<PAGE>
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 September 30, 2000
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)
2750 WEST MOORE AVENUE
FULLERTON, CALIFORNIA 92833
(Address and zip code of principal executive offices)
(714) 680-3500
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No /_/
Indicate the number of shares outstanding of each of the registrant's
classes of Common Stock, as of the latest practicable date:
CLASS NUMBER OF SHARES OUTSTANDING AT NOVEMBER 10, 2000
------------------------------ -----------------------------------------------
Common Stock, $0.001 par value 2,392,860
<PAGE>
DAY RUNNER, INC.
INDEX
-----
<TABLE>
<CAPTION>
PAGE REFERENCE
--------------
<S> <C> <C>
COVER PAGE....................................................................................... 1
INDEX ........................................................................................ 2
PART I -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets
September 30, 2000 and June 30, 2000...................................... 3
Consolidated Statements of Income
Three Months Ended September 30, 2000 and 1999............................ 4
Consolidated Statements of Cash Flows
Three Months Ended September 30, 2000 and 1999............................ 5
Notes to Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................... 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 21
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................ 22
SIGNATURES....................................................................................... 23
</TABLE>
2
<PAGE>
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
-------------- ---------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents...................................................... $ 7,102 $ 3,960
Accounts receivable (less allowance for doubtful accounts and
sales returns and other allowances of $9,410 and $8,391 at
September 30, 2000 and June 30, 2000, respectively)......................... 31,453 18,563
Inventories.................................................................... 31,386 34,046
Prepaid expenses and other current assets...................................... 5,365 6,098
Income taxes receivable........................................................ 1,192 1,823
-------- --------
Total current assets........................................................ 76,498 64,490
Property and equipment, net ....................................................... 9,405 10,972
Goodwill and other intangible assets (net of accumulated amortization of $4,170
and $4,042 at September 30, 2000 and June 30, 2000, respectively).............. 20,294 20,422
Other assets (net of accumulated amortization of $924 and $727 at September
30, 2000 and June 30, 2000, respectively)..................................... 996 1,210
-------- --------
TOTAL ............................................................................ $107,193 $97,094
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Line of credit................................................................. $107,841 $ 99,077
Accounts payable............................................................... 10,022 12,373
Accrued expenses............................................................... 24,994 21,725
Current portion of loan notes.................................................. 194
-------- --------
Total current liabilities................................................... 142,857 133,369
-------- --------
Long-term liabilities:
Loan notes..................................................................... 44 45
-------- --------
Total long-term liabilities................................................. 44 45
-------- --------
Commitments and contingencies
Stockholders' deficiency:
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 September 30, 2000 and
June 30, 2000).............................................................. 2 2
Additional paid-in capital..................................................... 19,181 19,181
Accumulated deficit............................................................ (45,060) (45,559)
Accumulated other comprehensive income......................................... 946 833
Treasury stock - At cost (144,859 shares at September 30, 2000 and
June 30, 2000).............................................................. (10,777) (10,777)
-------- --------
Total stockholders' deficiency.............................................. (35,708) (36,320)
-------- --------
TOTAL ............................................................................ $107,193 $ 97,094
======== ========
</TABLE>
See accompanying notes to consolidated financial
statements.
3
<PAGE>
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
2000 1999
-------- ---------
<S> <C> <C>
Net sales............................................................................... $41,824 $51,853
Cost of goods sold...................................................................... 19,814 25,971
------- ---------
Gross profit............................................................................ 22,010 25,882
------- ---------
Operating expenses:
Selling, marketing and distribution................................................ 11,331 15,670
General and administrative......................................................... 6,580 6,935
Restructuring and impairment charges............................................... 84
------- ---------
Total operating expenses......................................................... 17,995 22,605
------- ---------
Income from operations.................................................................. 4,015 3,277
Net interest expense.................................................................... 2,889 2,144
------- ---------
Income before provision for income taxes................................................ 1,126 1,133
Provision for income taxes.............................................................. 627 533
------- ---------
Net income.............................................................................. $ 499 $ 600
======= =========
Earnings per common share:
Basic.............................................................................. $ 0.21 $ 0.25
======= ========
Diluted............................................................................ $ 0.21 $ 0.25
======= ========
Weighted-average number of common shares outstanding:
Basic.............................................................................. 2,393 2,380
======= ========
Diluted............................................................................ 2,393 2,426
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
DAY RUNNER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
SEPTEMBER 30,
---------------------
2000 1999
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................... $ 499 $ 600
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization.............................................. 2,042 3,081
Provision for doubtful accounts and sales returns and other allowances..... 3,214 5,619
Loss on disposal of property and equipment................................. 168 3
Changes in operating assets and liabilities:
Accounts receivable..................................................... (16,365) (8,526)
Inventories............................................................. 2,427 (2,234)
Prepaid expenses and other current assets............................... 436 (732)
Income taxes receivable................................................. 684 1,667
Accounts payable........................................................ (2,250) (1,499)
Accrued expenses........................................................ 3,274 1,850
Income taxes payable.................................................... 1,278
--------- ---------
Net cash (used in) provided by operating activities..................... (5,871) 1,107
--------- ---------
Cash flows from investing activities:
Proceeds on disposition of property and equipment............................. 7
Acquisition of property and equipment......................................... (161) (1,144)
Other assets.................................................................. 19 (564)
--------- ---------
Net cash used in investing activities.................................... (135) (1,708)
--------- ---------
Cash flows from financing activities:
Net borrowings under line of credit........................................... 9,242 2,954
Repayment of loan notes....................................................... (193) (2,184)
--------- ---------
Net cash provided by financing activities................................ 9,049 770
--------- ---------
Effect of exchange rate changes in cash........................................... 99 26
--------- ---------
Net increase in cash and cash equivalents......................................... 3,142 195
Cash and cash equivalents at beginning of period.................................. 3,960 9,132
--------- ---------
Cash and cash equivalents at end of period........................................ $ 7,102 $ 9,327
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
DAY RUNNER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying consolidated balance sheet as of September 30, 2000
and consolidated statements of income and cash flows for the three-month periods
ended September 30, 2000 and 1999 of Day Runner, Inc. and subsidiaries ("the
Company") 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 accounting principles generally
accepted in the United States of America have been omitted pursuant to the
requirements of the Securities and Exchange Commission, although the Company
believes that the disclosures included in the consolidated financial statements
included herein are adequate to make the information therein not misleading. The
consolidated financial statements included herein should be read in conjunction
with the Company's audited consolidated financial statements for the year ended
June 30, 2000, and the notes thereto, which are included in the Company's Annual
Report on Form 10-K.
The results of operations for the three months ended September 30, 2000
and 1999 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.
As discussed in Note 3, at September 30 and 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 negotiating with its lenders to restructure its debt
and provide long-term financing to the Company and expects to sign a
definitive loan agreement in November 2000. The waiver agreement between the
Company and its lenders for the existing loan agreement expired on October
31, 2000. The Company anticipates that a new loan agreement will include a
waiver for any defaults that occur between November 1, 2000 and the date the
new loan agreement is signed. 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 and there can be no assurance that the
Company will succeed in these negotiations and/or obtain further waivers of
the existing loan agreement.
6
<PAGE>
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 of certain less profitable products and 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 of recognizable value to the consumer, while removing any product and
service costs not recognized or valued by the ultimate consumer. In addition,
the Company is aggressively pursuing the 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 and/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 5).
NEW ACCOUNTING PRONOUNCEMENTS - Effective July 1, 2000, the Company has
adopted Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which was amended by SFAS No.
137 and SFAS No. 138. 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 adoption of SFAS 133 has not
had an impact on the financial position or results of operations of the Company
because the Company does not have significant derivative activity.
7
<PAGE>
In December 1999, the Securities and Exchange Commission (the "SEC")
published Staff Accounting Bulletin No. 101 ("SAB 101"), REVENUE RECOGNITION IN
FINANCIAL STATEMENTS, effective for the fourth fiscal quarter of fiscal years
beginning after December 15, 1999. SAB 101 provides guidance in applying
generally accepted accounting principles to selected revenue recognition issues
in financial statements. The Company is assessing the impact that this bulletin
may have on the financial statements.
8
<PAGE>
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
------------- -----------
<S> <C> <C>
Raw materials................... $ 4,423 $ 5,127
Work in process................. 1,527 2,016
Finished goods.................. 25,436 26,903
------- --------
Total.................. $31,386 $ 34,046
======= ========
</TABLE>
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, 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, $40,000 of which was charged to interest expense
during the quarter ended September 30, 1999.
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
matured 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 terminated on October 31, 2000. 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 September 30, 2000, the Company had $107,841,000 outstanding
under the Amended Loan Agreement.
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, 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
9
<PAGE>
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 provided that outstanding balances would
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. These terms were modified in the waiver agreements and,
as a result, the Company has borrowed funds at the Agent Bank's prime rate plus
an interest rate margin of 200 basis points. During the quarter ended September
30, 2000, the weighted-average interest rate was 10.1%. The weighted-average
interest rate at September 30, 2000 was 10.7%.
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, $197,000 was
charged to interest expense during the quarter ended September 30, 2000 and the
unamortized fees totaling $786,000 are included in other assets in the
accompanying consolidated balance sheets as of September 30, 2000.
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 continued through October 31, 2000, waived compliance with
certain financial covenants and permitted 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
agreements continued for less than a one-year period, the Company's line of
credit is classified as a current liability at September 30, 2000 in the
accompanying consolidated balance sheets. As of September 30, 2000, the term
loan outstanding was $87,547,000 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, that waiver agreement provided 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.
The Company is negotiating with its lenders to restructure its debt and
provide long-term financing to the Company and expects to sign a definitive loan
agreement in November 2000. The most recent waiver agreement for the Amended
Loan Agreement expired on October 31, 2000. The Company anticipates that a new
loan agreement will include a waiver of any defaults that occur between November
1, 2000 and the date the new loan agreement is signed. The Company's continued
existence is dependent upon several factors including the Company's ability to
renegotiate the terms and convenants of the loan agreement and there can be no
10
<PAGE>
assurance that the Company will succeed in these negotiations and/or obtain
further waivers of the Amended Loan Agreement.
4. LOAN NOTES
In November 1998, loan notes in the amount of (pound)1,477,000 (US
$2,186,000) were issued in connection WITH the Filofax acquisition. These loan
notes are unsecured obligations of the Company's U.K. subsidiary and bear
interest at LIBOR (6.8% at September 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 September 30, 2000, (pound)1,447,000 (US
$2,142,000) of the Loan Notes had been redeemed.
5. 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 operating assets; (v) retained Crossroads, LLC, an interim management firm;
(vi) discontinued approximately 600 products and (vii) closed its Australian
subsidiary and began distributing its products through a third party distributor
in Australia. The Company is continuing its restructuring plan through fiscal
2001.
During the quarter ended September 30, 2000, the Company recorded
$112,000 in restructuring charges, which consist of $50,000 in facilities
closure costs and related write down of inventories and $62,000 in severance
costs. Of the restructuring charges, $28,000 is included in cost of goods sold
and $84,000 is included in restructuring and impairment charges for the quarter
ended September 30, 2000. No restructuring charges were recorded during the
quarter ended September 30, 1999. Included in accrued expenses at June 30, 2000
was $1,220,000 of restructuring costs of which $370,000 was paid out during the
quarter ended September 30, 2000. Remaining in accrued expenses at September 30,
2000 is $850,000 in restructuring costs of which $694,000 represents severance
costs. The severance costs recorded during the quarter ended September 30, 2000
were the result of seven terminations.
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
11
<PAGE>
proceeds will not differ significantly from these estimates. As a result of
the impairment analysis, the Company recorded impairment charges of
$59,337,000 during the fiscal year ended June 30, 2000. No additional
impairment charges were recorded during the quarter ended September 30, 2000.
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 for the quarters
ended September 30, are as follows (in thousands):
<TABLE>
<CAPTION>
2000 1999
--------- --------
<S> <C> <C>
Net sales $13,309 $17,363
Income from operations 2,069 3,068
Working capital 11,504 10,546
Long-term assets 20,384 83,214
</TABLE>
6. 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 is computed by dividing net income by the sum of the
weighted-average number of common shares outstanding for the period plus the
assumed exercise of all dilutive securities. The following reconciles the
numerator and denominator of the basic and diluted per share computations for
net income (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------- --------------
<S> <C> <C>
NET INCOME $ 499 $ 600
========= ==========
BASIC WEIGHTED-AVERAGE SHARES
Weighted average number of
common shares outstanding 2,393 2,380
EFFECT OF DILUTIVE SECURITIES
Additional shares from the assumed
exercise of options and warrants 262
Shares assumed to be repurchased
under the treasury stock method (216)
--------- ----------
DILUTED WEIGHTED-AVERAGE SHARES
Weighted-average number of
common shares outstanding and
common share equivalents $ 2,393 $ 2,426
========= ==========
EARNINGS PER SHARE:
Basic $ 0.21 $ 0.25
========= ==========
Diluted $ 0.21 $ 0.25
========= ==========
</TABLE>
12
<PAGE>
7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------- --------------
<S> <C> <C>
Net income $ 499 $ 600
Foreign currency translation adjustments 113 (621)
--------- ----------
Comprehensive income (loss) $ 612 $ (21)
========= ==========
</TABLE>
8. 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 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
------------------- ------------------
<S> <C> <C>
Organizers and planners $ 21,920 $ 21,180
Refills 13,208 18,480
Related organizing products 6,696 12,193
---------- ---------
Total $ 41,824 $ 51,853
========== =========
</TABLE>
13
<PAGE>
9. OPERATIONS IN FOREIGN COUNTRIES
The following is a summary of the financial activity of the Company by
geographical area (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 2000
------------------------------------------------------------------------------------
UNITED STATES EUROPE OTHER ELIMINATIONS TOTAL
------------- ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated entities $ 28,396 $ 9,972 $ 3,456 $ 41,824
Transfers between geographic areas 457 57 $ (514)
--------- -------- ---------- ----------- ----------
Net sales $ 28,853 $ 9,972 $ 3,513 $ (514) $ 41,824
========== ======== ========== =========== ==========
Long-lived assets $ 82,105 $ 20,209 $ 803 $ (72,422) $ 30,695
========== ======== ========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------------------------------------
UNITED STATES EUROPE OTHER ELIMINATIONS TOTAL
------------- ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated entities $ 33,094 $ 13,325 $ 5,434 $ 51,853
Transfers between geographic areas 863 355 $ (1,218)
---------- -------- ---------- ---------- ----------
Net sales $ 33,957 $ 13,325 $ 5,789 $ (1,218) $ 51,853
========== ======== ========== ========== ==========
Long-lived assets $ 89,004 $ 82,969 $ 3,393 $ (70,680) $ 104,686
========== ======== ========== ========== ==========
</TABLE>
10. CONTINGENCIES
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.
11. STATEMENTS OF CASH FLOWS
Supplemental disclosure of cash flow information (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
2000 1999
---------------- -----------------
<S> <C> <C>
Cash paid during the period for:
Interest $ 1,229 $ 1,857
Income taxes, net of refunds
received $ (77) $ (1,984)
</TABLE>
14
<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. 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 44.7%,
15.4% and 31.7%, respectively, of net sales for the three months ended September
30, 2000.
As discussed in Note 3 to the accompanying consolidated financial
statements, at September 30 and 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 negotiating with its lenders to restructure its debt and provide
long-term financing to the Company and expects to sign a definitive loan
agreement in November 2000. The waiver agreement between the Company and its
lenders for the existing loan agreement expired on October 31, 2000. The
Company anticipates that a new loan agreement will include a waiver for any
defaults that occur between November 1, 2000 and the date the new loan
agreement is signed. 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 and there can be no assurance that the
Company will succeed in these negotiations and/or obtain further waivers of
the existing 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 of certain less profitable products and 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.
15
<PAGE>
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 of recognizable value to the consumer, while removing any product and
service costs not recognized or valued by the ultimate consumer. In addition,
the Company is aggressively pursuing the 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 and/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 5 to the accompanying
consolidated financial statements).
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that selected income statement items bear to net sales and the
percentage change in the dollar amounts of such items.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
OF SALES CHANGE
---------- ----------
THREE THREE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- 1999
2000 1999 TO 2000
------ -------- ---------
<S> <C> <C> <C>
Net sales.............................................................. 100.0% 100.0% (19.3)%
Cost of goods sold..................................................... 47.4 50.1 (23.7)
----- -----
Gross profit........................................................... 52.6 49.9 (15.0)
----- -----
Operating expenses:
Selling, marketing and distribution................................ 27.1 30.2 (27.7)
General and administrative......................................... 15.7 13.4 (5.1)
Restructuring and impairment charges............................... 0.2 100.0
----- -----
Total operating expenses........................................ 43.0 43.6 (20.4)
----- ----- -
Income from operations................................................. 9.6 6.3 22.5
Net interest expense................................................... 6.9 4.1 34.7
---- ---
Income before provision for income taxes............................... 2.7 2.2 (0.6)
Provision for income taxes............................................. 1.5 1.0 17.6
---- ----
Net income............................................................. 1.2% 1.2% (16.8)%
==== ====
</TABLE>
16
<PAGE>
The following tables set forth, for the periods indicated, the
Company's approximate net sales by product category and distribution channel and
as a percentage of total net sales.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------
PRODUCT CATEGORY: 2000 1999
----------------- ---------------------------- --------------------
(unaudited; dollars in thousands)
<S> <C> <C> <C> <C>
Organizers and planners.............................. $ 21,920 52.4% $ 21,180 40.9%
Refills.............................................. 13,208 31.6 18,480 35.6
Related organizing products.......................... 6,696 16.0 12,193 23.5
-------- ----- --------- -----
Total............................................ $ 41,824 100.0% $ 51,853 100.0%
======== ===== ========= =====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------
DISTRIBUTION CHANNEL: 2000 1999
--------------------- --------------------------- -----------------------
(unaudited; dollars in thousands)
<S> <C> <C> <C> <C>
Office products...................................... $ 18,690 44.7% $ 19,968 38.5%
Mass market.......................................... 6,416 15.4 11,346 21.9
Foreign customers.................................... 13,273 31.7 18,590 35.8
Other................................................ 3,445 8.2 1,949 3.8
-------- ----- --------- -----
Total............................................ $ 41,824 100.0% $ 51,853 100.0%
======== ===== ========= =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED WITH
THE THREE MONTHS ENDED SEPTEMBER 30, 1999
NET SALES. Net sales consist of revenues from gross product
shipments net of allowances for returns, rebates and credits. In the first
quarter of fiscal 2001, net sales decreased by $10,029,000, or 19.3%,
compared with the first quarter of fiscal 2000 because of the adverse affects
of ongoing changes in the retail environment related to supply chain
management practices of its large U.S. customers. Other factors causing lower
net sales include the reduction of certain kinds of promotional activity and
the Company's decision to de-emphasize sales of certain less profitable
products and to certain less profitable channels. In the quarter ended
September 30, 2000, net sales were primarily to the office products channel
and secondarily to foreign customers. Net sales to miscellaneous customers
grouped together as "other", increased by $1,496,000, or 76.8%, net sales to
foreign customers decreased by $5,317,000, or 28.6%, net sales to mass market
customers decreased by $4,930,000, or 43.5%, and net sales to office products
customers decreased by $1,278,000, or 6.4%. Net sales of organizers and
planners increased by $740,000, or 3.5%, net sales of related organizing
products decreased by $5,497,000, or 45.1%, and net sales of refills
decreased by $5,272,000, or 28.5%.
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
17
<PAGE>
efficiencies, tariffs, duties and inventory carrying costs. Gross profit as a
percentage of net sales increased from 49.9% in the first quarter of fiscal
2000 to 52.6% in the first quarter of fiscal 2001 primarily because of the
significant decrease in actual returns and related customer return scrap.
OPERATING EXPENSES. Total operating expenses decreased by $4,610,000,
or 20.4%, in the first quarter of fiscal 2001 compared with the first quarter of
fiscal 2000 and decreased as a percentage of sales from 43.6% to 43.0%. Selling,
marketing and distribution expenses decreased by $4,339,000, and from 30.2% to
27.1% as a percentage of net sales, primarily because of a reduction in
promotional activity and secondarily due to lower net sales that resulted in
lower distribution expense. General and administrative expenses decreased by
$355,000 but increased from 13.4% to 15.7% as a percentage of net sales. The
increase in general and administrative expenses as a percentage of net sales is
due to the increase in consulting, legal and related costs which is due to the
Company's ongoing performance problems and the negotiations related to its
credit facility. Consulting, legal and related costs for the quarter ended
September 30, 2000 were $1,410,000 compared with $201,000 for the quarter ended
September 30, 1999.
As a result of the Company's restructuring activities during the
quarter ended September 30, 2000, the Company recorded $112,000 in restructuring
charges, which consist of $50,000 in facilities closure costs and the related
write down of inventories and $62,000 in severance costs. Of the restructuring
charges, $84,000 is included in restructuring and impairment charges and $28,000
is included in cost of goods sold. No restructuring charges were recorded during
the quarter ended September 30, 1999.
NET INTEREST EXPENSE. Net interest expense increased by $745,000, or
34.7%, in the first quarter of fiscal 2001 compared with the first quarter of
fiscal 2000 due to an increase in the average interest rate and an increase in
the amortization of deferred financing fees. During the quarter ended September
30, 2000, the weighted-average interest rate was 10.1% compared with 8.0% for
the quarter ended September 30, 1999. Additionally, included in net interest
expense is the amortization of deferred financing fees equal to $197,000 during
the quarter ended September 30, 2000 compared with $40,000 for the quarter ended
September 30, 1999.
INCOME TAXES. The Company's first quarter fiscal 2001 effective tax
rate was 55.7%, compared with 47.0% for the first quarter of fiscal 2000.
Although the Company's U.S. income will be offset by net operating losses, the
tax provision represents taxes based on income earned in foreign tax
jurisdictions. The effective tax rate is higher than may be expected due to the
Company's inability to utilize these taxes as foreign tax credits.
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
18
<PAGE>
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.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL. The Company's cash and cash equivalents at September 30, 2000
increased to $7,102,000 from $3,960,000 at June 30, 2000. During the quarter
ended September 30, 2000, net cash of $5,871,000 used in operating activities
and $135,000 used in investing activities was offset by net cash of $9,049,000
provided by financing activities.
Of the $5,871,000 net amount used in the Company's operating
activities, $3,274,000 was provided by an increase in accrued expenses,
$3,214,000 was provided by the provision for doubtful accounts and sales returns
and other allowances, $2,427,000 was provided by a decrease in inventories and
$2,042,000 was provided by depreciation and amortization. These amounts were
offset by an increase of $16,365,000 in accounts receivable and a decrease of
$2,250,000 in accounts payable.
Accounts receivable (net) at September 30, 2000 increased by 69.4% from
the fiscal 2000 year-end amount due primarily to an increase in net sales for
the quarter ended September 30, 2000 compared with the quarter ended June 30,
2000. Compared to the September 30, 1999 amount, accounts receivable (net)
decreased by 32.6% due primarily to a decrease in net sales for the quarter
ended September 30, 2000 compared with the quarter ended September 30, 1999.
Inventories at September 30, 2000 decreased by 7.8% from the fiscal
2000 year-end amount and by 30.3% from the September 30, 1999 amount primarily
because of a reduction in the number of products offered and secondarily because
of the Company's concentrated efforts to control and manage inventories more
efficiently.
The $135,000 used in the Company's investing activities was primarily
used to acquire property and equipment.
The $9,049,000 net amount provided by the Company's financing
activities was provided by net borrowings under 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, $40,000 of which was charged to interest expense
during the quarter ended September 30, 1999.
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
matured 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
20
<PAGE>
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 terminated on October 31, 2000. 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 September 30, 2000, the Company had $107,841,000 outstanding
under the Amended Loan Agreement.
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, 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 provided that outstanding balances would
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. These terms were modified in the waiver agreements and,
as a result, the Company has borrowed funds at the Agent Bank's prime rate plus
an interest rate margin of 200 basis points. During the quarter ended September
30, 2000, the weighted-average interest rate was 10.1%. The weighted-average
interest rate at September 30, 2000 was 10.7%.
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, $197,000 was
charged to interest expense during the quarter ended September 30, 2000 and the
unamortized fees totaling $786,000 are included in other assets in the
accompanying consolidated balance sheets as of September 30, 2000.
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 continued through October 31, 2000, waived compliance with
certain financial covenants and permitted 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
agreements continued for less than a one-year period, the Company's line of
credit is classified as a current liability at September 30, 2000 in the
accompanying consolidated balance sheets. As of September 30, 2000, the term
loan outstanding was $87,547,000 and the
21
<PAGE>
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, that waiver agreement provided 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.
The Company is negotiating with its lenders to restructure its debt and
provide long-term financing to the Company and expects to sign a definitive loan
agreement in November 2000. The most recent waiver agreement for the Amended
Loan Agreement expired on October 31, 2000. The Company anticipates that a new
loan agreement will include a waiver of any defaults that occur between November
1, 2000 and the date the new loan agreement is signed. The Company's continued
existence is dependent upon several factors including the Company's ability to
renegotiate the terms and convenants of the loan agreement and there can be no
assurance that the Company will succeed in these negotiations and/or obtain
further waivers of the Amended Loan Agreement.
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 income is $413,000 and $238,000 of net foreign exchange losses for the
quarters ended September 30, 2000 and 1999, 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. The most recent waiver agreement
expired 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 effect on
the Company's business, financial condition, results of operations and cash
flow.
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 that may cause actual events and results to differ materially from
those described in the forward-looking statements. Such statements are based on
current
22
<PAGE>
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," "will,"
"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
liquidity is dependent upon its ability to successfully renegotiate the terms of
its bank loan agreement and/or obtain further waivers of such agreement and
there can be no assurance that the Company will succeed in renegotiating and/or
obtaining waivers of such agreement; (2) the Company has reported substantial
losses over the last two fiscal years and there can be no assurance that the
Company's substantial restructuring plans will be successful in returning the
Company to profitability; (3) the Company's efforts to control costs may not
prove sufficient to prevent future increases in operating expenses in dollars or
as a percentage of sales; (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; (5) 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 (6)
there can be no assurance that the Company's new products will meet with market
acceptance.
Additional factors that may cause future events and 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; 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.
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, 2000 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
23
<PAGE>
There have been no material changes regarding the Company's market risk
position from the information provided in Form 10-K for the fiscal year ended
June 30, 2000.
24
<PAGE>
PART II --OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Registrant, as
amended(1)
3.2 Bylaws of the Registrant(2)
10.2 Second Amendment to Officer Severance Plan effective
as of July 14, 2000(1)
10.3 Letter Agreement dated September 26, 2000 terminating
the Consulting Agreement effective November 22, 1999
between the Registrant and Mr. Alan Rachlin(1)
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 September 30, 2000.
----------------------------------
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 0-19835) filed with the Commission on September 27, 2000.
(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.
25
<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: November 13, 2000
DAY RUNNER, INC.
By: /s/ JOHN F. AUSURA
-------------------------------------------
John F. Ausura
Chief Executive Officer
By: /s/ DAVID A. WERNER
-------------------------------------------
David A. Werner
Executive Vice President &
Chief Financial Officer
26
