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 March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-8689
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 March 31, 2001, was 3,168,047.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
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INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Information
Consolidated Balance Sheets --
March 31, 2001 and September 30, 2000 3-4
Consolidated Statements of Operations -- For The
Three and Six Months Ended March 31, 2001 and 2000 5
Consolidated Statements of Comprehensive Income (Loss)
-- For The Three and Six Months Ended March 31, 2001
and 2000 6
Consolidated Statements of Cash Flows -- For The
Six Months Ended March 31, 2001 and 2000 7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-15
Item 3. Quantitative and Qualitative Disclosures About Market 16
Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17-19
Signatures 20
PART I - FINANCIAL INFORMATION
Item 1.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2001 September 30,
(Unaudited) 2000
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 300,842 $ 448,452
Receivables, less allowance for
doubtful accounts of $1,402,557 at
March 31, 2001 and $1,418,908 at
September 30, 2000 29,419,970 30,881,626
Inventories 38,852,127 36,215,931
Other current assets 5,635,390 4,171,064
-------------- --------------
Total current assets 74,208,329 71,717,073
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 10,065,660 10,145,872
Machinery and equipment 16,126,843 16,054,327
Furniture and fixtures 1,706,204 1,654,404
-------------- --------------
27,898,707 27,854,603
Less accumulated depreciation (17,957,621) (17,572,320)
-------------- --------------
9,941,086 10,282,283
-------------- --------------
OTHER ASSETS 5,037,108 4,718,379
-------------- --------------
$89,186,523 $86,717,735
============== ==============
March 31, 2001 September 30,
(Unaudited) 2000
--------------- --------------
CURRENT LIABILITIES:
Notes payable $ 6,130,623 $ 3,574,929
Current maturities of long-term debt 7,140,767 7,135,198
Accounts payable 8,774,132 8,068,133
Accrued liabilities 7,956,912 10,056,935
--------------- --------------
Total current liabilities 30,002,434 28,835,195
--------------- --------------
LONG-TERM DEBT 32,562,315 30,210,410
--------------- --------------
DEFERRED INCOME TAXES AND OTHER 797,827 177,248
--------------- --------------
MINORITY INTEREST 554,274 552,215
--------------- --------------
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 3,710,309 3,710,309
Capital in excess of par value 3,700,272 3,700,272
Retained earnings 25,157,019 26,147,547
Accumulated comprehensive income (loss) (3,776,043) (3,093,577)
--------------- --------------
28,791,557 30,464,551
Less - treasury stock, at cost
(542,262 shares) (3,521,884) (3,521,884)
--------------- --------------
25,269,673 26,942,667
--------------- --------------
$ 89,186,523 $ 86,717,735
=============== ==============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2001 AND 2000
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2001 2000 2001 2000
---- ---- ---- ----
REVENUES $20,880,005 $22,392,291 $40,677,001 $42,017,436
------------ ------------ ------------ ------------
COST AND EXPENSES:
Cost of goods sold 13,272,116 14,689,101 27,203,304 28,424,972
Selling and administrative expenses 6,774,480 7,091,565 13,571,748 14,338,943
Provision for restructuring and
related costs 322,435 -- 322,435 --
------------ ------------ ------------ ------------
20,369,031 21,780,666 41,097,487 42,763,915
------------ ------------ ------------ ------------
GAIN ON SALE OF ASSETS 1,202,448 -- 1,202,448 --
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 1,713,422 611,625 781,962 (746,479)
INTEREST EXPENSE 1,178,708 988,508 2,297,717 1,921,545
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES
(BENEFIT) AND MINORITY INTEREST 534,714 (376,883) (1,515,755) (2,668,024)
INCOME TAXES (BENEFIT) 200,612 (156,830) (527,589) (933,013)
------------ ------------ ------------ ------------
334,102 (220,053) (988,166) (1,735,011)
MINORITY INTEREST 14,373 26,779 2,362 11,515
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 319,729 $ (246,832) $ (990,528) $(1,746,526)
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE:
BASIC $ 0.10 $ (.08) $ (.31) $ (.54)
============ ============ ============ ============
DILUTED $ 0.10 $ (.08) $ (.31) $ (.54)
============ ============ ============ ============
SHARES OUTSTANDING:
BASIC 3,168,047 3,157,290 3,168,047 3,238,704
============ ============ ============ ============
DILUTED 3,168,492 3,157,290 3,168,047 3,238,704
============ ============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2001 AND 2000
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ------------- ------------
NET INCOME (LOSS) $ 319,729 $ (246,832) $ (990,528) $(1,746,526)
OTHER COMPREHENSIVE INCOME (LOSS):
Cumulative effect adjustment to
recognize fair value of cash
flow hedges -- -- (54,205) --
Current period adjustment to
recognize fair value of cash
flow hedges (119,233) -- (276,948) --
Foreign currency translation
adjustments 229,030 418,527 (351,313) 113,853
----------- ----------- -------------- ------------
COMPREHENSIVE INCOME (LOSS) $ 429,526 $ 171,695 $ (1,672,994) $(1,632,673)
=========== ============ ============== =============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED MARCH 31, 2001 AND 2000
2001 2000
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (990,528) $ (1,746,526)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,267,837 1,222,871
Deferred taxes -- 89,937
Provision for doubtful accounts receivable 43,801 77,057
Gain on sale of assets (1,202,448) --
Loss attributable to foreign currency exchange 69,253 4,671
Income attributable to minority interest 2,362 11,515
Changes in assets and liabilities:
Receivables 1,149,469 3,133,725
Inventories (2,710,990) 339,144
Other current assets (527,113) (79,793)
Accounts payable and accrued liabilities (376,634) (4,206,991)
Other assets (327,638) (97,017)
---------------- ---------------
Net cash provided by (used in) operations (3,602,629) (1,251,407)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (1,508,385) (372,918)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable 2,521,412 1,841,265
Net proceeds from long-term debt 2,426,615 1,647,164
Purchase of treasury stock -- (2,016,510)
Exercise of stock options -- 168,624
Other non-current liabilities 47,631 (25,459)
---------------- ---------------
Net cash provided by (used in) financing
activities 4,995,658 1,615,084
---------------- ---------------
Effect of exchange rate changes on cash (32,254) (128,575)
---------------- ---------------
Net decrease in cash and cash equivalents (147,610) (137,816)
Cash and cash equivalents, beginning of period 448,452 935,413
---------------- ---------------
Cash and cash equivalents, end of period $ 300,842 $ 797,597
================ ===============
Supplemental Disclosures:
Cash paid during the period:
Interest $ 2,175,812 $ 1,843,960
Income taxes 1,452,010 1,374,554
The accompanying notes to consolidated financial statements
are an integral part of these statements.
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, 2001, and the results of their
operations and cash flows for the six months ended March 31, 2001 and 2000,
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, 2001 (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):
March 31, September 30,
2001 2000
------------ -------------
Raw materials $13,861 $12,839
Work in process 3,639 3,656
Finished goods 21,352 19,721
------------ -------------
$38,852 $36,216
============ =============
3. Effect of new accounting pronouncement:
On October 1, 2000, the Company adopted Statement of Financial Accounting
Standards (SFAS) No.133, "Accounting for Derivative Instruments and Hedging
Activities". The Company now records the fair value of interest rate swaps
designated as cash flow hedges in other liabilities with the offset to the
other comprehensive income (loss) component of shareholders' equity. At
adoption, the Company recorded its interest rate swaps designated as cash
flow hedges with a fair value of $86,314 in other liabilities. Other
comprehensive loss was increased $54,205 (net of tax benefit of $32,109) as
a cumulative effect adjustment for an accounting change. During the period
ended March 31, 2001, the Company also recognized an adjustment to the fair
value of these cash flow hedges of $441,001 in other liabilities. Other
comprehensive loss was increased $276,948 (net of tax benefit of $164,053)
during this period.
The Company utilizes interest rate swap agreements to provide an exchange
of interest payments computed on notional amounts that will offset any
undesirable change in cash flows or fair value resulting from market rate
changes on designated hedged bank borrowings. The Company limits the credit
risks of the interest rate agreements by initiating the transactions with
counterparties with significant financial positions, such as major
financial institutions.
SFAS No. 133 requires companies to recognize all of its derivative
instruments as either assets or liabilities in the balance sheet at fair
value. The accounting for changes in the fair value (i.e., gains or losses)
of a derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of
hedging relationship. For those derivative instruments that are designated
and qualify as hedging instruments, a company must designate the hedging
instrument, based upon the exposure being hedged, as either a fair value
hedge, cash flow hedge or a hedge of a net investment in a foreign
operation. For derivative instruments that are designated and qualify as a
cash flow hedge (such as the Company's interest rate swap agreements), the
effective portion of the gain or loss on the derivative instrument is
reported as a component of other comprehensive income (loss) and
reclassified into earnings in the same period or periods during which the
hedged transaction affects earnings. The remaining gain or loss on the
derivative instrument in excess of the cumulative change in the present
value of future cash flows of the hedged item, if any, is recognized in
current earnings during the period of the change in fair values. For
derivative instruments not designated as hedging instruments, the gain or
loss is recognized in current earnings during the period of the change in
fair values.
The Company has entered into interest rate swap agreements that effectively
convert a portion of its floating-rate debt to a fixed-rate basis, thus
reducing the impact of interest-rate changes on future interest expense.
The fair values of interest rate instruments are estimated by obtaining
quotes from brokers and are the estimated amounts that the Company would
receive or pay to terminate the agreements at the reporting date, taking
into account current interest rates and other relevant factors.
4. 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. 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 continued 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 2000, the Company reached
settlements with its insurers and all amounts recovered were reflected in
fiscal 2000 financial statements ($167,000 through March 31, 2000). In
1999, the malpractice suit was dismissed and the Company has appealed the
decision.
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.
5. RESTRUCTURING AND RELATED COSTS:
During the fourth quarter of fiscal 2000, the Company provided
approximately $1,435,000 of impairment and restructuring related costs in
connection with Phase 2 of its Restructuring and Cost Reduction Program,
which includes further consolidation of certain U.S. manufacturing
processes, the consolidation of its Mexico operations into a new leased
facility and personnel reductions in manufacturing, sales, marketing and
corporate activities. An additional 170 employees (principally plant
workers) are affected by the second phase of the program. The carrying
amount of property held for disposal under Phase 2 of the program is $1.1
million. Management expects to dispose of this additional property by June
2001 without material gain or loss.
The Phase 2 restructuring and impairment related charges and subsequent
utilization through March 31, 2001 are summarized below (in thousands):
2000 Utilized
Restructuring through Balance
and Related March 31, at March 31,
Charges 2001 2001
------------- ----------- -----------
Employee severance and related costs $ 967 $ (422) $ 545
costs
Anticipated losses from the sale or
abandonment of property and equipment 468 (299) 169
------------- ----------- -----------
$ 1,435 $ (721) $ 714
============= =========== ===========
In addition, during the quarter, the Company incurred $322,000 in costs
associated with the disposal of property remaining from its prior phase of
restructuring.
6. 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. In the period ended March 31, 2000, the Company
repurchased 260,000 shares at a cost of approximately $2 million.
7. LINE OF BUSINESS REPORTING:
The Company reports 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 March 31, 2001 and 2000, and for
the quarters then ended (in thousands):
Consumer Industrial
Group Group Total
------------ ------------ ------------
Net revenues:
Three months ended:
March 31, 2001 $ 18,727 $ 2,153 $20,880
March 31, 2000 19,395 2,997 22,392
Six months ended:
March 31, 2001 $ 35,969 $ 4,708 $40,677
March 31, 2000 35,746 6,271 42,017
Consumer Industrial
Group Group Total
------------ ------------ ------------
Income (loss) before interest,
taxes and minority interest:
Three months ended:
March 31, 2001 $ 1,525 $ (238) $ 1,287
March 31, 2000 1,246 10 1,256
Six months ended:
March 31, 2001 $ 1,450 $ (473) $ 977
March 31, 2000 671 (148) 523
A reconciliation of income (loss) before interest, taxes and minority interest
to net income (loss) follows (in thousands):
Three Months Ended March 31, 2001
--------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
----------- ---------- ---------- ----------
Income (loss) before interest,
taxes and minority interest $ 1,525 $ (238) $ 426 $ 1,713
Interest expense (875) (109) (195) (1,179)
Income tax benefit(expense) (232) 96 (64) (200)
Minority interest (14) -- -- (14)
----------- ---------- ---------- ----------
Net income (loss) $ 404 $ (251) $ 167 $ 320
=========== ========== ========== ==========
Six Months Ended March 31, 2001
--------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
----------- ---------- ---------- ----------
Income (loss) before interest,
taxes and minority interest $ 1,450 $ (473) $ (195) $ 782
Interest expense (1,689) (218) (391) (2,298)
Income tax benefit 61 252 214 527
Minority interest (2) -- -- (2)
----------- ---------- ---------- ----------
Net loss $ (180) $ (439) $ (372) $ (991)
=========== ========== ========== ==========
Three Months Ended March 31, 2000
--------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
----------- ---------- ---------- ----------
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
Minority interest (12) -- -- (12)
----------- ---------- ---------- ----------
Net loss $ (369) $ (241) $(1,137) $(1,747)
=========== ========== ========== ==========
Corporate income (loss) before interest, taxes and minority interest
includes a net gain on sale of assets of $1,202 and restructuring costs of
$322 in the March 31, 2001 periods. 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.
8. GAIN ON SALE OF ASSETS:
In January 2001, the Company sold certain idle real estate in Burnet
County, Texas. Under the terms of the sales contract, the buyer also
assumed certain related obligations previously retained by the Company
under its 1999 sale of its graphite and lubricants business. The
transaction resulted in an aggregate net pre-tax gain of approximately $1.2
million.
9. LONG TERM DEBT
At March 31, 2001, the Company did not meet one of the financial ratio
requirements of the loan and security agreement. In May 2001, the agreement
was amended to revise this financial ratio requirement through September
30, 2001 to be less restrictive and to provide for an increase in the
facility fees by $5,000 per month. The Company is presently in compliance
with all provisions of the loan agreement, as amended.
Item 2.
-------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
REVENUES for the quarter ended March 31, 2001, decreased $1,512,000 from
the same quarter last year. The changes by segment are as follows:
Increase % Increase (Decrease)
(Decrease) --------------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
U.S. Consumer $ 584 6 7 (1)
Foreign Consumer (1,252) (14) (16) 2
Industrial (844) (28) (29) 1
U.S. Consumer revenue increased principally in the educational market as
certain wholesalers deferred shipments from December 2000 into early 2001.
Foreign Consumer revenues decreased primarily in the Mexico retail market. The
2000 quarter benefited from higher than normal orders from Mexico retailers and
wholesalers that were held over from prior periods. Industrial revenue decreased
due to weakness in the manufacturing industries served by the Refractories
division.
Revenues for the six months ended March 31, 2001, decreased $1,340,000 from
the same quarter last year. The changes by segment are as follows:
Increase % Increase (Decrease)
(Decrease) --------------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
U.S. Consumer $ (58) -- -- --
Foreign Consumer 281 2 1 1
Industrial (1,563) (25) (26) 1
U.S. Consumer revenue was flat with increases in the educational market
being offset by decreases in other markets. Foreign Consumer increased
principally in Mexico with large retailers and wholesalers. Industrial revenue
decreased in the Refractories division as discussed above.
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 increased $1,101,000 over the same quarter last year,
including a net gain on sale of assets of $1,202,000 and restructuring costs of
$322,000. U.S. Consumer increased $687,000 as a result of lower selling and
distribution costs, as well as ongoing consolidation and cost reduction efforts
that resulted in improved manufacturing efficiencies. This improvement
contributed to lower overall cost of goods sold during the March 2001 quarter
(63.6% of sales as compared to 65.6% in the prior year quarter). Foreign
Consumer decreased $408,000, primarily in Mexico, due to lower revenues.
Industrial decreased $248,000 on lower revenues and higher energy costs.
Corporate administrative costs decreased $190,000 as lower salaries and fringes
from cost reduction initiatives more than offset non-recurring legal expense
recoveries of $167,000 in the prior year period.
Operating income for the six months ended March 31, 2001 increased
$1,528,000 over the prior period reflecting the aforementioned gain on sale of
assets and restructuring costs. U.S. Consumer increased $932,000 primarily due
to lower costs from consolidation and cost reduction efforts, as well as lower
sales and distribution expenses. Foreign Consumer decreased $154,000, primarily
due to start-up costs associated with the new Mexico facility. Industrial
decreased $325,000 on lower revenues and higher energy costs. Corporate
administrative costs decreased $194,000 as lower salaries and fringes more than
offset the aforementioned legal recoveries in the prior year period.
INTEREST EXPENSE increased $190,000 and $376,000 in the quarter and six
months ended March 31, 2001, respectively, primarily due to higher borrowings in
Mexico to finance the consolidation of manufacturing facilities.
INCOME TAX increased $357,000 and $405,000 from the same quarter and six
months last year, respectively, due to the improvement in before tax income
(loss).
MINORITY INTEREST represents approximately 3% of the results from
operations of the Company's Mexico subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's cash flows used in operating activities in the first six
months of fiscal 2001 were approximately $3.6 million as compared with only
$1.25 million in the prior year period. Accounts receivable increased over the
prior year due to increased sales in U.S. market channels and in Mexico where
traditionally longer customer payment terms are provided. Additionally,
inventories increased due to the manufacturing consolidation efforts in Mexico
and as the Company prepares for its back-to-school shipping season. These
factors were partially offset by improved accounts payable management in the
current year period.
The Company's investing activities included approximately $1.5 million in
purchases of property and equipment in the current period compared to $0.4
million in the prior year. This is a higher level of purchases as compared with
recent years, due to the Company's expansion of its Mexico manufacturing and
consolidation into its new leased 300,000 square-foot facility. 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 the prime rate plus 0.75% or the prevailing LIBOR rate plus 2.25%.
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 Company has previously executed an interest rate swap agreement
that effectively fixes the rate of interest on $8 million of the revolver debt
at 8.98% through August 2005. 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.
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. At March 31, 2001, the Company did not meet one
of the financial ratio requirements. In May 2001, the agreement was amended to
revise one financial ratio requirement through September 30, 2001 to be less
restrictive and to provide for the increase in the facility fees by $5,000 per
month. The Company is presently in compliance with all such provisions, as
amended. As of March 31, 2001, the Company had approximately $19 million of
unused lines of credit available under the revolving credit facility. In
addition, the Company's Mexico subsidiary has $17 million in bank lines of
credit ($11 million unused as of March 31, 2001) 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 Senior Subordinated Notes
valued at their face amount, due 2003. The notes bear interest at 13.5% through
June 2002 and 12.25% through maturity in 2003. The Company has issued to
noteholders warrants to purchase 300,000 shares of Company stock at $4.28 per
share. The note agreement, as amended, contains provisions that limit the
payment of dividends and require the maintenance of certain financial covenants
and ratios. The Company is presently in compliance with all such provisions, as
amended.
The subordinated and senior debts have been classified, in accordance with
their terms and management's expectations as to Company performance, as
long-term in the accompanying consolidated financial statements. However, 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 Company entered into the aforementioned interest rate swap agreement to
balance and manage overall interest rate exposure. The swaps are not presently
expected to have a material effect on total interest expense over the term of
the underlying agreements. (Also see Note 3 to Consolidated Financial
Statements.)
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. The Company repurchased 260,000 shares at a cost of $2 million in
the period ended March 31, 2000. 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 should, 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.
In September 2000, First Union Securities was engaged to advise and assist
the Company in evaluating certain strategic alternatives, including capital
restructuring, mergers and acquisitions and/or other measures designed to
maximize shareholder value. These activities are ongoing.
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 loan covenants in the future and
its current and anticipated obligations; the effects of interest rate swap
agreements; management's 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 expectations with regards to legal proceedings and environmental
matters. 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 inventory management efforts, difficulties encountered with the
consolidation and cost reduction program, increased competition, U.S. and
foreign economic factors, environmental risks, foreign currency exchange risk
and interest rate fluctuation risk, among others.
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 33% of the Company's fiscal 2000 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 March 31, 2001, approximately 54% of total short and
long-term debt is fixed, at rates between 7.2% and 13.5%. 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 2001 and 2005,
fix the rate of interest on $8 million of this debt at approximately 9%. A
change in the average prevailing interest rates of the remaining debt of 1%
would not have a material effect upon the Company's results of operations or
cash flows. 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 variable interest rate factor.
PART II. OTHER INFORMATION
Item 4. Sumission of Matters to a Vote of Security Holder
-------
a. The Annual Meeting of Shareholders of Dixon Ticonderoga Company was
held on March 9, 2001.
b. The following members of the Board of Directors were elected to serve
until the 2004 Annual Meeting or until their successors are elected
and qualified:
For Against Abstained
------------ -------------- ---------------
Gino N. Pala 2,632,574 93,335 0
Richard F. Joyce 2,613,618 112,291 0
John Ritenour 2,632,574 93,335 0
Item 6. Exhibits and Reports on Form 8-K
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(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
(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
(10) k. Fourth Modification of Amended and Restated Revolving
Credit Loan and Security Agreement. 8
(10) l. Second Modification of Amended and Restated Term Loan
Agreement. 8
(10) m. Amendment No. 2 to Note and Warrant Purchase Agreement. 8
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, 1998, 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.
8Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended September 30, 2000, file number 1-8689, filed in Washington, D.C.
(b) Reports on Form 8-K:
None.
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIXON TICONDEROGA COMPANY
Dated: May 14, 2001
-------------------------------
By: /s/ Gino N. Pala
-------------------------------
Gino N. Pala
Chairman of Board and
Co-Chief Executive Officer
Dated: May 14, 2001
-------------------------------
By: /s/ Richard A. Asta
-------------------------------
Richard A. Asta
Executive Vice President of Finance
Chief Financial Officer
Dated: May 14, 2001
---------------------------------
By: /s/ John Adornetto
---------------------------------
John Adornetto
Vice President/Corporate Controller and
Chief Accounting Officer