<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, 2000
[ ] 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 (I.R.S. Employer ID No.)
incorporation or organization)
130 West Second Street, Suite 1700, Dayton, Ohio 45402
- ------------------------------------------------ ---------
(Address of principal executive offices) (zip code)
(937) 224-4000
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of Common Shares of the Company, $0.01 per share par value,
outstanding as of May 12, 2000 was 23,298.
<PAGE> 2
DAY INTERNATIONAL GROUP, INC.
INDEX
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6 - 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 - 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 - 18
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
Signature 19
</TABLE>
2
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS 2000 1999
--------- ---------
<S> <C> <C>
Cash and cash equivalents $ 1,707 $ 508
Accounts receivable (less allowance for doubtful accounts
of $2,217 and $2,141) 32,383 35,240
Inventories 33,598 32,831
Other current assets 7,806 6,831
--------- ---------
Total current assets 75,494 75,410
Property, plant and equipment, net of accumulated
depreciation of $23,542 and $21,821 68,399 69,739
Goodwill and other intangible assets (net of accumulated
amortization of $35,112 and $32,832) 175,544 178,088
Other assets 8,056 8,267
--------- ---------
TOTAL ASSETS $ 327,493 $ 331,504
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 5,444 $ 8,903
Current maturities of long-term debt 3,361 3,361
Other current liabilities 27,471 29,486
--------- ---------
Total current liabilities 36,276 41,750
Long-term and subordinated long-term debt 276,240 276,469
Other long-term liabilities 21,291 21,257
Commitments and contingencies
--------- ---------
Total liabilities 333,807 339,476
Exchangeable preferred stock 43,102 41,745
STOCKHOLDERS' EQUITY (DEFICIT):
18% convertible cumulative preferred shares 41,449 39,711
Common shares 1 1
Contra-equity associated with the assumption of
majority shareholder's bridge loan (68,772) (68,772)
Retained earnings (deficit) (17,871) (15,542)
Foreign currency translation adjustment (4,223) (5,115)
--------- ---------
Total stockholders' equity (deficit) (49,416) (49,717)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 327,493 $ 331,504
========= =========
</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, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
NET SALES $ 70,397 $ 42,556
COST OF GOODS SOLD 43,141 26,738
-------- --------
GROSS PROFIT 27,256 15,818
SELLING, GENERAL AND ADMINISTRATIVE 14,740 8,060
AMORTIZATION OF INTANGIBLES 1,074 908
MANAGEMENT FEES 275 254
-------- --------
OPERATING PROFIT 11,167 6,596
OTHER EXPENSES:
Interest expense (including amortization of deferred financing
cost of $576 and $600) 7,461 6,883
Other expense (income) 2,269 215
-------- --------
9,730 7,098
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES 1,437 (502)
INCOME TAX EXPENSE (BENEFIT) 669 (160)
-------- --------
NET INCOME (LOSS) 768 (342)
PREFERRED STOCK DIVIDENDS (3,048) (1,189)
AMORTIZATION OF PREFERRED STOCK ISSUANCE COSTS (47) (42)
-------- --------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (2,327) $ (1,573)
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 768 $ (342)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,198 3,794
Deferred income taxes (1,726) (720)
Foreign currency loss 1,165
Change in operating assets and liabilities (1,864) (3,476)
------- -------
Net cash provided by (used in)
operating activities 2,541 (744)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,029) (1,602)
------- -------
Net cash used in investing activities (1,029) (1,602)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on term loan (1,250)
Net proceeds from revolving credit facility 1,000 53
------- -------
Net cash provided by (used in)
financing activities (250) 53
EFFECT OF EXCHANGE RATE CHANGES ON CASH (63) (53)
------- -------
Net increase (decrease) in cash and cash equivalents 1,199 (2,346)
Cash and cash equivalents at beginning of period 508 4,762
------- -------
Cash and cash equivalents at end of period $ 1,707 $ 2,416
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
NON CASH TRANSACTIONS:
Preferred stock dividends $ 3,048 $ 1,189
======= =======
Amortization of preferred stock discount $ 47 $ 42
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
DAY INTERNATIONAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
A. BASIS OF PRESENTATION
The balance sheet as of December 31, 1999, 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 accounting principles generally
accepted in the United States of America 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. INVENTORIES
Inventories as of March 31, 2000 and December 31, 1999, consists of:
<TABLE>
<CAPTION>
MARCH 31, DEC. 31,
2000 1999
--------- --------
<S> <C> <C>
Finished goods $20,726 $16,386
Work in process 5,084 6,232
Raw materials 7,788 10,213
------- -------
$33,598 $32,831
======= =======
</TABLE>
C. 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, fiber handling products for the textile industry and
pressroom chemicals and automatic dampening systems for the printing industry.
Day's Image Transfer business designs, manufactures and markets high-quality
printing blankets and sleeves used in the offset and flexographic printing
industries. Day's Textile Products business manufactures and markets precision
engineered rubber cots and aprons sold to textile yarn spinners and other
engineered rubber products sold to diverse markets. Day's Varn subsidiary
designs, manufactures and markets pressroom chemicals and automatic dampening
systems used in the printing industry.
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 three segments as separate strategic business units.
They are managed separately because each business unit requires different
manufacturing processes, technology and marketing strategies.
6
<PAGE> 7
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Third party sales:
Image Transfer $38,855 $35,181
Textile Products 15,560 7,375
Varn 15,982
------- -------
Total $70,397 $42,556
======= =======
Segment operating profit:
Image Transfer $10,070 $ 8,646
Textile Products 2,077 301
Varn 1,590
------- -------
Total $13,737 $ 8,947
======= =======
</TABLE>
The following is a reconciliation of the segment operating profit reported above
to the amount reported in the consolidated financial statements:
<TABLE>
<CAPTION>
2000 1999
-------- -------
<S> <C> <C>
Segment operating profit $ 13,737 $ 8,947
APB #16 depreciation and amortization (1,124) (1,022)
Non-allocated corporate expenses (97) (167)
Amortization of intangibles (1,074) (908)
Management fees (275) (254)
-------- -------
Total operating profit $ 11,167 $ 6,596
======== =======
D. COMPREHENSIVE INCOME (LOSS)
2000 1999
-------- -------
Net income (loss) $ 768 $ (342)
Foreign currency translation adjustment 892 (1,849)
-------- -------
Comprehensive income (loss) $ 1,660 $(2,191)
======== =======
</TABLE>
7
<PAGE> 8
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.
In January 2000, the Company received a Notice of Assessment from the Ohio
Department of Taxation for approximately $16.0 million relating to the 1995 Ohio
Franchise Tax. In February 2000, the Company filed a Petition for Reassessment.
The Company believes, based on consultation with legal counsel and outside tax
experts that it will ultimately prevail in this case. Should the Ohio Department
of Taxation ultimately prevail, the Company believes it is fully indemnified by
M.A. Hanna for this tax obligation. As a result, no provision has been recorded
in the financial statements for this contingency.
F. SUPPLEMENTAL CONSOLIDATING INFORMATION
The Company has outstanding $100,000, 11-1/8% Senior Notes and $115,000, 9 1/2%
Senior Subordinated Notes (collectively, the "Notes"). The Company has no assets
or operations other than its wholly-owned investment in Day International, Inc.
("Day International" or "Guarantor"). Day International 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. 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.
Intercompany notes are in place which effectively transfers the interest expense
from the Company to Day International. The following are the supplemental
combining condensed balance sheets as of March 31, 2000 and December 31, 1999,
and the supplemental combining condensed statements of operations and cash flows
for the three months ended March 31, 2000 and 1999, 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.
8
<PAGE> 9
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
MARCH 31, 2000
<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 $ 1,097 $ (1,564) $ 2,174 $ $ 1,707
Accounts receivable - net 15,486 16,897 32,383
Inventories 21,529 12,069 33,598
Other current assets 3,768 4,038 7,806
-------- -------- ------- --------- --------
TOTAL CURRENT ASSETS 1,097 39,219 35,178 75,494
Intercompany 285,069 (285,069)
Property, plant and equipment, net 48,250 20,149 68,399
Investment in subsidiaries (55,200) 32,242 (4,781) 27,739
Intangible and other assets 168,203 15,397 183,600
-------- -------- ------- --------- --------
TOTAL ASSETS $230,966 $287,914 $65,943 $(257,330) $327,493
======== ======== ======= ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ $ 2,393 $ 3,051 $ $ 5,444
Current maturities of long-term debt 3,297 64 3,361
Other current liabilities 4,164 11,883 11,424 27,471
-------- -------- ------- --------- --------
TOTAL CURRENT LIABILITIES 7,461 14,276 14,539 36,276
Intercompany (44,287) 318,771 10,585 (285,069)
Long-term and subordinated long-term
debt 274,871 1,369 276,240
Other long-term liabilities 15,309 5,982 21,291
Exchangeable preferred stock 43,102 43,102
Total stockholders' equity (deficit) (50,181) (60,442) 33,468 27,739 (49,416)
--------- -------- ------- --------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $230,966 $287,914 $65,943 $(257,330) $327,493
======== ======== ======= ========== ========
</TABLE>
9
<PAGE> 10
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
DECEMBER 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 $ 377 $ (1,773) $ 1,904 $ $ 508
Accounts receivable - net 17,605 17,635 35,240
Inventories 19,879 12,952 32,831
Other current assets 3,775 3,056 6,831
-------- -------- ------- --------- --------
TOTAL CURRENT ASSETS 377 39,486 35,547 75,410
Intercompany 278,408 (278,408)
Property, plant and equipment, net 48,763 20,976 69,739
Investment in subsidiaries (50,978) 35,395 15,583
Intangible and other assets 166,306 20,049 186,355
-------- -------- ------- --------- --------
TOTAL ASSETS $227,807 $289,950 $76,572 $(262,825) $331,504
======== ======== ======= ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ $ 5,762 $ 3,141 $ $ 8,903
Current maturities of long-term debt 3,297 64 3,361
Other current liabilities 4,631 13,159 11,696 29,486
-------- -------- ------- --------- --------
TOTAL CURRENT LIABILITIES 7,928 18,921 14,901 41,750
Intercompany (52,374) 315,700 14,295 (277,621)
Long-term and subordinated long-term
debt 275,111 1,358 276,469
Other long-term liabilities 14,704 6,553 21,257
Exchangeable preferred stock 41,745 41,745
Total stockholders' equity (deficit) (44,603) (59,375) 39,465 14,796 (49,717)
-------- ------- ------- --------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $227,807 $289,950 $76,572 $(262,825) $331,504
======== ======== ======= ========= ========
</TABLE>
10
<PAGE> 11
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000
<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 $ $43,314 $27,083 $ $70,397
Cost of goods sold 26,435 16,706 43,141
----- ------- ------- ------- -------
Gross profit 16,879 10,377 27,256
Selling, general and administrative 9,312 5,428 14,740
Amortization of intangibles 1,004 70 1,074
Management fees 275 275
----- ------- ------- ------- -------
Operating profit 6,288 4,879 11,167
Other expenses (income):
Equity in (earnings) loss of subsidiaries (767) (2,500) 3,267
Interest expense 1 7,460 7,461
Other (income) expense (3) 1,784 488 2,269
----- ------- ------- ------- -------
Income (loss) before income taxes 769 (456) 4,391 (3,267) 1,437
Income taxes (benefit) 1 (1,223) 1,891 669
----- ------- ------- ------- -------
Net income $ 768 $ 767 $ 2,500 $(3,267) $ 768
===== ======= ======= ======= =======
</TABLE>
11
<PAGE> 12
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 profit (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>
12
<PAGE> 13
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
DAY DAY INTER-
INTER- NATIONAL NON
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 768 $ 767 $ 2,500 $(3,267) $ 768
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,518 680 4,198
Equity in (earnings) loss of subsidiaries (767) (2,500) 3,267
Deferred income taxes and other (1,360) (366) (1,726)
Foreign currency loss 1,165 1,165
Changes in operating assets and liabilities (467) (1,385) (12) (1,864)
-------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities (466) 205 2,802 2,541
Cash Flows From Investing Activities:
Capital expenditures (936) (93) (1,029)
------- ------- ------- ------- -------
Net cash used in investing activities (936) (93) (1,029)
Cash Flows From Financing Activities:
Payments on term loan (1,250) (1,250)
Net borrowings on credit facilities 1,000 1,000
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities (250) (250)
Intercompany transfers and dividends 1,436 940 (2,376)
Effects of exchange rates on cash (63) (63)
------- ------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents 720 209 270 1,199
Cash and cash equivalents at
beginning of period 377 (1,773) 1,904 508
------- -------- ------- ------- -------
Cash and cash equivalents at end of period $ 1,097 $(1,564) $ 2,174 $ $ 1,707
======= ======= ======= ======= =======
</TABLE>
13
<PAGE> 14
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>
Cash Flows From 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)
Cash Flows From Investing Activities:
Capital expenditures (882) (720) (1,602)
------- ------- ------- ----- -------
Net cash used in investing activities (882) (720) (1,602)
Cash Flows From 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)
------- ------- ------- ----- -------
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>
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On September 30, 1999 and October 19, 1999, the textile products operations of
Armstrong World Industries, Inc. ("TPO") and Varn International ("Varn"),
respectively, were acquired. Accordingly, the results of operations for
historical as well as future periods may not be comparable to prior periods.
BASIS OF PRESENTATION
The following table sets forth selected financial information in millions of
dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
---- ----
$ % $ %
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 70.4 100.0 42.5 100.0
Costs of goods sold 43.1 61.3 26.7 62.8
---- ----- ---- -----
Gross profit 27.3 38.7 15.8 37.2
Selling, general and administrative expense 14.7 20.9 8.1 19.1
Amortization of intangibles 1.1 1.5 0.9 2.1
Management fees 0.3 0.4 0.2 0.5
---- ----- ---- -----
Operating profit 11.2 15.9 6.6 15.5
==== ===== ==== =====
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Net sales increased to $70.4 million for the three months ended March 31, 2000,
from $42.5 million for the comparable period in 1999, an increase of $27.9
million or 65.4%. Image Transfer's sales increased to $38.8 million for the
three months ended March 31, 2000, from $35.2 million for the comparable period
in 1999, an increase of $3.6 million or 10.4%. Foreign currency translation rate
changes resulted in a negative impact of $1.1 million to Image Transfer's
reported sales in the first quarter of 2000 compared to the same period in 1999.
Textile Products' sales increased to $15.6 million for the three months ended
March 31, 2000, from $7.3 million for the comparable period in 1999, an increase
of $8.3 million or 111.0%. Textile Products' sales increased primarily as a
result of the purchase of TPO in late 1999. The acquisition of Varn contributed
$16.0 million of net sales in the three months ended March 31, 2000. Excluding
sales of Varn and TPO, sales increased $3.8 million or 8.9% for the three months
ended March 31, 2000.
Gross profit increased $11.5 million to $27.3 million for the three months ended
March 31, 2000, from $15.8 million for the three months ended March 31, 1999. As
a percentage of net sales, gross profit increased to 38.7% for the three months
ended March 31, 2000, compared to 37.2% for the three months ended March 31,
1999, primarily as a result of improved margins in the Textile Products
business.
Selling, general and administrative expense ("SG&A") increased to $14.7 million
for the three months ended March 31, 2000, from $8.1 million for the comparable
period in 1999, an increase of $6.6 million or 82.9%. Varn and TPO accounted for
the entire increase. As a percentage of net sales, SG&A increased to
approximately
15
<PAGE> 16
20.9% from 19.0%. The increase in SG&A as a percent of sales is a result of
higher selling costs of Varn as compared to the other segments. Foreign currency
translation rate changes had a minimal impact on SG&A in the first quarter of
2000 compared to the first quarter of 1999.
Amortization of intangibles increased to $1.1 million for the three months ended
March 31, 2000, from $0.9 million for the comparable period in 1999, an increase
of $0.2 million. The increase is a result of the amortization of intangibles
from the Varn acquisition.
Operating profit increased to $11.2 million for the three months ended March 31,
2000, from $6.6 million, for the comparable period in 1999, an increase of $4.6
million or 69.3%. As a percentage of net sales, operating profit increased to
15.9% for the three months ended March 31, 2000, from 15.5% for the comparable
period in 1999. Excluding the impact of the acquisitions, operating profit
increased $1.5 million or 22.7% for the three months ended March 31, 2000.
Other expense was $2.2 million for the three months ended March 31, 2000,
compared to $0.2 million for the three months ended March 31, 1999. The increase
was primarily due to the effect of changes in foreign currency exchange rates.
The effective tax rate for the first quarter of 2000 was 46.6% compared to a
benefit of 31.9% for the first quarter of 1999. The higher effective tax rate in
2000 was impacted by increased profits in countries with higher tax rates.
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 and distributors to distribute the majority of its products, the
Company is able to maintain relatively minimal levels of working capital as its
distributors (converters) carry a greater portion of inventory and finance
receivables.
Cash Flows From Operating Activities. Cash flows provided by operations for the
three months ended March 31, 2000, were $2.5 million compared to $0.7 million
used in operations for the three months ended March 31, 1999. For the three
months ended March 31, 2000, cash flows from operations were adversely impacted
by a $1.9 million increase in working capital requirements.
Cash Flows From Investing Activities. Capital expenditures were $1.0 million and
$1.6 million for the quarters ended March 31, 2000 and 1999, respectively.
Capital expenditures are expected to be higher in the second half of 2000 than
in the first half of the year.
Cash Flows From Financing Activities. In the first quarter of 2000, the Company
borrowed $1.0 million on its revolving line of credit for working capital needs.
The Company paid $1.3 million on its outstanding term loan in the three months
ended March 31, 2000. As of March 31, 2000, there was $7.6 million outstanding
under the Revolving Credit Facility and the Company had approximately $12.4
million available under the Revolving Credit Facility (calculated by applying
the applicable borrowing base limitation).
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 at March 31, 2000, is approximately $279.6 million and the
aggregate liquidation preferences of the Exchangeable Preferred Stock is $44.8
million and the Convertible Preferred Stock is $41.7 million.
16
<PAGE> 17
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 the Convertible Preferred Stock and to
satisfy its other debt obligations, including its debt obligations under the
2005 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 Amended and Restated Senior Secured Credit Facility, the 2005
Notes and the 2008 Notes, for the payment of periodic cash dividends on the
Exchangeable Preferred Stock or the Convertible Preferred Stock, for any
redemption of the Exchangeable Preferred Stock or the Convertible 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company conducts a significant amount of business and has operating and
sales facilities in countries outside the United States. As a result, the
Company is subject to business risks inherent in non-U.S. activities, including
political uncertainty, import and export limitations, exchange controls and
currency fluctuations. The Company believes risks related to its foreign
operations are mitigated due to the political and economic stability of the
countries in which its largest foreign operations are located, the stand-alone
nature of the operations, the Company's limited net asset exposure, forward
foreign exchange contract practices and pricing flexibility. Thus, while changes
in foreign currency values do affect earnings, the longer-term economic effect
of these changes should not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
Certain of the Company's international subsidiaries make purchases in foreign
currencies, mainly intercompany transactions. As a result, they are subject to
transaction exposures that arise from foreign exchange movements between the
date that the foreign currency transaction is recorded and the date it is
consummated. The Company has entered into forward foreign exchange contracts to
protect it against such foreign exchange movements. The contract value of these
foreign exchange contracts was approximately $1.7 million at March 31, 2000 and
17
<PAGE> 18
approximately $0.9 million at December 31, 1999. These contracts generally
expire within three to twelve months. Foreign currency losses, included in other
(expense) income, were $2.2 million in 2000 and $0.2 million in 1999.
INTEREST RATE RISKS
The Company is subject to market risk from exposure to changes in the interest
rates based on its financing activities. The Company has the Notes and the
Revolving Credit Facility to maintain the desired level of exposure to risk of
interest rate fluctuations and to minimize interest expense. The Company
utilizes a mix of debt maturities along with both fixed- and variable-rate debt
to manage its exposure to changes in interest rates. The Company does not expect
changes in interest rates to have a material effect on income or cash flows in
2000, although there can be no assurances that interest rates will not
materially change.
COMMODITY RISKS
Rubber polymers and fabrics are key components in most of the Company's Image
Transfer and Textile products. The Company is exposed to changes in the costs of
these components. Varn is exposed to changes in the cost of certain
petroleum-based components. The largest raw material component in Varn's
products is petroleum distillates, such as aliphatics and aromatics. When
commodity prices increase, the Company has historically passed on increases to
its customers to maintain its profit margins. Conversely, when commodity prices
decline, the Company generally lowers its sales prices to meet competitive
pressures. The Company is evaluating the impact of the recent increase in
petroleum prices on its raw material costs and in some markets already has
instituted price increases to offset the impact of these increases. Because the
Company has historically been able to raise sales prices to offset higher costs,
management believes that a 10% change in the cost of its components could have a
short term impact until sales price increases take effect, but overall would not
have a material effect on income or cash flows for a fiscal year.
18
<PAGE> 19
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
(27) Financial Data Schedule
b. Reports on Form 8-K
A Form 8-K/A dated March 22, 2000, was filed which amends the
Registrant's Report on Form 8-K filed on October 28, 1999, to
supply the financial statements and pro forma financial
information related to the acquisition of Varn International.
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: May 12, 2000 /s/ Thomas J. Koenig
------------ -----------------------------
Thomas J. Koenig
Vice President and
Chief Financial Officer
(Principal Financial Officer)
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DAY
INTERNATIONAL GROUP, INC'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-Q.
</LEGEND>
<S> <C>
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<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
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<CURRENT-ASSETS> 75,494
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43,102
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