<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C, 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
---------------------------------------------
[ ] 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 and 333-50839
----------------------
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, Suite 1700, Dayton, Ohio 45402
- -------------------------------------------------- ----------
(Address of principal executive offices) (zip code)
(937) 224-4000
- --------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of Common Shares of the Company, $0.01 per share par value,
outstanding as of May 14, 1999 was 23,298
<PAGE> 2
DAY INTERNATIONAL GROUP, INC.
Index
<TABLE>
<CAPTION>
Pages
-----
<S> <C> <C>
Part I: Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive (Loss) Income
for the three months ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7 - 17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18 - 23
Part II: Other Information
Item 1 - Legal Proceedings 24
Item 2 - Changes in Securities and Use of Proceeds 24
Item 6 - Exhibits and Reports on Form 8-K 24
Signature 24
</TABLE>
2
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS 1999 1998
---- ----
<S> <C> <C>
Cash and cash equivalents $ 2,416 $ 4,762
Accounts receivable (less allowance for doubtful
accounts of $1,456 and $1,384) 19,989 18,630
Inventories 19,311 19,179
Prepaid expenses and other current assets 1,564 1,267
Deferred tax assets 2,546 2,543
--------- ---------
Total current assets 45,826 46,381
Property, plant and equipment, net 49,855 50,305
Goodwill and other intangible assets 154,526 157,799
Deferred tax assets 2,243 1,523
Other assets 1,265 1,400
--------- ---------
TOTAL ASSETS $ 253,715 $ 257,408
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 7,511 $ 5,905
Accrued associate-related costs and other accrued expenses 10,222 13,229
Income taxes payable 3,414 2,913
Interest payable 4,274 4,336
Current maturities of long-term debt 1,292 1,292
--------- ---------
Total current liabilities 26,713 27,675
Long-term and subordinated long-term debt 256,262 256,223
Deferred tax liabilities 1,293 1,353
Other long-term liabilities 15,295 15,813
Commitments and contingencies
--------- ---------
Total liabilities 299,563 301,064
Exchangeable Preferred Stock 37,857 36,627
STOCKHOLDERS' (DEFICIT) EQUITY:
Common Shares 1 1
Additional paid-in-capital
Contra-equity associated with the assumption of
majority shareholder's bridge loan (68,772) (68,772)
Retained earnings (deficit) (11,943) (10,370)
Foreign currency translation adjustment (2,991) (1,142)
--------- ---------
Total stockholders' (deficit) equity (83,705) (80,283)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY $ 253,715 $ 257,408
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
NET SALES $ 42,556 $ 43,137
COST OF GOODS SOLD 26,738 26,988
-------- --------
GROSS PROFIT 15,818 16,149
SELLING, GENERAL AND ADMINISTRATIVE 8,060 7,351
COMPENSATION AND RELATED
TRANSACTION COSTS 18,018
AMORTIZATION OF INTANGIBLES 908 651
MANAGEMENT FEES 254 235
-------- --------
OPERATING PROFIT (LOSS) 6,596 (10,106)
OTHER EXPENSES:
Interest Expense (including amortization
of deferred financing costs of $600 in 1999 and
$296 in 1998 6,883 7,051
Other expense (income)--net 215 210
-------- --------
7,098 7,261
-------- --------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEMS (502) (17,367)
INCOME TAX BENEFIT (160) (3,804)
-------- --------
LOSS BEFORE EXTRAORDINARY ITEMS (342) (13,563)
EXTRAORDINARY LOSSES ON EARLY
EXTINGUISHMENT OF DEBT (NET OF TAX
BENEFIT OF $2,368) 3,552
-------- --------
NET LOSS (342) (17,115)
PREFERRED STOCK DIVIDENDS (1,189) (153)
AMORTIZATION OF PREFERRED STOCK
ISSUANCE COSTS (42) (7)
-------- --------
NET LOSS AVAILABLE
TO COMMON SHAREHOLDERS $ (1,573) $(17,275)
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
NET LOSS $ (342) $(17,115)
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (1,849) (2)
-------- --------
COMPREHENSIVE NET LOSS $ (2,191) $(17,117)
======== ========
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE> 6
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (342) $ (17,115)
Adjustments to reconcile net loss
to net cash provided by operating activities:
Extraordinary loss on early extinguishment of debt 3,552
Depreciation and amortization 3,794 3,111
Deferred income taxes (720) (4,317)
Non-cash charge related to stock option awards 8,585
Change in operating assets and liabilities (3,476) 72
--------- ---------
Net cash used in operating activities (744) (6,112)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,602) (1,476)
--------- ---------
Net cash used in investing activities (1,602) (1,476)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of 2008 notes 111,134
Proceeds from issuance of exchangeable preferred stock 32,986
Proceeds from issuance of term loans 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 term loan (2,500)
Net proceeds from revolving credit facility 53
--------- ---------
Net cash provided by financing activities 53 8,791
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (53) 90
--------- ---------
CASH AND CASH EQUIVALENTS:
Net (decrease) increase in cash and cash equivalents (2,346) 1,293
Cash and cash equivalents at beginning of period 4,762 780
--------- ---------
Cash and cash equivalents at end of period $ 2,416 $ 2,073
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES
NON CASH TRANSACTIONS:
Assumption of bridge loan $ 140,000
=========
Preferred stock dividends $ 1,189 $ 153
========= =========
Amortization of preferred stock discount $ 42 $ 7
========= =========
Capital contribution $ 4,530
=========
</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, 1998 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. ACQUISITIONS AND RELATED TRANSACTIONS - On January 16, 1998, affiliates of
Greenwich Street Capital Partners, Inc. ("Greenwich Street") and SG Capital
Partners LLC ("SGCP") 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 (the "Senior Secured Credit Facility") consisting of a $40 million Term
Loan (the "Term Loan") and a $20 million Revolving Credit Facility (the
"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 11 1/8% 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 (the "2008
Notes") and $35.0 million of 12 1/4% Exchangeable Preferred Stock (the
"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 2008 Notes and the 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
7
<PAGE> 8
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.
Effective December 31, 1998, the Company acquired the stock of Rotec
Hulsensysteme GmbH ("Rotec") and entered into a five-year noncompete agreement
with the selling shareholders. The acquisition was financed through a $10
million additional term loan under the Senior Secured Credit Facility and
additional equity from the Company's two major shareholders and was accounted
for as a purchase in accordance with Accounting Principles Board Opinion No. 16.
The following summarizes the changes in stockholders' (deficit) equity for the
three months ended March 31, 1999:
<TABLE>
<CAPTION>
(dollars in thousands)
FOREIGN
COMMON SHARES RETAINED CURRENCY
------------- CONTRA EARNINGS TRANSLATION
SHARES AMOUNT EQUITY (DEFICIT) ADJUSTMENT
------- ------ --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 23,298 $ 1 $ (68,772) $ (10,370) $ (1,142)
Net loss (342)
Preferred stock dividends (1,189)
Amortization of preferred
stock discount (42)
Foreign currency
translation adjustment - - - - (1,849)
------- ---- ---------- ---------- ---------
Balance at March 31, 1999 23,298 $ 1 $ (68,772) $ (11,943) $ (2,991)
======= ==== ========== ========== =========
</TABLE>
C. INVENTORIES
Inventories as of March 31, 1999 and December 31, 1998 consists of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------- -------
<S> <C> <C>
Finished Goods $10,697 $ 9,762
Work in Progress 4,719 5,220
Raw Materials 3,895 4,197
------- -------
$19,311 $19,179
======= =======
</TABLE>
8
<PAGE> 9
D. BUSINESS SEGMENTS
The Company produces precision engineered rubber products, specializing in the
design and customization of consumable image-transfer products for the graphic
arts (printing) industry and fiber handling products for the textile industry.
The Company's printing components division ("Image Transfer") designs,
manufactures and markets high-quality printing blankets and sleeves for use in
offset printing.
Segment performance is evaluated based on operating profit results compared to
the annual operating plan. Intersegment sales and transfers are not material.
The Company manages the two segments as separate strategic business units. They
are managed separately because each business unit requires different
manufacturing processes, technology and marketing strategies.
<TABLE>
<CAPTION>
1999
----
IMAGE
TRANSFER TEXTILE TOTALS
-------- ------- ------
<S> <C> <C> <C>
Third party sales $35,181 $7,375 $42,556
Operating profit 8,646 301 8,947
<CAPTION>
1998
----
IMAGE
TRANSFER TEXTILE TOTALS
-------- ------- ------
<S> <C> <C> <C>
Third party sales $34,119 $9,018 $43,137
Operating profit 9,010 876 9,886
</TABLE>
The following is a reconciliation of the operating profit reported above to the
amount reported in the Consolidated Financial Statements:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Segment operating profit $ 8,947 $ 9,886
APB #16 depreciation and amortization (1,022) (1,022)
Non allocated corporate expenses (167) (66)
Compensation and related transaction costs (18,018)
Amortization of intangibles (908) (651)
Management fees (254) (235)
-------- --------
Total operating profit (loss) $ 6,596 $(10,106)
======== ========
</TABLE>
9
<PAGE> 10
E. CONTINGENCIES - Claims have been made against the Company for the costs of
environmental remedial measures taken or to be taken. Reserves for such
liabilities have been established and no insurance recoveries have been
anticipated in the determination of the reserves. In management's opinion, the
aforementioned claims will be resolved without material adverse effect on the
results of operations, financial position or cash flows of the Company. The
Company's previous parent and its parent, M.A. Hanna, have agreed to indemnify
the Company for certain of the costs associated with these matters.
F. SUPPLEMENTAL CONSOLIDATING INFORMATION - The Company issued $100,000 of
11 1/8% Senior Notes in conjunction with the purchase of Day International,
Inc., ("Day") from M.A. Hanna and in March 1998, the Company issued $115,000 of
9 1/2% Senior Subordinated Notes in conjunction with the acquisition of the
Company by Greenwich (collectively, the "Notes"). As a result of the 1995
acquisition, Day International, Inc. ("Day International" or "Guarantor") became
a wholly-owned subsidiary of the Company (which has no assets or operations
other than its investment in Day International). Day has provided a full and
unconditional guarantee of the Notes. The wholly-owned foreign subsidiaries of
Day International are not guarantors with respect to the Notes and do not have
any credit arrangements senior to the Notes. All of the assets of Day
International and its parent, other than the assets of the wholly-owned foreign
non guarantor subsidiaries, are pledged as collateral on the 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. In 1996, intercompany notes were put in place through a
dividend which effectively transfers the interest expense from Day International
Group, Inc. to Day International, Inc. The following are the supplemental
combined condensed balance sheets as of March 31, 1999 and December 31, 1998 and
the supplemental combined condensed statements of operations and cash flows for
the three months ended March 31, 1999 and 1998 with the investments in the
subsidiaries accounted for using the equity method. Separate complete financial
statements of the Guarantor are not presented because management has determined
that they are not material to the investors.
10
<PAGE> 11
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
MARCH 31, 1999
<TABLE>
<CAPTION>
DAY
DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 749 $ 58 $ 1,609 $ 2,416
Accounts receivable -- net 10,657 9,332 19,989
Inventories 11,948 7,363 19,311
Other assets 2,823 1,287 4,110
--------- --------- --------- --------- ---------
TOTAL CURRENT ASSETS 749 25,486 19,591 -- 45,826
Intercompany 257,554 -- $(257,554) --
Property, plant and equipment -- net 36,702 13,153 49,855
Investment in subsidiaries (52,707) 27,957 24,750 --
Intangible and other assets 141,269 16,765 158,034
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 205,596 $ 231,414 $ 49,509 $(232,804) $ 253,715
========= ========= ========= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 4,420 $ 3,530 $ (439) $ 7,511
Current maturities of long-term debt $ 1,292 1,292
Accrued associate related costs and
other expenses 4,274 7,542 6,094 17,910
--------- --------- --------- --------- ---------
TOTAL CURRENT LIABILITIES 5,566 11,962 9,624 (439) 26,713
Intercompany (13,374) 257,909 12,609 (257,144) --
Long-term and subordinated long-term
debt 256,262 256,262
Other long-term liabilities 13,757 2,831 16,588
Exchangeable Preferred Stock 37,857 37,857
Total stockholders' equity (deficit) (80,715) (52,214) 24,445 24,779 (83,705)
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 205,596 $ 231,414 $ 49,509 $(232,804) $ 253,715
========= ========= ========= ========= =========
</TABLE>
11
<PAGE> 12
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
DAY
DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 3,256 $ (955) $ 2,461 $ 4,762
Accounts receivable -- net 10,147 8,483 18,630
Inventories 11,450 7,729 19,179
Other assets 2,527 1,283 3,810
-------- -------- -------- --------- --------
TOTAL CURRENT ASSETS 3,256 23,169 19,956 -- 46,381
Intercompany 253,367 -- $(253,367) --
Property, plant and equipment -- net 36,812 13,493 50,305
Investment in subsidiaries (52,370) 28,561 23,809 --
Intangible and other assets 142,819 17,903 160,722
-------- -------- -------- --------- --------
TOTAL ASSETS $204,253 $231,361 $ 51,352 $(229,558) $257,408
======== ======== ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 2,702 $ 3,337 $ (134) $ 5,905
Current maturities of long-term debt $ 1,292 1,292
Accrued associate related costs and
other expenses 4,336 9,261 6,881 20,478
-------- -------- -------- --------- --------
TOTAL CURRENT LIABILITIES 5,628 11,963 10,218 (134) 27,675
Intercompany (15,082) 255,984 12,331 (253,233) --
Long-term and subordinated long-term
debt 256,223 256,223
Other long-term liabilities 14,187 2,979 17,166
Exchangeable Preferred Stock 36,627 36,627
Total stockholders' equity (deficit) (79,143) (50,773) 25,824 23,809 (80,283)
-------- -------- -------- --------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $204,253 $231,361 $ 51,352 $(229,558) $257,408
======== ======== ======== ========= ========
</TABLE>
12
<PAGE> 13
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
DAY
DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 29,979 $12,577 $ -- $42,556
Cost of goods sold 18,222 8,516 26,738
------ -------- ------- ----- -------
Gross profit -- 11,757 4,061 -- 15,818
Selling, general and administrative 9 5,635 2,416 8,060
Amortization of intangibles 824 84 908
Management fees 254 254
------ -------- ------- ----- -------
Operating income (9) 5,044 1,561 -- 6,596
Other expenses (income):
Equity in (earnings) loss of subsidiaries 337 (837) 500 --
Interest expense 6,883 6,883
Other (income) expense (2) 86 131 215
------ -------- ------- ----- -------
Income (loss) before income taxes (344) (1,088) 1,430 (500) (502)
Income taxes (benefit) (2) (751) 593 (160)
------ -------- ------- ----- -------
Net income (loss) $ (342) $ (337) $ 837 $(500) $ (342)
======= ========= ======= ====== =======
</TABLE>
13
<PAGE> 14
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
DAY
DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $ -- $ 31,320 $11,817 $ $ 43,137
Cost of goods sold 18,855 8,133 26,988
--------- ---------- ------- ------- ---------
Gross profit -- 12,465 3,684 -- 16,149
Selling, general and administrative 13 5,317 2,021 7,351
Compensation and related transaction costs 18,018 18,018
Amortization of intangibles 640 11 651
Management fees 235 235
--------- ---------- ------- ------- ---------
Operating income (13) (11,745) 1,652 -- (10,106)
Other expenses (income):
Equity in loss (earnings) of subsidiaries 12,232 (980) (11,252) --
Interest expense 2,797 4,254 7,051
Other (income) expense (12) 29 193 210
--------- ---------- ------- ------- ---------
Income (loss) before income taxes
and extraordinary items (15,030) (15,048) 1,459 11,252 (17,367)
Income taxes (benefit) (1,039) (3,244) 479 (3,804)
--------- ---------- ------- ------- ---------
Income (loss) before
extraordinary items (13,991) (11,804) 980 11,252 (13,563)
Extraordinary losses on early
extinguishment of debt 3,124 428 -- -- 3,552
--------- ---------- ------- ------- ---------
Net income (loss) $ (17,115) $ (12,232) $ 980 $11,252 $ (17,115)
========== =========== ======= ======= ==========
</TABLE>
14
<PAGE> 15
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
DAY
DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income (loss) $ (342) $ (337) $ 837 $ (500) $ (342)
Adjustments to reconcile net
income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,207 587 3,794
Equity in (earnings) loss of subsidiaries 337 (837) 500 --
Deferred income taxes and other (720) (720)
Changes in operating assets and liabilities (61) (1,943) (1,472) (3,476)
-------- -------- --------- -------- --------
Net cash provided by (used in)
operating activities (66) (630) (48) (744)
Investing activities:
Capital expenditures (882) (720) (1,602)
-------- -------- --------- -------- --------
Net cash used in investing activities -- (882) (720) -- (1,602)
Financing Activities:
Net borrowings on credit facilities 53 53
-------- -------- --------- -------- --------
Net cash provided by (used in)
financing activities 53 -- -- -- 53
Intercompany transfers and dividends (2,494) 2,525 (31) --
Effects of exchange rates on cash (53) (53)
-------- -------- --------- -------- --------
Cash and Cash Equivalents:
Net increase (decrease) in cash and
cash equivalents (2,507) 1,013 (852) -- (2,346)
Cash and cash equivalents at beginning of period 3,256 (955) 2,461 4,762
-------- -------- --------- -------- --------
Cash and cash equivalents at end of period $ 749 $ 58 $ 1,609 $ -- $ 2,416
======== ======== ========= ======== ========
</TABLE>
15
<PAGE> 16
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
DAY
DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income (loss) $ (17,115) $(12,232) $ 980 $ 11,252 $(17,115)
Adjustments to reconcile net
income (loss) to net cash provided by
(used in) operating activities:
Extraordinary loss on early
extinguishment of debt 3,124 428 3,552
Depreciation and amortization 2,716 395 3,111
Non-cash charge related to stock
option awards 8,585 8,585
Equity in (earnings) loss of subsidiaries 12,232 (980) (11,252) --
Deferred income taxes and other (4,317) (4,317)
Changes in operating assets and liabilities 6,354 (7,215) 933 72
---------- -------- --------- -------- --------
Net cash provided by (used in)
operating activities 4,595 (13,015) 2,308 -- (6,112)
Investing activities:
Capital expenditures (1,057) (419) (1,476)
---------- -------- --------- -------- --------
Net cash used in investing activities -- (1,057) (419) -- (1,476)
Financing Activities:
Proceeds from issuance of 2008 Notes 111,134 111,134
Proceeds from issuance of exchangeable
preferred stock 32,986 32,986
Proceeds from issuance of term loans 40,000 40,000
Contributions from shareholders 4,573 4,573
Repayment of existing credit facility (30,000) (902) (30,902)
Repayment of bridge loan (140,000) (140,000)
Payment of consent fee (6,500) (6,500)
Payments on the term loan (2,500) (2,500)
---------- -------- --------- -------- --------
Net cash provided by (used in)
financing activities 9,693 -- (902) -- 8,791
Intercompany transfers and dividends (13,485) 13,485 --
Effects of exchange rates on cash 90 90
---------- -------- --------- -------- --------
Cash and Cash Equivalents:
Net increase (decrease) in cash and
cash equivalents 803 (587) 1,077 -- 1,293
Cash and cash equivalents at beginning of period 596 (320) 504 780
---------- -------- --------- -------- --------
Cash and cash equivalents at end of period $ 1,399 $ (907) $ 1,581 $ -- $ 2,073
========== ======== ========= ======== ========
</TABLE>
16
<PAGE> 17
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.
17
<PAGE> 18
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 (loss) in millions of dollars
and as a percentage of net sales.
<TABLE>
<CAPTION>
Three Months
------------
Ended March 31
--------------
1999 1998
---- ----
$ % $ %
---- ----- ---- -----
<S> <C> <C> <C> <C>
Net sales................................ 42.5 100.0 43.1 100.0
Costs of goods sold...................... 26.7 62.8 27.0 62.6
Gross profit............................. 15.8 37.2 16.1 37.4
SG&A..................................... 8.1 19.1 7.4 17.2
Compensation and
related transaction costs........... -- -- 18.0 41.8
Amortization of intangibles.............. 0.9 2.1 0.7 1.6
Management Fees.......................... 0.2 0.5 0.2 0.5
Operating income (loss).................. 6.6 15.5 (10.1) (23.4)
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net sales decreased to $42.5 million for the three months ended March 31, 1999
from $43.1 million for the comparable period in 1998, a decrease of $0.6 million
or 1.4%. Image Transfer's sales increased to $35.2 million for the three months
ended March 31, 1999 from $34.1 million for the comparable period in 1998, an
increase of $1.1 million or 3.2%. The acquisition of Rotec Hulsensysteme GmbH
("Rotec") at the end of 1998 contributed $2.6 million to Image Transfer's net
sales in the three months ended March 31, 1999. Excluding sales contributed by
Rotec, Image Transfer sales decreased $1.5 million or 4.4% from the comparable
period in 1998. In early 1998, the Company's lead times were approximately ten
to twelve weeks. As a result of expanded capacity, the Company has been able to
reduce its lead times to approximately four weeks in the first quarter of 1999.
As a result of the shortened lead times, the Company's largest distributors were
reducing their inventory levels in the three months ended March 31, 1999
negatively impacting sales. Tubular sleeve sales continued to grow at over 30%
this quarter as
18
<PAGE> 19
new presses which utilize this technology are installed. Foreign currency
translation rate changes had no impact on Image Transfer's sales in the first
quarter of 1999 compared to the same period in 1998. Textiles' sales decreased
to $7.3 million for the three months ended March 31, 1999 from $9.0 million for
the comparable period in 1998, a decrease of $1.7 million or 18.9%. Textile
sales decreased across all markets. The largest decline occurred in Europe as a
result of a significant decline in sales to original equipment manufacturers
("OEM's"). The decline in sales to OEM's is a result of delays in purchasing of
new equipment by the major yarn manufacturers due to an overall slow down in the
world-wide yarn spinning industry that began in the second half of 1998 and
continued in the first quarter of 1999. Domestic sales were lower as increased
imports of low cost Asian yarns adversely impacted domestic yarn producers. At
the same time, domestic mills were faced with higher than normal inventories
causing several yarn spinning mills to be closed in the second half of 1998 and
the three months ended March 31, 1999. Export sales to Asian markets were
adversely impacted by the currency devaluations which occurred in 1998 making
the Day products more expensive. Sales to carpet and fiber glass manufacturers
remained strong.
Gross profit decreased $0.3 million to $15.8 million for the three months ended
March 31, 1999 from $16.1 million for the three months ended March 31, 1998. As
a percentage of net sales, gross profit remained relatively constant at 37.2%
for the three months ended March 31, 1999 compared to 37.4% for the three months
ended March 31, 1998. The major item affecting gross profit in the three months
ended March 31, 1999 was the lower sales volumes resulting in under-absorption
of fixed costs.
SG&A increased to $8.1 million for the three months ended March 31, 1999 from
$7.4 million for the comparable period in 1998, an increase of $0.7 million or
9.5%. Rotec accounted for $0.5 million of this increase. As a percentage of net
sales, SG&A increased to approximately 19.0% from 17.2%. The increase in SG&A as
a percent of sales is a result of the fixed component of SG&A supporting the
decreased sales volumes. Foreign currency translation rate changes had no impact
on SG&A in the first quarter of 1999 compared to the first quarter of 1998.
Amortization of intangibles increased to $0.9 million for the three months ended
March 31, 1999 from $0.7 million for the comparable period in 1998, an increase
of $0.2 million. The increase is a result of the amortization of the goodwill in
conjunction with the Rotec acquisition.
Operating income decreased to $6.6 million for the three months ended March 31,
1999 from $7.9 million, excluding the compensation and related acquisition
costs, for the comparable period in 1998, a decrease of $1.3 million or 16.5%.
As a percentage of net sales, operating income decreased to 15.5% for the three
months ended March 31, 1999 from 18.3% for the comparable period in 1998.
The effective tax rate, including the effect of the extraordinary item, for the
first quarter of 1999 was a benefit of 31.9% compared to a benefit of 26.5% for
the first quarter of 1998. The higher income tax benefit percentage in 1999
compared to 1998 is mainly a result of the establishment of a deferred tax
valuation allowance in 1998.
19
<PAGE> 20
Foreign currency translation rates, collectively, had less than a 2% impact on
sales, gross margins and selling, general and administrative expenses in the
quarter ended March 31, 1999.
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
the majority of inventory and maintain the receivables of the end users.
Cash Flows From Operating Activities. Cash flows used in operations for the
three months ended March 31, 1999 were $0.7 million compared to $6.1 million for
the three months ended March 31, 1998. For the three months ended March 31,
1999, cash flows from operations were adversely impacted by a $3.4 million
increase in working capital requirements. Cash flows from operations in 1998
were impacted by $9.5 million of compensation and related transaction costs
associated with the Acquisition.
Cash Flows From Investing Activities. The Company's expenditures for property,
plant and equipment were $7.1 million, $5.1 million and $5.2 million for 1998,
1997 and 1996, respectively. The Company believes that capital expenditures of
$7.0 million to $9.0 million over the next several years will be sufficient to
maintain its market position. The Company expects to fund these capital
expenditures from cash flow from operations. Capital expenditures were $1.6
million and $1.5 million for the quarters ended March 31, 1999 and 1998,
respectively.
Cash Flows From Financing Activities. In the first quarter of 1999, the Company
borrowed $0.1 million on its revolving line of credit for working capital needs.
In the first quarter of 1998, the Company entered into a $60 million Senior
Secured Credit Facility, concurrent with the Acquisition. The facility consisted
of a $40 million Term Loan and a $20 million Revolving Credit Facility. During
the quarter ended March 31, 1998, the Company made $2.5 million in payments on
the Term Loan. The proceeds from the Term Loan were used to repay the Company's
then existing US Credit Facility and to pay certain of the expenses associated
with the Acquisition. As of March 31, 1999, there was $8.3 million outstanding
under the Revolving Credit Facility and the Company had approximately $10.9
million available under the Revolving Credit Facility (calculated by applying
the applicable borrowing base limitation).
Also, during the quarter ended March 31, 1998, the Company paid the holders of
the existing 2005 Notes a $6.5 million Consent Fee so as to permit the Company
to issue $115.0 million of 9 1/2% Senior Subordinated Notes due in 2008 (the
"2008 Notes") and $35.0 million of 12 1/4% Exchangeable Preferred Stock (the
"Exchangeable Preferred Stock"). The Consent Agreement also allowed the Company
to assume the $140.0 million Bridge Loan (the "Bridge Loan") of its new majority
shareholder. The proceeds from the issuance of the 2008 Notes and the
Exchangeable Preferred Stock were used to repay the Bridge Loan and to pay other
financing fees and expenses. The Company also
20
<PAGE> 21
received a capital contribution of $9.1 million from its majority shareholder in
the three months ended March 31, 1998 which was used to pay certain financing
fees and expenses.
As a result of the additional debt incurred by the Company in conjunction with
the Acquisition, the Company is highly leveraged. The Company's aggregate
indebtedness is approximately $257.6 million and the aggregate liquidation
preference of the Exchangeable Preferred Stock is $39.7 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 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 (the "Exchange Debentures") have
been issued in exchange for the Exchangeable Preferred Stock, the payment of
principal 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.
Year 2000. The Year 2000 issue relates to the inability of information systems
to recognize and process date-sensitive information beyond January 1, 2000.
The Company recognizes the importance of the Year 2000 issue and is continuing
to make progress in its efforts to identify and rectify all potential Year 2000
problems related to its Information Technology ("IT") systems, manufacturing
equipment, vendors and customers.
21
<PAGE> 22
A Year 2000 committee has been established consisting of senior members of
management along with members of the IT and the facilities' engineering
departments. The committee's objective is to ensure that the Company will be
able to continue to service its customers, both internal and external, after
January 1, 2000. The scope of the Year 2000 project includes (i) information
technology, both hardware and software; (ii) non-IT systems or embedded
technology such as micro controllers contained in various manufacturing and lab
equipment, environmental and safety systems, facilities and utilities; and (iii)
readiness of key third parties, including suppliers and customers and electronic
data interchange, where applicable, with those key third parties. If the
necessary modifications and conversions are not made on a timely basis, the Year
2000 issue could have a material impact on the Company's operations.
The Company is using internal resources, and where necessary, external resources
to perform most of the testing and remediation functions. Upgrades to the
Company's business system have commenced and are anticipated to be completed and
tested by the end of July 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.
Responses have been received from a majority of the vendors and customers and
follow-up efforts are in process with those who have not yet responded.
The Company's historical and estimated costs of remediation of all potential
Year 2000 problems have not been and are not anticipated to be material to the
Company's results of operations or financial position, and will be funded
through operating cash flows. Total costs associated with the remediation of the
Year 2000 issues (including systems, software, and non-IT systems replaced as a
result of Year 2000 issues) are currently estimated to be less than $1 million.
The largest cost factor to date has been the expenditure of management and
associates' time in attention to Year 2000 and related issues. Estimated
remediation costs are based on management's best estimates. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated, particularly if unanticipated Year 2000
issues arise.
While the Company expects to make the necessary modifications or changes to both
its internal IT and non-IT systems and existing product base in a timely
fashion, there can be no assurance that the Company's internal systems will not
be materially adversely affected by the advent of Year 2000.
In the event of a failure as a result of Year 2000 issues, the Company could
lose or have trouble accessing accurate internal data, resulting in incomplete
or inaccurate accounting of Company financial results, the Company's
manufacturing operating systems could be impaired, and the Company could be
required to expend significant resources to address such failures. In an effort
intended to minimize potential disruption to its internal systems, the Company
intends to perform additional hard-disk back-up of its rudimentary systems and
critical information in advance of the Year 2000.
Similarly, in the event of a failure as a result of Year 2000 issues in any
systems of third parties with whom the Company interacts, the Company could lose
or have trouble accessing or receive inaccurate
22
<PAGE> 23
third party data, experience internal and external communications difficulties
or have difficulty obtaining components that are Year 2000 compliant from its
vendors. The Company could also experience a slowdown or reduction of sales if
customers are adversely affected by Year 2000 issues. In an effort to mitigate
the potential impact of any failures, the Company is developing and documenting
a contingency plan for each critical area of the business. The contingency plan
is also expected to be completed by the end of July 1999.
Euro. The Company began accepting orders in the Euro and making payments in the
Euro effective January 1, 1999. Business system upgrades that allow for
transactions in the Euro are installed at the Company's European facilities.
Customers and suppliers have been contacted indicating the Company's ability to
transact business in the Euro on January 1, 1999 and price lists have been
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.
23
<PAGE> 24
DAY INTERNATIONAL GROUP, INC.
Part II: Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 6. Exhibits and Reports on Form 8-K
a. Reports on Form 8-K - None
b. Exhibits
27 Financial Data Schedule
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, each of the
Registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Day International Group, Inc.
-----------------------------
(Registrant)
Date: May 14, 1999 /s/ David B. Freimuth
------------- ----------------------
David B. Freimuth
Vice President and
Chief Financial Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DAY
INTERNATIONAL GROUP, INC'S QUARTERLY REPORT ON FORM 10Q FOR THE QUARTER ENDED
MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,416
<SECURITIES> 0
<RECEIVABLES> 19,989
<ALLOWANCES> 0
<INVENTORY> 19,311
<CURRENT-ASSETS> 45,826
<PP&E> 49,855
<DEPRECIATION> 0
<TOTAL-ASSETS> 253,715
<CURRENT-LIABILITIES> 26,713
<BONDS> 256,262
37,857
0
<COMMON> 1
<OTHER-SE> (83,706)
<TOTAL-LIABILITY-AND-EQUITY> 253,715
<SALES> 42,556
<TOTAL-REVENUES> 42,556
<CGS> 26,738
<TOTAL-COSTS> 35,960
<OTHER-EXPENSES> 215
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,883
<INCOME-PRETAX> (502)
<INCOME-TAX> (160)
<INCOME-CONTINUING> (342)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (342)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
