SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-8689
DIXON TICONDEROGA COMPANY
Incorporated pursuant to the Laws of Delaware State
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Internal Revenue Service-- Employer Identification No. 23-0973760
195 International Parkway, Heathrow, FL 32746
(407) 829-9000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The total number of shares of the registrant's Common Stock, $1 par value,
outstanding on March 31, 2002, was 3,177,462.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Information
Consolidated Balance Sheets --
March 31, 2002 and September 30, 2001 3-4
Consolidated Statements of Operations -- For The
Three and Six Months Ended March 31, 2002 and 2001 5
Consolidated Statements of Comprehensive Income
(Loss) -- For The Three and Six Months Ended March
31, 2002 and 2001 6
Consolidated Statements of Cash Flows -- For The
Six Months Ended March 31, 2002 and 2001 7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 20-22
Signatures 23
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1.
-------
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31, 2002 September 30,
(Unaudited) 2001
--------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 603,674 $ 844,299
Receivables, less allowance for
doubtful accounts of $1,459,508 at
March 31, 2002 and $1,482,524 at
September 30, 2001 29,581,309 31,647,950
Inventories 35,613,512 35,583,082
Other current assets 2,314,749 2,227,785
--------------- --------------
Total current assets 68,113,244 70,303,116
--------------- --------------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 11,020,297 10,608,980
Machinery and equipment 17,519,554 17,155,371
Furniture and fixtures 1,726,228 1,741,811
--------------- --------------
30,266,079 29,506,162
Less accumulated depreciation (19,409,256) (19,022,674)
--------------- --------------
10,856,823 10,483,488
--------------- --------------
OTHER ASSETS 5,967,737 5,625,771
--------------- --------------
$84,937,804 $86,412,375
=============== ==============
3
March 31, 2002 September 30,
(Unaudited) 2001
--------------- --------------
CURRENT LIABILITIES:
Notes payable $ 8,900,398 $ 6,294,268
Current maturities of long-term debt 32,584,644 32,598,531
Accounts payable 8,549,210 9,321,957
Accrued liabilities 6,507,086 9,132,057
--------------- --------------
Total current liabilities 56,541,338 57,346,813
--------------- --------------
LONG-TERM DEBT 1,946,299 2,018,125
--------------- --------------
DEFERRED INCOME TAXES AND OTHER 581,831 984,492
--------------- --------------
MINORITY INTEREST 629,052 577,241
--------------- --------------
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 24,367,775 25,667,675
Accumulated comprehensive income (loss) (3,048,201) (4,101,681)
--------------- --------------
28,700,018 28,946,438
Less - treasury stock, at cost
(532,847 shares) (3,460,734) (3,460,734)
--------------- --------------
25,239,284 25,485,704
--------------- --------------
$ 84,937,804 $ 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 (UNAUDITED)
-------------------------------------------------
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2002 AND 2001
-----------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2002 2001 2002 2001
---- ---- ---- ----
REVENUES $18,418,306 $18,519,620 $36,320,456 $35,660,502
------------ ------------ ------------ ------------
COST AND EXPENSES:
Cost of goods sold 11,813,650 11,164,625 23,122,657 22,638,943
Selling and administrative expenses 6,409,765 6,399,717 13,176,478 12,856,411
Provision for restructuring and
related costs 150,951 322,435 325,801 322,435
------------ ------------ ------------ ------------
18,374,366 17,886,777 36,661,256 35,817,789
------------ ------------ ------------ ------------
OPERATING INCOME (LOSS) 43,940 632,843 (304,480) (157,287)
INTEREST EXPENSE 931,675 1,070,034 1,806,176 2,081,437
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAX BENEFIT AND
MINORITY INTEREST (887,735) (437,191) (2,110,656) (2,238,724)
INCOME TAX BENEFIT (247,053) (124,976) (700,967) (769,783)
MINORITY INTEREST 15,414 14,373 21,018 2,362
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (656,096) (326,588) (1,430,707) (1,471,303)
DISCONTINUED OPERATIONS, NET OF
INCOME TAXES 130,806 646,317 130,806 480,775
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (525,290) $ 319,729 $(1,299,901) $ (990,528)
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE
(BASIC):
Continuing operations $ (0.21) $ (0.10) $ (0.45) $ (0.46)
Discontinued operations 0.04 0.20 0.04 0.15
------------ ------------ ------------ ------------
Net income (loss) $ (0.17) $ 0.10 $ (0.41) $ (0.31)
============ ============ ============ ============
EARNINGS (LOSS) PER COMMON SHARE
(DILUTED):
Continuing operations $ (0.21) $ (0.10) $ (0.45) $ (0.46)
Discontinued operations 0.04 0.20 0.04 0.15
------------ ------------ ------------ ------------
Net income (loss) $ (0.17) $ 0.10 $ (0.41) $ (0.31)
============ ============ ============ ============
Shares Outstanding:
Basic 3,177,462 3,168,047 3,177,462 3,168,047
============ ============ ============ ============
Diluted 3,177,462 3,168,492 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 INCOME (LOSS) (UNAUDITED)
------------------------------------------------------------------
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2002 AND 2001
----------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ------------- ------------
NET INCOME (LOSS) $(525,290) $ 319,729 $(1,299,901) $ (990,528)
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 79,706 (119,233) 150,969 (276,948)
Foreign currency translation
adjustments 244,333 229,030 902,511 (351,313)
----------- ----------- ------------- ------------
COMPREHENSIVE INCOME (LOSS) $(201,251) $ 429,526 $ (246,421) $(1,672,994)
=========== =========== ============= ============
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 (UNAUDITED)
-------------------------------------------------
FOR THE SIX MONTHS ENDED MARCH 31, 2002 AND 2001
------------------------------------------------
2002 2001
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (1,430,707) $ (1,471,303)
Net income from discontinued operations 130,806 480,775
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,228,477 1,267,837
Provision for doubtful accounts receivable 109,935 43,801
Gain on sale of assets (208,290) (1,202,448)
Loss (gain) attributable to foreign currency exchange (3,595) 69,253
Income attributable to minority interest 21,018 2,362
Changes in assets and liabilities:
Receivables, net 2,542,287 1,149,469
Inventories 476,966 (2,710,990)
Other current assets (77,469) (527,113)
Accounts payable and accrued liabilities (3,641,961) (543,670)
Other assets (655,006) (327,638)
---------------- ---------------
Net cash used in operations (1,507,569) (3,769,665)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment, net (871,569) (1,508,385)
Proceeds on sale of assets 208,290 167,036
---------------- ---------------
Net cash used in investing activities (663,279) (1,341,349)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable 2,049,647 2,521,412
Net proceeds from (principal reductions of)
long-term debt (85,713) 2,426,615
Other non-current liabilities (16,194) 47,631
---------------- ---------------
Net cash provided by financing activities 1,947,740 4,995,658
---------------- ---------------
Effect of exchange rate changes on cash (17,517) (32,254)
---------------- ---------------
Net decrease in cash and cash equivalents (240,625) (147,610)
Cash and cash equivalents, beginning of period 844,299 448,452
---------------- ---------------
Cash and cash equivalents, end of period $ 603,674 $ 300,842
================ ===============
Supplemental Disclosures:
Cash paid during the period:
Interest $ 2,185,008 $ 2,175,812
Income taxes 789,104 1,452,010
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 March 31, 2002, and the
results of their operations and cash flows for the six months ended March
31, 2002 and 2001 have been included. The results of operations for such
interim periods are not necessarily indicative of the results for the
entire year. Certain fiscal 2001 balances have been reclassified to
conform to current year presentation.
2. INVENTORIES:
Since amounts for inventories under the LIFO method are based on annual
determinations of quantities and costs as of the end of the fiscal year,
the inventories at March 31, 2002 (for which the LIFO method of accounting
are used) are based on certain estimates relating to quantities and costs
as of year end.
Inventories consist of (in thousands):
March 31, September 30,
2002 2001
------------ -------------
Raw materials $14,469 $13,328
Work in process 3,069 3,572
Finished goods 18,076 18,683
------------ -------------
$35,614 $35,583
============ =============
3. EFFECT OF NEW ACCOUNTING PRONOUNCEMENT:
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.
8
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 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.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". The statement addresses the accounting for
extinguishment of debt, sale-leaseback transactions and certain lease
modifications. The statement is effective for transactions occurring after
May 15, 2002. The Company does not expect the adoption of Statement No.
145 to have a material impact on the Company's future results of
operations or financial position.
4. RESTRUCTURING AND RELATED COSTS:
In the first six months 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 all facilities. The restructuring and related costs
(severances and lease settlement expense) and utilization since September
30, 2001 are summarized below (in thousands):
Losses from the
Employee impairment, sale
severance or abandonment
and related of property and
costs equipment Total
---------- --------------- ---------
Reserve balances at September 30, 2001 $ 339 $ -- $ 339
Period ended March 31, 2002
restructuring and impairment
related charges 174 152 326
Payments in period ended March 31, 2002 (325) -- (325)
---------- --------------- ---------
Reserves balances at March 31, 2002 $ 188 $ 152 $ 340
========== =============== =========
During the quarter ending March 31, 2001, the Company incurred
approximately $322,000 in costs associated with the disposal of property
remaining from its prior phase of restructuring.
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 and six-month periods ended March 31, 2002 and 2001 (in thousands).
Three Months Six Months
------------------------ ------------------------
Operating Operating
Revenues Profit (Loss) Revenues Profit (Loss)
------------ ------------ ------------ ------------
2002:
United States $ 9,387 $(1,021) $ 20,405 $(1,677)
Canada 1,723 158 3,600 353
Mexico 7,076 858 11,833 949
United Kingdom 227 (3) 459 (9)
China 5 52 23 79
------------ ------------ ------------ ------------
$ 18,418 $ 44 $ 36,320 $ (305)
============ ============ ============ ============
2001:
United States $ 10,864 $ (405) $ 22,733 $ (849)
Canada 1,522 43 3,347 147
Mexico 5,890 1,068 9,117 711
United Kingdom 239 (13) 453 (29)
China 5 (60) 11 (137)
------------ ------------ ------------ ------------
$ 18,520 $ 633 $ 35,661 $ (157)
============ ============ ============ ============
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.
10
Net revenues and income (loss) from discontinued operations in the
accompanying financial statements are as follows (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
--------------------- ---------------------
2002 2001 2002 2001
--------- ---------- --------- ----------
Net revenues $ -- $2,153 $ -- $4,708
========= ========== ========= ==========
Income from discontinued
operations before income taxes $ 208 $ 972 $ 208 $ 723
Income taxes 77 325 77 242
--------- ---------- --------- ----------
Income from discontinued operations $ 131 $ 647 $ 131 $ 481
========= ========== ========= ==========
Earnings per share (basic) $ 0.04 $ 0.20 $ 0.04 $ 0.15
========= ========== ========= ==========
Earnings per share (diluted) $ 0.04 $ 0.20 $ 0.04 $ 0.15
========= ========== ========= ==========
Income from discontinued operations includes allocated interest expense of
$108 and $216 in the three-month and six-month periods ended March 31,
2001, respectively, based upon the identifiable assets of such operations.
The Company recorded pre-tax gains of $208 and $1,202 on the sale of idle
real estate in the three-month periods ended March 31, 2002 and 2001,
respectively. 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 three-month and six-month periods
ended March 31, 2002 were $100 and $365 (including $83 and $167 in
allocated interest expense, respectively). In addition, during the
six-month period ended March 31, 2002, 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):
March 31, September 30,
2002 2001
------------ --------------
Current assets $ 4,499 $ 4,619
Property, plant and equipment, net 429 473
Current liabilities (1,429) (1,448)
Long-term liabilities and other, net (788) (743)
------------ --------------
Net assets of discontinued operations $ 2,711 $ 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 prevented any payment to the subordinated noteholders
and the Company has continued to negotiate with its various lenders. The
Company has received additional extensions and waivers of default and its
subordinated lenders have agreed to extend its debt payments through May
31, 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 2003 to allow the Company time to
pursue a longer-term solution.
11
The Company has improved its cash management processes and 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 September 2003. Accordingly, the Company is
pursuing a new debt agreement with its present or new senior lenders and
has asked the subordinated noteholders 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. The subordinated
lenders have expressed a willingness to consider this proposal. 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 loan
arrangements, the report of the Company's independent accountants (with
respect to its fiscal 2001 financial statements) included an explanatory
paragraph as to substantial doubt about the Company's ability to continue
as a going concern.
The Company's Mexico subsidiary presently has approximately $14 million in
bank lines of credit ($4 million unused) expiring at various dates. The
Company is awaiting approval on $5 to $7 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 March 31, 2002 decreased $101,000 from the
same quarter last year. The changes are detailed below:
Increase % Increase (Decrease)
(Decrease) ------------------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
U.S. Consumer $ (1,477) (13) (11) (2)
Foreign Consumer 1,376 18 20 (2)
U.S. Consumer revenue decreased primarily due to lower demand in the
educational market as distributor consolidations led to delayed purchasing in an
effort to reduce their inventory levels. Foreign Consumer increased primarily
due to increased sales volume to existing customers in the Mexico and Canada
retail mass-market channels.
Revenues for the six months ended March 31, 2002 increased $660,000 from
the same quarter last year. The changes are as follows:
Increase % Increase (Decrease)
(Decrease) ------------------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
U.S. Consumer $ (2,328) (10) (8) (2)
Foreign Consumer 2,988 23 24 (1)
The U.S. Consumer revenue decrease was primarily in the educational market
as discussed above, partially offset by increased demand for new branded
products in the U.S. retail market channel. Foreign Consumer revenue increased
primarily in Mexico on increased demand in the mass retail market.
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 INCOME in the March 2002 quarter decreased $589,000 from the
same quarter last year. U.S. Consumer decreased $616,000 due to decreased
revenues and plant inefficiencies related to the scale-back in production in the
Company's U.S. plants in connection with its strict inventory reduction program.
Foreign Consumer operating income remained relatively flat (despite higher
revenues) due to lower Mexico margins from somewhat lower selling prices and mix
of business. These factors contributed to an increase in overall cost of goods
sold in the quarter (63.9% of revenues as compared to 60.3% of revenues in the
prior year quarter). Restructuring and related costs also increased $171,000
during the current year quarter due to additional severance costs and carrying
costs of an idled Mexico facility.
13
Operating loss for the six months ended March 31, 2002 increased $148,000
from the same period last year. U.S. Consumer operating results decreased
$828,000 due to the aforementioned decrease in revenues, as well as somewhat
higher marketing and selling costs associated with the retail mass market.
Foreign Consumer operating income increased $680,000 on higher Mexico and Canada
revenues as well as start-up costs incurred in the Beijing, China operation in
the prior year period.
INTEREST EXPENSE decreased $138,000 and $275,000 in the quarter and six
months ended March 31, 2002, respectively, primarily due to decreases in average
borrowing levels. In 2001, borrowings were higher, principally in order to
finance higher inventory levels.
INCOME TAX benefit increased $122,000 in the quarter ended March 31, 2002
when compared to the same quarter last year due to the increased before tax
loss. Conversely, the tax benefit decreased in the six months ended March 31,
2002 due to a lower before tax loss.
MINORITY INTEREST represents approximately 3% of the results of 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
(such as September 11th and the Mid-East crisis), softening economic conditions
appeared to have an effect in certain U.S. markets earlier in the fiscal year
and thus could lead to reduced overall annual revenues. In addition, certain
expenses (such as insurance and financing costs) have increased and could be
significantly higher in the coming years due to tightening in the various
financial markets in light of these events.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's cash flows used in operating activities decreased by $2.3
million in the period ended March 31, 2002. Cash flows from changes in inventory
improved and account receivable collections increased as the Company enhanced
its cash management processes. The improvements were partially offset by higher
cash flows used to extinguish certain Mexico trade liabilities.
The Company's fiscal 2002 investing activities included approximately
$872,000 in net purchases of property and equipment, compared to $1,508,000 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 in the loan documents. The
Company 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.
14
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 prevented any payment to the subordinated noteholders and
the Company has continued to negotiate with its various lenders. The Company has
received additional extensions and waivers of default and its subordinated
lenders have agreed to extend its debt payments through May 31, 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 2003 to allow time for the Company to pursue a longer-term solution. As
of March 31, 2002, the Company had approximately $13 million outstanding under
the revolving credit facility. In addition, the Company's Mexico subsidiary
currently has approximately $14 million in bank lines of credit ($4 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 $7 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 September 2003. The subordinated note
agreement provides for an 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 was not in compliance with as of
March 31, 2002.
The Company has improved its cash management processes and 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 September 2003. Accordingly,
the Company is pursuing a new debt agreement with its present or new senior
lenders and has asked the subordinated noteholders 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. The subordinated lenders have
expressed a willingness to consider this proposal. However, the Company cannot
assure that its efforts will be successful; that the subordinated noteholders
will amend their scheduled payments and/or that the Company 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 loans
have been classified as current maturities of long-term debt in the accompanying
consolidated balance sheets. Moreover, in light of the current circumstances
regarding the Company's various loan arrangements, the report of the Company's
independent accountants (with respect to its fiscal 2001 financial statements)
included an explanatory paragraph as to substantial doubt about the Company's
ability to continue as a going concern.
15
included 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.
Contractual cash obligations as of March 31, 2002 are summarized in the
table below. The senior and subordinated debt balances are reflected as an
obligation in the current fiscal year, due to the defaults described above.
Payments Due by Period (in thousands)
-----------------------------------------------------------
Contractual Cash Current Fiscal years Fiscal years
Obligations Total fiscal year 2003-2005 2006-2007 Thereafter
------------------- --------- ---------- ----------- ----------- ----------
Long Term Debt $43,431 $41,485 $ 620 $ 389 $ 937
Capital Lease
Obligations 63 47 16 -- --
Operating Leases 5,627 798 4,730 99 --
--------- ---------- ----------- ----------- ----------
$49,121 $42,330 $ 5,366 $ 488 $ 937
========= ========== =========== =========== ==========
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
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.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". The statement addresses the accounting for extinguishment of debt,
sale-leaseback transactions and certain lease modifications. The statement is
effective for transactions occurring after May 15, 2002. The Company does not
expect the adoption of Statement No. 145 to have a material impact on the
Company's future results of operations or financial position.
16
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
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; and the Company's ability to increase
sales in its core businesses. 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
17
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.
18
Item 3.
-------
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 March 31, 2002, approximately 43% 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
annual 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.
19
PART II. OTHER INFORMATION
--------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
----------------------------------------------------------------
(a) The Annual Meeting of Shareholders of Dixon Ticonderoga Company was
held on March 8, 2002
(b) The following members of the Board of Directors were elected to serve until
the 2004 Annual Meeting or until their successors are elected and qualified:
For Against Abstained
--------- --------- ---------
Richard A. Asta 2,718,709 42,207 0
Philip M. Shasteen 2,719,103 41,813 0
Harvey L. Massey 2,634,268 126,648 0
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
20
(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
(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.
21
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.
22
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIXON TICONDEROGA COMPANY
Dated: May 15, 2002
-------------------------------
By: /s/ Gino N. Pala
-------------------------------
Gino N. Pala
Chairman of Board and
Co-Chief Executive Officer
Dated: May 15, 2002
-------------------------------
By: /s/ Richard A. Asta
-------------------------------
Richard A. Asta
Executive Vice President of
Finance
Chief Financial Officer
Dated: May 15, 2002
---------------------------------
By: /s/ John Adornetto
---------------------------------
John Adornetto
Vice President / Corporate
Controller and
Chief Accounting Officer