-----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, M5KMeypvGwkHrSANqXUs/vQDV8FMtzPlop1RXZb1GeQpt5GmkSUxz3KFHsIZxOhW wFNUjKg/cCTxPS9L0r6s/A== /in/edgar/work/20000815/0000014995-00-500001/0000014995-00-500001.txt : 20000922 0000014995-00-500001.hdr.sgml : 20000921 ACCESSION NUMBER: 0000014995-00-500001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIXON TICONDEROGA CO CENTRAL INDEX KEY: 0000014995 STANDARD INDUSTRIAL CLASSIFICATION: [3950 ] IRS NUMBER: 230973760 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08689 FILM NUMBER: 702040 BUSINESS ADDRESS: STREET 1: 195 INTERNATIONAL PKWY STREET 2: STE 200 CITY: HEATHROW STATE: FL ZIP: 32746-5036 BUSINESS PHONE: 4078759000 MAIL ADDRESS: STREET 1: PO BOX 958413 STREET 2: STE 200 CITY: HEATHROW STATE: FL ZIP: 32795-8413 FORMER COMPANY: FORMER CONFORMED NAME: BRYN MAWR CORP/DE/ DATE OF NAME CHANGE: 19831002 FORMER COMPANY: FORMER CONFORMED NAME: BRYN MAWR GROUP INC DATE OF NAME CHANGE: 19730619 FORMER COMPANY: FORMER CONFORMED NAME: BRYN MAWR CAMP RESORTS INC DATE OF NAME CHANGE: 19700608 10-Q 1 0001.txt QUARTERLY REPORT FOR PERIOD ENDING JUNE 30, 2000 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ FORM 10-Q ------------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------ Commission file number 0-2655 DIXON TICONDEROGA COMPANY Incorporated pursuant to the Laws of Delaware State ------------------ Internal Revenue Service-- Employer Identification No. 23-0973760 195 International Parkway, Heathrow, FL 32746 (407) 829-9000 ------------------ 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 [ ] The total number of shares of the registrant's Common Stock, $1 par value, outstanding on June 30, 2000, was 3,168,048. DIXON TICONDEROGA COMPANY AND SUBSIDIARIES ------------------------------------------ INDEX -----
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Information Consolidated Balance Sheets -- June 30, 2000 and September 30, 1999 3-4 Consolidated Statements of Operations -- For The Three and Nine Months Ended June 30, 2000 and 1999 5 Consolidated Statements of Comprehensive Income (Loss) -- For The Three and Nine Months Ended June 6 30, 2000 and 1999 Consolidated Statements of Cash Flows -- For The Nine Months Ended June 30, 2000 and 1999 7 Notes to Consolidated Financial Statements 8-14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-18 Item 3. Quantitative and Qualitative Disclosures About Market 19 Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings 20 Item 5. Other Information 20 Item 6. Exhibits and Reports on Form 8-K 20-22 Signatures 23
PART I - FINANCIAL INFORMATION Item 1. DIXON TICONDEROGA COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, September 30, 2000 1999 -------------- -------------- CURRENT ASSETS: Cash and cash equivalents $ 1,065,501 $ 935,413 Receivables, less allowance for doubtful accounts of $1,451,307 at June 30, 2000 and $1,428,541 at September 30, 1999 39,664,787 29,343,196 Inventories 37,477,309 39,425,594 Other current assets 2,561,916 2,381,518 -------------- -------------- Total current assets 80,769,513 72,085,721 -------------- -------------- PROPERTY, PLANT AND EQUIPMENT: Land and buildings 13,322,651 13,413,125 Machinery and equipment 16,127,224 17,661,335 Furniture and fixtures 1,666,191 1,753,765 -------------- -------------- 31,116,066 32,828,225 Less accumulated depreciation (18,732,464) (19,004,402) -------------- -------------- 12,383,602 13,823,823 -------------- -------------- OTHER ASSETS 7,288,090 6,978,123 -------------- -------------- $ 100,441,205 $ 92,887,667 ============== ==============
June 30, September 30, 2000 1999 --------------- -------------- CURRENT LIABILITIES: Notes payable $ 6,507,115 $ 2,578,467 Current maturities of long-term debt 1,624,713 1,638,835 Accounts payable 9,819,837 6,143,136 Accrued liabilities 9,149,116 12,268,095 --------------- -------------- Total current liabilities 27,100,781 22,628,533 --------------- -------------- LONG-TERM DEBT 45,375,563 39,399,795 --------------- -------------- DEFERRED INCOME TAXES AND OTHER 144,799 96,843 --------------- -------------- MINORITY INTEREST 560,021 533,390 --------------- -------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, par $1, authorized 100,000 shares, none issued - - Common stock, par $1, authorized 8,000,000 shares; issued 3,710,309 shares at June 30, 2000 and 3,688,599 at September 30, 1999 3,710,309 3,688,559 Capital in excess of par value 3,700,272 3,586,471 Retained earnings 26,713,975 26,945,792 Accumulated comprehensive income (loss) (3,342,631) (2,416,475) --------------- -------------- 30,781,925 31,804,347 Less - treasury stock, at cost (542,261 shares as of June 30, 2000 and 292,789 shares as of September 30, 1999) (3,521,884) (1,575,241) --------------- -------------- 27,260,041 30,229,106 --------------- -------------- $ 100,441,205 $ 92,887,667 =============== ==============
The accompanying notes to consolidated financial statements are an integral part of these statements. DIXON TICONDEROGA COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2000 AND 1999 THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 REVENUES $33,389,698 $36,916,508 $75,407,134 $84,639,376 ------------ ------------ ------------ ------------ COST AND EXPENSES: Cost of goods sold 20,726,278 22,676,586 49,151,250 53,076,239 Selling and administrative expenses 9,174,811 9,398,727 23,513,754 25,143,122 Provision for restructuring and related costs - - - 1,685,000 ------------ ------------ ------------ ------------ 29,901,089 32,075,313 72,665,004 79,904,361 ------------ ------------ ------------ ------------ GAIN ON SALE OF ASSETS - - - 9,396,318 ------------ ------------ ------------ ------------ OPERATING INCOME 3,488,609 4,841,195 2,742,130 14,131,333 INTEREST EXPENSE 1,168,266 1,367,057 3,089,811 3,719,234 ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) AND MINORITY INTEREST 2,320,343 3,474,138 (347,681) 10,412,099 INCOME TAXES (BENEFIT) 761,978 1,158,687 (171,035) 4,208,122 ------------ ------------ ------------ ------------ 1,558,365 2,315,451 (476,646) 6,203,977 MINORITY INTEREST 43,656 189,351 55,171 346,780 ------------ ------------ ------------ ------------ NET INCOME (LOSS) $1,514,709 $2,126,100 $(231,817) $5,857,197 ============ ============ ============ ============ EARNINGS (LOSS) PER COMMON SHARE: Basic $ .48 $ .63 $ (.07) $ 1.71 ============ ============ ============ ============ DILUted $ .48 $ .59 $ (.07) $ 1.64 ============ ============ ============ ============ Shares Outstanding: Basic 3,164,461 3,401,689 3,213,458 3,427,810 ============ ============ ============ ============ Diluted 3,164,461 3,599,665 3,213,458 3,576,942 ============ ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. DIXON TICONDEROGA COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2000 AND 1999 THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ NET INCOME (LOSS) $ 1,514,709 $ 2,126,100 $ (231,817) $ 5,857,197 OTHER COMPREHENSIVE INCOME (LOSS): Foreign currency translation adjustments (1,040,009) 155,949 (926,156) 660,532 ------------ ------------ ------------ ------------ COMPREHENSIVE INCOME (LOSS) $ 474,700 $ 2,282,049 $(1,157,973) $ 6,517,729 ============ ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements. DIXON TICONDEROGA COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED JUNE 30, 2000 AND 1999 > 2000 1999 ---------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (231,817) $ 5,857,197 Adjustment to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 1,929,921 1,996,717 Deferred taxes 89,451 (389,636) Provision for doubtful accounts receivable 205,811 244,638 Gain on sale of assets - (9,396,318) Loss attributable to foreign currency exchange 210,251 175,124 Income attributable to minority interest 55,171 346,780 Changes in assets and liabilities: Receivables (11,342,051) (6,867,610) Inventories 1,347,758 (10,547,206) Other current assets (198,813) (823,353) Accounts payable and accrued liabilities 1,379,791 1,031,580 Other assets (567,191) (299,761) ---------------- --------------- Net cash provided by (used in) operations (7,121,718) (18,671,848) ---------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment, net (1,053,037) (610,384) Proceeds from sale of assets - 20,246,096 ---------------- --------------- Net cash provided by (used in) investing activities (1,053,037) 19,635,712 ---------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from notes payable 4,209,351 2,434,444 Net proceeds from (principal reductions of) long-term debt 6,025,643 (1,482,845) Exercise of stock options 168,844 304,139 Purchase of treasury stock (1,979,936) (714,353) Purchase of subsidiary stock - (2,747,689) Other non-current liabilities (31,803) (432,234) ---------------- --------------- Net cash provided by (used in) financing activities 8,392,099 (2,638,538) ---------------- --------------- Effect of exchange rate changes on cash (87,256) (12,023) ---------------- --------------- Net increase (decrease) in cash and cash equivalents 130,088 (1,686,697) Cash and cash equivalents, beginning of period 935,413 2,853,281 ---------------- --------------- Cash and cash equivalents, end of period $ 1,065,501 $ 1,166,584 ================ =============== Supplemental Disclosures: Cash paid during the period: Interest $ 2,488,238 $ 3,275,813 Income taxes 1,149,155 2,675,577
During the nine months ended June 30, 1999, the Company accepted a note receivable of $3,250,000 as partial consideration for the sale of assets of its U.S. Graphite and Lubricants division. The accompanying notes to consolidated financial statements are an integral part of these statements. DIXON TICONDEROGA COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements are read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. In the opinion of the Company, all adjustments (solely of a normal recurring nature) necessary to present fairly the financial position of Dixon Ticonderoga Company and subsidiaries as of June 30, 2000, and the results of their operations and cash flows for the three months ended June 30, 2000 and 1999, have been included. The results of operations for such interim periods are not necessarily indicative of the results for the entire year. 2. INVENTORIES: Since amounts for inventories under the LIFO method are based on annual determinations of quantities and costs as of the end of the fiscal year, the inventories at June 30, 2000 (for which the LIFO method of accounting are used) are based on certain estimates relating to quantities and costs as of year end. Inventories consist of (in thousands): June 30, September 30, 2000 1999 ------------ ------------- Raw materials $ 14,432 $ 15,246 Work in process 4,131 5,016 Finished goods 18,914 19,164 ------------ ------------- $ 37,477 $ 39,426 ============ =============
3. EFFECT OF CERTAIN NEW ACCOUNTING PRONOUNCEMENTS: In 1998, the FASB issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is effective for the Company in fiscal 2001. This statement requires all derivative instruments to be recognized in the balance sheet as either assets or liabilities at fair value. The Company currently uses cash flow hedges to convert variable rate debt to fixed rate debt and occasionally utilizes foreign currency hedges, but does not expect the prescribed accounting for these instruments to materially affect its financial position or results of operations when adopted. 4. TRANSLATION OF FOREIGN CURRENCIES: Prior to January 1, 1999, Mexico was considered as a highly inflationary economy for the purpose of applying FASB Statement No. 52, "Foreign Currency Translation." Therefore, Mexico translation gains and losses impacted the results of operation through December 31, 1998. Since January 1, 1999, Mexico is not considered a highly inflationary economy, and therefore the translation gains (losses) are included as a separate component of comprehensive income (loss). Total foreign currency losses included in results of operations were approximately $210,000 and $175,000 for the periods ended June 30, 2000 and 1999, respectively. 5. ACCOUNTING FOR INCOME TAXES: The difference between income taxes calculated at the U.S. statutory federal income tax rate and the provision in the accompanying Consolidated Financial Statements is primarily due to varying effective foreign tax rates, state income taxes and other permanent items. 6. CONTINGENCIES: The Company, in the normal course of business, is a party in certain litigation. In April 1996, a decision was rendered by the Superior Court of New Jersey in Hudson County finding the Company responsible for $1.94 million plus prejudgment interest for certain environmental clean-up costs relating to a claim under New Jersey's Environmental Clean-Up Responsibility Act (ECRA) by a 1984 purchaser of industrial property from the Company. All Company appeals were denied and in 1998 the Company paid $3.6 million to satisfy this claim in full, including all accrued interest. The Company continues to pursue other responsible parties for indemnification and/or contribution to the payment of this claim (including its insurance carriers) and a legal malpractice action against its former attorney. In 1999, the pending malpractice suit was dismissed and the Company has appealed the decision. In 2000, the Company reached settlements with several of its insurers for reimbursement of legal costs [reflected as a decrease in selling and administrative expenses in the amount of $564,000 ($398,000 in the quarter ended June 30, 2000)]. The Company has evaluated the merits of other litigation and believes their outcome will not have a further material effect on the Company's future results of operations or financial position. The Company assesses the extent of environmental matters on an ongoing basis. In the opinion of management (after taking into account accruals of approximately $320,000 as of June 30, 2000), the resolution of these matters will not materially affect the Company's future results of operations or financial position. 7. RESTRUCTURING AND RELATED COSTS: In the period ended March 31, 1999, the Company provided $1,685,000 in connection with its Restructuring and Cost Reduction Program, which is intended to improve overall financial performance in the future. The program included manufacturing plant closure and consolidation, as well as personnel reduction in manufacturing, sales and marketing and corporate activities. The provision was increased to $1,917,000 through September 30, 1999. The restructuring charge and subsequent utilization is summarized as follows: 1999 Utilized Restructuring through Balance at and Related June 30, June 30, Charges 2000 2000 -------------- ------------ ----------- Employee severance and related costs $ 587,000 $ 587,000 $ - Anticipated losses from the sale or abandonment of property and equipment 1,330,000 1,141,000 189,000 -------------- ------------ ----------- $ 1,917,000 $ 1,728,000 $ 189,000 ============== ============ ===========
8. STOCK REPURCHASE PROGRAM: In March 1999, the Company's Board of Directors approved a Stock Repurchase Program, authorizing the acquisition of up to $3 million in Dixon Ticonderoga Company stock. Under this program, the Company repurchased approximately 337,000 shares at a cost of $2.8 million through March 31, 2000, when the program was terminated. 9. LINE OF BUSINESS REPORTING: The Company has adopted FASB Statement No. 131 "Disclosure About Segments of an Enterprise and Related Information". This statement requires the Company to report information about its operating segments under the "management approach". The management approach is based on the manner in which management reports segment information within the Company for making operating decisions and assessments. The Company has two principal business segments - its Consumer Group and Industrial Group. The following information sets forth certain data pertaining to each line of business as of June 30, 2000 and 1999 and for the quarters and year to date then ended (in thousands): Consumer Industrial Group Group Total ------------ ------------ ------------ Net revenues: Three months ended: June 30, 2000 $ 30,619 $ 2,771 $ 33,390 June 30, 1999 33,668 3,249 36,917 Nine months ended: June 30, 2000 $ 66,364 $ 9,043 $ 75,407 June 30, 1999 70,386 14,253 84,639 Income before interest, taxes and minority interest: Three months ended: June 30, 2000 $ 3,923 $ 222 $ 4,145 June 30, 1999 5,484 159 5,643 Nine months ended: June 30, 2000 $ 4,594 $ 73 $ 4,667 June 30, 1999 5,836 10,246 16,082 A reconciliation of income (loss) before interest, taxes and minority interest to net income follows (in thousands):
Three Months Ended June 30, 2000 ---------------------------------------------- Consumer Industrial Total Group Group Corporate Company --------- --------- ---------- ----------- Income (loss) before interest, taxes and minority interest $ 3,923 $ 222 $ (656) $ 3,489 Interest expense (879) (97) (192) (1,168) Income tax benefit (expense) (1,009) (68) 315 (762) Minority interest (44) - - (44) --------- --------- ---------- ----------- Net income (loss) $ 1,991 $ 57 $ (533) $ 1,515 ========= ========= ========== ===========
Nine Months Ended June 30, 2000 ---------------------------------------------- Consumer Industrial Total Group Group Corporate Company --------- --------- ---------- ----------- Income (loss) before interest, taxes and minority interest $ 4,594 $ 73 $ (1,925) $ 2,742 Interest expense (2,273) (275) (542) (3,090) Income tax benefit (expense) (753) 6 918 171 Minority interest (55) - - (55) --------- --------- ---------- ----------- Net income (loss) $ 1,513 $ (196) $ (1,549) $ (232) ========= ========= ========== ===========
Three Months Ended June 30, 1999 ---------------------------------------------- Consumer Industrial Total Group Group Corporate Company --------- --------- ---------- ----------- Income (loss) before interest, taxes and minority interest $ 5,484 $ 159 $ (802) $ 4,841 Interest expense (1,133) (86) (148) (1,367) Income tax benefit (expense) (1,539) (32) 412 (1,159) Minority interest (189) - - (189) --------- --------- ---------- ----------- Net income (loss) $ 2,623 $ 41 $ (538) $ 2,126 ========= ========= ========== ===========
Nine Months Ended June 30, 1999 ---------------------------------------------- Consumer Industrial Total Group Group Corporate Company --------- --------- ---------- ----------- Income (loss) before interest, taxes and minority interest $ 5,836 $ 10,246 $ (1,951) $ 14,131 Interest expense (2,972) (273) (474) (3,719) Income tax benefit (expense) (1,150) (4,040) 982 (4,208) Minority interest (347) - - (347) --------- --------- ---------- ----------- Net income (loss) $ 1,367 $ 5,933 $ (1,443) $ 5,857 ========= ========= ========== ===========
Certain corporate expenses have been allocated based upon respective segment sales. Interest expense (where not specifically identified) has been allocated based upon identifiable assets by segment. Income taxes are determined based upon the respective effective tax rates. The Consumer Group includes a charge for restructuring and related costs of $1,685 and the Industrial Group includes the gain on the sale of the Graphite and Lubricants Division of $9,396, both before application of taxes. 10. SUBSEQUENT EVENT -- LONG-TERM DEBT: On August 4, 2000, the Company executed definitive agreements with its lenders to, in part, cure previous covenant defaults under its $16.5 million, 12% Senior Subordinated Note Agreement and its senior financing arrangements with a consortium of lenders. The subordinated note agreement was amended to require the payment of a fee of $50,000, the maintenance of certain revised financial covenants and ratios and an increase in the interest rate of the notes to 13.5% through June 2002 and 12.25% through maturity in 2003. In addition, the exercise price of 300,000 warrants held by the noteholders will be reduced to an amount yet to be determined, but based upon the average closing price over the 30 trading days following the execution of the definitive agreement. The Company's senior financing arrangements were also amended to require the maintenance of certain revised financial covenants and ratios and to increase the interest rate on its senior debt by 0.5% (to either the prevailing LIBOR rate, plus 2.25% or the prime rate, plus 0.75%) through maturity in 2004. In addition, the new agreement required the payment of an amendment fee of $206,875 and the adjustment of certain other fees. The Company is in compliance with all provisions of the amended agreements and, accordingly, the subordinated and senior debt have been classified, in accordance with their terms, as long-term debt in the accompanying consolidated financial statements. Item 2. - ------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - --------------------- REVENUES for the quarter ended June 30, 2000, decreased $3,527,000 from the same quarter last year. The changes by segment are as follows: Increase (Decrease) % Increase (in thousands) (Decrease) --------------- ---------------------------- Total Volume Price/Mix ------ ------ --------- U.S. Consumer $ (3,825) (18) (16) (2) Foreign Consumer 776 7 5 2 Industrial (478) (1) (2) 1 U.S. Consumer revenue decreased principally in the mass retail and wholesale club market channels. The Foreign Consumer revenue increase was primarily with Mexico mass market retailers. Industrial revenue decreased in the refractory division. REVENUES for the nine months ended June 30, 2000, decreased $9,232,000 from the same quarter last year. The changes by segment are as follows: Increase (Decrease) % Increase (in thousands) (Decrease) --------------- ---------------------------- Total Volume Price/Mix ------ ------ --------- U.S. Consumer $ (6,142) (13) (12) (1) Foreign Consumer 2,121 9 8 1 Industrial (5,211) (37) (37) - The decrease in U.S. Consumer revenue reflects the continuing impact of imports in the mass retail market and on seasonal wholesale club sales. Foreign Consumer revenue increased in Mexico and Canada primarily in the mass markets. Industrial revenue for the prior year includes the U.S. Graphite and Lubricants division, sold in March 1999. While the Company has operations in Canada, Mexico and the U.K., historically only the operating results in Mexico have been materially impacted by currency fluctuations. There has been a significant devaluation of the Mexican peso at least once in each of the last three decades, the last one being in August, 1998. In the short term after such a devaluation, consumer confidence has been shaken, leading to an immediate reduction in revenues in the months following the devaluation. Then, after the immediate shock, and as the peso stabilizes, revenues tend to grow. Selling prices tend to rise over the long term to offset any inflationary increases in costs. The peso, as well as any currency value, depends on many factors including international trade, investor confidence, and government policy, to name a few. These factors are impossible for the Company to predict, and thus, an estimate of the effect of future currency fluctuations on results of operations cannot be made. This currency risk in Mexico is also managed through occasional foreign currency hedges, local currency financing and by export sales to the U.S. denominated in U.S. dollars. OPERATING INCOME decreased $1,353,000 from the same quarter last year. U.S. Consumer decreased $1,510,000 due principally to the effect of lower revenues. Foreign Consumer decreased $51,000 as foreign currency losses in Mexico offset the effect of higher revenues. Industrial improved by $63,000. Total corporate administrative expenses decreased due to a reimbursement of legal costs of $398,000. (See Note 6 to the Consolidated Financial Statements). Operating income for the nine months ended June 30, 2000, decreased $11,389,000 from the same period last year. Industrial operating income decreased $10,173,000 principally due to the gain of $9,396,000 from the sale of the U.S. Graphite and Lubricants division and $425,000 of operating income attributable to that division in 1999. Industrial also decreased due to lower refractory division sales in the current period. U.S. Consumer decreased $470,000 despite the $1,685,000 restructuring charge in 1999 for manufacturing consolidation and personnel reduction. U.S. Consumer incurred significantly higher manufacturing inefficiencies, particularly in the earlier months of fiscal 2000, as a result of inventory reduction efforts and the consolidation of a manufacturing facility (see Note 7 to the Consolidated Financial Statements). Foreign Consumer decreased $772,000. Manufacturing inefficiencies due to inventory reductions and consolidation, as well as higher selling and distribution expenses in Mexico were the primary causes of this decrease. The aforementioned manufacturing inefficiencies in both U.S. and Foreign Consumer contributed to an overall increase in cost of goods sold to 65.2% of sales in 2000, as compared to 62.7% in 1999. INTEREST EXPENSE decreased $199,000 and $629,000 in the quarter and nine months ended June 30, 2000, respectively, from the same periods last year primarily due to lower average borrowings and interest rates in Mexico. INCOME TAXES decreased $397,000 and $4,379,000 from the comparable quarter and nine months of the prior year due to the lower before tax income. MINORITY INTEREST represents approximately 3% in 2000 and 20% in 1999 of the results from operations of the Company's Mexico subsidiary. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company's cash flows from operating activities improved dramatically (by approximately $11.6 million) in the first nine months of fiscal 2000, despite a net loss through June 30, 2000. The Company's strict inventory reduction efforts led to an increase in cash flows related to inventories of $1.3 million in the current year period, as compared with a decrease of $10.5 million in the prior year period. Lower receivable collections (following the Company's lower revenues in the 1999 back-to-school season and the 1999 sale of its Graphite and Lubricants division) were offset by improved accounts payable management in the U.S. and Mexico. The Company's investing activities included approximately $1,053,000 in net purchases of property and equipment in the current period and $610,000 in the prior year. Capital expenditures are somewhat higher in 2000 and include certain strategic equipment related to pencil manufacturing. However, management believes that expenditures have been reduced due to better capital budgeting and the continued use of leasing as an alternative to acquiring equipment. Generally, all major capital projects are discretionary in nature and thus no material purchase commitments exist. Capital expenditures will continue to be funded from existing financing or new leasing arrangements. The Company's primary financing arrangements are with a consortium of lenders, providing a total of up to $42.5 million in financing through September 2004. On August 4, 2000, certain financial covenants contained in the underlying loan and security agreements were revised to cure a previous default and to allow the Company to execute its reorganization and consolidation plans, as well as other strategic initiatives. The agreements were also amended to increase the rate of interest by 0.5% and require the payment of certain fees, including an amendment fee of $206,875. (See Note 10 to Consolidated Financial Statements.) The financing agreements, as amended, include a revolving line of credit facility in the amount of $35 million which bears interest at either the prime rate plus 0.75%, or the prevailing LIBOR rate plus 2.25% through September 2004. Borrowings under the revolving credit facility are based upon eligible accounts receivable and inventories of the Company's U.S. and Canada operations, as defined. The loan and security agreements also include a term loan in the initial amount of $7.5 million. The term loan is payable in monthly installments of $125,000, plus interest, through September 2004. The loan bears interest based upon the same prevailing rate described above in connection with the revolving credit facility. The Company has previously executed an interest rate swap agreement that effectively fixes the rate of interest on approximately $1.5 million of the term loan at 8.5% through May 2001. These financing arrangements are collateralized by the tangible and intangible assets of the U.S. and Canada operations (including accounts receivable, inventories, property, plant and equipment, patents and trademarks) and a pledge of the capital stock of the Company's subsidiaries. The loan and security agreement contains provisions pertaining to the maintenance of certain financial ratios and annual capital expenditure levels, as well as restrictions as to payment of cash dividends. The Company is in compliance with all such provisions, as amended. As of June 30, 2000, the Company had approximately $13 million of unused lines of credit available under the revolving credit facility. In addition, the Company's Mexico subsidiary has $14 million in bank lines of credit ($7 million unused as of June 30, 2000) which bear interest at a rate based upon either a floating U.S. bank rate or the rate of certain Mexican government securities. The Company also has outstanding $16.5 million of 12% Senior Subordinated Notes valued at their face amount, due 2003. In 1998, the Company canceled a reverse interest rate swap agreement (which had originally converted $10 million of the notes to a floating rate of interest) resulting in a deferred gain of approximately $375,000, which is being recognized over the remaining original term of the notes. On August 4, 2000, the subordinated note agreement was also amended to revise certain financial covenants and cure a previous default, as well as to provide the Company flexibility to execute its strategic initiatives. The interest rate was increased to 13.5% through June 2002 and 12.25% though maturity in 2003. The exercise price of 300,000 warrants held by the noteholders will be reduced to an amount yet to be determined, but based upon the average closing price over the 30 trading days following the execution of the amendment. The amendment also required payment of a fee of $50,000. (See Note 10 to Consolidated Financial Statements.) The note agreement, as amended, contains provisions that limit dividends and other payments, and require the maintenance of certain financial covenants and ratios. The Company is in compliance with all such provisions, as amended. The Company also incurred approximately $200,000 in legal costs associated with the aforementioned amendments to its senior and subordinated debt agreements. The Company cannot assure that it will be in compliance with all covenant provisions of its debt agreements in all future quarters and cannot assure that it will receive waivers or amendments of any such provisions should that occur. The subordinated and senior debt have been classified, in accordance with their terms, as long-term in the accompanying consolidated financial statements. The Company entered into the aforementioned interest rate swap agreements to balance and manage overall interest rate exposure and minimize overall cost of borrowings. The swaps are not presently expected to have a material effect on total interest expense over the term of the underlying agreements. In March 1999, the Company's Board of Directors approved a Stock Repurchase Program authorizing the acquisition of up to $3 million in Dixon Ticonderoga Company stock. Under this program, the Company repurchased 337,000 shares at a cost of $2.8 million. These repurchases were financed through the aforementioned and previous U.S. revolving line of credit facilities. The existing sources of financing described above and cash expected to be generated from future operations and / or asset sales would, in management's opinion, be sufficient to fulfill all current and anticipated requirements of the Company's ongoing business and to meet all of it obligations. However, if future covenant violations occur with respect to its current financing arrangements, the Company may need to pursue other sources of financing to satisfy certain obligations before their due date. YEAR 2000 READINESS DISCLOSURE - ------------------------------ The Year 2000 issue relates to the way computer systems and programs define calendar dates; they could fail or make miscalculations while interpreting a date including "00" to mean 1900, not 2000. Also, many systems and equipment that are not typically thought of as 'computer-related' (referred to as `non-IT') may contain embedded hardware or software that may have a time element dependency. The Company's work on the Year 2000 (Y2K) compliance issue began in 1998 and was completed in 1999. The scope of the project included addressing the compliance of all applications, operating systems, and hardware on mid-range, PC and local area network platforms; addressing issues related to non-IT embedded hardware and software; and addressing the compliance of business partners. The Company completed all phases for its U.S. and Canadian operations and its Mexican operations were brought into compliance by a complete system replacement. The Company's non-IT related systems and equipment were determined to be Y2K compliant. This statement is based primarily upon communication with the vendors as well as physical inspection, assessment, remediation and testing of equipment and related controlling software. Moreover, all critical business suppliers certified compliance. While no significant problems were experienced with its customer base, the Company is continuing to monitor the status of customers as a means of determining risks and alternatives. Dixon utilizes an IBM AS/400 system along with J. D. Edwards software for its core business applications. These systems have been assessed, upgraded, corrected where necessary and tested to insure continuous and accurate processing of information. The Company presently believes that its business-critical computer systems as well as non-IT related systems and equipment are Y2K compliant. The Company does not foresee significant continuing risks associated with Y2K compliance at this time. FORWARD-LOOKING STATEMENTS - -------------------------- The statements in this Quarterly Report on Form 10-Q that are not purely historical are "forward-looking statements" within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934, including statements about the Company's expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include statements regarding, among other things, the effects of the devaluation of the Mexican peso; the Company's ability to meet its current and anticipated obligations; management's inventory reduction plan and expectation for savings from the restructuring and cost-reduction program; the Company's ability to increase sales in its core businesses; its expectations as to the effect of new accounting pronouncements; its assessment with respect to Y2K; and its expectations with regards to legal proceedings. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those expressed or implied by such forward-looking statements. Such risks include (but are not limited to) manufacturing inefficiencies as a result of the inventory reduction plan, difficulties encountered with the consolidation and cost-reduction program, increased competition, U.S. and foreign economic factors, foreign currency exchange risk, interest rate fluctuation risk and Y2K compliance risk, among others. Item 3. - ------- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As discussed elsewhere in this Form 10-Q, the Company is exposed to the following principal market risks (i.e. risks of loss arising from adverse changes in market rates): foreign exchange rates and interest rates on debt. The Company's exposure to foreign currency exchange rate risk in its international operations is principally limited to Mexico and, to a lesser degree, Canada. Approximately 32% of the Company's fiscal 1999 net revenues were derived in Mexico and Canada, combined (exclusive of intercompany activities). Foreign exchange transaction gains and losses arise from monetary assets and liabilities denominated in currencies other than the business unit's functional local currency. It is estimated that a 10% change in both the Mexican peso and Canadian dollar would impact reported operating profit by $500,000. This quantitative measure has inherent limitations because it does not take into account the changes in customer purchasing patterns or any adjustment to the Company's financing or operating strategies in response to such a change in rates. Moreover, this measure does not take into account the possibility that these currency rates can move in opposite directions, such that gains from one may offset losses from another. In addition, the Company's cash flows and earnings are subject to changes in interest rates. As of June 30, 2000, approximately 45% of total short and long-term debt is fixed, at rates between 8% and 13.5% in the U.S. The balance of the Company debt is variable, principally based upon the prevailing U.S. bank prime rate or LIBOR rate. An interest rate swap, which expires in 2001, fixes the rate of interest on $1.5 million of this debt at approximately 8.5%. It is estimated that a change in the average prevailing interest rates of the remaining debt of 1% would impact reported pretax income by $300,000. This quantitative measure does not take into account the possibility that the prevailing rates (U.S. bank prime and LIBOR) can move in opposite directions and that the Company has, in most cases, the option to elect either as the determining interest rate factor. PART II. OTHER INFORMATION Item 1. Legal Proceedings - ---------------------------- On May 23, 2000 an article appeared in the Seattle Times Intelligencer Reporter alleging that the talc used as a binder in most domestic brands of crayons, including the Company's, contained trace amounts of a fiber resembling asbestos. In response to these allegations, the domestic crayon manufacturers, including the Company, as well as the talc supplier, engaged their own independent laboratories and each refuted the news article's claims. The Company issued a press release confirming this. As a result of the public interest surrounding the news article, however, the United States Consumer Product Safety Commission (CPSC) engaged two additional labs to test the crayons. The Government's own OSHA lab determined unequivocally that there was no asbestos in the crayons. Its independent lab found one suspicious fiber in each of two crayons of the many tested. In any event, based on its evaluation, the CPSC reconfirmed the non-toxicity and safety of the Company's crayons in a press release dated June 15, 2000. Nevertheless, although the Company has yet to be served, it has become aware of seven legal actions filed against itself as well as other domestic crayon manufacturers, as a result of the Seattle Times Intelligencer Reporter erroneous report. Of the seven legal actions, four are class action suits, two are misleading advertising claims and one is a personal injury suit. The Company denies the essential allegations of these complaints and intends to vigorously defend them. Significantly, plaintiffs in one of the class action and one of the misleading advertising claims have offered to settle for nominal amounts. The Company believes that none of the pending actions will have a material adverse effect on the Company's financial condition or results of operations. Item 5. Other Information - ------------------------------ Information regarding the amendment of the Company's 12% Senior Subordinated Note Agreement and senior financing arrangements with a consortium of lenders (See Part I - Item 1., Note 10 to Consolidated Financial Statements and Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations) is incorporated by reference herein and in lieu of a separate report on Form 8-K. Item 6. Exhibits and Reports on Form 8-K - --------------------------------------------- (a) Exhibits - ---------------- The following exhibits are required to be filed as part of this Quarterly Report on Form 10-Q: (2) a. Share Purchase Agreement by and among Dixon Ticonderoga de Mexico, S.A. de C.V., and by Grupo Ifam, S.A. de C.V., and Guillermo Almazan Cueto with respect to the capital stock of Vinci de Mexico, S.A. de C.V., (English translation). 4 (2) b. Asset Purchase Agreement dated February 9, 1999, by and between Dixon Ticonderoga Company, as Seller and Asbury Carbons, Inc., as Buyer. 6 (3) (i) Restated Certificate of Incorporation 2 (3) (ii) Amended and Restated Bylaws 1 (4) a. Specimen Certificate of Company Common Stock 2 (4) b. Amended and Restated Stock Option Plan 3 (10) a. First Modification of Amended and Restated Revolving Credit Loan and Security Agreement by and among Dixon Ticonderoga Company, Dixon Ticonderoga, Inc., First Union Commercial Corporation, First National Bank of Boston and National Bank of Canada 1 (10) b. 12.00% Senior Subordinated Notes, Due 2003, Note and Warrant Purchase Agreement 1 (10) c. 12.00% Senior Subordinated Notes, Due 2003, Common Stock Purchase Warrant Agreement 1 (10) d. License and Technological Agreement between Carborundum Corporation and New Castle Refractories Company, a division of Dixon Ticonderoga Company 1 (10) e. Equipment Option and Purchase Agreement between Carborundum Corporation and New Castle Refractories Company, a division of Dixon Ticonderoga Company 1 (10) f. Product Purchase Agreement between Carborundum Corporation and New Castle Refractories Company, a division of Dixon Ticonderoga Company 1 (10) g. Second Modification of Amended and Restated Revolving Credit Loan and Security Agreement by and among Dixon Ticonderoga Company, Dixon Ticonderoga, Inc., First Union Commercial Corporation, First National Bank of Boston and National Bank of Canada 5 (10) h. Third Modification of Amended and Restated Revolving Credit Loan and Security Agreement, Amendment to Loan Documents and Assignment by and among Dixon Ticonderoga Company, Dixon Ticonderoga, Inc., First Union Commercial Corporation, BankBoston, N.A., National Bank of Canada and LaSalle Bank. 7 (10) i. First Modification of Amended and Restated Term Loan Agreement and Assignment by and among Dixon Ticonderoga Company, Dixon Ticonderoga, Inc., First Union Commercial Corporation, BankBoston, N.A., National Bank of Canada and LaSalle Bank. 7 (10) j. Amendment No. 1 to 12.00% Senior Subordinated Notes, Due 2003, Note and Warrant Purchase Agreement. 7 (21) Subsidiaries of the Company 7 (27) Financial Data Schedule 8 1Incorporated by reference to the Company's annual report on Form 10-K for the year ended September 30, 1996, file number 0-2655, filed in Washington, D.C. 2Incorporated by reference to the Company's quarterly report on Form 10-Q for the period ended March 31, 1997, file number 0-2655, filed in Washington, D.C. 3Incorporated by reference to Appendix 3 to the Company's proxy statement dated January 27, 1997, filed in Washington, D.C. 4Incorporated by reference to the Company's current report on Form 8-K dated December 12, 1997, filed in Washington D.C. 5Incorporated by reference to the Company's annual report on Form 10-K for the year ended September 30, 1999, file number 0-2655, filed in Washington, D.C. 6Incorporated by reference to the Company's current report on Form 8-K dated March 2, 1999, filed in Washington D.C. 7Incorporated by reference to the Company's annual report on Form 10-K for the year ended September 30, 1999, file number 0-2655, filed in Washington, D.C. 8Filed electronically via EDGAR. (b) Reports on Form 8-K: - ---------------------------- None. SIGNATURES ---------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DIXON TICONDEROGA COMPANY Dated: August 14, 2000 ------------------------------------ By: /s/ Gino N. Pala ------------------------------------ Gino N. Pala Chairman of Board and Co-Chief Executive Officer Dated: August 14, 2000 ------------------------------------ By: /s/ Richard A. Asta ------------------------------------ Richard A. Asta Executive Vice President of Finance and Chief Financial Officer Dated: August 14, 2000 ------------------------------------ By: /s/ John Adornetto ------------------------------------ John Adornetto Vice President/Corporate Controller and Chief Accounting Officer EX-27 2 0002.txt FDS --
5 9-MOS SEP-30-2000 OCT-01-1999 JUN-30-2000 1,065,501 0 41,116,094 1,451,307 37,477,309 80,769,513 31,116,066 (18,732,464) 100,441,205 27,100,781 0 0 0 3,710,309 23,549,732 100,441,205 75,407,134 75,407,134 49,151,250 49,151,250 23,513,754 0 3,089,811 (347,681) (171,035) (231,817) 0 0 0 (231,817) (.07) (.07)
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