FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-19835
DAY RUNNER, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3624280
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
15295 Alton Parkway
Irvine, California 92618
(Address and zip code of principal executive offices)
(714) 680-3500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No|_|
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of the latest practicable date:
Class Number of Shares Outstanding at February 12, 1998
- ------------------------------ -------------------------------------------------
Common Stock, $0.001 par value 5,834,167
<PAGE>
DAY RUNNER, INC.
INDEX
Page Reference
COVER PAGE.......................................................... 1
INDEX ........................................................... 2
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 1997 and June 30, 1997........... 3
Consolidated Statements of Income
Three and Six Months Ended December 31, 1997
and 1996..................................... 4
Consolidated Statements of Cash Flows
Six Months Ended December 31, 1997 and 1996... 5
Notes to Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 10
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..15
Item 6. Exhibits and Reports on Form 8-K.....................16
SIGNATURES................................................................18
<PAGE>
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.
<TABLE>
<CAPTION>
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
December 31, June 30,
1997 1997
(unaudited) (audited)
----------- ---------
<S> <C> <C>
Cash and cash equivalents............................................................... $ 9,411 $ 15,550
Accounts receivable (less allowances for doubtful accounts and sales returns
and other allowances of $11,585 and $8,664 at December 31, 1997 and
June 30, 1997, respectively)....................................................... 24,514 22,303
Inventories............................................................................. 30,597 23,406
Prepaid expenses and other current assets............................................... 2,137 2,409
Deferred income taxes................................................................... 6,386 6,386
--------- ---------
Total current assets............................................................... 73,045 70,054
--------- ---------
Property and equipment -- At cost:
Machinery and equipment................................................................. 12,642 10,316
Data processing equipment and software.................................................. 6,993 5,863
Leasehold improvements.................................................................. 2,094 1,838
Vehicles................................................................................ 242 214
--------- ---------
Total.............................................................................. 21,971 18,231
Accumulated depreciation and amortization............................................... (11,838)
----------
(9,543)
Property and equipment -- net........................................................... 10,133 8,688
--------- ---------
Other assets................................................................................. 2,097 138
--------- ---------
Total assets................................................................................. $ 85,275 $ 78,880
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit......................................................................... $ 452
Accounts payable........................................................................ $ 7,280 8,320
Accrued expenses........................................................................ 14,879 9,500
Income taxes payable.................................................................... 3,268 1,049
Current portion of long-term debt and capital lease obligations......................... 99 23
--------- ---------
Total current liabilities.......................................................... 25,526 19,344
--------- ---------
Long-term debt and capital lease obligations................................................. 76 52
--------- ---------
Stockholders' equity:
Preferred stock (1,000,000 shares authorized, $0.001 par value; no shares issued
or outstanding)........................................................................
Common stock (14,000,000 shares authorized, $0.001 par value; 6,530,748 and ...6,364,429
issued and 5,669,854 and 5,851,329 outstanding at December 31,. 1997 and June 30, 1997,
respectively).......................................................................... 7 6
Additional paid-in capital.............................................................. 25,638 23,759
Retained earnings....................................................................... 59,044 49,168
Cumulative translation adjustment....................................................... 89 92
Treasury stock: at cost (860,894 and 513,100 shares at December 31, 1997 and
June 30, 1997, respectively)............................................................ (25,105) (13,541)
---------- ---------
Total stockholders' equity......................................................... 59,673 59,484
---------- ---------
Total liabilities and stockholders' equity................................................... $ 85,275 $ 78,880
========== =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
December 31, December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales........................................................ $ 49,388 $ 35,014 $ 87,526 $ 68,563
Cost of goods sold........................................... 23,626 16,502 41,658 32,466
--------- --------- --------- ---------
Gross profit................................................. 25,762 18,512 45,868 36,097
--------- --------- --------- ---------
Operating expenses:
Selling, marketing and distribution..................... 12,087 7,895 21,389 15,883
General and administrative.............................. 4,590 3,413 8,354 6,807
--------- --------- --------- ---------
Total operating expenses................................ 16,677 11,308 29,743 22,690
--------- --------- --------- ---------
Income from operations....................................... 9,085 7,204 16,125 13,407
Net interest expense (income)................................ 30 (303) (65) (513)
--------- ---------- ---------- ----------
Income before provision for income taxes..................... 9,055 7,507 16,190 13,920
Provision for income taxes................................... 3,531 3,003 6,314 5,568
--------- --------- --------- ---------
Net income................................................... $ 5,524 $ 4,504 $ 9,876 $ 8,352
========= ========= ========= =========
Earnings per common share:
Basic................................................... $ 0.98 $ 0.71 $ 1.73 $ 1.32
========= ========= ========= =========
Diluted................................................. $ 0.90 $ 0.67 $ 1.59 $ 1.25
========= ========== ========= ========
Weighted average number of common shares outstanding:
Basic................................................... 5,637 6,332 5,697 6,323
========= ========= ========= =========
Diluted................................................. 6,162 6,699 6,207 6,705
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
December 31,
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................... $ 9,876 $ 8,352
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.............................................. 2,255 1,566
Provision for losses on accounts receivable................................ 214
Changes in operating assets and liabilities:
Accounts receivable..................................................... (959) 1,091
Inventories............................................................. (4,423) 1,867
Prepaid expenses and other current assets............................... 293 (171)
Income taxes receivable................................................. 1,930
Accounts payable........................................................ (2,657) (2,571)
Accrued expenses........................................................ 5,011 785
Income taxes payable.................................................... 2,261 482
--------- ---------
Net cash provided by operating activities............................ 11,657 13,545
--------- ---------
Cash flows from investing activities:
Purchase of business.......................................................... (2,080)
Acquisition of property and equipment......................................... (2,565) (2,080)
Other assets.................................................................. (6) 2
---------- ---------
Net cash used in investing activities.................................... (4,651) (2,078)
---------- ----------
Cash flows from financing activities:
Net repayment under lines of credit........................................... (2,697)
Repayment of capital lease obligations........................................ (39)
Repayment of long-term debt................................................... (678)
Net proceeds from issuance of common stock.................................... 1,879 388
Repurchase of common stock.................................................... (11,564)
---------- ---------
Net cash (used in) provided by financing activities...................... (13,099) 388
---------- ---------
Effect of exchange rate changes in cash........................................... (46) 91
---------- ---------
Net (decrease) increase in cash and cash equivalents.............................. (6,139) 11,946
Cash and cash equivalents at beginning of period.................................. 15,550 19,765
--------- ---------
Cash and cash equivalents at end of period........................................ $ 9,411 $ 31,711
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
DAY RUNNER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information relating to the three and six months ended
December 31, 1997 and 1996 is unaudited)
1. Basis of Presentation and Accounting Policies
The accompanying consolidated balance sheet as of December 31, 1997 and
consolidated statements of income and cash flows for the three and six months
ended December 31, 1997 and 1996 are unaudited but, in the opinion of
management, include all adjustments consisting of normal, recurring accruals
necessary for a fair presentation of the financial position and the results of
operations for such periods. Certain information and footnote disclosures
normally included in financial statements prepared in conformity with generally
accepted accounting principles have been omitted pursuant to the requirements of
the Securities and Exchange Commission, although the Company believes that the
disclosures included in the financial statements included herein are adequate to
make the information therein not misleading. The financial statements included
herein should be read in conjunction with the Company's audited consolidated
financial statements for the year ended June 30, 1997, and the notes thereto,
which are included in the Company's Annual Report on Form 10-K.
The results of operations for the three and six months ended December
31, 1997 and 1996 are not necessarily indicative of the results for a full year.
The seasonality of the Company's financial results and the unpredictability of
the factors affecting such seasonality make the Company's quarterly and yearly
financial results difficult to predict and subject to significant fluctuation.
2. Inventories
Inventories consist of the following (in thousands):
December 31, June 30,
1997 1997
---- ----
Raw materials................... $ 10,877 $ 10,204
Work in process................. 268 426
Finished goods.................. 19,452 12,776
---------- ----------
Total.................. $ 30,597 $ 23,406
========== ==========
3. Lines of Credit
At December 31, 1997, the Company had no amounts outstanding under a
line of credit with a bank but had outstanding secured letters of credit
totaling approximately $1,623,000. Effective February 1, 1998, the Company
entered into a new credit agreement with the bank to allow the Company to borrow
up to $15,000,000 under a line of credit through February 1, 2000 and open
commercial or standby letters of credit up to $10,000,000, with the aggregate of
borrowing and letters of credit not to exceed $15,000,000. Commercial letters of
credit shall be issued for a term not to exceed 180 days provided however, that
no letters of credit shall have an expiration date subsequent to May 1, 2000.
Under this new credit agreement, borrowings bear interest at the
Company's election either at the bank's prime rate (8.50% at December 31, 1997)
less certain margins, which range from .75 to 1.00 basis points, or at LIBOR
(5.985% at December 31, 1997) plus certain margins, which range from .75 to 1.25
basis points, the margins being dependent on the Company meeting certain funded
debt to EBITDA ratios. The credit agreement requires the Company to maintain a
current ratio of not less than 1.50 to 1.00; maintain tangible net worth of not
less than $40,000,000, increasing to not less than $45,00,000 at any time from
and including June 30, 1998; and maintain funded debt to EBITDA ratio of less
than 1.50 to 1.00. The Company also is required to obtain the bank's approval to
declare or pay dividends in excess of $200,000.
The Company's Canadian subsidiary has a credit agreement with a
Canadian bank which the Company guarantees. Borrowings under this line of
credit, which are used for working capital purposes by the Company's Canadian
subsidiary, may not exceed Canadian $2,000,000, bear interest at the bank's
prime rate (6.0% at December 31, 1997) and are due and payable on demand. Prior
to October 17, 1997, borrowings under the line bore interest at the bank's prime
rate plus 0.50%. At December 31, 1997, the Canadian subsidiary had no amounts
outstanding under this line of credit.
4. Stockholders' Equity
During the six months ended December 31, 1997, certain directors,
officers and employees exercised options and warrants to purchase an aggregate
of 166,319 shares of the Company's Common Stock for an aggregate of
approximately $1,880,000.
5. Treasury Stock
During the six months ended December 31, 1997, the Company repurchased
347,794 shares from certain officers and directors at a cost of $33.25 per share
for an aggregate of approximately $11,564,000.
6. Earnings Per Share
The Company adopted the Financial Accounting Standards Board Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, for the
period ended December 31, 1997. SFAS No. 128 requires the Company to present
basic and diluted earnings per share on the face of the income statement. Basic
earnings per share is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
is computed by dividing net income by the sum of the weighted-average number of
common shares outstanding for the period plus the assumed exercise of all
diluted securities. The following reconciles the numerator and denominator of
the basic and diluted per-share computations for net income (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------------------- -------------------------------
1997 1996 1997 1996
--------------- ----------------- ---------------- ------------
<S> <C> <C> <C> <C>
Net Income $ 5,524 $ 4,504 $ 9,876 $ 8,352
======= ======== ======== ========
Basic Weighted Average Shares
Weighted average number of
common shares outstanding 5,637 6,332 5,697 6,323
Effect of Diluted Securities
Additional shares from the assumed
exercise of options and warrants 1,666 1,116 1,603 1,327
Shares assumed to be repurchased
under the treasury stock method (869) (567) (833) (753)
Non qualified tax benefit (272) (182) (260) (192)
----- ----- ----- -----
Diluted Weighted Average Shares
Weighted average number of
common shares outstanding and
common share equivalents 6,162 6,699 6,207 6,705
====== ====== ====== ======
Basic EPS $ 0.98 $ 0.71 $ 1.73 $ 1.32
====== ====== ====== ======
Diluted EPS $ 0.90 $ 0.67 $ 1.59 $ 1.25
====== ====== ====== ======
</TABLE>
7. Acquisitions
On July 29, 1997, the Company purchased the stock of Ultima
Distribution Inc., which was the distributor of the Company's products in
Canada, for approximately $130,000. In addition, contingent payments may be paid
over the next two years, based on Ultima's operating performance during that
period.
On October 1, 1997, the Company purchased substantially all the
operating assets of Ram Manufacturing, Inc., a Little Rock, Arkansas developer,
manufacturer and marketer of wall boards. The purchase price was approximately
$2,400,000, of which approximately $1,950,000 had been paid as of December 31,
1997. The Company also assumed certain liabilities totaling approximately
$3,000,000. In addition, contingent payments may be paid over the next three
years, based upon Ram's operating performance during that period.
<PAGE>
8. Statements of Cash Flow
The net cash expended by the Company in its acquisitions made during the
six months ended December 31, 1997 was used as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Ultima Ram
------ ---
Working capital $ 30 $ 624
Property, plant and equipment (150) (970)
Long-term debt 197 54
Cost in excess of net assets of company acquired (207) (1,658)
-------- ----------
Net cash used to acquire business $ (130) $ (1,950)
======== ===========
</TABLE>
Supplemental disclosure of cash flow information (in thousands):
<TABLE>
<CAPTION>
Six Months Ended December 31,
1997 1996
------------------------------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 149 $ 56
Income taxes $ 4,146 $ 3,174
</TABLE>
9. Subsequent Events
On January 20, 1998, the Company's Board of Directors approved a
two-for-one stock split and a doubling of the Company's number of authorized
shares from 15 million to 30 million shares. Both actions are subject to
stockholder approval at a special meeting to be held on March 17, 1998.
On February 1, 1998, the Company purchased the stock of Timeposters
Inc., a Canadian developer, manufacturer and marketer of planning and
presentation products, including flexible planners, planning boards, other wall
boards and easels, for approximately $2,500,000. In addition, contingent
payments may be paid over the next two years, based on Timeposters' operating
performance during that period.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and Notes
thereto included elsewhere in this Quarterly Report. Historical results and
percentage relationships among any amounts included in the Consolidated
Financial Statements are not necessarily indicative of trends in operating
results for any future period.
Since the Company's introduction of the first Day Runner System
organizer in 1982, the Company's revenues have been generated by sales primarily
of organizers and planners and secondarily of refills. Since fiscal 1995, most
of the Company's growth has resulted from sales of related organizing products,
virtually all of which have been introduced since January 1, 1995. The Company
focuses the great majority of its product development, sales and marketing
efforts on the office products channel, which accounted for 54.4% of second
quarter fiscal 1998 sales and 51.2% of sales for the six months ended December
31, 1997, and the mass market channel, which accounted for 32.6% of second
quarter fiscal 1998 sales and 36.4% of sales for the six months ended December
31, 1997.
Results of Operations
The following table sets forth, for the periods indicated, the
percentages that income statement items bear to sales and the percentage change
in the dollar amounts of such items.
<TABLE>
<CAPTION>
Percentage Change
-----------------
Percentage of Sales Three Six
--------------------- Months Months
Three Six Ended Ended
Months Ended Months Ended December 31, December 31,
December 31, December 31, 1996 to 1996 to
1996 1997 1996 1997 1997 to 1997
-------------- ------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Sales............................................ 100.0% 100.0% 100.0% 100.0% 41.1% 27.7%
Cost of goods sold............................... 47.8 47.1 47.6 47.4 43.2 28.3
----- ----- ----- -----
Gross profit..................................... 52.2 52.9 52.4 52.6 39.2 27.1
----- ----- ----- -----
Operating expenses:
Selling, marketing and distribution........... 24.5 22.6 24.4 23.2 53.1 34.7
General and administrative.................... 9.3 9.7 9.6 9.9 34.5 22.7
----- ----- ----- -----
Total operating expenses.................... 33.8 32.3 34.0 33.1 47.5 31.1
----- ----- ----- -----
Income from operations........................... 18.4 20.6 18.4 19.5 26.1 20.3
Net interest expense (income).................... 0.1 (0.9) (0.1) (0.8) (109.9) (87.3)
---- ------ ------ ------- ------
Income before provision for income taxes......... 18.3 21.5 18.5 20.3 20.6 16.3
Provision for income taxes....................... 7.1 8.6 7.2 8.1 17.6 13.4
----- ----- ----- -----
Net income....................................... 11.2% 12.9% 11.3% 12.2% 22.6 18.2
===== ===== ===== =====
</TABLE>
<PAGE>
The following tables set forth, for the periods indicated, the
Company's approximate sales by product category and distribution channel and as
a percentage of total sales.
<TABLE>
<CAPTION>
Product Category:
Three Months Ended December 31, Six Months Ended December 31,
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited; dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Organizers and planners......... $21,912 44.4% $ 20,179 57.6% $ 43,100 49.2% $ 41,240 60.1%
Refills......................... 16,255 32.9 12,981 37.1 27,130 31.0 23,425 34.2
Related organizing products..... 11,221 22.7 1,854 5.3 17,296 19.8 3,898 5.7
------ ------ ------- ----- -------- ----- -------- -----
Total........................ $49,388 100.0% $35,014 100.0% $ 87,526 100.0% $ 68,563 100.0%
======= ====== ======= ====== ======== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
Distribution Channel:
Three Months Ended December 31, Six Months Ended December 31,
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited; dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office products................. $26,874 54.4% $20,546 58.7% $ 44,798 51.2% $ 38,329 55.9%
Mass market..................... 16,106 32.6 10,525 30.1 31,856 36.4 23,005 33.6
Foreign customers............... 2,596 5.3 1,754 5.0 5,011 5.7 3,118 4.5
Other........................... 3,812 7.7 2,189 6.2 5,861 6.7 4,111 6.0
------- ---- ------- ----- -------- ---- -------- ----
Total........................ $49,388 100.0% $35,014 100.0% $ 87,526 100.0% $ 68,563 100.0%
======= ====== ======= ====== ======== ====== ======== ======
</TABLE>
Three Months Ended December 31, 1997 Compared with
the Three Months Ended December 31, 1996
Sales. Sales consist of revenues from gross product shipments net of
allowances for returns, rebates and credits. In the second quarter of fiscal
1998, sales increased by $14,374,000, or 41.1%, primarily because of increased
sales of related organizing products. In the quarter ended December 31, 1997,
sales of related organizing products grew by $9,367,000, or 505.2%; sales of
refills (which include calendars and accessories) grew by $3,274,000, or 25.2%;
and sales of organizers and planners grew by $1,733,000, or 8.6%. Product sales
were primarily to office products customers and secondarily to mass market
customers. Sales to office products customers grew by $6,328,000, or 30.8%;
sales to mass market customers grew by $5,581,000, or 53.0%; sales to
miscellaneous customers grouped together as "other" increased by $1,623,000, or
74.1%; and sales to foreign customers grew by $842,000, or 48.0%.
Gross Profit. Gross profit is sales less cost of goods sold, which is
comprised of materials, labor and manufacturing overhead. Gross profit may be
affected by, among other things, product mix, production levels, changes in
vendor and customer prices and discounts, sales volume and growth rate, sales
returns, purchasing and manufacturing efficiencies, tariffs, duties and
inventory carrying costs. Gross profit as a percentage of sales decreased
slightly from 52.9% in the second quarter of fiscal 1997 to 52.2% in the second
quarter of fiscal 1998 primarily because of a sales-growth related increase in
the provision for sales rebates to be paid to certain large customers and
secondarily because the gross profit levels of certain of the Company's
subsidiaries and of its Ram Manufacturing division are lower as a percentage of
sales than those of the parent company.
Operating Expenses. Total operating expenses increased by $5,369,000,
or 47.5%, in the second quarter of fiscal 1998 compared with the second quarter
of fiscal 1997 and increased as a percentage of sales from 32.3% to 33.8%.
Primarily because of expenses associated with the expanded distribution of
recently introduced products, selling, marketing and distribution expenses
increased by $4,192,000 and from 22.6% to 24.5% as a percentage of sales.
General and administrative expenses increased by $1,177,000, but decreased from
9.7% to 9.3% as a percentage of sales primarily because of the Company's
increased ability to absorb fixed costs as a result of higher sales.
Net Interest Expense (Income). Primarily because of a decrease in the
Company's cash available for short-term investment resulting from the Company's
repurchase of common stock, net interest expense was $30,000 for the second
quarter of fiscal 1998 compared with net interest income of $303,000 for the
second quarter of fiscal 1997.
Income Taxes. Primarily because of the improved financial results of
the Company's Hong Kong subsidiary, the Company's second quarter fiscal 1998
effective tax rate was 39.0%, compared with 40.0% for the second quarter of
fiscal 1997.
Six Months Ended December 31, 1997 Compared with
the Six Months Ended December 31, 1996
Sales. In the six months ended December 31, 1997 compared with the six
months ended December 31, 1996, sales increased by $18,963,000, or 27.7%,
primarily because of increased sales of related organizing products. In the six
months ended December 31, 1997, sales of related organizing products grew by
$13,398,000, or 343.7%; sales of refills grew by $3,705,000, or 15.8%; and sales
of organizers and planners grew by $1,860,000, or 4.5%. Product sales were
primarily to office products customers and secondarily to mass market customers.
Sales to mass market customers grew by $8,851,000, or 38.5%; sales to office
products customers grew by $6,469,000, or 16.9%; sales to foreign customers grew
by $1,893,000, or 60.7%; and sales to miscellaneous customers grouped together
as "other" increased by $1,750,000, or 42.6%.
Gross Profit. Gross profit as a percentage of sales decreased from
52.6% in the first six months of fiscal 1997 to 52.4% in the first six months of
fiscal 1998 primarily because of a sales-growth related increase in the
provision for sales rebates to be paid to certain large customers and
secondarily because the gross profit levels of certain of the Company's
subsidiaries and of its Ram Manufacturing division are lower as a percentage of
sales than those of the parent company.
Operating Expenses. Total operating expenses increased by $7,053,000,
or 31.1%, in the first six months of fiscal 1998 compared with the first six
months of fiscal 1997 and increased as a percentage of sales from 33.1% to
34.0%. Primarily because of expenses associated with the expanded distribution
of recently introduced products, selling, marketing and distribution expenses
increased by $5,506,000 and from 23.2% to 24.4% as a percentage of sales.
General and administrative expenses increased by $1,547,000, but decreased from
9.9% to 9.6% as a percentage of sales primarily because of the Company's
increased ability to absorb fixed costs as a result of higher sales.
Net Interest Expense(Income). Primarily because of a decrease in the
Company's cash available for short-term investment resulting from the Company's
repurchase of common stock, net interest income in the first six months of
fiscal 1998 compared with the first six months of fiscal 1997 decreased by
$448,000 and from 0.8% to 0.1% as a percentage of sales.
Income Taxes. Primarily because of the improved financial results of
the Company's Hong Kong subsidiary, the effective tax rate for the first six
months of fiscal 1998 was 39.0%, compared with 40.0% for the first six months of
fiscal 1997.
Earnings Per Share. During fiscal 1997, the Company repurchased 513,100
shares of Common Stock under the Company's stock repurchase program. 186,900
shares remain for repurchase under this program. Separately, in August 1997, the
Company repurchased an aggregate of 347,794 shares from certain officers and
directors of the Company. The repurchases reduce the number of shares that would
otherwise be used to calculate earnings per share for the 1998 fiscal year and
subsequent fiscal years.
Seasonal Fluctuations
The Company has historically experienced and expects to continue to
experience significant seasonal fluctuations in its sales and other financial
results that it believes have resulted and will continue to result primarily
from its customers' and users' buying patterns. These buying patterns have
typically adversely affected orders for the Company's products in the third
quarter of each fiscal year.
Although it is difficult to predict the future seasonality of sales,
the Company believes that future seasonality should be influenced at least in
part by customer and user buying patterns similar to those that have
historically affected the Company. Quarterly financial results are also affected
by new product introductions and line extensions, the timing of large orders,
changes in product sales or customer mix, vendor and customer pricing,
production levels, supply and manufacturing delays, large customers' inventory
management and general industry and economic conditions. The seasonality of the
Company's financial results and the unpredictability of the factors affecting
such seasonality make the Company's quarterly and yearly financial results
difficult to predict and subject to significant fluctuation.
Liquidity and Capital Resources
The Company's cash and cash equivalents at December 31, 1997 decreased
to $9,411,000 from $15,550,000 at June 30, 1997. In the six months ended
December 31, 1997, net cash of $11,657,000 provided by operating activities, was
offset by net cash of $4,651,000 and $13,099,000 used in investing activities
and financing activities, respectively.
Of the $11,657,000 net amount provided by the Company's operating
activities, $9,876,000 was provided by net income, $5,011,000 was provided by an
increase in accrued expenses, $2,261,000 was provided by an increase in income
taxes payable and $2,255,000 was provided by depreciation and amortization.
These amounts were partially offset by an increase of $4,423,000 in inventories
and a decrease of $2,657,000 in accounts payable.
Of the $4,651,000 net amount used in the Company's investing
activities, $2,565,000 was used to acquire primarily machinery and equipment and
secondarily computer equipment and software, and $2,080,000 was used to acquire
Ultima Distribution Inc. and Ram Manufacturing, Inc.
Of the $13,099,000 net amount used in the Company's financing
activities, $11,564,000 was used to repurchase 347,794 shares of Common Stock
from certain officers and directors, and $2,697,000 was used to repay lines of
credit. These amounts were partially offset by $1,879,000 that was provided by
the issuance of Common Stock upon exercise of then-outstanding stock options and
warrants.
Accounts receivable (net) at December 31, 1997 increased by 9.9% from
the fiscal 1997 year-end amount and by 21.4% compared with the December 31, 1996
amount primarily because of the Company's sales growth but did not grow as fast
as sales because substantial sales to a large customer occurred early in the
quarter. The average collection period of accounts receivable at December 31,
1997 was 46 days, compared with 47 days at both June 30, 1997 and December 31,
1996.
Inventories at December 31, 1997 increased by 30.7% from the fiscal
1997 year-end amount and by 67.5% compared with the December 31, 1996 amount
primarily because of the continuing expansion of distribution of new and
recently introduced products and the inventories of the companies acquired
during the six months ended December 31, 1997.
At December 31, 1997, Day Runner had no amounts outstanding under its
primary $15,000,000 bank line but had used the line to obtain outstanding
letters of credit of approximately $1,623,000, which reduced the availability
under the line to approximately $13,377,000. Effective February 1, 1998, the
Company entered into a new $15,000,000 line of credit with borrowings under this
line of credit bearing interest at the Company's election at either at the
bank's prime rate, less certain margins, or at LIBOR, plus certain margins, the
margins being dependent on the Company meeting certain funded debt to EBITDA
ratios.Prior to February 1, 1998, borrowings under the line bore interest at the
bank's prime rate or at LIBOR plus 1.75%. (See Note 3 to Consolidated Financial
Statements.)
The Canadian line of credit allows for borrowings, by one of the
Company's Canadian subsidiaries, of up to Canadian $2,000,000 (approximately US
$1,400,000). Borrowings bear interest at the Canadian bank's prime rate and are
due and payable on demand. Prior to October 17, 1997, borrowings under the line
bore interest at the bank's prime rate plus 0.50%. At December 31, 1997, the
Canadian subsidiary had no amounts outstanding under this line of credit.
(See Note 3 to Consolidated Financial Statements.)
The Company has not incurred significant losses or gains from foreign
currency exchange rate fluctuations. The continuing expansion of the Company's
international operations could, however, result in larger gains or losses as a
result of fluctuations in foreign currency exchange rates as those subsidiaries
conduct business in whole or in part in foreign currencies.
The Company believes that cash flow from operations, vendor credit, its
existing working capital and its bank lines of credit will be sufficient to
satisfy the Company's anticipated cash requirements at least through the next 12
months. Nonetheless, the Company may seek additional sources of capital as
necessary or appropriate for corporate finance purposes or to otherwise finance
the Company's growth or operations; however, there can be no assurance that such
funds if needed will be available on favorable terms, if at all.
The Company has conducted a review of its computer systems to identify
those areas that will be affected by the "Year 2000" issue and is developing an
implementation plan to resolve the issue. The "Year 2000" issue refers to the
inability of certain computer systems to recognize dates commencing on January
1, 2000. Such inability has the potential to materially adversely affect the
operation of computer systems. The Company currently believes that by modifying
existing software and converting to new software for certain tasks, the Year
2000 problem will not pose significant operational problems and is not
anticipated to be material to its financial position or results of operations in
any given year. At the present time, the Company estimates that the incremental
cash requirements related to the Year 2000 issue will total approximately
$500,000 to $900,000. Such expenditures will be expensed or capitalized as
appropriate.
Forward Looking Statements
With the exception of the actual reported financial results and other
historical information, the statements made in the Management's Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in this
quarterly report are forward looking statements that involve risks and
uncertainties that could affect actual future results. Such risks and
uncertainties include, but are not limited to: timing and size of orders from
large customers, timing and size of orders for new products, competition, large
customers' inventory management, general economic conditions, the health of the
retail environment, supply constraints, supplier performance and other risks
indicated in the Company's filings with the Securities and Exchange Commission.
<PAGE>
PART II --OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a)On November 25, 1997, the Company held its 1997 Annual
Meeting of Stockholders (the "Annual Meeting").
(b)At the Annual Meeting, the Company's stockholders elected
the following persons as directors of the Company. The
number of votes cast for each director, as well as the
number of votes withheld, are listed opposite each
director's name.
<TABLE>
<CAPTION>
Name Votes
of Cast for Votes
Director Director Withheld
-------- -------- --------
<S> <C> <C>
James E. Freeman, Jr. 5,557,263 6,458
James P. Higgins 5,559,363 4,358
Jill Tate Higgins 5,557,363 6,358
Charles Miller 5,557,463 6,258
Alan R. Rachlin 5,559,763 3,958
Mark A. Vidovich 5,557,463 6,258
Boyd I. Willat 5,559,628 4,093
Felice Willat 5,559,363 4,358
</TABLE>
(c)At the Annual Meeting, the stockholders approved, with
4,709,044 votes cast in favor, 812,194 votes cast against,
14,056 abstentions and 28,427 broker nonvotes, the
amendment to the Company's 1995 Stock Option Plan to
increase the aggregate number of shares authorized for
issuance thereunder from 500,000 to 775,000 shares.
(d)At the Annual Meeting, the stockholders approved, with
5,492,114 votes cast in favor, 30,922 votes cast against,
12,258 abstentions and 28,427 broker nonvotes, the
amendment to the Company's Employee Stock Option Plan to
increase the aggregate number of shares for issuance
thereunder from 100,000 to 175,000.
(e)At the Annual Meeting, with 5,554,893 votes cast in
favor, 3,285 votes cast against and 5,543 abstentions, the
stockholders ratified the appointment of Deloitte & Touche
LLP as independent auditors for the Company for the fiscal
year ending June 30, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Registrant, as amended(1)
3.2 Bylaws of the Registrant, as amended(2)
10.1 Credit Agreement dated as of February 1, 1998 between the
Registrant and Wells Fargo Bank, National Association,including
Revolving Line of Credit Note
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1997.
(1) Incorporated by reference to the Registrant's Transition Report on Form
10-K (File No. 0-19835) filed with the Commission on September 27, 1994.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
(File No. 0-19835) filed with the Commission on August 5, 1993.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 17, 1998
Day Runner, Inc.
By: /s/ MARK A. VIDOVICH
---------------------------
Mark A. Vidovich
Chairman of the Board and
Chief Executive Officer
By: /s/ DENNIS K. MARQUARDT
---------------------------
Dennis K. Marquardt
Executive Vice President,
Finance & Administration
and Chief Financial Officer
CREDIT AGREEMENT
THIS CREDIT AGREEMENT ("Agreement") is entered into as of February 1,
1998, by and between DAY RUNNER, INC., a Delaware corporation ("Borrower"), and
WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").
RECITAL
Borrower has requested from Bank the credit accommodation described
below, and Bank has agreed to provide said credit accommodation to Borrower on
the terms and conditions contained herein.
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Bank and Borrower hereby agree as follows:
ARTICLE I
THE CREDIT
SECTION 1.1. LINE OF CREDIT.
(a) Line of Credit. Subject to the terms and conditions of this
Agreement, Bank hereby agrees to make advances to Borrower from time to time up
to and including February 1, 2000, not to exceed at any time the aggregate
principal amount of Fifteen Million and No/100 Dollars ($15,000,000.00) ("Line
of Credit"), the proceeds of which shall be used for working capital and general
corporate purposes. Borrower's obligation to repay advances under the Line of
Credit shall be evidenced by a promissory note substantially in the form of
Exhibit A attached hereto ("Line of Credit Note"), all terms of which are
incorporated herein by this reference.
(b) Letter of Credit Subfeature. As a subfeature under the Line of
Credit, Bank agrees from time to time during the term thereof to issue
commercial or standby letters of credit for the account of Borrower to finance
the importation of inventory, to support "Subsidiaries" (as defined below), to
finance "Leveraged Acquisitions" (as defined below) and for general corporate
purposes (each, a "Letter of Credit" and collectively, "Letters of Credit");
provided however, that the form and substance of each Letter of Credit shall be
subject to approval by Bank, in its sole discretion; and provided further, that
the aggregate undrawn amount of all outstanding Letters of Credit including all
Letters of Credit issued in connection with Leveraged Acquisitions shall not at
any time exceed Ten Million and No/100 Dollars ($10,000,000.00). Each commercial
Letter of Credit shall be issued for a term not to exceed one hundred eighty
(180) days, as designated by Borrower; provided however, that no Letter of
Credit shall have an expiration date more than ninety (90) days beyond the
maturity date of the Line of Credit. The undrawn amount of all outstanding
Letters of Credit shall be reserved under the Line of Credit and shall not be
available for borrowings thereunder. Each Letter of Credit shall be subject to
the additional terms and conditions of the Letter of Credit Agreement and
related documents, if any, required by Bank in connection with the issuance
thereof (each, a "Letter of Credit Agreement" and collectively, "Letter of
Credit Agreements"). Each draft paid by Bank under a Letter of Credit shall be
deemed an advance under the Line of Credit and shall be repaid by Borrower in
accordance with the terms and conditions of this Agreement applicable to such
advances; provided however, that if advances under the Line of Credit are not
available, for any reason, at the time any draft is paid by Bank, then Borrower
shall
<PAGE>
immediately pay to Bank the full amount of such draft, together with interest
thereon from the date such amount is paid by Bank to the date such amount is
fully repaid by Borrower, at the rate of interest applicable to advances under
the Line of Credit. In such event Borrower agrees that Bank, in its sole
discretion, may debit any demand deposit account maintained by Borrower with
Bank for the amount of any such draft.
(c) Leveraged Acquisition Subfeature. As a subfeature under the Line of
Credit, Bank hereby agrees to make advances to, and issue Letters of Credit for,
Borrower from time to time for Leveraged Acquisitions, not to exceed at any time
the aggregate principal amount of Five Million and No/100 Dollars
($5,000,000.00). For purposes hereof, the following terms shall have the
meanings set forth below:
(i) "Leveraged Acquisition" shall mean an Acquisition with
respect to which (A) all or a portion of the purchase price shall be
paid with proceeds of one or more advances under the Line of Credit or
otherwise supported with the issuance of a Letter of Credit and (B) the
following conditions, as applicable, shall have been satisfied prior
to, or concurrently with, the making of any such advance or the
issuance of any such Letter of Credit, as the context may require:
(1) The Target is engaged in the same or related
business industry as Borrower;
(2) The purchase price of the assets of the Target
acquired in such Acquisition shall not exceed twenty-five percent (25%)
of the value of the total assets of Borrower and its Subsidiaries as
reflected in Borrower's most recent consolidated financial statements
delivered to Bank;
(3) Borrower shall have delivered to Bank within
thirty (30) days of the expected closing date of such Acquisition, two
(2) years of historical financial statements for the Target and a pro
forma consolidated financial statement of Borrower giving effect to
such Acquisition;
(4) No Event of Default or act, condition or event
which with the passage of time, the giving of notice, or both, would
constitute an Event of Default (a "Potential Event of Default"), shall
have occurred and be in effect as of the date of the Acquisition, nor,
after giving effect to such Acquisition shall any Event of Default or
Potential Event of Default occur; and
(5) If the proposed Acquisition involves the purchase
of an equity interest in the Target (rather than an asset purchase),
Borrower shall have provided to Bank within thirty (30) days of the
expected closing date of such Acquisition, such other information
regarding the Target's off-balance sheet liabilities (including without
limitation such things as operating leases, ERISA liabilities,
litigation matters, environmental hazardous materials matters and the
like) and Bank shall be reasonably satisfied, from the perspective of a
secured lender, with the contents of such information.
(ii) "Acquisition" shall mean any transaction, or any series of
related transactions, by which Borrower or any Subsidiary directly or
indirectly (A) acquires any ongoing business or all or substantially
all of the assets of any firm, partnership, joint venture, limited
liability company, or corporation (or division thereof) engaged in an
ongoing business, whether through purchase of assets, merger or
otherwise); (B) acquires control of at least a majority of the
securities which have ordinary voting power for the election of
directors
<PAGE>
of a corporation engaged in an ongoing business, or (C) acquires
control of a fifty percent (50%) or more ownership interest in any
limited liability company, partnership or joint venture engaged in an
ongoing business. For purposes of the foregoing, "Target" shall mean
any such firm, partnership, joint venture, limited liability company or
corporation (or division thereof).
(iii) "Subsidiary" shall mean, as of any date of determination and
with respect to Borrower, any corporation, partnership or limited
liability company (whether or not, in any such case, characterized as
such or as a "joint venture"), whether now existing or hereafter
organized or acquired: (a) in the case of a corporation, of which the
majority of the securities having ordinary voting power for the
election of directors or other governing body (other than securities
having such power only by reason of happening of a contingency) are at
the time beneficially owned by Borrower and/or one or more Subsidiaries
of Borrower, or (b) in the case of a partnership or limited liability
company, of which a majority of the partnership or other ownership
interests are at the time beneficially owned by Borrower and/or one or
more Subsidiaries of Borrower.
(d) Borrowing and Repayment. Borrower may from time to time during the
term of the Line of Credit borrow, partially or wholly repay its outstanding
borrowings, and reborrow, subject to all of the limitations, terms and
conditions contained herein or in the Line of Credit Note.
(e) Optional Termination of Line of Credit. Following the occurrence of
a "Change in Control" (as defined below), Bank may in its sole and absolute
discretion elect, during the sixty (60) day period immediately subsequent to the
later of (i) such occurrence or (ii) the earlier of (A) receipt of Borrower's
written notice to Bank of such occurrence, or (B) if no such notice has been
received by Bank, the date upon which Bank has actual knowledge thereof, to
terminate the Line of Credit in which case the Line of Credit shall be
terminated effective on the date which is thirty (30) days subsequent to written
notice from Bank to Borrower thereof. Upon any such termination date, all
amounts due under the Line of Credit shall be immediately due and payable. For
purposes hereof, "Change in Control" shall mean (x) any transaction or series of
related transactions in which any "Unrelated Person" (as defined below) or two
or more Unrelated Persons acting in concert acquire after the date hereof
beneficial ownership (within the meaning of Rule 13d-3(a)(1) under the
Securities Exchange Act of 1934, as amended) directly or indirectly, of thirty
percent (30%) or more of the outstanding voting stock of Borrower, (y) two (2)
individuals who, as of the date hereof, were members of Borrower's board of
directors, cease for any reason to continue to be members of Borrower's board of
directors; or (z) any event or circumstance constituting a "change in control"
or other similar occurrence under documentation evidencing or governing any
indebtedness of Borrower of $5,000,000.00 or more which results in an obligation
of Borrower to repay, purchase, offer to purchase, redeem or defease all or a
portion of such indebtedness. For purposes hereof, the term "Unrelated Person"
means any person or entity other than (1) an employee stock ownership plan or
other employee benefit plan covering employees of Borrower and its Subsidiaries
or (2) any person who is a member of the Board of Directors of Borrower as of
the date of this Agreement or any affiliate of any such member.
SECTION 1.2. INTEREST/FEES.
(a) Interest. The outstanding principal balance of the Line of Credit
shall bear interest at the rate of interest set forth in the Line of Credit
Note.
<PAGE>
(b) Computation and Payment. Interest shall be computed on the basis of
a 360-day year, actual days elapsed. Interest shall be payable at the times and
place set forth in the Line of Credit Note.
(c) Letter of Credit Fees. Borrower shall pay to Bank fees upon the
issuance of each Letter of Credit, upon the payment or negotiation by Bank of
each draft under any Letter of Credit and upon the occurrence of any other
activity with respect to any Letter of Credit (including without limitation, the
transfer, amendment or cancellation of any Letter of Credit) determined in
accordance with Bank's standard fees and charges then in effect for such
activity.
SECTION 1.3. COLLECTION OF PAYMENTS. Borrower authorizes Bank to
collect all principal, interest and fees due under the Line of Credit by
charging Borrower's demand deposit account number 4600171748 with Bank, or any
other demand deposit account maintained by Borrower with Bank, for the full
amount thereof. Should there be insufficient funds in any such demand deposit
account to pay all such sums when due, the full amount of such deficiency shall
be immediately due and payable by Borrower.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Bank,
which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to Bank
subject to this Agreement.
SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized
and existing and in good standing under the laws of the state of Delaware, and
is qualified or licensed to do business (and is in good standing as a foreign
corporation, if applicable) in all jurisdictions in which such qualification or
licensing is required or in which the failure to so qualify or to be so licensed
could have a material adverse effect on Borrower.
SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Line of
Credit Note, and each other document, contract and instrument required hereby or
at any time hereafter delivered to Bank in connection herewith (collectively,
the "Loan Documents") have been duly authorized, and upon their execution and
delivery in accordance with the provisions hereof will constitute legal, valid
and binding agreements and obligations of Borrower or the party which executes
the same, enforceable in accordance with their respective terms.
SECTION 2.3. NO VIOLATION. The execution, delivery and performance by
Borrower of each of the Loan Documents do not violate any provision of any law
or regulation, or contravene any provision of the Certificate of Incorporation
or By-Laws of Borrower, or result in any breach of or default under any
contract, obligation, indenture or other instrument to which Borrower is a party
or by which Borrower may be bound.
SECTION 2.4. LITIGATION. Except as set forth in Schedule 2.4 to this
Agreement (as amended, modified or supplemented from time to time), there are no
pending, or to the best of Borrower's knowledge threatened, actions, claims,
investigations, suits or proceedings by or before any governmental authority,
arbitrator, court or administrative agency which could have a material adverse
effect on the financial condition or operation of Borrower.
SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial
statement of Borrower dated December 31, 1997, a true copy of which has been
delivered by Borrower to Bank prior to the date hereof, (a) is complete and
correct and presents fairly the financial condition of Borrower, (b) discloses
all liabilities of Borrower that are required to be reflected or reserved
against under generally accepted accounting principles, whether liquidated or
unliquidated, fixed or contingent, and (c) has been prepared in accordance with
generally accepted accounting principles consistently applied. Since the date of
such financial statement there has been no material adverse change in the
financial condition of Borrower, nor, except as disclosed in Schedule 2.5 (as
amended, modified or supplemented from time to time) or as permitted by this
Agreement (including without limitation Section 5.9), has Borrower mortgaged,
pledged, granted a security interest in or otherwise encumbered any of its
assets or properties.
SECTION 2.6. INCOME TAX RETURNS. Except as disclosed in Schedule 2.6
(as amended, modified or supplemented from time to time), Borrower has no
knowledge of any pending assessments or adjustments of its income tax payable
with respect to any year.
SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture,
contract or instrument to which Borrower is a party or by which Borrower may be
bound that requires the subordination in right of payment of any of Borrower's
obligations subject to this Agreement to any other obligation of Borrower except
for such matters disclosed by Borrower to Bank in writing prior to the date
hereof.
SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will
hereafter possess, all material permits, memberships, consents, approvals,
franchises, contracts and licenses required and all material trademark rights,
trade names, trade name rights, patents, patent rights and material fictitious
name rights, necessary to enable it to conduct the business in which it is now
engaged without conflict with the rights of others.
SECTION 2.9. ERISA. Borrower is in compliance in all material respects
with all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as defined
in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no
Reportable Event as defined in ERISA has occurred and is continuing with respect
to any Plan initiated by Borrower; Borrower has met its minimum funding
requirements under ERISA with respect to each Plan; and each Plan will be able
to fulfill its benefit obligations as they come due in accordance with the Plan
documents and under generally accepted accounting principles.
SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any
obligation for borrowed money or any purchase money obligation that exceeds the
principal amount of $100,000. Further, Borrower is not in default under any
other material lease, commitment, contract, instrument or obligation where such
default would have a material adverse effect on Borrower's financial condition
or operations..
SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to
Bank in writing prior to the date hereof, Borrower, to the best of its
knowledge, is in compliance in all material respects with all applicable federal
or state environmental, hazardous waste, health and safety statutes, and any
rules or regulations adopted pursuant thereto, which govern or affect any of
Borrower's operations and/or properties, including without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
the Superfund Amendments and Reauthorization Act of 1986, the Federal Resource
Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control
Act, as any of the same may be amended, modified or
<PAGE>
supplemented from time to time. To the best of Borrower's knowledge, none of the
operations of Borrower or its Subsidiaries is the subject of any federal or
state investigation evaluating whether any remedial action involving a material
expenditure is needed to respond to a release of any toxic or hazardous waste or
substance into the environment. None of Borrower or its Subsidiaries has any
material contingent liability in connection with any release of any toxic or
hazardous waste or substance into the environment.
ARTICLE III
CONDITIONS
SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The
obligation of Bank to grant the initial extension of any credit contemplated by
this Agreement is subject to the fulfillment to Bank's satisfaction of all of
the following conditions:
(a) Approval of Bank Counsel. All legal matters incidental to the
extension of credit by Bank shall be reasonably satisfactory to Bank's counsel.
(b) Documentation. Bank shall have received, in form and substance
reasonably satisfactory to Bank, each of the following, duly executed:
(i) This Agreement and the Line of Credit Note;
(ii) Letter of Credit Agreement and related Letter of Credit
documentation;
(iii) Such documentation as Bank may reasonably require to
establish the due organization, valid existence and good standing of
Borrower, its qualifications to engage in business in each material
jurisdiction in which it is engaged in business or required to be so
qualified, its authority to execute, deliver and perform any Loan
Documents to which it is a party, the identity, authority and capacity
of each responsible official thereof authorized to act on its behalf,
including, without limitation, copies of its certificate of
incorporation and amendments thereto certified by the Delaware
Secretary of State, bylaws and amendments thereto certified by a
responsible official of such party, certificates of good standing
and/or qualification to engage in business, certified copies of
corporate resolutions, incumbency certificates, certificates of
responsible officials, and the like; and
(iv) Such other documents as Bank may require under any other
Section of this Agreement.
(c) Insurance. Borrower shall have delivered to Bank evidence of
insurance coverage on all Borrower's property, covering risks, in amounts,
issued by companies and in form and substance satisfactory to Bank.
(d) Financial Condition. There shall have been no material adverse
change, as determined by Bank, in the financial condition or business of
Borrower and its Subsidiaries taken as a whole.
SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of
Bank to make each extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Bank's satisfaction of each of the following
conditions:
<PAGE>
(a) Compliance. The representations and warranties contained herein and
in each of the other Loan Documents shall be true on and as of the date of the
signing of this Agreement and on the date of each extension of credit by Bank
pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, no
Event of Default as defined herein, and no Potential Event of Default, shall
have occurred and be continuing or shall exist.
(b) Documentation. Bank shall have received all additional documents
which may be required in connection with such extension of credit.
ARTICLE IV
AFFIRMATIVE COVENANTS
Borrower covenants that so long as Bank remains committed to extend
credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in
writing:
SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay the interest and
principal on each of the Loan Documents requiring any such payments at the times
and place and in the manner specified therein, and any fees or other liabilities
due under any of the Loan Documents at the times and place and in the manner
specified herein.
SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in
accordance with generally accepted accounting principles consistently applied,
and permit, and cause any Subsidiary of Borrower to permit, any representative
of Bank, at any reasonable time and upon three (3) days' prior notice (unless a
Potential Event of Default or Event of Default shall have occurred and be
continuing, in which case no such notice shall be required), to inspect, audit
and examine its books and records, to make copies of the same, and to inspect
the properties of Borrower and the properties of any Subsidiary of Borrower.
SECTION 4.3.FINANCIAL STATEMENTS. Provide to Bank all of the following,
in form and detail satisfactory to Bank:
(a) (i) not later than 120 days after and as of the end of each fiscal
year, (A) an audited consolidated financial statement of Borrower and its
Subsidiaries, prepared by a recognized independent accounting firm, to include a
consolidated balance sheet and consolidated statements of income, retained
earnings and cash flow, and (B) copies of the financial statements of each
Subsidiary (prepared by such Subsidiary) provided to the accounting firm
referenced in clause (A) above for the purpose of preparing the consolidated
financial statement described above, and (ii) within 10 days after filing, but
in no event later than 120 days after the end of each fiscal year, a copy of
Borrower's annual 10-K report for such year;
(b) not later than 55 days after and as of the end of each fiscal
quarter, a consolidated financial statement of Borrower and its Subsidiaries,
prepared by a senior financial officer of Borrower, to include a consolidated
balance sheet and consolidated statements of income, retained earnings and cash
flow; and within 10 days after filing, but in no event later than 55 days after
the end of each fiscal quarter, a copy of Borrower's quarterly 10-Q report for
such quarter;
<PAGE>
(c) not later than 90 days after the end of each fiscal year, an annual
projection for Borrower's next succeeding fiscal year, to include forecasted
balance sheets and profit and loss statements for each fiscal quarter of such
fiscal year;
(d) contemporaneously with each annual and quarterly financial
statement of Borrower required hereby, a certificate of a senior financial
officer of Borrower that said financial statements are accurate and that, to the
best knowledge of such officer, there exists no Event of Default nor any
Potential Event of Default, together with calculations confirming Borrower's
compliance with all financial covenants contained in this Agreement; and
(e) from time to time such other information as Bank may reasonably
request.
SECTION 4.4. COMPLIANCE. Preserve and maintain, and cause each
Subsidiary of Borrower to preserve and maintain, all material licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; conduct, and cause each Subsidiary of Borrower to
conduct, its business in an orderly and regular manner; and comply, and cause
each Subsidiary of Borrower to comply, with the provisions of all documents
pursuant to which Borrower or such Subsidiary is organized and/or which govern
Borrower's or such Subsidiary's continued existence and comply in all material
respects, and cause each Subsidiary of Borrower to comply in all material
respects, with the requirements of all laws, rules, regulations and orders of
any governmental authority applicable to Borrower or its business or to any such
Subsidiary or its business.
SECTION 4.5. INSURANCE. Maintain and keep in force, and cause each
Subsidiary of Borrower to maintain and keep in force, insurance of the types and
in amounts customarily carried in lines of business similar to that of Borrower
or any such Subsidiary, including but not limited to fire, extended coverage,
public liability, property damage and workers' compensation, with all such
insurance carried with companies and in amounts satisfactory to Bank, and
deliver to Bank from time to time at Bank's request schedules setting forth all
insurance then in effect.
SECTION 4.6. FACILITIES. Keep, and cause each Subsidiary of Borrower to
keep, all its properties useful or necessary to its business in good repair and
condition, and from time to time make, and cause each Subsidiary of Borrower to
make, necessary repairs, renewals and replacements thereto so that Borrower's
properties and the properties of any such Subsidiary shall be fully and
efficiently preserved and maintained; provided, however, that nothing herein
shall require Borrower or any such Subsidiary to maintain any property or assets
in good working order or repair if such property or assets are obsolete,
surplus, or unfit for use, or cannot be used advantageously in the conduct of
its business.
SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due,
and cause such Subsidiary of Borrower to pay and discharge when due, any and all
indebtedness, obligations, assessments and taxes, both real or personal and
including federal and state income taxes, except such as Borrower or any such
Subsidiary may in good faith contest or as to which a bona fide dispute may
arise, provided Borrower and/or such Subsidiary has established such reserves as
may be required by generally accepted accounting principles for eventual payment
thereof in the event that it is found that the same is an obligation of Borrower
or any such Subsidiary.
SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank
of any litigation pending or threatened against Borrower or any Subsidiary of
Borrower with a claim in excess of $300,000.00.
<PAGE>
SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial
condition on a consolidated basis as follows using generally accepted accounting
principles consistently applied and used consistently with prior practices
(except to the extent modified by the definitions herein), with compliance
determined commencing with Borrower's financial statements for the period ending
December 31, 1997:
(a) Current Ratio not at any time less than 1.50 to 1.00, with "Current
Ratio" defined as total current assets divided by total current liabilities. For
purposes of the foregoing, the aggregate outstanding balance of advances on the
Line of Credit shall be deemed "current liabilities."
(b) Tangible Net Worth not at any time less than $40,000,000, from and
including the fiscal quarter ended September 30, 1997, increasing to not less
than $45,000,000 at any time from and including June 30, 1998, with "Tangible
Net Worth" defined as the aggregate of total stockholders' equity plus
subordinated debt less the aggregate of any treasury stock, any intangible
assets and any obligations due from stockholders, employees and/or affiliates.
(c) Funded Debt to EBITDA Ratio not at any time greater than 1.50 to
1.00, with "Funded Debt to EBITDA Ratio" calculated as of the end of each fiscal
quarter and defined as the ratio of "Funded Debt" (as defined below) as of such
determination date, divided by "EBITDA" (as defined below) for the four fiscal
quarter period ending as of the date of determination. For purposes hereof,
"Funded Debt" shall mean, as of any date of determination, (i) all obligations
of Borrower and its Subsidiaries for borrowed money or for the deferred purchase
price of property or services, (ii) all obligations of Borrower and its
Subsidiaries under any conditional sale agreements relating to property
purchased by Borrower or any of its Subsidiaries, (iii) all capital and
synthetic lease obligations of Borrower and its Subsidiaries, (iv) all
obligations of Borrower and its Subsidiaries under letters of credit issued and
outstanding for the account of Borrower or any such Subsidiary, whether or not
drawn, (v) all obligations of Borrower and its Subsidiaries under direct or
indirect guaranties in respect of, and obligations (contingent or otherwise) to
purchase or otherwise acquire, or otherwise insure a creditor against loss in
respect of indebtedness or obligations of others of the kinds referred to in
clauses (i) through (iv) above, and (vi) all current or past due liabilities of
Borrower and its Subsidiaries in respect of unfunded vested benefits under Plans
covered by Title IV of ERISA. For purposes hereof, "EBITDA" shall mean, net
profit before tax plus interest expense (net of capitalized interest expense),
depreciation expense and amortization expense.
SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five
(5) days after the discovery of each such event or matter) give written notice
to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or
any Potential Event of Default; (b) any change in the name or the legal form of
organization of Borrower; (c) the occurrence and nature of any Reportable Event
or Prohibited Transaction, each as defined in ERISA, or any funding deficiency
with respect to any Plan; or (d) any termination or cancellation of any
insurance policy which Borrower is required to maintain, or any uninsured or
partially uninsured loss through liability or property damage, or through fire,
theft or any other cause affecting Borrower's property in excess of an aggregate
of $5,000,000.00.
SECTION 4.11. PLEDGE OF STOCK OF SUBSIDIARIES. In the event that at any
time the aggregate net sales of Borrower's Subsidiaries (as reflected in the
financial statements described in Section 4.3(a)) shall equal or exceed fifteen
percent (15%) of the consolidated gross revenues of Borrower and its
Subsidiaries, pledge and grant to Bank a security interest in and to all then
existing and thereafter acquired "Pledged Collateral" (as defined below). For
purposes of the foregoing, "Pledged Collateral" means, collectively, the
certificates evidencing (i) all of the shares of capital stock or other equity
interest held by Borrower (or any Subsidiary of Borrower) in all
<PAGE>
Subsidiaries of Borrower that are not "Foreign Subsidiaries" (as defined below)
and (b) to the extent owned by Borrower (or any Subsidiary of Borrower),
sixty-five percent (65%) of the shares of capital stock or other equity interest
in all Foreign Subsidiaries. For purposes of the foregoing, "Foreign Subsidiary"
means any Subsidiary of Borrower organized under the laws of a country other
than the United States of America. All of the foregoing shall be evidenced by
and subject to the terms of such pledge agreements, financing statements, and
other documents as Bank shall reasonably require, all in form and substance
reasonably satisfactory to Bank. Borrower shall reimburse Bank immediately upon
demand for all costs and expenses reasonably incurred by Bank in connection with
any of the foregoing security, including without limitation, filing fees.
ARTICLE V
NEGATIVE COVENANTS
Borrower further covenants that so long as Bank remains committed to
extend credit to Borrower pursuant hereto, or any liabilities (whether direct or
contingent, liquidated or unliquidated) of Borrower to Bank under any of the
Loan Documents remain outstanding, and until payment in full of all obligations
of Borrower subject hereto, Borrower, without Bank's prior written consent, will
not, and will not permit or cause any of its Subsidiaries to (either
individually, or on a consolidated basis, as the case may be):
SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any credit
extended hereunder except for the purposes stated in Article I hereof.
SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in
(a) "Maintenance Fixed Assets" (as defined below) in any fiscal year in excess
of an aggregate principal amount of $8,000,000 and (b) "Acquisition Related
Fixed Assets" in any fiscal year in excess of an aggregate principal amount of
$8,000,000, with "Maintenance Fixed Assets" defined as fixed assets that are
required to replace or upgrade existing fixed assets and "Acquisition Related
Fixed Assets" defined as fixed assets required in completing a new Acquisition
that, at the time thereof, were not included in the purchase price for such
Acquisition.
SECTION 5.3. LEASE EXPENDITURES. Permit rentals and other scheduled
payment obligations due under leases of real or personal property to exceed
$5,000,000 in the aggregate for any one fiscal year.
SECTION 5.4. OTHER INDEBTEDNESS. Create, incur, assume or permit to
exist any indebtedness or liabilities resulting from borrowings, loans or
advances, whether secured or unsecured, matured or unmatured, liquidated or
unliquidated, joint or several, except (a) the liabilities of Borrower to Bank,
(b) any other liabilities of Borrower existing as of, and disclosed to Bank in
Schedule 5.4 prior to, the date hereof, (c) purchase money indebtedness of
Borrower incurred in connection with the acquisition of assets permitted under
this Agreement in an aggregate amount not to exceed $10,000,000 from and after
the date of this Agreement and (d) indebtedness of Subsidiaries in an aggregate
amount not to exceed $3,500,000 from and after the date of this Agreement.
SECTION 5.5. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or
consolidate with any other entity (other than mergers of one Subsidiary into
another Subsidiary or of any Subsidiary into and with Borrower, with Borrower as
the surviving corporation); make any substantial change in the nature of
Borrower's business as conducted as of
<PAGE>
the date hereof; nor sell, lease, transfer or otherwise dispose of all or a
substantial or material portion of Borrower's or any Subsidiary's assets except
in the ordinary course of its business.
SECTION 5.6. GUARANTIES. Guarantee or become liable in any way as
surety, endorser (other than as endorser of negotiable instruments for deposit
or collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower or any
Subsidiary thereof as security for, any liabilities or obligations of any other
person or entity, except (a) any of the foregoing in favor of Bank, (b)
unsecured guaranties by Borrower of any Subsidiary's indebtedness or lease
obligations so long as any such guarantied indebtedness or lease obligation, as
the case may be, is permitted under Section 5.4(d) or Section 5.3, respectively.
SECTION 5.7. LOANS, ADVANCES, INVESTMENTS. Make any loans or
advances to or investments in any person or entity, except for (a) any of the
foregoing existing as of, and disclosed to Bank prior to, the date hereof, (b)
investments constituting capital expenditures permitted under Section 5.2 above,
(c) loans made to employees in respect of the payment of the exercise price upon
the exercise of options under Borrower's stock option plans and of any federal
and/or state income tax withholding obligations arising out of such exercises,
(d) other loans to employees of Borrower not to exceed an aggregate principal
amount of $1,000,000, (e) investments consisting of stock ownership by Borrower
of the outstanding capital stock of Day Runner de Mexico not to exceed an
aggregate principal amount of $1,000,000, (f) investments in new Subsidiaries,
(g) loans or advances to from and among Subsidiaries and Borrower evidenced by
promissory notes not to exceed an aggregate principal amount of $8,000,000 at
any time outstanding, (h) investments received in connection with the bankruptcy
or reorganization of suppliers and customers and in settlement of delinquent
obligations of, and other disputes with, customers and suppliers arising in the
ordinary course of business, and (i) investments in cash, cash equivalents and
investment grade securities made for cash management purposes in the ordinary
course of business.
SECTION 5.8. DIVIDENDS, DISTRIBUTIONS. Declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's or any
Subsidiary's stock now or hereafter outstanding, nor redeem, retire, repurchase
or otherwise acquire any shares of any class of Borrower's or any Subsidiary's
stock now or hereafter outstanding other than (a) dividends or distributions by
Borrower in cash in an aggregate amount not to exceed $200,000 during any fiscal
year, (b) dividends or distributions by any Subsidiary of Borrower to Borrower
or any other Subsidiary of Borrower, (c) dividends payable solely in capital
stock or rights to purchase capital stock and (d) repurchases by Borrower of
Borrower's common stock as described in that certain Consent and Waiver dated as
of August 26, 1997 executed by Bank. As used above, the term "acquire" shall not
apply to the original acquisition by Borrower or any Subsidiary of the stock of
any Target in connection with any Acquisition permitted hereunder.
SECTION 5.9. PLEDGE OF ASSETS. Mortgage, pledge, grant or permit to
exist a security interest in, or lien upon, all or any portion of its assets now
owned or hereafter acquired, except (a) any of the foregoing in favor of Bank,
(b) any other pledges of assets which are existing as of, and disclosed to Bank
in writing prior to the date hereof, (c) any of the foregoing that relate to
indebtedness described in Section 5.4(c) above, provided that such liens extend
only to the property financed, (d) any of the foregoing by any Subsidiary to
secure indebtedness of such Subsidiary permitted by the terms of Section
5.4(c),and (e) "Other Permitted Liens" (as defined below). "Other Permitted
Liens" means (i) liens for taxes, assessments or governmental charges the
payment of which is not at the time delinquent; (ii). statutory liens of
carriers, warehousemen, mechanics, materialmen and other similar persons and
other liens imposed by law incurred in the ordinary course of business for sums
not yet delinquent or being contested in good faith, provided
<PAGE>
provision is made to the satisfaction of Bank for eventual payment thereof in
the event it is found that the same is an obligation of Borrower; (iii) liens
incurred or deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other types of social
security, government contracts, and other similar obligations, (exclusive of
obligations for the payment of borrowed money); (iv) any attachment or judgment
lien, unless the judgment it secures (A) shall not, within 15 days after the
entry thereof, have been discharged or execution thereof stayed pending appeal,
provided provision is made to the satisfaction of Bank for eventual payment
thereof in the event it is found that the same is an obligation of Borrower, or
(B) shall be in effect and a period of 10 days or less remains prior to any
proposed sale thereunder; (v) easements, rights of way, servitudes or zoning or
building restrictions and other minor encumbrances on real property which do not
in the aggregate materially interfere with or impair the operation of such
property for the purposes for which it is or may reasonably be expected to be
used; and (vi) any interest or title of a lessor under any existing lease of
personal property where Borrower or any of its Subsidiaries is lessee (including
any extensions and renewals thereof) and any other lease of personal property
permitted under Section 5.3 of this Agreement.
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.1. The occurrence of any of the following shall constitute an
"Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal, interest, fees
or other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate furnished to Bank in
connection with, or any representation or warranty made by Borrower under this
Agreement shall prove to be false, incorrect or incomplete in any material
respect when furnished or made.
(c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained herein (other than those
referred to in subsections (a) and (b) above), and with respect to any such
default which by its nature can be cured, such default shall continue for a
period of twenty (20) days from notice to Borrower from Bank of the same.
(d) Any default in the payment or performance of any obligation, or any
defined event of default, under the terms of any contract or instrument (other
than any of the Loan Documents) pursuant to which Borrower has incurred any debt
or other liability to any person or entity, including Bank, in a principal
amount greater than $300,000.00, which default or defined event of default
results in acceleration of such debt or permits the holder of such debt or the
obligee of such liability to accelerate the maturity thereof or to exercise any
other remedy against Borrower in connection therewith.
(e) Any default (subject to any applicable notice and grace periods) in
the payment or performance of any obligation, or any defined event of default,
under any of the Loan Documents other than this Agreement.
(f) The filing of a notice of judgment lien against Borrower; or the
recording of any abstract of judgment against Borrower in any county in which
Borrower has an interest in real property; or the service of a notice of levy
and/or of a writ of attachment or execution, or other like process, against the
assets of Borrower; or the entry of a judgment against Borrower, in each case
which are not paid, fully bonded, dismissed or stayed within 15 days; provided
that the foregoing
<PAGE>
provisions of this Section 6.1(f) shall not apply to judgments, attachments,
levies or claims involving less than $300,000.00.
(g) Borrower shall become insolvent, or shall suffer or consent to or
apply for the appointment of a receiver, trustee, custodian or liquidator of
itself or any of its property, or shall generally fail to pay its debts as they
become due, or shall make a general assignment for the benefit of creditors;
Borrower shall file a voluntary petition in bankruptcy, or seeking
reorganization, in order to effect a plan or other arrangement with creditors or
any other relief under the Bankruptcy Reform Act, Title 11 of the United States
Code, as amended or recodified from time to time ("Bankruptcy Code"), or under
any state or federal law granting relief to debtors, whether now or hereafter in
effect; or any involuntary petition or proceeding pursuant to the Bankruptcy
Code or any other applicable state or federal law relating to bankruptcy,
reorganization or other relief for debtors is filed or commenced against
Borrower, or Borrower shall file an answer admitting the jurisdiction of the
court and the material allegations of any involuntary petition; or Borrower
shall be adjudicated a bankrupt, or an order for relief shall be entered by any
court of competent jurisdiction under the Bankruptcy Code or any other
applicable state or federal law relating to bankruptcy, reorganization or other
relief for debtors.
(h) The dissolution or liquidation of Borrower; or any of its
directors, stockholders or members, shall take action seeking to effect the
dissolution or liquidation of Borrower.
SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a)
all indebtedness of Borrower under each of the Loan Documents, any term thereof
to the contrary notwithstanding, shall at Bank's option and without notice
become immediately due and payable without presentment, demand, protest or
notice of dishonor, all of which are hereby expressly waived by Borrower; (b)
the obligation, if any, of Bank to extend any further credit under any of the
Loan Documents shall immediately cease and terminate; and (c) Bank shall have
all rights, powers and remedies available under each of the Loan Documents, or
accorded by law, including without limitation the right to resort to any or all
security for any credit accommodation from Bank subject hereto and to exercise
any or all of the rights of a beneficiary or secured party pursuant to
applicable law. All rights, powers and remedies of Bank in connection with each
of the Loan Documents may be exercised at any time by Bank and from time to time
after the occurrence of an Event of Default, are cumulative and not exclusive,
and shall be in addition to any other rights, powers or remedies provided by law
or equity.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Bank of any breach of or default under any of the Loan Documents must be
in writing and shall be effective only to the extent set forth in such writing.
SECTION 7.2. NOTICES. All notices, requests and demands which any party
is required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:
<PAGE>
BORROWER: DAY RUNNER, INC.
15295 Alton Parkway
Irvine, California 92718
Attn: Chief Financial Officer
Telephone: (714) 680-3500
Facsimile: (714) 441-4848
BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION
Los Angeles Commercial Banking Group
333 South Grand Avenue, Third Floor
Los Angeles, California 90071
Attn: Day Runner Account Officer
Telephone: (213) 253-6208
Facsimile: (213) 687-3501
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to
Bank immediately upon demand the full amount of all costs and expenses,
including reasonable attorneys' fees (to include outside counsel fees and all
allocated costs of Bank's in-house counsel), incurred by Bank in connection with
(a) the negotiation and preparation of this Agreement and each other of the Loan
Documents, Bank's continued administration hereof and thereof, and the
preparation of any amendments and waivers hereto and thereto, (b) the
enforcement of Bank's rights and/or the collection of any amounts which become
due to Bank under any of the Loan Documents, and (c) the prosecution or defense
of any action in any way related to any of the Loan Documents, including without
limitation, any action for declaratory relief, whether incurred at the trial or
appellate level, in an arbitration proceeding or otherwise, and including any of
the foregoing incurred in connection with any bankruptcy proceeding (including
without limitation, any adversary proceeding, contested matter or motion brought
by Bank or any other person) relating to any Borrower or any other person or
entity.
SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding
upon and inure to the benefit of the heirs, executors, administrators, legal
representatives, successors and assigns of the parties; provided however, that
Borrower may not assign or transfer its interest hereunder without Bank's prior
written consent. Bank reserves the right to sell, assign, transfer, negotiate or
grant participations in all or any part of, or any interest in, Bank's rights
and benefits under each of the Loan Documents. In connection therewith, but
subject to Section 7.11, Bank may disclose all documents and information which
Bank now has or may hereafter acquire relating to any credit extended by Bank to
Borrower, Borrower or its business, any Subsidiary or the business of such
Subsidiary, or if applicable, any collateral required hereunder.
SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and each other
of the Loan Documents constitute the entire agreement between Borrower and Bank
with respect to any extension of credit by Bank subject hereto and supersede all
prior negotiations, communications, discussions and correspondence concerning
the subject matter hereof. This Agreement may be amended or modified only in
writing signed by each party hereto.
<PAGE>
SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.
SECTION 7.7.TIME. Time is of the essence of each and every provision of
this Agreement and each other of the Loan Documents.
SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this
Agreement shall be prohibited by or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or any remaining provisions
of this Agreement.
SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which when executed and delivered shall be
deemed to be an original, and all of which when taken together shall constitute
one and the same Agreement.
SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by
and construed in accordance with the laws of the State of California.
SECTION 7.11. CONFIDENTIALITY. Bank agrees (and any assignee of all or
part of Bank's interests hereunder and any holder of a participation interest in
the Line of Credit Note shall be required) to hold any confidential information
that it may receive from Borrower pursuant to this Agreement in confidence,
except for disclosure: (a) to legal counsel and accountants for Borrower or
Bank; (b) to other professional advisors to Borrower or Bank; provided that the
recipient has been informed in advance of the confidential nature of such
information; (c) to regulatory officials having jurisdiction over Bank; (d) as
required by law or legal process or in connection with any legal proceeding or
litigation involving Bank and Borrower or any affiliate of Borrower; and (e) to
another financial institution in connection with a disposition or proposed
disposition to that financial institution of all or part of Bank's interests
hereunder or a participation interest in the Line of Credit Note, provided that
the recipient has been informed in advance of the confidential nature of such
information. For purposes of the foregoing, "confidential information" shall
mean any information respecting Borrower or its Subsidiaries reasonably
considered by Borrower to be confidential, other than (i) information previously
filed with any governmental agency or authority and available to the public,
(ii) information previously published in any public medium from a source other
than, directly or indirectly, Bank, and (iii) information previously disclosed
by Borrower to any person or entity not associated with Borrower without a
confidentiality agreement or obligation substantially similar to this Section
7.11. Nothing in this Section shall be construed to create or give rise to any
fiduciary duty on the part of Bank to Borrower or its Subsidiaries.
SECTION 7.12. ARBITRATION.
(a) Arbitration. Upon the demand of any party, any Dispute shall be
resolved by binding arbitration (except as set forth in (e) below) in accordance
with the terms of this Agreement. A "Dispute" shall mean any action, dispute,
claim or controversy of any kind, whether in contract or tort, statutory or
common law, legal or equitable, now existing or hereafter arising under or in
connection with, or in any way pertaining to, any of the Loan Documents, or any
past, present or future extensions of credit and other activities, transactions
or obligations of any kind related directly or indirectly to any of the Loan
Documents, including without limitation, any of the
<PAGE>
foregoing arising in connection with the exercise of any self-help, ancillary or
other remedies pursuant to any of the Loan Documents. Any party may by summary
proceedings bring an action in court to compel arbitration of a Dispute. Any
party who fails or refuses to submit to arbitration following a lawful demand by
any other party shall bear all costs and expenses incurred by such other party
in compelling arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be administered by
the American Arbitration Association ("AAA") or such other administrator as the
parties shall mutually agree upon in accordance with the AAA Commercial
Arbitration Rules. All Disputes submitted to arbitration shall be resolved in
accordance with the Federal Arbitration Act (Title 9 of the United States Code),
notwithstanding any conflicting choice of law provision in any of the Loan
Documents. The arbitration shall be conducted at a location in California
selected by the AAA or other administrator. If there is any inconsistency
between the terms hereof and any such rules, the terms and procedures set forth
herein shall control. All statutes of limitation applicable to any Dispute shall
apply to any arbitration proceeding. All discovery activities shall be expressly
limited to matters directly relevant to the Dispute being arbitrated. Judgment
upon any award rendered in an arbitration may be entered in any court having
jurisdiction; provided however, that nothing contained herein shall be deemed to
be a waiver by any party that is a bank of the protections afforded to it under
12 U.S.C. ss.91 or any similar applicable state law.
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No
provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be
active members of the California State Bar or retired judges of the state or
federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the contrary,
in any arbitration in which the amount in controversy exceeds $25,000,000, the
arbitrators shall be required to make specific, written findings of fact and
conclusions of law. In such arbitrations (i) the arbitrators shall not have the
power to make any award which is not supported by substantial evidence or which
is based on legal error, (ii) an award shall not be binding upon the parties
unless the findings of fact are supported by substantial evidence and the
conclusions of law are not erroneous under the
<PAGE>
substantive law of the state of California, and (iii) the parties shall have in
addition to the grounds referred to in the Federal Arbitration Act for vacating,
modifying or correcting an award the right to judicial review of (A) whether the
findings of fact rendered by the arbitrators are supported by substantial
evidence, and (B) whether the conclusions of law are erroneous under the
substantive law of the state of California. Judgment confirming an award in such
a proceeding may be entered only if a court determines the award is supported by
substantial evidence and not based on legal error under the substantive law of
the state of California.
(f) Real Property Collateral; Judicial Reference. Notwithstanding
anything herein to the contrary, no Dispute shall be submitted to arbitration if
the Dispute concerns indebtedness secured directly or indirectly, in whole or in
part, by any real property unless (i) the holder of the mortgage, lien or
security interest specifically elects in writing to proceed with the
arbitration, or (ii) all parties to the arbitration waive any rights or benefits
that might accrue to them by virtue of the single action rule statute of
California, thereby agreeing that all indebtedness and obligations of the
parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
(g) Miscellaneous. To the maximum extent practicable, the AAA, the
arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first written above.
WELLS FARGO BANK,
DAY RUNNER, INC. NATIONAL ASSOCIATION
By: ______________________ By: _______________________
Title: _____________________ Title: ______________________
<PAGE>
REVOLVING LINE OF CREDIT NOTE
$15,000,000.00 Los Angeles, California
February 1, 1998
FOR VALUE RECEIVED, the undersigned, DAY RUNNER, INC., a Delaware
corporation ("Borrower"), promises to pay to the order of WELLS FARGO BANK,
NATIONAL ASSOCIATION ("Bank") at its office at Los Angeles RCBO, 333 South Grand
Avenue, Third Floor, Los Angeles, California 90071, or at such other place as
the holder hereof may designate, in lawful money of the United States of America
and in immediately available funds, the principal sum of Fifteen Million Dollars
($15,000,000.00), or so much thereof as may be advanced and be outstanding, with
interest thereon, to be computed on each advance from the date of its
disbursement as set forth herein.
DEFINITIONS:
As used herein, the following terms shall have the meanings set forth
after each, and any other term defined in this Note shall have the meaning set
forth at the place defined:
(a) "Applicable LIBOR Margin" means, for each Pricing Period, the
interest rate margin set forth below (expressed in basis points per annum)
opposite the Applicable Pricing Level for that Pricing Period:
Applicable
Pricing Level Margin
----------------------- --------------
I 75.00
----------------------- --------------
II 100.00
----------------------- --------------
III 125.00
----------------------- --------------
(b) "Applicable Pricing Level" means, for each Pricing Period, the
pricing level set forth below opposite Borrower's Funded Debt to EBITDA Ratio as
of the last day of the fiscal quarter most recently ended prior to the
commencement of that Pricing Period, as reported in the quarterly financial
statements of Borrower provided to Bank pursuant to Section 4.3(b) of the Credit
Agreement, in each case subject to adjustment based on prior period adjustments
made pursuant to generally accepted accounting principles:
Pricing Level Funded Debt To EBITDA Ratio
----------------------- ---------------------------
I Less than 0.75 to 1.00
----------------------- ---------------------------------------------
II Greater than or equal to 0.75 to 1.00 but
less than 1.25 to 1.00
----------------------- ---------------------------------------------
III Greater than or equal to 1.25 to 1.00
----------------------- ---------------------------------------------
provided that if Borrower fails to deliver its financial statements as required
by Section 4.3(b) of the Credit Agreement prior to the commencement of such
Pricing Period, then until such financial statements are delivered, the
Applicable Pricing Level for that Pricing Period shall be Pricing Level III.
(c) "Applicable Prime Rate Margin" means, for each Pricing Period, the
interest rate margin set forth below (expressed in basis points per annum)
opposite the Applicable Pricing Level for that Pricing Period:
Applicable
Pricing Level Margin
----------------------- --------------
I -1.00
----------------------- --------------
II -0.75
----------------------- --------------
III -0.50
----------------------- --------------
(d) "Business Day" means any day except a Saturday, Sunday or any other
day on which commercial banks in California are authorized or required by law to
close.
(e) "Credit Agreement" means that certain Credit Agreement dated as of
February 1, 1998 between Borrower and Bank, as amended, modified or supplemented
from time to time.
(f) "Fixed Rate Term" means a period commencing on a Business Day and
continuing for one (1), two (2), three (3) or six (6) months, as designated by
Borrower, during which all or a portion of the outstanding principal balance of
this Note bears interest determined in relation to LIBOR; provided however, that
no Fixed Rate Term may be selected for a principal amount less than One Hundred
Thousand Dollars ($100,000.00); and provided further, that no Fixed Rate Term
shall extend beyond the scheduled maturity date hereof. If any Fixed Rate Term
would end on a day which is not a Business Day, then such Fixed Rate Term shall
be extended to the next succeeding Business Day.
(g) "Funded Debt to EBITDA Ratio" shall have the meaning specified for
such term in the Credit Agreement.
(h) "LIBOR" means the rate per annum (rounded upward, if necessary, to
the nearest whole 1/8 of l%) and determined pursuant to the following formula:
LIBOR = Base LIBOR
------------------------------------
100% - LIBOR Reserve Percentage
(i) "Base LIBOR" means the rate per annum for United States
dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate,
with the understanding that such rate is quoted by Bank for the purpose
of calculating effective rates of interest for loans making reference
thereto, on the first day of a Fixed Rate Term for delivery of funds on
said date for a period of time approximately equal to the number of
days in such Fixed Rate Term and in an amount approximately equal to
the principal amount to which such Fixed Rate Term applies. Borrower
understands and agrees that Bank may base its quotation of the
Inter-Bank Market Offered Rate upon such offers or other market
indicators of the Inter-Bank Market as Bank in its discretion deems
appropriate, including, but not limited to, the rate offered for U.S.
dollar deposits on the London Inter-Bank Market.
(ii) "LIBOR Reserve Percentage" means the reserve percentage
prescribed by the Board of Governors of the Federal Reserve System (or
any successor) for "Eurocurrency Liabilities" (as defined in Regulation
D of the Federal Reserve Board, as amended), adjusted by Bank for
expected changes in such reserve percentage during the applicable Fixed
Rate Term.
(i) "Pricing Period" means, as applicable, (a) the period commencing on
the date of this Note and ending on February 15, 1998, (b) the period commencing
on each February 16 and ending on the next following May 15, (c) the period
commencing on each May 16 and ending on the next following August 15, (d) the
period commencing on each August 16 and ending on the next following November
15, (e) the period commencing on each November 16 and ending on the next
following February 15.
(j) "Prime Rate" means at any time the rate of interest most recently
announced within Bank at its principal office as its Prime Rate, with the
understanding that the Prime Rate, one of Bank's base rates and serves as the
basis upon which effective rates of interest are calculated for those loans
making reference thereto, and is evidenced by the recording thereof after its
announcement in such internal publication or publications as Bank may designate.
INTEREST:
(a) Interest. The outstanding principal balance of this Note shall bear
interest (computed on the basis of a 360-day year, actual days elapsed) either
(i) at a fluctuating rate per annum equal to the Prime Rate in effect from time
to time plus the Applicable Prime Rate Margin, or (ii) at a fixed rate per annum
determined by Bank to be LIBOR in effect on the first day of the applicable
Fixed Rate Term plus the Applicable LIBOR Margin. When interest is determined in
relation to the Prime Rate, each change in the rate of interest hereunder shall
become effective on the date each Prime Rate change is announced within Bank.
With respect to each LIBOR selection hereunder, Bank is hereby authorized to
note the date, principal amount, interest rate and Fixed Rate Term applicable
thereto and any payments made thereon on Bank's books and records (either
manually or by electronic entry) and/or on any schedule attached to this Note,
which notations shall be prima facie evidence of the accuracy of the information
noted.
(b) Selection of Interest Rate Options. At any time any portion of this
Note bears interest determined in relation to LIBOR, it may be continued by
Borrower at the end of the Fixed Rate Term applicable thereto so that all or a
portion thereof bears interest determined in relation to the Prime Rate or to
LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion
of this Note bears interest determined in relation to the Prime Rate, Borrower
may convert all or a portion thereof so that it bears interest determined in
relation to LIBOR for a Fixed Rate Term designated by Borrower. At such time as
Borrower requests an advance hereunder or wishes to select a LIBOR option for
all or a portion of the outstanding principal balance hereof, and at the end of
each Fixed Rate Term, Borrower shall give Bank notice specifying: (i) the
interest rate option selected by Borrower; (ii) the principal amount subject
thereto; and (iii) for each LIBOR selection, the length of the applicable Fixed
Rate Term. Any such notice may be given by telephone, so long as, with respect
to each LIBOR selection, (A) Bank receives written confirmation from Borrower
not later than three (3) Business Days after such telephone notice is given, and
(B) such notice is given to Bank prior to 10:00 a.m., California time, on the
first day of the Fixed Rate Term. For each LIBOR option requested hereunder,
Bank will quote the applicable fixed rate to Borrower at approximately 10:00
a.m., California time, on the first day of the Fixed Rate Term. If Borrower does
not immediately accept the rate quoted by Bank, any subsequent acceptance by
Borrower shall be subject to a redetermination by Bank of the applicable fixed
rate; provided however, that if Borrower fails to accept any such rate by 11:00
a.m., California time, on the Business Day such quotation is given, then the
quoted rate shall expire and Bank shall have no obligation to permit a LIBOR
option to be selected on such day. If no specific designation of interest is
made at the time any advance is requested hereunder or at the end of any Fixed
Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection
for such advance or the principal amount to which such Fixed Rate Term applied.
(c) Additional LIBOR Provisions.
(i) If Bank at any time shall determine that for any reason
adequate and reasonable means do not exist for ascertaining LIBOR, then
Bank shall promptly give notice thereof to Borrower. If such notice is
given and until such notice has been withdrawn by Bank, then (A) no new
LIBOR option may be selected by Borrower, and (B) any portion of the
outstanding principal balance hereof which bears interest determined in
relation to LIBOR, subsequent to the end of the Fixed Rate Term
applicable thereto, shall bear interest determined in relation to the
Prime Rate.
(ii) If any law, treaty, rule, regulation or determination of
a court or governmental authority or any change therein or in the
interpretation or application thereof (each, a "Change in Law") shall
make it unlawful for Bank (A) to make LIBOR options available
hereunder, or (B) to maintain interest rates based on LIBOR, then in
the former event, any obligation of Bank to make available such
unlawful LIBOR options shall immediately be cancelled, and in the
latter event, any such unlawful LIBOR-based interest rates then
outstanding shall be converted, at Bank's option, so that interest on
the portion of the outstanding principal balance subject thereto is
determined in relation to the Prime Rate; provided however, that if any
such Change in Law shall permit any LIBOR-based interest rates to
remain in effect until the expiration of the Fixed Rate Term applicable
thereto, then such permitted LIBOR-based interest rates shall continue
in effect until the expiration of such Fixed Rate Term. Upon the
occurrence of any of the foregoing events, Borrower shall pay to Bank
immediately upon demand such amounts as may be necessary to compensate
Bank for any fines, fees, charges, penalties or other costs incurred or
payable by Bank as a result thereof and which are attributable to any
LIBOR options made available to Borrower hereunder, and any reasonable
allocation made by Bank among its operations shall be conclusive and
binding upon Borrower.
(iii) If any Change in Law or compliance by Bank with any
request or directive (whether or not having the force of law) from any
central bank or other governmental authority shall:
(A) subject Bank to any tax, duty or other charge with
respect to any LIBOR options, or change the basis of
taxation of payments to Bank of principal, interest,
fees or any other amount payable hereunder (except
for changes in the rate of tax on the overall net
income of Bank); or
(B) impose, modify or hold applicable any reserve,
special deposit, compulsory loan or similar
requirement against assets held by, deposits or other
liabilities in or for the account of, advances or
loans by, or any other acquisition of funds by any
office of Bank; or
(C) impose on Bank any other condition;
and the result of any of the foregoing is to increase the cost to Bank of
making, renewing or maintaining any LIBOR options hereunder and/or to reduce any
amount receivable by Bank in connection therewith, then in any such case,
Borrower shall pay to Bank immediately upon demand such amounts as may be
necessary to compensate Bank for any additional costs incurred by Bank and/or
reductions in amounts received by Bank which are attributable to such LIBOR
options. In determining which costs incurred by Bank and/or reductions in
amounts received by Bank are attributable to any LIBOR options made available to
Borrower hereunder, any reasonable allocation made by Bank among its operations
shall be conclusive and binding upon Borrower.
(d) Payment of Interest. Interest accrued on this Note shall be payable
on the 1st day of each month, commencing February 1, 1998.
(e) Default Interest. From and after the maturity date of this Note, or
such earlier date as all principal owing hereunder becomes due and payable by
acceleration or otherwise, the outstanding principal balance of this Note shall
bear interest until paid in full at an increased rate per annum (computed on the
basis of a 360-day year, actual days elapsed) equal to two percent (2.00%) above
the rate of interest from time to time applicable to this Note.
BORROWING AND REPAYMENT:
(a) Borrowing and Repayment. Borrower may from time to time during the
term of this Note borrow, partially or wholly repay its outstanding borrowings,
and reborrow, subject to all of the limitations, terms and conditions of this
Note and of any document executed in connection with or governing this Note;
provided however, that the total outstanding borrowings under this Note shall
not at any time exceed the principal amount stated above. The unpaid principal
balance of this obligation at any time shall be the total amounts advanced
hereunder by the holder hereof less the amount of principal payments made hereon
by or for Borrower, which balance may be endorsed hereon from time to time by
the holder. The outstanding principal balance of this Note shall be due and
payable in full on February 1, 2000.
(b) Advances. Advances hereunder, to the total amount of the principal
sum stated above, may be made by the holder at the oral or written request of
(i) Dennis K. Marquardt or James Freeman, Jr. or Kevin Marquez or Mark Vidovich
or Ravi Shan, any one acting alone, who are authorized to request advances and
direct the disposition of any advances until written notice of the revocation of
such authority is received by the holder at the office designated above, or (ii)
any person, with respect to advances deposited to the credit of any account of
Borrower with the holder, which advances, when so deposited, shall be
conclusively presumed to have been made to or for the benefit of Borrower
regardless of the fact that persons other than those authorized to request
advances may have authority to draw against such account. The holder shall have
no obligation to determine whether any person requesting an advance is or has
been authorized by Borrower.
(c) Application of Payments. Each payment made on this Note shall be
credited first, to any interest then due and second, to the outstanding
principal balance hereof. All payments credited to principal shall be applied
first, to the outstanding principal balance of this Note which bears interest
determined in relation to the Prime Rate, if any, and second, to the outstanding
principal balance of this Note which bears interest determined in relation to
LIBOR, with such payments applied to the oldest Fixed Rate Term first.
PREPAYMENT:
(a) Prime Rate. Borrower may prepay principal on any portion of this
Note which bears interest determined in relation to the Prime Rate at any time,
in any amount and without penalty.
(b) LIBOR. Borrower may prepay principal on any portion of this Note
which bears interest determined in relation to LIBOR at any time and in the
minimum amount of One Hundred Thousand Dollars ($100,000.00); provided however,
that if the outstanding principal balance of such portion of this Note is less
than said amount, the minimum prepayment amount shall be the entire outstanding
principal balance thereof. In consideration of Bank providing this prepayment
option to Borrower, or if any such portion of this Note shall become due and
payable at any time prior to the last day of the Fixed Rate Term applicable
thereto by acceleration or otherwise, Borrower shall pay to Bank immediately
upon demand a fee which is the sum of the discounted monthly differences for
each month from the month of prepayment through the month in which such Fixed
Rate Term matures, calculated as follows for each such month:
(i) Determine the amount of interest which would have accrued
each month on the amount prepaid at the interest rate applicable to
such amount had it remained outstanding until the last day of the Fixed
Rate Term applicable thereto.
(ii) Subtract from the amount determined in (i) above the
amount of interest which would have accrued for the same month on the
amount prepaid for the remaining term of such Fixed Rate Term at LIBOR
in effect on the date of prepayment for new loans made for such term
and in a principal amount equal to the amount prepaid.
(iii) If the result obtained in (ii) for any month is greater
than zero, discount that difference by LIBOR used in (ii) above.
Borrower acknowledges that prepayment of such amount may result in Bank
incurring additional costs, expenses and/or liabilities, and that it is
difficult to ascertain the full extent of such costs, expenses and/or
liabilities. Borrower, therefore, agrees to pay the above-described prepayment
fee and agrees that said amount represents a reasonable estimate of the
prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay
any prepayment fee when due, the amount of such prepayment fee shall thereafter
bear interest until paid at a rate per annum two percent (2.00%) above the Prime
Rate in effect from time to time (computed on the basis of a 360-day year,
actual days elapsed). Each change in the rate of interest on any such past due
prepayment fee shall become effective on the date each Prime Rate change is
announced within Bank.
EVENTS OF DEFAULT:
This Note is made pursuant to and is subject to the terms and
conditions of the Credit Agreement. Any default in the payment or performance of
any obligation under this Note, or any defined event of default under the Credit
Agreement, shall constitute an "Event of Default" under this Note.
MISCELLANEOUS:
(a) Remedies. Upon the occurrence of any Event of Default, the holder
of this Note, at the holder's option, may declare all sums of principal and
interest outstanding hereunder to be immediately due and payable without
presentment, demand, notice of nonperformance, notice of protest, protest or
notice of dishonor, all of which are expressly waived by Borrower, and the
obligation, if any, of the holder to extend any further credit hereunder shall
immediately cease and terminate. Borrower shall pay to the holder immediately
upon demand the full amount of all payments, advances, charges, costs and
expenses, including reasonable attorneys' fees (to include outside counsel fees
and all allocated costs of the holder's in-house counsel), expended or incurred
by the holder in connection with the enforcement of the holder's rights and/or
the collection of any amounts which become due to the holder under this Note,
and the prosecution or defense of any action in any way related to this Note,
including without limitation, any action for declaratory relief, whether
incurred at the trial or appellate level, in an arbitration proceeding or
otherwise, and including any of the foregoing incurred in connection with any
bankruptcy proceeding (including without limitation, any adversary proceeding,
contested matter or motion brought by Bank or any other person) relating to
Borrower or any other person or entity.
(b) Governing Law. This Note shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the
date first written above.
DAY RUNNER, INC.,
a Delaware corporation
By:_______________________
Title:______________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of income filed as
part of the quarterly report on form 10-Q and is qualified in its entirety by
reference to such quarterly report on form 10-Q.
</LEGEND>
<CIK> 0000853102
<NAME> Day Runner, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-END> Dec-31-1997
<CASH> 9,411
<SECURITIES> 0
<RECEIVABLES> 36,099
<ALLOWANCES> 11,585
<INVENTORY> 30,597
<CURRENT-ASSETS> 73,045
<PP&E> 21,971
<DEPRECIATION> 11,838
<TOTAL-ASSETS> 85,275
<CURRENT-LIABILITIES> 25,526
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 59,666
<TOTAL-LIABILITY-AND-EQUITY> 85,275
<SALES> 87,526
<TOTAL-REVENUES> 87,526
<CGS> 41,658
<TOTAL-COSTS> 41,658
<OTHER-EXPENSES> 29,743
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (65)
<INCOME-PRETAX> 16,190
<INCOME-TAX> 6,314
<INCOME-CONTINUING> 9,876
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,876
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.59
</TABLE>
