SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
------------------
Internal Revenue Service-- Employer Identification No. 23-0973760
195 International Parkway, Heathrow, FL 32746
(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 [ ]
The total number of shares of the registrant's Common Stock, $1 par value,
outstanding on March 31, 2000, was 3,157,290.
<PAGE>
<TABLE>
<CAPTION>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
==========================================
INDEX
=====
<S> <C> <C>
Page
====
PART I. FINANCIAL INFORMATION
Item 1. Financial Information
Consolidated Balance Sheets --
March 31, 2000 and September 30, 1999 3-4
Consolidated Statements of Operations -- For The
Three and Six Months Ended March 31, 2000 and 1999 5
Consolidated Statements of Comprehensive Income
(Loss) -- For The Three and Six Months Ended March
31, 2000 and 1999 6
Consolidated Statements of Cash Flows -- For The
Six Months Ended March 31, 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 15-19
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21-22
Signatures 23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
==============================
Item 1.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
===========================
<S> <C> <C> <C> <C>
March 31, September 30,
2000 1999
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 797,597 $ 935,413
Receivables, less allowance for
doubtful accounts of $1,390,809 at
March 31, 2000 and $1,428,541 at
September 30, 1999 26,281,719 29,343,196
Inventories 39,170,753 39,425,594
Other current assets 2,461,127 2,381,518
-------------- --------------
Total current assets 68,711,196 72,085,721
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 13,654,098 13,413,125
Machinery and equipment 16,173,231 17,661,335
Furniture and fixtures 1,740,425 1,753,765
-------------- --------------
31,567,754 32,828,225
Less accumulated depreciation (18,423,149) (19,004,402)
-------------- --------------
13,144,605 13,823,823
-------------- --------------
OTHER ASSETS 6,975,219 6,978,123
-------------- --------------
$ 88,831,020 $ 92,887,667
============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
--------------- --------------
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES:
Notes payable $ 2,497,144 $ 2,578,467
Current maturities of long-term debt 42,293,120 1,638,835
Accounts payable 6,654,438 6,143,136
Accrued liabilities 7,584,571 12,268,095
--------------- --------------
Total current liabilities 59,029,273 22,628,533
--------------- --------------
LONG-TERM DEBT 2,316,997 39,399,795
--------------- --------------
DEFERRED INCOME TAXES AND OTHER 187,972 96,843
--------------- --------------
MINORITY INTEREST 548,229 533,390
--------------- --------------
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 March 31,
2000 and 3,688,599 at September
30, 1999 3,710,309 3,688,599
Capital in excess of par value 3,733,345 3,586,471
Retained earnings 25,199,268 26,945,792
Accumulated comprehensive income
(loss) (2,302,622) (2,416,475)
--------------- --------------
30,340,300 31,804,347
Less - treasury stock, at cost
(553,019 shares as of March 31, 2000 and
292,789 shares as of September
30, 1999) (3,591,751) (1,575,241)
--------------- --------------
26,748,549 30,229,106
--------------- --------------
$ 88,831,020 $ 92,887,667
=============== ==============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
==========================================================
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C><C> <C><C> <C><C> <C>
REVENUES $22,392,291 $24,915,699 $42,017,436 $47,722,868
------------ ------------ ------------ ------------
COST AND EXPENSES:
Cost of goods sold 14,689,101 15,500,034 28,424,972 30,399,653
Selling and administrative
expenses 7,091,565 7,946,722 14,338,943 15,744,395
Provision for restructuring
and related costs - 1,685,000 - 1,685,000
------------ ------------ ------------ ------------
21,780,666 25,131,756 42,763,915 47,829,048
------------ ------------ ------------ ------------
GAIN ON SALE OF ASSETS - 9,396,318 - 9,396,318
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 611,625 9,180,261 (746,479) 9,290,138
INTEREST EXPENSE 988,508 1,243,105 1,921,545 2,352,177
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME
TAXES (BENEFIT) AND MINORITY
INTEREST (376,883) 7,937,156 (2,668,024) 6,937,961
INCOME TAXES (BENEFIT) (156,830) 3,413,635 (933,013) 3,049,435
------------ ------------ ------------ ------------
(220,053) 4,523,521 (1,735,011) 3,888,526
MINORITY INTEREST 26,779 192,507 11,515 157,429
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (246,832) $4,331,014 $(1,746,526) $3,731,097
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON
SHARE:
Basic $ (.08) $ 1.26 $ (.54) $ 1.09
============ ============ ============ ============
DILUted $ (.08) $ 1.20 $ (.54) $ 1.04
============ ============ ============ ============
Shares Outstanding:
Basic 3,157,290 3,440,217 3,238,704 3,436,915
============ ============ ============ ============
Diluted 3,157,290 3,599,113 3,238,704 3,571,561
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2000 AND 1999
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
<S> <C><C> <C><C> <C><C> <C><C>
2000 1999 2000 1999
------------ ------------ ------------ ------------
NET INCOME (LOSS) $(246,832) $4,331,014 $(1,746,526) $3,731,097
OTHER COMPREHENSIVE INCOME:
Foreign currency translation
adjustments 418,527 543,985 113,853 504,583
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME (LOSS) $ 171,695 $4,874,999 $(1,632,673) $4,235,680
============ ============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2000 AND 1999
<S> <C> <C> <C><C> <C>
2000 1999
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,746,526) $ 3,731,097
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,222,871 1,329,371
Deferred taxes 89,937 (513,037)
Provision for doubtful accounts receivable 77,057 211,913
Gain on sale of assets - (9,396,318)
Loss attributable to foreign currency exchange 4,671 52,091
Income (loss) attributable to minority interest 11,515 157,429
Changes in assets and liabilities:
Receivables 3,133,725 7,439,447
Inventories 339,144 (13,575,354)
Other current assets (79,793) (743,890)
Accounts payable and accrued liabilities (4,206,991) 2,648,787
Other assets (97,017) (359,174)
---------------- ---------------
Net cash provided by (used in) operations (1,251,407) (9,017,638)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (372,918) (288,422)
Proceeds from sale of assets - 20,246,096
---------------- ---------------
Net cash provided by (used in) investing
activities (372,918) 19,957,674
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (principal reductions of)
notes payable 1,841,265 (11,595,214)
Net proceeds from (principal reductions of)
long-term debt 1,647,164 (981,853)
Purchase of treasury stock (2,016,510) (142,500)
Exercise of stock options 168,624 74,938
Other non-current liabilities (25,459) (191,693)
---------------- ---------------
Net cash provided by (used in) financing
activities 1,615,084 (12,836,322)
---------------- ---------------
Effect of exchange rate changes on cash (128,575) 22,637
---------------- ---------------
Net decrease in cash and cash equivalents (137,816) (1,873,649)
Cash and cash equivalents, beginning of period 935,413 2,853,281
---------------- ---------------
Cash and cash equivalents, end of period $ 797,597 $ 979,632
================ ===============
Supplemental Disclosures:
Cash paid during the period:
Interest $ 1,843,960 $ 2,425,578
Income taxes 1,374,554 373,235
</TABLE>
During the six moths ended March 31, 1999, the Company accepted a note
receivable of $3,250,000 as partial consideration for the sale of assets of
its U.S. Graphite and Lubricants division.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
<PAGE>
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations, although
the Company believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these financial
statements be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, all adjustments (solely of a normal
recurring nature) necessary to present fairly the financial position of
Dixon Ticonderoga Company and subsidiaries as of March 31, 2000, and the
results of their operations and cash flows for the three months ended
March 31, 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 March 31, 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>
<CAPTION>
March 31, September 30,
2000 1999
------------ -------------
<S> <C> <C><C> <C><C> <C>
Raw materials $ 13,382 $ 15,246
Work in process 4,793 5,016
Finished goods 20,996 19,164
------------ -------------
$ 39,171 $ 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 $5,000 and $52,000
for the periods ended March 31, 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 prejudgement 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 has to
date reached settlements in the amount of $167,000 with two of its
insurers.
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 $350,000 as of March 31, 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>
<CAPTION>
1999 Utilized
Restructuring through Balance at
and Related March 31, March 31,
Charges 2000 2000
----------------- -------------- ------------
<S> <C> <C><C> <C><C> <C><C> <C><C>
Employee severance
and related costs $ 587,000 $ (527,000) $ 60,000
Anticipated losses
from the sale or
abandonment of
property and equipment 1,330,000 (367,000) 963,000
----------------- -------------- ------------
$ 1,917,000 $ (894,000) $ 1,023,000
================= ============== ============
</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 has
repurchased approximately 337,000 shares at a cost of $2.8 million.
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.
<PAGE>
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 March 31, 2000 and 1999, and for
the quarters and year to date then ended (in thousands):
<TABLE>
<CAPTION>
Consumer Industrial
Group Group Total
------------ ------------ ------------
<S> <C> <C> <C> <C><C> <C><C> <C>
Net revenues:
Three months ended:
March 31, 2000 $ 19,395 $ 2,997 $ 22,392
March 31, 1999 19,687 5,229 24,916
Six months ended:
March 31, 2000 $ 35,746 $ 6,271 $ 42,017
March 31, 1999 36,718 11,005 47,723
</TABLE>
<TABLE>
<CAPTION>
Income before interest, taxes and minority interest:
<S> <C> <C> <C> <C><C> <C><C> <C>
Three months ended:
March 31, 2000 $ 1,246 $ 10 $ 1,256
March 31, 1999 24 9,823 9,847
Six months ended:
March 31, 2000 $ 671 $ (148) $ 523
March 31, 1999 353 10,087 10,440
</TABLE>
<PAGE>
A reconciliation of income before interest, taxes and minority interest
to net income follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
---------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
--------- --------- ---------- ----------
<S> <C> <C><C> <C><C> <C><C> <C><C> <C>
Income (loss) before
interest, taxes and
minority interest $ 1,246 $ 10 $ (644) $ 612
Interest expense (700) (98) (191) (989)
Income tax benefit
(expense) (166) 31 292 157
Minority interest (27) - - (27)
--------- --------- ---------- ----------
Net income (loss) $ 353 $ (57) $ (543) $ (247)
========= ========= ========== ==========
Six Months Ended March 31, 2000
---------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
--------- --------- ---------- ----------
Income (loss) before
interest, taxes and
minority interest $ 671 $ (148) $(1,269) $ (746)
Interest expense (1,314) (207) (401) (1,922)
Income tax benefit 286 114 533 933
(expense)
Minority interest (12) - - (12)
--------- --------- ---------- ----------
Net income (loss) $ (369) $ (241) $(1,137) $(1,747)
========= ========= ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
---------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
--------- --------- ---------- ----------
<S> <C> <C><C> <C><C> <C><C> <C><C> <C>
Income (loss) before
interest, taxes and $ 24 $ 9,823 $ (667) $ 9,180
minority interest
Interest expense (987) (104) (152) (1,243)
Income tax benefit
(expense) 47 (3,779) 318 (3,414)
Minority interest (192) - - (192)
--------- --------- ---------- ----------
Net income (loss) $(1,108) $ 5,940 $ (501) $ 4,331
========= ========= ========== ==========
Six Months Ended March 31, 1999
---------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
--------- --------- ---------- ----------
Income (loss) before
interest, taxes and
minority interest $ 353 $10,087 $(1,150) $ 9,290
Interest expense (1,828) (212) (312) (2,352)
Income tax benefit expense 316 (3,950) 585 (3,049)
Minority interest (158) - - (158)
--------- --------- ---------- ----------
Net income (loss) $(1,317) $ 5,925 $ (877) $ 3,731
========= ========= ========== ==========
</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. LONG-TERM DEBT:
The Company has outstanding $16.5 million of 12% Senior Subordinated Notes,
due 2003. The note agreement, as amended, contains provisions which limit
the payment of dividends and require the maintenance of certain financial
covenants and ratios. For the quarter ended March 31, 2000, the Company is
in non-compliance with the interest and dividend coverage ratio requirement
of that agreement. In the past, the Company's subordinated lenders have
waived compliance with various covenants and the subordinated lenders have
granted limited waivers, through June 23, 2000, with respect to the current
non-compliance. The Company is also in non-compliance with one financial
covenant of its senior debt agreements as of March 31, 2000. The Company
and its senior lenders have executed a forbearance agreement that they have
agreed to extend through June 23, 2000 (and which includes a waiver of this
covenant). The Company is in negotiation with its lenders and management
believes it will be able to reach an agreement with them. However, because
it cannot be determined whether the aforementioned covenant violations will
be amended, cured or waived beyond June 23, 2000, the subordinated and
senior debt have been classified as current maturities of long-term debt as
of March 31, 2000.
<PAGE>
Item 2.
=======
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
=====================
REVENUES for the quarter ended March 31, 2000, decreased $2,523,000 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 $ (1,953) (16) (17) 1
Foreign Consumer 1,662 22 22 -
Industrial (2,232) (43) (41) (2)
U.S. Consumer revenue decreased principally in the mass retail market while
Foreign Consumer revenue increased primarily with Mexico retailers which had
deferred orders from late 1999. Industrial revenue decreased primarily as a
result of the sale of the Graphite and Lubricants division, completed in March,
1999. Refractory revenues also decreased $482,000 in the period.
REVENUES for the six months ended March 31, 2000, decreased $5,705,000 from
the same quarter last year. The changes by segment are as follows:
<TABLE>
<CAPTION>
Increase
(Decrease) % Increase
(in thousands) (Decrease)
--------------- ----------------------------
Total Volume Price/Mix
------ ------ ---------
<S> <C> <C> <C> <C> <C>
U.S. Consumer $ (2,318) (9) (11) 2
Foreign Consumer 1,346 12 12 -
Industrial (4,733) (43) (45) 2
</TABLE>
The decrease in U.S. Consumer revenues was primarily due to the lower
seasonal wholesale club sales and decreased sales in the mass retail market.
Foreign revenue increased in the Mexico and Canada mass markets. Industrial
revenue for the prior year includes the 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 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.
OPERATING INCOME decreased $8,568,000 from the same quarter last year. U.S.
Consumer increased $1,222,000 due to a $1,685,000 charge for restructuring and
related costs in the prior year period. Industrial operating income decreased
$9,813,000 due to the $9,396,000 pre-tax gain on the aforementioned Graphite and
Lubricants division sale in 1999, and the division's operating income in that
same period. Lower refractory revenues also contributed to this decrease.
<PAGE>
Operating income for the six months ended March 31, 2000, decreased
$10,036,000 from the prior period. Industrial operating income decreased
principally due to the $9,396,000 gain on the sale and approximately $425,000 of
operating income attributable to the Graphite and Lubricants division in 1999.
Consumer operating income increased only $318,000, despite the $1,685,000
restructuring charge in 1999. This was due to significantly higher manufacturing
inefficiencies as a result of strict inventory reduction efforts and related
decreased production, as well as the finalization of the consolidation of a
manufacturing facility (See Note 7 to Consolidated Financial Statements). These
factors contributed to an overall increase in cost of goods sold to 67.7% of
sales in 2000, as compared to 63.7% in 1999.
INTEREST EXPENSE decreased $255,000 and $431,000 in the quarter and six
months ending March 31, 2000 from the same periods with both U.S. and foreign
decreasing due to lower average overall borrowings.
INCOME TAX decreased $3,570,000 and $3,982,000 from the same quarter and
six months last 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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
===============================
The Company's cash flows from operating activities improved dramatically
(by approximately $7.8 million) in the first six months of fiscal 2000, despite
$1.7 million in net losses. The Company's strict inventory reduction efforts led
to an increase in cash flows related to inventories of $339,000 in the current
year period, as compared with a decrease of $13.6 million in the prior year
period. This significant improvement was partially offset by 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. Moreover,
accounts payable and accrued liabilities were reduced almost $4 million in the
current year period.
The Company's investing activities included approximately $373,000 in net
purchases of property and equipment in the current period and $288,000 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, providing a total of up to $42.5 million in financing through September
2004. The underlying loan and security 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 0.25%, or the prevailing LIBOR rate plus
1.75% through December 2000. Borrowings under the new revolving credit facility
are based upon eligible accounts receivable and inventories of the Company's
U.S. and Canada operations, as defined. The Company has previously executed an
interest rate swap agreement which effectively fixes the rate of interest on $5
million of the revolver debt at 8.12% through July 2000. The loan and security
agreements also include a term loan in the 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 which effectively fixes the
rate of interest on approximately $2 million of the term loan at 8% 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 non-compliance with one such
financial covenant as of March 31, 2000. The Company and its senior lenders have
executed a forbearance agreement, which they have agreed to extend through June
23, 2000 (and which includes a waiver of this covenant) in order to allow time
for negotiations to be completed and definitive amendments to be prepared and
signed. The senior lenders have cooperated with and supported the Company by
continuing all funding under their agreements during the Company's negotiations
with its subordinated lenders discussed below. The Company is also negotiating
with its senior lenders with respect to further amendments to its senior debt
agreements to provide additional financial covenant relief in the future. The
senior lenders have asked the Company to consider an increase in the interest
rate on the senior debt of not more than 1% and payment of a fee. The Company is
continuing its negotiations with respect to its lenders' requests and,
management believes that the Company will be able to reach an agreement with
them. As of March 31, 2000, the Company had approximately $15 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 ($11 million
unused as of March 31, 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 connection with the private
placement of these notes, the Company issued to noteholders warrants to purchase
300,000 shares of Company stock at $7.24 per share. 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. The note agreement, as amended, contains provisions
which limit the payment of dividends and require the maintenance of certain
financial covenants and ratios. For the quarter ended March 31, 2000, the
Company is in non-compliance with the interest and dividend coverage
ratio requirement of that agreement. In the past, the
<PAGE>
Company's subordinated lenders have waived compliance with various covenants.
With respect to the most recent non-compliance, the lenders have asked the
Company to consider amending the Note Agreement to revise the financial
covenants, increase the interest rate, require payment of a fee and decrease the
exercise price of warrants held by them. In order to allow time for negotiations
to progress, the subordinated lenders have granted a limited waiver through June
23, 2000. Although negotiations are continuing, the Company has preliminarily
agreed to increase the interest rate by 1%, in the form of a deferred payment,
due upon maturity. The Company has also agreed to pay the subordinated lenders a
fee of $50,000 and reduce the exercise price of the warrants held by them by an
amount yet to be determined. The Company and the subordinated lenders are
continuing their negotiations with respect to amendments to the financial
covenants applicable to the subordinated debt. None of the preliminary terms
agreed to by the Company and the subordinated lenders will be final or binding
until negotiations are completed and all outstanding matters are finally
resolved.
The Company anticipates that it will not be in compliance with all covenant
provisions in the next, and possibly in subsequent, future quarters and cannot
assure that it will receive waivers or amendments of any such provisions at that
time. Pending the outcome of final negotiations, the waivers granted by the
lenders may expire on June 23, 2000, and accordingly, the Company has reflected
the subordinated and senior debt as current maturities of long-term debt in its
consolidated financial statements as of March 31, 2000. The Company expects that
the debt will be reclassified as long-term upon signing the definitive
agreements with its lenders. (See Note 10 to Consolidated Financial Statements.)
The Company entered into the aforementioned interest rate swap agreement 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 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 the covenant
violations described above with respect to its current financing arrangements
are not cured, waived or amended, 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
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.
<PAGE>
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, including the Company's expectations with respect to its ability to
reach an agreement with its lenders and the related classification of its debt;
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; and its assessment with respect to Y2K. 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, Y2K compliance risk and
the inability to reach agreement with its lenders, among others.
<PAGE>
Item 3.
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 $400,000. 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 March 31, 2000, approximately 45% of total short and
long-term debt is fixed, at rates between 8% and 12%. The balance of the Company
debt is variable, principally based upon the prevailing U.S. bank prime rate or
LIBOR rate. Certain interest rate swaps, which expire in 2000, fix the rate of
interest on $7 million of this debt at approximately 8%. It is estimated that a
change in the average prevailing interest rates of the remaining debt of 1%
would impact reported pretax income by $200,000. 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 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
(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
<PAGE>
(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
1 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.
2 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.
3 Incorporated by reference to Appendix 3 to the Company's proxy statement dated
January 27, 1997, filed in Washington, D.C.
4 Incorporated by reference to the Company's current report on Form 8-K dated
December 12, 1997, filed in Washington D.C.
5 Incorporated 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.
6 Incorporated by reference to the Company's current report on Form 8-K dated
March 2, 1999, filed in Washington D.C.
7 Incorporated 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.
8 Filed 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: May 22, 2000
-------------------------------------
By: /s/ Gino N. Pala
-------------------------------------
Gino N. Pala
Chairman of Board and
Co-Chief Executive Officer
Dated: May 22, 2000
-------------------------------------
By: /s/ Richard A. Asta
-------------------------------------
Richard A. Asta
Executive Vice President of
Finance and Chief Financial Officer
Dated: May 22, 2000
-------------------------------------
By: /s/ John Adornetto
-------------------------------------
John Adornetto
Vice President / Corporate Controller
and Chief Accounting Officer
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