FORM 10-Q/A
AMENDMENT NO. 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 9, 1998
- ------------------------------ ------------------------------------------------
Common Stock, $0.001 par value 11,880,098
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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
September 30, 1998 and June 30, 1998...................................... 3
Consolidated Statements of Income
Three Months Ended September 30, 1998 and 1997............................ 4
Consolidated Statements of Cash Flows
Three Months Ended September 30, 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............................................ 18
SIGNATURES....................................................................................... 19
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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
September 30, June 30,
1998 1998
---------- ------
(As Restated -
See Note 11)
Current assets:
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Cash and cash equivalents....................................................... $ 1,449 $ 2,923
Accounts receivable (net of allowances for doubtful accounts and sales returns
and other allowances of $8,098 and $9,942 at September 30, 1998 and
June 30, 1998, respectively)............................................... 34,373 32,542
Inventories..................................................................... 39,485 37,610
Prepaid expenses and other current assets....................................... 3,418 1,670
Income taxes receivable......................................................... 474 2,606
Deferred income taxes........................................................... 7,218 7,218
--------- ---------
Total current assets....................................................... 86,417 84,569
Property and equipment -- net........................................................ 13,857 11,888
Investment in Filofax................................................................ 4,794
Other assets (net of accumulated amortization of $286 and $196 at September 30,
1998 and June 30, 1998, respectively)........................................... 4,826 4,722
--------- ---------
Total assets......................................................................... $ 109,894 $ 101,179
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit................................................................. $ 1,943 $ 2,716
Accounts payable................................................................ 11,913 9,969
Accrued expenses................................................................ 18,804 13,876
Current portion of capital lease obligations and long-term debt................. 24 33
--------- ---------
Total current liabilities.................................................. 32,684 26,594
--------- ---------
Long-term liabilities:
Capital lease obligations....................................................... 6 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; 13,677,886
and 13,677,386 issued and 11,880,098 and 11,955,598 outstanding at
September
30, 1998 and June 30, 1998, respectively).................................. 14 14
Additional paid-in capital...................................................... 34,448 34,445
Retained earnings............................................................... 68,745 65,076
Cumulative translation adjustment............................................... 376 102
Treasury stock: at cost (1,797,788 and 1,721,788 shares at September 30, 1998
and June 30, 1998, respectively)............................................ (26,379) (25,105)
--------- ---------
Total stockholders' equity................................................. 77,204 74,532
--------- ---------
Total liabilities and stockholders' equity........................................... $ 109,894 $ 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
September 30,
1998 1997
---- ----
(As Restated-
See Note 11)
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Net sales............................................................................... $ 47,731 $ 38,138
Cost of goods sold...................................................................... 24,860 18,032
--------- ---------
Gross profit............................................................................ 22,871 20,106
--------- ---------
Operating expenses:
Selling, marketing and distribution................................................ 12,265 9,302
General and administrative......................................................... 4,657 3,764
--------- ---------
Total operating expenses......................................................... 16,922 13,066
--------- ---------
Income from operations.................................................................. 5,949 7,040
Net interest expense (income)........................................................... 33 (95)
--------- ----------
Income before provision for income taxes................................................ 5,916 7,135
Provision for income taxes.............................................................. 2,247 2,783
--------- ---------
Net income.............................................................................. $ 3,669 $ 4,352
========= =========
Earnings per common share:
Basic.............................................................................. $ 0.31 $ 0.38
========= =========
Diluted............................................................................ $ 0.29 $ 0.35
========= =========
Weighted average number of common shares outstanding:
Basic.............................................................................. 11,931 11,513
========= =========
Diluted............................................................................ 12,656 12,511
========= =========
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)
Three Months Ended
September 30,
1998 1997
---- ----
(As Restated-
See Note 11)
Cash flows from operating activities:
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Net income.................................................................... $ 3,669 $ 4,352
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization.............................................. 1,733 1,074
Changes in operating assets and liabilities:
Accounts receivable..................................................... (1,897) (1,931)
Inventories............................................................. (2,017) (4,160)
Prepaid expenses and other current assets............................... (1,748) 40
Income taxes receivable................................................. 2,021
Accounts payable........................................................ 2,255 2,063
Accrued expenses........................................................ (50) 1,938
Income taxes payable.................................................... 110 1,719
--------- ---------
Net cash provided by operating activities......................................... 4,076 5,095
--------- ---------
Cash flows from investing activities:
Purchase of business.......................................................... (318)
Acquisition of property and equipment......................................... (3,656) (897)
Other assets.................................................................. (38)
--------- ----------
Net cash used in investing activities.................................... (3,656) (1,253)
---------- ----------
Cash flows from financing activities:
Net repayment under lines of credit........................................... (708) (888)
Repayment of capital lease obligations........................................ (56) (33)
Net proceeds from issuance of common stock.................................... 3 1,178
Repurchase of common stock.................................................... (1,274) (11,565)
---------- ----------
Net cash used in financing activities.................................... (2,035) (11,308)
---------- ----------
Effect of exchange rate changes on cash........................................... 141 (4)
--------- ----------
Net decrease in cash and cash equivalents......................................... (1,474) (7,470)
Cash and cash equivalents at beginning of period.................................. 2,923 15,550
--------- ---------
Cash and cash equivalents at end of period........................................ $ 1,449 $ 8,080
========= =========
See accompanying notes to consolidated financial statements.
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DAY RUNNER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying consolidated balance sheet as of September 30, 1998,
consolidated statements of income and cash flows for the three-month periods
ended September 30, 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 months ended September 30, 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):
September 30, June 30,
1998 1998
Raw materials................... $ 9,707 $ 14,087
Work in process................. 593 831
Finished goods.................. 29,185 22,692
---------- ----------
Total.................. $ 39,485 $ 37,610
========== ==========
3. LINES OF CREDIT
On September 23, 1998, the Company entered into a Revolving Loan
Agreement (the "Loan Agreement") with Wells Fargo Bank, National Association
("Wells Fargo"). The Loan Agreement provides for borrowings through September
30, 2005 (the "Maturity Date"). Borrowings will bear interest either at fixed
rates based on the higher of the bank's prime rate and the Federal Funds Rate
published by the Federal Reserve Bank of New York or at floating rates
calculated by reference to the interest rates at which the bank offers deposits
in U.S. dollars in amounts approximately equal to the amount of the relevant
Loan and for a period of time comparable to the number of days the relevant Loan
will remain outstanding, together with a margin. The maximum amount that may be
outstanding under the Loan Agreement is $160,000,000 through December 31, 2000.
Thereafter, the maximum amount of borrowings that may be outstanding under the
Loan Agreement is reduced by $20,000,000 in calendar 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 will pay Wells Fargo
$1,200,000 plus an unused commitment fee during the term of the Loan Agreement.
The Company will also pay legal, accounting and other fees and expenses in
connection with the Loan Agreement. At September 30, 1998, the Company had
$160,000 outstanding under this line of credit.
The Loan Agreement requires the Company to maintain 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) annual capital expenditures limited to specified amounts between
$11,000,000 and $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 as of March 31, 1999.
The Company's Canadian subsidiary has a credit agreement with a
Canadian bank. The borrowings under this line of credit, which is guaranteed by
the Company is used for working capital by the subsidiary, may not exceed
Canadian $3,000,000 (approximately US $1,961,000), bear interest at the bank's
prime rate (7.25% at September 30, 1998) and are due and payable on demand. At
September 30, 1998, approximately Canadian $2,730,000 (approximately US
$1,783,000) was outstanding under this line of credit. These borrowings were
collateralized by substantially all of the Canadian subsidiary's assets. The
borrowings under this credit agreement were repaid in full on October 22, 1998,
and the Canadian subsidiary will now borrow funds as a co-borrower under the
Wells Fargo Loan Agreement.
4. STOCKHOLDERS' EQUITY
During the three months ended September 30, 1998, certain employees
exercised options to purchase an aggregate of 500 shares of the Company's Common
Stock for an aggregate of approximately $3,000.
During the three months ended September 30, 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.
5. 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):
THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------ ------------
NET INCOME $ 3,669 $ 4,352
=========== ===========
BASIC WEIGHTED AVERAGE SHARES
Weighted average number of
common shares outstanding 11,931 11,513
EFFECT OF DILUTIVE SECURITIES
Additional shares from the assumed
exercise of options and warrants 2,866 3,118
Shares assumed to be repurchased
under the treasury stock method (2,141) (2,120)
----------- ----------
DILUTED WEIGHTED AVERAGE SHARES
Weighted average number of
common shares outstanding and
common share equivalents 12,656 12,511
=========== ==========
Basic $ 0.31 $ 0.38
=========== ==========
Diluted $ 0.29 $ 0.35
=========== ==========
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:
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THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------- -------------
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Net income $ 3,669 $ 4,352
Foreign currency translation adjustment 274 (52)
------------- -------------
Comprehensive income $ 3,943 $ 4,300
============= =============
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8. ACQUISITION
On September 24, 1998, the Company announced a cash offer for Filofax
Group plc ("Filofax"), a UK-based company traded on the London Stock Exchange.
The offer was for (pound)2.00 (approximately US $3.40) per share pursuant to a
tender offer for all of the outstanding ordinary shares of stock of Filofax. The
offer was not recommended by Filofax's Board of Directors. On September 25,
1998, the Company announced it had reached agreement with the Board of Directors
of Filofax on the terms of a recommended cash tender offer (the "Recommended
Offer"). The Recommended Offer was for (pound)2.10 (approximately US $3.57) per
share for all of the outstanding ordinary shares of Filofax for a total purchase
price of approximately (pound)50,300,000 (approximately US $85,500,000). As of
September 30, 1998, the Company had purchased 1,400,000 shares of Filofax stock
on the open market for approximately (pound)2,821,000 (approximately US
$4,794,000). Such amount is included in Investment in Filofax in the Company's
consolidated financial statements. In this discussion, all exchange rate
conversions between the U.S. dollar and the UK pound sterling were based on an
exchange rate of 1.6994, which was the exchange rate on September 30, 1998.
On October 30, 1998, the Company announced that it owned or had
received valid acceptances of the Recommended Offer for approximately 87% of the
outstanding shares of Filofax and had assumed control of Filofax. All conditions
of the Recommended Offer, including regulatory approval, have been satisfied or
waived and the Company has declared the Recommended Offer unconditional in all
respects. Filofax will operate as a subsidiary of the Company. The Company
expects to acquire the remaining outstanding shares of Filofax before the end of
1998. The acquisition of Filofax will be funded by bank debt pursuant to the
Loan Agreement.
In connection with the acquisition of Filofax, the Company currently
estimates that the aggregate fees and expenses of the transaction, including
investment banking, legal, accounting and other fees and expenses, will be in
the range of $4,000,000 to $6,000,000. Actual total fees and expenses may differ
from this estimate and are subject to future contingencies. The fees and
expenses, as well as payments for the Filofax shares, will be paid with
available cash and with borrowings under the Loan Agreement.
9. FINANCIAL INSTRUMENT
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 will
be paid for in pound sterling. The Company's objective is to protect itself from
the risk that the purchase price of the Filofax shares will be adversely
affected by changes in exchange rates. At September 30, 1998, the Company had
$775,000 in a call option which is included in prepaid expenses and other
current assets in the consolidated financial statements. The Company does not
trade in financial instruments nor does it enter into such contracts for
speculative purposes.
10. STATEMENTS OF CASH FLOW
Supplemental disclosure of cash flow information (in thousands):
THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
---------------------------------
Cash paid during the period for:
Interest $ 36 $ 52
Income taxes $ 44 $1,007
Supplemental disclosure of noncash investing and financing activities:
As of September 30, 1998, the Company had purchased 1,400,000 shares of
Filofax stock for approximately (pound)2,821,000 (approximately US $4,794,000).
This transaction was settled on October 1, 1998 and is included in Investment in
Filofax and accrued liabilities in the consolidated balance sheet.
11. RESTATEMENT
Subsequent to the issuance of the Company's financial statements on
Form 10-Q for the three months ended September 30, 1998, the Company discovered
errors related to the treatment of manufacturing variances and certain other
costs. These cost accounting errors had the effect of overstating inventory and
understating cost of goods sold as of and for the three months ended September
30, 1998.
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As a result, the accompanying financial statements as of and for the
three months ended September 30, 1998 have been restated from amounts previously
reported to properly record these transactions. The effects of the restatement
are disclosed below and have been properly reflected herein. A summary of the
significant effects of the restatement is as follows:
Previously Reported Restated
-------------------- ----------
As of September 30, 1998:
Inventory $ 41,665 $ 39,485
Retained earnings $ 70,096 $ 68,745
Three months ended September 30, 1998:
Cost of goods sold $ 22,680 $ 24,860
Income before provision for income taxes $ 8,096 $ 5,916
Net income $ 5,020 $ 3,669
Earnings per common share:
Basic $ 0.42 $ 0.31
Diluted $ 0.40 $ 0.29
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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. The
Company focuses the great majority of its product development, sales and
marketing efforts on the office products and the mass market channels. The
office products channel and the mass market channel accounted for 45.4% and
41.1%, respectively, of net sales for the three months ended September 30, 1998.
RESTATEMENT
Subsequent to the issuance of the Company's financial statements on
Form 10-Q for the three months ended September 30, 1998, the Company discovered
errors related to the treatment of manufacturing variances and certain other
costs. These cost accounting errors had the effect of overstating inventory and
understanding cost of goods sold as of and for the three months ended September
30, 1998. As a result, the financial statements as of and for the three months
ended September 30, 1998 have been restated from amounts previously reported to
properly record these transactions. The effects of the restatement have been
disclosed in the Notes to the Consolidated Financial Statements and have been
properly reflected herein.
RESULTS OF OPERATIONS
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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.
Percentage
Percentage Change
of Sales Three
Three Months Ended Months Ended
September 30, September 30,
1998 1997 1998 to 1997
----- ----- ------------
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Net sales.............................................................. 100.0% 100.0% 25.2%
Cost of goods sold..................................................... 52.1 47.3 37.9
----- -----
Gross profit........................................................... 47.9 52.7 13.8
----- -----
Operating expenses:
Selling, marketing and distribution................................ 25.7 24.4 31.9
General and administrative......................................... 9.8 9.9 23.7
----- -------
Total operating expenses........................................ 35.5 34.3 29.5
----- -----
Income from operations................................................. 12.4 18.4 (15.5)
Net interest expense (income).......................................... 0.0 (0.3) (134.7)
---- ----- ------
Income before provision for income taxes............................... 12.4 18.7 (17.1)
Provision for income taxes............................................. 4.7 7.3 (19.3)
---- ----
Net income............................................................. 7.7% 11.4% (15.7)
=== =====
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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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Three Months Ended September 30,
PRODUCT CATEGORY: 1998 1997
- ----------------- ---- ----
(unaudited; dollars in thousands)
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Organizers and planners.............................. $ 17,068 35.8% $ 21,188 55.6%
Refills.............................................. 17,048 35.7 10,875 28.5
Related organizing products.......................... 13,615 28.5 6,075 15.9
-------- ----- --------- -----
Total............................................ $ 47,731 100.0% $ 38,138 100.0%
======== ===== ========= =====
Three Months Ended September 30,
DISTRIBUTION CHANNEL: 1998 1997
- --------------------- ---- ----
(unaudited; dollars in thousands)
Office products...................................... $ 21,660 45.4% $ 17,924 47.0%
Mass market.......................................... 19,648 41.1 15,750 41.3
Foreign customers.................................... 4,232 8.9 2,415 6.3
Other................................................ 2,191 4.6 2,049 5.4
---------- ----- --------- ----
Total............................................ $ 47,731 100.0% $ 38,138 100.0%
========== ===== ========= =====
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THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH
THE THREE MONTHS ENDED SEPTEMBER 30, 1997
NET SALES. Net sales consist of revenues from gross product shipments
net of allowances for returns, rebates and credits. In the first quarter of
fiscal 1999, net sales increased by $9,593,000, or 25.2%, because of increased
sales primarily of related organizing products and secondarily of refills. In
the quarter ended September 30, 1998, sales of related organizing products grew
by $7,540,000, or 124.1%; sales of refills (which include calendars and
accessories) grew by $6,173,000, or 56.8%; and sales of organizers and planners
decreased by $4,120,000, or 19.4%. Product sales were primarily to office
products customers and secondarily to mass market customers. Sales to mass
market customers grew by $3,898,000, or 24.7%; sales to office products
customers grew by $3,736,000, or 20.8%; sales to foreign customers grew by
$1,817,000, or 75.2%; and sales to miscellaneous customers grouped together as
"other" increased by $142,000, or 6.9%.
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
52.7% in the first quarter of fiscal 1998 to 47.9% in the first quarter of
fiscal 1999 primarily because of a shift in product mix to lower margin products
for the parent company and certain of its subsidiaries.
OPERATING EXPENSES. Total operating expenses increased by $3,856,000,
or 29.5%, in the first quarter of fiscal 1999 compared with the first quarter of
fiscal 1998 and increased as a percentage of sales from 34.3% to 35.5%.
Primarily because of costs associated with the placement of promotional displays
with major customers during the quarter, selling, marketing and distribution
expenses increased by $2,963,000 and from 24.4% to 25.7% as a percentage of
sales. General and administrative expenses increased by $893,000, but decreased
slightly from 9.9% to 9.8% 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 primarily from the
Company's repurchase of common stock, net interest expense for the first quarter
of fiscal 1999 was $33,000 compared with net interest income of $95,000 for the
first quarter of fiscal 1998.
INCOME TAXES. Primarily as a result of state tax planning and
secondarily because of the continued growth of the Company's Hong Kong
subsidiary, the Company's first quarter fiscal 1999 effective tax rate was
38.0%, compared with 39.0% for the first quarter 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 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 September 30, 1998 decreased
to $1,449,000 from $2,923,000 at June 30, 1998. During the quarter ended
September 30, 1998, net cash of $4,076,000 provided by operating activities was
offset by net cash of $3,656,000 and $2,035,000 used in investing activities and
financing activities, respectively.
Of the $4,076,000 net amount provided by the Company's operating
activities, $3,669,000 was provided by net income, $2,255,000 was provided by an
increase in accounts payable, $2,021,000 was provided by a decrease in income
taxes receivable, and $1,733,000 was provided by depreciation and amortization.
These amounts were partially offset by an increase of $2,017,000 in inventories,
an increase of $1,897,000 in accounts receivable and an increase of $1,748,000
in prepaid expenses and other current assets.
Accounts receivable (net) at September 30, 1998 increased by 5.6% from
the fiscal 1998 year-end amount primarily because of a decrease in the allowance
for sales returns based upon improvement in the Company's actual sales returns
experience during the prior twelve months (which decrease was partially offset
by lower sales in the first quarter of fiscal 1999 compared with the fourth
quarter of fiscal 1998). Compared with the September 30, 1997 amount, accounts
receivable (net) increased by 39.5% primarily because of the growth in sales for
the quarter ended September 30, 1998 compared with the quarter ended September
30, 1997 and secondarily because of the decrease in the allowance for sales
returns. The average collection period of accounts receivable at September 30,
1998 was 44 days, compared with 45 and 47 days at June 30, 1998 and September
30, 1997, respectively.
Inventories at September 30, 1998 increased by 5.0% from the fiscal
1998 year-end amount and by 36.9% compared with the September 30, 1997 amount
primarily because of the inventories of the companies Day Runner acquired during
fiscal 1998 and its new Australian subsidiary and secondarily because of new and
recently introduced products.
The $3,656,000 net amount used in the Company's investing activities
was used to acquire primarily machinery and equipment and secondarily data
processing equipment and software.
Of the $2,035,000 net amount used in the Company's financing
activities, $1,274,000 was used to repurchase 76,000 shares of its Common Stock
and $708,000 was used as net repayment on the lines of credit.
At September 30, 1998, Day Runner had $160,000 outstanding under its
primary $160,000,000 bank line of credit. Borrowings bear interest either at
fixed rates based on the higher of the bank's prime rate and the Federal Funds
Rate published by the Federal Reserve Bank of New York or at floating rates
calculated by reference to the interest rates at which the bank offers deposits
in U.S. dollars in amounts approximately equal to the amount of the relevant
Loan and for a period of time comparable to the number of days the relevant Loan
will remain outstanding, together with a margin. The maximum amount that may be
outstanding under the Loan Agreement is $160,000,000 through December 31, 2000.
Thereafter, the maximum amount of borrowings that may be outstanding under the
Loan Agreement is reduced by $20,000,000 in calendar 2001 and by $10,000,000 in
each of the following calendar years up to September 30, 2005. (See Note 3 to
Consolidated Financial Statements.)
The Canadian line of credit allowed for aggregate borrowings by the
Company's Canadian subsidiary of up to Canadian $3,000,000 (approximately US
$1,961,000). Borrowings bore interest at the Canadian bank's prime rate and were
due and payable on demand. At September 30, 1998, approximately Canadian
$2,730,000 (approximately US $1,783,000) was outstanding under the line of
credit. This line of credit was repaid in full on October 22, 1998, and the
Canadian subsidiary will now borrow funds as a co-borrower under the Wells Fargo
Loan Agreement. (See Note 3 to Consolidated Financial Statements.)
In September 1998, the Company announced a cash offer for Filofax, a
UK-based company traded on the London Stock Exchange. The offer, as amended, was
for (pound)2.10 (approximately US $3.57) per share for all of the outstanding
ordinary shares of Filofax for a total purchase price of approximately
(pound)50,300,000 (approximately US $85,500,000). On October 30, 1998, the
Company announced that it owned or had received valid acceptances of the offer
for approximately 87% of the outstanding shares of Filofax and had assumed
control of Filofax. The Company expects to acquire the remaining outstanding
shares of Filofax before the end of 1998. In connection with the acquisition of
Filofax, the Company currently estimates that the aggregate fees and expenses of
the transaction, including investment banking, legal, accounting and other fees
and expenses, will be in the range of $4,000,000 to $6,000,000. Actual total
fees and expenses may differ from this estimate and are subject to future
contingencies. The fees and expenses, as well as payments for the Filofax
shares, will be paid with available cash and with borrowings under the Loan
Agreement. In this discussion, all exchange rate conversions between the U.S.
dollar and the UK pound sterling were based on an exchange rate of 1.6994, which
was the exchange rate on September 30, 1998. (See Note 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
will increase as a result of its acquisition of Filofax because the acquisition
will significantly expand the Company's international operations and because a
portion of the debt incurred to fund the acquisition is in pound sterling. The
Company has 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 additional call options or foreign
currency exchange contracts, 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
speculation purposes.
A single currency called the euro will be introduced in certain
countries in Europe on January 1, 1999, but will not be introduced in England.
The use of a single currency may affect the ability of Day Runner and other
companies to price their products differently in various European markets. The
Company has not yet evaluated the impact of the single currency.
The Company believes that cash flow from operations, vendor credit, its
existing working capital and its bank line of credit will be sufficient to
satisfy the Company's anticipated cash requirements at least through 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. This
has the potential to affect the operation of these systems adversely and
materially. Day Runner has identified four phases in its Year 2000 compliance
efforts: discovery, assessment, remediation and applicable testing and
verification. The Company has substantially completed the discovery and
assessment phases for its own systems and applications and believes that by
modifying existing software and converting to new software for certain tasks it
can prevent the Year 2000 transition from posing significant internal
operational problems.
The Company plans to complete the remediation phase by December 31,
1998 and complete the applicable testing and verification phase by March 31,
1999. Day Runner currently estimates that total incremental cash requirements
related to the Year 2000 issue will be approximately $750,000 to $1,200,000, of
which approximately $650,000 was incurred as of September 30, 1998. The Company
does not anticipate that the costs of these modifications and conversions will
be material to its financial position or results of operations in any given
year. Expenditures will be expensed or capitalized as appropriate. The cash
requirements described above do not include any estimates for costs of Year 2000
remediation or compliance that may be incurred by, or on behalf of, Filofax, the
Company's recently acquired subsidiary. The Company has not evaluated Filofax's
Year 2000 compliance efforts at this time.
Day Runner is surveying its vendors, customers and others on whom it
relies to assure that their systems will be Year 2000 compliant and that they
will be able to continue their business with the Company without interruption.
However, there can be no assurance that the systems of other parties on which
the Company's systems rely will also be compliant or that any failure to be
compliant in this area by another party would not have an adverse effect on the
Company's systems. Furthermore, no assurance can be given that any or all of the
Company's systems are or will be Year 2000 compliant, that the ultimate costs
required to address the Year 2000 issue will not exceed the amounts indicated
above, or that the impact of any failure to achieve substantial Year 2000
compliance will not have a material adverse effect on the Company's financial
condition.
FORWARD LOOKING STATEMENTS
With the exception of the actual reported financial results and other
historical information, the statements made in the Management's Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in this
annual report are forward looking statements that involve risks and
uncertainties that could affect actual future results. Such risks and
uncertainties include, but are not limited to: timing and size of orders from
large customers, timing and size of orders for new products, competition, large
customers' inventory management, general economic conditions, the health of the
retail environment, supply constraints, supplier performance and other risks
indicated in the Company's filings with the Securities and Exchange Commission.
PART II --OTHER INFORMATION
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<S> <C>
3.1 Certificate of Incorporation of the Registrant, as amended(1)
3.2 Bylaws of the Registrant(2)
10.1 First Amendment to Officer Severance Plan effective as of August 17, 1998(3)
10.2 Revolving Loan Agreement dated September 23, 1998
among the Registrant, Ultima Distribution Inc., Day
Runner UK plc and Wells Fargo Bank, National
Association, including Revolving Line of Credit
Note(4)
10.3 1999 Officer Bonus Plan(3)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
1) On September 24, 1998, the Company filed with the
Commission a Current Report on Form 8-K reporting the
Company's cash tender offer for Filofax and its
entering into a related Revolving Loan Agreement with
Wells Fargo Bank, National Association.
2) On September 25, 1998, the Company filed with the
Commission a Current Report on Form 8-K reporting
that the Company had reached agreement with the Board
of Directors of Filofax regarding the terms of the
Company's cash tender offer for Filofax.
(1) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
(File No. 0-19835) filed with the Commission on May 15, 1998.
(2) Incorporated by reference to the Registrant's Current Report on Form 8-K
(File No. 0-19835) filed with the Commission on August 5, 1993.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 0-19835) filed with the Commission on October 1, 1998.
(4) Incorporated by reference to the Registrant's Current Report on Form 8-K
(File No. 0-19835) filed with the Commission on September 24, 1998.
</TABLE>
<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: September 14, 1999
DAY RUNNER, INC.
By: /s/ JAMES E. FREEMAN JR.
--------------------------------------
James E. Freeman, Jr.
Chief Executive Officer
By: /s/ DENNIS K. MARQUARDT
---------------------------------------
Dennis K. Marquardt
Executive Vice President, Finance
& Administration and
Chief Financial Officer
<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/A and is qualified in its entirety by
reference to such quarterly report on form 10-Q/A.
</LEGEND>
<CIK> 0000853102
<NAME> Day Runner, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Jun-30-1999
<PERIOD-START> Jul-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 1,449
<SECURITIES> 0
<RECEIVABLES> 42,471
<ALLOWANCES> 8,098
<INVENTORY> 39,485
<CURRENT-ASSETS> 86,417
<PP&E> 30,573
<DEPRECIATION> 16,716
<TOTAL-ASSETS> 109,894
<CURRENT-LIABILITIES> 32,684
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 77,190
<TOTAL-LIABILITY-AND-EQUITY> 109,894
<SALES> 47,731
<TOTAL-REVENUES> 47,731
<CGS> 24,860
<TOTAL-COSTS> 24,860
<OTHER-EXPENSES> 16,922
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33
<INCOME-PRETAX> 5,916
<INCOME-TAX> 2,247
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 3,669
<EPS-BASIC> 0.31
<EPS-DILUTED> 0.29
</TABLE>
