<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 8-K/A
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT - MARCH 22, 2000
DATE OF EARLIEST EVENT REPORTED - OCTOBER 19, 1999
COMMISSION FILE NO. 33-93644
DAY INTERNATIONAL GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 31-1436349
- ------------------------ ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
130 WEST SECOND STREET, SUITE 1700, DAYTON, OHIO 45402
------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (937) 224-4000
This Amendment No. 1 amends the registrant's Report on Form 8-K filed on October
28, 1999 to supply the financial statements for an acquired business and pro
forma financial information required by Items 7(a)(1) and 7(b)(1), respectively.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired
The combined financial statements of Varn as of and for the year ended
December 31, 1998 have not been audited. The audited combined financial
statements for Varn as of October 15, 1999 and for the period from January
1, 1999 through October 15, 1999 are included in this Form 8K as Exhibit
99.2.
(b) Pro forma financial information
The unaudited pro forma consolidated balance sheet of the Company as
September 30, 1999 and the unaudited pro forma consolidated statements of
operations for the nine months ended September 30, 1999 and for the year
ended December 31, 1998 are included in this Form 8-K as exhibit 99.1.
<PAGE> 2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
Date: March 22, 2000 By: /s/ Thomas J. Koenig
--------------------
Thomas J. Koenig
Vice President and Chief Financial
Officer (Principal Financial Officer
and Principal Accounting Officer)
<PAGE> 3
INDEX TO EXHIBITS
Exhibit Page
Description Number
- ----------- ------
99.1 Unaudited Pro Forma Consolidated Balance Sheet of Day
International Group, Inc. as of September 30, 1999 and the
Unaudited Consolidated Statement of Operations of Day
International Group, Inc. for the nine months ended
September 30, 1999 and the year ended December 31, 1998
99.2 Audited Combined Financial Statements of Varn International
as of October 15, 1999 and for the period from January 1,
1999 through October 15, 1999.
<PAGE> 1
EXHIBIT 99.1
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
On October 19, 1999, Day International, Inc. ("the Company"), a wholly-owned
subsidiary of the registrant, completed the acquisition of the stock of Varn
International for approximately $58.2 million in cash (net of cash acquired of
$1.2 million) plus expenses. The acquisition was financed through the private
placement of $38.5 million of the Company's 18% convertible cumulative preferred
stock and through borrowings under the Company's Amended and Restated Senior
Secured Credit Facility. The Amended and Restated Senior Secured Credit Facility
provides for a $70.0 million Term Loan and a $20 million Revolving Credit
Facility.
Effective September 30, 1999, the Company acquired the Textile Products
Operations of Armstrong World Industries, Inc. ("TPO") for approximately $12.5
million in cash, including expenses. A portion of the proceeds from the Amended
and Restated Senior Secured Credit Facility and the convertible preferred stock
discussed above was used to finance the acquisition of TPO. The pro forma
information below excludes the effects of this transaction on the Company's 1998
and nine months ended September 30, 1999 results of operations.
The proceeds from the private placement of convertible preferred stock, together
with borrowings under the Amended and Restated Senior Secured Credit Facility,
were utilized to consummate the Varn and TPO acquisitions. The Varn acquisition,
the private placement of convertible preferred stock and amending and restating
the Senior Secured Credit Facility, together with the payment of related fees
and expenses, are collectively referred to as the "Transactions."
The following unaudited pro forma consolidated financial statements are based on
the Company's historical consolidated financial statements and the historical
consolidated financial statements of Varn. The following sets forth the
Company's unaudited pro forma statements of operations for the twelve months
ended December 31, 1998 and the nine months ended September 30, 1999. The
unaudited pro forma statements of operations give effect to each of the
Transactions as if such Transactions occurred on January 1, 1998. The unaudited
pro forma balance sheet as of September 30, 1999 gives effect to each of the
Transactions as if they had occurred on such date. The Varn balance sheet as of
September 30, 1999 shown below has been based on the audited financial
statements of Varn as of October 15, 1999 (see Exhibit 99.2 to this Form 8-K).
The pro forma consolidated financial statements are presented for informational
<PAGE> 2
purposes only and are not intended to be indicative of either future results of
operations or results that might be achieved had the Transactions actually
occurred on the dates specified. The summary unaudited consolidated pro forma
financial statements are qualified by and should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
December 31, 1998 Annual Report on Form 10-K and the September 30, 1999
Quarterly Report on Form 10-Q along with the combined financial statements of
Varn as of October 15, 1999 and for the period from January 1, 1999 through
October 15, 1999 included in the Form 8-K at Exhibit 99.2.
DAY INTERNATIONAL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Pro Forma
Day Day
International Pro Forma International
Group, Inc. Varn Adjustments Group, Inc.
<S> <C> <C> <C> <C>
Net Sales $130,660 $48,331 $ -- $178,991
Cost of Goods Sold 81,730 25,451 126 (1) 107,307
-------- ------- ------- --------
Gross Profit 48,930 22,880 (126) 71,684
Selling, General and Administrative 22,790 16,858 (1,655) (2) 37,993
Amortization of Intangibles 2,714 -- 599 (3) 3,313
Management Fees 806 -- -- 806
-------- ------- ------- --------
Operating Profit 22,620 6,022 930 29,572
Other Expenses:
Interest Expense (including amortization
of deferred financing costs) 20,608 300 1,654 (4) 22,562
Other Expense (Income) - net 337 (208) -- 129
-------- ------- ------- --------
Income (Loss) before Income Taxes (Benefit) 1,675 5,930 (724) 6,881
Income Taxes (Benefit) 757 2,061 (290) (5) 2,528
-------- ------- ------- --------
Net Income (Loss) $ 918 $ 3,869 $ (434) $ 4,353
======== ======= ======= ========
</TABLE>
<PAGE> 3
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(1) Represents the incremental depreciation expense on the additional value
assigned to property, plant and equipment of $126.
(2) Represents the elimination of the excess compensation paid to the
shareholder employees of $700 and the elimination of fees and expenses
related to the sale of Varn of $955.
(3) Represents amortization of goodwill.
(4) Represents incremental interest expense of $1,778 and additional
amortization of deferred financing costs of $225 less the amortization of
the deferred financing costs related to the original Credit Facility of
$349.
(5) Represents the tax benefit of transactions (1) through (4) above.
<PAGE> 4
DAY INTERNATIONAL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Twelve Months Ended December 31, 1998
(In thousands)
<TABLE>
<CAPTION>
Pro Forma
Day Day
International Pro Forma International
Group, Inc. Varn Adjustments Group, Inc.
<S> <C> <C> <C> <C>
Net Sales $173,066 $64,941 $ -- $238,007
Cost of Goods Sold 110,155 34,663 1,117 (1) 145,935
-------- ------- ------- --------
Gross Profit 62,911 30,278 (1,117) 92,072
Selling, General and Administrative 29,116 23,771 (1,500) (2) 51,387
Compensation and Related Transaction Costs 18,018 -- -- 18,018
Amortization of Intangibles 2,565 -- 798 (3) 3,363
Management Fees 1,043 -- -- 1,043
-------- ------- ------- --------
Operating Profit 12,169 6,507 (415) 18,261
Other Expenses:
Interest Expense (including amortization
of deferred financing costs) 27,470 607 2,338 (4) 30,415
Other Expense (Income) - net 306 -- -- 306
-------- ------- ------- --------
(Loss) Income Before Income Taxes and
Extraordinary Items (15,607) 5,900 (2,753) (12,460)
(Benefit) Income Taxes (2,732) 2,209 (1,101) (5) (1,624)
-------- ------- ------- --------
(Loss) Income Before Extraordinary Items (12,875) 3,691 (1,652) (10,836)
-------- ------- ------- --------
Extraordinary Losses on early Extinguishment of
Debt (Net of Tax Benefit) 3,552 -- 1,265 (6) 4,817
-------- ------- ------- --------
Net Income (Loss) $(16,427) $ 3,691 $(2,917) $(15,653)
======== ======= ======= ========
</TABLE>
<PAGE> 5
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
($ in thousands)
(1) Represents the amortization of the fair value write-up of inventory of $949
and incremental depreciation expense on the additional value assigned to
property, plant and equipment of $168.
(2) Represents the elimination of the excess compensation paid to the
shareholder employees.
(3) Represents amortization of goodwill.
(4) Represents incremental interest expense of $2,370 and additional
amortization of deferred financing costs of $300 less the amortization of
the deferred financing costs related to the original Credit Facility of
$332.
(5) Represents the tax benefit of transactions (1) through (4) above.
(6) Represents write-off of deferred financing fees from original Credit
Facility of $2,109 net of tax of $844.
<PAGE> 6
DAY INTERNATIONAL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Pro Forma
Day Day
International Pro Forma International
Group, Inc. Varn(a) Adjustments Group, Inc.
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 380 $ 1,215 $ 966 (1) $ 2,561
Accounts receivable, net 26,185 10,291 -- 36,476
Inventories 23,524 8,249 949 (2) 32,722
Prepaid expenses and other current assets 1,346 1,260 -- 2,606
Deferred tax assets 2,548 -- -- 2,548
-------- ------- ------- --------
Total current assets 53,983 21,015 1,915 76,913
Property, plant and equipment 53,873 12,019 3,500 (3) 69,392
Goodwill and other intangible assets 150,071 31,431 (4) 181,502
Deferred tax assets 2,482 844 (5) 3,326
Other assets 3,172 2,617 -- 5,789
-------- ------- ------- --------
TOTAL ASSETS $263,581 $35,651 $37,690 $336,922
======== ======= ======= ========
</TABLE>
<PAGE> 7
DAY INTERNATIONAL GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Pro Forma
Day Day
International Pro Forma International
Group, Inc. Varn(a) Adjustments Group, Inc.
<S> <C> <C> <C> <C>
LIABILITIES
Accounts payable $ 5,960 $ 3,842 $ (2,253) (6) $ 7,549
Accrued associate related costs and other
accrued expenses 13,477 3,983 2,279 (7) 19,739
Income tax payable 2,213 1,648 -- 3,861
Interest payable 4,438 -- -- 4,438
Current maturities of long-term debt and
capital lease obligations 1,292 4,837 (435) (8) 5,694
-------- ------- -------- --------
Total current liabilities 27,380 14,310 (409) 41,281
Long-term debt 259,851 -- 20,136 (9) 279,987
Obligation under capital lease -- 1,486 -- 1,486
Deferred tax liabilities 1,086 386 -- 1,472
Other long-term liabilities 19,648 432 -- 20,080
-------- ------- -------- --------
Total liabilities 307,965 16,614 19,727 344,306
Exchangeable preferred stock 40,402 -- -- 40,402
STOCKHOLDERS' EQUITY (DEFICIT):
Common shares 1 876 (876) (10) 1
Convertible preferred stock -- -- 38,265 (11) 38,265
Contra-equity (68,772) -- -- (68,772)
Retained earnings (deficit) (13,229) 18,107 (19,372) (10) (14,494)
Foreign currency translation adjustment (2,786) 54 (54) (10) (2,786)
-------- ------- -------- --------
Total stockholders' equity (deficit) (84,786) 19,037 17,963 (47,786)
-------- ------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $263,581 $35,651 $ 37,690 $336,922
======== ======= ======== ========
</TABLE>
<PAGE> 8
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
($ in thousands)
(a) Represents October 15, 1999 balances from audited financial statements
included in Exhibit 99.2. Change in the balance sheet amounts from
September 30, 1999 to October 15, 1999 are not considered material for
purpose of pro forma presentation.
(1) The increase (decrease) in cash and cash equivalents results from the
following:
<TABLE>
<CAPTION>
<S> <C>
Sources:
New Term Loan $ 69,000
Exchangeable Preferred Stock 38,500
---------
Total Sources 107,500
Uses:
Consideration paid to Varn shareholders for acquisition 59,550
Repayment of outstanding borrowings on Senior Secured Credit
Facility, including accrued interest 44,531
Fees and expenses 2,453
---------
Total Uses 106,533
---------
Proceeds $ 966
=========
</TABLE>
(2) Represents the write-up of inventory to fair value.
(3) Represents the write-up of property, plant and equipment to fair value.
(4) Represents the excess of the acquisition cost over the fair value of assets
and liabilities acquired of $31,901 plus Deferred Financing Fees incurred
with amending and restating the Senior Secured Credit Facility of $1,639
less Deferred Financing Fees related to the original Senior Secured Credit
Facility of $2,109.
(5) Represents deferred taxes associated with the write-off of the Deferred
Financing Fees related to the original Senior Secured Credit Facility.
(6) Represents the elimination of Varn indebtedness of $2,603 payable to former
shareholders and recording of amounts due to the former shareholders in
accordance with the Purchase Agreement of $350.
(7) Represents transaction fees and other acquisition costs not yet paid.
(8) Represents the repayment of Varn indebtedness of $4,768 and an increase in
the current portion of Day's borrowings under its Amended and Restated
Senior Secured Credit Facility of $4,333.
<PAGE> 9
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
($ in thousands)
(9) The increase in long-term debt relates to the Company's incremental
borrowings under its amended and restated Credit Agreement as follows:
<TABLE>
<CAPTION>
<S> <C>
Borrowings under Amended & Restated Senior Secured Credit Facility $ 69,000
Repayment of outstanding borrowings under Senior Secured Credit Facility (44,531)
Increase in current portion of debt (4,333)
--------
Net increase in Long-term debt $ 20,136
========
</TABLE>
(10) Represents the elimination of Varn's equity and the after-tax impact on
retained earnings of the write-off of the Deferred Financing Fees related
to the original Senior Secured Credit Facility of $1,265.
(11) Represents issuance of 18% convertible preferred stock of $38,500, net of
issuance costs of $235.
<PAGE> 1
Exhibit 99.2
VARN INTERNATIONAL GROUP
------------------------
COMBINED FINANCIAL STATEMENTS AS OF OCTOBER 15, 1999 AND
--------------------------------------------------------
FOR THE PERIOD JANUARY 1, 1999 TO OCTOBER 15, 1999
--------------------------------------------------
TOGETHER WITH AUDITORS' REPORT
------------------------------
<PAGE> 2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders of
Varn International Group:
We have audited the accompanying combined balance sheet of the Varn
International Group (see Notes 1 and 2) as of October 15, 1999, and the combined
statements of income, changes in stockholders' equity and cash flows for the
period January 1, 1999 to October 15, 1999. These financial statements are the
responsibility of the Group's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Varn International Group as
of October 15, 1999, and the results of their operations and their cash flows
for the period January 1, 1999 to October 15, 1999 in conformity with generally
accepted accounting principles.
Roseland, New Jersey
January 7, 2000
<PAGE> 3
VARN INTERNATIONAL GROUP
------------------------
COMBINED BALANCE SHEET - OCTOBER 15, 1999
-----------------------------------------
(000's omitted)
---------------
ASSETS
------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Cash and cash equivalents $ 1,215
Accounts receivable, net of allowance for doubtful accounts of $409 10,291
Inventories (Note 4) 8,249
Prepaid expenses and other current assets 1,260
-------------
Total current assets 21,015
Investment in affiliate 222
Property, plant and equipment, net (Notes 5 and 10) 12,019
Other assets 758
German tax receivable (Note 6) 1,637
-------------
Total assets $35,651
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Notes payable to stockholders (Note 7) $ 4,768
Obligation under capital lease (Note 10) 69
Accounts payable 3,842
Accrued expenses 3,983
Income taxes payable 1,648
-------------
Total current liabilities 14,310
DEFERRED TAX LIABILITIES (Note 6) 386
OBLIGATION UNDER CAPITAL LEASE, less current portion (Note 10) 1,486
OTHER LIABILITIES (Notes 8 and 9) 432
-------------
Total liabilities 16,614
-------------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 10)
STOCKHOLDERS' EQUITY (Note 1):
Common stock 876
Retained earnings 18,107
Accumulated other comprehensive income 54
-------------
Total stockholders' equity 19,037
-------------
Total liabilities and stockholders' equity $35,651
=============
The accompanying notes are an integral part of this balance sheet.
</TABLE>
<PAGE> 4
VARN INTERNATIONAL GROUP
------------------------
COMBINED STATEMENT OF INCOME
----------------------------
FOR THE PERIOD JANUARY 1, 1999 TO OCTOBER 15, 1999
--------------------------------------------------
(000's omitted)
---------------
NET SALES $51,016
COST OF SALES 26,865
--------------
Gross profit 24,151
SELLING AND DELIVERY EXPENSE 8,362
GENERAL AND ADMINISTRATIVE EXPENSE (Note 1) 9,433
--------------
Income from operations 6,356
INTEREST EXPENSE (317)
OTHER INCOME 220
--------------
Income before income taxes 6,259
PROVISION FOR INCOME TAXES (Note 6) 2,176
--------------
Net income $ 4,083
==============
The accompanying notes are an integral part of this statement.
<PAGE> 5
VARN INTERNATIONAL GROUP
------------------------
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
-----------------------------------------------------
FOR THE PERIOD JANUARY 1, 1999 TO OCTOBER 15, 1999
--------------------------------------------------
(000's omitted)
---------------
<TABLE>
<CAPTION>
Accumulated
Other Total
Common Retained Comprehensive Stockholders' Comprehensive
Stock Earnings Income Equity Income
------------- ------------ ------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1999 $876 $16,164 $ 0 $17,040
Comprehensive income -
Net income - 4,083 - 4,083 $4,083
Foreign currency
translation adjustment - - 54 54 54
---------------
Comprehensive income $4,137
===============
Cash dividends - (2,140) - (2,140)
------------- ------------ ------------- --------------
Balances, October 15, 1999 $876 $18,107 $54 $19,037
============= ============ ============= ==============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 6
VARN INTERNATIONAL GROUP
------------------------
COMBINED STATEMENT OF CASH FLOWS
--------------------------------
FOR THE PERIOD JANUARY 1, 1999 TO OCTOBER 15, 1999
--------------------------------------------------
(000's omitted)
---------------
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,083
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation 761
Net loss on disposal of fixed assets 18
Equity in net income of an affiliated company (14)
Deferred income taxes 93
Foreign currency translation 74
Changes in assets and liabilities-
Accounts receivable (642)
Inventories 1,304
Prepaid expenses and other current assets (1,030)
Other assets (212)
Accounts payable (2,286)
Accrued expenses 2,365
Income taxes payable (768)
Other liabilities 8
-------------
Net cash provided by operating activities 3,754
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (644)
Proceeds from sales of fixed assets 7
-------------
Net cash used in investing activities (637)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term borrowings (4,528)
Net change in obligation under capital lease (49)
Cash dividends paid (2,140)
-------------
Net cash used in financing activities (6,717)
-------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (20)
-------------
DECREASE IN CASH AND CASH EQUIVALENTS (3,620)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,835
-------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,215
=============
CASH PAID DURING THE PERIOD:
Interest paid $ 187
=============
Income taxes paid $ 1,678
=============
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE> 7
VARN INTERNATIONAL GROUP
------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
OCTOBER 15, 1999
----------------
(000's omitted, except share amounts)
-------------------------------------
(1) BASIS OF PRESENTATION:
---------------------
Varn International Group (the "Company" or "Varn") is engaged in the
manufacture of a broad range of specialty chemical products and automatic
damping systems used primarily in the printing industry.
The financial statements of Varn are a combination of legal entities
under common control representing the Varn businesses. These businesses
are all owned either directly or indirectly by members of the Von Zwehl
family. Accordingly, the combined financial statements represent the
combination of the businesses listed in Note 2. All material intragroup
balances have been eliminated in the combination.
(2) SCOPE OF THE COMBINATION:
------------------------
Common stock balances as of October 15, 1999 for the Varn entities, which
are included in the combined financial statements, are as follows-
<TABLE>
<CAPTION>
Shares
Entity Par Value Outstanding Amount
------ --------- ----------- -------------
<S> <C> <C> <C>
Graph Tech Corp. $ - 200 $ 48
Varn Holdings Inc. (a) - 932 63
Varn Products Co., Inc. Texas 1.00 1,020 380
JV TEX Realty Corp. 1.00 1,000 151
Varn Holdings PLC - 65,000 167
Varn Aegis Company GmbH - - 67
-------------
$ 876
=============
</TABLE>
(a) Under the terms of the purchase agreement between Day International
Group, Inc. and Varn (see Note 11), JVNJ Realty Corp., and JV Cal
Realty Corp. wholly-owned subsidiaries of Varn Holdings, Inc., were
not acquired and as such are not included in these combined financial
statements.
(3) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
-------------------
Cash and Cash Equivalents-
--------------------------
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
<PAGE> 8
-2-
Inventories-
------------
Inventories consist of raw materials and finished goods to be sold in
the normal course of business. Raw materials are valued at the lower of
cost or market. Finished goods are valued at the lower of cost of the
material plus a charge for labor and plant overhead or market. Costs
are determined by the first-in, first-out (FIFO) method.
Property, Plant and Equipment-
------------------------------
Property, plant and equipment are carried at cost. Major additions are
capitalized; expenditures for repairs and maintenance are charged
against earnings as incurred.
Property, plant and equipment are depreciated using the straight-line
method over the following estimated useful lives-
Buildings and improvements 30 years
Machinery and equipment 10 years
Printing equipment 10 years
Office equipment 7 years
Autos and trucks 5 years
Lab equipment 5 years
Computers 3 years
Use of Estimates-
-----------------
The preparation of the combined financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements. Actual results
could differ from those estimates.
Foreign Currency Translation-
-----------------------------
Assets and liabilities of foreign entities are translated to United
States dollars at the exchange rate in effect at the balance sheet
date. Revenues and expenses are translated at weighted average exchange
rates prevailing during the year.
Approximately 46% of net sales, 81% of net income and 46% of net assets
were derived from foreign entities.
Research and Development-
-------------------------
Research and development costs are charged to operations as incurred.
Such costs were $1,405 for the 9 1/2 month period ended October 15,
1999.
<PAGE> 9
-3-
(4) INVENTORIES:
-----------
The components of net inventories at October 15, 1999 consisted of the
following-
Raw materials $1,665
Finished goods 6,584
-------------
Total inventories $8,249
=============
(5) PROPERTY, PLANT AND EQUIPMENT, NET:
----------------------------------
Property, plant and equipment, net, consisted of the following at
October 15, 1999-
Land and buildings $12,097
Machinery and equipment 5,844
Printing equipment 628
Office equipment 1,591
Autos and trucks 569
Lab equipment 124
Computer equipment 1,300
-------------
Total property, plant and equipment 22,153
Less- Accumulated depreciation 10,134
-------------
Property, plant and equipment, net $12,019
=============
(6) INCOME TAXES:
------------
Income before income taxes for the 9 1/2 months ended October 15, 1999
include the following components-
Domestic income $1,384
Foreign income 4,875
The provision for income taxes consists of the following components-
Current-
Federal $ 385
Foreign 1,588
State 110
----------
2,083
----------
Deferred-
Federal 68
Foreign 15
State 10
----------
93
----------
$ 2,176
==========
<PAGE> 10
-4-
The difference between the income tax provision at the statutory Federal
income tax rate and the income tax provision reflected in the financial
statements is as follows-
Statutory tax provision $2,190
State taxes, net of Federal benefit 78
Impact of foreign operations (117)
Other 25
-------------
$2,176
=============
The components of the deferred tax liability at October 15, 1999 consists
of the following-
Depreciation $ 708
Allowance for doubtful accounts (131)
Inventories (192)
Other 1
----------
$ 386
==========
Included in total assets is a tax receivable from the German tax
authorities primarily relating to a refund due on taxes paid pursuant to
dividend distributions to stockholders.
(7) NOTES PAYABLE TO STOCKHOLDERS:
-----------------------------
Notes payable to stockholders at October 15, 1999 consisted of the
following-
Joseph Von Zwehl, interest bearing, due on demand $2,384
Vincent Von Zwehl, interest bearing, due on demand 2,384
-------------
$4,768
=============
No interest has been accrued under these notes in 1999 based on a mutual
agreement between the Company and these stockholders. In accordance with
the purchase agreement discussed in Note 11, these loans are to be repaid
at the closing of the sale transaction.
(8) OTHER LIABILITIES:
-----------------
Other liabilities at October 15, 1999 consisted of the following-
Deferred compensation (Note 9) $324
Loans payable to affiliate 108
------------
Total other liabilities $432
============
(9) EMPLOYEE BENEFIT PLANS:
----------------------
Profit Sharing Plan-
--------------------
The Company has a defined contribution profit sharing and 401(k) plan
which covers substantially all of its U.S. and Canadian employees.
Profit sharing plan contributions are based on a percentage of
employees' salaries as determined by the Executive Committee and
<PAGE> 11
-5-
are funded on a quarterly basis. The Company matches 25% of employee
401(k) contributions up to a maximum of 4% of each employee's salary.
These matching contributions are funded on an annual basis. Total
contributions for the 9 1/2 months ended October 15, 1999 amounted to
approximately $53.
In addition to the United States, employees of Varn businesses around
the world either participate in defined contribution benefit plans or
are covered by government-sponsored retirement plans. Expense to the
Company for these defined contribution plans was approximately $626 for
the 9 1/2 months ended October 15, 1999.
Deferred Compensation Plan-
---------------------------
In 1998, the Company terminated a salary continuation plan established
for three executives and received the cash surrender value of the
insurance policies established for these plans which approximated $698.
Two of the three key executives covered under this plan were paid their
portion of the cash surrender value of the insurance policies during
1998. The Company does not have any further liability to these
employees. The Company established a rabbi trust for the third
executive currently in the amount of $324 to be invested and maintained
by the Company until this key executive's retirement. The Company
recorded a $324 asset and corresponding liability included within the
other assets and other liabilities accounts, respectively.
(10) COMMITMENTS AND CONTINGENCIES:
------------------------------
The Company enters into various operating leases covering facilities,
office machines and autos. The Company also has a capital lease on a
building in Germany.
Property under this capital lease is included in property, plant and
equipment as follows-
Land and buildings $1,876
Less- Accumulated depreciation 354
------------
Net capital lease assets $1,522
============
The following is a schedule by year of future annual minimum lease
payments as of October 15, 1999-
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Leases Leases
------------ ---------------
<S> <C> <C>
2000 $ 170 $ 435
2001 170 379
2002 170 286
2003 170 389
and thereafter 1,730 433
------------ ---------------
2,410 $ 1,922
===============
Less- Amount representing interest at 6.7% 855
------------
Present value of minimum lease payments
(including current portion of $69) $ 1,555
============
</TABLE>
<PAGE> 12
-6-
(11) SUBSEQUENT EVENT:
-----------------
On August 13, 1999, Varn entered into a stock purchase agreement with
Day International Group, Inc. (Day) whereby Day agreed to acquire all
of the outstanding stock of the entities representing the Varn combined
group (as presented in these financial statements). This transaction
closed on October 19, 1999.
