SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 ( d )
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2002 Commission file number 1-8689
DIXON TICONDEROGA COMPANY
--------------------------------------------------------------------------------
(Exact name of Company as specified in its charter)
Form 10-K
X Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
--- Act of 1934 (Fee Required) for the fiscal year ended September 30, 2002.
___ Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 (No Fee Required) for the transaction period from
_____ to _____.
Delaware 23-0973760
--------------------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
195 International Parkway, Heathrow, FL 32746
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (407) 829-9000
Title of each class Name of each exchange on which registered
Common Stock, $1.00 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Based on the closing sales price on December 4, 2002, the aggregate market value
of the voting stock held by non-affiliates of the Company was $3,715,085.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of December 4, 2002: 3,192,832 shares of common stock, $1.00
Par Value.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this Form
10-K. [ ]
Documents Incorporated by Reference:
Proxy statement to security holders incorporated into Part III for the fiscal
year ended September 30, 2002.
1
PART I
------
ITEM 1. BUSINESS
------------------
RECENT EVENTS AND STRATEGIES
----------------------------
Dixon Ticonderoga Company, (hereinafter the "Company") focused its efforts
in fiscal 2002 toward enhancing cash flows and reducing debt, while working to
successfully restructure its existing lending arrangements and thus stabilize
its capital structure. On October 3, 2002, the Company closed a complete
refinancing and restructuring of its senior and subordinated debt through 2005,
resolving existing defaults and providing additional working capital liquidity
for operations. Moreover, in 2002 the Company improved its cash management
processes and accelerated its inventory reduction efforts resulting in
approximately $8.4 million in cash provided by operating activities. In
addition, total funded debt (net of cash balances) decreased $6.5 million or 16%
in fiscal 2002.
The Company also continued its aggressive manufacturing consolidation
initiative by completing its second phase and commencing Phase 3 which will
result in the complete shutdown of its Sandusky, Ohio manufacturing facility and
other cost reduction activities. The Company recognized an additional charge of
approximately $1.1 million in its fourth quarter of fiscal 2002 in connection
with this final phase of its overall consolidation plan.
In December 2002, the Company entered into a strategic distribution
arrangement with a third-party logistics partner under which the third-party
will distribute the Company's products from its facility in Statesville, North
Carolina. Management expects the strategic alliance will enhance customer
service while reducing fixed costs related to its prior distribution center.
In addition, the Company continued its expansion of production at its
wholly-owned China subsidiary, Beijing Dixon Ticonderoga Stationery Company,
Ltd. This subsidiary also acts as a sourcing arm, providing certain new and
innovative products for international sale.
In December 2002, the Company finalized an agreement to sell its Newcastle
Refractories division, the last business of its Industrial Group, to local
management. The transaction is expected to close in early 2003.
Further information regarding these matters is included elsewhere in this
Annual Report on Form 10-K.
COMPANY ORGANIZATION
--------------------
Dixon Ticonderoga Company
(Parent)
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| | | | |
| | | | |
| | | | |
Dixon Dixon Dixon Industrial Beijing Dixon Ticonderoga
Ticonderoga, Europe, Ltd. Mexico, S.A. de C.V. Ticonderoga Graphite,
Inc. Canada (Wholly-Owned) /Inactive(Wholly-Owned) Stationery Inc./Inactive
(Wholly-Owned) Company, Ltd. (Wholly-Owned)
(Wholly-Owned)
|
|
Grupo Dixon,
S.A. de C.V.
and subsidiaries
(97% Owned)
2
INDUSTRY SEGMENTS
-----------------
The Company has one principal continuing business segment: its Consumer
Group. This segment's primary operations are the manufacture and sale of writing
and drawing pencils, pens, artist materials, felt tip markers, industrial
markers, lumber crayons, correction materials and allied products. Certain
financial information regarding net revenues, operating profits and identifiable
assets for the years ended September 30, 2002, 2001 and 2000, is contained in
Note 11 to Consolidated Financial Statements.
CONSUMER GROUP
--------------
The Company manufactures its leading brand Ticonderoga(R) and a full line
of pencils in Versailles, Missouri. The Company manufactures and markets
advertising specialty pencils, pens and markers through its promotional products
division. The Company also manufactures and markets Wearever(R) and Dixon(R) pen
writing products as well as Prang(R) and Ticonderoga(R) lines of markers,
mechanical pencils and allied products.
Through 2002, the Company manufactured some or all of its Prang(R) brand of
soy-bean based and wax crayons, chalks, dry and liquid tempera, water colors and
art materials, in Sandusky, Ohio. Commencing in 2003, these products will be
manufactured by the Company's majority-owned (97%) subsidiary, Grupo Dixon, S.A.
de C.V. (Grupo Dixon).
Under a licensing agreement with NASCAR(R), The Company markets pencils and
pens with the NASCAR brand and features certain top NASCAR(R) drivers. Also,
under an agreement with Warner Bros. Consumer Products, the Company also markets
in Canada and Mexico a line of pencils, pens and related products featuring the
famous Looney Tunes(R) and Scooby Doo(R) characters.
Dixon Ticonderoga Inc., a wholly-owned subsidiary with a distribution
center in Newmarket, Ontario, and a manufacturing plant in Acton Vale, Quebec,
Canada, is engaged in the sale in Canada of black and color writing and drawing
pencils, pens, lumber crayons, correction materials, erasers, rubber bands and
allied products. It also distributes certain of the school product lines. The
Acton Vale plant also produces eraser products and correction materials for
distribution by the U.S. Consumer group.
Grupo Dixon is engaged, through its subsidiaries, in the manufacture and
sale in Mexico of black and color writing and drawing pencils, correction
materials, lumber crayons and allied products. Grupo Dixon also manufactures and
sells in Mexico, under its Vinci(R) brand, certain products of the type
manufactured at the Sandusky facility, as well as marker products and modeling
clay. Grupo Dixon also manufactures special markers for industrial use, all of
which are marketed and sold together with the products discussed above, by the
U.S. Consumer division.
Dixon Europe, Limited, a wholly-owned subsidiary of the Company, is engaged
in the distribution of many Dixon consumer products in the United Kingdom and
other European countries.
Beijing Dixon Ticonderoga Stationery Company, Ltd., a wholly-owned
subsidiary of the Company, is principally engaged in the manufacture of wood
slats for pencil manufacturing and the sourcing and distribution of certain
consumer products for international sale by the Company.
The Company's international operations are subject to certain risks
inherent in carrying on business abroad, including the risk of currency
fluctuations, currency remittance restrictions and unfavorable political
conditions. It is the Company's opinion that there are presently no material
political risks involved in doing business in the foreign countries (i.e.
Mexico, Canada and Europe) in which its operations are being conducted.
INDUSTRIAL GROUP (DISCONTINUED OPERATIONS)
------------------------------------------
In September 2001, the Company formalized its decision to sell its New
Castle Refractories division, the last business of its Industrial Group. In
December 2002, the Company finalized an agreement to sell this division to local
management. This division, with plants located in Ohio, Pennsylvania and West
Virginia, manufactures various types of non-graphitic refractory kiln furniture
used by the ceramic and glass industries; firebrick, silicon-carbide brick,
various types and designs of non-graphitic refractory special shapes for ferrous
and nonferrous metal industries; refractory shapes for furnace linings and
industrial furnace construction; various grades of insulating firebrick and
graphite stopper heads. The Company expects to conclude the sale in early 2003.
3
DISTRIBUTION
------------
Consumer products manufactured and/or marketed in the U.S. are distributed
nationally through wholesale, commercial and retail stationers, school supply
houses, industrial supply houses, blueprint and reproduction supply firms, art
material distributors and retailers. In an effort to enhance service levels
(especially with large retail customers), the Company entered into a strategic
distribution arrangement with a third-party located in Statesville, North
Carolina. The consumer products manufactured and/or marketed by the Canada,
Mexico and Europe subsidiaries are distributed nationally in these countries
from leased facilities and sold through wholesalers, distributors, school supply
houses and retailers.
RAW MATERIALS
-------------
Wood slats for pencil manufacturing can be considered a strategic raw
material for the Company's business and are purchased from various suppliers in
the U.S., Indonesia and China (including the Company's wholly-owned China
subsidiary). There were no significant raw material shortages of any consequence
during 2002 nor are any expected in the near future.
TRADEMARKS, PATENTS AND COPYRIGHTS
----------------------------------
The Company owns a large number of trademarks, patents and copyrights
related to products manufactured and marketed by it, which have been secured
over many years. These have been of value in the growth of the business and
should continue to be of value in the future. However, in the opinion of the
Company, its business generally is not dependent upon or at risk with respect to
the protection of any patent or patent application or the expiration of any
patent.
SEASONAL ASPECTS OF THE BUSINESS
--------------------------------
Greater portions (approximately 60% in 2002) of the Company's sales occur
in the third and fourth fiscal quarters of the year due to shipments of
back-to-school orders to its distribution network. This practice as well as
certain extended customer payment terms, which are standard for this industry,
causes the Company to incur additional bank borrowings during the period between
shipment and payment.
COMPETITION
-----------
The Company is engaged in a highly competitive business with a number of
competitors, some of whom are larger and have greater resources than the
Company. Important to the Company's market position are the quality and
performance of its products, its marketing, customer service and distribution
systems and the reputation developed over the many years that the Company has
been in business.
RESEARCH AND DEVELOPMENT
------------------------
The Company employs approximately 22 full-time professional employees in
the area of quality control and product development. For accounting purposes,
research and development expenses in any year presented in the accompanying
Consolidated Financial Statements represent less than 1% of revenues.
EMPLOYEES
---------
The total number of persons employed by the Company was approximately 1,499
of which 439 were employed in the United States.
4
ITEM 2. PROPERTIES
-------------------
The properties of the Company, set forth in the following table are owned
and are collateralized under the Company's senior and subordinated debt
agreements. The Heathrow, Florida, property, is also subject to a separate
mortgage agreement. (See Note 4 to Consolidated Financial Statements.) Most of
the buildings are of steel frame and masonry or concrete construction.
SQUARE FEET
LOCATION OF FLOOR SPACE
------------------------------------------------------------- --------------
Heathrow, Florida (Corporate Headquarters) 33,000
Sandusky, Ohio (Consumer) 276,000
Versailles, Missouri (Consumer) 120,000
Acton Vale, Quebec, Canada (Dixon Ticonderoga Inc.) (Consumer) 32,000
Beijing, China
(Beijing Dixon Ticonderoga Stationery Company, Ltd.) (Consumer) 25,000
New Castle, Pennsylvania
(Refractories division/discontinued operations) 131,000
Newell, West Virginia
(Refractories division/discontinued operations) 45,000
Massillon, Ohio
(Refractories division/discontinued operations) 113,000
The Company's Mexico subsidiary leases a 300,000 square-foot facility near
Mexico City, used for distribution and certain manufacturing operations, as well
as its corporate headquarters. The Company's Canada subsidiary leases 12,000
square feet in Newmarket, Ontario used for distribution and office space.
ITEM 3. LEGAL PROCEEDINGS
-------------------------
In April 1996, a decision was rendered by the Superior Court of New Jersey
in Hudson County finding the Company responsible for $1.94 million in certain
environmental clean-up costs. In January 1998, the Company paid $3.6 million to
satisfy this claim in full, including all accrued interest. The Company
continued to pursue other responsible parties for indemnification and/or
contribution to the payment of this claim (including its insurance carriers) and
in fiscal 2000 the Company reached settlements with its various insurers for
reimbursement of legal costs in the amount of $653,000. In 2001, a pending
malpractice suit against its former attorneys was settled and the Company
received $575,000. (Also see Note 13 to Consolidated Financial Statements.)
The Company believes that there are no pending actions which will have a
material adverse effect on the Company's financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
---------------------------------------------------------
None.
5
PART II
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ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY
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HOLDER MATTERS
---------------
Dixon Ticonderoga Company common stock is traded on the American Stock
Exchange under the symbol "DXT". The following table sets forth the low and high
per share prices as per the American Stock Exchange closing prices for the
applicable quarter.
FISCAL 2002 FISCAL 200
QUARTER ENDING LOW HIGH LOW HIGH
-------------------- ----- ------ ----- ------
December 31 $1.10 $2.50 $2.13 $5.00
March 31 1.62 1.75 2.75 5.50
June 30 1.45 2.00 3.35 4.50
September 30 1.10 1.63 2.15 4.10
The Board of Directors has indefinitely suspended the payment of dividends
which is also restricted under the Company's new debt agreements. (See Note 4 to
Consolidated Financial Statements.)
The number of record holders of the Company's common stock at December 3,
2002 was 421.
6
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
FOR THE FIVE YEARS ENDED SEPTEMBER 30, 2002
(in thousands, except per share amounts)
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
REVENUES 1 $ 88,591 $ 88,319 $ 88,867 $ 95,041 $ 96,695
========== ========== ========== ========== ==========
INCOME (LOSS) FROM
CONTINUING OPERATIONS $ (683) $ 620 $ (733) $ 399 $ 2,279
INCOME (LOSS) FROM
DISCONTINUED OPERATIONS 123 (1,100) (65) 6,283 857
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (560) $ (480) $ (798) $ 6,682 $ 3,136
========== ========== ========== ========== ==========
EARNINGS (LOSS) PER
COMMON SHARE (BASIC):
CONTINUING OPERATIONS $ (.22) $ .20 $ (.23) $ .12 $ .67
DISCONTINUED OPERATIONS .04 (.35) (.02) 1.83 .26
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (.18) $ (.15) $ (.25) $ 1.95 $ .93
========== ========== ========== ========== ==========
EARNINGS (LOSS) PER
COMMON SHARE (DILUTED):
CONTINUING OPERATIONS $ (.22) $ .20 $ (.23) $ .11 $ .62
DISCONTINUED OPERATIONS .04 (.35) (.02) 1.76 .23
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (.18) $ (.15) $ (.25) $ 1.87 $ .85
========== ========== ========== ========== ==========
TOTAL ASSETS $ 79,409 $ 86,091 $ 86,718 $ 92,888 $ 92,630
========== ========== ========== ========== ==========
LONG-TERM DEBT $ 16,383 4 $ 2, 018 3 $ 30,210 $ 39,400 2 $ 21,927
========== ========== ========== ========== ==========
DIVIDENDS PER
COMMON SHARE $ - $ - $ - $ - $ -
========== ========== ========== ========== ==========
1Certain reclassifications were made to classify certain sales incentives as
reductions of gross revenues that were previously classified as selling expenses
(See Note 1 to Consolidated Financial Statements).
2The increase in long-term debt in 1999 is attributable to the refinancing of
the Company's previous revolving credit agreement under a five-year facility.
3The reduction in long-term debt is due to reclassification of the Company's
senior credit facility and subordinated notes to current maturities of long-term
debt while in default.
4The increase in long-term debt in 2002 is attributable to the October 3, 2002
restructuring of the Company's subordinated notes, previously classified as
current maturities of long-term debt in 2001. (See Note 4 to Consolidated
Financial Statements.)
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
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AND RESULTS OF OPERATIONS
--------------------------
SUMMARY OF RESULTS OF OPERATIONS
--------------------------------
Discontinued operations:
------------------------
In September 2001, the Company formalized its decision to sell its New
Castle Refractories division, the last business of its Industrial group. In
December 2002, the Company finalized an agreement to sell this division to local
management. The transaction is expected to close in early 2003. The Industrial
Group had revenues of $9,169,000, $9,529,000 and $11,188,000 in 2002, 2001 and
2000, respectively. Income (loss) from discontinued operations (before
provisions in 2001 for loss on disposal, 0described below) was $123,000,
($56,000) and ($65,000) in 2002, 2001 and 2000, respectively, (including pre-tax
gains on sales of assets of $208,000 and $1,202,000 in 2002 and 2001, and income
tax benefit (expense) of ($77,000), $29,000 and $23,000 in 2002, 2001 and 2000,
respectively). Interest expense of $342,000, $427,000 and $597,000 has been
allocated to discontinued operations in 2002, 2001 and 2000, respectively.
In fiscal 2001, the Company also recorded an anticipated loss on disposal
of $1,570,000 (or $1,044,000 after tax benefit) including provisions for a loss
on the sale of the New Castle Refractories division of $468,000, for the wind-up
of that division's pension plans of $432,000 and for operating losses through
the expected date of disposal of $670,000. For financial reporting purposes, the
Company is accounting for the disposition of its Industrial Segment as a
discontinued operation and, accordingly, its statements of operations present
the results of the discontinued Industrial Segment separately from the results
of continuing operations. Since a discussion of the results of the Industrial
Segment is not meaningful to an understanding of the continuing Consumer
business, all discussions comparing the results of operations refer to the
continuing operations of the Consumer Group. (For further information regarding
discontinued operations, see Note 12 to Consolidated Financial Statements.)
2002 vs. 2001:
--------------
Income before taxes, minority interest and discontinued operations
decreased $2,159,000. Restructuring costs increased $705,000 as the Company
announced its final phase of plant consolidations. (See Note 10 to Consolidated
Financial Statements.) Administrative costs in the U.S. increased primarily due
to higher bank financing costs and the prior year administrative expenses
reflecting a $575,000 reduction for settlement of a lawsuit. Higher
Administrative expenses were partially offset by lower interest costs as
interest expense decreased $300,000 in 2002.
2001 vs. 2000:
--------------
Income before taxes, minority interest and discontinued operations
increased $2,125,000. Charges for the Company-wide restructuring and
consolidation plan decreased $640,000. Restructuring costs in 2001 included
$418,000 in U.S. costs associated with a prior phase of restructuring, as well
as $450,000 in Mexico for the consolidation of operations into a new facility.
Operating profits increased primarily due to lower selling, distribution and
administrative expenses. General corporate expenses also decreased due to
continued aggressive cost reduction efforts. Interest expense increased
$716,000, mainly due to higher borrowings in Mexico to finance the consolidation
of manufacturing facilities. Income taxes also increased due to pretax income in
2001, as compared to losses in the prior year.
REVENUES
--------
Overall 2002 revenues increased $271,000 from the prior year. The changes
are as follows:
Decrease % Increase (Decrease)
(in thousands) Total Volume Price / Mix
-------------- ----------------------------
U.S. $ (3,153) (6) (3) (3)
Foreign 3,424 10 13 (3)
8
U.S. Revenue decreased in the educational and promotional products markets
primarily due to customer consolidations and their related inventory reduction
efforts. Revenue increased in the retail channel, principally in the office
supply superstores, partially offsetting reductions in other channels. Foreign
revenue increased primarily in Mexico due to higher volume with existing mass
market customers and additional government business.
While the Company has operations in Canada, Mexico and the U.K.,
historically only the operating results in Mexico have been materially impacted
by currency fluctuations. There has been a significant devaluation of the
Mexican peso at least once in each of the last three decades, the last one being
in August of 1998. In the short term after such devaluations, consumer
confidence has been shaken, leading to an immediate reduction in revenues in the
months following the devaluation. Then, after the immediate shock, and as the
peso stabilizes, revenues tend to grow. Selling prices tend to rise over the
long term to offset any inflationary increases in costs. The peso, as well as
any currency value, depends on many factors including international trade,
investor confidence and government policy, to name a few. These factors are
impossible for the Company to predict, and thus, an estimate of potential effect
on results of operations for the future cannot be made. This currency risk in
Mexico is presently managed through occasional foreign currency hedges, local
currency financing and by export sales to the U.S. denominated in U.S. dollars.
Overall 2001 revenues decreased $548,000 from the prior year. The changes
are as follows:
Increase (Decrease) % Increase (Decrease)
(in thousands) Total Volume Price / Mix
------------------- ----------------------------
U.S. $ 407 1 1 --
Foreign (955) (3) (13) 10
U.S. revenue increased primarily in the traditional educational channel,
partially offset by decreases in the mass retail market where competitive
pressures from large suppliers and importers are the greatest. Foreign revenue
decreased primarily due to lower demand from large retail customers, partially
offset by Mexico price increases.
OPERATING INCOME
----------------
Operating income decreased $2,459,000 from the prior year. U.S. operating
income decreased $2,665,000 (excluding restructuring charges) due to the
aforementioned lower revenues and increased administrative costs. U.S.
administrative costs also increased principally due to the prior year reflecting
a reduction for legal settlements of $575,000 and significantly higher bank
financing costs (approximately $417,000). These factors were primarily
responsible for an increase in selling and administrative costs (30.5% of sales
as compared to 28.7% of sales in the prior year). Restructuring and related
costs increased $705,000 as the Company announced its final phase of its
consolidation plan. Foreign operating profit increased $1,111,000 principally
due to higher revenue described above.
Operating income in 2001 increased $2,841,000 over the prior year. U.S.
operating income increased $1,812,000 (excluding restructuring charges)
primarily due to lower selling, distribution and administrative costs. Foreign
operating income decreased $340,000, primarily in Canada, due to lower revenues.
General corporate expenses (excluding restructuring costs) decreased an
additional $730,000 due to lower salaries, fringes and related costs reflecting
continued aggressive cost reduction efforts. These decreases in selling,
distribution, administrative and general corporate expenses contributed to
significantly lower consolidated selling and administrative costs (28.7% of
sales as compared to 30.8% in the prior year). Restructuring and related costs
decreased $640,000 in 2001 as the Company finalized its efforts under the second
phase of its restructuring program.
MINORITY INTEREST
-----------------
Minority interest represents 3% of the net income of the consolidated
subsidiary, Grupo Dixon, S.A. de C.V., ($51,000, $31,000 and $24,000 in fiscal
2002, 2001 and 2000, respectively), equivalent to the extent of the investment
of the minority shareholders.
9
CURRENT ECONOMIC ENVIRONMENT AND EVENTS
---------------------------------------
Although not directly impacted by recent events in the U.S. and abroad,
management believes that softening economic conditions have recently affected
and could continue to affect the retail mass or other markets served by the
Company's Consumer Group and thus could lead to reduced overall revenues. In
addition, certain expenses which have risen recently (such as insurance costs)
could continue to trend significantly higher in the coming years due to recent
events.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company generated approximately $8.4 million in cash flows from
operating activities in 2002. The Company's strict inventory control and
reduction efforts in the U.S. and Mexico led to an increase in cash flows
related to inventories of approximately $6.3 million, continuing an initiative
begun in 2000, which has since resulted in approximately $10 million in cash
flows. In addition, enhanced cash management processes have led to further
improvement in accounts payable management and stronger accounts receivable
collections in the U.S. and Mexico. Overall, in the past three years, the
Company generated approximately $12.5 million in cash flows from operating
activities.
The Company's 2002 investing activities included approximately $1.3 million
in purchases of property and equipment (net of sales proceeds), compared to $2.0
million in the prior year. This reflects a higher level of purchases in 2001,
due to the Company's expansion of its Mexico manufacturing and consolidation
into its newly leased 300,000 square-foot facility. These expenditures were
partially offset by approximately $1.3 million in net proceeds on the sale of an
idled Mexico plant and other assets. Generally, all major capital projects are
discretionary in nature and thus no material purchase commitments exist. Capital
expenditures are usually funded from operations and existing financing or new
leasing arrangements.
On October 3, 2002, the Company completed a financing agreement with a new
senior lender and its existing subordinated lenders to restructure its present
U.S. debt through fiscal 2005. Foothill Capital Corporation has provided a
three-year $28 million senior debt facility which replaces the Company's
previous senior debt with a consortium of lenders. The new senior debt
arrangement provides approximately $5 million in increased working capital
liquidity for operations and to make certain subordinated debt payments.
The senior debt facility includes a $25 million revolving loan, which bears
interest at either the prime rate (4.75% at September 30, 2002), plus 0.75%, or
the prevailing LIBOR rate (approximately 1.8% at September 30, 2002), 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
senior debt at 8.98% through August 2005.
These financing arrangements are collateralized by the tangible and
intangible assets of the U.S. and Canada operations (including accounts
receivable, inventories, property, plant and equipment, patents and trademarks)
and a guarantee by and pledge of capital stock of the Company's subsidiaries. As
of the closing date of the new senior revolving loan and term arrangements, the
Company had approximately $13 million of unused lines of credit available.
On October 3, 2002, the Company also reached agreement with the holders of
$16.5 million of Senior Subordinated Notes to restructure the notes, extending
the maturity date to 2005. The Company is only required to pay monthly
installments of $50,000 through December 2003 and $150,000 per month from
January 2004 through the maturity date. However, the Company paid $1 million in
principal (and $2.1 million of accrued interest) at closing of the new senior
debt facility and expects to make additional excess payments to its subordinated
lenders over the next three years. Payments to the subordinated lenders are
subject to certain restrictions imposed under the senior debt facility. Interest
10
on the balance of subordinated debt is paid quarterly. If the Company is unable
to make scheduled and additional excess payments totaling at least $8 million by
2005 (due to restrictions imposed under the new senior debt facility or
otherwise) the noteholders will receive warrants equivalent to approximately
1.6% of the diluted common shares outstanding for each $1 million in unpaid
principal, in addition to warrants having an exercise price of $7.24 (expiring
in September 2003) now held by them. Any warrants received or earned will be
relinquished if the notes are paid in full during the term of the new agreement.
The agreement also grants the subordinated lenders a lien on Company assets
(junior in all aspects to the new senior debt collateral agreements described
above). The interest rate on the subordinated notes had been 13.5% through June
30, 2002 [12% payable in cash and 1.5% payable-in-kind (PIK)] plus an additional
2% on past due amounts. At closing, the interest rate on the notes was changed
to 12.5% (without PIK) 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 $12 million
in bank lines of credit ($4 million unused) as of September 30, 2002, expiring
at various dates from January 2003 through October 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 is awaiting approval on additional Mexico
lines of credit and is presently reviewing other debt proposals for this
subsidiary. The Company relies heavily upon the availability of the lines of
credit in the U.S. and Mexico for liquidity in its operations.
The Company believes that amounts available from its lines of credit under
its senior debt and under lines of credit available to its Mexican subsidiary
are sufficient to fulfill all current and anticipated operating requirements of
its business through 2005. The Company's 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.
Refer to Notes 3 and 4 to Consolidated Financial Statements for further
description of the aforementioned financing arrangements.
The Company has retained Wachovia Securities (formerly First Union
Securities) 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.
Contractual obligations as of September 30, 2002 are summarized in the
table below. Although classified as current maturities in the accompanying
consolidated financial statements and due in fiscal 2003 below (see Note 4 to
Consolidated Financial Statements), U.S. senior debt of $10,233 and Mexico notes
payable of $7,463 are expected to remain outstanding as revolving credit lines
for working capital purposes through 2005.
Payments Due by Period (in thousands)
-----------------------------------------------
Fiscal year Fiscal years Fiscal years
Contractual Obligations Total 2003 2004-2005 2006-2007
-------------------------------- --------- ------------- ------------- -------------
Long-Term Debt and Notes Payable $ 36,188 $ 19,805 $3,659 $ 12,724
Operating Leases 5,406 2,154 3,153 99
--------- ------------- ------------- -------------
$ 41,594 $ 21,959 $6,812 $ 12,823
========= ============= ============= =============
11
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 142 "Goodwill and Other Intangible Assets". Statement No. 142
requires the use of a nonamortization approach to account for purchased goodwill
and indefinite lived intangibles. Under a nonamortization approach, goodwill and
indefinite lived intangibles will not be amortized into results of operations,
but instead would be reviewed for impairment and written down and charged to
results of operations only in the periods in which the recorded value of
goodwill and indefinite lived intangibles is more than its fair value. The
provisions of Statement No. 142 will be effective for the Company in fiscal
2003. Management does not expect this standard, when implemented, to have a
material effect on its future results of operations or financial position.
In June 2001, the FASB issued Statement No. 143 "Accounting for Asset
Retirement Obligations". The statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The statement is effective for
the Company in fiscal 2003. The Company does not expect the adoption of
Statement No. 143 to have a material impact on the Company's future results of
operations or financial position.
In August 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supersedes
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", and the accounting and reporting
provisions of APB Opinion 30, "Reporting the Results of Operations - Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions", for the disposal of a
segment of a business. The statement is effective for the Company in fiscal
2003. The Company does not expect the adoption of Statement No. 144 to have a
material impact on the Company's future results of operations or financial
position.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". The statement addresses the accounting for extinguishment of debt,
sale-leaseback transactions and certain lease modifications. The statement is
effective for transactions occurring after May 15, 2002. The Company does not
expect the adoption of Statement No. 145 to have a material impact on the
Company's future results of operations or financial position.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)." The provisions of
Statement No. 146 are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not expect the adoption of
Statement No. 146 to have a material impact on the Company's future results of
operations or financial position.
CRITICAL ACCOUNTING POLICIES
----------------------------
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and
revenue and expenses during the period reported. The following accounting
policies require management to make estimates and assumptions. These estimates
and assumptions are reviewed periodically and the effects of revisions are
reflected in the period that they are determined to be necessary. If actual
results differ significantly from management's estimates, the financial
statements could be materially impacted.
Accounts receivable is recorded net of allowance for doubtful accounts. The
Company regularly reviews the adequacy of its accounts receivable allowance
after considering the size of the accounts receivable, the age of each invoice,
each customer's expected ability to pay and the collection history with each
customer. The allowance for doubtful accounts represents management's best
estimate, but changes in circumstances relating to accounts receivable may
result in a requirement for additional allowances in the near future.
Inventories are stated at the lower of cost or market. The Company
regularly reviews inventory quantities on hand and records a provision for
12
excess and obsolete inventory based primarily on the Company's estimated
forecast of product demand. The Company's estimate of forecasted product demand
may prove to be inaccurate, in which case the Company may have understated or
overstated the provision required for excess and obsolete inventory. In the
future, if the company's inventory is determined to be overvalued, the Company
would be required to recognize such costs in its cost of goods sold at the time
of such determination. Likewise if the Company's inventory is determined to be
undervalued, the Company may have over-reported costs of goods sold. Therefore,
although the Company makes every effort to ensure the accuracy of its forecasts
of future product demand, any significant unanticipated changes in demand could
have a significant impact on the value of inventory and the Company's reported
operating results.
Long-lived assets, such as property, plant and equipment, are reviewed for
impairment when events and circumstances indicate that the carrying amount of an
asset may not be recoverable. When such events occur, the Company compares the
carrying amount of the assets to undiscounted expected future cash flows. Should
this comparison indicate that there is an impairment, the amount of the
impairment is calculated using discounted expected future cash flows. If the
estimate of an asset's future cash flows is significantly different from the
asset's actual cash flows, the Company may over- or under-estimate the value of
an asset's impairment. A long-lived asset's value is also dependent upon its
estimated useful life. A change in the useful life of a long-lived asset could
result in higher or lower depreciation and amortization expense. If the asset's
actual life is different than its estimated life, the asset could be over-valued
or under-valued.
Restructuring and related costs reserves are recorded in connection with
the restructuring initiatives as they are announced. These reserves include
estimates pertaining to employee severance costs, the settlement of contractual
obligations and other matters. Although management does not anticipate
significant changes, the actual costs may differ from these estimates, resulting
in further charges or reversals of previously recorded charges.
The carrying value of the Company's net deferred tax assets assumes that
the Company will be able to generate sufficient future taxable income in certain
jurisdictions, based on estimates and assumptions. If these estimates and
related assumptions change in the future, the Company may be required to record
additional valuation allowances against its deferred tax assets resulting in
additional income tax expense in the Company's Consolidated Statement of
Operations. Management evaluates the recoverability of the deferred tax assets
quarterly and assesses the need for additional valuation allowances quarterly.
FORWARD-LOOKING STATEMENTS
--------------------------
The statements in this Annual Report on Form 10-K that are not purely
historical are "forward-looking statements" within the meaning of section 27A of
the Securities Act of 1933 and section 21E of the Securities Exchange Act of
1934, including statements about the Company's expectations, beliefs, intentions
or strategies regarding the future. Forward-looking statements include
statements regarding, among other things, the effects of the devaluation of the
Mexican peso; the sufficiency and continued availability of the Company's lines
of credit and its ability to meet its current and anticipated obligations;
management's inventory reduction plan and expectation for savings from the
restructuring and cost-reduction program; the Company's ability to increase
sales in its core businesses; management's expectations with regards to legal
proceedings; and its expectations regarding the Company's ability to utilize
certain tax benefits in the future. Readers are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
known and unknown risks, uncertainties and other factors that could cause the
actual results to differ materially from those expressed or implied by such
forward-looking statements. Such risks include (but are not limited to) the risk
that the 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 as a result of the inventory reduction plan;
difficulties encountered with the consolidation and cost-reduction program;
increased competition; U.S. and foreign economic factors; foreign currency
exchange risk and interest rate fluctuation risk, among others.
13
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
As discussed elsewhere, the Company is exposed to the following principal
market risks (i.e. risks of loss arising from adverse changes in market rates):
foreign exchange rates and interest rates on debt.
The Company's exposure to foreign currency exchange rate risk in its
international operations is principally limited to Mexico and, to a lesser
degree, Canada. Approximately 40% of the Company's fiscal 2002 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 the closing of its new debt arrangements on October 3,
2002, approximately 48% 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 $200,000 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.
14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
-------------------------------------------------------
PAGE
----
Report of Independent Certified Public Accountants 16
Consolidated Balance Sheets as of
September 30, 2002 and 2001 17
Consolidated Statements of Operations For the
Years Ended September 30, 2002, 2001 and 2000 18
Consolidated Statements of Comprehensive Loss For the
Years Ended September 30, 2002, 2001 and 2000 19
Consolidated Statements of Shareholders' Equity For the
Years Ended September 30, 2002, 2001 and 2000 20
Consolidated Statements of Cash Flows For the
Years Ended September 30, 2002, 2001 and 2000 21-22
Notes to Consolidated Financial Statements 23-40
Schedule For the Years Ended September 30, 2002, 2001 and 2000:
II. Valuation and Qualifying Accounts 41
Information required by other schedules called for
under Regulation S-X is either not applicable or is
included in the Consolidated Financial Statements or
Notes thereto.
15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
Shareholders and Board of Directors of
Dixon Ticonderoga Company
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of Dixon
Ticonderoga Company and its subsidiaries at September 30, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2002 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Tampa, Florida
December 9, 2002
16
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
SEPTEMBER 30, 2002 AND 2001
---------------------------
2002 2001
------------- -------------
ASSETS:
-------
CURRENT ASSETS:
Cash and cash equivalents $ 2,589,493 $ 844,299
Receivables, less allowance for doubtful
accounts of $1,381,780 in 2002 and
$1,482,524 in 2001 29,179,803 30,498,042
Inventories 28,761,337 35,583,082
Other current assets 3,914,817 2,464,043
------------- -------------
Total current assets 64,445,450 69,389,466
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 10,881,021 10,608,980
Machinery and equipment 16,948,612 17,155,371
Furniture and fixtures 1,607,449 1,741,811
------------- -------------
29,437,082 29,506,162
------------- -------------
Less accumulated depreciation (19,641,894) (19,022,674)
------------- -------------
9,795,188 10,483,488
------------- -------------
OTHER ASSETS 7,872,957 6,217,958
------------- -------------
$82,113,595 $86,090,912
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
-----------------------------------------------
CURRENT LIABILITIES:
Notes payable $ 7,463,458 $ 6,294,268
Current maturities of long-term debt 12,341,735 32,598,531
Accounts payable 8,819,499 9,321,957
Accrued liabilities 12,485,494 9,368,315
------------- -------------
Total current liabilities 41,110,186 57,583,071
------------- -------------
LONG-TERM DEBT 16,383,106 2,018,125
------------- -------------
DEFERRED INCOME TAXES AND OTHER 1,183,467 984,492
------------- -------------
MINORITY INTEREST 583,841 577,241
------------- -------------
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 2002
and 2001 3,710,309 3,710,309
Capital in excess of par value 3,593,826 3,670,135
Retained earnings 25,107,752 25,667,675
Accumulated other comprehensive loss (5,640,262) (4,101,681)
------------- -------------
26,771,625 28,946,438
Less shareholder loans (557,721) (557,721)
Less treasury stock, at cost (517,477 shares
in 2002 and 532,847 shares in 2001) (3,360,909) (3,460,734)
------------- -------------
22,852,995 24,927,983
------------- -------------
$82,113,595 $86,090,912
============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
17
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
-----------------------------------------------------
2002 2001 2000
------------- ------------- -------------
REVENUES $ 88,590,730 $ 88,319,455 $ 88,866,684
------------- ------------- -------------
COSTS AND EXPENSES:
Cost of goods sold 57,132,999 56,732,494 57,462,598
Selling and administrative expenses 26,987,835 25,363,628 27,380,388
Provision for restructuring and related costs 1,573,235 867,666 1,508,481
------------- ------------- -------------
85,694,069 82,963,788 86,351,467
------------- ------------- -------------
OPERATING INCOME 2,896,661 5,355,667 2,515,217
INTEREST EXPENSE 4,087,731 4,387,700 3,672,365
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES (BENEFIT) AND MINORITY INTEREST (1,191,070) 967,967 (1,157,148)
INCOME TAXES (BENEFIT) (559,064) 316,933 (448,087)
------------- ------------- -------------
(632,006) 651,034 (709,061)
MINORITY INTEREST 51,214 31,267 23,938
------------- ------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (683,220) 619,767 (732,999)
------------- ------------- -------------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS,
NET OF APPLICABLE INCOME TAXES 123,297 (1,099,639) (65,246)
------------- ------------- -------------
NET LOSS $ (559,923) $ (479,872) $ (798,245)
============= ============= =============
EARNINGS (LOSS) PER COMMON SHARE (BASIC):
Continuing operations $ (.22) $ .20 $ (.23)
Discontinued operations .04 (.35) (.02)
------------- ------------- -------------
Net loss $ (.18) $ (.15) $ (.25)
============= ============= =============
EARNING (LOSS) PER COMMON SHARE (DILUTED):
Continuing operations $ (.22) $ .20 $ (.23)
Discontinued operations .04 (.35) (.02)
------------- ------------- -------------
Net loss $ (.18) $ (.15) $ (.25)
============= ============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
18
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
---------------------------------------------
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
-----------------------------------------------------
2002 2001 2000
------------- ------------- -------------
NET LOSS $ (559,923) $ (479,872) $ (798,245)
OTHER COMPREHENSIVE LOSS:
Cumulative effect adjustment to recognize
fair value of cash flow hedge - (54,205) -
Adjustment to recognize fair value
of cash flow hedge (115,934) (451,388) -
Foreign currency translation adjustments (1,422,647) (502,511) (677,102)
------------- ------------- -------------
TOTAL COMPREHENSIVE LOSS $ (2,098,504) $ (1,487,976) $ (1,475,347)
============= ============= ==============
The accompanying notes are an integral part of the
consolidated financial statements.
19
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
Common Capital in Accumulated Other
Stock $1 Excess of Retained Comprehensive Shareholder Treasury
Par Value Par Value Earnings Income (Loss) Loans Stock Total
----------- ----------- ----------- ----------------- ------------ ------------ ------------
BALANCE, September 30, 1999 $ 3,688,559 $ 3,586,471 $26,945,792 $ (2,416,475) $ (393,940) $(1,575,241) $29,835,166
Net loss (798,245) (798,245)
Other comprehensive loss (677,102) (677,102)
Employee stock options
exercised (21,750 shares) 21,750 147,094 (163,781) 5,063
Employee Stock Purchase
Plan (10,757 shares) (33,293) 69,867 36,574
Purchase of treasury stock
(260,230 shares) (2,016,510) (2,016,510)
----------- ----------- ----------- ----------------- ------------ ------------ ------------
BALANCE, September 30, 2000 3,710,309 3,700,272 26,147,547 (3,093,577) (557,721) (3,521,884) 26,384,946
Net loss (479,872) (479,872)
Other comprehensive loss (1,008,104) (1,008,104)
Employee Stock Purchase
Plan (9,415 shares) (30,137) 61,150 31,013
----------- ----------- ----------- ----------------- ------------ ------------ ------------
BALANCE, September 30, 2001 3,710,309 3,670,135 25,667,675 (4,101,681) (557,721) (3,460,734) 24,927,983
Net loss (559,923) (559,923)
Other comprehensive loss (1,538,581) (1,538,581)
Employee Stock Purchase
Plan (15,370 shares) (76,309) 99,825 23,516
----------- ----------- ----------- ----------------- ------------ ------------ ------------
BALANCE, September 30, 2002 $ 3,710,309 $ 3,593,826 $25,107,752 $ (5,640,262) $ (557,721) $(3,360,909) $22,852,995
=========== =========== =========== ================= ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
20
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
2002 2001 2000
------------- ------------ -------------
Cash flows from operating activities:
Net income (loss) from continuing operations $ (683,220) $ 619,767 $ (732,999)
Net income (loss) from discontinued operations 123,297 (1,099,639) (65,246)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 2,322,692 2,219,658 2,521,400
Deferred taxes (2,334,000) (534,000) (639,000)
Provision for doubtful accounts receivable 193,979 151,263 218,795
Gain on sale of assets (208,290) (1,202,448) -
Income attributable to minority interest 51,214 31,267 23,938
(Income) loss attributable to foreign
currency exchange (215,955) 52,071 (78,888)
Changes in assets [(increase)decrease] and
liabilities[increase (decrease)]:
Receivables, net (7,574) (660,434) (1,830,724)
Inventories 6,226,836 474,990 3,087,532
Other current assets (457,698) (134,308) 17,422
Accounts payable and accrued liabilities 3,673,182 1,039,899 646,793
Other assets 250,686 210,519 (228,794)
------------- ------------ -------------
Net cash provided by operating activities 8,433,777 1,168,605 2,940,229
------------- ------------ -------------
Cash flows from investing activities:
Purchases of plant and equipment, net (1,520,088) (2,009,467) (1,399,403)
Proceeds on sale of assets 208,290 1,276,063 3,250,000
------------- ------------ -------------
Net cash provided by (used in) investing
activities (1,311,798) (733,404) 1,850,597
------------- ------------ -------------
21
2002 2001 2000
------------- ------------ -------------
Cash flows from financing activities:
Proceeds from additions to long-term debt - 138,566 70,715
Proceeds from additions to notes payable 1,716,828 2,779,894 1,023,554
Principal reductions of long-term debt (6,101,200) (2,728,952) (3,693,022)
Debt refinancing costs (955,628) - (369,842)
Purchase of treasury stock - - (2,016,510)
Other non-current liabilities 40,736 6,759 (42,975)
Employee Stock Purchase Plan 23,516 31,013 36,574
Exercise of stock options - - 5,063
------------- ------------ -------------
Net cash provided by (used in) financing
activities (5,275,748) 227,280 (4,986,443)
------------- ------------ -------------
Effect of exchange rate changes on cash (101,037) (266,634) (291,344)
------------- ------------ -------------
Net increase (decrease) in cash and cash
equivalents 1,745,194 395,847 (486,961)
Cash and cash equivalents, beginning of year 844,299 448,452 935,413
------------- ------------ -------------
Cash and cash equivalents, end of year $2,589,493 $ 844,299 $ 448,452
============= ============ =============
Supplemental disclosures:
Cash paid during the year for:
Interest $3,033,931 $4,647,079 $3,148,398
Income taxes 1,677,478 2,434,487 1,518,291
Non-cash investing and financing activities:
In fiscal 2001, the Company accepted a note receivable due May 2006 in the
amount of $1.64 million as consideration for the sale of an idle building in
Deer Lake, Pennsylvania.
The accompanying notes are an integral part
of the consolidated financial statements.
22
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
Business:
---------
Dixon Ticonderoga Company is a diversified manufacturer and marketer of
writing and art products. Its largest customers are school products
distributors and mass merchandisers, although none account for over 9% of
revenues.
Revenue recognition:
--------------------
Revenues are comprised of gross sales from the shipment of product to
customers, net of provisions for product returns, customer discounts (such
as volume rebates), co-op advertising and other related discounts. The
Company recognizes sales when the following has occurred: evidence of a
sales arrangement exists; shipment of product to the customer; the price is
fixed or determinable; and collectibility is reasonably assured. An
estimate of sales returns and allowances is recorded in the period that the
related product is shipped.
In August 2001, the Emerging Issues Task Force ("EITF") issued EITF No.
01-09, "Accounting for Consideration Given by Vendor to a Customer or a
Reseller of Vendor's Product", which codified and reconciled the Task
Force's consensuses in EITF 00-14, "Accounting for Certain Sales
Incentives", EITF 00-22, "Accounting for Points and Certain Other Time
Based Sales Incentives or Volume Based Sales Incentive Offers, and Offers
of Free Products or Services to Be Delivered in the Future", and EITF
00-25, "Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products". These EITF's prescribe guidance
regarding the timing of recognition and income statement classification of
costs incurred for certain sales incentive programs to resellers and end
consumers. The adoption of EITF No. 01-09 had no impact on results of
operations. The accompanying Consolidated Statement of Operations and Note
14 have been reclassified to reflect certain sales incentives as reductions
of gross revenue that were previously classified as selling expenses.
Estimates:
----------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements, and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Loss contingencies:
-------------------
The Company recognizes loss contingencies, including environmental
liabilities, when they become probable and the related amounts can be
reasonably estimated.
Principles of consolidation:
----------------------------
The consolidated financial statements include the accounts of Dixon
Ticonderoga Company and all of its subsidiaries (the "Company"). All
significant intercompany transactions and balances have been eliminated in
consolidation. Minority interest represents the minority shareholders'
proportionate share (3%) of the equity of the Company's Grupo Dixon, S.A.
de C.V. subsidiary.
23
Translation of foreign currencies:
----------------------------------
In accordance with Financial Accounting Standards Board (FASB) Statement
No. 52, the Company has determined that each foreign subsidiary's
functional currency is their local currency. All assets and liabilities are
translated at period-end exchange rates. All revenues and expenses are
translated using average exchange rates during that period. Translation
gains and losses are reflected as a separate component of other
comprehensive loss. Gains and losses from foreign currency transactions are
included in the accompanying Consolidated Statement of Operations. Total
foreign currency exchange gains (losses) included in operating income were
approximately $216,000, $(52,000) and $79,000 for fiscal years 2002, 2001
and 2000, respectively.
Cash and cash equivalents:
--------------------------
Cash and cash equivalents include investment instruments with a maturity of
three months or less at time of purchase.
Inventories:
------------
Inventories are stated at the lower of cost or market. The Company
regularly reviews inventory quantities on hand and records a provision for
excess and obsolete inventory based primarily on the estimated forecast of
product demand. Management estimates of forecasted product demand may prove
to be inaccurate, in which case the Company may have understated or
overstated the provision required for excess and obsolete inventory. In the
future, if inventory is determined to be overvalued, the Company would be
required to recognize such costs in costs of goods sold at the time of such
determination. Likewise, if inventory is determined to be undervalued, the
Company may have overstated costs of goods sold in previous periods and
would be required to recognize such additional operating income at the time
of sale. Therefore, although management makes every effort to ensure the
accuracy of forecasts of future product demand, significant unanticipated
changes in demand could have a significant impact on the value of the
Company's inventory and reported operating results.
Certain inventories amounting to $13,034,000 and $14,126,000 at September
30, 2002 and 2001, respectively, are stated on the last-in, first-out
(LIFO) method of determining inventory costs. Under the first-in, first-out
(FIFO) method of accounting, these inventories would be $1,007,000 and
$760,000 higher at September 30, 2002 and 2001, respectively. All other
inventories are accounted for using the FIFO method.
Inventories consist of (in thousands):
September 30,
2002 2001
--------- ---------
Raw material $11,014 $13,328
Work in process 2,718 3,572
Finished goods 15,029 18,683
--------- ---------
$28,761 $35,583
========= =========
24
Property, plant and equipment:
------------------------------
Property, plant and equipment are stated at cost. Depreciation is provided
principally on a straight-line basis over the estimated useful lives of the
respective assets. The range of estimated useful lives by class of
property, plant and equipment are as follows:
Buildings and improvements 10 - 25 years
Machinery and equipment 5 - 15 years
Furniture and fixtures 3 - 5 years
When assets are sold or retired, their cost and related accumulated
depreciation are removed from the accounts. Any gain or loss is included in
income.
Impairment of long-lived assets:
--------------------------------
Long-lived assets used in the Company's operations, including cost in
excess of net assets of businesses acquired, are reviewed for impairment
when events and circumstances indicate that the carrying amount of an asset
may not be recoverable. The primary indicators of recoverability are the
associated current and forecasted undiscounted operating cash flows. Asset
impairments in connection with the Company's restructuring programs are
identified and measured using the estimated net proceeds from their
ultimate sale or abandonment. (See Note 10.) The Company's policy is to
record an impairment loss when it is determined that the carrying amount of
the asset exceeds its fair value.
Stock-based compensation:
-------------------------
The Company accounts for compensation cost related to employee stock
options and other forms of employee stock-based compensation plans in
accordance with the requirements of Accounting Principles Board (APB)
Opinion 25 and related interpretations. APB 25 requires compensation cost
for stock-based compensation plans to be recognized based on the
difference, if any, between the fair market value of the stock on the date
of grant and the option exercise price. The Company provides additional
proforma disclosures as required under FASB Statement No. 123, "Accounting
For Stock-Based Compensation".
Income taxes:
-------------
The Company recognizes deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax
bases of assets and liabilities. The Company regularly reviews its
deferred tax assets for recoverability and establishes a valuation
allowance based on historical taxable income, projected future taxable
income, and the expected timing of the reversals of existing temporary
differences. If the Company continues to operate at a loss in the U.S. or
is unable to generate sufficient future U.S. taxable income, or if there is
a material change in the actual effective tax rates or time period within
which the underlying temporary differences become taxable or deductible,
the Company could be required to establish a valuation allowance against
all or a significant portion of its deferred tax assets resulting in a
substantial increase in the Company's effective tax rate and a material
negative impact on its operating results and financial position.
25
Derivative instruments and hedging activities:
----------------------------------------------
The Company adopted FASB Statement No.133, "Accounting for Derivative
Instruments and Hedging Activities", as amended by FASB Statement No.137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133", an amendment of FASB
Statement No.133, and FASB Statement No.138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", an amendment of
Statement No. 133 (referred to hereafter as "FAS 133") on October 1, 2000.
As a result, the Company records the fair value of interest rate swaps
designated as cash flow hedges in other liabilities with the offset in the
other comprehensive income (loss) component of shareholders' equity. Upon
adoption, the Company recorded its interest rate swap designated as a cash
flow hedge with a fair value of $86,314 in other liabilities. Other
comprehensive loss was increased $54,205 (net of tax benefit of $32,109) as
a cumulative effect adjustment for this accounting change. During the years
ended September 30, 2002 and 2001, the Company also recognized an
adjustment to the fair value of this cash flow hedge of $184,309 and
$718,773, respectively, in other liabilities. Other comprehensive loss was
increased $115,934 and $451,388 (net of tax benefit of $68,375 and
$267,385, respectively) during these periods.
The Company utilizes interest rate swap agreements to provide an exchange
of interest payments computed on notional amounts that will offset any
undesirable change in cash flows or fair value resulting from market rate
changes on designated hedged bank borrowings. The Company limits the credit
risks of the interest rate agreements by initiating the transactions with
counterparties with significant financial positions, such as major
financial institutions.
FAS 133 requires companies to recognize all of its derivative instruments
as either assets or liabilities in the balance sheet at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of
hedging relationship. For those derivative instruments that are designated
and qualify as hedging instruments, a Company must designate the hedging
instrument, based upon the exposure being hedged, as either a fair value
hedge, cash flow hedge or a hedge of a net investment in a foreign
operation. For derivative instruments that are designated and qualify as a
cash flow hedge (such as the Company's interest rate swap agreements), the
effective portion of the gain or loss on the derivative instrument is
reported as a component of other comprehensive loss and reclassified into
earnings in the same period or periods during which the hedged transaction
affects earnings. The remaining gain or loss on the derivative instrument
in excess of the cumulative change in the present value of future cash
flows of the hedged item, if any, is recognized in current earnings during
the period of the change in fair values. For derivative instruments not
designated as hedging instruments, the gain or loss is recognized in
current earnings during the period of the change in fair values.
The Company has entered into an interest rate swap agreement through August
2005 that effectively converts $8 million of its floating-rate debt to a
fixed-rate basis, thus reducing the impact of interest-rate changes on
future interest expense. The fair values of interest rate instruments are
estimated by obtaining quotes from brokers and are the estimated amounts
that the Company would receive or pay to terminate the agreements at the
reporting date, taking into account current interest rates and other
relevant factors.
26
Recent accounting pronouncements:
---------------------------------
In July 2001, the FASB issued Statement No. 142 "Goodwill and Other
Intangible Assets". Statement No. 142 requires the use of a nonamortization
approach to account for purchased goodwill and indefinite lived
intangibles. Under a nonamortization approach, goodwill and indefinite
lived intangibles will not be amortized into results of operations, but
instead would be reviewed for impairment and written down and charged to
results of operations only in the periods in which the recorded value of
goodwill and indefinite lived intangibles is more than its fair value. The
provisions of Statement No. 142 will be effective for the Company in fiscal
2003. Management does not expect this standard, when implemented, to have a
material effect on its future results of operations or financial position.
In June 2001, the FASB issued Statement No. 143 "Accounting for Asset
Retirement Obligations". The statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The statement
is effective for the Company in fiscal 2003. The Company does not expect
the adoption of Statement No. 143 to have a material impact on the
Company's future results of operations or financial position.
In August 2001, the FASB issued Statement No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement supersedes
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of", and the accounting and reporting
provisions of APB Opinion 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions",
for the disposal of a segment of a business. The statement is effective for
the Company in fiscal 2003. The Company does not expect the adoption of
Statement No. 144 to have a material impact on the Company's future results
of operations or financial position.
In April 2002, the FASB issued Statement No. 145 "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". The statement addresses the accounting for
extinguishment of debt, sale-leaseback transactions and certain lease
modifications. The statement is effective for transactions occurring after
May 15, 2002. The Company does not expect the adoption of Statement No. 145
to have a material impact on the Company's future results of operations or
financial position.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". The statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and supercedes Emerging Issues Task Force Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (Including Certain Costs Incurred in a
Restructuring)." The provisions of Statement No. 146 are effective for exit
or disposal activities that are initiated after December 31, 2002. The
Company does not expect the adoption of Statement No. 146 to have a
material impact on the Company's future results of operations or financial
position.
Reclassifications:
------------------
Certain prior year amounts have been reclassified to conform with the
current year classifications.
27
(2) ACCRUED LIABILITIES:
--------------------
The major components of accrued liabilities are as follows (in thousands):
September 30,
2002 2001
--------- ---------
Interest $ 2,844 $ 1,447
Salaries and wages
1,110 968
Employee benefit plans 540 720
Income taxes 3,174 1,428
Other 4,817 4,805
--------- ---------
$12,485 $ 9,368
========= =========
(3) NOTES PAYABLE:
--------------
The Company's Mexico subsidiary had bank lines of credit totaling
approximately $12 million, under which $7.5 and $6.3 million of unsecured
notes payable were outstanding as of September 30, 2002 and 2001,
respectively. The notes, which mature at varying dates from January 2003
through October 2004, bear interest (weighted average interest rate of
approximately 4.5% and 7.1% at September 30, 2002 and 2001, respectively)
based upon either a floating U.S. bank rate or the rate of certain Mexican
government securities and are renewable annually.
(4) LONG-TERM DEBT:
---------------
Long-term debt consists of the following (in thousands):
September 30,
2002 2001
--------- ---------
Senior Subordinated Notes $ 16,500 $ 16,500
Bank notes payable 8,208 11,327
Bank term loan 2,025 4,625
Building mortgage 1,992 2,138
Other - 27
--------- ---------
28,725 34,617
Less current maturities (12,342) (32,599)
--------- ---------
$ 16,383 $ 2,018
========= =========
On October 3, 2002, the Company completed a financing agreement with a new
senior lender and its existing subordinated lenders to restructure its
present U.S. debt through fiscal 2005. Foothill Capital Corporation has
provided a three-year $28 million senior debt facility which replaces the
Company's previous senior debt (bank notes payable and bank term loan) with
a consortium of lenders. The new senior debt arrangement provides
approximately $5 million in increased working capital liquidity for
operations and to make certain subordinated debt payments.
The senior debt facility includes a $25 million revolving loan, which bears
interest at either the prime rate (4.75% at September 30, 2002), plus
0.75%, or the prevailing LIBOR rate (approximately 1.8% at September 30,
2002), 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
28
interest at either the prime rate, plus 1.5%, or the prevailing LIBOR rate,
plus 4.25%. These loans are payable in monthly installments of $50,000,
plus interest, with the balance due in a balloon payment in October 2005.
The loan agreement also contains restrictions regarding the payment of
dividends as well as subordinated debt payments (discussed below), a
requirement to maintain a minimum level of earnings before interest, taxes,
depreciation and amortization and net worth and a limitation on the amount
of annual capital expenditures. To better balance and manage overall
interest rate exposure, the Company previously executed an interest note
swap agreement that effectively fixed the rate of interest on $8 million of
its senior debt at 8.98% through August 2005.
These financing arrangements are collateralized by the tangible and
intangible assets of the U.S. and Canada operations (including accounts
receivable, inventories, property, plant and equipment, patents and
trademarks) and a guarantee by and pledge of capital stock of the Company's
subsidiaries. As of the closing date of the new senior revolving loan and
term arrangements, the Company had approximately $13 million of unused
lines of credit available.
On October 3, 2002, the Company also reached agreement with the holders of
$16.5 million of Senior Subordinated Notes to restructure the notes,
extending the maturity date to 2005. The Company is only required to pay
monthly installments of $50,000 through December 2003 and $150,000 per
month from January 2004 through the maturity date. However, the Company
paid $1 million in principal (and $2.1 million of accrued interest) at
closing of the new senior debt facility and expects to make additional
excess payments to its subordinated lenders over the next three years.
Payments to the subordinated lenders are subject to certain restrictions
imposed under the senior debt facility. Interest on the balance of
subordinated debt is paid quarterly. If the Company is unable to make
scheduled and additional excess payments totaling at least $8 million by
2005 (due to restrictions imposed under the new senior debt facility or
otherwise) the noteholders will receive warrants equivalent to
approximately 1.6% of the diluted common shares outstanding for each $1
million in unpaid principal, in addition to warrants having an exercise
price of $7.24 (expiring in September 2003) now held by them. Any warrants
received or earned will be relinquished if the notes are paid in full
during the term of the new agreement. The agreement also grants the
subordinated lenders a lien on Company assets (junior in all aspects to the
new senior debt collateral agreements described above). The interest rate
on the subordinated notes had been 13.5% through June 30, 2002 [12% payable
in cash and 1.5% payable-in-kind (PIK)] plus an additional 2% on past due
amounts. At closing, the interest rate on the notes was changed to 12.5%
(without PIK) 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.
All amounts outstanding as of September 30, 2002 under the senior and
subordinated lending arrangements have been classified in the accompanying
consolidated financial statements based upon the terms of the new
underlying agreements entered into on October 3, 2002. The new senior debt
agreements include provisions which suggest the debt could become payable
upon demand under certain circumstances and thus, this debt has been
classified as current maturities of long-term debt. All prior defaults and
covenant violations under the Company's previous senior and subordinated
lending arrangements were waived, amended or satisfied through repayment of
the underlying debt.
The Company also has a mortgage agreement with respect to its corporate
headquarters building in Heathrow, Florida. The mortgage (in the original
amount of $2.73 million) is for a period of 15 years and bears interest at
8.1%.
29
Carrying values of the Senior Subordinated Notes, the bank notes payable
and term loan are reasonable estimates of fair value as interest rates are
based on prevailing market rates.
Aggregate maturities of long-term debt based upon the terms of the new
underlying agreements entered into on October 3, 2002 are as follows (in
thousands):
2003 $12,342
2004 1,672
2005 1,987
2006 11,452
Thereafter 1,272
----------
$28,725
==========
(5) INCOME TAXES:
-------------
The components of net deferred tax asset recognized in the accompanying
consolidated balance sheet are as follows (in thousands):
2002 2001
------------ ------------
U.S. current deferred tax assets (included
in other current assets) % 1,514 $ 578
Foreign current deferred tax liability
(included in accrued liabilities) (818) (1,326)
U.S. and foreign, noncurrent deferred tax
asset (liability) (included in other
assets and deferred income taxes and other) 2,829 1,559
------------ ------------
Net deferred tax asset $ 3,525 $ 811
============ ============
Deferred tax assets:
U.S. tax credit carryforwards $ 2,610 $ 534
Provisions for losses from discontinued
operations 174 534
Depreciation 214 192
Vacation pay 105 66
Accrued pension 657 622
Accrued restructuring and related costs 385 115
Accrued environmental costs 38 65
Installment sale and related expenses 95 216
Other 88 478
Foreign net operating loss carryforward 512 520
Valuation allowance (512) (520)
------------ ------------
Total deferred tax asset 4,366 2,288
------------ ------------
Deferred tax liabilities:
Inventories (748) (1,384)
Property, plant and equipment (93) (93)
------------ ------------
Total deferred tax liability (841) (1,477)
------------ ------------
Net deferred tax asset $ 3,525 $ 811
============ ============
It is the policy of the Company to accrue deferred income taxes on
temporary differences related to the financial statement carrying amounts
and tax bases of investments in foreign subsidiaries which are expected to
reverse in the foreseeable future. Management believes that it will obtain
the full benefit of U.S. deferred tax assets and credit carryforwards on
the basis of its evaluation of the Company's anticipated profitability over
the period of years that the temporary differences are expected to become
tax deductions. Management also believes that sufficient book and taxable
30
income will be generated to realize the benefit of these tax assets. This
assessment of profitability takes into account the Company's present and
anticipated split of domestic and international earnings.
At September 30, 2002 and 2001, the Company had valuation allowances
against certain deferred tax assets totaling $512,000 and $520,000,
respectively. These valuation allowances relate to tax assets in
jurisdictions where it is management's best estimate that there is not a
greater than 50% probability that the benefit of the assets will be
realized in the associated tax returns.
The provision (benefit) for income taxes from continuing operations is
comprised of the following (in thousands):
2002 2001 2000
-------- -------- ---------
Current:
U.S. Federal $ 640 $ (352) $ (530)
State (40) (12) (124)
Foreign 1,175 1,215 845
-------- -------- ---------
1,775 851 191
-------- -------- ---------
Deferred:
U.S. Federal (2,081) (199) (900)
State (206) (71) -
Foreign (47) 264 261
-------- -------- ---------
(2,334) (534) (639)
-------- -------- ---------
$ (559) $ 317 $ (448)
======== ======== =========
Foreign deferred tax provision (benefit) is comprised principally of
temporary differences related to Mexico asset purchases. The U.S. deferred
(benefit) in 2002, 2001 and 2000 result primarily from expenses accrued but
not yet deductible for taxes and tax credit carryforwards.
The differences between the provision (benefit) for income taxes from
continuing operations computed at the U.S. statutory federal income tax
rate and the provision (benefit) from continuing operations in the
accompanying consolidated financial statements are as follows (in
thousands):
2002 2001 2000
-------- -------- ---------
Amount computed using statutory rate $ (533) $ 329 $ (393)
Foreign income (178) (28) (169)
State taxes, net of federal benefit (162) (54) (82)
Permanent differences 149 168 254
Other 165 (98) (58)
-------- -------- ---------
Provision (benefit) for income taxes $ (559) $ 317 $ (448)
======== ======== =========
31
(6) EMPLOYEE BENEFIT PLANS:
-------------------------
Prior to 2002, the Company maintained several defined benefit pension plans
covering substantially all union employees. During 2002, several plans
related to the Company's Industrial Group (discontinued operations) were
wound up, leaving one defined benefit plan covering the remaining Company's
U.S. Consumer division union employees. The benefits are based upon fixed
dollar amounts per years of service. The assets of the various plans
(principally corporate stocks and bonds, insurance contracts and cash
equivalents) are managed by independent trustees. The policy of the Company
is to fund the minimum annual contributions required by applicable
regulations.
The following tables set forth the plans' funded status and other
information for the fiscal years ended September 30, 2002 and 2001 (in
thousands):
September 30,
2002 2001
------------ -------------
Change in benefit obligation:
Obligation at beginning of year $ 3,831 $ 3,887
Service cost 90 178
Interest cost 123 245
Actuarial gain 154 25
Benefit payments (2,436) (504)
------------ -------------
Obligation at end of year $ 1,762 $ 3,831
============ =============
Change in market value of plan assets:
Market value at beginning of year $ 3,489 $ 3,338
Actual return on plan assets 445 298
Employer contributions 610 357
Benefit payments (2,436) (504)
------------ -------------
Market value at end of year $ 2,108 $ 3,489
============ =============
Prepaid pension asset:
Projected benefit obligation $(1,762) $(3,831)
Plan assets at market value 2,108 3,489
------------ -------------
Projected benefit obligation less than
(in excess of) plan assets 346 (342)
Unrecognized net gain from past
experience differentfrom assumptions (69) 278
Unrecognized net obligation being recognized
over periods from 10 to 16 years 164 196
------------ -------------
Prepaid pension asset $ 441 $ 132
============ =============
32
Net periodic pension costs include the following components (in thousands):
2002 2001 2000
-------- -------- --------
Service costs - benefits earned during period $ 90 $ 178 $ 180
Interest cost on projected benefit obligation 123 245 237
Expected return on plan assets (153) (248) (214)
Net amortization and deferral 12 76 141
-------- -------- --------
Net periodic pension cost $ 72 $ 251 $ 344
======== ======== ========
In determining the projected benefit obligation, the weighted average
discount rates utilized were 6.4%, 6.4% and 6.7% for the periods ended
September 30, 2002, 2001 and 2000, respectively. The expected long-term
rates of return on assets used in determining net periodic pension cost
ranged from 7.5 % to 8.5 % in all years presented above. There are no
assumed rates of increase in compensation expense in any year, as benefits
are fixed and do not vary with compensation levels.
The Company also maintains two defined-contribution plans (401k) for all
non-union domestic employees and certain union employees who meet minimum
service requirements, as well as a supplemental deferred contribution plan
for certain executives. Company contributions under the plans consist of a
basic amount of up to 1.5% of the compensation of participants for the plan
year, and for those participants who elected to make voluntary
contributions to the plan, matching contributions up to an additional 4%,
as specified in the plan. Charges to operations for these plans for the
years ended September 30, 2002, 2001 and 2000 were $487,000, $588,000 and
$610,000, respectively.
In addition, the Company has a defined benefit retirement plan, which
provides supplemental benefits for certain key executive officers, upon
retirement, disability or death. The benefits are similar to those provided
under the 401(k) plans, but are funded through the purchase of certain life
insurance products. As of September 30, 2002 and 2001, the net liability
under the plan (included in accrued liabilities), was $504,000 and
$392,000, respectively. Amounts charged to expense under the plan totaled
$118,000 and $134,000 in 2002 and 2000, respectively. There was no net
expense under this plan in 2001.
(7) SHAREHOLDERS' EQUITY:
----------------------
The Company provides an Employee Stock Purchase Plan under which shares of
its common stock can be issued to eligible employees. Among the terms of
this plan, eligible employees may purchase through payroll deductions
shares of the Company's common stock up to 10 % of their compensation at
the lower of 85 % of the fair market value of the stock on the first or
last day of the plan year (May 1 and April 30). On May 1, 2002, 2001 and
2000 15,370, 9,415 and 10,757 shares, respectively, were issued under this
plan. At September 30, 2002, there are 56,936 shares available for future
purchases under the plan.
The Company has also granted non-qualified options to key employees, under
the 1988 Dixon Ticonderoga Company Executive Stock Plan, to purchase shares
of its common stock at the market price on the date of grant. Under the
1988 Plan (as amended) options vest 25 % after one year; 25 % after two
years; and 50 % after three years, and remain exercisable for a period of
five years from the date of vesting. All options expire three months after
termination of employment. At September 30, 2002, there were 243,500
options outstanding and no shares available for future grants under the
1988 Plan.
In addition, the Dixon Ticonderoga Company 1999 Stock Option Plan (the
"1999 Plan") was adopted in fiscal 1999, covering a maximum aggregate
300,000 shares. Under the 1999 Plan, qualified incentive stock options or
non-qualified stock options can be granted to employees at the market price
on the date of grant and which will vest on the same basis as the 1988 Plan
33
described above. Non-qualified options under the 1999 Plan may also be
issued to Company outside directors at the market price on the date of
grant and which may vest over varying periods. In 2001 and 2000, 159,800
and 10,000 options were granted to employees under the 1999 Plan,
respectively. In addition, in 1999, 30,000 non-qualified options were
granted to outside directors that vest over a two-year period. At September
30, 2002 there were 187,300 options outstanding and 112,700 shares
available for future grants under the 1999 Plan. The following table
summarizes the combined stock options activity for 2002, 2001 and 2000.
2002 2001 2000
-------------------- ------------------- --------------------
Number Option Number Option Number Option
of Shares Price of Shares Price of Shares Price
-------------------- ------------------- --------------------
Options outstanding
at beginning of year
27,000 $8.63 41,750 $8.63
21,250 6.75 34,125 6.75 48,625 6.75
2,500 7.13 10,750 7.13 10,750 7.13
231,000 8.88 258,000 8.88 273,000 8.88
2,500 12.88 2,500 12.88 5,500 12.88
10,000 11.38 10,000 11.38 10,000 11.38
25,000 11.00 30,000 11.00 40,000 11.00
5,000 4.25 7,500 4.25
2,500 3.81
147,300 3.70
10,000 4.75
Options exercised (10,000) 6.75
(11,750) 8.63
Options granted
10,000 4.25
10,000 4.75
2,500 3.81
147,300 3.70
Options expired
or canceled (2,500) 4.25 (2,500) 4.25
(27,000) 8.63 (3,000) 8.63
(21,250) 6.75 (12,875) 6.75 (4,500) 6.75
(27,000) 8.88 (15,000) 8.88
(8,250) 7.13
(5,000) 11.00 (10,000) 11.00
(2,500) 12.88 (3,000) 12.88
(2,500) 3.81
----------- ----------- -----------
430,800 457,050 379,875
=========== =========== ===========
34
The Company has adopted the disclosure-only provisions of FASB Statement
No. 123 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:
2002 2001 2000
------------ ------------ ------------
Pro forma net loss $ (662,354) $ (505,281) $ (1,048,842)
============ ============ ============
Loss per share:
Basic $ (.21) $ (.16) $ (.33)
============ ============ ============
Diluted $ (.21) $ (.16) $ (.33)
============ ============ ============
These pro forma amounts were estimated using the Black-Scholes valuation
model assuming no dividends, expected volatility of 36% in 2001 and 33% in
2000, an average risk-free interest rate of 4.7% in 2001 and 6.7% in 2000
and expected lives of approximately six years for all grants prior to 2001
and eight years thereafter. No options were granted in 2002. The weighted
average fair value estimates of options granted for 2002, 2001 and 2000 was
$2.49, $2.47 and $2.92, respectively. The weighted average remaining lives
of options granted are 2.4, 5.5 and 5.6 years for 2002, 2001 and 2000,
respectively.
In the past, the Company made loans under the aforementioned stock option
plans to certain shareholders who are executive officers, for the purchase
of Company common stock pursuant to the exercise of stock options. The
loans must be repaid at the time the underlying shares of common stock are
sold. Interest on a portion of the loans accrues at a rate of 8%. Total
shareholder loans approximated $558,000 at September 30, 2002 and 2001. No
such loans have been granted since late 1999.
In 1995, the Company declared a dividend distribution of one Preferred
Stock Purchase Right on each share of Company common stock. Each Right will
entitle the holder to buy one-thousandth of a share of a new series of
preferred stock at a price of $30.00 per share. The Rights will be
exercisable only if a person or group (other than the Company's chairman,
Gino N. Pala, and his family members) acquires 20% or more of the
outstanding shares of common stock of the Company or announces a tender
offer following which it would hold 30% or more of such outstanding common
stock. The Rights entitle the holders other than the acquiring person to
purchase Company common stock having a market value of two times the
exercise prices of the Right. If, following the acquisition by a person or
group of 20% or more of the Company's outstanding shares of common stock,
the Company were acquired in a merger or other business combination, each
Right would be exercisable for that number of the acquiring Company's
shares of common stock having a market value of two times the exercise
prices of the Right. The Company may redeem the Rights at one cent per
Right at any time until ten days following the occurrence of an event that
causes the Rights to become exercisable for common stock. The Rights expire
ten years from the date of distribution.
(8) STOCK REPURCHASE PROGRAM:
---------------------------
In 1999, the Company announced a Stock Repurchase Program authorizing the
acquisition of up to $3 million in Dixon Ticonderoga Company stock. Under
this program, the Company repurchased approximately 337,000 shares at a
total cost of $2.8 million (including approximately $2 million in fiscal
2000, when the program was terminated.).
35
(9) EARNINGS PER COMMON SHARE:
-----------------------------
Basic earnings (loss) per common share is calculated by dividing net income
(loss) by the weighted average number of shares outstanding. Diluted
earnings per common share is based upon the weighted average number of
shares outstanding, plus the effects of potentially dilutive common shares
[consisting of stock options (Note 7) and stock warrants (Note 4)]. For the
years ended September 30, 2002 and 2000, options and warrants to purchase
730,800 and 679,875 shares of common stock, respectively, were excluded
from the computation of diluted earnings (loss) per share as such options
and warrants were anti-dilutive.
Weighted average common shares used in the calculation of earnings (loss)
per share are as follows:
Year Basic Diluted
---- ---------- ----------
2002 3,183,866 3,183,866
2001 3,171,190 3,176,609
2000 3,202,582 3,202,582
(10) RESTRUCTURING AND RELATED COSTS:
--------------------------------
The Company began fiscal 2000 with reserves of approximately $1.7 million,
previously provided in connection with Phase 1 of its Restructuring and
Cost Reduction Program, which was intended to improve overall financial
performance in the future. The program included manufacturing plant closure
and consolidation, as well as personnel reduction in manufacturing, sales
and marketing and corporate activities. Approximately 125 employees
(principally plant workers) were affected by this phase of the program. The
carrying amount of property and equipment held for disposal in Phase 1
approximated $2 million with the estimated fair value principally based
upon assessments of value made by local realtors or appraisals. Management
disposed of the remaining assets from Phase 1 in May 2001.
In fiscal 2000, approximately $1,302,000 was charged against the
restructuring cost and impairment reserves for finalization of the Phase 1
program (net of $234,000 in credits representing higher than anticipated
proceeds from the sale and abandonment of property and equipment identified
in the Phase 1 program). As set forth below, the Company incurred
approximately $206,000 in net additional charges, principally for
unanticipated employee costs and other costs directly related to the
restructuring program which were not eligible for recognition in 1999 and
thus expensed as incurred in 2000.
Also in fiscal 2000, the Company provided approximately $1,302,000 of
impairment and restructuring related costs in connection with Phase 2 of
its Restructuring and Cost Reduction Program, which included further
consolidation of certain U.S. manufacturing processes, the consolidation of
its Mexico operations into a new facility and additional personnel
reductions in manufacturing, sales, marketing and corporate activities. An
additional 170 employees (principally plant workers) were affected by the
second phase of the program. The carrying amount of additional property
held for disposal under Phase 2 of the program was $1.1 million and this
additional property was disposed of in 2001 for approximately that amount.
In fiscal 2001, the Company incurred approximately $868,000 in costs
(principally in Mexico) directly related to the restructuring program which
were not eligible for recognition in 2000 and thus expensed as incurred in
2001.
In fiscal 2002, the Company provided $418,000 in additional charges,
principally for lease termination and employee costs related to the
completion of Phase 2 of the restructuring program.
Also in fiscal 2002, the Company provided approximately $1,155,000 for
restructuring and improvement related costs in connection with Phase 3 (the
final phase) of its Restructuring and Cost Reduction Program, which
36
includes a plant closure and further consolidation of its manufacturing
operations into the Company's Mexico facility and additional personnel
reductions, primarily in manufacturing and corporate activities. An
additional 120 employees (principally plant workers) were affected by the
final phase of the program. The carrying amount of additional property to
be held for disposal at completion of Phase 3 is approximately $200,000.
The restructuring and impairment related charges and subsequent utilization
for the three fiscal years ended September 30, 2002 are summarized below
(in thousands):
Losses from
Employee impairment, sale
severance and abandonment
and related of property
costs and equipment Total
-------------- ----------------- ----------
Reserve balances at September 30, 1999 $ 338 $ 1,316 $ 1,704
Utilized in fiscal 2000 (Phase 1) (594) (1,316) (1,910)
-------------- ----------------- ----------
(206) - (206)
-------------- ----------------- ----------
Additional fiscal 2000 provisions
(Phase 1) 206 - 206
2000 restructuring and impairment
related charges (Phase 2) 834 468 1,302
-------------- ----------------- ----------
Total 2000 restructuring and
impairment related charges (Phase 2) 1,040 468 1,508
-------------- ----------------- ----------
834 468 1,302
Utilized in fiscal 2000 (Phase 2) (161) (156) (317)
-------------- ----------------- ----------
Reserve balances at September 30, 2000 673 312 985
2001 restructuring and impairment
related charges (Phase 2) - 868 868
Utilized in fiscal 2001 (Phase 2) (334) (1,180) (1,514)
-------------- ----------------- ----------
Reserve balances at September 30, 2001 339 - 339
-------------- ----------------- ----------
Additional fiscal 2002 provisions
(Phase 2) 135 283 418
2002 restructuring and impairment
related charges (Phase 3) 1,110 45 1,155
-------------- ----------------- ----------
Total 2002 restructuring and
impairment related charges 1,245 328 1,573
-------------- ----------------- ----------
Utilized in fiscal 2002 (Phase 2) (474) (283) (757)
-------------- ----------------- ----------
Reserve balances at September 30, 2002 $1,110 $ 45 $1,155
============== ================= ==========
37
(11) LINE OF BUSINESS REPORTING:
--------------------------------
Due to the Company's plan to exit the Industrial Group (Note 12), the
Company's continuing operations only consist of one principal business
segment - its Consumer Group. The following information sets forth certain
additional data pertaining to its operations as of September 30, 2002, 2001
and 2000 for the years then ended (in thousands).
Operating Identifiable
Revenues Profit (Loss) Assets
------------ -------------- ----------------
2002:
United States $ 51,685 $(1,494) $ 41,127
Canada 8,694 792 5,879
Mexico 27,098 3,445 26,120
United Kingdom 1,094 29 642
China 20 125 1,435
2001:
United States $ 54,837 $ 2,076 $ 44,598
Canada 8,435 527 5,673
Mexico 23,813 2,849 29,012
United Kingdom 1,046 (26) 674
China 188 (70) 1,363
2000:
United States $ 54,430 $ (658) $ 45,317
Canada 9,303 620 6,741
Mexico 23,943 2,664 27,910
United Kingdom 1,124 (16) 616
China 67 (95) 1,153
(12) DISCONTINUED OPERATIONS:
------------------------
In September 2001, the Company formalized its decision to offer for sale
its New Castle Refractories division, the last business of its Industrial
Group. In December 2002, the Company entered into an agreement to sell this
division to local management. The transaction is expected to close in early
2003. Accordingly, related operating results of the Industrial Group have
been reported as discontinued operations in the accompanying consolidated
financial statements.
Net revenues and income (loss) from discontinued operations are as follows
(in thousands):
2002 2001 2000
--------- ---------- ---------
Net revenues $ 9,169 $ 9,529 $11,188
========= ========== =========
Income (loss) from discontinued
operations before income taxes $ 200 $ (85) $ (88)
Income tax benefit (expense) (77) 29 23
--------- ---------- ---------
123 (56) (65)
--------- ---------- ---------
Loss on disposal of Industrial Group - (1,570) -
Income tax benefit (expense) - 526 -
--------- ---------- ---------
- 1,044 -
--------- ---------- ---------
Income (loss) from discontinued
operations $ 123 $ (1,100) $ (65)
========= ========== =========
Earnings (loss) per share (basic) $ .04 $ (0.35) $(0.02)
========= ========== =========
Earnings (loss) per share (diluted) $ .04 $ (0.35) $(0.02)
========= ========== =========
38
Income (loss) from discontinued operations includes pre-tax gains on sales
of assets of $208 and $1,202 in 2002 and 2001, respectively, attributable
to the sale of the Company's Graphite and Lubricants division. In addition,
interest expense of $342, $427 and $597 has been allocated to income (loss)
from discontinued operations in 2002, 2001 and 2000, respectively, based
upon the identifiable assets of such operations. The loss on disposal in
2001 includes the anticipated loss on the sale of the New Castle
Refractories division of $468, a provision for the wind-up of that
division's pension plans of $432, and a provision for anticipated operating
losses through the date of disposal (expected to be by early 2003) of $670.
Assets and liabilities relating to discontinued operations and included in
the accompanying consolidated balance sheets are as follows (in thousands):
September 30,
2002 2001
--------- ----------
Current assets $ 3,905 $ 4,619
Property, plant and equipment, net 386 473
Current liabilities (1,254) (1,448)
Long-term liabilities and other, net (813) (743)
--------- ----------
Net assets of discontinued operations $ 2,224 $ 2,901
========= ==========
(13) COMMITMENTS AND CONTINGENCIES:
--------------------------------
The Company has entered into employment agreements with four executives
which provide for the continuation of salary (currently aggregating $68,700
per month) and related employee benefits for a period of 24 months
following their termination of employment under certain changes in control
of the Company. In addition, all options held by the executives would
become immediately exercisable upon the date of termination and remain
exercisable for 90 days thereafter. The Company has also entered into
various agreements with six additional employees which provide for
continuation of salaries (averaging $6,800 each per month) for periods up
to 16 months under certain circumstances.
On December 9, 2002, the Company entered into a strategic distribution
arrangement with a third-party logistics partner through June 2005. The
minimum payments under the related contract are approximately $811,000 in
2003, $945,000 in 2004 and $709,000 in 2005.
Since 2001, the Company leases certain manufacturing equipment under a
five-year noncancelable operating lease arrangement. The rental expense
under this lease was $410,000 and $372,000 in 2002 and 2001, respectively.
Annual future minimum rental payments are approximately $372,000 per year
through 2004 and $93,000 in 2005.
The Company, in the normal course of business, is party in certain
litigation. In 1996, a decision was rendered by the Superior Court of New
Jersey in Hudson County finding the Company responsible for $1.94 million
in certain environmental clean-up costs relating to a claim under New
Jersey's Environmental Clean-Up Responsibility Act (ECRA) by a 1984
purchaser of industrial property from the Company. All subsequent appeals
were denied and as a result of the judgment, the Company paid $3.6 million
in 1998 to satisfy this claim in full, including all accrued interest. The
Company continued to pursue other responsible parties for indemnification
and/or contribution to the payment of this claim (including its insurance
carriers) and in fiscal 2000 the Company reached settlements with its
various insurers for reimbursement of legal costs in the amount of $653,000
(reflected as a reduction in selling and administrative expenses). In 2001,
a pending malpractice suit against its previous legal counsel was settled
and the Company received $575,000 (also reflected as a reduction in selling
and administrative expenses).
The Company has evaluated the merits of other litigation and believes their
outcome will not have a further material effect on the Company's future
results of operations or financial position.
39
The Company assesses the extent of environmental matters on an ongoing
basis. In the opinion of management (after taking into account accruals of
approximately $322,000 as of September 30, 2002), the resolution of these
matters will not materially affect the Company's future results of
operations or financial position.
(14) SUMMARY OF QUARTERLY FINANCIAL INFORMATION ( UNAUDITED )
--------------------------------------------------------------
( In Thousands, Except Per Share Data ):
--------------------------------------------
2002: First Second Third Fourth
---------- ---------- ---------- ----------
Revenues (a) $17,496 $17,928 $28,148 $25,019
Income (loss) from continuing
operations (775) (656) 1,358 (610)
Income (loss) from discontinued
operations -- 131 -- (8)
Net income (loss) (775) (525) 1,358 (618)
Earnings (loss) per share: (b)
Continuing operations:
Basic (.24) (.21) .43 (.19)
Diluted (.24) (.21) .43 (.19)
Discontinued operations:
Basic -- .04 -- --
Diluted -- .04 -- --
Net income (loss):
Basic (.24) (.17) .43 (.19)
Diluted (.24) (.17) .43 (.19)
2001: First Second Third Fourth
---------- ---------- ---------- ----------
Revenues (a) $16,822 $18,213 $28,202 $25,082
Income (loss) from continuing
operations (1,144) (326) 1,514 576
Income (loss) from discontinued
operations (166) 646 (98) (1,482)
Net income (loss) (1,310) 320 1,416 (906)
Earnings (loss) per share: (b)
Continuing operations:
Basic (.36) (.10) .48 .18
Diluted (.36) (.10) .48 .18
Discontinued operations:
Basic (.05) .20 (.03) (.47)
Diluted (.05) .20 (.03) (.47)
Net income (loss):
Basic (.41) .10 .45 (.29)
Diluted (.41) .10 .45 (.29)
(a) Certain reclassifications were made to classify certain sales incentives as
reductions of gross revenues that were previously classified as selling
expenses (See Note 1 to Consolidated Financial Statements).
(b) Calculated independently for each period, and consequently, the sum of the
quarters may differ from the annual amount.
40
DIXON TICONDEROGA COMPANY AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED SEPTEMBER 30, 2001, 2000 and 1999
Balance at Additions Additions to Balance
Beginning Charged (Deductions at Close
Description Of Period to Income From) Reserves of Period
------------------- ------------ ---------- --------------- -------------
Allowance for Doubtful Accounts:
--------------------------------
Year Ended
September 30, 2002 $ 1,482,524 $ 193,979 $ (294,723) (1) $ 1,381,780
============ ========== =============== =============
Year Ended
September 30, 2001 $ 1,418,908 $ 151,263 $ (87,647) (1) $ 1,482,524
============ ========== =============== =============
Year Ended
September 30, 2000 $ 1,428,541 $ 218,795 $ (228,428) (1) $ 1,418,908
============ ========== =============== =============
(1) Write-off of accounts considered to be uncollectible (net of recoveries).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
None.
41
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
-----------------------------------------------------
Certain information required under this Item with respect to Directors and
Executive Officers will be contained in the Company's 2002 Proxy Statement,
pursuant to Regulation 14A, which is incorporated herein by reference.
The following table sets forth the names and ages of the Company's
Executive Officers, together with all positions and offices held with the
Company by such Executive Officers. All Executive Officers are subject to
re-election or re-appointment by the Board of Directors at the first Directors'
Meeting succeeding the next Annual Meeting of shareholders.
Name Age Title
---- --- -----
Gino N. Pala 74 Chairman of the Board since February
(Father-in-law of Richard F. Joyce) 1989; President and Chief Executive
Officer or Co-Chief Executive Officer
since 1978.
Richard F. Joyce 47 Vice Chairman of the Board since
(Son-in-law of Gino N. Pala) January 1990; President and Co-Chief
Executive Officer since March 1999;
prior thereto President and Chief
Operating Officer, Consumer Group,
since March,1996; Executive Vice
President and Chief Legal Executive
since February 1991; Corporate Counsel
since July 1990.
Richard A. Asta 46 Executive Vice President of Finance and
Chief Financial Officer since February
1991; prior thereto Senior Vice
President - Finance and Chief Financial
Officer since March 1990; and Director
since May 1999.
Leonard D. Dahlberg, Jr. 51 Executive Vice President of Operations
since August 2000; Executive Vice
President of Procurement since April
1999; prior thereto Executive Vice
President, Industrial Group, since
March 1996; Executive Vice President of
Manufacturing/Consumer Products
division since August 1995; Senior Vice
President of Manufacturing since
February 1993; Vice President of
Manufacturing since March 1990.
John Adornetto 61 Vice President and Corporate Controller
since January 1991; prior thereto
Corporate Controller since September
1978.
Diego Cespedes Creixell 44 President, Grupo Dixon S.A. de C.V.,
since August 1996 and Director since
May 2000.
42
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Information required under this Item will be contained in the Company's
2002 Proxy Statement which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Information required under this Item will be contained in the Company's
2002 Proxy Statement which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Information required under this Item will be contained in the Company's
2002 Proxy Statement which is incorporated herein by reference.
ITEM 14. 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.
43
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) Documents filed as part of this report:
--------------------------------------
1. Financial statements
--------------------
See index under Item 8. Financial Statements and Supplementary Data.
2. Exhibits
--------
The following exhibits are required to be filed as part of this
Annual Report on Form 10-K:
(2) a. Share Purchase Agreement by and among Dixon Ticonderoga
de Mexico, S.A. de C.V., and by Grupo Ifam, S.A. de C.V.,
and Guillermo Almazan Cueto with respect to the capital
stock of Vinci de Mexico, S.A. de C.V., (English
translation). 4
(2) b. Asset Purchase Agreement dated February 9, 1999, by and
between Dixon Ticonderoga Company, as Seller and Asbury
Carbons, Inc., as Buyer. 6
(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) a. First Modification of Amended and Restated Revolving
Credit Loan and Security Agreement by and among Dixon
Ticonderoga Company, Dixon Ticonderoga, Inc., First Union
Commercial Corporation, First National Bank of Boston and
National Bank of Canada. 1
(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) d. License and Technological Agreement between Carborundum
Corporation and New Castle Refractories Company, a division
of Dixon Ticonderoga Company. 1
(10) e. Equipment Option and Purchase Agreement between
Carborundum Corporation and New Castle Refractories
Company, a division of Dixon Ticonderoga Company. 1
(10) f. Product Purchase Agreement between Carborundum
Corporation and New Castle Refractories Company, a division
of Dixon Ticonderoga Company. 1
44
(10) g. Second Modification of Amended and Restated Revolving
Credit Loan and Security Agreement by and among Dixon
Ticonderoga Company, Dixon Ticonderoga, Inc., First Union
Commercial Corporation, First National Bank of Boston and
National Bank of Canada. 5
(10) h. Third Modification of Amended and Restated Revolving
Credit Loan and Security Agreement, Amendment to Loan
Documents and Assignment by and among Dixon Ticonderoga
Company, Dixon Ticonderoga, Inc., First Union Commercial
Corporation, BankBoston, N.A., National Bank of Canada and
LaSalle Bank. 7
(10) i. First Modification of Amended and Restated Term Loan
Agreement and Assignment by and among Dixon Ticonderoga
Company, Dixon Ticonderoga, Inc., First Union Commercial
Corporation, BankBoston, N.A., National Bank of Canada and
LaSalle Bank. 7
(10) j. Amendment No. 1 to 12.00% Senior Subordinated Notes, Due
2003, Note and Warrant Purchase Agreement. 7
(10) k. Fourth Modification of Amended and Restated Revolving
Credit Loan and Security Agreement. 8
(10) l. Second Modification of Amended and Restated Term Loan
Agreement. 8
(10) m. Amendment No. 2 to Note and Warrant Purchase Agreement. 8
(21) Subsidiaries of the Company
(23) Consent of Independent Certified Public Accountants.
(99.1) Certification by Officers
1 Incorporated 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.
2 Incorporated 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.
3 Incorporated by reference to Appendix 3 to the Company's Proxy Statement dated
January 27, 1997, filed in Washington, D.C.
4 Incorporated by reference to the Company's current report on Form 8-K dated
December 12, 1997, filed in Washington D.C.
5 Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended September 30, 1998, file number 0-2615, filed in Washington, D.C.
6 Incorporated by reference to the Company's current report on Form 8-K dated
March 2, 1999, filed in Washington D.C.
7 Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended September 30, 1999, file number 0-2615 filed in Washington, D.C.
8 Incorporated by reference to the Company's Annual Report on Form 10-K for the
year ended September 30, 2000, file number 0-2655 filed in Washington, D.C.
(b) Reports on Form 8-K:
--------------------
None.
45
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly authorized.
DIXON TICONDEROGA COMPANY
/s/ Gino N. Pala
-----------------------------
Gino N. Pala, Chairman of Board and
Co-Chief Executive Officer
Pursuant to the Securities Exchange Act of 1934, this Annual Report on Form
10-K has been signed below by the following persons on behalf of the Company in
the capacities indicated.
/s/ Gino N. Pala
----------------------------
Gino N. Pala Chairman of Board, Co-Chief
Executive Officer and Director
Date: January 14, 2003
/s/ Richard F. Joyce
----------------------------
Richard F. Joyce Vice Chairman of Board,
Co-Chief Executive Officer,
President and Director
Date: January 14, 2003
/s/ Richard A. Asta
----------------------------
Richard A. Asta Executive Vice President of Finance,
Chief Financial Officer and Director
Date: January 14, 2003
/s/ Diego Cespedes Creixell
----------------------------
Diego Cespedes Creixell President, Grupo Dixon S.A. de C.V.,
and Director
Date: January 14, 2003
/s/ Philip M. Shasteen
----------------------------
Philip M. Shasteen Director
Date: January 14, 2003
/s/ Ben Berzin, Jr.
----------------------------
Ben Berzin, Jr. Director
Date: January 14, 2003
/s/ Kent Kramer
----------------------------
Kent Kramer Director
Date: January 14, 2003
/s/ John Ritenour
----------------------------
John Ritenour Director
Date: January 14, 2003
/s/ Wesley D. Scovanner
----------------------------
Wesley D. Scovanner Director
Date: January 14, 2003
46
CERTIFICATIONS
I, Gino N. Pala, certify that:
1. I have reviewed this annual report on Form 10-K of Dixon Ticonderoga
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 14, 2003
/s/ Gino N. Pala
--------------------------------
Gino N. Pala
Chairman of Board, Co-Chief Executive
Officer and Director
47
CERTIFICATIONS
I, Richard F. Joyce, certify that:
1. I have reviewed this annual report on Form 10-K of Dixon Ticonderoga
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 14, 2003
/s/ Richard F. Joyce
--------------------------------
Richard F. Joyce
Vice Chairman of Board, Co-Chief
Executive Officer, President and Director
48
CERTIFICATIONS
I, Richard A. Asta, certify that:
1. I have reviewed this annual report on Form 10-K of Dixon Ticonderoga
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 14, 2003
/s/ Richard A. Asta
--------------------------------
Richard A. Asta
Executive Vice President of Finance,
Chief Financial Officer and Director
49
CERTIFICATIONS
I, John Adornetto, certify that:
1. I have reviewed this annual report on Form 10-K of Dixon Ticonderoga
Company;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a)all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: January 14, 2003
/s/ John Adornetto
--------------------------------
John Adornetto
Vice President and Corporate Controller
and Chief Accounting Officer
50
Exhibit (21)
------------
2002 ANNUAL REPORT ON FORM 10-K
-------------------------------
SUBSIDIARIES OF THE COMPANY
---------------------------
All of the Registrant's subsidiaries as of September 30, 2002, are listed below.
Subsidiaries of a subsidiary are indented. All subsidiaries are included in the
consolidated financial statements of the Registrant.
Percentage of
State Or Voting
Jurisdiction of Securities
Organization Owned
----------------- ---------------
Dixon Ticonderoga, Inc. Canada 100%
Grupo Dixon, S.A. de C.V. (50.1% Subsidiary of
Dixon Ticonderoga, Inc.) Mexico 97%
Dixon Ticonderoga de Mexico, S.A. de C.V.
(Subsidiary of Grupo Dixon, S.A. de C.V.) Mexico 100%
Dixon Comercializadora Dixon, S.A. de C.V.
(Subsidiary of Grupo Dixon, S.A. de C.V.) Mexico 100%
Servidix, S.A. de C.V. (Subsidiary of
Grupo Dixon, S.A. de C.V.) Mexico 100%
Dixon Industrial Mexico, S.A. de C.V. (a) Mexico 100%
Beijing Dixon Ticonderoga Stationery Company, Ltd. China 100%
Ticonderoga Graphite, Inc. (a) New York 100%
Dixon Europe, Limited United Kingdom 100%
(a) Inactive
51
Exhibit (23)
------------
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 33-20054, 33-23380 and 333-22205) of Dixon
Ticonderoga Company of our report dated December 9, 2002, relating to the
financial statements and financial statement schedule, which appears in this
Form 10-K.
PricewaterhouseCoopers LLP
Tampa, Florida
January 10, 2003
52
Exhibit 99.1
------------
CERTIFICATION BY OFFICERS
-------------------------
In connection with the Annual Report of Dixon Ticonderoga Company on Form
10-K for the period ended September 30, 2002 as filed with the Securities and
Exchange Commission on the date hereof the undersigned certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Annual Report fully complies with the requirements of section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in this Annual Report fairly present, in all
material respects, the financial condition and results of operations of
the Company.
DIXON TICONDEROGA COMPANY
Dated: January 14, 2003
-------------------------------
By: /s/ Gino N. Pala
-------------------------------
Gino N. Pala
Chairman of Board, Co-Chief
Executive Officer and Director
Dated: January 14, 2003
-------------------------------
By: /s/ Richard F. Joyce
-------------------------------
Richard F. Joyce
Vice-Chairman of Board and
Co-Chief Executive Officer
Dated: January 14, 2003
-------------------------------
By: /s/ Richard A. Asta
-------------------------------
Richard A. Asta
Executive Vice President of Finance,
Chief Financial Officer and Director
Dated: January 14, 2003
---------------------------------
By: /s/ John Adornetto
---------------------------------
John Adornetto
Vice President/Corporate
Controller and
Chief Accounting Officer
53