UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934
Commission file number 0-19835
DAY RUNNER, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3624280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
15295 Alton Parkway, Irvine, California 92618
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 680-3500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
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 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. |X|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of the Common Stock on September
16, 1996 as reported on The Nasdaq Stock Market, was approximately $117,000,000.
The number of shares outstanding of the registrant's Common Stock on
September 16, 1996 was 6,329,771.
PART I
Item 1. BUSINESS.
The Company
Day Runner(R), Inc. ("Day Runner") is the leading developer, manufacturer
and marketer of paper-based organizers for the retail market. We also develop,
manufacture and market related organizational products, including
telephone/address books and traditional spiral dated goods. We estimate that
since our founding in 1980 we have sold approximately 27 million organizers and
planners. Day Runner's products are carried by more than 20,000 retail stores
across the U.S.: in fiscal 1996, we shipped directly to approximately 11,500
retail locations, to distribution centers serving approximately 6,100 retail
locations and to approximately 200 wholesalers.
We market our products to customers through our own sales force, through
manufacturers' representatives and, in certain markets outside the U.S., through
independent distributors. Our major customers in each of our primary domestic
channels include: office products superstores Office Depot, Inc., OfficeMax,
Inc. and Staples, Inc.; office products national wholesalers United Stationers
Supply Co. and S.P. Richards Company; office products dealer McWhorter
Stationers Company, Inc.; and mass market retailers Wal-Mart, Kmart and Target.
Sales to the office products and mass market channels accounted for
approximately 49.8% and 37.4%, respectively, of fiscal 1996 sales.
Our organizers and planners are loose-leaf and spiral-bound time and
information management systems that range from simple to sophisticated. For
example, our flagship Day Runner System organizers include not only the
traditional planner components of appointment calendar, telephone/address
section and note pad but also interrelated pages for managing time and
information, tracking expenses, establishing goals and planning projects.
Segmenting the market for organizers and planners is a key element of our
strategy. We aim our product lines at market segments ranging from students to
women shopping in the mass market to business and professional people and offer
many of our organizers and planners in a choice of sizes, styles, cover
materials and colors. Suggested retail prices for our organizers and planners
range from $6 to $150.
Most of our organizers and planners are refillable. Refills, which include
calendars and accessories, accounted for approximately 34.7% of our sales in
fiscal 1996. Suggested retail prices for refills range from $0.75 to $30.
Our related organizational products include telephone/address books,
traditional spiral dated goods, products for elementary and middle school
children and personal information management (PIM) software intended to
complement our organizers. We group these products, along with certain
miscellaneous items, in a category called "other products." This category
accounted for approximately 3.5% of fiscal 1996 sales.
With the exception of our software product and the calculators we include
in certain of our products and sell as accessories, all of our current products
have been developed internally. The chart on page seven shows the year of
initial shipment of each of our current products. We manufacture and/or assemble
a portion of our products at our Fullerton, California facility and our Mexican
subsidiary and also use foreign and domestic contractors to supply both product
components and finished goods.
BUSINESS STRATEGY
Day Runner sells broad-based personal organizing products through retail
distribution channels. Our strategy is to leverage our brand name awareness and
distribution strength to maximize sales of our existing products, extend those
product lines and introduce new product lines. Key elements of our strategy
include:
o Segmenting the market for organizers and planners.
o Entering related product categories.
o Building sales through major customers.
o Marketing to increase sales.
o Expanding foreign sales.
o Providing excellent customer service.
SEGMENTING THE MARKET FOR ORGANIZERS AND PLANNERS. In order to expand and
segment our market, we offer our organizers and planners in a broad range of
systems, sizes, styles and cover materials and at suggested retail prices
ranging from $6 to $150. As a result, our products appeal to a large consumer
market comprised of users with differing needs, tastes and budgets and are
appropriate for sale through a broad range of retailers. Versatile Day Runner
System organizers and planners are suitable for use by adults in virtually all
walks of life. Specific target markets addressed by other Day Runner organizers
and planners include business and professional people, cost-conscious consumers,
young women shopping in the mass market, users of traditional spiral dated
goods, college students, middle school and high school students and elementary
school children.
ENTERING RELATED PRODUCT CATEGORIES. Day Runner believes that related
personal organizational products offer us an opportunity to leverage our brand
name and distribution and build upon our heritage in the area of personal
organization. Our strategy is to:
o Redefine existing product categories as value-added.
o Offer a superior price/value relationship to the consumer.
o Gain initial distribution through our existing customers.
o Produce sales results we can build upon.
Our current related organizational products include telephone/address
books, products for elementary and middle school children, PIM software and
traditional spiral dated goods.
BUILDING SALES THROUGH MAJOR CUSTOMERS. To reach consumers with differing
needs and varying retail shopping habits, we distribute our products in the U.S.
through multiple channels, including:
o Office products superstores, wholesalers and dealers.
o Mass market retailers, including discount department stores,
wholesale clubs, drug chains, chain groceries and other mass
market retailers.
o A wide variety of other customers, including book,
department, gift, leather and luggage, stationery and other
specialty stores and the U.S. Government.
Day Runner's products are carried by more than 20,000 retail outlets in the
U.S., including the leaders in our key office products and mass market channels
of distribution. Our strategy is to grow our sales through our major customers
by increasing our everyday shelf space where appropriate, continuing to expand
our product selection, serving the back-to-school market and creating other
seasonal, promotional and product opportunities.
MARKETING TO INCREASE SALES. We market our products to customers to inform
them of the benefits of selling Day Runner's products and to consumers to
further build brand name awareness and to maximize the productivity of the
retail shelf space our products occupy.
EXPANDING FOREIGN SALES. We are working to build our sales outside the
United States by focusing on key markets and offering products with features,
aesthetics and price points appropriate for those markets. We offer some of our
products in German and Spanish versions.
PROVIDING EXCELLENT CUSTOMER SERVICE. Day Runner believes that excellent
customer service can provide us with additional competitive advantage. We serve
customers from both our Fullerton plant and our Nashville, Tennessee-area
distribution center and ship directly to the individual retail locations of a
number of our large customers. We conduct business via EDI (Electronic Data
Interchange) with virtually all our key customers and recognize the importance
of continuing to implement applicable customer service/distribution technology.
INDUSTRY OVERVIEW
ORGANIZER INDUSTRY. Day Runner has been instrumental in creating and
defining paper-based "organizers" as a product category in the United States.
Although time management products that included some "organizer" features had
been on the market for some time, the product category, as such, did not emerge
until the 1980s. We believe that the introduction of the Day Runner System in
1982 helped define the product category and, ultimately, led to the growth of
the organizer industry. By the late 1980s, organizers had become accepted tools
for improving individual and group productivity. (Because the distinctions
between organizers and planners have become blurred, except where otherwise
specified, we are using the terms "organizer" and "planner" interchangeably in
this report.)
Today, awareness of the organizer product category is widespread;
organizers are broadly accepted as substitutes for traditional dated goods; and
the usefulness of time management techniques is well recognized. Organizers are
sold through a wide variety of channels, including: office products superstores,
wholesalers and dealers; mass market retailers; book, department, gift, leather
and luggage, stationery and other specialty stores; and are sold direct to
organizations, the U.S. Government and individuals.
Day Runner believes the current principal competitive factors in the
paper-based retail organizer industry are distribution breadth, depth and
strength; brand name recognition; size and loyalty of user base; product
function, design, perceived quality and value; marketing capability; breadth of
product lines; financial resources; customer service; product development
capability; manufacturing/sourcing expertise; and price.
MARKET POTENTIAL. Day Runner believes that the growth in demand for
organizers and other personal organization products in the United States is
attributable to a number of economic and cultural trends, including: the
increased percentage of women in the work force and the resulting prevalence of
two-income families; the continuing trend toward corporate downsizing; the
growth of the small business sector; the rising percentage of business done away
from the office; the greater emphasis on productivity; and the ongoing shift to
a service economy. Many of these trends contribute to widespread concerns with
saving and better using time and increasing personal productivity.
Day Runner's products address these concerns. We target both potential
first-time organizer users and existing users who may need refills or
replacements for their organizers. We address a broad consumer market that
includes individuals 25 years of age or older with annual household incomes of
$25,000 or more; college students; college-bound junior high and high school
students; and children 6-12 years of age residing in households with annual
incomes at or above the national median. Of these tens of millions of
individuals, only a minority currently use organizers.
In addition, we believe that expansion into related, non-organizer/planner
products that provide other ways for people to become better organized offers
Day Runner an opportunity to reach consumers who are not ready for an organizer
or planner and to market additional Day Runner branded products to consumers who
already use a Day Runner organizer or planner.
INDUSTRIES MARKETING SIMILAR OR SUBSTITUTE PRODUCTS. Day Runner's products
have features, functions or components in common with products in several other
industries. Our market overlaps to a limited extent that of companies marketing:
calendars, appointment books, agendas and diaries; small leather goods, which
include briefcases and folios; and training products and services designed to
improve group and individual productivity and to upgrade management skills. In
addition, both PIM software and electronic organizers are designed to fill many
of the same needs addressed by paper-based organizers, although virtually all
PIM software products provide for paper-based output and a number of such
products allow users to print out pages in sizes that fit the Company's
organizers.
PRODUCTS
Day Runner's products are designed to help people become better organized.
We aim our products at various segments of a broad-based consumer audience. Our
goal is to provide "something for everyone" and to offer consumers in each
target segment the perception of broad choice and good value for their money.
Our products include:
o Multiple lines of paper-based organizers and planners.
o Refills, which include calendars and accessories.
o Related organizational products.
ORGANIZERS AND PLANNERS. Our organizers and planners are available in
varying systems, sizes, styles, cover materials and colors and at a broad range
of price points. These loose-leaf and spiral-bound portable "books" help users
keep "everything in one place." For example, in addition to the traditional
planner components of appointment calendar, telephone/address section and note
pad, Day Runner System organizers include, among other things, interrelated
pages for managing time and information, tracking expenses, establishing goals
and planning projects.
REFILLS. The great majority of our organizers, planners and
telephone/address books are refillable. Users may customize their loose-leaf
organizers and planners by choosing from a variety of additional pages and
accessories, ranging from Mileage Log, Strategy and Things To Do pages to
Currency/Checkbook Insert, Diskette Holders and a solar powered
Calculator/Ruler.
RELATED ORGANIZATIONAL PRODUCTS. Our related organizational products
include telephone/address books, traditional spiral dated goods, products for
elementary and middle school children, and PIM software designed to complement
our paper-based products. These products are grouped together as "other
products."
The following table sets forth, for the periods indicated, approximate Day
Runner sales by product category and as a percentage of total sales.
Fiscal Fiscal Twelve Months Ended
Products 1996 1995 June 30, 1994
-------- --------------- ----------------- --------------------
(Unaudited; dollars in thousands)
Organizers and planners. $ 77,293 61.8% $ 84,473 69.4% $ 68,162 70.3%
Refills................. 43,473 34.7 35,240 28.9 27,264 28.1
Other .................. 4,360 3.5 2,088 1.7 1,601 1.6
-------- ---- -------- ----- -------- ------
Total .................. $125,126 100.0% $121,801 100.0% $ 97,027 100.0%
======== ===== ======== ===== ======== =====
Covers for Day Runner's organizers, planners and paper-based related
organizational products are made of leathers, vinyls and a variety of other
natural and man-made materials. In addition to holding loose-leaf or
spiral-bound pages, the covers of most of our organizers and planners are also
designed to hold note pads and many have additional features, such as places to
store pens, business and credit cards, calculators, loose papers and spare keys.
The following table sets forth basic price and other information concerning
the Company's product lines.
Current Number of Current
Year Different Suggested
Current Products Introduced Sizes Styles Materials Retail Price(s)
---------------- ---------- ----- ------ --------- ---------------
Day Runner:
Organizers and planners...... 1982-1996 4 11 7 $18-125
Telephone/Address Books...... FY95-FY96 7 2 2 $6.75-24
FactCentre(TM):
Organizers and planners...... 1991-1995 3 8 6 $12-45
Telephone/Address Books...... 1995 4 1 2 $8-20
4-1-1(TM)Student Planners........ SFY94-FY96 3 9 3 $6-27
Looney Tunes(TM):
Planners..................... 1996 1 3 4 $20-33.50
Telephone/Address Books...... 1996 1 1 1 $12
Mickey Unlimited(C):
Sticker Books................ FY96 3 4 1 $6.50-10.50
Sticker Diaries.............. FY96 2 2 2 $10.50-13.50
Perennials(TM):
Organizers and planners...... 1995 3 3 2 $20-33.50
Telephone/Address Books...... 1995 1 1 1 $16
PRO:
Organizers and planners...... 1993-1996 5 8 4 $40-150
Refills (which include calendars and
accessories)................. 1981-96 ... ... ... $0.75-30
Spiral Dated Goods............. 1996 8 8 2 $4.30-33.35
Day Runner Planner for Windows(R) FY96 ... ... ... $75
Day Runner is a registered trademark, and FactCentre, Perennials, PRO
Business System, Slimline and 4-1-1 are trademarks of Day Runner, Inc. LOONEY
TUNES, characters, names and all related indicia are trademarks of Warner Bros.
(C)Disney. VELCRO is a registered trademark of VELCRO, USA, Inc. Windows is a
registered trademark of Microsoft Corporation
PRODUCT DEVELOPMENT
Day Runner's product development programs emphasize (i) identifying unmet
consumer needs and developing organizers, planners and related organizational
products to meet those needs; (ii) extending its existing product lines through
additional sizes, styles and materials; and (iii) augmenting the selection of
refills and accessories available for its product lines.
In addition, we monitor our existing products for continued viability,
needed enhancements, improvements in quality and potential reductions in cost.
With the exception of our software product and the calculators we include in
certain of our products and sell as accessories, all of our current products
have been developed internally, and products developed internally accounted for
substantially all of Day Runner's fiscal 1996 sales.
Since the introduction of the first Day Runner System organizer in 1982, we
have transformed this single product into a broad line, which currently includes
three sizes and six styles, each of which is available in up to eight different
cover materials. The Entrepreneur Edition of the Day Runner System, for example,
has 8" x 11" pages and is available in three styles: "notebook" with a
snap closure; "notebook" with a VELCRO flap closure; and "attache" with a
full-zippered closure, a larger ring and slide up handles.
In 1991, as part of our strategy of offering products aimed at more
cost-conscious consumers, we introduced the FactCentre Personal Organizer. The
FactCentre line now includes organizers, planners and telephone/address books.
In 1993, we introduced the first products in our PRO line. PRO Business
System organizers are aimed at people seeking a sophisticated but easy-to-use
organizing system that is designed specifically for business and professional
use. We have substantially broadened this product line since its introduction
with additional book styles and sizes as well as refills and accessories. In
fiscal 1996, we added a simplified "Slimline" version and since year-end have
introduced PRO 4, a compact model, along with appropriately sized refills.
In fiscal 1994, we began shipping 4-1-1 Student Planners, a line aimed at
middle school, high school and college students. 4-1-1 products were developed
based on research into the needs and requirements of young people and are
marketed primarily for sale during the back-to-school consumer buying season.
Day Runner updates this product line with new cover materials and models each
year and in fiscal 1996 introduced a College Edition.
In fiscal 1995, we added telephone/address books to our Day Runner and
FactCentre lines and launched Perennials, a line of organizers, planners and
telephone/address books with pages featuring a floral design. Perennials is
aimed primarily at young women shopping in mass market outlets.
In fiscal 1996, we launched our first licensed products: a line of planners
and telephone/address books featuring Warner Bros. Looney Tunes cartoon
characters; and a line of "sticker books" and "sticker diaries" developed and
marketed under the Mickey Unlimited brand of Disney Enterprises. The Mickey
Unlimited Sticker Books and Diaries incorporate colorful stickers to make
planning and diary-keeping fun.
In fiscal 1996, we also introduced a line of spiral dated goods designed
for consumers who prefer traditional planning tools.
Developed under our direction, Day Runner Planner for Windows software
simulates the paper-based Day Runner System. Our computer paper refills allow
users of Day Runner Planner for Windows and a number of other software programs
to print their computerized information on paper that looks like Day Runner
System or PRO Business System pages and carry it with them in their organizers.
Day Runner plans to introduce a version of this product designed for Windows 95
during fiscal 1997.
SALES AND DISTRIBUTION
We market our products to customers through our own sales force, through
manufacturers' representatives and, in certain markets outside the U.S., through
independent distributors. Our primary channels of distribution are office
products and the mass market.
Day Runner's products are carried by more than 20,000 retail stores across
the U.S. Our sales policies encourage smaller customers to purchase through
wholesalers. In fiscal 1996, we shipped directly to approximately 11,500 retail
locations, to distribution centers serving approximately 6,100 retail locations
and to approximately 200 wholesalers.
During fiscal 1996, Day Runner sold products to approximately 730 different
customers, compared with approximately 785 in fiscal 1995. Our major customers
in each of our primary domestic channels include: office products superstores
Office Depot, Inc., OfficeMax, Inc. and Staples, Inc.; office products national
wholesalers United Stationers Supply Co. and S.P. Richards Company; office
products dealer McWhorter Stationers Company, Inc.; and mass market retailers
Wal-Mart, Kmart and Target. The only customers accounting for 10% or more of the
Company's fiscal 1996 sales were Wal-Mart Stores, Inc. and its affiliates,
including SAM'S Clubs; Office Depot, Inc. and its affiliates; and OfficeMax,
Inc. and its affiliates. These customers accounted for 16.7%, 14.8% and 11.7%,
respectively, of fiscal 1996 sales. Including their affiliates, the top five
customers of the Company accounted for an aggregate of 59.1% of fiscal 1996
sales.
The following table sets forth, for the periods indicated, approximate Day
Runner sales by distribution channel and as a percentage of total sales.
Fiscal Fiscal Twelve Months Ended
Distribution Channel 1996 1995 June 30, 1994
-------------------- --------------- ----------------- --------------------
(Unaudited; dollars in thousands)
Office products channel. $ 62,381 49.8% $ 56,717 46.6% $ 52,843 54.5%
Mass market............. 46,804 37.4 50,699 41.6 31,096 32.1
Foreign customers....... 6,346 5.1 4,170 3.4 3,733 3.8
Other channels.......... 9,595 7.7 10,215 8.4 9,355 9.6
-------- ----- -------- ------ -------- ------
Total............. $125,126 100.0% $121,801 100.0% $ 97,027 100.0%
======== ===== ======== ===== ======== =====
OFFICE PRODUCTS CHANNEL. Since 1987, Day Runner products have been broadly
distributed through the office products channel.
OFFICE PRODUCTS SUPERSTORES. Since their emergence in
1986, office products superstores offering discount
prices in a warehouse atmosphere have become a major
factor in office products distribution. Our products
are carried by all the leading superstores, including
Office Depot, Inc., OfficeMax, Inc. and Staples, Inc.
OFFICE PRODUCTS WHOLESALERS. Day Runner products are
currently distributed by most local and regional office
products wholesalers and by both national wholesalers, S.P.
Richards Company and United Stationers Supply Co., which
reach office products consumers through dealers nationwide.
OFFICE PRODUCTS DEALERS. Our products are also distributed
through traditional office products dealers, which buy
directly from manufacturers and indirectly through
wholesalers. These customers include both storefront
dealers and contract stationers (also known as commercial
dealers) that specialize in selling to larger businesses
through catalogs and their direct sales forces.
MASS MARKET. Discount chains addressing the mass market have become an
increasingly important factor in the distribution of a wide variety of consumer
goods. Day Runner products are distributed through a number of mass market
retailers, including: Kmart, Target and Wal-Mart; the major wholesale clubs,
PriceCostco and SAM'S Clubs; a number of discount drug chains; and a variety of
other mass market resellers.
FOREIGN CUSTOMERS. Day Runner products are marketed internationally through
Day Runner Hong Kong Limited and Day Runner International Limited, the Company's
wholly owned Hong Kong and UK subsidiaries, independent foreign distributors and
its own sales force. The United Kingdom and key markets on the European
continent are served by Day Runner International; Asian and Pacific Rim markets
are served by Day Runner Hong Kong Limited; and foreign markets in the Americas
are served through independent foreign distributors and by Day Runner's
U.S.-based sales force.
OTHER CHANNELS. The Company also distributes its products through a number
of additional channels, including book, department, gift, leather and luggage
and stationery stores and other specialty retailers. Since March 1989, Day
Runner has held a General Services Administration ("GSA") contract, which
extends through February 1997 and which allows the Company to market certain of
its products to the executive branch of the U.S. Government.
MARKETING
We market our products to consumers to increase awareness of the Day Runner
brand names and of specific products, to communicate the benefits of our
products and to create and reinforce an image that our products enable the user
to manage time and personal resources more effectively. We position Day Runner
to our distribution channels as the leader in the retail organizer market and
the logical source for organizers, planners and related organizational products
at a wide range of price points and appropriate for a wide range of broad
consumer markets.
ADVERTISING. Day Runner participates with customers in co-op advertising
and advertises from time to time in certain wholesale flyers and in trade
publications. In addition, from time to time, we conduct consumer advertising
campaigns. Media used in such campaigns have included cable and broadcast
television, business and lifestyle magazines and national and regional
newspapers.
PROMOTIONAL PROGRAMS. Day Runner offers special promotional and incentive
programs as part of our introduction of new products and to build sales at
specific times of the year; conducts promotions designed to build awareness,
expand distribution and increase sales of specific products; and conducts sales
incentive programs for wholesalers, dealers and manufacturers' representatives.
SALES SUPPORT. We support our sales force and manufacturers'
representatives with a variety of sales tools, including catalogs and
presentation materials. We support our dealers with point-of-sale materials
developed based upon research and intended to build brand name awareness and
increase sales. Day Runner displays are designed to be easy for consumers to
shop and for store personnel to refill. Our packaging is designed to help
consumers choose the right product and make the decision to buy.
TRADE SHOWS. Day Runner exhibits or is represented by manufacturers'
representatives in a number of national and regional trade shows aimed at office
products, mass market and other customers.
MARKET RESEARCH. We regularly conduct market research and test product
concepts and prototypes through the use of focus groups and other consumer
research. In addition, we maintain a database containing information on users
who have mailed in the Welcome Cards included in many of our products.
USER SUPPORT. We estimate that Day Runner has sold approximately 27 million
organizers and planners. To encourage our current users to continue to purchase
and recommend our products and their refills, we provide a toll-free consumer
hotline that consumers may call for referral to conveniently located dealers or
dealers that carry specific refills or accessories, for customer service, to
contribute suggestions and to purchase products directly from Day Runner. We
make such sales primarily as a service to our users and charge consumers full
suggested retail price plus handling and shipping.
Although Day Runner products require no special training, we provide a free
user's guide in each of our two most sophisticated organizers. Each Day Runner
System and PRO Business System organizer includes an "Owner's Manual." Each of
these booklets includes illustrations showing effective use of the system and of
specific pages as well as tips on time management, project management and
organization. In addition, through independent certified trainers, we offer to
organizations and groups our PROductivity Personalized Time Management training
programs, which teach the fundamentals of time management using the PRO Business
System.
MANUFACTURING
Day Runner's manufacturing strategy combines limited internal
manufacturing, consisting of heat-sealing binders, sewing binders and the
assembly of finished products, with the domestic and foreign subcontracting of
product components and finished goods. Our policy is to develop and maintain at
least two sources for key raw materials, product components and the finished
products we subcontract. Although we rely on foreign subcontractors for adequate
capacity, we have the ability to act as our own second or third source for the
manufacture of our loose-leaf binders and for the final assembly of many of our
products. This provides a certain degree of protection against vendor problems
and, under certain conditions, allows us to respond to higher than anticipated
demand and improve turn-around time.
INTERNAL MANUFACTURING. We manufacture a portion of our binders in our
Fullerton, California facility and at Day Runner de Mexico, S.A. de D.V., our
wholly owned manufacturing subsidiary located in Tijuana, and assemble a portion
of our finished products in our Fullerton facility.
PURCHASED COMPONENTS. In addition to vinyl and leather raw materials, we
purchase from suppliers certain major product components, including printed
pages, loose-leaf rings, pens, software disks containing our PIM software,
electronic components and certain accessories. With few exceptions, these items
are manufactured by a variety of outside contractors and are available both
domestically and overseas.
SUBCONTRACTED FINISHED GOODS. We subcontract the manufacture and assembly
of a portion of our finished products, including the great majority of our lower
priced organizers, planners and related products. Day Runner Hong Kong Limited
acts as our liaison with our Asian suppliers.
COMPETITION
The paper-based organizer industry is becoming increasingly competitive and
is subject to rapid change. Day Runner competes directly with other companies
marketing paper-based organizers to consumers through retail channels. We also
compete for the same target market with companies marketing stand-alone
organizer products and/or organizers coupled with time management training via
direct sales to individuals and to organizations. Our competitors include
companies marketing substitutes for paper-based organizer and planner products,
such as electronic organizers, PIM software and traditional dated goods. Certain
of our competitors have greater name recognition and/or financial, product
development, technical, manufacturing and/or marketing resources than Day
Runner.
Day Runner believes the current principal competitive factors in the
paper-based retail organizer industry are distribution breadth, depth and
strength; brand name recognition; size and loyalty of user base; product
function, design, perceived quality and value; marketing capability; breadth of
product lines; financial resources; customer service; product development
capability; manufacturing/sourcing expertise; and price. We believe that the
principal competitive factors in the related product categories we have entered
to date are similar to those in the paper-based organizer industry. Although a
number of our competitors have greater financial resources than Day Runner, we
believe that we compete well against our current direct competition on each of
the other principal competitive factors and against certain of our current
direct competition with respect to our financial strength.
Day Runner believes that we have a number of advantages over certain of our
competitors. Our products occupy significant shelf space in the office products
and mass market channels. Our leadership position in the retail market, brand
name recognition, broad product lines, marketing expertise,
manufacturing/sourcing skill, large user base and the appeal of our products to
consumers have been competitive advantages for us in these channels and in
certain other channels. There can be no assurance, however, that we will be able
to maintain or continue to benefit from our competitive advantages or that the
competitive environment will not change to our detriment.
EMPLOYEES
At August 23, 1996, Day Runner had 823 full-time employees, including 60 in
sales; 23 in marketing; 93 in executive, finance and administration; 23 in
product development; and 624 in manufacturing operations and distribution. None
of our employees is represented by a labor union, and we have experienced no
labor-related work stoppages.
PATENTS, COPYRIGHTS AND TRADEMARKS
Day Runner relies upon, among other things, a combination of copyright,
patent and trademark laws to protect our rights to certain aspects of our
products. There can be no assurance, however, that the steps taken by Day Runner
to protect our proprietary rights will be adequate to prevent imitation of our
products or independent development by others of similar products.
Day Runner holds seven United States patents, and has applied for several
foreign patents. The patents we hold are related to improvements in the
structure of and devices associated with our loose-leaf binders, and we do not
believe that any of these patents are material to our business. We have also
been issued United States copyright registrations covering the text and the
compilation and editing of data in certain of our material products. Day Runner
holds United States trademark registrations for "Day Runner," "Running Mate,"
"MEMO-RY" and the Day Runner logo and we have obtained certain state and foreign
registrations for certain of our trademarks.
Item 2. PROPERTIES.
Day Runner's principal facility is located in an approximately 221,000
square-foot building in Fullerton, California, of which 135,500 square feet are
occupied under a lease expiring in 2001 and 85,500 square feet are occupied
under a lease expiring in 1997. The leases include multiple, successive renewal
options that, if exercised in full, would extend the lease terms to expire in
2011. The Company's headquarters occupy approximately 21,300 square feet in
Irvine, California under a lease that expires in August 2001. The Company's
LaVergne, Tennessee distribution facility occupies an approximately 35,520
square foot facility under a lease expiring as of the commencement date of a
lease of a new facility in La Vergne, Tennessee currently under construction;
the Company's Mexican subsidiary occupies an approximately 22,450-square foot
facility under a month-to-month agreement and a 15,000 square foot facility
under a lease expiring in July 1997; the Company's United Kingdom subsidiary
occupies an approximately 1,500-square foot facility under a lease expiring in
December 1996; and the Company's Hong Kong subsidiary occupies an approximately
1,188 square foot facility under a lease expiring in May 1998. The Company has
entered into a lease agreement dated July 31, 1996 under which it has agreed to
lease a 101,200 square foot distribution facility to be constructed in La
Vergne, Tennessee. The lease of the Company's current facility in La Vergne will
be terminated concurrently with the commencement of the lease of the new
facility. The Company believes it has sufficient space in its facilities or will
be able to lease additional space on acceptable terms to meet its needs for the
foreseeable future.
Item 3. LEGAL PROCEEDINGS.
Inapplicable.
PART II
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Day Runner's Common Stock is traded over-the-counter on The Nasdaq Stock
Market under the symbol "DAYR". The table below shows the high and low closing
sales prices for the Common Stock as reported on The Nasdaq Stock Market for the
fiscal years ended June 30, 1996 and 1995. As of September 16, 1996, there were
195 recordholders of the Company's Common Stock based on information provided by
the Company's transfer agent.
Fiscal Year Fiscal Year
1996 1995
---------------- -----------------
Quarter High Low High Low
------- ---- --- ---- ---
First $ 20 $16-3/8 $22-1/8 $17-1/4
Second 34-1/2 19-1/4 21 13-3/4
Third 33-1/2 23-5/8 14-1/2 12-3/8
Fourth 31-1/4 24-3/4 18-1/4 13-1/8
The Company has never paid cash dividends. It is the present policy of the
Company to retain earnings to finance the growth and development of its
business, and therefore the Company does not anticipate paying cash dividends on
its Common Stock in the foreseeable future. Certain financial covenants in the
Company's bank line of credit agreement restrict the Company's ability to pay
cash dividends in excess of $200,000.
Item 6. SELECTED FINANCIAL DATA.
The selected consolidated income statement data for the fiscal year ended
June 30, 1996 and 1995, the short fiscal year ended June 30, 1994 and the year
ended December 31, 1993 and the consolidated balance sheet data at June 30, 1996
and 1995 are derived from, and are qualified in their entirety by reference to,
the Company's audited consolidated financial statements and notes thereto
included elsewhere in this Annual Report that have been audited by Deloitte &
Touche LLP, independent auditors, as indicated in this report, which is also
included elsewhere in this Annual Report. Information for the twelve months
ended June 30, 1994 is unaudited, and in the opinion of the Company's
management, the accounting principles used to prepare the unaudited financial
information are consistent with those used to prepare the audited financial
statements. The selected consolidated income statement data for the years ended
December 31, 1992 and 1991 and the consolidated balance sheet data at June 30,
1994 and December 31, 1993 and 1992 are derived from audited consolidated
financial statements of the Company that are not included herein.
Consolidated Income Statement Data:
(In thousands, except per share data)
Twelve Months Short
Fiscal Fiscal Ended Fiscal Year Years Ended December 31,
1996 1995 June 30, 1994(1) 1994 1993 1992 1991
---- ---- ------------- ---- ---- ---- ----
Sales........................... $125,126 $121,801 $ 97,027 $ 43,160 $ 81,892 $71,241 $53,160
Cost of goods sold.............. 60,600 62,175 50,405 22,981 41,699 35,512 24,933
------- ------- -------- -------- -------- ------- -------
Gross profit.................... 64,526 59,626 46,622 20,179 40,193 35,729 28,227
------- ------- -------- -------- -------- ------- -------
Operating expenses:
Selling, marketing and
distribution................ 29,198 32,154 25,180 12,156 21,786 20,125 15,883
General and administrative... 16,376 13,792 11,400 5,686 9,479 7,826 6,183
------- ------- -------- -------- -------- ------- -------
Total operating expenses..... 45,574 45,946 36,580 17,842 31,265 27,951 22,066
------- ------- -------- -------- -------- ------- -------
Income from operations.......... 18,952 13,680 10,042 2,337 8,928 7,778 6,161
Net interest (income) expense... (706) (161) (88) (91) 229 493
------- ------- -------- -------- -------- ------- -------
Income before provision for
income taxes, extraordinary
item and cumulative effect of
accounting change............ 19,658 13,841 10,130 2,428 8,928 7,549 5,668
Provision for income taxes...... 7,840 5,863 4,196 1,061 3,638 3,096 2,376
------- ------- -------- -------- -------- ------- -------
Income before extraordinary item
and cumulative effect of
accounting change............ 11,818 7,978 5,934 1,367 5,290 4,453 3,292
Extraordinary item litigation
settlement - net............ 718 718
Cumulative effect of change in
accounting for income taxes.. 350
Net income...................... $11,818 $ 7,978 $ 6,652 $ 2,085 $ 5,640 $ 4,453 $ 3,292
======= ======= ======== ======== ======== ======= =======
Earnings per common and common
equivalent share:
Income before extraordinary
item and cumulative effect of
accounting change............ $ 1.79 $ 1.25 $ 0.96 $ 0.22 $ 0.87 $ 0.77 $ 0.72
Extraordinary item........... 0.12 0.11
Cumulative effect of change in
accounting for income taxes.. 0.06
------- ------- -------- --------- --------- ------- --------
Net earnings per share........... $ 1.79 $ 1.25 $ 1.08 $ 0.33 $ 0.93 $ 0.77 $ 0.72
======== ======== ======== ========= ========= ======= ========
Weighted average number of
common and common
equivalent shares............. 6,602 6,374 6,185 6,308 6,065 5,799 4,852
======= ======= ======== ======== ======== ====== =======
(1) Information for the twelve months ended June 30, 1994 is provided on an unaudited basis for comparison purposes only.
Consolidated Balance Sheet Data:
(In thousands)
June 30, December 31,
--------------------------------------- -----------------------------
1996 1995 1994 1993 1992
---------- --------- ----------- ------------- ----------
Working capital............. $ 51,653 $ 38,260 $ 30,581 $ 28,190 $ 22,875
Total assets................ 77,931 63,650 50,769 49,103 35,955
Short-term debt............. 152 200 224 499
Long-term liabilities....... 12 141 223 96
Stockholders' equity........ 59,498 44,787 35,786 32,712 25,686
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report. Historical results and
percentage relationships among any amounts included in the Consolidated
Financial Statements are not necessarily indicative of trends in operating
results for any future period. Effective January 1, 1994, the Company changed
its fiscal year end from December 31 to June 30. The six-month period ended June
30, 1994 is therefore referred to as "fiscal 1994" or "short fiscal year 1994."
OVERVIEW
Since the Company's introduction of the first Day Runner System organizer
in 1982, the Company's revenues have been generated by increased unit sales
primarily of organizers and planners and secondarily of refills. Sales increases
have resulted from higher sales of existing products, new products and product
line extensions. The Company focuses the great majority of its product
development, sales and marketing efforts on the office products and the mass
market channels. The office products channel and the mass market channel
accounted for 49.8% and 37.4%, respectively, of fiscal 1996 sales.
Results of Operations
The following tables set forth, for the periods indicated, the percentages
that selected income statement items bear to sales and the percentage change in
the dollar amounts of such items.
Percentage of Sales
-------------------
Twelve Months
Years Ended June 30, Ended
1996 1995 June 30, 1994
--------- -------- -------------
(unaudited)
Sales........................................ 100.0% 100.0% 100.0%
Cost of goods sold........................... 48.4 51.0 51.9
----- ----- -----
Gross profit................................. 51.6 49.0 48.1
----- ----- -----
Operating expenses:
Selling, marketing and distribution....... 23.3 26.4 26.0
General and administrative................ 13.1 11.3 11.7
----- ----- -----
Total operating expenses................. 36.4 37.7 37.7
----- ----- -----
Income from operations....................... 15.2 11.3 10.4
Net interest income.......................... 0.5 0.1 0.1
----- ----- -----
Income before provision for income taxes and
extraordinary item........................ 15.7 11.4 10.5
Provision for income taxes................... 6.3 4.8 4.3
----- ----- -----
Income before extraordinary item............. 9.4 6.6 6.2
Extraordinary item: litigation settlement - net 0.7
----- ----- -----
Net income................................... 9.4% 6.6 % 6.9%
===== ===== =====
Percentage Change
-----------------
Year Ended Twelve Months
June 30, 1995 Ended June 30, 1994
to Year Ended to Year Ended
June 30, 1996 June 30, 1995
-------------------- --------------------
Sales............................................. 2.7% 25.5%
Cost of goods sold................................ (2.5) 23.4
Gross profit...................................... 8.2 27.9
Operating expenses:
Selling, marketing and distribution............ 9.2 27.7
General and administrative..................... 18.7 21.0
Total operating expenses...................... (0.8) 25.6
Income from operations............................ 38.5 36.2
Net interest income............................... 338.5 83.0
Income before provision for income taxes and
extraordinary item............................. 42.0 36.6
Provision for income taxes........................ 33.7 39.7
Income before extraordinary item.................. 48.1 34.4
Extraordinary item: litigation settlement - net... (100.0)
Net income........................................ 48.1 19.9
Fiscal Year Ended June 30, 1996 Compared with Fiscal Year Ended June 30, 1995
SALES. Sales consist of revenues from gross product shipments net of
allowances for returns, rebates and credits. In fiscal 1996, sales increased by
$3,325,000, or 2.7%, compared with fiscal 1995 primarily because of higher
average selling prices of refills and secondarily because of increased unit
sales of refills. Product sales were primarily to the office products channel
and secondarily to mass market customers. Sales to the office products channel
grew by $5,664,000, or 10.0%. Sales to mass market customers decreased by
$3,895,000, or 7.7%, primarily due to lower sales to Wal-Mart. Sales to foreign
customers grew by $2,176,000, or 52.2%, and sales to miscellaneous customers
grouped together as "other," decreased by $620,000, or 6.1%. Sales of refills
grew by $8,233,000, or 23.4%. Sales of organizers and planners decreased during
the year by $7,180,000, or 8.5%, which decrease was related primarily to the
lower sales to Wal-Mart. Sales of products grouped together as "other" increased
by $2,272,000, or 108.8%, primarily because of higher sales of telephone/address
books.
GROSS PROFIT. Gross profit is sales less cost of goods sold, which is
comprised of materials, labor and manufacturing overhead. Gross profit may be
affected by, among other things, product mix, production levels, changes in
vendor and customer prices and discounts, sales volume and growth rate,
purchasing and manufacturing efficiencies, tariffs, duties and inventory
carrying costs. Gross profit as a percentage of sales increased to 51.6% for
fiscal 1996 from 49.0% for fiscal 1995 primarily because of increased purchasing
and manufacturing efficiencies.
OPERATING EXPENSES. Total operating expenses decreased by $372,000, or
0.8%, for fiscal 1996 compared with fiscal 1995, and decreased as a percentage
of sales from 37.7% to 36.4%. Selling, marketing and distribution expenses as a
percentage of sales decreased from 26.4% to 23.3% primarily because of lower
advertising and promotion expenses and secondarily because of lower commissions.
General and administrative expenses as a percentage of sales increased from
11.3% to 13.1% primarily because of higher personnel costs.
NET INTEREST INCOME. Primarily because of the Company's higher levels of
cash available for short-term investment during the year, net interest income in
fiscal 1996 compared with fiscal 1995 increased by $545,000 and by 0.4% as a
percentage of sales.
INCOME TAXES. Primarily as a result of the improved financial results of
the Company's Hong Kong subsidiary, the Company's fiscal 1996 effective tax rate
was 39.9%, compared with 42.4% for fiscal 1995. Prior to fiscal 1996, the
operating losses incurred by the Company's United Kingdom and Hong Kong
subsidiaries, which were formed in 1993 and 1994, respectively, and the tax
treatment required for these losses had increased the Company's effective tax
rate above what it otherwise would have been.
NET INCOME. Compared with fiscal 1995, net income for fiscal 1996 increased
by $3,840,000, or 48.1%.
Fiscal Year Ended June 30, 1995 Compared with the Unaudited Twelve Months
Ended June 30, 1994
SALES. In fiscal 1995, sales increased by $24,774,000, or 25.5%, compared
with the twelve months ended June 30, 1994 because of increased unit sales
primarily of organizers and planners and secondarily of refills. Product sales
were primarily to the office products channel and secondarily to mass market
customers. Sales of organizers and planners grew during the year by $16,311,000,
or 23.9%, with all the Company's major product lines contributing to the growth.
Sales of refills grew by $7,976,000, or 29.3%. Sales to mass market customers
grew by $19,603,000, or 63.0%, and accounted for 79.1% of the sales increase
during the year. Sales to the office products channel grew by $3,874,000, or
7.3%. In addition, sales to miscellaneous customers grouped together as "other,"
grew by $860,000, or 9.2%, primarily as a result of higher sales to U.S.
Government customers, and sales to foreign customers grew by $437,000, or 11.7%.
GROSS PROFIT. Gross profit as a percentage of sales increased to 49.0% for
fiscal 1995 from 48.1% for the twelve months ended June 30, 1994 primarily
because of increased purchasing and manufacturing efficiencies.
OPERATING EXPENSES. Total operating expenses grew by $9,366,000, or 25.6%,
during fiscal 1995 compared with the twelve months ended June 30, 1994, but were
unchanged as a percentage of sales at 37.7%. General and administrative expenses
as a percentage of sales decreased from 11.7% to 11.3%, primarily due to the
Company's increased ability to absorb personnel expenses as a result of the
growth in sales. Selling, marketing and distribution expenses as a percentage of
sales increased from 26.0% to 26.4% primarily due to increased advertising and
promotion expenses.
NET INTEREST INCOME. Net interest income in fiscal 1995 increased by
$73,000 compared with the twelve months ended June 30, 1994 and was unchanged as
a percentage of sales primarily due to the Company's higher levels of cash
available for short-term investments during the year.
INCOME TAXES. Primarily as a result of operating losses incurred by the
Company's United Kingdom and Hong Kong subsidiaries, which were formed in June
1993 and May 1994, respectively, and the tax treatment required for these
losses, the effect of which was partially offset by the utilization of research
and development tax credits, the Company's fiscal 1995 effective tax rate was
42.4%, compared with 41.4% for the twelve months ended June 30, 1994.
NET INCOME. Net income for fiscal 1995 increased by $1,326,000, or 19.9%,
compared with the twelve months ended June 30, 1994, which included a net
extraordinary gain of $718,000 from the settlement of litigation. Income before
the extraordinary item rose $2,044,000, or 34.4%, for fiscal 1995 compared with
the twelve months ended June 30, 1994.
QUARTERLY RESULTS
The following tables set forth selected unaudited quarterly consolidated
financial data and the percentages such items represent of sales. The quarterly
consolidated financial data reflect, in the opinion of Management of the
Company, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the results of operations for such periods. Results
of any one or more quarters are not necessarily indicative of annual results or
continuing trends.
Quarters Ended
--------------
June 30, March 31, December 31, September 30,
1996 1996 1995 1995
------------- ----------------- ---------------- -----------------
(In thousands, except per share amounts)
Sales............................... $ 34,156 100.0% $ 18,106 100.0% $ 40,058 100.0% $ 32,806 100.0%
Gross profit........................ 17,888 52.4 9,505 52.5 20,678 51.6 16,455 50.2
Total operating expenses............ 13,637 39.9 8,484 46.9 12,463 31.1 10,990 33.5
Income from operations.............. 4,251 12.5 1,021 5.6 8,215 20.5 5,465 16.7
Net interest income................. 296 0.8 252 1.4 104 0.3 54 0.1
Income before provision for
income taxes..................... 4,547 13.3 1,273 7.0 8,319 20.8 5,519 16.8
Net income.......................... $ 2,978 8.7 $ 745 4.1 $ 4,922 12.3 $ 3,173 9.7
Earnings per common and
common equivalent share.......... $ 0.45 $ 0.11 $ 0.75 $ 0.49
Weighted average number of
common and common equivalent
shares........................... 6,686 6,657 6,584 6,445
Quarters Ended
--------------
June 30, March 31, December 31, September 30,
1995 1995 1994 1994
-------- ---------- ----------- -------------
(In thousands, except per share amounts)
Sales............................... $ 33,147 100.0% $ 20,422 100.0% $ 36,907 100.0% $ 31,325 100.0%
Gross profit........................ 16,615 50.1 10,073 49.3 18,019 48.8 14,919 47.6
Total operating expenses............ 13,265 40.0 9,259 45.3 11,989 32.5 11,433 36.5
Income from operations.............. 3,350 10.1 814 4.0 6,030 16.3 3,486 11.1
Net interest (income) expense....... 45 0.2 (153) (0.7) (26) (0.1) (27) (0.1)
Income before provision for
income taxes..................... 3,305 9.9 967 4.7 6,056 16.4 3,513 11.2
Net income.......................... $ 1,872 5.6 $ 652 3.2 $ 3,523 9.5 $ 1,931 6.2
Earnings per common and
common equivalent share.......... $ 0.29 $ 0.10 $ 0.55 $ 0.30
Weighted average number of
common and common equivalent
shares........................... 6,363 6,309 6,374 6,411
SEASONAL FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience significant seasonal fluctuations in its sales and other financial
results that it believes have resulted and will
continue to result primarily from its customers' and users' buying patterns.
These buying patterns have typically adversely affected orders for the Company's
products in the third quarter of each fiscal year.
Although it is difficult to predict the future seasonality of sales, the
Company believes that future seasonality should be influenced at least in part
by customer and user buying patterns similar to those that have historically
affected the Company. Quarterly financial results are also affected by new
product introductions and line extensions, the timing of large orders, changes
in product sales or customer mix, vendor and customer pricing, production
levels, supply and manufacturing delays and general industry and economic
conditions. The seasonality of the Company's financial results and the
unpredictability of the factors affecting such seasonality make the Company's
quarterly and yearly financial results difficult to predict and subject to
significant fluctuation.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1996, the Company financed its operating cash needs primarily
from internally generated funds. The Company's cash and cash equivalents at June
30, 1996 increased to $19,765,000 from $4,269,000 at June 30, 1995. In fiscal
1996, net cash of $18,643,000 and $1,311,000 provided by operating and financing
activities, respectively, offset net cash of $4,401,000 used in investing
activities. Of the $18,643,000 net amount provided by the Company's operating
activities, $11,818,000 was provided by net income, $6,543,000 was provided by a
decrease in inventories and $3,606,000 was provided by an increase in accrued
expenses, which amounts were partially offset by an increase of $2,884,000 in
accounts receivable and an increase of $1,930,000 in income taxes receivable. Of
the $1,311,000 net amount provided by the Company's financing activities,
$1,475,000 was provided by the issuance of common stock. Of the $4,401,000 net
amount used in the Company's investing activities, $4,393,000 was used to
acquire primarily machinery and equipment and secondarily computer equipment and
software.
Accounts receivable (net) at June 30, 1996 increased by $2,068,000, or
10.7%, from the amount at June 30, 1995 primarily due to terms given to certain
customers and secondarily due to the growth in sales. The average collection
period of accounts receivable at June 30, 1996 increased to 43 days from 42 days
at June 30, 1995.
Inventories decreased by $6,569,000, or 24.7%, from the June 30, 1995
amount primarily because of better control and management of inventory levels.
At June 30, 1996, Day Runner had no borrowings under its $5,000,000 bank
line of credit but had used the line of credit to secure outstanding letters of
credit of approximately $1,000,000, which reduced the availability under the
line of credit to approximately $4,000,000. Borrowings under the line of credit
bear interest at either the bank's prime rate or LIBOR plus 1.75%, at the
Company's election, and are due and payable on October 1, 1996. (See Note 3 to
Consolidated Financial Statements.) The Company is currently negotiating its
line of credit and expects that it will be able to renew it for one year on
terms no less favorable that those of its current credit line.
The Company has not incurred significant losses or gains from foreign
currency exchange rate fluctuations. The continuing expansion of the Company's
Hong Kong, Mexican and United Kingdom subsidiaries could, however, result in
larger gains or losses as a result of fluctuations in foreign currency exchange
rates as those subsidiaries conduct business in whole or in part in foreign
currencies.
The Company believes that cash flow from operations, vendor credit, its
existing working capital and its bank line of credit will be sufficient to
satisfy the Company's anticipated cash requirements at least through fiscal
1997. Nonetheless, the Company may seek additional sources of capital as
necessary or appropriate to finance acquisitions or to otherwise finance the
Company's growth or operations; however, there can be no assurance that such
funds if needed will be available on favorable terms, if at all.
FORWARD LOOKING STATEMENTS
With the exception of the actual reported financial results and other
historical information, the statements made in the Management's Discussion and
Analysis of Financial Condition and Results of Operations are forward looking
statements that involve risks and uncertainties that could affect actual future
results. Such risks and uncertainties include, but are not limited to: timing
and size of orders from large customers, timing and size of orders for new
products, competition, large customers' inventory management, general economic
conditions, the health of the retail environment, supply constraints, supplier
performance and other risks indicated in the Company's filings with the
Securities and Exchange Commission.
EFFECTS OF INFLATION
The Company believes that inflation has not had a material effect on its
operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements of the Company and its
subsidiaries included herein and listed in Item 14(a) of this Annual Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Inapplicable.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company and their ages are as
follows:
Name Age Title
- ---- --- -----
Mark A. Vidovich 46 Chairman of the Board, Chief Executive Officer
and Director
James E. Freeman, Jr. 49 President and Chief Operating Officer
Dennis K. Marquardt 53 Executive Vice President, Finance &
Administration, Chief Financial Officer
and Corporate Secretary
Dennis G. Baglama 43 Vice President, Sales
Ronald M. Bianco 49 Vice President, Product Development
Lee R. Coffey 60 Vice President, Human Resources
John P. Kirkland 52 Vice President, Operations, North America
Stan Littley 37 Vice President, International Sales
Judy Tucker 50 Vice President, Corporate Development
Richard J. Whatley 52 Vice President, Chief Information Officer
James P. Higgins 47 Director
Jill Tate Higgins 40 Director
Charles Miller 54 Director
Alan R. Rachlin 45 Director
Boyd I. Willat 53 Director
Felice Willat 52 Director
Each of the Company's directors is elected at the annual meeting of
stockholders and serves until the next annual meeting and until his or her
successor is elected and qualified, or until his or her earlier death,
resignation or removal. Officers are appointed by and serve at the discretion of
the Board of Directors. The Company pays each non-employee director an annual
fee of $10,000, payable quarterly, plus $750 and expenses for each Board meeting
attended. The Company pays each member of the Compensation and Audit Committees
an annual fee of $8,000 ($12,000 for the Chairperson of each such Committee),
payable quarterly, plus $750 and expenses for each Committee meeting attended.
Mr. Vidovich joined the Company as Chief Executive Officer and a director
in April 1986 and assumed the additional position of Chairman of the Board in
March 1990.
Mr. Freeman joined the Company as Chief Operating Officer in March 1993 and
assumed the additional position of President in May 1995. From August 1992 until
March 1993, Mr. Freeman was employed as a consultant by New Product Insights, an
Overland Park, Kansas-based marketing consulting firm. From 1986 until July
1992, he served as President, Chief Operating Officer and a director of Stuart
Hall Company, Inc., a Kansas City, Missouri-based manufacturer of office and
school supplies.
Mr. Marquardt joined the Company in April 1986 and has served as its Chief
Financial Officer since that time. He also served as Vice President, Finance of
the Company from April 1986 until March 1990 and as Executive Vice President,
Finance & Operations from March 1990 until April 1993 when he was appointed
Executive Vice President, Finance & Administration.
Mr. Baglama joined the Company as National Sales Manager in January 1985,
became National Sales Director in June 1987 and was appointed Vice President,
Sales in December 1990.
Mr. Bianco joined the Company in June 1985 and held various non-officer
positions until his appointment as Vice President, Product Development in
December 1990.
Mr. Coffey joined the Company as Senior Director, Human Resources in
January 1992 and became Vice President, Human Resources in January 1994. From
January 1991 until joining the Company, he served as Vice President of Richard
E. Nosky & Associates, a Phoenix, Arizona-based executive search and management
consulting firm.
Mr. Kirkland joined the Company as Director, Customer Service &
Distribution in February 1991 and became Senior Director, Customer Service &
Distribution in February 1992. He became Vice President, Customer Service &
Distribution in April 1993 and was appointed Vice President, Operations, North
America in March 1996.
Mr. Littley joined the Company in January 1986 and held various non-officer
sales positions until his appointment as Vice President, International Sales in
March 1996.
Ms. Tucker joined the Company in September 1990 and held various
non-officer positions until her appointment as Vice President, Corporate
Development in March 1994.
Mr. Whatley joined the Company as Senior Director, Information Services in
December 1993 and became Vice President, Chief Information Officer in February
1995. He served as Vice President, Information Services of Authentic Fitness
Corporation, an apparel manufacturer, from October 1993 until joining the
Company, and of Taren Holdings, Inc., an apparel manufacturer, from December
1991 until its acquisition by Authentic Fitness Corporation in October 1993.
Mr. Higgins has been a director since February 1987. Since 1984, Mr.
Higgins has been President and Chairman of the Board of Higgins Management
Company, a financial consulting firm. Mr. Higgins is the husband of Ms. Higgins.
Ms. Higgins has been a director since June 1986. Ms. Higgins is a private
investor and is the wife of Mr. Higgins.
Mr. Miller has been a director since August 1986. Mr. Miller is a private
investor.
Mr. Rachlin has been a director since August 1987. In November 1994, Mr.
Rachlin became Chief Executive Officer and President of Pate's Realm, Inc., a
software developer. From November 1992 until November 1994, Mr. Rachlin was a
business consultant. From May 1987 until October 1992, Mr. Rachlin held various
executive management positions at Government Technology Services, Inc., a
reseller of computer products to the government market, and most recently served
as its Executive Vice President--Strategic Development and General Counsel.
Mr. Willat is a co-founder of the Company, has been a director since its
incorporation and served as Chairman of the Board from May 1981 until August
1988. Mr. Willat has served as President and Chief Executive Officer of Willat
Writing Instruments, a pen manufacturer, since June 1988, and he has served as
President of Isola Bella, Inc., a real estate development company, since June
1987. Mr. Willat is the husband of Ms. Willat.
Ms. Willat is a co-founder of the Company and has been a director since
October 1980. She served as President from 1981 until June 1990 and as Vice
President, Consumer Affairs from June 1990 until July 1993 when she became
Director, Consumer Affairs. Ms. Willat is the wife of Mr. Willat.
Item 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth certain information concerning compensation
paid or accrued for the years indicated below by the Company and its
subsidiaries to or on behalf of the Company's Chief Executive Officer and each
of the four other most highly compensated executive officers for the fiscal year
ended June 30, 1996:
Annual Compensation Long-Term
-------------------- Compensation
Name and Awards All Other
Principal Position Year(1) Salary($)(2) Bonus($)(3) Options(#) Compensation($)(4)
------------------ ------- ------------ ----------- ---------- ------------------
Mark A. Vidovich 1996 $300,000 $285,480 75,875 $2,966
Chief Executive Officer and 1995 200,000 122,000 50,000 3,000
Chairman of the Board 1994 100,000 83,072 100,000 1,746
James E. Freeman, Jr. 1996 250,000 230,100 50,000 2,570
President and 1995 175,000 103,250 25,000 2,625
Chief Operating Officer 1994 87,500 64,147 50,000 547
Dennis K. Marquardt 1996 150,000 131,040 10,000 2,310
Executive Vice President, 1995 150,000 84,000 10,000 2,250
Finance & Administration 1994 75,000 49,984 10,000 1,791
and Chief Financial Officer
Dennis G. Baglama 1996 132,000 111,197 10,000 1,569
Vice President, Sales 1995 132,000 71,200 5,000 1,980
1994 66,000 33,930 10,000 363
Ronald M. Bianco 1996 132,000 111,197 10,000 2,358
Vice President, 1995 125,000 52,188 5,000 1,875
Product Development 1994 62,500 24,841 10,000 1,363
- -------------------------------
(1) The years 1996 and 1995 refer to the twelve months ended June 30, 1996
and 1995, respectively, and the year 1994 refers to the six months ended June
30, 1994.
(2) Includes amounts, if any, deferred by the named officer under
the Company's 401(k) Plan.
(3) Bonuses were based on the Company's financial performance and, except
for discretionary bonuses in the amounts of $25,000, $15,000 and $10,000
included in the amounts shown for 1994 with respect to Messrs. Vidovich, Freeman
and Marquardt, respectively, were paid under the Company's Officer Bonus Plan.
(4) All amounts shown represent Company matching contributions allocated
under the Company's 401(k) Plan to the accounts of the named officers.
Option Grants in Fiscal Year 1996
The following table sets forth certain information concerning stock
option grants in the fiscal year ended June 30, 1996 to the executive officers
named in the Summary Compensation Table:
Potential
Realizable Value
Individual Grants at Assumed
% of Total Annual Rates
Options of Stock Price
Granted to Exercise Appreciation
Options Employees Price Expiration for Option Term(3)
Name Granted (#)(1) in FY 1996(2) ($/Share) Date 5% ($) 10% ($)
---- -------------- ------------- --------- ---------- ----------- ----------
Mark A. Vidovich 75,875 45.1% $16.75 08/08/05 $799,266 $2,025,498
James E. Freeman, Jr. 50,000 29.7 16.75 08/08/05 526,699 1,334,760
Dennis K. Marquardt 10,000 5.9 16.75 08/08/05 105,340 266,952
Dennis G. Baglama 10,000 5.9 16.75 08/08/05 105,340 266,952
Ronald M. Bianco 10,000 5.9 16.75 08/08/05 105,340 266,952
- ----------------------------------
(1) Such options were granted under the Amended and Restated 1986 Stock
Option Plan (the "1986 Plan"), vest and become exercisable in 20 equal quarterly
installments over five years and were granted for terms of ten years subject to
earlier termination under certain circumstances relating to termination of
employment. The exercise prices of such options represent the reported closing
sales price of the Company's Common Stock on The Nasdaq Stock Market on the
grant date.
(2) The Company granted options to purchase an aggregate of 168,375 shares
of Common Stock under the 1986 Plan to employees in the fiscal year ended June
30, 1996.
(3) Potential values are net of exercise price and before taxes payable in
connection with the exercise of such options or the subsequent sale of shares
acquired upon the exercise of such options. These values represent certain
assumed rates of appreciation of the Company's Common Stock (i.e., 5% and 10%
compounded annually over the term of such options) based on the SEC's rules. The
actual values, if any, will depend upon, among other factors, the future
performance of the Company's Common Stock, overall market conditions and the
named officer's continued employment with the Company. Therefore, the potential
values reflected in this table may not necessarily be achieved.
Aggregated Option Exercises in Fiscal Year 1996
and Option Values at June 30, 1996
The following table sets forth certain information concerning stock option
exercises during the fiscal year ended June 30, 1996 and unexercised options
held as of June 30, 1996 by the executive officers named in the Summary
Compensation Table:
Shares Number of Shares Value of
Acquired Underlying Unexercised Unexercised in-the-Money
on Value Options at 6/30/96 Options at 6/30/96(2)
Name Exercise(#) Realized($)(1) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------------- ----------- ------------- ----------- -------------
Mark A. Vidovich 48,500 $978,078 164,037 210,713 $2,243,071 $2,392,836
James E. Freeman, Jr. 20,000 157,500 49,250 118,750 589,594 1,291,406
Dennis K. Marquardt 18,000 314,820 35,575 32,525 491,784 364,178
Dennis G. Baglama 20,000 238,125 8,250 26,750 103,594 310,656
Ronald M. Bianco 10,500 182,395 24,500 25,500 340,125 292,375
- --------------------------------
(1) Such value represents the difference between the market value of the
shares acquired upon exercise of such options (calculated using the
closing sales price of the Company's Common Stock on the date of exercise
as reported on The Nasdaq Stock Market) and the exercise price of such
options.
(2) Such value represents the difference between the market value of the
shares underlying such "in-the-money" options (calculated using the
closing sales price (i.e., $25.875) of the Company's Common Stock on June
30, 1996 as reported on The Nasdaq Stock Market) and the exercise price
of such options.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
OFFICER SEVERANCE PLAN
In February 1993, the Company implemented an officer severance plan (the
"Severance Plan") under which officers of the Company are entitled to receive
certain severance benefits following termination of employment, if such
termination is non-temporary, involuntary and without cause. In addition, if
there is a "change in control" of the Company, an officer will receive benefits
under the Severance Plan if such officer terminates his or her employment with
the Company either for any reason within one year following the change in
control or for "good reason" (which includes the assignment to the officer of
duties significantly inconsistent with his or her prior position or a reduction
in his or her compensation or benefits) within two years following such change
in control.
Each eligible officer is entitled to severance pay based on his or her
highest annual compensation (i.e., base salary plus automobile allowance), the
number of years employed by the Company and the highest office attained prior to
termination. The amounts that would be payable under the Severance Plan to
Messrs. Vidovich, Freeman, Marquardt, Baglama and Bianco if their employment
were terminated as of September 1, 1996 and they were eligible for severance
benefits under the Severance Plan would be $384,000, $192,900, $183,400,
$103,500 and $103,500, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee presently consists of Jill Tate Higgins
(Chairperson), Charles Miller and Alan R. Rachlin. No member of the Compensation
Committee is a current or former officer or an employee of the Company or any of
its subsidiaries.
In July 1995, Mr. Rachlin entered into a two-year consulting agreement with
the Company pursuant to which he agreed to perform consulting services for the
Company in exchange for ten-year warrants to purchase 25,000 shares of the
Company's Common Stock at $19.00 per share. The consulting agreement was
approved unanimously by the Board of Directors of the Company.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 1, 1996 by (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of the Company's Common Stock, (ii) each of the Company's
directors, (iii) the executive officers named in the Summary Compensation Table,
and (iv) all current directors and officers of the Company as a group:
Name of Beneficial Owner(1) Shares Beneficially Owned Percent of Class
- --------------------------- ------------------------- ----------------
Jill Tate Higgins(2) 1,097,540 17.3%
10153-1/2 Riverside Drive, #598
Toluca Lake, CA 91602
William Blair & Company(3) 756,190 11.9
135 South LaSalle Street
Chicago, IL 60603
Mark A. Vidovich(4)(5) 374,034 5.7
15295 Alton Parkway
Irvine, CA 92618
Felice Willat(6) 334,252 5.3
15295 Alton Parkway
Irvine, CA 92618
Alan R. Rachlin(4) 294,184 4.5
Boyd I. Willat(7) 228,709 3.6
Dennis K. Marquardt(4)(8) 158,142 2.5
James P. Higgins(9) 81,214 1.3
James E. Freeman, Jr.(4)(10) 79,800 1.2
Ronald M. Bianco(4) 40,716 *
Dennis G. Baglama(4) 14,250 *
Charles Miller(4) 8,000 *
All current directors and officers
as a group (16 persons)(2)(4)(5)(6)
(7)(8)(9)(10) 2,657,788 38.0
- ----------------------------
* Less than one percent. (footnotes on next page)
(1) Such persons have sole voting and investment power with respect to all
shares of Common Stock shown as being beneficially owned by them, subject to
community property laws, where applicable, and the information contained in the
footnotes to this table.
(2) Includes 1,027,426 shares held by O.S. II, Inc., a California
corporation of which Ms. Higgins, along with one of her minor children, is the
sole owner. Also includes 70,114 shares held by Lakeside Enterprises, L.P., a
California limited partnership of which Ms. Higgins is the general partner and a
limited partner and of which O.S. II, Inc. is a limited partner. Does not
include 11,100 shares beneficially owned by James P. Higgins, Ms. Higgins'
husband, as to which shares Ms. Higgins disclaims beneficial ownership (see
footnote 9 below).
(3) Based on a Form 13F dated August 14, 1996, wherein William Blair &
Company reported that, as an institutional investment manager, it has sole
investment discretion as to such shares and sole voting authority as to 177,700
of such shares.
(4) Includes 205,261, 190,624, 42,885, 71,750, 30,000, 14,250, 8,000 and
661,145 shares for which options or warrants beneficially owned by Messrs.
Vidovich, Rachlin, Marquardt, Freeman, Bianco, Baglama and Miller and all
current directors and officers as a group, respectively, are exercisable or
become exercisable within 60 days after September 1, 1996.
(5) Does not include 2,559 or 7,600 shares held by Mr. Vidovich's children
and by a trustee for the benefit of Mr. Vidovich's children, respectively, as to
which shares Mr. Vidovich disclaims beneficial ownership.
(6) Includes 20,000 shares for which options held by Ms. Willat are
exercisable or become exercisable within 60 days after September 1, 1996. Also
includes 34,000 shares held by Mr. and Ms. Willat as trustees of trusts for the
benefit of their minor children and as to which shares Mr. and Ms. Willat share
voting and investment power. Does not include 194,709 shares beneficially owned
by Boyd I. Willat, Ms. Willat's husband, as to which shares Ms. Willat disclaims
beneficial ownership (see footnote 7 below).
(7) Includes 25,000 shares for which warrants held by Mr. Willat are
exercisable or become exercisable within 60 days after September 1, 1996. Also
includes 34,000 shares held by Mr. and Ms. Willat as trustees of trusts for the
benefit of their minor children and as to which shares Mr. And Ms. Willat share
voting and investment power. Does not include 300,252 shares beneficially owned
by Felice Willat, Mr. Willat's wife, as to which shares Mr. Willat disclaims
beneficial ownership (see footnote 6 above).
(8) Includes 7,600 shares held by Mr. Marquardt as trustee for Mr.
Vidovich's children.
(9) Includes 5,500 shares for which warrants held by Mr. Higgins are
exercisable or become exercisable within 60 days after September 1, 1996. Also
includes 70,114 shares held by Lakeside Enterprises, L.P., a California limited
partnership of which Mr. Higgins is a limited partner in his individual capacity
and as custodian for each of the six minor children of Mr. Higgins and his wife.
Does not include 1,027,426 shares beneficially owned by Jill Tate Higgins, Mr.
Higgins' wife, as to which shares Mr. Higgins disclaims beneficial ownership
(see footnote 2 above).
(10) Includes 2,000 shares held by Mr. Freeman's wife for the benefit of
their minor children.
Item 13. CERTAIN TRANSACTIONS.
See Item 11 of this Annual Report entitled "Executive Compensation -
Compensation Committee Interlocks and Insider Participation."
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a) The following documents are filed as part of this Report: Page
1. Consolidated Financial Statements
Independent Auditors' Report F-1
Consolidated Balance Sheets at June 30, 1996 and
1995 F-2
Consolidated Statements of Income for the Years Ended June
30, 1996 and 1995, the Six Months Ended June 30, 1994
and the Year Ended December 31, 1993 F-3
Consolidated Statements of Stockholders' Equity for the
Years Ended June 30, 1996 and 1995, the Six Months Ended
June 30, 1994 and the Year Ended December 31, 1993 F-4
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1996 and 1995, the Six Months Ended June 30, 1994
and the Year Ended December 31, 1993 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedules
Independent Auditors' Report S-1
Schedule II - Valuation and Qualifying Accounts S-2
3. List of Exhibits
3.1 Certificate of Incorporation of the Registrant, as amended(1)
3.2 Bylaws of the Registrant(2)
10.1 Amended and Restated 1986 Stock Option Plan, including forms
of Stock Option Agreements and Stock Purchase Agreement(3)
and Amendment Nos. 1(4), 2(5), 3(5) and 4(6) thereto dated
July 17, 1992, February 28, 1993, May 10, 1993 and
May 12, 1994, respectively(7)
10.2 1995 Stock Option Plan, including forms of Stock Option
Agreements(7)(8)
10.3 Employee Stock Purchase Plan(3) and Amendment No. 1 thereto
dated July 17, 1992(4)(7)
10.4 Day Runner 401(k) Plan and Trust Agreement(3) effective as
of January 1, 1991 and Amendment Nos. 1(9), 2(1) and 3(10)
thereto effective January 1, 1992, January 1, 1991 and
January 1, 1991, respectively(7)
10.5 1995 Officer Bonus Plan(7)(11)
10.6 1996 Officer Bonus Plan(12) and Amendment thereto(7)
10.7 Officer Severance Plan effective as of February 28, 1993,
including form of Employment Separation Agreement(7)(9)
10.8 Credit Agreement dated as of May 1, 1993 between the
Registrant and Wells Fargo Bank, National Association,
including Line of Credit Note(5), Assumption and Consent to
Merger Agreement dated as of June 30, 1993(13), First
Amendment to Credit Agreement dated as of December 15,
1993(13), Second Amendment to Credit Agreement dated as of May
1, 1994, including Line of Credit Note(14), Third Amendment to
Credit Agreement dated as of October 1, 1994, including Line
of Credit Note(15) and Fourth Amendment to Credit Agreement
dated as of October 2, 1995, including revolving Line of
Credit Note(16)
10.9 Triple Net Lease, as amended, effective as of March 22, 1991
between Catellus Development Corporation and the Registrant(3)
and as amended by Lease Amendment dated June 29, 1992(9)
10.10 Triple Net Lease dated July 28, 1992 between Catellus
Development Corporation and the Registrant(9)
10.11 Koll Business Center Lease dated September 7, 1994 between
the Registrant and Koll Alton Plaza and Aetna Life Insurance
Co.(1)
10.12 Standard Commercial Lease Agreement dated as of July 31, 1996
between System Realty Nine, Inc. and the Registrant
10.13 Form of Warrant to purchase shares of the Registrant's Common
Stock issued to certain directors and officers of the
Registrant(3) and Schedule of Warrants(7)
10.14 Consulting Agreement effective July 28, 1995 between the
Registrant and Alan R. Rachlin(7)(10)
21.1 Subsidiaries of the Registrant(13)
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed or required to be filed by the
Registrant during the fourth quarter of the fiscal year ended June 30,
1996.
(c) Exhibits
See the list of Exhibits under Item 14(a)3 of this Annual Report on
Form 10-K.
(d) Financial Statement Schedules
See the list of Schedules under Item 14(a)2 of this Annual Report on
Form 10-K.
- ------------------------
(1) Incorporated by reference to the Registrant's Transition Report on Form
10-K (File No. 0-19835) filed with the Commission on September 27,
1994.
(2) Incorporated by reference to the Registrant's Current Report on Form
8-K (File No. 0-19835) filed with the Commission on August 5, 1993.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-45391) filed with the Commission on
January 30, 1992.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-53422) filed with the Commission on
October 15, 1992.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (Registration No. 0-19835) filed with the Commission on August 16,
1993.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-84036) filed with the Commission on
September 15, 1994.
(7) Constitutes a management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of this
Annual Report on Form 10-K.
(8) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-80819) filed with the Commission on
December 22, 1995.
(9) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-19835) filed with the Commission on March 31, 1993.
(10) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-19835) filed with the Commission on September 27,
1995.
(11) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-19835) filed with the Commission on February 14, 1995.
(12) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-19835) filed with the Commission on February 13, 1996.
(13) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-19835) filed with the Commission on March 30, 1994.
(14) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-19835) filed with the Commission on May 16, 1994.
(15) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-19835) filed with the Commission on November 14, 1994.
(16) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-19835) filed with the Commission on November 13, 1995.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Irvine, California.
DAY RUNNER, INC.
By: /s/ Mark A. Vidovich
--------------------------
Mark A. Vidovich
Chairman of the Board and
Chief Executive Officer
Dated: September 27, 1996
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Mark A. Vidovich September 27, 1996
- ---------------------------------------- Chairman of the Board and
Mark A. Vidovich Chief Executive Officer
(Principal Executive Officer)
/s/ Dennis K. Marquardt September 27, 1996
- ---------------------------------------- Executive Vice President,
Dennis K. Marquardt Finance & Administration and
Chief Financial Officer
(Principal Financial Officer
and Accounting Officer)
/s/ James P. Higgins Director September 27, 1996
- ----------------------------------------
James P. Higgins
/s/ Jill Tate Higgins Director September 27, 1996
- ----------------------------------------
Jill Tate Higgins
/s/ Charles Miller Director September 27, 1996
- ----------------------------------------
Charles Miller
/s/ Alan R. Rachlin Director September 27, 1996
- ----------------------------------------
Alan R. Rachlin
/s/ Boyd I. Willat Director September 27, 1996
- ----------------------------------------
Boyd I. Willat
/s/ Felice Willat Director September 27, 1996
- ----------------------------------------
Felice Willat
INDEPENDENT AUDITORS' REPORT
Day Runner, Inc.:
We have audited the accompanying consolidated balance sheets of Day Runner, Inc.
and subsidiaries as of June 30, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for the years ended
June 30, 1996 and 1995, the six months ended June 30, 1994 and the year ended
December 31, 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Day Runner, Inc. and subsidiaries
as of June 30, 1996 and 1995 and the results of their operations and their cash
flows for the years ended June 30, 1996 and 1995, the six months ended June 30,
1994 and the year ended December 31, 1993 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its method of accounting for income taxes to conform with
Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE LLP
/s/Deloitte & Touche LLP
Long Beach, California
August 9, 1996
F-1
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
June 30, June 30,
1996 1995
--------- ------
Current assets:
Cash and cash equivalents (Note 1)............................................. $ 19,765 $ 4,269
Accounts receivable (less allowance for doubtful accounts and
sales returns and other allowances of $7,374 and $7,132 at
June 30, 1996 and 1995, respectively) (Note 3).............................. 21,441 19,373
Inventories (Notes 1 & 3)...................................................... 20,040 26,609
Prepaid expenses and other current assets (Note 9)............................. 1,710 1,686
Income taxes receivable (Notes 1, 5 & 6)....................................... 1,930
Deferred income taxes (Notes 1 & 5)............................................ 5,200 5,174
-------- -------
Total current assets........................................................ 70,086 57,111
-------- -------
Property and equipment - At cost (Notes 1 & 4)
Machinery and equipment........................................................ 6,942 4,678
Data processing equipment and software......................................... 4,707 3,603
Leasehold improvements......................................................... 1,514 1,246
Vehicles........................................................................... 202 233
-------- -------
Total ............................................................................ 13,365 9,760
Less accumulated depreciation and amortization................................. 5,864 4,078
-------- -------
Property and equipment - net................................................... 7,501 5,682
-------- -------
Other assets (Note 9).............................................................. 344 857
-------- -------
Total assets....................................................................... $ 77,931 $63,650
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 8,063 $ 9,200
Accrued expenses (Note 2)...................................................... 10,370 7,498
Income taxes payable (Notes 1, 5 & 6).......................................... 2,001
Current portion of long-term debt (Note 3)..................................... 141
Current portion of capital lease obligations (Note 4).......................... 11
-------- -------
Total current liabilities................................................... 18,433 18,851
-------- -------
Long-term liabilities -
Capital lease obligations (Note 4)............................................. 12
-------
Commitments and contingencies (Notes 4, 10 & 11)
Stockholders' equity (Notes 6, 7 & 8):
Preferred stock (1,000,000 shares authorized; $0.001 par value, no shares
issued or outstanding)
Common stock (14,000,000 shares authorized; $0.001 par value; 6,304,771 and
6,125,797 shares issued and outstanding at June 30, 1996 and 1995,
respectively)............................................................... 6 6
Additional paid-in capital..................................................... 22,869 19,942
Retained earnings.............................................................. 36,620 24,802
Cumulative translation adjustment (Note 1)..................................... 3 37
-------- -------
Total stockholders' equity.................................................. 59,498 44,787
-------- -------
Total liabilities and stockholders' equity......................................... $ 77,931 $63,650
======== =======
See accompanying notes to consolidated financial statements.
F-2
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended Six Months Year Ended
June 30, Ended June 30, December 31,
1996 1995 1994 1993
------- ------- ----------------- --------------
Sales (Note 1).............................................. $125,126 $ 121,801 $ 43,160 $ 81,892
Cost of goods sold.......................................... 60,600 62,175 22,981 41,699
--------- --------- --------- ---------
Gross profit................................................ 64,526 59,626 20,179 40,193
--------- --------- --------- ---------
Operating expenses (Notes 4, 9 & 11):
Selling, marketing and distribution..................... 29,198 32,154 12,156 21,786
General and administrative.............................. 16,376 13,792 5,686 9,479
--------- --------- --------- ---------
Total operating expenses............................. 45,574 45,946 17,842 31,265
---------- ---------- --------- ---------
Income from operations...................................... 18,952 13,680 2,337 8,928
--------- --------- --------- ---------
Interest (income) expense:
Interest income......................................... (823) (428) (139) (85)
Interest expense........................................ 117 267 48 85
--------- --------- --------- ---------
Net interest income.................................. (706) (161) (91)
--------- --------- ---------
Income before provision for income taxes, extraordinary
item and cumulative effect of accounting change......... 19,658 13,841 2,428 8,928
Provision for income taxes (Notes 1 & 5).................... 7,840 5,863 1,061 3,638
--------- --------- --------- ---------
Income before extraordinary item and cumulative effect of
accounting change....................................... 11,818 7,978 1,367 5,290
Extraordinary item: litigation settlement, net of income taxes
of $542,000 (Note 10).................................. 718
Cumulative effect of change in accounting for income
taxes (Note 1).......................................... 350
--------- --------- --------- ---------
Net income.................................................. $ 11,818 $ 7,978 $ 2,085 $ 5,640
========= ========= ========= =========
Earnings per common and common equivalent share (Note 1):
Income before extraordinary item and cumulative effect
of accounting change.................................... $ 1.79 $ 1.25 $ 0.22 $ 0.87
Extraordinary item (Note 10)................................ 0.11
Cumulative effect of change in accounting for income taxes.. 0.06
--------- --------- --------- ---------
Net earnings per share...................................... $ 1.79 $ 1.25 $ 0.33 $ 0.93
========= ========= ========= =========
Weighted average number of common and common
equivalent shares....................................... 6,602 6,374 6,308 6,065
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Number Additional Cumulative
of Shares Common Paid-In Retained Translation
Outstanding Stock Capital Earnings Adjustment Total
----------- ----- ------- -------- ---------- -----
Balance at January 1, 1993............ 5,276,563 $ 5 $ 16,582 $ 9,099 $25,686
Exercise of warrants (Note 8)......... 345,962 1 430 431
Exercise of options (Notes 6 & 7)..... 173,906 505 505
Tax benefit of options (Note 6)....... 450 450
Net income............................ 5,640 5,640
--------- ------ -------- -------- -------- -------
Balance at December 31, 1993.......... 5,796,431 6 17,967 14,739 32,712
Exercise of options (Notes 6 & 7)..... 235,886 721 721
Tax benefit of options (Note 6)....... 276 276
Cumulative translation adjustment
(Note 1).......................... $ (8) (8)
Net income............................ 2,085 2,085
--------- ------ -------- -------- -------- -------
Balance at June 30, 1994.............. 6,032,317 6 18,964 16,824 (8) 35,786
Exercise of warrants (Note 8)......... 31,500 126 126
Exercise of options (Notes 6 & 7)..... 61,980 568 568
Tax benefit of options (Note 6)....... 284 284
Cumulative translation adjustment
(Note 1)........................... 45 45
Net income............................ 7,978 7,978
--------- ------ -------- -------- -------- -------
Balance at June 30, 1995.............. 6,125,797 6 19,942 24,802 37 44,787
Exercise of options (Notes 6 & 7)..... 178,974 1,475 1,475
Tax benefit of options (Note 6)....... 1,452 1,452
Cumulative translation adjustment
(Note 1)........................... (34) (34)
Net income............................ 11,818 11,818
--------- ------ -------- -------- -------- -------
Balance at June 30, 1996.............. 6,304,771 $ 6 $ 22,869 $ 36,620 $ 3 $59,498
========= ====== ======== ======== ======== =======
See accompanying notes to consolidated financial statements.
F-4
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended Six Months Year Ended
June 30, Ended June 30, December 31,
1996 1995 1994 1993
------ ------- ----------------- --------------
Cash flows from operating activities:
Net income................................................ $ 11,818 $ 7,978 $ 2,085 $ 5,640
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Gain on sale of property and equipment.................. (31)
Depreciation and amortization................................. 2,548 1,259 522 815
Provision for losses on accounts receivable............. 810 452 124 168
Write-off of barter credits................................... 520 210
Utilization of barter credits........................... 56 129
Cumulative effect of change in accounting for
income taxes.......................................... (350)
Deferred income tax provision........................... (26) (2,690) 165 309
Changes in operating assets and liabilities:
Accounts receivable................................... (2,884) (2,475) (2,506) (7,277)
Inventories ................................................. 6,543 8,182) (4,589) 3,647
Prepaid expenses and other current assets..................... (87) 224 (684) 238
Income taxes receivable....................................... (1,930)
Accounts payable...................................... (1,028) (101) 1,123 4,039
Accrued expenses.............................................. 3,606 3,209 (1,022) 1,376
Income taxes payable.......................................... (1,247) 1,308 (1,113) 1,305
-------- -------- -------- --------
Net cash provided by (used in)
operating activities................................ 18,643 1,248 (5,797) 9,910
-------- -------- -------- --------
Cash flows from investing activities:
Proceeds from disposition of property and equipment....... 110
Certificates of deposit....................................... 64
Acquisition of property and equipment..................... (4,393) (2,592) (1,094) (1,998)
Other assets ................................................. (8) (146) (71) 4
Purchase of marketable securities......................... (3,843)
Sale of marketable securities................................. 3,843
-------- -------- -------- --------
Net cash (used in) provided by investing activities........... (4,401) 1,105 (4,898) (1,930)
-------- -------- -------- --------
Cash flows from financing activities:
Net repayment under line of credit........................ (423)
Proceeds from long-term debt.............................. 461
Payment of long-term debt................................. (141) (154) (64) (102)
Payment of capital lease obligations.......................... (23) (23) (43) (84)
Exercise of warrants...................................... 126 431
Exercise of options....................................... 1,475 568 721 505
-------- -------- -------- --------
Net cash provided by financing activities................. 1,311 517 614 788
-------- -------- -------- --------
Effect of exchange rate changes on cash and
cash equivalents......................................... (57) (73) (3)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.......... 15,496 2,797 (10,084) 8,768
Cash and cash equivalents at beginning of period.............. 4,269 1,472 11,556 2,788
-------- -------- -------- --------
Cash and cash equivalents at end of period.................... $ 19,765 $ 4,269 $ 1,472 $ 11,556
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
DAY RUNNER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Day Runner, Inc. and subsidiaries (the "Company") design and manufacture
personal organizer systems, refills and related products, marketing them
domestically and internationally. A substantial portion of the Company's sales
is to office products superstores, wholesalers and dealers and to mass market
retailers throughout the United States. The Company grants credit to
substantially all of its customers.
FISCAL YEAR. Effective January 1, 1994, the Company changed its fiscal year
from a calendar year to the period ended June 30.
CONSOLIDATION. The consolidated financial statements include the accounts
of Day Runner, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars at the exchange rate
prevailing at the balance sheet date and, where appropriate, at historical rates
of exchange. Income and expense accounts are translated at the weighted average
rate in effect during the year. The aggregate effect of translating the
financial statements of the foreign subsidiaries is included as a separate
component of stockholders' equity. Foreign exchange gains (losses) were not
significant during the years ended June 30, 1996 and 1995, the six months ended
June 30, 1994 or the year ended December 31, 1993.
CASH EQUIVALENTS. The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
INVENTORIES. Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out basis. Inventories consist of the
following (in thousands):
June 30, June 30,
1996 1995
---------- ----------
Raw materials................. $ 8,212 $ 8,152
Work in process............... 327 274
Finished goods................ 11,501 18,183
---------- -----------
Total................ $ 20,040 $ 26,609
========== ===========
SALES. Revenue is recognized upon shipment of product to the customer, with
appropriate allowances for estimated returns, rebates and other allowances.
SIGNIFICANT CUSTOMERS. In fiscal 1996 and 1995, sales to three customers
accounted for 16.7%, 14.8% and 11.7% and 24.9%, 14.3% and 11.6%, respectively,
of the Company's sales. During the six months ended June 30, 1994, sales to
three customers accounted for 19.3%, 15.5% and 14.1% of the Company's sales. In
1993, sales to three customers accounted for 17.6%, 15.6% and 15.2% of the
Company's sales.
F-6
DEPRECIATION AND AMORTIZATION. Depreciation of property and equipment is
provided for over the estimated useful lives of the respective assets, using the
straight-line method. Estimated useful lives range from three to five years.
Leasehold improvements are amortized using the straight-line method over the
lesser of the estimated useful life of the asset or the life of the lease.
INCOME TAXES. The Company uses the liability method of accounting for
income taxes. Under the liability method, deferred taxes are determined based on
temporary differences between the financial reporting and income tax bases of
assets and liabilities at the balance sheet date multiplied by the applicable
tax rates. The Company adopted the liability method effective January 1, 1993
and recorded a one-time benefit of $350,000 representing the cumulative effect
of that change in accounting principle as of that date.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial instruments
consist primarily of cash, accounts receivable and payable, and debt
instruments. The book values of financial instruments, other than the debt
instruments, are representative of their fair values due to short-term maturity.
The book value of the Company's debt instruments is considered to approximate
its fair value because the interest rate of these instruments is based on
current rates offered to the Company.
EARNINGS PER SHARE. Earnings per share information is computed using the
weighted average number of shares of common stock outstanding and dilutive
common equivalent shares from stock options and warrants using the treasury
stock method. Fully diluted amounts for each period do not differ materially
from the amounts presented.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The
preparation of 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for the reporting period. Actual
results could differ from those estimates.
NEW ACCOUNTING STANDARDS. Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," requires that certain long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of the assets may
not be recoverable. The Company adopted SFAS No. 121 in 1996, the effect of
which was not significant.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," effective for transactions
entered into in fiscal years beginning after December 15, 1995. The Company
plans to continue accounting for stock-based compensation under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations as permitted by SFAS No.123. Beginning in 1997, under
SFAS No. 123, the Company will disclose pro forma net income and earnings per
share as if the fair value method of accounting for stock-based compensation had
been elected, for all awards granted in fiscal years 1996 and 1997.
RECLASSIFICATIONS. Certain reclassifications were made to the 1995
financial statements to conform to the current year presentation.
F-7
2. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
June 30, June 30,
1996 1995
--------- --------
Accrued sales and promotion costs..... $ 4,027 $ 3,350
Accrued payroll and related costs..... 3,923 2,297
Other................................. 2,420 1,851
--------- ---------
Total.............. $ 10,370 $ 7,498
========= =========
3. BANK BORROWINGS
The Company has a credit agreement with a bank, the terms of which provide
for borrowings under a line of credit of up to an aggregate of $5,000,000
through October 1, 1996. Under the line of credit, the Company may either borrow
funds, open commercial letters of credit or open standby letters of credit up to
$5,000,000. However, in no event may the aggregate of borrowings and letters of
credit exceed $5,000,000. Each letter of credit shall be issued for a term not
to exceed 180 days and shall not expire subsequent to February 1, 1997.
Borrowings are collateralized by accounts receivable, inventories and certain
other assets.
Under the bank credit agreement, the Company also had a term loan which
expired in May 1996. Accordingly, such amount was paid in full during 1996.
All borrowings under the line of credit bear interest either at the bank's
prime rate (8.75% at June 30, 1996) or at LIBOR (5.49% at June 30, 1996) plus
1.75%, at the Company's election.
The credit agreement requires the Company to maintain total debt to
tangible net worth of not more than 1.5 to 1 and to maintain certain specified
operating ratios. The agreement also requires that the Company obtain the bank's
approval to declare or pay dividends in excess of $200,000.
4. LEASES
The Company has three noncancelable operating leases for its principal
operating facility and its corporate headquarters. The leases expire in 1997 and
2001. The leases include renewal options that, if exercised, would extend the
lease terms through 2011, and the leases provide for increases in future minimum
annual rental payments based on defined increases in the Consumer Price Index,
subject to certain minimum increases. The Company also has entered into leases
for certain production, warehouse, computer and office equipment under
noncancelable operating leases that expire through August 1999.
Future minimum lease payments under the operating leases at June 30, 1996,
are summarized as follows (in thousands):
Operating
Year Leases
---- --------
1997.................................................... $ 3,032
1998.................................................... 2,092
1999.................................................... 1,625
2000.................................................... 1,242
2001.................................................... 1,221
Thereafter.............................................. 222
---------
Total minimum lease payments............................ $ 9,434
=========
F-8
Included in property and equipment at June 30, 1995 is capitalized leased
equipment with a cost of $268,000 and accumulated amortization of $219,000. Such
assets were fully depreciated at June 30, 1996.
Rent expense was $3,927,000, $3,128,000, $1,120,000 and $2,345,000 for the
years ended June 30, 1996 and 1995, the six months ended June 30, 1994, and the
year ended December 31, 1993, respectively.
5. INCOME TAXES
The income tax provision consists of the following (in thousands):
Six Months Year
Ended Ended
Years Ended June 30, June 30, December 31,
1996 1995 1994 1993
---- ---- --------- ------------
Current:
Federal............................... $ 6,393 $ 7,153 $ 667 $ 2,557
State................................. 1,473 1,400 229 772
-------- ------- -------- --------
Total current........................... 7,866 8,553 896 3,329
-------- -------- -------- --------
Deferred provision (benefit):...........
Federal............................... (37) (2,363) 173 246
State................................. 11 (327) (8) 63
-------- -------- -------- --------
Total deferred.......................... (26) (2,690) 165 309
--------- -------- -------- --------
Total income tax provision.............. $ 7,840 $ 5,863 $ 1,061 $ 3,638
======== ======== ======== ========
Differences between the total income tax provision and the amount computed
by applying the statutory federal income tax rate to income before income taxes
are as follows (in thousands):
Six Months Year
Ended Ended
Years Ended June 30, June 30, December 31,
1996 1995 1994 1993
---- ---- ----------- -------------
Computed tax expense using the
statutory federal income tax rate..... $ 6,880 $ 4,946 $ 826 $ 3,124
Increase (decrease) in taxes arising from:
State taxes, net of federal benefit... 980 698 146 544
Foreign subsidiary operating losses... 35 281 114
Other................................. (55) (62) (25) (30)
-------- -------- -------- --------
Total................................. $ 7,840 $ 5,863 $ 1,061 $ 3,638
======== ======== ======== ========
Effective income tax rate............... 40% 42% 44% 41%
======== ======== ======== ========
F-9
Total deferred tax assets and deferred tax liabilities consist of the
following at June 30, 1996 and 1995 (in thousands):
June 30, June 30,
1996 1995
------------ ----------
Allowance for sales returns............................ $2,072 $2,216
Inventory obsolescence reserve......................... 1,479 1,376
Allowance for doubtful accounts........................ 1,005 715
State taxes............................................ 523 518
Other deferred tax assets.............................. 706 382
------ ------
Total deferred tax assets.............................. 5,785 5,207
Less deferred tax liabilities.......................... 585 33
------ ------
Total.................................................. $5,200 $5,174
====== ======
6. STOCK OPTION PLAN
Under the Company's 1995 Stock Option Plan (the "Plan"), an aggregate of
300,000 shares of common stock is reserved for issuance to key employees,
including officers and directors, and outside directors. Both incentive stock
options and nonstatutory stock options are authorized for issuance under the
Plan. The terms of the options are determined at the time of grant. Pursuant to
the Plan, the per share option price of incentive stock options may not be less
than the fair market value of a share of common stock (85% of fair market value
in the case of nonstatutory stock options) at the date of grant, and no options
may be granted after December 2005. The outstanding options typically become
exercisable over a period of five years from the date of issuance and have terms
up to ten years.
The Company also authorized the issuance of up to 1,725,000 shares of the
Company's common stock under its Amended and Restated 1986 Stock Option Plan.
Such options typically become exercisable ratably over a period of five years
from the date of issuance and have terms of six to ten years. As of June 30,
1996, options covering 853,925 shares have been exercised and options covering
866,075 shares remain outstanding. No additional options will be granted under
this plan.
During the years ended June 30, 1996 and 1995, the six months ended June
30, 1994 and the year ended December 31, 1993, certain officers and employees
exercised options to purchase an additional 164,025, 45,750, 230,050 and 154,050
shares, respectively, of the Company's common stock for an aggregate of
$1,214,000, $362,000, $657,000 and $348,000, respectively (see Note 7).
In connection with the exercise of nonstatutory stock options and the sale
of shares purchased pursuant to incentive stock options, the Company realized a
reduction in its current tax liability during the years ended June 30, 1996 and
1995, the six months ended June 30, 1994, and the year ended December 31, 1993.
This reduction totaled $1,452,000, $284,000, $276,000 and $450,000,
respectively, and was credited to additional paid-in capital.
F-10
A summary of stock option activity is as follows:
Number of
Options Per Share
------- ---------
Outstanding, January 1, 1993.......... 708,425 $2.26 - $15.00
Granted............................ 292,500 8.75 - 12.00
Exercised.......................... (154,050) 2.26
Cancelled.......................... (48,600) 2.26 - 11.25
---------
Outstanding, December 31, 1993........ 798,275 2.26 - 15.00
Granted............................ 245,000 12.50 - 18.625
Exercised.......................... (230,050) 2.26 - 11.25
Cancelled.......................... (15,750) 10.25 - 12.50
---------
Outstanding, June 30, 1994............ 797,475 2.26 - 18.625
Granted............................ 148,000 16.75 - 19.50
Exercised.......................... (45,750) 2.26 - 12.50
Cancelled.......................... (33,000) 2.26 - 18.625
---------
Outstanding, June 30, 1995............ 866,725 2.26 - 19.50
Granted............................ 168,375 16.75
Exercised.......................... (164,025) 2.26 - 19.50
Cancelled.......................... (5,000) 12.50 - 19.50
---------
Outstanding, June 30, 1996............ 866,075 8.75 - 19.50
=========
At June 30, 1996, options to purchase 378,037 shares at prices ranging from
$8.75 to $19.50 were exercisable.
On July 8, 1996, the Company issued options to purchase 232,500 shares of
the Company's common stock at $26.00 per share to key employees. The options
vest over a period of five years and expire in 2006.
7. EMPLOYEE STOCK PURCHASE PLAN
During 1992, the Company adopted an Employee Stock Purchase Plan under
which 100,000 shares of common stock were authorized for issuance to employees.
Under the plan, qualified employees may purchase, through payroll deductions
withheld during an offering period, an amount of common stock not to exceed
approximately 5% of the employee's annual compensation. The purchase price per
share is the lower of 85% of the fair market value of a share of common stock on
the first day of the offering period or on the last day of the offering period.
There are two offering periods during each year. During the years ended June 30,
1996 and 1995, the six months ended June 30, 1994 and the year ended December
31, 1993, employees purchased an aggregate of 14,949, 16,230, 5,836 and 19,856
shares of common stock for $261,000, $206,000, $64,000, and $157,000,
respectively, under this plan. These amounts are included in the amounts shown
for exercise of options on the accompanying consolidated statements of
stockholders' equity (see Note 6).
F-11
8. WARRANTS
During the years ended June 30, 1996 and 1995, the six months ended June
30, 1994 and the year ended December 31, 1993, the Board of Directors approved
the issuance of warrants to purchase an aggregate of 150,000 shares of the
Company's common stock. Such warrants were issued at prices ranging from $4.00
to $19.00 per share, vest over periods up to 48 months and expire at various
times through August 2005.
During 1995 and 1993, certain officers, directors, employees and a
stockholder exercised warrants to purchase 31,500 and 345,962 shares,
respectively, of the Company's common stock for an aggregate of $126,000 and
$430,000, respectively. No warrants were exercised during the year ended June
30, 1996 and the six months ended June 30, 1994.
A summary of warrant activity is as follows:
Number of
Warrants Per Share
-------- ---------
Outstanding, January 1, 1993.......... 515,962 $1.00 - $4.00
Granted ....................... 25,000 12.00
Exercised.......................... (345,962) 1.00 - 4.00
-----------
Outstanding, December 31, 1993........ 195,000 4.00 - 12.00
Granted............................ 25,000 12.50
-----------
Outstanding, June 30, 1994............ 220,000 4.00 - 12.50
Granted............................ 25,000 19.00
Exercised.......................... (31,500) 4.00
-----------
Outstanding, June 30, 1995............ 213,500 4.00 - 19.00
Granted............................ 25,000 19.00
-----------
Outstanding, June 30, 1996............ 238,500 4.00 - 19.00
===========
At June 30, 1996, warrants to purchase 224,958 shares at prices ranging
from $4.00 to $19.00 were exercisable.
9. OTHER TRANSACTIONS
During 1995 and 1993, the Company entered into barter agreements whereby it
delivered $132,000 and $1,098,000, respectively, of its inventory in exchange
for future advertising credits and other items. The credits, which expire in
October 1998, are valued at the lower of the Company's cost or market value of
the inventory transferred. The Company has recorded barter credits of $36,000 in
prepaid expenses and other current assets at June 30, 1996 and 1995. At June 30,
1996 and 1995, other assets include $279,000 and $799,000, respectively, of such
credits. Under the terms of the agreement, the Company is required to pay cash
equal to a negotiated amount of the bartered advertising, or other items, and
use the barter credits to pay the balance. These credits are charged to expense
as they are used. During the year ended June 30, 1995, the Company charged
$56,000 to expense for barter credits used for advertising. No amounts were
charged to expense for barter credits used for advertising during the year ended
June 30, 1996.
F-12
The Company assesses the recoverability of barter credits periodically.
Factors considered in evaluating the recoverability include management's plans
with respect to advertising and other expenditures for which barter credits can
be used. Any impairment losses are charged to operations as they are
determinable. During the years ended June 30, 1996 and 1995, the Company charged
$520,000 and $210,000, respectively, to operations for such impairment losses.
10. LITIGATION
In May 1987, a jury awarded the Company certain damages on a copyright
infringement claim in a lawsuit that the Company initiated in June 1985 against
certain other companies alleging both copyright infringement and unfair
competition. In March 1994, the Company settled this lawsuit resulting in a
favorable settlement of $1,375,000. Such amount is included as an extraordinary
item in the accompanying consolidated statements of income, net of legal costs
of $115,000 and income taxes of $542,000.
11. PROFIT-SHARING AND BONUS PLANS
In January 1991, the Company established a 401(k) profit-sharing plan in
which eligible employees may contribute up to 15% of their eligible earnings.
The Company may contribute to the plan at the discretion of the Board of
Directors, subject to applicable regulations. In the years ended June 30, 1996
and 1995, the six months ended June 30, 1994 and the year ended December 31,
1993, the Board elected to contribute an amount equal to 25% of the first 6% of
eligible earnings. Participants vest in the Company's contributions 20% after
two years of plan participation and 20% each year thereafter until fully vested.
During the years ended June 30, 1996 and 1995, the six months ended June
30, 1994 and the year ended December 31, 1993, the Company's matching
contributions were $128,000, $120,000, $50,000 and $108,000, respectively.
The Company has an executive bonus plan and incentive compensation
arrangements for key employees based on an earnings formula. Compensation
expense recorded under these plans was $1,120,000, $550,000, $290,000 and
$336,000 during the years ended June 30, 1996 and 1995, the six months ended
June 30, 1994 and the year ended December 31, 1993, respectively.
12. STATEMENTS OF CASH FLOWS
In a barter transaction entered in 1995 and 1993, the Company exchanged
$132,000 and $1,098,000, respectively, of inventory for an equal amount of
barter credits (see Note 9).
The Company realized a reduction in its current tax liability during 1996,
1995, 1994 and 1993 in the amount of $1,452,000, $284,000, $276,000 and
$450,000, respectively. Such amounts were credited to additional paid-in capital
(see Note 6).
Six Months Year
Ended Ended
Years Ended June 30, June 30, December 31,
1996 1995 1994 1993
---- ---- --------- --------------
Supplemental disclosure of cash flow
information (in thousands) -
Cash paid during the period for:
Interest....................... $ 24 $ 80 $ 48 $ 85
Income taxes................... $ 9,988 $ 6,610 $2,433 $ 2,040
F-13
13. UNAUDITED COMPARATIVE FINANCIAL INFORMATION
The following represents certain unaudited financial information for the
six months ended June 30, 1993 (in thousands, except per share amounts):
Sales................................................................... $ 28,025
Gross profit............................................................ 13,750
Income before provision for income taxes
and cumulative effect of accounting change............................ 1,226
Provision for income taxes.............................................. 503
Income before cumulative effect of accounting change.................... 723
Cumulative effect of change in accounting for income taxes.............. 350
Net income.............................................................. $ 1,073
Earnings per Common and Common Equivalent Share:
Income before cumulative effect of accounting change.................. $ 0.12
Cumulative effect of change in accounting for income taxes............ 0.06
Net earnings per share................................................ $ 0.18
F-14
INDEPENDENT AUDITORS' REPORT
Day Runner, Inc.:
We have audited the consolidated financial statements of Day Runner, Inc. and
its subsidiaries as of June 30, 1996 and 1995, and for the years ended June 30,
1996 and 1995, the six months ended June 30, 1994 and the year ended December
31, 1993, and have issued our report thereon dated August 9, 1996; such report
is included elsewhere in this Form 10-K. Our audits also included the
consolidated financial statement schedule of Day Runner, Inc. and its
subsidiaries, listed in Item 14(a)2. This consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such consolidated
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
/s/Deloitte & Touche LLP
Long Beach, California
August 9, 1996
S-1
DAY RUNNER, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Balance at Balance at
June 30, Charged to June 30,
Classification 1995 Operations Deductions 1996
- -------------- ---------------- ---------- ---------- ----------
Allowance for doubtful accounts............ $1,671 $ 810 $ 123 $ 2,358
Allowance for sales returns................ 5,461 8,221 8,666 5,016
Reserve for obsolete inventory............. 3,214 2,754 2,495 3,473
Balance at Balance at
June 30, Charged to June 30,
Classification 1994 Operations Deductions 1995
- -------------- ---------------- ---------- ---------- ----------
Allowance for doubtful accounts............ $1,368 $ 452 $ 149 $ 1,671
Allowance for sales returns................ 2,883 10,451 7,873 5,461
Reserve for obsolete inventory............. 1,800 3,508 2,094 3,214
Balance at Balance at
December 31, Charged to June 30,
Classification 1993 Operations Deductions 1994
- -------------- ---------------- ---------- ---------- ----------
Allowance for doubtful accounts............ $1,362 $ 124 $ 118 $ 1,368
Allowance for sales returns................ 3,092 3,839 4,048 2,883
Reserve for obsolete inventory............. 1,529 924 653 1,800
Balance at Balance at
December 31, Charged to December 31,
Classification 1992 Operations Deductions 1993
- -------------- ---------------- ---------- ---------- ----------
Allowance for doubtful accounts............ $1,365 $ 168 $ 171 $ 1,362
Allowance for sales returns................ 2,896 5,339 5,143 3,092
Reserve for obsolete inventory............. 2,255 1,197 1,923 1,529
S-2
EXHIBIT INDEX
Exhibit
Number Description
10.6 Amendment to 1996 Officer Bonus Plan
10.12 Standard Commercial Lease Agreement dated as of July 31, 1996
between System Nine, Inc. and the Registrant
10.13 Schedule of Warrants
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule