-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FtVWWuQtZSLrmF/o6FiSlsb+ozCKGOaNvkeNDvwsgmgw/D/E7mRkAC2XSmmZA+sw FqsHqECFa9O5WUFtnk0pCg== 0000853102-96-000021.txt : 19961001 0000853102-96-000021.hdr.sgml : 19961001 ACCESSION NUMBER: 0000853102-96-000021 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960930 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAY RUNNER INC CENTRAL INDEX KEY: 0000853102 STANDARD INDUSTRIAL CLASSIFICATION: BLANKBOOKS, LOOSELEAF BINDERS & BOOKBINDING & RELATED WORK [2780] IRS NUMBER: 953624280 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19835 FILM NUMBER: 96636460 BUSINESS ADDRESS: STREET 1: 15295 ALTON PARKWAY CITY: IRVINE STATE: CA ZIP: 92718 BUSINESS PHONE: 714/680-3500 MAIL ADDRESS: STREET 1: 15295 ALTON PARKWAY CITY: IRVINE STATE: CA ZIP: 92718 10-K 1 ANNUAL REPORT ON FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES ACT OF 1934 Commission file number 0-19835 DAY RUNNER, INC. (Exact name of registrant as specified in its charter) Delaware 95-3624280 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 15295 Alton Parkway, Irvine, California 92618 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (714) 680-3500 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of the Common Stock on September 16, 1996 as reported on The Nasdaq Stock Market, was approximately $117,000,000. The number of shares outstanding of the registrant's Common Stock on September 16, 1996 was 6,329,771. PART I Item 1. BUSINESS. The Company Day Runner(R), Inc. ("Day Runner") is the leading developer, manufacturer and marketer of paper-based organizers for the retail market. We also develop, manufacture and market related organizational products, including telephone/address books and traditional spiral dated goods. We estimate that since our founding in 1980 we have sold approximately 27 million organizers and planners. Day Runner's products are carried by more than 20,000 retail stores across the U.S.: in fiscal 1996, we shipped directly to approximately 11,500 retail locations, to distribution centers serving approximately 6,100 retail locations and to approximately 200 wholesalers. We market our products to customers through our own sales force, through manufacturers' representatives and, in certain markets outside the U.S., through independent distributors. Our major customers in each of our primary domestic channels include: office products superstores Office Depot, Inc., OfficeMax, Inc. and Staples, Inc.; office products national wholesalers United Stationers Supply Co. and S.P. Richards Company; office products dealer McWhorter Stationers Company, Inc.; and mass market retailers Wal-Mart, Kmart and Target. Sales to the office products and mass market channels accounted for approximately 49.8% and 37.4%, respectively, of fiscal 1996 sales. Our organizers and planners are loose-leaf and spiral-bound time and information management systems that range from simple to sophisticated. For example, our flagship Day Runner System organizers include not only the traditional planner components of appointment calendar, telephone/address section and note pad but also interrelated pages for managing time and information, tracking expenses, establishing goals and planning projects. Segmenting the market for organizers and planners is a key element of our strategy. We aim our product lines at market segments ranging from students to women shopping in the mass market to business and professional people and offer many of our organizers and planners in a choice of sizes, styles, cover materials and colors. Suggested retail prices for our organizers and planners range from $6 to $150. Most of our organizers and planners are refillable. Refills, which include calendars and accessories, accounted for approximately 34.7% of our sales in fiscal 1996. Suggested retail prices for refills range from $0.75 to $30. Our related organizational products include telephone/address books, traditional spiral dated goods, products for elementary and middle school children and personal information management (PIM) software intended to complement our organizers. We group these products, along with certain miscellaneous items, in a category called "other products." This category accounted for approximately 3.5% of fiscal 1996 sales. With the exception of our software product and the calculators we include in certain of our products and sell as accessories, all of our current products have been developed internally. The chart on page seven shows the year of initial shipment of each of our current products. We manufacture and/or assemble a portion of our products at our Fullerton, California facility and our Mexican subsidiary and also use foreign and domestic contractors to supply both product components and finished goods. BUSINESS STRATEGY Day Runner sells broad-based personal organizing products through retail distribution channels. Our strategy is to leverage our brand name awareness and distribution strength to maximize sales of our existing products, extend those product lines and introduce new product lines. Key elements of our strategy include: o Segmenting the market for organizers and planners. o Entering related product categories. o Building sales through major customers. o Marketing to increase sales. o Expanding foreign sales. o Providing excellent customer service. SEGMENTING THE MARKET FOR ORGANIZERS AND PLANNERS. In order to expand and segment our market, we offer our organizers and planners in a broad range of systems, sizes, styles and cover materials and at suggested retail prices ranging from $6 to $150. As a result, our products appeal to a large consumer market comprised of users with differing needs, tastes and budgets and are appropriate for sale through a broad range of retailers. Versatile Day Runner System organizers and planners are suitable for use by adults in virtually all walks of life. Specific target markets addressed by other Day Runner organizers and planners include business and professional people, cost-conscious consumers, young women shopping in the mass market, users of traditional spiral dated goods, college students, middle school and high school students and elementary school children. ENTERING RELATED PRODUCT CATEGORIES. Day Runner believes that related personal organizational products offer us an opportunity to leverage our brand name and distribution and build upon our heritage in the area of personal organization. Our strategy is to: o Redefine existing product categories as value-added. o Offer a superior price/value relationship to the consumer. o Gain initial distribution through our existing customers. o Produce sales results we can build upon. Our current related organizational products include telephone/address books, products for elementary and middle school children, PIM software and traditional spiral dated goods. BUILDING SALES THROUGH MAJOR CUSTOMERS. To reach consumers with differing needs and varying retail shopping habits, we distribute our products in the U.S. through multiple channels, including: o Office products superstores, wholesalers and dealers. o Mass market retailers, including discount department stores, wholesale clubs, drug chains, chain groceries and other mass market retailers. o A wide variety of other customers, including book, department, gift, leather and luggage, stationery and other specialty stores and the U.S. Government. Day Runner's products are carried by more than 20,000 retail outlets in the U.S., including the leaders in our key office products and mass market channels of distribution. Our strategy is to grow our sales through our major customers by increasing our everyday shelf space where appropriate, continuing to expand our product selection, serving the back-to-school market and creating other seasonal, promotional and product opportunities. MARKETING TO INCREASE SALES. We market our products to customers to inform them of the benefits of selling Day Runner's products and to consumers to further build brand name awareness and to maximize the productivity of the retail shelf space our products occupy. EXPANDING FOREIGN SALES. We are working to build our sales outside the United States by focusing on key markets and offering products with features, aesthetics and price points appropriate for those markets. We offer some of our products in German and Spanish versions. PROVIDING EXCELLENT CUSTOMER SERVICE. Day Runner believes that excellent customer service can provide us with additional competitive advantage. We serve customers from both our Fullerton plant and our Nashville, Tennessee-area distribution center and ship directly to the individual retail locations of a number of our large customers. We conduct business via EDI (Electronic Data Interchange) with virtually all our key customers and recognize the importance of continuing to implement applicable customer service/distribution technology. INDUSTRY OVERVIEW ORGANIZER INDUSTRY. Day Runner has been instrumental in creating and defining paper-based "organizers" as a product category in the United States. Although time management products that included some "organizer" features had been on the market for some time, the product category, as such, did not emerge until the 1980s. We believe that the introduction of the Day Runner System in 1982 helped define the product category and, ultimately, led to the growth of the organizer industry. By the late 1980s, organizers had become accepted tools for improving individual and group productivity. (Because the distinctions between organizers and planners have become blurred, except where otherwise specified, we are using the terms "organizer" and "planner" interchangeably in this report.) Today, awareness of the organizer product category is widespread; organizers are broadly accepted as substitutes for traditional dated goods; and the usefulness of time management techniques is well recognized. Organizers are sold through a wide variety of channels, including: office products superstores, wholesalers and dealers; mass market retailers; book, department, gift, leather and luggage, stationery and other specialty stores; and are sold direct to organizations, the U.S. Government and individuals. Day Runner believes the current principal competitive factors in the paper-based retail organizer industry are distribution breadth, depth and strength; brand name recognition; size and loyalty of user base; product function, design, perceived quality and value; marketing capability; breadth of product lines; financial resources; customer service; product development capability; manufacturing/sourcing expertise; and price. MARKET POTENTIAL. Day Runner believes that the growth in demand for organizers and other personal organization products in the United States is attributable to a number of economic and cultural trends, including: the increased percentage of women in the work force and the resulting prevalence of two-income families; the continuing trend toward corporate downsizing; the growth of the small business sector; the rising percentage of business done away from the office; the greater emphasis on productivity; and the ongoing shift to a service economy. Many of these trends contribute to widespread concerns with saving and better using time and increasing personal productivity. Day Runner's products address these concerns. We target both potential first-time organizer users and existing users who may need refills or replacements for their organizers. We address a broad consumer market that includes individuals 25 years of age or older with annual household incomes of $25,000 or more; college students; college-bound junior high and high school students; and children 6-12 years of age residing in households with annual incomes at or above the national median. Of these tens of millions of individuals, only a minority currently use organizers. In addition, we believe that expansion into related, non-organizer/planner products that provide other ways for people to become better organized offers Day Runner an opportunity to reach consumers who are not ready for an organizer or planner and to market additional Day Runner branded products to consumers who already use a Day Runner organizer or planner. INDUSTRIES MARKETING SIMILAR OR SUBSTITUTE PRODUCTS. Day Runner's products have features, functions or components in common with products in several other industries. Our market overlaps to a limited extent that of companies marketing: calendars, appointment books, agendas and diaries; small leather goods, which include briefcases and folios; and training products and services designed to improve group and individual productivity and to upgrade management skills. In addition, both PIM software and electronic organizers are designed to fill many of the same needs addressed by paper-based organizers, although virtually all PIM software products provide for paper-based output and a number of such products allow users to print out pages in sizes that fit the Company's organizers. PRODUCTS Day Runner's products are designed to help people become better organized. We aim our products at various segments of a broad-based consumer audience. Our goal is to provide "something for everyone" and to offer consumers in each target segment the perception of broad choice and good value for their money. Our products include: o Multiple lines of paper-based organizers and planners. o Refills, which include calendars and accessories. o Related organizational products. ORGANIZERS AND PLANNERS. Our organizers and planners are available in varying systems, sizes, styles, cover materials and colors and at a broad range of price points. These loose-leaf and spiral-bound portable "books" help users keep "everything in one place." For example, in addition to the traditional planner components of appointment calendar, telephone/address section and note pad, Day Runner System organizers include, among other things, interrelated pages for managing time and information, tracking expenses, establishing goals and planning projects. REFILLS. The great majority of our organizers, planners and telephone/address books are refillable. Users may customize their loose-leaf organizers and planners by choosing from a variety of additional pages and accessories, ranging from Mileage Log, Strategy and Things To Do pages to Currency/Checkbook Insert, Diskette Holders and a solar powered Calculator/Ruler. RELATED ORGANIZATIONAL PRODUCTS. Our related organizational products include telephone/address books, traditional spiral dated goods, products for elementary and middle school children, and PIM software designed to complement our paper-based products. These products are grouped together as "other products." The following table sets forth, for the periods indicated, approximate Day Runner sales by product category and as a percentage of total sales.
Fiscal Fiscal Twelve Months Ended Products 1996 1995 June 30, 1994 -------- --------------- ----------------- -------------------- (Unaudited; dollars in thousands) Organizers and planners. $ 77,293 61.8% $ 84,473 69.4% $ 68,162 70.3% Refills................. 43,473 34.7 35,240 28.9 27,264 28.1 Other .................. 4,360 3.5 2,088 1.7 1,601 1.6 -------- ---- -------- ----- -------- ------ Total .................. $125,126 100.0% $121,801 100.0% $ 97,027 100.0% ======== ===== ======== ===== ======== =====
Covers for Day Runner's organizers, planners and paper-based related organizational products are made of leathers, vinyls and a variety of other natural and man-made materials. In addition to holding loose-leaf or spiral-bound pages, the covers of most of our organizers and planners are also designed to hold note pads and many have additional features, such as places to store pens, business and credit cards, calculators, loose papers and spare keys. The following table sets forth basic price and other information concerning the Company's product lines.
Current Number of Current Year Different Suggested Current Products Introduced Sizes Styles Materials Retail Price(s) ---------------- ---------- ----- ------ --------- --------------- Day Runner: Organizers and planners...... 1982-1996 4 11 7 $18-125 Telephone/Address Books...... FY95-FY96 7 2 2 $6.75-24 FactCentre(TM): Organizers and planners...... 1991-1995 3 8 6 $12-45 Telephone/Address Books...... 1995 4 1 2 $8-20 4-1-1(TM)Student Planners........ SFY94-FY96 3 9 3 $6-27 Looney Tunes(TM): Planners..................... 1996 1 3 4 $20-33.50 Telephone/Address Books...... 1996 1 1 1 $12 Mickey Unlimited(C): Sticker Books................ FY96 3 4 1 $6.50-10.50 Sticker Diaries.............. FY96 2 2 2 $10.50-13.50 Perennials(TM): Organizers and planners...... 1995 3 3 2 $20-33.50 Telephone/Address Books...... 1995 1 1 1 $16 PRO: Organizers and planners...... 1993-1996 5 8 4 $40-150 Refills (which include calendars and accessories)................. 1981-96 ... ... ... $0.75-30 Spiral Dated Goods............. 1996 8 8 2 $4.30-33.35 Day Runner Planner for Windows(R) FY96 ... ... ... $75
Day Runner is a registered trademark, and FactCentre, Perennials, PRO Business System, Slimline and 4-1-1 are trademarks of Day Runner, Inc. LOONEY TUNES, characters, names and all related indicia are trademarks of Warner Bros. (C)Disney. VELCRO is a registered trademark of VELCRO, USA, Inc. Windows is a registered trademark of Microsoft Corporation PRODUCT DEVELOPMENT Day Runner's product development programs emphasize (i) identifying unmet consumer needs and developing organizers, planners and related organizational products to meet those needs; (ii) extending its existing product lines through additional sizes, styles and materials; and (iii) augmenting the selection of refills and accessories available for its product lines. In addition, we monitor our existing products for continued viability, needed enhancements, improvements in quality and potential reductions in cost. With the exception of our software product and the calculators we include in certain of our products and sell as accessories, all of our current products have been developed internally, and products developed internally accounted for substantially all of Day Runner's fiscal 1996 sales. Since the introduction of the first Day Runner System organizer in 1982, we have transformed this single product into a broad line, which currently includes three sizes and six styles, each of which is available in up to eight different cover materials. The Entrepreneur Edition of the Day Runner System, for example, has 8" x 11" pages and is available in three styles: "notebook" with a snap closure; "notebook" with a VELCRO flap closure; and "attache" with a full-zippered closure, a larger ring and slide up handles. In 1991, as part of our strategy of offering products aimed at more cost-conscious consumers, we introduced the FactCentre Personal Organizer. The FactCentre line now includes organizers, planners and telephone/address books. In 1993, we introduced the first products in our PRO line. PRO Business System organizers are aimed at people seeking a sophisticated but easy-to-use organizing system that is designed specifically for business and professional use. We have substantially broadened this product line since its introduction with additional book styles and sizes as well as refills and accessories. In fiscal 1996, we added a simplified "Slimline" version and since year-end have introduced PRO 4, a compact model, along with appropriately sized refills. In fiscal 1994, we began shipping 4-1-1 Student Planners, a line aimed at middle school, high school and college students. 4-1-1 products were developed based on research into the needs and requirements of young people and are marketed primarily for sale during the back-to-school consumer buying season. Day Runner updates this product line with new cover materials and models each year and in fiscal 1996 introduced a College Edition. In fiscal 1995, we added telephone/address books to our Day Runner and FactCentre lines and launched Perennials, a line of organizers, planners and telephone/address books with pages featuring a floral design. Perennials is aimed primarily at young women shopping in mass market outlets. In fiscal 1996, we launched our first licensed products: a line of planners and telephone/address books featuring Warner Bros. Looney Tunes cartoon characters; and a line of "sticker books" and "sticker diaries" developed and marketed under the Mickey Unlimited brand of Disney Enterprises. The Mickey Unlimited Sticker Books and Diaries incorporate colorful stickers to make planning and diary-keeping fun. In fiscal 1996, we also introduced a line of spiral dated goods designed for consumers who prefer traditional planning tools. Developed under our direction, Day Runner Planner for Windows software simulates the paper-based Day Runner System. Our computer paper refills allow users of Day Runner Planner for Windows and a number of other software programs to print their computerized information on paper that looks like Day Runner System or PRO Business System pages and carry it with them in their organizers. Day Runner plans to introduce a version of this product designed for Windows 95 during fiscal 1997. SALES AND DISTRIBUTION We market our products to customers through our own sales force, through manufacturers' representatives and, in certain markets outside the U.S., through independent distributors. Our primary channels of distribution are office products and the mass market. Day Runner's products are carried by more than 20,000 retail stores across the U.S. Our sales policies encourage smaller customers to purchase through wholesalers. In fiscal 1996, we shipped directly to approximately 11,500 retail locations, to distribution centers serving approximately 6,100 retail locations and to approximately 200 wholesalers. During fiscal 1996, Day Runner sold products to approximately 730 different customers, compared with approximately 785 in fiscal 1995. Our major customers in each of our primary domestic channels include: office products superstores Office Depot, Inc., OfficeMax, Inc. and Staples, Inc.; office products national wholesalers United Stationers Supply Co. and S.P. Richards Company; office products dealer McWhorter Stationers Company, Inc.; and mass market retailers Wal-Mart, Kmart and Target. The only customers accounting for 10% or more of the Company's fiscal 1996 sales were Wal-Mart Stores, Inc. and its affiliates, including SAM'S Clubs; Office Depot, Inc. and its affiliates; and OfficeMax, Inc. and its affiliates. These customers accounted for 16.7%, 14.8% and 11.7%, respectively, of fiscal 1996 sales. Including their affiliates, the top five customers of the Company accounted for an aggregate of 59.1% of fiscal 1996 sales. The following table sets forth, for the periods indicated, approximate Day Runner sales by distribution channel and as a percentage of total sales.
Fiscal Fiscal Twelve Months Ended Distribution Channel 1996 1995 June 30, 1994 -------------------- --------------- ----------------- -------------------- (Unaudited; dollars in thousands) Office products channel. $ 62,381 49.8% $ 56,717 46.6% $ 52,843 54.5% Mass market............. 46,804 37.4 50,699 41.6 31,096 32.1 Foreign customers....... 6,346 5.1 4,170 3.4 3,733 3.8 Other channels.......... 9,595 7.7 10,215 8.4 9,355 9.6 -------- ----- -------- ------ -------- ------ Total............. $125,126 100.0% $121,801 100.0% $ 97,027 100.0% ======== ===== ======== ===== ======== =====
OFFICE PRODUCTS CHANNEL. Since 1987, Day Runner products have been broadly distributed through the office products channel. OFFICE PRODUCTS SUPERSTORES. Since their emergence in 1986, office products superstores offering discount prices in a warehouse atmosphere have become a major factor in office products distribution. Our products are carried by all the leading superstores, including Office Depot, Inc., OfficeMax, Inc. and Staples, Inc. OFFICE PRODUCTS WHOLESALERS. Day Runner products are currently distributed by most local and regional office products wholesalers and by both national wholesalers, S.P. Richards Company and United Stationers Supply Co., which reach office products consumers through dealers nationwide. OFFICE PRODUCTS DEALERS. Our products are also distributed through traditional office products dealers, which buy directly from manufacturers and indirectly through wholesalers. These customers include both storefront dealers and contract stationers (also known as commercial dealers) that specialize in selling to larger businesses through catalogs and their direct sales forces. MASS MARKET. Discount chains addressing the mass market have become an increasingly important factor in the distribution of a wide variety of consumer goods. Day Runner products are distributed through a number of mass market retailers, including: Kmart, Target and Wal-Mart; the major wholesale clubs, PriceCostco and SAM'S Clubs; a number of discount drug chains; and a variety of other mass market resellers. FOREIGN CUSTOMERS. Day Runner products are marketed internationally through Day Runner Hong Kong Limited and Day Runner International Limited, the Company's wholly owned Hong Kong and UK subsidiaries, independent foreign distributors and its own sales force. The United Kingdom and key markets on the European continent are served by Day Runner International; Asian and Pacific Rim markets are served by Day Runner Hong Kong Limited; and foreign markets in the Americas are served through independent foreign distributors and by Day Runner's U.S.-based sales force. OTHER CHANNELS. The Company also distributes its products through a number of additional channels, including book, department, gift, leather and luggage and stationery stores and other specialty retailers. Since March 1989, Day Runner has held a General Services Administration ("GSA") contract, which extends through February 1997 and which allows the Company to market certain of its products to the executive branch of the U.S. Government. MARKETING We market our products to consumers to increase awareness of the Day Runner brand names and of specific products, to communicate the benefits of our products and to create and reinforce an image that our products enable the user to manage time and personal resources more effectively. We position Day Runner to our distribution channels as the leader in the retail organizer market and the logical source for organizers, planners and related organizational products at a wide range of price points and appropriate for a wide range of broad consumer markets. ADVERTISING. Day Runner participates with customers in co-op advertising and advertises from time to time in certain wholesale flyers and in trade publications. In addition, from time to time, we conduct consumer advertising campaigns. Media used in such campaigns have included cable and broadcast television, business and lifestyle magazines and national and regional newspapers. PROMOTIONAL PROGRAMS. Day Runner offers special promotional and incentive programs as part of our introduction of new products and to build sales at specific times of the year; conducts promotions designed to build awareness, expand distribution and increase sales of specific products; and conducts sales incentive programs for wholesalers, dealers and manufacturers' representatives. SALES SUPPORT. We support our sales force and manufacturers' representatives with a variety of sales tools, including catalogs and presentation materials. We support our dealers with point-of-sale materials developed based upon research and intended to build brand name awareness and increase sales. Day Runner displays are designed to be easy for consumers to shop and for store personnel to refill. Our packaging is designed to help consumers choose the right product and make the decision to buy. TRADE SHOWS. Day Runner exhibits or is represented by manufacturers' representatives in a number of national and regional trade shows aimed at office products, mass market and other customers. MARKET RESEARCH. We regularly conduct market research and test product concepts and prototypes through the use of focus groups and other consumer research. In addition, we maintain a database containing information on users who have mailed in the Welcome Cards included in many of our products. USER SUPPORT. We estimate that Day Runner has sold approximately 27 million organizers and planners. To encourage our current users to continue to purchase and recommend our products and their refills, we provide a toll-free consumer hotline that consumers may call for referral to conveniently located dealers or dealers that carry specific refills or accessories, for customer service, to contribute suggestions and to purchase products directly from Day Runner. We make such sales primarily as a service to our users and charge consumers full suggested retail price plus handling and shipping. Although Day Runner products require no special training, we provide a free user's guide in each of our two most sophisticated organizers. Each Day Runner System and PRO Business System organizer includes an "Owner's Manual." Each of these booklets includes illustrations showing effective use of the system and of specific pages as well as tips on time management, project management and organization. In addition, through independent certified trainers, we offer to organizations and groups our PROductivity Personalized Time Management training programs, which teach the fundamentals of time management using the PRO Business System. MANUFACTURING Day Runner's manufacturing strategy combines limited internal manufacturing, consisting of heat-sealing binders, sewing binders and the assembly of finished products, with the domestic and foreign subcontracting of product components and finished goods. Our policy is to develop and maintain at least two sources for key raw materials, product components and the finished products we subcontract. Although we rely on foreign subcontractors for adequate capacity, we have the ability to act as our own second or third source for the manufacture of our loose-leaf binders and for the final assembly of many of our products. This provides a certain degree of protection against vendor problems and, under certain conditions, allows us to respond to higher than anticipated demand and improve turn-around time. INTERNAL MANUFACTURING. We manufacture a portion of our binders in our Fullerton, California facility and at Day Runner de Mexico, S.A. de D.V., our wholly owned manufacturing subsidiary located in Tijuana, and assemble a portion of our finished products in our Fullerton facility. PURCHASED COMPONENTS. In addition to vinyl and leather raw materials, we purchase from suppliers certain major product components, including printed pages, loose-leaf rings, pens, software disks containing our PIM software, electronic components and certain accessories. With few exceptions, these items are manufactured by a variety of outside contractors and are available both domestically and overseas. SUBCONTRACTED FINISHED GOODS. We subcontract the manufacture and assembly of a portion of our finished products, including the great majority of our lower priced organizers, planners and related products. Day Runner Hong Kong Limited acts as our liaison with our Asian suppliers. COMPETITION The paper-based organizer industry is becoming increasingly competitive and is subject to rapid change. Day Runner competes directly with other companies marketing paper-based organizers to consumers through retail channels. We also compete for the same target market with companies marketing stand-alone organizer products and/or organizers coupled with time management training via direct sales to individuals and to organizations. Our competitors include companies marketing substitutes for paper-based organizer and planner products, such as electronic organizers, PIM software and traditional dated goods. Certain of our competitors have greater name recognition and/or financial, product development, technical, manufacturing and/or marketing resources than Day Runner. Day Runner believes the current principal competitive factors in the paper-based retail organizer industry are distribution breadth, depth and strength; brand name recognition; size and loyalty of user base; product function, design, perceived quality and value; marketing capability; breadth of product lines; financial resources; customer service; product development capability; manufacturing/sourcing expertise; and price. We believe that the principal competitive factors in the related product categories we have entered to date are similar to those in the paper-based organizer industry. Although a number of our competitors have greater financial resources than Day Runner, we believe that we compete well against our current direct competition on each of the other principal competitive factors and against certain of our current direct competition with respect to our financial strength. Day Runner believes that we have a number of advantages over certain of our competitors. Our products occupy significant shelf space in the office products and mass market channels. Our leadership position in the retail market, brand name recognition, broad product lines, marketing expertise, manufacturing/sourcing skill, large user base and the appeal of our products to consumers have been competitive advantages for us in these channels and in certain other channels. There can be no assurance, however, that we will be able to maintain or continue to benefit from our competitive advantages or that the competitive environment will not change to our detriment. EMPLOYEES At August 23, 1996, Day Runner had 823 full-time employees, including 60 in sales; 23 in marketing; 93 in executive, finance and administration; 23 in product development; and 624 in manufacturing operations and distribution. None of our employees is represented by a labor union, and we have experienced no labor-related work stoppages. PATENTS, COPYRIGHTS AND TRADEMARKS Day Runner relies upon, among other things, a combination of copyright, patent and trademark laws to protect our rights to certain aspects of our products. There can be no assurance, however, that the steps taken by Day Runner to protect our proprietary rights will be adequate to prevent imitation of our products or independent development by others of similar products. Day Runner holds seven United States patents, and has applied for several foreign patents. The patents we hold are related to improvements in the structure of and devices associated with our loose-leaf binders, and we do not believe that any of these patents are material to our business. We have also been issued United States copyright registrations covering the text and the compilation and editing of data in certain of our material products. Day Runner holds United States trademark registrations for "Day Runner," "Running Mate," "MEMO-RY" and the Day Runner logo and we have obtained certain state and foreign registrations for certain of our trademarks. Item 2. PROPERTIES. Day Runner's principal facility is located in an approximately 221,000 square-foot building in Fullerton, California, of which 135,500 square feet are occupied under a lease expiring in 2001 and 85,500 square feet are occupied under a lease expiring in 1997. The leases include multiple, successive renewal options that, if exercised in full, would extend the lease terms to expire in 2011. The Company's headquarters occupy approximately 21,300 square feet in Irvine, California under a lease that expires in August 2001. The Company's LaVergne, Tennessee distribution facility occupies an approximately 35,520 square foot facility under a lease expiring as of the commencement date of a lease of a new facility in La Vergne, Tennessee currently under construction; the Company's Mexican subsidiary occupies an approximately 22,450-square foot facility under a month-to-month agreement and a 15,000 square foot facility under a lease expiring in July 1997; the Company's United Kingdom subsidiary occupies an approximately 1,500-square foot facility under a lease expiring in December 1996; and the Company's Hong Kong subsidiary occupies an approximately 1,188 square foot facility under a lease expiring in May 1998. The Company has entered into a lease agreement dated July 31, 1996 under which it has agreed to lease a 101,200 square foot distribution facility to be constructed in La Vergne, Tennessee. The lease of the Company's current facility in La Vergne will be terminated concurrently with the commencement of the lease of the new facility. The Company believes it has sufficient space in its facilities or will be able to lease additional space on acceptable terms to meet its needs for the foreseeable future. Item 3. LEGAL PROCEEDINGS. Inapplicable. PART II Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Inapplicable. Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Day Runner's Common Stock is traded over-the-counter on The Nasdaq Stock Market under the symbol "DAYR". The table below shows the high and low closing sales prices for the Common Stock as reported on The Nasdaq Stock Market for the fiscal years ended June 30, 1996 and 1995. As of September 16, 1996, there were 195 recordholders of the Company's Common Stock based on information provided by the Company's transfer agent. Fiscal Year Fiscal Year 1996 1995 ---------------- ----------------- Quarter High Low High Low ------- ---- --- ---- --- First $ 20 $16-3/8 $22-1/8 $17-1/4 Second 34-1/2 19-1/4 21 13-3/4 Third 33-1/2 23-5/8 14-1/2 12-3/8 Fourth 31-1/4 24-3/4 18-1/4 13-1/8 The Company has never paid cash dividends. It is the present policy of the Company to retain earnings to finance the growth and development of its business, and therefore the Company does not anticipate paying cash dividends on its Common Stock in the foreseeable future. Certain financial covenants in the Company's bank line of credit agreement restrict the Company's ability to pay cash dividends in excess of $200,000. Item 6. SELECTED FINANCIAL DATA. The selected consolidated income statement data for the fiscal year ended June 30, 1996 and 1995, the short fiscal year ended June 30, 1994 and the year ended December 31, 1993 and the consolidated balance sheet data at June 30, 1996 and 1995 are derived from, and are qualified in their entirety by reference to, the Company's audited consolidated financial statements and notes thereto included elsewhere in this Annual Report that have been audited by Deloitte & Touche LLP, independent auditors, as indicated in this report, which is also included elsewhere in this Annual Report. Information for the twelve months ended June 30, 1994 is unaudited, and in the opinion of the Company's management, the accounting principles used to prepare the unaudited financial information are consistent with those used to prepare the audited financial statements. The selected consolidated income statement data for the years ended December 31, 1992 and 1991 and the consolidated balance sheet data at June 30, 1994 and December 31, 1993 and 1992 are derived from audited consolidated financial statements of the Company that are not included herein. Consolidated Income Statement Data: (In thousands, except per share data)
Twelve Months Short Fiscal Fiscal Ended Fiscal Year Years Ended December 31, 1996 1995 June 30, 1994(1) 1994 1993 1992 1991 ---- ---- ------------- ---- ---- ---- ---- Sales........................... $125,126 $121,801 $ 97,027 $ 43,160 $ 81,892 $71,241 $53,160 Cost of goods sold.............. 60,600 62,175 50,405 22,981 41,699 35,512 24,933 ------- ------- -------- -------- -------- ------- ------- Gross profit.................... 64,526 59,626 46,622 20,179 40,193 35,729 28,227 ------- ------- -------- -------- -------- ------- ------- Operating expenses: Selling, marketing and distribution................ 29,198 32,154 25,180 12,156 21,786 20,125 15,883 General and administrative... 16,376 13,792 11,400 5,686 9,479 7,826 6,183 ------- ------- -------- -------- -------- ------- ------- Total operating expenses..... 45,574 45,946 36,580 17,842 31,265 27,951 22,066 ------- ------- -------- -------- -------- ------- ------- Income from operations.......... 18,952 13,680 10,042 2,337 8,928 7,778 6,161 Net interest (income) expense... (706) (161) (88) (91) 229 493 ------- ------- -------- -------- -------- ------- ------- Income before provision for income taxes, extraordinary item and cumulative effect of accounting change............ 19,658 13,841 10,130 2,428 8,928 7,549 5,668 Provision for income taxes...... 7,840 5,863 4,196 1,061 3,638 3,096 2,376 ------- ------- -------- -------- -------- ------- ------- Income before extraordinary item and cumulative effect of accounting change............ 11,818 7,978 5,934 1,367 5,290 4,453 3,292 Extraordinary item litigation settlement - net............ 718 718 Cumulative effect of change in accounting for income taxes.. 350 Net income...................... $11,818 $ 7,978 $ 6,652 $ 2,085 $ 5,640 $ 4,453 $ 3,292 ======= ======= ======== ======== ======== ======= ======= Earnings per common and common equivalent share: Income before extraordinary item and cumulative effect of accounting change............ $ 1.79 $ 1.25 $ 0.96 $ 0.22 $ 0.87 $ 0.77 $ 0.72 Extraordinary item........... 0.12 0.11 Cumulative effect of change in accounting for income taxes.. 0.06 ------- ------- -------- --------- --------- ------- -------- Net earnings per share........... $ 1.79 $ 1.25 $ 1.08 $ 0.33 $ 0.93 $ 0.77 $ 0.72 ======== ======== ======== ========= ========= ======= ======== Weighted average number of common and common equivalent shares............. 6,602 6,374 6,185 6,308 6,065 5,799 4,852 ======= ======= ======== ======== ======== ====== ======= (1) Information for the twelve months ended June 30, 1994 is provided on an unaudited basis for comparison purposes only.
Consolidated Balance Sheet Data: (In thousands) June 30, December 31, --------------------------------------- ----------------------------- 1996 1995 1994 1993 1992 ---------- --------- ----------- ------------- ---------- Working capital............. $ 51,653 $ 38,260 $ 30,581 $ 28,190 $ 22,875 Total assets................ 77,931 63,650 50,769 49,103 35,955 Short-term debt............. 152 200 224 499 Long-term liabilities....... 12 141 223 96 Stockholders' equity........ 59,498 44,787 35,786 32,712 25,686
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report. Historical results and percentage relationships among any amounts included in the Consolidated Financial Statements are not necessarily indicative of trends in operating results for any future period. Effective January 1, 1994, the Company changed its fiscal year end from December 31 to June 30. The six-month period ended June 30, 1994 is therefore referred to as "fiscal 1994" or "short fiscal year 1994." OVERVIEW Since the Company's introduction of the first Day Runner System organizer in 1982, the Company's revenues have been generated by increased unit sales primarily of organizers and planners and secondarily of refills. Sales increases have resulted from higher sales of existing products, new products and product line extensions. The Company focuses the great majority of its product development, sales and marketing efforts on the office products and the mass market channels. The office products channel and the mass market channel accounted for 49.8% and 37.4%, respectively, of fiscal 1996 sales. Results of Operations The following tables set forth, for the periods indicated, the percentages that selected income statement items bear to sales and the percentage change in the dollar amounts of such items.
Percentage of Sales ------------------- Twelve Months Years Ended June 30, Ended 1996 1995 June 30, 1994 --------- -------- ------------- (unaudited) Sales........................................ 100.0% 100.0% 100.0% Cost of goods sold........................... 48.4 51.0 51.9 ----- ----- ----- Gross profit................................. 51.6 49.0 48.1 ----- ----- ----- Operating expenses: Selling, marketing and distribution....... 23.3 26.4 26.0 General and administrative................ 13.1 11.3 11.7 ----- ----- ----- Total operating expenses................. 36.4 37.7 37.7 ----- ----- ----- Income from operations....................... 15.2 11.3 10.4 Net interest income.......................... 0.5 0.1 0.1 ----- ----- ----- Income before provision for income taxes and extraordinary item........................ 15.7 11.4 10.5 Provision for income taxes................... 6.3 4.8 4.3 ----- ----- ----- Income before extraordinary item............. 9.4 6.6 6.2 Extraordinary item: litigation settlement - net 0.7 ----- ----- ----- Net income................................... 9.4% 6.6 % 6.9% ===== ===== =====
Percentage Change ----------------- Year Ended Twelve Months June 30, 1995 Ended June 30, 1994 to Year Ended to Year Ended June 30, 1996 June 30, 1995 -------------------- -------------------- Sales............................................. 2.7% 25.5% Cost of goods sold................................ (2.5) 23.4 Gross profit...................................... 8.2 27.9 Operating expenses: Selling, marketing and distribution............ 9.2 27.7 General and administrative..................... 18.7 21.0 Total operating expenses...................... (0.8) 25.6 Income from operations............................ 38.5 36.2 Net interest income............................... 338.5 83.0 Income before provision for income taxes and extraordinary item............................. 42.0 36.6 Provision for income taxes........................ 33.7 39.7 Income before extraordinary item.................. 48.1 34.4 Extraordinary item: litigation settlement - net... (100.0) Net income........................................ 48.1 19.9
Fiscal Year Ended June 30, 1996 Compared with Fiscal Year Ended June 30, 1995 SALES. Sales consist of revenues from gross product shipments net of allowances for returns, rebates and credits. In fiscal 1996, sales increased by $3,325,000, or 2.7%, compared with fiscal 1995 primarily because of higher average selling prices of refills and secondarily because of increased unit sales of refills. Product sales were primarily to the office products channel and secondarily to mass market customers. Sales to the office products channel grew by $5,664,000, or 10.0%. Sales to mass market customers decreased by $3,895,000, or 7.7%, primarily due to lower sales to Wal-Mart. Sales to foreign customers grew by $2,176,000, or 52.2%, and sales to miscellaneous customers grouped together as "other," decreased by $620,000, or 6.1%. Sales of refills grew by $8,233,000, or 23.4%. Sales of organizers and planners decreased during the year by $7,180,000, or 8.5%, which decrease was related primarily to the lower sales to Wal-Mart. Sales of products grouped together as "other" increased by $2,272,000, or 108.8%, primarily because of higher sales of telephone/address books. GROSS PROFIT. Gross profit is 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, purchasing and manufacturing efficiencies, tariffs, duties and inventory carrying costs. Gross profit as a percentage of sales increased to 51.6% for fiscal 1996 from 49.0% for fiscal 1995 primarily because of increased purchasing and manufacturing efficiencies. OPERATING EXPENSES. Total operating expenses decreased by $372,000, or 0.8%, for fiscal 1996 compared with fiscal 1995, and decreased as a percentage of sales from 37.7% to 36.4%. Selling, marketing and distribution expenses as a percentage of sales decreased from 26.4% to 23.3% primarily because of lower advertising and promotion expenses and secondarily because of lower commissions. General and administrative expenses as a percentage of sales increased from 11.3% to 13.1% primarily because of higher personnel costs. NET INTEREST INCOME. Primarily because of the Company's higher levels of cash available for short-term investment during the year, net interest income in fiscal 1996 compared with fiscal 1995 increased by $545,000 and by 0.4% as a percentage of sales. INCOME TAXES. Primarily as a result of the improved financial results of the Company's Hong Kong subsidiary, the Company's fiscal 1996 effective tax rate was 39.9%, compared with 42.4% for fiscal 1995. Prior to fiscal 1996, the operating losses incurred by the Company's United Kingdom and Hong Kong subsidiaries, which were formed in 1993 and 1994, respectively, and the tax treatment required for these losses had increased the Company's effective tax rate above what it otherwise would have been. NET INCOME. Compared with fiscal 1995, net income for fiscal 1996 increased by $3,840,000, or 48.1%. Fiscal Year Ended June 30, 1995 Compared with the Unaudited Twelve Months Ended June 30, 1994 SALES. In fiscal 1995, sales increased by $24,774,000, or 25.5%, compared with the twelve months ended June 30, 1994 because of increased unit sales primarily of organizers and planners and secondarily of refills. Product sales were primarily to the office products channel and secondarily to mass market customers. Sales of organizers and planners grew during the year by $16,311,000, or 23.9%, with all the Company's major product lines contributing to the growth. Sales of refills grew by $7,976,000, or 29.3%. Sales to mass market customers grew by $19,603,000, or 63.0%, and accounted for 79.1% of the sales increase during the year. Sales to the office products channel grew by $3,874,000, or 7.3%. In addition, sales to miscellaneous customers grouped together as "other," grew by $860,000, or 9.2%, primarily as a result of higher sales to U.S. Government customers, and sales to foreign customers grew by $437,000, or 11.7%. GROSS PROFIT. Gross profit as a percentage of sales increased to 49.0% for fiscal 1995 from 48.1% for the twelve months ended June 30, 1994 primarily because of increased purchasing and manufacturing efficiencies. OPERATING EXPENSES. Total operating expenses grew by $9,366,000, or 25.6%, during fiscal 1995 compared with the twelve months ended June 30, 1994, but were unchanged as a percentage of sales at 37.7%. General and administrative expenses as a percentage of sales decreased from 11.7% to 11.3%, primarily due to the Company's increased ability to absorb personnel expenses as a result of the growth in sales. Selling, marketing and distribution expenses as a percentage of sales increased from 26.0% to 26.4% primarily due to increased advertising and promotion expenses. NET INTEREST INCOME. Net interest income in fiscal 1995 increased by $73,000 compared with the twelve months ended June 30, 1994 and was unchanged as a percentage of sales primarily due to the Company's higher levels of cash available for short-term investments during the year. INCOME TAXES. Primarily as a result of operating losses incurred by the Company's United Kingdom and Hong Kong subsidiaries, which were formed in June 1993 and May 1994, respectively, and the tax treatment required for these losses, the effect of which was partially offset by the utilization of research and development tax credits, the Company's fiscal 1995 effective tax rate was 42.4%, compared with 41.4% for the twelve months ended June 30, 1994. NET INCOME. Net income for fiscal 1995 increased by $1,326,000, or 19.9%, compared with the twelve months ended June 30, 1994, which included a net extraordinary gain of $718,000 from the settlement of litigation. Income before the extraordinary item rose $2,044,000, or 34.4%, for fiscal 1995 compared with the twelve months ended June 30, 1994. QUARTERLY RESULTS The following tables set forth selected unaudited quarterly consolidated financial data and the percentages such items represent of sales. The quarterly consolidated financial data reflect, in the opinion of Management of the Company, all adjustments (which include only normal recurring adjustments) necessary to present fairly the results of operations for such periods. Results of any one or more quarters are not necessarily indicative of annual results or continuing trends.
Quarters Ended -------------- June 30, March 31, December 31, September 30, 1996 1996 1995 1995 ------------- ----------------- ---------------- ----------------- (In thousands, except per share amounts) Sales............................... $ 34,156 100.0% $ 18,106 100.0% $ 40,058 100.0% $ 32,806 100.0% Gross profit........................ 17,888 52.4 9,505 52.5 20,678 51.6 16,455 50.2 Total operating expenses............ 13,637 39.9 8,484 46.9 12,463 31.1 10,990 33.5 Income from operations.............. 4,251 12.5 1,021 5.6 8,215 20.5 5,465 16.7 Net interest income................. 296 0.8 252 1.4 104 0.3 54 0.1 Income before provision for income taxes..................... 4,547 13.3 1,273 7.0 8,319 20.8 5,519 16.8 Net income.......................... $ 2,978 8.7 $ 745 4.1 $ 4,922 12.3 $ 3,173 9.7 Earnings per common and common equivalent share.......... $ 0.45 $ 0.11 $ 0.75 $ 0.49 Weighted average number of common and common equivalent shares........................... 6,686 6,657 6,584 6,445
Quarters Ended -------------- June 30, March 31, December 31, September 30, 1995 1995 1994 1994 -------- ---------- ----------- ------------- (In thousands, except per share amounts) Sales............................... $ 33,147 100.0% $ 20,422 100.0% $ 36,907 100.0% $ 31,325 100.0% Gross profit........................ 16,615 50.1 10,073 49.3 18,019 48.8 14,919 47.6 Total operating expenses............ 13,265 40.0 9,259 45.3 11,989 32.5 11,433 36.5 Income from operations.............. 3,350 10.1 814 4.0 6,030 16.3 3,486 11.1 Net interest (income) expense....... 45 0.2 (153) (0.7) (26) (0.1) (27) (0.1) Income before provision for income taxes..................... 3,305 9.9 967 4.7 6,056 16.4 3,513 11.2 Net income.......................... $ 1,872 5.6 $ 652 3.2 $ 3,523 9.5 $ 1,931 6.2 Earnings per common and common equivalent share.......... $ 0.29 $ 0.10 $ 0.55 $ 0.30 Weighted average number of common and common equivalent shares........................... 6,363 6,309 6,374 6,411
SEASONAL FLUCTUATIONS The Company has historically experienced and expects to continue to experience significant seasonal fluctuations in its sales and other financial results that it believes have resulted and will continue to result primarily from its customers' and users' buying patterns. These buying patterns have typically adversely affected orders for the Company's products in the third quarter of each fiscal year. Although it is difficult to predict the future seasonality of sales, the Company believes that future seasonality should be influenced at least in part by customer and user buying patterns similar to those that have historically affected the Company. Quarterly financial results are also affected by new product introductions and line extensions, the timing of large orders, changes in product sales or customer mix, vendor and customer pricing, production levels, supply and manufacturing delays 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 During fiscal 1996, the Company financed its operating cash needs primarily from internally generated funds. The Company's cash and cash equivalents at June 30, 1996 increased to $19,765,000 from $4,269,000 at June 30, 1995. In fiscal 1996, net cash of $18,643,000 and $1,311,000 provided by operating and financing activities, respectively, offset net cash of $4,401,000 used in investing activities. Of the $18,643,000 net amount provided by the Company's operating activities, $11,818,000 was provided by net income, $6,543,000 was provided by a decrease in inventories and $3,606,000 was provided by an increase in accrued expenses, which amounts were partially offset by an increase of $2,884,000 in accounts receivable and an increase of $1,930,000 in income taxes receivable. Of the $1,311,000 net amount provided by the Company's financing activities, $1,475,000 was provided by the issuance of common stock. Of the $4,401,000 net amount used in the Company's investing activities, $4,393,000 was used to acquire primarily machinery and equipment and secondarily computer equipment and software. Accounts receivable (net) at June 30, 1996 increased by $2,068,000, or 10.7%, from the amount at June 30, 1995 primarily due to terms given to certain customers and secondarily due to the growth in sales. The average collection period of accounts receivable at June 30, 1996 increased to 43 days from 42 days at June 30, 1995. Inventories decreased by $6,569,000, or 24.7%, from the June 30, 1995 amount primarily because of better control and management of inventory levels. At June 30, 1996, Day Runner had no borrowings under its $5,000,000 bank line of credit but had used the line of credit to secure outstanding letters of credit of approximately $1,000,000, which reduced the availability under the line of credit to approximately $4,000,000. Borrowings under the line of credit bear interest at either the bank's prime rate or LIBOR plus 1.75%, at the Company's election, and are due and payable on October 1, 1996. (See Note 3 to Consolidated Financial Statements.) The Company is currently negotiating its line of credit and expects that it will be able to renew it for one year on terms no less favorable that those of its current credit line. The Company has not incurred significant losses or gains from foreign currency exchange rate fluctuations. The continuing expansion of the Company's Hong Kong, Mexican and United Kingdom subsidiaries could, however, result in larger gains or losses as a result of fluctuations in foreign currency exchange rates as those subsidiaries conduct business in whole or in part in foreign currencies. The Company believes that cash flow from operations, vendor credit, its existing working capital and its bank line of credit will be sufficient to satisfy the Company's anticipated cash requirements at least through fiscal 1997. Nonetheless, the Company may seek additional sources of capital as necessary or appropriate to finance acquisitions or to otherwise finance the Company's growth or operations; however, there can be no assurance that such funds if needed will be available on favorable terms, if at all. FORWARD LOOKING STATEMENTS With the exception of the actual reported financial results and other historical information, the statements made in the Management's Discussion and Analysis of Financial Condition and Results of Operations are forward looking statements that involve risks and uncertainties that could affect actual future results. Such risks and uncertainties include, but are not limited to: timing and size of orders from large customers, timing and size of orders for new products, competition, large customers' inventory management, general economic conditions, the health of the retail environment, supply constraints, supplier performance and other risks indicated in the Company's filings with the Securities and Exchange Commission. EFFECTS OF INFLATION The Company believes that inflation has not had a material effect on its operations. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See the Consolidated Financial Statements of the Company and its subsidiaries included herein and listed in Item 14(a) of this Annual Report. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Inapplicable. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors and executive officers of the Company and their ages are as follows:
Name Age Title - ---- --- ----- Mark A. Vidovich 46 Chairman of the Board, Chief Executive Officer and Director James E. Freeman, Jr. 49 President and Chief Operating Officer Dennis K. Marquardt 53 Executive Vice President, Finance & Administration, Chief Financial Officer and Corporate Secretary Dennis G. Baglama 43 Vice President, Sales Ronald M. Bianco 49 Vice President, Product Development Lee R. Coffey 60 Vice President, Human Resources John P. Kirkland 52 Vice President, Operations, North America Stan Littley 37 Vice President, International Sales Judy Tucker 50 Vice President, Corporate Development Richard J. Whatley 52 Vice President, Chief Information Officer James P. Higgins 47 Director Jill Tate Higgins 40 Director Charles Miller 54 Director Alan R. Rachlin 45 Director Boyd I. Willat 53 Director Felice Willat 52 Director
Each of the Company's directors is elected at the annual meeting of stockholders and serves until the next annual meeting and until his or her successor is elected and qualified, or until his or her earlier death, resignation or removal. Officers are appointed by and serve at the discretion of the Board of Directors. The Company pays each non-employee director an annual fee of $10,000, payable quarterly, plus $750 and expenses for each Board meeting attended. The Company pays each member of the Compensation and Audit Committees an annual fee of $8,000 ($12,000 for the Chairperson of each such Committee), payable quarterly, plus $750 and expenses for each Committee meeting attended. Mr. Vidovich joined the Company as Chief Executive Officer and a director in April 1986 and assumed the additional position of Chairman of the Board in March 1990. Mr. Freeman joined the Company as Chief Operating Officer in March 1993 and assumed the additional position of President in May 1995. From August 1992 until March 1993, Mr. Freeman was employed as a consultant by New Product Insights, an Overland Park, Kansas-based marketing consulting firm. From 1986 until July 1992, he served as President, Chief Operating Officer and a director of Stuart Hall Company, Inc., a Kansas City, Missouri-based manufacturer of office and school supplies. Mr. Marquardt joined the Company in April 1986 and has served as its Chief Financial Officer since that time. He also served as Vice President, Finance of the Company from April 1986 until March 1990 and as Executive Vice President, Finance & Operations from March 1990 until April 1993 when he was appointed Executive Vice President, Finance & Administration. Mr. Baglama joined the Company as National Sales Manager in January 1985, became National Sales Director in June 1987 and was appointed Vice President, Sales in December 1990. Mr. Bianco joined the Company in June 1985 and held various non-officer positions until his appointment as Vice President, Product Development in December 1990. Mr. Coffey joined the Company as Senior Director, Human Resources in January 1992 and became Vice President, Human Resources in January 1994. From January 1991 until joining the Company, he served as Vice President of Richard E. Nosky & Associates, a Phoenix, Arizona-based executive search and management consulting firm. Mr. Kirkland joined the Company as Director, Customer Service & Distribution in February 1991 and became Senior Director, Customer Service & Distribution in February 1992. He became Vice President, Customer Service & Distribution in April 1993 and was appointed Vice President, Operations, North America in March 1996. Mr. Littley joined the Company in January 1986 and held various non-officer sales positions until his appointment as Vice President, International Sales in March 1996. Ms. Tucker joined the Company in September 1990 and held various non-officer positions until her appointment as Vice President, Corporate Development in March 1994. Mr. Whatley joined the Company as Senior Director, Information Services in December 1993 and became Vice President, Chief Information Officer in February 1995. He served as Vice President, Information Services of Authentic Fitness Corporation, an apparel manufacturer, from October 1993 until joining the Company, and of Taren Holdings, Inc., an apparel manufacturer, from December 1991 until its acquisition by Authentic Fitness Corporation in October 1993. Mr. Higgins has been a director since February 1987. Since 1984, Mr. Higgins has been President and Chairman of the Board of Higgins Management Company, a financial consulting firm. Mr. Higgins is the husband of Ms. Higgins. Ms. Higgins has been a director since June 1986. Ms. Higgins is a private investor and is the wife of Mr. Higgins. Mr. Miller has been a director since August 1986. Mr. Miller is a private investor. Mr. Rachlin has been a director since August 1987. In November 1994, Mr. Rachlin became Chief Executive Officer and President of Pate's Realm, Inc., a software developer. From November 1992 until November 1994, Mr. Rachlin was a business consultant. From May 1987 until October 1992, Mr. Rachlin held various executive management positions at Government Technology Services, Inc., a reseller of computer products to the government market, and most recently served as its Executive Vice President--Strategic Development and General Counsel. Mr. Willat is a co-founder of the Company, has been a director since its incorporation and served as Chairman of the Board from May 1981 until August 1988. Mr. Willat has served as President and Chief Executive Officer of Willat Writing Instruments, a pen manufacturer, since June 1988, and he has served as President of Isola Bella, Inc., a real estate development company, since June 1987. Mr. Willat is the husband of Ms. Willat. Ms. Willat is a co-founder of the Company and has been a director since October 1980. She served as President from 1981 until June 1990 and as Vice President, Consumer Affairs from June 1990 until July 1993 when she became Director, Consumer Affairs. Ms. Willat is the wife of Mr. Willat. Item 11. EXECUTIVE COMPENSATION. Summary Compensation Table The following table sets forth certain information concerning compensation paid or accrued for the years indicated below by the Company and its subsidiaries to or on behalf of the Company's Chief Executive Officer and each of the four other most highly compensated executive officers for the fiscal year ended June 30, 1996:
Annual Compensation Long-Term -------------------- Compensation Name and Awards All Other Principal Position Year(1) Salary($)(2) Bonus($)(3) Options(#) Compensation($)(4) ------------------ ------- ------------ ----------- ---------- ------------------ Mark A. Vidovich 1996 $300,000 $285,480 75,875 $2,966 Chief Executive Officer and 1995 200,000 122,000 50,000 3,000 Chairman of the Board 1994 100,000 83,072 100,000 1,746 James E. Freeman, Jr. 1996 250,000 230,100 50,000 2,570 President and 1995 175,000 103,250 25,000 2,625 Chief Operating Officer 1994 87,500 64,147 50,000 547 Dennis K. Marquardt 1996 150,000 131,040 10,000 2,310 Executive Vice President, 1995 150,000 84,000 10,000 2,250 Finance & Administration 1994 75,000 49,984 10,000 1,791 and Chief Financial Officer Dennis G. Baglama 1996 132,000 111,197 10,000 1,569 Vice President, Sales 1995 132,000 71,200 5,000 1,980 1994 66,000 33,930 10,000 363 Ronald M. Bianco 1996 132,000 111,197 10,000 2,358 Vice President, 1995 125,000 52,188 5,000 1,875 Product Development 1994 62,500 24,841 10,000 1,363
- ------------------------------- (1) The years 1996 and 1995 refer to the twelve months ended June 30, 1996 and 1995, respectively, and the year 1994 refers to the six months ended June 30, 1994. (2) Includes amounts, if any, deferred by the named officer under the Company's 401(k) Plan. (3) Bonuses were based on the Company's financial performance and, except for discretionary bonuses in the amounts of $25,000, $15,000 and $10,000 included in the amounts shown for 1994 with respect to Messrs. Vidovich, Freeman and Marquardt, respectively, were paid under the Company's Officer Bonus Plan. (4) All amounts shown represent Company matching contributions allocated under the Company's 401(k) Plan to the accounts of the named officers. Option Grants in Fiscal Year 1996 The following table sets forth certain information concerning stock option grants in the fiscal year ended June 30, 1996 to the executive officers named in the Summary Compensation Table:
Potential Realizable Value Individual Grants at Assumed % of Total Annual Rates Options of Stock Price Granted to Exercise Appreciation Options Employees Price Expiration for Option Term(3) Name Granted (#)(1) in FY 1996(2) ($/Share) Date 5% ($) 10% ($) ---- -------------- ------------- --------- ---------- ----------- ---------- Mark A. Vidovich 75,875 45.1% $16.75 08/08/05 $799,266 $2,025,498 James E. Freeman, Jr. 50,000 29.7 16.75 08/08/05 526,699 1,334,760 Dennis K. Marquardt 10,000 5.9 16.75 08/08/05 105,340 266,952 Dennis G. Baglama 10,000 5.9 16.75 08/08/05 105,340 266,952 Ronald M. Bianco 10,000 5.9 16.75 08/08/05 105,340 266,952 - ----------------------------------
(1) Such options were granted under the Amended and Restated 1986 Stock Option Plan (the "1986 Plan"), vest and become exercisable in 20 equal quarterly installments over five years and were granted for terms of ten years subject to earlier termination under certain circumstances relating to termination of employment. The exercise prices of such options represent the reported closing sales price of the Company's Common Stock on The Nasdaq Stock Market on the grant date. (2) The Company granted options to purchase an aggregate of 168,375 shares of Common Stock under the 1986 Plan to employees in the fiscal year ended June 30, 1996. (3) Potential values are net of exercise price and before taxes payable in connection with the exercise of such options or the subsequent sale of shares acquired upon the exercise of such options. These values represent certain assumed rates of appreciation of the Company's Common Stock (i.e., 5% and 10% compounded annually over the term of such options) based on the SEC's rules. The actual values, if any, will depend upon, among other factors, the future performance of the Company's Common Stock, overall market conditions and the named officer's continued employment with the Company. Therefore, the potential values reflected in this table may not necessarily be achieved. Aggregated Option Exercises in Fiscal Year 1996 and Option Values at June 30, 1996 The following table sets forth certain information concerning stock option exercises during the fiscal year ended June 30, 1996 and unexercised options held as of June 30, 1996 by the executive officers named in the Summary Compensation Table:
Shares Number of Shares Value of Acquired Underlying Unexercised Unexercised in-the-Money on Value Options at 6/30/96 Options at 6/30/96(2) Name Exercise(#) Realized($)(1) Exercisable Unexercisable Exercisable Unexercisable ---- ----------- -------------- ----------- ------------- ----------- ------------- Mark A. Vidovich 48,500 $978,078 164,037 210,713 $2,243,071 $2,392,836 James E. Freeman, Jr. 20,000 157,500 49,250 118,750 589,594 1,291,406 Dennis K. Marquardt 18,000 314,820 35,575 32,525 491,784 364,178 Dennis G. Baglama 20,000 238,125 8,250 26,750 103,594 310,656 Ronald M. Bianco 10,500 182,395 24,500 25,500 340,125 292,375
- -------------------------------- (1) Such value represents the difference between the market value of the shares acquired upon exercise of such options (calculated using the closing sales price of the Company's Common Stock on the date of exercise as reported on The Nasdaq Stock Market) and the exercise price of such options. (2) Such value represents the difference between the market value of the shares underlying such "in-the-money" options (calculated using the closing sales price (i.e., $25.875) of the Company's Common Stock on June 30, 1996 as reported on The Nasdaq Stock Market) and the exercise price of such options. TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS OFFICER SEVERANCE PLAN In February 1993, the Company implemented an officer severance plan (the "Severance Plan") under which officers of the Company are entitled to receive certain severance benefits following termination of employment, if such termination is non-temporary, involuntary and without cause. In addition, if there is a "change in control" of the Company, an officer will receive benefits under the Severance Plan if such officer terminates his or her employment with the Company either for any reason within one year following the change in control or for "good reason" (which includes the assignment to the officer of duties significantly inconsistent with his or her prior position or a reduction in his or her compensation or benefits) within two years following such change in control. Each eligible officer is entitled to severance pay based on his or her highest annual compensation (i.e., base salary plus automobile allowance), the number of years employed by the Company and the highest office attained prior to termination. The amounts that would be payable under the Severance Plan to Messrs. Vidovich, Freeman, Marquardt, Baglama and Bianco if their employment were terminated as of September 1, 1996 and they were eligible for severance benefits under the Severance Plan would be $384,000, $192,900, $183,400, $103,500 and $103,500, respectively. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee presently consists of Jill Tate Higgins (Chairperson), Charles Miller and Alan R. Rachlin. No member of the Compensation Committee is a current or former officer or an employee of the Company or any of its subsidiaries. In July 1995, Mr. Rachlin entered into a two-year consulting agreement with the Company pursuant to which he agreed to perform consulting services for the Company in exchange for ten-year warrants to purchase 25,000 shares of the Company's Common Stock at $19.00 per share. The consulting agreement was approved unanimously by the Board of Directors of the Company. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of September 1, 1996 by (i) each person who is known by the Company to own beneficially more than 5% of the outstanding shares of the Company's Common Stock, (ii) each of the Company's directors, (iii) the executive officers named in the Summary Compensation Table, and (iv) all current directors and officers of the Company as a group: Name of Beneficial Owner(1) Shares Beneficially Owned Percent of Class - --------------------------- ------------------------- ---------------- Jill Tate Higgins(2) 1,097,540 17.3% 10153-1/2 Riverside Drive, #598 Toluca Lake, CA 91602 William Blair & Company(3) 756,190 11.9 135 South LaSalle Street Chicago, IL 60603 Mark A. Vidovich(4)(5) 374,034 5.7 15295 Alton Parkway Irvine, CA 92618 Felice Willat(6) 334,252 5.3 15295 Alton Parkway Irvine, CA 92618 Alan R. Rachlin(4) 294,184 4.5 Boyd I. Willat(7) 228,709 3.6 Dennis K. Marquardt(4)(8) 158,142 2.5 James P. Higgins(9) 81,214 1.3 James E. Freeman, Jr.(4)(10) 79,800 1.2 Ronald M. Bianco(4) 40,716 * Dennis G. Baglama(4) 14,250 * Charles Miller(4) 8,000 * All current directors and officers as a group (16 persons)(2)(4)(5)(6) (7)(8)(9)(10) 2,657,788 38.0 - ---------------------------- * Less than one percent. (footnotes on next page) (1) Such persons have sole voting and investment power with respect to all shares of Common Stock shown as being beneficially owned by them, subject to community property laws, where applicable, and the information contained in the footnotes to this table. (2) Includes 1,027,426 shares held by O.S. II, Inc., a California corporation of which Ms. Higgins, along with one of her minor children, is the sole owner. Also includes 70,114 shares held by Lakeside Enterprises, L.P., a California limited partnership of which Ms. Higgins is the general partner and a limited partner and of which O.S. II, Inc. is a limited partner. Does not include 11,100 shares beneficially owned by James P. Higgins, Ms. Higgins' husband, as to which shares Ms. Higgins disclaims beneficial ownership (see footnote 9 below). (3) Based on a Form 13F dated August 14, 1996, wherein William Blair & Company reported that, as an institutional investment manager, it has sole investment discretion as to such shares and sole voting authority as to 177,700 of such shares. (4) Includes 205,261, 190,624, 42,885, 71,750, 30,000, 14,250, 8,000 and 661,145 shares for which options or warrants beneficially owned by Messrs. Vidovich, Rachlin, Marquardt, Freeman, Bianco, Baglama and Miller and all current directors and officers as a group, respectively, are exercisable or become exercisable within 60 days after September 1, 1996. (5) Does not include 2,559 or 7,600 shares held by Mr. Vidovich's children and by a trustee for the benefit of Mr. Vidovich's children, respectively, as to which shares Mr. Vidovich disclaims beneficial ownership. (6) Includes 20,000 shares for which options held by Ms. Willat are exercisable or become exercisable within 60 days after September 1, 1996. Also includes 34,000 shares held by Mr. and Ms. Willat as trustees of trusts for the benefit of their minor children and as to which shares Mr. and Ms. Willat share voting and investment power. Does not include 194,709 shares beneficially owned by Boyd I. Willat, Ms. Willat's husband, as to which shares Ms. Willat disclaims beneficial ownership (see footnote 7 below). (7) Includes 25,000 shares for which warrants held by Mr. Willat are exercisable or become exercisable within 60 days after September 1, 1996. Also includes 34,000 shares held by Mr. and Ms. Willat as trustees of trusts for the benefit of their minor children and as to which shares Mr. And Ms. Willat share voting and investment power. Does not include 300,252 shares beneficially owned by Felice Willat, Mr. Willat's wife, as to which shares Mr. Willat disclaims beneficial ownership (see footnote 6 above). (8) Includes 7,600 shares held by Mr. Marquardt as trustee for Mr. Vidovich's children. (9) Includes 5,500 shares for which warrants held by Mr. Higgins are exercisable or become exercisable within 60 days after September 1, 1996. Also includes 70,114 shares held by Lakeside Enterprises, L.P., a California limited partnership of which Mr. Higgins is a limited partner in his individual capacity and as custodian for each of the six minor children of Mr. Higgins and his wife. Does not include 1,027,426 shares beneficially owned by Jill Tate Higgins, Mr. Higgins' wife, as to which shares Mr. Higgins disclaims beneficial ownership (see footnote 2 above). (10) Includes 2,000 shares held by Mr. Freeman's wife for the benefit of their minor children. Item 13. CERTAIN TRANSACTIONS. See Item 11 of this Annual Report entitled "Executive Compensation - Compensation Committee Interlocks and Insider Participation." PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this Report: Page
1. Consolidated Financial Statements Independent Auditors' Report F-1 Consolidated Balance Sheets at June 30, 1996 and 1995 F-2 Consolidated Statements of Income for the Years Ended June 30, 1996 and 1995, the Six Months Ended June 30, 1994 and the Year Ended December 31, 1993 F-3 Consolidated Statements of Stockholders' Equity for the Years Ended June 30, 1996 and 1995, the Six Months Ended June 30, 1994 and the Year Ended December 31, 1993 F-4 Consolidated Statements of Cash Flows for the Years Ended June 30, 1996 and 1995, the Six Months Ended June 30, 1994 and the Year Ended December 31, 1993 F-5 Notes to Consolidated Financial Statements F-6 2. Financial Statement Schedules Independent Auditors' Report S-1 Schedule II - Valuation and Qualifying Accounts S-2 3. List of Exhibits 3.1 Certificate of Incorporation of the Registrant, as amended(1) 3.2 Bylaws of the Registrant(2) 10.1 Amended and Restated 1986 Stock Option Plan, including forms of Stock Option Agreements and Stock Purchase Agreement(3) and Amendment Nos. 1(4), 2(5), 3(5) and 4(6) thereto dated July 17, 1992, February 28, 1993, May 10, 1993 and May 12, 1994, respectively(7) 10.2 1995 Stock Option Plan, including forms of Stock Option Agreements(7)(8) 10.3 Employee Stock Purchase Plan(3) and Amendment No. 1 thereto dated July 17, 1992(4)(7) 10.4 Day Runner 401(k) Plan and Trust Agreement(3) effective as of January 1, 1991 and Amendment Nos. 1(9), 2(1) and 3(10) thereto effective January 1, 1992, January 1, 1991 and January 1, 1991, respectively(7) 10.5 1995 Officer Bonus Plan(7)(11) 10.6 1996 Officer Bonus Plan(12) and Amendment thereto(7) 10.7 Officer Severance Plan effective as of February 28, 1993, including form of Employment Separation Agreement(7)(9) 10.8 Credit Agreement dated as of May 1, 1993 between the Registrant and Wells Fargo Bank, National Association, including Line of Credit Note(5), Assumption and Consent to Merger Agreement dated as of June 30, 1993(13), First Amendment to Credit Agreement dated as of December 15, 1993(13), Second Amendment to Credit Agreement dated as of May 1, 1994, including Line of Credit Note(14), Third Amendment to Credit Agreement dated as of October 1, 1994, including Line of Credit Note(15) and Fourth Amendment to Credit Agreement dated as of October 2, 1995, including revolving Line of Credit Note(16) 10.9 Triple Net Lease, as amended, effective as of March 22, 1991 between Catellus Development Corporation and the Registrant(3) and as amended by Lease Amendment dated June 29, 1992(9) 10.10 Triple Net Lease dated July 28, 1992 between Catellus Development Corporation and the Registrant(9) 10.11 Koll Business Center Lease dated September 7, 1994 between the Registrant and Koll Alton Plaza and Aetna Life Insurance Co.(1) 10.12 Standard Commercial Lease Agreement dated as of July 31, 1996 between System Realty Nine, Inc. and the Registrant 10.13 Form of Warrant to purchase shares of the Registrant's Common Stock issued to certain directors and officers of the Registrant(3) and Schedule of Warrants(7) 10.14 Consulting Agreement effective July 28, 1995 between the Registrant and Alan R. Rachlin(7)(10) 21.1 Subsidiaries of the Registrant(13) 23.1 Consent of Deloitte & Touche LLP 27.1 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed or required to be filed by the Registrant during the fourth quarter of the fiscal year ended June 30, 1996. (c) Exhibits See the list of Exhibits under Item 14(a)3 of this Annual Report on Form 10-K. (d) Financial Statement Schedules See the list of Schedules under Item 14(a)2 of this Annual Report on Form 10-K.
- ------------------------ (1) Incorporated by reference to the Registrant's Transition Report on Form 10-K (File No. 0-19835) filed with the Commission on September 27, 1994. (2) Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 0-19835) filed with the Commission on August 5, 1993. (3) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-45391) filed with the Commission on January 30, 1992. (4) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33-53422) filed with the Commission on October 15, 1992. (5) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (Registration No. 0-19835) filed with the Commission on August 16, 1993. (6) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33-84036) filed with the Commission on September 15, 1994. (7) Constitutes a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this Annual Report on Form 10-K. (8) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 33-80819) filed with the Commission on December 22, 1995. (9) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19835) filed with the Commission on March 31, 1993. (10) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19835) filed with the Commission on September 27, 1995. (11) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19835) filed with the Commission on February 14, 1995. (12) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19835) filed with the Commission on February 13, 1996. (13) Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-19835) filed with the Commission on March 30, 1994. (14) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19835) filed with the Commission on May 16, 1994. (15) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19835) filed with the Commission on November 14, 1994. (16) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19835) filed with the Commission on November 13, 1995. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Irvine, California. DAY RUNNER, INC. By: /s/ Mark A. Vidovich -------------------------- Mark A. Vidovich Chairman of the Board and Chief Executive Officer Dated: September 27, 1996 Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Mark A. Vidovich September 27, 1996 - ---------------------------------------- Chairman of the Board and Mark A. Vidovich Chief Executive Officer (Principal Executive Officer) /s/ Dennis K. Marquardt September 27, 1996 - ---------------------------------------- Executive Vice President, Dennis K. Marquardt Finance & Administration and Chief Financial Officer (Principal Financial Officer and Accounting Officer) /s/ James P. Higgins Director September 27, 1996 - ---------------------------------------- James P. Higgins /s/ Jill Tate Higgins Director September 27, 1996 - ---------------------------------------- Jill Tate Higgins /s/ Charles Miller Director September 27, 1996 - ---------------------------------------- Charles Miller /s/ Alan R. Rachlin Director September 27, 1996 - ---------------------------------------- Alan R. Rachlin /s/ Boyd I. Willat Director September 27, 1996 - ---------------------------------------- Boyd I. Willat /s/ Felice Willat Director September 27, 1996 - ---------------------------------------- Felice Willat
INDEPENDENT AUDITORS' REPORT Day Runner, Inc.: We have audited the accompanying consolidated balance sheets of Day Runner, Inc. and subsidiaries as of June 30, 1996 and 1995, and the related consolidated statements of income, stockholders' equity, and cash flows for the years ended June 30, 1996 and 1995, the six months ended June 30, 1994 and the year ended December 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Day Runner, Inc. and subsidiaries as of June 30, 1996 and 1995 and the results of their operations and their cash flows for the years ended June 30, 1996 and 1995, the six months ended June 30, 1994 and the year ended December 31, 1993 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1993 the Company changed its method of accounting for income taxes to conform with Statement of Financial Accounting Standards No. 109. DELOITTE & TOUCHE LLP /s/Deloitte & Touche LLP Long Beach, California August 9, 1996 F-1
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) ASSETS June 30, June 30, 1996 1995 --------- ------ Current assets: Cash and cash equivalents (Note 1)............................................. $ 19,765 $ 4,269 Accounts receivable (less allowance for doubtful accounts and sales returns and other allowances of $7,374 and $7,132 at June 30, 1996 and 1995, respectively) (Note 3).............................. 21,441 19,373 Inventories (Notes 1 & 3)...................................................... 20,040 26,609 Prepaid expenses and other current assets (Note 9)............................. 1,710 1,686 Income taxes receivable (Notes 1, 5 & 6)....................................... 1,930 Deferred income taxes (Notes 1 & 5)............................................ 5,200 5,174 -------- ------- Total current assets........................................................ 70,086 57,111 -------- ------- Property and equipment - At cost (Notes 1 & 4) Machinery and equipment........................................................ 6,942 4,678 Data processing equipment and software......................................... 4,707 3,603 Leasehold improvements......................................................... 1,514 1,246 Vehicles........................................................................... 202 233 -------- ------- Total ............................................................................ 13,365 9,760 Less accumulated depreciation and amortization................................. 5,864 4,078 -------- ------- Property and equipment - net................................................... 7,501 5,682 -------- ------- Other assets (Note 9).............................................................. 344 857 -------- ------- Total assets....................................................................... $ 77,931 $63,650 ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable............................................................... $ 8,063 $ 9,200 Accrued expenses (Note 2)...................................................... 10,370 7,498 Income taxes payable (Notes 1, 5 & 6).......................................... 2,001 Current portion of long-term debt (Note 3)..................................... 141 Current portion of capital lease obligations (Note 4).......................... 11 -------- ------- Total current liabilities................................................... 18,433 18,851 -------- ------- Long-term liabilities - Capital lease obligations (Note 4)............................................. 12 ------- Commitments and contingencies (Notes 4, 10 & 11) Stockholders' equity (Notes 6, 7 & 8): Preferred stock (1,000,000 shares authorized; $0.001 par value, no shares issued or outstanding) Common stock (14,000,000 shares authorized; $0.001 par value; 6,304,771 and 6,125,797 shares issued and outstanding at June 30, 1996 and 1995, respectively)............................................................... 6 6 Additional paid-in capital..................................................... 22,869 19,942 Retained earnings.............................................................. 36,620 24,802 Cumulative translation adjustment (Note 1)..................................... 3 37 -------- ------- Total stockholders' equity.................................................. 59,498 44,787 -------- ------- Total liabilities and stockholders' equity......................................... $ 77,931 $63,650 ======== ======= See accompanying notes to consolidated financial statements. F-2
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) Years Ended Six Months Year Ended June 30, Ended June 30, December 31, 1996 1995 1994 1993 ------- ------- ----------------- -------------- Sales (Note 1).............................................. $125,126 $ 121,801 $ 43,160 $ 81,892 Cost of goods sold.......................................... 60,600 62,175 22,981 41,699 --------- --------- --------- --------- Gross profit................................................ 64,526 59,626 20,179 40,193 --------- --------- --------- --------- Operating expenses (Notes 4, 9 & 11): Selling, marketing and distribution..................... 29,198 32,154 12,156 21,786 General and administrative.............................. 16,376 13,792 5,686 9,479 --------- --------- --------- --------- Total operating expenses............................. 45,574 45,946 17,842 31,265 ---------- ---------- --------- --------- Income from operations...................................... 18,952 13,680 2,337 8,928 --------- --------- --------- --------- Interest (income) expense: Interest income......................................... (823) (428) (139) (85) Interest expense........................................ 117 267 48 85 --------- --------- --------- --------- Net interest income.................................. (706) (161) (91) --------- --------- --------- Income before provision for income taxes, extraordinary item and cumulative effect of accounting change......... 19,658 13,841 2,428 8,928 Provision for income taxes (Notes 1 & 5).................... 7,840 5,863 1,061 3,638 --------- --------- --------- --------- Income before extraordinary item and cumulative effect of accounting change....................................... 11,818 7,978 1,367 5,290 Extraordinary item: litigation settlement, net of income taxes of $542,000 (Note 10).................................. 718 Cumulative effect of change in accounting for income taxes (Note 1).......................................... 350 --------- --------- --------- --------- Net income.................................................. $ 11,818 $ 7,978 $ 2,085 $ 5,640 ========= ========= ========= ========= Earnings per common and common equivalent share (Note 1): Income before extraordinary item and cumulative effect of accounting change.................................... $ 1.79 $ 1.25 $ 0.22 $ 0.87 Extraordinary item (Note 10)................................ 0.11 Cumulative effect of change in accounting for income taxes.. 0.06 --------- --------- --------- --------- Net earnings per share...................................... $ 1.79 $ 1.25 $ 0.33 $ 0.93 ========= ========= ========= ========= Weighted average number of common and common equivalent shares....................................... 6,602 6,374 6,308 6,065 ========= ========= ========= ========= See accompanying notes to consolidated financial statements.
F-3
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands) Number Additional Cumulative of Shares Common Paid-In Retained Translation Outstanding Stock Capital Earnings Adjustment Total ----------- ----- ------- -------- ---------- ----- Balance at January 1, 1993............ 5,276,563 $ 5 $ 16,582 $ 9,099 $25,686 Exercise of warrants (Note 8)......... 345,962 1 430 431 Exercise of options (Notes 6 & 7)..... 173,906 505 505 Tax benefit of options (Note 6)....... 450 450 Net income............................ 5,640 5,640 --------- ------ -------- -------- -------- ------- Balance at December 31, 1993.......... 5,796,431 6 17,967 14,739 32,712 Exercise of options (Notes 6 & 7)..... 235,886 721 721 Tax benefit of options (Note 6)....... 276 276 Cumulative translation adjustment (Note 1).......................... $ (8) (8) Net income............................ 2,085 2,085 --------- ------ -------- -------- -------- ------- Balance at June 30, 1994.............. 6,032,317 6 18,964 16,824 (8) 35,786 Exercise of warrants (Note 8)......... 31,500 126 126 Exercise of options (Notes 6 & 7)..... 61,980 568 568 Tax benefit of options (Note 6)....... 284 284 Cumulative translation adjustment (Note 1)........................... 45 45 Net income............................ 7,978 7,978 --------- ------ -------- -------- -------- ------- Balance at June 30, 1995.............. 6,125,797 6 19,942 24,802 37 44,787 Exercise of options (Notes 6 & 7)..... 178,974 1,475 1,475 Tax benefit of options (Note 6)....... 1,452 1,452 Cumulative translation adjustment (Note 1)........................... (34) (34) Net income............................ 11,818 11,818 --------- ------ -------- -------- -------- ------- Balance at June 30, 1996.............. 6,304,771 $ 6 $ 22,869 $ 36,620 $ 3 $59,498 ========= ====== ======== ======== ======== ======= See accompanying notes to consolidated financial statements.
F-4
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Years Ended Six Months Year Ended June 30, Ended June 30, December 31, 1996 1995 1994 1993 ------ ------- ----------------- -------------- Cash flows from operating activities: Net income................................................ $ 11,818 $ 7,978 $ 2,085 $ 5,640 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Gain on sale of property and equipment.................. (31) Depreciation and amortization................................. 2,548 1,259 522 815 Provision for losses on accounts receivable............. 810 452 124 168 Write-off of barter credits................................... 520 210 Utilization of barter credits........................... 56 129 Cumulative effect of change in accounting for income taxes.......................................... (350) Deferred income tax provision........................... (26) (2,690) 165 309 Changes in operating assets and liabilities: Accounts receivable................................... (2,884) (2,475) (2,506) (7,277) Inventories ................................................. 6,543 8,182) (4,589) 3,647 Prepaid expenses and other current assets..................... (87) 224 (684) 238 Income taxes receivable....................................... (1,930) Accounts payable...................................... (1,028) (101) 1,123 4,039 Accrued expenses.............................................. 3,606 3,209 (1,022) 1,376 Income taxes payable.......................................... (1,247) 1,308 (1,113) 1,305 -------- -------- -------- -------- Net cash provided by (used in) operating activities................................ 18,643 1,248 (5,797) 9,910 -------- -------- -------- -------- Cash flows from investing activities: Proceeds from disposition of property and equipment....... 110 Certificates of deposit....................................... 64 Acquisition of property and equipment..................... (4,393) (2,592) (1,094) (1,998) Other assets ................................................. (8) (146) (71) 4 Purchase of marketable securities......................... (3,843) Sale of marketable securities................................. 3,843 -------- -------- -------- -------- Net cash (used in) provided by investing activities........... (4,401) 1,105 (4,898) (1,930) -------- -------- -------- -------- Cash flows from financing activities: Net repayment under line of credit........................ (423) Proceeds from long-term debt.............................. 461 Payment of long-term debt................................. (141) (154) (64) (102) Payment of capital lease obligations.......................... (23) (23) (43) (84) Exercise of warrants...................................... 126 431 Exercise of options....................................... 1,475 568 721 505 -------- -------- -------- -------- Net cash provided by financing activities................. 1,311 517 614 788 -------- -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents......................................... (57) (73) (3) -------- -------- -------- Net increase (decrease) in cash and cash equivalents.......... 15,496 2,797 (10,084) 8,768 Cash and cash equivalents at beginning of period.............. 4,269 1,472 11,556 2,788 -------- -------- -------- -------- Cash and cash equivalents at end of period.................... $ 19,765 $ 4,269 $ 1,472 $ 11,556 ======== ======== ======== ======== See accompanying notes to consolidated financial statements.
F-5 DAY RUNNER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Day Runner, Inc. and subsidiaries (the "Company") design and manufacture personal organizer systems, refills and related products, marketing them domestically and internationally. A substantial portion of the Company's sales is to office products superstores, wholesalers and dealers and to mass market retailers throughout the United States. The Company grants credit to substantially all of its customers. FISCAL YEAR. Effective January 1, 1994, the Company changed its fiscal year from a calendar year to the period ended June 30. CONSOLIDATION. The consolidated financial statements include the accounts of Day Runner, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. FOREIGN CURRENCY TRANSLATION. Assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at the exchange rate prevailing at the balance sheet date and, where appropriate, at historical rates of exchange. Income and expense accounts are translated at the weighted average rate in effect during the year. The aggregate effect of translating the financial statements of the foreign subsidiaries is included as a separate component of stockholders' equity. Foreign exchange gains (losses) were not significant during the years ended June 30, 1996 and 1995, the six months ended June 30, 1994 or the year ended December 31, 1993. CASH EQUIVALENTS. The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. INVENTORIES. Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out basis. Inventories consist of the following (in thousands): June 30, June 30, 1996 1995 ---------- ---------- Raw materials................. $ 8,212 $ 8,152 Work in process............... 327 274 Finished goods................ 11,501 18,183 ---------- ----------- Total................ $ 20,040 $ 26,609 ========== =========== SALES. Revenue is recognized upon shipment of product to the customer, with appropriate allowances for estimated returns, rebates and other allowances. SIGNIFICANT CUSTOMERS. In fiscal 1996 and 1995, sales to three customers accounted for 16.7%, 14.8% and 11.7% and 24.9%, 14.3% and 11.6%, respectively, of the Company's sales. During the six months ended June 30, 1994, sales to three customers accounted for 19.3%, 15.5% and 14.1% of the Company's sales. In 1993, sales to three customers accounted for 17.6%, 15.6% and 15.2% of the Company's sales. F-6 DEPRECIATION AND AMORTIZATION. Depreciation of property and equipment is provided for over the estimated useful lives of the respective assets, using the straight-line method. Estimated useful lives range from three to five years. Leasehold improvements are amortized using the straight-line method over the lesser of the estimated useful life of the asset or the life of the lease. INCOME TAXES. The Company uses the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on temporary differences between the financial reporting and income tax bases of assets and liabilities at the balance sheet date multiplied by the applicable tax rates. The Company adopted the liability method effective January 1, 1993 and recorded a one-time benefit of $350,000 representing the cumulative effect of that change in accounting principle as of that date. FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company's financial instruments consist primarily of cash, accounts receivable and payable, and debt instruments. The book values of financial instruments, other than the debt instruments, are representative of their fair values due to short-term maturity. The book value of the Company's debt instruments is considered to approximate its fair value because the interest rate of these instruments is based on current rates offered to the Company. EARNINGS PER SHARE. Earnings per share information is computed using the weighted average number of shares of common stock outstanding and dilutive common equivalent shares from stock options and warrants using the treasury stock method. Fully diluted amounts for each period do not differ materially from the amounts presented. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING STANDARDS. Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," requires that certain long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The Company adopted SFAS No. 121 in 1996, the effect of which was not significant. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," effective for transactions entered into in fiscal years beginning after December 15, 1995. The Company plans to continue accounting for stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations as permitted by SFAS No.123. Beginning in 1997, under SFAS No. 123, the Company will disclose pro forma net income and earnings per share as if the fair value method of accounting for stock-based compensation had been elected, for all awards granted in fiscal years 1996 and 1997. RECLASSIFICATIONS. Certain reclassifications were made to the 1995 financial statements to conform to the current year presentation. F-7 2. ACCRUED EXPENSES Accrued expenses consist of the following (in thousands): June 30, June 30, 1996 1995 --------- -------- Accrued sales and promotion costs..... $ 4,027 $ 3,350 Accrued payroll and related costs..... 3,923 2,297 Other................................. 2,420 1,851 --------- --------- Total.............. $ 10,370 $ 7,498 ========= ========= 3. BANK BORROWINGS The Company has a credit agreement with a bank, the terms of which provide for borrowings under a line of credit of up to an aggregate of $5,000,000 through October 1, 1996. Under the line of credit, the Company may either borrow funds, open commercial letters of credit or open standby letters of credit up to $5,000,000. However, in no event may the aggregate of borrowings and letters of credit exceed $5,000,000. Each letter of credit shall be issued for a term not to exceed 180 days and shall not expire subsequent to February 1, 1997. Borrowings are collateralized by accounts receivable, inventories and certain other assets. Under the bank credit agreement, the Company also had a term loan which expired in May 1996. Accordingly, such amount was paid in full during 1996. All borrowings under the line of credit bear interest either at the bank's prime rate (8.75% at June 30, 1996) or at LIBOR (5.49% at June 30, 1996) plus 1.75%, at the Company's election. The credit agreement requires the Company to maintain total debt to tangible net worth of not more than 1.5 to 1 and to maintain certain specified operating ratios. The agreement also requires that the Company obtain the bank's approval to declare or pay dividends in excess of $200,000. 4. LEASES The Company has three noncancelable operating leases for its principal operating facility and its corporate headquarters. The leases expire in 1997 and 2001. The leases include renewal options that, if exercised, would extend the lease terms through 2011, and the leases provide for increases in future minimum annual rental payments based on defined increases in the Consumer Price Index, subject to certain minimum increases. The Company also has entered into leases for certain production, warehouse, computer and office equipment under noncancelable operating leases that expire through August 1999. Future minimum lease payments under the operating leases at June 30, 1996, are summarized as follows (in thousands): Operating Year Leases ---- -------- 1997.................................................... $ 3,032 1998.................................................... 2,092 1999.................................................... 1,625 2000.................................................... 1,242 2001.................................................... 1,221 Thereafter.............................................. 222 --------- Total minimum lease payments............................ $ 9,434 ========= F-8 Included in property and equipment at June 30, 1995 is capitalized leased equipment with a cost of $268,000 and accumulated amortization of $219,000. Such assets were fully depreciated at June 30, 1996. Rent expense was $3,927,000, $3,128,000, $1,120,000 and $2,345,000 for the years ended June 30, 1996 and 1995, the six months ended June 30, 1994, and the year ended December 31, 1993, respectively. 5. INCOME TAXES
The income tax provision consists of the following (in thousands): Six Months Year Ended Ended Years Ended June 30, June 30, December 31, 1996 1995 1994 1993 ---- ---- --------- ------------ Current: Federal............................... $ 6,393 $ 7,153 $ 667 $ 2,557 State................................. 1,473 1,400 229 772 -------- ------- -------- -------- Total current........................... 7,866 8,553 896 3,329 -------- -------- -------- -------- Deferred provision (benefit):........... Federal............................... (37) (2,363) 173 246 State................................. 11 (327) (8) 63 -------- -------- -------- -------- Total deferred.......................... (26) (2,690) 165 309 --------- -------- -------- -------- Total income tax provision.............. $ 7,840 $ 5,863 $ 1,061 $ 3,638 ======== ======== ======== ========
Differences between the total income tax provision and the amount computed by applying the statutory federal income tax rate to income before income taxes are as follows (in thousands):
Six Months Year Ended Ended Years Ended June 30, June 30, December 31, 1996 1995 1994 1993 ---- ---- ----------- ------------- Computed tax expense using the statutory federal income tax rate..... $ 6,880 $ 4,946 $ 826 $ 3,124 Increase (decrease) in taxes arising from: State taxes, net of federal benefit... 980 698 146 544 Foreign subsidiary operating losses... 35 281 114 Other................................. (55) (62) (25) (30) -------- -------- -------- -------- Total................................. $ 7,840 $ 5,863 $ 1,061 $ 3,638 ======== ======== ======== ======== Effective income tax rate............... 40% 42% 44% 41% ======== ======== ======== ========
F-9 Total deferred tax assets and deferred tax liabilities consist of the following at June 30, 1996 and 1995 (in thousands):
June 30, June 30, 1996 1995 ------------ ---------- Allowance for sales returns............................ $2,072 $2,216 Inventory obsolescence reserve......................... 1,479 1,376 Allowance for doubtful accounts........................ 1,005 715 State taxes............................................ 523 518 Other deferred tax assets.............................. 706 382 ------ ------ Total deferred tax assets.............................. 5,785 5,207 Less deferred tax liabilities.......................... 585 33 ------ ------ Total.................................................. $5,200 $5,174 ====== ======
6. STOCK OPTION PLAN Under the Company's 1995 Stock Option Plan (the "Plan"), an aggregate of 300,000 shares of common stock is reserved for issuance to key employees, including officers and directors, and outside directors. Both incentive stock options and nonstatutory stock options are authorized for issuance under the Plan. The terms of the options are determined at the time of grant. Pursuant to the Plan, the per share option price of incentive stock options may not be less than the fair market value of a share of common stock (85% of fair market value in the case of nonstatutory stock options) at the date of grant, and no options may be granted after December 2005. The outstanding options typically become exercisable over a period of five years from the date of issuance and have terms up to ten years. The Company also authorized the issuance of up to 1,725,000 shares of the Company's common stock under its Amended and Restated 1986 Stock Option Plan. Such options typically become exercisable ratably over a period of five years from the date of issuance and have terms of six to ten years. As of June 30, 1996, options covering 853,925 shares have been exercised and options covering 866,075 shares remain outstanding. No additional options will be granted under this plan. During the years ended June 30, 1996 and 1995, the six months ended June 30, 1994 and the year ended December 31, 1993, certain officers and employees exercised options to purchase an additional 164,025, 45,750, 230,050 and 154,050 shares, respectively, of the Company's common stock for an aggregate of $1,214,000, $362,000, $657,000 and $348,000, respectively (see Note 7). In connection with the exercise of nonstatutory stock options and the sale of shares purchased pursuant to incentive stock options, the Company realized a reduction in its current tax liability during the years ended June 30, 1996 and 1995, the six months ended June 30, 1994, and the year ended December 31, 1993. This reduction totaled $1,452,000, $284,000, $276,000 and $450,000, respectively, and was credited to additional paid-in capital. F-10
A summary of stock option activity is as follows: Number of Options Per Share ------- --------- Outstanding, January 1, 1993.......... 708,425 $2.26 - $15.00 Granted............................ 292,500 8.75 - 12.00 Exercised.......................... (154,050) 2.26 Cancelled.......................... (48,600) 2.26 - 11.25 --------- Outstanding, December 31, 1993........ 798,275 2.26 - 15.00 Granted............................ 245,000 12.50 - 18.625 Exercised.......................... (230,050) 2.26 - 11.25 Cancelled.......................... (15,750) 10.25 - 12.50 --------- Outstanding, June 30, 1994............ 797,475 2.26 - 18.625 Granted............................ 148,000 16.75 - 19.50 Exercised.......................... (45,750) 2.26 - 12.50 Cancelled.......................... (33,000) 2.26 - 18.625 --------- Outstanding, June 30, 1995............ 866,725 2.26 - 19.50 Granted............................ 168,375 16.75 Exercised.......................... (164,025) 2.26 - 19.50 Cancelled.......................... (5,000) 12.50 - 19.50 --------- Outstanding, June 30, 1996............ 866,075 8.75 - 19.50 =========
At June 30, 1996, options to purchase 378,037 shares at prices ranging from $8.75 to $19.50 were exercisable. On July 8, 1996, the Company issued options to purchase 232,500 shares of the Company's common stock at $26.00 per share to key employees. The options vest over a period of five years and expire in 2006. 7. EMPLOYEE STOCK PURCHASE PLAN During 1992, the Company adopted an Employee Stock Purchase Plan under which 100,000 shares of common stock were authorized for issuance to employees. Under the plan, qualified employees may purchase, through payroll deductions withheld during an offering period, an amount of common stock not to exceed approximately 5% of the employee's annual compensation. The purchase price per share is the lower of 85% of the fair market value of a share of common stock on the first day of the offering period or on the last day of the offering period. There are two offering periods during each year. During the years ended June 30, 1996 and 1995, the six months ended June 30, 1994 and the year ended December 31, 1993, employees purchased an aggregate of 14,949, 16,230, 5,836 and 19,856 shares of common stock for $261,000, $206,000, $64,000, and $157,000, respectively, under this plan. These amounts are included in the amounts shown for exercise of options on the accompanying consolidated statements of stockholders' equity (see Note 6). F-11 8. WARRANTS During the years ended June 30, 1996 and 1995, the six months ended June 30, 1994 and the year ended December 31, 1993, the Board of Directors approved the issuance of warrants to purchase an aggregate of 150,000 shares of the Company's common stock. Such warrants were issued at prices ranging from $4.00 to $19.00 per share, vest over periods up to 48 months and expire at various times through August 2005. During 1995 and 1993, certain officers, directors, employees and a stockholder exercised warrants to purchase 31,500 and 345,962 shares, respectively, of the Company's common stock for an aggregate of $126,000 and $430,000, respectively. No warrants were exercised during the year ended June 30, 1996 and the six months ended June 30, 1994.
A summary of warrant activity is as follows: Number of Warrants Per Share -------- --------- Outstanding, January 1, 1993.......... 515,962 $1.00 - $4.00 Granted ....................... 25,000 12.00 Exercised.......................... (345,962) 1.00 - 4.00 ----------- Outstanding, December 31, 1993........ 195,000 4.00 - 12.00 Granted............................ 25,000 12.50 ----------- Outstanding, June 30, 1994............ 220,000 4.00 - 12.50 Granted............................ 25,000 19.00 Exercised.......................... (31,500) 4.00 ----------- Outstanding, June 30, 1995............ 213,500 4.00 - 19.00 Granted............................ 25,000 19.00 ----------- Outstanding, June 30, 1996............ 238,500 4.00 - 19.00 ===========
At June 30, 1996, warrants to purchase 224,958 shares at prices ranging from $4.00 to $19.00 were exercisable. 9. OTHER TRANSACTIONS During 1995 and 1993, the Company entered into barter agreements whereby it delivered $132,000 and $1,098,000, respectively, of its inventory in exchange for future advertising credits and other items. The credits, which expire in October 1998, are valued at the lower of the Company's cost or market value of the inventory transferred. The Company has recorded barter credits of $36,000 in prepaid expenses and other current assets at June 30, 1996 and 1995. At June 30, 1996 and 1995, other assets include $279,000 and $799,000, respectively, of such credits. Under the terms of the agreement, the Company is required to pay cash equal to a negotiated amount of the bartered advertising, or other items, and use the barter credits to pay the balance. These credits are charged to expense as they are used. During the year ended June 30, 1995, the Company charged $56,000 to expense for barter credits used for advertising. No amounts were charged to expense for barter credits used for advertising during the year ended June 30, 1996. F-12 The Company assesses the recoverability of barter credits periodically. Factors considered in evaluating the recoverability include management's plans with respect to advertising and other expenditures for which barter credits can be used. Any impairment losses are charged to operations as they are determinable. During the years ended June 30, 1996 and 1995, the Company charged $520,000 and $210,000, respectively, to operations for such impairment losses. 10. LITIGATION In May 1987, a jury awarded the Company certain damages on a copyright infringement claim in a lawsuit that the Company initiated in June 1985 against certain other companies alleging both copyright infringement and unfair competition. In March 1994, the Company settled this lawsuit resulting in a favorable settlement of $1,375,000. Such amount is included as an extraordinary item in the accompanying consolidated statements of income, net of legal costs of $115,000 and income taxes of $542,000. 11. PROFIT-SHARING AND BONUS PLANS In January 1991, the Company established a 401(k) profit-sharing plan in which eligible employees may contribute up to 15% of their eligible earnings. The Company may contribute to the plan at the discretion of the Board of Directors, subject to applicable regulations. In the years ended June 30, 1996 and 1995, the six months ended June 30, 1994 and the year ended December 31, 1993, the Board elected to contribute an amount equal to 25% of the first 6% of eligible earnings. Participants vest in the Company's contributions 20% after two years of plan participation and 20% each year thereafter until fully vested. During the years ended June 30, 1996 and 1995, the six months ended June 30, 1994 and the year ended December 31, 1993, the Company's matching contributions were $128,000, $120,000, $50,000 and $108,000, respectively. The Company has an executive bonus plan and incentive compensation arrangements for key employees based on an earnings formula. Compensation expense recorded under these plans was $1,120,000, $550,000, $290,000 and $336,000 during the years ended June 30, 1996 and 1995, the six months ended June 30, 1994 and the year ended December 31, 1993, respectively. 12. STATEMENTS OF CASH FLOWS In a barter transaction entered in 1995 and 1993, the Company exchanged $132,000 and $1,098,000, respectively, of inventory for an equal amount of barter credits (see Note 9). The Company realized a reduction in its current tax liability during 1996, 1995, 1994 and 1993 in the amount of $1,452,000, $284,000, $276,000 and $450,000, respectively. Such amounts were credited to additional paid-in capital (see Note 6).
Six Months Year Ended Ended Years Ended June 30, June 30, December 31, 1996 1995 1994 1993 ---- ---- --------- -------------- Supplemental disclosure of cash flow information (in thousands) - Cash paid during the period for: Interest....................... $ 24 $ 80 $ 48 $ 85 Income taxes................... $ 9,988 $ 6,610 $2,433 $ 2,040
F-13 13. UNAUDITED COMPARATIVE FINANCIAL INFORMATION
The following represents certain unaudited financial information for the six months ended June 30, 1993 (in thousands, except per share amounts): Sales................................................................... $ 28,025 Gross profit............................................................ 13,750 Income before provision for income taxes and cumulative effect of accounting change............................ 1,226 Provision for income taxes.............................................. 503 Income before cumulative effect of accounting change.................... 723 Cumulative effect of change in accounting for income taxes.............. 350 Net income.............................................................. $ 1,073 Earnings per Common and Common Equivalent Share: Income before cumulative effect of accounting change.................. $ 0.12 Cumulative effect of change in accounting for income taxes............ 0.06 Net earnings per share................................................ $ 0.18
F-14 INDEPENDENT AUDITORS' REPORT Day Runner, Inc.: We have audited the consolidated financial statements of Day Runner, Inc. and its subsidiaries as of June 30, 1996 and 1995, and for the years ended June 30, 1996 and 1995, the six months ended June 30, 1994 and the year ended December 31, 1993, and have issued our report thereon dated August 9, 1996; such report is included elsewhere in this Form 10-K. Our audits also included the consolidated financial statement schedule of Day Runner, Inc. and its subsidiaries, listed in Item 14(a)2. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP /s/Deloitte & Touche LLP Long Beach, California August 9, 1996 S-1
DAY RUNNER, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands) Balance at Balance at June 30, Charged to June 30, Classification 1995 Operations Deductions 1996 - -------------- ---------------- ---------- ---------- ---------- Allowance for doubtful accounts............ $1,671 $ 810 $ 123 $ 2,358 Allowance for sales returns................ 5,461 8,221 8,666 5,016 Reserve for obsolete inventory............. 3,214 2,754 2,495 3,473 Balance at Balance at June 30, Charged to June 30, Classification 1994 Operations Deductions 1995 - -------------- ---------------- ---------- ---------- ---------- Allowance for doubtful accounts............ $1,368 $ 452 $ 149 $ 1,671 Allowance for sales returns................ 2,883 10,451 7,873 5,461 Reserve for obsolete inventory............. 1,800 3,508 2,094 3,214 Balance at Balance at December 31, Charged to June 30, Classification 1993 Operations Deductions 1994 - -------------- ---------------- ---------- ---------- ---------- Allowance for doubtful accounts............ $1,362 $ 124 $ 118 $ 1,368 Allowance for sales returns................ 3,092 3,839 4,048 2,883 Reserve for obsolete inventory............. 1,529 924 653 1,800 Balance at Balance at December 31, Charged to December 31, Classification 1992 Operations Deductions 1993 - -------------- ---------------- ---------- ---------- ---------- Allowance for doubtful accounts............ $1,365 $ 168 $ 171 $ 1,362 Allowance for sales returns................ 2,896 5,339 5,143 3,092 Reserve for obsolete inventory............. 2,255 1,197 1,923 1,529
S-2 EXHIBIT INDEX Exhibit Number Description 10.6 Amendment to 1996 Officer Bonus Plan 10.12 Standard Commercial Lease Agreement dated as of July 31, 1996 between System Nine, Inc. and the Registrant 10.13 Schedule of Warrants 23.1 Consent of Deloitte & Touche LLP 27.1 Financial Data Schedule EX-10 2 AMENDMENT TO OFFICER BONUS PLAN DAY RUNNER, INC. Exhibit 10.6 AMENDMENT TO 1996 OFFICER BONUS PLAN Pursuant to resolutions duly adopted by the Compensation Committee of the Board of Directors on March 15, 1996: 1. The Vice President, Operations, North America and the Vice President, International Sales of the Company were added to and included in the 1996 Officer Bonus Plan (the "Bonus Plan") and the matrices attached hereto were added to the Bonus Plan; and 2. The requirement that a person must be an officer of the Company for at least six months of the Company's 1996 fiscal year in order to be eligible for participation in the Bonus Plan was waived with respect to the Vice President, International Sales of the Company. Net Income VP - Operations, Goal = $7,978,000 North America - ------------------------------------------ Annual $125,000 Salary Bonus Factor 1.80% - ------------------------------------------ After Bonus Percent Fiscal of 12 Months 1996 Net Percent Ended 6/30/95 Income of Annual Net Income ($000) Salary Bonus - ----------- ------ ------ ----- 120.0% $9,574 1.80% $2,250 120.5% $9,613 3.60% 4,500 121.0% $9,653 5.40% 6,750 121.5% $9,693 7.20% 9,000 122.0% $9,733 9.00% 11,250 122.5% $9,773 10.80% 13,500 123.0% $9,813 12.60% 15,750 123.5% $9,853 14.40% 18,000 124.0% $9,893 16.20% 20,250 124.5% $9,933 18.00% 22,500 125.0% $9,972 19.80% 24,750 125.5% $10,012 21.60% 27,000 126.0% $10,052 23.40% 29,250 126.5% $10,092 25.20% 31,500 127.0% $10,132 27.00% 33,750 127.5% $10,172 28.80% 36,000 128.0% $10,212 30.60% 38,250 128.5% $10,252 32.40% 40,500 129.0% $10,292 34.20% 42,750 130.0% $10,371 36.00% 45,000 131.0% $10,451 37.80% 47,250 132.0% $10,531 39.60% 49,500 133.0% $10,611 41.40% 51,750 134.0% $10,691 43.20% 54,000 135.0% $10,770 45.00% 56,250 136.0% $10,850 46.80% 58,500 137.0% $10,930 48.60% 60,750 138.0% $11,010 50.40% 63,000 139.0% $11,089 52.20% 65,250 140.0% $11,169 54.00% 67,500 141.0% $11,249 55.80% 69,750 142.0% $11,329 57.60% 72,000 143.0% $11,409 59.40% 74,250 144.0% $11,488 61.20% 76,500 145.0% $11,568 63.00% 78,750 146.0% $11,648 64.80% 81,000 147.0% $11,728 66.60% 83,250 148.0% $11,807 68.40% 85,500 149.0% $11,887 70.20% 87,750 150.0% $11,967 72.00% 90,000 151.0% $12,047 73.80% 92,250 152.0% $12,127 75.60% 94,500 153.0% $12,206 77.40% 96,750 154.0% $12,286 79.20% 99,000 155.0% $12,366 81.00% 101,250 156.0% $12,446 82.80% 103,500 157.0% $12,525 84.60% 105,750 158.0% $12,605 86.40% 108,000 159.0% $12,685 88.20% 110,250 160.0% $12,765 90.00% 112,500 161.0% $12,845 91.80% 114,750 162.0% $12,924 93.60% 117,000 163.0% $13,004 95.40% 119,250 164.0% $13,084 97.20% 121,500 165.0% $13,164 99.00% 123,750 166.0% $13,243 100.80% 126,000 167.0% $13,323 102.60% 128,250 168.0% $13,403 104.40% 130,500 169.0% $13,483 106.20% 132,750 170.0% $13,563 108.00% 135,000 171.0% $13,642 109.80% 137,250 172.0% $13,722 111.60% 139,500 173.0% $13,802 113.40% 141,750 174.0% $13,882 115.20% 144,000 175.0% $13,962 117.00% 146,250 176.0% $14,041 118.80% 148,500 177.0% $14,121 120.60% 150,750 178.0% $14,201 122.40% 153,000 179.0% $14,281 124.20% 155,250 180.0% $14,360 126.00% 157,500 181.0% $14,440 127.80% 159,750 182.0% $14,520 129.60% 162,000 183.0% $14,600 131.40% 164,250 184.0% $14,680 133.20% 166,500 185.0% $14,759 135.00% 168,750 186.0% $14,839 136.80% 171,000 187.0% $14,919 138.60% 173,250 188.0% $14,999 140.40% 175,500 189.0% $15,078 142.20% 177,750 190.0% $15,158 144.00% 180,000 191.0% $15,238 145.80% 182,250 192.0% $15,318 147.60% 184,500 193.0% $15,398 149.40% 186,750 194.0% $15,477 151.20% 189,000 195.0% $15,557 153.00% 191,250 196.0% $15,637 154.80% 193,500 197.0% $15,717 156.60% 195,750 198.0% $15,796 158.40% 198,000 199.0% $15,876 160.20% 200,250 200.0% $15,956 162.00% 202,500 201.0% $16,036 163.80% 204,750 - ------------------------------------------- - ------------------------------------------- Net Income VP - International Goal = $7,978,000 Sales - ------------------------------------------ Annual $110,000 Salary Bonus Factor 1.40% - ------------------------------------------ After Bonus Percent Fiscal of 12 Months 1996 Net Percent Ended 6/30/95 Income of Annual Net Income ($000) Salary Bonus - ----------- ------ ------ ----- 120.0% $9,574 1.40% $1,540 120.5% $9,613 2.80% 3,080 121.0% $9,653 4.20% 4,620 121.5% $9,693 5.60% 6,160 122.0% $9,733 7.00% 7,700 122.5% $9,773 8.40% 9,240 123.0% $9,813 9.80% 10,780 123.5% $9,853 11.20% 12,320 124.0% $9,893 12.60% 13,860 124.5% $9,933 14.00% 15,400 125.0% $9,972 15.40% 16,940 125.5% $10,012 16.80% 18,480 126.0% $10,052 18.20% 20,020 126.5% $10,092 19.60% 21,560 127.0% $10,132 21.00% 23,100 127.5% $10,172 22.40% 24,640 128.0% $10,212 23.80% 26,180 128.5% $10,252 25.20% 27,720 129.0% $10,292 26.60% 29,260 130.0% $10,371 28.00% 30,800 131.0% $10,451 29.40% 32,340 132.0% $10,531 30.80% 33,880 133.0% $10,611 32.20% 35,420 134.0% $10,691 33.60% 36,960 135.0% $10,770 35.00% 38,500 136.0% $10,850 36.40% 40,040 137.0% $10,930 37.80% 41,580 138.0% $11,010 39.20% 43,120 139.0% $11,089 40.60% 44,660 140.0% $11,169 42.00% 46,200 141.0% $11,249 43.40% 47,740 142.0% $11,329 44.80% 49,280 143.0% $11,409 46.20% 50,820 144.0% $11,488 47.60% 52,360 145.0% $11,568 49.00% 53,900 146.0% $11,648 50.40% 55,440 147.0% $11,728 51.80% 56,980 148.0% $11,807 53.20% 58,520 149.0% $11,887 54.60% 60,060 150.0% $11,967 56.00% 61,600 151.0% $12,047 57.40% 63,140 152.0% $12,127 58.80% 64,680 153.0% $12,206 60.20% 66,220 154.0% $12,286 61.60% 67,760 155.0% $12,366 63.00% 69,300 156.0% $12,446 64.40% 70,840 157.0% $12,525 65.80% 72,380 158.0% $12,605 67.20% 73,920 159.0% $12,685 68.60% 75,460 160.0% $12,765 70.00% 77,000 161.0% $12,845 71.40% 78,540 162.0% $12,924 72.80% 80,080 163.0% $13,004 74.20% 81,620 164.0% $13,084 75.60% 83,160 165.0% $13,164 77.00% 84,700 166.0% $13,243 78.40% 86,240 167.0% $13,323 79.80% 87,780 168.0% $13,403 81.20% 89,320 169.0% $13,483 82.60% 90,860 170.0% $13,563 84.00% 92,400 171.0% $13,642 85.40% 93,940 172.0% $13,722 86.80% 95,480 173.0% $13,802 88.20% 97,020 174.0% $13,882 89.60% 98,560 175.0% $13,962 91.00% 100,100 176.0% $14,041 92.40% 101,640 177.0% $14,121 93.80% 103,180 178.0% $14,201 95.20% 104,720 179.0% $14,281 96.60% 106,260 180.0% $14,360 98.00% 107,800 181.0% $14,440 99.40% 109,340 182.0% $14,520 100.80% 110,880 183.0% $14,600 102.20% 112,420 184.0% $14,680 103.60% 113,960 185.0% $14,759 105.00% 115,500 186.0% $14,839 106.40% 117,040 187.0% $14,919 107.80% 118,580 188.0% $14,999 109.20% 120,120 189.0% $15,078 110.60% 121,660 190.0% $15,158 112.00% 123,200 191.0% $15,238 113.40% 124,740 192.0% $15,318 114.80% 126,280 193.0% $15,398 116.20% 127,820 194.0% $15,477 117.60% 129,360 195.0% $15,557 119.00% 130,900 196.0% $15,637 120.40% 132,440 197.0% $15,717 121.80% 133,980 198.0% $15,796 123.20% 135,520 199.0% $15,876 124.60% 137,060 200.0% $15,956 126.00% 138,600 201.0% $16,036 127.40% 140,140 - ----------------------------------------- EX-10 3 LEASE AGREEMENT FOR TENNESSEE FACILITY DAY RUNNER, INC. Exhibit 10.12 STANDARD COMMERCIAL LEASE AGREEMENT BETWEEN SYSTEM REALTY NINE, INC., a Virginia corporation "LANDLORD" and DAY RUNNER, INC., a Delaware corporation "TENANT"
TABLE OF CONTENTS PAGE 1. Premises and Term...................................................................................... 1 2. Base Rent, Adjustment Thereof and Security Deposit..................................................... 3 3. Use.................................................................................................... 3 4. Base Rent Adjustment................................................................................... 4 5. Landlord's Repairs and Other Covenants of Service...................................................... 9 6. Tenant's Repairs and Other Covenants of Care and Treatment of Premises................................. 10 7. Alterations............................................................................................ 11 8. Signs.................................................................................................. 13 9. Inspection............................................................................................. 13 10. Utilities.............................................................................................. 13 11. Assignment and Subletting.............................................................................. 14 12. Fire, Flood and Casualty Damage........................................................................ 15 13. Liability.............................................................................................. 17 14. Condemnation........................................................................................... 19 15. Holding Over........................................................................................... 20 16. Quiet Enjoyment........................................................................................ 20 17. Events of Default...................................................................................... 21 18. Remedies............................................................................................... 21 19. Landlord's Lien........................................................................................ 25 20. Mortgages.............................................................................................. 25 21. Mechanic's Liens and Tenant's Personal Property Taxes.................................................. 26 22. Notices................................................................................................ 27 23. Miscellaneous.......................................................................................... 28 24. Additional Provisions.................................................................................. 31 SPECIAL PROVISIONS.............................................................................................. 32 25. Option to Extend....................................................................................... 32 26. Rental Abatement....................................................................................... 34 27. Hazardous Wastes....................................................................................... 34 28. Compliance with Public Accommodation Laws.............................................................. 35 29. Recordation of Memorandum of Lease..................................................................... 35 30. Quality of Construction................................................................................ 35 31. Personal Liability of Landlord......................................................................... 36 32. Abatement of Rent for Interruption in Utilities or Other Events........................................ 36 33. Mandated or Required Alterations....................................................................... 37 EXHIBIT A - Legal Description of Premises EXHIBIT B - Construction Agreement EXHIBIT C - Plans and Specifications EXHIBIT D - Nashville Class A Industrial Portfolio
STANDARD COMMERCIAL LEASE AGREEMENT 101,200 Rentable Square Feet (Building to be Constructed) Day Runner, Inc. 1284 Heil Quaker Boulevard LaVergne, Tennessee 37086 Lease Agreement THIS LEASE AGREEMENT, dated as of July 31, 1996, made and entered into by and between System Realty Nine, Inc., a Virginia corporation herein referred to as "Landlord", and Day Runner, Inc., a Delaware corporation, hereinafter referred to as "Tenant"; W I T N E S S E T H : 1. Premises and Term1. Premises and Term. In consideration of the obligation of Tenant to pay rent as herein provided, and in consideration of the other terms, provisions and covenants hereof, Landlord hereby demises and leases to Tenant, and Tenant hereby takes from Landlord certain premises situated within the County of Rutherford, State of Tennessee, more particularly described on EXHIBIT "A" attached hereto and incorporated herein by reference, together with all rights, privileges, easements, appurtenances, and immunities belonging to or in any way pertaining to the premises and together with the buildings and other improvements to be constructed upon said premises by Landlord in accordance with the plans and specifications (as hereinafter defined) and pursuant to the Construction Agreement attached hereto as EXHIBIT "B" (said real property, building and improvements being hereinafter referred to as the "premises"). TO HAVE AND TO HOLD the same for a term commencing on the date (i) the buildings and other improvements erected and to be erected upon the premises together with parking areas with a minimum of 75 single-stall parking spaces located in the front of the premises and 20 single-stall parallel parking spaces along the driveway at the rear of the building sufficient to accommodate full size automobiles, shown in the plans and specifications and site plan attached hereto as EXHIBIT "C" (the "Plans and Specifications") shall have been "substantially completed" as defined in Section 3.2 of the Construction Agreement attached hereto as EXHIBIT "B" and in accordance with such Plans and Specifications, as certified by both Landlord's and Tenant's architect or construction manager, and (ii) a certificate of occupancy is issued for the building (the "commencement date"). The premises shall not be deemed to be "substantially completed" until and unless, all parking areas are available for parking the number of vehicles described hereinabove, all building systems are fully operational, the premises shall have been constructed in accordance with the Plans and Specifications, the building warehouse floors have been properly sealed with sealants in accordance with manufacturer recommendations, and the office areas and its interiors, have been completed. Landlord shall provide Tenant with access to the premises at least forty-five (45) days prior to the commencement date to permit Tenant to install warehouse racking and material handling equipment, and to install phone system, computer system and furnishings in the office area. Landlord's and Landlord's contractor's work shall have been completed to the extent that Tenant can complete its installations without interference from any ongoing work by Landlord or its contractor. The commencement date shall in no event be earlier than March 1, 1997, nor later than May 1, 1997; unless the extension of the commencement date has been approved by Tenant. The initial term shall terminate on the last day of the 88th full calendar month following the commencement date. Landlord shall notify Tenant in writing thirty (30) days prior to the date Landlord expects the buildings and improvements will be completed so that Tenant may schedule the installations described hereinabove. In the event that said buildings and other improvements have not in fact been substantially completed as aforesaid, Tenant shall notify Landlord in writing of its objections. Landlord shall have a reasonable time after delivery of such notice in which to take such corrective action as may be necessary, and shall notify Tenant in writing as soon as it deems such corrective action has been completed so that said buildings and other improvements are completed and ready for occupancy; provided however, that the lease commencement date shall not extend beyond May 1, 1997 unless Tenant has consented to an extension of the commencement date beyond May 1, 1997. Taking of possession by Tenant shall be deemed conclusively to establish that said buildings and other improvements have been completed in accordance with the Plans and Specifications and that the premises are in good and satisfactory condition, as of when possession was so taken; provided however, that within thirty (30) days after taking possession, Tenant shall provide Landlord a punch list of those items and adjustments which require corrective action and which were discovered only after Tenant had accepted possession of the premises. Upon receipt of the punch list, Landlord shall at its sole cost and expense, proceed to diligently remedy all such items. Tenant acknowledges that no representations as to the condition of the premises have been made by Landlord, unless such are expressly set forth in this lease. After such "commencement date" Tenant shall, upon demand, execute and deliver to Landlord a Letter of Acceptance of delivery of the premises. In the event of any dispute as to substantial completion of work performed or required to be performed by Landlord, the date of substantial completion of the work shall be as mutually determined, in their reasonable judgment, by Landlord's and Tenant's respective architects and/or construction managers. 2. Base Rent, Adjustment Thereof and Security Deposit2. Base Rent, Adjustment Thereof and Security Deposit. A. Tenant agrees to pay to Landlord rent for the premises, in advance, without demand, deduction or set off, for the entire term hereof at the rate of Thirty-One Thousand, One Hundred Nineteen and No/100 Dollars ($31,119.00) per month. One such monthly installment shall be due and payable on the date hereof and shall be applied to the first full calendar month of rent due hereunder, and a like monthly installment shall be due and payable on or before the first day of each calendar month succeeding the commencement date recited above during the hereby demised term, except that the rental payment for any fractional calendar month at the commencement or end of the lease period shall be prorated, and further provided that no rent shall be due to Landlord for the second, third, fourth and fifth full calendar months of the initial term hereof. B. In addition, Tenant agrees to deposit with Landlord on the date hereof the sum of Eight Thousand, Fifty-One Dollars and 20/100 ($8,051.20*), which sum shall be held by Landlord, without obligation for interest, as security for the performance of Tenant's covenants and obligations under this lease, it being expressly understood and agreed that such deposit is not an advance rental deposit or a measure of Landlord's damages in case of Tenant's default. Upon the occurrence of any event of default by Tenant, Landlord may, from time to time, without prejudice to any other remedy provided herein or provided by law, use such fund to the extent necessary to make good any arrears of rent or other payments due Landlord hereunder, and any other damage, injury, expense or liability caused by such event of default; and Tenant shall pay to Landlord on demand the amount so applied in order to restore the security deposit to its original amount. Although the security deposit shall be deemed the property of Landlord, any remaining balance of such deposit shall be returned by Landlord to Tenant within two weeks after termination of this lease that all of Tenant's obligations under this lease have been fulfilled. 3. Use. The premises shall be used only for the purpose of warehouse distribution, light assembly, and office and other lawful uses as may be incidental thereto. Outside storage, including without limitation, storage of trucks and other vehicles, is prohibited without Landlord's prior written consent, provided that outside storage as shown on the Plans and Specifications described in EXHIBIT "C" shall be permitted, and Landlord shall not unreasonably withhold its consent for other outside storage for which adequate screening will be provided. In the event the premises constitutes a portion of a multiple occupancy building, washing of trucks and other vehicles is prohibited without Landlord's prior written consent. Tenant shall at its own cost and expense obtain any and all licenses and permits necessary for any such use. Tenant shall comply with all governmental laws, ordinances and regulations applicable to the use of the premises, and shall promptly comply with all governmental orders for the correction, prevention and abatement of nuisances, in or upon, or connected with, the premises, all at Tenant's sole expense. If the building in which the premises are located becomes a multi-tenant building, Tenant shall not permit any objectionable or unpleasant odors, smoke, dust, gas, noise or vibrations to emanate from the premises, not take any other action which would constitute a nuisance or would disturb or endanger any other tenants of the building in which the premises are situated or unreasonably interfere with their use of their respective premises. Without Landlord's prior written consent, Tenant shall not receive, store or otherwise handle any product, material or merchandise which is explosive or highly inflammable. Tenant will not permit the premises to be used for any purpose or in any manner (including without limitation any method of storage) which would render the insurance thereon void or the insurance risk more hazardous or cause the State Board of Insurance or other insurance authority to disallow any sprinkler credits. If any increase in the fire and extended coverage insurance premiums paid by Landlord for the building in which Tenant occupies space is caused by Tenant's use and occupancy of the premises, or if Tenant vacates the premises and causes an increase in such premiums, then Tenant shall pay as additional rental the amount of such increase to Landlord, provided that Tenant shall not be obligated to pay any such increase if Tenant remedies the situation causing the increase in insurance premiums within thirty (30) days after written notice to Tenant from Landlord. 4. Base Rent Adjustment. The base rent payable under the terms of subparagraph 2. A. of this lease shall be adjusted upward from time to time in accordance with the following provisions: A. Expense stop. As used in this lease, the term "Basic Costs" shall mean all real property taxes, assessments (whether general or special) and governmental charges of any kind and nature whatsoever, including, without limitation, assessments due to deed restrictions and/or owner's associations, which accrue against the building and/or project of which the premises are a part during the term of this lease and all insurance premiums Landlord is required to pay or deems necessary to pay, including, without limitation, public liability insurance and fire and extended coverage insurance with respect to the building and/or project. The term "Expense Stop" shall mean the actual sum of Basic Costs accrued for the first twelve (12) months of the initial term of this lease, beginning on the commencement date. Notwithstanding the foregoing, (i) if the premises are not occupied by Tenant for the first twelve (12) months of the initial term of the Lease, Landlord shall make an appropriate adjustment of the variable components of Basic Costs for the first twelve (12) months of the lease term as reasonably determined using sound accounting and management principles, to determine the amount of Basic Costs that would have been incurred had the premises been fully occupied by Tenant for the entire twelve months; and if for the first twelve (12) months of the lease term, the real estate tax assessor has not recognized the full value of the premises, including the land and the building of which the premises are a part, then the Basic Costs shall be adjusted to reflect a full year during which such property is fully assessed and a full annual insurance premium for such property is payable by Landlord, and the sum of the amounts calculated under the foregoing clauses (i) and (ii) shall equal the Expense Stop. Notwithstanding anything to the contrary contained herein, Tenant shall have the right to contest in good faith the imposition of any tax or assessment which is to be paid by Tenant, provided that (i) Tenant shall bear the responsibility for timely protests, legal actions, and such other actions as may be required for an effective protest; (ii) if Landlord has already paid the tax, or assessment, Tenant shall not withhold payment to Landlord of Tenant's share of this tax or assessment; (iii) Tenant shall immediately remove any lien which may be imposed against the premises as a result of any unpaid tax or assessment or post collateral in form and amount satisfactory to Landlord to assure payment of any lien against the premises; and (iv) Landlord is not then already prosecuting an appeal of or contest against such tax or assessment. Tenant shall for each year of the lease term after the first twelve (12) months, pay as an adjustment to the base rent, (i.e., the rent payable under subparagraph 2. A. hereof), the amount, if any, equal to the excess ("Excess") of actual Basic Costs for such year over the Expense Stop. Landlord will make a good faith estimate of the Excess for each calendar year and the monthly payment of base rent by Tenant shall be adjusted upward in accordance with such estimate. By April 1st of each calendar year during the term of this lease and by April 1st of the year following the calendar year in which this lease terminates, or as soon thereafter as practical, Landlord shall furnish to Tenant a statement of Landlord's actual Basic Costs for the previous calendar year. If for any calendar year additional rent collected under the terms of this subparagraph 4. A. for the prior year, as a result of Landlord's estimate of Basic Costs, is in excess of the additional rent actually due from Tenant hereunder during such prior year, then Landlord shall credit to Tenant's rental obligations any overpayment (or if Tenant has no further financial obligations under this lease, then Landlord shall refund the overpayment within thirty (30) days after Landlord has determined the amount of the overpayment). Likewise, Tenant shall pay to Landlord any underpayment with respect to the prior year within thirty (30) days after Landlord has notified Tenant in writing of the amount of the underpayment. Any payment to be made pursuant to this subparagraph 4. A. with respect to the calendar year in which this lease commences or terminates shall be prorated if this lease is not in force during the full calendar year. If any time during the term of this lease, the present method of taxation shall be changed so that in lieu of the whole or any part of any taxes, assessments or governmental charges levied, assessed or imposed on real estate and the improvements thereon, there shall be levied, assessed or imposed on Landlord a capital levy or other tax directly on the rents received therefrom and/or a franchise tax, assessment, levy or charge measured by or based, in whole or in part, upon such rents for the building and/or land of which the premises are a part, all such taxes, assessments, levies or charges, or the part thereof so measured or based, shall be deemed to be included within the term "real property taxes" for the purposes hereof. B. Common Area Maintenance (CAM). As used in this lease, the term "CAM Expenses" shall mean all direct and indirect costs and expenses in each calendar year of operating, maintaining, repairing and managing the building and/or project of which the premises are a part, as identified hereinbelow, including, without limitation, all costs incurred by Landlord for common area maintenance and utilities, snow removal, landscaping, exterior lighting, common water, periodic sweeping of the truck courts and parking areas, sprinkler head replacement, interior sprinkler maintenance and service, tax service, fire line inspection and maintenance, sewer line cleanouts. The term "CAM Expenses" shall exclude leasing commissions, attorneys' fees and other costs relating to leasing, other negotiations or disputes with tenants, occupants, prospective tenants or occupants, or associated with the enforcement of any leases; capital improvements, equipment, replacements, or related costs that constitute capital expenses under generally accepted accounting principles, including but not limited to, items such as replacement of building systems, etc.; interest, principal, amortization, costs of investigation, appraisal or other reports, points, fees and other lender costs and closing costs of any indebtedness, and ground rent payments; losses covered by insurance or which would be covered by insurance and which insurance is required to be maintained by Landlord under any leases of properties aggregated for purposes of calculating CAM Expenses, insurance premiums to the extent of any refunds of those premiums, and insurance deductibles in excess of commercially reasonable levels for comparable buildings; Landlord's general corporate overhead and general and administrative costs, including the salaries of management personnel; franchise taxes, federal and state income taxes, taxes imposed on (or measured by) Landlord's income (other than real property taxes and assessments), and other taxes that do not constitute real property taxes; advertising and promotional expenses primarily directed toward leasing tenant space and the costs of signs identifying the owner of any property and any property manager of any tenant; expenses directly resulting from the negligence of the Landlord, its agents, servants or employees or another tenant; any bad debt loss, rent loss, or reserves for bad debts or rent loss; costs associated with the operation of the business of the entity which constitutes the Landlord or the property manager, as the same are distinguished from the costs of operation of the premises, including accounting and legal matters; costs of defending or prosecuting any lawsuits with any mortgagee, lender, ground lessor, broker, tenant, occupancy, or prospective tenant; selling, syndicating, financing, mortgaging or hypothecating any of Landlord's interest in the premises; costs (including attorneys' fees and costs of settlement judgments and payments in lieu thereof) arising from claims, disputes or potential disputes in connection with potential or actual claims, litigation or arbitrations pertaining to Landlord, its property manager and/or the premises; the wages and benefits of any employee who does not devote substantially all of his or her time to the premises unless such wages and benefits are prorated to reflect time spent on operating and managing the premises vis-a-vis time spent on matters unrelated to operating and managing the premises; fines, penalties, late charges and interest; expenses, costs and disbursements relating to the testing for or analysis, handling, removal, treatment, disposal, remediation of hazardous substances in, on or about any of the properties aggregated for purposes of calculating CAM Expenses; capital expenditures to comply with applicable laws, including costs arising from the presence of hazardous materials or substances in or about the premises, or any of the properties for which CAM Expenses are aggregated, including, without limitation, hazardous substances in the ground water or soil; costs, including permit, license, legal, space planner and inspection fees, incurred in renovating or otherwise improving, decorating, painting, or redecorating space for tenants, or other occupants, or in renovating or redecorating vacant space available for lease; overhead and profit increment paid to Landlord or to subsidiaries or affiliates of Landlord for services in the premises; rentals and other expenses, incurred in leasing air conditioning systems, or other equipment ordinarily considered to be of a capital nature if purchased, except equipment not affixed to the premises which is used in providing janitorial or similar services; electric power costs for which any tenant directly contracts with the local public service or utility company; tax penalties incurred as a result of Landlord's negligence, inability or unwillingness to make payments when due; costs arising from the negligence or fault of the Landlord or its agents, or any vendors, contractors, or providers of materials or services selected, hired or engaged by Landlord or its agents including, without limitation, the selection of building materials; costs incurred by Landlord due to the violation by Landlord of the terms and conditions of any lease of space, or of laws, and other contracts; expenses incurred in connection with services, utilities, and other items and benefits which are offered or provided to other tenants or occupants without charge but not to Tenant or for which Tenant is charged directly; costs incurred because the properties violate any applicable building code, regulation or law in effect before the date on which a certificate of occupancy is issued for the premises. In addition, CAM Expenses shall not include any items for which Landlord is responsible pursuant to paragraph 5 herein, nor any items for which Tenant is responsible pursuant to paragraph 6 herein. All contracts entered into by Landlord for any repair or maintenance items included within the CAM Expenses shall be competitively bid to assure that the terms and cost of such services are as favorable as that typically charged for similar services in the Nashville area. Tenant shall, during the term of this lease pay as additional rent an amount equal to the product of the CAM Expenses for each calendar year during the term of this lease times a fraction, the numerator of which is the number of square feet in the space contained in the premises and the denominator of which is the number of square feet in the entire space contained in the park and owned by Landlord. A list of the properties in the park owned by Landlord as of the date hereof, together with the square feet of improvements located on each parcel, is attached hereto as EXHIBIT "D". Landlord covenants and agrees that during the term of the lease, (i) all properties owned by Landlord and which are aggregated for purposes of calculating CAM Expenses are and will be leased on a basis substantially similar to this lease pursuant to which tenants are responsible for the maintenance, upkeep and replacement of their respective leased premises, (ii) the CAM Expenses allocated per property represents an equitable and reasonable allocation based upon the actual CAM Expenses expended for each such property, (iii) CAM Expenses do not include maintenance, upkeep and repair of buildings, the responsibility for which is borne by tenants, other than such maintenance obligations as are consistent with Landlord's obligations under paragraph 5. As of the date hereof, Tenant's share of the CAM Expenses will be 8.41%. The CAM Expenses for the first calendar year is estimated to be $1,265.00 per month. Landlord will make a good faith estimate of Tenant's share of such additional rent for each calendar year and the monthly payment of CAM Expenses by Tenant shall be adjusted in accordance with such estimate. By April 1st of each calendar year during the term of this lease and by April 1st of the year following the year in which the term of this lease terminates, or as soon thereafter as practical, Landlord shall furnish to Tenant a statement of actual CAM Expenses for the previous calendar year. If for any calendar year additional rent collected under the terms of this subparagraph 4.B. for the prior year, as a result of Landlord's estimate of CAM Expenses, is in excess of the additional rent actually due from Tenant hereunder during such prior year, then Landlord shall credit to Tenant's rental obligations any overpayment (or if Tenant has no further financial obligations under this lease, then Landlord shall refund the overpayment within thirty (30) days after the end of the applicable calendar year). Likewise, Tenant shall pay to Landlord, within thirty (30) days after written demand by Landlord, any underpayment with respect to the prior year. Any payment to be made pursuant to this subparagraph 4.B. with respect to the calendar year in which this lease commences or terminates shall be prorated if this lease is not enforced during the full calendar year. C. Tenant's Examination of Records. Tenant at its own expense shall have the right no more frequently than once per calendar year, following prior written notice to Landlord, to examine Landlord's books and records relating to Basic Costs and CAM Expenses, during normal business hours only, and at a time agreed upon by the Landlord and Tenant; or at Landlord's sole discretion, Landlord will provide an audit prepared by an independent certified public accountant. If after such audit by Tenant, or upon Tenant's review of the audit supplied by Landlord's independent certified public accountant (who is reasonably acceptable to Tenant), Tenant still disputes the amount of CAM Expenses, a certification as to the proper amount shall be made by Landlord's independent certified public accountant in consultation with Tenant's professional, which certification shall be final and conclusive. If such audit reveals that CAM Expenses are overstated by five percent (5%) or more in the calendar year audited Landlord shall reimburse Tenant for its reasonable costs in doing the audit, and if the certification does not show that Landlord made an overstatement of five percent (5%) or more, then Tenant shall pay both the costs of its professional as well as the reasonable charges of Landlord's independent certified public accountant engaged to determine the correct amount of CAM Expenses. 5. Landlord's Repairs and Other Covenants of Service. Landlord shall at its expense maintain, repair and replace the roof (including without limitation the roof membrane, gutters and downspouts, and structure), foundation, exterior walls and other structural components of the building in good repair and appearance, reasonable wear and tear excepted. Tenant shall repair and pay for any damage caused by Tenant, or Tenant's employees, agents or invitees, or caused by Tenant's default hereunder. The term "walls" as used herein shall not include windows, glass or plate glass doors, special store fronts or office entries. Tenant shall immediately give Landlord written notice of any defect or need for repairs, after which Landlord shall have thirty (30) days to repair same or cure such defect; provided that if Landlord has commenced to cure such failure within such thirty (30) day period, and diligently and continuously prosecutes such cure to completion, such failure shall not be deemed a default by Landlord under this lease. Landlord shall maintain portions of the building for which it is responsible under this paragraph 5 in first-class condition, and shall comply with all governmental laws, ordinances and regulations applicable to the portions of the building for which Landlord is responsible. Landlord shall be responsible for the day to day maintenance of the roof, landscaping, parking and loading areas, and other common area, snow and ice removal, and replacement of exterior lights, all of which costs shall be included in CAM Expenses. Landlord shall provide maintenance on a frequent and regular basis to provide Tenant with access to the premises at all times, to keep the areas outside of the building, including parking areas and landscaped areas, free of debris and in an attractive, first-class condition. 6. Tenant's Repairs and Other Covenants of Care and Treatment of Premises. A. Subject to the provisions of paragraphs 5 and 30, Tenant shall at its own cost and expense keep and maintain all parts of the premises (except those for which Landlord is expressly responsible under the terms of this lease) in good condition, promptly making all necessary repairs and replacements, including, but not limited to, windows, glass and plate glass, doors, any special office entry, interior walls and finish work, doors and floor covering, heating and air conditioning systems, dock boards, truck doors, dock bumpers, plumbing work and fixtures, termite and pest extermination and regular removal of interior trash and debris, keeping the whole of the premises in a clean and sanitary condition. Tenant shall not be obligated to repair any damage to Landlord's property caused by flood, fire, tornado or other casualty whether or not covered by the insurance to be maintained by Landlord pursuant to subparagraph 12. A. below, except that Tenant shall be obligated to repair all damage to Tenant's property and all wind damage to glass, except with respect to tornado or hurricane damage. Notwithstanding the foregoing, Tenant shall not be obligated to perform any of the foregoing repair or maintenance work to the extent that such repair or maintenance work is necessitated as a result of Landlord's failure to perform its obligations under paragraph 5 herein. B. In the event the premises constitute a portion of a multiple occupancy building, Tenant shall not damage any demising wall or disturb the integrity and support provided by any demising wall and shall, at its sole cost and expense, promptly repair any damage or injury to any demising wall caused by Tenant or its employees, agents, customers, invitees, and/or licensees. C. In the event the premises constitute a portion of a multiple occupancy building, Tenant and its employees, agents, customers, invitees and/or licensees shall have the nonexclusive right to use the parking areas, if any, as may be designated by Landlord in writing, subject to such reasonable rules and regulations as Landlord may from time to time prescribe and subject to rights of ingress and egress of other tenants. Landlord shall not be responsible for enforcing any exclusive parking rights which may be granted to Tenant. D. Tenant shall, at its own cost and expense, enter into a regularly scheduled preventative maintenance/service contract with a maintenance contractor for servicing all hot water, heating and air conditioning systems, including the gas-fired warehouse heaters and vent fans, dock levelers and other equipment within the premises. The maintenance contractor and the contract must be reasonably approved by Landlord. The service contract must include all services suggested by the equipment manufacturer within the operation/maintenance manual and must become effective (and a copy thereof delivered to Landlord) within thirty (30) days of the date Tenant takes possession of the premises. In the event the premises constitutes a portion of a multiple occupancy building, tenant agrees that no washing of any type (other than reasonable restroom or kitchen washing) will take place in the demised premises, including the truck apron and parking areas. 7. Alterations. A. Except as provided below, Tenant shall not make any alterations, additions or improvements to the premises (including but not limited to roof and wall penetrations) without the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant may, without the consent of Landlord, but at its own cost and expense and in a good workmanlike manner erect such shelves, bins, machinery and trade fixtures as it may deem advisable, without altering the basic character of the building or improvements and without overloading or damaging such building or improvements, and in each case complying with all applicable governmental laws, ordinances, regulations and other requirements. All alterations, additions, improvements and partitions erected by Tenant, (but excluding trade fixtures, warehouse racking, material handling equipment, and other personal property of Tenant, which shall remain the property of Tenant) shall be and remain the property of Landlord during the term of this lease and Tenant shall, unless Landlord otherwise elects as hereinafter provided, remove all alterations, additions, improvements and partitions erected by Tenant and restore the premises to their original condition (as initially delivered by Landlord) by the date of termination of this lease or upon earlier vacating of the premises; provided, however, that if Landlord so elects within thirty (30) days after Landlord receives notice of Tenant's desire to alter the premises, such alterations, additions, improvements and partitions shall become the property of Landlord as of the date of termination of this lease or upon earlier vacating of the premises and shall be delivered up to the Landlord with the premises. All shelves, bins, machinery and trade fixtures installed by Tenant may be removed by Tenant prior to the termination of this lease if Tenant so elects, and shall be removed by the date of termination of this lease or upon earlier vacating of the premises if required by Landlord; upon any such removal Tenant shall restore the premises to their original condition, reasonable wear and tear excepted. All such removals and restoration shall be accomplished in a good workmanlike manner so as not to damage the primary structure or structural qualities of the building and other improvements situated on the premises. The tenant improvements, other than fixturing described in subparagraph 7. C. herein, made to the premises on or before the commencement date shall be surrendered to Landlord upon termination or expiration of this lease in their original condition, reasonable wear and tear excepted, and shall not be removed by Tenant. B. Notwithstanding the foregoing, Tenant shall be entitled to make nonstructural alterations of the premises without the Landlord's consent, provided that the following conditions are satisfied by Tenant: (1) The cost of such alterations, in the aggregate, is less than $100,000. (2) Tenant shall notify Landlord in writing of any alterations which Tenant plans to make in excess of a cost of $10,000. (3) Any alterations requiring access to the roof or any attachment to the roof shall only be made with prior written notice to Landlord, and Tenant shall be required to use Landlord's roofer for the portion of the work relating to the roof in order to keep any existing roof warranty in effect. (4) All such alterations will be performed at the sole cost and expense of Tenant, in a good and workmanlike manner, free of any liens affecting the premises. (5) Tenant shall provide as-built plans for any such alterations to Landlord promptly after completion of such alterations. C. Tenant shall provide to Landlord on or before the commencement date a list of fixtures, machinery and equipment to be installed in the premises, such as racking, conveyors and material handling systems, which shall remain the personal property of Tenant and which may be removed by Tenant at any time without the Landlord's consent, provided that upon any such removal Tenant shall restore the premises to their original condition, reasonable and wear tear excepted, and provided that such removal and restoration shall be accomplished in a good and workmanlike manner so as not to damage the primary structure or structural qualities of the building and other improvements situated on the premises. 8. Signs. Tenant, at Tenant's sole cost and expense, shall have the right to install signs upon the premises only when first approved in writing by Landlord, which approval shall not be unreasonably withheld, and subject to any applicable governmental laws, ordinances, regulations and other requirements. Tenant shall remove all such signs at the termination of this lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the building and other improvements, and Tenant shall repair any injury or defacement, including without limitation discoloration, caused by such installation and/or removal. Landlord shall have no right to place any signs on or about the premises except a sign no larger than 18" by 18" indicating a telephone number to call in the event of an emergency and except as provided in paragraph 9 below. 9. Inspection. Landlord and Landlord's agents and representatives shall have the right to enter and inspect the premises at any reasonable time upon a minimum of twenty-four (24) hours notice to Tenant (except in the event of an emergency, in which case no notice shall be required) during business hours, for the purpose of ascertaining the condition of the premises or in order to make such repairs as may be required or permitted to be made by Landlord under the terms of this lease. During the period that is six (6) months prior to the end of the term hereof, Landlord and Landlord's agents and representatives shall have the right to enter the premises upon reasonable prior notice to Tenant and during business hours for the purpose of showing the premises and shall have the right to erect on the premises or the building a suitable sign indicating the premises are available. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the premises and shall arrange to meet with Landlord for a joint inspection of the premises prior to vacating. In the event of Tenant's failure to give such notice or arrange such joint inspection, Landlord's inspection at or after Tenant's vacating the premises shall be conclusively deemed correct for purposes of determining Tenant's responsibility for repairs and restoration. 10. Utilities. Landlord agrees to provide at its cost water, electricity and telephone service connections into the premises, but Tenant shall pay for all water, gas, heat, light, power, telephone, sewer, sprinkler charges and other utilities and services used on or from the premises, together with any taxes, penalties, surcharges or the like pertaining thereto and any maintenance charges for utilities and shall furnish all electric light bulbs and tubes. All such services shall be separately metered to Tenant. 11. Assignment and Subletting. Tenant shall not have the right to assign, sublet, transfer or encumber this lease, or any interest therein, without the prior written consent of Landlord, which shall not be unreasonably withheld, conditioned or delayed. Landlord's consent may be conditioned upon the use of the premises by the proposed assignee or subtenant as being substantially similar to Tenant's use; provided that so long as Tenant remains liable under the lease, Landlord may not condition its approval on its review and receipt of financial information relating to the proposed assignee or subtenant. Notwithstanding the foregoing, Tenant may assign or sublease part or all of the premises without Landlord's consent to any corporation, partnership or other entity that controls, is controlled by, or is under common control, with Tenant, any corporation or entity into which Tenant is merged or consolidated, or any purchaser of all or substantially all of the assets of the business being conducted at the premises as a going concern. Any attempted assignment, subletting, transfer or encumbrance by Tenant in violation of the terms and covenants of this paragraph shall be void. Tenant shall provide to Landlord, whether Landlord's consent is required pursuant to this paragraph or not, copies of any instrument by which Tenant has assigned, sublet, transferred or encumbered all or any portion of its interest in this lease to any other party. All cash or other proceeds of any assignment, such proceeds as exceed the rentals called for hereunder in the case of a subletting, and all cash or other proceeds of any other transfer of Tenant's interest in this lease shall be the sole and exclusive property of Tenant. Any assignee, sublessee or transferee of Tenant's interest in this lease (all such assignees, sublessee and transferees being hereinafter referred to as "successors"), by assuming Tenant's obligations hereunder shall assume liability to Landlord for all amounts paid to persons other than Landlord by such successors in contravention of this paragraph. No assignment, subletting or other transfer, whether consented to by Landlord or not, shall relieve Tenant of its liability hereunder. Upon the occurrence of an "event of default" as hereinafter defined, if the premises or any part thereof are then assigned or sublet, Landlord, in addition to any other remedies herein provided, or provided by law, may at its option collect directly from such assignee or subtenant all rents becoming due to Tenant under such assignment or sublease and apply such rent against any sums due to Landlord from Tenant hereunder, and no such collection shall be construed to constitute a novation or a release of Tenant from the further performance of Tenant's obligations hereunder. 12. Fire, Flood and Casualty Damage12. Fire, Flood and Casualty Damage. A. Landlord agrees to maintain standard fire and extended coverage insurance covering the building of which the premises are a part in an amount not less than 100% (or such greater percentage as may be necessary to comply with the provisions of any co-insurance clauses of the policy) of the "replacement cost" thereof as such term is defined in the Replacement Cost Endorsement to be attached thereto, insuring against the perils of Fire, Lightning and Extended Coverage, such coverages and endorsements to be as defined, provided and limited in the standard bureau forms prescribed by the insurance regulatory authority for the State in which the premises are situated for use by insurance companies admitted in such state for the writing or such insurance on risks located within such state. Subject to the provisions of subparagraphs 12. C., 12. D. and 12. E. below, such insurance shall be for the sole benefit of Landlord and under its sole control. B. Landlord shall procure and maintain during the term of the lease, first party insurance coverage insuring against damage resulting from flood to the buildings and improvements comprising the premises. The coverage and amounts of insurance carried by Landlord in connection with the buildings and improvements shall be sufficient to repair and restore the building and improvements to their condition prior to the flood. C. If the buildings situated upon the premises should be damaged or destroyed by fire, tornado, flood or other casualty, Tenant shall give immediate written notice thereof to Landlord. D. If the buildings situated upon the premises should be totally destroyed by fire, tornado, flood or other casualty, or if they should be so damaged thereby that rebuilding or repairs cannot in Landlord's estimation be completed within one hundred eighty (180) days after the date upon which Landlord is notified by Tenant of such damage, Landlord shall so notify Tenant in writing within thirty (30) days after the date that such casualty occurs. At the option of either Landlord or Tenant, to be exercised within thirty (30) days after such notice is given, this lease shall terminate and the rent shall be abated during the unexpired portion of this lease, effective upon the date of the occurrence of such damage. E. If the buildings situated upon the premises should be damaged by any peril covered by the insurance to be provided by Landlord under subparagraphs 12. A. and B. above, but only to such extent that rebuilding or repairs can in Landlord's estimation be completed within one hundred eighty (180) days after the date upon which Landlord is notified by Tenant of such damage, Landlord shall so notify Tenant in writing within thirty (30) days after such casualty occurs. This lease shall not terminate, and Landlord shall at its sole cost and expense thereupon proceed with best efforts to rebuild and repair such buildings to substantially the condition in which they existed prior to such damage, except that Landlord shall not be required to rebuild, repair or replace any part of the partitions, fixtures, additions and other improvements which may have been placed in, on or about the premises by Tenant after the lease commencement date. If the premises are untenantable in whole or in part following such damage, the rent payable hereunder during the period in which they are untenantable shall be reduced to such extent as may be fair and reasonable under all of the circumstances. In the event that Landlord should fail to complete such repairs and rebuilding within one hundred eighty (180) days after the date upon which Landlord notifies Tenant of Landlord's intent to repair such damage, Tenant may at its option terminate this lease by delivering written notice of termination to Landlord as Tenant's exclusive remedy, whereupon all rights and obligations hereunder shall cease and terminate. F. Notwithstanding anything herein to the contrary, if (i) more than fifty percent (50%) of the building and premises are destroyed by such casualty, and (ii) the holder of any indebtedness secured by a mortgage or deed of trust covering the premises requires that the insurance proceeds to be applied to such indebtedness, then Landlord shall have the right to terminate this lease by delivering written notice of termination to Tenant within fifteen (15) days after such requirement is made by any such holder, whereupon all rights and obligations hereunder shall cease and terminate. G. Anything in this lease to the contrary notwithstanding, Landlord and Tenant hereby waive and release each other of and from any and all rights of recovery, claim, action or cause of action, against each other, their agents, officers and employees, for any loss or damage that may occur to the premises, improvements to the building of which the premises are a part, or personal property (building contents) within the building, by reason of fire or the elements regardless of cause or origin, including negligence of Landlord or Tenant and their agents, officers and employees, but only to the extent of the insurance proceeds payable under the policies of insurance covering the property. Because this subparagraph will preclude the assignment of any claim mentioned in it by way of subrogation (or otherwise) to an insurance company (or any other person), each party to this lease agrees immediately to give to each insurance company which has issued to it policies of fire and extended coverage insurance, written notice of the terms of the mutual waivers contained in this subparagraph, and to have the insurance policies properly endorsed, if necessary, to prevent the invalidation of the insurance coverages by reason of the mutual waivers contained in this subparagraph. H. Before the commencement date, Landlord shall deliver to Tenant the endorsements referred to in this paragraph 12, a certified copy of Landlord's insurance policy or policies, and an original certificate of insurance, executed by an authorized agent of the insurer or insurers, evidencing compliance with the insurance requirements of this paragraph 12. This certificate shall provide for no less than thirty (30) days' advance written notice to Tenant from the insurer or insurers of any cancellation, nonrenewal, or material change in coverage. I. Notwithstanding anything to the contrary contained in this lease or in any exhibit attached hereto or incorporated herein by reference, for so long as System Realty Nine, Inc., or any other entity which is wholly owned by the Virginia Retirement System (a "VRS-related entity"), is the Landlord hereunder (i) any indemnification provisions set forth in this lease or any exhibit attached hereto shall be of no force and effect except to the extent permitted by applicable law, and (ii) if not permitted by applicable law, and if such breach is not cured within any applicable grace period, each indemnity obligation of Landlord under this Lease shall be converted to a reimbursement obligation under which such VRS-related entity shall reimburse Tenant for any actual damages incurred by Tenant arising solely as a result of the breach by the VRS-related entity of the obligations described in the indemnity provisions. Tenant's right to reimbursement from the VRS-related entity shall be in addition to and not in lieu of Tenant's right to exercise any and all other remedies available to it under law by reason of Landlord's breach of any of its obligations hereunder. The indemnification provisions contained herein or in any exhibit attached hereto shall remain in full force and effect with respect to any party acting as landlord which is not a VRS-related entity. 13. Liability. A. Landlord shall not be liable to Tenant or Tenant's employees, agents, patrons or visitors, or to any other person whomsoever, for any injury to person or damage to property on or about the premises, resulting from and/or caused in part or whole by the negligence or misconduct of Tenant, its agents, servants or employees, or of any other person entering upon the premises, or Tenant's breach of its obligations under this Lease, and Tenant hereby covenants and agrees that it will at all times with counsel reasonably acceptable to Landlord, indemnify and hold safe and harmless the Landlord (including without limitation the trustee and beneficiaries if Landlord is a trust), Landlord's agents and employees from any loss, liability, claims, suits, costs, expenses, including without limitation attorney's fees and damages, both real and alleged, arising out of any such damage or injury, except injury to persons or damage to property the sole cause of which is the negligence of Landlord, the failure of Landlord to repair any part of the premises which Landlord is obligated to repair and maintain hereunder within a reasonable time after the receipt of written notice from Tenant of needed repairs, or the breach by Landlord of any of its obligations hereunder. Tenant shall procure and maintain throughout the term of this lease a policy or policies of insurance, at its sole cost and expense, insuring both Landlord and Tenant against all claims, demands or actions arising out of or in connection with (i) the premises; (ii) the condition of the premises; (iii) Tenant's operations in and maintenance and use of the premises; and (iv) Tenant's liability assumed under this lease, the limits of such policy or policies to be in the amount of not less than $1,000,000 per occurrence in respect of injury to persons (including death), and in the amount of not less than $500,000 per occurrence in respect of property damage or destruction, including loss of use thereof. B. Landlord shall procure and maintain throughout the term of this lease commercial general liability insurance written on an "occurrence" policy form, covering bodily injury, property damage, personal injury and advertising injury arising out of or relating to Landlord's, its agents', employees', contractors' and invitees' activities on or at the premises, Landlord's failure to maintain and repair any part of the premises Landlord is obligated to repair and maintain, Landlord's ownership of the premises, and Landlord's breach of its obligations under this Lease, and Landlord hereby covenants and agrees that it will at all times with counsel reasonably acceptable to Tenant, indemnify and hold safe and harmless the Tenant, Tenant's agents and employees from any loss, liability, claims, suits, costs, expenses, including without limitation attorney's fees and damages, both real and alleged, arising out of any such damage or injury, except injury to persons or damage to property the sole cause of which is the negligence of Tenant, the failure of Tenant to repair any part of the premises which Tenant is obligated to repair and maintain hereunder within a reasonable time after the receipt of written notice from Landlord of needed repairs or the breach of Tenant's obligations under the lease. Landlord further agrees that to the extent it is required to carry insurance under this lease, the cost of which is included in CAM Expenses, Landlord agrees to indemnify, defend and hold harmless Tenant from and against all claims for damage to property outside the premises to the extent that such claims are covered by such insurance (or would have been covered had Landlord carried the insurance required under this lease), even if resulting from the negligent acts, omissions, or willful misconduct of Tenant. Landlord's liability coverage shall include all the coverages typically provided by the Broad Form Comprehensive General Liability Endorsement and shall further include the broadest available form of contractual liability coverage. It is the parties' intent that Landlord's contractual liability coverage provide coverage to the maximum extent possible of Landlord's indemnification obligations under this Lease. Tenant shall be named by endorsement as additional insured under Landlord's general liability coverage. C. All such policies shall be procured by the insuring party from insurance companies duly licensed to transact business within the state in which the premises are located, and maintaining during the policy term a financial rating of at least an A:XIII status for any property insurance and a B+:IX for any liability insurance as rated in the most recent edition of Best's Insurance Reports. Certified copies of the policies required to be taken out by each party hereunder, together with receipt evidencing payment of premiums therefor, shall be delivered to the other party prior to the commencement date of this lease. Not less than fifteen (15) days prior to the expiration date of any such policies, certificates of insurance bearing notations evidencing the payment of renewal premiums shall be delivered to the other party. All such policies shall further provide that not less than thirty (30) days written notice shall be given to the other party before such policy may be cancelled or changed to reduce insurance provided thereby. 14. Condemnation. A. If the whole or any substantial part, whether of the building area or of the areas outside of the building used for parking or loading, as reasonably determined by Landlord and Tenant, of the premises should be taken for any public or quasi-public use under governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof and the taking would prevent or materially interfere with the use of the premises for the purpose for which they are being used, as reasonably determined by Tenant, this lease shall terminate and the rent shall be abated during the unexpired portion of this lease, effective when the physical taking of said premises shall occur. B. If part of the premises shall be taken for any public or quasi-public use under any governmental law, ordinance or regulation, or by right of eminent domain, or by private purchase in lieu thereof, and this lease is not terminated as provided in the subparagraph above, this lease shall not terminate but the rent payable hereunder during the unexpired portion of this lease shall be reduced proportionately to the rentable square footage so condemned or conveyed by private purchase in lieu of condemnation. C. In the event of any such taking or private purchase in lieu thereof, Landlord and Tenant shall each be entitled to receive and retain such separate awards and/or portion of lump sum awards as may be allocated to their respective interests in any condemnation proceedings. D. Notwithstanding the provisions of subparagraphs 14.A., 14.B. and 14.C, any taking or any public or quasi-public use under any governmental law, ordinance or regulation, or by the right of eminent domain, or by private purchase in lieu thereof, of any portion of the property, other than the building in which the premises is located and any parking which has been provided to Tenant pursuant to this lease, shall be deemed not to prevent or materially interfere with the use of the premises for the purpose for which they are being used and neither Tenant nor Landlord shall have a right in such instance to terminate this lease. In addition, in the event of such a taking not interfering with Tenant's use of the premises, there shall be no abatement or adjustment of rent payable pursuant to this lease, nor shall Tenant be entitled to receive any portion of the award for payment allocated to Landlord in such condemnation proceeding. 15. Holding Over. Tenant will, at the termination of this lease by lapse of time or otherwise, yield up immediate possession to Landlord. If Landlord agrees in writing that Tenant may hold over after the expiration or termination of this lease, unless the parties hereto otherwise agree in writing on the terms of such holding over, the holdover tenancy shall be subject to termination by Landlord or by Tenant at any time upon not less than thirty (30) days advance written notice, and all of the other terms and provisions of this lease shall be applicable during that period, except that if the holdover tenancy extends for more than sixty (60) days, Tenant shall pay Landlord from time to time upon demand, as rental for the period of any hold over, an amount equal to one hundred twenty-five percent (125%) of the rent in effect on the termination date, computed on a daily basis for each day of the hold over period. No holding over by Tenant, whether with or without consent of Landlord, shall operate to extend this lease except as otherwise expressly provided. The preceding provisions of this paragraph 15 shall not be construed consent for Tenant to hold over. 16. Quiet Enjoyment. Landlord covenants that it now has, or will acquire before Tenant takes possession of the premises, good title to the premises, free and clear of all liens and encumbrances, excepting only the lien for current taxes not yet due, such mortgage or mortgages as are permitted by the terms of this lease, zoning ordinances and other building and fire ordinances and governmental regulations relating to the use of such property, and easements, restrictions and other conditions of record. Landlord represents and warrants that it has full right and authority to enter into this lease and that Tenant, upon paying the rental herein set forth and performing its other covenants and agreements herein set forth, shall peaceably and quietly have, hold and enjoy the premises for the term hereof without hindrance or molestation from Landlord, subject to the terms and provisions of this lease. 17. Events of Default. The following events shall be deemed to be events of default by Tenant under this lease: A. Tenant shall fail to pay any installment of the rent herein reserved when due, or any payment with respect to CAM Expenses hereunder when due, or any other payment or reimbursement to Landlord required herein when due, and such failure shall continue for a period of five (5) days from the date Landlord has given notice in writing of such default to Tenant. B. Tenant shall become insolvent, or shall make a transfer in fraud of creditors, or shall make an assignment for the benefit of creditors. C. Tenant shall file a petition under any section or chapter of the National Bankruptcy Code, as amended, or under any similar law or statute of the United States or any State thereof; or an order for relief shall be entered against Tenant in any proceedings filed against Tenant thereunder, which order is not dismissed within thirty (30) days thereafter. D. A receiver or trustee shall be appointed for all or substantially all of the assets of Tenant and such proceedings are not dismissed within thirty (30) days thereafter. E. Tenant shall fail to discharge any lien placed upon the premises in violation of paragraph 21 hereof within thirty (30) days after any such lien or encumbrance is filed against the premises; provided that if Tenant has commenced to cure such failure within such thirty (30) day period, and diligently and continuously prosecutes such cure to completion, such failure shall not be deemed an event of default by the Tenant under this lease. F. Tenant shall fail to comply with any term provision or covenant of this lease (other than the foregoing in this paragraph 17), and shall not cure such failure within thirty (30) days after written notice thereof to Tenant, provided that if Tenant has commenced to cure such failure within such thirty (30) day period, and diligently and continuously prosecutes such cure to completion, such failure shall not be deemed an event of default by the Tenant under this lease. 18. Remedies. A. Upon the occurrence of any of such events of default described in paragraph 17 hereof, Landlord shall have the option to pursue any one or more of the following remedies without any notice or demand whatsoever except as expressly provided otherwise hereinbelow. (1) Terminate this lease, in which event Tenant shall immediately surrender the premises to Landlord, and if Tenant fails so to do, Landlord may, without prejudice to any other remedy which it may have for possession or arrearage in rent, enter upon and take possession of the premises pursuant to an action in unlawful detainer; provided however, that if termination is based upon a monetary default, Landlord shall provide written notice to Tenant of its intent to terminate and Tenant shall have an additional fifteen (15) days to cure the default and to avoid a termination of the lease; (2) Enter upon the premises and do whatever Tenant is obligated to do under the terms of this lease; and Tenant agrees to reimburse Landlord on demand for any expenses which Landlord may incur in thus effecting compliance with Tenant's obligations under this lease, and Tenant further agrees that Landlord shall not be liable for any damages resulting to the Tenant from such action, whether caused by the negligence of Landlord or otherwise; (3) Regain possession of the premises by a forcible detainer proceeding, in which event Tenant hereby specifically waives any statutory notice which may be required prior to any such proceeding, and agrees that Landlord's execution of this lease is, in part, consideration for this waiver; (4) Landlord may exercise any other remedy available to Landlord at law or in equity; provided however, that notwithstanding anything to the contrary contained herein, Landlord waives any and all rights whether granted by law or in equity to exercise any repossession of the premises by force or by "self-help" and agrees that it shall be limited to bringing an action at law to recover possession. In the event Tenant fails to pay any installment of rent hereunder within five (5) days of the date on which such installment is due, to help defray the additional cost to Landlord for processing such late payments Tenant shall pay to Landlord on demand a late charge in an amount equal to five percent (5%) of such installment; and the failure to pay such amount within ten (10) days after demand therefor shall be an event of default hereunder. The provision for such late charge shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner. B. Exercise by Landlord of any one or more remedies hereunder granted or otherwise available shall not be deemed to be in acceptance of surrender of the premises by Tenant, whether by agreement or by operation of law, it being understood that such surrender can be effected only by the written agreement of Landlord and Tenant. C. In the event Landlord elects to terminate the lease by reason of an event of default, then notwithstanding such termination, Tenant shall be liable for and shall pay to Landlord, at the address specified for notice to Landlord herein, the sum of all past due rental and other indebtedness accrued to date of such termination, plus, as damages, an amount equal to the difference between (i) the then present value of the total rental hereunder for the remaining portion of the lease term (had such term not been terminated by Landlord prior to the date of expiration stated in paragraph 1) and (ii) the then present value of the then fair rental value of the premises for such period. D. In the event that Landlord elects to repossess the premises without terminating the lease, then Tenant shall be liable for and shall pay to Landlord, at the address specified for notice to Landlord herein, all rental and other indebtedness accrued to the date of such repossession, plus rental required to be paid by Tenant to Landlord during the remainder of the lease term until the date of expiration of the then-current term diminished by any net sums thereafter received by Landlord through reletting the premises during said period (after deducting expenses incurred by Landlord as provided in subparagraph 17. E. below). In no event shall Tenant be entitled to any excess of any rental obtained by reletting over and above the rental herein reserved. Actions to collect amounts due by Tenant to Landlord under this subparagraph may be brought from time to time, on one or more occasions, without the necessity of Landlord's waiting until expiration of the lease term. E. In case of any event of default or breach by Tenant, or threatened or anticipatory breach or default, Tenant shall also be liable for and shall pay to Landlord, at the address specified for notice to Landlord herein, in addition to any sum provided to be paid above, brokers' fees incurred by Landlord in connection with reletting the whole or any part of the premises for the unexpired term of the lease plus all reasonable costs of reletting; the costs of removing and storing Tenant's or other occupant's property; the costs of repairing the premises to put them into condition acceptable to a new tenant or tenants; and all reasonable expenses incurred by Landlord in enforcing or defending Landlord's rights and/or remedies including reasonable attorney's fees whether suit is actually filed or not. F. In the event of termination or repossession of the premises for an event of default, Landlord shall have a good faith obligation to attempt to relet the premises in Landlord's name in the event of a termination of the Lease by Landlord, or in Tenant's name in the event of a non-termination of the Lease, but for the account of Tenant, at such term or terms (which may be for a term extending beyond the term of this lease) and at such rental or rentals and upon such other terms as Landlord may reasonably deem advisable, with or without advertisement, and by private negotiations, and Landlord shall be entitled to make such repairs as, in the Landlord's reasonable judgment, may be necessary in order to relet the premises. Notwithstanding the foregoing, Tenant's liability to Landlord shall be fully satisfied and discharged at such time as Landlord has received from any relettings all rentals which Landlord would have received under the terms of this Lease plus all reasonable costs of reletting. G. If Tenant should fail to make any payment or cure any default hereunder within the time herein permitted, Landlord, without being under any obligation to do so and without thereby waiving such default, may make such payment and/or remedy such other default for the account of Tenant (and enter the premises for such purpose), and thereupon Tenant shall be obligated to, and hereby agrees, to pay Landlord, upon demand, all costs, expenses and disbursements (including reasonable attorney's fees) incurred by Landlord in taking such remedial action. H. In the event of any default by Landlord, Tenant's exclusive remedy shall be an action for damages (Tenant hereby waiving the benefit of any laws granting it a lien upon the property of Landlord and/or upon rent due Landlord), but prior to any such action Tenant will give Landlord written notice specifying such default with particularity, and Landlord shall thereupon have thirty (30) days in which to cure any such default; provided that if Landlord has commenced to cure such failure within such thirty (30) day period, and diligently and continuously prosecutes such cure to completion, such failure shall not be deemed a default by Landlord under this lease. Unless and until Landlord fails to so cure any default after such notice, Tenant shall not have any remedy or cause of action by reason thereof. All obligations of Landlord hereunder will be construed as covenants, not conditions; and all such obligations will be binding upon Landlord only during the period of its possession of the premises and not thereafter except as provided in paragraph 31 below. Except as provided in paragraph 31 below, the term "Landlord" shall mean only the owner, for the time being of the premises, and in the event of the transfer by such owner of its interest in the premises, such owner shall thereupon be released and discharged from all covenants and obligations of the Landlord thereafter accruing, but such covenants and obligations shall be binding during the lease term upon each new owner for the duration of such owner's ownership. Except as provided in paragraph 31 below, Landlord shall not have any personal liability hereunder. Except as provided in paragraph 31 below, in the event of any breach or default by Landlord in any term or provision of this lease, Tenant agrees to look solely to the equity or interest then owned by Landlord in the premises; however, in no event, shall any deficiency judgement or any money judgment of any kind be sought or obtained against the Landlord. I. In the event that Landlord shall have taken possession of the premises pursuant to the authority herein granted and Tenant has not arranged to move its personal property and fixtures from the premises, then Landlord shall have the right to remove from the premises (without the necessity of obtaining a distress warrant, writ of sequestration or other legal process) all or any portion of such furniture, fixtures, equipment and other property located thereon and to place same in storage at any premises within the County in which the premises is located; and in such event, Tenant shall be liable to Landlord for costs incurred by Landlord in connection with such removal and storage. Landlord shall also have the right to relinquish possession of all or any portion of such furniture, fixtures, equipment and other property to any person ("Claimant") claiming to be entitled to possession thereof who presents to Landlord a copy of any instrument represented to Landlord by Claimant to have been executed by Tenant (or any predecessor of Tenant) granting Claimant the right under various circumstances to take possession of such furniture, fixtures, equipment or other property, without the necessity on the part of the Landlord to inquire into the authenticity of said instrument's copy of Tenant's or Tenant's predecessor's signature thereon and without the necessity of Landlord making any nature of investigation or inquiry as to the validity of the factual or legal basis upon which Claimant purports to act; provided however, that Landlord does not relinquish its possession without providing Tenant fifteen (15) days prior notice of its intent to do so accompanied by copies of the claims made by Claimant. Tenant agrees to indemnify and hold Landlord harmless from all cost, expense, loss, damage and liability incident to Landlord's relinquishment of possession of all or any portion of such furniture, fixtures, equipment or other property to Claimant. Tenant stipulates and agrees that the rights herein granted Landlord are commercially reasonable. 19. Landlord's Lien. Any statutory or equitable lien for rent in and to Tenant's furniture, fixtures, equipment and other property is hereby waived by Landlord. 20. Mortgages. Tenant accepts this lease subject and subordinate to any mortgage(s) and/or deed(s) of trust now constituting a lien or charge upon the premises or the improvements situated thereon; provided however, that if the mortgagee, trustee, or holder of any mortgage or deed of trust elects to have Tenant's interest in this lease superior to any such instrument in whole or in part, then by notice to Tenant, from such mortgagee, trustee or holder, this lease shall be deemed superior to such lien, whether this lease was executed before or after said mortgage or deed of trust, subject to the obligation of the mortgagor or trustor of a mortgage or deed of trust recorded after the lease to provide a non-disturbance as described hereinafter. Tenant shall at any time hereafter on demand execute any instruments, releases or other documents which may be required by any mortgagee for the purpose of subjecting and subordinating this lease or making this lease superior to the lien of any such mortgage and whether or not the mortgage is recorded before or after the date of this lease; provided that, the holder of such mortgage, whether or not the mortgage is recorded after the date of this lease, executes and delivers to Tenant a non-disturbance agreement stating that, so long as Tenant complies with all of its obligations under this lease and is not in default hereunder beyond the cure period of any such default as provided herein, then the holder of such mortgage or any person or entity acquiring the interest of the Landlord under this lease as a result of the enforcement and foreclosure of the mortgage shall not take actions to disturb Tenant's possession of the premises during the remainder of the term of this lease or any extension or renewal thereof, and such successor Landlord shall recognize all of Tenant's rights under this lease despite a foreclosure or other enforcement action taken by such holder of the mortgage. 21. Mechanic's Liens and Tenant's Personal Property Taxes. A. Tenant shall have no authority, express or implied, to create or place any lien or encumbrance of any kind or nature whatsoever upon, or in any manner to bind, the interest of Landlord or Tenant in the premises or to charge the rentals payable hereunder for any claim in favor of any person dealing with Tenant, including those who may furnish materials or perform labor for any construction or repairs. Tenant covenants and agrees that it will pay or cause to be paid all sums legally due and payable by it on account of any labor performed or materials furnished in connection with any work performed on the premises at Tenant's request on which any lien is or can be validly and legally asserted against its leasehold interest in the premises or the improvements thereon and that it will save and hold Landlord harmless from any and all loss, cost or expense based on or arising out of such asserted claims or liens against the leasehold estate or against the right, title and interest of the Landlord in the premises or under the terms of this lease. Tenant agrees to give Landlord immediate written notice of the placing of any lien or encumbrance against the premises. Notwithstanding the foregoing, Tenant shall have the right to contest any mechanic's lien filed against the premises provided that it has first either provided to Landlord collateral reasonably satisfactory to Landlord, or has otherwise bonded off such mechanic's lien, and further provided that Tenant diligently pursues the release of such mechanic's lien. Tenant shall obtain a release of record of such mechanic's lien within ten (10) days after the final non-appealable adjudication of such mechanic's lien dispute by court of competent jurisdiction. B. Tenant shall be liable for all taxes levied or assessed against personal property, furniture or fixtures placed by Tenant in the premises. If any such taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property and if Landlord elects to pay the same or if the assessed value of Landlord's property is increased by inclusion of personal property, furniture or fixtures placed by Tenant in the premises, and Landlord elects to pay the taxes based on such increase, Tenant shall pay to Landlord upon demand that part of such taxes. 22. Notices. Each provision of this instrument or of any applicable governmental laws, ordinances, regulations and other requirements with reference to the sending, mailing or delivery of any notice or the making of any payment by Landlord to Tenant or with reference to the sending, mailing or delivery of any notice or the making of any payment by Tenant to Landlord shall be deemed to be complied with when and if the following steps are taken: A. All rent and other payments required to be made by Tenant to Landlord hereunder shall be payable to Landlord at the address for Landlord hereinbelow set forth or at such other address as Landlord may specify from time to time by written notice delivered in accordance herewith. Tenant's obligation to pay rent and any other amounts to Landlord under the terms of this lease shall not be deemed satisfied until such rent and other amounts have been actually received by Landlord. B. All payments required to be made by Landlord to Tenant hereunder shall be payable to Tenant at the address hereinbelow set forth, or at such other address within the continental United States as Tenant may specify from time to time by written notice delivered in accordance herewith. C. With the exception of Paragraph 22(a) above, any notice or document required or permitted to be delivered hereunder shall be deemed to be delivered whether actually received or three (3) days after being deposited in the United States Mail, postage prepaid, Certified or Registered Mail, addressed to the parties hereto at the respective addresses set out below, or at such other address as they have theretofore specified by written notice delivered in accordance herewith: Landlord: Tenant: System Realty Nine, Inc. Day Runner, Inc. c/o Trammell Crow SE, Inc. Attn: John P. Kirkland 155 Franklin Road 2750 West Moore Avenue Suite 225 Fullerton, California 92633 Brentwood, Tennessee 37027 If and when included within the term "Landlord", as used in this instrument, there are more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of such a notice specifying some individual at some specific address for the receipt of notices and payments to Landlord; if and when included within the term "Tenant", as used in this instrument, there are more than one person, firm or corporation, all shall jointly arrange among themselves for their joint execution of such a notice specifying some individual at some specific address within the continental United States for the receipt of notices and payments to Tenant. All parties included within the terms "Landlord" and "Tenant", respectively, shall be bound by notices given in accordance with the provisions of this paragraph to the same effect as if each had received such notice. 23. Miscellaneous. A. Words of any gender used in this lease shall be held and construed to include any other gender, and words in the singular number shall be held to include the plural, unless the context otherwise requires. B. The terms, provisions and covenants and conditions contained in this lease shall apply to, inure to the benefit of, and be binding upon, the parties hereto and upon their respective heirs, legal representatives, successors and permitted assigns, except as otherwise herein expressly provided. Landlord shall have the right to transfer and assign, in whole or in part, its rights and obligations in the building and property that are the subject of this lease. Each party agrees to furnish to the other, promptly upon demand, a corporate resolution, proof of due authorization by partners, or other appropriate documentation evidencing the due authorization of such party to enter into this lease. C. The captions inserted in this lease are for convenience only and in no way define, limit or otherwise describe the scope or intent of this lease, or any provision hereof, or in any way affect the interpretation of this lease. D. Tenant agrees from time to time within twenty (20) days after request of Landlord, to deliver to Landlord, or Landlord's designee, an estoppel certificate stating (i) that this lease is in full force and effect, (ii) the date to which rent has been paid, (iii) the existence of any default on the part of Landlord or Tenant, (iv) the unexpired term of this lease, (v) the amount of any security deposit, (vi) any options to extend, (vii) identifying any amendments or modifications to this lease, (viii) stating whether the premises have been completed in accordance with the requirements of this lease and accepted by Tenant, (ix) stating whether any advance rentals have been paid, (x) stating whether Tenant has any existing defenses, offsets, liens, claims or credits against rent or against enforcement of the lease by the Landlord, (x) stating whether Tenant has any right of first refusal to lease additional space, or to terminate the lease before the scheduled expiration date, (xii) stating whether Tenant has assigned or sublet any portion of the premises, (xiii) stating whether, to Tenant's actual knowledge, any hazardous substances or hazardous wastes have been generated, manufactured, refined, transported, treated, stored, handled, or disposed on or about the premises by Tenant, other than in non-reportable quantities or other than in compliance with applicable laws, and (xiv) stating whether Tenant has filed any petition in bankruptcy or instituted any insolvency proceedings, or requested the appointment of a receiver for its assets, or whether, to Tenant's actual knowledge, any such proceedings are pending or threatened. If the estoppel certificate contains matters other than the foregoing, Landlord agrees to pay Tenant's reasonable attorneys' fees in reviewing, negotiating or revising the estoppel certificate. It is understood and agreed that Tenant's obligation to furnish such estoppel certificates in a timely fashion is a material inducement for Landlord's execution of this lease. E. This lease may not be altered, changed or amended except by an instrument in writing signed by both parties hereto. F. All obligations of Tenant hereunder not fully performed as of the expiration or earlier termination of the term of this lease shall survive the expiration or earlier termination of the term hereof, including without limitation all payment obligations with respect to taxes and insurance and all obligations concerning the condition of the premises. Upon the expiration or earlier termination of the term hereof, and prior to Tenant vacating the premises, Tenant shall pay to Landlord any amount reasonably estimated by Landlord and Tenant as necessary to put the premises, including without limitation all heating and air conditioning systems and equipment therein, in good condition and repair, reasonable wear and tear excepted. Tenant shall also, prior to vacating the premises, pay to Landlord the amount, as estimated by Landlord, of Tenant's obligation hereunder for real estate taxes and insurance premiums for the year in which the lease expires or terminates, prorated for the partial year, if any, in which this lease expires or terminates. All such amounts shall be used and held by Landlord for payment of such obligations of Tenant hereunder, with Tenant being liable for any additional costs therefor upon demand by Landlord, or with any excess to be returned to Tenant after all such obligations have been determined and satisfied, as the case may be. Any security deposit held by Landlord shall be credited against the amount payable by Tenant under this Paragraph 23. F. Tenant shall surrender the premises to Landlord upon the expiration or earlier termination of this lease in same condition as it was received by Tenant, reasonable wear and tear excepted, with all approved alterations which are not, by the terms of this lease, required to be removed, reasonable wear and tear excepted. G. If any clause or provision of this lease is illegal, invalid or unenforceable under present or future laws effective during the term of this lease, then and in that event, it is the intention of the parties hereto that the remainder of this lease shall not be affected thereby, and it is also the intention of the parties to this lease that in lieu of each clause or provision of this lease that is illegal, invalid or unenforceable, there be added as a part of this lease contract a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. H. All references in this lease to "the date hereof" or similar references shall be deemed to refer to the last date, in point of time, on which all parties hereto have executed this lease. I. Tenant represents and warrants that it has dealt with no broker, agent or other person in connection with this transaction or that no broker, agent or other person brought about this transaction, other than Frank L. Smith Company. Landlord agrees to pay a leasing commission to Frank L. Smith Company pursuant to its separate Commission Agreement dated March 15, 1996. Landlord and Tenant acknowledge that Frank L. Smith Company has entered into a separate agreement to compensate Pacific Properties Group, Inc., for certain services, and that neither Landlord nor Tenant shall be directly liable for a commission to Pacific Properties Group. Any commission owed to Trammell Crow SE, Inc., shall be paid by Landlord. Landlord and Tenant each agree to indemnify and hold each other harmless from and against any claims by any other broker, agent or other person claiming a commission or other form of compensation by virtue of having dealt with Tenant with regard to this leasing transaction. 24. Additional Provisions. See Additional Provisions outlined in paragraphs 25 through 33 attached hereto. EXECUTED BY LANDLORD, this 11th SYSTEM REALTY NINE, INC., day of September , 1996. a Virginia corporation Attest/Witness Jeffrey N. Haynes By: Michael Ruane Title: Its: President EXECUTED BY TENANT, this 19th Day Runner, Inc., day of August , 1996. a Delaware corporation John P. Kirkland Title: V.P. Operations Attest/Witness Betty J. Compean Title: Executive Assistant SPECIAL PROVISIONS Day Runner, Inc. 1284 Heil Quaker Boulevard 101,200 Rentable Square Feet Option to Extend. Extend A. Provided this Lease is in full force and effect and provided further that Tenant is not then in default of this Lease, Landlord hereby grants Tenant the option to extend the term of this Lease for two (2) periods of five (5) years each on the same terms and conditions set forth in this Lease, except that the base rent for the option periods shall be 90% of the then current market rental rate for comparable space with comparable tenant improvements for the first option period and 95% of the then current market rental rate for comparable space with comparable tenant improvements for the second option period. Comparable space shall mean buildings that are not subleased, not leased to a tenant that holds an ownership interest in the landlord, not leased to tenant under a renewal or extension of the lease, and leased for a term comparable to the option term and comparable in size, location and quality to the premises. In determining the current market rental rate for comparable space, the parties shall include all escalations and take into consideration rental abatement concessions, if any, tenant improvements or allowances provided or to be provided for the comparable space, taking into account the value of the existing improvements in the premises, as compared to the value of the improvements in the comparable space, and all other monetary and nonmonetary concessions, if any, being granted to tenants in connection with the comparable space. The first option period shall commence immediately upon the expiration of the original lease term, and the second option period shall commence immediately upon the expiration of the first option period. The option to extend for the first five (5) year period shall be exercised, if at all, by written notice from Tenant to Landlord given no later than two hundred seventy (270) days prior to the end of the original lease term, time being of the essence. If not so exercised, Tenant's options under this paragraph shall be forever null and void. Assuming Tenant has exercised its option to extend for the first five (5) year option period, the option to extend for the second five (5) year period shall be exercised, if at all, by written notice from Tenant to Landlord no later than two hundred seventy (270) days prior to the end of the first option period, time being of the essence. If not so exercised, Tenant's option to extend for the second option period shall be forever null and void. Once either option is exercised, Landlord and Tenant will have thirty (30) days to negotiate and agree on a rental rate. If Landlord and Tenant have not agreed upon the then current market rental rate within thirty (30) days after the Option has been exercised, Landlord and Tenant shall mutually agree upon a broker with a minimum of seven (7) years of experience in the commercial/industrial leasing of similar Properties in the metropolitan area of which the premises is a part. Upon the written agreement of Landlord and Tenant as to the broker to be used, Landlord and Tenant shall each submit to such broker in writing the figure which each believes to represent the then current market rental. The broker shall choose whichever of the two figures is closest to the then current market rental rate for comparable space with comparable Tenant improvements, which decision shall be binding on Tenant and Landlord as long as it is made in good faith by such broker. If Landlord and Tenant cannot agree upon a broker to establish the then current market rental rate, either Landlord or Tenant may petition a court in the county of which the Premises is located to select a broker for Landlord and Tenant. The costs for such local proceedings shall be paid by the party whose estimate of then current market rate is not chosen by such broker. B. Notwithstanding the provisions of paragraph 25.A. above, no subtenant or assignee of Tenant shall be entitled to extend the term of the Lease as it applies to the portion of the Premises occupied by such assignee or subtenant for the second option period. In addition, if any assignee or subtenant of Tenant desires to exercise the first five (5) year extension option, it may do so only with the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. In determining whether or not to consent to the exercise of the extension option by such assignee or subtenant, Landlord may consider whether the proposed assignee or subtenant fits the profile of tenants included in Landlord's portfolio of buildings (if there are any such other properties) located in the industrial park of which the Premises are a part including, without limitation, the following factors: (i) the financial condition of the proposed assignee or subtenant, and its ability to meet the terms, conditions and covenants of this Lease, (ii) the proposed use of the premises by the assignee or subtenant, and whether the proposed use is likely to result in increased wear and tear on the Premises or any increased maintenance requirements or insurance risks, and (iii) as the use of the Premises is intended to be for a distribution and light assembly center, Landlord may withhold its consent for any proposed manufacturing use other than light assembly. Provided that Landlord has given its written consent to the exercise of the extension option by an assignee or subtenant of Tenant, all of the terms and provisions relating to the first extension option set forth in paragraph 25.A. shall apply to the extension of the term by an assignee or subtenant of Tenant. 26. Rental Abatement Rental Abatement. Tenant shall occupy the Premises for the second through fifth month of the lease term without payment of base rent. Tenant shall be obligated to pay all adjustments in base rental under paragraph 4.B. of this Lease. The entire base rental otherwise due and payable for the abatement months shall not become due and payable upon the occurrence of an event of default by Tenant under this Lease occurring after the fifth month of the lease term. 27. Hazardous Wastes Hazardous Wastes. Tenant shall not cause or permit the use generation, storage or disposal in or about the demised premises of any substance, materials or wastes subject to regulation under any federal, state, or local law from time to time in effect concerning hazardous, toxic or radioactive materials (hereinafter Hazardous Materials) unless Tenant shall have received Landlord's prior written consent, which consent Landlord may withhold or at any time revoke at its sole discretion. If Tenant uses, generates, stores or disposes of any Hazardous Materials in or about the demised premises, Tenant shall obtain all necessary permits and comply with all statutes, regulations and rules applicable to such activity. Upon termination of this Lease, Tenant shall remove all Hazardous Materials, along with all storage and disposal facilities, from the demised premises, such removal to be in accordance with procedures approved by the proper governmental authority. Tenant shall indemnify and hold Landlord harmless from and against all liability, cost, claim, penalty, expense and fees (including court costs and attorney's fees) arising from Tenant's use, generation, storage, or disposal of Hazardous Materials in or about the demised premises. This section shall survive the expiration or earlier termination of this Lease. Landlord, to the best of its knowledge, hereby represents and warrants that the property does not and shall not as of the commencement date of the lease, contain asbestos, PCB's, or other materials which may be toxic to the Tenant and its employees, or other Hazardous Materials. Landlord covenants and agrees that in its operation of the property, including any maintenance and repair of the premises or the building of which the premises are a part, Landlord shall comply with all federal, state or local laws, rules or regulations regulating the use, generation, storage or disposal of Hazardous Materials. Landlord shall indemnify, protect, defend and hold Tenant, its officers, employees, agents, lenders and each of their respective successors and assigns harmless from any and all claims, judgments, damages, penalties, enforcement actions, taxes, fines, remedial actions, liabilities, losses, costs and expenses (including, without limitation, reasonable attorneys' fees, litigation, arbitration and administrative proceeding costs, expert and consultant fees and laboratory costs), which arise in whole or in part as a result of the presence or suspected presence of any hazardous substances in, on, under or about the premises as of the commencement date of this lease except to the extent such hazardous substances were placed in or on the premises by Tenant. Landlord's obligations under this paragraph shall survive the expiration or earlier termination of this lease. 28. Compliance with Public Accommodation Laws Compliance with Public Accommodation Laws. Landlord shall assume the responsibility for compliance of the premises building and the premises as of the commencement date with any and all applicable laws, regulations and building codes governing non-discrimination and public accommodations and commercial facilities ("Public Accommodation Laws"), including without limitation, the requirements of the American Disabilities Act, 42 U.S.C. 12-101 and all regulations and promulgations thereunder (the "ADA"). Tenant assumes all responsibility for compliance of the premises with Public Accommodation Laws necessitated by any alterations, modifications or improvements to the premises made by Tenant during the term of this lease. Tenant also assumes responsibility for complying with Public Accommodation Laws arising out of Tenant's use of the premises, not applying generally to other property in the industrial park of which the premises is a part owned by Landlord. 29. Recordation of Memorandum of Lease Recordation of Memorandum of Lease. Landlord agrees to execute and deliver to Tenant upon Tenant's written request a short form memorandum of this lease which may be recorded by Tenant, at Tenant's sole expense, in the land records of the county in which the premises is situated. Tenant shall, at its own cost and expense, execute and record in such land records a release of the short form memorandum of lease promptly after the expiration or earlier termination of this lease and Tenant shall be liable for any consequential damages in the event that it fails to release the short form memorandum of lease. 30. Quality of Construction Quality of Construction. Landlord covenants that the buildings and other improvements to be constructed by Landlord will be constructed in a first-class manner and in full compliance with all applicable governmental regulations, ordinances, and laws existing at the time of construction ("Applicable Laws") in order to make the building and other improvements suitable for the permitted uses. Landlord hereby covenants and agrees that notwithstanding anything to the contrary contained in the lease, Landlord shall be solely responsible at its cost (i) for making all alterations, replacements and repairs to the premises resulting from or necessitated by the failure of Landlord or Landlord's contractor to comply with Applicable Laws and (ii) for the twelve (12) months following the commencement date, for making all alterations, replacements and repairs required to be made to the premises to remedy or repair any defects or deficiencies in the building, improvements, building systems or other aspect of the construction work. The costs incurred by Landlord in making the foregoing alterations, replacements and repairs shall not be included in CAM Expenses. 31. Personal Liability of Landlord Personal Liability of Landlord. Notwithstanding the provisions of paragraph 18. H. of the lease or any other provisions of the lease to the contrary, in the event of any transfer of the Landlord's interest in the premises, System Realty Nine, Inc., shall not be relieved of liability for, and System Realty Nine, Inc. (but not any of its officers, directors, shareholders, agents, advisors or employees) shall be personally liable, for a period of one year beginning on the commencement date, for, (i) any default of Landlord under the Construction Agreement attached hereto as EXHIBIT "B" and, (ii) in the event the then owner of the premises fails to remedy any defects or deficiencies in the building and improvements constructed by Landlord under the Construction Agreement, for any breach of the warranty provided to Tenant under paragraph 30 above. Notwithstanding the provisions of paragraph 18. H. of the lease or any other provisions of the lease to the contrary, and in addition to the foregoing personal liability of System Realty Nine, Inc., any Landlord who transfers its interest in the premises shall remain personally liable to Tenant for any damages, costs, expense or liability incurred or suffered by Tenant which arises from defaults of Landlord occurring or accruing prior to the date of transfer which defaults are not cured by the successor purchaser and which are identified in an estoppel certificate or other notice to Landlord from Tenant setting forth any defaults of Landlord under the lease, which is delivered to Landlord at least five (5) days prior to any proposed transfer; provided however, that Landlord has provided Tenant with at least thirty (30) days prior notice of any proposed transfer of its interest in the premises. Notwithstanding the foregoing, nothing in this paragraph 31 shall be deemed or construed as relieving the purchaser of Landlord's interest in the premises from performing its obligations under the lease, regardless of whether or not a predecessor landlord may also have liability to the Tenant hereunder. 32. Abatement of Rent for Interruption in Utilities or Other Events Abatement of Rent for Interruption in Utilities or Other Events. In the event that Tenant is prevented from using, and does not use, the premises or any portion thereof, for thirty (30) consecutive days as a result of (i) any repair, maintenance or alteration performed by Landlord required to be performed under the lease which interferes with Tenant's use of the premises, (ii) any interruption in utilities, (iii) any interference in Tenant's access to the premises, or (iv) an eminent domain proceeding, then to the extent no other provision of this lease provides for rent abatement or reduction, Tenant's rent shall be abated or reduced from the date thirty (30) days after the occurrence of any of the foregoing (provided however, that if other provisions of the lease provide that rent abatement shall occur earlier than thirty (30) days following the occurrence of a specific event, then such other provision shall govern and control) and for so long Tenant is prevented from using the premises. Tenant's rent shall be abated in the proportion that the rentable area of the portion of the premises that Tenant is prevented from using, and does not use, bears to the total rentable area of the premises. If Tenant's right to abatement occurs because of an eminent domain taking and/or because of damage or destruction to the premises or Tenant's property, Tenant's abatement period shall continue until Tenant has been given sufficient time, and sufficient access to the premises, to install its property, furniture, fixtures, and equipment and to move in over one (1) weekend. 33. Mandated or Required Alterations Mandated or Required Alterations. From and after the commencement date, if any standard or regulation is imposed on Landlord or Tenant by a state, federal or local governmental body charged with the establishment, regulation and enforcement of health or safety standards for employers, employees, landlords or tenants, then Tenant agrees, at its sole cost and expense, to comply promptly with such standards or regulations to the extent such standards or regulations relate to Tenant's specific use of the premises. Notwithstanding the foregoing, Landlord shall comply with any standards or regulations which relate to any portion of the original building and improvements, or to industrial or commercial properties generally, and such costs shall not be included in CAM Expenses. Tenant shall not be required to make any repair to, modification of, or addition to the original building and improvements except and to the extent required because of Tenant's particular use of the premises for other than normal and customary warehouse distributions, light assembly, and related office operations. DAY RUNNER, INC. 1284 HEIL QUAKER BOULEVARD 101,200 RENTABLE SQUARE FEET EXHIBIT A - Legal description of premises EXHIBIT B - Construction Agreement EXHIBIT C - Plans and Specifications EXHIBIT D - List of other properties aggregated with premises to calculate CAM Expenses EXHIBIT A A tract of land in the Third Civil District of Rutherford County, Lavergne, Tennessee and being more fully described according to an ALTA/ACSM Land Title Survey dated November 6, 1995, prepared by Thomas G. Rosenthal, TN #1805, Ragan-Smith-Associates, Inc., 315 Woodland Street, Nashville, Tennessee 37206 as follows: Beginning at an existing iron pin in the southerly right-of-way line of Bridgestone Parkway, an 80-foot road formerly designated as Firestone Parkway, and the northwesterly corner of Freight Terminals, Incorporated Tract 28.12, said iron pin being 2233.89 feet as measures along said southerly line from the intersection of said southerly line with the westerly right-of-way line of Waldron Road and proceeding as follows: 1. Leaving said southerly line and with the westerly line of Freight Terminals, Inc. as recorded in Deed Book 432, Page 528, Register's Office for Rutherford County, Tennessee, South 10 degrees 35 minutes 26 seconds West a distance of 375.63 feet to a point in the East Branch of Hurricane Creek and a break in the northerly line of Lot 5, Interchange City Industrial Park, Section XXXII as recorded in Plat Book 8, Page 100, Register's Office for Rutherford County, Tennessee, said point being witnessed by an existing Railroad spike that bears South 69 degrees 15 minutes 35 seconds West, 7.16 feet thence; 2. With said northerly line, North 76 degrees 10 minutes 60 seconds West a distance of 153.42 feet to an existing iron pin in the northwesterly corner of aforementioned Section XXXII, thence; 3. With the westerly line of Section XXXII in a southerly direction with a 478.34-foot radius curve to the right, 297.38 feet to an existing iron pin, said curve having a bearing and distance of South 33 degrees 28 minutes 54 seconds West 292.61 feet, thence; 4. South 51 degrees 28 minutes 49 seconds West a distance of 33.51 feet to an existing iron pin in the northeasterly right-of-way line of Heil Quaker Boulevard, a 60-foot road, thence; 5. With said right-of-way line, North 32 degrees 01 minutes 31 seconds West a distance of 69.21 feet to an existing iron pin, thence: 6. With a 4642.75-foot radius curve to the left, 575.84 feet to a set iron pin in the southerly corner of Con-Way Southern Express, Inc. property as recorded in Deed Book 439, Page 731, Register's Office for Rutherford County, Tennessee, said curve having a chord bearing and distance of North 35 degrees 26 minutes 50 seconds West, 575.47 feet, thence; 7. Leaving said right-of-way line and with the southerly line of said property, North 46 degrees 23 minutes 57 seconds East a distance of 414.97 feet to an existing iron pin in the southwesterly right-of-way line of Bridgestone Parkway, a 80-foot road, thence; 8. With a 803.94-foot radius curve to the left, 532.07 feet to the Point of Beginning, said curve having a chord bearing and distance of South 65 degrees 33 minutes 31 seconds East 522.41 feet. This tract contains 335,406 square feet or 7.700 acres +/-, more or less, as calculated by the above courses which were determined within the precision requirements of a Class I Survey. Being part of the same property conveyed to Interchange City Associates, Ltd., a Tennessee Limited Partnership by deed from McDowell Development Corporation, a Tennessee corporation of record in Book 337, Page 509, Register's Office for Rutherford County, Tennessee. EXHIBIT B CONSTRUCTION AGREEMENT This Construction Agreement shall set forth the terms and conditions relating to the construction of a 101,200 square foot warehouse building and related improvements to be constructed by Landlord on approximately seven and seven-tenths (7.7) acres of land in the Interchange City Industrial Park, situated within the County of Rutherford, State of Tennessee, and more particularly described on EXHIBIT "A" attached to the lease (the "Site"). All references in this Construction Agreement to paragraphs of "this Lease" shall mean the relevant portions of Paragraphs 1 through 33 of the Lease Agreement between System Realty Nine, Inc. as "Landlord" and Day Runner, Inc. as "Tenant" to which this Construction Agreement is attached as EXHIBIT "B" and of which this Construction Agreement forms a part, and all references in this Construction Agreement to Sections of "this Construction Agreement" shall mean the relevant portion of Sections 1 through 6 of this Construction Agreement. The Site, improved as described in this Agreement, shall be referred to herein as the Leased Premises. SECTION 1 REQUIREMENTS FOR CONSTRUCTION OF BUILDING 1.1 Base Building as Constructed by Landlord. Landlord hereby agrees to construct on the Site, a 101,200 square foot warehouse building ("Building") together with parking areas with a minimum of 72 single-stall parking spaces located in the front of the Leased Premises and related improvements (collectively, the "Building and Site Improvements"), at its sole cost and expense, in accordance with all applicable codes and laws as of the lease commencement date (collectively, the "Laws") and in accordance with the requirements set forth below. Promptly following the issuance of the certificate of occupancy for the Building, Landlord shall also stripe 20 single-stall parking spaces to be situated at a mutually agreed upon location at the rear of the Building sufficient to accommodate full size automobiles. Landlord shall construct, at its sole cost and expense, the Building in accordance with the following plans and specifications approved by Landlord and Tenant, subject however, to the revisions and corrections to be made to such plans as described in subsection 1.3 below (collectively, the "Plans and Specifications"): 1.1.1 Architectural plans and specifications prepared by Thomas Miller & Partners, dated June 12, 1996, entitled "Interchange Center Building #11, revised August 26, 1996, which includes Sheets C-1, C-2, C-3, C-4, A-100, A-101, A-300, A-400, A-475, A-500, S-1.0, S-2.0, S-3.0, S-4.0, S-5.0, S-6.0, S-6.1, S-6.2, S-6.3, S-6.4 (the "Building Plans"). 1.1.2 Landscape plan prepared by Hawkins Partners, Inc. dated August 15, 1996, and included in the plans of Thomas Miller & Partners as Sheet L-100 (the "Landscape Plan") which the parties acknowledge is tentative and subject to further changes as described in Section 1.4.16. 1.1.3 The layout labeled "Day Runner Operations Floor Plan" which shows tentative locations for electrical, mechanical, and plumbing and racking ("Day Runner Operations Floor Plan"). 1.1.4 Those certain specified items and improvements described in Section 2.6 below. 1.1.5 The Working Drawings for Tenant Improvements described and defined in Section 2. 1.2 Approval of Plans by Tenant. Those certain Plans and Specifications identified in Section 1.1.1 have been submitted to Tenant for approval prior to commencement of construction and as indicated by Tenant's initials on each page, such approval is hereby granted; provided, that if the governmental agency having jurisdiction over the development requires any changes to Plans and Specifications which have already been approved by the Tenant, any such changes shall be re-submitted to the Tenant for its approval prior to Landlord's re-submission of those changes to the applicable governmental agency. Landlord and Tenant acknowledge that certain Plans and Specifications (e.g., mechanical, plumbing, including fire sprinkler system, and electrical) remain to be prepared and Landlord agrees to submit any additional Plans and Specifications to Tenant for Tenant's input and approval prior to commencing any installation or construction of the items shown on Plans and Specifications not identified in Section 1.1.1. Tenant shall, within five (5) business days of receipt of any additional Plans and Specifications, either approve the Plans and Specifications, which approval shall not be unreasonably withheld, or disapprove such Plans and Specifications specifying in detail the reasons for Tenant's disapproval. 1.3 Change Orders. In the event Landlord desires to change the Plans and Specifications, Landlord shall deliver notice (the "Change Notice") of the same to Tenant, setting forth in detail the changes (the "Landlord Change") Landlord desires to make to the Plans and Specifications. Tenant shall, within five (5) business days of receipt of the Change Notice, either (i) approve the Landlord Change, which approval shall not be unreasonably withheld, or (ii) disapprove the Landlord Change and deliver a notice to Landlord specifying in detail the reasons for Tenant's disapproval. Tenant may not disapprove a Landlord Change if all of the following criteria are met: (i) there will be no delay in construction by reason of such Landlord Change, (ii) the Landlord Change is not a material deviation from the Plans and Specifications, (iii) the appearance of the Building and Site Improvements is not adversely affected, and (iv) proposed substitute materials or designs are equal or better in quality to that shown on the Plans and Specifications. 1.4 Certain Specifications. Landlord agrees that in addition to the requirements set forth in the Plans and Specifications, the Building and Site Improvements shall be constructed with the following elements: 1.4.1 Toilet Rooms. The men's and women's toilets, one set in the office area and a second set adjacent to loading doors, shall be complete with vinyl or higher quality materials on floors, wet walls at least up to the height of the wainscot, countertops, walls and floors, lavatory mirrors, lighting, ceilings, toilet partitions, toilet accessories, building standard plumbing fixtures and all mechanical, plumbing and lighting services completed. 1.4.2 Lifesafety. All required alarm and communication systems within the telephone and electrical rooms, the stairwells, and toilet rooms. 1.4.3 Warehouse Lighting. Warehouse lighting to be installed to maximize illumination of aisles as shown in the rack layout plan, however, lighting shall not interfere with access to warehouse racking. Illumination shall be measured at no higher than six feet above the floor level. 1.4.3.1 30 foot candles for a combination of general warehouse and high pileaisle lighting; 50 foot candles to be provided at dock loading area using metal halide lighting with GE R4000 multi-vapor metal halide bulbs (or comparable). 1.4.3.2 Swing lights are required for each dock door in the loading area. Landlord to provide 4-plex outlets between each dock door. (Tenant shall pay the difference in cost between 2-plex and 4-plex outlets but in no event shall the increase in cost exceed $100.00 per outlet.) 1.4.3.3 Pick area lighting shall include up to 400 feet of drop lights, 8 foot double fluorescent. 1.4.4 Exterior Lighting. Wall pack lighting for the truck court and building perimeter as shown on Day Runner Operations Floor Plan and pole lighting for the automobile parking area, as shown on Sheet C-1 of the Building Plans. 1.4.5 Loading Doors. A total of 15 loading positions as shown in the Building Plans. 13 dock high doors shall have hydraulic load levelers model Kelley FX (seven foot by eight foot) dock levelers at all specified dock doors. Installation includes all electrical requirements and dock door limit switches. All doors will be provided with Frommelt Eliminator dock seals/shelters with built-in canopies. Installation shall include Track Guard protectors. One dock high loading position (as specified in the Plans) shall have ramp access to provide for the drive in of a 13 foot 6 inch trailer (a minimum of ten foot wide by fourteen foot six inch high door). 1.4.6 Space Heaters. Landlord to provide gas-fired furnace heaters which shall maintain not less than a uniform 50(Degree)F temperature inside the warehouse when the temperature outside is 9(Degree)F. Thermostats shall be placed six (6) feet from the warehouse floor. Heaters shall be placed at locations which minimize interference with warehouse racking and at maximum height permitted by code. 1.4.7 Power. Landlord to provide power panel(s) and meters in the building 1200 amps, 277/480 volt, 3 phase, 4 wire power. Power will be distributed by Landlord from the panel to the office areas and the warehouse lighting systems at Landlord's cost. 1.4.8 Floor Slab. A minimum of a 6 inch reinforced concrete, 3,000 psi, smooth and level. 1.4.9 Ceiling Clearance. 24 foot "stack" height uniformly clear throughout the warehouse. 1.4.10 Column Spacing. 40' x 40', except for one bay (from front wall to column six) which will be 40' x 30'. 1.4.11 Sprinklers. Early Suppression Fast Response system, plus on-site fire hoses and hydrants to meet all governmental codes plus any auxiliary pump equipment as required. 1.4.12 Truck Loading Apron. A minimum of 6 inch reinforced concrete, 3,000 psi, for first sixty (60) feet from loading docks. 1.4.13 Warehouse Floor Seal. Tenant 424 for all warehouse areas (2 coats). Floors will be prepared and installed and sealant applied in accordance with manufacturer's recommendations. Landlord agrees that no construction or installation activities will take place during the preparation of the floor which would result in dirt, materials or debris settling in the fresh sealant and Landlord agrees not to permit workmen or others to walk on the freshly sealed floor. 1.4.14 Insulation. Roof insulation shall be a minimum R factor of 10. 1.4.15 Access Gates. Landlord shall install at Tenant's written request and expense, two (2) gates on the property, which shall be approved by Landlord, such approval not to be unreasonably withheld. Such gates must be in compliance with all governmental requirements and the requirements of any private restrictive covenants affecting the property. Tenant shall provide keys for the gates to Landlord. 1.4.16 Landscaping. Landscaping will be similar to the other buildings at Interchange Center, including pear orchard trees along Heil Quaker Boulevard and heavy landscaping along the office entrance. The parties acknowledge that the Landscape Plan has been included in Building Plans to show the general nature of the landscaping to be provided by Landlord and quantities, types and tentative locations of shrubbery and plants and that the Landscape Plan is expected to be revised with the approval of Landlord and Tenant. Landlord shall provide and install at its cost, the landscaping as shown on the final Landscape Plan approved by both parties, including, but not limited to irrigation systems for landscaping in front of the building. At Tenant's expense, Landlord shall also construct pursuant to design plans delivered by Tenant, an outdoor picnic area, basketball court and/or horseshoe area, irrigation systems in the rear and/or western portion of the Property, or such other landscaping improvements which exceed the requirements shown on the Landscape Plan; provided, however, that Landlord will be responsible for the first $10,000 of such extraordinary costs. 1.4.17 Skylights. 20 skylights shall be installed as shown on the Plans and Specifications. 1.4.18 Storage. Tenant shall fence and screen outdoor pallet storage areas at Tenant's cost. 1.5 Further Specifications. Landlord shall, at Landlord's sole expense, perform all of the following in addition to that specified in Section 1.4 and in the Plans and Specifications: 1.5.1 Paint all four sides of the exterior of the building in accordance with the Building Plans. 1.5.2 Concrete bollards will be installed at four corners of the office and restroom areas and pump room. 1.5.3 Provide and install 220 volt electrical outlets and applicable electrical equipment for eight stations for battery charging. 1.5.4 Install a six foot high wooden fence and landscaping to screen from view the transformer and utility meters as shown on Building Plans. 1.5.5 Provide penetration into the Building to permit Tenant to install fiber optic cabling. SECTION 2 OFFICE AREA IMPROVEMENTS 2.1 Space Plan. Tenant and Landlord acknowledge and agree that they have approved the final layout plan for approximately 5000 square feet of space in the Building ("Office Area"), which lays out and designates offices, rooms and other partitioning in the designated office space ("Layout Plan"). The Layout Plan is attached hereto as EXHIBIT "C". The parties acknowledge that preliminary drawings are currently being prepared of the improvements to be constructed and installed in the Office Area (the "Tenant Improvements"). 2.2 Final Working Drawings. On or before October 1, 1996, Landlord's architect shall complete the architectural and engineering working drawings for the Tenant Improvements based upon the Layout Plan (collectively, the "Working Drawings") and shall submit the same to Tenant for Tenant's approval. Tenant shall, within ten (10) days after receipt of the Working Drawings, either (i) approve the Working Drawings, (ii) approve the Working Drawings subject to specified conditions to be satisfied by Landlord if the Working Drawings do not comply with the Layout Plan, or (iii) disapprove and return the Working Drawings to Landlord with requested revisions if the Working Drawings do not comply with the Layout Plan. All references in this Section 2 to Tenant's receipt shall mean receipt by Tenant's Representative identified in Section 6.2 below. If Tenant fails to approve or disapprove the Working Drawings within such ten (10) day period, Tenant shall be deemed to have approved the Working Drawings. If Tenant disapproves the Working Drawings, Landlord shall have five (5) business days to resubmit the Working Drawings to Tenant. Landlord agrees that it shall not disapprove any Working Drawings which have been approved by Tenant except where the Tenant Improvements shown on the Working Drawings would result in: (i) an adverse effect on the structural integrity of the Building; (ii) non-compliance with laws; (iii) an adverse effect on the systems and equipment of the Building; or (iv) any increase in costs to Landlord over the Building Standard costs as described in Section 2.3 below unless Tenant agrees to pay for such increased costs (each of the foregoing being referred to individually or collectively, as Tenant a "Design Problem"). 2.3 Landlord's Obligation to Construct. Landlord shall construct all Tenant Improvements in accordance with the Working Drawings approved by Tenant concurrently with its construction of the Building. Landlord agrees to pay all costs and expenses in constructing the Tenant Improvements which are hereby acknowledged to be Building Standard. Landlord shall obtain Tenant's prior written approval to the selection of interior decor specifications, e.g., carpet, vinyl, wall coverings, millwork, office noise insulation, etc., as well as the color of the window and door mulleins. 2.4 Change Orders. In the event that anytime after approval of the Working Drawings, Tenant desires to change the Working Drawings, Tenant shall deliver notice (the "Change Notice") of the same to Landlord, setting forth in detail the changes (the "Tenant Change") Tenant desires to make to the Working Drawings, Landlord shall, within three (3) business days of receipt of the Change Notice, either (i) approve the Tenant Change, which approval shall not be unreasonably withheld, or (ii) disapprove the Tenant Change and deliver a notice to Tenant specifying in detail the reasons for Landlord's disapproval, which reasons shall be limited to Design Problems. In the event of an approval, Landlord shall provide Tenant with a good faith, non-binding estimate of the additional costs which would be incurred by Landlord by reason of the change, and the period of delay in substantial completion of the Leased Premises which would result from the Tenant Change. Thereafter, Tenant shall, within five (5) business days of receipt of Landlord's approval, deliver notice to Landlord stating whether or not Tenant elects to cause Landlord to make such Tenant Change. Any additional costs which arise in connection with such Tenant Change shall be paid by Tenant contemporaneously with Tenant's notice to Landlord stating whether or not Tenant elects to cause Landlord to make such Tenant Change; provided however, that there shall be no additional cost or charge to Tenant unless Landlord actually incurs such additional cost by reason of the Tenant Change. In addition, the date by which Landlord is required to complete substantial completion of the Leased Premises shall be extended by the period of delay in construction, if any, which results solely from the Tenant Change. Likewise, the dates set forth in Section 4.1 (for Tenant's right to terminate the Lease) and 4.2 (for penalties for late deliveries) shall be extended by the same period of delay in substantial completion of the Leased Premises which results solely from the Tenant Change. 2.5 Additional Costs. If Tenant has approved Landlord's cost estimate for a Tenant Change as described in Section 2.4, Tenant shall request that Landlord, and Landlord shall upon such request, solicit bids from at least three (3) subcontractors from each trade or item, where reasonably practicable, in connection with the construction of the Tenant Change and shall provide Tenant with a cost proposal (the "Cost Proposal"), and Tenant shall, within ten (10) days of receipt of the Cost Proposal, either (i) approve the Cost Proposal or (ii) deliver notice (the "Disapproval Notice") to Landlord setting forth revisions to be made to the quantity and/or quality of various items in the Tenant Change. Upon receipt by Landlord of a Disapproval Notice, the process in this Section 2.5 shall be repeated until Tenant approves the Cost Proposal. Upon receipt of Tenant's approval of the Cost Proposal, Landlord shall be released by Tenant to purchase the items set forth in the Cost Proposal and to commence the construction of the Tenant Change. 2.6 Certain Tenant Improvement Specifications. Landlord agrees to install and construct those certain improvements described hereinbelow concurrently with the construction of the Building. All such items and improvements shall be constructed at the sole expense of Tenant provided that, before commencing such work, Landlord shall obtain cost proposals for the work in accordance with the procedures described in Section 2.5 above. Landlord shall construct the following as an integral part of its construction of the Building and Site Improvements: 2.6.1 Build a structural "joisted" deck on 25% of the office roof for storage purposes (the location will be identified on the floor plan). Include an access staircase and removable safety rail for forklift access. 2.6.2 Paint interior walls of the warehouse. 2.6.3 Stripe truck/dock lines to a distance of 40 feet from dock. (Work to be performed by parking stripe painter.) 2.6.4 Provide exterior dock-yard lighting to support night truck operations. (This is in addition to the security lighting provided by the Landlord at its expense around the perimeter of the building.) 2.6.5 Provide and install exterior building signs to Tenant's specifications. Landlord to provide electrical at its expense. 2.6.6 Paint all interior columns within the warehouse with a safety color to a height of 6 feet for a cost not to exceed $1500.00. 2.6.7 Provide and install 12, 4-Plex outlets on interior columns for a cost not to exceed $7500.00. 2.6.8 Install an electrical outlet by the trash compactor for a cost not to exceed $1500.00. 2.6.9 Move pump room to the L-7 corner of the building at a cost not to exceed $11,300.00. 2.6.10 Tenant, at its expense, shall have the right to require that Landlord install as part of the picnic area, a basketball court and/or a horseshoe pit. Tenant's notice shall be in writing. SECTION 3 CONSTRUCTION 3.1 Construction Schedule. Landlord shall diligently construct the Building and Site Improvements and Tenant Improvements in accordance with the Plans and Specifications and Working Drawings, in a good and workmanlike manner, in compliance with all applicable laws, ordinances, codes, regulations and requirements and shall diligently prosecute Landlord's work hereunder to completion. Landlord represents that construction of the Site Improvements has already commenced. 3.2 Completion of the Building and Site Improvements. The Building and Site Improvements shall be deemed "substantially completed" and the words "substantially complete" as used in this Agreement shall mean, when all of the following have been satisfied: (i) the Building and Site Improvements have been substantially completed in accordance with the Plans and Specifications, and the Tenant Improvements have been substantially completed in accordance with the Working Drawings, as certified by both Landlord's and Tenant's architect or construction manager, (ii) at least a temporary certificate of occupancy is issued for the Building, (iii) all parking areas are available for parking the number of vehicles described hereinabove, (iv) all building systems are fully operational, (v) all floors in the warehouse area of the Building have been properly sealed with sealants in accordance with manufacturer recommendations, (vi) the Building and Site Improvements are delivered to Tenant clean, free of all debris, and with no continuing work by contractors, subcontractors or other workmen except for minor punch list items, the repair of which does not interfere with Tenant's installations and work. Upon completion of construction of the Building and Site Improvements, Landlord shall obtain and deliver to Tenant all permits and authorizations permitting lawful occupancy of the Leased Premises. 3.3 Inspection of Construction. Tenant and/or its agents, shall have the right to inspect the Building and Site Improvements and Tenant Improvements during the course of construction upon reasonable prior notice to Landlord, and provided that Tenant and/or its agents comply with all safety governmental requirements and any safety rules reasonably imposed by the general contractor or any subcontractor. All work by Landlord shall be done expeditiously and in a workmanlike manner, and shall be in compliance with all applicable governmental laws, ordinances, and regulations. 3.4 Permits and Approvals. Landlord and Landlord's agents shall be solely responsible for obtaining any and all building permits and other approvals required to be obtained from governmental agencies in order to complete the construction contemplated herein and to lease the Leased Premises to Tenant. 3.5 Exterior Landscaping. The parties acknowledge that exterior landscaping on the Site may not be completed by the Lease commencement date based on then winter ground conditions. Landlord agrees to complete exterior landscaping as soon as ground conditions permit the same. If Landlord has not commenced the work of exterior landscaping within fifteen (15) days after Tenant has delivered to Landlord written notice that the ground is ready for landscaping as evidenced by a notice or letter from a landscaping contractor prepared and qualified to do the work, Landlord shall pay a penalty of $100.00 per day for each day it delays in commencing such work. Once commenced, Landlord shall diligently complete the exterior landscaping. 3.6 Monument Signs. Landlord shall obtain Tenant's prior written approval, not to be unreasonably withheld, to the design, location and specifications of any monument signs which Landlord desires to place on the Property prior to placing such signs on the Property. SECTION 4 DELAY IN THE SUBSTANTIAL COMPLETION OF THE LEASED PREMISES 4.1 Tenant's Right to Terminate Lease. In the event that the Building and Site Improvements have not been substantially completed as defined in Section 3.2 by June 1, 1997, Tenant shall have the right to terminate the Lease on ten (10) days' written notice to Landlord. Upon any such termination by Tenant, Landlord shall return any and all security deposits and prepayment of rent paid by Tenant and pay to Tenant an amount equal to the penalties described in Section 4.2 below for each day from and after April 1, 1997 to the date of Lease termination. Thereafter, no party shall have any liability to the other under the Lease. 4.2 Penalties for Late Delivery. In the event the Building and Site Improvements have not been substantially completed by April 1, 1997 and Tenant does not later elect to terminate the Lease as provided in Section 4.1, Landlord shall grant to Tenant a rent credit to be applied against the first rents coming due under the Lease in an amount equal to $1,500.00 for each day that possession of the Leased Premises, substantially completed by Landlord, is not delivered to Tenant from and after April 1, 1997 and until possession of the Building and Site Improvements, substantially completed as defined in Section 3.2, is delivered to Tenant. 4.3 Clean-Up. Prior to the delivery of the Leased Premises to Tenant and following the substantial completion of the Leased Premises, Landlord shall remove all rubbish and debris therefrom and reasonably clean the Leased Premises. 4.4 Punch List Items. Within thirty (30) days after the Lease commencement date, Landlord and Tenant shall prepare a punch list (latent and hidden defects excepted), which punch list shall consist of those items and adjustments which do not materially interfere with Tenant's use of the Leased Premises. Upon receipt of the punch list, Landlord shall cause its contractor to diligently remedy all such items. SECTION 5 WARRANTIES 5.1 Third Party Warranties. Landlord agrees to assign, and does hereby assign, to Tenant, as of the Lease commencement date, all of Landlord's right, title and interest in or to any and all warranties, whether express or implied, from third parties concerning the Building and Site Improvements and Tenant Improvements except warranties which extend to the roof and exterior walls and structural elements of the Building (the "Third Party Warranties"). Tenant shall have the right, during the term of the lease and from and after the lease commencement date, to enforce all of the Third Party Warranties, and any contract rights or other intangibles arising therefrom, all at the sole expense of Tenant. Landlord also conditionally assigns to Tenant, for the term of the Lease, all of Landlord's right, title and interest in or to any and all express warranties from third parties concerning the roof and exterior walls and structural elements of the Building (the "Structural Warranties"), which assignment is conditioned upon Landlord's failure to repair or replace the roof, exterior walls or structural elements of the Building in accordance with Paragraph 5 of the Lease or Section 5.2 below. Such assignment of the Structural Warranties will not take effect unless and until Landlord is in default under Paragraph 5 of the Lease or Section 5.2 below, Tenant has provided notice of such default to Landlord and Landlord has failed to cure such default within a reasonable period of time. Thereafter, Tenant shall have the right to enforce all of the Structural Warranties during the term of this Lease, and any contract rights or other intangibles arising therefrom. The foregoing assignment of the Third Party Warranties and Structural Warranties shall automatically terminate, and such Warranties shall be deemed to be reassigned to the Landlord, upon the expiration or earlier termination of this Lease. 5.2 Landlord Warranty. Landlord hereby warrants to Tenant that the Building and Site Improvements will be constructed in accordance with the Plans and Specifications and shall be free from all defects for a period of one year following substantial completion of the Building and Site Improvements and Tenant Improvements. If, within one year after the date of substantial completion of the Building and Site Improvements, any part of the Building and Site Improvements or Tenant Improvements is found not to be in accordance with the Plans and Specifications or Working Drawings, or if any repair or replacement is required to be made to any part of the Building and Site Improvements or Tenant Improvements which does not result from the acts or negligence of Tenant, its employees, agents or invitees, then upon demand by Tenant, Landlord shall promptly (within thirty (30) days) correct such non-conforming items and repair or replace any defects in the original construction of the Building and Site Improvements or Tenant Improvements. Upon receipt of such demand by Tenant, Landlord shall have the right to take an assignment of Tenant's claim against the grantors of the Third Party Warranties and/or Structural Warranties asserting a breach thereof; provided however, that such assignment shall not release or diminish in any manner Landlord's obligations to promptly take corrective action and to repair or replace defects in construction, and provided further, that Landlord shall indemnify, defend and hold Tenant harmless from and against any liability, loss, claim, expense or cost arising from the assignment of such claim to Landlord. 5.3 Maintenance of Creek Area. Landlord represents and warrants to Tenant that during the term of the Lease, Landlord shall be responsible for clearing plant overgrowth, debris and other material from that portion of Hurricane Creek located on the Property to maximize the flow of water and to prevent overflowing the creek due to the accumulation of plant overgrowth, debris and other matter, provided the same is not in violation of law. 5.4 Fencing Off of Creek Area. Landlord agrees to construct and maintain at its expense a six foot high chain link fence along the creek, from Heil Quaker Boulevard to the "ditch" protruding from the western portion of the Property, to prevent persons or property from falling into, or otherwise injuring themselves because of any drop-off in grade to the creek or ditch. In event Tenant desires to upgrade the appearance of the fence by incorporating vinyl or wooden slats in the chain link fencing, the cost of such upgraded material shall be borne by Tenant. SECTION 6 MISCELLANEOUS 6.1 Tenant's Entry Into the Leased Premises Prior to Substantial Completion. Landlord and Landlord's contractor shall allow Tenant and/or Tenant's agents access to the Leased Premises at least forty-five (45) days prior to the substantial completion of the Building and Site Improvements and Tenant Improvements, as defined in Section 3.2 above, for the purpose of Tenant and/or Tenant's agents installing warehouse racking, material handling and other equipment or fixtures (including Tenant's data and telephone equipment and related cabling). At least fifteen (15) days prior to substantial completion of the Building and Site Improvements and Tenant Improvements, Tenant shall be permitted to move in its furniture and furnishings in the office areas of the Building and shall be responsible for the safekeeping and security of such personal property moved into the Building. Landlord's contractor's work shall have been completed except for minor punch list items such that Tenant is able to complete its installations described herein without interference from any ongoing work by Landlord or its contractor. 6.2 Tenant's Representative. Tenant has designated John Kirkland as its sole representative with respect to the matters set forth in this Construction Agreement, who, until further notice to Landlord, shall have full authority and responsibility to act on behalf of the Tenant as required in this Construction Agreement. 6.3 Landlord's Representative. Landlord has designated Jeffery N. Haynes as its sole representative with respect to the matters set forth in this Construction Agreement, who, until further notice to Tenant, shall have full authority and responsibility to act on behalf of the Landlord as required in this Construction Agreement. 6.4 Time of the Essence in This Construction Agreement. Unless otherwise indicated, all references herein to a "number of days" shall mean and refer to calendar days. In all instances where a party is required to approve or deliver an item, if no written notice of approval is given or the item is not delivered within the stated time period, at the end of such period the item shall automatically be deemed approved by such party. 6.5 Life-Fire Safety Codes/Physical Handicap Codes/Earthquake Safety Codes. Landlord represents and warrants that when completed, the Building and Improvements shall comply with applicable current laws, including, without limitation, laws in connection with life-fire safety, physical handicap, including earthquake safety. 6.6 Hazardous Materials. In the event that any point in time during construction, the Leased Premises are determined to contain hazardous materials or substances, Tenant shall have the right to cause Landlord to remove, encapsulate, contain, or otherwise dispose of such hazardous materials or substances, and the cost incurred in connection therewith shall be paid by Landlord. 6.7 Force Majeure. Whenever a period of time is herein prescribed for action to be taken by Landlord or Tenant under this Construction Agreement, such party shall not be liable or responsible for, and there shall be excluded from the computation of any time period set forth in this Construction Agreement, any delays due to strikes, riots, acts of God, shortages of labor or materials and an inability to obtain substitutes thereof, governmental actions, adverse weather conditions or any other causes which are beyond the reasonable control of such party and which make performance by such party impossible. Landlord shall deliver a written notice to Tenant within three (3) business days following the occurrence of a force majeure event which prevents or delays construction of the Building and Site Improvements or Tenant Improvements and at the cessation or termination of such force majeure event, Landlord shall again deliver written notice of the same to Tenant together with Landlord's estimate of any delay in substantial completion of the Building and Site Improvements or Tenant Improvements which Landlord believes to have resulted from such force majeure event. 6.8 Tenant shall have the right to approve any developer, general contractor or architect retained by Landlord. Tenant pre-approves Trammell Crow SE, Inc., RCR Building Corporation and Thomas Miller and Partners. IN WITNESS WHEREOF, the parties to the Lease have executed this Construction Agreement and agreed to all of the terms and conditions of the foregoing Construction Agreement as of the date and year set forth below. EXECUTED BY LANDLORD, this SYSTEM REALTY NINE, INC., day of , 19 . a Virginia corporation Attest/Witness By: Title: Its: EXECUTED BY TENANT, this Day Runner, Inc., day of , 19 . a Delaware corporation Title: Attest/Witness Title: EXHIBIT C PLANS AND SPECIFICATIONS The Plans and Specifications consist of architectural and landscaping plans, specifications and drawings for the construction (pursuant to the Lease Agreement and a Construction Agreement in the form of Exhibit B attached thereto) of buildings and other improvements upon the premises covered by the Lease Agreement. EXHIBIT D NASHVILLE CLASS A INDUSTRIAL PORTFOLIO PROPERTY TOTAL YEAR BUILT TENANTS SF NASHVILLE - Interchange City Center 1401 Gould Blvd. 94,760 1979 1 1430 Gould Blvd. 96,000 1980 3 1450 Gould Blvd. 84,800 1980 1 1277 Heil Quaker Blvd. 100,200 1982 1 1284 Heil Quaker Blvd. 101,200 1996 1 1293 Heil Quaker Blvd. 100,000 1982 4 1325 Heil Quaker Blvd. 187,930 1989 1 1349 Heil Quaker Blvd. 193,200 1996 2 1375 Heil Quaker Blvd. 70,000 1990 1 1405 Heil Quaker Blvd. 88,000 1982 3 1435 Heil Quaker Blvd. 88,000 1981 1 --------------- -------------- ----------- TOTAL NASHVILLE 1,203,890 19 * $8,051.20 will be transferred from the Lease Agreement, commencing October 5, 1993, expiring November 4, 1996, as amended, between Landlord and Tenant for space at 1293 Heil Quaker Boulevard. EX-10 4 SCHEDULE OF CURRENTLY OUTSTANDING WARRANTS
DAY RUNNER, INC. Exhibit 10.13 Schedule of Warrants -------------------- No. of Exercise Date Date of Holder Shares Price of Issue Expiration Vesting Schedule - ------ ------ ----- -------- ---------- ---------------- Higgins, James 5,500(1) $4.00 03/12/91 03/12/98 As to 83 shares on 02/01/95 and in 13 equal monthly installments commencing 03/01/95 as to the remaining shares Miller, Charles 8,000(2) $4.00 03/12/91 03/12/98 As to 83 shares on 08/19/94 and in 19 equal monthly installments commencing 09/01/94 as to the remaining shares Rachlin, Alan 25,000 $4.00 03/12/91 03/12/98 60 equal monthly installments commencing 04/01/91 Rachlin, Alan 25,000(3) $4.00 03/12/91 03/12/98 60 equal monthly installments commencing 04/01/91 Rachlin, Alan 50,000 $4.00 03/18/92 03/12/98 10,000 commencing 03/18/92; 40,000 in 48 equal monthly installments commencing 04/01/92 Rachlin, Alan 25,000 $12.00 03/09/93 01/22/03 2,083 on 03/09/93; 22,917 in 11 equal monthly installments commencing 03/20/93 Rachlin, Alan 25,000 $12.50 01/16/94 01/16/04 12 equal monthly installments commencing 02/14/94 Rachlin, Alan 25,000 $19.00 08/15/94 08/15/04 12 equal monthly installments commencing 08/29/94 Rachlin, Alan 25,000 $19.00 07/28/95 07/28/05 24 equal monthly installments commencing 08/28/95 Willat, Boyd 25,000 $4.00 03/12/91 03/12/98 60 equal monthly installments commencing 04/01/91 (1) The original warrant covered 25,000 shares and has been exercised with respect to 19,500 of such shares. (2) The original warrant covered 25,000 shares and has been exercised with respect to 17,000 of such shares. (3) The subject warrant was assigned to Mr. Rachlin by Jill Tate Higgins on March 12, 1991.
EX-23 5 CONSENT BY DELOITTE & TOUCHE DAY RUNNER, INC. EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Post-Effective Amendment No. 1 to Registration Statement Nos. 33-46969 and 33-53422 of Day Runner, Inc. on Form S-8, in Registration Statement No. 33-670792 of Day Runner, Inc. on Form S-8, in Post-Effective Amendment No. 1 to Registration Statement No. 33-61186 of Day Runner, Inc. on Form S-3, and in Registration Statement Nos. 33-84036 and 80819 of Day Runner, Inc. on Form S-8 of our reports dated August 9, 1996 appearing in the Annual Report on Form 10-K of Day Runner, Inc. for the year ended June 30, 1996. DELOITTE & TOUCHE LLP /s/Deloitte & Touche LLP Long Beach, California September 26, 1996 EX-27 6 FDS --
5 This schedule contains summary financial information extracted from the consolidated balance sheet and the consolidated statement of income filed as part of the annual report on Form 10-K and is qualified in its entirety ty reference to such annual report on Form 10-K. 0000853102 Day Runner, Inc. 1,000 Year Jun-30-1996 Jun-30-1996 19,765 0 28,815 7,374 20,040 70,086 13,365 5,864 77,931 18,433 0 0 0 6 59,492 77,931 125,126 125,126 60,600 60,600 45,574 0 (706) 19,658 7,840 11,818 0 0 0 11,818 1.79 1.79
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