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 December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
__________________
Commission file number 1-8689
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 December 31, 2001, was 3,177,462.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
INDEX
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Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Information
Consolidated Balance Sheets --
December 31, 2001 and September 30, 2001 3-4
Consolidated Statements of Operations --
For The Three Months Ended December 31, 2001 5
and 2000
Consolidated Statements of Comprehensive Loss
For The Three Months Ended December 31, 2001 6
and 2000
Consolidated Statements of Cash Flows --
For The Three Months Ended December 31, 2001 7
and 2000
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-17
Item 3. Quantitative and Qualitative Disclosures 18
About Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19-20
Signatures 21
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, September 30,
2001 2001
-------------- ---------------
ASSETS:
-------
CURRENT ASSETS:
Cash and cash equivalents $ 871,975 $ 844,299
Receivables, less allowance for
doubtful accounts of $1,504,595 at
December 31, 2001 and $1,482,524 at
September 30, 2001 25,629,616 31,647,950
Inventories 35,703,381 35,583,082
Other current assets 2,480,959 2,227,785
-------------- ---------------
Total current assets 64,685,931 70,303,116
-------------- ---------------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 11,278,873 10,608,980
Machinery and equipment 17,467,897 17,155,371
Furniture and fixtures 1,748,796 1,741,811
-------------- ---------------
30,495,566 29,506,162
Less accumulated depreciation (19,513,101) (19,022,674)
-------------- ---------------
10,982,465 10,483,488
-------------- ---------------
OTHER ASSETS 5,554,460 5,625,771
-------------- ---------------
$ 81,222,856 $ 86,412,375
============== ===============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
December 31, September 30,
2001 2001
-------------- ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
-------------------------------------
CURRENT LIABILITIES:
Notes payable $ 7,511,462 $ 6,294,268
Current maturities of long-term debt 31,226,989 32,598,531
Accounts payable 7,275,997 9,321,957
Accrued liabilities 6,466,709 9,132,057
-------------- ---------------
Total current liabilities 52,481,157 57,346,813
-------------- ---------------
LONG-TERM DEBT 1,995,742 2,018,125
-------------- ---------------
DEFERRED INCOME TAXES AND OTHER 700,619 984,492
-------------- ---------------
MINORITY INTEREST 604,799 577,241
-------------- ---------------
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 3,670,135 3,670,135
Retained earnings 24,893,066 25,667,675
Accumulated comprehensive loss (3,372,237) (4,101,681)
-------------- ---------------
28,901,273 28,946,438
Less - treasury stock, at cost
(532,847 shares) (3,460,734) (3,460,734)
-------------- ---------------
25,440,539 25,485,704
-------------- ---------------
$81,222,856 $86,412,375
============== ===============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
THREE MONTHS ENDED
DECEMBER 31,
2001 2000
------------- -------------
REVENUES $17,902,150 $17,241,882
------------- -------------
COST AND EXPENSES:
Cost of goods sold 11,309,007 11,575,318
Selling and administrative expenses 6,766,713 6,456,694
Provision for restructuring and related costs 174,850 --
------------- -------------
18,250,570 18,032,012
------------- -------------
OPERATING LOSS (348,420) (790,130)
INTEREST EXPENSE 874,501 1,011,403
------------- -------------
LOSS FROM CONTINUING OPERATIONS BEFORE
INCOME TAX BENEFIT AND MINORITY INTEREST (1,222,921) (1,801,533)
INCOME TAX BENEFIT (453,914) (644,807)
------------- -------------
(769,007) (1,156,726)
MINORITY INTEREST 5,604 (12,011)
------------- -------------
LOSS FROM CONTINUING OPERATIONS (774,611) (1,144,715)
------------- -------------
LOSS FROM DISCONTINUED OPERATIONS, NET OF
APPLICABLE INCOME TAXES -- (165,542)
------------- -------------
NET LOSS $ (774,611) $(1,310,257)
============= =============
LOSS PER COMMON SHARE (BASIC):
Continuing operations $ (.24) $ (.36)
Discontinued operations -- (.05)
------------- -------------
Net loss $ (.24) $ (.41)
============= =============
LOSS PER COMMON SHARE (DILUTED):
Continuing operations $ (.24) $ (.36)
Discontinued operations -- (.05)
------------- -------------
Net loss $ (.24) $ (.41)
============= =============
SHARES OUTSTANDING:
BASIC 3,177,462 3,168,047
============= =============
DILUTED 3,177,462 3,168,047
============= =============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
5
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
---------------------------------------------
THREE MONTHS ENDED
DECEMBER 31,
2001 2000
------------ ------------
NET LOSS $ (774,611) $(1,310,257)
OTHER COMPREHENSIVE 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 71,263 (157,715)
Foreign currency translation adjustments 658,178 (580,343)
------------ ------------
COMPREHENSIVE LOSS $ (45,170) $(2,102,520)
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
6
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
THREE MONTHS ENDED
DECEMBER 31,
2001 2000
------------ -----------
Cash flows from operating activities:
Net loss from continuing operations $ (774,611) $(1,144,715)
Net loss from discontinued operations -- (165,542)
Adjustment to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 587,642 628,689
Provision for doubtful accounts receivable 109,935 111,828
Loss (gain) attributable to foreign currency
exchange (36,929) 57,760
Income (loss) attributable to minority interest 5,604 (12,011)
Changes in assets [(increase) decrease] and
liabilities [increase (decrease)]:
Receivables, net 6,303,861 5,601,811
Inventories 246,541 (54,790)
Other current assets (244,939) (314,919)
Accounts payable and accrued liabilities (4,893,783) (3,207,098)
Other assets (59,744) (109,591)
------------ -----------
Net cash provided by operations 1,243,577 1,391,422
------------ -----------
Cash flows from investing activities:
Purchases of plant and equipment, net (511,381) (853,037)
------------ -----------
Cash flows from financing activities:
Principal reductions of notes payable (212,595) (101,455)
Principal reductions of long-term debt (409,817) (441,088)
Other non-current liabilities (6,692) 64,719
------------ -----------
Net cash used in financing activities (629,104) (477,824)
------------ -----------
Effect of exchange rate changes on cash (75,416) (40,044)
------------ -----------
Net increase in cash and cash equivalents 27,676 20,517
Cash and cash equivalents, beginning of period 844,299 448,452
------------ -----------
Cash and cash equivalents, end of period $ 871,975 $ 468,969
============ ===========
Supplemental Disclosures:
Cash paid during the period:
Interest $1,487,510 $1,548,489
Income taxes 282,025 717,777
The accompanying notes to consolidated financial statements
are an integral part of these statements.
7
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Basis of presentation:
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the financial statements and the notes thereto
included in the Company's latest annual report on Form 10-K. In the opinion
of the Company, all adjustments (solely of a normal recurring nature)
necessary to present fairly the financial position of Dixon Ticonderoga
Company and subsidiaries as of December 31, 2001, and the results of their
operations and cash flows for the three months ended December 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 December 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):
December 31, September 30,
2001 2001
------------ -------------
Raw materials $ 14,159 $ 13,328
Work in process 3,374 3,572
Finished goods 18,170 18,683
------------ -------------
$ 35,703 $ 35,583
============ =============
3. RECENT ACCOUNTING PRONOUNCEMENTS:
In July 2001, the FASB issued Statement No. 141 "Business Combinations" and
Statement No. 142 "Goodwill and Other Intangible Assets". Statement No. 141
requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting and broadens the criteria for
recording intangible assets separate from goodwill. Statement No. 142
requires the use of a nonamortization approach to account for purchased
goodwill and indefinite lived intangibles. Under a nonamortization approach,
goodwill and indefinite lived intangibles will not be amortized into results
of operations, but instead would be reviewed for impairment and written down
and charged to results of operations only in the periods in which the
recorded value of goodwill and indefinite lived intangibles is more than its
fair value. The provisions of Statement No. 141 are effective currently. The
provisions of Statement No. 142 will be effective for the Company in fiscal
2003. Management does not expect these standards, when implemented, to have
a material effect on its future results of operations or financial position.
In June 2001, the FASB issued Statement No. 143 "Accounting for Asset
Retirement Obligations". The statement addresses financial accounting and
8
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The statement
is effective for the Company in fiscal 2003. The Company does not expect the
adoption of Statement No. 143 to have a material impact on the Company's
future results of operations or financial position.
In August 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supersedes
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of", and the accounting and reporting
provisions of APB Opinion 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions",
for the disposal of a segment of a business. The statement is effective for
the Company in fiscal 2003. The Company does not expect the adoption of
Statement No. 144 to have a material impact on the Company's future results
of operations or financial position.
4. RESTRUCTURING AND RELATED COSTS:
In the first quarter of fiscal 2002, the Company continued its efforts
towards completion of Phase 2 of its Restructuring and Cost Reduction
Program, including the further consolidation of certain U.S. manufacturing
processes with its Mexico operations as well as additional personnel
reductions at its new Mexico facility. The restructuring and related costs
(severances and lease settlement expense) and utilization since September
30, 2001 are summarized below (in thousands):
Losses from the
impairment, sale
Employee severance or abandonment of
and related costs property and equipment Total
------------------ ----------------------- ---------
Reserve balances at
September 30, 2001 $ 339 $ -- $ 339
Quarter ended December
31, 2001 restructuring
and impairment
related charges 99 76 175
Payments in quarter
ended December 31, 2001 (190) -- (190)
------------------ ----------------------- ---------
Reserves balances at
December 31, 2001 $ 248 $ 76 $ 324
================== ======================= =========
9
5. LINE OF BUSINESS REPORTING:
Effective with the Company's 2001 plan to exit the Industrial Segment (Note
6), the Company's continuing operations consist only of one principal
business segment - its Consumer Group. The following information sets forth
certain additional data pertaining to its operations for the three-month
periods ended December 31, 2001 and 2000 (in thousands).
Operating
Revenues Profit (Loss)
------------ ------------
2001:
United States $11,017 $ (558)
Canada 1,878 124
Mexico 4,757 65
United Kingdom 232 (6)
China 18 27
------------ ------------
$17,902 $ (348)
============ ============
2000:
United States $11,870 $(294)
Canada 1,825 25
Mexico 3,226 (429)
United Kingdom 214 (16)
China 107 (76)
------------ ------------
$17,242 $ (790)
============ ============
The United States operating loss in each period includes unallocated
corporate expenses.
6. DISCONTINUED OPERATIONS:
In September 2001, the Company formalized its decision to offer for sale its
New Castle Refractories division, the last business of its Industrial Group.
Accordingly, related operating results of the Industrial Group have been
reported as discontinued operations in the accompanying consolidated
financial statements. The Company expects to complete the sale of this
division by August 2002.
Net revenues and income (loss) from discontinued operations in the
accompanying financial statements are as follows (in thousands):
Three Months Ended
December 31,
---------------------
2001 2000
---------- ---------
Net revenues $ -- $ 2,555
========== =========
Income (loss) rom discontinued
operations before income taxes $ -- $ (249)
Income tax benefit -- 83
---------- ---------
Income (loss) from discontinued
operations $ -- $ (166)
========== =========
Earnings (loss) per share (basic) $ -- $ (0.05)
========== =========
Earnings (loss) per share (diluted) $ -- $ (0.05)
========== =========
10
Income (loss) from discontinued operations includes allocated interest
expense of $108 in the period ended December 31, 2000, based upon the
identifiable assets of such operations. In September 2001, the Company
provided $670 for anticipated operating losses and $432 for the wind-up of
certain pension plans. Losses from discontinued operations during the
December 31, 2001 period were $265 (including $84 in allocated interest
expense). In addition, the Company paid $432 for the wind-up of pension
plans.
Assets and liabilities relating to discontinued operations and included in
the accompanying consolidated balance sheets are as follows (in thousands):
December 31, September 30,
2001 2001
------------ --------------
Current assets $ 4,299 $ 4,619
Property, plant and equipment, net 448 473
Current liabilities (1,046) (1,448)
Long-term liabilities and other, net (766) (743)
------------ --------------
Net assets of discontinued operations $ 2,935 $ 2,901
============ ==============
7. LIQUIDITY AND CAPITAL RESOURCES:
On September 15, 2001, a waiver of compliance with one provision of the
Company's primary lending agreement expired and shortly thereafter its
senior lenders prohibited the payment of $5.5 million in principal due to
senior subordinated noteholders on September 26, 2001. The payment due date
was later extended by the noteholders until November 14, 2001 and the
aforementioned waiver from the Company's senior lenders was also extended
through that date. These extensions expired on November 15, 2001. The senior
lenders again blocked any payment to the subordinated noteholders and the
Company has continued to negotiate with its various lenders since then. As
of December 31, 2001, the Company was not in compliance with one financial
covenant under its subordinated note agreement. The Company has received an
additional extension and a waiver of default under its senior debt
agreements through May 3, 2002 to allow the Company more time to address its
debt issues to the mutual satisfaction of all parties involved. The Company
has asked both its senior and subordinated lenders to amend various
provisions of their debt agreements until at least October 2002 to allow the
Company time to pursue a longer-term solution.
The Company believes it has sufficient lines of credit available under its
senior debt and other agreements to fulfill all current and anticipated
operating requirements of its business. Moreover, the senior lenders have
consistently supported the Company by continuing normal funding under their
agreements throughout the ongoing negotiations. However, the Company does
not believe it will have excess cash flow to retire the total $16.5 million
in subordinated notes by their due date in 2003. The Company has asked the
subordinated noteholders and they have expressed a willingness to consider
restructuring their scheduled principal payments to allow the Company
sufficient time to retire the notes through the infusion of some form of new
equity capital, new secondary financing and/or the sale of assets. However,
the Company cannot assure that its efforts will be successful, that the
subordinated noteholders will amend their scheduled payments and/or that it
will maintain and/or secure new sources of capital. Moreover, in light of
the current circumstances regarding the Company's various debt arrangements,
the report of the Company's independent accountants (with respect to its
fiscal 2001 financial statements) includes an explanatory paragraph as to
substantial doubt about the Company's ability to continue as a going
concern.
11
The Company's Mexico subsidiary presently has outstanding approximately $10
million under its lines of credit ($2 million unused) expiring at various
dates. The Company is awaiting approval on $5 to $10 million of additional
Mexico lines of credit with various financial institutions. The Company's
subsidiary cannot assure that these lines of credit will continue to be
available after their respective expiration dates, or that additional lines
of credit will be secured.
The Company has retained Wachovia Securities (formerly First Union
Securities) and certain other outside consultants to advise and assist it in
evaluating certain strategic alternatives, including capital restructuring,
mergers and acquisitions, and/or other measures designed to resolve the
Company's issues with its lenders while maximizing shareholder value.
12
Item 2.
-------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
---------------------
REVENUES for the quarter ended December 31, 2001, increased $660,000 from
the prior year. The changes are detailed below:
Increase % Increase (Decrease)
(Decrease) --------------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
U.S. Consumer $ (852) (7) (6) (1)
Foreign Consumer 1,512 28 21 7
U.S. Consumer revenue decreased primarily due to lower demand in the
educational and commercial markets. Foreign revenue increased primarily in
Mexico due to increased demand in the mass retail market as well as certain
price increases.
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
presently managed through occasional foreign currency hedges, local currency
financing and by export sales denominated in U.S. dollars.
OPERATING LOSS decreased $442,000 from last year. In the quarter ended
December 31,2001, the Company incurred additional restructuring costs of
$175,000 in connection with its consolidation of operations in Mexico. These
costs were more than offset by higher operating profits in Foreign Consumer from
higher revenues and labor efficiencies and overhead expense reductions from the
consolidation activities (see Note 4). These efficiencies as well as
manufacturing savings in the U.S. contributed to significantly lower costs of
goods sold during the period (63.2% of sales as compared to 67.1% in the prior
year period). Consolidated selling and administrative expenses increased due to
higher U.S. selling expenses and financing costs, partially offset by
approximately $250,000 in import duty rebates, reflected in this category.
INTEREST EXPENSE decreased $137,000 from last year due to lower overall
borrowing rates, despite the additional interest charges under the Company's
debt agreements described below.
INCOME TAX benefit decreased $191,000 from last year due to lower pre-tax
losses.
MINORITY INTEREST represents approximately 3% of the net results from
operations of the Company's Mexico subsidiary.
CURRENT ECONOMIC ENVIRONMENT AND EVENTS
-------------------------------------------
Although not directly impacted by recent events in the U.S. and abroad,
softening economic conditions could affect the retail mass or other markets
served by the Company's Consumer Group and thus could lead to reduced overall
revenues. In addition, certain expenses (such as insurance and financing costs)
could be significantly higher in the coming years due to tightening in the
various financial markets in light of recent events.
13
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company generated approximately $1.2 million in cash flows from
operating activities in the first quarter of fiscal 2002. In the prior year
period, cash flows from operating activities amounted to $1.4 million. Lower
fiscal 2002 operating losses, increased accounts receivable collections and
improved inventory control were offset by higher cash flows used to extinguish
certain trade liabilities.
The Company's fiscal 2002 investing activities included approximately
$511,000 in net purchases of property and equipment, compared to $853,000 in the
prior year period. The prior year reflects a higher level of purchases as
compared with recent years, due to the Company's expansion of its Mexico
manufacturing and consolidation into its newly leased 300,000 square-foot
facility. Generally, all major capital projects are discretionary in nature and
thus no material purchase commitments exist. Capital expenditures are usually
funded from operations and existing financing or new leasing arrangements.
The Company's primary financing arrangements are with a consortium of
lenders, initially providing a total of up to $42.5 million in financing through
September 2004. The financing agreements, as amended, include a revolving line
of credit facility in the amount of $30 million, which bears interest at either
the prime rate plus 1.15%, or the prevailing LIBOR rate plus 2.65%, through
September 2004. The agreements also provide for the payment of various bank fees
approximating $14,000 per month. Borrowings under the revolving credit facility
are based upon eligible accounts receivable and inventories of the Company's
U.S. and Canada operations, subject to reserves for anticipated subordinated
debt payments and certain other items, as defined. The Company has executed an
interest rate swap agreement that effectively fixed the rate of interest on $8
million of these borrowings 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. The Company
entered into the aforementioned interest rate swap agreement to balance and
manage overall interest rate exposure and minimize overall cost of borrowings.
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. On September 15, 2001, a waiver of compliance
with one provision of the Company's primary lending agreement expired and
shortly thereafter its senior lenders prohibited the payment of $5.5 million in
principal due to senior subordinated noteholders on September 26, 2001. The
payment due date was later extended by the noteholders until November 14, 2001
and the aforementioned waiver from the Company's senior lenders was also
extended through that date. These extensions expired on November 15, 2001. The
senior lenders again blocked any payment to the subordinated noteholders and the
Company has continued to negotiate with its various lenders since then. The
Company has received an additional extension and waiver of certain existing
defaults under its senior debt agreements through May 3, 2002 to allow the
Company more time to address its debt issues to the mutual satisfaction of all
parties involved. The Company has asked both its senior and subordinated lenders
to amend various provisions of their debt agreements until at least October 2002
to allow time for the Company to pursue a longer-term solution. As of December
31, 2001, the Company had approximately $11 million outstanding under the
revolving credit facility. In addition, the Company's Mexico subsidiary
currently has approximately $10 million in bank lines of credit ($2 million
unused) expiring at various dates that bear interest at a rate based upon either
a floating U.S. bank rate or the rate of certain Mexican government securities.
The Company is awaiting approval on $5 to $10 million of additional Mexico lines
of credit with various financial institutions. The Company relies heavily on the
availability of the lines of credit in the U.S. and Mexico for liquidity in its
operations.
The Company also has outstanding $16.5 million of 12% Senior Subordinated
Notes valued at their face amount, due 2003. The subordinated note agreement
14
provides for a total interest rate of 13.5% through June 2002 and 12.25% through
maturity in 2003. Due to the Company's noncompliance under its primary lending
arrangements discussed above, it was prohibited from making a scheduled
subordinated note payment of $5.5 million due in September 2001. The note
agreement provides for an additional interest charge of 2% on this amount until
payment is made. The note agreement, as amended, contains provisions that limit
dividends and other payments, and requires the maintenance of certain financial
covenants and ratios, one of which the Company did not comply with as of
December 31, 2001.
The Company believes that amounts available under its lines of credit under
its senior debt and under lines of credit available to or requested by its
Mexican subsidiary, if funded, are sufficient to fulfill all current and
anticipated operating requirements of its business. The senior lenders have
consistently supported the Company and they, as well as the Company's foreign
lenders, have continued funding under their existing agreements throughout the
ongoing negotiations. However, the Company does not believe it will have excess
cash flow to retire the total $16.5 million in subordinated notes by their due
date in 2003. The Company's subordinated noteholders have expressed a
willingness to consider restructuring their scheduled principal payments to
allow the Company sufficient time to retire the notes through the infusion of
some form of new equity capital, new secondary financing and/or the sale of
assets. However, the Company cannot assure that its efforts will be successful,
that the subordinated noteholders will amend their scheduled payments and/or
that it will maintain and/or secure new sources of capital. In addition, the
Company's Mexico subsidiary cannot assure that its lines of credit will continue
to be available after their respective expiration dates, or that additional
lines of credit will be secured.
Due to the defaults described above, the subordinated and senior debts have
been classified as current maturities of long-term debt in the accompanying 2001
consolidated balance sheet. Moreover, in light of the current circumstances
regarding the Company's various debt arrangements, the report of the Company's
independent accountants (with respect to its fiscal 2001 financial statements)
includes an explanatory paragraph as to substantial doubt about the Company's
ability to continue as a going concern.
The Company has retained Wachovia Securities (formerly First Union
Securities) and certain other outside consultants to advise and assist it in
evaluating certain strategic alternatives, including capital restructuring,
mergers and acquisitions, and/or other measures designed to resolve the
Company's issues with its lenders while maximizing shareholder value.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In July 2001, the FASB issued Statement No. 141 "Business Combinations" and
Statement No. 142 "Goodwill and Other Intangible Assets". Statement No. 141
requires business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting and broadens the criteria for recording
intangible assets separate from goodwill. Statement No. 142 requires the use of
a nonamortization approach to account for purchased goodwill and indefinite
lived intangibles. Under a nonamortization approach, goodwill and indefinite
lived intangibles will not be amortized into results of operations, but instead
would be reviewed for impairment and written down and charged to results of
operations only in the periods in which the recorded value of goodwill and
indefinite lived intangibles is more than its fair value. The provisions of
Statement No. 141 are effective currently. The provisions of Statement No. 142
will be effective for the Company in fiscal 2003. Management does not expect
these standards, when implemented, to have a material effect on its future
results of operations or financial position.
In June 2001, the FASB issued Statement No. 143 "Accounting for Asset
Retirement Obligations". The statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The statement is effective for
the Company in fiscal 2003. The Company does not expect the adoption of
Statement No. 143 to have a material impact on the Company's future results of
operations or financial position.
In August 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supersedes
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
15
Long-Lived Assets to be Disposed of", and the accounting and reporting
provisions of APB Opinion 30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions", for the disposal of a
segment of a business. The statement is effective for the Company in fiscal
2003. The Company does not expect the adoption of Statement No. 144 to have a
material impact on the Company's future results of operations or financial
position.
CRITICAL ACCOUNTING POLICIES
----------------------------
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
revenue and expenses during the period reported. The following accounting
policies require management to make estimates and assumptions. These estimates
and assumptions are reviewed periodically and the effects of revisions are
reflected in the period that they are determined to be necessary. If actual
results differ significantly from management's estimates, the financial
statements could be materially impacted.
Accounts receivable is recorded net of allowance for doubtful accounts. The
Company regularly reviews the adequacy of its accounts receivable allowance
after considering the size of the accounts receivable, the age of each invoice,
each customer's expected ability to pay and the collection history with each
customer. The Company reviews any invoice greater than 60 days past due to
determine if an allowance is appropriate based on the risk category using the
factors discussed above. In addition, the Company maintains a general reserve
for all other invoices that may become doubtful in the future. The allowance for
doubtful accounts represents management's best estimate, but changes in
circumstances relating to accounts receivable may result in a requirement for
additional allowances in the near future.
Inventories are stated at the lower of cost or market. The inventory
valuation policy is based on a review of forecasted demand compared with
existing inventory levels. If the estimate of forecasted demand is significantly
less than the actual demand, the Company may have excess inventory which may be
over-valued.
Long-lived assets such as property, plant and equipment, are reviewed for
impairment when events and circumstances indicate that the carrying amount of an
asset may not be recoverable. When such events occur, the Company compares the
carrying amount of the assets to undiscounted expected future cash flows. Should
this comparison indicate that there is an impairment, the amount of the
impairment is calculated using discounted expected future cash flows. If the
estimate of an asset's future cash flows is significantly different from the
asset's actual cash flows, we may over- or under-estimate the value of an
asset's impairment. A long-lived asset's value is also dependent upon its
estimated useful life. A change in the useful life of a long-lived asset could
result in higher or lower depreciation and amortization expense. If the asset's
actual life is different than its estimated life, the asset could be over- or
under-valued.
Restructuring and related costs reserves are recorded in connection with the
restructuring initiatives as they are announced. These reserves include
estimates pertaining to employee severance costs, the settlement of contractual
obligations and other matters. Although management does not anticipate
significant changes, the actual costs may differ from these estimates, resulting
in further charges or reversals of previously recorded charges.
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 sufficiency and continued availability of the Company's lines
16
of credit and its 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; 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) the risk that the Company's lenders
will not continue to fund the Company in the future as they have in the past
when defaults have occurred; the inability of the Company to successfully
negotiate a restructuring of its subordinated debt and the exercise by its
lenders of various remedies available to them in the event of continued
defaults; the cancellation of the lines of credit available to the Company's
Mexico subsidiary; the inability to maintain and/or secure new sources of
capital; 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 and interest rate fluctuation risk, among others.
17
Item 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
As discussed elsewhere, 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 37% of the Company's fiscal 2001 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 exchange rates would impact reported operating profit by
approximately $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 December 31, 2001, approximately 46% of total short and
long-term debt is fixed, at rates between 8% and 13.5%. 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 2005, fixes the rate
of interest on $8 million of this debt at 8.98%. A change in the average
prevailing interest rates of the remaining debt of 1% would have an estimated
impact of $200,000 upon the Company's pre-tax results of operations and 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 interest rate factor.
18
PART II. OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
----------------------------------------
(a) Documents filed as part of this report:
--------------------------------------
1. Financial statements
--------------------
See index under Item 8. Financial Statements and Supplementary Data.
2. 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
19
(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
(21) Subsidiaries of the Company 9
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, 1998, file number 0-2615, 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 0-2615 filed in Washington, D.C.
8 Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended September 30, 2000, file number 0-2655 filed in Washington, D.C.
9 Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended September 30, 2001, file number 1-8689 filed in Washington, D.C.
(b) Reports on Form 8-K:
--------------------
None.
20
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIXON TICONDEROGA COMPANY
Dated: February 14, 2002
-------------------------------
By: /s/ Gino N. Pala
-------------------------------
Gino N. Pala
Chairman of Board and
Co-Chief Executive Officer
Dated: February 14, 2002
-------------------------------
By: /s/ Richard A. Asta
-------------------------------
Richard A. Asta
Executive Vice President of Finance
Chief Financial Officer
Dated: February 14, 2002
---------------------------------
By: /s/ John Adornetto
---------------------------------
John Adornetto
Vice President/Corporate Controller and
Chief Accounting Officer