ITEM 1. BUSINESS
COMPANY BACKGROUND
The Company is one of the world's leading producers of precision-engineered products, specializing in the design and customization of consumable image-transfer products for the graphic arts (printing) industry and consumable fiber handling products for the textile industry. The Company consists of two segments: the Image Transfer segment and the Textile Products segment. The Image Transfer segment consists of the Transfer Media division and the Pressroom Chemicals division. The Transfer Media division is the world's largest designer, manufacturer and marketer of high-quality printing blankets and sleeves for use in offset printing. The Company estimates that in 2002 it had the number one market share in offset-printing blankets and sleeves in North America and worldwide. The Company is one of the world's largest manufacturers and marketers of sleeves for use in flexographic printing. The Pressroom Chemicals division is a leading worldwide supplier of pressroom chemicals to the printing industry and also manufactures the Kompac brand of automatic dampening systems for printing presses. The Textile Products segment is one of the world's largest manufacturers and marketers of precision engineered rubber cots, aprons and other fabricated rubber fiber handling components sold to textile yarn spinners worldwide.
Affiliates of GSC Partners and SG Capital Partners LLC own substantially all of the common stock of the Company, with the Company's management holding the balance of the common stock.
Effective December 31, 1998, the Company acquired Rotec Hulsensysteme GmbH ("Rotec"). Rotec is a world leader in sleeve technology, producing a wide array of sleeves and rollers used in the flexographic printing process.
On September 30, 1999, the Company acquired the textile products operations of Armstrong World Industries, Inc. ("TPO"). TPO is a leading manufacturer and marketer of high-end precision engineered rubber cots and aprons sold to textile yarn spinners worldwide and was a major competitor of Day's textile division.
On October 19, 1999, the Company acquired Varn International ("Varn" or "Pressroom Chemicals"). Varn manufactures pressroom chemicals and dampening systems for the printing industry.
See the Notes to the Consolidated Financial Statements for more information on business segments.
IMAGE TRANSFER
The Image Transfer segment specializes in selling consumable products to the graphic arts (printing) industry, primarily those used in offset printing. Offset is the primary printing process for long-run, high-speed applications, such as the printing of magazines, annual reports, catalogs, direct mail and newspapers. Flexographic and digital, two other printing processes, are currently used primarily in short-run, lower speed applications, such as for printing brochures and packaging material. The Company believes that applications for image transfer products within flexographic and digital printing processes will increase significantly and that advances in digital technologies will complement offset
printing processes and will provide additional opportunities for consumable products. It is generally expected that the demand for these processes will grow rapidly and that they will be used for an increasing amount of printing jobs. If these other technologies develop so that they compete effectively with offset printing in the high-speed, long-run segment of the printing industry, and such technologies are widely adopted, the business of Image Transfer could be adversely affected. There can be no assurance that the Company will be able to effectively develop products for these technologies or to maintain its market leadership if such processes replace offset printing to any significant extent. The Company is developing blankets, sleeves and belts for these new printing machine technologies in conjunction with the companies working on the printing machine technologies. Due to the large number of offset printing presses installed in the United States, management expects that the offset process will continue to be the method of choice for high-quality, low-cost, long runs. Products designed for use in offset printing generate the majority of the sales of Image Transfer.
Transfer Media
Offset printing blankets are highly engineered products manufactured to narrow tolerances and precise specifications. They are composed of multiple layers of fabric, rubber and adhesives that determine performance features on the printing press and overall quality of the printing job. Offset printing sleeves are highly engineered "tubular" blankets that operate at speeds 20% to 30% faster than those of standard presses. Blankets and sleeves accept ink from cylindrical printing plates and transfer it to a broad range of paper stocks and other substrates. Blankets and sleeves are a major determinant of the quality of the image resolution and consistency of the printed material, as they are required to perform consistently over a broad range of press speeds and printing pressures with a wide variety of papers, inks and other chemicals. Blankets and sleeves are consumable and are replaced at regular intervals depending on the process used and printing requirements. Due to the importance of blankets and sleeves in determining the overall quality of the printing job, and because their cost typically represents less than 1% of the cost of the printed page, price is only one of the factors in the end-user's purchase decision.
Pressroom Chemicals
Pressroom Chemicals manufactures two categories of pressroom products: pressroom chemicals and dampening systems. Pressroom Chemicals manufactures over 100 different pressroom chemicals, which can be classified into the following categories: (i) roller and blanket washes, which are used to remove ink and glaze from the surface of the rollers and blankets on the printing press; (ii) fountain solutions, which are used to prevent ink from migrating to non-print areas of the printing plate; (iii) anti-setoff powders which are used by sheet fed and letter press printers to prevent ink from transferring from the top of one sheet to the bottom of the next; (iv) lithographic chemicals and specialties; and (v) silicones, which are used in heatset web offset to provide support in certain printing processes. Pressroom Chemicals' products can be grouped into standard and custom products. Product lines are formulated to meet regional requirements. For example, high volume printing operations, such as major daily newspapers and commercial heatset web, often require custom fountain solutions.
Products
The Company offers a full line of high-quality, name brand printing blankets and sleeves to both web-fed (continuous roll) and sheet-fed (individual sheet) offset printers under the "Day," "David M" and "Freedom" brands. The Company's printing blankets and sleeves are used to print magazines,
advertising material, business forms, packaging, newspapers and other printed material. As a result of the superior quality, reliability and value of the Company's printing blankets and sleeves and its customer service, the Company is able to command premium prices for its products.
The Company's leading printing blankets are the 9500 dayGraphica(R), 4000 dayGraphica(R), 3000 Patriot(R), 3610 dayGraphica(R), 8500 AccuDot(R), QuantaLith(R) Gold and QuantaLith(R) Blue lines, which produce high-quality images, particularly on high-speed printing presses. The Freedom brand was introduced in 2001 to address the group of customers who were looking for an economically priced product where quality was a secondary consideration. In addition to its traditional line of printing blankets, the Company is one of four global licensees to manufacture tubular, seamless printing sleeves for use on Heidelberg Web Press, Inc.'s "gapless" webpresses. During 2002, the Company and Heidelberg revised the license agreement such that Day will be the exclusive licensee after the expiration of the other licensees' agreements through June 2004.
During the latter part of 2001, the Company began producing consumable products for digital printing presses. Sales of these products are expected to grow over the next couple of years as digital printing presses are sold that utilize these products. The Company is evaluating the production of other prototypes for new short-run color printing processes.
Transfer Media manufactures a wide array of sleeves used in the flexographic printing process under the Rotec name. Rotec gained industry prominence in 1993 with the introduction of the compressible sleeve, a product innovation enabling flexographic printers to achieve higher levels of print quality. The base technology for the flexographic sleeve has the potential for use in other printing segments as well (e.g., gravure and offset), which may expand the market segments for sleeve technology.
Transfer Media also manufactures and sells two lines of specialty products consisting of (i) pre-inked porous rolls for use in business machines, automated bank teller machines, ticket machines and credit card imprinters and (ii) cast urethane mats used by the box board corrugating industry as a backing material in cutting operations. The Company sells printing accessories such as cylinder packing papers and aluminum bars for mounting blankets onto press cylinders. In addition, the Company sells custom rubber compounds to several wire coaters in Europe.
Pressroom Chemicals has developed products that speed wash-up, color changes and blanket and roller maintenance; all formulated to reduce downtime and improve productivity. Roller and blanket washes are used to remove ink and glaze from the surface of the rollers and blankets on the printing press. Pressroom Chemicals makes over 25 washes, grouped into five different categories: premium, environmental, general purpose, fast drying and specialty. Pressroom Chemicals is a market leader in the area of environmental washes, which constitutes an important subcategory of Pressroom Chemicals' overall roller and blanket washes business.
Pressroom Chemicals has created a family of fountain solutions, which are used to prevent ink from migrating to non-print areas of the printing plate, to cover all requirements from high-speed web printing presses down to small offset duplicating printing presses. The fountain solutions and fountain additives are adjusted for water condition and properly balanced and fortified to improve print quality and press productivity. Pressroom Chemicals has created a line of alcohol-free fountain solutions formulated to eliminate the use of isopropyl alcohol from the process thus improving the pressroom environment.
Antisetoff powders are used extensively by sheetfed, offset and letterpress printers to prevent ink from transferring from the top of one sheet to the bottom of the next. Pressroom Chemicals offers an extensive range of silicone and conventional antisetoff powders to meet all industry requirements.
Lithographic chemicals and specialties include a wide range of products (including deglazers, additives, plate cleaners, aerosols) formulated to meet the evolving needs of the printing industry.
Silicones are used in heatset web offset printing to provide slip to the sheet as it passes over the former board. Pressroom Chemicals offers an extensive line of conventional silicones, as well as new technology silicones.
Pressroom Chemicals also manufactures the patented Kompac Dampening System and other mechanical devices for offset printing presses. Pressroom Chemicals manufactures six different Kompac Dampening Systems models to fit more than 8 different presses, both for new and retrofit applications. Kompac Dampening Systems consume other products manufactured by Pressroom Chemicals, such as fountain solutions.
Sales and Distribution
Image Transfer has adopted an integrated approach to product development, marketing, sales and distribution. Sales professionals in the United States have strong customer relationships and superior technical expertise. The international sales force includes sales professionals in Australia, Canada, France, Germany, Hong Kong, Italy, Japan, Malaysia, Mexico, Russia, Scandinavia, South Africa and the United Kingdom.
Image Transfer's sales force calls directly on end-users and promotes the quality and technical features of the Company's products to pressroom foremen, purchasing agents, plant managers and press operators. Depending on the market and product, the end-users can then order directly from the Company or through authorized converters or dealers. Image Transfer distributes a majority of its products through a large network of converters who buy and cut printing blanket rolls to customized orders and dealers and sub-dealers who buy finished products, store inventory and hold receivables. Converters are value-added dealers who typically purchase rolls of uncut printing blankets from the Company and then cut, finish and package the blankets for sale to dealers or end-users. The Company believes that it has one of the most effective networks of converters and dealers in the industry. The sales force works closely with converters and dealers, through joint calling efforts on end-users and training programs. In addition, the sales and technical associates work directly with large end-users to identify the printing blankets and sleeves that best suit that printer's particular needs and formulate solutions to complex printing problems. Sales made to Network Distribution International, Inc. ("NDI"), a major U.S. converter, accounted for approximately 10% of total net sales in 2002 and 2001 and 12% in 2000. The Company's sales to NDI are not governed by a written contract between the parties. In the event that NDI was to significantly reduce or terminate its purchases of blankets and sleeves from the Company, the Company's financial condition or results of operations could be adversely affected. The Company has not received any indication that NDI intends to discontinue or otherwise substantially reduce its relationship with the Company.
TEXTILE PRODUCTS
The Textile Products segment manufactures highly engineered rubber rollers, known as cots, and flexible belts, known as aprons, for utilization in yarn spinning machinery. Industry reports characterize the United States as the most technologically advanced producer of textile products in the world. As a result of continuing technological improvements in automated high-speed spinning frames, customers are demanding cots and aprons of higher quality and greater flexibility to meet their specialized needs and are willing to pay a premium for cots and aprons that meet these standards. The Company is known as a leader in technological innovation and quality and has the broadest line of cots and aprons and related products of any domestic manufacturer.
Products
With the broadest line of cots and aprons of any domestic manufacturer, the Company offers its customers both general purpose and specialty cots and aprons recognized in the marketplace under the DAYtex(R) and Accotex(R) brand names, with over 4,000 different SKUs. General-purpose cots and aprons include a full line of products designed for "short staple" fibers (such as cotton) and "long staple" fibers (such as wool), while specialty cots and aprons include glass-forming aprons, carpet cots and drawing cots. The Company provides high-quality, precision engineered products that deliver superior value to its customers. As a result, Textile Products has been an industry leader in quality and performance, allowing the Company to command premium pricing for its products.
Because of changes in the spinning process, increasing textile machine speeds and other rigorous process demands, spinning industry suppliers are constantly challenged to improve the precision, quality and consistency of their products. The Company continues to introduce highly engineered cots and aprons targeted to the high-speed ring and air-jet spinning markets. Products such as aluminum-lined cots provide improved rigidity and tolerance and have been widely accepted in the marketplace. Although fewer cots are used on these machines, the cots that are used are replaced more frequently, are more technologically advanced, are environmentally friendly and command higher prices compared to traditional ring spinning cots.
Other products and services include ribbons (take-up roll covering), cot installation presses, various other accessories and reconditioning services.
Textile Products' product development has allowed the Company to diversify into new markets. The Company has developed specialty lines of aprons including glass-forming aprons, which are used to make glass fiber from liquid glass, and texturizing aprons, which are used to finish certain types of synthetic filaments. Textile Products also makes bolsters and rubber shrinkage belts for use in pre-shrinking processes, such as those used for denim, as well as rubber-covered industrial rollers for textile and other industrial applications.
Sales and Distribution
The Company believes that the quality, technical proficiency and experience of its Textile Products sales force distinguishes its marketing efforts from those of competitors. Textile Products' sales professionals have extensive knowledge of the spinning and weaving process. The sales force markets its products directly to end-users, primarily textile mills, and original equipment manufacturers.
RAW MATERIALS
Rubber polymers are a key component in most of the products of Transfer Media and Textile Products. The Pressroom Chemicals division purchases approximately 200 different raw materials from a variety of key national suppliers, and holds supply agreements with many of them. However, no single supplier accounts for more than 10% of total raw material costs. The largest raw material component for Pressroom Chemicals is petroleum distillates, such as aliphatics and aromatics. Raw material purchases accounted for approximately 50% of cost of goods sold for the Company's products during 2002, 2001 and 2000. Various fabrics and rubber represented approximately 30% of all raw materials purchased in each of 2002, 2001 and 2000. The Company has developed contingency plans to address any supply line disruptions, including identifying alternative sources and maintaining a safety stock of critical raw materials.
The Company is exposed to fluctuations in petroleum prices on certain raw material costs and historically has been able to pass on price increases to customers.
The Company purchases its raw material requirements from a number of suppliers on a purchase order basis, and the Company believes that there are sufficient sources of supply for the foreseeable future.
RESEARCH AND DEVELOPMENT
The research and development staff is focused on current product and process improvement efforts, as well as development of new consumables for future Image Transfer and Textile Products processes. The Company's active patents have been important to its existing product line, and increased emphasis is being placed on new product technologies. Active efforts to obtain additional patents are underway on a variety of technologies, including certain process patents.
In addition to its extensive patent and trademark portfolio, the Company has a variety of working agreements with key partners in the image transfer business. These agreements and other efforts with Original Equipment Manufacturers may stimulate proprietary processes and additional patent applications.
COMPETITION
The Company competes with a number of manufacturers in the image transfer and textile components industries, with the main competitive factors being quality, performance, service and price. While the Company competes with a number of manufacturers of offset printing blankets and sleeves, the principal competitors of Transfer Media are Reeves International, Inc. ("Reeves") and Polyfibron Technologies, Inc. ("Polyfibron"), a subsidiary of MacDermid. Rotec's principal competitors are Rossini, Polywest Kunststofftechnik, and Axcyl Inc., a subsidiary of Polyfibron. Pressroom Chemicals competes with a number of manufacturers of pressroom chemicals. The principal competitors are Anchor Chemical, Rycoline and PRISCO. Accel Graphics, a division of Parmarco, is the only main competitor to the Kompac line.
In Textile Products, the Company competes with manufacturers such as Premtec, Inc., Hokushin Corporation, Yamauchi and Berkol AG (Switzerland).
Some of the Company's competitors may have greater financial and other resources than the Company and may consequently have more operating flexibility and a greater ability to expand production capacity and increase research and development expenditures.
INTERNATIONAL OPERATIONS
The Company's principal international manufacturing facilities are located in Dundee, Scotland (Transfer Media), Ahaus-Ottenstein, Germany (Transfer Media), Manchester, England (Pressroom Chemicals) and Munster, Germany (Textile Products). In addition, the Company maintains sales and distribution facilities in England, France, Germany, Hong Kong, Italy, South Africa, Russia, Malaysia, Canada, Mexico, China and Australia.
The Company manufactures and markets its products worldwide through several international subsidiaries and independent agents. The Company's worldwide operations are subject to the risks normally associated with international operations including, but not limited to, the disruption of markets, changes in export or import laws, restrictions on currency exchanges, and the modification or introduction of other governmental policies with potentially adverse effects.
Approximately 49% of the Company's 2002 sales were derived from products sold outside the United States. This has increased from 47% in 2001 and 43% in 2000. The U.S. dollar value of these revenues varies with currency exchange rate fluctuations, and the Company may be exposed to gains or losses based upon such fluctuations. Significant increases in the value of the U.S. dollar relative to foreign currencies could have an adverse effect on the Company's ability to meet interest and principal obligations on its U.S. dollar-denominated debt. The Company periodically enters into forward foreign exchange contracts to protect it against a portion of such foreign exchange movements.
ENVIRONMENTAL MATTERS
The Company's facilities in the United States are subject to federal, state and local environmental laws and regulations, including those governing discharges to the air and water, the handling and disposal of solid and hazardous wastes, and the remediation of contamination associated with releases of hazardous substances. International facilities are subject to their respective countries' federal and local environmental requirements, as well as the environmental requirements promulgated by the European Union, where applicable. The Company has made, and will continue to make, expenditures to comply with current and future environmental requirements. Environmental requirements are becoming increasingly stringent, and therefore the Company's expenditures for environmental compliance may increase in the future.
Based on environmental assessments conducted by independent environmental consultants, except as otherwise stated herein, the Company believes that its operations are currently in compliance with environmental laws and regulations, except as would not be expected to have a material adverse effect on the Company. However, there can be no assurances that environmental requirements will not change in the future or that the Company will not incur significant costs in the future to comply with such requirements. In addition, the Company's operations involve the handling of toluene and other hazardous substances, and if a release of hazardous substances occurs on or from the Company's facilities, the Company may be required to pay the cost of remedying any condition caused by such release, the amount of which could be material.
On July 11, 2002, the United States Environmental Protection Agency issued the proposed Maximum Achievable Control Technology ("MACT") standard for the Printing source category. This MACT standard is applicable to sources located at the Company's U.S. operations. The MACT requirements were placed into effect on March 15, 2003. The primary effect of this rule will be to require implementation of additional air emission monitoring systems at the Company's U.S. facilities. These rules will require certain modifications to the plant facilities over the next two years that will total approximately $0.7 million for U.S. operations. The Company installed certain equipment from 1998 through 2002 to mitigate future spending requirements resulting from the Clean Air Act.
Cadillac Plastics Group, Inc ("CPG"), the former parent of the Company, and now known as M.A. Hanna Plastic Group, Inc., and a former subsidiary of M.A. Hanna Company (now PolyOne Corporation), is a party to a July 25, 1988, Consent Decree with the Michigan Department of Environmental Quality ("MDEQ") with regard to contamination at the Company's Three Rivers, Michigan, facility. CPG installed a groundwater remediation system at the facility in 1989, and was required to operate such system until certain cleanup levels were achieved. On November 17, 1999, MDEQ approved a study to determine if further degradation of contaminates will occur if pumping is discontinued and the aquifer returns to an anaerobic condition. Operations of the groundwater remediation system were suspended on December 6, 1999, with the approval of MDEQ. Analyses of the study completed in early 2001 as well as more recent groundwater-monitoring data show that remaining contamination in groundwater is stable (no significant increases in concentration). The parties involved continue to monitor groundwater, and are proceeding with a "natural attenuation" closure program that will consist of continued groundwater testing and "institutional controls." This new program is being performed under a December 3, 2001, commitment letter submitted to MDEQ by M.A. Hanna Plastic Group Inc. As of December 31, 2002, the Company had recorded accruals of approximately $218,000 to reflect future costs associated with this cleanup and, based on the reports of its independent consultants, the Company believes that such accruals are adequate. CPG has indemnified the Company for such costs and the Company expects to be reimbursed after amounts are expended. At December 31, 2002, a $215,000 indemnification receivable is recorded.
As a result of the disposal of hazardous substances prior to the acquisition of the Company by American Industrial Partners in June 1995, CPG was named a "potentially responsible party" pursuant to the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and/or similar state laws at certain waste disposal sites. CPG or the Company has entered into consent decrees at most of these sites, subject to standard reopener provisions. The Company expects that no significant expenditures will be made by the Company with respect to these matters. CPG has agreed to retain ongoing responsibility for and indemnify the Company with respect to these waste disposal locations. However, because liability under CERCLA is retroactive, the Company may receive notices of potential CERCLA liability in the future, and such liability could be material.
Subject to certain limitations, PolyOne and CPG have agreed to indemnify the Company for certain other environmental compliance and liability issues associated with the Company's business, including certain liabilities associated with an underground toluene tank at the Lerma, Mexico, facility. If PolyOne and CPG are unable to honor their indemnification obligations, the Company would likely be responsible for such matters and the cost of addressing such matters could be material.
ASSOCIATES
The Company currently employs approximately 1,350 full-time associates worldwide, of which approximately 700 are employed in the United States and Canada. The Company's associates in Dundee, Scotland, and Munster, Germany are represented by labor unions. The labor union in Dundee has entered into a collective bargaining agreement with the Company, expiring on December 31, 2003. The labor union in Munster has entered into collective bargaining agreements with the Company pertaining to general working conditions and to salaries and wages. During 2002, the Company renewed these agreements with the labor union. The agreement as to general working conditions expires December 31, 2006, and the agreement as to salaries and wages expires June 30, 2005. None of the Company's U.S. associates are covered by a collective bargaining agreement. To encourage productivity improvements, a portion of each associate's total compensation is tied to a performance bonus. The Company considers its employee relations to be good.
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 also owns or leases warehouse and sales offices in the United States, Europe, Mexico and Hong Kong. The Company's significant facilities are listed below:
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.
CPG and the Company are parties to consent decrees with respect to certain environmental matters. Hanna and CPG have agreed to retain, be responsible for and indemnify the Company with respect to these matters. See "Item 1. Business--Environmental Matters."
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2002.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of March 1, 2003, there were 19 holders of record of shares of Common Stock. Sale or transfer of the Common Stock is subject to the terms of a Stockholders Agreement that all stockholders have signed. There is no established trading market for the Common Stock. The Company has never paid or declared a cash dividend on the Common Stock.
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, 2002.
(a) The Company acquired TPO as of September 30, 1999 and Varn as of October 19, 1999. The statement of operations data includes the results of these acquisitions from the dates of acquisition.
(b) The Company acquired the stock of Rotec as of December 31, 1998. Balance sheet data for 1998 includes the assets and liabilities of Rotec as of December 31, 1998. The statement of operations data includes the results of Rotec for the period from January 1, 1999.
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.
COMPARISON OF RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002, COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net sales increased $5.8 million (2.3%) to $259.9 million, primarily as a result of favorable changes in foreign currency rates and higher sales volume in Europe. Sales in 2002 were positively affected by $4.5 million of favorable changes in foreign currency rates used to translate international sales into U.S. dollars and increased sales volumes of $3.0 million in Europe. Image Transfer's sales increased $6.8 million (3.3%) to $211.6 million. Image Transfer's sales were positively affected by $3.2 million as a result of the effect of changes in foreign currency rates. Excluding the effect of foreign currency rate changes, Image Transfer's sales increased $3.6 million (1.8%) from the comparable period in 2001. The increase is mainly a result of higher sales volumes in Europe. Textile Products' sales decreased $1.0 million (2.1%) to $48.3 million. Foreign currency rate changes positively affected Textile Products' sales by $1.3 million. Textile Products' sales decreased as a result of decreased volume of $2.0 million in the United States and $0.3 million in Europe and export markets.
Gross profit increased $4.4 million (4.8%) to $95.5 million. Foreign currency rate changes increased gross profit by $0.8 million. As a percentage of net sales, gross profit increased to 36.7% for the year ended December 31, 2002, from 35.8% for the comparable period in 2001, primarily as a result of benefits realized from the restructuring activities performed in the second half of 2001 and the first quarter of 2002.
Selling, general & administrative expenses increased $1.4 million (2.6%) to $55.5 million primarily as a result of foreign currency rate changes. Changes in foreign currency rates increased SG&A costs by $1.0 million in 2002. Active cost reduction and prior year restructuring activities offset substantially all of the increases in health care, retirement, incentive and insurance costs. As a percentage of net sales, SG&A remained constant at 21.3%.
A pre-tax charge of $0.5 million was recorded in the first quarter of 2001 for severance and termination costs to relocate the Textile Products operations from its Asheville, North Carolina, facility to its Greenville, South Carolina, facility. During the first quarter of 2002, the Company reversed $0.1 million of the reserve. Additionally, pre-tax charges of $0.3 million and $0.4 million have been recorded in 2002 and 2001 for relocation of machinery and equipment and write-off of abandoned assets. As of December 31, 2002, the relocation plan was complete.
During the fourth quarter of 2001, the Company ceased operations at its Transfer Media facility in Longwood, Florida. A pre-tax charge of $3.0 million was recorded in 2001 for severance costs for 55 associates, write-off of abandoned assets and costs related to closing the facility. During the second quarter of 2002, final severance payments were paid to all associates and the remaining reserve of $0.1 million for severance costs was reversed.
Also during the fourth quarter of 2001, the Company completed plans to relocate its Pressroom Chemicals German sales office into other existing facilities and the U.S. sales and administrative functions from Oakland, New Jersey to other U.S. locations. A pre-tax charge of $1.0 million was recorded for severance costs for 21 associates, costs for closing the offices and loss on the sale of fixed assets. As of December 31, 2002, this plan was complete.
Operating profit increased $11.5 million to $38.1 million. The increase in operating profit was partly attributable to the adoption of SFAS Nos. 141 and 142 and the related reduction in the amortization of goodwill of $3.7 million and to $4.8 million of lower restructuring costs in 2002. Excluding the restructuring costs of $0.1 million and $4.9 million in 2002 and 2001 and the amortization of goodwill of $3.7 million in 2001, operating profit increased $3.0 million (8.5%) from $35.2 million to $38.2 million. As a percentage of net sales, operating profit (excluding amortization of goodwill in 2001 and the restructuring costs in 2002 and 2001) was 14.7% for the year ended December 31, 2002, compared to 13.9% in 2001. Image Transfer's operating profit increased $2.1 million (5.9%) to $37.5 million, primarily as a result of higher sales volumes. As a percentage of net sales, Image Transfer's operating profit increased to 17.7% for the year ended December 31, 2002, compared to 17.3% in 2001. Textile Products' operating profit increased $0.4 million (6.5%) to $6.5 million, primarily as a result of foreign exchange rate changes. As a percentage of net sales, Textile Products' operating profit was 13.5% for the year ended December 31, 2002, compared to 12.4% in 2001.
Other income was $1.9 million in 2002, compared to other expense of $0.6 million in 2001. The other (income) expense is primarily due to foreign currency transaction (gains) losses incurred in the normal course of international subsidiaries doing business in other than their functional currency as well as a result of intercompany financing arrangements.
The effective tax rate benefit for 2002 was 30.6%. The Company recorded income tax expense for 2001 on a loss before taxes. This effect is a result of foreign sourced dividends and income taxable in the United States and non-deductible expenses.
As of January 1, 2002, the Company adopted SFAS Nos. 141, "Business Combinations" and 142, "Goodwill and Other Intangible Assets" and ceased recording amortization of goodwill of approximately $3.7 million per year and recognized pre-tax income of $1.0 million for the cumulative effect of the change in accounting principle for the amount of the unamortized deferred credit related to
the excess over cost arising from the TPO acquisition. The Company completed the initial review of the recoverability of goodwill as of January 1, 2002, and the subsequent review as of March 31, 2002, and has determined that no impairment of goodwill is indicated.
YEAR ENDED DECEMBER 31, 2001, COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net sales decreased $26.4 million (9.4%) to $254.1 million, primarily as a result of lower sales volume of $26.3 million in the United States and the Pacific Rim. Sales in 2001 were negatively affected by $4.2 million as a result of unfavorable changes in foreign currency rates used to translate international sales into U.S. dollars partly offset by increased sales volumes of $3.2 million in Europe. Image Transfer's sales decreased $20.1 million (8.9%) to $204.7 million. Image Transfer's sales were negatively affected by $3.2 million as a result of the effect of changes in foreign currency rates. Excluding the effect of foreign currency rate changes, Image Transfer's sales decreased $16.9 million (7.5%) from the comparable period in 2000. The decrease is mainly a result of lower sales in the United States as a result of the weak U.S. printing industry. Tubular sleeve sales increased as additional presses that utilize this technology were installed. Textile Products' sales decreased $6.3 million (11.4%) to $49.4 million. Foreign currency rate changes negatively affected Textile Products' sales by $1.0 million. Textile Products' sales decreased as a result of decreased volume of $7.4 million in the United States, partly offset by sales volume gains of $2.1 million in Europe and export markets.
Gross profit decreased $18.4 million (16.8%) to $91.1 million. Foreign currency rate changes reduced gross profit by $1.6 million. As a percentage of net sales, gross profit decreased to 35.8% for the year ended December 31, 2001, from 39.0% for the comparable period in 2000, primarily as a result of the lower Image Transfer sales volume in the United States. In addition, fixed costs such as research and development costs of new products have increased slightly from last year resulting in a further decrease in the gross profit percentage.
Selling, general & administrative expenses decreased $3.4 million (5.9%) to $54.1 million primarily as a result of lower selling costs. As a percentage of net sales, SG&A increased to 21.3% from 20.5%. Changes in foreign currency rates reduced SG&A costs by $0.8 million in 2001.
In 2001, the Company began consolidating its U.S. Textile Products operations into its Greenville, South Carolina, facility. The relocation was completed in early 2002. A pre-tax charge of $0.9 million was recorded in 2001 for relocation of machinery and equipment and severance and termination costs for 59 associates in 2001. As of December 31, 2001, 45 associates had been severed.
During the fourth quarter of 2001, the Company ceased operations at its Transfer Media facility in Longwood, Florida. A pre-tax charge of $3.0 million was recorded in 2001 for severance costs for 55 associates, write-off of abandoned assets and costs related to closing the facility.
Also during the fourth quarter of 2001, the Company completed plans to relocate its Pressroom Chemicals German sales office into other existing facilities and the U.S. sales and administrative functions from Oakland, New Jersey to other U.S. locations. A pre-tax charge of $1.0 million was recorded for severance costs for 21 associates, costs for closing the offices and loss on the sale of fixed assets.
Operating profit decreased $19.8 million to $26.7 million. The decrease in operating profit was partly attributable to $4.9 million of restructuring costs in 2001. Operating profit, excluding the restructuring costs of $4.9 million in 2001, decreased $14.9 million (32.1%) to $31.6 million. As a percentage of net sales, operating profit (excluding the restructuring costs in 2001) was 12.4% for the year ended December 31, 2001, compared to 16.6% in 2000. Image Transfer's operating profit decreased $14.1 million (28.5%) to $35.4 million, primarily as a result of lower sales volumes. As a percentage of net sales, Image Transfer's operating profit decreased to 17.3% for the year ended December 31, 2001, compared to 22.0% in 2000. Textile Products' operating profit decreased $1.2 million (16.5%) to $6.1 million. As a percentage of net sales, Textile Products' operating profit was 12.4% for the year ended December 31, 2001, compared to 13.1% in 2000.
Other expense was $0.6 million in 2001, compared to $4.6 million for 2000. The other expense is primarily due to foreign currency transaction losses incurred in the normal course of international subsidiaries doing business in other than their functional currency as well as a result of intercompany financing arrangements.
The Company recorded income tax expense for 2001 on a loss before taxes. This effect is a result of foreign sourced dividends and income taxable in the United States and non-deductible expenses.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
The Company conducts a significant amount of business and has operating and sales facilities in countries outside the United States. As a result, the Company is subject to business risks inherent in non-U.S. activities, including political uncertainty, import and export limitations, exchange controls and currency fluctuations. The Company believes risks related to its international operations are mitigated due to the political and economic stability of the countries in which its largest international operations are located, the stand-alone nature of the operations, the Company's limited net asset exposure, forward foreign exchange contract practices and pricing flexibility. Thus, while changes in foreign currency values do affect earnings, the longer-term economic effect of these changes should not have a material adverse effect on the Company's financial condition, results of operations or liquidity.
Certain of the Company's international subsidiaries make purchases and sales in designated currencies other than their functional currency. As a result, they are subject to transaction exposures that arise from foreign exchange movements between the date that the foreign currency transaction is recorded and the date it is consummated. In addition, the Company has intercompany loans outstanding with certain international subsidiaries in their local currencies, exposing it to the effect of changes in exchange rates at loan issue and loan repayment dates. The Company periodically enters into forward foreign exchange contracts to protect it against such foreign exchange movements. The contract value of these foreign exchange contracts was approximately $10.1 million at December 31, 2002, $9.3 million at December 31, 2001 and $2.1 million at December 31, 2000. These contracts generally expire within three to twelve months. Foreign currency gains (losses), included in other (expense) income-net, were $1.3 million in 2002, $(0.9) million in 2001 and $(5.0) million in 2000. Based on the Company's overall foreign currency exchange rate exposure at December 31, 2002, including the forward contracts, a 10% adverse change in foreign currency exchange rates would result in a hypothetical estimated loss in earnings of approximately $1.4 million.
INTEREST RATE RISKS
The Company is subject to market risk from exposure to changes in the interest rates based on its financing activities. The Company utilizes a mix of debt maturities along with both fixed- and variable-rate debt to manage its exposure to changes in interest rates and to minimize interest expense. The Company does not expect changes in interest rates to have a material effect on income or cash flows in 2002, although there can be no assurance that interest rates will not materially change.
COMMODITY RISKS
Rubber polymers and fabrics are key components in most of the Transfer Media and Textile products. The Company is exposed to changes in the costs of these components. Pressroom Chemicals is exposed to changes in the cost of certain petroleum-based components. The largest raw material component in Pressroom Chemicals' products is petroleum distillates, such as aliphatics and aromatics. When commodity prices increase, the Company has historically passed on increases to its customers to maintain its profit margins. Conversely, when commodity prices decline, the Company generally lowers its sales prices to meet competitive pressures. Because the Company has historically been able to raise sales prices to offset higher costs, management believes that a 10% change in the cost of its components could have a short-term effect until sales price increases take effect, but overall would not have a material effect on income or cash flows for a fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated sufficient funds from its operations to fund its working capital and capital expenditure requirements. The Company is able to maintain relatively low levels of working capital as its converters and distributors typically carry a greater portion of inventory and finance receivables of the Company's end users.
The Company's expenditures for plant, property and equipment were $8.3 million in 2002, $13.0 million in 2001, and $10.3 million in 2000. The Company believes that capital expenditures of $9.0 million to $12.0 million annually over the next several years will be sufficient to maintain its leading market position. The Company expects to fund these capital expenditures from cash flow from operations.
The Company is highly leveraged. At December 31, 2002, the Company's aggregate indebtedness is approximately $252.1 million and the aggregate liquidation preference of the Exchangeable Preferred Stock is $62.4 million (which, subject to certain conditions, may be exchanged for Exchange Debentures). At December 31, 2002, the aggregate liquidation preference of the Convertible Preferred Stock is $65.6 million.
The Company has a Senior Secured Credit Facility consisting of a $70.0 million Term Loan (of which $31.2 million was outstanding at December 31, 2002) and a $20 million Revolving Credit Facility (of which $4.9 million was outstanding at December 31, 2002).
The Senior Secured Credit Facility is repayable as follows: $12.5 million in 2003, $12.5 million in 2004 and $11.1 million in 2005. Prepayments on the Term Loan are applied in inverse order of maturity. During the year ended December 31, 2002, the Company made $12.6 million in payments on the term loans and borrowed $0.8 million on the Revolving Credit Facility. The Senior Secured Credit Facility is
secured by the assets of the Company and its domestic subsidiaries, as well as 65% of the stock of each international subsidiary. The amounts available under the Revolving Credit Facility are subject to a borrowing base limitation (defined generally as 80% of eligible domestic accounts receivable plus the lesser of 50% of eligible domestic inventory or $10 million). As of December 31, 2002, the Company had approximately $12.8 million available under the Revolving Credit Facility (calculated by applying the applicable borrowing base limitation).
The level of the Company's indebtedness could have important consequences including: (i) a substantial portion of the Company's cash flow from operations must be dedicated to debt service and will not be available for other purposes; (ii) the Company's ability to obtain additional debt or other financing in the future for working capital, capital expenditures, research and development or acquisitions may be limited; (iii) the Company's level of indebtedness could limit its flexibility in reacting to changes in its industries and economic conditions generally.
The Company's ability to pay principal and interest on its debt obligations and dividends on the Exchangeable Preferred Stock and the Convertible Preferred Stock will depend upon its future operating performance, which will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond its control, as well as the availability of revolving credit borrowings under the Revolving Credit Facility (which is subject to borrowing base limitations) or a successor facility. The Company anticipates that its operating cash flow, together with borrowings under the Revolving Credit Facility, will be sufficient to meet its operating expenses and capital expenditures and to service its debt requirements as they become due. However, there can be no assurance that the Company's cash flow, availability under the Revolving Credit Facility and other capital resources will be sufficient for payment of principal and interest on its indebtedness, for the payment of periodic cash dividends on the Exchangeable Preferred Stock or the Convertible Preferred Stock, for any redemption of the Exchangeable Preferred Stock or the Convertible Preferred Stock for cash, or if the Exchange Debentures have been issued, the payment of principal of or cash interest on the Exchange Debentures. If the Company's cash flow, availability under the Revolving Credit Facility and other capital resources are insufficient to fund the Company's debt service obligations, the Company may be forced to reduce or delay capital expenditures, to sell assets, to restructure or refinance its indebtedness, or to seek additional equity capital. There can be no assurance that any of such measures could be implemented on satisfactory terms, or if implemented, would be successful or would permit the Company to meet its debt service obligations.
The Senior Secured Credit Facility, the 2005 Indenture, the 2008 Indenture and the certificates of designation for the Preferred Stocks contain a number of significant covenants that restrict the operations of the Company. For example, under the Senior Secured Credit Facility, the Company is required to comply with specified financial ratios and tests, including minimum fixed charges coverage ratio, maximum leverage ratio and interest coverage ratio. There can be no assurance that the Company will be able to comply with any such covenants or restrictions in the future. The Company's ability to comply with such covenants and restrictions may be affected by events beyond its control, including prevailing economic, financial and industry conditions. The breach of any such covenants or restrictions could result in a default under the Senior Secured Credit Facility, the 2005 Indenture and/or the 2008 Indenture that would permit the lenders to declare all amounts outstanding to be immediately due and payable, together with accrued and unpaid interest, and the commitments of the lenders under the Revolving Credit Facility to make further extensions of credit could be terminated.
The occurrence of certain events that would constitute a Change of Control may result in a default, or otherwise require repayment of indebtedness, under the Senior Secured Credit Facility, the 2005 Indenture and the 2008 Indenture, and redemption of the Exchangeable Preferred Stock and the Convertible Preferred Stock or, in the case of the Exchange Debentures, repayment of indebtedness under the Exchange Debentures. In addition, the Senior Secured Credit Facility and the 2005 Indenture prohibit the repayment of indebtedness under the 2008 Indenture by the Company in such an event, unless and until such time as the indebtedness under the Senior Secured Credit Facility and the 2005 Indenture are repaid in full. The Company's failure to make such repayments in such instances would result in a default under the Senior Secured Credit Facility and the 2005 Indenture. The inability to repay the indebtedness under the Senior Secured Credit Facility or the 2005 Indenture, if accelerated, would also constitute an event of default under the 2008 Indenture, which could have materially adverse consequences to the Company and to the holders of the Notes under the 2008 Indenture. Future indebtedness of the Company may also contain restrictions or repayment requirements with respect to certain events or transactions that could constitute a Change of Control. In the event of a Change of Control, there can be no assurance that the Company would have sufficient assets to satisfy all of its obligations under the Senior Secured Credit Facility, 2005 Indenture or the 2008 Indenture, the Exchangeable Preferred Stock or the Exchange Debentures, as the case may be, or with respect to the Convertible Preferred Stock.
The Company does not have transactions, arrangements or relationships with special-purpose entities and the Company does not have any off-balance-sheet debt except as disclosed in the notes to the consolidated financial statements.
In 2001 the Company suspended its U.K. pension plan and intends to settle the remaining obligation in 2003. As of December 31, 2002, the settlement will require an additional contribution of approximately $1.6 million and will result in a pre-tax settlement loss of approximately $1.3 million. These amounts are subject to change as a result of the final determination of the amount of the obligation and the value of the plan assets at the date of the settlement.
ENVIRONMENTAL EXPENDITURES
The Company has made, and will continue to make, expenditures to comply with current and future requirements of environmental laws and regulations. The Company estimates that in 2002, 2001 and 2000 it spent approximately $0.2 million, $1.2 million and $0.8 million in capital expenditures for solvent recovery, wastewater treatment, air monitoring and related projects to comply with environmental requirements.
On July 11, 2002, the United States Environmental Protection Agency issued the proposed Maximum Achievable Control Technology ("MACT") standard for the Printing source category. This MACT standard is applicable to sources located at the Company's U.S. operations. The MACT requirements were placed into effect on March 15, 2003. The primary effect of this rule will be to require implementation of additional air emission monitoring systems at the Company's U.S. facilities. These rules will require certain modifications to the plant facilities over the next two years that will total approximately $0.7 million for U.S. operations. The Company installed certain equipment from 1998 through 2002 to mitigate future spending requirements resulting from the Clean Air Act. Capital expenditures relating to environmental matters are anticipated to be less than $1 million in 2003.
Based on environmental assessments conducted by independent environmental consultants, except as otherwise stated herein, the Company believes that its operations are currently in compliance with environmental laws and regulations, except as would not be expected to have a material adverse effect on the Company. However, there can be no assurances that environmental requirements will not change in the future or that the Company will not incur significant costs in the future to comply with such requirements. In addition, the Company's operations involve the handling of solvents and other hazardous substances, and if a release of hazardous substances occurs on or from the Company's facilities, the Company may be required to pay the cost of remedying any condition caused by such release, the amount of which could be material.
CRITICAL ACCOUNTING POLICIES
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates include: accounts receivable allowances, inventory valuation, recoverability of long-lived assets, retirement and other postretirement benefits, and the realization of deferred tax assets. We use the following methods and assumptions in determining our estimates:
Accounts Receivable Allowances-Allowances for doubtful accounts are determined by applying historical experience with consideration given to the condition of the economy and evaluation of specific accounts. Other allowances are calculated based on negotiated agreements with customers.
Inventory Valuation-Inventories are stated at the lower of cost as market using the First-in, First-out (FIFO) Method. Reserves for obsolete and slow-moving inventory are determined based on the lower of cost or market method. Market value is determined based on management's estimate of selling price less selling costs.
Recoverability of Long-lived Assets -Recoverability of goodwill is tested at least annually in accordance with SFAS No. 142 using a combination of valuation techniques, including present value of estimated future cash flows and earnings multiples of comparable companies. Other long-lived assets are reviewed for impairment annually or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144 by determining whether the amortization of the assets over their remaining lives can be recovered through projected undiscounted cash flows. Future cash flows are forecasted based on management's estimates of future events and could be materially different from actual cash flows.
Retirement and Other Postretirement Benefits-Retirement and other postretirement benefit costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest cost, expected return on plan assets, mortality rates and other factors. In accordance with accounting principles generally accepted in the United States, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company's retirement and other postretirement obligations and future expense. See Notes M and N to the Consolidated Financial Statements for further detail on the assumptions used.
Realization of Deferred Tax Assets-Realization of net operating loss carryforwards and other deferred tax assets is determined in accordance with the appropriate accounting guidance in SFAS No. 109. Realization of the deferred tax assets is periodically evaluated using expected future reversals of existing temporary differences, future taxable income resulting principally from the characterization of cash flow from international subsidiaries as
dividends taxable in the United States rather than repayment of intercompany loans and the effects of lower interest expense from lower outstanding debt levels as debt service requirements are met.
For further information regarding our accounting policies, see Note B to the Consolidated Financial Statements.
ITEM 7A.
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 sheet of Day International Group, Inc. and subsidiaries as of December 31, 2002, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated financial statements of Day International Group, Inc. and subsidiaries as of December 31, 2001, and for each of the two years in the period ended December 31, 2001, were audited by other auditors who have ceased operations and whose report dated March 26, 2002, expressed an unqualified opinion.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Day International Group, Inc. and subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.
As discussed in Note E, in 2002 the Company changed its method of accounting for goodwill in accordance with Statement of Financial Accounting Standards Nos. 141, "Business Combinations" and 142, "Goodwill and Other Intangible Assets."
ERNST & YOUNG LLP
Dayton, Ohio March 28, 2003
DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 (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, 2002, 2001 AND 2000 (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, 2002, 2001 AND 2000 (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, 2002, 2001 AND 2000 (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, 2002, 2001 AND 2000 (DOLLAR AMOUNTS IN THOUSANDS)
A. NATURE OF OPERATIONS, BASIS OF PRESENTATION
Day International Group, Inc. and subsidiaries is one of the world's leading producers of precision-engineered products, specializing in the design and customization of consumable image-transfer products for the graphic arts (printing) industry and consumable fiber handling products for the textile industry. The Image Transfer segment designs, manufactures and markets high-quality printing blankets, sleeves, pressroom chemicals and automatic dampening systems used primarily in the offset and flexographic printing industries. The Textile Products segment manufactures and markets precision engineered rubber cots and aprons sold to textile yarn spinners and other engineered rubber products sold to diverse markets. Sales are made through Day's sales organization, distributors and representatives.
B. SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION-The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS-Cash and cash equivalents include all highly liquid investments with an original purchased maturity of three months or less.
INVENTORIES-Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. Reserves for obsolete and slow-moving inventory are determined based on the lower of cost or market method. Market value is determined based on management's estimate of selling price less selling costs.
PROPERTY, PLANT AND EQUIPMENT-Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over their estimated useful lives. Buildings and improvements are depreciated over 10 to 40 years and machinery and equipment are depreciated over 5 to 10 years.
GOODWILL AND OTHER INTANGIBLES-Goodwill represents the excess of cost over the fair value of the net assets acquired and is evaluated for impairment based on the requirements as proscribed in Statement of Financial Accounting Standards ("SFAS") No. 142. The Company assesses the recoverability of other long-lived assets, including other intangibles, by determining whether the amortization of the respective balances over their remaining lives can be recovered through projected undiscounted cash flows.
Deferred financing costs are being amortized using an effective interest rate method over the lives of the related debt. Intangibles are being amortized using the straight-line method.
STOCK-BASED COMPENSATION-As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company applies the intrinsic value method of recognition and measurement under Accounting Principles Board Opinion No. 25 to its stock options and warrants. No compensation expense related to employee stock options or warrants issued to directors is reflected in net income (loss). The following table illustrates the effect on net income (loss) if compensation costs for all outstanding and unvested stock option and warrants had been determined based on their fair values at the grant date, consistent with the method prescribed by SFAS No. 123:
REVENUE RECOGNITION-Day recognizes revenue when the product is shipped. Reserves for product returns, based upon historical experience, and other allowances, calculated based on negotiated agreements with customers, are recognized upon shipment. Allowances for doubtful accounts are determined by applying historical experience with consideration given to the condition of the economy and evaluation of specific accounts and are recorded in selling, general and administrative costs.
FOREIGN CURRENCY TRANSLATION-The functional currency is the local currency of Day's respective international subsidiaries. Accordingly, foreign currency assets and liabilities are translated into U.S. dollars at the period end exchange rates. Foreign currency revenues and expenses are translated at the average exchange rates for the period. Translation gains and losses are recorded in the accumulated other comprehensive income (loss). Transaction gains and losses are recorded in other expense (income) in the consolidated statements of operations.
CONCENTRATION OF CREDIT RISK-The Company's receivables are from a diverse group of customers in the printing and textile industries and such receivables are generally unsecured. One customer accounted for 10%, 10% and 12% of net sales for the years ended December 31, 2002, 2001 and 2000. This customer accounted for 2% and 5% of receivables at December 31, 2002 and 2001.
FOREIGN EXCHANGE CONTRACTS-The Company and its international subsidiaries make purchases and sales in foreign currencies and are subject to transaction exposures that arise from foreign exchange movements between the date that the foreign currency transaction is recorded and the date it is consummated. In addition, the Company has intercompany loans outstanding with certain international subsidiaries in their local currencies, exposing it to the effect of changes in exchange rates at loan issue and loan repayment dates. Day periodically enters into forward foreign exchange contracts, with terms generally of 3 to 12 months, to protect itself against such foreign currency movements. These contracts are recorded at fair value with the change in fair value recorded as other expense (income) as an offset to the (income) expense recognized from the remeasurement of the hedged foreign-currency denominated asset or liability. Hedges of forecasted transactions are recorded as cash flow hedges and are reclassified to earnings when the hedged transaction is completed. The contract value of foreign exchange contracts was $10,136 and $9,312 at December 31, 2002 and 2001. The fair value of these contracts is a payable of $362 at December 31, 2002 and a receivable of $166 at December 31, 2001. Day is exposed to credit-related losses in the event of nonperformance by counterparties to the forward contracts. The counterparties are expected to meet their obligations given their credit ratings; therefore Day does not obtain collateral for these instruments.
FAIR VALUE OF FINANCIAL INSTRUMENTS-The carrying value of the Company's variable rate Credit Agreement approximates fair value. The fair market value of the 9 1/2% Senior Subordinated Debt and the 11-1/8% Senior Debt was approximately $195,200 and $169,900 at December 31, 2002 and 2001, based on quoted market prices. The fair value of the 12 1/4% Exchangeable Preferred Stock was approximately $9,400 and $12,700 at December 31, 2002 and 2001, based on quoted market prices. The fair value of the 18% Convertible Preferred Stock could not be determined as the securities are closely held and are not actively traded. See Note G for further information about the Convertible Preferred Stock. At December 31, 2002 and 2001, the carrying amounts of all other assets and liabilities that qualify as financial instruments approximated their fair value.
RESEARCH AND DEVELOPMENT-Research and development costs are expensed as incurred.
DISTRIBUTION-Distribution costs of $8,241, $7,973 and $6,914 for the years ended December 31, 2002, 2001 and 2000 are included in selling, general and administrative costs.
ADVERTISING-Advertising costs are expensed as incurred.
MANAGEMENT ESTIMATES-The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
C. ACCOUNTS RECEIVABLE
Changes in the allowance for doubtful accounts for the years ended December 31, 2002, 2001 and 2000 consist of:
D. INVENTORIES
Inventories as of December 31, 2002 and 2001 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 the goodwill and intangible assets is required. As of January 1, 2002, the Company adopted these statements and ceased recording amortization of goodwill of approximately $3,700 per year and recognized pre-tax income of $1,010 for the cumulative effect of the change in accounting principle for the amount of the unamortized deferred credit related to the excess over cost arising from the TPO acquisition in 1999.
The following reconciles reported net income (loss) to net income (loss) adjusted for the amortization of goodwill and the deferred credit related to an excess over cost for the years ended December 31, 2002, 2001 and 2000:
The following is detail of goodwill as of December 31, 2002 and 2001:
The following is detail of intangible assets as of December 31, 2002 and 2001:
Estimated amortization expense for the next five years is as follows: $6,371 in 2003, $5,570 in 2004, $3,538 in 2005, $2,110 in 2006 and $2,067 in 2007.
F. LONG-TERM AND SUBORDINATED LONG-TERM DEBT
Long-term and subordinated long-term debt as of December 31, 2002 and 2001 consists of:
SENIOR SECURED CREDIT FACILITY
The Senior Secured Credit Agreement is a $90,000 credit facility consisting of a five-year $70,000 term loan and a $20,000 revolving line of credit with a group of banks. The revolving line of credit includes a $10,000 letter of credit subfacility ($455 of letters of credit were outstanding at December 31, 2002 to support the Company's share of a loan by the joint venture in China) and a $1,000 swingline loan subfacility. At December 31, 2002, interest on the term loan and $2,500 of the revolving line of credit was based on the bank's LIBOR rate plus 3.00% (4.13%) and the remaining balance of the revolving line of credit was based on the banks' base rate plus 2.00% (6.00%). Interest rates on LIBOR borrowings are fixed for one, two, three or six month periods at the Company's discretion. The weighted average interest rate on the Senior Secured Credit Facility for the year ended December 31, 2002, 2001 and 2000 was 5.37%, 7.30% and 9.71%.
The amounts available under the Revolving Credit Facility are subject to a borrowing base limitation (defined generally as 80% of eligible domestic accounts receivable plus the lesser of 50% of eligible domestic inventory and $10,000). At December 31, 2002, $12,816 was available under the Senior Secured Credit Facility (calculated by applying the borrowing base test). The Senior Secured Credit Facility requires a commitment fee of 1/2% a year on the unused portion of the revolving line of credit. The Senior Secured Credit Facility contains various financial covenants, including minimum fixed charges coverage ratio, maximum leverage ratio and interest coverage ratio, and other covenants which place limits on, among other things, asset sales, dividends and distributions of the Company's or its subsidiaries' capital stock, the purchase, redemption, acquisition of capital stock of the Company or its affiliates or any subsidiaries, and the incurrence of certain additional indebtedness. No violations of these covenants occurred during the year ended December 31, 2002.
11-1/8% SENIOR NOTES AND 9 1/2% SENIOR SUBORDINATED NOTES
The Company has outstanding $100,000 of 11-1/8% Senior Notes due June 1, 2005, and $115,000 face amount of 9 1/2% Senior Subordinated Notes due March 15, 2008 (collectively, the "Notes"). The Senior Notes are subordinate to the Senior Secured Credit Facility. The Senior Subordinated Notes are subordinate to the Senior Notes.
Interest on the Notes is payable semi-annually. The Notes contain various financial and other covenants which place limits on, among other things, asset sales, dividends and distributions of the Company's or its subsidiaries' capital stock, the purchase, redemption, acquisition of capital stock of the Company or its affiliates or any subsidiaries, and the incurrence of certain additional indebtedness. Upon a change in control, the Notes can be put back to the Company at 101% of their face value.
The Company may, at its option, redeem the Senior Notes, in whole or in part, for cash, at 102.472% through May 31, 2003, 101.236% from June 1, 2003 through May 31, 2004 and 100.0% thereafter, together with all accrued and unpaid interest to the date of redemption. Except for a change in control, the Company may not redeem the Senior Subordinated Notes prior to March 15, 2003. On or after such date, the Company may, at its option, redeem the Senior Subordinated Notes, in whole or in part, for cash, at 104.75% in 2003, 103.167% in 2004, 101.583% in 2005 and 100.0% thereafter, together with all accrued and unpaid interest to the date of redemption.
The Company's wholly-owned subsidiary, Day International, Inc., has guaranteed the Senior Secured Credit Facility and the Notes. The Senior Secured Credit Facility is secured by the assets of the Company and its domestic subsidiaries, as well as 65% of the stock of each international subsidiary.
Principal payments on long-term debt for the next five years are payable as follows: $12,597 in 2003, $12,602 in 2004, $111,174 in 2005, $102 in 2006 and $108 in 2007.
G. REDEEMABLE PREFERRED STOCKS
12 1/4% SENIOR EXCHANGEABLE PREFERRED STOCK
The Company has outstanding $62,401 and $55,308 (face value) of 12 1/4% Senior Exchangeable Preferred Stock at December 31, 2002 and 2001. All dividends are payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. On or before March 15, 2003, the Company may, at its option, pay dividends in cash or in additional fully-paid and non-assessable shares of Exchangeable Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After March 15, 2003, dividends must be paid in cash and if not paid for four consecutive quarters, then the holders of the Exchangeable Preferred Stock have the right to elect two directors to the Board of Directors until the dividends in arrears have been paid. Certain restrictions in the Company's Senior Secured Credit Agreement and Notes limit the ability to pay cash dividends. On any scheduled dividend payment date, the Company may, at its option, but subject to certain conditions, exchange all of the shares of the Exchangeable Preferred Stock for the Company's 12 1/4% Subordinated Exchange Debentures Due 2010 (the "Exchange Debentures"). All dividends paid have been in the form of additional fully-paid and non-assessable shares of Exchangeable Preferred Stock.
The Company will be required, subject to certain conditions, to redeem all of the Exchangeable Preferred Stock or the Exchange Debentures as the case may be, on March 15, 2010. Except as described below, the Company may not redeem the Exchangeable Preferred Stock or the Exchange Debentures prior to March 15, 2003. On or after such date, the Company may, at its option, redeem the Exchangeable Preferred Stock or the Exchange Debentures, in whole or in part, for cash, at 106.125% in 2003, 104.083% in 2004, 102.042% in 2005 and 100.0% thereafter, together with, in the case of the Exchangeable Preferred Stock, all accumulated and unpaid dividends to the date of redemption, or in the case of the Exchange Debentures, all accrued and unpaid interest to the date of redemption. Upon the occurrence of a change in
control, the Company would be required to make an offer to purchase the Exchangeable Preferred Stock or the Exchange Debentures, for cash, at a price equal to 101% of the liquidation preference or aggregate principal amount (as the case may be) thereof, together with, in the case of the Exchangeable Preferred Stock, all accumulated and unpaid dividends to the date of purchase, or in the case of the Exchange Debentures, all accrued and unpaid interest to the date of purchase.
18% CONVERTIBLE CUMULATIVE PREFERRED STOCK
At December 31, 2002 and 2001, the Company has outstanding $65,629 and $55,618 liquidation preference of 18% Convertible Cumulative Preferred Stock ("Preference Stock") with a mandatory redemption date of June 30, 2010. The Preference Stock ranks junior to the Company's 12 1/4% Senior Exchangeable Preferred Stock and ranks senior to any subsequently issued preferred stock. All dividends are payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year. Holders of the Preference Stock are entitled to receive an annual dividend rate of 18% plus approximately 24% of the aggregate value of each dividend (if any) declared and paid on the Company's common stock. If not paid quarterly in cash, annually, accumulated and unpaid dividends are to be added to the basis of the stock.
The Company may redeem any or all of the shares of the Preference Stock for consideration equal to the Base Redemption Amount. The Base Redemption Amount is an amount equal to up to 1,500 shares of Common Stock issuable upon the exercise of future warrants plus the greater of the liquidation preference of the Preference Stock or the value of 7,348.7 shares of the Company's Common Stock, as adjusted for dilutive issuances.
Upon the occurrence of a change of control and subject to the Holders of all of the Company's Senior Securities having exercised their right to be prepaid and/or to put their securities to the Company upon such Change of Control, each Holder of Preference Stock may require the Company to redeem, on or after the 92nd day after the prepayment or redemption of the Company's Senior Securities in whole, all or any part of such Holder's Preference Stock at 102% of the redemption price of such securities. The redemption price of the Preference Stock is the Base Redemption Amount described above.
If, on any Redemption Date which occurs after an initial public offering of the Company's Common Stock, the value of the Preference Stock as converted into Common Stock exceeds the liquidation preference of the Preference Stock, the Company may elect, in lieu of paying cash on the redemption of such Preference Stock, to convert some or all of the Preference Stock into 7,348.7 shares of the Company's Common Stock, as adjusted for dilutive issuances, subject to certain limitations.
H. ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss as of December 31, 2002 and 2001, consists of:
I. INCOME TAXES
Significant components of deferred tax assets (liabilities) as of December 31, 2002 and 2001, are as follows:
Income tax expense consists of the following for the years ended December 31, 2002, 2001 and 2000:
The income tax expense differs from the United States statutory rate for the years ended December 31, 2002, 2001 and 2000, as a result of the following:
During 2002, it was determined that the Company's foreign source income taxable in the United States was less than previously estimated. The effect of this change in estimate was to decrease the 2002 income tax expense by $1,930. Other tax benefit for 2001 in the table above consists primarily of the release of tax reserves.
Income (loss) before income taxes includes $16,131, $13,069 and $14,441 of income from international operations for the years ended December 31, 2002, 2001 and 2000. Day has not provided for deferred taxes on the undistributed earnings of international subsidiaries because the earnings are deemed permanently reinvested. Undistributed earnings of Day's foreign subsidiaries amounted to approximately $35 million as of December 31, 2002. The unrecognized deferred tax liability on these earnings has not been calculated due to the complexities associated with the hypothetical calculation. Beginning in 2004, it is anticipated that Day will remit a substantial portion of annual foreign subsidiary earnings in the form of taxable dividends. The tax consequences of those dividends will be recorded when such dividends are paid. The Company has United States net operating loss carryforwards of approximately $58,890 expiring from 2006 through 2022.
J. BUSINESS SEGMENTS
The Company produces precision-engineered products, specializing in the design and customization of consumable image-transfer products for the graphic arts (printing) industry and consumable fiber handling products for the textile industry. The Image Transfer segment designs, manufactures and markets high-quality printing blankets and sleeves, pressroom chemicals and automatic dampening systems used primarily in the offset and flexographic printing industries. The Textile Products segment manufactures and markets precision engineered rubber cots and aprons sold to textile yarn spinners and other engineered rubber products sold to diverse markets.
The accounting policies of the segments are the same as those described in Note B-Significant Accounting Policies. Segment performance is evaluated based on operating profit results compared to the annual operating plan. Intersegment sales and transfers are not material.
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, 2002, 2001 and 2000, and long-lived assets as of December 31, 2002, 2001 and 2000, 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, 2002, 7,717 options have been granted (of which 999 are exercisable) under the 1998 Stock Option Plan with an exercise price of $4,030. These options expire as follows: 6,167 expire in 2007 and 1,550 expire in 2012.
DAY STOCK OPTION PLAN
Certain employees hold options that were previously granted under the Day International Group, Inc. Stock Option Plan (the "Day Option Plan"). In 1998 all options granted under the Day Option Plan became fully vested and the Day Option Plan was amended to provide that no further options may be awarded under that plan. As a result, compensation expense associated with these options was recorded in 1998 and the remaining balance of $7,821 is included in other long-term liabilities at December 31, 2002 and 2001. As of December 31, 2002, 2,452.5 options have been granted under the Day Option Plan with an exercise price of $1,000 a share and 310 options have been granted with an exercise price of $1,200 a share. The options expire as follows: 2,377.5 expire in 2005; 75 expire in 2006; and 310 expire in 2007.
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. These warrants vest in four equal installments, first on the grant date and then on each of the first three anniversaries thereof. In 2000, additional warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per share were granted to each of two Board members for their services. These warrants vest one-quarter on the grant date and on the first anniversary of the grant and the remainder on the second anniversary.
M. RETIREMENT PLANS
The Company has defined benefit plans covering certain associates of its international subsidiaries. Benefits under these plans are based primarily on years of service and qualifying compensation during the final years of employment. The pension plan in the United Kingdom has plan assets consisting of U.K. government bonds in 2002 and marketable equity securities in 2001. The Company's funding policy complies with the requirements of local laws and regulations. During 2001, the Company froze the benefits under the U.K. Pension plan and settled a portion of the obligation by transferring the benefits of active associates to a defined contribution plan.
In conjunction with the TPO acquisition in 1999, the Company entered into a Promise to Pay agreement with Armstrong World Industries GmbH ("Armstrong") for the unfunded pension obligation of TPO's Germany subsidiary in which Armstrong agreed to pay the portion of any pension obligations which the associates earned prior to the date of the acquisition. At December 31, 2002, a receivable of $1,483 has been recorded for the estimated portion of the pension obligation that is Armstrong's responsibility.
Day also sponsors defined contribution plans for certain associates, which provide for Company contributions of a specified percentage of each associate's total compensation.
The funded status of the Company's defined benefit plans at December 31, 2002 and 2001, is as follows:
The projected benefit obligation was determined using a weighted average assumed discount rate of 5.0% and 6.0% in 2002 and 2001, and a weighted average assumed long-term rate of increase in compensation of 2.5% and 4.5% in 2002 and 2001. The weighted average assumed long-term rate of return on plan assets was 4.5% and 8.0% in 2002 and 2001.
A summary of the components of net periodic pension cost for the defined benefit plans and for the defined contribution plans for the years ended December 31, 2002, 2001 and 2000, is as follows:
N. OTHER POSTRETIREMENT BENEFITS
Day provides certain contributory postretirement health care and life insurance benefits for certain U.S. associates. Those associates may become eligible for these postretirement benefits if they retire on or after age 55 with at least ten years of service.
The status of Day's unfunded plan at December 31, 2002 and 2001, is as follows:
The weighted-average assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost rate trend) is assumed to be 9.5% and decreasing gradually to 5.0% in 2011 and remaining at that level thereafter. A one percentage point increase in the assumed health care cost trend rate would have increased the accumulated benefit obligation by $2,142 at December 31, 2002, and the interest and service cost would have been $312 higher for the year ended December 31, 2002. A one percentage point decrease in the assumed health care cost trend rate would have decreased the accumulated benefit obligation by $1,702 at December 31, 2002, and the interest and service cost would have been $243 lower for the year ended December 31, 2002.
A discount rate of 7.00% and 7.25% was used in determining the accumulated obligation as of December 31, 2002 and 2001.
Net periodic postretirement benefit costs include the following components for the years ended December 31, 2002, 2001 and 2000:
O. RESTRUCTURING COSTS
As announced in the first quarter of 2001, the Company has consolidated its U.S. Textile Products operations into its Greenville, South Carolina, facility. The relocation was completed in early 2002. A pre-tax charge of $933 was recorded in 2001 for relocation of machinery and equipment and severance and termination costs for 59 associates. During the first quarter of 2002, the Company incurred additional relocation costs of $109, recorded a charge of $157 for write-off of fixed assets and recorded a reversal of $103 of the reserve for severance costs. As of September 30, 2002, final severance payments have been paid to 49 associates.
During the fourth quarter of 2001, the Company ceased operations at its Transfer Media facility in Longwood, Florida. A pre-tax charge of $3,010 was recorded in 2001 for severance costs for 55 associates, write-off of abandoned assets and costs related to closing the facility. The Company is attempting to sell the land and building. As of September 30, 2002, final severance payments have been paid to all associates and the remaining reserve of $45 for severance costs was reversed in the second quarter of 2002.
Also during the fourth quarter of 2001, the Company completed plans to relocate its Pressroom Chemicals German sales office into other existing facilities and the U.S. sales and administrative functions from Oakland, New Jersey to other U.S. locations. A pre-tax charge of $988 was recorded for severance costs for 21 associates, costs for closing the offices and loss on the sale of fixed assets. As of December 31, 2002, final severance payments have been paid to 21 associates.
Below is a summary of the restructuring charges in 2001:
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:
P. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases a building in Germany under a capital lease. Property under this capital lease is included in property, plant and equipment at December 31, 2002 and 2001, as follows:
The Company also leases certain warehouses, transportation equipment and office equipment under operating leases with terms of 1 to 10 years. Rental expense for the years ended December 31, 2002, 2001 and 2000 was $2,326, $1,949 and $1,873. The following is a schedule by year of future annual minimum lease payments under non-cancelable leases as of December 31, 2002:
CONTINGENCIES
There are currently no environmental claims against the Company for the costs of environmental remediation measures taken or to be taken. The Company is operating under a consent decree related to its Michigan manufacturing facility for environmental matters that occurred prior to the acquisition by American Industrial Partners in 1995. Independent environmental consultants have assessed the environmental matters. Based on this assessment and management's best estimates of the liability associated with these matters, reserves for such liabilities have been established and no insurance recoveries have been anticipated in determining the reserves. A previous owner, PolyOne, has agreed to indemnify the Company for certain costs associated with these matters. At December 31, 2002, a $215 indemnification receivable is recorded. Management believes that this receivable is fully realizable. In management's opinion, the aforementioned claims will be resolved without material adverse effect on the operations, financial position or cash flows of the Company.
From time to time, the Company is involved in various legal proceedings arising in the ordinary course of business. None of the matters in which the Company is currently involved, either individually or in the aggregate, is expected to have a material adverse effect on the Company's business or financial condition.
Q. SUPPLEMENTAL CASH FLOW DISCLOSURES
R. SUPPLEMENTAL CONSOLIDATING INFORMATION
The Company has outstanding $100,000 of 11-1/8% Senior Notes and $115,000 of 9 1/2% Senior Subordinated Notes (collectively, the "Notes"). Day International, Inc. ("Day International" or "Guarantor") is a wholly-owned subsidiary of the Company (which has no assets or operations other than its investment in Day International). Day International has provided a full and unconditional guarantee of the Notes. The wholly-owned international subsidiaries of Day International are not guarantors with respect to the Notes and do not have any credit arrangements senior to the Notes. All of the assets of Day and Day International, other than the assets of the wholly-owned international non-guarantor subsidiaries, are pledged as collateral on the Notes. The only intercompany eliminations are the normal intercompany eliminations with regard to intercompany sales and the Company's investment in the wholly-owned non-guarantor subsidiaries. Intercompany notes are in place that effectively transfers the interest expense from Day to Day International, Inc. The following are the supplemental consolidating condensed balance sheets as of December 31, 2002 and 2001, the supplemental consolidating condensed statements of operations and cash flows for the years ended December 31, 2002, 2001 and 2001, with the investments in the subsidiaries accounted for using the equity method. Separate complete financial statements of the Guarantor are not presented because management has determined that they are not material to the investors.
DAY INTERNATIONAL GROUP, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 31, 2002
DAY INTERNATIONAL GROUP, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 31, 2001
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 OPERATIONS YEAR ENDED DECEMBER 31, 2000
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
DAY INTERNATIONAL GROUP, INC. SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 2000
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
On May 29, 2002, the Board of Directors voted to approve the engagement of Ernst & Young LLP as its independent auditor for the year ending December 31, 2002, to replace the firm of Arthur Andersen LLP. In connection with the audits of the financial statements for the years ended December 31, 2001 and 2000, and in the subsequent interim periods, there were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure. No event of the type described in Item 304(a)(1)(v) of Regulation S-K occurred during the period described above.
Prior to the Board's determination to engage Ernst & Young LLP as its independent auditors' for the year ending December 31, 2002, Ernst & Young LLP was not consulted on accounting treatment and disclosure requirements.
ITEM 10.
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.
William C. Ferguson has been a director since 1998. He retired as Chairman and Chief Executive Officer of NYNEX in 1995, a position he had held since 1989. Mr. Ferguson is also a member of the Advisory Board of GSC Partners.
Carl J. Crosetto has been a director since 2000. He is President and a member of the Office of the Chairman of Bowne & Co., Inc. since December 1998. In January 2000, he was appointed to the Board of Directors of Bowne. Prior to December 1998, he served as President of Bowne International. Mr. Crosetto is a member of the board of directors of SpeedFlex Asia Limited and Check Printers, Inc.
Matthew C. Kaufman has been a director since 2000. He is a Managing Director with GSC Partners. He joined GSC Partners in 1997. He is Chairman of the Board of Pacific Aerospace & Electronics, Inc. and a director of Burke Industries, Inc., Check Printers, Inc., Waddington North America, Inc., Woods Equipment Company, and Worldtex, Inc.
Michael A. Pruzan has been a director since 2002. He is a Partner with Soros Private Equity Partners. He has been with SPEP since 1999. Prior to joining SPEP, Mr. Pruzan spent over eleven years with Goldman, Sachs & Co. in Mergers and Acquisitions, Equity Capital Markets and Principal Investments. Mr. Pruzan is Chairman of the Board of Nextec Applications, Inc. and a member of the board of directors of First Asset Management, Inc., MCG Capital Corporation, NuSign Industries, LLC, Onvoy, Inc., Raleigh Cycle Limited, R.V.I. Guaranty Co., Ltd. and WellCare Health Plans, Inc.
As compensation for his services as director, in 1998, Mr. Ferguson received warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per share. The warrants vest in four equal installments, first on the grant date and then on each of the first three anniversaries thereof. On January 18, 2000, Mr. Ferguson received additional warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per share. As compensation for his services as director, Mr. Crosetto also received warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per share on January 18, 2000. The warrants vest in one-quarter on the grant date, one-quarter on the first anniversary of the grant date and the remainder on the second anniversary. None of the other directors will receive any compensation for their services as directors.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation for 2002, 2001 and 2000 for Mr. Wolters and the four other most highly compensated executive officers of the Company at the end of 2002.
(a) Represents company contributions to the Day 401(k) and Profit Sharing Plan ($8,000), premiums for group term life insurance ($2,164), investment advisory services ($6,466) and automobile allowance ($6,044).
(b) Represents company contributions to a UK benefit plan ($71,219) and automobile allowance ($23,464).
(c) Represents company contributions to the Day 401(k) and Profit Sharing Plan ($7,566), premiums for group term life insurance ($505) and automobile allowance ($5,995).
(d) Represents company contributions to a UK benefit plan ($35,854), premiums for group term life insurance ($732) and automobile allowance ($10,059).
(e) Represents company contributions to the Day 401(k) and Profit Sharing Plan ($6,810), premiums for group term life insurance ($1,069), relocation expenses ($4,062) and automobile allowance ($4,883).
FY-END OPTION/SAR VALUES
(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.
Mr. Riley is a party to an employment agreement with the Company, having an expiration date of December 31, 2003. Under his employment agreement, he receives an annual base salary of Pound Sterling175,000 (subject to increase by the Board of Directors), and an incentive bonus of up to 30% of the annual base salary. The agreement also contains certain non-competition provisions. Mr. Riley retired effective January 31, 2003.
COMPENSATION COMMITTEE INTERLOCKS
Since the Company does not have a compensation committee, the Board of Directors determines executive compensation. Mr. Ferguson serves on the Advisory Board of GSC Partners. Mr. Kaufman is a Managing Director of GSC Partners. GSC Partners and SG Capital Partners LLC ("SGCP"), the Company's controlling shareholders, provide business, financial and management advisory services to the Company for an annual total fee of $1 million, plus expenses. The Company also indemnifies GSC Partners and SGCP from and against certain liabilities. Mr. Pruzan is a Partner with Soros Private Equity Partners ("SPEP"). SPEP and its affiliates are the majority shareholders of the Company's Convertible Cumulative Preferred Stock. The Company also indemnifies SPEP from and against certain liabilities. Mr. Wolters is the President and Chief Executive Officer of the Company. No other officers of the Company participated in Board deliberations regarding executive compensation in 2002.
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 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.
(b) The shares of Common Stock owned by SGCP are Class B Non-Voting Common Stock. All other shares are shares of Class A Voting Common Stock.
(c) Greenwich IV, LLC is an affiliate of GSC Partners. Mr. Kaufman may be deemed to have indirect beneficial ownership of the 18,912 shares of Common Stock beneficially owned by Greenwich IV, LLC by virtue of his affiliation with GSC Partners. Mr. Kaufman disclaims any such beneficial ownership.
THE STOCKHOLDERS AGREEMENT
The Stockholders Agreement provides for the number of directors of the Board of Directors of the Company to be such number as designated by GSC Partners, which initially shall be five, and for the composition of the Board of Directors of the Company to consist of four individuals designated by GSC Partners and, for so long as SGCP holds 5% of the outstanding Common Stock, one individual designated by SGCP.
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. CONTROLS AND PROCEDURES
The Company maintains a system of internal accounting controls designed to provide reasonable assurance that transactions are properly recorded and summarized so that reliable financial records and reports can be prepared and assets safeguarded. In addition, a system of disclosure controls is maintained to ensure that information required to be disclosed is recorded, processed, summarized and reported in a timely manner to management responsible for the preparation and reporting of the Company's financial information.
Management assesses the internal control and disclosure control systems as being effective as they encompass material matters for the year ended December 31, 2002. There were no changes in the internal control and disclosure control systems subsequent to December 31, 2002, that would significantly affect the control systems.
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, 2002, 2001 and 2000: Report of Independent Public Accountants Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity (Deficit) Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES
The information required to be submitted in the Financial Statement Schedules for Day International Group, Inc. and consolidated subsidiaries has either been shown in the financial statements or notes, or is not applicable or required under Regulation S-X; therefore, those schedules have been omitted.
(b) REPORTS ON FORM 8-K
None
(c) EXHIBITS
See Index to Exhibits
(d) SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report covering the Company's last fiscal year, and no proxy statement, form of proxy or other proxy soliciting material has been sent to security holders of the Company.
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.
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.
CERTIFICATION
I, Dennis R. Wolters, certify that:
1. I have reviewed this annual report on Form 10-K of Day International Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 By: /s/ Dennis R Wolters ------------------------ Dennis R. Wolters President and Chief Executive Officer (Principal Executive Officer)
CERTIFICATION
I, Thomas J. Koenig, certify that:
1. I have reviewed this annual report on Form 10-K of Day International Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the board of directors:
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 28, 2003 By: /s/ Thomas J. Koenig ------------------------ Thomas J. Koenig Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
INDEX TO EXHIBITS
(3) ARTICLES OF INCORPORATION AND BY-LAWS
3.1 Certificate of Incorporation of Day International Group, Inc. ("Group") (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-4 (Reg. No. 33-93644)); as amended on October 15, 1999 (incorporated by reference to Exhibit 3.1 to the Form 8-K dated October 28, 1999) 3.2 By-Laws of Group (incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-4 (Reg. No. 33-93644)) 3.3 Certificate of Incorporation of Day International, Inc. (the "Guarantor") (incorporated by reference to Exhibit 3.3 to the Registration Statement on Form S-4 (Reg. No. 33-93644)) 3.4 By-Laws of the Guarantor (incorporated by reference to Exhibit 3.4 to the Registration Statement on Form S-4 (Reg. No. 33-93644))
(4) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4.1 Indenture (the "Indenture") dated June 6, 1995 among Registrant, the Guarantor and American Bank National Association (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 (Reg. No. 33-93644)) 4.2 Registration Rights Agreement dated as of June 6, 1995 among Group, the Guarantor, Donaldson, Lufkin & Jenrette Securities Corporation, NationsBanc Capital Markets, Inc. (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-4 (Reg. No. 33-93644)) 4.3 First Supplemental Indenture, dated March 13, 1998, to the Indenture (incorporated by reference to Exhibit 4.2 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)) 4.4 Indenture (the "Subordinated Indenture") dated as of March 18, 1998, among Day International Group, Inc., Day International, Inc. and the Bank of New York (incorporated by reference to Exhibit 4.3.1 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)) 4.5 Form of Global Notes (incorporated by reference to Exhibit 4.3.2 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)) 4.6 Registration Rights Agreement, dated as of March 18, 1998, by and between the Company and Societe Generale Securities Corporation (incorporated by reference to Exhibit 4.4 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)) 4.7 Certificate of Designation, dated March 18, 1998, of Powers, Preferences and Relative, Participating, Optional and other Special Rights of 12 1/4% Senior Exchangeable Preferred Stock due 2010 and Qualifications, Limitations and Restrictions thereof (the "Exchangeable Preferred Stock") (incorporated by reference to Exhibit 4.5.1 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)) 4.8 Certificate of Designation for the Company's 18% Convertible Cumulative Preference Stock due 2010, filed with the Secretary of State of the State of Delaware on October 15, 1999 (incorporated by reference to Exhibit 4.1 to the Form 8-K dated October 28, 1999)
4.9 Form of Global Certificate for the Exchangeable Preferred Stock (incorporated by reference to Exhibit 4.5.2 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)) 4.10 Exchange Debenture Indenture, dated as of March 18, 1998, among Day International Group, Inc., Day International, Inc. and the Bank of New York as Trustee (incorporated by reference to Exhibit 4.6 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)) 4.11 Amended and Restated Stockholders Agreement, dated as of October 19, 1999, among the Company and certain of its stockholders (incorporated by reference to Exhibit 4.5 to the Form 8-K dated October 28, 1999) 4.12 Supplemental Indenture, dated as of October 19, 1999 among The Bank of New York and the several Guarantors party thereto (incorporated by reference to Exhibit 4.2 to the Form 8-K dated October 28, 1999)
(10) MATERIAL CONTRACTS
10.1 Purchase Agreement dated as of May 25, 1995 among Group, the Guarantor (as of June 6, 1995) Donaldson, Lufkin & Jenrette Securities Corporation and NationsBanc Capital Markets, Inc. (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-4 (Reg. No. 33-93644)) 10.2 Stock Purchase Agreement dated April 11, 1995 among Group, M.A. Hanna Company and Cadillac Plastic Group, Inc., as amended (incorporated by reference to Exhibit 4.11 to the Registration Statement on Form S-4 (Reg. No. 33-93644)) 10.3 Share Purchase Agreement dated April 11, 1995 between Group and Cadillac Plastic Limited, as amended (incorporated by reference to Exhibit 4.12 to the Registration Statement on Form S-4 (Reg. No. 33-93644)) 10.4 Asset Purchase Agreement between Day International (Canada) Limited and Group, as amended (incorporated by reference to Exhibit 4.13 to the Registration Statement on Form S-4 (Reg. No. 33-93644)) 10.5 Employment Agreement, dated January 16, 1998, between the Guarantor and Dennis R. Wolters (incorporated by reference to Exhibit 10.4 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)) 10.6 Employment Agreement, dated January 16, 1998, between Day International, Inc. and David B. Freimuth (incorporated by reference to Exhibit 10.5 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)) 10.7 Employment Agreement, dated January 1, 1999, between Varn Products (UK) Limited and Arthur C. Riley (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K for the year ended December 31, 2001) 10.8 Day International Group, Inc. Stock Option Plan, dated as of July 6, 1995 (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K for the period ended December 31, 1995); as amended on September 19, 1996 (incorporated by reference to Exhibit 10.17 to the Annual Report on Form 10-K for the year ended December 31, 1996); and as further amended on January 16, 1998 (incorporated by reference to Exhibit 10.2.3 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
10.9 Stock Purchase Agreement, dated as of December 18, 1997, by and among Greenwich IV, LLC, GSD Acquisition Corp. and the Stockholders of Day International Group, Inc. parties thereto (incorporated by reference to Exhibit 2.1 to the Form 8-K dated January 16, 1998); as amended on January 16, 1998 (incorporated by reference to Exhibit 2.2 to the Form 8-K dated January 16, 1998) 10.10 Purchase Agreement, dated as of March 13, 1998 between the Company and Societe Generale Securities Corporation (incorporated by reference to Exhibit 1.1 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)) 10.11 Amended and Restated Credit Agreement, dated as of October 19, 1999, among the Company, Societe Generale, as Administrative Agent, and SG Cowen Securities Corporation, as Arranger (incorporated by reference to Exhibit 10.1 to the Form 8-K dated October 28, 1999); as amended September 21, 2001 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2001) 10.12 Guarantee and Collateral Agreement, dated January 15, 1998, made by the Company and Day International, Inc. in favor of Societe Generale as Administrative Agent for the benefit of the Senior Lenders and certain other secured parties (incorporated by reference to Exhibit 4.8 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)) 10.13 Patent and Trademark Security Agreement, dated January 15, 1998, made by the Company in favor of the Administrative Agent for the benefit of the Senior Lenders under the Credit Agreement (incorporated by reference to Exhibit 4.9 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)) 10.14 Mortgage and Security Agreement Dated January 16, 1998, from Day, as Mortgagor, to the Administrative Agent, with respect to the Florida Property (incorporated by reference to Exhibit 4.10 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)) 10.15 Deed of Trust, dated January 15, 1998, from Day, as Mortgagor, to the Administrative Agent, with respect to the North Carolina property (incorporated by reference to Exhibit 4.12 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)) 10.16 Mortgage and Security Agreement Dated January 16, 1998, from Day, as Mortgagor, to the Administrative Agent, with respect to the Michigan Property (incorporated by reference to Exhibit 4.13 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))
10.17 Share Pledge Agreement dated December 22, 1998 between made by the Company and Day International, Inc. in favor of Societe Generale as Administrative Agent for the benefit of the Senior Lenders and certain other secured parties (incorporated by reference to Exhibit 10.28 to the Annual Report on Form 10-K for the year ended December 31, 1998) 10.18 Consulting Agreement between the Company and GSC Partners (incorporated by reference to Exhibit 10.5.1 to the Amendment No. 2 to Registration Statement on Form S-4/A filed on June 22, 1998 (Reg. No. 333-51839)) 10.19 Indemnification Agreement between the Company and GSC Partners (incorporated by reference to Exhibit 10.5.2 to the Amendment No. 2 to Registration Statement on Form S-4/A filed on June 22, 1998 (Reg. No. 333-51839)) 10.20 Consulting Agreement between the Company and SG Capital Partners Limited (incorporated by reference to Exhibit 10.5.3 to the Amendment No. 2 to Registration Statement on Form S-4/A filed on June 22, 1998 (Reg. No. 333-51839)) 10.21 Indemnification Agreement between the Company and SG Capital Partners Limited (incorporated by reference to Exhibit 10.5.4 to the Amendment No. 2 to Registration Statement on Form S-4/A filed on June 22, 1998 (Reg. No. 333-51839)) 10.22 Share Purchase Agreement between Day International, Inc., Mr. Rudolf Wilbring, Mr. Helmut Busshoff and Mr. Josef Dunne dated December 23, 1998 (incorporated by reference to Exhibit 10.26 to the Annual Report on Form 10-K for the year ended December 31, 1998) 10.23 Non Compete Agreement between Day International, Inc., Mr. Rudolf Wilbring, Mr. Helmut Busshoff and Mr. Josef Dunne dated December 23, 1998 (incorporated by reference to Exhibit 10.27 to the Annual Report on Form 10-K for the year ended December 31, 1998) 10.24 Stock warrant to purchase 74 shares of Common Stock of the Company, dated as of January 18, 1998 issued to Mr. William C. Ferguson (incorporated by reference to Exhibit 10.30 to the Annual Report on Form 10-K for the year ended December 31, 1998) 10.25 Stock warrant to purchase 74 shares of Common Stock of the Company, dated as of January 27, 2000, issued to Mr. William C. Ferguson (incorporated by reference to Exhibit 10.37 to the Annual Report on Form 10-K for the year ended December 31, 2000) 10.26 Stock warrant to purchase 74 shares of Common Stock of the Company, dated as of January 18, 2000, issued to Mr. Carl J. Crosetto (incorporated by reference to Exhibit 10.38 to the Annual Report on Form 10-K for the year ended December 31, 2000) 10.27 Purchase Agreement between Armstrong World Industries, Inc. and Armstrong World Industries GmbH, as Sellers and Day International, Inc., as Buyer (portions omitted pursuant to a request for confidential treatment) (incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999 10.28 Stock Purchase Agreement, dated as of August 13, 1999, by and among the Company and the stockholders of each of Varnco Holdings Inc., Varn Holdings PLC, Varn Aegis Co. GmbH Hautschutzsysteme, Varn Products Co., Inc., JV Tex Realty Corp. and Graph Tech, Inc. (incorporated by reference to Exhibit 2.1 to the Form 8-K dated October 28, 1999); as amended October 19, 1999 (incorporated by reference to Exhibit 2.2 to the Form 8-K dated October 28, 1999)
10.29 Subsidiary Guarantee, dated as of October 19, 1999, among Firstar Bank, N.A. and the several Guarantors party thereto (incorporated by reference to Exhibit 4.3 to the Form 8-K dated October 28, 1999) 10.30 Preference Stock Purchase Agreement, dated as of October 19, 1999, among the Company and the several Investors party thereto (incorporated by reference to Exhibit 4.4 to the Form 8-K dated October 28, 1999) 10.31 Day International, Inc. Supplemental Savings and Retirement Plan, dated as of March 1, 2001 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2001)
(21) SUBSIDIARIES OF THE REGISTRANT
(99) ADDITIONAL EXHIBITS
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002