<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 June 30, 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 incorporation (I.R.S. Employer ID No.)
or organization)
130 West Second Street, 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 July 31, 1998 was 20,940.5
<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 June 30, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Operations for the three months
ended June 30, 1998 and 1997 4
Condensed Consolidated Statements of Operations for the six months
ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7 - 15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16 - 20
Part II: Other Information
Item 1 - Legal Proceedings 21
Item 6 - Exhibits and Reports on Form 8-K 21
Signature 21
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAY INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
------ ---- ----
<S> <C> <C>
Cash and cash equivalents $ 4,453 $ 780
Accounts receivable, net of allowance 19,260 21,972
Inventories 20,500 16,501
Prepaid expenses and other current assets 1,997 1,457
Deferred tax assets 1,536 1,938
--------- ---------
Total current assets 47,746 42,648
Property, plant and equipment, net 45,148 44,792
Goodwill and other intangibles 144,958 136,722
Deferred tax assets 3,192 --
Other assets 1,292 1,365
--------- ---------
Total assets $ 242,336 $ 225,527
--------- ---------
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable $ 9,096 $ 7,743
Accrued associate - related costs and other expenses 11,123 11,871
Income taxes payable 2,444 1,618
Interest payable 4,139 1,013
Current maturities of long-term debt 2,961 774
--------- ---------
Total current liabilities 29,763 23,019
Long-term and subordinated long-term debt 249,135 130,109
Deferred tax liabilities 1,483 5,688
Other long term liabilities 15,370 6,522
Commitments and contingencies -- --
--------- ---------
Total liabilities 295,751 165,338
--------- ---------
Exchangeable preferred stock 34,290 --
--------- ---------
Stockholders' (deficit) equity:
Common stock -- 1
Additional paid in capital -- 51,959
Contra-equity associated with the assumption of
majority shareholder's bridge loan (78,314) --
Retained (deficit) earnings (8,011) 9,697
Foreign currency translation adjustment (1,380) (1,468)
--------- ---------
Total stockholders' (deficit) equity (87,705) 60,189
--------- ---------
Total liabilities and stockholders' (deficit) equity $ 242,336 $ 225,527
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
DAY INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $ 42,913 $40,147
Costs of goods sold 26,854 24,882
-------- -------
Gross profit 16,059 15,265
Selling, general and administrative
expenses 7,196 7,122
Amortization of intangibles 643 709
Management fees 243 230
-------- -------
Operating income 7,977 7,204
Interest expense (including amortization of
deferred financing costs of $576 - 1998 and $241 - 1997) 6,920 4,062
Other (income) expense (30) 105
-------- -------
Income before income taxes 1,087 3,037
Provision for income taxes 376 1,158
-------- -------
Net income 711 $ 1,879
-------- =======
Preferred stock dividends (1,102)
Amortization of preferred stock issuance costs (42)
--------
Net (loss) income available to common shareholders $ (433)
========
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE> 5
DAY INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $ 86,050 $ 79,628
Costs of goods sold 53,841 49,406
-------- --------
Gross profit 32,209 30,222
Selling, general and administrative
expenses 14,549 14,164
Compensation and related transaction costs 18,018
Amortization of intangibles 1,293 1,923
Management fees 478 460
-------- --------
Operating (loss) income (2,129) 13,675
Interest expense (including amortization of
deferred financing costs of $872 - 1998 and $483 - 1997) 13,971 8,161
Other (income) expense 180 (21)
-------- --------
(Loss) income before income taxes (16,280) 5,535
Benefit) provision for income taxes (3,428) 2,081
-------- --------
(Loss) income before extraordinary items (12,852) 3,454
Extraordinary losses on early extinguishment
of debt (net of tax benefit of $2,368) 3,552 --
-------- --------
Net (loss) income (16,404) $ 3,454
========
Preferred stock dividends (1,255)
Amortization of preferred stock issuance costs (49)
--------
Net (loss) income available for common shareholders $(17,708)
========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 6
DAY INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (16,404) $ 3,454
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 6,417 6,561
Deferred income taxes (4,447)
Non-cash charge related to stock option awards 8,585
Changes in operating assets and liabilities 2,473 (3,242)
--------- -------
Net cash (used in) provided by operating activities 176 6,773
--------- -------
INVESTING ACTIVITIES
Capital expenditures (2,979) (2,752)
Other -- 2,619
--------- -------
Net cash (used in) provided by investing activities (2,979) (133)
--------- -------
FINANCING ACTIVITIES
Proceeds from issuance of 2008 notes 111,134
Proceeds from issuance of exchangeable preferred stock 32,986
Proceeds from issuance of common stock 189
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)
Payment of deferred financing fees (2,742)
Net payments on revolving credit facility -- (5,385)
--------- -------
Net cash provided by (used in) financing activities 6,238 (5,385)
--------- -------
Effect of exchange rates on cash 238 (172)
--------- -------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash equivalents 3,673 1,083
Cash and cash equivalents at beginning of period 780 5,433
--------- -------
Cash and cash equivalents at end of period $ 4,453 $ 6,516
========= =======
NON CASH TRANSACTIONS
Assumption of bridge loan $ 140,000
=========
Preferred stock dividend $ 1,255
=========
Amortization of preferred stock discount $ 49
=========
</TABLE>
See notes to condensed consolidated financial statements
6
<PAGE> 7
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. As a result of such repayment of
the Company's 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. As of June 30, 1998, no amounts have been drawn on
the Revolving Credit Facility.
On March 18, 1998, the Company successfully completed a Consent Solicitation
(the "Consent") with respect to its $100.0 million 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 million 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.
7
<PAGE> 8
The following summarizes the changes in stockholders' (deficit) equity for the
six months ended June 30, 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>
Balance at December 31, 1997 51,655.5 $ 1 $51,959 $ -- $ 9,697 $(1,468)
Net loss (16,404)
Preferred stock dividends (1,255)
Amortization of preferred
stock discount (49)
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
Issuance of common shares 47 189
Foreign currency
translation adjustment -- -- -- -- -- 88
-------- -------- ------- --------- ------- -------
Balance at June 30, 1998 20,930.5 $ -- $ -- $ (78,314) $(8,011) $(1,380)
======== ======== ======= ========= ======= =======
</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. The only item affecting comprehensive income (loss)
other than the Company's net (loss) income was the foreign currency translation
adjustment of $90 and $(110), respectively, for the three months ended June 30,
1998 and 1997 and $88 and $(759), respectively, for the six months ended June
30, 1998 and 1997. As a result, comprehensive income (loss) for the three months
ended June 30, 1998 and 1997 was $801 and $1,769, respectively. Comprehensive
income (loss) for the six months ended June 30, 1998 and 1997 was $(16,316) and
$2,695, respectively.
8
<PAGE> 9
D. INVENTORIES - The components of inventories are as follows:
June 30, December 31,
1998 1997
---- ----
Finished goods $12,078 $8,917
Work-in-process 4,746 4,164
Raw materials 3,676 3,420
------- -------
Total $20,500 $16,501
======= =======
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 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 issuance
of 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, unconditional and joint and
several 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 June 30, 1998 and December 31, 1997 and
the supplemental combining condensed statements of operations and cash flows for
the quarters ended June 30, 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 investors.
9
<PAGE> 10
Day International Group, Inc.
Supplemental Combining Condensed Balance Sheet
June 30, 1998
<TABLE>
<CAPTION>
DAY DAY
International International Non Guarantor
Group, Inc. Inc. (Guarantor) Subsidiaries Eliminations Consolidated
----------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
Cash & cash equivalents $ 1,984 $(294) $2,763 $ 4,453
Accounts receivable - net 11,744 7,516 19,260
Inventories 13,526 6,974 20,500
Other assets 2,147 1,386 3,533
-----------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,984 27,123 18,639 -- 47,746
Intercompany 252,096 -- $(252,096) --
Property, plant and equipment - net 35,975 9,173 45,148
Investment in subsidiaries (52,321) 25,050 27,271 --
Intangible and other assets 144,144 5,298 149,442
-----------------------------------------------------------------------
TOTAL ASSETS $ 201,759 $ 232,292 $ 33,110 $(224,825) $242,336
=======================================================================
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable $ 5,918 $ 3,254 $ (76) $ 9,096
Accrued associate related costs
and other expenses 8,258 2,865 11,123
Income taxes payable 135 2,309 2,444
Interest payable $ 4,139 4,139
Current maturities of long-term debt 2,961 2,961
-----------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 7,100 14,311 8,428 (76) 29,763
Intercompany (2,440) 254,611 (151) (252,020) --
Long term and
subordinated long term debt 249,135 -- 249,135
Long term post retirement
benefits and other 14,093 2,760 16,853
Exchangeable preferred stock 34,290 34,290
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (86,326) (50,723) 22,073 27,271 (87,705)
-----------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY $ 201,759 $ 232,292 $ 33,110 $(224,825) $242,336
=======================================================================
</TABLE>
10
<PAGE> 11
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
----------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
- ------
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>
11
<PAGE> 12
Day International Group, Inc.
Supplemental Combining Condensed Statement of Operations
For the quarter ended June 30, 1998
<TABLE>
<CAPTION>
DAY DAY
International, International, Non Guarantor
Group, Inc. Inc. (Guarantor) Subsidiaries Eliminations Consolidated
----------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 33,756 $ 15,335 $(6,178) $42,913
Cost of goods sold 21,102 11,930 (6,178) 26,854
---------------------------------------------------------------------------
Gross profit -- 12,654 3,405 -- 16,059
Selling, general and administrative expenses 16 5,270 1,910 7,196
Amortization of intangibles 631 12 643
Management fees 243 243
---------------------------------------------------------------------------
Operating income (loss) (16) 6,510 1,483 -- 7,977
Other expenses (income):
Equity in (earnings) of subsidiaries (708) (964) 1,672 --
Interest expense 6,920 -- 6,920
Other expense (income) (21) 9 (18) (30)
---------------------------------------------------------------------------
Income before income taxes 713 545 1,501 (1,672) 1,087
Provision for income taxes 2 (163) 537 -- 376
---------------------------------------------------------------------------
Net income $ 711 $ 708 $ 964 $(1,672) $711
===========================================================================
</TABLE>
Day International Group, Inc.
Supplemental Combining Condensed Statement of Operations
For the quarter ended June 30, 1997
<TABLE>
<CAPTION>
DAY DAY
International, International, Non Guarantor
Group, Inc. Inc. (Guarantor) Subsidiaries Eliminations Consolidated
----------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 30,234 $ 15,643 $(5,730) $40,147
Cost of goods sold 18,232 12,380 (5,730) 24,882
---------------------------------------------------------------------------
Gross profit -- 12,002 3,263 -- 15,265
Selling, general and administrative expenses 17 5,140 1,965 7,122
Amortization of intangibles 697 12 709
Management fees 230 230
---------------------------------------------------------------------------
Operating income (loss) (17) 5,935 1,286 -- 7,204
Other expenses (income):
Equity in earnings of subsidiaries (1,882) (760) 2,642 --
Interest expense -- 3,957 105 4,062
Other (income) expense (12) 137 (20) 105
---------------------------------------------------------------------------
Income (loss) before income taxes 1,877 2,601 1,201 (2,642) 3,037
Provision (benefit) for income taxes (2) 719 441 1,158
---------------------------------------------------------------------------
Net Income (loss) $ 1,879 $ 1,882 $ 760 $(2,642) $1,879
===========================================================================
</TABLE>
12
<PAGE> 13
Day International Group, Inc.
Supplemental Combining Condensed Statement of Operations
For the six months ended June 30, 1998
<TABLE>
<CAPTION>
DAY DAY
International, International, Non Guarantor
Group, Inc. Inc. (Guarantor) Subsidiaries Eliminations Consolidated
----------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 65,710 $ 32,395 $(12,055) $86,050
Cost of goods sold 40,590 25,306 (12,055) 53,841
------------------------------------------------------------------------
Gross profit -- 25,120 7,089 -- 32,209
Selling, general and administrative expenses 29 10,630 3,890 14,549
Compensation and related transaction costs 18,018 -- 18,018
Amortization of intangibles 1,271 22 1,293
Management fees 478 478
------------------------------------------------------------------------
Operating income (loss) (29) (5,277) 3,177 -- (2,129)
Other expenses (income):
Equity in loss (earnings) of subsidiaries 11,524 (1,944) (9,580) --
Interest expense 2,797 11,174 13,971
Other expense (income) (34) (3) 217 180
------------------------------------------------------------------------
(Loss) income before income taxes and
extraordinary item (14,316) (14,504) 2,960 9,580 (16,280)
(Benefit) provision for income taxes (1,036) (3,408) 1,016 -- (3,428)
------------------------------------------------------------------------
(Loss) income before extraordinary item (13,280) (11,096) 1,944 9,580 (12,852)
Extraordinary (loss) - net of tax (3,124) (428) (3,552)
------------------------------------------------------------------------
Net (loss) income $(16,404) $(11,524) $1,944 $ 9,580 $(16,404)
========================================================================
</TABLE>
Day International Group, Inc.
Supplemental Combining Condensed Statement of Operations
For the six months ended June 30, 1997
<TABLE>
<CAPTION>
DAY DAY
International, International, Non Guarantor
Group, Inc. Inc. (Guarantor) Subsidiaries Eliminations Consolidated
----------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 60,598 $ 30,021 $(10,991) $79,628
Cost of goods sold 36,896 23,501 (10,991) 49,406
------------------------------------------------------------------------
Gross profit -- 23,702 6,520 -- 30,222
Selling, general and administrative expenses 27 10,242 3,895 14,164
Amortization of intangibles 1,900 23 1,923
Management fees 460 -- 460
------------------------------------------------------------------------
Operating income (loss) (27) 11,100 2,602 -- 13,675
Other expenses (income):
Equity in earnings of subsidiaries (3,454) (1,534) 4,988 --
Interest expense -- 7,957 204 8,161
Other (income) expense (27) (6) 12 (21)
------------------------------------------------------------------------
Income before income taxes 3,454 4,683 2,386 (4,988) 5,535
Provision (benefit) for income taxes -- 1,229 852 2,081
------------------------------------------------------------------------
Net Income $ 3,454 $ 3,454 $ 1,534 $ (4,988) $ 3,454
========================================================================
</TABLE>
13
<PAGE> 14
Day International Group, Inc.
Supplemental Combining Condensed Statement of Cash Flows
For the six months ended June 30, 1998
<TABLE>
<CAPTION>
DAY DAY
International International, Non Guarantor
Group, Inc. Inc. (Guarantor) Subsidiaries Eliminations Consolidated
----------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net (loss) income $ (16,404) $ (11,524) $ 1,944 $ 9,580 $(16,404)
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 5,627 790 6,417
Deferred income taxes (4,447) (4,447)
Non-cash charge related to stock option awards 8,585 8,585
Equity in loss (earnings) of subsidiaries 11,524 (1,944) (9,580) --
Changes in operating assets and liabilities 3,149 (2,234) 1,217 341 2,473
--------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,393 (5,509) 3,951 341 176
Investing Activities:
Capital expenditures (1,951) (1,028) (2,979)
Other -- -- --
--------------------------------------------------------------------
Net cash provided by (used in) investing activities -- (1,951) (1,028) -- (2,979)
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 common stock 189 189
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)
Payment of deferred financing fees (2,742) (2,742)
Payments on the term loan (2,500) -- (2,500)
--------------------------------------------------------------------
Net cash provided by (used in) financing activities 7,140 -- (902) -- 6,238
Intercompany transfers (7,145) 7,486 -- (341) --
Effects of exchange rates on cash 238 238
--------------------------------------------------------------------
Cash and Cash Equivalents:
Net increase (decrease) in cash and cash equivalents 1,388 26 2,259 -- 3,673
Cash and cash equivalents at beginning of period 596 (320) 504 780
--------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,984 $ (294) $ 2,763 $ -- $ 4,453
====================================================================
</TABLE>
14
<PAGE> 15
Day International Group, Inc.
Supplemental Combining Condensed Statement of Cash Flows
For the six months ended June 30, 1997
<TABLE>
<CAPTION>
DAY DAY
International International, Non Guarantor
Group, Inc. Inc. (Guarantor) Subsidiaries Eliminations Consolidated
----------- ---------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net Income $ 3,454 $ 3,454 $ 1,534 $(4,988) $3,454
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 5,772 789 6,561
Equity in earning of subsidiaries (3,454) (1,534) 4,988 --
Changes in operating assets and liabilities (112) (3,299) 386 (217) (3,242)
-------------------------------------------------------------------
Net cash provided by (used in) operating activities (112) 4,393 2,709 (217) 6,773
Investing Activities:
Capital expenditures (1,606) (1,146) (2,752)
Other 2,619 -- -- 2,619
-------------------------------------------------------------------
Net cash (used in) provided by investing activities -- 1,013 (1,146) -- (133)
Financing Activities:
Net payments on revolving credit facility (5,000) (385) (5,385)
-------------------------------------------------------------------
Net cash used in financing activities (5,000) -- (385) -- (5,385)
Intercompany transfers 5,593 (4,927) (883) 217 --
Effects of exchange rates on cash (172) (172)
-------------------------------------------------------------------
Cash and Cash Equivalents:
Net increase in cash and cash equivalents 481 479 123 -- 1,083
Cash and cash equivalents at beginning of period 2,756 (698) 3,375 5,433
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,237 $ (219) $ 3,498 $ -- $ 6,516
===================================================================
</TABLE>
G. RECENTLY ISSUED ACCOUNTING STANDARD - In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and for Hedging Activities." Under the
Statement, every derivative is recorded in the balance sheet as either an asset
or liability measured at its fair value. Changes in the derivatives fair value
will be recognized currently in earnings unless specific hedge criteria are met.
Day will be required to adopt this standard for its fiscal 2000 financial
statements. Based on current hedging activities, Day does not anticipate this
standard to have a material effect on its financial statements.
15
<PAGE> 16
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 Six Months
------------ ----------
Ended June 30 Ended June 30
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
$ % $ % $ % $ %
--- --- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................. 42.9 100.0 40.1 100.0 86.1 100.0 79.6 100.0
Costs of goods sold................... 26.9 62.7 24.9 62.1 53.9 62.6 49.4 62.1
Gross profit.......................... 16.0 37.3 15.2 37.9 32.2 37.4 30.2 37.9
SG&A.................................. 7.2 16.8 7.1 17.7 14.5 16.8 14.2 17.8
Compensation and related
transaction costs................ 18.0 20.9
Amortization of intangibles........... 0.6 1.4 0.7 1.7 1.3 1.5 1.9 2.4
Management Fees....................... 0.2 0.5 0.2 0.5 0.5 0.6 0.5 0.6
Operating income...................... 8.0 18.6 7.2 18.0 (2.1) (2.4) 13.7 17.2
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Net sales increased to $42.9 million for the three months ended June 30, 1998
from $40.1 million for the comparable period in 1997, an increase of $2.8
million or 7.0%. Sales volumes increased by $3.1 million or 7.7% offset by the
effect of foreign currency translation of $0.3 million or 0.7%. Image Transfer's
sales increased to $34.6 million for the three months ended June 30, 1998 from
$31.1 million for the comparable period in 1997, an increase of $3.5 million or
11.3%. The increase was mainly a result of higher sales of tubular sleeves and
increased demand for the Company's existing products in the US and Europe.
Foreign currency translation reduced Image Transfer's revenue by $0.3 million or
1.0%. Textiles' sales were $8.3 million for the three months ended June 30, 1998
compared to $9.0 million for the comparable period in 1997, a decrease of $0.7
million or 7.8%. The lower sales were primarily in the European markets where
the strong British pound compared to the other European currencies unfavorably
impacted pricing, however, in US dollars, foreign currency translation had no
material impact on Textile's sales this quarter.
Gross profit increased $0.8 million to $16.0 million for the three months ended
June 30, 1998 from $15.2 million for the three months ended June 30, 1997. As a
percentage of net sales, gross
16
<PAGE> 17
profit decreased to 37.3% for the three months ended June 30, 1998 from 37.9%
for the comparable period in 1997. Foreign currency translation reduced gross
profit $0.1 million. Gross profit increased by $1.1 million as a result of
higher sales volumes offset by higher material usage costs and manufacturing and
development costs. 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.
SG&A increased to $7.2 million for the three months ended June 30, 1998 from
$7.1 million for the comparable period in 1997, an increase of $0.1 million or
1.4%. In the quarter ended June 30, 1998, foreign currency translation decreased
SG&A by $0.1 million. As a percentage of net sales, SG&A decreased to 16.8% from
17.7%.
Amortization of intangibles remained constant at $0.6 million for the three
months ended June 30, 1998 compared with $0.7 million for the comparable period
in 1997.
Operating income increased to $8.0 million for the three months ended June 30,
1998 from $7.2 million for the comparable period in 1997, an increase of $0.8
million or 11.1%. As a percentage of net sales, operating income increased to
18.6% for the three months ended June 30, 1998 from 18.0% for the comparable
period in 1997.
The effective tax rate for the second quarter of 1998 was 34.6% compared to
38.1% for the second quarter of 1997. The lower effective tax rate in 1998 is
mainly a result of changes in the locations where European profits were
generated with more of the profits being generated in markets with lower tax
rates.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Net sales increased to $86.1 million for the six months ended June 30, 1998 from
$79.6 million for the comparable period in 1997, an increase of $6.5 million or
8.2%. Sales volumes for the six months ended June 30, 1998, were $7.4 million or
9.3% higher than the same period in 1997. Foreign currency translation reduced
sales by $0.9 million for the six months ended June 30, 1998 compared to the
same period a year ago. Image Transfer's sales increased to $68.7 million for
the six months ended June 30, 1998 from $62.2 million for the comparable period
in 1997, an increase of $6.5 million or 10.5%. Image Transfer's sales increased
as a result of modest price increases in certain markets, higher sales of
tubular sleeves, and increased demand for the Company's existing products in the
US and Europe. The impact of foreign currency translation reduced Image
Transfer's sales by $0.8 million or 1.3% in the first half of 1998 compared to
the same period a year ago. Textiles' sales were $17.3 million for the six
months ended June 30, 1998 compared to $17.5 million for the comparable period
in 1997; a decrease of $0.2 million or 1.1%. Foreign currency translation
accounted for $0.1 million of the decrease.
Gross profit increased $2.0 million to $32.2 million for the six months ended
June 30, 1998 from $30.2 million for the six months ended June 30, 1997. As a
percentage of net sales, gross profit decreased to 37.4% for the six months
ended June 30, 1998 from 37.9% for the same period of
17
<PAGE> 18
1997. Gross profit was positively impacted by productivity enhancements and
higher sales volumes, particularly sales of Image Transfer products. Gross
profit decreased $0.2 million as a result of foreign currency translation. Gross
profit increased by $2.4 million as a result of higher sales volumes offset by
higher material usage costs and manufacturing and development costs. 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.
SG&A increased to $14.5 million for the six months ended June 30, 1998 from
$14.2 million for the comparable period in 1997, an increase of $0.3 million or
2.1%. The impact of foreign currency translation reduced SG&A by $0.2 million.
As a percentage of net sales, SG&A decreased to 16.8% from 17.8%.
Amortization of intangibles decreased to $1.3 million for the six months ended
June 30, 1998 from $1.9 million for the comparable period in 1997, a decrease of
$0.6 million as a result of certain employment agreements becoming fully
amortized in the first six months 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 $15.9 million for the six months ended June 30, 1998 from $13.7
million for the comparable period in 1997, an increase of $2.2 million or 16.1%.
As a percentage of net sales, operating income (excluding the compensation and
related acquisition costs) increased to 18.5% for the three months ended June
30, 1998 from 17.2% for the comparable period in 1997.
The effective tax rate, including the effect of the extraordinary item, for the
first half of 1998 was a benefit of 26.1% compared to an expense of 37.6% for
the first half 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.
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 provided by operations for the
six months ended June 30, 1998 were $0.2 million compared to cash flows provided
by operations of $6.8 million for the six months ended June 30, 1997. For the
six months ended June 30, 1998, cash flows from operations were adversely
impacted by $9.5 million of compensation and related transaction costs
associated with the Acquisition and $5.2 million of pre-tax extraordinary losses
18
<PAGE> 19
related to the early extinguishment of debt in connection with the Acquisition.
Working capital provided $2.5 million of cash in the first six months of 1998
mainly through a reduction in accounts receivable balances. Cash flows from
operations in 1997 were impacted by a $3.2 million increase in working capital,
primarily due to increases in accounts receivable balances related to increased
sales offset by an increase in accrued liabilities.
Cash Flows From Investing Activities. The Company's expenditures for plant,
property and equipment were $5.1 million, $5.2 million and $3.6 million 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 $3.0 million for the six months ended June 30, 1998 compared
to $2.8 million for the same period in 1997. In the first six months 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 January 1998, the Company entered into
a $60 million Senior Secured Credit Facility, concurrent with the Acquisition.
The facility consists 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 six months ended June 30, 1998, the Company made $2.5
million in payments on the Term Loan and an additional $1.5 million was repaid
on July 1, 1998. 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 June 30, 1998, there were
no amounts 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 six months ended June 30, 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 also allowed the Company to
assume the $140.0 million Bridge Loan of its new majority shareholder and to
make certain other changes to the Indenture governing the 2005 Notes. 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 six months ended June 30, 1998 which was used to pay certain
financing fees and expenses.
19
<PAGE> 20
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 $36.2 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 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.
20
<PAGE> 21
DAY INTERNATIONAL GROUP, INC.
Part II: Other Information
Item 1. Legal Proceedings - None
Item 6. Exhibits and Reports on Form 8-K
a. No report on Form 8-K was filed during the quarter ended June 30, 1998.
b. Exhibits:
27 Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Day International Group, Inc.
-----------------------------
(Registrant)
Date: July 31, 1998 /s/ DAVID B. FREIMUTH
---------------------
David B. Freimuth
Vice President and
Chief Financial Officer
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) DAY
INTERNATIONAL GROUP, INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FORM
10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,453
<SECURITIES> 0
<RECEIVABLES> 19,260
<ALLOWANCES> 0
<INVENTORY> 20,500
<CURRENT-ASSETS> 47,746
<PP&E> 45,148
<DEPRECIATION> 0
<TOTAL-ASSETS> 242,336
<CURRENT-LIABILITIES> 29,763
<BONDS> 249,135
34,290
0
<COMMON> 0
<OTHER-SE> (87,705)
<TOTAL-LIABILITY-AND-EQUITY> 242,336
<SALES> 86,050
<TOTAL-REVENUES> 86,050
<CGS> 53,841
<TOTAL-COSTS> 88,179
<OTHER-EXPENSES> 180
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,971
<INCOME-PRETAX> (16,280)
<INCOME-TAX> (3,428)
<INCOME-CONTINUING> (12,852)
<DISCONTINUED> 0
<EXTRAORDINARY> 3,552
<CHANGES> 0
<NET-INCOME> (16,404)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
