<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 333-58223
DIAMOND BRANDS OPERATING CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 411905675
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1800 CLOQUET AVENUE 55720
CLOQUET, MINNESOTA
(Address of principal executive offices) (Zip Code)
(218) 879-6700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /x/ No / /
As of November 15, 1999, 100% of the common stock of the Registrant was owned
by Diamond Brands Incorporated. There is no established public trading market
for such stock.
Documents incorporated by reference: None
<PAGE>
DIAMOND BRANDS OPERATING CORP.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM - 1. Financial Statements (Unaudited)
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
ITEM - 2. Management's Discussion and Analysis of Results
Of Operations and Financial Condition
PART II - OTHER INFORMATION
Signature
<PAGE>
DIAMOND BRANDS OPERATING CORP.
Consolidated Balance Sheets (Unaudited)
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowances of $985 and $1,035 $ 15,930 $ 12,379
Inventories 12,902 11,966
Deferred income taxes 12,076 2,161
Prepaid expenses 694 980
Net assets from discontinued operations 578 26,508
--------- ---------
Total current assets 42,180 53,994
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $19,347 and $17,715 15,815 14,498
GOODWILL 24,561 25,100
DEFERRED FINANCING COSTS 6,370 6,735
--------- ---------
$ 88,926 $ 100,327
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-tem debt $ 4,250 $ 2,750
Accounts payable 7,588 5,801
Accrued expenses 14,140 11,252
--------- ---------
Total current liabilities 25,978 19,803
POSTRETIREMENT BENEFIT OBLIGATIONS 1,559 1,559
DEFERRED INCOME TAXES 20 20
LONG-TERM DEBT, net of current maturities 175,050 177,174
--------- ---------
Total liabilities 202,607 198,556
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value; 1,000 shares authorized;
1,000 shares issued and outstanding 1 1
Accumulated deficit (113,682) (98,230)
--------- ---------
Total stockholders' deficit (113,681) (98,229)
--------- ---------
$ 88,926 $ 100,327
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE>
DIAMOND BRANDS OPERATING CORP.
Consolidated Statements of Operations (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------
1999 1998 1999 1998
--------- --------- --------- --------
<S> <C> <C> <C> <C>
NET SALES $ 24,234 $ 24,024 $ 76,120 $ 72,968
COST OF SALES 14,682 15,154 47,050 47,682
-------- -------- -------- --------
Gross profit 9,552 8,870 29,070 25,286
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,812 2,704 9,221 7,690
GOODWILL AMORTIZATION 180 180 540 540
-------- -------- -------- --------
Operating income 6,560 5,986 19,309 17,056
INTEREST EXPENSE 4,679 4,474 13,825 10,629
-------- -------- -------- --------
Income from continuing operations before provision for income taxes 1,881 1,512 5,484 6,427
PROVISION FOR INCOME TAXES 826 676 2,410 379
-------- -------- -------- --------
Income from continuing operations 1,055 836 3,074 6,048
DISCONTINUED OPERATIONS (Note 2):
Loss from discontinued operations, net of income tax benefit of
$1,672, $18, $2,628 and $515, respectively (2,505) (28) (3,941) (772)
Loss on disposal, net of income tax benefit of $9,696 for 1999 (14,543) -- (14,543) --
-------- -------- -------- --------
Loss from discontinued operations (17,048) (28) (18,484) (772)
-------- -------- -------- --------
Net income (loss) $(15,993) $ 808 $(15,410) $ 5,276
======== ======== ======== ========
PRO FORMA INCOME FROM CONTINUING OPERATIONS:
Income from continuing operations before provision for income taxes $ 1,881 $ 1,512 $ 5,484 $ 6,427
Pro forma provision for income taxes (Note 5) 826 676 2,410 2,600
-------- -------- -------- --------
Pro forma income from continuing operations $ 1,055 $ 836 $ 3,074 $ 3,827
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
DIAMOND BRANDS OPERATING CORP.
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1999 1998
------------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ (15,410) $ 5,276
Net assets of discontinued operations 25,930 2,515
Adjustments to reconcile net loss to net cash provided by operating
activities from continuing operations-
Depreciation and amortization 2,878 3,389
Deferred income taxes (9,915) (1,352)
Change in operating assets and liabilities-
Accounts receivable (3,551) (3,564)
Inventories (936) (706)
Prepaid expenses 286 (1,470)
Accounts payable 1,787 656
Accrued expenses 2,888 4,972
--------- ---------
Net cash provided by operating activities of continuing operations 3,957 9,716
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,949) (1,395)
--------- ---------
Net cash used for investing activities of continuing operations (2,949) (1,395)
--------- ---------
FINANCING ACTIVITIES:
Borrowings under bank revolving line of credit 17,400 27,200
Repayments of bank revolving line of credit (16,149) (30,700)
Borrowings on long-term debt -- 180,000
Repayments of long-term debt (1,875) (44,997)
Distributions to stockholders -- (5,454)
Incorporation of Operating Corp. -- 1
Distributions to Holdings (42) (127,060)
Debt issuance costs (342) (7,311)
--------- ---------
Net cash (used for) financing activities of continuing operations (1,008) (8,321)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS -- --
CASH AND CASH EQUIVALENTS, beginning of period -- --
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ -- $ --
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 10,537 $ 6,400
========= =========
Income taxes $ 7 $ 32
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
DIAMOND BRANDS OPERATING CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Diamond Brands Operating Corp. ("Operating Corp") and Operating Corp.'s
wholly-owned subsidiaries, Forster Inc. and Empire Candle, Inc. after
elimination of all material intercompany balances and transactions.
Operating Corp. and its subsidiaries are collectively referred to as "the
Company".
The Company is a leading manufacturer and marketer under two business
segments (i) consumer products, consisting primarily of wooden matches,
toothpicks, clothespins and wooden crafts, and plastic cutlery and straws
("Consumer Products"); and (ii) poured scented, air freshener and
citronella candles ("Candles"). The Company's products are marketed
primarily in the United States and Canada under the nationally recognized
Diamond, Forster and Empire brand names. The Board of Directors of the
Company approved the divestiture of its Candle Operations (see note 2), and
is included as discontinued operations in the consolidated financial
statements for all periods presented.
The interim consolidated financial statements of the Company are unaudited;
however, in the opinion of management, all adjustments necessary for a fair
presentation of such consolidated financial statements have been reflected
in the interim periods presented. The significant accounting policies and
certain financial information which are normally included in financial
statements prepared in accordance with generally accepted accounting
principles, but which are not required for interim reporting purposes, have
been condensed or omitted. The accompanying consolidated financial
statements of the Company should be read in conjunction with the
consolidated financial statements and related notes included in the
Company's Annual Report on Form 10-K.
2. DISCONTINUED OPERATIONS
Effective September 30, 1999, the Board of Directors of the Company
approved the divestiture of the Candle operations of the Company.
Operations are expected to cease on or before June 30, 2000. Net sales were
$4.5 million and $6.7 for the three months ended September 30, 1999 and
1998, respectively. Net sales were $12.3 million and $16.3 million for the
nine months ended September 30, 1999 and 1998, respectively.
The losses of the Candle operations for the three months ended September
30, 1999 and 1998 were $2.5 million and $0.1 million, respectively. The
losses for the nine months ended September 30, 1999 and 1998 were $3.9
million and $0.8 million, respectively. The losses of the Candle operations
for all periods presented are included in the consolidated statements of
operations under "Loss from Discontinued Operations."
The provision for the "Loss on Disposal" reflected in the consolidated
income statement totaled $14.6 million, including the write down of assets
by $23.1 million to net realizable
<PAGE>
value, estimated costs of disposal and run off costs of $1.2 million, less
the expected tax benefit of $9.7 million.
3. RECAPITALIZATION
On March 3, 1998, the stockholders of the Company's parent, Diamond Brands
Incorporated (Holdings), entered into a recapitalization agreement (the
"Recapitalization Agreement") with Seaver Kent - TPG Partners, L.P. and
Seaver Kent I Parallel, L.P. (collectively "the Sponsors"), which provided
for the recapitalization of Holdings.
Pursuant to the Recapitalization Agreement, in April 1998, Holdings
purchased from the existing stockholders 15,129,232 shares of Holdings'
common stock for $211.5 million by Operating Corp. (i) issuing $100.0
million of senior subordinated notes and (ii) entering into a bank credit
agreement which provided for $80.0 million in term loan facilities and a
$25.0 million revolving credit facility. The proceeds of such were used to
partially fund the recapitalization. The transaction was accounted for as a
recapitalization for accounting purposes.
4. LONG TERM DEBT
In April 1998, the Company completed an offering of $100.0 million of
10 1/8% senior subordinated notes due 2008. The net proceeds to the Company
for the offering, after discounts, commissions and other offering costs
were $95.4 million and were used to repay existing indebtedness and
purchase common stock of the Company.
The senior subordinated notes are fully and unconditionally guaranteed on
a senior subordinated basis, jointly and severally, by all of Operating
Corp.'s direct and indirect subsidiaries (the "Subsidiary Guarantors").
The Subsidiary Guarantors are Forster, Inc. and Empire Candle, Inc.
Separate financial statements of the Subsidiary Guarantors are not
presented because management has determined that they are not material
to investors. In lieu of the separate guarantor financial statements,
summarized consolidating financial information of Holdings/Operating
Corp. and the Subsidiary Guarantors are presented below (in thousands):
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
Operating Subsidiary Consolidated
Corp Guarantor (1) Eliminations Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance sheet data:
Current assets $ 21,994 $32,000 $ 53,994
Non current assets 106,800 9,096 (69,563) 46,333
Current liabilities 49,222 4,270 (33,689) 19,803
Non current liabilities 177,801 952 178,753
Stockholders' deficit (98,229) 35,874 (35,874) (98,229)
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<S> <C> <C> <C> <C>
Statement of operations data:
Net sales $27,773 $48,347 $76,120
Gross profit 9,020 20,050 29,070
Operating income 5,115 14,194 19,309
Income from continuing operations 40 3,064 3,074
Loss from discontinued operations - (18,484) (18,484)
<PAGE>
Equity in (loss) of subsidiaries (15,450) - 15,450 -
Net (loss) (15,410) (15,450) 15,450 (15,410)
</TABLE>
AS OF SEPTEMBER 30, 1999
<TABLE>
<S> <C> <C> <C> <C>
Balance sheet data:
Current assets $ 31,971 $ 10,209 $ 42,180
Noncurrent assets 90,745 10,114 (54,113) 46,746
Current liabilities 60,720 12,334 (47,076) 25,978
Non current liabilities 175,677 952 - 176,629
Stockholders' (deficit) (113,681) (7,037) (7,037) (113,681)
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C> <C> <C> <C>
Statement of operations data:
Net sales $26,160 $46,808 $72,968
Gross profit 7,165 18,121 25,286
Operating income 3,869 13,187 17,056
Income from continuing operations 55 5,993 6,048
Loss from discontinued operations - (772) (772)
Equity in earnings of subsidiaries 5,221 - (5,221) -
Net income 5,276 5,221 (5,221) 5,276
</TABLE>
(1) Summarized financial information of the Subsidiary Guarantors includes the
results of operations for Empire Candle, Inc. as loss from discontinued
operations (see Note 2). Current assets of the Subsidiary Guarantors
included net assets of discontinued operations of $578 and $26,508 as of
September 30, 1999 and December 31, 1998, respectively.
The Company also entered into a bank credit agreement which provides for
$80.0 million in term facilities due in installments through March 2006 and
a $25.0 million revolving credit facility.
The senior credit agreement was amended on March 5, 1999, allowing for
certain non-recurring expenses totaling $6.0 million to be excluded in the
calculation of EBITDA on or before the third quarter of 1999. The amendment
also adjusted the Minimum Fixed Charge Coverage Ratio, Maximum Leverage
Ratio and Interest Coverage Ratio for the next eight quarters. The Company
was in compliance with all covenants as of September 30, 1999.
5. INCOME TAXES
Effective with the Recapitalization (see Note 3) in April 1998, the Company
converted from an S Corporation to a C Corporation and began accounting for
income taxes using the liability method.
The taxable income or loss of the Company for the period ended April 20,
1998, is included in the individual returns of the stockholders for federal
tax purposes and, to the extent allowed and elected, for state tax
purposes. Accordingly, there is no provision for current income taxes for
that period.
<PAGE>
The unaudited pro forma income tax expense is presented assuming the
Company had been a C corporation since January 1, 1998.
6. SEGMENT REPORTING
The Company's reportable segments include consumer products and candles.
The consumer products segment consists of wooden matches, toothpicks,
clothespins and wooden crafts, and plastic cutlery and straws sold
primarily to grocery, mass and drug store channels. The candle segment
consists primarily of poured scented, air freshener and citronella candles
sold through club, mass and grocery channels. The candle operations were
approved for divestiture in September, 1999 (see note2).
Financial results of the Company's operating segments for the nine months
ended September 30, 1999 and 1998 are summarized below (in millions):
<TABLE>
<CAPTION>
1999 1998
------------------------------------- -----------------------------------------
Consumer Consumer
Products Candles (1) Total Products Candles (1) Total
-------- ----------- ----- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Net sales $76.1 $ 12.3 $88.4 $73.0 $ 16.3 $89.3
Gross profit (loss) 29.0 ( 3.6) 25.4 25.3 1.6 26.9
Operating income (loss) 19.3 ( 6.6) $12.7 11.0 (1.3) 9.7
</TABLE>
(1) Included in discontinued operations in the consolidated statements of
operations.
<PAGE>
DIAMOND BRANDS OPERATING CORP.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF CONTINUING OPERATIONS
The Company manufactures and markets consumer products, consisting primarily
of plastic cutlery/straws, wooden matches, toothpicks, clothespins and wooden
crafts. The Company's products are marketed primarily under the nationally
recognized Diamond and Forster brand names, which have been in existence
since 1881 and 1887, respectively.
The Company derives its revenue primarily from the sale of its products to
substantially all major grocery stores, drug stores, mass merchandisers and
warehouse clubs in the United States. During the nine months ended September
30, 1999, sales to the Company's top 10 customers accounted for approximately
46% of the Company's gross sales, with one customer accounting for
approximately 18% of the Company's gross sales. The following table sets
forth, for the period indicated, certain historical statements of operations
data, as well as the Company's EBITDA and EBITDA margin, for the continuing
operations of the Company, with 1998 comparable results of continuing
operations restated to exclude discontinued operations.
THREE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
1999 1998
--------- ----------
(dollars in millions)
Total Total
----- -----
<S> <C> <C>
Net Sales $ 24.2 $ 24.0
Cost of Sales 14.6 15.1
--------- ----------
Gross Profit 9.6 8.9
Gross Margin % 39.7% 37.1%
Selling, General
and Administration Expense 2.8 2.7
Goodwill Amortization .2 .2
--------- ----------
Operating Income (1) $ 6.6 $ 6.0
Interest Expense $ 4.7 $ 4.5
EBITDA (2) $ 7.3 $ 6.7
--------- ----------
--------- ----------
EBITDA (3) 30.2% 27.9%
</TABLE>
(1) Excludes amortization of deferred financing costs.
(2) EBITDA represents operating income plus depreciation and amortization
(excluding amortization of deferred financing costs). The Company believes
that EBITDA provides useful information regarding the Company's ability to
service its debt; however, EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles and
should not be considered as a substitute for net income as an indicator of
the Company's operating performance or cash flow as a measure of liquidity.
(3) EBITDA margin represents EBITDA as a percentage of net sales.
Net sales for the Company were $24.2 million for the three months ended
September 30, 1999, a 0.8% increase over net sales of $24.0 million for the
three months ended September 30, 1998. The increase was led by a strong sales
performance in plastic cutlery/straws and wooden matches. Cutlery/straws net
sales were up 10.6% over the comparable three months of 1998, while wooden
matches net sales increased 4.6% over the comparable period for the previous
year.
<PAGE>
Gross profit was $9.6 million or 39.7% of net sales for the three months
ended September 30, 1999, compared to $8.9 million or 37.1% for the
comparable period in 1998. This increase was achieved through (i) the
increased sales volume of cutlery/straws and wooden matches; (ii) operating
efficiencies at the related plants; and (iii) favorable product sales mix.
Selling, general and administrative expenses were $2.8 million for the three
months ended September 30, 1999, compared to $2.7 million for the comparable
period in 1998. The increased spending was due to year 2000 remediation,
marketing spending on consumer awareness, and infrastructure improvements.
Interest expense for three months ended September 30, 1999 was $4.7 million
compared to $4.5 million for the comparable period in 1998. The increase was
caused primarily by higher interest rates on the Company's senior debt facility.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were
$7.3 million or 30.2% of net sales for the three months ended September 30,
1999, compared to EBITDA of $6.7 million or 27.9% for the same period in 1998.
RESULTS OF DISCONTINUED OPERATIONS
Effective September 30, 1999, the Board of Directors approved the divestiture of
the Candle operations of the Company. Operations are expected to cease on or
before June 30, 2000. Net sales from such operations were $4.5 million for the
three month period ended September 30, 1999 as compared to $6.7 million for the
comparable period in 1998.
The losses of the Candle operations for the three month period ended
September 30, 1999 totaled $2.5 million, and are included in the consolidated
income statement under "Loss from Discontinued Operations."
The provision for the "Loss on Disposal of Discontinued Operations" reflected in
the consolidated income statement totaled $14.6 million, including the write
down of assets by $23.1 million to net realizable value, estimated costs of
disposal and run off costs $1.2 million, less the expected tax benefit of $9.7
million.
RESULTS OF CONTINUING OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
1999 1998
------- -------
(dollars in millions)
Total Total
----- -----
<S> <C> <C>
Net Sales $ 76.1 $ 73.0
Cost of Sales 47.1 47.7
---- ----
Gross Profit 29.0 25.3
Gross Margin % 38.1% 34.7%
Selling, General
and Administration Expense 9.2 13.8
Goodwill Amortization .5 .5
---- ----
Operating Income (1) $ 19.3 $ 11.0
Interest Expense $ 13.8 $ 10.6
EBITDA (2) $ 21.4 $ 13.1
Recapitalization Expense (3) -- $ 5.8
Adjusted EBITDA (4) $ 21.4 $ 18.9
------- -------
------- -------
Adjusted EBITDA
Margin (5) 28.1% 25.9%
</TABLE>
<PAGE>
(1) Excludes amortization of deferred financing costs.
(2) EBITDA represents operating income plus depreciation and amortization
(excluding amortization of deferred financing costs). The Company believes
that EBITDA provides useful information regarding the Company's ability to
service its debt; however, EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles and
should not be considered as a substitute for net income as a indicator of
the Company's operating performance or cash flow as a measure of liquidity.
(3) Represents one time costs incurred in connection with the Recapitalization
including brokerage fee ($2.7 million) change in control management bonuses
and option payments ($1.9 million), and legal and professional fees ($1.2
million).
(4) Represents EBITDA excluding Recapitalization Expenses.
(5) EBITDA margin represents EBITDA as a percentage of net sales.
Net sales were $76.1 million for the nine months ended September 30, 1999, a
4.2% increase over net sales of $73.0 million for the nine months ended
September 30, 1998. The increase resulted from a strong sales performance in
plastic cutlery/straws and wooden matches. Cutlery/straws net sales were up
14.8% over the comparable nine months of 1998, while wooden matches net sales
were 9.7% ahead of the comparable period.
Gross profit was $29.0 million or 38.1% of net sales for the nine months ended
September 30, 1999, compared to $25.3 million or 34.7% for the comparable period
in 1998. This increase was achieved through (i) the increased sales volume of
cutlery/straws and wooden matches; (ii) operating efficiencies at the related
plants; and (iii) favorable product sales mix.
Selling, general and administrative expenses were $9.2 million for the nine
months ended September 30, 1999, compared to $13.8 million for the comparable
period in 1998 which included $5.8 million in one time Recapitalization
expenses. After adjusting 1998 for Recapitalization expenses, the increased
spending was due to year 2000 remediation, marketing spending on consumer
awareness, and infrastructure improvements.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were
$21.4 million or 28.1% of net sales for the nine months ended September 30,
1999, compared to Adjusted EBITDA of $18.9 million or 25.9% for the same period
in 1998.
Interest expense for the nine months ended September 30, 1999 was $13.8 million
compared to $10.6 million for the comparable period in 1998. This increase was
due primarily to the increase in debt as the result of the April 21, 1998
Recapitalization of the Company.
RESULTS OF DISCONTINUED OPERATIONS
Effective September 30, 1999, the Board of Directors approved the divestiture of
the Candle operations of the Company. Operations are expected to cease on or
before June 30, 2000. Net sales from such operations were $12.3 million for the
nine months ended September 30, 1999, and $16.3 million for the comparable
period in 1998.
The losses of the Candle operations for the nine months ended September 30,
1999 totaled $3.9 million, and are included in the consolidated income statement
under "Loss from Discontinued Operations".
The provision for the "Loss on Disposal of Discontinued Operations" reflected in
the consolidated income statement totaled $14.6 million, including the write
down of assets by $23.1 million to net realizable value, estimated costs of
disposal and run off costs $1.2 million, less the expected tax benefit of $9.7
million.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The senior credit agreement was amended on March 5, 1999, allowing for certain
non-recurring expenses totaling $6.0 million to be excluded in the calculation
of EBITDA on or before the third quarter of 1999, for the purpose of calculating
covenant compliance. The amendment also adjusted the Minimum Fixed Charge
Coverage Ratio, Maximum Leverage Ratio and Interest Coverage Ratio for the next
eight quarters. The Company was in compliance with all covenants as of September
30, 1999.
CASH FLOW - OPERATING ACTIVITIES. Cash provided by operating activities was $4.0
million for the nine months ended September 30, 1999 as compared to $9.7 million
cash provided for the comparable period in 1998.
CASH FLOW - INVESTMENT ACTIVITIES. Capital expenditures for the nine months
ended September 30, 1999, were $2.9 million, primarily used to expand capacity
at the cutlery plant. Capital expenditures for the comparable period in 1998
were $1.4 million.
CASH FLOW - FINANCING ACTIVITIES. Cash used for by financing activities was $1.0
million for the nine months ended September 30, 1999, as compared to $8.3
million for the comparable period in 1998. Borrowings and repayments under the
bank agreement for Working Capital requirements comprised the majority of the
financing activities for the nine months ended September 30, 1999. The
recapitalization of the Company on April 21, 1998 comprised the majority of the
financing activities for the nine months ended September 30, 1998.
OTHER MATTERS
INFLATION AND ECONOMIC TRENDS. Although its operations are affected by general
economic trends, the Company does not believe that inflation has had a material
impact on its results of operations.
YEAR 2000. Many computer systems and software applications, including most of
those used by the Company, identify dates using only the last two digits of the
year. These systems are unable to distinguish between dates in the year 2000 and
dates in the year 1900. That inability (referred to as the "Year 2000" issue),
if not addressed, could cause certain systems or applications to fail or provide
incorrect information after December 31, 1999 or when using dates after December
31, 1999. This could have an adverse effect on Diamond Brands, due to Diamond
Brands' direct dependence on its own system and applications and indirect
dependence on those of other entities with whom Diamond Brands must interact.
The Company has replaced or modified all of the Company's current computer
systems and software applications to be Year 2000 compliant. The Company
currently estimates that its costs through the year 2000 to enhance its
information systems will cost approximately $1.9 million, of which $1.3 million
has been paid to date. These costs include estimates for employee compensation,
consultants, hardware and software.
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This document contains statements that constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. When
used in this document, the words "anticipates," "plans," "believes,"
"estimates," "expects," and similar expressions are intended to identify
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors include, but are not limited to:
the Company's highly leveraged capital structure, its substantial principal
repayment obligations, price and product changes and promotional activity by
competitors, the loss of a significant customer, the difficulties of integrating
acquisitions, issues related to the year 2000, adverse publicity and product
liability claims and dependence on key employees. The risk factors described
herein could cause actual results or outcomes to differ materially from those
expressed in any forward-looking statements of the Company and investors,
therefore, should not place undue reliance on any such forward-looking
statements. Further, any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to update
any forward-looking statement or statements to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for management to predict all such factors. Further, management cannot
assess the impact of each such factor on the Company's business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIAMOND BRANDS OPERATING CORP. (Registrant)
By:/s/ Thomas W. Knuesel
-------------------
Thomas W. Knuesel , Vice President
of Finance and Chief Financial
Officer (authorized officer,
principal financial and accounting
officer)
Date: November 15, 1999
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