SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------------
Commission file number 1-8689
DIXON TICONDEROGA COMPANY
Incorporated pursuant to the Laws of Delaware State
------------------
Internal Revenue Service-- Employer Identification No. 23-0973760
195 International Parkway, Heathrow, FL 32746
(407) 829-9000
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The total number of shares of the registrant's Common Stock, $1 par value,
outstanding on March 31, 2004, was 3,202,149.
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
INDEX
-----
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Information
Consolidated Balance Sheets --
March 31, 2004 and September 30, 2003 3
Consolidated Statements of Operations -- For The
Three and Six Months Ended March 31, 2004 and 2003 4
Consolidated Statements of Comprehensive Income
(Loss) -- For The Three and Six Months Ended March
31, 2004 and 2003 5
Consolidated Statements of Cash Flows -- For The
Six Months Ended March 31, 2004 and 2003 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
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16-18
Signatures 19
Certifications 20-25
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1.
- -------
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31,
2004 September 30,
(Unaudited) 2003
------------- -------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 831,884 $ 1,032,974
Receivables, less allowance for doubtful accounts
of $1,360,090 at March 31, 2004 and $1,429,222 at
September 30, 2003 26,005,082 28,326,743
Inventories 32,777,013 26,439,361
Other current assets 1,941,723 2,350,813
------------- -------------
Total current assets 61,555,702 58,149,891
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 8,090,158 8,056,169
Machinery and equipment 11,270,938 11,158,157
Furniture and fixtures 1,382,616 1,385,857
------------- -------------
20,743,712 20,600,183
------------- -------------
Less accumulated depreciation (12,921,830) (12,490,680)
------------- -------------
7,821,882 8,109,503
------------- -------------
OTHER ASSETS 5,380,256 5,774,649
------------- -------------
$74,757,840 $72,034,043
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $11,618,782 $ 6,382,065
Current maturities of long-term debt 14,443,275 13,227,965
Accounts payable 9,883,374 9,102,711
Accrued liabilities 5,671,809 8,496,182
------------- -------------
Total current liabilities 41,617,240 37,208,923
------------- -------------
LONG-TERM DEBT 11,434,562 12,510,860
------------- -------------
DEFERRED INCOME TAXES AND OTHER 1,025,241 894,601
------------- -------------
MINORITY INTEREST 577,184 578,530
------------- -------------
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 3,547,567 3,547,567
Retained earnings 22,826,584 23,679,772
Accumulated other comprehensive loss (6,122,731) (6,238,403)
------------- -------------
23,961,729 24,699,245
------------- -------------
Less shareholder loans (557,721) (557,721)
------------- -------------
Less treasury stock, at cost (508,160 shares) (3,300,395) (3,300,395)
------------- -------------
20,103,613 20,841,129
------------- -------------
$74,757,840 $72,034,043
============= =============
The accompanying notes are an integral part
of the consolidated financial statements.
3
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2003 AND 2002
----------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
---- ---- ---- ----
REVENUES $18,950,950 $18,892,890 $34,429,570 $34,762,680
------------- ------------- ------------- -------------
COST AND EXPENSES:
Cost of goods sold 11,338,662 11,047,589 21,394,424 21,504,845
Selling and administrative
expenses 6,111,058 6,753,058 11,829,348 12,481,294
Provision for restructuring and
related costs -- 229,138 -- 303,688
Debt refinancing costs -- -- -- 624,662
Investment banking and related costs 340,310 -- 340,310 --
------------- ------------- ------------- -------------
17,790,030 18,029,785 33,564,082 34,914,489
------------- ------------- ------------- -------------
OPERATING INCOME (LOSS) 1,160,920 863,105 865,488 (151,809)
OTHER INCOME -- -- -- 440,820
INTEREST EXPENSE (832,917) (857,847) (1,607,005) (1,662,074)
------------- ------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAX
(BENEFIT) AND MINORITY INTEREST 328,003 5,258 (741,517) (1,373,063)
INCOME TAX (EXPENSE) BENEFIT (285,479) 155,983 (104,740) 592,536
MINORITY INTEREST (16,091) (16,119) (6,931) (6,881)
------------- ------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS 26,433 145,122 (853,188) (787,408)
DISCONTINUED OPERATIONS, NET OF
INCOME TAXES -- (251,438) -- (251,438)
------------- ------------- ------------- -------------
NET INCOME (LOSS) $ 26,433 $ (106,316) $ (853,188) $(1,038,846)
============= ============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE
(BASIC):
Continuing operations $ 0.01 $ 0.05 $ (0.27) $ (0.25)
Discontinued operations -- (0.08) -- (0.08)
------------- ------------- ------------- -------------
Net income (loss) $ 0.01 $ (0.03) $ (0.27) $ (0.33)
============= ============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE
(DILUTED):
Continuing operations $ 0.01 $ 0.05 $ (0.27) $ (0.25)
Discontinued operations -- (0.08) -- (0.08)
------------- ------------- ------------- -------------
Net income (loss) $ 0.01 $ (0.03) $ (0.27) $ (0.33)
============= ============= ============= =============
Shares Outstanding:
Basic 3,202,149 3,192,832 3,202,149 3,192,832
============= ============= ============= =============
Diluted 3,227,176 3,192,832 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
------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
------------------------------------------------------------------
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2004 AND 2003
----------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- ------------
NET INCOME (LOSS) $ 26,433 $(106,316) $(853,188) $(1,038,846)
OTHER COMPREHENSIVE INCOME (LOSS):
Current period adjustment to
recognize fair value of cash
flow hedges 36,295 23,390 116,170 37,647
Foreign currency translation
adjustments 23,183 146,804 (498) (321,700)
----------- ----------- ----------- ------------
COMPREHENSIVE INCOME (LOSS) $ 85,911 $ 63,878 $(737,516) $(1,322,899)
=========== =========== =========== ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
5
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------
FOR THE SIX MONTHS ENDED MARCH 31, 2004 AND 2003
------------------------------------------------
2004 2003
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (853,188) $ (787,408)
Net loss from discontinued operations -- (251,438)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,078,102 1,197,665
Deferred taxes 308,102 497,432
Provision for doubtful accounts receivable 209,272 236,856
Gain attributable to foreign currency exchange (112,567) (45,675)
Income attributable to minority interest 6,931 6,881
Changes in assets and liabilities:
Receivables, net 2,058,204 1,667,022
Inventories (6,313,500) (3,866,556)
Other current assets 409,365 1,089,308
Accounts payable and accrued liabilities (1,748,028) (7,081,707)
Other assets (80,997) 82,466
---------------- ---------------
Net cash used in operations (5,038,304) (7,255,154)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment, net (438,569) (746,501)
---------------- ---------------
Net cash used in investing activities (438,569) (746,501)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable 5,430,577 2,166,530
Net proceeds from long-term debt 139,012 4,436,984
Debt refinancing costs -- (549,193)
Other non-current liabilities -- (99,745)
---------------- ---------------
Net cash provided by financing activities 5,569,589 5,954,576
---------------- ---------------
Effect of exchange rate changes on cash (293,806) (14,228)
---------------- ---------------
Net decrease in cash and cash equivalents (201,090) (2,061,307)
Cash and cash equivalents, beginning of period 1,032,974 2,589,493
---------------- ---------------
Cash and cash equivalents, end of period $ 831,884 $ 528,186
================ ===============
Supplemental Disclosures:
Cash paid during the period:
Interest $ 1,618,558 $ 3,326,285
Income taxes 557,202 548,014
The accompanying notes to consolidated financial statements
are an integral part of these statements.
6
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is suggested that these unaudited financial
statements be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, all adjustments (solely of a normal
recurring nature) necessary to present fairly the financial position of
Dixon Ticonderoga Company and subsidiaries as of March 31, 2004, and the
results of their operations and cash flows for the six months ended March
31, 2004 and 2003, 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 March 31, 2004 (for which the LIFO method of accounting
are used) are based on certain estimates relating to quantities and costs
as of year end.
Inventories consist of (in thousands):
March 31, September 30,
2004 2003
---------- --------------
Raw materials $ 12,664 $ 10,486
Work in process 2,739 2,198
Finished goods 17,374 13,755
---------- --------------
$ 32,777 $ 26,439
========== ==============
3. RECENT ACCOUNTING PRONOUNCEMENTS:
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 (APB) 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 was required to adopt the interim-period
disclosure requirements of Statement No. 132(R) effective March 31, 2004.
7
Because Statement No. 132(R) pertains only to disclosure provisions, the
Company's adoption of Statement No. 132(R) did not have an impact on the
Company's financial condition, results of operations or cash flows.
In March 2004, the FASB issued a proposed statement, "Share-Based Payment -
an amendment of Statements No. 123 and 95" that addresses the accounting
for share-based payment transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of the enterprise
or (b) liabilities that are based on the fair value of the enterprise's
equity instruments or that may be settled by the issuance of such equity
instruments. The proposed statement would eliminate the ability to account
for share-based compensation transactions using APB Opinion No. 25,
"Accounting for Stock Issued to Employees", and generally would require
instead that such transactions be accounted for using a fair-value-based
method. The Company would be required to adopt this proposed statement in
its 2006 fiscal year, and its adoption is not expected to have a material
impact in 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 the six months ended March 31, 2004 (54)
-----------
Reserve balances at March 31, 2004 $ 36
===========
In the prior year period ended March 31, 2003, the Company incurred
approximately $304,000 for costs associated with the shutdown of a
manufacturing facility, which were not accruable in advance.
5. LONG-TERM DEBT:
In connection with the completion of its debt restructuring in October
2002, the Company expensed approximately $625,000 of deferred financing
costs in the six-month period ended March 31, 2003 associated with its
previous senior debt arrangements with a consortium of lenders and its
previous subordinated debt agreements.
In March 2004, the Company and its subordinated lenders amended their
warrant agreements to extend the vesting date of certain warrants from
March 31 to May 31, 2004.
6. OTHER INCOME:
Other income represents import duty rebates received in the period ended
March 31, 2003.
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 and six-month periods ended
March 31, 2004 and 2003 (in thousands).
Three Months Six Months
-------------------------- -------------------------
Operating Operating
Revenues Profit (Loss) Revenues Profit (Loss)
------------ ------------- ------------ -------------
2004:
United States $ 9,309 $ (251) $ 18,549 $ 57
Canada 1,532 127 3,127 145
Mexico 7,734 1,151 12,097 602
United Kingdom 375 41 656 48
China 1 93 1 13
------------ ------------- ------------ -------------
$ 18,951 $ 1,161 $ 34,430 $ 865
============ ============= ============ =============
2003:
United States $ 10,026 $ (560) $ 19,505 $ (1,619)
Canada 1,543 (4) 3,283 158
Mexico 6,940 1,129 11,284 1,040
United Kingdom 307 16 593 22
China 77 282 98 247
------------ ------------- ------------ -------------
$ 18,893 $ 863 $ 34,763 $ (152)
============ ============= ============ =============
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 income (loss) and
income (loss) per share would have been as follows if the fair value
estimates were used to record compensation expense:
Three Months Ended Six Months Ended
March 31, March 31,
2004 2003 2004 2003
----------- ----------- ------------- -------------
Net income (loss) reported $ 26,433 $(106,316) $(853,188) $(1,038,846)
Estimated stock
compensation expense 21,290 22,747 42,580 45,494
----------- ----------- ------------- -------------
Pro forma net income (loss) $ 5,143 $(129,063) $(895,768) $(1,084,340)
=========== =========== ============= =============
Pro forma income (loss) per share:
Basic $ -- $ (.04) $ (.28) $ (.34)
=========== =========== ============= =============
Diluted $ -- $ (.04) $ (.28) $ (.34)
=========== =========== ============= =============
9
9. INVESTMENT BANKING AND RELATED COSTS:
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 later
amended several times to extend the expiration date. On March 29, 2004, the
companies terminated their discussions. The Company incurred approximately
$340,000 in costs associated with the potential transaction which are
classified as investment banking and related costs in the accompanying
financial statements.
10
Item 2.
- -------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
REVENUES for the quarter ended March 31, 2004 increased $58,000 from the
same period last year. The changes are as follows:
Increase % Increase (Decrease)
(Decrease) ---------------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
U.S. Consumer (717) (7) (7) -
Foreign Consumer 775 8 10 2
U.S. Consumer revenue decreased primarily in the educational and commercial
markets as major wholesalers continued their shift in buying patterns to closer
to the back-to-school season (the Company's later fiscal quarters) to better
manage their inventory levels throughout the year. Foreign Consumer revenue
increased primarily in Mexico on higher volume in the mass retail channel.
Revenues for the six months ended March 31, 2004 decreased $333,000 from
the same period last year. The changes are as follows:
Increase % Increase (Decrease)
(Decrease) ---------------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
U.S. Consumer (955) (5) (5) -
Foreign Consumer 622 4 2 2
U.S. Consumer revenue decreased primarily in the educational market for the
reasons discussed above. Foreign Consumer revenue increased primarily due to the
higher volume in the Mexico mass market, despite the negative effects of the
decrease in the value of the Mexican peso earlier in the fiscal year.
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. A less significant devaluation occurred in 2003. 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
local currency financing and by export sales to the U.S. denominated in U.S.
dollars.
OPERATING INCOME increased $298,000 from the prior year quarter. U.S.
operating results increased $308,000 despite the aforementioned decrease in
revenue. This quarter includes $340,000 of investment banking and related costs
(see Note 9 to Consolidated Financial Statements). Excluding these costs and
restructuring charges of $229,000 in the prior year quarter, this U.S. operating
results improved $420,000. This increase is primarily due to manufacturing cost
reductions brought about by the Company's consolidation efforts and reduced
selling costs (principally salaries, commissions and sales incentives) which
contributed towards an improvement in consolidated selling and administrative
costs (32.2% of revenue as compared to 35.7% in the prior year's quarter).
Foreign Consumer operating profit was virtually unchanged as lower gross profit
margins offset higher revenues in Mexico.
11
Operating income in the six months ended March 31, 2004 increased
$1,017,000 over the same period last year. Excluding the aforementioned
investment banking costs and prior year restructuring costs of $304,000 and debt
refinancing costs of $625,000 (see Notes 4 and 5 to Consolidated Financial
Statements), operating income increased $429,000. U.S. Consumer (excluding the
aforementioned items) increased $1,087,000. Despite lower revenues, the
Company's consolidation and cost reduction programs significantly improved U.S.
gross margins. In addition, lower U.S. advertising, marketing, distribution and
personnel costs decreased consolidated selling and administrative costs (34.3%
of revenue as compared to 35.9% in the prior year). Foreign operating profit
decreased $659,000, primarily in Mexico and China. Mexico experienced lower
gross margins due to a less favorable mix of product sold and continuing
competitive pricing pressures. Higher material costs decreased China's operating
profits.
OTHER INCOME in the prior year represents import duty rebates received. The
Company's opportunity to receive import duty rebates in the future is subject to
certain Federal legislation and other factors.
INTEREST EXPENSE decreased $25,000 and $55,000 in the three and six months
ended March 31, 2004, respectively, due to decreased average borrowing levels.
INCOME TAX increased $441,000 and $697,000 in the three and six months
ended March 31, 2004, respectively. The income tax expense in each period
represents foreign tax expense only. Despite the continuing improvement in U.S.
operating results, the Company incurred a U.S. tax loss in both periods and,
accordingly, recorded further valuation allowances to offset any U.S. deferred
tax assets created in these periods.
MINORITY INTEREST represents approximately 3% of the net results from
operations of the Company's Mexico subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash flows used in operations improved $2.2 million in the
six months ended March 31, 2004. Higher U.S. inventory levels due to the shift
in buying patterns of certain of its customers and the addition of safety stock
during a move of its distribution center adversely affected cash flows during
the period. However, this was more than offset by enhanced accounts payable
management and by lower cash flows needed to extinguish trade payables, interest
and restructuring liabilities during the current year period.
The Company's fiscal 2004 investing activities included approximately
$439,000 in net purchases of property and equipment, compared to $747,000 in the
prior year period. The reduction reflects the disposal of the Company's
refractory division as well as lower capital purchases in Mexico during the
period. Generally, all major capital projects are discretionary in nature. A
purchase commitment exists with respect to certain computer software
enhancements approximating $300,000. Capital expenditures are usually funded
from operations and existing financing or new leasing arrangements.
The Company's financing agreements with its senior lender and subordinated
lenders run through fiscal 2005. Wells Fargo Foothill 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, 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 originally 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. In an attempt 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.
12
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 March 31, 2004, the Company had approximately $13 million of unused lines of
credit available under the senior debt facility.
The Company also has $16.5 million of Senior Subordinated Notes with a
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 has paid a total of
$4.2 million in principal through March 31, 2004 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 $4.8 million by 2005 (due to
restrictions imposed under the 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. Under
the subordinated note agreement, as amended, the first date at which a portion
of the warrants issued to the subordinated noteholders will become exercisable
is May 31, 2004, when 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 $5.05 million through that date. The
Company expects to make sufficient additional payments to avoid the grant of
part or all of the May 31, 2004 warrants. 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
subordinated 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.
In addition, the Company's Mexico subsidiary had approximately $15.5
million in bank lines of credit ($4 million unused) as of March 31, 2004,
expiring at various dates from September 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 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.
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 later amended several
times to extend the expiration date. On March 29, 2004, the companies terminated
their discussions.
13
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
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 was 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 additional disclosures included herein, the Company's adoption
of Statement No. 132(R) did not have an impact on the Company's financial
condition, results of operations or cash flows.
In March 2004, the FASB issued a proposed statement, "Share-Based Payment -
an amendment of Statements No. 123 and 95" that addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed statement would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, "Accounting for Stock Issued
to Employees", and generally would require instead that such transactions be
accounted for using a fair-value-based method. The Company would be required to
adopt this proposed statement in its 2006 fiscal year, and its adoption is not
expected to have a material impact in 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; and the
avoidance of the exercisability of part or all of the 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; and interest rate fluctuation risk, among others.
14
Item 3.
- -------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
As discussed elsewhere, the Company is exposed to the following principal
market risks (i.e. risks of loss arising from adverse changes in market rates):
foreign exchange rates and interest rates on debt.
The Company's exposure to foreign currency exchange rate risk in its
international operations is principally limited to Mexico and, to a lesser
degree, Canada. Approximately 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 March 31, 2004, 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, the rate of Mexico government securities or the LIBOR rate. An interest
rate swap, which expires in 2005, fixes the rate of interest on $8 million of
this debt at 8.98%. A change in the average prevailing interest rates of the
remaining debt of 1% would have an estimated annual impact of $150,000 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 can
move in opposite directions and that the Company has, in most cases, the option
to elect 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. EXHIBITS 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 Incorporation 2
(3) (ii) Amended and Restated Bylaws 1
(4) a. Specimen Certificate of Company Common Stock 2
(4) b. Amended and Restated Stock Option Plan 3
(10) b. 12.00% Senior Subordinated Notes, Due 2003, Note and
Warrant Purchase Agreement 1
(10) c. 12.00% Senior Subordinated Notes, Due 2003, Common Stock
Purchase Warrant Agreement 1
(10) 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
(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.
16
(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.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.
(b) Reports on Form 8-K:
On February 11, 2004, the Company filed a Form 8-K which included as an
exhibit its press release dated December 29, 2003, regarding its first fiscal
quarter results and the extension of its exclusivity agreement with Jarden
Corporation.
17
On February 27, 2004, the Company filed a Form 8-K which included as an
exhibit its press release regarding a further extension of its exclusivity
agreement with Jarden Corporation.
On March 15, 2004, the Company filed a Form 8-K which included as an
exhibit its press release regarding a further extension of its exclusivity
agreement with Jarden Corporation.
On March 29, 2004, the Company filed a Form 8-K which included as an
exhibit its press release regarding the termination of its discussions with
Jarden Corporation.
18
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: May 14, 2004 By: /s/ GINO N. PALA
------------ ---------------------
Gino N. Pala
Chairman of Board, Co-Chief Executive
Officer and Director
Date: May 14, 2004 By: /s/ RICHARD A. ASTA
------------ ---------------------
Richard A. Asta
Executive Vice President of Finance,
Chief Financial Officer and Director
Date: May 14, 2004 By: /s/ JOHN ADORNETTO
------------ ---------------------
John Adornetto
Vice President, Corporate Controller and
Chief Accounting Officer
19