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, 1998
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 10, 1999
- ------------------------------ ----------------------------------------
Common Stock, $0.001 par value 11,899,963
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DAY RUNNER, INC.
INDEX
PAGE REFERENCE
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COVER PAGE....................................................................................... 1
INDEX ....................................................................................... 2
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 1998 and June 30, 1998....................................... 3
Consolidated Statements of Income
Three and Six Months Ended December 31, 1998 and 1997..................... 4
Consolidated Statements of Cash Flows
Six Months Ended December 31, 1998 and 1997............................... 5
Notes to Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................... 11
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................ 17
SIGNATURES....................................................................................... 18
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PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
ASSETS
December 31, June 30,
1998 1998
------------ ----------
Current assets:
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Cash and cash equivalents ................................................................... $ 25,253 $ 2,923
Accounts receivable (net of allowances for doubtful accounts and sales returns
and other allowances of $8,654 and $9,942 at December 31, 1998 and
June 30, 1998, respectively) ........................................................... 48,580 32,542
Inventories ................................................................................. 47,887 37,610
Prepaid expenses and other current assets ................................................... 4,830 1,670
Income taxes receivable ..................................................................... 9 2,606
Deferred income taxes ....................................................................... 7,218 7,218
-------- --------
Total current assets ................................................................... 133,777 84,569
Property and equipment -- net .................................................................... 17,793 11,888
Goodwill (net of accumulated amortization of $648 and $108 at December 31, 1998 and June 30, 1998,
respectively) ................................................................................... 86,807 3,564
Other assets (net of accumulated amortization of $132 and $60 at December 31,
1998 and June 30, 1998, respectively) ....................................................... 2,120 1,158
-------- --------
Total assets ..................................................................................... $240,497 $101,179
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit.............................................................................. $ 2,716
Accounts payable............................................................................. $ 9,095 9,969
Accrued expenses............................................................................. 25,004 13,876
Income taxes payable......................................................................... 4,131
Current portion of capital lease obligations................................................. 32 33
--------- ---------
Total current liabilities............................................................... 38,262 26,594
--------- ---------
Long-term liabilities:
Capital lease obligations.................................................................... 53
Line of credit............................................................................... 118,351
Loan notes................................................................................... 2,457
--------- ---------
Total long-term debt....................................................................... 120,808 53
--------- ---------
Stockholders' equity:
Preferred stock (1,000,000 shares authorized, $0.001 par value; no shares issued
or outstanding)..........................................................................
Common stock (29,000,000 shares authorized, $0.001 par value; 13,697,001
and 13,677,386 issued and 11,899,213 and 11,955,598 outstanding at
December 31, 1998 and June 30, 1998, respectively)....................................... 14 14
Additional paid-in capital................................................................... 34,658 34,445
Retained earnings............................................................................ 72,998 65,076
Cumulative translation adjustment............................................................ 136 102
Treasury stock: at cost (1,797,788 and 1,721,788 shares at December 31, 1998
and June 30, 1998, respectively)......................................................... (26,379) (25,105)
--------- ----------
Total stockholders' equity.............................................................. 81,427 74,532
--------- ----------
Total liabilities and stockholders' equity........................................................ $ 240,497 $ 101,179
========= ==========
See accompanying notes to consolidated financial
statements.
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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,
1998 1997 1998 1997
---- ---- ---- ----
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Net sales.................................................... $ 64,565 $ 49,388 $ 112,296 $ 87,526
Cost of goods sold........................................... 32,100 23,626 54,780 41,658
--------- --------- --------- ---------
Gross profit................................................. 32,465 25,762 57,516 45,868
--------- --------- --------- ---------
Operating expenses:
Selling, marketing and distribution..................... 18,910 12,087 31,175 21,389
General and administrative.............................. 6,447 4,590 11,104 8,354
Costs relating to activities associated
with the Filofax acquisition......................... 1,072 1,072
--------- --------- --------- ---------
Total operating expenses................................ 26,429 16,677 43,351 29,743
--------- --------- --------- ---------
Income from operations....................................... 6,036 9,085 14,165 16,125
Net interest expense (income)................................ 1,356 30 1,389 (65)
--------- --------- --------- ---------
Income before provision for income taxes..................... 4,680 9,055 12,776 16,190
Provision for income taxes................................... 1,778 3,531 4,854 6,314
--------- --------- --------- ---------
Net income................................................... $ 2,902 $ 5,524 $ 7,922 $ 9,876
========= ========= ========= =========
Earnings per common share:
Basic................................................... $ 0.24 $ 0.49 $ 0.67 $ 0.87
========= ========= ========== ==========
Diluted................................................. $ 0.23 $ 0.45 $ 0.63 $ 0.80
========= ========= ========== ==========
Weighted average number of common shares outstanding:
Basic................................................... 11,883 11,273 11,907 11,393
========= ========= ========= =========
Diluted................................................. 12,564 12,323 12,619 12,415
========= ========= ========= =========
See accompanying notes to consolidated financial
statements.
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DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Six Months Ended
December 31,
1998 1997
---- ----
Cash flows from operating activities:
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Net income.................................................................... $ 7,922 $ 9,876
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.............................................. 4,478 2,255
Provision for losses on accounts receivable................................ 12
Changes in operating assets and liabilities, net of acquisition:
Accounts receivable..................................................... (1,482) (959)
Inventories............................................................. 2,296 (4,423)
Prepaid expenses and other current assets............................... (785) 293
Income taxes receivable................................................. 2,646
Accounts payable........................................................ (4,951) (2,657)
Accrued expenses........................................................ 3,294 5,011
Income taxes payable.................................................... 2,761 2,261
--------- ---------
Net cash provided by operating activities................................ 16,191 11,657
--------- ---------
Cash flows from investing activities:
Purchase of business.......................................................... (88,764) (2,080)
Acquisition of property and equipment......................................... (6,002) (2,565)
Other assets.................................................................. (385) (6)
---------- ----------
Net cash used in investing activities.................................... (95,151) (4,651)
---------- ----------
Cash flows from financing activities:
Net borrowings (repayments) under lines of credit............................. 102,146 (2,697)
Repayment of capital lease obligations........................................ (53) (39)
Repayment of long-term debt................................................... (678)
Net proceeds from issuance of common stock.................................... 212 1,879
Repurchase of common stock.................................................... (1,274) (11,564)
---------- ----------
Net cash provided by (used in) financing activities...................... 101,031 (13,099)
--------- ----------
Effect of exchange rate changes in cash........................................... 259 (46)
--------- ----------
Net increase (decrease) in cash and cash equivalents.............................. 22,330 (6,139)
Cash and cash equivalents at beginning of period.................................. 2,923 15,550
--------- ---------
Cash and cash equivalents at end of period........................................ $ 25,253 $ 9,411
========= =========
See accompanying notes to consolidated financial
statements.
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DAY RUNNER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying consolidated balance sheet as of December 31, 1998,
consolidated statements of income for the three and six months ended December
31, 1998 and 1997, and consolidated statements of cash flows for the six months
ended December 31, 1998 and 1997 are unaudited but, in the opinion of
management, include all adjustments consisting of normal, recurring accruals
necessary for a fair presentation of the financial position and the results of
operations for such periods. Certain information and footnote disclosures
normally included in financial statements prepared in conformity with generally
accepted accounting principles have been omitted pursuant to the requirements of
the Securities and Exchange Commission, although the Company believes that the
disclosures included in the financial statements included herein are adequate to
make the information therein not misleading. The financial statements included
herein should be read in conjunction with the Company's audited consolidated
financial statements for the year ended June 30, 1998, and the notes thereto,
which are included in the Company's Annual Report on Form 10-K.
The results of operations for the three and six months ended December
31, 1998 and 1997 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,
1998 1998
Raw materials................... $ 10,101 $ 14,087
Work in process................. 1,719 831
Finished goods.................. 36,067 22,692
---------- ----------
Total.................. $ 47,887 $ 37,610
========== ==========
3. LINES OF CREDIT
On September 23, 1998, the Company entered into a $160,000,000
Revolving Loan Agreement (the "Loan Agreement") with Wells Fargo Bank, National
Association ("Wells Fargo"). Effective November 24, 1998 this amount was reduced
to $145,000,000. The loan facility was syndicated with a group of banks in
December 1998. The Loan Agreement provides for borrowings through September 30,
2005 (the "Maturity Date"). Borrowings bear interest either at fixed rates based
on the higher of Wells Fargo's prime rate and the Federal Funds Rate published
by the Federal Reserve Bank of New York or at floating rates calculated by
reference to the interest rates at which Wells Fargo offers deposits in U.S.
dollars in amounts approximately equal to the amount of the relevant loan and
for a period of time comparable to the number of days the relevant loan will
remain outstanding, together with a margin. During the six months ended December
31, 1998, the weighted average interest rate was 6.70%.The maximum amount that
may be outstanding under the Loan Agreement is $145,000,000 through December 31,
2000 and is reduced thereafter by $5,000,000 in calendar year 2001 and by
$10,000,000 in each of the following calendar years up to the Maturity Date.
Under the terms of the Loan Agreement, the Company paid Wells Fargo a financing
fee of $1,200,000. The Company will also pay commitment fees for the unused
portion of the loan facility during the term of the Loan Agreement and will pay
certain legal, accounting and other fees and expenses in connection with the
Loan Agreement. At December 31, 1998, the Company had $118,351,000 outstanding
under this Loan Agreement.
The Loan Agreement requires the Company to meet certain financial
covenants, including: (i) a fixed charge coverage ratio of less than 2.00 to
1.00; (ii) a funded debt ratio declining over the term from 3.75 to 1.00 to 2.50
to 1.00; (iii) limits on annual capital expenditures increasing from $11,000,000
to $17,000,000 over the seven-year term; (iv) stockholders' equity, on a
quarterly basis, of not less than (a) 50% of net income plus 75% of net cash
proceeds from any stock issuances plus (b) the greater of $67,000,000 or 80% of
stockholders' equity at March 31, 1999.
The Company's Canadian subsidiary had a credit agreement with a
Canadian bank which allowed for borrowings up to Canadian $3,000,000, bore
interest at the bank's prime rate and was due and payable on demand. The
borrowings under this credit agreement were repaid in full on October 22, 1998,
and the Canadian subsidiary now borrows funds as a co-borrower under the Loan
Agreement.
4. LOAN NOTES
Loan Notes in the amount of $2,457,000 were issued in connection with
the Filofax acquisition are unsecured obligations of the Company's U.K.
subsidiary and bear interest at 1% below LIBOR (5.63% at December 31, 1998).
Interest on the Loan Notes is paid annually in arrears beginning September 30,
1999. The Loan Notes are redeemable, in whole or in part, at the holder's option
or each interest payment date. Unless they have previously been redeemed, all
Loan Notes will be redeemed on September 30, 2003.
5. STOCKHOLDERS' EQUITY
During the six months ended December 31, 1998, certain employees
exercised options to purchase an aggregate of 6,650 shares of the Company's
Common Stock for an aggregate of approximately $213,000.
During the six months ended December 31, 1998, the Company repurchased
76,000 shares of its Common Stock at an average cost of $16.76 per share for an
aggregate of approximately $1,274,000.
6. EARNINGS PER SHARE
Effective December 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE, which requires the
Company to present basic and diluted earnings per share on the face of the
income statement. Basic earnings per share is computed by dividing net income by
the weighted average number of common shares outstanding for the period. Diluted
earnings per share is computed by dividing net income by the sum of the weighted
average number of common shares outstanding for the period plus the assumed
exercise of all dilutive securities. The following reconciles the numerator and
denominator of the basic and diluted per share computations for net income (in
thousands, except per share amounts):
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THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------- --------------------------------------
1998 1997 1998 1997
----------------- ---------------- ----------------- ----------------
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NET INCOME $ 2,902 $ 5,524 $ 7,922 $ 9,876
======= ======== ======== ========
BASIC WEIGHTED AVERAGE SHARES
Weighted average number of
common shares outstanding 11,883 11,273 11,907 11,393
EFFECT OF DILUTED SECURITIES
Additional shares from the assumed
exercise of options and warrants 3,047 3,333 2,952 3,206
Shares assumed to be repurchased
under the treasury stock method (1,949) (1,739) (1,804) (1,666)
Non-qualified tax benefit (417) (544) (436) (518)
------- -------- -------- --------
DILUTED WEIGHTED AVERAGE SHARES
Weighted average number of
common shares outstanding and
common share equivalents 12,564 12,323 12,619 12,415
======= ======== ========= ========
BASIC $0.24 $ 0.49 $ 0.67 $ 0.87
======= ======== ========= ========
DILUTED $ 0.23 $ 0.45 $ 0.63 $ 0.80
======= ======== ======== ========
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7. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130 REPORTING COMPREHENSIVE INCOME. The statement establishes standards for
reporting and displaying comprehensive income and its components in a full set
of general-purpose financial statements. Comprehensive income is summarized as
follows:
SIX MONTHS ENDED DECEMBER 31,
1998 1997
------------- ------------
Net income $ 7,922 $ 9,876
Foreign currency translation
adjustment 35 (3)
------------- ------------
Comprehensive income $ 7,957 $ 9,873
============= ============
8. ACQUISITION
On October 30, 1998, the Company announced that it had control of a
majority of the outstanding shares of Filofax Group plc ("Filofax") as a result
of its previously announced cash tender offer for the Filofax stock. The Company
acquired all the remaining outstanding shares of Filofax on December 26, 1998.
This acquisition will be accounted for under the purchase method of accounting.
The total purchase price of $91,221,000, which includes costs of the
transaction, was paid in cash and Loan Notes (see Note 4). The Company borrowed
the cash portion of this amount under a Loan Agreement with a group of banks
(see Note 3).
The following table sets forth the unaudited proforma condensed
combined statements of income data for the six months ended December 31, 1998
and 1997 as if the acquisition had occurred on July 1, 1997 (dollars in
thousands):
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PRO FORMA SIX MONTHS
ENDED DECEMBER 31, 1998
----------------------------------
1998 1997
---------- -------
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Net sales $ 136,853 $ 131,908
============ ===========
Income before provision for
income taxes $ 12,687 $ 24,499
============ ===========
Net income $ 7,739 $ 14,944
============ ===========
Earnings per common share:
Basic $ 0.65 $ 1.31
============ ===========
Diluted $ 0.61 $ 1.20
============ ===========
Weighted average number of common
shares outstanding:
Basic 11,907 11,393
============ ============
Diluted 12,619 12,415
============ ============
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9. FINANCIAL INSTRUMENTS
On September 29, 1998, the Company entered into a call option in order
to limit its foreign exchange risk on the purchase of Filofax shares, which were
paid for in pound Sterling. The Company's objective was to protect itself from
the risk that the purchase price of the Filofax shares would be adversely
affected by changes in exchange rates. During the quarter ended December 31,
1998, the Company expensed $765,000 to operating expenses for the call option.
At December 31, 1998, the Company had not entered into any additional financial
instruments. The Company does not trade in financial instruments nor does it
enter into such contracts for speculative purposes.
10. STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information (in thousands):
SIX MONTHS ENDED DECEMBER 31,
1998 1997
---------------------------------
Cash paid during the period for:
Interest $ 1,217 $ 149
Income taxes, net of
refunds received $ (358) $ 4,146
Supplemental disclosure of noncash investing and financing activities:
During the six months ended December 31, 1998, the Company had
purchased 703,308 shares of Filofax's outstanding common stock by issuing
$2,457,000 in Loan Notes to former shareholders of Filofax.
The net cash expended by the Company in its acquisition of Filofax made
during the quarter ended December 31, 1998 was used as follows (in thousands)
(see Note 8):
Fair value of assets acquired $ (116,113)
Liabilities assumed 27,349
------------
Cash paid $ (88,764)
=============
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT. HISTORICAL RESULTS AND
PERCENTAGE RELATIONSHIPS AMONG ANY AMOUNTS INCLUDED IN THE CONSOLIDATED
FINANCIAL STATEMENTS ARE NOT NECESSARILY INDICATIVE OF TRENDS IN OPERATING
RESULTS FOR ANY FUTURE PERIOD.
Since the Company's introduction of the first Day Runner System
organizer in 1982, the Company's revenues have been generated by sales primarily
of organizers and planners and secondarily of refills. Since fiscal 1995, a
majority of the Company's growth has resulted from sales of related organizing
products, virtually all of which have been introduced since January 1, 1995. For
a number of years the Company focused the great majority of its product
development, sales and marketing efforts on the U.S. office products channel,
which accounted for 32.9% of second quarter fiscal 1999 net sales and 38.2% of
net sales for the six months ended December 31, 1998, and the U.S. mass market
channel, which accounted for 28.1% of second quarter fiscal 1999 net sales and
33.6% of net sales for the six months ended December 31, 1998. With the October
30, 1998 acquisition of Filofax, the Company substantially increased its
emphasis on markets outside the U.S., and sales to foreign customers accounted
from 33.3% of second quarter fiscal 1999 net sales and 23.0% of net sales for
the six months ended December 31, 1998.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that income statement items bear to net sales and the percentage
change in the dollar amounts of such items.
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PERCENTAGE CHANGE
Three Six
PERCENTAGE OF SALES Months Months
Three Six Ended Ended
Months Ended Months Ended December 31, December 31,
December 31, December 31, 1997 1997
1998 1997 1998 1997 to 1998 to 1998
---- ---- ---- ---- ------- -------
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Net sales........................................ 100.0% 100.0% 100.0% 100.0% 30.7% 28.3%
Cost of goods sold............................... 49.7 47.8 48.8 47.6 35.9 31.5
----- ----- ----- -----
Gross profit..................................... 50.3 52.2 51.2 52.4 26.0 25.4
----- ----- ----- -----
Operating expenses:
Selling, marketing and distribution........... 29.3 24.5 27.8 24.4 56.4 48.8
General and administrative.................... 10.0 9.3 9.9 9.6 40.5 32.9
Costs related to activities associated with
Filofax acquisition...................... 1.6 0.9 NA NA
----- ---- ----- ----
Total operating expenses.................... 40.9 33.8 38.6 34.0 58.5 45.8
----- ---- ----- ----
Income from operations........................... 9.4 18.4 12.6 18.4 (33.6) (12.2)
Net interest expense (income).................... 2.1 0.1 1.2 (0.1) NM NM
----- ----- ----- -----
Income before provision for income taxes......... 7.3 18.3 11.4 18.5 (48.3) (21.1)
Provision for income taxes....................... 2.8 7.1 4.3 7.2 (49.6) (23.1)
----- ----- ----- -----
Net income....................................... 4.5% 11.2% 7.1% 11.3% (47.5) (19.8)
===== ===== ===== =====
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The following tables set forth, for the periods indicated, the
Company's approximate net sales by product category and distribution channel and
as a percentage of total sales.
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PRODUCT CATEGORY:
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
----------------------------------- ---------------------------------
1998 1997 1998 1997
--------- --------- ---------- --------
(Unaudited; dollars in thousands)
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Organizers and planners......... $26,230 40.6% $ 21,912 44.4% $43,298 38.6% $ 43,100 49.2%
Refills......................... 22,049 34.2 16,255 32.9 39,097 34.8 27,130 31.0
Related organizing products..... 16,286 25.2 11,221 22.7 29,901 26.6 17,296 19.8
------- ----- -------- ------ -------- ----- -------- -----
Total........................ $64,565 100.0% $49,388 100.0% $112,296 100.0% $ 87,526 100.0%
======= ====== ======= ====== ======== ====== ======== ======
DISTRIBUTION CHANNEL:
THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31,
---------------------------------- --------------------------------
1998 1997 1998 1997
--------- --------- ---------- --------
(Unaudited; dollars in thousands)
Office products................. $21,226 32.9% $26,874 54.4% $ 42,886 38.2% $ 44,798 51.2%
Mass market..................... 18,139 28.1 16,106 32.6 37,787 33.6 31,856 36.4
Foreign customers............... 21,536 33.3 2,596 5.3 25,768 23.0 5,011 5.7
Other........................... 3,664 5.7 3,812 7.7 5,855 5.2 5,861 6.7
------- ------ ------- ------ -------- ------ --------
Total........................ $64,565 100.0% $49,388 100.0% $112,296 100.0% $ 87,526 100.0%
======= ====== ======= ====== ======== ====== ======== ======
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH
THE THREE MONTHS ENDED DECEMBER 31, 1997
NET SALES. Net sales consist of revenues from gross product shipments
net of allowances for returns, rebates and credits. In the second quarter of
fiscal 1999, net sales increased by $15,177,000, or 30.7%, because of the
Filofax acquisition. In the quarter ended December 31, 1998, sales of refills
(which include calendars and accessories) grew by $5,794,000, or 35.6%; sales of
related organizing products grew by $5,065,000, or 45.1%; and sales of
organizers and planners increased by $4,318,000, or 19.7%. Product sales were
primarily to foreign customers and secondarily to office products customers.
Sales to foreign customers grew by $18,940,000, or 729.6%; sales to mass market
customers grew by $2,033,000, or 12.6%; sales to office products customers
declined by $5,648,000, or 21.0%; and sales to miscellaneous customers grouped
together as "other" decreased by $148,000, or 3.9%.
GROSS PROFIT. Gross profit is net sales less cost of goods sold, which
is comprised of materials, labor and manufacturing overhead. Gross profit may be
affected by, among other things, product mix, production levels, changes in
vendor and customer prices and discounts, sales volume and growth rate, sales
returns, purchasing and manufacturing efficiencies, tariffs, duties and
inventory carrying costs. Gross profit as a percentage of sales decreased from
52.2% in the second quarter of fiscal 1998 to 50.3% in the second quarter of
fiscal 1999 primarily because the gross profit levels of certain of the
Company's smaller subsidiaries are lower as a percentage of sales than those of
the parent company.
OPERATING EXPENSES. Total operating expenses increased by $9,752,000,
or 58.5%, in the second quarter of fiscal 1999 compared with the second quarter
of fiscal 1998 and increased as a percentage of sales from 33.8% to 40.9%.
Excluding the operating expense portion of the costs related to activities
associated with the Filofax acquisition, second quarter fiscal 1999 operating
expenses would have increased by $8,680,000 and would have been 39.3% of sales.
Selling, marketing and distributiuon expenses increased by $6,823,000
primarily because of the addition of Filofax's expenses and secondarily because
of costs associated with new and recently introduced products. These expenses
grew from 24.5% to 29.3% as a percentage of sales primarily because of costs
associated with new and recently introduced products. General and administrative
expenses increased by $1,857,000 primarily because of the addition of Filofax's
expenses and increased from 9.3% to 10.0% as a percentage of sales primarily
because of the Company's inability to absorb higher costs as a result of lower
than anticipated sales.
NET INTEREST EXPENSE (INCOME). Because of the increase in the
Company's long-term debt, which was incurred primarily to finance the Filofax
acquisition, net interest expense for the second quarter of fiscal 1999 was
$1,356,000 compared with net interest expense of $30,000 for the second quarter
of fiscal 1998. As a result of the bank debt and Loan Notes incurred in the
Filofax acquisition, interest expense in future periods will be substantially
higher than in the periods prior to September 30, 1998. (See Notes 3, 4, and 8
to Consolidated Financial Statements.)
INCOME TAXES. The Company's second quarter fiscal 1999 effective tax
rate was 38.0%, compared with 39.0% for the second quarter of fiscal 1998.
SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH
THE SIX MONTHS ENDED DECEMBER 31, 1997
NET SALES. In the six months ended December 31, 1998, net sales
increased by $24,770,000, or 28.3%, primarily because of the Filofax acquisition
and secondarily because of increased sales to mass market customers. In the six
months ended December 31, 1998, sales of related organizing products grew by
$12,605,000, or 72.9%; sales of refills grew by $11,967,000, or 44.1%; and sales
of organizers and planners increased by $198,000, or 0.5%. Product sales were
primarily to office products customers and secondarily to mass market customers.
Sales to foreign customers grew by $20,757,000, or 414.2%; sales to mass market
customers grew by $5,931,000, or 18.6%; sales to office products customers
declined by $1,912,000, or 4.3%; and sales to miscellaneous customers grouped
together as "other" decreased by $6,000, or 0.1%.
GROSS PROFIT. Gross profit as a percentage of sales decreased from
52.4% in the first six months fiscal 1998 to 51.2% in the first six months of
fiscal 1999 primarily because the gross profit levels of certain of the
Company's smaller subsidiaries are lower as a percentage of sales than those of
the parent company.
OPERATING EXPENSES. Total operating expenses increased by $13,608,000,
or 45.8%, in the first six months of fiscal 1999 compared with the first six
months of fiscal 1998 and increased as a percentage of sales from 34.0% to
38.6%. Excluding the operating expense portion of the costs related to
activities associated with the Filofax acquisition, operating expenses for the
first six months ended December 31, 1998 would have increased by $12,536,000 and
would have been 37.6% of sales.
Selling, marketing and distribution expenses increased by $9,786,000
primarily because of costs associated with new and recently introduced products
and secondarily because of the addition of Filofax's expenses. These expenses
grew from 24.4% to 27.8% as a percentage of sales primarily because of costs
associated with new and recently introduced products. General and administrative
expenses increased by $2,750,000 primarily because of the addition of Filofax's
expenses and increased from 9.6% to 9.9% as a percentage of sales primarily
because of the Company's inability to absorb higher costs as a result of lower
than anticipated sales.
NET INTEREST EXPENSE (INCOME). Because of the increase in the
Company's long-term debt, which was incurred primarily to finance the Filofax
acquisition, net interest expense for the first six months of fiscal 1999 was
$1,389,000 compared with net interest income of $65,000 for the first six months
of fiscal 1998. As a result of the bank debt and Loan Notes incurred in the
Filofax acquisition, interest expense in future periods will be substantially
higher than in the periods prior to September 30, 1998. (See Notes 3, 4, and 8
to Consolidated Financial Statements.)
INCOME TAXES. The Company's effective tax rate was 38.0% for the first
six months of fiscal 1999, compared with 39.0% for the first six months of
fiscal 1998.
SEASONAL FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience significant seasonal fluctuations in its sales and other financial
results that it believes have resulted and will continue to result primarily
from its customers' and users' buying patterns. These buying patterns have
typically adversely affected orders for the Company's products in the third
quarter of each fiscal year.
Although it is difficult to predict the future seasonality of sales,
the Company believes that future seasonality should be influenced at least in
part by customer and user buying patterns substantially similar to those that
have historically affected the Company. Quarterly financial results are also
affected by new product introductions and line extensions, the timing of large
orders, changes in product sales or customer mix, vendor and customer pricing,
production levels, supply and manufacturing delays, large customers' inventory
management and general industry and economic conditions. The seasonality of the
Company's financial results and the unpredictability of the factors affecting
such seasonality make the Company's quarterly and yearly financial results
difficult to predict and subject to significant fluctuation.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at December 31, 1998 increased
to $25,253,000 from $2,923,000 at June 30, 1998. During the six months ended
December 31, 1998, net cash of $16,191,000 and $101,031,000 provided by
operating activities and financing activities, respectively, was partially
offset by net cash of $95,151,000 used in investing activities.
Of the $16,191,000 net amount provided by the Company's operating
activities, $7,922,000 was provided by net income, $4,478,000 was provided by
depreciation and amortization, $3,294,000 was provided by an increase in accrued
expenses, $2,761,000 was provided by an increase in income taxes payable,
$2,646,000 was provided by a decrease in income taxes receivable and $2,296,000
was provided by a decrease in inventories. These amounts were partially offset
by a decrease of $4,951,000 in accounts payable and an increase of $1,482,000 in
accounts receivable.
Accounts receivable (net) at December 31, 1998 increased by 49.3% from
the fiscal 1998 year-end amount and by 98.2% from the December 31, 1997 amount
primarily because an increase in sales and secondarily because of a decrease in
the allowance for sales returns based upon improvement in the Company's actual
sales returns experience duruing the prior twelve months. The average collection
period of accounts receivable at December 31, 1998 was 48 days, compared with 45
and 46 days at Juen 30, 1998 and December 31, 1997, respectively.
Inventories at December 31, 1998 increased by 27.3% from the fiscal
1998 year-end amount and by 56.5% compared with the December 31, 1997 amount
primarily because of the inventories of Filofax, which Day Runner acquired
during the second quarter of fiscal 1999, and secondarily because of new and
recently introduced products.
Of the $95,151,000 net amount used in the Company's investing
activities, $88,764,000 was used to acquire Filofax, and $6,002,000 was used to
acquire primarily machinery and equipment and secondarily data processing
equipment and software.
Of the $101,031,000 net amount provided by the Company's financing
activities, $102,146,000 was provided by borrowings under the Company's lines of
credit which amount was partially offset by $1,274,000 used to repurchase 76,000
shres of the Company's Common Stock.
At December 31, 1998, the Company had $118,351,000 outstanding under
its $145,000,000 bank line of credit (the "Loan Agreement"). Borrowings under
this Loan Agreement bear interest either at fixed rates based on the higher of
the bank's prime rate and the Federal Funds Rate published by the Federal
Reserve Bank of New York or at floating rates calculated by reference to the
interest rates at which the bank offers deposits in U.S. dollars in amounts
approximately equal to the amount of the relevant loan and for a period of time
comparable to the number of days the relevant loan will remain outstanding,
together with a margin. During the six months ended December 31, 1998, the
weighted average interest rate was 6.70%. The maximum amount that may be
outstanding under the Loan Agreement is $145,000,000 through December 31, 2000.
Thereafter, the maximum amount of borrowings that may be outstanding under the
Loan Agreement is reduced by $5,000,000 in calendar 2001 and by $10,000,000 in
each of the following calendar years up to September 30, 2005. (See Note 3 to
Consolidated Financial Statements.)
On October 30, 1998, the Company announced that it had control of a
majority of the outstanding shares of Filofax Group plc ("Filofax") as a result
of its previously announced cash tender offer for the Filofax stock. As of
December 26, 1998, the Company had acquired 100% of the outstanding shares of
Filofax. This acquisition will be accounted for under the purchase method of
accounting. The Company currently estimates that the aggregate fees and expenses
of the transaction, including investment banking, legal, accounting and other
fees and expenses, will be $5,000,000 to $6,000,000. The fees and expenses, as
well as payments for the Filofax shares, have been and will be paid with
available cash, borrowings under the Loan Agreement and the Loan Notes. (See
Notes 3, 4 and 8 to Consolidated Financial Statements.)
The Company has not incurred significant losses or gains from foreign
currency exchange rate fluctuations. The continuing expansion of the Company's
international operations could, however, result in larger gains or losses as a
result of fluctuations in foreign currency exchange rates as those subsidiaries
conduct business in whole or in part in foreign currencies. The Company's
exposure to the impact of interest changes and foreign currency fluctuations has
increased as a result of its acquisition of Filofax because the acquisition has
significantly expanded the Company's international operations and because a
portion of the debt incurred to fund the acquisition is in pound Sterling. The
Company entered into a call option with respect to the purchase of Filofax
shares in the tender offer to limit the effect of exchange rate fluctuations.
The Company may in the future enter into foreign currency exchange contracts,
call options, swap agreements or other financial instruments as hedges to
moderate the impact of foreign currency fluctuations. The Company does not trade
in financial instruments, nor does it enter into such contracts for speculative
purposes.
A single currency called the euro was introduced in certain countries
in Europe on January 1, 1999, but will not, at lease in the foreseeable future,
be introduced in United Kingdom. The use of a single currency may affect the
ability of Day Runner and other companies to price their products differently in
various European markets. The Company is evaluating the impact of the single
currency in these markets.
The Company believes that cash flow from operations, vendor credit,
its existing working capital and its bank line of credit will be sufficient to
satisfy the Company's anticipated cash requirements at least through the next 12
months. Nonetheless, the Company may seek additional sources of capital as
necessary or appropriate to finance acquisitions or to otherwise finance the
Company's growth or operations; however, there can be no assurance that such
funds, if needed, will be available on favorable terms, if at all.
The "Year 2000" issue refers to the inability of certain computer
systems, as well as certain hardware and equipment containing date-sensitive
data, to recognize accurately dates commencing on or after January 1, 2000, and
even possibly certain dates in 1999. This has the potential to affect the
operation of these systems adversely and materially. Day Runner has identified
four phases in its Year 2000 compliance efforts: discovery; assessment;
remediation; and applicable testing and verification. The Company has completed
the discovery and assessment phases for its own systems and applications, has
substantially completed the remediation phase and expects to complete the
remediation and applicable testing and verification phases by June 30, 1999. Day
Runner believes that by modifying existing software and converting to new
software for certain tasks it can prevent the Year 2000 transition from posing
significant internal operational problems.
The Company currently estimates that total incremental costs related
to the Year 2000 issue will be approximately $2,000,000 to $2,500,000, of which
approximately $900,000 had been incurred as of December 31, 1998. The Company
does not anticipate that the costs of these modifications and conversions will
be material to its financial position or results of operations in any given
year. Expenditures will be expensed or capitalized as appropriate.
Day Runner is surveying its vendors, customers and others on whom it
relies to assess their state of Year 2000 readieness. However, there can be no
assurance that the systems of other parties on which the Company's systems rely
will also be compliant or that any failure to be compliant in this area by
another party will not have an adverse effect on the Company's systems.
Furthermore, no assurance can be given that any or all of the Company's systems
are or will be Year 2000 compliant, that the ultimate costs required to address
the Year 2000 issue will not exceed the amounts indicated above, or that the
impact of any failure to achieve substantial Year 2000 compliance will not have
a material adverse effect on the Company's financial condition.
FORWARD LOOKING STATEMENTS
With the exception of the actual reported financial results and other
historical information, the statements made in the Management's Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in this
quarterly report are forward looking statements that involve risks and
uncertainties that could affect actual future results. Such risks and
uncertainties include, but are not limited to: timing and size of orders from
large customers, timing and size of orders for new products, competition, large
customers' inventory management, general economic conditions, the health of the
retail environment, foreign exchange rate fluctuations, supply constraints,
supplier performance and other risks indicated in the Company's filings with the
Securities and Exchange Commission.
PART II --OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Registrant, as amended(1)
3.2 Bylaws of the Registrant(2)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
1) On October 2, 1998, the Company filed with the
Commission a Current Report on Form 8-K reporting the
Company's additional purchases of Filofax shares.
2) On October 30, 1998, the Company filed with the
Commission a Current Report on Form 8-K attaching the
Company's press release announcing that the Company
had acquired a majority of the outstanding Filofax
shares.
3) On November 12, 1998, the Company filed with the
Commission a Current Report on Form 8-K reporting the
Company's acquisition of a majority of the
outstanding Filofax shares.
(1) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 0-19835) filed with the Commission on May 15, 1998.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
(File No. 0-19835) filed with the Commission on August 5, 1993.
<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 16, 1999
DAY RUNNER, INC.
By: /S/ JAMES E. FREEMAN JR.
------------------------------------
James E. Freeman, Jr.
Chief Executive Officer
By: /S/ DENNIS K. MARQUARDT
------------------------------------
Dennis K. Marquardt
Executive Vice President, Finance
& Administration and
Chief Financial Officer
<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 entireby by
reference to such quarterly report on Form 10-Q.
</LEGEND>
<CIK> 0000853102
<NAME> Day Runner, Inc.
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<FISCAL-YEAR-END> Jun-30-1999
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