<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 333-58233
DIAMOND BRANDS INCORPORATED
(Exact name of registrant as specified in its charter)
MINNESOTA 411565294
(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, 1,489,308 shares of common stock of the Registrant
were issued and outstanding. Of total outstanding shares of common stock on
November 15, 1999, 330,266 were held of record by affiliates. There is no
established public trading market for such stock.
Documents incorporated by reference: None
<PAGE>
DIAMOND BRANDS INCORPORATED
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 INCORPORATED
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 16,087 4,196
Prepaid expenses 694 980
Net assets from discontinued operations 578 26,508
--------- ----------
Total current assets 46,191 56,029
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 8,321 8,777
--------- ----------
$ 94,888 $ 104,404
========= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-tem debt $ 4,250 $ 2,750
Accounts payable 7,588 5,801
Accrued expenses 12,920 10,032
--------- ----------
Total current liabilities 24,758 18,583
POSTRETIREMENT BENEFIT OBLIGATIONS 1,559 1,559
DEFERRED INCOME TAXES 20 20
LONG-TERM DEBT, net of current maturities 229,056 226,373
--------- ----------
Total liabilities 255,393 246,535
--------- ----------
COMMITMENTS AND CONTINGENCIES
Redeemable preferred stock, $0.01 par value; 1,000,000 shares authorized;
46,900 issued and outstanding, net of subscriptions receivable of $1,167 40,279 36,068
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value; 50,000,000 shares authorized;
1,489,308 shares issued and outstanding 15 15
Warrants 10,614 10,614
Additional paid in capital 1,488 1,488
Accumulated deficit (212,901) (190,316)
--------- ----------
Total stockholders' deficit (200,784) (178,199)
--------- ----------
$ 94,888 $ 104,404
========= ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
<PAGE>
DIAMOND BRANDS INCORPORATED
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 13,784
GOODWILL AMORTIZATION 180 180 540 540
-------- -------- -------- -------
Operating income 6,560 5,986 19,309 10,962
INTEREST EXPENSE 6,366 5,951 18,765 13,588
-------- -------- -------- -------
Income (loss) from continuing operations before
provision (benefit) for income taxes 194 35 544 (2,626)
PROVISION (BENEFIT) FOR INCOME TAXES 151 86 434 (2,248)
-------- -------- -------- -------
Income (loss) from continuing operations 43 (51) 110 (378)
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 loss (17,005) (79) (18,374) (1,150)
PREFERRED STOCK DIVIDENDS AND ACCRETION 1,443 1,255 4,211 3,756
-------- -------- -------- -------
Net loss applicable to common stock $(18,448) $ (1,334) $(22,585) $(4,906)
======== ======== ======== =======
PRO FORMA INCOME (LOSS) FROM CONTINUING OPERATIONS:
Income (loss) from continuing operations before
provision (benefit) for income taxes $ 194 $ 35 $ 544 $(2,626)
Pro forma provision (benefit) for income taxes (Note 5) 151 86 434 (1,100)
-------- -------- -------- --------
Pro forma income (loss) from continuing operations $ 43 $ (51) $ 110 $(1,526)
======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
<PAGE>
DIAMOND BRANDS INCORPORATED
Consolidated Statements of Cash Flows (Unaudited)
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (18,374) $ (1,150)
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 3,010 3,414
Deferred income taxes (11,891) (1,942)
Accretion of debentures 4,808 2,566
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 5,291
--------- --------
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 (16,150) (30,700)
Borrowings on long-term debt 225,105
Repayments of long-term debt (1,875) (44,997)
Net proceeds from preferred stock and warrants 44,529
Repurchase of common stock (211,421)
Exercise of warrants 4
Exercise of options 1,258
Distributions to stockholders - (5,454)
Debt issuance costs (383) (9,420)
--------- --------
Net cash (used for) financing activities of continuing operations (1,008) (3,896)
--------- --------
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 INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Diamond Brands Incorporated ("Holdings") and its wholly owned subsidiary,
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.
Holdings and Operating Corp. 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 million 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."
<PAGE>
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 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 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 the Company.
Pursuant to the Recapitalization Agreement, in April 1998, the Company
purchased from the existing stockholders 15,129,232 shares of the Company's
common stock for $211.5 million by (i) issuing $100.0 million of senior
subordinated notes and $45.1 million senior discount debentures, (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, and
(iii) selling redeemable preferred stock with warrants to the Sponsors and
other investors for $47.0 million. The Sponsors and other investors
exercised warrants for 417,382 shares of common stock at closing. The
transaction was accounted for as a recapitalization for accounting
purposes.
4. LONG TERM DEBT
In April 1998, the Company completed offerings of $100.0 million of 10 1/8%
senior subordinated notes due to 2008 and $84 million of 12 7/8% senior
discount debentures due 2009 with an original issue discount of $38.9
million. The net proceeds to the Company for the offerings, after
discounts, commissions and other offering costs were $138.4 and were used
to repay existing indebtedness and purchase common stock of the Company.
The Company also entered into a bank credit agreement which provides for
$80.0 million in term loan facilities due in installments through March
2006 and a $25.0 million revolving credit facility.
The bank 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.
<PAGE>
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.
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 segments
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 (dollars 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 INCORPORATED
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)
<S> <C> <C>
Total Total
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 $ 6.4 $ 6.0
EBITDA (2) $ 7.3 $ 6.7
======= ======
EBITDA Margin (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.
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
<PAGE>
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 $6.4 million
compared to $6.0 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 net 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)
<S> <C> <C>
Total Total
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 $18.8 $13.6
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) 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 nine months ended September 30, 1999 was $18.8 million
compared to $13.6 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 (used for) operating
activities was $4.0 million for the nine months ended September 30, 1999 as
compared to $5.3 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 financing activities was $1.0
million for the nine months ended September 30, 1999, as compared to $3.9
million for the comparable period in 1998. Borrowing 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 INCORPORATED (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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 16,915
<ALLOWANCES> 985
<INVENTORY> 16,087
<CURRENT-ASSETS> 46,191
<PP&E> 35,162
<DEPRECIATION> 19,347
<TOTAL-ASSETS> 94,888
<CURRENT-LIABILITIES> 24,758
<BONDS> 229,056
40,279
0
<COMMON> 15
<OTHER-SE> (200,799)
<TOTAL-LIABILITY-AND-EQUITY> 94,888
<SALES> 76,120
<TOTAL-REVENUES> 76,120
<CGS> 47,050
<TOTAL-COSTS> 47,050
<OTHER-EXPENSES> 9,761
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,765
<INCOME-PRETAX> 544
<INCOME-TAX> 434
<INCOME-CONTINUING> 110
<DISCONTINUED> (18,484)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,374)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
