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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                            ------------------------

                                    FORM 10-K
              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL PERIOD ENDED DECEMBER 31, 1998

                   COMMISSION FILE NO. 33-93644 AND 333-51839

                          DAY INTERNATIONAL GROUP, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

             Delaware                                   31-1436349
             --------                                   ----------
    (State of Incorporation)                (IRS Employer Identification No.)

                   130 WEST SECOND STREET, DAYTON, OHIO 45402
                   ------------------------------------------
                    (Address of principal executive offices)

Registrant's telephone number, including area code:           (937)  224-4000

Securities Registered Pursuant to Section 12 (b) of the Act:      None

Securities Registered Pursuant to Section 12 (g) of the Act:      None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes      X       No
                                      -----------     -----------

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

At the close of business on March 29, 1999:
         Number of shares of Common Stock outstanding                23,298
         Aggregate market value of the Company's voting
           stock held by non-affiliates                                 $ 0

DOCUMENTS INCORPORATED BY REFERENCE - None.


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Except as otherwise stated or unless the context otherwise requires, references
to the "Company" include Day International Group, Inc., a Delaware corporation
which is the Registrant, and each of its subsidiaries. The Company's address is
P.O. Box 338, 130 West Second Street, Dayton, Ohio 45401-0338, and its telephone
number is (937) 224-4000.

Except as otherwise stated, the information contained in this report is given as
of December 31, 1998, the end of the Company's last fiscal year.

SAFE HARBOR STATEMENT; INDUSTRY DATA

Certain information contained in this report, particularly information regarding
future economic performance and finances, plans and objectives of management,
are forward-looking statements within the meaning of the Securities Act of 1933.
In some cases, information regarding certain important factors that could cause
actual results to differ materially from any such forward-looking statement
appear together with such statement. In addition, the following factors, in
addition to other possible factors not listed, could affect the Company's actual
results and cause such results to differ materially from those expressed in
forward-looking statements. These factors include the effect of leverage,
including the limitations imposed by the Company's various debt instruments;
risk related to significant operations in foreign countries; competition in the
Company's markets; the timely development and market acceptance of new products;
the impact of competitive products and pricing; the effect of changing general
and industry specific economic conditions; the impact of environmental
regulations; Year 2000 compliance by the Company and third parties with whom the
Company does business; and the potential for technology obsolescence.

Market data used throughout this report was obtained from internal company
surveys and industry publications. Industry publications generally indicate that
the information contained therein has been obtained from sources believed to be
reliable, but the accuracy and completeness of such information is not
guaranteed. The Company has not independently verified any of such market data.
Similarly, internal company surveys, while believed by the Company to be
reliable, have not been verified by any independent sources.

                                     PART I

ITEM 1.  BUSINESS

BACKGROUND

The Company is one of the world's leading producers of precision engineered
rubber products, specializing in the design and customization of consumable
image-transfer products for the graphic arts (printing) industry and fiber
handling products for the textile industry. The Company's printing components
division ("Image Transfer") 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 1998 it had the number one market share
in printing blankets and sleeves in North America and worldwide. The Company's
textiles component division ("Textiles") is one of the largest U.S.
manufacturers and 


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marketers of precision engineered rubber cots, aprons and other fabricated
rubber fiber handling components sold to textile yarn spinners worldwide. In
1998, Image Transfer and Textiles contributed 81% and 19%, respectively, of the
Company's total sales.

On January 16, 1998, affiliates of Greenwich Street Capital Partners, Inc. and
SG Capital Partners LLC acquired substantially all of the common stock of the
Company for approximately $206 million (the "Acquisition"), with the Company's
management retaining the balance of the common stock. In conjunction with the
Acquisition, the Company entered into a $60 million Senior Secured Credit
Facility consisting of a $40 million Term Loan and a $20 million Revolving
Credit Facility. Proceeds from the Term Loan were used to repay the Company's
then existing Credit Facility and to pay certain acquisition related fees and
expenses.

On March 18, 1998, the Company successfully completed a Consent Solicitation
(the "Consent") with respect to its $100.0 million Senior Subordinated Notes
which are due in 2005 (the "2005 Notes"). The Consent permitted the Company to
issue $115.0 million of 9 1/2% Senior Subordinated Notes (the "Senior
Subordinated Notes") and $35.0 million of 12 1/4% Exchangeable Preferred Stock
(the "Exchangeable Preferred Stock"). The Consent also allowed the Company to
assume a $140.0 million Bridge Loan (the "Bridge Loan") incurred by its majority
shareholder in connection with the Acquisition, and effected certain other
changes to the Indenture governing the 2005 Notes, including the elimination of
the provisions of the Indenture subordinating the 2005 Notes to other
indebtedness of the Company. As consideration for the Consent, the Company paid
a Consent fee of $65 for every $1,000 of notes held. Immediately following the
consent, the Company issued the Senior Subordinated Notes and the Exchangeable
Preferred Stock. The Exchangeable Preferred Stock is due in 2010 and has a
liquidation preference of $1,000 per share. Dividends on the Exchangeable
Preferred Stock are cumulative, and are payable by the Company 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. Thereafter, dividends may be paid in cash only. Subject to certain
restrictions, the Company may, at its option, exchange all shares of the
Exchangeable Preferred Stock then outstanding for 12 1/4% Subordinated Exchange
Debentures due 2010 (the "Exchange Debentures"). The proceeds from the issuance
of the $115.0 million of 9 1/2% Senior Subordinated Notes and $35.0 million of
12 1/4% Exchangeable Preferred Stock were used to repay the Bridge Loan and to
pay other financing fees and expenses. Expenses associated with obtaining the
Consent were approximately $1.0 million. As a result of the repayment of the
Bridge Loan, $5.2 million of deferred financing fees and expenses were also
written off as an extraordinary item. The Acquisition does not require a change
in the Company's historical basis of accounting since the Company's 2005 Notes
remained outstanding following the Acquisition.

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. Rotec was
founded in 1990. Its headquarters and main production facility are located in
Ahaus-Ottenstein, Germany, with a second manufacturing facility in Chrastava,
Czech Republic. Rotec gained industry prominence in 1993 with the introduction
of the compressible 



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sleeve, a product innovation enabling flexo printers to achieve higher levels of
print quality. The Company expects to operate Rotec as a stand alone business
unit.

GENERAL

Printing blankets are highly engineered products manufactured to narrow
tolerances and precise specifications. They are composed of multiple layers of
fabric, rubber and adhesives which determine performance features on the
printing press and overall quality of the printing job. Printing sleeves are
highly engineered "tubular" blankets which 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 a secondary factor in the end-user's purchase decision.

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. 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, and currently nearly all of the sales of Image
Transfer are generated by products designed for use in offset printing.

The Company, through its Textiles division, also manufactures highly engineered
rubber rollers known as cots and flexible belts known as aprons for utilization
in yarn spinning machinery. Cots and aprons are used to draw and twist fibers
into yarn. 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 throughout the
world as a leader in technological innovation and quality and has the broadest
line of cots and aprons and related products of any domestic manufacturer.


IMAGE TRANSFER

  Industry

Press manufacturers have continually invested in research and development to
introduce improved presses that are more efficient by operating at faster run
speeds, offering enhanced flexibility and 

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reducing setup time in an effort to maintain offset printing's technological and
cost advantages. Industry sources estimate that annual sales of new offset
presses were approximately $10 billion in 1998, with a 20 year average life
expectancy of each press. The Heidelberg Web Press, Inc. M-3000 press technology
is an example of the next generation of offset printing presses which have
increased the maximum web speed to 3,000 feet of paper per minute versus the
industry norm of 2,000 feet of paper per minute.

In addition to lowering costs, offset printers are constantly striving to
improve the quality of their printed product. The cost of the printing blankets
and sleeves represents less than 1% of the overall cost of the printed page, but
they are critical to the quality of the product and the efficiency of the
printing press. Factors most critical to the printer are the image resolution,
which is achievable with a particular printing blanket or sleeve; the
consistency of the printing output over long printing runs; the number of images
that can be printed by the printing blanket or sleeve over its useful life
relative to its cost; and the ability of the printing blanket or sleeve to
operate within prescribed parameters utilizing a variety of substrates, inks and
chemicals. As a result, high-quality blankets and sleeves will continue to be
important in achieving maximum press performance by both the new and the
existing installed equipment.

Industry reports forecast that alternative printing processes, such as digital
and flexography, will provide some short-run print jobs with enhanced quality
and increased flexibility. Digital printing, the electronic conveyance of image
to substrate, is estimated to grow by approximately 14% to 16% over the next
five years (based on various industry sources). Currently, this process is used
primarily for short runs, such as for the printing of specialized catalogs,
brochures and price lists. Developments in digital technology are expected to
impact the printing industry, in general, and the offset process, in particular,
in two different ways.

Digital technology is being used to image the offset plate for existing and new
offset presses in place of the traditional film-based imaging method. The
principal benefit of these methods is the elimination of certain pre-press
activities involving the preparation of film and plates. Within the next ten
years, it is expected that the percentage of plates which are digitally imaged
will increase to 80%. This shift in technology will have a positive impact on
the offset process through improved print quality, reduced set-up times, and
shorter run length capability. These advances will benefit the Company because a
transfer medium, such as a printing blanket or sleeve, between the plate and the
substrate will continue to be required. In conjunction with the companies
working on these new printing machine technologies, the Company is developing
blankets, sleeves and belts to address the strong demand generated by digital
enhancements to the offset process.


Flexographic printing uses a raised image flexible plate on a cylinder or
replaceable sleeve, which permits printing on a variety of substrates such as
plastic, paper and cardboard and generally results in the image being
transferred to be of high quality. As measured by the value of image transfer
products sold, the current size of this market is estimated at approximately $50
million and is forecasted to grow at an annual rate of 6% to 8%. This process is
primarily associated with the packaging market but is also used for catalogs and
periodicals. The flexible plates are used on many short run repeat jobs, and are
therefore taken on and off the press several times a month. Many flexographic
printers produce thousands of different images, and each of the images requires
its own plate which may be mounted on a 


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cylinder or a replaceable carrier sleeve. The Company intends to focus on
providing the replaceable carrier sleeves which are standard equipment on
flexographic presses through the acquisition of Rotec.

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" and "David M" 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 dayGraphica(R) product,
introduced in 1986 and utilizing improved surface characteristics resulting in
enhanced print quality, represented the most significant industry-wide product
advancement in compressible printing blankets in over ten years. The 4000
dayGraphica(R) was introduced in 1997. The 3000 Patriot(R) line was introduced
in 1992 to address customer demands for a more versatile and durable high volume
product adaptable to changes in the chemicals used in the printing process. In
1995, the Company introduced the 3500 Discovery(R), the next generation of the
Patriot(R), which is a premium-priced, more durable product. The 8500 AccuDot(R)
line is a line of general purpose printing blankets. In addition to its
traditional line of printing blankets, the Company is one of three global
licensees to manufacture tubular, seamless printing sleeves for use on
Heidelberg Web Press, Inc.'s "gapless" webpresses, the next generation of
high-speed presses. "David M" products are principally sold to small and
medium-sized printers, packaging companies and other specialty printers.

Products for digital printing are still principally under development and are
not yet produced on a commercial basis. In addition, the Company is evaluating
the production of other prototypes for new short-run color printing processes.

The Rotec acquisition brings to the Company a world leader in sleeve technology.
Rotec manufactures a wide array of sleeves used in the flexographic printing
process. Rotec gained industry prominence in 1993 with the introduction of the
compressible sleeve, a product innovation enabling flexo 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.

Image Transfer 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 also offers printing accessories such as
fountain solutions, washes, cylinder packing papers and aluminum bars for
mounting blankets onto press cylinders to its customers.

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  Sales and Distribution

Image Transfer has adopted an integrated approach to product development,
marketing, sales and distribution. This division's 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, Mexico, Japan, Russia and
the United Kingdom.

Image Transfer's sales force calls directly on all of the leading end-users in
their markets and promotes the quality and technical features of the Company's
products to pressroom foremen, purchasing agents, plant managers and press
operators who then order the Company's products from an authorized value-added
dealer. These dealers, known as converters, 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. 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. In 1998, approximately 96% of sales of
printing blankets and sleeves were made through value-added converters and
dealers whose efforts are supported by the Company's sales and technical
professionals.

The Company distributes its blankets through over 40 U.S. and 70 international
converters who buy printing blanket rolls, cut pieces (blankets) to customized
orders, store inventory and hold receivables. The sales force works closely with
converters and dealers, through joint calling efforts on end-users and training
programs. The Company believes that it has one of the most effective networks of
converters and dealers in the industry.

TEXTILES

  Industry

Yarn spinning machinery uses a combination of rollers (cots) and flexible belts
(aprons) to draw and twist fibers into yarn in a process known as drafting.
Large spinning mills (mills with over 50,000 spindles) typically require 200,000
cots and aprons (two cots and two aprons per spindle) to equip the spinning
frames. Yarn manufacturers require a wide range of cot and apron sizes and
constructions to handle cotton, synthetic and blended fibers. Cots and aprons
are differentiated by mill conditions, machine types and original equipment
manufacturer ("OEM") specifications. The type and quality of cots and aprons
impact yarn quality, while product life and performance are impacted by surface
finish, lap resistance, the ability to withstand ozone exposure, fiber
chemicals, wear and physical deformation.

The industry has undergone significant changes in recent years with
technological improvements in machinery resulting in productivity improvements
at the textile mill level. In the United States, a significant amount of ring
spinning and shuttle loom capacity has been replaced by fully automated
open-end, air-jet and high-speed spinning frames and looms.

Automated high-speed spinning frames produce 40% more yarn per spindle than
traditional spinning frames. As more high-quality yarn is produced at higher
speeds, the consumption of cots and aprons per position increases
correspondingly. As a result of these increasing demands, cots and aprons must
be of 


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higher quality and therefore command a premium price compared to traditional
ring spinning cots and aprons.

  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) brand, with over 3,000
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,
Textiles 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 and command higher prices compared to traditional ring spinning cots.

Textiles' 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. Textiles also makes bolsters, "rub" aprons and rubber shrinkage
blankets 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. In addition, the Company also sells custom rubber compounds to
several wire coaters in Europe.

  Sales and Distribution

The Company believes that the quality, technical proficiency and experience of
its Textiles sales force distinguishes its marketing efforts from those of any
other competitor. Textiles' 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 OEMs.

In 1997, the Company signed a collaborative technology and marketing agreement
with Coimbatore Cots and Coatings, a division of Lakshmi Machine Works in India.
The Company receives royalties for products sold in the Indian market that use
the Company's technology. In addition, the Company has exclusive worldwide
distribution rights for products manufactured by Coimbatore Cots and Coatings
that use the Company's technology.




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RAW MATERIALS

Rubber polymers are a key component in most of the Company's products. Various
fabrics, combined with rubber, represented over 40% of all raw materials
purchases in each of 1998 and 1997. Raw material purchases accounted for
approximately 50% of cost of goods sold for the Company's products during the
same period. 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 Company's research & development staff consists of approximately 25
full-time associates. These associates are focused on current product and
process improvement efforts, as well as development of new consumables for
future image transfer 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 system patents. The
Company's recent acquisition, Rotec, will be examined for trademarks and
patentable efforts as the Company develops its US and worldwide products for the
Flexo industry.

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, the creation of an Advanced Development Center for
consumables, and other efforts with OEM companies should stimulate proprietary
processes and additional patent applications. The material impact of these
efforts will be mostly reflected in future years revenues associated with the
launch and support of new image transfer equipment.

COMPETITION

The Company competes with a number of manufacturers in the printing and textiles
components industries, with the main competitive factors being quality,
performance and service. While the Company competes with a number of
manufacturers of offset printing blankets and sleeves, the principal competitors
of Image Transfer are Reeves International, Inc.
("Reeves") and Polyfibron Technologies, Inc. ("Polyfibron").

In Textiles, the Company's principal competitor is Armstrong World Industries
Inc. ("Armstrong"). Textiles also competes with other smaller manufacturers,
such as Premtec, Inc., Hokushin Corporation, Yamauchi and Berkol AG
(Switzerland).

INTERNATIONAL OPERATIONS

The Company's principal international manufacturing facility is located in
Dundee, Scotland, which produces products for both Image Transfer and Textiles.
As a result of increases in capacity and productivity enhancements in its US
facilities, the Company ceased manufacturing at its facility in Lerma, Mexico in
December 1998. The facility will continue to serve the Mexican market as a



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warehouse and distribution operation. As a result, a non-recurring charge of
$0.3 million was recorded in 1998 for charges related to severance, inventory
write-offs, etc. in Mexico. In addition, the Company maintains sales and
distribution facilities in England, France, Germany, Hong Kong, Italy and
Russia.

Rotec's main production facility and headquarters are located in
Ahaus-Ottenstein, Germany, with a second manufacturing facility located in
Chrastava, Czech Republic.

The Company manufactures and markets its products worldwide through several
foreign 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 40% of the Company's 1998 sales were derived from products sold
outside the United States. 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.

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. The Dundee, Scotland facility is subject to United Kingdom and local
environmental requirements, as well as the environmental requirements
promulgated by the European Union. The Company's facility in Lerma, Mexico is
subject to Mexican environmental requirements. Rotec's facilities in
Ahaus-Ottenstein, Germany, and Chrastava, Czech Republic are subject to German
and Czech environmental requirements. 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 in connection with the Acquisition and with the acquisition of
Rotec, except as otherwise stated herein, the Company believes that its
operations are currently in compliance with environmental laws and regulations,
except as would not be expected to have a material adverse effect on the
Company. However, there can be no assurances that environmental requirements
will not change in the future or that the Company will not incur significant
costs in the future to comply with such requirements. In addition, the Company's
operations involve the handling of toluene and other hazardous substances, and
if a release of hazardous substances occurs on or from the Company's facilities,
the Company may be required to pay the cost of remedying any condition caused by
such release, the amount of which could be material.

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New rules to be promulgated under the 1990 amendments to the Federal Clean Air
Act governing emissions of hazardous air pollutants may require implementation
of additional air emission control measures at the Company's U.S. facilities.
Because the applicable requirements are not scheduled to be promulgated until
2000, it is difficult to estimate the costs of any additional controls that
might be required with any certainty. The Company currently believes that the
total capital expenditures to install additional control equipment at these
facilities are not likely to exceed $2.5 million. Although such requirements are
not required to be promulgated before 2000, the Company began installing the
necessary equipment in 1998 to mitigate future spending requirements resulting
from the Clean Air Act and anticipates completion of these projects in 1999.

Solvent air emissions from the Dundee, Scotland facility have periodically
exceeded the regulatory limit for such emissions, and in 1997 the Company began
to initiate a plan for air controls and install a solvent recovery system in
order to control the solvent emissions and comply with the regulatory limit. The
Company believes that capital expenditures for such equipment will total
approximately $1.5 million and will be completed in 1999. The Dundee facility
has also had instances of non-compliance with wastewater discharge requirements,
though the Company believes that it is now in compliance with such requirements.

Cadillac Plastics Group, Inc ("CPG"), the former parent of the Company, and a
wholly-owned subsidiary of M.A. Hanna Company ("Hanna"), is a party to a July
25, 1988 Consent Decree with the Michigan Department of Natural Resources with
regard to contamination at the Company's Three Rivers, Michigan facility. CPG
installed a groundwater remediation system at the facility in 1989, and is
required to operate such system until certain cleanup levels are achieved
(currently expected to take seven to ten more years). As of December 31, 1998,
the Company had recorded accruals of approximately $800,000 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.

The Asheville, North Carolina facility has had some instances of exceeding the
zinc limit for wastewater discharged to the local publicly-owned treatment
works, due in part, the Company believes, to the very high levels of zinc in the
city provided water. As a result of past onsite release and disposal of
hazardous materials, the Asheville, North Carolina facility has been placed on
the CERCLIS list and the North Carolina Inactive Hazardous Sites Inventory,
although the Company has been informed that the CERCLIS listing for the
Asheville facility includes a designation of "No Further Remedial Action
Planned."

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.



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<PAGE>   12

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, Hanna 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 Hanna 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. The Company does not maintain insurance coverage for environmental
matters.

ASSOCIATES

The Company currently employs approximately 970 full-time associates worldwide,
of which approximately 620 are employed in the United States and Canada. The
Company's associates in Dundee, Scotland are represented by a labor union which
has entered into a collective bargaining agreement with the Company, which
agreement expires on January 1, 2001. 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.

                                  RISK FACTORS

Current and prospective investors should carefully consider the following
factors in addition to the other information set forth in this Report relating
to the Notes, Senior Subordinated Notes and Exchangeable Preferred Stock.

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

The Company manufactures and markets its products worldwide through several
foreign 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 40% in 1998 and 39% in 1997 of the Company's sales were derived
from products sold outside the United States. 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. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Risks Associated with International Operations."



                                       12
<PAGE>   13



IMPACT OF SIGNIFICANT COMPETITION

The Company's primary competitors are Reeves International, Inc. ("Reeves") and
Polyfibron Technologies, Inc. ("Polyfibron") in Image Transfer, and Armstrong
World Industries Inc. ("Armstrong") in Textiles. 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.

ENVIRONMENTAL MATTERS

The Company is subject to a broad range of Federal, state, local and foreign
environmental laws and regulations, including those governing discharges to the
air and water, the handling and disposal of solid and /or hazardous wastes and
the remediation of contamination associated with releases of hazardous
substances. The Company believes that its operations are in compliance with
environmental requirements, except as would not be expected to have a material
adverse effect on the Company or as otherwise stated herein. 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,
which costs could be material. New rules to be promulgated under the Federal
Clean Air Act by the year 2000 may require the Company to make capital
expenditures; the Company estimates that such capital expenditures could total
approximately $2.5 million, which the Company began incurring in 1998 rather
than waiting until 2000. In addition, in connection with the AIP Acquisition,
M.A. Hanna Company ("Hanna") and its wholly-owned subsidiary, Cadillac Plastics
Group, Inc. ("CPG"), the former parent of the Company, agreed to maintain
ongoing responsibility for and indemnify the Company with respect to certain
violations of environmental laws and regulations relating to the period before
the AIP Acquisition. If Hanna and CPG are unable to honor their obligations, the
Company would likely be responsible for such matters and the cost of addressing
them could be material. See "Business -- Environmental Matters."

IMPACT OF TECHNOLOGICAL CHANGE

Nearly all Image Transfer sales are generated by products designed for use on
offset presses. Flexographic and digital, two other printing processes, are
currently used primarily in short-run, lower speed applications. 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
recognizes the growth potential of alternative technologies and is actively
seeking to capitalize on opportunities presented by these processes by being an
industry leader in the development of printing blankets, sleeves and belts for
those


                                       13
<PAGE>   14

processes. The Company has taken steps to address this risk through its
acquisition of Rotec in December 1998

RELIANCE ON MATERIAL CUSTOMER

Sales made to National Offset Blanket ("National Offset"), a major U.S.
converter, accounted for approximately 12% of the Company's sales in 1998 and
11% in 1997. The Company's sales to National Offset are not governed by a
written contract between the parties. In the event that National Offset 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 National
Offset intends to discontinue or otherwise substantially reduce its relationship
with the Company.

YEAR  2000 COMPLIANCE

While the Company's computer and information systems are able to accommodate the
"year 2000" dating changes necessary to permit correct recording of year dates
for 2000 and later years, the Company has formed a task force to address all
year 2000 issues and is in the process of evaluating and correcting all year
2000 issues. The initial assessment indicates that the Company does not have a
significant year 2000 issue, and management believes that the cost of addressing
its year 2000 issues will not be material. The Company believes it will be able
to achieve year 2000 compliance by the end of 1999, and does not anticipate any
material disruption in its operations as the result of any failure by the
Company to be in compliance, although no assurance to such effect can be given.
In the event that any of the Company's significant suppliers or customers do not
successfully and timely achieve year 2000 compliance, the Company's business or
operations could be adversely affected.

DEPENDENCE ON KEY PERSONNEL

The success of the Company depends in large part on the Company's senior
management and its ability to attract and retain other highly qualified
management personnel. There can be no assurance that the Company will be
successful in hiring or retaining key personnel. The Company has entered into
employment agreements with certain of its senior managers.

SUBSTANTIAL LEVERAGE AND  DEBT SERVICE OBLIGATIONS

As a result of the Offerings and the other transactions, the Company is highly
leveraged. The Company's aggregate indebtedness is approximately $257.5 million
(including the Notes) and the aggregate liquidation preference of the
Exchangeable Preferred Stock is $38.5 million (which, subject to certain
conditions, may be exchanged for Exchange Debentures). In comparison, the
Company's outstanding indebtedness as of December 31, 1997 was $130.9 million.

The level of the Company's indebtedness could have important consequences for
the Company, 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 financing
in the future for working capital, capital expenditures, research and


                                       14
<PAGE>   15

development or acquisitions may be limited; and (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 the Notes and dividends
on the Exchangeable Preferred Stock and to satisfy its other debt obligations,
including its debt obligations under the 2005 Notes, 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 borrowing 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 of and interest on
its indebtedness, including the Senior Secured Credit Facility, the 2005 Notes
and the Notes, for the payment of periodic cash dividends on the Exchangeable
Preferred Stock, for any redemption of the Exchangeable 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.

IMPACT OF RESTRICTIVE FINANCING COVENANTS

The Senior Secured Credit Facility and the 2005 Indenture contain a number of
significant covenants that restrict the operations of the Company. The Company
is required to comply with specified financial ratios and tests, including
minimum fixed charge coverage ratios, maximum leverage ratios and minimum EBITDA
requirements. There can be no assurance that the Company will be able to comply
with such covenants or restrictions in the future. The Company's ability to
comply with such covenants and other 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 or the 2005 Indenture that
would permit the lenders thereto to declare all amounts outstanding thereunder
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 thereunder could be terminated.

IMPACT OF CHANGE OF CONTROL

The occurrence of certain of the 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 Notes and the Notes, and
redemption of the Exchangeable 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 of the 

                                       15
<PAGE>   16

Notes by the Company in such an event, unless and until such time as the
indebtedness under the Senior Secured Credit Facility and the 2005 Notes 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
Notes. The inability to repay the indebtedness under the Senior Secured Credit
Facility or the 2005 Notes, if accelerated, would also constitute an event of
default under the Indenture, which could have materially adverse consequences to
the Company and to the holders of the Notes. 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, the 2005 Notes or the Notes, or with respect to the
Exchangeable Preferred Stock or the Exchange Debentures, as the case may be.


                                       16
<PAGE>   17


ITEM 2.  PROPERTIES

The Company operates six state-of-the-art, strategically located manufacturing
facilities in Asheville, North Carolina; Three Rivers, Michigan; Longwood,
Florida; Dundee, Scotland; Ahaus, Germany and Chrastava, Czech Republic. 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. In the
fourth quarter of 1998, the Company ceased manufacturing at its Lerma, Mexico
facility. This facility will continue to serve the Mexico market as a
warehouse/sales office. All of the Company's manufacturing facilities are ISO
9002 certified, except for the Rotec facilities. 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:


<TABLE>
<CAPTION>

                                                                          OWNED/
           LOCATION                                 SIZE (SQ. FT.)        LEASED
           --------                                 --------------        ------

<S>                                                      <C>              <C>    
Manufacturing:
   Asheville, NC                                           240,600          Owned
   Dundee, Scotland                                        101,000          Owned
   Longwood, FL                                             43,600          Owned
   Three Rivers, MI                                         58,000          Owned
   Ahaus, Germany                                           42,000          Owned
   Chrastava, Czech Republic                                26,900          Owned
Warehouse/Sales Office:
   Dayton, OH                                               10,500         Leased
   Elk Grove, IL                                             5,000         Leased
   Greenville, SC                                           10,000          Owned
   Lerma, Mexico                                            45,000          Owned
   Hong Kong, China                                          3,100         Leased
   Milan, Italy (Erba)                                         600         Leased
   Moscow, Russia                                            1,000         Leased
   Nashville, TN                                             5,000         Leased
   Paris, France                                            12,800         Leased
   Reutligen, Germany                                        4,000         Leased
   Stockport, England                                        5,200          Owned

</TABLE>

                                       17
<PAGE>   18



ITEM 3.  LEGAL PROCEEDINGS

From time to time, the Company is involved in various legal proceedings arising
in the ordinary course of business. None of the matters in which the Company is
currently involved, either individually or in the aggregate, is expected to have
a material adverse effect on the Company's business or financial condition.

CPG and the Company are parties to consent decrees with respect to certain
environmental matters. Hanna and CPG have agreed to retain, be responsible for
and indemnify the Company with respect to these matters.
See "Item 1--Business--Environmental Matters."

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of 1998.

                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS

As of March 29, 1999, 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 which 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.  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, 1998. The summary
financial data set forth below with respect to the years ended December 31, 1998
are derived from the Consolidated Financial Statements included elsewhere in
this report, which have been audited by Arthur Andersen LLP, independent
auditors. The summary financial data set forth below with respect to the years
ended December 31, 1997 and 1996, the period from June 7, 1995 through December
31, 1995 and the period from January 1, 1995 through June 6, 1995 are derived
from the Consolidated Financial Statements included elsewhere in this report,
which have been audited by Deloitte & Touche LLP, independent auditors. The
summary financial data with respect to the year ended December 31, 1994 are
derived from the Company's consolidated financial statements for such year. The
financial data for the year ended December 31, 1994 and the 157 days ended June
6, 1995 represent the results of operations of the Company prior to the
acquisition of the Company by American Industrial Partners (the AIP
Acquisition"), and the financial data for the 208 days ended December 31, 1995
and the years ended December 31, 1996 and 1997 represents the results of
operations of the Company subsequent to the AIP Acquisition.


                                       18
<PAGE>   19



The summary financial data below should be read in conjunction with "Item
7--Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8--Financial Statements and Supplementary Data" included
elsewhere in this report.
<TABLE>
<CAPTION>

                                      (PREDECESSOR)                                (COMPANY)         
                                   ---------------------    -----------------------------------------------------------
                                                157 DAYS      208 DAYS
                                   FISCAL         ENDED         ENDED        FISCAL             FISCAL           FISCAL
                                    YEAR         JUNE 6,    DECEMBER 31,      YEAR               YEAR             YEAR
                                    1994          1995          1995          1996              1997(b)           1998
                                    ----          ----          ----          ----              -------           ----
                                                              (DOLLARS IN THOUSANDS)

STATEMENT OF OPERATIONS DATA:
<S>                               <C>           <C>           <C>           <C>                <C>              <C>     
Net sales                          $120,288      $ 55,454      $ 73,103      $136,814           $166,286         $173,066
Cost of goods sold                   70,996        33,935        47,503        84,602            103,035          110,155
                                  ---------      --------      --------      --------           --------          -------
Gross profit                         49,292        21,519        25,600        52,212             63,251           62,911
Selling, general and
  administrative expenses            22,741        11,257        12,885        23,657             28,629           29,116
Compensation and related
  transaction costs                                                                                                18,018
Amortization of  intangibles          5,212         2,258         3,688         6,474              3,315            2,565
Management fees                          --            --           455           920                896            1,043
                                  ---------      --------      --------      --------           --------          -------
Operating income                     21,339         8,004         8,572        21,161             30,411           12,169
Interest expense                         --            --         9,697        16,373             15,926           27,470
Other (income) expense                 (453)         (577)          952(c)       (219)               629              306
                                  ---------      --------      --------      --------           --------         --------
Income (loss) before income
  taxes and extraordinary items      21,792         8,581        (2,077)        5,007             13,856          (15,607)
Provision (benefit) for
  income taxes                        9,205         3,488          (850)        2,000              5,939           (2,732)
                                  ---------      --------      --------      --------           --------        ----------
Income (loss) before
  extraordinary items                12,587         5,093        (1,227)        3,007              7,917          (12,875)
Extraordinary losses on early
  extinguishment of debt                  -             -             -             -                  -            3,552
                                  ---------      --------      --------      --------           --------         --------
Net income (loss)                  $ 12,587      $  5,093      $ (1,227)     $  3,007           $  7,917         $(16,427)
                                  =========      ========      ========      ========           ========         =========
OTHER FINANCIAL DATA:
Capital expenditures                  3,564         1,565         2,082         5,221              5,124            7,103
Depreciation                          4,725         2,120         2,415         4,384              5,238            5,759
Amortization                          5,212         2,258         8,310        10,724              7,827            7,729
BALANCE SHEET DATA (AT
  END OF PERIOD):
Fixed assets, net of
  accumulated depreciation
  and amortization                 $ 25,162      $ 24,667      $ 44,496      $ 45,289(d)        $ 44,792         $ 50,305(a)
Total assets                        144,252       139,537       228,823       237,886(d)         225,527          257,408(a)
Long-term and subordinated
 long- term debt (including
  current maturities)                    --            --       151,250       152,919            130,883          257,515
Stockholders' equity (deficit)      117,128       114,780        49,861        52,734(c)          60,189          (80,283)

</TABLE>

(a)      The Company acquired the stock of Rotec Hulsensysteme GmbH as of
         December 31, 1998. This acquisition was accounted for as a purchase.
         Balance sheet data for 1998 includes the assets and liabilities of
         Rotec Hulsensysteme GmbH as of December 31, 1998.

(b)      The Company acquired the David M Company on December 31, 1996. This
         acquisition was accounted for as a purchase and financial data for the
         1997 fiscal year include the assets and results of operations of the
         David M Company.

(c)      Includes a bridge commitment fee, which resulted in a non-recurring
         expense of $1.0 million for the 208 days ended December 31, 1995.

(d)      Balance sheet data for 1996 includes the assets of the David M Company
         since it was acquired on December 31, 1996.

                                       19
<PAGE>   20


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.

As a result of the Acquisition, the Company entered into new financing
arrangements, including the Senior Secured Credit Facility, the 9 1/2% Senior
Subordinated Notes and the 12 1/4% Exchangeable Preferred Stock. As a result of
these transactions, the Company is highly leveraged. The Company's aggregate
indebtedness is approximately $257.5 million and the liquidation preference of
the 12 1/4% Exchangeable Preferred Stock is $38.5 million (which, subject to
certain conditions, may be exchanged for the Exchange Debentures). Accordingly,
the results of operations for periods subsequent to the Acquisition Closing Date
may not be comparable to prior periods.

BASIS OF PRESENTATION

The following table sets forth, for the periods shown, net sales, cost of goods
sold, gross profit, selling, general and administrative expense ("SG&A"),
amortization of intangibles and operating income in millions of dollars and as a
percentage of net sales.
<TABLE>
<CAPTION>

                                                        YEAR ENDED               YEAR ENDED               YEAR ENDED
                                                     DECEMBER 31, 1996        DECEMBER 31, 1997        DECEMBER 31, 1998
                                                     -----------------        -----------------        -----------------

<S>                                                   <C>         <C>         <C>         <C>         <C>         <C>   
Net sales                                             $136.8      100.0%      $166.3      100.0%      $173.1      100.0%
Cost of goods sold                                      84.6       61.8        103.0      62.0         110.2       63.7
                                                      ------      -----       ------     -----        ------      -----
Gross profit                                            52.2       38.2         63.3      38.0          62.9       36.3
SG&A                                                    23.7       17.3         28.6      17.2          29.1       16.8
Compensation and related transaction costs                                                              18.0       10.4
Amortization of intangibles                              6.5        4.7          3.3       2.0           2.6        1.5
Management fees                                          0.9        0.7          0.9       0.5           1.0        0.6
                                                      ------      -----       ------     -----        ------      -----
Operating income                                      $ 21.2       15.5%      $ 30.4      18.3%       $ 12.2        7.0%
                                                      ======      =====       ======     =====        ======      ======
</TABLE>


COMPARISON OF RESULTS OF OPERATIONS

TWELVE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1997

Net sales increased to $173.1 million for the year ended December 31, 1998 from
$166.3 million for the comparable period in 1997, an increase of $6.8 million or
4.1%. Sales in 1998 were negatively impacted by $0.9 million as a result of
foreign currency translation rate changes. Image Transfer's sales increased to
$139.7 million for the year ended December 31, 1998 from $132.0 million for the
comparable period in 1997, an increase of $7.7 million or 5.8%. Image Transfer's
sales were negatively impacted by $0.9 million as a result of the impact of
foreign currency translation rate changes. Image Transfer's sales increased as a
result of increased demand for the Company's existing products in the United
States, most export markets and Europe, offset by lower sales to the Pacific Rim
and Mexico. Also, tubular sleeve sales have continued to increase as additional
presses that utilize this technology are installed. 



                                       20
<PAGE>   21

Textiles' sales decreased to $33.4 million for the year ended December 31, 1998
compared to $34.3 million in 1997, a decrease of $0.9 million or 2.6%. Domestic
sales were consistent with 1997 while sales to export markets and in Europe
declined. Foreign currency translation changes had virtually no impact on
Textile sales in 1998.

Gross profit decreased to $62.9 million for the year ended December 31, 1998
from $63.3 million in 1997, a decrease of $0.4 million or 0.6%. As a percentage
of net sales, gross profit decreased to 36.3% for the year ended December 31,
1998 from 38.0% for the comparable period in 1997. Gross profit was positively
impacted by productivity enhancements and higher sales volumes. Higher sales
volumes accounted for a $2.5 million increase in gross profit, offset by higher
material usage and manufacturing costs of $2.3 million. The higher material
usage and manufacturing costs were primarily a result of changes in product mix
and end market mix combined with lower production yields from the Longwood,
Florida facility. Foreign currency translation rate changes reduced gross profit
by $0.3 million. Gross profit in 1998 was also impacted by $0.3 million of costs
associated with ceasing manufacturing activities at the Lerma, Mexico facility.

SG&A increased to $29.1 million for the year ended December 31, 1998 compared
with $28.6 million for 1997, an increase of $0.5 million or 1.7%. As a
percentage of net sales, SG&A decreased to 16.8% from 17.2%. Changes in foreign
currency translation rates reduced SG&A costs by $0.1 million in 1998.

Compensation and related transaction costs include $8.6 million related to
changes in the Company's stock option plan, $8.4 million related to amounts
payable under certain management employment arrangements and $1.0 million of
expenses associated with obtaining the Consent. All of these items arose out of
the Acquisition and related transactions.

Amortization of intangibles decreased to $2.6 million for the year ended
December 31, 1998 from $3.3 million in 1997, a decrease of $0.7 million as a
result of certain employment agreements becoming fully amortized in the first
quarter of 1997.

Operating income, excluding the compensation and related transaction costs,
decreased slightly to $30.2 million for the year ended December 31, 1998 from
$30.4 million for the comparable period in 1997, a decrease of $0.2 million or
0.7%. As a percentage of net sales, operating income (excluding the compensation
and related transaction costs) decreased to 17.4% for the year ended December
31, 1998 from 18.3% for the comparable period in 1997. Image Transfer's
operating income increased to $35.4 million in 1998 from $35.1 million in 1997
as a result of higher sales offset by higher material usage and manufacturing 
costs resulting from changes in product mix and end market mix combined with 
lower production yields from the Longwood, Florida facility. Textile's 
operating income decreased to $3.3 million in 1998 from $4.0 million in 1997. 
Lower sales volumes and the strong British pound compared to the German mark 
were the main contributors to this decrease.

The effective tax rate, including the effect of the extraordinary item, was a
benefit of 23.7% compared to an expense of 42.9% in 1997. The lower income tax
benefit percentage in 1998 compared to the income tax expense percentage in 1997
is mainly the result of certain non deductible expenses associated with the
acquisition in 1998.

                                       21
<PAGE>   22

TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1996

Net sales increased to $166.3 million for the year ended December 31, 1997 from
$136.8 million for the comparable period in 1996, an increase of $29.5 million
or 21.6%. Sales in 1997 were negatively impacted by $2.5 million as a result of
foreign currency translation rate changes. Image Transfer's sales increased to
$132.0 million for the year ended December 31, 1997 from $103.6 million for the
comparable period in 1996, an increase of $28.4 million or 27.4%. Image
Transfer's sales were negatively impacted by $2.3 million as a result of the
impact of foreign currency translation rate changes. Image Transfer sales
generated by the David M Company, which was acquired by the Company on December
31, 1996, amounted to $18.6 million, or 14.1% of 1997 sales of Image Transfer.
Excluding sales of the David M Company, Image Transfer's sales increased $9.8
million or 9.5% in 1997. The increased sales volumes resulted from increased
sales of tubular sleeves and increased demand for the Company's existing
products in Europe, the United States and Mexico, offset by lower sales to the
Pacific Rim and Latin America. Textiles' sales increased to $34.3 million for
the year ended December 31, 1997 compared to $33.2 million in 1996, an increase
of $1.1 million or 3.3%. Textile sales were negatively impacted by $0.2 million
as a result of the impact of foreign currency translation changes.

Gross profit increased to $63.3 million for the year ended December 31, 1997
from $52.2 million in 1996, an increase of $11.1 million or 21.3%. The
acquisition of David M accounted for $5.5 million of the 1997 gross profits. As
a percentage of net sales, gross profit decreased slightly to 38.0% for the year
ended December 31, 1997 from 38.2% for the comparable period in 1996. This
slight decline was due to the lower gross margin of David M compared with that
of the rest of the Company's operations; excluding the David M Company, gross
profit as a percentage of sales increased to 39.1% in 1997. This gross profit
improvement was primarily the result of increased volume and productivity
enhancements gained through process improvements. Foreign currency translation
rate changes reduced gross profit by $0.4 million.

SG&A increased to $28.6 million for the year ended December 31, 1997 compared
with $23.7 million for 1996, an increase of $4.9 million or 20.7%. David M
accounted for $3.2 million. As a percentage of net sales, SG&A decreased to
17.2% from 17.3% mainly as a result of European SG&A expenses remaining
relatively constant while sales increased 17.3%. Changes in foreign currency
translation rates reduced SG&A costs by $0.6 million in 1997.

Amortization of intangibles decreased to $3.3 million for the year ended
December 31, 1997 from $6.5 million in 1996, a decrease of $3.2 million as a
result of certain employment agreements becoming fully amortized in 1997.

Operating income increased to $30.4 million for the year ended December 31, 1997
from $21.2 million for the comparable period in 1996, an increase of $9.3
million or 43.9%. David M contributed $2.3 million to the 1997 operating income,
while $3.2 million of 1997 operating income relates to the reduction in the
amortization of intangibles. The remaining $3.8 million increase results from
increased sales volumes and productivity enhancements. As a percentage of net
sales, operating income increased to 18.3% for the year ended December 31, 1997
from 15.5% for the comparable period in 1996. Image Transfer's operating income
increased to $35.1 million in 1997 from $28.9 million in 1996. David M 


                                       22
<PAGE>   23

accounted for $2.3 million of this increase. The remaining $3.9 million increase
resulted from increased sales volumes and productivity enhancements. Textile's
operating income remained constant at $4.0 million. Higher sales were offset by
increased manufacturing costs resulting in virtually no change in operating
profit.

TWELVE MONTHS ENDED DECEMBER 31, 1996 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1995

Net sales increased to $136.8 million for the year ended December 31, 1996 from
$128.5 million for the comparable period in 1995, an increase of $8.3 million or
6.5%. The Company's net sales were adversely impacted by changes in foreign
currency translation rates, which amounted to $1.2 million. Image Transfer's
sales increased to $103.6 million for the year ended December 31, 1996 from
$95.2 million for the comparable period in 1995, an increase of $8.4 million or
8.8%, as a result of increased sales from new products, such as the
NewsMaker(TM) series for the newspaper market, higher sales of tubular sleeves
and increased demand for the Company's existing products in the United States,
Latin America and the Pacific Rim, and a modest price increase. Foreign currency
translation rate changes adversely impacted Image Transfer sales by $1.0
million. Textiles' sales remained relatively constant at $33.2 million for the
year ended December 31, 1996 compared to $33.3 million in 1995. Changes in
foreign currency translation rates reduced Textiles' sales by $0.2 million.
Domestic sales increases offset reduced European sales with export sales to
Latin America and the Pacific Rim remaining relatively constant.

Gross profit increased to $52.2 million for the year ended December 31, 1996
from $47.1 million in 1995, an increase of $5.1 million or 10.8%. As a
percentage of net sales, gross profit increased to 38.2% for the year ended
December 31, 1996 from 36.7% for the comparable period in 1995. Gross profit in
1996 increased by $3.3 million or 6.7% as a result of increased volume and
productivity enhancements through process improvements and a modest price
increase, offset by changes in foreign currency translation rates, higher costs
of material and labor and a shift in sales to markets with typically lower
margins. Also, gross profit in 1995 was adversely impacted by $2.3 million for
sales of finished goods inventory which were purchased at market values as a
result of the AIP Acquisition.

SG&A decreased slightly to $23.7 million for the year ended December 31, 1996
compared with $24.0 million for 1995. Stand alone costs related to the
acquisition were $0.5 million higher in 1996 and changes in currency translation
rates reduced SG&A costs by $0.2 million in 1996. As a percentage of net sales,
SG&A decreased to 17.3% from 18.7%.

Amortization of intangibles increased to $6.5 million for the year ended
December 31, 1996 from $6.0 million in 1995, an increase of $0.5 million as a
result of purchase accounting from the AIP Acquisition.

Operating income increased to $21.2 million for the year ended December 31, 1996
from $16.6 million for the comparable period in 1995, an increase of $4.6
million or 27.7%, of which $2.3 million relates to the higher costs of goods
sold in 1995 resulting from the sale of finished goods inventory that were
purchased at market values as a result of the AIP Acquisition. The remaining
$2.3 million increase in operating income results from increased sales volumes
and productivity enhancements offset by additional amortization and depreciation
and stand alone costs primarily as a result of the AIP 


                                       23
<PAGE>   24

Acquisition. As a percentage of net sales, operating income increased to 15.5%
for the year ended December 31, 1996 from 12.9% for the comparable period in
1995.

RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS

The Company conducts a significant amount of business and has operating and
sales facilities in countries outside the United States. As a result, the
Company is subject to business risks inherent in non-U.S. activities, including
political uncertainty, import and export limitations, exchange controls and
currency fluctuations. The Company believes risks related to its foreign
operations are mitigated due to the political and economic stability of the
countries in which its largest foreign operations are located, the stand-alone
nature of the operations, the Company's limited net asset exposure, forward
foreign exchange contract practices and pricing flexibility. Thus, while changes
in foreign currency values do affect earnings, the longer term economic effect
of these changes should not have a material adverse effect on the Company's
financial condition, results of operations or liquidity. 

Certain of the Company's international subsidiaries make purchases in foreign
currencies, mainly intercompany transactions. As a result, they are subject to
transaction exposures that arise from foreign exchange movements between the
date that the foreign currency transaction is recorded and the date it is
consummated. The Company has entered into forward foreign exchange contracts to
protect it against such foreign exchange movements. The contract value of these
foreign exchange contracts was approximately $1.2 million at December 31, 1998,
$2.3 million at December 31, 1997 and approximately $1.8 million at December 31,
1996. These contracts generally expire within three to twelve months. Foreign
currency gains and losses, included in other income-net, were a $0.5 million 
loss in 1998, $0.3 million loss in 1997, and a $0.1 million loss in 1996.
In 1999, the hypothetical loss in earnings of a 10% adverse change in foreign 
currency exchange rates is estimated to be approximately $0.8 million. The 
foreign exchange contracts would mitigate some of this hypothetical loss.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically generated funds from its operations and its working
capital requirements have not exhibited seasonal fluctuations. Utilizing
converters to distribute the majority of its products, the Company is able to
maintain relatively minimal levels of working capital as the converters carry
large amounts of inventory and finance receivables.

Cash Flows From Operating Activities. Cash flows from operations for years ended
December 31, 1998, 1997 and 1996 were $9.4 million, $19.7 million and $18.1
million, respectively. Cash flows from operations in 1998 were adversely
impacted by $9.5 million of compensation and related transaction costs
associated with the Acquisition and $7.1 million of additional interest paid on
the additional debt incurred as a result of the Acquisition. Working capital
provided $4.0 million in cash in 1998 mainly as a result of a reduction in
accounts receivable levels. Cash flows from operations in 1997 were unfavorably
impacted by a $5.1 million increase in working capital. The increase in working
capital in 1997 is mainly a result of the increased sales volumes, especially in
Europe, as working capital as a percent of sales has remained relatively
constant. Cash flows from operations for 1996 were unfavorably impacted by a
$0.2 million working capital increase and $7.5 million of additional cash paid
for interest.

                                       24
<PAGE>   25

Cash Flows From Investing Activities. The Company's expenditures for plant,
property and equipment were $7.1 million in 1998, $5.1 million in 1997 and $5.2
million in 1996. The Company believes that capital expenditures of $7.0 million
to $9.0 million over the next several years are sufficient to maintain its
leading market position. The Company expects to fund these capital expenditures
from cash flow from operations. Effective December 31, 1998 the Company acquired
the stock of Rotec Hulsensysteme GmbH which was funded by an increase in the
Senior Secured Credit Facility and additional capital from the Company's
majority shareholders. On December 31, 1996, the Company acquired certain
assets of the David M Company for $11.3 million in cash which was funded
through the Company's then existing Senior Credit Facilities. In 1997, the
Company received a purchase price adjustment of $1.5 million in cash related to
certain changes in David M's working capital as of the closing date of that
transaction.

Cash Flows From Financing Activities. In January 1998, the Company entered into
a $60 million Senior Secured Credit Facility concurrent with the Acquisition.
The facility originally consisted of a $40 million Term Loan and a $20 million
Revolving Credit Facility. In December 1998, in conjunction with the acquisition
of Rotec, the Term Loan was increased by an additional $10.0 million. The Term
Loans are repayable as follows: $1.3 million in 1999; $8.9 million in 2000;
$12.2 million in 2001 and $20.5 million in 2002. Prepayments on the Term Loan
are applied first to the next two quarterly installments and then spread equally
to the remaining quarterly installments. During the year ended December 31,
1998, the Company made $7.9 million in payments on the Term Loan and had $0.8
million outstanding on the revolver at December 31, 1998. The Senior Secured
Credit Facility is secured by the assets of the Company and its domestic
subsidiaries (currently, only Day), as well as 65% of the stock of each foreign
subsidiary. The amounts available under the Revolving Credit Facility are
subject to a borrowing base limitation (defined generally as $5 million plus 50%
of eligible domestic inventory and 80% of eligible domestic accounts
receivable). The original proceeds from the Term Loan were used to repay the 
Company's then existing US Credit Facility and to pay certain expenses 
associated with the Acquisition. As of December 31, 1998, the Company had 
approximately $14.5 million available under the Revolving Credit Facility 
(calculated by applying the applicable borrowing base limitation).

Also, during the year ended December 31, 1998, the Company paid the holders of
the existing 2005 Notes a $6.5 million Consent Fee so as to permit the Company
to issue $115.0 million of 9 1/2% Senior Subordinated Notes and $35.0 million of
12 1/4% Exchangeable Preferred Stock. The Consent also allowed the Company to
assume the $140.0 million Bridge Loan of its new majority shareholder and to
make certain other changes to the Indenture governing the 2005 Notes. The
proceeds from the issuance of the $115.0 million of 9 1/2% Senior Subordinated
Notes and $35.0 million of 12 1/4% Exchangeable Preferred Stock were used to
repay the Bridge Loan and to pay other financing fees and expenses. The Company
also received a capital contribution of $9.1 million from its majority
shareholders in the year ended December 31, 1998 which was used to pay certain
financing fees and expenses. The Company also sold additional shares of common
stock to its majority shareholders for $9.5 million to provide additional
funding for the purchase of Rotec.

As a result of the additional debt incurred by the Company in conjunction with
the Acquisition, the Company is highly leveraged. The Company's aggregate
indebtedness is approximately $257.5 


                                       25
<PAGE>   26

million and the aggregate liquidation preference of the Exchangeable Preferred
Stock is $38.5 million. In comparison, the Company's outstanding indebtedness at
December 31, 1997 was $130.9 million.

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 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 the Notes and dividends
on the Exchangeable Preferred Stock and to satisfy its other debt obligations,
including its debt obligations under the 2005 Notes and 2008 Notes, 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, including the Senior
Secured Credit Facility, the 2005 Notes and the 2008 Notes, for the payment of
periodic cash dividends on the Exchangeable Preferred Stock, for any redemption
of the Exchangeable 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.

Year 2000. The Year 2000 issue relates to the inability of information systems
to recognize and process date-sensitive information beyond January 1, 2000.

The Company recognizes the importance of the Year 2000 issue and is continuing
to make progress in its efforts to identify and rectify all potential Year 2000
problems related to its Information Technology ("IT") systems, manufacturing
equipment, vendors and customers.

A Year 2000 committee has been established consisting of senior members of
management along with members of the IT and the facilities' engineering
departments. The committee's objective is to ensure that the Company will be
able to continue to service its customers, both internal and external, after
January 1, 2000. The scope of the Year 2000 project includes (i) information
technology, both hardware and software; (ii) non-IT systems or embedded
technology such as micro controllers contained in various manufacturing and lab
equipment, environmental and safety systems, facilities 


                                       26
<PAGE>   27

and utilities; and (iii) readiness of key third parties, including suppliers and
customers and electronic data interchange, where applicable, with those key
third parties. If the necessary modifications and conversions are not made on a
timely basis, the Year 2000 issue could have a material impact on the Company's
operations.

The Company is using internal resources, and where necessary, external resources
to perform most of the testing and remediation functions. Upgrades to the
Company's business system have commenced and are anticipated to be completed and
tested by the end of the second quarter of 1999. A complete inventory of all
equipment (manufacturing and otherwise) has been completed and communication
with the manufacturers of the equipment has commenced to determine whether the
equipment is Year 2000 compliant. Letters have been sent to all significant
vendors and customers requesting them to confirm the status of their Year 2000
projects.

The Company's historical and estimated costs of remediation of all potential
Year 2000 problems have not been and are not anticipated to be material to the
Company's results of operations or financial position, and will be funded
through operating cash flows. Total costs associated with the remediation of the
Year 2000 issues (including systems, software, and non-IT systems replaced as a
result of Year 2000 issues) are currently estimated to be less than $1 million.
The largest cost factor to date has been the expenditure of management and
associates time in attention to Year 2000 and related issues. Estimated
remediation costs are based on management's best estimates. There can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those anticipated, particularly if unanticipated Year 2000
issues arise.

While the Company expects to make the necessary modifications or changes to both
its internal IT and non-IT systems and existing product base in a timely
fashion, there can be no assurance that the Company's internal systems will not
be materially adversely affected by the advent of Year 2000.

In the event of a failure as a result of Year 2000 issues, the Company could
lose or have trouble accessing accurate internal data, resulting in incomplete
or inaccurate accounting of Company financial results, the Company's
manufacturing operating systems could be impaired, and the Company could be
required to expend significant resources to address such failures. In an effort
intended to minimize potential disruption to its internal systems, the Company
intends to perform additional hard-disk back-up of its rudimentary systems and
critical information in advance of the Year 2000.

Similarly, in the event of a failure as a result of Year 2000 issues in any
systems of third parties with whom the Company interacts, the Company could lose
or have trouble accessing or receive inaccurate third party data, experience
internal and external communications difficulties or have difficulty obtaining
components that are Year 2000 compliant from its vendors. The Company could also
experience a slowdown or reduction of sales if customers are adversely affected
by Year 2000 issues.

Euro. The Company began accepting orders in the Euro and making payments in the
Euro effective January 1, 1999. Business systems upgrades that allow for
transactions in the Euro are installed at the Company's European facilities.
Customers and suppliers have been contacted indicating the Company's ability to
transact business in the Euro on January 1, 1999 and price lists have been


                                       27
<PAGE>   28

modified accordingly. The Company does not anticipate any material impact to its
revenues, expenses or results of operations as a result of the adoption of the
Euro.

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 1996, 1997 and 1998 it spent approximately $0.2
million, $0.6 million and $1.5 million, respectively, in capital expenditures
for solvent recovery, wastewater treatment, air monitoring and related projects
to comply with environmental requirements.

New rules to be promulgated under the 1990 amendments to the Federal Clean Air
Act governing emissions of hazardous air pollutants may require implementation
of additional air emission control measures at the Company's U.S. facilities.
Because the applicable requirements are not scheduled to be promulgated until
2000, it is difficult to estimate the costs of any additional controls that
might be required with any certainty. The Company currently believes that the
total capital expenditures to install additional control equipment at these
facilities are not likely to exceed $2.5 million. Although such requirements are
not required to be promulgated before 2000, the Company began installing the
necessary equipment in 1998 to mitigate future spending requirements resulting
from the Clean Air Act.

Solvent air emissions from the Dundee, Scotland facility have periodically
exceeded the regulatory limit for such emissions, and in 1997, the Company began
to initiate a plan for air controls and to install a solvent recovery system in
order to control the solvent emissions and comply with the regulatory limit. The
Company believes that capital expenditures for such equipment will total
approximately $1.5 million and will be completed in 1999.

Capital expenditures in 1998 relating to environmental matters were
approximately $1.5 million and are anticipated to be an additional $2.0 million
in 1999, which includes expenditures related to solvent air emissions at the
Dundee facility. In incurring expenditures for compliance with environmental
requirements, the Company intends to use the best-available technology in
anticipation of the requirements of the new Clean Air Act.

Based on environmental assessments conducted by independent environmental
consultants in connection with the Acquisition and with the acquisition of
Rotec, 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.




                                       28
<PAGE>   29



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>

                                                                                            PAGE
                                                                                            ----
<S>                                                                                      <C>  
DAY INTERNATIONAL GROUP, INC.
Reports of Independent Auditors'....................................................     30 - 31
     Consolidated Balance Sheets as of December 31, 1998 and 1997...................     32 - 33
     Consolidated Statement of Operations for the years ended
         December 31, 1998, 1997 and 1996...........................................          34
     Consolidated Statements of Comprehensive Income  (Loss)
         for the years ended December 31, 1998, 1997 and 1996.......................          35
     Consolidated Statements of Stockholders' Equity (Deficit)
         for the years ended December 31, 1998, 1997 and 1996.......................          36
     Consolidated Statements of Cash Flows for the years ended
         December 31, 1998, 1997 and 1996...........................................     37 - 38
     Notes to Consolidated Financial Statements.....................................     39 - 64

</TABLE>













                                       29
<PAGE>   30













 INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders
Day International Group, Inc.:

We have audited the accompanying consolidated balance sheet of Day International
Group, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998,
and the related consolidated statements of operations, comprehensive income
(loss), stockholders' equity (deficit) and cash flows for the year then ended.
These consolidated financial statements and the schedule referred to below are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
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 provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Day International Group, Inc.
and subsidiaries as of December 31, 1998, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.

Our audit was made for the purpose of forming an opinion on the consolidated
financial statements taken as a whole. The schedule listed in the index to the
financial statements is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not a part of the consolidated financial
statements. The supplemental schedule has been subjected to the auditing
procedures applied in our audit of the consolidated financial statements and, in
our opinion, is fairly stated in all material respects in relation to the
consolidated financial statements taken as a whole.



ARTHUR ANDERSEN LLP

Dayton, Ohio
March 15, 1999







                                       30
<PAGE>   31









INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders
Day International Group, Inc.

We have audited the accompanying consolidated balance sheet of Day International
Group, Inc. (the "Company") and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, comprehensive income (loss),
stockholders' equity (deficit) and cash flows for the years ended December 31,
1997 and 1996. Our audits also included the financial statement schedule listed
in the Index at Item 14(a)2 for the years ended December 31, 1997 and 1996.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Day International Group, Inc. and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the years ended December 31, 1997 and 1996, in conformity
with generally accepted accounting principles. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.



DELOITTE & TOUCHE LLP

Dayton, Ohio
February 17, 1998
(March 25, 1999 as to Notes G, J and K and as to the Consolidated Statements of
  Comprehensive Income (Loss) as to amounts as of December 31, 1997 and for the
  years ended December 31, 1997 and 1996)


                                       31
<PAGE>   32





                 DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1998 AND 1997
           (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>


                                                                                              1998                 1997
                                                                                              ----                 ----
<S>                                                                                       <C>                   <C>     

ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                                               $    4,762            $    780
  Accounts receivable:
    Trade (less allowance for doubtful accounts of
      $1,384 and $1,055)                                                                      18,390              21,593
    Other                                                                                        240                 379
  Inventories (Note C)                                                                        19,179              16,501
  Prepaid expenses and other current assets                                                    1,267               1,457
  Deferred tax assets (Note F)                                                                 2,543               1,938
                                                                                            --------            --------

         Total current assets                                                                 46,381              42,648

PROPERTY, PLANT AND EQUIPMENT (Notes A and B):
  Land                                                                                         2,125               2,023
  Buildings                                                                                   12,077              10,648
  Machinery and equipment                                                                     46,277              39,999
  Construction in progress                                                                     6,493               3,716
                                                                                            --------            --------
                                                                                              66,972              56,386
  Less accumulated depreciation                                                              (16,667)            (11,594)
                                                                                            --------           ---------
                                                                                              50,305              44,792

OTHER ASSETS:
  Goodwill and other intangible assets (Note B)                                              157,799             136,722
  Note receivable (Note L)                                                                       698                 890
  Deferred tax assets (Note F)                                                                 1,523
  Other assets                                                                                   702                 475
                                                                                            --------            --------
                                                                                             160,722             138,087
                                                                                            --------            --------
TOTAL ASSETS                                                                                $257,408            $225,527
                                                                                            ========            ========
</TABLE>



                 See notes to consolidated financial statements.



                                       32
<PAGE>   33
<TABLE>
<CAPTION>




                                                                                                    1998                     1997
                                                                                                    ----                     ----
<S>                                                                                              <C>                      <C>      
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
  Accounts payable                                                                               $   5,905                $   7,743
  Accrued associate-related costs                                                                    8,547                    8,177
  Other accrued expenses                                                                             4,682                    3,694
  Income taxes payable                                                                               2,913                    1,618
  Interest payable                                                                                   4,336                    1,013
  Current maturities of long-term debt (Note D)                                                      1,292                      774
                                                                                                 ---------                ---------

         Total current liabilities                                                                  27,675                   23,019

LONG-TERM AND SUBORDINATED LONG-TERM DEBT (Note D)                                                 256,223                  130,109
DEFERRED TAX LIABILITIES (Note F)                                                                    1,353                    5,688
OTHER LONG-TERM LIABILITIES (Notes K and L)                                                         15,813                    6,522
COMMITMENTS AND CONTINGENCIES (Note L)

         Total liabilities                                                                         301,064                  165,338

Exchangeable Preferred Stock (Note E)                                                               36,627

STOCKHOLDERS' EQUITY (DEFICIT)  (Note I):
  Preferred Shares $.01 per share par value, 10,000
    shares authorized, none outstanding
  Common Shares, $.01 per share par value, 100,000
    shares authorized, 23,298 shares--1998 and
    51,655 shares--1997 issued and outstanding                                                           1                        1
  Additional paid-in-capital                                                                                                 51,959
  Contra-equity associated with the assumption of
    majority shareholder's bridge loan                                                             (68,772)
  Retained earnings (deficit)                                                                      (10,370)                   9,697
  Foreign currency translation adjustment                                                           (1,142)                  (1,468)
                                                                                                 ---------                ---------

         Total stockholders' equity (deficit)                                                      (80,283)                  60,189
                                                                                                 ---------                ---------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                                             $ 257,408                $ 225,527
                                                                                                 =========                =========
</TABLE>



                                       33
<PAGE>   34


                 DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>

                                                                                      1998                1997                 1996
                                                                                      ----                ----                 ----

<S>                                                                              <C>                  <C>                 <C>      
NET SALES                                                                        $ 173,066            $ 166,286           $ 136,814

COST OF GOODS SOLD                                                                 110,155              103,035              84,602
                                                                                 ---------            ---------           ---------


GROSS PROFIT                                                                        62,911               63,251              52,212

SELLING, GENERAL AND ADMINISTRATIVE                                                 29,116               28,629              23,657
COMPENSATION AND RELATED
   TRANSACTION COSTS (Note A)                                                       18,018
AMORTIZATION OF INTANGIBLES                                                          2,565                3,315               6,474
MANAGEMENT FEES (Note H)                                                             1,043                  896                 920
                                                                                 ---------            ---------           ---------


OPERATING PROFIT                                                                    12,169               30,411              21,161

OTHER EXPENSES (Note D):
  Interest Expense (including amortization
    of deferred financing costs of $2,024 in 1998,
    $966 in 1997 and $1,000 in 1996                                                 27,470               15,926              16,373
  Other expense (income)--net                                                          306                  629                (219)
                                                                                 ---------            ---------           ---------

                                                                                    27,776               16,555              16,154
                                                                                 ---------            ---------           ---------

(LOSS) INCOME BEFORE INCOME TAXES
   AND EXTRAORDINARY ITEMS                                                         (15,607)              13,856               5,007

(BENEFIT) INCOME TAXES (Note F)                                                     (2,732)               5,939               2,000
                                                                                 ---------            ---------           ---------


(LOSS) INCOME BEFORE EXTRAORDINARY ITEMS                                           (12,875)               7,917               3,007

EXTRAORDINARY LOSSES ON EARLY
  EXTINGUISHMENT OF DEBT (NET OF TAX
  BENEFIT OF $2,368)(Note D)                                                         3,552                 --                  --
                                                                                 ---------            ---------           ---------


NET (LOSS) INCOME                                                                  (16,427)           $   7,917           $   3,007
                                                                                                      =========           =========

PREFERRED STOCK DIVIDENDS (Note E)                                                  (3,507)

AMORTIZATION OF PREFERRED STOCK
  ISSUANCE COSTS                                                                      (133)
                                                                                 ---------

NET (LOSS) INCOME AVAILABLE
  TO COMMON SHAREHOLDERS                                                         $ (20,067)
                                                                                 =========
</TABLE>

                 See notes to consolidated financial statements.



                                       34
<PAGE>   35

                                        
                 DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                            1998                  1997                   1996
                                                            ----                  ----                   ----

<S>                                                       <C>                   <C>                   <C>     
NET (LOSS) INCOME                                         $(16,427)             $  7,917              $  3,007

FOREIGN CURRENCY TRANSLATION ADJUSTMENT                        326                  (890)                  (66)
                                                          --------              --------              --------

COMPREHENSIVE NET (LOSS) INCOME                           $(16,101)             $  7,027              $  2,941
                                                          ========              ========              ========
</TABLE>

                 See notes to consolidated financial statements.



                                       35
<PAGE>   36


                 DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                         (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                                                          FOREIGN
                                                                          ADDITIONAL                       RETAINED       CURRENCY
                                                  COMMON SHARES            PAID-IN         CONTRA          EARNINGS     TRANSLATION
                                              SHARES        AMOUNT         CAPITAL         EQUITY          (DEFICIT)     ADJUSTMENT
                                              ------        ------         -------         ------          ---------     ----------

<S>                                           <C>           <C>             <C>            <C>             <C>             <C>      
December 31, 1995                             51,600        $      1        $ 51,599       $               $ (1,227)       $   (512)

Sale of common shares                             73                              73
Purchase of common shares                       (118)                           (141)
Net income                                                                                                    3,007
Foreign currency
  translation adjustment                                                                                                        (66)
                                            --------        --------        --------       --------        --------        --------
December 31, 1996                             51,555               1          51,531                          1,780            (578)

Sale of common shares                            100                            120
Issuance of stock options                                                       308
Net income                                                                                                    7,917
Foreign currency
  translation adjustment                                                                                                       (890)
                                            --------        --------        --------       --------        --------        --------

December 31, 1997                             51,655               1          51,959                          9,697          (1,468)

Sale of common shares                          2,415               1                          9,730
Issuance of stock options                        142                             435
Net loss                                                                                                    (16,427)
Preferred stock dividends                                                                                    (3,507)
Amortization of preferred
  stock discount                                                                                               (133)
Capital contribution from
  shareholders                                                                 9,103
Assumption of bridge loan                                                    (61,498)       (78,502)
Reduction of common shares                   (30,914)             (1)              1
Foreign currency
  translation adjustment                                                                                                        326
                                            --------        --------        --------       --------        --------        --------
December 31, 1998                             23,298        $      1        $   --         $(68,772)       $(10,370)       $ (1,142)
                                            ========        ========        ========       ========        ========        ========

</TABLE>

                See notes to consolidated financial statements.



                                        36
<PAGE>   37
<TABLE>
<CAPTION>

                                           DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                            YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                                           (IN THOUSANDS)
                                                                                  1998             1997              1996
                                                                                  ----             ----              ----
<S>                                                                            <C>              <C>              <C>      
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income                                                              $ (16,427)       $   7,917        $   3,007
Adjustments to reconcile net (loss) income
  to net cash provided by operating activities:
  Extraordinary loss on early extinguishment of debt                               3,552
  Depreciation                                                                     5,759            5,238            4,384
  Amortization of goodwill and intangibles                                         7,729            7,827           10,724
  Deferred income taxes                                                           (3,772)           3,528              146
  Non-cash charge related to stock option awards                                   8,585              308
Change in assets and liabilities, net of effect of acquisitions:
  Accounts receivable                                                              5,099           (5,455)            (125)
  Inventories                                                                     (1,596)            (532)             909
  Prepaid expenses and other current assets                                          497             (521)             236
  Accounts payable and other accrued expenses                                        (13)           1,361           (1,218)
                                                                               ---------        ---------        ---------
         Net cash provided by operating activities                                 9,413           19,671           18,063
                                                                               ---------        ---------        ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisition, net of cash acquired                                  (19,383)           1,513          (11,285)
Capital expenditures                                                              (7,103)          (5,124)          (5,221)
Other                                                                                               1,107           (1,107)
                                                                               ---------        ---------        ---------

         Net cash used in investing activities                                   (26,486)          (2,504)         (17,613)
                                                                               ---------        ---------        ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of 2008 notes                                             111,134
Proceeds from issuance of exchangeable preferred stock                            32,986
Proceeds from issuance of term loans                                              50,000
Contributions from shareholders                                                    4,573
Proceeds from issuance of common stock                                             9,731              120               73
Repayment of existing credit facility                                            (30,902)
Repayment of bridge loan                                                        (140,000)
Payment of consent fee                                                            (6,500)
Payment of deferred financing fees                                                (3,119)
Net payments on credit facilities                                                 (7,100)         (21,821)
Purchase of common shares                                                                                             (141)
Net proceeds from revolving credit facility                                                                          1,241
                                                                               ---------        ---------        ---------
         Net cash provided by (used in) financing activities                      20,803          (21,701)           1,173
                                                                               ---------        ---------        ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                              252             (119)              41
                                                                               ---------        ---------        ---------

CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash  equivalents                              3,982           (4,653)           1,664
Cash and cash equivalents at beginning  of period                                    780            5,433            3,769
                                                                               ---------        ---------        ---------
Cash and cash equivalents at end of period                                     $   4,762        $     780        $   5,433
                                                                               =========        =========        =========

                                           See notes to consolidated financial statements.
</TABLE>


                                                                 37
<PAGE>   38

                 DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>

                                                                1998                   1997              1996
                                                                ----                   ----              ----
<S>                                                           <C>                  <C>                  <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES

NON CASH TRANSACTIONS:
  Assumption of bridge loan                                   $140,000
                                                              ========
  Preferred stock dividends                                   $  3,507
                                                              ========
  Amortization of preferred stock discount                    $    133
                                                              ========
  Capital contribution                                        $  4,530
                                                              ========

CASH PAID FOR:
Income Taxes                                                  $  2,335             $  1,390             $  1,620
                                                              ========             ========             ========
Interest                                                      $ 22,123             $ 15,015             $ 15,517
                                                              ========             ========             ========
</TABLE>

                See notes to consolidated financial statements.




                                                                 38
<PAGE>   39


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
                          (DOLLAR AMOUNTS IN THOUSANDS)


A.       NATURE OF OPERATIONS, BASIS OF PRESENTATION

Day International Group, Inc. and subsidiaries ("Day" or "the Company") designs
and manufactures precision engineered rubber components for the printing and
textile industries. Day's Image Transfer business designs, manufactures and
markets high-quality printing blankets and sleeves used in the offset and
flexographic printing industries. Day's Textile business 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 organization, distributors and representatives.

On December 31, 1996, the Company acquired certain net assets of the David M
division of Flint Ink Corporation for $9.8 million in cash. The acquisition was
accounted for as a purchase in accordance with Accounting Principles Board
Opinion No. 16.

On January 16, 1998, affiliates of Greenwich Street Capital Partners, Inc.
("Greenwich Street") and SG Capital Partners LLC ("SGCP") acquired substantially
all of the common stock of the Company for approximately $206 million (the
"Acquisition"), with the Company's management retaining the balance of the
common stock. In conjunction with the Acquisition, the Company entered into a
$60 million Senior Secured Credit Facility consisting of a $40 million Term Loan
and a $20 million Revolving Credit Facility (See Note D - Long-Term and
Subordinated Long Term Debt). Proceeds from the Term Loan were used to repay the
Company's then existing Credit Facility and to pay certain acquisition related
fees and expenses. As a result of such repayment of the Company's then existing
Credit Facility, $0.7 million of deferred financing fees were written off as an
extraordinary item. The Acquisition also resulted in compensation related
expenses of $17.0 million associated with employment agreements with certain key
members of management and amendments to the Company's Stock Option Plan.

On March 18, 1998, the Company successfully completed a Consent Solicitation
(the "Consent") with respect to its $100.0 million Senior Subordinated Notes
which are due in 2005 (the "2005 Notes"). The Consent permitted the Company to
issue $115.0 million of 9 1/2% Senior Subordinated Notes and $35.0 million of 12
1/4% Exchangeable Preferred Stock. The Consent also allowed the Company to
assume a $140.0 million Bridge Loan (the "Bridge Loan") incurred by its majority
shareholder in connection with the Acquisition, and effected certain other
changes to the Indenture governing the 2005 Notes, including the elimination of
the provisions of the Indenture subordinating the 2005 Notes to other
indebtedness of the Company. As consideration for the Consent, the Company paid
a Consent fee of $65 for every $1,000 of notes held. The proceeds from the
issuance of the $115.0 million of 9 1/2% Senior Subordinated Notes and $35.0
million of 12 1/4% Exchangeable Preferred Stock were used to repay the Bridge
Loan and to pay other financing fees and expenses. Expenses associated with
obtaining the Consent were approximately $1.0 million. As a result of the
repayment of the Bridge Loan, $5.2 million of deferred financing fees and
expenses were also written off as an extraordinary item. The Acquisition 


                                       39
<PAGE>   40

does not require a change in the Company's historical basis of accounting since
the Company's 2005 Notes remained outstanding following the Acquisition.

Effective December 31, 1998, the Company acquired the stock of Rotec
Hulsensysteme GmbH ("Rotec") and entered into a five-year noncompete agreement
with the selling shareholders. The acquisition was financed through a $10
million addition to the Senior Secured Credit facility's term loans and
additional equity from the Company's two major shareholders and was accounted
for as a purchase in accordance with Accounting Principles Board Opinion No.
16. Rotec's purchase price is subject to adjustment based on a closing balance
sheet audit.

B.       SIGNIFICANT ACCOUNTING PRINCIPLES

PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include the
accounts of the Company and its domestic and foreign 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.

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 are depreciated over 25 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 being amortized on the straight
line basis over 40 years. The Company assesses the recoverability of goodwill
and 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 of $15,600 at December 31, 1998 (net of accumulated
amortization of $3,573) are being amortized using an effective interest rate
method over the lives of the related debt.




                                       40
<PAGE>   41



Goodwill and other intangibles are being amortized using the straight-line
method, as follows:
<TABLE>
<CAPTION>

                                                                           LIFE
                                                                           ----

<S>                                              <C>                     <C>     
Goodwill                                         $116,044                40 years
Noncompete agreements                               4,007                 5 years
Deferred financing costs                           19,173            5 to 7 years
Printing technology                                27,946              11.5 years
Textile compound formulas                           5,247                30 years
Unpatented technology                               9,529                20 years
                                                 --------
Total intangibles                                 181,946
Less accumulated amortization                     (24,147)
                                                 --------
                                                 $157,799
                                                 ========
</TABLE>

REVENUE RECOGNITION--Day recognizes revenue when the product is shipped.
Reserves for product returns, based upon historical experience, are also
recognized upon shipment.

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 translation adjustment account in stockholders' equity.
Transaction gains and losses are recorded in the consolidated statement of
operations for the period. Effective January 1, 1997, Day's Mexico subsidiary
switched its functional currency to the US dollar in accordance with Statement
of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency Translation"
because the Mexican economy was considered hyper-inflationary. Beginning January
1, 1999, Mexico is no longer considered a hyper-inflationary economy and as a
result will be switching its functional currency back to the Mexican peso in
1999.

CONCENTRATION OF CREDIT RISK--A majority of Day's U.S. textile sales are
concentrated in the southeastern part of the U.S. Day's Image Transfer and
Textile receivables are from a diverse group of customers in the printing and
textile industry and such receivables are generally unsecured. Day maintains a
reserve for potential losses. One customer accounted for 12% and 11% of sales
for the years ended December 31, 1998 and 1997, respectively. This customer also
accounted for 4% and 9% of receivables at December 31, 1998 and 1997.

Certain of Day's international subsidiaries make purchases in foreign
currencies. 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. Day has entered into
forward foreign exchange contracts to protect itself against such foreign
currency movements which generally expire in 3 to 12 months. The contract value,
which approximates fair market value, of these foreign exchange contracts was
$1,246 and $2,311 at December 31, 1998 and 1997, respectively. Day is exposed to
credit-related losses in the event of nonperformance by counterparties to the
forward contracts. No counterparties are expected to fail to meet their
obligations given their credit ratings, therefore Day does not obtain collateral
for these instruments.

                                       41
<PAGE>   42

FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying value of the Company's
variable rate US and UK Credit Agreements approximates fair value. The 9 1/2%
Senior Subordinated Debt and the 11 1/8% Senior Debt's fair market values were
approximately 99% and 107%, respectively, of their carrying value at December
31, 1998 based on quoted market prices. The 12 1/4% Exchangeable Preferred
Stock's fair market value was approximately 91% of its carrying value at
December 31, 1998 based on quoted market prices. At December 31, 1998 and 1997,
the carrying amounts of all other assets and liabilities which qualify as
financial instruments, approximated their fair value.

MANAGEMENT ESTIMATES--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. Actual
results could differ from these estimates.

C.       INVENTORIES

Inventories as of December 31, 1998 and 1997 consists of:
<TABLE>
<CAPTION>

                                                       1998              1997
                                                       ----              ----

<S>                                                   <C>                <C>    
Finished Goods                                        $ 9,762            $ 8,917
Work in Progress                                        5,220              4,164

Raw Materials                                           4,197              3,420
                                                      -------            -------

                                                      $19,179            $16,501
                                                      =======            =======
</TABLE>


D.       LONG-TERM AND SUBORDINATED LONG-TERM DEBT

Long-term and subordinated long-term debt as of December 31, 1998 and 1997
consists of:
<TABLE>
<CAPTION>

                                                           1998           1997
                                                           ----           ----

<S>                                                    <C>            <C>
Senior Secured Credit Facility                         $  42,900      $
US Credit Agreement                                                      30,000
UK Credit Agreement                                                         883
11- 1/8% Senior Notes                                    100,000        100,000
9- 1/2% Senior Subordinated Notes                        114,615
                                                       ---------      ---------
                                                         257,515        130,883
Less: Current maturities of long-term debt                (1,292)          (774)
                                                       ---------      ---------
                                                       $ 256,223      $ 130,109
                                                       =========      =========
</TABLE>


The Senior Secured Credit Facility was entered into on January 16, 1998 in
conjunction with the change of control as described in Note A to replace the US
Credit Agreement. The Senior Secured Credit Facility is a 


                                       42
<PAGE>   43

$60,000 credit facility consisting of a five year $40,000 term loan and a
$20,000 revolving line of credit with a group of banks. On December 17, 1998,
the Senior Secured Credit Facility was amended to add a new four year $10,000
term loan. Proceeds from the new term loan were used in conjunction with the
acquisition of Rotec. The revolving line of credit included a $10,000 letter of
credit subfacility ($525 of letters of credit were outstanding at December 31,
1998) and a $1,000 swingline loan subfacility. At December 31, 1998, interest on
$750 of the revolving line of credit was based on the banks' base rate plus 1.0%
(8.75% at December 31, 1998). The amounts available under the Revolving Credit
Facility are subject to a borrowing base limitation (defined generally as $5
million plus 50% of eligible domestic inventory and 80% of eligible domestic
accounts receivable). At December 31, 1998, $14,457 was available under the
Senior Secured Credit Facility. The Senior Secured Credit Facility requires a
commitment fee of 1/2% a year on the unused portion of the revolving line of
credit. Interest on the term loan was based on the banks' base rate plus 1.0%
(8.75% at December 31, 1998) or the LIBOR rate plus 2.00% (7.034% at December
31, 1998). Interest on the new term loan was based on the banks' base rate plus
2.0% (9.75% at December 31, 1998) or the LIBOR rate plus 3.00% (8.063% at
December 31, 1998). At December 31, 1998, interest on the term loans were based
on the LIBOR rate. 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, 1998 was 7.77%. The weighted average interest rate on the US Credit
Agreement for the years ended December 31, 1997 and 1996 was 8.61% and 8.46%,
respectively.

Principal payments under the term loans are as follows: $1,292--1999;
$8,856--2000; $12,177--2001 and $20,575--2002.

On March 18, 1998, the Company successfully completed a Consent Solicitation
(the "Consent") with respect to its $100.0 million Senior Subordinated Notes
which are due in 2005 (the "2005 Notes"). The Consent permitted the Company to
issue $115.0 million of 9 1/2% Senior Subordinated Notes and $35.0 million of 12
1/4% Exchangeable Preferred Stock. The Consent also allowed the Company to
assume a $140.0 million Bridge Loan (the "Bridge Loan") incurred by its majority
shareholder in connection with the Acquisition, and effected certain other
changes to the Indenture governing the 2005 Notes, including the elimination of
the provisions of the Indenture subordinating the 2005 Notes to other
indebtedness of the Company. As consideration for the Consent, the Company paid
a Consent fee of $65 for every $1,000 of notes held. The proceeds from the
issuance of the $115.0 million of 9 1/2% Senior Subordinated Notes and $35.0
million of 12 1/4% Exchangeable Preferred Stock were used to repay the Bridge
Loan and to pay other financing fees and expenses. Expenses associated with
obtaining the Consent were approximately $1.0 million. As a result of the
repayment of the Bridge Loan, $5.2 million of deferred financing fees and
expenses were also written off as an extraordinary item.

Interest on the 11 1/8% Senior Notes due June 1, 2005 and the 91/2% Senior
Subordinated Notes due March 15, 2008 (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. The Company's wholly-owned
subsidiary, Day International, Inc., has guaranteed the Senior Secured Credit
Facility and the Notes and pledged all its assets, except its 


                                       43
<PAGE>   44

investments in its foreign subsidiaries, as collateral on these agreements. Upon
a change in control, the Notes can be put back to the Company at 101% of their
face value.

In 1996, the Company's UK subsidiary entered into credit facilities with a UK
bank ("UK Credit Agreement") that provided a line of credit and two five year
term loans. The UK Credit Agreement was repaid on January 12, 1998.

E.       EXCHANGEABLE PREFERRED STOCK

In connection with the Acquisition, the Company issued $35.0 million (face
value) of 12 1/4% Exchangeable Preferred Stock (net of $2,014 of issuance costs
and original issue discount). 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.
Thereafter, dividends may be paid in cash only. On any scheduled dividend
payment date, the Company may, at its option, but subject to certain conditions,
exchange all but not less than 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 to date 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% - 2003; 104.083% - 2004; 102.042% - 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. In
addition, at any time and from time to time prior to March 15, 2001, the
Exchangeable Preferred Stock or the Exchange Debentures may be redeemed, in
whole or in part, for cash, with the proceeds of one or more Public Equity
Offerings at the redemption price of 112.25% of the liquidation preference
thereof, together with accumulated and unpaid dividends, if any, to the date of
redemption. Upon the occurrence of a change in control, the Company will 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.



                                       44
<PAGE>   45


F.       INCOME TAXES

Significant components of deferred tax assets (liabilities) as of December 31,
1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                                                                     1998                    1997
                                                                                     ----                    ----
<S>                                                                                <C>                     <C>    

Domestic:
  Current:
    Accounts receivable reserves                                                   $   632                 $   491
    Inventory reserves                                                                 727                     574
    Other reserves                                                                     671                     350
    AMT credit carryforward                                                            345                     350
                                                                                   -------                 -------
                                                                                     2,375                   1,765
                                                                                   -------                 -------

  Long-term:
    Depreciation                                                                    (3,431)                 (2,721)
    Amortization                                                                    (3,431)                 (1,830)
    Net operating loss carryforwards                                                 4,423
    Stock option compensation                                                        3,308
    Other postretirement benefits                                                      654                     463
                                                                                   -------                 -------
                                                                                     1,523                  (4,088)
                                                                                   -------                 -------
Total domestic deferred tax assets (liabilities)                                     3,898                  (2,323)
                                                                                   -------                 -------

Foreign:
  Current:
    Inventories                                                                         48                     (25)
    Other                                                                              120                     198
                                                                                   -------                 -------
                                                                                       168                     173
                                                                                   -------                 -------

  Long-term:
    Plant and equipment                                                             (1,368)                 (1,626)
    Pension                                                                             15                      26
                                                                                   -------                 -------
                                                                                    (1,353)                 (1,600)
                                                                                   -------                 -------
Total foreign deferred tax liabilities                                              (1,185)                 (1,427)
                                                                                   -------                 -------
Net deferred tax assets (liabilities)                                              $ 2,713                 $(3,750)
                                                                                   =======                 =======
</TABLE>





                                       45
<PAGE>   46


Income tax expense (benefit) consists of the following for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>

                                                                            1998                    1997                      1996
                                                                            ----                    ----                      ----
<S>                                                                      <C>                       <C>                      <C>    
Current:
  Domestic:
    Federal                                                              $                         $                        $
    State and local                                                          272                       309                      583
    Foreign                                                                1,315                     1,396                    1,251
                                                                         -------                   -------                  -------
                                                                           1,587                     1,705                    1,834
                                                                         -------                   -------                  -------
Deferred:
  Domestic:
    Federal                                                               (3,176)                    3,366                      324
    State and local                                                         (828)                      495                       48
    Foreign                                                                 (315)                      373                     (206)
                                                                         -------                   -------                  -------
                                                                          (4,319)                    4,234                      166
                                                                         -------                   -------                  -------
                                                                         $(2,732)                  $ 5,939                  $ 2,000
                                                                         =======                   =======                  =======
</TABLE>


The income tax (benefit) expense differs from the statutory rate for the years
ended December 31, 1998, 1997 and 1996 as a result of the following:
<TABLE>
<CAPTION>

                                                                           1998             1997                 1996
                                                                           ----             ----                 ----

<S>                                                                    <C>                 <C>                 <C>    
(Benefit) provision at the federal statutory rate                      $(5,306)            $ 4,711             $ 1,702
Foreign tax rate differential                                              350                 444                (169)
State and local taxes, net of federal
  income tax effect                                                       (696)                689                 417
Non-deductible expenses                                                  3,122                 117                  57
Other                                                                     (202)                (22)                 (7)
                                                                       -------             -------             -------
                                                                       $(2,732)            $ 5,939             $ 2,000
                                                                       =======             =======             =======
</TABLE>

Income (loss) before income taxes includes $2,850, $5,809 and $3,571 of income
from international operations for the years ended December 31, 1998, 1997 and
1996, respectively. Day has not provided deferred taxes on the undistributed
earnings of foreign subsidiaries because the earnings are deemed permanently
reinvested. The Company has domestic net operating loss carryforwards of
approximately $19 million expiring through 2013.




                                       46
<PAGE>   47




G.       BUSINESS SEGMENTS

The Company produces precision engineered rubber products, specializing in the
design and customization of consumable image-transfer products for the graphic
arts (printing) industry and fiber handling products for the textile industry.
The Company's printing components division ("Image Transfer") designs,
manufactures and markets high-quality printing blankets and sleeves for use in
offset printing.

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.
<TABLE>
<CAPTION>

                                                                                            1998
                                                                                            ----
                                                                        IMAGE
                                                                      TRANSFER             TEXTILE            TOTALS
                                                                      --------             -------            ------

<S>                                                                     <C>                  <C>                <C>     
Third party sales                                                       $139,666             $33,400            $173,066
Operating profit                                                          35,376               3,346              38,722
Depreciation and amortization                                              3,385               1,320               4,705
Assets                                                                    66,453              13,505              79,958
Capital expenditures                                                       6,052               1,051               7,103
<CAPTION>

                                                                                            1997
                                                                                            ----
                                                                        IMAGE
                                                                      TRANSFER             TEXTILE            TOTALS
                                                                      --------             -------            ------

<S>                                                                     <C>                  <C>                <C>     
Third party sales                                                       $132,000             $34,285            $166,286
Operating profit                                                          35,128               4,028              39,156
Depreciation and amortization                                              3,076               1,320               4,396
Assets                                                                    57,446              15,445              72,891
Capital expenditures                                                       4,055               1,069               5,124
<CAPTION>

                                                                                            1996
                                                                                            ----
                                                                        IMAGE
                                                                      TRANSFER             TEXTILE            TOTALS
                                                                      --------             -------            ------

<S>                                                                     <C>                  <C>                <C>     
Third party sales                                                       $103,627             $33,187            $136,814
Operating profit                                                          28,908               4,033              32,941
Depreciation and amortization                                              2,412               1,145               3,557
Assets                                                                    56,396              14,855              71,251
Capital expenditures                                                       4,469                 752               5,221
</TABLE>

                                       47
<PAGE>   48

The following is a reconciliation of the items reported above to the amounts
reported in the Consolidated Financial Statements:
<TABLE>
<CAPTION>

                                                                          1998                 1997                  1996
                                                                          ----                 ----                  ----
<S>                                                                 <C>                    <C>                  <C>    
Operating profit:
Segment operating profit                                             $  38,722             $  39,156             $  32,941
Non-recurring costs associated with Mexico                                (309)
UK pension adjustment                                                                            450
APB #16 depreciation and amortization                                   (4,194)               (4,388)               (4,077)
Non allocated corporate expenses                                          (424)                 (288)                 (309)
Compensation related to stock option awards                                                     (308)
Compensation and related transaction costs                             (18,018)
Amortization of intangibles                                             (2,565)               (3,315)               (6,474)
Management fees                                                         (1,043)                 (896)                 (920)
                                                                     ---------             ---------             ---------

         Total operating profit                                      $  12,169             $  30,411             $  21,161
                                                                     =========             =========             =========


Depreciation and amortization:
Segment depreciation and amortization                                $   4,705             $   4,396             $   3,557
Amortization of intangibles                                              2,565                 3,315                 6,474
APB #16 depreciation and amortization                                    4,194                 4,388                 4,077
Amortization of deferred financing fees                                  2,024                   966                 1,000
                                                                     ---------             ---------             ---------

         Total depreciation and amortization                         $  13,488             $  13,065             $  15,108
                                                                     =========             =========             =========

Assets:
Segment assets                                                       $  79,958             $  72,891             $  71,251
APB # 16 Adjustment                                                     12,311                13,365                14,299
Goodwill and other intangibles                                         157,799               136,722               145,018
Deferred tax assets                                                      4,066                 1,938                 3,389
Cash and other assets at corporate offices                               3,274                   611                 3,929
                                                                     ---------             ---------             ---------

         Total assets                                                $ 257,408             $ 225,527             $ 237,886
                                                                     =========             =========             =========
</TABLE>




                                       48
<PAGE>   49


Net sales for the years ended December 31, 1998, 1997 and 1996 and identifiable
assets as of December 31, 1998 and 1997 by geographic area are as follows:
<TABLE>
<CAPTION>


                                                         1998                       1997                      1996
                                                         ----                       ----                      ----
<S>                                                    <C>                       <C>                       <C>

NET SALES:
Domestic                                                $107,478                 $ 101,319                 $  83,819
Europe                                                    46,221                    45,280                    33,664
Other International                                       24,450                    25,243                    24,288
Interarea                                                 (5,083)                   (5,556)                   (4,957)
                                                       ---------                 ---------                 ---------
                                                       $ 173,066                 $ 166,286                 $ 136,814
                                                       =========                 =========                 =========

IDENTIFIABLE ASSETS:
Domestic                                                $196,201                 $ 183,267
Europe                                                    50,489                    30,871
Other International                                       10,718                    11,389
                                                       ---------                 ---------
                                                       $ 257,408                 $ 225,527
                                                       =========                 =========
</TABLE>


Sales between geographic areas are generally priced to recover cost plus an
appropriate mark-up for profit.

H.       RELATED PARTY TRANSACTIONS

In accordance with a management services agreement, the Company is required to
pay Greenwich Street and SGCP, the controlling shareholders of Day, an annual
management fee of $1.0 million plus expenses, payable semi-annually.

In accordance with a management services agreement, the Company was required to
pay American Industrial Partners, an affiliate of the controlling shareholders
of Day, an annual management fee of $800 plus expenses, payable semi-annually.
The agreement terminated on January 16, 1998 with the change in control
described in Note A.

The Company also paid American Industrial Partners $450 in conjunction with the
acquisition of David M, related to their assistance in acquiring David M which
was included in the David M purchase price allocation.

In 1997, the Company purchased approximately $1.7 million of its raw material
needs from suppliers who were also owned by the controlling shareholders of Day.
The Company has not experienced any price increases or service interruptions as
a result of the change in control described in Note A.




                                       49
<PAGE>   50


I.       STOCKHOLDERS' EQUITY AND STOCK BASED COMPENSATION PLAN

As a result of the Acquisition and related transactions in 1998, certain changes
occurred in the Company's equity structure. These changes included:

-     The Company's original majority shareholder, GSD Acquisition Corp. ("GSD")
      was collapsed up into its two shareholders.

-     The Company assumed the $140 million bridge loan from GSD.

-     The capital contribution from stockholders consisted of $4,573 of cash
      plus $4,530 of fees and expenses associated with the bridge loan
      financing.

-     The reduction of common shares represents the shares given up by the new
      shareholders in order for their basis per share to reflect the price paid
      for each share.

In conjunction with the acquisition of Rotec in December 1998, the Company sold
2,357.5 shares to its two majority shareholders for $9,501.

Also, management of the Company acquired 57 shares of common stock for $230 in
1998.

1998 STOCK OPTION PLAN

The Company adopted a new stock option plan (the "1998 Option Plan") following
the completion of the Offerings. The 1998 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 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 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 Greenwich Street 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 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 Option Plan.

As of December 31, 1998, 6,321 options have been granted under the 1998 Option
Plan with an exercise price of $4,030. These options expire in 2007.

                                       50
<PAGE>   51


DAY STOCK OPTION PLAN

Certain employees hold options which were previously granted under the Day
International Group, Inc. Stock Option Plan (the "Day Option Plan"). In
connection with the Acquisition, 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 of $8,585 was recorded in 1998. As of
December 31, 1998, 2,462.5 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. Also, the options expire as follows:
2,387.5 expire in 2005, 75 expire in 2006 and 310 expire in 2007.

The following table summarizes activity in the Company's stock option plans:
<TABLE>
<CAPTION>

                                                                 1998                    1997                  1996
                                                                 ----                    ----                  ----
                                                                     EXERCISE                EXERCISE               EXERCISE
                                                          SHARES      PRICE        SHARES      PRICE      SHARES     PRICE
                                                          ------      -----        ------      -----      ------     -----
<S>                                                     <C>          <C>        <C>          <C>        <C>         <C>
Outstanding at beginning
  of period                                               2,915                    2,605      $ 1,000      2,730     $ 1,000
Granted                                                   6,321      $ 4,030         310      $ 1,200         75     $ 1,000
Exercised                                                (142.5)     $ 1,000                                 (18)    $ 1,000
Canceled                                                                                                    (182)    $ 1,000
                                                        -------                  -------                 -------
Outstanding at end of  period                           9,093.5                    2,915                   2,605
                                                        =======                  =======                 =======
Exercisable at end of  period                           2,772.5                    1,520                     862
                                                        =======                  =======                 =======
Weighted-average fair  value
  of options granted during
  the year using the Black-Scholes
  options-pricing model                                              $ 1,860                  $ 1,548                $   662
                                                                     =======                  =======                =======
Weighted-average  assumptions used for grants:
  Expected dividend yield                                                 0%                       0%                      0%
  Expected life of options                                           9 years                  9 years                 9 years
  Risk-free interest rate                                                 7%                       7%                      7%
</TABLE>

The Company measures compensation cost for stock options issued to employees
using the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees." In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation," which the Company was
required to adopt in 1996. Pursuant to the new standard, companies are
encouraged, but not required, to adopt the fair value method of accounting for
stock options and similar equity instruments. Had compensation costs been
determined based on the fair value method of SFAS No. 123, the Company's net
earnings would have been reduced by $457 in 1998, $255 in 1997 and $214 in 1996.

Also, warrants to purchase up to 74 shares of Common Stock that vest in four
equal installments, first on the grant date and then on each of the first three
anniversaries thereof have been granted to one of the 

                                       51
<PAGE>   52

Board members as compensation for services as a director. Had compensation costs
been determined based on the fair value method of SFAS No. 123, the Company's
net earnings would have been reduced by $25 in 1998.

J.       RETIREMENT PLANS

The Company has non-contributory defined benefit plans covering certain
associates of its UK, German and French subsidiaries. Benefits under these plans
are based primarily on years of service and qualifying compensation during the
final years of employment. Plan assets include marketable equity securities. The
Company's funding policy complies with the requirements of local laws and
regulations.

Day also sponsors defined contribution plans for certain of its 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, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>

                                                                                   1998                   1997
                                                                                   ----                   ----
<S>                                                                           <C>              <C>    
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year                                          $ 11,355                $ 10,636
Service cost                                                                          570                     506
Interest cost                                                                         756                     728
Plan participant contributions                                                        247                     234
Actuarial losses                                                                    1,699                     520
Benefits paid                                                                      (1,411)                   (793)
Foreign currency exchange impact                                                      119                    (476)
                                                                                 --------                --------
Benefit obligation at end of year                                                  13,335                  11,355
                                                                                 --------                --------

CHANGE IN PLAN ASSETS
Fair value of plan assets at the beginning of the year                             10,894                  10,652
Actual return on plan assets                                                        1,447                     977
Employer contribution                                                                 371                     113
Plan participant contributions                                                        247                     234
Benefits paid                                                                      (1,409)                   (748)
Foreign currency exchange impact                                                       59                    (334)
                                                                                 --------                --------
Fair value of plan assets at end of year                                           11,608                  10,894
                                                                                 --------                --------

Funded status                                                                      (1,727)                   (461)
  Unrecognized net actuarial (gain) loss                                            1,333                      (4)
                                                                                 --------                --------

(Accrued) pension costs                                                          $   (394)               $   (465)
                                                                                 ========                ========
</TABLE>

The projected benefit obligation was determined using an assumed discount rate
of 5.5% and 7.0% in 1998 and 1997, respectively, and an assumed long-term rate
of increase in compensation of 4% in 1998 and 5% in 1997. The assumed long-term
rate of return on plan assets was 8.0% in 1998 and 9.0% in 1997.

                                       52
<PAGE>   53

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,
1998, 1997 and 1996 is as follows:

<TABLE>
<CAPTION>

                                                                                1998             1997              1996
                                                                                ----             ----              ----
<S>                                                                          <C>             <C>             <C>   
Defined benefit plans:
  Service cost                                                                   $570            $  506          $   433
  Interest cost                                                                   756               728              701
  Actual return on plan assets                                                 (1,447)             (977)          (1,006)
  Net amortization and deferral                                                   507                95              265
                                                                               ------            ------          -------
Net periodic pension cost                                                         386               352              393
Defined contribution plans                                                      1,174             1,458            1,247
                                                                               ------            ------          -------
Total pension expense                                                          $1,560            $1,810          $ 1,640
                                                                               ======            ======          =======
</TABLE>


K.       OTHER POSTRETIREMENT BENEFITS

Day provides certain contributory 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 plan at December 31, 1998 and 1997, which is unfunded, is as
follows:

<TABLE>
<CAPTION>

                                                                     1998              1997
                                                                     ----              ----

<S>                                                              <C>              <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year                              $4,571           $3,850
Service cost                                                            381              386
Interest cost                                                           327              315
Actuarial losses                                                        168              176
Benefits paid                                                          (218)            (156)
                                                                     ------           ------
Benefit obligation at end of year                                     5,229            4,571

  Unrecognized net actuarial gain (loss)                                 (7)             161
                                                                     ------           ------

Accrued postretirement benefit obligation                            $5,222           $4,732
                                                                     ======           ======
</TABLE>


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 8.5% and
decreasing gradually to 4.5% in 2007 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 $993 at December 31, 1998
and the interest and service cost would have been $151 higher for the year ended
December 31, 1998. A one percentage point decrease in the assumed health care
cost trend rate would have decreased the accumulated benefit obligation by $786
at December 31, 1998 and the interest and service cost would have been $118
lower for the year ended December 31, 1998.


                                       53

<PAGE>   54

A discount rate of 6.5% and 7.0% was used in determining the accumulated
obligation as of December 31, 1998 and 1997, respectively.

Net periodic postretirement benefit costs include the following components for
the years ended December 31, 1998, 1997 and 1996:

<TABLE>
<CAPTION>

                                                                   1998              1997             1996
                                                                   ----              ----             ----
<S>                                                           <C>               <C>              <C> 
Service cost                                                       $381              $386             $348
Interest cost                                                       327               315              263
                                                                   ----              ----             ----
Net periodic postretirement benefit costs                          $708              $701             $611
                                                                   ====              ====             ====
</TABLE>


L.       LEASE COMMITMENTS AND CONTINGENCIES

The Company 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, 1998, 1997 and 1996 was $802, $780 and $811,
respectively. At December 31, 1998, future minimum lease commitments for
noncancelable operating leases are:

<TABLE>
<CAPTION>

      <S>                                                    <C>   
         1999                                                    $  519
         2000                                                       389
         2001                                                       265
         2002                                                       152
         2003                                                        63
         Thereafter                                                  --
                                                                 ------
                  Total                                          $1,388
</TABLE>

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. The Company's previous parent and its
parent, M.A. Hanna, have agreed to indemnify the Company for certain costs
associated with these matters. At December 31, 1998, a $791 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.

                                       54

<PAGE>   55



M.       SUPPLEMENTAL CONSOLIDATING INFORMATION

As described in Note A, in April 1995, the Company issued $100,000 of 11 1/8%
Senior Notes in conjunction with the purchase of Day International, Inc., 
("Day") from M.A. Hanna and in March 1998, the Company issued $115,000 of 
9 1/2% Senior Subordinated Notes in conjunction with the acquisition of the 
Company by Greenwich (collectively, the "Notes"). As a result of the 1995 
acquisition, Day International, Inc. ("Day International" or "Guarantor")
became a wholly-owned subsidiary of the Company (which has no assets or
operations other than its investment in Day International). Day has provided a
full and unconditional guarantee of the Notes. The wholly-owned foreign
subsidiaries of Day International are not guarantors with respect to the Notes
and do not have any credit arrangements senior to the Notes. All of the assets
of Day International and its parent, other than the assets of the wholly-owned
foreign 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. In 1996, intercompany notes were put in place
through a dividend which effectively transfers the interest expense from Day
International Group, Inc. to Day International, Inc. The following are the
supplemental combined condensed balance sheets as of December 31, 1998 and
1997, the supplemental combined condensed statements of operations and cash
flows for the years ended December 31, 1998, 1997 and 1996 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.

                                       55

<PAGE>   56



                          DAY INTERNATIONAL GROUP, INC.

                 SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
                                DECEMBER 31, 1998

<TABLE>
<CAPTION>

                                                                      DAY
                                                       DAY           INTER-
                                                     INTER-          NATIONAL         NON
                                                    NATIONAL           INC.        GUARANTOR
                                                   GROUP, INC.     (GUARANTOR)    SUBSIDIARIES  ELIMINATIONS   CONSOLIDATED
                                                   -----------     -----------    ------------  ------------   ------------
<S>                                              <C>              <C>          <C>         <C>               <C> 
ASSETS
Cash and cash equivalents                          $    3,256        $   (955)   $    2,461                      $  4,762
Accounts receivable -- net                                             10,147         8,483                        18,630
Inventories                                                            11,450         7,729                        19,179
Other assets                                                            2,527         1,283                         3,810
                                                     --------        --------      --------   ------------       --------
         TOTAL CURRENT ASSETS                           3,256          23,169        19,956             --         46,381
Intercompany                                          253,367              --                    $(253,367)            --
Property, plant and equipment -- net                                   36,812        13,493                        50,305
Investment in subsidiaries                            (52,370)         28,561                       23,809             --
Intangible and other assets                                           142,819        17,903                       160,722
                                                     --------        --------     ---------      ---------       --------
         TOTAL ASSETS                                $204,253        $231,361      $ 51,352      $(229,558)      $257,408
                                                     ========        ========      ========      =========       ========
LIABILITIES AND
  STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable                                                     $  2,702      $  3,337      $    (134)      $  5,905
Current maturities of long-term debt                 $  1,292                                                       1,292
Accrued associate related costs and
  other expenses                                        4,336           9,261         6,881                        20,478
                                                      -------        --------      --------      ---------       --------
         TOTAL CURRENT LIABILITIES                      5,628          11,963        10,218           (134)        27,675
Intercompany                                          (15,082)        255,984        12,331       (253,233)            --
Long-term and subordinated long-term
  debt                                                256,223                                                     256,223
Other long-term liabilities                                            14,187         2,979                        17,166
Exchangeable Preferred Stock                           36,627                                                      36,627
Total stockholders' equity (Deficit)                  (79,143)        (50,773)       25,824         23,809       (80,283)
                                                    ----------      ----------     --------      ---------       --------
TOTAL LIABILITIES AND STOCKHOLDERS'
  EQUITY (DEFICIT)                                   $204,253        $231,361      $ 51,352      $(229,558)      $257,408
                                                     ========        ========      ========      =========       ========
</TABLE>


                                       56
<PAGE>   57



                          DAY INTERNATIONAL GROUP, INC.

                 SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
                                DECEMBER 31, 1997

<TABLE>
<CAPTION>

                                                                    DAY
                                                       DAY        INTER-
                                                     INTER-       NATIONAL          NON
                                                    NATIONAL        INC.         GUARANTOR
                                                   GROUP, INC.   (GUARANTOR)   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                   -----------   -----------   ------------   ------------   ------------
<S>                                              <C>              <C>           <C>         <C>             <C>
ASSETS
Cash and cash equivalents                            $    596        $   (320)     $    504                      $    780
Accounts receivable -- net                                             12,215         9,757                        21,972
Inventories                                                            10,637         5,864                        16,501
Other assets                                                            1,936         1,459                         3,395
                                                     --------        --------      --------      ---------       --------
         TOTAL CURRENT ASSETS                             596          24,468        17,584             --         42,648
Intercompany                                          130,000              --                    $(130,000)            --
Property, plant and equipment -- net                                   35,931         8,861                        44,792
Investment in subsidiaries                             70,337          23,106                      (93,443)            --
Intangible and other assets                                           132,809         5,278                       138,087
                                                     --------        --------      --------      ---------       --------
         TOTAL ASSETS                                $200,933        $216,314      $ 31,723      $(223,443)      $225,527
                                                     ========        ========      ========      =========       ========
LIABILITIES AND
  STOCKHOLDERS' EQUITY
Accounts payable                                                     $  4,736      $  3,532      $    (525)      $  7,743
Current maturities of long-term debt                                                    774                           774
Accrued associate related costs and
  other expenses                                     $    990           8,899         4,613                        14,502
                                                     --------        --------      --------      ---------       --------
         TOTAL CURRENT LIABILITIES                        990          13,635         8,919           (525)        23,019
Intercompany                                            8,286         121,217           (28)      (129,475)            --
Long-term and subordinated long-term
  debt                                                130,000                           109                       130,109
Long-term post retirement benefits
  and other                                                             9,527         2,683                        12,210
Total stockholders' equity                             61,657          71,935        20,040        (93,443)        60,189
                                                     --------        --------      --------      ---------       --------
TOTAL LIABILITIES AND STOCKHOLDERS'
  EQUITY                                             $200,933        $216,314      $ 31,723      $(223,443)      $225,527
                                                     ========        ========      ========      =========       ========
</TABLE>

                                       57

<PAGE>   58



                          DAY INTERNATIONAL GROUP, INC.

            SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>

                                                                     DAY
                                                       DAY         INTER-
                                                     INTER-       NATIONAL          NON
                                                    NATIONAL        INC.         GUARANTOR
                                                   GROUP, INC.   (GUARANTOR)   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                   -----------   -----------   ------------   ------------   ------------

<S>                                            <C>              <C>            <C>            <C>           <C>     
Net sales                                           $      --        $130,850       $42,216        $    --       $173,066
Cost of goods sold                                                     80,207        29,948                       110,155
                                                    ---------        --------       -------        -------       --------
         Gross profit                                      --          50,643        12,268             --         62,911
Selling, general and administrative                         6          21,335         7,775                        29,116
Compensation and related transaction costs                             18,018                                      18,018
Amortization of intangibles                                             2,520            45                         2,565
Management fees                                                         1,043                                       1,043
                                                    ---------        --------       -------        -------       --------
         Operating income                                  (6)          7,727         4,448             --         12,169
Other expenses (income):
Equity in (earnings) loss of subsidiaries              11,573          (1,441)                     (10,132)            --
Interest expense                                        2,797          24,673                                      27,470
Other (income) expense                                    (54)         (1,880)        2,240                           306
                                                    ---------       ---------       -------        -------       --------
         Income (loss) before income taxes
             and extraordinary items                  (14,322)        (13,625)        2,208         10,132        (15,607)
Income taxes (benefit)                                 (1,019)         (2,480)          767                        (2,732)
                                                    ---------       ---------       -------        -------       --------
         Income (loss) before
             extraordinary items                      (13,303)        (11,145)        1,441         10,132        (12,875)
Extraordinary losses on early
    extinguishment of debt                              3,124             428            --             --          3,552
                                                    ---------       ---------       -------        -------       --------
         Net income (loss)                          $ (16,427)      $ (11,573)      $ 1,441        $10,132       $(16,427)
                                                    =========       =========       =======        =======       ========

</TABLE>

                                       58

<PAGE>   59



                          DAY INTERNATIONAL GROUP, INC.

            SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>

                                                                     DAY
                                                       DAY         INTER-
                                                     INTER-       NATIONAL          NON
                                                    NATIONAL        INC.         GUARANTOR
                                                   GROUP, INC.   (GUARANTOR)   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                   -----------   -----------   ------------   ------------   ------------

<S>                                                 <C>            <C>            <C>           <C>            <C>     
Net sales                                             $    --        $124,422       $41,864       $     --       $166,286
Cost of goods sold                                                     74,846        28,189                       103,035
                                                      -------        --------       -------       --------       --------
         Gross profit                                      --          49,576        13,675             --         63,251
Selling, general and administrative                        50          20,741         7,838                        28,629
Amortization of intangibles                                             3,270            45                         3,315
Management fees                                                           896                                         896
                                                      -------        --------       -------       --------       --------
         Operating income                                 (50)         24,669         5,792             --         30,411
Other expenses (income):
Equity in earnings of subsidiaries                     (7,926)         (3,760)                      11,686             --
Interest expense                                           --          15,605           321                        15,926
Other (income) expense                                    (35)            489           175                           629
                                                      -------        --------       -------       --------       --------
         Income before income taxes                     7,911          12,335         5,296        (11,686)        13,856
Income taxes                                               (6)          4,409         1,536                         5,939
                                                      -------        --------       -------       --------       --------
         Net income                                   $ 7,917        $  7,926       $ 3,760       $(11,686)      $  7,917
                                                      =======        ========       =======       ========       ========

</TABLE>

                                       59

<PAGE>   60



                          DAY INTERNATIONAL GROUP, INC.

            SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>

                                                                     DAY
                                                       DAY         INTER-
                                                     INTER-       NATIONAL          NON
                                                    NATIONAL        INC.         GUARANTOR
                                                   GROUP, INC.   (GUARANTOR)   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                   -----------   -----------   ------------   ------------   ------------

<S>                                               <C>            <C>            <C>           <C>            <C>     
Net sales                                             $    --        $101,284       $35,530       $     --       $136,814
Cost of goods sold                                                     60,838        23,764                        84,602
                                                      -------        --------       -------       --------       --------
         Gross profit                                      --          40,446        11,766             --         52,212
Selling, general and administrative                        35          15,904         7,717                        23,657
Amortization of intangibles                                             6,291           183                         6,474
Management fees                                                           920                                         920
                                                      -------        --------       -------       --------       --------
         Operating income                                 (36)         17,331         3,866             --         21,161
Other expenses (income):
Equity in earnings of subsidiaries                     (2,976)         (2,526)                       5,502             --
Interest expense                                           --          16,078           295                        16,373
Other (income) expense                                    (87)           (132)            -              -           (219)
                                                      -------         -------       -------       --------       --------
         Income before income taxes                     3,027           3,911         3,571         (5,502)         5,007
Income taxes                                               20             935         1,045                         2,000
                                                      -------        --------       -------       --------       --------
         Net income                                   $ 3,007        $  2,976       $ 2,526       $ (5,502)      $  3,007
                                                      =======        ========       =======       ========       ========

</TABLE>

                                       60

<PAGE>   61


                          DAY INTERNATIONAL GROUP, INC.

            SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>


                                                                     DAY
                                                       DAY         INTER-
                                                     INTER-       NATIONAL          NON
                                                    NATIONAL        INC.         GUARANTOR
                                                   GROUP, INC.   (GUARANTOR)   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                   -----------   -----------   ------------   ------------   ------------
<S>                                             <C>             <C>              <C>           <C>         <C>    
Operating Activities:
Net income (loss)                                   $ (16,427)      $ (11,573)      $ 1,441       $ 10,132      $ (16,427)
  Adjustments to reconcile net
    income (loss)to net cash provided by
    (used in) operating activities:
  Extraordinary loss on early
     extinguishment of debt                             3,124             428                                       3,552
  Depreciation and amortization                                        11,817         1,671                        13,488
  Non-cash charge related to stock
    option awards                                                       8,585                                       8,585
  Equity in (earnings) loss of subsidiaries            11,573          (1,441)                     (10,132)            --
  Deferred income taxes and other                                      (3,772)                                     (3,772)
  Changes in operating assets and liabilities           3,346            (125)          775             (9)         3,987
                                                    ---------      ----------       -------       --------      ---------
Net cash provided by (used in)
  operating activities                                  1,616           3,919         3,887             (9)         9,413
Investing activities:
Cash paid for acquisition                                              (4,007)      (15,376)                      (19,383)
Capital expenditures                                                   (5,015)       (2,088)                       (7,103)
                                                    ---------      ----------       -------       --------      ----------
Net cash used in investing activities                      --          (9,022)      (17,464)            --        (26,486)
Financing Activities:
Proceeds from issuance of 2008 Notes                  111,134                                                     111,134
Proceeds from issuance of  exchangeable
   preferred stock                                     32,986                                                      32,986
Proceeds from issuance of term loans                   50,000                                                      50,000
Proceeds from issuance common stock                     9,731                                                       9,731
Contributions from shareholders                         4,573                                                       4,573
Repayment of existing credit facility                 (30,000)                         (902)                      (30,902)
Repayment of bridge loan                             (140,000)                                                   (140,000)
Payment of consent fee                                 (6,500)                                                     (6,500)
Payment of deferred financing fees                     (3,119)                                                     (3,119)
Net payments on credit facilities                      (7,100)                                                     (7,100)
                                                    ---------       ---------       -------       --------      ---------
Net cash provided by (used in)
   financing activities                                21,705              --          (902)            --         20,803
Intercompany transfers and dividends                  (20,661)          4,468        16,184              9             --
Effects of exchange rates on cash                                                       252                           252
                                                    ---------       ---------       -------       --------      ---------
Cash and Cash Equivalents:
Net increase (decrease) in cash and
  cash equivalents                                      2,660            (635)        1,957             --          3,982
Cash and cash equivalents at beginning of period          596            (320)          504                           780
                                                    ---------       ---------       -------       --------      ---------
Cash and cash equivalents at end of period          $   3,256       $    (955)      $ 2,461       $     --      $   4,762
                                                    =========       =========       =======       ========      =========

</TABLE>

                                       61
<PAGE>   62

                          DAY INTERNATIONAL GROUP, INC.

            SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>

                                                                     DAY
                                                        DAY         INTER-
                                                       INTER-       NATIONAL        NON
                                                      NATIONAL        INC.        GUARANTOR
                                                     GROUP, INC.   (GUARANTOR)   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                     -----------   -----------   ------------   ------------   ------------

<S>                                                <C>            <C>           <C>           <C>             <C>    
Operating Activities:
Net income                                            $ 7,917         $ 7,926       $ 3,760       $(11,686)       $ 7,917
  Adjustments to reconcile net
    income to net cash provided by
    (used in) operating activities:
  Depreciation and amortization                                        11,464         1,601                        13,065
  Non-cash charge related to stock
    option awards                                         308                                                         308
  Equity in earnings of subsidiaries                   (7,926)         (3,760)                      11,686             --
  Deferred income taxes and other                                       3,710          (182)                        3,528
  Changes in operating assets and
    liabilities                                           (78)         (3,693)       (1,276)          (100)        (5,147)
                                                      -------         -------       -------       --------        -------
Net cash provided by (used in)
  operating activities                                    221          15,647         3,903           (100)        19,671
Investing activities:
Cash paid for David M                                                   1,513                                       1,513
Capital expenditures                                                   (3,627)       (1,497)                       (5,124)
Other                                                                   1,107                                       1,107
                                                      -------         -------       -------       --------        -------
Net cash used in investing activities                      --          (1,007)       (1,497)            --         (2,504)
Financing Activities:
Sale of common shares                                     120                                                         120
Purchase of common shares                                                                                              --
Net payments on credit facilities                     (18,500)                       (3,321)                      (21,821)
                                                      -------         -------       -------       --------        -------
Net cash used in financing activities                 (18,380)             --        (3,321)            --        (21,701)
Intercompany transfers and dividends                   15,998         (14,234)       (1,864)           100             --
Effects of exchange rates on cash                                                      (119)                         (119)
                                                      -------         -------       -------       --------        -------
Cash and Cash Equivalents:
Net increase (decrease) in cash and
  cash equivalents                                     (2,161)            406        (2,898)            --         (4,653)
Cash and cash equivalents at beginning
  of period                                             2,757            (726)        3,402                         5,433
                                                      -------         -------       -------       --------        -------
Cash and cash equivalents at end
  of period                                           $   596         $  (320)      $   504       $     --        $   780
                                                      =======         =======       =======       ========        =======

</TABLE>

                                       62

<PAGE>   63



                          DAY INTERNATIONAL GROUP, INC.

            SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>

                                                                       DAY
                                                       DAY           INTER-
                                                     INTER-         NATIONAL          NON
                                                    NATIONAL          INC.         GUARANTOR
                                                   GROUP, INC.     (GUARANTOR)   SUBSIDIARIES   ELIMINATIONS   CONSOLIDATED
                                                   -----------     -----------   ------------   ------------   ------------
<S>                                                 <C>             <C>        <C>              <C>           <C>    
Operating Activities:
Net income                                            $ 3,007         $ 2,976       $ 2,526        $(5,502)       $ 3,007
  Adjustments to reconcile net
    income to net cash provided by
    (used in) operating activities:
    Depreciation and amortization                                      13,589         1,519                        15,108
    Equity in earnings of subsidiaries                 (2,976)         (2,526)                       5,502             --
    Deferred income taxes and other                                        88          (456)           514            146
    Change in operating assets and
      liabilities                                        (343)            696           (57)          (494)          (198)
                                                      -------         -------       -------        -------        -------
Net cash provided by (used in)
  operating activities                                   (312)         14,823         3,532             20         18,063
Investing activities:
  Cash paid for David M.                                              (11,285)                                    (11,285)
  Capital expenditures                                                 (3,968)       (1,253)                       (5,221)
  Other                                                                (2,665)          921            637         (1,107)
                                                      -------         -------       -------        -------        -------
Net cash used in investing activities                      --         (17,918)         (332)           637        (17,613)
Financing activities:
  Sale of common shares                                    73                                                          73
  Purchase of common shares                              (141)                                                       (141)
  Net proceeds from revolving credit
    facility                                           (2,750)                        3,991                         1,241
                                                      -------         -------       -------        -------        -------
Net cash provided by (used in)
  financing activities                                 (2,818)                        3,991                         1,173
Intercompany transfers and dividends                    5,484           2,282        (7,109)          (657)            --
Effects of exchange rates on cash                                                        41                            41
                                                      -------         -------       -------        -------        -------
Cash and Cash Equivalents:
  Net increase (decrease) in cash and
    cash equivalents                                    2,354            (813)          123             --          1,664
  Cash and cash equivalents at
    beginning of period                                   403              87         3,279                         3,769
                                                      -------         -------       -------        -------        -------
  Cash and cash equivalents at end
    of period                                         $ 2,757         $  (726)      $ 3,402        $    --        $ 5,433
                                                      =======         =======       =======        =======        =======
</TABLE>

                                       63
<PAGE>   64

N.    RECENTLY ISSUED ACCOUNTING STANDARD

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and for Hedging Activities." Under the Statement, every derivative is recorded
in the balance sheet as either an asset or liability measured at its fair value.
Changes in the derivatives fair value will be recognized currently in earnings
unless specific hedge criteria are met.

Day will be required to adopt this standard for its fiscal 2000 financial
statements. Based on current hedging activities, Day does not anticipate this
standard to have a material effect on its financial statements.

                                       64

<PAGE>   65


 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
FINANCIAL DISCLOSURES

On April 20, 1998, the Company's Board of Directors voted to approve the
engagement of Arthur Andersen LLP as its independent auditors' for the year
ending December 31, 1998 to replace the firm of Deloitte & Touche LLP. The
reason for this change is the change in control of the Company as previously
reported in Form 8-K dated January 16, 1998.

In connection with the audit of the Company's financial statements for the year
ended December 31, 1998, there have been no disagreements with Arthur Andersen
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.

The reports of Deloitte & Touche LLP on the Company's financial statements for
the years ended December 31, 1997 and 1996 did not contain an adverse opinion or
a disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles.

In connection with the audits of the Company's financial statements for the
years ended December 31, 1997 and 1996, and in the subsequent interim periods,
there have been no disagreements with Deloitte & Touche 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 Arthur Andersen LLP as its
independent auditors' for the year ending December 31, 1998, Arthur Andersen LLP
performed certain due diligence procedures for the new majority shareholders and
was consulted on the accounting treatment and disclosure requirements of certain
acquisition related transactions included in the Company's 144A Offering
Memorandum and Form S-4 Registration Statement, all of which are reflected in
the Company's pro forma financial statements which give effect to the
acquisition of the Company by affiliates of Greenwich Street Capital Partners,
Inc. and SG Capital Partners LLC .

There were no written views regarding the above accounting matters that were
received by the Company. Deloitte & Touche LLP was not consulted on these
matters.

                                       65


<PAGE>   66
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below are the names, ages and a brief account of the business
experience of each person who is a director or executive officer of the Company.
Four of the directors, Messrs. Eckert, and Ferguson and Ms. Vanden Beukel, were
elected as directors on the Acquisition Closing Date in connection with the
Acquisition.

<TABLE>
<CAPTION>
NAME                                     AGE                              POSITION
----                                     ---                              --------
<S>                                    <C>        <C>                                               
Alfred C. Eckert III                      51         Chairman of the Board
Dennis R. Wolters                         52         Chief Executive Officer, President and Director
David B. Freimuth                         46         Vice President and Chief Financial Officer
John R. Elia                              51         Vice President, Operations, Image Transfer
William B. Branson                        40         Vice President, General Manager, Textiles
Michael E. McLean                         49         Vice President, Technology, Planning and New
                                                     Product Development, Image Transfer
Dermot Healy                              44         Managing Director, Europe
Michael P. Neroni                         34         National Sales Director, Image Transfer
Dwaine R. Brooks                          56         Director, Human Resources and Assistant
                                                     Secretary
William C. Ferguson                       69         Director
Christine K. Vanden Beukel                28         Director, Secretary

</TABLE>

Alfred C. Eckert III has been the President of Greenwich Street Capital
Partners, Inc. ("Greenwich Street") since January 1994 and President of GSCP,
Inc. since June 1998. Since 1991, Mr. Eckert has been a general partner of 
Greycliff Partners. From 1984 to 1991, Mr. Eckert was a general partner of 
Goldman, Sachs & Co. He is a director of Eastgate Group Limited, Telex 
Communications, Inc., IPC Magazines and McKesson HBOC, Inc.

Dennis R. Wolters has been the Chief Executive Officer of the Company since the
AIP Acquisition in June 1995, and the President of the Company since 1990. He
joined the Company in 1983 as Director of Business Development and has served in
a number of positions with the Company since that time. Mr. Wolters was named
Executive Vice President of Image Transfer in 1986, President of Image Transfer
in 1989, President of the Company in June 1990, and Chief Executive Officer of
the Company following the AIP Acquisition in June 1995.

David B. Freimuth joined the Company in 1974 and assumed the position of Vice
President, Chief Financial Officer in 1995. He was named Controller of the
Company in 1987 and since that time he has been responsible for all accounting
functions for the domestic and international operations of the Company.

John R. Elia was named Vice President of Operations for Image Transfer in 1995.
Mr. Elia also heads the quality improvement process and was the technical leader
on ISO 9002 Certification. From 1992 to 1995 he was Vice President of
Manufacturing for Image Transfer. Mr. Elia was director of Textile Manufacturing
from 1990 until 1992.

William B. Branson assumed the position of Vice President, General Manager,
Textiles in August 1996. He previously held the position of Director, Sales and
Marketing, Image Transfer Products Division, Europe. From 1989 to 1995 he was
responsible for worldwide marketing, Image Transfer, in addition to being the
Sales Manager for Latin America and the Pacific Rim.

                                       66

<PAGE>   67

Michael E. McLean joined the Company in 1976 and was named Vice President,
Technology, Planning and New Product Development for Image Transfer in 1997.
From 1989 to 1997 he was Director, Technology and Product Engineering, Image
Transfer. Mr. McLean has worked in Image Transfer Products Division's Product
Engineering and Research and Development departments since he joined the
Company.

Dermot Healy, Managing Director, European Operations, joined Day in December
1996. Mr. Healy was previously employed by Renold PLC, since 1991, in several
capacities, most recently as Managing Director of the Milnrow and Bradford
operations. Renold PLC is a manufacturer and marketer of power transmission
products. Mr. Healy worked for Procter & Gamble, Pilkington Group and Cookson
Group-Horsell Graphics as product manager and business development manager and
group development director.

Michael P. Neroni, National Sales Director, Image Transfer Products, was named
National Sales Director in 1994 and is responsible for the Image Transfer
Division's marketing and sales for North America. Mr. Neroni began his career
with the Company in 1987. He was a District Sales Manager until 1993 when he was
promoted to Manager of Printing Sales Operations.

Dwaine R. Brooks was named Director Human Resources for the Company's worldwide
operations in August 1990. Previously, he was the Manager of Human Resources for
the Asheville facility.

William C. Ferguson retired as Chairman and Chief Executive Officer of NYNEX in
1995, a position he had held since 1989. From 1987 to 1989, Mr. Ferguson was
Vice Chairman, then President and Chief Executive Officer of NYNEX. Prior to
that, from 1971 to 1983, Mr. Ferguson held a number of executive positions with
New York Telephone and Michigan Bell. Mr. Ferguson is also a director of Best
Foods Corporation, Corn Products International.

Christine K. Vanden Beukel joined Greenwich Street at its inception in 1994 and
is an officer of GSCP, Inc. Ms. Vanden Beukel previously worked in the
investment banking division of Smith Barney Inc. Ms. Vanden Beukel is also a
director of Telex Communications, Inc.

As compensation for his services as director, Mr. Ferguson has received warrants
to purchase up to 74 shares of Common Stock at a price of $4,030 per share that
vest in four equal installments, first on the grant date and then on each of the
first three anniversaries thereof. None of the other directors will receive any
compensation for their services as directors.

                                       67

<PAGE>   68


ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation for 1998,
1997, and 1996 for Mr. Wolters and the four other most highly compensated
officers of the Company at the end of 1998.

<TABLE>
<CAPTION>

                                                                                LONG TERM COMPENSATION
                                                                                ----------------------
                                                                                AWARDS         PAYOUTS
                                                                                ------         -------
                                                          ANNUAL              SECURITIES
NAME AND                                              COMPENSATION            UNDERLYING         LTIP            ALL OTHER
PRINCIPAL POSITION                   YEAR          SALARY        BONUS        OPTIONS(#)      PAYOUTS(a)       COMPENSATION
------------------                   ----          ------        -----        ----------      ----------       ------------
<S>                               <C>          <C>           <C>               <C>            <C>          <C>          
Dennis R. Wolters,                   1998         $200,000      $191,410          2,850          $    -       $5,084,715(b)
  President and                      1997          193,333       221,436              0          20,534          242,501(c)
  Chief Executive                    1996          186,667        77,063              0          29,178           13,442
  Officer

David B. Freimuth,                   1998          105,000        50,371            780               -        2,537,727(b)
  Vice President                     1997          101,667        58,615            110           6,703          166,355(c)
                                     1996           90,000        19,265              0           7,586            7,662

William B. Branson,                  1998           94,000        28,947            270               -          103,370(b)
  Vice President                     1997           90,500        45,465              0           6,703          222,798(c)
                                     1996           90,442        34,296              0           6,419           11,530

Michael E. McLean,                   1998           91,000        44,124            385               -           11,680
  Vice President                     1997           89,000        47,750              0           6,703          172,643(c)
                                     1996           86,833        15,596              0           7,586           16,166

John R. Elia,                        1998           88,000        51,091            355               -            8,108
 Vice President                      1997           86,000        54,338              0           7,679          166,894(c)
                                     1996           83,567        20,246              0          11,087           28,567

</TABLE>


(a)      Represents compensation received under a Hanna long-term incentive
         plan. The Company has replaced the Hanna long-term incentive plan with
         a stock option program.

(b)      Includes principally the Executive Incentive Bonus Arrangements as a
         result of the Greenwich Street Acquisition. See "Certain Relationships
         and Related Transactions".

(c)      Includes principally the balance of sales fulfillment incentive fees
         as a result of the AIP Acquisition.

                                       68

<PAGE>   69
The following table sets forth information concerning the options to purchase
common stock granted in 1998 for Mr. Wolters and the four other most highly
compensated officers of the Company at the end of 1998.


<TABLE>
<CAPTION>

                                                     OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
                                                     --------------------------------------
                                                                % OF TOTAL
                                                                 OPTIONS/
                                                 NUMBER OF         SARS
                                                SECURITIES        GRANTED
                                                UNDERLYING          TO           EXERCISE                           GRANT
                                                 OPTIONS/        EMPLOYEES          OR                              DATE
NAME AND                                           SARS             IN          BASE PRICE        EXPIRATION      PRESENT
PRINCIPAL POSITION                             GRANTED(#)(B)       1998          ($/SHARE)           DATE       VALUE ($)(a)
------------------                             -------------       ----          ---------           ----       ------------

<S>                                              <C>           <C>             <C>                <C>        <C> 
Dennis R. Wolters,
  President and Chief
  Executive Officer                                 450   (b)       7.1%            $4,030            2007      $  976,500
                                                    824   (c)      13.0%            $4,030            2007       1,788,080
                                                  1,576   (d)      24.9%            $4,030            2007       3,419,920
David B. Freimuth,
  Vice President                                    124   (b)       2.0%            $4,030            2007      $  269,080
                                                    226   (c)       3.6%            $4,030            2007         490,420
                                                    430   (d)       6.8%            $4,030            2007         933,100
William B. Branson,
Vice President                                       43   (b)       0.8%            $4,030            2007      $   93,310
                                                     79   (c)       1.2%            $4,030            2007         171,430
                                                    148   (d)       2.3%            $4,030            2007         321,160
Michael E. McLean,
Vice President                                       61   (b)       1.0%            $4,030            2007      $  132,370
                                                    112   (c)       1.8%            $4,030            2007         243,040
                                                    212   (d)       3.4%            $4,030            2007         460,040
John R. Elia,
Vice President                                       56   (b)       0.9%            $4,030            2007      $  121,520
                                                    103   (c)       1.6%            $4,030            2007         223,510
                                                    196   (d)       3.1%            $4,030            2007         425,320

</TABLE>


(a)      The grant date present value calculated using Black-Scholes pricing 
         model.
(b)      Represents service options that, subject to the continuous employment
         of the named executive officer, become vested in five equal annual
         installments on each of the first five anniversaries of the grant date.
(c)      Represents performance and super performance options that, subject to
         the continuous employment of the named executive officer, become vested
         as follows: (a) one-fifth of the options become vested on each of the
         first five anniversaries of the date of grant if the Company achieves
         certain annual and cumulative EBITDA targets, and (b) any options that
         do not become vested as provided above will become vested on the ninth
         anniversary of the date of grant.

                                       69
<PAGE>   70
(d)      Represents exit options that, subject to the continuous employment of
         the named executive officer, become vested as follows: (a) based upon
         the internal rate of return of Greenwich Street realized in connection
         with the disposition of its investment in the Company, and (b) any
         options that do not become vested as provided above will become vested
         on the ninth anniversary of the date of grant.

               AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
                          AND FY-END OPTION/SAR VALUES


<TABLE>
<CAPTION>

                                                                                   NUMBER
                                                                                OF SECURITIES           VALUE OF
                                                                                  UNDERLYING          UNEXERCISED
                                                                                 UNEXERCISED          IN-THE-MONEY
                                                                                 OPTIONS/SARS         OPTIONS/SARS
                                                                                 AT FY-END(#)          AT FY-END($)
                                                                                 ------------          ------------
                                           SHARES                                EXERCISABLE/          EXERCISABLE/
                                         ACQUIRED ON         VALUE                 UNEXER-               UNEXER-
NAME                                     EXERCISE(#)      REALIZED($)              CISABLE              CISABLE(1)
----                                     -----------      -----------              -------              ----------

<S>                                       <C>              <C>                <C>                  <C>        
Dennis R. Wolters                              0                0                  1,200/               $3,636,000/
                                                                                   2,850                $     -

David B. Freimuth                              0                0                    310/               $917,300/
                                                                                     780                $     -

William B. Branson                             0                0                    112.5/             $340,875/
                                                                                     270                $     -

Michael E. McLean                              0                0                    200/               $606,000/
                                                                                     385                $     -

John R. Elia                                   0                0                    200/               $606,000/
                                                                                     355                $     -

</TABLE>

(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, having a term of five years from the Acquisition Closing Date,
subject to annual renewals thereafter 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, respectively (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, respectively. 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 

                                       70
<PAGE>   71



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) in the event of a termination on or
after the first anniversary of the Acquisition Closing Date but before the end
of the 5-year term of the agreement, a lump sum equal to two times the
executive's base salary and annual incentive bonus target and (b) in the event
of a termination on or after the end of the 5-year term of the agreement, 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. As
described in Item 1--"Business" and Item 13--"Certain Relationships and Related
Transactions," upon the consummation of the Acquisition, each of Messrs. Wolters
and Freimuth received an incentive bonus pursuant to the Executive Incentive
Bonus Arrangements. Mr. Wolters' incentive bonus was $4,868,750 and Mr.
Freimuth's incentive bonus was $2,434,375. Each of Messrs. Wolters and Freimuth
also served as an officer of GSD prior to its merger up into its two
shareholders and, in consideration for the performance of such services,
received signing bonuses on the Acquisition Closing Date in the amounts of
$198,566 and $99,283, respectively.

Each of Messrs. Branson, McLean and Brooks is a party to an employment agreement
with the Company, having a term of two years from the Acquisition Closing Date.
Under the employment agreements, each of Messrs. Branson, McLean and Brooks
receives annual base salaries of $94,000, $91,000 and $78,500, respectively
(subject to increase by the Board of Directors), and an incentive bonus at 100%
of plan target in an amount equal to at least $43,000, $43,000 and $40,000,
respectively. The agreements also contain certain non-competition provisions.
Each of the employment agreements also provided for the payment of a completion
bonus in the amount of $50,000 if the executive remains employed with the
Company through the first anniversary of the Acquisition Closing Date. The
completion bonuses were paid in February 1999. 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
up to two times the executive's base salary and annual incentive bonus target,
assuming that 100% of the annual plan target was met, and (iv) any portion of
the $50,000 completion bonus earned but not yet paid. As described in Item
1--"Business" and Item 13--"Certain Relationships and Related Transactions,"
upon the consummation of the Acquisition, Mr. Branson also received an incentive
bonus in the amount of $100,000.

COMPENSATION COMMITTEE INTERLOCKS

Executive compensation is determined by the Board of Directors. Mr. Eckert and
Ms. Vanden Beukel are the President and Managing Director of Greenwich Street,
respectively. Mr. Ferguson serves on the Advisory Board of Greenwich Street.
Greenwich Street 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 Greenwich Street and SGCP from and against certain liabilities.
Mr. Wolters is the President and Chief Executive Officer of the Company.
Pursuant to his Executive Bonus Arrangement, Mr. Wolters received $4,868,750
upon consummation of the Acquisition. Mr. Wolters also received options to
purchase 2,850 shares of Common Stock during 1998. See "Certain Relationships
and Related Transactions". No other officers of the Company participated in
Board deliberations regarding executive compensation in 1998.

                                       71
<PAGE>   72
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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.

<TABLE>
<CAPTION>

                                                                       NO. OF SHARES OF          % OF
                                                                         COMMON STOCK           COMMON
NAME OF BENEFICIAL OWNER                                                    (a)(b)               STOCK
------------------------                                                    ------               -----
<S>                                                                       <C>                   <C>
Dennis R. Wolters                                                           1,590                 6.0
David B. Freimuth                                                             435                 1.7
Michael E. McLean                                                             225                 0.9
John R. Elia                                                                  211                 0.8
Dwaine R. Brooks                                                              146                 0.6
William B. Branson                                                            151                 0.6
Alfred C. Eckert III(c)                                                        --                  --
Christine K. Vanden Beukel(c)                                                  --                  --
William C. Ferguson                                                            15                 0.1
All Directors and Executive Officers
  as a Group (21 persons)                                                   3,645                13.8
SG Capital Partners LLC                                                     3,777.5              14.3
Greenwich IV LLC(c)                                                        18,912                71.8
                                                                           ------               -----
         Total                                                             26,334.5             100.0

</TABLE>

(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 3,036.5.

(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 Greenwich Street. Mr. Eckert and
         Ms. Vanden Beukel may be deemed to beneficially own the 18,912 shares
         of Common Stock beneficially owned by Greenwich IV LLC by virtue of
         their affiliation with Greenwich Street. Mr. Eckert and Ms. Vanden
         Beukel disclaim any such beneficial ownership.

                                       72

<PAGE>   73


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 Greenwich Street,
which initially shall be five, and for the composition of the Board of Directors
of the Company to consist of four individuals designated as designated by
Greenwich Street 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, Greenwich Street shall have the right to require
the Company to effect up to two registrations of their Common Stock on Form S-1
under the Securities Act and, if available, unlimited registrations on Form S-2
or S-3 under the Securities Act; from and after a public offering, SGCP shall
have the right to require the Company to effect up to two registrations of the
Common Stock on Form S-3 under the Securities Act and that the Company shall pay
all registration expenses in connection with each registration of shares of the
Common Stock pursuant to the Stockholders Agreement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company has engaged the Investors, 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 to be paid to the Investors and
contains indemnification and expense reimbursement provisions which 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) the tenth anniversary of the date hereof and (ii) the date on which
Greenwich Street Capital Partners, L.P. or its affiliates no longer, directly or
indirectly, own any shares of capital stock of the Company, and may be earlier
terminated by Greenwich Street, in its sole discretion.

Pursuant to their Executive Incentive Bonus Arrangements, Dennis R. Wolters,
David B. Freimuth, William B. Branson and Thomas J. Koenig received $4,868,750,
$2,434,375, $100,000 and $25,000 respectively, upon the consummation of the
Acquisition.


                                       73
<PAGE>   74

SGCP owns 3,777.5 shares of Class B Non-Voting Common Stock representing 14.3%
of the outstanding Common Stock (on a fully-diluted basis). Societe Generale is
the Administrative Agent and the lender under both the GSD Credit Facility and
the Senior Secured Credit Facility.

In 1998, certain members of management purchased 57 shares of Common Stock at
$4,030 per share. Members of management were also granted options to purchase an
aggregate of 6,321 shares of Common Stock at an exercise price of $4,030 per
share. See "Executive Compensation - Option Grants in 1998."

                                     PART IV

ITEM 14. 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, 1998, 1997 and 1996:

     Independent Auditors' Reports
     Consolidated Balance Sheets
     Consolidated Statements of Operations
     Consolidated Statements of Comprehensive Income (Loss)
     Consolidated Statements of Stockholders' Equity (Deficit)
     Consolidated Statements of Cash Flows
     Notes to Consolidated Financial Statements

(a)(2)   FINANCIAL STATEMENT SCHEDULES
    Years ended December 31, 1998, 1997 and 1996:
       Independent Auditors' Reports - At pages 30 and 31 of this Report.
       Schedule II - Valuation and Qualifying Accounts (At page 77 of this
       Report).

     The information required to be submitted in Schedules I, III, IV and V 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

     Form 8-K dated January 16, 1998 - Affiliates of Greenwich Street Capital
     Partners, Inc. and SG Capital Partners LLC completed the acquisition of
     93.9% of the common stock of Day International Group, Inc. from American
     Industrial Partners Capital Fund, L.P. and American Industrial Partners
     Capital Fund II, L.P., certain affiliates of AIP and certain management
     stockholders.

                                       74
<PAGE>   75

     Form 8-K dated February 20, 1998 - A Consent Solicitation Statement was
     distributed to the registered holders of the 11 1/8% Senior Subordinated
     Notes due 2005 soliciting consent to certain amendments to the Indenture
     which governs the Notes.

     Form 8-K dated April 20, 1998, as amended, the Company's Board of Directors
     voted to approve the engagement of Arthur Andersen LLP as its independent
     auditors' for the year ending December 31, 1998 to replace the firm of
     Deloitte & Touche LLP. The reason for this change is the change in control
     of the Company as previously reported in Form 8-K dated January 16, 1998.

(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.

                                       75

<PAGE>   76


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Day International Group, Inc. has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.


                                           Day International Group, Inc.
                                                 (Registrant)

Date:    March 29, 1999                    By:/s/ Dennis R Wolters
                                              --------------------
                                           Dennis R. Wolters
                                           President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of Day International
Group, Inc. and in the capacities and on the dates indicated.

Date:     March 29, 1999                   By:/s/ Dennis R Wolters
                                              --------------------
                                           Dennis R. Wolters
                                           President, Chief Executive Officer
                                           and Director (Principal Executive
                                           Officer)
Date:     March 29, 1999                   By:/s/ David B. Freimuth
                                              ---------------------
                                           David B. Freimuth
                                           Vice President and Chief Financial
                                           Officer (Principal Financial Officer 
                                           and Principal Accounting Officer)
Date:     March 29, 1999                   By:/s/ Alfred E. Eckert, III
                                              -------------------------
                                           Alfred E. Eckert, III
                                           Director
Date:    March 29, 1999                    By:/s/ Christine K. Vanden Beukel
                                              ------------------------------
                                           Christine K. Vanden Beukel
                                           Director
Date:    March 29, 1999                    By:/s/ William C. Ferguson
                                              -----------------------
                                           William C. Ferguson
                                           Director

                                       76

<PAGE>   77

DAY INTERNATIONAL GROUP, INC.
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>

   COLUMN A            COLUMN B                    COLUMN C              COLUMN D   COLUMN E
   --------            --------    ------------------------------------- --------   --------
                                                  ADDITIONS
                                   -------------------------------------
 ALLOWANCE FOR        BALANCE AT      CHARGED TO                         DEDUCTIONS  BALANCE
   DOUBTFUL           BEGINNING       COSTS AND               CURRENCY      FORM     AT END
   ACCOUNTS           OF PERIOD        EXPENSES   ACQUIRED  TRANSLATION  RESERVES  OF PERIOD
   --------           ---------        --------   --------  -----------  --------  ---------
<S>                <C>            <C>         <C>         <C>         <C>       <C>
Period Ended:
 December 31, 1998   $  (1,055)      $  (217)    $   (218)    $  (32)    $  138    $  (1,384)
                     =========       =======     ========     ======     ======    =========

 December 31, 1997   $    (982)      $  (162)    $      -     $   47     $   42    $  (1,055)
                     =========       =======     ========     ======     ======    =========

 December 31, 1996   $  (1,248)      $  (118)    $    (50)    $   25     $  409    $    (982)
                     =========       =======     ========     ======     ======    =========
</TABLE>

                                       77

<PAGE>   78


INDEX TO EXHIBITS
<TABLE>
<CAPTION>
                                                                               Page No.
                                                                               --------
<S>    <C>                                                                      <C>
(3)      Articles of Incorporation and By-Laws:
          3.1  Certificate of Incorporation of Day International Group, Inc.      *
               ("Group")
          3.2  By-Laws of Group                                                   *
          3.3  Certificate of Incorporation of Day International, Inc.            *
               ("Guarantor") *
          3.4  By-Laws of the Guarantor                                           *

(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
          4.2  Registration Rights Agreement dated as of June 6, 1995 among
               Group, the Guarantor, Donaldson, Lufkin & Jenrette Securities
               Corporation, NationsBanc Capital Markets, Inc. .                   *
          4.3  First Supplemental Indenture, dated March 13,1998, to the
               Indenture                                                          ****** 
          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.                                     ******
          4.5  Form of Global Notes (filed as part of Exhibit 4.4)                ******
          4.6  Registration Rights Agreement, dated as of March 18, 1998, by and
               between the Company and Societe Generale Securities Corporation.   ******
          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")                               ******
          4.8   Form of Global Certificate for the Exchangeable Preferred Stock.  ******
          4.9  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.                                       ******

 (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. .     *
         10.2  Stockholders Agreement dated January 16, 1998, among GSD
               Acquisition Corp., Greenwich IV, LLC, Societe Generale Capital
               Corporation and certain Employee Stockholders                      ******
         10.3  Employment Agreement dated December 9, 1994 between the Guarantor
               and Dennis R. Wolters.                                             *
         10.4  Form of Employment Agreement between the Guarantor with certain
               members of management.                                             *
         10.5  Stock Purchase Agreement dated April 11, 1995 among Group, M.A.
               Hanna Company and Cadillac Plastic Group, Inc., as amended.        *
         10.6  Share Purchase Agreement dated April 11, 1995 between Group and
               Cadillac Plastic Limited, as amended.                              *
</TABLE>
  
                                     78
<PAGE>   79
<TABLE>
<CAPTION>

                                                                              Page No.
                                                                              --------
<S>    <C>                                                                      <C>
         10.7  Asset Purchase Agreement between Day International (Canada)
               Limited and Group, as amended.                                     *
         10.8  Day International Group, Inc. Stock Option Plan, date as of July
               6, 1995                                                            **
         10.9  Amendment to Stock Option Plan, dated September 19, 1996           ****
         10.10 Second Amendment to Stock Option Plan dated January 16, 1998.      ******
         10.11 Asset Purchase Agreement between Day International, Inc. and
               Flint Ink Corporation dated December 31, 1996                      ****
         10.12 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      *****
         10.13 Amendment to Stock Purchase Agreement, dated as of January 16,
               1998, by and among Greenwich IV, LLC, GSD Acquisition Corp. and
               the Stockholders of Day International Group, Inc. parties thereto  *****
         10.14 Senior Secured Credit Agreement, dated as of January 15, 1998,
               among Group, Guarantor and Societe Generale parties thereto        *****
         10.15 Purchase Agreement, dated as of March 13, 1998 between the
               Company and Societe Generale Securities Corporation.               ******
         10.16 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.                         ******
         10.17 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.          ******
         10.18 Mortgage and Security Agreement Dated January 16, 1998, from Day,
               as Mortgagor, to the Administrative Agent, with respect to the
               Florida property.                                                  ******
         10.19 Mortgage and Security Agreement Dated January 16, 1998, from Day,
               as Mortgagor, to the Administrative Agent, with respect to the
               South Carolina property.                                           ******
         10.20 Deed of Trust, dated January 15, 1998, from Day, as Mortgagor, to
               the Administrative Agent, with respect to the North Carolina
               property.                                                          ******
         10.21 Mortgage and Security Agreement Dated January 16, 1998, from Day,
               as Mortgagor, to the Administrative Agent, with respect to the
               Michigan property.                                                 ******
         10.22 Amendment to the Employment Agreement, dated January 16, 1998,
               between Day International, Inc. and Dennis R. Wolters.             ******
         10.23 Amendment to the Employment Agreement, dated January 16, 1998,
               between Day International, Inc. and David B. Freimuth.             ******
         10.24 Consulting Agreement between the Company and Greenwich Street.     ******
         10.25 Indemnification Agreement between the Company and Greenwich Street.******
         10.24 Consulting Agreement between the Company and SG Capital Partners
               Limited. .                                                         ******
</TABLE>

                                       79
<PAGE>   80
<TABLE>
<CAPTION>

                                                                                 Page No.
                                                                                 --------
         <S>    <C>                                                           <C>
         10.25 Indemnification Agreement between the Company and SG Capital
               Partners Limited.                                                  ******
         10.26 Share Purchase Agreement between Day International, Inc., Mr.
               Rudolf Wilbring, Mr. Helmut Bushoff and Mr. Josef Dunne dated
               December 23, 1998                                                  +
         10.27 Non Compete Agreement between Day International, Inc., Mr. Rudolf
               Wilbring, Mr. Helmut Bushoff and Mr. Josef Dunne dated December
               23, 1998 (included in Exhibit 10.26).                              +
         10.28 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.                         +
         10.29 First Amendment to Senior Secured Credit Agreement, dated as of
               December 17, 1998, by and among Societe Generale, as
               Administrative Agent for the Lenders, the Company and Day
               International, Inc.                                                +
         10.30 Stock warrant to purchase 74 shares of Common Stock of the
               Company, dated as of January 18, 1998 issued to Mr. William C.
               Ferguson.                                                          +

(21) Subsidiaries                                                                 81

(27) Financial Data Schedule                                                      82
</TABLE>

*        Incorporated by reference to the Group's Registration Statement on
         Form S-4 (Reg. No. 33-93644).

**       Incorporated by reference to the Group's Form 10K for the
         period ended December 31, 1995.

***      Incorporated by reference to the Group's Form 10Q for the quarterly
         period ended June 30, 1996.

****     Incorporated by reference to the Group's Form 10K for the year ended
         December 31, 1996.

*****    Incorporated by reference to the Group's Form 8K dated January 16, 1998
         and the Group's Form 8-K dated February 20, 1998.

******   Incorporated by reference to the Group's Registration Statement on
         Form S-4 (Reg. No. 333-51839).

+        Filed herewith

                                       80