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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
There were 23,298 Common Shares of the Company, $0.01 per share par value,
outstanding as of August 1, 2003.
DAY INTERNATIONAL GROUP, INC.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Operations for the three and six months
ended June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the six months ended June
30, 2003 and 2002 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 24
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
Signature 25
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002
(IN THOUSANDS)
ASSETS 2003 2002
Cash and cash equivalents $ 1,435 $ 996
Accounts receivable (less allowance for doubtful accounts of $2,590 and
$2,735) 35,456 32,782
Inventories (Note B) 41,043 34,851
Other current assets 7,306 6,064
--------- ---------
Total current assets 85,240 74,693
Property, plant and equipment, net of accumulated depreciation of $42,919
and $37,817 75,722 74,319
Goodwill 128,927 127,080
Intangible assets (net of accumulated amortization of $42,649 and $39,462) 23,664 26,696
Other assets 19,481 17,089
--------- ---------
TOTAL ASSETS $ 333,034 $ 319,877
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 8,201 $ 8,228
Current maturities of long-term debt 12,605 12,597
Other current liabilities 30,539 22,334
--------- ---------
Total current liabilities 51,345 43,159
Long-term and subordinated long-term debt 236,986 239,548
Other long-term liabilities 31,437 29,974
Redeemable preferred stock (Note C) 134,017 126,646
STOCKHOLDERS' EQUITY (DEFICIT):
Common shares 1 1
Contra-equity associated with the assumption of majority shareholder's
bridge loan (68,772) (68,772)
Retained earnings (deficit) (52,990) (49,139)
Accumulated other comprehensive income (loss) 1,010 (1,540)
--------- ---------
Total stockholders' equity (deficit) (120,751) (119,450)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 333,034 $ 319,877
========= =========
See notes to condensed consolidated financial statements.
3
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS)
THREE MONTHS SIX MONTHS
2003 2002 2003 2002
NET SALES $ 70,139 $ 64,034 $ 138,958 $ 125,220
COST OF GOODS SOLD 45,356 40,166 89,493 79,320
--------- --------- --------- ---------
GROSS PROFIT 24,783 23,868 49,465 45,900
SELLING, GENERAL AND ADMINISTRATIVE 15,419 13,974 29,968 26,378
RESTRUCTURING COSTS (Note G) (45) 118
AMORTIZATION OF INTANGIBLES 206 201 407 401
MANAGEMENT FEES 250 250 500 500
--------- --------- --------- ---------
OPERATING PROFIT 8,908 9,488 18,590 18,503
OTHER EXPENSES:
Interest expense (including amortization of
deferred financing cost of $587, $587, $1,174
and $1,174) 6,629 6,703 13,154 13,473
Other (income) expense 465 (597) (312) (446)
--------- --------- --------- ---------
7,094 6,106 12,842 13,027
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 1,814 3,382 5,748 5,476
INCOME TAX EXPENSE 742 1,328 2,227 2,149
--------- --------- --------- ---------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 1,072 2,054 3,521 3,327
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
(NET OF TAX EXPENSE OF $394) (Note I) 616
--------- --------- --------- ---------
NET INCOME 1,072 2,054 3,521 3,943
ACCUMULATING PREFERRED STOCK DIVIDENDS (Note C) (4,816) (4,158) (9,574) (8,264)
AMORTIZATION OF PREFERRED STOCK ISSUANCE COSTS (47) (47) (94) (94)
--------- --------- --------- ---------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (3,791) $ (2,151) $ (6,147) $ (4,415)
========= ========= ========= =========
See notes to condensed consolidated financial statements.
4
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS)
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,521 $ 3,943
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of change in accounting principle (616)
Depreciation and amortization 7,938 6,995
Deferred income taxes (2,031) 1,136
Foreign currency (gain) loss (1,119) (359)
Net (gain) loss on disposal of assets 774 157
Change in operating assets and liabilities (1,656) (5,399)
------- -------
Net cash provided by operating activities 7,427 5,857
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition (1,000)
Capital expenditures (4,312) (3,454)
Proceeds from sale of property 939
------- -------
Net cash used in investing activities (4,373) (3,454)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on term loan (6,347) (6,300)
Net proceeds from revolving credit facility 3,650 4,150
------- -------
Net cash used in financing activities (2,697) (2,150)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 82 (81)
------- -------
Net increase (decrease) in cash and cash equivalents 439 172
Cash and cash equivalents at beginning of period 996 609
------- -------
Cash and cash equivalents at end of period $ 1,435 $ 781
======= =======
NON-CASH TRANSACTIONS:
Preferred stock dividends $ 7,278 $ 8,264
======= =======
Amortization of preferred stock discount $ 94 $ 94
======= =======
Short-term note payable for acquisition $ 952 $
======= =======
See notes to condensed consolidated financial statements.
5
DAY INTERNATIONAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
A. BASIS OF PRESENTATION
The balance sheet as of December 31, 2002, is condensed financial information
derived from the audited balance sheet. The interim financial statements are
unaudited. The financial statements of Day International Group, Inc. have been
prepared in accordance with accounting principles generally accepted in the
United States and, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation in
accordance with accounting principles generally accepted in the United States
for the periods presented. The results of operations and cash flows for the
interim periods presented are not necessarily indicative of the results for the
full year.
B. INVENTORIES
Inventories as of June 30, 2003 and December 31, 2002, consist of:
2003 2002
Finished goods $24,539 $20,510
Work in process 5,607 4,935
Raw materials 10,897 9,406
------- -------
$41,043 $34,851
======= =======
C. REDEEMABLE PREFERRED STOCK
The Company's 12 1/4% Senior Exchangeable Preferred Stock require that dividends
must be paid in cash after March 15, 2003. The Company has not paid cash
dividends after March 15, 2003, because of certain restrictions in the Company's
Senior Secured Credit Agreement and Notes Indentures limiting the ability to pay
cash dividends. If not paid for four consecutive quarters, 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. All dividends
through March 15, 2003, have been in the form of additional fully-paid and
non-assessable shares of Exchangeable Preferred Stock. Dividends-in-arrears were
$1,960 as of June 30, 2003.
D. 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.
6
Segment performance is evaluated based on operating profit results compared to
the annual operating plan. Intersegment sales and transfers are not material.
The Company manages the two segments as separate strategic business units. They
are managed separately because each business unit requires different
manufacturing processes, technology and marketing strategies.
THREE MONTHS SIX MONTHS
2003 2002 2003 2002
Third party sales:
Image Transfer $ 57,523 $ 51,719 $ 113,122 $ 102,172
Textile Products 12,616 12,315 25,836 23,048
--------- --------- --------- ---------
Total $ 70,139 $ 64,034 $ 138,958 $ 125,220
========= ========= ========= =========
Segment operating profit:
Image Transfer $ 9,082 $ 8,934 $ 18,647 $ 18,631
Textile Products 1,427 1,958 2,981 2,963
--------- --------- --------- ---------
Total $ 10,509 $ 10,892 $ 21,628 $ 21,594
========= ========= ========= =========
The following is a reconciliation of the segment operating profit reported above
to the amount reported in the consolidated financial statements:
THREE MONTHS SIX MONTHS
2003 2002 2003 2002
Segment operating profit $ 10,509 $ 10,892 $ 21,628 $ 21,594
APB #16 depreciation and amortization (1,007) (897) (1,849) (1,811)
Non-allocated corporate expenses (138) (101) (282) (261)
Restructuring costs 45 (118)
Amortization of intangibles (206) (201) (407) (401)
Management fees (250) (250) (500) (500)
--------- --------- --------- ---------
Total operating profit $ 8,908 $ 9,488 $ 18,590 $ 18,503
========= ========= ========= =========
E. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) is comprised of net income, net currency
translation gains and losses and net unrealized gains and losses on cash flow
hedges. Total comprehensive income for the three months ended June 30, 2003 and
2002 was $3,325 and $5,158. Total comprehensive income for the six months ended
June 30, 2003 and 2002 was $6,071 and $5,812.
7
F. CONTINGENCIES
Claims have been made against the Company for the costs of environmental
remedial measures taken or to be taken. Reserves for such liabilities have been
established and no insurance recoveries have been anticipated in the
determination of the reserves. In management's opinion, the aforementioned
claims will be resolved without material adverse effect on the results of
operations, financial position or cash flows of the Company. The Company's
previous parent and its parent, PolyOne, have agreed to indemnify the Company
for certain of the costs associated with these matters.
G. RESTRUCTURING COSTS
A pre-tax charge of $500 was recorded in the first quarter of 2001 for severance
and termination costs for relocating the Textile Products operations from the
Asheville, North Carolina, facility to the Greenville, South Carolina, facility.
During the first quarter of 2002, the Company incurred additional relocation
costs of $109, recorded a charge of $157 for write-off of fixed assets and
recorded a reversal of $103 of the reserve for severance costs. As of June 30,
2002, final severance payments have been paid to 48 associates.
During the fourth quarter of 2001, the Company ceased operations at its Transfer
Media facility in Longwood, Florida. A pre-tax charge of $3,010 was recorded in
2001 for severance costs for 55 associates, write-off of abandoned assets and
costs related to closing the facility. As of June 30, 2002, final severance
payments have been paid to all associates and the remaining reserve of $45 for
severance costs was reversed in the second quarter of 2002.
A pre-tax charge of $988 was recorded during the fourth quarter of 2001 for
severance costs for 21 associates, costs for relocating the Pressroom Chemicals
German sales office and the U.S. sales and administrative functions and loss on
the sale of fixed assets. As of June 30, 2002, final severance payments have
been paid to 20 associates.
8
Below is a summary of the amounts charged against the reserves for severance and
facility shutdown in 2002:
TEXTILE IMAGE
PRODUCTS TRANSFER
Balance at December 31, 2001 $ 392 $ 1,508
Reversal of reserve (103)
Charges against the reserve for:
Severance costs (193) (549)
Facility shutdown (417)
--------- ---------
Balance at March 31, 2002 96 542
Reversal of reserve (45)
Charges against the reserve for:
Severance costs (46) (160)
Facility shutdown (32)
--------- ---------
Balance at June 30, 2002 $ 50 $ 305
========= =========
As of December 31, 2002, all restructuring programs had been completed.
H. 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. The following table illustrates the effect
on net income if compensation cost 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:
THREE MONTHS SIX MONTHS
2003 2002 2003 2002
Net income-as reported $ 1,072 $ 2,054 $ 3,521 $ 3,943
Less-stock-based compensation expense
determined using fair value based method in
SFAS No. 123 (208) (316) (416) (632)
------- ------- ------- -------
Pro forma net income $ 864 $ 1,738 $ 3,105 $ 3,311
======= ======= ======= =======
9
I. NEW ACCOUNTING PRINCIPLES
In July 2001, the Financial Accounting Standards Board (the "FASB") 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. These
Statements were adopted as of January 1, 2002. As of January 1, 2002, the
Company 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 May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
will require that the Company's redeemable preferred stock be recorded in the
same manner as long-term debt. The statement is effective for the Company as of
July 1, 2003, with no early adoption allowed. Beginning in the third quarter of
2003, the Company will reflect the redeemable preferred stock as long-term debt
and accrued dividends will be shown as interest expense. This statement will
have no effect on the net loss available to common shareholders, cash flows of
the Company or the Company's compliance with its debt covenants.
J. SUPPLEMENTAL CONSOLIDATING INFORMATION
The Company has outstanding $100,000, 11-1/8% Senior Notes and $115,000, 9 1/2%
Senior Subordinated Notes (collectively, the "Notes"). The Company has no assets
or operations other than its wholly-owned investment in Day International, Inc.
("Day International" or "Guarantor"). Day International has provided a full and
unconditional guarantee of the Notes. The wholly-owned foreign subsidiaries of
Day International are not guarantors with respect to the Notes and do not have
any credit arrangements senior to the Notes. The only intercompany eliminations
are the normal intercompany eliminations with regard to intercompany sales and
the Company's investment in the wholly-owned non-guarantor subsidiaries.
Intercompany notes are in place, which effectively transfers the interest
expense from the Company to Day International. The following are the
supplemental combining condensed balance sheets as of June 30, 2003 and December
31, 2002, and the supplemental combining condensed statements of operations and
cash flows for the three and six months ended June 30, 2003 and 2002, with the
investments in the subsidiaries accounted for using the equity method. Separate
complete financial statements of the Guarantor are not presented because
management has determined that they are not material to the investors.
10
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
JUNE 30, 2003
DAY
DAY INTER-
INTER- NATIONAL, NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
ASSETS
Cash and cash equivalents $ 249 $ (249) $ 1,435 $ $ 1,435
Accounts receivable-net 11,617 23,839 35,456
Inventories 20,055 20,988 41,043
Other current assets 5,219 2,087 7,306
----------- ----------- ----------- ----------- ----------
TOTAL CURRENT ASSETS 249 36,642 48,349 85,240
Intercompany 248,254 (3,266) 9,628 (254,616)
Property, plant and equipment, net 46,816 28,906 75,722
Investment in subsidiaries (35,753) 39,708 (3,790) (165)
Intangible and other assets 152,815 19,257 172,072
----------- ----------- ----------- ----------- ----------
TOTAL ASSETS $ 212,750 $ 272,715 $ 102,350 $ (254,781) $ 333,034
=========== =========== =========== =========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Accounts payable $ $ 3,199 $ 5,002 $ $ 8,201
Current maturities of long-term debt 12,511 94 12,605
Other current liabilities 4,292 9,587 16,660 30,539
----------- ----------- ----------- ----------- ----------
TOTAL CURRENT LIABILITIES 16,803 12,786 21,756 51,345
Intercompany (53,062) 300,490 (3,221) (244,207)
Long-term and subordinated long-term
debt 235,743 1,243 236,986
Other long-term liabilities 22,168 9,269 31,437
Redeemable preferred stock 134,017 134,017
Total stockholders' equity (deficit) (120,751) (62,729) 73,303 (10,574) (120,751)
----------- ----------- ----------- ----------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT) $ 212,750 $ 272,715 $ 102,350 $ (254,781) $ 333,034
=========== =========== =========== =========== ==========
11
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 current 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
Other current liabilities 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
=========== =========== =========== =========== ==========
12
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 36,095 $ 34,044 $ $ 70,139
Cost of goods sold 23,249 22,107 45,356
----------- ----------- ----------- ----------- -----------
Gross profit 12,846 11,937 24,783
Selling, general and administrative 14 8,671 6,734 15,419
Amortization of intangibles 206 206
Management fees 250 250
----------- ----------- ----------- ----------- -----------
Operating profit (14) 3,719 5,203 8,908
Other expenses (income):
Equity in (earnings) of subsidiaries (1,080) (2,652) 3,732
Interest expense 6,587 42 6,629
Other (income) expense (1) (326) 792 465
----------- ----------- ----------- ----------- -----------
Income before income taxes 1,067 110 4,369 (3,732) 1,814
Income tax expense (benefit) (5) (970) 1,717 742
----------- ----------- ----------- ----------- -----------
Net income $ 1,072 $ 1,080 $ 2,652 $ (3,732) $ 1,072
=========== =========== =========== =========== ===========
13
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 36,913 $ 27,121 $ $ 64,034
Cost of goods sold 23,197 16,969 40,166
----------- ----------- ----------- ----------- -----------
Gross profit 13,716 10,152 23,868
Selling, general and administrative 38 8,501 5,435 13,974
Restructuring costs (45) (45)
Amortization of intangibles 201 201
Management fees 250 250
----------- ----------- ----------- ----------- -----------
Operating profit (38) 4,809 4,717 9,488
Other expenses (income):
Equity in (earnings) of subsidiaries (2,076) (2,835) 4,911
Interest expense 6,703 6,703
Other (income) expense (1) (896) 300 (597)
----------- ----------- ----------- ----------- -----------
Income before income taxes 2,039 1,837 4,417 (4,911) 3,382
Income tax expense (benefit) (15) (239) 1,582 1,328
----------- ----------- ----------- ----------- -----------
Net income $ 2,054 $ 2,076 $ 2,835 $ (4,911) $ 2,054
=========== =========== =========== =========== ===========
14
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 71,808 $ 67,150 $ $ 138,958
Cost of goods sold 46,652 42,841 89,493
----------- ----------- ----------- ----------- -----------
Gross profit 25,156 24,309 49,465
Selling, general and administrative 59 17,157 12,752 29,968
Amortization of intangibles 407 407
Management fees 500 500
----------- ----------- ----------- ----------- -----------
Operating profit (59) 7,092 11,557 18,590
Other expenses (income):
Equity in (earnings) of subsidiaries (3,556) (5,991) 9,547
Interest expense 13,078 76 13,154
Other (income) expense (1) (1,993) 1,682 (312)
----------- ----------- ----------- ----------- -----------
Income before income taxes 3,498 1,998 9,799 (9,547) 5,748
Income tax expense (benefit) (23) (1,558) 3,808 2,227
----------- ----------- ----------- ----------- -----------
Net income $ 3,521 $ 3,556 $ 5,991 $ (9,547) $ 3,521
=========== =========== =========== =========== ===========
15
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2002
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 73,134 $ 52,086 $ $ 125,220
Cost of goods sold 46,450 32,870 79,320
----------- ----------- ----------- ----------- -----------
Gross profit 26,684 19,216 45,900
Selling, general and administrative 54 16,078 10,246 26,378
Restructuring costs 118 118
Amortization of intangibles 401 401
Management fees 500 500
----------- ----------- ----------- ----------- -----------
Operating profit (54) 9,587 8,970 18,503
Other expenses (income):
Equity in (earnings) of subsidiaries (3,975) (5,965) 9,940
Interest expense 13,472 1 13,473
Other (income) expense (1) (1,253) 808 (446)
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes 3,922 3,333 8,161 (9,940) 5,476
Income tax expense (benefit) (21) (642) 2,812 2,149
----------- ----------- ----------- ----------- -----------
Income (loss) before cumulative
effect of change in accounting
principles 3,943 3,975 5,349 (9,940) 3,327
Cumulative effect of change in
accounting principles 616 616
----------- ----------- ----------- ----------- -----------
Net income $ 3,943 $ 3,975 $ 5,965 $ (9,940) $ 3,943
=========== =========== =========== =========== ===========
16
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Cash Flows From Operating Activities:
Net income $ 3,521 $ 3,556 $ 5,991 $ (9,547) $ 3,521
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 6,284 1,654 7,938
Equity in (earnings) loss of subsidiaries (3,556) (5,991) 9,547
Deferred income taxes and other (1,779) (252) (2,031)
Foreign currency (gain) loss (1,927) 808 (1,119)
Net (gain) loss on disposal of assets 114 660 774
Changes in operating assets and
liabilities 96 3,232 (4,984) (1,656)
----------- ----------- ----------- ----------- -----------
Net cash provided by operating
activities 61 3,489 3,877 7,427
Cash Flows From Investing Activities:
Cash paid for acquisition (1,000) (1,000)
Capital expenditures (2,025) (2,287) (4,312)
Proceeds from sale of property 939 939
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities (2,086) (2,287) (4,373)
Cash Flows From Financing Activities:
Payments on term loan (6,300) (47) (6,347)
Net proceeds from revolving credit facility 3,650 3,650
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (2,650) (47) (2,697)
Intercompany transfers and dividends 2,342 (1,156) (1,186)
Effects of exchange rates on cash 82 82
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (247) 247 439 439
Cash and cash equivalents at beginning
of period 496 (496) 996 996
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period $ 249 $ (249) $ 1,435 $ $ 1,435
=========== =========== =========== =========== ===========
17
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2002
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Cash Flows From Operating Activities:
Net income $ 3,943 $ 3,975 $ 5,965 $ (9,940) $ 3,943
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Cumulative effect of change in
accounting principles (616) (616)
Depreciation and amortization 5,861 1,134 6,995
Equity in (earnings) loss of subsidiaries (3,975) (5,965) 9,940
Deferred income taxes and other 1,155 (19) 1,136
Foreign currency (gain) loss (627) 268 (359)
Loss on disposal of assets 157 157
Changes in operating assets and
liabilities (211) 1,001 (6,189) (5,399)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities (243) 5,557 543 5,857
Cash Flows From Investing Activities:
Capital expenditures (2,477) (977) (3,454)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities (2,477) (977) (3,454)
Cash Flows From Financing Activities:
Payments on term loan (6,300) (6,300)
Net borrowings on credit facilities 4,150 4,150
----------- ----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities (2,150) (2,150)
Intercompany transfers and dividends 1,978 (2,665) 687
Effects of exchange rates on cash (81) (81)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (415) 415 172 172
Cash and cash equivalents at beginning
of period 702 (702) 609 609
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period $ 287 $ (287) $ 781 $ $ 781
=========== =========== =========== =========== ===========
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SAFE HARBOR STATEMENT
This Quarterly Report contains forward-looking statements within the meaning of
the Securities Act of 1933. These are subject to certain risks and
uncertainties, including those identified below, which could affect the
Company's actual results and cause such results to differ materially from those
expressed in forward-looking statements. The words "believe," "anticipate,"
"expect," "intend," "will likely result," "will continue," and similar
expressions identify forward-looking statements.
Factors that could cause actual results to differ materially from the
forward-looking statements include but are not limited to (i) the effect of
leverage, including the limitations imposed by the Company's various debt
instruments; (ii) risks related to significant operations in foreign countries,
including the translation of operating results to the U.S. dollar; (iii) the
timely development and market acceptance of new products; (iv) the impact of
competitive products and pricing; (v) the effect of changing general and
industry specific economic conditions; (vi) the impact of environmental
regulations; and (vii) the potential for technology obsolescence.
While made in good faith and with a reasonable basis based on information
currently available to the Company's management, there is no assurance that any
such forward-looking statements will be achieved or accomplished. The Company is
under no obligation to update any forward-looking statements to the extent it
becomes aware that they are not achieved or likely to be achieved for any
reason.
BASIS OF PRESENTATION
The following table sets forth selected financial information in millions of
dollars and as a percentage of net sales:
THREE MONTHS SIX MONTHS
2003 2002 2003 2002
$ % $ % $ % $ %
Net sales 70.1 100.0 64.0 100.0 139.0 100.0 125.2 100.0
Costs of goods sold 45.3 64.7 40.1 62.7 89.5 64.4 79.3 63.3
------ ------- ------- ------ ------ ------- ------- ------
Gross profit 24.8 35.3 23.9 37.3 49.5 35.6 45.9 36.7
Selling, general and administrative expense 15.4 22.0 14.0 21.8 30.0 21.5 26.4 21.1
Restructuring costs 0.1 0.1
Amortization of intangibles 0.2 0.3 0.2 0.3 0.4 0.3 0.4 0.3
Management fees 0.3 0.3 0.2 0.4 0.5 0.4 0.5 0.4
------ ------- ------- ------ ------ ------- ------- ------
Operating profit 8.9 12.7 9.5 14.8 18.6 13.4 18.5 14.8
====== ======= ======= ====== ====== ======= ======= ======
19
COMPARISON OF RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003, COMPARED TO THREE MONTHS ENDED JUNE 30, 2002
Net sales increased $6.1 million (9.5%) to $70.1 million. Image Transfer's sales
increased $5.8 million (11.2%) to $57.5 million, primarily as a result of higher
sales volume in the United States of $1.0 million and in Europe of $1.5 million
and positive foreign currency rate changes of $3.4 million. The higher U.S.
Image Transfer sales volume was primarily as a result of sales from the
acquisition of a blanket manufacturer's product line in the first quarter of
2003. Europe sales volume increased primarily from market share gains in the
chemical products business in the United Kingdom and Germany. Textile Products'
sales increased $0.3 million (2.4%) to $12.6 million, primarily as a result of
positive foreign currency rate changes of $1.4 million offset by lower sales
volume in the United States of $1.0 million and in Europe of $0.1 million. The
lower U.S. Textile Products sales volume is primarily due to reduced demand in
the U.S. textile industry as a result of increased imports of low cost goods
from Asia and South America.
Gross profit increased $0.9 million (3.8%) to $24.8 million. As a percentage of
net sales, gross profit decreased to 35.3% for the three months ended June 30,
2003, compared to 37.3% for the three months ended June 30, 2002. The decrease
in the gross profit percentage was due primarily to higher spending for research
& development and higher depreciation expense resulting from capital projects
completed in 2002.
Selling, general and administrative expense ("SG&A") increased $1.4 million
(10.3%) to $15.4 million. As a percentage of net sales, SG&A increased to 22.0%
from 21.8%. Changes in foreign currency rates increased SG&A costs by $1.0
million in the second quarter of 2003 compared to the second quarter of 2002.
SG&A costs also increased as a result of higher insurance costs and higher
selling and distribution costs resulting from higher sales levels.
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. As of June 30, 2002, final
severance payments had been paid to all associates and the remaining reserve of
$0.1 million for severance costs was reversed in the second quarter of 2002.
Operating profit decreased $0.6 million (6.1%) to $8.9 million. As a percentage
of net sales, operating profit decreased to 12.7% for the three months ended
June 30, 2003, from 14.8% for the comparable period in 2002. Image Transfer's
operating profit increased $0.1 million (1.7%) to $9.1 million. As a percentage
of net sales, Image Transfer's operating profit decreased to 15.8% for the three
months ended June 30, 2003, from 17.3% in 2002. Textile Products' operating
profit decreased $0.5 million (27.1%) to $1.4 million. As a percentage of net
sales, Textile Products' operating profit decreased to 11.3% for the three
months ended June 30, 2003, from 15.9% in 2002.
Other expense was $0.5 million for the three months ended June 30, 2003,
compared to other income of $0.6 million for the three months ended June 30,
2002. The other (income) expense is primarily due to foreign currency
transaction (gains) losses incurred in the normal course of international
subsidiaries doing
20
business in other than their functional currency as well as a result of
intercompany financing arrangements. Other expense in 2003 includes a loss of
$1.1 million from the sale of the South African business, a gain of $0.9 million
from the sale of excess land in Mauldin, South Carolina and a loss of $0.5
million on the sale and disposal of equipment from the Longwood, Florida,
facility.
The effective tax rate for the second quarter of 2003 was 40.9% compared to
39.3% in 2002.
SIX MONTHS ENDED JUNE 30, 2003, COMPARED TO SIX MONTHS ENDED JUNE 30, 2002
Net sales increased $13.7 million (11.0%) to $139.0 million. Image Transfer's
sales increased $10.9 million (10.7%) to $113.1 million, primarily as a result
of higher sales volume in Europe of $3.8 million and in the United States of
$0.9 million and positive foreign currency rate changes of $6.6 million. Europe
sales volume increased primarily from market share gains in the pressroom
chemical business in the United Kingdom and Germany. The higher U.S. Image
Transfer sales volume was primarily as a result of sales from the acquisition of
a blanket manufacturer's product line in the first quarter of 2003. Textile
Products' sales increased $2.8 million (12.1%) to $25.8 million, primarily as a
result of positive foreign currency rate changes of $2.8 million and higher
sales volumes in Europe of $0.9 million, offset by lower sales volume in the
United States of $0.9 million. The lower U.S. Textile Products sales volume is
primarily a result of lower U.S. demand for spun yarn and woven fabric, coupled
with increased imports of textile articles from low cost countries in Asia and
South America. European sales volumes are steady in light of the relatively
strong Euro. Sales to textile equipment manufacturers, while at relatively lower
prices, continued to be steady in Europe. Sales of textile products to Asia from
Europe have not been significantly affected by the SARS situation.
Gross profit increased $3.6 million (7.8%) to $49.5 million. As a percentage of
net sales, gross profit decreased to 35.6% for the six months ended June 30,
2003, compared to 36.7% for the six months ended June 30, 2002. The decrease in
the gross profit percentage was due primarily to higher spending for research &
development and higher depreciation expense resulting from capital projects
completed in 2002.
Selling, general and administrative expense ("SG&A") increased $3.6 million
(13.6%) to $30.0 million. As a percentage of net sales, SG&A increased to 21.6%
from 21.1%. Changes in foreign currency rates increased SG&A costs by $1.8
million in the first six months of 2003 compared to the first six months of
2002. SG&A costs increased as a result of higher insurance costs and higher
selling and distribution costs from higher sales levels.
A pre-tax charge of $0.5 million was recorded in the first quarter of 2001 for
severance and termination costs to relocate the Textile Products operations from
its Asheville, North Carolina, facility to its Greenville, South Carolina,
facility. During the first quarter of 2002, the Company reversed $0.1 million of
the reserve. Additionally, a pre-tax charge of $0.3 million was recorded in the
first quarter of 2002 for relocation of machinery and equipment and write-off of
abandoned assets.
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,
21
write-off of abandoned assets and costs related to closing the facility. As of
June 30, 2002, final severance payments have been paid to all associates and the
remaining reserve of $0.1 million for severance costs was reversed in the second
quarter of 2002.
Operating profit increased $0.1 million (0.5%) to $18.6 million. As a percentage
of net sales, operating profit decreased to 13.4% for the six months ended June
30, 2003, from 14.8% for the comparable period in 2002. Image Transfer's
operating profit was flat at $18.6 million. As a percentage of net sales, Image
Transfer's operating profit decreased to 16.5% for the six months ended June 30,
2003, from 18.1% in 2002. Textile Products' operating profit was flat at $3.0
million. As a percentage of net sales, Textile Products' operating profit
decreased to 11.5% for the six months ended June 30, 2003, from 12.9% in 2002.
Other income was $0.3 million for the six months ended June 30, 2003, compared
to other income of $0.4 million for the six months ended June 30, 2002. The
other (income) expense is primarily due to foreign currency transaction losses
incurred in the normal course of international subsidiaries doing business in
other than their functional currency as well as a result of intercompany
financing arrangements. Other income in 2003 includes a loss of $1.1 million
from the sale of the South African business, a gain of $0.9 million from the
sale of excess land in Mauldin, South Carolina and a loss of $0.5 million on the
sale and disposal of equipment from the Longwood, Florida, facility.
The effective tax rate benefit for the first six months of 2003 was 38.7%
compared to 39.2% for 2002.
As of January 1, 2002, the Company adopted SFAS Nos. 141, "Business
Combinations" and 142, "Goodwill and Other Intangible Assets" and recognized
pre-tax income of $1.0 million for the cumulative effect of the change in
accounting principle for the amount of the unamortized deferred credit related
to the excess over cost arising from the TPO acquisition.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
will require that the Company's redeemable preferred stock be recorded in the
same manner as long-term debt. The statement is effective for the Company as of
July 1, 2003, with no early adoption allowed. Beginning in the third quarter of
2003, the Company will reflect the redeemable preferred stock as long-term debt
and accrued dividends will be shown as interest expense. This statement will
have no effect on the net loss available to common shareholders, cash flows of
the Company or the Company's compliance with its debt covenants.
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.
22
Capital expenditures were $4.3 million and $3.5 million for the six months ended
June 30, 2003 and 2002, respectively.
As of June 30, 2003, there was $8.6 million outstanding under the Revolving
Credit Facility and the Company had approximately $10.1 million available under
the Revolving Credit Facility (calculated by applying the applicable borrowing
base limitation). The Company's aggregate indebtedness at June 30, 2003, is
approximately $249.6 million and the aggregate liquidation preferences of the
Exchangeable Preferred Stock is $66.3 million and the Convertible Preferred
Stock is $71.3 million. The Company is highly leveraged. The Company's ability
to operate its business, service its debt requirements and reduce its total debt
will depend upon its future operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors,
certain of which are beyond its control, as well as the availability of
revolving credit borrowings. See the Company's Annual Report on Form 10-K for a
more extensive discussion of liquidity and capital resources.
The Company is currently in discussions regarding the issuance of a new senior
secured credit facility to refinance the existing Senior Secured Credit Facility
and the $100 million, 11-1/8% Senior Notes. The new agreement would allow the
Company to borrow at lower interest rates, extend the maturity of the Company's
indebtedness and permit additional borrowings to finance a potential future
acquisition. The Company intends to complete the refinancing in the third
quarter of 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company conducts a significant amount of business and has operating and
sales facilities in countries outside the United States. As a result, the
Company is subject to business risks inherent in non-U.S. activities, including
political uncertainty, import and export limitations, exchange controls and
currency fluctuations. The Company believes risks related to its foreign
operations are mitigated due to the political and economic stability of the
countries in which its largest foreign operations are located, the stand-alone
nature of the operations, the Company's limited net asset exposure, forward
foreign exchange contract practices and pricing flexibility. Thus, while changes
in foreign currency values do affect earnings, the longer-term economic effect
of these changes should not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
Certain of the Company's international subsidiaries make purchases in foreign
currencies, mainly intercompany transactions. As a result, they are subject to
transaction exposures that arise from foreign exchange movements between the
date that the foreign currency transaction is recorded and the date it is
consummated. The Company has entered into forward foreign exchange contracts to
protect it against such foreign exchange movements. The contract value of these
foreign exchange contracts was approximately $16.6 million at June 30, 2003 and
$10.1 million at December 31, 2002. These contracts generally expire within
three to twelve months. Foreign currency transaction (gains) losses, included in
other (income) expense, were $(0.6) million and $(0.5) million for the three
months ended June 30, 2003 and 2002 and $(1.4) million and $(0.3) million for
the six months ended June 30, 2003 and 2002.
23
INTEREST RATE RISKS
The Company is subject to market risk from exposure to changes in the interest
rates based on its financing activities. The Company utilizes a mix of debt
maturities along with both fixed- and variable-rate debt to manage its exposure
to changes in interest rates and to minimize interest expense. The Company does
not expect interest rate changes to have a material effect on income or cash
flows in 2003, although there can be no assurance that interest rates will not
materially change.
COMMODITY RISKS
Rubber polymers and fabrics are key components in most of the Image Transfer and
Textile products. The Company is exposed to changes in the costs of these
components. In addition, Image Transfer's pressroom chemical products are
exposed to changes in the cost of certain petroleum-based components. The
largest raw material component in the pressroom chemical products is petroleum
distillates, such as aliphatics and aromatics. When commodity prices increase,
the Company has historically passed on increases to its customers to maintain
its profit margins. Conversely, when commodity prices decline, the Company
generally lowers its sales prices to meet competitive pressures. The Company is
evaluating the impact of the recent increase in petroleum prices on its raw
material costs and in some markets already has instituted price increases to
offset the impact of these increases. Because the Company has historically been
able to raise sales prices to offset higher costs, management believes that a
10% change in the cost of its components could have a short-term impact until
sales price increases take effect, but overall would not have a material effect
on income or cash flows for a fiscal year.
ITEM 4. 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 as of June 30, 2003. To the best of
management's knowledge, there were no changes in the internal control and
disclosure control systems during the three months ended June 30, 2003, that
would significantly affect the control systems.
24
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
(31) RULE 13a-14(a)/15d-14(a) CERTIFICATIONS
31.1 Chief Executive Officer Certification
31.2 Chief Financial Officer Certification
(32) SECTION 1350 CERTIFICATIONS
32.1 Chief Executive Officer Certification
32.2 Chief Financial Officer Certification
b. Reports on Form 8-K
None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Day International Group, Inc.
-----------------------------
(Registrant)
Date: August 11, 2003 /s/ Thomas J. Koenig
--------------- -----------------------------------
Thomas J. Koenig
Vice President and
Chief Financial Officer
(Principal Financial Officer)
25