DAY RUNNER INC, 10-K, 2000-09-27

DAY RUNNER INC
10-K, 2000-09-27
BLANKBOOKS, LOOSELEAF BINDERS & BOOKBINDG & RELATD WORK

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 2000

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE

SECURITIES ACT OF 1934

COMMISSION FILE NUMBER 0-19835

DAY RUNNER, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 95-3624280
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

2750 W. MOORE AVE, FULLERTON, CALIFORNIA 92833
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 680-3500

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, $0.001 PAR VALUE
(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES /X/ NO / /

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /

The aggregate market value of the voting stock held by non-affiliates
of the registrant, based upon the closing price of the Common Stock on September
15, 2000 as reported on the OTC Bulletin Board, was approximately $1,540,000.

The number of shares outstanding of the registrant's Common Stock on
September 15, 2000 was 2,392,860.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement to be delivered
to stockholders in connection with their Annual Meeting of Stockholders to be
held on December 14, 2000 are incorporated by reference into Part III of this
Annual Report.

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TABLE OF CONTENTS

PART I PAGE
<S> <C> <C>
Item 1. Business 4

Item 2. Properties 16

Item 3. Legal Proceedings 17

Item 4. Submission of Matters to a Vote of Security Holders 17

PART II.

Item 5. Market for Registrant's Common Equity and Related 18
Stockholder Matters

Item 6. Selected Financial Data 18

Item 7. Management's Discussion and Analysis of Financial 20
Condition and Results of Operation

Item 7A. Quantitative and Qualitative Disclosures about Market Risk 31

Item 8. Financial Statements and Supplementary Data 32

Item 9. Changes in and Disagreements with Accountants 32
on Accounting and Financial Disclosure

PART III.

Item 10. Directors and Executive Officers of the Registrant 33

Item 11. Executive Compensation 33

Item 12. Security Ownership of Certain Beneficial Owners and 33
Management

Item 13. Certain Transactions 33

PART IV.

Item 14. Exhibits, Financial Statement Schedules, and Reports on 34
Form 8-K

Signatures 38

Exhibit Index

</TABLE>

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PART I

FORWARD LOOKING STATEMENTS

With the exception of actual reported financial results and other
historical information, the statements contained in this Annual Report on Form
10-K ("Annual Report") including, but not limited to, statements found in Item
1. "Business," Item 3. "Legal Proceedings," Item 7. "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" and Item 7A.
"Quantitative and Qualitative Disclosures about Market Risk" constitute "forward
looking statements" within the meaning of the federal securities laws and
involve a number of risks and uncertainties. Such statements are based on
current expectations and involve known and unknown risks and uncertainties and
certain assumptions, referred to below, and are indicated by words or phrases
such as "anticipate," "estimate," "project," "expect," "believes," "intends" and
similar words or phrases. These forward looking statements are based on
management's expectations as of the date set forth on the signature page of this
document, and the Company does not undertake any obligation to update any of
these statements.

There can be no assurance that the Company's actual future
performance will meet its expectations. The Company is subject to a number of
risks and its future operating results are difficult to predict and subject to
significant fluctuations. These include but are not limited to: (1) the
Company's efforts to restructure may not prove sufficient to prevent future
operating losses; (2) the Company may not be able to obtain future waivers of
the terms of its bank loan agreement and/or successfully renegotiate that
agreement and/or refinance existing loans, and this would severely impact the
Company's ability to meet its cash requirements to finance its operations; (3)
the Company may not correctly anticipate the product mix of retailers'
"just-in-time" inventory demands, resulting in the temporary unavailability of
the products in demand by retailers and lower sales; and (4) the Company may not
be able to counteract the effects of large customers' inventory tightening in
any significant way, which may result in lower than expected sales and/or higher
than expected product returns.

Additional factors that may cause future results to differ materially
from the Company's current expectations include, among others: the timing and
size of orders from large customers; timing and size of orders for new products;
competition from both paper-based and technology-based organizing products and
services; consumer demand; market acceptance of new products; general economic
conditions, especially the sustainability of the current economic expansion; the
health of the retail environment; foreign exchange rate fluctuations; supply and
manufacturing constraints; supplier performance; and changes in the Company's
effective tax rate. Among the effects of these factors may be: lower than
anticipated sales; higher than anticipated product returns and/or excess
inventory; negative effects on consumer purchases; lower than anticipated gross
profit; higher than anticipated operating expenses; and lower than anticipated
net income.

Discussions of certain of these factors and other factors that may
cause future results to differ materially from the Company's current
expectations are contained in this document in "Risk Factors" under Item 1, in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 and in "Quantitative and Qualitative Disclosures about
Market Risk" under Item 7A.

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ITEM 1. BUSINESS

THE COMPANY

Day Runner, Inc. ("Day Runner" or "the Company") develops, manufactures
and markets organizing products to broad-based consumer audiences through retail
channels. The Company is a leading developer, manufacturer, and marketer of
paper-based organizers and related organizing products for the retail market.

Day Runner markets its products under two major brands, Day Runner
and Filofax-Registered Trademark-, and a number of sub-brands. The Company
estimates its products occupy an aggregate of more than 900,000 linear feet of
shelf space in more than 20,000 retail stores across the U.S. and
approximately 6,000 retail stores in other markets around the world.

The vast majority of the Company's sales are to resellers, with direct
sales to organizations and to individuals accounting for a very small portion of
sales. The Company markets its products to its customers in the U.S. through its
own sales force and also makes selective use of manufacturers' representatives
and the Internet. The Company markets its products outside the U.S. primarily
through its subsidiaries and secondarily through independent distributors. The
Company's domestic sales are primarily to the office products and mass market
channels of distribution and are concentrated among relatively few major
customers, including office products superstores Office Depot, Inc., OfficeMax,
Inc. and Staples, Inc. and mass market retailers Wal-Mart and Kmart. Sales to
the U.S. office products and mass market channels accounted for approximately
33% and 22%, respectively, of fiscal 2000 sales. With its October 1998
acquisition of Filofax Group plc, the Company substantially increased its focus
on international markets. Sales to foreign customers accounted for approximately
37% of fiscal 2000 sales.

The Company groups its products into three categories: organizers and
planners (because the distinctions between organizers and planners have become
blurred, except where otherwise specified, the terms "organizer" and "planner"
are used interchangeably in this report); their refills, which include
calendars, other pages and accessories; and related organizing products.

The Company's organizers and planners are loose-leaf and spiral-bound
time and information management systems that range from simple to sophisticated.
The Company offers multiple product lines aimed at market segments ranging from
students to women managing a home to business and professional people.
Organizers and planners accounted for approximately 44% of Day Runner's fiscal
2000 sales.

The great majority of the Company's organizers and planners are
refillable. Refills, which include calendars, other pages and accessories,
accounted for approximately 38% of sales in fiscal 2000.

The Company's related organizing products include, among others:
telephone/address books, business accessories, products for students from
elementary school through college and organizing and other wall boards. Related
organizing products accounted for approximately 18% of fiscal 2000 sales.

All of the Company's current major product lines have been developed
internally or by one of the companies Day Runner has acquired. The Company
manufactures and assembles a portion of its products at its facilities and also
uses foreign and domestic contractors to supply both product components and
finished goods.

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Day Runner, Inc. was incorporated in California in 1980 and
reincorporated in Delaware in 1993. Unless the context requires otherwise, all
references to the "Company" or to "Day Runner" herein refer to Day Runner, Inc.
and its consolidated subsidiaries. The Company's corporate headquarters are
located at 2750 W. Moore Ave., Fullerton, California 92833 (phone number
714-680-3500).

Day Runner, Filofax and Timeposters are registered trademarks of Day
Runner, Inc. Business Manager, Home Manager, Microfile and org.board are
trademarks of Day Runner, Inc.

BUSINESS STRATEGY

Day Runner sells broad-based organizing products through retail
distribution channels.

NORTH AMERICA. Key elements of the Company's strategy for North America
include: leveraging its brand names and distribution strength to optimize sales
of existing products; to extend those product lines and to introduce new lines;
conducting major marketing initiatives; and building distribution in additional
channels, including the Web sites of brick-and-mortar retailers and
cyber-retailers.

OUTSIDE NORTH AMERICA. Key elements of the Company's strategy for
markets outside North America include: further segmenting the market for
organizers and planners; entering related organizing product categories; and
building sales through the emerging mass market channel of distribution.

E-COMMERCE. The Company believes many of its products are well suited
for online sale via the Company's own Web site, those of its current retailers
and, ultimately, those of cyber-retailers.

ACQUISITIONS AND DISPOSITIONS

FISCAL 1999. In October 1998, Day Runner acquired Filofax Group plc
("Filofax"), a UK-based company traded on the London Stock Exchange. Filofax is
a manufacturer and supplier of stationery products, including Filofax, Lefax and
Microfile brand organizers, with sales primarily through retail channels. For a
number of years, Filofax has been the leader in developing, manufacturing and
marketing paper-based organizers in the UK retail market and has had a solid
presence in a number of other key international markets. In addition to its core
organizer business, Filofax markets business forms and high-end pens.

With the Filofax acquisition, Day Runner substantially increased its
presence in international markets. Filofax's sales for its fiscal year ended
March 31, 1998 were approximately $63.3 million, with 86%, or approximately
$54.6 million, to markets outside the U.S. At the time of the acquisition,
Filofax had wholly owned sales subsidiaries in France, Germany, Hong Kong,
Sweden, Denmark, the UK and the U.S.

FISCAL 1998. Day Runner acquired Ultima Distribution, Inc., its
Toronto-based Canadian distributor; Ram Manufacturing, Inc. ("Ram"), a
developer, manufacturer and marketer of wall boards, headquartered in Little
Rock, Arkansas; and Timeposters-Registered Trademark-, Inc., a Toronto-based
developer, manufacturer and marketer of planning and presentation products,
including laminated wall planners. These three small companies were acquired
in July 1997, October 1997 and February 1998, respectively. The Company has
since combined Timeposters' manufacturing and distribution with Ultima's
operations and named that subsidiary Day Runner Canada, Inc. In June 2000, the
Company closed Ram and on July 3, 2000 sold the majority of the operating
assets of Ram for approximately $456,000. Based on the sales price of the
operating assets sold, the Company recorded a restructuring charge of
approximately $4,432,000 at June 30, 2000.

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SEEKING STRATEGIC ALTERNATIVES

In July 1999, Day Runner announced that its Board of Directors had
decided unanimously to seek possible strategic alternatives, which may include
new equity partners, joint ventures, asset sales, additional financing and/or a
potential sale of the Company. In addition, in a series of waiver agreements
relating to its bank loan agreement, the Company has agreed to pursue the sale
of substantial assets. Any proceeds from such a sale(s) will be used to reduce
the Company's bank debt. Day Runner has retained the investment banking firm
Wasserstein Perella & Co. to act as advisers in this process. There cannot be
any assurance that a transaction will result from this process. (See "Risk
Factors - Dependence on Loans".)

INDUSTRY OVERVIEW

The Company's roots are in paper-based organizers and planners and
their refills, and approximately 82% of the Company's fiscal 2000 sales were
generated by this core business. In the past five years, however, the Company
has diversified its product lines and now markets a number of related organizing
products that help people become better organized in a variety of ways.

PAPER-BASED ORGANIZERS. Awareness of the organizer product
category is widespread, and the usefulness of organizers is
well recognized. Paper-based organizers and their refills are
sold both through a wide variety of retail channels and
directly to organizations and individuals. Retailers selling
organizers include: office products superstores, wholesalers
and dealers; mass market retailers; book, department, gift,
leather and luggage and stationery stores; and other specialty
retailers.

RELATED ORGANIZING PRODUCTS. Product categories Day Runner has
entered include, among others: telephone/address books;
appointment books; assignment books; business accessories;
organizing and other wall boards; laminated wall planners; and
other planning and presentation products.

The Company groups all these products under the umbrella term
"related organizing products." These products are generally
either office supplies or school supplies. Others share
features and functions with office and/or school supplies but
are intended for use in the home. These products are generally
marketed through the same channels as organizers.

MARKET POTENTIAL. The Company believes that the appeal of organizers
and other organizing products is attributable to a number of economic and
cultural trends that have substantially affected the United States and that are
having an increasing impact on a number of other markets around the world. Many
of these trends contribute to widespread concerns with saving and better using
time and increasing personal productivity. These trends include: the increased
percentage of women in the work force and the resulting prevalence of two-income
families; the increased percentage of single parent families; the growth of the
small business sector; the rising percentage of business done away from the
office; the greater emphasis on productivity; the ongoing shift to a service
economy; and the trend toward global competition.

The Company's products address these concerns about time management
and productivity. The Company targets potential first-time organizer users and
existing users who may need refills or replacements for their organizers. The
Company's expansion into related products that provide other ways for people to
become better organized offers the Company an opportunity to reach a broader
consumer base. The Company's goal is to offer one or more products that appeal
to and meet the organizing needs of virtually every consumer, no matter what
that individual's income, occupation or age, in the U.S. and in key markets
around the world.

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INDUSTRIES MARKETING SIMILAR OR SUBSTITUTE PRODUCTS. Day Runner's
products have features, functions or components in common with products in a
number of other industries. The Company's market overlaps to a limited extent
that of companies marketing products and services designed to improve group and
individual productivity and to upgrade management skills. In addition,
electronic organizers, personal information management ("PIM") software and
Internet-resident organizers are designed to fill many of the same needs
addressed by paper-based organizers. (SEE ITEM 1. "BUSINESS - COMPETITION.")

SUPPLY CHAIN MANAGEMENT. The Company's primary channels of distribution
are office products and the mass market. As part of their supply chain
management, retailers in these channels have been substantially tightening their
inventories, with the goals of reducing on-hand inventories and increasing
inventory turns. Retailers' methods of accomplishing these goals vary but
generally include the following, among others: selling down inventory until they
reach their new, lower target levels; giving promotions a shorter time on the
shelf to sell through to consumers; and returning merchandise they might
otherwise have ultimately sold. This inventory tightening may manifest itself in
a number of ways that can reduce the Company's sales and increase its costs,
including but not limited to, retailers' reductions of on-hand supplies of the
Company's products; retailers' reduction of everyday selection of the Company's
products; accelerated and increased product returns; unexpected cancellations of
commitments for product; and reductions in minimum and average order quantities,
with potentially related increases in the frequency of orders and the Company's
associated costs of distribution.

PRODUCTS

Day Runner's products are designed to help people of all ages and in
all walks of life become better organized. The Company aims its products at
various segments of a broad-based consumer audience. The goal is to offer
consumers in each target market a broad choice of organizing products and good
value for their money.

Day Runner's product development programs emphasize (i) identifying
unmet consumer needs and developing organizing products to meet those needs and
(ii) extending the Company's existing product lines. All the Company's current
major product lines have been developed internally or by one of the companies
Day Runner has acquired. The Company monitors its existing products for
continued viability, needed enhancements, improvements in quality and potential
reductions in cost.

The Company's products include:

- Multiple lines of paper-based organizers and planners.

- Refills, which include calendars, other pages and accessories.

- Related organizing products.

ORGANIZERS AND PLANNERS. The Company's organizers and planners are
available in varying systems, sizes, styles, cover materials and colors and at a
wide range of prices. These loose-leaf and spiral-bound "books" help users keep
"Everything in One Place-TM-." For example, in addition to the traditional
planner components of appointment calendar, telephone/address section and note
pad, Day Runner System organizers include, among other things, pages for
managing time and information, tracking expenses, establishing goals and
planning projects. Some organizers also provide storage for cellular phones,
pagers or electronic devices. Certain of the Company's organizers and planners
are available in a number of languages.

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REFILLS. The majority of the Company's organizers, planners and
telephone/address books and certain of its related organizing products are
refillable. Users may customize their loose-leaf organizers and planners by
choosing from a variety of additional pages and accessories. Day Runner brand
refills range from Mileage Record and Things To Do pages to Currency/Checkbook
Insert and a solar powered Calculator/Ruler. Filofax brand refills include such
pages as Shopping List and Meetings Planner and such accessories as Diskette
Holders and a variety of maps.

RELATED ORGANIZING PRODUCTS. The Company's related organizing products
include, among others: telephone/address books; appointment books; products for
students ranging from elementary school through college; business accessories
such as business card files; organizing and other wall boards, such as the
patented Home Manager-TM-, Business Manager-TM-, org.board-TM- and a variety of
bulletin boards, combination white boards/bulletin boards and laminated wall
planners; and PC software designed to complement the Company's paper-based
organizers and planners.

The following table sets forth, for the periods indicated, approximate
Day Runner sales by product category and as a percentage of total sales.

FISCAL FISCAL FISCAL
PRODUCTS 2000 1999 1998
-------- ----------------- ------------------- ------------------
<S> <C> <C> <C>
(dollars in thousands)

Organizers and planners. $ 75,427 44.0% $ 84,956 43.3% $ 83,069 49.5%
Refills................. 65,373 38.1 64,279 32.8 51,876 30.9
Related organizing products 30,687 17.9 46,977 23.9 32,896 19.6
--------- ------ -------- ------ -------- ------
Total............. $ 171,487 100.0% $196,212 100.0% $167,841 100.0%
========= ====== ======== ====== ======== ======
</TABLE>

SALES AND DISTRIBUTION

The vast majority of Day Runner's sales are to resellers, with direct
sales to organizations and to individuals accounting for a very small portion of
sales. The Company markets its products to its customers in the U.S. primarily
through its own sales force and makes selective use of manufacturers'
representatives and the Internet. The Company markets its products outside the
U.S. primarily through its subsidiaries and secondarily through independent
distributors.

During fiscal 2000 and 1999, the Company sold products to approximately
6,000 different customers. Customers accounting for 10% or more of the Company's
fiscal 2000 sales were Wal-Mart Stores, Inc., including Sam's Clubs; Staples,
Inc., Office Depot, Inc.; and OfficeMax, Inc.; including their affiliates. These
customers accounted for approximately 17%, 13%, 11% and 10%, respectively, of
fiscal 2000 sales.

The following table sets forth, for the periods indicated, approximate
Day Runner sales by distribution channel and as a percentage of total sales.

<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
DISTRIBUTION CHANNEL 2000 1999 1998
-------------------- ----------------- ------------------- ------------------
<S> <C> <C> <C>
(dollars in thousands)

Office products channel. $ 56,731 33.1% $ 68,712 35.0% $ 79,303 47.2%
Mass market............. 37,233 21.7 63,600 32.4 65,752 39.2
Foreign customers....... 63,604 37.1 49,456 25.2 12,182 7.3
Other channels.......... 13,919 8.1 14,444 7.4 10,604 6.3
--------- ------ -------- ------ -------- ------
Total............. $171,487 100.0% $196,212 100.0% $167,841 100.0%
========= ====== ======== ====== ======== ======
</TABLE>

U.S. SALES AND DISTRIBUTION. The Company's primary channels of
domestic distribution are office products and the mass market, and the Company's
products are carried by more than 20,000 retail outlets across the country. In
fiscal 2000, the Company shipped directly to

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approximately 7,500 retail locations, to distribution centers serving
approximately 17,600 retail locations and to approximately 100 wholesalers,
each of which serves a number of dealers.

OFFICE PRODUCTS CHANNEL. Since 1987, Day Runner brand
products have been broadly distributed through the office
products channel.

OFFICE PRODUCTS SUPERSTORES. Since their emergence in
1986, office products superstores offering discount
prices in a warehouse atmosphere have become a major
force in office products distribution. The Company's
products are carried by all the leading superstores,
including Office Depot, Inc., OfficeMax, Inc. and
Staples, Inc., and sales to these customers account
for the bulk of the Company's sales in the U.S.
office products channel.

OFFICE PRODUCTS WHOLESALERS. The Company's products
are distributed by a number of office products
wholesalers, including national wholesaler S.P.
Richards Company and all three regional wholesaler
groups, MMA, NAMD and AMW.

OFFICE PRODUCTS DEALERS. The Company's products are
also distributed through traditional office products
dealers, which buy directly from manufacturers and
indirectly through wholesalers. These customers
include both storefront dealers and contract
stationers (also known as commercial dealers) that
specialize in selling to larger businesses through
catalogs and their direct sales forces.

MASS MARKET. Discount chains addressing the mass market have
become an increasingly important factor in the distribution of
a wide variety of consumer goods. The Company's products have
been distributed through a number of mass market retailers,
including: Wal-Mart and Kmart; a major wholesale club, Sam's
Clubs; a number of discount drug chains, including Rite Aid
Corp., Eckerd Drug and American Drug; and a variety of other
mass market resellers.

FOREIGN. The Company's products are marketed internationally
primarily through its foreign subsidiaries and secondarily
through independent distributors. The Company has sales and
marketing operations in Canada, Denmark, France, Germany, Hong
Kong, Italy, Sweden and the United Kingdom.

Foreign retailers carrying the Company's products include both
traditional, full-price retailers and emerging mass marketers.
Filofax has strong distribution in a variety of channels in
its home UK market and through high-end specialty shops and
department stores in a number of other markets. For its Day
Runner brand products, the Company has focused its sales and
distribution efforts outside North America on developing
distribution through emerging mass merchants in key markets.

OTHER. The Company also distributes its products through a
number of additional channels, including book, department,
gift, leather and luggage stores and other specialty
retailers, to the U.S. Government and via the Internet. The
Company's U.S. sales of its Filofax brand products are
concentrated in many of these distribution channels.

MARKETING

Day Runner markets its products to consumers to increase awareness of
its brand names and of specific products, to communicate the benefits of its
products, and to create and reinforce an image that its products enable the user
to manage time and personal resources more effectively.

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Packaging, merchandising, and promotions are designed to appeal to the
consumer shopping in the retail store. The Company positions itself to
retailers as the leader in the retail organizer market, a primary innovator
in the category, and the source for well designed, good quality organizers,
planners, and related organizing products at a wide range of price points and
appropriate for both broad-based consumer target markets (Day Runner brand)
and consumers looking for a prestige brand (Filofax brand).

The Company works to protect and strengthen its Day Runner and Filofax
brand names through consistent positioning, careful placement of new products in
the Company's price matrix, well thought out packaging, and the effective use of
secondary and heritage brands.

PROMOTIONAL PROGRAMS. The Company offers promotional and incentive
programs (1) as part of its introduction of new products, (2) to build sales at
specific times of year, and (3) to build awareness, expand distribution, and
increase sales of specific products.

ADVERTISING AND PUBLIC RELATIONS. Day Runner participates with
retailers in co-op advertising and periodically advertises in certain wholesale
flyers and in trade publications. Public relations campaigns are another element
in the Company's marketing strategy. The Company has from time to time conducted
consumer advertising campaigns, primarily in business and lifestyle magazines,
but generally does very little consumer advertising.

SALES SUPPORT. The Company supports its retailers with point-of-sale
materials intended to build brand name awareness and increase sales. The
Company's displays are designed to be easy for consumers to shop and for store
personnel to refill. The Company supplements its everyday display space of Day
Runner brand products with colorful, pre-packed corrugated displays designed to
act as marketing vehicles. Packaging is intended to help consumers choose the
right product and make the decision to buy.

TRADE SHOWS. The Company exhibits or is represented in a number of
international, national and regional trade shows.

MARKET RESEARCH. The Company regularly conducts market research and
tests product concepts and prototypes through the use of focus groups and other
consumer research. In addition, the Company maintains a database containing
information on users who have mailed in the Welcome Cards included in many of
its Day Runner brand products.

USER SUPPORT. To encourage its current users to continue to purchase
and recommend its products and their refills, the Company provides a toll-free
consumer hotline in the U.S. that consumers may call for referral to
conveniently located dealers that carry specific refills or accessories, for
customer service, to contribute suggestions and to purchase products directly
from the Company.

DAYRUNNER.COM. In June 1999, the Company launched its substantially
redesigned Internet site, dayrunner.com. Users may purchase certain of the
Company's products online via this web site. The Company makes direct sales
primarily as a service to its users.

COMPETITION

The product categories in which the Company participates are
competitive and subject to rapid change.

The Company competes directly with other companies marketing
paper-based organizers and planners, appointment books, assignment books,
business accessories, calendars, wall boards, laminated wall planners and
similar organizing products to consumers through retail channels and

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on the Internet and indirectly with companies marketing such products through
mail order or via other means.

The Company's competitors also include companies marketing
substitutes for paper-based organizer and planner products, such as electronic
organizers, including Palm Pilot-TM- and Windows CE-TM- products, among
others, PIM software and Internet-resident organizers.

In addition, the Company competes indirectly in the U.S. and directly
in certain foreign markets with companies marketing organizers and/or organizers
coupled with time management training via direct sales to individuals and to
organizations.

The companies with which Day Runner competes vary by product category
and geography. Each product category is competitive and subject to rapid
change, and none of the lists of competitors provided here is intended to be
all inclusive. The Company's competitors in paper-based organizers in North
America include Day-Timer-Registered Trademark-, FranklinCovey-Registered
Trademark-, Mead School and Office Products division of The Mead Corporation,
including At-A-Glance-Registered Trademark-, and many leather goods
manufacturers and companies manufacturing inexpensive, non-branded organizers
overseas for sale in North America. Paper-based organizer competitors outside
the U.S. vary from market to market, with none holding a dominant position in
retail channels in multiple markets.

The Company's North American competitors in telephone/address books
are Mead, including its At-A-Glance division, and a number of companies
marketing inexpensive imported products. The primary competitor marketing
appointment books and calendars through retail channels in North America is
Mead's At-A-Glance division. A number of U.S. calendar companies also produce
laminated wall planners. Business accessories are marketed in North America by
Day-Timer, Hazel-Registered Trademark- and many leather goods manufacturers,
and wall board manufacturers include ACCO and Quartet Manufacturing Company.

Day Runner believes that the current principal competitive factors in
the product categories in which it participates are: distribution breadth, depth
and strength; brand name recognition; product function, design, perceived
quality and value; marketing capability; product development capability; breadth
of product lines; financial resources; customer service; manufacturing/sourcing
expertise; and price. In the organizer/planner category, the size and loyalty of
a company's user base is also a key factor.

The Company believes that it has a number of competitive strengths. Its
products occupy significant retail shelf space. Its position as a leader in the
retail organizer/planner market, leading brand names, ability to develop new
products, broad product lines, marketing expertise, sourcing skill, large user
base and the appeal of its products to consumers constitute additional
competitive advantages. There can be no assurance, however, that the Company
will be able to maintain or continue to benefit from its competitive advantages
or that the competitive environment will not change to the Company's detriment.

MANUFACTURING

Day Runner's manufacturing strategy combines limited internal
manufacturing with the domestic and foreign subcontracting of product components
and finished products. The Company's policy is to develop and maintain multiple
sources for key raw materials, product components and the finished products it
subcontracts. The Company has the ability to act as its own second or third
source for the manufacture of loose-leaf binders, for those of its wall boards
that it subcontracts and for the final assembly of many of its products. This
provides a degree of protection against vendor problems and, under certain
conditions, allows the Company to respond to higher than anticipated demand and
improve turn-around time. The Company's manufacturing activities are not
capital-

11
<PAGE>

intensive, and the manufacture of most of its products can be only partially
automated. The Company subcontracts all printing.

PURCHASED COMPONENTS. In addition to vinyl and leather raw materials,
the Company purchases from suppliers certain major product components, including
printed pages, loose-leaf rings, pens, software disks containing its PIM
software, electronic components and certain accessories. With few exceptions,
these items are manufactured by a variety of outside contractors and are widely
available.

DAY RUNNER BRAND PRODUCTS.

ASIAN SUPPLIERS. The Company's Asian subcontractors
manufacture and assemble a majority of its finished Day Runner
brand products. Day Runner's Hong Kong subsidiary acts as
liaison with the Asian suppliers of the Company's Day Runner
brand products.

NORTH AMERICAN MANUFACTURING. The flexibility of internal and
subcontracted North American manufacturing helps Day Runner
meet unexpected demand and produce "fill-ins" near the end of
a season. In addition, North American manufacturing is
cost-effective for certain bulky products, where freight costs
are a key concern. Day Runner manufactures a portion of its
binders, assembles a portion of its finished products and does
refill packaging at Day Runner de Mexico, S.A. de C.V., its
wholly owned manufacturing subsidiary located in Tijuana,
Mexico. The Company manufactures wallboards and laminated wall
planners at its facility in Toronto, Canada and up until June
2000, the Company also used its Little Rock, Arkansas facility
for such manufacturing. The Little Rock operation was closed
in June 2000 and the majority of the operating assets were
sold in July 2000.

FILOFAX BRAND PRODUCTS. The Company's Filofax operations have also
combined internal manufacturing with subcontracting and subcontract the
production of certain product components and finished goods to Asian suppliers.
Manufacturing in the UK has been limited in scope, consisting primarily of
binder manufacture, book assembly and refill packaging, and the Company also
outsources some assembly there. In the fourth quarter of fiscal 2000, the
manufacturing operations in the UK were closed.

CUSTOMER SERVICE

Large U.S. retailers' focus on lowering inventory and increasing
inventory turns requires more efficient product replenishment systems as
measured by these retailers. Day Runner recognizes that customer service is a
vital link between itself and its key customers. (Note: This discussion does not
include distribution in the U.S. of the Company's Filofax products, which is
outsourced.)

SOPHISTICATED, FLEXIBLE DISTRIBUTION CAPABILITIES. Day Runner has
developed sophisticated distribution and customer service capabilities in the
U.S. The Company's facilities have the ability to ship in whatever form the
customer's logistics require. Day Runner ships directly to the individual retail
locations of a number of its customers and to the distribution centers of others
and participates in cross-docking programs.

EDI. Day Runner receives more than 90% of domestic orders representing
approximately 85% of domestic purchase order dollars via EDI (Electronic Data
Interchange). Transaction sets

12
<PAGE>

handled via EDI include purchase orders, acknowledgments, invoices, advance
ship notices, and debit/credit adjustments.

WMS. The Company has implemented WMS (Warehouse Management System)
software in its Nashville, Tennessee and Fullerton, California distribution
centers. WMS controls a multitude of warehouse functions, including, among
others: receiving; quality inspection; package labeling; cross docking; material
storage; order picking; automated replenishment; trailer loading; routing; and
inventory control. The Company believes WMS offers significant benefits,
including higher productivity, increased inventory and shipping accuracy and
more efficient facility utilization.

RISK FACTORS

The Company believes that risk factors that may cause future results to
differ materially from the Company's expectations and should be considered
carefully in evaluating the Company and its business include, but are not
limited to, the following (which, with the exception of "Other Risk Factors,"
are listed in alphabetical order). These risk factors are in addition to those
mentioned elsewhere in this report and in documents incorporated by reference
into this report.

COMPETITION. The paper-based organizer industry and the various
related organizing products industries in which the Company participates are
intensely competitive and subject to rapid change, with competition for retail
shelf space of particular concern. The Company competes primarily with a
number of companies that manufacture and market paper-based organizers and/or
related organizing products through retail, mail order or other direct sales
channels. The Company also competes with companies that manufacture and market
substitutes for paper-based organizers (E.G., handheld electronic organizers
such as Palm Pilot-TM-, Windows CE-TM- products, PIM software and
Internet-resident organizers). Many of the Company's competitors have
substantially greater financial, product development, technical, manufacturing
and marketing resources than the Company. There can be no assurance that the
Company will be able to compete successfully in the future or that competitive
pressures will not adversely affect the Company's sales growth or gross or
operating margins. (SEE ITEM 1. "BUSINESS -COMPETITION.")

CUSTOMER CONCENTRATION. The Company's sales have been, and very likely
will continue to be, concentrated among a small number of customers. In fiscal
2000, sales to the Company's top four customers represented approximately 51% of
sales, with sales to Wal-Mart Stores, Inc., Staples, Inc., Office Depot, Inc.
and OfficeMax, Inc., including their affiliates, representing approximately 17%,
13%, 11% and 10%, of sales, respectively. As a result, the Company's financial
results can be adversely affected by the business practices and actions of its
large customers in a number of ways, including timing, size and mix of product
orders and supply chain management. The loss of one or more of these customers
or a shift in the demand by, distribution methods of or pricing to or terms of
sale to one or more of these customers could materially adversely affect the
Company. The Company has no written agreement or other enforceable understanding
with any of these customers that relates to future purchases by such customers,
and thus such purchases could be delayed, reduced or discontinued at any time. A
termination or other adverse change in the Company's relationship with, an
adverse change in the financial condition of, or a significant reduction in
sales to one or more of its top customers could have a materially adverse effect
on the Company. The write-off of any significant receivable due from delays in
payment or return of product by these customers could also adversely impact the
Company. (SEE ITEM 1. "BUSINESS -- SALES AND DISTRIBUTION.")

DEPENDENCE ON CONTINUED DEMAND FOR PAPER-BASED AND OTHER LOW TECHNOLOGY
ORGANIZING PRODUCTS. The Company's future results depend upon ongoing consumer
demand for paper-based organizing products in general and the Company's products
in particular. In recent years,

13
<PAGE>

technological advances have led to the proliferation of increasingly powerful
portable laptop and "palmtop" computers and handheld electronic organizers,
such as Palm Pilot. Although many of these products are currently more
expensive and difficult to use than the Company's comparable paper-based
products, technological advances are likely to improve the ease of use and
functionality and to continue to reduce the cost of portable electronic
products that contain features directly competitive with paper-based
organizers and planners and with certain related organizing products. There
can be no assurance that current consumer demand for paper-based and other
low technology products will not decline or that the Company, alone or
jointly with technology companies, will be able to successfully develop in a
timely manner and market new paper-based or electronic products that will
achieve market acceptance.

DEPENDENCE ON LOANS. Under the Amended Loan Agreement and subsequent
waiver agreements, the Company may borrow, subject to certain conditions, a
maximum aggregate of approximately $115 million in bank loans. The Company's
liquidity is dependent upon its continued ability to borrow under this loan
facility, renegotiate this facility or obtain alternative financing. Since March
2000, the Company and the banks providing the credit facility have entered into
a series of waiver agreements. These waiver agreements, which continue in effect
through October 31, 2000, waive compliance with certain financial covenants and
permit the Company to borrow funds under the loan facility subject to certain
terms and conditions, including the Company's agreement to pursue the sale of
substantial assets. The Company is working to renegotiate its loan facility but
has no commitment for any additional financing after the expiration of the
existing waiver agreement on October 31, 2000. There can be no assurance that
the Company will be able to renegotiate the loan facility or obtain financing
from other sources. Any future financing, if available, may involve restrictions
on the manner in which the Company conducts its business. The Company's
continued existence is dependent upon several factors including the Company's
ability to renegotiate the terms and covenants of the loan agreement. (SEE ITEM
7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES BANK LOANS.")

DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a
significant extent upon certain of its officers and employees, the loss of the
services of certain of whom could materially adversely affect the Company. The
Company has no employment agreements with such persons. The Company's lack of
profitability combined with strong job markets in areas where it does business
may make it difficult to retain or replace employees.

LACK OF PROFITABILITY. The Company has reported substantial losses over
the last two fiscal years. Although the Company is in the process of
implementing a substantial restructuring plan to return the Company to
profitability, there can be no assurance that such a plan will be successful.
The Company's difficulties in meeting its loan agreement covenants and financing
needs, its recurring losses from operations and its negative working capital
position raise substantial doubt about its ability to continue as a going
concern.

NEW PRODUCTS. In order to maintain and improve its competitive
position, the Company must continue to enhance its existing product lines and to
develop and introduce innovative new products and line extensions that meet the
requirements of its existing and potential users. There can be no assurance that
such products will be developed and introduced in a timely fashion, or that they
will achieve market acceptance or that the timing and size of orders for new
products will not materially adversely affect the Company's financial results.

14
<PAGE>

PRODUCT SUPPLY AND MANUFACTURING RISKS. The Company depends on
outside foreign and domestic sources for the manufacture of a significant
portion of its product components and finished products and subcontracts the
production of all its printed materials. The Company's reliance on outside
vendors subjects it to the risks of potential delays in the receipt, or
shortfalls in the levels or quality, of products or components and of possible
increases in its costs of goods sold caused by, among other things, increases
in vendors' prices, trade tariffs, freight or duties. In addition, due to the
large number of sizes, materials and styles of the Company's products and the
inherent uncertainty of predicting customer demand levels, there is a risk
that the Company may not be able to fulfill certain orders in a timely
fashion, which may result in delayed shipments and/or lost business. The
Company seeks to reduce certain of these risks by setting what it believes are
appropriate safety stock inventory levels of its most popular products and
most frequently used product components, having multiple or alternative supply
sources for key product components and possessing the internal capability to
manufacture and/or assemble many of its core products. Nonetheless, external
or internal product or component supply or manufacturing delays, shortfalls or
other problems or cost increases could adversely affect the Company's
financial results. (SEE ITEM 1. "BUSINESS--MANUFACTURING.")

RETAILERS' SUPPLY CHAIN MANAGEMENT. As publicly announced by a number
of the retailers themselves and many of their suppliers, certain large U.S.
retailers, including a number of the Company's largest customers, have
intensified their focus on supply chain management, working to shift a greater
portion of the inventory burden to suppliers. This trend increases the
unpredictability of the Company's financial results.

As part of their supply chain management, retailers have been
substantially tightening their inventories, with the goals of reducing on-hand
inventories and increasing inventory turns. Retailers' methods of
accomplishing these goals vary but generally can include the following, among
others: selling down inventory until they reach their new, lower target
levels; giving promotions a shorter time on the shelf to sell through to
consumers; and returning other merchandise they might otherwise have
ultimately sold. This inventory tightening may manifest itself in a number of
ways that can reduce the Company's sales and increase its costs, including but
not limited to, retailers' reductions of on-hand supplies of the Company's
products; retailers' reduction of everyday selection of the Company's
products; accelerated and increased product returns; unexpected cancellations
of commitments for product; and reductions in minimum and average order
quantities, with potentially related increases in the frequency of orders and
the Company's associated costs of distribution.

In addition, the stress on minimizing on-hand inventories in retail
stores can result in spotty stock outages, particularly of popular products,
which can result in lost or delayed sales to consumers. The Company believes
the trend toward shifting the inventory burden farther back in the supply
chain is likely to eventually include the vast majority of retail chains both
in the U.S. and abroad.

SEASONAL FLUCTUATIONS. The Company has historically experienced and
expects to continue to experience significant seasonal fluctuations in its
sales and other financial results that it believes have resulted and will
continue to result primarily from its customers' and users' buying patterns.
These buying patterns have typically adversely affected orders for the
Company's products in the March and June quarters of each fiscal year.

<PAGE>

new product introductions and line extensions, the timing of large orders,
changes in product sales, vendor and customer pricing, production levels,
supply and manufacturing delays, large customers' inventory management and/or
product returns and general industry and economic conditions. The seasonality
of the Company's financial results and the unpredictability of the factors
affecting such seasonality make the Company's quarterly and yearly financial
results difficult to predict and subject to significant fluctuation. (SEE ITEM
7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - QUARTERLY RESULTS.")

SMALL SIZE. The Company believes that the retail environment,
particularly in the U.S. and Canada, is increasingly comprised of very large
retailers and suppliers and that the Company's relatively small size magnifies
the effects upon it of shifts in this environment. In connection with the
waiver agreements relating to its loan facility, the Company has agreed to
pursue the sale of substantial assets. If a sale of such assets occurs, the
Company believes that the risks associated with its small size will persist or
increase.

OTHER RISK FACTORS. Other factors that may cause the Company's future
performance to differ materially from its current expectations include:
general economic conditions, especially the sustainability of the current
economic expansion; the health of the retail environment; and foreign exchange
rate fluctuations.

PATENTS, COPYRIGHTS AND TRADEMARKS

Day Runner relies upon, among other things, a combination of
copyright, patent and trademark laws to protect its rights to certain aspects
of its products. There can be no assurance, however, that the steps taken by
Day Runner to protect its proprietary rights will be adequate to prevent
imitation of its products or independent development by others of similar
products.

Day Runner holds numerous patents in the U.S. and certain foreign
countries. The Company also has several United States and foreign patents
pending. The patents the Company holds are related to improvements in the
structure of and devices associated with its loose-leaf binders and its
related organizing products. We have also been issued U.S. copyright
registrations covering the text and the compilation and editing of data in
certain of our products. Day Runner holds United States and foreign trademark
registrations for a number of trademarks including "Day Runner" and "Filofax"
and various logos.

EMPLOYEES

At September 15, 2000, Day Runner had 841 full-time employees,
including 155 in sales; 30 in marketing; 127 in executive, finance and
administration; 24 in product development; and 505 in manufacturing operations
and distribution. None of the Company's employees is represented by a labor
union, and the Company has experienced no labor-related work stoppages.

ITEM 2. PROPERTIES.

Day Runner's principal operating facility is located in an
approximately 221,000 square-foot building in Fullerton, California, under
leases expiring in 2006. The leases include multiple, successive renewal
options that, if exercised in full, would extend the lease terms to expire in
2011. The Company's former corporate headquarters occupied approximately
21,300 square feet in Irvine, California under a lease that expires in 2001.
The Company moved from the Irvine, California building during fiscal 2000 and
has subleased this building under a sublease agreement that expires in 2001.
The Company's LaVergne, Tennessee distribution facility occupies an

<PAGE>

approximately 100,200 square-foot facility under a lease expiring in 2004. The
lease includes multiple, successive renewal options that, if exercised in
full, would extend the lease terms to expire in 2014. The Company's Canadian
subsidiary occupies an approximately 40,220 square-foot facility under a lease
expiring in 2008 that includes an option to extend the terms through 2013. The
Company's Mexican subsidiary occupies an approximately 70,000 square-foot
facility under a lease expiring in 2006 that includes options to extend the
terms through 2016. Additionally, the Company's U.K. subsidiary's corporate
headquarters occupy approximately 5,700 square feet in London, England under a
lease expiring in 2003. The Company believes it has sufficient space in its
facilities or will be able to lease additional space on acceptable terms to
meet its needs for the foreseeable future. The Company's U.K. subsidiary's
principal manufacturing operation was located in an approximately 23,300
square-foot facility in Burgess Hill, England, which is owned by the Company's
U.K. subsidiary. During May 2000, the Company closed its manufacturing
facility in Burgess Hill and is in the process of selling the land and
buildings.

ITEM 3. LEGAL PROCEEDINGS.

In September 1999, two, and in October 1999, one additional,
purported securities class action lawsuits were filed in the United States
District Court for the Central District California (the "District Court")
against the Company and certain of its officers and directors. The complaints
alleged that the Company violated Section 10(b) of the Securities Exchange Act
and Rule 10b-5 thereunder through the misstatement of the Company's financial
results of operations for the first through third quarters of fiscal 1999.
These alleged misstatements purportedly consisted of improper accounting for
manufacturing variances and other costs. The plaintiffs in all these actions
purported to represent a class consisting of all purchasers of the Company's
Common Stock between October 20, 1998 and August 31, 1999.

On January 14, 2000, a consolidated amended complaint (the "Amended
Complaint") was filed in the District Court against the Company and certain of
its officers and directors. The Amended Complaint extended the time period for
purported class members to include persons who purchased the Company's Common
Stock between February 1, 1998 through August 31, 1999. In addition to the
alleged misstatements included in the earlier complaints, the Amended
Complaint alleged that the Company failed to make certain disclosures during
this time period and that certain officers and directors sold shares of the
Company's Common Stock during this period. As they did in the earlier
complaints, the plaintiffs sought unspecified compensatory damages in the
Amended Complaint.

On May 15, 2000, the plaintiffs dismissed the Amended Complaint
without prejudice.

The Company is not a party to any litigation that, in the opinion of
management, would reasonably be expected to have a materially adverse effect
on the consolidated financial statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

(a) On April 25, 2000, the Company held a Special Meeting of
Stockholders (the "Annual Meeting").
(b) At the Special Meeting, the stockholders approved, with
11,173,527 votes cast in favor, 143,517 votes cast against,
10,901 abstentions and 0 broker nonvotes, a reverse
one-for-five stock split of the Company's outstanding
shares of Common Stock.

<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

Effective June 30, 2000, Day Runner's Common Stock began trading
over-the-counter on the OTC Bulletin Board under the symbol "DAYR." The
Company's stock previously traded on The Nasdaq National Market System. The
table below shows the high and low closing sales prices for the Common Stock
as reported on The Nasdaq Stock Market for the fiscal years ended June 30,
2000 and 1999. As of September 15, 2000, there were 209 recordholders of the
Company's Common Stock based on information provided by the Company's transfer
agent. All per share data have been retroactively restated to reflect the
one-for-five reverse stock split.

FISCAL YEAR FISCAL YEAR
2000 1999
----------------- ---------------------
QUARTER HIGH LOW HIGH LOW
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First $63 1/8 $41 7/8 $126 7/8 $84 3/8
Second 44 3/8 18 3/4 112 1/2 59 3/8
Third 19 1/16 6 1/4 70 5/16 5 17/8
Fourth 9 1/16 1 65 15/16 48 1/8

</TABLE>

The Company has never paid cash dividends. It is the present policy of
the Company to retain any earnings to pay down debt and improve the capital
structure of the Company, and therefore the Company does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. Certain
financial covenants in the Company's bank line of credit agreement restrict
the Company's ability to pay cash dividends.

ITEM 6. SELECTED FINANCIAL DATA.

The selected consolidated statement of operations data for the fiscal
years ended June 30, 2000, 1999 and 1998 and the consolidated balance sheet
data at June 30, 2000 and 1999 are derived from, and are qualified in their
entirety by reference to, the Company's audited consolidated financial
statements and notes thereto included elsewhere in this Annual Report that
have been audited by Deloitte & Touche LLP, independent auditors, as indicated
in their report, which is also included elsewhere in this Annual Report. The
selected consolidated statement of operations data for the fiscal years ended
June 30, 1997 and 1996 and the consolidated balance sheet data at June 30,
1998, 1997 and 1996 are derived from audited consolidated financial statements
of the Company that are not included herein.

<PAGE>

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

(IN THOUSANDS, EXCEPT PER SHARE DATA)

FISCAL
----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Net sales.......................... $ 171,487 $ 196,212 $ 167,841 $ 127,376 $ 125,126
Cost of goods sold................. 103,274 108,087 80,663 60,452 59,920
--------- ---------- --------- ---------- ----------
Gross profit....................... 68,213 88,125 87,178 66,924 65,206
--------- ---------- --------- ---------- ----------
Operating expenses:
Selling, marketing and
distribution................... 61,213 62,180 43,193 31,673 29,878
General and administrative..... 31,166 26,445 18,416 14,451 16,376
Restructuring and
impairment charges............ 66,214
Costs related to activities
associated with the Filofax
acquisition................... 1,072
Costs incurred in pursuing
acquisitions.................. 1,451
--------- ---------- --------- ---------- ----------
Total operating expenses........ 158,593 89,697 61,609 47,575 46,254
--------- ---------- --------- ---------- ----------
(Loss) income from
operations...................... (90,380) (1,572) 25,569 19,349 18,952
Net interest expense (income)...... 11,213 5,215 (172) (1,301) (706)
--------- ---------- --------- ---------- ----------
(Loss) income before provision
(benefit) for income taxes...... (101,593) (6,787) 25,741 20,650 19,658
Provision (benefit) for
income taxes................... 5,044 (2,789) 9,833 8,102 7,840
--------- ---------- --------- ---------- ----------
Net (loss) income.................. $(106,637) $ (3,998) $ 15,908 $ 12,548 $ 11,818
========= ========== ========= ========== ==========

(Loss) earnings per common share:
Basic........................... $ (44.79) $ (1.68) $ 6.90 $ 5.05 $ 4.74
========= ========== ========= ========== ==========
Diluted......................... $ (44.79) $ (1.68) $ 6.35 $ 4.76 $ 4.46
========= ========== ========= ========== ==========

Weighted average number of
common shares outstanding:
Basic........................... 2,381 2,379 2,307 2,486 2,494
========= ========== ========= ========== ==========
Diluted......................... 2,381 2,379 2,505 2,636 2,650
========= ========== ========= ========== ==========

CONSOLIDATED BALANCE SHEET DATA:
(IN THOUSANDS)

JUNE 30,
----------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------ ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Working (deficiency)
capital.................... $ (68,879) $ 70,491 $ 57,922 $ 50,710 $ 51,653
Total assets................ 97,094 216,311 101,179 78,880 77,931
Short-term debt............. 99,271 2,077 2,716 452
Long-term liabilities....... 45 105,568
Stockholders' (deficiency)
equity..................... (36,320) 70,397 74,532 59,484 59,498

</TABLE>

19
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. HISTORICAL RESULTS AND
PERCENTAGE RELATIONSHIPS AMONG ANY AMOUNTS INCLUDED IN THE CONSOLIDATED
FINANCIAL STATEMENTS ARE NOT NECESSARILY INDICATIVE OF TRENDS IN OPERATING
RESULTS FOR ANY FUTURE PERIOD.

OVERVIEW

Since the Company's introduction of the first Day Runner System
organizer in 1982, the Company's revenues have been generated primarily by
sales of organizers and planners and secondarily of refills. For a number of
years, the Company focused the majority of its product development, sales and
marketing efforts on the U.S. office products channel and the U.S. mass market
channel. With the October 30, 1998 acquisition of Filofax, the Company
substantially increased its emphasis on markets outside the U.S. The office
products channel, the mass market channel and sales to foreign customers
accounted for 33.1%, 21.7% and 37.1%, respectively, of fiscal 2000 net sales.

As discussed in Note 7 to the consolidated financial statements, at
June 30, 2000, the Company would not have been in compliance with certain
financial covenants of its loan agreement had the lenders not temporarily
waived the covenants. The Company's difficulties in meeting its loan agreement
covenants and financing needs, its recurring losses from operations and its
negative working capital position raise substantial doubt about its ability to
continue as a going concern. The Company is attempting to renegotiate the
terms and covenants of the loan agreement but has no commitment for any
additional financing after the expiration of the existing waiver agreement on
October 31, 2000. The Company's continued existence is dependent upon several
factors including the Company's ability to renegotiate the terms and covenants
of the loan agreement.

For a number of quarters, the Company's results have been adversely
affected by changes in supply chain management practices of the large U.S.
retailers that account for the majority of the Company's U.S. sales. The
Company believes that the U.S. retail environment has changed and that large
U.S. retailers will continue to emphasize minimizing on-hand inventories and
increasing inventory turns. Other major factors causing lower sales include
the reduction of certain kinds of promotional activity, the Company's decision
to de-emphasize sales to certain less profitable channels and increased
competition from substitutes for paper-based organizers.

The Company's high degree of leverage coupled with its lower sales
and profitability could have important consequences to the Company, including
but not limited to the following: (i) the Company's ability to obtain
necessary financing may be impaired in the future, (ii) a substantial portion
of the Company's cash flow from operations must be used for debt service,
thereby reducing the funds available for other purposes and (iii) the Company
may be more vulnerable to economic or market downturns, be limited in its
ability to withstand competitive pressures and be unable to attract and/or
retain key personnel.

The Company's near and long-term operating strategies are focused on
stabilizing profitable sales volume in its retail markets, exploiting product
innovation and promotions where appropriate profitability is achieved, and
aggressively reducing costs to better position the Company to compete under
current market conditions. The Company remains highly focused on providing
products to the consumer of recognizable value, while removing any product and
service costs not recognized or valued by the ultimate consumer. In addition,
the Company is aggressively pursuing the

<PAGE>

elimination or sale of unproductive assets, as well as the potential sale of
substantial assets, to reduce the Company's present debt burden.

The Company is currently in negotiations to obtain long-term
financing and expects that a loan agreement or an additional waiver
agreement(s) will be negotiated with its existing bank group. Although there
can be no assurance that the Company's restructuring and long-term financing
efforts will be successful, the Company believes that the restructuring
efforts presently underway will significantly improve its operating results
and should increase the Company's ability to renegotiate the terms of its
current debt.

These business conditions have been considered in evaluating the
recoverability and classification of recorded asset and liability accounts.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or to amounts and classifications of liabilities that may be
necessary should the entity be unable to continue as a going concern. (see
Note 10 to the Consolidated Financial Statements).

RESTRUCTURING OF OPERATIONS

For a number of quarters, the Company's results have been adversely
affected by changes in supply chain management practices of the large U.S.
retailers that account for the bulk of the Company's U.S. sales. The Company
believes that the U.S. retail environment has changed and that large U.S.
retailers will continue to emphasize minimizing on-hand inventories and
increasing inventory turns. As a result of this, on December 29, 1999, the
Company announced that it was developing a plan to restructure its operations
to substantially reduce costs.

As part of this restructuring plan, the Company (i) reduced
headcount; (ii) closed its Irvine, California headquarters and consolidated
those activities into its Fullerton, California center; (iii) closed its
manufacturing facility in the United Kingdom and moved those activities to
subcontractors; (iv) closed its Little Rock, Arkansas manufacturing plant and
sold certain of the Ram operating assets (see Note 2 to the Consolidated
Financial Statements); (v) retained Crossroads, LLC, an interim management and
financial advisory firm; (vi) discontinued approximately 600 products and
(vii) in August 2000, closed its Australian subsidiary and began distributing
its products through a third party distributor in Australia. The Company plans
to continue its restructuring plan through fiscal 2001.

As a result of the restructuring activities in fiscal 2000, the
Company recorded $13,895,000 in restructuring charges, which consist of
$7,286,000 in facilities closure costs and the related write down of
inventories, $4,278,000 in product line reduction costs and $2,331,000 in
severance costs. Of the restructuring charges, $4,664,000 is included in
restructuring and impairment charges and $9,231,000 is included in cost of
goods sold in the accompanying consolidated statements of operations for the
year ended June 30, 2000. During the fourth quarter of fiscal 2000,
$10,865,000 of these restructuring charges were recorded. Included in accrued
expenses at June 30, 2000 in the accompanying consolidated balance sheets is
$1,220,000 of restructuring costs, of which $1,064,000 represents severance
costs. The severance costs recorded during fiscal 2000 were the result of 193
terminations. The primary portion of the severance costs consists of payments
to five former officers.

In addition, during the fourth quarter of fiscal 2000, the Company
decided to pursue the sale of substantial assets. As a result, the Company
performed an impairment analysis and concluded

<PAGE>

that the carrying value of certain of these assets was in excess of their fair
value. Fair value was estimated based on estimated proceeds less related
selling costs. The proceeds were estimated using a variety of assumptions, and
there can be no assurance that the actual proceeds will not differ
significantly from these estimates. The amount in excess of fair value of
$59,337,000 is recorded in restructuring and impairment charges in the
accompanying consolidated statements of operations for the year ended June 30,
2000.

Operations that would be eliminated due to the Company's pursuit of
the sale of substantial assets, as part of the restructuring of operations,
which are included in the consolidated financial statements as of and during
the years ended June 30, are as follows (in thousands):

2000 1999
---------- ---------
<S> <C> <C>
Net sales $ 60,333 $35,848
(Loss) income from operations (58,735) 5,904
Working capital 10,129 7,568
Long-term assets 20,765 83,838

</TABLE>

There would be no impact on amounts reported in fiscal 1998.

Finally, the Company performed an impairment analysis and concluded
that the future undiscounted cash flows were below the carrying value of
certain of its related long-lived assets that it intends to retain.
Accordingly, the Company recorded a noncash impairment loss to adjust the
carrying values of goodwill and other intangible assets and other assets to
their estimated fair values, which were determined based on anticipated future
cash flows discounted at a rate commensurate with the risks involved. Included
in restructuring and impairment charges in the accompanying consolidated
statements of operations is $2,213,000, of which $1,830,000 relates to
goodwill and other intangible assets and $383,000 relates to a non-compete
agreement.

<PAGE>

RESULTS OF OPERATIONS

The following tables set forth, for the periods indicated, the
percentages that selected statement of operations items bear to sales and the
percentage change in the dollar amounts of such items.

PERCENTAGE OF SALES
---------------------------------------
YEARS ENDED JUNE 30,
---------------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>

Net sales........................................... 100.0% 100.0% 100.0%
Cost of goods sold.................................. 60.2 55.1 48.1
------ ----- -----
Gross profit........................................ 39.8 44.9 51.9
------ ----- -----
Operating expenses:
Selling, marketing and distribution.............. 35.7 31.7 25.7
General and administrative....................... 18.2 13.5 11.0
Restructuring and impairment charges............. 38.6
Costs related to activities associated with the
Filofax acquisition............................. 0.5
------ ----- -----
Total operating expenses........................ 92.5 45.7 36.7
------ ----- -----
(Loss) income from operations....................... (52.7) (0.8) 15.2
Net interest expense (income)....................... 6.6 2.6 (0.1)
------ ----- -----
(Loss) income before provision (benefit)
for income taxes................................ (59.3) (3.4) 15.3
Provision (benefit) for income taxes................ 2.9 (1.4) 5.8
------ ----- -----
Net (loss) income................................... (62.2)% (2.0)% 9.5%
====== ===== =====
</TABLE>

<TABLE>
<CAPTION>
PERCENTAGE CHANGE
------------------------------------------
FISCAL 1999 FISCAL 1998
TO TO
FISCAL 2000 FISCAL 1999
--------------- ---------------
<S> <C> <C>
Net sales........................................... (12.6)% 16.9%
Cost of goods sold.................................. (4.5) 34.0
Gross profit........................................ (22.6) 1.1
Operating expenses:
Selling, marketing and distribution.............. (1.6) 44.0
General and administrative....................... 17.9 43.6
Restructuring and impairment charges............. 100.0
Costs related to activities associated with the
Filofax acquisition............................. (100.0) 100.0
Total operating expenses........................ 76.8 45.6
(Loss) income from operations....................... (5649.4) (106.1)
Net interest expense (income)....................... 115.0 3132.0
(Loss) income before provision
(benefit) for income taxes...................... (1396.9) (126.4)
Provision (benefit) for income taxes................ (280.9) (128.4)
Net (loss) income................................... (2567.3) (125.1)

</TABLE>

FISCAL YEAR ENDED JUNE 30, 2000 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1999

NET SALES. Net sales consist of revenues from gross product shipments
net of allowances for returns, rebates and credits. In fiscal 2000, net sales
decreased by $24,725,000, or 12.6%, compared with fiscal 1999. For a number of
quarters the Company has been adversely affected by changes in the retail
environment related to the supply chain management practices of its large U.S.
customers. This "inventory tightening" which has resulted in lower gross
shipments and increased returns, continued to constrain the Company's net
sales in fiscal 2000. Other major factors causing lower

<PAGE>

net sales include the reduction of certain kinds of promotional activity and
the Company's decision to de-emphasize sales to certain less profitable
channels.

During fiscal 2000, net sales to mass market customers decreased by
$26,367,000, or 41.5%; the office products channel decreased by $11,981,000,
or 17.4%; and net sales to miscellaneous customers grouped together as
"other," decreased by $525,000, or 3.6%. These decreases were partially offset
by an increase in net sales to foreign customers of $14,148,000, or 28.6% due
to the inclusion of Filofax sales for the entire twelve months ended June 30,
2000 compared with the eight months in the fiscal year ended June 30, 1999.

Net sales of related organizing products decreased by $16,290,000, or
34.7%; net sales of organizers and planners decreased by $9,529,000, or 11.2%;
and net sales of refills increased by $1,094,000, or 1.7%.

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 and other allowances, purchasing and manufacturing
efficiencies, tariffs, duties, and inventory carrying costs. Gross profit as a
percentage of net sales decreased from 44.9% in fiscal 1999 to 39.8% in fiscal
2000 due primarily to costs associated with the write down of inventory at
closed facilities and secondarily to costs associated with the discontinuance
of certain products, in connection with the Company's restructuring plan.
Included in cost of sales in fiscal 2000 is approximately $4,930,000 in cost
associated with the write down of inventories at closed facilities (see Note
10 to the Consolidated Financial Statements) and approximately $4,278,000 in
cost associated with the discontinuance of approximately 600 products (see
Note 3 to the Consolidated Financial Statements), which the Company
discontinued during the year as part of its restructuring plan.

OPERATING EXPENSES. Total operating expenses increased from
$89,697,000 in fiscal 1999 to $158,593,000 in fiscal 2000, an increase of
$68,896,000 or 76.8%. As a percentage of net sales, operating expenses
increased from 45.7% in fiscal 1999 to 92.5% in fiscal 2000. The increase in
operating expenses resulted primarily from restructuring and impairment
charges recorded during fiscal 2000 and secondarily to the inclusion of
Filofax's expenses for the entire twelve months ended June 30, 2000, compared
with eight months in the fiscal year ended June 30, 1999. Partially offsetting
these increases is a decrease in Day Runner's U.S. operations and its
non-Filofax subsidiaries' operating expenses (excluding restructuring and
impairment charges).

Selling, marketing and distribution expenses decreased by $967,000,
or 1.6%, primarily because of the Company's focus on controlling costs, which
was partially offset by the inclusion of Filofax's expenses for the entire
twelve months ended June 30, 2000, compared with eight months in the fiscal
year ended June 30, 1999. As a percentage of net sales, selling, marketing and
distribution expenses increased from 31.7% in fiscal 1999 to 35.7% in fiscal
2000 primarily as a result of the Company's inability to reduce costs as
quickly as the decrease in U.S. sales.

General and administrative expenses increased by $4,721,000 or 17.9%,
and as a percentage of net sales from 13.5% in fiscal 1999 to 18.2% in fiscal
2000. The dollar increase is due primarily to the inclusion of Filofax's
expenses for the entire twelve months ended June 30, 2000, compared with eight
months in the fiscal year ended June 30, 1999. Secondarily, the Company
incurred approximately $2,600,000 in consulting, legal and related costs as a
result of the ongoing performance problems it has experienced and the
negotiations related to its credit facility. The

<PAGE>

increase in general and administrative expenses, as a percentage of net sales,
is due primarily to the Company's inability to reduce costs as quickly as the
decrease in U.S. sales.

Restructuring and impairment charges totaled $66,214,000 during the
fiscal year ended June 30, 2000. As a result of the Company's restructuring
activities in fiscal 2000, the Company recorded $13,895,000 in restructuring
charges, which consist of $7,286,000 in facilities closure costs and the
related write down of inventories, $4,278,000 in product line reduction costs
and $2,331,000 in severance costs. Of the restructuring charges, $4,664,000 is
included in restructuring and impairment charges and $9,231,000 is included in
cost of goods sold.

In addition, during the fourth quarter of fiscal 2000, the Company
decided to pursue the sale of substantial assets. As a result, the Company
performed an impairment analysis and concluded that the carrying value of the
assets held for sale was in excess of their fair value. Fair value was
estimated based on estimated proceeds less related selling costs. The amount
in excess of fair value of $59,337,000 is recorded in restructuring and
impairment charges in the accompanying consolidated statements of operations
for the year ended June 30, 2000.

Finally, the Company performed an impairment analysis and concluded
that the future undiscounted cash flows were below the carrying value of
certain of its related long-lived assets that it intends to retain.
Accordingly, the Company recorded a noncash impairment loss to adjust the
carrying values of goodwill and other intangible assets and other assets to
their estimated fair values, which were determined based on anticipated future
cash flows discounted at a rate commensurate with the risk involved. Included
in restructuring and impairment charges in the accompanying consolidated
statements of operations is $2,213,000, of which $1,830,000 relates to
goodwill and other intangible assets and $383,000 relates to a non-compete
agreement (see Note 10 to the Consolidated Financial Statements).

NET INTEREST EXPENSE. Net interest expense increased by approximately
$5,998,000, or 115.0%, because of an increase in the average monthly debt
outstanding, the write off of financing fees as a result of the line of credit
amendment and an increase in the average interest rates. During fiscal 2000,
the Company's average monthly line of credit balance and interest rate was
approximately $101,000,000 and 9.7%, respectively, compared with approximately
$71,000,000 and 7.5%, respectively, during fiscal 1999. As a result of the
renegotiation and amendment of the line of credit in October 1999, the Company
charged approximately $955,000 to interest expense upon the write off of loan
fees.

INCOME TAXES. During the year ended June 30, 2000, the Company
recorded an income tax provision of $5,044,000. The current tax benefit of
$6,145,000 resulted from recovering, to the extent possible, all taxes
previously paid. However, the current tax benefit was offset by the deferred
tax provision of $11,189,000, which resulted from an increase in the valuation
for previously recorded deferred tax assets.

EARNINGS PER SHARE. In fiscal 2000, the Company did not repurchase
any shares of Common Stock under the Company's stock repurchase program (see
Note 18 to the Consolidated Financial Statements).

FISCAL YEAR ENDED JUNE 30, 1999 COMPARED WITH FISCAL YEAR ENDED JUNE 30, 1998

NET SALES. In fiscal 1999, net sales increased by $28,371,000, or
16.9%, compared with fiscal 1998 primarily because of the Filofax acquisition
but were lower than anticipated primarily because inventory tightening on the
part of a number of the Company's large U.S. customers

<PAGE>

constrained the Company's sales and increased product returns. Net sales were
primarily to mass market customers and secondarily to the office products
channel. Net sales to the office products channel decreased by $10,591,000 or
13.4%; net sales to mass market customers decreased by $2,152,000 or 3.3%.
These decreases were partially offset by an increase in net sales to foreign
customers of $37,274,000 or 306.0% and net sales to miscellaneous customers
grouped together as "other," of $3,840,000 or 36.2%. Net sales of related
organizing products increased by $14,081,000 or 42.8%; net sales of refills
increased by $12,403,000 or 23.9%; and net sales of organizers and planners
increased during the year by $1,887,000, or 2.3%.

GROSS PROFIT. Gross profit as a percentage of net sales decreased
from 51.9% of net sales in fiscal 1998 to 44.9% of net sales in fiscal 1999
primarily because of a shift in the Company's Day Runner brand product mix
(including sub-brands) to lower margin products and an increase in the
provision for sales returns based upon recent higher sales returns experience
(which, in addition to lowering net sales, adversely impacted manufacturing
costs and variances), both of which the Company believes were largely related
to inventory tightening.

OPERATING EXPENSES. Total operating expenses increased as a
percentage of sales from 36.7% for fiscal 1998 to 45.7% for fiscal 1999
because of the Company's decreased ability to absorb costs as a result of the
lower sales of the parent company operation and because of Filofax's
seasonality. (The Company had the benefit of only two months of Filofax's
four-month busy season, but had the expenses associated with six months of its
eight-month slower period.) Excluding the $1,072,000 costs related to
activities associated with the Filofax acquisition, fiscal 1999 operating
expenses would have been 45.2% of sales.

Selling, marketing and distribution expenses increased by $18,987,000
primarily because of expenses associated with recently introduced products and
secondarily because of the addition of Filofax's expenses and increased as a
percentage of sales from 25.7% to 31.7% due to the expenses associated with
the recently introduced products. General and administrative expenses
increased by $8,029,000 and from 11.0% to 13.5% as a percentage of sales
primarily because of the addition of Filofax's expenses and secondarily
because of the Company's inability to absorb higher costs as a result of lower
than anticipated sales.

NET INTEREST EXPENSE. Because of the increase in the Company's
long-term debt, which was incurred primarily to finance the Filofax
acquisition, net interest expense for fiscal 1999 was $5,215,000 compared with
net interest income of $172,000 for fiscal 1998.

INCOME TAXES. The Company's fiscal 1999 effective tax rate was 41.0%
compared with an effective tax rate of 38.2% for fiscal 1998.

NET (LOSS) INCOME. The Company realized a net loss of $3,998,000 in
fiscal 1999 compared with a net income of $15,908,000 in fiscal 1998.
Excluding costs related to activities associated with the Filofax acquisition,
fiscal 1999 net loss would have been $2,926,000.

EARNINGS PER SHARE. In fiscal 1999, the Company repurchased an
aggregate of 19,200 shares of Common Stock under the Company's stock
repurchase program. These repurchases reduced the number of shares that would
otherwise have been used to calculate earnings per share (see Note 18 to
Consolidated Financial Statements).

26
<PAGE>

QUARTERLY RESULTS

The following tables set forth selected unaudited quarterly
consolidated financial data and the percentages such items represent of net
sales. The quarterly consolidated financial data reflect, in the opinion of
management of the Company, all adjustments necessary to present fairly the
results of operations for such periods. Results of any one or more quarters are
not necessarily indicative of annual results or continuing trends.

<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
2000 2000 1999 1999
----------------- ----------------- ----------------- ------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales........................... $ 32,175 100.0% $ 29,976 100.0% $ 57,483 100.0% $ 51,853 100.0%
Gross profit........................ 4,534 14.1 11,773 39.3 26,024 45.3 25,882 49.9
Total operating expenses............ 86,465 268.7 23,727 79.2 25,796 44.9 22,605 43.6
(Loss) income from operations....... (81,931) (254.6) (11,954) (39.9) 228 0.4 3,277 6.3
Net interest expense ............... 2,520 7.8 2,726 9.1 3,823 6.7 2,144 4.1
(Loss) income before provision
(benefit) for income taxes...... (84,451) (262.5) (14,680) (49.0) (3,595) (6.3) 1,133 2.2
Net (loss) income................... $ (92,169) (286.5)% $ (12,375) (41.3)% $ (2,693) (4.7)% $ 600 1.2%
(Loss) earnings per common share:
Basic.......................... $ (38.69) $ (5.20) $ (1.31) $ 0.25
Diluted........................ $ (38.69) $ (5.20) $ (1.31) $ 0.25
Weighted average number of
common shares outstanding:
Basic.......................... 2,382 2,382 2,380 2,380
Diluted........................ 2,382 2,382 2,380 2,426

QUARTERS ENDED
--------------------------------------------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
1999 1999 1998 1998
----------------- ----------------- ----------------- ------------------
(In thousands, except per share amounts)
Net sales........................... $ 47,700 100.0% $ 36,216 100.0% $ 64,565 100.0% $ 47,731 100.0%
Gross profit........................ 17,700 37.1 16,495 45.5 31,059 48.1 22,871 47.9
Total operating expenses............ 24,535 51.4 21,811 60.2 26,429 40.9 16,922 35.4
(Loss) income from operations....... (6,835) (14.3) (5,316) (14.7) 4,630 7.2 5,949 12.5
Net interest expense ............... 2,056 4.3 1,770 4.9 1,356 2.1 33 0.1
(Loss) income before (benefit)
provision for income taxes...... (8,891) (18.6) (7,086) (19.6) 3,274 5.2 5,916 12.4
Net (loss) income................... $ (5,249) (11.0)% $ (4,448) (12.3)% $ 2,030 3.1% $ 3,669 7.7%
(Loss) earnings per common share:
Basic.......................... $ (2.21) $ (1.87) $ 0.85 $ 1.54
Diluted........................ $ (2.21) $ (1.87) $ 0.81 $ 1.45
Weighted average number of
common shares outstanding:
Basic.......................... 2,377 2,380 2,377 2,386
Diluted........................ 2,377 2,380 2,513 2,531

</TABLE>

27
<PAGE>

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 March and
June quarters of each fiscal year.

Although it is difficult to predict the future seasonality of sales,
the Company believes that future seasonality should be influenced at least in
part by customer and user buying patterns similar to those that have
historically affected the Company. Quarterly financial results are also affected
by new product introductions and line extensions, the timing of large orders,
changes in product sales or customer mix, vendor and customer pricing,
production levels, supply and manufacturing delays, large customers' inventory
management and general industry and economic conditions. The seasonality of the
Company's financial results and the unpredictability of the factors affecting
such seasonality make the Company's quarterly and yearly financial results
difficult to predict and subject to significant fluctuation.

LIQUIDITY AND CAPITAL RESOURCES

GENERAL. The Company's cash and cash equivalents at June 30, 2000
decreased to $3,960,000 from $9,132,000 at June 30, 1999. In fiscal 2000, net
cash of $7,616,000 provided by operating activities was offset by net cash of
$4,230,000 used in investing activities and $8,901,000 used in financing
activities.

Of the $7,616,000 net amount provided by the Company's operating
activities, $61,550,000 was provided by impairment charges, $21,963,000 was
provided by the provision for doubtful accounts and sales returns and other
allowances, $13,104,000 was provided by depreciation and amortization,
$11,189,000 was provided by a decrease in the deferred income taxes and
$7,496,000 was provided by a decrease in inventories. These amounts were
partially offset by a net loss of $106,637,000, a decrease of $6,113,000 in
accounts payable and an increase of $1,295,000 in income taxes receivable.

Accounts receivable (net) at June 30, 2000 decreased by $24,652,000, or
57.0%, from the amount at June 30, 1999 primarily because of a decrease in sales
and secondarily because of an improvement in the average collection period. The
average collection period of accounts receivable at June 30, 2000 was 37 days
compared to 74 days at June 30, 1999.

Inventories decreased by $8,315,000, or 19.6%, from the June 30, 1999
amount primarily because of a reduction in the number of products offered during
fiscal 2000. As part of the Company's restructuring plan it implemented in
fiscal 2000, the Company discontinued 604 products, which represented less than
2% of its domestic sales.

Of the $4,230,000 net amount used in the Company's investing
activities, $4,725,000 was used to acquire primarily property and equipment
which was partially offset by $584,000 in proceeds received upon the disposition
of property and equipment.

28
<PAGE>

Of the $8,901,000 net amount used in the Company's financing
activities, $5,201,000 represents net repayments on the Company's line of
credit, $2,034,000 was used to repay loan notes and $1,710,000 was used for the
payment of financing fees in connection with the line of credit.

BANK LOANS. On September 23, 1998, the Company entered into a $160,000,000
Revolving Loan Agreement (the "Loan Agreement") with Wells Fargo Bank, National
Association ("Wells Fargo"). Effective November 24, 1998, the amount was
voluntarily reduced to $145,000,000 and unamortized financing fees of
approximately $84,000 were charged to interest expense. The loan facility was
syndicated with a group of banks in December 1998. During the year ended June
30, 1999, under the terms of the Loan Agreement, the Company paid Wells Fargo a
financing fee of $1,200,000, $205,000 of which was charged to interest expense
during in the fiscal year ended June 30, 1999. The remaining balance of $955,000
was included in other assets at June 30, 1999 and charged to interest expense
during the fiscal year ended June 30, 2000.

On October 12, 1999, the Company and the banks amended and restated the
Loan Agreement (the "Amended Loan Agreement"). The Amended Loan Agreement
converted the entire revolving loan availability into a term loan portion of
$90,444,000 and a maximum revolving loan availability of $29,556,000. The term
loan matures on September 30, 2001, and the revolving credit loan facility
matures on October 31, 2000. The maturity date of the revolving credit loan
facility could have been automatically extended through September 30, 2001,
provided that the Company had achieved as of June 30, 2000, compliance with
certain requirements, including a minimum EBITDA, a minimum fixed charge
coverage ratio and a maximum funded senior debt ratio, as defined in the Amended
Loan Agreement. The Company did not satisfy these conditions and, as a result,
the revolving facility will terminate on October 31, 2000 unless the credit
facility is further amended and extended. As a result of entering into the
Amended Loan Agreement, unamortized deferred financing fees due under the Loan
Agreement of approximately $955,000 were charged to interest expense in October
1999. At June 30, 2000, the Company had $99,077,000 outstanding under the
Amended Loan Agreement and had outstanding letters of credit totaling
approximately $40,000.

The Amended Loan Agreement is secured by the Company's assets and
includes, among other things, financial covenants that have been applicable
since October 12, 1999 (stockholders' equity and current ratio) certain other
covenants which become effective in the quarter ending September 30, 2000
(maintenance of a minimum fixed charge coverage ratio, a minimum EBITDA
covenant, and a maximum funded senior debt coverage ratio) and a covenant that
becomes applicable in the quarter ending December 31, 2000 (maximum operating
expenses to net sales ratio), all as defined in the amended agreement. The
Amended Loan Agreement also limits, among other things, the incurrence of liens
and other indebtedness, mergers, consolidations, the sales of assets, lease
obligations, annual capital expenditures, advances, investments and loans by the
Company and its subsidiaries, dividends, stock repurchases and certain
transactions with affiliates. The Amended Loan Agreement permits up to
$1,500,000 overdraft indebtedness (net of cash deposits) for Filofax and its
subsidiaries.

The Amended Loan Agreement provides that outstanding balances bear
interest at the Company's election at either (i) the higher of the Agent Bank's
prime rate or the Federal Funds Rate plus 50.00 basis points, plus an interest
rate margin ranging from 12.50 to 200.00 basis points, or (ii) the applicable
eurodollar rate plus an interest rate margin ranging from 112.50 to 300.00 basis
points, depending on the level of the funded debt ratio at the end of each
fiscal quarter. During the year ended June 30, 2000, the weighted-average
interest rate was 9.7%. The weighted-average interest rate at June 30, 2000, was
10.0%.

29
<PAGE>

The Amended Loan Agreement also provides that the Company is obligated
to pay certain fees, which include: an unused revolving loan commitment fee
ranging from 37.50 to 67.50 basis points, which varies with the level of the
funded debt ratio at the end of each fiscal quarter, payable quarterly in
arrears; letter of credit fees ranging from 112.50 to 300.00 basis points, which
varies with the level of funded debt ratio corresponding to the time the letter
of credit is issued; and amendment and other standard fees of approximately
$1,710,000, which were paid during the year ended June 30, 2000. Of the
$1,710,000 in deferred financing fees paid during fiscal 2000, $727,000 was
charged to interest expense during the fiscal year ended June 30, 2000 and the
unamortized fees totaling $983,000 are included in other assets in the
accompanying consolidated balance sheets.

Since March 2000, the Company and the banks have entered in a series of
waiver agreements related to the Amended Loan Agreement. These waiver
agreements, which continue through October 31, 2000, waive compliance with
certain financial covenants and permit the Company to borrow funds under the
credit facility subject to certain terms and conditions, including the Company's
agreement to pursue the sale of substantial assets. Because the existing waiver
agreement continues for less than a one-year period, the Company's line of
credit is classified as a current liability at June 30, 2000 in the accompanying
consolidated balance sheets. As of August 31, 2000, the term loan outstanding
was $87,299,000 and the maximum availability under the revolving credit facility
was $25,000,000. In the waiver agreement, effective as of August 26, 2000, it
was agreed among the banks that amounts in excess of $19,500,000 under the
revolving credit facility would be provided by all but one of the banks in the
syndicate. In addition, the waiver agreement provides that any scheduled
interest payments on the term loan and on the revolving loans up to $19,500,000
otherwise due during the period commencing August 31, 2000 through and including
October 30, 2000 shall be deferred until October 31, 2000 but continue to accrue
during such time (See "Risk Factors - Dependence on Loans").

FOREIGN CURRENCY. Certain of the Company's international operations
conduct business in whole or in part in foreign currencies, and this can result
in significant gains or losses as a result of fluctuations in foreign currency
exchange rates. The Company's exposure to the impact of foreign currency
fluctuations increased as a result of the Filofax acquisition because the
acquisition significantly expanded the Company's international operations.
Included in general and administrative expenses in the consolidated statement of
operations are approximately $660,000, $228,000 and $186,000 of net foreign
exchange losses for the years ended June 30, 2000, 1999 and 1998, respectively.

A single currency called the euro was introduced in certain countries
in Europe on January 1, 1999, but will not, at least for the foreseeable future,
be introduced in the United Kingdom. The use of a single currency may affect the
ability of Day Runner and other companies to price their products differently in
various European markets. The Company is evaluating the impact of the single
currency in these markets.

ADEQUACY OF CAPITAL. As a result of its losses in the last two fiscal
years, the Company required waiver agreements to certain terms of the Amended
Loan Agreement. The Company's liquidity is dependent upon its ability to
renegotiate or obtain waivers of terms and conditions of the Amended Loan
Agreement and/or its ability to obtain financing from alternative sources. The
Company is working to renegotiate the Amended Loan Agreement but has no
commitment for any additional financing after the expiration of the existing
waiver agreement on October 31, 2000. There can be no assurance that the Company
will be able to renegotiate its loan facility or obtain financing from other
sources. The failure to obtain future financing would have a material adverse

30
<PAGE>

effect on the Company's business, financial condition, results of operations and
cash flow. (See "Risk Factors - Dependence on Loan" and "Lack of Profitability")

EFFECTS OF INFLATION

The Company believes that inflation has not had a material
effect on its operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The primary market risk inherent in the Company's market sensitive
instruments is the risk of loss resulting from interest rate fluctuations. The
Company's term and revolving credit loans bear interest either at the Company's
election at (i) the higher of the Agent Bank's prime rate or the Federal Funds
Rate plus 50.00 basis points, plus an interest rate margin ranging from 12.50 to
200.00 basis points, or (ii) the applicable euro dollar rate plus an interest
rate margin ranging from 112.50 to 300.00 basis points, depending on the level
of the funded debt ratio at the end of each fiscal quarter. The tables below
provide information as of June 30, 2000 and 1999 about the Company's short and
long-term liability obligations that are sensitive to changes in interest rates,
including principal cash flows by scheduled maturity, weighted-average interest
rate and estimated fair value. The weighted-average interest rates presented are
the actual rates as of June 30, 2000 and 1999.

Because the Company would not have been in compliance with its debt
covenants at June 30, 2000 and due to its recurring losses from operations and
its negative working capital position, it is not practical to calculate the fair
value of its term and revolving credit loans.

The following table lists the Company's loan notes at June 30, 2000
(dollars in thousands):

PRINCIPAL MATURING IN FISCAL YEAR
------------------------------------------------------------------------------------------------
FAIR
2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other debt:
Loan notes $ 194 $ 45 $ 239 $ 239
Average interest rate 5.39%

The following table lists the Company's line of credit and loan notes as of June 30, 1999
(dollars in thousands):

PRINCIPAL MATURING IN FISCAL YEAR
------------------------------------------------------------------------------------------------
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
---- ---- ---- ---- ---- ---------- ----- -----
Term and revolving
credit loans $ 105,317 $105,317 $105,317
Average interest rate 9.30%

Other debt:
Loan notes $ 2,077 $ 251 $ 2,328 $ 2,328
Average interest rate 4.80%

</TABLE>

The Company's future earnings and cash flows relating to market
sensitive instruments are primarily dependent upon prevailing market interest
rate. Based upon the Company's borrowing

31
<PAGE>

mix as of June 30, 2000, a 1% increase or decrease in the interest rates
would increase or decrease pretax earnings and cash flow by approximately
$991,000.

FOREIGN CURRENCY EXPOSURE

The Company's reporting currency is the U.S. dollar, and interest and
principal payments on its long-term liabilities will be in U.S. dollars and
pounds Sterling. A portion of net sales and operating expenses are derived from
sales and operations outside the United States and are incurred in a number of
different currencies. Accordingly, fluctuations in currency exchange rates may
have a significant effect on the Company's results of operations and balance
sheet data. The Company has no significant exposure from financial instruments
which would require quantitative disclosure.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See the Consolidated Financial Statements of the Company and its
subsidiaries included herein and listed in Item 14(a) of this Annual Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.

Inapplicable.

32
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on December 14, 2000, entitled "Election of Directors
-- Compensation of Directors," "Executive Compensation and Other Information,"
"Compensation Committee Report on Executive Compensation" and "Performance
Graph," to be filed with the Commission.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.

The information required by this Item is incorporated by reference to
the section of the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on December 14, 2000, entitled "Common Stock
Ownership of Principal Stockholders and Management," to be filed with the
Commission.

ITEM 13. CERTAIN TRANSACTIONS.

The information required by this Item is incorporated by reference to
the sections of the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on December 14, 2000, entitled "Election of Directors
-- Compensation of Directors" and "Certain Relationships and Related
Transactions," to be filed with the Commission.

33
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.

(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:

1. CONSOLIDATED FINANCIAL STATEMENTS PAGE

Independent Auditors' Report F-1

Consolidated Balance Sheets at June 30,
2000 and 1999 F-2

Consolidated Statements of Operations
for Each of the Three Years in the Period
Ended June 30, 2000 F-3

Consolidated Statements of Stockholders'
(Deficiency) Equity for Each of the Three
Years in the Period Ended June 30, 2000 F-4

Consolidated Statements of Cash Flows for
Each of the Three Years in the Period Ended
June 30, 2000 F-5

Notes to Consolidated Financial Statements F-6

2. FINANCIAL STATEMENT SCHEDULES

Schedule II - Valuation and Qualifying Accounts S-1

Schedules which are not listed above have been omitted
because they are not applicable or the information
required to be set forth therein is included in the
Consolidated Financial Statements or notes thereto.

3. LIST OF EXHIBITS

3.1 Certificate of Incorporation of the
Registrant, as amended effective as of March
18, 1998(1) and as amended effective as of
April 27, 2000

3.2 Bylaws of the Registrant(2)

10.1 Amended and Restated 1986 Stock Option Plan,
including forms of Stock Option Agreements
and Stock Purchase Agreement(3) and
Amendment Nos. 1(4), 2(5), 3(5) and 4(6)
thereto dated July 17, 1992, February 28,
1993, May 10, 1993 and May 12, 1994,
respectively(7)

34
<PAGE>

10.2 1995 Stock Option Plan, including forms of
Stock Option Agreements(8) and Amendment
Nos. 1(9), 2(10), 3(10), 4(11) and 5 thereto
dated October 21, 1996, September 19, 1997,
October 20, 1997, September 15, 1998 and
September 30, 1999, respectively(7)

10.3 Employee Stock Purchase Plan(3) and
Amendment No. 1 thereto dated July 17,
1992(4)

10.4 Day Runner Restated 401(k) Plan effective as
of July 1, 1998 and Trust Agreement
effective as of July 1, 1998 between the
Registrant and New York Life Trust
Company(12) and Amendment No. 1 thereto
effective as of October 1, 1999(7)(13)

10.5 Non-Employee Director Stock Option Plan,
including form of Stock Option
Agreement(7)(11)

10.6 Fiscal 2000 Officer Bonus Plan(7)(13)

10.7 Officer Severance Plan effective as of
February 28, 1993, including form of
Employment Separation Agreement(14), First
Amendment thereto effective as of August 17,
1998(12) and Second Amendment thereto
effective as of July 14, 2000

10.8 Triple Net Lease, as amended, effective as
of March 22, 1991 between Catellus
Development Corporation and the Registrant
and as amended by Lease Amendment dated June
29, 1992(14)

10.9 Triple Net Lease dated July 28, 1992 between
Catellus Development Corporation and the
Registrant(14)

10.10 Koll Business Center Lease dated September
7, 1994 between the Registrant and Koll
Alton Plaza and Aetna Life Insurance Co.(15)

10.11 Standard Commercial Lease Agreement dated as
of July 31, 1996 between System Realty Nine,
Inc. and the Registrant(16)

10.12 Standard Commercial Lease Agreement dated as
of October 1, 1997 between RDC Sales and the
Registrant(12)

10.13 Standard Commercial Lease Agreement dated as
of May 11, 1998 between GPM Real Property
Ltd. And Endow Inc. and the Registrant(12)

35
<PAGE>

10.14 Lease Agreement dated as of April 2, 1999
between Mrs. Refugio Victoria Geffroy De
Flourie and Mr. David Bramzon Stengel and
the Registrant(17)

10.15 Form of Warrant dated August 19, 1997 to
purchase shares of the Registrant's Common
Stock issued to certain officers of the
Company and Schedule of Warrants(7)(19)

10.16 Form of Stock Purchase Agreement dated
August 27, 1997 and Schedule of Sellers(18)

10.17 Form of Warrant dated April 20, 1998 to
purchase shares of the Registrant's Common
Stock issued to the non-employee directors
of the Company and Schedule of
Warrants(7)(12)

10.18 First Amendment to Consulting Agreement
effective April 22, 1999 between the
Registrant and Alan R. Rachlin(7)(17)

10.19 Consulting Agreement effective May 22, 1999
between the Registrant and Mr. Alan R.
Rachlin(7)(17)
10.20 Consulting Agreement effective November 22,
1999 between the Registrant and Mr. Alan R.
Rachlin(13) and letter agreement terminating
such agreement dated September 26, 2000(7)

10.21 Revolving Loan Agreement dated September 23,
1998 between the Registrant, Day Runner UK
plc, Ultima Distribution Inc. and Wells
Fargo Bank, National Association, including
Revolving Line of Credit Note(19)

10.22 Amended and Restated Loan Agreement dated as
of October 12, 1999 among the Registrant,
Day Runner UK plc, Filofax Limited, the
Lenders named therein and Wells Fargo Bank,
National Association, including Revolving
and Term Loan Notes(17)

10.23 Crossroads Letter Agreement dated March 27,
2000 between the Registrant and Crossroads,
LLC and Amendment No. 2 thereto, dated May
15, 2000(7)

21.1 Subsidiaries of the Registrant

23.1 Consent of Deloitte & Touche LLP

27.1 Financial Data Schedule

36
<PAGE>

(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed or required to be filed by the
Registrant during the fourth quarter of the fiscal year ended June 30,
2000.

See the list of Exhibits under Item 14(a)3 of this Annual Report on
Form 10-K.

(d) FINANCIAL STATEMENT SCHEDULES

See the list of Schedules under Item 14(a)2 of this Annual Report on
Form 10-K.

------------------------
(1) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-19835) filed with the Commission on May 15, 1998.
(2) Incorporated by reference to the Registrant's Current Report on Form
8-K (File No. 0-19835) filed with the Commission on August 5, 1993.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-45391) filed with the Commission on
January 30, 1992.
(4) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-53422) filed with the Commission on
October 15, 1992.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-19835) filed with the Commission on August 16, 1993.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-84036) filed with the Commission on
September 15, 1994.
(7) Constitutes a management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of this
Annual Report on Form 10-K.
(8) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-80819) filed with the Commission on
December 22, 1995.
(9) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-20247) filed with the Commission on
January 23, 1997.
(10) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-44627) filed with the Commission on
January 21, 1998.
(11) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-69023) filed with the Commission on
December 16, 1998.
(12) Incorporated by reference to Registrant's Annual Report on Form 10-K
(File No. 0-19835) filed with the Commission on October 1, 1998.
(13) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q (File No. 0-19835) filed with the Commission on November 15, 1999.
(14) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-19835) filed with the Commission on March 31, 1993.
(15) Incorporated by reference to the Registrant's Transition Report on Form
10-K (File No. 0-19835) filed with the Commission on September 27,
1994.
(16) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-19835) filed with the Commission on September 27,
1996.
(17) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-19835) filed with the Commission on October 14, 1999.
(18) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-19835) filed with the Commission on September 29,
1997.
(19) Incorporated by reference to the Registrant's Current Report on Form
8-K (File No. 0-19835) filed with the Commission on September 24, 1998.

37
<PAGE>

SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Fullerton, California.

DAY RUNNER, INC.

By: /s/ John F. Ausura
----------------------------------
John F. Ausura
Chief Executive Officer

Dated: September 27, 2000

Pursuant to the requirements of the Securities Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE

/s/ John F. Ausura Chief Executive Officer September 27, 2000
----------------------- (Principal Executive Officer)
John F. Ausura

/s/ David A. Werner Executive Vice President, September 27, 2000
----------------------- Finance and Chief Financial
David A. Werner Officer (Principal Financial
Officer and Accounting Officer)

/s/ Charles Miller Director September 27, 2000
-----------------------
Charles Miller

/s/ Alan R. Rachlin Director September 27, 2000
-----------------------
Alan R. Rachlin

38
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of Day Runner, Inc.:

We have audited the accompanying consolidated balance sheets of Day Runner,
Inc. and subsidiaries (the "Company") as of June 30, 2000 and 1999, and the
related consolidated statements of operations, stockholders' (deficiency)
equity, and cash flows for each of the three years in the period ended June
30, 2000. Our audits also included the financial statement schedule listed in
the Index at Item 14(a)(2). These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Day Runner, Inc. and subsidiaries
as of June 30, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 2000 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, at June 30, 2000, the Company would not have
been in compliance with certain financial covenants of its loan agreement had
the lenders not temporarily waived the covenants. The Company's difficulties in
meeting its loan agreement covenants and financing needs, its recurring losses
from operations and its negative working capital position discussed in Note 1
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/ Deloitte & Touche LLP
Los Angeles, California
September 26, 2000

F-1

<PAGE>

DAY RUNNER, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS)

ASSETS

JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 3,960 $ 9,132
Accounts receivable (less allowance for doubtful accounts and sales returns
and other allowances of $8,391 and $11,481 at
June 30, 2000 and 1999, respectively)....................................... 18,563 43,215
Inventories.................................................................... 34,046 42,361
Prepaid expenses and other current assets...................................... 6,098 4,506
Income taxes receivable........................................................ 1,823 434
Deferred income taxes.......................................................... 11,189
----------- -----------
Total current assets........................................................ 64,490 110,837

Property and equipment, net ....................................................... 10,972 17,851
Goodwill and other intangible assets (net of accumulated amortization
of $4,042 and $1,934 at June 30, 2000 and 1999, respectively).................. 20,422 85,830
Other assets (net of accumulated amortization of $727 and $410 at June 30, 2000
and 1999, respectively)....................................................... 1,210 1,793
----------- -----------
TOTAL ............................................................................ $ 97,094 $ 216,311
=========== ===========

LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY

Current liabilities:
Line of credit................................................................. $ 99,077
Accounts payable............................................................... 12,373 $ 18,722
Accrued expenses............................................................... 21,725 19,547
Current portion of loan notes.................................................. 194 2,077
----------- -----------
Total current liabilities................................................... 133,369 40,346
----------- -----------

Long-term liabilities:
Line of credit................................................................. 105,317
Loan notes..................................................................... 45 251
----------- -----------
Total long-term liabilities........................................................ 45 105,568
----------- -----------

Commitments and contingencies

Stockholders' (deficiency) 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; 2,537,719
shares issued and 2,392,860 shares outstanding at June 30, 2000; 2,537,719
shares issued and 2,380,147 shares outstanding at June 30, 1999)............. 2 2
Additional paid-in capital..................................................... 19,181 20,010
(Accumulated deficit) retained earnings........................................ (45,559) 61,078
Accumulated other comprehensive income......................................... 833 958
Treasury stock - At cost (144,859 and 157,572 shares at June 30, 2000 and
1999, respectively).......................................................... (10,777) (11,651)
----------- -----------
Total stockholders' (deficiency) equity..................................... (36,320) 70,397
----------- -----------
TOTAL ............................................................................ $ 97,094 $ 216,311
=========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-2

<PAGE>

DAY RUNNER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEARS ENDED JUNE 30,
2000 1999 1998
--------- ---------- ---------
<S> <C> <C> <C>
Net sales................................................... $ 171,487 $ 196,212 $ 167,841
Cost of goods sold.......................................... 103,274 108,087 80,663
--------- ---------- ---------
Gross profit................................................ 68,213 88,125 87,178
--------- ---------- ---------
Operating expenses:
Selling, marketing and distribution..................... 61,213 62,180 43,193
General and administrative.............................. 31,166 26,445 18,416
Restructuring and impairment charges.................... 66,214

Costs related to activities associated with the
Filofax acquisition.................................. 1,072
--------- ---------- ---------
Total operating expenses............................. 158,593 89,697 61,609
--------- ---------- ---------
(Loss) income from operations............................... (90,380) (1,572) 25,569
--------- ---------- ---------
Interest expense (income):
Interest income......................................... (306) (340) (390)
Interest expense........................................ 11,519 5,555 218
--------- ---------- ---------
Net interest expense (income)........................ 11,213 5,215 (172)
--------- ---------- ---------
(Loss) income before provision (benefit) for income taxes... (101,593) (6,787) 25,741
Provision (benefit) for income taxes........................ 5,044 (2,789) 9,833
--------- ---------- ---------
Net (loss) income........................................... $(106,637) $ (3,998) $ 15,908
========= ========== =========
(Loss) earnings per common share:
Basic................................................ $ (44.79) $ (1.68) $ 6.90
========= ========== =========
Diluted.............................................. $ (44.79) $ (1.68) $ 6.35
========= ========== =========

Weighted-average number of common shares outstanding:
Basic................................................ 2,381 2,379 2,307
========= ========== =========
Diluted.............................................. 2,381 2,379 2,505
========= ========== =========

</TABLE>

See accompanying notes to consolidated financial statements.

F-3

<PAGE>

DAY RUNNER, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY

(DOLLARS IN THOUSANDS)

(ACCUMULATED ACCUMULATED
ADDITIONAL DEFICIT) OTHER COMPREHENSIVE
COMMON STOCK PAID-IN RETAINED COMPREHENSIVE INCOME TREASURY STOCK
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) SHARES AMOUNT
--------- ------- ---------- ---------- -------------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1997.............. 2,340,532 $ 2 $ 23,233 $ 49,168 $ 92 (197,187) $(13,010)
Treasury stock..................... (139,118) (139,118) (11,564)
Exercise of warrants............... 55,600 (3,389) 55,600 4,063
Exercise of options................ 134,106 (5,218) 134,106 9,799
Tax benefit of options............. 5,207
Compensation cost associated with
warrant grant.................. 232
Comprehensive income:
Net income...................... 15,908 $ 15,908
Other comprehensive income -
foreign currency translation 10 10
adjustments.................. ------------
Comprehensive income............... $ 15,918
--------- ------- ---------- ---------- -------------- ============ --------- --------
Balance, June 30, 1998............. 2,391,120 2 20,065 65,076 102 (146,599) (10,712)
Treasury stock..................... (19,200) (19,200) (1,490)
Exercise of options................ 8,227 (146) 8,227 551
Tax benefit of options............. 16
Compensation cost associated with
warrant grant.................. 75
Comprehensive loss:
Net loss........................ (3,998) $ (3,998)
Other comprehensive loss -
foreign currency translation
adjustments.................. 856 856
------------
Comprehensive loss................. $ (3,142)
--------- ------- ---------- ---------- -------------- ============ --------- --------
Balance, June 30, 1999............. 2,380,147 2 20,010 61,078 958 (157,572) (11,651)
Exercise of options................ 12,713 (829) 12,713 874
Comprehensive loss:
Net loss........................ (106,637) $ (106,637)
Other comprehensive loss -
foreign currency translation
adjustments.................. (125) (125)
------------
Comprehensive loss................. $ (106,762)
--------- ------- ---------- ---------- -------------- ============ --------- --------
Balance, June 30, 2000............. 2,392,860 $ 2 $ 19,181 $ (45,559) $ 833 (144,859) $(10,777)
========= ======= ========== ========== ============== ========= ========

</TABLE>

See accompanying notes to consolidated financial statements.
F-4

<PAGE>

DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED JUNE 30,
2000 1999 1998
--------- ---------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income....................................... $(106,637) $ (3,998) $ 15,908
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization......................... 13,104 10,240 5,517
Impairment charges.................................... 61,550
Provision for doubtful accounts and sales returns
and other allowances.............................. 21,963 19,039 9,799
Loss on disposal of property and equipment............ 2,097 199
Utilization of barter credits......................... 100
Compensation expense related to issuance of warrants.. 75 233
Deferred income taxes................................. 11,189 (3,971) (832)
Changes in operating assets and liabilities,
net of acquisition of businesses:
Accounts receivable.................................. 2,283 (15,268) (17,899)
Inventories.......................................... 7,496 7,432 (11,050)
Prepaid expenses and other current assets............ (238) (813) 595
Income taxes receivable.............................. (1,295) 968 2,087
Accounts payable..................................... (6,113) 4,508 (725)
Accrued expenses..................................... 2,217 (1,831) 3,697
Income taxes payable................................. (453)
--------- ---------- ---------
Net cash provided by operating activities......... 7,616 16,580 6,977
--------- ---------- ---------
Cash flows from investing activities:
Acquisition of businesses............................... (88,017) (4,626)
Proceeds on disposition of property and equipment....... 584
Acquisition of property and equipment................... (4,725) (10,495) (7,175)
Other assets............................................ (89) (1) (110)
--------- ---------- ---------
Net cash used in investing activities............... (4,230) (98,513) (11,911)
--------- ---------- ---------

Cash flows from financing activities:
Net (repayments) borrowings under lines of credit....... (5,201) 89,924 (338)
Financing fees.......................................... (1,710) (1,200)
Repayment of loan notes................................. (2,034)
Repayment under long-term liabilities................... (990)
Exercise of warrants.................................... 673
Exercise of options..................................... 44 406 4,580
Repurchase of common stock.............................. (1,490) (11,564)
--------- ---------- ---------
Net cash (used in) provided by financing activities. (8,901) 87,640 (7,639)
--------- ---------- ---------

Effect of exchange rate changes on cash and cash equivalents... 343 502 (54)
--------- ---------- ---------
Net (decrease) increase in cash and cash equivalents........ (5,172) 6,209 (12,627)
Cash and cash equivalents, beginning of year................ 9,132 2,923 15,550
--------- ---------- ---------

Cash and cash equivalents, end of year...................... $ 3,960 $ 9,132 $ 2,923
========= ========== =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

DAY RUNNER, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Day Runner, Inc. and subsidiaries (the "Company") develop,
manufacture, and market paper-based organizers for the retail market. The
Company also develops, manufactures and markets a number of related organizing
products, including telephone/address books, business accessories, products
for students and organizing and other wallboards. A substantial portion of the
Company's sales is to office products and mass market retailers throughout the
United States and to a variety of retailers abroad. The Company grants credit
to substantially all of its customers.

As discussed in Note 7, at June 30, 2000, the Company would not have
been in compliance with certain financial covenants of its loan agreement had
the lenders not temporarily waived the covenants. The Company's difficulties
in meeting its loan agreement covenants and financing needs, its recurring
losses from operations and its negative working capital position raise
substantial doubt about its ability to continue as a going concern. The
Company is attempting to renegotiate the terms and covenants of the loan
agreement but has no commitment for any additional financing after the
expiration of the existing waiver agreement on October 31, 2000. The Company's
continued existence is dependent upon several factors including the Company's
ability to renegotiate the terms and covenants of the loan agreement.

F-6

<PAGE>

CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

CASH EQUIVALENTS - The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents.

CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to concentration of credit risk consist principally of
cash equivalents and accounts receivable.

In fiscal 2000, sales to four customers accounted for 17%, 13%, 11%
and 10% of the Company's net sales. In fiscal 1999, sales to four customers
accounted for 25%, 13%, 11% and 11% of the Company's net sales. In fiscal
1998, sales to four customers accounted for 28%, 16%, 15% and 14% of the
Company's net sales.

At June 30, 2000, gross accounts receivables from three customers
accounted for 19%, 15% and 12% of the Company's gross accounts receivables. At
June 30, 1999, gross accounts receivables from two customers accounted for 29%
and 13% of the Company's gross accounts receivables.

FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying values of cash and
cash equivalents, accounts receivable and accounts payable approximate fair
value due to the short-term maturity of these instruments.

Because the Company would not have been in compliance with its
debt covenants at June 30, 2000 and due to its recurring losses from
operations and its negative working capital position, it is not practical to
calculate the fair value of its term and revolving credit loans.

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided for over the estimated useful lives of the respective
assets, using the straight-line method. Estimated

F-7

<PAGE>

useful lives range from three to ten years. Leasehold improvements are
amortized using the straight-line method over the lesser of the estimated
useful life of the asset or the life of the lease.

GOODWILL AND OTHER INTANGIBLE ASSETS - Goodwill represents the excess
of the purchase price over the fair value of net assets acquired in business
combinations and is amortized using the straight-line method over periods
ranging from 20 to 35 years. Other intangible assets consist of trade names
acquired in business combinations and are amortized using the straight-line
method over periods ranging from 15 to 40 years. During fiscal 2000, the
Company recorded an impairment charge on its goodwill and other intangible
assets (see Note 10).

OTHER ASSETS - Other assets primarily consists of financing fees and
a non-competition agreement. Financing fees represent fees in connection with
a loan agreement and are amortized using the straight-line method over the
remaining term of the loan agreement (see Note 7).

IMPAIRMENT OF LONG-LIVED ASSETS - The Company evaluates long-lived
assets for impairment whenever events or changes in circumstances indicate
that the carrying value of an asset may not be recoverable. If the estimated
future cash flows (undiscounted and without interest charges) are less than
the carrying value, a write-down would be recorded to reduce the related
carrying value of the asset to its estimated fair value. During fiscal 2000,
the Company recorded an impairment charge on its goodwill and other intangible
assets and other assets (see Note 10).

INCOME TAXES - Income taxes are recognized for (a) the amount of
income taxes payable or refundable for the current period and (b) deferred
income tax assets and liabilities for the future tax consequences of events
that have been recognized in the Company's financial statements or income tax
returns. The effects of income taxes are measured based on enacted tax laws
and rates. A valuation allowance is established, when necessary, to reduce
deferred income tax assets to the amount expected to be realized.

FOREIGN CURRENCY TRANSLATION - Balance sheet accounts for foreign
operations are translated at the exchange rate at the balance sheet date, and
statement of operations accounts are translated at the weighted-average
exchange rate for the year. Resulting translation adjustments are included in
accumulated other comprehensive income in the accompanying statements of
stockholders' (deficiency) equity. Net transaction losses included in general
and administrative expenses were approximately $660,000, $228,000 and $186,000
during the years ended June 30, 2000, 1999 and 1998, respectively.

NET SALES - Revenue is recognized upon shipment of product to the
customer, with allowances for estimated returns, rebates and other allowances.

NEW ACCOUNTING PRONOUNCEMENT - In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS")
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS
No. 133, which was amended by SFAS No. 137 and SFAS No. 138, is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000, which
will be the fiscal quarter ending September 30, 2000 for the Company. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
collectively referred to as derivatives, and for hedging activities. SFAS No.
133 requires the recognition of all derivatives as either assets or
liabilities in the statement of financial position and the measurement of
those instruments at fair value. The Company intends to adopt SFAS 133
effective July 1, 2000. Management does not expect the adoption of SFAS 133 to
have a significant impact on the financial position or results of operations
of the Company because the Company does not have significant derivative
activity.

F-8

<PAGE>

RECLASSIFICATIONS - Certain reclassifications were made to the prior
year financial statements to conform to the current year presentation.

2. ACQUISITIONS AND DISPOSITIONS

On October 30, 1998, the Company announced that it had control of a
majority of the outstanding shares of Filofax Group plc ("Filofax") as a
result of its previously announced cash tender offer for Filofax stock. The
Company acquired all the remaining outstanding shares of Filofax on December
26, 1998. This acquisition was accounted for under the purchase method of
accounting.

The total purchase price of $92,803,000, which includes costs of the
transaction, was paid in cash and loan notes (see Note 8). The Company
borrowed the cash portion of this amount under a loan agreement with a group
of banks (see Note 7).

On July 29, 1997, the Company purchased the stock of Ultima
Distribution, Inc. ("Ultima"), which was the distributor of the Company's
products in Canada, for approximately $130,000. The Company also entered into
non-competition agreements with certain of Ultima's former stockholders (see
Note 10).

On February 1, 1998, the Company purchased the stock of Timeposters,
Inc. ("Timeposters"), a Canadian developer, manufacturer and marketer of
planning and presentation products, including flexible planners, planning
boards, other wall boards and easels, and entered into certain non-competition
agreements with the founders, who continued to work for the Company. The
purchase price was approximately $2,546,000. In June 1998, the Company
combined Timeposters' manufacturing and distribution with Ultima's operations
and renamed that subsidiary Day Runner Canada, Inc. (see Note 10).

On October 1, 1997, the Company purchased substantially all of the
operating assets of Ram Manufacturing, Inc. ("Ram"), an Arkansas-based
developer, manufacturer and marketer of wallboards. The purchase price was
approximately $2,400,000. The Company also assumed certain liabilities
totaling approximately $3,000,000. In addition, contingent payments could
have been paid through December 31, 2000, based upon Ram's operating
performance during that period. In June 2000, the Company closed Ram and on
July 3, 2000 sold the majority of the operating assets of Ram for $456,000.
The Company recorded a restructuring charge relating to the exit of this
activity of $4,432,000, of which $2,539,000 is recorded in cost of sales and
$1,893,000 is recorded in restructuring and impairment charges in the
accompanying consolidated statements of operations for the year ended June
30, 2000 (see Note 10). This sale also terminated any obligation for
contingent payments.

F-9

<PAGE>

3. INVENTORIES

Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out basis. Inventories consists of the
following (in thousands):

Raw materials....................................... $ 16,454 $ 12,026
Work in process..................................... 2,016 2,138
Finished goods...................................... 15,576 28,197
--------- --------
Total........................... $ 34,046 $ 42,361
========= ========
</TABLE>

As part of the Company's restructuring plan that it announced in
December 1999, the Company discontinued approximately 600 products. This
product reduction resulted in a charge to cost of sales of approximately
$4,278,000 during the year ended June 30, 2000 (see Note 10).

4. PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

Displays............................................ $ 6,492 $ 11,653
Data processing equipment and software.............. 14,678 14,697
Machinery and equipment............................. 8,486 11,915
Leasehold improvements.............................. 3,395 5,106
Vehicles............................................ 493 715
-------- --------
Total........................... 33,544 44,086
Accumulated depreciation and amortization........... (22,572) (26,235)
-------- --------
Property and equipment - net........................ $ 10,972 $ 17,851
======== ========
</TABLE>

5. FINANCIAL INSTRUMENTS

On September 29, 1998, the Company entered into a call option in order
to limit its foreign exchange risk on the purchase of Filofax shares, which
were paid for in pounds Sterling. The Company's objective was to protect
itself from the risk that the purchase price of the Filofax shares would be
adversely affected by changes in exchange rates. During the year ended June
30, 1999, the Company expensed $765,000 to operating expenses for the call
option. At June 30, 2000 and 1999, the Company had not entered into any
additional foreign currency instruments. The Company does not trade in
financial instruments nor does it enter into such contracts for speculative
purposes.

F-10
<PAGE>

6. ACCRUED EXPENSES

Accrued expenses consists of the following (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
2000 1999
--------- ---------
<S> <C> <C>
Accrued sales and promotion costs.......... $ 13,006 $ 9,576
Accrued payroll and related costs.......... 4,028 5,366
Accrued severance and facilities closure
costs (Note 10)........................... 1,220
Other...................................... 3,471 4,605
--------- ---------
Total.................. $ 21,725 $ 19,547
========= =========
</TABLE>

7. LINES OF CREDIT

On September 23, 1998, the Company entered into a $160,000,000 Revolving
Loan Agreement (the "Loan Agreement") with Wells Fargo Bank, National
Association ("Wells Fargo"). Effective November 24, 1998, the amount was
voluntarily reduced to $145,000,000 and unamortized financing fees of
approximately $84,000 were charged to interest expense. The loan facility was
syndicated with a group of banks in December 1998. During the year ended June
30, 1999, under the terms of the Loan Agreement, the Company paid Wells Fargo a
financing fee of $1,200,000, $205,000 of which was charged to interest expense
during in the fiscal year ended June 30, 1999. The remaining balance of $955,000
was included in other assets at June 30, 1999 and charged to interest expense
during the fiscal year ended June 30, 2000.

F-11
<PAGE>

stock repurchases and certain transactions with affiliates. The Amended Loan
Agreement permits up to $1,500,000 overdraft indebtedness (net of cash
deposits) for Filofax and its subsidiaries.

8. LOAN NOTES

In November 1998, loan notes in the amount of L1,477,000 (US
$2,328,000) were issued in connection with the Filofax acquisition, are
unsecured obligations of the Company's U.K. subsidiary and bear interest at
LIBOR (6.39% at June 30, 2000) less 1%. Interest on the Loan Notes is paid
annually in arrears beginning September 30, 1999. The Loan Notes are redeemable,
in whole or in part, at the holder's option on each interest payment date.
Unless they have previously been redeemed, all Loan Notes will be redeemed on
September 30, 2003. As of June 30, 2000, L1,318,000 (US $1,990,000) of the Loan
Notes had been redeemed. As of September 7, 2000, an additional L129,000 (US
$194,000) of the Loan Notes had been called and will be redeemed on September
30, 2000.

F-12
<PAGE>

9. COMMITMENTS

The Company has five noncancelable operating leases for its principal
operating facilities. The leases expire through 2006. The leases include renewal
options that, if exercised, would extend the lease terms through 2016, and the
leases provide for increases in future minimum annual rental payments based on
defined increases in the Consumer Price Index, subject to certain minimum
increases. The Company has entered into a sublease agreement on one of its
facilities which expires in August 2001, the same date the Company's operating
lease expires with its landlord. The Company also has entered into leases for
certain production, warehouse, computer, and office equipment under
noncancelable operating leases that expire through June 2006.

Future minimum lease payments under the non-cancelable operating leases
at June 30, 2000 are summarized as follows (in thousands):

YEARS ENDING JUNE 30,
---------------------
<S> <C>
2001............................................ $ 5,077
2002............................................ 4,138
2003............................................ 3,621
2004............................................ 2,854
2005............................................ 2,362
Thereafter...................................... 2,316
---------
Total future minimum lease payments (not
reduced by sublease rentals of $259).......... $ 20,368
=========

</TABLE>

Rent expense totaled $6,010,000, $5,626,000 and $4,025,000 for the
years ended June 30, 2000, 1999 and 1998, respectively. Included in rent expense
is $240,000, $240,000 and $180,000 for the years ended June 30, 2000, 1999 and
1998, respectively related to rent amounts paid to a related party.

In March 2000, the Company entered into a Letter Agreement ("Letter
Agreement") with a consulting firm for certain executive services. As amended in
May 2000, the Letter Agreement establishes a monthly fixed fee of $110,000 for
such services and the appointment of a principal from the consulting firm as
interim Chief Executive Officer of the Company. The term of the amended Letter
Agreement extends through June 30, 2001. In addition, certain success fees will
be payable to the consulting firm based on the Company's achievement of the
following financial ratios during the year ending June 30, 2001. Success fees of
$300,000 are payable by the Company if earnings before income taxes,
depreciation and amortization ("EBITDA") exceeds $1,919,000, in addition to 30%
of EBITDA exceeding $1,919,000, not to exceed total success fees of $1,500,000.
Additionally, the Company shall pay contingent fees based on a percentage of
dollar savings generated from various consulting projects.

In November 1999, the Company entered into a license agreement
("License Agreement") with a licensor whereby the Company may manufacture and
sell certain merchandise articles using or based upon material which is a
registered trademark of the corporation. The License Agreement commences July 1,
2000 and expires July 1, 2003. The Company will pay the licensor 13% of net
sales of licensed articles, as defined. The license fees payable total
$1,800,000 in aggregate during the term of the License Agreement. An advance
minimum royalty of $600,000 was paid during fiscal year 2000 and is recorded in
prepaid and other current assets on the accompanying consolidated balance
sheets.

F-13
<PAGE>

Minimum aggregate licensing fees due as of July 1, 2001 and 2002 total
$1,200,000 and $1,800,000, respectively. The license agreement will terminate
in the event of a breach of contract or termination of the business.

During the three years ended June 30, 2000, the Company has entered
into consulting agreements for certain executive services with a member of the
Board of Directors and Audit Committee. The last agreement, which was entered
into in November 1999, was canceled in September 2000. Total amounts paid to the
director under the consulting agreement totaled $87,000 and $75,000 during the
years ended June 30, 2000 and 1999, respectively. No amounts were paid to the
director under the consulting agreement during fiscal 1998.

10. RESTRUCTURING AND IMPAIRMENT CHARGES AND RELATED ACCRUALS

For a number of quarters, the Company's results have been adversely
affected by changes in supply chain management practices of the large U.S.
retailers that account for the majority of the Company's U.S. sales. The Company
believes that the U.S. retail environment has changed and that large U.S.
retailers will continue to emphasize minimizing on-hand inventories and
increasing inventory turns. As a result of this, on December 29, 1999, the
Company announced that it was developing a plan to restructure its operations to
substantially reduce costs.

As part of this restructuring plan, the Company (i) reduced headcount;
(ii) closed its Irvine, California headquarters and consolidated those
activities into its Fullerton, California center; (iii) closed its manufacturing
facility in the United Kingdom and moved those activities to subcontractors;
(iv) closed its Little Rock, Arkansas manufacturing plant and sold certain of
the Ram operating assets (see Note 2); (v) retained Crossroads, LLC, an interim
management firm; (vi) discontinued approximately 600 products and (vii) in
August 2000, closed its Australian subsidiary and began distributing its
products through a third party distributor in Australia. The Company plans to
continue its restructuring plan through fiscal 2001.

As a result of the restructuring activities in fiscal 2000, the Company
recorded $13,895,000 in restructuring charges, which consist of $7,286,000 in
facilities closure costs and the related write down of inventories, $4,278,000
in product line reduction costs and $2,331,000 in severance costs. Of the
restructuring charges, $4,664,000 is included in restructuring and impairment
charges and $9,231,000 is included in cost of goods sold in the accompanying
consolidated statements of operations for the year ended June 30, 2000. During
the fourth quarter of fiscal 2000, $10,865,000 of these restructuring charges
were recorded. Included in accrued expenses at June 30, 2000 in the accompanying
consolidated balance sheets is $1,220,000 of restructuring costs, of which
$1,064,000 represents severance costs. The severance costs recorded during
fiscal 2000 were the result of 193 terminations. The primary portion of the
severance costs consists of payments to five former officers.

In addition, during the fourth quarter of fiscal 2000, the Company
decided to pursue the sale of substantial assets. As a result, the Company
performed an impairment analysis and concluded that the carrying value of
certain of these assets was in excess of their fair value. Fair value was
estimated based on estimated proceeds less related selling costs. The proceeds
were estimated using a variety of assumptions, and there can be no assurance
that the actual proceeds will not differ significantly from these estimates. The
amount in excess of fair value of $59,337,000 is recorded in restructuring and
impairment charges in the accompanying consolidated statements of operations for
the year ended June 30, 2000.

F-14
<PAGE>

Operations that may be eliminated due to the Company's pursuit of the
sale of certain assets, as part of the restructuring of operations, which are
included in the consolidated financial statements as of and during the years
ended June 30, are as follows (in thousands):

<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <C>
Net sales $ 60,333 $ 35,848
(Loss) income from operations (58,735) 5,904
Working capital 10,129 7,568
Long-term assets 20,765 83,838
</TABLE>

There would be no impact on amounts reported in fiscal 1998.

Finally, the Company performed an impairment analysis and concluded
that the future undiscounted cash flows were below the carrying value of certain
of its related long-lived assets that it intends to retain. Accordingly, the
Company recorded a noncash impairment loss to adjust the carrying values of
goodwill and other intangible assets and other assets to their estimated fair
values, which were determined based on anticipated future cash flows discounted
at a rate commensurate with the risks involved. Included in restructuring and
impairment charges in the accompanying consolidated statements of operations is
$2,213,000, of which $1,830,000 relates to goodwill and other intangible assets
and $383,000 relates to a non-compete agreement.

11. INCOME TAXES

The components of (loss) income before provision (benefit) for income
taxes are as follows (in thousands):

YEARS ENDED JUNE 30,
2000 1999 1998
------------- ---------- ----------
<S> <C> <C> <C>
United States......................... $ (96,424) $ (9,704) $ 22,856
Other................................. (5,169) 2,917 2,885
------------- ---------- ----------
Total.............................. $ (101,593) $ (6,787) $ 25,741
============= =========== ==========

The provision (benefit) for income taxes consists of the following (in
thousands):

YEARS ENDED JUNE 30,
2000 1999 1998
------------- ---------- ----------
Current:
Federal............................... $ (7,595) $ (310) $ 8,565
State................................. 512 (8) 1,477
Foreign............................... 938 1,500 623
------------- ---------- ----------
Total current........................... (6,145) 1,182 10,665
------------- ---------- ----------
Deferred:
Federal............................... 10,067 (3,821) (920)
State................................. 1,122 (150) 88
------------- ---------- ----------
Total deferred.......................... 11,189 (3,971) (832)
------------- ---------- ----------
Total provision (benefit)
for income taxes...................... $ 5,044 $ (2,789) $ 9,833
============= ========== ==========
</TABLE>

F-15
<PAGE>

Differences between the total income tax provision (benefit) and the
amount computed by applying the statutory federal income tax rate to (loss)
income before provision (benefit) for income taxes are as follows (in
thousands):

YEARS ENDED JUNE 30,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Computed tax expense using the
statutory federal income tax rate..... $ (35,558) $ (2,375) $ 9,009
(Decrease) increase in taxes arising
from:
Change in valuation allowance......... 43,984
State taxes, net of
federal benefit.................... (6,938) (102) 769
Foreign earnings taxed at other
than federal statutory rate......... 2,747 (79) (387)
Cumulative undistributed
earnings of foreign subsidiaries
at federal statutory rates, net
of foreign tax credit
carryforward amounts................ 1,491
Foreign tax credit.................... (634) (347)
Other................................. (48) 114 442
----------- ----------- -----------
Total................................. $ 5,044 $ (2,789) $ 9,833
=========== =========== ===========
</TABLE>

During the fourth quarter of fiscal 2000, the Company recorded a
$43,984,000 valuation allowance against its deferred tax assets. Total deferred
income tax assets and liabilities consist of the following (in thousands):

JUNE 30,
2000 1999
---------------- ----------------
<S> <C> <C>
Deferred income tax assets:
Restructuring and impairment charges $ 27,126
Net operating loss carryforward 9,128 $ 3,384
Allowance for sales returns 1,637 2,433
Inventory obsolescence reserve 3,051 1,988
Allowance for doubtful accounts 1,042 1,041
Sales programs 478 827
Foreign tax credit 2,654 360
Depreciation and amortization 443
Other 1,935 947
---------------- ----------------
Total deferred income tax assets 47,051 11,423
---------------- ----------------
Deferred income tax liabilities :
Depreciation and amortization (2,161)
Other (906) (234)
---------------- ----------------
Total deferred income tax liabilities (3,067) (234)
---------------- ----------------
Subtotal 43,984 11,189
Valuation allowances (43,984) 0
---------------- ----------------
Total $ 0 $ 11,189
================ ================
</TABLE>

F-16
<PAGE>

At June 30, 2000, there were no cumulative undistributed earnings of
foreign subsidiaries for which no deferred income taxes have been provided. At
June 30, 1999, cumulative undistributed earnings of foreign subsidiaries for
which no deferred income taxes have been provided approximated $6,942,000. The
additional income taxes payable on the earnings of foreign subsidiaries, when
remitted, would be offset by U.S. income tax credits for foreign taxes paid.

At June 30, 2000, the Company has a federal net operating loss
carryforward of $18,493,000. Such carryforward amount will expire in the year
ended June 30, 2020. In addition, as of June 30, 2000 the Company has a state
net operating loss carryforward of $26,686,000 that will expire between the
years ended June 30, 2004 and June 30, 2020.

12. EARNINGS PER SHARE

Basic earnings per share are computed by dividing net (loss) income by
the weighted-average number of common shares outstanding for the year. Diluted
earnings per share are computed by dividing net (loss) income by the sum of the
weighted-average number of common shares outstanding for the period plus the
assumed exercise of all dilutive securities. The following reconciles the
numerator and denominator of the basic and diluted per share computations for
net (loss) income (in thousands, except per share amounts):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 1999 1998
------------ ------------- -------------
<S> <C> <C> <C>
NET (LOSS) INCOME $ (106,637) $ (3,998) $ 15,908
============ ============= =============
BASIC WEIGHTED-AVERAGE SHARES
Weighted-average number of
common shares outstanding 2,381 2,379 2,307

Effect of dilutive securities
Additional shares from the
assumed exercise of
options and warrants 618
Shares assumed to be repurchased
under the treasury stock method (420)
------------ ------------- -------------

DILUTED WEIGHTED-AVERAGE SHARES
Weighted-average number of
common shares outstanding and
common share equivalents 2,381 2,379 2,505
============ ============= =============

(LOSS) EARNINGS PER SHARE:

Basic $ (44.79) $ (1.68) $ 6.90
============ ============= =============
Diluted $ (44.79) $ (1.68) $ 6.35
============ ============= =============
</TABLE>

For the years ended June 30, 2000 there were no dilutive securities
included as potential common stock equivalents as they are all antidilutive.
During the year ended June 30, 1999, dilutive securities equivalent to 230,700
shares are not included as potential common shares because they are
antidilutive. During the year ended June 30, 1998, there were no antidilutive
common share equivalents.

F-17
<PAGE>

13. STOCK OPTION PLANS

The Company authorized the issuance of up to 690,000 shares of the
Company's common stock under its Amended and Restated 1986 Stock Option Plan.
Such options typically become exercisable ratably over a period of five years
from the date of issuance and have terms of six to ten years. As of June 30,
2000, options covering 484,421 shares have been exercised and options covering
144,779 shares remain outstanding. No additional options will be granted under
this plan as it expired in fiscal 1996.

Under the Company's 1995 Stock Option Plan (the "Plan"), an aggregate
of 480,000 shares of common stock is reserved for issuance to key employees,
including officers and directors of the Company. Both incentive stock options
and nonstatutory stock options are authorized for issuance under the Plan. The
terms of the options are determined at the time of grant. Pursuant to the
Plan, the per share option price of incentive stock options may not be less
than the fair market value of a share of common stock at the date of grant,
and no options may be granted after December 2005. The outstanding options
typically become exercisable over a period of five years from the date of
issuance and have terms of up to ten years.

During the years ended June 30, 1999 and 1998, certain officers and
employees exercised options to purchase an additional 3,408 and 130,283
shares, respectively, of the Company's common stock for an aggregate of
$129,000 and $4,278,000, respectively (see Note 15). No options were exercised
during the year ended June 30, 2000.

In connection with the exercise of nonstatutory stock options and the
sale of shares purchased pursuant to incentive stock options, the Company
realized a reduction in its current tax liability during the years ended June
30, 1999 and 1998. This reduction totaled $16,000 and $5,207,000,
respectively, and was credited to additional paid-in capital in the
accompanying consolidated statements of stockholders' (deficiency) equity. As
there were no exercises of stock options during the year ended June 30, 2000,
the Company did not realize a reduction in its current tax liability.

A summary of option activity is as follows:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- -------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
------------ -------- ----------- ---------
<S> <C> <C> <C> <C>
Outstanding, July 1, 1997........... 418,320 $41.00
Granted.......................... 113,000 85.50
Exercised........................ (130,283) 32.85
------------
Outstanding, June 30, 1998.......... 401,037 56.20 186,730 $43.05
Granted.......................... 88,800 94.70
Exercised........................ (3,408) 37.75
Cancelled........................ (23,300) 82.05
------------
Outstanding, June 30, 1999.......... 463,129 62.40 268,786 49.70
Granted.......................... 229,000 23.76
Cancelled........................ (171,900) 59.19
------------
Outstanding, June 30, 2000.......... 520,229 46.47 277,486 52.86
============
</TABLE>

At June 30, 2000, the range of option prices for shares under
options and the weighted-average remaining contractual life is as follows:

F-18

<PAGE>

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED-
AVERAGE REMAINING AVERAGE
NUMBER OF EXERCISE CONTRACTUAL NUMBER EXERCISE
RANGE OF OPTION EXERCISE PRICE OPTIONS PRICE LIFE EXERCISABLE PRICE
------------------------------ ------------ -------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 6.250 - $9.688 122,650 $ 9.674 9.55 6,725 $ 9.688
25.625 - 48.750 213,529 37.691 5.53 155,086 35.509
65.000 - 103.125 184,050 81.166 7.05 115,675 78.624
</TABLE>

The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation cost has been recognized for stock option awards. Had
compensation cost for the Company's stock option plans and warrants been
determined based on the fair value at the grant dates for awards under those
plans as required by SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
the Company's net (loss) income and (loss) earnings per common and common
equivalent shares would have been reduced to the pro forma amounts indicated
below (see Notes 14 and 16):

YEARS ENDED JUNE 30,
2000 1999 1998
---------- ----------- --------
<S> <C> <C> <C>
Net (loss) income:
As reported $(106,637) $(3,998) $15,908
Pro forma $(108,724) $(6,694) $12,617

(Loss) earnings per common and common equivalent shares:
As reported:
Basic $ (44.79) $ (1.68) $ 6.90
Diluted $ (44.79) $ (1.68) $ 6.35

Pro forma:
Basic $ (45.66) $ (2.81) $ 5.47
Diluted $ (45.66) $ (2.81) $ 5.04

</TABLE>

The fair values of the options granted under the plans during fiscal
2000, 1999 and 1998 were estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted-average fair values of the
options at the date of grant were $17.84, $51.90 and $45.15 during fiscal
2000, 1999 and 1998, respectively. The following weighted-average assumptions
for fiscal 2000, 1999 and 1998, respectively, were used: no dividend yield;
volatility of 99.00%, 60.00% and 57.21%; risk-free interest rates of 6.305%,
5.245% and 5.877%; and expected option lives of 4.75, 4.85 and 4.74 years. Pro
forma compensation cost of options granted under the Employee Stock Purchase
Plan is measured based on the discount from market value (see Note 15).

14. NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN

In November 1998, the Company authorized the issuance of up to 30,000
shares of common stock under a non-employee director stock option plan. The
terms of the options are determined at the time of grant. No options may be
granted after November 22, 2008. Options typically become exercisable one year
from the date of issuance and have terms up to 10 years.

F-19

<PAGE>

During the year ended June 30, 2000 and 1999, the Board of Directors
and stockholders approved the issuance of options to purchase 5,000 and 10,000
shares, respectively, of the Company's common stock. Such options were granted
at a price of $30.390 and $110.625 per share, respectively, vest over a period
of one year and expire through December 2009.

A summary of option activity is as follows:

<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE OPTIONS EXERCISE
OPTIONS PRICE EXERCISABLE PRICE
------------ -------- ----------- ---------
<S> <C> <C> <C> <C>

Granted............................. 10,000 $110.625
------------
Outstanding, June 30, 1999.......... 10,000 110.625 5,000 $110.625
Granted............................. 5,000 30.390
------------
Outstanding, June 30, 2000.......... 15,000 83.880 12,500 94.578
============
</TABLE>

15. EMPLOYEE STOCK PURCHASE PLAN

The Company has an Employee Stock Purchase Plan under which 70,000
shares of common stock were authorized for issuance to employees. Under the
plan, eligible employees may purchase, through payroll deductions withheld
during an offering period, an amount of common stock not to exceed
approximately 5% of the employee's annual compensation. The purchase price per
share is the lower of 85% of the fair market value of a share of common stock
on the first day of the offering period or on the last day of the offering
period. There are two offering periods during each year. During the years
ended June 30, 2000, 1999 and 1998, employees purchased an aggregate of
12,713, 4,819 and 3,823 shares of common stock for $45,000, $277,000 and
$302,000, respectively, under this plan. These amounts are included in the
amounts shown for exercise of options on the consolidated statements of
stockholders' (deficiency) equity (see Note 13).

16. WARRANTS

During the year ended June 30, 1998, the Board of Directors approved
the issuance of warrants to purchase an aggregate of 43,000 shares of the
Company's common stock. Such warrants are exercisable at prices ranging from
$84.375 to $103.125 per share, vest over periods up to 48 months, and expire
at various times through April 2008. No warrants were granted during the years
ended June 30, 2000 and 1999.

During the year ended June 30, 1998, certain directors exercised
warrants to purchase 55,600 shares of the Company's common stock for an
aggregate of $673,000. No warrants were exercised during the years ended June
30, 2000 and 1999.

During the year ended June 30, 1997, the Company issued a warrant to
purchase 10,000 shares to a director under the terms of a consulting agreement
(see Note 9). Such issuance was accounted for under SFAS No. 123 using the
Black-Scholes option pricing model, which resulted in the recording of the
fair value of $75,000 and $233,000 in compensation cost during the years ended
June 30, 1999 and 1998, respectively. No compensation cost was recorded during
the year ended June 30, 2000.

F-20

<PAGE>

A summary of warrant activity is as follows:

<TABLE>
<CAPTION>
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
----------------------------- -------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
WARRANTS PRICE WARRANTS PRICE
------------- --------- ----------- ---------
<S> <C> <C> <C> <C>

Outstanding, July 1, 1997........... 153,200 $ 37.10
Granted.......................... 43,000 86.55
Exercised........................ (55,600) 12.10
------------
Outstanding, June 30, 1998.......... 140,600 62.08 96,433 $61.02
Cancelled........................ (6,000) 84.40
------------
Outstanding, June 30, 1999.......... 134,600 61.09 109,600 61.59
------------
Outstanding, June 30, 2000.......... 134,600 61.09 119,600 61.36
============
</TABLE>

At June 30, 2000, the range of warrant prices for shares under warrants
and the weighted-average remaining contractual life is as follows:

<TABLE>
<CAPTION>
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED
WEIGHTED- AVERAGE- WEIGHTED-
AVERAGE REMAINING AVERAGE
NUMBER OF EXERCISE CONTRACTUAL NUMBER EXERCISE
RANGE OF WARRANT EXERCISE PRICE WARRANTS PRICE LIFE EXERCISABLE PRICE
------------------------------- ----------- ---------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
$30.000 - $31.250 20,000 $ 30.625 3.05 20,000 $ 30.625
47.500 - 64.063 77,600 56.631 4.17 62,600 56.086
84.375 - 103.125 37,000 86.909 7.23 37,000 86.909
</TABLE>

17. STOCK SPLIT AND REVERSE STOCK SPLIT

At a Special Meeting of the Company's stockholders held on March 17,
1998, the Company's stockholders approved an amendment to the Company's
Certificate of Incorporation to (i) effect a two-for-one split of each of the
outstanding shares of common stock of the Company and (ii) increase the number
of authorized shares of all classes of stock of the Company from 15,000,000 to
30,000,000, consisting of 29,000,000 shares of common stock, $0.001 par value
per share, and 1,000,000 shares of preferred stock, $0.001 par value per
share. Both actions were effective March 18, 1998. All share and per share
data have been retroactively restated to reflect the two-for-one stock split.

At a Special Meeting of the Company's stockholders held on April 25,
2000, the Company's stockholders approved a reverse stock split of the
Company's outstanding shares of common stock. Following the stockholders'
vote, the Board of Directors voted to amend the Company's Certificate of
Incorporation to effect a one-for-five reverse stock split of each of the
outstanding shares of common stock of the Company. This action was effective
May 1, 2000. All common share and per share data have been retroactively
restated to reflect the one-for-five reverse stock split.

18. TREASURY STOCK

In fiscal 1997, the Board of Directors authorized the purchase of up
to 240,000 shares of the Company's common stock, which may be used to meet the
Company's common stock requirements for its stock benefit plans. In fiscal
1998, the Board of Directors increased the number of shares of common stock
that the Company is authorized to repurchase under this plan by 40,000 shares
and

F-21
<PAGE>

authorized the purchase of up to 144,000 shares of the Company's common stock
from officers and directors. During fiscal 1999 and 1998, the Company
repurchased 19,200 and 139,118, at an average per share cost of $77.65 and
$83.15, respectively. No shares were repurchased during fiscal 2000. The
139,118 shares repurchased in fiscal 1998 were from officers and directors at
a per share cost equal to the closing price of the stock on the day of the
repurchase. In fiscal 2000, 1999 and 1998, 12,713, 8,227, 134,106,
respectively, treasury shares were reissued upon the exercise of stock options
and warrants and the issuance of common stock under the Employee Stock
Purchase Plan.

19. PROFIT-SHARING AND BONUS PLANS

The Company has a 401(k) profit-sharing plan in which eligible
employees may contribute up to 15% of their eligible earnings. The Company may
contribute to the plan at the discretion of the Board of Directors, subject to
applicable regulations. In the years ended June 30, 2000, 1999 and 1998, the
Board elected to contribute an amount equal to 25% of the first 6% of eligible
earnings. Participants vest in the Company's contributions at a rate of 20%
after two years of plan participation and 20% each year thereafter until fully
vested.

During the years ended June 30, 2000, 1999 and 1998, the Company's
matching contributions were $130,000, $181,000 and $156,000, respectively.

The Company has an executive bonus plan and incentive compensation
arrangements for key employees based on an earnings formula. Compensation
expense recorded under these plans was $628,000 during the year ended June 30,
1998. No amounts were recorded under this plan during the years ended June 30,
2000 and 1999.

20. SEGMENT INFORMATION

The Company's operating segments have similar economic
characteristics and, as such, the Company has aggregated six operating
segments into a single reportable segment in conformity with SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The
business activities of the Company's operating segment are the development,
manufacturing and marketing of paper-based organizers for the retail market.
In addition, the Company also develops, manufactures and markets a number of
related organizing products including telephone/address books, business
accessories, products for students and organizing and other wallboards.

The Company groups its products into three categories: organizers and
planners; their refills, which include calendars, other pages and accessories;
and related organizing products. The following table sets forth, for the
periods indicated, approximate Day Runner sales by product category.

F-22
<PAGE>

YEARS ENDED JUNE 30,
PRODUCTS 2000 1999 1998
-------- ----------------- ------------------- ------------------
(in thousands)
<S> <C> <C> <C>
Organizers and planners......... $ 75,427 $ 84,956 $ 83,069
Refills......................... 65,373 64,279 51,876
Related organizing products..... 30,687 46,977 32,896
---------- ---------- ---------
Total $ 171,487 $ 196,212 $ 167,841
========== ========== =========
</TABLE>

21. OPERATIONS IN FOREIGN COUNTRIES

The following is a summary of the financial activity of the Company by
geographical area and is prepared on the same basis as the consolidated
financial statements (in thousands):

YEAR ENDED JUNE 30, 2000
UNITED STATES EUROPE OTHER ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated entities $ 107,077 $ 47,438 $ 16,972 $ 171,487
Transfers between geographic areas 2,500 769 $ (3,269)
------------- ------------- ------------- ------------- -------------
Net sales $ 109,577 $ 47,438 $ 17,741 $ (3,269) $ 171,487
============= ============= ============= ============= =============
Long-lived assets $ 83,422 $ 20,765 $ 891 $ (72,474) $ 32,604
============= ============= ============= ============= =============

YEAR ENDED JUNE 30, 1999
UNITED STATES EUROPE OTHER ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
Net sales to unaffiliated entities $ 136,603 $ 39,173 $ 20,436 $ 196,212
Transfers between geographic areas 2,396 1,670 $ (4,066)
------------- ------------- ------------- ------------- -------------
Net sales $ 138,999 $ 39,173 $ 22,106 $ (4,066) $ 196,212
============= ============= ============= ============= =============
Long-lived assets $ 87,144 $ 83,586 $ 3,426 $ (68,682) $ 105,474
============= ============= ============= ============= =============

YEAR ENDED JUNE 30, 1998
UNITED STATES EUROPE OTHER ELIMINATIONS TOTAL
------------- ------------- ------------- ------------- -------------
Net sales to unaffiliated entities $ 152,939 $ 2,745 $ 12,157 $ 167,841
Transfers between geographic areas 2,347 2,169 $ (4,516)
------------- ------------- ------------- ------------- -------------
Net sales $ 155,286 $ 2,745 $ 14,326 $ (4,516) $ 167,841
============= ============= ============= ============= =============
Long-lived assets $ 16,267 $ 95 $ 3,364 $ (3,117) $ 16,609
============= ============= ============= ============= =============
</TABLE>

22. CONTINGENCIES

In September 1999, two, and in October 1999, one additional, purported
securities class action lawsuits were filed in the United States District Court
for the Central District California (the "District Court") against the Company
and certain of its officers and directors. The complaints alleged that the
Company violated Section 10(b) of the Securities Exchange Act and Rule 10b-5
thereunder through the misstatement of the Company's financial results of
operations for the first through third quarters of fiscal 1999. These alleged
misstatements purportedly consisted of improper accounting for manufacturing
variances and other costs. The plaintiffs in all these actions purported to
represent a class consisting of all purchasers of the Company's Common Stock
between October 20, 1998 and August 31, 1999.

F-23
<PAGE>

On January 14, 2000, a consolidated amended complaint (the "Amended
Complaint") was filed in the District Court against the Company and certain of
its officers and directors. The Amended Complaint extended the time period for
purported class members to include persons who purchased the Company's Common
Stock between February 1, 1998 through August 31, 1999. In addition to the
alleged misstatements included in the earlier complaints, the Amended Complaint
alleged that the Company failed to make certain disclosures during this time
period and that certain officers and directors sold shares of the Company's
Common Stock during this period. As they did in the earlier complaints, the
plaintiffs sought unspecified compensatory damages in the Amended Complaint.

On May 15, 2000, the plaintiffs dismissed the Amended Complaint without
prejudice.

The Company is not a party to any litigation that, in the opinion of
management, would reasonably be expected to have a materially adverse effect on
the consolidated financial statements.

23. SUPPLEMENTAL CASH FLOW INFORMATION

Disclosure of cash flow information (in thousands):

YEARS ENDED JUNE 30,
2000 1999 1998
------------ ----------- -------------
<S> <C> <C> <C>
Cash paid (received) for:
Interest....................... $ 9,032 $ 4,944 $ 91
Income taxes, net of refunds $ (2,727) $ 1,488 $ 8,862

During the year ended June 30, 1999, the net cash expended by the
Company in its acquisition of Filofax was used as follows (in thousands) (see
Note 2):

Fair value of assets acquired $ (117,203)
Liabilities assumed 29,186
------------
Cash paid $ (88,017)
============

During the year ended June 30, 1998, the Company purchased all of the
capital stock of Ultima Distribution, Inc. and Timeposters, Inc. The Company
also purchased certain of the assets of Ram Manufacturing, Inc. In conjunction
with these acquisitions, net cash expended was as follows (in thousands) (see
Note 2):

Fair value of assets acquired $ (11,809)
Liabilities assumed 7,183
------------
Cash paid $ (4,626)
============
</TABLE>

During the year ended June 30, 1999, the Company purchased 703,308
shares of Filofax's outstanding common stock by issuing L1,477,000 (US
$2,328,000) in Loan Notes (see Note 8) to former shareholders of Filofax.

The Company realized a reduction in its current income tax liability
during fiscal 1999 and 1998 in the amount of $16,000 and $5,207,000,
respectively. The Company did not realize a reduction in its current income tax
liability during fiscal 2000. Such amounts were credited to additional paid-in
capital (see Note 13).

At June 30, 2000, the Company reclassified $1,462,000 from property and
equipment to prepaid expenses and other current assets related to the Burgess
Hill land and buildings held for sale.

F-24
<PAGE>

DAY RUNNER, INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

(DOLLARS IN THOUSANDS)

BALANCE AT BALANCE AT
JUNE 30, CHARGED TO JUNE 30,
CLASSIFICATION 1999 OPERATIONS DEDUCTIONS 2000
-------------- ---------------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts and
sales returns and other allowances...... $ 11,481 $ 21,963 $(25,053) $ 8,391
Reserve for obsolete inventories........... 9,735 8,234 (6,746) 11,223

BALANCE AT BALANCE AT
JUNE 30, FILOFAX CHARGED TO JUNE 30,
CLASSIFICATION 1998 ACQUISITION OPERATIONS DEDUCTIONS 1999
-------------- ---------------- ----------- ---------- ---------- ---------

Allowance for doubtful accounts and
sales returns and other allowances...... $ 9,942 $ 1,580 $ 19,039 $(19,080) $ 11,481
Reserve for obsolete inventories........... 3,052 4,782 4,286 (2,385) 9,735

BALANCE AT BALANCE AT
JUNE 30, CHARGED TO JUNE 30,
CLASSIFICATION 1997 OPERATIONS DEDUCTIONS 1998
-------------- ---------------- ---------- ---------- ---------

Allowance for doubtful accounts and
sales returns and other allowances...... $ 8,664 $ 9,799 $(8,521) $ 9,942
Reserve for obsolete inventories........... 3,259 898 (1,105) 3,052

</TABLE>

S-1

<PAGE>

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION
------- -----------

3.1 Certificate of Amendment of Certificate of Incorporation of
Day Runner, Inc. effective as of April 27, 2000

10.2 Amendment No. 5 to Day Runner, Inc. 1995 Stock Option Plan,
dated September 30, 1999

10.7 Second Amendment to Officer Severance Plan effective as of
July 14, 2000

10.20 Letter Agreement dated September 26, 2000 terminating the
Consulting Agreement effective November 22, 1999 between
Registrant and Mr. Alan R. Rachlin

10.24 Crossroads Letter Agreement dated March 27, 2000 between the
Registrant and Crossroads, LLC and Amendment No. 2 thereto,
dated May 15, 2000

21.1 Subsidiaries of the Registrant

23.1 Consent of Deloitte & Touche LLP

27.1 Financial Data Schedule