Day International Group, Inc. 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Year ended December 31, 2005

Commission File No. 333-51839

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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No þ

Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer”in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o No þ


At the close of business on March 1, 2006:
Number of shares of common stock outstanding		24,823
Aggregate market value of the Company’s voting and non- voting common stock held by non-affiliates	$	0

DOCUMENTS INCORPORATED BY REFERENCE – None

Except as otherwise stated or unless the context otherwise requires, references to the “Company” or “Day” include Day International Group, Inc., a Delaware corporation that is the Registrant, and each of its subsidiaries. The Company’s address is P.O. Box 338, 130 West Second Street, Dayton, Ohio 45401-0338, and its telephone number is (937) 224-4000. The Company’s periodic reports filed with the Securities and Exchange Commission (“SEC”) are available at the SEC’s website (www.sec.gov).

Except as otherwise stated, the information contained in this report is given as of December 31, 2005, the end of the Company’s latest fiscal year.

Safe Harbor Statement; Industry Data

This Annual 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 international countries, including the translation of operating results to the U.S. dollar; (iii) the timely development and market acceptance of new products; (iv) the effect of competitive products and pricing; (v) the effect of changing general and industry specific economic conditions; (vi) the effect of environmental regulations; and (vii) the potential for technology obsolescence.

While made in good faith and with a reasonable basis based on information currently available to the Company’s management, there is no assurance that any such forward-looking statements will be achieved or accomplished. The Company is under no obligation to update any forward-looking statements to the extent it becomes aware that they are not achieved or likely to be achieved for any reason.

Market data used throughout this report was obtained from internal company surveys and industry publications. Industry publications generally indicate that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. The Company has not independently verified any of such market data. Similarly, internal company surveys, while believed by the Company to be reliable, have not been verified by any independent sources.

TABLE OF CONTENTS


PART I
	ITEM 1. BUSINESS
	ITEM 1a. RISK FACTORS
	ITEM 1b. UNRESOLVED STAFF COMMENTS
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
	ITEM 6. SELECTED FINANCIAL DATA
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
	ITEM 9A. CONTROLS AND PROCEDURES
	ITEM 9B. OTHER INFORMATION
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	ITEM 11. EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
	Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Signatures
	INDEX TO EXHIBITS
EX-21 Subsidiaries
EX-31.1 Certification
EX-31.2 Certifications
EX-32.1 Certifications
EX-32.2 Certifications

PART I

ITEM 1. BUSINESS

Company Background

The Company is one of the world’s leading producers of 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 yarn spinning industry. The Company consists of two segments: the Image Transfer segment and the Textile Products segment. The Image Transfer segment consists of the Transfer Media division, the Chemical Products division and the Flexographic Products division. The Transfer Media division is the world’s largest designer, manufacturer and marketer of high-quality printing blankets and sleeves for use in offset printing and a leading designer and manufacturer of consumable sleeves for digital press applications. The Company estimates that in 2004 it had the number one market share in offset-printing blankets and sleeves in North America and worldwide. The Chemical Products division is a leading worldwide supplier of pressroom chemicals to the printing industry and also manufactures the Kompac brand of automatic dampening systems for printing presses. The Flexographic Products division is one of the world’s largest manufacturers and marketers of sleeves for use in flexographic printing. As a result of the acquisition of Network Distribution International (“NDI”) on November 24, 2003, the Image Transfer Segment is the largest converter of offset blankets in the United States and is a leading distributor of a broad range of pressroom chemicals and various ancillary products used in the pressroom. The Textile Products segment is one of the world’s largest manufacturers and marketers of precision engineered rubber cots, aprons and other fabricated rubber fiber handling components sold to the yarn spinning and glass-forming industries worldwide.

Affiliates of GSC Partners and SG Capital Partners LLC own substantially all of the common stock of the Company, with the Company’s management holding the balance of the common stock.

See the Notes to the Consolidated Financial Statements for more information on business segments and geographic areas.

Image Transfer

The Image Transfer segment specializes in selling consumable products to the graphic arts (printing) industry, primarily those used in offset printing. Offset is the primary printing process for long-run, high-speed applications, such as the printing of magazines, annual reports, catalogs, direct mail and newspapers. Flexographic and digital printing processes are currently used primarily in short-run, lower speed applications, such as for printing brochures and packaging material. The Company believes that applications for image transfer products within flexographic and digital printing processes will increase significantly and that advances in digital technologies will complement offset printing processes and will provide additional opportunities for consumable products. It is generally expected that the demand for these processes will grow rapidly and that they will be used for an increasing amount of printing jobs. If these other technologies develop so that they compete effectively with offset printing in the high-speed, long-run segment of the printing industry, and such technologies are widely adopted, the business of Image Transfer could be adversely affected. The Company manufactures certain

consumables for the digital printing market and, in conjunction with the original equipment manufacturers (“OEMs”), continues to develop additional products such as blankets, sleeves and belts for new printing machine technologies. Due to the large number of offset printing presses installed and the relative cost-effectiveness of the offset printing process, management expects that the offset process will continue to be the method of choice for long high-quality low-cost runs. Products designed for use in offset printing generate the majority of the sales of Image Transfer.

Transfer Media

Offset printing blankets are highly engineered products manufactured to narrow tolerances and precise specifications. They are composed of multiple layers of fabric, rubber and adhesives that determine performance features on the printing press and overall quality of the printing job. Offset printing sleeves are highly engineered “tubular” blankets that operate at speeds 20% to 30% faster than those of standard presses. Blankets and sleeves accept ink from cylindrical printing plates and transfer it to a broad range of paper stocks and other substrates. Blankets and sleeves are a major determinant of the quality of the image resolution and consistency of the printed material, as they are required to perform consistently over a broad range of press speeds and printing pressures with a wide variety of papers, inks and other chemicals. Blankets and sleeves are consumable and are replaced at regular intervals depending on the process used and printing requirements. Due to the importance of blankets and sleeves in determining the overall quality of the printing job, and because their cost typically represents less than 1% of the cost of the printed page, price is only one of the factors in the end-user’s purchase decision.

Chemical Products

Chemical Products manufactures two categories of products: pressroom chemicals and dampening systems. Chemical Products manufactures over 100 different pressroom chemicals, which can be classified into the following categories: (i) roller and blanket washes, which are used to remove ink and glaze from the surface of the rollers and blankets on the printing press; (ii) fountain solutions, which are used to prevent ink from migrating to non-print areas of the printing plate; (iii) anti-setoff powders, which are used by sheet fed and letter press printers to prevent ink from transferring from the top of one sheet to the bottom of the next; (iv) lithographic chemicals and specialties; (v) silicones, which are used in heatset web offset to provide support in certain printing processes; and (vi) coatings. Chemical Products’ products can be grouped into standard and custom products. Product lines are formulated to meet specific customer requirements. For example, high volume printing operations, such as major daily newspapers and commercial heatset web, often require custom fountain solutions.

Flexographic Products

The Company manufactures products for flexographic printing including fiberglass-based plate mounting sleeves, bridge mandrels, sleeves for coating applications, ready-to-image products and various support products. The Company’s traditional flexographic sleeves are constructed with a unique compressible technology that allows for greater flexibility in the printing of packaging materials, such as plastic or cardboard. In addition, the compressible sleeve offers the flexographic printer significant time and cost improvements over the traditional method of affixing a photopolymer plate to the metal cylinder.

Products

The Company manufactures a full line of high-quality, name brand printing blankets and sleeves to both web-fed (continuous roll) and sheet-fed (individual sheet) offset printers under the “Day,” “David M,” and “IPT” brands. In addition, through NDI, it offers certain name-brand blankets produced by competitors. The Company’s printing blankets and sleeves are used to print magazines, advertising material, business forms, packaging, newspapers and other printed material. As a result of the superior quality, reliability and value of the Company’s printing blankets and sleeves and its customer service, the Company is able to command premium prices for its products.

The Company’s leading printing blankets are the 9500 dayGraphica^{^®}, 4000 dayGraphica^{^®}, 3000 Patriot^{^®}, Durazone^{^®}, 3610 dayGraphica^{^®}, 8500 AccuDot^{^®}, QuantaLith^{^®} Gold and QuantaLith^{^®} Blue lines, which produce high-quality images, particularly on high-speed printing presses. The Company is the sole manufacturer of tubular, seamless printing sleeves for use on Goss International Corporation’s (formerly Heidelberg Web Systems) “gapless” web offset presses.

The Company produces consumable products for digital printing presses. Sales of these products are expected to grow as digital printing presses are sold that utilize these products. The Company is evaluating the production of other prototypes for new short-run color printing processes in conjunction with leading OEMs.

Transfer Media also manufactures and sells two lines of specialty products consisting of (i) pre-inked porous rolls for use in business machines, automated bank teller machines, ticket machines and credit card imprinters and (ii) cast urethane mats used by the box board corrugating industry as a backing material in cutting operations. The Company also sells printing accessories such as cylinder packing papers and aluminum bars for mounting blankets onto press cylinders. In addition, the Company sells custom rubber compounds to several wire coaters in Europe.

Chemical Products has developed products that speed wash-up, color changes and blanket and roller maintenance. All are formulated to reduce downtime and improve productivity. Roller and blanket washes are used to remove ink and glaze from the surface of the rollers and blankets on the printing press. Chemical Products makes over 25 washes, grouped into five different categories: premium, environmental, general purpose, fast drying and specialty. Chemical Products is a market leader in the area of environmentally friendly washes.

Chemical Products has created a family of fountain solutions, which are used to prevent ink from migrating to non-print areas of the printing plate, to cover all requirements from high-speed web printing presses down to small offset duplicating printing presses. The fountain solutions and fountain additives are adjusted for water condition and properly balanced and fortified to improve print quality and press productivity. Chemical Products has created a line of alcohol-free fountain solutions formulated to eliminate the use of isopropyl alcohol from the process, thus improving the pressroom environment.

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

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

Silicones are used in heatset web offset printing to provide slip to the sheet as it passes over the former board. Chemical Products offers an extensive line of conventional silicones, as well as new technology silicones.

Chemical Products also manufactures the patented Kompac Dampening System and other mechanical devices for offset printing presses. Chemical Products manufactures six different Kompac Dampening Systems models to fit more than eight different presses, both for new and retrofit applications. Kompac Dampening Systems consume other products manufactured by Chemical Products, such as fountain solutions.

Flexographic Products manufactures a wide array of sleeves used in the flexographic printing process under the Rotec name. Rotec gained industry prominence in 1993 with the introduction of the compressible sleeve, a product innovation enabling flexographic printers to achieve higher levels of print quality. The base technology for the flexographic sleeve has the potential for use in other printing segments as well (e.g., gravure and offset), which may expand the market segments for sleeve technology. The Company has entered into an exclusive agreement with E. I. du Pont de Nemours and Company to develop and manufacture an “in-the-round” sleeve under the Cyrel^{^®} brand name for flexographic presses. The Company will manufacture sleeves with a seamless photopolymer plate using DuPont’s proprietary Cyrel photopolymer technology.

Sales and Distribution

Image Transfer has adopted an integrated approach to product development, marketing, sales and distribution. The Company’s sales professionals, located throughout the world, develop and cultivate strong customer relationships and possess superior technical expertise. In certain regions, independent sales representatives and distributors complement the Company’s sales force.

Image Transfer’s sales force calls directly on end-users and promotes the quality and technical features of the Company’s products to pressroom foremen, purchasing agents, plant managers and press operators. Depending on the market and product, the end-users can then order directly from the Company or through authorized converters or dealers. Image Transfer distributes a majority of its products through its own converting operation (NDI) as well as through a large network of independent converters, who buy and cut printing blanket rolls to customized orders and dealers and sub-dealers who buy finished products, store inventory and hold receivables. Converters are value-added dealers who typically purchase rolls of uncut printing blankets from the Company and then cut, finish and package the blankets for sale to dealers or end-users. The Company believes that it has one of the most effective networks of converters and dealers in the industry. While the Company distributes a substantial portion of its products directly to end-users, the sales force supports and works closely with independent converters and dealers through joint calling efforts on end-users and training programs. In addition, sales and technical associates work directly with large end-users to identify the printing blankets and sleeves that best suit a printer’s particular needs and to formulate solutions to complex printing problems. NDI distributes products manufactured by the Company, as well as other blanket manufacturers.

Textile Products

The Textile Products segment manufactures highly engineered rubber rollers, known as cots, and flexible belts, known as aprons, for utilization on yarn spinning machinery, which produces yarn used in

the apparel, home furnishing, carpet and industrial fabric industries. In addition, the Company manufactures consumable aprons used to apply sizing to fiberglass filament during the glass-forming process. As a result of continuing technological improvements in automated high-speed spinning frames, customers continue to demand cots and aprons of higher quality and greater flexibility to meet their specialized needs and are typically willing to pay a premium for cots and aprons that meet their value equation. The Company is known as a leader in technological innovation and quality and has the broadest line of spinning cots and aprons of any global cots and aprons manufacturer.

Products

The Company offers its customers both general purpose and specialty cots and aprons recognized in the global marketplace under the DAYtex^{^®} and Accotex^{^®} brand names, with over 4,000 different SKUs. General-purpose cots and aprons include a full line of products designed for “short staple” fibers (such as cotton) and “long staple” fibers (such as wool), while specialty cots and aprons include glass-forming aprons, cordless aprons and drawing cots. The Company provides high-quality, precision-engineered products that deliver superior value to its customers. As a result, Textile Products has been an industry leader in quality and performance, allowing the Company to command premium pricing for its products.

Because of changes in the spinning process, increasing machine speeds and other rigorous process demands, spinning industry suppliers are constantly challenged to improve the precision, quality and consistency of their products. The Company continues to introduce highly engineered cots and aprons targeted to the texturing, high-speed ring and air-jet spinning markets and to the quickly growing compact spinning market. Products such as aluminum-lined cots provide improved rigidity and tolerance and have been widely accepted in the marketplace. Cots and aprons for these applications face ever-increasing performance and durability demands and DAYtex and Accotex products have been acknowledged as being technical leaders in these applications.

Other products and services include ribbons (take-up roll covering), various other accessories and reconditioning services.

Textile Products’ product development has allowed the Company to diversify into new markets. The Company’s glass-forming aprons are used to make glass fiber from liquid glass, and texturizing aprons are used to finish certain types of synthetic filaments. Textile Products also manufactures and markets rubber shrinkage belts for use in fabric pre-shrinking processes, such as those used for denim, as well as rubber-covered industrial rollers for textile and other industrial applications.

Sales and Distribution

The Company believes that the quality, technical proficiency and experience of its Textile Products sales force distinguishes its marketing efforts from those of competitors. Textile Products’ sales professionals have extensive knowledge of the spinning and weaving process. The sales force, located throughout the world (including Europe, China and the United States), markets its products directly to end-users, primarily textile mills, and original equipment manufacturers. In certain regions, independent sales representatives complement the Company’s sales force.

Raw Materials

Rubber polymers are a key component in most of the products of Transfer Media and Textile Products. The Chemical Products division purchases approximately 200 different raw materials from a variety of key national suppliers, and holds supply agreements with many of them. However, no single supplier accounts for more than 10% of total raw material costs. The largest raw material component for Chemical Products is petroleum distillates, such as aliphatics and aromatics. Raw material purchases accounted for approximately 50% of cost of goods sold for the Company’s products during 2005, 2004 and 2003. Various fabrics and rubber represented approximately 30% of all raw materials purchased in each of 2005, 2004 and 2003. The Company has developed contingency plans to address supply line disruptions, including identifying alternative sources and maintaining a safety stock of critical raw materials.

The Company is exposed to fluctuations in petroleum prices on certain raw material costs and historically has been able to pass on price increases to customers.

The Company purchases its raw material requirements from a number of suppliers on a purchase order basis, and the Company believes that there are sufficient sources of supply for the foreseeable future.

Research and Development

The research and development staff is focused on current product and process improvement efforts, as well as development of new consumables for future Image Transfer and Textile Products processes. The Company’s active patents have been important to its existing product line, and increased emphasis is being placed on new product technologies. Active efforts to obtain additional patents are underway on a variety of technologies, including certain process patents.

In addition to its extensive patent and trademark portfolio, the Company has a variety of working agreements with key partners in the image transfer business. These agreements and other efforts with original equipment manufacturers may stimulate proprietary processes and additional patent applications. In 2004, Heidelberger Druckmaschinen AG sold their web offset press business to Goss International Corporation and their 50%-ownership in Nexpress Solutions LLC to Eastman Kodak Co. The Company has long-standing relationships with both of these companies and expects these relationships to continue.

Competition

The Company competes with a number of manufacturers in the image transfer and textile components industries, with the main competitive factors being quality, performance, service and price. The Company competes with a number of manufacturers of offset printing blankets, including Reeves

International, Incorporated (“Reeves”), Polyfibron Technologies, Inc. (“Polyfibron”), a subsidiary of MacDermid, and Kinyosha Printing Company, Ltd. Chemical Products competes with a number of manufacturers of pressroom chemicals, of which the principal competitors are Anchor Chemical Company, Rycoline, Inc. (acquired by Sun Chemical Corporation in 2004) and Printers’ Service (PRISCO). In the United States, NDI competes with several distributors, many of which are customers of the Company. Rotec’s principal competitors are Rossini S.p.A., Polywest Kunststofftechnik, and Axcyl Inc., a subsidiary of Polyfibron. Accel Graphics, a division of Parmarco Technologies Inc., is the only main competitor to the Kompac line.

In Textile Products, the Company competes with manufacturers such as Hokushin Corporation, Yamauchi Corp. and Berkol, a division of Huber+Suhner AG.

Some of the Company’s competitors may have greater financial and other resources than the Company and may consequently have more operating flexibility and a greater ability to expand production capacity and increase research and development expenditures.

International Operations

The Company’s principal international manufacturing facilities are located in Dundee, Scotland (Transfer Media), Ahaus, Germany (Flexographic Products), Manchester, England (Chemical Products) and Münster, Germany (Textile Products). In addition, the Company maintains facilities in Australia, Brazil, Czech Republic, China/Hong Kong, France, Germany, Italy, Malaysia, Mexico and Russia.

The Company manufactures and markets its products worldwide through several international subsidiaries and independent agents. The Company’s worldwide operations are subject to the risks normally associated with international operations including, but not limited to, the disruption of markets, changes in export or import laws, restrictions on currency exchanges, and the modification or introduction of other governmental policies with potentially adverse effects.

Approximately 50% of the Company’s 2005 sales were derived from products sold to customers outside the United States. This has increased from 48% in 2004 and decreased from 53% in 2003. The U.S. dollar value of these revenues varies with currency exchange rate fluctuations, and the Company may be exposed to gains or losses based upon such fluctuations. Significant increases in the value of the U.S. dollar relative to foreign currencies could have an adverse effect on the Company’s ability to meet interest and principal obligations on its U.S. dollar-denominated debt. The Company periodically enters into forward foreign exchange contracts to protect it against a portion of such foreign exchange movements.

Environmental Matters

The Company’s facilities in the United States are subject to federal, state and local environmental laws and regulations, including those governing discharges to the air and water, the handling and disposal of solid and hazardous wastes, and the remediation of contamination associated with releases of hazardous substances. International facilities are subject to their respective countries’ federal and local environmental requirements, as well as the environmental requirements promulgated by the European Union, where applicable. The Company has made, and will continue to make, expenditures to comply with current and future environmental requirements. Environmental requirements are becoming

increasingly stringent, and therefore the Company’s expenditures for environmental compliance may increase in the future.

Based on environmental assessments conducted by independent environmental consultants, the Company believes that its operations are currently in compliance with environmental laws and regulations, except as would not be expected to have a material adverse effect on the Company. However, there can be no assurances that environmental requirements will not change in the future or that the Company will not incur significant costs in the future to comply with such requirements. In addition, the Company’s operations involve the handling of toluene and other hazardous substances, and if a release of hazardous substances occurs on or from the Company’s facilities, the Company may be required to pay the cost of remedying any condition caused by such release, the amount of which could be material.

On July 11, 2002, the United States Environmental Protection Agency issued the proposed Maximum Achievable Control Technology (“MACT”) standard for the Printing source category. This MACT standard is applicable to sources located at the Company’s U.S. operations. The MACT requirements were placed into effect on March 15, 2003. The primary effect of this rule will be to require implementation of additional air emission monitoring systems at the Company’s U.S. facilities. These rules will require certain modifications to the plant facilities over the next two years that will total approximately $2.8 million for U.S. operations.

Associates

The Company currently employs approximately 1,465 full-time associates worldwide, of which approximately 736 are employed in the United States and Canada. The Company’s associates in Dundee, Scotland, and Münster, Germany, are represented by labor unions. In January 2004, the labor union in Dundee entered into a new three-year collective bargaining agreement with the Company, expiring on December 31, 2006. The labor union in Münster has entered into collective bargaining agreements with the Company pertaining to general working conditions and to salaries and wages. The agreement as to general working conditions and the agreement as to salaries and wages expires December 31, 2006. None of the Company’s U.S. associates are covered by a collective bargaining agreement. To encourage productivity improvements, a portion of each associate’s total compensation is tied to a performance bonus. The Company considers its employee relations to be good.

ITEM 1a. RISK FACTORS

The risks described below are not the only risks facing our company. Additional risks not currently known or that we currently deem immaterial also may impair our business operations. Past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods because of the following factors, as well as other variables affecting our operating results.

Substantial Leverage and Debt Service Obligations: Our indebtedness could adversely affect our financial health, limit our ability to grow and compete and prevent us from fulfilling our obligations under our indebtedness.

We are highly leveraged. At December 31, 2005 our aggregate indebtedness is approximately $399 million, and the aggregate liquidation preference of our Exchangeable Preferred Stock is $49 million. In comparison our outstanding indebtedness as of December 31, 2004 was $252 million, with $79 million outstanding under the Exchangeable Preferred Stock and $91 million outstanding on the Redeemable Preferred Stock.

The level of our indebtedness could have important consequences to holders of the Company’s securities. For example, it could:

	•		require us to dedicate a substantial portion of our cash flow from operations to payments on the debt, limiting available cash for other purposes, such as funding working capital, capital expenditures, dividends, research and development efforts and other general corporate purposes;

	•		limit our ability to obtain additional debt financing in the future for working capital, capital expenditures, research and development or acquisitions;

	•		increase the amount of our interest expense, because certain of our borrowings are at variable rates of interest, which if interest rates increase, would result in higher interest expense;

	•		increase our vulnerability to general adverse economic and industry conditions;

	•		limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;

	•		restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities; and

	•		place us at a competitive disadvantage compared to our competitors that have less indebtedness.

Failing to comply with our debt covenants could result in an event of default which, if not cured or waived, could cause our lenders to initiate action to seek immediate repayment of our outstanding indebtedness. In these circumstances, we may not be able to refinance our indebtedness with other lenders and would not have the funds available to repay our indebtedness. Additionally, the operating and financial restrictions and covenants in our debt instruments, such as the credit agreement relating to the credit facility, may limit our ability to finance future operations or capital needs or engage in other business activities. These restrictions could place us at a disadvantage relative to competitors not subject to such limitations.

Risks Associated with our Exchangeable Preferred Stock: Various restrictions in the New Credit Agreements limit our ability to pay cash dividends.

We have outstanding $49 million liquidation preference of 12¹/4% Senior Exchangeable Preferred Stock at December 31, 2005. All dividends are payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. Although unpaid dividends through December 5, 2005 were paid, various restrictions in the New Credit Agreements limit our ability to pay cash dividends in the future. We do not anticipate that the restrictions on payment of cash dividends will change in the near term to allow future dividends to be paid.

Risks Associated with International Operations: Our substantial international operations subject us to risks inherent in non-U.S. activities, including political uncertainty, import and export limitations, exchange controls, unfavorable economic conditions outside of the United States, and currency fluctuations.

We manufacture and market our products worldwide. Our substantial worldwide operations are subject to risks inherent in international operations, including the following:

	•		agreements may be difficult to enforce and receivables difficult to collect through a foreign country’s legal system;

	•		foreign customers may have longer payment cycles;

	•		foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade or investment, including currency exchange controls;

	•		intellectual property rights may be more difficult to enforce in foreign countries;

	•		fluctuations in exchange rates may affect product demand and may adversely affect the profitability in U.S. dollars of products and services provided by us in foreign markets where payment for our products and services is made in the local currency;

	•		general economic conditions in the countries in which we operate could have an adverse effect on our earnings from operations in those countries;

	•		our business and profitability in a particular country could be affected by political or economic repercussions on a domestic, country-specific or global level from terrorist activities and the response to such activities;

	•		unexpected adverse changes in foreign laws or regulatory requirements may occur, including with respect to export duties and quotas;

	•		compliance with a variety of foreign laws and regulations may be difficult;

	•		overlap of different tax structures may subject us to additional taxes; and

	•		significant increases in the value of the U.S. dollar relative to foreign currencies could have an adverse effect on our ability to meet interest and principal obligations on U.S. dollar-denominated debt.

We believe that the political and economic stability of the countries in which our largest international operations are located, the stand-alone nature of the operations, our limited net asset exposure, our forward foreign exchange contract practices and pricing flexibility help to mitigate risks related to our international operations. We also have approximately $70 million of our outstanding indebtedness

denominated in Euros at December 31, 2005. We cannot be sure that any of the foregoing factors will not have a material adverse effect on our business, financial condition and results of operations.

We are exposed to fluctuations in foreign exchange rates, which may adversely affect our operating results and net income.

Approximately 50% of our 2005 sales were derived from products sold outside the United States. The U.S. dollar value of these revenues varies with currency exchange rate fluctuations, and we may be exposed to gains or losses based upon these fluctuations.

Certain of our international subsidiaries make purchases and sales in designated currencies other than the U.S. dollar. 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, we have intercompany loans outstanding with certain international subsidiaries in their local currencies, exposing us to the effect of changes in exchange rates at loan issue and loan repayment dates.

We periodically enter into forward foreign exchange contracts to protect against foreign currency exchange movements. We have euro-denominated debt to protect investments in Europe from fluctuations in the euro compared with the U.S. dollar. These strategies may not completely protect us from losses from these fluctuations.

Interest Rate Risks: We are subject to market risk from exposure to changes in the interest rates based on our financing activities.

We utilize a mix of debt maturities along with both fixed- and variable-rate debt to manage our exposure to changes in interest rates and to minimize interest expense. During 2005, we entered into an interest rate swap to swap a portion of our variable rate debt to fixed rates. We do not expect changes in interest rates to have a material effect on income or cash flows in 2006, although there can be no assurance that interest rates will not materially change.

Commodity Risks: Increases in costs or reductions in supplies of specialty and commodity products used in our manufacturing process could materially and adversely affect our operating results.

Rubber polymers and fabrics are key components in most of the products manufactured by the Image Transfer and Textile Products segments. We are 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. The availability and prices of raw materials may be subject to curtailment or change due to, among other things:

	•		new laws or regulations;

	•		suppliers’ allocations to other purchasers;

	•		interruptions in production by suppliers;

	•		changes in exchange rates; and

	•		worldwide price levels.

Our results of operations could be adversely affected if we were unable to obtain adequate supplies of raw materials in a timely manner or if the costs of raw materials increased significantly. When commodity prices increase, we have historically passed on increases to our customers to maintain our profit margins. Conversely, when commodity prices decline, we generally lower sales prices to meet competitive pressures. We may not be able to raise sales prices to offset significantly higher costs in the future

Impact of Significant Competition: The competitive pressures we face could harm our sales and gross profit.

We encounter competition from varied competitors in all areas of our business, and our competitors may target our key market segments. We compete primarily on the basis of quality, technology, performance, price, reliability, brand, reputation, distribution, range of products and services, and service and support levels. If our products, services, support and cost structure do not enable us to compete successfully based on any of those criteria, our operations, financial results and prospects could be harmed. Because our business model is based on providing innovative and high quality products, we may spend a proportionately greater amount on research and development than our competitors. Some of our competitors may have greater financial and other resources and consequently have more operating flexibility and a greater ability to expand production capacity and increase research and development expenditures.

Environmental Matters: Environmental and health and safety liabilities and requirements could require us to incur material costs.

We are subject to a broad range of Federal, state, local, and foreign environmental laws and regulations, including

	•		those governing discharges to the air and water;

	•		the handling and disposal of solid and/or hazardous wastes; and

	•		the remediation of contamination associated with releases of hazardous substances.

We have incurred, and will continue to incur, significant costs and capital expenditures in complying with these laws and regulations. We could incur significant additional costs, including cleanup costs, fines and sanctions and third-party claims, as a result of past or future violations of or liabilities under environmental laws.

The nature of our operations and products, including the raw materials we handle, exposes us to the risk of liabilities or claims with respect to environmental cleanup and other matters, including those in connection with the disposal of hazardous materials. Our operations involve the handling of toluene and other hazardous substances. If a release of hazardous substances occurs on or from one of our facilities, we may be required to pay the cost of remediating the condition caused by the release, which could be material. The ultimate costs and timing of environmental liabilities are difficult to predict. Liability under environmental laws relating to contaminated sites can be imposed retroactively and on a joint and several basis, meaning that one liable party could be held responsible for all costs at a site, regardless of fault or the legality of the original disposal.

In addition, future events, such as changes in or more rigorous enforcement of environmental laws could require us to make additional expenditures, modify or curtail our operations and/or install pollution control equipment.

We believe that our operations are in compliance with environmental requirements. However, there can be no assurances that environmental requirements will not change in the future or that we will not incur significant costs in the future to comply with such requirements.

Impact of Technological Change: We may be unable to respond effectively to technological changes in our industry, which could reduce the demand for our products and adversely affect our results of operations.

Currently, nearly all of the sales of Image Transfer are generated by product designed for use on offset, flexographic and digital presses. Our future business success will depend upon our ability to maintain and enhance our technological capabilities, develop and market products and applications that meet changing customer needs and successfully anticipate or respond to technological changes on a cost-effective and timely basis. Our inability to anticipate, respond to or utilize changing technologies could have an adverse effect on our business, financial condition or results of operations.

Recently enacted changes in the securities laws and regulations are likely to increase our costs.

The Sarbanes-Oxley Act of 2002 required changes in some of our corporate governance, securities disclosure and compliance practices. In response to the requirements of that Act, the Securities and Exchange Commission and the major stock exchanges have promulgated new rules on a variety of subjects. Compliance with these new rules has increased our legal and financial and accounting costs, and we expect these increased costs to continue indefinitely. Likewise, these developments may make it more difficult for us to attract and retain qualified members of our board of directors or qualified executive officers.

Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors or fraud, or in informing management of all material information in a timely manner.

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and internal controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system reflects that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur simply because of error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with US GAAP. Any changes in estimates, judgments and assumptions could have a material adverse effect on our business, financial position and results of operations.

The consolidated and condensed consolidated financial statements included in the periodic reports we file with the Securities and Exchange Commission are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of financial statements in accordance with U.S. GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets (including intangible assets), liabilities and related reserves, revenues, expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities, revenues, expenses and income. Any such changes could have a material adverse effect on our financial position and results of operations.

Dependence on Key Personnel: We may be adversely affected if we lose the services of any member of our senior management team.

The success of our Company depends in large part on senior management and our ability to attract and retain other highly qualified management personnel. The loss of any member of the senior management team could have an adverse affect on us, depending on our ability to locate a suitable replacement either within or from outside Day International, in a timely and cost-effective manner. There can be no assurance that we will be successful in hiring or retaining key personnel.

Our production facilities are subject to operating hazards, the occurrence of which could have an adverse effect on our business, financial condition or results of operations and business disruptions could seriously harm our future revenue and financial condition and increase our costs and expenses.

We are dependent on the continued operation of our production facilities. These production facilities are subject to hazards associated with the manufacture, handling, storage and transportation of chemical materials and products, including pipeline leaks and ruptures, explosions, power shortages, telecommunications failures, water shortages, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, and environmental hazards, such as spills, discharges or releases of toxic or hazardous substances and gases, storage tank leaks and remediation complications.

Our worldwide operations could be subject to natural disasters, fires, inclement weather earthquakes, tsunamis, floods, typhoons, fires, other extreme weather conditions, medical epidemics and other natural or manmade disasters, for which we may not be insured or fully insured.

These hazards can cause personal injury and loss of life, severe damage to, or destruction of, property and equipment and environmental contamination and other environmental damage and could have an adverse effect on our business, financial condition or results of operations.

We are exposed to intangible asset risk.

We have recorded intangible assets, including goodwill, in connection with business acquisitions. We are required to perform goodwill impairment tests at least on an annual basis and whenever events or circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. As a result of our annual and other periodic evaluations, we may determine that the intangible asset values need to be written down to their fair values, which could result in material charges that could be adverse to our operating results and financial position.

Prolonged downturns of our customers’ industries and general economic uncertainty could adversely affect our sales and operating profit.

Our sales and operating profit depend significantly on general economic conditions and the demand for our products and services in the markets in which we compete. Economic weakness and constrained spending, as well as diminishing markets in many of our customers’ industries, may result in the future, in decreased sales, gross margin, earnings or growth rates and problems with our ability to collect customer receivables. In addition, customer financial difficulties could result in increases in bad debt write-offs and additions to reserves in our receivables portfolio. Economic downturns could result in restructuring actions and associated expenses. Uncertainty about future economic conditions makes it difficult for us to forecast operating results and to make decisions about future investments. Delays or reductions in spending could have a material adverse effect on demand for our products and services, and consequently our results of operations.

We rely on patents, trademarks, and confidentiality agreements to protect our intellectual property. Our future performance and growth could be adversely affected if we fail to protect our intellectual property rights.

Our active patents have been important to our existing product line, and increased emphasis is being placed on new product technologies. Active efforts to obtain additional patents are underway on a variety of technologies, including certain process patents. Protection of our proprietary processes, methods and compounds and other technology is important to our business. Failure to protect our existing intellectual property rights may result in the loss of valuable technologies or having to pay other companies for infringing on their intellectual property rights. Some of our technologies are not covered by any patent or patent application, and we cannot assure you that any of our patents will not be challenged, invalidated, circumvented or rendered unenforceable. Furthermore, we cannot assure you that any pending patent application filed by us will result in an issued patent, or if patents are issued to us, that those patents will provide meaningful protection against competitors or against competitive technologies. In addition, effective patent, trademark, copyright and trade secret protection may be unavailable, limited or not applied for in some foreign countries.

ITEM 1b. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

As noted below, the Company operates state-of-the-art, manufacturing facilities strategically located throughout the world. The Company believes that it has sufficient capacity at its manufacturing facilities to meet its production needs for the foreseeable future, and further believes that all its sales worldwide can be sourced through these facilities. A majority of the Company’s manufacturing facilities are ISO certified. The Company’s significant facilities are listed below:

Size

Owned/

Location

Segment

(Sq. Ft.)

Leased

Manufacturing:

Addison, Illinois

Image Transfer

38,600

Owned

Asheville, North Carolina

Image Transfer

240,600

Owned

Fairfield, New Jersey

Image Transfer

19,900

Leased

Greenville, South Carolina

Textile Products

85,200

Owned

Houston, Texas

Image Transfer

64,000

Owned

Three Rivers, Michigan

Image Transfer

58,000

Owned

West Chester, Ohio

Image Transfer

14,500

Owned

Ahaus, Germany

Image Transfer

36,200

Owned

Chrastava, Czech Republic

Image Transfer

9,300

Owned

Dundee, Scotland

Image Transfer

184,300

Owned

Foshan, China

Image Transfer

19,000

Leased

Kuala Lumpur, Malaysia

Image Transfer

8,300

Leased

Manchester, England

Image Transfer

66,000

Owned

Melbourne, Australia

Image Transfer

28,700

Owned

Münster, Germany

Textile Products

79,600

Leased

Parana, Brazil

Image Transfer

10,800

Leased

Warehouse/Converting:

Cleveland, Ohio

Image Transfer

37,800

Leased

Covington, Georgia

Image Transfer

8,100

Leased

Eagan, Minnesota

Image Transfer

10,500

Leased

Hanover, Massachusetts

Image Transfer

20,000

Leased

Little Elm, Texas

Image Transfer

16,200

Leased

Monrovia, California

Image Transfer

25,900

Leased

Nashville, Tennessee

Image Transfer

5,000

Leased

Rockland, Massachusetts

Image Transfer

26,700

Leased

Rochdale, England

Image Transfer

5,800

Leased

Lerma, Mexico

Image Transfer

15,900

Owned

Milan, Italy

Textile Products

1,500

Leased

Moscow, Russia

Image Transfer

1,000

Leased

Paris, France

Image Transfer

23,400

Leased

Reutlingen, Germany

Image Transfer

19,400

Leased

Sales Office:

Dayton, Ohio

Corporate/Image Transfer

13,800

Leased

Albavilla, Italy

Image Transfer

400

Leased

Hong Kong, China

Image Transfer

8,000

Leased

Hong Kong, China

Textile Products

600

Leased

Tokyo, Japan

Image Transfer

600

Leased

Willich, Germany

Image Transfer

5,500

Leased

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth summary financial data of the Company for each of the five fiscal years in the period ended December 31, 2005.


	2005			2004			2003			2002			2001
				(a)			(a) (b)
	(Dollars in thousands)
Statement of Operations Data:
Net sales	$	363,269		$	362,707		$	288,987		$	259,948		$	254,146
Gross profit		135,016			132,674			105,169			95,522			91,159
Operating profit		53,248			50,729			39,860			38,122			26,662
Income (loss) before cumulative effect of change in accounting principle		(6,190	)		(10,021	)		(6,373	)		9,182			(5,108	)
Cumulative effect of change in accounting principle											616
Net income (loss)		(6,190	)		(10,021	)		(6,373	)		9,798			(5,108	)
Net loss available to common shareholders		(6,190	)		(10,021	)		(16,041	)		(7,493	)		(20,066	)
Other Financial Data:
Capital expenditures	$	7,478		$	10,433		$	6,874		$	8,264		$	12,983
Depreciation		10,782			10,501			9,309			8,197			7,308
Amortization		4,124			4,984			6,303			6,332			9,972
Balance Sheet Data (at end of period):
Fixed assets, net of accumulated depreciation	$	68,080		$	74,735		$	74,167		$	74,319		$	72,216
Total assets		374,657			370,235			371,540			319,877			317,004
Long-term and subordinated long-term debt (including current maturities)		399,307			252,390			279,820			252,145			263,831
Redeemable preferred stock		48,657			169,805			146,649			126,646			109,354
Stockholders’ equity (deficit)		(151,254	)		(136,018	)		(127,724	)		(119,450	)		(115,918	)


(a)		Effective July 1, 2003, the Company adopted SFAS No. 150 and recorded dividends on the redeemable preferred stock as interest expense subsequent to adoption. Preferred stock dividends included in interest expense were $24,813 in 2005, $23,156 in 2004 and $10,336 for the period from July 1, 2003 through December 31, 2003.

(b)		The Company acquired NDI as of November 24, 2003. The statement of operations data includes the results of this acquisition from the date of acquisition.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following should be read in conjunction with “Selected Financial Data” and “Financial Statements and Supplementary Data” and notes thereto included elsewhere in this report.

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.


	Year Ended				Year Ended				Year Ended
	December 31, 2005				December 31, 2004				December 31, 2003
	(Dollars in millions)
Net sales	$	363.3	100.0	%	$	362.7	100.0	%	$	289.0	100.0	%
Cost of goods sold		228.3	62.8			230.0	63.4			183.8	63.6

Gross profit		135.0	37.2			132.7	36.6			105.2	36.4
SG&A		80.7	22.2			80.9	22.3			63.5	22.0
Amortization of intangibles		0.1	0.0			0.1	0.0			0.8	0.3
Management fees and expenses		1.0	0.3			1.0	0.3			1.0	0.3

Operating profit	$	53.2	14.7		$	50.7	14.0	%	$	39.9	13.8	%

Comparison of Results of Operations

Year Ended December 31, 2005, compared to Year Ended December 31, 2004

Net sales increased $0.6 million (0.2%) to $363.3 million, primarily as a result of increased sales volume, and the effect of price increases in selected product lines. Sales in 2005 were negatively affected by decreased sales volumes of $5.7 million in the United States and by $0.6 million of unfavorable changes in foreign currency rates used to translate international sales into U.S. dollars, offset by increased sales volume of $5.1 million in Europe. Image Transfer’s sales increased $4.1 million (1.3%) to $317.8 million. Image Transfer’s sales were negatively affected by decreased sales volumes of $2.3 million in the United States, offset by increased sales volumes of $7.1 million in Europe and $0.7 million as a result of the effect of changes in foreign currency rates. The lower U.S. Image Transfer sales volume was primarily as a result of lower sales volumes in flat blankets and chemical products outside the United States. European sales volume increased primarily from growth of chemical products in the United Kingdom and Germany, transfer media products in Germany and flexographic products. Textile Products’ sales decreased $3.6 million (7.2%) to $45.5 million, primarily as a result of lower sales volume in Europe of $3.7 million offset by a $0.1 million of favorable changes in foreign currency rates. European Textile Products’ sales volumes were lower in 2005 compared to 2004, primarily as a result of lower demand from original equipment manufacturers (“OEMs”), in line with the OEMs own reduced level of business activity.

Gross profit increased $2.3 million (1.7%) to $135.0 million. Foreign currency rate changes decreased gross profit by $0.2 million. As a percentage of net sales, gross profit increased to 37.2% for 2005,

compared to 36.6% for 2004. The improvement in gross profit as a percentage of sales is a result of improved manufacturing performances.

Selling, general and administrative expense (“SG&A”) decreased $0.2 million (0.2%) to $80.7 million, primarily as a result of changes in foreign currency rates. Changes in foreign currency rates decreased SG&A costs by $0.2 million compared to 2004. As a percentage of net sales, SG&A decreased slightly to 22.2% from 22.3%. Included in SG&A is $1.0 million for consulting fees, paid to three NDI former shareholders (which expire in 2006), and $0.7 million for the loss for the settlement of the U.K. pension plan that was suspended during 2004.

Operating profit increased $2.5 million (4.9%) to $53.2 million. As a percentage of net sales, operating profit increased to 14.7% for 2005, from 14.0% for 2004. Image Transfer’s operating profit increased $3.3 million (6.4%) to $53.6 million, primarily as a result of higher sales volumes. As a percentage of net sales, Image Transfer’s operating profit increased to 16.9% for 2005, from 16.0% in 2004. Textile Products’ operating profit decreased $0.3 million (4.4%) to $6.3 million. As a percentage of net sales, Textile Products’ operating profit increased to 13.9% for 2005, from 13.5% in 2004. Lower selling and administrative costs in the United States and improved manufacturing performance in Europe favorably affected Textile Products’ operating profit as a percentage of net sales in 2005 compared to 2004.

Other (income) expense was $5.9 million and $(2.8) million for 2005 and 2004. The other (income) expense is primarily due to foreign currency transaction (gains) losses incurred in the normal course of international subsidiaries conducting business in other than their functional currencies as well as a result of intercompany financing arrangements. Other (income) expense includes a gain of $3.1 million in 2005 on the mark-to-market of the Euro Term Loan.

The effective tax rate was 197.6% in 2005. The effective tax rate is affected by the non-deductible preferred stock dividends reflected as interest expense in accordance with SFAS No. 150. The effective tax rate in 2005 is further affected by foreign-sourced dividends and income taxable in the United States and non-deductible expenses.

In 2004, the American Jobs Creation Act of 2004 (the “Jobs Act”) was enacted. The Jobs Act provides a deduction with respect to U.S. manufacturing activities, allows for tax-favored repatriation of offshore earnings and makes numerous changes to various tax rules. The Company’s ability to take advantage of certain provisions of the Jobs Act is limited because of the U.S. net operating loss carryforward position of the Company and because of various restrictions in the Company’s debt agreements. For these reasons, the Company does not believe that the Jobs Act will have a material effect on the Company’s tax expense or cash flows over the next several years.

In 2004, the FASB issued SFAS No. 123 (Revised), Share-based Payments. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement eliminates the alternative to use APB Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. Under APB Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. This Statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. This statement will have no effect on the cash flows of the Company, or the Company’s compliance with its debt covenants. Net income (loss) after the adoption will be affected

by the stock option expense that was previously only disclosed. The Company must adopt this Statement effective January 1, 2006. Pre-tax stock option expense is estimated to be $1.2 million for the year ending December 31, 2006.

Year Ended December 31, 2004, compared to Year Ended December 31, 2003

Net sales increased $73.7 million (25.5%) to $362.7 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 $44.4 million of sales from businesses acquired in 2003. Sales in 2004 were positively affected by increased sales volumes of $9.6 million in the United States, increased sales volume of $3.1 million in Europe and $13.4 million of favorable changes in foreign currency rates used to translate international sales into U.S. dollars. Image Transfer’s sales increased $73.1 million (30.4%) to $313.7 million. Image Transfer’s sales were positively affected by sales from business acquisitions in 2003 of $44.4 million, increased sales volumes of $9.3 million in the United States, increased sales volumes of $5.4 million in Europe and $10.8 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 higher sales volumes in blankets, offset sleeves, flexographic sleeves and digital products. European sales volume increased primarily from growth of chemical products in the United Kingdom and Germany, transfer media products in Germany and flexographic products. Textile Products’ sales increased $0.6 million (1.2%) to $49.0 million, primarily as a result of slightly higher sales volume in the United States of $0.3 million and by favorable foreign currency rate changes of $2.6 million, offset by lower sales volume in Europe of $2.3 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”), in line with the OEMs own reduced level of business activity. OEM sales in 2004 continued at a relatively strong level, but were not at the unusually high level of 2003. Lower demand from textile mills in Europe also contributed to the shortfall.

Gross profit increased $27.5 million (26.2%) to $132.7 million. Foreign currency rate changes increased gross profit by $5.2 million. As a percentage of net sales, gross profit increased to 36.6% for 2004, compared to 36.4% for 2003. The improvement in gross profit as a percentage of sales is a result of improved manufacturing performances offset by the effect of the NDI acquisition in 2003, as that business historically had lower gross profit percentages than Day’s other businesses.

Selling, general and administrative expense (“SG&A”) increased $17.4 million (27.4%) to $80.9 million, primarily as a result of SG&A associated with businesses acquired of $8.9 million and changes in foreign currency rates. Changes in foreign currency rates increased SG&A costs by $2.8 million compared to 2003. SG&A costs also increased as a result of higher insurance costs and higher selling and distribution costs resulting from higher sales levels. As a percentage of net sales, SG&A increased slightly to 22.3% from 22.0%.

Operating profit increased $10.9 million (27.3%) to $50.7 million. As a percentage of net sales, operating profit increased to 14.0% for 2004, from 13.8% for 2003. Image Transfer’s operating profit increased $8.6 million (20.6%) to $50.3 million, primarily as a result of higher sales volumes. As a percentage of net sales, Image Transfer’s operating profit decreased to 16.0% for 2004, from 16.7% in 2003. The decline in operating margin as a percentage of sales is a result of substantially lower operating margins on NDI’s distribution business than Day’s historical margins on manufactured products offset by improved manufacturing performances. Textile Products’ operating profit increased $2.4 million (55.6%) to $6.6 million. As a percentage of net sales, Textile Products’ operating profit increased to 13.5% for

2004, from 8.8% in 2003. Lower selling and administrative costs in the United States and improved manufacturing performance in Europe favorably affected Textile Products’ operating profit in 2004 compared to 2003.

Other (income) expense was $(2.8) million and $3.0 million for 2004 and 2003. The other (income) expense is primarily due to foreign currency transaction (gains) losses incurred in the normal course of international subsidiaries conducting business in other than their functional currencies as well as a result of intercompany financing arrangements. Other (income) expense includes a loss of $1.8 million in 2004 on the mark-to-market of the euro-denominated Tranche A Term Loan and a gain of $0.4 million on the sale of fixed assets. Other expense in 2003 included a loss of $3.2 million on the mark-to-market of the euro-denominated Tranche A Term Loan, a loss of $1.1 million from the sale of the South African business, and a gain of $0.9 million from the sale of excess land in Mauldin, South Carolina.

The effective tax rate was 219.6% in 2004. The Company recorded income tax expense on a loss before income taxes in 2003. The effective tax rate is affected by the non-deductible preferred stock dividends now reflected as interest expense in accordance with FAS 150. The effective tax rate in 2004 is further affected by foreign-sourced dividends and income taxable in the United States and non-deductible expenses.

In 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement requires that the Company’s redeemable preferred stock be recorded in the same manner as long-term debt. The Company adopted the statement as of July 1, 2003. Therefore, since the third quarter of 2003, the Company has reflected the redeemable preferred stock as long-term debt and accrued dividends are shown as interest expense. The adoption of this statement had no effect on the net

loss available to common shareholders, cash flows of the Company or the Company’s compliance with its debt covenants.

Risks Associated with International Operations

The Company conducts a significant amount of business and has operating and sales facilities in countries outside the United States. As a result, the Company is subject to business risks inherent in non-U.S. activities, including political uncertainty, import and export limitations, exchange controls and currency fluctuations. The Company believes risks related to its international operations are mitigated due to the political and economic stability of the countries in which its largest international operations are located, the stand-alone nature of the operations, the Company’s limited net asset exposure, forward foreign exchange contract practices and pricing flexibility. Thus, while changes in foreign currency values do affect earnings, the longer-term economic effect of these changes should not have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

Certain of the Company’s international subsidiaries make purchases and sales in designated currencies other than their functional currency. As a result, they are subject to transaction exposures that arise from foreign exchange movements between the date that the foreign currency transaction is recorded and the date it is consummated. In addition, the Company has intercompany loans outstanding with certain international subsidiaries in their local currencies, exposing it to the effect of changes in exchange rates at loan issue and loan repayment dates. The Company periodically enters into forward foreign exchange contracts to protect it against such foreign exchange movements. The contract value of these foreign exchange contracts was $13.9 million and $9.5 million at December 31, 2005 and 2004. These contracts generally have terms of three to twelve months. At December 31, 2005 and 2004, the Company had outstanding €59.6 million and €20.4 million of term loans issued under the Senior Secured Credit Facility. The Company has issued euro-denominated debt in order to protect the Company’s investments in Europe from fluctuations in the euro compared to the U.S. dollar. Foreign currency gains (losses), included in other (expense) income-net, were $1.9 million in 2005, $2.5 million in 2004 and $(2.6) million in 2003. Based on the Company’s overall foreign currency exchange rate exposure at December 31, 2005, a 10% adverse change in foreign currency exchange rates would result in a hypothetical estimated loss in earnings of approximately $3.9 million. If the forward contracts and the euro-denominated Tier 1 Loan were aggregated with the Company’s other exposures, a 10% adverse change in foreign currency exchange rates would result in a hypothetical estimated loss in earnings of $2.1 million.

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 2005, the Company entered into a $240 million and €45 million interest rate swaps to swap a portion of the Company’s variable rate debt to fixed rates. The swaps expire in December 2013 and 2012, respectively. The Company does not expect changes in interest rates to have a material effect on income or cash flows in 2006, 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 Transfer Media and Textile products. The Company is exposed to changes in the costs of these components. Chemical Products is exposed to changes in the cost of certain petroleum-based components. The largest raw material component in Pressroom Chemicals’ products is petroleum distillates, such as aliphatics and aromatics. When commodity prices increase, the Company has historically passed on increases to its customers to maintain its profit margins. Conversely, when commodity prices decline, the Company generally lowers its sales prices to meet competitive pressures. Because the Company has historically been able to raise sales prices to offset higher costs, management believes that a 10% change in the cost of its components could have a short-term effect until sales price increases take effect, but overall would not have a material effect on income or cash flows for a fiscal year.

Liquidity and Capital Resources

The Company has historically generated sufficient funds from its operations to fund its working capital and capital expenditure requirements.

The Company’s expenditures for plant, property and equipment were $7.5 million in 2005, $10.4 million in 2004 and $6.9 million in 2003. The Company believes that capital expenditures of $9.0 million to $12.0 million annually over the next several years will be sufficient to maintain its leading market position. The Company expects to fund these capital expenditures from cash flow from operations.

The Company will be required, subject to certain conditions, to redeem all of the Exchangeable Preferred Stock or the Exchange Debentures as the case may be, on March 15, 2010. The Company may, at its option, redeem the Exchangeable Preferred Stock or the Exchange Debentures, in whole or in part, for cash, at 102.042% until March 14, 2006 and 100.0% thereafter [Note: to be confirmed.] , together with, in the case of the Exchangeable Preferred Stock, all accumulated and unpaid dividends to the date of redemption, or in the case of the Exchange Debentures, all accrued and unpaid interest to the date of redemption. Upon the occurrence of a change in control, the Company would be required to make an offer to purchase the Exchangeable Preferred Stock or the Exchange Debentures, for cash, at a price equal to 101% of the liquidation preference or aggregate principal amount (as the case may be) thereof, together with, in the case of the Exchangeable Preferred Stock, all accumulated and unpaid dividends to the date of purchase, or in the case of the Exchange Debentures, all accrued and unpaid interest to the date of purchase.

The Company does not have transactions, arrangements or relationships with special-purpose entities and the Company does not have any off-balance-sheet debt except as disclosed in the notes to the consolidated financial statements.

In 2001, the Company suspended its U.K. pension plan and settled the remaining obligation in 2005. The settlement required an additional contribution of approximately $2.9 million and resulted in a pre-tax settlement loss of approximately $0.7 million.

Environmental Expenditures

The Company has made, and will continue to make, expenditures to comply with current and future requirements of environmental laws and regulations. The Company estimates that in 2005 it spent $0.7 million in capital expenditures and related expense projects to comply with environmental requirements.

Based on environmental assessments conducted by independent environmental consultants, the Company believes that its operations are currently in compliance with environmental laws and regulations, except as would not be expected to have a material adverse effect on the Company. However, there can be no assurances that environmental requirements will not change in the future or that the Company will not incur significant costs in the future to comply with such requirements. In addition, the Company’s operations involve the handling of solvents and other hazardous substances, and if a release of hazardous substances occurs on or from the Company’s facilities, the Company may

be required to pay the cost of remedying any condition caused by such release, the amount of which could be material.

Critical Accounting Policies

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant estimates include: accounts receivable allowances, inventory valuation, recoverability of long-lived assets, retirement and other postretirement benefits, and the realization of deferred tax assets. We use the following methods and assumptions in determining our estimates:

Accounts Receivable Allowances–Reserves for product returns are calculated based upon historical experience. Allowances for doubtful accounts are determined by applying historical experience with consideration given to the condition of the economy and evaluation of specific accounts. Other allowances are calculated based on negotiated agreements with customers.

Inventory Valuation– Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. Reserves for obsolete and slow-moving inventory are determined based on the lower of cost or market method. Market value is determined based on management’s estimate of selling price less selling costs.

Recoverability of Long-lived Assets–Recoverability of goodwill is tested at least annually in accordance with SFAS No. 142 using the present value of estimated future cash flows. Other long-lived assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144 by determining whether the amortization of the assets over their remaining lives can be recovered through projected undiscounted cash flows. Future cash flows are forecasted based on management’s estimates of future events and could be materially different from actual cash flows.

Retirement and Other Postretirement Benefits–Retirement and other postretirement benefit costs and obligations are dependent on assumptions used in calculating such amounts. These assumptions include discount rates, health care cost trend rates, benefits earned, interest cost, expected return on plan assets, mortality rates and other factors. In accordance with accounting principles generally accepted in the United States, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense and the recorded obligation in future periods. While management believes that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect the Company’s retirement and other postretirement obligations and future expense. See Notes M and N to the Consolidated Financial Statements for further detail on the assumptions used.

Realization of Deferred Tax Assets–Realization of net operating loss carryforwards and other deferred tax assets is determined in accordance with the appropriate accounting guidance in SFAS No. 109. Realization of the deferred tax assets is periodically evaluated using expected future reversals of existing temporary differences, future taxable income resulting principally from the characterization of cash flow from international subsidiaries as dividends taxable in the United States and the effects of lower interest expense from lower outstanding debt levels as debt service requirements are met.

For further information regarding our accounting policies, see Note B to the Consolidated Financial Statements.

Contractual Obligations

The Company enters into various contractual obligations throughout the year. Presented below are the contractual obligations of the Company as of December 31, 2005, and the time period in which payments under the obligations are due. Disclosures related to long-term debt, capital lease obligations and operating lease obligations are included in the footnotes to the consolidated financial statements of the Company. Disclosures regarding the amounts due under purchase obligations for capital expenditures are also included below. A purchase obligation is defined as an agreement to purchase goods or services that is enforceable and legally binding on the company and that specifies all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations related to normal and recurring purchase orders are not included, as the Company does not enter into long-term agreements that would represent purchase obligations. Any short-term purchase order that might meet the definition of purchase obligation is only entered into for a reasonable period of time for quantities to be used within normal operating conditions.


			Less than		2 - 3		4 - 5		After
	Total		one year		years		years		five years
	(Dollars in thousands)
Contractual Obligation:
Long-term debt	$	398,192	$	12,490	$	7,812	$	7,812	$	370,078
Redeemable preferred stock		48,657		0		0		48,657		0
Capital lease obligation		1,115		115		250		280		470
Operating leases		10,669		3,879		2,587		2,000		2,203

Total	$	458,633	$	16,484	$	10,649	$	58,749	$	372,751

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See information in Item 7.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheets of Day International Group, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Day International Group, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

As discussed in Note G, in 2003 the Company changed its method of accounting for redeemable preferred stock in accordance with Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.

ERNST & YOUNG LLP

Dayton, Ohio
March 27, 2006

DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
(Amounts in thousands, except share and per share amounts)


	2005			2004
ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	9,441		$	843
Accounts receivable:
Trade (less allowance for doubtful accounts) (Note C)		46,024			50,451
Other		900			1,516
Inventories (Note D)		51,150			50,334
Prepaid expenses and other current assets		3,688			6,204
Deferred tax assets (Note I)		18,445			11,608


Total current assets		129,648			120,956

PROPERTY, PLANT AND EQUIPMENT:
Land		4,294			4,479
Buildings and improvements		30,047			30,655
Machinery and equipment		98,580			96,093
Construction in progress		4,020			5,100

		136,941			136,327
Less accumulated depreciation		(68,861	)		(61,592	)

		68,080			74,735

OTHER ASSETS:
Goodwill (Note E)		142,212			143,444
Intangible assets (Note E)		21,168			18,842
Deferred tax assets (Note I)		238			298
Other assets		13,311			11,960

		176,929			174,544


TOTAL ASSETS	$	374,657		$	374,657

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


	2005			2004
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable	$	8,071		$	11,020
Accrued associate-related costs		11,415			12,672
Other accrued expenses		10,136			14,204
Income taxes payable		883			3,381
Interest payable		2,560			3,209
Current maturities of long-term debt and capital lease (Note F)		12,604			4,576


Total current liabilities		45,669			49,062

LONG-TERM AND SUBORDINATED LONG-TERM DEBT (Note F)		386,703			247,814
DEFERRED TAX LIABILITIES (Note I)		13,263			3,294
OTHER LONG-TERM LIABILITIES (Notes L, M and N)		31,619			36,278
REDEEMABLE PREFERRED STOCK (Note G)		48,657			169,805

STOCKHOLDERS’ EQUITY (DEFICIT) (Note L):
Common Shares, $.01 per share par value, 100,000 shares authorized, 24,823 and 23,323 shares issued and outstanding		1			1
Contra-equity associated with the assumption of majority shareholder’s bridge loan		(68,673	)		(68,673	)
Retained earnings (deficit)		(81,391	)		(75,201	)
Accumulated other comprehensive income (loss) (Note H)		(1,191	)		7,855

Total stockholders’ equity (deficit)		(151,254	)		(136,018	)


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	374,657		$	370,235

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

DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(In thousands)


	2005			2004			2003
NET SALES	$	363,269		$	362,707		$	288,987

COST OF GOODS SOLD		228,253			230,033			183,818


GROSS PROFIT		135,016			132,674			105,169

SELLING, GENERAL AND ADMINISTRATIVE		80,734			80,911			63,493
AMORTIZATION OF INTANGIBLES		34			34			816
MANAGEMENT FEES (Note K)		1,000			1,000			1,000


OPERATING PROFIT		53,248			50,729			39,860

OTHER EXPENSES:
Interest expense:
Long-term debt (including amortization of deferred financing costs and discount of $1,826, $1,775, and $2,313 in 2005, 2004 and 2003 and loss on extinguishment of debt of $8,378 and $2,783 in 2005 and 2003)		31,222			21,985			28,655

Redeemable preferred stock (including amortization of discount and issuance costs of $185, $188 and $94 in 2005, 2004 and 2003) (Note G)		24,813			23,156			10,336
Gain on expired Stock Options		(6,640	)
Other expense (income)—net		(2,492	)		(2,791	)		3,042

INCOME (LOSS) BEFORE INCOME TAXES		6,345			8,379			(2,173	)

INCOME TAXES (Note I)		12,535			18,400			4,200


NET INCOME (LOSS)		(6,190	)		(10,021	)		(6,373	)

PREFERRED STOCK DIVIDENDS (Note G)								(9,574	)
AMORTIZATION OF PREFERRED STOCK DISCOUNT AND ISSUANCE COSTS								(94	)


NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS	$	(6,190	)	$	(10,021	)	$	(16,041	)

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

DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollar amounts in thousands)


											Accumulated
								Retained			Other			Comprehensive
	Common Shares				Contra			Earnings			Comprehensive			Income
	Shares		Amount		Equity			(Deficit)			Income (Loss)			(Loss)
December 31, 2002		23,298	$	1	$	(68,772	)	$	(49,139	)	$	(1,540	)

Net income									(6,373	)				$	(6,373	)
Preferred stock dividends									(9,574	)
Amortization of preferred stock discount and issuance costs									(94	)
Minimum pension liability adjustment (net of tax of $238)												178			178
Foreign currency translation adjustment												7,797			7,797
Unrealized loss on cash flow hedges (net of tax of $134)												(208	)		(208	)


December 31, 2003		23,298		1		(68,772	)		(65,180	)		6,277		$	1,394


Net loss									(10,021	)				$	(10,021	)
Stock option exercise		25				99
Amortization of preferred stock discount and issuance costs
Minimum pension liability adjustment (net of tax of $406)												(193	)		(193	)
Foreign currency translation adjustment												1,577			1,577
Unrealized loss on cash flow hedges (net of tax of $157)												244			244


December 31, 2004		23,323		1		(68,673	)		(75,201	)		7,855		$	(8,393	)


Net income									(6,190	)				$	(6,190	)
Class C Common Shares Issued		1,500
Minimum pension liability adjustment (net of tax of $282)												(190	)		(190	)
Foreign currency translation adjustment												(7,696	)		(7,696	)
Unrealized gain on cash flow hedges (net of tax of $741)												(1,160	)		(1,160	)


December 31, 2005		24,823	$	1	$	(68,673	)	$	(81,391	)	$	(1,191	)	$	(15,236	)

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

DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(In thousands)


	2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(6,190	)	$	(10,021	)	$	(6,373	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		10,782			10,501			9,309
Amortization of goodwill and intangibles		4,124			4,984			6,303
Interest expense:
Redeemable preferred stock dividends		24,813			23,156			10,336
Loss on extinguishment of debt		8,378						2,783
Deferred income taxes		3,436			9,105			(2,183	)
Foreign currency (gain) loss		(5,986	)		(1,690	)		2,666
Undistributed earnings of investee		(609	)		(325	)
Non-cash gain related to stock options expiration		(6,640	)
Non-cash loss on disposal of fixed assets		(34	)		(28	)		930
Change in assets and liabilities:
Accounts receivable		1,261			(5,816	)		2,693
Inventories		(3,129	)		(146	)		(3,367	)
Prepaid expenses and other current assets		(938	)		684			(963	)
Accounts payable and accrued expenses		(1,662	)		9,313			(3,144	)

Net cash provided by operating activities		27,606			39,717			18,990

CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions		(379	)		(1,346	)		(33,407	)
Capital expenditures		(7,478	)		(10,433	)		(6,874	)
Proceeds from sale of property					2,085			2,447

Net cash used in investing activities		(7,857	)		(9,694	)		(37,834	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options					25
Proceeds from issuance of debt		390,000						163,950
Redemption of Preferred Shares		(149,518	)
Payment of deferred financing fees		(10,506	)		(633	)		(4,117	)
Payments on long-term debt		(239,938	)		(30,057	)		(136,797	)
Net (payments on) proceeds from revolving credit facility		(1,025	)		575			(4,500	)

Net cash provided by (used in) financing activities		(10,987	)		(30,090	)		18,536

EFFECT OF EXCHANGE RATE CHANGES ON CASH		(164	)		184			38


CASH AND CASH EQUIVALENTS:
Net increase (decrease) in cash and cash equivalents		8,598			117			(270	)
Cash and cash equivalents at beginning of period		843			726			996

Cash and cash equivalents at end of period	$	9,441		$	843		$	726

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

DAY INTERNATIONAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
(Dollar amounts in thousands)

A. NATURE OF OPERATIONS, BASIS OF PRESENTATION

Day International Group, Inc. and subsidiaries is one of the world’s leading producers and distributors of 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 distributes high-quality printing blankets, 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. Sales are made through Day’s sales organization, distributors and representatives.

On November 24, 2003, the Company acquired Network Distribution International (“NDI”). The total purchase price for NDI was $32,203, paid in cash. NDI is a converter of offset blankets and reseller of ancillary consumable products to the printing industry, primarily in the United States. NDI supplies printers with a broad range of printing blankets, pressroom chemicals, supplies and equipment. Results of operations of NDI are included in the Company’s consolidated results of operations for the period subsequent to the acquisition.

B. SIGNIFICANT ACCOUNTING PRINCIPLES

Principles of Consolidation–The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

Cash and Cash Equivalents–Cash and cash equivalents include all highly liquid investments with an original purchased maturity of three months or less.

Inventories–Inventories are stated at the lower of cost or market using the first-in, first-out (FIFO) method. Reserves for obsolete and slow-moving inventory are determined based on the lower of cost or market method. Market value is determined based on management’s estimate of selling price less selling costs.

Property, Plant and Equipment–Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over their estimated useful lives. Buildings and improvements are depreciated over 10 to 40 years and machinery and equipment are depreciated over 5 to 10 years.

Goodwill and Other Intangibles–Goodwill represents the excess of cost over the fair value of the net assets acquired and is evaluated for impairment based on the requirements as proscribed in Statement of Financial Accounting Standards (“SFAS”) No. 142. The Company assesses the recoverability of other long-lived assets, including other intangibles, by determining whether the amortization of the respective balances over their remaining lives can be recovered through projected undiscounted cash flows.

Deferred financing costs are being amortized using an effective interest rate method over the lives of the related debt. Intangibles are being amortized using the straight-line method.

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 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:


	2005			2004			2003
Net income (loss)–as reported	$	(6,190	)	$	(10,021	)	$	(6,373	)
Less–stock-based compensation expense determined using fair value based method in SFAS No. 123		(736	)		(719	)		(764	)

Pro forma net income (loss)	$	(6,926	)	$	(10,740	)	$	(7,137	)

Revenue Recognition–Day recognizes revenue when product is shipped, except for product shipped on consignment. Revenue for consignment sales is recognized when the customer uses the product. Reserves for product returns, based upon historical experience, and other allowances, calculated based on negotiated agreements with customers, are recognized at the time of the recording of the sale. Allowances for doubtful accounts are determined by applying historical experience with consideration given to the condition of the economy and evaluation of specific accounts and are recorded in selling, general and administrative costs.

Foreign Currency Translation–The functional currency is the local currency of Day’s respective international subsidiaries. Accordingly, foreign currency assets and liabilities are translated into U.S. dollars at the period end exchange rates. Foreign currency revenues and expenses are translated at the average exchange rates for the period. Translation gains and losses are recorded in accumulated other comprehensive income (loss). Transaction gains and losses are recorded in other expense (income) in the consolidated statements of operations.

Concentration of Credit Risk–The Company’s receivables are from a diverse group of customers in the printing and textile industries and such receivables are generally unsecured. No single customer accounts for more than 10% of net sales.

Foreign Exchange Contracts–The Company and its international subsidiaries make purchases and sales in foreign currencies and are subject to transaction exposures that arise from foreign exchange rate 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. Day periodically enters into forward foreign exchange contracts, with terms generally of 3 to 12 months, to protect itself against such foreign currency movements. These contracts are recorded at fair value with the change in fair value recorded as other expense (income) as an offset to the (income) expense recognized from the remeasurement of the hedged foreign-currency denominated asset or liability. Hedges of forecasted transactions are recorded as cash flow hedges and are reclassified to earnings when the hedged transaction is completed. The contract value of foreign exchange contracts was

$14,202, and $9,476 at December 31, 2005 and 2004. The fair value of these contracts is a payable of $57 and $219 at December 31, 2005 and 2004. Day is exposed to credit-related losses in the event of nonperformance by counterparties to the forward contracts. The counterparties are expected to meet their obligations given their credit ratings; therefore Day does not obtain collateral for these instruments.

Interest Rate Swap Agreement– The Company is a party to interest rate swaps, one for €45,000 and one for $240,000. The swaps are used to swap a majority of the Company’s variable rate debt to fixed rates. The swaps expire in December 2012 and December 2013, respectively. The Company has accounted for the swaps as a cash flow hedge and recognizes the gain or loss related to future periods in other comprehensive income (loss).

Fair Value of Financial Instruments–The carrying value of the Company’s variable rate new Credit Agreements approximate fair value. The fair market value and carrying amount of the 9¹/2% Senior Subordinated Debt was $8,584 at December 31, 2005, based on quoted market prices. The fair market value and carrying amount of the 9¹/2% Senior Subordinated Debt was $115,700 and $114,866 at December 31, 2004, based on quoted market prices. The fair value of the 12¹/4% Exchangeable Preferred Stock was $38,400 at December 31, 2004, based on quoted market prices. The fair value of the 12¹/4% Exchangeable Preferred Stock at December 31, 2005 could not be determined as the securities are closely held and are not actively traded. See Note G for further information about the Convertible Preferred Stock. The fair value of the interest rate swap was a payable of $1,696 at December 31, 2005 and a receivable of $195 at December 31, 2004 based on quoted market prices. At December 31, 2005 and 2004, the carrying amounts of all other assets and liabilities that qualify as financial instruments approximated their fair value.

Research and Development–Research and development costs are expensed as incurred.

Distribution–Distribution costs of $12,961, $11,503, and $9,617 for the years ended December 31, 2005, 2004 and 2003 are included in selling, general and administrative costs.

Advertising–Advertising costs are expensed as incurred.

Management Estimates–The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

C. ACCOUNTS RECEIVABLE

Changes in the allowance for doubtful accounts for the years ended December 31, 2005, 2004 and 2003 consist of:


	2005			2004			2003
Balance at beginning of year	$	3,694		$	3,407		$	2,735
Provision for doubtful accounts		315			961			369
Acquisition								368
Write-off of uncollectible accounts		(517	)		(808	)		(352	)
Currency translation		(234	)		134			287

Balance at end of year	$	3,258		$	3,694		$	3,407

The following is detail of intangible assets as of December 31, 2005 and 2004:


							Weighted-
							Average
	2005			2004			Life
Intangible Assets:
Gross Carrying Amount:
Deferred financing costs	$	11,058		$	15,710		9 years
Printing technology		27,946			27,946		11 years
Textile compound formulas		5,247			5,247		31 years
Unpatented technology		9,529			9,529		20 years
Other		613			613		5 years

Total intangibles		54,393			59,045		14 years

Accumulated Amortization:
Deferred financing costs		(128	)		(9,507	)
Printing technology		(25,480	)		(23,827	)
Textile compound formulas		(1,827	)		(1,638	)
Unpatented technology		(5,338	)		(4,909	)
Other		(452	)		(322	)

Total accumulated amortization		(33,225	)		(40,203	)


Net book value	$	21,168		$	18,842

Estimated amortization expense for the next five years is as follows: $3,442 in 2006, $3,442 in 2007, $2,860 in 2008, $2,412 in 2009 and $2,258 in 2010.

F. LONG-TERM AND SUBORDINATED LONG-TERM DEBT

Long-term and subordinated long-term debt as of December 31, 2005 and 2004 consist of:


	2005			2004
New Credit Agreements:
First Lien Credit and Guaranty Agreement U.S. term loan	$	204,488
Euro term loan (face amount of €59,466)		70,407
Second Lien Credit and Guaranty Agreement Term loan		114,713
Senior Secured Credit Facility:
Tranche A term loan (face amount of €20,406)					27,584
Tranche D term loan (face amount of $108,343)					107,519
Revolving line of credit					1,025
9¹/2% Senior Subordinated Notes (face amount $8,450)		8,584			114,866
Capital lease obligation (Note P)		1,115			1,396

		399,307			252,390
Less–Current maturities of long-term debt and capital lease		(12,604	)		(4,576	)

	$	386,703		$	247,814

In December 2005, the Company and certain of its subsidiaries completed a comprehensive refinancing of the debt and redeemable preferred equity of the Company when it incurred $415 million of senior secured indebtedness pursuant to $300 million of senior secured first lien credit facilities and $115 million of senior secured second lien credit facilities.

The proceeds of the debt financing were used to repay $96.2 million and €16.3 million to satisfy the Company’s obligations under its existing Senior Secured Credit Facility, purchased $106.6 million in outstanding principal amount of the 9¹/2% Notes (plus accrued and unpaid interest) for $110.8 million pursuant to a tender offer, and provided notice of redemption of the remaining $8.5 million in principal amount of Notes to be redeemed on January 5, 2006. In connection with the refinancing the Company recognized a loss of $8.4 million on early extinguishment on debt.

The Company also paid all accrued and unpaid dividends on the 12¹/4% Senior Exchangeable Preferred Stock (“Exchangeable Preferred Stock”) totaling $24.8 million and redeemed 15,204 shares of the Exchangeable Preferred Stock, or approximately 24% of the total outstanding shares of Exchangeable Preferred Stock, for an amount equal to $15.5 million, and redeemed all of the 18% Convertible Cumulative Preferred Stock (“Convertible Preferred”) in exchange for an aggregate payment of $106.5 million and the issuance of 1,500 shares of newly issued Class C Non-Voting Common Stock of the Company.

NEW CREDIT AGREEMENTS

In 2005, the Company and certain of its subsidiaries entered into $415 million of new credit facilities consisting of $300 million of senior secured first lien credit facilities (the “First Lien Credit and Guaranty Agreement”) and $115 million of senior secured second lien credit facilities (the “Second Lien Credit and Guaranty Agreement”; and together with the First Lien Credit and Guaranty Agreement, the “New Credit Agreements”). Net proceeds from the New Credit Agreements were used to finance the Refinancing.

The First Lien Credit and Guaranty Agreement provided for a $205 million U.S. term loan, a Euro term loan equal to the Euro equivalent of $70 million, and a $25 million revolving loan. The U.S. term loan and the Euro term loan shall be repaid in consecutive quarterly installments of 0.25% of the original aggregate principal amount, if not sooner paid in full, with the balance paid on the seventh anniversary of the closing date.

At December 31, 2005, interest on the U.S. term loan and the Euro term loan were based on the LIBOR rates plus 2.50% (7.03% and 4.99% respectively) and interest on the revolving loan was based on the base rate plus 2.5% (9.75%). Interest rates on LIBOR borrowings are fixed for one, two, three or six month periods at the Company’s discretion.

The Second Lien Credit and Guaranty Agreement provided for a $115 million term loan. The term loan shall be repaid in consecutive quarterly installments of 0.25% of the original aggregate principal amount, if not sooner paid in full, with the balance paid on the eighth anniversary of the closing date.

At December 31, 2005, interest on the $115 million term loan was based on the LIBOR rate plus 7.25% (11.56%). Interest rates on LIBOR borrowings are fixed for one, two, three or six month periods at the Company’s discretion.

The weighted average interest rate on the New Credit Agreements (and the repaid Senior Secured Credit Facility) for the years ended December 31, 2005, 2004, and 2003 was 6.99%, 5.91%, and 5.50%.

At December 31, 2005, $24,831 was available under the revolving loan. The revolving loan included a $10 million letter of credit sublimit ($.02 million of letters of credit were outstanding at December 31, 2005) and

a $5 million swing line loan sublimit. The First Lien Credit and Guaranty Agreement requires a commitment fee of 0.5% a year on the unused portion of the revolving loan.

The New Credit Agreements, among other things, limit the Company’s ability to incur additional indebtedness, liens, or negative pledges with respect to assets, make dividends, distributions and other restricted payments on junior securities, make certain investments in other persons or instruments, sell, lease, exchange, transfer or otherwise dispose of assets, enter into sale-leaseback transactions, enter into certain transactions with shareholders or affiliates or change the nature of the Company’s business.

The New Credit Agreements also contain financial covenants, which, among other things, require the Company to maintain certain interest coverage ratios with respect to earnings and interest and to maintain certain leverage ratios with respect to earnings and debt and which limit the amount of capital expenditures.

The New Credit Agreements also contain typical events of default (subject to certain threshold amounts and grace periods). If an event of default occurs and is continuing, the Company may be required to repay the obligations under the New Credit Agreements prior to their stated maturity, and the commitments under the New Credit Agreements may be terminated.

SENIOR SECURED CREDIT FACILITY

In 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 had terms identical to the refinanced Tranche B and Tranche C Term Loans, except that interest rates were lowered 100 basis points and were 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.

The Second Amended and Restated $185,000 Senior Secured Credit Agreement consisted of a $20,000 5-year Revolving Credit Facility, a Tranche A €26,577 ($30,000 equivalent at issuance) 5-year Term Loan and a Tranche D $126,473 6-year Term Loan. The Revolving Credit Facility included a $10,000 letter of credit subfacility ($125 of letters of credit were outstanding at December 31, 2004) and a $2,000 swing line loan subfacility. If the Company did not refinance the 9¹/2% Senior Subordinated Notes by September 15, 2007, then any amounts outstanding under the Senior Credit Facility would have been immediately due and payable. As noted above, the Senior Secured Facility was repaid in its entirety in 2005 in connection with the Refinancing.

9¹/2% SENIOR SUBORDINATED NOTES

For the years ended December 31, 2005 and 2004, the Company had outstanding $8,450 and $115,000 face amount of 9¹/2% Senior Subordinated Notes due March 15, 2008 (the “Notes”). As part of the Refinancing, the Company purchased $106,550 million in outstanding principal amount of the Notes (plus accrued and unpaid interest) for $110,800 million pursuant to a tender offer, and provided notice of

redemption of the remaining $8,450 million in principal amount of Notes which were redeemed on January 5, 2006.

Principal payments on long-term debt for the next five years are payable as follows: $12,604 in 2006, $4,027 in 2007, $4,034 in 2008, $4,042 in 2009, and $52,707 in 2010.

G. REDEEMABLE PREFERRED STOCK

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement requires that the Company’s redeemable preferred stock be recorded in the same manner as long-term debt. The Company adopted the statement as of July 1, 2003. Therefore, since the third quarter of 2003, the Company has reflected the redeemable preferred stock as a liability and accrued dividends as interest expense. The adoption of this statement had no effect on the cash flows of the Company, net loss available to common shareholders, or the Company’s compliance with its debt covenants.

12¹/4% SENIOR EXCHANGEABLE PREFERRED STOCK

The Company has outstanding $49,165 and $79,432 liquidation preference of 12¹/4% Senior Exchangeable Preferred Stock (“Exchangeable Preferred Stock”) at December 31, 2005 and 2004. As part of the Refinancing, the Company paid all accrued and unpaid dividends on the Exchangeable Preferred Stock through December 5, 2005, in an amount equal to $24,872, and redeemed 15,204 shares, or 24% of the total outstanding shares of Exchangeable Preferred Stock, for an amount equal to $15,514.

All dividends are payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year. On and before March 15, 2003, the Company paid dividends in additional fully-paid and non-assessable shares of Exchangeable Preferred Stock having an aggregate liquidation preference equal to the amount of such dividends. After March 15, 2003, dividends were required to be paid in cash and if not paid for four consecutive quarters, then the holders of the Exchangeable Preferred Stock would have the right to elect two directors to the Board of Directors until the dividends in arrears were paid. During the fourth quarter of 2004, the Exchangeable Preferred Stockholders elected two directors to the Board of Directors. Although the Company paid its accrued, unpaid dividends through December 5, 2005, various restrictions in the New Credit Agreements limit the Company’s ability to pay cash dividends. The Company does not anticipate that the restrictions on payment of cash dividends will change in the near term to allow future dividends to be paid. Dividends-in-arrears are $414 as of December 31, 2005 and are included in the redeemable preferred stock balance. On any scheduled dividend payment date, the Company may, at its option, but subject to certain conditions, exchange all of the shares of the Exchangeable Preferred Stock for the Company’s 12¹/4% Subordinated Exchange Debentures Due 2010 (the “Exchange Debentures”).

Exchangeable Preferred Stock or the Exchange Debentures, for cash, at a price equal to 101% of the liquidation preference or aggregate principal amount (as the case may be) thereof, together with, in the case of the Exchangeable Preferred Stock, all accumulated and unpaid dividends to the date of purchase, or in the case of the Exchange Debentures, all accrued and unpaid interest to the date of purchase.

18% CONVERTIBLE CUMULATIVE PREFERRED STOCK

(1) On December 5, 2005, all of the 18% Convertible Cumulative Preferred Stock were repaid, including all interest due on the notes.

At December 31, 2004, the Company had outstanding $91,382 liquidation preference of 18% Convertible Preferred with a mandatory redemption date of June 30, 2010. As part of the Refinancing, the Company redeemed all of the Convertible Preferred in exchange for an aggregate payment of $106,550 million and the issuance of 1,500 shares of newly issued Class C Non-Voting Common Stock of the Company. Also as part of the Refinancing, Neil Moszkowski resigned from the Board of Directors of the Company. Mr. Moszkowski was elected by the holders of the Convertible Preferred to serve on the Board of Directors in 2003.

The Convertible Preferred ranked junior to the Company’s 12¹/4% Senior Exchangeable Preferred Stock and senior to any subsequently issued preferred stock. All dividends on the Convertible Preferred were payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year. Holders of the Convertible Preferred were entitled to receive an annual dividend rate of 18% plus approximately 24% of the aggregate value of each dividend (if any) declared and paid on the Company’s common stock. If not paid quarterly in cash, annually, accumulated and unpaid dividends were to be added to the basis of the stock.

H. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) as of December 31, 2005 and 2004, consists of:


	2005			2004
Foreign currency translation adjustments	$	1,327		$	9,023
Minimum pension liabilities		(1,403	)		(1,213	)
Unrealized gain on cash flow hedges		(1,115	)		45

	$	(1,191	)	$	7,855

I. INCOME TAXES

Significant components of deferred tax assets (liabilities) as of December 31, 2005 and 2004, are as follows:


	2005		2004
Deferred tax assets:
Accounts receivable reserves	$	1,289	$	1,332
Inventory reserves		1,108		1,344
Other reserves		3,260		3,880
AMT credit and Foreign Tax credit carryforward		1,201		627
Net operating loss carryforwards		16,746		15,242
Stock option compensation		411		3,131
Pension benefits		1,778		1,521
Unrealized foreign exchange losses				518
Other postretirement benefits		4,140		3,686

Total deferred tax assets		29,933		31,281


	2005			2004
Deferred tax liabilities:
Unrealized Foreign Exchange Gain		(592	)
Depreciation		(5,591	)		(7,845	)
Amortization		(18,330	)		(14,824	)

Total deferred tax liabilities		(24,513	)		(22,669	)

Net deferred tax assets	$	5,420		$	8,612

Included in the balance sheets:
Current assets	$	18,445		$	11,608
Noncurrent assets		238			298
Noncurrent liability		(13,263	)		(3,294	)

Net deferred tax assets	$	5,420		$	8,612

Income tax expense consists of the following for the years ended December 31, 2005, 2004 and 2003:


	2005		2004		2003
Current:
United States:
Federal alternative minimum	$		$	500	$
State and local		293		351		451
International		7,301		8,904		5,739

		7,594		9,755		6,190
Deferred		3,918		8,396		(2,117	)

		11,512		18,151		4,073
Allocation to other comprehensive income		1,023		249		127


	$	12,535	$	18,400	$	4,200

The income tax expense differs from the United States statutory rate for the years ended December 31, 2005, 2004 and 2003, as a result of the following:


	2005		2004			2003
Tax provision (benefit) at the United States federal statutory rate$	$	2,157	$	2,849		$	(739	)
International tax rate differential		134		541			302
State and local taxes, net of federal income tax effect		605		627			363
Foreign source income taxable in the United States		721		6,421			369
Non-deductible preferred stock dividends included in net loss		8,582		7,873			3,514
Non-deductible expenses		181		187			138
Other		155		(98	)		253

	$	12,535	$	18,400		$	4,200

Income (loss) before income taxes includes$20,215, $20,466, and $16,464 of income from international operations for the years ended December 31, 2005, 2004 and 2003. Day has not provided for deferred taxes on the undistributed earnings of international subsidiaries because the earnings are deemed permanently reinvested. Undistributed earnings of Day’s international subsidiaries amounted to approximately $66,234 as of December 31, 2005. The unrecognized deferred tax liability on these earnings has not been calculated due to the complexities associated with the hypothetical calculation. It is anticipated that Day will continue to annually remit a substantial portion of prospective earnings of certain international subsidiaries in the form of taxable dividends. The U.S. tax consequences of those dividends

will be recorded when such dividends are paid. Since the Company intends to remit earnings from its international subsidiaries only on a prospective basis, the APB No. 23 exception will continue to apply to the international subsidiaries earnings accumulated through December 31, 2003 and for earnings that the Company does not expect to remit as dividends. The Company has United States net operating loss carryforwards of $44,603 expiring from 2019 through 2024 to be used in future periods. The Company has $690 of United States Alternative Minimum Tax credits which has an unlimited carryforward period. Additionally, the Company has $511 United States Foreign Tax credit carryforwards which expires in 2015.

J. 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.

The accounting policies of the segments are the same as those described in Note B–Significant Accounting Policies. Segment performance is evaluated based on operating profit results compared to the annual operating plan. Intersegment sales and transfers are not material.

The Company manages the two segments as separate strategic business units. They are managed separately because each business unit requires different manufacturing processes, technology and marketing strategies.


	2005		2004		2003
Third party sales:
Image Transfer	$	317,797	$	313,672	$	240,539
Textile Products		45,472		49,035		48,448

Total	$	363,269	$	362,707	$	288,987


Segment operating profit:
Image Transfer	$	53,562	$	50,325	$	41,737
Textile Products		6,342		6,634		4,263

Total	$	59,904	$	56,959	$	46,000


Depreciation and amortization:
Image Transfer	$	7,782	$	7,338	$	6,913
Textile Products		1,702		1,712		1,813

Total	$	9,484	$	9,050	$	8,726


Assets:
Image Transfer	$	152,649	$	157,305	$	147,827
Textile Products		27,498		30,222		29,300

Total	$	180,147	$	187,527	$	177,127


Capital expenditures:
Image Transfer	$	5,799	$	8,163	$	6,253
Textile Products		1,679		2,270		621

Total	$	7,478	$	10,433	$	6,874

The following is a reconciliation of the items reported above to the amounts reported in the consolidated financial statements:


	2005			2004			2003
Operating profit:
Segment operating profit	$	59,904		$	56,959		$	46,000
APB #16 depreciation and amortization		(3,569	)		(4,626	)		(3,757	)
UK Pension Settlement		(703	)
Non-allocated corporate expenses		(1,350	)		(570	)		(567	)
Amortization of intangibles		(34	)		(34	)		(816	)
Management fees		(1,000	)		(1,000	)		(1,000	)

Total operating profit	$	53,248		$	50,729		$	39,860


Depreciation and amortization:
Segment depreciation and amortization	$	9,484		$	9,050		$	8,726
Amortization of intangibles		34			34			816
APB #16 depreciation and amortization		3,569			4,626			3,757
Amortization of deferred financing fees		1,819			1,775			2,313

Total depreciation and amortization	$	14,906		$	15,485		$	15,612


Assets:
Segment assets	$	180,147		$	187,527		$	177,127
APB #16 Adjustment		3,743			5,120			6,523
Goodwill and other intangibles		163,380			162,286			165,803
Deferred tax assets		18,684			11,906			18,838
Cash and other assets		8,703			3,396			3,249

Total assets	$	374,657		$	370,235		$	371,540

Net sales for the years ended December 31, 2005, 2004 and 2003, and long-lived assets as of December 31, 2005, 2004 and 2003, by geographic area are as follows:


	2005			2004			2003
Net sales:
United States	$	180,606		$	187,850		$	136,495

Germany		83,230			82,138			71,855
United Kingdom		47,081			44,597			37,051
Other international		76,173			72,291			64,517

Total international		206,484			199,026			173,423

Interarea		(23,821	)		(24,169	)		(20,931	)

	$	363,269		$	362,707		$	288,987


Long-lived assets:
United States	$	168,546		$	169,032		$	174,762

Germany		29,612			32,288			28,407
United Kingdom		21,656			23,784			23,928
Other international		11,646			11,917			12,873

Total international		62,914			67,989			65,208

	$	231,460		$	237,021		$	239,970

Sales between geographic areas are generally priced to recover cost plus an appropriate mark-up for profit.

K. RELATED PARTY TRANSACTIONS

In accordance with a management services agreement, the Company is required to pay GSC Partners and SGCP, the controlling shareholders of Day, an annual management fee of $1,000 plus expenses, payable semi-annually.

L. STOCKHOLDERS’ EQUITY AND STOCK BASED COMPENSATION PLAN

1998 Stock Option Plan

The 1998 Stock Option Plan provides incentives to officers and other key employees of the Company that serve to align their interests with those of stockholders. Under the 1998 Stock Option Plan, the Board is authorized to award four different types of non-qualified stock options: (i) service options, (ii) performance options, (iii) super performance options and (iv) exit options. Under the 1998 Stock Option Plan, unless otherwise provided by the Board, service options vest and become exercisable in five equal annual installments on each of the first five anniversaries of the date of grant; performance and super performance options vest and become exercisable in annual installments based on the achievement of annual EBITDA targets of the Company; and exit options vest and become exercisable based upon the internal rate of return of GSC Partners realized in connection with the disposition of its investment in the Company. Regardless of the satisfaction of any performance goals, performance options, super performance options and exit options fully vest and become exercisable on the ninth anniversary of the date of grant.

Initially, 7,885 shares of the Company’s voting common stock were authorized for issuance under the 1998 Stock Option Plan. In the event of certain changes in the Company’s capital structure affecting the common stock, the Board of Directors may make appropriate adjustments in the number of shares then covered by options and, where applicable, the exercise price of options under the 1998 Stock Option Plan.

As of December 31, 2005, 7,437 options have been granted (of which 1,257 are exercisable) under the 1998 Stock Option Plan with an exercise price of $4,030. These options expire as follows: 5,987 expire in 2007 and 1,450 expire in 2012.

Day Stock Option Plan

Certain employees hold options that were previously granted under the Day International Group, Inc. Stock Option Plan (the “Day Option Plan”). In 1998, all options granted under the Day Option Plan became fully vested and the Day Option Plan was amended to provide that no further options may be awarded under that plan. As a result, compensation expense associated with these options was recorded in 1998 and the remaining balance of $1,105 and $7,720 is included in other long-term liabilities at December 31, 2005 and 2004. During 2005, 2,342.5 options with an exercise price of $1,000 expired under the plan resulting in again of 6,640. As of December 31, 2005, there are 310 options outstanding with an exercise price of $1,200 per share and 75 options outstanding with an exercise price of $1,000 per share. The options expire as follows: 75 expire in 2006; and 310 expire in 2007. The Company is currently evaluating a new stock option plan for 2006.

The following table summarizes activity in the Company’s stock option plans:


	2005					2004					2003
	Exercise					Exercise								Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year		10,165		$	3,223		10,290		$	1,970		10,480		$	3,237
Granted Exercised							(25	)		1,000
Forfeited		(2,343	)		1,000		(100	)		4,030		(190	)		3,871

Outstanding at end of year		7,822			3,889		10,165			3,223		10,290			3,226

Exercisable at end of year		1,642			3,414		3,985			1,995		3,973			1,970

Warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per share were granted in 1998 to one of the Board members as compensation for services as a director. In 2000, additional warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per share were granted to each of two Board members for their services. The warrants are fully vested as of December 31, 2002.

M. RETIREMENT PLANS

The Company has defined benefit plans covering certain associates of its international subsidiaries. Benefits under these plans are based primarily on years of service and qualifying compensation during the final years of employment. Day uses a December 31 measurement date for the plans.

The pension plan in the United Kingdom has plan assets consisting of U.K. government bonds. The Company’s funding policy complies with the requirements of local laws and regulations. During 2001, the Company froze the benefits under the U.K. pension plan and settled a portion of the obligation in

2003 by transferring the benefits of active associates to a defined contribution plan. The Company purchased annuity contracts in early 2005 to settle the remaining obligations under the plan.

In conjunction with the TPO acquisition in 1999, the Company entered into a Promise to Pay agreement with Armstrong World Industries GmbH (“Armstrong”) for the unfunded pension obligation of TPO’s Germany subsidiary in which Armstrong agreed to pay the portion of any pension obligations that the associates earned prior to the date of the acquisition. At December 31, 2005, the present value of the estimated portion of the pension obligation that is Armstrong’s responsibility is $3,096. The plan is closed to new participants subsequent to the date of the TPO acquisition.

Day also sponsors defined contribution plans for certain associates, which provide for Company contributions of a specified percentage of each associate’s total compensation. Certain of these plans include a profit-sharing component that varies depending on the achievement of certain objectives.

The funded status of the Company’s defined benefit plans at December 31, 2005 and 2004, is as follows:


	2005			2004
Change in benefit obligation:
Benefit obligation at beginning of year	$	19,490		$	15,672
Service cost		366			390
Interest cost		399			787
Actuarial (gains) losses		1,264			2,043
Benefits paid		(91	)		(685	)
Transfers		(10,361	)
Foreign currency exchange		(1,226	)		1,283

Benefit obligation at end of year		9,841			19,490


Change in plan assets:
Fair value of plan assets at the beginning of the year		7,534			7,036
Actual return on plan assets					632
Employer contribution		91			63
Benefits paid		(91	)		(685	)
Transfers		(7,534	)
Foreign currency exchange					488

Fair value of plan assets at end of year		0			7,534


Funded status		(9,841	)		(11,956	)
Unrecognized net actuarial (gain) loss		2,554			2,443
Additional minimum liability–included in accumulated other comprehensive income (loss)		(2,377	)		(1,906	)

(Accrued) pension costs	$	(9,664	)	$	(11,419	)

Included in the balance sheets:
Other accrued expenses—current liability	$			$	(2,826	)
Other long-term liabilities		(9,664	)		(8,593	)

(Accrued) pension costs	$	(9,664	)	$	(11,419	)


Accumulated benefit obligation	$	9,664		$	18,953

Weighted-average assumptions:
Discount rate		4.25	%		4.50	%

Long-term rate of increase in compensation		2.86	%		2.80	%

Long-term rate of return on plan assets		0	%		4.50	%

Post-retirement pension increase (cost-of-living adjustment)		1.00	%		1.90	%

The plan assets at December 31, 2004, consisted of U.K. government bonds. The Company had assumed a long-term rate of return of 4.50% based on the expected interest rates to be earned on the bonds. In accordance with U.K. regulations, the Company had been required to invest in the bonds upon the decision to terminate the U.K. pension plan. The Company contributed approximately $2,900 to the U.K. pension plan in 2005 to purchase annuity contracts and settle all plan obligations. The Company also recognized a loss upon settlement of approximately $700 in 2005.

A summary of the components of net periodic pension cost for the defined benefit plans and for the defined contribution plans for the years ended December 31, 2005, 2004 and 2003, is as follows:


	2005			2004			2003
Defined benefit plans:
Service cost	$	366		$	390		$	325
Interest cost		399			787			696
Expected return on plan assets					(341	)		(329	)
Actuarial loss recognized		34			888			678

Net periodic pension cost		799			1,724			1,370
Defined contribution plans		3,171			3,335			2,594

Total pension expense	$	3,970		$	5,059		$	3,964

Weighted-average assumptions:
Discount rate		4.5	%		5.25	%		5.00	%

Compensation increase		2.86	%		3.00	%		2.50	%

Long-term rate of return on plan assets		0	%		5.00	%		4.50	%

Future benefit payments for each of the next five years and for the five years thereafter are expected to be paid as follows: $126 in 2006, $143 in 2007, $167 in 2008, $181 in 2009, $190 in 2010 and $1,351 in total for 2011 through 2015. The Company’s remaining pension plans are unfunded, thus the Company contributes to the plans to fund current benefit payments.

N. OTHER POSTRETIREMENT BENEFITS

Day provides certain contributory postretirement health care and life insurance benefits for certain U.S. associates. During 2003, the Company amended the plan so that participants become eligible for postretirement benefits if they retire on or after age 55, with at least ten years of service after attaining age 45 and to increase the retirees’ share of benefit costs. The amendments made to the plan decreased the pension benefit obligation by $4,258, which will be amortized into income over 12 years. Day uses a December 31 measurement date for the plan.

The status of Day’s unfunded plan at December 31, 2005 and 2004, is as follows:


	2005			2004
Change in benefit obligation:
Benefit obligation at beginning of year	$	15,744		$	12,640
Service cost		1,321			1,101
Interest cost		1,013			849
Participant contributions		388			229
Actuarial (gains) losses		(1,714	)		1,721
Benefits paid		(764	)		(796	)

Benefit obligation at end of year		15,988			15,744

Unrecognized prior service gain		3,746			4,580
Unrecognized net actuarial gain (loss)		(4,183	)		(6,346	)

Accrued postretirement benefit obligation	$	15,551		$	13,978

Discount rate used in determining the benefit obligation at year end		6.00	%		6.00	%

The weighted-average assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) is assumed to be 10.0% and decreasing 1.0% per year to an ultimate trend rate of

5.0% in 2011 and remaining at that level thereafter. A one percentage point increase in the assumed health care cost trend rate would have increased the accumulated benefit obligation by $2,396 at December 31, 2005, and the interest and service cost would have been $463 higher for the year ended December 31, 2005. A one percentage point decrease in the assumed health care cost trend rate would have decreased the accumulated benefit obligation by $1,982 at December 31, 2005, and the interest and service cost would have been $372 lower for the year ended December 31, 2005.

Future benefit payments, net of participant contributions, for each of the next five years and for the five years thereafter are expected to be paid as follows: $437 in 2006, $502 in 2007, $545 in 2008, $612 in 2009, $701 in 2010 and $5,147 in total for 2011 through 2015. The Company’s postretirement plan is unfunded, thus the Company contributes to the plan to fund current benefit payments, net of participant contributions. The Company’s contributions to the plan for the years ended December 31, 2005 and 2004 was $375 and $567.

Net periodic postretirement benefit costs include the following components for the years ended December 31, 2005, 2004 and 2003:


	2005			2004			2003
Service cost	$	1,321		$	1,101		$	829
Interest cost		1,013			849			885
Prior service gain recognized		(834	)		(641	)		(206	)
Actuarial loss recognized		449			234			263

Net periodic postretirement benefit costs	$	1,949		$	1,543		$	1,771

Discount rate used in determining the interest cost		5.75	%		6.25	%		7.00	%

On December 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act expands Medicare primarily by adding a prescription drug benefit for Medicare-eligible individuals beginning in 2006, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. The Company believes that the plan, as currently designed, is not actuarially equivalent to Medicare Part D and thus would not qualify for the federal subsidy under the Act. As a result, the Company believes that the effect of the legislation will not be material to the results of operations or financial position of the Company.

O. COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS

The Company leases a building in Germany under a capital lease. Property under this capital lease is included in property, plant and equipment at December 31, 2005 and 2004, as follows:


	2005			2004
Land and buildings	$	1,596		$	1,822
Accumulated depreciation		(494	)		(423	)

	$	1,102		$	1,399

The Company also leases certain buildings, transportation equipment and office equipment under operating leases with terms of 1 to 10 years. Rental expense for the years ended December 31, 2005, 2004

and 2003 was $4,038, $3,413, and $2,438. The following is a schedule by year of future annual minimum lease payments under non-cancelable leases as of December 31, 2005:


	Capital			Operating
	Lease			Leases
2006	$	176		$	3,879
2007		176			2,587
2008		176			2,000
2009		176			1,423
2010		176			469
Thereafter		514			311

	$	1,394		$	10,669

Amount representing interest		(279	)

Present value of minimum lease payments (including current portion of $115)	$	1,115

CONTINGENCIES

There are currently no environmental claims against the Company for the costs of environmental remediation measures taken or to be taken. From time to time, the Company is involved in various legal proceedings arising in the ordinary course of business. None of the matters in which the Company is currently involved, either individually or in the aggregate, is expected to have a material adverse effect on the Company’s business or financial condition.

P. SUPPLEMENTAL CASH FLOW DISCLOSURES


	2005		2004		2003
NON-CASH TRANSACTIONS:
Preferred stock dividends paid in kind					$	1,901


CASH PAID FOR:
Income taxes	$	8,335	$	9,938	$	8,427

Interest	$	17,616	$	20,230	$	25,762

Q. RECENTLY ISSUED ACCOUNTING STANDARDS

In November 2004, the Financial Accounting Standards Board issued SFAS No. 151, Inventory Costs. This Statement amends ARB No. 43, Chapter 4 to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of this Statement has no effect on the Company as the Company’s current accounting complies with the guidance.

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (R), Share-based Payment. SFAS No. 123 (R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123 (R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123 (R) eliminates the alternative to use APB Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. Under APB Opinion 25, issuing stock options to employees generally resulted in recognition of no compensation cost. This

Statement requires entities to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. SFAS 123 (R) is effective as of the beginning of the first annual reporting period that begins after December 15, 2005. The Company plans to adopt SFAS 123(R) as of January 1, 2006 and has determined that this statement will have no effect on the cash flows of the Company, or the Company’s compliance with its debt covenants. Net income (loss) after the adoption will be affected by the stock option expense that was previously only disclosed. The Company will adopt this standard using the modified prospective method as defined in SFAS No. 123(R). Pre-tax income (loss) after the adoption will be affected by approximately $1.2 million in stock option expense. Compensation expense for the invested awards will be measured based on the fair value of the awards which will approximate the value previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. This estimate is based on many assumptions including the level of stock option grants expected in 2006, our stock price, and significant assumptions in the option valuation model including volatility and the expected life of options. Actual expenses could differ from the estimate.

R. SUBSEQUENT EVENT

At December 31, 2005 the Company had outstanding $8,450 face amount of 9¹/2% Senior Subordinated Notes due March 15, 2008 (the “Notes”). On December 5, 2005 the Company provided notice of redemption of the $8,450 million in principal amount of Notes and the notes were redeemed on January 5, 2006.

S. RESTATED THIRD QUARTER RESULTS (UNAUDITED)

The 2,342.5 stock options that expired during 2005, expired in August of 2005. Below are restated operating results had the stock options expiration been recorded in the 3^rd quarter of 2005.


	3 months ended		9 months ended
	September 30, 2005		September 30, 2005
	(Restated)		(Restated)
Net sales	$	91,854	$	273,163
Gross profit		33,948		101,622
Operating profit		14,013		40,560
Income before Taxes		9,886		13,197
Net income (loss)		8,245		5,258

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

None

ITEM 9A. 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 December 31, 2005. To the best of management’s knowledge, there were no changes in the internal control and disclosure control systems during the quarter ended December 31, 2005, that would materially affect the control systems.

ITEM 9B. OTHER INFORMATION

None

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following are the names, ages and a brief account of the business experience for the last five years of each person who is a director or executive officer of the Company as of March 1, 2006.


Name	Age		Position
William C. Ferguson		75	Chairman of the Board

Sean W. Brophy		37	Director

Carl J. Crosetto		57	Director

Matthew C. Kaufman		35	Director

Philip Raygorodetsky		32	Director


Christopher A. White		40	Director

Dennis R. Wolters		59	Chief Executive Officer, President and Director

Name	Age		Position

Dwaine R. Brooks		63	Vice President, Human Resources

David B. Freimuth		53	Group Vice President and General Manager, Textiles and Flexographic Products since January 2004; prior to that Senior Vice President, General Manager, Textile Products

Dermot J. Healy		51	Managing Director, Europe

Thomas J. Koenig		45	Vice President and Chief Financial Officer and Assistant Secretary

Stephen P. Noe		49	Group Vice President and General Manager, Image Transfer Group since November 2003; prior to that Senior Vice President, General Manager, Transfer Media since July 2001; prior to that Senior Vice President, Marketing & Sales, Transfer Media since January 2001; prior to that Principal at CSC Consulting in the Emerging Markets Practice since July 2000; prior to that Business Director at FMC Corporation

Brent A. Stephen		54	Managing Director, Pacific Rim since January 2003; prior to that Vice President and Sales Manager, Australia

William C. Ferguson has been a director since 1998. He retired as Chairman and Chief Executive Officer of NYNEX in 1995, a position he had held since 1989. Mr. Ferguson is a member of the Advisory Board of GSC Partners.

Sean W. Brophy has been a director since 2004. He is a Managing Director and founder of Labrador Capital since 2001. Prior to founding Labrador Capital, Mr. Brophy was a Principal and member of the General Partner of Celerity Partners, Inc. Mr. Brophy is a member of the board of directors of Vista

Cove Senior Living, Inc., Vista Cove Rancho Mirage, LLC, Robert Brandt & Co., and Rancho Cove Partners, LLC.

Carl J. Crosetto has been a director since 2000. He retired as President of Bowne & Co., Inc. in December 2003 after 30 years service with Bowne. In January 2004, Mr. Crosetto joined GSC Partners as a Senior Advisor and is now a Managing Director. Mr. Crosetto is a member of the board of directors of Bowne & Co., Inc. and SpeedFlex Asia Limited.

Matthew C. Kaufman has been a director since 2000. He is a Senior Managing Director with GSC Partners, which he joined in 1997. He is Chairman of the board of directors of Pacific Aerospace & Electronics, Inc. and a member of the board of directors of Atlantic Express Transportation Group, Burke Industries, Inc., Dukes Place Holdings Limited, Safety-Kleen Corp., Waddington North America, Inc. and Worldtex, Inc.

Philip Raygorodetsky has been a director since 2003. He is a Managing Director with GSC Partners, which he joined in 1997. Mr. Raygorodetsky is a member of the board of directors of Pacific Aerospace & Electronics, Inc., Worldtex, Inc. and Wrightline, LLC.

Christopher A. White has been a director since 2003. He is a Director of SG Capital Partners LLC. Previously, Mr. White worked in the Equity Capital Markets groups of SG Cowen from 1999 to 2003. He is a member of the board of directors of Achillion Pharmaceuticals, Inc., Coleman Floor Company, Ricerca Bioscience LLC and RNB Communications, Inc.

Messrs. Brophy and Crosetto were elected by the holders of the 12¹/4% Senior Exchangeable Preferred Stock due 2010 (the “Exchangeable Preferred Stock”). In accordance with the terms of the Certificate of Designation of the Exchangeable Preferred Stock the holders of the Exchangeable Preferred Stock, voting as one class, are allowed to elect two directors, if the dividends on the Exchangeable Preferred Stock are in arrears and unpaid (and in the case of dividends payable after March 15, 2003, are not paid in cash) for four consecutive quarterly periods. As long as the dividends are in arrears, 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. In December 2005, the Company paid all dividends in arrears in conjunction with the new Credit Agreement. However, since the new Credit Agreement restricts the payment of dividends on the Exchangeable Preferred Stock in the future, the Company has asked Messrs. Brophy and Crosetto to remain as directors.

In conjunction with the repurchase of the Jr. Preferred Shares in December 2005, Mr. Neal Moszkowski resigned as a director of the Company.

Director Compensation

As compensation for his services as director, in 1998, Mr. Ferguson received warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per share. On January 18, 2000, Mr. Ferguson received additional warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per share. As compensation for his services as director, Mr. Crosetto also received warrants to purchase up to 74 shares of Common Stock at a price of $4,030 per share on January 18, 2000. As of December 31, 2002, the warrants are fully vested. Beginning in 2003, Mr. Ferguson receives an annual retainer of $100,000 for his services as Chairman of the Board. Mr. Brophy receives an annual retainer of $25,000 for his

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation for 2005, 2004 and 2003 for Mr. Wolters and the four other most highly compensated executive officers of the Company at the end of 2005. All amounts for non-U.S. executive officers are converted to U.S. dollars at the average exchange rate for each year.


							Long Term
							Compensation
							Awards
			Annual				Securities
Name and			Compensation				Underlying		All Other
Principal Position	Year		Salary		Bonus		Options(#)		Compensation
Dennis R. Wolters,		2005	$	370,000	$	250,000		0	$	53,007	(a)
President and Chief		2004		351,200		250,000		0		46,736
Executive Officer		2003		270,000		140,000		0		31,312

David B. Freimuth, Group		2005		217,750		99,000		0		26,245	(b)
Vice President and General		2004		210,364		59,000		0		16,124
Manager, Textiles and Flexographic Products		2003		170,800		55,000		0		15,384

Dermot J. Healy,		2005		243,746		65,797		0		70,806	(c)
Managing Director,		2004		236,824		89,615		0		64,004
Europe		2003		188,037		67,330		0		58,811

Thomas J. Koenig,		2005		200,000		66,096		0		22,165	(d)
Vice President and		2004		190,640		59,000		0		17,349
Chief Financial Officer		2003		159,000		40,000		0		16,047

Stephen P. Noe, Group Vice		2005		231,500		114,659		0		25,288	(e)
President and General		2004		222,162		114,000		0		23,137
Manager, Image Transfer		2003		181,100		62,000		0		18,134


(a)		Represents company contributions to the Day 401(k) and Profit Sharing Plan ($26,436), company contributions to the Day International, Inc. Supplemental Savings and Retirement Plan ($15,848), premiums for group term life insurance ($5,180), and automobile allowance ($5,543).

(b)		Represents company contributions to the Day 401(k) and Profit Sharing Plan ($16,481), company contributions to the Day International, Inc. Supplemental Savings and Retirement Plan ($2,575), premiums for group term life insurance ($1,569) and automobile allowance ($5,620).

(c)		Represents company contributions to an UK benefit plan ($51,341) and automobile allowance ($19,465).

(d)		Represents company contributions to the Day 401(k) and Profit Sharing Plan ($15,889), company contributions to the Day International, Inc. Supplemental Savings and Retirement Plan ($1,786), premiums for group term life insurance ($765) and automobile allowance ($3,725).


(e)		Represents company contributions to the Day 401(k) and Profit Sharing Plan ($18,485), company contributions to the Day International, Inc. Supplemental Savings and Retirement Plan ($5,246), premiums for group term life insurance ($1,032) and automobile allowance ($525).

FY-End Option/SAR Values


	Number
	of Securities		Value of
	Underlying		Unexercised
	Unexercised		In-the-Money
	Options/SARs		Options/SARs
	at FY-End(#)		at FY-End($)
	Exercisable/		Exercisable/
	Unexer-		Unexer-
Name	cisable		cisable(1)
Dennis R. Wolters		450/	$	0/
		2,400	$	0

David B. Freimuth		434/	$	939,309/
		731	$	0

Dermot J. Healy		114/	$	0/
		322	$	0

Thomas J. Koenig		69/	$	0/
		186	$	0

Stephen P. Noe		100/	$	0/
		200	$	0


(1)		Based upon estimated fair market value of the shares less the exercise price.

Employment Agreements

Each of Messrs. Wolters, Freimuth, Healy, Koenig, and Noe is a party to an employment agreement with the Company, subject to annual renewals unless notice of non-renewal is given. Under the employment agreements, each receives annual base salaries and an incentive bonus at a percentage of plan target. The agreements also contain certain non-competition and non-solicitation provisions. Subject to certain exceptions, in the event that the executive is actually or constructively terminated under the employment agreement by the Company without cause, each employment agreement provides that the executive is entitled to receive the following compensation: (i) accrued salary, (ii) pro-rata incentive bonus for the year of termination, assuming that 100% of the annual plan target was met, (iii) a lump sum equal to one times base salary and annual incentive bonus target and (iv) continuation of benefits and perquisites for one year following termination.

Compensation Committee Interlocks

Since the Company does not have a compensation committee, the Board of Directors determines executive compensation. Mr. Ferguson serves on the Advisory Board of GSC Partners. Mr. Kaufman is a Managing Director of GSC Partners. Mr. Raygorodetsky is a Vice President of GSC Partners. Mr. Crosetto is a Managing Director of GSC Partners. Mr. White is a Director of SG Capital Partners LLC (“SGCP”). GSC Partners and SGCP, the Company’s controlling shareholders, provide business, financial and management advisory services to the Company for an annual total fee of $1.0 million, plus expenses. The Company also indemnifies GSC Partners and SGCP from and against certain liabilities. Mr. Moszkowski is a Managing Director with Soros Private Equity Partners (“SPEP”). SPEP and its affiliates are the majority shareholders of the Company’s Convertible Cumulative Preferred Stock. The Company also indemnifies SPEP from and against certain liabilities. Mr. Wolters is the President and Chief Executive Officer of the Company. No other officers of the Company participated in Board deliberations regarding executive compensation in 2005.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

Number of

securities

remaining

available for

Number of

future issuance

securities to be

under equity

issued upon

Weighted-average

compensation

exercise of

exercise price of

plans (excluding

outstanding

securities

options, warrants

reflected in

and rights

column (a))

(a)

(b)

(c)

Equity compensation plans approved by security holders

—

Equity compensation plans not approved by security holders (1)

8,044

3,893

448

Total

8,044

3,893

448


(1)		These plans consist of the Day Stock Option Plan, the 1998 Stock Option Plan and warrants issued to individual directors as compensation for services performed. These plans were approved by shareholders holding a majority of the Class A Voting Common Stock through their representation on the Board of Directors. See Note L to the Consolidated Financial Statements for detailed descriptions of these plans.

Security Ownership

The following table sets forth certain information regarding the beneficial ownership of the Company’s Common Stock, including options to acquire Common Stock, by (i) each person (or group of affiliated persons) known by the Company to be the beneficial owner of more than 5% of the outstanding Common Stock, (ii) each Director, (iii) the Company’s Chief Executive Officer and the Company’s other named executive officers (as determined in accordance with the rules of the Commission), and (iv) all of the Company’s executive officers and Directors as a group. Except as indicated in the footnotes to this table, the Company believes that the persons named in this table have sole voting and investment power with respect to all the shares of stock indicated.


	No. of Shares
	of Stock		% of
Name of Beneficial Owner	(a)(b)		Stock
Common Stock:
Dennis R. Wolters		750		2.4
David B. Freimuth		534		1.7
Dermot J. Healy		114		0.3
Thomas J. Koenig		84		0.2
Stephen P. Noe		100		0.3
Sean W. Brophy		—		—
Carl J. Crosetto (c)		74		0.2
William C. Ferguson		148		0.4
Matthew C. Kaufman (c)		—		—
Neal Moszkowski		—		—
Philip Raygorodetsky (c)		—		—
Christopher A. White (d)		—		—
All Directors and Executive Officers as a Group (14 persons)		4,780		15.0
Unione Italiana		195		0.6
Towerbrook		974		3.0
SG Capital Partners LLC (d)		3,865		12.6
1221 Avenue of the Americas New York, NY 10020
Greenwich IV, LLC (c)		19,156		62.2
GSC Partners 500 Campus Drive, Suite 220, Florham Park, NJ 07932
12¹/4% Senior Exchangeable Preferred:
GSC Recovery II, L.P. (e)		15,397		31.6


(a)		Beneficial ownership is determined in accordance with the rules of the Commission and includes general voting power and/or investment power with respect to securities. The table includes shares of Common Stock subject to options and warrants currently exercisable or exercisable within 60 days of the date of this report. As of the date of this report, the number of such shares is 4,146.5. Exercisable options included in the number of shares above include 450 shares for Mr. Wolters, 434 shares for Mr. Freimuth, 53 shares for Mr. Healy, 69 shares for Mr. Koenig, 100 shares for Mr. Noe and 2,808.5 shares for all directors and executive officers as a group. The shares listed for Mr. Crosetto and Mr. Ferguson represent vested warrants to purchase shares of Common Stock.

(b)		SGCP owns shares of Class B Non-Voting Common Stock. All other shares are shares of Class A Voting Common Stock.

(c)		Greenwich IV, LLC is an affiliate of GSC Partners. Messrs. Crosetto, Kaufman and Raygorodetsky may be deemed to have indirect beneficial ownership of the 19,156 shares of Common Stock beneficially owned by Greenwich IV, LLC by virtue of their affiliation with GSC Partners. Each of Messrs. Crosetto, Kaufman and Raygorodetsky disclaim any such beneficial ownership.

(d)		Mr. White may be deemed to have indirect beneficial ownership of the 3,865 shares of Common Stock. Class C Non Voting Shares are owned by Unione Italiana, Towerbrook, SGCP, and GSC partners

by virtue of his affiliation with SG Capital Partners LLC. Mr. White disclaims any such beneficial ownership.

(e)

GSC Recovery II, L.P. is an affiliate of GSC Partners. Messrs. Crosetto, Kaufman and Raygorodetsky may be deemed to have indirect beneficial ownership of the 15,397 shares of Senior Exchangeable Preferred Stock beneficially owned by GSC Recovery II, L.P. by virtue of their affiliation with GSC Partners. Each of Messrs. Crosetto, Kaufman and Raygorodetsky disclaim any such beneficial ownership. The Senior Exchangeable Preferred Stock has no voting rights other than the right to elect two directors as long as dividends are in arrears and unpaid for four consecutive quarterly periods. This right was exercised in 2004 with Carl Crosetto and Sean Brophy elected as directors.

Stockholders Agreement

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

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

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company has engaged GSC Partners and SGCP, pursuant to the Management Agreement, to provide it with certain business, financial and managerial advisory services, including developing and implementing corporate and business strategy and providing other consulting and advisory services. The Management Agreement provides for an annual fee of $1.0 million and contains indemnification and expense reimbursement provisions that are customary for management agreements of this type. The

Management Agreement will continue in full force and effect, and shall terminate upon, the earlier to occur of (i) January 18, 2008, and (ii) the date on which the affiliates of GSC Partners no longer, directly or indirectly, own any shares of capital stock of the Company, and may be earlier terminated by GSC Partners, in its sole discretion.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees

The following table presents fees for professional services rendered by Ernst & Young LLP for the years ended December 31, 2005 and 2004.


	2005		2004
Audit fees	$	527	$	423
Audit-related fees		3		30
Tax fees		435		346

Total	$	965	$	799

Audit fees consist of fees billed or agreed to be billed for services related to the audit of the Company’s consolidated annual financial statements and reviews of the interim consolidated financial statements and services that are normally provided by Ernst & Young LLP in connection with statutory and regulatory filings.

Audit-related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit and not reported under “Audit fees.” This category includes services related to audits of employee benefit plans and consultations in connection with acquisitions.

Tax fees consist of fees billed or agreed to be billed for services rendered for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and international tax compliance, acquisitions and international tax planning.

Policy on Pre-Approval of Services of the Independent Auditor

The Board of Directors’ policy is to pre-approve all audit and non-audit services provided by the independent auditors. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services. The Board has delegated pre-approval authority to the Chief Executive Officer for de minimis services when expedition of services is necessary, with follow-up with the Board of Directors at their next meeting. The independent auditors and management are required to periodically report to the full Board of Directors regarding the extent of services provided by the independent auditors.

Part IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) Financial Statements

The following consolidated financial statements of the Company and its subsidiaries are incorporated by reference as part of this Report at Item 8 hereof.

Day International Group, Inc.
Years ended December 31, 2005, 2004 and 2003:

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedules

The information required to be submitted in the Financial Statement Schedules for Day International Group, Inc. and consolidated subsidiaries has either been shown in the financial statements or notes, or is not applicable or required under Regulation S-X; therefore, those schedules have been omitted.

(b) Exhibits

See Index to Exhibits

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Day International Group, Inc. has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Day International Group, Inc.
	(Registrant)

Date: March 27, 2006	By:	/s/ Dennis R Wolters

	Dennis R. Wolters
	President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of Day International Group, Inc. and in the capacities and on the dates indicated.


Date: March 27, 2006				By: /s/ Dennis R Wolters

				Dennis R. Wolters
				President, Chief Executive Officer and
				Director (Principal Executive Officer)

Date: March 27, 2006				By: /s/ Thomas J. Koenig

				Thomas J. Koenig
				Vice President and Chief Financial Officer
				(Principal Financial Officer and Principal
				Accounting Officer)

Date: March 27, 2006				By: /s/ William C. Ferguson

				William C. Ferguson
				Director

Date: March 27, 2006				By: /s/ Sean W. Brophy

				Sean W. Brophy
				Director

INDEX TO EXHIBITS

(1) Underwriting Agreements

1.1

Purchase Agreement, dated as of March 13, 1998 between the Company and Societe Generale Securities Corporation (incorporated by reference to Exhibit 1.1 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))

(3) Articles of Incorporation and By-Laws

	3.1		Certificate of Incorporation of Day International Group, Inc. (“Group”), as amended (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K for the year ended December 31, 2003)

	3.2		By-Laws of Group, as amended (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K for the year ended December 31, 2003)

(4) Instruments Defining Rights of Security Holders, including Indentures


	4.1		Registration Rights Agreement, dated as of March 18, 1998, by and between the Company and Societe Generale Securities Corporation (incorporated by reference to Exhibit 4.4 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))

	4.2		Certificate of Designation, dated March 18, 1998, of Powers, Preferences and Relative, Participating, Optional and other Special Rights of 12¹/4% Senior Exchangeable Preferred Stock due 2010 and Qualifications, Limitations and Restrictions thereof (the “Exchangeable Preferred Stock”) (incorporated by reference to Exhibit 4.5.1 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))

	4.3		Form of Global Certificate for the Exchangeable Preferred Stock (incorporated by reference to Exhibit 4.5.2 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))

	4.4		Exchange Debenture Indenture, dated as of March 18, 1998, among Day International Group, Inc., Day International, Inc. and the Bank of New York as Trustee (incorporated by reference to Exhibit 4.6 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))

	4.5		Preference Stock Purchase Agreement, dated as of October 19, 1999, among the Company and the several investors party thereto (incorporated by reference to Exhibit 4.4 to Form 8-K dated October 28, 1999)

	4.6		Amended and Restated Stockholders Agreement, dated as of October 19, 1999, among the Company and certain of its Stockholders (incorporated by reference to Exhibit 4.5 to Form 8-K dated October 28, 1999)

(10) Material Contracts


	10.1		Credit Agreement, dated December 5, 2005 (incorporated by reference to Form 8-K dated December 5, 2005)

	10.2		Deed of Trust, dated January 15, 1998, with respect to the North Carolina property (incorporated by reference to Exhibit 4.12 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)); as amended October 19, 1999 (incorporated by reference to Exhibit 10.6.1 to the Form 8-K dated September 22, 2003); as further amended June 29, 2001 (incorporated by reference to Exhibit 10.6.2 to the Form 8-K dated September 22, 2003); and as modified September 16, 2003 (incorporated by reference to Exhibit 10.6.3 to the Form 8-K dated September 22, 2003) as modified December 2005

	10.3		Mortgage and Security Agreement Dated January 16, 1998, with respect to the Michigan Property (incorporated by reference to Exhibit 4.13 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839)); as amended October 19, 1999 (incorporated by reference to Exhibit 10.7.1 to the Form 8-K dated September 22, 2003); as further amended June 29, 2001 (incorporated by reference to Exhibit 10.7.2 to the Form 8-K dated September 22, 2003); and as modified September 16, 2003 (incorporated by reference to Exhibit 10.7.3 to the Form 8-K dated September 22, 2003) as modified

	10.4		Mortgage Agreement, dated October 19, 1999, with respect to the South Carolina property (incorporated by reference to Exhibit 10.5.1 to the Form 8-K dated September 22, 2003); as amended June 29, 2001 (incorporated by reference to Exhibit 10.5.2 to the Form 8-K dated September 22, 2003); and as modified September 16, 2003 (incorporated

			by reference to Exhibit 10.5.3 to the Form 8-K dated September 22, 2003) as modified

	10.5		Deed of Trust, dated October 19, 1999, with respect to the Texas property (incorporated by reference to Exhibit 10.8.1 to the Form 8-K dated September 22, 2003); as modified September 16, 2003 (incorporated by reference to Exhibit 10.8.2 to the Form 8-K dated September 22, 2003) as modified

	10.6		Mortgage Agreement, dated October 19, 1999, with respect to the Illinois property (incorporated by reference to Exhibit 10.9.1 to the Form 8-K dated September 22, 2003); as amended June 29, 2001 (incorporated by reference to Exhibit 10.9.2 to the Form 8-K dated September 22, 2003); and as modified September 16, 2003 (incorporated by reference to Exhibit 10.9.3 to the Form 8-K dated September 22, 2003) as modified

	10.9		Stock Purchase Agreement, dated as of December 18, 1997, by and among Greenwich IV, LLC, GSD Acquisition Corp. and the Stockholders of Day International Group, Inc. parties thereto (incorporated by reference to Exhibit 2.1 to the Form 8-K dated January 16, 1998); as amended on January 16, 1998 (incorporated by reference to Exhibit 2.2 to the Form 8-K dated January 16, 1998)

	10.10*		Consulting Agreement between the Company and GSC Partners (incorporated by reference to Exhibit 10.5.1 to the Amendment No. 2 to Registration Statement on Form S-4/A filed on June 22, 1998 (Reg. No. 333-51839))

	10.11*		Indemnification Agreement between the Company and GSC Partners (incorporated by reference to Exhibit 10.5.2 to the Amendment No. 2 to Registration Statement on Form S-4/A filed on June 22, 1998 (Reg. No. 333-51839))

	10.12*		Consulting Agreement between the Company and SG Capital Partners Limited (incorporated by reference to Exhibit 10.5.3 to the Amendment No. 2 to Registration Statement on Form S-4/A filed on June 22, 1998 (Reg. No. 333-51839))

	10.13*		Indemnification Agreement between the Company and SG Capital Partners Limited (incorporated by reference to Exhibit 10.5.4 to the Amendment No. 2 to Registration Statement on Form S-4/A filed on June 22, 1998 (Reg. No. 333-51839))

	10.14		Purchase Agreement between Armstrong World Industries, Inc. and Armstrong World Industries GmbH, as Sellers and Day International, Inc., as Buyer (incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1999)

	10.15*		Stock warrant to purchase shares of Common Stock of the Company, dated as of January 18, 1998, issued to Mr. William C. Ferguson (incorporated by reference to Exhibit 10.30 to the Annual Report on Form 10-K for the year ended December 31, 1998)

	10.16*		Stock warrant to purchase shares of Common Stock of the Company, dated as of January 27, 2000, issued to Mr. William C. Ferguson (incorporated by reference to Exhibit 10.37 to the Annual Report on Form 10-K for the year ended December 31, 2000)

	10.17*		Stock warrant to purchase shares of Common Stock of the Company, dated as of January 18, 2000, issued to Mr. Carl J. Crosetto (incorporated by reference to Exhibit 10.38 to the Annual Report on Form 10-K for the year ended December 31, 2000)

	10.18*		Employment Agreement, dated January 16, 1998, between the Guarantor and Mr. Dennis R. Wolters (incorporated by reference to Exhibit 10.4 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))

	10.19*		Employment Agreement, dated January 16, 1998, between Day International, Inc. and Mr. David B. Freimuth (incorporated by reference to Exhibit 10.5 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))

	10.20*		Day International Group, Inc. Stock Option Plan, dated as of July 6, 1995 (incorporated by reference to Exhibit 10.13 to the Annual Report on Form 10-K for the period ended December 31, 1995); as amended on September 19, 1996 (incorporated by reference to Exhibit 10.17 to the Annual Report on Form 10-K for the year ended December 31, 1996); and as further amended on January 16, 1998 (incorporated by reference to Exhibit 10.2.3 to the Amendment No. 1 to Registration Statement on Form S-4/A filed on May 8, 1998 (Reg. No. 333-51839))

	10.21*		Day International, Inc. Supplemental Savings and Retirement Plan, dated as of March 1, 2001 (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2001)

(21) Subsidiaries of the Registrant

(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

* - Management contract or compensatory plan or arrangement


	2005		2004
Finished goods	$	24,643	$	24,384
Work in process		5,505		5,193
Raw materials		21,002		20,757

	$	51,150	$	50,334


	Image			Textile
	Transfer			Products		Total
Balance at December 31, 2002	$	121,856		$	5,224	$	127,080
Acquisitions		13,817					13,817
Foreign currency exchange		1,683					1,683

Balance at December 31, 2003		137,356			5,224		142,580
Acquisitions		269					269
Purchase adjustments		(361	)				(361	)
Foreign currency exchange		956					956

Balance at December 31, 2004		138,220			5,224		143,444
Acquisitions		425					425
Foreign currency exchange		(1,657	)				(1,657	)

Balance at December 31, 2005	$	136,988		$	5,224	$	142,212


	Page
Report of Independent Registered Public Accounting Firm		32

Consolidated Balance Sheets as of December 31, 2005 and 2004		33

Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003		35

Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2005, 2004 and 2003		36

Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003		37

Notes to Consolidated Financial Statements		38


Date: March 27, 2006				By: /s/ Carl J. Crosetto

				Carl J. Crosetto
				Director

Date: March 27, 2006				By: /s/ Matthew C. Kaufman

				Matthew C. Kaufman
				Director

Date: March 27, 2006				By: /s/ Philip Raygorodetsky

				Philip Raygorodetsky
				Director

Date: March 27, 2006				By: /s/ Christopher A. White

				Christopher A. White
				Director


	Jurisdiction in	Percentage of
	Which	Voting
Name of Subsidiary	Incorporated	Securities owned
Day International, Inc.	Delaware	100%
Varn International, Inc.	Delaware	100% (1)
Day International Finance, Inc.	Delaware	100% (1)
Network Distribution International	Delaware	100% (1)
Network Distribution International, Inc.	Massachusetts	100% (2)
Day International (U.K.) Holdings Limited	Massachusetts	100% (1)
Day International (U.K.), Ltd.	United Kingdom	100% (3)
Varn Products Co., Ltd.	United Kingdom	100% (3)
Day International France S.A.R.L	United Kingdom	100% (1)
Day International de Mexico S.A. de C.V.	France	100% (1)
Varn Products Company Pty., Ltd.	Mexico	100% (1)
Varn Pressroom Products Sdn. Bhd.	Australia Malaysia	100% (1)
Varn International (Canada) Limited	Canada	100% (1)
R T C do Brasil Ltda.	Brazil	55% (1)
Day Germany Holdings GmbH	Germany	100% (1)
Day International Group GmbH	Germany	100% (4)
Rotec Verwaltungs GmbH	Germany	100% (5)
Rotec Hulsensysteme GmbH & Co. KG	Germany	100% (6)
Rotec Czech s.r.o.	Czech Republic	85% (7)
ATPG Textile Products Group GmbH	Germany	100% (4)
Day International (BRD) GmbH	Germany	100% (4)
ZAO Day International	Russia	75% (8)


(1)		Subsidiary of Day International, Inc.

(2)		Subsidiary of Network Distribution International

(3)		Subsidiary of Day International (U.K.) Holdings Limited

(4)		Subsidiary of Day Germany Holdings GmbH

(5)		Subsidiary of Day International Group GmbH

(6)		Subsidiary of Rotec Verwaltungs GmbH

(7)		Subsidiary of Rotec Hulsensysteme GmbH Co. & KG

(8)		Subsidiary of Day International (BRD) GmbH

1.		I have reviewed this annual report on Form 10-K of Day International Group, Inc.;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:


Date: March 27, 2006	By:	/s/ Dennis R. Wolters

	Dennis R. Wolters
	President and Chief Executive Officer
	(Principal Executive Officer)


Date: March 27, 2006	By:	/s/ Thomas J. Koenig

	Thomas J. Koenig
	Vice President and Chief Financial
	Officer (Principal Financial Officer and
	Principal Accounting Officer)


/s/ Dennis R. Wolters
Dennis R. Wolters
Chief Executive Officer
March 27, 2006