<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C, 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _________________
Commission File Number 33-93644
----------
DAY INTERNATIONAL GROUP, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1436 349
- ---------------------------- --------------
(State or other jurisdiction of (I.R.S. Employer ID No.)
incorporation or organization)
130 West Second Street, Suite 1700, Dayton, Ohio 45402
- -------------------------------------------------- --------
(Address of principal executive offices) (zip code)
(937) 224-4000
- --------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of Common Shares of the Company, $0.01 per share par value,
outstanding as of May 14, 1998 was 20,883.5
<PAGE> 2
DAY INTERNATIONAL GROUP, INC.
Index
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Part I: Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6 - 14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15 - 19
Part II: Other Information
Item 1 - Legal Proceedings 20
Item 2 - Changes in Securities and Use of Proceeds 20
Item 6 - Exhibits and Reports on Form 8-K 20
Signature 20
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAY INTERNATIONAL GROUP, INC.
Condensed Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1998 1997
------ ---- ----
<S> <C> <C>
Cash and cash equivalents $ 2,073 $ 780
Accounts receivable, net of allowance 21,678 21,972
Inventories 19,235 16,501
Prepaid expenses and other current assets 1,980 1,457
Deferred income taxes 1,545 1,938
--------- ---------
Total current assets 46,511 42,648
Property, plant and equipment, net 44,958 44,792
Goodwill and other intangibles 146,962 136,722
Deferred income taxes 3,100 -
Other assets 1,304 1,365
--------- ---------
Total assets $ 242,835 $ 225,527
========= =========
Liabilities and Stockholders' (Deficit) Equity
Accounts payable $ 8,824 $ 7,743
Accrued associate related costs and other expenses 13,163 11,871
Income taxes payable 1,954 1,618
Interest payable 4,514 1,013
Current maturities of long-term debt 1,779 774
--------- ---------
Total current liabilities 30,234 23,019
Long-term and subordinated long-term debt 250,306 130,109
Deferred tax liabilities 1,630 5,688
Other long term liabilities 15,070 6,522
Commitments and contingencies - -
--------- ---------
Total liabilities 297,240 165,338
--------- ---------
Exchangeable preferred stock 33,146 -
--------- ---------
Stockholders' (deficit) equity:
Common stock - 1
Additional paid-in capital - 51,959
Contra-equity associated with the assumption of
majority shareholder's bridge loan (78,503) -
Retained (deficit) earnings (7,578) 9,697
Foreign currency translation adjustment (1,470) (1,468)
--------- ---------
Total stockholders' (deficit) equity (87,551) 60,189
--------- ---------
Total liabilities and stockholders' (deficit) equity $ 242,835 $ 225,527
========= =========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(In Thousands)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $ 43,137 $ 39,481
Costs of goods sold 26,988 24,524
-------- --------
Gross profit 16,149 14,957
Selling, general and administrative expenses 7,351 7,042
Compensation and related transaction costs 18,018
Amortization of intangibles 651 1,214
Management fees 235 230
-------- --------
Operating (loss) income (10,106) 6,471
Interest expense (including amortization of debt discount and
deferred financing costs of $296 - 1998 and $242 - 1997) 7,051 4,100
Other expense (income) 210 (126)
-------- --------
(Loss) income before income taxes and extraordinary items (17,367) 2,497
(Benefit) provision for income taxes (3,804) 922
-------- --------
(Loss) income before extraordinary items (13,563) 1,575
Extraordinary losses on early extinguishment
of debt (net of tax benefit of $2,368) 3,552 --
-------- --------
Net (loss) income (17,115) $ 1,575
========
Preferred stock dividends (153)
Amortization of preferred stock issuance costs (7)
--------
Net (loss) income available to common shareholders $(17,275)
========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
<TABLE>
<CAPTION>
DAY INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS)
1998 1997
---- ----
OPERATING ACTIVITIES
<S> <C> <C>
Net (loss) income $ (17,115) $ 1,575
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Extraordinary loss on early extinguishment of debt 3,552
Depreciation and amortization 3,824 3,512
Deferred income taxes (4,317)
Non-cash charge related to stock option awards 8,585
Changes in operating assets and liabilities (641) (2,224)
--------- -------
Net cash (used in) provided by operating activities (6,112) 2,863
--------- -------
INVESTING ACTIVITIES
Capital expenditures (1,476) (1,500)
Other -- 2,620
--------- -------
Net cash (used in) provided by investing activities (1,476) 1,120
--------- -------
FINANCING ACTIVITIES
Proceeds from issuance of 2008 notes 111,134
Proceeds from issuance of exchangeable preferred stock 32,986
Proceeds from issuance of term loan 40,000
Contributions from shareholders 4,573
Repayment of existing credit facility (30,902)
Repayment of bridge loan (140,000)
Payment of consent fee (6,500)
Payments on the term loan (2,500)
Net payments on revolving credit facility -- (5,193)
--------- -------
Net cash provided by (used in) financing activities 8,791 (5,193)
--------- -------
Effect of exchange rates on cash 90 (161)
--------- -------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash equivalents 1,293 (1,371)
Cash and cash equivalents at beginning of period 780 5,433
--------- -------
Cash and cash equivalents at end of period $ 2,073 $ 4,062
========= =======
NON CASH TRANSACTIONS
Assumption of bridge loan $ 140,000
=========
Preferred stock dividend $ 153
=========
Amortization of preferred stock discount $ 7
=========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 6
DAY INTERNATIONAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
A. BASIS OF PRESENTATION - The balance sheet as of December 31, 1997 is
condensed financial information derived from the audited balance sheet. The
interim financial statements are unaudited. The financial statements of Day
International Group, Inc. (the "Company"), have been prepared in accordance with
generally accepted accounting principles and, in the opinion of management,
reflect all adjustments (consisting of normal recurring accruals) necessary for
a fair presentation in accordance with generally accepted accounting principles
for the periods presented. The results of operations and cash flows for the
interim periods presented are not necessarily indicative of the results for the
full year.
B. ACQUISITION AND RELATED TRANSACTIONS - On January 16, 1998, affiliates of
Greenwich Street Capital Partners, Inc. and SG Capital Partners acquired
substantially all of the common stock of the Company for approximately $206
million (the "Acquisition"), with the Company's management retaining the balance
of the common stock. In conjunction with the Acquisition, the Company entered
into a $60 million Senior Secured Credit Facility consisting of a $40 million
Term Loan and a $20 million Revolving Credit Facility. Proceeds from the Term
Loan were used to repay the Company's then existing Credit Facility and to pay
certain acquisition related fees and expenses. No amounts have been drawn on the
Revolving Credit Facility. As a result of the repayment of such then existing
Credit Facility, $0.7 million of deferred financing fees were written off as an
extraordinary item. The Acquisition also resulted in compensation related
expenses of $17.0 million associated with employment agreements with certain key
members of management and amendments to the Company's Stock Option Plan.
On March 18, 1998, the Company successfully completed a Consent Solicitation
(the "Consent") with respect to the previously existing $100,000 Senior
Subordinated Notes which are due in 2005 (the " 2005 Notes"). The Consent
permitted the Company to issue $115.0 million of 9 1/2% Senior Subordinated
Notes and $35.0 million of 12 1/4% Exchangeable Preferred Stock. The Consent
also allowed the Company to assume a $140.0 Bridge Loan (the "Bridge Loan")
incurred by its majority shareholder in connection with the Acquisition, and
effected certain other changes to the Indenture governing the 2005 Notes,
including the elimination of the provisions of the Indenture subordinating the
2005 Notes to other indebtedness of the Company. As consideration for the
Consent, the Company paid a Consent fee of $65 for every $1,000 of notes held.
The proceeds from the issuance of the $115.0 million of 9 1/2% Senior
Subordinated Notes and $35.0 million of 12 1/4% Exchangeable Preferred Stock
were used to repay the Bridge Loan and to pay other financing fees and expenses.
Expenses associated with obtaining the Consent were approximately $1.0 million.
As a result of the repayment of the Bridge Loan, $5.2 million of deferred
financing fees and expenses were also written off as an extraordinary item. The
Acquisition does not require a change in the Company's historical basis of
accounting since the Company's 2005 Notes remained outstanding following the
Acquisition.
6
<PAGE> 7
The following summarizes the changes in stockholders' (deficit) equity for the
three months ended March 31, 1998:
<TABLE>
<CAPTION>
(dollars in thousands) Foreign
Common Shares Additional Retained Currency
------------- Paid-In Contra Earnings Translation
Shares Amount Capital Equity (Deficit) Adjustment
------ ------ ------- ------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 51,655.5 $ 1 $ 51,959 $ - $ 9,697 $ (1,468)
Net loss (17,115)
Preferred stock dividends (153)
Amortization of preferred
stock discount (7)
Capital contribution from 9,103
stockholders
Assumption of bridge loan (61,497) (78,503)
Stock options exercised 142.5 434
Reduction of common shares (30,914.5) (1) 1
Foreign currency
translation adjustment - - - - - (2)
--------- ------ -------- --------- -------- -------
Balance at March 31, 1998 20,883.5 $ - $ - $ (78,503) $ (7,578) (1,470)
========= ===== ======= ========== ========= ========
</TABLE>
The capital contribution from stockholders consisted of $4,573 of cash plus
$4,530 of fees and expenses associated with the bridge loan financing.
The reduction of common shares represents the shares given up by the new
shareholders in order for their basis per share to reflect the price paid for
each share.
Certain of the acquisition related fees and expenses are estimates and are
subject to change upon receipt of the final invoices.
C. Comprehensive Income - In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." This statement is effective for fiscal years beginning
after December 15, 1997. For the three months ended March 31, 1998 and 1997, the
only item affecting comprehensive income (loss) other than the Company's net
(loss) income was the foreign currency translation adjustment of $(2) and
$(649), respectively. As a result, comprehensive income (loss) for the three
months ended March 31, 1998 and 1997 was $(17,117) and $926, respectively.
7
<PAGE> 8
D. Inventories - The components of inventories are as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
<S> <C> <C>
Finished goods $ 10,610 $ 8,917
Work-in-process 4,772 4,164
Raw materials 3,853 3,420
------ -----
Total $ 19,235 $ 16,501
========= ========
</TABLE>
E. CONTINGENCIES - Claims have been made against the Company for the costs of
environmental remedial measures taken or to be taken. Reserves for such
liabilities have been established and no insurance recoveries have been
anticipated in the determination of the reserves. In management's opinion, the
aforementioned claims will be resolved without material adverse effect on the
results of operations, financial position or cash flows of the Company. The
Company's previous parent and its parent, M.A. Hanna, have agreed to indemnify
the Company for certain of the costs associated with these matters.
F. SUPPLEMENTAL CONSOLIDATING INFORMATION - In April 1995, the Company purchased
Day International, Inc. ("Day"). This acquisition (the "Day Acquisition") was
financed through equity, term and revolving credit facilities and the 2005
Notes. In connection with the Day Acquisition, Day became a wholly-owned
subsidiary of the Company (which has no assets or operations other than its
investment in Day) and provided a full and unconditional guarantee, on an
unsecured basis, of the 2005 Notes. As described in footnote B, in March 1998
the Company issued $115 million of Senior Subordinated Notes (the "2008 Notes")
in connection with the Acquisition. The 2008 Notes are guaranteed on an
unsecured, senior subordinated basis by Day. The wholly-owned foreign
subsidiaries of Day are not guarantors with respect to the 2005 and 2008 Notes
and are not anticipated to have any credit arrangements senior to these Notes.
The only intercompany eliminations are the normal intercompany eliminations with
regard to intercompany sales and the Company's investment in the wholly owned
non guarantor subsidiaries. The following are the supplemental combining
condensed balance sheets as of March 31, 1998 and December 31, 1997 and the
supplemental combining condensed statements of operations and cash flows for the
quarters ended March 31, 1998 and 1997 with the investments in the subsidiaries
accounted for using the equity method. Separate complete financial statements of
Day ("the Guarantor") are not presented because management has determined that
they are not material to the investors.
8
<PAGE> 9
Day International Group, Inc.
Supplemental Combining Condensed Balance Sheet
March 31, 1998
<TABLE>
<CAPTION>
DAY DAY
International International Non Guarantor
Group, Inc. Inc. (Guarantor) Subsidiaries Eliminations Consolidated
----------- ---------------- ------------ ------------ ------------
ASSETS
- ------
<S> <C> <C> <C> <C> <C>
Cash & cash equivalents $ 1,399 $ (907) $ 1,581 $ 2,073
Accounts receivable - net 12,451 9,227 21,678
Inventories 12,765 6,470 19,235
Other assets 1,977 1,548 3,525
----------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,399 26,286 18,826 - 46,511
Intercompany 252,085 - $(252,085) -
Property, plant and equipment - net 35,999 8,959 44,958
Investment in subsidiaries (53,028) 24,085 28,943 -
Intangible and other assets 146,120 5,246 151,366
----------------------------------------------------------------------------------
TOTAL ASSETS $ 200,456 $ 232,490 $ 33,031 $(223,142) $ 242,835
==================================================================================
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
- -----------------------------------------------
Accounts payable $ 5,245 $ 3,686 $ (107) $ 8,824
Accrued associate related costs
and other expenses $ 1,424 8,619 3,120 13,163
Income taxes payable 151 1,803 1,954
Interest payable 4,514 4,514
Current maturities of long-term debt 1,779 1,779
----------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,717 14,015 8,609 (107) 30,234
Intercompany (4,632) 255,840 770 (251,978) -
Long term and
subordinated long term debt 250,306 - 250,306
Long term post retirement
benefits and other 14,066 2,634 16,700
Exchangeable Preferred Stock 33,146 33,146
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (86,081) (51,431) 21,018 28,943 (87,551)
----------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY $ 200,456 $ 232,490 $ 33,031 $(223,142) $ 242,835
==================================================================================
</TABLE>
9
<PAGE> 10
Day International Group, Inc.
Supplemental Combining Condensed Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
DAY DAY
International International Non Guarantor
Group, Inc. Inc. (Guarantor) Subsidiaries Eliminations Consolidated
----------- ---------------- ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash & cash equivalents $ 596 $ (320) $ 504 $ 780
Accounts receivable - net 12,215 9,757 21,972
Inventories 10,637 5,864 16,501
Other assets 1,936 1,459 3,395
------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 596 24,468 17,584 - 42,648
Intercompany 130,000 $(130,000) -
Property, plant and equipment - net 35,931 8,861 44,792
Investment in subsidiaries 70,337 23,106 (93,443) -
Intangible and other assets 132,809 5,278 138,087
------------------------------------------------------------------------------------
TOTAL ASSETS $ 200,933 $ 216,314 $ 31,723 $(223,443) $ 225,527
====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 4,736 $ 3,532 $ (525) $ 7,743
Accrued associate related costs
and other expenses 8,899 4,590 13,489
Interest payable $ 990 23 1,013
Current maturities of long-term debt 774 774
------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 990 13,635 8,919 (525) 23,019
Intercompany 8,286 121,217 (28) (129,475) -
Long-term and
subordinated long-term debt 130,000 109 130,109
Long-term post retirement
benefits and other 9,527 2,683 12,210
TOTAL STOCKHOLDERS' EQUITY 61,657 71,935 20,040 (93,443) 60,189
------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 200,933 $ 216,314 $ 31,723 $(223,443) $ 225,527
====================================================================================
</TABLE>
10
<PAGE> 11
Day International Group, Inc.
Supplemental Combining Condensed Statement of Operations
For the quarter ended March 31, 1998
<TABLE>
<CAPTION>
DAY DAY
International, International, Non Guarantor
Group, Inc. Inc. (Guarantor) Subsidiaries Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net sales $ - $ 31,954 $ 17,060 $ (5,877) $ 43,137
Cost of goods sold 19,489 13,376 (5,877) 26,988
------------------------------------------------------------------------------
Gross profit - 12,465 3,684 - 16,149
Selling, general and administrative expenses 13 5,317 2,021 7,351
Compensation and related transaction costs 18,018 - 18,018
Amortization of intangibles 640 11 651
Management fees 235 235
------------------------------------------------------------------------------
Operating income (loss) (13) (11,745) 1,652 - (10,106)
Other expenses (income):
Equity in loss (earnings) of subsidiaries 12,232 (980) (11,252) -
Interest expense 2,797 4,254 - 7,051
Other expense (income) (12) 29 193 210
------------------------------------------------------------------------------
(Loss) income before income taxes and
extraordinary item (15,030) (15,048) 1,459 11,252 (17,367)
(Benefit) provision for income taxes (1,039) (3,244) 479 - (3,804)
------------------------------------------------------------------------------
(Loss) income before extraordinary item (13,991) (11,804) 980 11,252 (13,563)
Extraordinary (loss) - net of tax (3,124) (428) (3,552)
------------------------------------------------------------------------------
Net (loss) income $ (17,115) $ (12,232) $ 980 $ 11,252 $ (17,115)
==============================================================================
</TABLE>
11
<PAGE> 12
Day International Group, Inc.
Supplemental Combining Condensed Statement of Operations
For the quarter ended March 31, 1997
<TABLE>
<CAPTION>
DAY DAY
International, International, Non Guarantor
Group, Inc. Inc. (Guarantor) Subsidiaries Eliminations Consolidated
-------------------------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 30,364 $ 14,378 $ (5,261) $39,481
Cost of goods sold 18,664 11,121 (5,261) 24,524
------------------------------------------------------------------------
Gross profit -- 11,700 3,257 -- 14,957
Selling, general and administrative expenses 10 5,102 1,930 7,042
Amortization of intangibles 1,203 11 1,214
Management fees 230 230
------------------------------------------------------------------------
Operating income(loss) (10) 5,165 1,316 -- 6,471
Other expenses (income):
Equity in earnings of subsidiaries (1,572) (774) 2,346 --
Interest expense -- 4,000 100 4,100
Other (income) expense (15) (143) 32 (126)
------------------------------------------------------------------------
Income before income taxes 1,577 2,082 1,184 (2,346) 2,497
Provision for income taxes 2 510 410 922
------------------------------------------------------------------------
Net Income $ 1,575 $ 1,572 $ 774 $ (2,346) $ 1,575
=========================================================================
</TABLE>
12
<PAGE> 13
Day International, Inc.
Supplemental Combining Condensed Statement of Cash Flows
For the quarter ended March 31, 1998
<TABLE>
<CAPTION>
DAY DAY
International International, Non Guarantor
Group, Inc. Inc. (Guarantor) Subsidiaries Eliminations Consolidated
----------- ---------------- ------------ ------------ ------------
Operating Activities:
<S> <C> <C> <C> <C> <C>
Net (loss) income $ (17,115) $ (12,232) $ 980 $ 11,252 $(17,115)
Adjustments to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Extraordinary loss on early extinguishment of debt 3,124 428 3,552
Depreciation and amortization 3,429 395 3,824
Deferred income taxes (4,317) (4,317)
Non-cash charge related to stock option awards 8,585 8,585
Equity in loss (earnings) of subsidiaries 12,232 (980) (11,252) --
Changes in operating assets and liabilities 6,354 (7,982) 933 54 (641)
-----------------------------------------------------------------------
Net cash provided by (used in) operating activities 4,595 (13,069) 2,308 54 (6,112)
Investing Activities:
Capital expenditures (1,057) (419) (1,476)
Other -- -- --
-----------------------------------------------------------------------
Net cash provided by (used in) investing activities -- (1,057) (419) -- (1,476)
Financing Activities:
Proceeds from issuance of 2008 Notes 111,134 111,134
Proceeds from issuance of exchangeable
preferred stock 32,986 32,986
Proceeds from issuance of term loan 40,000 40,000
Contributions from shareholders 4,573 4,573
Repayment of existing credit facility (30,000) (902) (30,902)
Repayment of bridge loan (140,000) (140,000)
Payment of consent fee (6,500) (6,500)
Payments on the term loan (2,500) -- (2,500)
---------------------------------------------------------------------
Net cash provided by (used in) financing activities 9,693 -- (902) -- 8,791
Intercompany transfers (13,485) 13,539 -- (54) --
Effects of exchange rates on cash 90 90
---------------------------------------------------------------------
Cash and Cash Equivalents:
Net increase (decrease) in cash and cash equivalents 803 (587) 1,077 -- 1,293
Cash and cash equivalents at beginning of period 596 (320) 504 780
----------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,399 $ (907) $ 1,581 $ -- $ 2,073
======================================================================
</TABLE>
13
<PAGE> 14
Day International, Inc.
Supplemental Combining Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
For the quarter ended March 31, 1997 DAY DAY
International International, Non Guarantor
Group, Inc. Inc. (Guarantor) Subsidiaries Eliminations Consolidated
----------- ----------------------------- ------------ ------------
Operating Activities:
<S> <C> <C> <C> <C> <C>
Net Income $ 1,575 $ 1,572 $ 774 $(2,346) $ 1,575
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,117 395 3,512
Equity in earnings of subsidiaries (1,572) (774) 2,346 --
Changes in operating assets and liabilities 2,733 (4,611) (226) (120) (2,224)
--------------------------------------------------------------
Net cash provided by (used in) operating activities 2,736 (696) 943 (120) 2,863
Investing Activities:
Capital expenditures (1,073) (427) (1,500)
Other 2,620 -- 2,620
--------------------------------------------------------------
Net cash provided by (used in) investing activities -- 1,547 (427) -- 1,120
Financing Activities -
Net payments on revolving credit facility (5,000) (193) (5,193)
---------------------------------------------------------------
Net cash used in financing activities (5,000) -- (193) -- (5,193)
Intercompany transfers 766 (873) (13) 120 --
Effects of exchange rates on cash (161) (161)
----------------------------------------------------------------
Cash and Cash Equivalents:
Net increase (decrease) in cash and cash equivalents (1,498) (22) 149 -- (1,371)
Cash and cash equivalents at beginning of period 2,757 (698) 3,374 5,433
----------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,259 $ (720) $ 3,523 $ -- $ 4,062
===============================================================
</TABLE>
14
<PAGE> 15
Day International Group, Inc.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Basis of Presentation
The following table sets forth, for the periods shown, net sales, cost of goods
sold, gross profit, selling, general and administrative expense ("SG&A"),
amortization of intangibles and operating income in millions of dollars and as a
percentage of net sales.
<TABLE>
<CAPTION>
Three Months
------------
Ended March 31
--------------
1998 1997
---- ----
$ % $ %
--- ----- ---- ------
<S> <C> <C> <C> <C>
Net sales.......................................................................... 43.1 100.0 39.5 100.0
Costs of goods sold................................................................ 27.0 62.6 24.5 62.0
Gross profit....................................................................... 16.1 37.4 15.0 38.0
SG&A............................................................................... 7.4 17.2 7.0 17.7
Compensation and
related transaction costs..................................................... 18.0 41.8 - -
Amortization of intangibles........................................................ 0.7 1.6 1.2 3.0
Management Fees.................................................................... 0.2 0.5 0.2 0.5
Operating (loss) income............................................................ (10.1) (23.4) 6.5 16.5
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Net sales increased to $43.1 million for the three months ended March 31, 1998
from $39.5 million for the comparable period in 1997, an increase of $3.6
million or 9.1%. Image Transfer's sales increased to $34.1 million for the three
months ended March 31, 1998 from $31.1 million for the comparable period in
1997, an increase of $3.0 million or 9.6%. Foreign currency translation rate
changes reduced Image Transfer's sales by $0.5 million in the first quarter of
1998 compared to the same period in 1997. The increased sales were a result of
increased demand for the Company's existing products across almost all markets.
Textiles' sales increased to $9.0 million for the three months ended March 31,
1998 from $8.4 million for the comparable period in 1997, an increase of $0.6
million or 7.2%. Textile sales increase was mainly a result of higher demand for
the Company's existing products in Europe.
Gross profit increased $1.1 million to $16.1 million for the three months ended
March 31, 1998 from $15.0 million for the three months ended March 31, 1997. As
a percentage of net sales,
15
<PAGE> 16
gross profit decreased to 37.4% for the three months ended March 31, 1998 from
38.0% for the comparable period in 1997. Gross profit continues to be positively
impacted by productivity enhancements such as new construction methods for Image
Transfer products and automated finishing equipment for Textile components.
Gross profit increased by $1.4 million as a result of higher sales volumes,
while higher material usage costs decreased gross profit by $0.6 million. Higher
material component costs, as a percent of sales, were primarily a result of
product mix and end market mix changes combined with slightly lower yields from
production. Manufacturing and development costs were $0.7 million or only 6.9%
higher than the same period last year compared to the 9.1% increase in sales.
SG&A increased to $7.4 million for the three months ended March 31, 1998 from
$7.0 million for the comparable period in 1997, an increase of $0.4 million or
5.7%. As a percentage of net sales, SG&A decreased to approximately 17.2% from
17.7%.. The reduction in SG&A as a percent of sales is a result of the fixed
component of SG&A supporting the increased sales, especially in the European
markets. Foreign currency translation rate changes decreased SG&A by $0.1
million in the first quarter of 1998.
Amortization of intangibles decreased to $0.7 million for the three months ended
March 31, 1998 from $1.2 million for the comparable period in 1997, a decrease
of $0.5 million. The decrease is a result of certain employment agreements
becoming fully amortized in the first quarter of 1997.
Compensation and related acquisition costs include $8.6 million as a result of
changes in the Company's stock option plan, $8.4 million related to amounts
payable under certain management employment agreements and $1.0 million of
expenses associated with obtaining the Consent. All of these items arose out of
the Acquisition and related transactions.
Operating income, excluding the compensation and related acquisition costs,
increased to $7.9 million for the three months ended March 31, 1998 from $6.5
million for the comparable period in 1997, an increase of $1.4 million or 21.5%.
As a percentage of net sales, operating income increased to 18.3% for the three
months ended March 31, 1998 from 16.5% for the comparable period in 1997.
The effective tax rate, including the effect of the extraordinary item, for the
first quarter of 1998 was a benefit of 26.5% compared to an expense of 36.9% for
the first quarter of 1997. The lower income tax benefit percentage in 1998
compared to the income tax expense percentage in 1997 is mainly a result of the
establishment of a deferred tax valuation allowance.
Foreign currency translation rates, collectively, had less than a 2% impact on
sales, gross margins and selling, general and administrative expenses in the
quarter ended March 31, 1998.
16
<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated funds from its operations and its working
capital requirements have not exhibited seasonal fluctuations. Utilizing
converters to distribute the majority of its products, the Company is able to
maintain relatively minimal levels of working capital as the converters carry
large amounts of inventory and finance receivables.
Cash Flows From Operating Activities. Cash flows used in operations for the
three months ended March 31, 1998 were $10.6 million compared to cash flows
provided by operations of $2.9 million for the three months ended March 31,
1997. For the three months ended March 31, 1998, cash flows from operations were
adversely impacted by $9.9 million of compensation and related transaction costs
associated with the Acquisition and $5.9 million of pre-tax extraordinary losses
related to the early extinguishment of debt in connection with the Acquisition
offset by a $1.2 million decrease in working capital, primarily due to increases
in accrued liabilities offset by an increase in inventory. Cash flows from
operations in 1997 were impacted by a $2.2 million increase in working capital,
primarily due to increases in accounts receivable balances related to increased
sales offset by an increase in accrued interest payable.
Cash Flows From Investing Activities. The Company's expenditures for plant,
property and equipment were $5.1 $5.2, and $3.6 for 1997, 1996, and 1995,
respectively. The Company believes that historical capital spending levels
should be sufficient to maintain its market position. The Company expects to
fund its annual capital expenditures of $7.0 million to $9.0 million over the
next several years from cash flow from operations. Capital expenditures were
$1.5 million for both quarters ended March 31, 1998 and 1997. In the first
quarter of 1997, $1.5 million was received from Flint Ink Corporation as an
adjustment to the David M purchase price and a $1.1 million note receivable was
collected.
Cash Flows From Financing Activities. In the first quarter of 1998, the Company
entered into a $60 million Senior Secured Credit Facility, concurrent with the
Acquisition. The facility consisted of a $40 million Term Loan and a $20 million
Revolving Credit Facility. The Term Loan is repayable as follows: $2.0 million
in 1998; $5.0 million in 1999; $8.0 million in 2000; $11.0 million in 2001 and
$14.0 million in 2002. Prepayments on the Term Loan are applied first to the
next two quarterly installments and then spread equally to the remaining
quarterly installments. During the quarter ended March 31, 1998, the Company
made $2.5 million in payments on the Term Loan. The Senior Secured Credit
Facility is secured by the assets of the Company and its domestic subsidiaries
(currently, only Day), as well as 65% of the stock of each foreign subsidiary.
The amounts available under the Revolving Credit Facility are subject to a
borrowing base limitation (defined generally as $5 million plus 50% of eligible
domestic inventory and 80% of eligible domestic accounts receivable). The
proceeds from the Term Loan were used to repay the Company's then existing US
Credit Facility and to pay certain of the expenses associated with the
Acquisition. As of March 31, 1998, there were no amounts
17
<PAGE> 18
outstanding under the Revolving Credit Facility and the Company had
approximately $19.5 million available under the Revolving Credit Facility
(calculated by applying the applicable borrowing base limitation).
Also, during the quarter ended March 31, 1998, the Company paid the holders of
the existing 2005 Notes a $6.5 million Consent Fee so as to permit the Company
to issue $115.0 million of 9 1/2% Senior Subordinated Notes and $35.0 million of
12 1/4% Exchangeable Preferred Stock. The Consent Agreement also allowed the
Company to assume the $140.0 Bridge Loan of its new majority shareholder. The
proceeds from the issuance of the $115.0 million of 9 1/2% Senior Subordinated
Notes and $35.0 million of 12 1/4% Exchangeable Preferred Stock were used to
repay the Bridge Loan and to pay other financing fees and expenses. The Company
also received a capital contribution of $9.1 million from its majority
shareholder in the three months ended March 31, 1998 which was used to pay
certain financing fees and expenses.
As a result of the additional debt incurred by the Company in conjunction with
the Acquisition, the Company is highly leveraged. The Company's aggregate
indebtedness is approximately $252.5 million and the aggregate liquidation
preference of the Exchangeable Preferred Stock is $35 million. In comparison,
the Company's outstanding indebtedness at December 31, 1997 was $130.9 million.
The level of the Company's indebtedness could have important consequences
including: (i) a substantial portion of the Company's cash flow from operations
must be dedicated to debt service and will not be available for other purposes;
(ii) the Company's ability to obtain additional debt financing in the future for
working capital, capital expenditures, research and development or acquisitions
may be limited; (iii) the Company's level of indebtedness could limit its
flexibility in reacting to changes in its industries and economic conditions
generally.
The Company's ability to pay principal and interest on the Notes and dividends
on the Exchangeable Preferred Stock and to satisfy its other debt obligations,
including its debt obligations under the 2005 Notes, will depend upon its future
operating performance, which will be affected by prevailing economic conditions
and financial, business and other factors, certain of which are beyond its
control, as well as the availability of revolving credit borrowings under the
Revolving Credit Facility (which is subject to borrowing base limitations) or a
successor facility. The Company anticipates that its operating cash flow,
together with borrowings under the Revolving Credit Facility, will be sufficient
to meet its operating expenses and capital expenditures and to service its debt
requirements as they become due. However, there can be no assurance that the
Company's cash flow, availability under the Revolving Credit Facility and other
capital resources will be sufficient for payment of principal of and interest on
its indebtedness, including the Senior Secured Credit Facility, the 2005 Notes
and the 2008 Notes, for the payment of periodic cash dividends on the
Exchangeable Preferred Stock, for any redemption of the Exchangeable Preferred
Stock for cash, or if the Exchange Debentures have been issued, the payment of
principal of or cash interest on the Exchange Debentures. If the
18
<PAGE> 19
Company's cash flow, availability under the Revolving Credit Facility and other
capital resources are insufficient to fund the Company's debt service
obligations, the Company may be forced to reduce or delay capital expenditures,
to sell assets, to restructure or refinance its indebtedness, or to seek
additional equity capital. There can be no assurance that any of such measures
could be implemented on satisfactory terms, or if implemented, would be
successful or would permit the Company to meet its debt service obligations.
19
<PAGE> 20
Day International Group, Inc.
Part II: Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds
a. During the quarter ended March 31, 1998, the Indenture governing
the 2005 Notes was amended to facilitate the Acquisition, to
eliminate the provisions of the Indenture subordinating the 2005
Notes to other indebtedness of the Company and to make certain
other changes. See Item 1 of this Report on Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
a. During the quarter ended March 31, 1998, the following reports
on Form 8-K were filed:
January 16, 1998 - Changes in Control of Registrant February 20,
1998 - Other Events
b. Exhibits
27 Financial Data Schedule
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, each of the
Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Day International Group, Inc.
-----------------------------
(Registrant)
Date: May 14, 1998 /s/ David B. Freimuth
------------ ---------------------
David B. Freimuth
Vice President and
Chief Financial Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DAY
INTERNATIONAL GROUP, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,073
<SECURITIES> 0
<RECEIVABLES> 21,678
<ALLOWANCES> 0
<INVENTORY> 19,235
<CURRENT-ASSETS> 46,511
<PP&E> 44,958
<DEPRECIATION> 0
<TOTAL-ASSETS> 242,835
<CURRENT-LIABILITIES> 30,234
<BONDS> 250,306
33,146
0
<COMMON> 0
<OTHER-SE> (87,551)
<TOTAL-LIABILITY-AND-EQUITY> 242,835
<SALES> 43,137
<TOTAL-REVENUES> 43,137
<CGS> 26,988
<TOTAL-COSTS> 53,243
<OTHER-EXPENSES> 210
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,051
<INCOME-PRETAX> (17,367)
<INCOME-TAX> (3,804)
<INCOME-CONTINUING> (13,563)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,552
<CHANGES> 0
<NET-INCOME> (17,115)
<EPS-PRIMARY> 0
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