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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NOS. 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
At the close of business on March 1, 2003:
Number of shares of common stock outstanding 23,298
Aggregate market value of the Company's voting and non-
voting common stock held by non-affiliates $ 0
DOCUMENTS INCORPORATED BY REFERENCE - None
Except as otherwise stated or unless the context otherwise requires, references
to the "Company" include Day International Group, Inc., a Delaware corporation
that is the Registrant, and each of its subsidiaries. The Company's address is
P.O. Box 338, 130 West Second Street, Dayton, Ohio 45401-0338, and its telephone
number is (937) 224-4000. The Company's periodic reports filed with the
Securities and Exchange Commission ("SEC") are available at the SEC's website
(www.sec.gov).
Except as otherwise stated, the information contained in this report is given as
of December 31, 2002, the end of the Company's latest fiscal year.
SAFE HARBOR STATEMENT; INDUSTRY DATA
This Annual 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 international
countries, including the translation of operating results to the U.S. dollar;
(iii) the timely development and market acceptance of new products; (v) the
effect of competitive products and pricing; (v) the effect of changing general
and industry specific economic conditions; (vi) the effect 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.
Market data used throughout this report was obtained from internal company
surveys and industry publications. Industry publications generally indicate that
the information contained therein has been obtained from sources believed to be
reliable, but the accuracy and completeness of such information is not
guaranteed. The Company has not independently verified any of such market data.
Similarly, internal company surveys, while believed by the Company to be
reliable, have not been verified by any independent sources.
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PART I
ITEM 1. BUSINESS
COMPANY BACKGROUND
The Company is one of the world's leading producers of 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 Company consists of two
segments: the Image Transfer segment and the Textile Products segment. The Image
Transfer segment consists of the Transfer Media division and the Pressroom
Chemicals division. The Transfer Media division is the world's largest designer,
manufacturer and marketer of high-quality printing blankets and sleeves for use
in offset printing. The Company estimates that in 2002 it had the number one
market share in offset-printing blankets and sleeves in North America and
worldwide. The Company is one of the world's largest manufacturers and marketers
of sleeves for use in flexographic printing. The Pressroom Chemicals division is
a leading worldwide supplier of pressroom chemicals to the printing industry and
also manufactures the Kompac brand of automatic dampening systems for printing
presses. The Textile Products segment is one of the world's largest
manufacturers and marketers of precision engineered rubber cots, aprons and
other fabricated rubber fiber handling components sold to textile yarn spinners
worldwide.
Affiliates of GSC Partners and SG Capital Partners LLC own substantially all of
the common stock of the Company, with the Company's management holding the
balance of the common stock.
Effective December 31, 1998, the Company acquired Rotec Hulsensysteme GmbH
("Rotec"). Rotec is a world leader in sleeve technology, producing a wide array
of sleeves and rollers used in the flexographic printing process.
On September 30, 1999, the Company acquired the textile products operations of
Armstrong World Industries, Inc. ("TPO"). TPO is a leading manufacturer and
marketer of high-end precision engineered rubber cots and aprons sold to textile
yarn spinners worldwide and was a major competitor of Day's textile division.
On October 19, 1999, the Company acquired Varn International ("Varn" or
"Pressroom Chemicals"). Varn manufactures pressroom chemicals and dampening
systems for the printing industry.
See the Notes to the Consolidated Financial Statements for more information on
business segments.
IMAGE TRANSFER
The Image Transfer segment specializes in selling consumable products to the
graphic arts (printing) industry, primarily those used in offset printing.
Offset is the primary printing process for long-run, high-speed applications,
such as the printing of magazines, annual reports, catalogs, direct mail and
newspapers. Flexographic and digital, two other printing processes, are
currently used primarily in short-run, lower speed applications, such as for
printing brochures and packaging material. The Company believes that
applications for image transfer products within flexographic and digital
printing processes will increase significantly and that advances in digital
technologies will complement offset
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printing processes and will provide additional opportunities for consumable
products. It is generally expected that the demand for these processes will grow
rapidly and that they will be used for an increasing amount of printing jobs. If
these other technologies develop so that they compete effectively with offset
printing in the high-speed, long-run segment of the printing industry, and such
technologies are widely adopted, the business of Image Transfer could be
adversely affected. There can be no assurance that the Company will be able to
effectively develop products for these technologies or to maintain its market
leadership if such processes replace offset printing to any significant extent.
The Company is developing blankets, sleeves and belts for these new printing
machine technologies in conjunction with the companies working on the printing
machine technologies. Due to the large number of offset printing presses
installed in the United States, management expects that the offset process will
continue to be the method of choice for high-quality, low-cost, long runs.
Products designed for use in offset printing generate the majority of the sales
of Image Transfer.
Transfer Media
Offset printing blankets are highly engineered products manufactured to narrow
tolerances and precise specifications. They are composed of multiple layers of
fabric, rubber and adhesives that determine performance features on the printing
press and overall quality of the printing job. Offset printing sleeves are
highly engineered "tubular" blankets that operate at speeds 20% to 30% faster
than those of standard presses. Blankets and sleeves accept ink from cylindrical
printing plates and transfer it to a broad range of paper stocks and other
substrates. Blankets and sleeves are a major determinant of the quality of the
image resolution and consistency of the printed material, as they are required
to perform consistently over a broad range of press speeds and printing
pressures with a wide variety of papers, inks and other chemicals. Blankets and
sleeves are consumable and are replaced at regular intervals depending on the
process used and printing requirements. Due to the importance of blankets and
sleeves in determining the overall quality of the printing job, and because
their cost typically represents less than 1% of the cost of the printed page,
price is only one of the factors in the end-user's purchase decision.
Pressroom Chemicals
Pressroom Chemicals manufactures two categories of pressroom products: pressroom
chemicals and dampening systems. Pressroom Chemicals manufactures over 100
different pressroom chemicals, which can be classified into the following
categories: (i) roller and blanket washes, which are used to remove ink and
glaze from the surface of the rollers and blankets on the printing press; (ii)
fountain solutions, which are used to prevent ink from migrating to non-print
areas of the printing plate; (iii) anti-setoff powders which are used by sheet
fed and letter press printers to prevent ink from transferring from the top of
one sheet to the bottom of the next; (iv) lithographic chemicals and
specialties; and (v) silicones, which are used in heatset web offset to provide
support in certain printing processes. Pressroom Chemicals' products can be
grouped into standard and custom products. Product lines are formulated to meet
regional requirements. For example, high volume printing operations, such as
major daily newspapers and commercial heatset web, often require custom fountain
solutions.
Products
The Company offers a full line of high-quality, name brand printing blankets and
sleeves to both web-fed (continuous roll) and sheet-fed (individual sheet)
offset printers under the "Day," "David M" and "Freedom" brands. The Company's
printing blankets and sleeves are used to print magazines,
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advertising material, business forms, packaging, newspapers and other printed
material. As a result of the superior quality, reliability and value of the
Company's printing blankets and sleeves and its customer service, the Company is
able to command premium prices for its products.
The Company's leading printing blankets are the 9500 dayGraphica(R), 4000
dayGraphica(R), 3000 Patriot(R), 3610 dayGraphica(R), 8500 AccuDot(R),
QuantaLith(R) Gold and QuantaLith(R) Blue lines, which produce high-quality
images, particularly on high-speed printing presses. The Freedom brand was
introduced in 2001 to address the group of customers who were looking for an
economically priced product where quality was a secondary consideration. In
addition to its traditional line of printing blankets, the Company is one of
four global licensees to manufacture tubular, seamless printing sleeves for use
on Heidelberg Web Press, Inc.'s "gapless" webpresses. During 2002, the Company
and Heidelberg revised the license agreement such that Day will be the exclusive
licensee after the expiration of the other licensees' agreements through June
2004.
During the latter part of 2001, the Company began producing consumable products
for digital printing presses. Sales of these products are expected to grow over
the next couple of years as digital printing presses are sold that utilize these
products. The Company is evaluating the production of other prototypes for new
short-run color printing processes.
Transfer Media manufactures a wide array of sleeves used in the flexographic
printing process under the Rotec name. Rotec gained industry prominence in 1993
with the introduction of the compressible sleeve, a product innovation enabling
flexographic printers to achieve higher levels of print quality. The base
technology for the flexographic sleeve has the potential for use in other
printing segments as well (e.g., gravure and offset), which may expand the
market segments for sleeve technology.
Transfer Media also manufactures and sells two lines of specialty products
consisting of (i) pre-inked porous rolls for use in business machines, automated
bank teller machines, ticket machines and credit card imprinters and (ii) cast
urethane mats used by the box board corrugating industry as a backing material
in cutting operations. The Company sells printing accessories such as cylinder
packing papers and aluminum bars for mounting blankets onto press cylinders. In
addition, the Company sells custom rubber compounds to several wire coaters in
Europe.
Pressroom Chemicals has developed products that speed wash-up, color changes and
blanket and roller maintenance; all formulated to reduce downtime and improve
productivity. Roller and blanket washes are used to remove ink and glaze from
the surface of the rollers and blankets on the printing press. Pressroom
Chemicals makes over 25 washes, grouped into five different categories: premium,
environmental, general purpose, fast drying and specialty. Pressroom Chemicals
is a market leader in the area of environmental washes, which constitutes an
important subcategory of Pressroom Chemicals' overall roller and blanket washes
business.
Pressroom Chemicals has created a family of fountain solutions, which are used
to prevent ink from migrating to non-print areas of the printing plate, to cover
all requirements from high-speed web printing presses down to small offset
duplicating printing presses. The fountain solutions and fountain additives are
adjusted for water condition and properly balanced and fortified to improve
print quality and press productivity. Pressroom Chemicals has created a line of
alcohol-free fountain solutions formulated to eliminate the use of isopropyl
alcohol from the process thus improving the pressroom environment.
5
Antisetoff powders are used extensively by sheetfed, offset and letterpress
printers to prevent ink from transferring from the top of one sheet to the
bottom of the next. Pressroom Chemicals offers an extensive range of silicone
and conventional antisetoff powders to meet all industry requirements.
Lithographic chemicals and specialties include a wide range of products
(including deglazers, additives, plate cleaners, aerosols) formulated to meet
the evolving needs of the printing industry.
Silicones are used in heatset web offset printing to provide slip to the sheet
as it passes over the former board. Pressroom Chemicals offers an extensive line
of conventional silicones, as well as new technology silicones.
Pressroom Chemicals also manufactures the patented Kompac Dampening System and
other mechanical devices for offset printing presses. Pressroom Chemicals
manufactures six different Kompac Dampening Systems models to fit more than 8
different presses, both for new and retrofit applications. Kompac Dampening
Systems consume other products manufactured by Pressroom Chemicals, such as
fountain solutions.
Sales and Distribution
Image Transfer has adopted an integrated approach to product development,
marketing, sales and distribution. Sales professionals in the United States have
strong customer relationships and superior technical expertise. The
international sales force includes sales professionals in Australia, Canada,
France, Germany, Hong Kong, Italy, Japan, Malaysia, Mexico, Russia, Scandinavia,
South Africa and the United Kingdom.
Image Transfer's sales force calls directly on end-users and promotes the
quality and technical features of the Company's products to pressroom foremen,
purchasing agents, plant managers and press operators. Depending on the market
and product, the end-users can then order directly from the Company or through
authorized converters or dealers. Image Transfer distributes a majority of its
products through a large network of converters who buy and cut printing blanket
rolls to customized orders and dealers and sub-dealers who buy finished
products, store inventory and hold receivables. Converters are value-added
dealers who typically purchase rolls of uncut printing blankets from the Company
and then cut, finish and package the blankets for sale to dealers or end-users.
The Company believes that it has one of the most effective networks of
converters and dealers in the industry. The sales force works closely with
converters and dealers, through joint calling efforts on end-users and training
programs. In addition, the sales and technical associates work directly with
large end-users to identify the printing blankets and sleeves that best suit
that printer's particular needs and formulate solutions to complex printing
problems. Sales made to Network Distribution International, Inc. ("NDI"), a
major U.S. converter, accounted for approximately 10% of total net sales in 2002
and 2001 and 12% in 2000. The Company's sales to NDI are not governed by a
written contract between the parties. In the event that NDI was to significantly
reduce or terminate its purchases of blankets and sleeves from the Company, the
Company's financial condition or results of operations could be adversely
affected. The Company has not received any indication that NDI intends to
discontinue or otherwise substantially reduce its relationship with the Company.
6
TEXTILE PRODUCTS
The Textile Products segment manufactures highly engineered rubber rollers,
known as cots, and flexible belts, known as aprons, for utilization in yarn
spinning machinery. Industry reports characterize the United States as the most
technologically advanced producer of textile products in the world. As a result
of continuing technological improvements in automated high-speed spinning
frames, customers are demanding cots and aprons of higher quality and greater
flexibility to meet their specialized needs and are willing to pay a premium for
cots and aprons that meet these standards. The Company is known as a leader in
technological innovation and quality and has the broadest line of cots and
aprons and related products of any domestic manufacturer.
Products
With the broadest line of cots and aprons of any domestic manufacturer, the
Company offers its customers both general purpose and specialty cots and aprons
recognized in the marketplace under the DAYtex(R) and Accotex(R) brand names,
with over 4,000 different SKUs. General-purpose cots and aprons include a full
line of products designed for "short staple" fibers (such as cotton) and "long
staple" fibers (such as wool), while specialty cots and aprons include
glass-forming aprons, carpet cots and drawing cots. The Company provides
high-quality, precision engineered products that deliver superior value to its
customers. As a result, Textile Products has been an industry leader in quality
and performance, allowing the Company to command premium pricing for its
products.
Because of changes in the spinning process, increasing textile machine speeds
and other rigorous process demands, spinning industry suppliers are constantly
challenged to improve the precision, quality and consistency of their products.
The Company continues to introduce highly engineered cots and aprons targeted to
the high-speed ring and air-jet spinning markets. Products such as
aluminum-lined cots provide improved rigidity and tolerance and have been widely
accepted in the marketplace. Although fewer cots are used on these machines, the
cots that are used are replaced more frequently, are more technologically
advanced, are environmentally friendly and command higher prices compared to
traditional ring spinning cots.
Other products and services include ribbons (take-up roll covering), cot
installation presses, various other accessories and reconditioning services.
Textile Products' product development has allowed the Company to diversify into
new markets. The Company has developed specialty lines of aprons including
glass-forming aprons, which are used to make glass fiber from liquid glass, and
texturizing aprons, which are used to finish certain types of synthetic
filaments. Textile Products also makes bolsters and rubber shrinkage belts
for use in pre-shrinking processes, such as those used for denim, as well as
rubber-covered industrial rollers for textile and other industrial applications.
Sales and Distribution
The Company believes that the quality, technical proficiency and experience of
its Textile Products sales force distinguishes its marketing efforts from those
of competitors. Textile Products' sales professionals have extensive knowledge
of the spinning and weaving process. The sales force markets its products
directly to end-users, primarily textile mills, and original equipment
manufacturers.
7
RAW MATERIALS
Rubber polymers are a key component in most of the products of Transfer Media
and Textile Products. The Pressroom Chemicals division purchases approximately
200 different raw materials from a variety of key national suppliers, and holds
supply agreements with many of them. However, no single supplier accounts for
more than 10% of total raw material costs. The largest raw material component
for Pressroom Chemicals is petroleum distillates, such as aliphatics and
aromatics. Raw material purchases accounted for approximately 50% of cost of
goods sold for the Company's products during 2002, 2001 and 2000. Various
fabrics and rubber represented approximately 30% of all raw materials purchased
in each of 2002, 2001 and 2000. The Company has developed contingency plans to
address any supply line disruptions, including identifying alternative sources
and maintaining a safety stock of critical raw materials.
The Company is exposed to fluctuations in petroleum prices on certain raw
material costs and historically has been able to pass on price increases to
customers.
The Company purchases its raw material requirements from a number of suppliers
on a purchase order basis, and the Company believes that there are sufficient
sources of supply for the foreseeable future.
RESEARCH AND DEVELOPMENT
The research and development staff is focused on current product and process
improvement efforts, as well as development of new consumables for future Image
Transfer and Textile Products processes. The Company's active patents have been
important to its existing product line, and increased emphasis is being placed
on new product technologies. Active efforts to obtain additional patents are
underway on a variety of technologies, including certain process patents.
In addition to its extensive patent and trademark portfolio, the Company has a
variety of working agreements with key partners in the image transfer business.
These agreements and other efforts with Original Equipment Manufacturers may
stimulate proprietary processes and additional patent applications.
COMPETITION
The Company competes with a number of manufacturers in the image transfer and
textile components industries, with the main competitive factors being quality,
performance, service and price. While the Company competes with a number of
manufacturers of offset printing blankets and sleeves, the principal competitors
of Transfer Media are Reeves International, Inc. ("Reeves") and Polyfibron
Technologies, Inc. ("Polyfibron"), a subsidiary of MacDermid. Rotec's principal
competitors are Rossini, Polywest Kunststofftechnik, and Axcyl Inc., a
subsidiary of Polyfibron. Pressroom Chemicals competes with a number of
manufacturers of pressroom chemicals. The principal competitors are Anchor
Chemical, Rycoline and PRISCO. Accel Graphics, a division of Parmarco, is the
only main competitor to the Kompac line.
In Textile Products, the Company competes with manufacturers such as Premtec,
Inc., Hokushin Corporation, Yamauchi and Berkol AG (Switzerland).
8
Some of the Company's competitors may have greater financial and other resources
than the Company and may consequently have more operating flexibility and a
greater ability to expand production capacity and increase research and
development expenditures.
INTERNATIONAL OPERATIONS
The Company's principal international manufacturing facilities are located in
Dundee, Scotland (Transfer Media), Ahaus-Ottenstein, Germany (Transfer Media),
Manchester, England (Pressroom Chemicals) and Munster, Germany (Textile
Products). In addition, the Company maintains sales and distribution facilities
in England, France, Germany, Hong Kong, Italy, South Africa, Russia, Malaysia,
Canada, Mexico, China and Australia.
The Company manufactures and markets its products worldwide through several
international subsidiaries and independent agents. The Company's worldwide
operations are subject to the risks normally associated with international
operations including, but not limited to, the disruption of markets, changes in
export or import laws, restrictions on currency exchanges, and the modification
or introduction of other governmental policies with potentially adverse effects.
Approximately 49% of the Company's 2002 sales were derived from products sold
outside the United States. This has increased from 47% in 2001 and 43% in 2000.
The U.S. dollar value of these revenues varies with currency exchange rate
fluctuations, and the Company may be exposed to gains or losses based upon such
fluctuations. Significant increases in the value of the U.S. dollar relative to
foreign currencies could have an adverse effect on the Company's ability to meet
interest and principal obligations on its U.S. dollar-denominated debt. The
Company periodically enters into forward foreign exchange contracts to protect
it against a portion of such foreign exchange movements.
ENVIRONMENTAL MATTERS
The Company's facilities in the United States are subject to federal, state and
local environmental laws and regulations, including those governing discharges
to the air and water, the handling and disposal of solid and hazardous wastes,
and the remediation of contamination associated with releases of hazardous
substances. International facilities are subject to their respective countries'
federal and local environmental requirements, as well as the environmental
requirements promulgated by the European Union, where applicable. The Company
has made, and will continue to make, expenditures to comply with current and
future environmental requirements. Environmental requirements are becoming
increasingly stringent, and therefore the Company's expenditures for
environmental compliance may increase in the future.
Based on environmental assessments conducted by independent environmental
consultants, except as otherwise stated herein, the Company believes that its
operations are currently in compliance with environmental laws and regulations,
except as would not be expected to have a material adverse effect on the
Company. However, there can be no assurances that environmental requirements
will not change in the future or that the Company will not incur significant
costs in the future to comply with such requirements. In addition, the Company's
operations involve the handling of toluene and other hazardous substances, and
if a release of hazardous substances occurs on or from the Company's facilities,
the Company may be required to pay the cost of remedying any condition caused by
such release, the amount of which could be material.
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On July 11, 2002, the United States Environmental Protection Agency issued the
proposed Maximum Achievable Control Technology ("MACT") standard for the
Printing source category. This MACT standard is applicable to sources located at
the Company's U.S. operations. The MACT requirements were placed into effect on
March 15, 2003. The primary effect of this rule will be to require
implementation of additional air emission monitoring systems at the Company's
U.S. facilities. These rules will require certain modifications to the plant
facilities over the next two years that will total approximately $0.7 million
for U.S. operations. The Company installed certain equipment from 1998 through
2002 to mitigate future spending requirements resulting from the Clean Air Act.
Cadillac Plastics Group, Inc ("CPG"), the former parent of the Company, and now
known as M.A. Hanna Plastic Group, Inc., and a former subsidiary of M.A. Hanna
Company (now PolyOne Corporation), is a party to a July 25, 1988, Consent Decree
with the Michigan Department of Environmental Quality ("MDEQ") with regard to
contamination at the Company's Three Rivers, Michigan, facility. CPG installed a
groundwater remediation system at the facility in 1989, and was required to
operate such system until certain cleanup levels were achieved. On November 17,
1999, MDEQ approved a study to determine if further degradation of contaminates
will occur if pumping is discontinued and the aquifer returns to an anaerobic
condition. Operations of the groundwater remediation system were suspended on
December 6, 1999, with the approval of MDEQ. Analyses of the study completed in
early 2001 as well as more recent groundwater-monitoring data show that
remaining contamination in groundwater is stable (no significant increases in
concentration). The parties involved continue to monitor groundwater, and are
proceeding with a "natural attenuation" closure program that will consist of
continued groundwater testing and "institutional controls." This new program is
being performed under a December 3, 2001, commitment letter submitted to MDEQ by
M.A. Hanna Plastic Group Inc. As of December 31, 2002, the Company had recorded
accruals of approximately $218,000 to reflect future costs associated with this
cleanup and, based on the reports of its independent consultants, the Company
believes that such accruals are adequate. CPG has indemnified the Company for
such costs and the Company expects to be reimbursed after amounts are expended.
At December 31, 2002, a $215,000 indemnification receivable is recorded.
As a result of the disposal of hazardous substances prior to the acquisition of
the Company by American Industrial Partners in June 1995, CPG was named a
"potentially responsible party" pursuant to the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") and/or similar state laws at
certain waste disposal sites. CPG or the Company has entered into consent
decrees at most of these sites, subject to standard reopener provisions. The
Company expects that no significant expenditures will be made by the Company
with respect to these matters. CPG has agreed to retain ongoing responsibility
for and indemnify the Company with respect to these waste disposal locations.
However, because liability under CERCLA is retroactive, the Company may receive
notices of potential CERCLA liability in the future, and such liability could be
material.
Subject to certain limitations, PolyOne and CPG have agreed to indemnify the
Company for certain other environmental compliance and liability issues
associated with the Company's business, including certain liabilities associated
with an underground toluene tank at the Lerma, Mexico, facility. If PolyOne and
CPG are unable to honor their indemnification obligations, the Company would
likely be responsible for such matters and the cost of addressing such matters
could be material.
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ASSOCIATES
The Company currently employs approximately 1,350 full-time associates
worldwide, of which approximately 700 are employed in the United States and
Canada. The Company's associates in Dundee, Scotland, and Munster, Germany are
represented by labor unions. The labor union in Dundee has entered into a
collective bargaining agreement with the Company, expiring on December 31, 2003.
The labor union in Munster has entered into collective bargaining agreements
with the Company pertaining to general working conditions and to salaries and
wages. During 2002, the Company renewed these agreements with the labor union.
The agreement as to general working conditions expires December 31, 2006, and
the agreement as to salaries and wages expires June 30, 2005. None of the
Company's U.S. associates are covered by a collective bargaining agreement. To
encourage productivity improvements, a portion of each associate's total
compensation is tied to a performance bonus. The Company considers its employee
relations to be good.
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ITEM 2. PROPERTIES
As noted below, the Company operates state-of-the-art, manufacturing facilities
strategically located throughout the world. The Company believes that it has
sufficient capacity at its manufacturing facilities to meet its production needs
for the foreseeable future, and further believes that all its sales worldwide
can be sourced through these facilities. A majority of the Company's
manufacturing facilities are ISO certified. The Company also owns or leases
warehouse and sales offices in the United States, Europe, Mexico and Hong Kong.
The Company's significant facilities are listed below:
OWNED/
LOCATION SIZE (SQ. FT.) LEASED
Manufacturing:
Asheville, North Carolina 240,600 Owned
Dundee, Scotland 121,900 Owned
Three Rivers, Michigan 58,000 Owned
Greenville, South Carolina 85,200 Owned
Fletcher, North Carolina 19,000 Leased
Ahaus, Germany 36,200 Owned
Chrastava, Czech Republic 26,900 Owned
Parana, Brazil 10,800 Leased
Fairfield, New Jersey 19,900 Leased
Addison, Illinois 38,600 Owned
Houston, Texas 64,000 Owned
West Chester, Ohio 14,500 Leased
Brampton, Ontario 23,200 Owned
Manchester, England (Irlam) 66,000 Owned
Melbourne, Australia 28,700 Owned
Kuala Lumpur, Malaysia 8,300 Leased
Johannesburg, South Africa 12,900 Owned
Foshan, China 19,000 Leased
Munster, Germany 79,600 Leased
Warehouse/Sales Office:
Dayton, Ohio 13,800 Leased
Elk Grove, Illinois 4,500 Leased
Lerma, Mexico 15,900 Owned
Hong Kong, China 8,000 Leased
Hong Kong, China 600 Leased
Tokyo, Japan 600 Leased
Milan, Italy (Trezzano, Rosa) 1,500 Leased
Moscow, Russia 1,000 Leased
Nashville, Tennessee 5,000 Leased
Paris, France 23,400 Leased
Reutlingen, Germany 7,000 Leased
Stockport, England 5,200 Owned
Willich, Germany 5,500 Leased
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ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings arising
in the ordinary course of business. None of the matters in which the Company is
currently involved, either individually or in the aggregate, is expected to have
a material adverse effect on the Company's business or financial condition.
CPG and the Company are parties to consent decrees with respect to certain
environmental matters. Hanna and CPG have agreed to retain, be responsible for
and indemnify the Company with respect to these matters. See "Item 1.
Business--Environmental Matters."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of March 1, 2003, there were 19 holders of record of shares of Common Stock.
Sale or transfer of the Common Stock is subject to the terms of a Stockholders
Agreement that all stockholders have signed. There is no established trading
market for the Common Stock. The Company has never paid or declared a cash
dividend on the Common Stock.
13
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary financial data of the Company for each of
the five fiscal years, during the period ended December 31, 2002.
2002 2001 2000 1999 1998
(a) (b)
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Net sales $ 259,948 $ 254,146 $ 280,573 $ 198,418 $ 173,066
Gross profit 95,522 91,159 109,556 75,082 62,911
Operating profit 38,122 26,662 46,514 32,861 12,169
Income (loss) before extraordinary items
and cumulative effect of change in
accounting principle 9,182 (5,108) 6,902 2,251 (12,875)
Extraordinary losses on early
extinguishment of debt 857 3,552
Cumulative effect of change in
accounting principle 616
Net income (loss) 9,798 (5,108) 6,902 1,394 (16,427)
OTHER FINANCIAL DATA:
Capital expenditures $ 8,264 $ 12,983 $ 10,324 $ 5,936 $ 7,103
Depreciation 8,197 7,308 7,319 6,432 5,759
Amortization 6,332 9,972 9,932 10,313 7,729
BALANCE SHEET DATA (AT END OF PERIOD):
Fixed assets, net of accumulated
depreciation $ 74,319 $ 72,216 $ 69,484 $ 69,739 $ 50,305
Total assets 319,877 317,004 330,492 334,504 260,408
Long-term and subordinated long-term
debt (including current maturities) 252,145 263,831 268,270 279,830 257,515
Stockholders' equity (deficit) (119,450) (115,918) (94,443) (89,428) (80,283)
(a) The Company acquired TPO as of September 30, 1999 and Varn as of October
19, 1999. The statement of operations data includes the results of these
acquisitions from the dates of acquisition.
(b) The Company acquired the stock of Rotec as of December 31, 1998. Balance
sheet data for 1998 includes the assets and liabilities of Rotec as of
December 31, 1998. The statement of operations data includes the results
of Rotec for the period from January 1, 1999.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following should be read in conjunction with "Selected Financial Data" and
"Financial Statements and Supplementary Data" and notes thereto included
elsewhere in this report.
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
(DOLLARS IN MILLIONS)
Net sales $ 259.9 100.0% $ 254.1 100.0% $ 280.6 100.0%
Cost of goods sold 164.4 63.3 163.0 64.2 171.0 61.0
--------- ----- --------- ----- --------- ------
Gross profit 95.5 36.7 91.1 35.8 109.6 39.0
SG&A 55.5 21.3 54.1 21.3 57.5 20.5
Restructuring costs 0.1 0.0 4.9 1.9
Amortization of intangibles 0.8 0.3 4.4 1.7 4.5 1.5
Management fees and expenses 1.0 0.4 1.0 0.4 1.1 0.4
--------- ----- --------- ----- --------- ------
Operating income $ 38.1 14.7% $ 26.7 10.5% $ 46.5 16.6%
========= ===== ========= ===== ========= =====
COMPARISON OF RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002, COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net sales increased $5.8 million (2.3%) to $259.9 million, primarily as a result
of favorable changes in foreign currency rates and higher sales volume in
Europe. Sales in 2002 were positively affected by $4.5 million of favorable
changes in foreign currency rates used to translate international sales into
U.S. dollars and increased sales volumes of $3.0 million in Europe. Image
Transfer's sales increased $6.8 million (3.3%) to $211.6 million. Image
Transfer's sales were positively affected by $3.2 million as a result of the
effect of changes in foreign currency rates. Excluding the effect of foreign
currency rate changes, Image Transfer's sales increased $3.6 million (1.8%) from
the comparable period in 2001. The increase is mainly a result of higher sales
volumes in Europe. Textile Products' sales decreased $1.0 million (2.1%) to
$48.3 million. Foreign currency rate changes positively affected Textile
Products' sales by $1.3 million. Textile Products' sales decreased as a result
of decreased volume of $2.0 million in the United States and $0.3 million in
Europe and export markets.
Gross profit increased $4.4 million (4.8%) to $95.5 million. Foreign currency
rate changes increased gross profit by $0.8 million. As a percentage of net
sales, gross profit increased to 36.7% for the year ended December 31, 2002,
from 35.8% for the comparable period in 2001, 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 & administrative expenses increased $1.4 million (2.6%) to
$55.5 million primarily as a result of foreign currency rate changes. Changes in
foreign currency rates increased SG&A costs by $1.0 million in 2002. Active cost
reduction and prior year restructuring activities offset substantially all of
the increases in health care, retirement, incentive and insurance costs. As a
percentage of net sales, SG&A remained constant at 21.3%.
15
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, pre-tax charges of $0.3 million and $0.4 million have
been recorded in 2002 and 2001 for relocation of machinery and equipment and
write-off of abandoned assets. As of December 31, 2002, the relocation plan was
complete.
During the fourth quarter of 2001, the Company ceased operations at its Transfer
Media facility in Longwood, Florida. A pre-tax charge of $3.0 million was
recorded in 2001 for severance costs for 55 associates, write-off of abandoned
assets and costs related to closing the facility. During the second quarter of
2002, final severance payments were paid to all associates and the remaining
reserve of $0.1 million for severance costs was reversed.
Also during the fourth quarter of 2001, the Company completed plans to relocate
its Pressroom Chemicals German sales office into other existing facilities and
the U.S. sales and administrative functions from Oakland, New Jersey to other
U.S. locations. A pre-tax charge of $1.0 million was recorded for severance
costs for 21 associates, costs for closing the offices and loss on the sale of
fixed assets. As of December 31, 2002, this plan was complete.
Operating profit increased $11.5 million to $38.1 million. The increase in
operating profit was partly attributable to the adoption of SFAS Nos. 141 and
142 and the related reduction in the amortization of goodwill of $3.7 million
and to $4.8 million of lower restructuring costs in 2002. Excluding the
restructuring costs of $0.1 million and $4.9 million in 2002 and 2001 and the
amortization of goodwill of $3.7 million in 2001, operating profit increased
$3.0 million (8.5%) from $35.2 million to $38.2 million. As a percentage of net
sales, operating profit (excluding amortization of goodwill in 2001 and the
restructuring costs in 2002 and 2001) was 14.7% for the year ended December 31,
2002, compared to 13.9% in 2001. Image Transfer's operating profit increased
$2.1 million (5.9%) to $37.5 million, primarily as a result of higher sales
volumes. As a percentage of net sales, Image Transfer's operating profit
increased to 17.7% for the year ended December 31, 2002, compared to 17.3% in
2001. Textile Products' operating profit increased $0.4 million (6.5%) to $6.5
million, primarily as a result of foreign exchange rate changes. As a percentage
of net sales, Textile Products' operating profit was 13.5% for the year ended
December 31, 2002, compared to 12.4% in 2001.
Other income was $1.9 million in 2002, compared to other expense of $0.6 million
in 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 benefit for 2002 was 30.6%. The Company recorded income
tax expense for 2001 on a loss before taxes. This effect is a result of foreign
sourced dividends and income taxable in the United States and non-deductible
expenses.
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
16
the excess over cost arising from the TPO acquisition. The Company completed the
initial review of the recoverability of goodwill as of January 1, 2002, and the
subsequent review as of March 31, 2002, and has determined that no impairment
of goodwill is indicated.
YEAR ENDED DECEMBER 31, 2001, COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net sales decreased $26.4 million (9.4%) to $254.1 million, primarily as a
result of lower sales volume of $26.3 million in the United States and the
Pacific Rim. Sales in 2001 were negatively affected by $4.2 million as a result
of unfavorable changes in foreign currency rates used to translate international
sales into U.S. dollars partly offset by increased sales volumes of $3.2 million
in Europe. Image Transfer's sales decreased $20.1 million (8.9%) to $204.7
million. Image Transfer's sales were negatively affected by $3.2 million as a
result of the effect of changes in foreign currency rates. Excluding the effect
of foreign currency rate changes, Image Transfer's sales decreased $16.9 million
(7.5%) from the comparable period in 2000. The decrease is mainly a result of
lower sales in the United States as a result of the weak U.S. printing industry.
Tubular sleeve sales increased as additional presses that utilize this
technology were installed. Textile Products' sales decreased $6.3 million
(11.4%) to $49.4 million. Foreign currency rate changes negatively affected
Textile Products' sales by $1.0 million. Textile Products' sales decreased as a
result of decreased volume of $7.4 million in the United States, partly offset
by sales volume gains of $2.1 million in Europe and export markets.
Gross profit decreased $18.4 million (16.8%) to $91.1 million. Foreign currency
rate changes reduced gross profit by $1.6 million. As a percentage of net sales,
gross profit decreased to 35.8% for the year ended December 31, 2001, from 39.0%
for the comparable period in 2000, primarily as a result of the lower Image
Transfer sales volume in the United States. In addition, fixed costs such as
research and development costs of new products have increased slightly from last
year resulting in a further decrease in the gross profit percentage.
Selling, general & administrative expenses decreased $3.4 million (5.9%) to
$54.1 million primarily as a result of lower selling costs. As a percentage of
net sales, SG&A increased to 21.3% from 20.5%. Changes in foreign currency rates
reduced SG&A costs by $0.8 million in 2001.
In 2001, the Company began consolidating its U.S. Textile Products operations
into its Greenville, South Carolina, facility. The relocation was completed in
early 2002. A pre-tax charge of $0.9 million was recorded in 2001 for relocation
of machinery and equipment and severance and termination costs for 59 associates
in 2001. As of December 31, 2001, 45 associates had been severed.
During the fourth quarter of 2001, the Company ceased operations at its Transfer
Media facility in Longwood, Florida. A pre-tax charge of $3.0 million was
recorded in 2001 for severance costs for 55 associates, write-off of abandoned
assets and costs related to closing the facility.
Also during the fourth quarter of 2001, the Company completed plans to relocate
its Pressroom Chemicals German sales office into other existing facilities and
the U.S. sales and administrative functions from Oakland, New Jersey to other
U.S. locations. A pre-tax charge of $1.0 million was recorded for severance
costs for 21 associates, costs for closing the offices and loss on the sale of
fixed assets.
17
Operating profit decreased $19.8 million to $26.7 million. The decrease in
operating profit was partly attributable to $4.9 million of restructuring costs
in 2001. Operating profit, excluding the restructuring costs of $4.9 million in
2001, decreased $14.9 million (32.1%) to $31.6 million. As a percentage of net
sales, operating profit (excluding the restructuring costs in 2001) was 12.4%
for the year ended December 31, 2001, compared to 16.6% in 2000. Image
Transfer's operating profit decreased $14.1 million (28.5%) to $35.4 million,
primarily as a result of lower sales volumes. As a percentage of net sales,
Image Transfer's operating profit decreased to 17.3% for the year ended December
31, 2001, compared to 22.0% in 2000. Textile Products' operating profit
decreased $1.2 million (16.5%) to $6.1 million. As a percentage of net sales,
Textile Products' operating profit was 12.4% for the year ended December 31,
2001, compared to 13.1% in 2000.
Other expense was $0.6 million in 2001, compared to $4.6 million for 2000. The
other 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 Company recorded income tax expense for 2001 on a loss before taxes. This
effect is a result of foreign sourced dividends and income taxable in the United
States and non-deductible expenses.
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 international
operations are mitigated due to the political and economic stability of the
countries in which its largest international 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 and sales in
designated currencies other than their functional currency. 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. In addition, the Company has intercompany loans outstanding
with certain international subsidiaries in their local currencies, exposing it
to the effect of changes in exchange rates at loan issue and loan repayment
dates. The Company periodically enters into forward foreign exchange contracts
to protect it against such foreign exchange movements. The contract value of
these foreign exchange contracts was approximately $10.1 million at December 31,
2002, $9.3 million at December 31, 2001 and $2.1 million at December 31, 2000.
These contracts generally expire within three to twelve months. Foreign currency
gains (losses), included in other (expense) income-net, were $1.3 million in
2002, $(0.9) million in 2001 and $(5.0) million in 2000. Based on the Company's
overall foreign currency exchange rate exposure at December 31, 2002, including
the forward contracts, a 10% adverse change in foreign currency exchange rates
would result in a hypothetical estimated loss in earnings of approximately $1.4
million.
18
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 changes in interest rates 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 Transfer Media and
Textile products. The Company is exposed to changes in the costs of these
components. Pressroom Chemicals is exposed to changes in the cost of certain
petroleum-based components. The largest raw material component in Pressroom
Chemicals' 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. 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 effect until sales price
increases take effect, but overall would not have a material effect on income or
cash flows for a fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated sufficient funds from its operations to
fund its working 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.
The Company's expenditures for plant, property and equipment were $8.3 million
in 2002, $13.0 million in 2001, and $10.3 million in 2000. The Company believes
that capital expenditures of $9.0 million to $12.0 million annually over the
next several years will be sufficient to maintain its leading market position.
The Company expects to fund these capital expenditures from cash flow from
operations.
The Company is highly leveraged. At December 31, 2002, the Company's aggregate
indebtedness is approximately $252.1 million and the aggregate liquidation
preference of the Exchangeable Preferred Stock is $62.4 million (which, subject
to certain conditions, may be exchanged for Exchange Debentures). At December
31, 2002, the aggregate liquidation preference of the Convertible Preferred
Stock is $65.6 million.
The Company has a Senior Secured Credit Facility consisting of a $70.0 million
Term Loan (of which $31.2 million was outstanding at December 31, 2002) and a
$20 million Revolving Credit Facility (of which $4.9 million was outstanding at
December 31, 2002).
The Senior Secured Credit Facility is repayable as follows: $12.5 million in
2003, $12.5 million in 2004 and $11.1 million in 2005. Prepayments on the Term
Loan are applied in inverse order of maturity. During the year ended December
31, 2002, the Company made $12.6 million in payments on the term loans and
borrowed $0.8 million on the Revolving Credit Facility. The Senior Secured
Credit Facility is
19
secured by the assets of the Company and its domestic subsidiaries, as well as
65% of the stock of each international subsidiary. The amounts available under
the Revolving Credit Facility are subject to a borrowing base limitation
(defined generally as 80% of eligible domestic accounts receivable plus the
lesser of 50% of eligible domestic inventory or $10 million). As of December 31,
2002, the Company had approximately $12.8 million available under the Revolving
Credit Facility (calculated by applying the applicable borrowing base
limitation).
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 or other 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 its debt obligations and
dividends on the Exchangeable Preferred Stock and the Convertible Preferred
Stock 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, 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
have been issued, the payment of principal of or cash interest on the Exchange
Debentures. If the Company's cash flow, availability under the Revolving Credit
Facility and other capital resources are insufficient to fund the Company's debt
service obligations, the Company may be 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.
The Senior Secured Credit Facility, the 2005 Indenture, the 2008 Indenture and
the certificates of designation for the Preferred Stocks contain a number of
significant covenants that restrict the operations of the Company. For example,
under the Senior Secured Credit Facility, the Company is required to comply with
specified financial ratios and tests, including minimum fixed charges coverage
ratio, maximum leverage ratio and interest coverage ratio. There can be no
assurance that the Company will be able to comply with any such covenants or
restrictions in the future. The Company's ability to comply with such covenants
and restrictions may be affected by events beyond its control, including
prevailing economic, financial and industry conditions. The breach of any such
covenants or restrictions could result in a default under the Senior Secured
Credit Facility, the 2005 Indenture and/or the 2008 Indenture that would permit
the lenders to declare all amounts outstanding to be immediately due and
payable, together with accrued and unpaid interest, and the commitments of the
lenders under the Revolving Credit Facility to make further extensions of credit
could be terminated.
20
The occurrence of certain events that would constitute a Change of Control may
result in a default, or otherwise require repayment of indebtedness, under the
Senior Secured Credit Facility, the 2005 Indenture and the 2008 Indenture, and
redemption of the Exchangeable Preferred Stock and the Convertible Preferred
Stock or, in the case of the Exchange Debentures, repayment of indebtedness
under the Exchange Debentures. In addition, the Senior Secured Credit Facility
and the 2005 Indenture prohibit the repayment of indebtedness under the 2008
Indenture by the Company in such an event, unless and until such time as the
indebtedness under the Senior Secured Credit Facility and the 2005 Indenture are
repaid in full. The Company's failure to make such repayments in such instances
would result in a default under the Senior Secured Credit Facility and the 2005
Indenture. The inability to repay the indebtedness under the Senior Secured
Credit Facility or the 2005 Indenture, if accelerated, would also constitute an
event of default under the 2008 Indenture, which could have materially adverse
consequences to the Company and to the holders of the Notes under the 2008
Indenture. Future indebtedness of the Company may also contain restrictions or
repayment requirements with respect to certain events or transactions that could
constitute a Change of Control. In the event of a Change of Control, there can
be no assurance that the Company would have sufficient assets to satisfy all of
its obligations under the Senior Secured Credit Facility, 2005 Indenture or the
2008 Indenture, the Exchangeable Preferred Stock or the Exchange Debentures, as
the case may be, or with respect to the Convertible Preferred Stock.
The Company does not have transactions, arrangements or relationships with
special-purpose entities and the Company does not have any off-balance-sheet
debt except as disclosed in the notes to the consolidated financial statements.
In 2001 the Company suspended its U.K. pension plan and intends to settle the
remaining obligation in 2003. As of December 31, 2002, the settlement will
require an additional contribution of approximately $1.6 million and will result
in a pre-tax settlement loss of approximately $1.3 million. These amounts are
subject to change as a result of the final determination of the amount of the
obligation and the value of the plan assets at the date of the settlement.
ENVIRONMENTAL EXPENDITURES
The Company has made, and will continue to make, expenditures to comply with
current and future requirements of environmental laws and regulations. The
Company estimates that in 2002, 2001 and 2000 it spent approximately $0.2
million, $1.2 million and $0.8 million in capital expenditures for solvent
recovery, wastewater treatment, air monitoring and related projects to comply
with environmental requirements.
On July 11, 2002, the United States Environmental Protection Agency issued the
proposed Maximum Achievable Control Technology ("MACT") standard for the
Printing source category. This MACT standard is applicable to sources located at
the Company's U.S. operations. The MACT requirements were placed into effect on
March 15, 2003. The primary effect of this rule will be to require
implementation of additional air emission monitoring systems at the Company's
U.S. facilities. These rules will require certain modifications to the plant
facilities over the next two years that will total approximately $0.7 million
for U.S. operations. The Company installed certain equipment from 1998 through
2002 to mitigate future spending requirements resulting from the Clean Air Act.
Capital expenditures relating to environmental matters are anticipated to be
less than $1 million in 2003.
21
Based on environmental assessments conducted by independent environmental
consultants, except as otherwise stated herein, the Company believes that its
operations are currently in compliance with environmental laws and regulations,
except as would not be expected to have a material adverse effect on the
Company. However, there can be no assurances that environmental requirements
will not change in the future or that the Company will not incur significant
costs in the future to comply with such requirements. In addition, the Company's
operations involve the handling of solvents and other hazardous substances, and
if a release of hazardous substances occurs on or from the Company's facilities,
the Company may be required to pay the cost of remedying any condition caused by
such release, the amount of which could be material.
CRITICAL ACCOUNTING POLICIES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The more significant
estimates include: accounts receivable allowances, inventory valuation,
recoverability of long-lived assets, retirement and other postretirement
benefits, and the realization of deferred tax assets. We use the following
methods and assumptions in determining our estimates:
Accounts Receivable Allowances-Allowances for doubtful accounts are determined
by applying historical experience with consideration given to the condition of
the economy and evaluation of specific accounts. Other allowances are calculated
based on negotiated agreements with customers.
Inventory Valuation-Inventories are stated at the lower of cost as market using
the First-in, First-out (FIFO) Method. Reserves for obsolete and slow-moving
inventory are determined based on the lower of cost or market method. Market
value is determined based on management's estimate of selling price less selling
costs.
Recoverability of Long-lived Assets -Recoverability of goodwill is tested at
least annually in accordance with SFAS No. 142 using a combination of valuation
techniques, including present value of estimated future cash flows and earnings
multiples of comparable companies. Other long-lived assets are reviewed for
impairment annually or whenever events or circumstances indicate that the
carrying amount of an asset may not be recoverable in accordance with SFAS No.
144 by determining whether the amortization of the assets over their remaining
lives can be recovered through projected undiscounted cash flows. Future cash
flows are forecasted based on management's estimates of future events and could
be materially different from actual cash flows.
Retirement and Other Postretirement Benefits-Retirement and other postretirement
benefit costs and obligations are dependent on assumptions used in calculating
such amounts. These assumptions include discount rates, health care cost trend
rates, benefits earned, interest cost, expected return on plan assets, mortality
rates and other factors. In accordance with accounting principles generally
accepted in the United States, actual results that differ from the assumptions
are accumulated and amortized over future periods and, therefore, generally
affect recognized expense and the recorded obligation in future periods. While
management believes that the assumptions used are appropriate, differences in
actual experience or changes in assumptions may affect the Company's retirement
and other postretirement obligations and future expense. See Notes M and N to
the Consolidated Financial Statements for further detail on the assumptions
used.
Realization of Deferred Tax Assets-Realization of net operating loss
carryforwards and other deferred tax assets is determined in accordance with the
appropriate accounting guidance in SFAS No. 109. Realization of the deferred tax
assets is periodically evaluated using expected future reversals of existing
temporary differences, future taxable income resulting principally from the
characterization of cash flow from international subsidiaries as
22
dividends taxable in the United States rather than repayment of intercompany
loans and the effects of lower interest expense from lower outstanding debt
levels as debt service requirements are met.
For further information regarding our accounting policies, see Note B to the
Consolidated Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See information in Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors 24
Consolidated Balance Sheets as of December 31, 2002 and 2001 25 - 26
Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000 27
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 2002, 2001 and 2000 28
Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000 29
Notes to Consolidated Financial Statements 30 - 55
23
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Day International Group, Inc.:
We have audited the accompanying consolidated balance sheet of Day International
Group, Inc. and subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. The
consolidated financial statements of Day International Group, Inc. and
subsidiaries as of December 31, 2001, and for each of the two years in the
period ended December 31, 2001, were audited by other auditors who have ceased
operations and whose report dated March 26, 2002, expressed an unqualified
opinion.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 2002 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Day
International Group, Inc. and subsidiaries as of December 31, 2002, and the
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.
As discussed in Note E, in 2002 the Company changed its method of accounting
for goodwill in accordance with Statement of Financial Accounting Standards
Nos. 141, "Business Combinations" and 142, "Goodwill and Other Intangible
Assets."
ERNST & YOUNG LLP
Dayton, Ohio
March 28, 2003
24
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS 2002 2001
CURRENT ASSETS:
Cash and cash equivalents $ 996 $ 609
Accounts receivable:
Trade (less allowance for doubtful accounts) (Note C) 31,607 27,987
Other 1,175 1,137
Inventories (Note D) 34,851 34,276
Prepaid expenses and other current assets 1,563 4,330
Deferred tax assets (Note I) 4,501 5,144
---------- ----------
Total current assets 74,693 73,483
PROPERTY, PLANT AND EQUIPMENT:
Land 4,269 3,542
Buildings and improvements 25,100 21,097
Machinery and equipment 76,836 66,034
Construction in progress 4,208 10,874
Assets held for sale (Note O) 1,723 1,723
---------- ----------
112,136 103,270
Less accumulated depreciation (37,817) (31,054)
---------- ----------
74,319 72,216
OTHER ASSETS:
Goodwill (Note E) 127,080 125,334
Intangible assets (Note E) 26,696 32,554
Note receivable (Note P) 71 1,225
Deferred tax assets (Note I) 10,697 8,836
Other assets 6,321 3,356
---------- ----------
170,865 171,305
---------- ----------
TOTAL ASSETS $ 319,877 $ 317,004
========== ==========
The accompanying notes are an integral part of
the consolidated financial statements.
25
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 2002 2001
CURRENT LIABILITIES:
Accounts payable $ 8,228 $ 6,688
Accrued associate-related costs 9,161 7,442
Other accrued expenses 7,604 7,385
Income taxes payable 1,373 4,846
Interest payable 4,196 4,512
Current maturities of long-term debt (Note F) 12,597 12,576
---------- ----------
Total current liabilities 43,159 43,449
LONG-TERM AND SUBORDINATED LONG-TERM DEBT (Note F) 239,548 251,255
DEFERRED TAX LIABILITIES (Note I) 2,211 2,595
OTHER LONG-TERM LIABILITIES (Notes L, M, N and P) 27,763 26,269
---------- ----------
Total liabilities 312,681 323,568
REDEEMABLE PREFERRED STOCK (Note G) 126,646 109,354
STOCKHOLDERS' EQUITY (DEFICIT) (Note L):
Common Shares, $.01 per share par value, 100,000
shares authorized, 23,298 shares issued and outstanding 1 1
Contra-equity associated with the assumption of
majority shareholder's bridge loan (68,772) (68,772)
Retained earnings (deficit) (49,139) (41,646)
Accumulated other comprehensive loss (Note H) (1,540) (5,501)
---------- ----------
Total stockholders' equity (deficit) (119,450) (115,918)
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 319,877 $ 317,004
========== ==========
The accompanying notes are an integral part of
the consolidated financial statements.
26
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
2002 2001 2000
NET SALES $ 259,948 $ 254,146 $ 280,573
COST OF GOODS SOLD 164,426 162,987 171,017
---------- ---------- ----------
GROSS PROFIT 95,522 91,159 109,556
SELLING, GENERAL AND ADMINISTRATIVE 55,472 54,073 57,472
RESTRUCTURING COSTS (Note O) 118 4,931
AMORTIZATION OF INTANGIBLES 810 4,451 4,470
MANAGEMENT FEES (Note K) 1,000 1,042 1,100
---------- ---------- ----------
OPERATING PROFIT 38,122 26,662 46,514
OTHER EXPENSES:
Interest expense (including amortization of deferred
financing costs and debt discount of $2,348, $2,347 and
$2,370 in 2002, 2001 and 2000) 26,759 28,419 30,357
Other expense (income)--net (1,869) 601 4,605
---------- ---------- ----------
24,890 29,020 34,962
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES
AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 13,232 (2,358) 11,552
INCOME TAXES (Note I) 4,050 2,750 4,650
---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 9,182 (5,108) 6,902
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (NET OF TAX
BENEFIT OF $394) (Note E) 616
---------- ---------- ----------
NET INCOME (LOSS) 9,798 (5,108) 6,902
PREFERRED STOCK DIVIDENDS (Note G) (17,103) (14,770) (12,752)
AMORTIZATION OF PREFERRED STOCK
DISCOUNT AND ISSUANCE COSTS (188) (188) (188)
---------- ---------- ----------
NET (LOSS) AVAILABLE
TO COMMON SHAREHOLDERS $ (7,493) $ (20,066) $ (6,038)
========== ========== ==========
The accompanying notes are an integral part of
the consolidated financial statements.
27
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(DOLLAR AMOUNTS IN THOUSANDS)
ACCUMULATED
COMMON SHARES RETAINED OTHER COMPREHENSIVE
------------- CONTRA EARNINGS COMPREHENSIVE INCOME
SHARES AMOUNT EQUITY (DEFICIT) INCOME (LOSS) (LOSS)
------ ------ ------ -------- ------------- ------
December 31, 1999 23,298 $ 1 $ (68,772) $ (15,542) $ (5,115)
Net income 6,902 $ 6,902
Preferred stock dividends (12,752)
Amortization of preferred
stock discount and
issuance costs (188)
Foreign currency
translation adjustment 1,023 1,023
---------- ---------- ---------- ---------- ---------- ----------
December 31, 2000 23,298 1 (68,772) (21,580) (4,092) $ 7,925
==========
Net loss (5,108) $ (5,108)
Preferred stock dividends (14,770)
Amortization of preferred
stock discount and
issuance costs (188)
Minimum pension liability
(net of tax of $568) (1,134) (1,134)
Foreign currency
translation adjustment (305) (305)
Unrealized gain on cash flow
hedges (net of tax of $19) 30 30
---------- ---------- ---------- ---------- ---------- ----------
December 31, 2001 23,298 1 (68,772) (41,646) (5,501) $ (6,517)
==========
Net income 9,798 $ 9,798
Preferred stock dividends (17,103)
Amortization of preferred
stock discount and
issuance costs (188)
Minimum pension liability
(net of tax of $43) (64) (64)
Foreign currency
translation adjustment 4,046 4,046
Unrealized loss on cash flow
hedges (net of tax of $13) (21) (21)
---------- ---------- ---------- ---------- ---------- ----------
December 31, 2002 23,298 $ 1 $ (68,772) $ (49,139) $ (1,540) $ 13,759
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of
the consolidated financial statements.
28
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(IN THOUSANDS)
2002 2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 9,798 $ (5,108) $ 6,902
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of change in accounting
principle (616)
Depreciation 8,197 7,308 7,319
Amortization of goodwill and intangibles 6,332 9,972 9,932
Deferred income taxes (1,834) (2,663) (728)
Foreign currency (gain) loss (1,273) 711 2,425
Undistributed earnings of investee (306)
Non-cash loss on disposal of fixed assets 465 2,205
Change in assets and liabilities:
Accounts receivable (1,737) 5,656 (879)
Inventories 1,092 793 (3,619)
Prepaid expenses and other current assets 2,663 1,314 (1,490)
Accounts payable and accrued expenses (2,489) (2,562) 4,594
----------- ---------- ----------
Net cash provided by operating activities 20,292 17,626 24,456
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions (2,329)
Capital expenditures (8,264) (12,983) (10,324)
Proceeds from sale of property 742
---------- ---------- ----------
Net cash used in investing activities (8,264) (12,983) (11,911)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred financing fees (249)
Payment of long term debt (12,726) (2,262) (12,462)
Net borrowings (payments) on revolving credit facilities 800 (2,150) 800
---------- ---------- ----------
Net cash used in financing activities (11,926) (4,661) (11,662)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 285 (295) (469)
---------- ---------- ----------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash equivalents 387 (313) 414
Cash and cash equivalents at beginning of period 609 922 508
---------- ---------- ----------
Cash and cash equivalents at end of period $ 996 $ 609 $ 922
========== ========== ==========
The accompanying notes are an integral part of
the consolidated financial statements.
29
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(DOLLAR AMOUNTS IN THOUSANDS)
A. NATURE OF OPERATIONS, BASIS OF PRESENTATION
Day International Group, Inc. and subsidiaries is one of the world's leading
producers of 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, 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. Sales are made through Day's
sales organization, distributors and representatives.
B. SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION-The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS-Cash and cash equivalents include all highly liquid
investments with an original purchased maturity of three months or less.
INVENTORIES-Inventories are stated at the lower of cost or market using the
first-in, first-out (FIFO) method. Reserves for obsolete and slow-moving
inventory are determined based on the lower of cost or market method. Market
value is determined based on management's estimate of selling price less selling
costs.
PROPERTY, PLANT AND EQUIPMENT-Property, plant and equipment are stated at cost.
Depreciation is computed using the straight-line method over their estimated
useful lives. Buildings and improvements are depreciated over 10 to 40 years and
machinery and equipment are depreciated over 5 to 10 years.
GOODWILL AND OTHER INTANGIBLES-Goodwill represents the excess of cost over the
fair value of the net assets acquired and is evaluated for impairment based on
the requirements as proscribed in Statement of Financial Accounting Standards
("SFAS") No. 142. The Company assesses the recoverability of other long-lived
assets, including other intangibles, by determining whether the amortization of
the respective balances over their remaining lives can be recovered through
projected undiscounted cash flows.
Deferred financing costs are being amortized using an effective interest rate
method over the lives of the related debt. Intangibles are being amortized using
the straight-line method.
STOCK-BASED COMPENSATION-As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company applies the intrinsic value method of
recognition and measurement under Accounting Principles Board Opinion No. 25 to
its stock options and warrants. No compensation expense related to employee
stock options or warrants issued to directors is reflected in net income (loss).
The following table illustrates the effect on net income (loss) if compensation
costs for all outstanding and unvested stock option and warrants had been
determined based on their fair values at the grant date, consistent with the
method prescribed by SFAS No. 123:
2002 2001 2000
Net income (loss)-as reported $ 9,798 $ (5,108) $ 6,902
Less--stock-based compensation expense determined using
fair value based method in SFAS No. 123 (1,263) (945) (1,061)
------- -------- -------
Pro forma net income (loss) $ 8,535 $ (6,053) $ 5,841
======= ======== =======
REVENUE RECOGNITION-Day recognizes revenue when the product is shipped. Reserves
for product returns, based upon historical experience, and other allowances,
calculated based on negotiated agreements with customers, are recognized upon
shipment. Allowances for doubtful accounts are determined by applying historical
experience with consideration given to the condition of the economy and
evaluation of specific accounts and are recorded in selling, general and
administrative costs.
30
FOREIGN CURRENCY TRANSLATION-The functional currency is the local currency of
Day's respective international subsidiaries. Accordingly, foreign currency
assets and liabilities are translated into U.S. dollars at the period end
exchange rates. Foreign currency revenues and expenses are translated at the
average exchange rates for the period. Translation gains and losses are recorded
in the accumulated other comprehensive income (loss). Transaction gains and
losses are recorded in other expense (income) in the consolidated statements of
operations.
CONCENTRATION OF CREDIT RISK-The Company's receivables are from a diverse group
of customers in the printing and textile industries and such receivables are
generally unsecured. One customer accounted for 10%, 10% and 12% of net sales
for the years ended December 31, 2002, 2001 and 2000. This customer accounted
for 2% and 5% of receivables at December 31, 2002 and 2001.
FOREIGN EXCHANGE CONTRACTS-The Company and its international subsidiaries make
purchases and sales in foreign currencies and 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. In
addition, the Company has intercompany loans outstanding with certain
international subsidiaries in their local currencies, exposing it to the effect
of changes in exchange rates at loan issue and loan repayment dates. Day
periodically enters into forward foreign exchange contracts, with terms
generally of 3 to 12 months, to protect itself against such foreign currency
movements. These contracts are recorded at fair value with the change in fair
value recorded as other expense (income) as an offset to the (income) expense
recognized from the remeasurement of the hedged foreign-currency denominated
asset or liability. Hedges of forecasted transactions are recorded as cash flow
hedges and are reclassified to earnings when the hedged transaction is
completed. The contract value of foreign exchange contracts was $10,136 and
$9,312 at December 31, 2002 and 2001. The fair value of these contracts is a
payable of $362 at December 31, 2002 and a receivable of $166 at December 31,
2001. Day is exposed to credit-related losses in the event of nonperformance by
counterparties to the forward contracts. The counterparties are expected to meet
their obligations given their credit ratings; therefore Day does not obtain
collateral for these instruments.
FAIR VALUE OF FINANCIAL INSTRUMENTS-The carrying value of the Company's variable
rate Credit Agreement approximates fair value. The fair market value of the 9
1/2% Senior Subordinated Debt and the 11-1/8% Senior Debt was approximately
$195,200 and $169,900 at December 31, 2002 and 2001, based on quoted market
prices. The fair value of the 12 1/4% Exchangeable Preferred Stock was
approximately $9,400 and $12,700 at December 31, 2002 and 2001, based on quoted
market prices. The fair value of the 18% Convertible Preferred Stock could not
be determined as the securities are closely held and are not actively traded.
See Note G for further information about the Convertible Preferred Stock. At
December 31, 2002 and 2001, the carrying amounts of all other assets and
liabilities that qualify as financial instruments approximated their fair value.
RESEARCH AND DEVELOPMENT-Research and development costs are expensed as
incurred.
DISTRIBUTION-Distribution costs of $8,241, $7,973 and $6,914 for the years ended
December 31, 2002, 2001 and 2000 are included in selling, general and
administrative costs.
ADVERTISING-Advertising costs are expensed as incurred.
31
MANAGEMENT ESTIMATES-The preparation of the financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
C. ACCOUNTS RECEIVABLE
Changes in the allowance for doubtful accounts for the years ended December 31,
2002, 2001 and 2000 consist of:
2002 2001 2000
Balance at beginning of year $ 1,949 $ 2,267 $ 2,141
Provision for doubtful accounts 782 280 447
Write-off of uncollectible accounts (163) (545) (272)
Currency translation 167 (53) (49)
---------- ---------- ----------
Balance at end of year $ 2,735 $ 1,949 $ 2,267
========== ========== ==========
D. INVENTORIES
Inventories as of December 31, 2002 and 2001 consists of:
2002 2001
Finished goods $ 20,510 $ 19,094
Work in process 4,935 3,932
Raw materials 9,406 11,250
---------- ----------
$ 34,851 $ 34,276
========== ==========
E. GOODWILL AND INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board issued SFAS Nos. 141,
"Business Combinations" and 142, "Goodwill and Other Intangible Assets."
These statements prohibit amortization of goodwill for periods beginning after
December 15, 2001. Instead an annual review of the recoverability of the
goodwill and intangible assets is required. As of January 1, 2002, the Company
adopted these statements and 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 in 1999.
32
The following reconciles reported net income (loss) to net income (loss)
adjusted for the amortization of goodwill and the deferred credit related to an
excess over cost for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
Income (loss) before cumulative effect of change in
accounting principle-as reported $ 9,182 $ (5,108) $ 6,902
Amortization of goodwill and deferred credits-net of tax
benefit 2,224 2,224
---------- ---------- ----------
Adjusted income (loss) before cumulative effect of change
in accounting principle $ 9,182 $ (2,884) $ 9,126
========== ========== ==========
The following is detail of goodwill as of December 31, 2002 and 2001:
IMAGE TEXTILE
TRANSFER PRODUCTS TOTAL
Balance at December 31, 2001 $ 120,110 $ 5,224 $ 125,334
Purchase adjustment (18) (18)
Foreign currency exchange 1,764 1,764
---------- ---------- ----------
Balance at December 31, 2002 $ 121,856 $ 5,224 $ 127,080
========== ========== ==========
The following is detail of intangible assets as of December 31, 2002 and 2001:
WEIGHTED-
AVERAGE
2002 2001 LIFE
Intangible Assets:
Gross Carrying Amount:
Noncompete agreements $ 4,007 $ 4,007 5 years
Deferred financing costs 18,957 18,952 9 years
Printing technology 27,946 27,946 11 years
Textile compound formulas 5,247 5,247 31 years
Unpatented technology 9,529 9,529 20 years
Other 472 5 years
---------- ----------
Total intangibles 66,158 65,681 13 years
Accumulated Amortization:
Noncompete agreements (3,206) (2,405)
Deferred financing costs (12,178) (9,871)
Printing technology (18,846) (16,355)
Textile compound formulas (1,296) (1,124)
Unpatented technology (3,884) (3,372)
Other (52)
---------- ----------
Total accumulated amortization (39,462) (33,127)
---------- ----------
Net book value $ 26,696 $ 32,554
========== ==========
Estimated amortization expense for the next five years is as follows: $6,371 in
2003, $5,570 in 2004, $3,538 in 2005, $2,110 in 2006 and $2,067 in 2007.
33
F. LONG-TERM AND SUBORDINATED LONG-TERM DEBT
Long-term and subordinated long-term debt as of December 31, 2002 and 2001
consists of:
2002 2001
Senior Secured Credit Facility:
Term loan $ 31,150 $ 43,750
Revolving line of credit 4,950 4,150
11-1/8% Senior Notes 100,000 100,000
9 1/2% Senior Subordinated Notes 114,783 114,742
Capital lease obligation (Note P) 1,262 1,189
---------- ----------
252,145 263,831
Less: Current maturities of long-term debt and capital lease (12,597) (12,576)
---------- ----------
$ 239,548 $ 251,255
========== ==========
SENIOR SECURED CREDIT FACILITY
The Senior Secured Credit Agreement is a $90,000 credit facility consisting of a
five-year $70,000 term loan and a $20,000 revolving line of credit with a group
of banks. The revolving line of credit includes a $10,000 letter of credit
subfacility ($455 of letters of credit were outstanding at December 31, 2002 to
support the Company's share of a loan by the joint venture in China) and a
$1,000 swingline loan subfacility. At December 31, 2002, interest on the term
loan and $2,500 of the revolving line of credit was based on the bank's LIBOR
rate plus 3.00% (4.13%) and the remaining balance of the revolving line of
credit was based on the banks' base rate plus 2.00% (6.00%). Interest rates on
LIBOR borrowings are fixed for one, two, three or six month periods at the
Company's discretion. The weighted average interest rate on the Senior Secured
Credit Facility for the year ended December 31, 2002, 2001 and 2000 was 5.37%,
7.30% and 9.71%.
The amounts available under the Revolving Credit Facility are subject to a
borrowing base limitation (defined generally as 80% of eligible domestic
accounts receivable plus the lesser of 50% of eligible domestic inventory and
$10,000). At December 31, 2002, $12,816 was available under the Senior Secured
Credit Facility (calculated by applying the borrowing base test). The Senior
Secured Credit Facility requires a commitment fee of 1/2% a year on the unused
portion of the revolving line of credit. The Senior Secured Credit Facility
contains various financial covenants, including minimum fixed charges coverage
ratio, maximum leverage ratio and interest coverage ratio, and other covenants
which place limits on, among other things, asset sales, dividends and
distributions of the Company's or its subsidiaries' capital stock, the purchase,
redemption, acquisition of capital stock of the Company or its affiliates or any
subsidiaries, and the incurrence of certain additional indebtedness. No
violations of these covenants occurred during the year ended December 31, 2002.
11-1/8% SENIOR NOTES AND 9 1/2% SENIOR SUBORDINATED NOTES
The Company has outstanding $100,000 of 11-1/8% Senior Notes due June 1, 2005,
and $115,000 face amount of 9 1/2% Senior Subordinated Notes due March 15, 2008
(collectively, the "Notes"). The Senior Notes are subordinate to the Senior
Secured Credit Facility. The Senior Subordinated Notes are subordinate to the
Senior Notes.
34
Interest on the Notes is payable semi-annually. The Notes contain various
financial and other covenants which place limits on, among other things, asset
sales, dividends and distributions of the Company's or its subsidiaries' capital
stock, the purchase, redemption, acquisition of capital stock of the Company or
its affiliates or any subsidiaries, and the incurrence of certain additional
indebtedness. Upon a change in control, the Notes can be put back to the Company
at 101% of their face value.
The Company may, at its option, redeem the Senior Notes, in whole or in part,
for cash, at 102.472% through May 31, 2003, 101.236% from June 1, 2003 through
May 31, 2004 and 100.0% thereafter, together with all accrued and unpaid
interest to the date of redemption. Except for a change in control, the Company
may not redeem the Senior Subordinated Notes prior to March 15, 2003. On or
after such date, the Company may, at its option, redeem the Senior Subordinated
Notes, in whole or in part, for cash, at 104.75% in 2003, 103.167% in 2004,
101.583% in 2005 and 100.0% thereafter, together with all accrued and unpaid
interest to the date of redemption.
The Company's wholly-owned subsidiary, Day International, Inc., has guaranteed
the Senior Secured Credit Facility and the Notes. The Senior Secured Credit
Facility is secured by the assets of the Company and its domestic subsidiaries,
as well as 65% of the stock of each international subsidiary.
Principal payments on long-term debt for the next five years are payable as
follows: $12,597 in 2003, $12,602 in 2004, $111,174 in 2005, $102 in 2006 and
$108 in 2007.
G. REDEEMABLE PREFERRED STOCKS
12 1/4% SENIOR EXCHANGEABLE PREFERRED STOCK
The Company has outstanding $62,401 and $55,308 (face value) of 12 1/4% Senior
Exchangeable Preferred Stock at December 31, 2002 and 2001. All dividends are
payable quarterly in arrears on March 15, June 15, September 15 and December 15
of each year. On or before March 15, 2003, the Company may, at its option, pay
dividends in cash or in additional fully-paid and non-assessable shares of
Exchangeable Preferred Stock having an aggregate liquidation preference equal to
the amount of such dividends. After March 15, 2003, dividends must be paid in
cash and if not paid for four consecutive quarters, then the holders of the
Exchangeable Preferred Stock have the right to elect two directors to the Board
of Directors until the dividends in arrears have been paid. Certain restrictions
in the Company's Senior Secured Credit Agreement and Notes limit the ability to
pay cash dividends. On any scheduled dividend payment date, the Company may, at
its option, but subject to certain conditions, exchange all of the shares of the
Exchangeable Preferred Stock for the Company's 12 1/4% Subordinated Exchange
Debentures Due 2010 (the "Exchange Debentures"). All dividends paid have been in
the form of additional fully-paid and non-assessable shares of Exchangeable
Preferred Stock.
The Company will be required, subject to certain conditions, to redeem all of
the Exchangeable Preferred Stock or the Exchange Debentures as the case may be,
on March 15, 2010. Except as described below, the Company may not redeem the
Exchangeable Preferred Stock or the Exchange Debentures prior to March 15, 2003.
On or after such date, the Company may, at its option, redeem the Exchangeable
Preferred Stock or the Exchange Debentures, in whole or in part, for cash, at
106.125% in 2003, 104.083% in 2004, 102.042% in 2005 and 100.0% thereafter,
together with, in the case of the Exchangeable Preferred Stock, all accumulated
and unpaid dividends to the date of redemption, or in the case of the Exchange
Debentures, all accrued and unpaid interest to the date of redemption. Upon the
occurrence of a change in
35
control, the Company would be required to make an offer to purchase the
Exchangeable Preferred Stock or the Exchange Debentures, for cash, at a price
equal to 101% of the liquidation preference or aggregate principal amount (as
the case may be) thereof, together with, in the case of the Exchangeable
Preferred Stock, all accumulated and unpaid dividends to the date of purchase,
or in the case of the Exchange Debentures, all accrued and unpaid interest to
the date of purchase.
18% CONVERTIBLE CUMULATIVE PREFERRED STOCK
At December 31, 2002 and 2001, the Company has outstanding $65,629 and $55,618
liquidation preference of 18% Convertible Cumulative Preferred Stock
("Preference Stock") with a mandatory redemption date of June 30, 2010. The
Preference Stock ranks junior to the Company's 12 1/4% Senior Exchangeable
Preferred Stock and ranks senior to any subsequently issued preferred stock. All
dividends are payable quarterly in arrears on March 30, June 30, September 30
and December 30 of each year. Holders of the Preference Stock are entitled to
receive an annual dividend rate of 18% plus approximately 24% of the aggregate
value of each dividend (if any) declared and paid on the Company's common stock.
If not paid quarterly in cash, annually, accumulated and unpaid dividends are to
be added to the basis of the stock.
The Company may redeem any or all of the shares of the Preference Stock for
consideration equal to the Base Redemption Amount. The Base Redemption Amount is
an amount equal to up to 1,500 shares of Common Stock issuable upon the exercise
of future warrants plus the greater of the liquidation preference of the
Preference Stock or the value of 7,348.7 shares of the Company's Common Stock,
as adjusted for dilutive issuances.
Upon the occurrence of a change of control and subject to the Holders of all of
the Company's Senior Securities having exercised their right to be prepaid
and/or to put their securities to the Company upon such Change of Control, each
Holder of Preference Stock may require the Company to redeem, on or after the
92nd day after the prepayment or redemption of the Company's Senior Securities
in whole, all or any part of such Holder's Preference Stock at 102% of the
redemption price of such securities. The redemption price of the Preference
Stock is the Base Redemption Amount described above.
If, on any Redemption Date which occurs after an initial public offering of the
Company's Common Stock, the value of the Preference Stock as converted into
Common Stock exceeds the liquidation preference of the Preference Stock, the
Company may elect, in lieu of paying cash on the redemption of such Preference
Stock, to convert some or all of the Preference Stock into 7,348.7 shares of the
Company's Common Stock, as adjusted for dilutive issuances, subject to certain
limitations.
H. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss as of December 31, 2002
and 2001, consists of:
2002 2001
Foreign currency translation adjustments $ (351) $ (4,397)
Minimum pension liabilities (1,198) (1,134)
Unrealized gain on cash flow hedges 9 30
---------- ----------
$ (1,540) $ (5,501)
========== ==========
36
I. INCOME TAXES
Significant components of deferred tax assets (liabilities) as of December 31,
2002 and 2001, are as follows:
2002 2001
Deferred tax assets:
Accounts receivable reserves $ 1,263 $ 1,166
Inventory reserves 1,011 1,233
Other reserves 1,955 2,400
AMT credit carryforward 273 345
Net operating loss carryforwards 20,477 16,441
Stock option compensation 3,308 3,308
Pension benefits 1,055 128
Other postretirement benefits 2,529 2,136
---------- ----------
Total deferred tax assets 31,871 27,157
Deferred tax liabilities:
Depreciation (7,967) (7,887)
Amortization (10,917) (7,885)
---------- ----------
Total deferred tax liabilities (18,884) (15,772)
---------- ----------
Net deferred tax assets $12,987 $11,385
=========== ==========
Included in the balance sheets:
Current assets $ 4,501 $ 5,144
Noncurrent assets 10,697 8,836
Noncurrent liability (2,211) (2,595)
----------- ----------
Net deferred tax assets $12,987 $11,385
=========== ==========
Income tax expense consists of the following for the years ended December 31,
2002, 2001 and 2000:
2002 2001 2000
Current:
United States-State and local $ 218 $ 185 $ 7
International 5,860 7,552 4,895
---------- ---------- ----------
6,078 7,737 4,902
Deferred (1,634) (4,987) (252)
---------- ---------- ----------
4,444 2,750 4,650
Allocation to cumulative effect of change in
accounting principle (394)
---------- ---------- ----------
$ 4,050 $ 2,750 $ 4,650
========== ========== ==========
37
The income tax expense differs from the United States statutory rate for the
years ended December 31, 2002, 2001 and 2000, as a result of the following:
2002 2001 2000
Tax provision (benefit) at the United States federal
statutory rate $ 4,499 $ (801) $ 3,928
International tax rate differential (434) 2,356 261
State and local taxes, net of federal
income tax effect 759 (408) (126)
Foreign source income taxable in the United States (1,374) 2,321
Non-deductible expenses 136 398 375
Other 464 (1,116) 212
---------- ---------- ----------
$ 4,050 $ 2,750 $ 4,650
========== ========== ==========
During 2002, it was determined that the Company's foreign source income taxable
in the United States was less than previously estimated. The effect of this
change in estimate was to decrease the 2002 income tax expense by $1,930. Other
tax benefit for 2001 in the table above consists primarily of the release of tax
reserves.
Income (loss) before income taxes includes $16,131, $13,069 and $14,441 of
income from international operations for the years ended December 31, 2002, 2001
and 2000. Day has not provided for deferred taxes on the undistributed earnings
of international subsidiaries because the earnings are deemed permanently
reinvested. Undistributed earnings of Day's foreign subsidiaries amounted to
approximately $35 million as of December 31, 2002. The unrecognized deferred tax
liability on these earnings has not been calculated due to the complexities
associated with the hypothetical calculation. Beginning in 2004, it is
anticipated that Day will remit a substantial portion of annual foreign
subsidiary earnings in the form of taxable dividends. The tax consequences of
those dividends will be recorded when such dividends are paid. The Company has
United States net operating loss carryforwards of approximately $58,890 expiring
from 2006 through 2022.
J. 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.
The accounting policies of the segments are the same as those described in Note
B-Significant Accounting Policies. Segment performance is evaluated based on
operating profit results compared to the annual operating plan. Intersegment
sales and transfers are not material.
38
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.
2002 2001 2000
Third party sales:
Image Transfer $ 211,598 $ 204,748 $ 224,835
Textile Products 48,350 49,398 55,738
---------- ---------- ----------
Total $ 259,948 $ 254,146 $ 280,573
========= ========= =========
Segment operating profit:
Image Transfer $ 37,524 $ 35,422 $ 49,541
Textile Products 6,508 6,110 7,313
--------- --------- ---------
Total $ 44,032 $ 41,532 $ 56,854
========= ========= =========
Depreciation and amortization:
Image Transfer $ 6,229 $ 4,995 $ 4,646
Textile Products 1,674 1,565 1,597
--------- --------- ---------
Total $ 7,903 $ 6,560 $ 6,243
========= ========= =========
Assets:
Image Transfer $ 113,420 $ 107,361 $ 112,405
Textile Products 29,925 29,463 30,014
--------- --------- ---------
Total $ 143,345 $ 136,824 $ 142,419
========= ========= =========
Capital expenditures:
Image Transfer $ 6,571 $ 9,171 $ 8,547
Textile Products 1,693 3,812 1,777
--------- --------- ---------
Total $ 8,264 $ 12,983 $ 10,324
========= ========= =========
The following is a reconciliation of the items reported above to the amounts
reported in the consolidated financial statements:
2002 2001 2000
Operating profit:
Segment operating profit $ 44,032 $ 41,532 $ 56,854
APB #16 depreciation and amortization (3,468) (3,922) (4,233)
Non-allocated corporate expenses (514) (524) (537)
Restructuring costs (118) (4,931)
Amortization of intangibles (810) (4,451) (4,470)
Management fees (1,000) (1,042) (1,100)
---------- ---------- ----------
Total operating profit $ 38,122 $ 26,662 $ 46,514
========== ========== ==========
Depreciation and amortization:
Segment depreciation and amortization $ 7,903 $ 6,560 $ 6,243
Amortization of intangibles 810 4,451 4,470
APB #16 depreciation and amortization 3,468 3,922 4,233
Amortization of deferred financing fees 2,348 2,347 2,305
---------- ---------- ----------
Total depreciation and amortization $ 14,529 $ 17,280 $ 17,251
========== ========== ==========
39
2002 2001 2000
Assets:
Segment assets $ 143,345 $ 136,824 $ 142,419
APB #16 Adjustment 7,073 7,731 8,417
Goodwill and other intangibles 153,776 157,888 169,048
Deferred tax assets 15,198 13,980 8,836
Cash and other assets 485 581 1,772
---------- ---------- ----------
Total assets $ 319,877 $ 317,004 $ 330,492
========== ========== ==========
Net sales for the years ended December 31, 2002, 2001 and 2000, and long-lived
assets as of December 31, 2002, 2001 and 2000, by geographic area are as
follows:
2002 2001 2000
Net sales:
United States $ 132,338 $ 135,609 $ 159,744
Germany 61,648 61,288 63,343
United Kingdom 32,989 25,184 27,508
Other international 50,831 47,463 46,356
---------- ---------- ----------
Total international 145,468 133,935 137,207
Interarea (17,858) (15,398) (16,378)
---------- ---------- ----------
$ 259,948 $ 254,146 $ 280,573
========== ========== ==========
Long-lived assets:
United States $ 167,874 $ 175,618 $ 186,200
Germany 24,390 20,506 19,294
United Kingdom 23,542 22,313 20,997
Other international 12,289 11,667 12,041
---------- ---------- ----------
Total international 60,221 54,486 52,332
---------- ---------- ----------
$ 228,095 $ 230,104 $ 238,532
========== ========== ==========
Sales between geographic areas are generally priced to recover cost plus an
appropriate mark-up for profit.
K. RELATED PARTY TRANSACTIONS
In accordance with a management services agreement, the Company is required to
pay GSC Partners and SGCP, the controlling shareholders of Day, an annual
management fee of $1.0 million plus expenses, payable semi-annually.
L. STOCKHOLDERS' EQUITY AND STOCK BASED COMPENSATION PLAN
1998 STOCK OPTION PLAN
The 1998 Stock Option Plan provides incentives to officers and other key
employees of the Company that serve to align their interests with those of
stockholders. Under the 1998 Stock Option Plan, the Board is authorized to award
four different types of non-qualified stock options: (i) service options, (ii)
performance options, (iii) super performance options and (iv) exit options.
Under the 1998 Stock Option Plan, unless otherwise provided by the Board,
service options vest and become exercisable in five equal annual installments on
each of the first five anniversaries of the date of grant; performance and super
40
performance options vest and become exercisable in annual installments based on
the achievement of annual EBITDA targets of the Company; and exit options vest
and become exercisable based upon the internal rate of return of GSC Partners
realized in connection with the disposition of its investment in the Company.
Regardless of the satisfaction of any performance goals, performance options,
super performance options and exit options fully vest and become exercisable on
the ninth anniversary of the date of grant.
Initially, 7,885 shares of the Company's voting common stock were authorized for
issuance under the 1998 Stock Option Plan. In the event of certain changes in
the Company's capital structure affecting the common stock, the Board of
Directors may make appropriate adjustments in the number of shares then covered
by options and, where applicable, the exercise price of options under the 1998
Stock Option Plan.
As of December 31, 2002, 7,717 options have been granted (of which 999 are
exercisable) under the 1998 Stock Option Plan with an exercise price of $4,030.
These options expire as follows: 6,167 expire in 2007 and 1,550 expire in 2012.
DAY STOCK OPTION PLAN
Certain employees hold options that were previously granted under the Day
International Group, Inc. Stock Option Plan (the "Day Option Plan"). In 1998 all
options granted under the Day Option Plan became fully vested and the Day Option
Plan was amended to provide that no further options may be awarded under that
plan. As a result, compensation expense associated with these options was
recorded in 1998 and the remaining balance of $7,821 is included in other
long-term liabilities at December 31, 2002 and 2001. As of December 31, 2002,
2,452.5 options have been granted under the Day Option Plan with an exercise
price of $1,000 a share and 310 options have been granted with an exercise price
of $1,200 a share. The options expire as follows: 2,377.5 expire in 2005; 75
expire in 2006; and 310 expire in 2007.
41
The following table summarizes activity in the Company's stock option plans:
2002 2001 2000
---- ---- ----
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at beginning of year 9,754 $ 3,151 9,404 $ 3,143 9,404 $ 3,143
Granted 1,100 4,030 350 4,030 100 4,030
Canceled (374) 3,949 (100) 4,030
------ ----- -----
Outstanding at end of year 10,480 3,237 9,754 3,151 9,404 3,143
====== ===== =====
Exercisable at end of year 3,762 1,821 3,436 1,603 3,176 1,405
====== ===== =====
Weighted-average fair value
of options granted during
the year using the Black-Scholes
options-pricing model $ 1,446 $ 1,446 $ 1,663
======== ======== ========
Weighted-average assumptions used for grants:
Expected dividend yield 0% 0% 0%
Expected life of options 9 years 9 years 9 years
Risk-free interest rate 5% 5% 6%
Warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per
share were granted in 1998 to one of the Board members as compensation for
services as a director. These warrants vest in four equal installments, first on
the grant date and then on each of the first three anniversaries thereof. In
2000, additional warrants to purchase up to 74 shares of Common Stock at a price
of $4,030 per share were granted to each of two Board members for their
services. These warrants vest one-quarter on the grant date and on the first
anniversary of the grant and the remainder on the second anniversary.
M. RETIREMENT PLANS
The Company has defined benefit plans covering certain associates of its
international subsidiaries. Benefits under these plans are based primarily on
years of service and qualifying compensation during the final years of
employment. The pension plan in the United Kingdom has plan assets consisting of
U.K. government bonds in 2002 and marketable equity securities in 2001. The
Company's funding policy complies with the requirements of local laws and
regulations. During 2001, the Company froze the benefits under the U.K. Pension
plan and settled a portion of the obligation by transferring the benefits of
active associates to a defined contribution plan.
In conjunction with the TPO acquisition in 1999, the Company entered into a
Promise to Pay agreement with Armstrong World Industries GmbH ("Armstrong") for
the unfunded pension obligation of TPO's Germany subsidiary in which Armstrong
agreed to pay the portion of any pension obligations which the associates earned
prior to the date of the acquisition. At December 31, 2002, a receivable of
$1,483 has been recorded for the estimated portion of the pension obligation
that is Armstrong's responsibility.
42
Day also sponsors defined contribution plans for certain associates, which
provide for Company contributions of a specified percentage of each associate's
total compensation.
The funded status of the Company's defined benefit plans at December 31, 2002
and 2001, is as follows:
2002 2001
Change in benefit obligation:
Benefit obligation at beginning of year $ 11,915 $ 16,545
Service cost 274 286
Interest cost 749 912
Plan participant contributions 35
Actuarial (gains) losses 1,064 (396)
Curtailment gain (703)
Transfer to defined contribution plan (3,733)
Benefits paid (626) (592)
Foreign currency exchange 1,668 (439)
---------- ----------
Benefit obligation at end of year 15,044 11,915
---------- ----------
Change in plan assets:
Fair value of plan assets at the beginning of the year 7,579 12,193
Actual return on plan assets 398 (980)
Employer contribution 28 873
Plan participant contributions 35
Transfer to defined contribution plan (3,733)
Benefits paid (626) (592)
Foreign currency exchange 785 (217)
---------- ----------
Fair value of plan assets at end of year 8,164 7,579
---------- ----------
Funded status (6,880) (4,336)
Unrecognized net actuarial (gain) loss 2,092 1,952
Additional minimum liability-included in accumulated other
comprehensive loss (1,723) (1,702)
---------- ----------
(Accrued) pension costs $ (6,511) $ (4,086)
========== ==========
The projected benefit obligation was determined using a weighted average assumed
discount rate of 5.0% and 6.0% in 2002 and 2001, and a weighted average assumed
long-term rate of increase in compensation of 2.5% and 4.5% in 2002 and 2001.
The weighted average assumed long-term rate of return on plan assets was 4.5%
and 8.0% in 2002 and 2001.
43
A summary of the components of net periodic pension cost for the defined benefit
plans and for the defined contribution plans for the years ended December 31,
2002, 2001 and 2000, is as follows:
2002 2001 2000
Defined benefit plans:
Service cost $ 274 $ 286 $ 689
Interest cost 749 912 926
Expected return on plan assets (601) (944) (1,080)
Net amortization 1,456 14 8
Settlement loss 621
---------- ---------- ----------
Net periodic pension cost 1,878 889 543
Defined contribution plans 2,232 1,457 2,782
---------- ---------- ----------
Total pension expense $ 4,110 $ 2,346 $ 3,325
========== ========== ==========
N. OTHER POSTRETIREMENT BENEFITS
Day provides certain contributory postretirement health care and life insurance
benefits for certain U.S. associates. Those associates may become eligible for
these postretirement benefits if they retire on or after age 55 with at least
ten years of service.
The status of Day's unfunded plan at December 31, 2002 and 2001, is as follows:
2002 2001
Change in benefit obligation:
Benefit obligation at beginning of year $ 10,502 $ 9,308
Service cost 711 618
Interest cost 805 746
Actuarial (gains) losses 771 44
Benefits paid (509) (214)
---------- ----------
Benefit obligation at end of year 12,280 10,502
Unrecognized net actuarial gain (loss) (1,713) (942)
---------- ----------
Accrued postretirement benefit obligation $ 10,567 $ 9,560
========== ==========
The weighted-average assumed rate of increase in the per capita cost of covered
benefits (i.e., health care cost rate trend) is assumed to be 9.5% and
decreasing gradually to 5.0% in 2011 and remaining at that level thereafter. A
one percentage point increase in the assumed health care cost trend rate would
have increased the accumulated benefit obligation by $2,142 at December 31,
2002, and the interest and service cost would have been $312 higher for the year
ended December 31, 2002. A one percentage point decrease in the assumed health
care cost trend rate would have decreased the accumulated benefit obligation by
$1,702 at December 31, 2002, and the interest and service cost would have been
$243 lower for the year ended December 31, 2002.
A discount rate of 7.00% and 7.25% was used in determining the accumulated
obligation as of December 31, 2002 and 2001.
44
Net periodic postretirement benefit costs include the following components for
the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
Service cost $ 711 $ 618 $ 452
Interest cost 805 746 589
Actuarial loss recognized 7
---------- ---------- ----------
Net periodic postretirement benefit costs $ 1,516 $ 1,371 $ 1,041
========== ========== ==========
O. RESTRUCTURING COSTS
As announced in the first quarter of 2001, the Company has consolidated its U.S.
Textile Products operations into its Greenville, South Carolina, facility. The
relocation was completed in early 2002. A pre-tax charge of $933 was recorded in
2001 for relocation of machinery and equipment and severance and termination
costs for 59 associates. 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 September 30, 2002, final severance payments have been paid to 49
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 is attempting to sell the
land and building. As of September 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.
Also during the fourth quarter of 2001, the Company completed plans to relocate
its Pressroom Chemicals German sales office into other existing facilities and
the U.S. sales and administrative functions from Oakland, New Jersey to other
U.S. locations. A pre-tax charge of $988 was recorded for severance costs for 21
associates, costs for closing the offices and loss on the sale of fixed assets.
As of December 31, 2002, final severance payments have been paid to 21
associates.
Below is a summary of the restructuring charges in 2001:
IMAGE TEXTILE
TRANSFER PRODUCTS TOTAL
Severance cost $ 975 $ 500 $ 1,475
Facility shutdown 769 769
Relocation and other costs incurred 49 433 482
Write-off of assets 2,205 2,205
---------- ---------- ----------
Total $ 3,998 $ 933 $ 4,931
========== ========== ==========
45
Below is a summary of the restructuring charges in 2002:
IMAGE TEXTILE
TRANSFER PRODUCTS TOTAL
Reversal of reserve for severance cost $ (45) $ (103) $ (148)
Relocation and other costs incurred 109 109
Write-off of assets 157 157
---------- ---------- ----------
Total $ (45) $ 163 $ 118
========== ========== ==========
Below is a summary of the amounts charged against the reserves for severance and
facility shutdown in 2001 and 2002:
IMAGE TEXTILE
TRANSFER PRODUCTS
Severance and facility shutdown restructuring charge $ 1,744 $ 500
Charges against the reserve for:
Severance costs (79) (108)
Facility shutdown (157)
---------- ----------
Balance at December 31, 2001 1,508 392
Reversal of reserve (45) (103)
Charges against the reserve for:
Severance costs (851) (289)
Facility shutdown (612)
---------- ----------
Balance at December 31, 2002 $ $
========== ==========
P. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases a building in Germany under a capital lease. Property under
this capital lease is included in property, plant and equipment at December 31,
2002 and 2001, as follows:
2002 2001
Land and buildings $ 1,416 $ 1,238
Accumulated depreciation (110) (84)
---------- ----------
$ 1,306 $ 1,154
========== ==========
46
The Company also leases certain warehouses, transportation equipment and office
equipment under operating leases with terms of 1 to 10 years. Rental expense for
the years ended December 31, 2002, 2001 and 2000 was $2,326, $1,949 and $1,873.
The following is a schedule by year of future annual minimum lease payments
under non-cancelable leases as of December 31, 2002:
CAPITAL OPERATING
LEASE LEASES
2003 $ 156 $ 1,914
2004 156 1,343
2005 156 1,065
2006 156 893
2007 156 558
Thereafter 937 630
---------- ----------
1,717 $ 6,403
Amount representing interest (455)
----------
Present value of minimum lease payments (including
current portion of $86) $ 1,262
==========
CONTINGENCIES
There are currently no environmental claims against the Company for the costs of
environmental remediation measures taken or to be taken. The Company is
operating under a consent decree related to its Michigan manufacturing facility
for environmental matters that occurred prior to the acquisition by American
Industrial Partners in 1995. Independent environmental consultants have assessed
the environmental matters. Based on this assessment and management's best
estimates of the liability associated with these matters, reserves for such
liabilities have been established and no insurance recoveries have been
anticipated in determining the reserves. A previous owner, PolyOne, has agreed
to indemnify the Company for certain costs associated with these matters. At
December 31, 2002, a $215 indemnification receivable is recorded. Management
believes that this receivable is fully realizable. In management's opinion, the
aforementioned claims will be resolved without material adverse effect on the
operations, financial position or cash flows of the Company.
From time to time, the Company is involved in various legal proceedings arising
in the ordinary course of business. None of the matters in which the Company is
currently involved, either individually or in the aggregate, is expected to have
a material adverse effect on the Company's business or financial condition.
Q. SUPPLEMENTAL CASH FLOW DISCLOSURES
2002 2001 2000
NON-CASH TRANSACTIONS:
Preferred stock dividends paid in kind $ 17,103 $ 14,770 $ 12,752
======== ======== ========
Amortization of preferred stock discount and issuance
costs $ 188 $ 188 $ 188
======== ======== ========
CASH PAID FOR:
Income taxes $ 9,549 $ 6,870 $ 4,990
======== ======== ========
Interest $ 24,833 $ 25,790 $ 28,411
======== ======== ========
47
R. SUPPLEMENTAL CONSOLIDATING INFORMATION
The Company has outstanding $100,000 of 11-1/8% Senior Notes and $115,000 of 9
1/2% Senior Subordinated Notes (collectively, the "Notes"). Day International,
Inc. ("Day International" or "Guarantor") is a wholly-owned subsidiary of the
Company (which has no assets or operations other than its investment in Day
International). Day International has provided a full and unconditional
guarantee of the Notes. The wholly-owned international subsidiaries of Day
International are not guarantors with respect to the Notes and do not have any
credit arrangements senior to the Notes. All of the assets of Day and Day
International, other than the assets of the wholly-owned international
non-guarantor subsidiaries, are pledged as collateral on the Notes. The only
intercompany eliminations are the normal intercompany eliminations with regard
to intercompany sales and the Company's investment in the wholly-owned
non-guarantor subsidiaries. Intercompany notes are in place that effectively
transfers the interest expense from Day to Day International, Inc. The following
are the supplemental consolidating condensed balance sheets as of December 31,
2002 and 2001, the supplemental consolidating condensed statements of operations
and cash flows for the years ended December 31, 2002, 2001 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.
48
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 2002
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
ASSETS
Cash and cash equivalents $ 496 $ (496) $ 996 $ $ 996
Accounts receivable - net 11,365 21,417 32,782
Inventories 19,165 15,686 34,851
Other assets 4,754 1,310 6,064
--------- --------- -------- ---------- ---------
TOTAL CURRENT ASSETS 496 34,788 39,409 74,693
Intercompany 250,883 (13,166) 13,644 (251,361)
Property, plant and
equipment - net 48,256 26,063 74,319
Investment in subsidiaries (39,309) 35,588 (4,918) 8,639
Intangible and other assets 153,258 17,607 170,865
--------- --------- -------- ---------- ---------
TOTAL ASSETS $ 212,070 $ 258,724 $ 91,805 $ (242,722) $ 319,877
========= ========= ======== ========== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Accounts payable $ $ 3,593 $ 4,635 $ $ 8,228
Current maturities of
long-term debt 12,511 86 12,597
Accrued associate related
costs and other expenses 4,196 6,318 11,820 22,334
--------- --------- -------- ---------- ---------
TOTAL CURRENT LIABILITIES 16,707 9,911 16,541 43,159
Intercompany (50,205) 295,916 11,110 (256,821)
Long-term and subordinated
long-term debt 238,372 1,176 239,548
Other long-term liabilities 21,639 8,335 29,974
Redeemable preferred stock 126,646 126,646
Total stockholders' equity
(deficit) (119,450) (68,742) 54,643 14,099 (119,450)
--------- --------- -------- ---------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT) $ 212,070 $ 258,724 $ 91,805 $ (242,722) $ 319,877
========= ========= ======== ========== =========
49
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING 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 158,033 13,272 171,305
--------------- ---------------- --------------- --------------- ---------------
TOTAL ASSETS $ 214,202 $ 262,219 $ 79,502 $ (238,919) $ 317,004
=============== ================ =============== =============== ===============
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 20,837 8,027 28,864
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 $ 262,219 $ 79,502 $ (238,919) $ 317,004
=============== ================ =============== =============== ===============
50
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 148,853 $ 111,095 $ $ 259,948
Cost of goods sold 94,335 70,091 164,426
--------------- ---------------- --------------- ------------ ---------------
Gross profit 54,518 41,004 95,522
Selling, general and administrative 60 32,029 23,383 55,472
Restructuring costs 118 118
Amortization of intangibles 810 810
Management fees 1,000 1,000
--------------- ---------------- --------------- ------------ ---------------
Operating profit (60) 20,561 17,621 38,122
Other expenses (income):
Equity in (earnings) of subsidiaries (9,833) (11,747) 21,580
Interest expense 26,719 40 26,759
Other (income) expense (3) (3,316) 1,450 (1,869)
--------------- ---------------- --------------- ------------ ---------------
Income before income taxes 9,776 8,905 16,131 (21,580) 13,232
Income taxes (benefit) (22) (928) 5,000 4,050
---------------- ----------------- --------------- ------------ ---------------
Income before cumulative effect of
change in accounting principles 9,798 9,833 11,131 (21,580) 9,182
Cumulative effect of change in accounting
principles 616 616
--------------- ---------------- --------------- ------------ ---------------
Net income $ 9,798 $ 9,833 $ 11,747 $ (21,580) $ 9,798
=============== ================ =============== ============ ===============
51
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 151,048 $ 103,098 $ $ 254,146
Cost of goods sold 97,868 65,119 162,987
--------------- ---------------- --------------- --------------- ---------------
Gross profit 53,180 37,979 91,159
Selling, general and administrative 52 34,120 19,901 54,073
Restructuring costs 4,554 377 4,931
Amortization of intangibles 4,104 347 4,451
Management fees 1,042 1,042
--------------- ---------------- --------------- --------------- ---------------
Operating profit (52) 9,360 17,354 26,662
Other expenses (income):
Equity in (earnings) loss of
subsidiaries 5,080 (6,269) 1,189
Interest expense 28,336 83 28,419
Other (income) expense (6) (3,595) 4,202 601
--------------- ---------------- --------------- --------------- ---------------
Income (loss) before income
taxes (5,126) (9,112) 13,069 (1,189) (2,358)
Income taxes (benefit) (18) (4,032) 6,800 2,750
--------------- ---------------- --------------- --------------- ---------------
Net income (loss) $ (5,108) $ (5,080) $ 6,269 $ (1,189) $ (5,108)
=============== ================ =============== =============== ===============
52
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 177,361 $ 103,212 $ $ 280,573
Cost of goods sold 108,356 62,661 171,017
--------------- ---------------- --------------- --------------- ---------------
Gross profit 69,005 40,551 109,556
Selling, general and administrative 36 35,929 21,507 57,472
Amortization of intangibles 3,743 727 4,470
Management fees 1,100 1,100
--------------- ---------------- --------------- --------------- ---------------
Operating profit (36) 28,233 18,317 46,514
Other expenses (income):
Equity in (earnings) of subsidiaries (6,916) (9,141) 16,057
Interest expense 1 30,172 184 30,357
Other (income) expense (14) 927 3,692 4,605
--------------- ---------------- --------------- --------------- ---------------
Income before income taxes 6,893 6,275 14,441 (16,057) 11,552
Income taxes (benefit) (9) (641) 5,300 4,650
--------------- ---------------- --------------- --------------- ---------------
Net income $ 6,902 $ 6,916 $ 9,141 $ (16,057) $ 6,902
=============== ================ =============== =============== ===============
53
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Cash Flows from Operating Activities:
Net income $ 9,798 $ 9,833 $ 11,747 $ (21,580) $ 9,798
Adjustments to reconcile net income
to net cash provided by
(used in) operating activities:
Cumulative effect of change in
accounting principle (616) (616)
Depreciation and amortization 12,057 2,472 14,529
Equity in (earnings) loss of
subsidiaries (9,833) (11,747) 21,580
Deferred income taxes and other (679) (1,155) (1,834)
Foreign currency (gain) loss (2,344) 1,071 (1,273)
Undistributed earnings of investee (306) (306)
Loss on disposal of fixed assets 157 308 465
Changes in operating assets and
liabilities (316) 4,277 (4,432) (471)
---------------- ---------------- --------------- --------------- ---------------
Net cash provided by (used in)
operating activities (351) 11,248 9,395 20,292
Cash Flows from Investing Activities:
Capital expenditures (5,199) (3,065) (8,264)
--------------- ---------------- --------------- --------------- ---------------
Net cash (used in) investing
activities (5,199) (3,065) (8,264)
Cash Flows from Financing Activities:
Payment of long-term debt (12,600) (126) (12,726)
Net borrowings on revolving credit
facility 800 800
--------------- ---------------- --------------- --------------- ---------------
Net cash (used in) financing
activities (11,800) (126) (11,926)
Intercompany transfers and dividends 11,945 (5,843) (6,102)
Effects of exchange rates on cash 285 285
--------------- ---------------- --------------- --------------- ---------------
Net increase (decrease) in cash and cash
equivalents (206) 206 387 387
Cash and cash equivalents at beginning
of period 702 (702) 609 609
--------------- ---------------- --------------- --------------- ---------------
Cash and cash equivalents at end
of period $ 496 $ (496) $ 996 $ $ 996
=============== ================ =============== =============== ===============
54
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Cash Flows from Operating Activities:
Net income (loss) $ (5,108) $ (5,080) $ 6,269 $ (1,189) $ (5,108)
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities:
Depreciation and amortization 14,830 2,450 17,280
Equity in (earnings) loss of
subsidiaries 5,080 (6,269) 1,189
Deferred income taxes and other (4,044) 1,381 (2,663)
Foreign currency loss 381 330 711
Loss on disposal of fixed assets 2,126 79 2,205
Changes in operating assets and
liabilities 262 (308) 5,247 5,201
--------------- ---------------- --------------- --------------- ---------------
Net cash provided by operating
activities 234 1,636 15,756 17,626
Cash Flows from Investing Activities:
Capital expenditures (8,952) (4,031) (12,983)
--------------- ---------------- --------------- --------------- ---------------
Net cash (used in) investing
activities (8,952) (4,031) (12,983)
Cash Flows from Financing Activities:
Payment of deferred financing fees (249) (249)
Payment of long-term debt (2,250) (12) (2,262)
Net payments on revolving credit
facility (2,150) (2,150)
--------------- ---------------- --------------- --------------- ---------------
Net cash (used in) financing
activities (4,649) (12) (4,661)
Intercompany transfers and dividends 4,527 7,204 (11,731)
Effects of exchange rates on cash (295) (295)
--------------- ---------------- --------------- --------------- ---------------
Net increase (decrease) in cash
and cash equivalents 112 (112) (313) (313)
Cash and cash equivalents at
beginning of period 590 (590) 922 922
--------------- ---------------- --------------- --------------- ---------------
Cash and cash equivalents at end
of period $ 702 $ (702) $ 609 $ $ 609
=============== ================ =============== =============== ===============
55
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Cash Flows from Operating Activities:
Net income $ 6,902 $ 6,916 $ 9,141 $ (16,057) $ 6,902
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 14,616 2,635 17,251
Equity in (earnings) of subsidiaries (6,916) (9,141) 16,057
Deferred income taxes and other (889) 161 (728)
Foreign currency loss 2,425 2,425
Changes in operating assets and
liabilities (381) (8,487) 7,474 (1,394)
--------------- ---------------- --------------- ----------- ---------------
Net cash provided by (used in)
operating activities (395) 3,015 21,836 24,456
Cash Flows from Investing Activities:
Cash paid for acquisitions (2,329) (2,329)
Capital expenditures (5,338) (4,986) (10,324)
Other 742 742
--------------- ---------------- --------------- ----------- ---------------
Net cash (used in) investing
activities (7,667) (4,244) (11,911)
Cash Flows from Financing Activities:
Payments on term loans (12,250) (212) (12,462)
Net borrowings on revolving credit
facility 800 800
--------------- ---------------- --------------- ----------- ---------------
Net cash (used in) financing
activities (11,450) (212) (11,662)
Intercompany transfers and dividends 12,058 5,835 (17,893)
Effects of exchange rates on cash (469) (469)
--------------- ---------------- --------------- ----------- ---------------
Net increase (decrease) in cash and
cash equivalents 213 1,183 (982) 414
Cash and cash equivalents at beginning
of period 377 (1,773) 1,904 508
--------------- ---------------- --------------- ----------- ---------------
Cash and cash equivalents at end of period $ 590 $ (590) $ 922 $ $ 922
=============== ================ =============== =========== ===============
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On May 29, 2002, the Board of Directors voted to approve the engagement of Ernst
& Young LLP as its independent auditor for the year ending December 31, 2002, to
replace the firm of Arthur Andersen LLP. In connection with the audits of the
financial statements for the years ended December 31, 2001 and 2000, and in the
subsequent interim periods, there were no disagreements with Arthur Andersen LLP
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure. No event of the type described in
Item 304(a)(1)(v) of Regulation S-K occurred during the period described above.
Prior to the Board's determination to engage Ernst & Young LLP as its
independent auditors' for the year ending December 31, 2002, Ernst & Young LLP
was not consulted on accounting treatment and disclosure requirements.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the names, ages and a brief account of the business experience
for the last five years of each person who is a director or executive officer of
the Company.
NAME AGE POSITION
William C. Ferguson 72 Chairman of the Board
Dennis R. Wolters 56 Chief Executive Officer, President and Director
Dwaine R. Brooks 60 Vice President, Human Resources and Assistant Secretary
since October 1999; prior to that Director Human
Resources for the Company's worldwide operations
Mario Busshoff 31 Senior Vice President and Managing Director, Rotec since
July 2001; prior to that Managing Director, Rotec since
January 1999; prior to that Vice President, Sales,
Marketing and Technology for Rotec Hulsensysteme GmbH
John W. Frazier 41 Senior Vice President, General Manager, Pressroom
Chemicals, North America since February 2002; prior to
that Business Director at Astaris since April 2001;
prior to that Sales Director at Astaris since March
2000; prior to that Business Director at FMC Corporation
David B. Freimuth 50 Senior Vice President, General Manager, Textile Products
since October 1999; prior to that Vice President, Chief
Financial Officer
Dermot J. Healy 48 Managing Director, Europe
57
NAME AGE POSITION
Thomas J. Koenig 42 Vice President and Chief Financial Officer since October
1999; prior to that Controller/Director of Accounting
Stephen P. Noe 46 Senior Vice President, General Manager, Transfer Media
since July 2001; prior to that Senior Vice President,
Marketing & Sales, Transfer Media since January 2001;
prior to that Principal at CSC Consulting in the
Emerging Markets Practice since July 2000; prior to that
Business Director at FMC Corporation
Arthur C. Riley 64 Senior Vice President and Managing Director, Pacific Rim
since July 2001; prior to that Managing Director, Varn
International
Arthur H. Rogove 57 Vice President, Technology since April 2001; prior to
that Director of Technology at the Performance Plastics
Division of St. Gobain Corporation (formerly the Furon
Corporation)
Carl J. Crosetto 54 Director
Matthew C. Kaufman 32 Director
Michael A. Pruzan 37 Director
William C. Ferguson has been a director since 1998. He retired as Chairman and
Chief Executive Officer of NYNEX in 1995, a position he had held since 1989. Mr.
Ferguson is also a member of the Advisory Board of GSC Partners.
Carl J. Crosetto has been a director since 2000. He is President and a member of
the Office of the Chairman of Bowne & Co., Inc. since December 1998. In January
2000, he was appointed to the Board of Directors of Bowne. Prior to December
1998, he served as President of Bowne International. Mr. Crosetto is a member of
the board of directors of SpeedFlex Asia Limited and Check Printers, Inc.
Matthew C. Kaufman has been a director since 2000. He is a Managing Director
with GSC Partners. He joined GSC Partners in 1997. He is Chairman of the Board
of Pacific Aerospace & Electronics, Inc. and a director of Burke Industries,
Inc., Check Printers, Inc., Waddington North America, Inc., Woods Equipment
Company, and Worldtex, Inc.
Michael A. Pruzan has been a director since 2002. He is a Partner with Soros
Private Equity Partners. He has been with SPEP since 1999. Prior to joining
SPEP, Mr. Pruzan spent over eleven years with Goldman, Sachs & Co. in Mergers
and Acquisitions, Equity Capital Markets and Principal Investments. Mr. Pruzan
is Chairman of the Board of Nextec Applications, Inc. and a member of the board
of directors of First Asset Management, Inc., MCG Capital Corporation, NuSign
Industries, LLC, Onvoy, Inc., Raleigh Cycle Limited, R.V.I. Guaranty Co., Ltd.
and WellCare Health Plans, Inc.
58
As compensation for his services as director, in 1998, Mr. Ferguson received
warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per
share. The warrants vest in four equal installments, first on the grant date and
then on each of the first three anniversaries thereof. On January 18, 2000, Mr.
Ferguson received additional warrants to purchase up to 74 shares of Common
Stock at a price of $4,030 per share. As compensation for his services as
director, Mr. Crosetto also received warrants to purchase up to 74 shares of
Common Stock at a price of $4,030 per share on January 18, 2000. The warrants
vest in one-quarter on the grant date, one-quarter on the first anniversary of
the grant date and the remainder on the second anniversary. None of the other
directors will receive any compensation for their services as directors.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for 2002,
2001 and 2000 for Mr. Wolters and the four other most highly compensated
executive officers of the Company at the end of 2002.
LONG TERM
COMPENSATION
AWARDS
ANNUAL ------
COMPENSATION SECURITIES
NAME AND ------------ UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION
Dennis R. Wolters, 2002 $260,000 $27,050 200 $ 22,674(a)
President and Chief 2001 250,000 207,545 0 17,664
Executive Officer 2000 239,735 0 0 7,798
Arthur C. Riley, Senior Vice 2002 296,150 165,363 0 94,683 (b)
President and Managing 2001 234,739 155,628 0 32,281
Director, Pacific Rim 2000 233,723 136,503 0 33,219
Stephen P. Noe, Senior Vice 2002 175,000 20,000 300 14,066 (c)
President and General 2001 160,000 0 0 14,160
Manager, Transfer Media
Dermot J. Healy, 2002 165,363 6,554 40 46,645 (d)
Managing Director, 2001 137,435 75,818 0 39,720
Europe 2000 131,953 0 0 39,527
Arthur H. Rogove, 2002 158,750 10,000 100 10,014 (e)
Vice President, Technology 2001 116,250 0 0 29,119
(a) Represents company contributions to the Day 401(k) and Profit Sharing
Plan ($8,000), premiums for group term life insurance ($2,164),
investment advisory services ($6,466) and automobile allowance ($6,044).
(b) Represents company contributions to a UK benefit plan ($71,219) and
automobile allowance ($23,464).
59
(c) Represents company contributions to the Day 401(k) and Profit Sharing
Plan ($7,566), premiums for group term life insurance ($505) and
automobile allowance ($5,995).
(d) Represents company contributions to a UK benefit plan ($35,854),
premiums for group term life insurance ($732) and automobile allowance
($10,059).
(e) Represents company contributions to the Day 401(k) and Profit Sharing
Plan ($6,810), premiums for group term life insurance ($1,069),
relocation expenses ($4,062) and automobile allowance ($4,883).
FY-END OPTION/SAR VALUES
NUMBER
OF SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
AT FY-END(#) AT FY-END($)
------------ ------------
EXERCISABLE/ EXERCISABLE/
UNEXER- UNEXER-
NAME CISABLE CISABLE(1)
Dennis R. Wolters 1,560/ $ 3,636,000/
2,690 $ 0
Arthur C. Riley 0/ $ 0/
0 $ 0
Stephen P. Noe 100/ $ 0/
200 $ 0
Dermot J. Healy 242/ $ 606,000/
333 $ 0
Arthur H. Rogove 15/ $ 0/
85 $ 0
(1) Based upon estimated fair market value of the shares less the exercise
price.
EMPLOYMENT AGREEMENTS
Each of Messrs. Wolters and Freimuth is a party to an employment agreement with
the Company, subject to annual renewals unless notice of non-renewal is given.
Under the employment agreements, each of Messrs. Wolters and Freimuth receives
annual base salaries of $200,000 and $105,000 (subject to increase by the Board
of Directors), and an incentive bonus at 100% of plan target in an amount equal
to at least $200,000 and $55,000. The agreements also contain certain
non-competition and non-solicitation provisions. Subject to certain exceptions,
in the event that the executive is actually or
60
constructively terminated under the employment agreement by the Company without
cause, each employment agreement provides that the executive is entitled to
receive the following compensation: (i) accrued salary, (ii) pro-rata incentive
bonus for the year of termination, assuming that 100% of the annual plan target
was met, (iii) a lump sum equal to one times base salary and annual incentive
bonus target and (iv) continuation of benefits and perquisites for one year
following termination.
Mr. Riley is a party to an employment agreement with the Company, having an
expiration date of December 31, 2003. Under his employment agreement, he
receives an annual base salary of Pound Sterling175,000 (subject to increase by
the Board of Directors), and an incentive bonus of up to 30% of the annual base
salary. The agreement also contains certain non-competition provisions. Mr.
Riley retired effective January 31, 2003.
COMPENSATION COMMITTEE INTERLOCKS
Since the Company does not have a compensation committee, the Board of Directors
determines executive compensation. Mr. Ferguson serves on the Advisory Board of
GSC Partners. Mr. Kaufman is a Managing Director of GSC Partners. GSC Partners
and SG Capital Partners LLC ("SGCP"), the Company's controlling shareholders,
provide business, financial and management advisory services to the Company for
an annual total fee of $1 million, plus expenses. The Company also indemnifies
GSC Partners and SGCP from and against certain liabilities. Mr. Pruzan is a
Partner with Soros Private Equity Partners ("SPEP"). SPEP and its affiliates are
the majority shareholders of the Company's Convertible Cumulative Preferred
Stock. The Company also indemnifies SPEP from and against certain liabilities.
Mr. Wolters is the President and Chief Executive Officer of the Company. No
other officers of the Company participated in Board deliberations regarding
executive compensation in 2002.
61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF
SECURITIES
REMAINING
AVAILABLE FOR
NUMBER OF FUTURE ISSUANCE
SECURITIES TO BE UNDER EQUITY
ISSUED UPON WEIGHTED-AVERAGE COMPENSATION
EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING
OUTSTANDING OUTSTANDING SECURITIES
OPTIONS, WARRANTS OPTIONS, WARRANTS REFLECTED IN
AND RIGHTS AND RIGHTS COLUMN (a))
(a) (b) (c)
Equity compensation plans
approved by security
holders -- $ -- --
Equity compensation plans
not approved by security
holders (1) 10,702 3,253 168
----------- -----------
Total 10,702 3,253 168
=========== ===========
(1) These plans consist of the Day Stock Option Plan, the 1998 Stock Option Plan
and warrants issued to individual directors as compensation for services
performed. These plans were approved by shareholders holding a majority of the
Class A Voting Common Stock through their representation on the Board of
Directors. See Note L to the Financial Statements for detailed descriptions of
these plans.
62
SECURITY OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, including options to acquire Common
Stock, by (i) each person (or group of affiliated persons) known by the Company
to be the beneficial owner of more than 5% of the outstanding Common Stock, (ii)
each Director, (iii) the Company's Chief Executive Officer and the Company's
other named executive officers (as determined in accordance with the rules of
the Commission), and (iv) all of the Company's executive officers and Directors
as a group. Except as indicated in the footnotes to this table, the Company
believes that the persons named in this table have sole voting and investment
power with respect to all the shares of stock indicated.
NO. OF SHARES OF % OF
COMMON STOCK COMMON
NAME OF BENEFICIAL OWNER (a)(b) STOCK
Dennis R. Wolters 1,950 7.1
Arthur C. Riley -- --
Stephen P. Noe 100 0.4
Dermot J. Healy 253 0.9
Arthur H. Rogove 15 0.1
Carl J. Crosetto 74 0.3
William C. Ferguson 148 0.5
Matthew C. Kaufman (c) -- --
Michael A. Pruzan -- --
All Directors and Executive Officers as a Group (11 persons) 3,354 12.2
SG Capital Partners LLC 3,777.5 13.8
Greenwich IV, LLC (c) 18,912 68.8
(a) Beneficial ownership is determined in accordance with the rules of the
Commission and includes general voting power and/or investment power
with respect to securities. The table includes shares of Common Stock
subject to options and warrants currently exercisable or exercisable
within 60 days of the date of this report. As of the date of this
report, the number of such shares is 3,957.
(b) The shares of Common Stock owned by SGCP are Class B Non-Voting Common
Stock. All other shares are shares of Class A Voting Common Stock.
(c) Greenwich IV, LLC is an affiliate of GSC Partners. Mr. Kaufman may be
deemed to have indirect beneficial ownership of the 18,912 shares of
Common Stock beneficially owned by Greenwich IV, LLC by virtue of his
affiliation with GSC Partners. Mr. Kaufman disclaims any such beneficial
ownership.
THE STOCKHOLDERS AGREEMENT
The Stockholders Agreement provides for the number of directors of the Board of
Directors of the Company to be such number as designated by GSC Partners, which
initially shall be five, and for the composition of the Board of Directors of
the Company to consist of four individuals designated by GSC Partners and, for
so long as SGCP holds 5% of the outstanding Common Stock, one individual
designated by SGCP.
63
In the Stockholders Agreement, the Management Stockholders have agreed, except
under certain circumstances, not to transfer shares of Common Stock, or options
to acquire Common Stock, prior to the later to occur of (i) the fifth
anniversary of the date of the Stockholders Agreement and (ii) the consummation
of a public offering. In addition, under the Stockholders Agreement, if a
Management Stockholder's employment is terminated, the Company shall have the
right to purchase all or part of the shares of the Common Stock owned by such
Management Stockholder and the vested options to acquire Common Stock owned by
such Management Stockholder, at prices calculated in accordance with, and
subject to certain other terms and conditions set forth in, the terms of the
Stockholders Agreement.
The Stockholders Agreement creates certain conventional "drag" and "tag" rights
with respect to the shares of the Common Stock owned by the Management
Stockholders. The Stockholders Agreement also provides that at any time after
the Acquisition Closing Date, GSC Partners shall have the right to require the
Company to effect up to two registrations of their Common Stock on Form S-1
under the Securities Act and, if available, unlimited registrations on Form S-2
or S-3 under the Securities Act; from and after a public offering, SGCP shall
have the right to require the Company to effect up to two registrations of the
Common Stock on Form S-3 under the Securities Act and that the Company shall pay
all registration expenses in connection with each registration of shares of the
Common Stock pursuant to the Stockholders Agreement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has engaged GSC Partners and SGCP, pursuant to the Management
Agreement, to provide it with certain business, financial and managerial
advisory services, including developing and implementing corporate and business
strategy and providing other consulting and advisory services. The Management
Agreement provides for an annual fee of $1.0 million and contains
indemnification and expense reimbursement provisions that are customary for
management agreements of this type. The Management Agreement will continue in
full force and effect, and shall terminate upon, the earlier to occur of (i)
January 18, 2008, and (ii) the date on which the affiliates of GSC Partners no
longer, directly or indirectly, own any shares of capital stock of the Company,
and may be earlier terminated by GSC Partners, in its sole discretion.
ITEM 14. CONTROLS AND PROCEDURES
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that transactions are properly recorded and
summarized so that reliable financial records and reports can be prepared and
assets safeguarded. In addition, a system of disclosure controls is maintained
to ensure that information required to be disclosed is recorded, processed,
summarized and reported in a timely manner to management responsible for the
preparation and reporting of the Company's financial information.
Management assesses the internal control and disclosure control systems as being
effective as they encompass material matters for the year ended December 31,
2002. There were no changes in the internal control and disclosure control
systems subsequent to December 31, 2002, that would significantly affect the
control systems.
64
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries are incorporated by reference as part of this Report at Item 8
hereof.
DAY INTERNATIONAL GROUP, INC.
Years ended December 31, 2002, 2001 and 2000:
Report of Independent Public Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES
The information required to be submitted in the Financial Statement
Schedules for Day International Group, Inc. and consolidated
subsidiaries has either been shown in the financial statements or notes,
or is not applicable or required under Regulation S-X; therefore, those
schedules have been omitted.
(b) REPORTS ON FORM 8-K
None
(c) EXHIBITS
See Index to Exhibits
(d) SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT
No annual report covering the Company's last fiscal year, and no proxy
statement, form of proxy or other proxy soliciting material has been
sent to security holders of the Company.
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Day International Group, Inc. has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Day International Group, Inc.
(Registrant)
Date: March 28, 2003 By: /s/ Dennis R Wolters
------------------------
Dennis R. Wolters
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of Day International
Group, Inc. and in the capacities and on the dates indicated.
Date: March 28, 2003 By: /s/ Dennis R Wolters
------------------------
Dennis R. Wolters
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: March 28, 2003 By: /s/ Thomas J. Koenig
------------------------
Thomas J. Koenig
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
Date: March 28, 2003 By:
---------------------------
William C. Ferguson
Director
Date: March 28, 2003 By: /s/ Carl J. Crosetto
------------------------
Carl J. Crosetto
Director
Date: March 28, 2003 By: /s/ Matthew C. Kaufman
--------------------------
Matthew C. Kaufman
Director
Date: March 28, 2003 By: /s/ Michael A. Pruzan
-------------------------
Michael A. Pruzan
Director
66
CERTIFICATION
I, Dennis R. Wolters, certify that:
1. I have reviewed this annual report on Form 10-K of Day International Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the board of directors:
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 28, 2003 By: /s/ Dennis R Wolters
------------------------
Dennis R. Wolters
President and Chief Executive
Officer (Principal Executive
Officer)
67
CERTIFICATION
I, Thomas J. Koenig, certify that:
1. I have reviewed this annual report on Form 10-K of Day International Group,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the board of directors:
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 28, 2003 By: /s/ Thomas J. Koenig
------------------------
Thomas J. Koenig
Vice President and Chief Financial
Officer (Principal Financial
Officer and Principal Accounting
Officer)
68
INDEX TO EXHIBITS
(3) ARTICLES OF INCORPORATION AND BY-LAWS
3.1 Certificate of Incorporation of Day International Group, Inc.
("Group") (incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-4 (Reg. No. 33-93644)); as
amended on October 15, 1999 (incorporated by reference to
Exhibit 3.1 to the Form 8-K dated October 28, 1999)
3.2 By-Laws of Group (incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-4 (Reg. No. 33-93644))
3.3 Certificate of Incorporation of Day International, Inc. (the
"Guarantor") (incorporated by reference to Exhibit 3.3 to the
Registration Statement on Form S-4 (Reg. No. 33-93644))
3.4 By-Laws of the Guarantor (incorporated by reference to Exhibit
3.4 to the Registration Statement on Form S-4 (Reg. No.
33-93644))
(4) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4.1 Indenture (the "Indenture") dated June 6, 1995 among Registrant,
the Guarantor and American Bank National Association
(incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-4 (Reg. No. 33-93644))
4.2 Registration Rights Agreement dated as of June 6, 1995 among
Group, the Guarantor, Donaldson, Lufkin & Jenrette Securities
Corporation, NationsBanc Capital Markets, Inc. (incorporated by
reference to Exhibit 4.3 to the Registration Statement on Form
S-4 (Reg. No. 33-93644))
4.3 First Supplemental Indenture, dated March 13, 1998, to the
Indenture (incorporated by reference to Exhibit 4.2 to the
Amendment No. 1 to Registration Statement on Form S-4/A filed on
May 8, 1998 (Reg. No. 333-51839))
4.4 Indenture (the "Subordinated Indenture") dated as of March 18,
1998, among Day International Group, Inc., Day International,
Inc. and the Bank of New York (incorporated by reference to
Exhibit 4.3.1 to the Amendment No. 1 to Registration Statement
on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
4.5 Form of Global Notes (incorporated by reference to Exhibit 4.3.2
to the Amendment No. 1 to Registration Statement on Form S-4/A
filed on May 8, 1998 (Reg. No. 333-51839))
4.6 Registration Rights Agreement, dated as of March 18, 1998, by
and between the Company and Societe Generale Securities
Corporation (incorporated by reference to Exhibit 4.4 to the
Amendment No. 1 to Registration Statement on Form S-4/A filed on
May 8, 1998 (Reg. No. 333-51839))
4.7 Certificate of Designation, dated March 18, 1998, of Powers,
Preferences and Relative, Participating, Optional and other
Special Rights of 12 1/4% Senior Exchangeable Preferred Stock
due 2010 and Qualifications, Limitations and Restrictions
thereof (the "Exchangeable Preferred Stock") (incorporated by
reference to Exhibit 4.5.1 to the Amendment No. 1 to
Registration Statement on Form S-4/A filed on May 8, 1998 (Reg.
No. 333-51839))
4.8 Certificate of Designation for the Company's 18% Convertible
Cumulative Preference Stock due 2010, filed with the Secretary
of State of the State of Delaware on October 15, 1999
(incorporated by reference to Exhibit 4.1 to the Form 8-K dated
October 28, 1999)
69
4.9 Form of Global Certificate for the Exchangeable Preferred Stock
(incorporated by reference to Exhibit 4.5.2 to the Amendment No.
1 to Registration Statement on Form S-4/A filed on May 8, 1998
(Reg. No. 333-51839))
4.10 Exchange Debenture Indenture, dated as of March 18, 1998, among
Day International Group, Inc., Day International, Inc. and the
Bank of New York as Trustee (incorporated by reference to
Exhibit 4.6 to the Amendment No. 1 to Registration Statement on
Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
4.11 Amended and Restated Stockholders Agreement, dated as of October
19, 1999, among the Company and certain of its stockholders
(incorporated by reference to Exhibit 4.5 to the Form 8-K dated
October 28, 1999)
4.12 Supplemental Indenture, dated as of October 19, 1999 among The
Bank of New York and the several Guarantors party thereto
(incorporated by reference to Exhibit 4.2 to the Form 8-K dated
October 28, 1999)
(10) MATERIAL CONTRACTS
10.1 Purchase Agreement dated as of May 25, 1995 among Group, the
Guarantor (as of June 6, 1995) Donaldson, Lufkin & Jenrette
Securities Corporation and NationsBanc Capital Markets, Inc.
(incorporated by reference to Exhibit 4.2 to the Registration
Statement on Form S-4 (Reg. No. 33-93644))
10.2 Stock Purchase Agreement dated April 11, 1995 among Group, M.A.
Hanna Company and Cadillac Plastic Group, Inc., as amended
(incorporated by reference to Exhibit 4.11 to the Registration
Statement on Form S-4 (Reg. No. 33-93644))
10.3 Share Purchase Agreement dated April 11, 1995 between Group and
Cadillac Plastic Limited, as amended (incorporated by reference
to Exhibit 4.12 to the Registration Statement on Form S-4 (Reg.
No. 33-93644))
10.4 Asset Purchase Agreement between Day International (Canada)
Limited and Group, as amended (incorporated by reference to
Exhibit 4.13 to the Registration Statement on Form S-4 (Reg. No.
33-93644))
10.5 Employment Agreement, dated January 16, 1998, between the
Guarantor and Dennis R. Wolters (incorporated by reference to
Exhibit 10.4 to the Amendment No. 1 to Registration Statement on
Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
10.6 Employment Agreement, dated January 16, 1998, between Day
International, Inc. and David B. Freimuth (incorporated by
reference to Exhibit 10.5 to the Amendment No. 1 to Registration
Statement on Form S-4/A filed on May 8, 1998 (Reg. No.
333-51839))
10.7 Employment Agreement, dated January 1, 1999, between Varn
Products (UK) Limited and Arthur C. Riley (incorporated by
reference to Exhibit 10.7 to the Annual Report on Form 10-K for
the year ended December 31, 2001)
10.8 Day International Group, Inc. Stock Option Plan, dated as of
July 6, 1995 (incorporated by reference to Exhibit 10.13 to the
Annual Report on Form 10-K for the period ended December 31,
1995); as amended on September 19, 1996 (incorporated by
reference to Exhibit 10.17 to the Annual Report on Form 10-K for
the year ended December 31, 1996); and as further amended on
January 16, 1998 (incorporated by reference to Exhibit 10.2.3 to
the Amendment No. 1 to Registration Statement on Form S-4/A
filed on May 8, 1998 (Reg. No. 333-51839))
70
10.9 Stock Purchase Agreement, dated as of December 18, 1997, by and
among Greenwich IV, LLC, GSD Acquisition Corp. and the
Stockholders of Day International Group, Inc. parties thereto
(incorporated by reference to Exhibit 2.1 to the Form 8-K dated
January 16, 1998); as amended on January 16, 1998 (incorporated
by reference to Exhibit 2.2 to the Form 8-K dated January 16,
1998)
10.10 Purchase Agreement, dated as of March 13, 1998 between the
Company and Societe Generale Securities Corporation
(incorporated by reference to Exhibit 1.1 to the Amendment No. 1
to Registration Statement on Form S-4/A filed on May 8, 1998
(Reg. No. 333-51839))
10.11 Amended and Restated Credit Agreement, dated as of October 19,
1999, among the Company, Societe Generale, as Administrative
Agent, and SG Cowen Securities Corporation, as Arranger
(incorporated by reference to Exhibit 10.1 to the Form 8-K dated
October 28, 1999); as amended September 21, 2001 (incorporated
by reference to Exhibit 10.1 to the Quarterly Report on Form
10-Q for the quarter ended September 30, 2001)
10.12 Guarantee and Collateral Agreement, dated January 15, 1998, made
by the Company and Day International, Inc. in favor of Societe
Generale as Administrative Agent for the benefit of the Senior
Lenders and certain other secured parties (incorporated by
reference to Exhibit 4.8 to the Amendment No. 1 to Registration
Statement on Form S-4/A filed on May 8, 1998 (Reg. No.
333-51839))
10.13 Patent and Trademark Security Agreement, dated January 15, 1998,
made by the Company in favor of the Administrative Agent for the
benefit of the Senior Lenders under the Credit Agreement
(incorporated by reference to Exhibit 4.9 to the Amendment No. 1
to Registration Statement on Form S-4/A filed on May 8, 1998
(Reg. No. 333-51839))
10.14 Mortgage and Security Agreement Dated January 16, 1998, from
Day, as Mortgagor, to the Administrative Agent, with respect to
the Florida Property (incorporated by reference to Exhibit 4.10
to the Amendment No. 1 to Registration Statement on Form S-4/A
filed on May 8, 1998 (Reg. No. 333-51839))
10.15 Deed of Trust, dated January 15, 1998, from Day, as Mortgagor,
to the Administrative Agent, with respect to the North Carolina
property (incorporated by reference to Exhibit 4.12 to the
Amendment No. 1 to Registration Statement on Form S-4/A filed on
May 8, 1998 (Reg. No. 333-51839))
10.16 Mortgage and Security Agreement Dated January 16, 1998, from
Day, as Mortgagor, to the Administrative Agent, with respect to
the Michigan Property (incorporated by reference to Exhibit 4.13
to the Amendment No. 1 to Registration Statement on Form S-4/A
filed on May 8, 1998 (Reg. No. 333-51839))
71
10.17 Share Pledge Agreement dated December 22, 1998 between made by
the Company and Day International, Inc. in favor of Societe
Generale as Administrative Agent for the benefit of the Senior
Lenders and certain other secured parties (incorporated by
reference to Exhibit 10.28 to the Annual Report on Form 10-K for
the year ended December 31, 1998)
10.18 Consulting Agreement between the Company and GSC Partners
(incorporated by reference to Exhibit 10.5.1 to the Amendment
No. 2 to Registration Statement on Form S-4/A filed on June 22,
1998 (Reg. No. 333-51839))
10.19 Indemnification Agreement between the Company and GSC Partners
(incorporated by reference to Exhibit 10.5.2 to the Amendment
No. 2 to Registration Statement on Form S-4/A filed on June 22,
1998 (Reg. No. 333-51839))
10.20 Consulting Agreement between the Company and SG Capital Partners
Limited (incorporated by reference to Exhibit 10.5.3 to the
Amendment No. 2 to Registration Statement on Form S-4/A filed on
June 22, 1998 (Reg. No. 333-51839))
10.21 Indemnification Agreement between the Company and SG Capital
Partners Limited (incorporated by reference to Exhibit 10.5.4 to
the Amendment No. 2 to Registration Statement on Form S-4/A
filed on June 22, 1998 (Reg. No. 333-51839))
10.22 Share Purchase Agreement between Day International, Inc., Mr.
Rudolf Wilbring, Mr. Helmut Busshoff and Mr. Josef Dunne dated
December 23, 1998 (incorporated by reference to Exhibit 10.26 to
the Annual Report on Form 10-K for the year ended December 31,
1998)
10.23 Non Compete Agreement between Day International, Inc., Mr.
Rudolf Wilbring, Mr. Helmut Busshoff and Mr. Josef Dunne dated
December 23, 1998 (incorporated by reference to Exhibit 10.27 to
the Annual Report on Form 10-K for the year ended December 31,
1998)
10.24 Stock warrant to purchase 74 shares of Common Stock of the
Company, dated as of January 18, 1998 issued to Mr. William C.
Ferguson (incorporated by reference to Exhibit 10.30 to the
Annual Report on Form 10-K for the year ended December 31, 1998)
10.25 Stock warrant to purchase 74 shares of Common Stock of the
Company, dated as of January 27, 2000, issued to Mr. William C.
Ferguson (incorporated by reference to Exhibit 10.37 to the
Annual Report on Form 10-K for the year ended December 31, 2000)
10.26 Stock warrant to purchase 74 shares of Common Stock of the
Company, dated as of January 18, 2000, issued to Mr. Carl J.
Crosetto (incorporated by reference to Exhibit 10.38 to the
Annual Report on Form 10-K for the year ended December 31, 2000)
10.27 Purchase Agreement between Armstrong World Industries, Inc. and
Armstrong World Industries GmbH, as Sellers and Day
International, Inc., as Buyer (portions omitted pursuant to a
request for confidential treatment) (incorporated by reference
to Exhibit 2.1 to the Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999
10.28 Stock Purchase Agreement, dated as of August 13, 1999, by and
among the Company and the stockholders of each of Varnco
Holdings Inc., Varn Holdings PLC, Varn Aegis Co. GmbH
Hautschutzsysteme, Varn Products Co., Inc., JV Tex Realty Corp.
and Graph Tech, Inc. (incorporated by reference to Exhibit 2.1
to the Form 8-K dated October 28, 1999); as amended October 19,
1999 (incorporated by reference to Exhibit 2.2 to the Form 8-K
dated October 28, 1999)
72
10.29 Subsidiary Guarantee, dated as of October 19, 1999, among
Firstar Bank, N.A. and the several Guarantors party thereto
(incorporated by reference to Exhibit 4.3 to the Form 8-K dated
October 28, 1999)
10.30 Preference Stock Purchase Agreement, dated as of October 19,
1999, among the Company and the several Investors party thereto
(incorporated by reference to Exhibit 4.4 to the Form 8-K dated
October 28, 1999)
10.31 Day International, Inc. Supplemental Savings and Retirement
Plan, dated as of March 1, 2001 (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001)
(21) SUBSIDIARIES OF THE REGISTRANT
(99) ADDITIONAL EXHIBITS
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
73