FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
--------------- ---------------
Commission file number 0-19835
DAY RUNNER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3624280
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
15295 ALTON PARKWAY
IRVINE, CALIFORNIA 92618
(Address and zip code of principal executive offices)
(714) 680-3500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No|_|
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of the latest practicable date:
Class Number of Shares Outstanding at February 11, 2000
- --------------------------- -------------------------------------------------
Common Stock, $0.001 par value 11,910,845
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DAY RUNNER, INC.
INDEX
Page Reference
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COVER PAGE....................................................................................... 1
INDEX ....................................................................................... 2
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 1999 and June 30, 1999....................................... 3
Consolidated Statements of Operations
Three and Six Months Ended December 31, 1999 and 1998..................... 4
Consolidated Statements of Cash Flows
Six Months Ended December 31, 1999 and 1998............................... 5
Notes to Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................... 12
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......................... 20
Item 6. Exhibits and Reports on Form 8-K............................................ 20
SIGNATURES....................................................................................... 21
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<CAPTION>
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
DECEMBER 31, JUNE 30,
1999 1999
----------- -----------
Current assets:
<S> <C> <C>
Cash and cash equivalents...................................................... $ 9,690 $ 9,132
Accounts receivable (less allowance for doubtful accounts and sales returns
and other allowances of $10,681 and $11,481 at
December 31, 1999 and June 30, 1999, respectively).......................... 42,055 43,215
Inventories.................................................................... 38,878 42,361
Prepaid expenses and other current assets...................................... 5,026 4,506
Income taxes receivable........................................................ 434
Deferred income taxes.......................................................... 11,189 11,189
--------- --------
Total current assets........................................................ 106,838 110,837
Property and equipment, net ................................................... 16,143 17,851
Goodwill and other intangible assets (net of accumulated amortization of $3,220
and $1,934 at December 31, 1999 and June 30, 1999, respectively)............ 84,615 85,830
Other assets (net of accumulated amortization of $447 and $410 at December 31,
1999 and June 30, 1999, respectively).. ................................ 2,269 1,793
---------- ---------
TOTAL ............................................................................ $ 209,865 $ 216,311
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit................................................................. $ 6,331
Accounts payable............................................................... 16,367 $ 18,722
Accrued expenses............................................................... 24,608 19,547
Income taxes payable........................................................... 3,919
Loan notes..................................................................... 2,077
-------- --------
Total current liabilities................................................... 51,225 40,346
-------- --------
Long-term liabilities:
Line of credit................................................................. 90,444 105,317
Loan notes..................................................................... 257 251
-------- --------
Total long-term liabilities................................................. 90,701 105,568
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock (1,000,000 shares authorized; $0.001 par value; no shares
issued or outstanding)......................................................
Common stock (29,000,000 shares authorized; $0.001 par value; 13,728,633
shares issued and 11,910,845 shares outstanding at December 31, 1999;
13,718,524 shares issued and 11,900,736 shares outstanding at
June 30, 1999)............................................................. 14 14
Additional paid-in capital..................................................... 21,742 21,709
Retained earnings.............................................................. 58,985 61,078
Accumulated other comprehensive income......................................... 556 954
Treasury stock - At cost (787,858 shares at December 31, 1999 and
June 30, 1999)................................................................ (13,358) (13,358)
--------- ---------
Total stockholders' equity.................................................. 67,939 70,397
--------- ---------
TOTAL ............................................................................ $ 209,865 $ 216,311
========= =========
See accompanying notes to consolidated financial statements.
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<CAPTION>
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
December 31, December 31,
---------------------- --------------------
1999 1998 1999 1998
---------- ---------- -------- --------
<S> <C> <C> <C> <C>
Net sales.................................................... $ 57,483 $ 64,565 $109,336 $112,296
Cost of goods sold........................................... 31,459 33,506 57,430 58,366
--------- --------- --------- ---------
Gross profit................................................. 26,024 31,059 51,906 53,930
--------- --------- --------- ---------
Operating expenses:
Selling, marketing and distribution..................... 17,822 18,910 33,492 31,175
General and administrative.............................. 7,974 6,447 14,909 11,104
Costs relating to activities associated
with the Filofax acquisition......................... 1,072 1,072
--------- --------- --------- ---------
Total operating expenses................................ 25,796 26,429 48,401 43,351
--------- --------- --------- ---------
Income from operations....................................... 228 4,630 3,505 10,579
Net interest expense......................................... 3,823 1,356 5,967 1,389
--------- --------- --------- ---------
(Loss) income before (benefit) provision for income taxes.... (3,595) 3,274 (2,462) 9,190
(Benefit) provision for income taxes......................... (902) 1,244 (369) 3,491
--------- --------- --------- ---------
Net (loss) income............................................ $ (2,693) $ 2,030 $ (2,093) $ 5,699
========= ========= ========= =========
(Loss) earnings per common share:
Basic................................................... $ (0.23) $ 0.17 $ (0.18) $ 0.48
========= ========= ========== ========
Diluted................................................. $ (0.23) $ 0.16 $ (0.18) $ 0.45
========= ========= ========== ========
Weighted-average number of common shares outstanding:
Basic................................................... 11,901 11,883 11,901 11,907
========= ========= ========= =========
Diluted................................................. 11,901 12,564 11,901 12,619
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
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<CAPTION>
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Six Months Ended
December 31,
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net (loss) income............................................................. $ (2,093) $ 5,699
Adjustments to reconcile net (loss) income to net cash provided by (used in)
operating activities:
Depreciation and amortization.............................................. 6,779 4,478
Provision for doubtful accounts and sales returns and other allowances..... 13,827 4,582
Loss on disposal of property and equipment................................. 2
Changes in operating assets and liabilities, net of acquisition of business:
Accounts receivable..................................................... (12,282) (6,052)
Inventories............................................................. 3,668 5,882
Prepaid expenses and other current assets............................... (448) (785)
Income taxes receivable................................................. 434 2,646
Accounts payable........................................................ (2,512) (4,951)
Accrued expenses........................................................ 4,835 3,241
Income taxes payable.................................................... 3,825 1,398
--------- ---------
Net cash provided by operating activities......................................... 16,035 16,138
--------- ---------
Cash flows from investing activities:
Acquisition of business.......................................................
( 88,764)
Acquisition of property and equipment......................................... (2,426) (6,002)
Other assets.................................................................. (1,667) (385)
--------- ----------
Net cash used in investing activities.................................... (4,093) (95,151)
--------- ---------
Cash flows from financing activities:
Net (repayments) borrowings under lines of credit............................. (9,274) 102,146
Repayment of loan notes....................................................... (2,164)
Net proceeds from issuance of common stock.................................... 33 212
Repurchase of common stock.................................................... (1,274)
--------- ----------
Net cash (used in) provided by financing activities...................... (11,405) 101,084
--------- ---------
Effect of exchange rate changes in cash and cash equivalents...................... 21 259
--------- ---------
Net increase in cash and cash equivalents......................................... 558 22,330
Cash and cash equivalents at beginning of period.................................. 9,132 2,923
--------- ---------
Cash and cash equivalents at end of period........................................ $ 9,690 $ 25,253
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
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DAY RUNNER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying consolidated balance sheet as of December 31, 1999,
consolidated statements of operations for the three and six months ended
December 31, 1999 and 1998 and consolidated statements of cash flows for the six
months ended December 31, 1999 and 1998 are unaudited but, in the opinion of
management, include all adjustments consisting of normal, recurring accruals
necessary for a fair presentation of the financial position and the results of
operations for such periods. Certain information and footnote disclosures
normally included in financial statements prepared in conformity with generally
accepted accounting principles have been omitted pursuant to the requirements of
the Securities and Exchange Commission, although the Company believes that the
disclosures included in the financial statements included herein are adequate to
make the information therein not misleading. The financial statements included
herein should be read in conjunction with the Company's audited consolidated
financial statements for the year ended June 30, 1999, and the notes thereto,
which are included in the Company's Annual Report on Form 10-K.
The results of operations for the three and six months ended December
31, 1999 and 1998 are not necessarily indicative of the results for a full year.
The seasonality of the Company's financial results and the unpredictability of
the factors affecting such seasonality make the Company's quarterly and yearly
financial results difficult to predict and subject to significant fluctuation.
Certain reclassifications were made to the prior period financial
statements to conform to the current period presentation.
2. INVENTORIES
Inventories consist of the following (in thousands):
December 31, June 30,
1999 1999
------------------ ---------
Raw materials................... $ 10,184 $ 12,026
Work in process................. 3,017 2,138
Finished goods.................. 25,677 28,197
---------- ----------
Total.................. $ 38,878 $ 42,361
========== ==========
3. LINE OF CREDIT
On September 23, 1998, the Company entered into a $160,000,000
Revolving Loan Agreement (the "Loan Agreement") with Wells Fargo Bank, National
Association ("Wells Fargo"). Effective November 24, 1998, this amount was
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.
On October 12, 1999, the Company and the banks amended the Loan
Agreement (the "Amended and Restated Loan Agreement"). The Amended and Restated
Loan Agreement converts the entire outstanding revolving loan balance into a
term loan portion of $90,444,000 and a revolving credit loan portion of
$29,556,000. The term loan matures on September 30, 2001, and the revolving
credit loan facility matures on October 9, 2000. The maturity date of the
revolving credit loan facility will be automatically extended through September
30, 2001, provided that the Company achieves as of September 30, 2000 a minimum
EBITDA, a minimum fixed charge coverage ratio and a maximum senior funded debt
ratio, as defined in the amended agreement. As a result of the amendment of the
Loan Agreement, unamortized financing fees due under the Loan Agreement of
approximately $955,000 were charged to interest expense in October 1999. At
December 31, 1999, the Company had $96,775,000 outstanding under this Loan
Agreement and had outstanding letters of credit totaling approximately $406,000.
The Amended and Restated Loan Agreement is secured by the Company's
assets and includes, among other things, financial covenants requiring the
maintenance of a minimum fixed charge coverage ratio, EBITDA, stockholders'
equity and current ratio, and a maximum senior funded debt coverage ratio and
operating expenses to net sales ratio, as defined in the amended agreement. The
Amended and Restated Loan Agreement also limits, among other things, the
incurrence of liens and other indebtedness, mergers, consolidations, the sale of
assets, annual capital expenditures, advances, investments and loans by the
Company and its subsidiaries, dividends, stock repurchases and certain
transactions with affiliates. It permits up to $10,000,000 of secured debt for
currency hedging purposes and up to $1,500,000 of unsecured overdraft borrowings
for foreign subsidiaries.
The 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 six
months ended December 31, 1999, the weighted-average interest rate was 9.15%.
The interest rate at December 31, 1999 was 9.11%.
Under the Amended and Restated Loan Agreement, 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
vary with the level of the funded debt ratio at the time the letter of credit is
issued; and amendment and other standard fees of approximately $1,600,000, which
were paid during the six months ended December 31, 1999.
4. STOCKHOLDERS' EQUITY
During the six months ended December 31, 1999, certain employees
exercised options to purchase an aggregate of 10,109 shares of the Company's
Common Stock for an aggregate of approximately $33,000.
5. EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share are computed by dividing net income by the sum of the
weighted-average number of common shares outstanding for the period plus the
assumed exercise of all dilutive securities. The following reconciles the
numerator and denominator of the basic and diluted per share computations for
net income (in thousands, except per share amounts):
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THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------- ----------------------------------
1999 1998 1999 1998
----------------- ---------------- ----------------- ------------
<S> <C> <C> <C> <C>
NET (LOSS) INCOME $(2,693) $ 2,030 $(2,093) $ 5,699
======= ======== ======= ========
BASIC WEIGHTED-AVERAGE SHARES
Weighted-average number of
common shares outstanding 11,901 11,883 11,901 11,907
EFFECT OF DILUTIVE SECURITIES
Additional shares from the assumed
exercise of options and warrants 0 3,047 0 2,952
Shares assumed to be repurchased
under the treasury stock method 0 (1,949) 0 (1,804)
Non-qualified tax benefit 0 (417) 0 (436)
------- -------- -------- --------
DILUTED WEIGHTED-AVERAGE SHARES
Weighted-average number of
common shares outstanding and
common share equivalents 11,901 12,564 11,901 12,619
======== ======== ======== ========
(LOSS) EARNINGS PER SHARE:
Basic $ (0.23) $ 0.17 $ (0.18) $ 0.48
======= ======= ======== =======
Diluted $ (0.23) $ 0.16 $ (0.18) $ 0.45
======= ======= ======== =======
</TABLE>
For the three and six months ended December 31, 1999, dilutive
securities equivalent to approximately 2,831,000 and 2,390,000 shares,
respectively, are not included as potential common share equivalents because
they are antidilutive.
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6. COMPREHENSIVE INCOME
Comprehensive (loss) income is summarized as follows (in thousands):
SIX MONTHS ENDED DECEMBER 31,
1999 1998
----------- ----------
<S> <C> <C>
Net (loss) income $ (2,093) $ 5,699
Foreign currency translation adjustment (398) 35
---------- ----------
Comprehensive (loss) income $ (2,491) $ 5,734
========== ==========
</TABLE>
7. 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 Statement of Financial Accounting
Standards ("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 net sales by product category (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------- ----------------------------------
1999 1998 1999 1998
----------------- ---------------- ----------------- ------------
<S> <C> <C> <C> <C>
Organizers and planners.......... $ 26,692 $ 26,230 $ 47,872 $ 43,298
Refills.......................... 24,381 22,049 42,861 39,097
Related organizing products...... 6,410 16,286 18,603 29,901
---------- ---------- ---------- ----------
Total......................... $ 57,483 $ 64,565 $ 109,336 $ 112,296
========== ========== ========== ===========
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8. OPERATIONS IN FOREIGN COUNTRIES
The following is a summary of the financial activity of the Company by
geographical area (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1999
UNITED STATES EUROPE OTHER ELIMINATIONS TOTAL
------------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Net sales to unaffiliated entities $ 66,833 $ 32,511 $ 9,992 $ 109,336
Transfers between geographic areas 1,578 553 $ (2,131)
---------- -------- ---------- --------- ---------
Net sales $ 68,411 $ 32,511 $ 10,545 $ (2,131) $ 109,336
========== ======== ========== ========= =========
(Loss) income from operations $ (1,398) $ 6,931 $ 101 $ (2,129) $ 3,505
========== ======== ========== ========= =========
Long-lived assets $ 88,252 $ 82,089 $ 3,381 $ (70,695) $ 103,027
========== ======== ========== ========= =========
SIX MONTHS ENDED DECEMBER 31, 1998
UNITED STATES EUROPE OTHER ELIMINATIONS TOTAL
------------- ---------- ---------- ------------ ---------
Net sales to unaffiliated entities $ 86,658 $ 16,138 $ 9,500 $ 112,296
Transfers between geographic areas 2,644 1,435 $ (4,079)
---------- -------- ---------- --------- ---------
Net sales $ 89,302 $ 16,138 $ 10,935 $ (4,079) $ 112,296
========== ======== ========== ========= =========
Income from operations $ 9,680 $ 4,141 $ 658 $ (3,900) $ 10,579
========== ======== ========== ========= =========
Long-lived assets $ 86,819 $ 83,979 $ 3,474 $ (67,552) $ 106,720
========== ======== ========== ========= =========
</TABLE>
9. 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 purport 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
alleges 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 are seeking unspecified compensatory damages in the Amended
Complaint. There has been no discovery in this action. Based on the allegations
and the issues raised by the Amended Complaint, the Company believes it has
meritorious defenses to the action and intends to defend it vigorously.
The Company is not a party to any other litigation that, in the opinion
of management, would reasonably be expected to have a materially adverse effect
on the consolidated financial statements.
<PAGE>
9. STATEMENTS OF CASH FLOW
Supplemental disclosure of cash flow information (in thousands):
SIX MONTHS ENDED DECEMBER 31,
1999 1998
---------- ----------
Cash paid during the period for:
Interest $ 4,168 $ 1,217
Income taxes, net of refunds
received $ (4,259) $ (358)
Supplemental disclosure of noncash investing and financing activities:
As of December 31, 1998, the Company had purchased 1,400,000
shares of Filofax stock for approximately (pound)2,821,000
(approximately US $4,794,000) in lOAN notes that were issued to former
shareholders of Filofax.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and Notes
thereto included elsewhere in this Quarterly Report. Historical results and
percentage relationships among any amounts included in the Consolidated
Financial Statements are not necessarily indicative of trends in operating
results for any future period.
Since the Company's introduction of the first Day Runner System
organizer in 1982, the Company's revenues have been generated by sales primarily
of organizers and planners and secondarily of refills. Since fiscal 1995, a
majority of the Company's internally generated growth has resulted from sales of
related organizing products. For a number of years, the Company focused the
great majority of its product development, sales and marketing efforts on the
U.S. office products channel, which accounted for 30.4% of second quarter fiscal
2000 net sales and 34.3% of net sales for the six months ended December 31,
1999, and the U.S. mass market channel, which accounted for 17.2% of second
quarter fiscal 2000 net sales and 19.4% of net sales for the six months ended
December 31, 1999. With the October 30, 1998 acquisition of Filofax, the Company
substantially increased its distribution in markets outside the U.S., and sales
to foreign customers accounted for 40.9% of second quarter fiscal 2000 net sales
and 38.5% of net sales for the six months ended December 31, 1999.
RESTRUCTURING OF OPERATIONS
For a number of quarters, the Company's results have been adversely
affected by changes in the 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. On December 29, 1999, the Company announced that it
is developing a plan to restructure its operations to substantially cut costs
and allow the Company to operate more effectively and become profitable under
these conditions. The Company's goals are to fully develop its restructuring
plan and to complete the bulk of its restructuring by the end of the fiscal
year. The Company expects a substantial loss in the March quarter, reflecting
the effects of a number of factors, including the seasonality of its business,
continued constraints on its U.S. sales and certain costs associated with the
restructuring. In addition, the Company expects to incur other
restructuring-related costs at some point before the end of fiscal 2000.
<PAGE>
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<CAPTION>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that statement of operations items bear to net sales and the
percentage change in the dollar amounts of such items.
Percentage Change
-----------------
Percentage of Sales Three Six
-------------------- Months Months
Three Six Ended Ended
Months Ended Months Ended December 31, December 31,
December 31, December 31, 1998 1998
1999 1998 1999 1998 to 1999 to 1999
---- ---- ---- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................................ 100.0% 100.0% 100.0% 100.0% (11.0)% (2.6)%
Cost of goods sold............................... 54.7 51.9 52.5 52.0 (6.1) (1.6)
----- ----- ----- ----- ------ ----
Gross profit..................................... 45.3 48.1 47.5 48.0 (16.2) (3.8)
----- ----- ----- ----- ----- ----
Operating expenses:
Selling, marketing and distribution........... 31.0 29.3 30.6 27.8 (5.8) 7.4
General and administrative.................... 13.9 10.0 13.7 9.9 23.7 34.3
Costs related to activities associated with the
Filofax acquisition...................... 1.6 0.9 (100.0) (100.0)
---- ----- --- ----- ------ -----
Total operating expenses.................... 44.9 40.9 44.3 38.6 (2.4) 11.6
----- ----- ----- ----- ----- -----
Income from operations........................... 0.4 7.2 3.2 9.4 (95.1) (66.9)
Net interest expense............................. 6.7 2.1 5.4 1.2 181.9 329.6
----- ----- ----- ----- ----- -----
(Loss) income before (benefit) provision for
income taxes (6.3) 5.1 (2.2) 8.2 (209.8) (126.8)
(Benefit) provision for income taxes............. (1.6) 1.9 (0.3) 3.1 (172.5) (110.6)
----- ----- ----- ---- ------- ------
Net (loss) income................................ (4.7)% 3.2% (1.9)% 5.1% (232.7)% (136.7)%
==== === ==== === ====== ======
</TABLE>
The following tables set forth, for the periods indicated, the
Company's approximate net sales by distribution channel and product category and
as a percentage of total sales.
<TABLE>
<CAPTION>
DISTRIBUTION CHANNEL:
Three Months Ended December 31, Six Months Ended December 31,
---------------------------------------- -------------------------------------
1999 1998 1999 1998
------------------- ------------------- ------------------ -----------------
(Unaudited; dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Office products................. $ 17,505 30.4% $ 21,226 32.9% $ 37,473 34.3% $ 42,886 38.2%
Mass market..................... 9,871 17.2 18,139 28.1 21,217 19.4 37,787 33.6
Foreign customers............... 23,513 40.9 21,536 33.3 42,103 38.5 25,768 23.0
Other........................... 6,594 11.5 3,664 5.7 8,543 7.8 5,855 5.2
-------- ----- -------- ----- -------- ---- -------- -----
Total........................ $ 57,483 100.0% $ 64,565 100.0% $109,336 100.0% $112,296 100.0%
======== ===== ========= ===== ======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
PRODUCT CATEGORY:
Three Months Ended December 31, Six Months Ended December 31,
---------------------------------------- -----------------------------------
1999 1998 1999 1998
------------------- ------------------- ------------------ ------------
(Unaudited; dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Organizers and planners......... $26,692 46.4% $ 26,230 40.6% $47,872 43.8% $ 43,298 38.6%
Refills......................... 24,381 42.4 22,049 34.2 42,861 39.2 39,097 34.8
Related organizing products..... 6,410 11.2 16,286 25.2 18,603 17.0 29,901 26.6
------- ----- -------- ------ -------- ----- -------- -----
Total........................ $57,483 100.0% $64,565 100.0% $109,336 100.0% $112,296 100.0%
======= ===== ======= ===== ======== ===== ======== =====
</TABLE>
<PAGE>
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH
THE THREE MONTHS ENDED DECEMBER 31, 1998
Net Sales. Net sales consist of revenues from gross product shipments
net of allowances for returns, rebates and credits. In the second quarter of
fiscal 2000, net sales decreased by $7,082,000, or 11.0%, compared with the
second quarter of fiscal 1999. The Company believes that the ongoing impact of
inventory tightening on the part of certain of the large retailers that account
for the bulk of the Company's U.S. net sales was the primary factor causing
lower gross product shipments, higher returns and lower net sales for the
quarter, particularly in the mass market channel.
In the quarter ended December 31, 1999, net sales to the office
products channel decreased by $3,721,000, or 17.5%, and net sales to mass market
customers decreased by $8,268,000, or 45.6%. Because of the inclusion of
Filofax's net sales for the entire fiscal 2000 second quarter compared with two
months of the fiscal 1999 second quarter, net sales to foreign customers
increased by $1,977,000, or 9.2%, and net sales to miscellaneous customers
grouped together as "other," increased by $2,930,000, or 80.0%.
Because of the inclusion of the additional month of Filofax's net
sales, net sales of organizers and planners grew by $462,000, or 1.8%, and net
sales of refills increased by $2,332,000, or 10.6%, in the quarter. Net sales of
related organizing products decreased by $9,876,000, or 60.6%, because the
Company had fewer related organizing products promotions in the mass market and
discontinued its line of non-licensed appointment books after the fall 1998
selling season.
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, net 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 48.1% in the second quarter of fiscal 1999 to 45.3% in
the second quarter of fiscal 2000 primarily because of an increase in the
provision for sales returns, which is based upon recent higher sales returns
experience.
Operating Expenses. Total operating expenses decreased by $633,000, or
2.4%, in the second quarter of fiscal 2000 compared with the second quarter of
fiscal 1999 but increased as a percentage of net sales from 40.9% to 44.9%.
Selling, marketing and distribution expenses decreased by $1,088,000 primarily
because of the decrease in net sales and secondarily because of the Company's
focus on controlling costs, but increased from 29.3% to 31.0% as a percentage of
net sales due to the Company's decreased ability to absorb expenses as a result
of the decline in U.S. net sales. General and administrative expenses increased
by $1,527,000 and from 10.0% to 13.9% as a percentage of net sales because of
the inclusion of Filofax's expenses for the entire second quarter of fiscal 2000
compared with two months of the quarter in fiscal 1999.
Net Interest Expense. Net interest expense for the second quarter of
fiscal 2000 was $3,823,000, compared with $1,356,000 for the second quarter of
fiscal 1999, primarily because the Company's bank debt, which was principally
incurred to finance the Filofax acquisition, was outstanding for the entire
fiscal 2000 second quarter, compared with approximately six weeks of the second
quarter of fiscal 1999.
Income Taxes. The Company recorded an income tax benefit of $902,000
for the second quarter of fiscal 2000, compared with an income tax provision of
$1,244,000 for the second quarter of fiscal 1999, and an effective tax rate of
25.1%, compared with 38.0%. The Company's tax benefit for the fiscal 2000 second
quarter was lower than it otherwise would have been, however, because of the
Company's inability to fully utilize its foreign tax credits and the pledging of
the capital stock of Day Runner Hong Kong Ltd. as part of the security required
by the Company's Amended and Restated Loan Agreement.
SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH
THE SIX MONTHS ENDED DECEMBER 31, 1998
Net Sales. During the six months ended December 31, 1999, net sales
decreased by $2,960,000, or 2.6%, primarily because of the ongoing impact of
U.S. retailers' inventory tightening, which reduced gross product shipments and
increased returns. Net sales to office products customers declined by
$5,413,000, or 12.6%, and net sales to mass market customers decreased by
$16,570,000, or 43.9%. Because of the inclusion of Filofax's net sales for the
entire six months, compared with two months of the same period of fiscal 1999,
net sales to foreign customers grew by $16,335,000, or 63.4%, and net sales to
miscellaneous customers grouped together as "other" increased by $2,688,000, or
45.9%.
Because of the inclusion of Filofax's net sales for the entire first
six-months of fiscal 2000, net sales of organizers and planners increased by
$4,574,000, or 10.6%, and net sales of refills grew by $3,764,000, or 9.6%. Net
sales of related organizing products decreased by $11,298,000, or 37.8%, because
the Company discontinued its line of non-licensed appointment books after the
fall 1998 selling season and had fewer second fiscal quarter 2000 related
organizing products promotions in the mass market.
Gross Profit. Gross profit as a percentage of net sales decreased
slightly from 48.0% in the first six months of fiscal 1999 to 47.5% in the first
six months of fiscal 2000. A decline in the gross profit of the Company's U.S.
operations resulting primarily from an increase in the provision for sales
returns was partially offset by the inclusion of Filofax's higher gross profit
for the entire six-month period ended December 31, 1999, compared with two
months of the same period last year.
Operating Expenses. Total operating expenses increased by $5,050,000,
or 11.6%, in the first six months of fiscal 2000 compared with the first six
months of fiscal 1999 and increased as a percentage of net sales from 38.6% to
44.3%. Selling, marketing and distribution expenses increased by $2,317,000
because of the inclusion of Filofax's expenses for the entire six months ended
December 31, 1999, compared with two months of the same period last year. As a
percentage of net sales, selling, marketing and distribution expenses increased
from 27.8% to 30.6% because of the Company's decreased ability to absorb
expenses as a result of the decline in U.S. net sales. General and
administrative expenses increased by $3,805,000 and from 9.9% to 13.7% as a
percentage of net sales because of the additional four months of Filofax's
expenses.
Net Interest Expense. Net interest expense for the first six months of
fiscal 2000 was $5,967,000, compared with $1,389,000 for the first six months of
fiscal 1999, primarily because the Company's bank debt, which was principally
incurred to finance the Filofax acquisition, was outstanding for the entire
six-month period ended December 31, 1999, compared with approximately six weeks
of the same period last year.
Income Taxes. The Company recorded an income tax benefit of $369,000
for the first six months of fiscal 2000, compared with an income tax provision
of $3,491,000 for the first six months of fiscal 1999, and an effective tax rate
of 15.0%, compared with 38.0%. The Company's tax benefit for the fiscal 2000 six
months was lower than it otherwise would have been, however, because of the
Company's inability to fully utilize its foreign tax credits and the pledging of
the capital stock of Day Runner Hong Kong Ltd. as part of the security required
by the Company's Amended and Restated Loan Agreement.
SEASONAL FLUCTUATIONS
The Company has historically experienced and expects to continue to
experience significant seasonal fluctuations in its sales and other financial
results that it believes have resulted and will continue to result primarily
from its customers' and users' buying patterns. These buying patterns have
typically adversely affected orders for the Company's products in the third
quarter of each fiscal year.
Although it is difficult to predict the future seasonality of sales,
the Company believes that future seasonality should be influenced at least in
part by customer and user buying patterns substantially similar to those that
have historically affected the Company. Quarterly financial results are also
affected by new product introductions and line extensions, the timing of large
orders, changes in product sales or customer mix, vendor and customer pricing,
production levels, supply and manufacturing delays, large customers' inventory
management and general industry and economic conditions. The seasonality of the
Company's financial results and the unpredictability of the factors affecting
such seasonality make the Company's quarterly and yearly financial results
difficult to predict and subject to significant fluctuation.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's cash and cash equivalents at December 31, 1999
increased to $9,690,000 from $9,132,000 at June 30, 1999. During the six months
ended December 31, 1999, net cash of $16,035,000 provided by operating
activities which was partially offset by net cash of $11,405,000 and $4,093,000
used in financing activities and investing activities, respectively.
Of the $16,035,000 net amount provided by the Company's operating
activities, $13,827,000 was provided by the provision for doubtful accounts and
sales returns and other allowances, $6,779,000 was provided by depreciation and
amortization, $4,835,000 was provided by an increase in accrued expenses and
$3,825,000 was provided by an increase in income taxes payable. These amounts
were partially offset by an increase of $12,282,000 in accounts receivable and a
decrease of $2,512,000 in accounts payable.
Accounts receivable (net) at December 31, 1999 decreased by 2.7% from
the fiscal 1999 year-end amount and by 13.4% from the December 31, 1998 amount
primarily because of the decrease in U.S. sales.
Inventories at December 31, 1999 decreased by 8.2% from the fiscal 1999
year end amount and by 12.2% from the December 31, 1998 amount primarily because
of the Company's improved inventory management.
Of the $4,093,000 net amount used in the Company's investing
activities, $2,426,000 was used to acquire primarily machinery and equipment and
secondarily data processing equipment and software, and $1,667,000 was used by
an increase in other assets.
Of the $11,405,000 net amount used in the Company's financing
activities, $9,274,000 was repaid on the line of credit and $2,164,000 was used
to repay loan notes incurred in connection with the Filofax acquisition.
Bank Loan. On September 23, 1998, the Company entered into a
$160,000,000 Revolving Loan Agreement (the "Loan Agreement") with Wells Fargo
Bank, National Association ("Wells Fargo"). Effective November 24, 1998, this
amount was 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.
On October 12, 1999, the Company and the banks amended the Loan
Agreement (the "Amended and Restated Loan Agreement"). The Amended and Restated
Loan Agreement converts the entire outstanding revolving loan balance into a
term loan portion of $90,444,000 and a revolving credit loan portion of
$29,556,000. The term loan matures on September 30, 2001, and the revolving
credit loan facility matures on October 9, 2000. The maturity date of the
revolving credit loan facility will be automatically extended through September
30, 2001, provided that the Company achieves as of September 30, 2000 a minimum
EBITDA, a minimum fixed charge coverage ratio and a maximum senior funded debt
ratio, as defined in the amended agreement. As a result of the amendment of the
Loan Agreement, unamortized financing fees due under the Loan Agreement of
approximately $955,000 were charged to interest expense in October 1999. At
December 31, 1999, the Company had $96,775,000 outstanding under this Loan
Agreement and had outstanding letters of credit totaling approximately $406,000.
The Amended and Restated Loan Agreement is secured by the Company's
assets and includes, among other things, financial covenants requiring the
maintenance of a minimum fixed charge coverage ratio, EBITDA, stockholders'
equity and current ratio, and a maximum senior funded debt coverage ratio and
operating expenses to net sales ratio, as defined in the amended agreement. The
Amended and Restated Loan Agreement also limits, among other things, the
incurrence of liens and other indebtedness, mergers, consolidations, the sale of
assets, annual capital expenditures, advances, investments and loans by the
Company and its subsidiaries, dividends, stock repurchases and certain
transactions with affiliates. It permits up to $10,000,000 of secured debt for
currency hedging purposes and up to $1,500,000 of unsecured overdraft borrowings
for foreign subsidiaries.
The 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 six
months ended December 31, 1999, the weighted-average interest rate was 9.15%.
The interest rate at December 31, 1999 was 9.11%.
Under the Amended and Restated Loan Agreement, 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
vary with the level of the funded debt ratio at the time the letter of credit is
issued; and amendment and other standard fees of approximately $1,600,000, which
were paid during the six months ended December 31, 1999.
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 statements
of operations are approximately $583,000 and $371,000 of foreign exchange losses
for the six months ended December 31, 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 continuing to evaluate the impact of
the single currency in these markets.
Adequacy of Capital. The Company's liquidity is significantly dependent
upon its continued compliance with the terms of the Amended and Restated Loan
Agreement. These terms include, among others, payment of interest and principal
when due and maintenance of certain financial ratios. There can be no assurance
that the Company will be able to continue to comply with the terms of the Loan
Agreement (see Note 3 to the Consolidated Financial Statements.) The Company
believes that if it is able to continue to comply, cash flow from operations,
vendor credit, its existing working capital and its term and revolving credit
loans will be sufficient to satisfy the Company's anticipated cash requirements
at least through fiscal 2000. Nonetheless, the Company may seek additional
sources of capital as necessary or appropriate to finance the Company's growth
or operations; however, there can be no assurance that such funds if needed will
be available on favorable terms, if at all.
YEAR 2000
The Year 2000 issue refers to the inability of certain computer
systems, as well as certain hardware and equipment containing date-sensitive
data, to recognize accurately dates commencing on or after January 1, 2000. To
date the Company has not experienced any significant internal or external
operational problems as a result of the commencement of Year 2000. Nevertheless,
computer experts have warned that there may still be residual consequences
stemming from the change in centuries, and, if these consequences become
widespread or impact the Company's systems or the systems or operations of any
third party on which the Company relies, there can be no assurance that such
occurrence will not have an adverse effect on the Company's systems, operations
and/or financial condition.
As of December 31, 1999, the Company had incurred approximately
$2,027,000 in total costs related to the Year 2000 issue, which have been
expensed or capitalized as appropriate.
FORWARD LOOKING STATEMENTS
With the exception of actual reported financial results and other
historical information, the statements contained in this Quarterly Report on
Form 10-Q ("Quarterly Report") constitute "forward-looking statements" within
the meaning of the federal securities laws and involve a number of risks and
uncertainties. Such statements are indicated by words or phrases such as
"believes," "will," "plan," "goals," "project," "expect," "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
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; (2) 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 (3) the Company's efforts to restructure may not prove
sufficient to prevent future operating losses.
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, especially for retail shelf space; 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; the Company's continued ability to comply
with the terms of its bank loan agreement and related ability to meet its cash
requirements to finance its operations and growth; 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.
For additional risks and more detailed explanations of factors that may
cause the Company's results of operations to vary materially from current
expectations, see the Company's Form 10-K for the year ended June 30, 1999 filed
with the SEC.
FOREIGN CURRENCY EXPOSURE
The Company's reporting currency is the U.S. dollar, and interest and
principal payments on its long-term debts will be in U.S. dollars and pounds
Sterling. A portion of revenues and operating costs 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.
<PAGE>
PART II --OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On December 9, 1999, the Company held its 1999 Annual
Meeting of Stockholders (the "Annual Meeting").
(b) At the Annual Meeting, the Company's stockholders elected
the following persons as directors of the Company. The
number of votes cast for each director, as well as the
number of votes withheld, are listed opposite each
director's name.
Name Votes
of Cast for Votes
Director Director Withheld
-------- -------- --------
James E. Freeman, Jr. 9,824,158 550,426
James P. Higgins 9,824,358 550,226
Jill Tate Higgins 9,824,358 550,226
Charles Miller 9,824,358 550,226
Alan R. Rachlin 9,824,158 550,426
Mark A. Vidovich 9,824,158 550,426
Boyd I. Willat 9,824,218 550,366
Felice Willat 9,824,358 550,226
(c) At the Annual Meeting, the stockholders approved, with
9,277,029 votes cast in favor, 852,109 votes cast against,
245,446 abstentions and 0 broker nonvotes, the amendment
to the Company's 1995 Stock Option Plan to increase the
aggregate number of shares authorized for issuance
thereunder from 1,925,000 to 2,400,000 shares.
(d) At the Annual Meeting, with 10,374,384 votes cast in
favor, 0 votes cast against and 200 abstentions, the
stockholders ratified the appointment of Deloitte & Touche
LLP as independent auditors for the Company for the fiscal
year ending June 30, 2000.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Registrant,
as amended(1)
3.2 Bylaws of the Registrant(2)
10.1 Consulting Agreement effective November 22, 1999
between the Registrant and Mr. Alan R. Rachlin(3)
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the
Company during the quarter ended December 31, 1999.
(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) Constitutes a management contract or compensatory plan or arrangement
required to be filed as an exhibit pursuant to Item 6 (a) of this Quarterly
Report.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February 11, 2000
DAY RUNNER, INC.
By: /s/ JAMES E. FREEMAN JR.
-----------------------------
James E. Freeman, Jr.
Chief Executive Officer
By: /s/ DAVID A. WERNER
------------------------
David A. Werner
Executive Vice President, Finance
and Chief Financial Officer
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement"), which includes Exhibit A hereto
which is incorporated herein by this reference, is entered into by and between
DAY RUNNER, INC., a Delaware corporation (the "Company"), and ALAN R. RACHLIN, a
resident of Virginia who is operating a consulting business as a sole
proprietorship ("Consultant"), and shall be effective as of November 22, 1999
(the "Effective Date").
NOW, THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the receipt and sufficiency of which are hereby acknowledged, the
Company and Consultant agree as follows:
1. CONSULTANCY. The Company hereby retains Consultant, and Consultant
hereby accepts such retention, upon the terms and subject to the conditions set
forth herein, commencing as of November 22, 1999 and continuing through and
including November 21, 2000 (the "Term"). Consultant shall render such services
to the Company as an independent contractor, and not as an employee, agent,
joint venturer or otherwise. Although Consultant is an attorney, it is
understood that such services shall be rendered as a consultant to, and not as
an attorney for, the Company.
2. DUTIES. Consultant shall make himself available during the Term to
advise the Chairman and such Company employees as he designates with regard to
such strategic business issues and projects as he shall select, including,
without limitation, those relating to new or existing business development,
strategic and tactical planning, corporate finance or business aspects of
potential securities or other legal matters. Time devoted to Consultant's duties
as a member of the Company's Board of Directors and committees thereof shall not
be considered as consulting services under this Agreement. The Company shall be
entitled to require Consultant to make himself available up to 60 days during
the Term (but not more than 10 days in any single month) for the performance of
consulting services hereunder at such times and places as are mutually
satisfactory to the Company and Consultant. Consultant will travel to the
Company's principal offices as necessary to meet with management but will not
otherwise be required to perform any of his duties outside of Virginia.
3. COMPENSATION. In consideration for his agreement herein to render
consulting services to the Company, the Company agrees to compensate Consultant
in cash at the rate of $2,500 per day.
4. EXPENSES. Any and all expenses incurred by Consultant in rendering
consulting services hereunder shall be borne by Consultant, such expenses to
include travel within the Virginia-Washington D.C.-area, secretarial support
(unless provided with the Chairman's permission by an employee of the Company),
office supplies, telephone (unless long distance), overhead, meals, market
research, seminars, textbooks and computer time. The Company shall pay all its
own expenses incurred by it in connection with such consulting and shall
reimburse Consultant for all long distance telephone charges and expenses for
travel (including transportation, hotel, meals and other reasonable charges
resulting from such travel) outside of the Virginia-Washington D.C.-area and for
such other expenses as are authorized by the Chairman as appropriate for
reimbursement.
5. TERMINATION. Consultant's retention hereunder shall continue during
the Term unless earlier terminated by Consultant's death or by lawful
termination of this Agreement after breach hereof by Consultant. Neither party
may terminate this Agreement for breach except after providing written notice to
the other of the alleged breach (specifically describing therein in full detail
the basis for such alleged breach) and allowing 30 days after such notice for
the other party to cure such breach or cease breaching the Agreement.
6.CONFIDENTIALITY. Consultant shall execute on the date hereof and
send to the Company the Confidentiality Agreement attached hereto as Exhibit A
(the "Confidentiality Agreement").
7. MISCELLANEOUS.
7.1 Notices. Except as otherwise noted herein, all notices
pursuant to this Agreement shall be in writing, shall specifically reference
this Agreement and shall be deemed duly sent and given upon actual delivery to
and receipt by the relevant party (which in the case of the Company, shall be
the Chairman).
7.2 Legal Advice and Construction of Agreement. Both parties
hereto have received independent legal advice with respect to, and neither has
relied upon the other (or his or its advisors) in, entering into this Agreement.
7.3 Entire Agreement. This Agreement and the Confidentiality
Agreement constitute a single integrated contract expressing the entire
agreement of the parties with respect to the subject matter hereof and supersede
all prior and contemporaneous oral and written agreements and discussions with
respect to the subject matter hereof.
7.4 Amendment and Waiver. This Agreement and each provision
hereof may be amended, modified, supplemented or waived only by a written
document specifically identifying this Agreement and signed by both parties
hereto.
7.5 Specific Performance. Each party hereto may obtain
specific performance to enforce its/his rights hereunder and each party
acknowledges that failure to fulfill its/his obligations to the other party
hereto would result in irreparable harm.
7.6 Virginia Law. This Agreement was negotiated and delivered
within the Commonwealth of Virginia and the rights and obligations of the
parties hereto shall be construed and enforced in accordance with and governed
by the internal (and not the conflict of laws) laws of Virginia applicable to
the construction and enforcement of contracts between parties resident in
Virginia which are entered into and fully performed in Virginia. Any action or
proceeding arising out of, relating to or concerning this Agreement shall be
filed in the state courts of the County of Fairfax, Commonwealth of Virginia or
in a U.S. District Court in the Eastern District of Virginia. The parties hereby
waive the right to object to such location on the basis of venue.
7.7 Attorney's Fees. In the event a lawsuit is instituted by
either party concerning a dispute under this Agreement, the prevailing party in
such lawsuit shall be entitled to recover from the losing party all reasonable
attorneys' fees, costs of suit and expenses (including the reasonable fees,
costs and expenses of appeals), in addition to whatever damages or other relief
the injured party is otherwise entitled to under law or equity.
7.8 Force Majeure. Neither party hereto shall be deemed in
default if its/his performance of obligations hereunder is delayed or becomes
impossible or impracticable by reason of any act of God, war, fire, earthquake,
strike, civil commotion, epidemic, or any other cause beyond such party's
reasonable control.
7.9 Successors and Assigns. Neither party may assign this
Agreement or any of its/his rights or obligations hereunder to any third party
or entity, and this Agreement may not be involuntarily assigned by operation of
law, without the prior written consent of the nonassigning party, which consent
may be given or withheld by such nonassigning party in the sole exercise of
its/his discretion, except that the Company may assign this Agreement to a
corporation acquiring: (1) 50% or more of the Company's capital stock in a
merger or acquisition; or (2) all or substantially all of the assets of the
Company in a single transaction; and except that Consultant may transfer or
assign his rights under this Agreement voluntarily, involuntarily or by
operation of law upon or as a result of his death to his heirs, estate and/or
personal representative(s). Any prohibited assignment or attempted assignment
shall be null and void. This Agreement shall be binding upon and inure to the
benefit of each of the parties hereto and their respective lawful successors and
permitted assigns.
7.10 Limitation of Damages. Except as expressly set forth
herein, in any action or proceeding arising out of, relating to or concerning
this Agreement, including any claim of breach of contract, liability shall be
limited to compensatory damages, proximately caused by the breach and neither
party shall, under any circumstances, be liable to the other party for
consequential, incidental, indirect or special damages, including but not
limited to lost profits or income, even if such party has been apprised of the
likelihood of such damages occurring.
7.11 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original and which together shall
constitute one and the same instrument.
DAY RUNNER, INC. ALAN R. RACHLIN
By: /s/ Mark Vidovich Signature: /s/ Alan R. Rachlin
-------------------------- ----------------------
Mark Vidovich
Chairman
EXHIBIT A
CONFIDENTIALITY AGREEMENT
AGREEMENT, dated and made effective as of this 22nd day of November, 1999, by
and between Day Runner, Inc., a Delaware corporation ("Discloser"), and Alan R.
Rachlin, a Virginia resident ("Disclosee");
WHEREAS, Discloser intends to provide Disclosee with certain data and other
information possibly of a confidential or proprietary nature to Discloser; and
WHEREAS, Discloser considers certain of this information confidential but is
willing to provide such information to Disclosee on a confidential basis;
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree as follows:
1. For purposes of this Agreement, the term "Confidential Information"
shall mean that information of Discloser which is disclosed to Disclosee under
the Consulting Agreement, effective as of the date hereof by and between the
Discloser and Disclosee and which is in written graphic, recorded, photographic
or any machine readable form, and which is conspicuously marked as confidential.
2. (a) Disclosee will use such Confidential Information for his own use
only and shall use the same degree of care he uses to protect and safeguard the
confidentiality of his own proprietary information to not disclose such
Confidential Information to any person or persons other than his attorneys or
accountants. Disclosee covenants that such degree of care is reasonably designed
to protect the confidentiality of Disclosee's proprietary and confidential
information.
(b) Disclosee shall not be liable for disclosure of any such
Confidential Information if the same:
(i) was in the public domain at the time it was disclosed;
(ii) was known to Disclosee prior to the time of disclosure;
(iii) is disclosed with the prior written approval of
Discloser;
(iv) is or becomes publicly known through no wrongful act of
Disclosee;
(v) is disclosed after two years from the date of this
Agreement;
(vi) was or is independently developed by Disclosee without
any use of the Confidential Information;
(vii) becomes known to Disclosee from a source other than
Discloser without breach of this Agreement by Disclosee;
(viii) is or has been furnished by Discloser to others not
in a Confidential relationship with Discloser without restrictions similar
to or stricter than those herein on the right of the Receiving party to
use or disclose;
(ix) is received by Disclosee after written notification to
Discloser that Disclosee will not accept any further information;
(x) is disclosed pursuant to the order or requirement of a
court, administrative agency, or other governmental body; or
(xi) is disclosed pursuant to litigation involving Disclosee
and relating to the information disclosed hereunder.
(c) In the event of a disclosure under subsection (b)(x)
above, Disclosee shall give Disclosure written notice of such order or
requirement as soon as practicable prior to disclosure of the Confidential
Information.
3. The provisions of this Agreement shall supersede the provisions
of any legends which may be affixed to any Confidential Information provided by
Discloser to Disclosee.
4. This document contains the entire agreement between the parties as
to the subject matter hereof and supersedes any previous or contemporaneous
understandings, commitments or agreements, oral or written, as to such subject
matter. This Agreement can only be amended by a written document executed by the
parties hereto.
5. This Agreement shall be governed by the laws of the Commonwealth of
Virginia.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the date first
above-written.
Understood and Agreed:
"Discloser" "Disclosee"
DAY RUNNER, INC. ALAN R. RACHLIN
By: /s/ Mark Vidovich Signature: /s/ Alan R. Rachlin
------------------ ------------------------------
Mark Vidovich
Chairman
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the consolidated balance sheet and the consolidated statement of income filed as
part of the quarterly report on Form 10-Q and is qualified in its entireby by
reference to such quarterly report on Form 10-Q.
</LEGEND>
<CIK> 0000853102
<NAME> Day Runner, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Jun-30-2000
<PERIOD-START> Jul-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 9,690
<SECURITIES> 0
<RECEIVABLES> 52,736
<ALLOWANCES> 10,681
<INVENTORY> 38,878
<CURRENT-ASSETS> 106,838
<PP&E> 46,307
<DEPRECIATION> 30,164
<TOTAL-ASSETS> 209,865
<CURRENT-LIABILITIES> 51,225
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 67,925
<TOTAL-LIABILITY-AND-EQUITY> 209,865
<SALES> 109,336
<TOTAL-REVENUES> 109,336
<CGS> 57,430
<TOTAL-COSTS> 57,430
<OTHER-EXPENSES> 48,401
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,967
<INCOME-PRETAX> (2,462)
<INCOME-TAX> (369)
<INCOME-CONTINUING> (2,093)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,093)
<EPS-BASIC> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
