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, 1998
|_| 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 September
16, 1998 as reported on The Nasdaq Stock Market, was approximately $171,000,000.
The number of shares outstanding of the registrant's Common Stock on
September 16, 1998 was 11,880,098.
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 November 23, 1998 are incorporated by reference into Part III of this Annual
Report.
PART I
Item 1. Business
THE COMPANY
Day Runner(R), Inc. ("Day Runner") develops, manufactures and markets
personal organizing products to broad-based consumer audiences through retail
distribution channels. We are the leading developer, manufacturer and marketer
of paper-based organizers for the retail market. We also develop, manufacture
and market related organizing products. Day Runner's products are carried by
more than 20,000 retail stores across the U.S. and are available in a number of
other countries in North America, Europe and the Asia-Pacific region.
We market our products to customers through our own sales force, through
manufacturers' representatives and, in certain markets outside the U.S., through
independent distributors. Our major customers in our primary domestic channels
include office products superstores Office Depot, Inc., Staples, Inc. and
OfficeMax, Inc. and mass market retailers Wal-Mart and Kmart. Sales to the
office products and mass market channels accounted for approximately 47% and
39%, respectively, of fiscal 1998 sales.
Our organizers and planners are loose-leaf and spiral-bound time and
information management systems that range from simple to sophisticated. For
example, our flagship Day Runner System organizers include not only the
traditional planner components of appointment calendar, telephone/address
section and note pad but also interrelated pages for managing time and
information, tracking expenses, establishing goals and planning projects.
Segmenting the market for organizers and planners is a key element of our
strategy. We aim our product lines at market segments ranging from students to
women shopping in the mass market to business and professional people and offer
many of our organizers and planners in a choice of sizes, styles, cover
materials and colors. Suggested retail prices for our organizers and planners
range from $4 to $150. Organizers and planners accounted for approximately 49%
of our fiscal 1998 sales.
Most of our organizers and planners are refillable. Refills, which include
calendars, other pages and accessories, accounted for approximately 31% of our
sales in fiscal 1998. Suggested retail prices for refills range from $0.75 to
$40.
Our related organizing products include telephone/address books,
appointment books, products for students from elementary school through college,
business accessories, organizing and other wall boards and personal information
management (PIM) software designed to complement our paper-based organizers,
among others. This category accounted for approximately 20% of fiscal 1998
sales.
With the exception of our software and electronic products we include in
certain of our products and sell as accessories, all of our current products
have been developed internally. In addition, all of the products of Ram
Manufacturing and Timeposters Inc., companies we acquired in fiscal 1998, were
developed by those companies. We manufacture and assemble a portion of our
products at our Fullerton, California and Little Rock, Arkansas facilities and
at our Mexican and Toronto subsidiaries and also use foreign and domestic
contractors to supply both product components and finished goods.
BUSINESS STRATEGY
Day Runner sells broad-based personal organizing products through retail
distribution channels. Our strategy is to leverage our brand name awareness and
distribution strength to maximize sales of our existing products, extend those
product lines and introduce new product lines. Key elements of our strategy
include:
o Segmenting the market for organizers and planners.
o Entering related organizing product categories.
o Building sales through major customers.
o Marketing to increase sales.
o Expanding foreign sales.
o Providing excellent customer service.
o Pursuing strategic acquisitions and alliances.
SEGMENTING THE MARKET FOR ORGANIZERS AND PLANNERS. In order to expand
and segment our market, we offer our organizers and planners in a broad range of
systems, sizes, styles and cover materials and at suggested retail prices
ranging from $4 to $150. As a result, our products appeal to a large consumer
market comprised of users with differing needs, tastes and budgets and are
appropriate for sale through a broad range of retailers. Versatile Day Runner
System organizers and planners are suitable for use by adults in virtually all
walks of life. Specific target markets addressed by other Day Runner organizers
and planners include business and professional people, cost-conscious consumers,
young women shopping in the mass market and students from elementary school
through college, among others.
ENTERING RELATED ORGANIZING PRODUCT CATEGORIES. Day Runner believes that
related personal organizing products offer us an opportunity to leverage our
brand name and distribution and build upon our heritage in the area of personal
organization. Our strategy is to:
o Redefine existing product categories as value-added and offer
a superior price/value relationship to the consumer.
o Create new categories of personal organizing products.
o Gain initial distribution through our existing customers.
o Produce sales results we can build upon.
BUILDING SALES THROUGH MAJOR CUSTOMERS. To reach consumers with differing
needs and varying retail shopping habits, we distribute our products in the U.S.
through multiple channels, including:
o Office products superstores, wholesalers and dealers.
o Mass market retailers, including discount department stores,
wholesale clubs, drug chains and other mass market retailers.
o A wide variety of other customers, including the U.S.
Government and book, department, gift, leather and luggage,
stationery and other specialty stores.
Day Runner's products are carried by more than 20,000 retail outlets in the
U.S., including leading retailers in our key office products and mass market
channels of distribution. Our strategy is to grow our sales through our major
customers by increasing our everyday shelf space where appropriate, continuing
to expand our product selection, serving the back-to-school market and creating
other seasonal, promotional and product opportunities.
PURSUING STRATEGIC ACQUISITIONS AND ALLIANCES. Day Runner believes that
acquisitions and other strategic alliances are important to the future growth of
the Company. During fiscal 1998, we acquired three companies: Ultima
Distribution Inc., our Canadian distributor based in Toronto; Ram Manufacturing,
Inc., a developer, manufacturer and marketer of wall boards, headquartered in
Little Rock, Arkansas; and Timeposters Inc., a Toronto-based developer,
manufacturer and marketer of planning and presentation products, including
laminated flexible wall planners.
On September 24, 1998, Day Runner announced a cash offer for Filofax Group
plc ("Filofax"), a UK-based company traded on the London Stock Exchange. The
offer was for (pound)2.00 (approximately US $3.36) per share pursuant to a
tender offer for all of the outstanding ordinary shares of stock of Filofax.
This offer was not recommended by Filofax's Board of Directors.
On September 25, 1998, we announced that the Company had reached agreement
with the Board of Directors of Filofax on the terms of a recommended cash tender
offer (the "Recommended Offer"). The Recommended Offer was for (pound)2.10
(approximately US $3.53) per share for all of the outstanding ordinary shares of
stock of Filofax for a total purchase price for such shares of appoximately
(pound)50,300,000 (approximately US $84,500,000). The proposed acquisition of
Filofax (the "Proposed Acquisition of Filofax") will be funded by bank debt
pursuant to a credit facility Day Runner entered into on September 23, 1998 (see
Note 20 to the Consolidated Financial Statements). The Company currently
estimates that the aggregate fees and expenses of the Proposed Acquisition of
Filofax, including investment banking, legal, accounting and other fees and
expenses, will be in the range of $4 to 6 million. Actual total fees and
expenses may differ from this estimate and are subject to future contingencies.
Filofax is a manufacturer and supplier of stationery products, including
Filofax, Lefax and Microfile brand personal organizers. In addition to its core
personal organizer business, Filofax markets business forms and high-end pens.
Filofax has wholly owned sales subsidiaries in France, Germany, Hong Kong,
Scandinavia, the UK and the U.S. and sells primarily through retail distribution
channels in each market. Filofax's sales from continuing operations for its
fiscal year ended March 31, 1998 were (pound)37,700,000 (approximately US
$63,300,000), with 86%, or approximately US $54,600,000, to markets outside the
U.S.
In this discussion all exchange rate conversions between the U.S. dollar
and the UK pound sterling were based on an exchange rate of 1.68, which was the
exchange rate on September 23, 1998. The exchange rate between the dollar and
the pound sterling is likely to fluctuate, up or down, between such date and
the date of any payments to Filofax stockholders. The Company has purchased a
call option to partially hedge our exposure to such currency fluctuations.
Consummation of Day Runner's Proposed Acquisition of Filofax is subject to,
among other things, the acceptance of Filofax's stockholders, regulatory
approvals and the satisfaction or waiver of various other conditions. There can
be no assurance at this time that the Proposed Acquisition of Filofax will be
completed.
MARKETING TO INCREASE SALES. We market our products to customers to inform
them of the benefits of selling Day Runner's products and to consumers to
further build brand name awareness and to maximize the productivity of the
retail shelf space our products occupy.
EXPANDING FOREIGN SALES. We are working to build our sales outside the
United States by focusing on key markets and offering products with features,
aesthetics and price points appropriate for those markets. We offer some of our
products in French, German and Spanish versions. During fiscal 1998, we launched
several product lines designed especially for Europe and for Asia. We completed
two acquisitions in Canada in fiscal 1998, purchasing Ultima Distribution Inc.,
our Canadian distributor, and Timeposters Inc., a manufacturer and marketer of
planning and presentation products. These acquisitions are intended to help us
further expand our business in Canada. We also established a direct sales and
marketing subsidiary in Australia in fiscal 1998. We expect Day Runner's foreign
sales to substantially increase if the Proposed Acquisition of Filofax is
consummated. In Filofax's most recent fiscal year, 86% of its sales from
continuing operations were to markets outside the U.S. There can be no assurance
at this time that the Proposed Acquisition of Filofax will be completed.
PROVIDING EXCELLENT CUSTOMER SERVICE. Day Runner believes that excellent
customer service can provide us with additional competitive advantage. We serve
customers from both our Fullerton, California and our Nashville, Tennessee-area
distribution centers and ship directly to the individual retail locations of a
number of our large customers. We conduct business via EDI (Electronic Data
Interchange) with virtually all our key customers and recognize the importance
of continuing to implement applicable customer service/distribution technology.
Industry Overview
Day Runner's roots are in paper-based organizers and planners and their
refills, and approximately 80% of our fiscal 1998 sales were generated by this
core business. In recent years, we have moved beyond organizers and now market a
number of other products that help people become better organized in a variety
of ways.
ORGANIZERS. Day Runner was instrumental in creating and defining
paper-based "organizers" as a product category in the United States. Although
time management products that included some "organizer" features had been on the
market for some time, the product category, as such, did not emerge until the
1980s. We believe that the introduction of the Day Runner System in 1982 helped
define the product category and, ultimately, led to the growth of the organizer
industry. By the late 1980s, organizers had become accepted tools for improving
individual and group productivity. (Because the distinctions between organizers
and planners have become blurred, except where otherwise specified, we are using
the terms "organizer" and "planner" interchangeably in this report.)
Today, awareness of the organizer product category is widespread;
organizers are broadly accepted as substitutes for traditional dated goods; and
the usefulness of time management techniques is well recognized. Organizers are
sold through a wide variety of channels, including: office products superstores,
wholesalers and dealers; mass market retailers; book, department, gift, leather
and luggage, stationery and other specialty stores; and are sold direct to
organizations, the U.S. Government and individuals.
RELATED ORGANIZING PRODUCTS. Product categories Day Runner has entered
include telephone/address books, diaries, assignment books and similar products
for children, appointment books (also referred to as traditional spiral dated
goods), organizing and other wall boards, such as Home Manager(TM); pocket
calendars, desk and desk pad calendars, and business accessories, among others.
Day Runner sells these products through the same channels as its organizers. In
fiscal 1998, we acquired companies that manufacture and market cork boards,
white boards and combination boards, laminated wall planners, easels, signage
boards and similar planning and presentation products.
We group all these products under the umbrella term "related organizing
products," but this does not constitute an industry as such. 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.
There are many companies, both domestic and foreign, that compete with us,
with competition varying from product category to product category. Day Runner
believes the current principal competitive factors in the industries in which it
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.
MARKET POTENTIAL. Day Runner believes that the appeal of organizers and
other personal organizing products in the United States is attributable to a
number of economic and cultural trends, including: the increased percentage of
women in the work force and the resulting prevalence of two-income families; the
continuing trend toward corporate downsizing; the growth of the small business
sector; the rising percentage of business done away from the office; the greater
emphasis on productivity; the ongoing shift to a service economy; and the trend
towards global competition. Many of these trends contribute to widespread
concerns with saving and better using time and increasing personal productivity.
Day Runner's products address these concerns. We target both potential
first-time organizer users and existing users who may need refills or
replacements for their organizers. In addition, our expansion into related,
non-organizer/planner products that provide other ways for people to become
better organized offers us an opportunity to reach consumers who do not use an
organizer or planner and to market additional Day Runner branded products to
consumers who already use a Day Runner organizer or planner. Our goal is to
offer one or more products that appeal to and meet the organizing needs of
virtually every American consumer, no matter what that individual's income,
occupation or age.
INDUSTRIES MARKETING SIMILAR OR SUBSTITUTE PRODUCTS. Day Runner's products
have features, functions or components in common with products in several other
industries. Our market overlaps to a limited extent that of companies marketing
training products and services designed to improve group and individual
productivity and to upgrade management skills. In addition, both PIM software
and electronic organizers are designed to fill many of the same needs addressed
by paper-based organizers, although virtually all PIM software products provide
for paper-based output and a number of such products allow users to print out
pages in sizes that fit Day Runner's organizers.
PRODUCTS
Day Runner's products are designed to help people become better organized.
We aim our products at various segments of a broad-based consumer audience. Our
goal is to help consumers to be "organized for life(TM)" and to offer consumers
in each target segment the perception of broad choice and good value for their
money. Our products include:
o Multiple lines of paper-based organizers and planners.
o Refills, which include calendars and accessories.
o Related organizing products.
ORGANIZERS AND PLANNERS. Our organizers and planners are available in
varying systems, sizes, styles, cover materials and colors and at a broad range
of price points. These loose-leaf and spiral-bound portable "books" help users
keep "Everything in One Place(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.
REFILLS. The great majority of our organizers, planners and
telephone/address books are refillable. Users may customize their loose-leaf
organizers and planners by choosing from a variety of additional pages and
accessories, ranging from Mileage Record, Strategy and Things To Do pages to
Currency/Checkbook Insert, Diskette Holders and a solar powered
Calculator/Ruler.
RELATED ORGANIZING PRODUCTS. Our related organizing products include
telephone/address books, appointment books, products for students from
elementary school through college, business accessories, organizing and other
wall boards and PIM software designed to complement our paper-based organizers,
among others. For a complete list, see the breakdown of current products below.
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 1998 1997 1996
-------- ----------------- ------------------- -------------------
(Unaudited; dollars in thousands)
Organizers and planners. $ 83,069 49.5% $ 73,858 58.0% $ 77,293 61.8%
Refills................. 51,876 30.9 43,264 34.0 43,473 34.7
Related organizing products 32,896 19.6 10,254 8.0 4,360 3.5
-------- ----- -------- ------ --------- ------
Total............. $167,841 100.0% $127,376 100.0% $125,126 100.0%
======== ===== ======== ====== ========== ======
Covers for Day Runner's organizers, planners and paper-based related
organizing products are made of leathers, vinyls and a variety of other natural
and man-made materials. In addition to holding loose-leaf or spiral-bound pages,
the covers of most of our organizers and loose-leaf planners are also designed
to hold note pads and many have additional features, such as places to store
pens, business and credit cards, calculators, loose papers and spare keys.
The following table sets forth basic price and other information concerning
the products we market in the United States.
Current
Suggested
Current Products Retail Price(s)
Organizers and planners: $4-150
Day Runner
DILBERT(TM)
FactCentre(TM)
THE FAR SIDE(R)
4-1-1 Student Planners(TM)
Looney Tunes(TM
Mickey Unlimited(TM)
Perennials(TM)
PRO Business System(R)
Refills (which include calendars, other pages and accessories) $0.75-40
Current
Suggested
Current Products Retail Price(s)
Related organizing products:
Assignment books: $3-9.50
4-1-1
Mickey Unlimited
Mickey For Kids(TM)
Business accessories $4-50
Telephone/address books: $6-24
Day Runner
DILBERT
FactCentre
Looney Tunes
Perennials
Mickey For Kids
Mickey Unlimited
Appointment books $4.30-35.75
Software and electronics:
Day Runner PC $17
Day Runner Planner for Windows(R)95 $75
Electronic Teleplanner $30-40
Pocket Calendars: $5-8
DILBERT
Looney Tunes
Perennials
Wall Boards $3.75-$650
Core boards
Wipe-Out(R)
Timeposters(R)
Planning boards
Flexible planners
Timeposters
Organizing boards
Home Manager(TM)
Business Manager(TM)
Cubicle Manager(TM)
Message Manager(TM)
org.board(TM)
Looney Tunes
DILBERT
Other:
Mickey For Kids Sticker Books $6.50-10.50
Mickey For Kids Diaries $10-26
Day Runner, PRO Business System, Timeposters and Wipe-Out are registered
trademarks, and Business Manager, Cubicle Manager, Entrepreneur, Everything in
One Place, FactCentre, 4-1-1, Home Manager, Message Manager, org.board and
Perennials are trademarks of Day Runner, Inc. DILBERT(C) is a trademark of
United Feature Syndicate, Inc. Mickey For Kids and Mickey Unlimited are
trademarks of Disney. THE FAR SIDE is a registered trademark of FarWorks, Inc.
LOONEY TUNES characters, names and all related indicia are trademarks of Warner
Bros. Post-it(R) is a registered trademark of 3M. Windows is a registered
trademark of Microsoft Corporation.
PRODUCT DEVELOPMENT
Day Runner's product development programs emphasize (i) identifying unmet
consumer needs and developing organizers, planners and related organizing
products to meet those needs; (ii) extending our existing product lines through
additional sizes, styles and materials; and (iii) augmenting the selection of
refills and accessories available for our product lines.
In addition, we monitor our existing products for continued viability,
needed enhancements, improvements in quality and potential reductions in cost.
With the exception of our software product and the calculators we include in
certain of our products and sell as accessories, all of our current products
have been developed internally. Internally developed products accounted for
substantially all of Day Runner's fiscal 1998 sales. The products of Ram
Manufacturing and Timeposters Inc., companies we acquired during fiscal 1998,
were also developed by those companies.
Since the introduction of the first Day Runner System organizer in 1982, we
have transformed this single product into a broad line. Our products are
available in a variety of sizes, styles and materials, designed to appeal to a
broad spectrum of consumers and at a wide range of price points. We offer
organizers that appeal to students from elementary school through college,
business professionals and people working at home. Our product introductions
reflect our focus on market segmentation and consumer needs.
In 1991, as part of our strategy of offering products aimed at more
cost-conscious consumers, we introduced the FactCentre line, which now includes
organizers, planners and telephone/address books.
In 1993, we introduced the PRO Business System organizer, aimed at people
seeking a sophisticated but easy-to-use organizing system that is designed
specifically for business and professional use.
In short fiscal 1994 (effective January 1, 1994, the Company changed its
fiscal year end from December 31 to June 30, resulting in a short fiscal year),
we began shipping 4-1-1 Student Planners, a line aimed at middle school, high
school and college students and marketed primarily for sale during the
back-to-school consumer buying season.
In fiscal 1995, we added telephone/address books to our Day Runner and
FactCentre lines and launched Perennials, a line of organizers, planners and
telephone/address books aimed primarily at young women shopping in mass market
outlets.
In fiscal 1996, we launched our first licensed products: a line of planners
and telephone/address books featuring Warner Bros. Looney Tunes cartoon
characters and a line of "sticker books" and "sticker diaries" developed and
marketed under the Mickey Unlimited brand of Disney Enterprises. The Mickey
Unlimited Sticker Books and Diaries incorporate colorful stickers to make
planning and diary-keeping fun. We also introduced a line of appointment books
designed for consumers who prefer traditional planning tools.
In fiscal 1997, we introduced THE FAR SIDE organizers featuring the classic
cartoons created by Gary Larson, a line of business accessories, including
travel document holders, business card cases, business card files and pad
holders, and the 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 or storage pocket,
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.
In fiscal 1998, we began shipment of a line of DILBERT organizers, refills,
telephone/address books and pocket calendars. Building on the success of Home
Manager, we extended our line of organizing wall boards to include Business
Manager, Cubicle Manager and Message Manager, designed for business
professionals and office workers. We expanded our selection of everyday student
products, introducing additional accessories like calculator/rulers and binder
accessories.
Also in fiscal 1998, we introduced Day Runner PC Software, consisting of
three value-priced software modules that allow users to create and update
telephone/address directories, notes and calendars on the PC. We also introduced
Day Runner Planner for Windows 95 software, a more complex software program for
updating organizer information on-line, for Windows users. Both software
offerings were developed under our direction. Users of our software can print
out updated pages on paper compatible with Day Runner organizers.
SALES AND DISTRIBUTION
We market our products to customers through our own sales force, through
manufacturers' representatives and, in certain markets outside the U.S., through
independent distributors. Our primary domestic channels of distribution are
office products and the mass market.
Day Runner's products are carried by more than 20,000 retail stores across
the U.S. Our sales policies encourage smaller customers to purchase through
wholesalers. In fiscal 1998, we shipped directly to approximately 9,500 retail
locations, to distribution centers serving approximately 9,700 retail locations
and to approximately 200 wholesalers, each of which serves a number of dealers.
During fiscal 1998 and 1997, Day Runner sold products to approximately 700
different customers. The only customers accounting for 10% or more of the
Company's fiscal 1998 sales were Wal-Mart Stores, Inc. and its affiliates,
including Sam's Clubs; Office Depot, Inc. and its affiliates; Staples, Inc. and
its affiliates; and OfficeMax, Inc. and its affiliates. These customers
accounted for approximately 28%, 16%, 15% and 14%, respectively, of fiscal 1998
sales. Including their affiliates, the top five customers of the Company
accounted for an aggregate of approximately 80% of fiscal 1998 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 1998 1997 1996
-------------------- ------------------ ------------------- -----------------
(Unaudited; dollars in thousands)
Office products channel. $ 79,303 47.2% $ 59,416 46.7% $ 62,381 49.8%
Mass market............. 65,752 39.2 53,785 42.2 46,804 37.4
Foreign customers....... 12,182 7.3 5,583 4.4 6,346 5.1
Other channels.......... 10,604 6.3 8,592 6.7 9,595 7.7
-------- ----- -------- ------ -------- ------
Total............. $167,841 100.0% $127,376 100.0% $125,126 100.0%
======== ===== ======== ====== ======== ======
OFFICE PRODUCTS CHANNEL. Since 1987, Day Runner products have been broadly
distributed through the office products channel. While sales to the office
products superstores have become increasingly significant, we continue to sell
our products to office products wholesalers and dealers.
OFFICE PRODUCTS SUPERSTORES. Since their emergence in 1986,
office products superstores offering discount prices in a
warehouse atmosphere have become a major factor in office
products distribution. Our products are carried by all the
leading superstores, including Office Depot, Inc., Staples, Inc.
and OfficeMax, Inc.
OFFICE PRODUCTS WHOLESALERS. Day Runner products are currently
distributed by local and regional office products wholesalers
and by both national wholesalers, S.P. Richards Company and
United Stationers Supply Co., which reach office products
consumers through dealers nationwide.
OFFICE PRODUCTS DEALERS. Our products are also distributed
through traditional office products dealers, which buy directly
from manufacturers and indirectly through wholesalers. These
customers include both storefront dealers and contract
stationers (also known as commercial dealers) that specialize in
selling to larger businesses through catalogs and their direct
sales forces.
MASS MARKET. Discount chains addressing the mass market have become an
increasingly important factor in the distribution of a wide variety of consumer
goods. Day Runner products are distributed through a number of mass market
retailers, including: Wal-mart, Kmart, and Target; the major wholesale clubs,
Sam's Clubs and Costco Companies, Inc.; a number of discount drug chains,
including CVS Corp., Rite Aid Corp., and Eckerd Drug; and a variety of other
mass market resellers.
FOREIGN CUSTOMERS. Day Runner products are marketed internationally through
Day Runner Australia Limited, Day Runner Hong Kong Limited, Day Runner
International Limited, and Ultima Distribution Inc. (the Company's wholly owned
Australian, Hong Kong, United Kingdom and Canadian subsidiaries), independent
foreign distributors and our own sales force. The United Kingdom and key markets
on the European continent are served by Day Runner International; Asian and
Pacific Rim markets are served by Day Runner Hong Kong Limited and Day Runner
Australia; Canada is served by Ultima; and Mexico is served by Day Runner's
U.S.-based sales force. If the Proposed Acquisition of Filofax is completed, we
may market current Day Runner products through Filofax's distribution system in
countries in Europe and Asia. There can be no assurance at this time that the
Proposed Acquisition of Filofax will be completed.
OTHER CHANNELS. The Company also distributes its products through a number
of additional channels, including book, department, gift, leather and luggage
and stationery stores and other specialty retailers. Since March 1989, Day
Runner has held a General Services Administration ("GSA") contract, which
extends through February 2002 and which allows the Company to market certain of
its products to the U.S. Government.
MARKETING
We market our products to consumers to increase awareness of the Day Runner
brand name and of specific products, to communicate the benefits of our products
and to create and reinforce an image that our products enable the user to manage
time and personal resources more effectively. Our packaging, merchandising and
promotions are designed to appeal to the consumer on the retail floor. We
position Day Runner to our distribution channels as the leader in the retail
organizer market and the logical source for organizers, planners and related
organizing products at a wide range of price points and appropriate for a wide
range of broad consumer markets.
PROMOTIONAL PROGRAMS. Day Runner offers special promotional and incentive
programs as part of our introduction of new products and to build sales at
specific times of the year; conducts promotions designed to build awareness,
expand distribution and increase sales of specific products; and conducts sales
incentive programs for wholesalers, dealers and manufacturers' representatives.
ADVERTISING AND PUBLIC RELATIONS. Day Runner participates with customers in
co-op advertising and advertises from time to time in certain wholesale flyers
and in trade publications. In addition, from time to time, we conduct consumer
advertising campaigns, primarily in business and lifestyle magazines. Public
relations campaigns, focused on trade and consumer publications, is another
important element in our marketing strategy.
SALES SUPPORT. We support our retailers with point-of-sale materials
developed based upon research and intended to build brand name awareness and
increase sales. Day Runner displays are designed to be easy for consumers to
shop and for store personnel to refill. Our packaging is designed to help
consumers choose the right product and make the decision to buy.
TRADE SHOWS. Day Runner exhibits or is represented by manufacturers'
representatives in a number of national and regional trade shows aimed at office
products, mass market and other customers.
MARKET RESEARCH. We regularly conduct market research and test product
concepts and prototypes through the use of focus groups and other consumer
research. In addition, we maintain a database containing information on users
who have mailed in the Welcome Cards included in many of our products.
USER SUPPORT. We estimate that we have sold approximately 38 million
organizers and planners since our inception. To encourage our current users to
continue to purchase and recommend our products and their refills, we provide a
toll-free consumer hotline that consumers may call for referral to conveniently
located dealers or dealers that carry specific refills or accessories, for
customer service, to contribute suggestions and to purchase products directly
from Day Runner. We make such sales primarily as a service to our users and
charge consumers full suggested retail price plus handling and shipping.
Although Day Runner products require no special training, we provide a free
user's guide in each of our two most sophisticated organizers. Each Day Runner
System and PRO Business System organizer includes an "Owner's Manual." Each of
these booklets includes illustrations showing effective use of the system and of
specific pages as well as tips on time management, project management and
organization.
MANUFACTURING
Day Runner's manufacturing strategy combines internal manufacturing with
the domestic and foreign subcontracting of product components and finished
goods. Our policy is to develop and maintain at least two sources for key raw
materials, product components and the finished products we subcontract. Although
we rely on foreign subcontractors for adequate capacity, we have the ability to
act as our own second or third source for the manufacture of our loose-leaf
binders and for the final assembly of many of our products. This provides a
degree of protection against vendor problems and, under certain conditions,
allows us to respond to higher than anticipated demand and improve turn-around
time.
INTERNAL MANUFACTURING. We manufacture a portion of our binders and assemble a
portion of our finished products in our Fullerton, California facility and at
Day Runner de Mexico, S.A. de C.V., our wholly owned manufacturing subsidiary
located in Tijuana. Wall boards are manufactured at our facilities in Little
Rock, Arkansas and Toronto, Canada.
PURCHASED COMPONENTS. In addition to vinyl and leather raw materials, we
purchase from suppliers certain major product components, including printed
pages, loose-leaf rings, pens, software disks containing our PIM software,
electronic components and certain accessories. With few exceptions, these items
are manufactured by a variety of outside contractors and are available both
domestically and overseas.
SUBCONTRACTED FINISHED GOODS. We subcontract the manufacture and assembly
of a portion of our finished products, including the great majority of our lower
priced organizers, planners and related products. Day Runner Hong Kong Limited
acts as our liaison with our Asian suppliers.
COMPETITION
The product categories in which Day Runner participates are competitive and
subject to rapid change. Day Runner competes directly with other companies
marketing paper-based organizers and planners, appointment books, calendars,
wall boards, laminated wall planners and business accessories to consumers
through retail channels and indirectly with companies marketing such products
through mail order or via other means. Our competitors also include companies
marketing substitutes for paper-based organizer and planner products, such as
electronic organizers and PIM software, and we compete for the same target
market 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. Each
product category is competitive and subject to rapid change, and none of the
lists of competitors provided here are intended to be all inclusive. Our
competitors in personal organizers/planners include At-A-Glance(R),
Day-Timer(R), Filofax(R), FranklinCovey(TM), Mead, many leather goods
manufacturers and a number of companies manufacturing inexpensive, non-branded
organizers overseas for sale in the United States. (If the Proposed Acquisition
of Filofax is completed, Filofax will, of course, cease to be a competitor;
however, there can be no assurance at this time that the Proposed Acquisition of
Filofax will be completed.) Competitors in telephone/address books include
At-A-Glance, E-Z Record, Stuart Hall(R) and a number of companies marketing
inexpensive imported products. Companies marketing appointment books and
calendars include At-A-Glance, House of Doolittle(R), Southworth(TM), Visual
Organizer and many printers producing inexpensive calendars for use in
advertising promotion. A number of calendar companies also produce laminated
wall planners. Business accessories are marketed by Day-Timer, Hazel(R), and
many leather goods manufacturers. Wall board manufacturers include Baker(R),
Boone(R) Boards, Quartet(R), Rose Art, Sanford(R) and Stempel.
Day Runner believes the current principal competitive factors in the
product categories in which we participate 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 our competitors
have greater financial resources than Day Runner, we believe that we compete
well against our direct competition on each of the other principal competitive
factors and against certain of our direct competition with respect to our
financial strength.
We believe that Day Runner has a number of competitive advantages. Our
products occupy significant shelf space in the office products and mass market
channels. Our leadership position in the retail organizer/planner market, brand
name recognition, ability to develop new products, broad product lines,
marketing expertise, manufacturing/sourcing skill, large user base and the
appeal of our products to consumers have been competitive advantages for us in
these channels and in certain other channels. There can be no assurance,
however, that we will be able to maintain or continue to benefit from our
competitive advantages or that the competitive environment will not change to
our detriment.
EMPLOYEES
At September 3, 1998, Day Runner had 1,298 full-time employees, including
71 in sales; 37 in marketing; 123 in executive, finance and administration; 31
in product development; and 1,036 in manufacturing operations and distribution.
None of our employees is represented by a labor union, and we have experienced
no labor-related work stoppages.
PATENTS, COPYRIGHTS AND TRADEMARKS
Day Runner relies upon, among other things, a combination of copyright,
patent and trademark laws to protect our rights to certain aspects of our
products. There can be no assurance, however, that the steps taken by Day Runner
to protect our proprietary rights will be adequate to prevent imitation of our
products or independent development by others of similar products.
Day Runner holds fourteen United States patents and sixteen foreign
patents. The Company also has several United States and foreign patents pending.
The patents we hold are related to improvements in the structure of and devices
associated with our loose-leaf binders and related organizing products, and we
do not believe that any of these patents is material to our business. We have
also been issued United States copyright registrations covering the text and the
compilation and editing of data in certain of our material products. Day Runner
holds United States trademark registrations for "Day Runner," "MEMO-RY," "PRO
Business System," "Running Mate," "Timeposters," "Wipe-Out," and the Day Runner
logo and we have obtained certain state and foreign registrations for certain of
our trademarks.
Item 2. PROPERTIES.
Day Runner's principal 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 August 2001. The Company's LaVergne, Tennessee
distribution facility occupies an approximately 101,200-square foot facility
under a lease expiring in 2005. The lease includes multiple, successive renewal
options that, if exercised in full, would extend the lease terms to expire in
2011. The Company's Little Rock, Arkansas manufacturing facility occupies an
approximately 114,000-square foot facility under a lease expiring in 2002. The
Company Canadian subsidiary occupies an approximately 40,200-square foot
facility under a lease expiring in 2008. The Company's Mexican subsidiary
operates in approximately 54,860 square feet in four buildings under separate
leases expiring in 1999. The Company currently has under construction a 70,000
square foot building to replace the currently leased buildings. The new building
lease will expire in 2006 and includes options to extend the terms. The
Company's Hong Kong subsidiary occupies an approximately 1,200-square foot
facility under a lease expiring in June 2000 and the Company's Canadian
subsidiary occupies an approximately 40,000-square foot facility under a lease
expiring in 2008. The Company believes it has sufficient space in its facilities
or will be able to lease additional space on acceptable terms to meet its needs
for the foreseeable future.
Item 3. LEGAL PROCEEDINGS.
Inapplicable.
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, 1998 and 1997. As of September 16, 1998, there were
189 recordholders of the Company's Common Stock based on information provided by
the Company's transfer agent.
Fiscal Year Fiscal Year
1998 1997
---------------- ------------------
Quarter High Low High Low
-------- ---------------- ------------------
First $19-1/2 $16-1/4 $15 $12-3/4
Second 21-1/16 18 15-1/2 9-3/8
Third 23-1/16 18-7/16 13 8-15/16
Fourth 25-1/4 18-1/8 16-3/4 12-9/16
The Company has never paid cash dividends. It is the present policy of the
Company to retain earnings to finance the growth and development of its
business, and therefore the Company does not anticipate paying cash dividends on
its Common Stock in the foreseeable future. Certain financial covenants in the
Company's bank line of credit agreement restrict the Company's ability to pay
cash dividends in excess of $200,000.
Item 6. SELECTED FINANCIAL DATA.
The selected consolidated income statement data for the fiscal years ended
June 30, 1998, 1997 and 1996 and the consolidated balance sheet data at June 30,
1998 and 1997 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. Information for the twelve months
ended June 30, 1994 is unaudited, and in the opinion of the Company's
management, the accounting principles used to prepare the unaudited financial
information are consistent with those used to prepare the audited financial
statements. The selected consolidated income statement data for the fiscal year
ended June 30, 1995, short fiscal year ended June 30, 1994 and the year ended
December 31, 1993 and the consolidated balance sheet data at June 30, 1996, 1995
and 1994 are derived from audited consolidated financial statements of the
Company that are not included herein. Effective January 1, 1994, the Company
changed its fiscal year end from December 31 to June 30. The six-month period
ended June 30, 1994 is therefore referred to as "short fiscal year 1994."
Consolidated Income Statement Data:
(In thousands, except per share data)
Twelve Months Short Year Ended
Fiscal Ended Fiscal Year December 31,
----------------------------------------------------------------------------------------
1998 1997 1996 1995 June 30, 1994 1994 1993
------- ------- ------- -------- ------------- ---------- ----------
Net sales....................... $167,841 $127,376 $125,126 $121,801 $ 97,027 $ 43,160 $81,892
Cost of goods sold.............. 80,663 60,452 59,920 62,175 50,405 22,981 41,699
------- ------- ------- -------- -------- -------- -------
Gross profit.................... 87,178 66,924 65,206 59,626 46,622 20,179 40,193
------- ------- ------- -------- -------- -------- -------
Operating expenses:
Selling, marketing and
distribution................ 43,193 31,673 29,878 32,154 25,180 12,156 21,786
General and administrative... 18,416 14,451 16,376 13,792 11,400 5,686 9,479
Costs incurred in pursuing
acquisitions................ 1,451
------- ------- ------- -------- -------- -------- -------
Total operating expenses..... 61,609 47,575 46,254 45,946 36,580 17,842 31,265
------- ------- ------- -------- -------- -------- -------
Income from operations.......... 25,569 19,349 18,952 13,680 10,042 2,337 8,928
Net interest (income)........... (172) (1,301) (706) (161) (88) (91)
------- ------- ------- -------- -------- -------- -------
Income before provision for
income taxes, extraordinary
item and cumulative effect of
accounting change............ 25,741 20,650 19,658 13,841 10,130 2,428 8,928
Provision for income taxes...... 9,833 8,102 7,840 5,863 4,196 1,061 3,638
------- ------- ------- -------- -------- -------- -------
Income before extraordinary item
and cumulative effect of
accounting change............ 15,908 12,548 11,818 7,978 5,934 1,367 5,290
Extraordinary item litigation
settlement - net............ 718 718
Cumulative effect of change in
accounting for income taxes.. 350
------- ------- ------- -------- -------- -------- -------
Net income...................... $15,908 $12,548 $11,818 $ 7,978 $ 6,652 $ 2,085 $ 5,640
======= ======= ======= ======== ======== ======== =======
Earnings per common share:
Basic......................... $ 1.38 $ 1.01 $ 0.95 $ 0.66 $ 0.57 $ 0.17 $ 0.50
======== ======== ======== ======== ======= ========= =======
Diluted....................... $ 1.27 $ 0.95 $ 0.89 $ 0.63 $ 0.54 $ 0.17 $ 0.47
======== ======== ======== ======== ======= ========= =======
Weighted average number of common shares outstanding:
Basic......................... 11,533 12,432 12,468 12,176 11,731 11,956 11,276
======== ======== ========= ========= ======== ======== =======
Diluted....................... 12,523 13,182 13,252 12,748 12,370 12,616 12,130
======== ======== ========= ========= ======== ======== =======
(1) Information for the twelve months ended June 30, 1994 is provided on an unaudited basis for comparison purposes
only.
Consolidated Balance Sheet Data:
(In thousands)
June 30,
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------- ----------
Working capital............. $ 57,975 $ 50,710 $ 51,653 $ 38,260 $ 30,581
Total assets................ 101,179 78,880 77,931 63,650 50,769
Short-term debt............. 2,749 475 152 200
Long-term liabilities....... 53 52 12 141
Stockholders' equity........ 74,532 59,484 59,498 44,787 35,786
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, virtually all of which have been introduced since January 1, 1995. The
Company focuses the great majority of its product development, sales and
marketing efforts on the office products and the mass market channels. The
office products channel and the mass market channel accounted for 47.2% and
39.2%, respectively, of fiscal 1998 sales.
RESULTS OF OPERATIONS
The following tables set forth, for the periods indicated, the percentages
that selected income statement items bear to sales and the percentage change in
the dollar amounts of such items.
Percentage of Sales
Years Ended June 30,
1998 1997 1996
--------- -------- -------
Net sales.................................... 100.0% 100.0% 100.0%
Cost of goods sold........................... 48.1 47.5 47.9
------ ----- -----
Gross profit................................. 51.9 52.5 52.1
------ ----- -----
Operating expenses:
Selling, marketing and distribution....... 25.7 24.9 23.9
General and administrative................ 11.0 11.3 13.1
Costs incurred in pursuing acquisitions... 1.1
----- -----
Total operating expenses................. 36.7 37.3 37.0
------ ----- -----
Income from operations....................... 15.2 15.2 15.1
Net interest income.......................... 0.1 1.0 0.6
------ ----- -----
Income before provision for income taxes..... 15.3 16.2 15.7
Provision for income taxes................... 5.8 6.3 6.3
------ ----- -----
Net income................................... 9.5% 9.9 % 9.4%
====== ===== =====
Percentage Change
Fiscal 1997 Fiscal 1996
to to
Fiscal 1998 Fiscal 1997
-------------------- -----------------
Net sales......................................... 31.8% 1.8%
Cost of goods sold................................ 33.4 0.9
Gross profit...................................... 30.3 2.6
Operating expenses:
Selling, marketing and distribution............ 36.4 6.0
General and administrative..................... 27.4 (11.8)
Costs incurred in pursuing acquisitions........ (100.0) NM
Total operating expenses...................... 29.5 2.9
Income from operations............................ 32.1 2.1
Net interest income............................... (86.8) 84.3
Income before provision for income taxes.......... 24.7 5.0
Provision for income taxes........................ 21.4 3.3
Net income........................................ 26.8 6.2
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1997
NET SALES. Net sales consist of revenues from gross product shipments net
of allowances for returns, rebates and credits. 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 is net sales less cost of goods sold, which is
comprised of materials, labor and manufacturing overhead. Gross profit may be
affected by, among other things, product mix, production levels, changes in
vendor and customer prices and discounts, sales volume and growth rate, sales
returns, purchasing and manufacturing efficiencies, tariffs, duties and
inventory carrying costs. Gross profit as a percentage of sales decreased from
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 net 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 net 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 net sales. General and administrative
expenses increased by $3,965,000, but declined from 11.3% to 11.0% as a
percentage of net 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.
Subsequent to fiscal year end 1998, the Company repurchased an additional
76,000 shares of Common Stock under its stock repurchase program (see Note 13 to
Consolidated Financial Statements).
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1996
NET SALES. In fiscal 1997, net sales increased by $2,250,000, or 1.8%,
compared with fiscal 1996 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 mass market customers grew by
$6,981,000, or 14.9%, primarily due to higher sales to Wal-Mart. Sales to the
office products channel decreased by $2,965,000, or 4.8%. Sales to foreign
customers declined by $763,000, or 12.0%, and sales to miscellaneous customers
grouped together as "other," decreased by $1,003,000, or 10.5%. Sales of related
organizing products increased by $5,894,000, or 135.2%. Sales of organizers and
planners decreased during the year by $3,435,000, or 4.4%, and sales of refills
decreased by $209,000, or 0.5%.
GROSS PROFIT. Primarily because of improved purchasing efficiencies, gross
profit as a percentage of sales increased to 52.5% for fiscal 1997 from 52.1%
for fiscal 1996.
OPERATING EXPENSES. Total operating expenses increased by $1,321,000, or
2.9%, for fiscal 1997 compared with fiscal 1996 and increased as a percentage of
net sales from 37.0% to 37.3% primarily because of $1,451,000 of costs incurred
in pursuing two significant acquisitions that did not come to fruition. These
costs included legal and accounting fees and miscellaneous expenses. Without
such costs, operating expenses for fiscal 1997 compared with fiscal 1996 would
have declined by $130,000 and would have decreased as a percentage of net sales
from 37.0% to 36.2%. Selling, marketing and distribution expenses as a
percentage of net sales increased from 23.9% to 24.9% primarily because of
increased display costs. General and administrative expenses as a percentage of
net sales decreased from 13.1% to 11.3% primarily because of lower personnel
costs.
NET INTEREST INCOME. Primarily because of the Company's higher levels of
cash available for short-term investment during the year, net interest income in
fiscal 1997 compared with fiscal 1996 increased by $595,000 and by 0.4% as a
percentage of net sales.
INCOME TAXES. Primarily as a result of the improved financial results of
the Company's Hong Kong subsidiary, the Company's fiscal 1997 effective tax rate
was 39.2%, compared with 39.9% for fiscal 1996. Prior to fiscal 1996, the
operating losses incurred by the Company's United Kingdom and Hong Kong
subsidiaries, which were formed in 1993 and 1994, respectively, and the tax
treatment required for these losses had increased the Company's effective tax
rate above what it otherwise would have been.
NET INCOME. Compared with fiscal 1996, net income for fiscal 1997 increased
by $730,000, or 6.2%. Without the costs of pursuing acquisitions, fiscal 1997
net income would have grown $1,619,000 or 13.7%, compared with fiscal 1996.
QUARTERLY RESULTS
The following tables set forth selected unaudited quarterly consolidated
financial data and the percentages such items represent of sales. The quarterly
consolidated financial data reflect, in the opinion of Management of the
Company, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the results of operations for such periods. Results
of any one or more quarters are not necessarily indicative of annual results or
continuing trends.
Quarters Ended
--------------
June 30, March 31, December 31, September 30,
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
Quarters Ended
--------------
June 30, March 31, December 31, September 30,
1997 1997 1996 1996
------------------- ----------------- ----------------- -----------------
(In thousands, except per share amounts)
Net sales........................... $ 37,793 100.0% $ 21,020 100.0% $ 35,014 100.0% $ 33,549 100.0%
Gross profit........................ 19,803 52.4 11,024 52.4 18,512 52.9 17,585 52.4
Total operating expenses............ 13,613 36.0 11,272 53.6 11,308 32.3 11,382 33.9
Income (loss) from operations....... 6,190 16.4 (248) (1.2) 7,204 20.6 6,203 18.5
Net interest (income)............... (443) (1.1) (345) (1.7) (303) (0.9) (210) (0.6)
Income before provision for
income taxes..................... 6,633 17.5 97 0.5 7,507 21.5 6,413 19.1
Net income.......................... $ 4,138 10.9 $ 58 0.3 $ 4,504 12.9 $ 3,848 11.5
Earnings per common share:
Basic.......................... $ 0.35 $ 0.00 $ 0.36 $ 0.30
Diluted........................ $ 0.33 $ 0.00 $ 0.34 $ 0.29
Weighted average number of common shares outstanding:
Basic.......................... 11,831 12,603 12,663 12,635
Diluted........................ 12,666 13,229 13,398 13,448
SEASONAL FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience significant seasonal fluctuations in its sales and other financial
results that it believes have resulted and will continue to result primarily
from its customers' and users' buying patterns. These buying patterns have
typically adversely affected orders for the Company's products in the third
quarter of each fiscal year.
Although it is difficult to predict the future seasonality of sales, the
Company believes that future seasonality should be influenced at least in part
by customer and user buying patterns similar to those that have historically
affected the Company. Quarterly financial results are also affected by new
product introductions and line extensions, the timing of large orders, changes
in product sales or customer mix, vendor and customer pricing, production
levels, supply and manufacturing delays, large customers' inventory management
and general industry and economic conditions. The seasonality of the Company's
financial results and the unpredictability of the factors affecting such
seasonality make the Company's quarterly and yearly financial results difficult
to predict and subject to significant fluctuation.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1998, the Company financed its operating cash needs primarily
from internally generated funds. The Company's cash and cash equivalents at June
30, 1998 decreased to $2,923,000 from $15,550,000 at June 30, 1997. In fiscal
1998, net cash of $7,035,000 provided by operating activities, was offset by net
cash of $11,911,000 and $7,697,000 used in investing activities and financing
activities, respectively.
Of the $7,035,000 net amount provided by the Company's operating
activities, $15,908,000 was provided by net income, $5,517,000 was provided by
depreciation and amortization and $3,755,000 was provided by an increase in
accrued expenses. These amounts were partially offset by an increase of
$11,050,000 in inventories and an increase of $8,100,000 in accounts receivable.
Of the $11,911,000 net amount used in the Company's investing activities,
$7,175,000 was used to acquire primarily machinery and equipment and secondarily
computer equipment and software, and $4,626,000 was used for business
acquisitions.
Of the $7,697,000 net amount used in the Company's financing activities,
$11,564,000 was used to repurchase 695,588 shares of Common Stock from certain
officers and directors. This amount was partially offset by $4,580,000 and
$673,000 that were provided by the issuance of Common Stock upon exercise of
then-outstanding stock options and warrants, respectively.
Accounts receivable (net) at June 30, 1998 increased by $10,239,000, or
45.9%, from the amount at June 30, 1997 primarily due to the growth in sales.
The average collection period of accounts receivable at June 30, 1998 decreased
to 45 days from 47 days at June 30, 1997.
Inventories increased by $14,204,000, or 60.7%, from the June 30, 1997
amount primarily because of the inventories of the three companies acquired
during fiscal 1998 and secondarily because of new and recently introduced
products.
Effective February 1, 1998, the Company entered into a $15,000,000 line of
credit. Borrowings under this line of credit bear interest at the Company's
election at either the bank's prime rate less certain margins, or at LIBOR plus
certain margins, with the margins dependent upon the Company's meeting certain
funded debt-to-EBITDA ratios. Prior to February 1, 1998, borrowings under the
line bore interest either at the bank's prime rate or at LIBOR plus 1.75%. At
June 30, 1998, the Company had $1,253,000 outstanding under its primary bank
line and had outstanding letters of credit totaling approximately $1,050,000,
which reduced the availability under the line to approximately $12,697,000. (See
Note 5 to Consolidated Financial Statements.)
The Canadian lines of credit allow for aggregate borrowings by the
Company's two Canadian subsidiaries of up to Canadian $3,000,000 (approximately
US $2,039,000). Borrowings bear interest at the Canadian bank's prime rate and
are due and payable on demand. At June 30, 1998, approximately Canadian
$2,155,000 (approximately US $1,463,000) was outstanding under these lines of
credit. (See Note 5 to Consolidated Financial Statements.)
On September 23, 1998, the Company entered into a Revolving Loan Agreement
(the "Loan Agreement") with Wells Fargo Bank, National Association ("Wells
Fargo"). The Loan Agreement provides for borrowings through September 30, 2005
(the "Maturity Date"). Borrowings will bear interest either at fixed rates based
on the higher of the bank's prime rate and the Federal Funds Rate published by
the Federal Reserve Bank of New York or at floating rates calculated by
reference to the interest rates at which the bank offers deposits in U.S.
dollars in amounts approximately equal to the amount of the relevant Loan and
for a period of time comparable to the number of days the relevant Loan will
remain outstanding, together with a margin. The maximum amount that may be
outstanding under the Loan Agreement is $160,000,000 through December 31, 2000.
Thereafter, the maximum amount of borrowings that may be outstanding under the
Loan Agreement is reduced by $20,000,000 in calendar 2001 and by $10,000,000 in
each of the following calendar years up to the Maturity Date. This Loan
Agreement replaces the Company's domestic and Canadian lines of credit discussed
above. (see Note 20 to the Consolidated Financial Statements).
In connection with the Proposed Acquisition of Filofax, the Company
currently estimates that the aggregate fees and expenses of the transaction,
including investment banking, legal, accounting and other fees and expenses,
will be in the range of $4 to 6 million. Actual total fees and expenses may
differ from this estimate and are subject to future contingencies. The fees and
expenses, as well as any payments for the Filofax shares, will be paid with
available cash and with borrowings under the Loan Agreement.
The Company has not incurred significant losses or gains from foreign
currency exchange rate fluctuations. The continuing expansion of the Company's
international operations could, however, result in larger gains or losses as a
result of fluctuations in foreign currency exchange rates as those subsidiaries
conduct business in whole or in part in foreign currencies. The Company's
exposure to the impact of interest changes and foreign currency fluctuations is
expected to increase if the Proposed Acquisition of Filofax is completed and the
Company incurs substantial debt under its new Loan Agreement. The Company has
entered into a call option with respect to the Proposed Acquisition of Filofax
and may in the future enter into additional call options or foreign currency
exchange contracts, swap agreements or other financial instruments as hedges to
moderate the impact of foreign currency fluctuations. There can be no assurance
that the Proposed Acquisition of Filofax will be completed.
A single currency called the euro will be introduced in certain countries
in Europe on January 1, 1999, but will not be introduced in England. 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 has
not yet evaluated the impact of the single currency.
The Company believes that cash flow from operations, vendor credit, its
existing working capital and its bank line of credit will be sufficient to
satisfy the Company's anticipated cash requirements at least through fiscal
1999. 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.
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 accurate dates commencing on or after January 1, 2000. This has the
potential to affect the operation of these systems adversely and materially. Day
Runner has identified four phases in its Year 2000 compliance efforts:
discovery, assessment, remediation and applicable testing and verification. The
Company has substantially completed the discovery and assessment phases for its
own systems and applications and believes that by modifying existing software
and converting to new software for certain tasks it can prevent the Year 2000
transition from posing significant internal operational problems.
The Company plans to complete the remediation phase by the second quarter
of fiscal year 1999 and complete the applicable testing and verification phase
by the end of the third quarter of fiscal year 1999. Day Runner currently
estimates that total incremental cash requirements related to the Year 2000
issue will be approximately $750,000 to $1,200,000, of which approximately
$650,000 was incurred as of June 30, 1998. The Company does not anticipate that
the costs of these modifications and conversions will be material to its
financial position or results of operations in any given year. Expenditures will
be expensed or capitalized as appropriate. The cash requirements described above
do not include any estimates for costs of Year 2000 remediation or compliance
that may be incurred if the Proposed Acquisition of Filofax is completed. The
Company is unable to estimate these costs at this time. There can be no
assurance that the Proposed Acquisition of Filofax will be completed.
Day Runner is surveying its vendors, customers and others on whom it relies
to assure that their systems will be Year 2000 compliant and that they will be
able to continue their business with the Company without interruption. 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 would not have an adverse effect on the
Company's systems. Furthermore, no assurance can be given that any or all of the
Company's systems are or will be Year 2000 compliant, that the ultimate costs
required to address the Year 2000 issue will not exceed the amounts indicated
above, or that the impact of any failure to achieve substantial Year 2000
compliance will not have a material adverse effect on the Company's financial
condition.
FORWARD LOOKING STATEMENTS
With the exception of the actual reported financial results and other
historical information, the statements made in the Management's Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in this
annual report are forward looking statements that involve risks and
uncertainties that could affect actual future results. Such risks and
uncertainties include, but are not limited to: timing and size of orders from
large customers, timing and size of orders for new products, competition, large
customers' inventory management, general economic conditions, the health of the
retail environment, supply constraints, supplier performance and other risks
indicated in the Company's filings with the Securities and Exchange Commission.
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.
Inapplicable
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 November 23, 1998, 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 November 23, 1998, 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 November 23, 1998, 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 November 23, 1998, 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: PAGE
1. Consolidated Financial Statements
Independent Auditors' Report F-1
Consolidated Balance Sheets at June 30, 1998 and
1997 F-2
Consolidated Statements of Income for Each of the Three
Years in the Period Ended June 30, 1998 F-3
Consolidated Statements of Stockholders' Equity for Each
of the Three Years in the Period Ended June 30, 1998 F-4
Consolidated Statements of Cash Flows for Each of the
Three Years in the Period Ended June 30, 1998 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) and 2 (10) thereto
dated October 21, 1996 and September 19, 1997 (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)
10.5 1998 Officer Bonus Plan(7)(12)
10.6 1999 Officer Bonus Plan(7)
10.7 Officer Severance Plan effective as of February 28, 1993,
including form of Employment Separation Agreement(11) and
First Amendment thereto effective as of August 17, 1998(7)
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(13)
10.9 Triple Net Lease, as amended, effective as of March 22, 1991
between Catellus Development Corporation and the Registrant(3)
and as amended by Lease Amendment dated June 29, 1992(10)
10.10 Triple Net Lease dated July 28, 1992 between Catellus
Development Corporation and the Registrant(11)
10.11 Koll Business Center Lease dated September 7, 1994 between the
Registrant and Koll Alton Plaza and Aetna Life Insurance
Co.(14)
10.12 Standard Commercial Lease Agreement dated as of July 31, 1996
between System Realty Nine, Inc. and the Registrant(15)
10.13 Standard Commercial Lease Agreement dated as of October 1,
1997 between RDC Sales and the Registrant
10.14 Standard Commercial Lease Agreement dated as of May 11,
1998 between GPM Real Property (7) Ltd. and Endow (7) Inc. and
the Registrant
10.15 Form of Warrant to purchase shares of the Registrant's Common
Stock issued to certain directors and officers of the
Registrant(3) and Schedule of Warrants(7)
10.16 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)(16)
10.17 Form of Stock Purchase Agreement dated August 27, 1997 and
Schedule of Sellers(12)
10.18 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)
10.19 Consulting Agreement effective April 22, 1997 between the
Registrant and Alan R. Rachlin(7)(17)
10.20 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(18)
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,
1998.
(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 (Registration No. 0-19835) filed with the Commission on August 16,
1993.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-84036) filed with the Commission on
September 15, 1994.
(7) Constitutes a management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of this
Annual Report on Form 10-K.
(8) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-80819) filed with the Commission on
December 22, 1995.
(9) Incorporated by reference to the Registrant's 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 Annual Report on Form
10-K (File No. 0-19835) filed with the Commission on March 31, 1993.
(12) 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.
(13) 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.
(14) 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.
(15) 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.
(16) 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.
(17) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-19835) filed with the Commission on May 15, 1997.
(18) 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: September 30, 1998
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 September 30, 1998
- ----------------------------------------
Mark A. Vidovich
/s/ James E. Freeman, Jr.
- ----------------------------------------- Chief Executive Officer September 30, 1998
James E. Freeman, Jr (Principal Executive Officer)
.
/s/ Dennis K. Marquardt Executive Vice President, September 30, 1998
- ---------------------------------------- Finance & Administration and
Dennis K. Marquardt Chief Financial Officer
(Principal Financial Officer
and Accounting Officer)
/s/ James P. Higgins Director September 30, 1998
- ----------------------------------------
James P. Higgins
3029, 1998
- ----------------------------------------
Jill Tate Higgins
/s/ Charles Miller Director September 30, 1998
----------------------------------------
Charles Miller
/s/ Alan R. Rachlin Director September 30, 1998
- ----------------------------------------
Alan R. Rachlin
/s/ Boyd I. Willat Director September 30, 1998
- ----------------------------------------
Boyd I. Willat
/s/ Felice Willat Director September 30, 1998
- ----------------------------------------
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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended June 30, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Day Runner, Inc. and subsidiaries
as of June 30, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
/s/ DELOITTE & TOUCHE LLP
Los Angeles, CA
August 17, 1998
(September 25, 1998 as to Note 20)
F-1
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
June 30,
1998 1997
--------- ------
Current assets:
Cash and cash equivalents...................................................... $ 2,923 $15,550
Accounts receivable (less allowance for doubtful accounts and
sales returns and other allowances of $9,942 and $8,664 at
June 30, 1998 and 1997, respectively)....................................... 32,542 22,303
Inventories.................................................................... 37,610 23,406
Prepaid expenses and other current assets...................................... 1,670 2,409
Income taxes receivable........................................................ 2,606
Deferred income taxes.......................................................... 7,218 6,386
--------- -------
Total current assets........................................................ 84,569 70,054
Property and equipment, net ....................................................... 11,888 8,688
Other assets (net of accumulated amortization of $196,000 at June 30, 1998)........ 4,722 138
--------- -------
Total assets....................................................................... $101,179 $78,880
========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit................................................................ $ 2,716 $ 452
Accounts payable............................................................... 9,969 8,320
Accrued expenses............................................................... 13,876 9,500
Income taxes payable........................................................... 1,049
Current portion of capital lease obligations................................... 33 23
--------- -------
Total current liabilities................................................... 26,594 19,344
--------- -------
Long-term liabilities:
Capital lease obligations...................................................... 53 52
--------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock (1,000,000 shares authorized; $0.001 par value, no shares
issued or outstanding)
Common stock (29,000,000 shares authorized; $0.001 par value; 13,677,386
shares issued and 11,955,598 outstanding at June 30, 1998;
12,728,858 shares issued and 11,702,658 outstanding at June 30, 1997)........ 14 13
Additional paid-in capital..................................................... 34,445 23,752
Retained earnings.............................................................. 65,076 49,168
Cumulative translation adjustment.............................................. 102 92
Treasury stock - At cost (1,721,788 and 1,026,200 shares, at June 30, 1998 and
1997, respectively).......................................................... (25,105) (13,541)
--------- --------
Total stockholders' equity.................................................. 74,532 59,484
--------- -------
Total liabilities and stockholders' equity......................................... $101,179 $78,880
========= =======
See accompanying notes to consolidated financial statements.
F-2
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended June 30,
1998 1997 1996
--------- ---------- --------
Net sales................................................... $ 167,841 $ 127,376 $125,126
Cost of goods sold.......................................... 80,663 60,452 59,920
--------- --------- ---------
Gross profit................................................ 87,178 66,924 65,206
--------- --------- ---------
Operating expenses:
Selling, marketing and distribution..................... 43,193 31,673 29,878
General and administrative.............................. 18,416 14,451 16,376
Costs incurred in pursuing acquisitions................. 1,451
--------- ---------
Total operating expenses............................. 61,609 47,575 46,254
--------- --------- ---------
Income from operations...................................... 25,569 19,349 18,952
--------- --------- ---------
Interest (income) expense:
Interest income......................................... (390) (1,431) (823)
Interest expense........................................ 218 130 117
--------- --------- ---------
Net interest income.................................. (172) (1,301) (706)
--------- --------- ---------
Income before provision for income taxes.................... 25,741 20,650 19,658
Provision for income taxes.................................. 9,833 8,102 7,840
--------- --------- ---------
Net income.................................................. $ 15,908 $ 12,548 $ 11,818
========= ========= =========
Earnings per common share:
Basic................................................ $ 1.38 $ 1.01 $ 0.95
========= ========= =========
Diluted.............................................. $ 1.27 $ 0.95 $ 0.89
========= ========= =========
Weighted average number of common shares outstanding:
Basic................................................ 11,533 12,432 12,468
========= ========= =========
Diluted.............................................. 12,523 13,182 13,252
========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
Number Additional Cumulative
of Shares Common Paid-In Retained Translation Treasury
Outstanding Stock Capital Earnings Adjustment Stock Total
----------- --------------- ---------------- -------- ---------- ---------- ------
Balance, July 1, 1995..................... 12,251,594 $ 12 $ 19,936 $ 24,802 $ 37 $44,787
Exercise of options......................... 357,948 1,475 1,475
Tax benefit of options...................... 1,452 1,452
Cumulative translation adjustment .......... (34) (34)
Net income.................................. 11,818 11,818
---------- ------ -------- ------ ------ -------- -------
Balance, June 30, 1996...................... 12,609,542 12 22,863 36,620 3 59,498
Exercise of warrants........................ 11,000 22 22
Exercise of options......................... 108,316 1 660 661
Tax benefit of options...................... 157 157
Compensation cost associated with
warrant grant........................... 50 50
Cumulative translation adjustment........... 89 89
Treasury stock.............................. (1,026,200) $(13,541) (13,541)
Net income.................................. 12,548 12,548
---------- ------- ----------- -------- ----- --------- --------
Balance, June 30, 1997...................... 11,702,658 13 23,752 49,168 92 ( 13,541) 59,484
Exercise of warrants........................ 278,000 673 673
Exercise of options......................... 670,528 1 4,579 4,580
Tax benefit of options...................... 5,208 5,208
Compensation cost associated with
warrant grant........................... 233 233
Cumulative translation adjustment........... 10 10
Treasury stock.............................. (695,588) (11,564) (11,564)
Net income.................................. 15,908 15,908
---------- ------- --------- --------- ------ -------- --------
Balance, June 30, 1998...................... 11,955,598 $ 14 $ 34,445 $ 65,076 $ 102 $(25,105) $74,532
========== ===== ========= ========= ===== ======== ========
See accompanying notes to consolidated financial statements.
F-4
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years Ended June 30,
1998 1997 1996
--------- ---------- -------
Cash flows from operating activities:
Net income.............................................. $ 15,908 $ 12,548 $11,818
Adjustments to reconcile net income to net cash provided
by(used in) operating activities:
Depreciation and amortization......................... 5,517 3,869 2,548
Provision for losses on accounts receivable........... 381 810
Write-off of barter credits........................... 200 520
Utilization of barter credits......................... 100
Compensation expense related to issuance of warrants.. 233 50
Deferred income tax benefit........................... (832) (1,186) (26)
Changes in operating assets and liabilities,
net of effects from purchase
of businesses:
Accounts receivable................................ (8,100) (1,220) (2,884)
Inventories ...................................... (11,050) (3,294) 6,543
Prepaid expenses and other current assets.......... 595 (689) (87)
Income taxes receivable............................ 2,087 1,930 (1,930)
Accounts payable................................... (725) 225 (1,028)
Accrued expenses................................... 3,755 (872) 3,606
Income taxes payable............................... (453) 1,206 (1,247)
-------- -------- -------
Net cash provided by operating activities........... 7,035 13,148 18,643
-------- -------- -------
Cash flows from investing activities:
Acquisition of property and equipment................... (7,175) (4,972) (4,393)
Purchase of businesses...................................... (4,626)
Other assets............................................ (110) 5 (8)
--------- ---------- ----------
Net cash used in investing activities................... (11,911) (4,967) (4,401)
--------- ---------- ----------
Cash flows from financing activities:
Net borrowings under line of credit..................... (338) 452
Payment of long-term debt............................... (990) (141)
Payment of capital lease obligations.................... (58) (13) (23)
Exercise of warrants.................................... 673 22
Exercise of options......................................... 4,580 661 1,475
Repurchase of common stock.............................. (11,564) (13,541)
-------- --------
Net cash (used in) provided by financing activities..... (7,697) (12,419) 1,311
-------- -------- -------
Effect of exchange rate changes on cash and cash equivalents (54) 23 (57)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents........ (12,627) (4,215) 15,496
Cash and cash equivalents, beginning of year................ 15,550 19,765 4,269
--------- -------- ---------
Cash and cash equivalents, end of year...................... $ 2,923 $ 15,550 $19,765
======== ======== =========
See accompanying notes to consolidated financial statements.
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") is a developer,
manufacturer and marketer of paper-based organizers for the retail market. The
Company also develops, manufactures and markets a number of related organizing
products, including telephone/address books, spiral dated goods, executive
accessories, products for children and students, organizing and other wall
boards and planners. A substantial portion of the Company's sales is to office
products superstores, wholesalers and dealers and to mass market retailers
throughout the United States and abroad. The Company grants credit to
substantially all of its customers.
CONSOLIDATION. The consolidated financial statements include the accounts
of Day Runner, Inc. and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for the reporting period. Actual
results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION. Assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars at the exchange rate
prevailing at the balance sheet date and, where appropriate, at historical rates
of exchange. Income and expense accounts are translated at the weighted average
rate in effect during the year. The aggregate effect of translating the
financial statements of the foreign subsidiaries is included as a separate
component of stockholders' equity. Foreign exchange gains (losses) were not
significant during the years ended June 30, 1998, 1997 and 1996.
CASH EQUIVALENTS. The Company considers all highly liquid investments
purchased with a maturity of three months or less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS. THe Company's financial instruments
consist primarily of cash, accounts receivable and payable, and debt
instruments. The book values of financial instruments, other than the debt
instruments, are representative of their fair values due to their short-term
maturity. The book value of the Company's debt instruments is considered to
approximate its fair value because the interest rate of these instruments is
based on current rates offered to the Company.
PROPERTY AND DEPRECIATION. Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided for over the estimated useful
lives of the respective assets, using the straight-line method. Estimated useful
lives range from three to seven years. Vehicles and equipment under capital
leases and leasehold improvements are amortized using the straight-line method
over the lesser of the estimated useful life of the asset or the life of the
lease.
F-1
OTHER ASSETS. Other assets consist primarily of goodwill and
non-competition agreements that arose as a result of the Company's acquisitions
during fiscal 1998. Goodwill is being amortized using the straight- line method
over a period of 20 years, and the non-competition agreements are being
amortized using the straight-line method over a period of five years.
IMPAIRMENT OF LONG-LIVED ASSETS. Long-lived assets are reviewed for
impairment, based on cash flows undiscounted without interest charges, whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Impairment losses would be recognized if the
carrying amount of the asset exceeds the fair value of the assets.
INCOME TAXES. Deferred taxes are determined based on temporary differences
between the financial reporting and income tax bases of assets and liabilities
at the balance sheet date multiplied by the applicable tax rates.
NET SALES. Revenue is recognized upon shipment of product to the customer,
with appropriate allowances for estimated returns, rebates and other allowances.
SIGNIFICANT CUSTOMERS. In 1998, sales to four customers accounted for 28%,
16%, 15% and 14% of the Company's sales. In 1997, sales to four customers
accounted for 25%, 15%, 14% and 11% of the Company's sales. In 1996, sales to
three customers accounted for 17%, 15% and 12% of the Company's sales.
NEW ACCOUNTING STANDARDS. In June 1997, the Financial Accounting Standards
Board (the "Board") issued Statement of Financial Accounting Standards ("SFAS")
No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. These statements are
effective for financial statements issued for periods beginning after December
15, 1997. In June 1998, the Board issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement is effective for financial
statements issued for periods beginning after June 15, 1999. The Company is
evaluating what, if any, additional disclosures may be required upon
implementation of SFAS Nos. 130, 131 and 133.
RECLASSIFICATIONS. Certain reclassifications were made to the prior year
financial statements to conform to the current presentation.
2. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
on the first-in, first-out basis. Inventories consist of the following (in
thousands):
June 30,
1998 1997
--------- ---------
Raw materials................. $ 14,087 $ 10,204
Work in process............... 831 426
Finished goods................ 22,692 12,776
--------- --------
Total................ $ 37,610 $ 23,406
========= ========
F-2
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
June 30,
1998 1997
-------- -------
Displays..................................... $ 9,003 $ 6,094
Data processing equipment and software....... 8,913 5,863
Machinery and equipment...................... 6,577 4,222
Leasehold improvements....................... 2,229 1,838
Vehicles..................................... 250 214
-------- ---------
Total................................ 26,972 18,231
Accumulated depreciation and amortization.... (15,084) (9,543)
-------- ---------
Property and equipment - net................. $ 11,888 $ 8,688
======== =========
4. ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
June 30,
1998 1997
-------- -------
Accrued sales and promotion costs........ $ 7,473 $ 5,223
Accrued payroll and related costs........ 2,955 2,128
Other.................................... 3,448 2,149
-------- ---------
Total............................ $ 13,876 $ 9,500
======== =========
5. LINES OF CREDIT
Effective February 1, 1998, the Company entered into a credit agreement
with a bank to allow the Company to borrow up to $15,000,000 under a line of
credit through February 1, 2000 and open commercial or standby letters of credit
up to $10,000,000, with the aggregate of borrowings and letters of credit not to
exceed $15,000,000. Commercial letters of credit shall be issued for a term not
to exceed 180 days, provided, however, that no letters of credit shall have an
expiration date subsequent to May 1, 2000. At June 30, 1998, the Company had
$1,253,000 outstanding under this line of credit and had outstanding letters of
credit totaling approximately $1,050,000.
Under this new credit agreement, borrowings bear interest at the Company's
election either at the bank's prime rate (8.50% at June 30, 1998) less certain
margins, which range from .50% to 1.00%, or at LIBOR (5.66% at June 30, 1998)
plus certain margins, which range from .75% to 1.25%, with the margins dependent
upon the Company's meeting certain funded debt-to-EBITDA ratios. The credit
agreement requires the Company to: maintain a current ratio of not less than
1.50 to 1.00, maintain tangible net worth of not less than $45,000,000, and
maintain a funded debt-to-EBITDA ratio of less than 1.50 to 1.00. The Company
also is required to obtain the bank's approval to declare or pay dividends in
excess of $200,000 (See Note 20).
Each of the Company's two Canadian subsidiaries has a credit agreement with
a Canadian bank. The aggregate borrowings under these lines of credit, which are
guaranteed by the Company and are used for working capital by these
subsidiaries, may not exceed Canadian $3,000,000 (approximately US $2,039,000),
bear interest at the bank's prime rate (6.50% at June 30, 1998) and are due and
payable on demand. At June 30, 1998, approximately Canadian $2,155,000
(approximately US $1,463,000) was outstanding under these lines of credit. These
borrowings were collateralized by substantially all of the two Canadian
subsidiaries' assets (See Note 20).
F-3
Total borrowings under the credit agreement and the two Canadian credit
agreements bore interest at an average interest rate of 7.00% and 8.50% for the
years ended June 30, 1998 and 1997, respectively. The Company had no borrowings
outstanding under its lines of credit during the year ended June 30, 1996.
6. LEASES
The Company has four noncancelable operating leases for its principal
operating facilities and its corporate headquarters. The leases expire through
2005. The leases include renewal options that, if exercised, would extend the
lease terms through 2011, and the leases provide for increases in future minimum
annual rental payments based on defined increases in the Consumer Price Index,
subject to certain minimum increases. The Company also has entered into leases
for certain production, warehouse, computer and office equipment under
noncancelable operating leases that expire through August 2002.
The Company also leases certain vehicles and equipment under agreements
that meet the criteria for classification as capital leases. Future minimum
lease payments under these capital leases, and the future minimum lease payments
under the operating leases at June 30, 1998, are summarized as follows (in
thousands):
Capital Operating
Years Ending June 30, Leases Leases
--------------------- --------- ---------
1999.................................................... $ 33 $ 4,525
2000.................................................... 24 3,626
2001.................................................... 12 3,014
2002.................................................... 13 1,478
2003.................................................... 4 1,137
Thereafter.............................................. 836
--------- --------
Total minimum lease payments............................ 86 $ 14,616
========
Less current portion of capital lease obligations....... 33
---------
Long-term portion of capital lease obligations.......... $ 53
=========
Included in property and equipment at June 30, 1998 and 1997 are vehicles
and equipment under capital leases with a cost of $157,000 and $88,000 and
accumulated depreciation of $47,000 and $43,000, respectively.
Rent expense was $4,025,000, $3,841,000 and $3,927,000 for the years ended
June 30, 1998, 1997 and 1996, respectively.
7. INCOME TAXES
The components of income before provision for income taxes were (in
thousands):
Years Ended June 30,
1998 1997 1996
---------- --------- --------
United States......................... $ 22,856 $ 18,765 $ 18,029
Other................................. 2,885 1,885 1,629
--------- --------- ---------
Total.............................. $ 25,741 $ 20,650 $ 19,658
========= ========= =========
F-4
The provision for income taxes consists of the following (in
thousands):
Years Ended June 30,
1998 1997 1996
---------- --------- -------
Current:
Federal............................... $ 8,565 $ 7,076 $ 6,051
State................................. 1,477 1,825 1,473
Foreign............................... 623 387 342
--------- --------- ---------
Total current........................... 10,665 9,288 7,866
--------- --------- ---------
Deferred:
Federal............................... (920) (961) (37)
State................................. 88 (225) 11
--------- --------- ---------
Total deferred.......................... (832) (1,186) (26)
--------- --------- ---------
Total provision for income taxes........ $ 9,833 $ 8,102 $ 7,840
========= ========= =========
Differences between the total income tax provision and the amount
computed by applying the statutory federal income tax rate to income before
provision for income taxes are as follows (in thousands):
Years Ended June 30,
1998 1997 1996
---------- ----------- -------
Computed tax expense using the
statutory federal income tax rate..... $ 9,009 $ 7,228 $ 6,880
Increase (decrease) in taxes arising from:
State taxes, net of federal benefit... 769 1,000 980
Foreign earnings taxed at other
than federal statutory rate......... (387) (273) (229)
Other................................. 442 147 209
--------- --------- ---------
Total................................. $ 9,833 $ 8,102 $ 7,840
========= ========= =========
Effective income tax rate............... 38% 39% 40%
========= ========= =========
Total deferred tax assets and deferred tax liabilities consist of the
following (in thousands):
June 30,
1998 1997
---------------- ----------
Allowance for sales returns............................ $ 2,918 $ 2,490
Inventory obsolescence reserve......................... 1,220 1,394
Allowance for doubtful accounts........................ 1,074 1,147
State taxes............................................ 615 615
Sales programs......................................... 608 374
Other deferred tax assets.............................. 1,368 1,117
------ --------
Total deferred tax assets.............................. 7,803 7,137
Deferred tax liabilities............................... (585) (751)
------- --------
Total.................................................. $7,218 $ 6,386
======= ========
Cumulative undistributed earnings of foreign subsidiaries for which no
deferred taxes have been provided approximated $4,153,000 at June 30, 1998. The
additional taxes payable on the earnings of foreign subsidiaries, if remitted,
would be offset by U.S. tax credits for foreign taxes paid.
F-5
8. EARNINGS PER SHARE
The Company adopted SFAS No. 128, Earnings Per Share, which requires the
Company to present basic and diluted earnings per share on the face of the
income statement. Basic earnings per share is computed by dividing net income by
the weighted-average number of common shares outstanding for the period. Diluted
earnings per share is computed by dividing net income by the sum of the weighted
average number of common shares outstanding for the period plus the assumed
exercise of all dilutive securities. The following reconciles the numerator and
denominator of the basic and diluted per share computations for net income (in
thousands, except per share amounts):
Years Ended June 30,
1998 1997 1996
------------ ------------- ----------
Net Income $ 15,908 $ 12,548 $ 11,818
========== ============= ==========
Basic Weighted Average Shares
Weighted average number of
common shares outstanding 11,533 12,432 12,468
Effect of Dilutive Securities
Additional shares from the assumed
exercise of options and warrants 3,093 2,757 2,295
Shares assumed to be repurchased
under the treasury stock method (2,103) (2,007) (1,511)
---------- ----------- ----------
Diluted Weighted Average Shares
Weighted average number of
common shares outstanding and
common share equivalents 12,523 13,182 13,252
========== =========== ==========
Basic $ 1.38 $ 1.01 $ 0.95
========== ========== ==========
Diluted $ 1.27 $ 0.95 $ 0.89
========== =========== ==========
9. STOCK OPTION PLANS
Under the Company's 1995 Stock Option Plan (the "Plan"), an aggregate
of 1,550,000 shares of common stock is reserved for issuance to key employees,
including officers and directors, and consultants of the Company. Both incentive
stock options and nonstatutory stock options are authorized for issuance under
the Plan. The terms of the options are determined at the time of grant. Pursuant
to the Plan, the per share option price of incentive stock options may not be
less than the fair market value of a share of common stock at the date of grant,
and no options may be granted after December 2005. The outstanding options
typically become exercisable over a period of five years from the date of
issuance and have terms of up to ten years.
The Company also authorized the issuance of up to 3,450,000 shares of
the Company's common stock under its Amended and Restated 1986 Stock Option
Plan. Such options typically become exercisable ratably over a period of five
years from the date of issuance and have terms of six to ten years. As of June
30, 1998, options covering 2,406,564 shares have been exercised and options
covering 1,027,186 shares remain outstanding. No additional options will be
granted under this plan.
F-6
During the years ended June 30, 1998, 1997 and 1996, certain officers
and employees exercised options to purchase an additional 651,414, 74,300 and
328,050 shares, respectively, of the Company's common stock for an aggregate of
$4,278,000, $381,000 and $1,214,000, respectively (see Note 10).
In connection with the exercise of nonstatutory stock options and the
sale of shares purchased pursuant to incentive stock options, the Company
realized a reduction in its current tax liability during the years ended June
30, 1998, 1997 and 1996. This reduction totaled $5,208,000, $157,000 and
$1,452,000, respectively, and was credited to additional paid-in capital.
A summary of option activity is as follows:
Weighted Weighted
Average Average
Number of Exercise Options Exercise
Options Price Exercisable Price
------- ----- ----------- -----
Outstanding, July 1, 1995........... 1,733,450 $ 5.96
Granted.......................... 336,750 8.38
Exercised........................ (328,050) 3.69
Cancelled........................ (10,000) 7.65
------------
Outstanding, June 30, 1996.......... 1,732,150 6.85 753,774 $ 6.22
Granted.......................... 465,000 13.00
Exercised........................ (74,300) 5.13
Cancelled........................ (31,250) 11.96
------------
Outstanding, June 30, 1997.......... 2,091,600 8.20 1,102,314 6.90
Granted.......................... 565,000 17.10
Exercised........................ (651,414) 6.57
------------
Outstanding, June 30, 1998.......... 2,005,186 11.24 933,648 8.61
============
At June 30, 1998, the range of option prices for shares under options
and the weighted average remaining contractual life is as follows:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number of Exercise Contractual Number Exercise
Range of Option Exercise Price Options Price Life Exercisable Price
------------------------------ ------------ -------- ------------ ----------- --------
$ 5.13 - $8.38 818,636 $ 6.69 5.80 601,098 $ 6.32
9.75 - 13.00 623,550 11.91 7.42 253,050 11.41
16.88 - 20.63 563,000 17.10 9.16 79,500 17.00
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation cost has been recognized for stock option awards. Had
compensation cost for the Company's stock option plans been determined based on
the fair value at the grant dates for awards under those plans as required by
SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net income
and earnings per common and common equivalent shares would have been reduced to
the pro forma amounts indicated below:
F-7
Years Ended June 30,
1998 1997 1996
---------- ---------- --------
As reported $ 15,908 $ 12,548 $ 11,818
Pro forma $ 12,617 $ 11,094 $ 11,294
Earnings per common and common equivalent shares:
As reported:
Basic $ 1.38 $ 1.01 $ 0.95
Diluted $ 1.27 $ 0.95 $ 0.89
Pro forma:
Basic $ 1.09 $ 0.89 $ 0.91
Diluted $ 1.01 $ 0.84 $ 0.85
The fair values of the options granted under the plans during 1998,
1997 and 1996 were estimated on the date of grant using the Black-Scholes
option-pricing model. The weighted-average fair value of the options at the date
of grant were $9.03, $14.53 and $10.10, during fiscal 1998, 1997 and 1996,
respectively. The following weighted average assumptions for 1998, 1997 and
1996, respectively, were used: no dividend yield; volatility of 57.21%, 53.28%
and 56.26%; risk-free interest rates of 5.24% to 6.21%, 5.41% to 6.95% and 5.69%
to 6.40%; and expected option lives of one to four years for all periods. Pro
forma compensation cost of options granted under the Employee Stock Purchase
Plan is measured based on the discount from market value (see Note 10).
On August 17, 1998, the Company issued options to key employees to
purchase 375,000 shares of the Company's common stock at $18.75 per share. The
options vest over a period of five years and expire in 2008.
10. EMPLOYEE STOCK PURCHASE PLAN
During 1992, the Company adopted an Employee Stock Purchase Plan under
which 350,000 shares of common stock were authorized for issuance to employees.
Under the plan, eligible employees may purchase, through payroll deductions
withheld during an offering period, an amount of common stock not to exceed
approximately 5% of the employee's annual compensation. The purchase price per
share is the lower of 85% of the fair market value of a share of common stock on
the first day of the offering period or on the last day of the offering period.
There are two offering periods during each year. During the years ended June 30,
1998, 1997 and 1996, employees purchased an aggregate of 19,114, 34,016 and
29,898 shares of common stock for $302,000, $280,000 and $261,000, respectively,
under this plan. These amounts are included in the amounts shown for exercise of
options on the consolidated statements of stockholders' equity (see Note 9).
11. WARRANTS
During the years ended June 30, 1998, 1997 and 1996, the Board of
Directors approved the issuance of warrants to purchase an aggregate of 565,000
shares of the Company's common stock. Such warrants are exercisable at prices
ranging from $9.50 to $20.625 per share, vest over periods up to 48 months and
expire at various times through April 2008.
F-8
During fiscal 1998 and 1997, certain directors exercised warrants to
purchase 278,000 and 11,000 shares, respectively, of the Company's common stock
for an aggregate of $673,000 and $22,000, respectively. No warrants were
exercised during the year ended June 30, 1996.
Included in the issuance of warrants to purchase 565,000 aggregate
shares of the Company's common stock is a warrant to purchase 50,000 shares that
was issued to a director under the terms of a consulting agreement during fiscal
1997. Such issuance was accounted for under SFAS No. 123 using the Black-Scholes
option pricing model, which resulted in the recording of $233,000 and $50,000 in
compensation cost during the years ended June 30, 1998 and 1997, respectively.
A summary of warrant activity is as follows:
Weighted Weighted
Average Average
Number of Exercise Options Exercise
Warrants Price Exercisable Price
-------- ----- ----------- -----
Outstanding, July 1, 1995........... 427,000 $ 3.84
Granted.......................... 50,000 9.50
------------
Outstanding, June 30, 1996.......... 477,000 4.44 449,916 $4.13
Granted.......................... 300,000 11.95
Exercised........................ (11,000) 2.00
------------
Outstanding, June 30, 1997.......... 766,000 7.42 493,082 4.91
Granted.......................... 215,000 17.31
Exercised........................ (278,000) 2.42
------------
Outstanding, June 30, 1998.......... 703,000 12.42 482,166 12.20
============
At June 30, 1998, the range of warrant prices for shares under warrants
and the weighted average remaining contractual life is as follows:
Warrants Outstanding Warrants Exercisable
-------------------- --------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Number of Exercise Contractual Number Exercise
Range of Warrant Exercise Price Warrants Price Life Exercisable Price
------------------------------- ---------- -------- ------------ ----------- ---------
$ 6.00 - 9.50 200,000 $ 7.81 5.83 200,000 $ 7.81
11.78 - 12.81 288,000 11.96 6.01 92,166 12.11
16.88 - 20.63 215,000 17.31 9.22 190,000 16.88
12. STOCK SPLIT
At a Special Meeting of the Company's stockholders held on March 17,
1998, the Company's stockholders approved an amendment to the Company's
Certificate of Incorporation to (i) effect a two-for-one split of each of the
outstanding shares of common stock of the Company and (ii) increase the number
of authorized shares of all classes of stock of the Company from 15,000,000 to
30,000,000, consisting of 29,000,000 shares of common stock, $0.001 par value
per share, and 1,000,000 shares of preferred stock, $0.001 par value per share.
Both actions were effective March 18, 1998. All share and per share data has
been retroactively restated to reflect the two-for-one stock split.
F-9
13. TREASURY STOCK
In fiscal 1997, the Board of Directors authorized the purchase of up to
1,200,000 shares of the Company's common stock, which may be used to meet the
Company's common stock requirements for its stock benefit plans. In fiscal 1998,
the Board of Directors increased the number of shares of common stock that the
Company is authorized to repurchase under this plan by 200,000 shares and
authorized the purchase of up to 720,000 shares of the Company's common stock
from officers and directors. During fiscal 1998 and 1997, the Company
repurchased 695,588 and 1,026,200 shares, respectively, at an average per share
cost of $16.625 and $13.195, respectively. All the shares repurchased in fiscal
1998 were from officers and directors at a per share cost equal to the closing
price of the stock on the day of the repurchase.
14. ACQUISITIONS
On July 29, 1997, the Company purchased the stock of Ultima
Distribution Inc. ("Ultima"), which was the distributor of the Company's
products in Canada, for approximately $130,000. The Company also entered into
non-competition agreements with certain of Ultima's former stockholders. In
addition, contingent payments may be paid over the two years following the
acquisition based on Ultima's operating performance during that period.
On October 1, 1997, the Company purchased substantially all the
operating assets of Ram Manufacturing, Inc. ("Ram"), an Arkansas based
developer, manufacturer and marketer of wall boards. The purchase price was
approximately $2,400,000, of which approximately $1,950,000 had been paid as of
June 30, 1998. The Company also assumed certain liabilities totaling
approximately $3,000,000. In addition, contingent payments may be paid over the
three years following the acquisition based upon Ram's operating performance
during that period. The owner of Ram, who now works for the Company, entered
into a non-competition agreement with the Company.
On February 1, 1998, the Company purchased the stock of Timeposters
Inc. ("Timeposters"), a Canadian developer, manufacturer and marketer of
planning and presentation products, including flexible planners, planning
boards, other wall boards and easels, and entered into certain non-competition
agreements with the founders, who continue to work for Timeposters. The purchase
price was approximately $2,546,000. In addition, contingent payments may be paid
over the two years following the acquisition based on Timeposters' operating
performance during that period.
The following table presents summarized unaudited pro forma operating
results assuming that the Company had acquired these three companies on July 1,
1996 (in thousands, except per share amounts):
Years Ended June 30,
1998 1997
------------- -----------
Net Sales $ 172,168 $ 138,475
Income from opera $ 25,667 $ 19,616
Net income $ 15,959 $ 12,574
Earnings per share
Basic $ 1.38 $ 1.01
Diluted $ 1.27 $ 0.95
Weighted average shares outstanding:
Basic 11,533 12,432
Diluted 12,523 13,182
F-10
15. OTHER TRANSACTIONS
During 1995 and 1993, the Company entered into barter agreements
whereby it delivered $132,000 and $1,098,000, respectively, of its inventory in
exchange for future advertising credits and other items. The credits, which
expire in October 1999, are valued at the lower of the Company's cost or market
value of the inventory transferred. The Company has recorded barter credits of
$15,000 and $36,000 in prepaid expenses and other current assets at June 30,
1998 and 1997, respectively. At June 30, 1997, other assets include $79,000 of
such credits. No amounts were included in other assets at June 30, 1998. Under
the terms of the agreement, the Company is required to pay cash equal to a
negotiated amount of the bartered advertising, or other items, and use the
barter credits to pay the balance. These credits are charged to expense as they
are used. During the year ended June 30, 1998, approximately $100,000 was
charged to expense for barter credits used. No amounts were charged to expense
for barter credits used during the years ended June 30, 1997 and 1996.
The Company assesses the recoverability of barter credits periodically.
Factors considered in evaluating the recoverability include management's plans
with respect to advertising and other expenditures for which barter credits can
be used. Any impairment losses are charged to operations as they are
determinable. During the years ended June 30, 1997 and 1996, the Company charged
$200,000 and $520,000, respectively, to operations for such impairment losses.
No such impairment losses were charged to operations during the year ended June
30, 1998.
16. PROFIT-SHARING AND BONUS PLANS
In January 1991, the Company established a 401(k) profit-sharing plan
in which eligible employees may contribute up to 15% of their eligible earnings.
The Company may contribute to the plan at the discretion of the Board of
Directors, subject to applicable regulations. In the years ended June 30, 1998,
1997 and 1996, the Board elected to contribute an amount equal to 25% of the
first 6% of eligible earnings. Participants vest in the Company's contributions
at a rate of 20% after two years of plan participation and 20% each year
thereafter until fully vested.
During the years ended June 30, 1998, 1997 and 1996, the Company's
matching contributions were $156,000, $133,000 and, $128,000, respectively.
The Company has an executive bonus plan and incentive compensation
arrangements for key employees based on an earnings formula. Compensation
expense recorded under these plans was $628,000 and $1,120,000 during the years
ended June 30, 1998 and 1996, respectively. No amounts were recorded under these
plans during the year ended June 30, 1997.
17. OPERATIONS IN FOREIGN COUNTRIES
The following is a summary of the financial activity of the Company by
geographical area (in thousands):
Year Ended June 30, 1998
United States Other Eliminations Total
------------- ----- ------------ -----
Net sales to unaffiliated entities $ 152,938 $ 14,903 $ 167,841
Transfers between geographic areas 2,348 2,125 $ (4,473)
------------- --------- ----------- ----------
Net sales $ 155,286 $ 17,028 $ (4,473) $ 167,841
============= ========= =========== ==========
Income from operations $ 31,883 $ 2,671 $ (8,985) $ 25,569
============= ========= =========== ==========
Identifiable assets $ 88,818 $ 13,096 $ (735) $ 101,179
============= ========= =========== ==========
F-11
Year Ended June 30, 1997
United States Other Eliminations Total
------------- ----- ------------ -----
Net sales to unaffiliated entities $ 122,618 $ 4,758 $ 127,376
Transfers between geographic areas 490 1,621 $ (2,111)
------------- --------- ---------- ----------
Net sales $ 123,108 $ 6,379 $ (2,111) $ 127,376
============= ========= ========== ==========
Income from operations $ 23,927 $ 1,834 $ (6,412) $ 19,349
============= ========= ========== ==========
Identifiable assets $ 74,050 $ 4,968 $ (138) $ 78,880
============= ========= ========== ==========
Year Ended June 30, 1996
United States Other Eliminations Total
Net sales to unaffiliated entities $ 120,519 $ 4,607 $ 125,126
Transfers between geographic areas 443 1,302 $ (1,745)
------------- --------- ----------
Net sales $ 120,962 $ 5,909 $ (1,745) $ 125,126
============= ========= ========== ==========
Income from operations $ 22,022 $ 1,675 $ (4,745) $ 18,952
============= ========= =========== ==========
Identifiable assets $ 73,940 $ 4,061 $ (70) $ 77,931
============= ========= ========== ==========
18. CONTINGENCIES
In the normal course of business, the Company and certain of its
subsidiaries are defendants in various lawsuits. After consultation with
counsel, management is of the opinion that these various lawsuits, individually
or in the aggregate, will not have a materially adverse effect on the
consolidated financial statements.
19. SUPPLEMENTAL CASH FLOW INFORMATION
Disclosure of cash flow information (in thousands):
Years Ended June 30,
1998 1997 1996
------------ ----------- --------
Cash paid during the period for:
Interest....................... $ 91 $ 130 $ 24
Income taxes................... $ 8,862 $6,026 $ 9,988
In fiscal 1998, the Company purchased all of the capital stock of
Ultima Distribution Inc. and Timeposters Inc. The Company also purchased certain
of the assets of Ram Manufacturing, Inc. In conjunction with these acquisitions,
net cash expended was as follows (in thousands) (see Note 14):
Fair value of assets acquired $ (11,809)
Liabilities assumed 7,183
---------
Cash paid $ (4,626)
==========
F-12
Disclosure of noncash investing and financing activities:
Capital lease obligations totaling $88,000 were incurred in 1997 when
the Company entered into leases to acquire certain vehicles.
The Company realized a reduction in its current tax liability during
1998, 1997 and 1996 in the amount of $5,208,000, $157,000 and $1,452,000,
respectively. Such amounts were credited to additional paid-in capital (see Note
9).
20. SUBSEQUENT EVENTS
On September 15, 1998, the Board of Directors of the Company approved
the Non-Employee Director Stock Option Plan. Under this plan, an aggregate of
150,000 shares of common stock is reserved for issuance to members of the Board
of Directors who are not employees of the Company. In accordance with the plan,
the per share option price must equal the fair market value of a share of common
stock at the date of grant. The outstanding options become exercisable over a
period of one year from the date of issuance and have terms of 10 years. The
plan is subject to final approval by the stockholders of the Company.
On September 23, 1998, the Company entered into a Revolving Loan
Agreement (the "Loan Agreement") with Wells Fargo Bank, National Association
("Wells Fargo"). The Loan Agreement provides for borrowings through September
30, 2005 (the "Maturity Date"). Borrowings will bear interest either at fixed
rates based on the higher of the bank's prime rate and the Federal Funds Rate
published by the Federal Reserve Bank of New York or at floating rates
calculated by reference to the interest rates at which the bank offers deposits
in U.S. dollars in amounts approximately equal to the amount of the relevant
Loan and for a period of time comparable to the number of days the relevant Loan
will remain outstanding, together with a margin. The maximum amount that may be
outstanding under the Loan Agreement is $160,000,000 through December 31, 2000.
Thereafter, the maximum amount of borrowings that may be outstanding under the
Loan Agreement is reduced by $20,000,000 in calendar 2001 and by $10,000,000 in
each of the following calendar years up to the Maturity Date. Under the terms of
the Loan Agreement, the Company will pay the Wells Fargo $1.2 million plus an
unused commitment fee during the term of the Loan Agreement. The Company will
also pay legal, accounting and other fees and expenses in connection with the
Loan Agreement.
On September 24, 1998, the Company announced a cash offer for Filofax
Group plc ("Filofax"), a UK-based company traded on the London Stock Exchange.
The offer was for (pound)2.00 (approximately US $3.36) per share pursuant to a
tender offer for all of the outstanding ordinary shares of stock of Filofax. The
offer was not recommended by Filofax's Board of Directors.
On September 25, 1998, the Company announced it had reached agreement
with the Board of Directors of Filofax on the terms of a recommended cash tender
offer (the "Recommended Offer"). The Recommended Offer was for (pound)2.10
(approximately US $3.53) per share for all of the outstanding ordinary shares of
Filofax for a total purchase price of approximately (pound)50,300,000
(approximately US $84,500,000). The proposed acquisition of Filofax (the
"Proposed Acquisition of Filofax") will be funded by bank debt pursuant to the
Loan Agreement. In this discussion all exchange rate conversions between the
U.S. dollar and the UK pound sterling were based on an exchange rate of 1.68,
which was the exchange rate on September 23, 1998.
Consummation of the Company's Proposed Acquisition of Filofax is
subject to, among other things, the tender of at least the majority of shares by
Filofax's stockholders, regulatory approvals and the satisfaction or waiver of
various other conditions. There can be no assurance at this time that the
Proposed Acquisition of Filofax will be completed.
F-13
INDEPENDENT AUDITORS' REPORT
Day Runner, Inc.:
We have audited the consolidated financial statements of Day Runner, Inc. and
its subsidiaries as of June 30, 1998 and 1997, and for each of the three years
in the period ended June 30, 1998, and have issued our report thereon dated
August 17, 1998 (September 25, 1998 as to Note 20); 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
August 17, 1998
S-1
DAY RUNNER, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Balance at Balance at
June 30, Charged to June 30,
Classification 1997 Operations Deductions 1998
- -------------- ---------------- ---------- ---------- ---------
Allowance for doubtful accounts............ $2,682 $ 76 $ 2,606
Allowance for sales returns................ 5,982 $ 9,799 8,445 7,336
Reserve for obsolete inventory............. 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............ $2,358 $ 381 $ 57 $ 2,682
Allowance for sales returns................ 5,016 13,883 12,917 5,982
Reserve for obsolete inventory............. 3,473 1,267 1,481 3,259
Balance at Balance at
June 30, Charged to June 30,
Classification 1995 Operations Deductions 1996
- -------------- ---------------- ---------- ---------- ---------
Allowance for doubtful accounts............ $1,671 $ 810 $ 123 $ 2,358
Allowance for sales returns................ 5,461 8,221 8,666 5,016
Reserve for obsolete inventory............. 3,214 2,754 2,495 3,473
S-2
EXHIBIT INDEX
Exhibit
Number Description
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
10.6 1999 Officer Bonus Plan
10.7 First Amendment to Officer Severance Plan effective
as of August 17, 1998
10.13 Standard Commercial Lease Agreement dated as of
October 1, 1997 between RDC Sales and the
Registrant
10.14 Standard Commercial Lease Agreement dated as of
May 11, 1998 between GPM Real Property (7)
Ltd. and Endow (7) Inc. and the Registrant
10.15 Schedule of Warrants
10.18 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
21.1 Subsidiaries of the Registrant
23.1 Consent of Deloitte & Touche LLP
27.1 Financial Data Schedule