-----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, AcV7qkFPBioZ2o5u6VD3LR7TKFB7ja872Zw4Cu1ckGqeOSRGLkRFKgC9aG270NBs 6lNPKZ+nHXdBY6BipTNLUg== 0000014995-99-000020.txt : 19990812 0000014995-99-000020.hdr.sgml : 19990812 ACCESSION NUMBER: 0000014995-99-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIXON TICONDEROGA CO CENTRAL INDEX KEY: 0000014995 STANDARD INDUSTRIAL CLASSIFICATION: PENS, PENCILS & OTHER ARTISTS' MATERIALS [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: 99684045 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 10Q FOR QTR END JUNE 30 SECURITIES AND EXCHANGE COMMISSION Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED JUNE 30, 1999 COMMISSION FILE NO. O-2655 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DIXON TICONDEROGA COMPANY ------------------------- (Exact name of registrant as specified in its charter) Delaware 23-0973760 -------- ---------- (State or other jurisdiction I.R.S. Employer of incorporation or organization) Identification No. 195 International Parkway, Heathrow, FL 32746 ---------------------------------------- ----- (Address of principal executive offices) Zip Code Registrant's telephone number, including area code: (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 [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Class Outstanding as of June 30, 1999 ----- ------------------------------- Common Stock $1 par value 3,400,791 DIXON TICONDEROGA COMPANY AND SUBSIDIARIES INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Information Consolidated Balance Sheets -- June 30, 1999 and September 30, 1998 3-4 Consolidated Statements of Operations -- For The Three and Nine Months Ended June 30, 1999 and 1998 5 Consolidated Statements of Comprehensive Income -- For The Three and Nine Months Ended June 30, 1999 and 1998 6 Consolidated Statements of Cash Flows -- For The Nine Months Ended June 30, 1999 and 1998 7-8 Notes to Consolidated Financial Statements 9-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13-18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 19-20 Signatures 21 Item 1. PART I. FINANCIAL INFORMATION DIXON TICONDEROGA COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, 1999 September 30, ------------- 1998 ------------- CURRENT ASSETS: Cash and cash equivalents $ 1,166,584 $ 2,853,281 Receivables, less allowance for doubtful accounts of $1,505,660 at June 30, 1999 and $1,369,815 at September 30, 1998 37,824,675 31,810,617 Inventories 42,562,514 37,445,502 Other current assets 2,433,206 1,630,381 -------------- -------------- Total current assets 83,986,979 73,739,781 -------------- -------------- PROPERTY, PLANT and EQUIPMENT: Land and buildings 13,409,801 14,847,930 Machinery and equipment 17,426,611 21,182,762 Furniture and fixtures 1,766,707 1,213,662 -------------- -------------- 32,603,119 37,244,354 Less - Accumulated depreciation (18,579,934) (20,975,708) -------------- -------------- 14,023,185 16,268,646 OTHER ASSETS 5,881,936 2,621,460 -------------- -------------- $ 103,892,100 $ 92,629,887 ============== ============== June 30, 1999 September 30, ------------- 1998 ------------- CURRENT LIABILITIES: Notes payable $28,826,231 $26,031,951 Current maturities of long-term debt 1,820,740 1,879,775 Accounts payable 6,386,725 7,765,451 Accrued liabilities 15,253,298 8,482,278 ------------- ------------- Total current liabilities 52,286,994 44,159,455 ------------- ------------- LONG-TERM DEBT 20,510,465 21,927,289 ------------- ------------- DEFERRED INCOME TAXES AND OTHER 687,742 776,100 ------------- ------------- MINORITY INTEREST 1,244,143 2,711,805 ------------- ------------- 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 3,685,559 shares as of June 30, 1999, and 3,654,558 shares as of 3,685,559 3,654,558 September 30, 1998 Capital in excess of par value 3,569,221 3,327,755 Retained earnings 26,121,257 20,264,057 Accumulated comprehensive income (loss) (2,713,305) (3,373,837) ------------- ------------- 30,662,732 23,872,533 Less - Treasury stock, at cost (284,768 shares as of June 30, 1999 and 222,841 as of September 30, 1998) (1,499,976) (817,295) ------------- ------------- 29,162,756 23,055,238 ============= ============= $103,892,100 $92,629,887 ============= ============= 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, 1999 AND 1998
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 ---- ---- ---- ---- REVENUES $36,916,508 $38,503,363 $84,639,376 $87,153,268 ------------ ------------ ------------ ------------ COST AND EXPENSES: Cost of goods sold 22,676,586 23,313,219 53,076,239 54,018,823 Selling and administrative expenses 9,398,727 10,490,978 25,143,122 25,787,139 Provision for restructuring and related costs -- -- 1,685,000 -- ------------ ------------ ------------ ------------ 32,075,313 33,804,197 79,904,361 79,805,962 ------------ ------------ ------------ ------------ GAIN ON SALE OF ASSETS -- -- 9,396,318 -- ------------ ------------ ------------ ------------ OPERATING INCOME 4,841,195 4,699,166 14,131,333 7,347,306 INTEREST EXPENSE 1,367,057 1,293,039 3,719,234 3,180,233 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 3,474,138 3,406,127 10,412,099 4,167,073 INCOME TAXES 1,158,687 1,098,449 4,208,122 1,128,689 ------------ ------------ ------------ ------------ 2,315,451 2,307,678 6,203,977 3,038,384 MINORITY INTEREST 189,351 292,575 346,780 597,656 ------------ ------------ ------------ ------------ NET INCOME $ 2,126,100 $ 2,015,103 $ 5,857,197 $ 2,440,728 ============ ============ ============ ============ EARNINGS PER COMMON SHARE: BASIC $ .63 $ .60 $ 1.71 $ .72 ============ ============ ============ ============ DILUTED $ .59 $ .54 $ 1.64 $ .65 ============ ============ ============ ============ Shares Outstanding: Basic 3,401,689 3,386,602 3,427,810 3,378,798 ============ ============ ============ ============ Diluted 3,599,665 3,744,365 3,576,942 3,731,420 ============ ============ ============ ============ The accompanying notes to consolidated financial statements are an integral part of these statements.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998
THREE MONTHS ENDED NINE MONTHS ENDED JUNE 30, JUNE 30, 1999 1998 1999 1998 ---- ---- ---- ---- NET INCOME $2,126,100 $2,015,103 $5,857,197 $2,440,728 OTHER COMPREHENSIVE INCOME (LOSS): Foreign currency translation adjustments 155,949 (283,372) 660,532 (455,482) ------------ ------------ ----------- ------------ COMPREHENSIVE INCOME $2,282,049 $1,731,731 $6,517,729 $1,985,246 ============ ============ ============ ============
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, 1999 AND 1998 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,857,197 $ 2,440,728 Adjustment to reconcile net income to net cash provided by(used in) operating activities: Depreciation and amortization 1,996,717 2,169,221 Deferred taxes (389,636) 204,230 Provision for doubtful accounts receivable 344,638 200,970 Gain on sale of assets (9,396,318) -- Loss attributable to foreign currency exchange 175,124 377,801 Income attributable to minority interest 346,780 597,656 Changes in assets and liabilities: Receivables, net (6,967,610) (9,771,563) Inventories (10,547,206) (6,000,497) Other current assets (823,353) (20,287) Accounts payable and accrued liabilities 1,031,580 (6,081,270) Other assets (299,761) (123,546) ------------ ----------- Net cash provided by (used in) operating activities (18,671,848) (16,006,557) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (610,384) (1,315,099) Purchase of Vinci de Mexico, S.A. de C.V., net of cash acquired -- (3,289,200) Proceeds from sale of assets 20,246,096 -- ----------- ----------- Net cash provided by (used in) investing activities 19,635,712 (4,604,299) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from notes payable 2,434,444 16,828,403 Principal reductions of long-term debt (1,482,845) (1,235,013) Exercise of stock options 304,139 355,861 Purchase of subsidiary stock (2,747,689) -- Purchase of treasury stock (714,353) -- Other non-current liabilities (432,234) 109 ----------- ----------- Net cash provided by (used in) financing activities (2,638,538) 15,949,360 ----------- ----------- Effect of exchange rate changes on cash (12,023) (143,487) ------------- ------------ Net decrease in cash and cash equivalents (1,686,697) (4,804,983) Cash and cash equivalents, beginning of period 2,853,281 5,607,587 ------------- ------------ Cash and cash equivalents, end of period $ 1,166,584 $ 802,604 ============= ============ Supplemental Disclosures: Cash paid during the period: Interest $ 3,275,813 $ 2,652,631 Income taxes 2,675,577 785,441 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 be 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, 1999, and the results of their operations and cash flows for the nine months ended June 30, 1999 and 1998, have been included. The results of operations for such interim periods are not necessarily indicative of the results for the entire year. Certain fiscal 1998 balances have been reclassified to conform to current year presentation. 2. INVENTORIES: Since amounts for inventories under the last-in, first-out (LIFO) method are based on annual determinations of quantities and costs as of the end of the fiscal year, the inventories at June 30, 1999 (for which the LIFO method of accounting are used) are based on certain estimates relating to quantities and costs as of year end. Under the first-in, first-out (FIFO) method of accounting, these inventories would be $1,135,000 and $897,000 higher at June 30, 1999 and September 30, 1998, respectively. Inventories consist of (in thousands): June 30, 1999 September 30, 1998 ------------- ------------------ Raw materials $ 15,503 $ 13,303 Work in process 5,659 4,651 Finished goods 21,401 19,492 --------- --------- $ 42,563 $ 37,446 ========= ========= 3. EFFECT OF CERTAIN NEW ACCOUNTING PRONOUNCEMENTS: In fiscal 1999, the Company implemented Financial Accounting Standards Board (FASB) Statement No. 130, "Reporting Comprehensive Income" which required reporting and display of comprehensive income. Comparative financial statements presented for earlier periods have been reclassified to reflect application of the provisions of this statement. In 1997, the FASB issued Statement No. 131. "Disclosures About Segments of an Enterprise and Related Information" which is effective for the Company in its fiscal 1999 Annual Report on Form 10-K. This statement revises current guidelines and requires financial information to be reported on the basis that it is used internally for evaluating segment performance and resource allocation. Total assets, segment profit (loss) and other key items are required to be reported as this data would be reported in internal financial statements. The Company does not expect this new statement to significantly affect how it presently defines or reports its business segment data. 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, 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: Until January 1, 1999, Mexico was considered as a highly inflationary economy for the purpose of applying FASB Statement No. 52, "Foreign Currency Translation." Translation gains and losses therefore impacted the results of operations through that date. Foreign currency losses included in net income were approximately $175,000 and $378,000 for the periods ended June 30, 1999 and 1998, respectively. Effective January 1, 1999, Mexico is not considered a highly inflationary economy, and therefore the translation gains and losses are presented as a separate component of comprehensive income (loss). 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. Income taxes reconciled to the statutory rates are as follows for all periods presented: Three Months Ended Nine Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- Taxes calculated at federal statutory rate $1,181 $1,158 $3,540 $1,417 Foreign income (118) (158) 234 (423) State taxes 40 41 240 (5) Other permanent items 56 57 194 140 ------- ------- ------- ------- Provision for income taxes $1,159 $ 1,098 $ 4,208 $ 1,129 6. CONTINGENCIES: The Company, in the normal course of business, is 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. All company appeals have been denied and in January 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). 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 is aware of several environmental matters related to certain facilities purchased or to be sold. The Registrant assesses the extent of these matters on an ongoing basis. In the opinion of management (after taking into account accruals of approximately $300,000 as of June 30, 1999), the resolution of these matters will not materially affect the Company's future results of operations or financial position. In addition, the Company has provided for certain future environmental obligations related to the sale of its U.S. Graphite and Lubricants division. (See Note 8). 7. ACQUISITION: In December 1997, the Company's Mexican subsidiary, acquired all of the capital stock of Vinci de Mexico, S.A. de C.V. ("Vinci"), and certain assets of a related entity for a final total purchase price of approximately 28.3 million pesos (approximately $3.5 million) in cash. Vinci is a well-known manufacturer of tempera and oil paints, chalk and modeling clay in Mexico. The company also manufactures plastic products (such as rulers and geometric sets), water colors and crayons. The acquisition was accounted for under the "purchase" method of accounting and the balance sheet herein includes the fair value of Vinci's specific assets and liabilities, including goodwill approximating $320,000. Goodwill is amortized over the estimated period of benefit of 20 years. The results of Vinci's operations have been included in the consolidated results of operations since the date of acquisition. 8. SALE OF ASSETS: On March 2, 1999, the Company completed the sale of its U.S. Graphite and Lubricants division for $23.5 million, plus the assumption of certain trade obligations related to the division. Except as provided for in the Asset Purchase Agreement, the Company generally retained all other liabilities of the business through the closing date, including various environmental liabilities. The purchaser paid $20.25 million in cash and executed a five-year subordinated note for the balance of $3.25 million. The note is unsecured and bears interest at 9%, deferred as additional principal until September 2, 2001. The Asset Purchase Agreement further provides that the note is subject to certain setoffs and $705,000 of the proceeds were placed in escrow pending the completion of certain post-closing procedures. In connection with this sale, the Company retained or accrued liabilities approximating $4.7 million for ongoing maintenance of unsold real estate and environmental expenses, employee severance and benefit costs and other post-closing obligations. 9. RESTRUCTURING COSTS: In March 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 includes Consumer plant closure and consolidation, as well as personnel reduction in manufacturing, sales and marketing and corporate activities. Restructuring costs principally include losses on the sale or abandonment of property and equipment and severance costs for affected employees. Through June 30, 1999, approximately $138,000 has been charged against this accrual for severance costs associated with planned personnel reduction. 10. STOCK REPURCHASE PROGRAM In March 1999, the Company announced a Stock Repurchase Program authorizing the acquisition of up to $3 million in Dixon Ticonderoga Company stock. To date, the Company has repurchased approximately 69,000 shares at a cost of $727,000. In addition, in May 1999, the Company repurchased 4,195,000 (or approximately 12.6%) of the outstanding shares of its Mexican subsidiary, Grupo Dixon, S.A. de C.V. for approximately $2.75 million. The repurchase increases the Company's ownership in its subsidiary to 92.4%. Item 2. - ------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS STRATEGIES AND NEW DEVELOPMENTS - ----------------------------------------- On March 2, 1999, the Company completed the sale of the assets of its U.S. Graphite and Lubricants division for $23.5 million plus the assumption of certain trade liabilities. The Company's net cash proceeds from the sale were initially used to pay down its debt to its primary consortium of lenders. This sale resulted in a pre-tax gain of $9.4 million. (See Note 8 to Consolidated Financial Statements). Company management believes the sale of these Industrial Group assets will significantly strengthen its financial position, thus allowing for expanded opportunities for growth of its Consumer Group, both internally and through possible acquisitions and joint ventures. Moreover, the Company's improved capitalization will make possible more aggressive restructuring of its remaining business operations to improve efficiency and reduce future operating costs to facilitate the aforementioned growth strategies. Accordingly, the Company has also embarked on an extensive Restructuring and Cost Reduction Program directed toward improving its overall financial performance in the near future. Key actions adopted include Consumer plant closure and consolidation, as well as personnel reduction in manufacturing, sales and marketing and corporate activities. In connection with this initiative, the Company recorded a non-recurring restructuring charge of approximately $1.7 million in the quarter ended June 30, 1999. When fully implemented, the annualized cost savings from these actions are expected to approximate $1.5 million. (See Note 9 to Consolidated Financial Statements). In March 1999, the company announced a Stock Repurchase Program authorizing the acquisition of up to $3 million in Dixon Ticonderoga Company stock. To date, the Company has repurchased approximately 69,000 shares at a cost of approximately $727,000. In addition, on May 14, 1999, the Company repurchased 4,195,000 (or approximately 12.6%) of the outstanding shares of its Mexican subsidiary, Grupo Dixon, S.A. de C.V. for approximately $2.75 million. The repurchase increases the Company's ownership in its subsidiary to 92.4%. (See Note 10 to Consolidated Financial Statements). RESULTS OF OPERATIONS - --------------------- REVENUES for the quarter ended June 30, 1999, decreased $1,587,000 from the same quarter last year. The changes by segment are as follows: Increase % Increase(Decrease) (Decrease) -------------------- (in thousands) Total Volume Price/Mix -------------- ----- ------ --------- Consumer U.S. 259 2 2 -- Consumer Foreign 1,062 10 19 (9) Industrial (2,908) (47) (47) -- The Foreign Consumer revenue increase was primarily due to the Mexican subsidiary that continues to increase revenues in its domestic mass market. However, revenue decreased $234,000 and $41,000 in Mexico and Canada, respectively, due to declines in their local currencies compared to the U.S. dollar. The sale of the U.S. Graphite and Lubricants division in March 1999 accounts for the large decrease in Industrial revenues. Revenues for the nine months ended June 30, 1999, decreased $2,514,000 over the same period last year. The changes by segment are as follows: Increase % Increase(Decrease) (Decrease) -------------------- (in thousands) Total Volume Price/Mix -------------- ----- ------ --------- Consumer U.S. 370 1 2 (1) Consumer Foreign 1,521 7 7 -- Industrial (4,405) (24) (23) (1) The increase in Foreign Consumer revenue primarily reflects the continued growth of the Mexican subsidiary in its domestic mass market. The increases in Foreign Consumer revenue were partially offset by decreases of $1,368,000 and $219,000 in Mexico and Canada, respectively, due to declines in their local currencies compared to the U.S. dollar. Industrial revenue decreased primarily due to the sale of the U.S. Graphite and Lubricants division. Revenues increased $12,001,000 from the prior quarter as follows: Increase % Increase(Decrease) (Decrease) -------------------- (in thousands) Total Volume Price/Mix -------------- ----- ------ --------- Consumer U.S. 9,655 79 78 1 Consumer Foreign 4,326 59 37 22 Industrial (1,980) (38) (38) -- The increase in U.S. and Foreign Consumer revenue reflects the seasonality of these segments. This quarter historically represents over 30% of annual revenues while the prior quarter represents under 20%. The decrease in Industrial is again due to the sale of the U.S. Graphite and Lubricants division. 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 intermediate 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 potential effect on results of operations for the future cannot be made. This currency risk in Mexico is managed through local currency financing and by export sales to the U.S. denominated in U.S. dollars. OPERATING INCOME increased $142,000 over the same quarter last year. U.S. Consumer operating income increased $432,000, principally due to decreased selling and marketing expenses. Foreign Consumer operating income increased $160,000 on higher revenues. Industrial decreased $520,000, principally due to the sale of the U.S. Graphite and Lubricant division, and general corporate administrative costs decreased $70,000. The lower sales and marketing costs contributed to a decrease in total selling and administrative costs (25.5% of sales compared to 27.2% in the prior year). Operating income increased $6,784,000 for the nine months over the same period last year. The sale of the U.S. Graphite and Lubricant division yielded a pre-tax gain of $9,396,000. U.S. Consumer included a charge for restructuring and related costs of $1,685,000 for manufacturing consolidation and personnel reduction. Through June 30, 1999, approximately $138,000 has been charged against this accrual for severance costs associated with planned personnel reduction. U.S. Consumer operating income (exclusive of the restructuring charge) increased $740,000 due to lower selling and marketing expenses and improved manufacturing efficiencies. Industrial operating income decreased $1,440,000 due to the sale of the U.S. Graphite and Lubricant division and lower Refractory division operating profit. Operating income decreased $4,339,000 from the prior quarter. The prior quarter included the gain from the sale of the U.S. Graphite and Lubricant division of $9,396,000 (partially offset by the restructuring charge of $1,685,000). Exclusive of the restructuring charge, U.S. Consumer and Foreign Consumer increased $2,550,000 and $1,220,000, respectively, on the higher seasonal revenues. Industrial decreased $430,000 due to the sale of the U.S. Graphite and Lubricant division. INTEREST EXPENSE increased $74,000 and $539,000 for the quarter and nine months ended June 30, 1999, respectively, over the same periods last year. Increased borrowings in Mexico offset a decrease in U.S. interest expense. This decrease is due to lower borrowings reflecting the proceeds of the sale of the U.S. Graphite and Lubricant division, partially offset by seasonal inventory and accounts receivable increases. Interest expense increased $123,000 over the prior quarter, again due to higher Mexico borrowings. INCOME TAXES increased $60,000 and $3,079,000 for the three months and nine months ended June 30, 1999, over the same periods last year. The nine month increase is principally due to the aforementioned gain on sale of assets. Income taxes decreased $2,255,000 from the prior quarter. (Also see Note 5 to Consolidated Financial Statements). MINORITY INTEREST represents 20% of the net income of the consolidated subsidiary, Grupo Dixon, S.A de C.V. through May 14, 1999. On that date, the Company increased its subsidiary ownership, reducing the minority interest to 7.6%. (See Note 10 to Consolidated Financial Statements). LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The Company's cash flows from operating activities decreased $2,665,000 in the first nine months of fiscal 1999. Increased receivable collections were more than offset by inventory increases during the period. Higher U.S. inventory levels were due to planned increases in preparation for manufacturing plant consolidation and new product introductions. In addition, continued growth in Mexico contributed to higher overall inventory levels. The Company's investing activities included approximately $610,000 in purchases of property and equipment in the current period as compared with $1,315,000 in the prior year. There has been a lower level of purchases as compared with prior years, due to better capital budgeting and the continued use of leasing as a financing 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 operations and existing financing or new leasing arrangements. Total cash provided from investing activities increased dramatically due to the cash proceeds of approximately $20.25 million from the sale of the U.S. Graphite and Lubricants division. These proceeds (net of escrowed funds and income tax payments) were initially used to reduce short-term indebtedness described below. The Company's primary financing arrangements are with a consortium of lenders and the underlying loan and security agreement, as amended, presently provides for a total of approximately $53 million in financing. This includes a revolving line of credit facility in the amount of $45 million which bears interest at either the prime rate, plus 0.5%, or the prevailing LIBOR rate plus 2.5%. 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 financing agreement also includes a term loan in the original amount of $7.75 million. The term loan bears interest at the same rate, and is payable in varying monthly installments through maturity. The Company previously executed certain interest rate "swap" agreements, which effectively fix the rate of interest on approximately $8.1 million of this debt at 8.75% to 8.87%. 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 received a waiver of three provisions and is in compliance with all others. At June 30, 1999, the Company had approximately $22 million of unused lines of credit available under this financing arrangement. These financing arrangements expire in September 1999. The Company is negotiating a new financing agreement which it expects will meet its needs for the next several years. The Company also has outstanding $16.5 million of 12% Senior Subordinated Notes, due 2003. In early 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, being recognized over the remaining original term of the notes. The Company also issued to noteholders warrants to purchase 300,000 shares of Company stock at $7.24 per share. The note agreement contains provisions which limit the payment of dividends and require the maintenance of certain financial covenants and ratios. The Company is presently in compliance with all provisions except two, for which it has received waivers. 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. The existing and future sources of financing and cash expected to be generated from operations and/or assets sales will, in management's opinion, be sufficient to fulfill all current and anticipated requirements of the Company's ongoing business and to meet all of its obligations. 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 began work on the Year 2000 (Y2K) compliance issue in 1998. The scope of the project includes 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 project has five phases: assessment of systems and equipment affected by the Y2K issue; definition of strategies to address affected systems and equipment; remediation of systems; testing of systems; and certification of systems. To certify that all IT systems are Y2K compliant, each system will be tested using a standard testing methodology which includes millenium testing, millenium leap year testing and cross-over year testing. Testing has been or will be performed on each system as remediation is completed. The target for completion of all phases is the third calendar quarter of 1999. The Company has completed the assessment and strategy phases for its U.S. and Canadian operations. Its Mexican operation will be brought into compliance by a complete system replacement project, which commenced in 1998. The majority of the Company's non-IT related systems and equipment are currently Y2K compliant. This statement is based primarily upon communication with the vendors as well as physical inspection, assessment and testing of equipment and related controlling software. Written documentation is substantially completed. With respect to key business suppliers, the assessment and strategy phases are underway with approximately 82% of critical vendors and 65% of all vendors certifying compliance. In addition, critical suppliers are being contacted and additional steps will be undertaken to insure non-interruption of services before, during and after January 1, 2000. Contingency planning is in the final stages and will be completed in the third quarter of 1999. Electronic interchange of data will be tested and certified in the third quarter of 1999. The Company is also dependent upon its customers for sales and cash flow. Y2K interruptions in our customers' operations could result in reduced sales, increase inventory or receivable levels and cash flow reductions. While these events are possible, our customer base is broad enough to minimize the effects of a single occurrence. We are taking steps to monitor the status of our 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 upgraded to Y2K compliant versions. Manufacturing software systems that are non-compliant will be replaced by the J.D. Edwards system in the third quarter of 1999. Since the inception of the project, the Company has incurred approximately $100,000 in incremental costs directly related to Y2K compliance. These costs were outside the normal and previously planned upgrades of systems. Based on assessments of equipment and systems, the Company expects additional Y2K expense to be approximately $50,000, which will not have a material affect on the Company's operations or financial condition. In addition, there will not be adverse impact due to postponement of IT projects because of resource constraints caused by the Y2K project. The Company presently believes that its business-critical computer systems which are not presently Y2K compliant will have been replaced, upgraded or modified in the normal replacement cycle prior to the end of the third calendar quarter of 1999. Based on the progress the Company has made in addressing its Y2K issues and its plan and timeline to complete its compliance program, the Company does not foresee significant risks associated with Y2K compliance at this time. FORWARD-LOOKING STATEMENTS - -------------------------- Any "forward-looking statements" contained in this Quarterly Report on Form 10-Q involve known and unknown risks (including, but not limited to certain foreign currency and Year 2000 readiness risks), uncertainties and other factors that could cause the actual results to differ materially from those expressed or implied by such forward-looking statements. PART II. OTHER INFORMATION 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).**** ( 2 ) b. Asset Purchase Agreement dated February 9, 1999, by and between Dixon Ticonderoga Company, as Seller, and Asbury Carbons, Inc., as Buyer. ****** ( 3 ) (i) Restated Certificate of Incorporation** ( 3 ) (ii) Amended and Restated Bylaws* ( 4 ) a. Specimen Certificate of Company Common Stock** ( 4 ) b. Amended and Restated Stock Option Plan*** ( 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* ( 10 ) b. 12.00% Senior Subordinated Notes, Due 2003, Note and Warrant Purchase Agreement* ( 10 ) c. 12.00% Senior Subordinated Notes, Due 2003, Common Stock Purchase Warrant Agreement* ( 10 ) d. License and Technological Agreement between Carborundum Corporation and New Castle Refractories Company, a division of Dixon Ticonderoga Company* ( 10 ) e. Equipment Option and Purchase Agreement between Carborundum Corporation and New Castle Refractories Company, a division of Dixon Ticonderoga Company* ( 10 ) f. Product Purchase Agreement between Carborundum Corporation and New Castle Refractories Company, a division of Dixon Ticonderoga Company* ( 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.***** ( 27 ) Financial Data Schedule (filed electronically via EDGAR) *Incorporated 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. **Incorporated by reference to the Company's quarterly report on Form 10-Q for the period ended June 30, 1997, file number 0-2655, filed in Washington, D.C. ***Incorporated by reference to Appendix 3 to the Company's Proxy Statement dated January 27, 1997, filed in Washington, D.C. ****Incorporated by reference to the Company's current report on Form 8-K dated December 12, 1997, filed in Washington, D.C. *****Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended September 30, 1998, file number 0-2655, filed in Washington, D.C. ******Incorporated by reference to the Company's current report on Form 8-K dated March 2, 1999, filed in Washington, D.C. (b) Reports on Form 8-K - --- ------------------- Not applicable. 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 11, 1999 By: /s/ Gino N. Pala --------------------------------- Gino N. Pala Chairman of the Board, President, Chief Executive Officer and Director Dated: August 11, 1999 By: /s/ Richard A. Asta --------------------------------- Richard A. Asta Executive Vice President of Finance and Chief Financial Officer Dated: August 11, 1999 By: /s/ John Adornetto -------------------------------- John Adornetto Vice President/Corporate Controller and Chief Accounting Officer EX-27 2 FDS
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheets, the Consolidated Statement of Oprations and the Consolidated Statement of Cash Flows, and is qualified in its entirety by reference to such financial statements. 9-MOS SEP-30-1999 OCT-01-1999 JUN-30-1999 1,166,584 0 39,330,335 1,505,660 42,562,514 83,986,979 32,603,119 (18,579,934) 103,892,110 52,286,994 0 0 0 3,685,559 25,477,197 103,892,100 84,639,376 84,639,376 53,076,239 26,828,122 0 0 3,719,234 10,412,099 4,208,122 5,857,197 0 0 0 5,857,197 1.71 1.64
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