<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 333-58233
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
Indicateby 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, 1,489,308 shares of common stock of the Registrant were
issued and outstanding. Of total outstanding shares of common stock on August
9, 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>
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 4,868 4,196
Prepaid expenses 1,358 999
--------- ---------
Total current assets 47,807 43,661
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 8,473 8,777
--------- ---------
$ 111,844 $ 107,939
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-tem debt $ 3,875 $ 2,750
Accounts payable 6,081 9,410
Accrued expenses 9,994 9,958
--------- ---------
Total current liabilities 19,950 22,118
POSTRETIREMENT BENEFIT OBLIGATIONS 1,559 1,559
DEFERRED INCOME TAXES 20 20
LONG-TERM DEBT, net of current maturities 233,815 226,373
--------- ---------
Total liabilities 255,344 250,070
--------- ---------
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 38,836 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 (194,453) (190,316)
--------- ---------
Total stockholders' deficit (182,336) (178,199)
--------- ---------
$ 111,844 $ 107,939
--------- ---------
--------- ---------
</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 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 9,654 7,265 12,634
GOODWILL AMORTIZATION 420 421 840 841
-------- -------- -------- --------
Operating income (loss) 6,095 (1,074) 10,357 3,735
INTEREST EXPENSE 6,468 6,590 12,399 7,637
-------- -------- -------- --------
Loss before benefit for income taxes (373) (7,664) (2,042) (3,902)
BENEFIT FOR INCOME TAXES (Note 4) (77) (2,831) (673) (2,831)
-------- -------- -------- --------
Net loss (296) (4,833) (1,369) (1,071)
PREFERRED STOCK DIVIDENDS AND ACCRETION 1,422 976 2,768 976
-------- -------- -------- --------
Net loss applicable to common stock $ (1,718) $ (5,809) $ (4,137) $ (2,047)
-------- -------- -------- --------
-------- -------- -------- --------
PRO FORMA NET LOSS (Note 4):
Loss before benefit for income taxes $ (373) $ (7,664) $ (2,042) $ (3,902)
Pro forma income tax benefit (77) (3,100) (673) (1,600)
-------- -------- -------- --------
Pro forma net loss $ (296) $ (4,564) $ (1,369) $ (2,302)
-------- -------- -------- --------
-------- -------- -------- --------
</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>
Six Months Ended
June 30,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,369) $ (1,071)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities-
Depreciation and amortization 2,707 3,122
Deferred income taxes (672) (2,010)
Accretion of debentures 3,167 1,114
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) 294
-------- --------
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 - 225,105
Repayments of long-term debt (1,000) (44,872)
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 (250) (9,420)
-------- --------
Net cash provided by financing activities 5,150 979
-------- --------
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 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 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 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.
<PAGE>
3. 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 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 candles segment consists
primarily of poured scented, air freshener and citronella candles sold
through club, mass and grocery channels.
<PAGE>
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 5.0 (1.3) 3.7
</TABLE>
<PAGE>
DIAMOND BRANDS INCORPORATED
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 8.7 1.0 9.7
Goodwill Amortization .2 .2 .4 .2 .2 .4
--- --- --- --- --- ---
Operating Income (Loss) (1) $ 7.6 ($1.5) $ 6.1 $ .6 ($1.7) ($1.1)
EBITDA (2) 8.3 ($1.1) $ 7.2 $ 1.3 ($1.3) 0
Recapitalization Expense (3) - - - 5.8 .3 6.1
Adjusted EBITDA (4) 8.3 ($1.1) 7.2 7.1 (1.0) 6.1
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
Adjusted EBITDA
Margin (5) 28.0% (29.7%) 21.6% 25.6% (23.3%) 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) Represents one time costs incurred in connection with the Recapitalization
including brokerage fee ($2.7 million), change in control management bonuses
and option payments ($2.2 million), and legal and professional fees ($1.2
million).
(4) Represents EBITDA excluding Recapitalization Expenses.
(5) EBITDA margin represents EBITDA as a percentage of net sales.
<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 $8.7 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
$8.3 million or 28.0% of net sales for the three months ended June 30, 1999,
compared to Adjusted 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 for the three
month period ending June 30, 1999, compared to $1.0 million (includes $0.3
million of Recapitalization Expenses) 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 Adjusted EBITDA of ($1.0
million) or (23.3%) of net sales for the comparable period in 1998.
INTEREST EXPENSE
Interest expense for three months ended June 30, 1999 was $6.5 million compared
to $6.6 million for the comparable period in 1998. Interest expense decreased
$0.1 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 costs ($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 11.0 1.7 12.7
Goodwill Amortization .4 .4 .8 .4 .4 .8
--- --- --- --- --- ---
Operating Income (Loss) (1) $12.7 ($2.3) $10.4 $ 5.0 ($1.3) $ 3.7
EBITDA (2) $14.2 ($1.7) $12.5 $ 6.4 ($ .5) $ 5.9
Recapitalization Expense (3) - - - 5.8 .3 6.1
Adjusted EBITDA (4) $14.2 ($1.7) $12.5 $12.2 (.2) 12.0
----- ----- ----- ----- ---- -----
----- ----- ----- ----- ---- -----
Adjusted EBITDA
Margin (5) 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) Represents one time costs incurred in connection with the Recapitalization
including brokerage fee ($2.7 million) change in control management bonuses
and option payments ($2.2 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.
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 $11.0 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.
<PAGE>
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 Adjusted EBITDA of $12.2 million or 24.9% for the same period in
1998.
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 $1.7
million (includes $0.3 of Recapitalization Expenses) 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 Adjusted 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 $12.4 million compared
to $7.6 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-re-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 as compared
to $0.3 million cash provided for the comparable period in 1998. Principle uses
of cash for the six months ended June 30, 1999 were for seasonal receivable
increases as the result of warm weather product sales for cutlery, clothespins,
and citronella candles, and the timing of accounts payable payments.
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 financing activities was $5.2
million for the six months ended June 30, 1999, as compared to $1.0 million for
the comparable period in 1998. Borrowing under the bank agreement for Working
Capital requirements comprised the majority of the financing activities 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.
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 $1.4 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.
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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: August 9, 1999
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