FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-19835
DAY RUNNER, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3624280
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
15295 Alton Parkway
Irvine, California 92618
(Address and zip code of principal executive offices)
(714) 680-3500
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the registrant's
classes of Common Stock, as of the latest practicable date:
Class Number of Shares Outstanding at February 12, 1998
- ------------------------------ -------------------------------------------------
Common Stock, $0.001 par value 5,834,167
DAY RUNNER, INC.
INDEX
Page Reference
COVER PAGE.......................................................... 1
INDEX ........................................................... 2
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 1997 and June 30, 1997........... 3
Consolidated Statements of Income
Three and Six Months Ended December 31, 1997
and 1996..................................... 4
Consolidated Statements of Cash Flows
Six Months Ended December 31, 1997 and 1996... 5
Notes to Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 10
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..15
Item 6. Exhibits and Reports on Form 8-K.....................16
SIGNATURES................................................................18
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
December 31, June 30,
1997 1997
(unaudited) (audited)
----------- ---------
Cash and cash equivalents............................................................... $ 9,411 $ 15,550
Accounts receivable (less allowances for doubtful accounts and sales returns
and other allowances of $11,585 and $8,664 at December 31, 1997 and
June 30, 1997, respectively)....................................................... 24,514 22,303
Inventories............................................................................. 30,597 23,406
Prepaid expenses and other current assets............................................... 2,137 2,409
Deferred income taxes................................................................... 6,386 6,386
--------- ---------
Total current assets............................................................... 73,045 70,054
--------- ---------
Property and equipment -- At cost:
Machinery and equipment................................................................. 12,642 10,316
Data processing equipment and software.................................................. 6,993 5,863
Leasehold improvements.................................................................. 2,094 1,838
Vehicles................................................................................ 242 214
--------- ---------
Total.............................................................................. 21,971 18,231
Accumulated depreciation and amortization............................................... (11,838)
----------
(9,543)
Property and equipment -- net........................................................... 10,133 8,688
--------- ---------
Other assets................................................................................. 2,097 138
--------- ---------
Total assets................................................................................. $ 85,275 $ 78,880
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit......................................................................... $ 452
Accounts payable........................................................................ $ 7,280 8,320
Accrued expenses........................................................................ 14,879 9,500
Income taxes payable.................................................................... 3,268 1,049
Current portion of long-term debt and capital lease obligations......................... 99 23
--------- ---------
Total current liabilities.......................................................... 25,526 19,344
--------- ---------
Long-term debt and capital lease obligations................................................. 76 52
--------- ---------
Stockholders' equity:
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; 6,530,748 and ...6,364,429
issued and 5,669,854 and 5,851,329 outstanding at December 31,. 1997 and June 30, 1997,
respectively).......................................................................... 7 6
Additional paid-in capital.............................................................. 25,638 23,759
Retained earnings....................................................................... 59,044 49,168
Cumulative translation adjustment....................................................... 89 92
Treasury stock: at cost (860,894 and 513,100 shares at December 31, 1997 and
June 30, 1997, respectively)............................................................ (25,105) (13,541)
---------- ---------
Total stockholders' equity......................................................... 59,673 59,484
---------- ---------
Total liabilities and stockholders' equity................................................... $ 85,275 $ 78,880
========== =========
See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
---- ---- ---- ----
Sales........................................................ $ 49,388 $ 35,014 $ 87,526 $ 68,563
Cost of goods sold........................................... 23,626 16,502 41,658 32,466
--------- --------- --------- ---------
Gross profit................................................. 25,762 18,512 45,868 36,097
--------- --------- --------- ---------
Operating expenses:
Selling, marketing and distribution..................... 12,087 7,895 21,389 15,883
General and administrative.............................. 4,590 3,413 8,354 6,807
--------- --------- --------- ---------
Total operating expenses................................ 16,677 11,308 29,743 22,690
--------- --------- --------- ---------
Income from operations....................................... 9,085 7,204 16,125 13,407
Net interest expense (income)................................ 30 (303) (65) (513)
--------- ---------- ---------- ----------
Income before provision for income taxes..................... 9,055 7,507 16,190 13,920
Provision for income taxes................................... 3,531 3,003 6,314 5,568
--------- --------- --------- ---------
Net income................................................... $ 5,524 $ 4,504 $ 9,876 $ 8,352
========= ========= ========= =========
Earnings per common share:
Basic................................................... $ 0.98 $ 0.71 $ 1.73 $ 1.32
========= ========= ========= =========
Diluted................................................. $ 0.90 $ 0.67 $ 1.59 $ 1.25
========= ========== ========= ========
Weighted average number of common shares outstanding:
Basic................................................... 5,637 6,332 5,697 6,323
========= ========= ========= =========
Diluted................................................. 6,162 6,699 6,207 6,705
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
December 31,
1997 1996
---- ----
Cash flows from operating activities:
Net income.................................................................... $ 9,876 $ 8,352
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.............................................. 2,255 1,566
Provision for losses on accounts receivable................................ 214
Changes in operating assets and liabilities:
Accounts receivable..................................................... (959) 1,091
Inventories............................................................. (4,423) 1,867
Prepaid expenses and other current assets............................... 293 (171)
Income taxes receivable................................................. 1,930
Accounts payable........................................................ (2,657) (2,571)
Accrued expenses........................................................ 5,011 785
Income taxes payable.................................................... 2,261 482
--------- ---------
Net cash provided by operating activities............................ 11,657 13,545
--------- ---------
Cash flows from investing activities:
Purchase of business.......................................................... (2,080)
Acquisition of property and equipment......................................... (2,565) (2,080)
Other assets.................................................................. (6) 2
---------- ---------
Net cash used in investing activities.................................... (4,651) (2,078)
---------- ----------
Cash flows from financing activities:
Net repayment under lines of credit........................................... (2,697)
Repayment of capital lease obligations........................................ (39)
Repayment of long-term debt................................................... (678)
Net proceeds from issuance of common stock.................................... 1,879 388
Repurchase of common stock.................................................... (11,564)
---------- ---------
Net cash (used in) provided by financing activities...................... (13,099) 388
---------- ---------
Effect of exchange rate changes in cash........................................... (46) 91
---------- ---------
Net (decrease) increase in cash and cash equivalents.............................. (6,139) 11,946
Cash and cash equivalents at beginning of period.................................. 15,550 19,765
--------- ---------
Cash and cash equivalents at end of period........................................ $ 9,411 $ 31,711
========= =========
See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information relating to the three and six months ended
December 31, 1997 and 1996 is unaudited)
1. Basis of Presentation and Accounting Policies
The accompanying consolidated balance sheet as of December 31, 1997 and
consolidated statements of income and cash flows for the three and six months
ended December 31, 1997 and 1996 are unaudited but, in the opinion of
management, include all adjustments consisting of normal, recurring accruals
necessary for a fair presentation of the financial position and the results of
operations for such periods. Certain information and footnote disclosures
normally included in financial statements prepared in conformity with generally
accepted accounting principles have been omitted pursuant to the requirements of
the Securities and Exchange Commission, although the Company believes that the
disclosures included in the financial statements included herein are adequate to
make the information therein not misleading. The financial statements included
herein should be read in conjunction with the Company's audited consolidated
financial statements for the year ended June 30, 1997, and the notes thereto,
which are included in the Company's Annual Report on Form 10-K.
The results of operations for the three and six months ended December
31, 1997 and 1996 are not necessarily indicative of the results for a full year.
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.
2. Inventories
Inventories consist of the following (in thousands):
December 31, June 30,
1997 1997
---- ----
Raw materials................... $ 10,877 $ 10,204
Work in process................. 268 426
Finished goods.................. 19,452 12,776
---------- ----------
Total.................. $ 30,597 $ 23,406
========== ==========
3. Lines of Credit
At December 31, 1997, the Company had no amounts outstanding under a
line of credit with a bank but had outstanding secured letters of credit
totaling approximately $1,623,000. Effective February 1, 1998, the Company
entered into a new credit agreement with the bank to allow the Company to borrow
up to $15,000,000 under a line of credit through February 1, 2000 and open
commercial or standby letters of credit up to $10,000,000, with the aggregate of
borrowing and letters of credit not to exceed $15,000,000. Commercial letters of
credit shall be issued for a term not to exceed 180 days provided however, that
no letters of credit shall have an expiration date subsequent to May 1, 2000.
Under this new credit agreement, borrowings bear interest at the
Company's election either at the bank's prime rate (8.50% at December 31, 1997)
less certain margins, which range from .75 to 1.00 basis points, or at LIBOR
(5.985% at December 31, 1997) plus certain margins, which range from .75 to 1.25
basis points, the margins being dependent on the Company meeting certain funded
debt to EBITDA ratios. The credit agreement requires the Company to maintain a
current ratio of not less than 1.50 to 1.00; maintain tangible net worth of not
less than $40,000,000, increasing to not less than $45,00,000 at any time from
and including June 30, 1998; and maintain funded debt to EBITDA ratio of less
than 1.50 to 1.00. The Company also is required to obtain the bank's approval to
declare or pay dividends in excess of $200,000.
The Company's Canadian subsidiary has a credit agreement with a
Canadian bank which the Company guarantees. Borrowings under this line of
credit, which are used for working capital purposes by the Company's Canadian
subsidiary, may not exceed Canadian $2,000,000, bear interest at the bank's
prime rate (6.0% at December 31, 1997) and are due and payable on demand. Prior
to October 17, 1997, borrowings under the line bore interest at the bank's prime
rate plus 0.50%. At December 31, 1997, the Canadian subsidiary had no amounts
outstanding under this line of credit.
4. Stockholders' Equity
During the six months ended December 31, 1997, certain directors,
officers and employees exercised options and warrants to purchase an aggregate
of 166,319 shares of the Company's Common Stock for an aggregate of
approximately $1,880,000.
5. Treasury Stock
During the six months ended December 31, 1997, the Company repurchased
347,794 shares from certain officers and directors at a cost of $33.25 per share
for an aggregate of approximately $11,564,000.
6. Earnings Per Share
The Company adopted the Financial Accounting Standards Board Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, for the
period ended December 31, 1997. SFAS No. 128 requires the Company to present
basic and diluted earnings per share on the face of the income statement. Basic
earnings per share is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
is computed by dividing net income by the sum of the weighted-average number of
common shares outstanding for the period plus the assumed exercise of all
diluted securities. The following reconciles the numerator and denominator of
the basic and diluted per-share computations for net income (in thousands,
except per share amounts):
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------------------- -------------------------------
1997 1996 1997 1996
--------------- ----------------- ---------------- ------------
Net Income $ 5,524 $ 4,504 $ 9,876 $ 8,352
======= ======== ======== ========
Basic Weighted Average Shares
Weighted average number of
common shares outstanding 5,637 6,332 5,697 6,323
Effect of Diluted Securities
Additional shares from the assumed
exercise of options and warrants 1,666 1,116 1,603 1,327
Shares assumed to be repurchased
under the treasury stock method (869) (567) (833) (753)
Non qualified tax benefit (272) (182) (260) (192)
----- ----- ----- -----
Diluted Weighted Average Shares
Weighted average number of
common shares outstanding and
common share equivalents 6,162 6,699 6,207 6,705
====== ====== ====== ======
Basic EPS $ 0.98 $ 0.71 $ 1.73 $ 1.32
====== ====== ====== ======
Diluted EPS $ 0.90 $ 0.67 $ 1.59 $ 1.25
====== ====== ====== ======
7. Acquisitions
On July 29, 1997, the Company purchased the stock of Ultima
Distribution Inc., which was the distributor of the Company's products in
Canada, for approximately $130,000. In addition, contingent payments may be paid
over the next two years, based on Ultima's operating performance during that
period.
On October 1, 1997, the Company purchased substantially all the
operating assets of Ram Manufacturing, Inc., a Little Rock, Arkansas developer,
manufacturer and marketer of wall boards. The purchase price was approximately
$2,400,000, of which approximately $1,950,000 had been paid as of December 31,
1997. The Company also assumed certain liabilities totaling approximately
$3,000,000. In addition, contingent payments may be paid over the next three
years, based upon Ram's operating performance during that period.
8. Statements of Cash Flow
The net cash expended by the Company in its acquisitions made during the
six months ended December 31, 1997 was used as follows (in thousands):
Ultima Ram
------ ---
Working capital $ 30 $ 624
Property, plant and equipment (150) (970)
Long-term debt 197 54
Cost in excess of net assets of company acquired (207) (1,658)
-------- ----------
Net cash used to acquire business $ (130) $ (1,950)
======== ===========
Supplemental disclosure of cash flow information (in thousands):
Six Months Ended December 31,
1997 1996
------------------------------------
Cash paid during the period for:
Interest $ 149 $ 56
Income taxes $ 4,146 $ 3,174
9. Subsequent Events
On January 20, 1998, the Company's Board of Directors approved a
two-for-one stock split and a doubling of the Company's number of authorized
shares from 15 million to 30 million shares. Both actions are subject to
stockholder approval at a special meeting to be held on March 17, 1998.
On February 1, 1998, the Company purchased the stock of Timeposters
Inc., a Canadian developer, manufacturer and marketer of planning and
presentation products, including flexible planners, planning boards, other wall
boards and easels, for approximately $2,500,000. In addition, contingent
payments may be paid over the next two years, based on Timeposters' operating
performance during that period.
Item 2. 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 Quarterly 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.
Since the Company's introduction of the first Day Runner System
organizer in 1982, the Company's revenues have been generated by sales primarily
of organizers and planners and secondarily of refills. Since fiscal 1995, most
of the Company's growth has resulted from sales of related organizing products,
virtually all of which have been introduced since January 1, 1995. The Company
focuses the great majority of its product development, sales and marketing
efforts on the office products channel, which accounted for 54.4% of second
quarter fiscal 1998 sales and 51.2% of sales for the six months ended December
31, 1997, and the mass market channel, which accounted for 32.6% of second
quarter fiscal 1998 sales and 36.4% of sales for the six months ended December
31, 1997.
Results of Operations
The following table sets forth, for the periods indicated, the
percentages that income statement items bear to sales and the percentage change
in the dollar amounts of such items.
Percentage Change
-----------------
Percentage of Sales Three Six
--------------------- Months Months
Three Six Ended Ended
Months Ended Months Ended December 31, December 31,
December 31, December 31, 1996 to 1996 to
1996 1997 1996 1997 1997 to 1997
-------------- ------------- ------- -------
Sales............................................ 100.0% 100.0% 100.0% 100.0% 41.1% 27.7%
Cost of goods sold............................... 47.8 47.1 47.6 47.4 43.2 28.3
----- ----- ----- -----
Gross profit..................................... 52.2 52.9 52.4 52.6 39.2 27.1
----- ----- ----- -----
Operating expenses:
Selling, marketing and distribution........... 24.5 22.6 24.4 23.2 53.1 34.7
General and administrative.................... 9.3 9.7 9.6 9.9 34.5 22.7
----- ----- ----- -----
Total operating expenses.................... 33.8 32.3 34.0 33.1 47.5 31.1
----- ----- ----- -----
Income from operations........................... 18.4 20.6 18.4 19.5 26.1 20.3
Net interest expense (income).................... 0.1 (0.9) (0.1) (0.8) (109.9) (87.3)
---- ------ ------ ------- ------
Income before provision for income taxes......... 18.3 21.5 18.5 20.3 20.6 16.3
Provision for income taxes....................... 7.1 8.6 7.2 8.1 17.6 13.4
----- ----- ----- -----
Net income....................................... 11.2% 12.9% 11.3% 12.2% 22.6 18.2
===== ===== ===== =====
The following tables set forth, for the periods indicated, the
Company's approximate sales by product category and distribution channel and as
a percentage of total sales.
Product Category:
Three Months Ended December 31, Six Months Ended December 31,
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited; dollars in thousands)
Organizers and planners......... $21,912 44.4% $ 20,179 57.6% $ 43,100 49.2% $ 41,240 60.1%
Refills......................... 16,255 32.9 12,981 37.1 27,130 31.0 23,425 34.2
Related organizing products..... 11,221 22.7 1,854 5.3 17,296 19.8 3,898 5.7
------ ------ ------- ----- -------- ----- -------- -----
Total........................ $49,388 100.0% $35,014 100.0% $ 87,526 100.0% $ 68,563 100.0%
======= ====== ======= ====== ======== ====== ======== ======
Distribution Channel:
Three Months Ended December 31, Six Months Ended December 31,
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited; dollars in thousands)
Office products................. $26,874 54.4% $20,546 58.7% $ 44,798 51.2% $ 38,329 55.9%
Mass market..................... 16,106 32.6 10,525 30.1 31,856 36.4 23,005 33.6
Foreign customers............... 2,596 5.3 1,754 5.0 5,011 5.7 3,118 4.5
Other........................... 3,812 7.7 2,189 6.2 5,861 6.7 4,111 6.0
------- ---- ------- ----- -------- ---- -------- ----
Total........................ $49,388 100.0% $35,014 100.0% $ 87,526 100.0% $ 68,563 100.0%
======= ====== ======= ====== ======== ====== ======== ======
Three Months Ended December 31, 1997 Compared with
the Three Months Ended December 31, 1996
Sales. Sales consist of revenues from gross product shipments net of
allowances for returns, rebates and credits. In the second quarter of fiscal
1998, sales increased by $14,374,000, or 41.1%, primarily because of increased
sales of related organizing products. In the quarter ended December 31, 1997,
sales of related organizing products grew by $9,367,000, or 505.2%; sales of
refills (which include calendars and accessories) grew by $3,274,000, or 25.2%;
and sales of organizers and planners grew by $1,733,000, or 8.6%. Product sales
were primarily to office products customers and secondarily to mass market
customers. Sales to office products customers grew by $6,328,000, or 30.8%;
sales to mass market customers grew by $5,581,000, or 53.0%; sales to
miscellaneous customers grouped together as "other" increased by $1,623,000, or
74.1%; and sales to foreign customers grew by $842,000, or 48.0%.
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, sales
returns, purchasing and manufacturing efficiencies, tariffs, duties and
inventory carrying costs. Gross profit as a percentage of sales decreased
slightly from 52.9% in the second quarter of fiscal 1997 to 52.2% in the second
quarter of fiscal 1998 primarily because of a sales-growth related increase in
the provision for sales rebates to be paid to certain large customers and
secondarily because the gross profit levels of certain of the Company's
subsidiaries and of its Ram Manufacturing division are lower as a percentage of
sales than those of the parent company.
Operating Expenses. Total operating expenses increased by $5,369,000,
or 47.5%, in the second quarter of fiscal 1998 compared with the second quarter
of fiscal 1997 and increased as a percentage of sales from 32.3% to 33.8%.
Primarily because of expenses associated with the expanded distribution of
recently introduced products, selling, marketing and distribution expenses
increased by $4,192,000 and from 22.6% to 24.5% as a percentage of sales.
General and administrative expenses increased by $1,177,000, but decreased from
9.7% to 9.3% as a percentage of sales primarily because of the Company's
increased ability to absorb fixed costs as a result of higher sales.
Net Interest Expense (Income). Primarily because of a decrease in the
Company's cash available for short-term investment resulting from the Company's
repurchase of common stock, net interest expense was $30,000 for the second
quarter of fiscal 1998 compared with net interest income of $303,000 for the
second quarter of fiscal 1997.
Income Taxes. Primarily because of the improved financial results of
the Company's Hong Kong subsidiary, the Company's second quarter fiscal 1998
effective tax rate was 39.0%, compared with 40.0% for the second quarter of
fiscal 1997.
Six Months Ended December 31, 1997 Compared with
the Six Months Ended December 31, 1996
Sales. In the six months ended December 31, 1997 compared with the six
months ended December 31, 1996, sales increased by $18,963,000, or 27.7%,
primarily because of increased sales of related organizing products. In the six
months ended December 31, 1997, sales of related organizing products grew by
$13,398,000, or 343.7%; sales of refills grew by $3,705,000, or 15.8%; and sales
of organizers and planners grew by $1,860,000, or 4.5%. Product sales were
primarily to office products customers and secondarily to mass market customers.
Sales to mass market customers grew by $8,851,000, or 38.5%; sales to office
products customers grew by $6,469,000, or 16.9%; sales to foreign customers grew
by $1,893,000, or 60.7%; and sales to miscellaneous customers grouped together
as "other" increased by $1,750,000, or 42.6%.
Gross Profit. Gross profit as a percentage of sales decreased from
52.6% in the first six months of fiscal 1997 to 52.4% in the first six months of
fiscal 1998 primarily because of a sales-growth related increase in the
provision for sales rebates to be paid to certain large customers and
secondarily because the gross profit levels of certain of the Company's
subsidiaries and of its Ram Manufacturing division are lower as a percentage of
sales than those of the parent company.
Operating Expenses. Total operating expenses increased by $7,053,000,
or 31.1%, in the first six months of fiscal 1998 compared with the first six
months of fiscal 1997 and increased as a percentage of sales from 33.1% to
34.0%. Primarily because of expenses associated with the expanded distribution
of recently introduced products, selling, marketing and distribution expenses
increased by $5,506,000 and from 23.2% to 24.4% as a percentage of sales.
General and administrative expenses increased by $1,547,000, but decreased from
9.9% to 9.6% as a percentage of sales primarily because of the Company's
increased ability to absorb fixed costs as a result of higher sales.
Net Interest Expense(Income). Primarily because of a decrease in the
Company's cash available for short-term investment resulting from the Company's
repurchase of common stock, net interest income in the first six months of
fiscal 1998 compared with the first six months of fiscal 1997 decreased by
$448,000 and from 0.8% to 0.1% as a percentage of sales.
Income Taxes. Primarily because of the improved financial results of
the Company's Hong Kong subsidiary, the effective tax rate for the first six
months of fiscal 1998 was 39.0%, compared with 40.0% for the first six months of
fiscal 1997.
Earnings Per Share. During fiscal 1997, the Company repurchased 513,100
shares of Common Stock under the Company's stock repurchase program. 186,900
shares remain for repurchase under this program. Separately, in August 1997, the
Company repurchased an aggregate of 347,794 shares from certain officers and
directors of the Company. The repurchases reduce the number of shares that would
otherwise be used to calculate earnings per share for the 1998 fiscal year and
subsequent fiscal years.
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, large customers' inventory
management 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
The Company's cash and cash equivalents at December 31, 1997 decreased
to $9,411,000 from $15,550,000 at June 30, 1997. In the six months ended
December 31, 1997, net cash of $11,657,000 provided by operating activities, was
offset by net cash of $4,651,000 and $13,099,000 used in investing activities
and financing activities, respectively.
Of the $11,657,000 net amount provided by the Company's operating
activities, $9,876,000 was provided by net income, $5,011,000 was provided by an
increase in accrued expenses, $2,261,000 was provided by an increase in income
taxes payable and $2,255,000 was provided by depreciation and amortization.
These amounts were partially offset by an increase of $4,423,000 in inventories
and a decrease of $2,657,000 in accounts payable.
Of the $4,651,000 net amount used in the Company's investing
activities, $2,565,000 was used to acquire primarily machinery and equipment and
secondarily computer equipment and software, and $2,080,000 was used to acquire
Ultima Distribution Inc. and Ram Manufacturing, Inc.
Of the $13,099,000 net amount used in the Company's financing
activities, $11,564,000 was used to repurchase 347,794 shares of Common Stock
from certain officers and directors, and $2,697,000 was used to repay lines of
credit. These amounts were partially offset by $1,879,000 that was provided by
the issuance of Common Stock upon exercise of then-outstanding stock options and
warrants.
Accounts receivable (net) at December 31, 1997 increased by 9.9% from
the fiscal 1997 year-end amount and by 21.4% compared with the December 31, 1996
amount primarily because of the Company's sales growth but did not grow as fast
as sales because substantial sales to a large customer occurred early in the
quarter. The average collection period of accounts receivable at December 31,
1997 was 46 days, compared with 47 days at both June 30, 1997 and December 31,
1996.
Inventories at December 31, 1997 increased by 30.7% from the fiscal
1997 year-end amount and by 67.5% compared with the December 31, 1996 amount
primarily because of the continuing expansion of distribution of new and
recently introduced products and the inventories of the companies acquired
during the six months ended December 31, 1997.
At December 31, 1997, Day Runner had no amounts outstanding under its
primary $15,000,000 bank line but had used the line to obtain outstanding
letters of credit of approximately $1,623,000, which reduced the availability
under the line to approximately $13,377,000. Effective February 1, 1998, the
Company entered into a new $15,000,000 line of credit with borrowings under this
line of credit bearing interest at the Company's election at either at the
bank's prime rate, less certain margins, or at LIBOR, plus certain margins, the
margins being dependent on the Company meeting certain funded debt to EBITDA
ratios.Prior to February 1, 1998, borrowings under the line bore interest at the
bank's prime rate or at LIBOR plus 1.75%. (See Note 3 to Consolidated Financial
Statements.)
The Canadian line of credit allows for borrowings, by one of the
Company's Canadian subsidiaries, of up to Canadian $2,000,000 (approximately US
$1,400,000). Borrowings bear interest at the Canadian bank's prime rate and are
due and payable on demand. Prior to October 17, 1997, borrowings under the line
bore interest at the bank's prime rate plus 0.50%. At December 31, 1997, the
Canadian subsidiary had no amounts outstanding under this line of credit.
(See Note 3 to Consolidated Financial Statements.)
The Company has not incurred significant losses or gains from foreign
currency exchange rate fluctuations. The continuing expansion of the Company's
international operations 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 lines of credit will be sufficient to
satisfy the Company's anticipated cash requirements at least through the next 12
months. Nonetheless, the Company may seek additional sources of capital as
necessary or appropriate for corporate finance purposes 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.
The Company has conducted a review of its computer systems to identify
those areas that will be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The "Year 2000" issue refers to the
inability of certain computer systems to recognize dates commencing on January
1, 2000. Such inability has the potential to materially adversely affect the
operation of computer systems. The Company currently believes that by modifying
existing software and converting to new software for certain tasks, the Year
2000 problem will not pose significant operational problems and is not
anticipated to be material to its financial position or results of operations in
any given year. At the present time, the Company estimates that the incremental
cash requirements related to the Year 2000 issue will total approximately
$500,000 to $900,000. Such expenditures will be expensed or capitalized as
appropriate.
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 and elsewhere in this
quarterly report 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.
PART II --OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a)On November 25, 1997, the Company held its 1997 Annual
Meeting of Stockholders (the "Annual Meeting").
(b)At the Annual Meeting, the Company's stockholders elected
the following persons as directors of the Company. The
number of votes cast for each director, as well as the
number of votes withheld, are listed opposite each
director's name.
Name Votes
of Cast for Votes
Director Director Withheld
-------- -------- --------
James E. Freeman, Jr. 5,557,263 6,458
James P. Higgins 5,559,363 4,358
Jill Tate Higgins 5,557,363 6,358
Charles Miller 5,557,463 6,258
Alan R. Rachlin 5,559,763 3,958
Mark A. Vidovich 5,557,463 6,258
Boyd I. Willat 5,559,628 4,093
Felice Willat 5,559,363 4,358
(c)At the Annual Meeting, the stockholders approved, with
4,709,044 votes cast in favor, 812,194 votes cast against,
14,056 abstentions and 28,427 broker nonvotes, the
amendment to the Company's 1995 Stock Option Plan to
increase the aggregate number of shares authorized for
issuance thereunder from 500,000 to 775,000 shares.
(d)At the Annual Meeting, the stockholders approved, with
5,492,114 votes cast in favor, 30,922 votes cast against,
12,258 abstentions and 28,427 broker nonvotes, the
amendment to the Company's Employee Stock Option Plan to
increase the aggregate number of shares for issuance
thereunder from 100,000 to 175,000.
(e)At the Annual Meeting, with 5,554,893 votes cast in
favor, 3,285 votes cast against and 5,543 abstentions, the
stockholders ratified the appointment of Deloitte & Touche
LLP as independent auditors for the Company for the fiscal
year ending June 30, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Registrant, as amended(1)
3.2 Bylaws of the Registrant, as amended(2)
10.1 Credit Agreement dated as of February 1, 1998 between the
Registrant and Wells Fargo Bank, National Association,including
Revolving Line of Credit Note
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1997.
(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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 17, 1998
Day Runner, Inc.
By: /s/ MARK A. VIDOVICH
---------------------------
Mark A. Vidovich
Chairman of the Board and
Chief Executive Officer
By: /s/ DENNIS K. MARQUARDT
---------------------------
Dennis K. Marquardt
Executive Vice President,
Finance & Administration
and Chief Financial Officer