<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 September 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 (I.R.S. Employer ID No.)
incorporation or organization)
130 West Second Street, Dayton, Ohio 45402-0338
------------------------------------ ----------
(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 October 27, 1998 was 20,940.5
<PAGE> 2
DAY INTERNATIONAL GROUP, INC.
Index
Pages
-----
<TABLE>
<S> <C>
Part I: Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Operations for the three months
ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Operations for the nine months
ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 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 - 21
Part II: Other Information
Item 1 - Legal Proceedings 22
Item 6 - Exhibits and Reports on Form 8-K 22
Signature 22
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAY INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
---- ----
<S> <C> <C>
Cash and cash equivalents $ 602 $ 780
Accounts receivable, net of allowance 22,064 21,972
Inventories 18,635 16,501
Prepaid expenses and other current assets 1,821 1,457
Deferred tax assets 1,607 1,938
--------- ---------
Total current assets 44,729 42,648
Property, plant and equipment, net 46,370 44,792
Goodwill and other intangibles 142,947 136,722
Deferred tax assets 2,509 -
Other assets 1,250 1,365
--------- ---------
Total assets $ 237,805 $ 225,527
========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable $ 7,420 $ 7,743
Accrued associate - related costs and other expenses 10,806 11,871
Income taxes payable 1,362 1,618
Interest payable 4,180 1,013
Current maturities of long-term debt 1,127 774
--------- ---------
Total current liabilities 24,895 23,019
Long-term and subordinated long-term debt 247,479 130,109
Deferred tax liabilities 1,425 5,688
Other long term liabilities 15,538 6,522
Commitments and contingencies - -
--------- ---------
Total liabilities 289,337 165,338
--------- ---------
Exchangeable preferred stock 35,442 -
--------- ---------
Stockholders' (deficit) equity:
Common stock - 1
Additional paid in capital - 51,959
Contra-equity associated with the assumption of
majority shareholder's bridge loan (78,273) -
Retained (deficit) earnings (7,804) 9,697
Foreign currency translation adjustment (897) (1,468)
--------- ---------
Total stockholders' (deficit) equity (86,974) 60,189
--------- ---------
Total liabilities and stockholders' (deficit) equity $ 237,805 $ 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 SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $ 46,466 $ 42,406
-------- --------
Costs of goods sold 29,206 26,203
-------- --------
Gross profit 17,260 16,203
Selling, general and administrative
expenses 7,146 7,147
Amortization of intangibles 641 704
Management fees 244 230
-------- --------
Operating income 9,229 8,122
Interest expense (including amortization of debt discount and
deferred financing costs of $576 - 1998 and $241 - 1997) 6,743 3,972
Other (income) expense 216 638
-------- --------
Income before income taxes 2,270 3,512
Provision for income taxes 916 1,233
-------- --------
Net income 1,354 $ 2,279
========
Preferred stock dividends (1,110)
Amortization of preferred stock issuance costs (42)
--------
Net income available to common shareholders $ 202
========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
DAY INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net sales $ 132,516 $ 122,034
Costs of goods sold 83,047 75,609
--------- ---------
Gross profit 49,469 46,425
Selling, general and administrative
expenses 21,695 21,311
Compensation and related transaction costs 18,018
Amortization of intangibles 1,934 2,627
Management fees 722 690
--------- ---------
Operating income 7,100 21,797
Interest expense (including amortization of debt discount and
deferred financing costs of $1,448 - 1998 and $724 - 1997) 20,714 12,133
Other (income) expense 396 617
--------- ---------
(Loss) income before income taxes and extraordinary items (14,010) 9,047
(Benefit) provision for income taxes (2,512) 3,314
--------- ---------
(Loss) income before extraordinary items (11,498) 5,733
Extraordinary losses on early extinguishment
of debt (net of tax benefit of $2,368) 3,552 -
--------- ---------
Net (loss) income (15,050) $ 5,733
=========
Preferred stock dividends (2,365)
Amortization of preferred stock issuance costs (91)
---------
Net (loss) income available to common shareholders $ (17,506)
=========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
DAY INTERNATIONAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (15,050) $ 5,733
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Extraordinary loss on early extinguishment of debt 3,552
Depreciation and amortization 9,754 9,627
Deferred income taxes (3,765)
Non-cash charge related to stock option awards 8,585
Changes in operating assets and liabilities (1,196) (609)
--------- ---------
Net cash provided by operating activities 1,880 14,751
--------- ---------
INVESTING ACTIVITIES
Capital expenditures (5,383) (3,897)
Other - 2,619
--------- ---------
Net cash used in investing activities (5,383) (1,278)
--------- ---------
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
Proceeds from issuance of common stock 230 120
Repayment of existing credit facility (30,902)
Repayment of bridge loan (140,000)
Payment of consent fee (6,500)
Payment of deferred financing fees (2,742)
Payments on term loan (8,000)
Net borrowings (payments) on revolving credit facility 2,000 (18,206)
--------- ---------
Net cash used in financing activities 2,779 (18,086)
--------- ---------
Effects of exchange rates on cash 546 (156)
--------- ---------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash equivalents (178) (4,769)
Cash and cash equivalents at beginning of period 780 5,433
--------- ---------
Cash and cash equivalents at end of period $ 602 $ 664
========= =========
NON CASH TRANSACTIONS
Assumption of bridge loan $ 140,000
=========
Preferred stock dividend $ 2,365
=========
Amortization of preferred stock discount $ 91
=========
</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.
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
nine months ended September 30, 1998:
(dollars in thousands)
<TABLE>
<CAPTION>
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 (15,050)
Preferred stock dividends (2,365)
Amortization of preferred
stock discount (91)
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 57 230
Foreign currency
translation adjustment - - - - - 571
--------- ---- ------- -------- -------- -------
Balance at September 30, 1998 20,940.5 $ - $ - $ (78,273) $ (7,809) $ (897)
========= ==== ======== ========== ========= ========
</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 $483 and $(185), respectively, for the three months ended
September 30, 1998 and 1997
8
<PAGE> 9
and $571 and $(944), respectively, for the nine months ended September 30, 1998
and 1997. As a result, comprehensive income (loss) for the three months ended
September 30, 1998 and 1997 was $1,837 and $2,094, respectively. Comprehensive
income (loss) for the nine months ended September 30, 1998 and 1997 was
$(14,479) and $4,789, respectively.
D. INVENTORIES - The components of inventories are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Finished goods $10,338 $ 8,917
Work-in-process 4,378 4,164
Raw materials 3,919 3,420
------- -------
Total $18,635 $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 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 September 30, 1998 and December 31,
1997 and the supplemental combining condensed statements of operations and cash
flows for the three and nine months ended September 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
September 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 $ 441 $ (827) $ 988 $ 602
Accounts receivable - net 14,053 8,011 22,064
Inventories 12,051 6,584 18,635
Other assets 1,867 1,561 3,428
------------------------------------------------------------------------
TOTAL CURRENT ASSETS 441 27,144 17,144 - 44,729
Intercompany 248,606 - $(248,606) -
Property, plant and equipment - net 36,568 9,802 46,370
Investment in subsidiaries (50,959) 25,323 25,636 -
Intangible and other assets 141,414 5,292 146,706
------------------------------------------------------------------------
TOTAL ASSETS $ 198,088 $ 230,449 $ 32,238 $(222,970) $ 237,805
========================================================================
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Accounts payable $ 4,212 $ 3,521 $ (313) $ 7,420
Accrued associate related costs
and other expenses $ 23 7,955 2,828 10,806
Income taxes payable 112 1,250 1,362
Interest payable 4,180 4,180
Current maturities of long-term debt 1,127 1,127
------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,330 12,279 7,599 (313) 24,895
Intercompany (4,081) 253,351 (977) (248,293) -
Long term and
subordinated long term debt 247,479 - 247,479
Long term post retirement
benefits and other 14,175 2,788 16,963
Exchangeable preferred stock 35,442 35,442
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY (86,082) (49,356) 22,828 25,636 (86,974)
------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' (DEFICIT) EQUITY $ 198,088 $ 230,449 $ 32,238 $(222,970) $ 237,805
========================================================================
</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 September 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 $ - $ 37,034 $ 14,422 $ (4,990) $ 46,466
Cost of goods sold 22,358 11,838 (4,990) 29,206
------------------------------------------------------------------------
Gross profit - 14,676 2,584 - 17,260
Selling, general and administrative expenses 18 5,233 1,895 7,146
Amortization of intangibles 629 12 641
Management fees 244 244
------------------------------------------------------------------------
Operating income (loss) (18) 8,570 677 - 9,229
Other expenses (income):
Equity in (earnings) of subsidiaries (1,362) (273) 1,635 -
Interest expense 6,743 - 6,743
Other expense (income) (5) 42 179 216
------------------------------------------------------------------------
Income before income taxes 1,349 2,058 498 (1,635) 2,270
Provision for income taxes (5) 696 225 - 916
------------------------------------------------------------------------
Net income $ 1,354 $ 1,362 $ 273 $ (1,635) $ 1,354
========================================================================
</TABLE>
Day International Group, Inc.
Supplemental Combining Condensed Statement of Operations
For the quarter ended September 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 $ - $ 32,928 $ 15,126 $ (5,648) $ 42,406
Cost of goods sold 19,873 11,978 (5,648) 26,203
------------------------------------------------------------------------
Gross profit - 13,055 3,148 - 16,203
Selling, general and administrative expenses 12 5,319 1,816 7,147
Amortization of intangibles 693 11 704
Management fees 230 230
------------------------------------------------------------------------
Operating income (loss) (12) 6,813 1,321 - 8,122
Other expenses (income):
Equity in earnings of subsidiaries (2,284) (848) 3,132 -
Interest expense - 3,893 79 3,972
Other (income) expense (4) 568 74 638
------------------------------------------------------------------------
Income (loss) before income taxes 2,276 3,200 1,168 (3,132) 3,512
Provision (benefit) for income taxes (3) 916 320 1,233
------------------------------------------------------------------------
Net Income (loss) $ 2,279 $ 2,284 $ 848 $ (3,132) $ 2,279
========================================================================
</TABLE>
12
<PAGE> 13
Day International Group, Inc.
Supplemental Combining Condensed Statement of Operations
For the nine months ended September 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 $ - $ 102,744 $ 46,817 $ (17,045) $ 132,516
Cost of goods sold 62,948 37,144 (17,045) 83,047
------------------------------------------------------------------------
Gross profit - 39,796 9,673 - 49,469
Selling, general and administrative expenses 47 15,863 5,785 21,695
Compensation and related transaction costs 18,018 - 18,018
Amortization of intangibles 1,900 34 1,934
Management fees 722 722
------------------------------------------------------------------------
Operating income (loss) (47) 3,293 3,854 - 7,100
Other expenses (income):
Equity in loss (earnings) of subsidiaries 10,162 (2,217) (7,945) -
Interest expense 2,797 17,917 20,714
Other expense (income) (39) 39 396 396
------------------------------------------------------------------------
(Loss) income before income taxes and
extraordinary item (12,967) (12,446) 3,458 7,945 (14,010)
(Benefit) provision for income taxes (1,041) (2,712) 1,241 - (2,512)
------------------------------------------------------------------------
(Loss) income before extraordinary item (11,926) (9,734) 2,217 7,945 (11,498)
Extraordinary (loss) - net of tax (3,124) (428) (3,552)
------------------------------------------------------------------------
Net (loss) income $ (15,050) $ (10,162) $ 2,217 $ 7,945 $ (15,050)
========================================================================
</TABLE>
Day International Group, Inc.
Supplemental Combining Condensed Statement of Operations
For the nine months ended September 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 $ - $ 93,526 $ 45,147 $ (16,639) $ 122,034
Cost of goods sold 56,769 35,479 (16,639) 75,609
------------------------------------------------------------------------
Gross profit - 36,757 9,668 - 46,425
Selling, general and administrative expenses 39 15,561 5,711 21,311
Amortization of intangibles 2,593 34 2,627
Management fees 690 - 690
------------------------------------------------------------------------
Operating income (loss) (39) 17,913 3,923 - 21,797
Other expenses (income):
Equity in earnings of subsidiaries (5,738) (2,382) 8,120 -
Interest expense - 11,850 283 12,133
Other (income) expense (31) 562 86 617
------------------------------------------------------------------------
Income before income taxes 5,730 7,883 3,554 (8,120) 9,047
Provision (benefit) for income taxes (3) 2,145 1,172 3,314
------------------------------------------------------------------------
Net Income $ 5,733 $ 5,738 $ 2,382 $ (8,120) $ 5,733
========================================================================
</TABLE>
13
<PAGE> 14
Day International Group, Inc.
Supplemental Combining Condensed Statement of Cash Flows
For the nine months ended September 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 $ (15,050) $ (10,162) $ 2,217 $ 7,945 $ (15,050)
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 8,568 1,186 9,754
Deferred income taxes (3,765) (3,765)
Non-cash charge related to stock option awards 8,585 8,585
Equity in loss (earnings) of subsidiaries 10,162 (2,217) (7,945) -
Changes in operating assets and liabilities 3,214 (4,683) 479 (206) (1,196)
-----------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,450 (3,246) 3,882 (206) 1,880
Investing Activities:
Capital expenditures (3,486) (1,897) (5,383)
Other - - -
-----------------------------------------------------------------------
Net cash provided by (used in) investing activities - (3,486) (1,897) - (5,383)
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 230 230
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 (6,000) - (6,000)
-----------------------------------------------------------------------
Net cash provided by (used in) financing activities 3,681 - (902) - 2,779
Intercompany transfers (5,286) 6,225 (1,145) 206 -
Effects of exchange rates on cash 546 546
-----------------------------------------------------------------------
Cash and Cash Equivalents:
Net increase (decrease) in cash and cash equivalents (155) (507) 484 - (178)
Cash and cash equivalents at beginning of period 596 (320) 504 780
-----------------------------------------------------------------------
Cash and cash equivalents at end of period $ 441 $ (827) $ 988 $ - $ 602
=======================================================================
</TABLE>
14
<PAGE> 15
Day International Group, Inc.
Supplemental Combining Condensed Statement of Cash Flows
For the nine months ended September 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 $ 5,733 $ 5,738 $ 2,382 $ (8,120) $ 5,733
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 8,444 1,183 9,627
Equity in earning of subsidiaries (5,738) (2,382) 8,120 -
Changes in operating assets and liabilities 2,681 (3,337) (282) 329 (609)
------------------------------------------------------------------------
Net cash provided by (used in) operating activities 2,676 8,463 3,283 329 14,751
Investing Activities:
Capital expenditures (2,542) (1,355) (3,897)
Other 2,619 - - 2,619
------------------------------------------------------------------------
Net cash (used in) provided by investing activities - 77 (1,355) - (1,278)
Financing Activities:
Net payments on revolving credit facility (16,000) (2,206) (18,206)
Sale of common shares 120 120
------------------------------------------------------------------------
Net cash used in financing activities (15,880) - (2,206) - (18,086)
Intercompany transfers 11,029 (10,661) (39) (329) -
Dividends 1,250 (1,250) -
Effects of exchange rates on cash (156) (156)
------------------------------------------------------------------------
Cash and Cash Equivalents:
Net increase in cash and cash equivalents (2,175) (871) (1,723) - (4,769)
Cash and cash equivalents at beginning of period 2,757 (726) 3,402 5,433
------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 582 $(1,597) $ 1,679 $ - $ 664
========================================================================
</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 Nine Months
------------ -----------
Ended September 30 Ended September 30
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
$ % $ % $ % $ %
------ ----- ----- ----- ------ ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................................ 46.5 100.0 42.4 100.0 132.5 100.0 122.0 100.0
Costs of goods sold...................... 29.2 62.8 26.2 61.8 83.0 62.6 75.6 62.0
Gross profit............................. 17.3 37.2 16.2 38.2 49.5 37.4 46.4 38.0
SG&A..................................... 7.1 15.3 7.1 16.7 21.7 16.4 21.3 17.5
Compensation and related
transaction costs................... 18.0 13.6
Amortization of intangibles.............. 0.6 1.3 0.7 1.7 1.9 1.4 2.6 2.1
Management Fees.......................... 0.2 0.4 0.2 0.5 0.7 0.5 0.7 0.6
Operating income......................... 9.2 19.8 8.1 19.1 7.1 5.4 21.8 17.9
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Net sales increased to $46.5 million for the three months ended September 30,
1998 from $42.4 million for the comparable period in 1997, an increase of $4.1
million or 9.7%. The increased net sales was entirely attributed to sales
volumes as foreign currency translation had no impact on sales for the three
months ended September 30, 1998 compared to the same period a year ago. Image
Transfer sales increased to $38.2 million for the three months ended September
30, 1998 from $34.3 million for the comparable period in 1997, an increase of
$3.9 million or 11.4%. Image Transfer sales increased as a result of increased
demand for the Company's existing products in the U.S. and most of the export
markets, offset by slightly lower sales in Europe and Mexico. Also, tubular
sleeves sales have continued to increase as additional presses that utilize this
technology are installed. Textiles sales were $8.3 million for the three months
ended September 30, 1998 compared to $8.1 million for the comparable period in
1997, an increase of $0.2 million or 2.5% mainly as a result of slightly higher
sales in the US and Europe offset by lower sales to the Latin America and
Pacific Rim markets. Foreign currency translation had no significant impact on
Textiles sales this quarter.
16
<PAGE> 17
Gross profit increased $1.1 million to $17.3 million for the three months ended
September 30, 1998 from $16.2 million for the three months ended September 30,
1997. As a percentage of net sales, gross profit decreased to 37.2% for the
three months ended September 30, 1998 from 38.2% for the comparable period in
1997. Gross Profit increased by $1.6 million as a result of increased sales
volumes offset by higher material usage and higher manufacturing costs of $0.5
million. The higher material usage as a percent of sales was primarily a result
of changes in product mix and end market mix changes combined with lower
production yields at the Longwood, Florida facility. Foreign currency
translation had no significant impact on gross profit for the quarter.
SG&A remained constant at $7.1 million for the three months ended September 30,
1998 compared to the three months ended September 30, 1997. As a percentage of
net sales, SG&A decreased to 15.3% from 16.7%, mainly as a result of improved
cost controls in all markets.
Amortization of intangibles remained relatively constant at $0.6 million for the
three months September 30, 1998 compared to $0.7 million for the same period in
1997.
Operating income increased to $9.2 million for the three months ended September
30, 1998 from $8.1 million for the comparable period in 1997, an increase of
$1.1 million or 13.6%. As a percentage of net sales, operating income increased
to 19.8% for the three months ended September 30, 1998 from 19.1% for the
comparable period in 1997.
The effective tax rate for the third quarter of 1998 was 40.4% compared to 35.1%
for the third quarter of 1997. The effective tax rate in 1998 is higher than the
federal statutory rate mainly because of the provision for state and local taxes
in the US and certain non-deductible foreign currency losses in Mexico. The
effective tax rate in 1997 was slightly higher than the federal statutory rate
as a result of the provision for state and local taxes in the US offset by lower
European tax rates as a result of European profits being generated in markets
with lower effective tax rates.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Net sales increased to $132.5 million for the nine months ended September 30,
1998 from $122.0 million for the comparable period in 1997, an increase of $10.5
million or 8.6%. For the nine months ended September 30, 1998, sales volumes
were $11.4 million or 9.3% higher offset by the impact of foreign currency
translation which reduced sales by $0.9 million or 0.7%. Image Transfer sales
increased to $106.9 million for the nine months ended September 30, 1998 from
$96.4 million for the comparable period in 1997, an increase of $10.5 million or
10.9%. The impact of foreign currency translation reduced Image Transfer sales
by $0.8 million or 0.7% in nine months ended September 30, 1998 compared to the
same period a year ago. Image Transfer sales increased as a result of increased
demand for the Company's existing products in the U.S., most of the export
markets and Europe, offset by slightly lower sales in Mexico. Also, tubular
sleeves sales have continued to increase as additional presses that utilize this
technology are
17
<PAGE> 18
installed. Textiles sales were $25.6 million for the nine months ended September
30, 1998 and 1997. Textiles sales were slightly higher in the US and Europe
offset by lower sales to the Latin America and Pacific Rim markets in 1998
compared to 1997. Foreign currency translation had no significant impact on
Textiles sales for the nine months ended September 30, 1998 compared to the same
period in 1997.
Gross profit increased $3.1 million to $49.5 million for the nine months ended
September 30, 1998 from $46.4 million for the nine months ended September 30,
1997. As a percentage of net sales, gross profit decreased to 37.4% for the nine
months ended September 30, 1998 from 38.0% for the same period of 1997. Gross
profit was positively impacted by productivity enhancements and higher sales
volumes, particularly sales of Image Transfer products. Gross Profit increased
by $4.0 million as a result of increased sales volumes offset by higher material
usage and higher manufacturing costs of $0.6 million. The higher material usage
as a percent of sales was primarily a result of changes in product mix and end
market mix changes combined with lower production yields at the Longwood,
Florida facility. Gross profit decreased $0.3 million due to foreign currency
translation.
SG&A increased to $21.7 million for the nine months ended September 30, 1998
from $21.3 million for the comparable period in 1997, an increase of $0.4
million or 1.9%. As a percentage of net sales, SG&A decreased to 16.4% from
17.5%.
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.
Amortization of intangibles decreased to $1.9 million for the nine months
September 30, 1998 from $2.6 million for the comparable period in 1997, a
decrease of $0.7 million as a result of certain employment agreements becoming
fully amortized in the first nine months of 1997.
Operating income, excluding the compensation and related acquisition costs,
increased to $25.1 million for the nine months ended September 30, 1998 from
$21.8 million for the comparable period in 1997, an increase of $3.3 million or
15.1%. As a percentage of net sales, operating income (excluding the
compensation and related acquisition costs) increased to 18.9% for the nine
months ended September 30, 1998 from 17.9% for the comparable period in 1997.
The effective tax rate, including the effect of the extraordinary item, for the
first nine months of 1998 was a benefit of 24.5% compared to an expense of 36.6%
for the first nine months 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 in 1998.
18
<PAGE> 19
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
nine months ended September 30, 1998 were $1.9 million compared to $14.8 million
for the nine months ended September 30, 1997. For the nine months ended
September 30, 1998, cash flows from operations were adversely impacted by $9.5
million of compensation and related transaction costs associated with the
Acquisition and $4.7 million of additional cash interest paid as a result of the
additional debt incurred as a result of the Acquisition. Working capital used
$1.2 million of cash in the first nine months of 1998 mainly as a result of
increased inventory levels. Cash flows from operations in 1997 were impacted by
a $0.6 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 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 $5.4 million for the nine months ended September 30, 1998
compared to $3.9 million for the same period in 1997. In the first nine 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 nine months ended September 30, 1998, the Company made
$8.0 million in payments on the Term Loan and had $2.0 million outstanding on
the revolver at September 30, 1998 which has subsequently been repaid. 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 September 30, 1998, $2.0 million was outstanding
under the Revolving Credit Facility and the Company had
19
<PAGE> 20
approximately $17.5 million available under the Revolving Credit Facility
(calculated by applying the applicable borrowing base limitation).
Also, during the nine months ended September 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 nine months ended September 30, 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 $248.6 million and the aggregate liquidation
preference of the Exchangeable Preferred Stock is $37.4 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 and 2008 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 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
20
<PAGE> 21
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.
Year 2000. The Company is continuing to make progress in its efforts to identify
and rectify all potential Year 2000 problems related to its business systems,
manufacturing equipment, vendors and customers. Upgrades to the Company's
business system have commenced and are anticipated to be completed and tested by
the end of the second quarter of 1999. A complete inventory of all equipment
(manufacturing and otherwise) has been completed and communication with the
manufacturers of the equipment has commenced to determine whether the equipment
is Year 2000 compliant. Letters have been sent to all significant vendors and
customers requesting them to confirm the status of their Year 2000 projects. The
Company does not anticipate the costs of rectifying all potential Year 2000
problems to be material.
Due to the nature of the Company's products, processes, customers and vendors,
the Company does not anticipate any material impact on the results of
operations, liquidity or financial condition as a result of Year 2000 issues.
The Company anticipates completion of its Year 2000 project by the end of the
second quarter of 1999, including the development of a contingency plan to
handle the most reasonably likely worst case scenarios.
Euro. The Company plans to accept orders in the Euro and make payments in the
Euro effective January 1, 1999. Business systems upgrades that will allow for
transactions in the Euro are currently being installed at the Company's European
facilities and will be completed and tested before the end of the year.
Customers and suppliers are being contacted indicating our ability to transact
business in the Euro on January 1, 1999 and price lists are being modified
accordingly. The Company does not anticipate any material impact to its
revenues, expenses or results of operations as a result of the adoption of the
Euro.
21
<PAGE> 22
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
September 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: October 27, 1998 /s/ David B. Freimuth
----------------- ---------------------
David B. Freimuth
Vice President and
Chief Financial Officer
22
<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
SEPTEMBER 30, 1998 AND IS QUALIFIED BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 602
<SECURITIES> 0
<RECEIVABLES> 22,064
<ALLOWANCES> 0
<INVENTORY> 18,635
<CURRENT-ASSETS> 44,729
<PP&E> 46,370
<DEPRECIATION> 0
<TOTAL-ASSETS> 237,805
<CURRENT-LIABILITIES> 24,895
<BONDS> 247,479
35,442
0
<COMMON> 0
<OTHER-SE> (86,974)
<TOTAL-LIABILITY-AND-EQUITY> 237,805
<SALES> 132,516
<TOTAL-REVENUES> 132,516
<CGS> 83,047
<TOTAL-COSTS> 125,416
<OTHER-EXPENSES> 396
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,714
<INCOME-PRETAX> (14,010)
<INCOME-TAX> 2,512
<INCOME-CONTINUING> (11,498)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,552)
<CHANGES> 0
<NET-INCOME> (15,050)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
