<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 MARCH 31, 2000
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 May 3, 2000, 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>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowances of $1,303 and $1,354 $ 11,014 $ 14,311
Inventories 16,823 12,084
Deferred income taxes 2,377 2,671
Prepaid expenses 570 590
Net assets from discontinued operations 474 1,589
------------ ------------
Total current assets 31,258 31,245
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $20,813 and $19,347 16,990 16,188
GOODWILL 24,201 24,381
DEFERRED INCOME TAXES 5,395 5,395
DEFERRED FINANCING COSTS 5,853 6,085
------------ ------------
$ 83,697 $ 83,294
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-tem debt $ 5,000 $ 4,625
Accounts payable 5,609 5,768
Accrued expenses 12,503 8,826
------------ ------------
Total current liabilities 23,112 19,219
POSTRETIREMENT BENEFIT OBLIGATIONS 1,497 1,497
LONG-TERM DEBT, net of current maturities 169,750 173,000
------------ ------------
Total liabilities 194,359 193,716
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value; 1,000 shares authorized;
1,000 shares issued and outstanding 1 1
Accumulated deficit (110,663) (110,423)
------------ ------------
Total stockholders' deficit (110,662) (110,422)
------------ ------------
$ 83,697 $ 83,294
============ ============
</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
March 31,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
NET SALES $ 23,282 $ 22,266
COST OF SALES 15,107 13,906
------------ ------------
Gross profit 8,175 8,360
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,151 3,009
GOODWILL AMORTIZATION 180 180
------------ ------------
Operating income 4,844 5,171
INTEREST EXPENSE 4,291 4,347
------------ ------------
Income from continuing operations before provision for income taxes 553 824
PROVISION FOR INCOME TAXES 293 400
------------ ------------
Income from continuing operations 260 424
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of income tax benefit of
$0 and $363 -- (544)
------------ ------------
Net income (loss) $ 260 $ (120)
============ ============
</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>
Three Months Ended
March 31,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 260 $ (120)
Net assets of discontinued operations 1,115 (1,999)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities of continuing operations-
Depreciation and amortization 1,014 950
Deferred income taxes 294 38
Change in operating assets and liabilities-
Accounts receivable 3,297 1,210
Inventories (4,739) (2,816)
Prepaid expenses 20 (5)
Accounts payable (159) (896)
Accrued expenses 3,677 2,894
------------ ------------
Net cash provided by (used for) operating activities of continuing operations 4,779 (744)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,404) (831)
------------ ------------
Net cash used for investing activities of continuing operations (1,404) (831)
------------ ------------
FINANCING ACTIVITIES:
Borrowings under bank revolving line of credit -- 4,050
Repayments of bank revolving line of credit (750) (2,100)
Repayments of long-term debt (2,125) (125)
Distributions to Holdings (500) --
Debt issuance costs -- (250)
------------ ------------
Net cash provided by (used for) financing activities of continuing operations (3,375) 1,575
------------ ------------
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 $ 1,623 $ 1,551
============ ============
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. (Empire)
after elimination of all material intercompany balances and transactions.
Operating Corp. and its subsidiaries are collectively referred to as "the
Company". Diamond Brands Operating Corp. is a wholly owned subsidiary of
Diamond Brands Incorporated ("Holdings")
The consolidated financial statements have been restated to reflect the
candle operation as a discontinued operation as further discussed in Note
2.
The Company is a leading manufacturer and marketer of a broad range of
consumer products including wooden matches, toothpicks, clothespins and
wooden crafts and plastic cutlery and straws. The Company's products are
marketed primarily in the United States and Canada under the nationally
recognized Diamond and Forster 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. DISCONTINUED OPERATIONS
Effective September 30, 1999, the board of directors of the Company
approved the divestiture of the candle operations of the Company and
recorded a total charge for the loss from discontinued operations of
approximately $18,500,000, net of tax. For segment reporting purposes, the
candle operations were previously reported as the candles reportable
segment.
On December 14, 1999, the Company entered into an agreement for purchase
and sale of the assets of Empire. The agreement provided for the sale of
certain assets and liabilities of Empire for a total consideration of
approximately $2,900,000. The sale resulted in a decrease of the net loss
on disposal of discontinued operations of $2,300,000, net of tax, during
the fourth quarter of 1999.
Net sales from discontinued operations were $0 and $4.1 million for the
three months ended March 31, 2000 and 1999, respectively
<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 are presented below
(in thousands):
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
Operating Subsidiary Consolidated
Corp Guarantor (1) Eliminations Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance sheet data:
Current assets $ 16,750 $ 14,508 -- $ 31,258
Non current assets 97,338 12,278 (57,177) 52,439
Current liabilities 54,868 4,319 (36,075) 23,112
Non current liabilities 170,356 891 -- 171,247
Stockholders' deficit (110,662) 21,102 (21,102) (110,662)
THREE MONTHS ENDED MARCH 31, 2000
Statement of operations data:
Net sales $ 9,756 $ 13,526 -- $ 23,282
Gross profit 3,516 4,659 -- 8,175
Operating income 2,015 2,829 -- 4,844
Income from continuing operations 102 158 -- 260
Loss from discontinued operations -- -- -- --
Equity in earnings of subsidiaries 158 -- (158) --
Net Income 260 158 (158) 260
AS OF DECEMBER 31, 1999
Balance sheet data:
Current assets $ 17,572 $ 13,673 -- $ 31,245
Noncurrent assets 93,926 15,142 (57,019) 52,049
Current liabilities 48,314 3,618 (32,713) 19,219
Non current liabilities 173,606 891 -- 174,497
Stockholders' (deficit) (110,422) 24,306 (24,306) (110,422)
THREE MONTHS ENDED MARCH 31, 1999
Statement of operations data:
Net sales $ 8,487 $ 13,779 -- $ 22,266
Gross profit 2,645 5,715 -- 8,360
Operating income 1,318 3,853 -- 5,171
<PAGE>
Income (loss) from continuing operations (174) 598 -- 424
Loss from discontinued operations -- (544) -- (544)
Equity in earnings of subsidiaries 54 -- (54) --
Net loss (120) 54 (54) (120)
</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 $474 and $1,589 as of
March 31, 2000, and December 31, 1999, respectively.
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 March 31, 2000.
4. SEGMENT REPORTING
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company has one reportable
segment, consumer products, after the sale of the Company's candle
operations (see Note 2). The consumer product segment consists of plastic
cutlery and straws, matches, toothpicks, clothespins, wooden crafts and
various woodenware items sold primarily to grocery, mass and drug store
channels.
Detailed gross revenue by product sold was as follows for the three months
ended March 31 (in thousands):
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Cutlery/straws $ 8,963 $ 8,082
Woodware 6,945 7,466
Wooden lights 5,669 5,740
Institutional/other 3,822 3,662
---------- ----------
Total $ 25,399 $ 24,950
========== ==========
</TABLE>
<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 three months ended March 31,
2000, sales to the Company's top 10 customers accounted for approximately 47.7%
of the Company's gross sales, with one customer accounting for approximately 21%
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 1999 comparable results of continuing operations restated to
exclude discontinued operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
2000 1999
---------- ------------
(dollars in millions)
TOTAL TOTAL
---------- ------------
<S> <C> <C>
Net Sales $23.3 $22.3
Cost of Sales 15.1 13.9
---------- ------------
Gross Profit 8.2 8.4
Gross Margin % 35.2% 37.7%
Selling, General
And Administration Expense 3.1 3.0
Goodwill Amortization .2 .2
---------- ------------
Operating Income (1) $4.9 $5.2
Interest Expense $4.3 $4.3
EBITDA (2) $5.6 $5.9
========== ============
EBITDA Margin (3) 24.0% 26.5%
</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 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 $23.3 million for the three months ended March
31, 2000, a 4.5% increase over net sales of $22.3 million for the three months
ended March 31, 1999. The increase was led by a strong sales performance in
plastic cutlery/straws and institutional products, offset somewhat by a decrease
in woodenware. Cutlery/straws and institutional products were up 10.9% and 4.4%
respectively over the comparable three months of 1999, while woodenware
decreased 7%.
Gross profit was $8.2 million or 35.2% of net sales for the three months ended
March 31, 2000, compared to $8.4 million or 37.7% for the comparable period in
1999. This decrease was due primarily to an increase in resin cost, as well as
higher packaging costs.
<PAGE>
Selling, general and administrative expenses were $3.1 million for the three
months ended March 31, 2000, compared to $3.0 million for the comparable period
in 1999. The current year includes a severance charge of $0.2 million.
Interest expense was $4.3 million for the three months ended March 31, 2000 and
1999.
Earnings before interest, taxes, depreciation and amortization (EBITDA) were
$5.6 million or 24.0% of net sales for the three months ended March 31, 2000,
compared to EBITDA of $5.9 million or 26.5% for the same period in 1999.
RESULTS OF DISCONTINUED OPERATIONS
Effective September 30, 1999, the Board of Directors approved the divestiture of
the Candle operations of the Company and recorded a total charge from the loss
of the discontinued operations of approximately $18.5 million, net of tax. For
segment reporting purposes, the candle operations were previously reported as
the "Candles" reportable segment.
Effective December 14, 1999, the Company entered into an asset purchase
agreement to sell certain assets and liabilities of Empire for total
consideration of approximately $2.9 million. The sale resulted in a decrease of
the net loss from discontinued operations of $2.3 million, net of tax, during
the fourth quarter of 1999. The Company anticipates the candle discontinuation
will have no impact on this year's operating income.
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 March 31,
2000.
CASH FLOW - OPERATING ACTIVITIES. Cash provided by (used for) operating
activities was $4.8 million for the three months ended March 31, 2000 as
compared to $0.7 million cash used for the comparable period in 1999. The
increase is due primarily to the change in the net assets of the discontinued
operations.
CASH FLOW - INVESTMENT ACTIVITIES. Capital expenditures for the three months
ended March 31, 2000, were $1.4 million, primarily used to expand capacity at
the cutlery plant. Capital expenditures for the comparable period in 1999 were
$0.8 million. Planned expenditures for the same period were $1.0 million.
CASH FLOW - FINANCING ACTIVITIES. Cash used for financing activities was ($3.4)
million for the three months ended March 31, 2000, as compared to cash provided
from financing activities of $1.6 million for the same period prior year. The
working capital adjustment relating to the April, 1998, recapitalization was
finalized during the period resulting in a payment to the former Holdings
shareholders of $.5 million. The Company also made a voluntary prepayment of
$1.25 million on its term loans.
<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, 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 INCORPORATED (Registrant)
By:/s/ Frank Chalk
---------------
Frank Chalk, Vice President of
Finance and Chief Financial Officer
(authorized officer, principal
financial and accounting officer)
Date: May 3, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 12,317
<ALLOWANCES> 1,303
<INVENTORY> 16,823
<CURRENT-ASSETS> 31,258
<PP&E> 37,803
<DEPRECIATION> 20,813
<TOTAL-ASSETS> 83,697
<CURRENT-LIABILITIES> 23,112
<BONDS> 169,750
0
0
<COMMON> 1
<OTHER-SE> (110,663)
<TOTAL-LIABILITY-AND-EQUITY> 83,697
<SALES> 23,282
<TOTAL-REVENUES> 23,282
<CGS> 15,107
<TOTAL-COSTS> 15,107
<OTHER-EXPENSES> 3,331
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,291
<INCOME-PRETAX> 553
<INCOME-TAX> 293
<INCOME-CONTINUING> 260
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 260
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
