-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O+T/32YaOzbycCj+dv73bTroS1NZexe/zjVGSh5aDmLJD8BpYwGDxLECCsUcdL/8 jZ9rjdHQJTnxAXUrNOHoeA== 0000912057-00-021896.txt : 20000508 0000912057-00-021896.hdr.sgml : 20000508 ACCESSION NUMBER: 0000912057-00-021896 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000505 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAMOND BRANDS OPERATING CORP CENTRAL INDEX KEY: 0001064048 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS MANUFACTURING INDUSTRIES [3990] IRS NUMBER: 411905675 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-58223 FILM NUMBER: 619790 BUSINESS ADDRESS: STREET 1: 1800 CLOQUET AVENUE CITY: CLOQUET STATE: MN ZIP: 55720 BUSINESS PHONE: 2188796700 MAIL ADDRESS: STREET 1: 1800 CLOQUET AVENUE CITY: CLOQUET STATE: MN ZIP: 55720 10-Q 1 10-Q 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 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 DIAMOND BRANDS OPERATING CORP. Consolidated Balance Sheets (Unaudited) (In Thousands, Except Share and Per Share Amounts)
March 31, December 31, 2000 1999 ------------ ------------ 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 ============ ============
The accompanying notes are an integral part of these consolidated balance sheets. DIAMOND BRANDS OPERATING CORP. Consolidated Statements of Operations (Unaudited) (In Thousands)
Three Months Ended March 31, -------------------------------- 2000 1999 ------------ ------------ 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) ============ ============
The accompanying notes are an integral part of these consolidated financial statements. DIAMOND BRANDS OPERATING CORP. Consolidated Statements of Cash Flows (Unaudited) (In Thousands)
Three Months Ended March 31, -------------------------------- 2000 1999 ------------ ------------ 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 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 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 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):
AS OF MARCH 31, 2000 Operating Subsidiary Consolidated Corp Guarantor (1) Eliminations Total ------------ ------------ ------------ ------------ 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 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)
(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):
2000 1999 ---------- ---------- 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 ========== ==========
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.
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 2000 1999 ---------- ------------ (dollars in millions) TOTAL TOTAL ---------- ------------ 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%
(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. 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. 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. 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 EX-27 2 EXHIBIT 27
5 1,000 3-MOS DEC-31-2000 MAR-31-2000 0 0 12,317 1,303 16,823 31,258 37,803 20,813 83,697 23,112 169,750 0 0 1 (110,663) 83,697 23,282 23,282 15,107 15,107 3,331 0 4,291 553 293 260 0 0 0 260 0 0
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