UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1999
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES ACT OF 1934
COMMISSION FILE NUMBER 0-19835
DAY RUNNER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3624280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
15295 ALTON PARKWAY, IRVINE, CALIFORNIA 92618
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number including Area Code: (714) 680-3500
Securities Registered Pursuant To Section 12(B) Of The Act: NONE
Securities Registered Pursuant To Section 12(G) Of The Act:
COMMON STOCK, $0.001 PAR VALUE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of the Common Stock on October
1, 1999 as reported on The Nasdaq Stock Market, was approximately $77,000,000.
The number of shares outstanding of the registrant's Common Stock on
October 1, 1999 was 11,900,736.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be delivered
to stockholders in connection with their Annual Meeting of Stockholders to be
held on December 9, 1999 are incorporated by reference into Part III of this
Annual Report.
TABLE OF CONTENTS
PART I PAGE
Item 1. Business 3
Item 2. Properties 18
Item 3. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
PART II.
Item 5. Market for Registrant's Common Equity and Related 19
Stockholder Matters
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation 22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 30
Item 8. Financial Statements and Supplementary Data 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 31
PART III.
Item 10. Directors and Executive Officers of the Registrant 31
Item 11. Executive Compensation 31
Item 12. Security Ownership of Certain Beneficial Owners and
Management 31
Item 13. Certain Transactions 31
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 32
Signatures 36
Exhibit Index
PART I
FORWARD LOOKING STATEMENTS
With the exception of actual reported financial results and other
historical information, the statements contained in this Annual Report on Form
10-K ("Annual Report") including, but not limited to, statements found in Item
1. "Business," Item 3. "Legal Proceedings," Item 7. "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and Item 7A.
"Quantitative and Qualitative Disclosures about Market Risk" constitute
"forward-looking statements" within the meaning of the federal securities laws
and involve a number of risks and uncertainties. Such statements are based on
current expectations and involve known and unknown risk and uncertainties and
certain assumptions, referred to below, and are indicated by words or phrases
such as "anticipate," "estimate," "project," "expect," "believes," "intends" and
similar words or phrases. These forward looking statements are based on
management's expectations as of the date set forth on the signature page of this
document, and the Company does not undertake any obligation to update any of
these statements.
There can be no assurance that the Company's actual future
performance will meet its expectations. The Company is subject to a number of
risks, and its future operating results are difficult to predict and subject to
significant fluctuations.
Factors that may cause future results to differ materially from the
Company's current expectations include, among others: the timing and size of
orders from large customers; timing and size of orders for new products; large
customers' inventory management; competition, especially for retail shelf space;
general economic conditions, especially the sustainability of the current
economic expansion; the health of the retail environment; foreign exchange rate
fluctuations; supply and manufacturing constraints; supplier performance; and
the Company's ability to meet its cash requirements to finance its operations
and growth. Among the effects of these factors may be: lower than anticipated
sales; higher than anticipated product returns and/or excess inventory; negative
effects on consumer purchases; lower than anticipated gross profit; and higher
than anticipated operating expenses.
Discussions of certain of these factors and other factors that may
cause future results to differ materially from the Company's current
expectations are contained in this document in "Risk Factors," under Item 1, in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 and in "Quantitative and Qualitative Disclosures about
Market Risk" under Item 7A.
ITEM 1. BUSINESS
THE COMPANY
Day Runner(R) develops, manufactures and markets organizing products to
broad-based consumer audiences through retail channels. The Company is the
leading developer, manufacturer, and marketer of paper-based organizers for the
retail market. Day Runner also develops, manufacturers and markets related
organizing products.
Day Runner markets its products under two major brands, Day Runner and
Filofax(R), and a number of sub-brands. The Company estimates its products
occupy an aggregate of more than 900,000 linear feet of shelf space in more than
22,000 retail stores across the U.S. and approximately 8,000 retail stores in
other markets around the world.
The vast majority of the Company's sales are to resellers, with direct
sales to organizations and to individuals accounting for a very small portion of
sales. The Company markets its products to its customers in the U.S. through its
own sales force and also makes selective use of manufacturers' representatives
and the Internet. The Company markets its products outside the U.S. primarily
through its subsidiaries and secondarily through independent distributors. The
Company's domestic sales are primarily to the office products and mass market
channels of distribution and are concentrated among relatively few major
customers, including office products superstores Office Depot, Inc., OfficeMax,
Inc. and Staples, Inc. and mass market retailers Wal-Mart and Kmart. Sales to
the U.S. office products and mass market channels accounted for approximately
35% and 36%, respectively, of fiscal 1999 sales. With its October 1998
acquisition of Filofax Group plc, the Company substantially increased its focus
on international markets. Sales to foreign customers accounted for approximately
23% of fiscal 1999 sales.
The Company groups its products into three categories: organizers and
planners; their refills, which include calendars, other pages and accessories;
and related organizing products.
The Company's organizers and planners are loose-leaf and spiral-bound
time and information management systems that range from simple to sophisticated.
The Company offers multiple product lines aimed at market segments ranging from
students to women managing a home to business and professional people.
Organizers and planners accounted for approximately 41% of Day Runner's fiscal
1999 sales.
The great majority of the Company's organizers and planners are
refillable. Refills, which include calendars, other pages and accessories,
accounted for approximately 32% of sales in fiscal 1999.
The Company's related organizing products include, among others:
telephone/address books, business accessories, products for students from
elementary school through college and organizing and other wall boards. Related
organizing products accounted for approximately 27% of fiscal 1999 sales.
All of the Company's current major product lines have been developed
internally by the parent company or one of the companies Day Runner has
acquired. The Company manufactures and assembles a portion of its products at
its facilities in the U.S. and abroad and also uses foreign and domestic
contractors to supply both product components and finished goods.
Day Runner, Inc. was incorporated in California in 1980 and
reincorporated in Delaware in 1993. Unless the context requires otherwise, all
references to the "Company" or to "Day Runner" herein refer to Day Runner, Inc.
and its consolidated subsidiaries. The Company's corporate headquarters are
located at 15295 Alton Parkway, Irvine, California 92618 (phone number
714/680-3500).
Day Runner, Filofax, PRO Business System, Timeposters and Wipe-Out are
registered trademarks of Day Runner, Inc. Business Manager, Cubicle Manager,
Everything in One Place, FactCentre, 4-1-1, Home Manager, Message Manager,
Microfile, org.board, Perennials and Phone Manager are trademarks of Day Runner,
Inc. DILBERT is a trademark of United Feature Syndicate, Inc. THE FAR SIDE is a
registered trademark of FarWorks, Inc. LOONEY TUNES characters, names and all
related indicia are trademarks of Warner Bros. Star Wars is a trademark of
Lucasfilm Ltd. All other trademarks remain the property of their respective
companies.
BUSINESS STRATEGY
Day Runner sells broad-based organizing products through retail
distribution channels.
North America. Key elements of the Company's strategy for North America
include: leveraging its brand names and distribution strength to maximize sales
of existing products, to extend those product lines and to introduce new lines;
conducting major marketing initiatives; and building distribution in additional
channels, including the Web sites of brick-and-mortar retailers and
cyber-retailers.
Outside North America. Key elements of the Company's strategy for
markets outside North America include: further segmenting the market for
organizers and planners; entering related organizing product categories;
building sales through the emerging mass market channel of distribution; and
building a second busy season in the back-to-school time frame in markets where
such an opportunity exists.
E-Commerce. The Company believes many of its products are well suited
for online sale via the Company's own Web site, those of its current retailers
and, ultimately, those of cyber-retailers.
ACQUISITIONS
Fiscal 1999. In October 1998, Day Runner acquired Filofax Group plc
("Filofax"), a UK-based company traded on the London Stock Exchange. Filofax is
a manufacturer and supplier of stationery products, including Filofax, Lefax and
Microfile brand organizers, with sales primarily through retail channels. For a
number of years, Filofax has been the leader in developing, manufacturing and
marketing paper-based organizers for the UK retail market and has had a solid
presence in a number of other key international markets. In addition to its core
organizer business, Filofax markets business forms and high-end pens.
With the Filofax acquisition, Day Runner substantially increased its
presence in international markets. Filofax's sales for its fiscal year ended
March 31, 1998 were approximately $63.3 million, with 86%, or approximately
$54.6 million, to markets outside the U.S. At the time of the acquisition,
Filofax had wholly owned sales subsidiaries in France, Germany, Hong Kong,
Scandinavia, the UK and the U.S.
Fiscal 1998. Day Runner acquired Ultima Distribution, Inc., its
Toronto-based Canadian distributor based in Toronto; Ram Manufacturing, Inc., a
developer, manufacturer and marketer of wall boards, headquartered in Little
Rock, Arkansas; and Timeposters(R), Inc., a Toronto-based developer,
manufacturer and marketer of planning and presentation products, including
laminated wall planners. These three small companies were acquired in July 1997,
October 1997 and February 1998, respectively. The Company has since combined
Timeposters' manufacturing and distribution with Ultima's operations and renamed
that subsidiary Day Runner Canada Inc.
SEEKING STRATEGIC ALTERNATIVES
In July 1999, Day Runner announced that its Board of Directors had
decided unanimously to seek possible strategic alternatives, which may include
new equity partners, joint ventures, asset sales, additional financing and/or a
potential sale of the Company. Day Runner has retained the investment banking
firm Wasserstein Perella & Co. to act as advisers in this process. The Company
has not made a decision as to any specific strategic alternatives, and there
cannot be any assurance that a transaction will result from this process.
INDUSTRY OVERVIEW
The Company's roots are in paper-based organizers and planners and
their refills, and approximately 73% of the Company's fiscal 1999 sales were
generated by this core business. In the past five years, however, the Company
has diversified its product lines and now markets a number of related organizing
products that help people become better organized in a variety of ways.
Paper-based Organizers. Awareness of the organizer product
category is widespread, and the usefulness of organizers is
well recognized. (Because the distinctions between organizers
and planners have become blurred, except where otherwise
specified, the terms "organizer" and "planner" are used
interchangeably in this report.) Paper-based organizers and
their refills are sold both through a wide variety of retail
channels and directly to organizations and individuals.
Retailers selling organizers include: office products
superstores, wholesalers and dealers; mass retailers; book,
department, gift, leather and luggage and stationery stores;
and other specialty retailers.
Related Organizing Products. Product categories Day Runner has
entered include, among others: telephone/address books;
appointment books; assignment books; business accessories;
organizing and other wall boards; laminated wall planners; and
other planning and presentation products.
The Company groups all these products under the umbrella term
"related organizing products." Some of these products are
office supplies, and some are school supplies. Others share
features and functions with office and/or school supplies but
are intended for use in the home. These products are generally
marketed through the same channels as organizers.
Market Potential. The Company believes that the appeal of organizers
and other organizing products is attributable to a number of economic and
cultural trends that have substantially affected the United States and that are
having an increasing impact on a number of other markets around the world. These
trends include: the increased percentage of women in the work force and the
resulting prevalence of two-income families; the increased percentage of single
parent families; the continuing trend toward corporate downsizing; the growth of
the small business sector; the rising percentage of business done away from the
office; the greater emphasis on productivity; the ongoing shift to a service
economy; and the trend toward global competition. Many of these trends
contribute to widespread concerns with saving and better using time and
increasing personal productivity.
The Company's products address these concerns. The Company targets both
potential first-time organizer users and existing users who may need refills or
replacements for their organizers. The Company's expansion into related,
non-organizer products that provide other ways for people to become better
organized offers the Company an opportunity to reach consumers that do not use
an organizer and to market additional products to consumers who do. The
Company's goal is to offer one or more products that appeal to and meet the
organizing needs of virtually every consumer, no matter what that individual's
income, occupation or age, in the U.S. and in key markets around the world.
Industries Marketing Similar or Substitute Products. Day Runner's
products have features, functions or components in common with products in a
number of other industries. The Company's market overlaps to a limited extent
that of companies marketing products and services designed to improve group and
individual productivity and to upgrade management skills. In addition,
electronic organizers, PIM software and Internet-resident organizers are
designed to fill many of the same needs addressed by paper-based organizers,
although virtually all PIM software products provide for paper-based output, and
a number of such products allow users to print out pages in sizes that fit the
Company's organizers. (See Item 1. "Business - Competition.")
Supply Chain Management. The Company's primary channels of
distribution are office products and the mass market. As part of their supply
chain management, retailers in these channels have been substantially tightening
their inventories, with the goals of reducing on-hand inventories and increasing
inventory turns. Retailers' methods of accomplishing these goals vary but
generally can include the following, among others: selling down inventory until
they reach their new, lower target levels; giving promotions a shorter time on
the shelf to sell through to consumers and returning other merchandise they
might otherwise have ultimately sold. This inventory tightening may manifest
itself in a number of ways that can reduce the Company's sales and increase its
costs, including but not limited to, retailers' reductions of on-hand supplies
of the Company's products; retailers' reduction of everyday selection of the
Company's products; accelerated and increased product returns; unexpected
cancellations of commitment for product; and reductions in minimum and average
order quantities, with potentially related increases in the frequency of orders
and the Company's associated costs of distribution.
PRODUCTS
Day Runner's products are designed to help people of all ages and in
all walks of life become better organized. The Company aims its products at
various segments of a broad-based consumer audience. The goal is to offer
consumers in each target market the perception of broad choice and good value
for the money and a variety of organizing products that meet their needs.
The Company's products include:
o Multiple lines of paper-based organizers and planners.
o Refills, which include calendars, other pages and accessories.
o Related organizing products.
Organizers and planners. The Company's organizers and planners are
available in varying systems, sizes, styles, cover materials and colors and at a
wide range of prices. These loose-leaf and spiral-bound "books" help users keep
"Everything in One Place(TM)." For example, in addition to the traditional
planner components of appointment calendar, telephone/address section and note
pad, Day Runner System organizers include, among other things, interrelated
pages for managing time and information, tracking expenses, establishing goals
and planning projects. Certain of the Company's organizers and planners are
available in a number of languages in addition to English, including: Danish,
French, German, Italian and Swedish.
Refills. The great majority of the Company's organizers, planners and
telephone/address books and certain of its related organizing products are
refillable. Users may customize their loose-leaf organizers and planners by
choosing from a variety of additional pages and accessories. Day Runner brand
refills range from Mileage Record, Strategy and Things To Do pages to
Currency/Checkbook Insert and a solar powered Calculator/Ruler. Filofax brand
refills include such pages as Shopping List and Meetings Planner and such
accessories as Diskette Holders and a variety of maps.
Related Organizing Products. The Company's related organizing products
include, among others: telephone/address books; appointment books; products for
students ranging from elementary school through college; business accessories
such as travel document holders and business card files; organizing and other
wall boards, such as the patented Home Manager(TM), Business Manager(TM),
org.board(TM) and a variety of bulletin boards, combination white
boards/bulletin boards and laminated wall planners; and PC software designed to
complement the Company's paper-based organizers and planners.
The following table sets forth, for the periods indicated, approximate
Day Runner sales by product category and as a percentage of total sales.
FISCAL FISCAL FISCAL
PRODUCTS 1999 1998 1997
-------- ----------------- ------------------- ------------------
(Unaudited; dollars in thousands)
Organizers and planners ... $ 80,092 40.8% $ 83,069 49.5% $ 73,858 58.0%
Refills ................... 63,596 32.4 51,876 30.9 43,264 34.0
Related organizing products 52,524 26.8 32,896 19.6 10,254 8.0
------ ---- ------ ---- ------ ---
Total....... $196,212 100.0% $167,841 100.0% $127,376 100.0%
======== ===== ======== ===== ======== =====
PRODUCT DEVELOPMENT
Day Runner's product development programs emphasize (i) identifying
unmet consumer needs and developing organizing products to meet those needs and
(ii) extending the Company's existing product lines. All the Company's current
major product lines have been developed internally by the parent company or by
one of the companies Day Runner has acquired.
The Company monitors its existing products for continued viability,
needed enhancements, improvements in quality and potential reductions in cost.
In fiscal 1999, the Company made the decision to discontinue non-licensed
appointment books, a seasonal product line that proved unprofitable, and Day
Runner will therefore not be offering this product line in fiscal 2000.
The Company's product lines reflect its focus on market segmentation
and consumer needs. Here are examples:
Expansion of Day Runner System Organizer Line. Since the introduction
of the first Day Runner System organizer in 1982, the Company has transformed
this single product into a broad line and has introduced multiple additional
organizer lines. The Company's organizers are now available in a variety of
sizes, styles and materials, designed to appeal to a broad spectrum of consumers
and at a wide range of prices.
Products for Cost-conscious Consumers. In 1991, as part of its strategy
of offering products aimed at cost-conscious consumers, the Company introduced
the FactCentre(TM) line, which now includes organizers, planners and
telephone/address books.
Products for Business and Professional People. In 1993, the Company
introduced the PRO Business System(R) organizer, aimed at people seeking a
sophisticated but easy-to-use organizing system designed specifically for
business and professional use. In fiscal 1997, Day Runner launched a line of
business accessories, including travel document holders, business card cases,
business card files and pad holders.
Products for Students. In 1994, Day Runner began shipping 4-1-1(TM)
Student Planners, a line aimed at middle school, high school and college
students and marketed primarily for sales during the back-to-school consumer
buying season. The 4-1-1 line is updated and refreshed each year to keep pace
with the changing tastes of its target market and became the first in the
Company's range of organizing products designed especially for young people.
Simple Organizing Tools. In fiscal 1995, the Company began to expand
into related organizing product categories, adding telephone/address books to
its Day Runner and FactCentre lines.
Products for Women. In fiscal 1995, the Company launched
Perennials(TM), a line of organizers, planners and telephone/address books aimed
primarily at young women shopping at mass merchants. In fiscal 1997, the Company
introduced the patented Home Manager, a unique product that builds upon the
American family's habit of using the refrigerator door as a communication
center. The Home Manager combines a dry-erase board, bulletin board strip,
Post-it(R) notes in a holder and a dated, monthly calendar and mounts on a
refrigerator via heavy-duty magnetic backing or on a wall with hooks.
Licensed Products. The Company develops, manufactures and markets
products under licenses from United Feature Syndicate, Inc. (DILBERT(TM)),
FarWorks, Inc. (THE FAR SIDE(R)), Warner Bros. (LOONEY TUNES(TM) and
X-Toons(TM)) and Lucasfilm Ltd. (Star Wars(TM)). In fiscal 1996, Day Runner
launched a line of planners and telephone/address books featuring Warner Bros.
Looney Tunes cartoon characters. In fiscal 1997, the Company introduced THE FAR
SIDE organizers featuring the classic cartoons created by Gary Larson. In fiscal
1998, the Company launched X-Toons, student products featuring Warner Bros.
characters engaged in extreme sports and designed to appeal to middle-school
boys and a line of DILBERT organizers, refills, telephone/address books and
pocket calendars. In fiscal 1999, the Company introduced a line of Star Wars
student planners, assignment books, telephone/address books and wall boards.
Acquired Products. Since acquiring Ram Manufacturing and Timeposters in
fiscal 1998, the Company has refined and further developed the wall board and
laminated wall planner product lines it gained through the purchase of these
companies. These lines are marketed under the Day Runner brand and the
Wipe-Out(R) and Timeposters sub-brands. Since acquiring Filofax in October 1998,
the Company has expanded product development activities for Filofax brand
products and for Day Runner brand products intended for foreign markets.
Continuing Product Innovation. Ongoing development of new products and
line extensions continues to be an important element of the Company's strategy.
Since its introduction in fiscal 1997, Day Runner has expanded Home Manager into
a broad line of organizing wall boards that includes Business Manager, Cubicle
Manager(TM), Message Manager(TM), a Looney Tunes organizing wall board for
children and Phone Manager(TM). The Company has augmented its product lines
aimed specifically at women with the fiscal 1999 introduction of Regency
organizers, planners and telephone/address books. Recently, the Company has
launched a new, higher-end line of Filofax refills.
SALES AND DISTRIBUTION
The vast majority of Day Runner's sales are to resellers, with direct
sales to organizations and to individuals accounting for a very small portion of
sales. The Company markets its products to its customers in the U.S. primarily
through its own sales force and makes selective use of manufacturers'
representatives and the Internet. The Company markets its products outside the
U.S. primarily through its subsidiaries and secondarily through independent
distributors.
During fiscal 1998 and 1999, the Company sold products to approximately
700 and 6,000 different customers, respectively, with the increase from fiscal
1998 to 1999 attributable primarily to the Filofax acquisition and the
non-consolidated nature of Filofax's distribution channels. The only customers
accounting for 10% or more of the Company's fiscal 1999 sales were Wal-Mart
Stores, Inc., including Sam's Clubs; OfficeMax, Inc.; Office Depot, Inc.; and
Staples, Inc., including their affiliates. These customers accounted for
approximately 25%, 13%, 11% and 11%, respectively, of fiscal 1999 sales.
Including their affiliates, the top five customers of the Company accounted for
an aggregate of approximately 64% of fiscal 1999 sales.
The following table sets forth, for the periods indicated, approximate
Day Runner sales by distribution channel and as a percentage of total sales.
FISCAL FISCAL FISCAL
DISTRIBUTION CHANNEL 1999 1998 1997
-------------------- ------------------ ------------------- --------------------
(Unaudited; dollars in thousands)
Office products channel. $ 68,839 35.1% $ 79,303 47.2% $ 59,416 46.7%
Mass market............. 69,899 35.6 65,752 39.2 53,785 42.2
Foreign customers....... 45,987 23.4 12,182 7.3 5,583 4.4
Other channels.......... 11,487 5.9 10,604 6.3 8,592 6.7
------ --- ------ --- ----- ---
Total............. $196,212 100.0% $167,841 100.0% $ 127,376 100.0%
======== ===== ======== ===== ========= =====
U.S. Sales and Distribution. The Company's primary channels of
domestic distribution are office products and the mass market, and the Company's
products are carried by more than 22,000 retail outlets across the country. In
fiscal 1999, the Company shipped directly to approximately 7,700 retail
locations, to distribution centers serving approximately 14,400 retail locations
and to approximately 100 wholesalers, each of which serves a number of dealers.
Office Products Channel. Since 1987, Day Runner brand products have been
broadly distributed through the office products channel.
Office Products Superstores. Since their emergence in
1986, office products superstores offering discount
prices in a warehouse atmosphere have become a major
force in office products distribution. The Company's
products are carried by all the leading superstores,
including Office Depot, Inc., OfficeMax, Inc. and
Staples, and sales to these customers account for the
bulk of the Company's sales in the U.S. office
products channel.
Office Products Wholesalers. The Company's products
are distributed by a number of office products
wholesalers, including national wholesaler S.P.
Richards Company and all three regional wholesaler
groups, MMA, NAMD and AMW.
Office Products Dealers. The Company's products are
also distributed through traditional office products
dealers, which buy directly from manufacturers and
indirectly through wholesalers. These customers
include both storefront dealers and contract
stationers (also known as commercial dealers) that
specialize in selling to larger businesses through
catalogs and their direct sales forces.
Mass Market. Discount chains addressing the mass market have
become an increasingly important factor in the distribution of
a wide variety of consumer goods. The Company's products are
distributed through a number of mass market retailers,
including: Wal-Mart and Kmart; the major wholesale clubs,
Sam's Clubs and Costco Companies, Inc.; a number of discount
drug chains, including Rite Aid Corp., Eckerd Drug and
American Drug; and a variety of other mass market resellers.
Other. The Company also distributes its products through
a number of additional channels, including book, department,
gift,leather and luggage stores and other specialty retailers,
to the U.S. Government and via the Internet. The Company's
U.S. sales of its Filofax brand products are concentrated
in these distribution channels.
Foreign. The Company's products are marketed internationally primarily
through its foreign subsidiaries and secondarily through independent
distributors. The Company has sales and marketing operations in Australia,
Canada, Denmark, France, Germany, Hong Kong, Italy, Sweden and the United
Kingdom.
Foreign retailers carrying the company's products include both
traditional, full-price retailers and emerging mass marketers. Prior to the
acquisition of Filofax Group plc, which had built strong distribution in a
variety of channels in its home UK market and through high-end specialty shops
and department stores in a number of other markets, Day Runner focused its sales
and distribution efforts outside North America primarily on developing
distribution through emerging mass merchants in key markets. The Company expects
to continue to serve this broad spectrum of distribution.
MARKETING
Day Runner believes that for a number of years its product and
merchandising innovations have been instrumental in driving the growth of the
organizer product category at retail. More recently, the Company has also been
working to increase the visibility of and expand demand for its related
organizing products.
Day Runner markets its products to consumers to increase awareness of
its brand names and of specific products, to communicate the benefits of its
products, and to create and reinforce an image that its products enable the user
to manage time and personal resources more effectively. Packaging,
merchandising, and promotions are designed to appeal to the consumer shopping in
the retail store. The Company positions itself to retailers as the leader in the
retail organizer market, the primary innovator in the category, and the logical
source for well designed, good quality organizers, planners, and related
organizing products at a wide range of price points and appropriate for both
broad-based consumer target markets (Day Runner brand) and consumers looking for
a prestige brand (Filofax brand).
The Company works to protect and strengthen its Day Runner and Filofax
brand names through consistent positioning, careful placement of new products in
the Company's price matrix, well thought out packaging, and the effective use of
secondary and heritage brands.
Promotional Programs. The Company offers promotional and incentive
programs (1) as part of its introduction of new products, (2) to build sales at
specific times of year, and (3) to build awareness, expand distribution, and
increase sales of specific products.
Advertising and Public Relations. Day Runner participates with
retailers in co-op advertising and periodically advertises in certain wholesale
flyers and in trade publications. Public relations campaigns are another
important element in the Company's marketing strategy. The Company has from time
to time conducted consumer advertising campaigns, primarily in business and
lifestyle magazines, but generally does very little consumer advertising.
Sales Support. The Company supports its retailers with point-of-sale
materials intended to build brand name awareness and increase sales. The
Company's displays are designed to be easy for consumers to shop and for store
personnel to refill. The Company supplements its everyday display space of Day
Runner brand products with colorful, pre-packed corrugated displays designed to
act as marketing vehicles. Packaging is intended to help consumers choose the
right product and make the decision to buy.
Trade Shows. The Company exhibits or is represented in a number of
international, national and regional trade shows.
Market Research. The Company regularly conducts market research and
tests product concepts and prototypes through the use of focus groups and other
consumer research. In addition, the Company maintains a database containing
information on users who have mailed in the Welcome Cards included in many of
its Day Runner brand products.
User Support. To encourage its current users to continue to purchase
and recommend its products and their refills, the Company provides a toll-free
consumer hotline in the U.S. that consumers may call for referral to
conveniently located dealers or dealers that carry specific refills or
accessories, for customer service, to contribute suggestions and to purchase
products directly from the Company.
Although Day Runner's products are designed to be intuitive and easy to
use, the Company provides a free user's guide in each Day Runner System and PRO
Business System organizer. Each of these booklets illustrates effective use of
the system and includes tips on time management, project management and
organization.
dayrunner.com. In June 1999, the Company launched its substantially
redesigned Internet site, dayrunner.com. Users may purchase certain of the
Company's products online via this web site. The Company makes direct sales
primarily as a service to its users and, except in certain cases, charges full
suggested retail price plus shipping and handling.
COMPETITION
The product categories in which the Company participates are
competitive and subject to rapid change.
The Company competes directly with other companies marketing
paper-based organizers and planners, appointment books, assignment books,
business accessories, calendars, wall boards, laminated wall planners and
similar organizing products to consumers through retail channels and on the
Internet and indirectly with companies marketing such products through mail
order or via other means.
The Company's competitors also include companies marketing substitutes
for paper-based organizer and planner products, such as electronic organizers,
including Palm Pilot and Windows CE products, among others, PIM software and
Internet-resident organizers.
In addition, the Company competes indirectly in the U.S. and directly
in certain foreign markets with companies marketing organizers and/or organizers
coupled with time management training via direct sales to individuals and to
organizations.
The companies with which Day Runner competes vary by product category
and geography. Each product category is competitive and subject to rapid change,
and none of the lists of competitors provided here is intended to be all
inclusive. The Company's competitors in paper-based organizers in North America
include At-A-Glance(R), Day-Timer(R), FranklinCovey(R), Mead School and Office
Products division of The Mead Corporation and many leather goods manufacturers
and companies manufacturing inexpensive, non-branded organizers overseas for
sale in North America. In September 1999, Mead announced that it had agreed to
acquire the At-A-Glance Group from Cullman Ventures. Paper-based organizer
competitors outside the U.S. vary from market to market, with none holding a
dominant position in retail channels in multiple markets.
The Company's North American competitors in telephone/address books
include At-A-Glance, Mead and a number of companies marketing inexpensive
imported products. The primary company marketing appointment books and calendars
through retail channels in North America is At-A-Glance. A number of U.S.
calendar companies also produce laminated wall planners. Business accessories
are marketed in North America by Day-Timer, Hazel(R) and many leather goods
manufacturers, and wall board manufacturers include Boone(R) Boards and Quartet
Manufacturing Company.
Day Runner believes that the current principal competitive factors in
the product categories in which its participates are: distribution breadth,
depth and strength; brand name recognition; product development capability;
product function, design, perceived quality and value; marketing capability;
breadth of product lines; financial resources; customer service;
manufacturing/sourcing expertise; and price. In the organizer/planner category,
the size and loyalty of a company's user base is also a key factor. Although a
number of its competitors have greater financial resources than Day Runner, the
Company believes that it competes well against its direct competition on most of
the other principal competitive factors.
The Company believes that it has a number of competitive advantages.
Its products occupy significant retail shelf space. Its leadership position in
the retail organizer/planner market, leading brand names, ability to develop new
products, broad product lines, marketing expertise, manufacturing/sourcing
skill, large user base and the appeal of its products to consumers constitute
additional competitive advantages. There can be no assurance, however, that the
Company will be able to maintain or continue to benefit from its competitive
advantages or that the competitive environment will not change to the Company's
detriment.
MANUFACTURING
Day Runner's manufacturing strategy combines limited internal
manufacturing with the domestic and foreign subcontracting of product components
and finished products. The Company's policy is to develop and maintain multiple
sources for key raw materials, product components and the finished products it
subcontracts. The Company has the ability to act as its own second or third
source for the manufacture of loose-leaf binders, for those of its wall boards
that it subcontracts and for the final assembly of many of its products. This
provides a degree of protection against vendor problems and, under certain
conditions, allows the Company to respond to higher than anticipated demand and
improve turn-around time. The Company's manufacturing activities are not
capital-intensive, and the manufacture of most of its products can be only
partially automated. The Company subcontracts all printing.
Purchased Components. In addition to vinyl and leather raw materials,
the Company purchases from suppliers certain major product components, including
printed pages, loose-leaf rings, pens, software disks containing its PIM
software, electronic components and certain accessories. With few exceptions,
these items are manufactured by a variety of outside contractors and are widely
available.
Day Runner Brand Products.
Asian Suppliers. The Company's Asian subcontractors
manufacture and assemble a portion of its finished Day Runner
brand products, including the great majority of its lower
priced organizers, planners and related organizing products.
Day Runner's Hong Kong subsidiary acts as liaison with the
Asian suppliers of the Company's Day Runner brand products.
North American Manufacturing. The flexibility of internal and
subcontracted North American manufacturing helps Day Runner
meet unexpected demand and produce "fill-ins" near the end of
a season. In addition, North American manufacturing is
cost-effective for certain bulky products, where freight costs
are a key concern.
Internal Manufacturing. Day Runner manufactures a portion of
its binders, assembles a portion of its finished products and
does refill packaging at Day Runner de Mexico, S.A. de C.V.,
its wholly owned manufacturing subsidiary located in Tijuana.
The Company manufactures wall boards and laminated wall
planners at its facilities in Little Rock, Arkansas and
Toronto, Canada.
Filofax Brand Products. The Company's Filofax operations also balance
internal manufacturing with subcontracting and subcontract the production of
certain product components and finished goods to Asian suppliers. Manufacturing
in the UK is limited in scope, consisting primarily of binder manufacture, book
assembly and refill packaging, and the Company also outsources some assembly
there.
CUSTOMER SERVICE
Large U.S. retailers' focus on lowering inventory and increasing
inventory turns requires ever improving product replenishment through-put time
as measured at the retail shelf. Day Runner recognizes that customer service is
an ever-more vital link between itself and its key customers. (Note: This
discussion does not include distribution in the U.S. of the Company's Filofax
products, which is outsourced.)
Sophisticated, Flexible Distribution Capabilities. Day Runner has
developed sophisticated distribution and customer service capabilities in the
U.S. The Company's facilities have the ability to ship in whatever form the
customer's logistics require. Day Runner ships directly to the individual retail
locations of a number of its customers and to the distribution centers of others
and participates in cross-docking programs.
EDI. Day Runner receives more than 90% of domestic orders representing
approximately 85% of domestic purchase order dollars via EDI (Electronic Data
Interchange). Transaction sets handled via EDI include purchase orders,
acknowledgments, invoices, ASNs (advance ship notices), and debit/credit
adjustments.
WMS. Recently, the Company has implemented WMS (Warehouse Management
System) software in its Nashville, Tennessee and Fullerton, California
distribution centers. WMS controls a multitude of warehouse functions,
including, among others: receiving; quality inspection; package labeling; cross
docking; material storage; order picking; automated replenishment; trailer
loading; routing; and inventory control. The Company believes WMS will offer
significant longer term benefits, including higher productivity, increased
inventory and shipping accuracy and more efficient facility utilization.
RISK FACTORS
The Company believes that risk factors that may cause future results
to differ materially from the Company's expectations and should be considered
carefully in evaluating the Company and its business include, but are not
limited to, the following (which, with the exception of "Other Risk Factors,"
are listed in alphabetical order). These risk factors are in addition to those
mentioned elsewhere in this report and in documents incorporated by reference
into this report.
Competition. The paper-based organizer industry and the various
related organizing products industries in which the Company participates are
intensely competitive and subject to rapid change, with competition for retail
shelf space of particular concern. The Company competes primarily with a number
of companies that manufacture and market paper-based organizers and/or related
organizing products through retail, mail order or other direct sales channels.
The Company also competes to a lesser extent with companies that manufacture and
market substitutes for paper-based organizers (e.g., handheld electronic
organizers such as Palm Pilot, Windows CE products, personal information
management ("PIM") software and Internet-resident organizers). Certain of the
Company's competitors have substantially greater financial, product development,
technical, manufacturing and marketing resources than the Company. There can be
no assurance that the Company will be able to compete successfully in the future
or that competitive pressures will not adversely affect the Company's sales
growth or gross or operating margins. (See Item 1. "Business Competition.")
Customer Concentration. The Company's sales have been, and very likely
will continue to be, concentrated among a small number of customers. In fiscal
1999, sales to the Company's top five customers represented approximately 64% of
sales, with sales to Wal-Mart Stores, Inc., OfficeMax, Inc., Office Depot, Inc.
and Staples, Inc., including their affiliates, representing approximately 25%,
13%, 11% and 11%, of sales, respectively. As a result, the Company's financial
results can be adversely affected by the business practices and actions of its
large customers in a number of ways, including timing and size of orders and
supply chain management. The loss of one or more of these customers or a shift
in the demand by, distribution methods of or pricing to or terms of sale to one
or more of these customers could materially adversely affect the Company. The
Company has no written agreement or other enforceable understanding with any of
these customers that relates to future purchases by such customers, and thus
such purchases could be delayed, reduced or discontinued at any time. A
termination or other adverse change in the Company's relationship with, an
adverse change in the financial condition of, or a significant reduction in
sales to one or more of its top customers could have a materially adverse effect
on the Company. The write-off of any significant receivable due from, delays in
payment by or return of product by these customers could also adversely impact
the Company. (See Item 1. "Business -- Sales and Distribution.")
Dependence on Continued Demand for Paper-based and other Low Technology
Organizing Products. The Company's future results depend upon ongoing consumer
demand for paper-based organizing products in general and the Company's products
in particular. In recent years, technological advances have led to the
proliferation of increasingly powerful portable laptop and "palmtop" computers
and handheld electronic organizers, such as Palm Pilot. Although many of these
products are currently significantly more expensive and difficult to use than
the Company's comparable paper-based products, technological advances are likely
to improve the ease of use and functionality and to continue to reduce the cost
of portable electronic products that contain features directly competitive with
paper-based organizers and planners and with certain related organizing
products. There can be no assurance that consumer demand for paper-based and
other low technology products will not decline or that the Company, alone or
jointly with technology companies, will be able to successfully develop in a
timely manner and market new paper-based or electronic products that will
achieve market acceptance.
Dependence on Loans. Under the Amended and Restated Loan Agreement, the
Company may borrow, subject to certain conditions, a maximum aggregate of
approximately $120 million in bank loans. The Company's liquidity is
significantly dependent upon its continued compliance with this loan agreement's
terms, including, among others, payment of interest and principal when due and
maintenance of certain financial ratios. The Company believes that it will be
able to comply with the terms of the loan agreement at least through fiscal
2000, but there can be no assurance that it will be able to do so. (See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources - Bank Loans.")
Dependence on Key Personnel. The Company's success depends to a
significant extent upon certain of its officers, the loss of the services of any
of whom could materially adversely affect the Company. The Company has no
employment agreements with such persons. (See Item 10. "Directors and Executive
Officers of the Registrant.")
Litigation. The Company is a defendant in purported securities class
action lawsuits related to allegations concerning the Company's alleged
misstatement of its financial results of operations for the first through third
quarters of fiscal 1999. The Company believes it has meritorious defenses to the
actions and intends to defend them vigorously, but there can be no assurance as
to the outcome. (See Item 3. "Legal Proceedings.")
New Products. In order to maintain and improve its competitive
position, the Company must continue to enhance its existing product lines and to
develop and introduce innovative new products and line extensions that meet the
requirements of its existing and potential users. There can be no assurance that
such products will be developed and introduced in a timely fashion, or that they
will achieve market acceptance or that the timing and size of orders for new
products will not materially adversely affect the Company's financial results.
Product Supply and Manufacturing Risks. The Company depends on outside
foreign and domestic sources for the manufacture of a portion of its product
components and finished products and subcontracts the production of all its
printed materials. The Company's partial reliance on outside vendors subjects it
to the risks of potential delays in the receipt, or shortfalls in the levels or
quality, of products or components and of possible increases in its costs of
goods sold caused by, among other things, increases in vendors' prices, trade
tariffs or duties. In addition, due to the large number of sizes, materials and
styles of the Company's products and the inherent uncertainty of predicting
customer demand levels, timing and mix, there is a risk that the Company may not
be able to fulfill certain orders in a timely fashion, which may result in
delayed shipments and/or lost business. Day Runner seeks to reduce certain of
these risks by setting what it believes are appropriate safety stock inventory
levels of its most popular products and most frequently used product components,
having multiple or alternative supply sources for key product components and
possessing the internal capability to manufacture and/or assemble many of its
core products. Nonetheless, external or internal product or component supply or
manufacturing delays, shortfalls or other problems or cost increases could
adversely affect the Company's financial results. (See Item 1. "Business --
Manufacturing.")
Retailers' Supply Chain Management. As publicly announced by a number
of the retailers themselves and many of their suppliers, certain large U.S.
retailers, including a number of the Company's largest customers, have
intensified their focus on supply chain management, working to shift a greater
portion of the inventory burden to suppliers. This trend increases the
unpredictability of the Company's financial results.
As part of their supply chain management, retailers have been
substantially tightening their inventories, with the goals of reducing on-hand
inventories and increasing inventory turns. Retailers' methods of accomplishing
these goals vary but generally can include the following, among others: selling
down inventory until they reach their new, lower target levels; giving
promotions a shorter time on the shelf to sell through to consumers and
returning other merchandise they might otherwise have ultimately sold. This
inventory tightening may manifest itself in a number of ways that can reduce the
Company's sales and increase its costs, including but not limited to, retailers'
reductions of on-hand supplies of the Company's products; retailers' reduction
of everyday selection of the Company's products; accelerated and increased
product returns; unexpected cancellations of commitments for product; and
reductions in minimum and average order quantities, with potentially related
increases in the frequency of orders and the Company's associated costs of
distribution.
In addition, the stress on minimizing on-hand inventories in retail
stores can result in spotty stock outages, particularly of popular products,
which can result in lost or delayed sales to consumers. The Company believes the
trend toward shifting the inventory burden farther back in the supply chain is
likely to eventually include the vast majority of retail chains both in the U.S.
and abroad.
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 parent Company's
products in the third quarter and for Filofax's products in the third and fourth
quarters of each fiscal year.
Although it is difficult to predict the future seasonality of sales,
the Company believes that future seasonality should be influenced at least in
part by customer and user buying patterns similar to those that have
historically affected the Company. Quarterly financial results are also affected
by new product introductions and line extensions, the timing of large orders,
changes in product sales or customer mix, vendor and customer pricing,
production levels, supply and manufacturing delays, large customers' inventory
management and general industry and economic conditions. The seasonality of the
Company's financial results and the unpredictability of the factors affecting
such seasonality make the Company's quarterly and yearly financial results
difficult to predict and subject to significant fluctuation. (See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Quarterly Results.")
Small Size. The Company believes that the retail environment,
particularly in the U.S. and Canada, is increasingly comprised of very large
retailers and suppliers and that the Company's relatively small size magnifies
the effects upon it of shifts in this environment. Through its exploration of
strategic alternatives, the Company is seeking ways in which to become less
vulnerable, whether through a financial partner, some form of additional
financing, or in alliance with or as part of a larger corporate entity. The
Company believes that the risks associated with its small size will persist
until and unless it succeeds in reducing this vulnerability. The Company has not
made a decision as to any specific strategic alternative, and there cannot be
any assurance that a transaction will result from the Company's process of
seeking strategic alternatives. (See Item 1.
"Business -- Seeking Strategic Alternatives.")
Year 2000 Readiness. 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, although the Company believes its internal
systems are Year 2000 compliant, there can be no guarantee 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 in this report 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. (See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations Year 2000.")
Other Risk Factors. Other factors that may cause the Company's future
performance to differ materially from its current expectations include: general
economic conditions, especially the sustainability of the current economic
expansion; the health of the retail environment; and foreign exchange rate
fluctuations.
PATENTS, COPYRIGHTS AND TRADEMARKS
Day Runner relies upon, among other things, a combination of
copyright, patent and trademark laws to protect its rights to certain aspects of
its products. There can be no assurance, however, that the steps taken by Day
Runner to protect its proprietary rights will be adequate to prevent imitation
of its products or independent development by others of similar products.
Day Runner holds numerous patents in the United States and certain
foreign countries. The Company also has several United States and foreign
patents pending. The patents the Company holds are related to improvements in
the structure of and devices associated with its loose-leaf binders and its
related organizing products. We have also been issued United States copyright
registrations covering the text and the compilation and editing of data in
certain of our products. Day Runner holds United States and foreign trademark
registrations for a number of trademarks including "Day Runner" and "Filofax"
and various logos.
EMPLOYEES
At October 1, 1999, Day Runner had 1,620 full-time employees,
including 178 in sales; 42 in marketing; 210 in executive, finance and
administration; 37 in product development; and 1,153 in manufacturing operations
and distribution. None of the Company's employees is represented by a labor
union, and the Company has experienced no labor-related work stoppages.
ITEM 2. PROPERTIES.
Day Runner's principal operating facility is located in an
approximately 221,000 square-foot building in Fullerton, California, under
leases expiring in 2001. The leases include multiple, successive renewal options
that, if exercised in full, would extend the lease terms to expire in 2011. The
Company's corporate headquarters occupy approximately 21,300 square feet in
Irvine, California under a lease that expires in 2001. The Company's LaVergne,
Tennessee distribution facility occupies an approximately 100,200 square-foot
facility under a lease expiring in 2004. The lease includes multiple, successive
renewal options that, if exercised in full, would extend the lease terms to
expire in 2014. The Company's Little Rock, Arkansas manufacturing facility
occupies an approximately 84,000 square-foot facility under a lease expiring in
2002. This lease includes a renewal option that, if exercised, would extend the
lease term to expire in 2007. The Company's Canadian subsidiary occupies an
approximately 40,220 square-foot facility under a lease expiring in 2008 that
includes an option to extend the terms through 2013. The Company's Mexican
subsidiary occupies an approximately 70,000 square-foot facility under a lease
expiring in 2006 that includes options to extend the terms through 2016. The
Company's U.K. subsidiary's principal manufacturing facility is located in an
approximately 23,300 square-foot building in Burgess Hill, England, which is
owned by the Company's U.K. subsidiary. Additionally, the Company's U.K.
subsidiary's corporate headquarters occupy approximately 5,700 square feet in
London, England under a lease expiring in 2003. The Company believes it has
sufficient space in its facilities or will be able to lease additional space on
acceptable terms to meet its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
In September 1999, two purported securities class action lawsuits were
filed in the United States District Court for the Central District California
against the Company and certain of its officers and directors. The complaints
allege that the Company violated Section 10(b) of the Securities Exchange Act
and Rule 10b-5 thereunder through the misstatement of the Company's financial
results of operations for the first through third quarters of fiscal 1999. These
alleged misstatements purportedly consisted of improper accounting for
manufacturing variances and other costs. The plaintiffs in both actions purport
to represent a class consisting of all purchasers of the Company's Common Stock
between October 20, 1998 and August 31, 1999. The plaintiffs are seeking
unspecified compensatory damages.
The Company expects that these actions will be consolidated into a
single action, that a lead plaintiff will be appointed, and that a consolidated
amended complaint will be filed. None of these events has yet taken place. There
has been no discovery in any of the actions. Based on the allegations and the
issues raised by the current complaint, the Company believes it has meritorious
defenses to the actions and intends to defend them vigorously.
The Company is not a party to any other litigation that, in the opinion
of management, would reasonably be expected to have a materially adverse effect
on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Day Runner's Common Stock is traded over-the-counter on The Nasdaq
Stock Market under the symbol "DAYR." The table below shows the high and low
closing sales prices for the Common Stock as reported on The Nasdaq Stock Market
for the fiscal years ended June 30, 1999 and 1998. As of October 1, 1999, there
were 208 recordholders of the Company's Common Stock based on information
provided by the Company's transfer agent.
FISCAL YEAR FISCAL YEAR
1999 1998
---------------- -----------------
QUARTER HIGH LOW HIGH LOW
First $25-6/16 $16-14/16 $19-1/2 $16-1/4
Second 22-1/2 11-14/16 21-1/16 18
Third 14-1/16 10-3/8 23-1/16 18-7/16
Fourth 13-3/16 9-5/8 25-1/4 18-1/8
The Company has never paid cash dividends. It is the present policy of
the Company to retain earnings to finance the growth and development of its
business, and therefore the Company does not anticipate paying cash dividends on
its Common Stock in the foreseeable future. Certain financial covenants in the
Company's bank line of credit agreement restrict the Company's ability to pay
cash dividends.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated statement of operations data for the fiscal
years ended June 30, 1999, 1998 and 1997 and the consolidated balance sheet data
at June 30, 1999 and 1998 are derived from, and are qualified in their entirety
by reference to, the Company's audited consolidated financial statements and
notes thereto included elsewhere in this Annual Report that have been audited by
Deloitte & Touche LLP, independent auditors, as indicated in their report, which
is also included elsewhere in this Annual Report. The selected consolidated
statement of operations data for the fiscal years ended June 30, 1996 and 1995
and the consolidated balance sheet data at June 30, 1997, 1996 and 1995 are
derived from audited consolidated financial statements of the Company that are
not included herein.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL
1999 1998 1997 1996 1995
------------ ------------- ------------- ------------- ------------
Net sales...................... $ 196,212 $ 167,841 $ 127,376 $ 125,126 $ 121,801
Cost of goods sold............. 108,087 80,663 60,452 59,920 62,175
--------- ---------- --------- ---------- ----------
Gross profit................... 88,125 87,178 66,924 65,206 59,626
--------- ---------- --------- ---------- ----------
Operating expenses:
Selling, marketing and
distribution............... 62,180 43,193 31,673 29,878 32,154
General and administrative..... 26,445 18,416 14,451 16,376 13,792
Costs related to activities
associated with the Filofax
acquisition............... 1,072
Costs incurred in pursuing
acquisitions.............. 1,451
--------- ---------- --------- ---------- ----------
Total operating expenses.... 89,697 61,609 47,575 46,254 45,946
--------- ---------- --------- ---------- ----------
(Loss) income from
operations................. (1,572) 25,569 19,349 18,952 13,680
Net interest expense (income).. 5,215 (172) (1,301) (706) (161)
--------- ---------- --------- ---------- ----------
(Loss) income before (benefit).
provision for income taxes. (6,787) 25,741 20,650 19,658 13,841
(Benefit) provision for
income taxes............... (2,789) 9,833 8,102 7,840 5,863
--------- ---------- --------- ---------- ----------
Net (loss) income.............. $ (3,998) $ 15,908 $ 12,548 $ 11,818 $ 7,978
========= ========== ========= ========== ========
(Loss) earnings per common share:
Basic....................... $ (0.34) $ 1.38 $ 1.01 $ 0.95 $ 0.66
========== ========== ========= ========== =======
Diluted $ (0.34) $ 1.27 $ 0.95 $ 0.89 $ 0.63
========== ========== ========= ========== =======
Weighted average number of
common shares outstanding:
Basic....................... 11,896 11,533 12,432 12,468 12,176
========= ========== ========= ========== ==========
Diluted........................ 11,896 12,523 13,182 13,252 12,748
========= ========== ========= ========== =========
CONSOLIDATED BALANCE SHEET DATA:
(IN THOUSANDS)
JUNE 30,
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------- -------------
Working capital............. $ 70,491 $ 57,922 $ 50,710 $ 51,653 38,260
Total assets................ 216,311 101,179 78,880 77,931 63,650
Short-term debt............. 2,077 2,716 452 152
Long-term liabilities....... 105,568 12
Stockholders' equity........ 70,397 74,532 59,484 59,498 44,787
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and Notes
thereto included elsewhere in this Annual Report. Historical results and
percentage relationships among any amounts included in the Consolidated
Financial Statements are not necessarily indicative of trends in operating
results for any future period.
OVERVIEW
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. 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 and the U.S. mass market channel. With the October 30, 1998 acquisition
of Filofax, the Company substantially increased its emphasis on markets outside
the U.S. The office products channel, the mass market channel and sales to
foreign customers accounted for 35.1%, 35.6% and 23.4%, respectively, of fiscal
1999 net sales.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, the
percentages that selected statement of operations items bear to sales and the
percentage change in the dollar amounts of such items.
PERCENTAGE OF NET SALES
YEARS ENDED JUNE 30,
1999 1998 1997
--------- -------- ---------
Net sales.................................... 100.0% 100.0% 100.0%
Cost of goods sold........................... 55.1 48.1 47.5
------ ----- -----
Gross profit................................. 44.9 51.9 52.5
------ ----- -----
Operating expenses:
Selling, marketing and distribution....... 31.7 25.7 24.9
General and administrative................ 13.5 11.0 11.3
Costs related to activities associated with the
Filofax acquisition...................... 0.5
Costs incurred in pursuing acquisitions...
1.1
Total operating expenses................. 45.7 36.7 37.3
------ ----- -----
(Loss) income from operations................ (0.8) 15.2 15.2
Net interest expense (income)................ 2.6 (0.1) (1.0)
------ ----- -----
(Loss) income before (benefit) provision
for income taxes......................... (3.4) 15.3 16.2
(Benefit) provision for income taxes......... (1.4) 5.8 6.3
------ ----- -----
Net (loss) income............................ (2.0)% 9.5 % 9.9%
====== ===== =====
PERCENTAGE CHANGE
FISCAL 1998 FISCAL 1997
TO TO
FISCAL 1999 FISCAL 1998
-------------------- --------------------
Net sales......................................... 16.9% 31.8%
Cost of goods sold................................ 34.0 33.4
Gross profit...................................... 1.1 30.3
Operating expenses:
Selling, marketing and distribution............ 44.0 36.4
General and administrative..................... 43.6 27.4
Costs related to activities associated with the
Filofax acquisition........................... 100.0
Costs incurred in pursuing acquisitions........ (100.0)
Total operating expenses...................... 45.6 29.5
(Loss) income from operations..................... (106.1) 32.1
Net interest expense (income)..................... 3132.0 (86.8)
(Loss) income before (benefit)
provision for income taxes....................... (126.4) 24.7
(Benefit) provision for income taxes.............. (128.4) 21.4
Net (loss) income................................. (125.1) 26.8
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1998
Net Sales. Net sales ("sales") consist of revenues from gross product
shipments net of allowances for returns, rebates and credits. In fiscal 1999,
sales increased by $28,371,000, or 16.9%, compared with fiscal 1998 primarily
because of the Filofax acquisition but were lower than anticipated primarily
because inventory tightening on the part of a number of the Company's large U.S.
customers constrained the Company's sales and increased product returns. Sales
were primarily to mass market customers and secondarily to the office products
channel. Sales to the office products channel decreased by $10,464,000, or
13.2%; sales to foreign customers grew by $33,805,000 or 277.5%; sales to mass
market customers grew by $4,147,000, or 6.3%; and sales to miscellaneous
customers grouped together as "other," grew by $883,000, or 8.3%. Sales of
related organizing products increased by $19,628,000 or 59.7%; sales of refills
increased by $11,720,000, or 22.6%; and sales of organizers and planners
decreased during the year by $2,977,000, or 3.6%.
Gross Profit. Gross profit is sales less cost of goods sold, which is
comprised of materials, labor, and manufacturing overhead. Gross profit may be
affected by, among other things, product mix, production levels, changes in
vendor and customer prices and discounts, sales volume and growth rate, sales
returns and other allowances, purchasing and manufacturing efficiencies,
tariffs, duties, and inventory carrying costs. Gross profit as a percentage of
sales decreased from 51.9% of sales in fiscal 1998 to 44.9% of sales in fiscal
1999 primarily because of a shift in the Company's Day Runner brand product mix
(including sub-brands) to lower margin products and an increase in the provision
for sales returns based upon recent higher sales returns experience (which, in
addition to lowering net sales, adversely impacted manufacturing costs and
variances), both of which the Company believes were largely related to inventory
tightening.
Operating Expenses. Total operating expenses increased as a percentage
of sales from 36.7% for fiscal 1998 to 45.7% for fiscal 1999 because of the
Company's decreased ability to absorb costs as a result of the lower sales of
the parent company operation and because of Filofax's seasonality. (The Company
had the benefit of only two months of Filofax's four-month busy season, but had
the expenses associated with six months of its eight-month slower period.)
Excluding the $1,072,000 costs related to activities associated with the Filofax
acquisition, fiscal 1999 operating expenses would have been 45.2% of sales.
Selling, marketing and distribution expenses increased by $18,987,000
primarily because of expenses associated with recently introduced products and
secondarily because of the addition of Filofax's expenses and increased as a
percentage of sales from 25.7% to 31.7% due to the expenses associated with the
recently introduced products. General and administrative expenses increased by
$8,029,000 and from 11.0% to 13.5% as a percentage of sales primarily because of
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. Because of the increase in the Company's
long-term debt, which was incurred primarily to finance the Filofax acquisition,
net interest expense for fiscal 1999 was $5,215,000 compared with net interest
income of $172,000 for fiscal 1998.
Income Taxes. The Company's fiscal 1999 effective tax rate was 41.0%
compared with an effective tax rate of 38.2% for fiscal 1998.
Net (Loss) Income. The Company realized a net loss of $3,998,000 in
fiscal 1999 compared with a net income of $15,908,000 in fiscal 1998. Excluding
costs related to activities associated with the Filofax acquisition, fiscal 1999
net loss would have been $2,926,000.
Earnings Per Share. In fiscal 1999, the Company repurchased an
aggregate of 96,000 shares of Common Stock under the Company's stock repurchase
program. These repurchases reduced the number of shares that would otherwise
have been used to calculate earnings per share (see Note 17 to Consolidated
Financial Statements).
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1997
Net Sales. In fiscal 1998, sales increased by $40,465,000, or 31.8%,
compared with fiscal 1997 primarily because of higher unit sales of related
organizing products. Product sales were primarily to the office products channel
and secondarily to mass market customers. Sales to the office products channel
increased by $19,887,000, or 33.5%; sales to mass market customers grew by
$11,967,000, or 22.2%; sales to foreign customers grew by $6,599,000, or 118.2%;
and sales to miscellaneous customers grouped together as "other," grew by
$2,012,000, or 23.4%. Sales of related organizing products increased by
$22,642,000, or 220.8%; sales of organizers and planners increased during the
year by $9,211,000, or 12.5%; and sales of refills increased by $8,612,000, or
19.9%.
Gross Profit. Gross profit as a percentage of sales decreased from
52.5% in fiscal 1997 to 51.9% in fiscal 1998 primarily because the gross profit
levels of certain of the Company's smaller operations are lower as a percentage
of sales than those of the parent company.
Operating Expenses. Total operating expenses increased by $14,034,000,
or 29.5%, for fiscal 1998 compared with fiscal 1997 but decreased as a
percentage of sales from 37.3% to 36.7% primarily because operating expenses for
fiscal 1997 included $1,451,000 of costs incurred in pursuing acquisitions that
did not come to fruition. No such costs were incurred in fiscal 1998.
Excluding the fiscal 1997 costs of pursuing acquisitions, total
operating expenses would have grown by $15,485,000, or 33.6%, and increased as a
percentage of sales from 36.2% to 36.7%.
Primarily because of expenses associated with new and recently
introduced products, selling, marketing and distribution expenses increased by
$11,520,000 and from 24.9% to 25.7% as a percentage of sales. General and
administrative expenses increased by $3,965,000, but declined from 11.3% to
11.0% as a percentage of sales primarily because of the Company's increased
ability to absorb fixed costs as a result of higher sales.
Net Interest Income. Primarily because of a decrease in the Company's
cash available for short-term investment resulting from the Company's repurchase
of Common Stock, net interest income in fiscal 1998 compared with fiscal 1997
decreased by $1,129,000 and by 0.9% as a percentage of net sales.
Income Taxes. Primarily as a result of state tax planning and
secondarily the continued growth of the Company's Hong Kong subsidiary, the
Company's fiscal 1998 effective tax rate was 38.2%, compared with 39.2% for
fiscal 1997.
Net Income. Compared with fiscal 1997, net income for fiscal 1998
increased by $3,360,000, or 26.8%. Excluding the fiscal 1997 costs incurred in
pursuing acquisitions, fiscal 1998 net income would have grown $2,471,000, or
18.4%, compared with fiscal 1997.
Earnings Per Share. In fiscal 1998, the Company repurchased an
aggregate of 695,588 shares from certain officers and directors of the Company.
Separately, during fiscal 1997, the Company repurchased 1,026,200 shares of
Common Stock under the Company's stock repurchase program. These repurchases
reduced the number of shares that would otherwise have been used to calculate
earnings per share. (See Note 13 to Consolidated Financial Statements).
QUARTERLY RESULTS
The following tables set forth selected unaudited quarterly
consolidated financial data and the percentages such items represent of net
sales. The quarterly consolidated financial data reflect, in the opinion of
management of the Company, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the results of operations for such
periods. Results of any one or more quarters are not necessarily indicative of
annual results or continuing trends.
QUARTERS ENDED
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1999 1999 1998 1998
---- ---- ---- ----
(In thousands, except per share amounts)
Net sales........................... $ 47,700 100.0% $ 36,216 100.0% $ 64,565 100.0% $ 47,731 100.0%
Gross profit........................ 17,700 37.1 16,495 45.5 31,059 48.1 22,871 47.9
Total operating expenses............ 24,535 51.4 21,811 60.2 26,429 40.9 16,922 35.4
(Loss) income from operations....... (6,835) (14.3) (5,316) (14.7) 4,630 7.2 5,949 12.5
Net interest expense ............... 2,056 4.3 1,770 4.9 1,356 2.1 33 0.1
(Loss) income before (benefit)
provision for income taxes...... (8,891) (18.6) (7,086) (19.6) 3,274 5.2 5,916 12.4
Net (loss) income................... $ (5,249) (11.0)% $ (4,448) (12.3)% $ 2,030 3.1% $ 3,669 7.7%
(Loss) earnings per common share:
Basic.......................... $ (0.44) $ (0.37) $ 0.17 $ 0.31
Diluted........................ $ (0.44) $ (0.37) $ 0.16 $ 0.29
Weighted average number of
common shares outstanding:
Basic.......................... 11,886 11,900 11,883 11,931
Diluted........................ 11,886 11,900 12,564 12,656
QUARTERS ENDED
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1998 1998 1997 1997
---- ---- ---- ----
(In thousands, except per share amounts)
Net sales........................... $ 50,927 100.0% $ 29,388 100.0% $ 49,388 100.0% $ 38,138 100.0%
Gross profit........................ 26,057 51.2 15,253 51.9 25,762 52.2 20,106 52.7
Total operating expenses............ 18,392 36.1 13,474 45.8 16,677 33.8 13,066 34.3
Income from operations.............. 7,665 15.1 1,779 6.1 9,085 18.4 7,040 18.4
Net interest (income) expense....... (123) (0.2) 16 0.1 30 0.1 (95) (0.3)
Income before provision for
income taxes..................... 7,788 15.3 1,763 6.0 9,055 18.3 7,135 18.7
Net income.......................... $ 4,957 9.7% $ 1,075 3.7% $ 5,524 11.2% $ 4,352 11.4%
Earnings per common share:
Basic.......................... $ 0.42 $ 0.09 $ 0.49 $ 0.38
Diluted........................ $ 0.39 $ 0.09 $ 0.45 $ 0.35
Weighted average number of
common shares outstanding:
Basic.......................... 11,776 11,571 11,273 11,513
Diluted........................ 12,695 12,520 12,323 12,511
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 parent company's products in the
third quarter and for Filofax's products in the third and fourth quarters of
each fiscal year.
Although it is difficult to predict the future seasonality of sales,
the Company believes that future seasonality should be influenced at least in
part by customer and user buying patterns similar to those that have
historically affected the Company. Quarterly financial results are also affected
by new product introductions and line extensions, the timing of large orders,
changes in product sales or customer mix, vendor and customer pricing,
production levels, supply and manufacturing delays, large customers' inventory
management and general industry and economic conditions. The seasonality of the
Company's financial results and the unpredictability of the factors affecting
such seasonality make the Company's quarterly and yearly financial results
difficult to predict and subject to significant fluctuation.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's cash and cash equivalents at June 30, 1999
increased to $9,132,000 from $2,923,000 at June 30, 1998. In fiscal 1999, net
cash of $16,580,000 provided by operating activities and $87,640,000 provided by
financing activities were partially offset by net cash of $98,513,000 used in
investing activities.
Of the $16,580,000 net amount provided by the Company's operating
activities, $19,039,000 was provided by the provision for doubtful accounts and
sales returns and other allowances, $10,240,000 was provided by depreciation and
amortization, $7,432,000 was provided by a decrease in inventories and
$4,508,000 was provided by an increase in accounts payable. These amounts were
partially offset by an increase of $15,268,000 in accounts receivable, a net
loss of $3,998,000, an increase of $3,971,000 in deferred income tax benefit,
and a decrease of $1,831,000 in accrued expenses.
Accounts receivable (net) at June 30, 1999 increased by $10,673,000, or
32.8%, from the amount at June 30, 1998 primarily due to the acquisition of
Filofax.
Inventories increased by $4,751,000, or 12.6%, from the June 30, 1998
amount primarily because of the inventories of Filofax, which the Company
acquired during fiscal 1999, which amount was partially offset by a decrease in
inventories at the parent company.
Of the $98,513,000 net amount used in the Company's investing
activities, $88,017,000 was used to acquire Filofax and $10,495,000 was used to
acquire primarily machinery and equipment and secondarily computer equipment and
software.
Of the $87,640,000 net amount provided by the Company's financing
activities, $89,924,000 was due to an increase in net borrowings on the line of
credit. This amount was partially offset by $1,490,000 that was used to
repurchase 96,000 shares of the Company's Common Stock and $1,200,000 that was
used for the payment of financing fees in connection with the line of credit.
Bank Loans. 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 voluntarily reduced to $145,000,000, and unamortized financing fees
of approximately $84,000 were charged to interest expense. The loan facility was
syndicated with a group of banks in December 1998. Borrowings bore interest
either at floating 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 fixed
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 remains outstanding, together with a margin. During the year ended
June 30, 1999, the weighted-average interest rate was 6.33%. During the year
ended June 30, 1999, under the terms of the Loan Agreement, the Company paid
Wells Fargo a financing fee of $1,200,000, $205,000 of which was expensed in the
fiscal year ended June 30, 1999. At June 30, 1999, the Company had $105,317,000
outstanding under this Loan Agreement and had outstanding letters of credit
totaling approximately $218,000.
On June 29, 1999, the Company obtained from the banks a waiver of the
fixed charge coverage ratio and the funded debt ratio covenants for the quarter
ended June 30, 1999. The waiver was subsequently extended through October 15,
1999. On October 12, 1999, the Company and the banks amended the Loan Agreement
(the "Amended and Restated Loan Agreement"). The Amended and Restated Loan
Agreement converts the entire outstanding revolving loan balance into a term
loan portion of $90,400,000 and a revolving credit loan portion of $29,600,000.
The term loan matures on September 30, 2001, and the revolving credit loan
facility matures on October 9, 2000. The maturity date of the revolving credit
loan facility will be automatically extended through September 30, 2001,
provided that the Company achieves on September 30, 2000 a minimum EBITDA, a
minimum fixed charge coverage ratio and a maximum senior funded debt ratio, as
defined in the amended agreement. As a result, unamortized financing fees on the
Loan Agreement of approximately $955,000 will be charged to interest expense in
October 1999.
The Amended and Restated Loan Agreement is secured by the Company's
assets and includes, among other things, financial covenants requiring the
maintenance of a minimum fixed charge coverage ratio, EBITDA, stockholders'
equity and current ratio, and a maximum senior funded debt coverage ratio and
operating expenses to net sales ratio, as defined in the amended agreement. The
Amended and Restated Loan Agreement also limits, among other things, the
incurrence of liens and other indebtedness, mergers, consolidations, the sale of
assets, annual capital expenditures, advances, investments and loans by the
Company and its subsidiaries, dividends, stock repurchases and certain
transactions with affiliates. It permits up to $10,000,000 of secured debt for
currency hedging purposes and up to $1,500,000 of unsecured overdraft borrowings
for foreign subsidiaries.
The outstanding balances bear interest at the Company's election at
either (i) the higher of the Agent Bank's prime rate or the Federal Funds Rate
plus 50.00 basis points, plus an interest rate margin ranging from 12.50 to
200.00 basis points, or (ii) the applicable eurodollar rate plus an interest
rate margin ranging from 112.50 to 300.00 basis points, depending on the level
of the funded debt ratio at the end of each fiscal quarter.
Under the Amended and Restated Loan Agreement, the Company is obligated
to pay certain fees including an unused revolving loan commitment fee ranging
from 37.50 to 67.50 basis points which varies with the level of the funded debt
ratio at the end of each fiscal quarter, payable quarterly in arrears; letter of
credit fees ranging from 112.50 to 300.00 basis points which vary with the level
of the funded debt ratio at the time the letter of credit is issued; and
amendment and other standard fees which are currently estimated at approximately
$1,500,000.
Foreign Currency. 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 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 for 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.
Adequacy of Capital. The Company believes that cash flow from
operations, vendor credit, its existing working capital and its term and
revolving credit loans will be sufficient to satisfy the Company's anticipated
cash requirements at least through fiscal 2000. 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 and has
substantially completed the remediation phase for all its major business
systems. The Company expects the remediation, applicable testing and
verification phases to be complete by November 30, 1999. The Company believes
that its modification of existing software and conversions to new software for
certain tasks will 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 $2,500,000, of which
approximately $1,945,000 had been incurred as of June 30, 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. Although the Company believes its
internal systems are year 2000 compliant, there can be no guarantee 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.
The Company has been surveying its vendors, customers and others on
whom it relies to assess their state of year 2000 readiness. As of October 1,
1999, the Company has: defined Day Runner's year 2000 compliance definition;
sent year 2000 questionnaires; advised critical suppliers and customers as to
Day Runner's year 2000 readiness; and received responses from a large portion of
these parties. There can be no assurance, however, that the systems of any
outside party on which the Company's systems rely will also be compliant or that
any failure to be compliant in this area by one or more of these parties will
not have an adverse effect on the Company's systems.
Suppliers of Raw Materials, Product Components and Finished Goods. The
Company has been assessing the year 2000 readiness of its significant suppliers.
A large portion have responded that their year 2000 readiness plans are complete
or that they plan to be year 2000 compliant prior to December 31, 1999.
Potential Materially Adverse Impact and Contingency Plans. The
` failure of multiple significant suppliers to supply raw materials,
product components, finished goods and ancillary goods for a
prolonged period could substantially impair the Company's ability to
ship product to its customers in a timely and reliable manner and
could, thus, have a materially adverse effect on the Company's
business. The Company does not have a basis at this time to determine
whether such a scenario is likely to occur.
The Company is therefore continuing to develop contingency plans to
cope with potential year 2000 failure on the part of its significant suppliers.
The contingency plans include, where appropriate, (1) placing orders for the
receipt of products prior to potential business disruptions; (2) defining
alternate sources for suppliers who are determined to be at a high risk of
noncompliance or business disruption; and (3) defining manual work processes.
Suppliers of Other Goods and Services. In addition, the Company has
identified and has been contacting its suppliers of business-critical goods and
services and has received responses from a large portion of these parties.
Potential Materially Adverse Impact and Contingency Plans. The failure
in one or more geographic regions of third-party systems over which
the Company has no control and for which the Company has no ready
substitute, such as, but not limited to, power and telecommunications
service could make it necessary for the Company to temporarily close
facilities in the affected geographic areas and have additional
materially adverse effects on the Company's business. The Company
is developing appropriate contingency plans for any business-critical
supplier that does not provide an adequate response to the Company
concerning its year 2000 readiness on a timely basis and has in place
a business resumption plan that addresses recovery from various
types of disasters, including significant interruptions to data flows
and to distribution capabilities at the Company's major U.S.
distribution centers.
The Company has made the necessary preparations for the execution of
this contingency plan. However, there can be no assurance that the
Company will be able to complete its contingency preparations on that
schedule.
EFFECTS OF INFLATION
The Company believes that inflation has not had a material
effect on its operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The primary risk inherent in the Company's market sensitive
instruments is the risk of loss resulting from interest rate fluctuations. The
Company's term and revolving credit loans bear interest either at the Company's
election at (i) the higher of the Agent Bank's prime rate or the Federal Funds
Rate plus 50.00 basis points, plus an interest rate margin ranging from 12.50 to
200.00 basis points, or (ii) the applicable euro dollar rate plus an interest
rate margin ranging from 112.50 to 300.00 basis points, depending on the level
of the funded debt ratio at the end of each fiscal quarter. The table below
provides information as of June 30, 1999 about the Company's long-term liability
obligations that are sensitive to changes in interest rates, including principal
cash flows by scheduled maturity, weighted-average interest rate and estimated
fair value. The weighted-average interest rates presented are the rates as of
June 30, 1999 as calculated under the Amended and Restated Loan Agremeent.
PRINCIPAL MATURING IN
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
(Dollars in thousands)
Term and revolving
credit loans $105,317 $105,317 $105,317
Average interest rate 9.30%
Other debt:
Loan notes $ 2,077 $251 $ 2,328 $ 2,328
Average interest rate 4.80%
The Company's future earnings and cash flows relating to market
sensitive instruments are primarily dependent upon prevailing market interest
rate. Based upon the Company's borrowing mix as of June 30, 1999, a 1% increase
or decrease in the interest rates would increase or decrease pretax earnings and
cash flow by approximately $1,100,000.
FOREIGN CURRENCY EXPOSURE
The Company's reporting currency is the U.S. dollar, and interest and
principal payments on its long-term debts will be in U.S. dollars and pounds
Sterling. A portion of revenues and operating costs are derived from sales and
operations outside the United States and are incurred in a number of different
currencies. Accordingly, fluctuations in currency exchange rates may have a
significant effect on the Company's results of operations and balance sheet
data. The Company has no significant exposure from financial instruments which
would require quantitative disclosure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Consolidated Financial Statements of the Company and its
subsidiaries included herein and listed in Item 14(a) of this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Inapplicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on December 9, 1999, entitled "Election of Directors"
and "Executive Officers," to be filed with the Commission.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on December 9, 1999, entitled "Election of Directors
- -- Compensation of Directors," "Executive Compensation and Other Information,"
"Compensation Committee Report on Executive Compensation" and "Performance
Graph," to be filed with the Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item is incorporated by reference to
the section of the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on December 9, 1999, entitled "Common Stock Ownership
of Principal Stockholders and Management," to be filed with the Commission.
ITEM 13. CERTAIN TRANSACTIONS.
The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on December 9, 1999, entitled "Election of Directors
- -- Compensation of Directors" and "Certain Relationships and Related
Transactions," to be filed with the Commission.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
1. CONSOLIDATED FINANCIAL STATEMENTS PAGE
Independent Auditors' Report F-1
Consolidated Balance Sheets at June 30, 1999 and
1998 F-2
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended June 30, 1999 F-3
Consolidated Statements of Stockholders' Equity for Each
of the Three Years in the Period Ended June 30, 1999 F-4
Consolidated Statements of Cash Flows for Each of the
Three Years in the Period Ended June 30, 1999 F-5
Notes to Consolidated Financial Statements F-6
2. FINANCIAL STATEMENT SCHEDULES
Independent Auditors' Report S-1
Schedule II - Valuation and Qualifying Accounts S-2
Schedules which are not listed above have been omitted
because they are not applicable or the information
required to be set forth therein is included in the
Consolidated Financial Statements or notes thereto.
3. LIST OF EXHIBITS
3.1 Certificate of Incorporation of the Registrant,
as amended(1)
3.2 Bylaws of the Registrant(2)
10.1 Amended and Restated 1986 Stock Option Plan, including forms of
Stock Option Agreements and Stock Purchase Agreement(3)
and Amendment Nos. 1(4), 2(5), 3(5) and 4(6) thereto
dated July 17, 1992, February 28, 1993, May 10, 1993 and
May 12, 1994, respectively(7)
10.2 1995 Stock Option Plan, including forms of Stock Option Agreements(8)
and Amendment Nos. 1(9), 2(10) and 3(11) thereto dated
October 21, 1996, September 19, 1997 and September 15,
1998, respectively(7)
10.3 Employee Stock Purchase Plan(3) and Amendment No. 1 thereto dated
July 17, 1992(4)(7)
10.4 Day Runner Restated 401(k) Plan effective as of July 1, 1998 and Trust
Agreement effective as of July 1, 1998 between the
Registrant and New York Life Trust Company(7)(12)
10.5 Non-Employee Director Stock Option Plan, including form of Stock
Option Agreement(7)(11)
10.6 Fiscal 1999 Officer Bonus Plan(7)(12)
10.7 Officer Severance Plan effective as of
February 28, 1993, including form of
Employment Separation Agreement(13) and
First Amendment thereto effective as of
August 17, 1998(7)(12)
10.8 Credit Agreement dated as of February 1, 1998
between the Registrant and Wells Fargo Bank,
National Association, including Revolving Line
of Credit Note(14)
10.9 Triple Net Lease, as amended, effective as of
March 22, 1991 between Catellus Development
Corporation and the Registrant and as amended
by Lease Amendment dated June 29, 1992(15)
10.10 Triple Net Lease dated July 28, 1992 between
Catellus Development Corporation and the
Registrant(13)
10.11 Koll Business Center Lease dated September 7, 1994 between the
Registrant and Koll Alton Plaza and Aetna Life Insurance Co.(16)
10.12 Standard Commercial Lease Agreement dated as of July 31, 1996
between System Realty Nine, Inc. and the Registrant(16)
10.13 Standard Commercial Lease Agreement dated
as of October 1, 1997 between RDC Sales and
the Registrant(12)
10.14 Standard Commercial Lease Agreement dated as of May 11, 1998
between GPM Real Property Ltd. And Endow Inc. and the
Registrant(12)
10.15 Lease Agreement dated as of April 2, 1999 between Mrs. Refugio Victoria
Geffroy De Flourie and Mr. David Bramzon Stengel and the
Registrant
10.16 Form of Warrant dated April 20, 1998 to purchase
shares of the Registrant's Common Stock issued to
certain directors and officers of the Registrant(3)
and Schedule of Warrants(7)(12)
10.17 Form of Warrant dated August 19, 1997 to purchase shares of the
Registrant's Common Stock issued to certain officers of
the Company and Schedule of Warrants(7)(18)
10.18 Form of Stock Purchase Agreement dated August 27, 1997
and Schedule of Sellers(18)
10.19 Form of Warrant dated April 20, 1998 to
purchase shares of the Registrant's Common
Stock issued to the non-employee directors
of the Company and Schedule of
Warrants(7)(12)
10.20 First Amendment to Consulting Agreement effective April 22, 1999
between the Registrant and Alan R. Rachlin(7)
10.21 Consulting Agreement effective May 22, 1999 between the Registrant
and Mr. Alan R. Rachlin(7)
10.22 Revolving Loan Agreement dated September 23, 1998 between the
Registrant, Day Runner UK plc, Ultima Distribution Inc.
and Wells Fargo Bank, National Association, including
Revolving Line of Credit Note(20)
10.23 Amended and Restated Loan Agreement dated as of
September 30, 1999 among the Registrant, Day Runner UK plc,
Filofax Limited, the Lenders named therein and Wells Fargo Bank,
National Association, including Revolving and Term Loan Notes.
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed or required to be filed by the
Registrant during the fourth quarter of the fiscal year ended June 30,
1999.
(C) EXHIBITS
See the list of Exhibits under Item 14(a)3 of this Annual Report on
Form 10-K.
(D) FINANCIAL STATEMENT SCHEDULES
See the list of Schedules under Item 14(a)2 of this Annual Report on
Form 10-K.
- ------------------------
(1) Incorporated by reference to the Registrant's 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-1 (Registration No. 33-45391) filed with the Commission on
January 30, 1992.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-53422) filed with the Commission on
October 15, 1992.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-19835) filed with the Commission on August 16, 1993.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-84036) filed with the Commission on
September 15, 1994.
(7) Constitutes a management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of this
Annual Report on Form 10-K.
(8) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-80819) filed with the Commission on
December 22, 1995.
(9) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-20247) filed with the Commission on
January 23, 1997.
(10) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-44627) filed with the Commission on
January 21, 1998.
(11) 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.
(12) Incorporated by reference to Registrant's Annual Report on Form 10-K
(File No. 0-19835) filed with the Commission on October 1, 1998.
(13) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-19835) filed with the Commission on March 31, 1993.
(14) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-19835) filed with the Commission on February 17, 1998.
(15) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-19835) filed with the Commission on March 21, 1993.
(16) Incorporated by reference to the Registrant's Transition Report on
Form 10-K (File No. 0-19835) filed with the Commission on
September 27, 1994.
(17) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-19835) filed with the Commission on September 27,
1996.
(18) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-19835) filed with the Commission on September 29,
1997.
(19) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-19835) filed with the Commission on November 13, 1997.
(20) Incorporated by reference to the Registrant's Current Report on Form
8-K (File No. 0-19835) filed with the Commission on September 24, 1998.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Irvine, California.
DAY RUNNER, INC.
By: /s/ James E. Freeman, Jr.
-------------------------------
James E. Freeman, Jr.
Chief Executive Officer
Dated: October 13, 1999
Pursuant to the requirements of the Securities Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Mark A. Vidovich Chairman of the Board October 13, 1999
-------------------------------
Mark A. Vidovich
/s/ James E. Freeman, Jr. Chief Executive Officer October 13, 1999
------------------------------- (Principal Executive Officer)
James E. Freeman, Jr.
/s/ Dennis K. Marquardt Executive Vice President, October 13, 1999
-------------------------------- Finance & Administration and
Dennis K. Marquardt Chief Financial Officer
(Principal Financial Officer
and Accounting Officer)
/s/ James P. Higgins Director October 13, 1999
---------------------------------
James P. Higgins
/s/ Jill Tate Higgins Director October 13, 1999
----------------------------------
Jill Tate Higgins
/s/ Charles Miller Director October 13, 1999
-----------------------------------
Charles Miller
/s/ Alan R. Rachlin Director October 13, 1999
-----------------------------------
Alan R. Rachlin
/s/ Boyd I. Willat Director October 13, 1999
------------------------------------
Boyd I. Willat
/s/ Felice Willat Director October 13, 1999
-------------------------------------
Felice Willat
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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended June 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Day Runner, Inc. and subsidiaries
as of June 30, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1999 in
conformity with generally accepted accounting principles.
Los Angeles, CA
October 12, 1999
F-1
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
JUNE 30,
1999 1998
--------- ---------
Current assets:
Cash and cash equivalents...................................................... $ 9,132 $ 2,923
Accounts receivable (less allowance for doubtful accounts and sales returns
and other allowances of $11,481 and $9,942 at
June 30, 1999 and 1998, respectively)....................................... 43,215 32,542
Inventories.................................................................... 42,361 37,610
Prepaid expenses and other current assets...................................... 4,506 1,670
Income taxes receivable........................................................ 434 2,606
Deferred income taxes.......................................................... 11,189 7,218
--------- --------
Total current assets........................................................ 110,837 84,569
Property and equipment, net ....................................................... 17,851 11,888
Goodwill and other intangible assets (net of accumulated amortization of $1,934
and $108 at June 30, 1999 and 1998, respectively).............................. 85,830 3,564
Other assets (net of accumulated amortization of $410 and $60 at June 30, 1999
and 1998, respectively)....................................................... 1,793 1,158
--------- --------
TOTAL ............................................................................ $216,311 $101,179
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit................................................................ $ 2,716
Accounts payable............................................................... $ 18,722 9,969
Accrued expenses............................................................... 19,547 13,962
Loan notes..................................................................... 2,077
--------- --------
Total current liabilities................................................... 40,346 26,647
--------- --------
Long-term liabilities:
Line of credit................................................................. 105,317
Loan notes..................................................................... 251
---------
Total long-term liabilities................................................. 105,568
---------
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; 13,718,524
shares issued and 11,900,736 shares outstanding at June 30, 1999;
13,677,386
shares issued and 11,955,598 shares outstanding at June 30, 1998)............ 14 14
Additional paid-in capital..................................................... 21,709 21,813
Retained earnings.............................................................. 61,078 65,076
Cumulative translation adjustment.............................................. 954 102
Treasury stock - At cost (787,858 and 732,996 shares at June 30, 1999 and
1998, respectively).......................................................... (13,358) (12,473)
--------- --------
Total stockholders' equity.................................................. 70,397 74,532
--------- --------
TOTAL ............................................................................ $216,311 $101,179
======== ========
See accompanying notes to consolidated financial statements.
F-2
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED JUNE 30,
1999 1998 1997
--------- ---------- ---------
Net sales................................................... $ 196,212 $ 167,841 $ 127,376
Cost of goods sold.......................................... 108,087 80,663 60,452
--------- --------- ---------
Gross profit................................................ 88,125 87,178 66,924
--------- --------- ---------
Operating expenses:
Selling, marketing and distribution..................... 62,180 43,193 31,673
General and administrative.............................. 26,445 18,416 14,451
Costs related to activities associated with the
Filofax acquisition.................................. 1,072
Costs incurred in pursuing acquisitions................. 1,451
--------- --------- ---------
Total operating expenses.................................... 89,697 61,609 47,575
--------- --------- ---------
(Loss) income from operations............................... (1,572) 25,569 19,349
--------- --------- ---------
Interest expense (income):
Interest income......................................... (340) (390) (1,431)
Interest expense........................................ 5,555 218 130
--------- --------- ---------
Net interest expense (income)............................... 5,215 (172) (1,301)
--------- --------- ---------
(Loss) income before (benefit) provision for income taxes... (6,787) 25,741 20,650
(Benefit) provision for income taxes........................ (2,789) 9,833 8,102
--------- --------- ---------
Net (loss) income........................................... $ (3,998) $ 15,908 $ 12,548
========= ========= =========
(Loss) earnings per common share:
Basic................................................ $ (0.34) $ 1.38 $ 1.01
======== ========= ========
Diluted.............................................. $ (0.34) $ 1.27 $ 0.95
======== ========= ========
Weighted-average number of common shares outstanding:
Basic................................................ 11,896 11,533 12,432
========= ========= =========
Diluted.............................................. 11,896 12,523 13,182
========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
ADDITIONAL
COMMON STOCK PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
----------- --------------- ---------------- --------
Balance, July 1, 1996....................... 12,609,542 $ 12 $ 22,863 $ 36,620
Treasury stock.............................. (1,026,200)
Exercis of warrants........................ 11,000 22
Exercise of options......................... 108,316 1 139
Tax benefit of options...................... 157
Compensation cost associated with
warrant grant........................... 50
Comprehensive income:
Net income............................... 12,548
Other comprehensive income -
foreign currency translation adjustments
Comprehensive income........................
----------- -------- --------- ----------
Balance, June 30, 1997...................... 11,702,658 13 23,231 49,168
Treasury stock.............................. (695,588)
Exercise of warrants........................ 278,000 (2,932)
Exercise of options......................... 670,528 1 (3,927)
Tax benefit of options...................... 5,208
Compensation cost associated with
warrant grant........................... 233
Comprehensive income:
Net income............................... 15,908
Other comprehensive income -
foreign currency translation adjustments
Comprehensive income........................
------------ -------- --------- ----------
Balance, June 30, 1998...................... 11,955,598 14 21,813 65,076
Treasury stock.............................. (96,000)
Exercise of options......................... 41,138 (199)
Tax benefit of options...................... 20
Compensation cost associated with
warrant grant........................... 75
Comprehensive income:
Net loss................................. (3,998)
Other comprehensive income -
foreign currency translation adjustments
Comprehensive income........................
------------ -------- --------- ----------
Balance, June 30, 1999...................... 11,900,736 $ 14 $ 21,709 $ 61,078
========== ======== ========= ==========
1
ACCUMULATED
OTHER TREASURY STOCK
INCOME INCOME SHARES AMOUNT
----------------- -------------- -------- ---------
Balance, July 1, 1996....................... $ 3
Treasury stock.............................. (1,026,200) $(13,541)
Exercise of warrants........................
Exercise of options......................... 40,264 521
Tax benefit of options......................
Compensation cost associated with
warrant grant...........................
Comprehensive income:
Net income............................... $12,548
Other comprehensive income - 89 89
foreign currency translation adjustments -------
Comprehensive income........................ $12,637
=======
Balance, June 30, 1997...................... 92 (985,936) (13,020)
Treasury stock.............................. (695,588) (11,564)
Exercise of warrants........................ 278,000 3,605
Exercise of options......................... 670,528 8,506
Tax benefit of options......................
Compensation cost associated with
warrant grant...........................
Comprehensive income:
Net income............................... $15,908
Other comprehensive income -
foreign currency translation adjustments 10 10
--- ---
Comprehensive income........................ $15,918
=======
Balance, June 30, 1998...................... 102 (732,996) (12,473)
Treasury stock.............................. (96,000) (1,490)
Exercise of options......................... 41,138 605
Tax benefit of options......................
Compensation cost associated with
warrant grant...........................
Comprehensive income:
Net loss................................. $ (3,998)
Other comprehensive income -
foreign currency translation adjustments 852 852
--- ---
Comprehensive income........................ $ (3,146)
========
-------- --------
Balance, June 30, 1999...................... $954 (787,858) $(13,358)
==== ======== ========
See accompanying notes to consolidated financial statements.
F-4
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30,
1999 1998 1997
--------- ---------- ----------
Cash flows from operating activities:
Net (loss) income....................................... $ (3,998) $ 15,908 $12,548
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:.......
Depreciation and amortization......................... 10,240 5,517 3,869
Provision for doubtful accounts and sales returns
and other allowances................................. 19,039 9,799 14,264
Loss on disposal of property and equipment.................. 199
Write-off of barter credits............................. 200
Utilization of barter credits........................... 100
Compensation expense related to issuance of warrants........ 75 233 50
Deferred income tax benefit............................. (3,971) (832) (1,186)
Changes in operating assets and liabilities, net of
acquisition of businesses:
Accounts receivable................................. (15,268) (17,899) (15,103)
Inventories ............................................... 7,432 (11,050) (3,294)
Prepaid expenses and other current assets................... (813) 595 (689)
Income taxes receivable..................................... 968 2,087 1,930
Accounts payable.................................... 4,508 (725) 225
Accrued expenses............................................ (1,831) 3,755 (872)
Income taxes payable........................................ (453) 1,206
-------- --------- -------
Net cash provided by operating activities......... 16,580 7,035 13,148
-------- -------- -------
Cash flows from investing activities:
Acquisition of businesses............................... (88,017) (4,626)
Acquisition of property and equipment....................... (10,495) (7,175) (4,972)
Other assets............................................ (1) (110) 5
-------- -------- --------
Net cash used in investing activities............... (98,513) (11,911) (4,967)
-------- -------- -------
Cash flows from financing activities:
Net borrowings (repayments) under lines of credit....... 89,924 (338) 452
Financing fees.......................................... (1,200)
Repayment under long-term liabilities................... (990)
Repayment under capital lease obligations............... (58) (13)
Exercise of warrants.................................... 673 22
Exercise of options......................................... 406 4,580 661
Repurchase of common stock.............................. (1,490) (11,564) (13,541)
-------- -------- -------
Net cash provided by (used in) financing activities. 87,640 (7,697) (12,419)
-------- -------- -------
Effect of exchange rate changes on cash and cash equivalents 502 (54) 23
-------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 6,209 (12,627) (4,215)
Cash and cash equivalents, beginning of year................ 2,923 15,550 19,765
-------- -------- -------
Cash and cash equivalents, end of year...................... $ 9,132 $ 2,923 $15,550
======== ======== =======
See accompanying notes to consolidated financial statements.
F-5
DAY RUNNER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Day Runner, Inc. and subsidiaries (the "Company") develop, manufacture,
and market paper-based organizers for the retail market. The Company also
develops, manufactures and markets a number of related organizing products,
including telephone/address books, business accessories, products for students
and organizing and other wallboards. A substantial portion of the Company's
sales is to office products and mass market retailers throughout the United
States and to a variety of retailers abroad. The Company grants credit to
substantially all of its customers.
CONSOLIDATION - The consolidated financial statements include the
accounts of the Company 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 the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS - The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to concentration of credit risk consist principally of cash
equivalents and accounts receivable.
The Company places its cash equivalents with various financial
institutions and, by policy, limits the amount of credit exposure to any one
financial institution. The Company believes that no significant credit risk
exists, as these investments are made with high quality financial institutions.
In fiscal 1999, sales to four customers accounted for 25%, 13%, 11% and
11% of the Company's net sales. In fiscal 1998, sales to four customers
accounted for 28%, 16%, 15% and 14% of the Company's net sales. In fiscal 1997,
sales to four customers accounted for 25%, 15%, 14% and 11% of the Company's net
sales.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value due to the short-term nature of these instruments.
The carrying value of the Company's line of credit at June 30, 1999
approximates fair value. The fair values were estimated by discounting the
future cash flows using rates currently available to the Company for debt
instruments with similar terms and remaining maturities.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
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. 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.
GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill represents the excess
of the purchase price over the fair value of net assets acquired in business
combinations and is amortized using the straight-line method over periods
ranging from 20 to 35 years. Other intangible assets consist of trade names
acquired in business combinations and are amortized using the straight-line
method over periods ranging from 15 to 40 years.
OTHER ASSETS - Other assets consist of financing fees and a
non-competition agreement. Financing fees represent fees in connection with a
loan agreement and are amortized using the straight-line method over the
remaining term of the loan agreement (see Note 7). The non-competition agreement
is amortized using the straight-line method over five years.
IMPAIRMENT OF LONG-LIVED ASSETS - The Company evaluates long-lived
assets for impairment whenever events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. If the estimated future
cash flows (undiscounted and without interest charges) are less than the
carrying value, a write-down would be recorded to reduce the related carrying
value of the asset to its estimated fair value.
INCOME TAXES - Income taxes are recognized for (a) the amount of income
taxes payable or refundable for the current period and (b) deferred income tax
assets and liabilities for the future tax consequences of events that have been
recognized in the Company's financial statements or income tax returns. The
effects of income taxes are measured based on enacted tax laws and rates. A
valuation allowance is established, when necessary, to reduce deferred income
tax assets to the amount expected to be realized.
FOREIGN CURRENCY TRANSLATION - Balance sheet accounts for foreign
operations are translated at the exchange rate at the balance sheet date, and
statement of operations accounts are translated at the weighted-average exchange
rate for the year. Resulting translation adjustments are included in accumulated
other comprehensive income. Transaction gains and losses included in (loss)
income were not significant during the years ended June 30, 1999, 1998 and 1997.
NET SALES - Revenue is recognized upon shipment of product to the
customer, with allowances for estimated returns, rebates and other allowances.
NEW ACCOUNTING PRONOUNCEMENT - In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
is effective for all fiscal quarters of all fiscal years beginning after June
15, 2000, which will be September 30, 2000 for the Company. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
collectively referred to as derivatives, and for hedging activities. SFAS No.
133 requires the recognition of all derivatives as either assets or liabilities
in the statement of financial position and the measurement of those instruments
at fair value. The Company expects that the adoption of SFAS No. 133 will not
have a material impact on the Company's financial position or results of
operations.
RECLASSIFICATIONS - Certain reclassifications were made to the prior
year financial statements to conform to the current year presentation.
2. ACQUISITIONS
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 Filofax stock. The Company
acquired all the remaining outstanding shares of Filofax on December 26, 1998.
This acquisition was accounted for under the purchase method of accounting.
The total purchase price of $92,803,000, which includes costs of the
transaction, was paid in cash and Loan Notes (see Note 8). The Company borrowed
the cash portion of this amount under a loan agreement with a group of banks
(see Note 7).
The following table sets forth the unaudited proforma condensed
combined statements of operations data for the years ended June 30, 1999 and
1998 as if the acquisition had occurred on July 1, 1997 (dollars in thousands):
YEARS ENDED JUNE 30,
1999 1998
------------ -----------
Net sales $220,904 $231,190
(Loss) income before (benefit) provision for income taxes $ (4,413) $ 27,040
Net (loss) income $ (2,603) $ 16,495
(Loss) earnings per common share:
Basic $ (0.22) $ 1.43
Diluted $ (0.22) $ 1.32
Weighted average number of common shares outstanding:
Basic 11,896 11,533
Diluted 11,896 12,523
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.
On October 1, 1997, the Company purchased substantially all of the
operating assets of Ram Manufacturing, Inc. ("Ram"), an Arkansas-based
developer, manufacturer and marketer of wallboards. The purchase price was
approximately $2,400,000. The Company also assumed certain liabilities totaling
approximately $3,000,000. In addition, contingent payments may be paid through
December 31, 2000, 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 the Company. The purchase
price was approximately $2,546,000. In addition, contingent payments may be paid
through December 31, 1999, based on Timeposters' operating performance during
that period.
3. 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,
1999 1998
---------- ---------
Raw materials................... $ 12,026 $ 14,087
Work in process................. 2,138 831
Finished goods.................. 28,197 22,692
---------- ---------
Total....... $ 42,361 $ 37,610
========== =========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
JUNE 30,
1999 1998
---------- ---------
Displays............................................ $ 11,653 $ 9,003
Data processing equipment and software.............. 14,697 8,785
Machinery and equipment............................. 11,915 6,705
Leasehold improvements.............................. 5,106 2,229
Vehicles............................................ 715 250
---------- ---------
Total........................... 44,086 26,972
Accumulated depreciation and amortization........... (26,235) (15,084)
---------- ---------
Property and equipment - net........................ $ 17,851 $ 11,888
========== =========
5. 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 pounds 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 year ended June 30, 1999, the Company expensed $765,000 to operating
expenses for the call option. At June 30, 1999, the Company had not
entered into any additional foreign currency instruments. The Company
does not trade in financial instruments nor does it enter into such
contracts for speculative purposes.
6. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
JUNE 30,
1999 1998
-------- ---------
Accrued sales and promotion costs.................... $ 9,576 $ 7,473
Accrued payroll and related costs.................... 5,366 2,955
Other................................................ 4,605 3,534
-------- ---------
Total............................ $ 19,547 $ 13,962
======== =========
7. 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
voluntarily reduced to $145,000,000, and unamortized financing fees of
approximately $84,000 were charged to interest expense. The loan facility was
syndicated with a group of banks in December 1998. Borrowings bore interest
either at floating 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 fixed
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 remains outstanding, together with a margin. During the year ended
June 30, 1999, the weighted-average interest rate was 6.33%. During the year
ended June 30, 1999, under the terms of the Loan Agreement, the Company paid
Wells Fargo a financing fee of $1,200,000, $205,000 of which was expensed in the
fiscal year ended June 30, 1999. At June 30, 1999, the Company had $105,317,000
outstanding under this Loan Agreement and had outstanding letters of credit
totaling approximately $218,000.
On June 29, 1999, the Company obtained from the banks a waiver of the
fixed charge coverage ratio and the funded debt ratio covenants for the quarter
ended June 30, 1999. The waiver was subsequently extended through October 15,
1999. On October 12, 1999, the Company and the banks amended the Loan Agreement
(the "Amended and Restated Loan Agreement"). The Amended and Restated Loan
Agreement converts the entire outstanding revolving loan balance into a term
loan portion of $90,400,000 and a revolving credit loan portion of $29,600,000.
The term loan matures on September 30, 2001, and the revolving credit loan
facility matures on October 9, 2000. The maturity date of the revolving credit
loan facility will be automatically extended through September 30, 2001,
provided that the Company achieves on September 30, 2000 a minimum EBITDA, a
minimum fixed charge coverage ratio and a maximum senior funded debt ratio, as
defined in the amended agreement. As a result, unamortized financing fees on the
Loan Agreement of approximately $955,000 will be charged to interest expense in
October 1999.
The Amended and Restated Loan Agreement is secured by the Company's
assets and includes, among other things, financial covenants requiring the
maintenance of a minimum fixed charge coverage ratio, EBITDA, stockholders'
equity and current ratio, and a maximum senior funded debt coverage ratio and
operating expenses to net sales ratio, as defined in the amended agreement. The
Amended and Restated Loan Agreement also limits, among other things, the
incurrence of liens and other indebtedness, mergers, consolidations, the sale of
assets, annual capital expenditures, advances, investments and loans by the
Company and its subsidiaries, dividends, stock repurchases and certain
transactions with affiliates. It permits up to $10,000,000 of secured debt for
currency hedging purposes and up to $1,500,000 unsecured overdraft borrowings
for foreign subsidiaries.
The outstanding balances bear interest at the Company's election at
either (i) the higher of the Agent Bank's prime rate or the Federal Funds Rate
plus 50.00 basis points, plus an interest rate margin ranging from 12.50 to
200.00 basis points, or (ii) the applicable eurodollar rate plus an interest
rate margin ranging from 112.50 to 300.00 basis points, depending on the level
of the funded debt ratio at the end of each fiscal quarter.
Under the Amended and Restated Loan Agreement, the Company is obligated
to pay certain fees including an unused revolving loan commitment fee ranging
from 37.50 to 67.50 basis points which varies with the level of the funded debt
ratio at the end of each fiscal quarter, payable quarterly in arrears; letter of
credit fees ranging from 112.50 to 300.00 basis points which vary with the level
of the funded debt ratio at the time the letter of credit is issued; and
amendment and other standard fees which are currently estimated at approximately
$1,500,000.
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.
8. LOAN NOTES
Loan Notes in the amount of (pound)1,477,000 (US $2,328,000) were
issued in connection with the Filofax acquisition, are unsecured obligations of
the Company's U.K. subsidiary and bear interest at LIBOR (5.90% at June 30,
1999) less 1%. 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. As of September
30, 1999, (pound)1,318,000 (US $2,077,000) of the Loan Notes had been redeemed.
9. LEASES
The Company has five noncancelable operating leases for its principal
operating facilities and its corporate headquarters. The leases expire through
2006. 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 May 2003.
Future minimum lease payments under the operating leases at June 30,
1999 are summarized as follows (in thousands):
YEARS ENDING JUNE 30,
2000.................................................... $ 5,396
2001.................................................... 4,872
2002.................................................... 2,781
2003.................................................... 1,712
2004.................................................... 868
Thereafter.............................................. 1,634
----------
Total future minimum lease payments..................... $ 17,263
==========
Rent expense was $5,626,000, $4,025,000 and $3,841,000 for the years
ended June 30, 1999, 1998 and 1997, respectively.
10. INCOME TAXES
The components of (loss) income before (benefit) provision for income
taxes are as follows (in thousands):
YEARS ENDED JUNE 30,
1999 1998 1997
---------- --------- -----------
United States......................... $ (9,704) $ 22,856 $ 18,765
Other................................. 2,917 2,885 1,885
---------- ---------- ----------
Total.............................. $ (6,787) $ 25,741 $ 20,650
=========== ========== ==========
The (benefit) provision for income taxes consists of the following (in
thousands):
YEARS ENDED JUNE 30,
1999 1998 1997
---------- --------- ---------
Current:
Federal............................... $ (310) $ 8,565 $ 7,076
State................................. (8) 1,477 1,825
Foreign............................... 1,500 623 387
--------- --------- ---------
Total current........................... 1,182 10,665 9,288
--------- --------- ---------
Deferred:
Federal............................... (3,821) (920) (961)
State................................. (150) 88 (225)
---------- --------- ---------
Total deferred.......................... (3,971) (832) (1,186)
---------- --------- ---------
Total (benefit) provision
for income taxes...................... $ (2,789) $ 9,833 $ 8,102
========== ========= =========
Differences between the total income tax (benefit) provision and the
amount computed by applying the statutory federal income tax rate to (loss)
income before (benefit) provision for income taxes are as follows (in
thousands):
YEARS ENDED JUNE 30,
1999 1998 1997
----------- ----------- -----------
>
Computed tax expense using the
statutory federal income tax rate..... $ (2,375) $ 9,009 $ 7,228
(Decrease) increase in taxes arising
from:
State taxes, net of
federal benefit.................... (102) 769 1,000
Foreign earnings taxed at other
than federal statutory rate......... (79) (387) (273)
Foreign tax credit.................... (347)
Other................................. 114 442 147
---------- ---------- ---------
Total................................. $ (2,789) $ 9,833 $ 8,102
========== ========== =========
Effective income tax rate............... 41% 38% 39%
========== ========== =========
Total deferred income tax assets and liabilities consist of the
following (in thousands):
JUNE 30,
1999 1998
---------------- ----------------
Net operating loss carryback/carryforward $ 3,384
Allowance for sales returns 2,433 $ 2,918
Inventory obsolescence reserve 1,988 1,220
Allowance for doubtful accounts 1,041 1,074
State taxes 615
Sales programs 827 608
Other 1,975 1,368
--------- -------
Total deferred income tax assets 11,648 7,803
Deferred income tax liabilities (459) (585)
--------- -------
Total $ 11,189 $ 7,218
========= =========
Cumulative undistributed earnings of foreign subsidiaries for which no
deferred income taxes have been provided approximated $6,942,000 and $4,153,000
at June 30, 1999 and 1998, respectively. The additional income taxes payable on
the earnings of foreign subsidiaries, if remitted, would be offset by U.S.
income tax credits for foreign taxes paid.
11. EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the
weighted-average number of common shares outstanding for the year. Diluted
earnings per share are 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):
YEARS ENDED JUNE 30,
1999 1998 1997
------------ ------------- -------------
NET (LOSS) INCOME $ (3,998) $ 15,908 $ 12,548
=========== ========= ========
BASIC WEIGHTED-AVERAGE SHARES
Weighted-average number of
common shares outstanding 11,896 11,533 12,432
Effect of dilutive securities
Additional shares from the
Assumed exercise of
options and warrants 3,093 2,757
Shares assumed to be repurchased
under the treasury stock method (2,103) (2,007)
--------- --------- ------
DILUTED WEIGHTED-AVERAGE SHARES
Weighted-average number of
common shares outstanding and
common share equivalents 11,896 12,523 13,182
========= ========= ======
(LOSS) EARNINGS PER SHARE:
Basic $ (0.34) $ 1.38 $ 1.01
======== ======== =======
Diluted $ (0.34) $ 1.27 $ 0.95
======== ======== =======
For the year ended June 30, 1999, dilutive securities equivalent to
1,160,000 shares are not included as potential common shares because they are
antidilutive. During the years ended June 30, 1998 and 1997, there were no
antidilutive common share equivalents.
12. STOCK OPTION PLANS
Under the Company's 1995 Stock Option Plan (the "Plan"), an aggregate
of 1,925,000 shares of common stock is reserved for issuance to key employees,
including officers and directors 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, 1999, options covering 2,422,104 shares have been exercised and options
covering 1,002,646 shares remain outstanding. No additional options will be
granted under this plan.
During the years ended June 30, 1999, 1998 and 1997, certain officers
and employees exercised options to purchase an additional 17,040, 651,414 and
74,300 shares, respectively, of the Company's common stock for an aggregate of
$129,000, $4,278,000 and $381,000, respectively (see Note 15).
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, 1999, 1998 and 1997. This reduction totaled $20,000, $5,208,000 and
$157,000, 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, 1996........... 1,732,150 $ 6.85
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
Granted.......................... 444,000 18.94
Exercised........................ (17,040) 7.55
Cancelled........................ (116,500) 16.41
------------
Outstanding, June 30, 1999.......... 2,315,646 12.48 1,343,933 9.94
============
At June 30, 1999, 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- WEIGHTED- WEIGHTED-
NUMBER OF EXERCISE CONTRACTUAL NUMBER EXERCISE
RANGE OF OPTION EXERCISE PRICE OPTIONS PRICE LIFE EXERCISABLE PRICE
------------------------------ ------------ -------- ------------ ----------- ---------
$ 5.13 - $8.38 799,596 $ 6.68 4.84 720,408 $ 6.50
9.75 - 13.00 594,050 11.89 6.41 376,500 11.53
16.88 - 20.63 922,000 17.89 8.59 247,025 17.54
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 (loss)
income and (loss) earnings per common and common equivalent shares would have
been reduced to the pro forma amounts indicated below:
YEARS ENDED JUNE 30,
1999 1998 1997
---------- ---------- -----------
Net (loss) income:
As reported $ (3,998) $ 15,908 $ 12,548
Pro forma $ (6,694) $ 12,617 $ 11,094
(Loss) earnings per common and common equivalent shares:
As reported:
Basic $ (0.34) $ 1.38 $ 1.01
Diluted $ (0.34) $ 1.27 $ 0.95
Pro forma:
Basic $ (0.56) $ 1.09 $ 0.89
Diluted $ (0.56) $ 1.01 $ 0.84
The fair values of the options granted under the plans during fiscal
1999, 1998 and 1997 were estimated on the date of grant using the Black-Scholes
option-pricing model. The weighted-average fair values of the options at the
date of grant were $10.38, $9.03 and $14.53 during fiscal 1999, 1998 and 1997,
respectively. The following weighted-average assumptions for fiscal 1999, 1998
and 1997, respectively, were used: no dividend yield; volatility of 60.00%,
57.21% and 53.28%; risk-free interest rates of 5.245%, 5.877% and 6.246%; and
expected option lives of 4.85, 4.74 and 6.05 years. Pro forma compensation cost
of options granted under the Employee Stock Purchase Plan is measured based on
the discount from market value (see Note 14).
On September 7, 1999, the Company issued options to key employees to
purchase 417,500 shares of the Company's common stock at $9.0625 per share. The
options vest over a period of five years and expire in 2009.
13. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
In November 1998, the Company authorized a non-employee director stock
option plan. The terms of the options are determined at the time of grant. No
options may be granted after November 22, 2008. Options typically become
exercisable one year from the date of issuance and have terms up to 10 years.
During the year ended June 30, 1999, the Board of Directors and
stockholders approved the issuance of options to purchase 50,000 shares of the
Company's common stock. Such options were granted at a price of $22.125 per
share, vest over a period of one year and expire in November 2008.
A summary of option activity is as follows:
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE OPTIONS EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
------- ----- ----------- -----
Granted............................. 50,000 $22.125
------------
Outstanding, June 30, 1999.......... 50,000 22.125 25,000 $22.125
============
14. 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,
1999, 1998 and 1997, employees purchased an aggregate of 24,098, 19,114 and
34,016 shares of common stock for $277,000, $302,000 and $280,000, 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 13).
15. WARRANTS
During the years ended June 30, 1998 and 1997, the Board of Directors
approved the issuance of warrants to purchase an aggregate of 515,000 shares of
the Company's common stock. Such warrants are exercisable at prices ranging from
$11.781 to $20.625 per share, vest over periods up to 48 months, and expire at
various times through April 2008. No warrants were granted during the year ended
June 30, 1999.
During the years ended June 30, 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, 1999.
Included in the issuance of warrants to purchase 515,000 aggregate
shares of the Company's common stock is a warrant to purchase 50,000 shares that
was issued during fiscal 1997 to a director under the terms of a consulting
agreement. Such issuance was accounted for under SFAS No. 123 using the
Black-Scholes option pricing model, which resulted in the recording of $75,000,
$233,000 and $50,000 in compensation cost during the years ended June 30, 1999,
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, 1996........... 477,000 $ 4.44
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
Cancelled........................ (30,000) 16.88
------------ ----- ------- -----
Outstanding, June 30, 1999.......... 673,000 12.22 548,000 12.32
============ ===== ======= =====
At June 30, 1999, 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- WEIGHTED-
AVERAGE AVERAGE 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 4.83 200,000 $ 7.81
11.78 - 12.81 288,000 11.96 5.02 163,000 12.10
16.88 - 20.63 185,000 17.38 8.23 185,000 17.38
16. 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.
17. 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 1999, 1998 and 1997, the Company
repurchased 96,000, 695,588 and 1,026,200 shares, at an average per share cost
of $15.53, $16.63 and $13.20, respectively. The 695,588 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. In fiscal 1999, 1998
and 1997, 41,138, 948,528 and 40,264, respectively, treasury shares were
reissued upon the exercise of stock options and warrants and the issuance of
common stock under the Employee Stock Purchase Plan.
18. OTHER TRANSACTIONS
During fiscal 1995 and 1993, the Company entered into barter agreements
whereby it delivered inventory in exchange for future advertising credits and
other items. The Company had recorded barter credits of $15,000 in prepaid
expenses and other current assets at June 30, 1998. During the years ended June
30, 1999 and 1998, approximately $15,000 and $100,000, respectively, was charged
to expense for barter credits used. No amounts were charged to expense for
barter credits used during the year ended June 30, 1997. During the year ended
June 30, 1997, the Company charged $200,000 to operations for impairment of
these credits. No such impairment losses were charged to operations during the
years ended June 30, 1999 and 1998.
19. 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, 1999,
1998 and 1997, 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, 1999, 1998 and 1997, the Company's
matching contributions were $181,000, $156,000 and $133,000, 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 during the year ended June 30,
1998. No amounts were recorded under these plans during the years ended June 30,
1999 and 1997.
20. SEGMENT INFORMATION
The Company's operating segments have similar economic characteristics
and, as such, the Company has aggregated six operating segments into a single
reportable segment in conformity with SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. The business activities of the
Company's operating segment are the development, manufacturing and marketing of
paper-based organizers for the retail market. In addition, the Company also
develops, manufactures and markets a number of related organizing products
including telephone/address books, business accessories, products for students
and organizing and other wallboards.
The Company groups its products into three categories: organizers and
planners; their refills, which include calendars, other pages and accessories;
and related organizing products. The following table sets forth, for the periods
indicated, approximate Day Runner sales by product category and as a percentage
of total net sales.
FISCAL FISCAL FISCAL
PRODUCTS 1999 1998 1997
-------- ----------------- ------------------- ------------------
(Unaudited; dollars in thousands)
Organizers and planners. $ 80,092 $ 83,069 $ 73,858
Refills................. 63,596 51,876 43,264
Related organizing products 52,524 32,896 10,254
--------- -------- --------
Total............. $ 196,212 $167,841 $127,376
========= ======== ========
21. 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, 1999
UNITED STATES EUROPE OTHER ELIMINATIONS TOTAL
------------- ------ ----- ------------ -----
Net sales to unaffiliated entities $ 136,603 $ 39,173 $ 20,436 $ 196,212
Transfers between geographic areas 2,396 1,670 $ (4,066)
---------- --------- ---------- ---------- ----------
Net sales $ 138,999 $ 39,173 $ 22,106 $ (4,066) $ 196,212
========== ========= ========== ========= ==========
Income (loss) from operations $ 651 $ 3,797 $ 852 $ (6,872) $ (1,572)
========== ========= ========= ========= ==========
Long-lived assets $ 87,144 $ 171,167 $ 6,626 $(159,463) $ 105,474
========== ========= ========= ========= ==========
YEAR ENDED JUNE 30, 1998
UNITED STATES EUROPE OTHER ELIMINATIONS TOTAL
------------- ------ ----- ------------ -----
Net sales to unaffiliated entities $ 152,939 $ 2,745 $ 12,157 $ 167,841
Transfers between geographic areas 2,347 2,169 $ (4,516)
---------- -------- ---------- ------------ ----------
Net sales $ 155,286 $ 2,745 $ 14,326 $ (4,516) $ 167,841
========== ======== =========== ============ ==========
Income from operations $ 31,883 $ 23 $ 2,648 $ (8,985) $ 25,569
========== ======== ========== ========== ==========
Long-lived assets $ 16,267 $ 95 $ 3,364 $ (3,117) $ 16,609
========== ======== ========== ========== ==========
YEAR ENDED JUNE 30, 1997
UNITED STATES EUROPE OTHER ELIMINATIONS TOTAL
------------- ------ ----- ------------ -----
Net sales to unaffiliated entities $ 122,618 $ 2,086 $ 2,672 $ 127,376
Transfers between geographic areas 490 1,621 $ (2,111)
---------- -------- ---------- ---------- ---------
Net sales $ 123,108 $ 2,086 $ 4,293 $ (2,111) $ 127,376
========== ======== ========== ========== =========
Income from operations $ 23,927 $ 24 $ 1,810 $ (6,412) $ 19,349
========== ======== ========== ========== =========
Long-lived assets $ 8,688 $ 157 $ 4 $ (61) $ 8,826
========== ======== ========= ========== =========
22. CONTINGENCIES
In September 1999, two purported securities class action lawsuits were
filed in the United States District Court for the Central District California
against the Company and certain of its officers and directors. The complaints
allege that the Company violated Section 10(b) of the Securities Exchange Act
and Rule 10b-5 thereunder through the misstatement of the Company's financial
results of operations for the first through third quarters of fiscal 1999. These
alleged misstatements purportetdly consisted of improper accounting for
manufacturing variances and other costs. The plaintiffs in both actions purport
to represent a class consisting of all purchasers of the Company's Common Stock
between October 20, 1998 and August 31, 1999. The plaintiffs are seeking
unspecified compensatory damages.
The Company expects that these actions will be consolidated into a
single action, that a lead plaintiff will be appointed, and that a consolidated
amended complaint will be filed. None of these events has yet taken place. There
has been no discovery in any of the actions. Based on the allegations and the
issues raised by the current complaint, the Company believes it has meritorious
defenses to the actions and intends to defend them vigorously.
The Company is not a party to any other litigation that, in the opinion
of management, would reasonably be expected to have a materially adverse effect
on the consolidated financial statements.
23. SUPPLEMENTAL CASH FLOW INFORMATION
DISCLOSURE OF CASH FLOW INFORMATION (IN THOUSANDS):
YEARS ENDED JUNE 30,
1999 1998 1997
------------ ----------- -------------
Cash paid for:
Interest....................... $ 4,944 $ 91 $ 130
Income taxes $ 1,488 $ 8,862 $ 6,026
During the year ended June 30, 1999, the net cash expended by the
Company in its acquisition of Filofax was used as follows (in thousands) (See
Note 2):
Fair value of assets acquired $ (117,203)
Liabilities assumed 29,186
-----------
Cash paid $ (88,017)
===========
During the year ended June 30, 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 2):
Fair value of assets acquired $ (11,809)
Liabilities assumed 7,183
-----------
Cash paid $ (4,626)
===========
During the year ended June 30, 1999, the Company purchased 703,308
shares of Filofax's outstanding common stock by issuing (pound)1,477,000 (US
$2,328,000) in Loan Notes (see Note 8) to former shareholders of Filofax.
The Company realized a reduction in its current income tax liability
during fiscal 1999, 1998 and 1997 in the amount of $20,000, $5,208,000 and
$157,000, respectively. Such amounts were credited to additional paid-in capital
(see Note 12).
INDEPENDENT AUDITORS' REPORT
Day Runner, Inc.:
We have audited the consolidated financial statements of Day Runner, Inc. and
its subsidiaries as of June 30, 1999 and 1998, and for each of the three years
in the period ended June 30, 1999, and have issued our report thereon dated
October 12, 1999; such report is included elsewhere in this Form 10-K. Our
audits also included the consolidated financial statement schedule of Day
Runner, Inc. and its subsidiaries, listed in Item 14(a)2. This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
October 12, 1999
S-1
DAY RUNNER, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
BALANCE AT BALANCE AT
JUNE 30, FILOFAX CHARGED TO JUNE 30,
CLASSIFICATION 1998 ACQUISITION OPERATIONS DEDUCTIONS 1999
- -------------- ---------------- ----------- ---------- ---------- ---------
Allowance for doubtful accounts and
sales returns and other allowances...... $ 9,942 $ 1,580 $ 19,039 $(19,080) $ 11,481
Reserve for obsolete inventories........... 3,052 4,782 4,286 (2,385) 9,735
BALANCE AT BALANCE AT
JUNE 30, CHARGED TO JUNE 30,
CLASSIFICATION 1997 OPERATIONS DEDUCTIONS 1998
- -------------- ---------------- ---------- ---------- ---------
Allowance for doubtful accounts and
sales returns and other allowances...... $ 8,664 $ 9,799 $( 8,521) $ 9,942
Reserve for obsolete inventories........... 3,259 898 (1,105) 3,052
BALANCE AT BALANCE AT
JUNE 30, CHARGED TO JUNE 30,
CLASSIFICATION 1996 OPERATIONS DEDUCTIONS 1997
- -------------- ---------------- ---------- ---------- ---------
Allowance for doubtful accounts and
sales returns and other allowances...... $ 7,374 $ 14,264 $( 12,974) $ 8,664
Reserve for obsolete inventories........... 3,473 1,267 (1,481) 3,259
S-2
EXHIBIT INDEX
Exhibit
Number Description
10.15 Lease Agreement dated as of April 2, 1999 between Mrs.
Refugio Victoria Geffroy De Flourie and Mr. David
Bramzon Stengel and the Registrant(7)
10.20 First Amendment to Consulting Agreement effective April 22,
1999 between the Registrant and Alan R. Rachlin(7)
10.21 Consulting Agreement effective May 22, 1999 between the
Registrant and Mr. Alan R. Rachlin(17)
10.23 Amended and Restated Loan Agreement dated as of September
30, 1999 among the Registrant, Day Runner UK plc, Filofax
Limited, the Lenders named therein and Wells Fargo Bank
National Association, including Revolving and Term
Loan Notes.
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule