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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 SECURITIESEXCHANGE ACT OF 1934

For the Quarterly Period ended June 30, 2004

Commission File No. 33-93644

DAY INTERNATIONAL GROUP, INC.
130 West Second Street
Dayton, Ohio 45402
(937) 224-4000

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 x   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 August 1, 2004.





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DAY INTERNATIONAL GROUP, INC.
INDEX






PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Condensed Consolidated Balance Sheets as of June 30,
2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the
six months ended June 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 and Reports on Form 8-K
    
    
    26Signature
    
    
    
    
    26EX-31.1 CERTIFICATION CEOEX-31.2 CERTIFICATION CFOEX-32.1 SECTION 1350 CERTIFICATION CEOEX-32.2 SECTION 1350 CERTIFICATION CFO




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PART I            FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
(In thousands)

2004
    
    2003ASSETSCash and cash equivalents
    
    $
    1,331
    
    
    $
    726Accounts receivable (less allowance for doubtful accounts of $3,431
and $3,407)
    
    
    48,075
    
    
    
    44,687Inventories (Note B)
    
    
    51,806
    
    
    
    48,652Other current assets
    
    
    13,087
    
    
    
    12,881Total current assets
    
    
    114,299
    
    
    
    106,946Property, plant and equipment, net of accumulated depreciation of
$54,858 and $49,529
    
    
    70,699
    
    
    
    74,167Goodwill
    
    
    142,470
    
    
    
    142,580Intangible assets (net of accumulated amortization of $37,696 and
$35,306)
    
    
    21,339
    
    
    
    23,223Other assets
    
    
    20,460
    
    
    
    24,624TOTAL ASSETS
    
    $
    369,267
    
    
    $
    371,540LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Accounts payable
    
    $
    10,046
    
    
    $
    7,563Current maturities of long-term debt
    
    
    4,016
    
    
    
    3,489Other current liabilities
    
    
    30,778
    
    
    
    29,421Total current liabilities
    
    
    44,840
    
    
    
    40,473Long-term and subordinated long-term debt
    
    
    265,777
    
    
    
    276,331Other long-term liabilities
    
    
    34,580
    
    
    
    35,811Redeemable preferred stock (Note D)
    
    
    157,839
    
    
    
    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)
    
    
    (69,581
    )
    
    
    (65,180
    )Accumulated other comprehensive loss
    
    
    4,484
    
    
    
    6,227Total stockholders equity (deficit)
    
    
    (133,769
    )
    
    
    (127,724
    )TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT)
    
    $
    369,267
    
    
    $
    371,540


See notes to condensed consolidated financial statements.

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DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(In thousands)

Three Months
    
    Six Months2004
    
    2003
    
    2004
    
    2003NET SALES
    
    $
    88,807
    
    
    $
    70,139
    
    
    $
    178,520
    
    
    $
    138,958COST OF GOODS SOLD
    
    
    56,692
    
    
    
    45,356
    
    
    
    113,074
    
    
    
    89,493GROSS PROFIT
    
    
    32,115
    
    
    
    24,783
    
    
    
    65,446
    
    
    
    49,465SELLING, GENERAL AND ADMINISTRATIVE
    
    
    19,853
    
    
    
    15,419
    
    
    
    39,953
    
    
    
    29,968AMORTIZATION OF INTANGIBLES
    
    
    8
    
    
    
    206
    
    
    
    17
    
    
    
    407MANAGEMENT FEES
    
    
    250
    
    
    
    250
    
    
    
    500
    
    
    
    500OPERATING PROFIT
    
    
    12,004
    
    
    
    8,908
    
    
    
    24,976
    
    
    
    18,590OTHER EXPENSES:Interest expense:Long-term debt (including amortization of
deferred financing costs and discount of $436,
$587, $863 and $1,174)
    
    
    5,646
    
    
    
    6,629
    
    
    
    11,282
    
    
    
    13,154Redeemable preferred stock dividends
(including amortization of discount and issuance
costs of $47 and $94)
    
    
    5,628
    
    
    
    
    
    
    
    11,190Other (income) expense
    
    
    (663
    )
    
    
    465
    
    
    
    (1,541
    )
    
    
    (312
    )INCOME BEFORE INCOME TAXES
    
    
    1,393
    
    
    
    1,814
    
    
    
    4,045
    
    
    
    5,748INCOME TAX EXPENSE
    
    
    3,779
    
    
    
    742
    
    
    
    8,446
    
    
    
    2,227NET INCOME (LOSS)
    
    
    (2,386
    )
    
    
    1,072
    
    
    
    (4,401
    )
    
    
    3,521ACCUMULATING PREFERRED STOCK
DIVIDENDS (Note D)
    
    
    
    
    
    
    (4,816
    )
    
    
    
    
    
    
    (9,574
    )AMORTIZATION OF PREFERRED STOCK
ISSUANCE COSTS
    
    
    
    
     
   
    (47
    )
    
    
    
    
    
 
    (94
    )NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS
    
    $
    (2,386
    )
    
    $
    (3,791
    )
    
    $
    (4,401
    )
    
    $
    (6,147
    )


See notes to condensed consolidated financial statements.

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DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003

2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (4,401
    )
    
    $
    3,521Adjustments to reconcile net income (loss) to net cash provided by operating
activities:Depreciation and amortization
    
    
    7,402
    
    
    
    7,938Interest expenseredeemable preferred stock dividends
    
    
    11,190Deferred income taxes
    
    
    3,619
    
    
    
    (2,031
    )Equity in earnings of investees
    
    
    (148
    )Foreign currency (gain) loss
    
    
    (907
    )
    
    
    (1,119
    )(Gain) loss on disposal of fixed assets
    
    
    (128
    )
    
    
    774Change in operating assets and liabilities
    
    
    (3,413
    )
    
    
    (1,656
    )Net cash provided by operating activities
    
    
    13,214
    
    
    
    7,427CASH FLOWS FROM INVESTING ACTIVITIES:Cash paid for acquisitions
    
    
    (1,346
    )
    
    
    (1,000
    )Capital expenditures
    
    
    (3,126
    )
    
    
    (4,312
    )Proceeds from sale of property
    
    
    1,410
    
    
    
    939Net cash used in investing activities
    
    
    (3,062
    )
    
    
    (4,373
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from exercise of stock options
    
    
    25Payment of deferred financing costs
    
    
    (633
    )Payments on term loans
    
    
    (8,927
    )
    
    
    (6,347
    )Net (payments on) proceeds from revolving credit facility
    
    
    50
    
    
    
    3,650Net cash provided by (used in) financing activities
    
    
    (9,485
    )
    
    
    (2,697
    )EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    (62
    )
    
    
    82Net increase (decrease) in cash and cash equivalents
    
    
    605
    
    
    
    439Cash and cash equivalents at beginning of period
    
    
    726
    
    
    
    996Cash and cash equivalents at end of period
    
    $
    1,331
    
    
    $
    1,435NON-CASH TRANSACTIONS:Preferred stock dividend
    
    
    
    
    
    $
    1,901Amortization of preferred stock discount
    
    
    
    
    
    $
    94Short-term note payable for acquisition
    
    
    
    
    
    $
    952


See notes to condensed consolidated financial statements.

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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 June 30, 2004 and December 31, 2003, consist of:

2004
    
    2003Finished goods
    
    $
    25,688
    
    
    $
    24,917Work in process
    
    
    5,182
    
    
    
    5,453Raw materials
    
    
    20,936
    
    
    
    18,282$
    51,806
    
    
    $
    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 will be added to the financing
fees paid to the debtors and amortized over the term of the Tranche D Term
Loan.

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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 $10,417 as of June 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 has 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 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 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 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.

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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
    
    Six Months2004
    
    2003
    
    2004
    
    2003Third party sales:Image Transfer
    
    $
    75,963
    
    
    $
    57,523
    
    
    $
    152,966
    
    
    $
    113,122Textile Products
    
    
    12,844
    
    
    
    12,616
    
    
    
    25,554
    
    
    
    25,836Total
    
    $
    88,807
    
    
    $
    70,139
    
    
    $
    178,520
    
    
    $
    138,958Segment operating profit:Image Transfer
    
    $
    11,808
    
    
    $
    9,082
    
    
    $
    24,366
    
    
    $
    18,647Textile Products
    
    
    1,601
    
    
    
    1,427
    
    
    
    3,403
    
    
    
    2,981Total
    
    $
    13,409
    
    
    $
    10,509
    
    
    $
    27,769
    
    
    $
    21,628


The following is a reconciliation of the segment operating profit reported
above to the amount reported in the consolidated financial statements:

Three Months
    
    Six Months2004
    
    2003
    
    2004
    
    2003Segment operating profit
    
    $
    13,409
    
    
    $
    10,509
    
    
    $
    27,769
    
    
    $
    21,628APB No. 16 depreciation and amortization
    
    
    (999
    )
    
    
    (1,007
    )
    
    
    (1,998
    )
    
    
    (1,849
    )Non-allocated corporate expenses
    
    
    (148
    )
    
    
    (138
    )
    
    
    (278
    )
    
    
    (282
    )Amortization of intangibles
    
    
    (8
    )
    
    
    (206
    )
    
    
    (17
    )
    
    
    (407
    )Management fees
    
    
    (250
    )
    
    
    (250
    )
    
    
    (500
    )
    
    
    (500
    )Total operating profit
    
    $
    12,004
    
    
    $
    8,908
    
    
    $
    24,976
    
    
    $
    18,590


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
June 30, 2004 and 2003 was $(3,865) and $3,325. Total comprehensive income
(loss) for the six months ended June 30, 2004 and 2003 was $(6,144) and $6,071.

H. CONTINGENCIES

Claims have been made against the Company for the costs of environmental
remedial measures taken or to be taken. Reserves for such liabilities have been
established and no insurance recoveries have been anticipated in the
determination of the reserves. In managements opinion, the aforementioned
claims will be resolved without material adverse effect on the consolidated
results of operations, financial position or cash flows of the Company.

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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
    
    Six Months2004
    
    2003
    
    2004
    
    2003Net income (loss)as reported
    
    $
    (2,386
    )
    
    $
    1,072
    
    
    $
    (4,401
    )
    
    $
    3,521Lessstock-based compensation
expense determined using fair
value based method in
SFAS No. 123
    
    
    (195
    )
    
    
    (208
    )
    
    
    (390
    )
    
    
    (416
    )Pro forma net income (loss)
    
    $
    (2,581
    )
    
    $
    864
    
    
    $
    (4,791
    )
    
    $
    3,105


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
    
    Six Months2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    92
    
    
    $
    82
    
    
    $
    187
    
    
    $
    159Interest cost
    
    
    192
    
    
    
    173
    
    
    
    389
    
    
    
    341Expected return on plan assets
    
    
    (84
    )
    
    
    (81
    )
    
    
    (170
    )
    
    
    (162
    )Actuarial loss recognized
    
    
    9
    
    
    
    168
    
    
    
    19
    
    
    
    334Net periodic pension costs
    
    $
    209
    
    
    $
    342
    
    
    $
    425
    
    
    $
    672


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
    
    Six Months2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    275
    
    
    $
    207
    
    
    $
    550
    
    
    $
    414Interest cost
    
    
    212
    
    
    
    221
    
    
    
    424
    
    
    
    442Amortization of prior service cost
    
    
    (160
    )
    
    
    
    
    
    
    (320
    )Actuarial loss recognized
    
    
    59
    
    
    
    66
    
    
    
    118
    
    
    
    132Net periodic postretirement benefit costs
    
    $
    386
    
    
    $
    494
    
    
    $
    772
    
    
    $
    988


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

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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
employer 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 the accounting for 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 impact
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 June
30, 2004 and December 31, 2003, and the supplemental combining condensed
statements of operations and cash flows for the three and six months ended June
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.

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DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
JUNE 30, 2004

DAYInter-
    
    
    
    
    
    Non-national
    
    Guarantor
    
    GuarantorGroup, Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCash and cash equivalents
    
    $
    500
    
    
    $
    (337
    )
    
    $
    1,168
    
    
    $
    
    
    
    $
    1,331Accounts
receivablenet
    
    
    
    
    
    
    23,137
    
    
    
    24,938
    
    
    
    
    
    
    
    48,075Inventories
    
    
    
    
    
    
    30,553
    
    
    
    21,253
    
    
    
    
    
    
    
    51,806Other current assets
    
    
    
    
    
    
    6,981
    
    
    
    6,106
    
    
    
    
    
    
    
    13,087TOTAL CURRENT ASSETS
    
    
    500
    
    
    
    60,334
    
    
    
    53,465
    
    
    
    
    
    
    
    114,299Intercompany
    
    
    268,411
    
    
    
    (580
    )
    
    
    781
    
    
    
    (268,612
    )Property, plant and equipment, net
    
    
    
    
    
    
    42,804
    
    
    
    27,895
    
    
    
    
    
    
    
    70,699Investment in subsidiaries
    
    
    (28,551
    )
    
    
    59,401
    
    
    
    (12,535
    )
    
    
    (18,315
    )Intangible and other assets
    
    
    
    
    
    
    164,658
    
    
    
    19,611
    
    
    
    
    
    
    
    184,269TOTAL ASSETS
    
    $
    240,360
    
    
    $
    326,617
    
    
    $
    89,217
    
    
    $
    (286,927
    )
    
    $
    369,267LIABILITIES AND
STOCKHOLDERS EQUITY
(DEFICIT)Accounts payable
    
    $
    
    
    
    $
    4,078
    
    
    $
    5,968
    
    
    $
    
    
    
    $
    10,046Current maturities of long-term debt
    
    
    3,912
    
    
    
    4
    
    
    
    100
    
    
    
    
    
    
    
    4,016Other current liabilities
    
    
    3,234
    
    
    
    11,260
    
    
    
    16,284
    
    
    
    
    
    
    
    30,778TOTAL CURRENT LIABILITIES
    
    
    7,146
    
    
    
    15,342
    
    
    
    22,352
    
    
    
    
    
    
    
    44,840Intercompany
    
    
    (55,355
    )
    
    
    311,673
    
    
    
    (4,213
    )
    
    
    (252,105
    )Long-term and subordinated long-term
debt
    
    
    264,499
    
    
    
    14
    
    
    
    1,264
    
    
    
    
    
    
    
    265,777Other long-term liabilities
    
    
    
    
    
    
    24,528
    
    
    
    10,052
    
    
    
    
    
    
    
    34,580Redeemable preferred stock
    
    
    157,839
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    157,839Total stockholders equity (deficit)
    
    
    (133,769
    )
    
    
    (24,940
    )
    
    
    59,762
    
    
    
    (34,822
    )
    
    
    (133,769
    )TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
(DEFICIT)
    
    $
    240,360
    
    
    $
    326,617
    
    
    $
    89,217
    
    
    $
    (286,927
    )
    
    $
    369,267


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
    
    
    
    
    
    
    
    3,489Accrued associate related costs and other
expenses
    
    
    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 JUNE 30, 2004

DAYInter-
    
    
    
    
    
    Non-national
    
    Guarantor
    
    GuarantorGroup, Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    53,194
    
    
    $
    35,613
    
    
    $
    
    
    
    $
    88,807Cost of goods sold
    
    
    
    
    
    
    33,978
    
    
    
    22,714
    
    
    
    
    
    
    
    56,692Gross profit
    
    
    
    
    
    
    19,216
    
    
    
    12,899
    
    
    
    
    
    
    
    32,115Selling, general and administrative
    
    
    16
    
    
    
    12,514
    
    
    
    7,323
    
    
    
    
    
    
    
    19,853Amortization of intangibles
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    8Management fees
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    250Operating profit (loss)
    
    
    (16
    )
    
    
    6,444
    
    
    
    5,576
    
    
    
    
    
    
    
    12,004Other expenses (income):Equity in (earnings) loss of subsidiaries
    
    
    (3,251
    )
    
    
    (3,018
    )
    
    
    
    
    
    
    6,269Interest expense
    
    
    5,628
    
    
    
    5,635
    
    
    
    11
    
    
    
    
    
    
    
    11,274Other (income) expense
    
    
    (1
    )
    
    
    (1,208
    )
    
    
    546
    
    
    
    
    
    
    
    (663
    )Income (loss) before income taxes
    
    
    (2,392
    )
    
    
    5,035
    
    
    
    5,019
    
    
    
    (6,269
    )
    
    
    1,393Income tax expense (benefit)
    
    
    (6
    )
    
    
    1,784
    
    
    
    2,001
    
    
    
    
    
    
    
    3,779Net income (loss)
    
    $
    (2,386
    )
    
    $
    3,251
    
    
    $
    3,018
    
    
    $
    (6,269
    )
    
    $
    (2,386
    )


13



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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003

DAYInter-
    
    
    
    
    
    Non-national
    
    Guarantor
    
    GuarantorGroup, Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    ConsolidatedNet sales
    
    $
    
    
    
    $
    36,095
    
    
    $
    34,044
    
    
    $
    
    
    
    $
    70,139Cost of goods sold
    
    
    
    
    
    
    23,249
    
    
    
    22,107
    
    
    
    
    
    
    
    45,356Gross profit
    
    
    
    
    
    
    12,846
    
    
    
    11,937
    
    
    
    
    
    
    
    24,783Selling, general and administrative
    
    
    14
    
    
    
    8,671
    
    
    
    6,734
    
    
    
    
    
    
    
    15,419Amortization of intangibles
    
    
    
    
    
    
    206
    
    
    
    
    
    
    
    
    
    
    
    206Management fees
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    250Operating profit (loss)
    
    
    (14
    )
    
    
    3,719
    
    
    
    5,203
    
    
    
    
    
    
    
    8,908Other expenses (income):Equity in (earnings) of subsidiaries
    
    
    (1,080
    )
    
    
    (2,652
    )
    
    
    
    
    
    
    3,732Interest expense
    
    
    
    
    
    
    6,587
    
    
    
    42
    
    
    
    
    
    
    
    6,629Other (income) expense
    
    
    (1
    )
    
    
    (326
    )
    
    
    792
    
    
    
    
    
    
    
    465Income before income taxes
    
    
    1,067
    
    
    
    110
    
    
    
    4,369
    
    
    
    (3,732
    )
    
    
    1,814Income tax expense (benefit)
    
    
    (5
    )
    
    
    (970
    )
    
    
    1,717
    
    
    
    
    
    
    
    742Net income
    
    $
    1,072
    
    
    $
    1,080
    
    
    $
    2,652
    
    
    $
    (3,732
    )
    
    $
    1,072


14



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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004

DAYInter-
    
    
    
    
    
    Non-national
    
    Guarantor
    
    GuarantorGroup, Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    106,143
    
    
    $
    72,377
    
    
    $
    
    
    
    $
    178,520Cost of goods sold
    
    
    
    
    
    
    67,454
    
    
    
    45,620
    
    
    
    
    
    
    
    113,074Gross profit
    
    
    
    
    
    
    38,689
    
    
    
    26,757
    
    
    
    
    
    
    
    65,446Selling, general and administrative
    
    
    17
    
    
    
    25,243
    
    
    
    14,693
    
    
    
    
    
    
    
    39,953Amortization of intangibles
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    17Management fees
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    500Operating profit (loss)
    
    
    (17
    )
    
    
    12,929
    
    
    
    12,064
    
    
    
    
    
    
    
    24,976Other expenses (income):Equity in (earnings) of subsidiaries
    
    
    (6,797
    )
    
    
    (6,362
    )
    
    
    
    
    
    
    13,159Interest expense
    
    
    11,190
    
    
    
    11,266
    
    
    
    16
    
    
    
    
    
    
    
    22,472Other (income) expense
    
    
    (4
    )
    
    
    (3,339
    )
    
    
    1,802
    
    
    
    
    
    
    
    (1,541
    )Income (loss) before income taxes
    
    
    (4,406
    )
    
    
    11,364
    
    
    
    10,246
    
    
    
    (13,159
    )
    
    
    4,045Income tax expense (benefit)
    
    
    (5
    )
    
    
    4,567
    
    
    
    3,884
    
    
    
    
    
    
    
    8,446Net income (loss)
    
    $
    (4,401
    )
    
    $
    6,797
    
    
    $
    6,362
    
    
    $
    (13,159
    )
    
    $
    (4,401
    )


15



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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003

DAYInter-
    
    
    
    
    
    Non-national
    
    Guarantor
    
    GuarantorGroup, Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet sales
    
    $
    
    
    
    $
    71,808
    
    
    $
    67,150
    
    
    $
    
    
    
    $
    138,958Cost of goods sold
    
    
    
    
    
    
    46,652
    
    
    
    42,841
    
    
    
    
    
    
    
    89,493Gross profit
    
    
    
    
    
    
    25,156
    
    
    
    24,309
    
    
    
    
    
    
    
    49,465Selling, general and administrative
    
    
    59
    
    
    
    17,157
    
    
    
    12,752
    
    
    
    
    
    
    
    29,968Amortization of intangibles
    
    
    
    
    
    
    407
    
    
    
    
    
    
    
    
    
    
    
    407Management fees
    
    
    
    
    
    
    500
    
    
    
    
    
    
    
    
    
    
    
    500Operating profit (loss)
    
    
    (59
    )
    
    
    7,092
    
    
    
    11,557
    
    
    
    
    
    
    
    18,590Other expenses (income):Equity in (earnings) of subsidiaries
    
    
    (3,556
    )
    
    
    (5,991
    )
    
    
    
    
    
    
    9,547Interest expense
    
    
    
    
    
    
    13,078
    
    
    
    76
    
    
    
    
    
    
    
    13,154Other (income) expense
    
    
    (1
    )
    
    
    (1,993
    )
    
    
    1,682
    
    
    
    
    
    
    
    (312
    )Income before income taxes
    
    
    3,498
    
    
    
    1,998
    
    
    
    9,799
    
    
    
    (9,547
    )
    
    
    5,748Income tax expense (benefit)
    
    
    (23
    )
    
    
    (1,558
    )
    
    
    3,808
    
    
    
    
    
    
    
    2,227Net income
    
    $
    3,521
    
    
    $
    3,556
    
    
    $
    5,991
    
    
    $
    (9,547
    )
    
    $
    3,521


16



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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004

DAYInter-
    
    
    
    
    
    Non-national
    
    Guarantor
    
    GuarantorGroup, Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash Flows From Operating Activities:Net income (loss)
    
    $
    (4,401
    )
    
    $
    6,797
    
    
    $
    6,362
    
    
    $
    (13,159
    )
    
    $
    (4,401
    )Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:Depreciation and amortization
    
    
    
    
    
    
    5,275
    
    
    
    2,127
    
    
    
    
    
    
    
    7,402Interest expenseredeemable preferred
stock
    
    
    11,190
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,190Equity in earnings of subsidiaries
    
    
    (6,797
    )
    
    
    (6,362
    )
    
    
    
    
    
    
    13,159Deferred income taxes and other
    
    
    
    
    
    
    4,912
    
    
    
    (1,293
    )
    
    
    
    
    
    
    3,619Equity in earnings of investees
    
    
    
    
    
    
    (148
    )
    
    
    
    
    
    
    
    
    
    
    (148
    )Foreign currency (gain) loss
    
    
    
    
    
    
    (1,602
    )
    
    
    695
    
    
    
    
    
    
    
    (907
    )(Gain) loss on disposal of fixed assets
    
    
    
    
    
    
    300
    
    
    
    (428
    )
    
    
    
    
    
    
    (128
    )Changes in operating assets and
liabilities
    
    
    4
    
    
    
    (1,192
    )
    
    
    (2,225
    )
    
    
    
    
    
    
    (3,413
    )Net cash provided by (used in)
operating activities
    
    
    (4
    )
    
    
    7,980
    
    
    
    5,238
    
    
    
    
    
    
    
    13,214Cash Flows From Investing Activities:Cash paid for acquisitions
    
    
    
    
    
    
    (1,346
    )
    
    
    
    
    
    
    
    
    
    
    (1,346
    )Capital expenditures
    
    
    
    
    
    
    (1,602
    )
    
    
    (1,524
    )
    
    
    
    
    
    
    (3,126
    )Proceeds from sale of property
    
    
    
    
    
    
    
    
    
    
    1,410
    
    
    
    
    
    
    
    1,410Net cash used in investing activities
    
    
    
    
    
    
    (2,948
    )
    
    
    (114
    )
    
    
    
    
    
    
    (3,062
    )Cash Flows From Financing Activities:Proceeds from exercise of stock options
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25Payment of deferred financing fees
    
    
    
    
    
    
    (633
    )
    
    
    
    
    
    
    
    
    
    
    (633
    )Payments on term loans
    
    
    (8,925
    )
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (8,927
    )Net proceeds from credit facilities
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Net cash provided by (used in)
financing activities
    
    
    (8,850
    )
    
    
    (635
    )
    
    
    
    
    
    
    
    
    
    
    (9,485
    )Intercompany transfers and dividends
    
    
    8,612
    
    
    
    (3,992
    )
    
    
    (4,620
    )Effects of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    (62
    )Net increase (decrease) in cash and cash
equivalents
    
    
    (242
    )
    
    
    405
    
    
    
    442
    
    
    
    
    
    
    
    605Cash and cash equivalents at beginning
of period
    
    
    742
    
    
    
    (742
    )
    
    
    726
    
    
    
    
    
    
    
    726Cash and cash equivalents at end of
period
    
    $
    500
    
    
    $
    (337
    )
    
    $
    1,168
    
    
    $
    
    
    
    $
    1,331


17



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##### Table of Contents



DAY INTERNATIONAL GROUP, INC.
SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003

DAYInter-
    
    
    
    
    
    Non-national
    
    Guarantor
    
    GuarantorGroup, Inc.
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash Flows From Operating Activities:Net income
    
    $
    3,521
    
    
    $
    3,556
    
    
    $
    5,991
    
    
    $
    (9,547
    )
    
    $
    3,521Adjustments to reconcile net income to
net cash provided by operating
activities:Depreciation and amortization
    
    
    
    
    
    
    6,284
    
    
    
    1,654
    
    
    
    
    
    
    
    7,938Equity in earnings of subsidiaries
    
    
    (3,556
    )
    
    
    (5,991
    )
    
    
    
    
    
    
    9,547Deferred income taxes and other
    
    
    
    
    
    
    (1,779
    )
    
    
    (252
    )
    
    
    
    
    
    
    (2,031
    )Foreign currency (gain) loss
    
    
    
    
    
    
    (1,927
    )
    
    
    808
    
    
    
    
    
    
    
    (1,119
    )Net (gain) loss on disposal of assets
    
    
    
    
    
    
    114
    
    
    
    660
    
    
    
    
    
    
    
    774Changes in operating assets and
liabilities
    
    
    96
    
    
    
    3,232
    
    
    
    (4,984
    )
    
    
    
    
    
    
    (1,656
    )Net cash provided by operating
activities
    
    
    61
    
    
    
    3,489
    
    
    
    3,877
    
    
    
    
    
    
    
    7,427Cash Flows From Investing Activities:Cash paid for acquisition
    
    
    
    
    
    
    (1,000
    )
    
    
    
    
    
    
    
    
    
    
    (1,000
    )Capital expenditures
    
    
    
    
    
    
    (2,025
    )
    
    
    (2,287
    )
    
    
    
    
    
    
    (4,312
    )Proceeds from sale of property
    
    
    
    
    
    
    939
    
    
    
    
    
    
    
    
    
    
    
    939Net cash used in investing activities
    
    
    
    
    
    
    (2,086
    )
    
    
    (2,287
    )
    
    
    
    
    
    
    (4,373
    )Cash Flows From Financing Activities:Payments on term loan
    
    
    (6,300
    )
    
    
    
    
    
    
    (47
    )
    
    
    
    
    
    
    (6,347
    )Net proceeds from revolving credit facility
    
    
    3,650
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,650Net cash provided by (used in)
financing activities
    
    
    (2,650
    )
    
    
    
    
    
    
    (47
    )
    
    
    
    
    
    
    (2,697
    )Intercompany transfers and dividends
    
    
    2,342
    
    
    
    (1,156
    )
    
    
    (1,186
    )Effects of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    82
    
    
    
    
    
    
    
    82Net increase (decrease) in cash and cash
equivalents
    
    
    (247
    )
    
    
    247
    
    
    
    439
    
    
    
    
    
    
    
    439Cash and cash equivalents at beginning
of period
    
    
    496
    
    
    
    (496
    )
    
    
    996
    
    
    
    
    
    
    
    996Cash and cash equivalents at end of
period
    
    $
    249
    
    
    $
    (249
    )
    
    $
    1,435
    
    
    $
    
    
    
    $
    1,435


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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

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
    
    Six Months2004
    
    2003
    
    2004
    
    2003$
    
    %
    
    $
    
    %
    
    $
    
    %
    
    $
    
    %Net sales
    
    
    88.8
    
    
    
    100.0
    
    
    
    70.1
    
    
    
    100.0
    
    
    
    178.5
    
    
    
    100.0
    
    
    
    139.0
    
    
    
    100.0Costs of goods sold
    
    
    56.7
    
    
    
    63.8
    
    
    
    45.3
    
    
    
    64.7
    
    
    
    113.1
    
    
    
    63.3
    
    
    
    89.5
    
    
    
    64.4Gross profit
    
    
    32.1
    
    
    
    36.2
    
    
    
    24.8
    
    
    
    35.3
    
    
    
    65.4
    
    
    
    36.7
    
    
    
    49.5
    
    
    
    35.6Selling, general and administrative expense
    
    
    19.8
    
    
    
    22.4
    
    
    
    15.4
    
    
    
    22.0
    
    
    
    39.9
    
    
    
    22.4
    
    
    
    30.0
    
    
    
    21.5Amortization of intangibles
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.0
    
    
    
    0.0
    
    
    
    0.4
    
    
    
    0.3Management fees
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.5
    
    
    
    0.3
    
    
    
    0.5
    
    
    
    0.4Operating profit
    
    
    12.0
    
    
    
    13.5
    
    
    
    8.9
    
    
    
    12.7
    
    
    
    25.0
    
    
    
    14.0
    
    
    
    18.6
    
    
    
    13.4


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Comparison of Results of Operations

Three Months Ended June 30, 2004, Compared to Three Months Ended June 30, 2003

Net sales increased $18.7 million (26.6%) to $88.8 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 $12.4 million of sales from businesses acquired in 2003. Sales
in 2004 were positively affected by increased sales volumes of $2.8 million in
the United States, increased sales volume of $0.1 million in Europe and $2.4
million of favorable changes in foreign currency rates used to translate
international sales into U.S. dollars. Image Transfers sales increased $18.5
million (32.1%) to $76.0 million. Image Transfers sales were positively
affected by increased sales volumes of $15.1 million in the United States and
$0.5 million in Europe and $2.0 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 $12.4
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. Textile Products sales increased
$0.2 million (1.8%) to $12.8 million, primarily as a result of slightly higher
sales volume in the United States of $0.1 million and by favorable foreign
currency rate changes of $0.4 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) and lower sales to Middle East markets.

Gross profit increased $7.3 million (29.6%) to $32.1 million. Foreign currency
rate changes increased gross profit by $0.9 million. As a percentage of net
sales, gross profit increased to 36.2% for the three months ended June 30,
2004, compared to 35.3% for the three months ended June 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 acquisitions in 2003, as
those businesses have historically had lower gross margin percentages than
Days businesses.

Selling, general and administrative expense (SG&A) increased $4.4 million
(28.8%) to $19.8 million, primarily as a result of SG&A associated with NDI of
$2.6 million and changes in foreign currency rates. As a percentage of net
sales, SG&A increased to 22.4% from 22.0%. Changes in foreign currency rates
increased SG&A costs by $0.5 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.

Operating profit increased $3.1 million (34.8%) to $12.0 million. As a
percentage of net sales, operating profit increased to 13.5% for the three
months ended June 30, 2004, from 12.7% for the comparable period in 2003. Image
Transfers operating profit increased $2.7 million (30.0%) to $11.8 million,
primarily as a result of higher sales volumes. As a percentage of net sales,
Image Transfers operating profit decreased to 15.5% for the three months ended
June 30, 2004, from 15.8% 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 $0.2 million (12.2%) to
$1.6 million. As a percentage of net sales, Textile Products operating profit
increased to 12.5% for the three months

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ended June 30, 2004, from 11.3% in 2003. Lower selling and administrative costs
in the United States favorably affected Textile Products operating profit in
2004 compared to 2003.

Other (income) expense was $(0.7) million and $0.5 million for the three months
ended June 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 gain of $0.4 million on the mark-to-market
of the euro-denominated Tranche A Term Loan.

The effective tax rate was 271.3% and 40.9% in 2004 and 2003. The effective tax
rate for 2004 is affected by the adoption of SFAS No. 150 and the
non-deductible preferred stock dividends now reflected as interest expense.
Adjusted for the preferred stock dividends, the effective tax rate would be
53.8% in 2004. The effective tax rate is further affected by foreign-sourced
dividends and income taxable in the United States and non-deductible expenses.

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 has no effect on the
net loss available to common shareholders, cash flows of the Company or the
Companys compliance with its debt covenants.

Six Months Ended June 30, 2003, Compared to Six Months Ended June 30, 2002

Net sales increased $39.6 million (28.5%) to $178.5 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. Sales in 2004
include $25.6 million of sales from businesses acquired in 2003. Sales in 2004
were positively affected by increased sales volumes of $5.3 million in the
United States and $7.3 million of favorable changes in foreign currency rates
used to translate international sales into U.S. dollars. Image Transfers sales
increased $39.8 million (35.2%) to $153.0 million. Image Transfers sales were
positively affected by increased sales volumes of $31.2 million in the United
States and $1.5 million in Europe and $5.9 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 $25.6
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. Textile Products sales decreased
$0.3 million (1.1%) to $25.6 million, primarily as a result of lower sales
volume in the United States of $0.4 million and in Europe of $1.4 million
offset by favorable foreign currency rate changes of $1.5 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

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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.

Gross profit increased $16.0 million (32.3%) to $65.4 million. Foreign currency
rate changes increased gross profit by $2.8 million. As a percentage of net
sales, gross profit increased to 36.7% for the six months ended June 30, 2004,
compared to 35.6% for the six months ended June 30, 2003.

Selling, general and administrative expense (SG&A) increased $10.0 million
(33.3%) to $39.9 million, primarily as a result of SG&A associated with NDI of
$5.0 million and changes in foreign currency rates. As a percentage of net
sales, SG&A increased to 22.4% from 21.6%. Changes in foreign currency rates
increased SG&A costs by $1.5 million in the first half of 2004 compared to the
first half of 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 $6.4 million (34.4%) to $25.0 million. As a
percentage of net sales, operating profit increased to 14.0% for the six months
ended June 30, 2004, from 13.4% for the comparable period in 2003. Image
Transfers operating profit increased $5.7 million (30.7%) to $24.4 million,
primarily as a result of higher sales volumes. As a percentage of net sales,
Image Transfers operating profit decreased to 15.9% for the six months ended
June 30, 2004, from 16.5% 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 $0.4 million (14.2%) to
$3.4 million. As a percentage of net sales, Textile Products operating profit
increased to 13.3% for the six months ended June 30, 2004, from 11.5% in 2003.
Lower selling and administrative costs in the United States favorably affected
textile Products operating profit in 2004 compared to 2003.

Other (income) expense was $(1.5) million and $(0.3) million for the six months
ended June 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 gain of $1.1 million 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 $1.1 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 208.8% and 38.7% in 2004 and 2003. The effective tax
rate for 2004 is affected by the adoption of SFAS No. 150 and the
non-deductible preferred stock dividends now reflected as interest expense.
Adjusted for the preferred stock dividends, the effective tax rate would be

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55.4% in 2004. The effective tax rate is further affected by foreign-sourced
dividends and income taxable in the United States and non-deductible expenses.

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 has 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 $3.1 million and $4.3 million for the six months
ended June 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 June 30, 2004, there was $0.5 million outstanding under the Revolving
Credit Facility and the Company had $18.6 million available under the Revolving
Credit Facility. The Companys aggregate indebtedness at June 30, 2004, is
$269.8 million and the aggregate liquidation preferences of the Exchangeable
Preferred Stock is $74.8 million and the Convertible Preferred Stock is $84.2
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.

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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
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 $8.1 million at June 30, 2004 and $15.9
million at December 31, 2003. The fair value of these contracts is a payable of
$0.2 million at June 30, 2004 and $0.7 million at December 31, 2003. These
contracts generally expire within three to twelve months. At June 30, 2004, the
Company has outstanding 24.0 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 $(0.5) million and $(0.6) million for
the three months ended June 30, 2004 and 2003 and $(0.9) million and $(1.4)
million for the six months ended June 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 receivable of $0.1 million
at June 30, 2004 and a payable of $0.3 million at 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.

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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 significantly 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 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 June 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 June 30, 2004, that would materially affect the control systems.

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PART II            OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a.
    
    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 Certificationb.
    
    Reports on Form 8-KOn June 7, 2004, the Company filed a Form 8-K reporting under Item 5 that
it had refinanced a portion of its outstanding long-term debt.





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: August 6, 2004
    
    /s/ Thomas J. KoenigThomas J. KoenigVice President andChief Financial Officer(Principal Financial Officer)


26