SECURITIES AND EXCHANGE COMMISSION
Judiciary Plaza, 450 Fifth Street, N.W.
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1999 COMMISSION FILE NO. O-2655
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DIXON TICONDEROGA COMPANY
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-0973760
-------- ----------
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification No.
195 International Parkway, Heathrow, FL 32746
-----------------------------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (407) 829-9000
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report.
Class Outstanding as of March 31, 1999
----- --------------------------------
Common Stock $1 par value 3,426,217
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Information
Consolidated Balance Sheets --
March 31, 1999 and September 30, 1998 3-4
Consolidated Statements of Operations -- For The
Three and Six Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Comprehensive Income (Loss) --
For The Three and Six Months Ended March 31, 1999 and 1998 6
Consolidated Statements of Cash Flows --
For The Six Months Ended March 31, 1999 and 1998 7-8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19-21
Signatures 22
<PAGE>
Item 1.
- -------
PART I. FINANCIAL INFORMATION
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1999 September 30, 1998
-------------- ------------------
CURRENT ASSETS:
Cash and cash equivalents $ 979,632 $ 2,853,281
Receivables, less allowance for
doubtful accounts of $1,480,529
at March 31, 1999 and $1,369,815 23,230,912 31,810,617
at September 30, 1998
Inventories 45,587,648 37,445,502
Other current assets 2,354,167 1,630,381
-------------- --------------
Total current assets 72,152,359 73,739,781
-------------- --------------
PROPERTY, PLANT and EQUIPMENT:
Land and buildings 12,566,786 14,847,930
Machinery and equipment 17,324,819 21,182,762
Furniture and fixtures 1,775,078 1,213,662
-------------- --------------
31,666,683 37,244,354
Less -Accumulated depreciation (20,975,708)
(18,172,725)
-------------- --------------
13,493,958 16,268,646
OTHER ASSETS 6,013,185 2,621,460
============== ==============
$ 91,659,502 $ 92,629,887
============== ==============
<PAGE>
March 31, 1999 September 30, 1998
-------------- ------------------
CURRENT LIABILITIES:
Notes payable $14,698,135 $26,031,951
Current maturities of long-term debt 1,852,716 1,879,775
Accounts payable 7,272,443 7,765,451
Accrued liabilities 15,927,470 8,482,278
------------- -------------
Total current liabilities 39,750,764 44,159,455
------------- -------------
LONG-TERM DEBT 20,977,245 21,927,289
------------- -------------
DEFERRED INCOME TAXES AND OTHER 838,903 776,100
------------- -------------
MINORITY INTEREST 2,869,234 2,711,805
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, par $1, authorized
100,000 shares, none issued -- --
Common stock, par $1, authorized
8,000,000 shares; issued 3,664,058
shares as of March 31, 1999, and
3,654,558 shares as of 3,664,058 3,654,558
September 30, 1998
Capital in excess of par value 3,393,193 3,327,755
Retained earnings 23,995,154 20,264,057
Accumulated comprehensive income (loss) (2,869,254) (3,373,837)
-------------- --------------
28,183,151 23,872,533
Less-Treasury stock, at cost(237,841
shares as of March 31, 1999 and
222,841 as of September 30, 1998) (959,795) (817,295)
------------- -------------
27,223,356 23,055,238
============= ==============
$91,659,502 $92,629,887
============= =============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $24,915,699 $24,853,289 $47,722,868 $48,649,905
------------ ------------ ------------ ------------
COST AND EXPENSES:
Cost of goods sold 15,500,034 15,386,760 30,399,653 30,705,604
Selling and administrative expenses 7,946,722 8,106,368 15,744,395 15,296,161
Provision for restructuring
and related costs 1,685,000 -- 1,685,000 --
------------ ------------ ------------ ------------
25,131,756 23,493,128 47,829,048 46,001,765
------------ ------------ ------------ ------------
GAIN ON SALE OF ASSETS 9,396,318 -- 9,396,318 --
------------ ------------ ------------ ------------
OPERATING INCOME 9,180,261 1,360,161 9,290,138 2,648,140
INTEREST EXPENSE 1,243,105 1,096,432 2,352,177 1,887,194
------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES AND MINORITY
INTEREST 7,937,156 263,729 6,937,961 760,946
INCOME TAXES (BENEFIT) 3,413,635 (43,582) 3,049,435 30,240
------------ ------------ ------------ ------------
4,523,521 307,311 3,888,526 730,706
MINORITY INTEREST 192,507 186,999 157,429 305,081
------------ ------------ ------------ ------------
NET INCOME $4,331,014 $ 20,312 $3,731,097 $ 425,625
============ ============ ============ ============
EARNINGS PER COMMON
SHARE:
BASIC $ 1.26 $ .04 $ 1.09 $ .13
============ ============ ============ ============
DILUTED $ 1.20 $ .03 $ 1.04 $ .11
============ ============ ============ ============
SHARES OUTSTANDING:
BASIC 3,440,217 3,374,467 3,436,915 3,370,165
============ ============ ============ ============
DILUTED 3,599,113 3,699,439 3,571,561 3,718,635
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $4,331,012 $ 120,312 $3,731,097 $ 425,625
OTHER COMPREHENSIVE INCOME
(LOSS):
Foreign currency translation 543,985 32,290 504,583 (172,110)
adjustments ------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $4,874,997 $ 152,602 $4,235,680 $ 253,515
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 3,731,097 $ 425,625
Adjustment to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,329,371 1,336,138
Deferred taxes (513,037) 197,809
Provision for doubtful accounts receivable 211,913 114,241
Gain on sale of assets (9,396,318) --
Loss attributable to foreign currency exchange 52,091 300,001
Income attributable to minority interest 157,429 305,081
Changes in assets and liabilities:
Receivables, net 7,439,447 4,617,090
Inventories (13,575,354) (7,259,132)
Other current assets (743,890) (302,065)
Accounts payable and accrued liabilities 2,648,787 (7,434,153)
Other assets (359,174) (232,722)
------------ ------------
Net cash provided by (used in) operating activities (9,017,638) (7,932,087)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (288,422) (577,954)
Purchase of Vinci de Mexico, S.A. de C.V.,
net of cash acquired -- (3,289,200)
Proceeds from sale of assets 20,246,096 --
------------ ------------
Net cash provided by (used in) investing activities 19,957,674 (3,867,154)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Principal reductions of) net proceeds from notes payable (11,595,214) 7,555,433
Principal reductions of long-term debt (981,853) (761,897)
Exercise of stock options 74,938 185,329
Purchase of treasury stock (142,500) --
Other non-current liabilities (191,693) --
------------ ------------
Net cash provided by (used in) financing activities (12,836,322) 6,978,865
------------ ------------
<PAGE>
Effect of exchange rate changes on cash 22,637 (50,950)
------------ ------------
Net decrease in cash and cash equivalents (1,873,649) (4,871,326)
Cash and cash equivalents, beginning of period 2,853,281 5,607,587
------------- -------------
Cash and cash equivalents, end of period $ 979,632 $ 736,261
============= =============
Supplemental Disclosures:
Cash paid during the period:
Interest $ 2,425,578 $ 1,886,329
Income taxes 373,235 589,699
During the six months ended March 31, 1999, the Company accepted a note
receivable of $3,250,000 as partial consideration for the sale of assets of
its U.S. Graphite and Lubricants division.
</TABLE>
The accompanying notes to consolidated financial
statements are an integral part of these statements.
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's latest
annual report on Form 10-K. In the opinion of the Company, all adjustments
(solely of a normal recurring nature) necessary to present fairly the financial
position of Dixon Ticonderoga Company and subsidiaries as of March 31, 1999, and
the results of their operations and cash flows for the six months ended March
31, 1999 and 1998, have been included. The results of operations for such
interim periods are not necessarily indicative of the results for the entire
year.
Certain fiscal 1998 balances have been reclassified to conform to current year
presentation.
2. INVENTORIES:
Since amounts for inventories under the last-in, first-out (LIFO) method are
based on annual determinations of quantities and costs as of the end of the
fiscal year, the inventories at March 31, 1999 (for which the LIFO method of
accounting are used) are based on certain estimates relating to quantities and
costs as of year end. Under the first-in, first-out (FIFO) method of accounting,
these inventories would be $1,097,000 and $897,000 higher at March 31, 1999 and
September 30, 1998, respectively.
Inventories consist of (in thousands):
March 31, 1999 September 30, 1998
-------------- ------------------
Raw materials $ 15,090 $ 13,303
Work in process 5,730 4,651
Finished goods 24,768 19,492
-------- --------
$ 45,588 $ 37,446
======== ========
3. EFFECT OF CERTAIN NEW ACCOUNTING PRONOUNCEMENTS:
In fiscal 1999, the Company implemented Financial Accounting Standards Board
(FASB) Statement No. 130, "Reporting Comprehensive Income" which required
reporting and display of comprehensive income. Comparative financial statements
presented for earlier periods have been reclassified to reflect application of
the provisions of this statement.
In 1997, the FASB issued Statement No. 131. "Disclosures About Segments of an
Enterprise and Related Information" which is effective for the Company in its
fiscal 1999 Annual Report on Form 10-K. This statement revises current
guidelines and requires financial information to be reported on the basis that
it is used internally for evaluating segment performance and resource
<PAGE>
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.
4. TRANSLATION OF FOREIGN CURRENCIES:
Until January 1, 1999, Mexico was considered as a highly inflationary economy
for the purpose of applying FASB Statement No. 52, "Foreign Currency
Translation." Translation gains and losses therefore impact the results of
operations. Foreign currency losses included in net income were approximately
$52,000 and $300,000 for the periods ended March 31, 1999 and 1998,
respectively. Effective January 1, 1999, Mexico is not considered a highly
inflationary economy, and therefore the translation gains and losses are
presented as a separate component of comprehensive income (loss).
5. ACCOUNTING FOR INCOME TAXES:
The difference between income taxes calculated at the U.S. statutory federal
income tax rate and the provision in the accompanying Consolidated Financial
Statements is primarily due to varying effective foreign tax rates, state income
taxes and other permanent items.
Income taxes reconciled to the statutory rates are as follows for all periods
presented:
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
Taxes calculated at federal statutory rate $2,699 $ 90 $2,359 $ 259
Foreign income 396 (120) 352 (265)
State taxes 222 (35) 200 (46)
Other permanent items 97 21 38 82
------- ------- ------- ------
Provision (benefit) for income taxes $3,414 $(44) $3,049 $ 30
======= ======= ======= ======
6. CONTINGENCIES:
The Company, in the normal course of business, is party in certain litigation.
In April 1996, a decision was rendered by the Superior Court of New Jersey in
Hudson County finding the Company responsible for $1.94 million plus prejudgment
interest. All company appeals have been denied and in January 1998 the Company
<PAGE>
paid $3.6 million to satisfy this claim in full, including all accrued interest.
The Company continues to pursue other responsible parties for indemnification
and/or contribution to the payment of this claim (including its insurance
carriers and a legal malpractice action against its former attorney).
The Company has evaluated the merits of other litigation and believes their
outcome will not have a further material effect on the Company's future results
of operations or financial position.
The Company is aware of several environmental matters related to certain
facilities purchased or to be sold. The Registrant assesses the extent of these
matters on an ongoing basis. In the opinion of management (after taking into
account accruals of approximately $300,000 as of March 31, 1999), the resolution
of these matters will not materially affect the Company's future results of
operations or financial position. In addition, the Company has provided for
certain future environmental obligations related to the sale of its U.S.
Graphite and Lubricants division. (See Note 8).
7. ACQUISITION:
In December 1997, the Company's Mexican subsidiary, acquired all of the capital
stock of Vinci de Mexico, S.A. de C.V. ("Vinci"), and certain assets of a
related entity for a final total purchase price of approximately 28.3 million
pesos (approximately $3.5 million) in cash. Vinci is a well-known manufacturer
of tempera and oil paints, chalk and modeling clay in Mexico. The company also
manufactures plastic products (such as rulers and geometric sets), water colors
and crayons. The acquisition was accounted for under the "purchase" method of
accounting and the balance sheet herein includes the fair value of Vinci's
specific assets and liabilities, including goodwill approximating $320,000.
Goodwill is amortized over the estimated period of benefit of 20 years. The
results of Vinci's operations have been included in the consolidated results of
operations since the date of acquisition.
8. SALE OF ASSETS:
On March 2, 1999, the Company completed the sale of its U.S. Graphite and
Lubricants division for $23.5 million, plus the assumption of certain trade
obligations related to the division. Except as provided for in the Asset
Purchase Agreement, the Company generally retained all other liabilities of the
business through the closing date, including various environmental liabilities.
The purchaser paid $20.25 million in cash and executed a five-year subordinated
note for the balance of $3.25 million. The note is unsecured and bears interest
at 9%, deferred as additional principal until September 2, 2001. The Asset
Purchase Agreement further provides that the note is subject to certain setoffs
and $705,000 of the proceeds were placed in escrow pending the completion of
certain post-closing procedures. In connection with this sale, the Company
retained or accrued liabilities approximating $4.7 million for ongoing
maintenance of unsold real estate and environmental expenses, employee
severance and benefit costs and other post-closing obligations.
9. RESTRUCTURING COSTS:
In March 1999, the Company provided $1,685,000 in connection with its
Restructuring and Cost Reduction Program, which is intended to improve overall
financial performance in the future. The program includes Consumer plant closure
and consolidation, as well as personnel reduction in manufacturing, sales and
marketing and corporate activities. Restructuring costs principally include
losses on the sale or abandonment of property and equipment and severance costs
for affected employees.
<PAGE>
10. STOCK REPURCHASE PROGRAMS:
In March 1999, the Company announced a Stock Repurchase Program authorizing
the acquisition of up to $3 million in Dixon Ticonderoga Company stock. To date,
the Company has repurchased approximately 61,000 shares at a cost of $636,000.
In addition, on May 14, 1999, the Company repurchased 4,195,000 (or
approximately 12.6%) of the outstanding shares of its Mexican subsidiary, Grupo
Dixon, S.A. de C.V. for approximately $2.75 million. The repurchase increases
the Company's ownership in its subsidiary to 92.4%.
<PAGE>
Item 2.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS STRATEGIES AND NEW DEVELOPMENTS
- -----------------------------------------
On March 2, 1999, the Company completed the sale of the assets of its U.S.
Graphite and Lubricants division for $23.5 million plus the assumption of
certain trade liabilities. The Company's net cash proceeds from the sale were
initially used to pay down its debt to its primary consortium of lenders. This
sale resulted in a pre-tax gain of $9.4 million. (See Note 8 to Consolidated
Financial Statements).
Company management believes the sale of these Industrial Group assets will
significantly strengthen its financial position, thus allowing for expanded
opportunities for growth of its Consumer Group, both internally and through
possible acquisitions and joint ventures. Moreover, the Company's improved
capitalization will make possible more aggressive restructuring of its remaining
business operations to improve efficiency and reduce future operating costs to
facilitate the aforementioned growth strategies.
Accordingly, the Company has also embarked on an extensive Restructuring and
Cost Reduction Program directed toward improving its overall financial
performance in the near future. Key actions adopted include Consumer plant
closure and consolidation, as well as personnel reduction in manufacturing,
sales and marketing and corporate activities. In connection with this
initiative, the Company recorded a non-recurring restructuring charge of
approximately $1.7 million in the quarter ended March 31, 1999. When fully
implemented, the annualized cost savings from these actions are expected to
exceed $1.5 million. (See Note 9 to Consolidated Financial Statements).
In March 1999, the Company announced a Stock Repurchase Program authorizing
the acquisition of up to $3 million in Dixon Ticonderoga Company stock. To date,
the Company has repurchased approximately 61,000 shares at a cost of
approximately $636,000.
In addition, on May 14, 1999, the Company repurchased 4,195,000 (or
approximately 12.6%) of the outstanding shares of its Mexican subsidiary, Grupo
Dixon, S.A. de C.V. for approximately $2.75 million. The repurchase increases
the Company's ownership in its subsidiary to 92.4%.
<PAGE>
REVENUES for the quarter ended March 31, 1999, increased $62,000 from the same
quarter last year. The changes by segment are as follows:
Increase % Increase(Decrease)
(Decrease) --------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
Consumer U.S. 467 4 3 1
Consumer Foreign 735 11 8 3
Industrial (1,140) (18) (19) 1
The U.S. Consumer revenue increase was primarily in the mass market. The
increase in Foreign Consumer revenue also reflects the continuing expansion in
the Mexican mass market. The March 1999 sale of the U.S. Graphite and Lubricants
division was primarily responsible for the decrease in Industrial revenue.
Revenues for the six months ended March 31, 1999, decreased $927,000 over the
same period last year. The changes by segment are as follows:
Increase % Increase(Decrease)
(Decrease) --------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
Consumer U.S. 111 - 1 (1)
Consumer Foreign 458 4 4 -
Industrial (1,496) (12) (11) (1)
The increase in Foreign revenue was again in the Mexican mass market. The March
1999 sale of the U.S. Graphite and Lubricants division was the primary cause of
the decline in the Industrial revenue, along with decreased volume in the
refractory industry.
Revenues increased $2,109,000 from the prior quarter as follows:
Increase % Increase(Decrease)
(Decrease) --------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
Consumer U.S. (644) (5) (6) 1
Consumer Foreign 3,300 79 74 5
Industrial (547) (9) (8) (1)
The decrease in U.S. Consumer revenue reflects the historical trend where the
first fiscal quarter is positively impacted by holiday sales. Industrial
decrease in revenue reflects a decrease due to the U.S. Graphite and Lubricants
sale partially offset by higher Refractory division revenue. Foreign Consumer
revenue reflects the growing trend of mass market revenue in Mexico.
<PAGE>
While the Company has operations in Canada, Mexico and the U.K., historically
only the operating results in Mexico have been materially impacted by currency
fluctuations. There has been a significant devaluation of the Mexican peso at
least once in each of the last three decades, the last one being in August 1998.
In the short term after such a devaluation, consumer confidence has been shaken,
leading to an intermediate reduction in revenues in the months following the
devaluation. Then, after the immediate shock, and as the peso stabilizes,
revenues tend to grow. Selling prices tend to rise over the long term to offset
any inflationary increases in costs. The peso, as well as any currency value,
depends on many factors including international trade, investor confidence, and
government policy, to name a few. These factors are impossible for the Company
to predict, and thus, an estimate of potential effect on results of operations
for the future cannot be made. This currency risk in Mexico is managed through
local currency financing and by export sales to the U.S. denominated in U.S.
dollars.
OPERATING INCOME increased $7,820,000 over the same quarter last year. The
afore-mentioned sale of the U.S. Graphite and Lubricants division yielded a
pre-tax gain of $9,396,000. U.S. Consumer included a charge for restructuring
and related costs of $1,685,000 for manufacturing consolidation and personnel
reduction. Decreased operating profit in the U.S. Graphite and Lubricants
division due to the sale, was principally offset by increases in U.S. and
Foreign Consumer operating income.
Operating income increased $6,642,000 for the six months ended March 31, 1999
over the same period last year. The gain on the sale of the Graphite and
Lubricants division of $9,396,000 (partially offset by the restructuring charge
of $1,685,000) were the primary causes of the change. Excluding these items,
operating income decreased $1,069,000, due primarily to the aforementioned
decline in Industrial revenue and increased distribution costs in the U.S.
Consumer division. The increased distribution costs contributed to an increase
in total selling and administrative costs (33.0% of sales compared to 31.4% in
the prior year.)
Operating income increased $9,070,000 over the prior quarter. As indicated above
the gain on sale, net of the restructuring charge, contributed to the increase.
Excluding these items, operating income increased $1,359,000, principally due to
higher revenues in Mexico. U.S. Consumer division decreased on lower revenues
and higher distribution costs.
INTEREST EXPENSE increased $147,000 and $465,000 for the quarter and six months
ended March 31, 1999, respectively, over the same periods last year, on
increased borrowings in Mexico. Interest expense also increased $134,000 over
the prior quarter due to higher seasonal borrowings.
INCOME TAXES increased $3,457,000 in the current fiscal quarter and $3,019,000
for the six months ended March 31, 1999, as compared with the prior year
periods, due principally to taxes attributable to the gain on the sale of the
U.S. Graphite and Lubricants division assets. The increase of $3,778,000 over
the prior quarter is also attributable to this gain.
MINORITY INTEREST represents 20% of the net income of the consolidated
subsidiary, Grupo Dixon, S.A de C.V.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash flows from operating activities, decreased $1,086,000 in the
first six-months of fiscal 1999, as higher receivable collections were offset by
inventories increased in preparation for U.S. manufacturing plant consolidation.
Accelerated raw material purchases in Mexico and production of new U.S. products
also contributed to this increase.
<PAGE>
The Company's investing activities included approximately $288,000 in purchases
of property and equipment in the current period as compared with $578,000 in the
prior year. There was a lower level of purchases as compared with prior years,
due to better capital budgeting and the continued use of leasing as a financing
alternative to acquiring equipment. Generally, all major capital projects are
discretionary in nature and thus no material purchase commitments exist. Capital
expenditures will continue to be funded from operations and existing financing
or new leasing arrangements. Total cash provided from investing activities
increased dramatically due to the cash proceeds of approximately $20.25 million
from the sale of the U.S. Graphite and Lubricants division. These proceeds were
initially used to reduce short-term indebtedness described below.
The Company's primary financing arrangements are with a consortium of lenders
and the underlying loan and security agreement, as amended, 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 $8.9
million of this debt at 8.75% to 8.87%.
These financing arrangements are collateralized by the tangible and intangible
assets of the U.S. and Canada operations (including accounts receivable,
inventories, property, plant and equipment, patents and trademarks) and a pledge
of the capital stock of the Company's subsidiaries. The loan and security
agreement contains provisions pertaining to the maintenance of certain financial
ratios and annual capital expenditure levels, as well as restrictions as to
payment of cash dividends. The Company received a waiver of two provisions and
is in compliance with all others. At March 31, 1999, the Company had
approximately $34 million of unused lines of credit available under this
financing arrangement. The Company is negotiating a new financing agreement as
its present facilities expire in July 1999.
The Company also has outstanding $16.5 million of 12% Senior Subordinated Notes,
due 2003. In early 1998, the Company canceled a reverse interest rate "swap"
agreement (which had originally converted $10 million of the notes to a floating
rate of interest) resulting in a deferred gain of approximately $375,000, being
recognized over the remaining original term of the notes. The Company also
issued to noteholders warrants to purchase 300,000 shares of Company stock at
$7.24 per share. The note agreement contains provisions which limit the payment
of dividends and require the maintenance of certain financial covenants and
ratios. The Company is presently in compliance with all provisions except two,
for which it has received waivers.
The Company entered into the aforementioned interest rate "swap" agreements to
balance and manage overall interest rate exposure and minimize overall cost of
borrowings. The "swaps" are not presently expected to have a material effect on
total interest expense over the term of the underlying agreements.
<PAGE>
The existing source 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, PC and local area network
platforms; addressing issues related to non-IT embedded hardware and software;
and addressing the compliance of business partners.
The project has five phases: assessment of systems and equipment affected by the
Y2K issue; definition of strategies to address affected systems and equipment;
remediation of systems; testing of systems; and certification of systems. To
certify that all IT systems are Y2K compliant, each system will be tested using
a standard testing methodology which includes millenium testing, millenium leap
year testing and cross-over year testing. Testing will be performed on each
system as remediation is completed.
The target for completion of all phases is the third calendar quarter of
1999. The Company has completed the assessment and strategy phases for its U.S.
and Canadian operations. Its Mexican operation will be brought into compliance
by a complete system replacement project, which commenced in 1998.
The majority of the Company's non-IT related systems and equipment are currently
Y2K compliant. This statement is based primarily upon communication with the
vendors as well as physical inspection and assessment of equipment and related
controlling software. Written documentation is substantially completed.
With respect to key business suppliers, the assessment and strategy phases are
underway with approximately 65% 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 quarter of 1999. Electronic interchange of data will be
tested and certified in the second quarter of 1999.
The Company is also dependent upon its customers for sales and cash flow. Y2K
interruptions in our customers' operations could result in reduced sales,
increase inventory or receivable levels and cash flow reductions. While these
events are possible, our customer base is broad enough to minimize the effects
of a single occurrence. We are taking steps to monitor the status of our
customers as a means of determining risks and alternatives.
<PAGE>
Dixon utilizes an IBM AS/400 system along with J. D. Edwards software for its
core business applications. These systems have been upgraded to Y2K compliant
versions. Manufacturing software systems that are non-compliant, will be
replaced by the J.D. Edwards system in the third quarter of 1999.
Since the inception of the project, the Company has incurred approximately
$100,000 in costs directly related to Y2K compliance. These costs were outside
the normal and previously planned upgrades of systems. Based on assessments of
equipment and systems, the Company expects additional Y2K expense to be
approximately $40,000, which will not have a material affect on the Company's
operations or financial condition. In addition, there will not be adverse impact
due to postponement of IT projects because of resource constraints caused by the
Y2K project.
The Company presently believes that its business-critical computer systems which
are not presently Y2K compliant will have been replaced, upgraded or modified in
the normal replacement cycle prior to the end of the second calendar quarter of
1999. Based on the progress the Company has made in addressing its Y2K issues
and its plan and timeline to complete its compliance program, the Company does
not foresee significant risks associated with Y2K compliance at this time.
FORWARD-LOOKING STATEMENTS
- --------------------------
Any "forward-looking statements" contained in this Quarterly Report on Form 10-Q
involve known and unknown risks (including, but not limited to certain foreign
currency and Year 2000 readiness risks), uncertainties and other factors that
could cause the actual results to differ materially from those expressed or
implied by such forward-looking statements.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------------------
At the Company's Annual Meeting of Shareholders held on March 12, 1999, one
matter was submitted to a vote of shareholders. Philip M. Shasteen and Harvey L.
Massey were elected as directors of the Company for terms expiring in 2002. The
following table sets forth certain information with respect to the election of
directors at the annual meeting:
Shares Withholding
Name of Nominee Shares Voted For Authority
--------------- ---------------- ---------
Philip M. Shasteen 3,161,638 1,128
Harvey L. Massey 3,161,638 1,128
The following table sets forth the other directors of the Company whose terms of
office continued after the aforementioned annual meeting of the shareholders:
Name of Director Term Expires
---------------- ------------
John E. Ramondo 2000
Kent Kramer 2000
Ben Berzin, Jr. 2000
Gino N. Pala 2001
Richard F. Joyce 2001
Item 6. Exhibits and Reports on Form 8-K
- ---------------------------------------------
(a) Exhibits
- --- --------
The following exhibits are required to be filed as part of this
Quarterly Report
on Form 10-Q:
( 2 ) a. Share Purchase Agreement by and among Dixon
Ticonderoga de Mexico, S.A. de C.V., and by Grupo Ifam,
S.A.de C.V., and Guillermo Almazan Cueto with respect to
the capital stock of Vinci de Mexico, S.A.de C.V.,
(English translation)****
( 2 ) b. Asset Purchase Agreement dated February 9, 1999,
by and between Dixon Ticonderoga Company, as Seller,
and Asbury Carbons, Inc., as Buyer. ******
( 3 ) (i) Restated Certificate of Incorporation**
( 3 ) (ii) Amended and Restated Bylaws*
( 4 ) a. Specimen Certificate of Company Common Stock**
( 4 ) b. Amended and Restated Stock Option Plan***
<PAGE>
( 10 ) a. First Modification of Amended and Restated Revolving Credit
Loan and Security Agreement by and among Dixon Ticonderoga
Company, Dixon Ticonderoga, Inc., First Union Commercial
Corporation, First National Bank of Boston and National
Bank of Canada*
( 10 ) b. 12.00% Senior Subordinated Notes, Due 2003, Note and Warrant
Purchase Agreement*
( 10 ) c. 12.00% Senior Subordinated Notes, Due 2003, Common Stock
Purchase Warrant Agreement*
( 10 ) d. License and Technological Agreement between Carborundum
Corporation and New Castle Refractories Company, a
division of Dixon Ticonderoga Company*
( 10 ) e. Equipment Option and Purchase Agreement between
Carborundum Corporation and New Castle Refractories
Company, a division of Dixon Ticonderoga Company*
( 10 ) f. Product Purchase Agreement between Carborundum Corporation
and New Castle Refractories Company, a division of Dixon
Ticonderoga Company*
( 10 ) g. Second Modification of Amended and Restated Revolving Credit
Loan and Security Agreement by and among Dixon Ticonderoga
Company, Dixon Ticonderoga, Inc., First Union Commercial
Corporation, First National Bank of Boston and National
Bank of Canada*****
( 27 ) Financial Data Schedule (filed electronically via EDGAR)
*Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended September 30, 1996, file number 0-2655, filed in Washington, D.C.
**Incorporated by reference to the Company's quarterly report on Form 10-Q for
the period ended 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.
*****Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended September 30, 1998, file number 0-2655, filed in Washington, D.C.
******Incorporated by reference to the Company's current report on Form 8-K
dated March 2, 1999, filed in Washington, D.C.
<PAGE>
(b) Reports on Form 8-K
On March 2, 1999, the Company filed a current report on Form 8-K regarding the
sale of its U.S. Graphite and Lubricants division. On April 20, 1999, the
Company filed an amendment on Form 8-K/A, to include certain required pro forma
financial information related to this sale.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIXON TICONDEROGA COMPANY
Dated: May 14, 1999 By: /s/ Gino N. Pala
-----------------------
Gino N. Pala
Chairman of the Board,
President, Chief Executive
Officer and Director
Dated: May 14, 1999 By: /s/ Richard A. Asta
----------------------------
Richard A. Asta
Executive Vice President of
Finance and Chief Financial Officer
Dated: May 14, 1999 By: /s/ John Adornetto
----------------------------
John Adornetto
Vice President/Corporate
Controller and Chief
Accounting Officer
<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> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 979,632
<SECURITIES> 0
<RECEIVABLES> 24,711,441
<ALLOWANCES> 1,480,529
<INVENTORY> 45,587,648
<CURRENT-ASSETS> 72,152,359
<PP&E> 31,666,683
<DEPRECIATION> (18,172,725)
<TOTAL-ASSETS> 91,659,502
<CURRENT-LIABILITIES> 39,750,764
<BONDS> 0
0
0
<COMMON> 3,664,508
<OTHER-SE> 23,559,298
<TOTAL-LIABILITY-AND-EQUITY> 91,659,502
<SALES> 47,722,868
<TOTAL-REVENUES> 47,722,868
<CGS> 30,399,653
<TOTAL-COSTS> 17,429,395
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,352,177
<INCOME-PRETAX> 6,937,961
<INCOME-TAX> 3,049,435
<INCOME-CONTINUING> 3,731,097
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,731,097
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.04
</TABLE>
