ------------ ------------ ------------ BASIC EARNINGS PER SHARE: Income (loss) from continuing operations before extraordinary item, less preferred stock dividend ......................... $ 752 $ 8,861 $ (1,734) Extraordinary item .................................. -- (7,769) -- ------------ ------------ ------------ Income (loss) from continuing operations ............ 752 1,092 (1,734) Discontinued operations ............................. -- -- (6,471) ------------ ------------ ------------ Net income (loss) attributable to common stockholders $ 752 $ 1,092 $ (8,205) ============ ============ ============ Weighted average number common shares outstanding ... 6,694,298 8,878,638 16,110,429 ============ ============ ============ Income (loss) from continuing operations............. $ .11 $ 1.00 $ (.11) Extraordinary item .................................. -- (.88) -- Discontinued operations ............................. -- -- (.40) ------------ ------------ ------------ Net income (loss) ................................... $ .11 $ .12 $ (.51) ============ ============ ============ DILUTED EARNINGS PER SHARE: Income (loss) from continuing operations before extraordinary item, less preferred stock dividend in 1998 ................. $ 1,313 $ 9,444 $ (1,734) Extraordinary item .................................. -- (7,769) -- ------------ ------------ ------------ Income (loss) from continuing operations ............ 1,313 1,675 (1,734) Discontinued operations ............................. -- -- (6,471) ------------ ------------ ------------ Net income (loss) ................................... $ 1,313 $ 1,675 $ (8,205) ============ ============ ============ Weighted average number common shares outstanding ... 6,694,298 8,878,638 16,110,429 Dilutive effect - options and warrants .............. 870,615 1,839,648 -- Dilutive effect - preferred stock ................... 7,500,000 7,751,390 -- ------------ ------------ ------------ 15,064,913 18,469,676 16,110,429 ============ ============ ============ Income (loss) from continuing operations ............ $ .09 $ .51 $ (.11) Extraordinary item .................................. -- (.42) -- Discontinued operations ............................. -- -- (.40) ------------ ------------ ------------ Net income (loss) ................................... $ .09 $ .09 $ (.51) ============ ============ ============
For the years ended December 31, 1996, 1997 and 1998, options and warrants excluded from the diluted earnings per share calculation because their effect was antidilutive to the calculation totaled 85,978, 168,185, and 844,100, 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. INCOME TAXES The Company accounts for income taxes in accordance with 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, 1996, 1997 and 1998 are as follows (in thousands): -38-
1996 1997 1998 -------- ------- -------- Income taxes paid .............................................. $ -- $ 2,022 $ 2,165 Interest paid .................................................. $10,646 $11,221 $14,861 Non cash transactions: Common stock issued for Mexico acquisition ................... $ 1,575 $ -- $ -- Warrants issued in connection with refinancing ............... $ 609 $ -- $ -- 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
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 will no longer be highly inflationary. RECLASSIFICATIONS Certain reclassifications have been made in the accompanying consolidated financial statements for the years ended December 31, 1996 and 1997, to conform with the presentation used in the December 31, 1998, 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. SOP 98-1 requires that certain costs related to computer software developed or obtained for internal use be expensed as incurred. The Company is required to adopt SOP 98-1 as of January 1, 1999. The Company does not expect the adoption of SOP 98-1 to 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 American Institute of Certified Public Accountants. SOP 98-5 requires that all nongovernmental entities expense costs of start-up activities as those costs are incurred. The Company is required to adopt SOP 98-5 as of January 1, 1999. The Company does not expect the adoption of SOP 98-5 to 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 of January 1, 2000 and does not expect the adoption of this statement to have a material effect on its financial position or results of operations as it does not currently hold derivatives. -39- 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 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 detergent operation and $2,000,000 related to existing contractual obligations required to be satisfied in disposing of the business. 3. FIRE AT ARGENTINA FACILITY: On August 8, 1998, the Company's manufacturing facility in Argentina was extensively damaged as a result of a fire. There were no employee injuries resulting from the fire. In addition to physical damage to the facility, the fire resulted in the loss of a portion of the finished goods and raw material inventory. Two of the four diaper manufacturing lines were completely destroyed and the remaining two lines were partially damaged. The Company maintained insurance to cover damage to the Company's property, business interruption and extra expense claims. The Company has invested additional funds for relocation to a new leased facility in Argentina and anticipates that these costs will be covered by insurance. As of December 31, 1998, the Company had received interim payments of $8,700,000 on its claim and to date has received approximately $11,000,000 in interim payments. As of December 31, 1998, the Company has 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. The Company is engaging in the claim process and settlement discussions with its insurers regarding additional insurance proceeds to which the Company believes it is entitled. The Company has recorded a substantial nonrecurring gain as other income, representing the difference between the estimated property insurance proceeds on the machinery and equipment and the carrying value of the machinery and equipment at the time of the fire. The ultimate amount of the gain to be recorded depends on final diaper line manufacturer quotes, installation costs, start-up costs, and other cost estimates and the final settlement reached with the Company's insurance carriers. As of December 31, 1998, the Company has recorded in prepaid expenses and other assets a receivable due from the insurance carriers of approximately $12,000,000 related to the Argentina fire. This receivable is comprised of the estimated remaining replacement cost of the Company's diaper manufacturing lines to be recovered under the property portion of the insurance claim as well as estimated lost profit and fixed expenses for the months of August through December 1998 to be recovered under the business interruption portion of the insurance claim. Management believes this is a reasonable estimate of insurance proceeds to be received, and will periodically review such amount for possible adjustment, if necessary, in the future. Of the total receivable amount, $2,300,000 has been received in 1999. 4. AQUISITIONS: MEXICO Effective December 17, 1996, the Company acquired certain assets and assumed certain liabilities of Pannolini de Mexico, S.A. de C.V ("Pannolini") for $1,575,000 of the Company's common stock (360,000 shares issued on December 17, 1996 and 46,782 shares issued on February 3, 1997), $595,000 in cash and $1,175,000 in the form of a note payable due in 1998. 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 $1,504,000, property and equipment of $2,679,000 and liabilities of $2,563,000). The consideration paid for Pannolini exceeded the estimated fair market value of the net tangible assets acquired by $1,725,000 and this excess was recorded as goodwill. -40- 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 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. 5. DEBT: SHORT-TERM BORROWINGS As of December 31, 1997, there were no borrowings outstanding under revolving credit facilities. As of December 31, 1998, the Company had borrowings outstanding of $36,317,000 under revolving credit facilities, at a weighted average interest rate of 8.2%. On April 1, 1998, the Company entered into a new three-year $50.0 million credit facility to replace the former revolving credit facility. The new credit facility permits the Company to borrow under a borrowing base formula equal to the sum of 75% of the aggregate net book value of its accounts receivable and 50% of the aggregate net book value of its inventory on a consolidated basis, subject to additional limitations on incurring debt. The new credit facility is secured by substantially all of the Company's assets. 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 raises the effective cost of bank borrowings under the Company's revolving credit facility. The new credit facility, as amended, bears interest in the range of prime to prime plus 1 1/2%, or LIBOR plus 1 1/2% to LIBOR PLUS 3 1/4%, in each case based on the Company's debt to EBITDA ratio determined on a quarterly basis. The Company plans to enter into discussions with the lender to restructure its facility into a combination of a revolver, term loan, and an over-advance facility. -41- The Company has issued a letter of credit for approximately $1,250,000 in connection with an operating lease for a diaper production line. This amount reduces the borrowing availability under the Company's revolving credit facility. Short-term borrowings for the international operations were not material as of December 31, 1997 and 1998. LONG-TERM DEBT Long-term debt as of December 31, 1997 and 1998 consisted of the following (in thousands): 1997 1998 ------- ------- Note payable, due 2001, interest at 8.4%, partially secured by land and buildings........... $ 1,950 $ 1,707 Various other notes payable ........................ 1,398 1,582 ------- ------- 3,348 3,289 Less: current maturities .................... (1,593) (322) ------- ------- $ 1,755 $ 2,967 ======= ======= On April 24, 1997, the Company entered into a note purchase agreement with a financial institution, whereby the Company obtained $10,000,000 in working capital financing. This financing was provided through the issuance of two $5,000,000 promissory notes (the "Working Capital Facility"), bearing interest at 12% per annum payable semiannually and each due on May 1, 1999. The Working Capital Facility was unsecured and could be prepaid by the Company, subject to a 3% premium if prepaid on or before January 2, 1998. In connection with the issuance of the Working Capital Facility, the Company issued a warrant to purchase 100,000 shares of the Company's common stock to the financial institution. The Working Capital Facility was paid in full with the proceeds of the 10 1/4% Senior Notes discussed below. The prepayment premium was included in the extraordinary item related to the early extinguishment of debt discussed below. SENIOR TERM NOTES Long-term debt under senior term notes as of December 31, 1997 and 1998 consisted of the following (in thousands): 1997 1998 -------- -------- 10 1/4% Senior Notes, interest due semiannually on June 15 and December 15, principal due June 15, 2007, including unamortized bond premium of $-- and $997, respectively ........... $115,000 $145,997 ======== ======== -42- 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 the $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 interest rate for similar financial instruments, and was estimated at approximately $144,261,000 as of December 31, 1998. -43- 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, 1996, 1997 and 1998 are composed of the following (in thousands): 1996 1997 1998 ------- ------- -------- Income (loss) from continuing operations before income tax provision and extraordinary item United States ........................ $ 1,287 $ 3,481 $(2,436) Non-United States .................... 335 8,307 2,347 ------- ------- ------- $ 1,622 $11,788 $ (89) ======= ======= ======= Income tax provision Current- United States ........................ $ 198 $ 55 $ 52 Non-United States .................... 111 2,289 1,513 ------- ------- ------- $ 309 $ 2,344 $ 1,565 ======= ======= ======= Deferred- United States ........................ $ -- $ -- $ -- Non-United States .................... -- -- -- ------- ------- ------- -- -- -- ------- ------- ------- $ 309 $ 2,344 $ 1,565 ======= ======= ======= 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 (liability) at December 31, 1997 and 1998 are as follows (in thousands): 1997 1998 -------- -------- Deferred tax assets- Accruals and reserves .......................... $ 1,319 $ 2,830 Net operating loss and credit carryforwards .... 7,272 9,821 Tax deferral of book write-down of machinery and equipment ..................... 1,194 1,194 Other .......................................... 253 318 -------- -------- 10,038 14,163 Less- Valuation allowance ...................... (3,089) (5,269) -------- -------- 6,949 8,894 -------- -------- Deferred tax liabilities- Excess of tax over book depreciation ........... (5,632) (5,455) Other .......................................... (1,317) (3,439) -------- -------- (6,949) (8,894) -------- -------- Net deferred tax asset (liability) .. $ -- $ -- ======== ======== -44- The consolidated provision for income taxes differs from the provision computed at the statutory United States federal income tax rate for the following reasons: 1996 1997 1998 ----- ----- ------ United States statutory rate ...................... 34% 34% (34)% Non-United States income, taxed at less than United States statutory rate ................. (9) (18) (6) (Utilization) generation of loss carryforwards..... (61) 25 21 U.S. taxes on Subpart F income .................... -- -- 20 Nondeductible expenses, primarily goodwill ........ 39 17 19 State income taxes ................................ 16 -- -- Other ............................................. -- -- 4 --- --- --- 19% 58% 24 % === === === As of December 31, 1998, the Company had net operating loss and credit carryforwards of approximately $26,000,000 which are available to offset future taxable income. The U.S. loss carryforward will expire in the years 2008 through 2013 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. -45- 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, 1996, 1997 and 1998, were 151,624, 767,916 and 1,166,174, respectively. Stock option transactions under the plans during 1996, 1997 and 1998 were as follows:
1996 1997 1998 --------------------------- -------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------- -------- ---------- -------- ---------- -------- Nonqualified stock option plans- Options outstanding at January 1 ..... 486,656 $ 7.71 1,890,010 $ 2.97 1,819,745 $ 3.03 Granted .............................. 1,864,876 3.01 15,000 6.00 113,570 6.28 Canceled ............................. (456,876) 8.21 -- -- -- -- Exercised ............................ (4,646) .04 (85,265) 2.41 (15,000) 6.00 ---------- -------- ---------- -------- ---------- -------- Options outstanding at December 31 ... 1,890,010 $ 2.97 1,819,745 $ 3.03 1,918,315 $ 3.19 ========== ======== ========== ======== ========== ======== Options exercisable at December 31 ... 1,758,259 $ 2.96 1,719,744 $ 2.99 1,803,513 $ 3.00 ========== ======== ========== ======== ========== ======== Options exercise price range at December 31........................ $ .04 - $3.50 $ 0.04 - $6.00 $ 0.04 - $7.50 Incentive stock option plans- Options outstanding at January 1 ..... 399,000 $ 7.55 690,125 $ 3.01 1,041,125 $ 3.91 Granted .............................. 736,000 3.01 396,500 5.42 542,230 7.06 Canceled ............................. (444,875) 7.12 (19,417) 3.91 (69,058) 5.87 Exercised ............................ -- -- (26,083) 3.00 (26,667) 3.07 ---------- -------- ---------- -------- ---------- -------- Options outstanding at December 31 ... 690,125 $ 3.01 1,041,125 $ 3.91 1,487,630 $ 4.97 ========== ======== ========== ======== ========== ======== Options exercisable at December 31 ... 149,349 $ 3.00 358,050 $ 3.02 669,686 $ 3.43 ========== ======== ========== ======== ========== ======== Options exercise price range at December 31...................... $3.00 - $3.50 $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 .............................. 55,000 $ 4.21 30,000 6.25 30,000 7.44 Canceled ............................. -- -- -- -- -- -- Exercised ............................ -- -- -- -- -- -- ---------- -------- ---------- -------- ---------- -------- Options outstanding at December 31 ... 55,000 $ 4.21 85,000 $ 4.84 115,000 $ 5.52 ========== ======== ========== ======== ========== ======== Options exercisable at December 31 ... 4,000 $ 5.88 22,336 $ 4.51 50,670 $ 4.70 ========== ======== ========== ======== ========== ======== Options exercise price range at December 31..................... $3.75 - $5.88 $3.75 - $6.25 $3.75 - $7.44
Effective February 1996, the board of directors approved a plan for all options whereby the exercise price was revised to reflect the current market price of $3.00. The options granted under the 1991 non-qualified stock option plan at an exercise price of $.04 per share and the non-employee director stock options were not included in the repricing. All repriced options were canceled and reissued accordingly. -46- 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):
1996 1997 1998 --------- ------- --------- Income (loss) from continuing operations As reported $ 1,313 $ 1,675 $ (1,654) Pro forma $ (1,243) $ 670 $ (3,303) Basic earnings (loss) per share As reported $ .11 $ .12 $ (.11) Pro forma $ (.27) $ .01 $ (.21) Diluted earnings (loss) per share As reported $ .09 $ .09 $ (.11) Pro forma $ (.27) $ .01 $ (.21)
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 total compensation cost recognized in reported income for the years ended December 31, 1996, 1997 and 1998, was $679,000, $ -- , and $ --, respectively. The weighted average fair value of options granted in 1996 for which the exercise price equaled the market price of the common stock on the grant date and for which the exercise price was less than the market price of the common stock on the grant date was $1.26 and $1.69 per share, respectively. The weighted average fair value of options granted in 1997 was $4.00 per share. The weighted average fair value of options granted in 1998 was $4.85 per share. 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 1996, 1997 and 1998, respectively: risk-free interest rates of 6.03%, 6.61% and 6.01%; expected lives of five years; expected volatility of 36.05%, 88.49% and 86.15%; and no expected dividend yield in all years. As of December 31, 1998, the following stock options were outstanding:
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 --------------------- ------------ ------------ ------------ ------------- ------------- Nonqualified stock option plans- $.04 2.6 years 7,994 $.04 7,994 $.04 $3.00 - $4.50 7.2 years 1,827,518 $3.01 1,795,519 $3.01 $7.50 9.4 years 82,803 $7.50 - - Incentive stock option plans- $3.00 - $4.50 7.5 years 788,333 $3.19 588,338 $3.08 $4.51 - $6.75 8.4 years 234,000 $5.98 81,348 $5.94 $6.76 - $7.50 9.4 years 465,297 $7.50 - - Non-Employee Director stock option plan- $3.75 - $4.50 7.4 years 43,000 $3.75 28,668 $3.75 $4.51 - $6.75 7.8 years 42,000 $5.97 22,002 $5.93 $7.44 9.4 years 30,000 $7.44 - -
-47- WARRANTS The Company has issued warrants under several separate agreements which expire by 2002. As of December 31, 1998, a total of 110,808 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, exercise prices and call prices are presented below. NUMBER OF SHARES ISSUABLE UNDER WARRANTS OUTSTANDING AT EXERCISE DECEMBER 31, PRICE 1998 WARRANT HOLDERS PER SHARE ---------------- ----------------- ----------- 10,808 Senior noteholders $ .02 100,000 Financial institution $ 4.50 ------- 110,808 ======= 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. The Company issued 258,247 additional warrants during 1996 pursuant to the antidilution provisions of these agreements. In addition, the Company issued 250,000 warrants and 25,000 shares of common stock to an outside investment advisory firm for services rendered in connection with the Company's refinancing in February 1996. The outside investment advisory firm exercised the 250,000 warrants in December 1997 under a cashless exercise provision. In 1997, the Company issued 100,000 warrants to a financial institution for services rendered in connection with providing the Working Capital Facility. 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 $174,000, $236,000 and $385,000 to the plan during the years ended December 31, 1996, 1997 and 1998, 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, 1996, 1997 and 1998, respectively, in connection with the profit sharing plan. -48- 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, 1998, 1,478,129 shares of the Company's common stock, par value $.001 per share, remain available for purchase under this plan. During 1998, 12,369 shares were purchased on the open market for employees under the plan at an average price of $6.89 per share. During 1998, 21,871 shares were issued under the employee stock purchase plan at an average price of $2.98 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 AGREEMENTS The Company has entered into employment agreements with two individuals that extend through December 31, 2001, with one individual that extends through August 25, 2001, and with two individuals that extend through December 31, 1999. The Company also has a consulting agreement with an individual that extends through February 25, 2000. As of December 31, 1998, the Company's remaining aggregate commitment under the agreements is approximately $3,500,000. -49- 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 $1,418,000, $3,216,000 and $5,153,000 for the years ended December 31, 1996, 1997 and 1998, respectively. The leases provide for minimum annual rentals plus, in certain instances, payment for property and use taxes, insurance and maintenance. Future minimum rental commitments under noncancelable operating leases, are as follows (in thousands): Year ending December 31- 1999 $ 6,667 2000 6,118 2001 5,856 2002 4,816 2003 3,398 Thereafter 5,696 -------- Total minimum lease payments required $ 32,551 ======== The table above includes future minimum rental commitments for a training pant production line and other ancillary manufacturing equipment under leases entered into in February 1999. 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. -50- Information as to the operations of the Company's reportable segments is as follows (in thousands): DOMESTIC INTERNATIONAL TOTAL --------- ------------- --------- 1996 Net sales ........................... $ 179,244 $ 27,770 $ 207,014 Intersegment sales .................. $ 15,992 $ 605 $ 16,597 Operating income before management fees and corporate overhead ...... $ 15,427 $ 1,149 $ 16,576 Corporate overhead .................. (6,023) Interest expense, net ............... (8,931) Other income ........................ -- --------- Income from continuing operations before taxes ..................... $ 1,622 ========= 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) ========= Information as to the depreciation/amortization, capital expenditures and assets of the Company's reportable segments is as follows (in thousands): DOMESTIC INTERNATIONAL TOTAL --------- ------------- --------- 1996 Depreciation and amortization expense $ 6,580 $ 1,044 $ 7,624 Capital expenditures ................ $ 5,692 $ 239 $ 5,931 Total assets ........................ $ 117,821 $ 32,734 $ 150,555 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 -51- Information as to the Company's operations in different geographical areas is as follows (in thousands):
ALL OTHER UNITED STATES(1) BRAZIL ARGENTINA INTERNATIONAL TOTAL ---------------- --------- ----------- --------------- ----------- 1996 Net sales ............... $179,244 $ -- $ 24,210 $ 3,560 $207,014 Long-lived assets ....... $ 30,968 $ -- $ 1,508 $ 2,678 $ 35,154 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 ............... $213,786 $ 56,105 $ 33,553 $ 29,196 $332,640 Long-lived assets ....... $ 40,392 $ 16,475 $ 6,785 $ 18,251 $ 81,903
(1) Includes Puerto Rico. (2) Includes Mexico, Malaysia, Singapore and Colombia. -52- 11. QUARTERLY FINANCIAL DATA (UNAUDITED): Unaudited summarized data by quarter for 1997 and 1998 is as follows (in thousands, except per share data):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL ----------- ------------ ----------- ----------- ----------- 1997 Net sales .............................. $ 60,161 $ 72,551 $ 80,086 $ 74,212 $ 287,010 Gross profit ........................... 23,405 27,568 31,701 28,791 111,465 Income before extraordinary item ....... 1,973 2,183 2,750 2,538 9,444 Net income (loss) ...................... 1,973 (5,586)(a) 2,750 2,538 1,675 Basic earnings (loss) per share: Continuing operations ............ $ .23 $ .26 $ .27 $ .24 $ 1.00 Extraordinary item ............... -- (.99) -- -- (.88) ----------- ----------- ----------- ----------- ----------- Net income (loss) ................ $ .23 $ (.73) $ .27 $ .24 $ .12 =========== =========== =========== =========== =========== Diluted earnings (loss) per share: Continuing operations ............ $ .11 $ .12 $ .15 $ .14 $ .51 Extraordinary item ............... -- (.42) -- -- (.42) ----------- ----------- ----------- ----------- ----------- Net income (loss) ................ $ .11 $ (.30) $ .15 $ .14 $ .09 =========== =========== =========== =========== =========== 1998(b) 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)(b) (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) =========== =========== =========== =========== ===========
- ----------------- (a) 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 early extinguishment of debt. (b) 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. -53- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of Drypers Corporation: We have audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of Drypers Corporation (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1998, 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, 1998, included in this Form 10-K and have issued our report thereon dated February 18, 1999. 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 18, 1999 -54- DRYPERS CORPORATION AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (In Thousands)
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COST AND AT END OF CLASSIFICATION OF PERIOD EXPENSE DEDUCTIONS(1) OTHER PERIOD ---------------- ------------ ----------- ------------- ------ ----------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: Year Ended December 31, 1996 $ 940 $ 1,240 $ (1,020) $ -- $ 1,160 Year Ended December 31, 1997 $ 1,160 $ 1,532 $ (628) $ -- $ 2,064 Year Ended December 31, 1998 $ 2,064 $ 1,395 $ (824) $ -- $ 2,635 RESERVE FOR DISPOSAL OF LAUNDRY DETERGENT BUSINESS: Year Ended December 31, 1996 $ -- $ -- $ -- $ -- $ -- Year Ended December 31, 1997 $ -- $ -- $ -- $ -- $ -- Year Ended December 31, 1998 $ -- $ 2,000(2) $ -- $ -- $ 2,000
- ---------------------- (1) Write-offs of uncollectible accounts. (2) Accrued for contractual obligations related to discontinuing the laundry detergent business. -55- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (c) Exhibits. *23.1 - Consent of Independent Public Accountants. - --------------- * Filed herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. DRYPERS CORPORATION Dated: APRIL 16, 1999 By: /S/ WALTER V. KLEMP Walter V. Klemp Chairman of the Board and Chief Executive Officer EX-23.1 2 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the inclusion in this Form 10-K/A of our report dated February 18, 1999. It should be noted that we have not audited any financial statements of the Company subsequent to December 31, 1998 or performed any audit procedures subsequent to the date of our report. ARTHUR ANDERSEN LLP Houston, Texas April 16, 1999 -----END PRIVACY-ENHANCED MESSAGE-----