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
For the fiscal year ended September 30, 1998 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, 1998 .
--------------------
___ 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 _____ .
<TABLE>
<S> <C>
Delaware 23-0973760
(State or other jurisdiction of (I.R. S. Employer
incorporation or organization) Identification Number)
195 International Parkway, Heathrow, FL 32746
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (407) 829-9000
--------------
<TABLE>
<S> <C>
Title of each class Name of each exchange on which registered
Common Stock, $1.00 par value American Stock Exchange
- ----------------------------- -----------------------
</TABLE>
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 9, 1998, the aggregate market value
of the voting stock held by non-affiliates of the Company was $22,549,376.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of December 9, 1998: 3,431,717 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, 1998.
<PAGE>
PART I
------
ITEM 1. BUSINESS
- ------------------
RECENT EVENTS AND STRATEGIES
----------------------------
Dixon Ticonderoga Company (hereinafter the "Company") achieved record
revenues in its fiscal year ended September 30, 1998. Revenues approximated
$125 million, an increase of approximately 8.4% over 1997, and net income
(exclusive of net foreign currency losses of approximately $1 million) grew 13%
to $4.1 million compared to $3.7 million in 1997. Operating income in the
Company's two core business groups (excluding foreign currency losses) grew
approximately $1 million to $11.9 million in 1998.
This continuing 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, including its
Consumer Group's new soybean-based crayon and new Prang (copyright) product
line. Moreover, new promotional programs increased the Consumer Group's
penetration of the educational and mass markets in the U.S. and Mexico.
The Consumer Group also improved its gross profit margins through ambitious
manufacturing efficiency efforts, including balancing production, sharing of
manufacturing processes between the U.S. and Mexico Consumer plants and the
addition of certain strategic manufacturing equipment. 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, as well as a new modernized distribution center operated by a
logistics third party.
Significant operating improvement was also realized in the Mexico Consumer
subsidiary where new management has made significant enhancements. The Company
repurchased approximately 30% of the minority interest in this subsidiary in
February 1997, increasing its ownership to approximately 80%. In December 1997,
the Mexican subsidiary completed its acquisition of Vinci de Mexico, S.A. de
C.V., (Vinci). 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. Graphite manufacturing activities were consolidated into the
division's Burnet, Texas facility to gain efficiencies. The Industrial Group
continued to offer new graphite products and silicon-carbide brick (under its
New Castle Refractories division's technology agreement).
Significant recent corporate activities include the 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 Group. In 1998,
the Company also 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 this
Annual Report on Form 10-K.
<PAGE>
<TABLE>
<S> <C> <C> <C>
COMPANY ORGANIZATION
--------------------
Dixon Ticonderoga Company
(Parent)
|
|
----------------------------------------------------------------------------
| | | |
| | | |
Dixon Ticonderoga, Inc. Dixon Europe, Ltd. Dixon Industrial Mexico, Bryn Mawr Ocean
Canada (Wholly-Owned) (Wholly-Owned) S.A. de C.V. Resorts/Inactive
| (Wholly-Owned) (Wholly-Owned)
| and
Grupo Dixon S.A. de C.V. Ticonderoga Graphite,
and subsidiaries Inc./Inactive
(79.8% Owned) (Wholly Owned)
</TABLE>
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:
<TABLE>
<S> <C>
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, silicon-carbide brick,
non-graphitic refractory kiln furniture and furnace
linings (Refractories division).
</TABLE>
Financial information regarding net revenues, operating profits and
identifiable assets related to the Company's industry segments for the years
ended September 30, 1998, 1997, and 1996, 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>
CONSUMER GROUP
- --------------
The Company manufactures its leading brand TICONDEROGA (copyright) 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 (copyright) writing products
at its facility in Deer Lake, Pennsylvania. In addition to the WEAREVER
(copyright) and Dixon lines of pens, the Company also manufactures and markets
its Prang (copyright) and Ticonderoga (copyright) 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 (copyright) brand of soy-bean based
and 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 (copyright) 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.
Grupo Dixon, S.A. de C.V., a majority-owned subsidiary (79.8%) is engaged,
through its subsidiaries, in the manufacture and sale in Mexico of black and
color writing and drawing pencils, typewriter correction materials, lumber
crayons and allied products. Grupo Dixon 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. Commencing in 1998, Dixon Industrial Mexico, S.A. de C.V.,
operates a graphite processing facility in Hermosillo, Mexico and is engaged in
related activities.
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 for furnace linings and industrial furnace construction;
various grades of insulating firebrick and graphite stopper heads.
<PAGE>
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 1998, in an effort to enhance service
levels(especially with large retail customers) the Company leased a central
distribution center, operated by a third party in Macon, Georgia. Also in 1998,
the Company sold its previous distribution center, located in Shelbyville,
Tennessee. 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, Sweden and
Zimbabwe. There were no significant raw material shortages of any consequence
during 1998 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 63% in 1998) 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.
COMPETITION
-----------
Both of the Company's industry segments are engaged in a highly competitive
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
established 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 1,562
of which 718 were employed in the United States.
<PAGE>
ITEM 2. PROPERTIES
- -------------------
The properties of the Company, set forth in the following table 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>
<S> <C>
LOCATION SQUARE FEET
--------
OF FLOOR SPACE
--------------
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 (Grupo Dixon,
S.A. de C.V.) (Consumer) 55,000
Mexico City, D.F., Mexico (Grupo Dixon, S.A. de C.V.)(Consumer) 64,000
Versailles, Missouri (Consumer) 120,000
Deer Lake, Pennsylvania (Consumer) 150,000
</TABLE>
The Company also owns a non-operating graphite mine near Burnet, Texas,
included with land at historical cost in the consolidated balance sheets. The
Company leases 100,000 square feet in Macon, Georgia from a third party who
operates the Company's U.S. Consumer central distribution center. In addition,
the Company's Dixon Industrial Mexico, S.A. de C.V., subsidiary leases 9,000
square feet in Hermosillo, Mexico.
<PAGE>
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 of
industrial 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. In January 1998,
the Company paid $3.6 million to satisfy this claim in full, including all
accrued interest. The Company continues to pursue other responsible parties for
indemnification and/or contribution to the payment of this claim ( including its
insurance carriers and a legal malpractice action against its former attorneys).
Also see Note 12 to Consolidated Financial Statements.
ITEM 4. SUBMISSION ON MATTERS TO VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------------
None.
<PAGE>
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>
<S> <C> <C> <C> <C>
FISCAL FISCAL
QUARTER ENDING 1998 1997
-------------- ---- ----
LOW HIGH LOW HIGH
--- ---- --- ----
December 31 $12.88 $16.94 $ 6.38 $ 8.38
March 31 12.63 15.00 6.25 7.38
June 30 12.38 15.56 6.38 12.00
September 30 9.13 14.00 11.56 14.00
</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 9,
1998, was 433.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
FOR THE FIVE YEARS ENDED SEPTEMBER 30, 1998
(in thousands, except per share amounts)
<TABLE>
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
REVENUES $124,722 $115,055 $106,696 $ 95,565 $ 91,932
======== ======== ======== ======== ========
INCOME FROM
CONTINUING OPERATIONS $ 3,136 $ 3,601 $ 1,168 $ 1,658 $ 3,417
LOSS FROM
DISCONTINUED OPERATIONS - - - (595) (116)
EXTRAORDINARY ITEM - - (282) - -
-------- -------- -------- -------- --------
NET INCOME $ 3,136 $ 3,601 $ 886 $ 1,063 $ 3,301
======== ======== ======== ======== ========
EARNINGS (LOSS) PER
COMMON SHARE (BASIC):
CONTINUING OPERATIONS $ .93 $ 1.08 $ .36 $ .51 $ 1.10
DISCONTINUED OPERATIONS - - - (.18) (.04)
EXTRAORDINARY ITEM - - (.09) - -
-------- -------- --------- -------- --------
NET INCOME $ .93 $ 1.08 $ .27 $ .33 $ 1.06
======== ======== ======== ======== ========
EARNINGS (LOSS) PER
COMMON SHARE (DILUTED):
CONTINUING OPERATIONS $ .85 $ 1.05 $ .36 $ .52 $ 1.10
DISCONTINUED OPERATIONS - - - (.19) (.04)
EXTRAORDINARY ITEM - - (.09) - -
-------- -------- -------- --------- --------
NET INCOME $ .85 $ 1.05 $ .27 $ .33 $ 1.06
======== ======== ======== ========= ========
TOTAL ASSETS $ 92,630 $ 84,161 $ 77,848 $ 70,158 $ 68,852
======== ======== ======== ======== ========
LONG-TERM DEBT $ 21,927 $ 23,556 $ 25,119 $ 14,541 $ 19,141
======== ======== ======== ======== ========
DIVIDENDS PER
COMMON SHARE $ - $ - $ - $ - $ -
======== ======== ======== ======== ========
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT ' S DISCUSSION AND ANALYSIS OF FINANCIAL
- ----------------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
---------------------------------------
RESULTS OF OPERATIONS
- -----------------------
1998 vs. 1997:
- --------------
Income from continuing operations before income taxes and minority interest
decreased $1,683,000 in 1998. Foreign currency losses increased $1,717,000 (see
Note 1 to Consolidated Financial Statements). Revenue increases in Mexico, due
to the acquisition of Vinci (see Note 10 to Consolidated Financial Statements)
and in the mass market, increased foreign operating profits $1,350,000,
excluding currency losses. U.S. Consumer operating profits remained constant in
spite of a revenue increase of $5,073,000 due to higher distribution, marketing
and sales costs, (including costs incurred to close its previous distribution
center and open a new facility operated by a third party) which offset higher
gross profit margins. Legal and professional expenses increased $540,000 due
primarily to ongoing legal costs incurred in an effort to recover from other
responsible parties for the claim previously paid under ECRA as described in
Item 3 and Note 12 to Consolidated Financial Statements. Interest expense
increased $870,000 on higher U.S. and Mexico borrowings. Income tax expense
decreased due to lower before tax income and lower effective foreign tax rates.
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
foreign 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 interests
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
receivable. 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.
<PAGE>
Extraordinary Item:
- -------------------
The 1996 extraordinary charge of $282,000 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
- --------
Revenues in 1998 increased $9,667,000 over the prior year. The changes by
segment are as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Increase(Decrease) %Increase (Decrease)
--------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
Consumer U.S. $ 5,073 8 8 -
Consumer Foreign 5,385 22 40 (18)
Industrial (791) (3 ) (3) -
</TABLE>
The U.S. Consumer increase was primarily in the educational market due to
more aggressive promotional programs and restructured sales force. The increase
in Foreign Consumer revenues reflects the acquisition of Vinci (see Note 10 to
Consolidated Financial Statements) and increases in the mass market in Mexico.
Decreases of $1,600,000 and $498,000 in the revenue of Mexico and Canada,
respectively, were due to the decline in their local currencies compared to the
U.S. dollar. The Industrial revenue decrease was in the bulk graphite markets,
due primarily to weakness in the automotive industry and continuing competitive
pricing pressures.
While the Company has operations in Canada, Mexico and the U.K.,
historically only the operating results in Mexico have been materially impacted
by currency fluctuations. There has been a significant devaluation of the
Mexican peso at least once in each of the last three decades, the last one being
in August of 1998. In the short term after such devaluations, 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. This currency risk in
Mexico is presently managed through local currency financing and by export sales
to the U.S. denominated in U.S. dollars.
Overall 1997 revenues increased $8,359,000 over the prior year. The
changes by segment are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Increase (Decrease) % Increase (Decrease)
---------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
Consumer U.S. $ 1,945 3 2 1
Consumer Foreign 5,715 30 22 8
Industrial 699 3 4 (1)
</TABLE>
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.
<PAGE>
Overall 1996 revenues increased $11,131,000 over the prior year. The changes by
segment are as follows:
<TABLE>
<S> <C> <C> <C> <C>
Increase (Decrease) % Increase (Decrease)
---------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
Consumer U.S. $ 8,223 15 14 1
Consumer Foreign 3,082 19 19 -
Industrial (74) (1) - (1)
</TABLE>
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.
OPERATING PROFITS
- ------------------
There was a decrease of $811,000 in operating profits by segment in 1998.
The Company recorded foreign currency losses of $1,604,000 and $194,000 in
Mexico and Canada, respectively, as discussed in Note 1 to Consolidated
Financial Statements. Foreign Consumer operating profit, excluding the foreign
currency losses, increased approximately $1.9 million. This increase occurred
in Mexico where the addition of Vinci (see Note 10 to Consolidated Financial
Statements) added $1,220,000. The remainder of the increase was due to higher
revenues and manufacturing efficiencies. U.S. Consumer operating profit
increased $250,000 over the prior year as higher gross profit margins were
partially offset by increased distribution, marketing and sales costs. Higher
distribution costs, adversely impacted U.S. operating profit this year, caused
in part by the closing of its previous distribution center and related start-up
costs of a new facility operated by a third party. In addition, higher
marketing and promotional costs had a negative impact on operating profit.
Legal and professional services increased $540,000 primarily due to ongoing
legal costs incurred in an effort to recover from other responsible parties for
the claim paid under ECRA, as described in Item 3 and Note 12 to Consolidated
Financial Statements. These above mentioned factors caused selling and
administrative costs to increase (30.7% of sales in 1998 compared to 27.2% in
1997). Operating profit in the Industrial segment decreased $350,000 due to the
decline in graphite revenue.
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 profit aforementioned
increased $2,393,000 and Canada increased $368,000 on revenue increases of 45%
and 15%, respectively. U.S. Consumer operating profit 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 profit 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 profit decreased $962,000 primarily due to the aforementioned
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 profit 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 partially 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 profit by $411,000 and $98,000, respectively.
<PAGE>
MINORITY INTEREST
- -----------------
Minority interest represents 20.2% of the net income of the consolidated
subsidiary, Grupo Dixon, S.A. de C.V., from February 1997 and 49.9% prior
thereto ($704,940 and $808,536 in fiscal 1998 and 1997, 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.
EFFECT OF CERTAIN NEW ACCOUNTING PRONOUNCEMENTS
- ----------------------------------------------------
In 1997, the Financial Accounting Standards Board (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 components of comprehensive income
that bypasses the statement of operations are certain foreign currency
translation adjustments and the tax benefit on the exercise of stock options
that presently are being reported in the Consolidated Statement of Shareholders'
Equity.
Also, 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 internal financial statements. The Company does not expect this
new statement to significantly affect how it presently defines or reports its
business segment data.
In 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for the Company in fiscal
2000. This statement requires all derivative instruments to be recognized in
the balance sheet as either assets or liabilities at fair value. The Company
currently uses cash flow hedges to convert variable rate debt to fixed rate
debt, but does not expect the prescribed accounting for these instruments to
materially affect its financial position or results of operations when adopted.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash flows in 1998 reflected $5.7 million used in operating
activities, principally in its expanding Mexico operations. Although income
from operations (exclusive of foreign currency losses) improved by approximately
$1.3 million, accounts receivable grew $4.1 million and inventories increased
$4.7 million (substantially in Mexico, reflecting the effects of increased
domestic market share and the growth of the acquired Vinci product lines).
Moreover, certain large assumed liabilities of Vinci (included in accounts
payable and accrued liabilities) were retired shortly after the acquisition.
U.S. Consumer inventories and accounts receivable also grew somewhat, in
proportion to the increase in 1998 sales. Industrial Group inventories also
increased approximately $1.4 million, reflecting the effect of the slowdown in
the automotive industry late in fiscal 1998 and the start-up of the operation in
Hermosillo, Mexico. 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 $1.4 million in
purchases of property and equipment in 1998. This is a lower level of purchases
as compared with prior years, due to better capital budgeting and the continued
use of leasing as an alternative to acquiring equipment. In 1998 and 1997, the
Company financed approximately $3 million of strategic manufacturing equipment
under long-term operating lease arrangements. (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 addition, in 1998, the Company's Mexican subsidiary acquired
the stock of Vinci de Mexico, S.A. de C.V., for approximately $3.3 million, net
of cash acquired.
The Company's primary financing arrangements are with a consortium of
lenders and the underlying loan and security agreement, as amended, provides for
a total of $53 million in financing. This includes a revolving line of credit
facility in the amount of $45 million which bears interest at either the prime
rate, plus 0.5%, or the prevailing LIBOR rate plus 2.5%. Borrowings under the
revolving credit facility are based upon eligible accounts receivable and
inventories of the Company's U.S. and Canada operations, as defined. The
financing agreement also includes a term loan in the original amount of $7.75
million. The term loan bears interest at the same rate, and is payable in
varying monthly installments through 2001. The Company previously executed
certain interest rate "swap" agreements, which effectively fix the rate of
interest on approximately $9.4 million of this debt at 8.75% to 8.87%.
These financing arrangements are collateralized by the tangible and
intangible assets of the U.S. and Canada operations (including accounts
receivable, inventories, property, plant and equipment, patents and trademarks)
and a pledge of the capital stock of the Company's subsidiaries. The loan and
security agreement contains provisions pertaining to the maintenance of certain
financial ratios and annual capital expenditure levels, as well as restrictions
as to payment of cash dividends. The Company is presently in compliance with
all such provisions, as amended. At September 30, 1998, the Company had
approximately $22 million of unused lines of credit available under this new
financing arrangement.
In 1996, the Company also completed the private placement of $16.5 million
of 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 through 1999. In 1998, the Company canceled a reverse
interest rate "swap" agreement (which had originally converted $10 million of
the notes to a floating rate of interest) resulting in a deferred gain of
approximately $375,000, being recognized over the remaining original term of the
notes. 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 Mexican 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 acquisition of
Vinci (see Note 10 to Consolidated Financial Statements) was financed initially
through its Mexican subsidiary's on-hand cash and cash equivalents. The
additional working capital needs in Mexico were financed through its U.S. parent
and local bank lines of credit.
Refer to Notes 3 and 4 to Consolidated Financial Statements for further
description of the aforementioned financing arrangements.
<PAGE>
The existing sources of financing and cash expected to be generated from
future operations and/or assets sales will, in management's opinion, be
sufficient to fulfill all current and anticipated requirements of the Company's
ongoing business and to meet all of its obligations.
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
The Year 2000 issue relates to the way computer systems and programs
define calendar dates; they could fail or make miscalculations while
interpreting a date including "00" to mean 1900, not 2000. Also, many systems
and equipment that are not typically thought of as "computer related" (referred
to as 'non-IT') may contain embedded hardware or software that may have a time
element dependency.
The Company began work on the Year 2000 (Y2K) compliance issue in 1998.
The scope of the project includes addressing the compliance of all applications,
operating systems, and hardware on mid-range, personal computer and local area
network platforms; addressing issues related to non-IT embedded hardware and
software; and addressing the compliance of business partners.
The project has five phases: assessment of systems and equipment affected
by the Y2K issue; definition of strategies to address affected systems and
equipment; remediation of systems; testing of systems; and certification of
systems. To certify that all systems are Y2K compliant, each system will be
tested using a standard testing methodology which includes millenium testing,
millenium leap year testing and cross-over year testing. Testing will be
performed on each system as remediation is completed.
The target for completion of all phases is the second calendar quarter of
1999. The Company has completed the assessment and strategy phases for its U.S.
and Canadian operations. Its Mexican operation will be brought into compliance
by a complete system replacement.
The majority of the Company's non-IT related systems and equipment are
currently Y2K compliant. This statement is based primarily upon communication
with the vendors as well as physical inspection and assessment of equipment and
related controlling software. Written documentation is underway and is scheduled
to be complete in the first quarter of calendar 1999.
With respect to key business suppliers, the assessment and strategy phases
are underway with approximately 30% of the vendors certifying compliance. In
addition, critical suppliers are being identified and additional steps will be
undertaken to insure non-interruption of services before during and after
January 1, 2000. Contingency planning is in the initial stages and will be
completed in the second calendar quarter of 1999. Electronic data interchange
will be tested and certified in the first calendar quarter of 1999.
The Company is also dependent upon its customers for sales and cash flow.
Y2K interruptions in our customers' operations could result in reduced sales,
increased inventory or receivable levels and cash flow reductions. While these
events are possible, our customer base is broad enough to minimize the effects
of a single occurrence. We are taking steps to monitor the status of our
customers as a means of determining risks and alternatives.
The Company utilizes an IBM AS/400 system along with J. D. Edwards
software for its core business applications. These systems will be upgraded to
Y2K compliant versions by the end of the first calendar quarter of 1999.
Manufacturing software systems that are non-compliant, will be replaced by the
J.D. Edwards system in the second calendar quarter of 1999.
Since the inception of the project, the Company has incurred approximately
$50,000 in costs directly related to Y2K compliance. These costs were outside
the normal and previously planned upgrades of systems. Based on assessments of
equipment and systems, the company expects additional Y2K expense to be less
than $75,000, which will not have a material affect on the Company's operations
or financial condition. In addition, there will be no adverse impact due to
postponement of other projects because of resource constraints caused by the Y2K
project.
The Company presently believes that its business-critical computer systems
which are not presently Y2K compliant will have been replaced, upgraded or
modified in the normal replacement cycle prior to the end of the second calendar
quarter of 1999. Based on the progress the Company has made in addressing its
Y2K issues and the Company's plan and timeline to complete its compliance
program, the Company does not foresee significant risks associated with Y2K
compliance at this time.
<PAGE>
FORWARD-LOOKING STATEMENTS
- --------------------------
Any "forward-looking statements" contained in this Annual Report on Form
10-K involve known and unknown risks (including, but not limited to certain
foreign currency risk), uncertainties and other factors that could cause the
actual results to differ materially from those expressed or implied by such
forward-looking statements.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------------
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<S> <C>
PAGE
Report of Independent Accountants 18
Consolidated Balance Sheets as of
September 30, 1998 and 1997 19-20
Consolidated Statements of Operations For the Years
Ended September 30, 1998, 1997 and 1996 21
Consolidated Statements of Shareholders' Equity
For the Years Ended September 30, 1998, 1997 and 1996 22
Consolidated Statements of Cash Flows For the Years
Ended September 30, 1998, 1997 and 1996 23-24
Notes to Consolidated Financial Statements 25-38
Schedule For the Years Ended
September 30, 1998, 1997, and 1996:
II. Valuation and Qualifying Accounts 39
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.
Consent of Independent Accountants 40
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
November 25, 1998
Shareholders and Board of Directors of
Dixon Ticonderoga Company
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of opertions and shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Dixon Ticonderoga Company and its subsidiaries at September 30, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Orlando, Florida
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<S> <C> <C> <C>
1998 1997
---- ----
ASSETS:
-------
CURRENT ASSETS:
Cash and cash equivalents $ 2,853,281 $ 5,607,587
Receivables, less allowance for
doubtful accounts of $1,369,815
in 1998 and $1,004,537 in 1997 31,810,617 25,969,659
Inventories 37,445,502 31,580,175
Other current assets 1,630,381 3,225,881
----------- -----------
Total current assets 73,739,781 66,383,302
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 14,847,930 16,955,803
Machinery and equipment 21,182,762 17,130,035
Furniture and fixtures 1,213,662 944,267
----------- -----------
37,244,354 35,030,105
Less accumulated depreciation (20,975,708) (19,542,880)
----------- -----------
16,268,646 15,487,225
----------- -----------
OTHER ASSETS 2,621,460 2,290,712
----------- -----------
$92,629,887 $84,161,239
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY: 1998 1997
- ---------------------- ---- ----
CURRENT LIABILITIES:
Notes payable $26,031,951 $16,058,080
Current maturities of long-term debt 1,879,775 1,745,080
Accounts payable 7,765,451 7,077,955
Accrued liabilities 8,482,278 12,712,385
----------- -----------
Total current liabilities 44,159,455 37,593,500
----------- -----------
LONG-TERM DEBT 21,927,289 23,555,618
----------- -----------
DEFERRED INCOME TAXES AND OTHER 776,100 1,142,631
----------- -----------
MINORITY INTEREST 2,711,805 2,006,865
----------- -----------
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 3,654,558
shares in 1998 and 3,591,681
shares in 1997 3,654,558 3,591,681
Capital in excess of par value 3,327,755 2,770,668
Retained earnings 20,264,057 17,127,698
Cumulative translation adjustment (3,373,837) (2,768,856)
----------- -----------
23,872,533 20,721,191
Less treasury stock, at cost
(222,841 shares in 1998 and 234,094
shares in 1997) (817,295) (858,566)
----------- -----------
23,055,238 19,862,625
----------- -----------
$92,629,887 $84,161,239
=========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
REVENUES $124,721,758 $115,054,806 $106,695,874
------------ ------------ ------------
COSTS AND EXPENSES
Cost of goods sold 76,296,877 72,916,837 70,343,837
Selling and administrative expenses 38,349,867 31,252,037 27,955,760
Provisions for litigation
settlements and related costs - - 2,039,000
------------ ------------ ------------
114,646,744 104,168,874 100,338,597
------------ ------------ ------------
OPERATING INCOME 10,075,014 10,885,932 6,357,277
INTEREST EXPENSE (4,671,646) (3,799,760) (3,423,650)
------------ ------------ ------------
INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST 5,403,368 7,086,172 2,933,627
INCOME TAXES 1,562,069 2,676,458 845,044
------------ ------------- -----------
3,841,299 4,409,714 2,088,583
MINORITY INTEREST 704,940 808,536 920,522
------------ ------------- -----------
INCOME FROM CONTINUING OPERATIONS 3,136,359 3,601,178 1,168,061
------------ ------------- -----------
EXTRAORDINARY ITEM - - (282,303)
------------ ------------- -----------
NET INCOME $ 3,136,359 $ 3,601,178 $ 885,758
============ ============= ===========
EARNINGS (LOSS) PER
COMMON SHARE (BASIC):
Continuing operations $ .93 $ 1.08 $ .36
Extraordinary item - - (.09)
------------ ------------- -----------
Net income $ .93 $ 1.08 $ .27
============ ============= ===========
EARNINGS (LOSS) PER
COMMON SHARE (DILUTED):
Continuing operations $ .85 $ 1.05 $ .36
Extraordinary item - - (.09)
------------ ------------- -----------
Net income $ .85 $ 1.05 $ .27
============ ============= ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<S> <C> <C> <C> <C> <C>
Common Capital in Cumulative
Stock $1 Excess of Retained Translation Treasury
Par Value Par Value Earnings Adjustment Stock
--------- --------- -------- ---------- -----
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)
Net income 3,136,359
Cumulative translation adjustment (604,981)
Employee stock options exercised 62,877 529,013
Employee Stock Purchase Plan
(11,253 shares) 28,074 41,271
----------- ---------- ---------- -----------
BALANCE, September 30, 1998 $ 3,654,558 $3,327,755 $20,264,057 $(3,373,837) $ (817 ,295)
=========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Income from continuing
operations $ 3,136,359 $ 3,601,178 $ 1,168,061
Loss from extraordinary item - - (282,303)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 2,933,660 2,571,660 2,361,081
Deferred taxes 1,448,626 (228,039) (900,298)
Provision for doubtful accounts
receivable 105,126 248,576 977,965
Income attributable to
minority interest 704,940 808,536 920,522
(Income) loss attributable to foreign
currency exchange 1,798,357 80,829 (201)
Changes in assets [(increase)
decrease] and liabilities
[increase (decrease)]:
Receivables, net (5,726,094) (2,862,231) (5,649,182)
Inventories (5,326,301) (207,379) 632,502
Other current assets 253,571 (374,881) 122,595
Accounts payable and accrued
liabilities (4,558,206) 3,703,760 3,176,740
Other assets (437,785) (655,730) (530,503)
----------- ----------- ----------
Net cash provided by (used in)
operating activities (5,667,747) 6,686,279 1,019,014
----------- ---------- ----------
Cash flows from investing activities:
Purchases of plant and equipment,net (1,350,855) (1,938,543) (4,090,295)
Proceeds on sale of assets 1,089,399 - -
Payment for purchase of Vinci
de Mexico, S.A. de C.V., net
of cash acquired (3,289,200) - -
----------- ---------- ----------
Net cash used in investing activities (3,550,656) (1,938,543) (4,090,295)
----------- ----------- ----------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Cash flows from financing activities:
Principal additions to Senior
Subordinated Notes - - 16,500,000
Principal reductions of Senior
Subordinated Notes - - (10,350,000)
Proceeds from additions to
long-term debt - - 2,725,000
Proceeds from additions to
notes payable 8,672,323 1,918,202 -
Principal reductions of
long-term debt (1,672,606) (1,433,695) (1,222,847)
Purchase of subsidiary stock - (2,519,324) -
Principal reductions of
notes payable - - (3,718,522)
Other non-current liabilities 44,044 197,435 (1,949)
Employee Stock Purchase Plan 69,345 54,577 70,939
Exercise of stock options 368,103 162,512 384,113
--------- --------- ---------
Net cash provided by (used in)
financing activities 7,481,209 (1,620,293) 4,386,734
--------- --------- ---------
Effect of exchange rate changes
on cash (1,017,112) (116,888) (232,043)
--------- --------- ---------
Net increase (decrease) in cash
and cash equivalents (2,754,306) 3,010,555 1,083,410
Cash and cash equivalents,
beginning of year 5,607,587 2,597,032 1,513,622
--------- --------- ---------
Cash and cash equivalents,
end of year $ 2,853,281 $ 5,607,587 $ 2,597,032
========= ========= =========
Supplemental Disclosures:
Cash paid during the year for:
Interest (net of amount
capitalized in 1996) $ 4,690,538 $ 4,127,005 $ 3,545,106
Income taxes 893,756 1,570,774 972,403
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
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 Grupo Dixon, S.A. de C.V., subsidiary. In February
1997, the Company repurchased shares of this subsidiary on the open market,
reducing the minority interest from 49.9% 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 included in the Consolidated Statement of Operations. Foreign
currency exchange losses included in operating income were approximately
$(1,798,000) and $(81,000), for fiscal years 1998 and 1997, respectively.
<PAGE>
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 $16,458,000 and $16,601,000, at September 30, 1998 and 1997,
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 $816,000 and $803,000 higher at September 30, 1998
and 1997, 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 $1,375,000 and $1,280,000 at September 30, 1998 and
1997, respectively.
Inventories consist of (in thousands):
<TABLE>
<S> <C> <C> <C>
September 30,
-------------
1998 1997
------- -------
Raw material $13,303 $11,760
Work in process 4,651 4,400
Finished goods 19,492 15,420
------- -------
$37,446 $31,580
======= =======
</TABLE>
Property, plant and equipment:
- --------------------------------
Property, plant and equipment are stated at cost. 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:
<TABLE>
<S> <C>
Buildings and improvements 10-25 years
Machinery and equipment 5-15 years
Furniture and fixtures 3-5 years
</TABLE>
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.
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 components of comprehensive income that bypasses the statement of
operations are certain foreign currency translation adjustments and the tax
benefit on the exercise of stock options that presently are being reported in
the Consolidated Statement of Shareholders' Equity.
<PAGE>
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):
<TABLE>
<S> <C> <C>
September 30,
-------------
1998 1997
------- -------
Salaries and wages $ 2,244 $ 2,775
Employee benefit plans 511 680
Income taxes 1,712 2,615
Other 4,015 6,642
------- -------
$ 8,482 $12,712
======= =======
</TABLE>
(3) NOTES PAYABLE:
-------------
The Company's primary financing arrangements are with a consortium of lenders
and the underlying loan and security agreement, as amended, provides for a
total of up to $53 million in financing through July 1999. This includes a
revolving line of credit facility in the amount of $45 million which bears
interest at either the prime rate (8.5% at September 30, 1998), plus 0.5%, or
the prevailing LIBOR rate (approximately 5.6% at September 30, 1998) plus 2.5%.
Borrowings under the revolving credit facility ($23,043,000 as of September 30,
1998) 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). The Company has executed an interest rate "swap" agreement which
effectively fixes the rate of interest on approximately $5 million of the
revolver debt at 8.87% through 2000. 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, 1998, the Company is in
compliance with all such provisions, as amended. At September 30, 1998, the
Company had approximately $22 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.
In addition, the Company's Mexican subsidiary has bank lines of credit totaling
approximately $7 million, under which $2.9 million of unsecured notes payable
were outstanding as of September 30, 1998. The notes bear interest
(approximately 8.4% at September 30, 1998) based upon either a floating U.S.
bank rate or the rate of certain Mexican government securities.
The weighted average interest rate of the Company's outstanding notes payable
(including foreign borrowings) was 10.0%, 9.0%, and 8.6% as of September 30,
1998, 1997 and 1996, respectively.
<PAGE>
(4) LONG-TERM DEBT:
--------------
Long-term debt consists of the following (in thousands):
<TABLE>
<S> <C> <C>
September 30,
-------------
1998 1997
-------- --------
12% Senior Subordinated Notes $ 16,500 $ 16,500
Bank term loan 4,444 6,000
Building mortgage 2,513 2,619
Other 350 182
-------- --------
23,807 25,301
Less-current maturities (1,880) (1,745)
-------- --------
$ 21,927 $ 23,556
======== ========
</TABLE>
In 1996, the Company completed the private placement of $16.5 million of 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 through 1999. In 1998,
the Company canceled a reverse interest rate "swap" agreement (which had
originally converted $10 million of the notes to a floating rate of interest)
resulting in a deferred gain of approximately $375,000, which is being
recognized over the remaining original term of the notes. 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, 1998, 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 lenders (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, 1998) plus 0.5% or the prevailing LIBOR rate (approximately 5.6%
at September 30, 1998) 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 two
remaining interest rate "swap" agreements (discussed in Note 3 and above) is an
unrecognized loss of approximately $234,000, representing the net cost to cancel
the underlying agreements as of September 30, 1998.
In 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for the Company in fiscal
2000. This statement requires all derivative instruments to be recognized in
the balance sheet as either assets or liabilities at fair value. The Company
currently uses cash flow hedges to convert variable rate debt to fixed rate
debt, but does not expect the prescribed accounting for these instruments to
materially affect its financial position or results of operations when adopted.
<PAGE>
Aggregate maturities of long-term debt are as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 1,880
1999 1,885
2000 6,825
2001 5,699
2002 5,526
Thereafter 1,992
-------
$23,807
=======
</TABLE>
(5) INCOME TAXES:
------------
The components of net deferred tax asset (liability) recognized in the
accompanying consolidated balance sheet are as follows (in thousands):
<TABLE>
<S> <C> <C>
1998 1997
---- ----
U.S. current deferred tax assets
(included in other current assets) $ 555 $ 1,818
Foreign current deferred tax liability
(included in accrued liabilities) (1,091) (535)
U.S. and foreign, noncurrent deferred
tax liability (included in deferred
income taxes and other) (525) (913)
--------- ---------
Net deferred tax asset (liability) $ (1,061) $ 370
========= ==========
Deferred tax assets:
Vacation pay $ 266 $ 238
Accrued pension 368 269
Accrued legal - 979
Accrued environmental costs 90 137
Accounts receivable (8) 8
Other 53 115
Foreign net operating loss carryforward 507 501
Valuation allowance (507) (501)
--------- ---------
Total deferred tax asset 769 1,746
--------- ---------
Deferred tax liabilities:
Inventories (1,094) (423)
Depreciation (198) (327)
Property, plant and equipment (538) (626)
-------- ---------
Total deferred tax liability (1,830) (1,376)
-------- ---------
Net deferred tax asset (liability) $ (1,061) $ 370
======== =========
</TABLE>
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 $15,170,000 as of September 30, 1998. The
determination of the unrecognized deferred tax liability for such temporary
differences is not practicable.
<PAGE>
The provision for income taxes from continuing operations is comprised of the
following (in thousands):
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Current:
U.S. Federal $ (656) $ 773 $ 910
State 41 85 13
Foreign 728 2,046 822
------ ------- -------
113 2,904 1,745
------ ------- -------
Deferred:
U.S. Federal 916 (51) (740)
Foreign 533 (177) (160)
------ ------- -------
1,449 (228) (900)
------ ------- -------
$ 1,562 2,676 $ 845
====== ======= =======
</TABLE>
Foreign deferred tax provision (benefit) is comprised principally of temporary
differences related to Mexico asset purchases. U.S. deferred provision in 1998
results primarily from legal expenses deducted on the books in prior years that
are deductible for tax purposes in the current year. The U.S. deferred
(benefit) in 1997 and 1996 results primarily from expenses accrued but not yet
deductible for taxes.
The Company has net operating loss carryforwards for its United Kingdom
subsidiary of approximately $2 million 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):
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Amount computed using statutory rate $ 1,837 $ 2,409 $ 997
Foreign income (557) 38 (327)
State taxes, net of federal benefit 27 56 9
Permanent differences 239 138 126
Others 16 35 40
------ ------- -------
Provision for income taxes $ 1,562 $ 2,676 $ 845
======= ======= =======
</TABLE>
Permanent differences result primarily from intercompany net income that is
eliminated from the consolidated statements of operations but are taxed in
various jurisdictions.
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 adequate to resolve these examinations without materially
affecting the Company's future results of operations or financial position.
<PAGE>
(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, 1998 and 1997 (in thousands):
<TABLE>
<S> <C> <C>
September 30,
-------------
1998 1997
---- ----
Actuarial present value of:
Accumulated benefit obligation $(4,123) $(3,428)
======= =======
Projected benefit obligation $(4,123) $(3,428)
Plan assets at market value 2,692 2,243
------- -------
Projected benefit obligation in excess
of plan assets (1,431) (1,185)
Unrecognized net gain from past
experience different from assumptions 830 571
Unrecognized net obligation being
recognized over periods from
10 to 16 years 830 683
------- -------
Prepaid pension expense $ 229 $ 69
======= =======
</TABLE>
Net periodic pension costs include the following components (in thousands):
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Service costs - benefits earned during period $ 126 $ 126 $ 124
Interest cost on projected benefit obligation 217 220 222
Actual return on plan assets (269) (58) (167)
Net amortization and deferral 190 30 155
----- ----- -----
Net periodic pension cost $ 264 $ 318 $ 334
===== ===== =====
</TABLE>
In determining the projected benefit obligation, the assumed discount rates
ranged from 4.25 % to 6.0 % for 1998 and 4.5% to 7.5% for 1997 and 1996. The
expected long-term rates of return on assets used in determining net periodic
pension cost ranged from 7.5 % to 8.5 % in all years presented above. There are
no assumed rates of increase in compensation expense in any year, as benefits
are fixed and do not vary with compensation levels.
<PAGE>
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, 1998, 1997, and 1996 were $875,000, $ 617,000 and $
586,000, respectively.
(7) SHAREHOLDERS' EQUITY:
--------------------
The Company provides an Employee Stock Purchase Plan under which shares of its
common stock can be issued to eligible employees. 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, 1998, 1997, and 1996, 11,253, 9,339, and 11,714
shares, respectively, were issued under this plan. At September 30, 1998, there
are 99,097 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 Plan to purchase shares of its common
stock at the market price on the 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 five years from the date of
vesting. All options expire three months after termination of employment. At
September 30, 1998, there were 465,437 options outstanding and 105,802 in shares
available for future grants under the Plans. The following table summarizes the
combined stock options activity for 1998, 1997 and 1996:
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
---- ---- ----
Number of Option Number of Option Number of Option
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Options outstanding 74,026 $ 4.20
beginning of year 36,817 4.75 52,333 4.75
1,500 5.13
18,935 7.75 42,375 7.75 42,375 7.75
2,000 6.13 2,000 6.13 2,000 6.13
72,750 8.63 97,000 8.63 99,000 8.63
72,750 6.75 92,000 6.75
15,750 7.13 17,000 7.13
351,000 8.88
Options exercised (74,026) 4.20
(36,720) 4.75 (14,069) 4.75
(9,500) 6.75 (2,625) 6.75
(500) 7.13 (1,250) 7.13
(18,623) 7.75 (6,375) 7.75
(28,000) 8.63 (7,500) 8.63
(2,000) 6.13
(4,250) 8.88
Options granted 94,000 6.75
17,000 7.13
351,000 8.88
10,000 14.13
18,500 12.88
Options expired (97) 4.75 (1,447) 4.75
or canceled (1,500) 5.13
(17,065) 7.75
(500) 8.63 (16,750) 8.63 (2,000) 8.63
(3,125) 6.75 (16,625) 6.75 (2,000) 6.75
(29,750) 8.88
-------- ------- -------
465,437 533,185 287,192
======== ======= =======
</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:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Net income $2,990,726 $3,503,790 $ 866,587
========== ========== =========
Earnings per share:
Basic $ .88 $ 1.05 $ .27
========== ========== =========
Diluted $ .81 $ 1.02 $ .27
========== ========== =========
</TABLE>
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 1998, 1997 and 1996 was $4.45, $2.98
and $1.86, respectively. The weighted average remaining lives are 6.5, 5.75 and
2.5 for options granted in 1998, 1997 and 1996, respectively.
In 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 ten years from the date of
distribution.
(8) SUBSIDIARY STOCK REPURCHASE:
------------------------------
In February 1997, the Company repurchased 9,900,000 shares (or approximately
30%) of its subsidiary, Grupo Dixon, 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 the subsidiary in an initial public offering
on the Mexico Intermediate Market at a price of approximately 40 cents per share
(U.S. equivalency). The Company applied the purchase method of accounting to
record this repurchase of subsidiary stock.
(9) EARNINGS PER COMMON SHARE:
----------------------------
Basic earnings per common share is calculated by dividing net income by the
weighted average number of shares outstanding. Diluted earnings per common
share is based upon the weighted average number of shares outstanding, plus the
effects of potentially dilutive common shares [consisting of stock options (Note
7) and stock warrants (Note 4)].
Average common shares used in the calculation of earnings per share are as
follows:
<TABLE>
<S> <C> <C>
Year Basic Diluted
---- ----- -------
1998 3,387,202 3,708,026
1997 3,323,261 3,433,801
1996 3,233,684 3,247,187
</TABLE>
<PAGE>
(10) ACQUISITION
-----------
In December 1997, the Company's Mexican subsidiary acquired all of the capital
stock of Vinci de Mexico, S.A. de C.V., ("Vinci"), and certain assets of a
related entity for a final total purchase price of approximately 28.3 million
pesos (approximately $3.5 million) in cash. Vinci is a well-known manufacturer
of tempera and oil paints, chalk and modeling clay in Mexico. The company also
manufactured plastic products (such as rulers and geometric sets), water colors
and crayons. The acquisition was accounted for under the purchase method of
accounting and, accordingly, the accompanying Consolidated Balance Sheet
includes the fair value of Vinci's specific assets and liabilities, including
goodwill approximating $320,000. Goodwill is being amortized over the estimated
period of benefit of 20 years. The results of Vinci's operations have been
included in the consolidated results of operations since the date of
acquisition.
The following shows pro forma, unaudited data that would have resulted had the
acquisition been consummated as of October 1, 1996:
<TABLE>
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Three Months Ended Year Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues $37,568 $37,968 $125,654 $122,586
Net Income 696 1,145 3,189 2,607
Earnings
Basic .20 .34 .94 .78
Diluted .19 .31 .86 .76
</TABLE>
(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, 1998, 1997 and 1996, and for the
years then ended (in thousands).
<TABLE>
<S> <C> <C> <C>
Consumer Industrial Total
Group Group Company
----- ----- -------
Net revenues:
1998 $ 99,874 $ 24,848 $124,722
1997 $ 89,416 $ 25,639 $115,055
1996 $ 81,756 $ 24,940 $106,696
Operating profit:
1998 $ 10,279 $ 2,859 $ 13,138
1997 $ 9,908 $ 3,243 $ 13,151
1996 $ 4,622 $ 3,128 $ 7,750
</TABLE>
<PAGE>
Certain corporate expenses have been allocated based upon respective segment
sales, including provisions for litigation settlements and related costs of
$2,039 in 1996. Interest expense was $4,672, $3,800 and $3,424, general
corporate expenses were $3,063, $2,265 and $1,393 in 1998, 1997 and 1996,
respectively, resulting in income from continuing operations before income taxes
of $5,403, $7,086 and $2,934 in 1998, 1997 and 1996, respectively.
<TABLE>
<S> <C> <C> <C>
Consumer Industrial Total
Group Group Company
----- ----- -------
Identifiable assets:
1998 $71,152 $15,622 $ 86,774
1997 $64,224 $14,164 $ 78,388
1996 $59,115 $13,417 $ 72,532
</TABLE>
Corporate assets were $5,856, $5,773 and $5,316, at September 30, 1998, 1997
and 1996, respectively.
<TABLE>
<S> <C> <C> <C>
Consumer Industrial Total
Group Group Company
----- ----- -------
Depreciation and amortization:
1998 $ 1,722 $ 532 $ 2,254
1997 1,306 500 1,806
1996 1,296 441 1,737
Expenditures for plant and
equipment:
1998 $ 853 $ 502 $ 1,355
1997 773 914 1,687
1996 1,250 585 1,835
</TABLE>
Corporate depreciation and amortization were $680, $766 and $624, for the years
ended September 30, 1998, 1997 and 1996, respectively. Corporate expenditures
for equipment were $148, $371 and $2,418, in 1998, 1997 and 1996, respectively.
Foreign operations:
<TABLE>
<S> <C> <C> <C>
Operating Identifiable
Revenues Profit (Loss) Assets
-------- ------------- ------
1998
Canada $ 8,537 $ 892 $ 6,712
Mexico 20,925 4,455 17,803
United Kingdom 1,056 ( 4) 789
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
</TABLE>
<PAGE>
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 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 TunesR 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 1998, the Company has paid $626,000 as earned
by Warner Bros.
The Company has entered into employment agreements with two executives which
provide for the continuation of salary (currently aggregating $32,800 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 $417,000 in 1998 and $322,000 in 1997. Annual future minimum rental
payments are approximately $417,000 per year through 2001 and $104,000 in 2002.
In 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, and which require Carborundum Corporation to reimburse the Company
for up to $225,000 for product development.
The Company, in the normal course of business, is party in certain litigation.
In 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 a claim under New Jersey's
Environmental Clean-Up Responsibility Act (ECRA) by a 1984 purchaser of
industrial property from the Company. All subsequent appeals were denied and
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). As a
result of the judgment, a final provision of approximately $2 million ($1.44
million, net of tax or 45 cents per share) was recorded in 1996. In 1998, the
Company paid $3.6 million to satisfy this claim in full, including all accrued
interest. No anticipated recoveries from insurance carriers or other third
parties have been recognized.
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 $300,000 as of September 30, 1998), the resolution of these
matters will not materially affect the Company's future results of operations or
financial position.
<PAGE>
(13) SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (In Thousands,
---------------------------------------------------------------------
Except Per Share Data):
----------------------
<TABLE>
<S> <C> <C> <C> <C>
1998: First Second Third Fourth
----- ----- ------ ----- ------
Revenues $ 23,797 $ 24,853 $ 38,503 $ 37,568
Operating income 1,288 1,360 4,699 2,728
Income before taxes and
minority interest 497 264 3,406 1,236
Minority interest 118 187 293 107
Net income 305 120 2,015 696
Earnings per share:(a)
Basic .09 .04 .60 .20
Diluted .08 .03 .54 .19
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:(a)
Basic .07 .02 .57 .43
Diluted .06 .01 .54 .39
</TABLE>
(a) Calculated independently for each period, and consequently, the sum of
the quarters may differ from the annual amount.
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<S> <C> <C> <C> <C> <C>
Additions to
Balance at Additions (Deductions Balance
Beginning Charged From) at Close
Description of Period to Income Reserves of Period
----------- --------- --------- -------- ---------
Allowance for Doubtful Accounts:
- -------------------------------
Year Ended $ 616,205 (1)
September 30, 1998 $1,004,537 $105,126 $ (356,053) (2) $1,369,815
========== ======== =========== ==========
Year Ended
September 30, 1997 $1,352,411 $248,576 $ (596,450) (2) $1,004,537
========== ======== =========== ==========
Year Ended
September 30, 1996 $ 796,715 $977,965 $ (422,269) (2) $1,352,411
========== ======== =========== ==========
</TABLE>
(1) Additions to reserve of Mexican subsidiary from acquisition of Vinci de
Mexico, SA. de C.V., and other adjustments.
(2) Write off of accounts considered to be uncollectible (net of recoveries).
<PAGE>
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
25, 1998, on our audits of the consolidated financial statements and financial
statement schedule of Dixon Ticonderoga Company and subsidiaries as of September
30, 1998 and 1997, and for each of the three years in the period ended September
30, 1998, which report is included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Orlando, Florida
December 29, 1998
<PAGE>
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 1998 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.
<TABLE>
<S> <C> <C>
Name Age Title
- ---- --- -----
Gino N. Pala 70 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 42 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 43 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.
Leonard D. Dahlberg, Jr. 47 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.
Laura Hemmings 47 Corporate Secretary since January 1986;
prior thereto secretary to President
and Chief Executive Officer since
February 1982.
John Adornetto 57 Vice President and Corporate Controller
since January 1991; prior thereto
Corporate Controller since September
1978.
</TABLE>
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
- ---------------------------------
Information required under this Item will be contained in the Company's
1998 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
1998 Proxy Statement which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information required under this Item will be contained in the Company's
1998 Proxy Statement which is incorporated herein by reference.
<PAGE>
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:
(2)a. Share Purchase Agreement by and among Dixon Ticonderoga de
Mexico, S.A. de C.V., and by Grupo Ifam, S.A. de C.V., and
Guillermo Almazan Cueto with respect to the capital stock of
Vinci de Mexico, S.A. de C.V., (English translation).****
(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*
<PAGE>
(10)g. Second Modification of Amended and Restated Revolving Credit
Loan and Security Agreement by and among Dixon Ticonderoga
Company, Dixon Ticonderoga, Inc., First Union Commercial
Corporation, First National Bank of Boston and National Bank
of Canada
(21) Subsidiaries of the Company*
(27) Financial Data Schedule*****
*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.
****Incorporated by reference to the Company's current report on Form 8-K dated
December 12, 1997, filed in Washington D.C.
*****Filed electronically via EDGAR.
(b) Reports on Form 8-K:
-------------------
None.
<PAGE>
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.
<TABLE>
<S> <C>
/s/ Gino N. Pala
- --------------------------
Gino N. Pala Chairman of Board, President, Chief
Executive Officer and Director
Date: December 19, 1998
/s/ Richard F. Joyce
- --------------------------
Richard F. Joyce Vice Chairman, Executive Vice President/
Corporate Counsel and Director
Date: December 19, 1998
/s/ Richard A. Asta
_________________________
Richard A. Asta Executive Vice President of Finance and
Chief Financial Officer
Date: December 19, 1998
/s/ Joseph R. Sadowski
- -------------------------
Joseph R. Sadowski Director
Date: December 19, 1998
/s/ Philip M. Shasteen
- -------------------------
Philip M. Shasteen Director
Date: December 19, 1998
/s/ Ben Berzin, Jr.
- -------------------------
Ben Berzin, Jr. Director
Date: December 19, 1998
/s/ John E. Romondo
- -------------------------
John E. Romondo Director
Date: December 19, 1998
/s/ Kent Kramer
- -------------------------
Kent Kramer Director
Date: December 19, 1998
</TABLE>
<PAGE>
SECOND MODIFICATION OF AMENDED AND RESTATED
REVOLVING CREDIT LOAN AND SECURITY AGREEMENT
This Second Modification of Amended and Restated Revolving Credit Loan and
Security Agreement (this "Second Modification") dated as of May 19, 1998 (the
"Effective Date"), amends the Amended and Restated Revolving Credit Loan and
Security Agreement dated as of July 10, 1996, as amended September 26, 1996, by
and among DIXON TICONDEROGA COMPANY, a Delaware corporation ("DTC"), and DIXON
TICONDEROGA INC., an Ontario corporation ("DTI"; DTC and DTI, are collectively
referred to hereinafter as the "Borrower"), the Lenders named therein and FIRST
UNION COMMERCIAL CORPORATION, a North Carolina corporation ("FUCC"), as Agent
for the Lenders (in its capacity as Agent, the "Agent").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrower has entered into an Amended and Restated Revolving
Credit Loan and Security Agreement, dated as of July 10, 1996, as amended
September 26, 1996 (said Agreement as it may be further amended, restated or
otherwise modified from time to time, being hereinafter called the "Revolving
Credit Agreement"), pursuant to which the Lenders extended financial
accommodations to Borrower in the form of a $40,000,000 revolving line of credit
and letter of credit facility in accordance with, and subject to, the terms and
conditions of the Revolving Credit Agreement; and
WHEREAS, the Borrower has requested that the revolving line of credit under
the Revolving Credit Agreement be increased to $45,000,000 and the Lenders have
agreed to such increase.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements hereinafter set forth, the parties hereto agree as follows:
SECTION 1. Defined Terms. Capitalized terms used in this Second
-------------
Modification and not otherwise defined herein, shall have the meanings ascribed
to them in the Revolving Credit Agreement.
SECTION 2. Amendment to Definitions. Section 1 (Definitions) of the
------------------------ -----------
Revolving Credit Agreement is amended by amending the following definition to
read in its entirety as follows:
"Revolving Credit Commitment" shall mean the commitments of each of the
Lenders pursuant to Section 2.1 hereof to make the Revolving Credit Loans to the
-----------
Borrower, to wit: FUCC, $22,649,625 or 50.3325% of the Revolving Credit Loans;
BankBoston, $14,906,250 or 33.125% of the Revolving Credit Loans; and NBC,
$7,444,125 or 16.5425% of the Revolving Credit Loans.
<PAGE>
SECTION 3. Additional Amendments to Definitions. Subsection (m) of the
------------------------------------
definition of "Eligible Accounts" in Section 1 is deleted and subsections (f),
(g), (h) and (l) of such definition are amended in their entirety so that such
subsections now read as follows:
(f) For all Educational Supplies Distributor Accounts, the Account is
evidenced by an invoice in form acceptable to the Lender and has not remained
unpaid for a period exceeding sixty (60) days after the due date of such invoice
or 300 days from the invoice date of such invoice.
(g) For all Mass Market Accounts, the Account is evidenced by an invoice
in form acceptable to the Lender and has not remained unpaid for a period
exceeding sixty (60) days from due date.
(h) For all Non-Dated Accounts, the Account is evidenced by an invoice in
form acceptable to the Lender and has not remained unpaid for a period exceeding
sixty (60) days after the due date for such invoice;
(l) The Account is not due from an Account Debtor fifty percent (50%) or
more of whose Accounts are ineligible pursuant to the other subsections of this
definition;
SECTION 4. Amendments to Section 2.1. Section 2.1 (Revolving Line of
------------------------- -----------------
Credit) of the Revolving Credit Agreement is amended by replacing the reference
- ------
to "Forty Million U.S. Dollars ($40,000,000)" with a reference to "Forty-Five
Million U.S. Dollars ($45,000,000)".
SECTION 5. Amendments to Section 2.2. Section 2.2 (Maximum Revolving
------------------------- -----------------
Credit Facility) of the Revolving Credit Agreement is amended by replacing the
- ---------------
reference to "Forty Million U.S. Dollars ($40,000,000)" with a reference to
"Forty-Five Million U.S. Dollars ($45,000,000)".
SECTION 6. Amendments to Exhibits. Exhibit A, Exhibit C, Exhibit F-1,
---------------------- --------- --------- -----------
Exhibit F-2 and Exhibit F-3 of the Revolving Credit Agreement are deleted and
- ----------- -----------
replaced with Exhibit A, Exhibit C, Exhibit F-1, Exhibit F-2 and Exhibit F-3,
--------- --------- ----------- ----------- -----------
respectively, attached hereto.
SECTION 7. Ratification: Effect on Term Loan Agreement. The terms and
-------------------------------------------
conditions of the Loan Agreements and the other Loan Documents shall remain in
full force and effect and are hereby ratified and confirmed in all respects,
except that all references contained therein to "Revolving Credit Agreement"
shall refer to the Revolving Credit Agreement as modified by this Second
Modification and any reference to $40,000,000 contained therein shall refer to
$45,000,000. To the extent that any of the amendments of the Revolving Credit
Agreement contained in this Second Modification are amendments of provisions
which are incorporated by reference in the Term Loan Agreement, the Term Loan
Agreement shall be deemed to be similarly amended.
<PAGE>
SECTION 8. Representations and Warranties. The Borrower represents
------------------------------
warrants to, and agrees with, the Agent and the Lenders and for the benefit of
First Union that (i) it has no defenses, set-offs, or counterclaims of any kind
or nature whatsoever against the Agent, the Lenders or First Union with respect
to the Obligations, any of the agreements among the parties hereto, including,
without limitation, the obligations of the Borrower under the Loan Agreements,
the Notes, this Second Modification or any other Loan Document, or any action
previously taken or not taken by the Agent or any Lender with respect thereto or
with respect to any Lien or Collateral in connection therewith to secure the
Obligations, and (ii) this Second Modification has been duly authorized by all
necessary corporate action on the part of the Borrower, has been duly executed
by a duly authorized officer of each entity comprising the Borrower, and
constitutes the valid and binding obligation of the Borrower, enforceable
against each entity comprising the Borrower in accordance with the terms hereof.
SECTION 9. Loan Agreement Representations and Warranties. The Borrower
---------------------------------------------
hereby certifies that the representations and warranties contained in the Loan
Agreements, as amended herein, continue to be true and correct and that no Event
of Default, or event which with the passage of time or the giving of notice, or
both, would constitute an Event of Default has occurred.
SECTION 10. Conditions Precedent to Effectiveness of Modification. It
-----------------------------------------------------
shall be a condition precedent to the effectiveness of this Second Modification
that the Borrower shall have complied with each of the following:
(a) Executed Documents. The Agent shall have received executed originals
------------------
of (i) this Second Modification together with the Consent attached hereto, (ii)
Revolving Credit Notes in favor of each of the Lenders and (iii) recorded
modifications of the Mortgages.
(b) Certificates of Secretaries of the Borrower and Guarantors. The Agent
----------------------------------------------------------
shall have received a certificate of the Secretary or an Assistant Secretary of
each entity comprising the Borrower and of each Guarantor, certifying (a) with
respect to each such Guarantor, that attached thereto is a true and complete
copy of resolutions adopted by the Board of Directors and sole shareholder of
such Guarantor authorizing the execution, delivery and performance by such
Guarantor of this Second Modification, (b) that attached thereto is a true and
complete copy of resolutions adopted by the Board of Directors of each entity
comprising the Borrower authorizing the execution delivery and performance of
this Second Modification by such entity; and (c) as to the incumbency and
genuineness of the signature of each officer of the Borrower and each Guarantor
executing this Second Modification and any other documents executed in
connection therewith.
<PAGE>
(c) Certificate of Borrower. The Agent shall have received a certificate
-----------------------
from each entity comprising the Borrower, signed by the Chief Executive Officer
and Secretary of such entity, in form and substance satisfactory to the Agent
and its special counsel, to the effect that all representations and warranties
of the Borrower contained in this Second Modification are true, correct and
complete as of the Effective Date; that the Borrower is not in violation of any
of the covenants contained in any of the Loan Documents to which it is a party;
that, giving effect to the transactions contemplated by this Second
Modification, no Event of Default or any event or condition which with notice,
lapse of time, or both would constitute such an Event of Default, has occurred
and is continuing; and that the Borrower has satisfied each of the closing
conditions set forth in this Section 9.
---------
(d) Opinion of Counsel to the Borrower. The Agent shall have received the
----------------------------------
opinion of counsel for the Borrower dated the Effective Date, as to the
transactions contemplated by this Second Modification, in form and substance
satisfactory to the Agent and its special counsel.
SECTION 11. Modication to Foreign Exchange Agreement. The Borrower and
----------------------------------------
FUCC hereby agree to modify the Foreign Exchange Agreement as follows: (a) all
references to the "Credit Agreement" contained therein shall refer to the
Revolving Credit Agreement as modified pursuant to this Second Modification, (b)
the reference to "$40,000,000" contained in the third WHEREAS paragraph on page
1 shall be changed to "$45,000,000" and (c) the reference to "Five Hundred
Thousand Dollars ($500,000)" in Section 3 on page 2 shall be changed to "One
Million Dollars ($1,000,000)."
SECTION 12. Fees. The Borrower agrees to pay to the Agent, for the
----
ratable benefit of the Lenders, a fee on the date of this Second Modification in
an amount equal to $25,000.00. The Borrower also agrees to pay to the Agent,
for the ratable benefit of the Lenders, a fee on February 15, 1999 in an amount
equal to $5,000.00.
SECTION 13. Payment of Expenses. Borrower agrees to pay, upon receipt of
-------------------
an invoice therefor, all fees and expenses of separate legal counsel for the
Agent and the Lenders in connection with the preparation, negotiation or
execution of this Second Modification.
SECTION 14. Counterparts This Second Modification may be executed in any
------------
number of counterparts which, when taken together, shall constitute one
original.
SECTION 15. Governing Law: Severability. This Second Modification shall
----------------------------
be governed by, and construed and interpreted in accordance with, the law of the
State of Florida. Wherever possible, each provision of this Second Modification
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Second Modification shall be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity and without
invalidating the remaining provisions of this Second Modification.
<PAGE>
SECTION 16. WAIVER OF TRIAL BY JURY. EACH OF THE BORROWER, THE AGENT AND
-----------------------
THE LENDERS HEREBY KNOWINGLY, VOLUNTARILY, IRREVOCABLY AND INTENTIONALLY WAIVES
THE RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY ACTION, PROCEEDING,
COUNTERCLAIM OR OTHER LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS SECOND MODIFICATION, THE LOAN AGREEMENTS OR ANY OTHER LOAN
DOCUMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL
OR WRITTEN) OR ACTIONS OF ANY PARTY HERETO. THIS PROVISION IS A MATERIAL
INDUCEMENT OF THE PARTIES TO ENTER INTO THIS SECOND MODIFICATION.
SECTION 17. Titles. The section titles contained in this Second
------
Modification are and shall be without substantive meaning or content of any kind
whatsoever and are not part of this Second Modification.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second Modification
to be executed as of the date first above written.
BORROWER:
DIXON TICONDEROGA COMPANY,
a Delaware corporation
By: /s/ Gino N. Pala
---------------------------
Title: President & CEO
---------------------------
DIXON TICONDEROGA INC.,
an Ontario corporation
By: /s/ Gino N. Pala
---------------------------
Title: Chairman
---------------------------
AGENT:
FIRST UNION COMMERCIAL CORPORATION,
a North Carolina corporation, as Agent
By : /s/ Kim Carpenter
--------------------------
Title: Vice President
--------------------------
<PAGE>
LENDERS:
FIRST UNION COMMERCIAL CORPORATION,
a North Carolina corporation, as Agent
By: /s/ Kim Carpenter
---------------------------
Vice President
---------------------------
BANKBOSTON, N.A.,
a national banking association
By: /s/ Randall Parrish
---------------------------
Vice President
---------------------------
NATIONAL BANK OF CANADA,
a Canadian chartered bank
By:
---------------------------
Name:
---------------------------
Title:
---------------------------
<PAGE>
CONSENT
This Consent (the "Consent"), dated May 19, 1998, is delivered in
connection with the Second Modification of Amended and Restated Revolving Credit
Loan and Security Agreement, dated as of the date hereof (the "Second
Modification"). Each of the undersigned hereby confirms and agrees that the
Guaranty previously executed by it is, and shall continue to be, in full force
and effect, and hereby ratifies and confirms in all respects its obligations
thereunder, except that upon the effectiveness of, and on and after the date of,
the Second Modification, all references in each Guaranty to the "Revolving
Credit Agreement" shall mean the Revolving Credit Agreement as modified by the
Second Modification and any reference to "$40,000,000" shall refer to
"$45,000,000".
DIXON TICONDEROGA INC.
By: /s/ Gino N. Pala
---------------------------
Title: Chairman
---------------------------
DIXON EUROPE, LIMITED
By: /s/ Gino N. Pala
---------------------------
Title: Chairman
---------------------------
BRYN MAWR OCEAN RESORTS, INC.
By: /s/ Gino N. Pala
--------------------------
Title: President
--------------------------
TICONDEROGA GRAPHITE INC.
By: /s/ Gino N. Pala
---------------------------
Title: President
--------------------------
<PAGE>
GRUPO DIXON, S.A. de C.V.
By: /s/ Gino N. Pala
---------------------------
Title: Chairman
---------------------------
VINCI de MEXICO, S.A. de C.V.
By: /s/ Gino N. Pala
---------------------------
Title: Chairman
---------------------------
VINCI de MEXICO MANUFACTURERS, S.A.
de C.V.
By: /s/ Gino N. Pala
---------------------------
Title: Chairman
---------------------------
COMMERCIAL DIXON, S.A. de C.V.
By: /s/ Gino N. Pala
---------------------------
Title: Chairman
---------------------------
SERVICIOS DIXON, S.A. de C.V.
By: /s/ Gino N. Pala
---------------------------
Title: Chairman
---------------------------
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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> YEAR
<FISCAL-YEAR-END> SEPT. 30, 1998
<PERIOD-END> SEPT. 30, 1998
<CASH> 2,853,281
<SECURITIES> 0
<RECEIVABLES> 33,180,432
<ALLOWANCES> 1,369,815
<INVENTORY> 37,445,502
<CURRENT-ASSETS> 73,739,781
<PP&E> 37,244,354
<DEPRECIATION> 20,975,708
<TOTAL-ASSETS> 92,629,887
<CURRENT-LIABILITIES> 44,159,455
<BONDS> 0
<COMMON> 3,654,558
0
0
<OTHER-SE> 19,400,680
<TOTAL-LIABILITY-AND-EQUITY> 92,629,887
<SALES> 124,721,758
<TOTAL-REVENUES> 124,721,758
<CGS> 76,296,877
<TOTAL-COSTS> 76,296,877
<OTHER-EXPENSES> 38,349,867
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,671,646
<INCOME-PRETAX> 5,403,368
<INCOME-TAX> 1,562,069
<INCOME-CONTINUING> 3,136,359
<DISCONTINUED> 0
</TABLE>
