<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, 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
(State or other jurisdiction of
incorporation or organization)
411905675
(IRS Employer
Identification No.)
1800 CLOQUET AVENUE
CLOQUET, MINNESOTA
(Address of principal executive offices)
55720
(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 13, 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 Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flow
Notes to Consolidated Financial Statements
ITEM - 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
ITEM - 3. Quantitative and Qualitative Disclosures about Market Risk
PART II - OTHER INFORMATION
ITEM - 6. Exhibits and Reports on Form 8-K
SIGNATURE
<PAGE>
DIAMOND BRANDS OPERATING CORP.
Consolidated Balance Sheets (Unaudited)
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net of allowances of $1,264 and $1,354 $ 12,013 $ 14,311
Inventories 15,764 12,084
Deferred income taxes 3,250 2,671
Prepaid expenses 474 590
Net assets from discontinued operations - 1,589
--------- ---------
Total current assets 31,501 31,245
PROPERTY, PLANT AND EQUIPMENT, net of
accumulated depreciation of $22,017 and $20,210 18,941 16,188
GOODWILL 23,841 24,381
DEFERRED INCOME TAXES 5,395 5,395
DEFERRED FINANCING COSTS 5,390 6,085
--------- ---------
$ 85,068 $ 83,294
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-tem debt (note 3) $ 79,300 $ 4,625
Accounts payable 3,045 5,768
Accrued expenses 13,602 8,826
--------- ---------
Total current liabilities 95,947 19,219
POSTRETIREMENT BENEFIT OBLIGATIONS 1,497 1,497
LONG-TERM DEBT, net of current maturities (note 3) 100,000 173,000
--------- ---------
Total liabilities 197,444 193,716
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value; 1,000 shares authorized;
1,000 shares issued and outstanding 1 1
Accumulated deficit (112,377) (110,423)
--------- ---------
Total stockholders' deficit (112,376) (110,422)
--------- ---------
$ 85,068 $ 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 Nine Months Ended
September 30, September 30,
-----------------------------------------------------
2000 1999 2000 1999
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 22,343 $ 24,234 $ 73,044 $ 76,120
COST OF SALES 16,471 14,682 50,397 47,050
--------- ---------- --------- ---------
Gross profit 5,872 9,552 22,647 29,070
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,341 2,812 9,166 9,219
GOODWILL AMORTIZATION 180 180 540 540
--------- ---------- --------- ---------
Operating income 2,351 6,560 12,941 19,311
INTEREST EXPENSE 4,686 4,679 13,601 13,825
--------- ---------- --------- ---------
Income (loss) from continuing operations before provision (2,335) 1,881 (660) 5,486
(benefit) for income taxes
PROVISION (BENEFIT) FOR INCOME TAXES (863) 825 (50) 2,409
--------- ---------- --------- ---------
Income (loss) from continuing operations (1,472) 1,056 (610) 3,077
DISCONTINUED OPERATIONS (Note 2):
Loss from discontinued operations, net of income tax benefit of
$530, $1,672, $530 and $2,628, respectively (795) (2,505) (795) (3,941)
--------- ---------- --------- ---------
Loss on disposal, net of income tax benefit of $9,696 for 1999 - (14,543) - (14,543)
--------- ---------- --------- ---------
Loss from discontinued operations (795) (17,048) (795) (18,484)
--------- ---------- --------- ---------
Net loss $ (2,267) $ (15,992) $ (1,405) $ (15,407)
========= ========== ========= ==========
</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,
--------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,405) $(15,407)
Net assets of discontinued operations 1,589 25,930
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operating activities from continuing operations-
Depreciation and amortization 3,041 2,917
Deferred income taxes (579) (9,915)
Accretion of debentures - -
Change in operating assets and liabilities-
Accounts receivable 2,298 (3,551)
Inventories (3,680) (936)
Prepaid expenses 116 286
Accounts payable (2,723) 1,787
Accrued expenses 4,776 2,888
-------- --------
Net cash provided by operating activities of continuing operations 3,433 3,999
-------- --------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,559) (2,949)
-------- --------
Net cash used for investing activities of continuing operations (4,559) (2,949)
-------- --------
FINANCING ACTIVITIES:
Borrowings under bank revolving line of credit 19,150 17,400
Repayments of bank revolving line of credit (14,100) (16,150)
Repayments of long-term debt (3,375) (1,875)
Distributions to Holdings (549) (42)
Debt issuance costs - (383)
-------- --------
Net cash provided by (used for) financing activities of continuing operations 1,126 (1,050)
-------- --------
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 $ 10,405 $ 10,537
======== ========
Income taxes $ - $ 7
======== ========
</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 accounting principles generally
accepted in the United States, 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 to sell the net
assets of Empire, which was included in the candle operations. 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.
<PAGE>
On November 1, 2000, the former owner of the candle operation was awarded a
judgement against Empire Candle, Inc. stemming from legal action regarding
certain inventory. For the period ended September 30, 2000, $795,000, net
of tax, was charged to discontinued operations to reflect this judgement
and additional deductions.
Net sales from discontinued operations were $0 and approximately
$14,400,000 for the nine months ended September 30, 2000 and 1999,
respectively
3. LONG TERM DEBT
The Company's existing senior credit agreement contains financial
covenants. As of September 30, 2000, the Company was not in compliance with
the financial covenants contained in the senior credit agreement. However,
the Company obtained a temporary waiver for non-compliance with such
financial covenants on October 13, 2000. The temporary waiver extends
through March 31, 2001 and contains temporary financial covenants for the
quarters ending September 30, 2000 and December 31, 2000. The Company will
be allowed to continue to borrow under its senior credit agreement during
the waiver period so long the Company remains in compliance with its
temporary financial covenants and satisfies other customary conditions. As
of September 30, 2000, the Company was in compliance with all of the
temporary covenants contained in the waiver.
In order to continue borrowing under the senior credit facility after March
31, 2001, the Company must obtain another waiver prior to March 31, 2001.
Because another waiver is required in order to extend the existing waiver
past March 31, 2000, the Company has classified the Company's obligations
under the senior credit agreement as current liabilities on the
accompanying September 30, 2000 Consolidated Balance Sheet. See further
discussion in the Liquidity and Capital Resources section of Management's
Discussion and Analysis.
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):
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
Operating Subsidiary Consolidated
Corp Guarantor (1) Eliminations Total
-------------------------------------------------------
<S> <C> <C> <C> <C>
Balance sheet data:
Current assets $ 13,610 $ 17,891 - $ 31,501
Non current assets 95,613 13,679 (55,725) 53,567
Current liabilities 120,993 3,585 (28,631) 95,947
Non current liabilities 100,606 891 - 101,497
Stockholders' equity (deficit) (112,376) 27,094 (27,094) (112,376)
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
<S> <C> <C> <C> <C>
Statement of operations data:
Net sales $ 26,097 $ 46,947 - $ 73,044
Gross profit 8,554 14,093 - 22,647
Operating income 4,739 8,202 - 12,941
Loss from continuing operations (111) (499) - (610)
Loss from discontinued operations - (795) - (795)
Equity in loss of subsidiaries (1,294) - 1,294 -
Net loss (1,045) (1,294) 1,294 (1,045)
<CAPTION>
AS OF DECEMBER 31, 1999
<S> <C> <C> <C> <C>
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' equity (deficit) (110,422) 24,306 (24,306) (110,422)
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
<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 5,116 14,195 - 19,311
Income from continuing operations 40 3,037 - 3,077
Loss from discontinued operations - (18,484) - (18,484)
Equity in loss of subsidiaries (15,447) - 15,447 -
Net loss (15,407) (15,447) 15,447 (15,407)
</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 $0 and $1,589 as of
September 30, 2000, and December 31, 1999, respectively.
4. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
deferred tax assets arise primarily due to net operating loss carryforwards
expiring in various years through 2019. The Company believes the deferred
tax assets will be realizable through future profitable operations.
<PAGE>
5. 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 revenue by product sold was as follows for the nine months ended
September 30 (in thousands):
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Cutlery/straws $ 35,509 $ 33,316
Woodware 20,819 22,261
Wooden lights 13,947 16,975
Institutional/other 10,897 11,386
Discounts and Allowances (8,128) (7,818)
-------- --------
Total $ 73,044 $ 76,120
======== ========
</TABLE>
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This statement requires
the recognition of derivative instruments as assets and liabilities, based
on their fair value, and specifies certain methods for the recognition of
related gains and losses. In June 2000, the FASB issued SFAS No. 138, which
amends and clarifies certain guidance in SFAS No. 133. Diamond is in the
process of implementing the appropriate process to adopt these statements
effective January 1, 2001. Currently, Diamond does not anticipate the
adoption to materially impact its result 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,
2000, sales to the Company's top 10 customers accounted for approximately 49.5%
of the Company's gross sales, with one customer accounting for approximately
20.5% 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.
THREE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
2000 1999
-------- --------
(dollars in millions)
<S> <C> <C>
TOTAL TOTAL
----- -----
Net Sales $ 22.3 $ 24.2
Cost of Sales 16.5 14.7
----- -----
Gross Profit 5.8 9.5
Gross Profit % 26.0% 39.3%
Selling, General
and Administration Expense 3.3 2.8
Goodwill Amortization .2 .2
----- -----
Operating Income (1) $ 2.3 $ 6.5
===== =====
Interest Expense $ 4.7 $ 4.7
===== =====
EBITDA (2) $ 3.1 $ 7.3
===== =====
EBITDA Margin (3) 13.9% 30.2%
====== ======
</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 $22.3 million for the three months ended
September 30 2000, a $1.9 million or 7.9% decrease from net sales of $24.2
million for the three months ended September 30, 1999. Net sales of plastic
cutlery/straws increased 5.2%, but were offset by 14.7% decreased net sales in
all other product lines, including wooden matches and other woodenware products.
<PAGE>
Gross profit was $5.8 million or 26.0% of net sales for the three months ended
September 30, 2000, compared to $9.5 million or 39.3% for the same period in
1999. Lower sales volume and increased raw material costs cause the lower gross
profit. Rising polystyrene costs, the primary plastic cutlery component, as well
as increased packaging costs adversely impacted gross margins.
Selling, general and administrative expenses were $3.3 million for the three
months ended September 30, 2000, compared to $2.8 million for the comparable
1999 period. Office staff reductions were made in the 3rd Quarter, 2000. As a
result, the quarter was impacted by a severance charge of $.3 million.
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 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.
On November 1, 2000, the former owner of the candle operation was awarded a
judgement against Empire Candle, Inc. stemming from legal action regarding
certain inventory. For the period ended September 30, 2000, $795,000, net of
tax, was charged to discontinued operations to reflect this judgement and
additional deductions.
RESULTS OF CONTINUING OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
2000 1999
------- ------
(dollars in millions)
<S> <C> <C>
TOTAL TOTAL
----- -----
Net Sales $73.0 $76.1
Cost of Sales 50.4 47.1
------ ------
Gross Profit 22.6 29.0
Gross Profit % 31.0% 38.1%
Selling, General
and Administration Expense 9.2 9.2
Goodwill Amortization .5 .5
----- -----
Operating Income (1) $12.9 $19.3
===== =====
Interest Expense $13.6 $13.8
===== =====
EBITDA (2) $15.3 $21.5
===== =====
EBITDA Margin (3) 21.0% 28.3%
====== ======
</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 were $73.0 million for the nine months ended September 30, 2000, a
$3.1 million or 4.1% decrease from net sales of $76.1 million for the nine
months ended September 30, 1999. Net sales of plastic cutlery/straws increased
7.2%, but were offset by 10.9% decreased net sales in all other product lines,
including wooden lights and other woodenware products.
<PAGE>
Gross profit was $22.6 million or 31.0% of net sales for the nine months ended
September 30, 2000, compared to $29.0 million or 38.1% for the comparable 1999
period. Lower sales volume and increased raw material costs cause the lower
gross profit. Rising polystyrene costs, the primary plastic cutlery component,
as well as increased packaging costs adversely impacted gross margins.
Selling, general and administrative expenses were $9.2 million for the nine
months ended September 30, 2000, compared to $9.2 million for the comparable
1999 period.
Interest expense for the nine months ended September 30, 2000 was $13.6 million
compared to $13.8 million for the comparable 1999 period. Lower debt balances
compared to 1999 account for the decreased interest.
RESULTS FROM DISCONTINUED OPERATIONS
On November 1, 2000, the former owner of the candle operation was awarded a
judgement against Empire Candle, Inc. stemming from legal action regarding
certain inventory. For the period ended September 30, 2000, $795,000, net of
tax, was charged to discontinued operations to reflect this judgement and
additional deductions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's existing senior credit agreement contains financial covenants. As
of September 30, 2000, the Company was not in compliance with the financial
covenants contained in the senior credit agreement. However, the Company
obtained a temporary waiver for non-compliance with such financial covenants on
October 13, 2000. The temporary waiver extends through March 31, 2001 and
contains temporary financial covenants for the quarters ending September 30,
2000 and December 31, 2000. The Company will be allowed to continue to borrow
under its senior credit agreement during the waiver period so long as the
Company remains in compliance with its temporary financial covenants and
satisfies other customary conditions. As of September 30, 2000, the Company was
in compliance with all of the temporary covenants contained in the waiver.
In order to continue borrowing under the senior credit facility after March 31,
2001, we must obtain another waiver prior to March 31, 2001. Because another
waiver is required in order to extend the existing waiver past March 31, 2001,
we have classified the Company's obligations under the senior credit agreement
as current liabilities on the accompanying September 30, 2000 Consolidated
Balance Sheet. We cannot provide any assurances that we will be successful in
negotiating additional waivers or amendments to our senior credit agreement. If
we fail to obtain additional waivers or amendments, and cannot refinance the
existing senior credit facility or secure an additional source of liquidity, the
indebtedness under our senior credit facility may become due and our financial
condition and results of operation may be materially adversely affected. The
Company has been advised by its independent public accountants that unless
additional waivers or amendments are obtained prior to December 31, 2000, the
auditor's report on those financial statements may contain qualifications.
The Company is highly leveraged. The Company's high degree of leverage may have
important consequences for the Company, including that (i) the ability of the
Company to obtain additional financing, if necessary, for working capital,
capital expenditures, acquisitions or other purposes may be impaired, or such
financing may not be available on terms favorable to the Company; (ii) a
substantial portion of the Company's cash flow will be used to pay the Company's
interest expense and, in the cases of indebtedness incurred in the future,
possible principal repayments, which will reduce the funds that would otherwise
be available to the Company for its operations and future business
opportunities; (iii) a substantial decrease in net operating cash flows or an
increase in expenses of the Company could make it difficult for the Company to
meet its debt service requirements and force it to modify its operations; (iv)
the Company may be more highly leveraged than its competitors, which may place
it at a competitive disadvantage; and (v) the Company's high degree of leverage
may make it more vulnerable to a downturn in its business, the general economy
or interest rate increases. Any inability of the Company to service its
indebtedness or to obtain additional financing, as needed, would have a material
adverse effect on the Company's business.
<PAGE>
CASH FLOW - OPERATING ACTIVITIES. Cash provided by operating activities was $3.4
million for the nine months ended September 30, 2000. Cash provided by operating
activities was $4.0 million for the comparable 1999 period. Cash used for
inventory and accounts payable was $7.3 million higher while cash provided by
accounts receivable and other accrued expenses was $7.7 million higher.
CASH FLOW - INVESTMENT ACTIVITIES. Capital expenditures of $4.6 million for the
nine months ended September 30, 2000, were primarily used to expand capacity at
the cutlery plant. Planned capital expenditures for 2000 are $3.2 million.
Capital expenditures for the comparable period in 1999 were $2.9 million.
CASH FLOW - FINANCING ACTIVITIES. Cash provided by financing activities was $1.1
million for the nine months ended September 30, 2000, as compared to cash used
for financing activities of $1.0 million for the same period in 1999. Line of
credit net borrowings were $5.05 million for the nine months ended September 30,
2000, compared to 1999 nine months net borrowings of $1.25 million.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in reported market risks since December 31, 1999.
See discussion at Item 7a in the Company's annual report on Form 10-K.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No.
10.1 Amendment No. 2 to credit agreement dated April 21, 1998.
27 Financial data schedule worksheet
b. Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter ended
September 30, 2000.
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/ William L. Olson
-------------------------
William L. Olson, Vice President of Finance
(authorized officer, principal financial and
accounting officer)
Date: November 13, 2000
