FORM 10-Q/A
AMENDMENT NO. 1
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 March 31, 1999
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 May 4, 1999
- ------------------------------ --------------------------------------------
Common Stock, $0.001 par value 11,889,603
DAY RUNNER, INC.
INDEX
Page Reference
COVER PAGE....................................................................................... 1
INDEX ........................................................................................ 2
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
March 31, 1999 and June 30, 1998.......................................... 3
Consolidated Statements of Operations
Three and Nine Months Ended March 31, 1999 and 1998....................... 4
Consolidated Statements of Cash Flows
Nine Months Ended March 31, 1999 and 1998................................. 5
Notes to Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 12
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......................... 18
Item 6. Exhibits and Reports on Form 8-K............................................ 19
SIGNATURES....................................................................................... 20
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
March 31, June 30,
1999 1998
---------- --------
(As Restated -
See Note 11)
Current assets:
Cash and cash equivalents....................................................... $ 14,800 $ 2,923
Accounts receivable (net of allowances for doubtful accounts and sales returns
and other allowances of $8,396 and $9,942 at March 31, 1999 and
June 30, 1998, respectively)............................................... 24,989 32,542
Inventories..................................................................... 42,937 37,610
Prepaid expenses and other current assets....................................... 4,854 1,670
Income taxes receivable......................................................... 764 2,606
Deferred income taxes........................................................... 7,218 7,218
--------- ---------
Total current assets....................................................... 95,562 84,569
Property and equipment -- net........................................................ 17,082 11,888
Goodwill (net of accumulated amortization of $1,409 and $108 at March 31, 1999
and June 30, 1998, respectively)................................................ 86,302 3,564
Other assets (net of accumulated amortization of $240 and $60 at March 31, 1999
and June 30, 1998, respectively)................................................ 2,039 1,158
--------- ---------
Total assets......................................................................... $200,985 $ 101,179
7 ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit................................................................. $ 2,716
Accounts payable................................................................ $10,334 9,969
Accrued expenses................................................................ 18,142 13,876
Current portion of capital lease obligations.................................... 26 33
-------- ---------
Total current liabilities.................................................. 28,502 26,594
-------- ---------
Long-term liabilities:
Capital lease obligations....................................................... 53
Line of credit.................................................................. 5,256
Loan notes...................................................................... 2,438
-------- ---------
Total long-term liabilities................................................... 97,694 53
-------- ---------
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; 13,697,751
and 13,677,386 issued and 11,879,963 and 11,955,598 outstanding at
March 31, 1999 and June 30, 1998, respectively)....................... 14 14
Additional paid-in capital...................................................... 34,663 34,445
Retained earnings............................................................... 66,327 65,076
Accumulated other comprehensive income - foreign currency translation
adjustment.............................................................. 381 102
Treasury stock: at cost (1,817,788 and 1,721,788 shares at March 31, 1999
and June 30, 1998, respectively)............................................ (26,596) (25,105)
--------- ---------
Total stockholders' equity................................................. 74,789 74,532
--------- ---------
Total liabilities and stockholders' equity........................................... $ 200,985 $101,179
========= =========
See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended
March 31, March 31,
1999 1998 1999 1998
---- ---- ---- ----
(As Restated- (As Restated-
See Note 11) See Note 11)
Net sales.................................................... $ 36,216 $ 29,388 $148,512 $ 116,914
Cost of goods sold........................................... 19,721 14,135 78,087 55,793
--------- --------- --------- ---------
Gross profit................................................. 16,495 15,253 70,425 61,121
--------- --------- --------- ---------
Operating expenses:
Selling, marketing and distribution..................... 14,666 9,399 45,841 30,788
General and administrative.............................. 7,145 4,075 18,249 12,429
Costs relating to activities associated
with the Filofax acquisition......................... 1,072
--------- --------- --------- ---------
Total operating expenses................................ 21,811 13,474 65,162 43,217
--------- --------- --------- ---------
(Loss) income from operations................................ (5,316) 1,779 5,263 17,904
Net interest expense (income)................................ 1,770 16 3,159 (49)
--------- --------- --------- ----------
(Loss) income before (benefit) provision for income taxes.... (7,086) 1,763 2,104 17,953
(Benefit) provision for income taxes......................... (2,638) 688 853 7,002
---------- --------- --------- ---------
Net (loss) income............................................ $ (4,448) $ 1,075 $ 1,251 $ 10,951
========== ========= ========= =========
(Loss) earnings per common share:
Basic................................................... $ (0.37) $ 0.09 $ 0.11 $ 0.96
========== ========= ======== ========
Diluted................................................. $ (0.37) $ 0.09 $ 0.10 $ 0.88
========== ========= ======== ========
Weighted average number of common shares outstanding:
Basic................................................... 11,900 11,571 11,904 11,452
========= ========= ========= =========
Diluted................................................. 11,900 12,520 12,474 12,452
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Nine Months Ended
March 31,
1999 1998
---- ----
(As Restated -
See Note 11)
Cash flows from operating activities:
Net income.................................................................... $ 1,251 $10,951
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.............................................. 7,283 3,530
Provision for doubtful accounts............................................ 18
Loss on disposal of property and equipment................................. 18
Changes in operating assets and liabilities, net of acquisition of business:
Accounts receivable..................................................... 22,125 14,404
Inventories............................................................. 6,881 (9,694)
Prepaid expenses and other current assets............................... (923) 603
Income taxes receivable........................................................... (308) (809)
Accounts payable........................................................ (3,906) (4,016)
Accrued expenses........................................................ (3,183) 430
Income taxes payable.................................................... 905 (1,049)
--------- ---------
Net cash provided by operating activities......................................... 30,161 14,350
--------- ---------
Cash flows from investing activities:
Acquisition of business....................................................... (90,364) (4,113)
Acquisition of property and equipment......................................... (7,425) (3,824)
Other assets.................................................................. (990) (45)
---------- ---------
Net cash used in investing activities.................................... (98,779) (7,982)
---------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under lines of credit............................. 79,647 (1,224)
Repayment of capital lease obligations........................................ (58) (46)
Borrowings under long-term liabilities........................................ 2,416
Repayments under long-term liabilities............................................ (512)
Net proceeds from issuance of common stock.................................... 218 3,445
Repurchase of common stock.................................................... (1,491) (11,564)
---------- ----------
Net cash provided by (used in) financing activities...................... 80,732 (9,901)
--------- ----------
Effect of exchange rate changes on cash and cash equivalents...................... (237) (62)
---------- ----------
Net increase (decrease) in cash and cash equivalents.............................. 11,877 (3,595)
Cash and cash equivalents, beginning of period.................................... 2,923 15,550
--------- ---------
Cash and cash equivalents, end of period.......................................... $ 14,800 $ 11,955
========= =========
See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THREE AND NINE MONTHS ENDED MARCH 31, 1999 AND 1998)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying consolidated balance sheet as of March 31, 1999,
consolidated statements of operations for the three and nine months ended March
31, 1999 and 1998, and consolidated statements of cash flows for the nine months
ended March 31, 1999 and 1998 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, 1998, 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 nine months ended March 31,
1999 and 1998 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):
March 31, June 30,
1999 1998
---- ----
Raw materials................... $ 10,815 $ 14,087
Work in process................. 1,759 831
Finished goods.................. 30,363 22,692
---------- ----------
Total.................. $ 42,937 $ 37,610
========== ==========
3. LINES OF CREDIT
On September 23, 1998, the Company entered into a $160,000,000
Revolving Loan Agreement (the "Loan Agreement") with Wells Fargo Bank, National
Association ("Wells Fargo"). Effective November 24, 1998 this amount was reduced
to $145,000,000. The loan facility was syndicated with a group of banks in
December 1998. The Loan Agreement provides for borrowings through September 30,
2005 (the "Maturity Date"). Borrowings bear interest either at fixed rates based
on the higher of Wells Fargo'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 Wells Fargo offers deposits in U.S.
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. During the nine months ended March
31, 1999, the weighted average interest rate was 7.50%. Subject to the Company
meeting certain EBITDA multiples, the maximum amount that may be outstanding
under the Loan Agreement is $145,000,000 through December 31, 2000 and is
reduced thereafter by $5,000,000 in calendar year 2001 and by $10,000,000 in
each of the following calendar years up to the Maturity Date. During the nine
months ended March 31, 1999, under the terms of the Loan Agreement, the Company
paid Wells Fargo a financing fee of $1,200,000. The Company will also pay
commitment fees for the unused portion of the loan facility during the term of
the Loan Agreement and will pay certain legal, accounting and other fees and
expenses in connection with the Loan Agreement. At March 31, 1999, the Company
had $95,256,000 outstanding under this Loan Agreement.
The Loan Agreement requires the Company to meet certain financial
covenants, including: (i) a fixed charge coverage ratio of less than 2.00:1.00;
(ii) a funded debt ratio declining over the term from 3.75:1.00 to 2.50:1.00;
(iii) limits on annual capital expenditures increasing from $11,000,000 to
$17,000,000 over the seven-year term; (iv) stockholders' equity, on a quarterly
basis, of not less than (a) 50% of net income plus 75% of net cash proceeds from
any stock issuances plus (b) the greater of $67,000,000 or 80% of stockholders'
equity at March 31, 1999.
The Company's Canadian subsidiary had a credit agreement with a
Canadian bank which allowed for borrowings up to Canadian $3,000,000, bore
interest at the bank's prime rate and was due and payable on demand. The
borrowings under this credit agreement were repaid in full on October 22, 1998,
and the Canadian subsidiary now borrows funds as a co-borrower under the Loan
Agreement.
4. LOAN NOTES
Loan Notes in the amount of (pound)1,477,000 (US $2,438,000) were
issued in connection with the Filofax acquisition, are unsecured obligations of
the Company's U.K. subsidiary and bear interest at 1% below LIBOR (5.39% at
March 31, 1999). Interest on the Loan Notes is paid annually in arrears
beginning September 30, 1999. The Loan Notes are redeemable, in whole or in
part, at the holder's option on each interest payment date. Unless they have
previously been redeemed, all Loan Notes will be redeemed on September 30, 2003.
5. STOCKHOLDERS' EQUITY
During the nine months ended March 31, 1999, certain employees
exercised options to purchase an aggregate of 7,400 shares of the Company's
Common Stock for an aggregate of approximately $58,000.
During the nine months ended March 31, 1999, certain employees
purchased an aggregate of 12,965 shares of the Company's Common Stock for an
aggregate of approximately $160,000 under the Employee Stock Purchase Plan.
During the nine months ended March 31, 1999, the Company repurchased
96,000 shares of its Common Stock at an average cost of $15.53 per share for an
aggregate of approximately $1,491,000.
6. EARNINGS PER SHARE
Effective December 1997, the Company adopted Statement of Financial
Accounting Standards ("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 (loss)
income (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------------------- --------------------------------------
1999 1998 1999 1998
----------------- ---------------- ----------------- ----------------
NET (LOSS) INCOME $(4,448) $ 1,075 $ 1,251 $ 10,951
======== ======== ======== ========
BASIC WEIGHTED AVERAGE SHARES
Weighted average number of
common shares outstanding 11,900 11,571 11,904 11,452
EFFECT OF DILUTED SECURITIES
Additional shares from the assumed
exercise of options and warrants - 3,046 2,628 3,166
Shares assumed to be repurchased
under the treasury stock method - (1,521) (1,694) (1,628)
Non-qualified tax benefit - (576) (364) (538)
------- -------- -------- --------
DILUTED WEIGHTED AVERAGE SHARES
Weighted average number of
common shares outstanding and
common share equivalents 11,900 12,520 12,474 12,452
======= ======== ======== ========
BASIC $(0.37) $ 0.09 $ 0.11 $ 0.96
====== ======== ========= ========
DILUTED $(0.37) $ 0.09 $ 0.10 $ 0.88
====== ======== ======== ========
7. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, Reporting Comprehensive Income. The statement establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements. Comprehensive income is summarized as
follows:
NINE MONTHS ENDED MARCH 31,
1999 1998
--------- --------
Net income $ 1,251 $ 10,951
Foreign currency translation adjustments 279 72
--------- ---------
Comprehensive income $ 1,530 $ 11,023
========= =========
8. ACQUISITION
On October 30, 1998, the Company announced that it had control of a
majority of the outstanding shares of Filofax Group plc ("Filofax") as a result
of its previously announced cash tender offer for the Filofax stock. The Company
acquired all the remaining outstanding shares of Filofax on December 26, 1998.
This acquisition is being accounted for under the purchase method of accounting.
The total purchase price of $92,802,000, which includes costs of the
transaction, was paid in cash and Loan Notes (see Note 4). The Company borrowed
the cash portion of this amount under a Loan Agreement with a group of banks
(see Note 3).
The following table sets forth the unaudited proforma condensed
combined statements of income data for the nine months ended March 31, 1999 and
1998 as if the acquisition had occurred on July 1, 1997 (dollars in thousands):
PRO FORMA NINE MONTHS
ENDED MARCH 31,
1999 1998
-------- --------
Net sales $174,155 $170,181
======== ========
Income before provision for income taxes $ 3,691 $ 22,134
======== ========
Net income $ 2,219 $ 13,502
======== ========
Earnings per common share:
Basic $ 0.19 $ 1.18
======== ========
Diluted $ 0.18 $ 1.08
======== ========
Weighted average number of common shares outstanding:
Basic 11,904 11,452
======== =======
Diluted 12,474 12,452
======== =======
9. FINANCIAL INSTRUMENTS
On September 29, 1998, the Company entered into a call option in order
to limit its foreign exchange risk on the purchase of Filofax shares, which were
paid for in pound Sterling. The Company's objective was to protect itself from
the risk that the purchase price of the Filofax shares would be adversely
affected by changes in exchange rates. During the nine months ended March 31,
1999, the Company expensed $765,000 to operating expenses for the call option.
At March 31, 1999, the Company had not entered into any additional financial
instruments. The Company does not trade in financial instruments nor does it
enter into such contracts for speculative purposes.
10. STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information (in thousands):
NINE MONTHS ENDED MARCH 31,
1999 1998
--------------------------------
Cash paid during the period for:
Interest $ 2,249 $ 196
Income taxes, net of refunds
received $ 1,190 $ 8,883
Supplemental disclosure of noncash investing and financing activities:
During the nine months ended March 31, 1999, the Company had purchased
703,308 shares of Filofax's outstanding common stock by issuing (pound)1,477,000
(US $2,438,000) in Loan Notes (see Note 4) to former shareholders of Filofax.
During the nine months ended March 31, 1999, the net cash expended by
the Company in its acquisition of Filofax was used as follows (in thousands)
(see Note 8):
Fair value of assets acquired $ (117,157)
Liabilities assumed 26,793
------------
Cash paid $ (90,364)
=============
11. RESTATEMENT
Subsequent to the issuance of the Company's financial statements on
Form 10-Q for the three and nine months ended March 31, 1999, the Company
discovered errors related to the treatment of manufacturing variances and
certain other costs. These cost accounting errors had the effect of overstating
inventory and understating cost of goods sold as of and for the three and nine
months ended March 31, 1999.
As a result, the accompanying financial statements as of and for the
three and nine months ended March 31, 1999 have been restated from amounts
previously reported to properly record these transactions. The effects of the
restatement are disclosed below and have been properly reflected herein. A
summary of the significant effects of the restatement is as follows:
Previously reported Restated
------------------- --------
As of March 31, 1999:
Inventory $ 46,336 $ 42,937
Retained earnings $ 68,433 $ 66,327
Three months ended March 31, 1999:
Cost of goods sold $ 19,908 $ 19,721
(Loss) Income before provision for
income taxes $ (7,273) $ (5,316)
Net (loss) income $ (4,565) $ (4,448)
(Loss) earnings per common share:
Basic $ (0.38) $ (0.37)
Diluted $ (0.38) $ (0.37)
Nine months ended March 31, 1999:
Cost of goods sold $ 74,688 $ 78,087
Income before provision for income taxes $ 5,503 $ 2,104
Net income $ 3,357 $ 1,251
Earnings per common share:
Basic $ 0.28 $ 0.11
Diluted $ 0.27 $ 0.10
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, a
majority of the Company's growth has resulted from sales of related organizing
products, virtually all of which have been introduced since January 1, 1995. For
a number of years the Company focused the great majority of its product
development, sales and marketing efforts on the U.S. office products channel,
which accounted for 27.5% of third quarter fiscal 1999 net sales and 35.6% of
net sales for the nine months ended March 31, 1999, and the U.S. mass market
channel, which accounted for 36.9% of third quarter fiscal 1999 net sales and
34.4% of net sales for the nine months ended March 31, 1999. With the October
30, 1998 acquisition of Filofax, the Company substantially increased its
emphasis on markets outside the U.S. Sales to foreign customers accounted for
26.5% of third quarter fiscal 1999 net sales and 23.8% of net sales for the nine
months ended March 31, 1999.
RESTATEMENT
Subsequent to the issuance of the Company's financial statements on
Form 10-Q for the three and nine months ended March 31, 1999, the Company
discovered errors related to the treatment of manufacturing variances and
certain other costs. These cost accounting errors had the effect of overstating
inventory and understanding cost of goods sold as of and for the three and nine
months ended March 31, 1999. As a result, the financial statements as of and for
the three and nine months ended March 31, 1999 have been restated from amounts
previously reported to properly record these transactions. The effects of the
restatement have been disclosed in the Notes to the Consolidated Financial
Statements and have been properly reflected herein.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that statement of operations items bear to net sales and the
percentage change in the dollar amounts of such items.
Percentage Change
------------------
Three Nine
Percentage of Sales Months Months
------------------- ------ ------
Three Nine Ended Ended
Months Ended Months Ended March 31, March 31,
March 31, March 31, 1998 1998
--------- --------- ---- ----
1999 1998 1999 1998 to 1999 to 1999
---- ---- ---- ---- ------- -------
Net sales........................................ 100.0% 100.0% 100.0% 100.0% 23.2% 27.0%
Cost of goods sold............................... 54.5 48.1 52.6 47.7 39.5 40.0
----- ----- ----- -----
Gross profit..................................... 45.5 51.9 47.4 52.3 8.1 15.2
----- ----- ----- -----
Operating expenses:
Selling, marketing and distribution........... 40.5 32.0 30.9 26.4 56.0 48.9
General and administrative.................... 19.7 13.8 12.3 10.6 75.3 46.8
Costs relating to activities associated with the
Filofax acquisition....................... 0.7 NA NA
----- ----- ----- -----
Total operating expenses.................... 60.2 45.8 43.9 37.0 61.9 50.8
----- ----- ----- -----
(Loss) income from operations.................... (14.7) 6.1 3.5 15.3 (398.8) (70.6)
Net interest expense (income).................... 4.9 0.1 2.1 (0.1) NM NM
---- ---- ----- ------
(Loss) income before (benefit) provision for
income taxes (19.6) 6.0 1.4 15.4 (101.9) (88.3)
(Benefit) provision for income taxes............. (7.3) 2.3 0.6 6.0 (483.4) (87.8)
------ ----- ----- -----
Net (loss) income................................ (12.3%) 3.7% 0.8% 9.4% (513.8) (88.6)
====== ====== ===== =====
The following tables set forth, for the periods indicated, the
Company's approximate net sales by product category and distribution channel and
as a percentage of total sales.
PRODUCT CATEGORY:
Three Months Ended March 31, Nine Months Ended March 31,
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited; dollars in thousands)
Organizers and planners......... $16,733 46.2% $ 14,346 48.8% $60,031 40.4% $ 56,936 48.7%
Refills......................... 12,305 34.0 9,176 31.2 51,402 34.6 35,985 30.8
Related organizing products..... 7,178 19.8 5,866 20.0 37,079 25.0 23,993 20.5
----- ---- ----- ---- ------ ---- ------ ----
- ------
Total........................ $36,216 100.0% $29,388 100.0% $148,512 100.0% $116,914 100.0%
======= ====== ======= ====== ======== ====== ======== ======
DISTRIBUTION CHANNEL:
Three Months Ended March 31, Nine Months Ended March 31,
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited; dollars in thousands)
Office products................. $ 9,944 27.5% $10,417 35.5% $ 52,830 35.6% $ 55,215 47.2%
Mass market..................... 13,377 36.9 13,052 44.4 51,164 34.4 44,908 38.4
Foreign customers............... 9,607 26.5 3,216 10.9 35,375 23.8 8,227 7.1
Other........................... 3,288 9.1 2,703 9.2 9,143 6.2 8,564 7.3
------- ----- ------- ----- -------- ----- --------
Total........................ $36,216 100.0% $29,388 100.0% $148,512 100.0% $116,914 100.0%
======= ====== ======= ====== ======== ====== ======== ======
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH
THE THREE MONTHS ENDED MARCH 31, 1998
NET SALES. Net sales consist of revenues from gross product shipments
net of allowances for returns, rebates and credits. In the third quarter of
fiscal 1999, net sales increased by $6,828,000, or 23.2%, because of the Filofax
acquisition but were lower than anticipated primarily because of inventory
tightening on the part of a number of the Company's large U.S. customers. In the
quarter ended March 31, 1999, sales of refills (which include calendars and
accessories) grew by $3,129,000, or 34.1%; sales of organizers and planners
increased by $2,387,000, or 16.6%; and sales of related organizing products grew
by $1,312,000, or 22.4%. Product sales were primarily to mass market customers
and secondarily to office products customers and to foreign customers. Sales to
foreign customers grew by $6,391,000, or 198.7%; sales to miscellaneous
customers grouped together as "other" increased by $585,000, or 21.6%; sales to
mass market customers grew by $325,000, or 2.5%; and sales to office products
customers declined by $473,000, or 4.5%.
GROSS PROFIT. Gross profit is net 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 from
51.9% in the third quarter of fiscal 1998 to 45.5% in the third quarter of
fiscal 1999 primarily because of an increase in the provision for sales returns.
The increase is based upon recent higher sales returns experience, which the
Company believes is related to the intensifying emphasis of retailers on
shifting the inventory burden to manufacturers.
OPERATING EXPENSES. Total operating expenses increased by $8,337,000,
or 61.9%, in the third quarter of fiscal 1999 compared with the third quarter of
fiscal 1998 and increased as a percentage of sales from 45.8% to 60.2%.
Selling, marketing and distribution expenses increased by $5,267,000
primarily because of the addition of Filofax's expenses and grew from 32.0% to
40.5% as a percentage of sales primarily because of the Company's inability to
absorb higher costs as a result of lower than anticipated sales. General and
administrative expenses increased by $3,070,000 primarily because of the
addition of Filofax's expenses, and increased from 13.8% to 19.7% as a
percentage of sales primarily because of the Company's inability to absorb
higher costs as a result of lower than anticipated sales.
NET INTEREST EXPENSE (INCOME). Because of the increase in the Company's
long-term liabilities, which was incurred primarily to finance the Filofax
acquisition, net interest expense for the third quarter of fiscal 1999 was
$1,770,000 compared with net interest expense of $16,000 for the third quarter
of fiscal 1998. As a result of the bank debt and Loan Notes incurred in the
Filofax acquisition, interest expense in future periods will be substantially
higher than in the periods prior to September 30, 1998. (See Notes 3, 4 and 8 to
Consolidated Financial Statements.)
INCOME TAXES. The Company's third quarter fiscal 1999 effective tax
rate was 37.2%, compared with 39.0% for the third quarter of fiscal 1998.
NINE MONTHS ENDED MARCH 31, 1999 COMPARED WITH
THE NINE MONTHS ENDED MARCH 31, 1998
NET SALES. In the nine months ended March 31, 1999, net sales increased
by $31,598,000, or 27.0%, primarily because of the Filofax acquisition and
secondarily because of increased sales to mass market customers but were lower
than anticipated primarily because of inventory tightening on the part of a
number of the Company's large U.S. customers. In the nine months ended March 31,
1999, sales of refills grew by $15,417,000, or 42.8%; sales of related
organizing products grew by $13,086,000, or 54.5%; and sales of organizers and
planners increased by $3,095,000, or 5.4%. Product sales were primarily to
office products customers and secondarily to mass market customers. Sales to
foreign customers grew by $27,148,000, or 330.0%; sales to mass market customers
grew by $6,256,000, or 13.9%; sales to office products customers declined by
$2,385,000, or 4.3%; and sales to miscellaneous customers grouped together as
"other" increased by $579,000, or 6.8%.
GROSS PROFIT. The effect of inventory tightening by certain of the
Company's large U.S. customers negatively affected gross profit for the period.
Gross profit as a percentage of sales decreased from 52.3% in the first nine
months of fiscal 1998 to 47.4% in the first nine months of fiscal 1999 primarily
because of a shift in product mix to a higher proportion of lower priced
products.
OPERATING EXPENSES. Total operating expenses increased by $21,945,000,
or 50.8%, in the first nine months of fiscal 1999 compared with the first nine
months of fiscal 1998 and increased as a percentage of sales from 37.0% to
43.9%. Excluding the operating expense portion of the costs relating to
activities associated with the Filofax acquisition, operating expenses for the
nine months ended March 31, 1999 would have increased by $20,873,000 and would
have been 43.2% of sales.
Selling, marketing and distribution expenses increased by $15,053,000
primarily because of the addition of Filofax's expenses and secondarily because
of costs associated with new and recently introduced products. These expenses
grew from 26.4% to 30.9% as a percentage of sales primarily because of costs
associated with new and recently introduced products. General and administrative
expenses increased by $5,820,000 primarily because of the addition of Filofax's
expenses and increased from 10.6% to 12.3% as a percentage of sales primarily
because the addition of Filofax's expenses and secondarily because of the
Company's inability to absorb higher costs as a result of lower than anticipated
sales.
NET INTEREST EXPENSE (INCOME). Because of the increase in the Company's
long-term liabilities, which was incurred primarily to finance the Filofax
acquisition, net interest expense for the first nine months of fiscal 1999 was
$3,159,000 compared with net interest income of $49,000 for the first nine
months of fiscal 1998. As a result of the bank debt and Loan Notes incurred in
the Filofax acquisition, interest expense in future periods will be
substantially higher than in the periods prior to September 30, 1998. (See Notes
3, 4 and 8 to Consolidated Financial Statements.)
INCOME TAXES. The Company's effective tax rate was 41.0% for the first
nine months of fiscal 1999 compared with 39% for the first nine months of fiscal
1998.
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 substantially 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 March 31, 1999 increased to
$14,800,000 from $2,923,000 at June 30, 1998. During the nine months ended March
31, 1999, net cash of $30,161,000 and $80,732,000 provided by operating
activities and financing activities, respectively, was partially offset by net
cash of $98,779,000 used in investing activities.
Of the $30,161,000 net amount provided by the Company's operating
activities, $1,251,000 was provided by net income, $7,283,000 was provided by
depreciation and amortization, $22,125,000 was provided by a decrease in
accounts receivable and $6,881,000 was provided by a decrease in inventories.
These amounts were partially offset by a decrease of $3,906,000 in accounts
payable and a decrease of $3,183,000 in accrued expenses.
Accounts receivable (net) at March 31, 1999 decreased by 23.2% from the
fiscal 1998 year-end amount primarily because of a decrease in sales. Compared
to the March 31, 1998 amount, accounts receivable (net) increased by 226.7%
primarily because of the lengthening of the average collection period of
accounts receivable related to increased chargebacks on the part of certain of
the Company's large customers that have been intensifying their focus on
inventory management and secondarily because of the Filofax acquisition. The
average collection period of accounts receivable at March 31, 1999 was 54 days,
compared with 45 and 46 days at June 30, 1998 and March 31, 1998, respectively.
Inventories at March 31, 1999 increased by 14.2% from the fiscal 1998
year-end amount and by 17.6% compared with the March 31, 1998 amount because of
the inventories of Filofax, which the Company acquired during the second quarter
of fiscal 1999.
Of the $98,779,000 net amount used in the Company's investing
activities, $90,364,000 was used to acquire Filofax, and $7,425,000 was used to
acquire primarily machinery and equipment and secondarily data processing
equipment and software.
Of the $80,732,000 net amount provided by the Company's financing
activities, $79,647,000 was provided by borrowings under the Company's line of
credit which amount was partially offset by $1,491,000 used to repurchase 96,000
shares of the Company's Common Stock.
At March 31, 1999, the Company had $95,256,000 outstanding under its
$145,000,000 bank line of credit (the "Loan Agreement"). Borrowings under this
Loan Agreement 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 U.S. 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. During the nine months ended March 31, 1999, the weighted average
interest rate was 7.50%. Subject to the Company meeting certain EBITDA
multiples, the maximum amount that may be outstanding under the Loan Agreement
is $145,000,000 through December 31, 2000. Thereafter, the maximum amount of
borrowings that may be outstanding under the Loan Agreement is reduced by
$5,000,000 in calendar 2001 and by $10,000,000 in each of the following calendar
years up to September 30, 2005. (See Note 3 to Consolidated Financial
Statements.)
On October 30, 1998, the Company announced that it had control of a
majority of the outstanding shares of Filofax as a result of its previously
announced cash tender offer for the Filofax stock. As of December 26, 1998, the
Company had acquired 100% of the outstanding shares of Filofax. This acquisition
is being accounted for under the purchase method of accounting. The Company
currently estimates that the aggregate fees and expenses of the transaction,
including investment banking, legal, accounting and other fees and expenses,
will be $5,000,000 to $6,000,000. The fees and expenses, as well as payments for
the Filofax shares, have been and will be paid with available cash, borrowings
under the Loan Agreement and the Loan Notes. (See Notes 3, 4 and 8 to
Consolidated Financial Statements.)
The Company has not incurred significant gains or losses 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's
exposure to the impact of interest changes and foreign currency fluctuations has
increased as a result of its acquisition of Filofax because the acquisition has
significantly expanded the Company's international operations and because a
portion of the debt incurred to fund the acquisition is in pounds Sterling. The
Company entered into a call option with respect to the purchase of Filofax
shares in the tender offer to limit the effect of exchange rate fluctuations.
The Company may in the future enter into foreign currency exchange contracts,
call options, swap agreements or other financial instruments as hedges to
moderate the impact of foreign currency fluctuations. The Company does not trade
in financial instruments nor does it enter into such contracts for speculative
purposes.
A single currency called the euro was introduced in certain countries
in Europe on January 1, 1999, but will not, at least in the foreseeable future,
be introduced in the United Kingdom. The use of a single currency may affect the
ability of Day Runner and other companies to price their products differently in
various European markets. The Company is evaluating the impact of the single
currency in these markets.
The Company believes that cash flows 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 the next 12
months. 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.
YEAR 2000
The Year 2000 issue refers to the inability of certain computer
systems, as well as certain hardware and equipment containing date-sensitive
data, to recognize accurately dates commencing on or after January 1, 2000, and
even possibly certain dates in 1999. This has the potential to affect the
operation of these systems adversely and materially. The Company has identified
four phases in its Year 2000 compliance efforts: discovery; assessment;
remediation; and applicable testing and verification. The Company has completed
the discovery and assessment phases for its own systems and applications, has
substantially completed the remediation phase and expects to complete the
remediation and applicable testing and verification phases by June 30, 1999. The
Company believes that by modifying existing software and converting to new
software for certain tasks it can prevent the Year 2000 transition from posing
significant internal operational problems.
The Company currently estimates that total costs related to the Year
2000 issue will be approximately $2,000,000 to $2,750,000, of which
approximately $1,285,000 had been incurred as of March 31, 1999. The Company
does not anticipate that the costs of these modifications and conversions will
be material to its financial position or results of operations. Expenditures
will be expensed or capitalized as appropriate.
The Company is surveying its vendors, customers and others on whom it
relies to assess their state of Year 2000 readiness. However, there can be no
assurance that the systems of other parties on which the Company's systems rely
will also be compliant or that any failure to be compliant in this area by
another party will not have an adverse effect on the Company's systems.
Furthermore, no assurance can be given that any or all of the Company's systems
are or will be Year 2000 compliant, that the ultimate costs required to address
the Year 2000 issue will not exceed the amounts indicated above, or that the
impact of any failure to achieve substantial Year 2000 compliance will not have
a materially adverse effect on the Company's financial condition.
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, foreign exchange rate fluctuations, 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 23, 1998, the Company held its 1998 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. 10,641,953 67,297
James P. Higgins 10,648,950 60,300
Jill Tate Higgins 10,649,570 59,680
Charles Miller 10,648,970 60,280
Alan R. Rachlin 10,649,670 59,580
Mark A. Vidovich 10,649,670 59,580
Boyd I. Willat 10,649,870 59,380
Felice Willat 10,648,994 60,256
(c) At the Annual Meeting, the stockholders approved, with
9,743,930 votes cast in favor, 944,790 votes cast against,
20,530 abstentions and 0 broker nonvotes, the amendment to
the Company's 1995 Stock Option Plan to increase the
aggregate number of shares authorized for issuance
thereunder from 1,550,000 to 1,925,000 shares.
(d) At the Annual Meeting, the stockholders approved, with
8,803,836 cast in favor, 1,799,993 cast against, 27,463
abstentions and 77,958 broker non-votes, the Company's
Non-Employee Director Stock Option Plan.
(c) At the Annual Meeting, with 10,656,681 votes cast in
favor, 33,402 votes cast against and 19,167 abstentions,
the stockholders ratified the appointment of Deloitte &
Touche as independent auditors for the Company for the
fiscal year ending June 30, 1999.
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(2)
10.1 Amendment No. 3 to 1995 Stock Option Plan(3)
10.2 Non-Employee Director Stock Option Plan(3)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
1) On January 19, 1999, the Company filed with the
Commission a Current Report on Form 8-K/A.
(1) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 0-19835) filed with the Commission on May 15, 1998.
(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-8 (Registration No. 333-69023) filed with the Commission on
December 16, 1998.
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: September 14, 1999
DAY RUNNER, INC.
By: /s/ JAMES E. FREEMAN JR.
---------------------------------------
James E. Freeman, Jr.
Chief Executive Officer
By: /s/ DENNIS K. MARQUARDT
--------------------------------------
Dennis K. Marquardt
Executive Vice President, Finance
& Administration and
Chief Financial Officer