<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
September 30,
For the fiscal year ended 1997 Commission file number 0-2655
DIXON TICONDEROGA COMPANY
(Exact name of Company as specified in its charter)
Form 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required) For the fiscal year ended September 30, 1997.
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required) For the transaction period from
to .
Delaware 23-0973760
(State or other jurisdiction of (I.R.S. Employer
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
Title of each class Name of each exchange on which registered
Common Stock, $1.00 par value American Stock Exchange
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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Based on the closing sales price on December 3, 1997, the aggregate market value
of the voting stock held by non-affiliates of the Company was $31,074,863.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of December 3, 1997: 3,357,587 shares of common stock, $1.00
Par Value.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this Form
10-K. [ ]
Documents Incorporated by Reference:
Proxy statement to security holders incorporated into Part III for the fiscal
year ended September 30, 1997.
<PAGE>
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PART I
ITEM 1. BUSINESS
NEW DEVELOPMENTS AND BUSINESS STRATEGIES
Dixon Ticonderoga Company (hereinafter the "Company") achieved record
revenues and earnings in its fiscal year ended September 30, 1997. Revenues
exceeded $115 million, an increase of approximately 8% over 1996, and net income
grew to $3.6 million compared to $2.6 million in 1996 (excluding after tax
provisions of $1.44 million for litigation costs and $282,000 for extraordinary
refinancing costs). Operating income in the Company's two core business groups
grew 34% to $13.2 million compared with $9.8 million in 1996 (excluding
litigation costs). In 1997, cash flow from operating activities increased $5.7
million. These cash flows were utilized to reduce the Company's total debt (net
of cash balances) by approximately $2.5 million and to finance the repurchase of
subsidiary stock (an additional $2.5 million) discussed below.
This improvement is attributable to the success of many of the Company's
strategic objectives over the past several years. The Company aggressively
introduced new products and repositioned many others, most notably its Consumer
Group's new soybean-based crayon and the entire new design of its Prang product
line. With the participation of the U.S. Soybean Board and several state
Soybean Councils, the Company supported this introduction with a focused,
full-scale promotional program utilizing outside public relations and
advertising agencies and purchased media. The Industrial Group also began to
offer new products such as petroleum coke and silicon-carbide brick (under its
New Castle Refractories division's new technology agreement).
The U.S. Consumer division also improved its gross profit margins by over
3% largely through ambitious manufacturing efficiency efforts. Such efforts
included balancing production, efficiency studies by outside consultants,
sharing of manufacturing processes between the U.S. and Mexico Consumer plants
and the addition of certain strategic manufacturing equipment. For example,
in 1997 the division began manufacturing its marker products on its modernized
production line in place at its Deer Lake, Pennsylvania facility. The U.S.
Consumer division also continued its emphasis on improving its distribution and
customer service systems and processes through further training and technology
enhancements.
Significant operating improvement was also realized in the Mexico Consumer
subsidiary where new management was put in place in late 1996. In addition, the
Company repurchased approximately 30% of the minority interest in this
subsidiary in February 1997, increasing its ownership to approximately 80%.
Moreover, in December 1997, the Mexico subsidiary completed its acquisition of
Vinci de Mexico, S.A. de C.V. This acquisition brings with it one of the most
highly-regarded and recognized brand names in the school products industry in
Mexico. Management expects continuing strong growth in its Mexico subsidiary.
The Industrial Group's management ranks were reorganized and strengthened
in such key areas as sales, technical research and development and in
manufacturing. Also in 1997, graphite manufacturing activities were
consolidated into the division's Burnet, Texas facility to gain efficiencies.
Significant recent corporate activities include the 1996 recapitalization
of the Company's U.S. debt, including nearly $70 million of new financing,
primarily to provide working capital to support the growth of its Consumer and
Industrial Groups. In 1996, the Company completed its relocation of corporate
headquarters and has recently centralized additional management activities
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at this new facility in Heathrow, Florida. In 1997, the Company began many
new human resource initiatives intended to enhance training, personnel
development, benefits and incentive compensation for its employees.
Further information regarding these matters is included elsewhere in the
Annual Report on Form 10-K.
COMPANY ORGANIZATION
Dixon Ticonderoga Company
(Parent)
|
|
--------------------------------------------------------
| | |
| | |
Dixon Ticonderoga, Inc./ Dixon Europe, Ltd. Bryn Mawr Ocean
Canada (Wholly-Owned) (Wholly-Owned) Resorts/Inactive
| (Wholly-Owned)
| and
Dixon Ticonderoga de Ticonderoga Graphite,
Mexico, S.A. de C.V. Inc./Inactive
(79.8% Owned) (Wholly-Owned)
INDUSTRY SEGMENTS
The Company has two principal continuing business segments: its Consumer Group
and Industrial Group. These segments, and the primary operations of each, are
as follows:
BUSINESS SEGMENTS OPERATIONS
Consumer Group Manufacture and sale of writing and drawing
pencils, pens, artist materials, felt tip
markers, industrial markers, lumber
crayons, typewriter correction materials
and allied products.
Industrial Group Manufacture and sale to industry of
processed natural and synthetic bulk
graphite, graphite oil, solvent and water-
based lubricants, as well as colloidal
graphitic suspensions (Graphite and
Lubricants division); clay and graphite
stopper heads, firebrick, non-graphitic
refractory kiln furniture and furnace
linings (Refractories division).
Financial information regarding net revenues, operating profits and
identifiable assets related to the Company's industry segments for the years
ended September 30, 1997, 1996, and 1995, is contained in Note 11 to
Consolidated Financial Statements.
The Company's international operations are subject to certain risks
inherent in carrying on business abroad, including the risk of currency
fluctuations, currency remittance restrictions and unfavorable political
conditions. It is the Company's opinion that there are presently no material
political risks involved in doing business in the foreign countries (i.e.
Mexico, Canada and Europe) in which its operations are being conducted.
<PAGE> 4
CONSUMER GROUP
The Company manufactures its leading brand TICONDEROGA and a full line of
pencils in Versailles, Missouri. The Company also manufactures and markets
advertising specialty pencils, pens and markers through its promotional products
division.
The Company is also the producer of WEAREVER writing products at its
facility in Deer Lake, Pennsylvania. In addition to the WEAREVER and Dixon
lines of pens, the Company also manufactures and markets its Prang and
Ticonderoga lines of markers, mechanical pencils, and allied products at this
facility.
The Company also manufactures in Sandusky, Ohio (mainly for wholesale
school suppliers and retailers) its PRANG brand of wax crayons, chalks, dry and
liquid tempera, water colors and art materials. This division also manufactures
special markers for industrial use all of which are marketed and sold, together
with the products manufactured by the Versailles and Deer Lake operations, by
the U.S. Consumer Products group.
Under an agreement with Warner Bros. Consumer Products, the Company also
manufactures and markets in the U.S., Canada, and Mexico a complete product line
of pencils, pens, crayons, chalks, markers, paints, art kits and related items
featuring the famous Looney Tunes characters. (See Note 12 to Consolidated
Financial Statements.)
Dixon Ticonderoga Inc., a wholly-owned subsidiary with a distribution
center in Newmarket, Ontario, and a manufacturing plant in Acton Vale, Quebec,
Canada, is engaged in the sale in Canada of black and color writing and drawing
pencils, pens, lumber crayons, correction materials, erasers, rubber bands and
allied products. It also distributes certain of the school product lines. The
Acton Vale plant also produces eraser products and correction materials for
distribution by the U.S. Consumer Products group.
Dixon Ticonderoga de Mexico, Inc., S.A. de C.V., a majority-owned
subsidiary (79.8%) is engaged in the manufacture and sale in Mexico of black and
color writing and drawing pencils, typewriter correction materials, lumber
crayons and allied products. This subsidiary also manufactures and sells in
Mexico certain products of the type manufactured at the Sandusky facility, as
well as marker products manufactured at the Deer Lake facility.
Dixon Europe, Limited, a wholly-owned subsidiary of the Company is engaged
in the distribution of many Dixon Consumer Products in the United Kingdom and
other European countries.
INDUSTRIAL GROUP
Through its Graphite and Lubricants division, Dixon manufactures and sells
processed natural and synthetic graphite, graphite oil, petroleum coke, solvent
and water-based lubricants as well as colloidal graphitic suspensions. The
American Graphite location in Manchester Township, New Jersey, and the
Southwestern Graphite location in Burnet, Texas, process and sell graphite to
industrial customers, and are engaged in the processing and blending of various
grades of foreign and domestic graphites for use in the manufacture and sale of
related products.
The New Castle Refractories division, with plants located in Ohio,
Pennsylvania and West Virginia, manufactures various types of non-graphitic
refractory kiln furniture used by the ceramic and glass industries; firebrick,
silicon-carbide brick, various types and designs of non-graphitic refractory
special shapes for ferrous and nonferrous metal industries; refractory shapes
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for furnace linings and industrial furnace construction; various grades
of insulating firebrick and graphite stopper heads.
REAL ESTATE OPERATIONS (Discontinued Operations)
The Company previously developed Bryn Mawr Ocean Towers (three nine-story
towers) on North Hutchinson Island, Florida, which were sold as condominiums.
Pursuant to a formal plan and agreement dated September 29, 1995, the Company
disposed of the remaining property dedicated to this project and has ceased any
further real estate activities. This segment is therefore treated as
"Discontinued Operations." (See Note 10 to Consolidated Financial Statements.)
DISTRIBUTION
Consumer products manufactured at the Sandusky, Ohio; Deer Lake,
Pennsylvania; and Versailles, Missouri plants are distributed nationally through
wholesale, commercial and retail stationers, school supply houses, industrial
supply houses, blueprint and reproduction supply firms, art material
distributors and retailers. In 1996, the Company opened a central distribution
center in Shelbyville, Tennessee, to enhance service levels, especially with
respect to large retail customers. The consumer products manufactured at the
Canadian and Mexican plants are distributed nationally in these countries
through wholesalers, distributors, school supply houses and retailers.
The industrial products manufactured at the various plants are sold by
direct sales, manufacturers' representatives and industrial distributors in
North America. In addition, these products are sold worldwide, principally in
Central and South America, Europe, the Philippines and Japan.
RAW MATERIALS
Graphite, which can be considered a strategic raw material for the
Company's business, is sold by the Company in bulk and as a component, and is
used in the manufacture of refractory products, lubricants and leads for
wood-cased pencils. Graphite is purchased from Brazil, Madagascar, India,
Mexico, People's Republic of China, Sri Lanka, West Germany and Zimbabwe. There
were no significant raw material shortages of any consequence during 1997 nor
any anticipated for future periods.
TRADEMARKS, PATENTS AND COPYRIGHTS
The Company owns a large number of trademarks, patents and copyrights in
each industry segment related to products manufactured and marketed by it, which
have been secured over many years. These have been of value in the growth of
the business and should continue to be of value in the future. However, in the
opinion of the Company, its business generally is not dependent upon the
protection of any patent or patent application or the expiration of any patent.
SEASONAL ASPECTS OF THE BUSINESS
The Consumer Group reflects greater portions (approximately 64% in 1997)
of its sales in the third and fourth fiscal quarters of the year due to
shipments of school orders to its distribution network. This practice, which
is standard for this industry, usually causes the Company to incur additional
bank borrowings during the period between shipment and payment.
The Industrial Group has no material seasonal aspects.
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COMPETITION
Both of the Company's industry segments are engaged in a highly competi-
tive business with a number of competitors, some of whom are larger and have
greater resources than the Company. Important to the Company's market position
are the quality and performance of its products, its marketing and distribution
systems, and the reputation developed over the many years that the Company has
been in business.
RESEARCH AND DEVELOPMENT
The Company employs approximately 18 full-time professional employees in
the area of quality control and product development. The Company has establish-
ed a centralized research and development laboratory in its Sandusky, Ohio
facility. For accounting purposes, research and development expenses in any year
presented in the accompanying Consolidated Financial Statements do not represent
more than 1% of revenues.
EMPLOYEES
The total number of persons employed by the Company was approximately
1,170 of which 760 were employed in the United States.
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ITEM 2. PROPERTIES
The following properties of the Company are owned and are collateralized
or pledged under the Company's loan agreement with a consortium of lenders
(First Union Capital Corporation as agent), except for the Heathrow, Florida,
property, which is subject to a separate mortgage agreement. See Notes 3 and
4 to Consolidated Financial Statements. Most of the buildings are of steel
frame and masonry or concrete construction.
<TABLE>
<CAPTION> SQUARE FEET
<S> LOCATION OF FLOOR SPACE
<C>
Heathrow, Florida (Corporate Headquarters) 33,000
Sandusky, Ohio (Consumer) 276,000
Manchester Township, New Jersey (American
Graphite) (Graphite and Lubricants division) 76,000
Near Burnet, Texas (Southwestern Graphite)
(Graphite and Lubricants division) 97,000
New Castle, Pennsylvania (Refractories division) 131,000
Newell, West Virginia (Refractories division) 45,000
Massillon, Ohio (Refractories division) 113,000
Zoar, Ohio (Refractories division) 65,000
Acton Vale, Quebec, Canada (Dixon
Ticonderoga Inc.) (Consumer) 32,000
Tlalnepantla, D.F., Mexico (Dixon Ticonderoga de Mexico,
S.A. de C.V.) (Consumer) 55,000
Versailles, Missouri (Consumer) 120,000
Shelbyville, Tennessee (Consumer) 94,000
Deer Lake, Pennsylvania (Consumer) 150,000
The Company also owns a non-operating graphite mine near Burnet, Texas,
included with land at historical cost in the consolidated balance sheets.
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ITEM 3. LEGAL PROCEEDINGS
In March 1986, The Dixon Venture ("Venture") (an unrelated company) filed
a civil action in the New Jersey Superior Court seeking recovery of damages and
costs allegedly incurred by Venture in connection with the clean-up ofindustrial
property acquired from the Company in Jersey City, New Jersey in February, 1984.
Venture's claims were brought pursuant to the New Jersey Environmental Clean-up
Responsibility Act ("ECRA"), an environmental remedial statute dealing with the
transfer of industrial property.
On April 24, 1996, a decision was rendered by the Superior Court of New
Jersey in Hudson County finding the Company responsible for $1.94 million in
certain environmental clean-up costs relating to this matter. Including pre-
judgment interest on the damage award, the Company estimates its exposure
to be approximately $3.3 million. 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 attorneys). A subsequent appeal and filing
with the New Jersey Supreme Court for relief from the original judgment have
been denied. As a result of the judgment, the Company increased its
liability accrued for this matter to $3.3 million during 1996.
Also see Notes 12 and 14 to Consolidated Financial Statements.
ITEM 4. SUBMISSION ON MATTERS TO VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK
AND RELATED SECURITY HOLDER MATTERS
Dixon Ticonderoga Company common stock is traded on the American Stock
Exchange. The following table sets forth the low and high per share prices as
per the American Stock Exchange closing prices for the applicable quarter.
</TABLE>
<TABLE>
<CAPTION>
<S> FISCAL FISCAL
QUARTER ENDING 1997 1996
<C> <C> <C> <C>
LOW HIGH LOW HIGH
December 31 6.38 8.38 5.50 9.88
March 31 6.25 7.38 6.38 7.75
June 30 6.38 12.00 6.00 7.50
September 30 11.56 14.00 6.50 8.13
</TABLE>
Since fiscal 1990, the Board of Directors has suspended payment of
dividends. The Board will continue to review the Company's future performance
and determine the dividend policy on a quarter-to-quarter basis. The Company's
debt agreements restrict the amount of dividends which can be paid in the
future. (See Notes 3 and 4 to Consolidated Financial Statements).
The number of record holders of the Company's common stock at December 3,
1997, was 425.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
FOR THE FIVE YEARS ENDED SEPTEMBER 30, 1997
(in thousands, except per share amounts)
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
REVENUES $115,055 $106,696 $95,565 $91,932 $82,138
INCOME FROM
CONTINUING OPERATIONS $ 3,601 $ 1,168 $ 1,658 $ 3,417 $ 476
LOSS FROM
DISCONTINUED OPERATIONS - - (595) (116) (146)
EXTRAORDINARY ITEM - (282) - - -
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE - - - - 235
NET INCOME $ 3,601 $ 886 $ 1,063 $ 3,301 $ 565
EARNINGS (LOSS) PER
COMMON SHARE (PRIMARY):
CONTINUING OPERATIONS $ 1.05 $ .36 $ .52 $ 1.10 $ .15
DISCONTINUED OPERATIONS - - (.19) (.04) (.04)
EXTRAORDINARY ITEM - (.09) - - -
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE - - - - .07
NET INCOME $ 1.05 $ .27 $ .33 $ 1.06 $ .18
EARNINGS (LOSS) PER
COMMON SHARE ( FULLY DILUTED):
CONTINUING OPERATIONS $ 1.00 $ .36 $ .52 $ 1.10 $ .15
DISCONTINUED OPERATIONS\ - - (.19) (.04) (.04)
EXTRAORDINARY ITEM - (.09) - - -
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE - - - - .07
NET INCOME $ 1.00 $ .27 $ .33 $ 1.06 $ .18
TOTAL ASSETS $ 84,161 $ 77,848 $70,158 $68,852 $63,946
LONG-TERM DEBT $ 23,556 $ 25,119 $14,541 $19,141 $18,279
DIVIDENDS PER
COMMON SHARE $ - $ - $ - $ - $ -
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
1997 vs. 1996:
Income from continuing operations before income taxes and minority
interest increased $4,153,000 in 1997. In 1996, there were provisions for
litigation settlements and legal costs of $2,039,000 (see Item 3 and Note 12 to
Consolidated Financial Statements). Revenue increases of $5,715,000 in the for-
eign operations contributed to an increase in operating profits of $2,815,000.
Manufacturing efficiencies and higher volume increased U.S. Consumer operating
profits by $1,011,000. Higher employee benefit and insurance costs, consulting
and professional expenses, and amortization of loan fees increased corporate
administrative expenses by $870,000. Operating profits in the Industrial
segment decreased $464,000 with gains in the Refractories division being more
than offset by a decrease in the Graphite and Lubricants division operating
profit, which suffered from competitive pricing pressures. Interest expense
increased $380,000 on higher average borrowing rates during the year. The 1997
effective tax rates increased to more normal U.S. statutory and state tax rates
overall, compared with 1996 which was favorably affected by lower foreign tax
rates.
1996 vs. 1995:
Income from continuing operations before income taxes, minority interest
and extraordinary items decreased $1,014,000 in 1996. In 1996 and 1995 there
were provisions of $2,039,000 and $1,530,000, respectively, for litigation
settlements and legal costs related to several lawsuits (see Item 3 and Note 12
to Consolidated Financial Statements). Foreign Consumer operating profits
decreased $962,000 primarily due to provisions for doubtful accounts receivable
(of approximately $500,000) in Mexico, as well as 1995 foreign currency gains of
over $500,000. The referenced $500,000 provision for doubtful accounts was
principally due to one large and unusual bad debt regarding a large Mexican
retailer. The Company does not expect such losses to reoccur, nor does this
represent any trend or deterioration of the Company's Mexico accounts receiv-
able. Also in 1997, there were additional distribution and promotional costs
incurred by U.S. Consumer to service the mass retail and mega-store markets.
Interest expense decreased $229,000 due to lower average borrowings. Income tax
expense decreased in the same proportions as before tax income. The difference
between the effective tax rate and the U.S. statutory rate primarily is due to
the effect of lower foreign rates and certain permanent items.
1995 vs. 1994:
Income from continuing operations before income taxes and minority interest
decreased $1,000,000 in 1995. Included in 1995 are provisions of $1,530,000 for
litigation settlements and legal costs related to several lawsuits (see Item 3
and Note 12 to Consolidated Financial Statements). In 1994 there was a gain on
sale of subsidiary stock and other assets of $2,313,000 relating primarily to
the sale of stock in our Mexico subsidiary (see Note 8 to Consolidated Financial
Statements). Net corporate expenses decreased $690,000 in 1995, while interest
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expense decreased $678,000. The interest expense reduction was principally due
to the Mexican subsidiary's low borrowing position subsequent to the
aforementioned sale of stock. Income taxes decreased $380,000 on lower before
tax income and the 1995 effective rate decreased due to the impact of lower
foreign rates and certain permanent items.
Discontinued Operations:
The 1995 loss from discontinued operations of the real estate segment
represents a net operating loss of $175,000 (net of a tax benefit of $104,000)
and a loss on disposal of $420,000 (net of a tax benefit of $250,000).
Extraordinary Item:
The 1996 extraordinary charge of $282,303 represents costs associated with
the early retirement of the Company's 10.59% Senior Subordinated Notes, due
1999. See Note 4 to Consolidated Financial Statements.
REVENUES
Overall 1997 revenues increased $8,359,000 over the prior year. The
changes by segment are as follows:
Increase % Increase (Decrease)
(Decrease) Total Volume Price/Mix
Consumer U.S. $1,945,000 3 2 1
Consumer Foreign 5,715,000 30 22 8
Industrial 699,000 3 4 (1)
U.S. Consumer revenue increased primarily in the educational, mass retail
and commercial office supply mega-store markets. Revenue in Mexico and Canada
increased $4,168,000 and $1,326,000, respectively. In both geographic areas
there were aggressive efforts in the mass retail market. In Mexico, there was a
decrease of $425,000 in revenue due to the decline in value of the peso compared
to the U.S. dollar. The Industrial increase was primarily due to higher volume
in the Refractories 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 once in each of the last three decades, the last one being in
December 1994. In the short term after such 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 potential effect on results
of operations for the future cannot be made. The Company's Mexico subsidiary
purchased a peso currency option to protect against devaluation in excess of
approximately 10%. This currency
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risk in Mexico is further managed through local currency financing and by export
sales to the U.S. denominated in U.S. dollars. Subsequent to September 30, 1997,
the Mexican peso devalued approximately 6% as compared with the U.S. dollar.
Overall 1996 revenues increased $11,131,000 over the prior year. The
changes by segment are as follows:
Increase % Increase (Decrease)
(Decrease) Total Volume Price/Mix
Consumer U.S. $8,223,000 15 14 1
Consumer Foreign 3,082,000 19 19 -
Industrial (174,000) (1) - (1)
Consumer revenues in the United States increased primarily in the
commercial office supply mega-stores and mass retail markets. The increase
in Foreign Consumer revenue included increases of $1,100,000 in Canada and
$1,960,000 in Mexico. In the prior year, Mexico revenue was depressed because of
the devaluation of the Mexican peso that occurred in early fiscal 1995. This
year's revenue decreased $1,700,000 in Mexico due to the decline of the peso
value compared to the U.S. dollar. This decline was offset by increased peso
selling prices.
Revenues in 1995 increased $3,632,000 over the prior year. The changes by
segment are as follows:
Increase % Increase (Decrease)
(Decrease) Total Volume Price/Mix
Consumer U.S. $4,624,000 9 8 1
Consumer Foreign (2,198,000) (13) (9) (4)
Industrial 1,206,000 5 4 1
U.S. Consumer revenue volume increases were primarily in the office supply
mega-store market. The decrease in Foreign Consumer revenue was primarily due
to the majority-owned subsidiary in Mexico. Revenue in Mexico decreased
$5,200,000 due to the decline of the peso value compared to the U.S. dollar.
This decrease was partially offset by increased peso selling prices. Industrial
revenue increased primarily due to higher volume in the Refractories division.<PAGE>
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<PAGE> 14
OPERATING PROFITS
There was an increase of $3,362,000 in operating profits by segment in 1997
(exclusive of provisions for litigation settlements and related costs). Foreign
operations increased $2,815,000. Mexico operating profits increased $2,393,000
and Canada increased $368,000 on revenue increases of 45% and 15%, respectively.
U.S. Consumer operating profits increased $1,011,000 (exclusive of provisions
for litigation settlements and related costs in 1996), primarily due to
increased manufacturing efficiencies and higher volume. Industrial operating
profits decreased $464,000 primarily due to competitive pricing pressures in
the Graphite and Lubricants division. Total cost of goods sold in 1997 decreased
(63.4% of sales as compared with 65.9% in 1996) due primarily to the
aforementioned manufacturing efficiencies.
There was a decrease of $582,000 in operating profits by segment in 1996
(exclusive of provisions for litigation settlements and related costs). Foreign
Consumer operating profits decreased $962,000 primarily due to the aforemen-
tioned provisions for doubtful accounts receivable (of approximately $500,000)
in Mexico, as well as 1995 foreign currency gains of over $500,000. U.S.
Consumer operating profits increased $367,000. This increase was due to the
U.S. Consumer revenue growth. However, additional distribution and promotional
costs incurred to service the U.S. Consumer retail and mega-store markets part-
ially offset revenue growth. In addition, provisions for litigation settlements
and related costs increased over provisions made in 1995, and accordingly,
decreased U.S. Consumer and Industrial operating profits by $411,000 and
$98,000, respectively.
Operating profits increased $1,476,000 in 1995 (exclusive of provisions for
litigation settlements and related costs). Foreign operations increased
$984,000. Our Canadian subsidiary increase of $396,000 reflected higher
revenues and a stable year with respect to that country's currency. The
increase in Mexico was primarily due to increased shipments to the U.S. and
related plant efficiencies and currency gains. Industrial Group revenues
increased $350,000 on higher Refractories division volume. U.S. Consumer
operating profits were relatively flat. U.S. Consumer revenue and gross profit
increases were offset by increased selling and distribution costs, primarily
incurred to service the office supply mega-store markets. Total cost of
goods sold in 1995 decreased (65.1% of sales as compared with 67.7% in 1994)
due primarily to increased manufacturing efficiencies from higher production
volume at the U.S. and Mexico Consumer plants. Litigation settlements and
related costs decreased U.S. Consumer and Industrial operating profits by
$1,049,000 and $481,000, respectively.
MINORITY INTEREST
Minority interest represents 20.2% of the net income of the consolidated
subsidiary, Dixon Ticonderoga de Mexico, S.A. de C.V. from February 1997 and
49.9% prior thereto ($808,536 and $920,522 in fiscal 1997 and 1996,
respectively), equivalent to the extent of the investment of the minority
shareholders. As described in Note 8 to Consolidated Financial Statements, this
minority interest was created by an initial public offering in 1994. The
Company repurchased approximately 30% of its subsidiaries shares in February
1997.
<PAGE> 15
EFFECT OF CERTAIN NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 128 "Earnings Per Share." This statement, which is effective for the
Company's first quarter of fiscal 1998, establishes new requirements for the
calculation, presentation and disclosure of earnings per share. There will be
a requirement to present two earnings per share calculations. Basic earnings per
share will be calculated on the weighted average of shares outstanding. The
second calculation, diluted earnings per share, will be based on the weighted
average of shares outstanding plus the effects of potentially dilutive common
shares. The effect on fiscal years 1997, 1996, and 1995 is disclosed in Note 9
to Consolidated Financial Statements.
Also in 1997, the FASB issued Statement No. 130 "Reporting Comprehensive
Income" which is effective for the Company in fiscal 1999. This statement
requires the reporting of net income and all other charges to equity during the
period, except those resulting from investments by owners and distributions to
owners, in a separate statement that begins with net income or in the
consolidated statement of operations below net income. The Company estimates
that currently the only component of comprehensive income that bypasses the
statement of operations is foreign currency translation adjustments presently
being reported in the Consolidated Statement of Shareholders' Equity.
<PAGE>
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition has benefited significantly from its
recent operating success and the completion of major financing initiatives.
Cash flows from operating activities in 1997 improved by approximately $5.7
million over the prior year, due principally to higher operating profits,
increased receivable collections and more strict inventory control and accounts
payable management practices. Income from operations increased $2.4 million
and inventory levels remained relatively flat, despite an increase in consol-
idated revenues of 8%. Despite strong collection efforts, total accounts
receivable increased approximately $2.5 million on the higher revenues
(although this increase was significantly less than in 1996). Account payable
management procedures also contributed to improved operating cash flows. As is
the case historically, cyclical short-term borrowings (see below) financed peak
mid-year increases in accounts receivable and inventories.
The Company's investing activities included approximately $2 million in
purchases of property and equipment in 1997. This lower level of purchases as
compared with prior years is attributable to the 1996 construction of the
Company's new corporate headquarters facility in Heathrow, Florida.
Expenditures to complete this building project approximated $2.2 million in 1996
(with a total project cost of approximately $3.6 million). The construction
costs were ultimately financed through a permanent $2.73 million mortgage
arrangement. (See Note 4 to Consolidated Financial Statements). The Company
also financed certain strategic manufacturing equipment (in the amount of $2.7
million) under a long-term operating lease arrangement. (See Note 12 to
Consolidated Financial Statements). 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.
In July 1996, the Company entered into new financing arrangements with a
consortium of lenders to provide additional working capital. The new loan and
security agreement provides for a total of $48 million in financing. This
includes a revolving line of credit facility in the amount of $40 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 2001. The Company
previously executed certain interest rate "swap" agreements which effectively
fix the rate of interest on approximately $13 million of this debt at 8.75% to
8.87%.
These new 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 presently in compliance with
all such provisions. These new arrangements provide up to $10 million in
additional financing as compared with the Company's previous primary lender
agreement. At September 30, 1997, the Company had approximately $24 million of
unused lines of credit available under this new financing arrangement.
<PAGE>
<PAGE> 17
In September 1996, the Company also completed the private placement of
$16.5 million of new 12% Senior Subordinated Notes, due 2003. The net proceeds
were used to retire early the remaining $7 million of the Company's prior issue
of Senior Subordinated Notes due 1999, and to reduce short-term borrowings, thus
providing additional working capital. This transaction also reduced the
Company's annual debt service obligations by approximately $3.3 million through
1998. The Company executed a reverse interest rate "swap" agreement which
converts $10 million of the notes to a floating rate of interest (approximately
10.8% at September 30, 1997). In connection with the private placement, the
Company 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, with which the Company is presently in compliance.
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 Company's repurchase of its Mexico subsidiary's stock in February 1997
(see Note 8 to Consolidated Financial Statements) was financed through the
aforementioned revolving line of credit facility. The Company's subsidiary's
acquisition of Vinci de Mexico, S.A. de C.V., completed in December 1997, was
financed entirely through its on-hand cash and cash equivalents.
Refer to Notes 3 and 4 to Consolidated Financial Statements for further
description of the aforementioned financing arrangements.
The new and existing sources of financing and cash expected to be generat-
ed from future operations will, in management's opinion, be sufficient to ful-
fill all current and anticipated requirements of the Company's ongoing business
and to meet all of its obligations.
YEAR 2000 COMPUTER ISSUES
The Company is in process of assessing and addressing the impact of the
year 2000 on its computer hardware and software. The Company's principal
operating and application software is believed to be year 2000 compliant,
although peripheral applications and/or personal computer systems may not be.
Management and its outside management information consultants are in the process
of developing a plan to assure full compliance by 1999. Accordingly, the
Company does not expect this matter to materially impact how it conducts
business nor its future results of operations or financial position.
FORWARD-LOOKING STATEMENTS
Any "forward-looking statements" contained in this Annual Report on Form
10-K 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.
<PAGE>
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<CAPTION>
<S> <C>PAGE
Report of Independent Accountants 19
Consolidated Balance Sheets as of
September 30, 1997 and 1996 20
Consolidated Statements of Operations For the Years
Ended September 30, 1997, 1996 and 1995 22-23
Consolidated Statements of Shareholders' Equity
For the Years Ended September 30, 1997, 1996 and 1995 24
Consolidated Statements of Cash Flows For the Years
Ended September 30, 1997, 1996 and 1995 25-26
Notes to Consolidated Financial Statements 27-43
Schedule For the Years Ended
September 30, 1997, 1996, and 1995:
II. Valuation and Qualifying Accounts 44
Consent of Independent Accountants 45
</TABLE>
Information required by other schedules called for under Regulation S-X is
either not applicable or is included in the Consolidated Financial Statements or
Notes thereto.
<PAGE>
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
Shareholders and Board of Directors of
Dixon Ticonderoga Company
We have audited the accompanying consolidated financial statements and the
financial statement schedule of Dixon Ticonderoga Company and subsidiaries as
listed in the index on page 17 of this Form 10-K. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Dixon
Ticonderoga Company and subsidiaries at September 30, 1997 and 1996, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended September 30, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Orlando, Florida
November 26, 1997,
except as to Note 14 for which
the date is December 19, 1997
<PAGE>
<PAGE> 20
<TABLE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND 1996
<CAPTION>
<S> <C> <C>
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 5,607,587 $ 2,597,032
Receivables, less allowance for
doubtful accounts of $1,004,537
in 1997 and $1,352,411 in 1996 25,969,659 23,442,889
Inventories 31,580,175 31,460,934
Other current assets 3,225,881 3,044,796
Total current assets 66,383,302 60,545,651
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 16,955,803 15,711,724
Machinery and equipment 17,130,035 16,537,994
Furniture and fixtures 944,267 917,222
35,030,105 33,166,940
Less accumulated depreciation (19,542,880) (17,730,505)
15,487,225 15,436,435
OTHER ASSETS 2,290,712 1,866,054
$ 84,161,239 $ 77,848,140
</TABLE>
<PAGE>
<PAGE> 21
LIABILITIES AND
SHAREHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES:
Notes payable $16,058,080 $14,159,143
Current maturities of long-term debt 1,745,080 1,613,773
Accounts payable 7,077,955 5,461,348
Accrued liabilities 12,712,385 10,934,838
Total current liabilities 37,593,500 32,169,102
LONG-TERM DEBT 23,555,618 25,119,305
DEFERRED INCOME TAXES AND OTHER 1,142,631 1,051,171
MINORITY INTEREST 2,006,865 3,517,006
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 3,591,681
shares in 1997 and 3,537,211
shares in 1996 3,591,681 3,537,211
Capital in excess of par value 2,770,668 2,489,674
Retained earnings 17,127,698 13,526,520
Cumulative translation adjustment (2,768,856) (2,669,031)
20,721,191 16,884,374
Less treasury stock, at cost
(234,094 shares in 1997; 243,433
shares in 1996) (858,566) (892,818)
19,862,625 15,991,556
$84,161,239 $77,848,140
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
<PAGE> 22
<TABLE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
REVENUES $115,054,806 $106,695,874 $95,565,000
COSTS AND EXPENSES:
Cost of goods sold 72,916,837 70,343,837 62,193,918
Selling and
administrative expenses 31,252,037 27,955,760 24,241,328
Provisions for litigation
settlements and related costs -- 2,039,000 1,530,377
104,168,874 100,338,597 87,965,623
OPERATING INCOME 10,885,932 6,357,277 7,599,377
INTEREST EXPENSE (3,799,760) (3,423,650) (3,652,824)
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST 7,086,172 2,933,627 3,946,553
INCOME TAXES 2,676,458 845,044 1,137,897
4,409,714 2,088,583 2,808,656
MINORITY INTEREST 808,536 920,522 1,150,690
INCOME FROM CONTINUING OPERATIONS 3,601,178 1,168,061 1,657,966
DISCONTINUED OPERATIONS:
Loss from operations -- -- (174,923)
Loss on disposal -- -- (420,000)
-- -- (594,923)
EXTRAORDINARY ITEM -- (282,303) --
NET INCOME $ 3,601,178 $ 885,758 $1,063,043
</TABLE>
<PAGE>
<PAGE> 23
EARNINGS (LOSS) PER
COMMON SHARE (PRIMARY):
Continuing operations $ 1.05 $ .36 $ .52
Discontinued operations -- -- (.19)
Extraordinary item -- (.09) --
Net income $ 1.05 $ .27 $ .33
EARNINGS (LOSS) PER
COMMON SHARE (FULLY DILUTED):
Continuing operations $ 1.00 $ .36 $ .52
Discontinued operations -- -- (.19)
Extraordinary item -- (.09) --
Net income $ 1.00 $ .27 $ .33
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
<PAGE> 24
<TABLE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<CAPTION>
Common Capital in Cumulative
Stock $1 Excess of Retained Translation
Treasury
Par Value Par Value Earnings Adjustment Stock
<S> <C> <C> <C> <C> <C>
BALANCE, September 30, 1994 $ 3,424,873 $ 2,042,639 $11,577,719 $ (531,455)$
(972,912)
Net income 1,063,043
Cumulative translation adjustment (1,555,899)
Employee stock options exercised 23,593 91,985
Employee Stock Purchase Plan
(10,123 shares) 31,705
37,132
BALANCE, September 30, 1995 $ 3,448,466 $ 2,166,329 $12,640,762 $(2,087,354)$
(935,780)
Net income 885,758
Cumulative translation adjustment (581,677)
Employee stock options exercised 88,745 295,368
Employee Stock Purchase Plan
(11,714 shares) 27,977
42,962
BALANCE, September 30, 1996 $ 3,537,211 $ 2,489,674 $13,526,520 $(2,669,031)$
(892,818)
Net income 3,601,178
Cumulative translation adjustment (99,825)
Employee stock options exercised 54,470 260,669
Employee Stock Purchase Plan
(9,339 shares) 20,325
34,252
BALANCE, September 30, 1997 $ 3,591,681 $ 2,770,668 $17,127,698 $(2,768,856)$
(858,566)
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 25
<TABLE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Income from continuing operations $3,601,178 $1,168,061 $1,657,966
Loss from discontinued operations -- -- (594,923)
Loss from extraordinary item -- (282,303) --
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,571,660 2,361,081 2,379,728
Deferred taxes (228,039) (900,298) 83,802
Provision for doubtful accounts
receivable 248,576 977,965 421,850
Income attributable to
minority interest 808,536 920,522 1,150,690
(Income) loss attributable
to currency transactions 80,829 (201) (511,424)
Changes in assets [(increase)
decrease] and liabilities
[increase(decrease)]:
Receivables, net (2,862,231) (6,627,147) (227,805)
Inventories (207,379) 632,502 (929,306)
Other current assets (374,881) 122,595 147,739
Accounts payable and accrued
liabilities 3,703,760 3,176,740 (21,632)
Other assets (655,730) (530,503) 114,006
Net cash provided by (used in)
operating activities 6,686,279 1,019,014 (329,309)
Cash flows from investing activities:
Purchases of plant and equipment (1,938,543) (4,090,295) (3,007,547)
</TABLE>
<PAGE>
<PAGE> 26
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from financing activities:
Principal additions to Senior
Subordinated Notes -- 16,500,000 --
Principal reductions of Senior
Subordinated Notes -- (10,350,000) (3,325,000)
Proceeds from additions to
long-term debt -- 2,725,000 --
Proceeds from additions to
notes payable 1,918,202 -- 8,040,299
Principal reductions of
long-term debt (1,433,695) (1,222,847) (1,131,276)
Purchase of subsidiary stock (2,519,324) -- --
Principal reductions of
notes payable -- (3,718,522) --
Other non-current liabilities 197,435 (1,949) (109,626)
Employee Stock Purchase Plan 54,577 70,939 68,837
Exercise of stock options 162,512 384,113 115,578
Net cash provided by (used in)
financing activities (1,620,293) 4,386,734 3,658,812
Effect of exchange rate changes
on cash (116,888) (232,043) (631,098)
Net increase (decrease) in cash
and cash equivalents 3,010,555 1,083,410 (309,142)
Cash and cash equivalents,
beginning of year 2,597,032 1,513,622 1,822,764
Cash and cash equivalents,
end of year $5,607,587 $ 2,597,032 $ 1,513,622
Supplemental Disclosures:
Cash paid during the year for:
Interest (net of amount capitalized
in 1996 and 1995) $4,127,005 $ 3,545,106 $ 3,697,023
Income taxes 1,570,774 972,403 1,616,427
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
<PAGE>
<PAGE> 27
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Business:
Dixon Ticonderoga Company is a diversified manufacturer and marketer of
writing and art products as well as a producer of graphite, lubricant and
refractory products. Its largest principal customers are school products
distributors, mass merchandisers and industrial manufacturers, although
none account for over 6% of revenues.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Loss contingencies:
The Company recognizes loss contingencies, including environmental
liabilities, when they become probable and the related amounts can be
reasonably estimated.
Principles of consolidation:
The consolidated financial statements include the accounts of Dixon
Ticonderoga Company and all of its subsidiaries (the "Company"). All
significant intercompany transactions and balances have been eliminated in
consolidation. Minority interest represents the minority shareholders'
proportionate share of the equity of the Company's Mexico subsidiary
(49.9% at the beginning of the year). In February the company repurchased
shares of this subsidiary on the open market reducing the minority
interest to 20.2%
Translation of foreign currencies:
In accordance with Financial Accounting Standards Board (FASB) Statement
No. 52, the Company has determined that each foreign subsidiary's
functional currency is their local currency. All assets and liabilities
are translated at period-end exchange rates. All revenues and expenses
are translated using average exchange rates during that period.
Translation gains and losses are reflected as a separate component of
shareholders' equity, except for Mexico. As of January 1, 1997 Mexico is
considered a highly inflationary economy for purposes of applying this
statement. Mexico translation gains and losses, therefore, affect results
of operations after January 1, 1997. Gains and losses from foreign
currency transactions are
<PAGE>
<PAGE> 28
included in the Consolidated Statement of Operations. Foreign currency
transaction gains (losses) included in net income were approximately
($81,000) and $511,000, for fiscal years 1997 and 1995, respectively.
Cash and cash equivalents:
Cash and cash equivalents include investment instruments with a maturity
of three months or less at time of purchase.
Inventories:
Inventories are stated at the lower of cost or market. Certain
inventories amounting to $16,601,000 and $16,253,000, at September 30,
1997 and 1996, respectively, are stated on the last-in, first-out (LIFO)
method of determining inventory costs. Under the first-in, first-out
(FIFO) method of accounting, these inventories would be $803,000 and
$958,000 higher at September 30, 1997 and 1996, respectively. All other
inventories are accounted for using the FIFO method.
The financial accounting basis for the LIFO inventories exceeds the LIFO
tax basis by approximately $1,280,000 and $1,276,000 at September 30, 1997
and 1996, respectively.
Inventories consist of (in thousands):
September 30,
1997 1996
Raw material $ 11,760 $ 12,538
Work in process 4,400 4,268
Finished goods 15,420 14,655
$ 31,580 $ 31,461
Property, plant and equipment:
Property, plant and equipment are stated at cost. During 1997, there was
no capitalized interest. Depreciation is provided principally on a
straight-line basis over the estimated useful lives of the respective
assets. The range of estimated useful lives by class of property, plant
and equipment are as follows:
Buildings and improvements 10-25 years
Machinery and equipment 5-15 years
Furniture and fixtures 3- 5 years
When assets are sold or retired, their cost and related accumulated
depreciation are removed from the accounts. Any gain or loss is included
in income.
<PAGE> 29
Income taxes:
The Company recognizes deferred tax assets and liabilities for future tax
consequences of events that have been included in the financial statements
or tax returns. Under this method, amounts for deferred tax assets and
liabilities are determined based on the differences between the financial
statement and tax bases of assets and liabilities using enacted tax
rates. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable for the period and the change during the period
in deferred tax assets and liabilities.
Reporting comprehensive income:
In 1997, the FASB issued Statement No. 130 "Reporting Comprehensive
Income" which is effective for the Company in fiscal 1999. This statement
requires the reporting of net income and all other changes to equity
during the period, except those resulting from investments by owners and
distributions to owners, in a separate statement that begins with net
income or in the consolidated statement of operations below net income.
The Company estimates that currently the only component of comprehensive
income that bypasses the statement of operations is foreign currency
translation adjustments presently being reported in the Consolidated
Statement of Shareholders' Equity.
Reclassifications:
Certain prior year amounts have been reclassified to conform with the
current year classifications.
(2) ACCRUED LIABILITIES:
The major components of accrued liabilities are as follows (in thousands):
September 30,
1997 1996
Salaries and wages $ 2,775 $ 2,012
Employee benefit plans 680 769
Income taxes 2,615 1,572
Other 6,642 6,582
$12,712 $ 10,935
(3) NOTES PAYABLE:
In July 1996, the Company entered into new financing arrangements with a
consortium of lenders to provide additional working capital. The new loan
and security agreement provides for a total of $48 million in financing
through July 1999. This includes a revolving line of credit facility in
the amount of $40 million which bears interest at either the prime rate
(8.5% at September 30, 1997), plus 0.5%, or the prevailing LIBOR rate
(approximately 5.7% at September 30, 1997) plus 2.5%. Borrowings under
<PAGE>
<PAGE> 30
the revolving credit facility ($15,960,000 as of September 30, 1997)
are based upon eligible accounts receivable and inventories of the
Company's U.S. and Canada operations, as defined. In addition, the
financing agreement also includes a term loan in the original amount
of $7.75 million (see Note 4). In 1995, the Company executed an
interest rate "swap" agreement which effectively fixes the rate of
interest on approximately $5 million of the revolver debt at 8.87% for
five years. The carrying value of borrowings under the revolving
credit facility is a reasonable estimate of fair value as interest
rates are based on prevailing market rates.
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. As of September 30, 1997, the Company is in compliance with
all such provisions. These arrangements provide up to $10 million in
additional financing as compared with the Company's previous primary
lender agreement. At September 30, 1997, the Company had approximately $24
million of unused lines of credit available under the revolving credit
facility. A fee of 0.25% is paid on the unused portion of this facility.
The weighted average interest rate of the Company's outstanding notes
payable (including foreign borrowings) was 9.0%, 8.6%, and 9.4% as of
September 30, 1997, 1996 and 1995, respectively.
(4) LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
September 30,
1997 1996
12% Senior Subordinated Notes $ 16,500 $ 16,500
Bank term loan 6,000 7,500
Building mortgage 2,619 2,717
Other 181 16
25,300 26,733
Less-current maturities (1,745) (1,614)
$ 23,555 $ 25,119
In September 1996, the Company completed the private placement of $16.5
million of new 12% Senior Subordinated Notes valued at their face amount,
due 2003. The net proceeds were used to retire early the remaining $7
million of the Company's prior issue of 10.59% Senior Subordinated Notes
due 1999, to reduce short-term borrowings and to provide additional
working capital. This transaction also reduced the Company's annual debt
service obligations by approximately $3.3 million through 1998. The
Company executed
<PAGE>
<PAGE> 31
a reverse interest rate "swap" agreement which converts $10 million of the
notes to a floating rate of interest (approximately 10.8% at September 30,
1997). In connection with the private placement, the Company issued to
noteholders warrants to purchase 300,000 shares of Company stock at $7.24
per share. No value was assigned to the warrants, which expire in 2003,
based on a fair market value determination at the date of issuance. The
note agreement contains provisions which limit the payment of dividends
and require the maintenance of certain financial covenants and ratios. As
of September 30, 1997, the Company is in compliance with all such
provisions.
In connection with the early retirement of the 10.59% Senior Subordinated
Notes in 1996, the Company incurred a loss on early extinguishment of debt
of $448,303 ($282,303, after tax), presented as an extraordinary item in
the accompanying consolidated financial statements.
The loan and security agreement with the Company's primary lender (see
Note 3) also includes a term loan in the original amount of $7.75
million. Interest on the term loan is payable monthly at either the
bank's prime rate (8.5% at September 30, 1997) plus 0.5% or the prevailing
LIBOR rate (approximately 5.7% at September 30, 1997) plus 2.5%. In 1995,
the Company executed an interest rate "swap" agreement which effectively
fixes the term loan rate at 8.75% through its maturity. The term loan is
payable in varying monthly installments through May 2001.
In addition, in 1996 the Company entered into a mortgage agreement with
respect to its corporate headquarters building in Heathrow, Florida. The
mortgage (in the original amount of $2.73 million) is for a period of 15
years and bears interest at 8.1%.
Carrying values of the Senior Subordinated Notes, the bank term loan and
the building mortgage are reasonable estimates of fair value as interest
rates are based on prevailing market rates. The aggregate fair value of
the Company's three interest rate "swap" agreements (discussed in Note 3
and above) is an unrecognized gain of approximately $58,000, representing
the net value of the underlying agreements, if settled as of September 30,
1997.
Aggregate maturities of long-term debt are as follows (in thousands):
1998 1,745
1999 1,872
2000 1,799
2001 6,746
2002 5,647
Thereafter 7,491
$25,300
<PAGE>
<PAGE> 32
(5) INCOME TAXES:
The components of net deferred tax asset recognized in the accompanying
consolidated balance sheet are as follows (in thousands):
1997 1996
U.S. current deferred tax assets
(included in other current assets) $ 1,818 $ 1,884
Foreign current deferred tax liability
(included in accrued liabilities) (535) (758)
U.S. and foreign, noncurrent deferred
tax liability (included in deferred
income taxes and other) (913) (1,017)
Net deferred tax asset $ 370 $ 109
Deferred tax assets:
Vacation pay $ 238 $ 193
Accrued pension 269 175
Accrued legal 979 983
Accrued environmental costs 137 135
Accounts receivable 8 224
Other 115 111
Foreign net operating loss carryforward 501 504
Valuation allowance (501) (504)
Total deferred tax asset 1,746 1,821
Deferred tax liabilities:
Inventories (423) (549)
Depreciation (327) (461)
Property, plant and equipment (626) (502)
Foreign dividend income -- (200)
Total deferred tax liability (1,376) (1,712)
Net deferred tax asset $ 370 $ 109
It is the policy of the Company to accrue deferred income taxes on
temporary differences related to the financial statement carrying amounts
and tax bases of investments in foreign subsidiaries which are expected to
reverse in the foreseeable future. Certain undistributed earnings of
foreign subsidiaries that are essentially permanent in duration and not
expected to reverse in the foreseeable future approximate $13,406,000 as
of September 30, 1997. The determination of the unrecognized deferred tax
liability for such temporary differences is not practicable.
<PAGE>
<PAGE> 33
The provision for income taxes (benefit) from continuing operations is
comprised of the following (in thousands):
1997 1996 1995
Current:
U.S. Federal $ 773 $ 910 $ 795
State 85 13 44
Foreign 2,046 822 215
2,904 1,745 1,054
Deferred:
U.S. Federal (51) (740) (612)
Foreign (177) (160) 696
(228) (900) 84
$2,676 $ 845 $1,138
Foreign deferred tax provision (benefit) is comprised principally of
temporary differences related to Mexico asset purchases. U.S. deferred
benefit in 1996 and 1995 results primarily from expenses accrued but not
deductible for taxes.
The Company has net operating loss carryforwards for its United Kingdom
subsidiary of approximately $2,000,000 without an expiration date.
The differences between the provision for income taxes on continuing
operations computed at the U.S. statutory federal income tax rate and the
provision in the consolidated financial statements are as follows (in
thousands):
1997 1996 1995
Amount computed using statutory rate $2,409 $ 997 $1,342
Foreign income 38 (327) (329)
State taxes, net of federal benefit 56 9 29
Permanent differences 138 126 104
Others 35 40 (8)
Provision for income taxes $2,676 $ 845 $1,138
Permanent differences result primarily from intercompany net income that
is eliminated from the consolidated statements of operations but are taxed
in various jurisdictions.
The Company has paid the total obligation assessed under a Revenue Canada
examination for its tax years 1991 through 1993. A Revenue Canada
examination is in process with respect to its 1994 and 1995 tax years.
The Company and its outside tax advisors have assessed the potential
outcome of the current examination and believe that the above income tax
provisions are
<PAGE>
<PAGE> 34
adequate to resolve these examinations without materially affecting the
Company's future results of operations or financial position.
(6) EMPLOYEE BENEFIT PLANS:
The Company maintains several defined benefit pension plans covering
substantially all union employees. The benefits are based upon fixed
dollar amounts per years of service. The assets of the various plans
(principally corporate stocks and bonds, insurance contracts and cash
equivalents) are managed by independent trustees. The policy of the
Company and its subsidiaries is to fund the minimum annual contributions
required by applicable regulations.
The following table sets forth the plans' funded status (accumulated
benefits exceed assets in all plans) at September 30, 1997 and 1996 (in
thousands):
September 30,
1997 1996
Actuarial present value of:
Accumulated benefit obligation $(3,428) $(3,530)
Projected benefit obligation $(3,428) $(3,530)
Plan assets at market value 2,243 2,277
Projected benefit obligation in excess
of plan assets (1,185) (1,253)
Unrecognized net gain from past
experience different from assumptions 571 474
Unrecognized net obligation being
recognized over periods from
10 to 16 years 683 762
Prepaid pension (liability) $ 69 $ (17)
Net periodic pension costs include the following components (in
thousands):
1997 1996 1995
Service costs - benefits earned during period $ 126 $ 124 $ 100
Interest cost on projected benefit obligation 220 222 184
Actual (return) loss on plan assets (58) (167) (150)
Net amortization and deferral 30 155 155
Net periodic pension cost $ 318 $ 334 $ 289
In determining the projected benefit obligation, the assumed discount
rates ranged from 4.5% to 7.5% for 1997 and 1996, and 6.0% to 7.5% for
1995. The expected long-term rates of return on assets used in determining
net periodic pension cost ranged from 7.5% to 8.5% for 1997, 7.5% to 8.5%
<PAGE>
<PAGE> 35
for 1996, and 7.5% to 8.5% for 1995. There are no assumed rates of
increase in compensation expense in any year, as benefits are fixed and
do not vary with compensation levels.
The Company also maintains a defined-contribution plan (401K) for all
non-union domestic employees who meet minimum service requirements, as well
as a supplemental deferred contribution plan for certain executives.
Company contributions under the plans consist of a basic 3% of the
compensation of participants for the plan year, and for those participants
who elected to make voluntary contributions to the plan, matching
contributions up to an additional 4%, as specified in the plan. Charges
to operations for these plans for the years ended September 30, 1997, 1996,
and 1995 were $617,000, $586,000, and $552,000, respectively.
(7) SHAREHOLDERS' EQUITY:
The Company provides an employee stock purchase plan under which 100,000
shares of its common stock can be issued. Among the terms of this plan,
eligible employees may purchase through payroll deductions shares of the
Company's common stock up to 10% of their compensation at the lower of 85%
of the fair market value of the stock on the first or last day of the plan
year (May 1 and April 30). On May 1, 1997, 1996, and 1995, 9,339, 11,714,
and 10,123 shares, respectively, were issued under this plan. At September
30, 1997, there are 110,350 shares available for future purchases under the
plan.
In addition, the Company has granted options to key employees, under the
1988 Dixon Ticonderoga Company Executive Stock Plans to purchase shares of
its common stock at the market price on the date of grant. Options under
the 1979 Plan (as amended) become exercisable one year after date of grant
and were exercisable during a period not to exceed ten years from date of
grant. Under the 1988 Plan (as amended) options vest 25% after one year;
25% after two years; and 50% after three years, and remain exercisable for
a period of three years from the date of vesting. All options expire three
months after termination of employment. At September 30, 1997, there were
533,185 options outstanding and 100,927 shares available for future grants
under the Plans. The following table summarizes the combined stock options
activity for 1997, 1996 and 1995:
<PAGE>
<PAGE> 36
<TABLE>
<CAPTION> 1997 1996 1995
<S> <C> <C> <C> <C>
<C> <C>
Number of Option Number of Option Number of Option
Shares Price Shares Price Shares Price
Options outstanding 74,026 $4.20 74,026 $4.20
beginning of year 36,817 $4.75 52,333 4.75 75,302 4.75
1,500 5.13 2,000 5.13
42,375 7.75 42,375 7.75 43,000 7.75
2,000 6.13 2,000 6.13 2,000 6.13
97,000 8.63 99,000 8.63
92,000 6.75
17,000 7.13
Options exercised (74,026) 4.20
(36,720) 4.75 (14,069) 4.75 (22,969) 4.75
(500) 5.13
( 2,625) 6.75
( 1,250) 7.13
( 6,375) 7.75 (125) 7.75
( 7,500) 8.63
Options granted 2,000 8.13
100,000 8.63
94,000 6.75
17,000 7.13
351,000 8.88
Options expired ( 97) 4.75 (1,447) 4.75
or canceled (1,500) 5.13
(17,065) 7.75 ( 500) 7.75
(2,000) 8.13
(16,750) 8.63 (2,000) 8.63 (1,000) 8.63
(16,625) 6.75 (2,000) 6.75
533,185 287,192 271,234
</TABLE>
The Company has adopted the disclosure-only provisions of FASB 123 and
applies Accounting Principles Board Opinion (APB) No. 25 and related
interpretations in accounting for its stock option plans. Accordingly,
there is no compensation expense recognized for its stock option plans.
Pro forma net income and earnings per share would have been as follows if
the fair market estimates were used to record compensation expense:
1997 1996
Net income $3,503,790 $ 866,587
Earnings per share:
Primary $ 1.02 $ .27
Fully diluted $ .97 $ .27
<PAGE>
<PAGE> 37
These pro forma amounts were estimated using the Black-Scholes valuation
model assuming no dividends, expected volatility of 33%, risk-free
interest rate of 6.5%, and expected lives of approximately six years. The
weighted average fair value estimates of options granted during 1997 and
1996 was $2.98 and $1.86, respectively. The weighted average remaining
lives are 6.75 and 3.5 for options granted in 1997 and 1996, respectively.
In March 1995, the Company declared a dividend distribution of one
Preferred Stock Purchase Right on each share of Company common stock.
Each Right will entitle the holder to buy one-thousandth of a share of a
new series of preferred stock at a price of $30.00 per share. The Rights
will be exercisable only if a person or group (other than the Company's
chairman, Gino N. Pala, and his family members) acquires 20% or more of
the outstanding shares of common stock of the Company or announces a
tender offer following which it would hold 30% or more of such outstanding
common stock. The Rights entitle the holders other than the acquiring
person to purchase Company common stock having a market value of two times
the exercise prices of the Right. If, following the acquisition by a
person or group of 20% or more of the Company's outstanding shares of
common stock, the Company were acquired in a merger or other business
combination, each Right would be exercisable for that number of the
acquiring company's shares of common stock having a market value of two
times the exercise prices of the Right.
The Company may redeem the Rights at one cent per Right at any time until
ten days following the occurrence of an event that causes the Rights to
become exercisable for common stock. The Rights expire in ten years.
(8) SUBSIDIARY STOCK REPURCHASE:
In February 1997, the Company repurchased 9,900,000 shares (or
approximately 30%) of its subsidiary, Dixon Ticonderoga de Mexico, S.A. de
C.V., from a consortium of Mexican financial institutions. The shares,
which were repurchased for approximately $2.5 million (or 25 cents per
share), were originally issued in 1994, when the Company sold 16,627,760
shares of Dixon Ticonderoga de Mexico, S.A. de C.V., in an initial public
offering on the Mexico Intermediate Market at a price of approximately 40
cents per share (US equivalency). The Company applied the purchase method
of accounting to record this repurchase of subsidiary stock.
(9) EARNINGS PER COMMON SHARE:
Earnings per common share for 1997 are based on the weighted average of
shares outstanding and the dilutive effect of common stock equivalents
outstanding for the period. Common stock equivalents consist of stock
options (Note 7) and stock warrants (Note 4). In 1996 and 1995 common
stock equivalents were not included in the calculation of primary earnings
per share as they were not dilutive.
Fully diluted earnings per common share for 1997 reflect the maximum
dilution that would have resulted from the exercise of all common stock
equivalents. In 1996 and 1995 fully diluted earnings per share were not
<PAGE>
<PAGE> 38
reported because the effects of the common stock equivalents were not
dilutive.
Average common shares (and equivalents in 1997) used in the calculation of
earnings per share are as follows:
Year Primary Fully Diluted
1997 3,433,801 3,602,120
1996 3,233,684 3,233,684
1995 3,180,626 3,180,626
In 1997, the FASB issued Statement No. 128 "Earnings Per Share." This
statement, which is effective for the Company's first quarter of fiscal
1998, establishes new requirements for the calculation, presentation and
disclosure of earnings per share. There will be a requirement to present
two earnings per share calculations. Basic earnings per share will be
calculated on the weighted average of shares outstanding. The second
calculation, diluted earnings per share, will be based on the weighted
average of shares outstanding plus the effects of potentially dilutive
common shares. The following would be the earnings per share if this
statement were in effect for each of the three years presented in the
accompanying consolidated financial statements:
Basic Diluted
1997
Continuing operations $ 1.08 $ 1.05
Discontinued operations -- --
Extraordinary item -- --
Net income $ 1.08 $ 1.05
1996
Continuing operations $ .36 $ .36
Discontinued operations -- --
Extraordinary item (.09) (.09)
Net income $ .27 $ .27
1995
Continuing operations $ .52 $ .51
Discontinued operations (.19) (.18)
Extraordinary item -- --
Net income $ .33 $ .33
(10) DISCONTINUED OPERATIONS:
Pursuant to a 1995 formal plan and agreement, the Company transferred the
remaining property and its developmental rights dedicated to the Bryn Mawr
Ocean Towers Condominium project to its Association. Discontinued
operations in 1995 reflect a loss on disposal of $420,000 (net of a tax
benefit of $250,000).
The Real Estate segment has been accounted for as a discontinued operation
as of September 30, 1995, and, accordingly, its operating results are
<PAGE>
<PAGE> 39
reported in this manner in all years presented in the accompanying
Consolidated Financial Statements and related data. There were no
revenues in 1995. Net real estate operating losses were $279,000 and
related income tax benefits were $104,000 in 1995.
(11) LINE OF BUSINESS REPORTING:
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 September 30, 1997, 1996 and
1995, and for the years then ended (in thousands).
Consumer Industrial Total
Group Group Company
Net
revenues:
1997 $89,416 $25,639 $115,055
1996 $81,756 $24,940 $106,696
1995 $70,451 $25,114 $ 95,565
Operating
profits:
1997 $ 9,908 $ 3,243 $ 13,151
1996 $ 4,622 $ 3,128 $ 7,750
1995 $ 5,628 $ 3,213 $ 8,841
Certain corporate expenses have been allocated based upon respective
segment sales, including provisions for litigation settlements and related
costs of $2,039 and $1,530 in 1996 and 1995, respectively. Interest
expense was $3,800, $3,424 and $3,653; general corporate expenses were
$2,265, $1,393, and $1,241 in 1997, 1996 and 1995, respectively, resulting
in income from continuing operations before income taxes of $7,086, $2,934
and $3,947, in 1997, 1996 and 1995, respectively.
Consumer Industrial Total
Group Group Company
Identifiable
assets:
1997 $64,224 $14,164 $ 78,388
1996 $59,115 $13,417 $ 72,532
1995 $51,373 $13,801 $ 65,174
<PAGE>
<PAGE> 40
Corporate assets were $5,773, $5,316, and $4,984, at September 30, 1997,
1996, and 1995, respectively.
Consumer Industrial Total
Group Group Company
Depreciation and
amortization:
1997 $ 1,306 $ 500 $ 1,806
1996 $ 1,296 $ 441 $ 1,737
1995 $ 1,347 $ 456 $ 1,803
Expenditures for
plant and equipment:
1997 $ 773 $ 914 $ 1,687
1996 $ 1,250 $ 585 $ 1,835
1995 $ 1,029 $ 461 $ 1,490
Corporate depreciation and amortization were $766, $624, and $577, for the
years ended September 30, 1997, 1996 and 1995, respectively. Corporate
expenditures for equipment were $371, $2,418, and $1,601, in 1997, 1996
and 1995, respectively.
Foreign operations (Consumer Group):
Operating Identifiable
Revenues Profits Assets
1997:
Canada $10,041 $ 1,038 $ 7,305
Mexico 13,714 4,339 13,140
United Kingdom 1,092 9 667
1996:
Canada $ 8,715 $ 670 $ 6,277
Mexico 9,544 1,946 8,906
United Kingdom 873 (45) 635
1995:
Canada $ 7,623 $ 576 $ 6,839
Mexico 7,588 2,997 8,085
United Kingdom 839 (40) 648
In 1997, the FASB issued Statement No. 131 "Disclosures About Segments of
an Enterprise and Related Information" which is effective for the Company
in fiscal 1999. 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
<PAGE>
<PAGE> 41
internal financial statements. The Company does not expect this new
statement to significantly affect how it presently defines or reports
its business segment data.
(12) COMMITMENTS AND CONTINGENCIES:
Under an agreement with Warner Bros. Consumer Products, the Company
manufactures and markets in the U.S. and Canada a complete line of
products featuring the famous Looney Tunes characters. Under the terms
of the agreement, the Company is obligated to pay a total of $1 million
through 1999, for the right to market and sell all types of pencils,
pens, crayons, chalks, markers, paints, art kits and related items.
Through fiscal 1997, the Company has paid $202,000 of $278,000 earned
by Warner Bros.
The Company has entered into employment agreements with two executives
which provide for the continuation of salary (currently aggregating
$32,300 per month) and related employee benefits for a period of 24
months following their termination of employment under certain changes
in control of the Company. In addition, all options held by the
executives would become immediately exercisable upon the date of
termination and remain exercisable for 90 days thereafter.
The Company leases certain manufacturing equipment under a five-year
noncancelable operating lease arrangement. The rental expense under
this lease was $322,000 in 1997. Annual future minimum rental payments
are approximately $417,000 per year through 2001 and $104,000 in 2002.
In November 1996, the Company's New Castle Refractories Division entered
into an agreement to perpetually license certain silicon carbide
refractory brick technology from Carborundum Corporation. Under the
terms of the perpetual license agreement, the Company is obligated to
pay a fixed sum of $450,000 with payments made through 2001 or earlier,
if certain stipulated sales levels are reached. The Company also
executed related agreements to, at its option, purchase manufactured
product or specific equipment from Carborundum Corporation. The Company
had no sales utilizing this technology in 1997.
The Company, in the normal course of business, is party in certain
litigation. Ongoing litigation includes a claim under New Jersey's
Environmental Clean-Up Responsibility Act (ECRA) by a 1984 purchaser of
industrial property from the Company. On April 24, 1996, a decision was
rendered by the Superior Court of New Jersey in Hudson County finding
the Company responsible for $1.94 million in certain environmental
clean-up costs relating to this matter. Including pre-judgment interest
on the damage award, the Company estimates its exposure to be
approximately $3.3 million. 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). A subsequent appeal has
been denied and the Company filed with the New Jersey Supreme
Court for relief from the original judgment (see Note 14). As a
result of the judgment, a provision of approximately $2 million
($1.44 million, net of tax or 45 cents per share) was
<PAGE>
<PAGE> 42
recorded in 1996. In 1995, the Company provided approximately $1.5
million in total ($960,000 net of tax or 30 cents per share) for
settlement and related legal costs associated with three separate
lawsuits, including $1.3 million for the aforementioned ECRA claim. No
anticipated recoveries from insurance carriers or other third parties
have been considered in these recorded loss provisions.
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 $400,000 as of September 30, 1997), the resolution of
these matters will not materially affect the Company's future results
of operations or financial position.
<PAGE>
<PAGE> 43
(13) SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (In Thousands,
Except Per Share Data):
1997: First Second Third Fourth
Revenues $22,308 $21,907 $36,364 $34,476
Operating income 1,293 1,115 4,401 4,077
Income before taxes
and minority interest 493 220 3,364 3,009
Minority interest (153) (146) (206) (304)
Net income 214 50 1,896 1,441
Earnings per share .07 .02 .57 .39
1996: First Second Third Fourth
Revenues $20,946 $20,622 $33,170 $31,958
Operating income (loss) 980 (1,023)* 3,680 2,720
Income (loss) before taxes
and minority interest 365 (1,814)* 2,759 1,624
Minority interest (114) (127) (348) (332)
Extraordinary item -- -- -- (282)
Net income (loss) 151 (1,254)* 1,417 572
Earnings (loss) per share .05 (.39)* .44 .17
* Reflects provision for litigation settlements and related costs as
described in Note 12.
(14) SUBSEQUENT EVENTS:
On December 12, 1997, the Company's subsidiary, Dixon Ticonderoga de Mexico,
S.A. de C.V., 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 total
purchase price of approximately 27.2 million pesos ($3.3 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.
On December 19, 1997, the Company learned that its request to the New
Jersey Supreme Court for a hearing of its ECRA litigation has been
denied (see Note 12).
<PAGE>
<PAGE> 44
<TABLE>
<CAPTION>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
Deductions
Balance at Additions From Balance
Beginning Charged Reserves at Close
Description of Period to Income (1) of Period
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
Year Ended
September 30, 1997 $1,352,411 $ 248,576 $ 596,450 $1,004,537
Year Ended
September 30, 1996 $ 796,715 $ 977,965 $ 422,269 $1,352,411
Year ended
September 30, 1995 $ 564,905 $ 421,850 $ 190,040 $ 796,715
(1) Write-off of accounts considered to be uncollectible (net of
recoveries).
<PAGE>
<PAGE> 45
CONSENT OF INDEPENDENT ACCOUNTANTS
Shareholders and Board of Directors of
Dixon Ticonderoga Company
We consent to the incorporation by reference in the registration
statements of Dixon Ticonderoga Company on Form S-8 (File Nos.
33-20054, 33-23380 and 333-22205) and on Form S-2 (File No. 333-22119) of
our report, dated November 26, 1997, except as to Note 14, for which the
date is December 19, 1997, on our audits of the consolidated financial
statements and financial statement schedule of Dixon Ticonderoga Company
and subsidiaries as of September 30, 1997 and 1996, and for each of the
three years in the period ended September 30, 1997, which report is
included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Orlando, Florida
December 19, 1997
<PAGE>
<PAGE> 46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Certain information required under this Item with respect to Directors and
Executive Officers will be contained in the Company's 1997 Proxy Statement,
pursuant to Regulation 14A, which is incorporated herein by reference.
The following table sets forth the names and ages of the Company's
Executive Officers, together with all positions and offices held with the
Company by such Executive Officers. All Executive Officers are subject to
re-election or re-appointment by the Board of Directors at the first Directors'
Meeting succeeding the next Annual Meeting of shareholders.
Name Age Title
Gino N. Pala 69 Chairman of the Board since February
(Father-in-law of 1989; President and Chief Executive
Richard F. Joyce) Officer since July 1985; prior thereto
President and Co-chief Executive
Officer since 1978.
Richard A. Asta 41 Executive Vice President of Finance
and Chief Financial Officer since
February 1991; prior thereto Senior
Vice President - Finance and Chief
Financial Officer since March 1990.
Richard F. Joyce 42 Vice Chairman of the Board since
(Son-in-law of January 1990; President and Chief
Gino N. Pala) Operating Officer, Consumer Group,
since March, 1996; Executive Vice
President and Chief Legal Executive
since February 1991; prior thereto
Corporate Counsel since July 1990.
<PAGE>
<PAGE> 47
Leonard D. Dahlberg, Jr. 46 Executive Vice President, Industrial
Group, since March 1996; prior thereto
Executive Vice President of
Manufacturing/Consumer Products
Division since August 1995; prior
thereto Senior Vice President of
Manufacturing since February 1993;
prior thereto Vice President of
Manufacturing since March 1990.
Kenneth A. Baer 51 Vice President and Treasurer since
January 1991; prior thereto Treasurer
since November 1985.
Laura Hemmings 46 Corporate Secretary since January
1986; prior thereto secretary to
President and Chief Executive Officer
since February 1982.
John Adornetto 56 Vice President and Corporate
Controller since January 1991; prior
thereto Corporate Controller since
September 1978.
Richard H. D'Antonio 49 Senior Vice President and Chief
Information Officer since March 1996;
prior thereto Vice President of
Information Services since October
1993; prior thereto Principal of RHD
Management Consulting since May 1990.
ITEM 11. EXECUTIVE COMPENSATION
Information required under this Item will be contained in the Company's
1997 Proxy Statement which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Information required under this Item will be contained in the Company's
1997 Proxy Statement which is incorporated herein by reference.
<PAGE>
<PAGE> 48
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required under this Item will be contained in the Company's
1997 Proxy Statement which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1. Financial statements
See index under Item 8. Financial Statements and Supplementary Data.
2. Exhibits
The following exhibits are required to be filed as part of this Annual
Report on Form 10-K:
(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*
(21) Subsidiaries of the Company*
(27) Financial Data Schedule****
<PAGE>
<PAGE> 49
*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 March 31, 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.
****Filed electronically via EDGAR.
(b) Reports on Form 8-K:
None.
<PAGE>
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
DIXON TICONDEROGA COMPANY
/s/ Gino N. Pala
Gino N. Pala, President and
Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this Annual Report on
Form 10-K has been signed below by the following persons on behalf of the
Company in the capacities indicated.
/s/ Gino N. Pala Chairman of Board, President, Chief
Gino N. Pala Executive Officer and Director
Date: December 19, 1997
/s/ Richard F. Joyce Vice Chairman, Executive Vice President/
Richard F. Joyce Corporate Counsel and Director
Date: December 19, 1997
/s/ Richard A. Asta Executive Vice President of Finance and
Richard A. Asta Chief Financial Officer
Date: December 19, 1997
Director
Joseph R. Sadowski Date: December 19, 1997
/s/ Philip M. Shasteen Director
Philip M. Shasteen Date: December 19, 1997
/s/ Ben Berzin, Jr. Director
Ben Berzin, Jr. Date: December 19, 1997
/s/ Bobby Brantley Director
Bobby Brantley Date: December 19, 1997
/s/ John E. Ramondo Director
John E. Ramondo Date: December 19, 1997
/s/ Kent Kramer Director
Kent Kramer Date: December 19, 1997
<PAGE>
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
DIXON TICONDEROGA COMPANY
Gino N. Pala, President and
Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934 this Annual Report on
Form 10-K has been signed below by the following persons on behalf of the
Company in the capacities indicated.
Chairman of Board, President, Chief
Gino N. Pala Executive Officer and Director
Date: December 19, 1997
Vice Chairman, Executive Vice President/
Richard F. Joyce Corporate Counsel and Director
Date: December 19, 1997
Executive Vice President of Finance and
Richard A. Asta Chief Financial Officer
Date: December 19, 1997
Director
Joseph R. Sadowski Date: December 19, 1997
Director
Philip M. Shasteen Date: December 19, 1997
Director
Ben Berzin, Jr. Date: December 19, 1997
Director
Bobby Brantley Date: December 19, 1997
Director
John E. Ramondo Date: December 19, 1997
Director
Kent Kramer Date: December 19, 1997
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets, the Consolidated Statement of Operations and
the Consolidated Statement of Cash Flows, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 5,607,587
<SECURITIES> 0
<RECEIVABLES> 26,974,196
<ALLOWANCES> 1,004,537
<INVENTORY> 31,580,175
<CURRENT-ASSETS> 66,383,302
<PP&E> 35,030,105
<DEPRECIATION> 19,542,880
<TOTAL-ASSETS> 84,161,239
<CURRENT-LIABILITIES> 37,593,500
<BONDS> 0
0
0
<COMMON> 3,591,681
<OTHER-SE> 16,270,944
<TOTAL-LIABILITY-AND-EQUITY> 84,161,239
<SALES> 115,054,806
<TOTAL-REVENUES> 115,054,806
<CGS> 72,916,837
<TOTAL-COSTS> 72,916,837
<OTHER-EXPENSES> 31,252,037
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,799,760
<INCOME-PRETAX> 7,086,172
<INCOME-TAX> 2,676,458
<INCOME-CONTINUING> 3,601,178
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,601,178
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.00
</TABLE>
