SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 0-2655
DIXON TICONDEROGA COMPANY
Incorporated pursuant to the Laws of Delaware State
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Internal Revenue Service-- Employer Identification No. 23-0973760
195 International Parkway, Heathrow, FL 32746
(407) 829-9000
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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 [ ]
The total number of shares of the registrant's Common Stock, $1 par value,
outstanding on June 30, 2000, was 3,168,048.
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
INDEX
-----
<TABLE>
<CAPTION>
<S> <C> <C>
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Information
Consolidated Balance Sheets --
June 30, 2000 and September 30, 1999 3-4
Consolidated Statements of Operations -- For The
Three and Nine Months Ended June 30, 2000 and 1999 5
Consolidated Statements of Comprehensive Income
(Loss) -- For The Three and Nine Months Ended June 6
30, 2000 and 1999
Consolidated Statements of Cash Flows -- For The
Nine Months Ended June 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8-14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15-18
Item 3. Quantitative and Qualitative Disclosures About Market 19
Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20-22
Signatures 23
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
June 30, September 30,
2000 1999
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 1,065,501 $ 935,413
Receivables, less allowance for
doubtful accounts of $1,451,307 at
June 30, 2000 and $1,428,541 at
September 30, 1999 39,664,787 29,343,196
Inventories 37,477,309 39,425,594
Other current assets 2,561,916 2,381,518
-------------- --------------
Total current assets 80,769,513 72,085,721
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 13,322,651 13,413,125
Machinery and equipment 16,127,224 17,661,335
Furniture and fixtures 1,666,191 1,753,765
-------------- --------------
31,116,066 32,828,225
Less accumulated depreciation (18,732,464) (19,004,402)
-------------- --------------
12,383,602 13,823,823
-------------- --------------
OTHER ASSETS 7,288,090 6,978,123
-------------- --------------
$ 100,441,205 $ 92,887,667
============== ==============
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
June 30, September 30,
2000 1999
--------------- --------------
CURRENT LIABILITIES:
Notes payable $ 6,507,115 $ 2,578,467
Current maturities of long-term debt 1,624,713 1,638,835
Accounts payable 9,819,837 6,143,136
Accrued liabilities 9,149,116 12,268,095
--------------- --------------
Total current liabilities 27,100,781 22,628,533
--------------- --------------
LONG-TERM DEBT 45,375,563 39,399,795
--------------- --------------
DEFERRED INCOME TAXES AND OTHER 144,799 96,843
--------------- --------------
MINORITY INTEREST 560,021 533,390
--------------- --------------
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
3,710,309 shares at June 30, 2000
and 3,688,599 at September 30,
1999 3,710,309 3,688,559
Capital in excess of par value 3,700,272 3,586,471
Retained earnings 26,713,975 26,945,792
Accumulated comprehensive income
(loss) (3,342,631) (2,416,475)
--------------- --------------
30,781,925 31,804,347
Less - treasury stock, at cost
(542,261 shares as of June 30, 2000
and 292,789 shares as of September
30, 1999) (3,521,884) (1,575,241)
--------------- --------------
27,260,041 30,229,106
--------------- --------------
$ 100,441,205 $ 92,887,667
=============== ==============
</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
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<S> <C> <C> <C><C> <C><C> <C><C> <C>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
REVENUES $33,389,698 $36,916,508 $75,407,134 $84,639,376
------------ ------------ ------------ ------------
COST AND EXPENSES:
Cost of goods sold 20,726,278 22,676,586 49,151,250 53,076,239
Selling and administrative
expenses 9,174,811 9,398,727 23,513,754 25,143,122
Provision for restructuring
and related costs - - - 1,685,000
------------ ------------ ------------ ------------
29,901,089 32,075,313 72,665,004 79,904,361
------------ ------------ ------------ ------------
GAIN ON SALE OF ASSETS - - - 9,396,318
------------ ------------ ------------ ------------
OPERATING INCOME 3,488,609 4,841,195 2,742,130 14,131,333
INTEREST EXPENSE 1,168,266 1,367,057 3,089,811 3,719,234
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME
TAXES (BENEFIT) AND MINORITY
INTEREST 2,320,343 3,474,138 (347,681) 10,412,099
INCOME TAXES (BENEFIT) 761,978 1,158,687 (171,035) 4,208,122
------------ ------------ ------------ ------------
1,558,365 2,315,451 (476,646) 6,203,977
MINORITY INTEREST 43,656 189,351 55,171 346,780
------------ ------------ ------------ ------------
NET INCOME (LOSS) $1,514,709 $2,126,100 $(231,817) $5,857,197
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic $ .48 $ .63 $ (.07) $ 1.71
============ ============ ============ ============
DILUted $ .48 $ .59 $ (.07) $ 1.64
============ ============ ============ ============
Shares Outstanding:
Basic 3,164,461 3,401,689 3,213,458 3,427,810
============ ============ ============ ============
Diluted 3,164,461 3,599,665 3,213,458 3,576,942
============ ============ ============ ============
</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 NINE MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<S> <C> <C> <C><C> <C><C> <C><C> <C>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 1,514,709 $ 2,126,100 $ (231,817) $ 5,857,197
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation
adjustments (1,040,009) 155,949 (926,156) 660,532
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 474,700 $ 2,282,049 $(1,157,973) $ 6,517,729
============ ============ ============ ============
</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, 2000 AND 1999
<TABLE>
<S> <C>> <C> <C> <C>
2000 1999
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (231,817) $ 5,857,197
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,929,921 1,996,717
Deferred taxes 89,451 (389,636)
Provision for doubtful accounts receivable 205,811 244,638
Gain on sale of assets - (9,396,318)
Loss attributable to foreign currency exchange 210,251 175,124
Income attributable to minority interest 55,171 346,780
Changes in assets and liabilities:
Receivables (11,342,051) (6,867,610)
Inventories 1,347,758 (10,547,206)
Other current assets (198,813) (823,353)
Accounts payable and accrued liabilities 1,379,791 1,031,580
Other assets (567,191) (299,761)
---------------- ---------------
Net cash provided by (used in) operations (7,121,718) (18,671,848)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (1,053,037) (610,384)
Proceeds from sale of assets - 20,246,096
---------------- ---------------
Net cash provided by (used in) investing
activities (1,053,037) 19,635,712
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable 4,209,351 2,434,444
Net proceeds from (principal reductions of)
long-term debt 6,025,643 (1,482,845)
Exercise of stock options 168,844 304,139
Purchase of treasury stock (1,979,936) (714,353)
Purchase of subsidiary stock - (2,747,689)
Other non-current liabilities (31,803) (432,234)
---------------- ---------------
Net cash provided by (used in) financing
activities 8,392,099 (2,638,538)
---------------- ---------------
Effect of exchange rate changes on cash (87,256) (12,023)
---------------- ---------------
Net increase (decrease) in cash and
cash equivalents 130,088 (1,686,697)
Cash and cash equivalents, beginning of period 935,413 2,853,281
---------------- ---------------
Cash and cash equivalents, end of period $ 1,065,501 $ 1,166,584
================ ===============
Supplemental Disclosures:
Cash paid during the period:
Interest $ 2,488,238 $ 3,275,813
Income taxes 1,149,155 2,675,577
</TABLE>
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 are 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, 2000, and the
results of their operations and cash flows for the three months ended June
30, 2000 and 1999, have been included. The results of operations for such
interim periods are not necessarily indicative of the results for the
entire year.
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 June 30, 2000 (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):
<TABLE>
<S> <C> <C> <C><C> <C>
June 30, September 30,
2000 1999
------------ -------------
Raw materials $ 14,432 $ 15,246
Work in process 4,131 5,016
Finished goods 18,914 19,164
------------ -------------
$ 37,477 $ 39,426
============ =============
</TABLE>
3. EFFECT OF CERTAIN NEW ACCOUNTING PRONOUNCEMENTS:
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 and occasionally utilizes foreign currency
hedges, 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:
Prior to January 1, 1999, Mexico was considered as a highly inflationary
economy for the purpose of applying FASB Statement No. 52, "Foreign
Currency Translation." Therefore, Mexico translation gains and losses
impacted the results of operation through December 31, 1998. Since January
1, 1999, Mexico is not considered a highly inflationary economy, and
therefore the translation gains (losses) are included as a separate
component of comprehensive income (loss). Total foreign currency losses
included in results of operations were approximately $210,000 and $175,000
for the periods ended June 30, 2000 and 1999, respectively.
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.
6. CONTINGENCIES:
The Company, in the normal course of business, is a 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 for certain environmental clean-up costs
relating to a claim under New Jersey's Environmental Clean-Up
Responsibility Act (ECRA) by a 1984 purchaser of industrial property from
the Company. All Company appeals were denied and in 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. In 1999, the pending malpractice suit was dismissed
and the Company has appealed the decision. In 2000, the Company reached
settlements with several of its insurers for reimbursement of legal costs
[reflected as a decrease in selling and administrative expenses in the
amount of $564,000 ($398,000 in the quarter ended June 30, 2000)].
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 $320,000 as of June 30, 2000), the resolution of these
matters will not materially affect the Company's future results of
operations or financial position.
<PAGE>
7. RESTRUCTURING AND RELATED COSTS:
In the period ended March 31, 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 included manufacturing plant closure and consolidation, as well as
personnel reduction in manufacturing, sales and marketing and corporate
activities. The provision was increased to $1,917,000 through September
30, 1999. The restructuring charge and subsequent utilization is
summarized as follows:
<TABLE>
<S> <C><C> <C><C> <C><C> <C>
1999 Utilized
Restructuring through Balance at
and Related June 30, June 30,
Charges 2000 2000
-------------- ------------ -----------
Employee
severance and
related costs $ 587,000 $ 587,000 $ -
Anticipated
losses from the
sale or abandonment of
property and equipment 1,330,000 1,141,000 189,000
-------------- ------------ -----------
$ 1,917,000 $ 1,728,000 $ 189,000
============== ============ ===========
</TABLE>
8. STOCK REPURCHASE PROGRAM:
In March 1999, the Company's Board of Directors approved a Stock
Repurchase Program, authorizing the acquisition of up to $3 million in
Dixon Ticonderoga Company stock. Under this program, the Company
repurchased approximately 337,000 shares at a cost of $2.8 million through
March 31, 2000, when the program was terminated.
<PAGE>
9. LINE OF BUSINESS REPORTING:
The Company has adopted FASB Statement No. 131 "Disclosure About Segments
of an Enterprise and Related Information". This statement requires the
Company to report information about its operating segments under the
"management approach". The management approach is based on the manner in
which management reports segment information within the Company for making
operating decisions and assessments.
The Company has two principal business segments - its Consumer Group and
Industrial Group. The following information sets forth certain data
pertaining to each line of business as of June 30, 2000 and 1999 and for
the quarters and year to date then ended (in thousands):
Consumer Industrial
Group Group Total
------------ ------------ ------------
Net revenues:
Three months ended:
June 30, 2000 $ 30,619 $ 2,771 $ 33,390
June 30, 1999 33,668 3,249 36,917
Nine months ended:
June 30, 2000 $ 66,364 $ 9,043 $ 75,407
June 30, 1999 70,386 14,253 84,639
Income before interest, taxes and minority interest:
Three months ended:
June 30, 2000 $ 3,923 $ 222 $ 4,145
June 30, 1999 5,484 159 5,643
Nine months ended:
June 30, 2000 $ 4,594 $ 73 $ 4,667
June 30, 1999 5,836 10,246 16,082
<PAGE>
A reconciliation of income (loss) before interest, taxes and minority
interest to net income follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000
----------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
--------- --------- ---------- -----------
<S> <C><C> <C><C> <C><C> <C><C> <C>
Income (loss) before
interest, taxes and
minority interest $ 3,923 $ 222 $ (656) $ 3,489
Interest expense (879) (97) (192) (1,168)
Income tax benefit
(expense) (1,009) (68) 315 (762)
Minority interest (44) - - (44)
--------- --------- ---------- -----------
Net income (loss) $ 1,991 $ 57 $ (533) $ 1,515
========= ========= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended June 30, 2000
----------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
--------- --------- ---------- -----------
<S> <C><C> <C><C> <C><C> <C><C> <C>
Income (loss) before
interest, taxes and
minority interest $ 4,594 $ 73 $ (1,925) $ 2,742
Interest expense (2,273) (275) (542) (3,090)
Income tax benefit
(expense) (753) 6 918 171
Minority interest (55) - - (55)
--------- --------- ---------- -----------
Net income (loss) $ 1,513 $ (196) $ (1,549) $ (232)
========= ========= ========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
----------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
--------- --------- ---------- -----------
<S> <C><C> <C><C> <C><C> <C><C> <C>
Income (loss) before
interest, taxes and
minority interest $ 5,484 $ 159 $ (802) $ 4,841
Interest expense (1,133) (86) (148) (1,367)
Income tax benefit
(expense) (1,539) (32) 412 (1,159)
Minority interest (189) - - (189)
--------- --------- ---------- -----------
Net income (loss) $ 2,623 $ 41 $ (538) $ 2,126
========= ========= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended June 30, 1999
----------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
--------- --------- ---------- -----------
<S> <C><C> <C><C> <C><C> <C><C> <C>
Income (loss) before
interest, taxes and
minority interest $ 5,836 $ 10,246 $ (1,951) $ 14,131
Interest expense (2,972) (273) (474) (3,719)
Income tax benefit
(expense) (1,150) (4,040) 982 (4,208)
Minority interest (347) - - (347)
--------- --------- ---------- -----------
Net income (loss) $ 1,367 $ 5,933 $ (1,443) $ 5,857
========= ========= ========== ===========
</TABLE>
Certain corporate expenses have been allocated based upon respective
segment sales. Interest expense (where not specifically identified) has
been allocated based upon identifiable assets by segment. Income taxes are
determined based upon the respective effective tax rates.
The Consumer Group includes a charge for restructuring and related costs
of $1,685 and the Industrial Group includes the gain on the sale of the
Graphite and Lubricants Division of $9,396, both before application of
taxes.
<PAGE>
10. SUBSEQUENT EVENT -- LONG-TERM DEBT:
On August 4, 2000, the Company executed definitive agreements with its
lenders to, in part, cure previous covenant defaults under its $16.5
million, 12% Senior Subordinated Note Agreement and its senior financing
arrangements with a consortium of lenders.
The subordinated note agreement was amended to require the payment of a
fee of $50,000, the maintenance of certain revised financial covenants and
ratios and an increase in the interest rate of the notes to 13.5% through
June 2002 and 12.25% through maturity in 2003. In addition, the exercise
price of 300,000 warrants held by the noteholders will be reduced to an
amount yet to be determined, but based upon the average closing price over
the 30 trading days following the execution of the definitive agreement.
The Company's senior financing arrangements were also amended to require
the maintenance of certain revised financial covenants and ratios and to
increase the interest rate on its senior debt by 0.5% (to either the
prevailing LIBOR rate, plus 2.25% or the prime rate, plus 0.75%) through
maturity in 2004. In addition, the new agreement required the payment of
an amendment fee of $206,875 and the adjustment of certain other fees.
The Company is in compliance with all provisions of the amended agreements
and, accordingly, the subordinated and senior debt have been classified,
in accordance with their terms, as long-term debt in the accompanying
consolidated financial statements.
<PAGE>
Item 2.
-------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
REVENUES for the quarter ended June 30, 2000, decreased $3,527,000 from
the same quarter last year. The changes by segment are as follows:
Increase
(Decrease) % Increase
(in thousands) (Decrease)
--------------- ----------------------------
Total Volume Price/Mix
------ ------ ---------
U.S. Consumer $ (3,825) (18) (16) (2)
Foreign Consumer 776 7 5 2
Industrial (478) (1) (2) 1
U.S. Consumer revenue decreased principally in the mass retail and
wholesale club market channels. The Foreign Consumer revenue increase was
primarily with Mexico mass market retailers. Industrial revenue decreased in the
refractory division.
REVENUES for the nine months ended June 30, 2000, decreased $9,232,000
from the same quarter last year. The changes by segment are as follows:
Increase
(Decrease) % Increase
(in thousands) (Decrease)
--------------- ----------------------------
Total Volume Price/Mix
------ ------ ---------
U.S. Consumer $ (6,142) (13) (12) (1)
Foreign Consumer 2,121 9 8 1
Industrial (5,211) (37) (37) -
The decrease in U.S. Consumer revenue reflects the continuing impact of
imports in the mass retail market and on seasonal wholesale club sales. Foreign
Consumer revenue increased in Mexico and Canada primarily in the mass markets.
Industrial revenue for the prior year includes the U.S. Graphite and Lubricants
division, sold in March 1999.
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 to predict, and thus, an estimate of the effect of future
currency fluctuations on results of operations cannot be made. This currency
risk in Mexico is also managed through occasional foreign currency hedges, local
currency financing and by export sales to the U.S. denominated in U.S. dollars.
OPERATING INCOME decreased $1,353,000 from the same quarter last year. U.S.
Consumer decreased $1,510,000 due principally to the effect of lower revenues.
Foreign Consumer decreased $51,000 as foreign currency losses in Mexico offset
the effect of higher revenues. Industrial improved by $63,000. Total corporate
administrative expenses decreased due to a reimbursement of legal costs of
$398,000. (See Note 6 to the Consolidated Financial Statements).
Operating income for the nine months ended June 30, 2000, decreased
$11,389,000 from the same period last year. Industrial operating income
decreased $10,173,000 principally due to the gain of $9,396,000 from the sale of
the U.S. Graphite and Lubricants division and $425,000 of operating income
<PAGE>
attributable to that division in 1999. Industrial also decreased due to lower
refractory division sales in the current period. U.S. Consumer decreased
$470,000 despite the $1,685,000 restructuring charge in 1999 for manufacturing
consolidation and personnel reduction. U.S. Consumer incurred significantly
higher manufacturing inefficiencies, particularly in the earlier months of
fiscal 2000, as a result of inventory reduction efforts and the consolidation of
a manufacturing facility (see Note 7 to the Consolidated Financial Statements).
Foreign Consumer decreased $772,000. Manufacturing inefficiencies due to
inventory reductions and consolidation, as well as higher selling and
distribution expenses in Mexico were the primary causes of this decrease. The
aforementioned manufacturing inefficiencies in both U.S. and Foreign Consumer
contributed to an overall increase in cost of goods sold to 65.2% of sales in
2000, as compared to 62.7% in 1999.
INTEREST EXPENSE decreased $199,000 and $629,000 in the quarter and nine
months ended June 30, 2000, respectively, from the same periods last year
primarily due to lower average borrowings and interest rates in Mexico.
INCOME TAXES decreased $397,000 and $4,379,000 from the comparable quarter
and nine months of the prior year due to the lower before tax income.
MINORITY INTEREST represents approximately 3% in 2000 and 20% in 1999 of
the results from operations of the Company's Mexico subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's cash flows from operating activities improved dramatically
(by approximately $11.6 million) in the first nine months of fiscal 2000,
despite a net loss through June 30, 2000. The Company's strict inventory
reduction efforts led to an increase in cash flows related to inventories of
$1.3 million in the current year period, as compared with a decrease of $10.5
million in the prior year period. Lower receivable collections (following the
Company's lower revenues in the 1999 back-to-school season and the 1999 sale of
its Graphite and Lubricants division) were offset by improved accounts payable
management in the U.S. and Mexico.
The Company's investing activities included approximately $1,053,000 in
net purchases of property and equipment in the current period and $610,000 in
the prior year. Capital expenditures are somewhat higher in 2000 and include
certain strategic equipment related to pencil manufacturing. However, management
believes that expenditures have been reduced 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 existing financing or new leasing arrangements.
The Company's primary financing arrangements are with a consortium of
lenders, providing a total of up to $42.5 million in financing through September
2004. On August 4, 2000, certain financial covenants contained in the underlying
loan and security agreements were revised to cure a previous default and to
allow the Company to execute its reorganization and consolidation plans, as well
as other strategic initiatives. The agreements were also amended to increase the
rate of interest by 0.5% and require the payment of certain fees, including an
amendment fee of $206,875. (See Note 10 to Consolidated Financial Statements.)
The financing agreements, as amended, include a revolving line of credit
facility in the amount of $35 million which bears interest at either the prime
rate plus 0.75%, or the prevailing LIBOR rate plus 2.25% through September 2004.
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 loan and security agreements also include a term loan in the
initial amount of $7.5 million. The term loan is payable in monthly installments
of $125,000, plus interest, through September 2004. The loan bears interest
based upon the same prevailing rate described above in connection with the
revolving credit facility. The Company has previously executed an interest rate
swap agreement that effectively fixes the rate of interest on approximately $1.5
million of the term loan at 8.5% through May 2001.
These financing arrangements are collateralized by the tangible and
intangible assets of the U.S. and Canada operations (including accounts
receivable, inventories, property, plant and equipment, patents and trademarks)
and a pledge of the capital stock of the Company's subsidiaries. The loan and
security agreement contains provisions pertaining to the maintenance of certain
financial ratios and annual capital expenditure levels, as well as restrictions
as to payment of cash dividends. The Company is in compliance with all such
<PAGE>
provisions, as amended. As of June 30, 2000, the Company had approximately $13
million of unused lines of credit available under the revolving credit facility.
In addition, the Company's Mexico subsidiary has $14 million in bank lines of
credit ($7 million unused as of June 30, 2000) which bear interest at a rate
based upon either a floating U.S. bank rate or the rate of certain Mexican
government securities.
The Company also has outstanding $16.5 million of 12% Senior Subordinated
Notes valued at their face amount, due 2003. In 1998, the Company canceled a
reverse interest rate swap agreement (which had originally converted $10 million
of the notes to a floating rate of interest) resulting in a deferred gain of
approximately $375,000, which is being recognized over the remaining original
term of the notes. On August 4, 2000, the subordinated note agreement was also
amended to revise certain financial covenants and cure a previous default, as
well as to provide the Company flexibility to execute its strategic initiatives.
The interest rate was increased to 13.5% through June 2002 and 12.25% though
maturity in 2003. The exercise price of 300,000 warrants held by the noteholders
will be reduced to an amount yet to be determined, but based upon the average
closing price over the 30 trading days following the execution of the amendment.
The amendment also required payment of a fee of $50,000. (See Note 10 to
Consolidated Financial Statements.) The note agreement, as amended, contains
provisions that limit dividends and other payments, and require the maintenance
of certain financial covenants and ratios. The Company is in compliance with all
such provisions, as amended.
The Company also incurred approximately $200,000 in legal costs associated
with the aforementioned amendments to its senior and subordinated debt
agreements.
The Company cannot assure that it will be in compliance with all covenant
provisions of its debt agreements in all future quarters and cannot assure that
it will receive waivers or amendments of any such provisions should that occur.
The subordinated and senior debt have been classified, in accordance with their
terms, as long-term in the accompanying consolidated financial statements.
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.
In March 1999, the Company's Board of Directors approved a Stock
Repurchase Program authorizing the acquisition of up to $3 million in Dixon
Ticonderoga Company stock. Under this program, the Company repurchased 337,000
shares at a cost of $2.8 million. These repurchases were financed through the
aforementioned and previous U.S. revolving line of credit facilities.
The existing sources of financing described above and cash expected to be
generated from future operations and / or asset sales would, in management's
opinion, be sufficient to fulfill all current and anticipated requirements of
the Company's ongoing business and to meet all of it obligations. However, if
future covenant violations occur with respect to its current financing
arrangements, the Company may need to pursue other sources of financing to
satisfy certain obligations before their due date.
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's work on the Year 2000 (Y2K) compliance issue
began in 1998 and was completed in 1999. The scope of the project included
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 Company completed all phases for its U.S. and Canadian operations and
its Mexican operations were brought into compliance by a complete system
replacement. The Company's non-IT related systems and equipment were determined
to be Y2K compliant. This statement is based primarily upon communication with
the vendors as well as physical inspection, assessment, remediation and testing
of equipment and related controlling software. Moreover, all critical business
suppliers certified compliance.
While no significant problems were experienced with its customer base, the
Company is continuing to monitor the status of customers as a means of
<PAGE>
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 assessed, upgraded, corrected where necessary and tested to insure
continuous and accurate processing of information.
The Company presently believes that its business-critical computer systems
as well as non-IT related systems and equipment are Y2K compliant. The Company
does not foresee significant continuing risks associated with Y2K compliance at
this time.
FORWARD-LOOKING STATEMENTS
--------------------------
The statements in this Quarterly Report on Form 10-Q that are not purely
historical are "forward-looking statements" within the meaning of section 27A of
the Securities Act of 1933 and section 21E of the Securities Exchange Act of
1934, including statements about the Company's expectations, beliefs, intentions
or strategies regarding the future. Forward-looking statements include
statements regarding, among other things, the effects of the devaluation of the
Mexican peso; the Company's ability to meet its current and anticipated
obligations; management's inventory reduction plan and expectation for savings
from the restructuring and cost-reduction program; the Company's ability to
increase sales in its core businesses; its expectations as to the effect of new
accounting pronouncements; its assessment with respect to Y2K; and its
expectations with regards to legal proceedings. Readers are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those expressed or implied by
such forward-looking statements. Such risks include (but are not limited to)
manufacturing inefficiencies as a result of the inventory reduction plan,
difficulties encountered with the consolidation and cost-reduction program,
increased competition, U.S. and foreign economic factors, foreign currency
exchange risk, interest rate fluctuation risk and Y2K compliance risk, among
others.
<PAGE>
Item 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As discussed elsewhere in this Form 10-Q, the Company is exposed to the
following principal market risks (i.e. risks of loss arising from adverse
changes in market rates): foreign exchange rates and interest rates on debt.
The Company's exposure to foreign currency exchange rate risk in its
international operations is principally limited to Mexico and, to a lesser
degree, Canada. Approximately 32% of the Company's fiscal 1999 net revenues were
derived in Mexico and Canada, combined (exclusive of intercompany activities).
Foreign exchange transaction gains and losses arise from monetary assets and
liabilities denominated in currencies other than the business unit's functional
local currency. It is estimated that a 10% change in both the Mexican peso and
Canadian dollar would impact reported operating profit by $500,000. This
quantitative measure has inherent limitations because it does not take into
account the changes in customer purchasing patterns or any adjustment to the
Company's financing or operating strategies in response to such a change in
rates. Moreover, this measure does not take into account the possibility that
these currency rates can move in opposite directions, such that gains from one
may offset losses from another.
In addition, the Company's cash flows and earnings are subject to changes
in interest rates. As of June 30, 2000, approximately 45% of total short and
long-term debt is fixed, at rates between 8% and 13.5% in the U.S. The balance
of the Company debt is variable, principally based upon the prevailing U.S. bank
prime rate or LIBOR rate. An interest rate swap, which expires in 2001, fixes
the rate of interest on $1.5 million of this debt at approximately 8.5%. It is
estimated that a change in the average prevailing interest rates of the
remaining debt of 1% would impact reported pretax income by $300,000. This
quantitative measure does not take into account the possibility that the
prevailing rates (U.S. bank prime and LIBOR) can move in opposite directions and
that the Company has, in most cases, the option to elect either as the
determining interest rate factor.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
----------------------------
On May 23, 2000 an article appeared in the Seattle Times Intelligencer
Reporter alleging that the talc used as a binder in most domestic brands of
crayons, including the Company's, contained trace amounts of a fiber resembling
asbestos. In response to these allegations, the domestic crayon manufacturers,
including the Company, as well as the talc supplier, engaged their own
independent laboratories and each refuted the news article's claims. The Company
issued a press release confirming this.
As a result of the public interest surrounding the news article, however,
the United States Consumer Product Safety Commission (CPSC) engaged two
additional labs to test the crayons. The Government's own OSHA lab determined
unequivocally that there was no asbestos in the crayons. Its independent lab
found one suspicious fiber in each of two crayons of the many tested. In any
event, based on its evaluation, the CPSC reconfirmed the non-toxicity and safety
of the Company's crayons in a press release dated June 15, 2000.
Nevertheless, although the Company has yet to be served, it has become
aware of seven legal actions filed against itself as well as other domestic
crayon manufacturers, as a result of the Seattle Times Intelligencer Reporter
erroneous report. Of the seven legal actions, four are class action suits, two
are misleading advertising claims and one is a personal injury suit. The Company
denies the essential allegations of these complaints and intends to vigorously
defend them. Significantly, plaintiffs in one of the class action and one of the
misleading advertising claims have offered to settle for nominal amounts.
The Company believes that none of the pending actions will have a material
adverse effect on the Company's financial condition or results of operations.
Item 5. Other Information
------------------------------
Information regarding the amendment of the Company's 12% Senior
Subordinated Note Agreement and senior financing arrangements with a consortium
of lenders (See Part I - Item 1., Note 10 to Consolidated Financial Statements
and Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations) 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). 4
(2) b. Asset Purchase Agreement dated February 9, 1999, by and
between Dixon Ticonderoga Company, as Seller and Asbury
Carbons, Inc., as Buyer. 6
(3) (i) Restated Certificate of Incorporation 2
(3) (ii) Amended and Restated Bylaws 1
(4) a. Specimen Certificate of Company Common Stock 2
<PAGE>
(4) b. Amended and Restated Stock Option Plan 3
(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 1
(10) b. 12.00% Senior Subordinated Notes, Due 2003, Note and
Warrant Purchase Agreement 1
(10) c. 12.00% Senior Subordinated Notes, Due 2003, Common Stock
Purchase Warrant Agreement 1
(10) d. License and Technological Agreement between Carborundum
Corporation and New Castle Refractories Company, a division
of Dixon Ticonderoga Company 1
(10) e. Equipment Option and Purchase Agreement between
Carborundum Corporation and New Castle Refractories Company,
a division of Dixon Ticonderoga Company 1
(10) f. Product Purchase Agreement between Carborundum Corporation
and New Castle Refractories Company, a division of Dixon
Ticonderoga Company 1
(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 5
(10) h. Third Modification of Amended and Restated Revolving
Credit Loan and Security Agreement, Amendment to Loan
Documents and Assignment by and among Dixon Ticonderoga
Company, Dixon Ticonderoga, Inc., First Union Commercial
Corporation, BankBoston, N.A., National Bank of Canada and
LaSalle Bank. 7
(10) i. First Modification of Amended and Restated Term Loan
Agreement and Assignment by and among Dixon Ticonderoga
Company, Dixon Ticonderoga, Inc., First Union Commercial
Corporation, BankBoston, N.A., National Bank of Canada and
LaSalle Bank. 7
(10) j. Amendment No. 1 to 12.00% Senior Subordinated Notes, Due
2003, Note and Warrant Purchase Agreement. 7
(21) Subsidiaries of the Company 7
(27) Financial Data Schedule 8
<PAGE>
1Incorporated 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.
2Incorporated 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.
3Incorporated by reference to Appendix 3 to the Company's proxy statement dated
January 27, 1997, filed in Washington, D.C.
4Incorporated by reference to the Company's current report on Form 8-K dated
December 12, 1997, filed in Washington D.C.
5Incorporated by reference to the Company's annual report on Form 10-K for the
year ended September 30, 1999, file number 0-2655, filed in Washington, D.C.
6Incorporated by reference to the Company's current report on Form 8-K dated
March 2, 1999, filed in Washington D.C.
7Incorporated by reference to the Company's annual report on Form 10-K for the
year ended September 30, 1999, file number 0-2655, filed in Washington, D.C.
8Filed electronically via EDGAR.
(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: August 14, 2000
------------------------------------
By: /s/ Gino N. Pala
------------------------------------
Gino N. Pala
Chairman of Board and
Co-Chief Executive Officer
Dated: August 14, 2000
------------------------------------
By: /s/ Richard A. Asta
------------------------------------
Richard A. Asta
Executive Vice President of
Finance and Chief Financial Officer
Dated: August 14, 2000
------------------------------------
By: /s/ John Adornetto
------------------------------------
John Adornetto
Vice President/Corporate Controller
and Chief Accounting Officer
