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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 
 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarterly Period ended September 30, 2004 Commission File No. 33-93644 DAY INTERNATIONAL GROUP, INC. 
 State of Incorporation:            Delaware IRS Employer Identification No.:      31-1436349 Securities Registered Pursuant to Section 12 (b) of the Act: None Securities Registered Pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.     Yesx     No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).    Yes o       No x There were 23,323 Common Shares of the Company, $0.01 per share par value,
outstanding as of November 1, 2004.




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DAY INTERNATIONAL GROUP, INC.
INDEX PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets as of September
30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    19Item 3.Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4.Controls and Procedures
    
    
    25PART II    OTHER INFORMATIONItem 6. Exhibits
    
    
    26Signature
    
    
    26EX-31.1 CERTIFICATIONSEX-31.2 CERTIFICATIONSEX-32.1 CERTIFICATIONSEX-32.2 CERTIFICATIONS
 2




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PART I            FINANCIAL INFORMATION 
 ITEM 1.     FINANCIAL STATEMENTS 
 DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
(In thousands) 2004
    
    2003ASSETSCash and cash equivalents
    
    $
    3,361
    
    
    $
    726Accounts receivable (less allowance for doubtful accounts of $3,073 and $3,407)
    
    
    50,089
    
    
    
    44,687Inventories (Note B)
    
    
    51,129
    
    
    
    48,652Other current assets
    
    
    12,442
    
    
    
    12,881Total current assets
    
    
    117,021
    
    
    
    106,946Property, plant and equipment, net of accumulated depreciation of $56,480 and $49,529
    
    
    72,468
    
    
    
    74,167Goodwill
    
    
    142,737
    
    
    
    142,580Intangible assets (net of accumulated amortization of $38,927 and $35,306)
    
    
    20,103
    
    
    
    23,223Other assets
    
    
    17,744
    
    
    
    24,624TOTAL ASSETS
    
    $
    370,073
    
    
    $
    371,540LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Accounts payable
    
    $
    9,845
    
    
    $
    7,563Current maturities of long-term debt
    
    
    4,301
    
    
    
    3,489Other current liabilities
    
    
    30,204
    
    
    
    29,421Total current liabilities
    
    
    44,350
    
    
    
    40,473Long-term and subordinated long-term debt
    
    
    262,780
    
    
    
    276,331Other long-term liabilities
    
    
    34,942
    
    
    
    35,811Redeemable preferred stock (Note D)
    
    
    163,535
    
    
    
    146,649STOCKHOLDERS EQUITY (DEFICIT):Common shares
    
    
    1
    
    
    
    1Contra-equity associated with the assumption of majority shareholders bridge loan
    
    
    (68,673
    )
    
    
    (68,772
    )Retained earnings (deficit)
    
    
    (71,400
    )
    
    
    (65,180
    )Accumulated other comprehensive loss
    
    
    4,538
    
    
    
    6,227Total stockholders equity (deficit)
    
    
    (135,534
    )
    
    
    (127,724
    )TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
    
    $
    370,073
    
    
    $
    371,540
 See notes to condensed consolidated financial statements. 3




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DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(In thousands) Three Months
    
    Nine Months2004
    
    2003
    
    2004
    
    2003NET SALES
    
    $
    90,494
    
    
    $
    70,054
    
    
    $
    269,014
    
    
    $
    209,012COST OF GOODS SOLD
    
    
    57,122
    
    
    
    45,050
    
    
    
    170,196
    
    
    
    134,543GROSS PROFIT
    
    
    33,372
    
    
    
    25,004
    
    
    
    98,818
    
    
    
    74,469SELLING, GENERAL AND ADMINISTRATIVE
    
    
    19,516
    
    
    
    15,241
    
    
    
    59,469
    
    
    
    45,209AMORTIZATION OF INTANGIBLES
    
    
    9
    
    
    
    205
    
    
    
    26
    
    
    
    612MANAGEMENT FEES
    
    
    250
    
    
    
    250
    
    
    
    750
    
    
    
    750OPERATING PROFIT
    
    
    13,597
    
    
    
    9,308
    
    
    
    38,573
    
    
    
    27,898OTHER (INCOME) EXPENSES:Interest expense:Long-term debt (including amortization of
deferred financing costs and discount of $456,
$606, $1,319 and $1,780 and loss on
extinguishment of debt of $542 and $542 in 2003)
    
    
    5,405
    
    
    
    7,260
    
    
    
    16,687
    
    
    
    20,414Redeemable preferred stock dividends (including
amortization of discount and issuance costs of
$47, $47, $141 and $47)
    
    
    5,696
    
    
    
    4,923
    
    
    
    16,886
    
    
    
    4,923Other (income) expense
    
    
    (340
    )
    
    
    (225
    )
    
    
    (1,881
    )
    
    
    (537
    )INCOME (LOSS) BEFORE INCOME TAXES
    
    
    2,836
    
    
    
    (2,650
    )
    
    
    6,881
    
    
    
    3,098INCOME TAX EXPENSE
    
    
    4,655
    
    
    
    901
    
    
    
    13,101
    
    
    
    3,128NET INCOME (LOSS)
    
    
    (1,819
    )
    
    
    (3,551
    )
    
    
    (6,220
    )
    
    
    (30
    )ACCUMULATING PREFERRED STOCK DIVIDENDS (Note D)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,574
    )AMORTIZATION OF PREFERRED STOCK ISSUANCE COSTS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (94
    )NET LOSS AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    (1,819
    )
    
    $
    (3,551
    )
    
    $
    (6,220
    )
    
    $
    (9,698
    )
 See notes to condensed consolidated financial statements. 4




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DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(In thousands) 2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (6,220
    )
    
    $
    (30
    )Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    11,067
    
    
    
    11,890Interest expense:Redeemable preferred stock dividends
    
    
    16,886
    
    
    
    4,923Loss on extinguishment of debt
    
    
    
    
    
    
    542Deferred income taxes
    
    
    5,459
    
    
    
    (3,151
    )Equity in earnings of investees
    
    
    (192
    )Foreign currency (gain) loss
    
    
    (1,633
    )
    
    
    (1,017
    )(Gain) loss on disposal of fixed assets
    
    
    (61
    )
    
    
    774Change in operating assets and liabilities
    
    
    (2,757
    )
    
    
    (3,124
    )Net cash provided by operating activities
    
    
    22,549
    
    
    
    10,807CASH FLOWS FROM INVESTING ACTIVITIES:Cash paid for acquisitions
    
    
    (1,346
    )
    
    
    (1,952
    )Capital expenditures
    
    
    (7,053
    )
    
    
    (5,456
    )Cash held for retirement of debt
    
    
    
    
    
    
    (97,971
    )Proceeds from sale of properties
    
    
    1,410
    
    
    
    939Net cash used in investing activities
    
    
    (6,989
    )
    
    
    (104,440
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options
    
    
    25Proceeds from issuance of debt
    
    
    
    
    
    
    133,950Payment of deferred financing costs
    
    
    (633
    )
    
    
    (3,537
    )Payments on term loans
    
    
    (14,267
    )
    
    
    (31,197
    )Net (payments on) proceeds from
revolving credit facility
    
    
    1,975
    
    
    
    (4,950
    )Net cash provided by (used in) financing
activities
    
    
    (12,900
    )
    
    
    94,266EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (25
    )
    
    
    112Net increase (decrease) in cash and
cash equivalents
    
    
    2,635
    
    
    
    745Cash and cash equivalents at beginning of period
    
    
    726
    
    
    
    996Cash and cash equivalents at end of period
    
    $
    3,361
    
    
    $
    1,741NON-CASH TRANSACTIONS:Preferred stock dividend
    
    
    
    
    
    $
    1,901Amortization of preferred stock discount
    
    
    
    
    
    $
    94
 See notes to condensed consolidated financial statements. 5




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DAY INTERNATIONAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) A. BASIS OF PRESENTATION The balance sheet as of December 31, 2003, is condensed financial information
derived from the audited balance sheet. The interim financial statements are
unaudited. The consolidated financial statements of Day International Group,
Inc. have been prepared in accordance with accounting principles generally
accepted in the United States and, in the opinion of management, reflect all
adjustments (consisting of normal recurring accruals) necessary for a fair
presentation in accordance with accounting principles generally accepted in the
United States for the periods presented. The consolidated results of operations
and cash flows for the interim periods presented are not necessarily indicative
of the results for the full year. B. INVENTORIES Inventories as of September 30, 2004 and December 31, 2003, consist of: 2004
    
    2003Finished goods
    
    $
    24,579
    
    
    $
    24,917Work in process
    
    
    4,778
    
    
    
    5,453Raw materials
    
    
    21,772
    
    
    
    18,282$
    51,129
    
    
    $
    48,652
 C. LONG-TERM DEBT On June 2, 2004, the Company issued $126,473 of Tranche D Term Loans under the
$185,000 Senior Secured Credit Facility to refinance the previously outstanding
Tranche B and Tranche C Term Loans. The Tranche D Term Loans have terms
identical to the refinanced Tranche B and Tranche C Term Loans, except that
interest rates have been lowered 100 basis points and are now based on the
banks base rate plus 2.50% or the LIBOR rate plus 3.50%. No change in the
final maturity date was made. In accordance with EITF 96-19, Debtors
Accounting for a Modification or Exchange of Debt Instruments, there was not a
substantial difference between the debt instruments, thus no extinguishment of
debt is recognized. Remaining unamortized deferred financing fees and debt
discount from the Tranche B and C Term Loans have been added to the financing
fees paid to the debtors and will amortized over the term of the Tranche D Term
Loan. On September 16, 2003, the Company issued $135,000 of
 senior secured debt under an $185,000 Senior Secured Credit Facility to refinance its $100,000
 11-1/8% Senior Notes and repay its $24,850 term loan and $10,750 revolving credit facility. The
 Company issued a notice of redemption for the $100,000 11-1/8% Senior Notes and redeemed the
 Senior Notes in October 2003 at a call price of $101,236. In the third quarter of 2003, the
 Company recorded a loss of $542 on the write-off of the remaining deferred 6




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financing fees related to the existing credit agreement and recorded an
additional loss of $2,241 in the fourth quarter of 2003 to write-off an
additional $1,005 of deferred financing fees related to the Senior Notes and to
record the loss resulting from the $1,236 call premium. D. REDEEMABLE PREFERRED STOCK The Companys 121/4% Senior Exchangeable Preferred Stock require that
dividends must be paid in cash after March 15, 2003. The Company has not paid
cash dividends after March 15, 2003, because of certain restrictions in the
Companys Senior Secured Credit Agreement and Notes Indentures limiting the
ability to pay cash dividends. If not paid for four consecutive quarters, the
holders of the Exchangeable Preferred Stock have the right to elect two
directors to the Board of Directors until the dividends in arrears have been
paid. All dividends through March 15, 2003, have been in the form of additional
fully-paid and non-assessable shares of Exchangeable Preferred Stock.
Dividends-in-arrears are $12,695 as of September 30, 2004, which are included
in the redeemable preferred stock balance. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement requires that the Companys redeemable preferred stock be recorded in
the same manner as long-term debt. The Company adopted the statement as of July
1, 2003. Therefore, since the third quarter of 2003, the Company has reflected
the redeemable preferred stock as a liability and accrued dividends as interest
expense. The adoption of this statement had no effect on the cash flows of the
Company, net loss available to common shareholders or the Companys compliance
with its debt covenants. E. INCOME TAXES The Companys effective income tax rate for 2004 and 2003 is significantly
different from the statutory rates in effect as a result of the adoption of
SFAS No. 150 and the inclusion of the dividends on the redeemable preferred
stock in income (loss) before income taxes. The non-deductible preferred stock
dividends cause a significant difference between book income and taxable income
subsequent to the adoption of SFAS No. 150. In addition, the effective rate for
2004 is affected by dividends from non-U.S. subsidiaries taxable in the United
States. F. BUSINESS SEGMENTS The Company produces precision-engineered products, specializing in the design
and customization of consumable image-transfer products for the graphic arts
(printing) industry and consumable fiber handling products for the textile
industry. The Image Transfer segment designs, manufactures and markets
high-quality printing blankets and sleeves, pressroom chemicals and automatic
dampening systems used primarily in the offset, flexographic and digital
printing industries. The Textile Products segment 7




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manufactures and markets precision engineered rubber cots and aprons sold to
textile yarn spinners and other engineered rubber products sold to diverse
markets. Segment performance is evaluated based on operating profit results compared to
the annual operating plan. Intersegment sales and transfers are not material. The Company manages the two segments as separate strategic business units. They
are managed separately because each business unit requires different
manufacturing processes, technology and marketing strategies. Three Months
    
    Nine Months2004
    
    2003
    
    2004
    
    2003Third party sales:Image Transfer
    
    $
    78,477
    
    
    $
    58,424
    
    
    $
    231,443
    
    
    $
    171,546Textile Products
    
    
    12,017
    
    
    
    11,630
    
    
    
    37,571
    
    
    
    37,466Total
    
    $
    90,494
    
    
    $
    70,054
    
    
    $
    269,014
    
    
    $
    209,012Segment operating profit:Image Transfer
    
    $
    13,578
    
    
    $
    9,914
    
    
    $
    37,944
    
    
    $
    28,561Textile Products
    
    
    1,463
    
    
    
    1,028
    
    
    
    4,866
    
    
    
    4,009Total
    
    $
    15,041
    
    
    $
    10,942
    
    
    $
    42,810
    
    
    $
    32,570
 The following is a reconciliation of the segment operating profit reported
above to the amount reported in the consolidated financial statements: Three Months
    
    Nine Months2004
    
    2003
    
    2004
    
    2003Segment operating profit
    
    $
    15,041
    
    
    $
    10,942
    
    
    $
    42,810
    
    
    $
    32,570APB #16 depreciation and amortization
    
    
    (999
    )
    
    
    (1,044
    )
    
    
    (2,997
    )
    
    
    (2,893
    )Non-allocated corporate expenses
    
    
    (186
    )
    
    
    (135
    )
    
    
    (464
    )
    
    
    (417
    )Amortization of intangibles
    
    
    (9
    )
    
    
    (205
    )
    
    
    (26
    )
    
    
    (612
    )Management fees
    
    
    (250
    )
    
    
    (250
    )
    
    
    (750
    )
    
    
    (750
    )Total operating profit
    
    $
    13,597
    
    
    $
    9,308
    
    
    $
    38,573
    
    
    $
    27,898
 G. COMPREHENSIVE INCOME (LOSS) Total comprehensive income (loss) is comprised of net
 income (loss), net currency translation gains and losses and net unrealized gains and losses
 on cash flow hedges. Total comprehensive income (loss) for the three months ended September
 30, 2004 and 2003 was $(1,765) and $(3,288). Total comprehensive income (loss) for the nine
 months ended September 30, 2004 and 2003 was $(7,909) and $2,783. 8




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H. CONTINGENCIES The Company is involved in various litigation occurring incidental to normal
operations. In the opinion of management, after consultation with legal
counsel, the resolution of pending litigation and proceedings is not expected
to have a material effect on the consolidated results of operations, financial
position or cash flows of the Company. I. STOCK-BASED COMPENSATION As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company applies the intrinsic value method of recognition and measurement under
Accounting Principles Board Opinion No. 25 to its stock options and warrants.
No compensation expense related to employee stock options or warrants issued to
directors is reflected in net income (loss). The following table illustrates
the effect on net income (loss) if compensation cost for all outstanding and
unvested stock option and warrants had been determined based on their fair
values at the grant date, consistent with the method prescribed by SFAS No.
123: Three Months
    
    Nine Months2004
    
    2003
    
    2004
    
    2003Net income (loss)as reported
    
    $
    (1,819
    )
    
    $
    (3,551
    )
    
    $
    (6,220
    )
    
    $
    (30
    )Lessstock-based compensation
expense determined using fair value
based method in SFAS No. 123
    
    
    (195
    )
    
    
    (203
    )
    
    
    (585
    )
    
    
    (619
    )Pro forma net income (loss)
    
    $
    (2,014
    )
    
    $
    (3,754
    )
    
    $
    (6,805
    )
    
    $
    (649
    )
 J. RETIREMENT AND OTHER POSTRETIREMENT BENEFITS A summary of the components of net periodic pension cost for the defined
benefit retirement plans is as follows: Three Months
    
    Nine Months2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    93
    
    
    $
    81
    
    
    $
    280
    
    
    $
    240Interest cost
    
    
    194
    
    
    
    172
    
    
    
    583
    
    
    
    513Expected return on plan assets
    
    
    (85
    )
    
    
    (81
    )
    
    
    (255
    )
    
    
    (243
    )Actuarial loss recognized
    
    
    9
    
    
    
    167
    
    
    
    28
    
    
    
    501Net periodic pension costs
    
    $
    211
    
    
    $
    339
    
    
    $
    636
    
    
    $
    1,011
 9




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A summary of the components of net periodic postretirement benefit cost for the
postretirement health care and life insurance benefits plans is as follows: Three Months
    
    Nine Months2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    275
    
    
    $
    207
    
    
    $
    825
    
    
    $
    621Interest cost
    
    
    212
    
    
    
    221
    
    
    
    636
    
    
    
    663Amortization of prior service cost
    
    
    (160
    )
    
    
    
    
    
    
    (480
    )Actuarial loss recognized
    
    
    59
    
    
    
    66
    
    
    
    177
    
    
    
    198Net periodic postretirement benefit costs
    
    $
    386
    
    
    $
    494
    
    
    $
    1,158
    
    
    $
    1,482
 On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003(the Act) was enacted. The Act expands Medicare
primarily by adding a prescription drug benefit for Medicare-eligible
individuals beginning in 2006, as well as a federal subsidy to sponsors of
retiree health care benefit plans that provide a benefit that is at least
actuarially equivalent to the Medicare benefit. Pursuant to guidance provided
in FASB Staff Position SFAS No. 106-2, the Company has chosen to defer
recognition of the Act, and, accordingly, postretirement benefit obligations
and net periodic postretirement benefit cost do not reflect any potential
effect of the legislation associated with the subsidy because the Company is
unable to conclude whether the benefits provided by the plan are actuarially
equivalent to Medicare Part D under the Act. In addition, specific
authoritative guidance on certain aspects of the Act has not yet been
determined and that guidance, when issued, could require the Company to change
previously reported information. The Company believes that the effect of the
legislation will not be material to the results of operations or financial
position of the Company. K. SUPPLEMENTAL CONSOLIDATING INFORMATION The Company has outstanding $115,000, 91/2% Senior Subordinated Notes (the
Notes). The Company has no assets or operations other than its wholly-owned
investment in Day International, Inc. (Day International or Guarantor). Day
International and the wholly-owned United States subsidiaries have provided
full and unconditional guarantees of the Notes. The wholly-owned international
subsidiaries of Day International are not guarantors with respect to the Notes
and do not have any credit arrangements senior to the Notes. The only
intercompany eliminations are the normal intercompany eliminations with regard
to intercompany sales and the Companys investment in the wholly-owned
non-guarantor subsidiaries. Intercompany notes are in place, which effectively
transfers the interest expense from the Company to Day International. The
following are the supplemental combining condensed balance sheets as of
September 30, 2004 and December 31, 2003, and the supplemental combining
condensed statements of operations and cash flows for the three and nine months
ended September 30, 2004 and 2003, 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. 10




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DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
SEPTEMBER 30, 2004 DAYInter-
    
    
    
    
    
    Non-national
    
    Guarantor
    
    GuarantorGroup, Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCash and cash equivalents
    
    $
    1,588
    
    
    $
    158
    
    
    $
    1,615
    
    
    $
    
    
    
    $
    3,361Accounts receivablenet
    
    
    
    
    
    
    24,190
    
    
    
    25,899
    
    
    
    
    
    
    
    50,089Inventories
    
    
    
    
    
    
    30,478
    
    
    
    20,651
    
    
    
    
    
    
    
    51,129Other current assets
    
    
    
    
    
    
    6,880
    
    
    
    5,562
    
    
    
    
    
    
    
    12,442TOTAL CURRENT ASSETS
    
    
    1,588
    
    
    
    61,706
    
    
    
    53,727
    
    
    
    
    
    
    
    117,021Intercompany
    
    
    265,669
    
    
    
    (767
    )
    
    
    969
    
    
    
    (265,871
    )Property, plant and equipment, net
    
    
    
    
    
    
    43,693
    
    
    
    28,775
    
    
    
    
    
    
    
    72,468Investment in subsidiaries
    
    
    (24,640
    )
    
    
    62,420
    
    
    
    (12,535
    )
    
    
    (25,245
    )Intangible and other assets
    
    
    
    
    
    
    160,784
    
    
    
    19,800
    
    
    
    
    
    
    
    180,584TOTAL ASSETS
    
    $
    242,617
    
    
    $
    327,836
    
    
    $
    90,736
    
    
    $
    (291,116
    )
    
    $
    370,073LIABILITIES AND
STOCKHOLDERS EQUITY (DEFICIT)Accounts payable
    
    $
    
    
    
    
    3,800
    
    
    $
    6,045
    
    
    $
    
    
    
    $
    9,845Current maturities of long-term debt
    
    
    4,195
    
    
    
    4
    
    
    
    102
    
    
    
    
    
    
    
    4,301Other current liabilities
    
    
    554
    
    
    
    11,955
    
    
    
    17,695
    
    
    
    
    
    
    
    30,204TOTAL CURRENT LIABILITIES
    
    
    4,749
    
    
    
    15,759
    
    
    
    23,842
    
    
    
    
    
    
    
    44,350Intercompany
    
    
    (51,608
    )
    
    
    307,583
    
    
    
    (7,705
    )
    
    
    (248,270
    )Long-term and subordinated
long-term debt
    
    
    261,475
    
    
    
    13
    
    
    
    1,292
    
    
    
    
    
    
    
    262,780Other long-term liabilities
    
    
    
    
    
    
    24,841
    
    
    
    10,101
    
    
    
    
    
    
    
    34,942Redeemable preferred stock
    
    
    163,535
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    163,535Total stockholders equity (deficit)
    
    
    (135,534
    )
    
    
    (20,360
    )
    
    
    63,206
    
    
    
    (42,846
    )
    
    
    (135,534
    )TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY (DEFICIT)
    
    $
    242,617
    
    
    $
    327,836
    
    
    $
    90,736
    
    
    $
    (291,116
    )
    
    $
    370,073
 11




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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 2003 DAYInter-
    
    
    
    
    
    Non-national
    
    Guarantor
    
    GuarantorGroup, Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCash and cash equivalents
    
    $
    742
    
    
    $
    (742
    )
    
    $
    726
    
    
    $
    
    
    
    $
    726Accounts receivable  net
    
    
    
    
    
    
    22,280
    
    
    
    22,407
    
    
    
    
    
    
    
    44,687Inventories
    
    
    
    
    
    
    28,104
    
    
    
    20,548
    
    
    
    
    
    
    
    48,652Other assets
    
    
    
    
    
    
    7,186
    
    
    
    5,695
    
    
    
    
    
    
    
    12,881TOTAL CURRENT ASSETS
    
    
    742
    
    
    
    56,828
    
    
    
    49,376
    
    
    
    
    
    
    
    106,946Intercompany
    
    
    278,389
    
    
    
    (811
    )
    
    
    1,012
    
    
    
    (278,590
    )Property, plant and equipment  net
    
    
    
    
    
    
    44,329
    
    
    
    29,838
    
    
    
    
    
    
    
    74,167Investment in subsidiaries
    
    
    (35,348
    )
    
    
    44,173
    
    
    
    (3,682
    )
    
    
    (5,143
    )Intangible and other assets
    
    
    
    
    
    
    169,969
    
    
    
    20,458
    
    
    
    
    
    
    
    190,427TOTAL ASSETS
    
    $
    243,783
    
    
    $
    314,488
    
    
    $
    97,002
    
    
    $
    (283,733
    )
    
    $
    371,540LIABILITIES AND
STOCKHOLDERS EQUITY
(DEFICIT)Accounts payable
    
    $
    
    
    
    $
    3,415
    
    
    $
    4,148
    
    
    $
    
    
    
    $
    7,563Current maturities of long-term debt
    
    
    3,376
    
    
    
    4
    
    
    
    109
    
    
    
    
    
    
    
    3,489Other current liabilities
    
    
    3,229
    
    
    
    13,171
    
    
    
    13,021
    
    
    
    
    
    
    
    29,421TOTAL CURRENT LIABILITIES
    
    
    6,605
    
    
    
    16,590
    
    
    
    17,278
    
    
    
    
    
    
    
    40,473Intercompany
    
    
    (56,760
    )
    
    
    330,798
    
    
    
    (16,552
    )
    
    
    (257,486
    )Long-term and subordinated
long-term debt
    
    
    275,013
    
    
    
    16
    
    
    
    1,302
    
    
    
    
    
    
    
    276,331Other long-term liabilities
    
    
    
    
    
    
    24,111
    
    
    
 11,700    
    
    
    

    
    
    

    35,811Redeemable preferred stock
    
    
    146,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    146,649Total stockholders equity (deficit)
    
    
    (127,724
    )
    
    
    (57,027
    )
    
    
    83,274
    
    
    
    (26,247
    )
    
    
    (127,724
    )TOTAL LIABILITIES
AND STOCKHOLDERS EQUITY (DEFICIT)
    
    $
    243,783
    
    
    $
    314,488
    
    
    $
    97,002
    
    
    $
    (283,733
    )
    
    $
    371,540
 12




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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 DAYInter-
    
    
    
    
    
    Non-national
    
    Guarantor
    
    GuarantorGroup, Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    54,128
    
    
    $
    36,366
    
    
    $
    
    
    
    $
    90,494Cost of goods sold
    
    
    
    
    
    
    33,696
    
    
    
    23,426
    
    
    
    
    
    
    
    57,122Gross profit
    
    
    
    
    
    
    20,432
    
    
    
    12,940
    
    
    
    
    
    
    
    33,372Selling, general and administrative
    
    
    58
    
    
    
    12,081
    
    
    
    7,377
    
    
    
    
    
    
    
    19,516Amortization of intangibles
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    9Management fees
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    250Operating profit (loss)
    
    
    (58
    )
    
    
    8,092
    
    
    
    5,563
    
    
    
    
    
    
    
    13,597Other (income) expenses:Equity in (earnings) loss of subsidiaries
    
    
    (3,910
    )
    
    
    (3,019
    )
    
    
    
    
    
    
    6,929Interest expense
    
    
    5,696
    
    
    
    5,407
    
    
    
    (2
    )
    
    
    
    
    
    
    11,101Other (income) expense
    
    
    (3
    )
    
    
    (973
    )
    
    
    636
    
    
    
    
    
    
    
    (340
    )Income (loss) before income taxes
    
    
    (1,841
    )
    
    
    6,677
    
    
    
    4,929
    
    
    
    (6,929
    )
    
    
    2,836Income tax expense (benefit)
    
    
    (22
    )
    
    
    2,767
    
    
    
    1,910
    
    
    
    
    
    
    
    4,655Net income (loss)
    
    $
    (1,819
    )
    
    $
    3,910
    
    
    $
    3,019
    
    
    $
    (6,929
    )
    
    $
    (1,819
    )
 13




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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003 DayDAY
    
    Inter-Inter-
    
    national
    
    Non-national
    
    Inc.
    
    GuarantorGroup, Inc.
    
    (Guarantor)
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    38,084
    
    
    $
    31,970
    
    
    $
    
    
    
    $
    70,054Cost of goods sold
    
    
    
    
    
    
    24,200
    
    
    
    20,850
    
    
    
    
    
    
    
    45,050Gross profit
    
    
    
    
    
    
    13,884
    
    
    
    11,120
    
    
    
    
    
    
    
    25,004Selling, general and administrative
    
    
    9
    
    
    
    8,311
    
    
    
    6,921
    
    
    
    
    
    
    
    15,241Amortization of intangibles
    
    
    
    
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    205Management fees
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    250Operating profit (loss)
    
    
    (9
    )
    
    
    5,118
    
    
    
    4,199
    
    
    
    
    
    
    
    9,308Other (income) expenses:Equity in (earnings) of subsidiaries
    
    
    (1,378
    )
    
    
    (2,700
    )
    
    
    
    
    
    
    4,078Interest expense
    
    
    4,923
    
    
    
    7,257
    
    
    
    3
    
    
    
    
    
    
    
    12,183Other (income) expense
    
    
    
    
    
    
    12
    
    
    
    (237
    )
    
    
    
    
    
    
    (225
    )Income (loss) before income taxes
    
    
    (3,554
    )
    
    
    549
    
    
    
    4,433
    
    
    
    (4,078
    )
    
    
    (2,650
    )Income tax expense (benefit)
    
    
    (3
    )
    
    
    (829
    )
    
    
    1,733
    
    
    
    
    
    
    
    901Net income (loss)
    
    $
    (3,551
    )
    
    $
    1,378
    
    
    $
    2,700
    
    
    $
    (4,078
    )
    
    $
    (3,551
    )
 14




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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004 DAYInter-
    
    
    
    
    
    Non-national
    
    Guarantor
    
    GuarantorGroup, Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    160,271
    
    
    $
    108,743
    
    
    $
    
    
    
    $
    269,014Cost of goods sold
    
    
    
    
    
    
    101,150
    
    
    
    69,046
    
    
    
    
    
    
    
    170,196Gross profit
    
    
    
    
    
    
    59,121
    
    
    
    39,697
    
    
    
    
    
    
    
    98,818Selling, general and administrative
    
    
    75
    
    
    
    37,324
    
    
    
    22,070
    
    
    
    
    
    
    
    59,469Amortization of intangibles
    
    
    
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    26Management fees
    
    
    
    
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    750Operating profit (loss)
    
    
    (75
    )
    
    
    21,021
    
    
    
    17,627
    
    
    
    
    
    
    
    38,573Other (income) expenses:Equity in (earnings) loss of subsidiaries
    
    
    (10,707
    )
    
    
    (9,381
    )
    
    
    
    
    
    
    20,088Interest expense
    
    
    16,886
    
    
    
    16,673
    
    
    
    14
    
    
    
    
    
    
    
    33,573Other (income) expense
    
    
    (7
    )
    
    
    (4,312
    )
    
    
    2,438
    
    
    
    
    
    
    
    (1,881
    )Income (loss) before income taxes
    
    
    (6,247
    )
    
    
    18,041
    
    
    
    15,175
    
    
    
    (20,088
    )
    
    
    6,881Income tax expense (benefit)
    
    
    (27
    )
    
    
    7,334
    
    
    
    5,794
    
    
    
    
    
    
    
    13,101Net income (loss)
    
    $
    (6,220
    )
    
    $
    10,707
    
    
    $
    9,381
    
    
    $
    (20,088
    )
    
    $
    (6,220
    )
 15




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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003 DayDAY
    
    Inter-Inter-
    
    national
    
    Non-national
    
    Inc.
    
    GuarantorGroup, Inc.
    
    (Guarantor)
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    109,892
    
    
    $
    99,120
    
    
    $
    
    
    
    $
    209,012Cost of goods sold
    
    
    
    
    
    
    70,852
    
    
    
    63,691
    
    
    
    
    
    
    
    134,543Gross profit
    
    
    
    
    
    
    39,040
    
    
    
    35,429
    
    
    
    
    
    
    
    74,469Selling, general and administrative
    
    
    68
    
    
    
    25,468
    
    
    
    19,673
    
    
    
    
    
    
    
    45,209Amortization of intangibles
    
    
    
    
    
    
    612
    
    
    
    
    
    
    
    
    
    
    
    612Management fees
    
    
    
    
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    750Operating profit (loss)
    
    
    (68
    )
    
    
    12,210
    
    
    
    15,756
    
    
    
    
    
    
    
    27,898Other (income) expenses:Equity in (earnings) of subsidiaries
    
    
    (4,934
    )
    
    
    (8,691
    )
    
    
    
    
    
    
    13,625Interest expense
    
    
    4,923
    
    
    
    20,335
    
    
    
    79
    
    
    
    
    
    
    
    25,337Other (income) expense
    
    
    (1
    )
    
    
    (1,981
    )
    
    
    1,445
    
    
    
    
    
    
    
    (537
    )Income (loss) before income taxes
    
    
    (56
    )
    
    
    2,547
    
    
    
    14,232
    
    
    
    (13,625
    )
    
    
    3,098Income tax expense (benefit)
    
    
    (26
    )
    
    
    (2,387
    )
    
    
    5,541
    
    
    
    
    
    
    
    3,128Net income (loss)
    
    $
    (30
    )
    
    $
    4,934
    
    
    $
    8,691
    
    
    $
    (13,625
    )
    
    $
    (30
    )
 16




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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004 DAYInter-
    
    
    
    
    
    Non-national
    
    Guarantor
    
    GuarantorGroup, Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    ConsolidatedCash Flows From Operating Activities:Net income (loss)
    
    $
    (6,220
    )
    
    $
    10,707
    
    
    $
    9,381
    
    
    $
    (20,088
    )
    
    $
    (6,220
    )Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:Depreciation and amortization
    
    
    
    
    
    
    7,931
    
    
    
    3,136
    
    
    
    
    
    
    
    11,067Interest expenseredeemable preferred stock
    
    
    16,886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,886Equity in earnings of subsidiaries
    
    
    (10,707
    )
    
    
    (9,381
    )
    
    
    
    
    
    
    20,088Deferred income taxes and other
    
    
    
    
    
    
    6,778
    
    
    
    (1,319
    )
    
    
    
    
    
    
    5,459Equity in earnings of investees
    
    
    
    
    
    
    (192
    )
    
    
    
    
    
    
    
    
    
    
    (192
    )Foreign currency (gain) loss
    
    
    
    
    
    
    (2,559
    )
    
    
    926
    
    
    
    
    
    
    
    (1,633
    )(Gain) loss on disposal of fixed assets
    
    
    
    
    
    
    367
    
    
    
    (428
    )
    
    
    
    
    
    
    (61
    )Changes in operating assets and liabilities
    
    
    (2,676
    )
    
    
    (738
    )
    
    
    657
    
    
    
    
    
    
    
    (2,757
    )Net cash provided by (used in) operating
activities
    
    
    (2,717
    )
    
    
    12,913
    
    
    
    12,353
    
    
    
    
    
    
    
    22,549Cash Flows From Investing Activities:Cash paid for acquisitions
    
    
    
    
    
    
    (1,346
    )
    
    
    
    
    
    
    
    
    
    
    (1,346
    )Capital expenditures
    
    
    
    
    
    
    (3,955
    )
    
    
    (3,098
    )
    
    
    
    
    
    
    (7,053
    )Proceeds from sale of property
    
    
    
    
    
    
    
    
    
    
    1,410
    
    
    
    
    
    
    
    1,410Net cash used in investing activities
    
    
    
    
    
    
    (5,301
    )
    
    
    (1,688
    )
    
    
    
    
    
    
    (6,989
    )Cash Flows From Financing Activities:Proceeds from exercise of stock options
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25Payment of deferred financing fees
    
    
    
    
    
    
    (633
    )
    
    
    
    
    
    
    
    
    
    
    (633
    )Payments on term loans
    
    
    (14,264
    )
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    (14,267
    )Net proceeds from credit facilities
    
    
    1,975
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,975Net cash provided by (used in) financing
activities
    
    
    (12,264
    )
    
    
    (636
    )
    
    
    
    
    
    
    
    
    
    
    (12,900
    )Intercompany transfers and dividends
    
    
    15,827
    
    
    
    (6,076
    )
    
    
    (9,751
    )Effects of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    (25
    )
    
    
    
    
    
    
    (25
    )Net increase (decrease) in cash and cash
equivalents
    
    
    846
    
    
    
    900
    
    
    
    889
    
    
    
    
    
    
    
    2,635Cash and cash equivalents at beginning of period
    
    
    742
    
    
    
    (742
    )
    
    
    726
    
    
    
    
    
    
    
    726Cash and cash equivalents at end of period
    
    $
    1,588
    
    
    $
    158
    
    
    $
    1,615
    
    
    $
    
    
    
    $
    3,361
 17




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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 DayDAY
    
    Inter-Inter-
    
    national
    
    Non-national
    
    Inc.
    
    GuarantorGroup, Inc.
    
    (Guarantor)
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash Flows From Operating Activities:Net income (loss)
    
    $
    (30
    )
    
    $
    4,934
    
    
    $
    8,691
    
    
    $
    (13,625
    )
    
    $
    (30
    )Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:Depreciation and amortization
    
    
    
    
    
    
    9,341
    
    
    
    2,549
    
    
    
    
    
    
    
    11,890Interest expense:Redeemable preferred stock dividends
    
    
    4,923
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,923Loss on extinguishment of debt
    
    
    
    
    
    
    542
    
    
    
    
    
    
    
    
    
    
    
    542Equity in (earnings) of subsidiaries
    
    
    (4,934
    )
    
    
    (8,691
    )
    
    
    
    
    
    
    13,625Deferred income taxes and other
    
    
    
    
    
    
    (2,848
    )
    
    
    (303
    )
    
    
    
    
    
    
    (3,151
    )Foreign currency (gain) loss
    
    
    
    
    
    
    (1,814
    )
    
    
    797
    
    
    
    
    
    
    
    (1,017
    )(Gain) loss on disposal of fixed assets
    
    
    
    
    
    
    113
    
    
    
    661
    
    
    
    
    
    
    
    774Changes in operating assets and liabilities
    
    
    (18
    )
    
    
    3,806
    
    
    
    (6,912
    )
    
    
    
    
    
    
    (3,124
    )Net cash provided by (used in) operating
activities
    
    
    (59
    )
    
    
    5,383
    
    
    
    5,483
    
    
    
    
    
    
    
    10,807Cash Flows From Investing Activities:Cash paid for acquisition
    
    
    
    
    
    
    (1,952
    )
    
    
    
    
    
    
    
    
    
    
    (1,952
    )Capital expenditures
    
    
    
    
    
    
    (2,725
    )
    
    
    (2,731
    )
    
    
    
    
    
    
    (5,456
    )Cash held for retirement of debt
    
    
    (97,971
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (97,971
    )Proceeds from sale of property
    
    
    
    
    
    
    939
    
    
    
    
    
    
    
    
    
    
    
    939Net cash used in investing activities
    
    
    (97,971
    )
    
    
    (3,738
    )
    
    
    (2,731
    )
    
    
    
    
    
    
    (104,440
    )Cash Flows From Financing Activities:Proceeds from issuance of debt
    
    
    133,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    133,950Payment of deferred financing fees
    
    
    
    
    
    
    (3,537
    )
    
    
    
    
    
    
    
    
    
    
    (3,537
    )Payments on long-term debt
    
    
    (31,150
    )
    
    
    
    
    
    
    (47
    )
    
    
    
    
    
    
    (31,197
    )Net borrowings (payments) on revolving credit
facility
    
    
    (4,950
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,950
    )Net cash provided by (used in) financing
activities
    
    
    97,850
    
    
    
    (3,537
    )
    
    
    (47
    )
    
    
    
    
    
    
    94,266Intercompany transfers and dividends
    
    
    281
    
    
    
    1,791
    
    
    
    (2,072
    )Effects of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    112
    
    
    
    
    
    
    
    112Net increase (decrease) in cash and cash
equivalents
    
    
    101
    
    
    
    (101
    )
    
    
    745
    
    
    
    
    
    
    
    745Cash and cash equivalents at beginning of period
    
    
    496
    
    
    
    (496
    )
    
    
    996
    
    
    
    
    
    
    
    996Cash and cash equivalents at end of period
    
    $
    597
    
    
    $
    (597
    )
    
    $
    1,741
    
    
    $
    
    
    
    $
    1,741
 18




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS Safe Harbor Statement This Quarterly Report contains forward-looking statements within the meaning of
the Securities Act of 1933. These are subject to certain risks and
uncertainties, including those identified below, which could affect the
Companys actual results and cause such results to differ materially from those
expressed in forward-looking statements. The words believe, anticipate,
expect, intend, will likely result, will continue, and similar
expressions identify forward-looking statements. Factors that could cause actual results to differ materially from the
forward-looking statements include but are not limited to (i) the effect of
leverage, including the limitations imposed by the Companys various debt
instruments; (ii) risks related to significant operations in foreign countries,
including the translation of operating results to the U.S. dollar; (iii) the
timely development and market acceptance of new products; (iv) the effect of
competitive products and pricing; (v) the effect of changing general and
industry specific economic conditions; (vi) the effect of environmental
regulations; and (vii) the potential for technology obsolescence. While made in good faith and with a reasonable basis based on information
currently available to the Companys management, there is no assurance that any
such forward-looking statements will be achieved or accomplished. The Company
is under no obligation to update any forward-looking statements to the extent
it becomes aware that they are not achieved or likely to be achieved for any
reason. Basis of Presentation On November 24, 2003, Network Distribution International (NDI) was acquired.
Its results of operations are included in the Companys consolidated results of
operations for the period subsequent to the acquisition. Accordingly, the
results of operations for historical as well as future periods may not be
comparable to prior periods. The following table sets forth selected financial information in millions of
dollars and as a percentage of net sales: THREE MONTHS
    
    
    
    
    
    
    
    
    
    NINE MONTHS2004
    
    2003
    
    2004
    
    2003$
    
    %
    
    $
    
    %
    
    $
    
    %
    $
    %Net sales
    
    
    90.5
    
    
    
    100.0
    
    
    
    70.1
    
    
    
    100.0
    
    
    
    269.0
    
    
    
    100.0
    
    
    
    209.0
    
    
    
    100.0Costs of goods sold
    
    
    57.1
    
    
    
    63.1
    
    
    
    45.1
    
    
    
    64.3
    
    
    
    170.2
    
    
    
    63.3
    
    
    
    134.5
    
    
    
    64.4Gross profit
    
    
    33.4
    
    
    
    36.9
    
    
    
    25.0
    
    
    
    35.7
    
    
    
    98.8
    
    
    
    36.7
    
    
    
    74.5
    
    
    
    35.6Selling, general and administrative
    
    
    19.5
    
    
    
    21.6
    
    
    
    15.2
    
    
    
    21.8
    
    
    
    59.4
    
    
    
    22.1
    
    
    
    45.2
    
    
    
    21.6Amortization of intangibles
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.6
    
    
    
    0.3Management fees
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.8
    
    
    
    0.3
    
    
    
    0.8
    
    
    
    0.4Operating profit
    
    
    13.6
    
    
    
    15.0
    
    
    
    9.3
    
    
    
    13.3
    
    
    
    38.6
    
    
    
    14.3
    
    
    
    27.9
    
    
    
    13.3
 19




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Comparison of Results of Operations Three Months Ended September 30, 2004, Compared to Three Months Ended September
30, 2003 Net sales increased $20.4 million (29.2%) to $90.5 million, primarily as a
result of sales from businesses acquired in 2003, higher sales volumes in the
United States and Europe and favorable changes in foreign currency rates. Sales
in 2004 include $12.8 million of sales from a business acquired in 2003. Sales
in 2004 were positively affected by increased sales volumes of $2.6 million in
the United States, increased sales volume of $2.4 million in Europe and $3.0
million of favorable changes in foreign currency rates used to translate
international sales into U.S. dollars. Image Transfers sales increased $20.0
million (34.3%) to $78.5 million. Image Transfers sales were positively
affected by increased sales volumes of $15.2 million in the United States and
$2.7 million in Europe and $2.5 million as a result of the effect of changes in
foreign currency rates. The higher U.S. Image Transfer sales volume was
primarily as a result of sales from a business acquisition in 2003 of $12.8
million and from higher sales volumes across substantially all product lines.
European sales volume increased primarily from growth in the United Kingdom and
Germany. Textile Products sales increased $0.4 million (3.3%) to $12.0
million, primarily as a result of slightly higher sales volume in the United
States of $0.2 million and by favorable foreign currency rate changes of $0.5
million and offset by lower sales volume in Europe of $0.3 million. European
Textile Products sales volumes were lower in 2004 compared to 2003, primarily
as a result of lower demand from original equipment manufacturers (OEMs). Gross profit increased $8.4 million (33.5%) to $33.4 million. Foreign currency
rate changes increased gross profit by $1.1 million. As a percentage of net
sales, gross profit increased to 36.9% for the three months ended September 30,
2004, compared to 35.7% for the three months ended September 30, 2003. The
improvement in gross profit as a percentage of sales is a result of improved
manufacturing performances offset by the effect of the acquisition in 2003, as
that business had historically had lower gross margin percentages than Days
businesses. Selling, general and administrative expense (SG&A) increased $4.3 million
(28.0%) to $19.5 million, primarily as a result of SG&A associated with a
business acquired of $2.6 million and changes in foreign currency rates.
Changes in foreign currency rates increased SG&A costs by $0.6 million compared
to 2003. SG&A costs also increased as a result of higher insurance costs and
higher selling and distribution costs from higher sales levels. As a percentage
of net sales, SG&A decreased to 21.6% from 21.8%. Operating profit increased $4.3 million (46.1%) to $13.6 million. As a
percentage of net sales, operating profit increased to 15.0% for the three
months ended September 30, 2004, from 13.3% for the comparable period in 2003.
Image Transfers operating profit increased $3.7 million (37.0%) to $13.6
million, primarily as a result of higher sales volumes. As a percentage of net
sales, Image Transfers operating profit increased to 17.3% for the three
months ended September 30, 2004, from 17.0% in 2003. The improvement in
operating margin as a percentage of sales is a result of improved manufacturing
performances offset by substantially lower operating margins on NDIs
distribution business than Days historical margins on manufactured products.
Textile Products operating profit increased $0.4 million (42.3%) to $1.5
million. As a percentage of net sales, Textile Products operating profit
increased to 12.2% for the three months ended September 30, 2004, from 8.8% in
2003. Lower selling and administrative 20




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##### Table of Contents



costs in the United States and
manufacturing cost efficiencies in Europe favorably affected Textile Products
operating profit in 2004 compared to 2003. Other (income) expense was $(0.3) million and $(0.2) million for the three
months ended September 30, 2004 and 2003. The other (income) expense is
primarily due to foreign currency transaction (gains) losses incurred in the
normal course of international subsidiaries doing business in other than their
functional currency as well as a result of intercompany financing arrangements.
Other (income) expense in 2004 includes a loss of $0.6 million and $1.0 million
in 2004 and 2003 from the mark-to-market of the euro-denominated Tranche A Term
Loan. The effective tax rate was 164.1% in 2004. The Company recorded income tax
expense on a loss before income taxes in the third quarter of 2003. The
effective tax rate is affected by the adoption of SFAS No. 150 and the
non-deductible preferred stock dividends now reflected as interest expense. The
effective tax rate in 2004 is further affected by foreign-sourced dividends and
income taxable in the United States and non-deductible expenses. Nine Months Ended September 30, 2004, Compared to Nine Months Ended September
30, 2003 Net sales increased $60.0 million (28.7%) to $269.0 million, primarily as a
result of sales from businesses acquired in 2003, favorable changes in foreign
currency rates and higher sales volumes in the United States and Europe. Sales
in 2004 include $38.3 million of sales from businesses acquired in 2003. Sales
in 2004 were positively affected by increased sales volumes of $8.4 million in
the United States, increased sales volumes of $2.5 million in Europe and $10.4
million of favorable changes in foreign currency rates used to translate
international sales into U.S. dollars. Image Transfers sales increased $59.9
million (34.9%) to $231.4 million. Image Transfers sales were positively
affected by increased sales volumes of $46.4 million in the United States and
$4.3 million in Europe and $8.4 million as a result of the effect of changes in
foreign currency rates. The higher U.S. Image Transfer sales volume was
primarily as a result of sales from business acquisitions in 2003 of $38.3
million and from higher sales volumes across substantially all product lines.
European sales volume increased primarily from growth in the chemical products
business in the United Kingdom and Germany and transfer media products business
in Germany. Textile Products sales increased $0.1 million (0.3%) to $37.6
million, primarily as a result of lower sales volume in the United States of
$0.2 million and in Europe of $1.7 million offset by favorable foreign currency
rate changes of $2.0 million. The lower U.S. Textile Products sales volume is
due to reduced demand in the U.S. textile industry, mostly a result of
increased imports of low cost goods from Asia and South America. The ongoing
restructuring of the U.S. textile manufacturing industry has resulted in
further consolidation and closure of yarn spinning mills as well as weaving
facilities. Weak sales have forced textile manufacturers to cut expenses and
reduce inventories, which have had a direct effect on reducing Textile
Products sales. European Textile Products sales volumes were lower in 2004
compared to 2003, primarily as a result of lower sales to original equipment
manufacturers (OEMs), in line with the OEMs own reduced level of business
activity. OEM sales in 2004 continued at a relatively strong level, but were
not at the unusually high level of 2003. Lower demand from textile mills in
Europe also contributed to the shortfall. 21




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##### Table of Contents



Gross profit increased $24.3 million (32.7%) to $98.8 million. Foreign currency
rate changes increased gross profit by $3.9 million. As a percentage of net
sales, gross profit increased to 36.7% for the nine months ended September 30,
2004, compared to 35.6% for the nine months ended September 30, 2003. The
improvement in gross profit as a percentage of sales is a result of improved
manufacturing
performances offset by the effect of the acquisition in 2003, as that business
had historically had lower gross margin percentages than Days businesses. Selling, general and administrative expense (SG&A) increased $14.3 million
(31.5%) to $59.5 million, primarily as a result of SG&A associated with a
business acquired of $8.1 million and changes in foreign currency rates. As a
percentage of net sales, SG&A increased to 22.1% from 21.6%. Changes in foreign
currency rates increased SG&A costs by $2.1 million in the first nine months of
2004 compared to 2003. SG&A costs also increased as a result of higher
insurance costs and higher selling and distribution costs from higher sales
levels. Operating profit increased $10.7 million (38.3%) to $38.6 million. As a
percentage of net sales, operating profit increased to 14.3% for the nine
months ended September 30, 2004, from 13.3% for the comparable period in 2003.
Image Transfers operating profit increased $9.4 million (32.9%) to $37.9
million, primarily as a result of higher sales volumes. As a percentage of net
sales, Image Transfers operating profit decreased to 16.4% for the nine months
ended September 30, 2004, from 16.6% in 2003. Operating margins on NDIs
distribution business are substantially lower than Days historical margins on
manufactured products. Textile Products operating profit increased $0.9
million (21.4%) to $4.9 million. As a percentage of net sales, Textile
Products operating profit increased to 13.0% for the nine months ended
September 30, 2004, from 10.7% in 2003. Lower selling and administrative costs
in the United States and manufacturing cost efficiencies in Europe favorably
affected Textile Products operating profit in 2004 compared to 2003. Other (income) expense was $(1.9) million and $(0.5) million for the nine
months ended September 30, 2004 and 2003. The other (income) expense is
primarily due to foreign currency transaction (gains) losses incurred in the
normal course of international subsidiaries doing business in other than their
functional currency as well as a result of intercompany financing arrangements.
Other (income) expense includes a gain of $0.5 million in 2004 on the
mark-to-market of the euro-denominated Tranche A Term Loan and $0.4 million
gain on the sale of fixed assets. Other income in 2003 includes a loss of $1.0
million on the mark-to-market of the euro-denominated Tranche A Term Loan, a
loss of $1.1 million from the sale of the South African business, a gain of
$0.9 million from the sale of excess land in Mauldin, South Carolina and a loss
of $0.5 million on the sale and disposal of equipment from the Longwood,
Florida, facility. The effective tax rate was 190.4% and 101.0% in 2004 and 2003. The effective
tax rate is affected by the adoption of SFAS No. 150 and the non-deductible
preferred stock dividends now reflected as interest expense. The effective tax
rate in 2004 is further affected by foreign-sourced dividends and income
taxable in the United States and non-deductible expenses. In October 2004, the American Jobs Creation Act of 2004(the Jobs Act) was
enacted. The Jobs Act provides a deduction with respect to U.S. manufacturing
activities, allows for tax-favored repatriation of offshore earnings and makes
numerous changes to various tax rules. The Companys ability to take 22




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##### Table of Contents



advantage
of certain provisions of the Jobs Act is limited because of the U.S. net
operating loss carryforward position of the Company and because of various
restrictions in the Companys debt agreements. For these reasons, the Company
does not believe that the Jobs Act will have a material effect on the Companys
tax expense or cash flows over the next several years. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This statement
established standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement requires that the Companys redeemable preferred stock be recorded in
the same manner as long-term debt. The Company adopted the statement as of July
1, 2003. Therefore, since the third quarter of 2003, the Company has reflected
the redeemable preferred stock as long-term debt and accrued dividends are
shown as interest expense. The adoption of this statement had no effect on the
net loss available to common shareholders, cash flows of the Company or the
Companys compliance with its debt covenants. Liquidity and Capital Resources The Company has historically generated sufficient funds from its operations to
fund its working capital and capital expenditure requirements. Capital expenditures were $7.1 million and $5.5 million for the nine months
ended September 30, 2004 and 2003. On June 2, 2004, the Company issued $126.5 million of Tranche D Term Loans
under the $185.0 million Senior Secured Credit Facility to refinance the
outstanding Tranche B and Tranche C Term Loans. The Tranche D Term Loans have
terms identical to the outstanding Tranche B and Tranche C Term Loans, except
that interest rates have been lowered 100 basis points and are now based on the
banks base rate plus 2.50% or the LIBOR rate plus 3.50%. No changes in
maturity dates were made. As of September 30, 2004, there was $2.4 million outstanding under the
Revolving Credit Facility and the Company had $17.0 million available under the
Revolving Credit Facility. The Companys aggregate indebtedness at September
30, 2004, is $267.1 million and the aggregate liquidation preferences of the
Exchangeable Preferred Stock is $77.1 million and the Convertible Preferred
Stock is $87.5 million. The Company is highly leveraged. The Companys ability
to operate its business, service its debt requirements and reduce its total
debt will depend upon its future operating performance, which will be affected
by prevailing economic conditions and financial, business and other factors,
certain of which are beyond its control, as well as the availability of
revolving credit borrowings. See the Companys Annual Report on Form 10-K for a
more extensive discussion of liquidity and capital resources. 23




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Risks Associated with International Operations The Company conducts a significant amount of business and has operating and
sales facilities in countries outside the United States. As a result, the
Company is subject to business risks inherent in non-U.S. activities, including
political uncertainty, import and export limitations, exchange controls and
currency fluctuations. The Company believes risks related to its international
operations are mitigated due to the political and economic stability of the
countries in which its largest international operations are located, the
stand-alone nature of the operations, the Companys limited net asset exposure,
forward foreign exchange contract practices and pricing flexibility. Thus,
while changes in foreign currency values do affect earnings, the longer-term
economic effect of these changes should not have a material adverse effect on
the Companys consolidated financial condition, results of operations or
liquidity. Certain of the Companys international subsidiaries make purchases and sales in
designated currencies other than their functional currency. As a result, they
are subject to transaction exposures that arise from foreign exchange movements
between the date that the foreign currency transaction is recorded and the date
cash is paid or collected. In addition, the Company has intercompany loans
outstanding with certain international subsidiaries in their local currencies,
exposing it to the effect of changes in exchange rates at loan issue and loan
repayment dates. The Company periodically enters into forward foreign exchange
contracts to protect it against such foreign exchange movements. The contract
value of these foreign exchange contracts was $8.3 million at September 30,
2004 and $15.9 million at December 31, 2003. The fair value of these contracts
is a payable of $0.1 million at September 30, 2004 and $0.7 million at December
31, 2003. These contracts generally expire within three to twelve months. At
September 30, 2004 and December 31, 2003, the Company had outstanding 22.7
million and 25.8 million of term loans issued under the Senior Secured Credit
Facility. The Company has issued euro-denominated debt in order to protect the
Companys investments in Europe from fluctuations in the euro compared to the
U.S. dollar. Foreign currency transaction (gains) losses, included in other
(income) expense, were $(0.7) million and $0.3 million for the three months
ended September 30, 2004 and 2003 and $(1.6) million and $(1.2) million for the
nine months ended September 30, 2004 and 2003. Interest Rate Risks The Company is subject to market risk from exposure to changes in the interest
rates based on its financing activities. The Company utilizes a mix of debt
maturities along with both fixed- and variable-rate debt to manage its exposure
to changes in interest rates and to minimize interest expense. During 2003, the
Company entered into a $25 million interest rate swap to swap a portion of the
Companys variable rate debt to fixed rates. The swap expires in September
2006. The fair value of the interest rate swap was a payable of $0.1 million
and $0.3 million at September 30, 2004 and December 31, 2003. The Company does
not expect changes in interest rates to have a material effect on income or
cash flows in 2004, although there can be no assurance that interest rates will
not materially change. 24




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##### Table of Contents



Commodity Risks Rubber polymers and fabrics are key components in most of the Image Transfer
and Textile products. The Company is exposed to changes in the costs of these
components. Chemical Products is exposed to changes in the cost of certain
petroleum-based components. The largest raw material component in Chemical
Products products is petroleum distillates, such as aliphatics and aromatics.
When commodity prices increase, the Company has historically passed on
increases to its customers to maintain its profit margins. Conversely, when
commodity prices decline, the Company generally lowers its sales prices to meet
competitive pressures. Because the Company has historically been able to raise
sales prices to offset significantly higher costs, management believes that a
10% change in the cost of its components could have a short-term effect until
sales price increases take effect, but overall would not have a material effect
on income or cash flows for a longer term. 
 ITEM 4. CONTROLS AND PROCEDURES The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that transactions are properly recorded and
summarized so that reliable financial records and reports can be prepared and
assets safeguarded. In addition, a system of disclosure controls is maintained
to ensure that information required to be disclosed is recorded, processed,
summarized and reported in a timely manner to management responsible for the
preparation and reporting of the Companys financial information. Management, with the participation of the Companys Chief Executive Officer and
Chief Financial Officer, assesses the internal control and disclosure control
systems as being effective as they encompass material matters for the three
months ended September 30, 2004. To the best of managements knowledge, there
were no changes in the internal control and disclosure control systems during
the quarter ended September 30, 2004, that would materially affect the control
systems. 25




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##### Table of Contents



PART II            OTHER INFORMATION 
 ITEM 6. EXHIBITS  (31)
    
    Rule 13a-14(a)/15d-14(a)Certifications  31.1
    
    Chief Executive Officer Certification31.2
    
    Chief Financial Officer Certification  (32)
    
    Section 1350 Certifications  32.1
    
    Chief Executive Officer Certification32.2
    
    Chief Financial Officer Certification 
 Signature Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Day International Group,
Inc.(Registrant)
 Date: November 1, 2004
    
    /s/ Thomas J. KoenigThomas J. KoenigVice President andChief Financial Officer(Principal Financial Officer)
 26