<PAGE>   1
                                  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, 1999

                   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]

<TABLE>
<S>                                                                      <C>
At the close of business on March 30, 2000:
         Number of shares of common stock outstanding                     23,298
         Aggregate market value of the Company's voting and
           Non-voting common stock held by non-affiliates                $     0
</TABLE>

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, 1999, 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.
The words "believe", "anticipate", "project", "plan", "expect", "intend", "will
likely result", "will continue", and similar expressions identify
forward-looking statements. 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. While made in good faith and with a reasonable basis based on
information currently available to the Company's management, there is no
assurance that any such forward-looking statements will be achieved or
accomplished. The Company is under no obligation to update any forward-looking
statements to the extent it becomes aware that they are not achieved for any
reason.

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.




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                                     PART I

ITEM 1.  BUSINESS

COMPANY 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. Following its acquisition of Varn
International ("Varn"), discussed below, the Company is also a leading
manufacturer and marketer of pressroom chemicals and automatic dampening systems
for the graphic arts (printing) 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 1999 it had the number one market share
in printing blankets and sleeves in North America and worldwide. Following the
acquisition of Rotec Hulsensysteme GmbH ("Rotec") in December 1998 (described
below), the Company is one of the world's largest manufacturer and marketers of
sleeves for use in flexographic printing. The Company's textiles component
division ("Textiles") is one of the largest U.S. manufacturers and marketers of
precision engineered rubber cots, aprons and other fabricated rubber fiber
handling components sold to textile yarn spinners worldwide.

On January 16, 1998, affiliates of Greenwich Street Capital Partners, Inc. ("GSC
PARTNERS") 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. References
to GSC Partners include Greenwich Street Capital Partners, Inc. and its
successor entities as the context requires. 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


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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 did 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. 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 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.

On September 30, 1999, the Company acquired the textile products operations of
Armstrong World Industries, Inc. ("TPO") for $12.5 million in cash. TPO is a
leading manufacturer and marketer of high-end precision engineered rubber cots
and aprons sold to textile yarn spinners worldwide and was a major competitor of
Day's textile division. This business is being merged with Day's textile
division to create one business that manufactures and markets two brands,
DAYtex(R) and Accotex(R).

On October 19, 1999, the Company completed its acquisition of the stock of
privately-held Varn International ("Varn") for $61.5 million in cash, net of
cash acquired of $1.2 million. Varn is a leading worldwide supplier of pressroom
chemicals to the printing industry. Varn also manufactures the Kompac brand of
automatic dampening systems for printing presses through its Graph Tech
subsidiary. Headquartered in Oakland, New Jersey, Varn has manufacturing
facilities in Addison, IL; Houston, TX; Ontario, Canada; Manchester, England;
Willich, Germany; Johannesburg, South Africa; Melbourne, Australia; Kuala
Lumpur, Malaysia and a joint venture in Foshan, China.

These acquisitions in 1999 were financed through the private placement of $38.5
million of 18% convertible cumulative preferred stock and by amending and
restating the existing $60 million Senior Secured Credit Facility ($40 million
term and $20 million revolver). The Amended and Restated Senior Secured Credit
Facility provides for a $70 million Term Loan and a $20 million Revolving Credit
Facility.

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


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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 the majority 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.

Varn manufactures two categories of pressroom products: pressroom chemicals and
dampening systems. Varn manufactures over 100 different pressroom chemicals,
which can be classified into the following categories: (i) roller and blanket
washes, which are used to remove ink and glaze from the surface of the rollers
and blankets on the printing press; (ii) fountain solutions, which are used to
prevent ink from migrating to non-print areas of the printing plate; (iii)
anti-setoff powders which are used by sheet fed and letter press printers to
prevent ink from transferring from the top of one sheet to the bottom of the
next; (iv) lithographic chemicals and specialties; and (v) silicones, which are
used in heatset web offset to provide support in certain printing processes.

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 reducing setup time in an effort to
maintain offset printing's technological and cost advantages. Industry


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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 are expected to 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 expected to
be 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 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.



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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.

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
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 1999, approximately 82% 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


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position increases correspondingly. As a result of these increasing demands,
cots and aprons must be of 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) and Accotex(R) brand names,
with over 4,000 different SKUs. General purpose cots and aprons include a full
line of products designed for "short staple" fibers (such as cotton) and "long
staple" fibers (such as wool), while specialty cots and aprons include
glass-forming aprons, carpet cots and drawing cots. The Company provides
high-quality, precision engineered products that deliver superior value to its
customers. As a result, 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.

Other products and services include ribbons, cot installation presses, various
other accessories and reconditioning services.

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


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exclusive worldwide distribution rights for products manufactured by Coimbatore
Cots and Coatings that use the Company's technology.

PRESSROOM CHEMICALS AND AUTOMATIC DAMPENING SYSTEMS

  Industry

CONSUMABLE PRESSROOM CHEMICAL MARKET. The consumable pressroom chemical market
consists of a variety of products used in the pressroom to improve the quality
of print. The growth is anticipated to be predominantly driven by the heatset
web segment in the U.S. and Europe and overall market growth in developing
countries. Heatset web printing utilizes large presses to print high volume run
lengths of impressions. In addition, some of the market growth will be driven by
segments that use new and improved technologies, such as the rapidly growing
flexography market segment.

DAMPENERS. Graph Tech is a leading dampening system manufacturer for small and
medium presses worldwide. Through its extensive product line, Graph Tech
provides a totally unique system for applying fountain solutions to lithographic
plates for offset printing. The use of dampening systems on a press improves the
quality of the printed page. The dampening systems can be used for both new
and retrofit applications.

Products

Consumable Pressroom Chemicals. Varn manufactures a variety of pressroom
chemicals, classified into five categories: (i) roller and blanket washes, (ii)
fountain solutions, (iii) antisetoff powders, (iv) lithographic chemicals and
specialties and (v) silicones.

Roller and Blanket Washes -Varn has developed products that speed wash-up, color
changes and blanket and roller maintenance, all formulated to reduce down-time
and improve productivity. Roller and blanket washes are used to remove ink and
glaze from the surface of the rollers and blankets on the printing press. Varn
makes over 25 washes, grouped into five different categories: premium,
environmental, general purpose, fast drying and specialty. Varn is a market
leader in areas of environmental washes, which constitute an important
subcategory of Varn's overall roller and blanket washes business. Varn offers
environmental products for all segments of the printing industry, which are used
for cleaning presses of any size, from small presses to giant offset newspaper
presses. A knowledgeable technical service team supports those products.

Fountain Solutions - Varn has created a family of fountain solutions, which are
used to prevent ink from migrating to non-print areas of the printing plate, to
cover all requirements from giant web printing presses down to small offset
duplicating printing presses. The fountain solutions and fountain additives are
adjusted for water condition and properly balanced and fortified to improve
print quality and press productivity. Varn's R&D laboratories have created a
line of alcohol-free


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fountain solutions formulated to eliminate the use of flammable isopropyl
alcohol from the printing industry thus improving the pressroom environment.

Anti-setoff Powders - Antisetoff powders are used extensively by sheetfed,
offset and letterpress printers to prevent ink from transferring from the top of
one sheet to the bottom of the next. Varn offers an extensive range of
silicone-coated and conventional antisetoff powders to meet all industry
requirements.

Lithographic chemicals and specialties - This line includes a wide range of
products (including deglazers, additives, plate cleaners, aerosols), all
formulated to meet the evolving needs of the printing industry.

Silicones - Silicones are used in heatset web offset to provide slip to the
sheet as it passes over the former board. Varn offers an extensive line of
conventional silicones, as well as the patented new technology Web-Pro AMS
series.

Dampening Systems - Graph Tech produces the patented Kompac Dampening System and
other mechanical devices for offset printing presses. Graph Tech manufactures
six different Kompac Dampening System models to fit more than 8 different
presses, both for new and retrofit applications. Kompac Dampening Systems
consume other products manufactured by Varn, such as fountain solutions.

  Sales and Distribution

Varn has the largest distributor-oriented pressroom chemicals sales force in the
US with a sales team composed of (i) a product manager whose function is to
position new and existing products by coordinating R&D efforts with the sales
force and the development team, (ii) a marketing manager, (iii) a national
accounts manager for Varn, whose function is to bring Varn product lines to a
number of major national accounts, (iv) two product managers for Kompac
Dampening System, and (v) full-time sales associates.

The international sales organization reports to the UK-based Managing Director
of Varn International. The Varn UK team covers Great Britain, Scandinavia, as
well as India, Sri Lanka and Israel. The majority of Varn's distribution and
service in Continental Europe is based in Germany, at the Willich facility
outside Dusseldorf. This center serves all of Continental Europe and Eastern
Europe, including Russia. In the South Pacific, Varn has sales and service staff
covering both product lines supported by factories in Melbourne, Australia and
Kuala Lumpur, Malaysia. In November 1999, the new joint venture in China began
operations adding additional sales and service personnel to serve Greater China.

Varn sells pressroom chemicals into over 90% of the world's market - roughly 50
countries. After years of developing a global distribution network, Varn is now
strongly diversified across many geographic markets. Approximately 98% of Varn's
sales are to distributors servicing the printing


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industry. These distributors employ over 6,000 sales and service personnel who
sell and deliver Varn products to over 40,000 customers.

RAW MATERIALS

Rubber polymers are a key component in most of the Company's Image Transfer and
Textile products. Various fabrics, combined with rubber, represented
approximately 40% of all raw materials purchases in each of 1999 and 1998. Raw
material purchases accounted for approximately 50% of cost of goods sold for the
Company's products during the same period. Varn purchases approximately 200
different raw materials. Varn works with a variety of key national suppliers,
and holds supply agreements with many of them. However, no single supplier
accounts for more than 10% of total raw material costs. The largest raw material
component is petroleum distillates, such as aliphatics and aromatics. The key
materials purchased for the Kompac systems are rollers, which account
for approximately 35% of the cost of components. These are sourced from major
roller manufacturers globally. The remainder of Kompac components are castings
and other products machined in-house at the Graph Tech facility in Oakland, NJ.

The Company is evaluating the impact of the recent increase in petroleum prices
on its raw material costs and in some markets already has instituted price
increases to offset the impact of these increases.

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 Image Transfer and Textile research & development staff consists
of approximately 30 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.

Varn's R&D and technical services team consists of an international group of 36
engineers, technologists and chemists from the U.S., U.K. and Australia. R&D
personnel have expertise in a variety of fields including analytical and surface
chemistry, ink and coating chemistry, environmental science, health and safety,
statistics and environmental design, aqueous chemistry, organic chemistry, as
well as graphic arts chemistry and printing technology.

Varn's products can be grouped into standard and custom products. Product lines
are formulated to meet regional requirements. For example, high volume printing
operations, such as major daily newspapers and commercial heatset web, often
require custom fountain solutions.



                                       12
<PAGE>   13
A team of chemists at the Addison, Illinois lab develops new and improved
products for North America, Latin America, and the North Pacific Rim. The Varn
U.K. labs have an extensive and qualified staff operating in a fully equipped
lab with the latest technology and develop new and improved products for Europe.
The US and U.K. labs cooperate on product development.

In addition to its extensive patent and trademark portfolio, the Company has a
variety of working agreements with key partners in the image transfer business.
These agreements and other efforts with OEM companies should stimulate
proprietary processes and additional patent applications.

COMPETITION

The Company competes with a number of manufacturers in the printing, pressroom
chemicals, automatic dampening systems 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"), recently
acquired by MacDermid.

In Textiles, the Company competes with manufacturers, such as Premtec, Inc.,
Hokushin Corporation, Yamauchi and Berkol AG (Switzerland).

Varn competes with a number of manufacturers of pressroom chemicals: the
principle competitors are Anchor Chemical, Rycoline and PRISCO. There is one
main competitor to Graph Tech's Kompac line: Accel Graphics (a division of
Parmarco), based in Dallas, Texas, that manufactures the Crestline dampening
system.

INTERNATIONAL OPERATIONS

The Company's principal international manufacturing facilities are located in
Dundee, Scotland (Image Transfer), Munster, Germany (Textiles) and Manchester,
England (Pressroom Chemicals). In conjunction with the acquisition of TPO, the
Company has decided to close its Textile manufacturing operation in Dundee,
Scotland and move its production output to Munster, Germany and Asheville, NC. A
one-time restructuring charge of $1.4 million was recorded in 1999.

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
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, South
Africa, Russia, Malaysia, Canada and Australia.

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



                                       13
<PAGE>   14
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 43% of the Company's 1999 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. The Company has entered into forward foreign exchange
contracts to protect it against such foreign exchange movements.

ENVIRONMENTAL MATTERS

The Company's facilities in the United States are subject to Federal, state and
local environmental laws and regulations, including those governing discharges
to the air and water, the handling and disposal of solid and hazardous wastes,
and the remediation of contamination associated with releases of hazardous
substances. The Dundee, Scotland facility and the Manchester, England facility
are 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 Textile facility
in Munster, Germany is subject to German and local environmental requirements,
as well as the environmental requirements promulgated by the European Union.
Varn's other facilities in Canada, South Africa, Malaysia and Australia are
subject to their respective countries federal and local 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 acquisitions of
Rotec, Varn and TPO, 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.

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


                                       14
<PAGE>   15
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 2000.

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.
Capital expenditures for this equipment total approximately $1.5 million and
were completed in 1999.

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 was
required to operate such system until certain cleanup levels were achieved. On
November 17, 1999, the Michigan Department of Environmental Quality approved a
study to determine if further degradation of contaminates will occur if pumping
is discontinued and the acquifer returns to an anaerobic condition. Operations
of the groundwater remediation system were suspended on December 6, 1999 and the
results of the study will be reviewed after a one year period. As of December
31, 1999, the Company had recorded accruals of approximately $656,000 to reflect
future costs associated with this cleanup and, based on the reports of its
independent consultants, the Company believes that such accruals are adequate.
CPG has indemnified the Company for such costs and the Company expects to be
reimbursed after amounts are expended.
At December 31, 1999, a $647,000 indemnification receivable is recorded.

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.
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.



                                       15
<PAGE>   16
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.

Varn facilities in the US and Canada comply in all material respects with local,
state and federal environment regulation governing operations. Required facility
operating permits are current and in good standing. EPCRA facility contingency
plans, TRI reports, waste reports, air emissions and VOC usage reports are
current.

Varn has been proactive in removing underground storage tanks at all sites prior
to 1996. Remediation of soil and groundwater from those sites is either complete
or near completion. Remaining soil and groundwater contamination is low or below
government standards. Natural attenuation is the elected remediation strategy.

Varn has been named as a de-minimus Potentially Responsible Party (PRP) at six
Superfund sites in the past 10 years. Varn's liability at each site was small
and the EPA therefore classified Varn as de-minimus at those sites.

ASSOCIATES

The Company currently employs approximately 1,445 full-time associates
worldwide, of which approximately 800 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.




                                       16
<PAGE>   17
                                  RISK FACTORS

Current and prospective investors should carefully consider the following
factors in addition to the other information set forth in this Report.

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 43% in 1999 and 40% in 1998 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."

IMPACT OF SIGNIFICANT COMPETITION

The Company's primary competitors are Reeves International, Inc. ("Reeves") and
Polyfibron Technologies, Inc. ("Polyfibron"), recently acquired by MacDermid, in
Image Transfer; Premtec, Inc., Hokushin Corporation, Yamauchi and Berkol AG
(Switzerland) in Textiles. Varn competes with a number of manufacturers of
pressroom chemicals; the principle competitors are Anchor Chemical, Rycoline and
PRISCO. There is one main competitor to Graph Tech's Kompac line: Accel Graphics
(a division of Parmarco), that manufactures the Crestline dampening system. 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 solvents and other hazardous substances, and if a release of
hazardous substances occurs on or


                                       17
<PAGE>   18
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 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 11% of the Company's sales in 1999 and
12% in 1998. 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.


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.



                                       18
<PAGE>   19
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 at December 31, 1999 is
approximately $279.8 million (including the Notes) and the aggregate liquidation
preference of the Exchangeable Preferred Stock is $43.5 million (which, subject
to certain conditions, may be exchanged for Exchange Debentures). Also, in 1999,
the Company issued Convertible Preferred Stock. At December 31, 1999 the
aggregate liquidation preference of the Convertible Preferred Stock is $39.9
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
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 the Convertible 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 Amended and Restated Senior Secured Credit Facility, the 2005
Notes and the Notes, for the payment of periodic cash dividends on the
Exchangeable Preferred Stock and the Convertible Preferred Stock, for any
redemption of the Exchangeable Preferred Stock and the Convertible Preferred
Stock for cash, or if the Exchange Debentures have been issued, the payment of
principal of or cash interest on the Exchange Debentures. If the Company's cash
flow, availability under the Revolving Credit Facility and other capital
resources are insufficient to fund the Company's debt service obligations, the
Company may be forced to reduce or delay capital expenditures, to sell assets,
to restructure or refinance its indebtedness, or to seek additional equity
capital. There can be no assurance that any of such measures could be
implemented on satisfactory terms or, if implemented, would be successful or
would permit the Company to meet its debt service obligations.



                                       19
<PAGE>   20
IMPACT OF RESTRICTIVE FINANCING COVENANTS

The Amended and Restated Senior Secured Credit Facility, the 2005 Indenture and
the 2008 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 Amended and
Restated 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 Amended and Restated Senior Secured Credit Facility, the 2005 Notes
and the Notes, and redemption of the Exchangeable Preferred Stock and the
Convertible Preferred Stock or, in the case of the Exchange Debentures,
repayment of indebtedness under the Exchange Debentures. In addition, the
Amended and Restated Senior Secured Credit Facility and the 2005 Indenture
prohibit the repayment of indebtedness of the Notes by the Company in such an
event, unless and until such time as the indebtedness under the Amended and
Restated 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 Amended and Restated Senior Secured Credit Facility and the
2005 Notes. The inability to repay the indebtedness under the Amended and
Restated 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 Amended and Restated Senior Secured Credit Facility,
the 2005 Notes or the Notes, the Exchangeable Preferred Stock or the Exchange
Debentures, as the case may be, or with respect to the Convertible Preferred
Stock.




                                       20
<PAGE>   21
ITEM 2.  PROPERTIES

As noted below, the Company operates state-of-the-art, manufacturing facilities
strategically located throughout the world. The Company believes that it has
sufficient capacity at its manufacturing facilities to meet its production needs
for the foreseeable future, and further believes that all its sales worldwide
can be sourced through these facilities. A majority of the Company's
manufacturing facilities are ISO certified. The Company also owns or leases
warehouse and sales offices in the United States, Europe, Mexico and Hong Kong.
The Company's significant facilities are listed below:

<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
   Oakland, NJ                                                                                       53,000         Leased
   Addison, IL                                                                                       38,600          Owned
   Houston, TX                                                                                       66,000          Owned
   Brampton, Ontario                                                                                 23,200          Owned
   Manchester, England (Irlam)                                                                       65,400          Owned
   Melbourne, Australia                                                                              28,700          Owned
   Kuala Lumpur, Malaysia                                                                             9,300         Leased
   Johannesburg, South Africa                                                                        12,100          Owned
   Foshan, China                                                                                     19,000         Leased
   Mauldin, SC                                                                                       63,000          Owned
   Munster, Germany                                                                                  68,800         Leased
Warehouse/Sales Office:
   Dayton, OH                                                                                        10,500         Leased
   Elk Grove, IL                                                                                      5,000         Leased
   Lerma, Mexico                                                                                     45,000          Owned
   Hong Kong, China                                                                                   3,100         Leased
   Milan, Italy (Trezzano, Rosa)                                                                      1,500         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
   Willich, Germany                                                                                  25,800         Leased
</TABLE>



                                       21
<PAGE>   22
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.

In January 2000, the Company received a Notice of Assessment from the Ohio
Department of Taxation for approximately $16.0 million relating to the 1995 Ohio
Franchise Tax. In February 2000, the Company filed a Petition for Reassessment.
The Company believes, based on consultation with legal counsel and outside tax
experts, that it will ultimately prevail in this case. Should the Ohio
Department of Taxation ultimately prevail, the Company believes it is fully
indemnified by M.A. Hanna for this tax obligation. As a result, no provision has
been recorded in the financial statements for this contingency.

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 1999.

                                     PART II

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

As of March 29, 2000, 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, 1999. The summary
financial data set forth below with respect to the years ended December 31, 1999
and 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, which have been audited by
Deloitte & Touche LLP, independent auditors. The financial data for 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 periods subsequent to June 5, 1995
represents the results of operations of the Company subsequent to the AIP
Acquisition.



                                       22
<PAGE>   23
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>
                                      157 DAYS       208 DAYS
                                       ENDED           ENDED            FISCAL           FISCAL         FISCAL            FISCAL
                                      JUNE 6,      DECEMBER 31,          YEAR             YEAR           YEAR              YEAR
                                        1995           1995              1996            1997(c)         1998              1999
                                     ---------      ---------         ---------         ---------     ---------         ---------
                                                                         (DOLLARS IN THOUSANDS)
<S>                                  <C>            <C>               <C>               <C>           <C>               <C>
STATEMENT OF OPERATIONS DATA:
Net sales                            $  55,454      $  73,103         $ 136,814         $ 166,286     $ 173,066         $ 198,418
Cost of goods sold                      33,935         47,503            84,602           103,035       110,155           123,336
                                     ---------      ---------         ---------         ---------     ---------         ---------
Gross profit                            21,519         25,600            52,212            63,251        62,911            75,082
Selling, general and
  administrative expenses               11,257         12,885            23,657            28,629        29,116            35,960
Restructuring costs                                                                                                         1,361
Compensation and related
  transaction costs                                                                                      18,018
Amortization of  intangibles             2,258          3,688             6,474             3,315         2,565             3,821
Management fees and expenses                --            455               920               896         1,043             1,079
                                     ---------      ---------         ---------         ---------     ---------         ---------
Operating income                         8,004          8,572            21,161            30,411        12,169            32,861
Interest expense                            --          9,697            16,373            15,926        27,470            28,085
Other (income) expense                    (577)           952(d)           (219)              629           306               504
                                     ---------      ---------         ---------         ---------     ---------         ---------
Income (loss) before income
  taxes and extraordinary items          8,581         (2,007)            5,077            13,856       (15,607)            4,272
Provision (benefit) for
  income taxes                           3,488           (850)            2,000             5,939        (2,732)            2,021
                                     ---------      ---------         ---------         ---------     ---------         ---------
Income (loss) before
  extraordinary items                    5,093         (1,227)            3,007             7,917       (12,875)            2,251
Extraordinary losses on early
  extinguishment of debt                    --             --                --                --         3,552               857
                                     ---------      ---------         ---------         ---------     ---------         ---------
Net income (loss)                    $   5,093      $  (1,227)        $   3,007         $   7,917     $ (16,427)        $   1,394
                                     =========      =========         =========         =========     =========         =========
OTHER FINANCIAL DATA:
Capital expenditures                 $   1,565      $   2,082         $   5,221         $   5,124     $   7,103         $   5,936
Depreciation                             2,120          2,415             4,384             5,238         5,759             6,432
Amortization                             2,258          8,310            10,724             7,827         7,729            10,313
BALANCE SHEET DATA (AT
  END OF PERIOD):
Fixed assets, net of
  accumulated depreciation
  and amortization                   $  24,667      $  44,496         $  45,289(c)      $  44,792     $  50,305(b)      $  69,739(a)
Total assets                           139,537        228,823           237,886(c)        225,527       257,408(b)        331,504(a)
Long-term and subordinated
 long-term debt (including
  current maturities)                       --        151,250           152,919           130,883       257,515           279,830
Stockholders' equity (deficit)         114,780         49,861            52,734            60,189       (80,283)(e)       (49,717)
</TABLE>

(a)      The Company acquired TPO as of September 30, 1999. This acquisition was
         accounted for as a purchase. The statement of operations data includes
         the results of TPO for the period from October 1, 1999. On October 19,
         1999, the Company acquired Varn. This acquisition was also accounted
         for as a purchase. The statement of operations data includes the
         results of Varn for the period from October 19, 1999. Balance sheet
         data for 1999 includes the assets and liabilities from both of these
         acquisitions.

(b)      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. The statement of
         operations data includes the results of Rotec for the period from
         January 1, 1999.

(c)      The Company acquired the David M Company on December 31, 1996. This
         acquisition was accounted for as a purchase. Balance Sheet data for
         1996 includes the assets and liabilities of the David M Company
         while the Statement of Operations data includes the results of
         David M for the period from January 1, 1997.



                                       23
<PAGE>   24
(d)      Includes a bridge commitment fee, which resulted in a non-recurring
         expense of $1.0 million for the 208 days ended December 31, 1995.

(e)      Balance sheet data for 1998 reflects the effects of the Acquisition.

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 $279.8 million and the liquidation preference of
the 12-1/4% Exchangeable Preferred Stock is $43.5 million (which, subject to
certain conditions, may be exchanged for the Exchange Debentures) and the
liquidation preference on the Convertible Preferred Stock is $39.9 million. In
addition, on December 31, 1998, Rotec was acquired and on September 30, 1999 and
October 19, 1999, TPO and Varn, respectively, were acquired. Accordingly, the
results of operations for historical as well as future periods 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, 1997          DECEMBER 31, 1998          DECEMBER 31, 1999
                                                 -------------------        -------------------        -------------------
<S>                                              <C>          <C>           <C>          <C>           <C>          <C>
Net sales                                        $166.3        100.0%       $173.1        100.0%       $198.4        100.0%
Cost of goods sold                                103.0         62.0         110.2         63.7         123.3         62.1
                                                 ------       ------        ------       ------        ------       ------
Gross profit                                       63.3         38.0          62.9         36.3          75.1         37.9
SG&A                                               28.6         17.2          29.1         16.8          36.0         18.1
Restructuring costs                                                                                       1.4          0.7
Compensation and related transaction costs                                    18.0         10.4
Amortization of intangibles                         3.3          2.0           2.6          1.5           3.8          1.9
Management fees                                     0.9          0.5           1.0          0.6           1.0          0.6
                                                 ------       ------        ------       ------        ------       ------
Operating income                                 $ 30.4         18.3%       $ 12.2          7.0%       $ 32.9         16.6%
                                                 ======       ======        ======       ======        ======       ======
</TABLE>




                                       24
<PAGE>   25
COMPARISON OF RESULTS OF OPERATIONS

TWELVE MONTHS ENDED DECEMBER 31, 1999 COMPARED TO TWELVE MONTHS ENDED DECEMBER
31, 1998

Net sales increased to $198.4 million for the year ended December 31, 1999 from
$173.1 million for the comparable period in 1998, an increase of $25.3 million
or 14.6%. Sales in 1999 were negatively impacted by $1.6 million as a result of
foreign currency translation rate changes.

Image Transfer's sales increased to $148.3 million for the year ended December
31, 1999 from $139.7 million for the comparable period in 1998, an increase of
$8.6 million or 6.2%. The acquisition of Rotec on December 31, 1998 contributed
$11.2 million of the increase. Image Transfer's sales were negatively impacted
by $1.3 million as a result of the impact of foreign currency translation rate
changes. Excluding sales contributed by Rotec and the impact of foreign currency
translation rate changes, Image Transfer sales decreased $1.3 million or 0.8%
from the comparable period in 1998. The decrease is mainly a result of lower
domestic sales combined with lower export sales to Japan and Latin America
compared to the same period a year ago. Sales in Europe were flat compared to a
year ago while Mexico was slightly ahead of the same period a year ago. Tubular
sleeve sales have continued to increase as additional presses that utilize this
technology are installed.

Textiles' sales increased to $35.7 million for the year ended December 31, 1999
compared to $33.4 million in 1998, an increase of $2.3 million or 6.9%. The
acquisition of TPO on September 30, 1999, accounted for $6.5 million or 19.5% of
the increase. Foreign currency translation changes negatively impacted Textile
sales in 1999 by $0.3 million. Excluding sales contributed by TPO and the impact
of foreign currency translation rate changes, Textile's sales decreased $3.9
million or 11.7% from the comparable period in 1998. Textile sales decreased
across all markets. Domestic sales were lower as increased imports of low cost
Asian yarns adversely impacted domestic yarn producers. At the same time,
domestic mills were faced with higher than normal inventories causing several
yarn spinning mills to be closed in the second half of 1998 and during 1999.
Export sales to Asian markets continued to be adversely impacted by currency's
devaluation that occurred in 1998. The decline in Europe was largely a result of
a significant decline in sales to original equipment manufacturers ("OEM's").
The decline in sales to OEM's was, for the most part, a result of the reduced
demand for new equipment by the major yarn manufacturers in the Pacific Rim
markets associated with their currency's devaluation, coupled with an overall
slow down in the world-wide yarn spinning industry that began in the second half
of 1998 and continued in 1999.

The acquisition of Varn in October 1999 contributed $14.4 million of sales or
8.3% of Day's total sales increase.

Gross profit increased to $75.1 million for the year ended December 31, 1999
from $62.9 million in 1998, an increase of $12.2 million or 19.4%. As a
percentage of net sales, gross profit increased to 37.9% for the year ended
December 31, 1999 from 36.3% for the comparable period in 1998. Foreign currency
translation rate changes reduced gross profit by $0.4 million. The acquisitions
of Rotec, Varn and TPO contributed $11.9 million of the gross profit increase in
1999. Excluding the impact of these acquisitions, gross profit as a percentage
of net sales increased to 38.0% for the year ended


                                       25
<PAGE>   26
December 31, 1999 from 36.3% for the comparable period in 1998. Gross profit was
positively impacted by improvements in material usage and reduced manufacturing
costs. Gross profit was adversely effected by a one-time charge of $0.9 million
for sales of finished goods inventory which were purchased at market values in
connection with the Varn acquisition. Gross profit in 1998 was decreased by $0.3
million as a result of one-time costs associated with ceasing manufacturing
activities at the Lerma, Mexico facility.

SG&A increased to $36.0 million for the year ended December 31, 1999 compared
with $29.1 million for 1998, an increase of $6.9 million or 23.7%. As a
percentage of net sales, SG&A increased to 18.1% from 16.8%. The acquisitions of
Rotec, Varn and TPO accounted for $7.7 million of this increase. Excluding the
acquisitions, SG&A as a percentage of sales was 17.0% in 1999. Changes in
foreign currency translation rates reduced SG&A costs by $0.3 million in 1999.

Amortization of intangibles increased to $3.8 million for the year ended
December 31, 1999 from $2.6 million in 1998, an increase of $1.2 million as a
result of amortization of the goodwill recorded from the Rotec, Varn and TPO
acquisitions.

Operating income, excluding the restructuring costs in 1999 and the compensation
and related transaction costs in 1998, increased slightly to $34.2 million for
the year ended December 31, 1999 from $30.2 million for the comparable period in
1998, a increase of $4.0 million or 13.2%. As a percentage of net sales,
operating income (excluding the restructuring costs in 1999 and the compensation
and related transaction costs in 1998) was 17.2% for the year ended December 31,
1999 compared to 17.4% in 1998. Image Transfer's operating income increased to
$41.1 million in 1999 from $35.4 million in 1998, an increase of $5.7 million or
16.1%. The acquisition of Rotec contributed $2.8 million of the increase. The
remainder of the increase was a result of improvements in material usage and
reduced manufacturing costs combined with lower SG&A costs. Textile's operating
income decreased to $2.6 million in 1999, excluding the restructuring costs,
from $3.3 million in 1998. The acquisition of TPO at the end of the third
quarter of 1999 increased Textile's operating income by $0.9 million. Lower
sales volumes and the strong British pound compared to the German mark were the
main contributors to the $1.6 million decrease in Textile's operating income.
Varn, which was acquired in fourth quarter of 1999, contributed $1.5 million of
the operating profit increase.

The effective tax rate, including the effect of the extraordinary item, was an
expense of 51.0% in 1999 compared to a benefit of 23.7% in 1998. The high income
tax expense percentage in 1999 compared to the US statutory rate is mainly the
result of certain one-time non deductible expenses associated with the Varn and
TPO acquisitions in 1999. The lower income tax benefit percentage in 1998
compared to the US statutory rate is mainly the result of certain non deductible
expenses associated with the Acquisition in 1998.




                                       26
<PAGE>   27
  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. 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 volume. 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 cost 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 with 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


                                       27
<PAGE>   28
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 $0.4 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.

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 $0.9 million at December 31, 1999,
$1.2 million at December 31, 1998 and approximately $2.3 million at December 31,
1997. These contracts generally expire within three to twelve months. Foreign
currency gains and losses, included in other (expense) income-net, were a $0.6
million loss in 1999, $0.5 million loss in 1998, and a $0.3 million loss in
1997. In 1999 and 1998, the hypothetical loss in earnings of a 10% adverse
change in foreign currency exchange rates is estimated to be approximately $0.9
million and $0.8 million, respectively.

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 and distributors to distribute the majority of its products, the
Company is able to maintain relatively minimal levels of working capital as its
distributors (converters) carry relatively large amounts of inventory and
finance receivables.

Cash Flows From Operating Activities. Cash flows from operations for years ended
December 31, 1999, 1998 and 1997 were $18.7 million, $9.4 million and $19.7
million, respectively. Cash flows from


                                       28
<PAGE>   29
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 in 1999 was relatively flat. 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 remained relatively constant.

Cash Flows From Investing Activities. The Company's expenditures for plant,
property and equipment were $5.9 million in 1999, $7.1 million in 1998 and $5.1
million in 1997. The Company believes that capital expenditures of $7.0 million
to $9.0 million annually over the next several years will be sufficient to
maintain its leading market position. The Company expects to fund these capital
expenditures from cash flow from operations.

On September 30, 1999, the Company acquired the textile products operations of
Armstrong World Industries, Inc. ("TPO") for $12.5 million in cash. TPO is a
leading manufacturer and marketer of high-end precision engineered rubber cots
and aprons sold to textile yarn spinners worldwide similar to Day's textile
division. This business is being merged with Day's textile division to create
one business that manufactures and markets two brands, DAYtex(R) and Accotex(R).

On October 19, 1999, the Company completed its acquisition of the stock of
privately-held Varn International ("Varn") for $61.5 million in cash, net of
cash acquired of $1.2 million.

Varn is a leading worldwide supplier of pressroom chemicals to the printing
industry. Varn also manufactures the Kompac brand of automatic dampening systems
for printing presses through its Graph Tech subsidiary. Headquartered in
Oakland, New Jersey, Varn has manufacturing facilities in Addison, IL; Houston,
TX; Ontario, Canada; Manchester, England; Johannesburg, South Africa; Melbourne,
Australia; Kuala Lumpur, Malaysia and a joint venture in Foshan, China.

These acquisitions completed in 1999 were financed through the private placement
of $38.5 million of 18% convertible cumulative preferred stock and by amending
and restating the existing $60 million Senior Secured Credit Facility ($40
million term and $20 million revolver). The Amended and Restated Senior Secured
Credit Facility provides for a $70 million Term Loan and a $20 million Revolving
Credit Facility.

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. In
1997, the Company received a purchase price adjustment of $1.5 million in cash
related to its 1996 acquisition of certain assets of the David M company.

Cash Flows From Financing Activities. As noted above, in October 1999, in
conjunction with its acquisitions of TPO and Varn, the Company issued $38.3
million (net of issuance costs of $0.2 million) of 18% convertible cumulative
preferred stock and amended and restated the existing $60 million Senior Secured
Credit Facility ($40 million term and $20 million revolver). The Amended and
Restated Senior Secured Credit Facility provided for a $70 million Term Loan and
a $20 million


                                       29
<PAGE>   30
Revolving Credit Facility, of which $68.0 million of the Term Loan and $1.0
million on the Revolving Credit Facility were outstanding after closing these
two transactions.

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, as described above, 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: $3.3 million in 2000; $8.8 million in
2001; $13.2 million in 2002; $13.2 million in 2003; $13.2 million in 2004 and
$6.6 million in 2005. 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, 1999, the Company made $3.5
million in payments on the credit facilities and had $5.5 million outstanding on
the revolver at December 31, 1999. The Amended and Restated 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). In 1998, 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, 1999, the Company had
approximately $14.0 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 $279.8 million and the aggregate liquidation
preference of the Exchangeable Preferred Stock is $43.5 million (which, subject
to certain conditions, may be exchanged for Exchange Debentures). Also, in 1999,
the Company issued Convertible Preferred Stock. At December 31, 1999 the
aggregate liquidation preference of the Convertible Preferred Stock is $39.9
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


                                       30
<PAGE>   31
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 the Convertible 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 Amended and Restated Senior Secured Credit Facility, the 2005
Notes and the 2008 Notes, for the payment of periodic cash dividends on the
Exchangeable Preferred Stock or the Convertible Preferred Stock, for any
redemption of the Exchangeable Preferred Stock or the Convertible Preferred
Stock for cash, or if the Exchange Debentures have been issued, the payment of
principal of or cash interest on the Exchange Debentures. If the Company's cash
flow, availability under the Revolving Credit Facility and other capital
resources are insufficient to fund the Company's debt service obligations, the
Company may be forced to reduce or delay capital expenditures, to sell assets,
to restructure or refinance its indebtedness, or to seek additional equity
capital. There can be no assurance that any of such measures could be
implemented on satisfactory terms, or if implemented, would be successful or
would permit the Company to meet its debt service obligations.

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 recognized the importance of the Year 2000 issue and, as a result of
its efforts to identify and rectify all potential Year 2000 problems related to
its Information Technology ("IT") systems, manufacturing equipment, vendors and
customers, can report that it has had no disruption in its business as a result
of Year 2000 issues.

A Year 2000 committee was established consisting of senior members of management
along with members of the IT and the facilities' engineering departments. The
committee's objective was 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 included (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 and utilities; and (iii) readiness of key third
parties, including suppliers and customers and electronic data interchange,
where applicable, with those key third parties.

The Company used internal resources, and where necessary, external resources to
perform most of the testing and remediation functions. Upgrades to the Company's
business system were completed and


                                       31
<PAGE>   32
tested. A complete inventory of all equipment (manufacturing and otherwise) was
completed and the manufacturers of the equipment were contacted to determine
whether the equipment is Year 2000 compliant. Letters were 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 were not material to the Company's results of operations or
financial position, and were 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) were less
than $1 million. The largest cost factor was the expenditure of management and
associates time in attention to Year 2000 and related issues. The Company does
not foresee any Year 2000 issues arising during the remainder of 2000 either
internally or from third parties.

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
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 1997, 1998 and 1999 it spent approximately $0.6
million, $1.5 million and $1.8 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.
Capital expenditures for this equipment totaled approximately $1.5 million and
were completed in 1999.

Capital expenditures in 1999 relating to environmental matters were
approximately $1.8 million and are anticipated to be $2.0 million in 2000. In
incurring expenditures for compliance with environmental


                                       32
<PAGE>   33
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, Varn and TPO, except as otherwise stated herein, the Company believes
that its operations are currently in compliance with environmental laws and
regulations, except as would not be expected to have a material adverse effect
on the Company. However, there can be no assurances that environmental
requirements will not change in the future or that the Company will not incur
significant costs in the future to comply with such requirements. In addition,
the Company's operations involve the handling of solvents and other hazardous
substances, and if a release of hazardous substances occurs on or from the
Company's facilities, the Company may be required to pay the cost of remedying
any condition caused by such release, the amount of which could be material.




                                       33
<PAGE>   34
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'...............................................................................     35 - 36
     Consolidated Balance Sheets as of December 31, 1999 and 1998..............................................     37 - 38
     Consolidated Statement of Operations for the years ended
         December 31, 1999, 1998 and 1997......................................................................          39
     Consolidated Statements of Comprehensive Income  (Loss)
         for the years ended December 31, 1999, 1998 and 1997..................................................          40
     Consolidated Statements of Stockholders' Equity (Deficit)
         for the years ended December 31, 1999, 1998 and 1997..................................................          41
     Consolidated Statements of Cash Flows for the years ended
         December 31, 1999, 1998 and 1997......................................................................     42 - 43
     Notes to Consolidated Financial Statements................................................................     44 - 72

Financial Statement Schedule...................................................................................          84
</TABLE>




                                       34
<PAGE>   35
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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

We have audited the accompanying consolidated balance sheets of Day
International Group, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, comprehensive income (loss), stockholders' equity (deficit) and cash
flows for the years 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 schedule based on our audits.

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

In our opinion, the 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.

Our audits were 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
consolidated 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 basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein.



ARTHUR ANDERSEN LLP

Dayton, Ohio
March 28, 2000




                                       35
<PAGE>   36
INDEPENDENT AUDITORS' REPORT


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

We have audited the accompanying consolidated statements of operations,
comprehensive income (loss), stockholders' equity (deficit) and cash flows of
Day International Group, Inc. (the "Company") and subsidiaries for the year
ended December 31, 1997. Our audit also included the financial statement
schedule listed in the Index at Item 14(a)2 for the year ended December 31,
1997. 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 audit.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of Day International Group, Inc. and subsidiaries
operations and their cash flows for the year ended December 31, 1997 in
conformity with accounting principles generally accepted in the United States of
America. 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
  year then ended.)



                                       36
<PAGE>   37
                 DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 1999 AND 1998
           (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)



<TABLE>
<CAPTION>
                                                            1999             1998
                                                         ---------        ---------
<S>                                                      <C>              <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                              $     508        $   4,762
  Accounts receivable:
    Trade (less allowance for doubtful accounts of
      $2,141 and $1,384)                                    33,138           18,390
    Other                                                    2,102              240
  Inventories (Note C)                                      32,831           19,179
  Prepaid expenses and other current assets                  3,640            1,267
  Deferred tax assets (Note F)                               3,191            2,543
                                                         ---------        ---------

         Total current assets                               75,410           46,381

PROPERTY, PLANT AND EQUIPMENT (Notes A and B):
  Land                                                       4,347            2,125
  Buildings                                                 23,533           12,077
  Machinery and equipment                                   54,631           46,277
  Construction in progress                                   9,049            6,493
                                                         ---------        ---------
                                                            91,560           66,972
  Less accumulated depreciation                            (21,821)         (16,667)
                                                         ---------        ---------
                                                            69,739           50,305

OTHER ASSETS:
  Goodwill and other intangible assets (Note B)            178,088          157,799
  Note receivable (Note L)                                   1,623              698
  Deferred tax assets (Note F)                               1,773            1,523
  Other assets                                               4,871              702
                                                         ---------        ---------
                                                           186,355          160,722
                                                         ---------        ---------
TOTAL ASSETS                                             $ 331,504        $ 257,408
                                                         =========        =========
</TABLE>



   The accompanying notes are an integral part of the consolidated financial
                                  statements.



                                       37
<PAGE>   38
<TABLE>
<CAPTION>
                                                                      1999             1998
                                                                   ---------        ---------
<S>                                                                <C>              <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
  Accounts payable                                                 $   8,903        $   5,905
  Accrued associate-related costs                                      8,440            8,547
  Other accrued expenses                                              12,680            4,682
  Income taxes payable                                                 3,735            2,913
  Interest payable                                                     4,631            4,336
  Current maturities of long-term debt (Note D)                        3,361            1,292
                                                                   ---------        ---------

         Total current liabilities                                    41,750           27,675

LONG-TERM AND SUBORDINATED LONG-TERM DEBT (Note D)                   276,469          256,223
DEFERRED TAX LIABILITIES (Note F)                                      1,183            1,353
OTHER LONG-TERM LIABILITIES (Notes K and L)                           20,074           15,813
COMMITMENTS AND CONTINGENCIES (Note L)
                                                                   ---------        ---------

         Total liabilities                                           339,476          301,064

Exchangeable Preferred Stock (Note E)                                 41,745           36,627

STOCKHOLDERS' EQUITY (DEFICIT)  (Notes E and I):
  18% Convertible Cumulative Preferred Shares $.01 per share
    par value, 100,000 shares authorized, 38,500 outstanding          39,711
  Common Shares, $.01 per share par value, 100,000
    shares authorized, 23,298 shares--1999 and
    1998 issued and outstanding                                            1                1
  Contra-equity associated with the assumption of
    majority shareholder's bridge loan                               (68,772)         (68,772)
  Retained earnings (deficit)                                        (15,542)         (10,370)
  Foreign currency translation adjustment                             (5,115)          (1,142)
                                                                   ---------        ---------

         Total stockholders' equity (deficit)                        (49,717)         (80,283)
                                                                   ---------        ---------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)               $ 331,504        $ 257,408
                                                                   =========        =========

</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.




                                       38
<PAGE>   39
                 DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               1999             1998             1997
                                                            ---------        ---------        ---------
<S>                                                         <C>              <C>              <C>
NET SALES                                                   $ 198,418        $ 173,066        $ 166,286

COST OF GOODS SOLD                                            123,336          110,155          103,035
                                                            ---------        ---------        ---------


GROSS PROFIT                                                   75,082           62,911           63,251

SELLING, GENERAL AND ADMINISTRATIVE                            35,960           29,116           28,629
RESTRUCTURING COSTS (Note A)                                    1,361
COMPENSATION AND RELATED
   TRANSACTION COSTS (Note A)                                                   18,018
AMORTIZATION OF INTANGIBLES                                     3,821            2,565            3,315
MANAGEMENT FEES (Note H)                                        1,079            1,043              896
                                                            ---------        ---------        ---------


OPERATING PROFIT                                               32,861           12,169           30,411

OTHER EXPENSES (Note D):
  Interest expense (including amortization
    of deferred financing costs of $2,370 in 1999,
    $2,024 in 1998 and $966 in 1997                            28,085           27,470           15,926
  Other expense (income)--net                                     504              306              629
                                                            ---------        ---------        ---------

                                                               28,589           27,776           16,555
                                                            ---------        ---------        ---------

INCOME (LOSS) BEFORE INCOME TAXES
   AND EXTRAORDINARY ITEMS                                      4,272          (15,607)          13,856

INCOME TAXES (BENEFIT) (Note F)                                 2,021           (2,732)           5,939
                                                            ---------        ---------        ---------


INCOME (LOSS) BEFORE EXTRAORDINARY ITEMS                        2,251          (12,875)           7,917

EXTRAORDINARY LOSSES ON EARLY
  EXTINGUISHMENT OF DEBT (NET OF TAX
  BENEFIT OF $571 IN 1999 AND $2,368 IN 1998)(Note D)             857            3,552               --
                                                            ---------        ---------        ---------


NET INCOME (LOSS)                                               1,394          (16,427)       $   7,917
                                                                                              =========

PREFERRED STOCK DIVIDENDS (Note E)                             (6,394)          (3,507)

AMORTIZATION OF PREFERRED STOCK
  ISSUANCE COSTS                                                 (172)            (133)
                                                            ---------        ---------

NET (LOSS) AVAILABLE
  TO COMMON SHAREHOLDERS                                    $  (5,172)       $ (20,067)
                                                            =========        =========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.




                                       39
<PAGE>   40
                 DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                1999            1998            1997
                                              --------        --------        --------
<S>                                           <C>             <C>             <C>
NET INCOME (LOSS)                             $  1,394        $(16,427)       $  7,917

FOREIGN CURRENCY TRANSLATION ADJUSTMENT         (3,973)            326            (890)
                                              --------        --------        --------

COMPREHENSIVE (LOSS) INCOME                   $ (2,579)       $(16,101)       $  7,027
                                              ========        ========        ========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.




                                       40
<PAGE>   41
                 DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                          (DOLLAR AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                          FOREIGN     18% CUMULATIVE
                                                          ADDITIONAL                     RETAINED         CURRENCY      CONVERTIBLE
                                    COMMON SHARES          PAID-IN        CONTRA         EARNINGS       TRANSLATION      PREFERRED
                                  SHARES     AMOUNT        CAPITAL        EQUITY         (DEFICIT)       ADJUSTMENT       SHARES
                                  ------     ------        -------        ------         ---------       ----------       ------
<S>                              <C>         <C>          <C>            <C>             <C>            <C>           <C>
December 31, 1996                 51,555     $   1        $ 51,531       $               $  1,780        $   (578)       $

Sale of common shares                100                       120
Issuance of common shares                                      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)

Net income                                                                                  1,394
Sale of Preferred Shares                                                                                                   38,264
Preferred stock dividends                                                                  (6,394)                          1,443
Amortization of preferred
  stock discount                                                                             (172)                              4
Foreign currency
  translation adjustment                                                                                   (3,973)
                                 -------     -----        --------       --------        --------        --------        --------
December 31, 1999                 23,298     $   1        $     --       $(68,772)       $(15,542)       $ (5,115)       $ 39,711
                                 =======     =====        ========       ========        ========        ========        ========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.



                                       41
<PAGE>   42
                 DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                          1999             1998             1997
                                                                       ---------        ---------        ---------
<S>                                                                    <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                      $   1,394        $ (16,427)       $   7,917
Adjustments to reconcile net income (loss)
  to net cash provided by operating activities:
  Extraordinary loss on early extinguishment of debt                         871            3,552
  Depreciation                                                             6,432            5,759            5,238
  Amortization of goodwill and intangibles                                10,313            7,729            7,827
  Deferred income taxes                                                     (676)          (3,772)           3,528
  Non-cash charge related to stock option awards                                            8,585              308
Change in assets and liabilities, net of effect of acquisitions:
  Accounts receivable                                                     (1,515)           5,099           (5,455)
  Inventories                                                               (981)          (1,596)            (532)
  Prepaid expenses and other current assets                               (1,782)             497             (521)
  Accounts payable and other accrued expenses                              4,605              (13)           1,361
                                                                       ---------        ---------        ---------

         Net cash provided by operating activities                        18,661            9,413           19,671
                                                                       ---------        ---------        ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions, net of cash acquired                         (74,039)         (19,383)           1,513
Capital expenditures                                                      (5,936)          (7,103)          (5,124)
Other                                                                                                        1,107
                                                                       ---------        ---------        ---------

         Net cash used in investing activities                           (79,975)         (26,486)          (2,504)
                                                                       ---------        ---------        ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible preferred stock                     38,264
Proceeds from issuance of 2008 notes                                                       111,134
Proceeds from issuance of exchangeable preferred stock                                      32,986
Net proceeds from issuance of term loans                                  24,469            50,000
Contributions from shareholders                                                              4,573
Proceeds from issuance of common stock                                                       9,731              120
Repayment of existing credit facility                                                     (30,902)
Repayment of bridge loan                                                                 (140,000)
Payment of consent fee                                                                     (6,500)
Payment of deferred financing fees                                        (1,639)          (3,119)
Net payments on credit facilities                                         (3,515)          (7,100)         (21,821)
                                                                       ---------        ---------        ---------
         Net cash provided by (used in) financing activities              57,579           20,803          (21,701)
                                                                       ---------        ---------        ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                     (519)             252             (119)
                                                                       ---------        ---------        ---------

CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash equivalents                      (4,254)           3,982           (4,653)
Cash and cash equivalents at beginning of period                           4,762              780            5,433
                                                                       ---------        ---------        ---------

Cash and cash equivalents at end of period                             $     508        $   4,762        $     780
                                                                       =========        =========        =========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.




                                       42
<PAGE>   43
                 DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                   1999           1998           1997
                                                 --------       --------       --------
<S>                                              <C>            <C>            <C>
SUPPLEMENTAL CASH FLOW DISCLOSURES

NON CASH TRANSACTIONS:
  Assumption of bridge loan                                     $140,000
                                                                ========
  Preferred stock dividends                      $  6,394       $  3,507
                                                 ========       ========
  Amortization of preferred stock discount       $    172       $    133
                                                 ========       ========
  Capital contribution                                          $  4,530
                                                                ========

CASH PAID FOR:
Income Taxes                                     $  2,518       $  2,335       $  1,390
                                                 ========       ========       ========
Interest                                         $ 25,420       $ 22,123       $ 15,015
                                                 ========       ========       ========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.




                                       43
<PAGE>   44
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                          (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 and pressroom chemicals and automatic dampening systems for
the printing industry. 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. Day's
Varn subsidiary designs, manufactures and markets pressroom chemicals and
automatic dampening systems used in the printing industry. Sales are made
through Day's organization, distributors and representatives.

On January 16, 1998, affiliates of Greenwich Street Capital Partners, Inc.
("GSC PARTNERS") 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. References to GSC Partners include Greenwich Street Capital
Partners, Inc. and its successor entites as the context requires. 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 does
not require a change in the Company's historical basis of accounting since the
Company's 2005 Notes remained outstanding following the Acquisition.



                                       44
<PAGE>   45
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.

On September 30, 1999, the Company acquired the textile products operations
("TPO") of Armstrong World Industries, Inc. ("Armstrong") for $12.5 million in
cash. TPO is a leading manufacturer and marketer of high-end precision
engineered rubber cots and aprons sold to textile yarn spinners worldwide and
was a major competitor of Day's textile division. This business is being merged
with Day's textile division to create one business that manufactures and markets
two brands, DAYtex(R) and Accotex(R). In conjunction with the acquisition, the
Company entered into a two year general services agreement for the Munster,
Germany operation where Armstrong has agreed to furnish TPO certain services
which will permit TPO to administer and operate the business in the same way it
has administered and operated the business in the past. The Company also entered
into a two year management services agreement with Armstrong where Armstrong
will provide the services of one of its associates to act as the managing
director of the Munster facility. The Company is also leasing its Munster
facility from Armstrong under a 10 year lease agreement, with customary
termination provisions.

As a result of this acquisition, the Company announced in November 1999 that it
intends to cease its textile manufacturing operations in Dundee, Scotland as of
March 31, 2000 moving the production to other textile manufacturing facilities.
In addition, the Company has or is in the process of consolidating its customer
service and sales offices in the U.S., Germany and Italy. As a result, a pre-tax
restructuring charge of $1.4 million has been recorded in 1999's Consolidated
Statement of Operations.

On October 19, 1999, the Company completed its acquisition of the stock of
privately-held Varn International ("Varn") for $61.5 million in cash, net of
cash acquired of $1.2 million. The Company also agreed to lease the Oakland, NJ
headquarters from the former shareholders for a period of 3 years. The purchase
price is subject to adjustment based on a closing balance sheet audit. The
acquisition has been accounted for as a purchase in accordance with Accounting
Principles Board Opinion No. 16. The purchase price has preliminarily been
allocated to the net assets acquired based on their fair market values as
follows:

<TABLE>
<S>                                                                    <C>
Current assets                                                         $ 20,237
Property, Plant and Equipment                                            15,519
Other Assets                                                              9,987
Goodwill and intangibles                                                 31,902
Current liabilities                                                     (13,798)
Long-term liabilities                                                    (2,303)
                                                                       --------
Purchase Price                                                         $ 61,545
                                                                       ========
</TABLE>



                                       45
<PAGE>   46
Pro forma results for the years ended December 31, 1999 and 1998 had the Varn
acquisition occurred at the beginning of 1998 is as follows:

<TABLE>
<CAPTION>
                                                        1999             1998
                                                     ---------        ---------
<S>                                                  <C>              <C>
Net sales                                            $ 249,606        $ 238,007
Income (loss) before extraordinary items                 9,780          (10,836)
Net income (loss)                                        9,780          (15,653)
</TABLE>


Varn is a leading worldwide supplier of pressroom chemicals to the printing
industry. Varn also manufactures the Kompac brand of automatic dampening systems
for printing presses through its Graph Tech subsidiary. Headquartered in
Oakland, New Jersey, Varn has manufacturing facilities in Addison, IL; Houston,
TX; Ontario, Canada; Manchester, England; Willich, Germany; Johannesburg, South
Africa; Melbourne, Australia; Kuala Lumpur, Malaysia and a joint venture in
Foshan, China.

These acquisitions in 1999 were financed through the private placement of $38.5
million of 18% convertible cumulative preferred stock and by amending and
restating the existing $60 million Senior Secured Credit Facility ($40 million
term and $20 million revolver). The Amended and Restated Senior Secured Credit
Facility provides for a $70 million Term Loan and a $20 million Revolving Credit
Facility.

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 $13,441 at December 31, 1999 (net of accumulated
amortization of $5,262) are being amortized using an effective interest rate
method over the lives of the related debt.




                                       46
<PAGE>   47
Goodwill and other intangibles are being amortized using the straight-line
method, as follows:

<TABLE>
<CAPTION>
                                       1999             1998              LIFE
                                    ---------        ---------        ------------
<S>                                 <C>              <C>              <C>
Goodwill                            $ 145,488        $ 116,044            40 years
Noncompete agreements                   4,007            4,007             5 years
Deferred financing costs               18,703           19,173        5 to 7 years
Printing technology                    27,946           27,946          11.5 years
Textile compound formulas               5,247            5,247            30 years
Unpatented technology                   9,529            9,529            20 years
                                    ---------        ---------
Total intangibles                     210,920          181,946
Less accumulated amortization         (32,832)         (24,147)
                                    ---------        ---------
                                    $ 178,088        $ 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 has switched 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 industries and such receivables are generally unsecured. Day maintains a
reserve for potential losses. One customer accounted for 11% and 12% of sales
for the years ended December 31, 1999 and 1998, respectively. This customer also
accounted for 4% of receivables at December 31, 1999 and 1998.

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
$899 and $1,246 at December 31, 1999 and 1998, 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.



                                       47
<PAGE>   48
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying value of the Company's
variable rate Credit Agreement approximates fair value. The 9-1/2% Senior
Subordinated Debt and the 11 1/8% Senior Debt's fair market values were
approximately 84% and 101%, respectively, of their carrying value at December
31, 1999 based on quoted market prices. The 12 1/4% Exchangeable Preferred
Stock's fair market value was approximately 76% of its carrying value at
December 31, 1999 based on quoted market prices. At December 31, 1999 and 1998,
the carrying amounts of all other assets and liabilities which qualify as
financial instruments approximated their fair value.

RESEARCH AND DEVELOPMENT--Research and development costs are expensed as
incurred.

ADVERTISING--Advertising costs are expensed as incurred.

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, 1999 and 1998 consists of:

<TABLE>
<CAPTION>
                                                     1999                  1998
                                                   -------               -------
<S>                                                <C>                   <C>
Finished Goods                                     $16,386               $ 9,762
Work in Progress                                     6,232                 5,220

Raw Materials                                       10,213                 4,197
                                                   -------               -------

                                                   $32,831               $19,179
                                                   =======               =======
</TABLE>


D.       LONG-TERM AND SUBORDINATED LONG-TERM DEBT

Long-term and subordinated long-term debt as of December 31, 1999 and 1998
consists of:

<TABLE>
<CAPTION>
                                                                       1999             1998
                                                                    ---------        ---------
<S>                                                                 <C>              <C>
Senior Secured Credit Facility                                      $  63,750        $  42,900
11-1/8% Senior Notes                                                  100,000          100,000
9-1/2% Senior Subordinated Notes                                      114,658          114,615
Capital lease obligation (Note L)                                       1,422               --
                                                                    ---------        ---------
                                                                      279,830          257,515
Less: Current maturities of long-term debt and capital leases          (3,361)          (1,292)
                                                                    ---------        ---------
                                                                    $ 276,469        $ 256,223
                                                                    =========        =========
</TABLE>




                                       48
<PAGE>   49
On October 19, 1999, the Senior Secured Credit Facility was amended and restated
to provide funds to finance a portion of the acquisitions of Varn and TPO. The
Amended and Restated Senior Secured Credit Agreement is a $90,000 credit
facility consisting of a five year $70,000 term loan and a $20,000 revolving
line of credit with a group of banks. The revolving line of credit includes a
$10,000 letter of credit subfacility ($530 of letters of credit were outstanding
at December 31, 1999) and a $1,000 swingline loan subfacility. At December 31,
1999, interest on $5,500 was based on the bank's LIBOR rate plus 2.75% (8.92%).
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, 1999, $13,970 was available under the Amended and Restated Senior
Secured Credit Facility (calculated by applying the borrowing base test). The
Amended and Restated 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 1.75% (10.25% at December
31, 1999) or the LIBOR rate plus 2.75% (8.92% at December 31, 1999). At December
31, 1999, interest on $57,000 of the term loan was based on the LIBOR rate while
$1,250 was based on the base 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 Amended and Restated Senior Secured Credit
Facility for the year ended December 31, 1999 was 7.94%.

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 was a $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 weighted average interest rate on the Senior Secured Credit Facility and the
US Credit Agreement for the years ended December 31, 1998 and 1997 was 7.77% and
8.61%, respectively.

Principal payments under the term loans are as follows: $3,297--2000;
$8,792--2001; $13,189--2002; $13,189--2003; $13,189--2004, and $6,594 --2005 .

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 affected 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.



                                       49
<PAGE>   50
Interest on the 11 1/8% Senior Notes due June 1, 2005 and the 9 -1/2% 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 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.

E.       PREFERRED STOCK

     12-1/4% SENIOR 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.

                                       50
<PAGE>   51
     18% CONVERTIBLE CUMULATIVE PREFERRED STOCK

In connection with the acquisitions of Varn and TPO, the Company issued $38.5
million liquidation preference of 18% Convertible Cumulative Preferred Stock
("Preference Stock") with a mandatory redemption date of June 30, 2010. The
Preference Stock ranks junior to the Company's 12-1/4 % Senior Exchangeable
Preferred Stock and ranks senior to any subsequently issued preferred stock. All
dividends are payable quarterly in arrears on March 30, June 30, September 30
and December 30 of each year. Holders of the Preference Stock are entitled to
receive an annual dividend rate of 18% plus approximately 24% of the aggregate
value of each dividend (if any) declared and paid on the Company's common stock.
If not paid quarterly in cash, annually, accumulated and unpaid dividends are to
be added to the basis of the stock. In addition, a representative of one of the
holders of the Preference Stock was elected to the board of directors of the
Company.

At any time and from time to time prior to September 30, 2002, the Company may
redeem shares of the Preference Stock, in whole or in part, at the option of the
Company, for consideration equal to the Base Redemption Amount plus an early
redemption premium which is based upon the liquidation preference of the stock.
The Base Redemption Amount is an amount equal to up to 1,500 shares of Common
Stock issuable upon the exercise of future warrants plus the greater of the
liquidation preference of the Preference Stock or the value of 7,348.7 shares of
the Company's Common Stock, as adjusted for dilutive issuances. The Company may
at any time on or after September 30, 2002 redeem any or all of the shares of
the Convertible Preference Stock for consideration equal to the Base Redemption
Amount.

Upon the occurrence of a change of control and subject to the Holders of all of
the Company's Senior Securities having exercised their right to be prepaid
and/or to put their securities to the Company upon such Change of Control, each
Holder of Preference Stock may require the Company to redeem, on or after the
92nd day after the prepayment or redemption of the Company's Senior Securities
in whole, all or any part of such Holder's Preference Stock at 102% of the
redemption price of such securities. The redemption price of the Preference
Stock is the Base Redemption Amount described above.

If, on any Redemption Date which occurs after an initial public offering of the
Company's Common Stock, the value of the Preference Stock as converted into
Common Stock exceeds the liquidation preference of the Preference Stock, the
Company may elect, in lieu of paying cash on the redemption of such Preference
Stock, to convert some or all of the Preference Stock into 7,348.7 shares of
the Company's Common Stock, as adjusted for dilutive issuances, subject to
certain limitations.





                                       51
<PAGE>   52
F.       INCOME TAXES

Significant components of deferred tax assets (liabilities) as of December 31,
1999 and 1998 are as follows:

<TABLE>
<CAPTION>
                                                         1999             1998
                                                       -------          -------
<S>                                                    <C>              <C>
Domestic:
  Current:
    Accounts receivable reserves                       $   922          $   632
    Inventory reserves                                     793              727
    Other reserves                                         843              671
    AMT credit carryforward                                345              345
                                                       -------          -------

                                                         2,903            2,375
                                                       -------          -------

  Long-term:
    Depreciation                                        (3,880)          (3,431)
    Amortization                                        (4,883)          (3,431)
    Net operating loss carryforwards                     6,299            4,423
    Stock option compensation                            3,308            3,308
    Other postretirement benefits                          929              654
                                                       -------          -------

                                                         1,773            1,523
                                                       -------          -------

Total domestic deferred tax assets                       4,676            3,898
                                                       -------          -------

Foreign:
  Current:
    Inventories                                             28               48
    Other                                                  260              120
                                                       -------          -------

                                                           288              168
                                                       -------          -------

  Long-term:
    Plant and equipment                                 (1,054)          (1,368)
    Other                                                 (129)              15
                                                       -------          -------

                                                        (1,183)          (1,353)
                                                       -------          -------

Total foreign deferred tax liabilities                    (895)          (1,185)
                                                       -------          -------

Net deferred tax assets (liabilities)                  $ 3,781          $ 2,713
                                                       =======          =======
</TABLE>




                                       52
<PAGE>   53
Income tax expense (benefit) consists of the following for the years ended
December 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                       1999              1998              1997
                                     -------           -------           -------
<S>                                  <C>               <C>               <C>
Current:
  Domestic:
    Federal                          $                 $                 $
    State and local                      143               272               309
    Foreign                            2,492             1,315             1,396
                                     -------           -------           -------
                                       2,635             1,587             1,705
                                     -------           -------           -------
Deferred:
  Domestic:
    Federal                             (187)           (3,176)            3,366
    State and local                      (85)             (828)              495
    Foreign                             (342)             (315)              373
                                     -------           -------           -------
                                        (614)           (4,319)            4,234
                                     -------           -------           -------
                                     $ 2,021           $(2,732)          $ 5,939
                                     =======           =======           =======
</TABLE>


The income tax (benefit) expense differs from the statutory rate for the years
ended December 31, 1999, 1998 and 1997 as a result of the following:

<TABLE>
<CAPTION>
                                                          1999           1998           1997
                                                        -------        -------        -------
<S>                                                     <C>            <C>            <C>
(Benefit) provision at the federal statutory rate       $ 1,452        $(5,306)       $ 4,711
Foreign tax rate differential                               112            350            444
State and local taxes, net of federal
  income tax effect                                           3           (696)           689
Non-deductible expenses                                     491          3,122            117
Other                                                       (37)          (202)           (22)
                                                        -------        -------        -------
                                                        $ 2,021        $(2,732)       $ 5,939
                                                        =======        =======        =======
</TABLE>

Income (loss) before income taxes includes $5,996, $2,850 and $5,809 of income
from international operations for the years ended December 31, 1999, 1998 and
1997, respectively. Day has not provided deferred taxes on the undistributed
earnings of foreign subsidiaries because the earnings are deemed permanently
reinvested. The unrecognized deferred tax assets on these earnings is not
considered material. The Company has domestic net operating loss carryforwards
of approximately $23 million expiring through 2014.

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, fiber handling products for the textile industry and
pressroom chemicals and automatic dampening systems for the printing industry.


                                       53
<PAGE>   54
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. Day's Varn subsidiary designs, manufactures
and markets pressroom chemicals and automatic dampening systems used in the
printing industry.

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 three segments as separate strategic business units.
They are managed separately because each business unit requires different
manufacturing processes, technology and marketing strategies.

<TABLE>
<CAPTION>
                                                            1999
                                                            ----
                                     IMAGE
                                    TRANSFER       TEXTILE          VARN          TOTALS
                                    --------       -------          ----          ------
<S>                                 <C>            <C>            <C>            <C>
Third party sales                   $148,283       $ 35,692       $ 14,443       $198,418
Operating profit                      41,054          1,208          1,453         43,715
Depreciation and amortization          3,762          1,316            161          5,239
Assets                                67,549         29,908         31,357        128,814
Capital expenditures                   4,832          1,104             --          5,936
</TABLE>

<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
</TABLE>

<TABLE>
<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
</TABLE>



                                       54
<PAGE>   55
  The following is a reconciliation of the items reported above to the amounts
reported in the Consolidated Financial Statements:

<TABLE>
<CAPTION>
                                                                 1999             1998             1997
                                                              ---------        ---------        ---------
<S>                                                           <C>              <C>              <C>
Operating profit:
Segment operating profit                                      $  43,715        $  38,722        $  39,156
Non-recurring costs associated with Mexico                                          (309)
UK pension adjustment                                                                                 450
APB #16 depreciation and amortization                            (4,366)          (4,194)          (4,388)
Non allocated corporate expenses                                   (639)            (424)            (288)
Compensation related to stock option awards                                                          (308)
Compensation and related transaction costs                                       (18,018)
Amortization of intangibles                                      (3,821)          (2,565)          (3,315)
Amortization of inventory write-up to fair market value            (949)
Management fees                                                  (1,079)          (1,043)            (896)
                                                              ---------        ---------        ---------

         Total operating profit                               $  32,861        $  12,169        $  30,411
                                                              =========        =========        =========


Depreciation and amortization:
Segment depreciation and amortization                         $   5,239        $   4,705        $   4,396
Amortization of intangibles                                       3,821            2,565            3,315
APB #16 depreciation and amortization                             4,366            4,194            4,388
Amortization of inventory write-up to fair market value             949
Amortization of deferred financing fees                           2,370            2,024              966
                                                              ---------        ---------        ---------

         Total depreciation and amortization                  $  16,745        $  13,488        $  13,065
                                                              =========        =========        =========

Assets:
Segment assets                                                $ 128,814        $  79,958        $  72,891
APB # 16 Adjustment                                              12,635           12,311           13,365
Goodwill and other intangibles                                  178,088          157,799          136,722
Deferred tax assets                                               4,964            4,066            1,938
Cash and other assets at corporate offices                        7,003            3,274              611
                                                              ---------        ---------        ---------

         Total assets                                         $ 331,504        $ 257,408        $ 225,527
                                                              =========        =========        =========
</TABLE>




                                       55
<PAGE>   56
Net sales for the years ended December 31, 1999, 1998 and 1997 and identifiable
assets as of December 31, 1999, 1998 and 1997 by geographic area are as follows:

<TABLE>
<CAPTION>
                                     1999              1998              1997
                                  ---------         ---------         ---------
<S>                               <C>               <C>               <C>
NET SALES:
Domestic                           $118,901         $ 107,478         $ 101,319
Europe                               63,644            46,221            45,280
Other International                  24,985            24,450            25,243
Interarea                            (9,112)           (5,083)           (5,556)
                                  ---------         ---------         ---------
                                  $ 198,418         $ 173,066         $ 166,286
                                  =========         =========         =========

IDENTIFIABLE ASSETS:
Domestic                           $221,270         $ 196,201         $ 183,267
Europe                               86,892            50,489            30,871
Other International                  23,342            10,718            11,389
                                  ---------         ---------         ---------
                                  $ 331,504         $ 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 GSC Partners 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.

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:



                                       56
<PAGE>   57
-        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 GSC Partners realized in connection with the disposition of its
investment in the Company. Regardless of the satisfaction of any performance
goals, performance options, super performance options and exit options fully
vest and become exercisable on the ninth anniversary of the date of grant.

Initially, 7,885 shares of the Company's voting common stock were authorized for
issuance under the 1998 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, 1999, 6,631 options have been granted under the 1998 Option
Plan with an exercise price of $4,030. These options expire as follows: 6,281
expire in 2007 and 350 expire in 2008.

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


                                       57
<PAGE>   58
options may be awarded under that plan. As a result, compensation expense
associated with these options of $8,585 was recorded in 1998 and is included in
other long-term liabilities at December 31, 1999 and 1998. As of December 31,
1999, 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>
                                                              1999                         1998                         1997
                                                              ----                         ----                         ----
                                                                    EXERCISE                    EXERCISE                    EXERCISE
                                                      SHARES         PRICE         SHARES        PRICE          SHARES       PRICE
                                                      ------         -----         ------        -----          ------       -----
<S>                                                  <C>            <C>           <C>           <C>             <C>         <C>
Outstanding at beginning
  of period                                          9,053.5                        2,915                       2,605       $1,000
Granted                                                  350         $4,030         6,281        $4,030           310       $1,200
Exercised                                                                          (142.5)       $1,000
Canceled
                                                     -------                      -------                       -----
Outstanding at end of  period                        9,403.5                      9,053.5                       2,915
                                                     =======                      =======                       =====
Exercisable at end of  period                        2,976.2                      2,772.5                       1,520
                                                     =======                      =======                       =====
Weighted-average fair  value
  of options granted during
  the year using the Black-Scholes
  options-pricing model                                              $1,860                      $1,860                     $1,548
                                                                     ======                      ======                     ======
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." Had compensation costs been determined based on the fair value
method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's
net earnings would have been reduced by $1,396 in 1999, $457 in 1998 and $255 in
1997.

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 were granted in 1998 to one of the 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 $21 in 1999 and $40 in 1998.

In January 2000, additional warrants to purchase up to 74 shares of Common Stock
at a price of $4,030 per share were granted to each of two Board members for
their services. These warrants also vest in four equal installments, first on
the grant date and then on each of the first three anniversaries thereof.



                                       58
<PAGE>   59
J.       RETIREMENT PLANS

The Company has non-contributory defined benefit plans covering certain
associates of its foreign 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.

In conjunction with the TPO acquisition, the Company entered into a Promise to
Pay agreement with Armstrong for the unfunded pension obligation of TPO's
Germany subsidiary in which Armstrong agreed to pay the portion of any pension
obligations which the associates earned prior to the date of the acquisition. At
December 31, 1999, a receivable of $1.2 million has been recorded for the
estimated portion of the pension obligation that is Armstrong's responsibility.

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, 1999
and 1998 is as follows:

<TABLE>
<CAPTION>
                                                               1999            1998
                                                             --------        --------
<S>                                                          <C>             <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year                      $ 13,335        $ 11,355
Service cost                                                      688             570
Interest cost                                                     749             756
Acquisitions                                                    2,778              --
Plan participant contributions                                    248             247
Actuarial (gains) losses                                         (328)          1,699
Benefits paid                                                    (698)         (1,411)
Foreign currency exchange impact                                 (602)            119
                                                             --------        --------
Benefit obligation at end of year                              16,170          13,335
                                                             --------        --------

CHANGE IN PLAN ASSETS
Fair value of plan assets at the beginning of the year         11,608          10,894
Actual return on plan assets                                    2,928           1,447
Employer contribution                                             495             371
Plan participant contributions                                    248             247
Benefits paid                                                    (691)         (1,409)
Foreign currency exchange impact                                 (315)             58
                                                             --------        --------
Fair value of plan assets at end of year                       14,273          11,608
                                                             --------        --------

Funded status                                                  (1,897)         (1,727)
  Unrecognized net actuarial (gain) loss                          171           1,333
                                                             --------        --------
(Accrued) pension costs                                      $ (1,726)       $   (394)
                                                             ========        ========
</TABLE>



                                       59
<PAGE>   60
The projected benefit obligation was determined using an assumed discount rate
of 6.0% and 5.5% in 1999 and 1998, respectively, and an assumed long-term rate
of increase in compensation of 4.5% in 1999 and 4% in 1998. The assumed
long-term rate of return on plan assets was 8.0% in 1999 and 8.0% in 1998.

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,
1999, 1998 and 1997 is as follows:


<TABLE>
<CAPTION>
                                            1999           1998           1997
                                          -------        -------        -------
<S>                                       <C>            <C>            <C>
Defined benefit plans:
  Service cost                            $   688        $   570        $   506
  Interest cost                               749            756            728
  Expected return on plan assets             (890)          (948)          (890)
  Net amortization                              8              8              8
                                          -------        -------        -------
Net periodic pension cost                     555            386            352
Defined contribution plans                  1,253          1,174          1,458
                                          -------        -------        -------
Total pension expense                     $ 1,808        $ 1,560        $ 1,810
                                          =======        =======        =======
</TABLE>

K.       OTHER POSTRETIREMENT BENEFITS

Day provides certain contributory postretirement health care and life insurance
benefits for certain U.S. associates. Those associates may become eligible for
these postretirement benefits if they retire on or after age 55 with at least
ten years of service.

The status of Day's plan at December 31, 1999 and 1998, which is unfunded, is as
follows:

<TABLE>
<CAPTION>
                                                         1999             1998
                                                       -------          -------
<S>                                                    <C>              <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year                $ 5,229          $ 4,571
Service cost                                               378              381
Interest cost                                              409              327
Actuarial losses                                           (97)             168
Liability recognized - TPO acquisition                     538               --
Benefits paid                                              (85)            (218)
                                                       -------          -------
Benefit obligation at end of year                        6,372            5,229

  Unrecognized net actuarial gain (loss)                    92               (7)
                                                       -------          -------

Accrued postretirement benefit obligation              $ 6,464          $ 5,222
                                                       =======          =======
</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 8.0% and
decreasing gradually to 5.0% in 2006 and remaining at that level thereafter. A
one percentage point increase in the assumed health care cost trend rate would
have increased the accumulated benefit obligation by $1,159 at December 31, 1999
and the interest and service cost would


                                       60
<PAGE>   61
have been $169 higher for the year ended December 31, 1999. A one percentage
point decrease in the assumed health care cost trend rate would have decreased
the accumulated benefit obligation by $919 at December 31, 1999 and the interest
and service cost would have been $132 lower for the year ended December 31,
1999.

A discount rate of 7.5% and 6.5% was used in determining the accumulated
obligation as of December 31, 1999 and 1998, respectively.

Net periodic postretirement benefit costs include the following components for
the years ended December 31, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                      1999       1998       1997
                                                      ----       ----       ----
<S>                                                   <C>        <C>        <C>
Service cost                                          $378       $381       $386
Interest cost                                          409        327        315
Actuarial loss recognized                                2         --         --
                                                      ----       ----       ----
Net periodic postretirement benefit costs             $789       $708       $701
                                                      ====       ====       ====
</TABLE>

L.       LEASE COMMITMENTS AND CONTINGENCIES

In conjunction with the Varn acquisition, the Company assumed a capital lease on
a building in Germany. Property under this capital lease is included in
property, plant and equipment at December 31, 1999 as follows:

<TABLE>
<S>                                                                     <C>
                 Land and buildings                                     $ 1,431
                 Less - Accumulated depreciation                            (37)
                                                                        -------
                                                                        $ 1,394
                                                                        =======
</TABLE>

The following is a schedule by year of future annual minimum lease payments
under capital leases as of December 31, 1999:

<TABLE>
<S>                                                                      <C>
                  2000                                                   $   162
                  2001                                                       162
                  2002                                                       162
                  2003                                                       162
                  Thereafter                                               1,568
                                                                         -------
                                                                           2,216
                     Less- Amount representing interest                     (794)
                                                                         -------

                  Present value of minimum lease
                     payments (including current portion of $64)         $ 1,422
                                                                         =======
</TABLE>


The Company also leases certain warehouses, transportation equipment and office
equipment under operating leases with terms of 1 to 10 years. Rental expense for
the years ended December 31, 1999, 1998


                                       61
<PAGE>   62
and 1997 was $962, $802 and $780, respectively. At December 31, 1999, future
minimum lease commitments for noncancelable operating leases are:

<TABLE>
<S>                                                                      <C>
         2000                                                            $ 1,495
         2001                                                              1,276
         2002                                                              1,017
         2003                                                                766
         2004                                                                723
         Thereafter                                                        1,321
                                                                         -------
                  Total                                                  $ 6,598
                                                                         =======
</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, 1999, a $647 indemnification
receivable is recorded. Management believes that this receivable is fully
realizable. In management's opinion, the aforementioned claims will be resolved
without material adverse effect on the operations, financial position or cash
flows of the Company.

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

In January 2000, the Company received a Notice of Assessment from the Ohio
Department of Taxation for approximately $16.0 million relating to the 1995 Ohio
Franchise Tax. In February 2000, the Company filed a Petition for Reassessment.
The Company believes, based on consultation with legal counsel and outside tax
experts that it will ultimately prevail in this case. Should the Ohio Department
of Taxation ultimately prevail, the Company believes it is fully indemnified by
M.A. Hanna for this tax obligation. As a result, no provision has been recorded
in the financial statements for this contingency.




                                       62
<PAGE>   63
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 GSC Partners (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
consolidated condensed balance sheets as of December 31, 1999 and 1998, the
supplemental consolidated condensed statements of operations and cash flows for
the years ended December 31, 1999, 1998 and 1997 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.




                                       63
<PAGE>   64
                          DAY INTERNATIONAL GROUP, INC.

               SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
                                DECEMBER 31, 1999

<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                  $     377        $  (1,773)       $   1,904                         $     508
Accounts receivable -- net                                     17,605           17,635                            35,240
Inventories                                                    19,879           12,952                            32,831
Other assets                                                    3,775            3,056                             6,831
                                           ---------        ---------        ---------        ---------        ---------
         TOTAL CURRENT ASSETS                    377           39,486           35,547               --           75,410
Intercompany                                 278,408               --                         $(278,408)              --
Property, plant and equipment -- net                           48,763           20,976                            69,739
Investment in subsidiaries                   (50,978)          35,395                            15,583               --
Intangible and other assets                                   166,306           20,049                           186,355
                                           ---------        ---------        ---------        ---------        ---------
         TOTAL ASSETS                      $ 227,807        $ 289,950        $  76,572        $(262,825)       $ 331,504
                                           =========        =========        =========        =========        =========
LIABILITIES AND
  STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable                                            $   5,762        $   3,141        $                $   8,903
Current maturities of long-term debt       $   3,297                                64                             3,361
Accrued associate related costs and
  other expenses                               4,631           13,159           11,696                            29,486
                                           ---------        ---------        ---------        ---------        ---------
         TOTAL CURRENT LIABILITIES             7,928           18,921           14,901                            41,750
Intercompany                                 (52,374)         315,700           14,295         (277,621)              --
Long-term and subordinated long-term
  debt                                       275,111                             1,358                           276,469
Other long-term liabilities                                    14,704            6,553                            21,257
Exchangeable Preferred Stock                  41,745                                                              41,745
Total stockholders' equity (Deficit)         (44,603)         (59,375)          39,465           14,796          (49,717)
                                           ---------        ---------        ---------        ---------        ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
  EQUITY (DEFICIT)                         $ 227,807        $ 289,950        $  76,572        $(262,825)       $ 331,504
                                           =========        =========        =========        =========        =========
</TABLE>




                                       64
<PAGE>   65
                          DAY INTERNATIONAL GROUP, INC.

               SUPPLEMENTAL CONSOLIDATING 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>




                                       65
<PAGE>   66
                          DAY INTERNATIONAL GROUP, INC.

          SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 1999

<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                                  $      --        $ 135,868        $  62,550       $      --        $ 198,418
Cost of goods sold                                             81,600           41,736                          123,336
                                           ---------        ---------        ---------       ---------        ---------
         Gross profit                             --           54,268           20,814              --           75,082
Selling, general and administrative               14           23,519           12,427                           35,960
Restructuring costs                                                              1,361                            1,361
Amortization of intangibles                                     3,776               45                            3,821
Management fees                                                 1,079                                             1,079
                                           ---------        ---------        ---------       ---------        ---------
         Operating income (loss)                 (14)          25,894            6,981              --           32,861
Other expenses (income):
Equity in (earnings) of subsidiaries          (1,391)          (3,556)                           4,947               --
Interest expense                                               28,085                                            28,085
Other (income) expense                           (18)            (753)           1,275                              504
                                           ---------        ---------        ---------       ---------        ---------
         Income before income taxes
             and extraordinary items           1,395            2,118            5,706          (4,947)           4,272
Income taxes (benefit)                             1             (130)           2,150                            2,021
                                           ---------        ---------        ---------       ---------        ---------
         Income (loss) before
             extraordinary items               1,394            2,248            3,556          (4,947)           2,251
Extraordinary losses on early
    extinguishment of debt                        --              857               --              --              857
                                           ---------        ---------        ---------       ---------        ---------
         Net income                        $   1,394        $   1,391        $   3,556       $  (4,947)       $   1,394
                                           =========        =========        =========       =========        =========
</TABLE>




                                       66
<PAGE>   67
                          DAY INTERNATIONAL GROUP, INC.

          SUPPLEMENTAL CONSOLIDATING 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>




                                       67
<PAGE>   68
                          DAY INTERNATIONAL GROUP, INC.

          SUPPLEMENTAL CONSOLIDATING 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>




                                       68
<PAGE>   69
                          DAY INTERNATIONAL GROUP, INC.

          SUPPLEMENTAL CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1999

<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)                                      $  1,394        $  1,391        $  3,556        $ (4,947)      $  1,394
  Adjustments to reconcile net
    income (loss) to net cash provided by
    (used in) operating activities:
  Extraordinary loss on early
     extinguishment of debt                                 871                                                            871
  Depreciation and amortization                                          14,027           2,718                         16,745
  Equity in (earnings) of subsidiaries                   (1,391)         (3,556)                          4,947             --
  Deferred income taxes and other                                           (65)           (611)                          (676)
  Changes in operating assets and liabilities               296            (421)            452                            327
                                                       --------        --------        --------        --------       --------
Net cash provided by (used in)
  operating activities                                    1,170          11,376           6,115                         18,661
Investing activities:
Cash paid for acquisition                               (74,039)                                                       (74,039)
Capital expenditures                                                     (3,762)         (2,174)                        (5,936)
                                                       --------        --------        --------        --------       --------
Net cash used in investing activities                   (74,039)         (3,762)         (2,174)             --        (79,975)
Financing Activities:
Proceeds from issuance of  convertible
   preferred stock                                       38,264                                                         38,264
Proceeds from issuance of term loans                     24,469                                                         24,469
Payment of deferred financing fees                       (1,639)                                                        (1,639)
Net payments on credit facilities                        (3,515)                                                        (3,515)
                                                       --------        --------        --------        --------       --------
Net cash provided by (used in)
   financing activities                                  57,579              --              --              --         57,579
Intercompany transfers and dividends                     12,411          (8,432)         (3,979)             --             --
Effects of exchange rates on cash                                                          (519)                          (519)
                                                       --------        --------        --------        --------       --------
Cash and Cash Equivalents:
Net increase (decrease) in cash and
  cash equivalents                                       (2,879)           (818)           (557)             --         (4,254)
Cash and cash equivalents at beginning of period          3,256            (955)          2,461                          4,762
                                                       --------        --------        --------        --------       --------
Cash and cash equivalents at end of period             $    377        $ (1,773)       $  1,904        $     --       $    508
                                                       ========        ========        ========        ========       ========
</TABLE>




                                       69
<PAGE>   70
                          DAY INTERNATIONAL GROUP, INC.

          SUPPLEMENTAL CONSOLIDATING 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>




                                       70
<PAGE>   71
                          DAY INTERNATIONAL GROUP, INC.

          SUPPLEMENTAL CONSOLIDATING 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
    Change 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>




                                       71
<PAGE>   72
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" as amended by Statement of Financial Accounting
Standards No. 137. 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 2001 financial
statements. Based on current hedging activities, Day does not anticipate this
standard to have a material effect on its financial statements.

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

In connection with the audit of the Company's financial statements for the year
ended December 31, 1999, 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.




                                       72
<PAGE>   73
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.
In March 2000, Messrs. Raymond, Crosetto and Kaufman were elected as directors
and Ms. Christine K. Vanden Beukel resigned as a director.

<TABLE>
<CAPTION>
NAME                                     AGE                               POSITION
----                                     ---                               --------
<S>                                      <C>         <C>
Alfred C. Eckert III                      52         Chairman of the Board
Dennis R. Wolters                         53         Chief Executive Officer, President and Director
David B. Freimuth                         47         Senior Vice President, General Manager, Textiles
Thomas J. Koenig                          39         Vice President and Chief Financial Officer
John R. Elia                              52         Vice President, Operations, Image Transfer
William B. Branson                        41         Vice President, Sales and Marketing, Textiles
Michael E. McLean                         50         Vice President, Technology, Planning and New
                                                     Product Development, Image Transfer
Dermot Healy                              45         Managing Director, Europe
Michael P. Neroni                         35         National Sales Director, Image Transfer
Dwaine R. Brooks                          57         Vice President, Human Resources and Assistant
                                                     Secretary
Thomas Tymon                              48         Vice President, Operations, Textiles
Steven Wilson                             47         President, Varn
Carl J. Crosetto                          51         Director
William C. Ferguson                       70         Director
Matthew C. Kaufman                        29         Director
Colin Raymond                             29         Director
</TABLE>


Alfred C. Eckert III is the Chairman and Chief Executive Officer of GSC
Partners, which he founded in 1994. He is a director of Eastgate Group Limited,
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 and President of Image
Transfer in 1989.

David B. Freimuth was named Senior Vice President, General Manager, Textiles in
October 1999. From 1995 through September 1999 he was Vice President, Chief
Financial Officer. He was named Controller of the Company in 1987. He joined the
Company in 1974.



                                       73
<PAGE>   74
Thomas J. Koenig was named Vice President and Chief Financial Officer in October
1999. From 1995 through September 1999 he was Controller/Director of Accounting.
Prior to joining Day in 1995, he was with Deloitte & Touche LLP for 13 years,
most recently as a Senior Manager.

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 was named Vice President, Sales and Marketing, Textiles in
October 1999. From 1996 to 1999 he was Vice President, General Manager,
Textiles. 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.

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 Vice President, Human Resources in October 1999. He
was Director Human Resources for the Company's worldwide operations from 1990
through 1999. Previously, he was the Manager of Human Resources for the
Asheville facility.

Thomas Tymon was named Vice President, Operations, Textiles in October 1999.
Armstrong World Industries, Inc. previously employed Mr. Tymon since 1976. Most
recently Mr. Tymon was Vice President for the Western Hemisphere of Armstrong
TPO. Prior to this, he had served as an R & D manager, a Worldwide Textile
Technology manager and as a Business Unit manager for Armstrong World
Industries, Inc.

Steven Wilson was named President, Varn International in December 1999.
Previously, Mr. Wilson served as Group Director Worldwide Sales and Marketing,
and Group General Manager of Operations for Associated Spring, a business unit
of Barnes Group, Inc. From 1993 through 1996, Mr. Wilson was


                                       74
<PAGE>   75
a Division President of TransTechnology Corporation. Mr. Wilson was an
Operations Manager for TRW Inc. from 1988 through 1993, and from 1986 through
1988, he was a TRW Division Controller.

Carl J. Crosetto is Executive Vice President and member of the Office of the
Chairman of Bowne & Co., Inc. since December 1998. In January 2000, he was
appointed to the Board of Directors of Bowne. Previously he had been Senior
Vice President and Director of Sales. In 1989 he was named President of Bowne
International. Mr. Crosetto joined Bowne in 1973 and held various sales related
positions from 1973 to 1989. Mr. Crosetto is current member of the board of
directors of SpeedFlex Asia Limited

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 and Eircom.

Matthew C. Kaufman joined GSC Partners in 1997. Mr. Kaufman was previously
Director of Corporate Finance with NextWave Telecom, Inc. Prior to NextWave, he
was with The Blackstone Group, in Merchant Banking and Mergers & Acquisitions
departments. Mr. Kaufman graduated with Highest Distinction with a B.B.A. and
M.A.C.C from the University of Michigan.

Colin F. Raymond is a Partner with Soros Private Equity Partners ("SPEP") in New
York. He has been with SPEP since May 1999. Prior to joining SPEP, Mr. Raymond
was a member of the Merchant Banking division of Morgan Stanley in New York from
1996 to 1999. For the four years prior to Morgan Stanley, Mr. Raymond was with
Wolfensohn & Co. and with J.P. Morgan & Co. in their corporate finance and
mergers and acquisitions groups. Mr. Raymond is a current member of the board of
directors for ARM Financial Group, Inc., CrossWorlds Software, Inc., C.S.
Aviation Inc., Onvoy, Inc. and PointOne Telecommunications, Inc. He previously
served on the board of directors for Consolidated Hydro, Inc., Somerset Energy
Inc. and Union Drilling Inc.

As compensation for his services as director, in 1998, 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. On January 18, 2000, Mr. Ferguson
has received additional 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. As
compensation for his services as director, Mr. Crosetto also received warrants
to purchase up to 74 shares of Common Stock at a price of $4,030 per share on
January 18, 2000 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.




                                       75
<PAGE>   76
ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation for 1999,
1998, and 1997 for Mr. Wolters and the four other most highly compensated
officers of the Company at the end of 1999.

<TABLE>
<CAPTION>
                                                                      LONG TERM COMPENSATION
                                                                      ----------------------
                                                                        AWARDS       PAYOUTS
                                             ANNUAL                     ------       -------
                                          COMPENSATION                SECURITIES
NAME AND                                  ------------                UNDERLYING      LTIP              ALL OTHER
PRINCIPAL POSITION       YEAR        SALARY          BONUS            OPTIONS(#)   PAYOUTS(a)         COMPENSATION
------------------       ----        ------          -----            ----------   ----------         ------------
<S>                      <C>       <C>             <C>                <C>          <C>                <C>
Dennis R. Wolters,       1999      $  215,000      $   80,000               0      $       --         $   26,662
  President and          1998         200,000         191,410           2,850              --          5,084,715(c)
  Chief Executive        1997         193,333         221,436               0          20,534            242,501(d)
  Officer

David B. Freimuth,       1999         120,750          22,000               0              --              5,673
  Vice President         1998         105,000          50,371             780              --          2,537,727(c)
                         1997         101,667          58,615             110           6,703            166,355(d)

William B. Branson,      1999          97,700           8,600               0              --             85,984(b)
  Vice President         1998          94,000          28,947             270              --            103,370(c)
                         1997          90,500          45,465               0           6,703            222,798(d)

Michael E. McLean,       1999          95,500          22,080               0              --             57,028(b)
  Vice President         1998          91,000          44,124             385              --             11,680
                         1997          89,000          47,750               0           6,703            172,643(d)

John R. Elia,            1999          92,740          22,080               0              --             52,226(b)
 Vice President          1998          88,000          51,091             355              --              8,108
                         1997          86,000          54,338               0           7,679            166,894(d)
</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 completion bonus as a result of the GSC
         Partners Acquisition. See "Certain Relationships and Related
         Transactions".

(c)      Includes principally the Executive Incentive Bonus Arrangements as a
         result of the GSC Partners Acquisition. See "Certain Relationships
         and Related Transactions".

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




                                       76
<PAGE>   77
There were no options to purchase common stock granted in 1999 for Mr. Wolters
and the four other most highly compensated officers of the Company at the end of
1999.

                            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($)
                                                    ------------    ------------
                                                    EXERCISABLE/    EXERCISABLE/
                                                       UNEXER-        UNEXER-
NAME                                                   CISABLE       CISABLE(1)
----                                                   -------       ----------
<S>                                                <C>              <C>
Dennis R. Wolters                                      1,290/       $ 3,636,000/
                                                       2,760        $        --

David B. Freimuth                                        335/       $   917,300/
                                                         755        $        --

William B. Branson                                     121.5/       $   340,875/
                                                         261        $        --

Michael E. McLean                                        212/       $   606,000/
                                                         373        $        --

John R. Elia                                             211/       $   606,000/
                                                         344        $        --
</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 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


                                       77
<PAGE>   78
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 were 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 received 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. These agreements expired in
January 2000. 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

Since the Company does not have a compensation committee, executive compensation
is determined by the Board of Directors. Messrs. Eckert and Kaufman are the
Chairman and Chief Executive Officer and Managing Director of GSC Partners,
respectively. Mr. Ferguson serves on the Advisory Board of GSC Partners.
GSC Partners and SG Capital Partners LLC ("SGCP"), the Company's controlling
shareholders, provide business, financial and management advisory services to
the Company for an annual total fee of $1 million, plus expenses. The Company
also indemnifies GSC Partners and SGCP from and against certain liabilities.
Mr. Raymond is a partner with Soros Private Equity Partners. SPEP and its
affiliates are the majority shareholders of the Company's Convertible Cumulative
Preferred Stock. The Company also indemnifies SPEP from and against certain
liabilities. Mr. Wolters is the President and Chief Executive Officer of the
Company. 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 1999.


                                       78
<PAGE>   79
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                                              1,680         6.3
David B. Freimuth                                                460         1.7
Michael E. McLean                                                237         0.9
John R. Elia                                                     222         0.8
Dwaine R. Brooks                                                 155         0.6
William B. Branson                                               160         0.6
Thomas J. Koenig                                                  19         0.1
Alfred C. Eckert III(c)                                           --          --
Matthew C. Kaufman(c)                                             --          --
William C. Ferguson                                               37         0.1
All Directors and Executive Officers
  as a Group (23 persons)                                      3,788        14.3
SG Capital Partners LLC                                      3,777.5        14.3
Greenwich IV, LLC(c)                                          18,912        71.3
                                                              ------       -----
         Total                                              26,514.5       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 3,216.5.

(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 GSC Partners. Mr. Eckert and
         Mr. Kaufman 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 Mr. Kaufman disclaim
         any such beneficial ownership.




                                       79
<PAGE>   80
THE STOCKHOLDERS AGREEMENT

The Stockholders Agreement provides for the number of directors of the Board of
Directors of the Company to be such number as designated by GSC Partners,
which initially shall be five, and for the composition of the Board of Directors
of the Company to consist of four individuals designated as designated by
GSC Partners and, for so long as SGCP holds 5% of the outstanding Common
Stock, one individual designated by SGCP.

In the Stockholders Agreement, the Management Stockholders have agreed, except
under certain circumstances, not to transfer shares of Common Stock, or options
to acquire Common Stock, prior to the later to occur of (i) the fifth
anniversary of the date of the Stockholders Agreement and (ii) the consummation
of a public offering. In addition, under the Stockholders Agreement, if a
Management Stockholder's employment is terminated, the Company shall have the
right to purchase all or part of the shares of the Common Stock owned by such
Management Stockholder and the vested options to acquire Common Stock owned by
such Management Stockholder, at prices calculated in accordance with, and
subject to certain other terms and conditions set forth in, the terms of the
Stockholders Agreement.

The Stockholders Agreement creates certain conventional "drag" and "tag" rights
with respect to the shares of the Common Stock owned by the Management
Stockholders. The Stockholders Agreement also provides that at any time after
the Acquisition Closing Date, GSC Partners shall have the right to require
the Company to effect up to two registrations of their Common Stock on Form S-1
under the Securities Act and, if available, unlimited registrations on Form S-2
or S-3 under the Securities Act; from and after a public offering, SGCP shall
have the right to require the Company to effect up to two registrations of the
Common Stock on Form S-3 under the Securities Act and that the Company shall pay
all registration expenses in connection with each registration of shares of the
Common Stock pursuant to the Stockholders Agreement.

ITEM 13. 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
the affiliates of GSC Partners no longer, directly or indirectly, own any shares
of capital stock of the Company, and may be earlier terminated by GSC Partners,
in its sole discretion.

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.



                                       80
<PAGE>   81
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, 1999, 1998 and 1997:

     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, 1999, 1998 and 1997:

         Independent Auditors' Reports - At pages 35 and 36 of this Report.

         Schedule II - Valuation and Qualifying Accounts (At page 84 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 October 28, 1999, as amended, the Company announced the
     completion of its acquisition of privately-held Varn International and
     filed the required financial statements and pro forma financial statements
     related to the acquisition.

(c) EXHIBITS. SEE INDEX TO EXHIBITS



                                       81
<PAGE>   82
(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.




                                       82
<PAGE>   83
                                   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 30, 2000                          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 30, 2000                          By:/s/ Dennis R Wolters
                                                  ------------------------------
                                                      Dennis R. Wolters
                                                      President, Chief Executive
                                                        Officer and Director
                                                        (Principal Executive
                                                        Officer)

Date:  March 30, 2000                          By:/s/ Thomas J. Koenig
                                                  ------------------------------
                                                      Thomas J. Koenig
                                                      Vice President and Chief
                                                        Financial Officer
                                                        (Principal Financial
                                                        Officer and Principal
                                                        Accounting Officer)

Date:  March 30, 2000                          By:/s/ Alfred C. Eckert, III
                                                  ------------------------------
                                                      Alfred C. Eckert, III
                                                      Director

Date:  March 30, 2000                          By:/s/ Matthew C. Kaufman
                                                  ------------------------------
                                                      Matthew C. Kaufman
                                                      Director

Date:  March 30, 2000                          By:/s/ William C. Ferguson
                                                  ------------------------------
                                                      William C. Ferguson
                                                      Director

Date:  March 30, 2000                          By:/s/ Colin F. Raymond
                                                  ------------------------------
                                                      Colin Raymond
                                                      Director

Date:  March 30, 2000                          By:/s/ Carl J. Crosetto
                                                  ------------------------------
                                                      Carl Crosetto
                                                      Director



                                       83
<PAGE>   84
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        from        at End
      Accounts           of Period     Expenses        Acquired     Translation    Reserves     of Period
      --------           ---------     --------        --------     -----------    --------     ---------
<S>                      <C>           <C>           <C>             <C>           <C>          <C>
Period Ended:
  December 31, 1999      $(1,384)      $  (470)      $     (418)     $    76       $    55      $(2,141)
                         =======       =======       ==========      =======       =======      =======

  December 31, 1998      $(1,055)      $  (217)      $     (218)     $   (32)      $   138      $(1,384)
                         =======       =======       ==========      =======       =======      =======

  December 31, 1997      $  (982)      $  (162)      $       --      $    47       $    42      $(1,055)
                         =======       =======       ==========      =======       =======      =======
</TABLE>




                                       84
<PAGE>   85
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
                                                                                        Page No.
                                                                                        --------
<S>                                                                                     <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. (the
                  "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>



                                       85
<PAGE>   86
<TABLE>
<CAPTION>
                                                                                        Page No.
                                                                                        --------
<S>                                                                                     <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>


                                       86
<PAGE>   87
<TABLE>
<CAPTION>
                                                                                        Page No.
                                                                                        --------
<S>                                                                                     <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.                                                               +

         10.31    Purchase Agreement between Armstrong World Industries, Inc.
                  and Armstrong World Industries GmbH, as Sellers and Day
                  International, Inc., as Buyer (portions omitted pursuant to a
                  request for confidential treatment).                                    ++

         10.32    Stock Purchase Agreement, dated as of August 13, 1999, by and
                  among the Company and the stockholders of each of Varnco
                  Holdings Inc., Varn Holdings PLC, Varn Aegis Co. GmbH
                  Hautschutzsysteme, Varn Products Co., Inc., JV Tex Realty
                  Corp. and Graph Tech, Inc.                                              +++

         10.33    Amendment No. 1, dated October 19, 1999, to the Stock Purchase
                  Agreement, dated as of August 13, 1999, by and among the
                  Company and the stockholders of each of Varnco Holdings Inc.,
                  Varn Holdings PLC, Varn Aegis Co. GmbH Hautschutzsysteme, Varn
                  Products Co., Inc., JV Tex Realty Corp. and Graph Tech, Inc.            +++

         10.34    Certificate of Amendment to the Certificate of Incorporation
                  of the Company, filed with the Secretary of State of the State
                  of Delaware on October 15, 1999.                                        +++

         10.35    Certificate of Designation for the Company's 18% Convertible
                  Cumulative Preference Stock due 2010, filed with the Secretary
                  of State of the State of Delaware on October 15, 1999.                  +++

         10.36    Supplemental Indenture, dated as of October 19, 1999 among The
                  Bank of New York and the several Guarantors party thereto.              +++

         10.37    Subsidiary Guarantee, dated as of October 19, 1999, among
                  Firstar Bank, N.A. and the several Guarantors party thereto.            +++

         10.38    Preference Stock Purchase Agreement, dated as of October 19,
                  1999, among the Company and the several Investors party
                  thereto.                                                                +++

         10.39    Amended and Restated Stockholders Agreement, dated as of
                  October 19, 1999, among the Company and certain of its
                  stockholders.                                                           +++
</TABLE>



                                       87
<PAGE>   88
<TABLE>
<CAPTION>
                                                                                        Page No.
                                                                                        --------
<S>                                                                                     <C>
         10.40    Amended and Restated Credit Agreement, dated as of October 19,
                  1999, among the Company, Societe Generale, as Administrative
                  Agent, and SG Cowen Securities Corporation, as Arranger.                +++

         10.41    Unaudited Pro Forma Consolidated Balance Sheet of Day
                  International Group, nc. as of September 30, 1999 and the
                  Unaudited Consolidated Statement of Operations of Day
                  International Group, Inc. for the nine months ended September
                  30, 1999 and the year ended December 31, 1998.                          +++

         10.42    Audited Combined Financial Statements of Varn International as
                  of October 15, 1999 and for the period from January 1, 1999
                  through October 15, 1999.                                               +++


(21)     Subsidiaries                                                                     89-90

(27)     Financial Data Schedule                                                          91
</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).

+        Incorporated by reference to the Group's Form 10K for the year ended
         December 31, 1998.

++       Incorporated by reference to the Group's Form 10Q for the quarterly
         period ended September 30, 1999.

+++      Incorporated by reference to the Group's Form 8K dated October 28,
         1999, as amended

++++     Filed herewith




                                       88