ITEM 1. BUSINESS
COMPANY BACKGROUND
The Company is one of the world's leading producers of precision-engineered products, specializing in the design and customization of consumable image-transfer products for the graphic arts (printing) industry and consumable fiber handling products for the textile industry. The Company consists of two segments: the Image Transfer segment and the Textile Products segment. The Image Transfer segment consists of the Transfer Media division and the Chemical Products division. The Transfer Media division is the world's largest designer, manufacturer and marketer of high-quality printing blankets and sleeves for use in offset printing. The Company estimates that in 2003 it had the number one market share in offset-printing blankets and sleeves in North America and worldwide. The Company is one of the world's largest manufacturers and marketers of sleeves for use in flexographic printing. The Chemical Products division is a leading worldwide supplier of pressroom chemicals to the printing industry and also manufactures the Kompac brand of automatic dampening systems for printing presses. The Textile Products segment is one of the world's largest manufacturers and marketers of precision engineered rubber cots, aprons and other fabricated rubber fiber handling components sold to textile yarn spinners worldwide.
Affiliates of GSC Partners and SG Capital Partners LLC own substantially all of the common stock of the Company, with the Company's management holding the balance of the common stock.
On September 30, 1999, the Company acquired the textile products operations of Armstrong World Industries, Inc. ("TPO"). TPO is a leading manufacturer and marketer of high-end precision engineered rubber cots and aprons sold to textile yarn spinners worldwide and was a major competitor of Day's textile division.
On October 19, 1999, the Company acquired Varn International ("Varn" or "Chemical Products"). Varn manufactures pressroom chemicals and dampening systems for the printing industry.
On November 24, 2003, the Company acquired Network Distribution International ("NDI"). NDI is a converter of offset blankets and reseller of ancillary consumable products to the printing industry, primarily in the United States. NDI supplies printers with a broad range of printing blankets, pressroom chemicals, supplies and equipment.
See the Notes to the Consolidated Financial Statements for more information on business segments.
IMAGE TRANSFER
The Image Transfer segment specializes in selling consumable products to the graphic arts (printing) industry, primarily those used in offset printing. Offset is the primary printing process for long-run, high-speed applications, such as the printing of magazines, annual reports, catalogs, direct mail and newspapers. Flexographic and digital, two other printing processes, are currently used primarily in short-run, lower speed applications, such as for printing brochures and packaging material. The Company believes that applications for image transfer products within flexographic and digital printing
processes will increase significantly and that advances in digital technologies will complement offset printing processes and will provide additional opportunities for consumable products. It is generally expected that the demand for these processes will grow rapidly and that they will be used for an increasing amount of printing jobs. If these other technologies develop so that they compete effectively with offset printing in the high-speed, long-run segment of the printing industry, and such technologies are widely adopted, the business of Image Transfer could be adversely affected. There can be no assurance that the Company will be able to effectively develop products for these technologies or to maintain its market leadership if such processes replace offset printing to any significant extent. The Company is developing blankets, sleeves and belts for these new printing machine technologies in conjunction with the companies working on the printing machine technologies. Due to the large number of offset printing presses installed in the United States, management expects that the offset process will continue to be the method of choice for high-quality, low-cost, long runs. Products designed for use in offset printing generate the majority of the sales of Image Transfer.
Transfer Media
Offset printing blankets are highly engineered products manufactured to narrow tolerances and precise specifications. They are composed of multiple layers of fabric, rubber and adhesives that determine performance features on the printing press and overall quality of the printing job. Offset printing sleeves are highly engineered "tubular" blankets that operate at speeds 20% to 30% faster than those of standard presses. Blankets and sleeves accept ink from cylindrical printing plates and transfer it to a broad range of paper stocks and other substrates. Blankets and sleeves are a major determinant of the quality of the image resolution and consistency of the printed material, as they are required to perform consistently over a broad range of press speeds and printing pressures with a wide variety of papers, inks and other chemicals. Blankets and sleeves are consumable and are replaced at regular intervals depending on the process used and printing requirements. Due to the importance of blankets and sleeves in determining the overall quality of the printing job, and because their cost typically represents less than 1% of the cost of the printed page, price is only one of the factors in the end-user's purchase decision.
Chemical Products
Chemical Products manufactures two categories of products: pressroom chemicals and dampening systems. Chemical Products manufactures over 100 different pressroom chemicals, which can be classified into the following categories: (i) roller and blanket washes, which are used to remove ink and glaze from the surface of the rollers and blankets on the printing press; (ii) fountain solutions, which are used to prevent ink from migrating to non-print areas of the printing plate; (iii) anti-setoff powders, which are used by sheet fed and letter press printers to prevent ink from transferring from the top of one sheet to the bottom of the next; (iv) lithographic chemicals and specialties; and (v) silicones, which are used in heatset web offset to provide support in certain printing processes. Chemical Products' products can be grouped into standard and custom products. Product lines are formulated to meet regional requirements. For example, high volume printing operations, such as major daily newspapers and commercial heatset web, often require custom fountain solutions.
Products
The Company manufactures a full line of high-quality, name brand printing blankets and sleeves to both web-fed (continuous roll) and sheet-fed (individual sheet) offset printers under the "Day," "David M," "Freedom" and "IPT" brands. In addition, through its acquisition of NDI, it offers a line of name brand blankets produced by competitors. The Company's printing blankets and sleeves are used to print magazines, advertising material, business forms, packaging, newspapers and other printed material. As a result of the superior quality, reliability and value of the Company's printing blankets and sleeves and its customer service, the Company is able to command premium prices for its products.
The Company's leading printing blankets are the 9500 dayGraphica(R), 4000 dayGraphica(R), 3000 Patriot(R), 3610 dayGraphica(R), 8500 AccuDot(R), QuantaLith(R) Gold and QuantaLith(R) Blue lines, which produce high-quality images, particularly on high-speed printing presses. The Freedom brand was introduced in 2001 to address the group of customers who were looking for an economically priced product where quality was a secondary consideration. In 2003, the Company introduced the Durazone blanket, which is a longer-lasting, more durable blanket. At the end of 2003, the Company is the sole manufacturer of tubular, seamless printing sleeves for use on Heidelberg Web Press, Inc.'s "gapless" webpresses.
During the latter part of 2001, the Company began producing consumable products for digital printing presses. Sales of these products are expected to grow as digital printing presses are sold that utilize these products. The Company is evaluating the production of other prototypes for new short-run color printing processes.
Transfer Media manufactures a wide array of sleeves used in the flexographic printing process under the Rotec name. Rotec gained industry prominence in 1993 with the introduction of the compressible sleeve, a product innovation enabling flexographic printers to achieve higher levels of print quality. The base technology for the flexographic sleeve has the potential for use in other printing segments as well (e.g., gravure and offset), which may expand the market segments for sleeve technology. The Company has entered into an agreement with E. I. du Pont de Nemours and Company to manufacture an "in-the-round" sleeve under the Cyrel(R) brand name for flexographic presses.
Transfer Media also manufactures and sells two lines of specialty products consisting of (i) pre-inked porous rolls for use in business machines, automated bank teller machines, ticket machines and credit card imprinters and (ii) cast urethane mats used by the box board corrugating industry as a backing material in cutting operations. The Company sells printing accessories such as cylinder packing papers and aluminum bars for mounting blankets onto press cylinders. In addition, the Company sells custom rubber compounds to several wire coaters in Europe.
Chemical Products has developed products that speed wash-up, color changes and blanket and roller maintenance; all formulated to reduce downtime and improve productivity. Roller and blanket washes are used to remove ink and glaze from the surface of the rollers and blankets on the printing press. Chemical Products makes over 25 washes, grouped into five different categories: premium, environmental, general purpose, fast drying and specialty. Chemical Products is a market leader in the area of environmental washes, which constitutes an important subcategory of Chemical Products' overall roller and blanket washes business.
Chemical Products has created a family of fountain solutions, which are used to prevent ink from migrating to non-print areas of the printing plate, to cover all requirements from high-speed web printing presses down to small offset duplicating printing presses. The fountain solutions and fountain additives are adjusted for water condition and properly balanced and fortified to improve print quality and press productivity. Chemical Products has created a line of alcohol-free fountain solutions formulated to eliminate the use of isopropyl alcohol from the process thus improving the pressroom environment.
Antisetoff powders are used extensively by sheetfed, offset and letterpress printers to prevent ink from transferring from the top of one sheet to the bottom of the next. Chemical Products offers an extensive range of silicone and conventional antisetoff powders to meet all industry requirements.
Lithographic chemicals and specialties include a wide range of products (including deglazers, additives, plate cleaners, aerosols) formulated to meet the evolving needs of the printing industry.
Silicones are used in heatset web offset printing to provide slip to the sheet as it passes over the former board. Chemical Products offers an extensive line of conventional silicones, as well as new technology silicones.
Chemical Products also manufactures the patented Kompac Dampening System and other mechanical devices for offset printing presses. Chemical Products manufactures six different Kompac Dampening Systems models to fit more than 8 different presses, both for new and retrofit applications. Kompac Dampening Systems consume other products manufactured by Chemical Products, such as fountain solutions.
Sales and Distribution
Image Transfer has adopted an integrated approach to product development, marketing, sales and distribution. Sales professionals in the United States have strong customer relationships and superior technical expertise. The international sales force includes sales professionals in Australia, Brazil, Canada, China/Hong Kong, France, Germany, Italy, Japan, Malaysia, Mexico, Russia, Scandinavia and the United Kingdom.
Image Transfer's sales force calls directly on end-users and promotes the quality and technical features of the Company's products to pressroom foremen, purchasing agents, plant managers and press operators. Depending on the market and product, the end-users can then order directly from the Company or through authorized converters or dealers. Image Transfer distributes a majority of its products through a large network of converters, including NDI, who buy and cut printing blanket rolls to customized orders and dealers and sub-dealers who buy finished products, store inventory and hold receivables. Converters are value-added dealers who typically purchase rolls of uncut printing blankets from the Company and then cut, finish and package the blankets for sale to dealers or end-users. The Company believes that it has one of the most effective networks of converters and dealers in the industry. The sales force works closely with converters and dealers through joint calling efforts on end-users and training programs. In addition, sales and technical associates work directly with large end-users to identify the printing blankets and sleeves that best suit that printer's particular needs and formulate solutions to complex printing problems. NDI distributes products manufactured by the Company, as well as other blanket manufacturers. The Company distributes a substantial portion of its products direct to end-users.
TEXTILE PRODUCTS
The Textile Products segment manufactures highly engineered rubber rollers, known as cots, and flexible belts, known as aprons, for utilization in yarn spinning machinery. As a result of continuing technological improvements in automated high-speed spinning frames, customers continue to demand cots and aprons of higher quality and greater flexibility to meet their specialized needs and are typically willing to pay a premium for cots and aprons that meet their value equation. The Company is known as a leader in technological innovation and quality and has the broadest line of cots and aprons and related products of any global manufacturer.
Products
With the broadest line of cots and aprons of any manufacturer, the Company offers its customers both general purpose and specialty cots and aprons recognized in the global marketplace under the DAYtex(R) and Accotex(R) brand names, with over 4,000 different SKUs. General-purpose cots and aprons include a full line of products designed for "short staple" fibers (such as cotton) and "long staple" fibers (such as wool), while specialty cots and aprons include glass-forming aprons, carpet cots and drawing cots. The Company provides high-quality, precision engineered products that deliver superior value to its customers. As a result, Textile Products has been an industry leader in quality and performance, allowing the Company to command premium pricing for its products.
Because of changes in the spinning process, increasing textile machine speeds and other rigorous process demands, spinning industry suppliers are constantly challenged to improve the precision, quality and consistency of their products. The Company continues to introduce highly engineered cots and aprons targeted to the high-speed ring and air-jet spinning markets. Products such as aluminum-lined cots provide improved rigidity and tolerance and have been widely accepted in the marketplace. Although fewer cots are used on these machines, the cots that are used are replaced more frequently, are more technologically advanced, are environmentally friendly and command higher prices compared to traditional ring spinning cots.
Other products and services include ribbons (take-up roll covering), cot installation presses, various other accessories and reconditioning services.
Textile Products' product development has allowed the Company to diversify into new markets. The Company has developed specialty lines of aprons including glass-forming aprons, which are used to make glass fiber from liquid glass, and texturizing aprons, which are used to finish certain types of synthetic filaments. Textile Products also manufactures and markets bolsters and rubber shrinkage belts for use in fabric pre-shrinking processes, such as those used for denim, as well as rubber-covered industrial rollers for textile and other industrial applications.
Sales and Distribution
The Company believes that the quality, technical proficiency and experience of its Textile Products sales force distinguishes its marketing efforts from those of competitors. Textile Products' sales professionals have extensive knowledge of the spinning and weaving process. The sales force markets its products directly to end-users, primarily textile mills, and original equipment manufacturers.
RAW MATERIALS
Rubber polymers are a key component in most of the products of Transfer Media and Textile Products. The Chemical Products division purchases approximately 200 different raw materials from a variety of key national suppliers, and holds supply agreements with many of them. However, no single supplier accounts for more than 10% of total raw material costs. The largest raw material component for Chemical Products is petroleum distillates, such as aliphatics and aromatics. Raw material purchases accounted for approximately 50% of cost of goods sold for the Company's products during 2003, 2002 and 2001. Various fabrics and rubber represented approximately 30% of all raw materials purchased in each of 2003, 2002 and 2001. The Company has developed contingency plans to address any supply line disruptions, including identifying alternative sources and maintaining a safety stock of critical raw materials.
The Company is exposed to fluctuations in petroleum prices on certain raw material costs and historically has been able to pass on price increases to customers.
The Company purchases its raw material requirements from a number of suppliers on a purchase order basis, and the Company believes that there are sufficient sources of supply for the foreseeable future.
RESEARCH AND DEVELOPMENT
The research and development staff is focused on current product and process improvement efforts, as well as development of new consumables for future Image Transfer and Textile Products processes. The Company's active patents have been important to its existing product line, and increased emphasis is being placed on new product technologies. Active efforts to obtain additional patents are underway on a variety of technologies, including certain process patents.
In addition to its extensive patent and trademark portfolio, the Company has a variety of working agreements with key partners in the image transfer business. These agreements and other efforts with original equipment manufacturers may stimulate proprietary processes and additional patent applications. In 2004, Heidelberger Druckmaschinen AG announced that they are divesting their webpress business and their 50%-ownership in Nexpress Solutions LLC. The Company has long-standing relationships with both of these companies and expects these relationships to continue.
COMPETITION
The Company competes with a number of manufacturers in the image transfer and textile components industries, with the main competitive factors being quality, performance, service and price. While the Company competes with a number of manufacturers of offset printing blankets, including Reeves International, Inc. ("Reeves"), Polyfibron Technologies, Inc. ("Polyfibron"), a subsidiary of
MacDermid, and Kinyosha Printing Company, Ltd. Chemical Products competes with a number of manufacturers of pressroom chemicals. The principal competitors are Anchor Chemical, Rycoline and PRISCO. In the United States, NDI competes with several distributors, many of which are customers of the Company. Rotec's principal competitors are Rossini, Polywest Kunststofftechnik, and Axcyl Inc., a subsidiary of Polyfibron. Accel Graphics, a division of Parmarco, is the only main competitor to the Kompac line.
In Textile Products, the Company competes with manufacturers such as Hokushin Corporation, Yamauchi and Berkol AG (Switzerland).
Some of the Company's competitors may have greater financial and other resources than the Company and may consequently have more operating flexibility and a greater ability to expand production capacity and increase research and development expenditures.
INTERNATIONAL OPERATIONS
The Company's principal international manufacturing facilities are located in Dundee, Scotland (Transfer Media), Ahaus, Germany (Transfer Media), Manchester, England (Chemical Products) and Munster, Germany (Textile Products). In addition, the Company maintains facilities in Australia, Brazil, China/Hong Kong, France, Germany, Italy, Malaysia, Mexico and Russia.
The Company manufactures and markets its products worldwide through several international subsidiaries and independent agents. The Company's worldwide operations are subject to the risks normally associated with international operations including, but not limited to, the disruption of markets, changes in export or import laws, restrictions on currency exchanges, and the modification or introduction of other governmental policies with potentially adverse effects.
Approximately 53% of the Company's 2003 sales were derived from products sold to customers outside the United States. This has increased from 49% in 2002 and 47% in 2001. The U.S. dollar value of these revenues varies with currency exchange rate fluctuations, and the Company may be exposed to gains or losses based upon such fluctuations. Significant increases in the value of the U.S. dollar relative to foreign currencies could have an adverse effect on the Company's ability to meet interest and principal obligations on its U.S. dollar-denominated debt. The Company periodically enters into forward foreign exchange contracts to protect it against a portion of such foreign exchange movements.
ENVIRONMENTAL MATTERS
The Company's facilities in the United States are subject to federal, state and local environmental laws and regulations, including those governing discharges to the air and water, the handling and disposal of solid and hazardous wastes, and the remediation of contamination associated with releases of hazardous substances. International facilities are subject to their respective countries' federal and local environmental requirements, as well as the environmental requirements promulgated by the European Union, where applicable. The Company has made, and will continue to make, expenditures to comply with current and future environmental requirements. Environmental requirements are becoming increasingly stringent, and therefore the Company's expenditures for environmental compliance may increase in the future.
Based on environmental assessments conducted by independent environmental consultants, except as otherwise stated herein, the Company believes that its operations are currently in compliance with environmental laws and regulations, except as would not be expected to have a material adverse effect on the Company. However, there can be no assurances that environmental requirements will not change in the future or that the Company will not incur significant costs in the future to comply with such requirements. In addition, the Company's operations involve the handling of toluene and other hazardous substances, and if a release of hazardous substances occurs on or from the Company's facilities, the Company may be required to pay the cost of remedying any condition caused by such release, the amount of which could be material.
On July 11, 2002, the United States Environmental Protection Agency issued the proposed Maximum Achievable Control Technology ("MACT") standard for the Printing source category. This MACT standard is applicable to sources located at the Company's U.S. operations. The MACT requirements were placed into effect on March 15, 2003. The primary effect of this rule will be to require implementation of additional air emission monitoring systems at the Company's U.S. facilities. These rules will require certain modifications to the plant facilities over the next two years that will total approximately $0.7 million for U.S. operations.
ASSOCIATES
The Company currently employs approximately 1,470 full-time associates worldwide, of which approximately 780 are employed in the United States and Canada. The Company's associates in Dundee, Scotland, and Munster, Germany are represented by labor unions. In January 2004, the labor union in Dundee entered into a new three-year collective bargaining agreement with the Company, expiring on December 31, 2006. The labor union in Munster has entered into collective bargaining agreements with the Company pertaining to general working conditions and to salaries and wages. The agreement as to general working conditions expires December 31, 2006, and the agreement as to salaries and wages expires June 30, 2005. None of the Company's U.S. associates are covered by a collective bargaining agreement. To encourage productivity improvements, a portion of each associate's total compensation is tied to a performance bonus. The Company considers its employee relations to be good.
ITEM 2.
ITEM 2. PROPERTIES
As noted below, the Company operates state-of-the-art, manufacturing facilities strategically located throughout the world. The Company believes that it has sufficient capacity at its manufacturing facilities to meet its production needs for the foreseeable future, and further believes that all its sales worldwide can be sourced through these facilities. A majority of the Company's manufacturing facilities are ISO certified. The Company's significant facilities are listed below:
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various legal proceedings arising in the ordinary course of business. None of the matters in which the Company is currently involved, either individually or in the aggregate, is expected to have a material adverse effect on the Company's business or financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2003.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 1, 2004, there were 19 holders of record of shares of Common Stock. Sale or transfer of the Common Stock is subject to the terms of a Stockholders Agreement that all stockholders have signed. There is no established trading market for the Common Stock. The Company has never paid or declared a cash dividend on the Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary financial data of the Company for each of the five fiscal years, during the period ended December 31, 2003.
(a) Effective July 1, 2003, the Company adopted SFAS No. 150 and has recorded dividends of $10,336 on the redeemable preferred stock as interest expense subsequent to adoption.
(b) The Company acquired NDI as of November 24, 2003. The statement of operations data includes the results of this acquisition from the date of acquisition.
(c) The Company acquired TPO as of September 30, 1999 and Varn as of October 19, 1999. The statement of operations data includes the results of these acquisitions from the dates of acquisition.
(d) Income (loss) before cumulative effect of change in accounting principle in 1999 was restated to reflect the adoption of SFAS No. 145 as of January 1, 2003, and to reclassify the pre-tax loss of $1,428 on early extinguishment of debt to interest expense.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with "Selected Financial Data" and "Financial Statements and Supplementary Data" and notes thereto included elsewhere in this report.
On November 24, 2003, Network Distribution International ("NDI") was acquired. Its results of operations are included in the Company's consolidated results of operations for the period subsequent to the acquisition. Accordingly, the results of operations for historical as well as future periods may not be comparable to prior periods.
COMPARISON OF RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003, COMPARED TO YEAR ENDED DECEMBER 31, 2002
Net sales increased $29.0 million (11.2%) to $289.0 million, primarily as a result of favorable changes in foreign currency rates and higher sales volumes in Europe. Sales in 2003 include $6.6 million of incremental sales subsequent to the date of acquisitions. Sales in 2003 were positively affected by $17.0 million of favorable changes in foreign currency rates used to translate international sales into U.S. dollars and increased sales volumes of $2.3 million in the United States and $4.0 million in Europe. Image Transfer's sales increased $28.9 million (13.7%) to $240.5 million. Image Transfer's sales were positively affected by $12.2 million as a result of the effect of changes in foreign currency rates and increased sales volumes of $12.5 million in the United States and $5.0 million in Europe. The higher U.S. Image Transfer sales volume was primarily as a result of sales from business acquisitions in 2003 of $6.6 million and from higher sales volumes across substantially all product lines. Europe sales volume increased primarily from market share gains in the chemical products business in the United Kingdom and Germany. Textile Products' sales increased $0.1 million (0.2%) to $48.4 million. Foreign currency rate changes positively affected Textile Products' sales by $4.7 million. Textile Products' sales decreased as a result of decreased volume of $3.6 million in the United States and $1.0 million in Europe and export markets. 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.
Gross profit increased $9.6 million (10.1%) to $105.2 million. Foreign currency rate changes increased gross profit by $6.0 million. As a percentage of net sales, gross profit decreased slightly to 36.4% for the year ended December 31, 2003, from 36.7% for the comparable period in 2002.
Selling, general & administrative expenses increased $8.0 million (14.5%) to $63.5 million primarily as a result of foreign currency rate changes. As a percentage of net sales, SG&A increased to 22.0% from 21.3% for the comparable period in 2002. Changes in foreign currency rates increased SG&A costs by $3.5 million in 2003. SG&A costs also increased as a result of higher insurance costs and higher selling and distribution costs from higher sales levels, as well as SG&A costs related to businesses acquired in 2003.
A pre-tax charge of $0.5 million was recorded in the first quarter of 2001 for severance and termination costs to relocate the Textile Products operations from its Asheville, North Carolina, facility to its Greenville, South Carolina, facility. During the first quarter of 2002, the Company reversed $0.1 million of the reserve. Additionally, pre-tax charges of $0.3 million have been recorded in 2002 for relocation of machinery and equipment and write-off of abandoned assets. As of December 31, 2002, the relocation plan was complete.
During the fourth quarter of 2001, the Company ceased operations at its Transfer Media facility in Longwood, Florida. A pre-tax charge of $3.0 million was recorded in 2001 for severance costs for 55 associates, write-off of abandoned assets and costs related to closing the facility. During the second quarter of 2002, final severance payments were paid to all associates and the remaining reserve of $0.1 million for severance costs was reversed.
Operating profit increased $1.7 million to $39.9 million. As a percentage of net sales, operating profit was 13.8% for the year ended December 31, 2003, compared to 14.7% in 2002. Image Transfer's operating profit increased $4.2 million (11.2%) to $41.7 million, primarily as a result of higher sales volumes. As a percentage of net sales, Image Transfer's operating profit decreased to 17.4% for the year ended December 31, 2003, compared to 17.7% in 2002, primarily as a result of higher development costs for new products. Textile Products' operating profit decreased $2.2 million (34.5%) to $4.3 million. As a percentage of net sales, Textile Products' operating profit was 8.8% for the year ended December 31, 2003, compared to 13.5% in 2002. Textile Products' operating profit was adversely affected by underabsorbed fixed overhead costs resulting from lower U.S. production volumes and by costs related to write-off of non-productive equipment.
Other expense was $3.0 million in 2003, compared to other income of $1.9 million in 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. Other expense in 2003 includes a loss of $3.2 million on the mark-to-market of the euro-denominated Tranche A Term Loan, a loss of $1.1 million from the sale of the South African business and a gain of $0.9 million from the sale of excess land in Mauldin, South Carolina.
The Company recorded income tax expense on a loss before income taxes in 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 51.5%. The effective tax rate is further affected by foreign-sourced dividends and income taxable in the United States and non-deductible expenses. The effective tax rate for 2002 was 40.0%.
As of January 1, 2002, the Company adopted SFAS Nos. 141, "Business Combinations" and 142, "Goodwill and Other Intangible Assets" and ceased recording amortization of goodwill of approximately $3.7 million per year and recognized pre-tax income of $1.0 million for the cumulative effect of the change in accounting principle for the amount of the unamortized deferred credit related to the excess over cost arising from the TPO acquisition.
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 long-term debt and accrued dividends are 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.
YEAR ENDED DECEMBER 31, 2002, COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net sales increased $5.8 million (2.3%) to $259.9 million, primarily as a result of favorable changes in foreign currency rates and higher sales volume in Europe. Sales in 2002 were positively affected by $4.5 million of favorable changes in foreign currency rates used to translate international sales into U.S. dollars and increased sales volumes of $3.0 million in Europe. Image Transfer's sales increased $6.8 million (3.3%) to $211.6 million. Image Transfer's sales were positively affected by $3.2 million as a result of the effect of changes in foreign currency rates. Excluding the effect of foreign currency rate changes, Image Transfer's sales increased $3.6 million (1.8%) from the comparable period in 2001. The increase is mainly a result of higher sales volumes in Europe. Textile Products' sales decreased $1.0 million (2.1%) to $48.3 million. Foreign currency rate changes positively affected Textile Products' sales by $1.3 million. Textile Products' sales decreased as a result of decreased volume of $2.0 million in the United States and $0.3 million in Europe and export markets.
Gross profit increased $4.4 million (4.8%) to $95.5 million. Foreign currency rate changes increased gross profit by $0.8 million. As a percentage of net sales, gross profit increased to 36.7% for the year ended December 31, 2002, from 35.8% for the comparable period in 2001, primarily as a result of benefits realized from the restructuring activities performed in the second half of 2001 and the first quarter of 2002.
Selling, general & administrative expenses increased $1.4 million (2.6%) to $55.5 million primarily as a result of foreign currency rate changes. Changes in foreign currency rates increased SG&A costs by $1.0 million in 2002. Active cost reduction and prior year restructuring activities offset substantially all of the increases in health care, retirement, incentive and insurance costs. As a percentage of net sales, SG&A remained constant at 21.3%.
A pre-tax charge of $0.5 million was recorded in the first quarter of 2001 for severance and termination costs to relocate the Textile Products operations from its Asheville, North Carolina, facility to its Greenville, South Carolina, facility. During the first quarter of 2002, the Company reversed $0.1 million of the reserve. Additionally, pre-tax charges of $0.3 million and $0.4 million have been recorded in 2002 and 2001 for relocation of machinery and equipment and write-off of abandoned assets. As of December 31, 2002, the relocation plan was complete.
During the fourth quarter of 2001, the Company ceased operations at its Transfer Media facility in Longwood, Florida. A pre-tax charge of $3.0 million was recorded in 2001 for severance costs for 55 associates, write-off of abandoned assets and costs related to closing the facility. During the second quarter of 2002, final severance payments were paid to all associates and the remaining reserve of $0.1 million for severance costs was reversed.
Also during the fourth quarter of 2001, the Company completed plans to relocate its Chemical Products German sales office into other existing facilities and the U.S. sales and administrative functions from Oakland, New Jersey to other U.S. locations. A pre-tax charge of $1.0 million was recorded for severance costs for 21 associates, costs for closing the offices and loss on the sale of fixed assets. As of December 31, 2002, this plan was complete.
Operating profit increased $11.5 million to $38.1 million. The increase in operating profit was partly attributable to the adoption of SFAS Nos. 141 and 142 and the related reduction in the amortization of goodwill of $3.7 million and to $4.8 million of lower restructuring costs in 2002. Excluding the restructuring costs of $0.1 million and $4.9 million in 2002 and 2001 and the amortization of goodwill of $3.7 million in 2001, operating profit increased $3.0 million (8.5%) from $35.2 million to $38.2 million. As a percentage of net sales, operating profit (excluding amortization of goodwill in 2001 and the restructuring costs in 2002 and 2001) was 14.7% for the year ended December 31, 2002, compared to 13.9% in 2001. Image Transfer's operating profit increased $2.1 million (5.9%) to $37.5 million, primarily as a result of higher sales volumes. As a percentage of net sales, Image Transfer's operating profit increased to 17.7% for the year ended December 31, 2002, compared to 17.3% in 2001. Textile Products' operating profit increased $0.4 million (6.5%) to $6.5 million, primarily as a result of foreign exchange rate changes. As a percentage of net sales, Textile Products' operating profit was 13.5% for the year ended December 31, 2002, compared to 12.4% in 2001.
Other income was $1.9 million in 2002, compared to other expense of $0.6 million in 2001. The other (income) expense is primarily due to foreign currency transaction (gains) losses incurred in the normal course of international subsidiaries doing business in other than their functional currency as well as a result of intercompany financing arrangements.
The effective tax rate benefit for 2002 was 30.6%. The Company recorded income tax expense for 2001 on a loss before taxes. This effect is a result of foreign sourced dividends and income taxable in the United States and non-deductible expenses.
As of January 1, 2002, the Company adopted SFAS Nos. 141, "Business Combinations" and 142, "Goodwill and Other Intangible Assets" and ceased recording amortization of goodwill of approximately $3.7 million per year and recognized pre-tax income of $1.0 million for the cumulative effect of the change in accounting principle for the amount of the unamortized deferred credit related to
the excess over cost arising from the TPO acquisition. The Company completed the initial review of the recoverability of goodwill as of January 1, 2002, and the subsequent review as of March 31, 2002, and has determined that no impairment of goodwill is indicated.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company conducts a significant amount of business and has operating and sales facilities in countries outside the United States. As a result, the Company is subject to business risks inherent in non-U.S. activities, including political uncertainty, import and export limitations, exchange controls and currency fluctuations. The Company believes risks related to its international operations are mitigated due to the political and economic stability of the countries in which its largest international operations are located, the stand-alone nature of the operations, the Company's limited net asset exposure, forward foreign exchange contract practices and pricing flexibility. Thus, while changes in foreign currency values do affect earnings, the longer-term economic effect of these changes should not have a material adverse effect on the Company's financial condition, results of operations or liquidity.
Certain of the Company's international subsidiaries make purchases and sales in designated currencies other than their functional currency. As a result, they are subject to transaction exposures that arise from foreign exchange movements between the date that the foreign currency transaction is recorded and the date it is consummated. In addition, the Company has intercompany loans outstanding with certain international subsidiaries in their local currencies, exposing it to the effect of changes in exchange rates at loan issue and loan repayment dates. The Company periodically enters into forward foreign exchange contracts to protect it against such foreign exchange movements. The contract value of these foreign exchange contracts was approximately $15.9 million at December 31, 2003, $10.1 million at December 31, 2002 and $9.3 million at December 31, 2001. These contracts generally expire within three to twelve months. At December 31, 2003, the Company has outstanding (euro)25.8 million of term loans issued under the Senior Secured Credit Facility. The Company has issued euro-denominated debt in order to protect the Company's investments in Europe from fluctuations in the euro compared to the U.S. dollar. Foreign currency gains (losses), included in other (expense) income-net, were $(2.6) million in 2003, $1.3 million in 2002 and $(0.9) million in 2001. Based on the Company's overall foreign currency exchange rate exposure at December 31, 2003, a 10% adverse change in foreign currency exchange rates would result in a hypothetical estimated loss in earnings of approximately $3.0 million. If the forward contracts and the euro-denominated Tranche A Term Loan are aggregated with the Company's other exposures, a 10% adverse change in foreign currency exchange rates would result in an insignificant hypothetical estimated loss in earnings.
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. During 2003, the Company entered into a $25 million interest rate swap to swap a portion of the Company's variable rate debt to fixed rates. The swap expires in September 2006. The Company does not expect changes in interest rates to have a material effect on income or cash flows in 2004, although there can be no assurance that interest rates will not materially change.
COMMODITY RISKS
Rubber polymers and fabrics are key components in most of the Transfer Media and Textile products. The Company is exposed to changes in the costs of these components. Chemical Products is exposed to changes in the cost of certain petroleum-based components. The largest raw material component in Pressroom Chemicals' products is petroleum distillates, such as aliphatics and aromatics. When commodity prices increase, the Company has historically passed on increases to its customers to maintain its profit margins. Conversely, when commodity prices decline, the Company generally lowers its sales prices to meet competitive pressures. Because the Company has historically been able to raise sales prices to offset higher costs, management believes that a 10% change in the cost of its components could have a short-term effect until sales price increases take effect, but overall would not have a material effect on income or cash flows for a fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated sufficient funds from its operations to fund its working capital and capital expenditure requirements.
The Company's expenditures for plant, property and equipment were $6.9 million in 2003, $8.3 million in 2002, and $13.0 million in 2001. The Company believes that capital expenditures of $9.0 million to $12.0 million annually over the next several years will be sufficient to maintain its leading market position. The Company expects to fund these capital expenditures from cash flow from operations.
The Company is highly leveraged. At December 31, 2003, the Company's aggregate indebtedness is approximately $279.8 million and the aggregate liquidation preference of the Exchangeable Preferred Stock is $70.4 million (which, subject to certain conditions, may be exchanged for Exchange Debentures). At December 31, 2003, the aggregate liquidation preference of the Convertible Preferred Stock is $77.4 million. See Note G of the Notes to the Consolidated Financial Statements.
On September 16, 2003, the Company issued $135.0 million of senior secured debt under a 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. On November 24, 2003, the Company issued an additional $30.0 million of senior secured debt under the Senior Secured Credit Facility to finance the acquisition of NDI. 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, a Tranche B $105.0 million 6-year Term Loan and a Tranche C $30.0 million 6-year Term Loan. The Revolving Credit Facility includes a $10.0 million letter of credit subfacility ($1.9 million of letters of credit were outstanding at December 31, 2003) and a $2.0 million swing line loan subfacility. The Company redeemed the 11-1/8% Senior Notes in October at the call price of $101.2 million.
The Senior Secured Credit Facility is repayable as follows: $3.4 million in 2004, $5.0 million in 2005, $7.5 million in 2006, $12.0 million in 2007, $42.2 million in 2008 and $94.0 million in 2009. Prepayments on the Term Loans are applied pro rata to all maturities. If the Company does not refinance the 9-1/2% Senior Subordinated Notes by September 15, 2007, then any amounts outstanding under the Senior Credit Facility will be immediately due and payable. The Senior Secured Credit Facility is secured by the assets of the Company and its domestic subsidiaries, as well as 65% of the stock of each
international subsidiary. As of December 31, 2003, the Company had $17.7 million available under the Revolving Credit Facility.
The level of the Company's indebtedness could have important consequences including: (i) a substantial portion of the Company's cash flow from operations must be dedicated to debt service and will not be available for other purposes; (ii) the Company's ability to obtain additional debt or other financing in the future for working capital, capital expenditures, research and development or acquisitions may be limited; (iii) the Company's level of indebtedness could limit its flexibility in reacting to changes in its industries and economic conditions generally.
The Company's ability to pay principal and interest on its debt obligations and dividends on the Exchangeable Preferred Stock and the Convertible Preferred Stock will depend upon its future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond its control, as well as the availability of revolving credit borrowings under the Revolving Credit Facility or a successor facility. The Company anticipates that its operating cash flow, together with borrowings under the Revolving Credit Facility, will be sufficient to meet its operating expenses and capital expenditures and to service its debt requirements as they become due. However, there can be no assurance that the Company's cash flow, availability under the Revolving Credit Facility and other capital resources will be sufficient for payment of principal and interest on its indebtedness, for the payment of periodic cash dividends on the Exchangeable Preferred Stock or the Convertible Preferred Stock, for any redemption of the Exchangeable Preferred Stock or the Convertible Preferred Stock for cash, or if the Exchange Debentures have been issued, the payment of principal of or cash interest on the Exchange Debentures. If the Company's cash flow, availability under the Revolving Credit Facility and other capital resources are insufficient to fund the Company's debt service obligations, the Company may be forced to reduce or delay capital expenditures, to sell assets, to restructure or refinance its indebtedness, or to seek additional equity capital. There can be no assurance that any of such measures could be implemented on satisfactory terms, or if implemented, would be successful or would permit the Company to meet its debt service obligations.
The Senior Secured Credit Facility, the 2008 Indenture and the certificates of designation for the Preferred Stocks contain a number of significant covenants that restrict the operations of the Company. For example, under the Senior Secured Credit Facility, the Company is required to comply with specified financial ratios and tests, including minimum fixed charges coverage ratio, maximum leverage ratio, senior leverage ratio and interest coverage ratio. There can be no assurance that the Company will be able to comply with any such covenants or restrictions in the future. The Company's ability to comply with such covenants and restrictions may be affected by events beyond its control, including prevailing economic, financial and industry conditions. The breach of any such covenants or restrictions could result in a default under the Senior Secured Credit Facility and/or the 2008 Indenture that would permit the lenders to declare all amounts outstanding to be immediately due and payable, together with accrued and unpaid interest, and the commitments of the lenders under the Revolving Credit Facility to make further extensions of credit could be terminated.
The occurrence of certain events that would constitute a Change of Control may result in a default, or otherwise require repayment of indebtedness, under the Senior Secured Credit Facility and the 2008 Indenture, and redemption of the Exchangeable Preferred Stock and the Convertible Preferred Stock or, in the case of the Exchange Debentures, repayment of indebtedness under the Exchange Debentures. In
addition, the Senior Secured Credit Facility prohibits the repayment of indebtedness under the 2008 Indenture by the Company in such an event, unless and until such time as the indebtedness under the Senior Secured Credit Facility is repaid in full. The Company's failure to make such repayments in such instances would result in a default under the Senior Secured Credit Facility. The inability to repay the indebtedness under the Senior Secured Credit Facility, if accelerated, would also constitute an event of default under the 2008 Indenture, which could have materially adverse consequences to the Company and to the holders of the Notes under the 2008 Indenture. Future indebtedness of the Company may also contain restrictions or repayment requirements with respect to certain events or transactions that could constitute a Change of Control. In the event of a Change of Control, there can be no assurance that the Company would have sufficient assets to satisfy all of its obligations under the Senior Secured Credit Facility or the 2008 Indenture, the Exchangeable Preferred Stock or the Exchange Debentures, as the case may be, or with respect to the Convertible Preferred Stock.
The Company does not have transactions, arrangements or relationships with special-purpose entities and the Company does not have any off-balance-sheet debt except as disclosed in the notes to the consolidated financial statements.
In 2001 the Company suspended its U.K. pension plan and intends to settle the remaining obligation in 2004. As of December 31, 2003, the settlement will require an additional contribution of approximately $1.5 million and will result in a pre-tax settlement loss of approximately $0.8 million. These amounts are subject to change as a result of the final determination of the amount of the obligation and the value of the plan assets at the date of the settlement.
ENVIRONMENTAL EXPENDITURES
The Company has made, and will continue to make, expenditures to comply with current and future requirements of environmental laws and regulations. The Company estimates that in 2003, 2002 and 2001 it spent approximately $0.1 million, $0.2 million and $1.2 million in capital expenditures for solvent recovery, wastewater treatment, air monitoring and related projects to comply with environmental requirements.
On July 11, 2002, the United States Environmental Protection Agency issued the proposed Maximum Achievable Control Technology ("MACT") standard for the Printing source category. This MACT standard is applicable to sources located at the Company's U.S. operations. The MACT requirements were placed into effect on March 15, 2003. The primary effect of this rule will be to require implementation of additional air emission monitoring systems at the Company's U.S. facilities. These rules will require certain modifications to the plant facilities over the next two years that will total approximately $0.7 million for U.S. operations. Capital expenditures relating to environmental matters are anticipated to be less than $1 million in 2004.
Based on environmental assessments conducted by independent environmental consultants, except as otherwise stated herein, the Company believes that its operations are currently in compliance with environmental laws and regulations, except as would not be expected to have a material adverse effect on the Company. However, there can be no assurances that environmental requirements will not change in the future or that the Company will not incur significant costs in the future to comply with such requirements. In addition, the Company's operations involve the handling of solvents and other hazardous substances, and if a release of hazardous substances occurs on or from the Company's
facilities, the Company may be required to pay the cost of remedying any condition caused by such release, the amount of which could be material.
CRITICAL ACCOUNTING POLICIES
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates include: accounts receivable allowances, inventory valuation, recoverability of long-lived assets, retirement and other postretirement benefits, and the realization of deferred tax assets. We use the following methods and assumptions in determining our estimates:
Accounts Receivable Allowances - Allowances for doubtful accounts are determined by applying historical experience with consideration given to the condition of the economy and evaluation of specific accounts. Other allowances are calculated based on negotiated agreements with customers.
Inventory Valuation - Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. Reserves for obsolete and slow-moving inventory are determined based on the lower of cost or market method. Market value is determined based on management's estimate of selling price less selling costs.
Recoverability of Long-lived Assets - Recoverability of goodwill is tested at least annually in accordance with SFAS No. 142 using the present value of estimated future cash flows. Other long-lived assets are reviewed for impairment annually or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144 by determining whether the amortization of the assets over their remaining lives can be recovered through projected undiscounted cash flows. Future cash flows are forecasted based on management's estimates of future events and could be materially different from actual cash flows.
Retirement and Other Postretirement Benefits - Retirement and other postretirement benefit costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest cost, expected return on plan assets, mortality rates and other factors. In accordance with accounting principles generally accepted in the United States, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company's retirement and other postretirement obligations and future expense. See Notes M and N to the Consolidated Financial Statements for further detail on the assumptions used.
Realization of Deferred Tax Assets - Realization of net operating loss carryforwards and other deferred tax assets is determined in accordance with the appropriate accounting guidance in SFAS No. 109. Realization of the deferred tax assets is periodically evaluated using expected future reversals of existing temporary differences, future taxable income resulting principally from the characterization of cash flow from international subsidiaries as dividends taxable in the United States and the effects of lower interest expense
from lower outstanding debt levels as debt service requirements are met and from lower interest rates resulting from the refinancing occurring in 2003.
For further information regarding our accounting policies, see Note B to the Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS
The Company enters into various contractual obligations throughout the year. Presented below are the contractual obligations of the Company as of December 31, 2003, and the time period in which payments under the obligations are due. Disclosures related to long-term debt, capital lease obligations and operating lease obligations are included in the footnotes to the consolidated financial statements of the company. Disclosures regarding the amounts due under purchase obligations for capital expenditures are also included below. A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on the company and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations related to normal and recurring purchase orders are not included, as the Company does not enter into long-term agreements that would represent purchase obligations. Any short-term purchase order that might meet the definition of purchase obligation is only entered into for a reasonable period of time for quantities to be used within normal operating conditions.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See information in Item 7.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Day International Group, Inc.:
We have audited the accompanying consolidated balance sheets of Day International Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of Day International Group, Inc. and subsidiaries for the year ended December 31, 2001, were audited by other auditors who have ceased operations and whose report dated March 26, 2002, expressed an unqualified opinion.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 2003 and 2002 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Day International Group, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
As discussed in Note E, in 2002 the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards Nos. 141, "Business Combinations" and 142, "Goodwill and Other Intangible Assets."
As discussed in Note G, in 2003 the Company changed its method of accounting for redeemable preferred stock in accordance with Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity."
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
Dayton, Ohio March 20, 2004
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2003 AND 2002 (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS)
The accompanying notes are an integral part of the consolidated financial statements.
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (DOLLAR AMOUNTS IN THOUSANDS)
The accompanying notes are an integral part of the consolidated financial statements.
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (IN THOUSANDS)
The accompanying notes are an integral part of the consolidated financial statements.
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001 (DOLLAR AMOUNTS IN THOUSANDS)
A. NATURE OF OPERATIONS, BASIS OF PRESENTATION
Day International Group, Inc. and subsidiaries is one of the world's leading producers and distributors of precision-engineered products, specializing in the design and customization of consumable image-transfer products for the graphic arts (printing) industry and consumable fiber handling products for the textile industry. The Image Transfer segment designs, manufactures and distributes high-quality printing blankets, sleeves, pressroom chemicals and automatic dampening systems used primarily in the offset and flexographic printing industries. The Textile Products segment manufactures and markets precision engineered rubber cots and aprons sold to textile yarn spinners and other engineered rubber products sold to diverse markets. Sales are made through Day's sales organization, distributors and representatives.
On November 24, 2003, the Company acquired Network Distribution International ("NDI"). The total purchase price for NDI was $32.2 million, paid in cash. NDI is a converter of offset blankets and reseller of ancillary consumable products to the printing industry, primarily in the United States. NDI supplies printers with a broad range of printing blankets, pressroom chemicals, supplies and equipment. Results of operations of NDI are included in the Company's consolidated results of operations for the period subsequent to the acquisition. The following summarizes the fair values of the assets acquired and liabilities assumed at the date of acquisition:
B. SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include all highly liquid investments with an original purchased maturity of three months or less.
INVENTORIES - Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. Reserves for obsolete and slow-moving inventory are determined based on the lower of cost or market method. Market value is determined based on management's estimate of selling price less selling costs.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over their estimated useful lives. Buildings and improvements are depreciated over 10 to 40 years and machinery and equipment are depreciated over 5 to 10 years.
GOODWILL AND OTHER INTANGIBLES - Goodwill represents the excess of cost over the fair value of the net assets acquired and is evaluated for impairment based on the requirements as proscribed in Statement of Financial Accounting Standards ("SFAS") No. 142. The Company assesses the recoverability of other long-lived assets, including other intangibles, by determining whether the amortization of the respective balances over their remaining lives can be recovered through projected undiscounted cash flows.
Deferred financing costs are being amortized using an effective interest rate method over the lives of the related debt. Intangibles are being amortized using the straight-line method.
STOCK-BASED COMPENSATION - As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company applies the intrinsic value method of recognition and measurement under Accounting Principles Board Opinion No. 25 to its stock options and warrants. No compensation expense related to employee stock options or warrants issued to directors is reflected in net income (loss). The following table illustrates the effect on net income (loss) if compensation cost for 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:
REVENUE RECOGNITION - Day recognizes revenue when the product is shipped, except for product shipped on consignment. Revenue for consignment sales is recognized when the customer uses the product. Reserves for product returns, based upon historical experience, and other allowances, calculated based on negotiated agreements with customers, are recognized upon shipment. Allowances for doubtful accounts are determined by applying historical experience with consideration given to the condition of the economy and evaluation of specific accounts and are recorded in selling, general and administrative costs.
FOREIGN CURRENCY TRANSLATION - The functional currency is the local currency of Day's respective international subsidiaries. Accordingly, foreign currency assets and liabilities are translated into U.S. dollars at the period end exchange rates. Foreign currency revenues and expenses are translated at the average exchange rates for the period. Translation gains and losses are recorded in accumulated other comprehensive income (loss). Transaction gains and losses are recorded in other expense (income) in the consolidated statements of operations.
CONCENTRATION OF CREDIT RISK - The Company's receivables are from a diverse group of customers in the printing and textile industries and such receivables are generally unsecured.
FOREIGN EXCHANGE CONTRACTS - The Company and its international subsidiaries make purchases and sales in foreign currencies and are subject to transaction exposures that arise from foreign exchange movements between the date that the foreign currency transaction is recorded and the date it is consummated. In
addition, the Company has intercompany loans outstanding with certain international subsidiaries in their local currencies, exposing it to the effect of changes in exchange rates at loan issue and loan repayment dates. Day periodically enters into forward foreign exchange contracts, with terms generally of 3 to 12 months, to protect itself against such foreign currency movements. These contracts are recorded at fair value with the change in fair value recorded as other expense (income) as an offset to the (income) expense recognized from the remeasurement of the hedged foreign-currency denominated asset or liability. Hedges of forecasted transactions are recorded as cash flow hedges and are reclassified to earnings when the hedged transaction is completed. The contract value of foreign exchange contracts was $15,865 and $10,136 at December 31, 2003 and 2002. The fair value of these contracts is a payable of $736 and $362 at December 31, 2003 and 2002. Day is exposed to credit-related losses in the event of nonperformance by counterparties to the forward contracts. The counterparties are expected to meet their obligations given their credit ratings; therefore Day does not obtain collateral for these instruments.
INTEREST RATE SWAP AGREEMENT - During 2003, the Company entered into a $25,000 interest rate swap to swap a portion of the Company's variable rate debt to fixed rates. The swap expires in September 2006. The Company has accounted for this swap as a cash flow hedge and recognizes the gain or loss related to future periods in other comprehensive income (loss).
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of the Company's variable rate Credit Agreement approximates fair value. The fair market value and carrying amount of the 9-1/2% Senior Subordinated Debt was approximately $108,100 and $114,825 at December 31, 2003, based on quoted market prices. The fair market value and carrying amounts of the 9-1/2% Senior Subordinated Debt and the 11-1/8% Senior Debt was approximately $195,200 and $214,783 at December 31, 2002, based on quoted market prices. The fair value of the 12-1/4% Exchangeable Preferred Stock was approximately $31,700 and $9,400 at December 31, 2003 and 2002, based on quoted market prices. The fair value of the 18% Convertible Preferred Stock could not be determined as the securities are closely held and are not actively traded. See Note G for further information about the Convertible Preferred Stock. The fair value of the interest rate swap was a payable of $284 at December 31, 2003. At December 31, 2003 and 2002, the carrying amounts of all other assets and liabilities that qualify as financial instruments approximated their fair value.
RESEARCH AND DEVELOPMENT - Research and development costs are expensed as incurred.
DISTRIBUTION - Distribution costs of $9,617, $8,241, and $7,973 for the years ended December 31, 2003, 2002 and 2001 are included in selling, general and administrative costs.
ADVERTISING - Advertising costs are expensed as incurred.
MANAGEMENT ESTIMATES - The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
C. ACCOUNTS RECEIVABLE
Changes in the allowance for doubtful accounts for the years ended December 31, 2003, 2002 and 2001 consist of:
D. INVENTORIES
Inventories as of December 31, 2003 and 2002 consists of:
E. GOODWILL AND INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board issued SFAS Nos. 141, "Business Combinations" and 142, "Goodwill and Other Intangible Assets." These statements prohibit amortization of goodwill for periods beginning after December 15, 2001. Instead an annual review of the recoverability of goodwill and intangible assets is required. As of January 1, 2002, the Company adopted these statements and ceased recording amortization of goodwill of approximately $3,700 per year and recognized pre-tax income of $1,010 for the cumulative effect of the change in accounting principle for the amount of the unamortized deferred credit related to the excess over cost arising from the acquisition of the textile products operations of Armstrong World Industries, Inc. ("TPO") in 1999.
The following reconciles reported net income (loss) to net income (loss) adjusted for the amortization of goodwill and the deferred credit related to an excess over cost for the years ended December 31, 2003, 2002 and 2001:
The following is detail of goodwill as of December 31, 2003 and 2002:
The following is detail of intangible assets as of December 31, 2003 and 2002:
Estimated amortization expense for the next five years is as follows: $4,753 in 2004, $3,845 in 2005, $3,153 in 2006, $3,109 in 2007 and $1,865 in 2008.
F. LONG-TERM AND SUBORDINATED LONG-TERM DEBT
Long-term and subordinated long-term debt as of December 31, 2003 and 2002 consists of:
SENIOR SECURED CREDIT FACILITY
In 2003, the Company issued $165,000 of senior secured debt under a $185,000 Senior Secured Credit Facility to refinance its existing $100,000 11-1/8% Senior Notes, repay its outstanding $24,850 term loan and $10,750 revolving credit facility and to finance the acquisition of NDI. 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, a Tranche B $105,000 6-year Term Loan and a Tranche C $30,000 6-year Term Loan. The Revolving Credit Facility includes a $10,000 letter of credit subfacility ($1,900 of letters of credit were outstanding at December 31, 2003 to support the Company's share of a loan by the joint venture in China and to support a letter of credit for purchase commitments) and a $2,000 swing line loan subfacility. If the Company does not refinance the 9 1/2% Senior Subordinated Notes by September 15, 2007, then any amounts outstanding under the Senior Credit Facility will be immediately due and payable. The Company redeemed the 11-1/8% Senior Notes at a call price of $101,236. 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 recorded an additional loss of $2,241 in the fourth quarter of 2003 on the remaining deferred financing fees related to the 11-1/8% Senior Notes and the call premium.
At December 31, 2003, interest on the Tranche A Term Loan was based on the bank's LIBOR rate plus 3.75% (5.88%); interest on the Tranche B and Tranche C Term Loans was based on the bank's LIBOR rate plus 4.50% (5.64%); and interest on the revolving line of credit was based on the banks' base rate plus 2.75% (6.75%). Interest rates on LIBOR borrowings are fixed for one, two, three or six month periods at the Company's discretion. The weighted average interest rate on the Senior Secured Credit Facility (and the old Senior Secured Credit Facility) for the years ended December 31, 2003, 2002 and 2001 was 5.50%, 5.37% and 7.30%.
At December 31, 2003, $17,650 was available under the Senior Secured Credit Facility. The Senior Secured Credit Facility requires a commitment fee of 0.5% a year on the unused portion of the revolving line of credit. The Senior Secured Credit Facility contains various financial covenants, including minimum fixed charges coverage ratio, maximum leverage ratio, maximum senior debt ratio and interest
coverage ratio, and other covenants which place limits on, among other things, asset sales, dividends and distributions of the Company's or its subsidiaries' capital stock, the purchase, redemption, acquisition of capital stock of the Company or its affiliates or any subsidiaries, and the incurrence of certain additional indebtedness. No violations of these covenants occurred during the year ended December 31, 2003.
9 1/2% SENIOR SUBORDINATED NOTES
The Company has outstanding $115,000 face amount of 9 1/2% Senior Subordinated Notes due March 15, 2008 (the "Notes"). The Notes are subordinate to the Senior Secured Credit Facility.
Interest on the Notes is payable semi-annually. The Notes contain various financial and other covenants which place limits on, among other things, asset sales, dividends and distributions of the Company's or its subsidiaries' capital stock, the purchase, redemption, acquisition of capital stock of the Company or its affiliates or any subsidiaries, and the incurrence of certain additional indebtedness. Upon a change in control, the Notes can be put back to the Company at 101% of their face value.
The Company may, at its option, redeem the Notes, in whole or in part, for cash, at 103.167% in 2004, 101.583% in 2005 and 100.0% thereafter, together with all accrued and unpaid interest to the date of redemption.
The Company's wholly-owned subsidiary, Day International, Inc., has guaranteed the Senior Secured Credit Facility and the Notes. The Senior Secured Credit Facility is secured by the assets of the Company and its domestic subsidiaries, as well as 65% of the stock of each international subsidiary.
Principal payments on long-term debt for the next five years are payable as follows: $3,489 in 2004, $5,140 in 2005, $7,614 in 2006, $12,145 in 2007 and $157,339 in 2008.
G. REDEEMABLE PREFERRED STOCK
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 long-term debt 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.
12 1/4% SENIOR EXCHANGEABLE PREFERRED STOCK
The Company has outstanding $70,404 and $62,401 liquidation preference of 12 1/4% Senior Exchangeable Preferred Stock ("Exchangeable Preferred Stock") at December 31, 2003 and 2002. All dividends are payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. On and before March 15, 2003, the Company paid dividends in additional fully-paid and non-assessable shares of Exchangeable Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After March 15, 2003, dividends must be paid in cash and if not paid for four consecutive quarters, then the holders of the Exchangeable Preferred Stock have the right to elect
two directors to the Board of Directors until the dividends in arrears have been paid. Certain restrictions in the Company's Senior Secured Credit Agreement and Notes limit the ability to pay cash dividends. The Company has not paid dividends after March 15, 2003 and does not anticipate that the restrictions on payment of cash dividends will change in the near term to allow the dividends to be paid. Dividends-in-arrears are $6,061 as of December 31, 2003, which are included in the redeemable preferred stock balance. On any scheduled dividend payment date, the Company may, at its option, but subject to certain conditions, exchange all of the shares of the Exchangeable Preferred Stock for the Company's 12 1/4% Subordinated Exchange Debentures Due 2010 (the "Exchange Debentures").
The Company will be required, subject to certain conditions, to redeem all of the Exchangeable Preferred Stock or the Exchange Debentures as the case may be, on March 15, 2010. The Company may, at its option, redeem the Exchangeable Preferred Stock or the Exchange Debentures, in whole or in part, for cash, at 106.125% until March 14, 2004, 104.083% thereafter until March 14, 2005, 102.042% thereafter until March 14, 2006 and 100.0% thereafter, together with, in the case of the Exchangeable Preferred Stock, all accumulated and unpaid dividends to the date of redemption, or in the case of the Exchange Debentures, all accrued and unpaid interest to the date of redemption. Upon the occurrence of a change in control, the Company would be required to make an offer to purchase the Exchangeable Preferred Stock or the Exchange Debentures, for cash, at a price equal to 101% of the liquidation preference or aggregate principal amount (as the case may be) thereof, together with, in the case of the Exchangeable Preferred Stock, all accumulated and unpaid dividends to the date of purchase, or in the case of the Exchange Debentures, all accrued and unpaid interest to the date of purchase.
18% CONVERTIBLE CUMULATIVE PREFERRED STOCK
At December 31, 2003 and 2002, the Company has outstanding $77,442 and $65,629 liquidation preference of 18% Convertible Cumulative Preferred Stock ("Preference Stock") with a mandatory redemption date of June 30, 2010. The Preference Stock ranks junior to the Company's 12 1/4% Senior Exchangeable Preferred Stock and ranks senior to any subsequently issued preferred stock. All dividends are payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year. Holders of the Preference Stock are entitled to receive an annual dividend rate of 18% plus approximately 24% of the aggregate value of each dividend (if any) declared and paid on the Company's common stock. If not paid quarterly in cash, annually, accumulated and unpaid dividends are to be added to the basis of the stock.
The Company may redeem any or all of the shares of the Preference Stock for consideration equal to the Base Redemption Amount. The Base Redemption Amount is an amount equal to up to 1,500 shares of Common Stock issuable upon the exercise of future warrants plus the greater of the liquidation preference of the Preference Stock or the value of 7,348.7 shares of the Company's Common Stock, as adjusted for dilutive issuances.
Upon the occurrence of a change of control and subject to the Holders of all of the Company's Senior Securities having exercised their right to be prepaid and/or to put their securities to the Company upon such Change of Control, each Holder of Preference Stock may require the Company to redeem, on or after the 92nd day after the prepayment or redemption of the Company's Senior Securities in whole, all or any part of such Holder's Preference Stock at 102% of the redemption price of such securities. The redemption price of the Preference Stock is the Base Redemption Amount described above.
If, on any Redemption Date which occurs after an initial public offering of the Company's Common Stock, the value of the Preference Stock as converted into Common Stock exceeds the liquidation preference of the Preference Stock, the Company may elect, in lieu of paying cash on the redemption of such Preference Stock, to convert some or all of the Preference Stock into 7,348.7 shares of the Company's Common Stock, as adjusted for dilutive issuances, subject to certain limitations.
H. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The components of accumulated other comprehensive income (loss) as of December 31, 2003 and 2002, consists of:
I. INCOME TAXES
Significant components of deferred tax assets (liabilities) as of December 31, 2003 and 2002, are as follows:
Income tax expense consists of the following for the years ended December 31, 2003, 2002 and 2001:
The income tax expense differs from the United States statutory rate for the years ended December 31, 2003, 2002 and 2001, as a result of the following:
During 2002, it was determined that the Company's foreign source income taxable in the United States was less than previously estimated. The effect of this change in estimate was to decrease the 2002 income tax expense by $1,930. Other tax benefit for 2001 in the table above consists primarily of the release of tax reserves.
Income (loss) before income taxes includes $16,464, $16,131 and $13,069 of income from international operations for the years ended December 31, 2003, 2002 and 2001. Day has not provided for deferred taxes on the undistributed earnings of international subsidiaries because the earnings are deemed permanently reinvested. Undistributed earnings of Day's foreign subsidiaries amounted to approximately $50 million as of December 31, 2003. The unrecognized deferred tax liability on these earnings has not been calculated due to the complexities associated with the hypothetical calculation. Beginning in 2004, it is anticipated that Day will remit a substantial portion of prospective foreign subsidiary earnings in the form of taxable dividends. The tax consequences of those dividends will be recorded when such dividends are paid. Since the Company intends to remit earnings from its foreign subsidiaries only on a prospective basis, the APB #23 exception will continue to apply to the foreign subsidiaries earnings accumulated through December 31, 2003. The Company has United States net operating loss carryforwards of approximately $67,697 expiring from 2006 through 2023.
J. BUSINESS SEGMENTS
The Company produces precision-engineered products, specializing in the design and customization of consumable image-transfer products for the graphic arts (printing) industry and consumable fiber handling products for the textile industry. The Image Transfer segment designs, manufactures and markets high-quality printing blankets and sleeves, pressroom chemicals and automatic dampening systems used primarily in the offset and flexographic printing industries. The Textile Products segment manufactures and markets precision engineered rubber cots and aprons sold to textile yarn spinners and other engineered rubber products sold to diverse markets.
The accounting policies of the segments are the same as those described in Note B-Significant Accounting Policies. Segment performance is evaluated based on operating profit results compared to the annual operating plan. Intersegment sales and transfers are not material.
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.
The following is a reconciliation of the items reported above to the amounts reported in the consolidated financial statements:
Net sales for the years ended December 31, 2003, 2002 and 2001, and long-lived assets as of December 31, 2003, 2002 and 2001, by geographic area are as follows:
Sales between geographic areas are generally priced to recover cost plus an appropriate mark-up for profit.
K. RELATED PARTY TRANSACTIONS
In accordance with a management services agreement, the Company is required to pay GSC Partners and SGCP, the controlling shareholders of Day, an annual management fee of $1.0 million plus expenses, payable semi-annually.
L. STOCKHOLDERS' EQUITY AND STOCK BASED COMPENSATION PLAN
1998 STOCK OPTION PLAN
The 1998 Stock Option Plan provides incentives to officers and other key employees of the Company that serve to align their interests with those of stockholders. Under the 1998 Stock Option Plan, the Board is authorized to award four different types of non-qualified stock options: (i) service options, (ii) performance options, (iii) super performance options and (iv) exit options. Under the 1998 Stock Option Plan, unless otherwise provided by the Board, service options vest and become exercisable in five equal annual installments on each of the first five anniversaries of the date of grant; performance and super performance options vest and become exercisable in annual installments based on the achievement of annual EBITDA targets of the Company; and exit options vest and become exercisable based upon the internal rate of return of GSC Partners realized in connection with the disposition of its investment in the Company. Regardless of the satisfaction of any performance goals, performance options, super performance options and exit options fully vest and become exercisable on the ninth anniversary of the date of grant.
Initially, 7,885 shares of the Company's voting common stock were authorized for issuance under the 1998 Stock Option Plan. In the event of certain changes in the Company's capital structure affecting the common stock, the Board of Directors may make appropriate adjustments in the number of shares then covered by options and, where applicable, the exercise price of options under the 1998 Stock Option Plan.
As of December 31, 2003, 7,537 options have been granted (of which 1,221 are exercisable) under the 1998 Stock Option Plan with an exercise price of $4,030. These options expire as follows: 6,087 expire in 2007 and 1,450 expire in 2012.
DAY STOCK OPTION PLAN
Certain employees hold options that were previously granted under the Day International Group, Inc. Stock Option Plan (the "Day Option Plan"). In 1998 all options granted under the Day Option Plan became fully vested and the Day Option Plan was amended to provide that no further options may be awarded under that plan. As a result, compensation expense associated with these options was recorded in 1998 and the remaining balance of $7,821 is included in other long-term liabilities at December 31, 2003 and 2002. As of December 31, 2003, 2,442.5 options have been granted under the Day Option Plan with an exercise price of $1,000 a share and 310 options have been granted with an exercise price of $1,200 a share. The options expire as follows: 2,367.5 expire in 2005; 75 expire in 2006; and 310 expire in 2007.
The following table summarizes activity in the Company's stock option plans:
Warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per share were granted in 1998 to one of the Board members as compensation for services as a director. In 2000, additional warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per share were granted to each of two Board members for their services. The warrants are fully vested as of December 31, 2002.
M. RETIREMENT PLANS
The Company has defined benefit plans covering certain associates of its international subsidiaries. Benefits under these plans are based primarily on years of service and qualifying compensation during the final years of employment. Day uses a December 31 measurement date for the plans. The pension plan in the United Kingdom has plan assets consisting of U.K. government bonds. The Company's funding policy complies with the requirements of local laws and regulations. During 2001, the Company froze the benefits under the U.K. Pension plan and settled a portion of the obligation by transferring the benefits of active associates to a defined contribution plan.
In conjunction with the TPO acquisition in 1999, the Company entered into a Promise to Pay agreement with Armstrong World Industries GmbH ("Armstrong") for the unfunded pension obligation of TPO's Germany subsidiary in which Armstrong agreed to pay the portion of any pension obligations which the associates earned prior to the date of the acquisition. At December 31, 2003, a receivable of $1,704 has been recorded for the estimated portion of the pension obligation that is Armstrong's responsibility.
Day also sponsors defined contribution plans for certain associates, which provide for Company contributions of a specified percentage of each associate's total compensation. Certain of these plans include a profit-sharing component that varies depending on the achievement of certain objectives.
The funded status of the Company's defined benefit plans at December 31, 2003 and 2002, is as follows:
A summary of the components of net periodic pension cost for the defined benefit plans and for the defined contribution plans for the years ended December 31, 2003, 2002 and 2001, is as follows:
N. OTHER POSTRETIREMENT BENEFITS
Day provides certain contributory postretirement health care and life insurance benefits for certain U.S. associates. During 2003, the Company amended the plan so that participants become eligible for postretirement benefits if they retire on or after age 55, with at least ten years of service after attaining age 45 and to increase the retirees' share of benefit costs. The amendments made to the plan decreased the pension benefit obligation by $4,258, which will be amortized into income over the next 12 years. Day uses a December 31 measurement date for the plan.
The status of Day's unfunded plan at December 31, 2003 and 2002, is as follows:
The weighted-average assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is assumed to be 9.0% and decreasing gradually to 5.0% in 2012 and remaining at that level thereafter. A one percentage point increase in the assumed health care cost trend rate would have increased the accumulated benefit obligation by $1,858 at December 31, 2003, and the interest and service cost would have been $367 higher for the year ended December 31, 2003. A one percentage point decrease in the assumed health care cost trend rate would have decreased the accumulated benefit obligation by $1,542 at December 31, 2003, and the interest and service cost would have been $301 lower for the year ended December 31, 2003. Future benefit payments for each of the next five years and for the five years thereafter are expected to be paid as follows: $336 in 2004, $378 in 2005, $429 in 2006, $491 in 2007, $549 in 2008 and $4,151 in total for 2009 through 2013.
Net periodic postretirement benefit costs include the following components for the years ended December 31, 2003, 2002 and 2001:
On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act"). The Act expands Medicare primarily by adding a prescription drug benefit for Medicare-eligible individuals beginning in 2006. Pursuant to guidance provided in FASB Staff Position SFAS No. 106-1, the Company has chosen to defer recognition of the Act, and, accordingly, postretirement benefit obligations and net periodic postretirement benefit cost do not reflect any potential effect of the legislation. In addition, specific authoritative guidance on the accounting for certain aspects of the Act has not yet been determined and that guidance, when issued, could require the Company to change previously reported information. The Company believes that the impact of the legislation will not be material to the results of operations or financial position of the Company.
O. RESTRUCTURING COSTS
As announced in the first quarter of 2001, the Company has consolidated its U.S. Textile Products operations into its Greenville, South Carolina, facility. The relocation was completed in early 2002. A pre-tax charge of $933 was recorded in 2001 for relocation of machinery and equipment and severance and termination costs for 59 associates. During the first quarter of 2002, the Company incurred additional relocation costs of $109, recorded a charge of $157 for write-off of fixed assets and recorded a reversal of $103 of the reserve for severance costs. As of September 30, 2002, final severance payments 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 September 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. In 2003, the Company sold the land and building and recognized a small gain from the sale that is included in other (income) expense-net.
Also during the fourth quarter of 2001, the Company completed plans to relocate its Chemical Products German sales office into other existing facilities and the U.S. sales and administrative functions from Oakland, New Jersey to other U.S. locations. A pre-tax charge of $988 was recorded for severance costs for 21 associates, costs for closing the offices and loss on the sale of fixed assets. As of December 31, 2002, final severance payments had been paid to 21 associates.
Below is a summary of the restructuring charges in 2001:
Below is a summary of the restructuring charges in 2002:
Below is a summary of the amounts charged against the reserves for severance and facility shutdown in 2001 and 2002:
As of December 31, 2002, all restructuring programs had been completed.
P. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases a building in Germany under a capital lease. Property under this capital lease is included in property, plant and equipment at December 31, 2003 and 2002, as follows:
The Company also leases certain warehouses, transportation equipment and office equipment under operating leases with terms of 1 to 10 years. Rental expense for the years ended December 31, 2003, 2002 and 2001 was $2,438, $2,326 and $1,949. The following is a schedule by year of future annual minimum lease payments under non-cancelable leases as of December 31, 2003:
CONTINGENCIES
There are currently no environmental claims against the Company for the costs of environmental remediation measures taken or to be taken. From time to time, the Company is involved in various legal proceedings arising in the ordinary course of business. None of the matters in which the Company is currently involved, either individually or in the aggregate, is expected to have a material adverse effect on the Company's business or financial condition.
Q. SUPPLEMENTAL CASH FLOW DISCLOSURES
R. SUPPLEMENTAL CONSOLIDATING INFORMATION
The Company has outstanding $115,000 of 9-1/2% Senior Subordinated Notes (the "Notes"). Day International, Inc. ("Day International" or "Guarantor") is a wholly-owned subsidiary of the Company (which has no assets or operations other than its investment in Day International). Day International and its wholly-owned United States subsidiaries have provided a full and unconditional guarantee of the Notes. The wholly-owned international subsidiaries of Day International are not guarantors with respect to the Notes and do not have any credit arrangements senior to the Notes. All of the assets of Day and Day International, other than the assets of the wholly-owned international non-guarantor subsidiaries, are pledged as collateral on the Notes. The only intercompany eliminations are the normal intercompany eliminations with regard to intercompany sales and the Company's investment in the wholly-owned non-guarantor subsidiaries. Intercompany notes are in place that effectively transfers the interest expense from Day to Day International, Inc. The following are the supplemental consolidating condensed balance sheets as of December 31, 2003 and 2002, the supplemental consolidating condensed statements of operations and cash flows for the years ended December 31, 2003, 2002 and 2001, with the investments in the subsidiaries accounted for using the equity method. Separate complete financial statements of the Guarantor are not presented because management has determined that they are not material to the investors.
DAY INTERNATIONAL GROUP, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 31, 2003
DAY INTERNATIONAL GROUP, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 31, 2002
DAY INTERNATIONAL GROUP, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2003
DAY INTERNATIONAL GROUP, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2002
DAY INTERNATIONAL GROUP, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2001
DAY INTERNATIONAL GROUP, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2003
DAY INTERNATIONAL GROUP, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2002
DAY INTERNATIONAL GROUP, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2001
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
ITEM 9A.
ITEM 9A. 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, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, assesses the internal control and disclosure control systems as being effective as they encompass material matters for the three months ended December 31, 2003. To the best of management's knowledge, there were no changes in the internal control and disclosure control systems during the quarter ended December 31, 2003, that would materially affect the control systems.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the names, ages and a brief account of the business experience for the last five years of each person who is a director or executive officer of the Company as of February 29, 2004.
William C. Ferguson has been a director since 1998. He retired as Chairman and Chief Executive Officer of NYNEX in 1995, a position he had held since 1989. Mr. Ferguson is also a member of the Advisory Board of GSC Partners.
Carl J. Crosetto has been a director since 2000. He retired as President of Bowne & Co., Inc. in December 2003 after 30 years service with Bowne. In January 2004, Mr. Crosetto joined GSC Partners as a Senior Advisor. Mr. Crosetto is a member of the board of directors of Bowne & Co., Inc. and SpeedFlex Asia Limited.
Matthew C. Kaufman has been a director since 2000. He is a Managing Director with GSC Partners. He joined GSC Partners in 1997. He is Chairman of the Board of Pacific Aerospace & Electronics, Inc. and a director of Atlantic Express Transportation Group, Burke Industries, Inc., etalk Corporation, Safety-Kleen Corp., Waddington North America, Inc. and Worldtex, Inc.
Neal Moszkowski has been a director since 2003. He is a senior partner with Soros Private Equity Partners, LLC. He has been with SPEP since 1998. Mr. Moszkowski is a member of the board of directors of Bluefly, Inc., Integra LifeSciences Holdings Corporation and JetBlue Airways Corporation.
Philip Raygorodetsky became a director of the Company in 2003. He is a Vice President with GSC Partners, which he joined in 1997. Mr. Raygorodetsky is also a director of Pacific Aerospace & Electronics, Inc. and Worldtex, Inc.
Christopher A. White became a director of the Company in 2003. He is a Director of SG Capital Partners LLC. Previously, Mr. White worked in the Equity Capital Markets groups of SG Cowen from 1999 to 2003 and Salomon Smith Barney from 1997 to 1999. He is also a director of Achillion Pharmaceuticals, Inc., Anadys Pharmaceuticals, Inc. and Coleman Floor Company.
As compensation for his services as director, in 1998, Mr. Ferguson received warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per share. On January 18, 2000, Mr. Ferguson received additional warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per share. As compensation for his services as director, Mr. Crosetto also received warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per share on January 18, 2000. As of December 31, 2003, the warrants are fully vested. Beginning in 2003, Mr. Ferguson receives an annual retainer of $100,000 for his services as Chairman of the Board. None of the other directors will receive any compensation for their services as directors.
AUDIT COMMITTEE FINANCIAL EXPERT
The Company's Board of Directors has determined that Mr. Ferguson is an independent audit committee financial expert in accordance with Item 401(h) of Regulation S-K.
CODE OF ETHICS
The Company has adopted a Code of Ethics for all associates, including the chief executive officer, chief financial officer, controller and treasurer, addressing business ethics and conflicts of interest. A copy of the Code of Ethics will be provided free of charge upon request of the Chief Financial Officer at P.O. Box 338, 130 West Second Street, Dayton, Ohio 45401-0338, or (937) 224-4000.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for 2003, 2002 and 2001 for Mr. Wolters and the four other most highly compensated executive officers of the Company at the end of 2003. All amounts for non-U.S. executive officers are converted to U.S. dollars at the average exchange rate for each year.
(a) Represents company contributions to the Day 401(k) and Profit Sharing Plan ($12,000), company contributions to the Day International, Inc. Supplemental Savings and Retirement Plan ($3,600), premiums for group term life insurance ($3,226), investment advisory services ($7,428) and automobile allowance ($5,058).
(b) Represents company contributions to a UK benefit plan ($43,003) and automobile allowance ($15,808).
(c) Represents company contributions to the Day 401(k) and Profit Sharing Plan ($11,500), premiums for group term life insurance ($593) and automobile allowance ($6,041).
(d) Represents company contributions to the Day 401(k) and Profit Sharing Plan ($11,300), premiums for group term life insurance ($899) and automobile allowance ($3,185).
(e) Represents company contributions to an Australian benefit plan ($19,476) and automobile allowance ($9,378).
FY-END OPTION/SAR VALUES
(1) Based upon estimated fair market value of the shares less the exercise price.
EMPLOYMENT AGREEMENTS
Each of Messrs. Wolters and Freimuth is a party to an employment agreement with the Company, subject to annual renewals unless notice of non-renewal is given. Under the employment agreements, each of Messrs. Wolters and Freimuth receives annual base salaries of $200,000 and $105,000 (subject to increase by the Board of Directors), and an incentive bonus at 100% of plan target in an amount equal to at least $200,000 and $55,000. The agreements also contain certain non-competition and non-solicitation provisions. Subject to certain exceptions, in the event that the executive is actually or constructively terminated under the employment agreement by the Company without cause, each employment agreement provides that the executive is entitled to receive the following compensation: (i) accrued salary, (ii) pro-rata incentive bonus for the year of termination, assuming that 100% of the annual plan target was met, (iii) a lump sum equal to one times base salary and annual incentive bonus target and (iv) continuation of benefits and perquisites for one year following termination.
COMPENSATION COMMITTEE INTERLOCKS
Since the Company does not have a compensation committee, the Board of Directors determines executive compensation. Mr. Ferguson serves on the Advisory Board of GSC Partners. Mr. Kaufman is a Managing Director of GSC Partners. Mr. Raygorodetsky is a Vice President of GSC Partners. Mr. White is a Director of SG Capital Partners LLC ("SGCP"). GSC Partners and SGCP, the Company's controlling shareholders, provide business, financial and management advisory services to the Company for an annual total fee of $1 million, plus expenses. The Company also indemnifies GSC Partners and SGCP from and against certain liabilities. Mr. Moszkowski is a Partner with Soros Private Equity Partners ("SPEP"). SPEP and its affiliates are the majority shareholders of the Company's Convertible Cumulative Preferred Stock. The Company also indemnifies SPEP from and against certain liabilities. Mr. Wolters is the President and Chief Executive Officer of the Company. No other officers of the Company participated in Board deliberations regarding executive compensation in 2003.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
EQUITY COMPENSATION PLAN INFORMATION
(1) These plans consist of the Day Stock Option Plan, the 1998 Stock Option Plan and warrants issued to individual directors as compensation for services performed. These plans were approved by shareholders holding a majority of the Class A Voting Common Stock through their representation on the Board of Directors. See Note L to the Consolidated Financial Statements for detailed descriptions of these plans.
SECURITY OWNERSHIP
The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock, including options to acquire Common Stock, by (i) each person (or group of affiliated persons) known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock, (ii) each Director, (iii) the Company's Chief Executive Officer and the Company's other named executive officers (as determined in accordance with the rules of the Commission), and (iv) all of the Company's executive officers and Directors as a group. Except as indicated in the footnotes to this table, the Company believes that the persons named in this table have sole voting and investment power with respect to all the shares of stock indicated.
(a) Beneficial ownership is determined in accordance with the rules of the Commission and includes general voting power and/or investment power with respect to securities. The table includes shares of Common Stock subject to options and warrants currently exercisable or exercisable within 60 days of the date of this report. As of the date of this report, the number of such shares is 3,957. Exercisable options included in the number of shares above include 1,650 shares for Mr. Wolters, 253 shares for Mr. Healy, 100 shares for Mr. Noe, 434 shares for Mr. Freimuth and 2,790 shares for all directors and executive officers as a group. Mr. Crosetto's and Mr. Ferguson's shares represent vested warrants to purchase shares of Common Stock.
(b) The shares of Common Stock owned by SGCP are Class B Non-Voting Common Stock. All other shares are shares of Class A Voting Common Stock.
(c) Greenwich IV, LLC is an affiliate of GSC Partners. Messrs. Kaufman and Raygorodetsky may be deemed to have indirect beneficial ownership of the 18,912 shares of Common Stock beneficially owned by Greenwich IV, LLC by virtue of their affiliation with GSC Partners. Mr. Kaufman and Mr. Raygorodetsky disclaim any such beneficial ownership.
(d) Mr. White may be deemed to have indirect beneficial ownership of the 3,777.5 shares of Common Stock beneficially owned by SG Capital Partners LLC by virtue of his affiliation with SG Capital Partners LLC. Mr. White disclaims any such beneficial ownership.
STOCKHOLDERS AGREEMENT
The Stockholders Agreement provides for the number of directors of the Board of Directors of the Company to be such number as designated by GSC Partners, which initially shall be five, and for the composition of the Board of Directors of the Company to consist of four individuals designated by GSC Partners and, for so long as SGCP holds 5% of the outstanding Common Stock, one individual designated by SGCP.
In the Stockholders Agreement, the Management Stockholders have agreed, except under certain circumstances, not to transfer shares of Common Stock, or options to acquire Common Stock, prior to the later to occur of (i) the fifth anniversary of the date of the Stockholders Agreement and (ii) the consummation of a public offering. In addition, under the Stockholders Agreement, if a Management Stockholder's employment is terminated, the Company shall have the right to purchase all or part of the shares of the Common Stock owned by such Management Stockholder and the vested options to acquire Common Stock owned by such Management Stockholder, at prices calculated in accordance with, and subject to certain other terms and conditions set forth in, the terms of the Stockholders Agreement.
The Stockholders Agreement creates certain conventional "drag" and "tag" rights with respect to the shares of the Common Stock owned by the Management Stockholders. The Stockholders Agreement also provides that at any time after the Acquisition Closing Date, GSC Partners shall have the right to require the Company to effect up to two registrations of their Common Stock on Form S-1 under the Securities Act and, if available, unlimited registrations on Form S-2 or S-3 under the Securities Act; from and after a public offering, SGCP shall have the right to require the Company to effect up to two registrations of the Common Stock on Form S-3 under the Securities Act and that the Company shall pay all registration expenses in connection with each registration of shares of the Common Stock pursuant to the Stockholders Agreement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has engaged GSC Partners and SGCP, pursuant to the Management Agreement, to provide it with certain business, financial and managerial advisory services, including developing and implementing corporate and business strategy and providing other consulting and advisory services. The Management Agreement provides for an annual fee of $1.0 million and contains indemnification and expense reimbursement provisions that are customary for management agreements of this type. The Management Agreement will continue in full force and effect, and shall terminate upon, the earlier to occur of (i) January 18, 2008, and (ii) the date on which the affiliates of GSC Partners no longer, directly or indirectly, own any shares of capital stock of the Company, and may be earlier terminated by GSC Partners, in its sole discretion.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
FEES
The following table presents fees for professional services rendered by Ernst & Young LLP for the years ended December 31, 2003 and 2002.
Audit fees consist of fees billed or agreed to be billed for services related to the audit of the Company's consolidated annual financial statements and reviews of the interim consolidated financial statements and services that are normally provided by Ernst & Young LLP in connection with statutory and regulatory filings.
Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit and not reported under "Audit fees." This category includes services related to audits of employee benefit plans and consultations in connection with acquisitions.
Tax fees consist of fees billed or agreed to be billed for services rendered for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and international tax compliance, acquisitions and international tax planning.
POLICY ON PRE-APPROVAL OF SERVICES OF THE INDEPENDENT AUDITOR
The Board of Directors' policy is to pre-approve all audit and non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services. The Board has delegated pre-approval authority to the Chief Executive Officer for de minimis services when expedition of services is necessary, with follow-up with the Board of Directors at their next meeting. The independent auditors and management are required to periodically report to the full Board of Directors regarding the extent of services provided by the independent auditors.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its subsidiaries are incorporated by reference as part of this Report at Item 8 hereof.
DAY INTERNATIONAL GROUP, INC.
Years ended December 31, 2003, 2002 and 2001: Report of Independent Public Accountants Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity (Deficit) Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES
The information required to be submitted in the Financial Statement Schedules for Day International Group, Inc. and consolidated subsidiaries has either been shown in the financial statements or notes, or is not applicable or required under Regulation S-X; therefore, those schedules have been omitted.
(b) REPORTS ON FORM 8-K
On December 4, 2003, the Company filed a Form 8-K reporting under Item 2 that it had acquired the stock of privately-held Network Distribution International and had issued additional term loans under the existing Senior Secured Credit Facility to finance a portion of the purchase price.
(c) EXHIBITS
See Index to Exhibits
(d) SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report covering the Company's last fiscal year, and no proxy statement, form of proxy or other proxy soliciting material has been sent to security holders of the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Day International Group, Inc. has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
Day International Group, Inc. (Registrant)
Date: March 24, 2004 By: /s/ Dennis R Wolters ----------------------------- Dennis R. Wolters President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Day International Group, Inc. and in the capacities and on the dates indicated.
Date: March 24, 2004 By: /s/ Dennis R Wolters ----------------------------- Dennis R. Wolters President, Chief Executive Officer and Director (Principal Executive Officer)
Date: March 24, 2004 By: /s/ Thomas J. Koenig ----------------------------- Thomas J. Koenig Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
Date: March 24, 2004 By: /s/ William C. Ferguson -------------------------------- William C. Ferguson Director
Date: March 24, 2004 By: /s/ Carl J. Crosetto ----------------------------- Carl J. Crosetto Director
Date: March 24, 2004 By: /s/ Matthew C. Kaufman ------------------------------- Matthew C. Kaufman Director
Date: March 24, 2004 By: /s/ Neal Moszkowski ---------------------------- Neal Moszkowski Director
Date: March 24, 2004 By: /s/ Philip Raygorodetsky --------------------------------- Philip Raygorodetsky Director
Date: March 24, 2004 By: /s/ Christopher A. White --------------------------------- Christopher A. White Director
INDEX TO EXHIBITS
(1) UNDERWRITING AGREEMENTS
1.1 Purchase Agreement, dated as of March 13, 1998 between the Company and Societe Generale Securities Corporation (incorporated by reference to Exhibit 1.1 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
(3) ARTICLES OF INCORPORATION AND BY-LAWS
3.1 Certificate of Incorporation of Day International Group, Inc. ("Group"), as amended
3.2 By-Laws of Group, as amended
(4) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4.1 Indenture (the "Subordinated Indenture") dated as of March 18, 1998, among Day International Group, Inc., Day International, Inc. and the Bank of New York (incorporated by reference to Exhibit 4.3.1 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
4.2 Supplemental Indenture, dated as of October 19, 1999 among The Bank of New York and the several Guarantors party thereto (incorporated by reference to Exhibit 4.2 to the Form 8-K dated October 28, 1999)
4.3 Form of Global Notes (incorporated by reference to Exhibit 4.3.2 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
4.4 Registration Rights Agreement, dated as of March 18, 1998, by and between the Company and Societe Generale Securities Corporation (incorporated by reference to Exhibit 4.4 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
4.5 Certificate of Designation, dated March 18, 1998, of Powers, Preferences and Relative, Participating, Optional and other Special Rights of 12-1/4% Senior Exchangeable Preferred Stock due 2010 and Qualifications, Limitations and Restrictions thereof (the "Exchangeable Preferred Stock") (incorporated by reference to Exhibit 4.5.1 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
4.6 Form of Global Certificate for the Exchangeable Preferred Stock (incorporated by reference to Exhibit 4.5.2 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
4.7 Exchange Debenture Indenture, dated as of March 18, 1998, among Day International Group, Inc., Day International, Inc. and the Bank of New York as Trustee (incorporated by reference to Exhibit 4.6 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
4.8 Certificate of Designation for the Company's 18% Convertible Cumulative Preference Stock due 2010, filed with the Secretary of State of the State of Delaware on October 15, 1999 (incorporated by reference to Exhibit 4.1 to the Form 8-K dated October 28, 1999)
4.9 Preference Stock Purchase Agreement, dated as of October 19, 1999, among the Company and the several Investors party thereto (incorporated by reference to Exhibit 4.4 to the Form 8-K dated October 28, 1999)
4.10 Amended and Restated Stockholders Agreement, dated as of October 19, 1999, among the Company and certain of its stockholders (incorporated by reference to Exhibit 4.5 to the Form 8-K dated October 28, 1999)
(10) MATERIAL CONTRACTS
10.1 Second Amended and Restated Senior Secured Credit Agreement, dated as of September 16, 2003, among the Company, Lehman Commercial Paper Inc., as administrative agent, and others (incorporated by reference to Exhibit 10.1 to the Form 8-K dated September 22, 2003)
10.2 Second Amended and Restated Guarantee and Collateral Agreement, dated as of September 16, 2003, made by the Company in favor of Lehman Commercial Paper Inc., as administrative agent, for the benefit of the Lenders under the Senior Secured Credit Agreement (incorporated by reference to Exhibit 10.2 to the Form 8-K dated September 22, 2003)
10.3 Second Amended and Restated Patent and Trademark Security Agreement, dated as of September 16, 2003, made by the Company in favor of Lehman Commercial Paper Inc., as administrative agent, for the benefit of the Lenders under the Senior Secured Credit Agreement (incorporated by reference to Exhibit 10.3 to the Form 8-K dated September 22, 2003)
10.4 First Amendment to the Second Amended and Restated Senior Secured Credit Agreement, dated as of November 24, 2003, among the Company, Lehman Commercial Paper Inc., as administrative agent, and others (incorporated by reference to Exhibit 10.1 to the Form 8-K dated December 4, 2003)
10.5 Deed of Trust, dated January 15, 1998, with respect to the North Carolina property (incorporated by reference to Exhibit 4.12 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)); as amended October 19, 1999 (incorporated by reference to Exhibit 10.6.1 to the Form 8-K dated September 22, 2003); as further amended June 29, 2001 (incorporated by reference to Exhibit 10.6.2 to the Form 8-K dated September 22, 2003); and as modified September 16, 2003 (incorporated by reference to Exhibit 10.6.3 to the Form 8-K dated September 22, 2003)
10.6 Mortgage and Security Agreement Dated January 16, 1998, with respect to the Michigan Property (incorporated by reference to Exhibit 4.13 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)); as amended October 19, 1999 (incorporated by reference to Exhibit 10.7.1 to the Form 8-K dated September 22, 2003); as further amended June 29, 2001 (incorporated by reference to Exhibit 10.7.2 to the Form 8-K dated September 22, 2003); and as modified September 16, 2003 (incorporated by reference to Exhibit 10.7.3 to the Form 8-K dated September 22, 2003)
10.7 Mortgage Agreement, dated October 19, 1999, with respect to the South Carolina property (incorporated by reference to Exhibit 10.5.1 to the Form 8-K dated September 22, 2003); as amended June 29, 2001 (incorporated by reference to Exhibit 10.5.2 to the Form 8-K dated September 22, 2003); and as modified September 16, 2003 (incorporated by reference to Exhibit 10.5.3 to the Form 8-K dated September 22, 2003)
10.8 Deed of Trust, dated October 19, 1999, with respect to the Texas property (incorporated by reference to Exhibit 10.8.1 to the Form 8-K dated September 22, 2003); as modified September 16, 2003 (incorporated by reference to Exhibit 10.8.2 to the Form 8-K dated September 22, 2003)
10.9 Mortgage Agreement, dated October 19, 1999, with respect to the Illinois property (incorporated by reference to Exhibit 10.9.1 to the Form 8-K dated September 22, 2003); as amended June 29, 2001 (incorporated by reference to Exhibit 10.9.2 to the Form 8-K dated September 22, 2003); and as modified September 16, 2003 (incorporated by reference to Exhibit 10.9.3 to the Form 8-K dated September 22, 2003)
10.10 Stock Purchase Agreement, dated as of December 18, 1997, by and among Greenwich IV, LLC, GSD Acquisition Corp. and the Stockholders of Day International Group, Inc. parties thereto (incorporated by reference to Exhibit 2.1 to the Form 8-K dated January 16, 1998); as amended on January 16, 1998 (incorporated by reference to Exhibit 2.2 to the Form 8-K dated January 16, 1998)
10.11* Consulting Agreement between the Company and GSC Partners (incorporated by reference to Exhibit 10.5.1 to the Amendment No. 2 to Registration Statement on Form S-4/A filed on June 22, 1998 (Reg. No. 333-51839))
10.12* Indemnification Agreement between the Company and GSC Partners (incorporated by reference to Exhibit 10.5.2 to the Amendment No. 2 to Registration Statement on Form S-4/A filed on June 22, 1998 (Reg. No. 333-51839))
10.13* Consulting Agreement between the Company and SG Capital Partners Limited (incorporated by reference to Exhibit 10.5.3 to the Amendment No. 2 to Registration Statement on Form S-4/A filed on June 22, 1998 (Reg. No. 333-51839))
10.14* Indemnification Agreement between the Company and SG Capital Partners Limited (incorporated by reference to Exhibit 10.5.4 to the Amendment No. 2 to Registration Statement on Form S-4/A filed on June 22, 1998 (Reg. No. 333-51839))
10.15 Purchase Agreement between Armstrong World Industries, Inc. and Armstrong World Industries GmbH, as Sellers and Day International, Inc., as Buyer (incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999
10.16* Stock warrant to purchase shares of Common Stock of the Company, dated as of January 18, 1998, issued to Mr. William C. Ferguson (incorporated by reference to Exhibit 10.30 to the Annual Report on Form 10-K for the year ended December 31, 1998)
10.17* Stock warrant to purchase shares of Common Stock of the Company, dated as of January 27, 2000, issued to Mr. William C. Ferguson (incorporated by reference to Exhibit 10.37 to the Annual Report on Form 10-K for the year ended December 31, 2000)
10.18* Stock warrant to purchase shares of Common Stock of the Company, dated as of January 18, 2000, issued to Mr. Carl J. Crosetto (incorporated by reference to Exhibit 10.38 to the Annual Report on Form 10-K for the year ended December 31, 2000)
10.19* Employment Agreement, dated January 16, 1998, between the Guarantor and Dennis R. Wolters (incorporated by reference to Exhibit 10.4 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
10.20* Employment Agreement, dated January 16, 1998, between Day International, Inc. and David B. Freimuth (incorporated by reference to Exhibit 10.5 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
10.21* Day International Group, Inc. Stock Option Plan, dated as of July 6, 1995 (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K for the period ended December 31, 1995); as amended on September 19, 1996 (incorporated by reference to Exhibit 10.17 to the Annual Report on Form 10-K for the year ended December 31, 1996); and as further amended on January 16, 1998 (incorporated by reference to Exhibit 10.2.3 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
10.22* Day International, Inc. Supplemental Savings and Retirement Plan, dated as of March 1, 2001 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2001)
(21) SUBSIDIARIES OF THE REGISTRANT
(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
* - Management contract or compensatory plan or arrangement