SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 June 30, 2001, was 3,177,463.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Information
Consolidated Balance Sheets --
June 30, 2001 and September 30, 2000 3-4
Consolidated Statements of Operations -- For The
Three and Nine Months Ended June 30, 2001 and 2000 5
Consolidated Statements of Comprehensive Income
(Loss) -- For The Three and Nine Months Ended June 6
30, 2001 and 2000
Consolidated Statements of Cash Flows -- For The
Nine Months Ended June 30, 2001 and 2000 7
Notes to Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-17
Item 3. Quantitative and Qualitative Disclosures About Market 18
Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19-20
Signatures 21
PART I - FINANCIAL INFORMATION
Item 1.
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DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2001 September 30,
(Unaudited) 2000
-------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 429,865 $ 448,452
Receivables, less allowance for
doubtful accounts of $1,515,648 at
June 30, 2001 and $1,418,908 at
September 30, 2000 42,021,442 30,881,626
Inventories 38,270,820 36,215,931
Other current assets 2,616,520 4,171,064
-------------- --------------
Total current assets 83,338,647 71,717,073
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 9,999,378 10,145,872
Machinery and equipment 16,657,068 16,054,327
Furniture and fixtures 1,727,903 1,654,404
-------------- --------------
28,384,349 27,854,603
Less accumulated depreciation (17,823,513) (17,572,320)
-------------- --------------
10,560,836 10,282,283
-------------- --------------
OTHER ASSETS 6,628,596 4,718,379
-------------- --------------
$100,528,079 $ 86,717,735
============== ==============
June 30, 2001 September 30,
(Unaudited) 2000
-------------- --------------
CURRENT LIABILITIES:
Notes payable $ 10,567,952 $ 3,574,929
Current maturities of long-term debt 40,836,733 7,135,198
Accounts payable 9,848,273 8,068,133
Accrued liabilities 7,877,832 10,056,935
-------------- --------------
Total current liabilities 69,130,790 28,835,195
-------------- --------------
LONG-TERM DEBT 2,052,179 30,210,410
-------------- --------------
DEFERRED INCOME TAXES AND OTHER 873,937 177,248
-------------- --------------
MINORITY INTEREST 612,109 552,215
-------------- --------------
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 3,670,135 3,700,272
Retained earnings 26,573,431 26,147,547
Accumulated comprehensive income (loss) (2,634,077) (3,093,577)
-------------- --------------
31,319,798 30,464,551
Less - treasury stock, at cost (532,846
shares at June 30, 2001 and 542,262
shares at September 30, 2000) (3,460,734) (3,521,884)
-------------- --------------
27,859,064 26,942,667
-------------- --------------
$100,528,079 $ 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 NINE MONTHS ENDED JUNE, 2001 AND 2000
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
2001 2000 2001 2000
---- ---- ---- ----
REVENUES $31,409,776 $33,389,698 $72,086,777 $75,407,134
------------ ------------ ------------ ------------
COST AND EXPENSES:
Cost of goods sold 20,271,737 20,726,278 47,475,041 49,151,250
Selling and administrative expenses 7,174,163 9,174,811 20,745,911 23,513,754
Provision for restructuring
and related costs 440,553 -- 762,988 --
------------ ------------ ------------ ------------
27,886,453 29,901,089 68,983,940 72,665,004
------------ ------------ ------------ ------------
GAIN ON SALE OF ASSETS -- -- 1,202,448 --
------------ ------------ ------------ ------------
OPERATING INCOME 3,523,323 3,488,609 4,305,285 2,742,130
INTEREST EXPENSE 1,280,950 1,168,266 3,578,667 3,089,811
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME
TAXES (BENEFIT) AND MINORITY
INTEREST 2,242,373 2,320,343 726,618 (347,681)
INCOME TAXES (BENEFIT) 795,228 761,978 267,639 (171,035)
------------ ------------ ------------ ------------
1,447,145 1,558,365 458,979 (176,646)
MINORITY INTEREST 30,733 43,656 33,095 55,171
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 1,416,412 $ 1,514,709 $ 425,884 $ (231,817)
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE:
BASIC $ .45 $ .48 $ .13 $ (.07)
============ ============ ============ ============
DILUTED $ .45 $ .48 $ .13 $ (.07)
============ ============ ============ ============
SHARES OUTSTANDING:
BASIC 3,174,324 3,164,461 3,169,616 3,213,458
============ ============ ============ ============
DILUTED 3,178,999 3,164,461 3,171,120 3,213,458
============ ============ ============ ============
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 NINE MONTHS ENDED JUNE 30, 2001 AND 2000
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ------------- ------------
NET INCOME (LOSS) $ 1,416,412 $ 1,514,709 $ 425,884 $ (231,817)
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 43,863 -- (233,085) --
Foreign currency translation adjustments 1,098,103 (1,040,009) 746,790 (926,156)
----------- ----------- ------------- ------------
COMPREHENSIVE INCOME (LOSS) $ 2,558,378 $ 474,700 $ 885,384 $(1,157,973)
=========== =========== ============= ============
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 NINE MONTHS ENDED JUNE 30, 2001 AND 2000
2001 2000
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 425,884 $ (231,817)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,849,141 1,929,921
Deferred taxes 49,681 89,451
Provision for doubtful accounts receivable 154,048 205,811
Gain on sale of assets (1,202,448) --
(Gain) loss attributable to foreign currency
exchange (231,909) 210,251
Income attributable to minority interest 33,095 55,171
Changes in assets and liabilities:
Receivables (10,595,201) (11,342,051)
Inventories (1,507,486) 1,347,758
Other current assets (262,095) (198,813)
Accounts payable and accrued liabilities 591,220 1,379,791
Other assets (205,671) (567,191)
---------------- ---------------
Net cash used in operations (10,901,741) (7,121,718)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (2,639,342) (1,053,037)
Proceeds on sale of assets, net 1,034,028 --
---------------- ---------------
Net cash used in investing activities (1,605,314) (1,053,037)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable 6,517,076 4,209,351
Net proceeds from long-term debt 5,696,430 6,025,643
Exercise of stock options -- 168,844
Sales (purchases) of treasury stock 31,013 (1,979,936)
Other non-current liabilities (22,036) (31,803)
---------------- ---------------
Net cash provided by financing activities 12,222,483 8,392,099
---------------- ---------------
Effect of exchange rate changes on cash 265,985 (87,256)
---------------- ---------------
Net increase (decrease) in cash and cash
equivalents (18,587) 130,088
Cash and cash equivalents, beginning of period 448,452 935,413
---------------- ---------------
Cash and cash equivalents, end of period $ 429,865 $ 1,065,501
================ ===============
Supplemental Disclosures:
Cash paid during the period:
Interest $ 3,893,169 $ 2,488,238
Income taxes 1,872,223 1,149,155
During the nine months ended June 30, 2001, the Company accepted a note
receivable of $1,640,000 as partial consideration for the sale of certain
assets.
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 for the fair presentation of the financial
position of Dixon Ticonderoga Company and subsidiaries as of June 30,
2001, and the results of their operations and cash flows for the nine
months ended June 30, 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 June 30, 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):
June 30, September 30,
2001 2000
------------ -------------
Raw materials $ 13,480 $ 12,839
Work in process 4,953 3,656
Finished goods 19,838 19,721
------------ -------------
$ 38,271 $ 36,216
============ =============
3. EFFECT OF CERTAIN NEW ACCOUNTING PRONOUNCEMENTS:
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 June 30, 2001, the Company also recognized
an adjustment to the fair value of these cash flow hedges of $371,156 in
other liabilities. Other comprehensive loss was increased $233,085 (net of
tax benefit of $138,071) 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 $8 million 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.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141
Business Combinations and SFAS No. 142 Goodwill and Other Intangible
Assets. SFAS 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. SFAS No. 142 requires the use of a nonamortization approach to
account for purchased goodwill and certain intangibles. Under a
nonamortization approach, goodwill and certain 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 certain
intangibles is more than its fair value. The provisions of each statement
which apply to goodwill and intangible assets acquired prior to June 30,
2001 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.
4. CONTINGENCIES:
The Company, in the normal course of business, is a party in certain
litigation. In April 1996, the Superior Court of New Jersey in Hudson
County found 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 the fiscal 2000
financial statements as a reduction in selling and administrative expenses
($564,000 through June 30, 2000). In June 2001, the Company reached a
settlement in the malpractice suit for an additional $575,000 reflected as
a reduction in selling and administrative expenses.
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 was $1.1
million and this additional property was disposed of in 2001 without
material gain or loss.
The Phase 2 restructuring and impairment related charges and subsequent
utilization through June 30, 2001 are summarized below (in thousands):
Accrued Utilized Accrued
2000 Liability Fiscal 2001 Liability
Restructuring Utilized Balance at Through Balance at
and Related In Fiscal September 30, June 30, June 30,
Charges 2000 2000 2001 2001
------------ --------- --------- ----------- ---------
Employee severance
and related costs $ 967 $ (161) $ 806 $ (286) $ 520
Anticipated losses
from the sale or
abandonment of
property and
equipment 468 (156) 312 (215) 97
------------ --------- --------- ----------- ---------
$1,435 $ (317) $1,118 $ (501) $ 617
============ ========= ========= =========== =========
In addition, the Company incurred $64,000 and $386,000 in costs associated
with the disposal of property remaining from its prior phase of
restructuring in the quarter and nine months ended June 30, 2001,
respectively. Moreover, in the June 30, 2001 quarter, the Company incurred
$377,000 in Mexico for the consolidation of operations into a new
facility.
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 June 30, 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 June 30, 2001 and 2000, and for
the three months and nine months then ended (in thousands):
Consumer Industrial
Group Group Total
------------ ------------ ------------
Net revenues:
Three months ended:
June 30, 2001 $28,996 $2,414 $31,410
June 30, 2000 30,619 2,771 33,390
Nine months ended:
June 30, 2001 $64,965 $7,122 $72,087
June 30, 2000 66,364 9,043 75,407
Income before interest, taxes and minority interest:
Three months ended:
June 30, 2001 $3,655 $(116) $3,539
June 30, 2000 3,923 222 4,145
Nine months ended:
June 30, 2001 $5,104 $(589) $4,515
June 30, 2000 4,594 73 4,667
A reconciliation of income (loss) before interest, taxes and minority
interest to net income follows (in thousands):
Three Months Ended June 30, 2001
--------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
----------- ---------- ---------- ----------
Income (loss) before
interest, taxes and
minority interest $3,655 $ (116) $ (16) $3,523
Interest expense (1,001) (108) (172) (1,281)
Income tax benefit
(expense) (909) 62 52 (795)
Minority interest (31) -- -- (31)
----------- ---------- ---------- ----------
Net income (loss) $1,714 $ (162) $ (136) $1,416
=========== ========== ========== ==========
Nine Months Ended June 30, 2001
--------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
----------- ---------- ---------- ----------
Income (loss) before
interest, taxes and
minority interest $5,104 $ (589) $ (210) $4,305
Interest expense (2,690) (326) (562) (3,578)
Income tax benefit
(expense) (848) 314 266 (268)
Minority interest (33) -- -- (33)
----------- ---------- ---------- ----------
Net income (loss) $1,533 $ (601) $ (506) $ 426
=========== ========== ========== ==========
Three Months Ended June 30, 2000
--------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
----------- ---------- ---------- ----------
Income (loss) before
interest, taxes and
minority interest $3,734 $ 222 $ (467) $3,489
Interest expense (879) (97) (192) (1,168)
Income tax benefit
(expense) (939) (68) 245 (762)
Minority interest (44) -- -- (44)
----------- ---------- ---------- ----------
Net income (loss) $1,872 $ 57 $ (414) $1,515
=========== ========== ========== ==========
Nine Months Ended June 30, 2000
--------------------------------------------
Consumer Industrial Total
Group Group Corporate Company
----------- ---------- ---------- ----------
Income (loss) before
interest, taxes and
minority interest $4,252 $ 73 $(1,583) $2,742
Interest expense (2,273) (275) (542) (3,090)
Income tax benefit
(expense) (626) 6 791 171
Minority interest (55) -- -- (55)
----------- ---------- ---------- ----------
Net income (loss) $1,298 $ (196) $(1,334) $ (232)
=========== ========== ========== ==========
Consumer Group income (loss) before interest, taxes and minority interest
includes restructuring costs of $377 in the June 30, 2001 periods.
Corporate income (loss) before interest, taxes and minority interest
includes a pre-tax gain on sale of assets of $1,202 in the nine months
ended June 30, 2001 and restructuring costs of $64 and $386 in the quarter
and nine months ended June 30, 2001, respectively. 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 tax rates effective during the periods. Certain corporate
expense allocations in the June 2000 periods have been reclassified to
conform to the current period's presentation.
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 assumed
certain related obligations 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.
In May 2001, the Company also sold an idle building in Deer Lake,
Pennsylvania for approximately $1.8 million (net of closing costs)
including a note receivable in the amount of $1.64 million. The note bears
interest at 10% and is due in May 2006. The transaction resulted in no net
gain or loss.
In addition, in June 2001, the Company finalized a sale of an idle
building in Mexico for approximately $1.1 million in cash resulting in no
material gain or loss.
9. LONG-TERM DEBT:
In May 2001, the Company's loan and security agreement with its primary
lenders was amended to revise the leverage 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. As of June 30, 2001, the Company
was not in compliance with the amended leverage ratio requirement and in
August 2001, this financial covenant was waived through September 15, 2001
by the lenders. The Company is presently in compliance with all other
provisions of the loan agreement, as amended. However, the Company cannot
assure that it will be in compliance with the aforementioned financial
covenant after September 15, 2001, or that it will continue to receive
waivers or amendments of this or any other covenants and, accordingly, has
classified the debt with its primary lenders as current maturities of
long-term debt in the accompanying consolidated balance sheet as of June
30, 2001.
In addition, should the Company not obtain a waiver beyond September 15,
2001, its primary lenders may prohibit the payment of $5.5 million in
principal due to subordinated noteholders on September 27, 2001. If the
Company is precluded by its primary lenders from making this payment, the
Company would become in default under the subordinated note agreement. The
Company cannot assure that it will be in compliance with the financial
covenants of its subordinated note agreement or that it will not be
prohibited from making the September payment and, accordingly, has
classified its subordinated notes as current maturities of long-term debt
in the accompanying consolidated balance sheet as of June 30, 2001.
Item 2.
-------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
REVENUES for the quarter ended June 30, 2001, decreased $1,980,000 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 $ (863) (5) (4) (1)
Foreign Consumer (760) (6) (16) 10
Industrial (357) (12) (14) 2
U.S. Consumer decreased principally in the mass market channels where
competitive pressures from large suppliers are the greatest. These volume
decreases were partially offset by increases in the traditional educational
market. Foreign Consumer revenue decreased in Mexico and Canada, primarily due
to lower demand from large retail customers. These volume decreases were,
however, partially offset by Mexico price increases during the quarter.
Industrial revenue decreased due to continued weakness in the manufacturing
industries served by the Refractories division. Revenues for the nine months
ended June 30, 2001, decreased $3,320,000 from the same period last year. The
changes by segment are as follows:
Increase % Increase (Decrease)
(Decrease) --------------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
U.S. Consumer $ (921) (3) (3) -
Foreign Consumer (478) (2) (11) 9
Industrial (1,921) (21) (22) 1
The decrease in revenues is due to many of the same factors discussed
above. U.S. Consumer principally decreased in the mass and commercial markets,
partially offset by strong increases in the educational market. Foreign Consumer
revenue principally decreased in the Canada retail market. Industrial Revenue
decreased due to ongoing weak demand in the industries that utilize refractory
products.
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 $35,000 over the same quarter last year, after
reflecting a decrease from $441,000 in charges for restructuring, primarily in
Mexico for the consolidation of its operations. The effect of the aforementioned
revenue decreases as well as lower U.S. gross profit margins were more than
offset by increased manufacturing efficiencies and lower selling, distribution
and corporate costs. Lower gross margins on certain U.S. mass market business
and low profit margins in the Refractories division contributed to higher cost
of sales during the June 2001 quarter (64.5% of sales as compared to 62.0% in
the prior year quarter). However, lower selling, distribution and corporate
administrative expenses (salaries, fringes, legal and professional fees)
contributed to significantly lower total selling and administrative expenses
during the June 2001 quarter (22.8% of sales as compared to 27.5% in the prior
year quarter).
Operating income for the nine months ended June 30, 2001 increased
$1,563,000 over the prior period including a net gain on sale of assets of
$1,202,000 and after deducting restructuring costs of $763,000. U.S. Consumer
increased $1,510,000 primarily due to lower costs from consolidation and cost
reduction efforts, as well as lower sales and distribution expenses. Foreign
Consumer decreased $281,000, primarily due to start-up costs associated with the
Mexico consolidation and lower Canada operating profits. Industrial decreased
$662,000 on the aforementioned lower revenue and profit margins and
significantly higher energy costs. Net corporate and other administrative costs
decreased $557,000 principally reflecting cost reduction efforts resulting in
lower salaries, fringes and other costs.
INTEREST EXPENSE increased $113,000 and $489,000 in the quarter and nine
months ended June 30, 2001, respectively, primarily due to higher borrowings in
Mexico to finance the consolidation of manufacturing facilities.
INCOME TAX increased $33,000 and $439,000 from the same quarter and nine
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 nine
months of fiscal 2001 were approximately $10.9 million. Seasonal accounts
receivable increases represent $10.6 million of the cash flows used in
operations ($11.3 million in the prior year period). Revolving credit facilities
described below are utilized to finance these peak mid-year receivable levels.
Additionally, a decrease in cash flows of $1.5 million is principally
attributable to inventories which increased due to the manufacturing
consolidation efforts and as the Company prepares for the transfer of additional
manufacturing processes to Mexico. In the prior year period, cash flows related
to inventories increased $1.3 million due to the strict 2000 inventory reduction
efforts.
The Company's cash flows used in investing activities included
approximately $1.6 million in net effects from the purchase and sale of property
and equipment in the current period, compared to $1.1 million in the prior year.
This 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
new leased 300,000 square-foot facility, partially offset by approximately $1
million in net proceeds on the sale of an idled Mexico plant and other assets.
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 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.)
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. In May 2001, the agreement was amended to
revise the leverage 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. As of June 30, 2001, the Company was not in compliance with the amended
leverage ratio requirement and in August 2001, this financial covenant was
waived through September 15, 2001 by the lenders. The Company is presently in
compliance with all other provisions, as amended. However, the Company cannot
assure that it will be in compliance with the aforementioned financial covenant
after September 15, 2001 or that it will continue to receive waivers or
amendments of this or any other covenants, and accordingly, has classified the
debt under its primary financing arrangements as current maturities of long-term
debt in the accompanying consolidated balance sheet as of June 30, 2001. As of
June 30, 2001, 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 $16 million in lines of credit with four banks expiring in
varying amounts from September 2001 through May 2002 ($5 million unused as of
June 30, 2001). This debt bears interest at a rate based upon either a floating
U.S. bank rate or the rate of certain Mexican government securities. Management
expects to have sufficient liquidity and available lines of credit to make the
payment of $5.5 million in principal due to subordinated noteholders on
September 27, 2001 (see below). However, should the Company not obtain a waiver
beyond September 15, 2001, the primary lenders may prohibit the September
subordinated notes payment.
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. However, the Company cannot assure that it will be in compliance with
the interest coverage ratio or other requirements of its note agreement in all
future quarters and cannot assure that it will receive waivers or amendments of
any such provisions should that occur. If the Company is precluded by its
primary lenders from making the September 27, 2001 payment due to the
subordinated noteholders, the Company would become in default under the note
agreement. However, the Company's primary lenders have the right under certain
provisions of the relevant debt agreements to preclude the subordinated
noteholders from exercising certain of their remedies for a period of
approximately six months. During that time (should all these events occur), the
Company expects that it would negotiate with its subordinated noteholders to
amend the note agreement to the satisfaction of its primary lenders. However,
management cannot assure that the negotiations will be successful. Accordingly,
the Company has classified its subordinated notes as current maturities of
long-term debt in the accompanying consolidated balance sheet as of June 30,
2001.
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 June 30, 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, including its expectation as to having
sufficient liquidity to make the scheduled September 27, 2001 subordinated notes
payment or to be able to negotiate amendments to the note agreement; 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 and uncertainties include (but are not
limited to) the risk that the Company will not be able to successfully negotiate
amendments to its note agreement; the risk that the Company's primary lenders
will not extend their waiver beyond September 15,2001 and continue to fund the
Company in the future as they have done in the past when covenant defaults
existed; 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 year-to-date 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 would impact annual reported operating profit by
$500,000. This quantitative measure has inherent limitations because it does not
take into account the changes in customer purchasing patterns or any adjustment
to the Company's financing or operating strategies in response to such a change
in rates. Moreover, this measure does not take into account the possibility that
these currency rates can move in opposite directions, such that gains from one
may offset losses from another.
In addition, the Company's cash flows and earnings are subject to changes
in interest rates. As of June 30, 2001, approximately 47% of total 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%. It is estimated that
a change in the average prevailing interest rates of the remaining debt of 1%
would impact annual 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 variable
interest rate factor.
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
(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: August 14, 2001
-------------------------------
By: /s/ Gino N. Pala
-------------------------------
Gino N. Pala
Chairman of Board and
Co-Chief Executive Officer
Dated: August 14, 2001
-------------------------------
By: /s/ Richard A. Asta
-------------------------------
Richard A. Asta
Executive Vice President of Finance
Chief Financial Officer
Dated: August 14, 2001
---------------------------------
By: /s/ John Adornetto
---------------------------------
John Adornetto
Vice President/Corporate Controller and
Chief Accounting Officer