-----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, I6bAn4oRhEc5OpKcBqU1weu6uknhZuik2FWtW0z5Bw26TWw7yzg3FNQm10tHrHAD /GI67KT/jC+KWaCgQdwutw== /in/edgar/work/0000912057-00-048971/0000912057-00-048971.txt : 20001114 0000912057-00-048971.hdr.sgml : 20001114 ACCESSION NUMBER: 0000912057-00-048971 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIAMOND BRANDS OPERATING CORP CENTRAL INDEX KEY: 0001064048 STANDARD INDUSTRIAL CLASSIFICATION: [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: 760319 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 a2030863z10-q.txt 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 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 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 DIAMOND BRANDS OPERATING CORP. Consolidated Balance Sheets (Unaudited) (In Thousands, Except Share and Per Share Amounts)
September 30, December 31, 2000 1999 ------------- ------------ 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 ========= =========
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 Nine Months Ended September 30, September 30, ----------------------------------------------------- 2000 1999 2000 1999 --------- ---------- --------- --------- 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) ========= ========== ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. DIAMOND BRANDS OPERATING CORP. Consolidated Statements of Cash Flows (Unaudited) (In Thousands)
Nine Months Ended September 30, -------------------- 2000 1999 -------- -------- 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 ======== ========
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 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. 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):
AS OF SEPTEMBER 30, 2000 Operating Subsidiary Consolidated Corp Guarantor (1) Eliminations Total ------------------------------------------------------- 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) NINE MONTHS ENDED SEPTEMBER 30, 2000 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) 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' equity (deficit) (110,422) 24,306 (24,306) (110,422) NINE MONTHS ENDED SEPTEMBER 30, 1999 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)
(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. 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):
2000 1999 -------- -------- 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 ======== ========
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. 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
2000 1999 -------- -------- (dollars in millions) 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% ====== ======
(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. 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
2000 1999 ------- ------ (dollars in millions) 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% ====== ======
(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. 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. 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. 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 EX-10.1 2 a2030863zex-10_1.txt EXHIBIT 10.1 Exhibit 10.1 THIS TEMPORARY WAIVER AND SECOND AMENDMENT (this "WAIVER AND AMENDMENT"), dated as of October 11, 2000, is entered into by and among DIAMOND BRANDS OPERATING CORP., a Delaware corporation (the "COMPANY"), the several financial institutions (the "LENDERS") listed on the signature pages hereof, DLJ CAPITAL FUNDING, INC., as Syndication Agent (the "SYNDICATION AGENT"), and WELLS FARGO BANK, N.A., as Swing Line Lender and Administrative Agent (the "ADMINISTRATIVE AGENT"). RECITALS A. The Company, the lenders party thereto, the Syndication Agent, the Swing Line Lender and the Administrative Agent are parties to the Credit Agreement dated as of April 21, 1998 (as amended by the First Amendment thereto dated as of March 5, 1999, the "CREDIT AGREEMENT"), pursuant to which the lenders party thereto have extended credit under various facilities to the Company. B. The Company has requested that such lenders waive the applicability of the financial covenants in the Credit Agreement for a limited time and make certain amendments with respect to the Credit Agreement. The Lenders now wish to grant a waiver and make such amendments under the Credit Agreement as set forth in greater detail below. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. DEFINED TERMS. Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to them in the Credit Agreement. 2. WAIVER. (a) The Lenders hereby temporarily waive compliance by the Company with Section 7.06 of the Credit Agreement from the Effective Date through March 31, 2001. The parties hereto acknowledge and agree that should the financial statements delivered by the Company for the fiscal quarters ending either September 30, 2000 or December 31, 2000 evidence that the Company would not be in compliance with Section 7.06 with respect to either of such fiscal quarters but for this Waiver and Amendment, and such financial covenants are not hereafter further waived or amended, an Event of Default shall exist on April 1, 2001. From the period commencing on the Effective Date until the expiration of this waiver on March 31, 2001, no Event of Default or Potential Event of Default shall exist solely on account of the fact that the Company has not complied with, and is not likely to comply with, the covenants set forth in Section 7.06 of the Credit Agreement. (b) The Lenders hereby waive any Event of Default as may have occurred as a result of the failure of the Company to provide written notice to the Administrative Agent for distribution to the Lenders pursuant to Section 6.1(x) of the Credit Agreement of Empire Manufacturing Company v. Empire Candle, Inc. District 1 Court, Wyandotte County, Kansas, a lawsuit in which Kent Meisemer, prior owner of Empire Manufacturing Company, alleges that Diamond Brands did not fully comply with required actions from the sales contract and alleges damages of $1,200,000. 3.INTERIM COVENANTS. The Company covenants and agrees that from the Effective Date through March 31, 2001, unless the Requisite Lenders waive compliance in writing, the Company shall perform and comply with the following covenants. The Company's failure to observe the following covenants shall constitute an Event of Default without notice to the Company or any grace period. (a) MINIMUM FIXED CHARGE COVERAGE RATIO. The Company shall not permit the ratio of (i) Consolidated EBITDA to (ii) Consolidated Fixed Charges for any consecutive four-Fiscal Quarter period ending on the dates set forth below to be less than the correlative ratio indicated: FISCAL QUARTER MINIMUM FIXED CHARGE ENDING DATE COVERAGE RATIO September 30, 2000 0.80 to 1.0 December 31, 2000 0.70 to 1.0 (b) MAXIMUM LEVERAGE RATIO. The Company shall not permit the Consolidated Leverage Ratio at any time during any of the periods set forth below to exceed the correlative ratio indicated: PERIOD MAXIMUM LEVERAGE RATIO September 30, 2000 8.00 to 1.0 December 31, 2000 8.85 to 1.0 (c) INTEREST COVERAGE RATIO. The Company shall not permit the ratio of (i) Consolidated EBITDA to (ii) Consolidated Interest Expense for any consecutive four-Fiscal Quarter period ending on the dates set forth below to be less than the correlative ratio indicated: FISCAL QUARTER MINIMUM INTEREST ENDING DATE COVERAGE RATIO September 30, 2000 1.20 to 1.0 December 31, 2000 1.0 to 1.0 (d) COMPLIANCE CERTIFICATE. The Company shall deliver to the Administrative Agent and each Lender, together with the financial statements it delivers pursuant to Section 6.1(i) for the monthly period ending December 31, 2000, a Compliance Certificate demonstrating in reasonable detail compliance at the end of such accounting period with the restrictions contained in Sections 3(a) through (c) above. The Company agrees that the Administrative Agent and the Lenders may conclusively rely upon such Compliance Certificate in determining whether an Event of Default exists under those Sections for such accounting period. 2 4. REVOLVING LOANS. Pursuant to Section 2.4(B)(ii) of the Credit Agreement and commencing on the Effective Date, the Revolving Loan Commitments shall be permanently reduced from $25,000,000 to $17,500,000 and such reduction shall reduce the Revolving Loan Commitment of each Revolving Lender proportionately to its Pro Rata Share. Notwithstanding the foregoing, the Company shall not permit the Total Utilization of Revolving Loan Commitments (i) from the Effective Date through December 31, 2000, to exceed $15,000,000 and (ii) thereafter, to exceed $12,500,000. The Company acknowledges and agrees that the foregoing shall not in any way limit the Company's obligation to pay commitment fees on the entire amount of the unutilized Revolving Loan Commitment as reduced by the first sentence of this Section. 5. SWING LINE LOANS. The Company and the Swing Line Lender hereby agree that, from the Effective Date until otherwise agreed in writing by the Swing Line Lender, the Swing Line Lender shall have no obligation to make any Swing Line Loans under the Credit Agreement. 6. AMENDMENTS. The parties hereto hereby agree that the Credit Agreement shall be amended as follows: (a) Section 1 is amended by deleting the definition of "Asset Sale" therein in its entirety and replacing it with the following new definition: "Asset Sale" means the sale by Company or any of its Subsidiaries to any Person other than Company or any of its wholly-owned Subsidiaries of (i) any of the equity ownership of any of Company's Subsidiaries (other than directors' qualifying shares), (ii) substantially all of the assets of any division or line of business of Company or of its Subsidiaries, or (iii) any other assets (whether tangible or intangible) of Company or any of its Subsidiaries (other than (a) inventory sold in the ordinary course of business, (b) Cash Equivalents, and (c) any such other assets to the extent that (i) the aggregate value of such assets sold in any single transaction or related series of transactions is equal to $500,000 or less and (ii) the aggregate value of such assets sold in any Fiscal Year is equal to $1,000,000 or less). (b) Section 2.2(A) is amended by: (i) deleting subsection (i)(a)(I) and (II) thereof in their entireties and replacing them with the following: (I) if a Base Rate Loan, then the sum of the Base Rate PLUS 2.50%; (II) if a Eurodollar Rate Loan, then at the sum of the Adjusted Eurodollar Rate plus 3.50%. AND 3 (ii) deleting subsections (i)(b)(I) and (II) thereof in their entireties and replacing them with the following: (I) if a Base Rate Loan, then the sum of the Base Rate PLUS 3.00%; (II) if a Eurodollar Rate Loan, then at the sum of the Adjusted Eurodollar Rate plus 4.00%. (c) Section 2.4(B)(iii) is amended by: (i) deleting subsection (a) thereof in its entirety and replacing it with the following: (a) PREPAYMENTS AND REDUCTIONS FROM NET ASSET SALE PROCEEDS. No later than the fifth Business Day following the date of receipt by Company or any of its Subsidiaries of any Net Asset Sale Proceeds in respect of any Asset Sale, Company shall prepay the Loans and/or the Revolving Loan Commitments shall be permanently reduced in an aggregate amount equal to the amount of such Net Asset Sale Proceeds. AND (ii) deleting the second proviso in subsection (d) thereof and replacing it with the following: "PROVIDED FURTHER that none of the Net Securities Proceeds from the issuance of Subordinated Indebtedness permitted hereunder shall be applied to the mandatory prepayment of the Loans pursuant to this subsection 2.4(B)(iii)(d) to the extent that it is used to make scheduled payments of principal and interest on the Senior Subordinated Notes". AND (iii) deleting the second paragraph of subsection (g) thereof in its entirety. AND (iv) deleting the reference to "$5,000,000" in the third paragraph of subsection (g) thereof and replacing it with the following: "$1,000,000". (d) Section 7.1(vi) is amended by inserting the following at the end thereof: "or other Subordinated Indebtedness in an aggregate principal amount not in excess of $10,000,000". (e) Section 7.3 is amended by: 4 (i) inserting the following after subsection (i) thereof: "so long as the Administrative Agent holds a perfected first priority security interest in such Investments in Cash Equivalents and either takes possession of such Investments in Cash Equivalents or enters into an account control agreement with Company or its applicable Subsidiary and the entity in possession of such Investments in Cash Equivalents in form and substance satisfactory to the Administrative Agent". AND (ii) deleting the reference to "$8,000,000" in subsection (vi) thereof and replacing it with the following "$500,000". (f) Section 7.4(iv) is amended by deleting the reference to "$5,000,000" therein and replacing it with the following "$1,000,000". (g) Section 7.7 is amended by deleting subsection (ii) thereof therefrom in its entirety and replacing the same with the following "[Intentionally omitted]". (h) Section 7.8 is amended by deleting such Section in its entirety and replacing it with the following: 7.8 CONSOLIDATED CAPITAL EXPENDITURES. Holdings shall not, and shall not permit its Subsidiaries to make or incur Consolidated Capital Expenditures in an amount in excess of (x) $5,500,000 for Fiscal Year ending December 31, 2000 and (y) $4,000,000 for Fiscal Year ending December 31, 2001 and each Fiscal Year thereafter. 7. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants as follows: (a) The execution, delivery and performance by the Company of this Waiver and Amendment have been duly authorized by all necessary corporate and other action and do not and will not require any registration with, consent or approval of, notice to or action by, any person (including any governmental agency) in order to be effective and enforceable. The Credit Agreement, as amended by this Waiver and Amendment, constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its respective terms, without defense, counterclaim or offset, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law. (b) Except as set forth on Annex I, all representations and warranties of the Company contained in the Credit Agreement are true and correct in all 5 material respects as though made on and as of the Effective Date (except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true and correct as of such earlier date). (c) The Company is entering into this Waiver and Amendment on the basis of its own investigation and for its own reasons, without reliance upon the Administrative Agent and the Lenders or any other person. 8. EFFECTIVE DATE. This Waiver will become effective as of date that each of the following conditions precedent is satisfied (the "EFFECTIVE DATE"): (a) the Administrative Agent or its counsel has received from the Company and the Requisite Lenders a duly executed original or facsimile of this Waiver and Amendment; (b) the Company has paid all amounts described in Section 9 below; (c) each of the Company and its Subsidiaries has executed and delivered account control agreements in form and substance satisfactory to the Administrative Agent with respect to each of its deposit accounts; and (d) to the extent that the Administrative Agent has been advised by its counsel in the relevant states that such action is customary and reasonable for a waiver and amendment of this general nature, the Company shall have caused the title company or companies that issued policies of title insurance in connection with the Credit Agreement to issue endorsements substantially in the form of CLTA endorsements 110.5 and 111.10 to assure the Lenders of the continuing priority of the Liens securing the Loans made after the Effective Date hereunder and shall have taken such additional steps as are necessary to enable such endorsements to be issued. 9. WAIVER FEE. The Company shall pay to the Administrative Agent for the account of each Lender that has delivered to the Administrative Agent or its counsel a duly executed original or facsimile of this Waiver and Amendment by 12:00 Noon California time on October 11, 2000 a nonrefundable waiver fee equal to 0.125% of such Lender's Commitment. 10. RESERVATION OF RIGHTS. The Company acknowledges and agrees that neither the Administrative Agent's nor the Lenders' execution and delivery of this Waiver and Amendment shall be deemed to create a course of dealing or otherwise obligate the Administrative Agent or the Lenders or any other party hereto to execute similar waivers under the same or similar circumstances in the future. 6 11. MISCELLANEOUS. (a) Except as expressly set forth herein, this Waiver and Amendment shall not by implication or otherwise limit, impair, constitute a waiver of, or otherwise affect the rights or remedies of the Administrative Agent or the Lenders under the Credit Agreement or any of the other Loan Documents, and shall not alter, modify, amend, or in any way affect the terms, conditions, obligations, covenants, or agreements contained in the Credit Agreement or the other Loan Documents, all of which are hereby ratified and affirmed in all respects and shall continue in full force and effect. (b) This Waiver and Amendment shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and assigns. No third party beneficiaries are intended in connection with this Waiver and Amendment. (c) This Waiver and Amendment shall be governed by and construed in accordance with the law of the State of New York. (d) This Waiver and Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. (e) This Waiver and Amendment, together with the Credit Agreement, contains the entire and exclusive agreement of the parties hereto with reference to the matters discussed herein and therein. This Waiver and Amendment supersedes all prior drafts and communications with respect thereto. This Waiver and Amendment may not be amended except in accordance with the provisions of Section 10.6 of the Credit Agreement. (f) If any term or provision of this Waiver and Amendment shall be deemed prohibited by or invalid under any applicable law, such provision shall be invalidated without affecting the remaining provisions of this Waiver and Amendment or the Credit Agreement, respectively. (g) The Company hereby covenants to pay or to reimburse the Administrative Agent, upon demand, for all reasonable costs and expenses (including reasonable attorney costs) incurred in connection with the development, preparation, negotiation, execution and delivery of this Waiver and Amendment. (h) Hereafter, all references to the Credit Agreement or any Loan Document contained in the Credit Agreement or any Loan Document or any certificate delivered pursuant to the Credit Agreement or any Loan Document shall be deemed to refer to the Credit Agreement and each Loan Document after giving effect to the provisions of this Waiver and Amendment. 7 IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Waiver and Amendment as of the date first above written. DIAMOND BRANDS OPERATING CORP. By: __________________________________ Name: Title: WELLS FARGO BANK, N.A., individually and as Swing Line Lender and Administrative Agent By: __________________________________ Name: Title: DLJ CAPITAL FUNDING, INC., individually and as Syndication Agent By: __________________________________ Name: Title: PARIBAS CAPITAL FUNDING LLC By: __________________________________ Name: Title: EATON VANCE MANAGEMENT By: __________________________________ Name: Title: 8 CAPTIVA III FINANCE LIMITED By: __________________________________ Name: Title: ATHENA CDO, LIMITED By: __________________________________ Name: Title: BLACK DIAMOND INTERNATIONAL By: __________________________________ Name: Title: BLACK DIAMOND CLO By: __________________________________ Name: Title: DELANO COMPANY By: __________________________________ Name: Title: 9 SENIOR DEBT PORTFOLIO By: __________________________________ Name: Title: BHF-BANK AKTIENGESELLSCHAFT By: __________________________________ Name: Title: BANK OF AMERICA, N.A. (formerly Bank of America National Trust and Savings Association) By: __________________________________ Name: Title: U.S. BANK, NATIONAL ASSOCIATION By: __________________________________ Name: Title: 10 BANQUE PARIBAS By: __________________________________ Name: Title: CREDIT AGRICOLE INDOSUEZ By: __________________________________ Name: Title: FREMONT INVESTMENT By: __________________________________ Name: Title: CANADIAN IMPERIAL BANK OF COMMERCE By: __________________________________ Name: Title: 11 ANNEX I EXCEPTIONS TO REPRESENTATIONS AND WARRANTIES OF THE COMPANY, PURSUANT TO SECTION 7(B) OF THIS WAIVER AND AMENDMENT 1. With respect to Section 5.4 of the Credit Agreement, the Company notes that resin costs have escalated from prior years, adversely affecting operating earnings. 2. With respect to Section 5.4 of the Credit Agreement, the Company notes that, in December 1999, the Company divested their holdings in Empire Candle Inc., with an associated loss on sale of assets. 12 ACKNOWLEDGMENT AND CONSENT The undersigned, each a guarantor or third-party pledgor or mortgagor with respect to the Company's Obligations to the Lenders under the Credit Agreement, each hereby (i) acknowledge and consent to the execution, delivery and performance by Company of the foregoing Amendment, (ii) reaffirm and agree that the respective guaranty, third-party pledge or security agreement, deed of trust, or mortgage to which the undersigned is party and all other documents and agreements executed and delivered by the undersigned to the Administrative Agent or the Lenders in connection with the Credit Agreement are in full force and effect, without defense, offset or counterclaim and continue to guaranty or secure the full amount of the Obligations to the extent provided in the Loan Documents, and (iii) confirm that this Acknowledgment and Consent is not required by the terms of the Loan Documents and need not be obtained in connection with any prior or future waivers of or amendments to the Loan Documents. (Capitalized terms used herein have the meanings specified in the Amendment.) Dated: October , 2000 DIAMOND BRANDS INCORPORATED --- By: ____________________________ Name: Title: EMPIRE CANDLE, INC. By: ____________________________ Name: Title: FORSTER, INC. By: ____________________________ Name: Title: 13 EX-27 3 a2030863zex-27.txt EXHIBIT 27
5 0001064048 DIAMOND BRANDS OPERATING CORP 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 0 0 17,028 (1,264) 15,764 31,501 40,958 (22,017) 85,068 95,947 100,000 0 0 1 (112,377) 85,068 73,044 73,044 50,397 50,397 9,706 0 13,601 (660) (50) (610) (795) 0 0 (1,405) 0 0
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