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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
COMMISSION FILE NO. 33-93644 AND 333-51839
DAY INTERNATIONAL GROUP, INC.
130 West Second Street
Dayton, Ohio 45402
(937) 224-4000
State of Incorporation: Delaware
IRS Employer Identification No.: 31-1436349
Securities Registered Pursuant to Section 12 (b) of the Act: None
Securities Registered Pursuant to Section 12 (g) of the Act: None
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
There were 23,298 Common Shares of the Company, $0.01 per share par value,
outstanding as of August 1, 2002.
DAY INTERNATIONAL GROUP, INC.
INDEX
Pages
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 3
Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows for the six months ended June
30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6 - 17
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 18 - 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 - 23
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
Signature 24
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(IN THOUSANDS)
ASSETS 2002 2001
Cash and cash equivalents $ 781 $ 609
Accounts receivable (less allowance for doubtful accounts of $2,499
and $1,949) 34,473 29,124
Inventories 35,085 34,276
Other current assets 8,989 9,474
--------- ---------
Total current assets 79,328 73,483
Property, plant and equipment, net of accumulated depreciation of $34,810
and $31,054 73,125 72,216
Goodwill (net of accumulated amortization of $19,614) 126,302 125,334
Intangible assets (net of accumulated amortization of $36,269 and $33,127) 29,417 32,554
Other assets 13,543 10,417
--------- ---------
TOTAL ASSETS $ 321,715 $ 314,004
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 10,515 $ 6,688
Current maturities of long-term debt 12,584 12,576
Other current liabilities 23,758 24,185
--------- ---------
Total current liabilities 46,857 43,449
Long-term and subordinated long-term debt 249,252 251,255
Other long-term liabilities 26,358 25,864
Commitments and contingencies
--------- ---------
Total liabilities 322,467 320,568
Redeemable preferred stock 117,712 109,354
STOCKHOLDERS' EQUITY (DEFICIT):
Common shares 1 1
Contra-equity associated with the assumption of majority shareholder's
bridge loan (68,772) (68,772)
Retained earnings (deficit) (46,061) (41,646)
Accumulated other comprehensive loss (3,632) (5,501)
--------- ---------
Total stockholders' equity (deficit) (118,464) (115,918)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 321,715 $ 314,004
========= =========
See notes to condensed consolidated financial statements.
3
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS)
THREE MONTHS SIX MONTHS
2002 2001 2002 2001
NET SALES $ 64,034 $ 64,767 $ 125,220 $ 131,630
COST OF GOODS SOLD 40,166 41,857 79,320 84,393
--------- --------- --------- ---------
GROSS PROFIT 23,868 22,910 45,900 47,237
SELLING, GENERAL AND ADMINISTRATIVE 13,974 13,929 26,378 28,942
RESTRUCTURING COSTS (45) 119 118 619
AMORTIZATION OF INTANGIBLES 201 1,105 401 2,217
MANAGEMENT FEES 250 267 500 542
--------- --------- --------- ---------
OPERATING PROFIT 9,488 7,490 18,503 14,917
OTHER EXPENSES:
Interest expense (including amortization of
deferred financing cost of $587, $576, $1,174
and $1,152) 6,703 7,187 13,473 14,448
Other (income) expense (597) 322 (446) 1,299
--------- --------- --------- ---------
6,106 7,509 13,027 15,747
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) 3,382 (19) 5,476 (830)
INCOME TAX EXPENSE (BENEFIT) 1,328 (365) 2,149 (423)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 2,054 346 3,327 (407)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(NET OF TAX EXPENSE OF $394) (Note G) 616
--------- --------- --------- ---------
NET INCOME (LOSS) 2,054 346 3,943 (407)
PREFERRED STOCK DIVIDENDS (4,158) (3,591) (8,264) (7,137)
AMORTIZATION OF PREFERRED STOCK ISSUANCE COSTS (47) (47) (94) (94)
--------- --------- --------- ---------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (2,151) $ (3,292) $ (4,415) $ (7,638)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
4
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS)
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,943 $ (407)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of change in accounting principle (616)
Depreciation and amortization 6,995 8,959
Deferred income taxes 1,136 (4,724)
Foreign currency (gain) loss (359) 1,318
Non-cash restructuring charge 157
Change in operating assets and liabilities (5,399) (3,015)
------- -------
Net cash provided by operating activities 5,857 2,131
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,454) (6,268)
------- -------
Net cash used in investing activities (3,454) (6,268)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on term loan (6,300) (1,506)
Net proceeds from revolving credit facility 4,150 5,250
------- -------
Net cash provided by (used in) financing activities (2,150) 3,744
EFFECT OF EXCHANGE RATE CHANGES ON CASH (81) (274)
------- -------
Net increase (decrease) in cash and cash equivalents 172 (667)
Cash and cash equivalents at beginning of period 609 922
------- -------
Cash and cash equivalents at end of period $ 781 $ 255
NON-CASH TRANSACTIONS:
Preferred stock dividends $ 8,264 $ 7,137
------- -------
Amortization of preferred stock discount $ 94 $ 94
======= =======
See notes to condensed consolidated financial statements.
5
DAY INTERNATIONAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
A. BASIS OF PRESENTATION
The balance sheet as of December 31, 2001, 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 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. Certain prior year amounts have been reclassified to conform to current
year presentation.
B. INVENTORIES
Inventories as of June 30, 2002 and December 31, 2001, consist of:
2002 2001
Finished goods $20,094 $19,094
Work in process 5,177 3,932
Raw materials 9,814 11,250
------- -------
$35,085 $34,276
======= =======
C. BUSINESS SEGMENTS
The Company produces precision-engineered products, specializing in the design
and customization of consumable image-transfer products for the graphic arts
(printing) industry and consumable fiber handling products for the textile
industry. The Image Transfer segment designs, manufactures and markets
high-quality printing blankets and sleeves, pressroom chemicals and automatic
dampening systems used primarily in the offset and flexographic printing
industries. The Textile Products segment manufactures and markets precision
engineered rubber cots and aprons sold to textile yarn spinners and other
engineered rubber products sold to diverse markets.
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.
6
THREE MONTHS SIX MONTHS
2002 2001 2002 2001
Third party sales:
Image Transfer $ 51,719 $ 51,744 $102,172 $104,393
Textile Products 12,315 13,023 23,048 27,237
-------- -------- -------- --------
Total $ 64,034 $ 64,767 $125,220 $131,630
======== ======== ======== ========
Segment operating profit:
Image Transfer $ 8,934 $ 8,414 $ 18,631 $ 16,745
Textile Products 1,958 1,836 2,963 3,991
-------- -------- -------- --------
Total $ 10,892 $ 10,250 $ 21,594 $ 20,736
======== ======== ======== ========
The following is a reconciliation of the segment operating profit reported above
to the amount reported in the consolidated financial statements:
THREE MONTHS SIX MONTHS
2002 2001 2002 2001
Segment operating profit $ 10,892 $ 10,250 $ 21,594 $ 20,736
APB #16 depreciation and amortization (897) (1,122) (1,811) (2,155)
Non-allocated corporate expenses (101) (147) (261) (286)
Restructuring costs 45 (119) (118) (619)
Amortization of intangibles (201) (1,105) (401) (2,217)
Management fees (250) (267) (500) (542)
-------- -------- -------- --------
Total operating profit $ 9,488 $ 7,490 $ 18,503 $ 14,917
======== ======== ======== ========
D. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) is comprised of net income (loss), net
currency translation gains and losses and net unrealized gains and losses on
cash flow hedges. Total comprehensive income for the three months ended June 30,
2002 and 2001 was $5,158 and $570. Total comprehensive income (loss) for the six
months ended June 30, 2002 and 2001 was $5,812 and $(1,288).
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, PolyOne, have agreed to indemnify the Company
for certain of the costs associated with these matters.
7
F. RESTRUCTURING COSTS
Pre-tax charges of $619 were recorded in the first two quarters of 2001 for
severance and termination costs for relocating its Textile Products operations
from its Asheville, North Carolina, facility to its Greenville, South Carolina,
facility. During the first quarter of 2002, the Company incurred additional
relocation costs of $109, recorded a charge of $157 for write-off of fixed
assets and recorded a reversal of $103 of the reserve for severance costs. As of
June 30, 2002, final severance payments have been paid to 48 associates.
During the fourth quarter of 2001, the Company ceased operations at its Transfer
Media facility in Longwood, Florida. A pre-tax charge of $3,010 was recorded in
2001 for severance costs for 55 associates, write-off of abandoned assets and
costs related to closing the facility. The Company intends to sell the land and
building in 2002. As of June 30, 2002, final severance payments have been paid
to all associates and the remaining reserve of $45 for severance costs was
reversed in the second quarter of 2002.
A pre-tax charge of $988 was recorded during the fourth quarter of 2001 for
severance costs for 21 associates, costs for relocating the Pressroom Chemicals
German sales office and the U.S. sales and administrative functions and loss on
the sale of fixed assets. As of June 30, 2002, final severance payments have
been paid to 20 associates.
Below is a summary of the amounts charged against the reserves for severance and
facility shutdown in 2002:
TEXTILE IMAGE
PRODUCTS TRANSFER
Balance at December 31, 2001 $ 392 $ 1,508
Reversal of reserve (103)
Charges against the reserve for:
Severance costs (193) (549)
Facility shutdown (417)
------- -------
Balance at March 31, 2002 96 542
Reversal of reserve (45)
Charges against the reserve for:
Severance costs (46) (160)
Facility shutdown (32)
------- -------
Balance at June 30, 2002 $ 50 $ 305
======= =======
G. NEW ACCOUNTING PRINCIPLES
In July 2001, the Financial Accounting Standards Board issued SFAS Nos. 141,
"Business Combinations" and 142, "Goodwill and Other Intangible Assets." These
statements will not require amortization of goodwill for periods beginning after
December 15, 2001. Instead an annual review of the
8
recoverability of the goodwill and intangible assets will be required. These
Statements were adopted as of January 1, 2002. As of January 1, 2002, the
Company ceased recording amortization of goodwill of approximately $3,700 per
year and recognized pre-tax income of $1,010 for the cumulative effect of the
change in accounting principle for the amount of the unamortized deferred credit
related to the excess over cost arising from the TPO acquisition. As of June 30,
2002, the Company has completed the initial review of the recoverability of
goodwill and has determined that no impairment of goodwill is indicated.
The following is a reconciliation from reported net income (loss) to net income
(loss) adjusted for the amortization of goodwill and the deferred credit related
to an excess over cost:
THREE MONTHS SIX MONTHS
2002 2001 2002 2001
Income (loss) before cumulative effect of change in
accounting principle-as reported $2,054 $ 346 $3,327 $ (407)
Amortization of goodwill and deferred credits-net
of tax benefit 552 1,108
------ ------ ------ ------
Adjusted income (loss) before cumulative effect of
change in accounting principle $2,054 $ 898 $3,327 $ 701
====== ====== ====== ======
H. 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 June 30, 2002 and December
31, 2001, and the supplemental combining condensed statements of operations and
cash flows for the three and six months ended June 30, 2002 and 2001, 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.
9
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
JUNE 30, 2002
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
ASSETS
Cash and cash equivalents $ 287 $ (287) $ 781 $ $ 781
Accounts receivable-net 13,089 21,384 34,473
Inventories 20,103 14,982 35,085
Other current assets 6,315 2,674 8,989
--------- --------- --------- --------- ---------
TOTAL CURRENT ASSETS 287 39,220 39,821 79,328
Intercompany 260,512 (7,532) 7,532 (260,512)
Property, plant and equipment, net 48,561 24,564 73,125
Investment in subsidiaries (45,166) 30,139 (4,918) 19,945
Intangible and other assets 152,044 17,218 169,262
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 215,633 $ 262,432 $ 84,217 $(240,567) $ 321,715
--------- --------- --------- --------- ---------
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Accounts payable $ $ 4,100 $ 6,415 $ $ 10,515
Current maturities of long-term debt 12,511 73 12,584
Other current liabilities 4,301 7,380 12,077 23,758
--------- --------- --------- --------- ---------
TOTAL CURRENT LIABILITIES 16,812 11,480 18,565 46,857
Intercompany (48,428) 310,610 8,243 (270,425) -
Long-term and subordinated long-term
debt 248,001 1,251 249,252
Other long-term liabilities 18,128 8,230 26,358
Redeemable preferred stock 117,712 117,712
Total stockholders' equity (deficit) (118,464) (77,786) 47,928 29,858 (118,464)
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT) $ 215,633 $ 262,432 $ 84,217 $(240,567) $ 321,715
========= ========= ========= ========= =========
10
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
DECEMBER 31, 2001
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
ASSETS
Cash and cash equivalents $ 702 $ (702) $ 609 $ $ 609
Accounts receivable - net 12,029 17,095 29,124
Inventories 20,687 13,589 34,276
Other assets 5,322 4,152 9,474
--------- --------- --------- --------- ---------
TOTAL CURRENT ASSETS 702 37,336 35,445 73,483
Intercompany 262,642 (13,228) 13,228 (262,642)
Property, plant and equipment - net 48,940 23,276 72,216
Investment in subsidiaries (49,142) 31,138 (5,719) 23,723
Intangible and other assets 155,033 13,272 168,305
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 214,202 $ 259,219 $ 79,502 $(238,919) $ 314,004
========= ========= ========= ========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Accounts payable $ $ 3,373 $ 3,315 $ $ 6,688
Current maturities of long-term debt 12,511 65 12,576
Accrued associate related costs and other
expenses 4,512 7,606 12,067 24,185
--------- --------- --------- --------- ---------
TOTAL CURRENT LIABILITIES 17,023 10,979 15,447 43,449
Intercompany (46,388) 307,813 14,862 (276,287)
Long-term and subordinated long-term
debt 250,131 1,124 251,255
Other long-term liabilities 17,837 8,027 25,864
Redeemable preferred stock 109,354 109,354
Total stockholders' equity (deficit) (115,918) (77,410) 40,042 37,368 (115,918)
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT) $ 214,202 $ 259,219 $ 79,502 $(238,919) $ 314,004
========= ========= ========= ========= =========
11
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 36,913 $ 27,121 $ $ 64,034
Cost of goods sold 23,197 16,969 40,166
-------- -------- -------- -------- --------
Gross profit 13,716 10,152 23,868
Selling, general and administrative 38 8,501 5,435 13,974
Restructuring costs (45) (45)
Amortization of intangibles 201 201
Management fees 250 250
-------- -------- -------- -------- --------
Operating profit (38) 4,809 4,717 9,488
Other expenses (income):
Equity in (earnings) loss of subsidiaries (2,076) (2,835) 4,911
Interest expense 6,703 6,703
Other (income) expense (1) (896) 300 (597)
-------- -------- -------- -------- --------
Income (loss) before income taxes 2,039 1,837 4,417 (4,911) 3,382
Income tax expense (benefit) (15) (239) 1,582 1,328
-------- -------- -------- -------- --------
Net income (loss) $ 2,054 $ 2,076 $ 2,835 $ (4,911) $ 2,054
======== ======== ======== ======== ========
12
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 38,398 $ 26,369 $ $ 64,767
Cost of goods sold 24,828 17,029 41,857
-------- -------- -------- -------- --------
Gross profit 13,570 9,340 22,910
Selling, general and administrative 19 8,688 5,222 13,929
Restructuring costs 119 119
Amortization of intangibles 1,043 62 1,105
Management fees 267 267
-------- -------- -------- -------- --------
Operating profit (19) 3,453 4,056 7,490
Other (income) expense:
Equity in (earnings) loss of subsidiaries (355) (2,493) 2,848
Interest expense 7,162 25 7,187
Other (income) expense (3) (185) 510 322
-------- -------- -------- -------- --------
Income (loss) before income taxes 339 (1,031) 3,521 (2,848) (19)
Income tax expense (benefit) (7) (1,386) 1,028 (365)
-------- -------- -------- -------- --------
Net income (loss) $ 346 $ 355 $ 2,493 $ (2,848) $ 346
======== ======== ======== ======== ========
13
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 73,134 $ 52,086 $ $ 125,220
Cost of goods sold 46,450 32,870 79,320
--------- --------- --------- --------- ---------
Gross profit 26,684 19,216 45,900
Selling, general and administrative 54 16,078 10,246 26,378
Restructuring costs 118 118
Amortization of intangibles 401 401
Management fees 500 500
--------- --------- --------- --------- ---------
Operating profit (54) 9,587 8,970 18,503
Other expenses (income):
Equity in (earnings) loss of subsidiaries (3,975) (5,965) 9,940
Interest expense 13,472 1 13,473
Other (income) expense (1) (1,253) 808 (446)
--------- --------- --------- --------- ---------
Income (loss) before income taxes 3,922 3,333 8,161 (9,940) 5,476
Income tax expense (benefit) (21) (642) 2,812 2,149
--------- --------- --------- --------- ---------
Income (loss) before cumulative
effect of change in accounting
principles 3,943 3,975 5,349 (9,940) 3,327
Cumulative effect of change in
accounting principles 616 616
--------- --------- --------- --------- ---------
Net income (loss) $ 3,943 $ 3,975 $ 5,965 $ (9,940) $ 3,943
========= ========= ========= ========= =========
14
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 77,771 $ 53,859 $ $ 131,630
Cost of goods sold 50,499 33,894 84,393
--------- --------- --------- --------- ---------
Gross profit 27,272 19,965 47,237
Selling, general and administrative 43 18,505 10,394 28,942
Restructuring costs 619 619
Amortization of intangibles 2,088 129 2,217
Management fees 542 542
--------- --------- --------- --------- ---------
Operating profit (43) 5,518 9,442 14,917
Other (income) expense:
Equity in (earnings) losses of
subsidiaries 384 (5,316) 4,932
Interest expense 14,395 53 14,448
Other (income) expense (5) 497 807 1,299
--------- --------- --------- --------- ---------
Income (loss) before income taxes (422) (4,058) 8,582 (4,932) (830)
Income tax expense (benefit) (15) (3,674) 3,266 (423)
--------- --------- --------- --------- ---------
Net income (loss) $ (407) $ (384) $ 5,316 $ (4,932) $ (407)
========= ========= ========= ========= =========
15
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Cash Flows From Operating Activities:
Net income $ 3,943 $ 3,975 $ 5,965 $(9,940) $ 3,943
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Cumulative effect of change in
accounting principles (616) (616)
Depreciation and amortization 5,861 1,134 6,995
Equity in (earnings) loss of subsidiaries (3,975) (5,965) 9,940
Deferred income taxes and other 1,155 (19) 1,136
Foreign currency (gain) loss (627) 268 (359)
Non-cash restructuring charge 157 157
Changes in operating assets and
liabilities (211) 1,001 (6,189) (5,399)
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities (243) 5,557 543 5,857
Cash Flows From Investing Activities:
Capital expenditures (2,477) (977) (3,454)
------- ------- ------- ------- -------
Net cash used in investing activities (2,477) (977) (3,454)
Cash Flows From Financing Activities:
Payments on term loan (6,300) (6,300)
Net borrowings on credit facilities 4,150 4,150
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities (2,150) (2,150)
Intercompany transfers and dividends 1,978 (2,665) 687
Effects of exchange rates on cash (81) (81)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents (415) 415 172 172
Cash and cash equivalents at beginning
of period 702 (702) 609 609
------- ------- ------- ------- -------
Cash and cash equivalents at end of
period $ 287 $ (287) $ 781 $ $ 781
======= ======= ======= ======= =======
16
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Cash Flows From Operating Activities:
Net income (loss) $ (407) $ (384) $ 5,316 $(4,932) $ (407)
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 7,564 1,395 8,959
Equity in (earnings) loss of subsidiaries 384 (5,316) 4,932
Deferred income taxes and other (4,160) (564) (4,724)
Foreign currency loss 895 423 1,318
Changes in operating assets and
liabilities 461 (1,526) (1,950) (3,015)
------- ------- ------- ------ -------
Net cash provided by (used in)
operating activities 438 (2,927) 4,620 2,131
Cash Flows From Investing Activities:
Capital expenditures (4,069) (2,199) (6,268)
------- ------- ------- ------ -------
Net cash used in investing activities (4,069) (2,199) (6,268)
Cash Flows From Financing Activities:
Payments on term loan (1,500) (6) (1,506)
Net borrowings on credit facilities 5,250 5,250
------- ------- ------- ------ -------
Net cash provided by (used in)
financing activities 3,750 (6) 3,744
Intercompany transfers and dividends (4,011) 6,819 (2,808)
Effects of exchange rates on cash (274) (274)
------- ------- ------- ------ -------
Net increase (decrease) in cash and
cash equivalents 177 (177) (667) (667)
Cash and cash equivalents at
beginning of period 590 (590) 922 922
------- ------- ------- ------ -------
Cash and cash equivalents at end of
period $ 767 $ (767) $ 255 $ $ 255
======= ======= ======= ====== =======
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT
This Quarterly Report contains forward-looking statements within the meaning of
the Securities Act of 1933. These are subject to certain risks and
uncertainties, including those identified below, which could affect the
Company's actual results and cause such results to differ materially from those
expressed in forward-looking statements. The words "believe," "anticipate,"
"expect," "intend," "will likely result," "will continue," and similar
expressions identify forward-looking statements.
Factors that could cause actual results to differ materially from the
forward-looking statements include but are not limited to (i) the effect of
leverage, including the limitations imposed by the Company's various debt
instruments; (ii) risks related to significant operations in foreign countries,
including the translation of operating results to the U.S. dollar; (iii) the
timely development and market acceptance of new products; (iv) the impact of
competitive products and pricing; (v) the effect of changing general and
industry specific economic conditions; (vi) the impact of environmental
regulations; and (vii) the potential for technology obsolescence.
While made in good faith and with a reasonable basis based on information
currently available to the Company's management, there is no assurance that any
such forward-looking statements will be achieved or accomplished. The Company is
under no obligation to update any forward-looking statements to the extent it
becomes aware that they are not achieved or likely to be achieved for any
reason.
BASIS OF PRESENTATION
The following table sets forth selected financial information in millions of
dollars and as a percentage of net sales:
THREE MONTHS SIX MONTHS
2002 2001 2002 2001
$ % $ % $ % $ %
Net sales 64.0 100.0 64.8 100.0 125.2 100.0 131.6 100.0
Costs of goods sold 40.1 62.7 41.9 64.6 79.3 63.3 84.4 64.1
------ ------- ------- ------ ------ ------- ------- ------
Gross profit 23.9 37.3 22.9 35.4 45.9 36.7 47.2 35.9
Selling, general and administrative expense 14.0 21.8 13.9 21.5 26.4 21.1 29.0 22.0
Restructuring costs 0.1 0.2 0.1 0.1 0.6 0.5
Amortization of intangibles 0.2 0.3 1.1 1.7 0.4 0.3 2.2 1.7
Management fees 0.2 0.4 0.3 0.4 0.5 0.4 0.5 0.4
------ ------- ------- ------ ------ ------- ------- ------
Operating profit 9.5 14.8 7.5 11.6 18.5 14.8 14.9 11.3
====== ======= ======= ====== ====== ======= ======= ======
18
COMPARISON OF RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002, COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Net sales decreased $0.7 million (1.1%) to $64.0 million. Image Transfer's sales
were flat at $51.7 million, primarily as a result of lower sales volume in the
United States of $1.6 million, offset by positive foreign currency rate changes
of $1.0 million. The lower U.S. Image Transfer sales volume was as a result of
the weak U.S. printing industry in the quarter. Textile Products' sales
decreased $0.7 million (5.4%) to $12.3 million, primarily as a result of lower
sales volume in the United States of $0.6 million and in Europe of $0.4 million,
offset by positive foreign currency rate changes of $0.3 million. The lower U.S.
Textile Products sales volume was primarily a result of customers consolidating
and closing textile mills as a result of weak demand for U.S. produced textile
products combined with a lower global demand for spun yarn. The strong U.S.
dollar over the past several years has reduced U.S. textile exports and caused
an increase of lower-cost textile imports into the United States.
Gross profit increased $1.0 million (4.2%) to $23.9 million. As a percentage of
net sales, gross profit increased to 37.3% for the three months ended June 30,
2002, compared to 35.4% for the three months ended June 30, 2001 and 36.0% for
the three months ended March 31, 2002, primarily as a result of benefits
realized from the restructuring activities performed in the second half of 2001
and the first quarter of 2002.
Selling, general and administrative expense ("SG&A") was flat at $14.0 million.
As a percentage of net sales, SG&A increased slightly to approximately 21.8%
from 21.5%. Foreign currency translation rate changes had a minimal impact on
SG&A in the second quarter of 2002 compared to the second quarter of 2001.
During the fourth quarter of 2001, the Company ceased operations at its Transfer
Media facility in Longwood, Florida. A pre-tax charge of $3,010 was recorded in
2001 for severance costs for 55 associates, write-off of abandoned assets and
costs related to closing the facility. As of June 30, 2002, final severance
payments have been paid to all associates and the remaining reserve of $45 for
severance costs was reversed in the second quarter of 2002.
Operating profit increased $2.0 million (26.1%) to $9.5 million, primarily as a
result of decrease in amortization of goodwill from the adoption of SFAS No. 142
($0.9 million) and the higher gross margin. As a percentage of net sales,
operating profit increased to 14.8% for the three months ended June 30, 2002,
from 11.6% for the comparable period in 2001. Excluding the restructuring
charges and the amortization of goodwill in 2001, operating profit as a
percentage of net sales would have been 14.8% in 2002 and 13.1% in 2001. Image
Transfer's operating profit increased $0.5 million (6.2%) to $8.9 million. As a
percentage of net sales, Image Transfer's operating profit increased to 17.3%
for the three months ended June 30, 2002, from 16.3% in 2001, primarily as a
result of benefits realized from the restructuring activities performed in 2001.
Textile
19
Products' operating profit increased $0.1 million (6.6%) to $2.0 million,
excluding the restructuring costs in 2001. As a percentage of net sales, Textile
Products' operating profit (excluding the restructuring costs in 2001) increased
to 15.9% for the three months ended June 30, 2002, from 14.1% in 2001, primarily
as a result of increased margins on sales from the European operations.
Other income was $0.6 million for the three months ended June 30, 2002, compared
to other expense of $0.3 million for the three months ended June 30, 2001. The
other (income) expense is primarily due to foreign currency transaction (gains)
losses incurred in the normal course of international subsidiaries doing
business in other than their functional currency as well as a result of
intercompany financing arrangements.
The effective tax rate for the second quarter of 2002 was 39.3%. In 2001 a
benefit of $0.4 million was recorded on a slight loss before taxes. The
difference in the effective tax rate for 2001 compared to the statutory rates
was as a result of non-deductible expenses and international earnings taxable in
the United States.
SIX MONTHS ENDED JUNE 30, 2002, COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Net sales decreased $6.4 million (4.9%) to $125.2 million. Image Transfer's
sales decreased $2.2 million (2.1%) to $102.2 million, primarily as a result of
lower sales volume in the United States. The lower U.S. Image Transfer sales
volume was as a result of the weak U.S. printing industry in 2002. Textile
Products' sales decreased $4.2 million (15.4%) to $23.0 million, primarily as a
result of lower sales volume in the United States of $2.6 million and in Europe
of $1.6 million. The lower U.S. Textile Products sales volume was primarily a
result of customers consolidating and closing textile mills as a result of weak
demand for U.S. produced textile products combined with a lower global demand
for spun yarn. The strong U.S. dollar over the past several years has reduced
U.S. textile exports and caused an increase of lower-cost textile imports into
the United States.
Gross profit decreased $1.3 million (2.8%) to $45.9 million. As a percentage of
net sales, gross profit increased to 36.7% for the six months ended June 30,
2002, compared to 35.9% for the six months ended June 30, 2001, primarily as a
result of benefits realized from the restructuring activities performed in the
second half of 2001, offset by lower Textile sales volumes.
Selling, general and administrative expense ("SG&A") decreased $2.6 million
(8.9%) to $26.4 million. As a percentage of net sales, SG&A decreased to
approximately 21.1% from 22.0%, primarily as a result of benefits realized from
the restructuring activities performed in 2001. Foreign currency translation
rate changes had a minimal impact on SG&A in the first two quarters of 2002
compared to 2001.
A pre-tax charge of $0.5 million was recorded in the first quarter of 2001 for
severance and termination costs to relocate the Textile Products operations from
its Asheville, North Carolina, facility to its Greenville, South Carolina,
facility. During the first quarter of 2002, the Company reversed $0.1 million of
the reserve. Additionally, a pre-tax charge of $0.3 has been recorded in the
first quarter ended of 2002 for relocation of machinery and equipment and
write-off of abandoned assets.
20
During the fourth quarter of 2001, the Company ceased operations at its Transfer
Media facility in Longwood, Florida. A pre-tax charge of $3,010 was recorded in
2001 for severance costs for 55 associates, write-off of abandoned assets and
costs related to closing the facility. As of June 30, 2002, final severance
payments have been paid to all associates and the remaining reserve of $45 for
severance costs was reversed in the second quarter of 2002.
Operating profit increased $3.5 million (23.7%) to $18.5 million, primarily as a
result of decrease in amortization of goodwill from the adoption of SFAS No. 142
($1.8 million) and the reduction in SG&A. As a percentage of net sales,
operating profit increased to 14.8% for the six months ended June 30, 2002, from
11.3% for the comparable period in 2001. Excluding the restructuring charges and
the amortization of goodwill in 2001, operating profit as a percentage of net
sales would have been 14.9% in 2002 and 13.2% in 2001. Image Transfer's
operating profit increased $1.9 million (11.3%) to $18.6 million. As a
percentage of net sales, Image Transfer's operating profit increased to 18.2%
for the six months ended June 30, 2002, from 16.0% in 2001, primarily as a
result of benefits realized from the restructuring activities performed in 2001.
Textile Products' operating profit decreased $1.0 million (25.8%) to $3.0
million, excluding the restructuring costs in 2002 and 2001 as a result of the
large decrease in sales volume. As a percentage of net sales, Textile Products'
operating profit (excluding the restructuring costs in 2002 and 2001) decreased
to 12.9% for the six months ended June 30, 2002, from 14.7% in 2001, primarily
as a result of higher than expected training and startup costs in the first
quarter as a result of the recent relocation of production to the Greenville,
South Carolina, facility.
Other income was $0.4 million for the six months ended June 30, 2002, compared
to other expense of $1.3 million for the six months ended June 30, 2001. The
other (income) expense is primarily due to foreign currency transaction losses
incurred in the normal course of international subsidiaries doing business in
other than their functional currency as well as a result of intercompany
financing arrangements.
The effective tax rate benefit for the first two quarters of 2002 was 39.2%
compared to 51.0% for 2001. The difference in the effective tax rate for 2001
compared to the statutory rates was as a result of non-deductible expenses and
international earnings taxable in the United States.
As of January 1, 2002, the Company adopted SFAS Nos. 141, "Business
Combinations" and 142, "Goodwill and Other Intangible Assets" and ceased
recording amortization of goodwill of approximately $3.7 million per year and
recognized pre-tax income of $1.0 million for the cumulative effect of the
change in accounting principle for the amount of the unamortized deferred credit
related to the excess over cost arising from the TPO acquisition. As of June 30,
2002, the Company has completed the initial review of the recoverability of
goodwill and has determined that no impairment of goodwill is indicated.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated sufficient funds from its operations to
fund its working
21
capital and capital expenditure requirements. The Company is able to maintain
relatively low levels of working capital as its converters and distributors
typically carry a greater portion of inventory and finance receivables of the
Company's end users.
Capital expenditures were $3.5 million and $6.3 million for the six months ended
June 30, 2002 and 2001, respectively.
As of June 30, 2002, there was $8.3 million outstanding under the Revolving
Credit Facility and the Company had approximately $11.3 million available under
the Revolving Credit Facility (calculated by applying the applicable borrowing
base limitation). The Company's aggregate indebtedness at June 30, 2002, is
approximately $261.8 million and the aggregate liquidation preferences of the
Exchangeable Preferred Stock is $58.7 million and the Convertible Preferred
Stock is $60.4 million. The Company is highly leveraged. The Company's ability
to operate its business, service its debt requirements and reduce its total debt
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. See the Company's Annual Report on Form 10-K for a
more extensive discussion of liquidity and capital resources.
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 $12.7 million at June 30, 2002 and
$9.3 million at December 31, 2001. These contracts generally expire within three
to twelve months. Foreign currency transaction (gains) losses, included in other
(income) expense, were $(0.5) million and $0.3 million for the three months
ended June 30, 2002 and 2001 and $(0.3) million and $1.3 million for the six
months ended June 30, 2002 and 2001.
22
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 utilizes a mix of debt
maturities along with both fixed- and variable-rate debt to manage its exposure
to changes in interest rates and to minimize interest expense. The Company does
not expect interest rate changes to have a material effect on income or cash
flows in 2002, although there can be no assurance that interest rates will not
materially change.
COMMODITY RISKS
Rubber polymers and fabrics are key components in most of the Image Transfer and
Textile products. The Company is exposed to changes in the costs of these
components. In addition, Image Transfer's pressroom chemical products are
exposed to changes in the cost of certain petroleum-based components. The
largest raw material component in the pressroom chemical 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.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
(99) MISCELLANEOUS
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
b. Reports on Form 8-K
On June 4, 2002, the Company filed a Form 8-K disclosing that it had
appointed Ernst & Young LLP as independent auditor and dismissed the
firm of Arthur Andersen LLP.
23
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: August 13, 2002 /s/ Thomas J. Koenig
--------------- ---------------------
Thomas J. Koenig
Vice President and
Chief Financial Officer
(Principal Financial Officer)
24