SECURITIES AND EXCHANGE COMMISSION
Judiciary Plaza, 450 Fifth Street, N.W.
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1999 COMMISSION FILE NO. O-2655
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DIXON TICONDEROGA COMPANY
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 23-0973760
-------- ----------
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification No.
195 International Parkway, Heathrow, FL 32746
---------------------------------------- -----
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (407) 829-9000
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the close of the period covered by this report.
Class Outstanding as of June 30, 1999
----- -------------------------------
Common Stock $1 par value 3,400,791
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Information
Consolidated Balance Sheets --
June 30, 1999 and September 30, 1998 3-4
Consolidated Statements of Operations -- For The
Three and Nine Months Ended June 30, 1999 and 1998 5
Consolidated Statements of Comprehensive Income --
For The Three and Nine Months Ended June 30, 1999 and 1998 6
Consolidated Statements of Cash Flows --
For The Nine Months Ended June 30, 1999 and 1998 7-8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19-20
Signatures 21
<PAGE>
Item 1.
PART I. FINANCIAL INFORMATION
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1999 September 30,
------------- 1998
-------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,166,584 $ 2,853,281
Receivables, less allowance for
doubtful accounts of $1,505,660
at June 30, 1999 and $1,369,815
at September 30, 1998 37,824,675 31,810,617
Inventories 42,562,514 37,445,502
Other current assets 2,433,206 1,630,381
-------------- --------------
Total current assets 83,986,979 73,739,781
-------------- --------------
PROPERTY, PLANT and EQUIPMENT:
Land and buildings 13,409,801 14,847,930
Machinery and equipment 17,426,611 21,182,762
Furniture and fixtures 1,766,707 1,213,662
-------------- --------------
32,603,119 37,244,354
Less - Accumulated depreciation (18,579,934) (20,975,708)
-------------- --------------
14,023,185 16,268,646
OTHER ASSETS 5,881,936 2,621,460
-------------- --------------
$ 103,892,100 $ 92,629,887
============== ==============
<PAGE>
June 30, 1999 September 30,
------------- 1998
-------------
CURRENT LIABILITIES:
Notes payable $28,826,231 $26,031,951
Current maturities of long-term debt 1,820,740 1,879,775
Accounts payable 6,386,725 7,765,451
Accrued liabilities 15,253,298 8,482,278
------------- -------------
Total current liabilities 52,286,994 44,159,455
------------- -------------
LONG-TERM DEBT 20,510,465 21,927,289
------------- -------------
DEFERRED INCOME TAXES AND OTHER 687,742 776,100
------------- -------------
MINORITY INTEREST 1,244,143 2,711,805
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, par $1, authorized
100,000 shares, none issued -- --
Common stock, par $1, authorized
8,000,000 shares; issued 3,685,559
shares as of June 30, 1999, and
3,654,558 shares as of 3,685,559 3,654,558
September 30, 1998
Capital in excess of par value 3,569,221 3,327,755
Retained earnings 26,121,257 20,264,057
Accumulated comprehensive income (loss) (2,713,305) (3,373,837)
------------- -------------
30,662,732 23,872,533
Less - Treasury stock, at cost
(284,768 shares as of
June 30, 1999 and 222,841
as of September 30, 1998) (1,499,976) (817,295)
------------- -------------
29,162,756 23,055,238
============= =============
$103,892,100 $92,629,887
============= =============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES $36,916,508 $38,503,363 $84,639,376 $87,153,268
------------ ------------ ------------ ------------
COST AND EXPENSES:
Cost of goods sold 22,676,586 23,313,219 53,076,239 54,018,823
Selling and administrative expenses 9,398,727 10,490,978 25,143,122 25,787,139
Provision for restructuring
and related costs -- -- 1,685,000 --
------------ ------------ ------------ ------------
32,075,313 33,804,197 79,904,361 79,805,962
------------ ------------ ------------ ------------
GAIN ON SALE OF ASSETS -- -- 9,396,318 --
------------ ------------ ------------ ------------
OPERATING INCOME 4,841,195 4,699,166 14,131,333 7,347,306
INTEREST EXPENSE 1,367,057 1,293,039 3,719,234 3,180,233
------------ ------------ ------------ ------------
INCOME BEFORE INCOME
TAXES AND MINORITY
INTEREST 3,474,138 3,406,127 10,412,099 4,167,073
INCOME TAXES 1,158,687 1,098,449 4,208,122 1,128,689
------------ ------------ ------------ ------------
2,315,451 2,307,678 6,203,977 3,038,384
MINORITY INTEREST 189,351 292,575 346,780 597,656
------------ ------------ ------------ ------------
NET INCOME $ 2,126,100 $ 2,015,103 $ 5,857,197 $ 2,440,728
============ ============ ============ ============
EARNINGS PER COMMON
SHARE:
BASIC $ .63 $ .60 $ 1.71 $ .72
============ ============ ============ ============
DILUTED $ .59 $ .54 $ 1.64 $ .65
============ ============ ============ ============
Shares Outstanding:
Basic 3,401,689 3,386,602 3,427,810 3,378,798
============ ============ ============ ============
Diluted 3,599,665 3,744,365 3,576,942 3,731,420
============ ============ ============ ============
The accompanying notes to consolidated financial statements are an integral
part of these statements.
</TABLE>
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME $2,126,100 $2,015,103 $5,857,197 $2,440,728
OTHER COMPREHENSIVE INCOME
(LOSS):
Foreign currency translation adjustments 155,949 (283,372) 660,532 (455,482)
------------ ------------ ----------- ------------
COMPREHENSIVE INCOME $2,282,049 $1,731,731 $6,517,729 $1,985,246
============ ============ ============ ============
</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 NINE MONTHS ENDED JUNE 30, 1999 AND 1998
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,857,197 $ 2,440,728
Adjustment to reconcile net income to net cash
provided by(used in) operating activities:
Depreciation and amortization 1,996,717 2,169,221
Deferred taxes (389,636) 204,230
Provision for doubtful accounts receivable 344,638 200,970
Gain on sale of assets (9,396,318) --
Loss attributable to foreign currency exchange 175,124 377,801
Income attributable to minority interest 346,780 597,656
Changes in assets and liabilities:
Receivables, net (6,967,610) (9,771,563)
Inventories (10,547,206) (6,000,497)
Other current assets (823,353) (20,287)
Accounts payable and accrued liabilities 1,031,580 (6,081,270)
Other assets (299,761) (123,546)
------------ -----------
Net cash provided by (used in) operating activities
(18,671,848) (16,006,557)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (610,384) (1,315,099)
Purchase of Vinci de Mexico, S.A. de C.V.,
net of cash acquired -- (3,289,200)
Proceeds from sale of assets 20,246,096 --
----------- -----------
Net cash provided by (used in) investing activities 19,635,712 (4,604,299)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable 2,434,444 16,828,403
Principal reductions of long-term debt (1,482,845) (1,235,013)
Exercise of stock options 304,139 355,861
Purchase of subsidiary stock (2,747,689) --
Purchase of treasury stock (714,353) --
Other non-current liabilities (432,234) 109
----------- -----------
Net cash provided by (used in) financing activities
(2,638,538) 15,949,360
----------- -----------
<PAGE>
Effect of exchange rate changes on cash (12,023) (143,487)
------------- ------------
Net decrease in cash and cash equivalents (1,686,697) (4,804,983)
Cash and cash equivalents, beginning of period 2,853,281 5,607,587
------------- ------------
Cash and cash equivalents, end of period $ 1,166,584 $ 802,604
============= ============
Supplemental Disclosures:
Cash paid during the period:
Interest $ 3,275,813 $ 2,652,631
Income taxes 2,675,577 785,441
During the nine months ended June 30, 1999, the Company accepted a note
receivable of $3,250,000 as partial consideration for the sale of assets of its
U.S. Graphite and Lubricants division.
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<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 June 30, 1999, and
the results of their operations and cash flows for the nine months ended June
30, 1999 and 1998, have been included. The results of operations for such
interim periods are not necessarily indicative of the results for the entire
year. Certain fiscal 1998 balances have been reclassified to conform to current
year presentation.
2. INVENTORIES:
Since amounts for inventories under the last-in, first-out (LIFO) method
are based on annual determinations of quantities and costs as of the end of the
fiscal year, the inventories at June 30, 1999 (for which the LIFO method of
accounting are used) are based on certain estimates relating to quantities and
costs as of year end. Under the first-in, first-out (FIFO) method of accounting,
these inventories would be $1,135,000 and $897,000 higher at June 30, 1999 and
September 30, 1998, respectively.
Inventories consist of (in thousands):
June 30, 1999 September 30, 1998
------------- ------------------
Raw materials $ 15,503 $ 13,303
Work in process 5,659 4,651
Finished goods 21,401 19,492
--------- ---------
$ 42,563 $ 37,446
========= =========
3. EFFECT OF CERTAIN NEW ACCOUNTING PRONOUNCEMENTS:
In fiscal 1999, the Company implemented Financial Accounting Standards
Board (FASB) Statement No. 130, "Reporting Comprehensive Income" which required
reporting and display of comprehensive income. Comparative financial statements
presented for earlier periods have been reclassified to reflect application of
the provisions of this statement. In 1997, the FASB issued Statement No. 131.
"Disclosures About Segments of an Enterprise and Related Information" which is
effective for the Company in its fiscal 1999 Annual Report on Form 10-K. This
statement revises current guidelines and requires financial information to be
reported on the basis that it is used internally for evaluating segment
performance and resource allocation. Total assets, segment profit (loss) and
other key items are required to be reported as this data would be reported in
internal financial statements. The Company does not expect this new statement to
significantly affect how it presently defines or reports its business segment
data. In 1998, the FASB issued Statement No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for the Company in fiscal
2001. This statement requires all derivative instruments to be recognized in the
balance sheet as either assets or liabilities at fair value. The Company
currently uses cash flow hedges to convert variable rate debt to fixed rate
debt, but does not expect the prescribed accounting for these instruments to
materially affect its financial position or results of operations when adopted.
4. TRANSLATION OF FOREIGN CURRENCIES:
Until January 1, 1999, Mexico was considered as a highly inflationary
economy for the purpose of applying FASB Statement No. 52, "Foreign Currency
Translation." Translation gains and losses therefore impacted the results of
operations through that date. Foreign currency losses included in net income
were approximately $175,000 and $378,000 for the periods ended June 30, 1999 and
1998, respectively. Effective January 1, 1999, Mexico is not considered a highly
inflationary economy, and therefore the translation gains and losses are
presented as a separate component of comprehensive income (loss). 5. Accounting
for income taxes: The difference between income taxes calculated at the U.S.
statutory federal income tax rate and the provision in the accompanying
Consolidated Financial Statements is primarily due to varying effective foreign
tax rates, state income taxes and other permanent items. Income taxes reconciled
to the statutory rates are as follows for all periods presented:
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
Taxes calculated at federal statutory rate $1,181 $1,158 $3,540 $1,417
Foreign income (118) (158) 234 (423)
State taxes 40 41 240 (5)
Other permanent items 56 57 194 140
------- ------- ------- -------
Provision for income taxes $1,159 $ 1,098 $ 4,208 $ 1,129
6. CONTINGENCIES:
The Company, in the normal course of business, is party in certain
litigation. In April 1996, a decision was rendered by the Superior Court of New
Jersey in Hudson County finding the Company responsible for $1.94 million plus
prejudgment interest. All company appeals have been denied and in January 1998
the Company paid $3.6 million to satisfy this claim in full, including all
accrued interest. The Company continues to pursue other responsible parties for
indemnification and/or contribution to the payment of this claim (including its
insurance carriers and a legal malpractice action against its former attorney).
The Company has evaluated the merits of other litigation and believes their
outcome will not have a further material effect on the Company's future results
of operations or financial position. The Company is aware of several
environmental matters related to certain facilities purchased or to be sold. The
Registrant assesses the extent of these matters on an ongoing basis. In the
opinion of management (after taking into account accruals of approximately
$300,000 as of June 30, 1999), the resolution of these matters will not
materially affect the Company's future results of operations or financial
position. In addition, the Company has provided for certain future environmental
obligations related to the sale of its U.S. Graphite and Lubricants division.
(See Note 8).
7. ACQUISITION:
In December 1997, the Company's Mexican subsidiary, acquired all of the
capital stock of Vinci de Mexico, S.A. de C.V. ("Vinci"), and certain assets of
a related entity for a final total purchase price of approximately 28.3 million
pesos (approximately $3.5 million) in cash. Vinci is a well-known manufacturer
of tempera and oil paints, chalk and modeling clay in Mexico. The company also
manufactures plastic products (such as rulers and geometric sets), water colors
and crayons. The acquisition was accounted for under the "purchase" method of
accounting and the balance sheet herein includes the fair value of Vinci's
specific assets and liabilities, including goodwill approximating $320,000.
Goodwill is amortized over the estimated period of benefit of 20 years. The
results of Vinci's operations have been included in the consolidated results of
operations since the date of acquisition.
8. SALE OF ASSETS:
On March 2, 1999, the Company completed the sale of its U.S. Graphite and
Lubricants division for $23.5 million, plus the assumption of certain trade
obligations related to the division. Except as provided for in the Asset
Purchase Agreement, the Company generally retained all other liabilities of the
business through the closing date, including various environmental liabilities.
The purchaser paid $20.25 million in cash and executed a five-year subordinated
note for the balance of $3.25 million. The note is unsecured and bears interest
at 9%, deferred as additional principal until September 2, 2001. The Asset
Purchase Agreement further provides that the note is subject to certain setoffs
and $705,000 of the proceeds were placed in escrow pending the completion of
certain post-closing procedures. In connection with this sale, the Company
retained or accrued liabilities approximating $4.7 million for ongoing
maintenance of unsold real estate and environmental expenses, employee severance
and benefit costs and other post-closing obligations.
9. RESTRUCTURING COSTS:
In March 1999, the Company provided $1,685,000 in connection with its
Restructuring and Cost Reduction Program, which is intended to improve overall
financial performance in the future. The program includes Consumer plant closure
and consolidation, as well as personnel reduction in manufacturing, sales and
marketing and corporate activities. Restructuring costs principally include
losses on the sale or abandonment of property and equipment and severance costs
for affected employees. Through June 30, 1999, approximately $138,000 has been
charged against this accrual for severance costs associated with planned
personnel reduction.
10. STOCK REPURCHASE PROGRAM
In March 1999, the Company announced a Stock Repurchase Program authorizing
the acquisition of up to $3 million in Dixon Ticonderoga Company stock. To date,
the Company has repurchased approximately 69,000 shares at a cost of $727,000.
In addition, in May 1999, the Company repurchased 4,195,000 (or
approximately 12.6%) of the outstanding shares of its Mexican subsidiary, Grupo
Dixon, S.A. de C.V. for approximately $2.75 million. The repurchase increases
the Company's ownership in its subsidiary to 92.4%.
<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 June 30, 1999. When fully
implemented, the annualized cost savings from these actions are expected to
approximate $1.5 million. (See Note 9 to Consolidated Financial Statements).
In March 1999, the company announced a Stock Repurchase Program authorizing
the acquisition of up to $3 million in Dixon Ticonderoga Company stock. To date,
the Company has repurchased approximately 69,000 shares at a cost of
approximately $727,000. In addition, on May 14, 1999, the Company repurchased
4,195,000 (or approximately 12.6%) of the outstanding shares of its Mexican
subsidiary, Grupo Dixon, S.A. de C.V. for approximately $2.75 million. The
repurchase increases the Company's ownership in its subsidiary to 92.4%. (See
Note 10 to Consolidated Financial Statements).
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
REVENUES for the quarter ended June 30, 1999, decreased $1,587,000 from the
same quarter last year. The changes by segment are as follows:
Increase % Increase(Decrease)
(Decrease) --------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
Consumer U.S. 259 2 2 --
Consumer Foreign 1,062 10 19 (9)
Industrial (2,908) (47) (47) --
The Foreign Consumer revenue increase was primarily due to the Mexican
subsidiary that continues to increase revenues in its domestic mass market.
However, revenue decreased $234,000 and $41,000 in Mexico and Canada,
respectively, due to declines in their local currencies compared to the U.S.
dollar. The sale of the U.S. Graphite and Lubricants division in March 1999
accounts for the large decrease in Industrial revenues.
Revenues for the nine months ended June 30, 1999, decreased $2,514,000 over
the same period last year. The changes by segment are as follows:
Increase % Increase(Decrease)
(Decrease) --------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
Consumer U.S. 370 1 2 (1)
Consumer Foreign 1,521 7 7 --
Industrial (4,405) (24) (23) (1)
The increase in Foreign Consumer revenue primarily reflects the continued
growth of the Mexican subsidiary in its domestic mass market. The increases in
Foreign Consumer revenue were partially offset by decreases of $1,368,000 and
$219,000 in Mexico and Canada, respectively, due to declines in their local
currencies compared to the U.S. dollar. Industrial revenue decreased primarily
due to the sale of the U.S. Graphite and Lubricants division.
Revenues increased $12,001,000 from the prior quarter as follows:
Increase % Increase(Decrease)
(Decrease) --------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
Consumer U.S. 9,655 79 78 1
Consumer Foreign 4,326 59 37 22
Industrial (1,980) (38) (38) --
The increase in U.S. and Foreign Consumer revenue reflects the seasonality
of these segments. This quarter historically represents over 30% of annual
revenues while the prior quarter represents under 20%. The decrease in
Industrial is again due to the sale of the U.S. Graphite and Lubricants
division.
While the Company has operations in Canada, Mexico and the U.K.,
historically only the operating results in Mexico have been materially impacted
by currency fluctuations. There has been a significant devaluation of the
Mexican peso at least once in each of the last three decades, the last one being
in August 1998. In the short term after such a devaluation, consumer confidence
has been shaken, leading to an intermediate reduction in revenues in the months
following the devaluation. Then, after the immediate shock, and as the peso
stabilizes, revenues tend to grow. Selling prices tend to rise over the long
term to offset any inflationary increases in costs. The peso, as well as any
currency value, depends on many factors including international trade, investor
confidence, and government policy, to name a few. These factors are impossible
for the Company to predict, and thus, an estimate of potential effect on results
of operations for the future cannot be made. This currency risk in Mexico is
managed through local currency financing and by export sales to the U.S.
denominated in U.S. dollars.
OPERATING INCOME increased $142,000 over the same quarter last year. U.S.
Consumer operating income increased $432,000, principally due to decreased
selling and marketing expenses. Foreign Consumer operating income increased
$160,000 on higher revenues. Industrial decreased $520,000, principally due to
the sale of the U.S. Graphite and Lubricant division, and general corporate
administrative costs decreased $70,000. The lower sales and marketing costs
contributed to a decrease in total selling and administrative costs (25.5% of
sales compared to 27.2% in the prior year).
Operating income increased $6,784,000 for the nine months over the same
period last year. The sale of the U.S. Graphite and Lubricant division yielded a
pre-tax gain of $9,396,000. U.S. Consumer included a charge for restructuring
and related costs of $1,685,000 for manufacturing consolidation and personnel
reduction. Through June 30, 1999, approximately $138,000 has been charged
against this accrual for severance costs associated with planned personnel
reduction. U.S. Consumer operating income (exclusive of the restructuring
charge) increased $740,000 due to lower selling and marketing expenses and
improved manufacturing efficiencies. Industrial operating income decreased
$1,440,000 due to the sale of the U.S. Graphite and Lubricant division and lower
Refractory division operating profit.
Operating income decreased $4,339,000 from the prior quarter. The prior
quarter included the gain from the sale of the U.S. Graphite and Lubricant
division of $9,396,000 (partially offset by the restructuring charge of
$1,685,000). Exclusive of the restructuring charge, U.S. Consumer and Foreign
Consumer increased $2,550,000 and $1,220,000, respectively, on the higher
seasonal revenues. Industrial decreased $430,000 due to the sale of the U.S.
Graphite and Lubricant division.
INTEREST EXPENSE increased $74,000 and $539,000 for the quarter and nine
months ended June 30, 1999, respectively, over the same periods last year.
Increased borrowings in Mexico offset a decrease in U.S. interest expense. This
decrease is due to lower borrowings reflecting the proceeds of the sale of the
U.S. Graphite and Lubricant division, partially offset by seasonal inventory and
accounts receivable increases. Interest expense increased $123,000 over the
prior quarter, again due to higher Mexico borrowings.
INCOME TAXES increased $60,000 and $3,079,000 for the three months and nine
months ended June 30, 1999, over the same periods last year. The nine month
increase is principally due to the aforementioned gain on sale of assets. Income
taxes decreased $2,255,000 from the prior quarter. (Also see Note 5 to
Consolidated Financial Statements).
MINORITY INTEREST represents 20% of the net income of the consolidated
subsidiary, Grupo Dixon, S.A de C.V. through May 14, 1999. On that date, the
Company increased its subsidiary ownership, reducing the minority interest to
7.6%. (See Note 10 to Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash flows from operating activities decreased $2,665,000 in
the first nine months of fiscal 1999. Increased receivable collections were more
than offset by inventory increases during the period. Higher U.S. inventory
levels were due to planned increases in preparation for manufacturing plant
consolidation and new product introductions. In addition, continued growth in
Mexico contributed to higher overall inventory levels.
The Company's investing activities included approximately $610,000 in
purchases of property and equipment in the current period as compared with
$1,315,000 in the prior year. There has been a lower level of purchases as
compared with prior years, due to better capital budgeting and the continued use
of leasing as a financing alternative to acquiring equipment. Generally, all
major capital projects are discretionary in nature and thus no material purchase
commitments exist. Capital expenditures will continue to be funded from
operations and existing financing or new leasing arrangements. Total cash
provided from investing activities increased dramatically due to the cash
proceeds of approximately $20.25 million from the sale of the U.S. Graphite and
Lubricants division. These proceeds (net of escrowed funds and income tax
payments) were initially used to reduce short-term indebtedness described below.
The Company's primary financing arrangements are with a consortium of
lenders and the underlying loan and security agreement, as amended, presently
provides for a total of approximately $53 million in financing. This includes a
revolving line of credit facility in the amount of $45 million which bears
interest at either the prime rate, plus 0.5%, or the prevailing LIBOR rate plus
2.5%. Borrowings under the revolving credit facility are based upon eligible
accounts receivable and inventories of the Company's U.S. and Canada operations,
as defined. The financing agreement also includes a term loan in the original
amount of $7.75 million. The term loan bears interest at the same rate, and is
payable in varying monthly installments through maturity. The Company previously
executed certain interest rate "swap" agreements, which effectively fix the rate
of interest on approximately $8.1 million of this debt at 8.75% to 8.87%.
These financing arrangements are collateralized by the tangible and
intangible assets of the U.S. and Canada operations (including accounts
receivable, inventories, property, plant and equipment, patents and trademarks)
and a pledge of the capital stock of the Company's subsidiaries. The loan and
security agreement contains provisions pertaining to the maintenance of certain
financial ratios and annual capital expenditure levels, as well as restrictions
as to payment of cash dividends. The Company received a waiver of three
provisions and is in compliance with all others. At June 30, 1999, the Company
had approximately $22 million of unused lines of credit available under this
financing arrangement. These financing arrangements expire in September 1999.
The Company is negotiating a new financing agreement which it expects will meet
its needs for the next several years.
The Company also has outstanding $16.5 million of 12% Senior Subordinated
Notes, due 2003. In early 1998, the Company canceled a reverse interest rate
"swap" agreement (which had originally converted $10 million of the notes to a
floating rate of interest) resulting in a deferred gain of approximately
$375,000, being recognized over the remaining original term of the notes. The
Company also issued to noteholders warrants to purchase 300,000 shares of
Company stock at $7.24 per share. The note agreement contains provisions which
limit the payment of dividends and require the maintenance of certain financial
covenants and ratios. The Company is presently in compliance with all provisions
except two, for which it has received waivers.
The Company entered into the aforementioned interest rate "swap" agreements
to balance and manage overall interest rate exposure and minimize overall cost
of borrowings. The "swaps" are not presently expected to have a material effect
on total interest expense over the term of the underlying agreements.
The existing and future sources of financing and cash expected to be
generated from operations and/or assets sales will, in management's opinion, be
sufficient to fulfill all current and anticipated requirements of the Company's
ongoing business and to meet all of its obligations.
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
The Year 2000 issue relates to the way computer systems and programs define
calendar dates; they could fail or make miscalculations while interpreting a
date including "00" to mean 1900, not 2000. Also, many systems and equipment
that are not typically thought of as computer-related (referred to as 'non-IT')
may contain embedded hardware or software that may have a time element
dependency.
The Company began work on the Year 2000 (Y2K) compliance issue in 1998. The
scope of the project includes addressing the compliance of all applications,
operating systems, and hardware on mid-range, PC and local area network
platforms; addressing issues related to non-IT embedded hardware and software;
and addressing the compliance of business partners.
The project has five phases: assessment of systems and equipment affected
by the Y2K issue; definition of strategies to address affected systems and
equipment; remediation of systems; testing of systems; and certification of
systems. To certify that all IT systems are Y2K compliant, each system will be
tested using a standard testing methodology which includes millenium testing,
millenium leap year testing and cross-over year testing. Testing has been or
will be performed on each system as remediation is completed.
The target for completion of all phases is the third calendar quarter of
1999. The Company has completed the assessment and strategy phases for its U.S.
and Canadian operations. Its Mexican operation will be brought into compliance
by a complete system replacement project, which commenced in 1998.
The majority of the Company's non-IT related systems and equipment are
currently Y2K compliant. This statement is based primarily upon communication
with the vendors as well as physical inspection, assessment and testing of
equipment and related controlling software. Written documentation is
substantially completed.
With respect to key business suppliers, the assessment and strategy phases
are underway with approximately 82% of critical vendors and 65% of all vendors
certifying compliance. In addition, critical suppliers are being contacted and
additional steps will be undertaken to insure non-interruption of services
before, during and after January 1, 2000. Contingency planning is in the final
stages and will be completed in the third quarter of 1999. Electronic
interchange of data will be tested and certified in the third quarter of 1999.
The Company is also dependent upon its customers for sales and cash flow.
Y2K interruptions in our customers' operations could result in reduced sales,
increase inventory or receivable levels and cash flow reductions. While these
events are possible, our customer base is broad enough to minimize the effects
of a single occurrence. We are taking steps to monitor the status of our
customers as a means of determining risks and alternatives.
Dixon utilizes an IBM AS/400 system along with J. D. Edwards software for
its core business applications. These systems have been upgraded to Y2K
compliant versions. Manufacturing software systems that are non-compliant will
be replaced by the J.D. Edwards system in the third quarter of 1999.
Since the inception of the project, the Company has incurred approximately
$100,000 in incremental costs directly related to Y2K compliance. These costs
were outside the normal and previously planned upgrades of systems. Based on
assessments of equipment and systems, the Company expects additional Y2K expense
to be approximately $50,000, which will not have a material affect on the
Company's operations or financial condition. In addition, there will not be
adverse impact due to postponement of IT projects because of resource
constraints caused by the Y2K project.
The Company presently believes that its business-critical computer systems
which are not presently Y2K compliant will have been replaced, upgraded or
modified in the normal replacement cycle prior to the end of the third calendar
quarter of 1999. Based on the progress the Company has made in addressing its
Y2K issues and its plan and timeline to complete its compliance program, the
Company does not foresee significant risks associated with Y2K compliance at
this time.
FORWARD-LOOKING STATEMENTS
- --------------------------
Any "forward-looking statements" contained in this Quarterly Report on Form
10-Q involve known and unknown risks (including, but not limited to certain
foreign currency and Year 2000 readiness risks), uncertainties and other factors
that could cause the actual results to differ materially from those expressed or
implied by such forward-looking statements.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ---------------------------------------------
(a) Exhibits
- --- --------
The following exhibits are required to be filed as part of this
Quarterly Report on Form 10-Q:
( 2 ) a. Share Purchase Agreement by and among Dixon Ticonderoga de
Mexico, S.A. de C.V., and by Grupo Ifam, S.A. de C.V., and
Guillermo Almazan Cueto with respect to the capital
stock of Vinci de Mexico, S.A.de C.V.,
(English translation).****
( 2 ) b. Asset Purchase Agreement dated February 9, 1999, by and
between Dixon Ticonderoga Company, as Seller, and Asbury
Carbons, Inc., as Buyer. ******
( 3 ) (i) Restated Certificate of Incorporation**
( 3 ) (ii) Amended and Restated Bylaws*
( 4 ) a. Specimen Certificate of Company Common Stock**
( 4 ) b. Amended and Restated Stock Option Plan***
( 10 ) a. First Modification of Amended and Restated Revolving
Credit Loan and Security Agreement by and among Dixon
Ticonderoga Company, Dixon Ticonderoga, Inc., First Union
Commercial Corporation, First National Bank of Boston
and National Bank of Canada*
( 10 ) b. 12.00% Senior Subordinated Notes, Due 2003, Note
and Warrant Purchase Agreement*
( 10 ) c. 12.00% Senior Subordinated Notes, Due 2003, Common
Stock Purchase Warrant Agreement*
( 10 ) d. License and Technological Agreement between
Carborundum Corporation and New Castle Refractories
Company, a division of Dixon Ticonderoga Company*
( 10 ) e. Equipment Option and Purchase Agreement between Carborundum
Corporation and New Castle Refractories Company, a division
of Dixon Ticonderoga Company*
( 10 ) f. Product Purchase Agreement between Carborundum
Corporation and New Castle Refractories Company, a division
of Dixon Ticonderoga Company*
( 10 ) g. Second Modification of Amended and Restated Revolving Credit
Loan and Security Agreement by and among Dixon Ticonderoga
Company, Dixon Ticonderoga, Inc., First Union Commercial
Corporation, First National Bank of Boston and National Bank
of Canada.*****
( 27 ) Financial Data Schedule (filed electronically via EDGAR)
*Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended September 30, 1996, file number 0-2655, filed in
Washington, D.C.
**Incorporated by reference to the Company's quarterly report on
Form 10-Q for the period ended June 30, 1997, file number 0-2655, filed
in Washington, D.C.
***Incorporated by reference to Appendix 3 to the Company's Proxy
Statement dated January 27, 1997, filed in Washington, D.C.
****Incorporated by reference to the Company's current report
on Form 8-K dated December 12, 1997, filed in Washington, D.C.
*****Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended September 30, 1998, file number 0-2655,
filed in Washington, D.C.
******Incorporated by reference to the Company's current report
on Form 8-K dated March 2, 1999, filed in Washington, D.C.
(b) Reports on Form 8-K
- --- -------------------
Not applicable.
<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: August 11, 1999 By: /s/ Gino N. Pala
---------------------------------
Gino N. Pala
Chairman of the Board,
President, Chief Executive
Officer and Director
Dated: August 11, 1999 By: /s/ Richard A. Asta
---------------------------------
Richard A. Asta
Executive Vice President of
Finance and Chief Financial
Officer
Dated: August 11, 1999 By: /s/ John Adornetto
--------------------------------
John Adornetto
Vice President/Corporate
Controller and Chief
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets, the Consolidated Statement of Oprations and the
Consolidated Statement of Cash Flows, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,166,584
<SECURITIES> 0
<RECEIVABLES> 39,330,335
<ALLOWANCES> 1,505,660
<INVENTORY> 42,562,514
<CURRENT-ASSETS> 83,986,979
<PP&E> 32,603,119
<DEPRECIATION> (18,579,934)
<TOTAL-ASSETS> 103,892,110
<CURRENT-LIABILITIES> 52,286,994
<BONDS> 0
0
0
<COMMON> 3,685,559
<OTHER-SE> 25,477,197
<TOTAL-LIABILITY-AND-EQUITY> 103,892,100
<SALES> 84,639,376
<TOTAL-REVENUES> 84,639,376
<CGS> 53,076,239
<TOTAL-COSTS> 26,828,122
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,719,234
<INCOME-PRETAX> 10,412,099
<INCOME-TAX> 4,208,122
<INCOME-CONTINUING> 5,857,197
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,857,197
<EPS-BASIC> 1.71
<EPS-DILUTED> 1.64
</TABLE>
