SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-8689
DIXON TICONDEROGA COMPANY
Incorporated pursuant to the Laws of Delaware State
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Internal Revenue Service-- Employer Identification No. 23-0973760
195 International Parkway, Heathrow, FL 32746
(407) 829-9000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The total number of shares of the registrant's Common Stock, $1 par
value,outstanding on December 31, 2003, was 3,202,149.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
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INDEX
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Information
Consolidated Balance Sheets --
December 31, 2003 and September 30, 2003 3
Consolidated Statements of Operations --
For The Three Months Ended December 31, 2003 and 2002 4
Consolidated Statements of Comprehensive Loss
For The Three Months Ended December 31, 2003 and 2002 5
Consolidated Statements of Cash Flows --
For The Three Months Ended December 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16 - 17
Signatures 18
Certifications 19 - 24
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1.
- -------
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31,
2003 September 30,
(Unaudited) 2003
--------------- ---------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 540,892 $ 1,032,974
Receivables, less allowance for doubtful
accounts of $1,213,727 at December 31, 2003
and $1,429,222 at September 30, 2003. 20,581,708 28,326,743
Inventories 30,159,593 26,439,361
Other current assets 2,044,798 2,350,813
--------------- ---------------
Total current assets 53,326,991 58,149,891
--------------- ---------------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 6,731,529 6,737,943
Machinery and equipment 8,297,416 8,288,647
Furniture and fixtures 1,280,075 1,307,980
--------------- ---------------
16,309,020 16,334,570
Less accumulated depreciation (8,447,794) (8,225,067)
--------------- ---------------
7,861,226 8,109,503
--------------- ---------------
OTHER ASSETS 5,513,271 5,774,649
--------------- ---------------
$ 66,701,488 $ 72,034,043
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 6,089,390 $ 6,382,065
Current maturities of long-term debt 12,639,691 13,227,965
Accounts payable 7,778,369 9,102,711
Accrued liabilities 6,408,033 8,496,182
--------------- ---------------
Total current liabilities 32,915,483 37,208,923
--------------- ---------------
LONG-TERM DEBT 12,127,180 12,510,860
--------------- ---------------
DEFERRED INCOME TAXES AND OTHER 1,080,340 894,601
--------------- ---------------
MINORITY INTEREST 560,783 578,530
--------------- ---------------
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 3,710,309 3,710,309
Capital in excess of par value 3,547,567 3,547,567
Retained earnings 22,800,151 23,679,772
Accumulated other comprehensive loss (6,182,209) (6,238,403)
--------------- ---------------
23,875,818 24,699,245
Less shareholder loans (557,721) (557,721)
Less treasury stock, at cost (508,160 shares) (3,300,395) (3,300,395)
--------------- ---------------
20,017,702 20,841,129
--------------- ---------------
$ 66,701,488 $72,034,043
=============== ==============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------
THREE MONTHS ENDED
DECEMBER 31,
2003 2002
--------------- ---------------
REVENUES $ 15,478,620 $ 15,869,790
--------------- ---------------
COST AND EXPENSES:
Cost of goods sold 10,055,762 10,457,256
Selling and administrative expenses 5,718,290 5,728,236
Provision for restructuring and related cost - 74,550
Debt refinancing costs - 624,662
--------------- ---------------
15,774,052 16,884,704
--------------- ---------------
OPERATING LOSS (295,432) (1,014,914)
OTHER INCOME - 440,820
INTEREST EXPENSE (774,088) (804,227)
--------------- ---------------
LOSS BEFORE INCOME TAX BENEFIT AND
MINORITY INTEREST (1,069,520) (1,378,321)
INCOME TAX BENEFIT 180,739 436,553
--------------- ---------------
(888,781) (941,768)
MINORITY INTEREST 9,160 9,238
--------------- ---------------
NET LOSS $ (879,621) $ (932,530)
=============== ===============
LOSS PER COMMON SHARE (BASIC): $ (.27) $ (.29)
=============== ===============
LOSS PER COMMON SHARE (DILUTED): $ (.27) $ (.29)
=============== ===============
SHARES OUTSTANDING:
Basic 3,202,149 3,192,832
=============== ===============
Diluted 3,202,149 3,192,832
=============== ===============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
----------------------------------------------------------
THREE MONTHS ENDED
DECEMBER 31,
2003 2002
-------------- --------------
NET LOSS $ (879,621) $ (932,530)
OTHER COMPREHENSIVE INCOME (LOSS):
Current period adjustment to recognize
fair value of cash flow hedges 79,875 14,257
Foreign currency translation adjustments (23,681) (468,504)
-------------- --------------
TOTAL COMPREHENSIVE LOSS $ (823,427) $(1,386,777)
============== ==============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
5
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
THREE MONTHS ENDED
DECEMBER 31,
2003 2002
------------ -----------
Cash flows from operating activities:
Net loss $ (879,621) $ (932,530)
Adjustment to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 553,987 609,057
Deferred taxes 308,102 433,620
Provision for doubtful accounts receivable 68,273 117,584
Loss (gain) attributable to foreign currency
exchange 44,557 (116,114)
Loss attributable to minority interest (9,160) (9,238)
Changes in assets [(increase) decrease] and
liabilities [increase (decrease)]:
Receivables, net 7,648,445 9,580,033
Inventories (3,866,530) (2,834,198)
Other current assets 307,663 878,063
Accounts payable and accrued liabilities (2,959,554) (6,417,918)
Other assets 8,645 109,253
------------ -----------
Net cash provided by operating activities 1,224,807 1,417,612
------------ -----------
Cash flows from investing activities:
Purchases of plant and equipment, net (193,856) (386,483)
------------ -----------
Cash flows from financing activities:
Principal reductions of notes payable (150,379) (1,597,469)
Principal reductions of long-term debt (971,953) (15,173,814)
Proceeds from long-term debt - 14,449,123
Debt refinancing costs - (549,193)
Other non-current liabilities - (99,745)
------------ -----------
Net cash used in financing activities (1,122,332) (2,971,098)
------------ -----------
Effect of exchange rate changes on cash 64,788 79,614
------------ -----------
Net decrease in cash and cash equivalents (26,593) (1,860,355)
Cash and cash equivalents, beginning of period 567,485 2,589,493
------------ -----------
Cash and cash equivalents, end of period $ 540,892 $ 729,138
============ ===========
Supplemental Disclosures:
Cash paid during the period:
Interest $812,965 $2,483,514
Income taxes 270,466 1,290,899
The accompanying notes to consolidated financial statements
are an integral part of these statements.
6
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these financial statements
be read in conjunction with the financial statements and the notes thereto
included in the Company's latest annual report on Form 10-K. In the opinion
of the Company, all adjustments (solely of a normal recurring nature)
necessary to present fairly the financial position of Dixon Ticonderoga
Company and subsidiaries as of December 31, 2003, and the results of their
operations and cash flows for the three months ended December 31, 2003 and
2002, have been included. The results of operations for such interim
periods are not necessarily indicative of the results for the entire year.
Certain prior year amounts have been reclassified to conform with the
current year classifications.
2. INVENTORIES:
Since amounts for inventories under the LIFO method are based on annual
determinations of quantities and costs as of the end of the fiscal year,
the inventories at December 31, 2003 (for which the LIFO method of
accounting are used) are based on certain estimates relating to quantities
and costs as of year end.
Inventories consist of (in thousands):
December 31, September 30,
2003 2003
------------ -------------
Raw materials $12,105 $10,486
Work in process 1,774 2,198
Finished goods 16,281 13,755
------------ -------------
$30,160 $26,439
============ =============
3. RECENT ACCOUNTING PRONOUNCEMENTS:
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
which clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial
position. Previously, many of those financial instruments were classified
as equity. Statement No. 150 is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. As the
Company does not have any of these financial instruments, the adoption of
Statement No. 150 is not expected to have any impact on the Company's
consolidated financial statements.
In December 2003, the FASB issued Statement No. 132 (revised 2003),
"Employers' Disclosures About Pensions and Other Post-Retirement Benefits,
an amendment of FASB Statements No. 87, 88 and 106" (collectively
7
"Statement No. 132(R)"). Statement No. 132(R) incorporates all of the
disclosure requirements of Statement No. 132 "Employers Disclosures about
Pensions and Other Post-Retirement Benefits" and increases annual
disclosure requirements to include more details about pension plan assets,
benefit obligations, cash flows, benefit costs and related information. The
Company will be required to adopt the new annual disclosure requirements
effective September 30, 2004.
Statement No. 132(R) also amends Accounting Principles Board Opinion No.
28, "Interim Financial Reporting" to require interim-period disclosure of
the components of net periodic benefit cost and, if significantly different
from previously disclosed amounts, the amounts of contributions and
projected contributions to fund pension plans and other post-retirement
benefit plans. The Company is required to adopt the interim-period
disclosure requirements of Statement No. 132(R) effective March 31, 2004.
Because Statement No. 132(R) pertains only to disclosure provisions, the
Company's adoption of Statement No. 132(R) will not have an impact on the
Company's financial condition, results of operations or cash flows.
4. RESTRUCTURING AND RELATED COSTS:
In fiscal 2003, the Company completed its comprehensive Restructuring and
Cost Reduction Program, including the final phase of consolidation of its
manufacturing operations. The Company had reserved $90,000 of employee
severance and related costs as of September 30, 2003.
The restructuring costs reserve and utilization since September 30, 2003
are summarized below (in thousands):
Reserve balances at September 30, 2003 $ 90
Payments in quarter ended December 31, 2003 (32)
----------
Reserve balances at December 31, 2003 $ 58
==========
In the prior year quarter ended December 31, 2002, the Company incurred
approximately $75,000 for costs associated with the shutdown of a
manufacturing facility, which were not accruable in advance.
5. DEBT FINANCING COSTS:
In connection with the completion of its debt restructuring in October
2002, the Company expensed approximately $625,000 of deferred financing
costs in the quarter ended December 31, 2002 associated with its previous
senior debt arrangements with a consortium of lenders and its previous
subordinated debt agreements.
6. OTHER INCOME:
Other income represents import duty rebates received in the quarter ended
December 31, 2002.
8
7. LINE OF BUSINESS REPORTING:
The Company's operations consist only of one principal business segment -
its Consumer Group. The following information sets forth certain additional
data pertaining to its operations for the three-month periods ended
December 31, 2003 and 2002 (in thousands).
Operating
Profit
Revenues (Loss)
------------ ------------
2003:
United States $ 9,240 $ 309
Canada 1,594 17
Mexico 4,363 (549)
United Kingdom 281 8
China 1 (80)
------------ ------------
$15,479 $ (295)
============ ============
2002:
United States $ 9,479 $(1,059)
Canada 1,740 162
Mexico 4,344 (88)
United Kingdom 286 6
China 21 (36)
------------ ------------
$15,870 $(1,015)
============ ============
The United States operating loss in each period includes unallocated
corporate expenses.
8. STOCK OPTIONS - PRO FORMA DISCLOSURES:
The Company has adopted the disclosure-only provisions of FASB Statements
No. 123 and No. 148, and, accordingly, there is no compensation expense
recognized for its stock option plans. Pro forma net loss and loss per
share would have been as follows if the fair value estimates were used to
record compensation expense:
Three Months Ended
December 31,
2003 2002
---------------- ----------------
Net loss, as reported $ (879,621) $ (932,530)
Deduct: total stock-based employee
compensation expense determined
under the fair value based method,
net of related tax effects (21,290) (18,400)
---------------- ----------------
Pro forma net loss $ (900,911) $ (950,930)
================ ================
Loss per share:
Basic $ (.27) $ (.30)
================ ================
Diluted $ (.27) $ (.30)
================ ================
9
9. SUBSEQUENT EVENTS:
On January 9, 2004, the Company and Jarden Corporation (NYSE: JAH) signed
an exclusivity agreement to allow Jarden to evaluate a potential
transaction among the companies whereby Jarden or its affiliate may acquire
all of the outstanding shares of the Company's common stock at a price of
$5 per share, subject to, among other things, due diligence and entering
into definitive acquisition agreements. The exclusivity agreement was
amended on February 10, 2004 to extend the expiration date from February
10, 2004 until February 29, 2004 and to contemplate a possible acquisition
by Jarden of common stock or assets. No assurance can be made that a
transaction with Jarden can or will be consummated.
In addition, on January 9, 2004, the Company's Chairmen entered into an
option agreement, which grants Jarden, under certain circumstances, an
option to buy 440,000 shares of the Chairmen's common stock at a purchase
price of $5 per share, and a support agreement which provides the Chairman
certain severance benefits if a transaction with Jarden is consummated.
Moreover, certain other executives of the Company also executed support
agreements with Jarden which obligate the executives to remain in the
employ of the company for periods ranging from 12 to 36 months after the
date of consummation of a transaction with Jarden and which provide the
executives with certain severance benefits if they remain in the employ of
the Company upon the terms and conditions provided in their support
agreements.
10
Item 2.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
REVENUES for the quarter ended December 31, 2003, decreased $391,000 from
the prior year. The changes are detailed below:
Increase % Increase (Decrease)
(Decrease) ------------------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
U.S. Consumer $ (239) (3) (2) (1)
Foreign Consumer (152) (2) 5 (7)
U.S. Consumer revenue decreased 2.5% overall primarily in the educational
market as major wholesalers continued a shift in buying patterns away from the
Company's first fiscal quarter to its later quarters. Foreign Consumer revenue
decreased principally due to a combined decline in the value of foreign
currencies when compared to the U.S. dollar. The decrease in the value of the
Mexican peso affected revenues by $425,000, while the Canadian dollar and
British pound strengthened to increase revenue by $270,000. In addition,
revenues in Mexico were adversely affected by a less favorable mix of products
sold, despite higher unit volume.
While the Company has operations in Canada, Mexico and the U.K.,
historically only the operating results in Mexico have been materially impacted
by currency fluctuations. There has been a significant devaluation of the
Mexican peso at least once in each of the last three decades, the last one being
in August, 1998. In the short term after such a devaluation, consumer confidence
has been shaken, leading to an immediate reduction in revenues in the months
following the devaluation. Then, after the immediate shock, and as the peso
stabilizes, revenues tend to grow. Selling prices tend to rise over the long
term to offset any inflationary increases in costs. The peso, as well as any
currency value, depends on many factors including international trade, investor
confidence, and government policy, to name a few. These factors are impossible
for the Company to predict, and thus, an estimate of potential effect on results
of operations for the future cannot be made. This currency risk in Mexico is
presently managed through occasional foreign currency hedges, local currency
financing and by export sales denominated in U.S. dollars.
OPERATING LOSS improved $720,000 principally due to the prior year's
quarterly results reflecting $75,000 in restructuring and related costs as well
as $625,000 in costs expensed in connection with the Company's debt refinancing.
Excluding these items, consolidated operating loss improved by $20,000. U.S.
operating results (excluding the aforementioned items) increased $668,000. This
improvement is primarily due to manufacturing cost reductions brought about by
the Company's consolidation efforts and which account for the continuing
improvement in consolidated cost of goods sold (65% of revenues as compared with
66% of revenues in the prior year quarter). In addition, U.S. selling and
administrative expenses were reduced due to the Company's cost reduction program
and improved distribution costs. Foreign operating results decreased $648,000.
The operating loss in Mexico increased $461,000 due to lower gross profit from
less favorable mix of products sold during the quarter; manufacturing
inefficiencies from certain new plant processes; and high foreign currency
exchange losses. Somewhat higher selling and administrative costs and currency
exchange losses reduced operating profit in Canada by $145,000.
OTHER INCOME represents import duty rebates received in the prior year
quarter.
INTEREST EXPENSE decreased $30,000 on lower overall consolidated
borrowings.
INCOME TAX benefit decreased to 17% from 32% of loss from operations before
income taxes. Income tax benefit in the December 31, 2003 quarter represents
foreign tax benefit only. Despite the continuing improvement in U.S. operating
results, the Company incurred a U.S. tax loss during the period and,
accordingly, recorded further valuation allowances to offset its deferred tax
assets.
11
MINORITY INTEREST represents approximately 3% of the net results from
operations of the Company's Mexico subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company generated approximately $1.2 million in cash flows from
operating activities in the first quarter of fiscal 2004, as compared with $1.4
million in the prior year period. Increased Mexico accounts receivable and
higher Mexico inventories (reflecting increased production and lead-time for
shipments to the U.S., as well as the deferral of purchases by certain
educational wholesalers) reduced cash flows in the current year period. These
factors were largely offset by lower cash flows needed to extinguish trade
payables, interest and restructuring liabilities during the current quarter.
The Company's fiscal 2003 investing activities included approximately
$200,000 in net purchases of property and equipment, compared to $400,000 in the
prior year period. The reduction reflects the disposal of the Company's
refractory division as well as lower foreign purchases during the period.
Generally, all major capital projects are discretionary in nature. A purchase
commitment exists with respect to one project for certain computer software
enhancements approximating $300,000. Capital expenditures are usually funded
from operations and existing financing or new leasing arrangements.
In October 2002, the Company completed a financing agreement with a new
senior lender and its existing subordinated lenders to restructure its present
U.S. debt through fiscal 2005. Wells Fargo Foothill provided a three-year $28
million senior debt facility which replaced the Company's previous senior debt
with a consortium of lenders. The new senior debt arrangement provided
approximately $5 million in increased working capital liquidity for operations
and to make certain subordinated debt payments.
The senior debt facility includes a $25 million revolving loan, which bears
interest at either the prime rate, plus 0.75%, or the prevailing LIBOR rate,
plus 3.5%. Borrowings under the revolving loan are based upon 85% of eligible
U.S. and Canada accounts receivable, as defined; 50% of certain accounts
receivable having extended payment terms; and varying advance rates for U.S. and
Canada raw materials and finished goods inventories. The facility also includes
term loans aggregating $3 million, which bear interest at either the prime rate,
plus 1.5%, or the prevailing LIBOR rate, plus 4.25%. These loans are payable in
monthly installments of $50,000, plus interest, with the balance due in a
balloon payment in October 2005. The loan agreement also contains restrictions
regarding the payment of dividends as well as subordinated debt payments
(discussed below), a requirement to maintain a minimum level of earnings before
interest, taxes, depreciation and amortization and net worth and a limitation on
the amount of annual capital expenditures. To better balance and manage overall
interest rate exposure, the Company previously executed an interest rate swap
agreement that effectively fixed the rate of interest on $8 million of its
variable rate 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 December 31, 2003, the Company had approximately $15 million of unused lines
of credit available.
In October 2002, the Company also reached agreement with the holders of
$16.5 million of Senior Subordinated Notes to restructure the notes, extending
the maturity date to 2005. The Company had only been required to pay monthly
installments of $50,000 through December 2003 and $150,000 per month, commencing
January 2004 through the maturity date. However, the Company paid a total of
$3.5 million in principal through December 31, 2003 and expects to make
additional excess payments to its subordinated lenders through the maturity date
in October 2005. 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 excess payments totaling at least an additional $5.5 million by 2005 (due to
restrictions imposed under the new senior debt facility or otherwise) warrants
issued to the noteholders equivalent to up to approximately 1.7% of the diluted
common shares outstanding for each $1 million in remaining unpaid additional
principal will become exercisable at an exercise price of $.01 per share. The
first date at which a portion of the warrants issued to the subordinated
noteholders will become exercisable is March 31, 2004, when warrants to purchase
12
up to 2.5% of the diluted common shares outstanding will become exercisable if
aggregate payments to the subordinated noteholders are less than $4.75 million
through that date. The Company expects to make sufficient additional payments to
avoid the exerciseability of part or all of the March 2004 warrants. 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. The new subordinated note agreement includes certain other provisions,
including restrictions as to the payment of dividends and the elimination or
adjustment of financial covenants contained in the original agreement to conform
to those contained in the new senior debt agreements.
In addition, the Company's Mexico subsidiary had approximately $15 million
in bank lines of credit ($9 million unused) as of December 31, 2003, expiring at
various dates from March 2004 through December 2004, which bear interest at a
rate based upon either a floating U.S. bank rate or the rate of certain Mexico
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 and under lines of credit available to its Mexican subsidiary
are sufficient to fulfill all current and anticipated operating requirements of
its business through 2005. The Company's Mexico subsidiary cannot assure that
each of its lines of credit will continue to be available after their respective
expiration dates, or that replacement lines of credit will be secured. However,
the Company believes there should be sufficient amounts available under its
present or future facilities or lines of credit to cover any potential
shortfalls due to any expiring lines of credit.
The Company has 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.
On January 9, 2004, the Company and Jarden Corporation (NYSE: JAH) signed
an exclusivity agreement to allow Jarden to evaluate a potential transaction
among the companies whereby Jarden or its affiliate may acquire all of the
outstanding shares of the Company's common stock at a price of $5 per share,
subject to, among other things, due diligence and entering into definitive
acquisition agreements. The exclusivity agreement was amended on February 10,
2004 to extend the expiration date from February 10, 2004 until February 29,
2004 and to contemplate a possible acquisition by Jarden of common stock or
assets. No assurance can be made that a transaction with Jarden can or will be
consummated.
In addition, on January 9, 2004, the Company's Chairmen entered into an
option agreement, which grants Jarden, under certain circumstances, an option to
buy 440,000 shares of the Chairmen's common stock at a purchase price of $5 per
share, and a support agreement which provides the Chairman certain severance
benefits if a transaction with Jarden is consummated. Moreover, certain other
executives of the Company also executed support agreements with Jarden which
obligates the executives to remain in the employ of the company for periods
ranging from 12 to 36 months from the date of consummation of a transaction with
Jarden and which provide the executives with certain severance benefits if they
remain in the employ of the company upon the terms and conditions provided in
their support agreements.
13
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
which clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial position.
Previously, many of those financial instruments were classified as equity.
Statement No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. As the Company does not have
any of these financial instruments, the adoption of Statement No. 150 is not
expected to have any impact on the Company's consolidated financial statements.
In December 2003, the FASB issued Statement No. 132 (revised 2003),
"Employers' Disclosures About Pensions and Other Post-Retirement Benefits, an
amendment of FASB Statements No. 87, 88 and 106" (collectively "Statement No.
132(R)"). Statement No. 132(R) incorporates all of the disclosure requirements
of Statement No. 132 "Employers Disclosures about Pensions and Other
Post-Retirement Benefits" and increases annual disclosure requirements to
include more details about pension plan assets, benefit obligations, cash flows,
benefit costs and related information. The Company will be required to adopt the
new annual disclosure requirements effective September 30, 2004.
Statement No. 132(R) also amends Accounting Principles Board Opinion No.
28, "Interim Financial Reporting" to require interim-period disclosure of the
components of net periodic benefit cost and, if significantly different from
previously disclosed amounts, the amounts of contributions and projected
contributions to fund pension plans and other post-retirement benefit plans. The
Company is required to adopt the interim-period disclosure requirements of
Statement No. 132(R) effective March 31, 2004. Because Statement No. 132(R)
pertains only to disclosure provisions, the Company's adoption of Statement No.
132(R) will not have an impact on the Company's financial condition, results of
operations or cash flows.
FORWARD-LOOKING STATEMENTS
- --------------------------
The statements in this Quarterly Report on Form 10-Q that are not purely
historical are "forward-looking statements" within the meaning of section 27A of
the Securities Act of 1933 and section 21E of the Securities Exchange Act of
1934, including statements about the Company's expectations, beliefs, intentions
or strategies regarding the future. Forward-looking statements include
statements regarding, among other things, the effects of the devaluation of the
Mexican peso; the sufficiency and continued availability of the Company's lines
of credit and its ability to meet its current and anticipated obligations,
including payments due under its subordinated debt; management's expectation for
savings from the restructuring and cost-reduction program; the Company's ability
to increase sales in its core businesses; its expectations regarding the
Company's ability to utilize certain tax benefits in the future; the probability
of completing a transaction with Jarden Corporation; and the avoidance of the
exercisability of part or all of the March 2004 warrants issued to the Company's
subordinated noteholders. Readers are cautioned that any such forward-looking
statements are not guarantees of future performance and involve known and
unknown risks, uncertainties and other factors that could cause the actual
results to differ materially from those expressed or implied by such
forward-looking statements. Such risks include (but are not limited to) the risk
that the shareholders' ownership will be diluted by the issuance of common stock
to the Company's subordinated lenders; the Company's lenders will not continue
to fund the Company in the future; the cancellation of the lines of credit
available to the Company's Mexico subsidiary; the inability to maintain and/or
secure new sources of capital; manufacturing inefficiencies; difficulties
encountered with the consolidation and cost-reduction program; increased
competition; decrease in revenues; U.S. and foreign economic factors; foreign
currency exchange risk; interest rate fluctuation risk; and the risk that
negotiations with Jarden Corporation will be terminated before the execution of
definitive agreements, among others.
14
Item 3.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
As discussed elsewhere, the Company is exposed to the following principal
market risks (i.e. risks of loss arising from adverse changes in market rates):
foreign exchange rates and interest rates on debt.
The Company's exposure to foreign currency exchange rate risk in its
international operations is principally limited to Mexico and, to a lesser
degree, Canada. Approximately 39% of the Company's fiscal 2003 net revenues were
derived in Mexico and Canada, combined (exclusive of intercompany activities).
Foreign exchange transaction gains and losses arise from monetary assets and
liabilities denominated in currencies other than the business unit's functional
local currency. It is estimated that a 10% change in both the Mexican peso and
Canadian dollar exchange rates would impact reported operating profit by
approximately $500,000. This quantitative measure has inherent limitations
because it does not take into account the changes in customer purchasing
patterns or any adjustment to the Company's financing or operating strategies in
response to such a change in rates. Moreover, this measure does not take into
account the possibility that these currency rates can move in opposite
directions, such that gains from one may offset losses from another.
In addition, the Company's cash flows and earnings are subject to changes
in interest rates. As of December 31, 2003, approximately 50% of total short and
long-term debt is fixed, at rates between 8% and 12.5%. The balance of the
Company debt is variable, principally based upon the prevailing U.S. bank prime
rate or LIBOR rate. An interest rate swap, which expires in 2005, fixes the rate
of interest on $8 million of this debt at 8.98%. A change in the average
prevailing interest rates of the remaining debt of 1% would have an estimated
impact of $100,000 upon the Company's pre-tax results of operations and cash
flows. This quantitative measure does not take into account the possibility that
the prevailing rates (U.S. bank prime and LIBOR) can move in opposite directions
and that the Company has, in most cases, the option to elect either as the
determining interest rate factor.
Item 4.
- -------
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.
15
PART II. OTHER INFORMATION
- -------- -----------------
Item 6. Exhibit 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
Quarterly Report on Form 10-Q:
(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
(21) Subsidiaries of the Company. 7
(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.
16
(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.A11) Code of Ethics8
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.
(b) Reports on Form 8-K:
On December 29, 2003, the Company filed a Form 8-K which included as an
exhibit its press release dated December 29, 2003, regarding its fourth fiscal
quarter and fiscal year end results.
17
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIXON TICONDEROGA COMPANY
Date: February 13, 2004 By: /s/ GINO N. PALA
----------------- -----------------------
Gino N. Pala
Chairman of Board, Co-Chief
Executive Officer and Director
Date: February 13, 2004 By: /s/ RICHARD A. ASTA
----------------- -----------------------
Richard A. Asta
Executive Vice President of Finance,
Chief Financial Officer and Director
Date: February 13, 2004 By: /s/ JOHN ADORNETTO
----------------- -----------------------
John Adornetto
Vice President, Corporate Controller and
Chief Accounting Officer
18