-----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, GvEusJlDAB3GC404n7P8WUKgeJEhPmxexTvT8E2p7zkfNZEt2YY94VfyuqNFwM7M cq938NO1cBlanPl1tN8GMw== 0000912057-99-006091.txt : 19991117 0000912057-99-006091.hdr.sgml : 19991117 ACCESSION NUMBER: 0000912057-99-006091 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99755206 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 FORM 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, 1999 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 November 15, 1999, 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)
September 30, December 31, 1999 1998 ------------- ------------ ASSETS CURRENT ASSETS: Accounts receivable, net of allowances of $985 and $1,035 $ 15,930 $ 12,379 Inventories 12,902 11,966 Deferred income taxes 12,076 2,161 Prepaid expenses 694 980 Net assets from discontinued operations 578 26,508 --------- --------- Total current assets 42,180 53,994 PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation of $19,347 and $17,715 15,815 14,498 GOODWILL 24,561 25,100 DEFERRED FINANCING COSTS 6,370 6,735 --------- --------- $ 88,926 $ 100,327 ========= ========= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Current maturities of long-tem debt $ 4,250 $ 2,750 Accounts payable 7,588 5,801 Accrued expenses 14,140 11,252 --------- --------- Total current liabilities 25,978 19,803 POSTRETIREMENT BENEFIT OBLIGATIONS 1,559 1,559 DEFERRED INCOME TAXES 20 20 LONG-TERM DEBT, net of current maturities 175,050 177,174 --------- --------- Total liabilities 202,607 198,556 --------- --------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' DEFICIT: Common stock, $.01 par value; 1,000 shares authorized; 1,000 shares issued and outstanding 1 1 Accumulated deficit (113,682) (98,230) --------- --------- Total stockholders' deficit (113,681) (98,229) --------- --------- $ 88,926 $ 100,327 ========= =========
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, -------------------------------------------- 1999 1998 1999 1998 --------- --------- --------- -------- NET SALES $ 24,234 $ 24,024 $ 76,120 $ 72,968 COST OF SALES 14,682 15,154 47,050 47,682 -------- -------- -------- -------- Gross profit 9,552 8,870 29,070 25,286 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,812 2,704 9,221 7,690 GOODWILL AMORTIZATION 180 180 540 540 -------- -------- -------- -------- Operating income 6,560 5,986 19,309 17,056 INTEREST EXPENSE 4,679 4,474 13,825 10,629 -------- -------- -------- -------- Income from continuing operations before provision for income taxes 1,881 1,512 5,484 6,427 PROVISION FOR INCOME TAXES 826 676 2,410 379 -------- -------- -------- -------- Income from continuing operations 1,055 836 3,074 6,048 DISCONTINUED OPERATIONS (Note 2): Loss from discontinued operations, net of income tax benefit of $1,672, $18, $2,628 and $515, respectively (2,505) (28) (3,941) (772) Loss on disposal, net of income tax benefit of $9,696 for 1999 (14,543) -- (14,543) -- -------- -------- -------- -------- Loss from discontinued operations (17,048) (28) (18,484) (772) -------- -------- -------- -------- Net income (loss) $(15,993) $ 808 $(15,410) $ 5,276 ======== ======== ======== ======== PRO FORMA INCOME FROM CONTINUING OPERATIONS: Income from continuing operations before provision for income taxes $ 1,881 $ 1,512 $ 5,484 $ 6,427 Pro forma provision for income taxes (Note 5) 826 676 2,410 2,600 -------- -------- -------- -------- Pro forma income from continuing operations $ 1,055 $ 836 $ 3,074 $ 3,827 ======== ======== ======== ========
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, ------------------------ 1999 1998 ------------- -------- OPERATING ACTIVITIES: Net income (loss) $ (15,410) $ 5,276 Net assets of discontinued operations 25,930 2,515 Adjustments to reconcile net loss to net cash provided by operating activities from continuing operations- Depreciation and amortization 2,878 3,389 Deferred income taxes (9,915) (1,352) Change in operating assets and liabilities- Accounts receivable (3,551) (3,564) Inventories (936) (706) Prepaid expenses 286 (1,470) Accounts payable 1,787 656 Accrued expenses 2,888 4,972 --------- --------- Net cash provided by operating activities of continuing operations 3,957 9,716 --------- --------- INVESTING ACTIVITIES: Purchases of property, plant and equipment (2,949) (1,395) --------- --------- Net cash used for investing activities of continuing operations (2,949) (1,395) --------- --------- FINANCING ACTIVITIES: Borrowings under bank revolving line of credit 17,400 27,200 Repayments of bank revolving line of credit (16,149) (30,700) Borrowings on long-term debt -- 180,000 Repayments of long-term debt (1,875) (44,997) Distributions to stockholders -- (5,454) Incorporation of Operating Corp. -- 1 Distributions to Holdings (42) (127,060) Debt issuance costs (342) (7,311) --------- --------- Net cash (used for) financing activities of continuing operations (1,008) (8,321) --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS -- -- CASH AND CASH EQUIVALENTS, beginning of period -- -- --------- --------- CASH AND CASH EQUIVALENTS, end of period $ -- $ -- ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the year for- Interest $ 10,537 $ 6,400 ========= ========= Income taxes $ 7 $ 32 ========= =========
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. after elimination of all material intercompany balances and transactions. Operating Corp. and its subsidiaries are collectively referred to as "the Company". The Company is a leading manufacturer and marketer under two business segments (i) consumer products, consisting primarily of wooden matches, toothpicks, clothespins and wooden crafts, and plastic cutlery and straws ("Consumer Products"); and (ii) poured scented, air freshener and citronella candles ("Candles"). The Company's products are marketed primarily in the United States and Canada under the nationally recognized Diamond, Forster and Empire brand names. The Board of Directors of the Company approved the divestiture of its Candle Operations (see note 2), and is included as discontinued operations in the consolidated financial statements for all periods presented. The interim consolidated financial statements of the Company are unaudited; however, in the opinion of management, all adjustments necessary for a fair presentation of such consolidated financial statements have been reflected in the interim periods presented. The significant accounting policies and certain financial information which are normally included in financial statements prepared in accordance with generally accepted accounting principles, but which are not required for interim reporting purposes, have been condensed or omitted. The accompanying consolidated financial statements of the Company should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K. 2. DISCONTINUED OPERATIONS Effective September 30, 1999, the Board of Directors of the Company approved the divestiture of the Candle operations of the Company. Operations are expected to cease on or before June 30, 2000. Net sales were $4.5 million and $6.7 for the three months ended September 30, 1999 and 1998, respectively. Net sales were $12.3 million and $16.3 million for the nine months ended September 30, 1999 and 1998, respectively. The losses of the Candle operations for the three months ended September 30, 1999 and 1998 were $2.5 million and $0.1 million, respectively. The losses for the nine months ended September 30, 1999 and 1998 were $3.9 million and $0.8 million, respectively. The losses of the Candle operations for all periods presented are included in the consolidated statements of operations under "Loss from Discontinued Operations." The provision for the "Loss on Disposal" reflected in the consolidated income statement totaled $14.6 million, including the write down of assets by $23.1 million to net realizable value, estimated costs of disposal and run off costs of $1.2 million, less the expected tax benefit of $9.7 million. 3. RECAPITALIZATION On March 3, 1998, the stockholders of the Company's parent, Diamond Brands Incorporated (Holdings), 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 Holdings. Pursuant to the Recapitalization Agreement, in April 1998, Holdings purchased from the existing stockholders 15,129,232 shares of Holdings' common stock for $211.5 million by Operating Corp. (i) issuing $100.0 million of senior subordinated notes and (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. The proceeds of such were used to partially fund the recapitalization. The transaction was accounted for as a recapitalization for accounting purposes. 4. 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 DECEMBER 31, 1998
Operating Subsidiary Consolidated Corp Guarantor (1) Eliminations Total -------------------------------------------------------------------- Balance sheet data: Current assets $ 21,994 $32,000 $ 53,994 Non current assets 106,800 9,096 (69,563) 46,333 Current liabilities 49,222 4,270 (33,689) 19,803 Non current liabilities 177,801 952 178,753 Stockholders' deficit (98,229) 35,874 (35,874) (98,229)
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 5,115 14,194 19,309 Income from continuing operations 40 3,064 3,074 Loss from discontinued operations - (18,484) (18,484) Equity in (loss) of subsidiaries (15,450) - 15,450 - Net (loss) (15,410) (15,450) 15,450 (15,410)
AS OF SEPTEMBER 30, 1999 Balance sheet data: Current assets $ 31,971 $ 10,209 $ 42,180 Noncurrent assets 90,745 10,114 (54,113) 46,746 Current liabilities 60,720 12,334 (47,076) 25,978 Non current liabilities 175,677 952 - 176,629 Stockholders' (deficit) (113,681) (7,037) (7,037) (113,681)
NINE MONTHS ENDED SEPTEMBER 30, 1998 Statement of operations data: Net sales $26,160 $46,808 $72,968 Gross profit 7,165 18,121 25,286 Operating income 3,869 13,187 17,056 Income from continuing operations 55 5,993 6,048 Loss from discontinued operations - (772) (772) Equity in earnings of subsidiaries 5,221 - (5,221) - Net income 5,276 5,221 (5,221) 5,276
(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 $578 and $26,508 as of September 30, 1999 and December 31, 1998, respectively. The Company also entered into a bank credit agreement which provides for $80.0 million in term facilities due in installments through March 2006 and a $25.0 million revolving credit facility. 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 September 30, 1999. 5. INCOME TAXES Effective with the Recapitalization (see Note 3) in April 1998, the Company converted from an S Corporation to a C Corporation and began accounting for income taxes using the liability method. The taxable income or loss of the Company for the period ended April 20, 1998, is included in the individual returns of the stockholders for federal tax purposes and, to the extent allowed and elected, for state tax purposes. Accordingly, there is no provision for current income taxes for that period. The unaudited pro forma income tax expense is presented assuming the Company had been a C corporation since January 1, 1998. 6. SEGMENT REPORTING The Company's reportable segments include consumer products and candles. The consumer products segment consists of wooden matches, toothpicks, clothespins and wooden crafts, and plastic cutlery and straws sold primarily to grocery, mass and drug store channels. The candle segment consists primarily of poured scented, air freshener and citronella candles sold through club, mass and grocery channels. The candle operations were approved for divestiture in September, 1999 (see note2). Financial results of the Company's operating segments for the nine months ended September 30, 1999 and 1998 are summarized below (in millions):
1999 1998 ------------------------------------- ----------------------------------------- Consumer Consumer Products Candles (1) Total Products Candles (1) Total -------- ----------- ----- -------- -------- ----- Net sales $76.1 $ 12.3 $88.4 $73.0 $ 16.3 $89.3 Gross profit (loss) 29.0 ( 3.6) 25.4 25.3 1.6 26.9 Operating income (loss) 19.3 ( 6.6) $12.7 11.0 (1.3) 9.7
(1) Included in discontinued operations in the consolidated statements 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, 1999, sales to the Company's top 10 customers accounted for approximately 46% of the Company's gross sales, with one customer accounting for approximately 18% of the Company's gross sales. The following table sets forth, for the period indicated, certain historical statements of operations data, as well as the Company's EBITDA and EBITDA margin, for the continuing operations of the Company, with 1998 comparable results of continuing operations restated to exclude discontinued operations. THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998
1999 1998 --------- ---------- (dollars in millions) Total Total ----- ----- Net Sales $ 24.2 $ 24.0 Cost of Sales 14.6 15.1 --------- ---------- Gross Profit 9.6 8.9 Gross Margin % 39.7% 37.1% Selling, General and Administration Expense 2.8 2.7 Goodwill Amortization .2 .2 --------- ---------- Operating Income (1) $ 6.6 $ 6.0 Interest Expense $ 4.7 $ 4.5 EBITDA (2) $ 7.3 $ 6.7 --------- ---------- --------- ---------- EBITDA (3) 30.2% 27.9%
(1) Excludes amortization of deferred financing costs. (2) EBITDA represents operating income plus depreciation and amortization (excluding amortization of deferred financing costs). The Company believes that EBITDA provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as a substitute for net income as an indicator of the Company's operating performance or cash flow as a measure of liquidity. (3) EBITDA margin represents EBITDA as a percentage of net sales. Net sales for the Company were $24.2 million for the three months ended September 30, 1999, a 0.8% increase over net sales of $24.0 million for the three months ended September 30, 1998. The increase was led by a strong sales performance in plastic cutlery/straws and wooden matches. Cutlery/straws net sales were up 10.6% over the comparable three months of 1998, while wooden matches net sales increased 4.6% over the comparable period for the previous year. Gross profit was $9.6 million or 39.7% of net sales for the three months ended September 30, 1999, compared to $8.9 million or 37.1% for the comparable period in 1998. This increase was achieved through (i) the increased sales volume of cutlery/straws and wooden matches; (ii) operating efficiencies at the related plants; and (iii) favorable product sales mix. Selling, general and administrative expenses were $2.8 million for the three months ended September 30, 1999, compared to $2.7 million for the comparable period in 1998. The increased spending was due to year 2000 remediation, marketing spending on consumer awareness, and infrastructure improvements. Interest expense for three months ended September 30, 1999 was $4.7 million compared to $4.5 million for the comparable period in 1998. The increase was caused primarily by higher interest rates on the Company's senior debt facility. Earnings before interest, taxes, depreciation and amortization (EBITDA) were $7.3 million or 30.2% of net sales for the three months ended September 30, 1999, compared to EBITDA of $6.7 million or 27.9% for the same period in 1998. RESULTS OF DISCONTINUED OPERATIONS Effective September 30, 1999, the Board of Directors approved the divestiture of the Candle operations of the Company. Operations are expected to cease on or before June 30, 2000. Net sales from such operations were $4.5 million for the three month period ended September 30, 1999 as compared to $6.7 million for the comparable period in 1998. The losses of the Candle operations for the three month period ended September 30, 1999 totaled $2.5 million, and are included in the consolidated income statement under "Loss from Discontinued Operations." The provision for the "Loss on Disposal of Discontinued Operations" reflected in the consolidated income statement totaled $14.6 million, including the write down of assets by $23.1 million to net realizable value, estimated costs of disposal and run off costs $1.2 million, less the expected tax benefit of $9.7 million. RESULTS OF CONTINUING OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998
1999 1998 ------- ------- (dollars in millions) Total Total ----- ----- Net Sales $ 76.1 $ 73.0 Cost of Sales 47.1 47.7 ---- ---- Gross Profit 29.0 25.3 Gross Margin % 38.1% 34.7% Selling, General and Administration Expense 9.2 13.8 Goodwill Amortization .5 .5 ---- ---- Operating Income (1) $ 19.3 $ 11.0 Interest Expense $ 13.8 $ 10.6 EBITDA (2) $ 21.4 $ 13.1 Recapitalization Expense (3) -- $ 5.8 Adjusted EBITDA (4) $ 21.4 $ 18.9 ------- ------- ------- ------- Adjusted EBITDA Margin (5) 28.1% 25.9%
(1) Excludes amortization of deferred financing costs. (2) EBITDA represents operating income plus depreciation and amortization (excluding amortization of deferred financing costs). The Company believes that EBITDA provides useful information regarding the Company's ability to service its debt; however, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as a substitute for net income as a indicator of the Company's operating performance or cash flow as a measure of liquidity. (3) Represents one time costs incurred in connection with the Recapitalization including brokerage fee ($2.7 million) change in control management bonuses and option payments ($1.9 million), 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. Net sales were $76.1 million for the nine months ended September 30, 1999, a 4.2% increase over net sales of $73.0 million for the nine months ended September 30, 1998. The increase resulted from a strong sales performance in plastic cutlery/straws and wooden matches. Cutlery/straws net sales were up 14.8% over the comparable nine months of 1998, while wooden matches net sales were 9.7% ahead of the comparable period. Gross profit was $29.0 million or 38.1% of net sales for the nine months ended September 30, 1999, compared to $25.3 million or 34.7% for the comparable period in 1998. This increase was achieved through (i) the increased sales volume of cutlery/straws and wooden matches; (ii) operating efficiencies at the related plants; and (iii) favorable product sales mix. Selling, general and administrative expenses were $9.2 million for the nine months ended September 30, 1999, compared to $13.8 million for the comparable period in 1998 which included $5.8 million in one time Recapitalization expenses. After adjusting 1998 for Recapitalization expenses, the increased spending was due to year 2000 remediation, marketing spending on consumer awareness, and infrastructure improvements. Earnings before interest, taxes, depreciation and amortization (EBITDA) were $21.4 million or 28.1% of net sales for the nine months ended September 30, 1999, compared to Adjusted EBITDA of $18.9 million or 25.9% for the same period in 1998. Interest expense for the nine months ended September 30, 1999 was $13.8 million compared to $10.6 million for the comparable period in 1998. This increase was due primarily to the increase in debt as the result of the April 21, 1998 Recapitalization of the Company. RESULTS OF DISCONTINUED OPERATIONS Effective September 30, 1999, the Board of Directors approved the divestiture of the Candle operations of the Company. Operations are expected to cease on or before June 30, 2000. Net sales from such operations were $12.3 million for the nine months ended September 30, 1999, and $16.3 million for the comparable period in 1998. The losses of the Candle operations for the nine months ended September 30, 1999 totaled $3.9 million, and are included in the consolidated income statement under "Loss from Discontinued Operations". The provision for the "Loss on Disposal of Discontinued Operations" reflected in the consolidated income statement totaled $14.6 million, including the write down of assets by $23.1 million to net realizable value, estimated costs of disposal and run off costs $1.2 million, less the expected tax benefit of $9.7 million. LIQUIDITY AND CAPITAL RESOURCES The senior credit agreement was amended on March 5, 1999, allowing for certain non-recurring expenses totaling $6.0 million to be excluded in the calculation of EBITDA on or before the third quarter of 1999, for the purpose of calculating covenant compliance. The amendment also adjusted the Minimum Fixed Charge Coverage Ratio, Maximum Leverage Ratio and Interest Coverage Ratio for the next eight quarters. The Company was in compliance with all covenants as of September 30, 1999. CASH FLOW - OPERATING ACTIVITIES. Cash provided by operating activities was $4.0 million for the nine months ended September 30, 1999 as compared to $9.7 million cash provided for the comparable period in 1998. CASH FLOW - INVESTMENT ACTIVITIES. Capital expenditures for the nine months ended September 30, 1999, were $2.9 million, primarily used to expand capacity at the cutlery plant. Capital expenditures for the comparable period in 1998 were $1.4 million. CASH FLOW - FINANCING ACTIVITIES. Cash used for by financing activities was $1.0 million for the nine months ended September 30, 1999, as compared to $8.3 million for the comparable period in 1998. Borrowings and repayments under the bank agreement for Working Capital requirements comprised the majority of the financing activities for the nine months ended September 30, 1999. The recapitalization of the Company on April 21, 1998 comprised the majority of the financing activities for the nine months ended September 30, 1998. OTHER MATTERS INFLATION AND ECONOMIC TRENDS. Although its operations are affected by general economic trends, the Company does not believe that inflation has had a material impact on its results of operations. YEAR 2000. Many computer systems and software applications, including most of those used by the Company, identify dates using only the last two digits of the year. These systems are unable to distinguish between dates in the year 2000 and dates in the year 1900. That inability (referred to as the "Year 2000" issue), if not addressed, could cause certain systems or applications to fail or provide incorrect information after December 31, 1999 or when using dates after December 31, 1999. This could have an adverse effect on Diamond Brands, due to Diamond Brands' direct dependence on its own system and applications and indirect dependence on those of other entities with whom Diamond Brands must interact. The Company has replaced or modified all of the Company's current computer systems and software applications to be Year 2000 compliant. The Company currently estimates that its costs through the year 2000 to enhance its information systems will cost approximately $1.9 million, of which $1.3 million has been paid to date. These costs include estimates for employee compensation, consultants, hardware and software. 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. 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 OPERATING CORP. (Registrant) By:/s/ Thomas W. Knuesel ------------------- Thomas W. Knuesel , Vice President of Finance and Chief Financial Officer (authorized officer, principal financial and accounting officer) Date: November 15, 1999 EX-27 2 EXHIBIT 27
5 1,000 9-MOS DEC-31-1999 SEP-30-1999 0 0 16,915 985 12,902 42,180 35,162 19,347 88,926 25,978 175,050 0 0 1 (113,682) 88,926 76,120 76,120 47,050 47,050 9,761 0 13,825 5,484 2,410 3,074 (18,484) 0 0 (15,410) 0 0
-----END PRIVACY-ENHANCED MESSAGE-----