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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 March 31, 2005 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. Yes þ 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 þ There were 23,323 Common Shares of the Company, $0.01 per share par value, outstanding as of May 1,
2005.




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DAY INTERNATIONAL GROUP, INC.
INDEX  
 PagePART I FINANCIAL INFORMATIONItem 1. Financial Statements:Condensed Consolidated Balance Sheets as of March 31, 2005 and
December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three months
ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and 2004
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    21PART II OTHER INFORMATIONItem 6. Exhibits
    
    
    21Signature
    
    
    22EX-31.1 CertificationEX-31.2 CertificationEX-32.1 CertificationEX-32.2 Certification
  2




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PART I FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 MARCH 31, 2005 AND
DECEMBER 31, 2004
(In thousands)
 2005
    
    
    2004(Unaudited)ASSETSCash and cash equivalents
    
    $
    1,111
    
    
    $
    843Accounts receivable (less allowance for doubtful accounts of $3,480 and $3,694)
    
    
    53,656
    
    
    
    51,967Inventories (Note B)
    
    
    51,115
    
    
    
    50,334Other current assets
    
    
    17,663
    
    
    
    17,812Total current assets
    
    
    123,545
    
    
    
    120,956Property, plant and equipment, net of accumulated depreciation of $63,856 and $61,592
    
    
    72,928
    
    
    
    74,735Goodwill
    
    
    142,895
    
    
    
    143,444Intangible assets (net of accumulated amortization of $41,440 and $40,203)
    
    
    17,607
    
    
    
    18,842Other assets
    
    
    10,284
    
    
    
    12,258TOTAL ASSETS
    
    $
    367,259
    
    
    $
    370,235LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Accounts payable
    
    $
    9,060
    
    
    $
    11,020Current maturities of long-term debt
    
    
    4,790
    
    
    
    4,576Other current liabilities
    
    
    24,277
    
    
    
    33,466Total current liabilities
    
    
    38,127
    
    
    
    49,062Long-term and subordinated long-term debt
    
    
    251,119
    
    
    
    247,814Other long-term liabilities
    
    
    40,719
    
    
    
    39,572Redeemable preferred stock (Note C)
    
    
    176,248
    
    
    
    169,805STOCKHOLDERS EQUITY (DEFICIT):Common shares
    
    
    1
    
    
    
    1Contra-equity associated with the assumption of majority shareholders bridge loan
    
    
    (68,673
    )
    
    
    (68,673
    )Retained earnings (deficit)
    
    
    (77,769
    )
    
    
    (75,201
    )Accumulated other comprehensive loss
    
    
    7,487
    
    
    
    7,855Total stockholders equity (deficit)
    
    
    (138,954
    )
    
    
    (136,018
    )TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
    
    $
    367,259
    
    
    $
    370,235
 See notes to condensed consolidated financial statements. 3




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DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 THREE MONTHS ENDED
MARCH 31, 2005 AND 2004
(In thousands)
 2005
    
    
    2004(Unaudited)NET SALES
    
    $
    89,919
    
    
    $
    89,713COST OF GOODS SOLD
    
    
    56,878
    
    
    
    56,382GROSS PROFIT
    
    
    33,041
    
    
    
    33,331SELLING, GENERAL AND ADMINISTRATIVE
    
    
    20,522
    
    
    
    20,100AMORTIZATION OF INTANGIBLES
    
    
    9
    
    
    
    9MANAGEMENT FEES
    
    
    250
    
    
    
    250OPERATING PROFIT
    
    
    12,260
    
    
    
    12,972OTHER EXPENSES:Interest expense:Long-term debt (including
amortization of deferred financing
costs and discount of $456 and $426)
    
    
    5,467
    
    
    
    5,636Redeemable preferred stock dividends
(including amortization
of discount and issuance costs
of $47 and $47)
    
    
    6,428
    
    
    
    5,562Other (income) expensenet
    
    
    310
    
    
    
    (878
    )INCOME (LOSS) BEFORE INCOME TAXES
    
    
    55
    
    
    
    2,652INCOME TAX EXPENSE
    
    
    2,624
    
    
    
    4,667NET INCOME (LOSS)
    
    $
    (2,569
    )
    
    $
    (2,015
    )
 See notes to condensed consolidated financial statements. 4




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DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 THREE MONTHS ENDED
MARCH 31, 2005 AND 2004
(In thousands)
 2005
    
    
    2004(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (2,569
    )
    
    $
    (2,015
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    4,089
    
    
    
    3,720Interest expenseredeemable preferred stock dividends
    
    
    6,428
    
    
    
    5,562Deferred income taxes
    
    
    2,155
    
    
    
    2,421Equity in earnings of investees
    
    
    (59
    )
    
    
    (23
    )Foreign currency (gain) loss
    
    
    (633
    )
    
    
    (412
    )(Gain) on disposal of fixed assets
    
    
    
    
    
    
    (360
    )Change in operating assets and liabilities
    
    
    (12,021
    )
    
    
    (5,303
    )Net cash (used in) provided by operating activities
    
    
    (2,610
    )
    
    
    3,590CASH FLOWS FROM INVESTING ACTIVITIES:Cash paid for acquisitions
    
    
    
    
    
    
    (1,254
    )Capital expenditures
    
    
    (1,821
    )
    
    
    (995
    )Proceeds from sale of property
    
    
    
    
    
    
    360Net cash used in investing activities
    
    
    (1,821
    )
    
    
    (1,889
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options
    
    
    
    
    
    
    25Payments on term loans
    
    
    (1,022
    )
    
    
    (3,454
    )Net proceeds from revolving credit facility
    
    
    5,675
    
    
    
    3,500Net cash provided by financing activities
    
    
    4,653
    
    
    
    71EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    46
    
    
    
    15Net increase in cash and cash equivalents
    
    
    268
    
    
    
    1,787Cash and cash equivalents at beginning of period
    
    
    843
    
    
    
    726Cash and cash equivalents at end of period
    
    $
    1,111
    
    
    $
    2,513
 See notes to condensed consolidated financial statements. 5




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DAY INTERNATIONAL GROUP, INC. 
 NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS  UNAUDITED
 (In thousands)
 A. BASIS OF PRESENTATION The balance sheet as of December 31, 2004, is condensed financial information derived from the
audited balance sheet. The interim financial statements are unaudited. The 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
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 March 31, 2005 and December 31, 2004, consist of: 2005
    
    
    2004(audited)Finished goods
    
    $
    24,760
    
    
    $
    24,384Work in process
    
    
    4,425
    
    
    
    5,193Raw materials
    
    
    21,930
    
    
    
    20,757$
    51,115
    
    
    $
    50,334
 C. REDEEMABLE PREFERRED STOCK The Companys 12 1/4% 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 $17,464 and $15,043 as of March 31,
2005 and December 31, 2004 which are included in the redeemable
preferred stock balance. D. INCOME TAXES The Companys effective income tax rate for 2005 and 2004 is different from the statutory rates in
effect as a result of the inclusion of the dividends on the redeemable preferred stock in income
 before income taxes. The non-deductible preferred stock dividends cause a significant
difference between book income and taxable income. In addition, the effective rate for 2004 is
affected by dividends from non-U.S. subsidiaries taxable in the United States. 6




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E. 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 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. 2005
    
    
    2004Third party sales:Image Transfer
    
    $
    77,813
    
    
    $
    77,003Textile Products
    
    
    12,106
    
    
    
    12,710Total
    
    $
    89,919
    
    
    $
    89,713Segment operating profit:Image Transfer
    
    $
    12,496
    
    
    $
    12,558Textile Products
    
    
    1,308
    
    
    
    1,802Total
    
    $
    13,804
    
    
    $
    14,360
 The following is a reconciliation of the segment operating profit reported above to the amount
reported in the consolidated financial statements: 2005
    
    
    2004Segment operating profit
    
    $
    13,804
    
    
    $
    14,360APB #16 depreciation and amortization
    
    
    (1,119
    )
    
    
    (999
    )Non-allocated corporate expenses
    
    
    (166
    )
    
    
    (130
    )Amortization of intangibles
    
    
    (9
    )
    
    
    (9
    )Management fees
    
    
    (250
    )
    
    
    (250
    )Total operating profit
    
    $
    12,260
    
    
    $
    12,972
 F. 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 March 31, 2005 and 2004
was $(2,937) and $(2,279). 7




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G. 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. H. STOCK-BASED COMPENSATION As permitted by SFAS No. 123, the Company applied 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 was reflected in net (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: 2005
    
    
    2004Net (loss)as reported
    
    $
    (2,569
    )
    
    $
    (2,015
    )Lessstock-based compensation expense determined using
fair value based method in SFAS No. 123
    
    
    (186
    )

    
    
    (195
    )Pro forma net (loss)
    
    $
    (2,755
    )
    
    $
    (2,210
    )
 8




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I. RETIREMENT AND OTHER POSTRETIREMENT BENEFITS A summary of the components of net periodic pension cost for the defined benefit retirement plans
is as follows: 2005
    
    
    2004Service cost
    
    $
    108
    
    
    $
    95Interest cost
    
    
    105
    
    
    
    197Expected return on plan assets
    
    
    
    
    
    
    (86
    )Actuarial loss recognized
    
    
    13
    
    
    
    10Settlement loss
    
    
    703Net periodic pension costs
    
    $
    929
    
    
    $
    216
 During the first quarter of 2005, the Company purchased annuity contracts to settle the remaining
U.K. pension obligation and recognized a loss on the settlement. A summary of the components of net periodic postretirement cost for the postretirement health care
and life insurance benefits plans is as follows: 2005
    
    
    2004Service cost
    
    $
    330
    
    
    $
    275Interest cost
    
    
    253
    
    
    
    212Amortization of prior service cost
    
    
    (208
    )
    
    
    (160
    )Actuarial loss recognized
    
    
    112
    
    
    
    59Net periodic postretirement benefit costs
    
    $
    487
    
    
    $
    386
 J. SUPPLEMENTAL CONSOLIDATING INFORMATION The Company has outstanding
$115,000, 9 1/2% 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 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. 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 March
31, 2005 and December 31, 2004, and the supplemental combining condensed statements of operations
and cash flows for the three months ended March 31, 2005 and 2004, 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. 9




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DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
MARCH 31, 2005 DAYInter-
    
    
    
    
    
    
    Non-national
    
    
    Guarantor
    
    
    GuarantorGroup, Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCash and cash equivalents
    
    $
    414
    
    
    $
    15
    
    
    $
    682
    
    
    $
    
    
    
    $
    1,111Accounts receivablenet
    
    
    
    
    
    
    21,402
    
    
    
    32,254
    
    
    
    
    
    
    
    53,656Inventories
    
    
    
    
    
    
    27,815
    
    
    
    23,300
    
    
    
    
    
    
    
    51,115Other current assets
    
    
    
    
    
    
    11,569
    
    
    
    6,094
    
    
    
    
    
    
    
    17,663TOTAL CURRENT ASSETS
    
    
    414
    
    
    
    60,801
    
    
    
    62,330
    
    
    
    
    
    
    
    123,545Intercompany
    
    
    241,119
    
    
    
    (7,762
    )
    
    
    8,714
    
    
    
    (242,071
    )Property, plant and equipment, net
    
    
    
    
    
    
    41,764
    
    
    
    31,164
    
    
    
    
    
    
    
    72,928Investment in subsidiaries
    
    
    (18,316
    )
    
    
    69,119
    
    
    
    (12,535
    )
    
    
    (38,268
    )Intangible and other assets
    
    
    
    
    
    
    153,450
    
    
    
    17,336
    
    
    
    
    
    
    
    170,786TOTAL ASSETS
    
    $
    223,217
    
    
    $
    317,372
    
    
    $
    107,009
    
    
    $
    (280,339
    )
    
    $
    367,259LIABILITIES AND
STOCKHOLDERS EQUITY (DEFICIT)Accounts payable
    
    $
    
    
    
    $
    4,189
    
    
    $
    14,054
    
    
    $
    (9,183
    )
    
    $
    9,060Current maturities of long-term debt
    
    
    4,671
    
    
    
    
    
    
    
    119
    
    
    
    
    
    
    
    4,790Other current liabilities
    
    
    479
    
    
    
    9,107
    
    
    
    14,691
    
    
    
    
    
    
    
    24,277TOTAL CURRENT LIABILITIES
    
    
    5,150
    
    
    
    13,296
    
    
    
    28,864
    
    
    
    (9,183
    )
    
    
    38,127Intercompany
    
    
    (63,725
    )
    
    
    297,457
    
    
    
    (6,481
    )
    
    
    (227,251
    )Long-term and subordinated
long-term debt
    
    
    249,928
    
    
    
    
    
    
    
    1,191
    
    
    
    
    
    
    
    251,119Other long-term liabilities
    
    
    
    
    
    
    29,772
    
    
    
    10,947
    
    
    
    
    
    
    
    40,719Redeemable preferred stock
    
    
    176,248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    176,248Total stockholders equity (deficit)
    
    
    (144,384
    )
    
    
    (23,153
    )
    
    
    72,488
    
    
    
    (43,905
    )
    
    
    (138,954
    )TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY (DEFICIT)
    
    $
    223,217
    
    
    $
    317,372
    
    
    $
    107,009
    
    
    $
    (280,339
    )
    
    $
    367,259
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DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEETAUDITED
DECEMBER 31, 2004 DAYInter-
    
    
    
    
    
    
    Non-national
    
    
    Guarantor
    
    
    GuarantorGroup, Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCash and cash equivalents
    
    $
    (130
    )
    
    $
    130
    
    
    $
    843
    
    
    $
    
    
    
    $
    843Accounts receivablenet
    
    
    
    
    
    
    22,771
    
    
    
    29,196
    
    
    
    
    
    
    
    51,967Inventories
    
    

    
    
    
    
    29,264
    
    
    
    21,070
    
    
    
    
    
    
    
    50,334Other assets
    
    
    
    
    
    
    11,815
    
    
    
    5,997
    
    
    
    
    
    
    
    17,812TOTAL CURRENT ASSETS
    
    
    (130
    )
    
    
    63,980
    
    
    
    57,106
    
    
    
    
    
    
    
    120,956Intercompany
    
    
    250,993
    
    
    
    3,997
    
    
    
    555
    
    
    
    (255,545
    )Property, plant and equipmentnet
    
    
    
    
    
    
    42,674
    
    
    
    32,061
    
    
    
    
    
    
    
    74,735Investment in subsidiaries
    
    
    (22,174
    )
    
    
    66,005
    
    
    
    (12,535
    )
    
    
    (31,296
    )Intangible and other assets
    
    
    
    
    
    
    154,984
    
    
    
    19,560
    
    
    
    
    
    
    
    174,544TOTAL ASSETS
    
    $
    228,689
    
    
    $
    331,640
    
    
    $
    96,747
    
    
    $
    (286,841
    )
    
    $
    370,235LIABILITIES AND
STOCKHOLDERS EQUITY (DEFICIT)Accounts payable
    
    $
    
    
    
    $
    3,814
    
    
    $
    7,206
    
    
    $
    
    
    
    $
    11,020Current maturities of long-term debt
    
    
    4,452
    
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    4,576Other current liabilities
    
    
    3,209
    
    
    
    13,096
    
    
    
    17,161
    
    
    
    
    
    
    
    33,466TOTAL CURRENT LIABILITIES
    
    
    7,661
    
    
    
    16,910
    
    
    
    24,491
    
    
    
    
    
    
    
    49,062Intercompany
    
    
    (59,301
    )
    
    
    300,853
    
    
    
    (10,119
    )
    
    
    (231,433
    )Long-term and subordinated long-term
debt
    
    
    246,542
    
    
    
    
    
    
    
    1,272
    
    
    
    
    
    
    
    247,814Other long-term liabilities
    
    
    
    
    
    
    28,354
    
    
    
    11,218
    
    
    
    
    
    
    
    39,572Redeemable preferred stock
    
    
    169,805
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    169,805Total stockholders equity (deficit)
    
    
    (136,018
    )
    
    
    (14,477
    )
    
    
    69,885
    
    
    
    (55,408
    )
    
    
    (136,018
    )TOTAL LIABILITIES AND STOCKHOLDERS
EQUITY (DEFICIT)
    
    $
    228,689
    
    
    $
    331,640
    
    
    $
    96,747
    
    
    $
    (286,841
    )
    
    $
    370,235
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DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2005 DAYInter-
    
    
    
    
    
    
    Non-national
    
    
    Guarantor
    
    
    GuarantorGroup, Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    50,797
    
    
    $
    39,122
    
    
    $
    
    
    
    $
    89,919Cost of goods sold
    
    
    
    
    
    
    32,175
    
    
    
    24,703
    
    
    
    
    
    
    
    56,878Gross profit
    
    
    
    
    
    
    18,622
    
    
    
    14,419
    
    
    
    
    
    
    
    33,041Selling, general and administrative
    
    
    
    
    
    
    11,989
    
    
    
    8,533
    
    
    
    
    
    
    
    20,522Amortization of intangibles
    
    
    
    
    

    
    9
    
    
    
    
    
    
    
    
    
    
    
    9Management fees
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    250Operating profit
    
    
    
    
    
    
    6,374
    
    
    
    5,886
    
    
    
    
    
    
    
    12,260Other expenses (income):Equity in (earnings) loss of subsidiaries
    
    
    (3,857
    )
    
    
    (3,114
    )
    
    
    
    
    
    
    6,971Interest expense
    
    
    6,425
    
    
    
    5,425
    
    
    
    45
    
    
    
    
    
    
    
    11,895Other (income) expense
    
    
    
    
    
    
    (676
    )
    
    
    986
    
    
    
    
    
    
    
    310Income (loss) before income taxes
    
    
    (2,568
    )
    
    
    4,739
    
    
    
    4,855
    
    
    
    (6,971
    )
    
    
    55Income tax expense (benefit)
    
    
    1
    
    
    
    882
    
    
    
    1,741
    
    
    
    
    
    
    
    2,624Net income (loss)
    
    $
    (2,569
    )
    
    $
    3,857
    
    
    $
    3,114
    
    
    $
    (6,971
    )
    
    $
    (2,569
    )
 12




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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 DAYInter-
    
    
    
    
    
    
    Non-national
    
    
    Guarantor
    
    
    GuarantorGroup, Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    52,949
    
    
    $
    36,764
    
    
    $
    
    
    
    $
    89,713Cost of goods sold
    
    
    
    
    
    
    33,476
    
    
    
    22,906
    
    
    
    
    
    
    
    56,382Gross profit
    
    
    
    
    
    
    19,473
    
    
    
    13,858
    
    
    
    
    
    
    
    33,331Selling, general and administrative
    
    
    1
    
    
    
    12,729
    
    
    
    7,370
    
    
    
    
    
    
    
    20,100Amortization of intangibles
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    9Management fees
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    250Operating profit
    
    
    (1
    )
    
    
    6,485
    
    
    
    6,488
    
    
    
    
    
    
    
    12,972Other expenses (income):Equity in (earnings) loss of subsidiaries
    
    
    (3,546
    )
    
    
    (3,344
    )
    
    
    
    
    
    
    6,890Interest expense
    
    
    5,562
    
    
    
    5,631
    
    
    
    5
    
    
    
    
    
    
    
    11,198Other (income) expense
    
    
    (3
    )
    
    
    (2,131
    )
    
    
    1,256
    
    
    
    
    
    
    
    (878
    )Income (loss) before income taxes
    
    
    (2,014
    )
    
    
    6,329
    
    
    
    5,227
    
    
    
    (6,890
    )
    
    
    2,652Income tax expense (benefit)
    
    
    1
    
    
    
    2,783
    
    
    
    1,883
    
    
    
    
    
    
    
    4,667Net income (loss)
    
    $
    (2,015
    )
    
    $
    3,546
    
    
    $
    3,344
    
    
    $
    (6,890
    )
    
    $
    (2,015
    )
 13




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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2005 DAYInter-
    
    
    
    
    
    
    Non-national
    
    
    Guarantor
    
    
    GuarantorGroup, Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash Flows From Operating Activities:Net income (loss)
    
    $
    (2,569
    )
    
    $
    3,857
    
    
    $
    3,114
    
    
    $
    (6,971
    )
    
    $
    (2,569
    )Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:Depreciation and amortization
    
    
    
    
    
    
    2,974
    
    
    
    1,115
    
    
    
    
    
    
    
    4,089Interest expenseredeemable preferred stock
    
    
    6,428
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,428Equity in (earnings) loss of subsidiaries
    
    
    (3,857
    )
    
    
    (3,114
    )
    
    
    
    
    
    
    6,971Deferred income taxes and other
    
    
    
    
    
    
    2,340
    
    
    
    (185
    )
    
    
    
    
    
    
    2,155Equity in earnings of investees
    
    
    
    
    
    
    (59
    )
    
    
    
    
    
    
    
    
    
    
    (59
    )Foreign currency (gain) loss
    
    
    
    
    
    
    201
    
    
    
    (834
    )
    
    
    
    
    
    
    (633
    )Changes in operating assets and liabilities
    
    
    (2,731
    )
    
    
    (6,133
    )
    
    
    (3,157
    )
    
    
    
    
    
    
    (12,021
    )Net cash
(used in) provided by operating activities
    
    
    (2,729
    )
    
    
    66
    
    
    
    53
    
    
    
    
    
    

    
    (2,610
    )Cash Flows From Investing Activities:Capital expenditures
    
    
    
    
    
    
    (807
    )
    
    
    (1,014
    )
    
    
    
    
    
    
    (1,821
    )Net cash used in investing activities
    
    
    
    
    
    
    (807
    )
    
    
    (1,014
    )
    
    
    
    
    
    
    (1,821
    )Cash Flows From Financing Activities:Payments on term loans
    
    
    (993
    )
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    (1,022
    )Net proceeds from credit facilities
    
    
    5,675
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,675Net cash provided by (used in) financing activities
    
    
    4,682
    
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    4,653Intercompany transfers and dividends
    
    
    (1,409
    )
    
    
    626
    
    
    
    783Effects of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    46Net increase (decrease) in cash and cash equivalents
    
    
    544
    
    
    
    (115
    )
    
    
    (161
    )
    
    
    
    
    
    
    268Cash and cash equivalents at beginning of period
    
    
    (130
    )
    
    
    130
    
    
    
    843
    
    
    
    
    
    
    
    843Cash and cash equivalents at end of period
    
    $
    414
    
    
    $
    15
    
    
    $
    682
    
    
    $
    
    
    
    $
    1,111
 14




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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 DAYInter-
    
    
    
    
    
    
    Non-national
    
    
    Guarantor
    
    
    GuarantorGroup, Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedCash Flows From Operating Activities:Net income (loss)
    
    $
    (2,015
    )
    
    $
    3,546
    
    
    $
    3,344
    
    
    $
    (6,890
    )
    
    $
    (2,015
    )Adjustments to reconcile net income (loss)
to net cash provided by operating activities:Depreciation and amortization
    
    
    
    
    
    
    2,607
    
    
    
    1,113
    
    
    
    
    
    
    
    3,720Interest expenseredeemable preferred stock
    
    
    5,562
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,562Equity in (earnings) loss of subsidiaries
    
    
    (3,546
    )
    
    
    (3,344
    )
    
    
    
    
    
    
    6,890Deferred income taxes and other
    
    
    
    
    
    
    3,253
    
    
    
    (832
    )
    
    
    
    
    
    
    2,421Equity in earnings of investees
    
    
    
    
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    (23
    )Foreign currency (gain) loss
    
    
    
    
    
    
    (1,398
    )
    
    
    986
    
    
    
    
    
    
    
    (412
    )(Gain) on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    (360
    )
    
    
    
    
    
    
    (360
    )Changes in operating assets and liabilities
    
    
    (2,775
    )
    
    
    688
    
    
    
    (3,216
    )
    
    
    
    
    
    
    (5,303
    )Net cash provided by operating activities
    
    
    (2,774
    )
    
    
    5,329
    
    
    
    1,035
    
    
    
    
    
    
    
    3,590Cash Flows From Investing Activities:Cash paid for acquisitions
    
    
    
    
    
    
    (1,254
    )
    
    
    
    
    
    
    
    
    
    
    (1,254
    )Capital expenditures
    
    
    
    
    
    
    (688
    )
    
    
    (307
    )
    
    
    
    
    
    
    (995
    )Proceeds from sale of property
    
    
    
    
    
    
    
    
    
    
    360
    
    
    
    
    
    
    
    360Net cash used in investing activities
    
    
    
    
    
    
    (1,942
    )
    
    
    53
    
    
    
    
    
    
    
    (1,889
    )Cash Flows From Financing Activities:Proceeds from exercise of stock options
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25Payments on term loans
    
    
    (3,453
    )
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    (3,454
    )Net proceeds from credit facilities
    
    
    3,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,500Net cash provided by (used in) financing activities
    
    
    72
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    71Intercompany transfers and dividends
    
    
    2,658
    
    
    
    (2,223
    )
    
    
    (435
    )Effects of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    15
    
    
    
    
    
    
    
    15Net increase (decrease) in cash and cash equivalents
    
    
    (44
    )
    
    
    1,163
    
    
    
    668
    
    
    
    
    
    
    
    1,787Cash and cash equivalents at beginning of period
    
    
    742
    
    
    
    (742
    )
    
    
    726
    
    
    
    
    
    
    
    726Cash and cash equivalents at end of period
    
    $
    698
    
    
    $
    421
    
    
    $
    1,394
    
    
    $
    
    
    
    $
    2,513
 15




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##### Table of Contents



K. RECENTLY ISSUED
ACCOUNTING STANDARDS In December 2004, the
Financial Accounting Standards Board issued SFAS No. 123 (Revised),
Share-based Payment. In April 2005, the Financial Accounting
Standards Board deferred the effective date of this standard.
Previously, the Company had announced its intention to adopt this
Statement effective January 1, 2005. As a result of the deferred
effective date, the Company has elected to continue accounting for
its Share-based Payments under SFAS 123. This Statement establishes
standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. This
Statement focuses primarily on accounting for transactions in which
an entity obtains employee services in share-based payment
transactions. This Statement eliminates the alternative to use APB
Opinion 25s intrinsic value method of accounting that was
provided in Statement 123 as originally issued. Under APB Opinion 25,
issuing stock options to employees generally resulted in recognition
of no compensation cost. This Statement requires entities to
recognize the cost of employee services received in exchange for
awards of equity instruments based on the grant-date fair value of
those awards. This statement will have no effect on the cash flows of
the Company, or the Companys compliance with its debt
covenants. Net income (loss) after the adoption will be affected by
the stock option expense that was previously only disclosed. 16




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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 impact of competitive products and
pricing; (v) the effect of changing general and industry specific economic conditions; (vi) the
impact 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 The following table sets forth selected financial information in millions of dollars and as a
percentage of net sales: Three Months Ended March 31,2005
    
    
    2004$
    
    
    
    %
    
    
    
    $
    
    
    
    %Net sales
    
    
    89.9
    
    
    
    100.0
    
    
    
    89.7
    
    
    
    100.0Costs of goods sold
    
    
    56.9
    
    
    
    63.3
    
    
    
    56.4
    
    
    
    62.8Gross profit
    
    
    33.0
    
    
    
    36.7
    
    
    
    33.3
    
    
    
    37.2Selling, general and administrative expense
    
    
    20.5
    
    
    
    22.8
    
    
    
    20.1
    
    
    
    22.4Stock option expense
    
    
    0.3
    
    
    
    0.3Amortization of intangibles
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.0Management fees
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.3Operating profit
    
    
    12.0
    
    
    
    13.4
    
    
    
    13.0
    
    
    
    14.5
 17




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##### Table of Contents



Comparison of Results of Operations Three Months Ended March 31, 2005, Compared to Three Months Ended March 31, 2004 Net sales increased $0.2 million (0.2%) to $89.9 million, primarily as a result of favorable
changes in foreign currency rates and offset by lower sales volumes in the United States. Sales in
2005 were positively affected by increased sales volumes of $0.2 million in Europe and $1.6 million
of favorable changes in foreign currency rates used to translate international sales into U.S.
dollars offset by lower sales volumes in the United States. Image Transfers sales increased $0.8 million (1.1%) to $77.8 million. Image Transfers
sales were positively affected by increased sales volumes of $1.5 million in Europe and $1.3
million as a result of the effect of changes in foreign currency rates offset by $2.0 million of
lower sales volumes in the United States. The lower U.S. Image Transfer sales volume was primarily
as a result of lower sales volumes in the US distribution business. Europe sales volume increased
primarily from growth in both the blanket and chemical products lines in the United Kingdom and
Germany along with growth in flexographic base sleeves. Textile Products sales decreased $0.6
million (5.0%) to $12.1 million, primarily as a result of lower sales volume in Europe of $1.0
million offset by favorable foreign currency rate changes of $0.3 million. Gross profit decreased $0.3 million (0.9%) to $33.0 million. Foreign currency rate changes
increased gross profit by $0.6 million. As a percentage of net
sales, gross profit decreased to
36.7% for the three months ended March 31, 2005, compared to 37.2% for the three months ended March
31, 2004. Selling, general and administrative expense (SG&A) increased $0.4 million (2.1%) to $20.5
million, primarily as a result of changes in foreign currency rates. As a percentage of net sales,
SG&A increased to 22.8% from 22.4%. Changes in foreign currency rates increased SG&A costs by $0.3
million in the first quarter of 2005 compared to the first quarter of 2004. SG&A costs also
increased as a result of higher insurance costs and higher selling and distribution costs from
higher sales levels. Operating profit decreased $1.0 million (8.5%) to $12.0 million. As a percentage of net sales,
operating profit decreased to 13.4% for the three months ended March 31, 2005, from 14.5% for the
comparable period in 2004. Image Transfers operating profit remained relatively constant at $12.5
million. As a percentage of net sales, Image Transfers operating profit decreased to 16.1% for the
three months ended March 31, 2005, from 16.3% for the three months ended March 31, 2004, primarily
as a result of higher sales volumes in Europe where operating profit margins are slightly lower and
the decrease in the U.S. distribution business sales volumes. Textile Products operating profit
decreased $0.5 million (27.6%) to $1.3 million. As a percentage of net sales, Textile Products
operating profit decreased to 10.8% for the three months ended March 31, 2005, from 14.2% for the
three months ended March 31, 2004. Textile Products operating profit was affected by the lower
sales volumes in Europe and the unfavorable foreign currency impact related to the importing of
product into the U.S. market manufactured in Europe. Other (income) expense
was $(0.3) million and $(0.9) million for the three months ended March 31,
2005 and 2004. The other (income) expense is primarily due to foreign currency transaction (gains)
losses incurred in the normal course of international subsidiaries doing business in currencies
other than their functional currency as well as a result of intercompany financing arrangements.
Other (income) expense in 18




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##### Table of Contents



2005 and 2004 includes a gain of $1.1 million and $0.7 million on the mark-to-market of the
euro-denominated Tranche A Term Loan, a $1.0 million of expenses associated with a discontinued
acquisition in 2005 and $0.4 million gain on the sale of fixed assets in 2004. The effective tax rate was (997.6)% and 176.0% for the three months ended March 31, 2005 and 2004.
The effective tax rate is affected by the non-deductible preferred stock dividends reflected as
interest expense. The effective tax rate is further affected in the three months ended March 31,
2004 by foreign-sourced dividends and income taxable in the United States and non-deductible
expenses. In December 2004, the
Financial Accounting Standards Board issued SFAS No. 123 (Revised),
Share-based Payment. In April 2005, the Financial Accounting
Standards Board deferred the effective date of this standard.
Previously, the Company had announced its intention to adopt this
Statement effective January 1, 2005. As a result of the deferred
effective date, the Company has elected to continue accounting for
its Share-based Payments under SFAS 123. 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 $1.8 million and $1.0 million for the quarters ended March 31, 2005 and
2004, respectively. As of March 31, 2005, there was $6.7 million outstanding under the Revolving Credit Facility and
the Company had $13.3 million available under the Revolving Credit Facility. The Companys
aggregate indebtedness at March 31, 2005, is $255.9 million and the aggregate liquidation
preferences of the Exchangeable Preferred Stock is $81.9 million and the Convertible Preferred
Stock is $95.3 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. 19




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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
financial condition, results of operations or liquidity. Certain of the Companys international subsidiaries make purchases and sales in designated
currencies other than their functional currency. As a result, they are subject to transaction
exposures that arise from foreign exchange movements between the date that the foreign currency
transaction is recorded and the date it is consummated. In addition, the Company has intercompany
loans outstanding with certain international subsidiaries in their local currencies, exposing it to
the effect of changes in exchange rates at loan issue and loan repayment dates. The Company
periodically enters into forward foreign exchange contracts to protect it against such foreign
exchange movements. The contract value of these foreign exchange contracts was $6.6 million at
March 31, 2005 and $9.5 million at December 31, 2004. These contracts generally expire within three
to twelve months. At March 31, 2005 and December 31, 2004, the Company had outstanding 19.9
million and 20.4 million of term loans issued under the Senior Secured Credit Facility. The
Company has issued euro-denominated debt in order to protect the Companys investments in Europe
from fluctuations in the euro compared to the U.S. dollar. Foreign currency (gains) losses,
included in other (income) expensenet, were $(0.6) million in 2005 and $(0.4) million in 2004. 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 receivable of $0.4 million and $0.2 million at March 31, 2005
and December 31, 2004. 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. 20




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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. Pressroom Chemicals is exposed
to changes in the cost of certain petroleum-based components. The largest raw material component in
Pressroom Chemicals products is petroleum distillates, such as aliphatics and aromatics. When
commodity prices increase, the Company has historically passed on increases to its customers to
maintain its profit margins. Conversely, when commodity prices decline, the Company generally
lowers its sales prices to meet competitive pressures. Because the Company has historically been
able to raise sales prices to offset higher costs, management believes that a 10% change in the
cost of its components could have a short-term impact until sales price increases take effect, but
overall would not have a material effect on income or cash flows for a fiscal year. 
 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 March 31, 2005. To the best of managements
knowledge, there were no changes in the internal control and disclosure control systems during the
quarter ended March 31, 2005, that would materially affect the control systems. 
 PART II            OTHER INFORMATION 
 ITEM 6. EXHIBITS (31)
    
    Rule 13a-14(a)/15d-14(a) Certifications31.1
    
    
    
    Chief Executive Officer Certification31.2
    
    
    
    Chief Financial Officer Certification(32)
    
    Section 1350 Certifications32.1
    
    
    
    Chief Executive Officer Certification32.2
    
    
    
    Chief Financial Officer Certification
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##### Table of Contents



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: May 13, 2005
    
    /s/ Thomas J. KoenigThomas J. KoenigVice President andChief Financial Officer(Principal Financial Officer)
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