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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 SEPTEMBER 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 November 1, 2003.
DAY INTERNATIONAL GROUP, INC.
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 3
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows for the nine months ended September
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 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
Item 4. Controls and Procedures 26
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
Signature 27
2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND DECEMBER 31, 2002
(IN THOUSANDS)
2003 2002
ASSETS
Cash and cash equivalents $ 1,741 $ 996
Accounts receivable (less allowance for doubtful accounts of $2,741 and
$2,735) 35,141 32,782
Inventories (Note B) 38,755 34,851
Other current assets 7,172 6,064
----------- ---------
Total current assets 82,809 74,693
Property, plant and equipment, net of accumulated depreciation of
$45,152 and $37,817 74,692 74,319
Goodwill 129,075 127,080
Intangible assets (net of accumulated amortization of $42,907 and
$39,462) 25,056 26,696
Cash held for retirement of debt (Note C) 97,971
Other assets 20,319 17,089
----------- ---------
TOTAL ASSETS $ 429,922 $ 319,877
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 5,203 $ 8,228
Current maturities of long-term debt 15,207 12,597
Other current liabilities 26,541 22,334
----------- ---------
Total current liabilities 46,951 43,159
Long-term and subordinated long-term debt (Note C) 335,922 239,548
Other long-term liabilities 32,148 29,974
Redeemable preferred stock (Note D) 141,236 126,646
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) (58,837) (49,139)
Accumulated other comprehensive income (loss) 1,273 (1,540)
----------- ---------
Total stockholders' equity (deficit) (126,335) (119,450)
----------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 429,922 $ 319,877
=========== =========
See notes to condensed consolidated financial statements.
3
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS)
THREE MONTHS NINE MONTHS
2003 2002 2003 2002
NET SALES $ 70,054 $ 66,901 $ 209,012 $ 192,121
COST OF GOODS SOLD 45,050 42,521 134,543 121,841
--------- --------- ----------- ----------
GROSS PROFIT 25,004 24,380 74,469 70,280
SELLING, GENERAL AND ADMINISTRATIVE 15,241 14,372 45,209 40,750
RESTRUCTURING COSTS (Note I) 118
AMORTIZATION OF INTANGIBLES 205 208 612 609
MANAGEMENT FEES 250 250 750 750
--------- --------- ----------- ----------
OPERATING PROFIT 9,308 9,550 27,898 28,053
OTHER EXPENSES:
Interest expense:
Long-term debt (including amortization of
deferred financing costs and discount of $606,
$587, $1,780 and $1,771 and loss on
extinguishment of debt of $542 and $542 in 2003) 7,260 6,760 20,414 20,233
Redeemable preferred stock dividends (including
amortization of discount and issuance costs of $47 and
$47) (Note D) 4,923 4,923
Other (income) expense--net (225) (63) (537) (509)
--------- --------- ----------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (2,650) 2,853 3,098 8,329
INCOME TAX EXPENSE 901 1,180 3,128 3,329
--------- --------- ----------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (3,551) 1,673 (30) 5,000
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NET OF
TAX EXPENSE OF $394) (Note K) 616
--------- --------- ----------- ----------
NET INCOME (LOSS) (3,551) 1,673 (30) 5,616
PREFERRED STOCK DIVIDENDS (4,211) (9,574) (12,475)
AMORTIZATION OF PREFERRED STOCK DISCOUNT AND ISSUANCE COSTS (47) (94) (141)
--------- --------- ----------- ----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (3,551) $ (2,585) $ (9,698) $ (7,000)
========= ========= =========== ==========
See notes to condensed consolidated financial statements.
4
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(IN THOUSANDS)
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (30) $ 5,616
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Cumulative effect of change in accounting principle (616)
Interest expense:
Redeemable preferred stock dividends 4,923
Loss on extinguishment of debt 542
Depreciation and amortization 11,890 10,934
Deferred income taxes (3,151) (622)
Foreign currency (gain) loss (1,017) (10)
Undistributed earnings of investee (264)
Non-cash loss on disposal of fixed assets 774 157
Change in operating assets and liabilities (3,124) (2,505)
---------- ----------
Net cash provided by operating activities 10,807 12,690
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition (1,952)
Capital expenditures (5,456) (5,623)
Cash held for retirement of debt (97,971)
Proceeds from sale of property 939
---------- ----------
Net cash used in investing activities (104,440) (5,623)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 133,950
Payment of deferred financing fees (3,537)
Payments on long-term debt (31,197) (9,580)
Net borrowings (payments) on revolving credit facility (4,950) 3,150
---------- ----------
Net cash provided by (used in) financing activities 94,266 (6,430)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 112 (518)
---------- ----------
Net increase (decrease) in cash and cash equivalents 745 119
Cash and cash equivalents at beginning of period 996 609
---------- ----------
Cash and cash equivalents at end of period $ 1,741 $ 728
========== ==========
NON-CASH TRANSACTIONS:
Preferred stock dividends $ 7,278 $ 12,475
========== ==========
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 September 30, 2003 and December 31, 2002, consist of:
2003 2002
Finished goods $ 22,898 $ 20,510
Work in process 5,031 4,935
Raw materials 10,826 9,406
-------- --------
$ 38,755 $ 34,851
======== ========
C. LONG-TERM DEBT
On September 16, 2003, the Company issued $135,000 of senior secured debt under
a $155,000 Senior Secured Credit Facility to refinance its existing $100,000
11-1/8% Senior Notes and repay its outstanding $24,850 term loan and $10,750
revolving credit facility. The Second Amended and Restated Senior Secured Credit
Agreement consists of a $20,000 5-year Revolving Credit Facility, a Tranche A
(euro)26,577 ($30,000 equivalent at issuance) 5-year Term Loan and a Tranche B
$105,000 6-year Term Loan. The Revolving Credit Facility includes a $10,000
letter of credit subfacility ($455 of letters of credit were outstanding at
September 30, 2003) and a $2,000 swing line loan subfacility. The Company issued
a notice of redemption for the $100,000 11-1/8% Senior Notes and redeemed the
Senior Notes in October at a call price of $101,236. The proceeds received from
the debt issuance that were used to redeem the Senior Notes are classified as a
long-term asset as of September 30, 2003. In the third quarter of 2003, the
Company recorded a loss of $542 on the write-off of the remaining deferred
financing fees related to the existing credit agreement and will record an
additional loss of $2,241 in the fourth quarter of 2003 to write-off an
additional $1,005 of deferred financing fees related to the Senior Notes when
the debt is retired and to record the loss resulting from the $1,236 call
premium.
The Senior Secured Credit Facility requires a commitment fee of 1/2% a year on
the unused portion of the Revolving Credit Facility. Interest on the Tranche A
Term Loan and the Revolving Credit Facility is based on the banks' base rate
plus 2.75% or the LIBOR rate plus 3.75% and is subject to change based on the
debt leverage of the Company (5.88% at September 30, 2003). Interest rates on
LIBOR borrowings are fixed for one, two, three or six month periods at the
Company's discretion. Interest on
6
the Tranche B Term Loan is based on the banks' base rate plus 3.50% or the LIBOR
rate plus 4.50% (5.62% at September 30, 2003).
The Tranche A Term Loan matures in 20 consecutive quarterly installments and the
Tranche B Term Loan matures in 24 consecutive quarterly installments, commencing
on December 31, 2003. Principal payments on the Tranche A and the Tranche B Term
Loans are to be made in the following amounts (using U.S. dollar equivalents at
the issuance date for the Tranche A Term Loan denominated in euros):
installments 1-4, $637 per installment; installments 5-8, $1,013 per
installment; installments 9-12, $1,387 per installment; installments 13-16,
$2,513 per installment; installments 17-20, $3,262 per installment; and
installments 21-24, $24,938 per installment.
The Senior Secured Credit Agreement includes typical covenants, including
maximum total debt to EBITDA, maximum senior debt to EBITDA, minimum interest
coverage, minimum fixed charge coverage and limitations on capital expenditures
and distributions. The Agreement also requires 75% of excess cash flows (as
defined) be used to pay down the Term Loans.
D. 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 are
$3,979 as of September 30, 2003, which are included in the redeemable preferred
stock balance.
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
requires that the Company's redeemable preferred stock be recorded in the same
manner as long-term debt. The Company adopted the statement as of July 1, 2003.
Beginning in the third quarter of 2003, the Company reflects the redeemable
preferred stock as a liability and accrued dividends as interest expense. This
statement has no effect on the cash flows of the Company, net loss available to
common shareholders or the Company's compliance with its debt covenants.
E. INCOME TAXES
The Company's effective income tax rate is significantly different from the
statutory rates in effect as a result of the adoption of SFAS No. 150 and the
inclusion of the dividends on the redeemable preferred stock in income (loss)
before income taxes. The non-deductible preferred stock dividends cause a
significant difference between book income and taxable income subsequent to the
adoption of SFAS No. 150.
7
F. BUSINESS SEGMENTS
The Company produces precision-engineered products, specializing in the design
and customization of consumable image-transfer products for the graphic arts
(printing) industry and consumable fiber handling products for the textile
industry. The Image Transfer segment designs, manufactures and markets
high-quality printing blankets and sleeves, pressroom chemicals and automatic
dampening systems used primarily in the offset and flexographic printing
industries. The Textile Products segment manufactures and markets precision
engineered rubber cots and aprons sold to textile yarn spinners and other
engineered rubber products sold to diverse markets.
Segment performance is evaluated based on operating profit results compared to
the annual operating plan. Intersegment sales and transfers are not material.
The Company manages the two segments as separate strategic business units. They
are managed separately because each business unit requires different
manufacturing processes, technology and marketing strategies.
THREE MONTHS NINE MONTHS
2003 2002 2003 2002
Third party sales:
Image Transfer $ 58,424 $ 54,054 $ 171,546 $ 156,226
Textile Products 11,630 12,847 37,466 35,895
-------- -------- --------- ---------
Total $ 70,054 $ 66,901 $ 209,012 $ 192,121
======== ======== ========= =========
Segment operating profit:
Image Transfer $ 9,914 $ 9,039 $ 28,561 $ 27,670
Textile Products 1,028 1,986 4,009 4,949
-------- -------- --------- ---------
Total $ 10,942 $ 11,025 $ 32,570 $ 32,619
======== ======== ========= =========
The following is a reconciliation of the segment operating profit reported above
to the amount reported in the consolidated financial statements:
THREE MONTHS NINE MONTHS
2003 2002 2003 2002
Segment operating profit $ 10,942 $ 11,025 $ 32,570 $ 32,619
APB #16 depreciation and amortization (1,044) (892) (2,893) (2,703)
Non-allocated corporate expenses (135) (125) (417) (386)
Restructuring costs (118)
Amortization of intangibles (205) (208) (612) (609)
Management fees (250) (250) (750) (750)
-------- -------- -------- --------
Total operating profit $ 9,308 $ 9,550 $ 27,898 $ 28,053
======== ======== ======== ========
8
G. COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) is comprised of net income (loss), net
currency translation gains and losses and net unrealized gains and losses on
cash flow hedges. Total comprehensive income (loss) for the three months ended
September 30, 2003 and 2002 was $(3,288) and $1,993. Total comprehensive income
for the nine months ended September 30, 2003 and 2002 was $2,783 and $7,805. The
adoption of SFAS No. 150 is the primary cause of the difference between 2003 and
2002 amounts of comprehensive income (loss).
H. 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.
I. 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 September
30, 2002, final severance payments had 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. As of June 30, 2002, final severance
payments had 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 September 30, 2002, final severance payments had
been paid to 20 associates.
9
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
Charges against the reserve for:
Severance costs (50) (80)
Facility shutdown (21)
-------- --------
Balance at September 30, 2002 $ $ 204
======== ========
As of December 31, 2002, all restructuring programs had been completed.
J. 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
options 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 NINE MONTHS
2003 2002 2003 2002
Net income (loss)-as reported $ (3,551) $ 1,673 $ (30) $ 5,616
Less-stock-based compensation expense
determined using fair value based method in
SFAS No. 123 (203) (316) (619) (948)
-------- ------- ------- -------
Pro forma net income (loss) $ (3,754) $ 1,357 $ (649) $ 4,668
======== ======= ======= =======
10
K. NEW ACCOUNTING PRINCIPLE
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.
L. 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 September 30, 2003 and
December 31, 2002, and the supplemental combining condensed statements of
operations and cash flows for the three and nine months ended September 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.
11
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
SEPTEMBER 30, 2003
DAY
DAY INTER-
INTER- NATIONAL, NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
ASSETS
Cash and cash equivalents $ 597 $ (597) $ 1,741 $ $ 1,741
Accounts receivable-net 12,742 22,399 35,141
Inventories 18,891 19,864 38,755
Other current assets 5,116 2,056 7,172
--------- --------- --------- ---------- ---------
TOTAL CURRENT ASSETS 597 36,152 46,060 82,809
Intercompany 349,774 (4,306) 10,429 (355,897)
Property, plant and equipment, net 46,067 28,625 74,692
Investment in subsidiaries (34,375) 42,300 (3,682) (4,243)
Cash held for retirement of debt 97,971 97,971
Intangible and other assets 155,125 19,325 174,450
--------- --------- --------- ---------- ---------
TOTAL ASSETS $ 413,967 $ 275,338 $ 100,757 $ (360,140) $ 429,922
========= ========= ========= ========== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ $ 2,148 $ 3,055 $ $ 5,203
Current maturities of long-term debt 15,111 96 15,207
Other current liabilities 4,178 8,418 13,945 26,541
--------- --------- --------- ---------- ---------
TOTAL CURRENT LIABILITIES 19,289 10,566 17,096 46,951
Intercompany 45,115 303,326 (3,577) (344,864)
Long-term and subordinated long-term debt 334,662 1,260 335,922
Other long-term liabilities 22,535 9,613 32,148
Redeemable preferred stock 141,236 141,236
Total stockholders' equity (deficit) (126,335) (61,089) 76,365 (15,276) (126,335)
--------- --------- --------- ---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 413,967 $ 275,338 $ 100,757 $ (360,140) $ 429,922
========= ========= ========= ========== =========
12
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
========= ========= ========= ========= =========
13
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 38,084 $ 31,970 $ $ 70,054
Cost of goods sold 24,200 20,850 45,050
-------- -------- -------- -------- --------
Gross profit 13,884 11,120 25,004
Selling, general and administrative 9 8,311 6,921 15,241
Amortization of intangibles 205 205
Management fees 250 250
-------- -------- -------- -------- --------
Operating profit (loss) (9) 5,118 4,199 9,308
Other expenses (income):
Equity in (earnings) of subsidiaries (1,378) (2,700) 4,078
Interest expense 4,923 7,257 3 12,183
Other (income) expense 12 (237) (225)
-------- -------- -------- -------- --------
Income (loss) before income taxes (3,554) 549 4,433 (4,078) (2,650)
Income tax expense (benefit) (3) (829) 1,733 901
-------- -------- -------- -------- --------
Net income (loss) $ (3,551) $ 1,378 $ 2,700 $ (4,078) $ (3,551)
======== ======== ======== ======== ========
14
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 38,462 $ 28,439 $ $ 66,901
Cost of goods sold 24,348 18,173 42,521
--------- --------- --------- -------- --------
Gross profit 14,114 10,266 24,380
Selling, general and administrative 1 8,364 6,007 14,372
Amortization of intangibles 208 208
Management fees 250 250
--------- --------- --------- -------- --------
Operating profit (loss) (1) 5,292 4,259 9,550
Other expenses (income):
Equity in (earnings) of subsidiaries (1,673) (2,379) 4,052
Interest expense 6,699 61 6,760
Other (income) expense (1) (281) 219 (63)
--------- --------- --------- -------- --------
Income before income taxes 1,673 1,253 3,979 (4,052) 2,853
Income tax expense (benefit) (420) 1,600 1,180
--------- --------- --------- -------- --------
Net income $ 1,673 $ 1,673 $ 2,379 $ (4,052) $ 1,673
========= ========= ========= ======== ========
15
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 109,892 $ 99,120 $ $ 209,012
Cost of goods sold 70,852 63,691 134,543
--------- --------- --------- --------- ---------
Gross profit 39,040 35,429 74,469
Selling, general and administrative 68 25,468 19,673 45,209
Amortization of intangibles 612 612
Management fees 750 750
--------- --------- --------- --------- ---------
Operating profit (loss) (68) 12,210 15,756 27,898
Other expenses (income):
Equity in (earnings) of subsidiaries (4,934) (8,691) 13,625
Interest expense 4,923 20,335 79 25,337
Other (income) expense (1) (1,981) 1,445 (537)
--------- --------- --------- --------- ---------
Income (loss) before income taxes (56) 2,547 14,232 (13,625) 3,098
Income tax expense (benefit) (26) (2,387) 5,541 3,128
--------- --------- --------- --------- ---------
Net income (loss) $ (30) $ 4,934 $ 8,691 $ (13,625) $ (30)
========= ========= ========= ========= =========
16
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Net sales $ $ 111,596 $ 80,525 $ $ 192,121
Cost of goods sold 70,798 51,043 121,841
--------- --------- --------- --------- ---------
Gross profit 40,798 29,482 70,280
Selling, general and administrative 55 24,442 16,253 40,750
Restructuring costs 118 118
Amortization of intangibles 609 609
Management fees 750 750
--------- --------- --------- --------- ---------
Operating profit (loss) (55) 14,879 13,229 28,053
Other expenses (income):
Equity in (earnings) loss of subsidiaries (5,648) (8,344) 13,992
Interest expense 20,171 62 20,233
Other (income) expense (2) (1,534) 1,027 (509)
--------- --------- --------- --------- ---------
Income before income taxes 5,595 4,586 12,140 (13,992) 8,329
Income tax expense (benefit) (21) (1,062) 4,412 3,329
--------- --------- --------- --------- ---------
Income before cumulative effect of
change in accounting principles 5,616 5,648 7,728 (13,992) 5,000
Cumulative effect of change in accounting
principles 616 616
--------- --------- --------- --------- ---------
Net income $ 5,616 $ 5,648 $ 8,344 $ (13,992) $ 5,616
========= ========= ========= ========= =========
17
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Cash Flows From Operating Activities:
Net income (loss) $ (30) $ 4,934 $ 8,691 $ (13,625) $ (30)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Interest expense:
Redeemable preferred stock dividends 4,923 4,923
Loss on extinguishment of debt 542 542
Depreciation and amortization 9,341 2,549 11,890
Equity in (earnings) loss of subsidiaries (4,934) (8,691) 13,625
Deferred income taxes and other (2,848) (303) (3,151)
Foreign currency (gain) loss (1,814) 797 (1,017)
Net (gain) loss on disposal of fixed assets 113 661 774
Changes in operating assets and
liabilities (18) 3,806 (6,912) (3,124)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities (59) 5,383 5,483 10,807
Cash Flows From Investing Activities:
Cash paid for acquisition (1,952) (1,952)
Capital expenditures (2,725) (2,731) (5,456)
Cash held for retirement of debt (97,971) (97,971)
Proceeds from sale of property 939 939
--------- --------- --------- --------- ---------
Net cash used in investing activities (97,971) (3,738) (2,731) (104,440)
Cash Flows From Financing Activities:
Proceeds from issuance of debt 133,950 133,950
Payment of deferred financing fees (3,537) (3,537)
Payments on long-term debt (31,150) (47) (31,197)
Net borrowings (payments) on revolving credit
facility (4,950) (4,950)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities 97,850 (3,537) (47) 94,266
Intercompany transfers and dividends 281 1,791 (2,072)
Effects of exchange rates on cash 112 112
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 101 (101) 745 745
Cash and cash equivalents at beginning of
period 496 (496) 996 996
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 597 $ (597) $ 1,741 $ $ 1,741
========= ========= ========= ========= =========
18
DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002
DAY
DAY INTER-
INTER- NATIONAL NON-
NATIONAL INC. GUARANTOR
GROUP, INC. (GUARANTOR) SUBSIDIARIES ELIMINATIONS CONSOLIDATED
Cash Flows From Operating Activities:
Net income $ 5,616 $ 5,648 $ 8,344 $ (13,992) $ 5,616
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 8,934 2,000 10,934
Equity in (earnings) loss of subsidiaries (5,648) (8,344) 13,992
Deferred income taxes and other (588) (34) (622)
Foreign currency (gain) loss (160) 150 (10)
Undistributed earnings of investee (264) (264)
Non-cash restructuring charge 157 157
Changes in operating assets and
liabilities (183) 1,531 (3,853) (2,505)
--------- --------- --------- --------- ---------
Net cash provided by (used in)
operating activities (215) 6,914 5,991 12,690
Cash Flows From Investing Activities:
Capital expenditures (3,375) (2,248) (5,623)
--------- --------- --------- --------- ---------
Net cash used in investing activities (3,375) (2,248) (5,623)
Cash Flows From Financing Activities:
Payments on term loan (9,450) (130) (9,580)
Net borrowings on credit facilities 3,150 3,150
--------- --------- --------- --------- ---------
Net cash used in financing activities (6,300) (130) (6,430)
Intercompany transfers and dividends 6,625 (3,649) (2,976)
Effects of exchange rates on cash (518) (518)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 110 (110) 119 119
Cash and cash equivalents at beginning of
period 702 (702) 609 609
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 812 $ (812) $ 728 $ $ 728
========= ========= ========= ========= =========
19
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 NINE MONTHS
2003 2002 2003 2002
$ % $ % $ % $ %
Net sales 70.1 100.0 66.9 100.0 209.0 100.0 192.1 100.0
Costs of goods sold 45.1 64.3 42.5 63.6 134.5 64.4 121.8 63.4
------ ------- ------- ------ ------ ------- ------- ------
Gross profit 25.0 35.7 24.4 36.4 74.5 35.6 70.3 36.6
Selling, general and administrative expense 15.2 21.8 14.4 21.5 45.2 21.6 40.7 21.2
Restructuring costs 0.1 0.1
Amortization of intangibles 0.2 0.3 0.2 0.3 0.6 0.3 0.6 0.3
Management fees 0.3 0.3 0.2 0.3 0.8 0.4 0.8 0.4
------ ------- ------- ------ ------ ------- ------- ------
Operating profit 9.3 13.3 9.6 14.3 27.9 13.3 28.1 14.6
====== ======= ======= ====== ====== ======= ======= ======
COMPARISON OF RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002
Net sales increased $3.2 million (4.7%) to $70.1 million. Image Transfer's sales
increased $4.4 million (8.1%) to $58.4 million, primarily as a result of higher
sales volume in the United States of $2.7 million and in Europe of $0.5 million
and positive foreign currency rate changes of $2.1 million offset by lower
20
sales volumes in the Pacific Rim of $0.8 million. The higher U.S. Image
Transfer sales volume was primarily as a result of sales from an acquisition in
the first quarter of 2003 of $0.8 million and from higher sales volumes across
substantially all product lines. European sales volume increased primarily from
market share gains in the chemical products business in the United Kingdom and
Germany. Textile Products' sales decreased $1.2 million (9.5%) to $11.6 million,
primarily as a result of lower sales volume in the United States of $1.6 million
and in Europe of $0.5 million offset by positive foreign currency rate changes
of $0.9 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 weak consumer
demand for textile and apparel products coupled with increased imports of low
cost goods from Asia and South America. The ongoing restructuring of the U.S.
textile manufacturing industry has resulted in further consolidation and closure
of yarn spinning mills as well as weaving facilities. Weak sales have forced
textile manufacturers to cut expenses and reduce inventories, which have had a
direct effect on reducing Textile Products' sales. The lower European Textile
Products' sales are as a result of lower sales by original equipment
manufacturers ("OEMs") and lower textile mill activity in Europe.
Gross profit increased $0.6 million (2.6%) to $25.0 million. As a percentage of
net sales, gross profit decreased to 35.7% for the three months ended September
30, 2003, compared to 36.4% for the three months ended September 30, 2002. The
decrease in the gross profit percentage was due primarily to underabsorbed fixed
overhead costs of Textile Products resulting from the lower sales volumes and
higher spending for research and development for Image Transfer.
Selling, general and administrative expense ("SG&A") increased $0.9 million
(6.0%) to $15.2 million. As a percentage of net sales, SG&A increased to 21.8%
from 21.5%. Changes in foreign currency rates increased SG&A costs by $0.6
million in the third quarter of 2003 compared to the third 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.
Operating profit decreased $0.2 million (2.5%) to $9.3 million. As a percentage
of net sales, operating profit decreased to 13.3% for the three months ended
September 30, 2003, from 14.3% for the comparable period in 2002. Image
Transfer's operating profit increased $0.9 million (9.7%) to $9.9 million. As a
percentage of net sales, Image Transfer's operating profit increased to 17.0%
for the three months ended September 30, 2003, from 16.7% in 2002. Textile
Products' operating profit decreased $1.0 million (48.2%) to $1.0 million. As a
percentage of net sales, Textile Products' operating profit decreased to 8.8%
for the three months ended September 30, 2003, from 15.5% in 2002.
Interest expense increased $5.4 million as a result of the adoption of SFAS No.
150 and the non-deductible preferred stock dividends now reflected as interest
expense of $4.9 million and a loss of $0.5 million on the write-off of the
remaining deferred financing fees related to the existing credit agreement. The
Company will record an additional loss of $2.2 million in the fourth quarter of
2003 to write-off an additional $1.0 million of deferred financing fees related
to the Senior Notes when the debt is retired and to record the loss resulting
from the $1.2 million call premium.
Other income was $0.2 million for the three months ended September 30, 2003,
compared to other income of $0.1 million for the three months ended September
30, 2002. 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.
21
The Company recorded income tax expense on a loss before income taxes in the
third quarter of 2003. The effective tax rate for 2003 is affected by the
adoption of SFAS No. 150 and the non-deductible preferred stock dividends now
reflected as interest expense. Adjusted for the preferred stock dividends, the
effective tax rate would be 39.6% in 2003. The effective tax rate for the third
quarter of 2002 was 41.4%.
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
requires that the Company's redeemable preferred stock be recorded in the same
manner as long-term debt. The Company adopted the statement as of July 1, 2003.
Beginning in the third quarter of 2003, the Company reflects the redeemable
preferred stock as a liability and accrued dividends as interest expense. This
statement has no effect on the net loss available to common shareholders, cash
flows of the Company or the Company's compliance with its debt covenants.
NINE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2002
Net sales increased $16.9 million (8.8%) to $209.0 million. Image Transfer's
sales increased $15.3 million (9.8%) to $171.5 million, primarily as a result of
higher sales volume in Europe of $4.3 million and in the United States of $3.6
million and positive foreign currency rate changes of $8.7 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 an acquisition in the first
quarter of 2003 of $1.9 million and from higher sales volumes across
substantially all product lines. Textile Products' sales increased $1.6 million
(4.4%) to $37.5 million, primarily as a result of positive foreign currency rate
changes of $3.7 million and higher sales volumes in Europe of $0.4 million,
offset by lower sales volume in the United States of $2.5 million. The lower
U.S. Textile Products sales volume is primarily a result of reduced production
of spun yarn in the United States as yarn production continues to shift to
lower-cost areas outside the United States, coupled with the weak consumer
demand for textile and apparel products. Additionally, U.S. textile
manufacturers have continued to face financial difficulties resulting in
bankruptcies and closure of facilities, expense reductions and inventory cuts.
The European Textile Products' sales volume has increased primarily as a result
of increased OEM sales over the prior year, more than offsetting weaker sales to
European textile mills. Textile Products' sales to Asian markets are steady, but
typically at lower unit values.
Gross profit increased $4.2 million (6.0%) to $74.5 million. As a percentage of
net sales, gross profit decreased to 35.6% for the nine months ended September
30, 2003, compared to 36.6% for the nine months ended September 30, 2002. The
decrease in the gross profit percentage was due primarily to increased sales in
non-U.S. markets where margins are typically lower combined with higher spending
for research & development and higher depreciation expense resulting from
capital projects completed in 2002.
Selling, general and administrative expense ("SG&A") increased $4.5 million
(10.9%) to $45.2 million. As a percentage of net sales, SG&A increased to 21.6%
from 21.2%. Changes in foreign currency rates increased SG&A costs by $2.5
million in the first nine months of 2003 compared to the first nine
22
months of 2002. SG&A costs also 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 was recorded in the first
quarter ended 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 $3,010 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 had been paid to all associates and the remaining reserve of $45 for
severance costs was reversed in the second quarter of 2002.
Operating profit decreased $0.2 million (0.6%) to $27.9 million. As a percentage
of net sales, operating profit decreased to 13.3% for the nine months ended
September 30, 2003, from 14.6% for the comparable period in 2002. Image
Transfer's operating profit increased $0.9 million (3.2%) to $28.6 million. As a
percentage of net sales, Image Transfer's operating profit decreased to 16.6%
for the nine months ended September 30, 2003, from 17.7% in 2002. Textile
Products' operating profit decreased $0.9 million (19.0%) to $4.0 million. As a
percentage of net sales, Textile Products' operating profit decreased to 10.7%
for the nine months ended September 30, 2003, from 13.8% in 2002.
Interest expense increased $5.4 million as a result of the adoption of SFAS No.
150 and the non-deductible preferred stock dividends now reflected as interest
expense of $4.9 million and as a result of a loss of $0.5 million on the
write-off of the remaining deferred financing fees related to the existing
credit agreement, offset by lower interest expense resulting from lower interest
rates and lower borrowing levels. The Company will record an additional loss of
$2.2 million in the fourth quarter of 2003 to write-off an additional $1.0
million of deferred financing fees related to the Senior Notes when the debt is
retired and to record the loss resulting from the $1.2 million call premium.
Other income was $0.5 million for the nine months ended September 30, 2003,
compared to other income of $0.5 million for the nine months ended September 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 for the first nine months of 2003 was 101.0% compared to
40.0% for 2002. The effective tax rate for 2003 is affected by the adoption of
SFAS No. 150 and the non-deductible preferred stock dividends now reflected as
interest expense. Adjusted for the preferred stock dividends, the effective tax
rate would be 39.0%.
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
23
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
requires that the Company's redeemable preferred stock be recorded in the same
manner as long-term debt. The Company adopted the statement as of July 1, 2003.
Beginning in the third quarter of 2003, the Company reflects the redeemable
preferred stock as a liability and accrued dividends as interest expense. This
statement has no effect on the cash flows of the Company, net loss available to
common shareholders 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.
Capital expenditures were $5.5 million and $5.6 million for the nine months
ended September 30, 2003 and 2002, respectively.
On September 16, 2003, the Company issued $135.0 million of senior secured debt
under a $155.0 million Senior Secured Credit Facility to refinance its existing
$100.0 million 11-1/8% Senior Notes and repay its outstanding $24.9 million term
loan and $10.7 million revolving credit facility. The Second Amended and
Restated Senior Secured Credit Agreement consists of a $20.0 million 5-year
Revolving Credit Facility, a Tranche A (euro)26.6 million ($30.0 million
equivalent at issuance) 5-year Term Loan and a Tranche B $105.0 million 6-year
Term Loan. The Revolving Credit Facility includes a $10.0 million letter of
credit subfacility ($0.5 million of letters of credit were outstanding at
September 30, 2003) and a $2.0 million swing line loan subfacility. The Company
issued a notice for redemption of the $100.0 million 11-1/8% Senior Notes and
redeemed the Senior Notes in October at the call price of $101.2 million. The
proceeds received from the debt issuance that were used to redeem the Senior
Notes are classified as a long-term asset as of September 30, 2003.
The Senior Secured Credit Facility requires a commitment fee of 1/2% a year on
the unused portion of the revolving line of credit. Interest on the Tranche A
Term Loan and the Revolving Credit Facility is based on the banks' base rate
plus 2.75% or the LIBOR rate plus 3.75% and is subject to change based on the
debt leverage of the Company. Interest rates on LIBOR borrowings are fixed for
one, two, three or six month periods at the Company's discretion. Interest on
the Tranche B Term Loan is based on the banks' base rate plus 3.5% or the LIBOR
rate plus 4.5%.
The Tranche A Term Loan matures in 20 consecutive quarterly installments and the
Tranche B Term Loan matures in 24 consecutive quarterly installments, commencing
on December 31, 2003. Principal payments are to be made in the following amounts
(using U.S. dollar equivalents at the issuance date for the Tranche A Term Loan
denominated in euros): installments 1-4, $0.6 million per installment;
installments 5-8, $1.0 million per installment; installments 9-12, $1.4 million
per installment;
24
installments 13-16, $2.5 million per installment; installments 17-20, $3.3
million per installment; and installments 21-24, $24.9 million per installment.
The Senior Secured Credit Agreement includes typical covenants, including
maximum total debt to EBITDA, maximum senior debt to EBITDA, minimum interest
coverage, minimum fixed charge coverage and limitations on capital expenditures
and distributions. The Agreement also requires 75% of excess cash flows (as
defined) be used to pay down the Term Loans.
As of September 30, 2003, there were no outstanding borrowings under the
Revolving Credit Facility and the Company had $19.5 million available under the
Revolving Credit Facility. The Company's aggregate indebtedness at September 30,
2003, is $351.1 million, including the $100.0 million Senior Notes redeemed in
October. At September 30, 2003, the Company held $98.0 million of cash for
retirement of the Senior Notes. The aggregate liquidation preference of the
Exchangeable Preferred Stock is $68.3 million and the Convertible Preferred
Stock is $74.2 million. The Company is highly leveraged. The Company's ability
to operate its business, service its debt requirements and reduce its total debt
will depend upon its future operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors,
certain of which are beyond its control, as well as the availability of
revolving credit borrowings. See the Company's Annual Report on Form 10-K for a
more extensive discussion of liquidity and capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company conducts a significant amount of business and has operating and
sales facilities in countries outside the United States. As a result, the
Company is subject to business risks inherent in non-U.S. activities, including
political uncertainty, import and export limitations, exchange controls and
currency fluctuations. The Company believes risks related to its foreign
operations are mitigated due to the political and economic stability of the
countries in which its largest foreign operations are located, the stand-alone
nature of the operations, the Company's limited net asset exposure, forward
foreign exchange contract practices and pricing flexibility. Thus, while changes
in foreign currency values do affect earnings, the longer-term economic effect
of these changes should not have a material adverse effect on the Company's
financial condition, results of operations or liquidity.
Certain of the Company's international subsidiaries make purchases in foreign
currencies, mainly intercompany transactions. As a result, they are subject to
transaction exposures that arise from foreign exchange movements between the
date that the foreign currency transaction is recorded and the date it is
consummated. The Company has entered into forward foreign exchange contracts to
protect it against such foreign exchange movements. The contract value of these
foreign exchange contracts was approximately $13.3 million at September 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 $0.3 million and $0.3 million for the three months
ended September 30, 2003 and 2002 and $(1.2) million and zero for the nine
months ended September 30, 2003 and 2002.
25
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 for the three months ended
September 30, 2003. To the best of management's knowledge, there were no changes
in the internal control and disclosure control systems during the quarter ended
September 30, 2003, that would materially affect the control systems.
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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
On September 22, 2003, the Company filed a Form 8-K reporting under
Item 5 that it had refinanced a portion of its outstanding long-term
debt.
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: November 4, 2003 /s/ Thomas J. Koenig
-----------------------------
Thomas J. Koenig
Vice President and
Chief Financial Officer
(Principal Financial Officer)
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