-----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, Tsp6KykVggrmPKHpluXy0airUwIgC97IH9GJxuzqlmpoTVDf4xsrmvmTgz/Cypd5 JgmlO0k3cvCy+jf2KTAL+A== 0000853102-98-000006.txt : 19980518 0000853102-98-000006.hdr.sgml : 19980518 ACCESSION NUMBER: 0000853102-98-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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-Q SEC ACT: SEC FILE NUMBER: 000-19835 FILM NUMBER: 98623755 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-Q 1 10Q FOR QTR ENDED 3/31/98 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 0-19835 DAY RUNNER, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-3624280 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 15295 ALTON PARKWAY IRVINE, CALIFORNIA 92618 (Address and zip code of principal executive offices) (714) 680-3500 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No|_| Indicate the number of shares outstanding of each of the registrant's classes of Common Stock, as of the latest practicable date: CLASS NUMBER OF SHARES OUTSTANDING AT MAY 12, 1998 - ------------------------------ --------------------------------------------- Common Stock, $0.001 par value 11,696,334
DAY RUNNER, INC. INDEX PAGE REFERENCE COVER PAGE....................................................................................... 1 INDEX ........................................................................................ 2 PART I -- FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets March 31, 1998 and June 30, 1997.......................................... 3 Consolidated Statements of Income Three and Nine Months Ended March 31, 1998 and 1997................................................................. 4 Consolidated Statements of Cash Flows Nine Months Ended March 31, 1998 and 1997................................. 5 Notes to Consolidated Financial Statements.................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 10 PART II -- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders......................... 15 Item 6. Exhibits and Reports on Form 8-K............................................ 16 SIGNATURES....................................................................................... 17
PART I -- FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS March 31, June 30, 1998 1997 (unaudited) (audited) ---------- --------- Current assets: Cash and cash equivalents............................................................... $ 11,955 $ 15,550 Accounts receivable (less allowances for doubtful accounts and sales returns and other allowances of $11,143 and $8,664 at March 31, 1998 and June 30, 1997, respectively)....................................................... 7,649 22,303 Inventories............................................................................. 36,517 23,406 Prepaid expenses and other current assets............................................... 1,770 2,409 Income taxes receivable................................................................. 809 Deferred income taxes................................................................... 6,386 6,386 --------- --------- Total current assets............................................................... 65,086 70,054 --------- --------- Property and equipment -- At cost: Machinery and equipment................................................................. 13,534 10,316 Data processing equipment and software.................................................. 7,852 5,863 Leasehold improvements.................................................................. 2,130 1,838 Vehicles................................................................................ 242 214 --------- --------- Total.............................................................................. 23,758 18,231 Accumulated depreciation and amortization............................................... (13,306) (9,543) --------- --------- Property and equipment -- net........................................................... 10,452 8,688 --------- --------- Goodwill and other assets (net of accumulated amortization of $64 at March 31, 1998)......... 4,128 138 --------- --------- Total assets................................................................................. $ 79,666 $78,880 ========= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines of credit......................................................................... $ 580 $ 452 Accounts payable........................................................................ 6,096 8,320 Accrued expenses........................................................................ 10,417 9,500 Income taxes payable.................................................................... 1,049 Current portion of long-term debt and capital lease obligations......................... 97 23 --------- --------- Total current liabilities.......................................................... 17,190 19,344 --------- --------- Long-term debt and capital lease obligations................................................. 88 52 --------- --------- Stockholders' equity: Preferred stock (1,000,000 shares authorized, $0.001 par value; no shares issued or outstanding)........................................................................ Common stock (29,000,000 shares authorized, $0.001 par value; 13,418,122 and 12,728,858 issued and 11,696,334 and 11,702,658 outstanding at March 31, 1998 and June 30, 1997, respectively)....................................................... 13 13 Additional paid-in capital.............................................................. 27,197 23,752 Retained earnings....................................................................... 60,119 49,168 Cumulative translation adjustment....................................................... 164 92 Treasury stock: at cost (1,721,788 and 1,026,200 shares at March 31, 1998 and June 30, 1997, respectively)............................................................ (25,105) (13,541) --------- --------- Total stockholders' equity......................................................... 62,388 59,484 --------- --------- Total liabilities and stockholders' equity................................................... $ 79,666 $ 78,880 ========= ========= See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three Months Ended Nine Months Ended March 31, March 31, 1998 1997 1998 1997 --------- --------- ---------- --------- Sales........................................................ $ 29,388 $ 21,020 $ 116,914 $ 89,583 Cost of goods sold........................................... 14,135 9,996 55,793 42,462 --------- --------- --------- --------- Gross profit................................................. 15,253 11,024 61,121 47,121 --------- --------- --------- --------- Operating expenses: Selling, marketing and distribution..................... 9,399 6,312 30,788 22,195 General and administrative.............................. 4,075 3,469 12,429 10,276 Costs incurred in pursuing acquisitions................. 1,491 1,491 --------- --------- --------- --------- Total operating expenses................................ 13,474 11,272 43,217 33,962 --------- --------- --------- --------- Income (loss) from operations................................ 1,779 (248) 17,904 13,159 Net interest expense (income)................................ 16 (345) (49) (858) --------- ---------- ---------- ---------- Income before provision for income taxes..................... 1,763 97 17,953 14,017 Provision for income taxes................................... 688 39 7,002 5,607 --------- --------- --------- --------- Net income................................................... $ 1,075 $ 58 $ 10,951 $ 8,410 ========= ========= ========= ========= Earnings per common share: Basic................................................... $ 0.09 $ 0.00 $ 0.96 $ 0.67 ========= ========= ======== ======== Diluted................................................. $ 0.09 $ 0.00 $ 0.88 $ 0.63 ========= ========= ======== ======== Weighted average number of common shares outstanding: Basic................................................... 11,571 12,603 11,452 12,632 ========= ========= ========= ========= Diluted................................................. 12,520 13,229 12,452 13,349 ========= ========= ========= ========= See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS) Nine Months Ended March 31, 1998 1997 --------- -------- Cash flows from operating activities: Net income.................................................................... $ 10,951 $ 8,410 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.............................................. 3,466 2,379 Provision for losses on accounts receivable................................ 275 Amortization of goodwill................................................... 64 Changes in operating assets and liabilities: Accounts receivable..................................................... 14,404 13,571 Inventories............................................................. (9,694) (3,096) Prepaid expenses and other current assets............................... 603 (520) Income taxes receivable................................................. (809) (415) Accounts payable........................................................ (4,016) (2,551) Accrued expenses........................................................ 430 (1,552) Income taxes payable.................................................... (1,049) ---------- --------- Net cash provided by operating activities............................ 14,350 16,501 --------- --------- Cash flows from investing activities: Purchase of business.......................................................... (4,113) Acquisition of property and equipment......................................... (3,824) (3,269) Other assets.................................................................. (45) 5 ---------- --------- Net cash used in investing activities.................................... (7,982) (3,264) ---------- ---------- Cash flows from financing activities: Net repayment under lines of credit........................................... (1,224) Repayment of capital lease obligations........................................ (46) (10) Repayment of long-term debt................................................... (512) Net proceeds from issuance of common stock.................................... 3,445 390 Repurchase of common stock.................................................... (11,564) (5,762) ---------- ---------- Net cash used in financing activities.................................... (9,901) (5,382) ---------- ---------- Effect of exchange rate changes in cash........................................... (62) 218 ---------- --------- Net (decrease) increase in cash and cash equivalents.............................. (3,595) 8,073 Cash and cash equivalents at beginning of period.................................. 15,550 19,765 --------- --------- Cash and cash equivalents at end of period........................................ $ 11,955 $ 27,838 ========= ========= See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION RELATING TO THE THREE AND NINE MONTHS ENDED MARCH 31, 1998 AND 1997 IS UNAUDITED) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES The accompanying consolidated balance sheet as of March 31, 1998, consolidated statements of income for the three and nine months ended March 31, 1998 and 1997, and consolidated statements of cash flows for the nine months ended March 31, 1998 and 1997 are unaudited but, in the opinion of management, include all adjustments consisting of normal, recurring accruals necessary for a fair presentation of the financial position and the results of operations for such periods. Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have been omitted pursuant to the requirements of the Securities and Exchange Commission, although the Company believes that the disclosures included in the financial statements included herein are adequate to make the information therein not misleading. The financial statements included herein should be read in conjunction with the Company's audited consolidated financial statements for the year ended June 30, 1997, and the notes thereto, which are included in the Company's Annual Report on Form 10-K. The results of operations for the three and nine months ended March 31, 1998 and 1997 are not necessarily indicative of the results for a full year. The seasonality of the Company's financial results and the unpredictability of the factors affecting such seasonality make the Company's quarterly and yearly financial results difficult to predict and subject to significant fluctuation. 2. INVENTORIES Inventories consist of the following (in thousands): March 31, June 30, 1998 1997 ----------- ----------- Raw materials................... $ 11,003 $ 10,204 Work in process................. 546 426 Finished goods.................. 24,968 12,776 ---------- ---------- Total.................. $ 36,517 $ 23,406 ========== ========== 3. LINES OF CREDIT Effective February 1, 1998, the Company entered into a new credit agreement with a bank to allow the Company to borrow up to $15,000,000 under a line of credit through February 1, 2000 and open commercial or standby letters of credit up to $10,000,000, with the aggregate of borrowings and letters of credit not to exceed $15,000,000. Commercial letters of credit shall be issued for a term not to exceed 180 days, provided, however, that no letters of credit shall have an expiration date subsequent to May 1, 2000. At March 31, 1998, the Company had no amounts outstanding under this line of credit but had outstanding secured letters of credit totaling approximately $1,000,000. Under this new credit agreement, borrowings bear interest at the Company's election either at the bank's prime rate (8.50% at March 31, 1998) less certain margins, which range from .75 to 1.00 basis points, or at LIBOR (5.69% at March 31, 1998) plus certain margins, which range from .75 to 1.25 basis points, with the margins dependent upon the Company's meeting certain funded debt-to-EBITDA ratios. The credit agreement requires the Company to: maintain a current ratio of not less than 1.50 to 1.00; maintain tangible net worth of not less than $40,000,000, increasing to not less than $45,00,000 as of June 30, 1998; and maintain funded debt-to-EBITDA ratio of less than 1.50 to 1.00. The Company also is required to obtain the bank's approval to declare or pay dividends in excess of $200,000. Each of the Company's two Canadian subsidiaries has a credit agreement with a Canadian bank. The aggregate borrowings under these lines of credit, which are guaranteed by the Company and are used for working capital by these subsidiaries, may not exceed Canadian $3,000,000 (approximately US $2,118,000), bear interest at the bank's prime rate (6.5% at March 31, 1998) and are due and payable on demand. At March 31, 1998, approximately Canadian $821,000 (approximately US $580,000) was outstanding under these lines of credit. 4. STOCKHOLDERS' EQUITY At a Special Meeting of the Company's stockholders held on March 17, 1998, the Company's stockholders approved an amendment to the Company's Certificate of Incorporation to: (i) effect a two-for-one split of each of the outstanding shares of Common Stock of the Company; (ii) increase the number of authorized shares of all classes of stock of the Company from 15,000,000 to 30,000,000, consisting of 29,000,000 shares of Common Stock, $0.001 par value per share, and 1,000,000 shares of Preferred Stock, $0.001 par value per share. Both actions were effective March 18, 1998. All share and per share data has been retroactively restated to reflect the two-for-one stock split. During the nine months ended March 31, 1998, certain directors, officers and employees exercised options and warrants to purchase an aggregate of 689,264 shares of the Company's Common Stock for an aggregate of approximately $3,445,000. 5. TREASURY STOCK During the nine months ended March 31, 1998, the Company repurchased 695,588 shares from certain officers and directors at a cost of $16.625 per share for an aggregate of approximately $11,564,000. 6. EARNINGS PER SHARE The Company adopted the Financial Accounting Standards Board Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share which requires the Company to present basic and diluted earnings per share on the face of the income statement. Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding for the period plus the assumed exercise of all diluted securities. The following reconciles the numerator and denominator of the basic and diluted per-share computations for net income (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, --------------------------------------- ----------------------------------- 1998 1997 1998 1997 ----------------- ---------------- ----------------- ------------- NET INCOME $ 1,075 $ 58 $ 10,951 $ 8,410 ================= ================ ================== ============= BASIC WEIGHTED AVERAGE SHARES Weighted average number of common shares outstanding 11,571 12,603 11,452 12,632 EFFECT OF DILUTED SECURITIES Additional shares from the assumed exercise of options and warrants 3,046 2,148 3,166 2,272 Shares assumed to be repurchased under the treasury stock method (1,521) (1,230) (1,628) (1,203) Non-qualified tax benefit (576) (292) (538) (352) ------- ------- ------- ------- DILUTED WEIGHTED AVERAGE SHARES Weighted average number of common shares outstanding and common share equivalents 12,520 13,229 12,452 13,349 ====== ======= ======= ======== BASIC $ 0.09 $ 0.00 $ 0.96 $ 0.67 ====== ======= ======= ======== DILUTED $ 0.09 $ 0.00 $ 0.88 $ 0.63 ====== ======= ======= ========
7. ACQUISITIONS On July 29, 1997, the Company purchased the stock of Ultima Distribution Inc. ("Ultima"), which was the distributor of the Company's products in Canada, for approximately $130,000. The Company also entered into non-competition agreements with certain of Ultima's former stockholders. In addition, contingent payments may be paid over the next two years, based on Ultima's operating performance during that period. On October 1, 1997, the Company purchased substantially all the operating assets of Ram Manufacturing, Inc. ("Ram"), a Little Rock, Arkansas developer, manufacturer and marketer of wall boards. The purchase price was approximately $2,400,000, of which approximately $1,950,000 had been paid as of March 31, 1998. The Company also assumed certain liabilities totaling approximately $3,000,000. In addition, contingent payments may be paid over the next three years, based upon Ram's operating performance during that period. The owner of Ram, who now works for Day Runner, entered into a non-competition agreement with the Company. On February 1, 1998, the Company purchased the stock of Timeposters Inc. ("Timeposters"), a Canadian developer, manufacturer and marketer of planning and presentation products, including flexible planners, planning boards, other wall boards and easels, and entered into certain non-competition agreements with the founders, who continue to work for Timeposters. The purchase price was approximately $2,476,000, of which approximately $2,033,000 had been paid as of March 31, 1998. In addition, contingent payments may be paid over the next two years, based on Timeposters' operating performance during that period. For financial statement purposes, all goodwill arising from these acquisitions is being amortized over a period of 20 years on the Company's financial statements. 8. STATEMENTS OF CASH FLOW The net cash expended by the Company in its acquisitions made during the nine months ended March 31, 1998 was used as follows (in thousands):
ULTIMA RAM TIMEPOSTERS -------------- -------------- ------------ Working capital $ 30 $ 624 $ 52 Property, plant and equipment (150) (970) (293) Non-competition agreement (706) Long-term debt 197 54 323 Cost in excess of net assets of company acquired (207) (1,658) (1,409) -------------- -------------- ------------ Net cash used to acquire business $ (130) $ (1,950) $ (2,033) ============== ============== =============
Supplemental disclosure of cash flow information (in thousands): NINE MONTHS ENDED MARCH 31, 1998 1997 ---------------------------------- Cash paid during the period for: Interest $ 196 $ 90 Income taxes $ 8,883 $ 5,958 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and notes thereto included elsewhere in this quarterly report. historical results and percentage relationships among any amounts included in the consolidated financial statements are not necessarily indicative of trends in operating results for any future period. Since the Company's introduction of the first Day Runner System organizer in 1982, the Company's revenues have been generated by sales primarily of organizers and planners and secondarily of refills. Since fiscal 1995, most of the Company's growth has resulted from sales of related organizing products, virtually all of which have been introduced since January 1, 1995. The Company focuses the great majority of its product development, sales and marketing efforts on the office products channel, which accounted for 35.5% of third quarter fiscal 1998 sales and 47.2% of sales for the nine months ended March 31, 1998, and the mass market channel, which accounted for 44.4% of third quarter fiscal 1998 sales and 38.4% of sales for the nine months ended March 31, 1998. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages that income statement items bear to sales and the percentage change in the dollar amounts of such items.
PERCENTAGE CHANGE Three Nine PERCENTAGE OF SALES Months Months Three Nine Ended Ended Months Ended Months Ended March 31, March 31, March 31, March 31, 1997 1997 1998 1997 1998 1997 to 1998 to 1998 ------ ------ ------ ------ ------- ------- Sales............................................ 100.0% 100.0% 100.0% 100.0% 39.8% 30.5% Cost of goods sold............................... 48.1 47.6 47.7 47.4 41.4 31.4 ----- ----- ----- ----- Gross profit..................................... 51.9 52.4 52.3 52.6 38.4 29.7 ----- ----- ----- ----- Operating expenses: Selling, marketing and distribution........... 32.0 30.0 26.4 24.8 48.9 38.7 General and administrative.................... 13.8 16.5 10.6 11.5 17.5 21.0 Cost incurred in pursuing acquisitions........ 7.1 1.6 NM NM ---- ----- ----- ----- Total operating expenses.................... 45.8 53.6 37.0 37.9 19.5 27.3 ----- ----- ----- ----- Income (loss) from operations.................... 6.1 (1.2) 15.3 14.7 817.3 36.1 Net interest expense (income).................... 0.1 (1.7) (0.1) (1.0) 104.6 (94.3) ----- ----- ----- ----- Income before provision for income taxes......... 6.0 0.5 15.4 15.7 NM 28.1 Provision for income taxes....................... 2.3 0.2 6.0 6.3 NM 24.9 ----- ----- ----- ----- Net income....................................... 3.7% 0.3% 9.4% 9.4% NM 30.2 ===== ===== ===== =====
The following tables set forth, for the periods indicated, the Company's approximate sales by product category and distribution channel and as a percentage of total sales.
PRODUCT CATEGORY: Three months ended March 31, Nine months ended March 31, 1998 1997 1998 1997 -------------- ---------------- ----------------- ------------------ (Unaudited; dollars in thousands) Organizers and planners......... $14,346 48.8% $ 11,636 55.4% $56,936 48.7% $ 52,876 59.0% Refills......................... 9,176 31.2 7,598 36.1 35,985 30.8 31,023 34.6 Related organizing products..... 5,866 20.0 1,786 8.5 23,993 20.5 5,684 6.4 ------- ------ ------- ----- -------- ------ -------- ------ Total........................ $29,388 100.0% $21,020 100.0% $116,914 100.0% $ 89,583 100.0% ======= ====== ======= ====== ======== ====== ======== ====== DISTRIBUTION CHANNEL: Three months ended March 31, Nine months ended March 31, 1998 1997 1998 1997 --------------- ----------------- ------------------ ------------------ (Unaudited; dollars in thousands) Office products................. $10,417 35.5% $ 7,181 34.2% $ 55,215 47.2% $ 45,510 50.8% Mass market..................... 13,052 44.4 10,224 48.6 44,908 38.4 33,229 37.1 Foreign customers............... 3,216 10.9 1,443 6.9 8,227 7.1 4,561 5.1 Other........................... 2,703 9.2 2,172 10.3 8,564 7.3 6,283 7.0 ------- ------ ------- ------ -------- ----- -------- ----- Total........................ $29,388 100.0% $21,020 100.0% $116,914 100.0% $ 89,583 100.0% ======= ====== ======= ====== ======== ====== ======== ======
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 1997 SALES. Sales consist of revenues from gross product shipments net of allowances for returns, rebates and credits. In the third quarter of fiscal 1998, sales increased by $8,368,000, or 39.8%, primarily because of increased sales of related organizing products. In the quarter ended March 31, 1998, sales of related organizing products grew by $4,080,000, or 228.4%; sales of organizers and planners grew by $2,710,000, or 23.3%; and sales of refills (which include calendars and accessories) grew by $1,578,000, or 20.8%. Product sales were primarily to mass market customers and secondarily to office products customers. Sales to office products customers grew by $3,236,000, or 45.1%; sales to mass market customers grew by $2,828,000, or 27.7%; sales to foreign customers grew by $1,773,000, or 122.9%; and sales to miscellaneous customers grouped together as "other" increased by $531,000, or 24.4%. 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, sales returns, purchasing and manufacturing efficiencies, tariffs, duties and inventory carrying costs. Gross profit as a percentage of sales decreased from 52.4% in the third quarter of fiscal 1997 to 51.9% in the third quarter of fiscal 1998 primarily because the gross profit levels of certain of the Company's subsidiaries and its Ram Manufacturing division are lower as a percentage of sales than those of the parent company. OPERATING EXPENSES. Total operating expenses increased by $2,202,000, or 19.5%, in the third quarter of fiscal 1998 compared with the third quarter of fiscal 1997 but decreased as a percentage of sales from 53.6% to 45.8% primarily because third quarter fiscal 1997 operating expenses included $1,491,000 of costs incurred in pursuing acquisitions that did not come to fruition. No such costs were incurred in the third quarter of fiscal 1998. Excluding the third quarter fiscal 1997 costs of pursuing acquisitions, total operating expenses would have grown by $3,693,000, or 37.8%, but would have declined as a percentage of sales from 46.5% to 45.8%. Primarily because of expenses associated with recently introduced products, selling, marketing and distribution expenses increased by $3,087,000 and from 30.0% to 32.0% as a percentage of sales. General and administrative expenses increased by $606,000, but declined from 16.5% to 13.8% as a percentage of sales primarily because of the Company's increased ability to absorb fixed costs as a result of higher sales. NET INTEREST EXPENSE (INCOME). Primarily because of a decrease in the Company's cash available for short-term investment resulting from the Company's repurchase of its common stock, net interest expense for the third quarter of fiscal 1998 was $16,000 compared with net interest income of $345,000 for the third quarter of fiscal 1997. INCOME TAXES. Primarily because of the improved financial results of the Company's Hong Kong subsidiary, the Company's third quarter fiscal 1998 effective tax rate was 39.0%, compared with 40.0% for the third quarter of fiscal 1997. NET INCOME. Net income for the third quarter of fiscal 1998 compared with the same quarter of fiscal 1997 increased $1,017,000 and from 0.3% to 3.7% as a percentage of sales. Excluding the March quarter fiscal 1997 costs incurred in pursuing acquisitions, net income would have grown by $122,000 and decreased from 4.5% to 3.7% as a percentage of sales. NINE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THE NINE MONTHS ENDED MARCH 31, 1997 SALES. In the nine months ended March 31, 1998 compared with the nine months ended March 31, 1997, sales increased by $27,331,000, or 30.5%, primarily because of increased sales of related organizing products. In the nine months ended March 31, 1998, sales of related organizing products grew by $18,309,000, or 322.1%; sales of refills grew by $4,962,000, or 16.0%; and sales of organizers and planners grew by $4,060,000, or 7.7%. Product sales were primarily to office products customers and secondarily to mass market customers. Sales to mass market customers grew by $11,679,000, or 35.1%; sales to office products customers grew by $9,705,000, or 21.3%; sales to foreign customers grew by $3,666,000, or 80.4%; and sales to miscellaneous customers grouped together as "other" increased by $2,281,000, or 36.3%. GROSS PROFIT. Gross profit as a percentage of sales decreased from 52.6% in the first nine months of fiscal 1997 to 52.3% in the first nine months of fiscal 1998 primarily because the gross profit levels of certain of the Company's subsidiaries and its Ram Manufacturing division are lower as a percentage of sales than those of the parent company and secondarily because of a sales-growth related increase in the provision for sales rebates to be paid to certain large customers. OPERATING EXPENSES. Total operating expenses increased by $9,255,000, or 27.3%, in the first nine months of fiscal 1998 compared with the first nine months of fiscal 1997 but decreased as a percentage of sales from 37.9% to 37.0% primarily because operating expenses for the first nine months of fiscal 1997 included $1,491,000 of costs incurred in pursuing acquisitions that did not come to fruition. No such costs were incurred in the first nine months of fiscal 1998. Excluding the nine months fiscal 1997 costs of pursuing acquisitions, total operating expenses would have grown by $10,746,000, or 33.1%, and increased as a percentage of sales from 36.2% to 37.0%. Primarily because of expenses associated with new and recently introduced products, selling, marketing and distribution expenses increased by $8,593,000 and from 24.8% to 26.4% as a percentage of sales. General and administrative expenses increased by $2,153,000, but declined from 11.5% to 10.6% as a percentage of sales primarily because of the Company's increased ability to absorb fixed costs as a result of higher sales. .................. NET INTEREST EXPENSE (INCOME). Primarily because of a decrease in the Company's cash available for short-term investment resulting from the Company's repurchase of common stock, net interest income in the first nine months of fiscal 1998 compared with the first nine months of fiscal 1997 decreased by $809,000 and from 1.0% to 0.1% as a percentage of sales. INCOME TAXES. Primarily because of the improved financial results of the Company's Hong Kong subsidiary, the effective tax rate for the first nine months of fiscal 1998 was 39.0%, compared with 40.0% for the first nine months of fiscal 1997. NET INCOME. Net income for the nine months ended March 31, 1998 compared with the nine months ended March 31, 1997 increased by $2,541,000 and was 9.4% of sales in both periods. Excluding the nine months fiscal 1997 costs incurred in pursuing acquisitions, net income would have grown by $1,647,000 and decreased from 10.4% to 9.4% as a percentage of sales. EARNINGS PER SHARE. In August 1997, the Company repurchased an aggregate of 695,588 shares from certain officers and directors of the Company. Separately, during fiscal 1997, the Company repurchased 1,026,200 shares of Common Stock under the Company's stock repurchase program. 373,800 shares remain for repurchase under this program. These repurchases reduce the number of shares that would otherwise be used to calculate earnings per share. SEASONAL FLUCTUATIONS The Company has historically experienced and expects to continue to experience significant seasonal fluctuations in its sales and other financial results that it believes have resulted and will continue to result primarily from its customers' and users' buying patterns. These buying patterns have typically adversely affected orders for the Company's products in the third quarter of each fiscal year. Although it is difficult to predict the future seasonality of sales, the Company believes that future seasonality should be influenced at least in part by customer and user buying patterns similar to those that have historically affected the Company. Quarterly financial results are also affected by new product introductions and line extensions, the timing of large orders, changes in product sales or customer mix, vendor and customer pricing, production levels, supply and manufacturing delays, large customers' inventory management and general industry and economic conditions. The seasonality of the Company's financial results and the unpredictability of the factors affecting such seasonality make the Company's quarterly and yearly financial results difficult to predict and subject to significant fluctuation. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and cash equivalents at March 31, 1998 decreased to $11,955,000 from $15,550,000 at June 30, 1997. In the nine months ended March 31, 1998, net cash of $14,350,000 provided by operating activities, was offset by net cash of $7,982,000 and $9,901,000 used in investing activities and financing activities, respectively. Of the $14,350,000 net amount provided by the Company's operating activities, $10,951,000 was provided by net income, $14,404,000 was provided by a decrease in accounts receivable and $3,466,000 was provided by depreciation and amortization. These amounts were partially offset by an increase of $9,694,000 in inventories and a decrease of $4,016,000 in accounts payable. Of the $7,982,000 net amount used in the Company's investing activities, $4,113,000 was used to acquire Ultima Distribution Inc., Ram Manufacturing, Inc. and Timeposters Inc. and $3,824,000 was used to acquire primarily machinery and equipment and secondarily computer equipment and software. Of the $9,901,000 net amount used in the Company's financing activities, $11,564,000 was used to repurchase 695,588 shares of Common Stock from certain officers and directors, and $1,224,000 net was used to repay lines of credit. These amounts were partially offset by $3,445,000 that was provided by the issuance of Common Stock upon exercise of then-outstanding stock options and warrants. Because of the Company's seasonal sales patterns, accounts receivable (net) at March 31, 1998 decreased by 65.7% from the fiscal 1997 year-end amount. Compared with the March 31, 1997 amount, accounts receivable (net) increased by 0.5% primarily because of the growth in sales but did not grow as fast as sales because of an increase in the allowances for sales returns and other allowances. The average collection period of accounts receivable at March 31, 1998 was 46 days, compared with 47 days at both June 30 and March 31, 1997. Inventories at March 31, 1998 increased by 56.0% from the fiscal 1997 year-end amount and by 57.5% compared with the March 31, 1997 amount primarily because of new and recently introduced products and the inventories of the three companies acquired during the nine months ended March 31, 1998. Effective February 1, 1998, the Company entered into a new $15,000,000 line of credit. Borrowings under this line of credit bear interest at the Company's election at either the bank's prime rate less certain margins, or at LIBOR plus certain margins, with the margins dependent upon the Company's meeting certain funded debt-to-EBITDA ratios. Prior to February 1, 1998, borrowings under the line bore interest either at the bank's prime rate or at LIBOR plus 1.75%. At March 31, 1998, the Company had no amounts outstanding under its primary bank line but had used the line to secure outstanding letters of credit totaling approximately $1,000,000, which reduced the availability under the line to approximately $14,000,000. (See Note 3 to Consolidated Financial Statements.) The Canadian lines of credit allow for aggregate borrowings by the Company's two Canadian subsidiaries of up to Canadian $3,000,000 (approximately US $2,118,000). Borrowings bear interest at the Canadian bank's prime rate and are due and payable on demand. At March 31, 1998, approximately Canadian $821,000 (approximately US $580,000) was outstanding under these lines of credit. (See Note 3 to Consolidated Financial Statements.) The Company has not incurred significant losses or gains from foreign currency exchange rate fluctuations. The continuing expansion of the Company's international operations could, however, result in larger gains or losses as a result of fluctuations in foreign currency exchange rates as those subsidiaries conduct business in whole or in part in foreign currencies. The Company believes that cash flow from operations, vendor credit, its existing working capital and its bank lines of credit will be sufficient to satisfy the Company's anticipated cash requirements at least through the next 12 months. Nonetheless, the Company may seek additional sources of capital as necessary or appropriate for corporate finance purposes or to otherwise finance the Company's growth or operations; however, there can be no assurance that such funds if needed will be available on favorable terms, if at all. The "Year 2000" issue refers to the inability of certain computer systems to recognize accurate dates commencing on or after January 1, 2000. This has the potential to affect the operation of these systems adversely and materially. Day Runner has reviewed its computer systems to identify areas that may be affected and believes that by modifying existing software and converting to new software for certain tasks it can prevent the Year 2000 transition from posing significant operational problems. The Company does not anticipate that the costs of these modifications and conversions will be material to its financial position or results of operations in any given year. The Company currently estimates that total incremental cash requirements related to the Year 2000 issue will be approximately $500,000 to $900,000 and to date has spent approximately $545,000. Expenditures will be expensed or capitalized as appropriate. FORWARD LOOKING STATEMENTS With the exception of the actual reported financial results and other historical information, the statements made in the Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly report are forward looking statements that involve risks and uncertainties that could affect actual future results. Such risks and uncertainties include, but are not limited to: timing and size of orders from large customers, timing and size of orders for new products, competition, large customers' inventory management, general economic conditions, the health of the retail environment, supply constraints, supplier performance and other risks indicated in the Company's filings with the Securities and Exchange Commission. PART II --OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On March 17, 1998, the Company held a Special Meeting of Stockholders (the "Special Meeting"). (b) At the Special Meeting, the stockholders approved, with 4,407,055 votes cast in favor of, 124,136 votes cast against and 6,648 abstentions, the amendment to the Company's Certificate of Incorporation to: (i) effect a two-for-one split of each of the outstanding shares of Common Stock of the Company; (ii) to increase the number of authorized shares of all classes of stock of the Company from 15,000,000 to 30,000,000, consisting of 29,000,000 shares of Common Stock, $0.001 par value per share, and 1,000,000 shares of Preferred Stock, $0.001 par value per share. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Certificate of Incorporation of the Registrant, as amended 3.2 Bylaws of the Registrant, as amended(1) 10.1 Credit Agreement dated as of February 1, 1998 between the Registrant and Wells Fargo Bank, National Association, including Revolving Line of Credit Note(2) 27.1 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended March 31, 1998. - ---------------- (1) 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. (2) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19835) filed with the Commission on February 17, 1998. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 15, 1998 DAY RUNNER, INC. By: /S/ MARK A. VIDOVICH --------------------------- Mark A. Vidovich Chairman of the Board and Chief Executive Officer By: /S/ DENNIS K. MARQUARDT ---------------------------- Dennis K. Marquardt Executive Vice President, Finance & Administration and Chief Financial Officer EX-99 2 CERTIFICATE OF INCORPORATION, AS AMENDED CERTIFICATE OF INCORPORATION OF DAY RUNNER, INC. The undersigned, in order to form a corporation under and pursuant to the provisions of the General Corporation Law of the State of Delaware, does hereby certify as follows: Article I The name of the corporation is Day Runner, Inc. Article II The address of the registered office of the corporation in the State of Delaware is 32 Loockerman Square, Suite L-100, in the City of Dover, County of Kent. The name of the registered agent of the corporation at such address is The Prentice-Hall Corporation System, Inc. Article III The purpose of the corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. Article IV The total number of shares of all classes of stock which the corporation is authorized to issue is 51,000,000 shares, consisting of 50,000,000 shares of Common Stock having a par value of $0.001 per share (the "Common Stock") and 1,000,000 shares of Preferred Stock having a par value of $0.001 per share (the "Preferred Stock"). The Board of Directors is authorized by resolution or resolutions from time to time adopted, subject to any limitation prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designations, powers (including voting powers), preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, limitations and restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the outstanding shares of Common Stock, without a vote of the holders of Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing any series of Preferred Stock. Article V The election of directors of the corporation need not be by written ballot unless required by the bylaws of the corporation. Article VI In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to adopt, amend and repeal the bylaws of the corporation. Article VII Any action required or permitted to be taken by the stockholders of the corporation must be effected at a duly called annual or special meeting of the stockholders and may not be effected by a written consent of the stockholders in lieu of such meeting. Article VIII A director of the corporation shall not be personally liable to the corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director of the corporation; provided, however, that the foregoing is not intended to eliminate or limit the liability of a director of the corporation (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law or (iv) for any transaction from which the director derived any improper personal benefit. If the Delaware General Corporation Law is amended after the date of incorporation of the corporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. No amendment to or repeal of this Article VIII shall have any adverse effect on the liability or alleged liability of any director of the corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. Article IX The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation or to adopt new provisions, in the manner now or hereafter prescribed by the laws of the State of Delaware, as amended from time to time, and all rights conferred herein are granted subject to this reservation. Article X The name and mailing address of the incorporator of the corporation are as follows: Mark A. Vidovich c/o Day Runner, Inc. 2750 West Moore Avenue Fullerton, California 92633 IN WITNESS WHEREOF, I have hereunto set my hand this 18th day of May, 1993. Mark A. Vidovich ----------------- Mark A. Vidovich Incorporator CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF DAY RUNNER, INC. DAY RUNNER, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify that: FIRST: The Board of Directors of the Corporation, at a meeting duly noticed and held, adopted a resolution setting forth a proposed amendment to the Certificate of Incorporation of the Corporation. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the first paragraph of Article IV of the Company's Certificate of Incorporation be amended to read in its entirety as follows: "The total number of shares of all classes of stock which the corporation is authorized to issue is 15,000,000 shares, consisting of 14,000,000 shares of Common Stock having a par value of $0.001 per share (the `Common Stock') and 1,000,000 shares of Preferred Stock having a par value of $0.001 per share (the `Preferred Stock')." SECOND: Thereafter, pursuant to resolutions of the Corporation's Board of Directors, the Corporation's 1994 Annual Meeting of Stockholders was duly called and held upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute was voted in favor of the amendment. THIRD:The aforesaid amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, DAY RUNNER, INC. has caused this Certificate of Amendment to be signed by Mark A. Vidovich, its Chief Executive Officer, and attested by Dennis K. Marquardt, its Secretary, this 29th day of June, 1994. DAY RUNNER, INC. Mark A. Vidovich ----------------- Mark A. Vidovich Chief Executive Officer ATTEST: Dennis K. Marquardt - --------------------- Dennis K. Marquardt Secretary CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF DAY RUNNER, INC. DAY RUNNER, INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify that: FIRST: At a meeting of the Board of Directors of the Corporation, the Board duly adopted resolutions setting forth a proposed amendment to the Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and calling a meeting of the stockholders of the Corporation for consideration thereof. The resolution setting forth the proposed amendment is as follows: RESOLVED, that the first paragraph of Article IV of the Company's Certificate of Incorporation be amended to read in its entirety as follows: 'The total number of shares of all classes of stock which the corporation is authorized to issue is 30,000,000 shares, consisting of 29,000,000 shares of Common Stock having a par value of $0.001 per share (the 'Common Stock') and 1,000,000 shares of Preferred Stock having a par value of $0.001 per share (the 'Preferred Stock'). Upon amendment of this Article IV, each outstanding share of Common Stock is split up and converted into two shares of Common Stock." SECOND: Thereafter, pursuant to a resolution of the Board of Directors of the Corporation, a special meeting of the stockholders of the Corporation was duly called and held, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of shares as required by statute was voted in favor of the amendment. THIRD: The aforesaid amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, Day Runner, Inc. has caused this Certificate of Amendment to be signed by Mark A. Vidovich, its authorized officer, this 18th day of March, 1998. DAY RUNNER, INC. /s/ Mark A. Vidovich ----------------------------------------- Mark A. Vidovich Chief Executive Officer EX-27 3 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 quarterly report on Form 10-Q and is qualified in its entirety by reference to such quarterly report on Form 10-Q. 0000853102 Day Runner, Inc. 1000 9-mos Jun-30-1998 Mar-31-1998 11,955 0 18,792 11,143 36,517 65,086 23,758 13,306 79,666 17,190 0 0 0 13 62,375 79,666 116,914 116,914 55,793 55,793 43,217 0 (49) 17,953 7,002 10,951 0 0 0 10,951 0.96 0.88
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