-----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, TJlXViIc3PIo6w7XFLGSi/WHwodxhbK9Our6tjYjUXdVUrye+6xQslAi75uHr0qX iOAKFNaT5ss7X8wruB1DEg== 0000853102-00-000022.txt : 20000215 0000853102-00-000022.hdr.sgml : 20000215 ACCESSION NUMBER: 0000853102-00-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 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: 537337 BUSINESS ADDRESS: STREET 1: 15295 ALTON PARKWAY CITY: IRVINE STATE: CA ZIP: 92718 BUSINESS PHONE: 7146803500 MAIL ADDRESS: STREET 1: 15295 ALTON PARKWAY CITY: IRVINE STATE: CA ZIP: 92718 10-Q 1 10-Q FOR QUARTER ENDED 12/31/99 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1999 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . --------------- --------------- Commission file number 0-19835 DAY RUNNER, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-3624280 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 15295 ALTON PARKWAY IRVINE, CALIFORNIA 92618 (Address and zip code of principal executive offices) (714) 680-3500 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No|_| Indicate the number of shares outstanding of each of the registrant's classes of Common Stock, as of the latest practicable date: Class Number of Shares Outstanding at February 11, 2000 - --------------------------- ------------------------------------------------- Common Stock, $0.001 par value 11,910,845
DAY RUNNER, INC. INDEX Page Reference COVER PAGE....................................................................................... 1 INDEX ....................................................................................... 2 PART I -- FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets December 31, 1999 and June 30, 1999....................................... 3 Consolidated Statements of Operations Three and Six Months Ended December 31, 1999 and 1998..................... 4 Consolidated Statements of Cash Flows Six Months Ended December 31, 1999 and 1998............................... 5 Notes to Consolidated Financial Statements.................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................... 12 PART II -- OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders......................... 20 Item 6. Exhibits and Reports on Form 8-K............................................ 20 SIGNATURES....................................................................................... 21
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) ASSETS DECEMBER 31, JUNE 30, 1999 1999 ----------- ----------- Current assets: Cash and cash equivalents...................................................... $ 9,690 $ 9,132 Accounts receivable (less allowance for doubtful accounts and sales returns and other allowances of $10,681 and $11,481 at December 31, 1999 and June 30, 1999, respectively).......................... 42,055 43,215 Inventories.................................................................... 38,878 42,361 Prepaid expenses and other current assets...................................... 5,026 4,506 Income taxes receivable........................................................ 434 Deferred income taxes.......................................................... 11,189 11,189 --------- -------- Total current assets........................................................ 106,838 110,837 Property and equipment, net ................................................... 16,143 17,851 Goodwill and other intangible assets (net of accumulated amortization of $3,220 and $1,934 at December 31, 1999 and June 30, 1999, respectively)............ 84,615 85,830 Other assets (net of accumulated amortization of $447 and $410 at December 31, 1999 and June 30, 1999, respectively).. ................................ 2,269 1,793 ---------- --------- TOTAL ............................................................................ $ 209,865 $ 216,311 ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit................................................................. $ 6,331 Accounts payable............................................................... 16,367 $ 18,722 Accrued expenses............................................................... 24,608 19,547 Income taxes payable........................................................... 3,919 Loan notes..................................................................... 2,077 -------- -------- Total current liabilities................................................... 51,225 40,346 -------- -------- Long-term liabilities: Line of credit................................................................. 90,444 105,317 Loan notes..................................................................... 257 251 -------- -------- Total long-term liabilities................................................. 90,701 105,568 -------- -------- Commitments and contingencies Stockholders' equity: Preferred stock (1,000,000 shares authorized; $0.001 par value; no shares issued or outstanding)...................................................... Common stock (29,000,000 shares authorized; $0.001 par value; 13,728,633 shares issued and 11,910,845 shares outstanding at December 31, 1999; 13,718,524 shares issued and 11,900,736 shares outstanding at June 30, 1999)............................................................. 14 14 Additional paid-in capital..................................................... 21,742 21,709 Retained earnings.............................................................. 58,985 61,078 Accumulated other comprehensive income......................................... 556 954 Treasury stock - At cost (787,858 shares at December 31, 1999 and June 30, 1999)................................................................ (13,358) (13,358) --------- --------- Total stockholders' equity.................................................. 67,939 70,397 --------- --------- TOTAL ............................................................................ $ 209,865 $ 216,311 ========= ========= See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three Months Ended Six Months Ended December 31, December 31, ---------------------- -------------------- 1999 1998 1999 1998 ---------- ---------- -------- -------- Net sales.................................................... $ 57,483 $ 64,565 $109,336 $112,296 Cost of goods sold........................................... 31,459 33,506 57,430 58,366 --------- --------- --------- --------- Gross profit................................................. 26,024 31,059 51,906 53,930 --------- --------- --------- --------- Operating expenses: Selling, marketing and distribution..................... 17,822 18,910 33,492 31,175 General and administrative.............................. 7,974 6,447 14,909 11,104 Costs relating to activities associated with the Filofax acquisition......................... 1,072 1,072 --------- --------- --------- --------- Total operating expenses................................ 25,796 26,429 48,401 43,351 --------- --------- --------- --------- Income from operations....................................... 228 4,630 3,505 10,579 Net interest expense......................................... 3,823 1,356 5,967 1,389 --------- --------- --------- --------- (Loss) income before (benefit) provision for income taxes.... (3,595) 3,274 (2,462) 9,190 (Benefit) provision for income taxes......................... (902) 1,244 (369) 3,491 --------- --------- --------- --------- Net (loss) income............................................ $ (2,693) $ 2,030 $ (2,093) $ 5,699 ========= ========= ========= ========= (Loss) earnings per common share: Basic................................................... $ (0.23) $ 0.17 $ (0.18) $ 0.48 ========= ========= ========== ======== Diluted................................................. $ (0.23) $ 0.16 $ (0.18) $ 0.45 ========= ========= ========== ======== Weighted-average number of common shares outstanding: Basic................................................... 11,901 11,883 11,901 11,907 ========= ========= ========= ========= Diluted................................................. 11,901 12,564 11,901 12,619 ========= ========= ========= ========= See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS) Six Months Ended December 31, 1999 1998 ---- ---- Cash flows from operating activities: Net (loss) income............................................................. $ (2,093) $ 5,699 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization.............................................. 6,779 4,478 Provision for doubtful accounts and sales returns and other allowances..... 13,827 4,582 Loss on disposal of property and equipment................................. 2 Changes in operating assets and liabilities, net of acquisition of business: Accounts receivable..................................................... (12,282) (6,052) Inventories............................................................. 3,668 5,882 Prepaid expenses and other current assets............................... (448) (785) Income taxes receivable................................................. 434 2,646 Accounts payable........................................................ (2,512) (4,951) Accrued expenses........................................................ 4,835 3,241 Income taxes payable.................................................... 3,825 1,398 --------- --------- Net cash provided by operating activities......................................... 16,035 16,138 --------- --------- Cash flows from investing activities: Acquisition of business....................................................... ( 88,764) Acquisition of property and equipment......................................... (2,426) (6,002) Other assets.................................................................. (1,667) (385) --------- ---------- Net cash used in investing activities.................................... (4,093) (95,151) --------- --------- Cash flows from financing activities: Net (repayments) borrowings under lines of credit............................. (9,274) 102,146 Repayment of loan notes....................................................... (2,164) Net proceeds from issuance of common stock.................................... 33 212 Repurchase of common stock.................................................... (1,274) --------- ---------- Net cash (used in) provided by financing activities...................... (11,405) 101,084 --------- --------- Effect of exchange rate changes in cash and cash equivalents...................... 21 259 --------- --------- Net increase in cash and cash equivalents......................................... 558 22,330 Cash and cash equivalents at beginning of period.................................. 9,132 2,923 --------- --------- Cash and cash equivalents at end of period........................................ $ 9,690 $ 25,253 ========= ========= See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES The accompanying consolidated balance sheet as of December 31, 1999, consolidated statements of operations for the three and six months ended December 31, 1999 and 1998 and consolidated statements of cash flows for the six months ended December 31, 1999 and 1998 are unaudited but, in the opinion of management, include all adjustments consisting of normal, recurring accruals necessary for a fair presentation of the financial position and the results of operations for such periods. Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have been omitted pursuant to the requirements of the Securities and Exchange Commission, although the Company believes that the disclosures included in the financial statements included herein are adequate to make the information therein not misleading. The financial statements included herein should be read in conjunction with the Company's audited consolidated financial statements for the year ended June 30, 1999, and the notes thereto, which are included in the Company's Annual Report on Form 10-K. The results of operations for the three and six months ended December 31, 1999 and 1998 are not necessarily indicative of the results for a full year. The seasonality of the Company's financial results and the unpredictability of the factors affecting such seasonality make the Company's quarterly and yearly financial results difficult to predict and subject to significant fluctuation. Certain reclassifications were made to the prior period financial statements to conform to the current period presentation. 2. INVENTORIES Inventories consist of the following (in thousands): December 31, June 30, 1999 1999 ------------------ --------- Raw materials................... $ 10,184 $ 12,026 Work in process................. 3,017 2,138 Finished goods.................. 25,677 28,197 ---------- ---------- Total.................. $ 38,878 $ 42,361 ========== ========== 3. LINE OF CREDIT On September 23, 1998, the Company entered into a $160,000,000 Revolving Loan Agreement (the "Loan Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"). Effective November 24, 1998, this amount was voluntarily reduced to $145,000,000, and unamortized financing fees of approximately $84,000 were charged to interest expense. The loan facility was syndicated with a group of banks in December 1998. On October 12, 1999, the Company and the banks amended the Loan Agreement (the "Amended and Restated Loan Agreement"). The Amended and Restated Loan Agreement converts the entire outstanding revolving loan balance into a term loan portion of $90,444,000 and a revolving credit loan portion of $29,556,000. The term loan matures on September 30, 2001, and the revolving credit loan facility matures on October 9, 2000. The maturity date of the revolving credit loan facility will be automatically extended through September 30, 2001, provided that the Company achieves as of September 30, 2000 a minimum EBITDA, a minimum fixed charge coverage ratio and a maximum senior funded debt ratio, as defined in the amended agreement. As a result of the amendment of the Loan Agreement, unamortized financing fees due under the Loan Agreement of approximately $955,000 were charged to interest expense in October 1999. At December 31, 1999, the Company had $96,775,000 outstanding under this Loan Agreement and had outstanding letters of credit totaling approximately $406,000. The Amended and Restated Loan Agreement is secured by the Company's assets and includes, among other things, financial covenants requiring the maintenance of a minimum fixed charge coverage ratio, EBITDA, stockholders' equity and current ratio, and a maximum senior funded debt coverage ratio and operating expenses to net sales ratio, as defined in the amended agreement. The Amended and Restated Loan Agreement also limits, among other things, the incurrence of liens and other indebtedness, mergers, consolidations, the sale of assets, annual capital expenditures, advances, investments and loans by the Company and its subsidiaries, dividends, stock repurchases and certain transactions with affiliates. It permits up to $10,000,000 of secured debt for currency hedging purposes and up to $1,500,000 of unsecured overdraft borrowings for foreign subsidiaries. The outstanding balances bear interest at the Company's election at either (i) the higher of the Agent Bank's prime rate or the Federal Funds Rate plus 50.00 basis points, plus an interest rate margin ranging from 12.50 to 200.00 basis points, or (ii) the applicable eurodollar rate plus an interest rate margin ranging from 112.50 to 300.00 basis points, depending on the level of the funded debt ratio at the end of each fiscal quarter. During the six months ended December 31, 1999, the weighted-average interest rate was 9.15%. The interest rate at December 31, 1999 was 9.11%. Under the Amended and Restated Loan Agreement, the Company is obligated to pay certain fees, which include: an unused revolving loan commitment fee ranging from 37.50 to 67.50 basis points, which varies with the level of the funded debt ratio at the end of each fiscal quarter, payable quarterly in arrears; letter of credit fees ranging from 112.50 to 300.00 basis points, which vary with the level of the funded debt ratio at the time the letter of credit is issued; and amendment and other standard fees of approximately $1,600,000, which were paid during the six months ended December 31, 1999. 4. STOCKHOLDERS' EQUITY During the six months ended December 31, 1999, certain employees exercised options to purchase an aggregate of 10,109 shares of the Company's Common Stock for an aggregate of approximately $33,000. 5. EARNINGS PER SHARE Basic earnings per share are computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share are computed by dividing net income by the sum of the weighted-average number of common shares outstanding for the period plus the assumed exercise of all dilutive securities. The following reconciles the numerator and denominator of the basic and diluted per share computations for net income (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------------------------- ---------------------------------- 1999 1998 1999 1998 ----------------- ---------------- ----------------- ------------ NET (LOSS) INCOME $(2,693) $ 2,030 $(2,093) $ 5,699 ======= ======== ======= ======== BASIC WEIGHTED-AVERAGE SHARES Weighted-average number of common shares outstanding 11,901 11,883 11,901 11,907 EFFECT OF DILUTIVE SECURITIES Additional shares from the assumed exercise of options and warrants 0 3,047 0 2,952 Shares assumed to be repurchased under the treasury stock method 0 (1,949) 0 (1,804) Non-qualified tax benefit 0 (417) 0 (436) ------- -------- -------- -------- DILUTED WEIGHTED-AVERAGE SHARES Weighted-average number of common shares outstanding and common share equivalents 11,901 12,564 11,901 12,619 ======== ======== ======== ======== (LOSS) EARNINGS PER SHARE: Basic $ (0.23) $ 0.17 $ (0.18) $ 0.48 ======= ======= ======== ======= Diluted $ (0.23) $ 0.16 $ (0.18) $ 0.45 ======= ======= ======== =======
For the three and six months ended December 31, 1999, dilutive securities equivalent to approximately 2,831,000 and 2,390,000 shares, respectively, are not included as potential common share equivalents because they are antidilutive.
6. COMPREHENSIVE INCOME Comprehensive (loss) income is summarized as follows (in thousands): SIX MONTHS ENDED DECEMBER 31, 1999 1998 ----------- ---------- Net (loss) income $ (2,093) $ 5,699 Foreign currency translation adjustment (398) 35 ---------- ---------- Comprehensive (loss) income $ (2,491) $ 5,734 ========== ==========
7. SEGMENT INFORMATION The Company's operating segments have similar economic characteristics and, as such, the Company has aggregated six operating segments into a single reportable segment in conformity with Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures about Segments of an Enterprise and Related Information. The business activities of the Company's operating segment are the development, manufacturing and marketing of paper-based organizers for the retail market. In addition, the Company also develops, manufactures and markets a number of related organizing products including telephone/address books, business accessories, products for students and organizing and other wallboards. The Company groups its products into three categories: organizers and planners; their refills, which include calendars, other pages and accessories; and related organizing products. The following table sets forth, for the periods indicated, approximate Day Runner net sales by product category (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------------------------- ---------------------------------- 1999 1998 1999 1998 ----------------- ---------------- ----------------- ------------ Organizers and planners.......... $ 26,692 $ 26,230 $ 47,872 $ 43,298 Refills.......................... 24,381 22,049 42,861 39,097 Related organizing products...... 6,410 16,286 18,603 29,901 ---------- ---------- ---------- ---------- Total......................... $ 57,483 $ 64,565 $ 109,336 $ 112,296 ========== ========== ========== ===========
8. OPERATIONS IN FOREIGN COUNTRIES The following is a summary of the financial activity of the Company by geographical area (in thousands):
SIX MONTHS ENDED DECEMBER 31, 1999 UNITED STATES EUROPE OTHER ELIMINATIONS TOTAL ------------- ---------- ---------- ------------ --------- Net sales to unaffiliated entities $ 66,833 $ 32,511 $ 9,992 $ 109,336 Transfers between geographic areas 1,578 553 $ (2,131) ---------- -------- ---------- --------- --------- Net sales $ 68,411 $ 32,511 $ 10,545 $ (2,131) $ 109,336 ========== ======== ========== ========= ========= (Loss) income from operations $ (1,398) $ 6,931 $ 101 $ (2,129) $ 3,505 ========== ======== ========== ========= ========= Long-lived assets $ 88,252 $ 82,089 $ 3,381 $ (70,695) $ 103,027 ========== ======== ========== ========= ========= SIX MONTHS ENDED DECEMBER 31, 1998 UNITED STATES EUROPE OTHER ELIMINATIONS TOTAL ------------- ---------- ---------- ------------ --------- Net sales to unaffiliated entities $ 86,658 $ 16,138 $ 9,500 $ 112,296 Transfers between geographic areas 2,644 1,435 $ (4,079) ---------- -------- ---------- --------- --------- Net sales $ 89,302 $ 16,138 $ 10,935 $ (4,079) $ 112,296 ========== ======== ========== ========= ========= Income from operations $ 9,680 $ 4,141 $ 658 $ (3,900) $ 10,579 ========== ======== ========== ========= ========= Long-lived assets $ 86,819 $ 83,979 $ 3,474 $ (67,552) $ 106,720 ========== ======== ========== ========= =========
9. CONTINGENCIES In September 1999, two, and in October 1999, one additional, purported securities class action lawsuits were filed in the United States District Court for the Central District California (the "District Court") against the Company and certain of its officers and directors. The complaints alleged that the Company violated Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder through the misstatement of the Company's financial results of operations for the first through third quarters of fiscal 1999. These alleged misstatements purportedly consisted of improper accounting for manufacturing variances and other costs. The plaintiffs in all these actions purport to represent a class consisting of all purchasers of the Company's Common Stock between October 20, 1998 and August 31, 1999. On January 14, 2000, a consolidated amended complaint (the "Amended Complaint") was filed in the District Court against the Company and certain of its officers and directors. The Amended Complaint extended the time period for purported class members to include persons who purchased the Company's Common Stock between February 1, 1998 through August 31, 1999. In addition to the alleged misstatements included in the earlier complaints, the Amended Complaint alleges that the Company failed to make certain disclosures during this time period and that certain officers and directors sold shares of the Company's Common Stock during this period. As they did in the earlier complaints, the plaintiffs are seeking unspecified compensatory damages in the Amended Complaint. There has been no discovery in this action. Based on the allegations and the issues raised by the Amended Complaint, the Company believes it has meritorious defenses to the action and intends to defend it vigorously. The Company is not a party to any other litigation that, in the opinion of management, would reasonably be expected to have a materially adverse effect on the consolidated financial statements. 9. STATEMENTS OF CASH FLOW Supplemental disclosure of cash flow information (in thousands): SIX MONTHS ENDED DECEMBER 31, 1999 1998 ---------- ---------- Cash paid during the period for: Interest $ 4,168 $ 1,217 Income taxes, net of refunds received $ (4,259) $ (358) Supplemental disclosure of noncash investing and financing activities: As of December 31, 1998, the Company had purchased 1,400,000 shares of Filofax stock for approximately (pound)2,821,000 (approximately US $4,794,000) in lOAN notes that were issued to former shareholders of Filofax. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and Notes thereto included elsewhere in this Quarterly Report. Historical results and percentage relationships among any amounts included in the Consolidated Financial Statements are not necessarily indicative of trends in operating results for any future period. Since the Company's introduction of the first Day Runner System organizer in 1982, the Company's revenues have been generated by sales primarily of organizers and planners and secondarily of refills. Since fiscal 1995, a majority of the Company's internally generated growth has resulted from sales of related organizing products. For a number of years, the Company focused the great majority of its product development, sales and marketing efforts on the U.S. office products channel, which accounted for 30.4% of second quarter fiscal 2000 net sales and 34.3% of net sales for the six months ended December 31, 1999, and the U.S. mass market channel, which accounted for 17.2% of second quarter fiscal 2000 net sales and 19.4% of net sales for the six months ended December 31, 1999. With the October 30, 1998 acquisition of Filofax, the Company substantially increased its distribution in markets outside the U.S., and sales to foreign customers accounted for 40.9% of second quarter fiscal 2000 net sales and 38.5% of net sales for the six months ended December 31, 1999. RESTRUCTURING OF OPERATIONS For a number of quarters, the Company's results have been adversely affected by changes in the supply chain management practices of the large U.S. retailers that account for the bulk of the Company's U.S. sales. The Company believes that the U.S. retail environment has changed and that large U.S. retailers will continue to emphasize minimizing on-hand inventories and increasing inventory turns. On December 29, 1999, the Company announced that it is developing a plan to restructure its operations to substantially cut costs and allow the Company to operate more effectively and become profitable under these conditions. The Company's goals are to fully develop its restructuring plan and to complete the bulk of its restructuring by the end of the fiscal year. The Company expects a substantial loss in the March quarter, reflecting the effects of a number of factors, including the seasonality of its business, continued constraints on its U.S. sales and certain costs associated with the restructuring. In addition, the Company expects to incur other restructuring-related costs at some point before the end of fiscal 2000.
RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages that statement of operations items bear to net sales and the percentage change in the dollar amounts of such items. Percentage Change ----------------- Percentage of Sales Three Six -------------------- Months Months Three Six Ended Ended Months Ended Months Ended December 31, December 31, December 31, December 31, 1998 1998 1999 1998 1999 1998 to 1999 to 1999 ---- ---- ---- ---- ------- ------- Net sales........................................ 100.0% 100.0% 100.0% 100.0% (11.0)% (2.6)% Cost of goods sold............................... 54.7 51.9 52.5 52.0 (6.1) (1.6) ----- ----- ----- ----- ------ ---- Gross profit..................................... 45.3 48.1 47.5 48.0 (16.2) (3.8) ----- ----- ----- ----- ----- ---- Operating expenses: Selling, marketing and distribution........... 31.0 29.3 30.6 27.8 (5.8) 7.4 General and administrative.................... 13.9 10.0 13.7 9.9 23.7 34.3 Costs related to activities associated with the Filofax acquisition...................... 1.6 0.9 (100.0) (100.0) ---- ----- --- ----- ------ ----- Total operating expenses.................... 44.9 40.9 44.3 38.6 (2.4) 11.6 ----- ----- ----- ----- ----- ----- Income from operations........................... 0.4 7.2 3.2 9.4 (95.1) (66.9) Net interest expense............................. 6.7 2.1 5.4 1.2 181.9 329.6 ----- ----- ----- ----- ----- ----- (Loss) income before (benefit) provision for income taxes (6.3) 5.1 (2.2) 8.2 (209.8) (126.8) (Benefit) provision for income taxes............. (1.6) 1.9 (0.3) 3.1 (172.5) (110.6) ----- ----- ----- ---- ------- ------ Net (loss) income................................ (4.7)% 3.2% (1.9)% 5.1% (232.7)% (136.7)% ==== === ==== === ====== ======
The following tables set forth, for the periods indicated, the Company's approximate net sales by distribution channel and product category and as a percentage of total sales.
DISTRIBUTION CHANNEL: Three Months Ended December 31, Six Months Ended December 31, ---------------------------------------- ------------------------------------- 1999 1998 1999 1998 ------------------- ------------------- ------------------ ----------------- (Unaudited; dollars in thousands) Office products................. $ 17,505 30.4% $ 21,226 32.9% $ 37,473 34.3% $ 42,886 38.2% Mass market..................... 9,871 17.2 18,139 28.1 21,217 19.4 37,787 33.6 Foreign customers............... 23,513 40.9 21,536 33.3 42,103 38.5 25,768 23.0 Other........................... 6,594 11.5 3,664 5.7 8,543 7.8 5,855 5.2 -------- ----- -------- ----- -------- ---- -------- ----- Total........................ $ 57,483 100.0% $ 64,565 100.0% $109,336 100.0% $112,296 100.0% ======== ===== ========= ===== ======== ===== ======== =====
PRODUCT CATEGORY: Three Months Ended December 31, Six Months Ended December 31, ---------------------------------------- ----------------------------------- 1999 1998 1999 1998 ------------------- ------------------- ------------------ ------------ (Unaudited; dollars in thousands) Organizers and planners......... $26,692 46.4% $ 26,230 40.6% $47,872 43.8% $ 43,298 38.6% Refills......................... 24,381 42.4 22,049 34.2 42,861 39.2 39,097 34.8 Related organizing products..... 6,410 11.2 16,286 25.2 18,603 17.0 29,901 26.6 ------- ----- -------- ------ -------- ----- -------- ----- Total........................ $57,483 100.0% $64,565 100.0% $109,336 100.0% $112,296 100.0% ======= ===== ======= ===== ======== ===== ======== =====
THREE MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH THE THREE MONTHS ENDED DECEMBER 31, 1998 Net Sales. Net sales consist of revenues from gross product shipments net of allowances for returns, rebates and credits. In the second quarter of fiscal 2000, net sales decreased by $7,082,000, or 11.0%, compared with the second quarter of fiscal 1999. The Company believes that the ongoing impact of inventory tightening on the part of certain of the large retailers that account for the bulk of the Company's U.S. net sales was the primary factor causing lower gross product shipments, higher returns and lower net sales for the quarter, particularly in the mass market channel. In the quarter ended December 31, 1999, net sales to the office products channel decreased by $3,721,000, or 17.5%, and net sales to mass market customers decreased by $8,268,000, or 45.6%. Because of the inclusion of Filofax's net sales for the entire fiscal 2000 second quarter compared with two months of the fiscal 1999 second quarter, net sales to foreign customers increased by $1,977,000, or 9.2%, and net sales to miscellaneous customers grouped together as "other," increased by $2,930,000, or 80.0%. Because of the inclusion of the additional month of Filofax's net sales, net sales of organizers and planners grew by $462,000, or 1.8%, and net sales of refills increased by $2,332,000, or 10.6%, in the quarter. Net sales of related organizing products decreased by $9,876,000, or 60.6%, because the Company had fewer related organizing products promotions in the mass market and discontinued its line of non-licensed appointment books after the fall 1998 selling season. Gross Profit. Gross profit is net sales less cost of goods sold, which is comprised of materials, labor and manufacturing overhead. Gross profit may be affected by, among other things, product mix, production levels, changes in vendor and customer prices and discounts, net sales volume and growth rate, sales returns and other allowances, purchasing and manufacturing efficiencies, tariffs, duties and inventory carrying costs. Gross profit as a percentage of net sales decreased from 48.1% in the second quarter of fiscal 1999 to 45.3% in the second quarter of fiscal 2000 primarily because of an increase in the provision for sales returns, which is based upon recent higher sales returns experience. Operating Expenses. Total operating expenses decreased by $633,000, or 2.4%, in the second quarter of fiscal 2000 compared with the second quarter of fiscal 1999 but increased as a percentage of net sales from 40.9% to 44.9%. Selling, marketing and distribution expenses decreased by $1,088,000 primarily because of the decrease in net sales and secondarily because of the Company's focus on controlling costs, but increased from 29.3% to 31.0% as a percentage of net sales due to the Company's decreased ability to absorb expenses as a result of the decline in U.S. net sales. General and administrative expenses increased by $1,527,000 and from 10.0% to 13.9% as a percentage of net sales because of the inclusion of Filofax's expenses for the entire second quarter of fiscal 2000 compared with two months of the quarter in fiscal 1999. Net Interest Expense. Net interest expense for the second quarter of fiscal 2000 was $3,823,000, compared with $1,356,000 for the second quarter of fiscal 1999, primarily because the Company's bank debt, which was principally incurred to finance the Filofax acquisition, was outstanding for the entire fiscal 2000 second quarter, compared with approximately six weeks of the second quarter of fiscal 1999. Income Taxes. The Company recorded an income tax benefit of $902,000 for the second quarter of fiscal 2000, compared with an income tax provision of $1,244,000 for the second quarter of fiscal 1999, and an effective tax rate of 25.1%, compared with 38.0%. The Company's tax benefit for the fiscal 2000 second quarter was lower than it otherwise would have been, however, because of the Company's inability to fully utilize its foreign tax credits and the pledging of the capital stock of Day Runner Hong Kong Ltd. as part of the security required by the Company's Amended and Restated Loan Agreement. SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED WITH THE SIX MONTHS ENDED DECEMBER 31, 1998 Net Sales. During the six months ended December 31, 1999, net sales decreased by $2,960,000, or 2.6%, primarily because of the ongoing impact of U.S. retailers' inventory tightening, which reduced gross product shipments and increased returns. Net sales to office products customers declined by $5,413,000, or 12.6%, and net sales to mass market customers decreased by $16,570,000, or 43.9%. Because of the inclusion of Filofax's net sales for the entire six months, compared with two months of the same period of fiscal 1999, net sales to foreign customers grew by $16,335,000, or 63.4%, and net sales to miscellaneous customers grouped together as "other" increased by $2,688,000, or 45.9%. Because of the inclusion of Filofax's net sales for the entire first six-months of fiscal 2000, net sales of organizers and planners increased by $4,574,000, or 10.6%, and net sales of refills grew by $3,764,000, or 9.6%. Net sales of related organizing products decreased by $11,298,000, or 37.8%, because the Company discontinued its line of non-licensed appointment books after the fall 1998 selling season and had fewer second fiscal quarter 2000 related organizing products promotions in the mass market. Gross Profit. Gross profit as a percentage of net sales decreased slightly from 48.0% in the first six months of fiscal 1999 to 47.5% in the first six months of fiscal 2000. A decline in the gross profit of the Company's U.S. operations resulting primarily from an increase in the provision for sales returns was partially offset by the inclusion of Filofax's higher gross profit for the entire six-month period ended December 31, 1999, compared with two months of the same period last year. Operating Expenses. Total operating expenses increased by $5,050,000, or 11.6%, in the first six months of fiscal 2000 compared with the first six months of fiscal 1999 and increased as a percentage of net sales from 38.6% to 44.3%. Selling, marketing and distribution expenses increased by $2,317,000 because of the inclusion of Filofax's expenses for the entire six months ended December 31, 1999, compared with two months of the same period last year. As a percentage of net sales, selling, marketing and distribution expenses increased from 27.8% to 30.6% because of the Company's decreased ability to absorb expenses as a result of the decline in U.S. net sales. General and administrative expenses increased by $3,805,000 and from 9.9% to 13.7% as a percentage of net sales because of the additional four months of Filofax's expenses. Net Interest Expense. Net interest expense for the first six months of fiscal 2000 was $5,967,000, compared with $1,389,000 for the first six months of fiscal 1999, primarily because the Company's bank debt, which was principally incurred to finance the Filofax acquisition, was outstanding for the entire six-month period ended December 31, 1999, compared with approximately six weeks of the same period last year. Income Taxes. The Company recorded an income tax benefit of $369,000 for the first six months of fiscal 2000, compared with an income tax provision of $3,491,000 for the first six months of fiscal 1999, and an effective tax rate of 15.0%, compared with 38.0%. The Company's tax benefit for the fiscal 2000 six months was lower than it otherwise would have been, however, because of the Company's inability to fully utilize its foreign tax credits and the pledging of the capital stock of Day Runner Hong Kong Ltd. as part of the security required by the Company's Amended and Restated Loan Agreement. SEASONAL FLUCTUATIONS The Company has historically experienced and expects to continue to experience significant seasonal fluctuations in its sales and other financial results that it believes have resulted and will continue to result primarily from its customers' and users' buying patterns. These buying patterns have typically adversely affected orders for the Company's products in the third quarter of each fiscal year. Although it is difficult to predict the future seasonality of sales, the Company believes that future seasonality should be influenced at least in part by customer and user buying patterns substantially similar to those that have historically affected the Company. Quarterly financial results are also affected by new product introductions and line extensions, the timing of large orders, changes in product sales or customer mix, vendor and customer pricing, production levels, supply and manufacturing delays, large customers' inventory management and general industry and economic conditions. The seasonality of the Company's financial results and the unpredictability of the factors affecting such seasonality make the Company's quarterly and yearly financial results difficult to predict and subject to significant fluctuation. LIQUIDITY AND CAPITAL RESOURCES General. The Company's cash and cash equivalents at December 31, 1999 increased to $9,690,000 from $9,132,000 at June 30, 1999. During the six months ended December 31, 1999, net cash of $16,035,000 provided by operating activities which was partially offset by net cash of $11,405,000 and $4,093,000 used in financing activities and investing activities, respectively. Of the $16,035,000 net amount provided by the Company's operating activities, $13,827,000 was provided by the provision for doubtful accounts and sales returns and other allowances, $6,779,000 was provided by depreciation and amortization, $4,835,000 was provided by an increase in accrued expenses and $3,825,000 was provided by an increase in income taxes payable. These amounts were partially offset by an increase of $12,282,000 in accounts receivable and a decrease of $2,512,000 in accounts payable. Accounts receivable (net) at December 31, 1999 decreased by 2.7% from the fiscal 1999 year-end amount and by 13.4% from the December 31, 1998 amount primarily because of the decrease in U.S. sales. Inventories at December 31, 1999 decreased by 8.2% from the fiscal 1999 year end amount and by 12.2% from the December 31, 1998 amount primarily because of the Company's improved inventory management. Of the $4,093,000 net amount used in the Company's investing activities, $2,426,000 was used to acquire primarily machinery and equipment and secondarily data processing equipment and software, and $1,667,000 was used by an increase in other assets. Of the $11,405,000 net amount used in the Company's financing activities, $9,274,000 was repaid on the line of credit and $2,164,000 was used to repay loan notes incurred in connection with the Filofax acquisition. Bank Loan. On September 23, 1998, the Company entered into a $160,000,000 Revolving Loan Agreement (the "Loan Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"). Effective November 24, 1998, this amount was voluntarily reduced to $145,000,000, and unamortized financing fees of approximately $84,000 were charged to interest expense. The loan facility was syndicated with a group of banks in December 1998. On October 12, 1999, the Company and the banks amended the Loan Agreement (the "Amended and Restated Loan Agreement"). The Amended and Restated Loan Agreement converts the entire outstanding revolving loan balance into a term loan portion of $90,444,000 and a revolving credit loan portion of $29,556,000. The term loan matures on September 30, 2001, and the revolving credit loan facility matures on October 9, 2000. The maturity date of the revolving credit loan facility will be automatically extended through September 30, 2001, provided that the Company achieves as of September 30, 2000 a minimum EBITDA, a minimum fixed charge coverage ratio and a maximum senior funded debt ratio, as defined in the amended agreement. As a result of the amendment of the Loan Agreement, unamortized financing fees due under the Loan Agreement of approximately $955,000 were charged to interest expense in October 1999. At December 31, 1999, the Company had $96,775,000 outstanding under this Loan Agreement and had outstanding letters of credit totaling approximately $406,000. The Amended and Restated Loan Agreement is secured by the Company's assets and includes, among other things, financial covenants requiring the maintenance of a minimum fixed charge coverage ratio, EBITDA, stockholders' equity and current ratio, and a maximum senior funded debt coverage ratio and operating expenses to net sales ratio, as defined in the amended agreement. The Amended and Restated Loan Agreement also limits, among other things, the incurrence of liens and other indebtedness, mergers, consolidations, the sale of assets, annual capital expenditures, advances, investments and loans by the Company and its subsidiaries, dividends, stock repurchases and certain transactions with affiliates. It permits up to $10,000,000 of secured debt for currency hedging purposes and up to $1,500,000 of unsecured overdraft borrowings for foreign subsidiaries. The outstanding balances bear interest at the Company's election at either (i) the higher of the Agent Bank's prime rate or the Federal Funds Rate plus 50.00 basis points, plus an interest rate margin ranging from 12.50 to 200.00 basis points, or (ii) the applicable eurodollar rate plus an interest rate margin ranging from 112.50 to 300.00 basis points, depending on the level of the funded debt ratio at the end of each fiscal quarter. During the six months ended December 31, 1999, the weighted-average interest rate was 9.15%. The interest rate at December 31, 1999 was 9.11%. Under the Amended and Restated Loan Agreement, the Company is obligated to pay certain fees, which include: an unused revolving loan commitment fee ranging from 37.50 to 67.50 basis points, which varies with the level of the funded debt ratio at the end of each fiscal quarter, payable quarterly in arrears; letter of credit fees ranging from 112.50 to 300.00 basis points, which vary with the level of the funded debt ratio at the time the letter of credit is issued; and amendment and other standard fees of approximately $1,600,000, which were paid during the six months ended December 31, 1999. Foreign Currency. Certain of the Company's international operations conduct business in whole or in part in foreign currencies, and this can result in significant gains or losses as a result of fluctuations in foreign currency exchange rates. The Company's exposure to the impact of foreign currency fluctuations increased as a result of the Filofax acquisition because the acquisition significantly expanded the Company's international operations. Included in general and administrative expenses in the consolidated statements of operations are approximately $583,000 and $371,000 of foreign exchange losses for the six months ended December 31, 1999 and 1998, respectively. A single currency called the euro was introduced in certain countries in Europe on January 1, 1999, but will not, at least for the foreseeable future, be introduced in the United Kingdom. The use of a single currency may affect the ability of Day Runner and other companies to price their products differently in various European markets. The Company is continuing to evaluate the impact of the single currency in these markets. Adequacy of Capital. The Company's liquidity is significantly dependent upon its continued compliance with the terms of the Amended and Restated Loan Agreement. These terms include, among others, payment of interest and principal when due and maintenance of certain financial ratios. There can be no assurance that the Company will be able to continue to comply with the terms of the Loan Agreement (see Note 3 to the Consolidated Financial Statements.) The Company believes that if it is able to continue to comply, cash flow from operations, vendor credit, its existing working capital and its term and revolving credit loans will be sufficient to satisfy the Company's anticipated cash requirements at least through fiscal 2000. Nonetheless, the Company may seek additional sources of capital as necessary or appropriate to finance the Company's growth or operations; however, there can be no assurance that such funds if needed will be available on favorable terms, if at all. YEAR 2000 The Year 2000 issue refers to the inability of certain computer systems, as well as certain hardware and equipment containing date-sensitive data, to recognize accurately dates commencing on or after January 1, 2000. To date the Company has not experienced any significant internal or external operational problems as a result of the commencement of Year 2000. Nevertheless, computer experts have warned that there may still be residual consequences stemming from the change in centuries, and, if these consequences become widespread or impact the Company's systems or the systems or operations of any third party on which the Company relies, there can be no assurance that such occurrence will not have an adverse effect on the Company's systems, operations and/or financial condition. As of December 31, 1999, the Company had incurred approximately $2,027,000 in total costs related to the Year 2000 issue, which have been expensed or capitalized as appropriate. FORWARD LOOKING STATEMENTS With the exception of actual reported financial results and other historical information, the statements contained in this Quarterly Report on Form 10-Q ("Quarterly Report") constitute "forward-looking statements" within the meaning of the federal securities laws and involve a number of risks and uncertainties. Such statements are indicated by words or phrases such as "believes," "will," "plan," "goals," "project," "expect," "intends" and similar words or phrases. These forward looking statements are based on management's expectations as of the date set forth on the signature page of this document, and the Company does not undertake any obligation to update any of these statements. There can be no assurance that the Company's actual future performance will meet its expectations. The Company is subject to a number of risks, and its future operating results are difficult to predict and subject to significant fluctuations. These include but are not limited to: (1) the Company may not be able to counteract the effects of large customers' inventory tightening in any significant way, which may result in lower than expected sales and/or higher than expected product returns; (2) the Company may not correctly anticipate the product mix of retailers' "just-in-time" inventory demands, resulting in the temporary unavailability of the products in demand by retailers and lower sales; and (3) the Company's efforts to restructure may not prove sufficient to prevent future operating losses. Additional factors that may cause future results to differ materially from the Company's current expectations include, among others: the timing and size of orders from large customers; timing and size of orders for new products; competition, especially for retail shelf space; consumer demand; market acceptance of new products; general economic conditions, especially the sustainability of the current economic expansion; the health of the retail environment; foreign exchange rate fluctuations; supply and manufacturing constraints; supplier performance; the Company's continued ability to comply with the terms of its bank loan agreement and related ability to meet its cash requirements to finance its operations and growth; and changes in the Company's effective tax rate. Among the effects of these factors may be: lower than anticipated sales; higher than anticipated product returns and/or excess inventory; negative effects on consumer purchases; lower than anticipated gross profit; higher than anticipated operating expenses; and lower than anticipated net income. For additional risks and more detailed explanations of factors that may cause the Company's results of operations to vary materially from current expectations, see the Company's Form 10-K for the year ended June 30, 1999 filed with the SEC. FOREIGN CURRENCY EXPOSURE The Company's reporting currency is the U.S. dollar, and interest and principal payments on its long-term debts will be in U.S. dollars and pounds Sterling. A portion of revenues and operating costs are derived from sales and operations outside the United States and are incurred in a number of different currencies. Accordingly, fluctuations in currency exchange rates may have a significant effect on the Company's results of operations and balance sheet data. The Company has no significant exposure from financial instruments which would require quantitative disclosure. PART II --OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On December 9, 1999, the Company held its 1999 Annual Meeting of Stockholders (the "Annual Meeting"). (b) At the Annual Meeting, the Company's stockholders elected the following persons as directors of the Company. The number of votes cast for each director, as well as the number of votes withheld, are listed opposite each director's name. Name Votes of Cast for Votes Director Director Withheld -------- -------- -------- James E. Freeman, Jr. 9,824,158 550,426 James P. Higgins 9,824,358 550,226 Jill Tate Higgins 9,824,358 550,226 Charles Miller 9,824,358 550,226 Alan R. Rachlin 9,824,158 550,426 Mark A. Vidovich 9,824,158 550,426 Boyd I. Willat 9,824,218 550,366 Felice Willat 9,824,358 550,226 (c) At the Annual Meeting, the stockholders approved, with 9,277,029 votes cast in favor, 852,109 votes cast against, 245,446 abstentions and 0 broker nonvotes, the amendment to the Company's 1995 Stock Option Plan to increase the aggregate number of shares authorized for issuance thereunder from 1,925,000 to 2,400,000 shares. (d) At the Annual Meeting, with 10,374,384 votes cast in favor, 0 votes cast against and 200 abstentions, the stockholders ratified the appointment of Deloitte & Touche LLP as independent auditors for the Company for the fiscal year ending June 30, 2000. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Certificate of Incorporation of the Registrant, as amended(1) 3.2 Bylaws of the Registrant(2) 10.1 Consulting Agreement effective November 22, 1999 between the Registrant and Mr. Alan R. Rachlin(3) 27.1 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1999. (1) Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 0-19835) filed with the Commission on May 15, 1998. (2) Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 0-19835) filed with the Commission on August 5, 1993. (3) Constitutes a management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 6 (a) of this Quarterly Report. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 11, 2000 DAY RUNNER, INC. By: /s/ JAMES E. FREEMAN JR. ----------------------------- James E. Freeman, Jr. Chief Executive Officer By: /s/ DAVID A. WERNER ------------------------ David A. Werner Executive Vice President, Finance and Chief Financial Officer EX-10 2 CONSULTING AGREEMENT CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (this "Agreement"), which includes Exhibit A hereto which is incorporated herein by this reference, is entered into by and between DAY RUNNER, INC., a Delaware corporation (the "Company"), and ALAN R. RACHLIN, a resident of Virginia who is operating a consulting business as a sole proprietorship ("Consultant"), and shall be effective as of November 22, 1999 (the "Effective Date"). NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the receipt and sufficiency of which are hereby acknowledged, the Company and Consultant agree as follows: 1. CONSULTANCY. The Company hereby retains Consultant, and Consultant hereby accepts such retention, upon the terms and subject to the conditions set forth herein, commencing as of November 22, 1999 and continuing through and including November 21, 2000 (the "Term"). Consultant shall render such services to the Company as an independent contractor, and not as an employee, agent, joint venturer or otherwise. Although Consultant is an attorney, it is understood that such services shall be rendered as a consultant to, and not as an attorney for, the Company. 2. DUTIES. Consultant shall make himself available during the Term to advise the Chairman and such Company employees as he designates with regard to such strategic business issues and projects as he shall select, including, without limitation, those relating to new or existing business development, strategic and tactical planning, corporate finance or business aspects of potential securities or other legal matters. Time devoted to Consultant's duties as a member of the Company's Board of Directors and committees thereof shall not be considered as consulting services under this Agreement. The Company shall be entitled to require Consultant to make himself available up to 60 days during the Term (but not more than 10 days in any single month) for the performance of consulting services hereunder at such times and places as are mutually satisfactory to the Company and Consultant. Consultant will travel to the Company's principal offices as necessary to meet with management but will not otherwise be required to perform any of his duties outside of Virginia. 3. COMPENSATION. In consideration for his agreement herein to render consulting services to the Company, the Company agrees to compensate Consultant in cash at the rate of $2,500 per day. 4. EXPENSES. Any and all expenses incurred by Consultant in rendering consulting services hereunder shall be borne by Consultant, such expenses to include travel within the Virginia-Washington D.C.-area, secretarial support (unless provided with the Chairman's permission by an employee of the Company), office supplies, telephone (unless long distance), overhead, meals, market research, seminars, textbooks and computer time. The Company shall pay all its own expenses incurred by it in connection with such consulting and shall reimburse Consultant for all long distance telephone charges and expenses for travel (including transportation, hotel, meals and other reasonable charges resulting from such travel) outside of the Virginia-Washington D.C.-area and for such other expenses as are authorized by the Chairman as appropriate for reimbursement. 5. TERMINATION. Consultant's retention hereunder shall continue during the Term unless earlier terminated by Consultant's death or by lawful termination of this Agreement after breach hereof by Consultant. Neither party may terminate this Agreement for breach except after providing written notice to the other of the alleged breach (specifically describing therein in full detail the basis for such alleged breach) and allowing 30 days after such notice for the other party to cure such breach or cease breaching the Agreement. 6.CONFIDENTIALITY. Consultant shall execute on the date hereof and send to the Company the Confidentiality Agreement attached hereto as Exhibit A (the "Confidentiality Agreement"). 7. MISCELLANEOUS. 7.1 Notices. Except as otherwise noted herein, all notices pursuant to this Agreement shall be in writing, shall specifically reference this Agreement and shall be deemed duly sent and given upon actual delivery to and receipt by the relevant party (which in the case of the Company, shall be the Chairman). 7.2 Legal Advice and Construction of Agreement. Both parties hereto have received independent legal advice with respect to, and neither has relied upon the other (or his or its advisors) in, entering into this Agreement. 7.3 Entire Agreement. This Agreement and the Confidentiality Agreement constitute a single integrated contract expressing the entire agreement of the parties with respect to the subject matter hereof and supersede all prior and contemporaneous oral and written agreements and discussions with respect to the subject matter hereof. 7.4 Amendment and Waiver. This Agreement and each provision hereof may be amended, modified, supplemented or waived only by a written document specifically identifying this Agreement and signed by both parties hereto. 7.5 Specific Performance. Each party hereto may obtain specific performance to enforce its/his rights hereunder and each party acknowledges that failure to fulfill its/his obligations to the other party hereto would result in irreparable harm. 7.6 Virginia Law. This Agreement was negotiated and delivered within the Commonwealth of Virginia and the rights and obligations of the parties hereto shall be construed and enforced in accordance with and governed by the internal (and not the conflict of laws) laws of Virginia applicable to the construction and enforcement of contracts between parties resident in Virginia which are entered into and fully performed in Virginia. Any action or proceeding arising out of, relating to or concerning this Agreement shall be filed in the state courts of the County of Fairfax, Commonwealth of Virginia or in a U.S. District Court in the Eastern District of Virginia. The parties hereby waive the right to object to such location on the basis of venue. 7.7 Attorney's Fees. In the event a lawsuit is instituted by either party concerning a dispute under this Agreement, the prevailing party in such lawsuit shall be entitled to recover from the losing party all reasonable attorneys' fees, costs of suit and expenses (including the reasonable fees, costs and expenses of appeals), in addition to whatever damages or other relief the injured party is otherwise entitled to under law or equity. 7.8 Force Majeure. Neither party hereto shall be deemed in default if its/his performance of obligations hereunder is delayed or becomes impossible or impracticable by reason of any act of God, war, fire, earthquake, strike, civil commotion, epidemic, or any other cause beyond such party's reasonable control. 7.9 Successors and Assigns. Neither party may assign this Agreement or any of its/his rights or obligations hereunder to any third party or entity, and this Agreement may not be involuntarily assigned by operation of law, without the prior written consent of the nonassigning party, which consent may be given or withheld by such nonassigning party in the sole exercise of its/his discretion, except that the Company may assign this Agreement to a corporation acquiring: (1) 50% or more of the Company's capital stock in a merger or acquisition; or (2) all or substantially all of the assets of the Company in a single transaction; and except that Consultant may transfer or assign his rights under this Agreement voluntarily, involuntarily or by operation of law upon or as a result of his death to his heirs, estate and/or personal representative(s). Any prohibited assignment or attempted assignment shall be null and void. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their respective lawful successors and permitted assigns. 7.10 Limitation of Damages. Except as expressly set forth herein, in any action or proceeding arising out of, relating to or concerning this Agreement, including any claim of breach of contract, liability shall be limited to compensatory damages, proximately caused by the breach and neither party shall, under any circumstances, be liable to the other party for consequential, incidental, indirect or special damages, including but not limited to lost profits or income, even if such party has been apprised of the likelihood of such damages occurring. 7.11 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and which together shall constitute one and the same instrument. DAY RUNNER, INC. ALAN R. RACHLIN By: /s/ Mark Vidovich Signature: /s/ Alan R. Rachlin -------------------------- ---------------------- Mark Vidovich Chairman EXHIBIT A CONFIDENTIALITY AGREEMENT AGREEMENT, dated and made effective as of this 22nd day of November, 1999, by and between Day Runner, Inc., a Delaware corporation ("Discloser"), and Alan R. Rachlin, a Virginia resident ("Disclosee"); WHEREAS, Discloser intends to provide Disclosee with certain data and other information possibly of a confidential or proprietary nature to Discloser; and WHEREAS, Discloser considers certain of this information confidential but is willing to provide such information to Disclosee on a confidential basis; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. For purposes of this Agreement, the term "Confidential Information" shall mean that information of Discloser which is disclosed to Disclosee under the Consulting Agreement, effective as of the date hereof by and between the Discloser and Disclosee and which is in written graphic, recorded, photographic or any machine readable form, and which is conspicuously marked as confidential. 2. (a) Disclosee will use such Confidential Information for his own use only and shall use the same degree of care he uses to protect and safeguard the confidentiality of his own proprietary information to not disclose such Confidential Information to any person or persons other than his attorneys or accountants. Disclosee covenants that such degree of care is reasonably designed to protect the confidentiality of Disclosee's proprietary and confidential information. (b) Disclosee shall not be liable for disclosure of any such Confidential Information if the same: (i) was in the public domain at the time it was disclosed; (ii) was known to Disclosee prior to the time of disclosure; (iii) is disclosed with the prior written approval of Discloser; (iv) is or becomes publicly known through no wrongful act of Disclosee; (v) is disclosed after two years from the date of this Agreement; (vi) was or is independently developed by Disclosee without any use of the Confidential Information; (vii) becomes known to Disclosee from a source other than Discloser without breach of this Agreement by Disclosee; (viii) is or has been furnished by Discloser to others not in a Confidential relationship with Discloser without restrictions similar to or stricter than those herein on the right of the Receiving party to use or disclose; (ix) is received by Disclosee after written notification to Discloser that Disclosee will not accept any further information; (x) is disclosed pursuant to the order or requirement of a court, administrative agency, or other governmental body; or (xi) is disclosed pursuant to litigation involving Disclosee and relating to the information disclosed hereunder. (c) In the event of a disclosure under subsection (b)(x) above, Disclosee shall give Disclosure written notice of such order or requirement as soon as practicable prior to disclosure of the Confidential Information. 3. The provisions of this Agreement shall supersede the provisions of any legends which may be affixed to any Confidential Information provided by Discloser to Disclosee. 4. This document contains the entire agreement between the parties as to the subject matter hereof and supersedes any previous or contemporaneous understandings, commitments or agreements, oral or written, as to such subject matter. This Agreement can only be amended by a written document executed by the parties hereto. 5. This Agreement shall be governed by the laws of the Commonwealth of Virginia. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the date first above-written. Understood and Agreed: "Discloser" "Disclosee" DAY RUNNER, INC. ALAN R. RACHLIN By: /s/ Mark Vidovich Signature: /s/ Alan R. Rachlin ------------------ ------------------------------ Mark Vidovich Chairman 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 entireby by reference to such quarterly report on Form 10-Q. 0000853102 Day Runner, Inc. 1,000 6-mos Jun-30-2000 Jul-01-1999 Dec-31-1999 9,690 0 52,736 10,681 38,878 106,838 46,307 30,164 209,865 51,225 0 0 0 14 67,925 209,865 109,336 109,336 57,430 57,430 48,401 0 5,967 (2,462) (369) (2,093) 0 0 0 (2,093) (0.18) (0.18)
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