-----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, EJIl0TRlwUQYbN4f8WGIeatC8GofW4WqIMmSVTdXe9PIEyJjl0K73hsPIvrXfpCU OASbWMnNTK6UTE+Q5KMq6w== 0000853102-99-000077.txt : 19990916 0000853102-99-000077.hdr.sgml : 19990916 ACCESSION NUMBER: 0000853102-99-000077 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990915 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/A SEC ACT: SEC FILE NUMBER: 000-19835 FILM NUMBER: 99711619 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/A 1 AMENDED FORM 10-Q FOR QTR ENDED 12/31/98 FORM 10-Q/A AMENDMENT NO. 1 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, 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 February 10, 1999 - ----------------------------- ------------------------------------------------- Common Stock, $0.001 par value 11,899,963
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, 1998 and June 30, 1998....................................... 3 Consolidated Statements of Income Three and Six Months Ended December 31, 1998 and 1997..................... 4 Consolidated Statements of Cash Flows Six Months Ended December 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............................... 11 PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................................ 18 SIGNATURES....................................................................................... 19
PART I -- FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS.
DAY RUNNER, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS) ASSETS December 31, June 30, 1998 1998 ------------- ------- (As Restated - See Note 11) Current assets: Cash and cash equivalents....................................................... $ 25,253 $ 2,923 Accounts receivable (net of allowances for doubtful accounts and sales returns and other allowances of $8,654 and $9,942 at December 31, 1998 and June 30, 1998, respectively)............................................... 48,580 32,542 Inventories..................................................................... 44,301 37,610 Prepaid expenses and other current assets....................................... 4,830 1,670 Income taxes receivable......................................................... 9 2,606 Deferred income taxes........................................................... 7,218 7,218 --------- --------- Total current assets....................................................... 130,191 84,569 Property and equipment -- net........................................................ 17,793 11,888 Goodwill (net of accumulated amortization of $648 and $108 at December 31, 1998 and June 30, 1998, respectively)................................................ 86,807 3,564 Other assets (net of accumulated amortization of $132 and $60 at December 31, 1998 and June 30, 1998, respectively)........................................... 2,120 1,158 --------- --------- Total assets......................................................................... $ 236,911 $ 101,179 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Lines of credit................................................................. $ 2,716 Accounts payable................................................................ $ 9,095 9,969 Accrued expenses................................................................ 25,004 13,876 Income taxes payable............................................................ 2,768 Current portion of capital lease obligations.................................... 32 33 --------- --------- Total current liabilities.................................................. 36,899 26,594 --------- --------- Long-term liabilities: Capital lease obligations....................................................... 53 Line of credit.................................................................. 118,351 Loan notes...................................................................... 2,457 --------- --------- Total long-term liabilities................................................... 120,808 53 --------- --------- 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; 13,697,001 and 13,677,386 issued and 11,899,213 and 11,955,598 outstanding at December 31, 1998 and June 30, 1998, respectively).................................. 14 14 Additional paid-in capital...................................................... 34,658 34,445 Retained earnings............................................................... 70,775 65,076 Cumulative translation adjustment............................................... 136 102 Treasury stock: at cost (1,797,788 and 1,721,788 shares at December 31, 1998 and June 30, 1998, respectively)............................................ (26,379) (25,105) --------- --------- Total stockholders' equity................................................. 79,204 74,532 --------- --------- Total liabilities and stockholders' equity........................................... $ 236,911 $ 101,179 ========= ========= 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 Six Months Ended December 31, December 31, 1998 1997 1998 1997 ---- ---- ---- ---- (As Restated- (As Restated- See Note 11) See Note 11) Net sales.................................................... $ 64,565 $ 49,388 $ 112,296 $ 87,526 Cost of goods sold........................................... 33,506 23,626 58,366 41,658 --------- --------- --------- --------- Gross profit................................................. 31,059 25,762 53,930 45,868 --------- --------- --------- --------- Operating expenses: Selling, marketing and distribution..................... 18,910 12,087 31,175 21,389 General and administrative.............................. 6,447 4,590 11,104 8,354 Costs relating to activities associated with the Filofax acquisition......................... 1,072 1,072 --------- --------- --------- --------- Total operating expenses................................ 26,429 16,677 43,351 29,743 --------- --------- --------- --------- Income from operations....................................... 4,630 9,085 10,579 16,125 Net interest expense (income)................................ 1,356 30 1,389 (65) --------- --------- --------- ---------- Income before provision for income taxes..................... 3,274 9,055 9,190 16,190 Provision for income taxes................................... 1,244 3,531 3,491 6,314 --------- --------- --------- --------- Net income................................................... $ 2,030 $ 5,524 $ 5,699 $ 9,876 ======== ======== ======== ======== Earnings per common share: Basic................................................... $ 0.17 $ 0.49 $ 0.48 $ 0.87 ========= ======== ======== ======= Diluted................................................. $ 0.16 $ 0.45 $ 0.45 $ 0.80 ========= ========= ======== ======= Weighted average number of common shares outstanding: Basic................................................... 11,883 11,273 11,907 11,393 ========= ========= ========= ========= Diluted................................................. 12,564 12,323 12,619 12,415 ========= ========= ========= ========= 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, 1998 1997 ---- ---- (As Restated - See Note 11) Cash flows from operating activities: Net income.................................................................... $ 5,699 $ 9,876 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.............................................. 4,478 2,255 Provision for losses on accounts receivable................................ 12 Changes in operating assets and liabilities, net of acquisition: Accounts receivable..................................................... (1,482) (959) Inventories............................................................. 5,882 (4,423) Prepaid expenses and other current assets............................... (785) 293 Income taxes receivable........................................................... 2,646 Accounts payable........................................................ (4,951) (2,657) Accrued expenses........................................................ 3,294 5,011 Income taxes payable.................................................... 1,398 2,261 --------- --------- Net cash provided by operating activities......................................... 16,191 11,657 --------- --------- Cash flows from investing activities: Purchase of business.......................................................... (88,764) (2,080) Acquisition of property and equipment......................................... (6,002) (2,565) Other assets.................................................................. (385) (6) --------- --------- Net cash used in investing activities.................................... (95,151) (4,651) --------- --------- Cash flows from financing activities: Net borrowings (repayments) under lines of credit............................. 102,146 (2,697) Repayment of capital lease obligations........................................ (53) (39) Repayment of long-term debt................................................... (678) Net proceeds from issuance of common stock.................................... 212 1,879 Repurchase of common stock.................................................... (1,274) (11,564) --------- --------- Net cash provided by (used in) financing activities...................... 101,031 (13,099) --------- --------- Effect of exchange rate changes in cash........................................... 259 (46) --------- --------- Net increase (decrease) in cash and cash equivalents.............................. 22,330 (6,139) Cash and cash equivalents at beginning of period.................................. 2,923 15,550 --------- --------- Cash and cash equivalents at end of period........................................ $ 25,253 $ 9,411 ========= ========= See accompanying notes to consolidated financial statements.
DAY RUNNER, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (THREE AND SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES The accompanying consolidated balance sheet as of December 31, 1998, consolidated statements of income for the three and six months ended December 31, 1998 and 1997, and consolidated statements of cash flows for the six months ended December 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, 1998, 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, 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): December 31, June 30, 1998 1998 Raw materials................... $ 10,101 $ 14,087 Work in process................. 1,719 831 Finished goods.................. 32,481 22,692 ---------- ---------- Total.................. $ 44,301 $ 37,610 ========== ========== 3. LINES 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 reduced to $145,000,000. The loan facility was syndicated with a group of banks in December 1998. The Loan Agreement provides for borrowings through September 30, 2005 (the "Maturity Date"). Borrowings bear interest either at fixed rates based on the higher of Wells Fargo's prime rate and the Federal Funds Rate published by the Federal Reserve Bank of New York or at floating rates calculated by reference to the interest rates at which Wells Fargo offers deposits in U.S. dollars in amounts approximately equal to the amount of the relevant loan and for a period of time comparable to the number of days the relevant loan will remain outstanding, together with a margin. During the six months ended December 31, 1998, the average interest rate was 6.70%. The maximum amount that may be outstanding under the Loan Agreement is $145,000,000 through December 31, 2000 and is reduced thereafter by $5,000,000 in calendar year 2001 and by $10,000,000 in each of the following calendar years up to the Maturity Date. Under the terms of the Loan Agreement, the Company paid Wells Fargo a financing fee of $1,200,000. The Company will also pay commitment fees for the unused portion of the loan facility during the term of the Loan Agreement and will pay certain legal, accounting and other fees and expenses in connection with the Loan Agreement. At December 31, 1998, the Company had $118,351,000 outstanding under this Loan Agreement. The Loan Agreement requires the Company to meet certain financial covenants, including: (i) a fixed charge coverage ratio of less than 2.00 to 1.00; (ii) a funded debt ratio declining over the term from 3.75 to 1.00 to 2.50 to 1.00; (iii) limits on annual capital expenditures increasing from $11,000,000 to $17,000,000 over the seven-year term; (iv) stockholders' equity, on a quarterly basis, of not less than (a) 50% of net income plus 75% of net cash proceeds from any stock issuances plus (b) the greater of $67,000,000 or 80% of stockholders' equity at March 31, 1999. The Company's Canadian subsidiary had a credit agreement with a Canadian bank which allowed for borrowings up to Canadian $3,000,000, bore interest at the bank's prime rate and was due and payable on demand. The borrowings under this credit agreement were repaid in full on October 22, 1998, and the Canadian subsidiary now borrows funds as a co-borrower under the Loan Agreement. 4. LOAN NOTES Loan Notes in the amount of $2,457,000 were issued in connection with the Filofax acquisition, are unsecured obligations of the Company's U.K. subsidiary and bear interest at 1% below LIBOR (5.63% at December 31, 1998). Interest on the Loan Notes is paid annually in arrears beginning September 30, 1999. The Loan Notes are redeemable, in whole or in part, at the holder's option on each interest payment date. Unless they have previously been redeemed, all Loan Notes will be redeemed on September 30, 2003. 5. STOCKHOLDERS' EQUITY During the six months ended December 31, 1998, certain employees exercised options to purchase an aggregate of 6,650 shares of the Company's Common Stock for an aggregate of approximately $213,000. During the six months ended December 31, 1998, the Company repurchased 76,000 shares of its Common Stock at an average cost of $16.76 per share for an aggregate of approximately $1,274,000. 6. EARNINGS PER SHARE Effective December 1997, the Company adopted 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 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, --------------------------------------- -------------------------------------- 1998 1997 1998 1997 ----------------- ---------------- ----------------- ---------------- NET INCOME $ 2,030 $ 5,524 $ 5,699 $9,876 ======= ======== ======== ====== BASIC WEIGHTED AVERAGE SHARES Weighted average number of common shares outstanding 11,883 11,273 11,907 11,393 EFFECT OF DILUTED SECURITIES Additional shares from the assumed exercise of options and warrants 3,047 3,333 2,952 3,206 Shares assumed to be repurchased under the treasury stock method (1,949) (1,739) (1,804) (1,666) Non-qualified tax benefit (417) (544) (436) (518) ------- -------- -------- -------- DILUTED WEIGHTED AVERAGE SHARES Weighted average number of common shares outstanding and common share equivalents 12,564 12,323 12,619 12,415 ======= ======== ======== ======== BASIC $ 0.17 $ 0.49 $ 0.48 $ 0.87 ======= ======== ======== ======== DILUTED $ 0.16 $ 0.45 $ 0.45 $ 0.80 ======= ======== ======== ========
7. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued SFAS No. 130 Reporting Comprehensive Income. The statement establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is summarized as follows: SIX MONTHS ENDED DECEMBER 31, 1998 1997 --------- --------- Net income $ 5,699 $ 9,876 Foreign currency translation adjustment 35 (3) --------- -------- Comprehensive income $ 5,734 $ 9,873 ========= ======== 8. ACQUISITION On October 30, 1998, the Company announced that it had control of a majority of the outstanding shares of Filofax Group plc ("Filofax") as a result of its previously announced cash tender offer for the Filofax stock. The Company acquired all the remaining outstanding shares of Filofax on December 26, 1998. This acquisition will be accounted for under the purchase method of accounting. The total purchase price of $91,221,000, which includes costs of the transaction, was paid in cash and Loan Notes (see Note 4). The Company borrowed the cash portion of this amount under a Loan Agreement with a group of banks (see Note 3). The following table sets forth the unaudited proforma condensed combined statements of income data for the six months ended December 31, 1998 and 1997 as if the acquisition had occurred on July 1, 1997 (dollars in thousands): PRO FORMA SIX MONTHS ENDED DECEMBER 31, 1998 1997 ---- ---- Net sales $136,853 $131,908 ======== ======== Income before provision for income taxes $ 9,101 $ 24,499 ======== ======== Net income $ 5,516 $ 14,944 ======== ======== Earnings per common share: Basic $ 0.46 $ 1.31 ======== ======== Diluted $ 0.44 $ 1.20 ======== ======== Weighted average number of common shares outstanding: Basic 11,907 11,393 ======== ======= Diluted 12,619 12,415 ======== ======= 9. FINANCIAL INSTRUMENTS On September 29, 1998, the Company entered into a call option in order to limit its foreign exchange risk on the purchase of Filofax shares, which were paid for in pound Sterling. The Company's objective was to protect itself from the risk that the purchase price of the Filofax shares would be adversely affected by changes in exchange rates. During the quarter ended December 31, 1998, the Company expensed $765,000 to operating expenses for the call option. At December 31, 1998, the Company had not entered into any additional financial instruments. The Company does not trade in financial instruments nor does it enter into such contracts for speculative purposes. 10. STATEMENTS OF CASH FLOWS Supplemental disclosure of cash flow information (in thousands): SIX MONTHS ENDED DECEMBER 31, 1998 1997 ------------------------------ Cash paid during the period for: Interest $ 1,217 $ 149 Income taxes, net of refunds received $ (358) $ 4,146 Supplemental disclosure of noncash investing and financing activities: During the six months ended December 31, 1998, the Company had purchased 703,308 shares of Filofax's outstanding common stock by issuing $2,457,000 in Loan Notes to former shareholders of Filofax. The net cash expended by the Company in its acquisition of Filofax made during the quarter ended December 31, 1998 was used as follows (in thousands) (see Note 8): Fair value of assets acquired $ (116,113) Liabilities assumed 27,349 ------------- Cash paid $ (88,764) ============= 11. RESTATEMENT Subsequent to the issuance of the Company's financial statements on Form 10-Q for the three and six months ended December 31, 1998, the Company discovered errors related to the treatment of manufacturing variances and certain other costs. These cost accounting errors had the effect of overstating inventory and understating cost of goods sold as of and for the three and six months ended December 31, 1998. As a result, the accompanying financial statements as of and for the three and six months ended December 31, 1998 have been restated from amounts previously reported to properly record these transactions. The effects of the restatement are disclosed below and have been properly reflected herein. A summary of the significant effects of the restatement is as follows: Previously reported Restated ------------------- -------- As of December 31, 1998: Inventory $ 47,887 $ 44,301 Retained earnings $ 72,998 $ 70,775 Three months ended December 31, 1998: Cost of goods sold $ 32,100 $ 33,506 Income before provision for income taxes $ 4,680 $ 3,274 Net income $ 2,902 $ 2,030 Earnings per common share: Basic $ 0.24 $ 0.17 Diluted $ 0.23 $ 0.16 Six months ended December 31, 1998 Cost of goods sold $ 54,780 $ 58,366 Income before provision for income taxes $ 12,776 $ 9,190 Net income $ 7,922 $ 5,699 Earnings per common share: Basic $ 0.67 $ 0.48 Diluted $ 0.63 $ 0.45 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 growth has resulted from sales of related organizing products, virtually all of which have been introduced since January 1, 1995. 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 32.9% of second quarter fiscal 1999 net sales and 38.2% of net sales for the six months ended December 31, 1998, and the U.S. mass market channel, which accounted for 28.1% of second quarter fiscal 1999 net sales and 33.6% of net sales for the six months ended December 31, 1998. With the October 30, 1998 acquisition of Filofax, the Company substantially increased its emphasis on markets outside the U.S., and sales to foreign customers accounted from 33.3% of second quarter fiscal 1999 net sales and 23.0% of net sales for the six months ended December 31, 1998. RESTATEMENT Subsequent to the issuance of the Company's financial statements on Form 10-Q for the three and six months ended December 31, 1998, the Company discovered errors related to the treatment of manufacturing variances and certain other costs. These cost accounting errors had the effect of overstating inventory and understanding cost of goods sold as of and for the three and six months ended December 31, 1998. As a result, the financial statements as of and for the three and six months ended December 31, 1998 have been restated from amounts previously reported to properly record these transactions. The effects of the restatement have been disclosed in the Notes to the Consolidated Financial Statements and have been properly reflected herein. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentages that income statement items bear to net sales and the percentage change in the dollar amounts of such items.
PERCENTAGE CHANGE Three Six PERCENTAGE OF SALES Months Months Three Six Ended Ended Months Ended Months Ended December 31, December 31, December 31, December 31, 1997 1997 1998 1997 1998 1997 to 1998 to 1998 ---- ---- ---- ---- ------- ------- Net sales........................................ 100.0% 100.0% 100.0% 100.0% 30.7% 28.3% Cost of goods sold............................... 51.9 47.8 52.0 47.6 41.8 40.1 ----- ----- ----- ----- Gross profit..................................... 48.1 52.2 48.0 52.4 20.6 17.6 ----- ----- ----- ----- Operating expenses: Selling, marketing and distribution........... 29.3 24.5 27.8 24.4 56.4 48.8 General and administrative.................... 10.0 9.3 9.9 9.6 40.5 32.9 Costs related to activities associated with Filofax acquisition...................... 1.6 0.9 NA NA ----- ----- ----- ----- Total operating expenses.................... 40.9 33.8 38.6 34.0 58.5 45.8 ----- ----- ----- ----- Income from operations........................... 7.2 18.4 9.4 18.4 (49.0) (34.4) Net interest expense (income).................... 2.1 0.1 1.2 (0.1) NM NM ---- ------ ------- ----- Income before provision for income taxes......... 5.1 18.3 8.2 18.5 (63.8) (43.2) Provision for income taxes....................... 1.9 7.1 3.1 7.2 ----- ----- ----- ----- (64.8) (44.7) Net income....................................... 3.2% 11.2% 5.1% 11.3% (63.3) (42.3) ===== ===== ===== =====
The following tables set forth, for the periods indicated, the Company's approximate net sales by product category and distribution channel and as a percentage of total sales.
PRODUCT CATEGORY: THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, ----------------------------------- --------------------------------- 1998 1997 1998 1997 --------- --------- ---------- -------- (Unaudited; dollars in thousands) Organizers and planners......... $26,230 40.6% $ 21,912 44.4% $43,298 38.6 $ 43,100 49.2% Refills......................... 22,049 34.2 16,255 32.9 39,097 34.8 27,130 31.0 Related organizing products..... 16,286 25.2 11,221 22.7 29,901 26.6 17,296 19.8 ------ ---- ------ ---- ------ ---- ------ ---- Total........................ $64,565 100.0% $49,388 100.0% $112,296 100.0% $ 87,526 100.0% ======= ====== ======= ====== ======== ====== ======== ====== DISTRIBUTION CHANNEL: THREE MONTHS ENDED DECEMBER 31, SIX MONTHS ENDED DECEMBER 31, ----------------------------------- --------------------------------- 1998 1997 1998 1997 --------- --------- ---------- -------- (Unaudited; dollars in thousands) Office products................. $21,226 32.9% $26,874 54.4% $ 42,886 38.2% $ 44,798 51.2% Mass market..................... 18,139 28.1 16,106 32.6 37,787 33.6 31,856 36.4 Foreign customers............... 21,536 33.3 2,596 5.3 25,768 23.0 5,011 5.7 Other........................... 3,664 5.7 3,812 7.7 5,855 5.2 5,861 6.7 ----- --- ----- --- ----- --- ----- --- Total........................ $64,565 100.0% $49,388 100.0% $112,296 100.0% $ 87,526 100.0% ======= ===== ======= ===== ======== ===== ======== =====
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THE THREE MONTHS ENDED DECEMBER 31, 1997 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 1999, net sales increased by $15,177,000, or 30.7%, because of the Filofax acquisition. In the quarter ended December 31, 1998, sales of refills (which include calendars and accessories) grew by $5,794,000, or 35.6%; sales of related organizing products grew by $5,065,000, or 45.1%; and sales of organizers and planners increased by $4,318,000, or 19.7%. Product sales were primarily to foreign customers and secondarily to office products customers. Sales to foreign customers grew by $18,940,000, or 729.6%; sales to mass market customers grew by $2,033,000, or 12.6%; sales to office products customers declined by $5,648,000, or 21.0%; and sales to miscellaneous customers grouped together as "other" decreased by $148,000, or 3.9%. GROSS PROFIT. Gross profit is net sales less cost of goods sold, which is comprised of materials, labor and manufacturing overhead. Gross profit may be affected by, among other things, product mix, production levels, changes in vendor and customer prices and discounts, sales volume and growth rate, sales returns, purchasing and manufacturing efficiencies, tariffs, duties and inventory carrying costs. The effects of inventory tightening by certain of the Company's large U.S. customers began to negativelly affect gross profit in the fiscal 1999 second quarter.Gross profit as a percentage of sales decreased from 52.2% in the second quarter of fiscal 1998 to 48.1% in the second quarter of fiscal 1999 primarily because of a shift in product mix to lower margin products for the parent company and certain of its subsidiaries. OPERATING EXPENSES. Total operating expenses increased by $9,752,000, or 58.5%, in the second quarter of fiscal 1999 compared with the second quarter of fiscal 1998 and increased as a percentage of sales from 33.8% to 40.9%. Excluding the operating expense portion of the costs related to activities associated with the Filofax acquisition, second quarter fiscal 1999 operating expenses would have increased by $8,680,000 and would have been 39.3% of sales. Selling, marketing and distribution expenses increased by $6,823,000 primarily because of the addition of Filofax's expenses and secondarily because of costs associated with new and recently introduced products. These expenses grew from 24.5% to 29.3% as a percentage of sales primarily because of costs associated with new and recently introduced products. General and administrative expenses increased by $1,857,000 primarily because of the addition of Filofax's expenses, and increased from 9.3% to 10.0% as a percentage of sales primarily because of the Company's inability to absorb higher costs as a result of lower than anticipated sales. NET INTEREST EXPENSE (INCOME). Because of the increase in the Company's long-term debt, which was incurred primarily to finance the Filofax acquisition, net interest expense for the second quarter of fiscal 1999 was $1,356,000 compared with net interest expense of $30,000 for the second quarter of fiscal 1998. As a result of the bank debt and Loan Notes incurred in the Filofax acquisition, interest expense in future periods will be substantially higher than in the periods prior to September 30, 1998. (See Notes 3, 4 and 8 to Consolidated Financial Statements.) INCOME TAXES. The Company's second quarter fiscal 1999 effective tax rate was 38.0%, compared with 39.0% for the second quarter of fiscal 1998. SIX MONTHS ENDED DECEMBER 31, 1998 COMPARED WITH THE SIX MONTHS ENDED DECEMBER 31, 1997 NET SALES. In the six months ended December 31, 1998, net sales increased by $24,770,000, or 28.3%, primarily because of the Filofax acquisition and secondarily because of increased sales to mass market customers. In the six months ended December 31, 1998, sales of related organizing products grew by $12,605,000, or 72.9%; sales of refills grew by $11,967,000, or 44.1%; and sales of organizers and planners increased by $198,000, or 0.5%. Product sales were primarily to office products customers and secondarily to mass market customers. Sales to foreign customers grew by $20,757,000, or 414.2%; sales to mass market customers grew by $5,931,000, or 18.6%; sales to office products customers declined by $1,912,000, or 4.3%; and sales to miscellaneous customers grouped together as "other" decreased by $6,000, or 0.1%. GROSS PROFIT. The effects of inventory tightening by certain of the Company's large U.S. customers began to negatively affect gross profit during the period.Gross profit as a percentage of sales decreased from 52.4% in the first six months fiscal 1998 to 48.0% in the first six months of fiscal 1999 primarily because of a shift in product mix to lower margin products for the parent company and certain of its subsidiaries. OPERATING EXPENSES. Total operating expenses increased by $13,608,000, or 45.8%, in the first six months of fiscal 1999 compared with the first six months of fiscal 1998 and increased as a percentage of sales from 34.0% to 38.6%. Excluding the operating expense portion of the costs related to activities associated with the Filofax acquisition, operating expenses for the first six months ended December 31, 1998 would have increased by $12,536,000 and would have been 37.6% of sales. Selling, marketing and distribution expenses increased by $9,786,000 primarily because of costs associated with new and recently introduced products and secondarily because of the addition of Filofax's expenses. These expenses grew from 24.4% to 27.8% as a percentage of sales primarily because of costs associated with new and recently introduced products. General and administrative expenses increased by $2,750,000 primarily because of the addition of Filofax's expenses and from 9.6% to 9.9% as a percentage of sales primarily because of the Company's inability to absorb higher costs as a result of lower than anticipated sales. NET INTEREST EXPENSE (INCOME). Because of the increase in the Company's long-term debt, which was incurred primarily to finance the Filofax acquisition, net interest expense for the first six months of fiscal 1999 was $1,389,000 compared with net interest income of $65,000 for the first six months of fiscal 1998. As a result of the bank debt and Loan Notes incurred in the Filofax acquisition, interest expense in future periods will be substantially higher than in the periods prior to September 30, 1998. (See Notes 3, 4 and 8 to Consolidated Financial Statements.) INCOME TAXES. The Company's effective tax rate was 38.0% for the first six months of fiscal 1999, compared with 39.0% for the first six months of fiscal 1998. 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 The Company's cash and cash equivalents at December 31, 1998 increased to $25,253,000 from $2,923,000 at June 30, 1998. During the six months ended December 31, 1998, net cash of $16,191,000 and $101,031,000 provided by operating activities and financing activities, respectively, was partially offset by net cash of $95,151,000 used in investing activities. Of the $16,191,000 net amount provided by the Company's operating activities, $5,699,000 was provided by net income, $5,882,000 was provided by a decrease in inventories, $4,478,000 was provided by depreciation and amortization, $3,294,000 was provided by an increase in accrued expenses, $1,398,000 was provided by an increase in income taxes payable and $2,646,000 was provided by a decrease in income taxes receivable. These amounts were partially offset by a decrease of $4,951,000 in accounts payable and an increase of $1,482,000 in accounts receivable. Accounts receivable (net) at December 31, 1998 increased by 49.3% from the fiscal 1998 year-end amount and by 98.2% from the December 31, 1997 amount primarily because of an increase in sales and secondarily because of a decrease in the allowance for sales returns based upon improvement in the Company's actual sales returns experience during the prior twelve months. The average collection period of accounts receivable at December 31, 1998 was 48 days, compared with 45 and 46 days at June 30, 1998 and December 31, 1997, respectively. Inventories at December 31, 1998 increased by 17.8% from the fiscal 1998 year-end amount and by 44.8% compared with the December 31, 1997 amount primarily because of the inventories of Filofax, which Day Runner acquired during the second quarter of fiscal 1999, and secondarily because of new and recently introduced products. Of the $95,151,000 net amount used in the Company's investing activities, $88,764,000 was used to acquire Filofax, and $6,002,000 was used to acquire primarily machinery and equipment and secondarily data processing equipment and software. Of the $101,031,000 net amount provided by the Company's financing activities, $102,146,000 was provided by borrowings under the Company's lines of credit which amount was partially offset by $1,274,000 used to repurchase 76,000 shares of the Company's Common Stock. At December 31, 1998, the Company had $118,351,000 outstanding under its $145,000,000 bank line of credit (the "Loan Agreement"). Borrowings under this Loan Agreement bear interest either at fixed rates based on the higher of the bank's prime rate and the Federal Funds Rate published by the Federal Reserve Bank of New York or at floating rates calculated by reference to the interest rates at which the bank offers deposits in U.S. dollars in amounts approximately equal to the amount of the relevant loan and for a period of time comparable to the number of days the relevant loan will remain outstanding, together with a margin. During the six months ended December 31, 1998, the weighted average interest rate was 6.70%. The maximum amount that may be outstanding under the Loan Agreement is $145,000,000 through December 31, 2000. Thereafter, the maximum amount of borrowings that may be outstanding under the Loan Agreement is reduced by $5,000,000 in calendar 2001 and by $10,000,000 in each of the following calendar years up to September 30, 2005. (See Note 3 to Consolidated Financial Statements.) On October 30, 1998, the Company announced that it had control of a majority of the outstanding shares of Filofax Group plc ("Filofax") as a result of its previously announced cash tender offer for the Filofax stock. As of December 26, 1998, the Company had acquired 100% of the outstanding shares of Filofax. This acquisition will be accounted for under the purchase method of accounting. The Company currently estimates that the aggregate fees and expenses of the transaction, including investment banking, legal, accounting and other fees and expenses, will be $5,000,000 to $6,000,000. The fees and expenses, as well as payments for the Filofax shares, have been and will be paid with available cash, borrowings under the Loan Agreement and the Loan Notes. (See Notes 3, 4 and 8 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's exposure to the impact of interest changes and foreign currency fluctuations has increased as a result of its acquisition of Filofax because the acquisition has significantly expanded the Company's international operations and because a portion of the debt incurred to fund the acquisition is in pound Sterling. The Company entered into a call option with respect to the purchase of Filofax shares in the tender offer to limit the effect of exchange rate fluctuations. The Company may in the future enter into foreign currency exchange contracts, call options, swap agreements or other financial instruments as hedges to moderate the impact of foreign currency fluctuations. The Company does not trade in financial instruments, nor does it enter into such contracts for speculative purposes. A single currency called the euro was introduced in certain countries in Europe on January 1, 1999, but will not, at least in the foreseeable future, be introduced in United Kingdom. The use of a single currency may affect the ability of Day Runner and other companies to price their products differently in various European markets. The Company is evaluating the impact of the single currency in these markets. The Company believes that cash flow from operations, vendor credit, its existing working capital and its bank line of credit will be sufficient to satisfy the Company's anticipated cash requirements at least through the next 12 months. Nonetheless, the Company may seek additional sources of capital as necessary or appropriate to finance acquisitions or to otherwise finance the Company's growth or operations; however, there can be no assurance that such funds, if needed, will be available on favorable terms, if at all. 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, and even possibly certain dates in 1999. This has the potential to affect the operation of these systems adversely and materially. Day Runner has identified four phases in its Year 2000 compliance efforts: discovery; assessment; remediation; and applicable testing and verification. The Company has completed the discovery and assessment phases for its own systems and applications, has substantially completed the remediation phase and expects to complete the remediation and applicable testing and verification phases by June 30, 1999. Day Runner believes that by modifying existing software and converting to new software for certain tasks it can prevent the Year 2000 transition from posing significant internal operational problems. The Company currently estimates that total incremental costs related to the Year 2000 issue will be approximately $2,000,000 to $2,500,000, of which approximately $900,000 had been incurred as of December 31, 1998. 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. Expenditures will be expensed or capitalized as appropriate. Day Runner is surveying its vendors, customers and others on whom it relies to assess their state of Year 2000 readiness. However, there can be no assurance that the systems of other parties on which the Company's systems rely will also be compliant or that any failure to be compliant in this area by another party will not have an adverse effect on the Company's systems. Furthermore, no assurance can be given that any or all of the Company's systems are or will be Year 2000 compliant, that the ultimate costs required to address the Year 2000 issue will not exceed the amounts indicated above, or that the impact of any failure to achieve substantial Year 2000 compliance will not have a materially adverse effect on the Company's financial condition. 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, foreign exchange rate fluctuations, supply constraints, supplier performance and other risks indicated in the Company's filings with the Securities and Exchange Commission. PART II --OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Certificate of Incorporation of the Registrant, as amended(1) 3.2 Bylaws of the Registrant(2) 27.1 Financial Data Schedule (b) Reports on Form 8-K 1) On October 2, 1998, the Company filed with the Commission a Current Report on Form 8-K reporting the Company's additional purchases of Filofax shares. 2) On October 30, 1998, the Company filed with the Commission a Current Report on Form 8-K attaching the Company's press release announcing that the Company had acquired a majority of the outstanding Filofax shares. 3) On November 12, 1998, the Company filed with the Commission a Current Report on Form 8-K reporting the Company's acquisition of a majority of the outstanding Filofax shares. (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. 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: September 14, 1999 DAY RUNNER, INC. By: /s/ JAMES E. FREEMAN JR. ----------------------------- James E. Freeman, Jr. Chief Executive Officer By: /s/ DENNIS K. MARQUARDT ----------------------------- Dennis K. Marquardt Executive Vice President, Finance & Administration and Chief Financial Officer EX-27 2 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/A and is qualified in its entireby by reference to such quarterly report on Form 10-Q/A. 0000853102 Day Runner, Inc. 1,000 6-mos Jun-30-1999 Jul-01-1998 Dec-31-1998 25,253 0 57,234 8,654 44,301 130,191 42,557 24,764 236,911 36,899 0 0 0 14 79,190 236,911 112,296 112,296 58,366 58,366 43,351 0 1,389 9,190 3,491 5,699 0 0 0 5,699 0.48 0.45
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