EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
Day Runner, Inc.:
We have audited the accompanying consolidated balance sheets of Day Runner, Inc.
and subsidiaries (the "Company") as of June 30, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 1998. 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 audits 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, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
August 17, 1998
(September 24, 1998 as to Note 20)
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
June 30,
1998 1997
--------- ------
Current assets:
Cash and cash equivalents...................................................... $ 2,923 $15,550
Accounts receivable (less allowance for doubtful accounts and
sales returns and other allowances of $9,942 and $8,664 at
June 30, 1998 and 1997, respectively)....................................... 32,542 22,303
Inventories.................................................................... 37,610 23,406
Prepaid expenses and other current assets...................................... 1,670 2,409
Income taxes receivable........................................................ 2,606
Deferred income taxes.......................................................... 7,218 6,386
--------- -------
Total current assets........................................................ 84,569 70,054
Property and equipment, net ....................................................... 11,888 8,688
Other assets (net of accumulated amortization of $196,000 at June 30, 1998)........ 4,722 138
--------- -------
Total assets....................................................................... $101,179 $78,880
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit................................................................ $ 2,716 $ 452
Accounts payable............................................................... 9,969 8,320
Accrued expenses............................................................... 13,876 9,500
Income taxes payable........................................................... 1,049
Current portion of capital lease obligations................................... 33 23
--------- -------
Total current liabilities................................................... 26,594 19,344
--------- -------
Long-term liabilities:
Capital lease obligations...................................................... 53 52
--------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock (1,000,000 shares authorized; $0.001 par value, no shares
issued or outstanding)
Common stock (29,000,000 shares authorized; $0.001 par value; 13,677,386
shares issued and 11,955,598 outstanding at June 30, 1998;
12,728,858 shares issued and 11,702,658 outstanding at June 30, 1997)........ 14 13
Additional paid-in capital..................................................... 34,445 23,752
Retained earnings.............................................................. 65,076 49,168
Cumulative translation adjustment.............................................. 102 92
Treasury stock - At cost (1,721,788 and 1,026,200 shares, at June 30, 1998 and
1997, respectively).......................................................... (25,105) (13,541)
--------- --------
Total stockholders' equity.................................................. 74,532 59,484
--------- -------
Total liabilities and stockholders' equity......................................... $101,179 $78,880
========= =======
See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended June 30,
1998 1997 1996
--------- ---------- --------
Net sales................................................... $ 167,841 $ 127,376 $125,126
Cost of goods sold.......................................... 80,663 60,452 59,920
--------- --------- ---------
Gross profit................................................ 87,178 66,924 65,206
--------- --------- ---------
Operating expenses:
Selling, marketing and distribution..................... 43,193 31,673 29,878
General and administrative.............................. 18,416 14,451 16,376
Costs incurred in pursuing acquisitions................. 1,451
--------- ---------
Total operating expenses............................. 61,609 47,575 46,254
--------- --------- ---------
Income from operations...................................... 25,569 19,349 18,952
--------- --------- ---------
Interest (income) expense:
Interest income......................................... (390) (1,431) (823)
Interest expense........................................ 218 130 117
--------- --------- ---------
Net interest income.................................. (172) (1,301) (706)
--------- --------- ---------
Income before provision for income taxes.................... 25,741 20,650 19,658
Provision for income taxes.................................. 9,833 8,102 7,840
--------- --------- ---------
Net income.................................................. $ 15,908 $ 12,548 $ 11,818
========= ========= =========
Earnings per common share:
Basic................................................ $ 1.38 $ 1.01 $ 0.95
========= ========= =========
Diluted.............................................. $ 1.27 $ 0.95 $ 0.89
========= ========= =========
Weighted average number of common shares outstanding:
Basic................................................ 11,533 12,432 12,468
========= ========= =========
Diluted.............................................. 12,523 13,182 13,252
========= ========= =========
See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Number Additional Cumulative
of Shares Common Paid-In Retained Translation Treasury
Outstanding Stock Capital Earnings Adjustment Stock Total
----------- --------------- ---------------- -------- ---------- ---------- ------
Balance, July 1, 1995..................... 12,251,594 $ 12 $ 19,936 $ 24,802 $ 37 $44,787
Exercise of options......................... 357,948 1,475 1,475
Tax benefit of options...................... 1,452 1,452
Cumulative translation adjustment .......... (34) (34)
Net income.................................. 11,818 11,818
---------- ------ -------- ------ ------ -------- -------
Balance, June 30, 1996...................... 12,609,542 12 22,863 36,620 3 59,498
Exercise of warrants........................ 11,000 22 22
Exercise of options......................... 108,316 1 660 661
Tax benefit of options...................... 157 157
Compensation cost associated with
warrant grant........................... 50 50
Cumulative translation adjustment........... 89 89
Treasury stock.............................. (1,026,200) $(13,541) (13,541)
Net income.................................. 12,548 12,548
---------- ------- ----------- -------- ----- --------- --------
Balance, June 30, 1997...................... 11,702,658 13 23,752 49,168 92 ( 13,541) 59,484
Exercise of warrants........................ 278,000 673 673
Exercise of options......................... 670,528 1 4,579 4,580
Tax benefit of options...................... 5,208 5,208
Compensation cost associated with
warrant grant........................... 233 233
Cumulative translation adjustment........... 10 10
Treasury stock.............................. (695,588) (11,564) (11,564)
Net income.................................. 15,908 15,908
---------- ------- --------- --------- ------ -------- --------
Balance, June 30, 1998...................... 11,955,598 $ 14 $ 34,445 $ 65,076 $ 102 $(25,105) $74,532
========== ===== ========= ========= ===== ======== ========
See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended June 30,
1998 1997 1996
--------- ---------- -------
Cash flows from operating activities:
Net income.............................................. $ 15,908 $ 12,548 $11,818
Adjustments to reconcile net income to net cash provided
by(used in) operating activities:
Depreciation and amortization......................... 5,517 3,869 2,548
Provision for losses on accounts receivable........... 381 810
Write-off of barter credits........................... 200 520
Utilization of barter credits......................... 100
Compensation expense related to issuance of warrants.. 233 50
Deferred income tax benefit........................... (832) (1,186) (26)
Changes in operating assets and liabilities,
net of effects from purchase of businesses:
Accounts receivable................................ (8,100) (1,220) (2,884)
Inventories ...................................... (11,050) (3,294) 6,543
Prepaid expenses and other current assets.......... 595 (689) (87)
Income taxes receivable............................ 2,087 1,930 (1,930)
Accounts payable................................... (725) 225 (1,028)
Accrued expenses................................... 3,755 (872) 3,606
Income taxes payable............................... (453) 1,206 (1,247)
-------- -------- -------
Net cash provided by operating activities........... 7,035 13,148 18,643
-------- -------- -------
Cash flows from investing activities:
Acquisition of property and equipment................... (7,175) (4,972) (4,393)
Purchase of businesses...................................... (4,626)
Other assets............................................ (110) 5 (8)
--------- ---------- ----------
Net cash used in investing activities................... (11,911) (4,967) (4,401)
--------- ---------- ----------
Cash flows from financing activities:
Net borrowings under line of credit..................... (338) 452
Payment of long-term debt............................... (990) (141)
Payment of capital lease obligations.................... (58) (13) (23)
Exercise of warrants.................................... 673 22
Exercise of options......................................... 4,580 661 1,475
Repurchase of common stock.............................. (11,564) (13,541)
-------- --------
Net cash (used in) provided by financing activities..... (7,697) (12,419) 1,311
-------- -------- -------
Effect of exchange rate changes on cash and cash equivalents (54) 23 (57)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents........ (12,627) (4,215) 15,496
Cash and cash equivalents, beginning of year................ 15,550 19,765 4,269
--------- -------- ---------
Cash and cash equivalents, end of year...................... $ 2,923 $ 15,550 $19,765
======== ======== =========
See accompanying notes to consolidated financial statements.
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") is a developer,
manufacturer and marketer of paper-based organizers for the retail market. The
Company also develops, manufactures and markets a number of related organizing
products, including telephone/address books, spiral dated goods, executive
accessories, products for children and students, organizing and other wall
boards and planners. 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 and abroad. The Company grants credit to
substantially all of its customers.
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.
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.
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, 1998, 1997 and 1996.
Cash Equivalents. The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
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 their 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.
Property and Depreciation. Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided for over the estimated useful
lives of the respective assets, using the straight-line method. Estimated useful
lives range from three to seven years. Vehicles and equipment under capital
leases and 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.
Other Assets. Other assets consist primarily of goodwill and
non-competition agreements that arose as a result of the Company's acquisitions
during fiscal 1998. Goodwill is being amortized using the straight-line method
over a period of 20 years, and the non-competition agreements are being
amortized using the straight-line method over a period of five years.
Impairment of Long-Lived Assets. Long-lived assets are reviewed for
impairment, based on cash flows undiscounted without interest charges, whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Impairment losses would be recognized if the
carrying amount of the asset exceeds the fair value of the assets.
Income Taxes. 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.
Net Sales. Revenue is recognized upon shipment of product to the customer,
with appropriate allowances for estimated returns, rebates and other allowances.
Significant Customers. In 1998, sales to four customers accounted for 28%,
16%, 15% and 14% of the Company's sales. In 1997, sales to four customers
accounted for 25%, 15%, 14% and 11% of the Company's sales. In 1996, sales to
three customers accounted for 17%, 15% and 12% of the Company's sales.
New Accounting Standards. In June 1997, the Financial Accounting Standards
Board (the "Board") issued Statement of Financial Accounting Standards ("SFAS")
No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. These statements are
effective for financial statements issued for periods beginning after December
15, 1997. In June 1998, the Board issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement is effective for financial
statements issued for periods beginning after June 15, 1999. The Company is
evaluating what, if any, additional disclosures may be required upon
implementation of SFAS Nos. 130, 131 and 133.
Reclassifications. Certain reclassifications were made to the prior year
financial statements to conform to the current presentation.
2. 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,
1998 1997
---------- -------
Raw materials................. $ 14,087 $ 10,204
Work in process............... 831 426
Finished goods................ 22,692 12,776
--------- --------
Total................ $ 37,610 $ 23,406
========= ========
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
June 30,
1998 1997
-------- -------
Displays................................. $ 9,003 $ 6,094
Data processing equipment and software... 8,785 5,863
Machinery and equipment.................. 6,705 4,222
Leasehold improvements................... 2,229 1,838
Vehicles................................. 250 214
-------- ---------
Total................................ 26,972 18,231
Accumulated depreciation and
amortization...................... (15,084) (9,543)
--------- ---------
Property and equipment - net.. ..... $ 11,888 $ 8,688
======== =========
4. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
June 30,
1998 1997
-------- -------
Accrued sales and promotion costs........ $ 7,473 $ 5,223
Accrued payroll and related costs........ 2,955 2,128
Other.................................... 3,448 2,149
-------- ---------
Total............................ $ 13,876 $ 9,500
======== =========
5. LINES OF CREDIT
Effective February 1, 1998, the Company entered into a new credit agreement
with a 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 borrowings 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. At June 30, 1998, the Company had
$1,253,000 outstanding under this line of credit and had outstanding letters of
credit totaling approximately $1,050,000. (See Note 20).
Under this new credit agreement, borrowings bear interest at the Company's
election either at the bank's prime rate (8.50% at June 30, 1998) less certain
margins, which range from .50% to 1.00%, or at LIBOR (5.66% at June 30, 1998)
plus certain margins, which range from .75% to 1.25%, with the margins dependent
upon the Company's 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 $45,000,000, and
maintain a 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.
Each of the Company's two Canadian subsidiaries has a credit agreement with
a Canadian bank. The aggregate borrowings under these lines of credit, which are
guaranteed by the Company and are used for working capital by these
subsidiaries, may not exceed Canadian $3,000,000 (approximately US $2,039,000),
bear interest at the bank's prime rate (6.50% at June 30, 1998) and are due and
payable on demand. At June 30, 1998, approximately Canadian $2,155,000
(approximately US $1,463,000) was outstanding under these lines of credit. These
borrowings were collateralized by substantially all of the two Canadian
subsidiaries' assets.
Total borrowings under the new credit agreement and the two Canadian credit
agreements bore interest at an average interest rate of 7.00% and 8.50% for the
years ended June 30, 1998 and 1997, respectively. The Company had no borrowings
outstanding under its lines of credit during the year ended June 30, 1996.
6. LEASES
The Company has four noncancelable operating leases for its principal
operating facilities and its corporate headquarters. The leases expire through
2005. 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 2002.
The Company also leases certain vehicles and equipment under agreements
that meet the criteria for classification as capital leases. Future minimum
lease payments under these capital leases, and the future minimum lease payments
under the operating leases at June 30, 1998, are summarized as follows (in
thousands):
Capital Operating
Years Ending June 30, Leases Leases
--------------------- --------- ---------
1999.................................................... $ 33 $ 4,525
2000.................................................... 24 3,626
2001.................................................... 12 3,014
2002.................................................... 13 1,478
2003.................................................... 4 1,137
Thereafter.............................................. 836
--------- --------
Total minimum lease payments............................ 86 $ 14,616
========
Less current portion of capital lease obligations....... 33
---------
Long-term portion of capital lease obligations.......... $ 53
=========
Included in property and equipment at June 30, 1998 and 1997 are
vehicles and equipment under capital leases with a cost of $157,000 and $88,000
and accumulated depreciation of $47,000 and $43,000, respectively.
Rent expense was $4,025,000, $3,841,000 and $3,927,000 for the years
ended June 30, 1998, 1997 and 1996, respectively.
7. INCOME TAXES
The components of income before provision for income taxes were (in
thousands):
Years Ended June 30,
1998 1997 1996
--------- --------- ---------
United States......................... $ 22,856 $ 18,765 $ 18,029
Other................................. 2,885 1,885 1,629
--------- --------- ---------
Total.............................. $ 25,741 $ 20,650 $ 19,658
========= ========= =========
The provision for income taxes consists of the following (in
thousands):
Years Ended June 30,
1998 1997 1996
---------- --------- ---------
Current:
Federal............................... $ 8,565 $ 7,076 $ 6,051
State................................. 1,477 1,825 1,473
Foreign............................... 623 387 342
--------- --------- ---------
Total current........................... 10,665 9,288 7,866
--------- --------- ---------
Deferred:
Federal............................... (920) (961) (37)
State................................. 88 (225) 11
--------- --------- ---------
Total deferred.......................... (832) (1,186) (26)
--------- --------- ---------
Total provision for income taxes........ $ 9,833 $ 8,102 $ 7,840
========= ========= =========
Differences between the total income tax provision and the amount
computed by applying the statutory federal income tax rate to income before
provision for income taxes are as follows (in thousands):
Years Ended June 30,
1998 1997 1996
---------- ----------- -------
Computed tax expense using the
statutory federal income tax rate..... $ 9,009 $ 7,228 $ 6,880
Increase (decrease) in taxes arising from:
State taxes, net of federal benefit... 769 1,000 980
Foreign earnings taxed at other
than federal statutory rate......... (387) (273) (229)
Other................................. 442 147 209
--------- --------- ---------
Total................................. $ 9,833 $ 8,102 $ 7,840
========= ========= =========
Effective income tax rate............... 38% 39% 40%
========= ========= =========
Total deferred tax assets and deferred tax liabilities consist of the
following (in thousands):
June 30,
1998 1997
------------ ------------
Allowance for sales returns............................ $ 2,918 $ 2,490
Inventory obsolescence reserve......................... 1,220 1,394
Allowance for doubtful accounts........................ 1,074 1,147
State taxes............................................ 615 615
Sales programs......................................... 608 374
Other deferred tax assets.............................. 1,368 1,117
------ --------
Total deferred tax assets.............................. 7,803 7,137
Deferred tax liabilities............................... (585) (751)
------- --------
Total.................................................. $7,218 $ 6,386
======= ========
Cumulative undistributed earnings of foreign subsidiaries for which no
deferred taxes have been provided approximated $4,153,000 at June 30, 1998. The
additional taxes payable on the earnings of foreign subsidiaries, if remitted,
would be offset by U.S. tax credits for foreign taxes paid.
8. EARNINGS PER SHARE
The Company adopted SFAS No. 128, Earnings Per Share, which 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 dilutive 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):
Years Ended June 30,
1998 1997 1996
------------ ----------- ----------
Net Income $ 15,908 $ 12,548 $ 11,818
========== =========== ==========
Basic Weighted Average Shares
Weighted average number of
common shares outstanding 11,533 12,432 12,468
Effect of Dilutive Securities
Additional shares from the assumed
exercise of options and warrants 3,093 2,757 2,295
Shares assumed to be repurchased
under the treasury stock method (2,103) (2,007) (1,511)
---------- ----------- ----------
Diluted Weighted Average Shares
Weighted average number of
common shares outstanding and
common share equivalents 12,523 13,182 13,252
========== =========== ==========
Basic $ 1.38 $ 1.01 $ 0.95
========== =========== ==========
Diluted $ 1.27 $ 0.95 $ 0.89
========== ============ ==========
9. STOCK OPTION PLANS
Under the Company's 1995 Stock Option Plan (the "Plan"), an aggregate
of 1,550,000 shares of common stock is reserved for issuance to key employees,
including officers and directors, and consultants of the Company. 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 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 of up to ten years.
The Company also authorized the issuance of up to 3,450,000 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, 1998, options covering 2,406,564 shares have been exercised and options
covering 1,027,186 shares remain outstanding. No additional options will be
granted under this plan.
During the years ended June 30, 1998, 1997 and 1996, certain officers
and employees exercised options to purchase an additional 651,414, 74,300 and
328,050 shares, respectively, of the Company's common stock for an aggregate of
$4,278,000, $381,000 and $1,214,000, respectively (see Note 10).
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, 1998, 1997 and 1996. This reduction totaled $5,208,000, $157,000 and
$1,452,000, respectively, and was credited to additional paid-in capital.
A summary of option activity is as follows:
Weighted Weighted
Average Average
Number of Exercise Options Exercise
Options Price Exercisable Price
------- ----- ----------- -----
Outstanding, July 1, 1995............... 1,733,450 $ 5.96
Granted.......................... 336,750 8.38
Exercised........................ (328,050) 3.69
Cancelled........................ (10,000) 7.65
------------
Outstanding, June 30, 1996.......... 1,732,150 6.85 753,774 $ 6.22
Granted.......................... 465,000 13.00
Exercised........................ (74,300) 5.13
Cancelled........................ (31,250) 11.96
------------
Outstanding, June 30, 1997.......... 2,091,600 8.20 1,102,314 6.90
Granted.......................... 565,000 17.10
Exercised........................ (651,414) 6.57
------------
Outstanding, June 30, 1998.......... 2,005,186 11.24 933,648 8.61
============
At June 30, 1998, the range of option prices for shares under options
and the weighted average remaining contractual life is as follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number of Exercise Contractual Number Exercise
Range of Option Exercise Price Options Price Life Exercisable Price
------------------------------ ------------ -------- ------------ ----------- --------
$ 5.13 - $8.38 818,636 $ 6.69 5.80 601,098 $ 6.32
9.75 - 13.00 623,550 11.91 7.42 253,050 11.41
16.88 - 20.63 563,000 17.10 9.16 79,500 17.00
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation cost has been recognized for stock option awards. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant dates for awards under those plans as required by
SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income
and earnings per common and common equivalent shares would have been reduced to
the pro forma amounts indicated below:
Years Ended June 30,
1998 1997 1996
---------- ---------- --------
Net income:
As reported $ 15,908 $ 12,548 $ 11,818
Pro forma $ 12,617 $ 11,094 $ 11,294
Earnings per common and common equivalent shares:
As reported:
Basic $ 1.38 $ 1.01 $ 0.95
Diluted $ 1.27 $ 0.95 $ 0.89
Pro forma:
Basic $ 1.09 $ 0.89 $ 0.91
Diluted $ 1.01 $ 0.84 $ 0.85
The fair values of the options granted under the plans during 1998,
1997 and 1996 were estimated on the date of grant using the Black-Scholes
option-pricing model. The weighted-average fair value of the options at the date
of grant were $9.03, $14.53 and $10.10, during fiscal 1998, 1997 and 1996,
respectively. The following weighted average assumptions for 1998, 1997 and
1996, respectively, were used: no dividend yield; volatility of 57.21%, 53.28%
and 56.26%; risk-free interest rates of 5.24% to 6.21%, 5.41% to 6.95% and 5.69%
to 6.40%; and expected option lives of one to four years for all periods. Pro
forma compensation cost of options granted under the Employee Stock Purchase
Plan is measured based on the discount from market value (see Note 10).
On August 17, 1998, the Company issued options to key employees to
purchase 375,000 shares of the Company's common stock at $18.75 per share. The
options vest over a period of five years and expire in 2008.
10. EMPLOYEE STOCK PURCHASE PLAN
During 1992, the Company adopted an Employee Stock Purchase Plan under
which 350,000 shares of common stock were authorized for issuance to employees.
Under the plan, eligible 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,
1998, 1997 and 1996, employees purchased an aggregate of 19,114, 34,016 and
29,898 shares of common stock for $302,000, $280,000 and $261,000, respectively,
under this plan. These amounts are included in the amounts shown for exercise of
options on the consolidated statements of stockholders' equity (see Note 9).
11. WARRANTS
During the years ended June 30, 1998, 1997 and 1996, the Board of
Directors approved the issuance of warrants to purchase an aggregate of 565,000
shares of the Company's common stock. Such warrants are exercisable at prices
ranging from $9.50 to $20.625 per share, vest over periods up to 48 months and
expire at various times through April 2008.
During fiscal 1998 and 1997, certain directors exercised warrants to
purchase 278,000 and 11,000 shares, respectively, of the Company's common stock
for an aggregate of $673,000 and $22,000, respectively. No warrants were
exercised during the year ended June 30, 1996.
Included in the issuance of warrants to purchase 565,000 aggregate
shares of the Company's common stock is a warrant to purchase 50,000 shares that
was issued to a director under the terms of a consulting agreement during fiscal
1997. Such issuance was accounted for under SFAS No. 123 using the Black-Scholes
option pricing model, which resulted in the recording of $233,000 and $50,000 in
compensation cost during the years ended June 30, 1998 and 1997, respectively.
A summary of warrant activity is as follows:
Weighted Weighted
Average Average
Number of Exercise Options Exercise
Warrants Price Exercisable Price
-------- ----- ----------- -----
Outstanding, July 1, 1995........... 427,000 $ 3.84
Granted.......................... 50,000 9.50
------------
Outstanding, June 30, 1996.......... 477,000 4.44 449,916 $4.13
Granted.......................... 300,000 11.95
Exercised........................ (11,000) 2.00
------------
Outstanding, June 30, 1997.......... 766,000 7.42 493,082 4.91
Granted.......................... 215,000 17.31
Exercised........................ (278,000) 2.42
------------
Outstanding, June 30, 1998.......... 703,000 12.42 482,166 12.20
============
At June 30, 1998, the range of warrant prices for shares under warrants
and the weighted average remaining contractual life is as follows:
Warrants Outstanding Warrants Exercisable
-------------------- --------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number of Exercise Contractual Number Exercise
Range of Warrant Exercise Price Warrants Price Life Exercisable Price
------------------------------- ---------- -------- ------------ ----------- ---------
$ 6.00 - 9.50 200,000 $ 7.81 5.83 200,000 $ 7.81
11.78 - 12.81 288,000 11.96 6.01 92,166 12.11
16.88 - 20.63 215,000 17.31 9.22 190,000 16.88
12. STOCK SPLIT
At a Special Meeting of the Company's stockholders held on March 17,
1998, the Company's stockholders approved an amendment to the Company's
Certificate of Incorporation to (i) effect a two-for-one split of each of the
outstanding shares of common stock of the Company and (ii) increase the number
of authorized shares of all classes of stock of the Company from 15,000,000 to
30,000,000, consisting of 29,000,000 shares of common stock, $0.001 par value
per share, and 1,000,000 shares of preferred stock, $0.001 par value per share.
Both actions were effective March 18, 1998. All share and per share data has
been retroactively restated to reflect the two-for-one stock split.
13. TREASURY STOCK
In fiscal 1997, the Board of Directors authorized the purchase of up to
1,200,000 shares of the Company's common stock, which may be used to meet the
Company's common stock requirements for its stock benefit plans. In fiscal 1998,
the Board of Directors increased the number of shares of common stock that the
Company is authorized to repurchase under this plan by 200,000 shares and
authorized the purchase of up to 720,000 shares of the Company's common stock
from officers and directors. During fiscal 1998 and 1997, the Company
repurchased 695,588 and 1,026,200 shares, respectively, at an average per share
cost of $16.625 and $13.195, respectively. All the shares repurchased in fiscal
1998 were from officers and directors at a per share cost equal to the closing
price of the stock on the day of the repurchase.
14. ACQUISITIONS
On July 29, 1997, the Company purchased the stock of Ultima
Distribution Inc. ("Ultima"), which was the distributor of the Company's
products in Canada, for approximately $130,000. The Company also entered into
non-competition agreements with certain of Ultima's former stockholders. In
addition, contingent payments may be paid over the two years following the
acquisition 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. ("Ram"), an Arkansas based
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
June 30, 1998. The Company also assumed certain liabilities totaling
approximately $3,000,000. In addition, contingent payments may be paid over the
three years following the acquisition based upon Ram's operating performance
during that period. The owner of Ram, who now works for the Company, entered
into a non-competition agreement with the Company.
On February 1, 1998, the Company purchased the stock of Timeposters
Inc. ("Timeposters"), a Canadian developer, manufacturer and marketer of
planning and presentation products, including flexible planners, planning
boards, other wall boards and easels, and entered into certain non-competition
agreements with the founders, who continue to work for Timeposters. The purchase
price was approximately $2,546,000. In addition, contingent payments may be paid
over the two years following the acquisition based on Timeposters' operating
performance during that period.
The following table presents summarized unaudited pro forma operating
results assuming that the Company had acquired these three companies on July 1,
1996 (in thousands, except per share amounts):
Years Ended June 30,
1998 1997
------------- -----------
Net Sales $ 172,168 $ 138,475
Income from operations $ 25,667 $ 19,616
Net income $ 15,959 $ 12,574
Earnings per share:
Basic $ 1.38 $ 1.01
Diluted $ 1.27 $ 0.95
Weighted average shares outstanding:
Basic 11,533 12,432
Diluted 12,523 13,182
15. 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 1999, are valued at the lower of the Company's cost or market
value of the inventory transferred. The Company has recorded barter credits of
$15,000 and $36,000 in prepaid expenses and other current assets at June 30,
1998 and 1997, respectively. At June 30, 1997, other assets include $79,000 of
such credits. No amounts were included in other assets at June 30, 1998. 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, 1998, approximately $100,000 was
charged to expense for barter credits used. No amounts were charged to expense
for barter credits used during the years ended June 30, 1997 and 1996.
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, 1997 and 1996, the Company charged
$200,000 and $520,000, respectively, to operations for such impairment losses.
No such impairment losses were charged to operations during the year ended June
30, 1998.
16. 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, 1998,
1997 and 1996, the Board elected to contribute an amount equal to 25% of the
first 6% of eligible earnings. Participants vest in the Company's contributions
at a rate of 20% after two years of plan participation and 20% each year
thereafter until fully vested.
During the years ended June 30, 1998, 1997 and 1996, the Company's
matching contributions were $156,000, $133,000 and $128,000, 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 $628,000 and $1,120,000 during the years
ended June 30, 1998 and 1996, respectively. No amounts were recorded under these
plans during the year ended June 30, 1997.
17. OPERATIONS IN FOREIGN COUNTRIES
The following is a summary of the financial activity of the Company by
geographical area (in thousands):
Year Ended June 30, 1998
United States Other Eliminations Total
------------- ----- ------------ -----
Net sales to unaffiliated entities $ 152,938 $ 14,903 $ 167,841
Transfers between geographic areas 2,348 2,125 $ (4,473)
------------- --------- ----------- ----------
Net sales $ 155,286 $ 17,028 $ (4,473) $ 167,841
============= ========= =========== ==========
Income from operations $ 31,883 $ 2,671 $ (8,985) $ 25,569
============= ========= =========== ==========
Identifiable assets $ 88,818 $ 13,096 $ (735) $ 101,179
============= ========= =========== ==========
Year Ended June 30, 1997
United States Other Eliminations Total
------------- ----- ------------ -----
Net sales to unaffiliated entities $ 122,618 $ 4,758 $ 127,376
Transfers between geographic areas 490 1,621 $ (2,111)
------------- --------- ---------- ----------
Net sales $ 123,108 $ 6,379 $ (2,111) $ 127,376
============= ========= ========== ==========
Income from operations $ 23,927 $ 1,834 $ (6,412) $ 19,349
============= ========= ========== ==========
Identifiable assets $ 74,050 $ 4,968 $ (138) $ 78,880
============= ========= ========== ==========
Year Ended June 30, 1996
United States Other Eliminations Total
------------- ----- ------------ -----
Net sales to unaffiliated entities $ 120,519 $ 4,607 $ 125,126
Transfers between geographic areas 443 1,302 $ (1,745)
------------- --------- ---------- ---------
Net sales $ 120,962 $ 5,909 $ (1,745) $ 125,126
============= ========= ========== ==========
Income from operations $ 22,022 $ 1,675 $ (4,745) $ 18,952
============= ========= =========== ==========
Identifiable assets $ 73,940 $ 4,061 $ (70) $ 77,931
============= ========= ========== ==========
18. CONTINGENCIES
In the normal course of business, the Company and certain of its
subsidiaries are defendants in various lawsuits. After consultation with
counsel, management is of the opinion that these various lawsuits, individually
or in the aggregate, will not have a materially adverse effect on the
consolidated financial statements.
19. SUPPLEMENTAL CASH FLOW INFORMATION
Disclosure of cash flow information (in thousands):
Years Ended June 30,
1998 1997 1996
-------- -------- --------
Cash paid during the period for:
Interest....................... $ 91 $ 130 $ 24
Income taxes........................ $ 8,862 $6,026 $ 9,988
In fiscal 1998, the Company purchased all of the capital stock of
Ultima Distribution Inc. and Timeposters Inc. The Company also purchased certain
of the assets of Ram Manufacturing, Inc. In conjunction with these acquisitions,
net cash expended was as follows (in thousands) (see Note 14):
Fair value of assets acquired $ (11,809)
Liabilities assumed 7,183
---------
Cash paid $ (4,626)
==========
Disclosure of noncash investing and financing activities:
Capital lease obligations totaling $88,000 were incurred in 1997 when
the Company entered into leases to acquire certain vehicles.
The Company realized a reduction in its current tax liability during
1998, 1997 and 1996 in the amount of $5,208,000, $157,000 and $1,452,000,
respectively. Such amounts were credited to additional paid-in capital (see Note
9).
20. SUBSEQUENT EVENTS
On September 15, 1998, the Board of Directors of the Company approved
the Non-Employee Director Stock Option Plan. Under this plan, an aggregate of
150,000 shares of common stock is reserved for issuance to members of the Board
of Directors who are not employees of the Company. In accordance with the plan,
the per share option price must equal the fair market value of a share of common
stock at the date of grant. The outstanding options become exercisable over a
period of one year from the date of issuance and have terms of 10 years. The
plan is subject to final approval by the stockholders of the Company.
On September 23, 1998, Day Runner, Inc., a Delaware corporation (the
"Registrant"), and Day Runner UK, plc, a corporation organized under the laws of
the United Kingdom and a wholly-owned subsidairy of the Registrant (the
"Purchaser"), entered into a Revolving Loan Agreement (the "Loan Agreement")
with a bank. The Loan Agreement provides for borrowings through September 30,
2005 (the "Maturity Date"). Borrowings will bear interest either at fixed rates
based on the higher of the bank's prime rate and the Federal Funds Rate
published by the Federal Reserve Bank of New York or at floating rates
calculated by reference to the interest rates at which the bank offers deposits
in US dollars in amounts approximately equal to the amount of the relevant Loan
and for a period of time comparable to the number of days the relevant Loan will
remain outstanding, together with a margin. The maximum amount that may be
outstanding under the Loan Agreement is $160,000,000 through December 31, 2000.
Thereafter, the maximum amount of borrowings that may be outstanding under the
Loan Agreement is reduced by $10,000,000 in each of the following calendar years
up to the Maturity Date.
On September 24, 1998, Registrant announced a cash offer (the "Offer")
for Filofax Group plc ("Filofax"), a UK-based company traded on the London Stock
Exchange. The offer is for (pound)2.00 (approximately US $3.36) per share for a
total of approximately US$80,500,000. The acquisition is being made pursuant
to a tender offer by Purchaser to purchase all of the outstanding ordinary
shares of stock of Filofax.
The Offer has not been recommended by Filofax's Board of Directors. The
proposed acquisition will be funded by bank debt pursuant to the Loan
Agreement.
Consummation of the Company's Offer is subject to, among other things,
the acceptance of Filofax's stockholders, regulatory approvals and the
satisfaction or waiver of various other conditions. There can be no assurance
that the acquisition will be consummated, or as to the terms on which it may be
consummated.