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 June 30, 2005

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. Yesþ Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

There were 23,323 Common Shares of the Company, $0.01 per share par value, outstanding as of August 1, 2005.

DAY INTERNATIONAL GROUP, INC.

INDEX


	Page
PART I FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004		3

Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004		4

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004		5

Notes to Condensed Consolidated Financial Statements		6

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations		19

Item 3.Quantitative and Qualitative Disclosures About Market Risk		23

Item 4.Controls and Procedures		25

PART II OTHER INFORMATION

Item 6. Exhibits		25

Signature		25
EX-31.1 302 Certification for CEO
EX-31.2 302 Certification for CFO
EX-32.1 906 Certification for CEO
EX-32.2 906 Certification for CFO

PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND DECEMBER 31, 2004
(In thousands)


	2005			2004
	(Unaudited)
ASSETS
Cash and cash equivalents	$	1,823		$	843
Accounts receivable (less allowance for doubtful accounts of $3,319 and $3,815)		49,380			51,967
Inventories (Note B)		51,529			50,334
Other current assets		18,798			17,812

Total current assets		121,530			120,956

Property, plant and equipment, net of accumulated depreciation of $65,236 and $61,592		70,377			74,735
Goodwill		142,472			143,444
Intangible assets, net of accumulated amortization of $42,570 and $40,203		16,472			18,842
Other assets		11,306			12,258

TOTAL ASSETS	$	362,157		$	370,235


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Accounts payable	$	6,254		$	11,020
Current maturities of long-term debt		4,545			4,576
Other current liabilities		27,648			33,466

Total current liabilities		38,447			49,062

Long-term and subordinated long-term debt		243,156			247,814
Other long-term liabilities		41,591			39,572
Redeemable preferred stock (Note D)		182,765			169,805

STOCKHOLDERS’ EQUITY (DEFICIT):
Common shares		1			1
Contra-equity associated with the assumption of majority shareholder’s bridge loan		(68,673	)		(68,673	)
Retained earnings (deficit)		(78,318	)		(75,201	)
Accumulated other comprehensive gain/(loss)		3,188			7,855

Total stockholders’ equity (deficit)		(143,803	)		(136,018	)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	362,157		$	370,235

See notes to condensed consolidated financial statements.

DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(In thousands)
(Unaudited)


	Three Months						Six Months
	2005			2004			2005			2004
NET SALES	$	91,390		$	88,807		$	181,309		$	178,520

COST OF GOODS SOLD		56,762			56,692			113,635			113,074


GROSS PROFIT		34,628			32,115			67,674			65,446

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE		20,087			19,853			40,609			39,953
AMORTIZATION OF INTANGIBLES		8			8			17			17
MANAGEMENT FEES		250			250			500			500


OPERATING PROFIT		14,283			12,004			26,548			24,976

OTHER EXPENSES:
Interest expense:
Long-term debt (including amortization of deferred financing costs and discount of $456, $436, $913, and $863)		5,650			5,646			11,117			11,282
Redeemable preferred stock dividends (including amortization of discount and issuance costs of $47, $47, $94, and $94)		6,518			5,628			12,946			11,190
Other (income) expense		(1,137	)		(663	)		(827	)		(1,541	)


INCOME BEFORE INCOME TAXES		3,252			1,393			3,312			4,045

INCOME TAX EXPENSE		3,800			3,779			6,429			8,446


NET INCOME (LOSS)	$	(548	)	$	(2,386	)	$	(3,117	)	$	(4,401	)

See notes to condensed consolidated financial statements.

DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(In thousands)
(Unaudited)


	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(3,117	)	$	(4,401	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		7,976			7,402
Interest expense—redeemable preferred stock dividends		12,946			11,190
Deferred income taxes		3,510			3,619
Equity in earnings of investees		(59	)		(148	)
Foreign currency (gain) loss		(1,684	)		(907	)
(Gain) loss on disposal of fixed assets		(8	)		(128	)
Change in operating assets and liabilities		(12,777	)		(3,413	)

Net cash provided by operating activities		6,787			13,214

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions		(426	)		(1,346	)
Capital expenditures		(3,643	)		(3,126	)
Proceeds from sale of property					1,410

Net cash (used in) investing activities		(4,069	)		(3,062	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options					25
Payment of deferred financing costs					(633	)
Payments on term loans		(1,979	)		(8,927	)
Net (payments on) proceeds from revolving credit facility		175			50

Net cash provided by (used in) financing activities		(1,804	)		(9,485	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		66			(62	)


Net increase (decrease) in cash and cash equivalents		980			605
Cash and cash equivalents at beginning of period		843			726


Cash and cash equivalents at end of period	$	1,823		$	1,331

See notes to condensed consolidated financial statements.

DAY INTERNATIONAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)

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 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, 2005 and December 31, 2004, consist of:


	2005		2004
Finished goods	$	25,514	$	24,384
Work in process		4,717		5,193
Raw materials		21,298		20,757

	$	51,529	$	50,334

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 was recognized. Remaining unamortized deferred financing fees and debt discount from the Tranche B and C Term Loans were added to the financing fees paid to the debtors and amortized over the term of the Tranche D Term Loan.

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. During the fourth quarter of 2004, the Exchangeable Preferred Stockholders elected two directors to the Board of Directors in accordance with their rights when dividends in arrears have not 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 were $19,958 as of June 30, 2005 and $15,043 as of December 31, 2004 which are included in the redeemable preferred stock balance.

E. 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 tax rates for 2004 were 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.

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. Segment detail for the three and six months ended June 30, 2005 follow.


	Three Months				Six Months
	2005		2004		2005		2004
Third party sales:
Image Transfer	$	79,702	$	75,963	$	157,515	$	152,966
Textile Products		11,688		12,844		23,794		25,554

Total	$	91,390	$	88,807	$	181,309	$	178,520


Segment operating profit:
Image Transfer	$	14,318	$	11,808	$	26,818	$	24,366
Textile Products		1,516		1,601		2,824		3,403

Total	$	15,834	$	13,409	$	29,642	$	27,769

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


	Three Months						Six Months
	2005			2004			2005			2004
Segment operating profit	$	15,834		$	13,409		$	29,642		$	27,769
APB No. 16 depreciation and amortization		(1,038	)		(999	)		(2,157	)		(1,998	)
Non-allocated corporate expenses		(254	)		(148	)		(420	)		(278	)
Amortization of intangibles		(9	)		(8	)		(17	)		(17	)
Management fees		(250	)		(250	)		(500	)		(500	)

Total operating profit	$	14,283		$	12,004		$	26,548		$	24,976

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, 2005 and 2004 was $(3,587) and $(3,865). Total comprehensive income/(loss) for the six months ended June 30, 2005 and 2004 was $(7,784) and $(6,144).

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.

I. STOCK-BASED COMPENSATION

As permitted by Statement of Financial Accounting Standards (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 options 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 Months
	2005			2004			2005			2004
Net income (loss)–as reported	$	(548	)	$	(2,386	)	$	(3,117	)	$	(4,401	)
Less–stock-based compensation expense determined using fair value based method in SFAS No. 123		(184	)		(195	)		(370	)		(390	)

Pro forma net income (loss)	$	(732	)	$	(2,581	)	$	(3,487	)	$	(4,791	)

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 Months
	2005		2004			2005		2004
Service cost	$	104	$	92		$	212	$	187
Interest cost		101		192			206		389
Expected return on plan assets		—		(84	)		—		(170	)
Actuarial loss recognized		13		9			26		19

Net periodic pension costs	$	218	$	209		$	444	$	425

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 Months
	2005			2004			2005			2004
Service cost	$	330		$	275		$	660		$	550
Interest cost		253			212			506			424
Amortization of prior service cost		(208	)		(160	)		(417	)		(320	)
Actuarial loss recognized		112			59			224			118

Net periodic postretirement benefit costs	$	487		$	386		$	973		$	772

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, 2005 and December 31, 2004, and the supplemental combining condensed statements of operations and cash flows for the three and six months ended June 30, 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.

DAY INTERNATIONAL GROUP, INC.

SUPPLEMENTAL COMBINING CONDENSED BALANCE SHEET
JUNE 30, 2005


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	378		$	—		$	1,445		$	—		$	1,823
Accounts receivable—net		—			21,926			27,454			—			49,380
Inventories		—			28,580			22,949			—			51,529
Other current assets		—			12,669			6,129			—			18,798

TOTAL CURRENT ASSETS		378			63,175			57,977			—			121,530
Intercompany		246,506			6,582			7,715			(260,803	)		—
Property, plant and equipment, net		—			40,845			29,532			—			70,377
Investment in subsidiaries		(12,350	)		71,386			(12,549	)		(46,487	)		—
Intangible and other assets		—			151,896			18,354			—			170,250

TOTAL ASSETS	$	234,534		$	333,884		$	101,029		$	(307,290	)	$	362,157


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Accounts payable	$	—		$	5,173		$	10,542		$	(9,461	)	$	6,254
Current maturities of long-term debt		4,434			—			111			—			4,545
Other current liabilities		3,296			9,901			14,451			—			27,648


TOTAL CURRENT LIABILITIES		7,730			15,074			25,104			(9,461	)		38,447
Intercompany		(54,229	)		296,808			(7,264	)		(235,315	)		—
Long-term and subordinated long-term debt		242,071			—			1,085			—			243,156
Other long-term liabilities		—			31,322			10,269			—			41,591
Redeemable preferred stock		182,765			—			—			—			182,765
Total stockholders’ equity (deficit)		(143,803	)		(9,320	)		71,835			(62,515	)		(143,803	)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	234,534		$	333,884		$	101,029		$	(307,209	)	$	362,157

DAY INTERNATIONAL GROUP, INC.

SUPPLEMENTAL CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 2004


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	(130	)	$	130		$	843		$	—		$	843
Accounts receivable—net		—			22,771			29,196			—			51,967
Inventories		—			29,264			21,070			—			50,334
Other assets		—			11,815			5,997			—			17,812


TOTAL CURRENT ASSETS		(130	)		63,980			57,106			—			120,956
Intercompany		250,993			3,997			555			(255,545	)		—
Property, plant and equipment—net		—			42,674			32,061			—			74,735
Investment in subsidiaries		(22,174	)		66,005			(12,535	)		(31,296	)		—
Intangible and other assets		—			154,984			19,560			—			174,544


TOTAL ASSETS	$	228,689		$	331,640		$	96,747		$	(286,841	)	$	370,235


LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Accounts payable	$	—		$	3,814		$	7,206		$	—		$	11,020
Current maturities of long-term debt		4,452			—			124			—			4,576
Other current liabilities		3,209			13,096			17,161			—			33,466


TOTAL CURRENT LIABILITIES		7,661			16,910			24,491			—			49,062
Intercompany		(59,301	)		300,853			(10,119	)		(231,433	)		—
Long-term and subordinated long-term debt		246,542			—			1,272			—			247,814
Other long-term liabilities		—			28,354			11,218			—			39,572
Redeemable preferred stock		169,805			—			—			—			169,805
Total 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

DAY INTERNATIONAL GROUP, INC.

SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries		Eliminations			Consolidated
Net sales	$	—		$	75,955		$	63,480	$	(48,045	)	$	91,390
Cost of goods sold		—			55,629			49,178		(48,045	)		56,762

Gross profit		—			20,326			14,302		—			34,628
Selling, general and administrative		—			11,913			8,174		—			20,087
Amortization of intangibles		—			8			—		—			8
Management fees		—			250			—		—			250


Operating profit (loss)		—			8,155			6,128		—			14,283
Other expenses (income):
Equity in (earnings) loss of subsidiaries		(5,967	)		(3,374	)		—		9,341			—
Interest expense		6,520			5,590			58		—			12,168
Other (income) expense		(6	)		(1,666	)		535		—			(1,137	)


Income (loss) before income taxes		(547	)		7,605			5,535		(9,341	)		3,252
Income tax expense (benefit)		1			1,638			2,161		—			3,800


Net income (loss)	$	(548	)	$	5,967		$	3,374	$	(9,341	)	$	(548	)

DAY INTERNATIONAL GROUP, INC.

SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries		Eliminations			Consolidated
Net sales	$	—		$	53,194		$	35,613	$	—		$	88,807
Cost of goods sold		—			33,978			22,714		—			56,692


Gross profit		—			19,216			12,899		—			32,115
Selling, general and administrative		16			12,514			7,323		—			19,853
Amortization of intangibles		—			8			—		—			8
Management fees		—			250			—		—			250


Operating profit (loss)		(16	)		6,444			5,576		—			12,004
Other expenses (income):
Equity in (earnings) loss of subsidiaries		(3,251	)		(3,018	)		—		6,269			—
Interest expense		5,628			5,635			11		—			11,274
Other (income) expense		(1	)		(1,208	)		546		—			(663	)


Income (loss) before income taxes		(2,392	)		5,035			5,019		(6,269	)		1,393
Income tax expense (benefit)		(6	)		1,784			2,001					3,779


Net income (loss)	$	(2,386	)	$	3,251		$	3,018	$	(6,269	)	$	(2,386	)

DAY INTERNATIONAL GROUP, INC.

SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2005


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries		Eliminations			Consolidated
Net sales	$	—		$	126,752		$	102,602	$	(48,045	)	$	181,309
Cost of goods sold		—			87,799			73,881		(48,045	)		113,635


Gross profit		—			38,953			28,721		—			67,674
Selling, general and administrative		—			23,902			16,707		—			40,609
Amortization of intangibles		—			17			—		—			17
Management fees		—			500			—		—			500


Operating profit (loss)		—			14,534			12,014		—			26,548
Other expenses (income):
Equity in (earnings) loss of subsidiaries		(9,824	)		(6,488	)		—		16,312			—
Interest expense		12,945			11,015			103		—			24,063
Other (income) expense		(6	)		(2,342	)		1,521		—			(827	)


Income (loss) before income taxes		(3,115	)		12,349			10,390		(16,312	)		3,312
Income tax expense (benefit)		2			2,525			3,902		—			6,429


Net income (loss)	$	(3,117	)	$	9,824		$	6,488	$	(16,312	)	$	(3,117	)

DAY INTERNATIONAL GROUP, INC.

SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries		Eliminations			Consolidated
Net sales	$	—		$	106,143		$	72,377	$	—		$	178,520
Cost of goods sold		—			67,454			45,620		—			113,074


Gross profit		—			38,689			26,757		—			65,446
Selling, general and administrative		17			25,243			14,693		—			39,953
Amortization of intangibles		—			17			—		—			17
Management fees		—			500			—		—			500


Operating profit (loss)		(17	)		12,929			12,064		—			24,976
Other expenses (income):
Equity in (earnings) of subsidiaries		(6,797	)		(6,362	)		—		13,159			—
Interest expense		11,190			11,266			16		—			22,472
Other (income) expense		(4	)		(3,339	)		1,802		—			(1,541	)

Income (loss) before income taxes		(4,406	)		11,364			10,246		(13,159	)		4,045
Income tax expense (benefit)		(5	)		4,567			3,884		—			8,446


Net income (loss)	$	(4,401	)	$	6,797		$	6,362	$	(13,159	)	$	(4,401	)

DAY INTERNATIONAL GROUP, INC.

SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash Flows From Operating Activities:
Net income (loss)	$	(3,117	)	$	9,824		$	6,488		$	(16,312	)	$	(3,117	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		—			5,771			2,205			—			7,976
Interest expense—redeemable preferred stock dividends		12,946			—			—			—			12,946
Equity in earnings of subsidiaries		(9,824	)		(6,488	)		—			16,312			—
Deferred income taxes and other		—			3,640			(130	)		—			3,510
Equity in earnings of investees		—			(59	)		—			—			(59	)
Foreign currency (gain) loss		—			(29	)		(1,655	)		—			(1,684	)
(Gain) loss on disposal of fixed assets		—			—			(8	)		—			(8	)
Changes in operating assets and liabilities		86			1,223			(14,086	)		—			(12,777	)

Net cash provided by (used in) operating activities		91			13,882			(7,186	)		—			6,787

Cash Flows From Investing Activities:
Cash paid for acquisitions		—			(426	)		—			—			(426	)
Capital expenditures		—			(1,533	)		(2,110	)		—			(3,643	)
Proceeds from sale of property		—			—			—			—			—

Net cash (used in) investing activities		—			(1,959	)		(2,110	)		—			(4,069	)

Cash Flows From Financing Activities:
Proceeds from exercise of stock options
Payment of deferred financing fees
Payments on term loans		(1,919	)		—			(60	)		—			(1,979	)
Net proceeds from credit facilities		175			—			—			—			175

Net cash provided by (used in) financing activities		(1,744	)		—			(60	)		—			(1,804	)

Intercompany transfers and dividends		2,161			(12,053	)		9,892			—			—
Effects of exchange rates on cash		—			—			66			—			66

Net increase (decrease) in cash and cash equivalents		508			(130	)		602		—			980
Cash and cash equivalents at beginning of period		(130	)		130			843			—			843

Cash and cash equivalents at end of period	$	378		$	—		$	1,445		$	—		$	1,823

DAY INTERNATIONAL GROUP, INC.

SUPPLEMENTAL COMBINING CONDENSED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004


	DAY
	Inter-						Non-
	national			Guarantor			Guarantor
	Group, Inc.			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash 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			—			7,402
Interest expense—redeemable preferred stock dividends		11,190			—			—			—			11,190
Equity in earnings of subsidiaries		(6,797	)		(6,362	)		—			13,159			—
Deferred income taxes and other		—			4,912			(1,293	)		—			3,619
Equity 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			—			13,214

Cash 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			—			1,410

Net cash (used in) investing activities		—			(2,948	)		(114	)		—			(3,062	)

Cash Flows From Financing Activities:
Proceeds from exercise of stock options		25			—			—			—			25
Payment of deferred financing fees		—			(633	)		—			—			(633	)
Payments on term loans		(8,925	)		(2	)		—			—			(8,927	)
Net proceeds from credit facilities		50			—			—			—			50

Net 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			—			605
Cash and cash equivalents at beginning of period		742			(742	)		726			—			726

Cash and cash equivalents at end of period	$	500		$	(337	)	$	1,168		$	—		$	1,331

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								Six Months
	2005				2004				2005				2004
	$		%		$		%		$		%		$		%
Net sales		91.4		100.0		88.8		100.0		181.3		100.0		178.5		100.0
Costs of goods sold		56.8		62.1		56.7		63.9		113.6		62.7		113.1		63.3

Gross profit		34.6		37.9		32.1		36.1		67.7		37.3		65.4		36.7
Selling, general and administrative expense		20.1		22.0		19.9		22.4		40.6		22.4		39.9		22.4
Amortization of intangibles		0.0		0.0		0.0		0.0		0.0		0.0		0.0		0.0
Management fees		0.2		0.2		0.2		0.2		0.5		0.3		0.5		0.3

Operating profit		14.3		15.7		12.0		13.5		26.6		14.6		25.0		14.0

Comparison of Results of Operations

Three Months Ended June 30, 2005, Compared with Three Months Ended June 30, 2004

Net sales increased $2.6 million, or 2.9%, to $91.4 million primarily due to increased sales volume, the impact of price increases in selected product lines, and favorable changes in foreign currency rates. Foreign currency rate changes used to translate international sales into U.S. dollars contributed $1.7 million to sales. Image Transfer sales increased $3.7 million, or 4.9%, to $79.7 million. Image Transfer sales were positively affected by $1.4 million from the effect of changes in foreign currency rates, price increases in selected product lines, and increased sales volume outside the United States. Partially offsetting these increases were lower flat-blanket sales volume in the United States, primarily of competitors’ brands that are sold through the Company’s NDI distribution channel. Textile Products segment sales decreased $1.2 million, or 9.0%, to $11.7 million, primarily as a result of lower sales volume in the United States of $0.3 million and by lower sales volume in Europe of $1.1 million, partially offset by favorable foreign currency rate changes of $0.3 million.

Gross profit increased $2.5 million, or 7.8% to $34.6 million. Foreign currency rate changes increased gross profit by $0.6 million. As a percentage of net sales, gross profit increased to 37.9% for the three months ended June 30, 2005, compared with 36.1% for the three months ended June 30, 2004.

Selling, general and administrative expense (“SG&A”) increased $0.2 million, or 1.0%, to $20.1 million, primarily as a result of changes in foreign currency rates. As a percentage of net sales, SG&A decreased to 22.0% from 22.4%. Changes in foreign currency rates increased SG&A costs by $0.4 million compared with 2004.

Operating profit increased $2.3 million, or 19.2%, to $14.3 million. As a percentage of net sales, operating profit increased to 15.7% for the three months ended June 30, 2005, versus 13.5% for the comparable period in 2004. Image Transfer’s operating profit increased $2.5 million, or 21.2%, to $14.3 million, primarily as a result of higher sales volume, the impact of selected price increases, and continued focus on operational improvements. As a percentage of net sales, Image Transfer’s operating profit increased to 18.0% for the three months ended June 30, 2005, from 15.5% in 2004. Textile Products’ operating profit decreased $0.1 million, or 5.3%, to $1.5 million. As a percentage of net sales, Textile Products’ operating profit increased to 13.0% for the three months ended June 30, 2005, from 12.5% in 2004.

Other (income)/expense was ($1.6) million and ($0.7) million for the three months ended June 30, 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 includes gains of $1.7 million, in 2005, and $0.4 million, in 2004, on the mark-to-market of the euro-denominated Tranche A Term Loan.

The effective tax rate was 102.7% and 271.3% in 2005 and 2004. The high effective tax rates are due to the adoption of SFAS No. 150 that requires non-deductible preferred stock dividends to be reflected as interest expense. Excluding the preferred stock dividends, the effective tax rate would have been 37.2% in 2005. The effective tax rate in 2004 was further impacted by foreign-sourced dividends.

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 SFAS No. 123 (Revised) effective January 1, 2005. As a result of the deferred effective date, the Company elected to continue accounting for its share-based payments under SFAS No. 123.

Six Months Ended June 30, 2005, Compared with Six Months Ended June 30, 2004

Net sales increased $2.8 million, or 1.6%, to $181.3 million, primarily as a result of favorable changes in foreign currency rates, higher sales volume in Europe and the United States, and the impact of price increases in selected product lines. Favorable changes in foreign currency rates used to translate international sales into U.S. dollars contributed $3.3 million. Image Transfer’s sales increased $4.5 million, or 3.0%, to $157.5 million. Image Transfer’s sales were positively affected by increased sales volumes in Europe and the United States, the impact of price increases on selected product lines, and $2.7 million as a result of the effect of changes in foreign currency rates. Partially offsetting these increases were lower flat-blanket sales volume in the United States, primarily of competitors’ brands that are sold through the Company’s NDI distribution channel. Textile Products’ sales decreased $1.8 million, or 6.9%, to $23.8 million, partly offset by favorable foreign currency rate changes of $0.6 million.

Gross profit increased $2.3 million, or 3.5%, to $67.7 million. Foreign currency rate changes increased gross profit by $1.2 million. As a percentage of net sales, gross profit increased to 37.3% for the six months ended June 30, 2005, compared with 36.7% for the six months ended June 30, 2004.

Selling, general and administrative expense (“SG&A”) increased $0.7 million, or 1.8%, to $40.6 million, primarily as a result of changes in foreign currency rates. As a percentage of net sales, SG&A did not change from the 22.4% reported in 2004. Changes in foreign currency rates increased SG&A costs by $0.7 million in the first half of 2005 compared with the first half of 2004.

Operating profit increased $1.6 million, or 6.4%, to $26.6 million. As a percentage of net sales, operating profit increased to 14.6% for the six months ended June 30, 2005, from 14.0% for the comparable period in 2004. Image Transfer’s operating profit increased $2.5 million, or 10.1%, to $26.8 million, primarily as a result of higher sales volume, the impact of selected price increases, and continued focus on operational improvements. As a percentage of net sales, Image Transfer’s operating profit increased to 17.0% for the six months ended June 30, 2005, from 15.9% in 2004. Textile Products’ operating profit decreased $0.6 million, or 17.0%, to $2.8 million. As a percentage of net sales, Textile Products’ operating profit decreased to 11.9% for the six months ended June 30, 2005, from 13.3% in 2004.

Other (income)/expense was ($1.3) million and ($1.5) million expense for the six months ended June 30, 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 2005 includes a gain of $2.8 million on the mark-to-market of the euro-denominated Tranche A Term Loan and $1.0 million of expenses from a discontinued acquisition. 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.

The effective tax rate was 171.0% and 208.8% in 2005 and 2004. The high effective tax rates are affected by SFAS No. 150 that requires non-deductible preferred stock dividends to be reflected as interest expense. Adjusted for the preferred stock dividends, the effective tax rate would be 38.5% in 2005. The effective tax rate in 2004 is further affected by foreign-sourced dividends.

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 $4.2 million and $3.1 million for the six months ended June 30, 2005 and 2004.

As of June 30, 2005, there was $1.2 million outstanding under the Revolving Credit Facility and the Company had $18.8 million available under the Revolving Credit Facility. The Company’s aggregate indebtedness at June 30, 2005 is $247.7 million and the aggregate liquidation preferences of the Exchangeable Preferred Stock is $84.4 million and the Convertible Preferred Stock is $99.3 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.

The Company’s debt agreements contain certain financial covenants regarding a consolidated leverage ratio, a consolidated senior debt ratio, a consolidated interest coverage ratio, a consolidated fixed charge coverage ratio, and a limitation on capital expenditures. As of June 30, 2005, the Company remained in compliance with all debt covenants and none of the covenants were materially restrictive.

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 $8.6 million at June 30, 2005 and $9.5 million at December 31, 2004. These contracts generally expire within three to twelve months. At June 30, 2005 and December 31, 2004, the Company had outstanding €19.3 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 with the U.S. dollar. Foreign currency transaction (gains)/losses included in other (income)/expense were $1.4 million income and $0.5 million income for the three months ended June 30, 2005 and 2004 and $2.1 million income and $0.9 million income for the six months ended June 30, 2005 and 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 2004, 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 $0.3 million at June 30, 2005 and a receivable of $0.2 million at December 31, 2004. The Company does not expect changes in interest rates to have a material effect on income or cash flows in 2005, although there can be no assurance that interest rates will not materially change.

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 has established disclosure controls and procedures to ensure that material information relating to the Company is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors. As a result of changes in the Company’s corporate controller position, the Company was unable to complete its timely review of the Company’s financial reports for the quarter ended June 30, 2005 and as a result filed a Form 12b-25 Notification of Late Filing on August 16, 2005. Management has now completed its review of the Company’s financial reports and, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, management concluded that as of June 30, 2005 the Company’s disclosure controls and procedures were not effective solely for the reason noted above. Management has taken actions to prevent a delay from occurring in future periods and believes that the Company’s disclosure controls and procedures are now effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities Exchange Commissions rules and forms.

Except as noted above, there were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2005 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 6. EXHIBITS

a. Exhibits

(31) Rule 13a-14(a)/15d-14(a) Certifications


31.1		Chief Executive Officer Certification

31.2		Chief Financial Officer Certification

(32) Section 1350 Certifications


32.1		Chief Executive Officer Certification

32.2		Chief Financial Officer Certification

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	Day International Group, Inc. (Registrant)
Date: August 19, 2005	/s/ Thomas J. Koenig
	Thomas J. Koenig
	Vice President and Chief Financial Officer (Principal Financial Officer)

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

DAY INTERNATIONAL GROUP INC 10-Q