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 June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number 1-8689
DIXON TICONDEROGA COMPANY
Incorporated pursuant to the Laws of Delaware State
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Internal Revenue Service-- Employer Identification No. 23-0973760
195 International Parkway, Heathrow, FL 32746
(407) 829-9000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The total number of shares of the registrant's Common Stock, $1 par value,
outstanding on June 30, 2004, was 3,207,894.
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 --
June 30, 2004 and September 30, 2003 3
Consolidated Statements of Operations -- For The
Three and Nine Months Ended June 30, 2004 and 2003 4
Consolidated Statements of Comprehensive Income --
For The Three and Nine Months Ended June 30, 2004 and 2003 5
Consolidated Statements of Cash Flows -- For The
Nine Months Ended June 30, 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 6. Exhibits and Reports on Form 8-K 16-17
Signatures 18
Certifications 19-24
2
PART I - FINANCIAL INFORMATION
------------------------------
Item 1.
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DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
June 30, 2004 September 30,
(Unaudited) 2003
------------------ ------------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,743,035 $ 1,032,974
Receivables, less allowance for doubtful
accounts of $1,393,007 at June 30, 2004
and $1,429,222 at September 30, 2003 37,071,023 28,326,743
Inventories 32,192,464 26,439,361
Other current assets 2,353,742 2,350,813
------------------ ------------------
Total current assets 73,360,264 58,149,891
------------------ ------------------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 8,071,776 8,056,169
Machinery and equipment 11,594,554 11,158,157
Furniture and fixtures 1,400,016 1,385,857
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21,066,346 20,600,183
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Less accumulated depreciation (13,025,837) (12,490,680)
------------------ ------------------
8,040,509 8,109,503
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OTHER ASSETS 4,641,611 5,774,649
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$ 86,042,384 $ 72,034,043
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 12,943,738 $ 6,382,065
Current maturities of long-term debt 21,193,333 13,227,965
Accounts payable 12,456,685 9,102,711
Accrued liabilities 6,697,460 8,496,182
------------------ ------------------
Total current liabilities 53,291,216 37,208,923
------------------ ------------------
LONG-TERM DEBT 10,341,075 12,510,860
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DEFERRED INCOME TAXES AND OTHER 782,429 894,601
------------------ ------------------
MINORITY INTEREST 584,590 578,530
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, par $1, authorized
100,000 shares, none issued -- --
Common stock, par $1, authorized
8,000,000 shares, issued 3,710,309
shares in 2003 and 2002 3,710,309 3,710,309
Capital in excess of par value 3,519,531 3,547,567
Retained earnings 24,498,648 23,679,772
Accumulated other comprehensive loss (6,864,612) (6,238,403)
------------------ ------------------
24,863,876 24,699,245
Less shareholder loans (557,721) (557,721)
Less treasury stock, at cost (502,415
shares at June 30, 2004 and 508,160
shares at September 30, 2003) (3,263,081) (3,300,395)
------------------ ------------------
21,043,074 20,841,129
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$ 86,042,384 $ 72,034,043
================== ==================
3
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2004 AND 2003
----------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
2004 2003 2004 2003
---- ---- ---- ----
$ $ $
REVENUES $ 27,367,166 $ 26,940,174 $ 61,796,736 $ 61,702,854
------------- ------------- ------------- -------------
COST AND EXPENSES:
Cost of goods sold 16,093,878 15,535,113 37,488,302 37,039,958
Selling and administrative expenses 7,851,966 7,998,795 19,681,314 20,480,089
Provision for restructuring and
related costs -- 183,178 -- 486,866
Debt refinancing costs -- -- -- 624,662
Investment banking and related costs 128,283 -- 468,593 --
------------- ------------- ------------- -------------
24,074,127 23,717,086 57,638,209 58,631,575
------------- ------------- ------------- -------------
OPERATING INCOME 3,293,039 3,223,088 4,158,527 3,071,279
OTHER INCOME, NET -- 611,680 -- 1,052,500
INTEREST EXPENSE (912,476) (990,806) (2,519,481) (2,652,880)
------------- ------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY
INTEREST 2,380,563 2,843,962 1,639,046 1,470,899
INCOME TAXES (682,231) (971,733) (786,971) (379,197)
MINORITY INTEREST (26,268) (21,948) (33,199) (28,829)
------------- ------------- ------------- -------------
INCOME FROM CONTINUING OPERATIONS 1,672,064 1,850,281 818,876 1,062,873
DISCONTINUED OPERATIONS, NET OF
INCOME TAXES -- (59,723) -- (311,161)
------------- ------------- ------------- -------------
NET INCOME $ 1,672,064 $ 1,790,558 $ 818,876 $ 751,712
============= ============= ============= =============
EARNINGS (LOSS) PER COMMON
SHARE (BASIC):
Continuing operations $ 0.52 $ 0.58 $ 0.26 $ 0.33
Discontinued operations -- (0.02) -- (0.09)
------------- ------------- ------------- -------------
Net income $ 0.52 $ 0.56 $ 0.26 $ 0.24
============= ============= ============= =============
EARNINGS (LOSS) PER COMMON
SHARE (DILUTED):
Continuing operations $ 0.52 $ 0.58 $ 0.26 $ 0.33
Discontinued operations -- (0.02) -- (0.09)
------------- ------------- ------------- -------------
Net income $ 0.52 $ 0.56 $ 0.26 $ 0.24
============= ============= ============= =============
SHARES OUTSTANDING:
Basic 3,205,979 3,199,043 3,203,107 3,194,902
============= ============= ============= =============
Diluted 3,206,190 3,199,043 3,203,107 3,194,902
============= ============= ============= =============
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 INCOME (UNAUDITED)
-----------------------------------------------------------
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2004 AND 2003
----------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- ------------
NET INCOME $ 1,672,064 $ 1,790,558 $ 818,876 $ 751,712
OTHER COMPREHENSIVE INCOME (LOSS):
Current period adjustment to
recognize fair value of cash
flow hedges 193,188 14,673 378,172 52,320
Foreign currency translation
adjustments (1,050,741) 1,186,575 (1,004,381) 864,875
----------- ----------- ----------- ------------
COMPREHENSIVE INCOME $ 814,511 $ 2,991,806 $ 192,667 $ 1,668,907
----------- ----------- ----------- ------------
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)
-------------------------------------------------
FOR THE NINE MONTHS ENDED JUNE 30, 2004 AND 2003
------------------------------------------------
2004 2003
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 818,876 $ 1,062,873
Net loss from discontinued operations -- (311,161)
Gain on receipt of securities from insurance
company demutualizations -- (672,291)
Adjustment to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 1,570,230 1,815,576
Deferred taxes 308,102 13,875
Provision for doubtful accounts receivable 288,220 260,478
Gain attributable to foreign currency exchange (346,153) (67,721)
Income attributable to minority interest 33,199 28,829
Changes in assets and liabilities:
Receivables (9,629,052) (8,552,684)
Inventories (6,266,262) (4,428,977)
Other current assets (18,163) (936,378)
Accounts payable and accrued liabilities 2,163,502 (2,344,096)
Other assets 517,362 1,421,865
---------------- ---------------
Net cash used in operations $ (10,560,139) $ (12,709,812)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (1,185,695) (747,931)
Proceeds on sale of securities received from
insurance tualizations -- 607,262
---------------- ---------------
Net cash used in investing activities $ (1,185,695) $ (140,669)
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable 7,089,310 5,876,929
Net proceeds from long-term debt 5,795,583 5,585,430
Deferred financing costs -- (549,193)
Sales of treasury stock 9,278 14,255
Other non-current liabilities -- (99,745)
---------------- ---------------
Net cash provided by financing activities 12,894,171 10,827,676
---------------- ---------------
Effect of exchange rate changes on cash (438,276) 63,255
---------------- ---------------
Net increase (decrease) in cash and
cash equivalents 710,061 (1,959,550)
Cash and cash equivalents, beginning of period 1,032,974 2,589,493
---------------- ---------------
Cash and cash equivalents, end of period $ 1,743,035 $ 629,943
================ ===============
Supplemental Disclosures:
Cash paid during the period:
Interest $ 2,532,085 $ 4,279,085
Income taxes 795,713 606,442
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 for the fair presentation of the financial position of Dixon
Ticonderoga Company and subsidiaries as of June 30, 2004, and the results
of their operations and cash flows for the nine months ended June 30, 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 other 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 June 30, 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):
June 30, September 30,
2004 2003
------------ -------------
Raw materials $ 12,434 $ 10,486
Work in process 3,471 2,198
Finished goods 16,287 13,755
------------ -------------
$ 32,192 $ 26,439
============ =============
7
3. RECENT ACCOUNTING PRONOUNCEMENT:
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 nine months ended June 30, 2004 (78)
-----------
Reserve balances at June 30, 2004 $ 12
===========
In the prior year period ended June 30, 2003, the Company incurred
approximately $487,000 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 nine-month period ended June 30, 2003 associated with its
previous senior debt arrangements with a consortium of lenders and its
previous subordinated debt agreements.
6. OTHER INCOME:
Other income, net in the nine-month period ended June 30, 2003, includes
$672,000 of gains from the receipt of securities by the Company as a
policyholder following the demutualization of certain insurance companies.
Additionally, the Company received $380,000 in import duty rebates in the
2003 period.
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 nine-month periods
ended June 30, 2004 and 2003 (in thousands).
Three Months Nine Months
-------------------------- -------------------------
Operating Operating
Revenues Profit Revenues Profit (Loss)
------------ ------------- ------------ -------------
2004:
United States $ 16,049 $ 1,002 $ 34,599 $ 1,060
Canada 3,097 759 6,223 904
Mexico 7,558 1,329 19,655 1,932
United Kingdom 413 39 1,069 87
China 250 164 251 176
------------ ------------- ------------ -------------
$ 27,367 $ 3,293 $ 61,797 $ 4,159
============ ============= ============ =============
2003:
United States $ 16,064 $ 789 $ 35,569 $ (830)
Canada 3,179 468 6,463 626
Mexico 7,291 1,734 18,575 2,774
United Kingdom 366 42 958 64
China 40 190 138 437
------------ ------------- ------------ -------------
$ 26,940 $ 3,223 $ 61,703 $ 3,071
============ ============= ============ =============
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 and income per
share would have been as follows if the fair value estimates were used to
record compensation expense:
Three Months Ended Nine Months Ended
June 30, June 30,
2004 2003 2004 2003
------------ ------------- ------------ -------------
Net income reported $1,672,064 $1,790,558 $ 818,876 $ 751,712
Estimated stock
compensation expense 9,446 22,747 52,026 68,241
------------ ------------- ------------ -------------
Pro forma net income $1,662,618 $1,767,811 $ 766,850 $ 683,471
============ ============= ============ =============
Pro forma income per
share:
Basic $ .52 $ .55 $ .24 $ .21
============ ============= ============ =============
Diluted $ .52 $ .55 $ .24 $ .21
============ ============= ============ =============
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 would
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 $469,000 through June 30, 2004
associated with the aforementioned potential transaction and other
investment banking and related costs which are classified accordingly in
the accompanying financial statements.
10
Item 2.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
RESULTS OF OPERATIONS
---------------------
REVENUES for the quarter ended June 30, 2004, increased $427,000 from the
same quarter last year. The changes are as follows:
Increase % Increase (Decrease)
(Decrease) ---------------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
U.S. Consumer (13) -- 5 (5)
Foreign Consumer 440 4 8 (4)
U.S. Consumer revenue increases in the educational and commercial market
reflecting a shift in buying patterns closer to the back-to-school season were
offset by lower retail and superstore market sales. Volume increases in Mexico
offset a reduction of $630,000 due to the devaluation of the Mexican peso.
Canada remained flat with small volume decreases offsetting a gain of $80,000
due to the increasing value of the Canadian dollar. The Company expects to
experience continued competitive pressures making it difficult for the Company
to grow revenues substantially over the short-term.
Revenues for the nine months ended June 30, 2004, increased $94,000 from
the same period last year. The changes are as follows:
Increase % Increase (Decrease)
(Decrease) ---------------------------
(in thousands) Total Volume Price/Mix
-------------- ----- ------ ---------
U.S. Consumer (970) (3) - (3)
Foreign Consumer 1,064 4 2 2
U.S. Consumer revenue decreased $970,000 with the educational and retail
markets experiencing a less favorable mix of products sold and certain
competitive pricing pressures. Foreign consumer increased $1,064,000 despite a
reduction of $1.1 million due to the devaluation of the Mexico peso. Volume and
price increases in Mexico and increases in the value of the Canadian dollar of
$560,000 more than offset the peso decline.
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 devaluation, consumer confidence
has been shaken, leading to an immediate reduction in revenues in the months
following the devaluation. Then, after the immediate shock, and as the peso
stabilizes, revenues tend to grow. Selling prices tend to rise over the long
term to offset any inflationary increases in costs. The peso, as well as any
currency value, depends on many factors including international trade, investor
confidence, and government policy, to name a few. These factors are impossible
for the Company to predict, and thus, an estimate of potential effect on results
of operations for the future cannot be made. This currency risk in Mexico is
presently managed through occasional foreign currency hedges, local currency
financing and by export sales denominated in U.S. dollars.
OPERATING INCOME in the quarter ended June 30, 2004 increased $70,000 over
the same quarter last year. U.S. operating profits increased $213,000. The
current quarter's U.S. operating profit reflects $128,000 in investment banking
costs, while the prior year quarter included $183,000 in restructuring costs.
Reductions in U.S. administrative expenses due to previous cost reduction
initiatives also contributed to the U.S. increase. Foreign operating profits
decreased $143,000. Canada increased $290,000 due to lower costs associated with
certain imported products and the favorable impact of the Canadian dollar.
Mexico decreased $405,000 due principally to the effects of pricing pressures
following the peso devaluation and mix of products sold during the period. China
operating profits declined somewhat due to higher material costs impacting its
profit on wood slats.
11
Operating income for the nine months ended June 30, 2004 increased
$1,088,000 over the prior year. U.S. operating income increased $1,890,000.
Excluding investment banking costs incurred this year and debt refinancing costs
and restructuring costs incurred in the prior year period, operating income
increased $1,288,000. The Company's consolidation and cost reduction programs
significantly improved U.S. gross margins despite the decline in revenues. Lower
U.S. commissions, advertising, distribution and personnel costs contributed to a
decrease in consolidated selling and administrative costs (31.8% of revenue as
compared to 33.2% of revenue in the prior year). Foreign operating income
decreased $802,000 primarily in Mexico, due to the aforementioned factors. The
Mexico decrease in operating income was partially offset by higher profits in
Canada due to the effects of higher margins on certain imported products and
favorable currency effects. China decreased due to higher material costs, as
discussed above.
OTHER INCOME, net of $612,000 in the prior year quarter represents gains
from securities received by the Company as a policyholder following the
demutualization of certain insurance companies. Other income of $1,052,000 in
the nine months ended June 30, 2003, includes the aforementioned gains from the
receipt of securities from insurance company demutualizations as well as import
duty rebates received.
INTEREST EXPENSE decreased $78,000 and $133,000 in the quarter and nine
months ended June 30, 2004, respectively (net of interest allocated to
discontinued operations in the corresponding prior year periods). The decreases
are primarily due to lower average borrowing levels during the current year
periods.
INCOME TAX decreased $290,000 and increased $408,000 for the quarter and
nine months ended June 30, 2004, respectively. Income tax expense in each period
represents foreign income tax only. For the quarter ended June 30, 2004, any tax
on U.S. income was offset by tax benefits from available loss carry-forwards.
Despite the improvement in U.S. operating results, no tax benefit was recognized
for U.S. tax losses in the nine-month period as the Company recorded further
valuation reserves to offset any U.S. deferred tax assets created.
MINORITY INTEREST represents approximately 3% of the results of operations
of the Company's Mexico subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's cash flows used in operations improved $2.15 million in the
nine months ended June 30, 2004. Somewhat higher U.S. inventory levels (due to
the shift in buying patterns of certain of its major customers as well as higher
in-transit imported products) and higher Mexico trade and other receivables
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
$1,186,000 in net purchases of property and equipment, compared to $748,000 in
the prior year period. 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. Generally, all major
capital projects are discretionary in nature. 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
12
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.
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 June 30, 2004, the Company had approximately $8 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
$5.2 million in principal through June 30, 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 $3.8 million by 2005 (due to
restrictions imposed under the senior debt facility or otherwise) contingent
warrants issued to the noteholders equivalent to up to approximately 1.2% 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 Company made sufficient payments through May 31, 2004 so that
contingent warrants to purchase 2.5% of diluted common shares outstanding were
cancelled May 31, 2004, before ever vesting. 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. 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 $16 million
in bank lines of credit ($3 million unused) as of June 30, 2004, expiring at
various dates from September 2004 through March 2005, 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.
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 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 would 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
13
their discussions and all costs related to the proposed transaction have been
expensed.
RECENT ACCOUNTING PRONOUNCEMENT
-------------------------------
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; the avoidance
of the exercisability of part or all of the warrants issued to the Company's
subordinated noteholders; and management's expectation that the Company will
incur additional costs related to certain investment banking activities. 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 and
the costs associated with pursuing 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 June 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, 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 9
(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.
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.
17
(b) Reports on Form 8-K:
On May 13, 2004, the Company filed a Form 8-K which included as an exhibit
its press release, also dated May 13, 2004, regarding its second fiscal quarter
results.
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: August 13, 2004 By: /s/ GINO N. PALA
--------------- ---------------------
Gino N. Pala
Chairman of Board, Co-Chief Executive
Officer and Director
Date: August 13, 2004 By: /s/ RICHARD A. ASTA
--------------- ---------------------
Richard A. Asta
Executive Vice President of Finance,
Chief Financial Officer and Director
Date: August 13, 2004 By: /s/ JOHN ADORNETTO
--------------- ---------------------
John Adornetto
Vice President, Corporate Controller and
Chief Accounting Officer
18