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, 2004 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, 2004.
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
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Title of each class Name of each exchange on which registered
Common Stock, $1.00 par value American Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the 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, 2004, the aggregate market value
of the voting stock held by non-affiliates of the Company was $11,709,310.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of December 9, 2004: 3,207,894 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, 2004.
PART I
------
ITEM 1. BUSINESS
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RECENT EVENTS AND BUSINESS STRATEGIES
-------------------------------------
Merger of Dixon Ticonderoga Company with Fila - Fabbrica Italiana Lapis ed
Affini S.p.A:
On December 16, 2004, Dixon Ticonderoga Company (hereinafter the "Company")
and Fila - Fabbrica Italiana Lapis ed Affini S.p.A. ("Fila") executed a
definitive merger agreement under which Fila would acquire all of the
outstanding shares of the Company for $7.00 per share in cash. The price
represents a premium of approximately 68% over the stock price at the time the
parties began negotiations in late August 2004. Under the terms of the
definitive agreement, a wholly-owned subsidiary of Fila will commence a cash
tender offer on or about January 7, 2005, after which any remaining shares will
be acquired in a cash merger at the same price. The transaction has been
approved by both companies' boards of directors. However, since the consummation
of the transaction is subject to certain conditions, there is no assurance that
the tender offer or merger will be completed.
Recent Operating Results and Business Strategies:
In its fiscal year ended September 30, 2004, the Company achieved its best
operating results since 1999, reporting net income of over $1.7 million, or
$0.54 per share compared with net losses in each of the prior four fiscal years.
The Company has continued its emphasis on debt reduction following the
successful restructuring of its senior and subordinated debt arrangements in
late 2002. Total long-term debt and notes payable (net of cash balances) have
been reduced by approximately $10 million or 24% since 2001.
In 2004, the Company also concentrated its efforts on integration of its
operations following the completion of its aggressive manufacturing
consolidation and cost reduction program completed in 2003.
In addition, the Company's China subsidiary, Beijing Dixon Ticonderoga
Stationery Company, Ltd., continued its expansion as it is now dedicated to both
the production of wood slats used by the U.S. and Mexico in pencil manufacturing
and also the manufacture and marketing of 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.
In late 2003, the Company completed the sale of its last Industrial Group
business, its New Castle Refractories division, to local management and now
operates as strictly a consumer products company. (See Note 13 to Consolidated
Financial Statements.)
Additional information regarding these matters is included elsewhere in
this Annual Report on Form 10-K.
2
COMPANY ORGANIZATION
--------------------
Dixon Ticonderoga Company
(Parent)
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| | | |
| | | |
| | | |
Dixon Ticonderoga, Inc. Dixon Beijing Dixon Ticonderoga Graphite, Inc.
Canada Europe, Ltd. Ticonderoga Inactive
(Wholly-Owned) (Wholly-Owned) Stationery (Wholly-Owned)
Company, Ltd.
| (Wholly-Owned)
|
|
Grupo Dixon,
S.A. de C.V.
and subsidiaries
(98% 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, 2004, 2003 and 2002, 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. The Company manufactures the majority of
its Prang(R) brand of soy-bean based and wax crayons, chalks, dry and liquid
tempera, water colors and art materials at the facility of its majority-owned
(98%) subsidiary, Grupo Dixon, S.A. de C.V. (Grupo Dixon).
Through its subsidiaries, Grupo Dixon is engaged in the manufacture and
sale of black and color writing and drawing pencils, correction materials,
lumber crayons and allied products in Mexico. It also manufactures and sells the
types of products marketed in the U.S. under the Prang(R) brand under its
Vinci(R) brand in Mexico. Grupo Dixon also manufactures marker products,
modeling clay and special markers for industrial use, all of which are marketed
and sold together with the Prang(R) products by the U.S. Consumer division.
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.
Under a licensing agreement with Warner Bros. Consumer Products, the
Company also markets a line of pencils, pens and related products featuring the
famous Looney Tunes(R) and Scooby Doo(R) characters in Canada.
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.
3
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 manufactures 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)
------------------------------------------
In fiscal 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 better control the
distribution of its products in the U.S. market, the Company ended its
distribution arrangement with a third-party located in Statesville, North
Carolina in fiscal 2004. It now directly distributes from a leased facility in
Macon, GA. 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
based 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 2004 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 2004) 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.
4
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 1,403
of which 270 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
OF FLOOR
LOCATION 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 leases approximately 124,000 square feet in Macon, Georgia for
its U.S. central distribution center. 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.
5
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
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None.
PART II
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ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
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HOLDER MATTERS
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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 2004 2003
-------------- ---- ----
LOW HIGH LOW HIGH
---- ---- ---- ----
December 31 $3.05 $4.20 $1.15 $2.50
March 31 3.35 4.90 1.35 1.75
June 30 3.16 4.04 1.62 2.00
September 30 3.40 4.60 1.63 2.84
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 8,
2004 was 401.
6
ITEM 6. SELECTED FINANCIAL DATA
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
FOR THE FIVE YEARS ENDED SEPTEMBER 30, 2004
(in thousands, except per share amounts)
2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
REVENUES $ 88,169 $ 88,838 $ 88,591 $ 88,319 $ 88,867
========== ========== ========== ========== ==========
INCOME (LOSS) FROM
CONTINUING OPERATIONS $ 1,732 $ (849) $ (683) $ 620 $ (733)
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS $ -- $ (579) $ 123 $ (1,100) $ (65)
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 1,732 $ (1,428) $ (560) $ (480) $ (798)
========== ========== ========== ========== ==========
EARNINGS (LOSS) PER
COMMON SHARE (BASIC):
CONTINUING OPERATIONS $ .54 $ (.27) $ (.22) $ .20 $ (.23)
DISCONTINUED OPERATIONS $ -- $ (.18) $ .04 $ (.35) $ (.02)
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ .54 $ (.45) $ (.18) $ (.15) $ (.25)
========== ========== ========== ========== ==========
EARNINGS (LOSS) PER
COMMON SHARE (DILUTED):
CONTINUING OPERATIONS $ .54 $ (.27) $ (.22) $ .20 $ (.23)
DISCONTINUED OPERATIONS $ -- $ (.18) $ .04 $ (.35) $ (.02)
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ .54 $ (.45) $ (.18) $ (.15) $ (.25)
========== ========== ========== ========== ==========
TOTAL ASSETS $ 73,986 $ 72,034 $ 79,409 $ 86,091 $ 86,718
========== ========== ========== ========== ==========
LONG-TERM DEBT $ 9,974 $ 12,511 $ 16,383 2 $ 2,018 1 $ 30,210
========== ========== ========== ========== ==========
DIVIDENDS PER
COMMON SHARE $ -- $ -- $ -- $ -- $ --
========== ========== ========== ========== ==========
1The 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.
2The 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.)
7
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:
------------------------
In fiscal 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 and $9,169,000 in 2003 and 2002, respectively.
Income (loss) from discontinued operations was ($578,000) and $123,000 in 2003
and 2002, respectively (including pre-tax gains on sales of assets of $208,000
and income tax expense of $77,000 in 2002). Interest expense of $270,000 and
$342,000 has been allocated to discontinued operations in 2003 and 2002,
respectively.
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:
----------------------
2004 vs 2003:
-------------
Income from continuing operations before taxes and minority interest
improved by $314,000 in 2004. 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):
2004 2003
---------- -----------
Income (loss) from continuing operations $ 2,251 $ 1,937
before income taxes and minority interest
Restructuring and related costs -- 487
Debt refinancing costs -- 625
Investment banking and related costs 768 483
Other (income) expense, net 94 (1,052)
---------- -----------
$ 3,113 $ 2,480
========== ===========
The Company concluded its comprehensive restructuring and plant
consolidation program as well as its debt restructuring initiatives in 2003;
accordingly, there were no costs incurred in 2004 for these items. The Company
continued to pursue merger and acquisition activity in 2004 resulting in an
increase in investment banking and related costs. Other (income) expense, net in
2003 represents gains from securities received by the Company following the
demutualization of certain insurance companies amounting to $612,000 and import
duty rebates received. In 2004, the Company incurred $94,000 in legal costs
related to claims for additional import duty rebates. For further information
regarding special items, see Notes 8, 9 and 10 to Consolidated Financial
Statements.
Lower selling and administrative costs in U.S. Consumer (principally
commissions, advertising, distribution and personnel costs) contributed to the
Company's improvement in results from operations. Foreign Consumer decreased
primarily due to the effects of pricing pressures in Mexico following the peso
devaluation in 2003 and mix of product sold. Lower Mexico profits were partially
offset by lower costs associated with certain imported products and favorable
currency effects in Canada.
8
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.
REVENUES
--------
Revenues in 2004 decreased $669,000 from the prior year. The changes are as
follows:
Increase (Decrease) % Increase (Decrease)
(in thousands) Total Volume Price/Mix
------------- ----- ------ ---------
U.S. $ (2,754) (5) (3) (2)
Foreign 2,085 6 6 --
U.S. Consumer revenue decreased in the educational and retail markets. The
prior year educational market reflected historical end of year promotional
activity that was not repeated in 2004. Also in the prior year, the retail club
market included a back-to-school program that was not offered in fiscal 2004 due
to its associated high promotional cost. Increases in the commercial and special
markets partially offset these decreases. Foreign Consumer revenue decreased
$1.5 million in Mexico and increased $700,000 and $170,000 in Canada and Great
Britain, respectively due to their change in their foreign currencies in
relationship to the U.S. dollar. Price and volume increases in Mexico of
approximately $2.9 million more than offset the foreign currency effects.
Overall 2003 revenues increased $247,000 from the prior year. The changes
are as follows:
Increase(Decrease) % Increase (Decrease)
(in thousands) Total Volume Price/Mix
------------- ----- ------ ---------
U.S. $ 1,401 3 5 (2)
Foreign (1,154) (3) (7) 4
9
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.
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 2004 operating income increased $1,337,000 as compared to the prior
year. Special items including restructuring and related costs, debt refinancing
costs and investment banking and related costs are set forth in the table below.
2004 2003
---------- ----------
Operating income $5,807 $4,470
Restructuring and related costs -- 487
Debt refinancing costs -- 625
Investment banking and related costs 768 483
---------- ----------
$6,575 $6,065
========== ==========
Before special items described more fully above, U.S. operating income
increased $735,000, primarily due to lower marketing, selling and distribution
costs and lower administrative personnel costs. Foreign Consumer operating
income decreased $225,000 before special items, as revenue increases discussed
above were more than offset by increased selling and distribution costs and
lower gross margins due to competitive pricing pressures and higher
manufacturing costs in certain foreign operations.
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 483 --
---------- ----------
$6,065 $4,217
========== ==========
10
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).
For further information regarding the aforementioned special items, see
Notes 8, 9 and 10 to Consolidated Financial Statements.
INCOME TAXES
------------
As more fully described in Note 5 to Consolidated Financial Statements, in
fiscal 2004 and 2003 the Company provided valuation allowances for U.S. deferred
tax assets in the amount of $1,135,000 and $2,232,000, respectively. Despite the
significant improvement in U.S. operating results in 2004 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, 2004.
MINORITY INTEREST
------------------
Minority interest represents approximately 2% in fiscal 2004 and 3% in 2003
and 2002 of the net income of the consolidated subsidiary, Grupo Dixon, S.A. de
C.V., ($47,000, $42,000 and $51,000 in fiscal 2004, 2003 and 2002,
respectively), equivalent to the extent of the investment of the minority
shareholders.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
In 2004, the Company achieved significantly improved results from
operations and its cash flows from operating activities improved in excess of $3
million. This was accomplished despite an increase in inventories of over $4
million resulting from significantly higher (approximately $2 million)
in-transit imported products necessary to accommodate production and marketing
lead times; elimination of certain year-end sales promotions in the U.S.; and
certain safety stock levels which were increased as new manufacturing processes
were implemented in Mexico. Cash flows were also favorably impacted by better
accounts receivable collections; improved accounts payable management; and lower
payments of accrued liabilities (principally interest, restructuring and asset
disposal costs) as compared with the prior year.
The Company's 2004 investing activities included approximately $1.3 million
in net purchases of property and equipment compared with only $427,000 last
year. The increase is due to the purchase of computer software enhancements
designed to improve logistics and inventory management, as well as certain
strategic manufacturing equipment in Mexico. 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, cash flows were provided from the sale of the
aforementioned Newcastle Refractories division assets and proceeds from the sale
of securities received from insurance company demutualizations.
In fiscal 2003, the Company completed a financing agreement with a 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 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 (4.75% at September 30, 2004), plus 0.75%, or
the prevailing LIBOR rate (approximately 1.98% at September 30, 2004), plus
11
3.5%. Borrowings under the revolving loan are based upon 85% of eligible U.S.
and Canada accounts receivable, as defined in the loan agreement; 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 $33,333, 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, 2004, the Company had approximately $11 million of unused lines
of credit available. The Company expects to renew and extend the senior debt
facility before its expiration in October 2005.
In fiscal 2003, 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 was 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 senior debt
facility and made additional payments to its subordinated lenders of
approximately $4.5 million in through September 30, 2004. 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 the maturity date in October 2005 (due
to restrictions imposed under the 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 through fiscal 2004 to avoid the issuance of
any such warrants, at least through that date. Under the subordinated note
agreement, as amended, the next date at which a portion of the contingent
warrants issued to the subordinated noteholders would become exercisable is
March 31, 2005, when contingent warrants to purchase up to 2.5% of the diluted
common shares outstanding will become exercisable if aggregate payments to the
subordinated noteholders are less than $8 million 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. Management believes that if the potential
transaction described below does not close by then, the Company will have
sufficient availability under its existing lines of credit and those of its
Mexican subsidiary to make the required payment due on March 31, 2005 in order
to avoid the exercise of the subordinated lenders' warrants, but there can be no
assurance that such funds will be available and that the warrants will not be
exercised.
The agreement also grants the subordinated lenders a lien on Company assets
(junior in all aspects to the senior debt collateral agreements described
above). The interest rate on the notes is 12.5% through maturity in October
2005. The 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 senior debt agreements.
If the potential transaction discussed below is consummated, the
subordinated notes will be repaid in full. Notwithstanding the potential
transaction, the Company has been negotiating a new long-term subordinated debt
agreement based upon several proposals from various financial institutions. Such
proposals include payment levels supported by the present cash flows of the
Company's operations. There can be no assurance that management's efforts in
this regard will be successful.
In addition, the Company's Mexican subsidiary had approximately $25 million
in bank lines of credit ($19 million unused) as of September 30, 2004, currently
expiring at various dates from March 2005 through November 2007, which bear
12
interest at a rate based upon either a fixed or floating U.S. bank rate, LIBOR
or the rate of certain Mexican government securities. 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 (which it expects to renew and extend before the end of fiscal
2005) and under lines of credit available to its Mexican subsidiary are
sufficient to fulfill all current and anticipated operating requirements of its
business through September 30, 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 Mexico lines of credit.
Refer to Notes 3 and 4 to Consolidated Financial Statements for further
description of the aforementioned financing arrangements.
The Company has recently been assisted by investment bankers and certain
other outside consultants to advise and assist it in evaluating certain
strategic alternatives, including capital restructuring, mergers and
acquisitions, and/or other measures designed to maximize shareholder value. The
Company continues to pursue strategic alternatives, including a potential sale.
The costs associated with these initiatives (including the potential transaction
discussed below) are reflected as investment banking and related costs in the
accompanying financial statements. Management expects to continue to incur
certain expenses in the future related to these activities.
On December 16, 2004, the Company and Fila - Fabbrica Italiana Lapis ed
Affini S.p.A. ("Fila") executed a definitive merger agreement under which Fila
would acquire all of the outstanding shares of the Company for $7.00 per share
in cash. The price represents a premium of approximately 68% over the stock
price at the time the parties began negotiations in late August 2004. Under the
terms of the definitive agreement, a wholly-owned subsidiary of Fila will
commence a cash tender offer on or about January 7, 2005, after which any
remaining shares will be acquired in a cash merger at the same price. The
transaction has been approved by both companies' boards of directors. However,
since the consummation of the transaction is subject to certain conditions,
there is no assurance that the tender offer or merger will be completed. (See
Note 17 to Consolidated Financial Statements.)
RECENT ACCOUNTING PRONOUNCEMENT
-------------------------------
In October 2004, the FASB concluded that Statement No. 123R, "Share-Based
Payment" ("Statement 123R"), which would require all companies to measure
compensation cost for all share-based payments (including employee stock
options) at fair value, would be effective for public companies (except small
business issuers as defined in SEC Regulation S-B) for interim or annual periods
beginning after June 15, 2005. Retroactive application of the requirements of
Statement No. 123, "Accounting for Stock-Based Compensation," ("Statement 123"),
not Statement 123R, to the beginning of the fiscal year that includes the
effective date would be permitted, but not required. The Company would be
required to adopt this statement in its 2006 fiscal year. Note 1 - "Stock-based
compensation" sets forth the pro forma effect on net income (loss) and earnings
(loss) per share assuming the Company had applied the fair value recognition
provisions of Statement 123.
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.
13
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 in future
periods. The Company currently has no reserves for future restructuring
initiatives.
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 and 2004, the Company provided additional valuation allowances
for U.S. deferred tax assets, as more fully described above and in Note 5 to
Consolidated Financial Statements.
14
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 and
its Mexican subsidiary's lines of credit and its ability to meet its current and
anticipated obligations and operating requirements through September 30, 2005,
including payments due under its subordinated debt; management's expectation as
to the Company's ability to avoid the exercise of warrants held by its
subordinated lenders; management's belief that there will be sufficient amounts
available under its present or future facilities or lines of credit to cover any
potential shortfalls due to any expiring Mexico lines of credit; management's
expectation with respect to renewing and extending its senior debt facility and
negotiating a new subordinated debt arrangement; 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 following: that the shareholders
ownership will be diluted by the issuance of common stock to the Company's
subordinated lenders; that the Company will not be successful in renewing and
extending its senior debt facility and /or negotiating a new subordinated debt
agreement; that the Company's lenders will not continue to fund the Company in
the future; the risk of the cancellation of the lines of credit available to the
Company's Mexico subsidiary; the risk of the inability to maintain and/or secure
new sources of capital; manufacturing inefficiencies; risks associated with
difficulties encountered with the consolidation and cost-reduction program;
risks associated with increased competition; risks associated with decreases in
revenues; risks related to U.S. and foreign economic factors; risks related to
foreign currency exchange risk; interest rate fluctuation risk; and, the risk of
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 41% of the Company's fiscal 2004 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, 2004, approximately 50% of total short
and long-term debt is fixed, at rates between 4% 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.
15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
PAGE
Report of Independent Registered Certified Public Accounting Firm 17
Consolidated Balance Sheets as of September 30, 2004 and 2003 18
Consolidated Statements of Operations For the Years
Ended September 30, 2004, 2003 and 2002 19
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended September 30, 2004, 2003 and 2002 20
Consolidated Statements of Shareholders' Equity For the Years
Ended September 30, 2004, 2003 and 2002 21
Consolidated Statements of Cash Flows For the Years
Ended September 30, 2004, 2003 and 2002 22-23
Notes to Consolidated Financial Statements 24-41
Schedule For the Years Ended September 30, 2004, 2003 and 2002:
II. Valuation and Qualifying Accounts 42
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.
16
Report of Independent Registered Certified Public Accounting Firm
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, 2004 and 2003, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2004 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 present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statement. These financial
statements and the 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 the standards of the
Public Company Accounting Oversight Board (United States). Those standards
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.
As more fully discussed in Note 17 to the consolidated financial statements, on
December 16, 2004, the Company entered into a merger agreement for the sale of
all of the outstanding shares of the Company.
As more fully discussed in Note 4 to the consolidated financial statements, the
Company's Senior Subordinated Notes mature on October 3, 2005.
PricewaterhouseCoopers LLP
Orlando, Florida
December 16, 2004
17
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30, 2004 AND 2003
---------------------------
2004 2003
-------------- --------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 2,246,723 $ 1,032,974
Receivables, less allowance for doubtful accounts
of $1,333,462 in 2004 and $1,429,222 in 2003. 26,130,131 28,326,743
Inventories 31,168,466 26,439,361
Other current assets 2,273,590 2,350,813
-------------- --------------
Total current assets 61,818,910 58,149,891
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 8,121,479 8,242,881
Machinery and equipment 12,766,784 12,118,409
Furniture and fixtures 1,483,528 1,424,425
-------------- --------------
22,371,791 21,785,715
-------------- --------------
Less accumulated depreciation (14,558,544) (13,676,212)
-------------- --------------
7,813,247 8,109,503
-------------- --------------
OTHER ASSETS 4,353,854 5,774,649
-------------- --------------
$73,986,011 $72,034,403
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 5,519,704 $ 6,382,065
Current maturities of long-term debt 16,691,140 13,227,965
Accounts payable 11,731,712 9,102,711
Accrued liabilities 7,005,461 8,496,182
-------------- --------------
Total current liabilities 40,948,017 37,208,923
-------------- --------------
LONG-TERM DEBT 9,974,414 12,510,860
-------------- --------------
DEFERRED INCOME TAXES AND OTHER 418,836 894,601
-------------- --------------
MINORITY INTEREST 392,238 578,530
-------------- --------------
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 2004 and 2003 3,710,309 3,710,309
Capital in excess of par value 3,519,531 3,547,567
Retained earnings 25,411,678 23,679,772
Accumulated other comprehensive loss (6,568,210) (6,238,403)
-------------- --------------
26,073,308 24,699,245
Less shareholder loans (557,721) (557,721)
Less treasury stock, at cost (502,415 shares in
2004 and 508,160 shares in 2003) (3,263,081) (3,300,395)
-------------- --------------
22,252,506 20,841,129
-------------- --------------
$73,986,011 $72,034,043
============== ==============
The accompanying notes are an integral part of the consolidated financial statements.
18
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
------------------------------------------------------
2004 2003 2002
------------- ------------- -------------
REVENUES
$ 88,168,759 $ 88,837,615 $ 88,590,730
------------- ------------- -------------
COSTS AND EXPENSES:
Cost of goods sold 54,704,107 54,978,678 57,132,999
Selling and administrative expenses 26,889,243 27,793,534 27,240,511
Provision for restructuring and related costs -- 486,866 1,573,235
Debt refinancing costs -- 624,662 --
Investment banking and related costs 768,260 483,493 --
------------- ------------- -------------
82,361,610 84,367,233 85,946,745
------------- ------------- -------------
OPERATING INCOME 5,807,149 4,470,382 2,643,985
OTHER INCOME (EXPENSE), NET (93,963) 1,052,500 252,676
INTEREST EXPENSE (3,461,733) (3,585,729) (4,087,731)
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (BENEFIT) AND MINORITY INTEREST 2,251,453 1,937,153 (1,191,070)
INCOME TAXES (BENEFIT) 472,889 2,744,420 (559,064)
------------- ------------- -------------
1,778,564 (807,267) (632,006)
MINORITY INTEREST 46,658 42,221 51,214
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 1,731,906 (849,488) (683,220)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF APPLICABLE INCOME TAXES (BENEFIT) -- (578,492) 123,297
------------- ------------- -------------
NET INCOME (LOSS) $ 1,731,906 $ (1,427,980) $ (559,923)
============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE (BASIC):
Continuing operations $ .54 $ (.27) $ (.22)
Discontinued operations -- (.18) .04
------------- ------------- -------------
Net income (loss) $ .54 $ (.45) $ (.18)
============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE (DILUTED):
Continuing operations $ .54 $ (.27) $ (.22)
Discontinued operations -- (.18) .04
------------- ------------- -------------
Net income (loss) $ .54 $ (.45) $ (.18)
============= ============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
19
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
---------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
-----------------------------------------------------
2004 2003 2002
------------ ------------ -------------
NET INCOME (LOSS) $ 1,731,906 $(1,427,980) $ (559,923)
OTHER COMPREHENSIVE INCOME (LOSS):
Adjustment to recognize fair value
of cash flow hedge 461,824 (138,672) (115,934)
Foreign currency translation (791,631) (459,469) (1,422,647)
adjustments
------------ ------------ -------------
TOTAL COMPREHENSIVE INCOME (LOSS): $ 1,402,099 $(2,026,121) $ (2,098,504)
============ ============ =============
The accompanying notes are an integral part of the
consolidated financial statements.
20
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
------------------------------------------------------
Accumulated
Common Capital in Other
Stock $1 Excess of Retained Comprehensive Shareholder Treasury
Par Value Par Value Earnings Loss Loans Stock Total
----------- ---------- ----------- --------------- ---------- ----------- ------------
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
Net loss 3,710,309 3,593,826 25,107,752 (5,640,262) (557,721) (3,360,909) 22,852,995
Other comprehensive loss (1,427,980) (1,427,980)
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
Net income 1,731,906 1,731,906
Other comprehensive loss (329,807) (329,807)
Employee Stock Purchase
Plan (5,745 shares) (28,036) 9,278
----------- ---------- ----------- --------------- ---------- ----------- ------------
BALANCE, September 30, 2004 $3,710,309 $3,519,531 $25,411,678 $(6,568,210) $(557,721) $(3,263,081) $22,252,506
=========== ========== =========== =============== ========== =========== ============
The accompanying notes are an integral part
of the consolidated financial statements.
21
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 2004, 2003 AND 2002
------------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) from continuing operations $ 1,731,906 $ (849,488) $ (683,220)
Net income (loss) from discontinued operations -- (578,492) 123,297
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 2,142,617 2,414,819 2,322,692
Deferred taxes (158,000) 2,175,000 (2,334,000)
Provision for doubtful accounts receivable 258,032 315,026 193,979
Debt refinancing costs -- 624,662 --
Gain on sale of assets -- -- (208,290)
Gain on sale of securities received from
insurance companies demutualizations -- (672,291) --
Income attributable to minority interest 46,658 42,221 51,214
Income attributable to foreign
currency exchange (225,035) (433,461) (215,955)
Changes in assets [(increase) decrease] and
liabilities [increase (decrease)]:
Receivables, net 1,766,114 (1,230,691) (7,574)
Inventories (4,087,438) (348,379) 6,226,836
Other current assets 74,870 (109,737) (457,698)
Accounts payable and accrued liabilities 719,586 (3,278,476) 3,673,182
Other assets 456,798 1,521,103 (250,686)
------------ ------------ ------------
Net cash provided by (used in)
operating activities 2,726,108 (408,184) 8,433,777
------------ ------------ ------------
Cash flows from investing activities:
Purchases of plant and equipment, net (1,253,077) (426,775) (1,520,088)
Proceeds on sale of assets -- 2,988,616 208,290
Proceeds on sale of securities received from
insurance companies demutualizations -- 737,321 --
------------ ------------ ------------
Net cash provided by (used in)
investing activities (1,253,077) 3,299,162 (1,311,798)
------------ ------------ ------------
22
2004 2003 2002
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 4,475,916 14,449,123 --
Proceeds from (principal reductions of)
notes payable (625,539) (564,975) 1,716,828
Principal reductions of long-term debt (3,549,187) (17,435,139) (6,101,200)
Deferred refinancing costs -- (549,193) (955,628)
Other non-current liabilities (255) (100,545) 40,736
Employee Stock Purchase Plan 9,278 14,255 23,516
------------ ------------ ------------
Net cash provided by (used in)
financing activities 310,213 (4,186,474) (5,275,748)
------------ ------------ ------------
Effect of exchange rate changes on cash (569,495) (261,023) (101,037)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents 1,213,749 (1,556,519) 1,745,194
Cash and cash equivalents, beginning of year 1,032,974 2,589,493 844,299
------------ ------------ ------------
Cash and cash equivalents, end of year 2,246,723 1,032,974 2,589,493
============ ============ ============
Supplemental disclosures:
Cash paid during the year for:
Interest 3,444,765 5,684,833 3,033,931
Income taxes 1,034,068 882,246 1,677,478
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.
The accompanying notes are an integral part
of the consolidated financial statements.
23
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 (currently approximately 2%) 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 and 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 included in operating income were
approximately $225,000, $433,000 and $216,000 for fiscal years 2004, 2003
and 2002, respectively.
Cash and cash equivalents:
--------------------------
Cash and cash equivalents include investment instruments with a maturity of
three months or less at time of purchase.
24
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 $7,331,000 and $7,512,000 at September 30,
2004 and 2003, 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 $276,000 and $266,000
lower at September 30, 2004 and 2003, respectively. All other inventories
are valued for using the FIFO method.
Inventories consist of (in thousands):
September 30,
2004 2003
--------- ---------
Raw material $ 13,662 $ 10,486
Work in process 2,854 2,198
Finished goods 14,652 13,755
--------- ---------
$ 31,168 $ 26,439
========= =========
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
25
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:
2004 2003 2002
------------ ------------ ------------
Net income (loss), as reported $ 1,731,906 $(1,427,980) $ (559,923)
Deduct: total stock-based
employee compensation
expense determined under
the fair value based method,
net of related tax effects (41,320) (73,601) (102,431)
------------ ------------ ------------
Pro forma net income (loss) $ 1,690,586 $(1,501,581) $ (662,354)
============ ============ ============
Income (loss) per share:
Basic, as reported .54 (.45) (.18)
============ ============ ============
Basic, pro forma .53 (.47) (.21)
============ ============ ============
Diluted, as reported .54 (.45) (.18)
============ ============ ============
Diluted, pro forma .53 (.47) (.21)
============ ============ ============
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 and 2004, 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.
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
26
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 pronouncement:
--------------------------------
In October 2004, the FASB concluded that Statement No. 123R, "Share-Based
Payment" ("Statement 123R"), which would require all companies to measure
compensation cost for all share-based payments (including employee stock
options) at fair value, would be effective for public companies (except
small business issuers as defined in SEC Regulation S-B) for interim or
annual periods beginning after June 15, 2005. Retroactive application of
the requirements of Statement No. 123, "Accounting for Stock-Based
Compensation," ("Statement 123"), not Statement 123R, to the beginning of
the fiscal year that includes the effective date would be permitted, but
not required. The Company would be required to adopt this statement in its
2006 fiscal year. Note 1 - "Stock-based compensation" sets forth the pro
forma effect on net income (loss) and earnings (loss) per share assuming
the Company had applied the fair value recognition provisions of Statement
123.
Reclassifications:
------------------
Certain prior year amounts have been reclassified to conform with the
current year classifications.
27
(2) ACCRUED LIABILITIES:
--------------------
The major components of accrued liabilities are as follows (in thousands):
September 30,
2004 2003
--------- ---------
Interest (see Note 4) $ 1,163 $ 1,180
Salaries and wages 582 1,014
Employee benefit plans 420 417
Income taxes 2,997 2,965
Other 1,843 2,920
--------- ---------
$ 7,005 $ 8,496
========= =========
(3) NOTES PAYABLE:
--------------
The Company's Mexico subsidiary has bank lines of credit totaling
approximately $25 million, under which $5.5 and $6.4 million of unsecured
notes payable were outstanding as of September 30, 2004 and 2003,
respectively. The notes, which currently mature at varying dates from March
2005 through November 2007, bear interest (weighted average interest rate
of approximately 5.4% and 7.4% at September 30, 2004 and 2003,
respectively) based upon either a fixed or floating U.S. bank rate, LIBOR
or the rate of certain Mexican government securities and are renewable at
varying dates.
(4) LONG-TERM DEBT:
---------------
Long-term debt consists of the following (in thousands):
September 30,
2004 2003
--------- ---------
Senior Subordinated Notes $ 10,992 $ 13,342
Bank notes payable 12,809 8,348
Bank term loan 1,203 2,216
Building mortgage 1,661 1,833
--------- ---------
26,665 25,739
Less current maturities (16,691) (13,228)
--------- ---------
$ 9,974 $ 12,511
========= =========
In fiscal 2003, 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
provides a three-year $28 million senior debt facility.
The senior debt facility includes a $25 million revolving loan, which bears
interest at either the prime rate (4.75% at September 30, 2004), plus
0.75%, or the prevailing LIBOR rate (approximately 1.98% at September 30,
2004), 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
28
facility also includes term loans aggregating an initial amount of $3
million, which bear interest at either prime rate, plus 1.5%, or the
prevailing LIBOR rate, plus 4.25%. These loans are payable in monthly
installments of $33,333, 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, 2004 the Company had approximately
$11 million of unused lines of credit available under the revolving loan.
The Company expects to renew and extend the senior debt facility before its
expiration in October 2005.
In fiscal 2003, 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 October 3, 2005. The Company was 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 aforementioned senior debt facility and made additional
payments to its subordinated lenders of approximately $4.5 million through
September 30, 2004. 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 the maturity date in October 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. Under
the subordinated note agreement, as amended, the next date at which the
noteholders could receive warrants is March 31, 2005, when contingent
warrants to purchase up to 2.5% of the diluted common shares outstanding
would be issued if aggregate payments to the subordinated noteholders are
less than $8 million 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 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 $714,000, included in accrued interest at September 30, 2004.
(See Note 2). The subordinated note agreement includes certain other
provisions, including restrictions as to the payment of dividends.
If the potential transaction discussed in Note 17 is consummated, the
subordinated notes will be repaid in full. Not withstanding the potential
transaction, the Company has been negotiating a new long-term subordinated
debt agreement based upon several proposals from various financial
institutions. Such proposals include payment levels supported by the
present cash flows of the Company's operations. There can be no assurance
that management's efforts in this regard will be successful.
29
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):
2005 $16,691
2006 8,703
2007 219
2008 238
Thereafter 814
----------
$26,665
==========
(5) INCOME TAXES:
-------------
The components of net deferred tax asset recognized in the accompanying
consolidated balance sheet are as follows (in thousands):
2004 2003
------------ ------------
Foreign current deferred tax liability
(included in accrued liabilities) $ (1,296) $ (1,455)
U.S. and foreign, noncurrent deferred tax
asset (included in other assets and
deferred income taxes and other) 554 602
------------ ------------
Net deferred tax liability $ (742) $ (853)
============ ============
Deferred tax assets:
U.S. tax credit carryforwards $ 1,232 $ --
Provisions for losses from discontinued
operations 33 48
Depreciation 151 157
Accrued pension 752 683
Interest 110 266
Other accrued expenses 149 481
Installment sale and related expenses (211) (248)
Other items, net 571 289
Foreign net operating loss carryforward 554 602
Valuation allowance (2,787) (1,676)
------------ ------------
Total deferred tax asset 554 602
------------ ------------
Deferred tax liabilities:
Inventories (622) (791)
Property, plant and equipment (94) (108)
Valuation allowance (580) (556)
------------ ------------
Total deferred tax liability (1,296) (1,455)
------------ ------------
Net deferred tax liability $ (742) $ (853)
============ ============
It is the policy of the Company to accrue deferred income taxes on
temporary differences related to the financial statement carrying amounts
30
and tax bases of investments in foreign subsidiaries which are expected to
reverse in the foreseeable future. There has been no provision for U.S.
income taxes for the remaining undistributed earnings of non-U.S.
subsidiaries (approximating $34 million at September 30, 2004) because the
Company intends to reinvest these earnings indefinitely in operations
outside the U.S. In fiscal 2004 and 2003, the Company provided additional
valuation allowances for certain U.S. deferred tax assets in the amount of
$1,135,000 and $2,232,000, respectively, due to continuing U.S. taxable
losses. In 2004, the Company again incurred tax losses in the U.S.
partially due to certain costs (Notes 8 and 9), among other factors.
At September 30, 2004 and 2003, the Company had valuation allowances
against U.S. deferred tax assets totaling $3,367,000 and $2,232,000,
respectively. These valuation allowances relate to U.S. tax assets as
management believes 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):
2004 2003 2002
-------- -------- ---------
Current:
U.S. Federal $ - $ - $ 640
State - 95 (40)
Foreign 631 474 1,175
-------- -------- ---------
631 569 1,775
-------- -------- ---------
Deferred:
U.S. Federal - 2,050 (2,081)
State - - (206)
Foreign (158) 125 (47)
-------- -------- ---------
(158) 2,175 (2,334)
-------- -------- ---------
$ 473 $2,744 $ (559)
======== ======== =========
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 results primarily from expenses accrued but
not yet deductible for taxes and tax credit carryforwards.
31
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):
2004 2003 2002
-------- -------- ---------
Amount computed using statutory rate $ 765 $ 659 $ (533)
Foreign income (1,101) (518) (178)
State taxes, net of federal benefit - 63 (162)
Permanent differences 128 - 149
Valuation allowances 1,135 2,232 -
Other (454) 308 165
-------- -------- ---------
Provision (benefit) for income taxes $ 473 $2,744 $ (559)
======== ======== =========
(6) EMPLOYEE BENEFIT PLANS:
-----------------------
The Company maintains one defined benefit plan covering certain former U.S.
Consumer division union employees. The benefits are based upon fixed dollar
amounts per years of service. The assets of this plan (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.
32
The following tables set forth the plan's funded status and other
information for the fiscal years ended September 30, 2004 and 2003 (in
thousands):
September 30,
-------------
2004 2003
---------- ----------
Change in benefit obligation:
Obligation at beginning of year $ 1,815 $ 1,762
Service cost -- 50
Interest cost 107 118
Actuarial gain 27 179
Benefit payments (480) (294)
---------- ----------
Obligation at end of year $ 1,469 $ 1,815
========== ==========
Change in market value of plan assets:
Market value at beginning of year $ 2,211 $ 2,108
Actual return on plan assets 59 251
Employer contributions 65 146
Benefit payments (454) (294)
---------- ----------
Market value at end of year $ 1,881 $ 2,211
========== ==========
Prepaid pension asset:
Projected benefit obligation $(1,469) $(1,815)
Plan assets at market value 1,881 2,211
---------- ----------
Projected benefit obligation less
than plan assets 412 396
Unrecognized net (gain) loss from past
experience different from assumptions 65 37
Unrecognized net obligation being recognized
over periods from 10 to 16 years -- 2
---------- ----------
Prepaid pension asset $ 477 $ 435
========== ==========
Net periodic pension (income) expense includes the following components
(in thousands):
2004 2003 2002
--------- ---------- ----------
Service costs - benefits earned
during period $ - $ 50 $ 90
Interest cost on projected benefit
obligation 125 118 123
Expected return on plan assets (167) (186) (153)
Curtailment loss - 162 -
Net amortization and deferral - - 12
--------- ---------- ----------
Net periodic pension
(income) expense $ (42) $ 144 $ 72
========= ========== ==========
33
In determining the projected benefit obligation, the weighted average
discount rates utilized were 6.25%, 6.5% and 6.4% for the periods ended
September 30, 2004, 2003 and 2002, respectively. The expected long-term
rates of return on assets used in determining net periodic pension cost
ranged from 7.0 % 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 a defined-contribution plan (401k) for all
remaining domestic 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,
2004, 2003 and 2002 were $160,000, $240,000 and $243,000, 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 partially funded through the purchase of
certain life insurance products. As of September 30, 2004 and 2003, the net
liability under the plan (included in accrued liabilities), was $722,000
and $633,000, respectively. Amounts charged to expense under the plan
totaled $120,000, $93,000 and $118,000 in 2004, 2003 and 2002,
respectively.
(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, 2004, 2003 and
2002, 5,745, 9,317 and 15,370 shares, respectively, were issued under this
plan. At September 30, 2004, there are 41,874 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, 2004, there were 122,500
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 2004, 15,000 options were
granted to employees under the 1999 Plan. At September 30, 2004 there were
175,500 options outstanding and 124,500 shares available for future grants
under the 1999 Plan.
34
The following table summarizes the combined stock options activity for
2004, 2003 and 2002.
2004 2003 2002
-------------------- ------------------- -------------------
Number Option Number Option Number Option
of Shares Price of Shares Price of Shares Price
-------------------- ------------------- -------------------
Options outstanding at
beginning of year
21,250 6.75
1,250 7.13 2,500 7.13 2,500 7.13
171,750 8.88 231,000 8.88 231,000 8.88
2,500 12.88
10,000 11.38 10,000 11.38 10,000 11.38
20,000 11.00 25,000 11.00 25,000 11.00
5,000 4.25 5,000 4.25
2,500 3.81
141,600 3.70 147,300 3.70 147,300 3.70
10,000 4.75 10,000 4.75 10,000 4.75
Options granted
5,000 3.41
10,000 3.80
Options expired
or canceled
(5,000) 4.25
(21,250) 6.75
(59,250) 8.88 (59,250) 8.88
(1,250) 7.13 (1,250) 7.13
(10,000) 11.00 (5,000) 11.00
(2,500) 12.88
(2,500) 3.81
(1,100) 3.70 (5,700) 3.70
---------- --------- ----------
298,000 354,600 430,800
========== ========= ==========
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, average 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. There
were 15,000 options granted in 2004 and none in 2003 or 2002. The weighted
average fair value estimate of options granted in 2004 was $1.23. The
weighted average remaining lives of options granted was 2.7 years in 2004.
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, 2004 and 2003. No
such loans have been granted since late 1999.
35
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 fiscal 2003,
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 $768,000 and $483,000 in fiscal
2004 and 2003, respectively in professional fees and other costs related to
mergers and acquisitions activity pursued by the Company through its
investment bankers and outside advisors. These costs are included in
operating income as investment banking and related costs in the
accompanying Consolidated Financial Statements.
(9) OTHER INCOME (EXPENSE):
-----------------------
Other income (expense), 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. In fiscal 2004, the Company
incurred approximately $94,000 of legal costs in connection with claims for
additional import duty rebates. (Also see Note 17.)
(10) RESTRUCTURING AND RELATED COSTS:
--------------------------------
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 its comprehensive 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 this final phase of
36
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, 2004 are summarized below
(in thousands):
Losses from
Employee impairment, sale
severance and abandonment
and related of property and
costs equipment Total
----------- ---------------- ----------
Reserve balances at September 30, 2001 $ 339 $ - $ 339
----------- ---------------- ----------
Additional fiscal 2002 provisions
for prior phases of restructuring 135 283 418
2002 restructuring and impairment
related charges for final phase
of restructuring 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 for final phase
of restructuring 163 324 487
Utilized in fiscal 2003 (1,183) (369) (1,552)
----------- ---------------- ----------
Reserve balances at September 30, 2003 90 - 90
----------- ---------------- ----------
Utilized in fiscal 2004 (90) - (90)
----------- ---------------- ----------
Reserve balances of September 30, 2004 $ - $ - $ -
=========== ================ ==========
(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 (loss) 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)]. For the years ended
September 30, 2004, 2003 and 2002, options to purchase 293,000, 354,600 and
730,800 shares of common stock, respectively, were excluded from the
computation of diluted earnings (loss) per share as such options were
anti-dilutive.
Weighted average common shares used in the calculation of earnings (loss)
per share are as follows:
Year Basic Diluted
---- ---------- ----------
2004 3,204,543 3,204,613
2003 3,196,714 3,196,714
2002 3,183,866 3,183,866
37
(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, 2004, 2003 and 2002
for the years then ended (in thousands).
Operating Identifiable
Revenues Profit (Loss) Assets
----------- -------------- ------------
2004:
United States $ 50,332 $ 669 $ 36,715
Canada 9,046 1,255 6,169
Mexico 26,958 3,038 27,350
United Kingdom 1,542 327 1,311
China 291 518 2,441
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
(13) DISCONTINUED OPERATIONS:
------------------------
In 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.
38
Net revenues and income (loss) from discontinued operations in fiscal 2003
and 2002 are as follows (in thousands):
2003 2002
---------- ---------
Net revenues $ 8,021 $ 9,169
========== =========
Income (loss) from discontinued
operations before income taxes $ (578) $ 200
Income tax benefit (expense) -- (77)
---------- ---------
Income (loss) from discontinued
operations $ (578) $ 123
========== =========
Earnings (loss) per share (basic) $ (0.18) $ .04
========== =========
Earnings (loss) per share (diluted) $ (0.18) $ .04
========== =========
Income (loss) from discontinued operations includes pre-tax gains on sales
of assets of $208 in 2002, attributable to the sale of the Company's
Graphite and Lubricants division. In addition, interest expense of $270 and
$342 has been allocated to income (loss) from discontinued operations in
2003 and 2002, respectively, based upon the identifiable assets of such
operations.
(14) COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company has entered into employment agreements with four executives
which provide for the continuation of salary for a period of 24 months
(currently aggregating $68,700 per month) and related employee benefits for
a period of 36 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 seven additional upper management
employees which provide for continuation of salaries (averaging $10,300
each per month) for periods of up to 24 months under certain circumstances.
The Company leases certain manufacturing equipment under a five-year
noncancelable operating lease arrangement. The rental expense under this
lease was $410,000, $433,000 and $410,000 in 2004, 2003 and 2002,
respectively. Annual future minimum rental payments approximate $93,000 in
2005.
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 $218,000 as of September 30, 2004), 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 $203,000, $241,000 and $33,000 for professional services
rendered by this firm in the fiscal years ended September 30, 2004, 2003
and 2002, respectively.
39
(16) SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (In Thousands,
---------------------------------------------------------------------
Except Per Share Data):
-----------------------
2004: First Second Third Fourth
----- --------- --------- --------- --------
Revenues $15,479 $18,951 $27,367 $26,372
Income (loss) from continuing
operations (879) 26 1,672 913
Net income (loss) (879) 26 1,672 913
Earnings (loss) per share: (a)
Continuing operations:
Basic (.27) .01 .52 .28
Diluted (.27) .01 .52 .28
Net income (loss):
Basic (.27) .01 .52 .28
Diluted (.27) .01 .52 .28
2003: First Second Third Fourth
----- --------- --------- --------- -----------
Revenues $15,870 $18,893 $26,940 $27,135
Income (loss) from continuing
operations (933) 146 1,850 (1,912) (b)
Loss from discontinued operations - (252) (59) (267) (b)
Net income (loss) (933) (106) 1,791 (2,179) (b)
Earnings (loss) per share: (a)
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)
(a) Calculated independently for each period, and consequently, the sum of the
quarters may differ from the annual amount.
(b) 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).
40
(17) SUBSEQUENT EVENTS:
------------------
Import duty rebates:
In December 2004, the Company received approximately $1.1 million from the
U.S. Customs and Border Protection Service for certain import duty rebates.
These rebates will be reported as other income in the Company's results of
operations for the quarter ending December 31, 2004. Additional receipts
are not assured in the future and are subject to Federal legislation and
the activities of various foreign pencil manufacturers.
Merger of Dixon Ticonderoga Company with Fila - Fabbrica Italiana Lapis ed
Affini S.p.A.:
On December 16, 2004, the Company and Fila - Fabbrica Italiana Lapis ed
Affini S.p.A. ("Fila") executed a definitive merger agreement under which
Fila would acquire all of the outstanding shares of the Company for $7.00
per share in cash. Under the terms of the definitive agreement, a
wholly-owned subsidiary of Fila will commence a cash tender offer on or
about January 7, 2005, after which any remaining shares will be acquired in
a cash merger at the same price. The transaction has been approved by both
companies' boards of directors. However, since the consummation of the
transaction is subject to certain conditions, there is no assurance that
the tender offer or merger will be completed.
41
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
------------------------------------------------
FOR THE THREE YEARS ENDED SEPTEMBER 30, 2004, 2003 and 2002
-----------------------------------------------------------
Additions to
Balance at Additions (Deductions Balance
Beginning Charged From) at Close
Description of Period to Income Reserves of Period
-------------------- ------------ ----------- -------------- ------------
Allowance for Doubtful Accounts:
--------------------------------
Year Ended
September 30, 2004 $ 1,429,222 $ 258,032 $ (353,792)(1) $ 1,333,462
=========== ========= =============== ===========
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
=========== ========= ============= ===========
(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.
42
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 2004 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 76 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 49 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 48 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. 53 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 63 Vice President and Corporate Controller
since January 1991; prior thereto
Corporate Controller since September
1978.
Diego Cespedes Creixell 46 President, Grupo Dixon S.A. de C.V.,
since August 1996 and Director since
May 2000.
43
ITEM 11. EXECUTIVE COMPENSATION
-------------------------------
Information required under this Item will be contained in the Company's
2004 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
2004 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
2004 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
2004 Proxy Statement which is incorporated herein by reference.
44
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) 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.7
(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) 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) j. Amendment No. 1 to 12.00% Senior Subordinated Notes, Due
2003, Note and Warrant Purchase Agreement.4
(10) m. Amendment No. 2 to Note and Warrant Purchase Agreement.5
(10) n. Loan and Security Agreement by and among Dixon Ticonderoga
Company and its Subsidiaries and Foothill Capital
Corporation.6
(10) o. Dixon Ticonderoga Company Amended and Restated Note and
Warrant Purchase Agreement, 12.5% Senior Subordinated Notes,
due October 3, 2005.6
(10) p. Warrant Amendment Agreement.9
(21) Subsidiaries of the Company.
(23) Consent of Independent Certified Public Accountants.
45
(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.
(99) Audit Committee Charter
(99.A11) Code of Ethics.8
1Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended September 30, 1996, file number 0-2655, filed in Washington, D.C.
2Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the period ended March 31, 1997, file number 0-2655, filed in Washington, D.C.
3Incorporated by reference to Appendix 3 to the Company's Proxy Statement dated
January 27, 1997, file number 0-2655, filed in Washington, D.C.
4Incorporated 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.
5Incorporated 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.
6Incorporated 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.
7Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended September 30, 2003, file number 0-2655 filed in Washington, D.C.
8Incorporated by reference to the Company's Report on Form 10-K/A, Amendment No.
1, for the year ended September 30, 2003, file number 0-2655, filed in
Washington, D.C.
46
9Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the period ended March 31, 2004, file number 0-2655, filed in Washington, D.C.
(b) Reports on Form 8-K:
On August 13, 2004, the Company filed a Form 8-K which included as an
exhibit its press release, also dated August 13, 2004, regarding its third
fiscal quarter results.
47
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 22, 2004
/s/ Richard F. Joyce
----------------------------
Richard F. Joyce Vice Chairman of Board,
Co-Chief Executive Officer,
President and Director
Date: December 22, 2004
/s/ Richard A. Asta
----------------------------
Richard A. Asta Executive Vice President of
Finance, Chief Financial
Officer and Director
Date: December 22, 2004
/s/ Diego Cespedes Creixell
----------------------------
Diego Cespedes Creixell President, Grupo Dixon S.A. de
C.V., and Director
Date: December 22, 2004
/s/ Philip M. Shasteen
----------------------------
Philip M. Shasteen Director
Date: December 22, 2004
/s/ Ben Berzin, Jr.
----------------------------
Ben Berzin, Jr. Director
Date: December 22, 2004
/s/ Kent Kramer
----------------------------
Kent Kramer Director
Date: December 22, 2004
/s/ John Ritenour
----------------------------
John Ritenour Director
Date: December 22, 2004
/s/ Wesley D. Scovanner
----------------------------
Wesley D. Scovanner Director
Date: December 22, 2004