SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 ( d )
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2003 Commission file number 1-8689
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DIXON TICONDEROGA COMPANY
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(Exact name of Company as specified in its charter)
Form 10-K
---------
X Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
--- Act of 1934 (Fee Required) for the fiscal year ended September 30, 2003.
Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transaction period
--- from _____ to _____.
Delaware 23-0973760
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
195 International Parkway, Heathrow, FL 32746
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (407) 829-9000
--------------
Title of each class Name of each exchange on which registered
Common Stock, $1.00 par value American Stock Exchange
----------------------------- -----------------------
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 company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Based on the closing sales price on December 9, 2003, the aggregate market value
of the voting stock held by non-affiliates of the Company was $7,760,188.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of December 9, 2003: 3,202,149 shares of common stock, $1.00
Par Value.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this Form
10-K. [ ]
Documents Incorporated by Reference:
Proxy statement to security holders incorporated into Part III for the fiscal
year ended September 30, 2003.
PART I
------
ITEM 1. BUSINESS
--------
RECENT EVENTS AND BUSINESS STRATEGIES
-------------------------------------
Dixon Ticonderoga Company (hereinafter the "Company") achieved
significantly improved operating results in fiscal 2003 as a result of its
strategic initiatives over the past several years aimed at improving
profitability through the rationalization of manufacturing operations and other
cost reduction efforts. The Company's operating income increased approximately
$1.8 million in the current fiscal year.
The Company has continued its emphasis on debt reduction following the
successful restructuring of its senior and subordinated debt arrangements in
early fiscal 2003. Total long-term debt and notes payable have been reduced by
approximately $9 million or 21% since the end of fiscal 2001.
The final phase of the Company's aggressive manufacturing consolidation
initiative was also completed in fiscal 2003, resulting in the shutdown of its
Sandusky, Ohio manufacturing facility. As a further cost reduction strategy, in
fiscal 2003 the Company entered into a distribution arrangement with a third
party logistics partner located in Statesville, North Carolina.
In addition, the Company's China subsidiary, Beijing Dixon Ticonderoga
Stationery Company, Ltd., continued its expansion in 2003. The subsidiary not
only increased further its production of wood slats used by the U.S. and Mexico
in pencil manufacturing, but also began to produce colored and graphite pencils
for export sale. This entity also acts as a sourcing arm, providing certain new
and innovative products for international sale, while assisting in securing
other critical raw materials used in production in the U.S. and Mexico.
Effective July 2003, the Company completed the sale of its last Industrial
Group business, its New Castle Refractories division, to local management. The
Company received proceeds of approximately $3 million, used to reduce senior
debt, and a note receivable in the amount of $500,000. (See Note 13 to
Consolidated Financial Statements.)
Further information regarding these matters is included elsewhere in this
Annual Report on Form 10-K.
COMPANY ORGANIZATION
--------------------
Dixon Ticonderoga Company
(Parent)
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| | | | |
| | | | |
| | | | |
Dixon Dixon Dixon Industrial Beijing Dixon Ticonderoga
Ticonderoga, Europe, Ltd. Mexico, S.A. de C.V. Ticonderoga Graphite,
Inc. Canada (Wholly-Owned) /Inactive(Wholly-Owned) Stationery Inc./Inactive
(Wholly-Owned) Company, Ltd. (Wholly-Owned)
(Wholly-Owned)
|
|
Grupo Dixon,
S.A. de C.V.
and subsidiaries
(97% Owned)
INDUSTRY SEGMENTS
-----------------
The Company has one principal continuing business segment: its Consumer
Group. This segment's primary operations are the manufacture and sale of writing
and drawing pencils, pens, artist materials, felt tip markers, industrial
markers, lumber crayons, correction materials and allied products.
Certain financial information regarding net revenues, operating profits and
identifiable assets for the years ended September 30, 2003, 2002 and 2001, is
contained in Note 12 to Consolidated Financial Statements.
CONSUMER GROUP
--------------
The Company manufactures its leading brand Ticonderoga(R) and a full line
of pencils in Versailles, Missouri. The Company manufactures and markets
advertising specialty pencils, pens and markers through its promotional products
division. The Company also manufactures and markets Wearever(R) and Dixon(R) pen
writing products as well as Prang(R) and Ticonderoga(R) lines of markers,
mechanical pencils and allied products.
Through fiscal 2002, the Company manufactured some or all of its Prang(R)
brand of soy-bean based and wax crayons, chalks, dry and liquid tempera, water
colors and art materials, in Sandusky, Ohio. Commencing in fiscal 2003, these
products are manufactured by the Company's majority-owned (97%) subsidiary,
Grupo Dixon, S.A. de C.V. (Grupo Dixon).
Under a licensing agreement with NASCAR(R), The Company markets pencils and
pens with the NASCAR brand and features certain top NASCAR(R) drivers. Also,
under an agreement with Warner Bros. Consumer Products, the Company also markets
in Canada a line of pencils, pens and related products featuring the famous
Looney Tunes(R) and Scooby Doo(R) characters.
Dixon Ticonderoga Inc., a wholly-owned subsidiary with a distribution
center in Newmarket, Ontario, and a manufacturing plant in Acton Vale, Quebec,
Canada, is engaged in the sale in Canada of black and color writing and drawing
pencils, pens, lumber crayons, correction materials, erasers, rubber bands and
allied products. It also distributes certain of the school product lines. The
Acton Vale plant also produces eraser products and correction materials for
distribution by the U.S. Consumer group.
Grupo Dixon is engaged, through its subsidiaries, in the manufacture and
sale in Mexico of black and color writing and drawing pencils, correction
materials, lumber crayons and allied products. Grupo Dixon also manufactures and
sells in Mexico, under its Vinci(R) brand, certain products of the type
previously manufactured at the Sandusky facility, as well as marker products and
modeling clay. Grupo Dixon also manufactures special markers for industrial use,
all of which are marketed and sold together with the Prang(R) products discussed
above, by the U.S. Consumer division.
Dixon Europe, Limited, a wholly-owned subsidiary of the Company, is engaged
in the distribution of many Dixon consumer products in the United Kingdom and
other European countries.
Beijing Dixon Ticonderoga Stationery Company, Ltd., a wholly-owned
subsidiary of the Company, is principally engaged in the manufacture of wood
slats for pencil manufacturing and the sourcing and distribution of certain
consumer products for international sale by the Company. In addition, the
subsidiary has recently begun to manufacture colored and graphite pencils for
export sale.
The Company's international operations are subject to certain risks
inherent in carrying on business abroad, including the risk of currency
fluctuations, currency remittance restrictions and unfavorable political
conditions. It is the Company's opinion that there are presently no material
political risks involved in doing business in the foreign countries (i.e.
Mexico, Canada, Europe and China) in which its operations are being conducted.
INDUSTRIAL GROUP (DISCONTINUED OPERATIONS)
------------------------------------------
Effective July 2003, the Company completed its sale of the New Castle
Refractories division, the last business of its Industrial Group. This division,
with plants located in Ohio, Pennsylvania and West Virginia, had manufactured
various types of non-graphitic refractory kiln furniture used by the ceramic and
glass industries; firebrick, silicon-carbide brick, various types and designs of
non-graphitic refractory special shapes for ferrous and nonferrous metal
industries; refractory shapes for furnace linings and industrial furnace
construction; various grades of insulating firebrick and graphite stopper heads.
(See Note 13 to Consolidated Financial Statements.)
DISTRIBUTION
------------
Consumer products manufactured and/or marketed in the U.S. are distributed
nationally through wholesale, commercial and retail stationers, school supply
houses, industrial supply houses, blueprint and reproduction supply firms, art
material distributors and retailers. In an effort to enhance service levels
(especially with large retail customers), the Company entered into a strategic
distribution arrangement with a third-party located in Statesville, North
Carolina early in fiscal 2003. The consumer products manufactured and/or
marketed by the Canada, Mexico and Europe subsidiaries are distributed
nationally in these countries from leased facilities and sold through
wholesalers, distributors, school supply houses and retailers.
RAW MATERIALS
-------------
Wood slats for pencil manufacturing can be considered a strategic raw
material for the Company's business and are purchased from various suppliers in
the U.S., Indonesia and China (including the Company's wholly-owned China
subsidiary). There were no significant raw material shortages of any consequence
during 2003 nor are any expected in the near future.
TRADEMARKS, PATENTS AND COPYRIGHTS
----------------------------------
The Company owns a large number of trademarks, patents and copyrights
related to products manufactured and marketed by it, which have been secured
over many years. These have been of value in the growth of the business and
should continue to be of value in the future. However, in the opinion of the
Company, its business generally is not dependent upon or at risk with respect to
the protection of any patent or patent application or the expiration of any
patent.
SEASONAL ASPECTS OF THE BUSINESS
--------------------------------
Greater portions (approximately 61% in 2003) of the Company's sales occur
in the third and fourth fiscal quarters of the year due to shipments of
back-to-school orders to its distribution network. This practice as well as
certain extended customer payment terms, which are standard for this industry,
requires the Company to increase its bank borrowings during the period between
shipment and payment.
COMPETITION
-----------
The Company is engaged in a highly competitive business with a number of
competitors, some of whom are larger and have greater resources than the
Company. Important to the Company's market position are the quality and
performance of its products, its marketing, customer service and distribution
systems and the reputation developed over the many years that the Company has
been in business.
RESEARCH AND DEVELOPMENT
------------------------
The Company employs approximately 32 full-time professional employees in
the area of quality control and product development. For accounting purposes,
research and development expenses in any year presented in the accompanying
Consolidated Financial Statements represent less than 1% of revenues.
EMPLOYEES
---------
The total number of persons employed by the Company was approximately 1,596
of which 294 were employed in the United States. The Company does not unlawfully
discriminate on the basis of race, color, creed, pregnancy, religion, sex,
national origin, age, disability, veteran status, marital status or other
characteristics protected by law.
ITEM 2. PROPERTIES
----------
The properties of the Company, set forth in the following table are owned
and are collateralized under the Company's senior and subordinated debt
agreements. The Heathrow, Florida, property, is also subject to a separate
mortgage agreement. (See Note 4 to Consolidated Financial Statements.) Most of
the buildings are of steel frame and masonry or concrete construction.
SQUARE FEET
LOCATION OF FLOOR SPACE
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Heathrow, Florida (Corporate Headquarters) 33,000
Versailles, Missouri 120,000
Sandusky, Ohio (Idle) 276,000
Acton Vale, Quebec, Canada (Dixon Ticonderoga Inc.) 32,000
Beijing, China (Beijing Dixon Ticonderoga Stationery Company, Ltd.) 25,000
The Company's Mexico subsidiary leases a 300,000 square-foot facility near
Mexico City, used for distribution and certain manufacturing operations, as well
as its corporate headquarters. The Company's Canada subsidiary leases 12,000
square feet in Newmarket, Ontario and its Europe subsidiary leases 3,000 square
feet in Peterborough, England for distribution and office space.
ITEM 3. LEGAL PROCEEDINGS
-----------------
The Company believes that there are no pending actions which will have a
material adverse effect on the Company's financial condition or results of
operations. (Also see Note 14 to Consolidated Financial Statements.)
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
-------------------------------------------------
None.
PART II
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ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND
-----------------------------------------
RELATED SECURITY HOLDER MATTERS
-------------------------------
Dixon Ticonderoga Company common stock is traded on the American Stock
Exchange under the symbol "DXT". The following table sets forth the low and high
per share prices as per the American Stock Exchange closing prices for the
applicable quarter.
FISCAL FISCAL
QUARTER ENDING 2003 2002
-------------- ---- ----
LOW HIGH LOW HIGH
--- ---- --- ----
December 31 $1.15 $1.95 $1.10 $2.50
March 31 1.35 1.95 1.62 1.75
June 30 1.62 3.50 1.45 2.00
September 30 2.84 4.05 1.10 1.63
The Board of Directors has indefinitely suspended the payment of dividends
which is also restricted under the Company's new debt agreements. (See Note 4 to
Consolidated Financial Statements.)
The number of record holders of the Company's common stock at December 5,
2003 was 412.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
FOR THE FIVE YEARS ENDED SEPTEMBER 30, 2003
(in thousands, except per share amounts)
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
REVENUES $ 88,838 $ 88,591 $ 88,319 $ 88,867 $ 95,041
========== ========== ========== ========== ==========
INCOME (LOSS) FROM
CONTINUING OPERATIONS $ (849) $ (683) $ 620 $ (733) $ 399
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS (579) 123 (1,100) (65) 6,283
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (1,428) $ (560) $ (480) $ (798) $ 6,682
========== ========== ========== ========== ==========
EARNINGS (LOSS) PER
COMMON SHARE (BASIC):
CONTINUING OPERATIONS $ (.27) $ (.22) $ .20 $ (.23) $ .12
DISCONTINUED OPERATIONS (.18) .04 (.35) (.02) 1.83
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (.45) $ (.18) $ (.15) $ (.25) $ 1.95
========== ========== ========== ========== ==========
EARNINGS (LOSS) PER
COMMON SHARE (DILUTED):
CONTINUING OPERATIONS $ (.27) $ (.22) $ .20 $ (.23) $ .12
DISCONTINUED OPERATIONS (.18) .04 (.35) (.02) 1.83
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (.45) $ (.18) $ (.15) $ (.25) $ 1.95
========== ========== ========== ========== ==========
TOTAL ASSETS $ 72,034 $ 79,409 $ 86,091 $ 86,718 $ 92,888
========== ========== ========== ========== ==========
LONG-TERM DEBT $ 12,511 $ 16,383 3 $ 2,018 2 $ 30,210 $ 39,400 1
========== ========== ========== ========== ==========
DIVIDENDS PER
COMMON SHARE $ - $ - $ - $ - $ -
========== ========== ========== ========== ==========
1The increase in long-term debt in 1999 is attributable to the refinancing of
the Company's previous revolving credit agreement under a five-year facility.
2The reduction in long-term debt is due to reclassification of the Company's
senior credit facility and subordinated notes to current maturities of long-term
debt while in default.
3The increase in long-term debt in 2002 is attributable to the October 2002
restructuring of the Company's subordinated notes, previously classified as
current maturities of long-term debt in 2001. (See Note 4 to Consolidated
Financial Statements.)
ITEM 7. MANAGEMENT ' S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
---------------------
SUMMARY OF RESULTS OF OPERATIONS
------------------------------------
Discontinued operations:
------------------------
Effective July 2003, the Company completed its sale of the New Castle
Refractories division, the last business of its Industrial group. The Industrial
Group had revenues of $8,021,000, $9,169,000 and $9,529,000 in 2003, 2002 and
2001, respectively. Income (loss) from discontinued operations (before
provisions in 2001 for loss on disposal, described below) was ($578,000),
$123,000 and ($56,000) in 2003, 2002 and 2001, respectively (including pre-tax
gains on sales of assets of $208,000 and $1,202,000 in 2002 and 2001, and income
tax benefit (expense) of ($77,000) and $29,000 in 2002 and 2001, respectively).
Interest expense of $270,000, $342,000 and $427,000 has been allocated to
discontinued operations in 2003, 2002 and 2001, respectively.
In fiscal 2001, the Company also recorded an anticipated loss on disposal
of $1,570,000 (or $1,044,000 after tax benefit) including provisions for a loss
on the sale of the New Castle Refractories division of $468,000, for the
termination of that division's pension plans of $432,000 and for operating
losses of $670,000. For financial reporting purposes, the Company is accounting
for the disposition of its Industrial Segment as a discontinued operation and,
accordingly, its statements of operations present the results of the
discontinued Industrial Segment separately from the results of continuing
operations. Since a discussion of the results of the Industrial Segment is not
meaningful to an understanding of the continuing Consumer business, all
discussions comparing the results of operations refer to the continuing
operations of the U.S. and Foreign divisions of the Consumer Group. (For further
information regarding discontinued operations, see Note 13 to Consolidated
Financial Statements.)
Continuing operations:
----------------------
2003 vs 2002:
-------------
Income from continuing operations before taxes and minority interest
improved by $3,128,000 in 2003. Special items, including the effects of
restructuring and related costs; debt refinancing costs; investment banking and
related costs; and other income, net are set forth in the table below (in
thousands):
2003 2002
------------ -----------
Income (loss) from continuing operations before
income taxes and minority interest $ 1,937 $ (1,191)
Restructuring and related costs 487 1,573
Debt refinancing costs 625 -
Investment banking and related costs 483 -
Other income, net (1,052) (253)
------------ -----------
$ 2,480 $ 129
============ ===========
Restructuring costs decreased $1,086,000 in 2003 as the Company entered the
final completion stage of its plant consolidation initiative. Debt refinancing
costs consists of the write-off of costs from the former debt arrangements in
connection with the Company's October 2002 debt restructuring. Investment
banking and related costs were incurred in connection with unconsummated mergers
and acquisition activity pursued through the Company's investment bankers. For
further information regarding special items, see Notes 8, 9 and 10 to
Consolidated Financial Statements.
U.S. Consumer accounted for the majority of this net improvement, as the
Company's manufacturing consolidation efforts led to significantly improved
gross margins. Higher revenues and a decrease of approximately $400,000 in
interest costs also contributed to the U.S. improvement. Foreign Consumer
operating income also improved in all geographic areas due principally to higher
gross margins from lower pencil raw materials costs and improved manufacturing
overhead efficiencies.
2002 vs. 2001:
--------------
Income before taxes, minority interest and discontinued operations
decreased $2,159,000. Restructuring costs increased $705,000 as the Company
announced its final phase of plant consolidations. (See Note 10 to Consolidated
Financial Statements.) Administrative costs in the U.S. increased primarily due
to higher bank financing costs and the prior year administrative expenses
reflecting a $575,000 reduction for settlement of a lawsuit. Higher
administrative expenses were partially offset by lower interest costs as
interest expense decreased $300,000 in 2002.
REVENUES
--------
Revenues in 2003 increased $247,000 over the prior year. The changes are as
follows:
Decrease % Increase (Decrease)
(in thousands) Total Volume Price / Mix
-------------- ----------------------------
U.S. $ 1,401 3 5 (2)
Foreign (1,154) (3) (7) 4
U.S. Revenue increased primarily in the educational market. Foreign revenue
decreases were primarily in Mexico where an approximate 10% reduction in the
value of the peso resulted in a decline of approximately $2.7 million. This
decrease was partially offset by Mexico price increases, an increase in the
value of the Canadian dollar and higher volume in Europe.
Overall 2002 revenues increased $271,000 from the prior year. The changes
are as follows:
Increase (Decrease) % Increase (Decrease)
(in thousands) Total Volume Price / Mix
-------------- ----------------------------
U.S. $ (3,153) (6) (3) (3)
Foreign 3,424 10 13 (3)
U.S. Revenue decreased in the educational and promotional products markets
primarily due to customer consolidations and their related inventory reduction
efforts. Revenue increased in the retail channel, principally in the office
supply superstores, partially offsetting reductions in other channels. Foreign
revenue increased primarily in Mexico due to higher volume with existing mass
market customers and additional government business.
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 of 1998. In the short term after such devaluations, 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 to the U.S. denominated in U.S. dollars.
OPERATING INCOME
-----------------
In 2003, operating income increased $1,826,000 as compared to the prior
year. Special items, including restructuring and related costs; debt refinancing
costs; and investment banking and related costs are as set forth in the table
below (in thousands):
2003 2002
---------------- ----------------
Operating income $ 4,470 $ 2,644
Restructuring and related costs 487 1,573
Debt refinancing costs 625 -
Investment banking and related costs 483 -
---------------- ----------------
$ 6,065 $ 4,217
================ ================
For further information regarding the aforementioned special items, see
Notes 8 and 10 to Consolidated Financial Statements.
U.S. operating income improved approximately $1.1 million principally due
to the aforementioned manufacturing cost savings from plant consolidation
efforts and higher revenue resulting in gross margin increases of approximately
$800,000. In addition, selling and administrative expenses decreased overall,
despite significantly higher legal, tax and audit professional fees. The
reduction was principally due to lower sales and marketing salaries and related
expenses, reflecting recent cost reduction activities. Foreign operating profit
increased $700,000 as savings from consolidation efforts in Mexico and lower raw
material costs and increased production resulted in higher profits in China. All
of the aforementioned manufacturing efficiencies and costs savings contributed
to a decrease in overall consolidated cost of sales (61.9% of revenues as
compared to 64.5% in the prior year).
Operating income decreased $2,712,000 in 2002 from the prior year. U.S.
operating income decreased $2,998,000 (excluding restructuring charges) due to
the aforementioned lower revenues and increased administrative costs. U.S.
administrative costs also increased principally due to the prior year reflecting
a reduction for legal settlements of $575,000 and significantly higher bank
financing costs (approximately $417,000). These factors were primarily
responsible for an increase in selling and administrative costs (30.5% of sales
as compared to 28.7% of sales in the prior year). Restructuring and related
costs increased $705,000 as the Company announced its final phase of its
consolidation plan. Foreign operating profit increased $1,111,000 principally
due to higher revenue described above.
INCOME TAXES
------------
As more fully described in Note 5 to Consolidated Financial Statements, in
fiscal 2003 the Company provided additional valuation allowances for certain
U.S. deferred tax assets in the amount of $2,232,000. Despite the significant
improvement in U.S. operating results in 2003 described above, the Company again
incurred tax losses in the U.S. Accordingly, the Company recorded the additional
valuation allowances with respect to the related tax assets as of September 30,
2003.
MINORITY INTEREST
-----------------
Minority interest represents 3% of the net income of the consolidated
subsidiary, Grupo Dixon, S.A. de C.V., ($42,000, $51,000 and $31,000 in fiscal
2003, 2002 and 2001, respectively), equivalent to the extent of the investment
of the minority shareholders.
CURRENT ECONOMIC ENVIRONMENT AND EVENTS
---------------------------------------
Although not directly impacted by recent events in the U.S. and abroad,
management believes that softening economic conditions have recently affected
and could continue to affect the retail mass or other markets served by the
Company's Consumer Group and thus could lead to reduced overall revenues. In
addition, certain expenses which have risen recently (such as insurance costs)
could continue to trend significantly higher in the coming years due to recent
events.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Despite significantly improved results from operations, the Company's cash
flows used in operating activities approximated $400,000 in fiscal 2003. The
Company has generated annual cash flows from operating activities exceeding $4
million on average for the previous three fiscal years. After significant prior
year reductions in inventories from its strict inventory management plan, the
Company did not significantly reduce inventories in 2003, except from the sale
of its New Castle Refractories division. Certain safety stock levels were
increased as new manufacturing processes were implemented in Mexico. However,
the Company did extinguish certain significant liabilities aggregating
approximately $3.3 million in 2003 (consisting principally of deferred interest
and restructuring charges). Cash flows from accounts receivable also decreased
approximately $1.2 million in 2003 due to large Mexico government sales late in
the fiscal year having payment terms extending beyond September 30, 2003.
The Company's 2003 investing activities provided approximately $3.3 million
in cash flows as compared with 2002 when $1.3 million in cash flows were used
for purchase of plant and equipment, net of the effects of disposals. Major
capital projects are discretionary in nature with no material purchase
commitments. Capital expenditures are usually funded from operations and
existing lending and leasing arrangements. In 2003, the Company's net capital
expenditures were only $427,000, due to shrinking manufacturing facilities. Cash
flows were provided from the sale of the aforementioned division assets and
proceeds from the sale of securities received from insurance company
demutualizations.
In October 2002, the Company completed a financing agreement with a new
senior lender and its existing subordinated lenders to restructure its present
U.S. debt through fiscal 2005. Foothill Capital Corporation provided a
three-year $28 million senior debt facility which replaced the Company's
previous senior debt with a consortium of lenders. The new senior debt
arrangement provided approximately $5 million in increased working capital
liquidity for operations and to make certain subordinated debt payments.
The senior debt facility includes a $25 million revolving loan, which bears
interest at either the prime rate (4.0% at September 30, 2003), plus 0.75%, or
the prevailing LIBOR rate (approximately 1.3% at September 30, 2003), plus 3.5%.
Borrowings under the revolving loan are based upon 85% of eligible U.S. and
Canada accounts receivable, as defined; 50% of certain accounts receivable
having extended payment terms; and varying advance rates for U.S. and Canada raw
materials and finished goods inventories. The facility also includes term loans
aggregating an initial amount of $3 million, which bear interest at either the
prime rate, plus 1.5%, or the prevailing LIBOR rate, plus 4.25%. These loans are
payable in monthly installments of $50,000, plus interest, with the balance due
in a balloon payment in October 2005. The loan agreement also contains
restrictions regarding the payment of dividends as well as subordinated debt
payments (discussed below), a requirement to maintain a minimum level of
earnings before interest, taxes, depreciation and amortization and net worth and
a limitation on the amount of annual capital expenditures. To better balance and
manage overall interest rate exposure, the Company previously executed an
interest rate swap agreement that effectively fixed the rate of interest on $8
million of its senior debt at 8.98% through August 2005.
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 guarantee by and pledge of capital stock of the Company's subsidiaries. As
of September 30, 2003, the Company had approximately $14 million of unused lines
of credit available.
In October 2002, the Company also reached agreement with the holders of
$16.5 million of Senior Subordinated Notes to restructure the notes, extending
the maturity date to 2005. The Company is only required to pay monthly
installments of $50,000 through December 2003 and $150,000 per month from
January 2004 through the maturity date. However, the Company paid $1 million in
principal (and $2.1 million of accrued interest) at closing of the new senior
debt facility and made additional payments to its subordinated lenders of
approximately $2.1 million in fiscal 2003. Payments to the subordinated lenders
are subject to certain restrictions imposed under the senior debt facility.
Interest on the balance of subordinated debt is paid quarterly. If the Company
is unable to make scheduled and additional excess payments totaling at least $8
million by 2005 (due to restrictions imposed under the new senior debt facility
or otherwise) the noteholders will receive warrants equivalent to approximately
1.6% of the diluted common shares outstanding for each $1 million in unpaid
principal. The Company made sufficient payments in fiscal 2003 and expects to do
so in fiscal 2004 to avoid the issuance of any such warrants, at least through
that date. Any warrants received or earned will be relinquished if the notes are
paid in full during the term of the new agreement. The agreement also grants the
subordinated lenders a lien on Company assets (junior in all aspects to the new
senior debt collateral agreements described above). The interest rate on the
notes is 12.5% through maturity in October 2005. The new subordinated note
agreement includes certain other provisions, including restrictions as to the
payment of dividends and the elimination or adjustment of financial covenants
contained in the original agreement to conform to those contained in the new
senior debt agreements.
In addition, the Company's Mexican subsidiary had approximately $12.5
million in bank lines of credit ($6 million unused) as of September 30, 2003,
currently expiring at various dates from January 2004 through December 2004,
which bear interest at a rate based upon either a floating U.S. bank rate or the
rate of certain Mexican government securities. The Company is presently
reviewing other debt proposals for this subsidiary. The Company relies heavily
upon the availability of the lines of credit in the U.S. and Mexico for
liquidity in its operations.
The Company believes that amounts available from its lines of credit under
its senior debt and under lines of credit available to its Mexican subsidiary
are sufficient to fulfill all current and anticipated operating requirements of
its business through 2005. The Company's Mexican subsidiary cannot assure that
each of its lines of credit will continue to be available after their respective
expiration dates, or that replacement lines of credit will be secured. However,
the Company believes there should be sufficient amounts available under its
present or future facilities or lines of credit to cover any potential
shortfalls due to any expiring lines of credit.
Refer to Notes 3 and 4 to Consolidated Financial Statements for further
description of the aforementioned financing arrangements.
The Company has been assisted by investment bankers and certain other
outside consultants to advise it in evaluating certain strategic alternatives,
including capital restructuring, mergers and acquisitions, and/or other measures
designed to maximize shareholder value. (See Note 8 to Consolidated Financial
Statements.)
RECENT ACCOUNTING PRONOUNCEMENTS
----------------------------------
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contacts and for hedging activities
under FASB Statement No. 133, "Accounting for Derivative instruments and Hedging
Activities". Statement No. 149 provides greater clarification of the
characteristics of a derivative instrument so that contracts with similar
characteristics will be accounted for consistently. In general, the statement is
effective for contracts with similar characteristics will be accounted for
consistently. In general, the statement is effective for contracts entered into
or modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. The Company did not enter into or modify any of their derivative
financial instruments (which consists of only an interest rate swap agreement)
since June 30,2 003 and thus the adoption of Statement No. 149 did not have any
impact on the Company's consolidated financial statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
which clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial position.
Previously, many of those financial instruments were classified as equity.
Statement No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective a the beginning of the
first interim period beginning after June 15, 2003. As the Company does not have
any of these financial instruments, the adoption of Statement No. 150 is not
expected to have any impact on the Company's consolidated financial statements.
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.
The Company promotes its products with significant marketing activities,
including advertising, consumer incentives and trade promotions. Advertising
costs are expensed as incurred. The Company records consumer incentive and trade
promotion costs as a reduction of revenues in the year in which these programs
are offered, based upon estimates of utilization and redemption rates that are
developed from historical information.
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 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 Company
regularly reviews inventory quantities on hand and records a provision for
excess and obsolete inventory based primarily on the Company's estimated
forecast of product demand. The Company's estimate of forecasted product demand
may prove to be inaccurate, in which case the Company may have understated or
overstated the provision required for excess and obsolete inventory. In the
future, if the company's inventory is determined to be overvalued, the Company
would be required to recognize such costs in its cost of goods sold at the time
of such determination. Likewise if the Company's inventory is determined to be
undervalued, the Company may have over-reported costs of goods sold. Therefore,
although the Company makes every effort to ensure the accuracy of its forecasts
of future product demand, any significant unanticipated changes in demand could
have a significant impact on the value of inventory and the Company's reported
operating results.
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, the Company 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-valued
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.
The carrying value of the Company's net deferred tax assets assumes that
the Company will be able to generate sufficient future taxable income in certain
jurisdictions, based on estimates and assumptions. If these estimates and
related assumptions change in the future, the Company may be required to record
additional valuation allowances against its deferred tax assets resulting in
additional income tax expense in the Company's Consolidated Statement of
Operations. Management evaluates the recoverability of the deferred tax assets
quarterly and assesses the need for additional valuation allowances quarterly.
In fiscal 2003, the Company provided additional valuation allowances for certain
U.S. deferred tax assets, as more fully described above and in Note 5 to
Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
--------------------------
The statements in this Annual Report on Form 10-K 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 and
operating requirements, including payments due under its subordinated debt;
management's expectation as to the Company's ability to avoid the issuance of
warrants to its subordinated lenders; management's expectation for continuing
savings from the restructuring and cost-reduction program; the Company's ability
to increase revenues in its core businesses; and its expectations regarding the
Company's ability to utilize certain tax benefits in the future. Readers are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve known and unknown risks, uncertainties and other factors
that could cause the actual results to differ materially from those expressed or
implied by such forward-looking statements. Such risks include (but are not
limited to) the risk that the shareholders ownership will be diluted by the
issuance of common stock to the Company's subordinated lenders; the Company's
lenders will not continue to fund the Company in the future; 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;
difficulties encountered with the consolidation and cost-reduction program;
increased competition; decreases in revenues; U.S. and foreign economic factors;
foreign currency exchange risk; interest rate fluctuation risk; and the
inability to generate taxable income to utilize certain tax benefits in the
future, among others.
ITEM 7A. 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 39% of the Company's fiscal 2003 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 September 30, 2003, approximately 47% of total short
and long-term debt is fixed, at rates between 8% and 12.5%. The balance of the
Company debt is variable, principally based upon the prevailing U.S. bank prime
rate or LIBOR rate. An interest rate swap, which expires in 2005, fixes the rate
of interest on $8 million of this debt at 8.98%. A change in the average
prevailing interest rates of the remaining debt of 1% would have an estimated
impact of $100,000 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
--------------------------------------------------------
PAGE
Report of Independent Certified Public Accountants 17
Consolidated Balance Sheets as of September 30, 2003 and 2002 18
Consolidated Statements of Operations For the Years Ended
September 30, 2003, 2002 and 2001 19
Consolidated Statements of Comprehensive Loss For the
Years Ended September 30, 2003, 2002 and 2001 20
Consolidated Statements of Shareholders' Equity For the
Years Ended September 30, 2003, 2002 and 2001 21
Consolidated Statements of Cash Flows For the
Years Ended September 30, 2003, 2002 and 2001 22-23
Notes to Consolidated Financial Statements 24-42
Schedule For the Years Ended September 30, 2003, 2002 and 2001:
II. Valuation and Qualifying Accounts 43
Information required by other schedules called for under Regulation
S-X is either not applicable or is included in the Consolidated
Financial Statements or Notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Shareholders and Board of Directors of
Dixon Ticonderoga Company
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Dixon
Ticonderoga Company and its subsidiaries at September 30, 2003 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2003 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Orlando, Florida
December 12, 2003
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30, 2003 AND 2002
---------------------------
2003 2002
------------- -------------
ASSETS:
-------
CURRENT ASSETS:
Cash and cash equivalents $ 1,032,974 $ 2,589,493
Receivables, less allowance for doubtful
accounts of $1,429,222 in 2003 and
$1,381,780 in 2002 28,326,743 29,179,803
Inventories 26,439,361 28,761,337
Other current assets 2,350,813 3,914,817
------------- -------------
Total current assets 58,149,891 64,445,450
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 6,737,943 10,881,021
Machinery and equipment 8,288,647 16,948,612
Furniture and fixtures 1,307,980 1,607,449
------------- -------------
16,334,570 29,437,082
------------- -------------
Less accumulated depreciation (8,225,067) (19,641,894)
------------- -------------
8,109,503 9,795,188
------------- -------------
OTHER ASSETS 5,774,649 7,872,957
------------- -------------
$72,034,043 $82,113,595
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 6,382,065 $ 7,463,458
Current maturities of long-term debt 13,227,965 12,341,735
Accounts payable 9,102,711 8,819,499
Accrued liabilities 8,496,182 12,485,494
------------- -------------
Total current liabilities 37,208,923 41,110,186
------------- -------------
LONG-TERM DEBT 12,510,860 16,383,106
------------- -------------
DEFERRED INCOME TAXES AND OTHER 894,601 1,183,467
------------- -------------
MINORITY INTEREST 578,530 583,841
------------- -------------
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 in
2003 and 2002 3,710,309 3,710,309
Capital in excess of par value 3,547,567 3,593,826
Retained earnings 23,679,772 25,107,752
Accumulated other comprehensive loss (6,238,403) (5,640,262)
------------- -------------
24,699,245 26,771,625
Less shareholder loans (557,721) (557,721)
Less treasury stock, at cost (508,160 shares
in 2003 and 517,477 shares in 2002) (3,300,395) (3,360,909)
------------- -------------
20,841,129 22,852,995
------------- -------------
$72,034,043 $82,113,595
============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
-----------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
REVENUES $ 88,837,615 $ 88,590,730 $ 88,319,455
-------------- -------------- --------------
COSTS AND EXPENSES:
Cost of goods sold 54,978,678 57,132,999 56,732,494
Selling and administrative expenses 27,793,534 27,240,511 25,363,628
Provision for restructuring and related costs 486,866 1,573,235 867,666
Debt refinancing costs 624,662 - -
Investment banking and related costs 483,493 - -
-------------- -------------- --------------
84,367,233 85,946,745 82,963,788
-------------- -------------- --------------
OPERATING INCOME 4,470,382 2,643,985 5,355,667
OTHER INCOME, NET 1,052,500 252,676 -
INTEREST EXPENSE (3,585,729) (4,087,731) (4,387,700)
-------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (BENEFIT) AND MINORITY INTEREST 1,937,153 (1,191,070) 967,967
INCOME TAXES (BENEFIT) 2,744,420 (559,064) 316,933
-------------- -------------- --------------
(807,267) (632,006) 651,034
MINORITY INTEREST 42,221 51,214 31,267
-------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (849,488) (683,220) 619,767
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF APPLICABLE INCOME TAXES (BENEFIT) (578,492) 123,297 (1,099,639)
-------------- -------------- --------------
NET LOSS $ (1,427,980) $ (559,923) $ (479,872)
============== ============== ==============
EARNINGS (LOSS) PER COMMON SHARE (BASIC):
Continuing operations $ (.27) $ (.22) $ .20
Discontinued operations (.18) .04 (.35)
-------------- -------------- --------------
Net loss $ (.45) $ (.18) $ (.15)
============== ============== ==============
EARNINGS (LOSS) PER COMMON SHARE (DILUTED):
Continuing operations $ (.27) $ (.22) $ .20
Discontinued operations (.18) .04 (.35)
-------------- -------------- --------------
Net loss $ (.45) $ (.18) $ (.15)
============== ============== ==============
The accompanying notes are an integral part
of the consolidated financial statements.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
---------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
-----------------------------------------------------
2003 2002 2001
--------------- --------------- ---------------
NET LOSS $ (1,427,980) $ (559,923) $ (479,872)
OTHER COMPREHENSIVE LOSS:
Cumulative effect adjustment to
recognize fair value of cash
flow hedge - - (54,205)
Adjustment to recognize fair value
of cash flow hedge (138,672) (115,934) (451,388)
Foreign currency translation
adjustments (459,469) (1,422,647) (502,511)
--------------- --------------- ---------------
TOTAL COMPREHENSIVE LOSS $(2,026,121) $(2,098,504) $(1,487,976)
=============== =============== ===============
The accompanying notes are an integral part
of the consolidated financial statements.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
-----------------------------------------------------
Common Capital in Accumulated Other
Stock $1 Excess of Retained Comprehensive Shareholder Treasury
Par Value Par Value Earnings Income (Loss) Loans Stock Total
------------ ------------- ------------- ------------------ -------------- ------------- -------------
BALANCE, September 30, 2000 $ 3,710,309 $ 3,700,272 $26,147,547 $ (3,093,577) $ (557,721) $(3,521,884) $26,384,946
Net loss (479,872) (479,872)
Other comprehensive loss (1,008,104) (1,008,104)
Employee Stock Purchase
Plan (9,415 shares) (30,137) 61,150 31,013
------------ ------------- ------------- ------------------ -------------- ------------- -------------
BALANCE, September 30, 2001 3,710,309 3,670,135 25,667,675 (4,101,681) (557,721) (3,460,734) 24,927,983
Net loss (559,923) (559,923)
Other comprehensive loss (1,538,581) (1,538,581)
Employee Stock Purchase
Plan (15,370 shares) (76,309) 99,825 23,516
------------ ------------- ------------- ------------------ -------------- ------------- -------------
BALANCE, September 30, 2002 3,710,309 3,593,826 25,107,752 (5,640,262) (557,721) (3,360,909) 22,852,995
Net loss (1,427,980) (1,427,980)
Other comprehensive loss (598,141) (598,141)
Employee Stock Purchase
Plan (9,317 shares) (46,259) 60,514 14,255
------------ ------------- ------------- ------------------ -------------- ------------- -------------
BALANCE, September 30, 2003 $ 3,710,309 $ 3,547,567 $23,679,772 $ (6,238,403) $ (557,721) $(3,300,395) $20,841,129
============ ============= ============= ================== ============== ============= =============
The accompanying notes are an integral part of the consolidated financial statements.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
-----------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Cash flows from operating activities:
Net income (loss) from continuing operations $ (849,488) $ (683,220) $ 619,767
Net income (loss) from discontinued operations (578,492) 123,297 (1,099,639)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 2,414,819 2,322,692 2,219,658
Deferred taxes 2,504,854 (2,334,000) (534,000)
Provision for doubtful accounts receivable 315,026 193,979 151,263
Debt refinancing costs 624,662 - -
Gain on sale of assets - (208,290) (1,202,448)
Gain on sale of securities received from
insurance companies demutualizations (672,291) - -
Income attributable to minority interest 42,221 51,214 31,267
(Income) loss attributable to
foreign currency exchange (433,461) (215,955) 52,071
Changes in assets [(increase)decrease] and
liabilities [increase (decrease)]:
Receivables, net (1,230,691) (7,574) (660,434)
Inventories (348,379) 6,226,836 474,990
Other current assets (109,737) (457,698) (134,308)
Accounts payable and accrued liabilities (3,278,476) 3,673,182 1,039,899
Other assets 1,191,249 (250,686) 210,519
-------------- -------------- --------------
Net cash provided by (used in) operating
activities (408,184) 8,433,777 1,168,605
-------------- -------------- --------------
Cash flows from investing activities:
Purchases of plant and equipment, net (426,775) (1,520,088) (2,009,467)
Proceeds on sale of assets 2,988,616 208,290 1,276,063
Proceeds on sale of securities received from
insurance companies demutualizations 737,321 - -
-------------- -------------- --------------
Net cash provided by (used in) investing
activities 3,299,162 (1,311,798) (733,404)
-------------- -------------- --------------
2003 2002 2001
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from long-term debt 14,449,123 - 138,566
Proceeds from (principal reductions of)
notes payable (564,975) 1,716,828 2,779,894
Principal reductions of long-term debt (17,435,139) (6,101,200) (2,728,952)
Deferred refinancing costs (549,193) (955,628) -
Other non-current liabilities (100,545) 40,736 6,759
Employee Stock Purchase Plan 14,255 23,516 31,013
-------------- -------------- --------------
Net cash provided by (used in) financing
activities (4,186,474) (5,275,748) 227,280
-------------- -------------- --------------
Effect of exchange rate changes on cash (261,023) (101,037) (266,634)
-------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents (1,556,519) 1,745,194 395,847
Cash and cash equivalents, beginning of year 2,589,493 844,299 448,452
-------------- -------------- --------------
Cash and cash equivalents, end of year $ 1,032,974 $ 2,589,493 $ 844,299
============== ============== ==============
Supplemental disclosures:
Cash paid during the year for:
Interest $ 5,684,833 $ 3,033,931 $ 4,647,079
Income taxes 882,246 1,677,478 2,434,487
Non-cash investing and financing activities:
In fiscal 2003, the Company accepted a note receivable due August 2010 in
the amount of $500,000 as partial consideration for the sale of its Newcastle
Refractories division.
In fiscal 2001, the Company accepted a note receivable due May 2006 in the
amount of $1.64 million as consideration for the sale of an idle building in
Deer Lake, Pennsylvania.
The accompanying notes are an integral part
of the consolidated inancial statements.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Business:
---------
Dixon Ticonderoga Company is a diversified manufacturer and marketer of
writing and art products. Its largest customers are school products
distributors and mass merchandisers, although none account for over 8% of
revenues.
Principles of consolidation:
----------------------------
The consolidated financial statements include the accounts of Dixon
Ticonderoga Company and all of its subsidiaries (the "Company"). All
significant intercompany transactions and balances have been eliminated in
consolidation. Minority interest represents the minority shareholders'
proportionate share (3%) of the equity of the Company's Grupo Dixon, S.A.
de C.V. subsidiary.
Revenue recognition:
--------------------
Revenues are comprised of gross sales from the shipment of product to
customers, net of provisions for product returns, customer discounts (such
as volume rebates), co-op advertising and other related discounts. The
Company recognizes sales when the following has occurred: evidence of a
sales arrangement exists; shipment of product to the customer; the price is
fixed or determinable; and collectibility is reasonably assured. An
estimate of sales returns and allowances is recorded in the period that the
related product is shipped.
Estimates:
----------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Translation of foreign currencies:
----------------------------------
In accordance with Financial Accounting Standards Board (FASB) Statement
No. 52, the Company has determined that each foreign subsidiary's
functional currency is their local currency. All assets and liabilities are
translated at period-end exchange rates. All revenues and expenses are
translated using average exchange rates during that period. Translation
gains and losses are reflected as a separate component of other
comprehensive loss. Gains and losses from foreign currency transactions are
included in the accompanying Consolidated Statement of Operations. Total
foreign currency exchange gains (losses) included in operating income were
approximately $433,000, $216,000 and ($52,000) for fiscal years 2003, 2002
and 2001.
Cash and cash equivalents:
--------------------------
Cash and cash equivalents include investment instruments with a maturity of
three months or less at time of purchase.
Inventories:
------------
Inventories are stated at the lower of cost or market. The Company
regularly reviews inventory quantities on hand and records a provision for
excess and obsolete inventory based primarily on the estimated forecast of
product demand.
Certain inventories amounting to $7,512,000 and $13,034,000 at September
30, 2003 and 2002, respectively, are stated on the last-in, first-out
(LIFO) method of determining inventory costs. Under the first-in, first-out
(FIFO) method of accounting, these inventories would be ($266,000) and
$1,007,000 (lower) higher at September 30, 2003 and 2002, respectively. All
other inventories are valued for using the FIFO method.
Inventories consist of (in thousands):
September 30,
2003 2002
--------- ---------
Raw material $10,486 $11,014
Work in process 2,198 2,718
Finished goods 13,755 15,029
--------- ---------
$26,439 $28,761
========= =========
Property, plant and equipment:
------------------------------
Property, plant and equipment are stated at cost. Depreciation is provided
principally on a straight-line basis over the estimated useful lives of the
respective assets. The range of estimated useful lives by class of
property, plant and equipment are as follows:
Buildings and improvements 10 - 25 years
Machinery and equipment 5 - 15 years
Furniture and fixtures 3 - 5 years
When assets are sold or retired, their cost and related accumulated
depreciation are removed from the accounts. Any gain or loss is included in
income.
Impairment of long-lived assets:
--------------------------------
Long-lived assets used in the Company's operations, including cost in
excess of net assets of businesses acquired, are reviewed for impairment
when events and circumstances indicate that the carrying amount of an asset
may not be recoverable. The primary indicators of recoverability are the
associated current and forecasted undiscounted operating cash flows. Asset
impairments in connection with the Company's restructuring programs are
identified and measured using the estimated net proceeds from their
ultimate sale or abandonment. (See Note 10.) The Company's policy is to
record an impairment loss when it is determined that the carrying amount of
the asset exceeds its fair value.
Stock-based compensation:
-------------------------
The Company accounts for compensation cost related to employee stock
options and other forms of employee stock-based compensation plans in
accordance with the requirements of Accounting Principles Board (APB)
Opinion 25 and related interpretations. APB 25 requires compensation cost
for stock-based compensation plans to be recognized based on the
difference, if any, between the fair market value of the stock on the date
of grant and the option exercise price. The Company provides additional
proforma disclosures as required under FASB Statement No. 123, "Accounting
For Stock-Based Compensation", as amended by FASB Statement No. 148,
"Accounting for Stock-Based Compensation-Transition and Disclosure".
Pro forma net loss and net loss per share would have been as follows if the
fair value estimates were used to record compensation expense:
2003 2002 2001
------------ ------------ ------------
Net loss, as reported $(1,427,980) $ (559,923) $ (479,872)
Deduct: total stock-based
employee compensation
expense determined under the
fair value based method, net
of related tax effects (73,601) (102,431) (25,409)
------------ ------------ ------------
Pro forma net loss $(1,501,581) $ (662,354) $ (505,281)
============ ============ ============
Loss per share:
Basic, as reported $ (.45) $ (.18) $ (.15)
============ ============ ============
Basic, pro forma $ (.47) $ (.21) $ (.16)
============ ============ ============
Diluted, as reported $ (.45) $ (.18) $ (.15)
============ ============ ============
Diluted, pro forma $ (.47) $ (.21) $ (.16)
============ ============ ============
Income taxes:
-------------
The Company recognizes deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax
bases of assets and liabilities. The Company regularly reviews its deferred
tax assets, by taxing jurisdiction, for recoverability and establishes a
valuation allowance based on historical taxable income, projected future
taxable income, and the expected timing of the reversals of existing
temporary differences. If there is a material change in the actual
effective tax rates or time period within which the underlying temporary
differences become taxable or deductible, the Company could be required to
establish further valuation allowances against all or a significant portion
of its deferred tax assets resulting in a substantial increase in the
Company's effective tax rate and a material negative impact on its
operating results and financial position. In fiscal 2003, the Company
provided additional valuation allowances for certain U.S. deferred tax
assets, as more fully described in Note 5.
Derivative instruments and hedging activities:
----------------------------------------------
The Company adopted FASB Statement No.133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by FASB Statement No.137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133", an amendment of FASB
Statement No.133, and FASB Statement No.138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", an amendment of
Statement No. 133 (referred to hereafter as "FAS 133") on October 1, 2000.
As a result, the Company records the fair value of interest rate swaps
designated as cash flow hedges in other liabilities with the offset in the
other comprehensive income (loss) component of shareholders' equity. Upon
adoption, the Company recorded its interest rate swap designated as a cash
flow hedge 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 this accounting change. During the years
ended September 30, 2003, 2002 and 2001, the Company also recognized an
adjustment to increase (decrease) the fair value of this cash flow hedge of
($203,408), $184,309 and $718,773, respectively, in other liabilities.
Other comprehensive loss was increased $138,672, $115,934 and $451,388 (net
of tax expense (benefit) of $342,080, ($68,375) and ($267,385),
respectively) during these periods.
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.
FAS 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 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 an interest rate swap agreement through August
2005 that effectively converts $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.
Recent accounting pronouncements:
---------------------------------
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" which amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and
for hedging activities under FASB Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities". Statement No. 149 provides
greater clarification of the characteristics of a derivative instrument so
that contracts with similar characteristics will be accounted for
consistently. In general, the statement is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. The Company did not enter into or modify
any of their derivative financial instruments (which consists of only an
interest rate swap agreement) since June 30, 2003 and thus the adoption of
Statement No. 149 did not have any impact on the Company's consolidated
financial statements.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
which clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial
position. Previously, many of those financial instruments were classified
as equity. Statement No. 150 is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. As the
Company does not have any of these financial instruments, the adoption of
Statement No. 150 is not expected to have any impact on the Company's
consolidated financial statements.
Reclassifications:
------------------
Certain prior year amounts have been reclassified to conform with the
current year classifications.
(2) ACCRUED LIABILITIES:
--------------------
The major components of accrued liabilities are as follows (in thousands):
September 30,
2003 2002
--------- ---------
Interest (see Note 4) $ 1,180 $ 2,844
Salaries and wages 1,014 1,110
Employee benefit plans 417 540
Income taxes 2,965 3,174
Other 2,920 4,817
--------- ---------
$ 8,496 $ 12,485
========= =========
(3) NOTES PAYABLE:
--------------
The Company's Mexico subsidiary had bank lines of credit totaling
approximately $12.5 million, under which $6.4 and $7.5 million of unsecured
notes payable were outstanding as of September 30, 2003 and 2002,
respectively. The notes, which currently mature at varying dates from
January 2004 through December 2004, bear interest (weighted average
interest rate of approximately 7.4% and 4.5% at September 30, 2003 and
2002, respectively) based upon either a floating U.S. bank rate or the rate
of certain Mexican government securities and are renewable annually.
(4) LONG-TERM DEBT:
---------------
Long-term debt consists of the following (in thousands):
September 30,
2003 2002
--------- ---------
Senior Subordinated Notes $ 13,342 $ 16,500
Bank notes payable 8,348 8,208
Bank term loan 2,216 2,025
Building mortgage 1,833 1,992
--------- ---------
25,739 28,725
Less current maturities (13,228) (12,342)
--------- ---------
$ 12,511 $ 16,383
========= =========
In October 2002, the Company completed a financing agreement with a new
senior lender and its existing subordinated lenders to restructure its
present U.S. debt through fiscal 2005. Foothill Capital Corporation has
provided a three-year $28 million senior debt facility which replaces the
Company's previous senior debt (bank notes payable and bank term loan) with
a consortium of lenders. The new senior debt arrangement provides
approximately $5 million in increased working capital liquidity for
operations and to make certain subordinated debt payments.
The senior debt facility includes a $25 million revolving loan, which bears
interest at either the prime rate (4.0% at September 30, 2003), plus 0.75%,
or the prevailing LIBOR rate (approximately 1.3% at September 30, 2003),
plus 3.5%. Borrowings under the revolving loan are based upon 85% of
eligible U.S. and Canada accounts receivable, as defined; 50% of certain
accounts receivable having extended payment terms; and varying advance
rates for U.S. and Canada raw materials and finished goods inventories. The
facility also includes term loans aggregating an initial amount of $3
million, which bear interest at either the prime rate, plus 1.5%, or the
prevailing LIBOR rate, plus 4.25%. These loans are payable in monthly
installments of $50,000, plus interest, with the balance due in a balloon
payment in October 2005. The loan agreement also contains restrictions
regarding the payment of dividends as well as subordinated debt payments
(discussed below), a requirement to maintain a minimum level of earnings
before interest, taxes, depreciation and amortization and net worth and a
limitation on the amount of annual capital expenditures. To better balance
and manage overall interest rate exposure, the Company previously executed
an interest note swap agreement that effectively fixed the rate of interest
on $8 million of its senior debt at 8.98% through August 2005.
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 guarantee by and pledge of capital stock of the Company's
subsidiaries. The new senior debt agreements include provisions which
suggest the debt could become payable upon demand under certain
circumstances and thus, this debt has been classified as current maturities
of long-term debt. As of September 30, 2003 the Company had approximately
$14 million of unused lines of credit available.
In October 2002, the Company also reached agreement with the holders of
$16.5 million of Senior Subordinated Notes to restructure the notes,
extending the maturity date to 2005. The Company is required to pay monthly
installments of $50,000 through December 2003 and $150,000 per month from
January 2004 through the maturity date. However, the Company paid $1
million in principal (and $2.1 million of accrued interest) at closing of
the new senior debt facility and made additional payments to its
subordinated lenders of approximately $2.2 million in fiscal 2003. Payments
to the subordinated lenders are subject to certain restrictions imposed
under the senior debt facility. Interest on the balance of subordinated
debt is paid quarterly. If the Company is unable to make scheduled and
additional excess payments totaling at least $8 million by 2005 (due to
restrictions imposed under the new senior debt facility or otherwise) the
noteholders will receive warrants equivalent to approximately 1.6% of the
diluted common shares outstanding for each $1 million in unpaid principal.
Any warrants received or earned will be relinquished if the notes are paid
in full during the term of the new agreement. The agreement also grants the
subordinated lenders a lien on Company assets (junior in all aspects to the
new senior debt collateral agreements described above). The interest rate
on the subordinated notes is 12.5% through maturity in October 2005. In
addition, the Company has due in October 2005 previously deferred
payable-in-kind (PIK) interest in the amount of $642,000, included in
accrued interest at September 30, 2003. (See Note 2). The new subordinated
note agreement includes certain other provisions, including restrictions as
to the payment of dividends and the elimination or adjustment of financial
covenants contained in the original agreement to conform to those contained
in the new senior debt agreements.
The Company also has a mortgage agreement with respect to its corporate
headquarters building in Heathrow, Florida. The mortgage (in the original
amount of $2.73 million) is for a period of 15 years and bears interest at
8.1%.
Carrying values of the Senior Subordinated Notes, the bank notes payable
and term loan are reasonable estimates of fair value as interest rates are
based on prevailing market rates.
Aggregate maturities of long-term debt are as follows (in thousands):
2004 $ 13,228
2005 3,437
2006 7,802
2007 219
Thereafter 1,053
----------
$ 25,739
==========
(5) INCOME TAXES:
-------------
The components of net deferred tax asset recognized in the accompanying
consolidated balance sheet are as follows (in thousands):
2003 2002
------------ ------------
U.S. current deferred tax assets (included
in other current assets) $ - $ 1,514
Foreign current deferred tax liability
(included in accrued liabilities) (1,455) (818)
U.S. and foreign, noncurrent deferred tax
asset (included in other assets and
deferred income taxes and other) 602 2,829
------------ ------------
Net deferred tax asset (liability) $ (853) $ 3,525
============ ============
Deferred tax assets:
U.S. tax credit carryforwards $ - $ 2,610
Provisions for losses from discontinued
operations 48 174
Depreciation 157 214
Accrued pension 683 653
Interest 266 386
Other accrued expenses 481 430
Installment sale and related expenses (248) (197)
Other items, net 289 96
Foreign net operating loss carryforward 602 512
Valuation allowance (1,676) (512)
------------ ------------
Total deferred tax asset 602 4,366
------------ ------------
Deferred tax liabilities:
Inventories (791) (748)
Property, plant and equipment (108) (93)
Valuation allowance (556) -
------------ ------------
Total deferred tax liability (1,455) (841)
------------ ------------
Net deferred tax asset (liability) $ (853) $ 3,525
============ ============
It is the policy of the Company to accrue deferred income taxes on
temporary differences related to the financial statement carrying amounts
and tax bases of investments in foreign subsidiaries which are expected to
reverse in the foreseeable future. In fiscal 2003, the Company provided
additional valuation allowances for certain U.S. deferred tax assets in the
amount of $2,232,000 due to continuing U.S. taxable losses. The Company
again incurred tax losses in the U.S., partially due to certain costs
(Notes 8 and 10) and discontinued operations, among other factors.
Accordingly, the Company recorded the additional valuation allowances with
respect to the related tax assets as of September 30, 2003.
At September 30, 2003 and 2002, the Company had valuation allowances
against certain deferred tax assets totaling $2,232,000 and $512,000,
respectively. These valuation allowances relate to tax assets in
jurisdictions where there is significant probability that the benefit of
the assets will not be realized in the associated tax returns.
The provision (benefit) for income taxes from continuing operations is
comprised of the following (in thousands):
2003 2002 2001
--------- -------- ---------
Current:
U.S. Federal $ - $ 640 $ (352)
State 95 (40) (12)
Foreign 474 1,175 1,215
--------- -------- ---------
569 1,775 851
--------- -------- ---------
Deferred:
U.S. Federal 2,050 (2,081) (199)
State - (206) (71)
Foreign 125 (47) 264
--------- -------- ---------
2,175 (2,334) (534)
--------- -------- ---------
$ 2,744 $ (559) $ 317
========= ======== =========
Foreign deferred tax provision (benefit) is comprised principally of
temporary differences related to Mexico asset purchases. The U.S. deferred
expense in 2003 principally reflects the establishment of valuation
allowances against certain net deferred assets, as discussed above. The
U.S. deferred (benefit) in 2002 and 2001 result primarily from expenses
accrued but not yet deductible for taxes and tax credit carryforwards.
The differences between the provision (benefit) for income taxes from
continuing operations computed at the U.S. statutory federal income tax
rate and the provision (benefit) from continuing operations in the
accompanying consolidated financial statements are as follows (in
thousands):
2003 2002 2001
-------- -------- ---------
Amount computed using statutory rate $ 659 $ (533) $ 329
Foreign income (518) (178) (28)
State taxes, net of federal benefit 63 (162) (54)
Permanent differences - 149 168
Valuation allowances 2,232 - -
Other 308 165 (98)
-------- -------- ---------
Provision (benefit) for income taxes $ 2,744 $ (559) $ 317
======== ======== =========
(6) EMPLOYEE BENEFIT PLANS:
-----------------------
Prior to 2002, the Company maintained several defined benefit pension plans
covering substantially all union employees. During 2002, several plans
related to the Company's Industrial Group (discontinued operations) were
terminated, leaving one defined benefit plan covering the remaining
Company's U.S. Consumer division union employees. The benefits are based
upon fixed dollar amounts per years of service. The assets of the various
plans (principally corporate stocks and bonds, insurance contracts and cash
equivalents) are managed by independent trustees. The policy of the Company
is to fund the minimum annual contributions required by applicable
regulations.
The following tables set forth the plans' funded status and other
information for the fiscal years ended September 30, 2003 and 2002 (in
thousands):
September 30,
-------------
2003 2002
---------- ----------
Change in benefit obligation:
Obligation at beginning of year $1,762 $3,831
Service cost 50 90
Interest cost 118 123
Actuarial gain 179 154
Benefit payments (294) (2,436)
---------- ----------
Obligation at end of year $1,815 $1,762
========== ==========
Change in market value of plan assets:
Market value at beginning of year $2,108 $3,489
Actual return on plan assets 251 445
Employer contributions 146 610
Benefit payments (294) (2,436)
---------- ----------
Market value at end of year $2,211 $2,108
========== ==========
Prepaid pension asset:
Projected benefit obligation $(1,815) $(1,762)
Plan assets at market value 2,211 2,108
---------- ----------
Projected benefit obligation less than plan
assets 396 346
Unrecognized net (gain) loss from past
experience different from assumptions 37 (69)
Unrecognized net obligation being
recognized over periods from 10 to
16 years 2 164
---------- ----------
Prepaid pension asset $ 435 $ 441
========== ==========
Net periodic pension costs include the following components (in thousands):
2003 2002 2001
--------- ---------- ----------
Service costs - benefits earned
during period $ 50 $ 90 $ 178
Interest cost on projected benefit
obligation 118 123 245
Expected return on plan assets (186) (153) (248)
Curtailment loss 162 - -
Net amortization and deferral - 12 76
--------- ---------- ----------
Net periodic pension cost $ 144 $ 72 $ 251
========= ========== ==========
In determining the projected benefit obligation, the weighted average
discount rates utilized were 6.5%, 6.4% and 6.4% for the periods ended
September 30, 2003, 2002 and 2001, respectively. The expected long-term
rates of return on assets used in determining net periodic pension cost
ranged from 7.5 % to 8.0 % in all years presented above. There are no
assumed rates of increase in compensation expense in any year, as benefits
are fixed and do not vary with compensation levels.
The Company also maintains two defined-contribution plans (401k) for all
non-union domestic employees and certain union employees who meet minimum
service requirements, as well as a supplemental deferred contribution plan
for certain executives. Company contributions under the plans consist of a
basic amount of up to 3% of the compensation of participants for the plan
year, and for those participants who elected to make voluntary
contributions to the plan, matching contributions up to an additional 4%,
as specified in the plan. Charges to operations for these plans for the
years ended September 30, 2003, 2002 and 2001 were $240,000, $243,000 and
$588,000, respectively.
In addition, the Company has a defined benefit retirement plan, which
provides supplemental benefits for certain key executive officers, upon
retirement, disability or death. The benefits are similar to those provided
under the 401(k) plans, but are funded through the purchase of certain life
insurance products. As of September 30, 2003 and 2002, the net liability
under the plan (included in accrued liabilities), was $633,000 and
$504,000, respectively. Amounts charged to expense under the plan totaled
$93,000 and $118,000 in 2003 and 2002, respectively. There was no net
expense under this plan in 2001.
(7) SHAREHOLDERS' EQUITY:
---------------------
The Company provides an Employee Stock Purchase Plan under which shares of
its common stock can be issued to eligible employees. Among the terms of
this plan, eligible employees may purchase through payroll deductions
shares of the Company's common stock up to 10 % of their compensation at
the lower of 85 % of the fair market value of the stock on the first or
last day of the plan year (May 1 and April 30). On May 1, 2003, 2002 and
2001, 9,317, 15,370 and 9,415 shares, respectively, were issued under this
plan. At September 30, 2003, there are 47,619 shares available for future
purchases under the plan.
The Company has also granted non-qualified options to key employees, under
the 1988 Dixon Ticonderoga Company Executive Stock Plan, to purchase shares
of its common stock at the market price on the date of grant. Under the
1988 Plan (as amended) options vest 25 % after one year; 25 % after two
years; and 50 % after three years, and remain exercisable for a period of
five years from the date of vesting. All options expire three months after
termination of employment. At September 30, 2003, there were 183,000
options outstanding and no shares available for future grants under the
1988 Plan.
In addition, the Dixon Ticonderoga Company 1999 Stock Option Plan (the
"1999 Plan") was adopted in fiscal 1999, covering a maximum aggregate
300,000 shares. Under the 1999 Plan, qualified incentive stock options or
non-qualified stock options can be granted to employees at the market price
on the date of grant and which will vest on the same basis as the 1988 Plan
described above. Non-qualified options under the 1999 Plan may also be
issued to Company outside directors at the market price on the date of
grant and which may vest over varying periods. In 2001, 159,800 options
were granted to employees under the 1999 Plan. At September 30, 2003 there
were 171,600 options outstanding and 128,400 shares available for future
grants under the 1999 Plan.
The following table summarizes the combined stock options activity for
2003, 2002 and 2001.
2003 2002 2001
-------------------- ------------------- --------------------
Number Option Number Option Number Option
of Shares Price of Shares Price of Shares Price
-------------------- ------------------- --------------------
Options outstanding
at beginning of year
27,000 $8.63
21,250 6.75 34,125 6.75
2,500 7.13 2,500 7.13 10,750 7.13
231,000 8.88 231,000 8.88 258,000 8.88
2,500 12.88 2,500 12.88
10,000 11.38 10,000 11.38 10,000 11.38
25,000 11.00 25,000 11.00 30,000 11.00
5,000 4.25 5,000 4.25 7,500 4.25
2,500 3.81
147,300 3.70 147,300 3.70
10,000 4.75 10,000 4.75
Options granted
10,000 4.75
2,500 3.81
147,300 3.70
Options expired
or canceled
(5,000) 4.25 (2,500) 4.25
(27,000) 8.63
(21,250) 6.75 (12,875) 6.75
(59,250) 8.88 (27,000) 8.88
(1,250) 7.13 (8,250) 7.13
(5,000) 11.00 (5,000) 11.00
(2,500) 12.88
(2,500) 3.81
(5,700) 3.70
---------- --------- ----------
354,600 430,800 457,050
========== ========= ==========
The Company has adopted the disclosure-only provisions of FASB Statement
No. 123, as amended by FASB Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" and, accordingly, there is no
compensation expense recognized for its stock option plans.
Pro forma information related to the fair value of stock-based compensation
is presented in Note 1. The pro forma amounts were estimated using the
Black-Scholes valuation model assuming no dividends, expected volatility of
36% for all years presented, an average risk-free interest rate of 4.7% for
all years presented and expected lives of approximately six years for all
grants prior to 2001 and eight years thereafter. No options were granted in
2002 or 2003. The weighted average fair value estimates of options granted
in 2001 was $2.47. The weighted average remaining lives of options granted
in 2001 were 5.5 years.
In the past, the Company made loans under the aforementioned stock option
plans to certain shareholders who are executive officers, for the purchase
of Company common stock pursuant to the exercise of stock options. The
loans must be repaid at the time the underlying shares of common stock are
sold. Interest on a portion of the loans accrues at a rate of 8%. Total
shareholder loans approximated $558,000 at September 30, 2003 and 2002. No
such loans have been granted since late 1999.
In 1995, the Company declared a dividend distribution of one Preferred
Stock Purchase Right on each share of Company common stock. Each Right will
entitle the holder to buy one-thousandth of a share of a new series of
preferred stock at a price of $30.00 per share. The Rights will be
exercisable only if a person or group (other than the Company's chairman,
Gino N. Pala, and his family members) acquires 20% or more of the
outstanding shares of common stock of the Company or announces a tender
offer following which it would hold 30% or more of such outstanding common
stock. The Rights entitle the holders other than the acquiring person to
purchase Company common stock having a market value of two times the
exercise prices of the Right. If, following the acquisition by a person or
group of 20% or more of the Company's outstanding shares of common stock,
the Company were acquired in a merger or other business combination, each
Right would be exercisable for that number of the acquiring Company's
shares of common stock having a market value of two times the exercise
prices of the Right. The Company may redeem the Rights at one cent per
Right at any time until ten days following the occurrence of an event that
causes the Rights to become exercisable for common stock. The Rights expire
ten years from the date of distribution.
(8) OTHER COSTS:
------------
In connection with the completion of its debt restructuring in October
2002, the Company expensed approximately $625,000 of deferred financing
costs associated with its previous senior debt with a consortium of lenders
(which was repaid) and its previous subordinated debt agreements (which
were substantially modified). This expense is included in operating income
as debt refinancing costs in the accompanying Consolidated Financial
Statements.
The Company also incurred approximately $483,000 in professional fees and
other costs related to unconsummated mergers and acquisitions activity
pursued by the Company through its investment bankers. These costs are
included in operating income as investment banking and related costs in the
accompanying Consolidated Financial Statements.
(9) OTHER INCOME:
-------------
Other income, net in fiscal 2003 includes $672,000 of gains from the sale
of securities received by the Company as a policyholder following the
demutualizations of certain insurance companies. Additionally, the Company
received $380,000 and $253,000 in import duty rebates in 2003 and 2002,
respectively.
(10) RESTRUCTURING AND RELATED COSTS:
--------------------------------
The Company began fiscal 2001 with reserves of approximately $1 million,
previously provided in connection with its Restructuring and Cost Reduction
Program, which was intended to improve overall financial performance in the
future. The program included manufacturing plant closure and consolidation,
as well as personnel reduction in manufacturing, sales and marketing and
corporate activities. Approximately 300 employees (principally plant
workers) were affected by the prior phases of the program. The carrying
amount of property and equipment held for disposal at that time
approximated $3.1 million. Management disposed of these remaining assets in
2001.
In fiscal 2001, the Company incurred approximately $868,000 in costs
(principally in Mexico) directly related to the restructuring program which
were not eligible for recognition in prior periods and thus expensed as
incurred in 2001.
In fiscal 2002, the Company provided $418,000 in additional charges,
principally for lease termination and employee costs related to the
completion of prior phases of the restructuring program.
Also in fiscal 2002, the Company provided approximately $1,155,000 for
restructuring and improvement related costs in connection with the final
phase of its Restructuring and Cost Reduction Program, which included a
plant closure and further consolidation of its manufacturing operations
into the Company's Mexico facility and additional personnel reductions,
primarily in manufacturing and corporate activities. An additional 120
employees (principally plant workers) were affected by the final phase of
the program. The carrying amount of additional property held for disposal
from this final phase is approximately $200,000.
In fiscal 2003, the Company incurred an additional $487,000 in
restructuring costs related primarily to holding costs of a closed
manufacturing facility (not accruable in advance) and additional severance
related to personnel reductions in 2003.
The restructuring and impairment related charges and subsequent utilization
for the three fiscal years ended September 30, 2003 are summarized below
(in thousands):
Losses from
Employee impairment, sale
severance and abandonment
and related of property
costs and equipment Total
-------------- ----------------- ----------
Reserve balances at September 30, 2000 $ 673 $ 312 $ 985
2001 restructuring and impairment
related charges - 868 868
Utilized in fiscal 2001 (334) (1,180) (1,514)
-------------- ----------------- ----------
Reserve balances at September 30, 2001 339 - 339
-------------- ----------------- ----------
Additional fiscal 2002 provisions 135 283 418
2002 restructuring and impairment
related charges 1,110 45 1,155
-------------- ----------------- ----------
Total 2002 restructuring and
impairment related charges 1,245 328 1,573
Utilized in fiscal 2002 (474) (283) (757)
-------------- ----------------- ----------
Reserve balances at September 30, 2002 1,110 45 1,155
-------------- ----------------- ----------
2003 restructuring and impairment
related charges 163 324 487
Utilized in fiscal 2003 (1,183) (369) (1,552)
-------------- ----------------- ----------
Reserve balances at September 30, 2003 $ 90 $ - $ 90
============== ================= ==========
(11) EARNINGS PER COMMON SHARE:
--------------------------
Basic earnings (loss) per common share is calculated by dividing net income
(loss) by the weighted average number of shares outstanding. Diluted
earnings per common share is based upon the weighted average number of
shares outstanding, plus the effects of potentially dilutive common shares
[consisting of stock options (Note 7) and stock warrants (Note 4)]. For the
years ended September 30, 2003, 2002 and 2001, options and warrants to
purchase 354,600, 730,800 and 607,250 shares of common stock, respectively,
were excluded from the computation of diluted earnings (loss) per share as
such options and warrants were anti-dilutive.
Weighted average common shares used in the calculation of earnings (loss)
per share are as follows:
Year Basic Diluted
---- ---------- ----------
2003 3,196,714 3,196,714
2002 3,183,866 3,183,866
2001 3,171,190 3,176,609
(12) LINE OF BUSINESS REPORTING:
---------------------------
Due to the Company's sale of its Industrial Group (Note 13), the Company's
continuing operations only consist of one principal business segment - its
Consumer Group. The following information sets forth certain additional
data pertaining to its operations as of September 30, 2003, 2002 and 2001
for the years then ended (in thousands).
Operating Identifiable
Revenues Profit (Loss) Assets
------------ -------------- ----------------
2003:
United States $ 53,087 $ (910) $ 35,844
Canada 8,705 914 6,414
Mexico 25,569 3,731 25,965
United Kingdom 1,321 107 1,277
China 156 628 2,534
2002:
United States $ 51,685 $ (1,747) $ 41,127
Canada 8,694 792 5,879
Mexico 27,098 3,445 26,120
United Kingdom 1,094 29 642
China 20 125 1,435
2001:
United States $ 54,837 $ 2,076 $ 44,598
Canada 8,435 527 5,673
Mexico 23,813 2,849 29,012
United Kingdom 1,046 (26) 674
China 188 (70) 1,363
(13) 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 for all periods presented. In December 2002, the
Company entered into an agreement to sell this division to local
management. The transaction closed effective July 31, 2003. At closing, the
Company received consideration of $500,000 in the form of a seven-year
amortizing note receivable and net cash proceeds of approximately $3
million, utilized to reduce its senior debt. The Company retained tax and
certain other net liabilities of approximately $800,000.
Net revenues and income (loss) from discontinued operations are as follows
(in thousands):
2003 2002 2001
---------- ---------- ----------
Net revenues $ 8,021 $ 9,169 $ 9,529
========== ========== ==========
Income (loss) from discontinued
operations before income taxes $ (578) $ 200 $ (85)
Income tax benefit (expense) - (77) 29
---------- ---------- ----------
(578) 123 (56)
---------- ---------- ----------
Loss on disposal of Industrial Group - - (1,570)
Income tax benefit - - 526
---------- ---------- ----------
- - (1,044)
---------- ---------- ----------
Income (loss) from discontinued $ (578) $ 123 $(1,100)
========== ========== ==========
Earnings (loss) per share (basic) $ (0.18) $ .04 $ (0.35)
========== ========== ==========
Earnings (loss) per share (diluted) $ (0.18) $ .04 $ (0.35)
========== ========== ==========
Income (loss) from discontinued operations includes pre-tax gains on sales
of assets of $208 and $1,202 in 2002 and 2001, respectively, attributable
to the sale of the Company's Graphite and Lubricants division. In addition,
interest expense of $270, $342 and $427 has been allocated to income (loss)
from discontinued operations in 2003, 2002 and 2001, respectively, based
upon the identifiable assets of such operations. The loss on disposal in
2001 includes the anticipated loss on the sale of the New Castle
Refractories division of $468, a provision for the termination of that
division's pension plans of $432, and a provision for anticipated operating
losses of $670.
Assets and liabilities relating to discontinued operations, included in the
accompanying Consolidated Balance Sheet as of September 30, 2002 are as
follows (in thousands):
Current assets $ 3,905
Property, plant and equipment, net 386
Current liabilities (1,254)
Long-term liabilities and other, net (813)
------------
Net assets of discontinued operations $ 2,224
============
(14) COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company has entered into employment agreements with four executives
which provide for the continuation of salary (currently aggregating $68,700
per month) and related employee benefits for a period of 24 months
following their termination of employment under certain changes in control
of the Company. In addition, all options held by the executives would
become immediately exercisable upon the date of termination and remain
exercisable for 90 days thereafter. The Company has also entered into
various agreements with six additional employees which provide for
continuation of salaries (averaging $6,800 each per month) for periods up
to 16 months under certain circumstances.
In December 2002, the Company entered into a strategic distribution
arrangement with a third-party logistics partner to provide turn-key
distribution of the Company's products to its U.S. customers through June
2005. The Company incurred approximately $933,000 under this arrangement in
2003. The minimum remaining payments under the related contract are
approximately $945,000 in 2004 and $709,000 in 2005.
The Company leases certain manufacturing equipment under a five-year
noncancelable operating lease arrangement. The rental expense under this
lease was $433,000, $410,000 and $372,000 in 2003, 2002 and 2001,
respectively. Annual future minimum rental payments are approximately
$372,000 per year in 2004 and $93,000 in 2005.
The Company, in the normal course of business, is party in certain
litigation. In 1996, a decision was rendered by the Superior Court of New
Jersey in Hudson County finding the Company responsible for $1.94 million
in certain environmental clean-up costs relating to a claim under New
Jersey's Environmental Clean-Up Responsibility Act (ECRA) by a 1984
purchaser of industrial property from the Company. All subsequent appeals
were denied and as a result of the judgment, the Company paid $3.6 million
in 1998 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 and in fiscal 2000 the
Company reached settlements with its various insurers for reimbursement of
legal costs. In 2001, a pending malpractice suit against its previous legal
counsel was settled and the Company received $575,000 (reflected as a
reduction in selling and administrative expenses).
The Company is involved in various legal proceedings incident to the
conduct of its business. The Company does not expect the proceedings to
have a material effect on the Company's future results of operations or
financial position.
The Company assesses the extent of environmental matters on an ongoing
basis. In the opinion of management (after taking into account accruals of
approximately $269,000 as of September 30, 2003), the resolution of these
matters will not materially affect the Company's future results of
operations or financial position.
(15) RELATED PARTY TRANSACTIONS
--------------------------
A member of the Company's board of directors is a partner of a law firm
which represents the Company in various legal matters. The Company incurred
approximately $241,000, $33,000 and $20,000 for professional services
rendered by this firm in the fiscal years ended September 30, 2003, 2002
and 2001, respectively.
(16) SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
-----------------------------------------------------------
(In Thousands, Except Per Share Data):
--------------------------------------
2003: First Second Third Fourth
----- --------- --------- --------- --------
Revenues (a) $15,870 $18,893 $26,940 $27,135
Income (loss) from continuing operations (933) 146 1,850 (1,912) (c)
Income (loss) from discontinued operations - (252) (59) (267) (c)
Net income (loss) (933) (106) 1,791 (2,179) (c)
Earnings (loss) per share: (b)
Continuing operations:
Basic (.29) .04 .58 (.60)
Diluted (.29) .04 .58 (.60)
Discontinued operations:
Basic - (.07) (.02) (.08)
Diluted - (.07) (.02) (.08)
Net income (loss):
Basic (.29) (.03) .56 (.68)
Diluted (.29) (.03) .56 (.68)
2002: First Second Third Fourth
----- --------- --------- --------- --------
Revenues (a) $17,496 $17,928 $28,148 $25,019
Income (loss) from continuing operations (775) (656) 1,358 (610)
Income (loss) from discontinued operations - 131 - (8)
Net income (loss) (775) (525) 1,358 (618)
Earnings (loss) per share: (b)
Continuing operations:
Basic (.24) (.21) .43 (.19)
Diluted (.24) (.21) .43 (.19)
Discontinued operations:
Basic - .04 - -
Diluted - .04 - -
Net income (loss):
Basic (.24) (.17) .43 (.19)
Diluted (.24) (.17) .43 (.19)
(a) Certain reclassifications were made to classify certain sales incentives as
reductions of gross revenues and/or increases in cost of goods sold that
were previously classified as selling expenses (See Note 1 to Consolidated
Financial Statements).
(b) Calculated independently for each period, and consequently, the sum of the
quarters may differ from the annual amount.
(c) The fourth quarter of fiscal 2003 reflects the impact of providing for
additional valuation allowances for the Company's U.S. deferred tax assets
in the amounts of $2,232 and $190, included in continuing operations and
discontinued operations, respectively (see Note 5).
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
------------------------------------------------
FOR THE THREE YEARS ENDED SEPTEMBER 30, 2001, 2000 and 1999
-----------------------------------------------------------
Balance at Additions Additions to Balance
Beginning Charged (Deductions From) at Close
Description of Period to Income Reserves of Period
-------------------- ------------ ------------ --------------- -----------
Allowance for Doubtful Accounts:
Year Ended
September 30, 2003 $ 1,381,780 $ 315,026 $ (267,584) (1) $ 1,429,222
============ ============ =============== ===========
Year Ended
September 30, 2002 $ 1,482,524 $ 193,979 $ (294,723) (1) $ 1,381,780
============ ============ =============== ===========
Year Ended
September 30, 2001 $ 1,418,908 $ 151,263 $ (87,647) (1) $ 1,482,524
============ ============ =============== ===========
(1) Write-off of accounts considered to be uncollectible (net of recoveries).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-------------------------------------------------------------------
AND FINANCIAL DISCLOSURES
-------------------------
None.
ITEM 9A. CONTROLS AND PROCEDURES
--------------------------------
Within the 90-day period prior to the date of this report, the Company's
Co-Chief Executive Officers, Chief Financial Officer and Chief Accounting
Officer evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures and concluded that such
disclosure controls and procedures are effective. There have been no
significant changes in internal controls or in other factors, which could
significantly affect internal controls subsequent to the date that the
officers carried out their evaluations.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
--------------------------------------------------------------
Certain information required under this Item with respect to Directors and
Executive Officers will be contained in the Company's 2003 Proxy Statement,
pursuant to Regulation 14A, which is incorporated herein by reference.
The following table sets forth the names and ages of the Company's
Executive Officers, together with all positions and offices held with the
Company by such Executive Officers. All Executive Officers are subject to
re-election or re-appointment by the Board of Directors at the first
Directors' Meeting succeeding the next Annual Meeting of shareholders.
Name Age Title
---- --- -----
Gino N. Pala 75 Chairman of the Board since February
(Father-in-law of Richard F. Joyce) 1989; President and Chief Executive
Officer or Co-Chief Executive Officer
since 1978.
Richard F. Joyce 48 Vice Chairman of the Board since
(Son-in-law of Gino N. Pala) January 1990; President and Co-Chief
Executive Officer since March 1999;
prior thereto President and Chief
Operating Officer, Consumer Group,
since March, 1996; Executive Vice
President and Chief Legal Executive
since February 1991; Corporate Counsel
since July 1990.
Richard A. Asta 47 Executive Vice President of Finance and
Chief Financial Officer since February
1991; prior thereto Senior Vice
President - Finance and Chief Financial
Officer since March 1990; and Director
since May 1999.
Leonard D. Dahlberg, Jr. 52 Executive Vice President of Operations
since August 2000; Executive Vice
President of Procurement since April
1999; prior thereto Executive Vice
President, Industrial Group, since
March 1996; Executive Vice President of
Manufacturing / Consumer Products
division since August 1995; Senior Vice
President of Manufacturing since
February 1993; Vice President of
Manufacturing since March 1990.
John Adornetto 62 Vice President and Corporate Controller
since January 1991; prior thereto
Corporate Controller since September
1978.
Diego Cespedes Creixell 45 President, Grupo Dixon S.A. de C.V.,
since August 1996 and Director since
May 2000.
ITEM 11. EXECUTIVE COMPENSATION
-------------------------------
Information required under this Item will be contained in the Company's
2003 Proxy Statement which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------
Information required under this Item will be contained in the Company's
2003 Proxy Statement which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------
Information required under this Item will be contained in the Company's
2003 Proxy Statement which is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
-----------------------------------------------
Information required under this Item will be contained in the Company's
2003 Proxy Statement which is incorporated herein by reference.
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
------------------------------------------------------------------------
(a) Documents filed as part of this report:
1. Financial statements
See index under Item 1. Financial Information.
2. Exhibits
The following exhibits are required to be filed as part of this
Annual Report on Form 10-K:
(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
(2) c. Asset Purchase Agreement dated December 23, 2002, between
Dixon Ticonderoga Company, as Seller and New Castle
Refractories Company, Inc., Inc., as Buyer with addenda.
(3) (i) Restated Certificate of Incorporation2
(3) (ii) Amended and Restated Bylaws1
(4) a. Specimen Certificate of Company Common Stock2
(4) b. Amended and Restated Stock Option Plan3
(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
Canada1
(10) b. 12.00% Senior Subordinated Notes, Due 2003, Note and Warrant
Purchase Agreement1
(10) c. 12.00% Senior Subordinated Notes, Due 2003, Common Stock
Purchase Warrant Agreement1
(10) d. License and Technological Agreement between Carborundum
Corporation and New Castle Refractories Company, a division of
Dixon Ticonderoga Company1
(10) e. Equipment Option and Purchase Agreement between Carborundum
Corporation and New Castle Refractories Company, a division of
Dixon Ticonderoga Company1
(10) f. Product Purchase Agreement between Carborundum Corporation
and New Castle Refractories Company, a division of Dixon
Ticonderoga Company1
(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
Canada5
(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
(10) n. Loan and Security Agreement by and among Dixon Ticonderoga
Company and its Subsidiaries and Foothill Capital
Corporation.10
(10) o. Dixon Ticonderoga Company Amended and Restated Note and
Warrant Purchase Agreement, 12.5% Senior Subordinated Notes,
due October 3, 2005.10
(21) Subsidiaries of the Company.
(23) Consent of Independent Certified Public Accountants.
(31.1)Chairman of the Board and Co-Chief Executive Officer
Certification pursuant to Exchange Act Rule 13a-14 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)Vice Chairman of the Board and Co-Chief Executive Officer
Certification pursuant to Exchange Act Rule 13a-14 as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.3)Executive Vice President of Finance and Chief Financial
Officer Certification pursuant to Exchange Act Rule 13a-14 as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
(32.1)Chairman of the Board and Co-Chief Executive Officer
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2)Vice Chairman of the Board and Co-Chief Executive Officer
Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32.3)Executive Vice President of Finance and Chief Financial
Officer Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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 0-2655, filed in Washington, D.C.
9Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended September 30, 2002, file number 0-2655, filed in Washington, D.C.
10Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the period ended December 31, 2002, file number 0-2655, filed in Washington,
D.C.
(b) Reports on Form 8-K:
On August 15, 2003, the Company filed a Form 8-K which included as an
exhibit its press release dated August 13, 2003, regarding its third
fiscal quarter results.
SIGNATURES
----------
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
DIXON TICONDEROGA COMPANY
/s/ Gino N. Pala
-----------------------------
Gino N. Pala, Chairman of Board and
Co-Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this Annual Report on Form
10-K has been signed below by the following persons on behalf of the Company in
the capacities indicated.
/s/ Gino N. Pala
----------------------------
Gino N. Pala Chairman of Board, Co-Chief
Executive Officer and Director
Date: December 29, 2003
/s/ Richard F. Joyce
----------------------------
Richard F. Joyce Vice Chairman of Board,
Co-Chief Executive Officer,
President and Director
Date: December 29, 2003
/s/ Richard A. Asta
----------------------------
Richard A. Asta Executive Vice President of
Finance, Chief Financial
Officer and Director
Date: December 29, 2003
/s/ Diego Cespedes Creixell
----------------------------
Diego Cespedes Creixell President, Grupo Dixon S.A. de
C.V., and Director
Date: December 29, 2003
/s/ Philip M. Shasteen
----------------------------
Philip M. Shasteen Director
Date: December 29, 2003
/s/ Ben Berzin, Jr.
----------------------------
Ben Berzin, Jr. Director
Date: December 29, 2003
/s/ Kent Kramer
----------------------------
Kent Kramer Director
Date: December 29, 2003
/s/ John Ritenour
----------------------------
John Ritenour Director
Date: December 29, 2003
/s/ Wesley D. Scovanner
----------------------------
Wesley D. Scovanner Director
Date: December 29, 2003