<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 JUNE 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 August 9, 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 Sheets
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>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowances of $2,154 and $2,047 $ 18,709 $ 16,094
Inventories 22,872 22,372
Deferred income taxes 1,532 2,161
Prepaid expenses 1,358 999
--------- ---------
Total current assets 44,471 41,626
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $19,535 and $18,222 18,633 17,730
GOODWILL 36,931 37,771
DEFERRED FINANCING COSTS 6,518 6,735
--------- ---------
$ 106,553 $ 103,862
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-tem debt $ 3,875 $ 2,750
Accounts payable 6,081 9,410
Accrued expenses 11,214 11,178
--------- ---------
Total current liabilities 21,170 23,338
POSTRETIREMENT BENEFIT OBLIGATIONS 1,559 1,559
DEFERRED INCOME TAXES 20 20
LONG-TERM DEBT, net of current maturities 181,450 177,174
--------- ---------
Total liabilities 204,199 202,091
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value; 1,000 shares authorized;
1,000 shares issued and outstanding 1 1
Accumulated deficit (97,647) (98,230)
--------- ---------
Total stockholders' deficit (97,646) (98,229)
--------- ---------
$ 106,553 $ 103,862
--------- ---------
--------- ---------
</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 Six Months Ended
June 30, June 30,
-------------------------------------------------
1999 1998 1999 1998
--------- --------- --------- --------
<S> <C> <C> <C> <C>
NET SALES $ 33,289 $ 32,072 $ 59,672 $ 58,558
COST OF SALES 22,989 23,071 41,210 41,348
-------- -------- -------- --------
Gross profit 10,300 9,001 18,462 17,210
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,785 3,560 7,265 6,540
GOODWILL AMORTIZATION 420 421 840 841
-------- -------- -------- --------
Operating income 6,095 5,020 10,357 9,829
INTEREST EXPENSE 4,799 5,108 9,146 6,155
-------- -------- -------- --------
Income (loss) before provision (benefit) for income taxes 1,296 (88) 1,211 3,674
PROVISION (BENEFIT) FOR INCOME TAXES (Note 4) 591 (794) 628 (794)
-------- -------- -------- --------
Net income $ 705 $ 706 $ 583 $ 4,468
-------- -------- -------- --------
-------- -------- -------- --------
PRO FORMA NET INCOME (LOSS) (Note 4):
Income (loss) before provision for income taxes $ 1,296 $ (88) $ 1,211 $ 3,674
Pro forma income tax expense 591 - 628 1,500
-------- -------- -------- --------
Pro forma net income (loss) $ 705 $ (88) $ 583 $ 2,174
-------- -------- -------- --------
-------- -------- -------- --------
</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>
Six Months Ended
June 30,
--------------------------
1999 1998
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 583 $ 4,468
Adjustments to reconcile net income to net cash provided by
(used for) operating activities-
Depreciation and amortization 2,621 3,092
Deferred income taxes 629 (2,010)
Change in operating assets and liabilities-
Accounts receivable (2,615) (2,299)
Inventories (500) (603)
Prepaid expenses (359) (1,551)
Accounts payable (3,329) 661
Accrued expenses 36 2,931
--------- ---------
Net cash provided by (used for) operating activities (2,934) 4,689
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,216) (1,273)
--------- ---------
FINANCING ACTIVITIES:
Borrowings under bank revolving line of credit 9,400 23,700
Repayments of bank revolving line of credit (3,000) (22,450)
Borrowings on long-term debt - 180,000
Repayments of long-term debt (1,000) (44,872)
Distributions to stockholders - (5,454)
Incorporation of Operating Corp. - 1
Distributions to Holdings - (127,060)
Debt issuance costs (250) (7,281)
--------- ---------
Net cash provided by (used for) financing activities 5,150 (3,416)
--------- ---------
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 period for-
Interest $ 9,130 $ 4,676
--------- ---------
--------- ---------
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 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. 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.
<PAGE>
3. 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 is presented below
(in thousands):
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
Operating Guarantor Consolidated
Corp. Subsidiaries Eliminations Total
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance sheet data:
Current assets $ 25,034 $ 19,437 $ - $ 44,471
Non current assets 106,386 25,661 (69,965) 62,082
Current liabilities 46,989 4,817 (30,636) 21,170
Noncurrent liabilities 182,077 952 - 183,029
Stockholders' equity (deficit) (97,646) 39,329 (39,329) (97,646)
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
<S> <C> <C> <C> <C>
Statement of operations data:
Net sales $ 17,094 $ 42,578 $- $ 59,672
Gross profit 5,435 13,027 - 18,462
Operating income 2,995 7,362 - 10,357
Equity in earnings (loss) of
subsidiaries 402 - (402) -
Net income (loss) 583 402 (402) 583
<CAPTION>
AS OF DECEMBER 31, 1998
<S> <C> <C> <C> <C>
Balance sheet data:
Current assets $ 21,994 $ 19,632 $ - $ 41,626
Noncurrent assets 106,800 24,999 (69,563) 62,236
Current liabilities 49,222 7,805 (33,689) 23,338
Noncurrent liabilities 177,801 952 - 178,753
Stockholders' equity
(deficit) (98,229) 35,874 (35,874) (98,229)
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
<S> <C> <C> <C> <C>
Statement of operations data:
Net sales $ 16,583 $ 41,975 $ - $ 58,558
Gross profit 4,146 13,064 - 17,210
Operating income 1,934 7,895 - 9,829
Equity in earnings of
Subsidiaries 4,236 - (4,236) -
Net income 4,468 4,236 (4,236) 4,468
</TABLE>
<PAGE>
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 June 30, 1999.
4. INCOME TAXES
Effective with the Recapitalization (see Note 2) 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.
The unaudited pro forma income tax expense is presented assuming the Company
had been a C corporation since January 1, 1998.
5. 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 segments consists
primarily of poured scented, air freshener and citronella candles sold
through club, mass and grocery channels.
Financial results of the Company's operating segments for the six months
ended June 30, 1999 and 1998 are summarized below (dollars in millions):
<TABLE>
<CAPTION>
1999 1998
--------------------------------- --------------------------------
Consumer Consumer
Products Candles Total Products Candles Total
---------- ------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 51.9 $ 7.8 $ 59.7 $ 48.9 $ 9.6 $ 58.5
Gross profit (loss) 19.5 (1.0) 18.5 16.4 .8 17.2
Operating income (loss) 12.7 (2.3) $ 10.4 10.8 (1.0) 9.8
</TABLE>
<PAGE>
DIAMOND BRANDS OPERATING CORP.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATION
The Company focuses manufacturing and marketing under two business units: (i)
consumer products, consisting primarily of plastic cutlery/straws, wooden
matches, toothpicks, clothespins and wooden crafts ("Consumer Products"); and
(ii) poured scented, air freshener and citronella candles ("Candles"). The
Company's products are marketed primarily under the nationally recognized
Diamond, Forster and Empire brand names, which have been in existence since
1881, 1887 and 1950, 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 six months ended June 30, 1999,
sales to the Company's top 10 customers accounted for approximately 42% 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 Consumer Products, Candles, and the total for the
Company.
THREE MONTHS ENDED JUNE 30, 1999
COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
1999 1998
----------------------------------- -----------------------------------
(dollars in millions)
Consumer Consumer
Products Candles Total Products Candles Total
-------- ------- ----- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $29.6 $ 3.7 $33.3 $27.8 $ 4.3 $32.1
Cost of Sales 18.4 4.6 23.0 18.3 4.8 23.1
----- ----- ----- ----- ----- -----
Gross Profit (Loss) 11.2 (.9) 10.3 9.5 (.5) 9.0
Gross Margin % 37.8% (24.3%) 30.9% 34.2% (11.6%) 28.0%
Selling, General
and Administration Expense 3.4 .4 3.8 2.9 .7 3.6
Goodwill Amortization .2 .2 .4 .2 .2 .4
----- ----- ----- ----- ----- -----
Operating Income (Loss) (1) $ 7.6 ($1.5) $ 6.1 $ 6.4 ($1.4) $ 5.0
EBITDA (2) 8.3 ($1.1) $ 7.2 $ 7.1 ($1.0) $ 6.1
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
EBITDA Margin (3) 28.0% (29.7%) 21.6% 25.6% (23.6%) 19.0%
</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 a 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.
<PAGE>
CONSUMER PRODUCTS
Net sales for the Consumer Products segment were $29.6 million for the three
months ended June 30, 1999, a 6.5% increase over net sales of $27.8 million for
the three months ended June 30, 1998. The increase was led by a strong sales
performance in plastic cutlery/straws and wooden matches. Cutlery/straws net
sales were $13.7 million, up 17.1% over the comparable three months of 1998,
while wooden matches net sales totaled $4.8 million, 14.0% ahead of the
comparable period.
Gross profit was $11.2 million or 37.8% of net sales for the three months ended
June 30, 1999, compared to $9.5 million or 34.2% 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 $3.4 million for the three
months ended June 30, 1999, compared to $2.9 million for the comparable period
in 1998. 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
$8.3 million or 28.0% of net sales for the three months ended June 30, 1999,
compared to EBITDA of $7.1 million or 25.6% for the same period in 1998.
CANDLES
Net sales for the Candle segment were $3.7 million for the three months ended
June 30, 1999, a 14.0% decrease over net sales of $4.3 million for the three
months ended June 30, 1998. This decrease was caused by soft sales of scented
candles and a realization decline for citronella products due to competitive
pricing pressure (citronella realization dropped 9.3%).
Gross profit (loss) was ($0.9) million or (24.3%) for the three months ended
June 30, 1999, compared to ($0.5) million or (11.6%) for the comparable period
in 1998. This decline was caused primarily by the drop in citronella candle
realization ($0.2 million) and sales shortfall on higher margin scented candles
($0.2 million).
Selling, general and administrative expenses were $0.4 million versus $0.7
million for the three months ended June 30, 1998.
Earnings (loss) before interest, taxes, depreciation and amortization (EBITDA)
was ($1.1 million) or (29.7%) of net sales, compared to $(1.0) million or
(23.3%) in 1998.
INTEREST EXPENSE
Interest expense for three months ended June 30, 1999 was $4.8 million compared
to $5.1 million for the comparable period in 1998. Interest expense decreased
$0.3 million as the one-time expensing of bridge commitment fees ($1.0 million)
related to the recapitalization in April 1998, and the write off of deferred
finance cost ($0.7 million) related to pre-recapitalization debt in 1998, was
offset somewhat by higher average debt load for the three month period ended
June 30, 1999.
<PAGE>
SIX MONTHS ENDED JUNE 30, 1999
COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
1999 1998
------------------------------------ ----------------------------------
(dollars in millions)
Consumer Consumer
Products Candles Total Products Candles Total
--------- ------- ----- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Net Sales $51.9 $ 7.8 $59.7 $48.9 $ 9.6 $58.5
Cost of Sales 32.4 8.8 41.2 32.5 8.8 41.3
----- ----- ----- ----- ----- -----
Gross Profit (Loss) 19.5 (1.0) 18.5 16.4 .8 17.2
Gross Margin % 37.6% (12.8%) 31.0% 33.5% 8.3% 29.4%
Selling, General
and Administration Expense 6.4 .9 7.3 5.2 1.4 6.6
Goodwill Amortization .4 .4 .8 .4 .4 .8
----- ----- ----- ----- ----- -----
Operating Income (Loss) (1) $12.7 ($2.3) $10.4 $10.8 ($1.0) $ 9.8
EBITDA (2) $14.2 ($1.7) $12.5 $12.2 ($ .2) $12.0
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
EBITDA Margin (3) 27.4% (21.8%) 20.9% 24.9% (2.1%) 20.5%
</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 a 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.
CONSUMER PRODUCTS
Net sales for the Consumer Products segment were $51.9 million for the six
months ended June 30, 1999, a 6.1% increase over net sales of $48.9 million for
the six months ended June 30, 1998. The increase resulted from a strong sales
performance in plastic cutlery/straws and wooden matches. Cutlery/straws net
sales were $20.4 million, up 16.6% over the comparable six months of 1998, while
wooden matches net sales totaled $10.1 million, 12.8% ahead of the comparable
period.
Gross profit was $19.5 million or 37.6% of net sales for the six months ended
June 30, 1999, compared to $16.4 million or 33.5% 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 $6.4 million for the six
months ended June 30, 1999, compared to $5.2 million for the comparable period
in 1998. 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
$14.2 million or 27.4% of net sales for the six months ended June 30, 1999,
compared to EBITDA of $12.2 million or 24.9% for the same period in 1998.
<PAGE>
CANDLES
Net sales for the Candle segment were $7.8 million for the six months ended June
30, 1999, a 18.8% decrease over net sales of $9.6 million for the six months
ended June 30, 1998. This decrease was caused by soft sales of scented candles
and a realization decline for citronella products due to competitive pricing
pressure.
Gross profit (loss) was ($1.0) million or (12.8%) for the six months ended June
30, 1999, compared to $0.8 million or 8.3% for the comparable period in 1998.
This decrease was primarily the result of (i) sales volume decline ($0.6
million); (ii) drop in citronella candle realization due to competitive pricing
pressures ($0.7 million); (iii) high freight and distribution costs ($0.2
million); (iv) and increase in promotion and allowance spending ($0.2 million).
Selling, general and administrative expenses were $0.9 million versus $1.4
million for the six months ended June 30, 1998.
Earnings (loss) before interest, taxes, depreciation and amortization (EBITDA)
was $(1.7 million) or (21.8%) of net sales compared to EBITDA of ($0.2 million)
or (2.1%) for the comparable six months in 1998.
INTEREST EXPENSE
Interest expense for six months ended June 30, 1999 was $9.1 million compared to
$6.2 million for the comparable period in 1998. This increase was due to the
increase in debt as the result of the April 21, 1998 Recapitalization of the
Company.
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. 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 June 30, 1999.
CASH FLOW - OPERATING ACTIVITIES. Cash provided by (used for) operating
activities was ($2.9) million for the six months ended June 30, 1999. Principle
uses of cash during this period were for seasonal accounts receivable increase
as the result of warm weather product sales for cutlery, clothespins, and
citronella candles, and the timing of accounts payable payments. For the
comparable period in 1998, cash provided was $4.7 million.
CASH FLOW - INVESTMENT ACTIVITIES. Capital expenditures for the six months ended
June 30, 1999, were $2.2 million, primarily used to expand capacity at the
cutlery plant. Capital expenditures for the comparable period in 1998 were $1.3
million. The Company currently expects its capital expenditures for 1999 to be
approximately $4.9 million.
CASH FLOW - FINANCING ACTIVITIES. Cash provided by (used for) financing
activities was $5.2 million for the six months ended June 30, 1999, as compared
to ($3.4) million used in the comparable period in 1998. Borrowing under the
bank agreement for Working Capital requirements comprises the majority of the
financing action for the six months ended June 30, 1999. The recapitalization of
the Company on April 21, 1998, comprised the majority of the financing
activities for the six months ended June 30, 1998.
<PAGE>
OTHER MATTERS
PLANT CONSOLIDATION. On June 25, 1999, the Company announced plans to
consolidate the candle manufacturing operations into its existing Cloquet,
Minnesota plant by the end of the third quarter of 1999. The current candle
manufacturing facility in Kansas City, Kansas will continue to operate as a
distribution center, at least until the termination of the lease in July, 2000.
The costs associated with the plant consolidation will be recognized in the
third and fourth quarters of 1999, and relate primarily to severance costs of
terminated employees and moving expenses for manufacturing equipment. These
costs are not expected to exceed $0.5 million.
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 during the past three fiscal years.
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 modied 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 $1.4 million, of which $0.9 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: August 9, 1999
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