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 DECEMBER 31, 1998 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
or incorporation or rganization) 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 December 31, 1998
- ------------------------- -----------------------------------
Common Stock $1 par value 3,439,967
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
INDEX
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Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Information
Consolidated Balance Sheets --
December 31, 1998 and September 30, 1998 3-4
Consolidated Statements of Operations --
For The Three Months Ended December 31, 1998 and 1997 5
Consolidated Statements of Comprehensive Income (Loss)
For the Three Months Ended December 21, 1998 and 1997 6
Consolidated Statements of Cash Flows --
For The Three Months Ended December 31, 1998 and 1997 7-8
Notes to Consolidated Financial Statements 9-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-16
PART II. OTHER INFORMATION
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17-18
Signatures 19
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
December 31, September 30,
1998 1998
----------- -------------
CURRENT ASSETS:
Cash and cash equivalents $ 444,938 $ 2,853,281
Receivables, less allowance for
doubtful accounts of $1,331,268
at December 31,1998 and $1,369,815
at September 30, 1998 22,431,900 31,810,617
Inventories 45,579,947 37,445,502
Other current assets 2,063,680 1,630,381
------------- ------------
Total current assets 70,520,465 73,739,781
------------- ------------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 14,989,096 14,847,930
Machinery and equipment 21,225,913 21,182,762
Furniture and fixtures 1,231,241 1,213,662
------------ -----------
37,446,250 37,244,354
Less accumulated depreciation (21,529,408) (20,975,708)
------------ -----------
15,916,842 16,268,646
OTHER ASSETS 2,698,046 2,621,460
------------ -----------
$89,135,353 $92,629,887
============ ===========
<PAGE>
December 31, September 30,
1998 1998
----------- ------------
CURRENT LIABILITIES:
Notes payable $25,190,802 $26,031,951
Current maturities of long-term debt 1,871,102 1,879,775
Accounts payable 7,918,726 7,765,451
Accrued liabilities 7,013,913 8,482,278
----------- -----------
Total current liabilities 41,994,543 44,159,455
----------- -----------
LONG-TERM DEBT 21,446,891 21,927,289
----------- -----------
DEFERRED INCOME TAXES AND OTHER 534,770 776,100
MINORITY INTEREST 2,676,727 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 3,662,808
shares at December 31, 1998 and
3,654,558 at September 30, 1998 3,662,808 3,654,558
Capital in excess of par value 3,386,005 3,327,755
Retained earnings 19,664,143 20,264,057
Accumulated comprehensive income (loss) (3,413,239) (3,373,837)
------------ ------------
Less - treasury stock, at cost
(222,841 shares) (817,295) (817,295)
------------ ------------
22,482,422 23,055,238
------------ ------------
$89,135,353 $92,629,887
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
--------- ----------
REVENUES $ 22,807,169 $ 23,796,616
------------- ------------
COST AND EXPENSES:
Cost of goods sold 14,899,619 15,318,844
Selling and administrative expenses 7,797,673 7,189,793
------------- ------------
22,697,292 22,508,637
------------- ------------
OPERATING INCOME 109,877 1,287,979
INTEREST EXPENSE 1,109,072 790,762
------------- ------------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST (999,195) 497,217
INCOME TAXES (BENEFIT) (364,200) 73,822
------------- ------------
(634,995) 423,395
MINORITY INTEREST (35,078) 118,082
------------- ------------
NET INCOME (LOSS) $ (599,917) $ 305,313
============= ============
EARNINGS (LOSS) PER COMMON SHARE:
BASIC $ (.17) $ .09
============= ============
DILUTED $ (.17) $ .08
============= ============
WEIGHTED AVERAGE SHARES
OUTSTANDING:
BASIC 3,431,797 3,366,324
============== ============
DILUTED 3,539,740 3,738,206
============== ============
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)
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
-------- --------
NET INCOME (LOSS) $ (599,917) $ 305,313
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation of adjustments (39,402) (204,400)
---------- ---------
COMPREHENSIVE INCOME (LOSS) $ (639,319) $ 100,913
========== =========
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
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (599,917) $ 305,313
Adjustment to reconcile net income (loss) to
net cash provided by (used in)
operating activities:
Depreciation and amortization 634,803 658,914
Deferred taxes (151,651) 208,631
Provision for doubtful accounts receivable 74,608 31,026
(Income) loss attributable to foreign currency
exchange (84,557) 286,127
Income (loss) attributable to minority interest (35,078) 118,082
Changes in assets and liabilities:
Receivables 6,116,829 9,499,521
Inventories (8,210,565) (5,232,734)
Other current assets (438,273) (379,324)
Accounts payable and accured liabilities (1,419,699) (2,923,696)
Other assets (133,923) (239,759)
---------- ----------
Net cash provided by (used in) operations (864,731) (1,050,591)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment, net (210,045) (458,031)
Purchase of Vinci de Mexico, S.A. de C.V.,
net of cash acquired --- (3,289,200)
---------- ----------
Net cash provided by (used in)
investing activities (210,045) (3,747,231)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (principal
reductions of) notes payable (927,916) 2,969,304
Principal reductions of long-term debt (492,971) (634,611)
Exercise of stock options 66,500 109,682
Other non-current liabilities (116,322) ---
---------- ----------
Net cash provided by (used in)
financing activities (1,470,709) 2,444,375
---------- ----------
<PAGE>
Effect of exchange rate changes on cash 137,142 134,906
---------- ----------
Net decrease in cash and
cash equivalents (2,408,343) (2,218,541)
Cash and cash equivalents,
beginning of period 2,853,281 5,607,587
---------- ----------
Cash and cash equivalents,
end of period $ 444,938 $ 3,389,046
========== ===========
Supplemental Disclosures:
Cash paid during the period:
Interest $ 626,722 $ 673,788
Income taxes 226,490 247,817
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 December 31, 1998,
and the results of their operations and cash flows for the three months ended
December 31, 1998 and 1997, 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 LIFO method are based on annual
determinations of quantities and costs as of the end of the fiscal year, the
inventories at December 31, 1998 (for which the LIFO method of accounting are
used) are based on certain estimates relating to quantities and costs as of year
end.
Inventories consist of (in thousands):
December 31, September 30,
1998 1998
---- ----
Raw materials $17,682 $13,303
Work in process 5,193 4,651
Finished goods 22,705 19,492
-------- --------
$45,580 $37,446
======== ========
3. EFFECT OF CERTAIN NEW ACCOUNTING PRONOUNCEMENTS:
In 1997, the Financial Accounting Standards Board (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>
4. TRANSLATION OF FOREIGN CURRENCIES:
Since January 1, 1997, 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. Foreign currency gains (losses) included in net income (loss) were
approximately $85,000 and ($286,000) for the periods ended December 31, 1998 and
1997, respectively. Effective January 1, 1999, Mexico will be not considered a
highly inflationary economy, and therefore the translation gains and losses will
be presented as a separate component of shareholders' equity.
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 consolidated financial statements is
primarily due to lower effective foreign tax rates, state income taxes and other
permanent items.
6. CONTINGENCIES:
The Company, in the normal course of business, is a party in certain litigation.
In April 1997, a decision was rendered by the Superior Court of New Jersey in
Hudson County finding the Company responsible for $1.94 million plus
prejudgement 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 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 December 31, 1998), the resolution of these matters
will not materially affect the Company's future results of operations or
financial position.
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
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 the balance sheet herein includes the fair value of Vinci's
specific assets and liabilities, including goodwill in an original amount
approximating $425,000. 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.
<PAGE>
The following shows pro forma, unaudited data for the three months ended
December 31, 1997, as if the acquisition had been consummated as of
October 1, 1997:
Revenues $24,728,000
Net income 358,000
Earnings per share:
Basic .11
Diluted .10
8. SUBSEQUENT EVENT:
On February 9, 1999, the Company executed a definitive agreement to sell the
assets of its U.S. Graphite and Lubricants division to Asbury Carbons, Inc., a
privately-held corporation based in Wilmington, Delaware, for $23.5 million,
plus the assumption of certain trade liabilities. The closing of the
transaction, which is subject to certain conditions, is scheduled for February
25, 1999. The Company's net cash proceeds from the sale will initially be used
to pay down its debt to its primary consortium of lenders.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NEW DEVELOPMENTS AND BUSINESS STRATEGIES
- ----------------------------------------
On February 9, 1999, the Company executed a definitive agreement to sell the
assets of its U.S. Graphite and Lubricants division to Asbury Carbons, Inc., a
privately-held corporation based in Wilmington, Delaware, for $23.5 million,
plus the assumption of certain trade liabilities. The closing of the
transaction, which is subject to certain conditions, is scheduled for February
25, 1999. The Company's net cash proceeds from the sale will initially be used
to pay down its debt to its primary consortium of lenders.
Company management expects the sale of these Industrial Group assets to
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 also announced in February 1999, its 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 expects to record a non-recurring pre-tax re-
structuring charge of approximately $1.5 million in its second fiscal quarter
ending March 31, 1999. When fully implemented, the annualized cost savings from
these actions are expected to reach $1.5 to $2.0 million.
RESULTS OF OPERATIONS
- ---------------------
REVENUES for the quarter ended December 31, 1998, decreased $989,000 from the
same quarter last year. The changes by segment are as follows:
Increase % Increase (Decrease)
(Decrease) ---------------------
(in thousands) Total Volume Price/Mix
------------ ----- ------ --------
U.S. Consumer $(356) (3) 1 (4)
Foreign Consumer (277) (6) 2 (8)
Industrial (356) (6) (6) --
U.S. Consumer revenue decreased primarily in the mass market segment. Foreign
Consumer revenues decreased by $388,000 in Mexico and $159,000 in Canada
due to the decline of their respective currencies when compared to the U.S.
dollar. These decreases in price/mis were partially offset by higher volume.
Industrial revenue decrease was primarily in the refractory industry.
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 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
<PAGE>
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 also managed
through local currency financing and by export sales to the U.S. denominated in
U.S. dollars.
Revenues decreased $14,761,000 from the prior quarter as follows:
Increase % Increase (Decrease)
(Decrease) ---------------------
(in thousands) Total Volume Price/Mix
------------- ----- ------ ---------
U.S. Consumer $(10,201) (44) (41) (3)
Foreign Consumer (4,146) (50) (49) (1)
Industrial (414) (6) (6) --
U.S. and Foreign Consumer reflects the seasonality of demand for their products.
Historically, this quarter represents approximately 20% of annual revenues being
shipped, while the prior quarter represents 30%. The higher percentage in the
prior quarter represents seasonal school and mass market sales. The decrease in
Industrial revenues was primarily in the refractory industry.
OPERATING INCOME decreased $ 1,178,000 from the prior year. Foreign operating
income decreased $669,000 primarily in Mexico. This decrease was due to lower
revenue and an unfavorable product mix resulting in decreased gross margins and
increased selling and administrative costs due to higher personnel costs. U.S.
Consumer operating profit increased $160,000 due primarily to manufacturing
efficiencies. Industrial operating profit decreased $480,000 primarily due to
lower revenue and decreased manufacturing efficiencies. Corporate expenses
increased $189,000 primarily due to higher employee benefit costs. Due to the
level of fixed expenses as well as factors discussed above, selling and
administrative costs increased to 34.2% of sales in 1998 compared to 30.3% in
1997.
OPERATING INCOME decreased $2,954,000 from the prior quarter, primarily due to
the aforementioned U.S. and Foreign Consumer seasonality that generates higher
revenue and related operating income in the final fiscal quarter.
INTEREST EXPENSE increased $318,000 over the same quarter last year due
primarily to higher borrowings in Mexico to finance the Vinci acquisition (see
Note 7 to the Consolidated Financial Statements) and increased working capital
requirements. Interest expense decreased $382,000 from the prior quarter due to
lower cyclical borrowing levels.
INCOME TAXES decreased $438,000 and $798,000 from the same quarter last year and
the prior quarter, respectively, due to the decrease in before tax income and
the effect of foreign tax rates which differ from the U.S. statutory rate.
MINORITY INTEREST represents approximately 20% of the income of the Company's
Mexican subsidiary.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash flows from operating activities, improved modestly in the
first quarter of fiscal 1999, as higher receivable collections were offset by
increased inventories. Deferred shipments in Mexico and production of new U.S.
products contributed to this increase. Moreover, certain large assumed
liabilities of Vinci (included in accounts payable and accrued liabilities) were
retired shortly after their acquisition in December 1997. (See Note 7 to
Consolidated Financial Statements.)
<PAGE>
The Company's investing activities included only approximately $210,000 in
purchases of property and equipment in the current period as compared with
$495,000 in the prior year. 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. 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.
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 several provisions
and is in compliance with all others. At December 31, 1998, the Company had
approximately $20 million of unused lines of credit available under this
financing arrangement.
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 one,
for which it has received a waiver.
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 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.
<PAGE>
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 second calendar quarter of 1999.
Dixon 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 36% 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 first 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 second quarter of 1999.
Since the inception of the project, the Company has incurred approximately
$55,000 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
that $70,000, 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.
<PAGE>
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 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>
PART II. OTHER INFORMATION
Item 5. Other Information
- ---------------------------
Information regarding the sale of the Company's U.S. Graphite and Lubricants
division (See PART I - Item 1., Note 8 to Consolidated Financial Statements and
Item 2., Management's Discussion and Analysis of Financial Condition and Results
of Operations, "New Developments and Business Strategies") is incorporated by
reference herein and in lieu of a separate report on Form 8-K.
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).****
( 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*
<PAGE>
( 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.
(b) Reports on Form 8-K
- --- -------------------
None.
<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: February 12, 1999
-----------------
By: /s/ Gino N. Pala
----------------
Gino N. Pala
Chairman of the Board
President, Chief Executive
Officer and Director
Dated: February 12, 1999
-----------------
By: /s/ Richard A. Asta
-------------------
Richard A. Asta
Executive Vice President of
Finance and Chief Financial
Officer
Dated: February 12, 1999
-----------------
By: /s/ John Adornetto
------------------
John Adornetto
Vice President/Corporate
Controller and Chief
Accounting Officer
<PAGE>
<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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 444,938
<SECURITIES> 0
<RECEIVABLES> 23,763,168
<ALLOWANCES> 1,331,268
<INVENTORY> 45,579,947
<CURRENT-ASSETS> 70,520,465
<PP&E> 37,446,250
<DEPRECIATION> 21,529,408
<TOTAL-ASSETS> 89,135,353
<CURRENT-LIABILITIES> 41,994,543
<BONDS> 0
0
0
<COMMON> 3,662,808
<OTHER-SE> 18,819,614
<TOTAL-LIABILITY-AND-EQUITY> 89,135,353
<SALES> 22,807,169
<TOTAL-REVENUES> 22,807,169
<CGS> 14,899,619
<TOTAL-COSTS> 14,899,619
<OTHER-EXPENSES> 7,797,673
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,109,072
<INCOME-PRETAX> (999,195)
<INCOME-TAX> (364,200)
<INCOME-CONTINUING> (599,917)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (599,917)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> (.17)
</TABLE>
