<PAGE>
 
     
  AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 15, 1997
                                                   
                                                REGISTRATION NO. 333-34071     
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
                                
                             AMENDMENT NO. 1     
                                       
                                    TO     
                                   FORM S-4
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
 
                               ----------------
 
                              DRYPERS CORPORATION
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                               ----------------
 
         DELAWARE                     2676                   76-0344044
      (STATE OR OTHER           (PRIMARY STANDARD         (I.R.S. EMPLOYER
       JURISDICTION                INDUSTRIAL            IDENTIFICATION NO.)
    OF INCORPORATION OR        CLASSIFICATION CODE
       ORGANIZATION)                 NUMBER)
 
                        5300 MEMORIAL DRIVE, SUITE 900
                             HOUSTON, TEXAS 77007
                                (713) 869-8693
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                               ----------------
 
                                WALTER V. KLEMP
                              DRYPERS CORPORATION
                        5300 MEMORIAL DRIVE, SUITE 900
                             HOUSTON, TEXAS 77007
                                (713) 869-8693
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)
 
                                  COPIES TO:
 
                           ROBERT F. GRAY, JR., ESQ.
                          FULBRIGHT & JAWORSKI L.L.P.
                           1301 MCKINNEY, SUITE 5100
                           HOUSTON, TEXAS 77010-3095
                                (713) 651-5151
 
  Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
 
  If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
 
                               ----------------
 
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
 
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<PAGE>
 
                             CROSS REFERENCE SHEET
 
           (PURSUANT TO RULE 404(A) UNDER THE SECURITIES ACT OF 1933)
 
<TABLE>
<CAPTION>
       FORM S-4 ITEM AND CAPTION           LOCATION OR PROSPECTUS CAPTION
       -------------------------           ------------------------------
 <C> <S>                            <C>
  1. Forepart of Registration
      Statement and Outside Front                            
      Cover Page of Prospectus...   Outside Front Cover Page 
  2. Inside Front and Outside
      Back Cover Pages of                                              
       Prospectus................   Inside Front Cover Page; Pages 2-3 
  3. Risk Factors, Ratio of Earn-
      ings to Fixed Charges and                                               
      Other Information..........   Summary; Risk Factors; Selected Financial 
                                     Data                                     
  4. Terms of the Transaction....   Summary; Description of the Exchange Notes;
                                     Exchange Offer; Certain U.S. Federal Tax
                                     Considerations
  5. Pro Forma Financial Informa-                  
      tion.......................   Not applicable 
  6. Material Contacts with the
      Company Being Acquired.....   Not applicable
  7. Additional Information Re-
      quired for Reoffering by
      Persons and Parties Deemed                   
      to Be Underwriters.........   Not applicable 
  8. Interests of Named Experts                   
      and Counsel................   Legal Matters 
  9. Disclosure of Commission Po-
      sition on Indemnification                    
      for Securities Act Liabili- 
      ties.......................   Not applicable 
 10. Information with Respect to                   
      S-3 Registrants............   Not applicable 
 11. Incorporation of Certain In-
      formation by Reference.....   Not applicable
 12. Information with Respect to
      S-2 or S-3 Registrants.....   Summary; Business; Selected Financial Data; 
                                     Management's Discussion and Analysis of    
                                     Financial Condition and Results of         
                                     Operations; Financial Statements           
 13. Incorporation of Certain In-
      formation by Reference.....   Incorporation by Reference 
 14. Information with Respect to
      Registrants Other Than S-3
      or S-2 Registrants.........   Not applicable
 15. Information with Respect to                   
      S-3 Companies..............   Not applicable 
 16. Information with Respect to                   
      S-2 or S-3 Companies.......   Not applicable 
 17. Information with Respect to
      Companies Other Than S-3 or                  
      S-2 Companies..............   Not applicable 
 18. Information if Proxies, Con-
      sents or Authorizations are                  
      to be Solicited............   Not applicable 
 19. Information if Proxies, Con-
      sents or Authorizations are
      not to be Solicited or in                                     
      an Exchange Offer..........   Principal Stockholders; Certain 
                                     Transactions                   
</TABLE>
<PAGE>
 
       
PROSPECTUS
-------------------------------------------------------------------------------
                               Offer to Exchange
                                all outstanding
                         10 1/4% Senior Notes due 2007
                  ($115,000,000 principal amount outstanding)
                                      for
                     
                  10 1/4% Series B Senior Notes due 2007     
                        ($115,000,000 principal amount)
                                      of
                              
                  [Logo of Drypers Corporation appears here]
                                  
     
  The Exchange Offer will expire at 5:00 p.m., New York City time, on October
                        14, 1997, unless extended.     
-------------------------------------------------------------------------------
   
  Drypers Corporation, a Delaware corporation ("Drypers"), hereby offers, upon
the terms and subject to the conditions set forth in this Prospectus and the
accompanying Letter of Transmittal, to exchange $1,000 principal amount of its
10 1/4% Series B Senior Notes due 2007 (the "Exchange Notes"), in a
transaction registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement (as defined herein) of
which this Prospectus constitutes a part, for each $1,000 principal amount of
the outstanding 10 1/4% Senior Notes due 2007 (the "Outstanding Notes"), of
which $115,000,000 aggregate principal amount is outstanding (the "Exchange
Offer"). The Exchange Notes and the Outstanding Notes are sometimes referred
to herein collectively as the "Notes."     
   
  Drypers will accept for exchange any and all Outstanding Notes that are
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the date the Exchange Offer expires, which will be October 14, 1997 unless the
Exchange Offer is extended (the "Expiration Date"). Tenders of Outstanding
Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on
the Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Outstanding Notes being tendered for exchange. However,
the Exchange Offer is subject to certain conditions that may be waived by
Drypers and to the terms and provisions of the Registration Rights Agreement
(as defined herein). See "The Exchange Offer." Outstanding Notes may be
tendered only in denominations of $1,000 and integral multiples thereof.
Drypers has agreed to pay the expenses of the Exchange Offer. There will be no
cash proceeds to Drypers from the Exchange Offer. See "Use of Proceeds."     
 
  The Exchange Notes will be obligations of Drypers entitled to the benefits
of the indenture relating to the Notes (the "Indenture"). The form and terms
of the Exchange Notes are identical in all material respects to the form and
terms of the Outstanding Notes, except that (i) the offering of the Exchange
Notes has been registered under the Securities Act, (ii) the Exchange Notes
will not be subject to transfer restrictions and (iii) certain provisions
relating to an increase in the stated interest rate on the Outstanding Notes
provided for under certain circumstances will be eliminated. Following the
Exchange Offer, any holders of Outstanding Notes will continue to be subject
to the existing restrictions on transfer thereof and, as a general matter,
Drypers will not have any further obligation to such holders to provide for
registration under the Securities Act of transfers of the Outstanding Notes
held by them. To the extent that Outstanding Notes are tendered and accepted
in the Exchange Offer, a holder's ability to sell untendered and tendered but
unaccepted Outstanding Notes could be adversely affected. See "The Exchange
Offer--Purpose and Effect of the Exchange Offer."
 
                                                       (continued on next page)
 
                               ---------------
 
SEE "RISK FACTORS" ON PAGES 17 TO 22 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE
NOTES OFFERED HEREBY.
 
 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
  EXCHANGE  COMMISSION  OR  ANY  STATE SECURITIES  COMMISSION  NOR  HAS  THE
    SECURITIES AND EXCHANGE COMMISSION  OR ANY STATE SECURITIES COMMISSION
     PASSED  UPON  THE  ACCURACY  OR ADEQUACY  OF  THIS  PROSPECTUS.  ANY
             REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
               
            The date of this Prospectus is September 15, 1997     
<PAGE>
 
(continued from page 1)
 
  The Outstanding Notes were sold by Drypers on June 24, 1997 to Prudential
Securities, Inc. and Credit Suisse First Boston Corporation (the "Initial
Purchasers") in transactions not registered under the Securities Act in
reliance upon the exemption provided in Section 4(2) of the Securities Act
(the "Offering"). The Initial Purchasers placed the Outstanding Notes with
qualified institutional buyers (as defined in Rule 144A under the Securities
Act) ("Qualified Institutional Buyers" or "QIBs"). Accordingly, the
Outstanding Notes may not be reoffered, resold or otherwise transferred in the
United States unless such transaction is registered under the Securities Act
or an applicable exemption from the registration requirements of the
Securities Act is available. The Exchange Notes are being offered hereby in
order to satisfy the obligations of Drypers under the Registration Rights
Agreement.
 
  The Exchange Notes will bear interest at a rate of 10 1/4% per annum,
payable semi-annually on June 15 and December 15 of each year, commencing
December 15, 1997. Holders of Exchange Notes of record on December 1, 1997,
will receive on December 15, 1997, an interest payment in an amount equal to
(x) the accrued interest on such Exchange Notes from the date of issuance
thereof to December 15, 1997, plus (y) the accrued interest on the previously
held Outstanding Notes from the date of issuance of such Outstanding Notes
(June 24, 1997) to the date of exchange thereof. Interest will not be paid on
Outstanding Notes that are accepted for exchange. The Notes mature on June 15,
2007.
 
  Outstanding Notes were initially represented by a single, global Outstanding
Note (the "Outstanding Global Note") in registered form, registered in the
name of Cede & Co., as nominee for The Depository Trust Company ("DTC" or the
"Depositary"), as depositary. The Exchange Notes exchanged for Outstanding
Notes represented by the Outstanding Global Note will be initially represented
by a single, global Exchange Note (the "Exchange Global Note") in registered
form, registered in the name of the Depositary. See "Description of the
Exchange Notes--Book-Entry, Delivery and Form." References herein to "Global
Note" shall be references to the Outstanding Global Note and the Exchange
Global Note.
 
  Based on an interpretation of the Securities Act by the staff of the
Securities and Exchange Commission (the "SEC"), Exchange Notes issued pursuant
to the Exchange Offer in exchange for Outstanding Notes may be offered for
resale, resold and otherwise transferred by a holder thereof (other than (i) a
broker-dealer who purchased such Outstanding Notes directly from Drypers for
resale pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an "affiliate" (within the meaning of
Rule 405 of the Securities Act) of Drypers), without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that the holder is acquiring the Exchange Notes in its ordinary
course of business and is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of the
Exchange Notes. Holders of Outstanding Notes wishing to accept the Exchange
Offer must represent to Drypers that such conditions have been met.
 
  Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must agree that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Outstanding Notes
where such Outstanding Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. Drypers has agreed
that, for a period of 90 days after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
 
  Prior to the Exchange Offer, there has been no public market for the
Outstanding Notes or the Exchange Notes. Drypers does not intend to apply for
listing of the Exchange Notes on any securities exchange or for quotation
through The Nasdaq Stock Market. There can be no assurance that an active
market for the Exchange Notes will develop. To the extent that a market for
the Exchange Notes does develop, future trading prices of
 
                                       2
<PAGE>
 
the Exchange Notes will depend on many factors, including, among other things,
prevailing interest rates, and the market for similar securities as well as
Drypers' results of operations and its financial condition. See "Risk
Factors."
 
  Any Outstanding Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that any Outstanding Notes are not tendered
and accepted in the Exchange Offer, a holder's ability to sell untendered
Outstanding Notes could be adversely affected. Following consummation of the
Exchange Offer, the holders of Outstanding Notes that are not tendered and
accepted will continue to be subject to the existing restrictions on transfer
thereof.
 
  The Company expects that the Exchange Notes issued pursuant to this Exchange
Offer will be issued in the form of a Global Exchange Note (as defined under
the caption "Description of the Exchange Notes"), which will be deposited
with, or on behalf of the DTC and registered in its name or in the name of
Cede & Co., the DTC's nominee. Beneficial interests in the Global Exchange
Note representing the Exchange Notes will be shown on, and transfers thereof
to Qualified Institutional Buyers will be effected through, records maintained
by the DTC and its participants. After the initial issuance of the Global
Exchange Note, Exchange Notes in certificated form will be issued in exchange
for the Global Exchange Note on the terms set forth in the Indenture. See
"Description of the Exchange Notes-Book-Entry, Delivery and Form".
 
                               ----------------
  NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY DRYPERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF DRYPERS SINCE THE DATE HEREOF.
 
                               ----------------
 
                      SPECIAL CAUTIONARY NOTICE REGARDING
                          FORWARD-LOOKING STATEMENTS
 
  Certain of the matters discussed under "Summary", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business" and elsewhere in this Prospectus contain certain
forward-looking statements concerning the Company's operations, economic
performance and financial condition, including, among other things, the
Company's business strategy. These statements are based on the Company's
expectations and are subject to various risks and uncertainties. Actual
results could differ materially from those anticipated due to a number of
factors, including those identified under "Risk Factors" and elsewhere in this
Prospectus.
 
                               ----------------
 
  Drypers(R), Comfees(R), Baby's Choice(R), Wee-Fits(R) and Cozies(R) are U.S.
registered trademarks and Puppet is a Brazilian federally registered trademark
owned by the Company. Sesame Street(R) is a trademark licensed to the Company
by The Children's Television Workshop. All other trademarks or service marks
referred to in this Prospectus are the property of their respective owners and
are not the property of the Company.
   
  UNTIL DECEMBER 13, 1997 (90 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
       
  THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
DRYPERS CORPORATION, 5300 MEMORIAL DRIVE, SUITE 900, HOUSTON, TEXAS 77007,
ATTENTION: INVESTOR RELATIONS (TELEPHONE NUMBER: (713) 869-8693). IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY
OCTOBER 7, 1997.     
 
 
                                       3
<PAGE>
 
                                    SUMMARY
 
  The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto set forth in this
Prospectus. As used herein, the terms "Company" and "Drypers" mean Drypers
Corporation and its subsidiaries, except as the context may otherwise require.
Unless otherwise specified, all U.S. market share and market position data in
this Prospectus for the Company's brands and products and for its competitors
are based upon retail dollar sales that are derived from A.C. Nielsen data.
Such data represent A.C. Nielsen's estimates based upon data gathered by A.C.
Nielsen from market samples and, in the case of grocery store sales in the
United States, are based on samples taken from stores with sales in excess of
$2.0 million per year. Such data are therefore subject to some degree of
variance. Unless otherwise indicated, all sales and market share information in
this Prospectus referring to the United States excludes Puerto Rico.
 
                                  THE COMPANY
 
  Drypers 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. 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 has historically marketed its products primarily in grocery stores in
the United States and Puerto Rico and in certain international markets,
including Latin America and the Pacific Rim. The U.S. disposable diaper and
training pant market (the "U.S. diaper market") for products sold in grocery
stores in 1996 totaled approximately $2.0 billion or 54% of the estimated $3.7
billion total U.S. diaper market. As of April 19, 1997, the Company sold its
products throughout the United States to approximately 600 grocery retailers
with an estimated 18,000 retail outlets. These retailers had an estimated 61%
share of total U.S. grocery store sales of all products at that date. Drypers
believes that its brands represented 5.8% of the dollar volume and 6.2% of the
unit volume in the U.S. grocery store diaper market during 1996, and that its
market share exceeds 10% in 16 of the 50 major markets as defined by A.C.
Nielsen, including such markets as Phoenix, Denver, Kansas City, Minneapolis,
Pittsburgh and Hartford. In addition, the Company believes that it has an
approximate 24% market share of the disposable diaper category in Puerto Rico.
For the year ended December 31, 1996, domestic operations, including Puerto
Rico and export sales, represented 86.6% of the Company's net sales and 85.5%
of its EBITDA (as defined herein), with the balance of its sales and EBITDA
generated by its international operations.
 
  The Company has significantly expanded its international presence since 1994.
The Company has been exporting diapers to Latin America and the Pacific Rim
since the early 1980s and in 1993 began operations in Puerto Rico, both to
serve Puerto Rico and to better serve the Latin American export market. In
1994, the Company acquired an interest in an existing disposable diaper
producer in Argentina, and in 1995 such producer became a wholly-owned
subsidiary of the Company. In 1996, the Company entered into a contract
manufacturing arrangement with a Mexican diaper producer and, in December 1996,
acquired substantially all of the assets of this producer. In early 1997, the
Company acquired the rights to the Puppet brand name (the third largest selling
diaper brand in Brazil), established a majority-owned subsidiary to market its
products in Brazil and entered into a supply arrangement with a local diaper
manufacturer. Wal-Mart International has since selected the Company to be its
private label supplier of disposable diapers in Brazil and has agreed to carry
the Puppet brand in its Brazilian stores.
 
 
                                       4
<PAGE>
 
  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 seeks to position 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. At the same time, the Company intends to continue to
expand its international operations.
 
 Background
 
  During 1995, a confluence of unusual events adversely impacted the Company's
financial performance. The December 1994 devaluation of the Mexican peso
reduced the Company's 1995 export sales by an estimated $10 million. Beginning
in the first quarter of 1995, The Procter & Gamble Company ("Procter &
Gamble"), which manufactures Pampers and Luvs, and Kimberly-Clark Corporation
("Kimberly-Clark"), which manufactures Huggies and which together with Procter
& Gamble accounted for an estimated 78.1% of dollar sales in the total U.S.
diaper market in 1996, increased their rates of promotional spending more
aggressively than the Company. In addition, Procter & Gamble repositioned Luvs,
its national value-priced brand, with a reduction in the number of diapers per
package and a reduction in price per package. The Company responded with a
repositioning of its own, lowering package counts and prices per package and,
as a result, recognized $2.4 million in unusual expenses in the first quarter
of 1995. Throughout 1995, the industry experienced substantial price increases
in pulp, a major component of the total cost to produce diapers and training
pants. Due to the competitive environment, the increase in pulp prices was not
passed on to consumers, thus reducing the Company's gross margins. The adverse
impact of these events was further compounded by the Company's planned
transition to a single national brand from four regional brands and the
simultaneous roll-out of an "ultra-thin" premium diaper, which experienced slow
initial consumer acceptance. The Company attributes the 1995 decline in its
national market share, U.S. grocery store penetration rate, sales volume and
profitability to the combined effect of these events.
 
  In addition, the Company's liquidity was adversely affected and, among other
things, it (i) obtained various amendments and waivers from the lender under
its existing revolving credit facility and term loan and (ii) deferred payment
of the interest due on November 1, 1995 under its $45.0 million of outstanding
12 1/2% Senior Notes, which default was cured by the payment of overdue
interest on February 29, 1996 as part of the refinancing described in Note 1 of
the Notes to Consolidated Financial Statements. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources".
 
  In response to these events, management implemented a plan to improve sales
and margins, increase operating efficiency and substantially reduce costs
throughout the Company's operations. The major components of the cost reduction
program included the closure of the Company's Houston manufacturing facility,
reduction of manufacturing and general overhead costs and a redesigned premium
diaper, which reduced pulp content and thus overall product cost. In addition,
this redesign led to an increase in consumer acceptance of the new "ultra-thin"
premium diaper. To offset its loss of export sales to Mexico, the Company re-
entered the Mexican diaper market in the second quarter of 1996 through
contract manufacturing arrangements with a local producer.
 
 Recent Financial Performance
 
  In 1996, the Company experienced improved financial performance, in part due
to the successful introduction of "Drypers with Natural Baking Soda" in May of
that year and a full year of consolidated operations in Argentina. Net sales
increased by 26.3% to $207.0 million in 1996 from $163.9 million in 1995. As a
result of the new product launch, the improved competitive pricing environment,
the effects of its cost reduction program and lower pulp prices, the Company
increased its national market share and returned to profitability, generating
EBITDA of $17.4 million in 1996 as compared with a loss of $5.0 million in
1995.
 
 
                                       5
<PAGE>
 
  This improvement in financial performance has continued into 1997 with net
sales increasing 35.6% to $132.7 million for the six months ended June 30, 1997
from $97.9 million during the first half of 1996. The Company's EBITDA
increased $3.0 million to $8.4 million, which is net of the $4.0 million cash
portion of extraordinary item, for the six months ended June 30, 1997 from $5.4
million during the first half of 1996.
 
  On May 1, 1997, the Company announced new and innovative features to its
Drypers brand diapers and training pants. During June 1997, the Company
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 features a breathable, cloth-like outer cover
typically only found on premium-priced branded diapers. In addition, the
Company has entered into an exclusive licensing arrangement with The Children's
Television Workshop under which the Company's products, packaging, advertising
and promotional materials will feature Big Bird, Elmo and other familiar
characters from the children's television show Sesame Street.
 
 Business Strategy
 
  The Company's business strategy is to maximize sales, EBITDA and
profitability through its focus on the following key elements:
 
  . Offer "Every Day Value" branded products to consumers. The Company's
    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. Drypers believes that
    this combination of brand name, 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. Drypers sells its 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. The Company believes that it is 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 the Company's emphasis on (i) selective development
    of innovative product features which distinguish its products from the
    premium-priced brands, (ii) manufacturing high quality products at
    substantially the same costs as the leading national brand manufacturers,
    (iii) significantly lower advertising, promotion and research and
    development expenses and (iv) a substantially lower corporate overhead
    structure.
 
  . Increase penetration of domestic distribution channels by promoting the
    Drypers brand. The Company continually seeks to expand its sales and
    distribution network (currently approximately 600 retailers with an
    estimated 18,000 retail outlets in the United States). The Company
    believes that marketing its products under one national brand name has
    increased its market share within the United States by enhancing the
    familiarity of its brand name to retailers and consumers, while resulting
    in certain production and advertising cost savings. As a result, the
    Company believes that it is well positioned to increase its extensive
    penetration of the grocery store market, as well as its limited
    penetration of the mass-merchant and drugstore chain markets, which
    currently account for approximately 46% of the total U.S. diaper market.
 
  . Continue to introduce successful product features and innovations.
    Drypers differentiates its brand from the other national brands through
    the selective development of cost-effective innovative product features,
    in addition to price. For example, in 1994, the Company began to promote
    its diapers and
 
                                       6
<PAGE>
 
    training pants as the only "perfume free" national brand. In 1996,
    Drypers introduced the first odor control diaper, "Drypers with Natural
    Baking Soda". The Company believes that its launch of diapers with baking
    soda was in large part responsible for its increased penetration of the
    U.S. grocery store market from an estimated 54% in December 1995 to an
    estimated 61% in April 1997. In addition, Drypers announced on May 1,
    1997 the launch of "Drypers with Aloe Vera", as well as a licensing
    agreement to use the Sesame Street trademark and characters on the
    Company's products and packaging and in advertising and promotional
    materials. In addition, the Company's improved diaper will feature a
    breathable, cloth-like outer cover.
 
  . Pursue international expansion opportunities. Management believes that
    there are substantial growth opportunities for producers of disposable
    diapers and training pants in Latin America and the Pacific Rim
    (excluding Japan) in view of the current low levels of consumer
    penetration for those products (on average approximately 12% in those
    markets versus approximately 90% in the United States, Western Europe and
    Japan in 1995) and the rapid increase in the standard of living in both
    regions in recent years. The Company intends to continue to expand its
    operations in Argentina, Mexico and Brazil and is actively seeking
    further expansion opportunities through acquisition, joint venture or
    other arrangements in the Pacific Rim and Latin America. The Company
    believes that increased geographic diversity should help to reduce its
    sensitivity to competitive pressures in any one specific market in the
    future.
 
  The Company's principal executive offices are located at 5300 Memorial
Drive, Suite 900, Houston, Texas 77007, and its telephone number is (713) 869-
8693.
 
                     TRANSACTIONS RELATED TO THE OFFERING
 
  On May 22, 1997, the Company commenced an offer to purchase (the "Purchase
Offer") all of the $45.0 million outstanding principal amount of its 12 1/2%
Senior Notes and a solicitation of consents under the Existing Indenture. The
purchase price paid for each 12 1/2% Senior Note tendered was the present
value of the redemption price of the 12 1/2% Senior Notes on the earliest
redemption date therefor (November 1, 1997) and the interest payment due on
such date, on the basis of the yield on the 5 5/8% U.S. Treasury Note due
October 31, 1997 plus a fixed spread of 100 basis points, together with
accrued interest to the date of purchase. In connection with the Purchase
Offer, the Company obtained consents from the holders of a majority of the
aggregate principal amount of the outstanding 12 1/2% Senior Notes to amend
the Existing Indenture. The amendments to the Existing Indenture eliminated,
from and after the consummation of the Purchase Offer, substantially all of
the restrictive covenants contained in the Existing Indenture. The Purchase
Offer expired June 23, 1997 and $43.4 million of the $45.0 million outstanding
principal amount of the 12 1/2% Senior Notes was repurchased.
 
  On June 24, 1997, the Company issued the Outstanding Notes to the Initial
Purchasers (the "Note Offering") pursuant to a Purchase Agreement dated June
17, 1997.
 
                                       7
<PAGE>
 
 
                            TERMS OF EXCHANGE OFFER
 
  The Exchange Offer relates to the exchange of up to $115,000,000 aggregate
principal amount of Exchange Notes for up to an equal aggregate principal
amount of Outstanding Notes. The Exchange Notes will be obligations of Drypers
entitled to the benefits of the Indenture. The form and terms of the Exchange
Notes are identical in all material respects to the form and terms of the
Outstanding Notes, except that (i) the offering of the Exchange Notes has been
registered under the Securities Act, (ii) the Exchange Notes will not be
subject to transfer restrictions and (iii) certain provisions relating to an
increase in the stated interest rate on the Outstanding Notes provided for
under certain circumstances will be eliminated. See "Description of the
Exchange Notes."

Registration Rights          
Agreement...................  The Outstanding Notes were sold by Drypers on
                              June 24, 1997 to the Initial Purchasers pursuant
                              to a Purchase Agreement, dated June 17, 1997 (the
                              "Purchase Agreement"). Pursuant to the Purchase
                              Agreement, Drypers and the Initial Purchasers
                              entered into the Registration Rights Agreement
                              which, among other things, grants the holders of
                              the Outstanding Notes certain exchange and
                              registration rights. The Exchange Offer is
                              intended to satisfy certain obligations of
                              Drypers under the Registration Rights Agreement.
 
The Exchange Offer..........  $1,000 principal amount of Exchange Notes will be
                              issued in exchange for each $1,000 principal
                              amount of Outstanding Notes validly tendered and
                              accepted pursuant to the Exchange Offer. As of
                              the date hereof, $115,000,000 in aggregate
                              principal amount of Outstanding Notes are
                              outstanding. Drypers will issue the Exchange
                              Notes to tendering holders of Outstanding Notes
                              promptly following the Expiration Date.
 
                              The terms of the Exchange Notes are identical in
                              all material respects to the Outstanding Notes
                              except for certain transfer restrictions and
                              registration rights relating to the Outstanding
                              Notes and except that the Outstanding Notes
                              provide that if (i) the Exchange Offer has not
                              been consummated within 30 days of the
                              effectiveness of the registration statement or
                              (ii) a shelf registration statement has not been
                              declared effective by November 21, 1997, the
                              interest rate on the Outstanding Notes will
                              increase by an amount ranging from 0.25% to 1.50%
                              per annum, from and including the applicable date
                              as described in the Registration Rights Agreement
                              until but excluding the date of the consummation
                              of the Exchange Offer.
 
                              In addition, to comply with the securities laws
                              of certain states of the United States, it may be
                              necessary to qualify for sale or register
                              thereunder the Exchange Notes prior to offering
                              or selling such Exchange Notes. Drypers has
                              agreed, pursuant to the Registration Rights
                              Agreement, subject to certain limitations
                              specified therein, to register or qualify the
                              Exchange Notes for offer or sale under the
                              securities laws of such states as any holder
                              reasonably requests in writing. Unless a holder
                              so requests, Drypers does not intend to register
                              or qualify the offer or sale of the Exchange
                              Notes in any such jurisdiction.
 
                                       8
<PAGE>
 
 
Resale......................  Based on existing interpretations of the
                              Securities Act by the staff of the SEC set forth
                              in several no-action letters to third parties,
                              and subject to the immediately following
                              sentence, Drypers believes that Exchange Notes
                              issued pursuant to the Exchange Offer in exchange
                              for Outstanding Notes may be offered for resale,
                              resold and otherwise transferred by a holder
                              thereof (other than (i) a broker-dealer who
                              purchased such Outstanding Notes directly from
                              Drypers for resale pursuant to Rule 144A or any
                              other available exemption under the Securities
                              Act or (ii) a person that is an "affiliate"
                              (within the meaning of Rule 405 of the Securities
                              Act) of Drypers), without compliance with the
                              registration and prospectus delivery provisions
                              of the Securities Act, provided that the holder
                              is acquiring the Exchange Notes in its ordinary
                              course of business and is not participating, and
                              has no arrangement or understanding with any
                              person to participate, in the distribution of the
                              Exchange Notes. However, any purchaser of Notes
                              who is an affiliate of Drypers or who intends to
                              participate in the Exchange Offer for the purpose
                              of distributing the Exchange Notes, or any
                              broker-dealer who purchased the Outstanding Notes
                              from Drypers to resell pursuant to Rule 144A or
                              any other available exemption under the
                              Securities Act, (i) will not be able to rely on
                              the interpretations by the staff of the SEC set
                              forth in the above-mentioned no-action letters,
                              (ii) will not be able to tender its Outstanding
                              Notes in the Exchange Offer and (iii) must comply
                              with the registration and prospectus delivery
                              requirements of the Securities Act in connection
                              with any sale or transfer of the Notes unless
                              such sale or transfer is made pursuant to an
                              exemption from such requirements. Drypers does
                              not intend to seek its own no-action letter and
                              there is no assurance that the staff of the SEC
                              would make a similar determination with respect
                              to the Exchange Notes as it has in such no-action
                              letters to third parties. See "The Exchange
                              Offer--Purpose and Effect of the Exchange Offer"
                              and "Plan of Distribution." Each broker-dealer
                              that receives Exchange Notes for its own account
                              pursuant to the Exchange Offer must acknowledge
                              that it will deliver a prospectus in connection
                              with any resale of such Exchange Notes. The
                              Letter of Transmittal states that by so
                              acknowledging and by delivering a prospectus, a
                              broker-dealer will not be deemed to admit that it
                              is an "underwriter" within the meaning of the
                              Securities Act. This Prospectus, as it may be
                              amended or supplemented from time to time, may be
                              used by a broker-dealer in connection with
                              resales of Exchange Notes received in exchange
                              for Outstanding Notes where such Outstanding
                              Notes were acquired by such broker-dealer as a
                              result of market-making activities or other
                              trading activities. Drypers has agreed that, for
                              a period of 90 days after the Expiration Date, it
                              will make this Prospectus available to any
                              broker-dealer for use in connection with any such
                              resale. See "Plan of Distribution."
 
Expiration Date.............     
                              5:00 p.m., New York City time, on October 14,
                              1997, unless the Exchange Offer is extended, in
                              which case the term "Expiration Date" means the
                              latest date and time to which the Exchange Offer
                                  
                                       9
<PAGE>
 
                              is extended. See "The Exchange Offer--Expiration
                              Date; Extensions; Amendments."
                              
Accrued Interest on the      
 Exchange Notes and the      
 Outstanding Notes..........  The Exchange Notes will bear interest at a rate
                              of 10 1/4% per annum, payable semi-annually on
                              June 15 and December 15 of each year, commencing
                              December 15, 1997. Holders of Exchange Notes of
                              record on December 1, 1997, will receive on
                              December 15, 1997, an interest payment in an
                              amount equal to (x) the accrued interest on such
                              Exchange Notes from the date of issuance thereof
                              to December 15, 1997, plus (y) the accrued
                              interest on the previously held Outstanding Notes
                              from the date of issuance of such Outstanding
                              Notes (June 24, 1997) to the date of exchange
                              thereof. Interest will not be paid on Outstanding
                              Notes that are accepted for exchange. The Notes
                              mature on June 15, 2007.

Conditions to the Exchange   
Offer.......................  Drypers may terminate the Exchange Offer if it
                              determines that its ability to proceed with the
                              Exchange Offer could be materially impaired due
                              to the occurrence of certain conditions. Drypers
                              does not expect any of such conditions to occur,
                              although there can be no assurance that such
                              conditions will not occur. Holders of Outstanding
                              Notes will have certain rights under the
                              Registration Rights Agreement should Drypers fail
                              to consummate the Exchange Offer. See "The
                              Exchange Offer--Conditions to the Exchange
                              Offer."
                              
Procedures for Tendering     
 Outstanding Notes..........  Each holder of Outstanding Notes wishing to
                              accept the Exchange Offer must complete, sign and
                              date the Letter of Transmittal, or a facsimile
                              thereof, in accordance with the instructions
                              contained herein and therein, and mail or
                              otherwise deliver such Letter of Transmittal, or
                              such facsimile, together with the Outstanding
                              Notes to be exchanged and any other required
                              documentation, to Bankers Trust Company, as
                              Exchange Agent, at the address set forth herein
                              and therein or effect a tender of Outstanding
                              Notes pursuant to the procedures for book-entry
                              transfer as provided for herein and therein. By
                              executing the Letter of Transmittal, each holder
                              will represent to Drypers that, among other
                              things, the Exchange Notes acquired pursuant to
                              the Exchange Offer are being acquired in the
                              ordinary course of business of the person
                              receiving such Exchange Notes, whether or not
                              such person is the holder, that neither the
                              holder nor any such other person has any
                              arrangement or understanding with any person to
                              participate in the distribution of such Exchange
                              Notes and that neither the holder nor any such
                              other person is an "affiliate," as defined in
                              Rule 405 under the Securities Act, of Drypers.
                              See "The Exchange Offer--Procedures for
                              Tendering."
 
                              Following the consummation of the Exchange Offer,
                              holders of Outstanding Notes not tendered as a
                              general matter will not have
 
                                       10
<PAGE>
 
                              any further registration rights, and the
                              Outstanding Notes will continue to be subject to
                              certain restrictions on transfer. Accordingly,
                              the liquidity of the market for the Outstanding
                              Notes could be adversely affected. See "The
                              Exchange Offer--Consequences of Failure to
                              Exchange."
                              
Special Procedures for       
 Beneficial Owners..........  Any beneficial owner whose Outstanding Notes are
                              registered in the name of a broker, dealer,
                              commercial bank, trust company or other nominee
                              and who wishes to tender in the Exchange Offer
                              should contact such registered holder promptly
                              and instruct such registered holder to tender on
                              his behalf. If such beneficial owner wishes to
                              tender on his own behalf, such beneficial owner
                              must, prior to completing and executing the
                              Letter of Transmittal and delivering his
                              Outstanding Notes, either make appropriate
                              arrangements to register ownership of the
                              Outstanding Notes in such holder's name or obtain
                              a properly completed bond power from the
                              registered holder or endorsed certificates
                              representing the Outstanding Notes to be
                              tendered. The transfer of record ownership may
                              take considerable time, and completion of such
                              transfer prior to the Expiration Date may not be
                              possible. See "The Exchange Offer--Procedures for
                              Tendering."

Guaranteed Delivery          
Procedures..................  Holders of Outstanding Notes who wish to tender
                              their Outstanding Notes and who cannot complete
                              the procedure for book-entry transfer and deliver
                              a properly completed Letter of Transmittal and
                              any other documents required by the Letter of
                              Transmittal to the Exchange Agent prior to the
                              Expiration Date may tender their Outstanding
                              Notes according to the guaranteed delivery
                              procedures set forth in "The Exchange Offer--
                              Guaranteed Delivery Procedures."
 
Withdrawal Rights...........  Tenders of Outstanding Notes may be withdrawn at
                              any time prior to the Expiration Date by
                              furnishing a written or facsimile transmission
                              notice of withdrawal to the Exchange Agent
                              containing the information set forth in "The
                              Exchange Offer--Withdrawal of Tenders."
 
Acceptance of Outstanding
 Notes and Delivery of
 Exchange Notes.............  Subject to certain conditions (as summarized
                              above in "Conditions to the Exchange Offer" and
                              described more fully in "The Exchange Offer--
                              Conditions to the Exchange Offer"), Drypers will
                              accept for exchange any and all Outstanding Notes
                              that are properly tendered in the Exchange Offer
                              prior to the Expiration Date. See "The Exchange
                              Offer--Procedures for Tendering." The Exchange
                              Notes issued pursuant to the Exchange Offer will
                              be delivered promptly following the Expiration
                              Date.
 
Exchange Agent..............  Bankers Trust Company, the Trustee under the
                              Indenture, is serving as exchange agent (the
                              "Exchange Agent") in connection with the Exchange
                              Offer. The mailing address of the Exchange Agent
                              is BT
 
                                       11
<PAGE>
 
                              Services Tennessee, Inc. Reorganization Unit,
                              P.O. Box 292737, Nashville, TN 37229-2737; the
                              address for deliveries by overnight courier is BT
                              Services Tennessee, Inc. Reorganization Unit,
                              Grassmere Park Drive, Nashville, TN 37211; and
                              the address for hand deliveries is Bankers Trust
                              Company, Corporate Trust and Agency Unit, 123
                              Washington Street, First Floor Window, New York,
                              NY 10008. For assistance and requests for
                              additional copies of this Prospectus, the Letter
                              of Transmittal or the Notice of Guaranteed
                              Delivery, the telephone number for the Exchange
                              Agent is (615) 835-3572 or (800) 735-7777, and
                              the facsimile number for the Exchange Agent is
                              (615) 835-3701.
 
Effect on Holders of          
 Outstanding Notes..........  Holders of Outstanding Notes who do not tender   
                              their Outstanding Notes in the Exchange Offer    
                              will continue to hold their Outstanding Notes and
                              will be entitled to all the rights and           
                              limitations applicable thereto under the         
                              Indenture. All untendered, and tendered but      
                              unaccepted, Outstanding Notes will continue to be
                              subject to the restrictions on transfer provided 
                              for in the Outstanding Notes and the Indenture.  
                              To the extent that Outstanding Notes are tendered
                              and accepted in the Exchange Offer, the trading  
                              market, if any, for the Outstanding Notes could  
                              be adversely affected. See "Risk Factors--       
                              Consequences of Exchange and Failure to          
                              Exchange."                                        

  See "The Exchange Offer" for more detailed information concerning the terms
of the Exchange Offer.
 
                                       12
<PAGE>
 
 
                       SUMMARY OF TERMS OF EXCHANGE NOTES
 
Securities Offered..........     
                              $115,000,000 aggregate principal amount of 10
                              1/4% Series B Senior Notes due 2007.     
 
Maturity Date...............  June 15, 2007.
 
Interest Payment Dates......  June 15 and December 15, commencing December 15,
                              1997.
 
Optional Redemption.........  The Exchange Notes will be redeemable at the
                              option of Drypers, in whole or in part, at any
                              time on or after June 15, 2002, at the redemption
                              prices set forth herein, plus accrued and unpaid
                              interest, if any, to the applicable redemption
                              date. In addition, Drypers may, at its option,
                              redeem prior to June 15, 2000, up to 34.78% of
                              the original principal amount of the Exchange
                              Notes at 110.25% of the principal amount thereof,
                              plus accrued and unpaid interest, if any, to the
                              applicable redemption date, with the net proceeds
                              of one or more Public Equity Offerings (as
                              defined). See "Description of the Exchange
                              Notes--Redemption."
 
Ranking.....................  The Exchange Notes will be senior unsecured
                              obligations of the Company ranking pari passu
                              with all existing and future unsubordinated debt
                              of the Company. The Exchange Notes will be
                              effectively subordinated to all of the Company's
                              secured debt, including loans under the Revolving
                              Credit Facility (as defined herein), to the
                              extent of the assets securing such debt and will
                              be structurally subordinated to all liabilities,
                              including trade payables, of the Company's
                              subsidiaries that did not guarantee the Notes. As
                              of June 30, 1997, the Company had $3.1 million of
                              debt outstanding other than the Notes ($1.5
                              million of which was debt of its subsidiaries)
                              and its subsidiaries had approximately $9.7
                              million of accounts payable and third party debt.
                              See "Capitalization" and Note 4 of the Notes to
                              Consolidated Financial Statements.
 
Change of Control...........  Upon a Change of Control, the Company will be
                              required, subject to certain conditions, to offer
                              to purchase all outstanding Exchange Notes at
                              101% of the principal amount thereof, plus
                              accrued interest to the date of purchase. See
                              "Description of the Exchange Notes".
 
Certain Covenants...........  The Indenture contains certain covenants,
                              including, but not limited to, covenants with
                              limitations on the following: (i) the incurrence
                              of additional debt; (ii) restricted payments;
                              (iii) asset dispositions; (iv) transactions with
                              affiliates; (v) dividend and other payment
                              restrictions affecting subsidiaries; (vi) liens;
                              and (vii) the merger, consolidation or sale of
                              assets of the Company. In addition, subsidiaries
                              of the Company may, in the future, be required to
                              guarantee payment of the Notes. See "Description
                              of the Exchange Notes".
 
                                       13
<PAGE>
 
 
Use of Proceeds.............  Drypers will not receive any cash proceeds from
                              the issuance of the Exchange Notes offered
                              hereby. In consideration for issuing the Exchange
                              Notes as contemplated in this Prospectus, Drypers
                              will receive in exchange Outstanding Notes in
                              like principal amount.
 
Risk Factors................  Prospective purchasers of the Exchange Notes
                              should carefully consider all of the information
                              contained in this Prospectus, including the
                              information set forth under the caption "Risk
                              Factors", before making an investment in the
                              Exchange Notes.
 
                                       14
<PAGE>
 
                         SUMMARY FINANCIAL INFORMATION
 
  The following summary historical financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements, including
the notes thereto, included elsewhere herein.
 
<TABLE>
<CAPTION>
                                                                                     SIX MONTHS ENDED
                                    YEAR ENDED DECEMBER 31                               JUNE 30
                          ---------------------------------------------------------  -----------------
                           1992         1993        1994         1995        1996     1996      1997
                          -------     --------    --------     --------    --------  -------  --------
                                             (DOLLARS IN THOUSANDS)
<S>                       <C>         <C>         <C>          <C>         <C>       <C>      <C>
STATEMENT OF EARNINGS
 DATA(1):
  Net sales.............  $77,719     $156,079    $173,552     $163,947    $207,014  $97,864  $132,712
  Cost of goods sold....   48,338       95,295     106,130      114,075     126,128   60,115    81,739
                          -------     --------    --------     --------    --------  -------  --------
   Gross profit.........   29,381       60,784      67,422       49,872      80,886   37,749    50,973
  Selling, general and
   administrative
   expenses.............   23,723(2)    46,231      48,081       53,691      70,333   35,716    41,933
  Unusual expenses......       --        2,376(3)    1,141(4)     3,185(5)       --       --        --
  Restructuring charge..       --           --          --        4,255(6)       --       --        --
                          -------     --------    --------     --------    --------  -------  --------
   Operating income
    (loss)..............    5,658       12,177      18,200      (11,259)     10,553    2,033     9,040
  Interest expense......    4,132       11,115       7,685        8,035       8,931    4,403     4,210
  Other income..........       --           --        (434)          --          --       --       (42)
                          -------     --------    --------     --------    --------  -------  --------
  Income (loss) before
   income tax provision
   (benefit) and
   extraordinary items..    1,526        1,062      10,949      (19,294)      1,622   (2,370)    4,872
  Income tax provision
   (benefit)............      866        1,370       4,151       (3,829)        309      201       716
                          -------     --------    --------     --------    --------  -------  --------
  Income (loss) before
   extraordinary items..      660         (308)      6,798      (15,465)      1,313   (2,571)    4,156
  Extraordinary items...   (2,898)(7)       --      (3,688)(8)       --          --       --    (7,769)(9)
                          -------     --------    --------     --------    --------  -------  --------
  Net income (loss).....  $(2,238)    $   (308)   $  3,110     $(15,465)   $  1,313  $(2,571) $ (3,613)
                          =======     ========    ========     ========    ========  =======  ========
FINANCIAL RATIOS AND
 OTHER DATA:
  EBITDA(10)............  $ 7,381     $ 16,594    $ 23,767     $ (4,959)   $ 17,412  $ 5,384  $  8,370
  Adjusted EBITDA(11)...    7,381       18,970      24,908        2,481      17,412    5,384     8,370
  Capital expenditures..    6,470        6,157       7,079        8,896       5,931    1,394     8,518
  Depreciation and
   amortization.........    2,023        5,017       5,799        7,068       7,624    3,717     4,037
  Ratio of EBITDA to pro
   forma interest
   expense(10)(12)......                                                        1.5x               1.4x
  Ratio of earnings to
   fixed charges(13)....      1.3x         1.1x        2.3x          --         1.2x      .5x      2.1x
  Pro forma ratio of
   earnings to fixed
   charges(12)(13)......                                                        1.1x               1.8x
</TABLE>
 
<TABLE>
<CAPTION>
                                                          DECEMBER 31, JUNE 30,
                                                              1996       1997
                                                          ------------ --------
                                                             (IN THOUSANDS)
<S>                                                       <C>          <C>
BALANCE SHEET DATA:
  Working capital........................................   $  8,707   $ 59,034
  Property and equipment, net............................     35,154     41,233
  Total assets...........................................    150,555    199,120
  Short-term debt, including current portion of long-term
   debt..................................................     16,567         --
  Long-term debt.........................................     48,647    118,065
  Stockholders' equity...................................     53,608     49,972
</TABLE>
-------
 (1) The Company acquired two U.S. regional diaper manufacturing operations in
     1992. In 1994, the Company acquired a preferred stock interest in an
     Argentine diaper manufacturer, which became a wholly owned subsidiary of
     the Company in July 1995. In December 1996, the Company acquired a diaper
     manufacturing operation in Mexico. The Company established operations in
     Brazil in February 1997. The results of these operations have been
     included since their respective dates of acquisition or establishment.
 
                                       15
<PAGE>
 
 (2) Includes one-time expenses of $300,000 that were paid as bonuses to
     management in connection with the 1992 acquisitions.
 (3) Includes unusual expenses of $1,536,000 to reflect the costs associated
     with the Company's repositioning of its premium brand diaper products and
     $840,000 of legal fees and expenses in connection with a patent
     infringement lawsuit in which the Company settled by entering into a
     license agreement and agreed to pay a royalty if the Company should use
     the other party's patented technology.
 (4) Includes legal fees and expenses of $1,141,000 incurred in connection with
     a patent infringement lawsuit, which was settled during the second quarter
     of 1994 with no payment by the Company or the other party.
 (5) Includes unusual expenses of $2,358,000 to reflect the costs associated
     with the Company's repositioning/brand transition of its premium brand
     diaper products and unusual expenses of $827,000 related to costs
     associated with the Company's refinancing described in Note 1 of the Notes
     to Consolidated Financial Statements.
 (6) Includes a noncash restructuring charge of $4,255,000 related to the
     write-down of idled equipment to net realizable value and lease
     termination costs related to the closure of the Houston facility.
 (7) Includes a noncash extraordinary expense of $2,432,000, net of taxes, for
     the write-off of capitalized debt issuance costs, a cash extraordinary
     expense of $466,000, net of taxes, for prepayment and other fees in
     connection with the acquisition of a regional diaper manufacturer and
     completion of the 12 1/2% Senior Note offering.
 (8) Includes a noncash extraordinary expense of $2,014,000, net of taxes, for
     the write-off of capitalized debt issuance costs and original issue
     discount, and a cash extraordinary expense of $1,674,000, net of taxes,
     for prepayment fees in connection with the redemption of $30,000,000
     principal amount of 12 1/2% Senior Notes from the proceeds of the
     Company's initial public offering.
 (9) 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.
(10) EBITDA represents net income (loss) plus the non-cash portion of
     extraordinary item (if any), tax provision, interest expense, depreciation
     and amortization (excluding the portion of amortization included in
     interest expense). The Company has included EBITDA data (which is not a
     measure of financial performance under generally accepted accounting
     principles) because such data are used by certain investors to measure a
     company's ability to service debt and because a comparable measure will be
     a factor in certain incurrence tests included in the Indenture. EBITDA
     should not be considered as an alternative to income from operations or to
     cash flows from operating activities (as determined in accordance with
     generally accepted accounting principles) and should not be construed as
     an indication of a company's operating performance or as a measure of
     liquidity.
(11) Adjusted EBITDA represents EBITDA plus unusual expenses and restructuring
     charges.
(12) The calculation of pro forma interest expense gives effect to the Offering
     and the application of the estimated net proceeds therefrom to debt
     reduction as if they had occurred on January 1, 1996. This pro forma
     information is not necessarily indicative of the financial results that
     might have occurred had the transactions actually taken place on January
     1, 1996, or of future results of operations.
(13) For purposes of computing the ratio of earnings to fixed charges,
     "earnings" consists of income (loss) before income tax provision (benefit)
     and extraordinary items plus fixed charges. "Fixed charges" consist of
     interest on all debt and amortization of deferred financing costs and
     original issue discounts plus the interest component of rental expense
     under operating leases (assumed to equal one-third of rental expense).
     Earnings were not adequate to cover fixed charges by $10,669,000 for the
     year ended December 31, 1995.
 
                                       16
<PAGE>
 
                                 RISK FACTORS
 
  An investment in the Notes offered hereby involves a high degree of risk.
Each prospective investor should carefully examine this entire Prospectus and
should give particular attention to the risk factors set forth below before
purchasing the Notes offered hereby.
 
  CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE. Holders of Outstanding
Notes who do not exchange their Outstanding Notes for Exchange Notes pursuant
to the Exchange Offer will continue to be subject to the restrictions on
transfer to such Outstanding Notes as set forth in the legend thereon as a
consequence of the issuance of the Outstanding Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the
Outstanding Notes that are not tendered, or are tendered but not accepted, may
not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. Drypers does not
currently anticipate that it will register the Outstanding Notes under the
Securities Act. In addition, upon the consummation of the Exchange Offer
holders of Outstanding Notes which remain outstanding will not be entitled to
any rights to have such Outstanding Notes registered under the Securities Act
or to any similar rights under the Registration Rights Agreement. To the
extent that Outstanding Notes are tendered and accepted in the Exchange Offer,
a holder's ability to sell untendered, or tendered but unaccepted, Outstanding
Notes could be adversely affected. The Outstanding Notes provide that if (i)
the Exchange Offer has not been consummated within 30 days of the
effectiveness of the Registration Statement or (ii) a shelf registration
statement has not been declared effective by November 21, 1997, the interest
rate on the Outstanding Notes will increase by an amount ranging from 0.25% to
1.50% per annum from and including the applicable date as described in the
Registration Rights Agreement until but excluding the date on which the
Exchange Offer is consummated or a shelf registration statement is declared
effective.
 
  LEVERAGE AND DEBT SERVICE. The Company is highly leveraged. As of June 30,
1997, the Company's total debt and stockholders' equity was $118.1 million and
$50.0 million, respectively, and its ratio of debt to stockholders' equity was
2.4 to 1. See "Capitalization". In addition, the Company is party to a
revolving credit facility (the "Revolving Credit Facility") under which up to
$21.0 million may be borrowed on a secured basis, subject to certain
conditions, including without limitation, the maintenance by the Company of a
sufficient level of accounts receivable and inventories. At July 25, 1997, the
Company's borrowing base of accounts receivable and inventories would have
permitted it to borrow up to $12.4 million. The Company's level of debt will
have several important effects on its future operations, including (i) a
substantial portion of the Company's cash flow from operations must be
dedicated to the payment of interest on its indebtedness and will not be
available for other purposes, (ii) covenants contained in the Company's debt
obligations require the Company to meet certain financial tests, and other
restrictions will limit its ability to borrow additional funds or to dispose
of assets and may affect the Company's flexibility in planning for, and
reacting to, changes in its business, including possible acquisition
opportunities, and (iii) the Company's ability to obtain additional financing
in the future for working capital, capital expenditures, acquisitions or
general corporate purposes may be impaired. Management believes that,
excluding acquisitions, future cash flow from operations, together with
available borrowings under the Revolving Credit Facility, will be adequate to
meet the Company's anticipated cash requirements, including for working
capital, capital expenditures and debt service, for the foreseeable future.
See "Management's Discussion and Analysis of Financial Conditions and Results
of Operations--Liquidity and Capital Resources".
 
  In 1995, the Company's liquidity was adversely affected by a confluence of
unusual events and, among other things, it (i) obtained various amendments and
waivers from the lender under its existing revolving credit facility and term
loan and (ii) deferred payment of the interest due on November 1, 1995 under
its $45.0 million of outstanding 12 1/2% Senior Notes, which default was cured
by the payment of overdue interest on February 29, 1996 as part of the
refinancing described in Note 1 of the Notes to Consolidated Financial
Statements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources".
 
                                      17
<PAGE>
 
  The Company's ability to meet its debt service obligations and to reduce its
total debt will be dependent upon the Company's future performance, which will
be subject to general economic conditions and financial, business and other
factors affecting the operations of the Company, many of which are beyond its
control. There can be no assurance that the Company's business will continue
to generate cash flow at or above current levels. If the Company is unable to
generate sufficient cash flow from operations in the future to service its
debt, it may be required to refinance all or a portion of its existing debt,
including the Notes, or to obtain additional financing. There can be no
assurance that any such financing could be obtained on terms acceptable to the
Company, if at all.
 
  COMPETITIVE INDUSTRY. In the United States, the Company experiences
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. For the 52 weeks ended December
28, 1996, Procter & Gamble and Kimberly-Clark held 78.1% of the total U.S.
diaper market and 67.0% of the domestic grocery store market for disposable
diapers. One or both of Procter & Gamble and Kimberly-Clark also dominate most
of the international markets, including those in which the Company currently
competes. Both Procter & Gamble and Kimberly-Clark have substantially greater
manufacturing, marketing and financial resources than the Company and thus are
able to exert significant influence on the worldwide markets in which they
compete. Actions by the Company's competitors could have a material adverse
effect on the Company. See "Business--Industry Conditions".
 
  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 the Company's larger competitors initiates
such pricing changes. The Company may respond to these pricing changes with
changes to its own prices, product counts or promotional programs. The process
of fully implementing such changes may require a number of months and the
Company's operating results may be adversely affected. For example, a price
per package and product count reduction by Procter & Gamble in the first
quarter of 1995 led to a subsequent repositioning of the Company's Drypers
brand, which adversely affected the Company's results of operations during
that period. There can be no assurance that these or future price or product
changes by the Company's larger competitors will not have a material adverse
effect on the Company or that the Company will be able to react with price or
product changes of its own to maintain its 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 the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Industry Conditions".
 
  DEPENDENCE ON KEY PRODUCTS AND ACCEPTANCE OF PRODUCT INNOVATIONS. The
Company's Drypers brand premium diapers and training pants accounted for 61.3%
and 62.0% of the Company's net sales for 1995 and 1996, respectively. The
Company has made substantial investments in manufacturing equipment and
processes for these products. In addition, the Company from time to time has
introduced product innovations that are incorporated into all of the Company's
premium products. The Company is substantially dependent on the continued
success of sales of these products and customer acceptance of its product
innovations. A number of factors could materially reduce sales by the Company
of its products, or the profitability of such sales, including actions by its
competitors, shifts in consumer preferences or the lack of acceptance of the
Company's product innovations. There can be no assurance that in the future
such factors will not have a material adverse effect on the Company. See
"Business--Products".
 
  COST OF CERTAIN RAW MATERIALS. Raw materials, especially pulp,
superabsorbent polymers and polypropylene nonwoven fabric, are significant
components of the Company's products and packaging. An industry-wide shortage
or a significant increase in the price of any of these components could
adversely affect the Company's ability to maintain its profit margins in the
event price competition does not permit the Company to increase prices.
Beginning in late 1994, pulp prices rose dramatically with quoted market
prices rising from $575 per ton in September 1994 to a high price of $975 per
ton in October 1995. These increases in pulp prices
 
                                      18
<PAGE>
 
had a material adverse effect on the Company in 1995. Since March 1996, the
quoted market price for pulp has ranged between $550 per ton and $650 per ton.
The Company has reduced the pulp content (as measured by weight) in its
premium brand diaper by 30% since 1995. However, there can be no assurance
that a sustained high level in the cost of pulp or any other raw material will
not have a material adverse effect on the Company in the future.
 
  INTERNATIONAL OPERATIONS; CURRENCY FLUCTUATIONS, DEVALUATIONS AND
RESTRICTIONS. Approximately 24.2% of the Company's net sales during 1996 were
to customers outside of the United States and 14.5% of the Company's EBITDA
for that year was derived from such sales. The Company currently has
operations in Argentina, Mexico and Brazil and expects its international
operations to become a larger contributor to sales and profitability in the
future. The success of the Company's sales to, operations in and expansion
into international markets depends on numerous factors, many of which are
beyond the Company's control. Such factors include economic conditions in the
foreign countries in which the Company operates and to which it sells its
products. In addition, international operations and expansion may increase the
Company's 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 the Company's exports are
impacted by the relative strength or weakness of the U.S. dollar. Other than
the United States, each country in which the Company operates 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
or political 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; currency devaluations,
fluctuations, controls and shortages; troubled and insolvent financial
institutions; capital flight; political instability, turmoil and violence; and
economic contraction and unemployment. Any of the foregoing could have a
material adverse effect on the Company.
 
  INTELLECTUAL PROPERTY RISKS. The Company's larger branded competitors
normally seek U.S. and foreign patent protection for the product enhancements
they develop. The Company believes it has been able to introduce product
features comparable to those introduced by its competitors by using
manufacturing methods or materials that are not protected by patents, although
there can be no assurance that the Company will be able to continue to do so
in the future. To the extent the Company is not able to introduce comparable
products on a timely basis, its financial position and results of operation
could be materially adversely affected.
 
  In addition, the Company from time to time has received, and may receive in
the future, communications from third parties asserting that the Company's
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 the Company with respect
to existing or future products or packaging. Should the Company be found to
infringe upon the intellectual property rights of others, the Company could be
required to cease use of certain products, trademarks, designs, labels or
packaging or pay damages to the affected parties, any of which could have a
material adverse effect on the Company. Substantial costs also may be incurred
by the Company in redesigning its labels or packaging, in selecting and
clearing new trademarks or in defending any legal action. In 1994, the Company
settled a patent infringement lawsuit with a competitor. See Note 8 of the
Notes to Consolidated Financial Statements for a description of such
litigation and the associated costs.
 
  TECHNOLOGICAL CHANGES. The disposable baby diaper industry is subject to
frequent technological innovations, with the Company's 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. The Company
believes that by working closely with its suppliers, distributors and other
industry participants it has been able to introduce product enhancements
comparable to those introduced by its competitors when needed to maintain the
Company's competitive position, although there can be no assurance that the
Company will be able, or will have adequate resources, to do so in the future.
To the extent the Company is not able or does not have
 
                                      19
<PAGE>
 
adequate resources to introduce comparable products on a timely basis, its
financial position and results of operations could be materially adversely
affected.
 
  COVENANT LIMITATIONS. The Revolving Credit Facility and the Indenture
contain numerous financial and operating covenants that will limit the
discretion of the Company's management with respect to certain business
matters. These covenants will place significant restrictions on, among other
things, the ability of the Company to incur additional debt, to create liens
or other encumbrances, to pay dividends and make other investments and
restricted payments, and to sell or otherwise dispose of assets and to merge
or consolidate with other entities. See "Description of Certain Debt" and
"Description of the Notes--Certain Covenants". The Revolving Credit Facility
also requires the Company to meet certain financial ratios and tests. A
failure to comply with the obligations contained in the Revolving Credit
Facility or the Indenture 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 evidencing debt that may contain cross-
acceleration or cross-default provisions. If, as a result thereof, a default
occurs with respect to the Revolving Credit Facility, the lender thereunder
will have a prior claim with respect to assets pledged as security by the
Company, the effect of which could be to restrict payments to the holders of
the Notes.
 
  ENCUMBRANCES ON ASSETS TO SECURE REVOLVING CREDIT FACILITY; EFFECTIVE
SUBORDINATION. The Notes are unsecured. The Company's obligations under the
Revolving Credit Facility are secured by a first priority lien on the
receivables, inventory, financial assets and general intangibles of the
Company. The Indenture permits the Company to incur certain additional secured
debt subject to the conditions specified therein. If the Company becomes
insolvent or is liquidated, or if payment under the Revolving Credit Facility
is accelerated, the lender under the Revolving Credit Facility will have a
prior claim with respect to such assets and will be entitled to exercise the
remedies available to a secured lender under applicable law pursuant to the
Revolving Credit Facility. See "Description of Certain Debt".
 
  The Notes are also effectively subordinated to all existing and future debt
and other liabilities of the Company's subsidiaries that do not guarantee the
Notes. While the Company's subsidiaries do not presently carry a significant
amount of debt, the Indenture will permit the existing subsidiaries to incur
additional debt under certain circumstances. In the event of an insolvency,
liquidation or other reorganization of any of the subsidiaries of the Company,
creditors of such subsidiaries, including trade creditors, would be entitled
to payment in full from the assets of such subsidiaries before the Company, as
a stockholder, would be entitled to receive any distribution therefrom.
 
  CONTROL BY MAJOR STOCKHOLDERS. As of August 15, 1997, Equus II Incorporated
and its affiliates beneficially owned 28.7% of the outstanding common stock of
the Company and Heartland SmallCap Contrarian Fund beneficially owned 18.3% of
the outstanding common stock of the Company. In addition, as of August 15,
1997, another two stockholders of the Company beneficially owned an aggregate
of 23.2% of the Company's outstanding common stock. Because a majority of the
capital stock of the Company is held by a limited number of holders, such
holders, if acting together, have the ability to exercise control over the
business and affairs of the Company because of their ability to elect the
Company's Board of Directors and their voting power with respect to actions
requiring stockholder approval. See "Principal Stockholders". As a result,
circumstances could arise in which the interests of the major stockholders
could be in conflict with the interests of the holders of the Notes. For
example, if the Company were to encounter financial difficulties or were
unable to pay its debts as they mature, the interests of the major
stockholders might conflict with the interests of the holders of the Notes. In
addition, the major stockholders may have an interest in pursuing
acquisitions, divestitures, financings or other transactions that, in their
judgment, could enhance their equity investment, even though such transactions
might involve risks to the holders of the Notes.
 
  DEPENDENCE ON KEY PERSONNEL. The Company believes that its continued success
will depend to a significant extent upon the abilities and continued efforts
of its senior management. The loss of the services of
 
                                      20
<PAGE>
 
any one or more of such key personnel could have an adverse effect on the
Company and there can be no assurance that the Company would be able to find
suitable replacements for such key personnel. The Company has employment
agreements with certain of its senior executives. The Company does not
maintain key man life insurance on any of its executives. See "Management and
Ownership of Securities".
 
  INABILITY TO PURCHASE NOTES UPON A CHANGE OF CONTROL. Upon a Change of
Control, the Company will be required to offer to repurchase all outstanding
Notes at 101% of the principal amount thereof plus accrued interest to the
date of repurchase. However, there can be no assurance that sufficient funds
will be available at the time of any Change of Control to make any required
repurchases of the Notes tendered, or that restrictions in the Revolving
Credit Facility will allow the Company to make such required repurchases.
Notwithstanding these provisions, the Company could enter into certain
transactions, including certain recapitalizations, that would not constitute a
Change of Control but would increase the amount of debt outstanding at such
time. See "Description of the Exchange Notes--Certain Covenants--Purchase of
Notes upon a Change of Control".
 
  LACK OF PUBLIC MARKET FOR THE EXCHANGE NOTES. The Outstanding Notes
currently are owned by a relatively small number of beneficial owners. The
Outstanding Notes have not been registered under the Securities Act and are
subject to significant restrictions on resale. The Exchange Notes will
constitute a new issue of securities with no established trading market. The
Company does not intend to list the Outstanding Notes or the Exchange Notes on
any national securities exchange or to seek the admission thereof to trading
in the National Association of Securities Dealers Automated Quotation System.
Although the Initial Purchasers have advised the Company that, following
consummation of the Exchange Offer, they currently intend to make a market in
the Exchange Notes, they are not obligated to do so, and any market making
activity with respect to the Exchange Notes may be discontinued at any time
without notice. In addition, such market making activity will be subject to
the limits imposed in the Exchange Act, and may be limited during the Exchange
Offer. Accordingly, no assurance can be given that an active public or other
market will develop for the Exchange Notes or as to the liquidity of or the
trading market for the Exchange Notes.
 
  EXCHANGE OFFER PROCEDURES. Issuance of the Exchange Notes in Exchange for
Outstanding Notes pursuant to the Exchange Offer will be made only after a
timely receipt by the Company of the Outstanding Notes, a properly completed
and duly executed Letter of Transmittal and all other required documents.
Therefore, holders of the Outstanding Notes desiring to tender their
Outstanding Notes in exchange for Exchange Notes should allow sufficient time
to ensure timely delivery. The Company is under no duty to give notification
of defects or irregularities with respect to the tenders of Outstanding Notes
for exchange. Outstanding Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to
be subject to the existing restrictions on transfer thereof. On consummation
of the Exchange Offer, the registration rights under the Registration
Agreement will terminate except that if (i) the Company determines that the
Exchange Offer may not be consummated as soon as practicable after the
Expiration Date because it would violate applicable law or the applicable
interpretations of the staff of the Commission, (ii) the Initial Purchasers so
request with respect to the Outstanding Notes not eligible to be exchanged for
Exchange Notes in the Exchange Offer and held by them following consummation
of the Exchange Offer or (iii) any holder of an Outstanding Note (other than a
broker-dealer exchanging Outstanding Notes that were acquired as a result of
market making or other trading activities) is not eligible to participate in
the Exchange Offer or, in the case of any holder of Outstanding Notes (other
than a broker-dealer exchanging Outstanding Notes that were acquired as a
result of market making or other trading activities) that participates in the
Exchange Offer, such holder does not receive freely tradeable Exchange Notes
on the date of the exchange for validly tendered (and not withdrawn)
Outstanding Notes, the Company has agreed to file and maintain a shelf
registration statement that would allow resales or transfer of restricted
Outstanding Notes or Exchange Notes owned by such holders. In addition, any
holder of Outstanding Notes who tenders in the Exchange Offer for the purpose
of participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Outstanding Notes that were
acquired by the broker-dealer as a result of market-making activities or other
trading activities
 
                                      21
<PAGE>
 
must acknowledge that it will deliver a prospectus in connection with any
resale of the Exchange Notes. See "Plan of Distribution". To the extent that
Outstanding Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Outstanding Notes could be
adversely affected. See "The Exchange Offer".
 
  CONSEQUENCES OF THE EXCHANGE OFFER ON NON-TENDERING HOLDERS OF OUTSTANDING
NOTES. The Company intends for the Exchange Offer to satisfy its registration
obligations under the Registration Agreement. If the Exchange Offer is
consummated, the Company does not, except in very limited circumstances set
forth in the Registration Agreement, intend to file additional registration
statements for the sale or other disposition of Outstanding Notes.
Consequently, following completion of the Exchange Offer, holders of
Outstanding Notes seeking liquidity in their investment would have to rely on
an exemption from the registration requirements of applicable securities laws,
including the Securities Act, with respect to any sale or other disposition of
Outstanding Notes.
 
                               ----------------
 
                      SPECIAL CAUTIONARY NOTICE REGARDING
                          FORWARD-LOOKING STATEMENTS
 
  Certain of the matters discussed under "Summary", "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Business" and elsewhere in this Prospectus contain certain
forward-looking statements concerning the Company's operations, economic
performance and financial condition, including, among other things, the
Company's business strategy. These statements are based on the Company's
expectations and are subject to various risks and uncertainties. Actual
results could differ materially from those anticipated due to a number of
factors, including those identified under "Risk Factors" and elsewhere in this
Prospectus.
 
                                      22
<PAGE>
 
                              THE EXCHANGE OFFER
 
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
 
  The Outstanding Notes were sold by Drypers on June 24, 1997, to the Initial
Purchasers pursuant to a Purchase Agreement, dated June 17, 1997, between
Drypers and the Initial Purchasers (the "Purchase Agreement"). The Initial
Purchasers subsequently resold all of the Outstanding Notes to Qualified
Institutional Buyers, each of whom agreed to comply with certain transfer
restrictions and other conditions. As a condition to the purchase of the
Outstanding Notes by the Initial Purchasers, Drypers entered into a
Registration Rights Agreement with the Initial Purchasers, which requires,
among other things, that promptly following the issuance and sale of the
Outstanding Notes, Drypers file with the SEC the Registration Statement with
respect to the Exchange Notes, use its best efforts to cause the Registration
Statement to become effective under the Securities Act and, upon the
effectiveness of the Registration Statement, offer to the holders of the
Outstanding Notes the opportunity to exchange their Outstanding Notes for a
like principal amount of Exchange Notes, which will be issued without a
restrictive legend and may be reoffered and resold by the holder without
restrictions or limitations under the Securities Act subject to certain
exceptions described below. A copy of the Registration Rights Agreement has
been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The term "holder" with respect to the Exchange Offer
means any person in whose name Outstanding Notes are registered on Drypers'
books or any other person who has obtained a properly completed bond power
from the registered holder or any person whose Outstanding Notes are held of
record by the Depositary who desires to deliver such Outstanding Notes by
book-entry transfer of the Depositary. The Outstanding Notes provide that if
(i) the Exchange Offer has not been consummated within 30 days of the
effectiveness of the Registration Statement or (ii) a shelf registration
statement has not been declared effective by November 21, 1997, the interest
rate on the Outstanding Notes will increase by an amount ranging from 0.25% to
1.50% per annum from and including the applicable date as described in the
Registration Rights Agreement until but excluding the date the Exchange Offer
is consummated or a shelf registration statement is declared effective.
 
  Based on existing interpretations of the Securities Act by the staff of the
SEC set forth in several no-action letters to third parties, and subject to
the immediately following sentence, Drypers believes that Exchange Notes
issued pursuant to the Exchange Offer in exchange for Outstanding Notes may be
offered for resale, resold and otherwise transferred by a holder thereof
(other than (i) a broker-dealer who purchased such Outstanding Notes directly
from Drypers for resale pursuant to Rule 144A or any other available exemption
under the Securities Act or (ii) a person that is an "affiliate" (within the
meaning of Rule 405 of the Securities Act) of Drypers), without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that the holder is acquiring the Exchange Notes in its ordinary
course of business and is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of the
Exchange Notes. However, any purchaser of Outstanding Notes who is an
affiliate of Drypers or who intends to participate in the Exchange Offer for
the purpose of distributing the Exchange Notes, or any broker-dealer who
purchased the Outstanding Notes from Drypers to resell pursuant to Rule 144A
or any other available exemption under the Securities Act, (i) will not be
able to rely on the interpretations by the staff of the SEC set forth in the
above-mentioned no-action letters, (ii) will not be able to tender its
Outstanding Notes in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Outstanding Notes unless such sale
or transfer is made pursuant to an exemption from such requirements.
Accordingly, any holder who tenders in the Exchange Offer with the intention
to participate, or for the purpose of participating, in a distribution of the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. See "Plan of Distribution."
 
  As a result of the filing and effectiveness of the Registration Statement of
which this Prospectus is a part, Drypers will not be required to pay an
increased interest rate on the Outstanding Notes. Following the consummation
of the Exchange Offer, holders of Outstanding Notes not tendered will not have
any further registration rights except in certain limited circumstances
requiring the filing of a Shelf Registration Statement (as defined herein),
and the Outstanding Notes will continue to be subject to certain restrictions
on transfer. See
 
                                      23
<PAGE>
 
"Description of the Exchange Notes." Accordingly, the liquidity of the market
for the Outstanding Notes could be adversely affected.
 
TERMS OF THE EXCHANGE OFFER
 
  Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, Drypers will accept all Outstanding Notes
properly tendered and not withdrawn prior to 5:00 p.m. New York City time, on
the Expiration Date. After authentication of the Exchange Notes by the Trustee
or an authenticating agent, Drypers will issue and deliver $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
Outstanding Notes accepted in the Exchange Offer. Holders may tender some or
all of their Outstanding Notes pursuant to the Exchange Offer in denominations
of $1,000 and integral multiples thereof.
 
  Each holder of Outstanding Notes (other than certain specified holders) who
wishes to exchange Outstanding Notes for Exchange Notes in the Exchange Offer
will be required to represent that (i) it is not an affiliate of Drypers, (ii)
any Exchange Notes to be received by it were acquired in the ordinary course
of its business and (iii) it has no arrangement or understanding with any
person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Notes.
 
  Each broker-dealer that receives Exchange Notes for its own account in
exchange for Outstanding Notes, where such Outstanding Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
 
  The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the Outstanding Notes, except that (i) the
offering of the Exchange Notes has been registered under the Securities Act,
(ii) the Exchange Notes will not be subject to transfer restrictions and (iii)
certain provisions relating to an increase in the stated interest rate on the
Outstanding Notes provided for under certain circumstances will be eliminated.
The Exchange Notes will evidence the same debt as the Outstanding Notes. The
Exchange Notes will be issued under and entitled to the benefits of the
Indenture.
 
  As of the date of this Prospectus, $115,000,000 aggregate principal amount
of the Outstanding Notes is outstanding. In connection with the issuance of
the Outstanding Notes, Drypers arranged for the Outstanding
Notes to be issued and transferable in book-entry form through the facilities
of the Depositary, acting as depositary. The Exchange Notes will also be
issuable and transferable in book-entry form through the Depositary.
   
  This Prospectus, together with the accompanying Letter of Transmittal, is
initially being sent to all registered holders of the Outstanding Notes as of
the close of business on September 11, 1997. Drypers intends to conduct the
Exchange Offer in accordance with the applicable requirements of the Exchange
Act, and the rules and regulations of the SEC thereunder, including Rule 14e-
1, to the extent applicable. The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Outstanding Notes being tendered, and
holders of the Outstanding Notes do not have any appraisal or dissenters'
rights under the General Corporation Law of the State of Delaware or under the
Indenture in connection with the Exchange Offer. Drypers shall be deemed to
have accepted validly tendered Outstanding Notes when, as and if Drypers has
given oral or written notice thereof to the Exchange Agent. See "--Exchange
Agent." The Exchange Agent will act as agent for the tendering holders for the
purpose of receiving Exchange Notes from Drypers and delivering Exchange Notes
to such holders.     
 
  If any tendered Outstanding Notes are not accepted for exchange because of
an invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted Outstanding Notes will be returned, at
Drypers' cost, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
 
  Holders who tender Outstanding Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the
 
                                      24
<PAGE>
 
exchange of Outstanding Notes pursuant to the Exchange Offer. Drypers will pay
all charges and expenses, other than certain applicable taxes, in connection
with the Exchange Offer. See "--Solicitation of Tenders; Fees and Expenses."
 
  NEITHER THE BOARD OF DIRECTORS OF DRYPERS NOR DRYPERS MAKES ANY
RECOMMENDATION TO HOLDERS OF OUTSTANDING NOTES AS TO WHETHER TO TENDER OR
REFRAIN FROM TENDERING ALL OR ANY PORTION OF THEIR OUTSTANDING NOTES PURSUANT
TO THE EXCHANGE OFFER. MOREOVER, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF OUTSTANDING NOTES MUST MAKE THEIR OWN DECISION
WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE
AMOUNT OF OUTSTANDING NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE
LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR ADVISORS, IF ANY, BASED ON
THEIR OWN FINANCIAL POSITION AND REQUIREMENTS.
 
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
   
  The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
October 14, 1997, unless Drypers, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date to
which the Exchange Offer is extended. Drypers may extend the Exchange Offer at
any time and from time to time by giving oral or written notice to the
Exchange Agent and by timely public announcement.     
 
  Drypers expressly reserves the right, in its sole discretion (i) to delay
acceptance of any Outstanding Notes, to extend the Exchange Offer or to
terminate the Exchange Offer and to refuse to accept Outstanding Notes not
previously accepted, if any of the conditions set forth herein under "--
Conditions to the Exchange Offer" shall have occurred and shall not have been
waived by Drypers (if permitted to be waived by Drypers), by giving oral or
written notice of such delay, extension or termination to the Exchange Agent
and (ii) to amend the terms of the Exchange Offer in any manner. Any such
delay in acceptance, extension, termination or amendment will be followed as
promptly as practicable by oral or written notice thereof by Drypers to the
registered holders of the Outstanding Notes. If the Exchange Offer is amended
in a manner determined by Drypers to constitute a material change, Drypers
will promptly disclose such amendment in a manner reasonably calculated to
inform the holders of such amendment and Drypers will extend the Exchange
Offer to the extent required by law.
 
  Without limiting the manner in which Drypers may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of the Exchange Offer, Drypers shall have no obligation to publish, advise, or
otherwise communicate any such public announcement, other than by making a
timely release thereof to the Dow Jones News Service.
 
INTEREST ON THE EXCHANGE NOTES
 
  The Exchange Notes will bear interest at a rate of 10 1/4% per annum,
payable semi-annually on June 15 and December 15 of each year, commencing
December 15, 1997. Holders of Exchange Notes of record on December 1, 1997,
will receive on December 15, 1997, an interest payment in an amount equal to
(x) the accrued interest on such Exchange notes from the date of issuance
thereof to December 15, 1997, plus (y) the accrued interest on the previously
held Outstanding Notes from the date of issuance of such Outstanding Notes
(June 24, 1997) to the date of exchange thereof. Interest will not be paid on
Outstanding Notes that are accepted for exchange. The Notes mature on June 15,
2007.
 
PROCEDURES FOR TENDERING
 
  Each holder of Outstanding Notes wishing to accept the Exchange Offer must
complete, sign and date the Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or such facsimile, together with
the Outstanding Notes to be exchanged and any other required documentation, to
Bankers Trust Company, as Exchange Agent, at the
 
                                      25
<PAGE>
 
address set forth herein and therein or effect a tender of Outstanding Notes
pursuant to the procedures for book-entry transfer as provided for herein and
therein. By executing the Letter of Transmittal, each holder will represent to
Drypers that, among other things, the Exchange Notes acquired pursuant to the
Exchange Offer are being acquired in the ordinary course of business of the
person receiving such Exchange Notes, whether or not such person is the
holder, that neither the holder nor any such other person has any arrangement
or understanding with any person to participate in the distribution of such
Exchange Notes and that neither the holder nor any such other person is an
"affiliate," as defined in Rule 405 under the Securities Act, of Drypers.
 
  Any financial institution that is a participant in the Depositary's Book-
Entry Transfer Facility system may make book-entry delivery of the Outstanding
Notes by causing the Depositary to transfer such Outstanding Notes into the
Exchange Agent's account in accordance with the Depositary's procedure for
such transfer. Although delivery of Outstanding Notes may be effected through
book-entry transfer into the Exchange Agent's account at the Depositary, the
Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at its address set forth herein under
"--Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration
Date. DELIVERY OF DOCUMENTS TO THE DEPOSITARY IN ACCORDANCE WITH ITS
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
 
  Only a holder may tender its Outstanding Notes in the Exchange Offer. To
tender in the Exchange Offer, a holder must complete, sign and date the Letter
of Transmittal or a facsimile thereof, have the signatures thereof guaranteed
if required by the Letter of Transmittal, and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with the Outstanding Notes
(unless such tender is being effected pursuant to the procedure for book-entry
transfer) and any other required documents, to the Exchange Agent, prior to
5:00 p.m., New York City time, on the Expiration Date.
 
  The tender by a holder will constitute an agreement between such holder,
Drypers and the Exchange Agent in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal. If less than all
of the Outstanding Notes are tendered, a tendering holder should fill in the
amount of Outstanding Notes being tendered in the appropriate box on the
Letter of Transmittal. The entire amount of Outstanding Notes delivered to the
Exchange Agent will be deemed to have been tendered unless otherwise
indicated.
 
  THE LETTER OF TRANSMITTAL WILL INCLUDE REPRESENTATIONS TO DRYPERS THAT,
AMONG OTHER THINGS, (1) THE EXCHANGE NOTES ACQUIRED PURSUANT TO THE EXCHANGE
OFFER ARE BEING ACQUIRED IN THE ORDINARY COURSE OF BUSINESS OF THE PERSON
RECEIVING SUCH EXCHANGE NOTES (WHETHER OR NOT SUCH PERSON IS THE HOLDER), (2)
NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON IS ENGAGED IN, INTENDS TO ENGAGE
IN OR HAS ANY ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN
THE DISTRIBUTION OF SUCH EXCHANGE NOTES, (3) NEITHER THE HOLDER NOR ANY SUCH
OTHER PERSON IS AN "AFFILIATE," AS DEFINED IN RULE 405 UNDER THE SECURITIES
ACT, OF DRYPERS AND (4) IF THE TENDERING HOLDER IS A BROKER OR DEALER (AS
DEFINED IN THE EXCHANGE ACT) (A) IT ACQUIRED THE OUTSTANDING NOTES FOR ITS OWN
ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES
AND (B) IT HAS NOT ENTERED INTO ANY ARRANGEMENT OR UNDERSTANDING WITH DRYPERS
OR ANY "AFFILIATE" THEREOF (WITHIN THE MEANING OF RULE 405 UNDER THE
SECURITIES ACT) TO DISTRIBUTE THE EXCHANGE NOTES TO BE RECEIVED IN THE
EXCHANGE OFFER. IN THE CASE OF A BROKER-DEALER THAT RECEIVES EXCHANGE NOTES
FOR ITS OWN ACCOUNT IN EXCHANGE FOR OUTSTANDING NOTES WHICH WERE ACQUIRED BY
IT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES, THE LETTER OF
TRANSMITTAL WILL ALSO INCLUDE AN ACKNOWLEDGMENT THAT THE BROKER-DEALER WILL
DELIVER A COPY OF THIS PROSPECTUS IN CONNECTION WITH THE RESALE BY IT OF
EXCHANGE NOTES RECEIVED PURSUANT TO THE EXCHANGE OFFER; HOWEVER, BY SO
ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, SUCH HOLDER WILL NOT BE DEEMED
TO ADMIT THAT IT IS AN
 
                                      26
<PAGE>
 
"UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT. SEE "PLAN OF
DISTRIBUTION."
 
  THE METHOD OF DELIVERY OF OUTSTANDING NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND
RISK OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ENSURE DELIVERY TO THE EXCHANGE AGENT PRIOR TO THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT
TO DRYPERS. HOLDERS MAY ALSO REQUEST THAT THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES EFFECT SUCH TENDER FOR HOLDERS,
IN EACH CASE AS SET FORTH HEREIN AND IN THE LETTER OF TRANSMITTAL.
 
  Any beneficial owner whose Outstanding Notes are registered in the name of
his broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on his behalf. If such beneficial owner
wishes to tender on his own behalf, such beneficial owner must, prior to
completing and executing the Letter of Transmittal and delivering his
Outstanding Notes, either make appropriate arrangements to register ownership
of the Outstanding Notes in such owner's name or obtain a properly completed
bond power from the registered holder. The transfer of record ownership may
take considerable time.
 
  Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act (each an "Eligible Institution"), unless
the Outstanding Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" of the Letter of Transmittal
or (ii) for the account of an Eligible Institution. If the Letter of
Transmittal is signed by a person other than the registered holder listed
therein, such Outstanding Notes must be endorsed or accompanied by appropriate
bond powers which authorize such person to tender the Outstanding Notes on
behalf of the
registered holder, in either case signed as the name of the registered holder
or holders appears on the Outstanding Notes. If the Letter of Transmittal or
any Outstanding Notes or bond powers are signed or endorsed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by Drypers,
evidence satisfactory to Drypers of their authority to so act must be
submitted with such Letter of Transmittal.
 
  The Company understands that the Exchange Agent has confirmed with DTC that
any financial institution that is a participant in DTC's system may utilize
DTC's Automated Tender Offer Program ("ATOP") to tender Outstanding Notes. The
Company further understands that the Exchange Agent will request, within two
business days after the date the Exchange Offer commences, that DTC establish
an account with respect to the Outstanding Notes for the purpose of
facilitating the Exchange Offer, and any participant may make book-entry
delivery of Outstanding Notes by causing DTC to transfer such Outstanding
Notes into the Exchange Agent's account in accordance with DTC's ATOP
procedures for transfer. However, the exchange of the Outstanding Notes so
tendered will only be made after timely confirmation (a "Book-Entry
Confirmation") of such book-entry transfer and timely receipt by the Exchange
Agent of an Agent's Message (as defined in the next sentence), and any other
documents required by the Letter of Transmittal. The term "Agent's Message"
means a message, transmitted by DTC and received by the Exchange Agent and
forming part of Book-Entry Confirmation, which states that DTC has received an
express acknowledgment from a participant tendering Outstanding Notes which
are the subject of such Book-Entry Confirmation and that such participant has
received and agrees to be bound by the terms of the Letter of Transmittal and
that the Company may enforce such agreement against such participant.
 
 
                                      27
<PAGE>
 
  All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Outstanding Notes will be
determined by Drypers in its sole discretion, which determination will be
final and binding. Drypers reserves the absolute right to reject any and all
Outstanding Notes not properly tendered or any Outstanding Notes Drypers'
acceptance of which would, in the opinion of counsel for Drypers, be unlawful.
Drypers also reserves the absolute right to waive any irregularities or
conditions of tender as to particular Outstanding Notes. Drypers'
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in the Letter of Transmittal) will be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of Outstanding Notes must be cured within such time as Drypers shall
determine. Although Drypers intends to notify holders of defects or
irregularities with respect to tenders of Outstanding Notes, neither Drypers,
the Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of
Outstanding Notes, nor shall any of them incur any liability for failure to
give such notification. Tenders of Outstanding Notes will not be deemed to
have been made until such irregularities have been cured or waived. Any
Outstanding Notes received by the Exchange Agent that Drypers determines are
not properly tendered or the tender of which is otherwise rejected by Drypers
and as to which the defects or irregularities have not been cured or waived by
Drypers will be returned by the Exchange Agent to the tendering holder unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
 
  In addition, Drypers reserves the right in its sole discretion (a) to
purchase or make offers for any Outstanding Notes that remain outstanding
subsequent to the Expiration Date, or, as set forth under "--Conditions to the
Exchange Offer," terminate the Exchange Offer and (b) to the extent permitted
by applicable law, to purchase Outstanding Notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such
purchases or offers may differ from the terms of the Exchange Offer.
 
BOOK-ENTRY TRANSFER
 
  Drypers understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Outstanding Notes at the DTC (the "Book-Entry Transfer Facility") for the
purpose of facilitating the Exchange Offer, and subject to the establishment
thereof, any financial institution that is a participant in the Book-Entry
Transfer Facility's system may make book-entry delivery of Outstanding Notes
by causing such Book-Entry Transfer Facility to transfer such Outstanding
Notes into the Exchange Agent's account with respect to the Outstanding Notes
in accordance with the Book-Entry Transfer Facility's procedures for such
transfer.
 
  ALTHOUGH DELIVERY OF OUTSTANDING NOTES MAY BE EFFECTED THROUGH BOOK-ENTRY
TRANSFER INTO THE EXCHANGE AGENT'S ACCOUNT AT THE BOOK-ENTRY TRANSFER
FACILITY, AN APPROPRIATE LETTER OF TRANSMITTAL PROPERLY COMPLETED AND DULY
EXECUTED WITH ANY REQUIRED SIGNATURE GUARANTEE AND ALL OTHER REQUIRED
DOCUMENTS MUST IN EACH CASE BE TRANSMITTED TO AND RECEIVED OR CONFIRMED BY THE
EXCHANGE AGENT AT ITS ADDRESS SET FORTH BELOW ON OR PRIOR TO THE EXPIRATION
DATE, OR, IF THE GUARANTEED DELIVERY PROCEDURES DESCRIBED BELOW ARE COMPLIED
WITH, WITHIN THE TIME PERIOD PROVIDED UNDER SUCH PROCEDURES. DELIVERY OF
DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO
THE EXCHANGE AGENT.
 
GUARANTEED DELIVERY PROCEDURES
 
  Holders who wish to tender their Outstanding Notes and (i) whose Outstanding
Notes are not immediately available, or (ii) who cannot deliver their
Outstanding Notes, the Letter of Transmittal or any other required documents
to the Exchange Agent prior to the Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely basis, may effect a tender if:
 
    (a) the tender is made through an Eligible Institution;
 
                                      28
<PAGE>
 
    (b) prior to the Expiration Date, the Exchange Agent receives from such
  Eligible Institution a properly completed and duly executed Notice of
  Guaranteed Delivery (by facsimile transmittal, mail or hand delivery)
  setting forth the name and address of the holder, the certificate number or
  numbers of such holder's Outstanding Notes and the principal amount of such
  Outstanding Notes tendered, stating that the tender is being made thereby,
  and guaranteeing that, within three New York Stock Exchange ("NYSE")
  trading days after the Expiration Date, the Letter of Transmittal (or
  facsimile thereof), together with the certificate(s) representing the
  Outstanding Notes to be tendered in proper form for transfer (or
  confirmation of a book-entry transfer into the Exchange Agent's account at
  the Depositary of Outstanding Notes delivered electronically) and any other
  documents required by the Letter of Transmittal, will be deposited by the
  Eligible Institution with the Exchange Agent; and
 
    (c) such properly completed and executed Letter of Transmittal (or
  facsimile thereof), together with the certificate(s) representing all
  tendered Outstanding Notes in proper form for transfer (or confirmation of
  a book-entry transfer into the Exchange Agent's account at the Depositary
  of Outstanding Notes delivered electronically) and all other documents
  required by the Letter of Transmittal are received by the Exchange Agent
  within three NYSE trading days after the Expiration Date.
 
  Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Outstanding Notes according to the
guaranteed delivery procedures set forth above.
 
WITHDRAWAL OF TENDERS
 
  Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
 
  For a withdrawal to be effective, a written or facsimile transmission notice
of withdrawal must be received by the Exchange Agent at its address set forth
herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any
such notice of withdrawal must (i) specify the name of the person having
deposited the Outstanding Notes to be withdrawn (the "Depositor"), (ii)
identify the Outstanding Notes to be withdrawn (including the certificate
number or numbers and principal amount of such Outstanding Notes or, in the
case of Outstanding Notes transferred by book-entry transfer, the name and
number of the account at the Depositary to be credited), (iii) be signed by
the Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Outstanding Notes were tendered (including any
required signature guarantee) or be accompanied by documents of transfer
sufficient to permit the Trustee with respect to the Outstanding Notes to
register the transfer of such Outstanding Notes into the name of the Depositor
withdrawing the tender and (iv) specify the name in which any such Outstanding
Notes are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time of receipt)
of such withdrawal notices will be determined by Drypers, whose determination
shall be final and binding on all parties. Any Outstanding Notes so withdrawn
will be deemed not to have been validly tendered for purposes of the Exchange
Offer, and no Exchange Notes will be issued with respect thereto unless the
Outstanding Notes so withdrawn are validly retendered. Any Outstanding Notes
that have been tendered but are not accepted for exchange will be returned to
the holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Outstanding Notes may be retendered by following one of the
procedures described above under "--Procedures for Tendering" at any time
prior to the Expiration Date.
 
CONDITIONS TO THE EXCHANGE OFFER
 
  Notwithstanding any other term of the Exchange Offer, Drypers will not be
required to accept for exchange, or to issue Exchange Notes for, any
Outstanding Notes, and may terminate or amend the Exchange Offer as provided
herein before the acceptance of such Outstanding Notes if, in Drypers'
judgment, any of the following conditions has occurred or exists or has not
been satisfied: (i) that the Exchange Offer, or the making of any exchange by
a holder, violates applicable law or any applicable interpretation of the
staff of the SEC, (ii) that any action or proceeding shall have been
instituted or threatened in any court or by or before any governmental
 
                                      29
<PAGE>
 
agency or body with respect to the Exchange Offer, (iii) that there has been
adopted or enacted any law, statute, rule or regulation that can reasonably be
expected to impair the ability of Drypers to proceed with the Exchange Offer,
(iv) that there has been declared by United States federal or Texas or New
York state authorities a banking moratorium; or (v) that trading on the New
York Stock Exchange or generally in the United States over-the-counter market
has been suspended by order of the SEC or any other governmental agency.
 
  If Drypers determines that it may terminate the Exchange Offer for any of
the reasons set forth above, Drypers may (i) refuse to accept any Outstanding
Notes and return any Outstanding Notes that have been tendered to the holders
thereof, (ii) extend the Exchange Offer and retain all Outstanding Notes
tendered prior to the Expiration Date of the Exchange Offer, subject to the
rights of such holders of tendered Outstanding Notes to withdraw their
tendered Outstanding Notes or (iii) waive such termination event with respect
to the Exchange Offer and accept all properly tendered Outstanding Notes that
have not been withdrawn. If such waiver constitutes a material change in the
Exchange Offer, Drypers will disclose such change by means of a supplement to
this Prospectus that will be distributed to each registered holder, and
Drypers will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the waiver and the manner of
disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such period.
 
EXCHANGE AGENT
 
  Bankers Trust Company, the Trustee under the Indenture, has been appointed
as Exchange Agent for the Exchange Offer. In such capacity, the Exchange Agent
has no fiduciary duties and will be acting solely on the basis of directions
of Drypers. Requests for assistance and requests for additional copies of this
Prospectus or of the Letter of Transmittal should be directed to the Exchange
Agent addressed as follows:
 
              By Mail:
                                          BT Services Tennessee, Inc.
                                              Reorganization Unit
                                                P.O. Box 292737
                                            Nashville, TN 37229-2737
 
        By Overnight Courier:
                                          BT Services Tennessee, Inc.
                                              Reorganization Unit
                                              Grassmere Park Drive
                                              Nashville, TN 37211
 
          By Hand Delivery:
                                             Bankers Trust Company
                                        Corporate Trust and Agency Unit
                                             123 Washington Street
                                               First Floor Window
                                               New York, NY 10008
 
                    Facsimile Transmission: (615) 835-3701
                   Confirmation by Telephone: (615) 835-3572
                          Information: (800) 735-7777
 
  Delivery to an address or facsimile number other than those listed above
will not constitute a valid delivery.
 
 
                                      30
<PAGE>
 
SOLICITATION OF TENDERS; FEES AND EXPENSES
 
  The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by Drypers. The principal solicitation pursuant to the Exchange Offer is
being made by mail. Additional solicitations may be made by officers and
regular employees of Drypers and its affiliates in person, by telegraph,
telephone or telecopier.
 
  Drypers has not retained any dealer-manager in connection with the Exchange
Offer and will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. Drypers will, however, pay the
Exchange Agent reasonable and customary fees for its services and will
reimburse the Exchange Agent for its reasonable out-of-pocket costs and
expenses in connection therewith and will indemnify the Exchange Agent for all
losses and claims incurred by it as a result of the Exchange Offer. Drypers
may also pay brokerage houses and other custodians, nominees and fiduciaries
the reasonable out-of-pocket expenses incurred by them in forwarding copies of
this Prospectus, Letters of Transmittal and related documents to the
beneficial owners of the Outstanding Notes and in handling or forwarding
tenders for exchange.
 
  The expenses to be incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees and printing costs, will be paid by Drypers.
 
  Drypers will pay all transfer taxes, if any, applicable to the exchange of
Outstanding Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Outstanding Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered
holder of the Outstanding Notes tendered, or if tendered Outstanding Notes are
registered in the name of any person other than the person signing the Letter
of Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Outstanding Notes pursuant to the Exchange Offer, then the amount
of any such transfer taxes (whether imposed on the registered holder or any
other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed by
Drypers directly to such tendering holder.
 
ACCOUNTING TREATMENT
 
  The Exchange Notes will be recorded at the same carrying value as the
Outstanding Notes, as reflected in Drypers' accounting records on the date of
the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by Drypers as a result of the consummation of the Exchange Offer.
The expenses of the Exchange Offer will be amortized by Drypers over the term
of the Exchange Notes.
 
CONSEQUENCES OF FAILURE TO EXCHANGE
 
  Participation in the Exchange Offer is voluntary. Holders of the Outstanding
Notes are urged to consult their financial and tax advisors in making their
own decisions as to what action to take.
 
  As a result of the making of, and upon acceptance for exchange of all
validly tendered Outstanding Notes pursuant to the terms of, this Exchange
Offer, Drypers will have fulfilled a covenant contained in the Registration
Rights Agreement. Holders of the Outstanding Notes who do not tender their
Outstanding Notes in the Exchange Offer will continue to hold such Outstanding
Notes and will be entitled to all the rights, and subject to the limitations
applicable thereto, under the Indenture and the Registration Rights Agreement,
except for any such rights under the Registration Rights Agreement that by
their terms terminate or cease to have further effect as a result of the
making of this Exchange Offer. See "Description of the Exchange Notes." All
untendered Outstanding Notes will continue to be subject to the restrictions
on transfer set forth in the Indenture. The Outstanding Notes may not be
offered, resold, pledged or otherwise transferred, prior to the date that is
two years after the later of June 24, 1997 and the last date on which Drypers
or any "affiliate" (within the meaning of Rule 144 of the Securities Act) of
Drypers was the owner of such Outstanding Note except (i) to Drypers, (ii)
pursuant to a registration statement which has been declared effective under
the Securities Act, (iii) to Qualified
 
                                      31
<PAGE>
 
Institutional Buyers in reliance upon the exemption from the registration
requirements of the Securities Act provided by Rule 144A, (iv) to
Institutional Accredited Investors in transactions exempt from the
registration requirements of the Securities Act, (v) in transactions complying
with the provisions of Regulation S under the Securities Act or (vi) pursuant
to any other available exemption from the registration requirements under the
Securities Act. To the extent that Outstanding Notes are tendered and accepted
in the Exchange Offer, the liquidity of the trading market for untendered
Outstanding Notes could be adversely affected.
 
  Drypers may in the future seek to acquire untendered Outstanding Notes in
the open market or through privately negotiated transactions, through
subsequent exchange offers or otherwise. Drypers intends to make any such
acquisitions of Outstanding Notes in accordance with the applicable
requirements of the Exchange Act and the rules and regulations of the SEC
thereunder, including Rule 14e-1, to the extent applicable. Drypers has no
present plan to acquire any Outstanding Notes that are not tendered in the
Exchange Offer or to file a registration statement to permit resales of any
Outstanding Notes that are not tendered in the Exchange Offer.
 
                                      32
<PAGE>
 
                                USE OF PROCEEDS
 
  Drypers will not receive any cash proceeds from the issuance of the Exchange
Notes offered hereby. In consideration for issuing the Exchange Notes as
contemplated in this Prospectus, Drypers will receive in exchange Outstanding
Notes in like principal amount. The form and terms of the Exchange Notes are
identical in all material respects to the form and terms of the Outstanding
Notes, except that (i) the offering of the Exchange Notes has been registered
under the Securities Act, (ii) the Exchange Notes will not be subject to
transfer restrictions and (iii) certain provisions relating to an increase in
the stated interest rate on the Outstanding Notes provided for under certain
circumstances will be eliminated. The Outstanding Notes surrendered in
exchange for Exchange Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the Exchange Notes will not result in a
change in the indebtedness of Drypers.
 
  The net proceeds from the sale of the Outstanding Notes were approximately
$110.6 million. These net proceeds were used in the manner described below.
 
    (i) To repurchase $43.4 million outstanding principal amount of the 12
  1/2% Senior Notes that were tendered pursuant to the Purchase Offer plus
  accrued interest thereon to the date of purchase and related fees and
  expenses for a total cash price of $47.1 million.
 
    (ii) To repay all outstanding borrowings under the Revolving Credit
  Facility, which totaled $10.2 million as a result of the combined effects
  of a required repurchase and retirement of $4.0 million of common stock of
  the Company issued in connection with the acquisition of the Puppet brand
  name, borrowings under the Working Capital Facility, capital expenditures
  and borrowings for general corporate purposes.
 
    (iii) To redeem in full the $10.0 million Working Capital Facility
  incurred in April 1997 for a total, including the applicable prepayment
  premium and accrued interest, of $10.5 million.
 
    (iv) To purchase 44% of the remaining 49% interest in the Company's
  subsidiary that owns the recently established marketing and distribution
  operations in Brazil for $5.3 million.
 
    (v) To redeem in full the Company's 12% Junior Subordinated Debentures
  due 1998 and to repay certain accounts payable, which required an aggregate
  of $4.9 million.
 
    (vi) To redeem in full the Company's term loan with a bank, which totaled
  $.9 million.
 
  The remaining net proceeds of $30.6 million are being used for general
corporate purposes including capital expenditures. Pending the application of
the total net proceeds as described above, the Company has invested the
proceeds in short-term investment grade securities.
 
  The 12 1/2% Senior Notes mature on November 1, 2002. Borrowings under the
Revolving Credit Facility bear interest at the rate of prime plus 1 3/4% per
annum and mature on February 26, 1999. The Working Capital Facility bore
interest at the rate of 12% per annum and would have matured on May 1, 1999.
Borrowings under the Working Capital Facility were used to increase available
working capital. The Company's bank term loan bore interest at prime plus 2%
and would have matured on May 1, 1999. The 12% Junior Subordinated Debentures
due 1998 would have matured on June 30, 1998.
 
                                      33
<PAGE>
 
                                CAPITALIZATION
 
  The following table sets forth the capitalization of the Company as of June
30, 1997. See "Use of Proceeds" and the Consolidated Financial Statements,
including the notes thereto, included elsewhere herein.
 
<TABLE>
<CAPTION>
                                                             JUNE 30, 1997
                                                             -------------
                                                              (IN THOUSANDS)
<S>                                                          <C>           <C>
Short-term debt:
  Revolving Credit Facility(1)..............................   $     --
                                                               --------
Long-term debt, less current portion:
  Long-term debt............................................      1,499
  Outstanding Notes.........................................    115,000
  12 1/2% Senior Notes......................................      1,566
                                                               --------
    Total long-term debt....................................    118,065
                                                               --------
Stockholders' equity:
  Preferred stock, $.01 par value, 5,000,000 shares
   authorized; 85,750 shares issued and outstanding.........          1
  Common stock, $.001 par value, 20,000,000 shares
   authorized; 7,813,777 shares issued and outstanding(2)...          8
  Additional paid-in capital(2).............................     69,148
  Warrants..................................................      1,382
  Retained deficit..........................................    (20,567)
                                                               --------
    Total stockholders' equity..............................     49,972
                                                               --------
      Total capitalization..................................   $168,037
                                                               ========
</TABLE>
--------
(1) The Revolving Credit Facility provides for up to $21.0 million of
    borrowings, with availability determined as a function of advance rates
    based on eligible accounts receivable, finished goods inventory and raw
    material inventory. As of July 25, 1997, the Company's borrowing base of
    accounts receivable and inventories would have permitted it to borrow up
    to $12.4 million.
(2) Does not include (a) up to 8,575,000 shares of common stock issuable upon
    the conversion of the outstanding 85,750 shares of preferred stock; (b) up
    to 1,911,608 shares of common stock that may be issued upon exercise of
    stock options under various stock option plans at a weighted average
    exercise price of $2.97 per share; and (c) up to 942,664 shares of common
    stock issuable upon exercise of common stock warrants at a weighted
    average exercise price of $3.17 per share.
 
                                      34
<PAGE>
 
                            SELECTED FINANCIAL DATA
 
  The following selected historical financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements,
including the notes thereto, included elsewhere herein.
 
<TABLE>
<CAPTION>
                                                                                    SIX MONTHS ENDED
                                   YEAR ENDED DECEMBER 31                               JUNE 30
                         ---------------------------------------------------------  -----------------
                          1992         1993        1994         1995        1996     1996      1997
                         -------     --------    --------     --------    --------  -------  --------
                             (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S>                      <C>         <C>         <C>          <C>         <C>       <C>      <C>
STATEMENT OF EARNINGS
 DATA(1):
Net sales............... $77,719     $156,079    $173,552     $163,947    $207,014  $97,864  $132,712
Cost of goods sold......  48,338       95,295     106,130      114,075     126,128   60,115    81,739
                         -------     --------    --------     --------    --------  -------  --------
  Gross profit..........  29,381       60,784      67,422       49,872      80,886   37,749    50,973
Selling, general and
 administrative
 expenses...............  23,723(2)    46,231      48,081       53,691      70,333   35,716    41,933
Unusual expenses........      --        2,376(3)    1,141(4)     3,185(5)       --       --        --
Restructuring charge....      --           --          --        4,255(6)       --       --        --
                         -------     --------    --------     --------    --------  -------  --------
  Operating income
   (loss)...............   5,658       12,177      18,200      (11,259)     10,553    2,033     9,040
Interest expense........   4,132       11,115       7,685        8,035       8,931    4,403     4,210
Other income............      --           --        (434)          --          --       --       (42)
                         -------     --------    --------     --------    --------  -------  --------
Income (loss) before
 income tax provision
 (benefit) and
 extraordinary items....   1,526        1,062      10,949      (19,294)      1,622   (2,370)    4,872
Income tax provision
 (benefit)..............     866        1,370       4,151       (3,829)        309      201       716
                         -------     --------    --------     --------    --------  -------  --------
Income (loss) before
 extraordinary items....     660         (308)      6,798      (15,465)      1,313   (2,571)    4,156
Extraordinary items.....  (2,898)(7)       --      (3,688)(8)       --          --       --    (7,769)(9)
                         -------     --------    --------     --------    --------  -------  --------
Net income (loss)....... $(2,238)    $   (308)   $  3,110     $(15,465)   $  1,313  $(2,571) $ (3,613)
                         =======     ========    ========     ========    ========  =======  ========
Common and common
 equivalent shares
 outstanding............   1,602        2,989       6,246        6,588      14,194    6,635    19,057
                         =======     ========    ========     ========    ========  =======  ========
Net income (loss) per
 common share:
  Before extraordinary
   item................. $ (1.20)    $   (.10)   $   1.09     $  (2.35)   $    .09  $  (.42) $    .22
  Extraordinary item....   (1.80)          --        (.59)          --          --       --      (.41)
                         -------     --------    --------     --------    --------  -------  --------
  Net income (loss)..... $ (3.00)    $   (.10)   $    .50     $  (2.35)   $    .09  $  (.42) $   (.19)
                         =======     ========    ========     ========    ========  =======  ========
FINANCIAL RATIOS AND
 OTHER DATA:
EBITDA(10).............. $ 7,381     $ 16,594    $ 23,767     $ (4,959)   $ 17,412  $ 5,384  $  8,370
Adjusted EBITDA(11).....   7,381       18,970      24,908        2,481      17,412    5,384     8,370
Capital expenditures....   6,470        6,157       7,079        8,896       5,931    1,394     8,518
Depreciation and
 amortization...........   2,023        5,017       5,799        7,068       7,624    3,717     4,037
Ratio of EBITDA to pro
 forma interest
 expense(10)(12)........                                                       1.5x               1.4x
Ratio of earnings to
 fixed charges(13)......     1.3x         1.1x        2.3x          --         1.2x     .5x       2.1x
Pro forma ratio of
 earnings to fixed
 charges(12)(13)........                                                       1.1x               1.8x
</TABLE>
 
<TABLE>
<CAPTION>
                                         DECEMBER 31
                         --------------------------------------------- JUNE 30,
                           1992     1993     1994     1995      1996     1997
                         -------- -------- -------- --------  -------- --------
                                            (IN THOUSANDS)
<S>                      <C>      <C>      <C>      <C>       <C>      <C>
BALANCE SHEET DATA:
Working capital
 (deficit).............. $ 10,994 $  8,587 $ 17,962 $ (3,597) $  8,707 $ 59,034
Property and equipment,
 net....................   27,872   31,271   34,853   34,208    35,154   41,233
Total assets............  112,918  115,905  131,731  137,420   150,555  199,120
Short-term debt,
 including current
 portion of long-term
 debt...................    2,850    6,807    6,813   12,064    16,567       --
Long-term debt..........   75,235   75,510   46,632   47,350    48,647  118,065
Stockholders'
 equity(14).............   10,692   13,997   56,767   41,822    53,608   49,972
</TABLE>
--------
 (1) The Company acquired two U.S. regional diaper manufacturing operations in
     1992. In 1994, the Company acquired a preferred stock interest in an
     Argentine diaper manufacturer, which became a wholly-owned subsidiary of
     the Company in July 1995. In December 1996, the Company acquired a diaper
     manufacturing operation in Mexico. The Company established operations in
     Brazil in February 1997. The results of these operations have been
     included since their respective dates of acquisition or establishment.
 
                                      35
<PAGE>
 
 (2) Includes one-time expenses of $300,000 that were paid as bonuses to
     management in connection with the 1992 acquisitions.
 (3) Includes unusual expenses of $1,536,000 to reflect the costs associated
     with the Company's repositioning of its premium brand diaper products and
     $840,000 of legal fees and expenses in connection with a patent
     infringement lawsuit in which the Company settled by entering into a
     license agreement and agreed to pay a royalty if the Company should use
     the other party's patented technology.
 (4) Includes legal fees and expenses of $1,141,000 incurred in connection
     with a patent infringement lawsuit, which was settled during the second
     quarter of 1994 with no payment by the Company or the other party.
 (5) Includes unusual expenses of $2,358,000 to reflect the costs associated
     with the Company's repositioning/brand transition of its premium brand
     diaper products and unusual expenses of $827,000 related to costs
     associated with the Company's refinancing described in Note 1 of the
     Notes to Consolidated Financial Statements.
 (6) Includes a noncash restructuring charge of $4,255,000 related to the
     write-down of idled equipment to net realizable value and lease
     termination costs related to the closure of the Company's Houston
     facility.
 (7) Includes a noncash extraordinary expense of $2,432,000, net of taxes, for
     the write-off of capitalized debt issuance costs, a cash extraordinary
     expense of $466,000, net of taxes, for prepayment and other fees in
     connection with the acquisition of a regional diaper manufacturer and
     completion of the 12 1/2% Senior Note offering.
 (8) Includes a noncash extraordinary expense of $2,014,000, net of taxes, for
     the write-off of capitalized debt issuance costs and original issue
     discount, and a cash extraordinary expense of $1,674,000, net of taxes,
     for prepayment fees in connection with the redemption of $30,000,000
     principal amount of 12 1/2% Senior Notes from the proceeds of the
     Company's initial public offering.
 (9) 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.
(10) EBITDA represents net income (loss) plus the non-cash portion of
     extraordinary item (if any), tax provision, interest expense,
     depreciation and amortization (excluding the portion of amortization
     included in interest expense). The Company has included EBITDA data
     (which is not a measure of financial performance under generally accepted
     accounting principles) because such data are used by certain investors to
     measure a company's ability to service debt and because a comparable
     measure will be a factor in certain incurrence tests included in the
     Indenture. EBITDA should not be considered as an alternative to income
     from operations or to cash flows from operating activities (as determined
     in accordance with generally accepted accounting principles) and should
     not be construed as an indication of a company's operating performance or
     as a measure of liquidity.
(11) Adjusted EBITDA represents EBITDA plus unusual expenses and restructuring
     charges.
(12) The calculation of pro forma interest expense gives effect to the
     Offering and the application of the estimated net proceeds therefrom to
     debt reduction as if they had occurred on January 1, 1996. The pro forma
     information is not necessarily indicative of the financial results that
     might have occurred had the transactions actually taken place on January
     1, 1996, or of future results of operations.
(13) For purposes of computing the ratio of earnings to fixed charges,
     "earnings" consists of income (loss) before income tax provision
     (benefit) and extraordinary items, plus fixed charges. "Fixed charges"
     consist of interest on all indebtedness and amortization of deferred
     financing costs and original issue discounts plus the interest component
     of rental expense under operating leases (assumed to equal one-third of
     rental expense). Earnings were not adequate to cover fixed charges by
     $10,669,000 for the year ended December 31, 1995.
(14) The Company has never declared a cash dividend on its common stock.
 
                                      36
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
  The following discussion and analysis, together with the accompanying
Consolidated Financial Statements and related notes, is intended to aid in
understanding the Company's results of operations as well as its financial
position, cash flows, debt and other key financial information.
 
OVERVIEW
 
  Drypers 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. 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. During
1995, the Company successfully integrated its four regional brands under the
Drypers brand name which it believes has increased the awareness of the
Company's products with retailers and consumers while generating operating
efficiencies. The Company currently sells its products principally to
approximately 600 U.S. grocery retailers with an estimated 18,000 retail
outlets. The Company continually seeks to expand its U.S. grocery store
distribution network while increasing its limited penetration of the mass
merchant and drugstore chain markets. In 1996, sales of branded products
represented 86.3% of the Company's net sales in the United States and sales of
private label and other products represented 13.7% of net sales in the United
States.
 
  The Company's annual net sales increased to $207.0 million in the year ended
December 31, 1996 from $156.1 million in the year ended December 31, 1993.
This sales growth has been achieved by (i) the increase in sales of training
pants, (ii) the expansion of international sales through exports, contract
manufacturing and acquisitions of diaper manufacturing operations,
particularly in Latin America, and (iii) the increased share in existing
retail accounts and expanded penetration into new accounts in part due to the
introduction of several new product features such as "Drypers with Natural
Baking Soda". The Company seeks to expand both its domestic and international
sales and operations.
 
  The Company's domestic operations include sales in the United States, Puerto
Rico and exports from these manufacturing operations. The following table sets
forth the Company's domestic and international net sales for each of the last
three years and the six-month periods ended June 30, 1996 and 1997.
 
<TABLE>
<CAPTION>
                                                                           SIX MONTHS
                                  YEAR ENDED DECEMBER 31                 ENDED JUNE 30
                          ----------------------------------------  -------------------------
                              1994          1995          1996         1996          1997
                          ------------  ------------  ------------  -----------  ------------
                                               (DOLLARS IN MILLIONS)
<S>                       <C>    <C>    <C>    <C>    <C>    <C>    <C>   <C>    <C>    <C>
Domestic................  $173.6 100.0% $154.5  94.3% $179.2  86.6% $85.9  87.8% $ 92.6  69.8%
International...........      --    --     9.4   5.7    27.8  13.4   12.0  12.2%   40.1  30.2%
                          ------ -----  ------ -----  ------ -----  ----- -----  ------ -----
 Total net sales........  $173.6 100.0% $163.9 100.0% $207.0 100.0% $97.9 100.0% $132.7 100.0%
                          ====== =====  ====== =====  ====== =====  ===== =====  ====== =====
</TABLE>
 
  Among the factors that have a direct bearing on the Company's results of
operations are price and product changes and promotional activity by
competitors, increases in costs of raw materials, timing of technological
advances by the Company and its competitors, lack of acceptance by consumers
of new replacement products, foreign governmental monetary and policy changes
and other factors discussed herein.
 
  Gross profit margins vary significantly across the Company's 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
Company's 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 Company had U.S. net operating loss carryforwards of approximately $14.3
million as of December 31, 1996 available to offset future taxable income. The
loss carryforwards will expire in the years
 
                                      37
<PAGE>
 
2008 through 2011 if not utilized. The Company also has alternative minimum
tax credits of $387,000 which are available indefinitely. The Company recorded
an income tax benefit of $3.8 million in 1995 and an income tax provision of
$309,000 in 1996. Utilization of U.S. net operating loss carryforwards reduced
the Company's income tax provision by approximately $500,000 in 1996.
 
  Recent Industry Conditions. A confluence of unusual events adversely
impacted the Company's financial performance in 1995. In December 1994, the
Mexican peso was devalued and, because Drypers did not have a plant in Mexico
at that time and was instead exporting to Mexico from its Houston, Texas
plant, an estimated $10 million in annual sales were lost almost immediately.
The effect of the economic crisis in Mexico later adversely impacted the
Argentine economy as well, reducing the Company's ability to maintain sales
volumes and margins in its recently acquired operations in Buenos Aires.
 
  Beginning in the first quarter of 1995, Procter & Gamble and Kimberly-Clark
increased their rates of promotional spending on their premium-priced brands
more aggressively than the Company. In addition, Procter & Gamble repositioned
Luvs, its national value-priced brand, after having already reduced prices
substantially within the previous 18 months, with a reduction in the number of
diapers per package and a reduction in price per package. The Company
responded with a repositioning of its own, lowering the number of diapers per
package and the price per package and, as a result, recognized $2.4 million in
unusual expenses in the first quarter of 1995.
 
   Throughout 1995, the industry experienced substantial price increases in
pulp, a major component of the total cost to produce diapers and training
pants. Beginning in late 1994, pulp prices rose dramatically with quoted
market prices rising from $575 per ton in June 1994 to $650 per ton in March
1995, $850 per ton in June 1995 and $975 per ton in September 1995. Due to the
competitive environment, the 1995 increases in pulp prices were not passed on
to consumers, thus reducing gross profit margins. These increases in pulp
prices had a material adverse effect on the Company in 1995. A decline in the
quoted market price of pulp began in November 1995 with the quoted market
price of pulp ranging between $550 and $650 per ton since March 1996.
 
  These external events happened at a particularly vulnerable point in the
Company's own development. As a final step to complete the Company's planned
transition to one national brand throughout the United States, the Company
converted, during the first quarter of 1995, its four regional brands
(Drypers, Baby's Choice, Wee-Fits and Cozies) into one common package design
and brand name, Drypers. This conversion meant that the Company's brand
awareness was unusually low in roughly three-quarters of the United States
until consumers became accustomed to the new brand and package. In response to
rising pulp prices, the Company accelerated the conversion of its premium
diaper products to include a thinner absorbent core that is less reliant on
pulp. The initial version of this "ultra-thin" product met with slow initial
consumer acceptance.
 
  Improved Recent Performance. In response to these events, management
implemented a plan to improve sales and margins, increase operating efficiency
and substantially reduce costs throughout the Company's operations. The major
components of the cost reduction program included the closure of the Company's
Houston manufacturing facility, reduction of manufacturing and general
overhead costs and a redesigned premium diaper, which reduced overall product
cost. Between January 1995 and January 1996, the Company's redesign of its
premium diaper to an "ultra-thin" configuration reduced pulp content (as
measured by weight) by 30%. In response to initial slow consumer acceptance,
this product was subsequently modified resulting in increased consumer
acceptance. The full benefit of the cost reduction plan was not reflected in
operating income until the third quarter of 1996, as the Company invested
heavily in promotional spending to rebuild market share during the first half
of 1996. In the second half of 1996, promotional spending returned to normal
levels. To offset its loss of export sales to Mexico, the Company re-entered
the Mexican diaper market in the second quarter of 1996 through contract
manufacturing arrangements with a local producer. The Company acquired the
manufacturing operations of this producer in December 1996. In addition, the
Company introduced "Drypers with Natural Baking Soda" in May 1996. As a result
of the combined effect of these initiatives, the Company experienced a
significant recovery of sales volume and a return to profitability.
 
 
                                      38
<PAGE>
 
  The foregoing factors should be taken into account, along with the other
factors discussed below and elsewhere in this Prospectus, in comparing the
Company's results during the past three years and the six months ended June
30, 1996 and 1997, and in understanding the results that may be expected in
the future.
 
RESULTS OF OPERATIONS
 
  The following table sets forth the specified components of income and
expense for the Company expressed as a percentage of net sales for the years
ended December 31, 1994, 1995 and 1996, and the six months ended June 30, 1996
and 1997.
 
<TABLE>
<CAPTION>
                                                                 SIX MONTHS
                                              YEAR ENDED         ENDED JUNE
                                              DECEMBER 31            30
                                           --------------------  -------------
                                           1994   1995    1996   1996    1997
                                           -----  -----   -----  -----   -----
<S>                                        <C>    <C>     <C>    <C>     <C>
Net sales................................  100.0% 100.0%  100.0% 100.0%  100.0%
Cost of goods sold.......................   61.2   69.6    60.9   61.4    61.6
                                           -----  -----   -----  -----   -----
Gross profit.............................   38.8   30.4    39.1   38.6    38.4
Selling, general and administrative ex-
 penses..................................   27.7   32.8    34.0   36.5    31.6
Unusual expenses.........................    0.7    1.9      --     --      --
Restructuring charge.....................     --    2.6      --     --      --
                                           -----  -----   -----  -----   -----
Operating income (loss)..................   10.4   (6.9)    5.1    2.1     6.8
Interest expense.........................    4.4    4.9     4.3    4.5     3.2
Other income.............................   (0.3)    --      --     --      --
                                           -----  -----   -----  -----   -----
Income (loss) before income tax provision
 (benefit) and extraordinary item........    6.3  (11.8)    0.8   (2.4)    3.6
Income tax provision (benefit)...........    2.4   (2.4)    0.2     .2      .5
Extraordinary item.......................    2.1     --      --     --     5.9
                                           -----  -----   -----  -----   -----
Net income (loss)........................    1.8%  (9.4)%   0.6%  (2.6)%  (2.8)%
                                           =====  =====   =====  =====   =====
</TABLE>
 
 Six Months Ended June 30, 1997 Compared to the Six Months Ended June 30, 1996
 
  Net Sales. Net sales increased 35.6% to $132.7 million for the six months
ended June 30, 1997 from $97.9 million for the six months ended June 30, 1996.
Domestic sales increased 7.8% to $92.6 million for the six months ended June
30, 1997 from $85.9 million for the same period in 1996, primarily as a result
of the introduction of the new baking soda product in May 1996 and the
continued growth in training pants sales. The Company believes that the
introduction of the new baking soda product contributed to an increased share
in existing retail accounts and expanded penetration into new accounts. Net
sales in the international sector grew to $40.1 million for the six months
ended June 30, 1997 from $12.0 million in the prior comparable period. This
substantial increase reflected primarily the improved sales volume for the
Company's operations in Argentina, the acquisition of a manufacturer in Mexico
in December 1996 and the Company's majority-owned consolidated venture in
Brazil, which began operations in March 1997.
 
  Cost of Goods Sold. Cost of goods sold increased as a percentage of net
sales to 61.6% for the six months ended June 30, 1997 compared to 61.4% for
the six months ended June 30, 1996. This increase in cost of goods sold as a
percentage of net sales reflects an increase in international sales which have
generally lower gross profit margins, offset by the benefits of higher volumes
over the fixed cost base.
 
  Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased as a percentage of net sales to 31.6% for
the six months ended June 30, 1997 compared to 36.5% of net sales for the six
months ended June 30, 1996. The decrease reflects the Company's focus on
reducing domestic per-pad selling costs and increases in international sales
which have lower selling and promotional costs.
 
                                      39
<PAGE>
 
  Operating Income. As a result of the above factors, the Company's operating
income increased $7.0 million to $9.0 million for the six months ended June
30, 1997 from $2.0 million for the six months ended June 30, 1996. Operating
income as a percentage of net sales was 6.8% for the six months ended June 30,
1997 versus 2.1% for the six months ended June 30, 1996.
 
  Interest Expense. Interest expense decreased slightly to $4.2 million for
the six months ended June 30, 1997 as compared to $4.4 million for the six
months ended June 30, 1996. The decrease reflected reduced borrowings under
the Company's revolving credit facility offset by borrowings under a working
capital facility and amortization of additional deferred loan costs related to
the refinancing transactions discussed under "Liquidity and Capital
Resources".
 
  Income Taxes. The Company recorded a provision of $716,000 related to state
and foreign taxes for the six months ended June 30, 1997.
 
  Extraordinary Item. In connection with the Company's financing transactions
completed during the second quarter of 1997, the Company recognized an
extraordinary item of $7.8 million for the write-off of capitalized debt
issuance costs and prepayment and other fees.
 
 Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
 
  Net Sales. Net sales increased 26.3% to $207.0 million for the year ended
December 31, 1996 from $163.9 million for the year ended December 31, 1995.
Domestic sales increased 16.0% to $179.2 million in 1996 from $154.5 million
in 1995, primarily as a result of increased promotional spending at the
beginning of the year, the introduction of the new baking soda product in May
1996, and continued growth in training pants sales. Net sales in the
international sector grew significantly to $27.8 million in 1996 from $9.4
million in 1995. Most of this increase came from the inclusion of the results
of the Company's operations in Argentina for a full year in 1996 as compared
to five months during 1995, with the balance generated by the establishment of
a contract manufacturing relationship in Mexico.
 
  Cost of Goods Sold. Cost of goods sold decreased as a percentage of net
sales to 60.9% for 1996 compared to 69.6% for the prior year. A major
component of the cost of goods sold is the cost of pulp, which accounted for
approximately 10% and 7% of cost of goods sold in 1995 and 1996, respectively.
Of the 8.7 percentage point improvement, approximately 3.0 percentage points
resulted from a reduction in the average cost of pulp content in the Company's
products in 1996 with the balance resulting from efficiency improvements. The
quoted market price of pulp began 1996 at $925 per ton and fluctuated between
$550 per ton and $650 per ton for most of the year as compared to 1995 when
the quoted market price began the year at $650 per ton but fluctuated between
$850 per ton and $975 per ton for most of the year. The major components of
improved efficiency included closure of the Houston manufacturing facility and
increased sales and production volumes. This reduction in cost of goods sold
as a percentage of net sales came despite an increase in international sales
which have generally lower gross profit margins.
 
  Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased as a percentage of net sales to 34.0% for
the year ended December 31, 1996 compared to 32.8% of net sales for 1995. The
total increase reflected higher couponing and promotional spending as well as
an increase in the percentage of premium domestic diaper and training pant
sales relative to total net sales, offset by a decrease in general and
administrative expenses as a percentage of net sales and by the increases in
international sales which have inherently lower selling and promotional costs.
Selling, general and administrative expenses as a percentage of net sales
declined during 1996, however, from 38.0% of net sales in the first quarter to
31.6% of net sales in the fourth quarter, due to the Company's focus on
reducing per pad selling costs. The reduction in per pad selling costs was
made possible by the increased demand for the Company's new baking soda
diaper.
 
 
                                      40
<PAGE>
 
  Operating Income. As a result of the above factors, the Company's operating
income in 1996 increased to $10.6 million from an operating loss of $11.3
million in 1995, a period affected by $7.4 million in nonrecurring charges
associated with the Company's restructuring. Operating income as a percentage
of net sales was 5.1% in 1996.
 
  Interest Expense. Interest expense was $8.9 million for the year ended
December 31, 1996, as compared to $8.0 million for the year ended December 31,
1995. The increase reflects increased borrowings under the new revolving
credit facility and amortization of additional deferred loan costs related to
the refinancing.
 
  Income Taxes. The Company recorded a provision related to state and foreign
taxes of $309,000 for the year ended December 31, 1996. A portion of the
Company's available net operating loss carryforwards offset the need for any
federal tax provision related to domestic operations.
 
 Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994
 
  Net Sales. Net sales decreased 5.5% to $163.9 million for the year ended
December 31, 1995 from $173.6 million for the year ended December 31, 1994.
The decline in net sales was due primarily to a reduction in the market share
of the Drypers brand, the per unit price reductions and the absence of any
significant export sales to Mexico due to the December 1994 devaluation of the
Mexican peso. The Company was subjected to significant increases in
competitive activity from Procter & Gamble and Kimberly-Clark in the first
half of 1995. The decline in premium brand diaper sales was partially
mitigated by increases in the Company's other domestic business and the
additional business which resulted from the Company's acquisition of a diaper
manufacturer in Argentina, effective July 31, 1995.
 
  Cost of Goods Sold. Cost of goods sold increased as a percentage of net
sales to 69.6% for the year ended December 31, 1995, compared to 61.2% for the
year ended December 31, 1994. The increase was primarily due to the shift in
the product sales mix toward lower margin products, reduced per unit sales
prices, higher pulp prices and allocation of fixed costs over lower production
volume.
 
  Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased as a percentage of net sales to 32.8% for
the year ended December 31, 1995, compared to 27.7% of net sales for the year
ended December 31, 1994. The selling expense increase as a percentage of net
sales was primarily due to higher fixed advertising and promotional spending
on lower sales volume of the Company's premium brand products.
 
  Unusual Expenses. In connection with the repositioning of its premium diaper
and transition to one national brand in early 1995, the Company recognized
$2.4 million of promotional and other related expenses which were recorded as
an unusual expense. The Company also recognized $827,000 of expenses related
to the refinancing transaction completed on February 29, 1996, which were
recorded as an unusual expense. During the second quarter of 1994, the Company
recorded $1.1 million of legal fees associated with its defense and settlement
of a patent infringement lawsuit as an unusual expense.
 
  Restructuring Charge. Operating results for 1995 include a restructuring
charge of approximately $4.3 million. As part of the restructuring, the
Company implemented a plan to realign and consolidate its operations, a move
intended to allow the Company the flexibility to react to other business
opportunities and utilize its excess capacity while reducing costs. The plan
provided for consolidation of the Company's domestic operations from three
production facilities to two in an effort to curtail the costs associated with
idle capacity. The restructuring charge included a $3.3 million provision for
the write-down of idled equipment to net realizable value and a $1.0 million
charge related to lease termination costs for the Houston facility.
 
 
                                      41
<PAGE>
 
  Operating Income. As a result of the above factors, the Company incurred an
operating loss of $11.3 million in 1995 as compared to operating income of
$18.2 million in 1994.
 
  Interest Expense. Interest expense increased slightly to $8.0 million for
the year ended December 31, 1995, as compared to $7.7 million for the year
ended December 31, 1994. This increase was primarily the result of increased
borrowing under the revolving credit facility and a term loan obtained to fund
working capital and capital expenditure requirements, and higher interest
rates, offset by the effect of the redemption of $30.0 million of 12 1/2%
Senior Notes funded by the proceeds of the initial public offering in March
1994.
 
  Other Income. The Company did not recognize any dividend income on its
preferred stock investment in an Argentine diaper manufacturer during the year
ended December 31, 1995, as compared to dividend income of $434,000 for the
year ended December 31, 1994.
 
  Income Taxes. The Company recorded a $3.8 million income tax benefit for the
year ended December 31, 1995. Tax benefits recognized were limited due to the
uncertainties related to future realization of net operating loss
carryforwards.
 
  Extraordinary Item. In connection with the 1994 redemption of $30.0 million
of 12 1/2% Senior Notes funded by the proceeds of the Company's initial public
offering, the Company incurred a noncash extraordinary expense of
approximately $2.0 million, net of taxes, for the write-off of previously
capitalized debt issuance costs and original issue discount and a cash
extraordinary expense of approximately $1.7 million, net of taxes, for
prepayment fees.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company's liquidity and capital requirements include, but are not
limited to, the payment of principal and interest on its debt; the funding of
working capital needs, primarily inventory, accounts receivable and
advertising and promotional expenses; and the funding of capital investments
in machinery, equipment and computer systems. Historically, the Company has
financed its debt service, working capital and capital expenditure
requirements through a combination of internally generated cash flow,
borrowings under the Company's revolving credit facility and other sources and
proceeds from private and public offerings of debt and equity securities.
 
  The matters discussed above under "Overview--Recent Industry Conditions" had
a material adverse impact on the Company's financial position and results of
operations. In addition, the Company's liquidity was adversely affected, which
required it to, among other things, obtain various amendments and waivers from
the lenders under its existing revolving credit facility and defer payment of
the interest due on November 1, 1995 under its $45.0 million of outstanding 12
1/2% Senior Notes, which default was cured by the payment of overdue interest
on February 29, 1996 as part of the refinancing described in Note 1 to the
Notes to Consolidated Financial Statements.
 
  On April 24, 1997, the Company entered into a Note Purchase Agreement with a
financial institution, whereby the Company obtained $10.0 million in working
capital financing. This financing was provided through the issuance of two
$5.0 million promissory notes (the "Working Capital Facility"), bearing
interest at 12% per annum payable semiannually and due on May 1, 1999. The
Working Capital Facility was unsecured and was prepaid by the Company, subject
to a 3% premium.
 
  On June 24, 1997, the Company closed a private issuance of $115.0 million
aggregate principal amount of its 10 1/4% Senior Notes due 2007 (the "Notes").
Proceeds from the offering of the Notes were used to repurchase $43.4 million
of the $45.0 million in principal amount of the Company's outstanding 12 1/2%
Series B Senior Notes Due November 1, 2002 pursuant to a tender offer
therefor, to repay the Working Capital Facility described above, to repay
borrowings outstanding under the Company's revolving credit facility, to repay
the Company's term loan with a bank, to repay the Company's junior
subordinated debt and other indebtedness
 
                                      42
<PAGE>
 
and for general corporate purposes. In connection with these transactions, the
Company 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.
 
  The Company currently has available a revolving credit facility with a
borrowing base of up to $21.0 million. Borrowings under the revolving credit
facility bear interest at a rate of prime plus 1 3/4% per annum. Borrowing
availability under the revolving credit facility is a function of advance
rates based on eligible accounts receivable and inventory and is secured by
accounts receivable, inventory, trademarks and trade names, stock of certain
subsidiaries and other intangibles. No borrowings were outstanding under the
Revolving Credit Facility as of June 30, 1997.
 
  In February 1997, the Company began a series of transactions in which it
established a 51% owned subsidiary in Brazil to market its products, acquired
the rights to the Puppet brand name and entered into a supply arrangement with
a Brazilian manufacturer. The Company initially paid 1.0 million shares of
common stock and canceled an outstanding $2.2 million receivable from such
manufacturer as consideration for the transactions. The sellers of the Puppet
brand name exercised an option to receive $4.0 million in cash in lieu of the
1.0 million shares, and such cash was paid to the sellers in May 1997. During
the second quarter of 1997, the Company also exercised a portion of its fair
value option to purchase 44% of the remaining 49% interest in its Brazilian
subsidiary for $5.3 million in cash.
 
  The Company's estimated cash requirements during 1997 are primarily the
funding of working capital needs, payment of debt service and planned capital
expenditures of approximately $13.5 million. The capital expenditures in 1997
are primarily related to the Company's new product launch in the second
quarter of 1997, as well as expansion of its domestic and international
manufacturing capacity. Of the total capital expenditure budget, approximately
$8.5 million had been incurred through June 30, 1997.
 
  The Company's working capital was $59.0 million as of June 30, 1997 compared
to $8.7 million as of December 31, 1996. The Company's current assets
increased from $51.6 million at December 31, 1996 to $86.0 million at June 30,
1997, and current liabilities, including short-term debt, decreased from $42.9
million at December 31, 1996 to $27.0 million at June 30, 1997. Total debt
increased from $65.2 million at December 31, 1996 to $118.1 million at June
30, 1997.
 
  The Company's operations used $8.5 million of cash during the six months
ended June 30, 1996 and $4.0 million of cash for the six months ended June 30,
1997. The use of cash during the six months ended June 30, 1997 reflects the
cash portion of the extraordinary item and the Company's expanding
international operations. Capital expenditures for the six months ended June
30, 1996 and 1997 were $1.4 million and $8.5 million, respectively. The
significant increase between periods in capital expenditures reflected machine
enhancements incurred in connection with the launch of "Drypers with Aloe
Vera" and capacity increases. Operations and capital expenditures in the 1996
period were funded primarily with $8.8 million of proceeds from the private
placement of convertible preferred stock. For the six months ended June 30,
1997, capital expenditures and the Company's investment in the Brazilian
venture were funded primarily by borrowings.
 
  The Company generated cash flows of $3.8 million and $6.3 million from
operations in 1994 and 1995, respectively, and used $4.3 million in operations
in 1996. Increased sales activity during 1994 resulted in operating cash flows
before depreciation and amortization, the non-cash portion of the
extraordinary item and deferred tax provision of $13.2 million. A significant
portion of this increase was absorbed by increases in working capital items
resulting from the past and anticipated future volume increases. In 1995, as
the Company experienced the difficulties described above under "Overview--
Recent Industry Conditions" which resulted in a net loss of $15.5 million, it
was able to maintain positive cash flow primarily by reducing the levels of
receivables and inventories it maintained by $6.9 million, and by allowing its
accounts payable and accrued liabilities to rise by an aggregate of $8.0
million. In 1996, the Company returned its working capital to more normal
levels by reducing accounts payable and accrued liabilities, resulting in an
operational cash flow deficit of $4.3 million.
 
                                      43
<PAGE>
 
  The Company's capital expenditures were $7.1 million in 1994, $8.9 million
in 1995 and $5.9 million in 1996. The Company financed the expenditures in
1994 and 1995 through a combination of borrowings under a revolving credit
facility and from the proceeds of the Company's initial public offering in
1994. The Company financed its capital expenditures in 1996 from the proceeds
of an offering of preferred stock and through borrowing under the Revolving
Credit Facility.
 
  The Company believes, excluding acquisitions, that the combination of its
cash on hand, cash flow from operations and the borrowing availability under
existing working capital facilities and existing operating lease financing
arrangements should allow the Company to meet its working capital, capital
expenditure and debt service requirements, remain in compliance with its
financial covenants and manage its business needs for the foreseeable future.
 
INFLATION
 
  Inflationary conditions in the United States have been moderate and, except
for pulp prices in 1995, have not had a material impact on the Company's
results of operations or financial position. Despite higher inflationary rates
in Latin America, inflation has not had a material impact on the results of
operations of the Company's operations located in that region because the
Company has generally been able to pass on cost increases to its customers.
 
FOREIGN CURRENCY
 
  The Company operates in the United States and various foreign countries and
is therefore subject to currency fluctuations. The Company's foreign
operations attempt to minimize the effects of currency risk by offsetting,
whenever possible, amounts payable in U.S. dollars with amounts receivable in
U.S. dollars. As a matter of policy, the Company does not engage in currency
speculation. Other than the December 1994 devaluation of the Mexican peso
described above, changes in exchange rates historically have not materially
impacted the Company's net sales, costs or business practices.
 
NEW ACCOUNTING STANDARDS
 
  In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". This
statement establishes new standards for computing and presenting earnings per
share requiring the presentation of "basic" and "diluted" earnings per share
as compared to "primary" and "fully diluted" earnings per share. The Company
is required to adopt SFAS No. 128 in the first quarter of fiscal 1998. Earlier
adoption is not permitted and restatement of all prior period earnings per
share data is required. The Company believes that the "diluted" disclosure
required under SFAS No. 128 will not differ materially from historical
"primary" earnings per share amounts for the 1996 and 1997 periods presented.
 
  In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". This statement establishes standards for
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income is the total of net income and all other
nonowner changes in equity. The Company is required to adopt SFAS No. 130 in
the first quarter of fiscal 1998. Reclassification of comparative financial
statements provided for earlier periods will be required. The Company believes
that the display of comprehensive income will not differ materially from the
currently reported net income (loss) attributable to common stockholders.
 
  In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information". This
statement requires disclosure related to each segment of an enterprise's
operations similar to those required under current standards with the addition
of quarterly disclosure requirements and a finer partitioning of geographic
disclosures. The Company is required to adopt SFAS No. 131 for the fiscal year
ending December 31, 1998.
 
                                      44
<PAGE>
 
                                   BUSINESS
 
  Drypers 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. 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. At the same time, the Company intends to continue to
expand its international operations.
 
INDUSTRY CONDITIONS
 
  U.S. Disposable Baby Diaper Market. The size of the U.S. diaper market
measured by retail sales was approximately $3.7 billion in 1996. The Company
believes 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 to a 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: premium-priced branded producers,
value-priced branded producers and private label producers.
 
  Procter & Gamble and Kimberly-Clark are the leading premium-priced branded
producers and have tended to compete on the basis of product quality, features
and price. 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 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 produced by the
Company 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 low 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. Value-priced brands 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. Private label manufacturers generally emphasize
price over quality and features and, therefore, typically do not invest as
heavily in research and development as, and are generally slower to
incorporate new product enhancements than, premium-priced branded competitors
and the Company. 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.
 
                                      45
<PAGE>
 
  The size of the U.S. disposable baby diaper and training pants market sold
through grocery stores, measured by retail sales, was approximately $2.0
billion during 1996. Since 1989, the Company's 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 distribution of diapers has been decreasing as a
percentage of total diaper sales in the United States from 60% in 1994 to 54%
in 1996, reflecting a shift in distribution to mass merchants.
 
  Procter & Gamble and Kimberly-Clark are the dominant companies in the
disposable diaper market, with an estimated 37% and 41% share, respectively,
of the total U.S. diaper market and an estimated 34% and 40% share,
respectively, of the domestic grocery store market for disposable diapers for
the 52 weeks ended December 28, 1996. There are also private label
manufacturers with higher diaper sales than the Company in terms of sales.
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-merchants
and drugstore chain retailers, measured by retail sales, was approximately
$1.7 billion during 1996, representing approximately 46% 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 30% in 1994 to 37%
in 1996 while drug store market share has decreased from 10% to 9% over the
same period.
 
  International Disposable Baby Diaper Markets. Although disposable baby
diaper usage is significantly lower outside the United States, Western Europe,
Japan and other developed countries, the Company estimates that the
international disposable baby diaper market is approximately $12 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
which 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. The
Company believes that increased 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.
 
STRATEGY
 
  The Company's business strategy is to maximize sales, EBITDA and
profitability by implementing a strategy based upon the following elements.
 
  . Offer "Every Day Value" branded products to consumers. The Company's
    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. Drypers believes that
    this combination of brand name, 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. Drypers sells its 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. The Company believes
 
                                      46
<PAGE>
 
    that it is 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 the Company's emphasis on
    (i) selective development of innovative product features which
    distinguish its products from the premium-priced brands, (ii)
    manufacturing high quality products at substantially the same costs as
    the leading national brand manufacturers, (iii) significantly lower
    advertising, promotion and research and development expenses and (iv) a
    substantially lower corporate overhead structure.
 
  . Increase penetration of domestic distribution channels by promoting the
    Drypers brand. The Company continually seeks to expand its sales and
    distribution network (currently approximately 600 retailers with an
    estimated 18,000 retail outlets in the United States). The Company
    believes that marketing its products under one national brand name has
    increased its market share within the United States by enhancing the
    familiarity of its brand name to retailers and consumers, while resulting
    in certain production and advertising cost savings. As a result, the
    Company believes that it is well positioned to increase its extensive
    penetration of the grocery store market, as well as its limited
    penetration of the mass-merchant and drugstore chain markets, which
    currently account for approximately 46% of the total U.S. diaper market.
 
  . Continue to introduce successful product features and innovations.
    Drypers differentiates its brand from the other national brands through
    the selective development of cost-effective innovative product features,
    in addition to price. For example, in 1994, the Company began to promote
    its diapers and training pants as the only "perfume free" national brand.
    In 1996, Drypers introduced the first odor control diaper, "Drypers with
    Natural Baking Soda". The Company believes that its launch of diapers
    with baking soda was in large part responsible for its increased
    penetration of the U.S. grocery store market from an estimated 54% in
    December 1995 to an estimated 61% in April 1997. Drypers announced on May
    1, 1997 the launch of "Drypers with Aloe Vera", as well as a licensing
    agreement to use the Sesame Street trademark and characters on the
    Company's products and packaging and in advertising and promotional
    materials. In addition, the Company's improved diaper will feature a
    breathable, cloth-like outer cover.
 
  . Pursue international expansion opportunities. Management believes that
    there are substantial growth opportunities for producers of disposable
    diapers and training pants in Latin America and the Pacific Rim
    (excluding Japan) in view of the current low levels of consumer
    penetration for those products (on average approximately 12% in those
    markets versus approximately 90% in the United States, Western Europe and
    Japan in 1995) and the rapid increase in the standard of living in both
    regions in recent years. The Company intends to continue to expand its
    operations in Argentina, Mexico and Brazil and is actively seeking
    further expansion opportunities through acquisition, joint venture or
    other arrangements in the Pacific Rim and Latin America. The Company
    believes that increased geographic diversity should help to reduce its
    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 54% of the U.S. diaper
market, or $2.0 billion of retail sales, in 1996. The Company estimates that
its products are currently distributed through approximately 600 retailers
with an estimated 18,000 retail outlets in the United States whose sales
represented 61% of the total U.S. grocery store market for disposable diapers
and training pants in April 1997, as compared to 54% in December 1995, and has
achieved distribution levels in excess of 90% of the grocery stores in its
most developed markets. The Company believes that its brands represented 5.8%
of the total dollar volume and 6.2% of the total unit volume for disposable
diapers and training pants in the total grocery store category during 1996.
However, the Company estimates that its brands have market shares as high as
20% in its more established domestic grocery store markets.
 
 
                                      47
<PAGE>
 
 U.S. Mass-Merchant and Drugstore Chains
 
  The mass-merchant and drugstore chain segments, in aggregate, represented
approximately 46% of the U.S. diaper market, or $1.7 billion of retail sales
in 1996. 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, Drypers completed acquisitions
that provided nationwide production and distribution capabilities and began a
program of unifying its products nationwide under the Drypers brand name,
which was completed in the first quarter of 1995. As a result of this program,
Drypers has obtained distribution through certain mass-merchant and drugstore
chains, including Super K-Mart stores of K-Mart, Venture, Meijer and Caldor.
Drypers believes that its national branded focus will generate increased
distribution opportunities with mass-merchants and drugstore chains.
 
 U.S. Private Label Customer Base
 
  Private label products play an important role in maintaining profit within
many retailers' stores. The Company believes that its private label products
are complementary to the value-priced positioning of its premium branded
products. The Company believes private label opportunities are enhanced by the
Company's 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.
 
 International Operations
 
  Industry sources estimate the international disposable diaper market to
represent approximately $12 billion in annual manufacturers' sales, with
current low levels of consumer penetration of those products (on average
approximately 12% versus approximately 90% penetration in the United States,
Western Europe and Japan in 1995). The Company's foreign produced and exported
products are sold in over 28 countries and accounted for approximately 16.7%
of the Company's net sales during 1996. The Company has focused its
international efforts primarily in Latin America because of the relatively low
but growing level of diaper market penetration, the rapid increase in the
standard of living, the relatively higher birth rate and the resulting high
level of market potential. In these markets, the Company predominantly
competes in the lower-priced branded and private label categories. The
Company, with operations in Argentina and Mexico, has 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 Argentina, despite a lagging economy in 1996, the Company believes
that it had an approximate 12% market share of the disposable diaper category.
Furthermore, the Company believes that the acquired Puppet brand name has an
approximate 14% market share in Brazil, largely through distribution to major
grocery store chains and mass-merchants. The Company intends to continue to
expand its operations in Argentina, Mexico and Brazil and is actively seeking
further expansion opportunities through acquisition, joint venture or other
arrangements in the Pacific Rim and Latin America.
 
PRODUCTS
 
 Disposable Baby Diapers
 
  There are significant quality differences among the various disposable
diapers available to consumers. The most important quality features of
disposable diapers are their ability to absorb and retain fluids, to prevent
leakage through leg and waist openings by the use of elasticized bands and to
be easily fitted and held in place by fastening systems which secure the
diaper firmly without causing discomfort to the baby. Other features, such as
thinner construction, odor control, perfume free, attractive designs, extra-
dry sub-layers, gender-specific coloring, and packaging, help to differentiate
products from one another.
 
  The Company manufactures and markets three types of disposable baby diapers
in the United States: premium brand name diapers, lower-priced brand name
diapers and private label diapers.
 
                                      48
<PAGE>
 
  Premium Brand Name Baby Diapers. The Company sells its premium brand name
products under the brand name Drypers. The Company's premium quality brand
diapers incorporate many of the product features that are offered by the
leading national premium brands. The Company believes that the lower retail
price and the combination of product features distinguish its premium quality
value-priced brand name diapers in the market. These product features include
multi-strand leg elastic for a wide soft cuff, a reinforced tape landing zone
for more secure fastening, a soft elastic waistband, a thin overall profile,
leakage barrier inner cuffs, and, beginning in 1997, a breathable, cloth-like
outer cover. In addition, Drypers are differentiated by features not offered
by some or all of the other national brands, such as "perfume free", baking
soda for odor control and, beginning in 1997, aloe vera to soothe skin.
 
  Lower-priced Brand Name Baby Diapers. The Company's lower-priced products,
sold under the brand name Comfees, incorporate some of the product features
currently offered by the Company's premium brand. These product features
include multi-strand leg elastic for a wide soft cuff, a reinforced tape
landing zone for more secure fastening, a thin overall profile and compression
packaging. The Company's lower-priced brand name baby diapers are sold in
packages that contain fewer diapers, and at a package and per diaper cost to
the consumer that is less than the Company's premium brands. The Company
currently sells its lower-priced diapers in only limited U.S. markets.
 
  Private Label Baby Diapers. The Company's private label products are
manufactured to the specifications of, and are sold under the labels of, major
retailers. The private label products produced by the Company range in quality
from the Company's premium brand products to the Company's lower-priced
products. The Company believes private label opportunities are enhanced by the
Company's low cost structure and its ability to provide products with features
and performance characteristics substantially equivalent to the national
brands.
 
  In addition to its premium and lower-priced branded products, the Company
sells 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
 
  The Company has developed a line of premium disposable training pants,
marketed under the Drypers brand name for children of toilet-training age. The
Company also produces and sells private label training pants which are
manufactured to the specifications of and are sold under labels of various
concerns. 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 pants market has grown to $493 million in 1996
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. The Company
believes that its 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. The Company believes these attributes are
important to the success of disposable training pants since young children
often display a desire to wear "real underwear". Typically, the Company's
disposable training pants are sold at a substantially higher per unit price
than the Company's premium disposable diapers, resulting in substantially
higher gross profit margins than on premium disposable diapers.
 
  Significant product improvements were made to Drypers training pants in
1995: improved contouring in the core for better absorbency, Lycra Tummy Snugs
for better fit around the waist and a 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. The Company believes its training pants represented 7.8% of the total
training pants category on a unit volume basis during 1996. More recently, the
Company added baking soda and aloe vera to its training pants, similar to its
baby diapers. The Company's
 
                                      49
<PAGE>
 
Drypers training pants are now the second leading brand of disposable training
pants sold through grocery stores in the United States.
 
 Pre-moistened Baby Wipes
 
  The Company manufactures and markets pre-moistened baby wipes in the United
States. The Company estimates the pre-moistened baby wipes retail market in
the United States was approximately $506 million in 1996.
 
PRODUCT DESIGN AND DEVELOPMENT
 
  Drypers seeks to enhance its products by adding cost effective product
features and substituting materials and components to improve performance.
Drypers works closely with its suppliers, distributors and other industry
participants to identify, anticipate, and in some cases develop technological
innovations so that the Company's products can incorporate the most advanced
design features and also be clearly differentiated from the other national
brands. The Company uses 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. The Company believes that its
approach to the introduction of innovative features for its core branded
products minimizes its risk because it does not spend significant sums on
research and development, limits the introduction of untried innovations and
features and does not have to spend heavily to advertise new product
developments or to educate consumers.
 
  In the first quarter of 1995, the Company converted its diaper products to
an "ultra-thin" absorbent core, changed its diaper and training pants
products' packaging to be consistent throughout the United States and
completed the transition of its diaper and training pants products to the
brand name Drypers. In the second quarter of 1996, Drypers launched the
industry's first odor control diaper, "Drypers with Natural Baking Soda". On
May 1, 1997, the Company announced the launch of diapers and training pants
that include aloe vera as well as a licensing agreement to use the Sesame
Street trademark and characters on the Company's products and packaging and in
advertising and promotional materials.
 
SALES AND DISTRIBUTION
 
  In the United States, the Company uses in-house managers to coordinate
brokerage companies which facilitate the distribution of the Company's
products through grocery stores on a non-exclusive basis. The Company believes
that this approach has expedited the Company's 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 its plants has enabled the Company to
achieve average shipping times of one to two days for most destinations in the
United States.
 
  Outside the United States, the Company tailors its approach to each foreign
market, taking into consideration the political and cultural environment as
well as the distribution infrastructures. In general, the Company works with
independent local distributors; however, in Puerto Rico, it uses a direct
sales force and, in Argentina and Mexico, it uses 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, Drypers has
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
 
                                      50
<PAGE>
 
when less than full distribution has yet to be achieved. As the Company's
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, the Company's international business, similar to its
domestic private label business, generally experiences lower gross margins and
selling, general and administrative expenses than its 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. The Company believes it is able to purchase raw materials on
substantially the same terms as its larger branded competitors, and that it is
able to operate with proportionately lower corporate overhead because of its
more focused value-oriented strategy.
 
  The Company maintains quality control procedures throughout the production
process, commencing with the receipt of raw materials and continuing through
shipment of the finished product. Each of the Company's production lines has
on-line 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 the Company's 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 raw materials used in the Company's manufacturing process include wood
pulp, super absorbent polymer, polyethylene film, polypropylene nonwoven
fabric, adhesive closure tape, hot melt adhesive, elastic, tissue, bags, boxes
and baking soda. In general, the Company has at least two suppliers for each
of the raw materials used in its manufacturing process. The Company believes
that it maintains good relationships with all of its raw material suppliers
and that it is able to purchase raw materials on substantially the same terms
as its larger branded competitors.
 
TRADEMARKS AND PATENTS
 
  The Company has registered or has applications pending to register numerous
trademarks in the United States, including Drypers. In addition, the Company
has registered or applied for registration of certain of its 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 the diapers produced by the Company are considered by patent
counsel before the manufacture and sale of such products to avoid the features
covered by unexpired patents. The Company believes it has been able to
introduce product innovations comparable to those introduced by its
competitors by using manufacturing methods or materials that are not protected
by such patents. See Note 8 to the Consolidated Financial Statements included
elsewhere herein.
 
 
                                      51
<PAGE>
 
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. The Company maintains varying levels of raw
material and finished product inventory depending on lead times and shipping
schedules. The Company's inventory levels generally vary between two and five
weeks. As a result of the short lead time between order and delivery of
product, the Company does not maintain a significant backlog.
 
INSURANCE
 
  All of the Company's plant, machinery and inventory are covered by fire and
extended coverage insurance. Although the Company has never been named as a
defendant in a product liability lawsuit, the Company maintains product
liability insurance in amounts it believes to be adequate. In addition, the
Company has obtained insurance with respect to the collection of certain of
its international accounts receivable. There can be no assurance, however,
that future claims will not exceed coverage.
 
EMPLOYEES
 
  As of July 31, 1997, the Company employed approximately 920 people on a
full-time basis. None of the Company's employees are represented by a labor
union except in Mexico where such representation is required by local law. The
Company's Mexican employees are members of a syndicate and are employed under
a one-year contract entered into with the syndicate. The Company believes its
relationship with its employees is good.
 
LEGAL PROCEEDINGS
 
  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.
 
PROPERTIES
 
  The Company leases manufacturing, distribution and administrative space in
seven locations in the United States, Brazil, Puerto Rico, Argentina and
Mexico, as follows:
 
<TABLE>
<CAPTION>
                               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             215,000 February 28, 1998  Manufacturing and Administrative
      Marion, Ohio             114,000 Month to Month     Warehouse
      Houston, Texas            32,000 May 1, 2004        Administrative
      Mogi das Cruzes, Brazil   23,000 May 1, 1998        Warehouse and Administrative
      Toa Alta, Puerto Rico     51,000 November 30, 2003  Manufacturing and Administrative
      Buenos Aires, Argentina   54,000 January 31, 1998   Manufacturing and Administrative
      Guadalajara, Mexico       30,000 December 31, 1997  Manufacturing and Administrative
</TABLE>
 
  The Company's equipment is highly automated and capable of continuous 24-
hour, seven-day per week production. The Company has maintenance and machine
shops which are capable of meeting the majority of the Company's equipment
service requirements. The Company's Mexico operation will require additional
manufacturing, warehouse and administrative space in 1997, and the Company is
currently in negotiations to secure such space. The Company believes that its
other leased facilities are adequate for its current needs.
 
                                      52
<PAGE>
 
                                  MANAGEMENT
 
  Set forth below are the names, ages, and positions of the officers and
directors of the Company. All directors are elected for a term of one year and
serve until their successors are elected and qualified. All officers hold
office until their successors are elected and qualified.
 
<TABLE>
<CAPTION>
          NAME           AGE                POSITION WITH THE COMPANY
          ----           ---                -------------------------
<S>                      <C> <C>
EXECUTIVE OFFICERS AND
 DIRECTORS:
Walter V. Klemp.........  38 Chairman of the Board, Co-Chief Executive Officer and
                              Director
Terry A. Tognietti......  40 Co-Chief Executive Officer, President--Drypers North
                              America, Secretary and Director
Raymond M. Chambers.....  41 Co-Chief Executive Officer, President--Drypers
                              International and Director
Joe D. Tanner...........  50 Executive Vice President and Chief Operating Officer--
                              Drypers International
Jonathan P. Foster......  33 Executive Vice President and Chief Financial Officer
Gary L. Forbes..........  53 Director
Nolan Lehmann...........  53 Director
Philip A. Tuttle........  55 Director
OTHER OFFICERS:
David M. Olsen..........  39 Vice President of Marketing
Chris R. Richards.......  32 Vice President of Sales--Drypers North America
</TABLE>
 
  Mr. Klemp has served as the Chairman of the Board and Co-Chief Executive
Officer of Drypers since January 1995 and has served on its Board of Directors
since its formation in February 1987. From February 1996 to July 1996, in
addition to his duties as Chairman and Co-Chief Executive Officer, he served
as Acting Chief Financial Officer. He served as the Managing Director--Finance
of Drypers from its formation to December 1994. In 1984, Mr. Klemp
participated in the formation of VMG Enterprises, Inc. ("VMG") and, in 1987,
the formation of Drypers. From February 1984 to April 1986, he served as Chief
Financial Officer of VMG. Prior to 1984, Mr. Klemp, a certified public
accountant, specialized in consulting to development stage businesses with the
accounting firm of Coopers & Lybrand in Portland, Oregon. Mr. Klemp also
serves on the board of directors of EqualNet Holding Corp., a publicly traded
telecommunications company.
 
  Mr. Tognietti participated in the formation of Drypers and has served as Co-
Chief Executive Officer, President of Drypers North America and Secretary
since January 1995. Mr. Tognietti also has served as a director of Drypers
since August 1991, and as Managing Director of Drypers from its formation to
December 1994. From January 1994 to December 1994, he served as the Company's
Managing Director--Domestic Operations. From June 1992 to December 1993, he
served as President of the Company's Veragon division. From June 1979 to
August 1987, Mr. Tognietti was involved in operations management within the
baby diaper division of Procter & Gamble, serving in various positions,
including Pampers operations department manager, Luvs operations department
manager and Luvs manufacturing development manager.
 
  Mr. Chambers has served as Co-Chief Executive Officer, President of Drypers
International and a director of Drypers since January 1995 and served as a
Managing Director of Drypers from June 1992 to December 1994. In June 1992, he
also became President of the Company's VMG division and served in such
capacity until December 1993. From January 1994 to December 1994, he served as
the Company's Managing Director--International Operations. From July 1989
until joining the Company in June 1992, Mr. Chambers served as Chief Executive
Officer and President of VMG. Mr. Chambers also served as Vice President of
Manufacturing of VMG from March 1986 to July 1989 and as Operations Manager of
VMG from April 1985 to March 1986. From March 1979 to April 1985, Mr. Chambers
served in various manufacturing management positions with Procter & Gamble,
including process engineer with divisional responsibilities for specific
Pampers product improvements.
 
                                      53
<PAGE>
 
  Mr. Tanner has served as Executive Vice President and Chief Operating
Officer--Drypers International since February 1996. From February 1995 until
February 1996, he served as the Company's Vice President, Chief Operating
Officer--Drypers International. Mr. Tanner served as President of Hygienic
Products International, Inc., a subsidiary of the Company that was merged into
Drypers in February 1996, from its inception in February 1992 to February
1995. Prior to February 1992, Mr. Tanner was a partner with the law firm of
Williams, Kastner & Gibbs in Portland, Oregon. Mr. Tanner also served as a
state senator for the State of Washington for two years and as a Washington
State Representative for four years.
 
  Mr. Foster has served as Chief Financial Officer since July 1996 and as
Executive Vice President of Drypers since November 1996. From September 1995
to July 1996, Mr. Foster was Chief Financial Officer of Dickson Weatherproof
Nail Company, Inc., based in Chicago, Illinois. From September 1991 to August
1995, Mr. Foster was with Schlumberger, Ltd. as Controller and Treasurer for
Global Tel*Link, Inc., a telecommunications subsidiary in Mobile, Alabama, and
as Assistant Controller and Controller for Schlumberger's Measurement
Division, a manufacturer and worldwide marketer of industrial flow measurement
products, based in Greenwood, South Carolina. Prior to 1991, Mr. Foster, a
certified public accountant, provided audit, consulting and tax services to
development stage companies as a Manager in the Middle Market Group of
Deloitte & Touche, LLP in Atlanta, Georgia.
 
  Mr. Forbes has served as a director of the Company since May 1996. Mr.
Forbes has served as Vice President of Equus Capital Management Corporation
since 1991 and also has served as Vice President of Equus Capital Corporation
since December 1991. Equus Capital Management Corporation and Equus Capital
Corporation also serve as the management company and managing general partner
of Equus Capital Partners, L.P. ("Equus Capital"), one of several funds formed
by Equus Capital Corporation. Equus Capital and its affiliate, Equus II
Incorporated ("Equus"), are principal stockholders of the Company. From
January 1991 to November 1991, Mr. Forbes was President of Coal and Timber,
Inc., a natural resource investment company. He was Vice President and Chief
Financial Officer of Elders Resources North America, Inc., a natural resources
investment company, from 1988 to 1990. From 1983 to 1988, he was President of
WKG Corporation, a private investment company. Mr. Forbes is a director of
Consolidated Graphics, Inc., a company involved in commercial and financial
printing, and NCI Building Systems, Inc., a manufacturer of pre-engineered
metal buildings. Mr. Forbes is a certified public accountant.
 
  Mr. Lehmann has served as a director of the Company since 1991. He has
served as President and a director of Equus Capital Management Corporation,
located in Houston, Texas, since 1983, and is also President and a director of
Equus Capital Corporation. Mr. Lehmann also currently serves as President and
a director of Equus, a business development company listed on the American
Stock Exchange. Equus Capital Management Corporation and Equus Capital
Corporation also serve as the management company and managing general partner
of Equus Capital, one of several funds formed by Equus Capital Corporation.
Equus Capital and its affiliate, Equus, are principal stockholders of the
Company. See "Principal Stockholders". Mr. Lehmann also serves on the board of
directors of Allied Waste Industries, Inc., a company involved in solid waste
disposal, Garden Ridge Corporation, a specialty retail corporation, American
Residential Services, Inc., a company that provides plumbing, heating/air
conditioning, and electrical services to the residential community, and Brazos
Sportswear, Inc., a licensed sportswear company. Mr. Lehmann is a certified
public accountant.
 
  Mr. Tuttle has served as a director of the Company since 1991. Since May
1989, Mr. Tuttle has been a general partner of Davis Venture Group, the
general partner of Davis Venture Partners, L.P. and Davis, Tuttle Venture
Partners, L.P., each a private equity partnership (collectively, "Davis").
Davis is a principal stockholder of the Company. See "Principal Stockholders".
From August 1987 through May 1989, Mr. Tuttle managed private investments and,
from August 1982 through August 1987, Mr. Tuttle was president of Allied
Bancshares Capital Corporation, a small business investment company. Mr.
Tuttle also serves on the board of directors of Zydeco Energy, Inc., a
drilling, exploration and energy services company. Mr. Tuttle is a certified
public accountant and is a fellow of the Institute of Directors, London,
England.
 
                                      54
<PAGE>
 
  Mr. Olsen has served as the Vice President of Marketing since March 1996 and
in various management positions in the Marketing Department of Drypers since
January 1992. Mr. Olsen worked at Johnson and Johnson from December 1988 to
December 1991 as a Product Manager in their feminine hygiene business. From
1985 to 1988, Mr. Olsen worked at Saatchi and Saatchi Advertising where he was
the account supervisor on the Procter & Gamble account.
 
  Mr. Richards has served as Vice President of Sales for Drypers North America
since March 1996. Mr. Richards worked in the marketing and sales departments
of a regional U.S. diaper manufacturer from March 1990 until the Company's
acquisition of such manufacturer in 1992. Prior to March 1990, Mr. Richards
worked at Revlon, Inc. in various sales and sales management positions.
 
                                      55
<PAGE>
 
                            PRINCIPAL STOCKHOLDERS
 
  The following table and the notes thereto set forth, as of August 15, 1997,
the beneficial ownership of the Company's Common Stock ("Common Stock") and
the Company's Series A Senior Convertible Cumulative 7.5% Preferred Stock
("7.5% Preferred Stock") by (i) each person known by the Company to be the
beneficial owner of more than 5% of either the Common Stock or the 7.5%
Preferred Stock, (ii) each director and named executive officer of the
Company, and (iii) all directors and executive officers of the Company as a
group.
 
<TABLE>
<CAPTION>
                                           BENEFICIAL OWNERSHIP(1)
                                   --------------------------------------------
                                    COMMON               7.5% PREFERRED
              NAME                   STOCK       PERCENT     STOCK      PERCENT
              ----                 ---------     ------- -------------- -------
<S>                                <C>           <C>     <C>            <C>
Equus II Incorporated and
 affiliates(2)...................  3,834,472(3)   28.7       25,000      39.2
 2929 Allen Parkway, 25th Floor
 Houston, Texas 77019
Heartland SmallCap Contrarian
 Fund............................  2,253,929(4)   18.3       20,250      31.8
 790 N. Milwaukee Street
 Milwaukee, Wisconsin 53202
Davis Venture Group and
 affiliates(5)...................  1,514,000(6)   13.6       11,000      17.3
 12 Greenway Plaza, Suite 600
 Houston, Texas 77046
Meridian Fund, Ltd...............  1,066,195       9.6           --        --
 601 Jefferson, Suite 4000
 Houston, Texas 77002
Antar & Co.......................    812,339       7.5           --        --
 600 Jefferson, Suite 4000
 Houston, Texas 77002
Heartland Limited Partners I.....    550,000(7)    5.2        5,500       8.6
 790 N. Milwaukee Street
 Milwaukee, Wisconsin 53202
Walter V. Klemp..................    782,755(8)    7.3           --        --
 5300 Memorial Drive, Suite 900
 Houston, Texas 77007
Terry A. Tognietti...............    665,513(9)    6.3           --        --
 5300 Memorial Drive, Suite 900
 Houston, Texas 77007
Raymond M. Chambers..............    596,765(10)   5.6           --        --
 5300 Memorial Drive, Suite 900
 Houston, Texas 77007
Joe D. Tanner....................    281,784(11)   2.7        1,500       2.4
Gary L. Forbes...................     13,834(12)   (12)         (12)      (12)
Nolan Lehmann....................     12,348(13)   (13)         (13)      (13)
Philip A. Tuttle.................      9,334(14)   (14)         (14)      (14)
6 directors and 2 other executive
 officers as a group
 (8 persons)(15).................  7,727,472      49.3       37,500      58.8
</TABLE>
 
                                                  (footnotes on following page)
 
                                      56
<PAGE>
 
--------
 (1) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule 13d-
     3(d), shares not outstanding that are subject to options, warrants,
     rights or conversion privileges exercisable within 60 days are deemed
     outstanding for the purpose of calculating the number and percentage
     owned by such person, but not deemed outstanding for the purpose of
     calculating the percentage owned by any other person. Beneficial
     ownership includes both outstanding shares of Common Stock and 7.5%
     Preferred Stock and shares of Common Stock that such holder has a right
     to acquire within 60 days upon exercise of outstanding options or
     warrants or upon conversion of the 7.5% Preferred Stock. Except as
     otherwise noted, each stockholder has sole voting and dispositive power
     with respect to the shares of Common Stock or the 7.5% Preferred Stock,
     as the case may be.
 (2) "Equus II Incorporated and affiliates" consists of Equus Capital
     Management Corporation, Equus Capital Corporation, Equus and Equus
     Capital. Equus Capital Management Corporation and Equus Capital
     Corporation serve as the management company and sub-advisor of Equus.
     Equus Capital Management Corporation and Equus Capital Corporation also
     serve as the management company and managing general partner of Equus
     Capital. Because of these relationships, each of the entities
     constituting Equus II Incorporated and affiliates may be deemed to
     beneficially own the 1,107,882 shares of Common Stock held directly by
     Equus, the 2,500,000 shares of Common Stock issuable on the conversion of
     25,000 shares of 7.5% Preferred Stock held directly by Equus and the
     226,590 shares of Common Stock held directly by Equus Capital.
 (3) Includes 13,236 shares of Common Stock issuable upon exercise of warrants
     and 2,500,000 shares of Common Stock issuable on the conversion of shares
     of 7.5% Preferred Stock held by such stockholder.
 (4) Includes 2,025,000 shares of Common Stock issuable on the conversion of
     shares of 7.5% Preferred Stock held by such stockholder.
 (5) "Davis Venture Group and affiliates" comprises Davis Venture Group, Davis
     Venture Partners, L.P. and Davis, Tuttle Venture Partners, L.P. Davis
     Venture Group is the general partner of each of Davis Venture Partners,
     L.P. and Davis, Tuttle Venture Partners, L.P. Because of such
     relationships, Davis Venture Group may be deemed to be beneficial owner
     of shares of Common Stock and 7.5% Preferred Stock held of record by
     Davis Venture Partners, L.P. and Davis, Tuttle Venture Partners, L.P.
 (6) Includes 1,100,000 shares of Common Stock issuable on the conversion of
     shares of 7.5% Preferred Stock held by such stockholder.
 (7) All shares of Common Stock included are issuable on the conversion of
     shares of 7.5% Preferred Stock held by such stockholder.
 (8) Includes 129,081 and 490,583 shares of Common Stock issuable upon
     exercise of warrants and options, respectively.
 (9) Includes 17,211 and 490,583 shares of Common Stock issuable upon exercise
     of warrants and options, respectively.
(10) Includes 103,265 and 473,500 shares of Common Stock issuable upon
     exercise of warrants and options, respectively.
(11) Includes 7,284 and 124,500 shares of Common Stock issuable upon exercise
     of warrants and options, respectively, and 150,000 shares of Common Stock
     issuable upon conversion of the 1,500 shares of 7.5% Preferred Stock held
     by Mr. Tanner.
(12) Mr. Forbes is Vice President of Equus Capital Management Corporation and
     Equus Capital Corporation. Because of such relationships, he may be
     deemed to be the beneficial owner of the shares of Common Stock and 7.5%
     Preferred Stock beneficially owned by Equus II Incorporated and
     affiliates. Mr. Forbes disclaims such beneficial ownership. See Note (2)
     to this table.
(13) Mr. Lehmann is President and a director of each of Equus Capital
     Corporation and Equus and, because of such relationships, may be deemed
     to be the beneficial owner of the shares of Common Stock and 7.5%
     Preferred Stock beneficially owned by Equus II Incorporated and
     affiliates. Mr. Lehmann disclaims such beneficial ownership. See Note (2)
     to this table.
(14) Mr. Tuttle is a general partner of Davis Venture Group and, because of
     such relationship, Mr. Tuttle may be deemed the beneficial owner of the
     shares of Common Stock and 7.5% Preferred Stock beneficially owned by
     Davis Venture Group and affiliates. Mr. Tuttle disclaims such beneficial
     ownership. See Note (5) to this table.
(15) See notes (8) through (14) above.
 
 
                                      57
<PAGE>
 
                             CERTAIN TRANSACTIONS
 
  A portion of the proceeds of the offering of the Outstanding Notes was used
to repay the outstanding principal amount of, plus any accrued and unpaid
interest on, the Company's 12% Junior Subordinated Debentures. See "Use of
Proceeds". Walter V. Klemp, the Company's Chairman of the Board and Co-Chief
Executive Officer, Terry A. Tognietti, the Company's Co-Chief Executive
Officer and President--Drypers North America, and Raymond M. Chambers, the
Company's Co-Chief Executive Officer and President--Drypers International,
were each holders of 12% Junior Subordinated Debentures in the original
principal amounts of $128,250, $19,250 and $82,750, respectively.
 
  On June 30, 1997, the Company extended non-interest bearing loans of
$130,000 to each of its three Co-Chief Executive Officers. One-half of the
loan balances will be forgiven on June 30, 1998 and the remaining balances
will be forgiven on June 30, 1999, if the officers remain employed by the
Company. The loan balances will be charged to compensation expense over the
two-year terms of the loans.
 
 
                          DESCRIPTION OF CERTAIN DEBT
 
REVOLVING CREDIT FACILITY
 
  The Company entered into the Revolving Credit Facility with Congress
Financial Corporation (Southwest) ("Congress") on February 29, 1996. The
Revolving Credit Facility is a three-year facility with a borrowing base of up
to $21.0 million. Borrowings under the Revolving Credit Facility accrue
interest at a rate of prime plus 1 3/4% per annum. Borrowing availability
under the Revolving Credit Facility is a function of advance rates based on
eligible accounts receivable, finished goods inventory and raw materials
inventory. Borrowings are collateralized by accounts receivable, inventory,
trademarks and trade names, stock of certain subsidiaries and other
intangibles.
 
  The terms of the Revolving Credit Facility are embodied in a Loan and
Security Agreement dated February 26, 1996. The aggregate amount available
under the Revolving Credit Facility as of July 25, 1997 was $12.4 million. No
borrowings were outstanding under the Revolving Credit Facility as of June 30,
1997. The Revolving Credit Facility, as amended, requires the Company, among
other things, to maintain consolidated working capital, as defined, which
excludes borrowings under the Revolving Credit Facility, of at least $18.0
million during fiscal 1997, of at least $23.0 million during fiscal 1998, and
of at least $25.0 million during fiscal 1999 and thereafter, and adjusted net
worth, as defined, of at least $50.5 million through May 31, 1997, of at least
$45.0 million from June 1, 1997 through December 30, 1997, of at least $52.5
million from December 31, 1997 through December 30, 1998, and of at least
$54.5 million from December 31, 1998 and thereafter. The Company was in
compliance with the terms of the revolving credit facility as of June 30,
1997. The Loan and Security Agreement imposes additional restrictions and
requirements upon the Company concerning operating and maintaining its assets;
maintaining insurance; complying with laws and regulations; creating or
assuming debt and liens; making investments or capital expenditures; declaring
dividends or distributions; maintaining certain financial ratios (including
those described above); acquiring, selling or leasing assets and properties;
liquidations, consolidations and mergers; transactions with affiliates; and
payment of taxes.
 
  The stated maturity date of the Revolving Credit Facility is February 26,
1999. The Revolving Credit Facility requires the Company to pay a commitment
fee of 0.5% per annum on the average daily balance of unused borrowings. Loans
made under the Revolving Credit Facility may be prepaid in whole or in part.
 
  A portion of the proceeds of the Offering was used to repay amounts
outstanding under the Revolving Credit Facility. See "Use of Proceeds".
 
12 1/2% SENIOR NOTES
 
  The 12 1/2% Senior Notes represent unsecured obligations of the Company and
were issued pursuant to the Existing Indenture, dated November 10, 1992, as
amended by the First Supplemental Indenture dated
 
                                      58
<PAGE>
 
October 21, 1996, between the Company and The Bank of New York, as successor
trustee. Interest on the 12 1/2% Senior Notes is payable semi-annually on May
1 and November 1 of each year.
 
  On or after November 1, 1997, the remaining 12 1/2% Senior Notes ($1.6
million in principal amount) will be redeemable in whole or in part at the
redemption prices (expressed in percentages of principal amount) set forth
below, plus accrued and unpaid interest to the redemption date, if redeemed in
the 12-month period commencing on November 1 of the years indicated below:
 
<TABLE>
<CAPTION>
        YEAR                                              PERCENTAGE
        ----                                              ----------
        <S>                                               <C>
        1997.............................................   104.7%
        1998.............................................   103.1%
        1999.............................................   101.6%
</TABLE>
 
and thereafter at 100% of the principal amount, plus accrued and unpaid
interest thereon to the redemption date.
 
  Holders of the 12 1/2% Senior Notes repurchased in the Purchase Offer
consented to amend the Existing Indenture to remove certain restrictive
covenants contained in the Existing Indenture.
 
                                      59
<PAGE>
 
                       DESCRIPTION OF THE EXCHANGE NOTES
 
  The Exchange Notes offered hereby will be issued under an indenture to be
dated as of June 15, 1997 (the "Indenture") between the Company and Bankers
Trust Company, trustee (the "Trustee"), a copy of the form of which is
available from the Company for inspection by potential investors in this
offering. Upon the effectiveness of the Exchange Offer Registration Statement
or the Shelf Registration Statement, as the case may be, the Indenture will be
subject to and governed by the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The following summary of the material provisions of
the Indenture does not purport to be complete and is subject to, and qualified
in its entirety by, reference to the provisions of the Indenture, including
the definitions of certain terms contained therein and those terms made part
of the Indenture by reference to the Trust Indenture Act. For definitions of
certain capitalized terms used in the following summary, see "Certain
Definitions" below.
 
GENERAL
 
  The Exchange Notes, like the Outstanding Notes, will mature on June 15,
2007, will be limited to $115,000,000 aggregate principal amount and will be
senior unsecured obligations of the Company. Each Exchange Note, like the
Outstanding Notes, will bear interest at the rate of 10 1/4% per annum from
June 24, 1997 or from the most recent interest payment date to which interest
has been paid or duly provided for, payable semiannually on June 15 and
December 15 in each year, commencing December 15, 1997, until the principal
thereof is paid or duly provided for, to the person in whose name the Note (or
any predecessor Note) is registered at the close of business on June 1 or
December 1 next preceding such interest payment date. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
 
  The principal of and premium, if any, and interest on the Notes will be
payable, and the Notes will be exchangeable and transferable, at the office or
agency of the Company in The City of New York maintained for such purposes
(which initially will be the office of the Trustee located at Four Albany
Street, New York, New York 10006); provided, however, that, at the option of
the Company, interest may be paid by check mailed to the address of the person
entitled thereto as such address appears in the security register. The Notes
will be issued only in registered form without coupons and only in
denominations of $1,000 and any integral multiple thereof. No service charge
will be made for any registration of transfer or exchange or redemption of
Notes, but the Company may require payment in certain circumstances of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in connection therewith.
 
  Currently, all of the Company's Subsidiaries are Restricted Subsidiaries.
However, under certain circumstances, the Company will be able to designate
current or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to any of the restrictive covenants set forth
in the Indenture.
 
  Any Notes that remain outstanding after the consummation of the Exchange
Offer and Exchange Notes issued in connection with the Exchange Offer will be
treated as a single class of securities under the Indenture.
 
  The Notes will not be entitled to the benefit of any sinking fund.
 
GUARANTEES
 
  Payment of the principal of (and premium, if any, on) and interest on the
Notes, when and as the same become due and payable, will be guaranteed,
jointly and severally, on a senior unsecured basis by the Subsidiary
Guarantors referred to below. The obligations of each Subsidiary Guarantor
under its Subsidiary Guarantee will be limited so as not to constitute a
fraudulent conveyance under applicable law.
 
  The Indenture will require that each domestic Restricted Subsidiary (those
active Restricted Subsidiaries that are organized or principally doing
business in the United States and its territories and possessions) be a
Subsidiary Guarantor, as well as each other Restricted Subsidiary that
guarantees any other Debt of the
 
                                      60
<PAGE>
 
Company, except that the Indenture will permit one or more Restricted
Subsidiaries to guarantee the Company's obligations under any 12 1/2% Senior
Notes that remain outstanding after consummation of the Purchase Offer so long
as such guarantees do not extend beyond December 15, 1997. Currently, the
Company has no active domestic Restricted Subsidiaries or any other Restricted
Subsidiaries that guarantee any other Debt of the Company (other than the 12
1/2% Senior Notes that remain outstanding) and, accordingly, there will
initially be no Subsidiary Guarantors.
 
  The Indenture provides that no Subsidiary Guarantor may consolidate with or
merge with or into any other person (other than the Company or another
Subsidiary Guarantor) unless: (a) subject to the provisions of the following
paragraph, the person formed by or surviving such consolidation or merger (if
other than such Subsidiary Guarantor) assumes all of the obligations of such
Subsidiary Guarantor under the Indenture and its Subsidiary Guarantee,
pursuant to a supplemental indenture in form and substance satisfactory to the
Trustee and (b) immediately after giving effect to such transaction, no
Default or Event of Default has occurred and is continuing.
 
  The Indenture provides that, in the event of (a) a sale, transfer or other
disposition of all of the Capital Stock of a Subsidiary Guarantor to a person
that is not an Affiliate of the Company, (b) a sale, transfer or other
disposition of all or substantially all of the assets of a Subsidiary
Guarantor to a person that is not an Affiliate of the Company or (c) the
designation of such Subsidiary Guarantor as an Unrestricted Subsidiary, in any
such case in compliance with the terms of the Indenture, then such Subsidiary
Guarantor will be deemed automatically and unconditionally released and
discharged from all of its obligations under its Subsidiary Guarantee without
any further action on the part of the Trustee or any holder of the Notes;
provided that the Net Proceeds of any such sale, transfer or other disposition
are applied in accordance with the "Limitation on Certain Asset Sales"
covenant.
 
RANKING
 
  The Notes will be senior unsecured obligations of the Company and will rank
pari passu in right of payment with all other existing and future senior
obligations of the Company. Loans under the existing Revolving Credit Facility
are secured by substantially all of the Company's assets other than equipment.
Accordingly, the Notes will be effectively subordinated to the loans
outstanding under the Revolving Credit Facility to the extent of the value of
the assets securing such loans and will be structurally subordinated to all
liabilities, including trade payables, of the Company's Subsidiaries that are
not Subsidiary Guarantors, except to the extent that the Company is a creditor
of such Subsidiaries. As of June 30, 1997, the Company had $3.1 million of
debt outstanding other than the Notes ($1.5 million of which was debt of its
subsidiaries) and its subsidiaries had approximately $10.8 million of accounts
payable and third party debt. Subject to certain limitations, the Company and
its Restricted Subsidiaries may incur additional Debt in the future.
 
REDEMPTION
 
  The Notes will be redeemable at the election of the Company, as a whole or
from time to time in part, at any time on or after June 15, 2002, on not less
than 30 nor more than 60 days' prior notice at the redemption prices
(expressed as percentages of principal amount) set forth below, together with
accrued interest, if any, to the redemption date, if redeemed during the 12-
month period beginning on June 15 of the years indicated below (subject to the
right of holders of record on the relevant record dates to receive interest
due on an interest payment date):
 
<TABLE>
<CAPTION>
                                                                      REDEMPTION
     YEAR                                                               PRICE
     ----                                                             ----------
     <S>                                                              <C>
     2002............................................................  105.125%
     2003............................................................  103.417
     2004............................................................  101.708
</TABLE>
 
and thereafter at 100% of the principal amount, together with accrued
interest, if any, to the redemption date.
 
                                      61
<PAGE>
 
 
  In addition, at any time or from time to time prior to June 15, 2000, the
Company may at its option redeem Notes with the net proceeds of one or more
Equity Offerings at a redemption price equal to 110.25% of the principal
amount thereof, together with accrued interest, if any, to the date of
redemption (subject to the rights of holders of record on the relevant record
date to receive interest due on an interest payment date); provided that,
immediately after giving effect to any such redemption, at least $75,000,000
aggregate principal amount of the Notes remains outstanding. Any such
redemption must be made within 90 days of the related Equity Offering.
 
  If less than all the Notes are to be redeemed, the particular Notes to be
redeemed will be selected not more than 60 days prior to the redemption date
by the Trustee by lot or such other method as the Trustee deems fair and
appropriate.
 
CERTAIN DEFINITIONS
 
  "Acquired Debt" means Debt of a person (a) existing at the time such person
is merged with or into the Company or becomes a Subsidiary or (b) assumed in
connection with the acquisition of assets from such person.
 
  "Affiliate" means, with respect to any specified person, any other person
directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified person. For the purposes of this
definition, "control," when used with respect to any specified person, means
the power to direct the management and policies of such person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
 
  "Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer") by the Company or
a Restricted Subsidiary, directly or indirectly, in one or a series of related
transactions, to any person other than the Company or a Restricted Subsidiary
of (a) any Capital Stock of any Restricted Subsidiary, (b) all or
substantially all of the properties and assets of the Company and its
Restricted Subsidiaries representing a division or line of business or (c) any
other properties or assets of the Company or any Restricted Subsidiary, other
than in the ordinary course of business. For the purposes of this definition,
the term "Asset Sale" does not include any transfer of properties or assets
(i) that is governed by the provisions of the Indenture described under
"Consolidation, Merger and Sale of Assets", (ii) between or among the Company
and its Restricted Subsidiaries pursuant to transactions that do not violate
any other provision of the Indenture, (iii) to an Unrestricted Subsidiary or a
Joint Venture, if permitted under the "Limitation on Restricted Payments"
covenant, (iv) representing obsolete or permanently retired equipment and
facilities, (v) involving the leasing of a JOA diaper line from McDonnell
Douglas Leasing Corporation, including the sale and leaseback of related
equipment, (vi) the sale and leaseback of all or a portion of a diaper,
training pant or wet wipe production line acquired by the Company or a
Restricted Subsidiary after the Closing Date, provided that the aggregate
amount of proceeds received by the Company from any such sale may not exceed
$1,500,000 or (vii) the gross proceeds of which (exclusive of indemnities) do
not exceed $1,000,000 for any particular item or $2,000,000 in the aggregate
for any fiscal year of the Company.
 
  "Capital Stock" of any person means any and all shares, interests,
partnership interests, participations, rights in or other equivalents (however
designated) of such person's equity interest (however designated).
 
  "Capitalized Lease Obligation" means, with respect to any person, an
obligation incurred or assumed under or in connection with any capital lease
of real or personal property that, in accordance with GAAP, has been recorded
as a capitalized lease.
 
  "Change of Control" means the occurrence of any of the following events:
 
    (a) Any person or "group" (as such term is used in Sections 13(d) and
  14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined
  in Rules 13d-3 and 13d-5 under the Exchange Act, except that a person will
  be deemed to have "beneficial ownership" of all securities that such person
  has the right
 
                                      62
<PAGE>
 
  to acquire, whether such right is exercisable immediately or only after the
  passage of time), directly or indirectly, of a majority of the voting power
  of all classes of Voting Stock of the Company.
 
    (b) During any consecutive two-year period, individuals who at the
  beginning of such period constituted the Board of Directors of the Company
  (together with any new directors whose election to such Board of Directors,
  or whose nomination for election by the stockholders of the Company, was
  approved by a vote of 66 2/3% of the directors then still in office who
  were either directors at the beginning of such period or whose election or
  nomination for election was previously so approved) cease for any reason to
  constitute a majority of the Board of Directors of the Company then in
  office.
 
    (c) The Company is liquidated or dissolved or adopts a plan of
  liquidation or dissolution.
 
  "Closing Date" means the date on which the Notes are originally issued under
the Indenture.
 
  "Consolidated Adjusted Net Income" means, for any period, the net income (or
net loss) of the Company and its Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP, adjusted to the
extent included in calculating such net income or loss by excluding (a) any
net after-tax extraordinary gains or losses (less all fees and expenses
relating thereto), (b) any net after-tax gains or losses (less all fees and
expenses relating thereto) attributable to Asset Sales, (c) the portion of net
income (or loss) of any person (other than the Company or a Restricted
Subsidiary), including Unrestricted Subsidiaries, in which the Company or any
Restricted Subsidiary has an ownership interest, except to the extent of the
amount of dividends or other distributions actually paid to the Company or any
Restricted Subsidiary in cash during such period, (d) the net income (or loss)
of any person combined with the Company or any Restricted Subsidiary on a
"pooling of interests" basis attributable to any period prior to the date of
combination and (e) the net income (but not the net loss) of any Restricted
Subsidiary to the extent that the declaration or payment of dividends or
similar distributions by such Restricted Subsidiary is at the date of
determination restricted, directly or indirectly, including by way of foreign
governmental limitations on remittances, except to the extent that such net
income could be paid to the Company or a Restricted Subsidiary thereof by
loans, advances, intercompany transfers, principal repayments or otherwise;
provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted
Subsidiary, Consolidated Adjusted Net Income will be reduced (to the extent
not otherwise reduced in accordance with GAAP) by an amount equal to (A) the
amount of the Consolidated Adjusted Net Income otherwise attributable to such
Restricted Subsidiary multiplied by (B) the quotient of (1) the number of
shares of outstanding common stock of such Restricted Subsidiary not owned on
the last day of such period by the Company or any of its Restricted
Subsidiaries divided by (2) the total number of shares of outstanding common
stock of such Restricted Subsidiary on the last day of such period.
 
  "Consolidated EBITDA" means, for any period, the sum of, without duplication
Consolidated Adjusted Net Income for such period, plus (or, in the case of
clause (d) below, plus or minus) the following items to the extent included in
computing Consolidated Adjusted Net Income for such period (a) Consolidated
Fixed Charges for such period, plus (b) the provision for federal, state,
local and foreign income taxes of the Company and its Restricted Subsidiaries
for such period, plus (c) the aggregate depreciation and amortization expense
of the Company and its Restricted Subsidiaries for such period, plus (d) any
other non-cash charges for such period, and minus non-cash credits for such
period, other than non-cash charges or credits resulting from changes in
prepaid assets or accrued liabilities in the ordinary course of business;
provided that income tax expense, depreciation and amortization expense, fixed
charges and non-cash charges and credits of a Restricted Subsidiary will be
included in Consolidated EBITDA only to the extent (and in the same
proportion) that the net income of such Subsidiary was included in calculating
Consolidated Adjusted Net Income for such period.
 
  "Consolidated Fixed Charge Coverage Ratio" means, for any period, the ratio
of (a) Consolidated EBITDA for such period to (b) Consolidated Fixed Charges
for such period.
 
  "Consolidated Fixed Charges" means, for any period, without duplication, the
sum of (a) the amount that, in conformity with GAAP, would be set forth
opposite the caption "interest expense" (or any like caption) on a
consolidated statement of operations of the Company and its Restricted
Subsidiaries for such period, including,
 
                                      63
<PAGE>
 
without limitation, (i) amortization of debt discount, (ii) the net cost of
interest rate contracts (including amortization of discounts), (iii) the
interest portion of any deferred payment obligation, (iv) amortization of debt
issuance costs and (v) the interest component of Capitalized Lease
Obligations, plus (b) cash dividends paid on Preferred Stock and Disqualified
Stock by the Company and any Restricted Subsidiary (to any person other than
the Company and its Restricted Subsidiaries), plus (c) all interest on any
Debt of any person guaranteed by the Company or any of its Restricted
Subsidiaries; provided, however, that Consolidated Fixed Charges will not
include (i) any gain or loss from extinguishment of debt, including the write-
off of debt issuance costs and (ii) the fixed charges of a Restricted
Subsidiary to the extent (and in the same proportion) that the net income of
such Subsidiary was excluded in calculating Consolidated Adjusted Net Income
pursuant to clause (e) of the definition thereof for such period.
 
  "Consolidated Net Worth" means, at any date of determination, stockholders'
equity of the Company and its Restricted Subsidiaries as set forth on the most
recently available quarterly or annual consolidated balance sheet of the
Company and its Restricted Subsidiaries, less any amounts attributable to
Disqualified Stock or any equity security convertible into or exchangeable for
Debt, the cost of treasury stock and the principal amount of any promissory
notes receivable from the sale of the Capital Stock of the Company or any of
its Restricted Subsidiaries and less, to the extent included in calculating
such stockholders' equity of the Company and its Restricted Subsidiaries, the
stockholders' equity attributable to Unrestricted Subsidiaries, each item to
be determined in conformity with GAAP (excluding the effects of foreign
currency adjustments under Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 52).
 
  "Debt" means (without duplication), with respect to any person, whether
recourse is to all or a portion of the assets of such person and whether or
not contingent, (a) every obligation of such person for money borrowed, (b)
every obligation of such person evidenced by bonds, debentures, notes or other
similar instruments, (c) every reimbursement obligation of such person with
respect to letters of credit, bankers' acceptances or similar facilities
issued for the account of such person, (d) every obligation of such person
issued or assumed as the deferred purchase price of property or services, (e)
every Capitalized Lease Obligation of such person, (f) all Disqualified Stock
of such person valued at its maximum fixed repurchase price, plus accrued and
unpaid dividends, (g) all obligations of such person under or in respect of
Hedging Obligations, and (h) every obligation of the type referred to in
clauses (a) through (g) of another person and all dividends of another person
the payment of which, in either case, such person has guaranteed. For purposes
of this definition, the "maximum fixed repurchase price" of any Disqualified
Stock that does not have a fixed repurchase price will be calculated in
accordance with the terms of such Disqualified Stock as if such Disqualified
Stock were repurchased on any date on which Debt is required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by,
the fair market value of such Disqualified Stock, such fair market value will
be determined in good faith by the board of directors of the issuer of such
Disqualified Stock. Notwithstanding the foregoing, trade accounts payable and
accrued liabilities arising in the ordinary course of business and any
liability for federal, state or local taxes or other taxes owed by such person
will not be considered Debt for purposes of this definition.
 
  "Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
 
  "Disinterested Director" means, with respect to any transaction or series of
transactions in respect of which the Board of Directors is required to deliver
a resolution of the Board of Directors under the Indenture, a member of the
Board of Directors who does not have any material direct or indirect financial
interest in or with respect to such transaction or series of transactions
(other than as the holder of Voting Stock of the Company).
 
  "Disqualified Stock" means any class or series of Capital Stock that, either
by its terms, or by the terms of any security into which it is convertible or
exchangeable or by contract or otherwise (i) is, or upon the happening of an
event or passage of time would be, required to be redeemed prior to one year
after the final Stated Maturity of the Notes, (ii) is redeemable at the option
of the holder thereof at any time prior to one year after such final Stated
Maturity or (iii) at the option of the holder thereof, is convertible into or
exchangeable for debt securities at any time prior to one year after such
final Stated Maturity; provided that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders
thereof the right to cause the issuer thereof
 
                                      64
<PAGE>
 
to repurchase or redeem such Capital Stock upon the occurrence of an "asset
sale" or "change of control" occurring prior to the Stated Maturity of the
Notes will not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in the
"Limitation on Certain Asset Sales" and "Purchase of Notes upon a Change of
Control" covenants described below and such Capital Stock specifically
provides that the issuer will not repurchase or redeem any such stock pursuant
to such provision prior to the Company's repurchase of such Notes as are
required to be repurchased pursuant to the "Limitation on Certain Asset Sales"
and "Purchase of Notes upon a Change of Control" covenants described below.
 
  "Equity Offering" means an offer and sale by the Company of its common stock
(which is Qualified Stock) to a person other than a Subsidiary.
 
  "Exchange Act" means the Securities Exchange Act of 1934, as amended.
 
  "Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
that are in effect on the Closing Date.
 
  "guarantee" means, as applied to any obligation, (a) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (b) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limitation, the payment of
amounts drawn down under letters of credit.
 
  "Hedging Obligations" means the obligations of any person under (i) interest
rate swap agreements, interest rate cap agreements and interest rate collar
agreements and (ii) other agreements or arrangements designed to protect such
person against fluctuations in interest rates or the value of foreign
currencies.
 
  "Investment" in any person means, (i) directly or indirectly, any advance,
loan or other extension of credit (including, without limitation, by way of
guarantee or similar arrangement) or capital contribution to any person, the
purchase or other acquisition of any stock, bonds, notes, debentures or other
securities issued by such person, the acquisition (by purchase or otherwise)
of all or substantially all of the business or assets of such person, or the
making of any investment in such person, (ii) the designation of any
Restricted Subsidiary as an Unrestricted Subsidiary and (iii) the transfer of
any assets or properties from the Company or a Restricted Subsidiary to any
Unrestricted Subsidiary, other than the transfer of assets or properties made
in the ordinary course of business. Investments exclude extensions of trade
credit on commercially reasonable terms in accordance with normal trade
practices.
 
  "Joint Venture" means any person (other than an individual or government)
that is not a Subsidiary of the Company and a majority of whose revenues are
derived or will, as a consequence of the Company's or one of its Subsidiaries'
Investments therein, be derived from the business of the manufacture and sale
of disposable diapers and/or training pants in the United States or elsewhere
or a business reasonably related thereto.
 
  "Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim,
preference, priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. A person will be deemed to own subject to a Lien any property that
such person has acquired or holds subject to the interest of a vendor or
lessor under any conditional sale agreement, capital lease or other title
retention agreement.
 
  "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or cash equivalents, including payments in respect
of deferred payment obligations when received in the form of, or stock or
other assets when disposed for, cash or cash equivalents (except to the extent
that such obligations
 
                                      65
<PAGE>
 
are financed or sold with recourse to the Company or any Restricted
Subsidiary), net of (a) brokerage commissions and other fees and expenses
(including fees and expenses of legal counsel and investment banks) related to
such Asset Sale, (b) provisions for all taxes payable as a result of such
Asset Sale, (c) payments made to retire Debt where payment of such Debt is
secured by the assets that are the subject of such Asset Sale, (d) amounts
required to be paid to any person (other than the Company or any Restricted
Subsidiary) owning a beneficial interest in the assets that are subject to the
Asset Sale and (e) appropriate amounts to be provided by the Company or any
Restricted Subsidiary, as the case may be, as a reserve required in accordance
with GAAP against any liabilities associated with such Asset Sale and retained
by the seller after such Asset Sale, including pension and other post-
employment benefit liabilities, liabilities related to environmental matters
and liabilities under any indemnification obligations associated with such
Asset Sale.
 
  "Permitted Investments" means any of the following:
 
    (a) Investments in (i) securities with a maturity of 180 days or less
  issued or directly and fully guaranteed or insured by the United States or
  any agency or instrumentality thereof (provided that the full faith and
  credit of the United States is pledged in support thereof); (ii)
  certificates of deposit or acceptances with a maturity of 180 days or less
  of any financial institution that is a member of the Federal Reserve System
  having combined capital and surplus of not less than $500,000,000; and
  (iii) commercial paper with a maturity of 180 days or less issued by a
  corporation that is not an Affiliate of the Company and is organized under
  the laws of any state of the United States or the District of Columbia and
  having a rating of P-1 (or its equivalent) from Moody's Investors Service,
  Inc. or A-1 (or its equivalent) from Standard & Poor's Ratings Services.
 
    (b) Investments by the Company or any Restricted Subsidiary in another
  person, if as a result of such Investment such other person (i) becomes a
  Restricted Subsidiary or (ii) is merged or consolidated with or into, or
  transfers or conveys all or substantially all of its assets to, the Company
  or a Restricted Subsidiary.
 
    (c) Investments by the Company or a Restricted Subsidiary in the Company
  or a Subsidiary Guarantor.
 
    (d) Investments in the form of senior loans to any Restricted Subsidiary
  that is not a Subsidiary Guarantor, provided that no portion of its net
  income would be excluded under the definition of Consolidated Adjusted Net
  Income by reason of clause (e) of the definition thereof.
 
    (e) Investments in assets owned or used in the ordinary course of
  business.
 
    (f) Investments in existence on the Closing Date.
 
    (g) Investments in any person in the form of the capital contribution of
  the Company's common stock.
 
    (h) Promissory notes received as a result of Asset Sales permitted under
  the "Limitation on Certain Asset Sales" covenant.
 
    (i) Direct or indirect loans to employees, or to a trustee for the
  benefit of such employees, of the Company or any Restricted Subsidiary in
  an aggregate amount outstanding at any time not exceeding $400,000 plus the
  amount of direct or indirect loans to employees for relocation assistance.
 
    (j) The purchase of all or any portion of the 49% of Hygienic Products
  International Limited, the Company's Cayman Islands subsidiary that owns
  its Brazilian operations, not owned by the Company prior to the Closing
  Date.
 
    (k) Other Investments that do not exceed $3,000,000 in the aggregate at
  any time outstanding.
 
  "Preferred Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
person's preferred or preference stock, whether now outstanding or issued
after the Closing Date, and including, without limitation, all classes and
series of preferred or preference stock of such person.
 
  "Qualified Equity Interest" means any Qualified Stock and all warrants,
options or other rights to acquire Qualified Stock (but excluding any debt
security that is convertible into or exchangeable for Capital Stock).
 
 
                                      66
<PAGE>
 
  "Qualified Stock" of any person means any and all Capital Stock of such
person, other than Disqualified Stock.
 
  "Restricted Subsidiary" means any Subsidiary other than an Unrestricted
Subsidiary.
 
  "Revolving Credit Facility" means the loan and security agreement dated
February 26, 1996, between the Company and Congress Financial Corporation
(Southwest), as such agreement may be amended, restated, supplemented,
refinanced or otherwise modified from time to time with the same lender or one
or more other lenders.
 
  "Significant Subsidiary" means any Restricted Subsidiary of the Company that
together with its Subsidiaries, (a) for the most recent fiscal year of the
Company, accounted for more than 10% of the consolidated net sales of the
Company and its Restricted Subsidiaries or (b) as of the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of the Company
and its Restricted Subsidiaries, in the case of either (a) or (b), as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year or (c) was organized or acquired after the
beginning of such fiscal year and would have been a Significant Subsidiary if
it had been owned during the entire fiscal year.
 
  "Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is
due and payable and, when used with respect to any other Debt, means the date
specified in the instrument governing such Debt as the fixed date on which the
principal of such Debt or any installment of interest thereon is due and
payable.
 
  "Subordinated Debt" means Debt of the Company or a Subsidiary Guarantor that
is subordinated in right of payment to the Notes or the Subsidiary Guarantee
issued by such Subsidiary Guarantor, as the case may be.
 
  "Subsidiary" means any person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by the Company
and/or one or more other Subsidiaries of the Company.
 
  "Subsidiary Guarantee" means a guarantee of the Notes by a Restricted
Subsidiary in accordance with the provisions of the Indenture.
 
  "Subsidiary Guarantor" means any Restricted Subsidiary that issues a
Subsidiary Guarantee.
 
  "Unrestricted Subsidiary" means (a) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary in accordance with the
"Unrestricted Subsidiaries" covenant and (b) any Subsidiary of an Unrestricted
Subsidiary.
 
  "Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees
of any person (irrespective of whether or not, at the time, stock of any other
class or classes has, or might have, voting power by reason of the happening
of any contingency).
 
  "Weighted Average Life" means, as of the date of determination with respect
to any Debt or Disqualified Stock, the quotient obtained by dividing (a) the
sum of the products of (i) the number of years from the date of determination
to the date or dates of each successive scheduled principal or liquidation
value payment of such Debt or Disqualified Stock, respectively, multiplied by
(ii) the amount of each such principal or liquidation value payment by (b) the
sum of all such principal or liquidation value payments.
 
  "Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary, all of
the outstanding voting securities (other than directors' qualifying shares or
an immaterial number of shares required to be owned by other persons pursuant
to applicable law) of which are owned, directly or indirectly, by the Company.
 
 
                                      67
<PAGE>
 
CERTAIN COVENANTS
 
  The Indenture will contain, among others, the following covenants:
 
  Limitation on Debt. The Company will not, and will not permit any Restricted
Subsidiary to, create, issue, assume, guarantee or in any manner become
directly or indirectly liable for the payment of, or otherwise incur
(collectively, "incur"), any Debt (including Acquired Debt and the issuance of
Disqualified Stock), except that the Company or a Restricted Subsidiary may
incur Debt or issue Disqualified Stock if, at the time of such event, the
Consolidated Fixed Charge Coverage Ratio for the immediately preceding four
full fiscal quarters for which internal financial statements are available,
taken as one accounting period, would have been equal to at least 2.0 to 1.0
through June 30, 1998 and 2.5 to 1.0 thereafter.
 
  In making the foregoing calculation, pro forma effect will be given to: (i)
the incurrence of such Debt and (if applicable) the application of the net
proceeds therefrom, including to refinance other Debt, as if such Debt was
incurred and the application of such proceeds occurred at the beginning of
such four-quarter period, (ii) the incurrence, repayment or retirement of any
other Debt by the Company or its Restricted Subsidiaries since the first day
of such four-quarter period as if such Debt was incurred, repaid or retired at
the beginning of such four-quarter period and (iii) the acquisition (whether
by purchase, merger or otherwise) or disposition (whether by sale, merger or
otherwise) of any company, entity or business acquired or disposed of by the
Company or its Restricted Subsidiaries, as the case may be, since the first
day of such four-quarter period, as if such acquisition or disposition
occurred at the beginning of such four-quarter period. In making a computation
under the foregoing clause (i) or (ii), (A) interest on Debt bearing a
floating interest rate will be computed as if the rate in effect on the date
of computation had been the applicable rate for the entire period, (B) if such
Debt bears, at the option of the Company, a fixed or floating rate of
interest, interest thereon will be computed by applying, at the option of the
Company, either the fixed or floating rate and (C) the amount of Debt under a
revolving credit facility will be computed based upon the average daily
balance of such Debt during such four-quarter period.
 
  Notwithstanding the foregoing, the Company may, and may, to the extent
expressly permitted below, permit its Restricted Subsidiaries to, incur any of
the following Debt ("Permitted Debt"):
 
    (i) Debt of the Company or any Restricted Subsidiary under the Revolving
  Credit Facility or one or more other credit facilities in an aggregate
  principal amount at any one time outstanding not to exceed the greater of
  (a) $21,000,000 and (b) the sum of 75% of the aggregate book value of the
  accounts receivable (net of bad debt reserves) and 50% of the aggregate net
  book value of the inventory of the Company and its Restricted Subsidiaries
  determined on a consolidated basis in accordance with GAAP as of the last
  day of the immediately preceding four full fiscal quarters for which
  internal financial statements are available, less any amounts applied to
  the permanent reduction of such credit facilities pursuant to the
  "Limitation on Certain Asset Sales" covenant, together with guarantees of
  such Debt by a Restricted Subsidiary; provided, however, that the aggregate
  principal amount of Debt of the Company's foreign Restricted Subsidiaries
  that are not Subsidiary Guarantors, as a group, permitted to be outstanding
  in reliance on this clause (i) may not exceed the greater of (x)
  $10,000,000 and (y) 50% of the aggregate book value of the accounts
  receivable (net of bad debt reserves) of such foreign Restricted
  Subsidiaries calculated in accordance with the foregoing provisions of this
  clause (i).
 
    (ii) Debt of the Company or any Restricted Subsidiary outstanding on the
  Closing Date (excluding borrowings under the Revolving Credit Facility).
 
    (iii) Debt owed by the Company to any Restricted Subsidiary or owed by
  any Subsidiary Guarantor to the Company or any other Restricted Subsidiary
  that is a Subsidiary Guarantor (provided that such Debt is held by the
  Company or such Restricted Subsidiary) or owed by the Company or a
  Subsidiary Guarantor to a Restricted Subsidiary that is not a Subsidiary
  Guarantor, provided such debt would represent a "Permitted Investment"
  under clause (d) of the definition thereof.
 
    (iv) Debt represented by the Notes and the Subsidiary Guarantees.
 
 
                                      68
<PAGE>
 
    (v) Debt of the Company or any Restricted Subsidiary in respect of
  Hedging Obligations incurred in the ordinary course of business.
 
    (vi) Capitalized Lease Obligations of the Company or any Restricted
  Subsidiary, provided that the aggregate amount of Debt under this clause
  (vi) does not exceed $5,000,000 at any one time outstanding.
 
    (vii) Debt of the Company or any Restricted Subsidiary under purchase
  money mortgages or secured by purchase money security interests so long as
  (x) such Debt is not secured by any property or assets of the Company or
  any Restricted Subsidiary other than the property and assets so acquired
  and (y) such Debt is created within 60 days of the acquisition of the
  related property; provided that the aggregate amount of Debt under this
  clause (vii) does not exceed $2,000,000 at any one time outstanding.
 
    (viii) Debt of the Company or any Restricted Subsidiary consisting of
  guarantees, indemnities or obligations in respect of purchase price
  adjustments in connection with the acquisition or disposition of assets,
  including, without limitation, shares of Capital Stock.
 
    (ix) Guarantees by any Restricted Subsidiary made in accordance with the
  provisions of the "Guarantees of Debt by Restricted Subsidiaries" covenant.
 
    (x) Debt of the Company or any Restricted Subsidiary, not permitted by
  any other clause of this definition, in an aggregate principal amount not
  to exceed $3,000,000 at any one time outstanding.
 
    (xi) Any renewals, extensions, substitutions, refinancings or
  replacements (each, for purposes of this clause, a "refinancing") of any
  outstanding Debt, other than Debt incurred pursuant to clauses (i), (v),
  (vi), (vii) or (x) of this definition, including any successive
  refinancings thereof, so long as (A) any such new Debt is in a principal
  amount that does not exceed the principal amount so refinanced, plus the
  amount of any premium required to be paid in connection with such
  refinancing pursuant to the terms of the Debt refinanced or the amount of
  any premium reasonably determined by the Company as necessary to accomplish
  such refinancing, plus the amount of the expenses of the Company incurred
  in connection with such refinancing, (B) in the case of any refinancing of
  Subordinated Debt, such new Debt is made subordinate to the Notes at least
  to the same extent as the Debt being refinanced and (C) such refinancing
  Debt does not have a Weighted Average Life less than the Weighted Average
  Life of the Debt being refinanced and does not have a final scheduled
  maturity earlier than the final scheduled maturity, or permit redemption at
  the option of the holder earlier than the earliest date of redemption at
  the option of the holder, of the Debt being refinanced.
 
  Limitation on Restricted Payments. The Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, take any of the
following actions:
 
    (a) declare or pay any dividend on, or make any distribution to holders
  of, any shares of the Capital Stock of the Company or any Restricted
  Subsidiary (other than (i) dividends or distributions payable solely in
  Qualified Equity Interests, (ii) dividends or distributions by a Restricted
  Subsidiary payable to the Company or another Restricted Subsidiary or (iii)
  pro rata dividends or distributions on common stock of a Restricted
  Subsidiary held by minority stockholders, provided that such dividends do
  not in the aggregate exceed the minority stockholders' pro rata share of
  such Restricted Subsidiary's net income from the first day of the Company's
  fiscal quarter during which the Closing Date occurs);
 
    (b) purchase, redeem or otherwise acquire or retire for value, directly
  or indirectly, any shares of Capital Stock (or any options, warrants or
  other rights to acquire shares of Capital Stock) of (i) the Company or any
  Unrestricted Subsidiary or (ii) any Restricted Subsidiary held by any
  Affiliate of the Company (other than, in either case, any such Capital
  Stock owned by the Company or any of its Restricted Subsidiaries);
 
    (c) make any principal payment on, or repurchase, redeem, defease or
  otherwise acquire or retire for value, prior to any scheduled principal
  payment, sinking fund payment or maturity, any Subordinated Debt; and
 
    (d) make any Investment (other than a Permitted Investment) in any person
 
 
                                      69
<PAGE>
 
(such payments or other actions described in (but not excluded from) clauses
(a) through (d) being referred to as "Restricted Payments"), unless at the
time of, and immediately after giving effect to, the proposed Restricted
Payment:
 
    (i) no Default or Event of Default has occurred and is continuing,
 
    (ii) the Company could incur at least $1.00 of additional Debt (other
  than Permitted Debt) pursuant to the first paragraph of the "Limitation on
  Debt" covenant and
 
    (iii) the aggregate amount of all Restricted Payments declared or made
  after the Closing Date does not exceed the sum of:
 
      (A) 50% of the aggregate Consolidated Adjusted Net Income of the
    Company during the period (taken as one accounting period) from the
    first day of the Company's fiscal quarter during which the Closing Date
    occurs to the last day of the Company's most recently ended fiscal
    quarter for which internal financial statements are available at the
    time of such proposed Restricted Payment (or, if such aggregate
    cumulative Consolidated Adjusted Net Income is a loss, minus 100% of
    such amount); plus
 
      (B) the aggregate net cash proceeds received by the Company after the
    Closing Date from the issuance or sale (other than to a Subsidiary) of
    Qualified Equity Interests of the Company (excluding proceeds of an
    Equity Offering that are used to redeem Notes, as discussed above);
    plus
 
      (C) the aggregate net cash proceeds received by the Company after the
    Closing Date from the issuance or sale (other than to a Subsidiary) of
    debt securities or Disqualified Stock that have been converted into or
    exchanged for Qualified Stock of the Company, together with the
    aggregate net cash proceeds received by the Company at the time of such
    conversion or exchange; plus
 
      (D) $5,000,000.
 
  Notwithstanding the foregoing, the Company and its Restricted Subsidiaries
may take any of the following actions, so long as (with respect to clauses (e)
and (f) below) no Default or Event of Default has occurred and is continuing
or would occur:
 
    (a) The payment of any dividend within 60 days after the date of
  declaration thereof, if at the declaration date such payment would not have
  been prohibited by the foregoing provision.
 
    (b) The repurchase, redemption or other acquisition or retirement for
  value of any shares of Capital Stock of the Company in exchange for, or out
  of the net cash proceeds of a substantially concurrent issuance and sale
  (other than to a Subsidiary) of, Qualified Equity Interests of the Company.
 
    (c) The purchase, redemption, defeasance or other acquisition or
  retirement for value of any Subordinated Debt in exchange for, or out of
  the net cash proceeds of a substantially concurrent issuance and sale
  (other than to a Subsidiary) of Qualified Equity Interests of the Company.
 
    (d) The purchase, redemption, defeasance or other acquisition or
  retirement for value of Subordinated Debt in exchange for, or out of the
  net cash proceeds of a substantially concurrent issuance or sale (other
  than to a Subsidiary) of, Subordinated Debt, so long as the Company or a
  Restricted Subsidiary would be permitted to refinance such original
  Subordinated Debt with such new Subordinated Debt pursuant to clause (xi)
  of the definition of Permitted Debt.
 
    (e) The repurchase of any Subordinated Debt at a purchase price not
  greater than 101% of the principal amount of such Subordinated Debt in the
  event of a "change of control" in accordance with provisions similar to the
  "Purchase of Notes upon a Change of Control" covenant; provided that, prior
  to or simultaneously with such repurchase, the Company has made the Change
  of Control Offer as provided in such covenant with respect to the Notes and
  has repurchased all Notes validly tendered for payment in connection with
  such Change of Control Offer.
 
    (f) The repayment, on or promptly after the Closing Date, of the
  Company's outstanding 12% Junior Subordinated Debentures in the principal
  amount of $2,400,000.
 
 
                                      70
<PAGE>
 
The payments described in clauses (b), (c) and (e) of this paragraph will be
Restricted Payments that will be permitted to be taken in accordance with this
paragraph but will reduce the amount that would otherwise be available for
Restricted Payments under the foregoing clause (iii) and the payments
described in clauses (a), (d) and (f) of this paragraph will be Restricted
Payments that will be permitted to be taken in accordance with this paragraph
and will not reduce the amount that would otherwise be available for
Restricted Payments under the foregoing clause (iii).
 
  For the purpose of making any calculations under the Indenture (i) if a
Restricted Subsidiary is designated an Unrestricted Subsidiary, the Company
will be deemed to have made an Investment in an amount equal to the fair
market value of the net assets of such Restricted Subsidiary at the time of
such designation as determined by the Board of Directors of the Company, whose
good faith determination will be conclusive, (ii) any property transferred to
or from an Unrestricted Subsidiary will be valued at fair market value at the
time of such transfer, as determined by the Board of Directors of the Company,
whose good faith determination will be conclusive and (iii) subject to the
foregoing, the amount of any Restricted Payment, if other than cash, will be
determined by the Board of Directors of the Company, whose good faith
determination will be conclusive.
 
  If the aggregate amount of all Restricted Payments calculated under the
foregoing provision includes an Investment in an Unrestricted Subsidiary or
other person that thereafter becomes a Restricted Subsidiary, the aggregate
amount of all Restricted Payments calculated under the foregoing provision
will be reduced by the lesser of (x) the net asset value of such Subsidiary at
the time it becomes a Restricted Subsidiary and (y) the initial amount of such
Investment.
 
  If an Investment resulted in the making of a Restricted Payment, the
aggregate amount of all Restricted Payments calculated under the foregoing
provision will be reduced by the amount of any net reduction in such
Investment (resulting from the payment of interest or dividends, loan
repayment, transfer of assets or otherwise), to the extent such net reduction
is not included in the Company's Consolidated Adjusted Net Income; provided
that the total amount by which the aggregate amount of all Restricted Payments
may be reduced may not exceed the lesser of (x) the cash proceeds received by
the Company and its Restricted Subsidiaries in connection with such net
reduction and (y) the initial amount of such Investment.
 
  In computing Consolidated Adjusted Net Income of the Company for purposes of
the foregoing clause (iii)(A), (i) the Company may use audited financial
statements for the portions of the relevant period for which audited financial
statements are available on the date of determination and unaudited financial
statements and other current financial data based on the books and records of
the Company for the remaining portion of such period and (ii) the Company will
be permitted to rely in good faith on the financial statements and other
financial data derived from the books and records of the Company that are
available on the date of determination. If the Company makes a Restricted
Payment that, at the time of the making of such Restricted Payment, would in
the good faith determination of the Company be permitted under the
requirements of the Indenture, such Restricted Payment will be deemed to have
been made in compliance with the Indenture notwithstanding any subsequent
adjustments made in good faith to the Company's financial statements affecting
Consolidated Adjusted Net Income of the Company for any period.
 
  Purchase of Notes upon a Change of Control. If a Change of Control occurs at
any time, then each holder of Notes will have the right to require that the
Company purchase such holder's Notes, in whole or in part in integral
multiples of $1,000, at a purchase price in cash equal to 101% of the
principal amount of such Notes, plus accrued and unpaid interest, if any, to
the date of purchase, pursuant to the offer described below (the "Change of
Control Offer") and the other procedures set forth in the Indenture.
 
  Within 45 days following any Change of Control, the Company will notify the
Trustee thereof and give written notice of such Change of Control to each
holder of Notes by first-class mail, postage prepaid, at its address appearing
in the Note Register, stating, among other things, (i) the purchase price and
the purchase date, which will be a Business Day no earlier than 30 days nor
later than 60 days from the date such notice is mailed or such later date as
is necessary to comply with requirements under the Exchange Act; (ii) that any
Note not
 
                                      71
<PAGE>
 
tendered will continue to accrue interest; (iii) that, unless the Company
defaults in the payment of the purchase price, any Notes accepted for payment
pursuant to the Change of Control Offer will cease to accrue interest on and
after the Change of Control purchase date; and (iv) certain other procedures
that a holder of Notes must follow to accept a Change of Control Offer or to
withdraw such acceptance.
 
  If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes that might be tendered by holders of the Notes seeking to accept
the Change of Control Offer. The Revolving Credit Facility is expected to
prohibit the purchase of Notes by the Company prior to full repayment of debt
thereunder. There can be no assurance that in the event of a Change of Control
the Company will be able to obtain the necessary consents to consummate a
Change of Control Offer. The failure of the Company to make or consummate the
Change of Control Offer or pay the applicable Change of Control purchase price
when due would result in an Event of Default and would give the Trustee and
the holders of the Notes the rights described under "Events of Default".
 
  One of the events that constitutes a Change of Control under the Indenture
is the disposition of "all or substantially all" of the Company's assets. This
term has not been interpreted under New York law (which is the governing law
of the Indenture) to represent a specific quantitative test. As a consequence,
in the event holders of the Notes elect to require the Company to purchase the
Notes and the Company elects to contest such election, there can be no
assurance as to how a court interpreting New York law would interpret the
phrase in many circumstances.
 
  The existence of a holder's right to require the Company to purchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction that constitutes a Change of Control.
 
  The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture may not afford holders of Notes the right to
require the Company to repurchase such Notes in the event of a highly
leveraged transaction or certain transactions with the Company's management or
its affiliates, including a reorganization, restructuring, merger or similar
transaction involving the Company (including, in certain circumstances, an
acquisition of the Company by management or its affiliates) that may adversely
affect holders of the Notes, if such transaction is not a transaction defined
as a Change of Control. See "Certain Definitions" above for the definition of
"Change of Control". A transaction involving the Company's management or its
affiliates, or a transaction involving a recapitalization of the Company,
would result in a Change of Control if it is the type of transaction specified
in such definition.
 
  The Company will comply with the applicable tender offer rules including
Rule l4e-l under the Exchange Act, and any other applicable securities laws
and regulations in connection with a Change of Control Offer.
 
  The Company will not, and will not permit any Restricted Subsidiary to,
create any restriction (other than restrictions existing under Debt as in
effect on the Closing Date or in refinancings of such Debt) that would
materially impair the ability of the Company to make a Change of Control Offer
to purchase the Notes or, if such Change of Control Offer is made, to pay for
the Notes tendered for purchase.
 
  Limitation on Certain Asset Sales. (a) The Company will not, and will not
permit any Restricted Subsidiary to, engage in any Asset Sale unless (i) the
consideration received by the Company or such Restricted Subsidiary for such
Asset Sale is not less than the fair market value of the assets sold (as
determined by the Board of Directors of the Company, whose good faith
determination will be conclusive) and (ii) the consideration received by the
Company or the relevant Restricted Subsidiary in respect of such Asset Sale
consists of at least 80% (A) cash or cash equivalents or (B) the assumption by
the transferee of Debt of the Company or a Restricted Subsidiary ranked pari
passu with the Notes and release of the Company or such Restricted Subsidiary
from all liability on such Debt.
 
  (b) If the Company or any Restricted Subsidiary engages in an Asset Sale,
the Company may, at its option, within 12 months after such Asset Sale, (i)
apply all or a portion of the Net Cash Proceeds to the permanent
 
                                      72
<PAGE>
 
reduction of amounts outstanding under the Revolving Credit Facility or to the
repayment of other senior Debt of the Company or a Restricted Subsidiary or
(ii) invest (or enter into a legally binding agreement to invest) all or a
portion of such Net Cash Proceeds in properties and assets to replace the
properties and assets that were the subject of the Asset Sale or in properties
and assets that will be used in businesses of the Company or its Restricted
Subsidiaries, as the case may be, existing on the Closing Date. If any such
legally binding agreement to invest such Net Cash Proceeds is terminated, the
Company may, within 90 days of such termination or within 12 months of such
Asset Sale, whichever is later, invest such Net Cash Proceeds as provided in
clause (i) or (ii) (without regard to the parenthetical contained in such
clause (ii)) above. The amount of such Net Cash Proceeds not so used as set
forth above in this paragraph (b) constitutes "Excess Proceeds".
 
  (c) When the aggregate amount of Excess Proceeds exceeds $5,000,000, the
Company will, within 30 days thereafter, make an offer to purchase from all
holders of Notes, on a pro rata basis, in accordance with the procedures set
forth in the Indenture, the maximum principal amount (expressed as a multiple
of $1,000) of Notes that may be purchased with the Excess Proceeds, at a
purchase price in cash equal to 100% of the principal amount thereof, plus
accrued interest, if any, to the date such offer to purchase is consummated.
To the extent that the aggregate principal amount of Notes tendered pursuant
to such offer to purchase is less than the Excess Proceeds, the Company may
use such deficiency for general corporate purposes. If the aggregate principal
amount of Notes validly tendered and not withdrawn by holders thereof exceeds
the Excess Proceeds, the Notes to be purchased will be selected on a pro rata
basis. Upon completion of such offer to purchase, the amount of Excess
Proceeds will be reset to zero.
 
  Limitation on Transactions with Affiliates. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
suffer to exist any transaction with, or for the benefit of, any Affiliate of
the Company or any beneficial owner of 5% or more of any class of the Capital
Stock of the Company at any time outstanding ("Interested Persons"), unless
(a) such transaction is on terms that are no less favorable to the Company or
such Restricted Subsidiary, as the case may be, than those that could have
been obtained in an arm's length transaction with third parties who are not
Interested Persons and (b) either (i) with respect to any transaction or
series of related transactions involving aggregate payments in excess of
$1,000,000, but less than $5,000,000, the Company delivers an officers'
certificate to the Trustee certifying that such transaction or transactions
comply with clause (a) above or (ii) with respect to a transaction or series
of transactions involving aggregate payments equal or greater than $5,000,000,
such transaction or transactions have been approved by the Board of Directors
(including a majority of the Disinterested Directors) of the Company or the
Company has obtained a written opinion from a nationally recognized investment
banking firm to the effect that such transaction or transactions are fair to
the Company or such Restricted Subsidiary from a financial point of view.
 
  The foregoing covenant will not restrict any of the following:
 
    (A) Transactions among the Company and/or its Restricted Subsidiaries.
 
    (B) The Company from paying reasonable and customary regular compensation
  and fees to directors of the Company or any Restricted Subsidiary who are
  not employees of the Company or any Restricted Subsidiary.
 
  Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction of any
kind on the ability of any Restricted Subsidiary to (a) pay dividends, in cash
or otherwise, or make any other distributions on or in respect of its Capital
Stock, (b) pay any Debt owed to the Company or any other Restricted
Subsidiary, (c) make loans or advances to the Company or any other Restricted
Subsidiary or (d) transfer any of its properties or assets to the Company or
any other Restricted Subsidiary, except for such encumbrances or restrictions
existing under or by reason of any of the following:
 
    (i) Any agreement in effect on the Closing Date.
 
 
                                      73
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    (ii) Customary non-assignment provisions of any lease governing a
  leasehold interest of the Company or any Restricted Subsidiary.
 
    (iii) The refinancing or successive refinancings of Debt incurred under
  the agreements in effect on the Closing Date, so long as such encumbrances
  or restrictions are no less favorable to the Company or any Restricted
  Subsidiary than those contained in such original agreement.
 
    (iv) Any agreement or other instrument of a person acquired by the
  Company or any Restricted Subsidiary in existence at the time of such
  acquisition (but not created in contemplation thereof), which encumbrance
  or restriction is not applicable to any person, or the properties or assets
  of any person, other than the person, or the property or assets of the
  person, so acquired.
 
    (v) Any agreement providing for the incurrence of Permitted Debt by a
  Restricted Subsidiary in compliance with the "Limitation on Debt" covenant
  provided that such Restricted Subsidiary is or becomes a Subsidiary
  Guarantor.
 
  Restriction on Transfer of Assets to Subsidiaries. The Company will not
sell, convey, transfer or otherwise dispose of its property or assets to any
of its Subsidiaries, except for sales, conveyances, transfers or other
dispositions (a) of property or assets having an aggregate fair market value
no greater than $5,000,000 made after the Closing Date and in the ordinary
course of business; (b) of property or assets having a fair market value not
in excess of the amount of Investments then permitted to be made pursuant to
the definition of Permitted Investments or the "Limitation on Restricted
Payments" covenant; or (c) made to any Restricted Subsidiary, if such
Restricted Subsidiary is either (i) a Subsidiary Guarantor or (ii) a
Restricted Subsidiary, provided that no portion of its net income would be
excluded under the definition of Consolidated Adjusted Net Income by reason of
clause (e) of the definition thereof. The amount of any sale, conveyance,
transfer or other disposition permitted to be made pursuant to the foregoing
clause (b), unless it constitutes a Permitted Investment, will be treated as
the payment of a Restricted Payment in calculating the amount of Restricted
Payments made by the Company.
 
  Limitation on Issuances and Sales of Capital Stock of Restricted
Subsidiaries. The Company will not sell, and will not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell, any shares of Capital
Stock of a Restricted Subsidiary (including options, warrants or other rights
to purchase shares of such Capital Stock) except (i) to the Company or a
Wholly Owned Restricted Subsidiary, (ii) issuances or sales to foreign
nationals of shares of Capital Stock of foreign Restricted Subsidiaries, to
the extent required by applicable law, or issuances or sales to directors of
directors' qualifying shares, (iii) if, immediately after giving effect to
such issuance or sale, neither the Company nor any of its Subsidiaries owns
any shares of Capital Stock of such Restricted Subsidiary (including options,
warrants or other rights to purchase shares of such Capital Stock) (iv) if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer constitute a Restricted Subsidiary and any
Investment in such person remaining after giving effect to such issuance or
sale would have been permitted to be made under the "Limitation on Restricted
Payments" covenant if made on the date of such issuance or sale or (v)
issuances or sales to the other stockholders of such Restricted Subsidiary of
up to 1% of the Capital Stock of such Restricted Subsidiary.
 
  Guarantees of Debt by Restricted Subsidiaries. All of the Company's domestic
Restricted Subsidiaries (those active Restricted Subsidiaries organized or
principally doing business in the United States and its territories and
possessions) will be Subsidiary Guarantors.
 
  In addition, the Company will not permit any Restricted Subsidiary that is
not a Subsidiary Guarantor, directly or indirectly, to guarantee, assume or in
any other manner become liable for the payment of any Debt of the Company or
any Debt of any other Restricted Subsidiary, unless (a) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture
providing for a guarantee of payment of the Notes by such Restricted
Subsidiary and (b) with respect to any guarantee of Subordinated Debt by a
Restricted Subsidiary, any such guarantee is subordinated to such Restricted
Subsidiary's guarantee with respect to the Notes at least to the same extent
as such Subordinated Debt is subordinated to the Notes, provided that the
foregoing provision will not be applicable to any guarantee by any Restricted
Subsidiary (i) that existed at the time such person became a Restricted
Subsidiary and was not incurred in connection with, or in contemplation
 
                                      74
<PAGE>
 
of, such person becoming a Restricted Subsidiary or (ii) of the 12 1/2% Senior
Notes as of any date on or prior to December 15, 1997.
 
  Any guarantee by a Restricted Subsidiary of the Notes pursuant to the
preceding paragraph will provide by its terms that it will be automatically
and unconditionally released and discharged upon (i) any sale, exchange or
transfer to any person not an Affiliate of the Company of all of the Company's
and the Restricted Subsidiaries' Capital Stock in, or all or substantially all
the assets of, such Restricted Subsidiary (which sale, exchange or transfer is
not prohibited by the Indenture), (ii) the release or discharge of the
guarantee that resulted in the creation of such guarantee of the Notes, except
a discharge or release by or as a result of payment under such guarantee or
(iii) the designation of such Restricted Subsidiary as an Unrestricted
Subsidiary in accordance with the terms of the Indenture.
 
  Unrestricted Subsidiaries. (a) The Board of Directors of the Company may
designate any Subsidiary (including any newly acquired or newly formed
Subsidiary) to be an Unrestricted Subsidiary so long as (i) neither the
Company nor any Restricted Subsidiary is directly or indirectly liable for any
Debt of such Subsidiary, (ii) no default with respect to any Debt of such
Subsidiary would permit (upon notice, lapse of time or otherwise) any holder
of any other Debt of the Company or any Restricted Subsidiary to declare a
default on such other Debt or cause the payment thereof to be accelerated or
payable prior to its stated maturity, (iii) any Investment in such Subsidiary
made as a result of designating such Subsidiary an Unrestricted Subsidiary
will not violate the provisions of the "Limitation on Restricted Payments"
covenant, (iv) neither the Company nor any Restricted Subsidiary has a
contract, agreement, arrangement, understanding or obligation of any kind,
whether written or oral, with such Subsidiary other than those that might be
obtained at the time from persons who are not Affiliates of the Company and
(v) neither the Company nor any Restricted Subsidiary has any obligation to
subscribe for additional shares of Capital Stock or other equity interest in
such Subsidiary, or to maintain or preserve such Subsidiary's financial
condition or to cause such Subsidiary to achieve certain levels of operating
results.
 
  (b) The Board of Directors of the Company may designate any Unrestricted
Subsidiary as a Restricted Subsidiary; provided that (i) no Default or Event
of Default has occurred and is continuing following such designation and (ii)
the Company is in compliance with the "Limitation on Debt" covenant (treating
any Debt of such Unrestricted Subsidiary as the incurrence of Debt by a
Restricted Subsidiary).
 
  Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Lien of any kind on or with respect to any of its property
or assets, including any shares of stock or indebtedness of any Restricted
Subsidiary, whether owned at the Closing Date or thereafter acquired, or any
income, profits or proceeds therefrom, or assign or otherwise convey any right
to receive income thereon, unless (a) in the case of any Lien securing
Subordinated Debt, the Notes are secured by a Lien on such property, assets or
proceeds that is senior in priority to such Lien and (b) in the case of any
other Lien, the Notes are equally and ratably secured with the obligation or
liability secured by such Lien.
 
  Notwithstanding the foregoing, the Company may, and may permit any
Restricted Subsidiary to, incur any of the following Liens ("Permitted
Liens"):
 
    (i) Liens (other than Liens securing Debt under the Revolving Credit
  Facility) existing as of the Closing Date.
 
    (ii) Liens on property or assets of the Company or any Restricted
  Subsidiary securing Debt under the Revolving Credit Facility or other
  credit facilities permitted by clause (i) of the definition of "Permitted
  Debt" in a principal amount not to exceed the principal amount of the
  outstanding Debt thereunder.
 
    (iii) Liens on any property or assets of a Restricted Subsidiary granted
  in favor of the Company or any Restricted Subsidiary.
 
    (iv) Liens securing the Notes or any Subsidiary Guarantee.
 
 
                                      75
<PAGE>
 
    (v) Liens representing the interest or title of lessors under Capitalized
  Lease Obligations or Liens securing purchase money mortgages or purchase
  money security interests, so long as the aggregate amount secured by such
  Liens does not exceed the respective amounts permitted by clause (vi) or
  (vii) of the definition of "Permitted Debt".
 
    (vi) Liens securing Acquired Debt created prior to (and not in connection
  with or in contemplation of) the incurrence of such Debt by the Company or
  any Restricted Subsidiary; provided that such Lien does not extend to any
  property or assets of the Company or any Restricted Subsidiary other than
  the property and assets acquired in connection with the incurrence of such
  Acquired Debt.
 
    (vii) Liens securing obligations under Hedging Obligations permitted to
  be incurred pursuant to clause (v) of the definition of "Permitted Debt".
 
    (viii) Statutory Liens or landlords', carriers', warehouseman's,
  mechanics', suppliers', materialmen's, repairmen's or other like Liens
  arising in the ordinary course of business and with respect to amounts not
  yet delinquent or being contested in good faith by appropriate proceedings.
 
    (ix) Liens for taxes, assessments, government charges or claims that are
  being contested in good faith by appropriate proceedings promptly
  instituted and diligently conducted.
 
    (x) Liens incurred or deposits made to secure the performance of tenders,
  bids, leases, statutory obligations, surety and appeal bonds, government
  contracts, performance bonds and other obligations of a like nature
  incurred in the ordinary course of business (other than contracts for the
  payment of money).
 
    (xi) Easements, rights-of-way, restrictions and other similar charges or
  encumbrances not interfering in any material respect with the business of
  the Company or any Restricted Subsidiary incurred in the ordinary course of
  business.
 
    (xii) Liens arising by reason of any judgment, decree or order of any
  court, so long as such Lien is adequately bonded and any appropriate legal
  proceedings that may have been duly initiated for the review of such
  judgment, decree or order have not been finally terminated or the period
  within which such proceedings may be initiated has not expired.
 
    (xiii) Liens securing reimbursement obligations with respect to letters
  of credit that encumber documents and other property relating to such
  letters of credit and the products and proceeds thereof.
 
    (xiv) Liens upon specific items of inventory or other goods and proceeds
  of the Company or any Restricted Subsidiary securing its obligations in
  respect of bankers' acceptances issued or created for the account of any
  person to facilitate the purchase, shipment or storage of such inventory or
  other goods.
 
    (xv) Liens in favor of customs and revenue authorities arising as a
  matter of law to secure payment of customs duties in connection with the
  importation of goods.
 
    (xvi) Any extension, renewal or replacement, in whole or in part, of any
  Lien described in the foregoing clauses (i) through (xv); provided that any
  such extension, renewal or replacement is no more restrictive in any
  material respect than the Lien so extended, renewed or replaced and does
  not extend to any additional property or assets.
 
  Reports. The Company will be required to file on a timely basis with the
Commission, to the extent such filings are accepted by the Commission and
whether or not the Company has a class of securities registered under the
Exchange Act, the annual reports, quarterly reports and other documents that
the Company would be required to file if it were subject to Section 13 or
15(d) of the Exchange Act. The Company will also be required (a) to file with
the Trustee, and provide to the Trustee for distribution to each holder of
Notes, without cost to such holder, copies of such reports and documents
within 15 days after the date on which the Company files such reports and
documents with the Commission or the date on which the Company would be
required to file such reports and documents if the Company were so required
and (b) if filing such reports and documents with the Commission is not
accepted by the Commission or is prohibited under the Exchange Act, to supply
at the Company's cost copies of such reports and documents to any prospective
holder of Notes promptly upon written request.
 
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<PAGE>
 
CONSOLIDATION, MERGER AND SALE OF ASSETS
 
  The Company may not consolidate with or merge with or into any other person
or, directly or indirectly, convey, sell, assign, transfer, lease or otherwise
dispose of its properties and assets substantially as an entirety to any other
person (in one transaction or a series of related transactions), unless each
of the following conditions is satisfied:
 
    (a) Either (i) the Company is the surviving corporation or (ii) the
  person (if other than the Company) formed by such consolidation or into
  which the Company is merged or the person that acquires by sale,
  assignment, transfer, lease or other disposition the properties and assets
  of the Company substantially as an entirety (the "Surviving Entity") (A) is
  a corporation, partnership or trust organized and validly existing under
  the laws of the United States, any state thereof or the District of
  Columbia and (B) expressly assumes, by a supplemental indenture in form
  satisfactory to the Trustee, all of the Company's obligations under the
  Indenture and the Notes.
 
    (b) Immediately after giving effect to such transaction and treating any
  obligation of the Company or a Restricted Subsidiary in connection with or
  as a result of such transaction as having been incurred at the time of such
  transaction, no Default or Event of Default has occurred and is continuing.
 
    (c) Immediately after giving effect to such transaction on a pro forma
  basis, the Consolidated Net Worth of the Company (or of the Surviving
  Entity if the Company is not the continuing obligor under the Indenture) is
  equal to or greater than the Consolidated Net Worth of the Company
  immediately prior to such transaction.
 
    (d) Immediately after giving effect to such transaction on a pro forma
  basis (on the assumption that the transaction occurred at the beginning of
  the most recently ended four full fiscal quarter period for which internal
  financial statements are available, the Company (or the Surviving Entity if
  the Company is not the continuing obligor under the Indenture) could incur
  at least $1.00 of additional Debt (other than Permitted Debt) pursuant to
  the first paragraph of the "Limitation on Debt" covenant.
 
    (e) If the Company is not the continuing obligor under the Indenture,
  each Subsidiary Guarantor, unless it is the other party to the transaction
  described above, has by supplemental indenture confirmed that its
  Subsidiary Guarantee applies to the Surviving Entity's obligations under
  the Indenture and the Notes.
 
    (f) If any of the property or assets of the Company or any of its
  Restricted Subsidiaries would thereupon become subject to any Lien, the
  provisions of the "Limitation on Liens" covenant are complied with.
 
    (g) The Company delivers, or causes to be delivered, to the Trustee, in
  form and substance reasonably satisfactory to the Trustee, an officers'
  certificate and an opinion of counsel, each stating that such transaction
  complies with the requirements of the Indenture.
 
  In the event of any transaction described in and complying with the
conditions listed in the first paragraph of this covenant in which the Company
is not the continuing obligor under the Indenture, the Surviving Entity will
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, and thereafter the Company will, except in
the case of a lease, be discharged from all its obligations and covenants
under the Indenture and Notes.
 
EVENTS OF DEFAULT
 
  Each of the following will be "Events of Default" under the Indenture:
 
    (a) Default in the payment of any interest on any Note when it becomes
  due and payable, and continuance of such default for a period of 30 days.
 
    (b) Default in the payment of the principal of (or premium, if any, on)
  any Note when due.
 
    (c) Failure to perform or comply with the Indenture provisions described
  under "Consolidation, Merger and Sale of Assets".
 
 
                                      77
<PAGE>
 
    (d) Default in the performance, or breach, of any covenant or agreement
  of the Company or any Subsidiary Guarantor contained in the Indenture or
  any Subsidiary Guarantee (other than a default in the performance, or
  breach, of a covenant or agreement that is specifically dealt with
  elsewhere herein), and continuance of such default or breach for a period
  of 60 days after written notice has been given to the Company by the
  Trustee or to the Company and the Trustee by the holders of at least 25% in
  aggregate principal amount of the Notes then outstanding.
 
    (e) (i) An event of default has occurred under any mortgage, bond,
  indenture, loan agreement or other document evidencing an issue of Debt of
  the Company or any Significant Subsidiary, which issue has an aggregate
  outstanding principal amount of not less than $5,000,000, and such default
  has resulted in such Debt becoming, whether by declaration or otherwise,
  due and payable prior to the date on which it would otherwise become due
  and payable or (ii) a default in any payment when due at final maturity of
  any such Debt.
 
    (f) Failure by the Company or any of its Restricted Subsidiaries to pay
  one or more final judgments the uninsured portion of which exceeds in the
  aggregate $5,000,000, which judgment or judgments are not paid, discharged
  or stayed for a period of 60 days.
 
    (g) Any Subsidiary Guarantee issued by a Significant Subsidiary ceases to
  be in full force and effect or is declared null and void or any Subsidiary
  Guarantor denies that it has any further liability under any Subsidiary
  Guarantee, or gives notice to such effect (other than by reason of the
  termination of the Indenture or the release of any such Subsidiary
  Guarantee in accordance with the Indenture), and such condition has
  continued for a period of 60 days after written notice of such failure
  requiring the Subsidiary Guarantor and the Company to remedy the same has
  been given (x) to the Company by the Trustee or (y) to the Company and the
  Trustee by the holders of 25% in aggregate principal amount of the Notes
  then outstanding.
 
    (h) The occurrence of certain events of bankruptcy, insolvency or
  reorganization with respect to the Company or any Significant Subsidiary.
 
  If an Event of Default (other than as specified in clause (h) above) occurs
and is continuing, the Trustee or the holders of not less than 25% in
aggregate principal amount of the Notes then outstanding may, and the Trustee
at the request of such holders will, declare the principal of all of the
outstanding Notes immediately due and payable and, upon any such declaration,
such principal will become due and payable immediately. If an Event of Default
specified in clause (h) above occurs and is continuing, then the principal of
all of the outstanding Notes will ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
holder of Notes.
 
  At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may
rescind such declaration and its consequences if (i) the Company has paid or
deposited with the Trustee a sum sufficient to pay (A) all overdue interest on
all Notes, (B) all unpaid principal of (and premium, if any, on) any
outstanding Notes that has become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Notes, (C) to the
extent that payment of such interest is lawful, interest upon overdue interest
and overdue principal at the rate borne by the Notes and, (D) all sums paid or
advanced by the Trustee under the Indenture and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel;
and (ii) all Events of Default, other than the non-payment of amounts of
principal of (or premium, if any, on) or interest on the Notes that have
become due solely by such declaration of acceleration, have been cured or
waived. No such rescission will affect any subsequent default or impair any
right consequent thereon.
 
  The holders of not less than a majority in aggregate principal amount of the
outstanding Notes may, on behalf of the holders of all of the Notes, waive any
past defaults under the Indenture, except a default in the payment of the
principal of (and premium, if any) or interest on any Note, or in respect of a
covenant or provision that under the Indenture cannot be modified or amended
without the consent of the holder of each Note outstanding.
 
                                      78
<PAGE>
 
  If a Default or an Event of Default occurs and is continuing and is known to
the Trustee, the Trustee will mail to each holder of the Notes notice of the
Default or Event of Default within 90 days after the occurrence thereof.
Except in the case of a Default or an Event of Default in payment of principal
of (and premium, if any, on) or interest on any Notes, the Trustee may
withhold the notice to the holders of the Notes if a committee of its trust
officers in good faith determines that withholding such notice is in the
interests of the holders of the Notes.
 
  The Company is required to furnish to the Trustee annual statements as to
the performance by the Company and the Subsidiary Guarantors of their
respective obligations under the Indenture and as to any default in such
performance. The Company is also required to notify the Trustee within ten
days of any officer of the Company having knowledge of any Default.
 
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
 
  The Company may by board resolution, at its option and at any time,
terminate the obligations of the Company and any Subsidiary Guarantors with
respect to the outstanding Notes ("defeasance"). Such defeasance means that
the Company and any Subsidiary Guarantors will be deemed to have paid and
discharged the entire Debt represented by the outstanding Notes, except for
(i) the rights of holders of outstanding Notes to receive payments in respect
of the principal of (and premium, if any, on) and interest on such Notes when
such payments are due, (ii) the Company's obligations to issue temporary
Notes, register the transfer or exchange of any Notes, replace mutilated,
destroyed, lost or stolen Notes, maintain an office or agency for payments in
respect of the Notes and segregate and hold such payments in trust, (iii) the
rights, powers, trusts, duties and immunities of the Trustee and (iv) the
defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to terminate the obligations of the Company and
any Subsidiary Guarantor with respect to certain covenants set forth in the
Indenture under "Certain Covenants" above, and any omission to comply with
such obligations would not constitute a Default or an Event of Default with
respect to the Notes ("covenant defeasance").
 
  In order to exercise either defeasance or covenant defeasance, (a) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated
solely to, the benefit of the holders of the Notes, money in an amount, or
U.S. Government Obligations (as defined in the Indenture) that through the
scheduled payment of principal and interest thereon will provide money in an
amount, or a combination thereof, sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay and discharge the
principal of (and premium, if any, on) and interest on the outstanding Notes
at maturity (or upon redemption, if applicable) of such principal or
installment of interest; (b) no Default or Event of Default has occurred and
is continuing on the date of such deposit or, insofar as an event of
bankruptcy under clause (h) of "Events of Default" above is concerned, at any
time during the period ending on the 91st day after the date of such deposit;
(c) such defeasance or covenant defeasance must not result in a breach or
violation of, or constitute a default under, the Indenture or any material
agreement or instrument to which the Company or any Subsidiary Guarantor is a
party or by which it is bound or cause the Trustee or the trust so created to
be subject to the Investment Company Act of 1940; (d) in the case of
defeasance, the Company must deliver to the Trustee an opinion of counsel
stating that the Company has received from, or there has been published by,
the Internal Revenue Service a ruling, or since the date hereof, there has
been a change in applicable federal income tax law, to the effect, and based
thereon such opinion must confirm that, the holders of the outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such defeasance had not occurred; (e) in the case of covenant
defeasance, the Company must have delivered to the Trustee an opinion of
counsel to the effect that the Holders of the Notes outstanding will not
recognize income, gain or loss for federal income tax purposes as a result of
such covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such covenant defeasance had not occurred; and (f) the Company must have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that
 
                                      79
<PAGE>
 
all conditions precedent provided for relating to either the defeasance or the
covenant defeasance, as the case may be, have been complied with.
 
SATISFACTION AND DISCHARGE
 
  Upon the request of the Company, the Indenture will cease to be of further
effect (except as to surviving rights of registration of transfer or exchange
of the Notes, as expressly provided for in the Indenture) and the Trustee, at
the expense of the Company, will execute proper instruments acknowledging
satisfaction and discharge of the Indenture when (a) either (i) all the Notes
theretofore authenticated and delivered (other than destroyed, lost or stolen
Notes that have been replaced or paid and Notes that have been subject to
defeasance as described under "Defeasance or Covenant Defeasance of
Indenture") have been delivered to the Trustee for cancellation or (ii) all
Notes not theretofore delivered to the Trustee for cancellation (A) have
become due and payable, (B) will become due and payable at Stated Maturity
within one year or (C) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Company, and
the Company has irrevocably deposited or caused to be deposited with the
Trustee funds in trust for the purpose in an amount sufficient to pay and
discharge the entire Debt on such Notes not theretofore delivered to the
Trustee for cancellation, for principal (and premium, if any, on) and interest
to the date of such deposit (in the case of Notes that have become due and
payable) or to the Stated Maturity or Redemption Date, as the case may be; (b)
the Company has paid or caused to be paid all sums payable under the Indenture
by the Company; and (c) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent provided in the Indenture relating to the satisfaction and discharge
of the Indenture have been complied with.
 
AMENDMENTS AND WAIVERS
 
  Modifications and amendments of the Indenture and any Subsidiary Guarantee
may be made by the Company, any affected Subsidiary Guarantor and the Trustee
with the consent of the holders of a majority in aggregate outstanding
principal amount of the Notes; provided, however, that no such modification or
amendment may, without the consent of the holder of each outstanding Note
affected thereby:
 
    (a) change the Stated Maturity of the principal of, or any installment of
  interest on, any Note, or reduce the principal amount thereof or the rate
  of interest thereon or any premium payable upon the redemption thereof, or
  change the place of payment where, or the coin or currency in which, any
  Note or any premium or interest thereon is payable, or impair the right to
  institute suit for the enforcement of any such payment after the Stated
  Maturity thereof (or, in the case of redemption, on or after the Redemption
  Date);
 
    (b) reduce the principal amount of outstanding Notes, the consent of
  whose holders is required for any amendment, supplement or waiver under the
  Indenture; or
 
    (c) waive a default in the payment of principal of, or premium, if any,
  or interest on the Notes.
 
  The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
 
  Without the consent of any holders, the Company and the Trustee, at any time
and from time to time, may enter into one or more indentures supplemental to
the Indenture for any of the following purposes: (1) to evidence the
succession of another person to the Company and the assumption by any such
successor of the covenants of the Company in the Indenture and in the Notes;
or (2) to add to the covenants of the Company for the benefit of the holders,
or to surrender any right or power herein conferred upon the Company; or (3)
to add additional Events of Defaults; or (4) to provide for uncertificated
Notes in addition to or in place of the certificated Notes; or (5) to evidence
and provide for the acceptance of appointment under the Indenture by a
successor Trustee; or (6) to secure the Notes; or (7) to cure any ambiguity,
to correct or supplement any provision in the Indenture that may be defective
or inconsistent with any other provision in the Indenture, or to make any
other provisions with respect to matters or questions arising under the
Indenture, provided that such actions pursuant to this clause do not adversely
affect the interests of the holders in any material respect; or (8) to
 
                                      80
<PAGE>
 
evidence the succession of another Person to any Subsidiary Guarantor and the
assumption by any such successor of the covenants of such Subsidiary Guarantor
in the Indenture and in the Notes; or (9) to evidence an addition of a new
Subsidiary Guarantor and the assumption by any such new Subsidiary Guarantor
of the covenants in the Indenture and in the Notes; or (10) to comply with any
requirements of the Commission in order to effect and maintain the
qualification of the Indenture under the Trust Indenture Act.
 
THE TRUSTEE
 
  Bankers Trust Company, the Trustee under the Indenture, will be the initial
paying agent and registrar for the Notes.
 
  The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. Under the Indenture, the holders of a majority in
outstanding principal amount of the Notes will have the right to direct the
time, method and place of conducting any proceeding for exercising any remedy
available to the Trustee, subject to certain exceptions. If an Event of
Default has occurred and is continuing, the Trustee will exercise such rights
and powers vested in it under the Indenture and use the same degree of care
and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
 
  The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee thereunder,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage
in other transactions; provided, however, that, if it acquires any conflicting
interest (as defined) it must eliminate such conflict or else resign.
 
GOVERNING LAW
 
  The Indenture, the Notes and the Subsidiary Guarantees will be governed by,
and construed in accordance with, the laws of the State of New York.
 
BOOK-ENTRY, DELIVERY AND FORM
 
  Except as set forth in the next paragraph, the Notes to be resold as set
forth herein will initially be issued in the form of one Global Note (the
"Global Note"). The Global Note will be deposited on the Closing Date with the
Trustee as custodian for The Depository Trust Company (the "Depositary") and
registered in the name of Cede & Co., as nominee of the Depositary (such
nominee being referred to herein as the "Global Note Holder").
 
  Notes that were (i) originally issued to or transferred to institutional
"accredited investors" who are not "Qualified Institutional Buyers" (as such
terms are defined under "Notices to Investors" elsewhere herein (the "Non-
Global Purchasers") or (ii) issued as described below under "Certificated
Notes" will be issued in registered, definitive, certificated form (the
"Certificated Notes"). Upon the transfer to a Qualified Institutional Buyer of
Certificated Notes initially issued to a Non-Global Purchaser, such
Certificated Notes may, unless the Global Note has previously been exchanged
for Certificated Notes, be exchanged for an interest in the Global Note
representing the principal amount of the Notes being transferred.
 
  The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between
Participants through electronic book-entry changes in accounts of its
Participants. The Depositary's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies (collectively, the "Indirect
Participants" or the "Depositary's Indirect Participants") that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly. Persons who are not Participants
 
                                      81
<PAGE>
 
may beneficially own securities held by or on behalf of the Depositary only
through the Depositary's Participants or the Depositary's Indirect
Participants.
 
  The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with portions of
the principal amount of the Global Note and (ii) ownership of the Notes
evidenced by the Global Note will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to own, transfer or pledge Notes evidenced
by the Global Note will be limited to such extent. For certain other
restrictions on the transferability of the Notes, see "Notices to Investors".
 
  So long as the Global Note Holder is the registered owner of any Notes, the
Global Note Holder will be considered the sole Holder under the Indenture of
any Notes evidenced by the Global Note. Beneficial owners of Notes evidenced
by the Global Note will not be considered the owners or Holders thereof under
the Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any
aspect of the records of the Depositary or for maintaining, supervising or
reviewing any records of the Depositary relating to the Notes.
 
  Payments in respect of the principal of and premium, if any, and interest on
any Notes registered in the name of the Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of the
Global Note Holder in its capacity as the registered Holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names Notes, including the Global Note, are
registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial
owners of Notes. The Company believes, however, that it is currently the
policy of the Depositary to immediately credit the accounts of the relevant
Participants with such payments, in amounts proportionate to their respective
holdings of beneficial interests in the relevant security as shown on the
records of the Depositary. Payments by the Depositary's Participants and the
Depositary's Indirect Participants to the beneficial owners of Notes will be
governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or the Depositary's Indirect
Participants.
 
 Certificated Notes
 
  Transferees of Notes who are not "Qualified Institutional Buyers" as defined
in Rule 144A under the Securities Act may hold Notes only in the form of
Certificated Notes. All such Certificated Notes would be subject to the legend
requirements described herein under "Notices to Investors." In addition, if
(i) the Company notifies the Trustee in writing that the Depositary is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its
option, notifies the Trustee in writing that it elects to change the issuance
of Notes in the form of Certificated Securities under the Indenture then, upon
surrender by the Global Note Holder of its Global Note, Certificated Notes
will be issued to each person that the Global Note Holder and the Depositary
identify as being the beneficial owner of the related Notes.
 
  Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
 
 
                                      82
<PAGE>
 
 Same-Day Settlement and Payment
 
  The Indenture will require that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, and interest) be
made by wire transfer of immediately available funds to the accounts specified
by the Global Note Holder. With respect to Certificated Notes, the Company
will make all payments of principal, premium, if any, and interest by wire
transfer of immediately available funds to the accounts specified by the
Holders thereof or, if no such account is specified, by mailing a check to
each such Holder's registered address. Secondary trading in long-term notes
and debentures of corporate issuers is generally settled in clearinghouse or
next-day funds. In contrast, the Notes represented by the Global Note are
expected to be eligible to trade in the PORTAL market and to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated Notes will also be settled in
immediately available funds.
 
                                      83
<PAGE>
 
                CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
 
  The following is a general discussion of the principal U.S. federal income
tax consequences of the purchase, ownership and disposition of the Notes to
initial purchasers thereof who are U.S. Holders (as defined below) and the
principal U.S. federal income and estate tax consequences of the purchase,
ownership and disposition of the Notes to initial purchasers who are Foreign
Holders (as defined below). This discussion is based on currently existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing and temporary regulations of the U.S. Department of the Treasury
("Treasury") promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect on the date hereof and all of which
are subject to change, possibly with retroactive effect, or different
interpretations. This discussion does not address the tax consequences to
subsequent purchasers of Notes and is limited to purchasers who hold the Notes
as capital assets, within the meaning of section 1221 of the Code. This
discussion also does not address the tax consequences to Foreign Holders that
are subject to U.S. federal income tax on a net basis on income realized with
respect to a Note because such income is effectively connected with the
conduct of a U.S. trade or business. Such Foreign Holders are generally taxed
in a similar manner to U.S. Holders, but certain special rules do apply.
Moreover, this discussion is for general information only and does not address
all of the tax consequences that may be relevant to particular initial
purchasers in light of their personal circumstances or to certain types of
initial purchasers (such as certain financial institutions, insurance
companies, tax-exempt entities, dealers in securities or currencies or persons
holding Notes as a part of a hedging or conversion transaction or a straddle).
 
  PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION
OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY U.S. FEDERAL TAX LAWS AND ANY
STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN
APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
 
U.S. FEDERAL INCOME TAXATION OF U.S. HOLDERS
 
  As used herein, the term "U.S. Holder" means a holder of a Note that is, for
U.S. federal income tax purposes, (a) a citizen or resident of the United
States, (b) a corporation, partnership or other entity created or organized in
or under the laws of the United States or any political subdivision thereof,
(c) an estate the income of which is subject to U.S. federal income taxation
regardless of source or (d) a trust subject to the primary supervision of a
court within the United States and the control of a United States fiduciary,
as described in Section 7701(a)(30) of the Code.
 
  Payment of Interest on Notes. Interest paid or payable on a Note will be
taxable to a U.S. Holder as ordinary interest income, generally at the time it
is received or accrued, in accordance with such holder's regular method of
accounting for U.S. federal income tax purposes.
 
  Sale, Exchange or Retirement of the Notes. Upon the sale, exchange,
redemption, retirement at maturity or other disposition of a Note, a U.S.
Holder generally will recognize taxable gain or loss equal to the difference
between the sum of cash plus the fair market value of all other property
received on such disposition (except to the extent such cash or property is
attributable to accrued but unpaid interest, which will be taxable as ordinary
income) and such U.S. Holder's adjusted tax basis in the Note. A U.S. Holder's
adjusted tax basis in a Note generally will equal the cost of the Note to such
U.S. Holder, less any principal payments received by such U.S. Holder.
 
  Gain or loss recognized on the disposition of a Note generally will be
capital gain or loss and will be long-term capital gain or loss if, at the
time of such disposition, the U.S. Holder's holding period for the Note is
more than one year. Under the Taxpayer Relief Act of 1997, lower tax rates
apply to the sale or exchange of capital assets by individuals who have held
such assets for more than 18 months.
 
  The exchange of a Note by a U.S. Holder for an Exchange Note should not
constitute a taxable exchange. Under certain Treasury regulations issued in
June 1996 relating to modifications and exchanges of debt
 
                                      84
<PAGE>
 
instruments, any increase in the interest rate of the Notes resulting from an
Exchange Offer not being consummated, or a Shelf Registration Statement not
being declared effective, would not be treated as a taxable exchange, as such
change in interest rate would occur pursuant to the original terms of the
Notes.
 
  Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements may apply to certain payments of principal,
premium, if any, and interest on a Note, and to proceeds of the sale or
redemption of a Note before maturity. The Company, its agent, a broker, the
Trustee or any paying agent, as the case may be, will be required to withhold
from any payment that is subject to backup withholding a tax equal to 31% of
such payment if a U.S. Holder fails to furnish his taxpayer identification
number (social security number or employer identification number), certify
that such number is correct, certify that such holder is not subject to backup
withholding or otherwise comply with the applicable requirements of the backup
withholding rules. Certain U.S. Holders, including all corporations, are not
subject to backup withholding and information reporting requirements. Any
amounts withheld under the backup withholding rules from a payment to a U.S.
Holder will be allowed as a credit against such U.S. Holder's U.S. federal
income tax liability and may entitle the holder to a refund, provided that the
required information is furnished to the U.S. Internal Revenue Service
("IRS").
 
U.S. FEDERAL INCOME TAXATION OF FOREIGN HOLDERS
 
  As used herein, the term "Foreign Holder" means a holder of a Note that is,
for U.S. federal income tax purposes, (a) a nonresident alien individual, (b)
a foreign corporation, (c) a nonresident alien fiduciary of a foreign estate
or trust or (d) a foreign partnership.
 
  Payment of Interest on Notes. In general, payments of interest received by a
Foreign Holder will not be subject to U.S. federal withholding tax, provided
that (a)(i) the Foreign Holder does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the Company
entitled to vote, (ii) the Foreign Holder is not a controlled foreign
corporation that is related to the Company actually or constructively through
stock ownership, (iii) the Foreign Holder is not a bank receiving interest
described in Section 881(c)(3)(A) of the Code, and (iv) either (A) the
beneficial owner of the Note, under penalties of perjury, provides the Company
or its agent with such beneficial owner's name and address and certifies on
IRSForm W-8 (or a suitable substitute form) that it is not a U.S. Holder or
(B) a securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or
business (a "financial institution") holds the Note and provides a statement
to the Company or its agent under penalties of perjury in which it certifies
that such an IRS Form W-8 (or a suitable substitute) has been received by it
from the beneficial owner of the Notes or qualifying intermediary and
furnishes the Company or its agent a copy thereof or (b) the Foreign Holder is
entitled to the benefits of an income tax treaty under which interest on the
Notes is exempt from U.S. withholding tax and the Foreign Holder or such
Foreign Holder's agent provides a properly executed IRS Form 1001 claiming the
exemption. Payments of interest not exempt from U.S. federal withholding tax
as described above will be subject to such withholding tax at the rate of 30%
(subject to reduction under an applicable income tax treaty).
 
  Sale, Exchange or Retirement of the Notes. A Foreign Holder generally will
not be subject to U.S. federal income tax (and generally no tax will be
withheld) with respect to gain realized on the sale, exchange, redemption,
retirement at maturity or other disposition of a Note unless the Foreign
Holder is an individual who is present in the United States for a period or
periods aggregating 183 or more days in the taxable year of the disposition
and, generally, either has a "tax home" or an "office or other fixed place of
business" in the United States.
 
  Backup Withholding and Information Reporting. Backup withholding and
information reporting requirements do not apply to payments of interest made
by the Company or a paying agent to Foreign Holders if the certification
described above under "--U.S. Federal Income Taxation of Foreign Holders--
Payment of Interest on Notes" is received, provided that the payor does not
have actual knowledge that the holder is a U.S.
 
                                      85
<PAGE>
 
Holder. If any payments of principal and interest are made to the beneficial
owner of a Note by or through the foreign office of a foreign custodian,
foreign nominee or other foreign agent of such beneficial owner, or if the
foreign office of a foreign "broker" (as defined in applicable Treasury
regulations) pays the proceeds of the sale of a Note or a coupon to the seller
thereof, backup withholding and information reporting will not apply.
Information reporting requirements (but not backup withholding) will apply,
however, to a payment by a foreign office of a broker that is a U.S. person or
is a foreign person that derives 50% or more of its gross income for certain
periods from the conduct of a trade or business in the United States, or that
is a "controlled foreign corporation" (generally, a foreign corporation
controlled by certain U.S. shareholders) with respect to the United States
unless the broker has documentary evidence in its records that the holder is a
Foreign Holder and certain other conditions are met or the holder otherwise
establishes an exemption. Payment by a U.S. office of a broker is subject to
both backup withholding at a rate of 31% and information reporting unless the
holder certifies under penalties of perjury that it is a Foreign Holder or
otherwise establishes an exemption.
 
  The procedures described above for withholding tax on interest payments, and
some of the associated backup withholding and information reporting rules, are
currently the subject of new proposed regulations, which are proposed to be
effective for payments made after December 31, 1997, subject to certain
transition rules. The proposed regulations, if adopted in their current form,
would modify the procedures for establishing an exemption from withholding tax
described above. Informal statements by the IRS indicate that the proposed
regulations, when finally adopted, will be made effective for payments made
after December 31, 1998. No official announcement to this effect, however, has
been issued by the IRS.
 
  Federal Estate Taxes. Subject to applicable estate tax treaty provisions,
Notes held at the time of death (or Notes transferred before death but subject
to certain retained rights or powers) by an individual who at the time of
death is a Foreign Holder will not be included in such Foreign Holder's gross
estate for U.S. federal estate tax purposes provided that the individual does
not actually or constructively own 10% or more of the total combined voting
power of all classes of stock of the Company entitled to vote or hold the
Notes in connection with a U.S. trade or business.
 
                                      86
<PAGE>
 
                             PLAN OF DISTRIBUTION
   
  Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer (a "Participating Broker-Dealer") must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. This Prospectus, as it may be amended or supplemented from time to
time, may be used by a broker-dealer in connection with resales of Exchange
Notes received in exchange for Outstanding Notes where such Outstanding Notes
were acquired by the broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed that, for a period of 90 days
after the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. In addition, until
December 13, 1997, all dealers effecting transactions in the Exchange Notes
may be required to deliver a prospectus.     
 
  The Company will not receive any proceeds from any sales of the Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their
own account pursuant to the Exchange Offer may be sold from time to time in
one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to the purchaser or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such Exchange
Notes. Any broker-dealer that resells the Exchange Notes that were received by
it for its own account pursuant to the Exchange Offer and any broker or dealer
that participates in a distribution of such Exchange Notes may be deemed to be
an "underwriter" within the meaning of the Securities Act, and any profit on
any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a Prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
 
  For a period of 90 days after the Expiration Date, the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the
Letter of Transmittal. The Company has agreed to pay all expenses incident to
the Exchange Offer (including the expenses of one counsel for the Holders of
the Notes) other than commissions or concessions of any brokers or dealers,
and will indemnify the holders of the Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
 
  By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes for its own account pursuant to the Exchange Offer agrees that,
upon receipt of notice from the Company of the happening of any event which
makes any statement in the Prospectus untrue in any material respect or which
requests the making of any changes in the Prospectus in order to make the
statements therein not misleading (which notice the Company agrees to deliver
promptly to such broker-dealer), such broker-dealer will suspend use of the
Prospectus until the Company has amended or supplemented the Prospectus to
correct such misstatement or omission and has furnished copies of the amended
or supplemental Prospectus to such broker-dealer. If the Company shall give
any such notice to suspend the use of the Prospectus, it shall extend the time
period referred to above by the number of days during the period from and
including the date of the giving of such notice to and including when broker-
dealers shall have received copies of the supplemented or amended Prospectus
necessary to permit resales of the Exchange Notes.
 
                                      87
<PAGE>
 
                                 LEGAL MATTERS
 
  The validity of the Exchange Notes will be passed upon for the Company by
Fulbright & Jaworski L.L.P., Houston, Texas. Certain members of Fulbright &
Jaworski L.L.P. involved in the preparation of this Prospectus own in the
aggregate 7,467 shares of Common Stock and warrants to purchase 3,905 shares
of Common Stock at an exercise price of $2.41 per share.
 
                                    EXPERTS
 
  The consolidated financial statements and schedule of the Company as of
December 31, 1995 and 1996, and for each of the three years in the period
ended December 31, 1996, included in this Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their reports with respect thereto, and are included herein in reliance
upon the authority of said firm as experts in accounting and auditing in
giving said reports.
 
                             AVAILABLE INFORMATION
 
  The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to
the securities offered by this Prospectus. Certain of the information
contained in the Registration Statement is omitted from this Prospectus, and
reference is hereby made to the Registration Statement and exhibits and
schedules relating thereto for further information with respect to the Company
and the securities offered by this Prospectus. Subsequent to the Exchange
Offer, the Company will be subject to certain periodic reporting and other
informational requirements of the Exchange Act, and, in accordance therewith,
will file certain reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information will be
available for inspection, and copies of such materials may be obtained upon
payment of the fees prescribed therefor by the rules and regulations of the
Commission from the Commission, at its principal offices located at Judiciary
Plaza, 450 Fifth Street, Room 1024, Washington, D.C. 20549, and at the
Regional Offices of the Commission located at Northwestern Atrium Center, 500
West Madison Street, 1400, Chicago, Illinois 60661-2511, and at 7 World Trade
Center, Suite 1300, New York, New York 10048. The Commission maintains a World
Wide Web site on the Internet at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants,
including the Company, that file electronically with the Commission.
 
  So long as the Company is subject to the periodic reporting requirements of
the Exchange Act, it is required to furnish the information required to be
filed with the Commission to the Trustee and the holders of the Outstanding
Notes and the Exchange Notes. The Company has agreed that, notwithstanding
that it may not be required to remain subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the Company will file with the
Commission and provide the Trustee and Noteholders with such annual reports
and such information, documents and other reports as are specified in Sections
13 and 15(d) of the Exchange Act (excluding however information with respect
to benefit plans and long-term compensation arrangements) and applicable to a
U.S. corporation subject to such Sections, such information, documents and
other reports to be so filed and provided at the times specified for the
filing of such information, documents and reports under such Sections.
 
  The Company has agreed that for so long as any of the Outstanding Notes are
outstanding and are "restricted securities" within the meaning of Rule
144(a)(3) under the Securities Act, it will make available to any prospective
purchaser of the Outstanding Notes or beneficial owner of the Outstanding
Notes in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act until such time as the Company has either
exchanged the Outstanding Notes for the Exchange Notes or until such time as
the holders thereof have disposed of such Outstanding Notes pursuant to an
effective registration statement filed by the Company.
 
                                      88
<PAGE>
 
                          INCORPORATION BY REFERENCE
 
 
  All documents filed by the Company pursuant to the Exchange Act, after the
date of this Prospectus and prior to the termination of the Registration
Statement of which this Prospectus is a part with respect to registration of
the Exchange Notes, shall be deemed to be incorporated by reference in this
Prospectus and be a part hereof from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference in this Prospectus shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that a statement contained in this
Prospectus, or in any other subsequently filed document that also is or is
deemed to be incorporated by reference, modifies or replaces such statement.
 
  The Company undertakes to provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus has been delivered,
upon written or oral request of any such person, a copy of any or all of the
documents incorporated by reference herein, other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference
into the information that this Prospectus incorporates. Written or oral
requests for such copies should be directed to: Drypers Corporation, 5300
Memorial Drive, Suite 900, Houston, Texas 77007 (telephone 713/369-3693),
Attention: Investor Relations.
 
  The information on executive compensation, including the summary
compensation table and information on options set forth in the Company's proxy
statement dated April 28, 1997 (the "Proxy Statement"), is incorporated by
reference in this Prospectus. The Company will provide a copy of the Proxy
Statement, without charge, to each person to whom this Prospectus is
delivered, upon written or oral request to Drypers Corporation, 5300 Memorial
Drive, Suite 900, Houston, Texas 77007 (telephone (713) 869-8693), Attention:
Investor Relations.
 
  Any statement contained in the information in the Proxy Statement which is
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein modifies or supersedes such information in the Proxy Statement. Any
such statement that has been so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
 
                                      89
<PAGE>
 
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                         <C>
Report of Independent Public Accountants................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996, and June 30,
 1997...................................................................... F-3
Consolidated Statements of Earnings for the Years Ended December 31, 1994,
 1995 and 1996, and the Six Months Ended June 30, 1996 and 1997............ F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
 December 31, 1994, 1995 and 1996, and the Six Months Ended June 30, 1997.. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
 1994, 1995 and 1996, and the Six Months Ended June 30, 1996 and 1997...... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
 
                                      F-1
<PAGE>
 
                   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, 1995
and 1996, and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. 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, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
 
ARTHUR ANDERSEN LLP
 
Houston, Texas
March 26, 1997
 
                                      F-2
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                    DECEMBER 31
                                                 ------------------   JUNE 30,
                    ASSETS                         1995      1996       1997
                    ------                       --------  --------  -----------
                                                                     (UNAUDITED)
<S>                                              <C>       <C>       <C>
CURRENT ASSETS:
  Cash and cash equivalents....................  $  2,236  $  4,923   $ 30,567
  Accounts receivable, net of allowance for
   doubtful accounts of $940, $1,160 and
   $1,702, respectively........................    24,039    30,631     36,092
  Inventories..................................    10,913    11,616     12,632
  Prepaid expenses and other...................     3,437     4,410      6,722
                                                 --------  --------   --------
    Total current assets.......................    40,625    51,580     86,013
PROPERTY AND EQUIPMENT, net of depreciation and
 amortization..................................    34,208    35,154     41,233
INTANGIBLE AND OTHER ASSETS, net of
 amortization of $7,094, $10,185 and $9,166,
 respectively..................................    62,587    63,821     71,874
                                                 --------  --------   --------
                                                 $137,420  $150,555   $199,120
                                                 ========  ========   ========
<CAPTION>
     LIABILITIES AND STOCKHOLDERS' EQUITY
     ------------------------------------
<S>                                              <C>       <C>       <C>
CURRENT LIABILITIES:
  Short-term borrowings........................  $ 11,314  $ 15,622   $     --
  Current portion of long-term debt............       750       945         --
  Accounts payable.............................    19,319    16,958     17,850
  Accrued liabilities..........................    12,839     9,348      9,129
                                                 --------  --------   --------
    Total current liabilities..................    44,222    42,873     26,979
LONG-TERM DEBT.................................     1,000     2,125      1,499
SENIOR TERM NOTES..............................    43,950    44,122    116,566
SUBORDINATED DEBT TO RELATED PARTIES...........     2,400     2,400         --
OTHER LONG-TERM LIABILITIES....................     4,026     5,427      4,104
                                                 --------  --------   --------
                                                   95,598    96,947    149,148
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
  Preferred stock, $.01 par value, 5,000,000
   shares authorized, 0, 90,000 and 85,750
   shares issued and outstanding, respectively.        --         1          1
  Common stock, $.001 par value, 20,000,000
   shares authorized, 6,619,804, 7,179,230 and
   7,813,777 shares issued and outstanding,
   respectively................................         7         7          8
  Additional paid-in capital...................    58,482    68,823     69,148
  Warrants.....................................       703     1,395      1,382
  Retained deficit.............................   (17,370)  (16,618)   (20,567)
                                                 --------  --------   --------
    Total stockholders' equity.................    41,822    53,608     49,972
                                                 --------  --------   --------
                                                 $137,420  $150,555   $199,120
                                                 ========  ========   ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-3
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENTS OF EARNINGS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                              SIX MONTHS ENDED
                             YEAR ENDED DECEMBER 31               JUNE 30
                         -------------------------------- ---------------------
                           1994       1995        1996      1996        1997
                         ---------  ---------  ---------- ---------  ----------
                                                              (UNAUDITED)
<S>                      <C>        <C>        <C>        <C>        <C>       
NET SALES............... $ 173,552  $ 163,947  $  207,014 $  97,864  $  132,712
COST OF GOODS SOLD......   106,130    114,075     126,128    60,115      81,739
                         ---------  ---------  ---------- ---------  ----------
    Gross profit........    67,422     49,872      80,886    37,749      50,973
SELLING, GENERAL AND
 ADMINISTRATIVE
 EXPENSES...............    48,081     53,691      70,333    35,716      41,933
UNUSUAL EXPENSES........     1,141      3,185          --        --          --
RESTRUCTURING CHARGE....        --      4,255          --        --          --
                         ---------  ---------  ---------- ---------  ----------
    Operating income
     (loss).............    18,200    (11,259)     10,553     2,033       9,040
RELATED-PARTY INTEREST
 EXPENSE................       375        406         354       176         170
OTHER INTEREST EXPENSE,
 net....................     7,310      7,629       8,577     4,227       4,040
OTHER INCOME............      (434)        --          --        --         (42)
                         ---------  ---------  ---------- ---------  ----------
INCOME (LOSS) BEFORE
 INCOME TAX PROVISION
 (BENEFIT) AND
 EXTRAORDINARY ITEM.....    10,949    (19,294)      1,622    (2,370)      4,872
INCOME TAX PROVISION
 (BENEFIT)..............     4,151     (3,829)        309       201         716
                         ---------  ---------  ---------- ---------  ----------
INCOME (LOSS) BEFORE
 EXTRAORDINARY ITEM.....     6,798    (15,465)      1,313    (2,571)      4,156
EXTRAORDINARY ITEM:
  Costs of early
   extinguishment of
   debt, net of tax
   benefit of $2,260 in
   1994.................    (3,688)        --          --        --      (7,769)
                         ---------  ---------  ---------- ---------  ----------
NET INCOME (LOSS).......     3,110    (15,465)      1,313    (2,571)     (3,613)
PREFERRED STOCK
 DIVIDEND...............        --         --         561       220         336
                         ---------  ---------  ---------- ---------  ----------
NET INCOME (LOSS)
 ATTRIBUTABLE TO COMMON
 STOCKHOLDERS........... $   3,110  $ (15,465) $      752 $  (2,791) $   (3,949)
                         =========  =========  ========== =========  ==========
COMMON AND COMMON
 EQUIVALENT SHARES
 OUTSTANDING............ 6,246,087  6,587,698  14,194,298 6,635,401  19,057,189
                         =========  =========  ========== =========  ==========
NET INCOME (LOSS) PER
 COMMON SHARE:
  Before extraordinary
   item................. $    1.09  $   (2.35) $      .09 $    (.42) $      .22
  Extraordinary item....      (.59)        --          --        --        (.41)
                         ---------  ---------  ---------- ---------  ----------
  Net income (loss)..... $     .50  $   (2.35) $      .09 $    (.42) $     (.19)
                         =========  =========  ========== =========  ==========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-4
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                          PREFERRED    COMMON
                           SHARES      SHARES                     ADDITIONAL
                         ISSUED AND  ISSUED AND  PREFERRED COMMON  PAID-IN            RETAINED
                         OUTSTANDING OUTSTANDING   STOCK   STOCK   CAPITAL   WARRANTS DEFICIT
                         ----------- ----------- --------- ------ ---------- -------- --------
<S>                      <C>         <C>         <C>       <C>    <C>        <C>      <C>
BALANCE, December 31,
 1993...................       --     3,003,865     $--     $ 3    $12,447    $6,562  $ (5,015)
 Issuance of common
  stock, net of $1,514
  in offering costs.....       --     3,048,005      --       4     39,595        --        --
 Exercise of redeemable
  warrant issued to a
  financial institution.       --       286,995      --      --      3,444    (3,444)       --
 Exercise of senior term
  note warrants.........       --       183,809      --      --      2,217    (2,210)       --
 Exercise of stock
  options and other
  warrants..............       --        30,867      --      --         54        --        --
 Net income.............       --            --      --      --         --        --     3,110
                           ------     ---------     ---     ---    -------    ------  --------
BALANCE, December 31,
 1994...................       --     6,553,541      --       7     57,757       908    (1,905)
 Conversion of junior
  subordinated
  debenture.............       --        41,666      --      --        500        --        --
 Exercise of senior term
  note warrants.........       --        14,780      --      --        170      (170)       --
 Exercise of stock
  options and other
  warrants..............       --         9,817      --      --         55       (35)       --
 Net loss...............       --            --      --      --         --        --   (15,465)
                           ------     ---------     ---     ---    -------    ------  --------
BALANCE, December 31,
 1995...................       --     6,619,804      --       7     58,482       703   (17,370)
 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)................       --            --      --      --         --        --      (561)
 Exercise of stock
  options...............       --         4,646      --      --         --        --        --
 Net income.............       --            --      --      --         --        --     1,313
                           ------     ---------     ---     ---    -------    ------  --------
BALANCE, December 31,
 1996...................   90,000     7,179,230       1       7     68,823     1,395   (16,618)
 Issuance of common
  stock in connection
  with acquisition
  (unaudited)...........       --        46,872      --      --         --        --        --
 Conversion of preferred
  stock and dividends
  into common stock
  (unaudited)...........   (4,250)      433,374      --       1         40        --        --
 Preferred stock
  dividends ($3.79 per
  share) (unaudited)....       --            --      --      --         --        --      (336)
 Issuance of warrants
  (unaudited)...........       --            --      --      --         --        50        --
 Exercise of stock
  options (unaudited)...       --        90,848      --      --        222        --        --
 Exercise of warrants
  (unaudited)...........       --        63,453      --      --         63       (63)       --
 Net loss (unaudited)...       --            --      --      --         --        --    (3,613)
                           ------     ---------     ---     ---    -------    ------  --------
BALANCE, June 30, 1997
 (unaudited)............   85,750     7,813,777     $ 1     $ 8    $69,148    $1,382  $(20,567)
                           ======     =========     ===     ===    =======    ======  ========
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-5
<PAGE>
 
                      DRYPERS CORPORATION AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                 SIX MONTHS
                                   YEAR ENDED DECEMBER 31       ENDED JUNE 30
                                  ---------------------------  ----------------
                                   1994      1995      1996     1996     1997
                                  -------  --------  --------  -------  -------
                                                                 (UNAUDITED)
<S>                               <C>      <C>       <C>       <C>      <C>
CASH FLOWS FROM OPERATING
 ACTIVITIES:
 Net income (loss)..............  $ 3,110  $(15,465) $  1,313  $(2,571) $(3,613)
 Adjustments to reconcile net
  income (loss) to net cash
  provided by (used in)
  operating activities--
   Depreciation and
    amortization................    5,799     7,068     7,624    3,717    4,037
   Restructuring charge.........       --     4,255        --       --       --
   Extraordinary item, non-cash
    portion.....................    3,248        --        --       --    3,745
   Provision for (benefit from)
    deferred income taxes.......    1,030    (4,187)       --       --       --
   Other........................     (103)     (379)      401     (221)     (43)
   Changes in operating assets
    and liabilities, net of
    acquisition--
     (Increase) decrease in--
      Accounts receivable.......   (7,487)    1,476    (5,724)    (908)  (5,461)
      Inventories...............   (3,101)    5,398       (67)  (1,838)  (1,016)
      Prepaid expenses and
       other....................     (486)      110      (973)  (1,138)  (2,312)
     Increase (decrease) in--
      Accounts payable..........    3,097     5,038    (2,974)  (2,531)     892
      Accrued and other
       liabilities..............   (1,287)    2,941    (3,891)  (3,016)    (219)
                                  -------  --------  --------  -------  -------
       Net cash provided by
        (used in) operating
        activities..............    3,820     6,255    (4,291)  (8,506)  (3,990)
                                  -------  --------  --------  -------  -------
CASH FLOWS FROM INVESTING
 ACTIVITIES:
 Purchase of property and
  equipment.....................   (7,079)   (8,896)   (5,931)  (1,394)  (8,518)
 Proceeds from sale of
  equipment.....................       --        --       800       --       --
 Investment in other noncurrent
  assets........................     (154)     (773)   (1,197)      --     (643)
 Payments under noncompete
  agreements....................     (250)     (250)     (400)    (126)    (126)
 Refund of deposits.............    1,622        --     2,573       --       --
 Investment in affiliate........   (6,895)       --        --       --       --
 Investment in Brazilian
  venture.......................       --        --        --       --   (9,500)
                                  -------  --------  --------  -------  -------
       Net cash used in
        investing activities....  (12,756)   (9,919)   (4,155)  (1,520) (18,787)
                                  -------  --------  --------  -------  -------
CASH FLOWS FROM FINANCING
 ACTIVITIES:
 Borrowings under senior term
  notes.........................       --        --        --       --  115,000
 Borrowings under working
  capital facility..............       --        --        --       --   10,000
 Payments on working capital
  facility......................       --        --        --       --  (10,000)
 Borrowings under revolvers.....   11,113    47,553   157,677   76,206   79,296
 Payments on revolvers..........  (11,107)  (44,922) (153,968) (73,015) (94,918)
 Borrowings (payments) on other
  debt..........................       --     1,750      (625)    (375)  (3,972)
 Payments on senior term notes..  (30,000)       --        --       --  (43,434)
 Financing related costs........       --        --      (773)    (872)  (3,773)
 Proceeds from issuance of
  common stock..................   39,599        --        --       --       --
 Proceeds from issuance of
  preferred stock...............       --        --     8,822    8,822       --
 Proceeds from exercise of
  warrants......................       17        --        --       --       --
 Proceeds from exercise of stock
  options.......................       54        20        --       --      222
                                  -------  --------  --------  -------  -------
       Net cash provided by
        financing activities....    9,676     4,401    11,133   10,766   48,421
                                  -------  --------  --------  -------  -------
NET INCREASE IN CASH AND CASH
 EQUIVALENTS....................      740       737     2,687      740   25,644
CASH AND CASH EQUIVALENTS AT
 BEGINNING OF PERIOD............      759     1,499     2,236    2,236    4,923
                                  -------  --------  --------  -------  -------
CASH AND CASH EQUIVALENTS AT END
 OF PERIOD......................  $ 1,499  $  2,236  $  4,923  $ 2,976  $30,567
                                  =======  ========  ========  =======  =======
</TABLE>
 
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
 
                                      F-6
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
 
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
 
 Business
 
  Drypers Corporation and its subsidiaries (the "Company") manufacture and
market premium quality, value-priced disposable baby diapers under the brand
name Drypers and other brand names internationally. The Company also
manufactures and markets disposable training pants under the Drypers brand
name as well as lower priced, value-oriented branded disposable baby diapers,
private label disposable baby diapers, training pants and pre-moistened baby
wipes. The principal markets for its products are grocery stores, mass-
merchants and private label customers throughout the United States, Puerto
Rico, Argentina, Mexico, and Brazil, and in certain other international
markets.
 
 Business Conditions
 
  During the first quarter of 1995, the Company repositioned its diaper
products in response to similar activity by its competitors. In response to
continued market pressures, the Company announced a plan in the second quarter
of 1995, to realign and consolidate its operations and recorded a
restructuring charge of $4,255,000. This realignment and consolidation was
completed in the second quarter of 1996.
 
  Concurrent with the operational reorganization discussed above, the Company
undertook a plan to reorganize its financial structure. The Company's
financial restructuring was completed on February 29, 1996, with the
establishment of a new revolving credit facility with a borrowing base of up
to $21,000,000 (see Note 4) and the private issuance of convertible preferred
stock (see Note 6). Availability under the new revolving credit facility and
the proceeds from the preferred stock were used to repay the existing
revolving credit facility, the previously deferred interest payment on the 12
1/2% Senior Notes and transaction costs.
 
  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 (the "Notes").
Proceeds from the offering of the Notes were used to repurchase $43,434,000 of
the $45,000,000 in principal of the Company's outstanding 12 1/2% Series B
Senior Notes Due November 1, 2002 pursuant to a tender offer therefor, to
repay the Company's working capital facility, to repay borrowings outstanding
under the Company's revolving credit facility, to repay the Company's 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.
 
  The Company believes that the combination of its cash on hand, future
profitable operations, the borrowing availability under the existing revolving
credit facility, and existing operating lease financing arrangements should
allow the Company to meet its debt service and capital expenditure
requirements, remain in compliance with its amended financial covenants and
manage its business needs.
 
                                      F-7
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
 
  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.
 
  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 liabilities, 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.
 
 Interim Financial Information
 
  The unaudited consolidated financial information as of and for the six-month
periods ended June 30, 1996 and 1997 has not been audited by independent
public accountants, but in the opinion of management of the Company, all
adjustments (consisting only of normal, recurring adjustments) necessary for a
fair presentation of the consolidated balance sheet, statements of earnings,
statement of stockholders' equity and statements of cash flows at the date and
for the interim periods indicated have been made. Accounting measurements at
interim dates inherently involve greater reliance on estimates than at year
end. The results of operations for the six months ended June 30, 1997, are not
necessarily indicative of the results that will be realized for the fiscal
year ending December 31, 1997.
 
 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.
 
                                      F-8
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
 
 Inventories
 
  Inventories consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31
                                                     ---------------  JUNE 30,
                                                      1995    1996      1997
                                                     ------- ------- -----------
                                                                     (UNAUDITED)
<S>                                                  <C>     <C>     <C>
Raw materials....................................... $ 5,722 $ 4,659   $ 5,481
Finished goods......................................   5,191   6,957     7,151
                                                     ------- -------   -------
                                                     $10,913 $11,616   $12,632
                                                     ======= =======   =======
</TABLE>
 
  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 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.
 
<TABLE>
<CAPTION>
                                              USEFUL LIVES
                                ----------------------------------------
<S>                             <C>
Machinery and equipment                       10--12 years
Office equipment and furniture                  5 years
Automobiles                                     5 years
Leasehold improvements          Lesser of term of lease or life of asset
</TABLE>
 
  Property and equipment consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                     DECEMBER 31
                                                   ----------------   JUNE 30,
                                                    1995     1996       1997
                                                   -------  -------  -----------
                                                                     (UNAUDITED)
<S>                                                <C>      <C>      <C>
Machinery and equipment........................... $41,176  $44,349    $51,385
Office equipment and furniture....................   1,957    2,573      2,893
Automobiles.......................................     222      222        280
Leasehold improvements............................   1,925    2,167      2,308
                                                   -------  -------    -------
                                                    45,280   49,311     56,866
Accumulated depreciation and amortization......... (11,072) (14,157)   (15,633)
                                                   -------  -------    -------
                                                   $34,208  $35,154    $41,233
                                                   =======  =======    =======
</TABLE>
 
  In December 1996, the Company entered into a six-year operating lease with a
lease financing company for a new state-of-the-art diaper production line. The
line was delivered in December 1996, and was operational late in the first
quarter of 1997. Previous deposits related to this diaper line of $1,100,000
were included as a component of machinery and equipment as of December 31,
1995 and the Company was reimbursed during 1996 through lease financing. The
Company has entered into a six-year operating lease with a lease financing
company
 
                                      F-9
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
for a second diaper production line, which is scheduled for delivery in the
fourth quarter of 1997. Deposits of $1,100,000 related to this production line
are included as a component of machinery and equipment as of December 31, 1996
and June 30, 1997. The Company expects to be reimbursed for these deposits
during the latter portion of 1997. In connection with these lease agreements,
the Company issued letters of credit totaling approximately $2,500,000. These
operating lease commitments are included in the future minimum rental
commitments presented in Note 8. Additionally, in August 1997, the Company
committed to acquire a training pant line by December 31, 1997.
 
 Intangible and Other Assets
 
  Intangible and other assets, net of accumulated amortization, consisted of
the following (in thousands):
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31
                                                    ---------------  JUNE 30,
                                                     1995    1996      1997
                                                    ------- ------- -----------
                                                                    (UNAUDITED)
<S>                                                 <C>     <C>     <C>
Goodwill........................................... $55,096 $54,086   $62,052
Deferred financing costs...........................   2,109   3,153     3,791
License agreement..................................   1,619   1,310     1,083
Noncompete agreements..............................     334   1,322     1,018
Receivable from Chansommes do Brasil Ind. E Com.
 Ltda. (See Note 2)................................   2,167   2,167        --
Other..............................................   1,262   1,783     3,930
                                                    ------- -------   -------
                                                    $62,587 $63,821   $71,874
                                                    ======= =======   =======
</TABLE>
 
  Goodwill is amortized over 10 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 not be recoverable.
 
  Deferred financing costs are amortized over the lives of the related debt
using the effective interest method. The license agreement is amortized over
six years, the estimated life of the relevant patent, using the straight-line
method. The noncompete agreements are amortized over the five-year life of the
agreements using the straight-line method.
 
 Accrued Liabilities
 
  Accrued liabilities consisted of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                       DECEMBER 31
                                                      --------------  JUNE 30,
                                                       1995    1996     1997
                                                      ------- ------ -----------
                                                                     (UNAUDITED)
<S>                                                   <C>     <C>    <C>
Selling and promotional.............................. $ 2,964 $2,684   $5,091
Interest payable.....................................   4,245  1,428      234
License agreement payable............................   1,050    400      400
Property and sales tax payable.......................     543  1,254      509
Other................................................   4,037  3,582    2,895
                                                      ------- ------   ------
                                                      $12,839 $9,348   $9,129
                                                      ======= ======   ======
</TABLE>
 
 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 4.
 
                                     F-10
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
 
 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.
 
 Coupon Promotions
 
  The Company follows the policy of recognizing promotion expense when
products are shipped, based on the estimated redemption rate.
 
 Unusual Expenses
 
  During 1995, the Company repositioned its diaper products in response to
similar activity by its competitors with a reduction in the number of diapers
per package and a reduction in the price per package. As part of this
repositioning, the Company recognized $2,358,000 of promotional and other
related expenses which are reflected as an unusual expense in the accompanying
consolidated statement of earnings. In addition, the Company recognized
$827,000 for expenses related to the refinancing transaction in 1995 which is
reflected as an unusual expense in the accompanying consolidated statement of
earnings. During 1994, the Company recorded, as unusual expense, legal fees of
$1,141,000 associated with the defense of a patent infringement lawsuit
discussed further in Note 8.
 
 Income (Loss) Per Common Share
 
  Net income (loss) per common share is computed using the weighted average
number of shares of common stock outstanding plus, when their effect is
dilutive, common stock equivalents. For the year ended December 31, 1996 and
the six months ended June 30, 1997, common and common equivalent shares
include the weighted average common shares issuable upon conversion of
convertible preferred stock. See Note 6.
 
 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 are as follows.
 
  Income taxes paid for the years ended December 31, 1994, 1995 and 1996, were
$604,000, $325,000, and $--, respectively. Income taxes paid for the six
months ended June 30, 1996 and 1997, were $-- and $70,000, respectively.
 
  Interest paid on debt for the years ended December 31, 1994, 1995 and 1996,
was $7,965,000, $4,213,000 and $10,646,000, respectively. Interest paid on
debt for the six months ended June 30, 1996 and 1997, was $6,771,000 and
$5,041,000, respectively.
 
                                     F-11
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
 
 Foreign Currency Translation
 
  Local currencies are generally considered the functional currencies outside
the United States, except in countries treated as 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. To date, cumulative
translation adjustments have been immaterial.
 
  For operations in countries treated as 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 and to
date, have been immaterial.
 
 Reclassifications
 
  Certain reclassifications have been made in the accompanying consolidated
financial statements for 1994 and 1995, to conform with the presentation in
the 1996 consolidated financial statements.
 
 New Accounting Standards
 
  In 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The adoption
of this standard did not have a significant impact on the Company's financial
position or results of operations.
 
  In 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." The adoption of this standard did not have a significant impact
on the Company's financial position or results of operations. See Note 6 for
disclosures related to the adoption of SFAS No. 123.
 
  In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share". This statement establishes new standards for
computing and presenting earnings per share requiring the presentation of
"basic" and "diluted" earnings per share as compared to "primary" and "fully
diluted" earnings per share. The Company is required to adopt SFAS No. 128 in
the first quarter of fiscal 1998. Earlier adoption is not permitted and
restatement of all prior period earnings per share data is required. The
Company believes that the "diluted" disclosure required under SFAS No. 128
will not differ materially from the historical "primary" earnings per share
amounts for the 1996 and 1997 periods presented.
 
  In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". This statement establishes standards for
reporting and display of comprehensive income and its components in financial
statements. Comprehensive income is the total of net income and all other
nonowner changes in equity. The Company is required to adopt SFAS No. 130 in
the first quarter of fiscal 1998. Reclassification of comparative financial
statements provided for earlier periods will be required. The Company believes
that the display of comprehensive income will not differ materially from the
currently reported net income (loss) attributable to common stockholders.
 
  In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information". This
statement requires disclosure related to each segment of an enterprise's
operations similar to those required under current standards with the addition
of quarterly disclosure requirements and a finer partitioning of geographic
disclosures. The Company is required to adopt SFAS No. 131 for the fiscal year
ending December 31, 1998.
 
                                     F-12
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
 
2. ACQUISITIONS:
 
 Argentina
 
  Effective July 31, 1994, the Company entered into a venture with Seler, S.A.
("Seler"), an Argentine manufacturer of disposable diapers. In connection with
the venture, the Company purchased shares of mandatorily redeemable preferred
stock of Seler for $6,895,000. The terms of the preferred stock included a
cumulative annual dividend at a rate consistent with Argentine market rates
and a fair market value option to purchase all of the outstanding common stock
of Seler in the future.
 
  In July 1995, Seler purchased all of its issued and outstanding capital
stock not owned by the Company for two promissory notes in the aggregate of
$1,100,000, resulting in Seler becoming a wholly owned subsidiary of the
Company. 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 of $6,262,000, property and
equipment of $228,000 and liabilities of $7,258,000). The consideration paid
for Seler exceeded the fair market value of the tangible assets acquired by
$10,970,000 and this excess was recorded as goodwill. Prior to July 31, 1995,
the Company accounted for its investment in Seler under the cost method.
Effective July 31, 1995, the accounts of Seler and the results of its
operations have been consolidated.
 
  Prior to the consolidation of Seler, the Company recognized rental and
technical support/management and marketing service revenues under various
agreements between the Company and Seler. Rental revenues and technical
support revenues recognized for the year ended December 31, 1994, were
$329,000 and $840,000, respectively, in addition to $430,000 recognized as
dividend income on the preferred stock of Seler. Unaudited pro forma net
sales, net income (loss), and net income (loss) per common share for the years
ended December 31, 1994 and 1995, respectively, would have been approximately
$180,747,000 and $172,736,000, respectively, $3,143,000 and $(16,910,000),
respectively, and $.50 and $(2.57), respectively, assuming the acquisition of
Seler occurred on January 1, 1994, and assuming there were no other changes in
the operations of Seler. The pro forma results are not necessarily indicative
of the financial results that might have occurred had the transaction actually
taken place on January 1, 1994, or of future results of operations.
 
 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 46,872 shares issued on February 3, 1997) and consideration
payable at a future date totaling $595,000. The remaining consideration was
paid in cash subsequent to June 30, 1997. 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 $550,000 and this excess
was recorded as goodwill. The Company's allocation of purchase price is based
on preliminary estimates of fair market value and may be revised at a later
date. In connection with the acquisition, the Company entered into a
$1,175,000 five year noncompete agreement with the former Pannolini
shareholders. The historical operations of Pannolini were not material to
those of the Company.
 
 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
 
                                     F-13
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
connection with the transactions totaled $6,367,000, including $4,000,000 of
common stock of the Company (1,000,000 shares), cancellation of an outstanding
receivable from Chansommes of $2,167,000 and $200,000 of transaction related
costs. 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 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.
 
3. INITIAL PUBLIC OFFERING:
 
  On March 11, 1994, the Company issued 3,048,005 shares of common stock in an
initial public offering. Net proceeds to the Company after deduction of the
underwriter's discount and other related offering costs were approximately
$39,600,000. No members of management or the board of directors sold any
shares in the initial public offering. The majority of the net proceeds from
the initial public offering were used to redeem $30,000,000 in principal
amount of the Company's 12 1/2% Senior Notes and to pay down the revolving
line of credit.
 
4. DEBT:
 
  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. Proceeds from
the offering of these notes were used to repurchase $43,434,000 of the
$45,000,000 in principal amount of the Company's outstanding 12 1/2% Series B
Senior Notes Due November 1, 2002 pursuant to a tender offer therefor, to
repay the Company's working capital facility, to repay borrowings outstanding
under the Company's revolving credit facility, to repay the Company's term
loan with a bank, to repay the Company's junior subordinated debt and other
indebtedness and for general corporate purposes.
 
 Short-Term Borrowings
 
  As of December 31, 1995 and 1996, the Company had borrowings outstanding of
$11,314,000 and $15,622,000, respectively, under revolving credit facilities,
at weighted average interest rates of 11.5% and 10.0%, respectively. No
borrowings were outstanding under revolving credit facilities as of June 30,
1997.
 
  On February 29, 1996, the Company entered into a three-year revolving credit
facility with a borrowing base of up to $21,000,000. Availability under the
new revolving credit facility and a portion of the proceeds from the sale of
preferred stock were used to repay the previously existing credit facility,
the previously deferred interest on the 12 1/2% Senior Notes and transaction
costs. Borrowings outstanding under the previous revolving credit facility
bore interest at prime plus 3% from January 1, 1996 through February 29, 1996.
Borrowings under the current revolving credit facility accrue interest at a
rate of prime plus 1 3/4% per annum. Borrowing availability under this
facility is a function of advance rates based on eligible accounts receivable,
finished goods inventory and raw materials inventory. Borrowings are
collateralized by accounts receivable, inventory, trademarks and trade names,
stock of certain subsidiaries and other intangibles. As of December 31, 1996
and June 30, 1997, the Company had borrowings outstanding of $14,700,000 and
$ -- under this facility, respectively.
 
  The revolving credit facility, as amended, requires the Company, among other
things, to maintain consolidated working capital, as defined, which excludes
borrowings under the revolving credit facility, of at least $10,500,000
through December 31, 1996, of at least $18,000,000 during fiscal 1997, of at
least $23,000,000 during fiscal 1998, and of at least $25,000,000 during
fiscal 1999 and thereafter, and adjusted net worth, as defined, of at least
$50,500,000 from December 31, 1996, through May 31, 1997, of at least
$45,000,000 from
 
                                     F-14
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
June 1, 1997, through December 30, 1997, of at least $50,500,000 from December
31, 1997, through December 30, 1998 and of at least $54,500,000 from December
31, 1998, and thereafter. The Company was in compliance with the terms of the
revolving credit facility as of December 31, 1996 and June 30, 1997.
 
  Short-term borrowings for the international operations were not material as
of December 31, 1996 or June 30, 1997.
 
 Long-Term Debt
 
  Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
                                                     DECEMBER 31
                                                    --------------   JUNE 30,
                                                     1995    1996      1997
                                                    ------  ------  -----------
                                                                    (UNAUDITED)
<S>                                                 <C>     <C>     <C>
Term loan with a bank, interest at prime plus 2%,
 secured by a diaper production line............... $1,750  $1,125       $--
Note payable due 1997..............................     --     446        --
Note payable to Mexico Bank, due 2006, interest at
 LIBOR plus 10%....................................     --     510       510
Note payable to Mexico Bank, due 2003, interest at
 12%, partially secured by a diaper production
 line..............................................     --     989       989
                                                    ------  ------    ------
                                                     1,750   3,070     1,499
  Less: current maturities.........................   (750)   (945)       --
                                                    ------  ------    ------
                                                    $1,000  $2,125    $1,499
                                                    ======  ======    ======
</TABLE>
 
  In connection with the refinancing discussed above, the term loan with a
bank was continued and the loan covenants were amended and are similar to
those of the new revolving credit facility.
 
  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.
 
 Senior Term Notes
 
  Long-term debt under senior term notes consisted of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31
                                                    ---------------  JUNE 30,
                                                     1995    1996      1997
                                                    ------- ------- -----------
                                                                    (UNAUDITED)
<S>                                                 <C>     <C>     <C>
10 1/4% Senior Notes, interest due semiannually on
 June 15 and December 15, principal due June 15,
 2007.............................................  $    -- $    --  $115,000
12 1/2% Senior Notes, interest due semiannually on
 May 1 and November 1, principal due November 1,
 2002, net of unamortized debt discount of $1,050,
 $878 and $--, respectively.......................   43,950  44,122     1,566
                                                    ------- -------  --------
                                                    $43,950 $44,122  $116,566
                                                    ======= =======  ========
</TABLE>
 
  The Company redeemed $30,000,000 in an aggregate principal amount of the 12
1/2% Senior Notes at 109% of the principal amount, plus accrued and unpaid
interest, with the net proceeds of an initial public offering of common stock
of the Company in March 1994.
 
                                     F-15
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
 
  In October 1996, the indenture governing the Company's 12 1/2% Senior Notes
was amended to allow, among other things, increased borrowing under the
revolving credit facility and additional flexibility for certain business
investments. The Company issued 169,780 shares of $.001 par value common stock
to certain bondholders as consideration for their consent to these indenture
modifications.
 
  The fair value of the Company's 12 1/2% 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
$46,912,000 as of December 31, 1996.
 
  The indenture governing the 10 1/4% Senior Notes contains certain covenants
that, among other things, limit the Company's ability to incur additional
indebtedness; pay dividends; purchase capital stock; make certain other
distributions, loans and investments; sell assets; enter into transactions
with related persons; and merge, consolidate or transfer substantially all of
its assets. The indenture also contains provisions for acceleration of payment
of principal upon a change in control, as defined.
 
 Long-Term Subordinated Debt
 
  Long-term subordinated debt to stockholders or warrant holders consisted of
the following (in thousands):
 
<TABLE>
<CAPTION>
                                                        DECEMBER 31
                                                       -------------  JUNE 30,
                                                        1995   1996     1997
                                                       ------ ------ -----------
                                                                     (UNAUDITED)
<S>                                                    <C>    <C>    <C>
Junior subordinated notes, bearing interest at 12% ... $2,400 $2,400     $--
                                                       ====== ======     ===
</TABLE>
 
  The carrying amount of all debt outstanding as of December 31, 1996, other
than the 12 1/2% Senior Notes, approximates fair value, based on the Company's
current incremental interest rate for similar types of financial instruments.
 
5. INCOME TAXES:
 
  Income (loss) before income tax provision (benefit) and extraordinary item
and income tax provision (benefit) for the years ended December 31, 1994, 1995
and 1996 are composed of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                       1994     1995     1996
                                                     -------- --------  ------
<S>                                                  <C>      <C>       <C>
Income (loss) before income tax provision (benefit)
 and extraordinary item--
  United States..................................... $ 10,949 $(19,393) $1,287
  Non-United States.................................       --       99     335
                                                     -------- --------  ------
                                                     $ 10,949 $(19,294) $1,622
                                                     ======== ========  ======
Income tax provision (benefit)--
  Current--
    United States................................... $    861 $    358  $  198
    Non-United States...............................       --       --     111
                                                     -------- --------  ------
                                                          861      358     309
                                                     -------- --------  ------
  Deferred--
    United States...................................    3,290   (4,187)     --
    Non-United States...............................       --       --      --
                                                     -------- --------  ------
                                                        3,290   (4,187)     --
                                                     -------- --------  ------
                                                       $4,151 $ (3,829) $  309
                                                     ======== ========  ======
</TABLE>
 
                                     F-16
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
 
  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, 1995 and 1996 are as follows
(in thousands):
 
<TABLE>
<CAPTION>
                                                                1995     1996
                                                               -------  -------
   <S>                                                         <C>      <C>
   Deferred tax assets--
     Accruals and reserves.................................... $ 1,176  $ 1,469
     Net operating loss and credit carryforwards..............   7,468    5,550
     Other....................................................     303      994
                                                               -------  -------
                                                                 8,947    8,013
     Less-- Valuation allowance...............................  (2,248)  (1,898)
                                                               -------  -------
                                                                 6,699    6,115
                                                               -------  -------
   Deferred tax liabilities--
     Excess of tax over book depreciation.....................  (5,497)  (4,907)
     Other....................................................  (1,202)  (1,208)
                                                               -------  -------
                                                                (6,699)  (6,115)
                                                               -------  -------
       Net deferred tax asset (liability)..................... $    --  $    --
                                                               =======  =======
</TABLE>
 
  The decrease in the valuation allowance was recorded due to utilization of
previously reserved net operating loss carryforwards.
 
  The consolidated provision (benefit) for income taxes differs from the
provision (benefit) computed at the statutory United States federal income tax
rate for the following reasons:
 
<TABLE>
<CAPTION>
                                                               1994   1995   1996
                                                               ----   ----   ----
   <S>                                                         <C>    <C>    <C>
   United States statutory rate..............................   34 %  (34)%   34 %
   Non-United States income, taxed at less than United States
    statutory rate...........................................   (9)    --     (9)
   Increase (decrease) in valuation allowance................   --     12    (61)
   Nondeductible expenses, primarily goodwill................    8      3     39
   State income taxes........................................    5     (1)    16
                                                               ---    ---    ---
                                                                38 %  (20)%   19%
                                                               ===    ===    ===
</TABLE>
 
  As of December 31, 1996, the Company had net operating loss carryforwards of
approximately $14,301,000 which are available to offset future taxable income.
The loss carryforwards will expire in the years 2008 through 2011 if not
utilized. The Company also has alternative minimum tax credits of
approximately $387,000 which are available indefinitely.
 
                                     F-17
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
 
6. 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 as further discussed in Note 1. The 7.5% Preferred Stock is
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 accrue at the rate of $7.50 per share, per
year, and are payable only upon the conversion or redemption of the 7.5%
Preferred Stock or on December 1, 2003. The preferred shares have a
liquidation preference of $100 per share. Holders of the 7.5% Preferred Stock
have 100 votes per share.
 
  During the second quarter of 1997, 4,250 shares of the Company's 7.5%
Preferred Stock together with accrued dividends were converted into 433,374
shares of common stock. Subsequent to June 30, 1997, an additional 22,000
shares of the Company's 7.5% Preferred Stock together with accrued dividends
were converted into 2,234,240 shares of 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.
 
 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 and executives 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 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, 1994, 1995 and 1996, were 47,256, 370,006 and 151,624, respectively. The
total compensation cost recognized in income for stock-based compensation
awards was $679,000 for 1996.
 
                                     F-18
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
 
  Stock option transactions under the plans during 1994, 1995 and 1996 were as
follows:
 
<TABLE>
<CAPTION>
                                  1994                    1995                   1996
                         ----------------------- ----------------------- ----------------------
                                        WEIGHTED                WEIGHTED               WEIGHTED
                                        AVERAGE                 AVERAGE                AVERAGE
                                        EXERCISE                EXERCISE               EXERCISE
                            OPTIONS      PRICE      OPTIONS      PRICE     OPTIONS      PRICE
                         -------------  -------- -------------  -------- ------------  --------
<S>                      <C>            <C>      <C>            <C>      <C>           <C>
Nonqualified stock
 option plans--
  Options outstanding at
   January 1............       397,244   $ 7.55        460,656   $ 8.13       486,656   $7.71
  Granted...............        65,000    11.49         41,000     3.79     1,864,876    3.01
  Canceled..............            --       --        (15,000)    9.88      (456,876)   8.21
  Exercised.............        (1,588)     .04             --       --        (4,646)    .04
                         -------------   ------  -------------   ------  ------------   -----
  Options outstanding at
   December 31..........       460,656   $ 8.13        486,656   $ 7.71     1,890,010   $2.97
                         =============   ======  =============   ======  ============   =====
  Options exercisable at
   December 31..........       247,532   $ 8.64        305,906   $ 4.52     1,758,259   $2.96
                         =============   ======  =============   ======  ============   =====
  Options exercise price
   range at
   December 31.......... $.04--$ 16.00           $ .04--$ 8.38           $.04--$ 3.50
Incentive stock option
 plan--
  Options outstanding at
   January 1............       197,500   $ 9.57        281,375   $10.14       399,000   $7.55
  Granted...............        98,500    11.06        165,600     3.88       736,000    3.01
  Canceled..............       (13,625)    8.92        (42,975)   10.80      (444,875)   7.12
  Exercised.............        (1,000)    4.00         (5,000)    4.00            --      --
                         -------------   ------  -------------   ------  ------------   -----
  Options outstanding at
   December 31..........       281,375   $10.14        399,000   $ 7.55       690,125   $3.01
                         =============   ======  =============   ======  ============   =====
  Options exercisable at
   December 31..........            --       --         37,060   $ 9.11       149,349   $3.00
                         =============   ======  =============   ======  ============   =====
  Options exercise price
   range at
   December 31.......... $4.00--$12.50           $3.88--$12.50           $3.00--$3.50
Non-Employee Director
 stock option plan--
  Options outstanding at
   January 1............            --   $   --             --   $   --            --   $  --
  Granted...............            --       --             --       --        55,000    4.21
  Canceled..............            --       --             --       --            --      --
  Exercised.............            --       --             --       --            --      --
                         -------------   ------  -------------   ------  ------------   -----
  Options outstanding at
   December 31..........            --   $   --             --   $   --        55,000   $4.21
                         =============   ======  =============   ======  ============   =====
  Options exercisable at
   December 31..........            --       --             --       --         4,000   $5.88
                         =============   ======  =============   ======  ============   =====
  Options exercise price
   range at
   December 31..........                                                 $3.75--$5.88
</TABLE>
 
  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
 
                                     F-19
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
option plan at an exercise price of $.04 per share were not included in the
repricing. All repriced options were canceled and reissued accordingly.
 
  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 at the date of grant. Had compensation cost
for these plans been determined consistent with SFAS No. 123, the Company's
net income (loss) and earnings (loss) per share would have been reduced to the
following pro forma amounts:
 
<TABLE>
<CAPTION>
                                                          1995         1996
                                                      ------------  -----------
      <S>                                             <C>           <C>
      Net income (loss)
        As reported.................................. $(15,465,000) $ 1,313,000
        Pro forma.................................... $(15,580,000) $(1,243,000)
      Earnings (loss) per share
        As reported.................................. $      (2.35) $       .09
        Pro forma.................................... $      (2.37) $      (.09)
</TABLE>
 
  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 weighted average fair value of options granted in 1995 was $1.70 per
share. The weighted average fair value of options granted in 1996 for which
the exercise price equaled the market price of the stock on the grant date and
for which the exercise price was less than the market price of the stock on
the grant date was $1.26 and $1.69 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 1995 and 1996, respectively: risk-free interest rates of
6.34% and 6.03%; expected lives of five years; expected volatility of 36.05%;
and no expected dividend yield in both years.
 
  Of the 1,890,010 nonqualified stock options outstanding at December 31,
1996, 25,134 have an exercise price of $.04, with a weighted average exercise
price of $.04 and a weighted average remaining contractual life of eight
months. All of these options are exercisable. The remaining 1,864,876
nonqualified stock options have exercise prices between $3.00 and $3.50, with
a weighted average exercise price of $3.01 and a weighted average remaining
contractual life of 10 years. Of these 1,864,876 nonqualified stock options,
1,733,125 are exercisable and their weighted average exercise price is $3.00.
The incentive stock options and the non-employee director stock options
outstanding at December 31, 1996 have a weighted average remaining contractual
life of ten years.
 
                                     F-20
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
 
 Warrants
 
  The Company has issued warrants under several separate agreements which
expire between 1997 and 2006. As of December 31, 1996, a total of 942,664
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. The warrants are recorded at their estimated fair values at the
date of issuance. The warrants were issued in connection with acquisition and
financing transactions. Certain warrants are callable by the Company through
their expiration dates. The number of warrants outstanding, warrant holders,
exercise prices and call prices are presented below.
 
<TABLE>
<CAPTION>
 NUMBER OF SHARES
  ISSUABLE UNDER
     WARRANTS
  OUTSTANDING AT                                 EXERCISE
   DECEMBER 31,                                    PRICE     COMPANY CALL
       1996              WARRANT HOLDERS         PER SHARE PRICE PER WARRANT
 ---------------- ----------------------------   --------- -----------------
 <C>              <S>                            <C>       <C>
     256,842      Management                       $2.41    Not callable
      35,918      Senior noteholders                 .02    Not callable
                  Nonmanagement common
     258,835      stockholders                      2.41    Not callable
                  Employees, vendors and other
      98,820      affiliates                        2.41    Not callable
                  Predecessor company
      17,254      stockholders                      5.00    $8.00 to $14.00
     250,000      Investment advisors               2.08    Not callable
      24,995      Others                           36.00    Not callable
     -------
     942,664
     =======
</TABLE>
 
  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.
 
7. EMPLOYEE BENEFIT PLANS:
 
 401(k) Savings Plan
 
  The Company has adopted a 401(k) savings plan which covers substantially all
employees. The Company contributed $195,000, $171,000 and $174,000 to the plan
during the years ended December 31, 1994, 1995 and 1996, 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 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 earned.
 
                                     F-21
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
 
 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, 1996, 1,500,000 shares of the Company's
common stock, par value $.001 per share, have been registered for purchase
under this plan.
 
8. COMMITMENTS AND CONTINGENCIES:
 
LITIGATION AND LEGAL MATTERS
 
 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 patent 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 ("Kimberly-Clark"), 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. However, during 1992 and 1993, Kimberly-Clark and
Uni-Charm Corporation ("Uni-Charm"), respectively, commenced separate lawsuits
against the Company alleging patent infringements. The Company subsequently
filed counterclaims relating to both lawsuits.
 
  In September 1992, Kimberly-Clark commenced a lawsuit against the Company
and a competitor alleging infringement of their inner leg gather patent. The
lawsuit was settled in June 1994, and such settlement required no payment by
the Company or Kimberly-Clark. Legal fees of $1,141,000 in 1994 associated
with this litigation were recorded as an unusual expense. The Company does not
expect the provisions of the settlement to have an adverse effect on future
operations.
 
  In November 1993, Uni-Charm commenced a lawsuit against the Company alleging
infringement of their training pants patent. After preliminary discovery, the
parties entered into a settlement agreement resolving the contentions between
the parties. Uni-Charm has granted Drypers a license to manufacture disposable
pant-diapers, training pants and absorbent underpants covered by its patented
technology at an agreed royalty rate, if such technology is used. Drypers does
not expect the provisions of the settlement to have an adverse effect on
future operations.
 
  There can be no assurance that the Company will not be held to be infringing
on other existing patents in the future; any such holding could result in an
injunction, damages and/or an increase in future operating costs as a result
of design changes or payment of royalties with respect to such patents, which
might have a material adverse effect on the financial condition or results of
operations of the Company.
 
  The Company is involved in certain other 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.
 
                                     F-22
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
 
 Employment Agreements
 
  The Company has entered into employment agreements with three executive
officers that extend through February 25, 2000, two officers that extend
through July 19, 1997 and March 14, 1999, and another with a key employee
which extends through December 31, 1999. Additionally, the Company has entered
into an agreement for consulting services with a former officer of the Company
which extends through November 10, 1997. As of December 31, 1996, the
Company's remaining aggregate commitment under the agreements is approximately
$3,354,000.
 
 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 2004. Rental expense aggregated $1,567,000, $1,771,000
and $1,418,000 for the years ended December 31, 1994, 1995 and 1996,
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,
excluding amounts accrued in the accompanying financial statements, are as
follows (in thousands):
 
<TABLE>
<CAPTION>
      YEAR ENDING DECEMBER 31--
      <S>                                                                <C>
        1997............................................................ $ 3,209
        1998............................................................   3,603
        1999............................................................   3,541
        2000............................................................   3,419
        2001............................................................   2,965
        Thereafter......................................................   4,253
                                                                         -------
          Total minimum lease payments required......................... $20,990
                                                                         =======
</TABLE>
 
  The table above includes future minimum rental commitments for a diaper
production line under a lease entered into subsequent to December 31, 1996.
Additionally, in August 1997, the Company committed to acquire a training pant
line by December 31, 1997.
 
9. SIGNIFICANT CUSTOMERS/GEOGRAPHIC DATA:
 
  For each of the three years ended December 31, 1994, 1995 and 1996, the
Company had no individual customers whose purchases exceeded 10% of net sales.
For each of the three years ended December 31, 1994, 1995 and 1996, the
percentage of the Company's net sales which were to customers in foreign
countries totaled 13.5%, 19.2% and 24.2%, respectively.
 
                                     F-23
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
 
  The following table presents geographic data for the years ended December
31, 1995 and 1996. Prior to the acquisition of Seler, in July 1995, the
Company did not have any significant consolidated operations outside of the
United States and its commonwealths. The Company includes in domestic
operations all export sales originating from the United States and sales in
Puerto Rico.
 
<TABLE>
<CAPTION>
                                                         1995          1996
                                                     ------------  ------------
      <S>                                            <C>           <C>
      United States
        Net sales................................... $154,546,000  $179,244,000
        Operating income (loss).....................  (11,211,000)    9,854,000
        Identifiable assets.........................  118,970,000   117,821,000
      Latin America
        Net sales................................... $  9,401,000  $ 27,770,000
        Operating income (loss).....................      (48,000)      699,000
        Identifiable assets.........................   18,450,000    32,734,000
</TABLE>
 
10. RELATED PARTY TRANSACTIONS
 
  On June 30, 1997, the Company extended non-interest bearing loans of
$130,000 to each of its three Co-Chief Executive Officers. One-half of the
loan balances will be forgiven on June 30, 1998 and the remaining balances
will be forgiven on June 30, 1999, if the officers remain employed by the
Company. The loan balances will be charged to compensation expense over the
two-year terms of these loans.
 
11. QUARTERLY FINANCIAL DATA (UNAUDITED):
 
  Unaudited summarized data by quarter for 1995, 1996 and 1997 is as follows:
 
<TABLE>
<CAPTION>
                          FIRST       SECOND       THIRD   FOURTH
                         QUARTER      QUARTER     QUARTER  QUARTER      TOTAL
                         --------     -------     -------  -------     --------
                         (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                      <C>          <C>         <C>      <C>         <C>
1995--
  Net sales............. $ 36,340     $37,758     $43,295  $46,554     $163,947
  Gross profit..........   11,210      10,452      12,817   15,393       49,872
  Net loss..............   (3,208)(a)  (6,206)(b)  (2,656)  (3,395)(c)  (15,465)
  Net loss per share....     (.49)(a)    (.95)(b)    (.40)    (.51)(c)    (2.35)
1996--
  Net sales............. $ 45,042     $52,821     $55,066  $54,085     $207,014
  Gross profit..........   16,229      21,520      21,874   21,263       80,886
  Net income (loss).....   (2,915)        348       1,956    1,924        1,313
  Net income (loss) per
   share................     (.45)        .02         .12      .11          .09 (d)
1997--
  Net sales............. $ 60,161     $72,551                          $132,712
  Gross profit..........   23,405      27,568                            50,973
  Income before
   extraordinary item...    1,973       2,183                             4,156
  Net income (loss).....    1,973      (5,586)                           (3,613)
  Income per share
   before extraordinary
   item.................      .11         .12                               .22
  Net income (loss) per
   share................      .11        (.29)(e)                          (.19)
</TABLE>
--------
(a) Includes unusual expenses of $2,358,000 to reflect the costs associated
    with the Company's repositioning/brand transition of its premium brand
    diaper products.
 
                                     F-24
<PAGE>
 
                     DRYPERS CORPORATION AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
(All discussions and disclosures with a reference date subsequent to March 26,
                             1997 are unaudited.)
(b) Includes a noncash restructuring charge of $2,972,000 associated with the
    write-down of idled equipment to net realizable value and lease
    termination costs related to the closure of the Houston facility.
(c) Includes a noncash charge of $1,283,000 to revise estimated restructuring
    charges recorded in the second quarter of 1995 for the write-down of idled
    equipment to net realized value and an unusual expense of $827,000 to
    reflect the costs associated with the Company's refinancing transaction.
(d) Common and common equivalent shares for the three months ended June 30,
    1996, September 30, 1996 and December 31, 1996, and for the year ended
    December 31, 1996, include the weighted average common shares issuable
    upon conversion of 90,000 shares of convertible preferred stock issued in
    February, 1996. Given the loss for the three months ended March 31, 1996,
    such common stock equivalents were not included since the impact would
    have been antidilutive. As a result, the sum of net income (loss) per
    share for the four quarters of 1996, which is based on average shares
    outstanding during the quarters, does not equal net income (loss) per
    share for the year, which is based on average shares outstanding during
    the year.
(e) 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.
 
                                     F-25
<PAGE>
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASERS. THIS PROSPEC-
TUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY NOTES BY ANY-
ONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED,
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO
DO SO, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SO-
LICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN-
DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS NOT
BEEN A CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF
THE COMPANY SINCE THE DATE HEREOF.
 
                               ----------------
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Summary....................................................................   4
Risk Factors...............................................................  17
The Exchange Offer.........................................................  23
Use of Proceeds............................................................  33
Capitalization.............................................................  34
Selected Financial Data....................................................  35
Management's Discussion and Analysis
 of Financial Condition and Results of Operations..........................  37
Business...................................................................  45
Management.................................................................  53
Principal Stockholders.....................................................  56
Certain Transactions.......................................................  58
Description of Certain Debt................................................  58
Description of the Exchange Notes..........................................  60
Certain U.S. Federal Income Tax Considerations.............................  84
Plan of Distribution.......................................................  87
Legal Matters..............................................................  88
Experts....................................................................  88
Available Information......................................................  88
Incorporation by Reference.................................................  89
Index to Financial Statements.............................................. F-1
</TABLE>
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
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                                 $115,000,000
 
 
                                     LOGO
                        [LOGO OF DRYPERS APPEARS HERE]
                              DRYPERS CORPORATION
 
 
 
                            ----------------------
                                  PROSPECTUS
                            ----------------------
                            
                         10 1/4% Series B Senior     
                                 
                              Notes due 2007     
                               
                            September 15, 1997     
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
 
                                    PART II
 
INFORMATION NOT REQUIRED IN THE PROSPECTUS
 
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
  The Company has authority under Section 145 of the General Corporation Law
of the State of Delaware to indemnify its officers, directors, employees and
agents to the extent provided in such statute. Article Ninth of the Company's
Restated Certificate of Incorporation, referenced as Exhibit 3.1 hereto, and
Article VIII of the Company's Bylaws, referenced as Exhibit 3.2 hereto,
provide for indemnification of the Company's officers, directors, employees
and agents.
 
  Section 102 of the General Corporation Law of the State of Delaware permits
the limitation of directors' personal liability to the corporation or its
stockholders for monetary damages for breach of fiduciary duties as a director
except for (i) any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) breaches under
Section 174 of the Delaware General Corporation Law, which relates to unlawful
payments of dividends or unlawful stock repurchases or redemptions and (iv)
any transaction from which the director derived an improper personal benefit.
Article Ninth of the Company's Restated Certificate of Incorporation limits a
director's personal liability to the extent permitted by Section 102.
 
  Article VIII of the Company's Bylaws provides that the Company may maintain
insurance, at its expense, to protect itself and any of its directors,
officers, employees or agents or any person serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against and incurred by such person, or arising out of such person's
status as such, whether or not the Company would have the power to indemnify
such person against such liability under the Delaware General Corporation Law.
Pursuant to this provision, the Company currently maintains directors and
officers insurance.
 
  The Company has entered into an indemnity agreement with each of its
officers and directors contractually obligating the Company to indemnify such
person to the fullest extent permitted by the General Corporation Law of the
State of Delaware. In connection with the Recapitalization and pursuant to the
Agreement and Plan of Merger dated March 22, 1991, the Company agreed that (i)
the indemnification obligations of the Company under its Certificate of
Incorporation and Bylaws constitute binding contractual obligations to each of
the Company's officers and directors immediately prior to the
Recapitalization, (ii) the amendment or repeal of those provisions will not
affect the rights of officers and directors of the Company immediately prior
to the Recapitalization relating to services occurring prior to such amendment
or repeal and (iii) for three years after the effective time of the
Recapitalization, it will use its best efforts to cause the Company to
maintain director and officer liability insurance for the officers and
directors of the Company immediately prior to the Recapitalization with
comparable terms as existing immediately prior to the Recapitalization, unless
the annual cost for premiums for such insurance (reduced by amounts
voluntarily contributed by covered parties) is more than $50,000.
 
  In connection with the UltraCare acquisition and pursuant to the Agreement
and Plan of Reorganization dated September 18, 1992, pursuant to which
UltraCare was acquired, the Company agreed that the indemnification
obligations of UltraCare under its Certificate of Incorporation and Bylaws
would survive the closing and continue in full force and effect, as an
obligation of the Company. In addition, for a period of three years following
the closing of the UltraCare acquisition, the Company must use its best
efforts to (i) maintain or extend coverage of any directors' and officers'
liability insurance and fiduciary liability insurance carried by UltraCare or
its subsidiaries to the former officers and directors of UltraCare with
respect to actions or omissions occurring on or prior to the closing of the
UltraCare acquisition, unless the annual costs for premiums for such insurance
(reduced by amounts voluntarily contributed by covered parties) is in excess
of $50,000 and (ii) not amend the Certificate of Incorporation or Bylaws to
reduce the level of indemnification below that in effect on the day the
Agreement and Plan of Reorganization was executed.
 
                                     II-1
<PAGE>
 
  Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrants
pursuant to the foregoing provisions, the Registrants have been informed that
in the opinion of the Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
 
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
 
(a) 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.
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                          DESCRIPTION OF EXHIBITS
 -------                         -----------------------
 <C>     <S>
  **3.1  Restated Certificate of Incorporation of Drypers Corporation, as
         amended (Filed as Exhibit 3.1 to current report on Form 8-K dated
         March 1, 1996).
  **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  Specimen 12 1/2% Series B Senior Note Certificate (Filed as Exhibit
         4.1 to Amendment No. 1 to Form S-4 filed March 17, 1993, Registration
         Statement No. 33-54810).
  **4.2  Form of Common Stock Certificate (Filed as Exhibit 4.2 to Form S-1
         filed January 26, 1994, Registration Statement No. 33-74436).
  **4.3  Form of Common Stock Purchase Warrant entitling the persons listed on
         Schedule 4.3 to purchase an aggregate of 14,680 shares of Common Stock
         (Filed as Exhibit 4.3 to Form S-1 filed January 26, 1994, Registration
         Statement No. 33-74436).
  **4.4  Form of Common Stock Purchase Warrant entitling the persons listed on
         Schedule 4.4 to purchase an aggregate of 24,088 shares of Common Stock
         (Filed as Exhibit 4.4 to Form S-1 filed January 26, 1994, Registration
         Statement No. 33-74436).
  **4.5  Form of Common Stock Purchase Warrant entitling the persons listed on
         Schedule 4.5 to purchase an aggregate of 23,971 shares of Common Stock
         (Filed as Exhibit 4.5 to Form S-1 filed January 26, 1994, Registration
         Statement No. 33-74436).
  **4.6  Form of Common Stock Purchase Warrant entitling the persons listed on
         Schedule 4.6 to purchase an aggregate of 346,183 shares of Common
         Stock (Filed as Exhibit 4.6 to Form S-1 filed January 26, 1994,
         Registration Statement No. 33-74436).
  **4.7  Form of Common Stock Purchase Warrant entitling the persons listed on
         Schedule 4.7 to purchase an aggregate of 24,995 shares of Common Stock
         (Filed as Exhibit 4.7 to Form S-1 filed January 26, 1994, Registration
         Statement No. 33-74436).
  **4.8  Forms of Warrants (Filed as Exhibit 4.37 to Form S-1 Filed October 8,
         1993, Registration Statement No. 33-70098).
 **+4.9  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).
 **+4.10 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).
</TABLE>
 
 
                                     II-2
<PAGE>
 
<TABLE>   
<CAPTION>
 EXHIBIT
  NUMBER                         DESCRIPTION OF EXHIBITS
 -------                         -----------------------
 <C>      <S>
  **+4.11 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).
  **+4.12 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).
  **+4.13 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).
   **4.14 Indenture dated as of November 10, 1992, by and among the Company,
          Hygienic Products International, Inc., VRG Leasing Corporation, and
          First Interstate Bank of Texas, N.A., as trustee (Filed as Exhibit
          4.29 to Form S-4 filed November 20, 1992, Registration Statement No.
          33-54810).
   **4.15 First Supplemental Indenture dated October 2, 1996, between Drypers
          Corporation and Wells Fargo Bank Texas National Association, as
          Trustee (Filed as Exhibit 4.1 to Form 10-Q filed November 13, 1996,
          Commission File No. 0-23422)
   **4.16 Warrant Agreement dated as of November 10, 1992, by and between the
          Company and First Interstate Bank of Texas, N.A., as warrant agent
          (Filed as Exhibit 4.31 to Form S-4 filed November 20, 1992,
          Registration Statement No. 33-54810).
   **4.17 Warrant Agreement as dated as of July 31, 1991, by and between the
          Company and First Interstate Bank of Texas, N.A., as warrant agent
          (Filed as Exhibit 4.16 to Form S-4 filed November 20, 1992,
          Registration Statement No. 33-54810).
   **4.18 2% Convertible Junior Subordinated Debenture due June 30, 1998,
          issued to Randy C. Schaaf in the original principal amount of
          $500,000 (Filed as Exhibit 4.32 to Form S-4 filed November 20, 1992,
          Registration Statement No. 33-54810).
   **4.19 Form of Investment and Stock Registration Rights 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).
   **4.20 Certificate of Designation of Senior Convertible Cumulative 7.5%
          Preferred Stock of Drypers Corporation (Filed as Exhibit 4.1 to
          Current Report on Form 8-K dated March 1, 1996).
   **4.21 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)
   **4.22 Rights Agreement Amendment dated as of February 26, 1996, by and
          between Drypers Corporation and ChaseMellon Shareholder Services,
          L.L.C. (Filed as Exhibit 4.21 to Form 10-K filed March 31, 1997,
          Commission File No. 0-23422)
   **4.23 Indenture dated as of June 15, 1997 by and between the Company and
          Bankers Trust & Company, as trustee. (Filed as Exhibit 4.1 to Form
          10-Q filed August 12, 1997).
    *5.1  Opinion of Fulbright & Jaworski L.L.P. regarding the legality of the
          Exchange Notes.
 **+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  Indemnity Agreement dated November 10, 1992, between the Company and
          Randy C. Schaaf (Filed as Exhibit 10.28 to Form S-4 filed November
          20, 1992, Registration Statement No. 33-54810).
 **+10.3  Consulting Agreement dated December 7, 1994, by and between the
          Company and Randy C. Schaaf (Filed as Exhibit 10.4 to Amendment No. 6
          to Form S-1 filed January 23, 1995, Registration Statement No. 33-
          70098).
  **10.4  Employment Agreement dated as of October 24, 1994, by and between the
          Company and David M. Pitassi (Filed as Exhibit 10.6 to Amendment No.
          6 to Form S-1 filed January 23, 1995, Registration Statement No. 33-
          70098).
</TABLE>    
 
 
                                      II-3
<PAGE>
 
<TABLE>   
<CAPTION>
 EXHIBIT
  NUMBER                         DESCRIPTION OF EXHIBITS
 -------                         -----------------------
 <C>      <S>
  **10.5  Noncompetition Agreement dated June 11, 1991, by and between VMG
          Enterprises, Inc. and Dan A. Badders (Filed as Exhibit 10.23 to Form
          S-4 filed November 20, 1992, Registration Statement No. 33-54810).
 **+10.6  Noncompetition Agreement dated as of November 10, 1992, by and among
          the Company and Randy C. Schaaf (Filed as Exhibit 10.31 to Form S-4
          filed November 20, 1992, Registration Statement No. 33-54810).
  **10.7  Lease Agreement dated April 1, 1988, by and between Gerald D. Hines
          and ACP Enterprises, Inc. (Filed as Exhibit 10.12 to Form S-4 filed
          November 20, 1992, Registration Statement No.
          33-54810).
  **10.8  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).
  **10.9  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, 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).
  **10.10 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).
  **10.11 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).
  **10.12 Lease Contract dated July 1, 1994 between Houston-West Loop, Limited
          and Drypers Corporation.
  **10.13 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).
 **+10.14 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).
  **10.15 Form of 12% Junior Subordinated Debenture due June 30, 1998, in the
          aggregate principal amount of $2,400,000 issued to the persons listed
          on Schedule 10.29 (Filed as Exhibit 10.29 to Form S-4 filed November
          20, 1992, Registration Statement No. 33-54810).
  **10.16 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).
  **10.17 Memorandum of Preferred Stock Purchase Agreement dated July 31, 1994,
          by and among Drypers Corporation, Seler S.A., Ricardo Marcelo
          Albamonte and Alfred Garcia Bernal (Filed as Exhibit 10.1 to Form 10-
          Q filed August 15, 1994, Commission File No. 0-23422).
  **10.18 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).
  **10.19 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).
</TABLE>    
 
 
                                      II-4
<PAGE>
 
<TABLE>   
<CAPTION>
 EXHIBIT
  NUMBER                         DESCRIPTION OF EXHIBITS
 -------                         -----------------------
 <C>      <S>
  **10.20 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).
  **10.21 Loan and Security Agreement dated February 26, 1996, between Congress
          Financial Corporation (Southwest) and Drypers Corporation (Filed as
          Exhibit 10.1 to Current Report on Form 8-K dated March 1, 1996).
  **10.22 Second Amended and Restated Loan Agreement dated as of February 23,
          1996, between Drypers Corporation and First Interstate Bank of Texas,
          N.A. (Filed as Exhibit 10.2 to Current Report on Form 8-K dated March
          1, 1996).
 **+10.23 Employment Agreement dated February 25, 1997, by and between Drypers
          Corporation and Walter V. Klemp. (Filed as Exhibit 10.24 to Form 10-K
          filed March 31, 1997, Commission File No. 0-23422)
 **+10.24 Employment Agreement dated February 25, 1997, by and between Drypers
          Corporation and Raymond M. Chambers. (Filed as Exhibit 10.25 to Form
          10-K filed March 31, 1997, Commission File No. 0-23422)
 **+10.25 Employment Agreement dated February 25, 1997, by and between Drypers
          Corporation and Terry A. Tognietti. (Filed as Exhibit 10.26 to Form
          10-K filed March 31, 1997, Commission File No. 0-23422)
 **+10.26 Employment Agreement dated March 14, 1996, by and between Drypers
          Corporation and Joe D. Tanner. (Filed as Exhibit 10.27 to Form 10-K
          filed March 31, 1997, Commission File No. 0-23422)
 **+10.27 Employment Agreement dated July 19, 1996, by and between Drypers
          Corporation and David M. Olsen. (Filed as Exhibit 10.28 to Form 10-K
          filed March 31, 1997, Commission File No. 0-23422)
   *10.28 Drypers Corporation Amended and Restated 1995 Key Employee Stock
          Option Plan.
   *10.29 Drypers Corporation 1996 Non-Employee Director Stock Option Plan.
   *10.30 First Amendment to Drypers Corporation Amended and Restated 1995 Key
          Employee Stock Option Plan.
 ***11.1  Statement Regarding Computation of Per Share Earnings.
 ***12.1  Statement Regarding Computation of Ratio of Earnings to Fixed
          Charges.
   *21.1  Subsidiaries of Drypers Corporation.
   *23.1  Consent of Arthur Andersen LLP.
   *23.2  Consent of Fulbright & Jaworski L.L.P. (contained in Exhibit 5.1)
   *24.1  Powers of Attorney (see page II-7)
 ***25.1  Statement of Eligibility Under Trust Indenture Act of 1939 of a
          Corporation Designated to Act as Trustee on Form T-1.
   *99.1  Form of Letter of Transmittal and related documents.
</TABLE>    
--------
   
  * Filed herewith.     
   
 ** Incorporated by reference to the filing indicated.     
   
*** Previously filed.     
 + Management contract or compensatory plan or arrangement filed pursuant to
   Item 14 of Form 10-K.
       
(b) Financial Statement Schedules
 
  The following financial statement schedule should be read in conjunction with
the financial statements included in this Registration Statement.
 
<TABLE>
      <S>                                                                    <C>
      Report of Independent Public Accountants.............................. S-1
      Schedule II--Valuation and Qualifying Accounts........................ S-2
</TABLE>
 
                                      II-5
<PAGE>
 
ITEM 22. UNDERTAKINGS.
 
  We the undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Exchange Act aunt, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
 
  Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
 
  The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
 
  The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
 
                                     II-6
<PAGE>
 
                                  SIGNATURES
   
  Pursuant to the requirements of the Securities Act, the registrant has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of
Texas, on September 15, 1997.     
 
                                          DRYPERS CORPORATION
 
                                                   /s/ Walter V. Klemp
                                          By __________________________________
                                                     Walter V. Klemp
                                                  Chairman of the Board
                                            and to Co-Chief Executive Officer
 
                               POWER OF ATTORNEY
 
  KNOW ALL MEN BY THESE PRESENTS, that each director and officer of Drypers
Corporation whose signature appears below constitute and appoint Walter V.
Klemp and Jonathan P. Foster, and each of them, their true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for each of them and in each of their names, places and stead,
in any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement on Form S-4, and to file
the same and all exhibits thereto, and all documents in connection therewith,
with the Securities and Exchange Commission, granting said attorney-in-fact
and agent, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as each of them might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact
and agent or either of them, or their or his substitute or substitutes,may
lawfully do or cause to be done by virtue hereof.
 
<TABLE>   
<CAPTION>
             SIGNATURE                            TITLE                     DATE
             ---------                            -----                     ----
 
<S>                                  <C>                             <C>
     /s/   Walter V. Klemp           Chairman of the Board, Co-Chief September 15, 1997
____________________________________ Executive Officer and Director
          Walter V. Klemp            (Principal Executive Officer)
 
     /s/ Terry A. Tognietti          Co-Chief Executive Officer,     September 15, 1997
____________________________________ President--Drypers North
         Terry A. Tognietti          America and Director
 
   /s/  Raymond M. Chambers          Co-Chief Executive Officer,     September 15, 1997
____________________________________ President--Drypers
        Raymond M. Chambers          International
                                     and Director
 
   /s/    Philip A. Tuttle           Director                        September 15, 1997
____________________________________
          Philip A. Tuttle
 
       /s/ Nolan Lehmann             Director                        September 15, 1997
____________________________________
           Nolan Lehmann
 
       /s/ Gary L. Forbes            Director                        September 15, 1997
____________________________________
           Gary L. Forbes
 
     /s/ Jonathan P. Foster          Executive Vice President and    September 15, 1997
____________________________________ Chief Financial Officer
         Jonathan P. Foster          (Principal Financial Officer
                                     and Principal Accounting
                                     Officer)
</TABLE>    
 
                                     II-7
<PAGE>
 
                   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, 1995 and 1996, and the
related consolidated statements of earnings, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1996,
included in this Registration Statement and have issued our report thereon
dated March 26, 1997. 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
March 26, 1997
 
                                      S-1
<PAGE>
 
                                                                     SCHEDULE II
 
                      DRYPERS CORPORATION AND SUBSIDIARIES
 
                       VALUATION AND QUALIFYING ACCOUNTS
 
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                      ADDITIONS
                             BALANCE   CHARGED                         BALANCE
                               AT      TO COST                         AT END
                            BEGINNING    AND                             OF
      CLASSIFICATION        OF PERIOD  EXPENSE  DEDUCTIONS(1) OTHER(2) PERIOD
      --------------        --------- --------- ------------- -------- -------
<S>                         <C>       <C>       <C>           <C>      <C>
ALLOWANCE FOR DOUBTFUL
 ACCOUNTS:
  Year Ended December 31,
   1994....................   $304     $   80      $  (146)     $ --   $  238
  Year Ended December 31,
   1995....................    238        490         (395)      607      940
  Year Ended December 31,
   1996....................    940      1,240       (1,020)       --    1,160
</TABLE>
--------
(1) Write-offs of uncollectible accounts.
(2) Consolidation of Seler, S.A.'s allowance for doubtful accounts as of July
    31, 1995.
 
                                      S-2